‘The Last Dance’ was awesome, but…

361 Capital Market Commentary | May 18th, 2020

Jerome Powell’s appearance on ’60 Minutes’ added $2.5 trillion in value to the global equity markets on Monday. That is the same value as 4.5 million pairs of Jordan-signed 1997 NBA Finals “Flu Game” sneakers which auctioned off at $560,000 this weekend. I fully expected the markets to open lower Sunday night as the White House’s saber rattling with China intensified during the Sunday morning talk shows. And, while market participants knew Powell’s thinking, and saw some of the “60 Minutes” text and sound bites, we didn’t anticipate his delivery to be so Jordanesque. Of course, it did help that he appeared on the highest rated show on prime-time TV, thus getting one of the biggest soapboxes available to talk directly to the American public. With Scott Pelley slinging socially distanced questions at the Chairman, he answered confidently and truthfully about the potential difficulties ahead and the large cache of tools available to the Fed to keep the U.S. economy moving in the right direction. He also further put to rest the notion of using negative interest rates. So, let’s get Jay-Pow a ‘Big Air’ license plate to go with his incoming Nobel Prize, and Time Man of the Year award. The U.S. economy and our IRAs have already nominated him for every 2020 award.

Chairman Powell did note in his ’60 Minutes’ interview that at some point in the future when the economy is better, the U.S. will need to repay these emergency debts. This will be no small feat. Many trillions will need to be deposited back into the piggy bank when this is all done. Many top market seers are turning their attention toward how to remove trillions from the economy and become more cautious. They are entirely correct to do so. It is easy to create unlimited liquidity as we have done—which is a major reason why the credit and equity markets have stabilized and recovered. So, what do you think will happen when we try and put the trillion-dollar genies back into the lamp?

For the week, the U.S. states and cities continued to open their local economies a bit further. This will soon help the jobs figures turn from losses into gains. But it likely won’t be quick enough to keep many Americans from having July or August rent or mortgage concerns. Another COVID aid package will be on its way and will probably add another $1-2 trillion to the deficit this year. Could we get $1 trillion in new infrastructure spending as part of the program? Let’s just keep the big American economy in a stable glide path to its recovery. No more saber rattling with China (farmers need the customers and the Treasury needs them rolling over their debt). No more fights with Congress (just get in there and do some horse trading and help those in need out). And no more calls for negative interest rates (want to see the U.S. banking industry move to new lows again?). Let’s focus on getting things done, forward progress and then summer and soccer, baseball, hockey and then football.

If Jerome Powell is the GOAT Fed Chairman, then who plays the role of LeBron?

In an interview on 60 Minutes Sunday night, Fed Chairman Jerome Powell said that despite the plethora of steps the central bank has taken to prop up the economy, “we’re not out of ammunition by a long shot.” The Fed could enlarge existing lending programs or start new ones, he said, noting “there’s really no limit to what we can do with these lending programs that we have.”


Jerome Powell: The 2020 60 Minutes Interview

No negative interest rate policy. Good news for bank stocks and long-term savers…

Federal Reserve Chair Jerome Powell made two things clear during much-anticipated remarks on Wednesday. First, fiscal policy might need to do more to combat the lasting economic damage from the coronavirus pandemic. Second — in what markets were most eager to hear — he’s not about to steer the central bank down the path to negative interest rates.

“The evidence on the effectiveness of negative rates is very mixed,” Powell said Wednesday in a webinar hosted by the Peterson Institute for International Economics. To hammer home the point: “This is not something that we’re looking at.”

“It’s an unsettled area, I would call it,” he said. “I know that there are fans of the policy, but for now it’s not something that we’re considering. We think we have a good toolkit, and that’s the one we’ll be using.”


The weekend also showed some good progress on a COVID vaccine…

The first coronavirus vaccine to be tested in people appears to be safe and able to stimulate an immune response against the virus, its manufacturer, Moderna, announced on Monday.

The findings are based on results from the first eight people who each received two doses of the experimental vaccine, starting in March.

