Wednesday, June 3, 2020

Lots of green shoots

Economic fundamentals are definitely on the mend. It's no wonder stocks are rising nearly everywhere: the virus is burning out and lockdowns are ending. People are anxious to get out and go back to work, and it shows. Numerous high-frequency indicators show sharp turnarounds, and the stock market appears to be pricing in a substantial recovery. There's a whiff of a market "meltup" in the air, in the sense that those who cashed out when the cannons were blasting are now worried about whether and when to get back in. But it's not at all clear that prices are overbought or that investors are over-confident.

Chart #1

As Chart #1 shows, equity prices have recovered a substantial portion of what they lost in March. The Vix Index (fear) is still elevated however, so it's tough to say that investors are throwing caution to the wind, especially given the still-low level of 10yr Treasury yields (0.75% as of today).

Chart #2

Chart #1
Both the 10yr Treasury yield and the ratio of copper to gold prices have turned up a bit of late (see Chart #2), and this is a good sign that global economic conditions are beginning to improve. Still, there is lots and lots of room for further improvement.

Chart #3

As Chart #3 suggests, consumption of motor gasoline has rebounded significantly. This is a good measure of the extent to which consumers are still sheltering at home and working at home.

Chart #4

Thanks to aggressive Fed action to supply much-needed liquidity to the banking system, over financial conditions have improved dramatically, as Chart #4 shows. We've never seen such a rapid rate of financial healing after a recession.

Chart #5

Chart #5 shows that credit spreads have narrowed significantly and rather rapidly. When liquidity is abundant and the economy is expanding, the risks to corporate profits decline. Spreads are still somewhat elevated, but they have retreated meaningfully from the edge of the abyss.
Chart #6

As Chart #6 shows, Eurozone equities have also rallied significantly. However, US stocks continue to be the strongest. The S&P 500 index has outpaced its Eurozone counterpart by roughly 100% over the past decade.

Chart #7

Earnings are very likely to be weak for the remainder of the year, but even discounting that, the equity risk premium is at least 3%. Investors are still willing to give up a substantial amount of yield in exchange for the safety of Treasuries. Again, no sign here that caution has been thrown to the wind.

Chart #8

The business activity subset of the ISM service sector surveys (Chart #8) shows a significant rebound in the month of May. This should move higher still with this month's survey.

Chart #9

Chart #9 shows an index of new mortgage purchases (mortgages taken out for an initial home purchase, as contrasted to mortgage refinancings). Home sales must be doing quite well these days, despite the shutdowns.

Chart #10

Chart #10 shows the national average of 30-yr fixed rate mortgage rates. Mortgage rates for conventional mortgages have never been lower in the history of the US. However, they do have room to decline further, since the spread between this index and the 10-yr Treasury is still unusually wide.

Chart #11

On a 7-day moving average basis, TSA screeners as of yesterday had processed three times the number they processed just two months ago. Still a long way to go to get back to normal, but there is a noticeable increase in the demand for air travel.

I still worry about a potential surplus of money. Monetary expansion has been off the charts in the past two months, and that is fine as long as the market wants precautionary and safe haven money balances. But as confidence returns the demand for money will inevitably decline, and it will be critical for the Fed to respond to this by raising short-term interest rates. Whether this will play out soon or later this year is an open question.

I can point to some evidence of declining money demand which is showing up as rising prices for stocks, commodities, and risk assets in general. But as yet it's not clear that prices for any of these things is irrational, as might prove the case when and if the Fed is slow to offset declining money demand with higher interest rates. But I am keeping a sharp eye out for this.

In the meantime, the chance of an unexpected rise in inflation has probably never been so likely, given that hardly anyone is concerned about this at a time when the fundamentals could definitely support higher inflation. That increases the attractiveness of debt in general, and of real estate and other hard assets.


Johnny Bee Dawg said...

All-time highs again today. So much for the Great Depression.

VIX is still elevated. We need that for further gains. Mortgage rates lowest ever. Love it.
Strong markets rising in the face of negative sentiment, as we have now, has been very bullish, historically.
Markets expand even more as Negative sentiment unwinds...and it will unwind.
Too much going right. Big boys sitting on record cash. That wont last.

Markets have never been very concerned about riots and looting.
That dissipates in a few weeks. Exhausts itself like a typical respiratory virus.
But Markets LOVE protests. (Think back to the millions in DC fighting Obama in July 4, 2009.)
Lots of other examples.
Protests are proof that our American experiment is alive and well. Off we go.

