The Hokium of a V Recovery and Stock Market Rally
By Victor Sperandeo with the Curmudgeon
The unique world events and market reactions continue! Victor provides his razor sharp, incisive analysis of the current U.S. economic and financial conditions along with his opinions and forecasts for the future. He also assesses the recent stock market run-up (off the March 2020 lows) supplemented by (Hokium) comments from Canter Fitzgerald.
U.S. Economic Overview:
President Trump and his advisers, as well as many economists, are repeatedly saying that the U.S. will experience a V type economic recovery -- with a boom coming in the 3rd quarter! Lets examine that scenario by looking at recent economic reports and forecasts. Note that the GDP report and forecasts below are annualized numbers:
BEA wrote: The decline in first quarter GDP was, IN PART (emphasis added), due to the response to the spread of COVID-19, as governments issued "stay-at-home" orders in March. This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the first quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.
Curmudgeon Note No V Recovery!
Widespread joblessness will cause a lasting strain for the economy to rebound. Some have estimated the unemployment rate at 20% and a few have predicted it to get as high as 30%. If those figures are correct, the unemployment rate will be between three and five times higher than that of the last financial crisis. When hiring resumes, consumer spending is unlikely to stage such a quick comeback as many Americans have limited savings before the pandemic hit. They will also be a lot more careful and somewhat fearful of going to restaurants and shopping malls with lots of people.
Is the U.S. Economy in a Depression?
John Maynard Keynes defined a depression as when the economy grows at below trend for a long time period.
The U.S. economy from June 2009 (the beginning of the so called recovery) to 2019 GDP grew at 2.17%. That was well below the long-term trend of about 3.4% (from 1949 to 2008 GDP grew at 3.38% in in 2012 chained dollars according to the BEA). Therefore, Keynes would classify the last decade as a depression, even though it was still positive growth. With that in mind and considering the sharp economic decline in the first half of 2020, Keynes would certainly call the last 12 years a depression.
My view is that it is highly unlikely that the 3rd quarter of 2020 will be the beginning of anything near normal. I do believe the economy will be positive, but how much is pure speculation as no one knows when all of the U.S. will return to work? For calendar years 2020 through 2021, I estimate U.S. economic growth to be from -1% to +1%.
Further, no matter who wins in the November elections, I believe the U.S. will be like Japans lost decade (at best) longer term.
The American public has been caught up in a government suicide plan (see our Suicide is NOT Painless! article) that effectively will take down the economy, whether to fight the virus or for political reasons to cause Trump to lose the Presidential election.
We should put the facts into context: the Black Swan event we are now experiencing is largely due to state Governors closing down the bulk of the productive businesses in the U.S. economy.
The Coronavirus is the excuse. However, the CHOICE of HOW to fight the virus was a personal decision by government officials.
Most Asian countries did not shut down any business or schools. For example, Taiwan, with 19% more people than New York state, did not shut down. [As of this writing NY state has 19,795,000 people and Taiwan has 23,600,000]. Yet Taiwan has 429 virus cases and 6 deaths while NYC has 311,795 cases and 23,796 deaths!
Why? In Taiwan everyone wears a mask and many tests are taken. In sharp contrast, NYC Mayor Bill de Blasio stopped many trains and buses from running and packed more people into a smaller space without masks. This was truly ignorant and greatly caused the spread of the virus. As you can observe, the use of masks is now mandatory in several states and businesses.
Sidebar - A Short History of Pandemics and Plagues:
There were 10 major plagues before 1789, when the law of the United States - the U.S. Constitution - was created.
The Black Plague (from 1338/1339-1351) was the most well-known. It killed an estimated 75-200 million people for a mortality rate of 30%-60%. Compare that to the current global reported coronavirus cases of 3,446,291 with 244,122 reported deaths, which is about a 7% morality rate. Most COVID-19 deaths were elderly people with pre-existing conditions.
The U.S. Founding Fathers were the greatest combination of educated men in history. They ignored laws that allow government to regulate Liberty in the name of keeping them safe.
The U.S. government cannot protect the people against a virus. However, it may incur an extreme cost of destroying the economy in its attempt to do so. Sweden has not done anything to prevent the spread of the virus, yet the COVID-19 stats are the same as in New York state.