Those people, healthy volunteers ages 18 to 55, made antibodies that were then tested in infected cells in the lab, and were able to stop the virus from replicating — the key requirement for an effective vaccine. The levels of those so-called neutralizing antibodies matched or exceeded the levels found in patients who had recovered after contracting the virus in the community…

Moderna has said that it is proceeding on an accelerated timetable, with the second phase involving 600 people to begin soon, and a third phase to begin in July involving thousands of healthy people. The Food and Drug Administration gave Moderna the go-ahead for the second phase earlier this month.

If those trials go well, a vaccine could become available for widespread use by the end of this year or early 2021, Dr. Tal Zaks, Moderna’s chief medical officer, said in an interview. How many doses might be ready is not clear, but Dr. Zaks said, “We’re doing our best to make it as many millions as possible.”


A good interview with Nancy Lazar in this weekend’s Barron’s…

Here she addresses the ongoing question of excitement in the markets versus the actual economy.

Barron’s: The Nasdaq is near its all-time high, and we have an unemployment rate that rivals the Great Depression’s. How do you reconcile the two?

Nancy Lazar: Policy makers did a fantastic job responding to the crisis. That said, policy can’t stop the virus, or prevent companies from closing or states from shutting down. There is a huge lag between the impact on the economy and the employment backdrop. This time it is going to be bigger than normal.

Beryl Sprinkel, a famous economist in the 1960s and ’70s, wrote a book in 1964 titled Money and Stock Prices, which said that before you can see a policy’s impact on the economy, you must first see it in financial markets. We have seen the healing of the credit markets in a broad-based way, even energy. Credit yields are down; high-quality credit spreads are down. Mortgage rates are back down to their pre-crisis low. That’s a necessary condition before you see it in economic activity. There are green shoots unfolding in the economy as a result of policy. But it could be a long time before you see the full effects of policy supporting the economy.


And a good Bloomberg interview with Reinhart & Rogoff. Important inflation thoughts…

BM: There is some question over the future path of inflation. Do you see an inflationary surge at some point?

KR: We don’t know where we will come out. So the probability is, for the foreseeable future, we’ll have deflation. But at the end of this, I think we’re going to have experienced an extremely negative productivity shock with deglobalization. In terms of growth and productivity, they will be lasting negative shocks, and demand may come back. And then you have the many forces that have led to very low inflation maybe going into reverse, either because of deglobalization or because workers will strengthen their rights. The market sees essentially zero chance of ever having inflation again. And I think that’s very wrong.

BM: And what scars are left on economies once the pandemic passes?

CR: Some of the scars are on supply chains. I don’t think we’ll return to their precrisis normal. We’re going to see a lot of risk aversion. We’ll be more inward-looking, self-sufficient in medical supplies, self-sufficient in food. If you look at some of the legacies of the big crises, those have all seen fixed investment ratchet down and often stay down.


BofA’s Michael Hartnett notes ‘The Big Change’ in today’s transforming world. From deflation to stagflation?

Today, deflation is dominant. The long view is stagflation. In the 2020s “peak capitalism” (taxes, regulation, redistribution) = low, volatile growth. A populist electorate (voting for UBI & MMT), a bigger government (public sector monopolistic & inflation solves debt), and a smaller world (globalization to localization) = higher inflation; weaker US dollar (DXY<100) & low in bond yields (GT30>1%) best lead indicators of regime change.

So, are you ready to flip your asset allocation upside down?

Asset Allocation

Will commodities soon have their day in the green?

Rolling 10yr annualized price

Gold is green…

Gold Broke Out

The biggest hedge fund managers can’t be more favorable about Gold right now…

Hedge fund luminaries including Paul Singer, David Einhorn, and Crispin Odey are among those bullish on gold, according to recent letters to investors. So are large asset managers like Blackrock Inc. and Newton Investment Management.

“Gold is the only escape from global monetising,” Odey wrote. Gold futures were the third-largest position held by his flagship Odey European Inc. fund at the end of March. “In the short term, the money will be made on the inflation bet.”

The logic is simple: the massive expansion of central bank balance sheets around the world must eventually dilute the value of their currencies — most importantly the dollar — leading to inflation of hard assets like gold. The price of the metal has already risen sharply this year, touching a seven-year high of $1,751.69 an ounce on Friday. But some believe it has much further to go.

