May 28, 2020
This is another very short note, but it is bizarre that markets continue their ascent with the dire news that is hitting the wires.
Continuing claims for unemployment were released today, and the news is improving; there were 4.1 million fewer people unemployed (14.5% unemployment, slightly better than the last reading of 17.1%). Still there were another 2.1 million people added to the initial claims tally. There are many caveats there (these are the ‘insured’ unemployed, etc.), but the fact that markets are rallying based on this data is just silly.
There is plenty of other data. GDP in the first quarter was revised down to -5% from the initial reading of -4.8%. Meanwhile US Durable goods orders dropped 17.2% in April which was better than the expected 19% drop, so again, let’s celebrate by buying shares in these companies!!
Of course the thesis is that the economy may be bottoming (and there should be a vaccine soon, and everyone will get back out and shop by June and everyone will get there job back, and so on, etc.). The only part of that that is true is that the worst may be over on the economic front (and that is still up for debate).
There is no evidence that things will return to anything approaching normal any time soon. In fact there are many prognosticators now suggesting that we will NEVER get back to the old normal, and that this will change consumer behaviour forever. (This author made that same claim in February.) It is still too early to know. Yet the market is rising rapidly to levels last seen at the beginning of the year. It is even more odd when you consider that some forecasters thought asset prices were too high at that time! The COVID crash is making things much, much worse in the short term, and generally worse in the long term. It really isn’t all better now.
This post won’t review the concepts of the velocity of money, but a chart is forthcoming anyway. For the last 12 years, the economy has been slowing, based on the velocity of money. Sure asset prices may have risen (and so we feel wealthier), but the pace at which people are transacting business has been slowing, with only a minor bump after the last huge cash injection in 2009. A longer post, another time will discuss why the money being thrown at the market is wasted effort at restarting the economy. The simple fact is that the largest group of economic actors, consumers, no longer have the financial firepower to support the economy. The COVID crash is simply going to make that worse and that means a reckoning is coming for stretched asset prices. Do keep in mind these things can take many months, and even many years to play out. The trends are not your friend for long term investors.