“I can’t believe there is no uproar for a policy that involves so much resource misallocation, moral hazard behavior, and price manipulation.”
– David Rosenberg
President and Chief Economist & Strategist of
Rosenberg Research & Associates Inc.
There is nothing like more government stimulus to reinvigorate the stock market.
- From the federal government:
- From the Fed:
Some 78% of fund managers surveyed by BofA see the stock market as “overvalued.”
Federal Reserve on the economy:
The Fed sees the economy recovering over the course of a few years. They project unemployment to fall to 9.3% by the end of 2020, and to 6.5% by the end of 2021. The Fed sees the economy contracting 6.5% this year, before growing 5% in 2021.
The Fed’s future plans:
The central bank is committed to maintaining its unprecedented stimulus plan until the economy is over the impact of the pandemic. The Fed promised to not reduce its quantitative easing. The Fed will increase holding of Treasury and mortgage-backed securities and will buy corporate bonds.
The Fed recently cut interest rates to near zero in light of the coronavirus pandemic. Federal Reserve chairman Jerome Powell says they are not considering raising interest rates at this time. We are just seeing the beginnings of economy recovery.
The Federal Reserve issued a statement that “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”
Economists use the word “recovery” to define a rebound from the previous time period. If there was a 30% drop, a 10% increase would, for an economist, be a “recovery.” But in the real world, it still means you are more than 20% below where you started. Recovery doesn’t necessarily mean recovered. Even optimistic projections say we won’t see anything like 2019 GDP until late 2021. Many suggest it will be even longer.
Kudos to the Fed for actually giving a fairly transparent, coherent, and reasonable list of risks. Here they are.
- The future progression of the pandemic remains highly uncertain.
- The collapse in demand may ultimately bankrupt many businesses.
- Unlike past recessions, services activity has dropped more sharply than manufacturing—with restrictions on movement severely curtailing expenditures on travel, tourism, restaurants, and recreation. Social-distancing requirements and attitudes may further weigh on the recovery in these sectors.
- Disruptions to global trade may result in a costly reconfiguration of global supply chains.
- Persistently weak consumer and firm demand may push medium- and longer-term inflation expectations well below central bank targets.
- Additional expansionary fiscal policies—possibly in response to future large-scale outbreaks of COVID-19—could significantly increase government debt and add to sovereign risk.
The Fed’s second risk: collapsed demand could bankrupt many businesses. In fact, collapsed demand already bankrupted some businesses.
It is certainly easy to see the restaurant businesses and their brethren are seeing extremely bad data. How soon before we go back to a movie theater, when we can watch from home, generally for less cost, even with a few friends for the human experience? How many other businesses have similar dynamics?
It is going to take several years for the employment situation to sort itself out. If your job is gone, what do you do now?
One recent survey of San Francisco restaurant owners found 60% lose money by staying open. They are low-margin even in normal times. Now capacity restrictions, combined with a general desire to stay home, make their prospects bleak indeed. Many won’t survive. The may hang on awhile, helped by PPP and other programs, but their challenge is deeper.
Nor is it just restaurants. The same or similar problems apply to bars, hotels, casinos, nightclubs, theaters, music venues—basically anywhere people gather in crowds. The crowds make them profitable. These businesses often can’t survive at 50% or even 80% capacity. They need to be full and now they can’t be. Can they change their model? Of course. But that will mean fewer employees and lower profits.
Which brings us to the real problem: These businesses employ millions of workers directly, and millions more depend on them indirectly. Many who lost their jobs in the last three months won’t get them back. That could make many of these “temporary” job losses permanent.
Debt
I have argued for years that we are on an unsustainable fiscal path. This year it suddenly got much worse. Household debt problems of rent, mortgages and utilities eventually become government debt problems. State and local governments were already a problem, too. Many were over their heads in pension debt and now the crisis is decimating their tax revenue. This, too, may turn into federal debt.
US federal debt is over $26 trillion and rising rapidly. There will likely be at least a $1 trillion additional stimulus package before July 31 that extends the additional unemployment benefits for some period. There is some debate on the amount. I expect a further multi-trillion stimulus/infrastructure bill before the election.
Banks
Since the market peaked in February, bank stocks have tumbled much harder than the broad S&P 500 Index. Many banks were hit with declines of 40% to 60%, and the whole sector has not rebounded like the S&P 500, with many bank stocks still 25% to 35% off their highs. This sector will continue to struggle with some very challenging times ahead due to default risk for loans and credit card balances.
COVID News
The Stock Market
The Bull Case
The bullish case for the market is pretty thin.
- Hopes are high for a full reopening of the economy
- A vaccine
- A rapid return to economic normalcy.