“In recent months, gold has gone up in price to some degree, but we think that it is one of the most undervalued investable assets existing today,” Singer’s Elliott Management Corp. wrote in a letter to investors in April. He argued that low interest rates, mine disruptions and “fanatical debasement of money by all of the world’s central banks” would lead gold to rise to “literally multiples of its current price”.


PNC sold their Blackrock stake to put themselves in a position of strength if the economy got worse…

PNC’s decision to sell its $17bn stake in BlackRock was prompted by the bank’s increasing fears over the US economy, chief executive Bill Demchak told the Financial Times.

The head of America’s seventh-largest commercial bank said the sale would give him a “bulletproof” balance sheet to deal with an extreme crisis or a war chest to buy distressed assets in a more moderate recession.

“As we entered this crisis, it became clear that everything we thought we knew was proven incorrect,” Mr Demchak said of the deliberations that led the PNC to decide to end its long relationship with the world’s biggest asset manager…

“I can’t stress the importance of being able to play offence into that environment,” Mr Demchak said. “If you’re left in a situation where you’re defending, where you’re shrinking your balance sheet, where you’re worried about your capital, where you’re continually cajoling shareholders, or clients to stick with you, you’re not focused on growing.”

(Financial Times)

Current economic data points are turning up…

For example, map requests on Apple Inc. devices fell 50% throughout the country between mid-January and the week ended April 9, but they have steadily climbed since then and are now down just 20%. While driving doesn’t necessarily equate to spending, retail visits show the same trend, according to Unacast, a mobility-data analytics company: off more than 50% in mid-April from a year earlier, but down just 32% this past week. Real-estate brokerage Redfin Corp. said home-buyer demand as measured by customers contacting affiliated agents, after plummeting by one-third, is now above prepandemic levels.


Apple has given us a mobility trend data series to monitor the recovery…

Mobility Trends


The U.S. hotel industry looks to have found its bottom occupancy and RevPar…

Trough occupancy

(Goldman Sachs)

Luxury hotel properties also seeing a recovery…

Luxury Hotel Properties

(Goldman Sachs)

Airline travel data looks to be growing 20% week over week…

TSA Checkpoint Travel Numbers


Hmmm, maybe I will drive instead…

For as long as most of us can remember, air travel hasn’t been a whole lot of fun. As airlines crawl out of virus-lockdown mode, passengers can expect it to be even more of a bummer, with new temperature check points, lines of distancing people stretching into the parking lot, and plexiglass barriers isolating baggage clerks, baristas, and other staffers.

Face masks and gloves will be de rigueur, disinfectants will be everywhere, and even though many processes will be automated to minimize human interaction, industry officials predict travel times will have to increase to accommodate the hygiene-inspired precautions.

“Going through an airport, the whole travel experience, will be as enjoyable as open-heart surgery,” says Paul Griffiths, chief executive officer of Dubai Airports, whose workers wear disposable gowns and safety visors that wouldn’t look out of place in a Covid-19 ward.


Boeing’s CEO had strong thoughts on the outlook for his customers…

“Traffic levels will not be back to 100%. They won’t even be back to 25%…Maybe by the end of the year we approach 50%.. I believe it’s three full years before we return to the traffic levels that we had just in 2019, and then probably another two before we begin to return to the growth rates that we used to have.” – Boeing CEO, Dave Calhoun


The CEO of Boeing doesn’t think all of his customers are going to make it thru COVID-19…

These Robinhood clients trading airline stocks to the long side may have missed the Boeing comments, but their portfolios will not.

Tweet from @CharlesSizemore

I wonder if Robinhood investors are also plowing into GE?

$GE Printing


The big global economic commodity named oil is breaking higher…

@Schuldensuehner: Brent #Oil jumps >$35/bbl for the first time since Apr 9.


It might take a lot longer for the energy stocks to follow the commodity higher…

Energy vs. S&P 500

The breakdown in bank stocks last week, due to talk about negative interest rates, was concerning…

Banks vs. S&P 500


Agree fully…

Bank stocks should not trade at their current multiples if so many software/cloud/internet stocks can trade at triple digit multiples. Either the U.S. economy is healthier than it appears and banks must rise, or banks are ringing the bell and tech’s customer base is about to have a major negative event.

Tweet from @nosunkcosts

Are insurance prices about to rise meaningfully?

