April Jobs Report: In what was the most depressing economic data point yet from the Covid fallout, today we learned that 20.5 million jobs were lost in April. This drove the Unemployment rate up to 14.7% (note: could have been 19.7% if the responses were measured differently). The US has already lost more than double the percentage of jobs lost in 2008-10, and nearly half the percentage lost in 1929-1933 (via ECRI):
Since today’s announcement is backward looking, in isolation it does not tell us what to expect in May. Of the 20.5 million who lost their jobs, 18.1 million reported that they expect to be rehired, let’s hope they’re right.
States Reopening: According to Tom Lee of Fundstrat, as of this Friday, 26 states are in some state of “open”, representing 58% of US GDP. These openings are occurring despite many states have not been able to meet all of the White House Coronavirus Task Force recommendations for phased reopening (Bloomberg). We know that re-opening will not occur in unison and be broad based, with some states refusing to move too fast (NY, NJ and more) while other states proceed aggressively (GA, MS, TX).
What Will Things Look Like? Billionaire Sam Zell pointed out on Bloomberg, “How soon will anybody get on an airplane? How soon will anybody stay in a hotel? How soon will anybody go to a mall? The fact that these places may be open doesn’t necessarily mean they’ll be doing business.” Here is a sample survey from Twitter of how people may adjust their behavior:
If you were thinking about purchasing a car anytime soon, there may be some good deals to be found. Auto demand is expected to drop 27% this year, used car prices to drop between 8-16% through June.
“If a prolonged shut down unfolds, unemployment remains elevated for an extended period of time and especially if there are no additional rounds of government stimulus, we’re at some significant risk of cascading bankruptcies,” said Investment Banker Peter Orszag. “Most Americans were not prepared to weather this economic storm, and the damage that is being done to household balance sheets, let alone the damage to their confidence, is going to have long-term negative repercussions on consumption.” As former Fed Consultant Danielle DiMartino Booth emphasized “...we need to have end demand so we don’t have a 2nd wave of layoffs, higher up on the income chain.”
Market participants are sure to monitor the speed and magnitude of the re-open along with the changes these actions have on Covid infections over the coming weeks. A delicate balancing act for sureà re-open the economy to limit negative impacts without allowing a second wave of increased infections.
Massive Money For Nothin’: On the back of near 0% interest rates, the Fed has unleashed a wave of liquidity to arrest the economic fallout caused by the hard stop on the global economy. The Fed’s balance sheet now stands at $7.8T and is well expected to exceed $12T by year-end 2021. Currently, there are 12 programs being managed by the Fed (full graphic here). Fiscal help has been meaningful as well, at least in the short-term. By Goldman Sachs assessment, disposable income in Q2 and Q3 will be slightly positive.
Global interest rates are negative for sovereign institutions throughout Europe and in Japan. The prospects for negative yields in the US are rising and cannot be ruled out. Fixed income traders are now starting to price a negative Fed Funds rate in 2021.
With all the talk of low interest rates, you would think mortgage rates would be at an all-time low. And they very well should be, except for the historically outsized spread charged during origination for servicing costs. This spread, or incremental cost over the base mortgage rate is historically high right now, given the environment for mortgage forbearance requests and current dynamics around interest rate volatility.
This leads me to my final comment here. Given there has been massive free money in the form of stimulus checks, combined with the trend for people to raise chickens in their back yard—if people used their stimulus checks to buy chickens, does that mean they got their money for nothin’ and their chicks for free?
Why do Markets Keep Rallying? In the face of April’s job print stocks rallied further to close the week at 2,929 on the S&P 500. Portfolio Manager Dylan Grice offered one theory, “Everyone ‘knows’ that the world won’t return to normal for years, if ever; that society has changed, probably permanently; that we are now in a different world. Which means its not a good thing to bet on.” Perhaps markets are right, and this recent cover from The Economist is a contrarian indicator:
As the Veteran Investor Doug Kass stated on Twitter: “One observation I will say with authority...nearly every smart investor I know is somewhere between scared sh*tless and bearish on the markets and on the trajectory of economic growth.” This falls pretty square with Dylan’s observation. But, should investment managers be bearish given the mix of risks with current risk premiums? That is a topic for another discussion. One thing’s for sure, Warren Buffet isn’t buying, in fact, recently he’s been selling.
Gold’s Been Acting Nice: Gold and gold-related investments experienced some pretty harrowing price movements over the past several weeks. But recently, things have been working out well for the shiny metal. What may be driving investors in its direction? Here are several quotes I came across over the course of the week:
“Because gold is honest money it is disliked by dishonest men.” -Ron Paul
“Of the roughly 750 currencies that have existed since 1700, only about 20% remain, and of those that remain all have been devalued” -Ray Dalio
“We are witnessing the Great Monetary Inflation—an unprecedented expansion of every form of money unlike anything the developed world has ever seen.” -Paul Tudor Jones
“The perfect storm is emerging for gold: a) risk-free treasury debt could have negative yields, b) money printing will eventually spur a wave of inflation, and c) central bankers have to continue the path of NEGATIVE real interest rates…whatever it takes to manage debt.” -Gold Telegraph
I will close here for the week. Have a great weekend.