In normal times, the stock market and economy are not correlated, but have more of a causal relationship. When employment is in full strength and GDP growth is increasing, we can expect companies to have stellar earning reports and distribute a gracious return to shareholders. Today, there is a huge disconnect between the stock market and economy where the economy looks more like a depression, but the stock market looks like it just started its next expansion. In this day, politics has more of a deciding factor on our stock market than corporate finance and economics. I say its too soon for this ambition rebound. The world is changing and will forever be changed. Globalization will look more like a risk than an opportunity. The equality gap will widen. Our health care systems will have to restructure. Our fiat currency system will be tested. Ultimately, there will be no market place (normal buying and selling) for a while.

​Dear Reader,

The Market.

• Active Investing versus Passive Investing has swapped; active managers are favored during this market environment. The challenge now is to pick the winners from the losers before the world emerges from the COVID crisis.
• It could be several more weeks- or longer- until the auto industry starts up again. The big US manufactures are waiting to be more widely available.
• Are markets broken?
  • The Feds are buying ETFs, junk bonds, and other assets
  • 11 years of job creation has been erased by 22 million jobs disappearing
    • 20% unemployment
  • The market is at an artificially high level with from where it should be based on earnings, GDP and unemployment
• Rallies in the middle of bear markets are to be expected.
• What we experienced in the oil market was “overcapacity, oversupply, demand crashes”… the ultimate cause of deflation.
• Unlimited amounts of cash from central banks used to combat the impending depression will ultimately lead to currency debasement
  • Gold could have an unlimited upside.
  • Gold is on track to outperform the market
    • Estimates of 2,800-3,000/ounce

The Fight Continues. As the United States presses forward with its battle against the novel Coronavirus, some Americans have grown weary of the economic consequences of the massive economic slowdown. Right now, more than 97% of Americans have at least some confinement guidelines set by their local governments while tens of millions are under stay at home orders. These measures have not only drastically affected the economy but also tested the patience of many Americans. This last week we have seen an increase in protests against safety measures even as the death toll climbs past 51,000. This begs the question, should the U.S reopen to minimize the economic impact at the cost of human lives? 
Today, The US Congressional Budget Office announced that they expect the federal budget deficit to hit $3.7 trillion by the end of fiscal year 2020, making it the largest budget deficit since World War 2. They also estimate that the federal debt to GDP ratio will hit 101%. At the same time as government spending is heavily increasing, they predict the economy will contract by 5.6%, and unemployment will still be as high as 16% in the third quarter and average 11.4% for the year. By comparison during the Great Recession, unemployment peaked at 10% and the largest annual contraction in GDP was by 2.5%. Many other countries are also facing a grim economic outlook as the world has seen a severe decline in services, manufacturing, and global trade (shown in the figures below). As discouraging as the data is these circumstances have not been encountered in modern times and the possibility of a V-shaped recovery can not be entirely dismissed. So, should states allow businesses to reopen and people to get back to work? We will let you decide since it comes down to how much value you place on a human life. 
 
Trump facing a hard path to victory as pandemic rages. With the upcoming presidential election looming large in November, President Donald Trump had seemingly laid out strategy similar to the one that brought him victory in 2016 against Hillary Clinton, full of delegitimizing attacks on reputation and catchy nicknames. This election calculus has been thrown into disarray with the onset of the COVID-19 worldwide pandemic. The present crisis has forced the president to act in a manner not often associated with his character, including working with Democrats to pass legislation, continually hosting experts who have publicly disagreed with his past statements, and attempting to make eloquent, scripted remarks to the entire American people, calling himself a “Wartime President.” While crises do have the potential to substantially increase a president’s approval ratings, they have just as much potential to dissuade previously enthusiastic voters of a president’s competence in the job. For his part, President Trump has mobilized national resources to respond to the pandemic and has overseen the deployment of military and emergency resources at a record pace. However, his initial response to the pandemic was unenthusiastic, with the president publicly blaming both the media and the Democrats for blowing the story out of proportion, before finally declaring a state of emergency upon him personally almost being exposed to the virus. His present demeanor has won him some support, as his approval rating has finally edged above 50%. However, he is still projected to lose to his Democratic counterpart, former Vice President Joe Biden, including in Fox News polling that shows Biden winning in Michigan, Pennsylvania, and Florida. The crisis has not helped Trump narrow this lead, though the election is still 6 months away, and much could change as election season heats up. While polls are not necessarily indicative of future election results, Americans have a tendency to rally around leaders during national crises, and Trump not receiving more of a boost during this time should trouble him, and his campaign greatly as 2020 drags on.
 