If AIG is correct, then there is about to be a significant amount of insurance capital exit or be locked up which can’t be used for future business writings.



Lots of cash has built up in portfolios. Will it deploy?

@carlquintanilla: “The assets sitting in money market mutual funds now totals $4.8 trillion, which equates to around 16% of market cap. On a percentage basis it’s not as big as 2008, but it’s still a meaningful amount of dry powder earning little & suffering from increasing FOMO.” @TimmerFidelity

Cash on the Sidelines

The market multiple has broken higher. Thank you tech and healthcare stocks…

@FactSet: The forward 12-month P/E ratio for $SPX of 20.3 is above the 5-year average (16.7) and above the 10-year average (15.1). https://bit.ly/2LwfN7Z

S&P 500 Forward

And we move closer to this being a stock picker’s market…

@LeutholdGroup: At year-end, the SP500 Top-5 firms’ weight was on par w/ bottom 300. On April 30 the gap = 6%. Equal-weighted $SPY is @ 11-yr RS low vs. cap weighted. The “proletariat” firms’ revolution may not be imminent, but this excess should be a tailwind for active management… eventually

S&P 500 Weights of the Top 5

If commuting to NYC for work might be a thing of the past, then why live in the Tri-State region?

Those Monday through Friday commutes from Greenwich, Connecticut, to Wall Street may become a thing of the past.

Connecticut Governor Ned Lamont said the chief executives of some large companies have told him that telecommuting could help them save money by cutting office space by as much as 30%, signaling what may be a national shift by businesses. And with employees already stuck at home for weeks, they realize they can run just as well when they work at home.

“The old idea of the commuter going into New York City five days a week may be an idea that’s behind us,” Lamont said in an interview with Bloomberg Television. “Maybe you have a great job that seems to be geographically located in New York City, you can do it two-thirds of the time from your home in Stamford.”


Imagine that, people in big cities love to see the blue skies and breath fresh air…

The ruling Democratic party in South Korea won a landslide re-election last month on its own Green New Deal platform. The country now aims to reach zero carbon emissions by 2050, the first such pledge in East Asia.

The moves are being driven by shifting public opinion among Korea’s politically active citizenry, as they are in cities around the world. Over half of the global population lives in cities with dangerously poor air quality. In the last few months, billions have been able to breathe fresh air, many for the first time. A recent study documented how air pollution caused 8.8 million premature deaths in 2015 and reduced overall life expectancy by almost three years — as much as tobacco and HIV combined. Some researchers believe improved air quality due to lockdowns may have saved more lives than the quarantine itself.

No wonder 96 mayors from around the world have stated their intention to emerge their cities from the pandemic cleaner and greener than before. “We, as leaders of major cities across the globe, are clear that our ambition should not be a return to ‘normal,’” wrote the C-40 Cities coalition in a statement. “Our goal is to build a better, more sustainable, more resilient and fairer society out of the recovery from the COVID-19 crisis.”

Representing over 700 million people and one-quarter of the global economy, these local leaders are now sharing ideas on how to pivot toward urban transformation. The easing of gridlock has allowed bold experiments that may persist after the lockdown. Milan has opened up 22 miles of streets for walking and cycling. The mayor of Paris dedicated 300 million euros ($325 million USD) towards expanding cycling lanes. Bogata is permanently closing 75 miles of streets to car traffic.


Speaking of making the world a better place…

And making yourself healthier… Oat Milk, there is no substitute.

Milk vs. Milk


The LED light bulb is one of the greatest inventions of our lifetimes…

But today’s appliances and electronics are more efficient. New homes are tighter and better insulated. And most important, light-emitting diodes, or LEDs, have replaced traditional incandescent lightbulbs.

“No other change is so dramatic,” Dr. Davis said. “When you take an incandescent bulb out and screw in an LED, consumption goes down 80%. Imagine you could get a car that uses 80% less gasoline. That would be amazing.”

With the transition to LEDs, the amount of electricity used for lighting dropped 26% from 2015 to 2017. In raw numbers, that meant consumption slipped from 129.7 million megawatt-hours a year nationwide to 95.5 million megawatt-hours.

