Thoughts from Friday, July 3

It’s been another long week full of good information on the stock market and economy, so I want to take a quick look at some of the developments.

  1. Jobs Report – 4.8m new jobs, falling unemployment rate, record continuing unemployment claims.

You read that right.  It seems contradictory.  The Bureau of Labor and Statistics reported more new jobs than expected along with a falling unemployment rate.  But at the SAME TIME, they also reported a RECORD number of continuing unemployment claims…over 31 million.  As “Mish” says in the article below, the “strength in the report is relative”.  The broader U6 unemployment rate is 18%.  I don’t know about you, but it seems that these numbers are so big they feel unreal.  But the reality is that over 31m people are receiving unemployment benefits, many more are unemployment and NOT receiving benefits, so the actual unemployment “rate” is irrelevant.  If continuing claims persist for another few months, any hope of a significant and quick economic recovery is gone.  Bottom Line – the US economy cannot be bouncing back with a vengeance when 20% of its workforce is out of work.

  1. Consumer Confidence is rising – Rebound in June

Consumer confidence should be rebounding, but the challenge will be going forward with significantly rising COVID-19 cases and more importantly hospitalizations, will the consumer retreat?  But here’s the thing, while confidence rebounded in June, it is still 30% below it’s peak in February.  30%.  Another big and hard to believe number.  How long could it take to get back to pre-pademic levels?  As extra unemployment benefits sunset, home and car loan forbearances need to be repaid and the virus continues to leave a fog of uncertainty around the world, it will likely be many YEARS before the consumer is indeed comfortable again.

  1. More Gvt Spending – are there consequences?

One of the things we keep hearing in the media and those that are bullish about the stock market is that the Gvt needs to spend more and the Federal Reserve needs to do more in order to keep stock prices high.  First, as we have discussed before, history has shown that more Fed intervention is only artificial and eventually become irrelevant to stock prices.  Second, numerous academic studies, including those done by various Federal Reserve banks, have shown that additional Gvt spending is not a significant multiplier to long-term economic growth.  For every $1 spent, the affect has less than a $1 of economic productivity.  What does that all mean?  Well, it means that when the Gvt spends money, it doesn’t really help the economy very much.  In fact, it take away from private spending and growth.  This is why Gvt deficits and debt are counter-productive over time.  

But nevertheless, the opinion still stands that the Gvt and the Fed should to more because the are not consequences to borrowing.  For you and me along with businesses and local governments, when we borrow, we have to pay it back.  Is the US Gvt different?  Yes and No.  For now, the consequences seem small and distant but as the Federal debt has now soared past $26 trillion and the Federal Reserve has over $7 trillion on its balance sheet, when will it all matter?  And why are we trying to save the stock market?  Should saving people be the priority?

Thoughts from June 15, 2020

  1. CalPERS borrowing $BILLIONS

In a short few weeks, it will mark the 7th anniversary of moving my family from Los Angeles to Raleigh, NC.  The list of reasons why is long.  CalPERS is just another ridiculous organization that I am glad to be away from, but sadly, the stable retirement of many friends and family is dependent upon CalPERS.  This is an insane practice, but one which has been used before and will be used many times over in the years to come by pensions that can’t keep up with their obligations.  Any deepening of the stock market correction for any significant period of time will blow the whole thing up anyway.

  1. Tesla #1

Shares of Tesla are now up 139% YTD while everything about the company seems to be trending in the wrong direction.  Sales down.  Deliveries down.  Earnings non-existent.  Factories offline.  Demand down.  But with all of that as a background, Tesla became the largest Automaker IN THE WORLD (in terms of value…not actual making anything), surpassing Toyota.  I am not surprised in the least considering we are in the age of valuing only the distant future while completely discounting the past.

  1. Jobs lost from Demand Destruction will not come back

While many of the 40M+ jobs that were lost over the past few months will come back as the economy reopens, many will not.  And not just from restaurants closing or small businesses shutting their doors.  Ultimately, when demand stops, companies cut.  Those cuts are permanent and will only be replaced when demand returns to a robust pace.  For many industries, it may be years.  Recessions (and dare I say Depressions) change people’s behavior.  The financial security there once was is now in question.  There will be more saving, and therefore less spending.  With many out of work, they also will be spending less.  Less spending means less revenue for companies which typically means less profit which means more job cuts.  It is and likely will be a vicious cycle.  I keep reminding people.  We are only 3 months into this.  3 months.  There is a lot more coming.

  1. Speculation is not investing

Hertz did announce today a $500m follow-on offering, but was quick to note that is was very likely the shares are worthless.  Wow.  Typically I am more of an anti-gvt involvement kinda guy, but this is one where I wish the SEC would step in and protect investors.  There is very little moving Hertz stock except retail speculators.  More to come on some of these other companies that should be worth next to nothing.|linkedin&par=sharebar