- 2022 earnings will be sufficiently high enough to justify “current” prices. (Let that sink in – that’s two years of ZERO price growth.)
- The Fed.
In actuality, the first four points are rationalizations. It is the Fed’s liquidity driving the market.
The Bear Case
The bears built their case on more solid fundamental views.
- The potential for a second wave of the virus
- A slower than expected economic recovery
- A second wave of the virus erodes consumer confidence slowing employment
- High unemployment weighs on personal consumption
- Debt defaults and bankruptcies rise more sharply than expected.
- All of this leads into sharply reduced earnings and corporate profitability.
- Stocks are also overvalued based on the 24-month earnings-per-share expectations.
Signs to know we are likely close to a peak:
- Wall Street firms using 2-year forward “operating (or B.S.)” earnings to justify valuations.
- Investors are chasing bankrupt companies.
- Companies rampantly issuing debt to shore up liquidity
- A complete lack of market liquidity.
- Investor over-confidence
- Retail investor exuberance.
- Overly optimistic estimated future earnings growth.
You get the idea.
The Housing Market
Residential construction didn’t rebound much in May. Economists were hoping to see more of a pop in housing starts.
Single-family construction starts were flat.
However, building permits showed some improvement.
Market Data
- A good way to determine whether a market environment is healthy or not is by watching how many stocks and indexes are holding above their 200-day moving averages. Healthy markets see most of them holding above, with dips below quickly getting bought. So far, we’re seeing the opposite among stocks, industries, sectors, and worldwide indexes.
- Continuing claims are holding above 18 million. The labor market is facing a long recovery.
- The amount of delinquent short-term consumer debt keeps climbing in China.
What is Love
A group of professional people posed this question to a group of 4- to 8-year-olds: “What does love mean?”
The answers they got were broader, deeper, and more profound than anyone could have ever imagined!
“When my grandmother got arthritis, she couldn’t bend over and paint her toenails anymore. So, my grandfather does it for her all the time, even when his hands got arthritis too. That’s love.” – Rebecca (age 8)
“When someone loves you, the way they say your name is different. You just know that your name is safe in their mouth.” – Billy (age 4)
“Love is when a girl puts on perfume and a boy puts on shaving cologne and they go out and smell each other.” – Karl (age 5)
“Love is when you go out to eat and give somebody most of your French fries without making them give you any of theirs.” – Chrissy (age 6)
“Love is what makes you smile when you’re tired.” – Terri (age 4)
“Love is what’s in the room with you at Christmas if you stop opening presents and just listen.” – Bobby (age 7) (Wow!)
“If you want to learn to love better, you should start with a friend who you hate.” – Nikka (age 6) (We need a few million more Nikka’s on this planet.)
“Love is when you tell a guy you like his shirt, then he wears it every day.” – Noelle (age 7)
“Love is like a little old woman and a little old man who are still friends even after they know each other so well.” – Tommy (age 6)
“During my piano recital, I was on a stage and I was scared. I looked at all the people watching me and saw my daddy waving and smiling. He was the only one doing that. I wasn’t scared anymore” – Cindy (age 8)
“My mommy loves me more than anybody. You don’t see anyone else kissing me to sleep at night.” – Clare (age 6)
“Love is when Mommy gives Daddy the best piece of chicken.” – Elaine (age 5)
“Love is when Mommy sees Daddy smelly and sweaty and still says he is handsomer than Robert Redford.” – Chris (age 7)
“Love is when your puppy licks your face even after you left him alone all day.” – Mary Ann (age 4)
“I know my older sister loves me because she gives me all her old clothes and has to go out and buy new ones.” – Lauren (age 4)
“When you love somebody, your eyelashes go up and down and little stars come out of you.” – Karen (age 7)
“You really shouldn’t say ‘I love you’ unless you mean it. But if you mean it, you should say it a lot. People forget.” – Jessica (age 8)
And the final one: The winner was a four-year-old child whose next-door neighbor was an elderly gentleman who had recently lost his wife. Upon seeing the man cry, the little boy went into the old gentleman’s yard, climbed onto his lap, and just sat there.
When his mother asked what he had said to the neighbor, the little boy said, “Nothing, I just helped him cry.”
Dad Jokes
- What’s brown and sticky? A stick.
- What do you call a fake noodle? An impasta.
- The circus fire was in-tents!
- Why can’t you see elephants hiding in the woods? Because they are good at it.
- What’s an astronaut’s favorite part of the computer? The space bar.
- I don’t trust those trees over there. They seem pretty shady.
All Content is the Opinion Brian J. Decker
