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Economic Indicators Say: V-Shape This!
08/06/2020 9:33 am EST
Despite market performance, especially by mega-cap tech companies, economic data suggests trouble ahead, writes Landon Whaley.
The vast majority of data sets looked better in May and June than they did in March and April. But I will continue to pound the table and re-iterate the economic fact that growth is rebounding, not recovering. There is a difference.
If you want to know the most likely direction for the economy, look no further than the most recent developments in the labor market. First, initial unemployment claims have now re-accelerated for two consecutive weeks indicating the rebound in jobs is over. Second, the number of people who are now permanently unemployed is on the rise. This V-shaped growth of permanent job losses is just beginning as more of the 53 million people claiming unemployment will find themselves without a place to go from 9-to-5.
My call remains for a confluence of bearish factors to hit during September, October and November crushing the V-shaped recovery narrative and the stock market too.
This past Friday, the enhanced unemployment benefits started to taper. We begin getting Q3 economic data this month, and those same critical data sets that rebounded in May and June will start to roll over with either the July or August data. On Sept. 30, student loan forbearance programs end. On Oct. 31, mortgage forbearance programs start to unwind. In November, there’s a little thing known as the U.S. Presidential Election. On Dec. 31, the Payroll Protection Program (PPP) grace period ends.
This brings us full circle back to the present, and the recent surge in Covid-19 cases. Keep in mind; college kids head back to school in the middle of August. What do you think happens to the Coronavirus pandemic flare up when millions of 18-22-year-olds (who believe they're invincible) are finally away from mom and dad for the first time in five months? How long before they lose the masks and six feet of social distancing becomes six millimeters? My guess is as long as it takes to shotgun a beer.
That pretty much sums up the growth side of the U.S. economic equation. As for inflation, the June reading of inflation, the consumer price index (CPI) and import prices confirmed our contrarian call for an inflationary impulse. We’ve now perfectly timed the last six inflections in U.S. inflation and once again proven what’s possible when you remain data-dependent and process-driven.
For the V-shapers among you arguing recovery not rebound, let’s look at what U.S.-based financial markets are telling us about the economy in real-time.
Markets Say What?
While everyone on Wall Street is navel-gazing the S&P 500 and Tesla (TSLA) with bullish enthusiasm, every other market is screaming that the United States is experiencing a short-lived rebound and not the often touted V-shaped recovery.
Exhibit A in the case against a recovery is the performance of gold. The barbarous relic is absolutely slaying it, with a 29.7% year-to-date gain, of which 11.2% came in just the last four weeks. Folks, gold would not be rocketing to all-time high if the U.S. economy was in a recovery. The fact that gold is tacking on double-digit returns in a matter of weeks says in no unequivocal terms “no recovery for you!”
Exhibit B for a short-lived rebound rather than a recovery is Treasuries. Here again, if the U.S. economy were in a recovery resembling any letter of the alphabet, Treasuries would be getting smoked like they were in a Cheech and Chong movie. Instead, Treasuries as represented by the iShares 20+ Year Treasury Bond ETF (TLT) have gained an additional 4.6% during July and are now up a massive 26.2% for the year.
Exhibit C for a Fall Fundamental Gravity characterized by growth slowing and inflation accelerating are Treasury Inflation-Protected Securities (TIPS), your grand pappy’s stodgy hedge against inflation is up a tidy 2.0% in the last month and are currently busting an M.C. Hammer-esque move to brand new all-time highs.
Outside of five mega-cap tech companies, markets are speaking loudly and in an articulate manner. Are you V-shapers out there listening?
The Bottom Line
Economic data sets rebounding from “worst ever” to “not-so worst ever” is not a catalyst for a prolonged bull market in equities and risk assets more broadly. Mark my words, that rebound will end as abruptly as it began. From a financial market perspective, two things are clear. First, markets are telling us in real-time that growth will slow for at least the next six months. Second, the United States is experiencing an inflationary impulse that few expected.
Given this economic and financial market backdrop, the playbook for August mirrors July. We remain bullish on silver, gold miners, commodities Treasuries, TIPS and gold. We will also stay wary of the dollar’s massive negative correlation to those markets and the fact that it's poised to make a run higher. On the bearish side of U.S. markets, we will opportunistically short small-caps and different parts of the financial sector when the Mongoose gives us the green light.
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