The Retired Investor: Inflation, a Factor to Forget?
It has been a long time since we have seen a rise in the inflation rate of any magnitude. As a result, most investors have largely dismissed inflation as a near-term concern. But that doesn't mean we have vanquished this troublesome variable from the financial equation forever.
There is a reason that inflation fears have subsided. Ever since the Financial Crisis, when central banks and governments dumped trillions of dollars into the world's economies, investors feared that all this money would re-ignite the inflation fire. It didn't happen. Instead, the inflation rate moderated, and in some countries began to drop. Rather than worry about inflation, investors and central bankers began to worry about the opposite — deflation.
You see, inflation, as any economists will tell you, is caused by an increase in the velocity of money. Simply put, velocity is a measurement of the rate that money is exchanged. It is the number of times that money moves from one entity to another.
Let's say I borrow $100 from my local bank. I spend $10 of it at McDonald's, another $20 at the movies, and spend the rest taking my wife out to dinner. If any of these three use that money to pay their suppliers, workers, or whatever, the money I spent is passed on to others. If they, in turn, take that money and buy items of their own with it, then the velocity of money continues higher. Over time, if this continues, the velocity of that same $100 will be so great that too much of this money will be chasing too few goods. In which case, inflation takes off.
One of the principles of economic theory is that in order for inflation to catch hold, all the money that central banks dumped into the global economic system over the last decade had to somehow find its way into the hands of consumers, who will spend it and pass it on. That didn't happen either. Instead, the world's banks and other financial institutions, stashed all that central bank cash in their electronic vaults, but didn't lend it out. There were two reasons for this.
The first one was fear. Banks were not about to lend this money to consumers, or corporations, given the aftermath of the crisis. Lending (in the form of mortgage money), was a big risk for banks, given what happened to the housing markets during 2008-2009. At the same time, unless you were one of the bluest of blue-chip companies, banks were charging an arm and a leg for corporate borrowers. Besides, the corporate appetite to borrow money was tepid at best. Given that the economy was sluggish, and the future uncertain, who really wanted to invest?
The growth rate of the economy continued to justify that attitude. The economy remained anemic throughout the Obama years and beyond. Companies argued that there just wasn't enough incentive to invest. Taxes were too high and regulations too onerous.
The Trump administration, as we know, thought they had provided the solution. They cut regulations and gave businesses a massive tax cut, expecting that at long last corporations would hire workers, raise wages, and grow the economy. Instead, all companies did was buy back their stock, pay out larger dividends, or acquire other companies with the money. The only inflation we experienced was in the stock market as prices of financial assets soared.
Fast-forward to today, worldwide, both governments and their central banks have upped the ante on additional monetary and fiscal stimulus, thanks to the pandemic. They feel they can do so with impunity, knowing consumers worldwide will not be spending much of that money until the all-clear is sounded on the pandemic side. They are confident that despite the fact that while monetary and fiscal stimulus is at historical highs and still growing, inflation will remain subdued.
As long as all that new stimulus money remains in the banks and does not fall into the hands of the consumer or into business investment, the velocity of money should remain tame. However, in my next column, I will point out that in this new round of stimulus, the Federal Reserve Bank has changed the rules of the game dramatically.
At the same time, more and more politicians, and some economists, are arguing that Modern Monetary Theory (MMT), by necessity, should be the natural direction the world takes in combating the fallout from the pandemic. Why is that important?
I believe by force of circumstances, both the Fed and proponents of MMT may be rubbing a lamp that could lead over time to releasing that genie of inflation back into the world once again. I'll explain why in my next column.
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@theMarket: Markets Fear New Virus Surge
Thursday happened to be one of the worst days for the market all year. Stock indexes dropped between 5-6 percent in the blink of the eye as the number of COVID-19 cases spiked higher in several states. Was that simply an excuse to sell, or should we be worried about a second surge?
As far as a second surge is concerned, I don't know what Wall Street is talking about. We are still in the initial phase of the pandemic. All that has happened is that a number of states are playing catch up with ground zero states like New York, New Jersey and California. Of course, it doesn't help that most states, like Florida, Texas, Arizona, Mississippi, Alabama, etc., have all but ignored the medical guidelines for re-opening their economies. This flouting of the best medical advice in favor of political partisanship has contributed to the sudden spike in cases since Memorial Day.
If investors spent a little more time listening to the epidemiologists, instead of bidding up airlines and cruise ship stocks, they would have realized that new cases would start to show up by the second week in June. And, like clockwork, that is just what is happening. But I believe this so-called "second surge" was simply the excuse traders needed to take profits in a market that had become way too frothy.
In my column last week, I wrote:
"Can we go even higher? I expect so. Look for the S&P 500 to hit 3,220-3,250 next week before pausing to catch its breath." The S&P 500 Index touched 3,232 on Monday before profit-taking set in. Thursday, that same index fell to the level I discussed with you two weeks ago, the 200 Day Moving Average at 3,002, and that is where it bounced on Friday.