I think the protests are helping drive these gains.
Its mostly children, but that's OK.
Protests show America is vibrant and engaged....requirements for a free society.

Riots are good for Trump re-election. They have literally nothing to do with "justice" or the (false) narrative of an epidemic of blacks murdered by cops.
Nobody sane is going to vote for more Marxist/DEM rabble and looting.
And kneeling police and Whitey begging for atonement. LOL.
Soy boy beta male DEM mayors are not a good look. Voters are ashamed of those idiots.
Gotta love the narrative, but America hates weakness.
People want good business and prosperity that Trump brings.
Record low unemployment for blacks, and record high wages.

Thesis: Protests, good. Looting, Antifa Marxists, bad.

Yield curve remains super positive ever since the minute the Fed finally stopped tightening in March.
And the curve has not budged AT ALL ever since. Always indicating recovery would come, and quickly.

Americans flush with cash, and ready to spend.
BOA CEO Moynahan says avg checking account's Avg, Daily Balance is 30% higher than normal, backing Scott's "insatiable demand for money" thesis.
Those funds are going to be spent or invested. More upside to come.

Market signalers like JPM & SUI have broken downtrends, and given demand "buy" signals.
If employment is going to be a debilitating problem, those 2 could not be doing that.
SUI is a trailer park REIT. Presumably, all their tenants are out of work.
But it's breaking out & recovering...NO LONGER concerned about their future ability to pay rent.

Sit-down restaurant demand is huge (except in looting neighborhoods!)
Parking lots packed, with people forced to wait in cars for their table to be called because of crowds & "Corona"
Look at the moves off the bottom in DRI, DIN, SYY. America wants to go out.
NOT scared. Ready to go back to living.

Shortest Bear Market in history...11 days. That should, in itself, tell u its not as bad as predicted.

Index targets are 10-15% higher, and then we get into Election Hunker Down mode.
So far, so good! These are the Good Ol Days!
The Struggle is REAL!

cbt696 said...

By implementing a policy of lockdowns, Anthony Fauci, President Trump, Gov Wittmer, Gov. Pritzket, Gov. Walz, Gov. Cuomo, et al., have literally recreated the very conditions of a failed third world state (no schools, mass unemployment, fiat currency, suppression of religion...favored faux-essential, crony cliques).

What we are now enduring is not a pandemic; it is simply politics at its absolute worst.

Excerpts from : Jeffery Tucker, AIER

“ The lockdown carnage from missed cancer diagnostics and forgone elective surgeries are only now presenting themselves. Then there are the 100 thousand wrecked businesses, the 40 million unemployment, the blown budgets of every government, the scary monetary policies. SWAT teams were entering bars to arrest people — in the name of health. Churches were shuttered on Easter. No restaurants, no shopping, no sports, no theaters, no gyms, no outdoor activities. We were all treated like animals, and told to cage ourselves in our homes. And so on it went for 75 days.
It’s hard to imagine a better recipe for social unrest. “

“Based on the speed and duplicity of the news cycle, we can predict with confidence that within six months, you won’t find a single person in public life willing to defend the lockdown. And yet it was this event that laid the foundation for the rest of the tragic unfolding of events that is wrecking this country.” ~ Jeffrey Tucker

steve said...

"Riots are good for Trump re-election".

I'll remind you of this on 11/3.

AL said...

Scott, I know you provided information regarding the index of new mortgage purchases, which is definitely promising and positive data/news...but what are your thoughts about folks who haven't been paying their mortgages, and will continue to do so through the end of the year? What impact would that have on the markets? Also, would that mortgage-paying issue have any sort of ties to the unusually wide spread between the 10-yr Treasury and mortgage rates for conventional mortgages or not? As always, thank you for all that you do Scott.

WealthMony said...

JBD, where did you get the Moynahan information? That's a very interesting and encouraging piece of data for the future US economy. I always enjoy your posts. Good realistic optimism.

cbt696 said...

You’re making the case that what is good for Trump is not necessarily what’s good for the nation.

Are you sure you want to go there?

wkevinw said...

"Blogger steve said...

"Riots are good for Trump re-election".

I'll remind you of this on 11/3."

This will be interesting. In 1968 for whatever reason the riot organizers targeted the Democrat Convention. This certainly helped the "law and order" Republicans/Nixon in the election.

This year, it will be interesting whether voters blame the incumbent party or whether the incumbent party is viewed as the "law and order" vote (and vote R).

cbt696 said...

