The declines of yesterday in both stocks and gold, proved to be good buying opportunities.
As we discussed, the VP selection from Biden yesterday didn’t introduce any surprises, so markets should continue the focus on the big themes: the progression on the health crisis front, the massive global stimulus (and a bulldog President that will continue force things through to keep the bridge intact) and building momentum toward a showdown with China, which includes moving the global supply chain to “freedom loving” countries.
Within that second “big theme” (stimulus), we’ve laid out the simple math that shows the response has been bigger than the damage.
The economy in Q2 produced an annual equivalent of $19.4 trillion of output. That is down $2.3 trilion from the Q4 peak.
More than offsetting that is the $6.6 trillion worth of fiscal and monetary stimulus still working through the system.
Even ignoring the additional monetary stimulus that is available through Fed facilities, and ignoring the growth in money supply that will certainly come with the Fed’s loosening of bank reserve requirements, and ignoring the possibility of more fiscal stimulus, we still have more than $3 trillion in excess response.
As we’ve discussed, this will unleash a global reset of asset prices.
We’ve already seen a big spike in the wage data, thanks to an aggressive federal unemployment subsidy and increased essential worker wages (hazard pay), which is an important driver of prices. We’ve seen a spike in food prices, thanks to supply chain disruptions. And today, we’re seeing some of the growth in money supply show up in the consumer price index, as you can see in the chart below. This is likely just the beginning of an aggressive bounce in prices.
As we’ve discussed now for months, inflation is coming. Be long asset prices.
Big news came late in the day as Biden selected his running mate: Kamala Harris.
Harris has been the high probability pick, and that should be good news for market stability. And that should be good news for a Trump re-election.
As we discussed yesterday, in my view, Michelle Obama represented the biggest risk to Trump. It had the element of surprise. The media would have gone crazy over it. And it would have opened the door to another Obama White House, in the case of a Biden resignation. That could have been enough to get the Democrats over the line.
It didn’t happen. And for markets that like certainty, in a world of total uncertainty, this pick should be keep markets focused on the big themes: the progression on the health crisis front, the massive global stimulus (and a bulldog President that will continue force things through to keep the bridge intact) and building momentum toward a showdown with China, which includes moving the global supply chain to “freedom loving” countries.
This should continue to promote higher global asset prices.
On that note, let’s look at a couple of key charts …
Here’s a look at stocks.Â
The S&P 500 neared the all-time highs today and reversed into the close.
And gold sold off aggressively today into the VP announcement. But it retests the 2011 record highs, which should be a buying opportunity.Â
From spending time in several small town economies over the past week, I have a few observations:
Granted, I was in an attractive vacationing area in a sparsely populated area, but tourism is hot! Resorts and cabin rentals were booked – and booked out for some time.
This is consistent with what the CEO/Founder of Airbnb, Brian Chesky, has said in recent weeks. After his $40 billion-dollar IPO was shelved by COVID in March, Airbnb proceeded to lose 80% of its business over the next two months. It looked like the death spiral. But by June, the year-over-year comps had recovered!
According to Chesky, after months of lockdown, people are looking to get away, to change scenery. And they have been looking to do so in areas within driving distance of about 300 miles. That indeed seems to be the case.
Surprisingly, in a world derailed by a widespread infectious disease, it hasn't been enough to kill the "sharing economy." And that's probably a good leading indicator to a recovery in Uber's ride sharing business (which was down 73% in Q2), and in air travel.
Second observation: With over 20 million people unemployed in this country, there were help wanted signs everywhere. Some restaurants were shuttered due to lack of staff. Others were running on skeleton crews on modified hours, and yet (in their words) were still making more money than they had ever made.
Bottom line: The demand is strong, but the supply is suffering in a number of ways (including a labor shortfall in services and fulfillment). Employers can't compete with the government for low wage workers.
This brings us back to the point of my last note. While the federal unemployment subsidy (the extra $600/week) has been a disincentive for getting people back to work, if left with the choice of taking it away or continuing it (even into the end of the year), we have no choice but to continue it. If not, the economy implodes and takes with it trillions of dollars of intervention bullets that have already been fired.
With that in mind, we expected the Democrats to use that Federal unemployment subsidy as ransom in new stimulus negotiations, in an effort to force the Republicans to agree to their wish list. That would include voting reforms, which would all but seal the election for them.
Consequently, we expected this to result in Trump's use of Executive Order to extend the federal unemployment checks.
Indeed, that's precisely what we got on Saturday.
Trump used Executive Action to keep the unemployment checks going, but reduced them $400, only if states contribute $100 of the $400. With this, the tables have turned on the Democrats here, and very quickly. They lose their bargaining chip in stimulus negotiations. This means, no voting reform. And if they fight the Executive Action, they become the clear obstructor in getting money in people's hands. Moreover, key Democrat-led states (with large fiscal issues) are most likely to balk at contributing to the Federal subsidy – a bad look.
With this, I suspect the next political card played by the Democrats will be a big one — a bombshell VP announcement of Michelle Obama. The bookmakers have this at 22-1 odds. That puts her behind five more likely candidates.
