S&P 500: The data suggests a contrarian bullish view
Unfortunately, I think that the easy returns have already been made, hedging and asset allocation will be very important moving forward.
1. Initial claims are a risk, however, it's wise to take fiscal stimulus and the specific unemployment per industry into consideration.
- Unemployment benefit increases by $600 per week on top of the $384 national average. This works out to $25/h based on a 40-hour workweek. For context, Washington State has the highest minimum wage at $13.50/h. Households earning less than $99k per year are also entitled to $1,200 one time payment and $500 per child.
2. The Employment change by Industry implies that the unemployment numbers are heavily concentrated among "Leisure & Hospitality", and "Education & Healthcare". Given the details of the stimulus package, the incentivized caused bias for many of these workers is forced layoff because it is a quasi pay rise.
This is dollars entering the system!!! Stimulus in 2009 - 2011 was concentrated in MBS and T-Bills meaning $$$ never left the financial markets.
3. Feds response was expected given the BoP issues that arise when asset prices fall. The pain threshold today versus 2008/09 is far lower.
4. Intervention by the Fed in high yield credit specifically alleviated default risk from levered corporations.
5. Since, high yield credit has returned 22.5% since March 23rd, outperforming a number of liquid equities.
6. Growth of M2 is EXPLODING, the YoY rate of change is likely to top out closer to 20% to 25%. This has outpaced the GFC, DotCom & crises from the early 80s. The expectation would be to see VoM2 start to rally OR a blow out of Gold to the upside. In 1933 FDR confiscated Gold in tandem with fiscal stimulus so that $$ were spend which would push growth and inflation higher. If VoM2 doesn't pick up, I would expect a special tax and/or a restriction on domestic Gold consumption. Russia have recently taken this step.
7. Fear, as measured by VIX, equalled the lows of GFC.
8. A move above a1.4 ratio on the 5-day moving average of PCC has coincided with a major low, indicating that fear has likely led to overshooting on the downside. So far this has worked for a 3rd time in a row. Suggesting that mid-March was a significant low.
9. Fear & Greed hit an all tie low of 1.
10. The manufacturing recession in 2019 is an important cornerstone to understand why we are in a very transitory deflation before much higher inflation in 2021. More likely stagflation.
11. Customer inventories have been wiped out, we are currently at similar lows to the DotCom bubble burst low in 2003 and not too far away from the GFC low in 2009. We now have lots of liquidity (M2 growth), but not enough supplies. This issue compounds as lockdowns continue.
12. New Orders for manufacturing ticked higher earlier in the year suggesting that manufacturing was ready to rebuild inventories until lockdown caused a transitory drop. Similar to hospitality jobs returning after lockdown, I would expect new orders pick up thus adding manufacturing job growth into 2021.
13. Production followed new orders higher with a big spike, again, adding to the idea that inventories will be rebuilt once lockdown ends.
14. Manufacturing labor markets have been shedding throughout 201 due to slow order growth, expect this to ramp up in time as social norms are back.
15. 65% of crude demand is gasoline, as the price collapses this acts as a quasi pay rise for consumers in the form of lower oil prices. With lockdown currently reducing demand by 18 million barrels per day, prices have collapsed more than 50% in a short period of time. Taking into consideration IEA purchases and OPEX+ agreement we are likely to see a cut of between 19 to 20 million barres. It's important to recognize that markets are future discounting mechanisms, what's in the price is a demand shock. The duration of oil cuts will matter, but it puts a floor under the price in the near term. A move from $20 to $30 over the next 12 months will add inflation to markets, given the volatility that's not out of the realms of possibility.
16. Tech developments that led to Shale oil ramp up disrupted the market. This recent crash has scaled back CAPEX dramatically, this capital is not likely to come back online until prices trade closer to breakeven at $49.
17. The rate of change in rig counts in the Permian Basin is collapsing. This is supply that will remain offline until prices trade back towards $49.