“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.“ Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations

How has President Trump done in the eyes of Adam Smith’s goals?
• Peace...very divisive (although he has been give a great deal to be divisive about)
• Easy taxes...very nice tax cuts, but very expensive tariffs
• Tolerable administration of justice...he seems to have by-passed the Bill of Rights on the whim of a discredited expert.

How about “thwarting the natural course of things” and “arrest the progress of society?”
• the lockdown certainly “thwart[ed] the natural course of things”
• tariffs and the pandemic response “arrested the progress of society”

Mr. Trump’s appeal lies mostly in his heroic stand against the unfair treatment he has received from the media and the Congressional Democrats. Judged on his own achievements the jury is very much out.

My guess is that he needs to create a plan to civilize the discourse and normalize the economy. The second task will be the easiest (cut taxes and deregulate), but the first will be the most immediate. The worst policy for this country would be for Mr. Trump to provoke his enemies into acting even uglier for the purpose of making his own behavior look less bad by comparison.

If I had to start in on this, I would begin by introducing federal legislation to bring fairness into police disciplinary codes.

Adam said...

BOFA cash index high. Also good for the stocks.

steve said...

cbt, firstly, I feel like I'm responding to a Star Wars character. First name please? Secondly, YES, I am sure I want to go there. Pretty much everyone agrees that DT is a polarizing figure and this time he has crossed the line to being unnecessarily incendiary. I believe that the slice of America that elected him (and Obama-twice) will reject him this year.

Time will tell and YES I know Biden is terrible candidate but less terrible than Trump.

Johnny Bee Dawg said...


Brian Moynahan was interviewed during the morning show on CNBC. I think it was last Thursday am. Maybe Wednesday.
Can probably find it in their video archives on their web site.
He was referring to their biggest tranche of checking accounts....those with Avg Daily Balances of less than $5000.

He pointed out that accounts were flush, with balances 30% above average.
He stated further that BOA's internal economists had analyzed the bank customers' balance & spending histories, and concluded that we are about to have a strong recovery...better than any internal forecast they had back in March. "That money is going to be spent or invested. Both are good." Almost a direct quote.

In fact, most recent CEO interviews have casually mentioned that their forecasts have dramatically improved from their prior opinions back in March. The is not surprising, because there was a dearth of dependable DATA on just about everything back then. Everybody was flying blind, and the only "data" any of us had were prices of stocks & bonds in the market. Thank God for markets.

Market prices have been very good indicators of fear, hope, and despair throughout history. Its absurd to contend that its impossible to "time" the market at important major inflection points. Indicators always suggest, and often scream, the bottom.
Indicators I've talked about in earlier Calafia Beach posts got lowest ever, puked out, and began to improve between March 18-24.
That range is where I finally put in the bulk of my cash. I was a early on some, and one day late on some, but you dont have to be precise at major bottoms. Bottoms always occur at maximum pessimism, with almost NO good news on the horizon.
Good news like Moynahan's always occurs later...after the initial bounce. And can help unwind more negative sentiment.

cbt696 said...


I am not offering a challenge to your position. I think you feel Trump’s re-election is likely going to be in the nation’s best interest, while I would pose that idea in terms of looking for the policies that are best for the nation and consequently might work toward Trumps re-election. It’s splitting hairs on how to frame the remark.

I worry more about the senate and holding an anti socialist majority in terms of confirming justices through 2024. It matters little who the president is if the senate slips further left.

We really have run out of statesmen. Not that the country has been overrun with them in the past.

Scott Grannis said...

Re " what are your thoughts about folks who haven't been paying their mortgages, and will continue to do so through the end of the year?"

I think this is one of the factors that is keeping the spread between mortgage rates and the 10-yr unusually wide. Buying mortgages has now become riskier due to refi risk and non-payment risk.

randy said...

Regarding Trump - it is interesting and perplexing to see how seemingly un-reconcileable the viewpoints are. In my view, the riots DID present an opportunity for Trump to come out looking good. An exceptional leader could with, some grace, have built on unity with the outrage of Floyd's death, and at the same time exposed the bad actors and enforced the law. I would have liked to see someone show the public / protestors how their good intentions were getting hijacked and undermined. Whatever. He couldn't have done a worse job at unifying. Trump made a passing hand wave at understanding that might have been a fart in the wind it was so overwhelmed by his authoritarian behavior and language. How will this be good for him? Anyone that approves of his approach clearly was already in his camp. But there are a hell of a lot of us that are natural conservatives, for which recent behavior is the final straw. Go General Mattis.