My view: This would be the most challenging set-up for Trump (for re-election), as it would bring about the potential for an Obama White House again, in the case of a Biden resignation.
She launched a heavily promoted podcast two weeks ago, and the early episodes sound like campaigning, rather than podcast hosting.
We came into the week expecting the Democrats to use the expiration of the $600/week unemployment as ransom for their bigger demands, which include mail-in voting.
The Republicans have made an attempt to strip that out from the stimulus package negotations, and just extend it. But the Democrats aren’t having it. It’s too valuable a bargaining chip for them. And they will now hold the economy hostage for their demands.
That doesn’t bode well for the economy, as $2,400 to $4,800/week of household income for the 30 million unemployed goes away today.
Again, as we discussed last Friday, this may require Trump to use Executive Order to extend the federal unemployment checks.
Can he do it? Congress has exclusive control of the purse. But once they’ve appropriated funds, “the President and executive branch enjoy considerable discretions has to how those funds are spent” (paper on Presidential Spending Discretion and Congressional Controls, here). Mnuchin said earlier this week that there’s still over a trillion dollars yet to be spent from the first package.
With all of this building, we ended last week with a look at this S&P chart, as it was breaching this very important trendline that represents the recovery from the March lows. …
Here’s how it look today, as we head into the weekend with no progress made on Capitol Hill …
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We had the second quarter GDP report this morning.
Remember, we've been following the consensus view and the projections from the Fed models here in my daily note.
Let's take a look at the evolution of those projections …
The consensus view has been running in the down 35% area. The Fed model has been projecting as deep a decline as 54% for the quarter. The official number for Q2 was down 32.9%. So, if we add this to the contraction of 5% in the first quarter, the economic hit from COVID (and the related shutdown) comes in at $2.3 trillion.
You can see the BEA's table above, we have peak in GDP in Q4 of 2019, where the economic output was an annualized $21.7 trillion. And the economy in Q2 produced an annual equivalent of $19.4 trillion of output. The difference is $2.3 trilion.
Now, remember, we have
$3.3 trillion in fiscal stimulus, half of which has yet to work through the economy. And the Fed has pumped $3 trillion into the system since March. That’s a total of $6.6 trillion. And it’s estimated that, with the Fed’s other facilities, the Fed could inject up to another $3 trillion+.
So, there's a lot of excess money floating around. The response is bigger than the damage. Unfortunately, that money seems to be funneling to the winners of the lockdown economy. Amazon, Apple, Google and Facebook all put up record numbers in the quarter.
The big question has been, all along, how much excess money will be left in the response, once the economy gets back to full operating capacity? That has always been dependent upon the path of the virus. And as we've discussed here, the data, on that front, look favorable. However, the politics and propaganda at this stage has become, perhaps, a bigger threat.
Yesterday we talked about the big announcement from Navarro, that the government would be reviving the once iconic American company, Kodak, by anointing it as the primary manufacturer of ingredients for medicines to be made in America (bringing the supply chain home).
As we discussed, this was a $100 million company on Monday that would likely become a $5-$10 billion company in the coming years. That means after the near quadruple in the value yesterday, it was still dramatically undervalued.
Here’s what the chart looks like now …
The valuation touched as high as $2.6 billion today! It’s still cheap.Â
Next, we have developments on the virus front …
The “second wave” of rising cases, is now more than a month and a half in, and indeed, as we discussed in my July 16 note, the rate-of-change in the death-to-cases ratio has only declined more rapidly as the rate-of-change in testing has increased.Â
To put it simply, those that were projecting a big spike in deaths, because of the spike in cases, have been wrong. Rather, the spike in cases is simply representing the slow closing of the gap between the reported infection rate and what the CDC believes to be the real infection rate (at least 10 times as many), while revealing a death rate that is converging toward the annual flu death rate. Â
With the above in mind, we have another big development on the treatment front. The controversy over an early treatment option for the virus is re-emerging. Doctors are standing up and making their case publicly for the safety and efficacy of hydroxychloroquine and zinc.  The group met with Pence today asking for the administration to “empower doctors to prescribe hydroxychloroquine without political obstruction.”Â
As Jay Powell said today, the path of the economy depends on the path of the virus. The developments above are positive for the economic outlook.
Finally, the battle between the Republics and Democrats on a new stimulus package is playing out just as we’ve expected it. The federal unemployment subsidy is the political football, and there is no viable path toward an agreement. With that, as we’ve discussed, it may boil down to an Executive Order from Trump to extend the $600/ week. Good news. It was reported today (by Jim Cramer) that a short-term extension is coming. Based on history, I suspect his “source” was Mnuchin.Â
Back in early March, before the shutdown, the government was beginning to scramble to get funding packages moving to respond to the virus.
They started with $8 billion, which is now a rounding error in the overall response.