U.S. Stock Market Comments:
In the face of the economy falling off a cliff and new unemployment claims soaring, why is the S&P 500 up 31.4% from 3/22/20-4/29/20? The answer is psychological, as all value is subjective.
While the stock market believes the fable of everything will be back to normal in October 2020, the commodity markets see the horrible news for what it really is. The Commodity Research Bureau (CRB) Index traded at 1994 lows according to Barcharts. From its monthly closing high in June 2008 of 462.74 to its March 21st, 2020 low of 106.29 the CRB declined by -77 %! The current CRB rally bounce has been +10.25% with +4.8% coming on April 30th.
It should be understood that stock market rallies in bear markets are historically irrational in their extent and duration as they are usually overly optimistic. Investors dont want to miss the bottom, so they tend to buy rallies which eventually fail.
Using 1929 as a comparable example to the current situation... the Dow Jones Industrials (DJI) made a high on 9/3/29 at 381.17 and then proceeded to decline in two waves to 11/13/29 at 198.69. The DJI then rallied to 4/17/30 at 294.07 or +48% in 5 months and 4 days. At the time, many thought the bear market was over. WRONG! The DJI then declined to 41.22 by 7/8/32...a whopping -87%!
Cantor Fitzgerald on the Stock Market Rally:
We continue to suggest the rally this week was due to market participants smoking hopium, and it was perhaps the denouement [1.] of one of the five silliest rallies weve seen in our careers. That is exactly how a bear trap feels. We continue to believe it is time to aggressively hedge equity portfolios. To be fair, this has been our suggestion for the past week. Yesterdays market action was emblematic of the disconnect of the equity markets from any kind of reality not just a fundamental one. In a world in which central banks distort risk and prevent price discovery, we understand that the markets and the economy are distinct.
Note 1. Hopium implies irrational or unwarranted optimism, while denouement is the final part of a play, movie, or narrative in which the strands of the plot are drawn together and matters are explained or resolved. .
The U.S. is in deep decline economically and morally. America is bought and paid for by corporations. The corruption that corporate America has used to buy Congress is beyond repair without changing the law, i.e. see the Citizens United v. FEC (Supreme Court).
Tax loopholes. Prescription drug pricing. Financial rules. Environmental protection. These companies define policies that are great for their bottom line, while good, honest people who work hard get squeezed harder every year. Its corruption, pure and simple, Elizabeth Warren wrote to her supporters in 2019.
The U.S. economy is now run by politicians from many states. As George R. R. Martin wrote in Ace in the Hole: Politicians were mostly people whod had too little morals and ethics to stay lawyers. And politicians are greatly influenced by their large corporate constituents.
Congressional offices pay a lot of attention to what big business groups are saying especially when those groups give them money. Well over half of GOP staffers said that input from business groups was very or extremely important in shaping the policy advice they gave their bosses, a study published in the American Political Science Review found. Over a quarter of Democratic staffers said the same thing.
The U.S. Congress in total earns an estimated $93 million dollars ($174,000 average salary x 535 members =93,090,000). Compare that to telecom - media giant AT&T, which had gross revenues of $181.2 Billion last year and an army of political lobbyists. In 2019, AT&T spent $4,437,353 on political contributions and $12,820,000 on lobbying, according to Open Secrets. 77 out of 98 (~79%) AT&T lobbyists previously held government jobs.
Indeed, Federal lobbying spending soared to nearly $903 million during the first three months of the year -- approaching record levels. If this pattern holds, lobbying during the first quarter of 2020 will top the previous first-quarter record of $926 million set in 2010 when Congress finalized the Affordable Care Act, overhauling the nation's health care system. It clearly shows that large U.S. corporations are trying to shape how Congress and the Trump administration respond to the coronavirus pandemic.
The lobbying surge "relates to every industry and company in the country fighting for their lives and Washington turning on the spigot with almost unlimited money," said Dan Auble, a senior researcher at the center. "Everyone is getting in on this lobbying boom," he added.
People never lie so much as after a hunt, during a war, or before an election. by Otto Eduard Leopold, Prince of Bismarck, Duke of Lauenburg-1 April 1815 30 July 1898), known as Otto von Bismarck -Chancellor of the German Empire.
Good luck, good health, and be well. Till next time
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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