Johnny Bee Dawg said...

FWIW...the VIX just gave yet another important "Sell" signal today on its chart at 25.
This is important (to me) and suggests even lower levels ahead.

FWIW, Steve, I have no idea if Trump will get re-elected or not. I sure hope so. Am making no predictions on that.
I point out that decent people do not like rioters and looters and Marxist rabble-rousers ginned up by Democrats.
I do believe that DEMs rig elections always, and will be doing it more than ever this time.

Trump policies and rhetoric delivered record prosperity and independence for our most marginalized citizens.... not to mention the rest of us.
That prosperity and independence is a true existential threat to the Party of government dependency.

Also, recently declassified documents ensure deep investigations of ObamaGate are on the way if Trump remains, implicating criminals"all the way to the top" of the previous administration, along with dirtbags in govt agencies, and members of Congress in BOTH Parties.
Biden and his son are criminals in danger of being brought to justice. There are many more.

There is a panicked, all-out coup attempt ongoing.
"Pandemic" panic, and ginning up social unrest, and trying to somehow blame the POTUS. There is literally nothing that "Progessives" and their media stooges will stop at to grab power, and stop those who expose them. Those of their ideology have murdered 120 million innocent citizens in the past 100 years, worldwide...not in war, after all.

Barack/Biden was the most corrupt administration of my lifetime....that we know of. More is coming out each week.
I would not be surprised at anything else they try to pull before November. Literally anything. As bad as it gets.
No wonder so many Major Power DEMS went to cash. Perhaps they were privy to the DEM playbook for 2020.

Adam said...

On inflation. Let's assume a serious spike in oil prices in 2021. Could that factor only push up inflation. I remember one of your charts on declining share of oil in US economy.

randy said...

Gotta give JBD credit for calling his shot publicly back in March. Took confidence in position that covid was massively over-hyped.

Adam said...

On president Trump.
Some time after he won and part of the western media started propaganda war against him, I found an interviev with ex russian intel guy in russian radio. That guy worked within US elite for a long time, US intel has expelled him out of America.
He said that Trump is a part of a project "US economy recovery".
Some US centrist business, decided to unwind 30 years long process of China grabbing steadily the US production. They decided to improve taxes, reduce regulations, defend IP.
And this is the same what president Trump has done. I am amazed that after such a achievements people i America do not get it right. No one is an angel of course.

Grechster said...

Seems that everything divides America these days. Everything. Heck, even a virus (and the resulting response) almost immediately divides. We didn't even get that short-lived moment of togetherness that we all felt after 9/11.

The mentality on both sides seems hopelessly dug in, completely immune from considering any search for common ground. No acknowledgement that "the other side" might have a point. Trump's style is hard to take, sure. But the hostility to the man - from the Deep State, the media, and half the country - has been breathtaking, and, we're finding out, illegal. I don't think we can fix this.

So... Is it too early to start discussing, as a nation, the voluntary break-up of the country? Is this heretical? I say why not? I'm tired of the fighting. So tired of all the pat arguments and the small-minded personalities that dominate politics/media. I'm tired of the rank stupidity I hear from so many in the public square.

Let's break-up, or at least talk about it. And let's consider six or more resulting countries. I propose allowing Americans a long period of time, say ten years, to decide which country they'd like to be a citizen of.

In this way, we'd acknowledge our irreconcilable differences. And we might even provide a little economic competition going forward. Also, it might have a palliative effect in arresting our absurd foreign policy of constant (and super-expensive) intervention.

I only mention this because the latest missive, like so many before it, results in comments that expose the obvious philosophical divide in this country.

randy said...

Grechster - what a coincidence. My daughter just suggested the same thing last night at dinner. That's a GREAT idea, as long as I'm not stuck in one of the coastal regions. Southwest works for me.

Benjamin Cole said...

Another excellent post by Scott Grannis.

Grechster- interesting idea, but geography and politics do not always align. That is, liberals and conservatives live everywhere, if in varying proportions.

I am appalled by the role played by American media in the recent troubles, as well as mysteriously slow-footed police departments. Evidently it is a premise that every white police officer is a racist and is entitled to the presumption of guilt.

If the stock market can survive this, I guess it can survive anything.

Johnny Bee Dawg has out-invested 99% of the highly paid money managers sauntering around Wall Street.

cbt696 said...