Is it a coincidence that the new virus numbers coincided with the technical levels that I have been watching? You might think so, but I believe otherwise. As such, we should see some further correction next week after this bounce has played itself out. I am guessing we possibly break back down below the 200 DMA on the S&P 500 Index, depending on the virus news.
My reasoning: the surge in COVID-19 cases will continue into next week and beyond. That won't change. That should cap the market's upside, but not the downside. I believe investors will be jumpy until we determine the extent of the new virus surge.
A countervailing bull trend would be the argument that the medical community is now far better prepared to handle an uptick in virus cases, so further isolation tactics are not necessary, and we can expect fewer deaths. At the same time, both the Trump Administration and businesses are determined to re-open the economy. They are on the record stating that there will be no further economic shut-downs. That should support the stock market, at least temporarily, in my opinion, if things get out of hand (virus-wise) across the nation, than all bets are off.
Of course, both the bulls and the bears are avoiding a very ugly truth hiding underneath of all this financial, medical, and economic story-telling. The fact is that American lives are at stake. We are way beyond the worst-case estimate of 100,000 deaths and over 2 million virus cases and we are still counting. For our elderly community, this pandemic is a death warrant just waiting to happen.
The greatest tragedy of all is that most Americans, through their willful and selfish decision to ignore the rules as a matter of national political and economic policy, have made the decision that "the lives of the elderly don't matter." I can only say shame on us.
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The Retired Investor: The Virus & the Stock Market
Once upon a time, the world suffered from a pandemic. The global stock markets collapsed. The world's labor force disappeared, and the economies in every corner of the world plunged. All seemed lost until one day, the virus mysteriously disappeared, and every one lived happily ever after. If you liked that fairy tale, I also have a bridge I can sell you.
Don't say we were not warned. Every epidemiologist that wasn't on the government's payroll has been sounding the alert to prepare for a second wave of the COVID-19 virus. So why didn't we listen? There are a number of reasons.
Number one, it is an election year. If the economy doesn't show signs of new life between now and November the chances are less than even that our own orange-haired fairy will get re-elected. It is why, from the outset of the virus, President Trump attempted to downplay the seriousness of the epidemic. He still is.
Then there is the business community and its relationship to the federal government. I like to think of this country as one in transformation. It is no longer a democracy, in my opinion, but a welfare state that places the needs of the corporation first. We, the people, have been reclassified as "workers" first, and individuals with rights a distant second.
Both the government and Corporate America, for different reasons, have determined that the economy needs to re-open, despite the risks. Corporations fear that they will go bankrupt, lose market share as well as profits, if the shutdown continues any longer. And if that happens, the employment rate will fall even further. The present government, if it wants a second term in the White House, cannot afford to let that happen. As the U.S. Treasury Secretary, Steven Mnuchin, said today on CNBC, "We can't shut down the economy again."
Finally, some element of blame must fall on our shoulders, if we do experience a resurgence of COVID-19 cases and deaths. Few states paid attention to the non-binding guidelines of safe re-opening issued by medical authorities. That is because Americans, for the most part, had had enough medical advice anyway. After three months of lock-down, many of us simply found it too difficult, or too uncomfortable, to stick with the program. After all, if the president and some governors were saying it was okay, then why not me?
We used politics to demand the re-opening of many communities before an "all clear" was sounded. States such as Texas, Montana, Utah, Arizona and California have seen virus cases spike at least 35 percent since Memorial Day weekend. We used politics again, in the side-by-side demonstrations of the last three weeks as well, and justified our stance in the name of "black lives matter."
Here in Massachusetts, where until recently, most residents were pretty good at adhering to the guidelines, things started to break down on Memorial Day weekend, as well. I passed countless outdoor parties, BBQs, and the like where throngs of people simply ignored safe distancing. At the lake, pontoon boats were packed with people, as were picnic areas.
While we won't know for another week or so if the number of states with an upsurge in new cases expands dramatically, it is a time to at least expect more bad news on the virus front. As such, investors may see some of those outsized gains that everyone has accumulated since March disappear rather rapidly.
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@theMarket: Jobs Jubilee
A funny thing happened before the market opened Friday morning. Jobless claims, which were supposed to come in at a loss of 8 million, actually did the reverse. Investors were stunned when the Department of Labor announced a gain of 2.5 million jobs. That was cause to celebrate.
Total nonfarm payrolls for the month of May revealed an overall unemployment rate of 13.3 percent, but that was a far cry from the 18.5 percent rate economists had expected. Indications from the most recent data argue that the re-opening of the economy is going far better than expected. That, combined with another $1 trillion in stimulus out of Congress that investors expect to be passed next month, sent stocks up over 2 percent on the opening.
This week, American Airlines also announced that they were planning on increasing their load capacity in July to 55 percent, which is a substantial jump from the airline's present capacity of 20 percent. Given that airlines (along with cruise ship companies) have taken the brunt of business losses during this pandemic, the news heartened the markets and also sent airline stocks in general up anywhere from 20 percent to 50 percent.