By 2021, if incandescent and halogen bulbs continue to be eliminated, the energy used for lighting is expected to decline by more than half, dropping to 61.3 million megawatt-hours annually.


Who would have ever thought that golf pushcarts would go on allocation?

That makes pushcarts one of the unlikeliest products being hoarded during the pandemic. Warehouses are empty of them, retailers are too, and there even is pushcart price gouging. “It’s not unlike grocery stores with hand sanitizers and toilet paper,” said Todd Hansen, a distributor.

Golf has been a popular escape since much of the U.S. went into lockdown. It’s outdoors, and it involves inherent social distancing. Although some golf courses have closed, others have stayed open or recently reopened.

The open ones are taking extra precautions. They have shut clubhouses and raised cups out of the ground so golfers don’t touch them, in addition to reducing or eliminating the use of carts and caddies.

Suddenly, people eager to trade the misery of sheltering in place for the frustration of chasing around a tiny ball realize they need a pushcart.


Golf Push Cart


If you are going to rent or buy an RV for this summer’s vacation, you had better hop on it this week…

“[We] felt stuck because even if we were isolated in a car and brought our own food, we would still have the challenge of what to do in a hotel,” he said, a common sentiment among quarantiners yearning to be free. Only 14% of travelers feel safe taking a domestic flight, and 17% feel safe at a hotel or resort according to a late-April survey by MMGY Global for the U.S. Travel Association. The couple ultimately decided that when they can again venture into the world, they’ll do so in a nostalgic way they’d “never” considered: aboard an RV….

“We have been flooded with new inquiries, and an unusually high number of longer rentals (lasting from one to three months in duration),” said Mr. Ward. “I think this is going to be the trend for the remainder of 2020 and 2021, at a minimum.” One couple, he said, just booked their RV for a three-month loop around the deep South on short notice. “Neither have work to do right now due to the virus, so they’re like, ‘There’s no better time. We’ve always wanted to travel in an Airstream. This works for us now.’”

In a season when the urge to escape home will only be matched by the need to be flexible, getting lost in America in an RV works for a lot of people right now. Mr. Rybak and Ms. O’Hara are still hoping to tick at least one national park off their list in the next few months. They even have a campsite reserved. If you see them, say “Hi.” From a safe distance.


Find a good mask for everyone in your family to wear…

If you’re wondering whether to wear or not to wear, consider this. The day before yesterday, 21 people died of COVID-19 in Japan. In the United States, 2,129 died. Comparing overall death rates for the two countries offers an even starker point of comparison with total U.S. deaths now at a staggering 76,032 and Japan’s fatalities at 577. Japan’s population is about 38% of the U.S., but even adjusting for population, the Japanese death rate is a mere 2% of America’s.

This comes despite Japan having no lockdown, still-active subways, and many businesses that have remained open—reportedly including karaoke bars, although Japanese citizens and industries are practicing social distancing where they can. Nor have the Japanese broadly embraced contact tracing, a practice by which health authorities identify someone who has been infected and then attempt to identify everyone that person might have interacted with—and potentially infected. So how does Japan do it?

“One reason is that nearly everyone there is wearing a mask,” said De Kai, an American computer scientist with joint appointments at UC Berkeley’s International Computer Science Institute and at the Hong Kong University of Science and Technology. He is also the chief architect of an in-depth study, set to be released in the coming days, that suggests that every one of us should be wearing a mask—whether surgical or homemade, scarf or bandana—like they do in Japan and other countries, mostly in East Asia. This formula applies to President Donald Trump and Vice President Mike Pence (occasional mask refuseniks) as well as every other official who routinely interacts with people in public settings. Among the findings of their research paper, which the team plans to submit to a major journal: If 80% of a closed population were to don a mask, COVID-19 infection rates would statistically drop to approximately one twelfth the number of infections—compared to a live-virus population in which no one wore masks.


Finally, as we all move to leave our homes a bit more as COVID-19 restrictions ease, here is a great reminder piece from an immunology and infectious disease expert to help keep you safe…

As we are allowed to move around our communities more freely and be in contact with more people in more places more regularly, the risks to ourselves and our family are significant. Even if you are gung-ho for reopening and resuming business as usual, do your part and wear a mask to reduce what you release into the environment. It will help everyone, including your own business.


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