Meanwhile, government experts unraveled an entire society
• putting 40M out of work
• postponing surgeries and diagnostics for millions of people
• closing schools and churches
• floating the economy on fiat money and welfare checks
• shelving the Bill of Rights
Americans will be recovering from this fool’s errand for a decade or more.

If anyone on this blog imagined that either Mr. Trump or Mr. Biden is the answer to anything then they’ve understood nothing about what has just happened.

Further research in COVID 19:
“Just one month ago, the idea that most people aren’t susceptible to Covid-19 — perhaps the overwhelming majority — was considered dangerous denialism. It was startling when Nobel-prize-winning scientist Michael Levitt argued in UnHerd at the start of May that the growth curves of the disease were never truly exponential, suggesting that some sort of “prior immunity” must be kicking in very early.

Today, though, the presence of some level of prior resistance and immunity to Covid-19 is fast becoming accepted scientific fact. Results have just been published of a study suggesting that 40%-60% of people who have not been exposed to coronavirus have resistance at the T-cell level from other similar coronaviruses like the common cold.

Now, from the unlikely source of a prominent member of the “Independent SAGE committee”, the group set up by Sir David King to challenge government scientific advice and accused by some of being populated with Left-wing activists, comes a claim that the true portion of people who are not even susceptible to Covid-19 may be as high as 80%.“

“ His explanation for the remarkably similar mortality outcomes in Sweden (no lockdown) and the UK (lockdown) is that “they weren’t actually any different. Because at the end of the day the actual processes that get into the epidemiological dynamics — the actual behaviours, the distancing, was evolutionarily specified by the way we behave when we have an infection.”

Most significantly, it would mean that the principal underlying assumption behind the global shutdowns, typified by the famous Imperial College forecasts — namely, that left unchecked this disease would rapidly pass through the entire population of every country and kill around 1% of those infected, leading to untold millions of deaths worldwide without draconian action — was wrong, out by a large factor. The largest co-ordinated government action in history, forcibly closing down most of the world’s societies with consequences that may last for generations, would have been based on faulty science.”

Johnny Bee Dawg said...

Indexes busting above 290 day moving averages like a rocket. Glass ceiling got shattered.
Massive breadth. Market is telling you what’s going on if you want to listen.

My money is on Donald Trump and his pro-growth policies as being the answer. Most of the CEO’s spending enormous time, all over media, virtue signaling, seem to helm the underperforming stocks. Not all, not all, not all...but most.

Gonna “invest” hundreds of millions in “social equity”. When pressed for what that means, we get unintelligible word salads. Market sees thru the false narrative of “systematic racism” and a false epidemic of cops killing black people. Black people need jobs and high wages. That’s what Trump brings.

Markets know America wants to get back quickly to record prosperity. The sad thing is how badly DEM mayors and Governors destroyed the neighborhoods and jobs of the most marginalized citizens with unnecessary shutdowns, and rampant destruction. They also demoralized their own police forces...those forces are the best friend the poor person has in a DEM city, besides Donald.

We are going to build it back, and America has no bigger cheerleader than President Trump. All time highs again today, FWIW.

Johnny Bee Dawg said...

Sorry for typo in previous post. Stocks breaking above 200 day moving averages.
I don’t follow a 290 day MA.

Another I mportant signal (to me)...all indexes soaring with trading volume UP way over 50%. Breadth expanding massively.
That big volume increase on a huge UP day shows “everybody” getting in, but particularly institutions. Institutions can’t hide their tracks when they all start buying at once.

People with large cash positions are on their knees praying for pullbacks so they can participate. That suggests that pullbacks should not be all that meaningful until we get to index chart targets,10% above today’s levels.

God bless Scott Grannis for all his data, observations and wisdom!

WealthMony said...

The stock market is experiencing a "melt up." You've heard that expression, haven't you? That's one of the dumbest expressions I've heard, and it has come from big time professional money managers! Don't they know that nothing melts up? Nothing! When something melts, it melts down, not up. To melt up is illogical. Maybe those who use the expression think there is no logical reason for prices to be going higher, so they use an illogical expression to identify it. If so, they are wrong. JBD has given us reasons for the stock market's advance, and there are many he did not name. Never forget, investors invest for the future, not the past.

Maybe they should change the expression to "the stock market is burning up." At least that gets the direction right. How about "the stock market is on fire." That's even better, or "man, this market is hot." Please, just don't use "melt up." That's illogical.

QSP said...

Scott i like your job. Keep Going and thank you. Luis

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