Conclusion, inflation follows and I dont think many are prepared.
1. Initial claims are a risk, however, it's wise to take fiscal stimulus and the specific unemployment per industry into consideration.
- Unemployment benefit increases by $600 per week on top of the $384 national average. This works out to $25/h based on a 40-hour workweek. For context, Washington State has the highest minimum wage at $13.50/h. Households earning less than $99k per year are also entitled to $1,200 one time payment and $500 per child.
2. The Employment change by Industry implies that the unemployment numbers are heavily concentrated among "Leisure & Hospitality", and "Education & Healthcare". Given the details of the stimulus package, the incentivized caused bias for many of these workers is forced layoff because it is a quasi pay rise.
This is dollars entering the system!!! Stimulus in 2009 - 2011 was concentrated in MBS and T-Bills meaning $$$ never left the financial markets.
3. Feds response was expected given the BoP issues that arise when asset prices fall. The pain threshold today versus 2008/09 is far lower.
4. Intervention by the Fed in high yield credit specifically alleviated default risk from levered corporations.
5. Since, high yield credit has returned 22.5% since March 23rd, outperforming a number of liquid equities.
6. Growth of M2 is EXPLODING, the YoY rate of change is likely to top out closer to 20% to 25%. This has outpaced the GFC, DotCom & crises from the early 80s. The expectation would be to see VoM2 start to rally OR a blow out of Gold to the upside. In 1933 FDR confiscated Gold in tandem with fiscal stimulus so that $$ were spend which would push growth and inflation higher. If VoM2 doesn't pick up, I would expect a special tax and/or a restriction on domestic Gold consumption. Russia have recently taken this step.
7. Fear, as measured by VIX, equalled the lows of GFC.
8. A move above a1.4 ratio on the 5-day moving average of PCC has coincided with a major low, indicating that fear has likely led to overshooting on the downside. So far this has worked for a 3rd time in a row. Suggesting that mid-March was a significant low.
9. Fear & Greed hit an all tie low of 1.
10. The manufacturing recession in 2019 is an important cornerstone to understand why we are in a very transitory deflation before much higher inflation in 2021. More likely stagflation.
11. Customer inventories have been wiped out, we are currently at similar lows to the DotCom bubble burst low in 2003 and not too far away from the GFC low in 2009. We now have lots of liquidity (M2 growth), but not enough supplies. This issue compounds as lockdowns continue.
12. New Orders for manufacturing ticked higher earlier in the year suggesting that manufacturing was ready to rebuild inventories until lockdown caused a transitory drop. Similar to hospitality jobs returning after lockdown, I would expect new orders pick up thus adding manufacturing job growth into 2021.
13. Production followed new orders higher with a big spike, again, adding to the idea that inventories will be rebuilt once lockdown ends.
14. Manufacturing labor markets have been shedding throughout 201 due to slow order growth, expect this to ramp up in time as social norms are back.
15. 65% of crude demand is gasoline, as the price collapses this acts as a quasi pay rise for consumers in the form of lower oil prices. With lockdown currently reducing demand by 18 million barrels per day, prices have collapsed more than 50% in a short period of time. Taking into consideration IEA purchases and OPEX+ agreement we are likely to see a cut of between 19 to 20 million barres. It's important to recognize that markets are future discounting mechanisms, what's in the price is a demand shock. The duration of oil cuts will matter, but it puts a floor under the price in the near term. A move from $20 to $30 over the next 12 months will add inflation to markets, given the volatility that's not out of the realms of possibility.
16. Tech developments that led to Shale oil ramp up disrupted the market. This recent crash has scaled back CAPEX dramatically, this capital is not likely to come back online until prices trade closer to breakeven at $49.
17. The rate of change in rig counts in the Permian Basin is collapsing. This is supply that will remain offline until prices trade back towards $49.
Conclusion, inflation follows and I dont think many are prepared.