Back then, we talked about the winners that could come from government spending packages. Here's an excerpt from my March 4th note:
"Likely winners in the U.S. will be healthcare (related to the healthcare crisis — hospitals, pharmaceuticals)… perhaps manufacturing, as an effort to bring the supplychain back home … that would [also] bode well for engineering companies, heavy equipment/ machinery makers, metals producers, natural resource stocks and maybe some left for dead industrial conglomerates (GE?)."
Let's focus on the latter part: bringing the supply chain home.
We're seeing it, and its the very early stages.
Through the Defense Production Act, we've already seen U.S. companies turned into medical supply manufacturers. And today, Navarro announced the first major step toward moving the manufacturing of medicines back to the United States. Indeed, he's doing it with a "left for dead" iconic American company, Kodak.
Kodak was a $114 million company yesterday. Today, it's worth three times as much. In five years, it will probably be a $5-$10 billion company, transformed by the initiative to bring the supply chain home.
If Trump wins the election, my guess is he will make more iconic American companies relevant again, as he has with Kodak. Again, GE is name that comes to mind that, in the eyes of the administration, could be a symbol of American manufacturing renaissance.
In 2007, GE was a $425 billion company, the second largest company in the world. Thirteen years later, and GE is fighting for its life, worth an eighth of its peak value. Billionaire Nelson Peltz has a large stake in GE, and we own it in my Billionaire’s Portfolio.
In my Friday note, we talked about the set up for a breakout in gold and the vulnerability of stocks, as we head into a very important week that will determine the path of the government-sponsored economic recovery.
After plans were reported over the weekend that the White House and Republicans in Congress agreed on more handouts, gold broke to new record highs, and stocks were bid for the day, as we opened the trading week.
Let’s talk about the Republican package. First, as we’ve discussed, Congress is very unlikely to come to an agreement on a new stimulus package (not next week, not before the election). With that, the Republican proposal is probably just an exercise. But as we’ve also discussed, they must figure out a way to extend the federal unemployment subsidy (I’ve seen reports that it expired over the weekend… the bill, itself, says it expires on July 31).
With the above in mind, Mnuchin said over the weekend that they may piecemeal (or “phase”) the next stimulus package. I suspect what he’s really saying is “we need to get the unemployment benefit extended (in some form), and fast, and we can’t let the Democrats hold the economy hostage, by negotiating mail-in voting against it.”
This is setting up to hit a crescendo by the end of the week. And it may require Trump using Executive Order (if possible) on the unemployment subsidy.
We end the week with the clock ticking on the July 31st expiration of the unemployment subsidy (the extra $600/week).
And we end the week a significant step closer to action against China, whether it be a U.S. led coalition that puts China in the economic penalty box, or something bigger (military action).
With this, gold is getting power from two sources. It is already well on the path to new record highs, on the bet that trillions of dollars of new money floating around the world will inflate the price of all assets. And now, global capital is moving to gold as a flight to relative safety, as the probability of war with China has risen. Gold crossed $1,900 today…
How high can it go? Let’s revisit an updated chart on gold from my March 5 note.
This is a classic C-wave (from Elliott Wave theory) here in gold. This technical pattern projects a move up to $2,700.
Next, not surprisingly, with an imminent risk to the economy (the expiration of the unemployment subsidy), and 2) the rising risk of geopolitical instability, stocks end the week in a technically vulnerable position.
As you can see, the S&P sits on this very important trendline (as I write), representing the recovery from the March lows. This doesn’t look good, and this line has already given way in the Nasdaq.
With the above in mind, next week will likely come with less than comforting price action in markets. But, even though Congress is very unlikely to come to an agreement on a new stimulus package (not next week, not before the election), I suspect/hope the White House will find a way to extend the unemployment benefits, in the current form (faults and all). That should keep the economic recovery intact.
As we discussed yesterday, if you've been listening to Pompeo, it's increasingly clear that he's setting the table for a large-scale confrontation with China.
Today, he took the case to the world.
If we had any question on how aggressive Pompeo might be, he led the way yesterday with a comment about the head of the WHO, saying he was "bought by China." Remember, Tedros (WHO head) was on the ground in China, through the depths of the health crisis there, yet refused to call it a pandemic until March 11th — over a month after it was known that there was human-to-human transmission and about 20 days after the virus had already reached over 20 countries worldwide.
Take a look at the language in Pompeo's message today:
"The only way to truly change communist China is to act, not on what they say, but on the way they behave” – followed by examples of China's IP theft, censorship, global propaganda campaigns, espionage, etc — and he documented the threat to its own citizens.
"It's time."
"It's time for free nations to act."
“For too long we let the CCP set the terms of engagement. But no longer. Free nations must set the tone.”
I’d say the line in the sand has been drawn.
And to be sure, it will be crossed. And now the table has been set for action to follow.
As we discussed yesterday, this will likely come before the election.
With this, gold traded near $1,900 today. We've talked about gold here in my daily notes quite a bit, saying a new record high was coming, given the recipe for a global reset in prices (i.e. inflation). The last $100 has been fast. We're in sniffing distance of the all-time highs now, and it's not only inflation-driven flows, but also flight-to-safety flows now.