Over the last two weeks, given that the economic news has been better than expected, the rally from the March lows has started to spread out from a handful of "FANG" mega-cap, technology stocks to more economic-sensitive sectors like financials, industrials, and even basic material sectors. That was a good sign. The durability and confidence of bull market rallies increases as the breath of the market expands and more stocks participate in the upside. That is what is happening now.
Another indication that the worst may be over is that the bond market is starting to get back to normal. As stocks rise and the economy begins to revive, interest rates should start to move up (and bond prices fall). Of course, it is early days, and when I say rise that's really a relative term. The U.S. 10-year Treasury bond, at 0.925 percent, is still yielding less than 1 percent.
The U.S. dollar (a traditional safe haven asset) has also weakened somewhat, which is another sign that investors around the world are starting to become more confident that things are improving. That is despite the fact that in places like Brazil the number of COVID-19 cases is still in an upward trajectory.
Gold has also taken it on the chin this week, falling almost 2.5 percent on Friday as investors dumped the precious metal for "risk-on" trades in the equity markets. As it stands, the S&P 500 Index (down 1 percent year-to-date) is still below its highs, while NASDAQ has regained its losses from the entire decline. As such, technology is taking a back seat in the last few days as other sectors play catch-up. That should continue. The question you may be asking is for how much longer.
In my last column, I outlined the importance and power of remaining above the 200 Day Moving Average (200 DMA) on the S&P 500 Index. We did that and look, a week later we have gained almost 100 points. Can we go even higher? I expect so. Look for the S&P 500 to hit 3,220-3,250 next week before pausing to catch its breath.
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The Retired Investor: Will Jobs Come Back Postpandemic?
As this week's job report looms ever closer, investors have become inured over data showing job losses in the multimillions. The present thinking among economists, strategists and politicians is that all these jobs will come back. The question is when.
Readers need to realize that prior to the onset of the pandemic, the unemployment rate at 3.5 percent was a historically low level. The spread of COVID-19 forced the country's economy to shut down. The first Americans to lose their jobs were those low-paid workers in the service industries, those that could not work from home. Fortunately, the government's response was to provide fiscal stimulus (in the form of extended and increased unemployment insurance), plus direct payments to those below a certain income level. That effort boosted household income and somewhat cushioned the pain of historical job losses.
Many of those jobs in restaurants, retail stores, and the like are expected to come back as the economy re-opens and there is evidence that they already are. However, layoffs in other areas, such as white-collar jobs and among women, are continuing to escalate. In fact, white-collar jobs continue to shrink and have done so every week since the pandemic started.
One reason that Congress is working on yet another stimulus program is that once the impact of the last stimulus wears off, they worry that the layoffs could continue to spread. Consumer spending and a rebound in economic growth may take more time than most expect. From the outset, economists believed that many of the service jobs would come back. Those lay-offs were considered to be temporary, a "quasi-furlough," as opposed to an outright firing. However, the losses of the higher-paid, white-collar jobs that are continuing will be more difficult to gain back and could be permanent.
There is also another alarming unemployment trend facing the nation this summer. The problem centers around working women with children. Readers may recall that for the first time in many years, women made up the majority of the workforce in 2019. As such, it should come as no surprise that during March and April of this year, women suffered the most (55 percent) job losses in this country. In those sectors that are heavily represented by women, the losses were even greater.
Recall my column of last month in which I outlined the one-sided difficulties working women were facing in juggling work commitments, child care, home schooling, cooking, cleaning and a variety of other chores during this pandemic. None of those issues have gone away. In fact, they have multiplied. Online schooling, where it existed, has helped but it will end soon. As the summer begins, working women have no child-care support to rely on while they go back to work.
As it is, they are losing more jobs than men, and have, in general, less paid sick leave than their male counterparts. As school winds down, women are now being forced to make some hard choices. Do they quit their job (or possibly get laid off) because there is no one to take care of the kids this summer? At the very least, they will be forced to scale back their professional ambitions, while continuing to balance an even more untenable situation between work and children.
Well, you might ask, why don't their spouses, or male counterparts, stay home instead? The answer is an economic one. Women still make about 20 percent less than men, so an already cash-strapped family will need to opt for the man's higher salary. So what is to be done?
Although a long shot, government might finally recognize the needs of the working women, something I have been writing about for ages. The pandemic would be the perfect excuse to establish policies that would equalize the pay scale, provide additional child-care support, and institute flexible working arrangements, among other initiatives for women. Unfortunately, I expect that our government will likely cast a blind eye to these needs. So, it is up to us. What, therefore, can you do to help?
In our case, my wife and I (along with the other grandparents), are scheduling weekly internet dates with the grandkids throughout the summer. We will set times and schedules, just like in summer camp. For starters, I will play (and probably lose) a weekly chess tournament with my 8-year-old grandson, chess champion Miles.
In addition, my wife will begin a photography course for both Miles, and 5-year-old, Madeline. That summer project, in addition to teaching them the rudiments of photography, will hopefully result in a photo book of this pandemic from their own perspective. Now, it is your turn.
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