While chatter over reopening of the economy has been positive for the markets, it could be a trap, warns Jeff Greenblatt.
No, I’m not in favor of keeping the lockdowns in place but there is already a psychological trap concerning the reopening of the economy. We are seeing the stock market rally on hopes of a cure for the virus. In other words, the market is hopeful the economy will reopen. On the one hand, that’s good. On the other hand, it looks like it could trap overly optimistic investors.
A trap? What kind of trap? There are a lot of people who believe that if conditions don’t come back to “normal” then it will be close to normal. Some pundits are suggesting the multitudes can’t wait to eat out again. Hope is a good thing, except when it comes to bear markets.
The market is believing it. Right now, the food shortages I’ve discussed in this space is starting to materialize. Perhaps people should be happy enough to eat as opposed to eat out. Numerous sources have reported millions of chickens as well as hogs are being euthanized. Trump issued an executive order to keep the meat plants open. It’s probably too late to prevent shortages.
But let’s say, for the moment, food can get to the restaurants and enough people are able to eat out. This is one example as a microcosm for the entire economy. How is a restaurant which thrives on the lunch and dinner peak hours going to survive when they’ll have to social distance the number of occupants at any given point in time? I thought the idea for commerce was to turn a profit. Key point is was, because it doesn’t appear these businesses will be turning a profit anytime soon. That is assuming they can pay rent. Same thing will happen in other industries. Go into the grocery store, every place seems to be missing something. Consider this, we have infrastructure in place that has taken 50-100 years to build, which have been all but destroyed in less than two months.
Here’s something else to meditate on. Since a lot of businesses won’t be reopening, the next disaster could very well be a commercial real estate crash worse than what we experienced in the residential 2008 housing disaster. The new trend could very well be people working from home. There will be a glut of office space. It will take at least a generation to recover.
Yet the stock market has stayed up. More and more are coming to the realization there is a disconnect between the cold hard facts on Main Street and Wall Street with its fat cat bankers. What they can’t come out and tell you is in addition to everything else; the Federal Reserve is also buying up the stock market. I saw one story yesterday that stated if this were true then politicians would howl. The Fed doesn’t have to buy the stocks, the banks can do it for them. Something is keeping the market up. If you are trading intraday, you probably feel it because most intraday buy signals keep working while most intraday sell signal yield very meager results. But we must be getting close to some resolution as the Dow Jones is within 500 points of its 61% retracement to the top which is the bold orange line on the chart below.
Look around at the destruction of so many industries all at the same time. It boggles the mind. Just in this update I’m talking about food, retail, restaurants and real estate. How many other businesses support these industries?
The airlines are in bad shape as are the cruise lines. We didn’t even get to energy. Nobody feels sorry for billionaire owners or millionaire players, but sports are losing hundreds of millions. Multiple sources report car payments are not being made. I’ve heard from numerous people who have been forgiven at least two and maybe three car payments. How is it that millions of people basically have ‘free’ cars for several months? People deserve the help, but the question is: how will the financial infrastructure hold up under all this stress?
What am I really saying? First, we are never going back to normal. If they do open states for business, it will be with a suffocating type of regulation that will strangle profitability. Many businesses will not be coming back. The Fed is now the central bank of central banks and they will do whatever it takes and that means propping up the stock market. I don’t like breaking this to you, but we do not have freely traded markets anymore. To get the stock market to drop, it may require another panic or black swan type event. The higher probability is a trading range type of market going forward.
Did the Fed meet this week? They left rates unchanged. Why should they do anything with rates, they’ve done everything else. What caught my eye is they said inflation is under control due to lack of demand and lower oil prices. What also caught my ear was Fed Chair Jerome Powell suggesting Congress has the ability to tax and spend. He could have just mentioned the spending side of fiscal policy. Could he be possibly signaling a tax hike could be coming after the election?
What they did not say is with impending food shortages, the price of chicken or beef can ultimately go through the roof. One iron law is people still must eat. All of this is consistent with my near-term view of deflation with the bigger picture developing into a hyperinflationary depression.
What should you do aside from hiding under the bed? This is not an investors market. It can be a trader’s paradise, but you must know what you are doing. Risk is still high since the velocity of the moves are still much faster than normal times, but markets have calmed down from those hundred-point-a-minute moves from last month. The most important challenge to traders is establishing where they are wrong and putting in a stop loss. Just as important is understanding how far a move can go. Be more aware of support and resistance areas and the later you get into a move, the more easily you should give up the position to take a small profit. Those who have the skills to get in early have more staying power. Even if your profits are small, its better than losing.
In terms of psychology, the market is hoping for relief from this virus anyway it can get it. When everything is considered, it is likely riding the slope of hope.
If you want more information, go to: Lucaswaveinternational.com and sign up for the free newsletter.