Not Taking a Position. With the equity market trading between a range of 35-50 VIX, the bond market volatility between 60-100 (signified by the MOVE index), and oil volatility near 175, it's a traders dream. The issue is we aren’t all traders, and can’t take full advantage, if any, of the constant price movements. A high volatility environment means that price changes are occurring much faster than usual, and trading time has been sped up. If you don’t have experience trading these markets, it's more likely than not, that you will be whipsawed back and forth and ultimately end up on the bad end of the trade. Personally, I don’t have time to sit and trade these markets the entire time, so I’m taking a position most people don’t realize exists, not taking a position. With unemployment nearing 20 million, businesses starting to go under, lockdown being extended to may, fed decreasing rates to 0% w/ nothing but cash left in the arsenal, and increasing the federal balance sheet to an unprecedented 6.6 Trillion, the market seems to still be pricing in a near best-case scenario being just 20% off 2019.  “Markets can stay irrational longer than you can stay solvent.”
​
Opening the Economy. As people across the country begin to become more and more agitated with a government-imposed "quarantine" (protests, a general relaxation of strictness), it's very plausible to consider the pros and cons of opening the economy back up and resuming operations in a somewhat normal capacity. The pros of doing so are fairly simple and obvious. Opening the economy back up would, essentially, be as if nothing has changed. Of course, there would still be the massive layoffs that we have already seen, as well as a change in consumer habits. Nonetheless, if businesses reopened their doors, individuals would go back to work and continue getting a paycheck if they have not been receiving one during the quarantine. This means more money to spend on goods and more grease on the cogs of the economy.
What if it doesn’t go so well? What if there is a second, equally intense wave of infections in the fall (as global health organizations/professionals are predicting? What if we open the economy back up to early, and that second wave is even more intense, resulting in more infections/deaths? Surely, the impact on the economy could be even greater than if it were to just remain closed now. A few financial newsletter writers can't predict how a global pandemic is going to spread. But we can look at some of the logic surrounding the economy. If people stop working, stop getting a paycheck, and remain home, what will happen? Well, we're already seeing this now, but on a more long-term basis, it could lead to more deaths as people won't have the money to buy necessities and otherwise survive. That is, they won't have the means to survive without assistance, most of which will have to come from the government. Having already given out over a trillion dollars, many people are looking at the government to do more. How much more can the government handle given the current record debt and deficit levels? It would take a restructuring of the budget, we fathom.
In additional long term impacts, many small companies are closing their doors right now, never to re-open again. Filling that void of small businesses will be the giant conglomerates, leading to greater market share for those companies, and generally a greater capacity to manipulate the market and harm consumers.

 
Keep Climbing,


The ACA Foundation

We ended this week lower, but this was expected. We were in a mirage from tech earning reports (the NASDAQ is only down -4% YTD) and continuous promises of stimulus from the Feds. Within the US, there is no value for the USD. Consumption and demand is decreasing, paying off debt and saving is happening more than spending and investing, and the government is LITERALLY giving away money. It is one thing for the government to give when someone needs and applies for it, and it’s another thing when they just give it without the recipient asking for it. Even with the funding, corporations and businesses will solve their short-term liquidity problems, but they will not solve their long-term solvency problems. States are beginning to open up their marketplaces, but at the risk of new cases. There is risk of retesting March lows and entering into a depression. With the disconnect between the economy and stock market, we can see the stock market starting to correct based on our current economic environment.
 
Dear Reader,


​The Market.

• Emerging markets and developing countries have $11 trillion debt and $3.9 trillion in debt service due in 2020
• The worst performing capital have been energy, distressed credit, and mortgage-backed credit fund
• Why we might not be in a depression even though economic data suggest it?
  • Businesses want to start up again and governments are making sure credit does not dry up
• Some observers point to falling commodity prices, tumbling oil prices, and a depressed labor market and see low inflation, perhaps even deflation as far as forecasts go.
  • Others point to the very large increases in fiscal deficits and central bank balance sheets and see inflation, perhaps even high inflation.
  •  It is hard to see strong demand leading to inflation. 
• This transition/adaptability may result in the end to the service job
• U.S. Treasury Secretary Steven Mnuchin believes the economy will "really bounce back" in the summer after reopening begins in May and June.
• I would expect more stimulus checks in the near future
• Microsoft, Apple, Amazon, Facebook, and Google combined are now 25% of the market value of the S&P 500 and bigger than 350 companies within it. They all report quarterly results this week, and as they go, so goes the stock market. 
  • These stocks have more than a 46% influence on how the price of the Nasdaq 100 index is calculated. If these six stocks are seen as a proxy for the larger index, then as the market responds favorably to them, the index is more likely to continue higher over the months to come.
  
  
• Feds are holding rates at 0%.
  • Fed is performing a puppet show. They are presenting stability to get investors to buy.
  • Feds have been purchasing large amounts of mortgage-backed securities but they slowed their pace of purchases.
  • They will continue to practice QE until they are confident the economy is close to recovery. 
  • The Fed credit policies do not have a dollar limit.
  
  
• The first-quarter GDP report that showed a 4.8% decline for the U.S. economy, ending the longest expansion in post-war history as the economy abruptly fell into a steep recession.
• "buy the rumor, sell the news."
• Tips: Watch AMC. Even before this COVID crisis, going to the movie theater was dying.

The Fed Minutes. The Federal Reserve echoed its previous statements this week. Jerome Powell reassured the global economy that the Fed would do whatever necessary to keep the market afloat and get us on the track to total recovery. If you were afraid that the Fed would be more limited and will only be able to offer a limited amount of help from a monetary quantity basis, fear not. Powell said that the Fed would absolutely not run out of money. Robert Kaplan, President of the Dallas Central Bank, reiterated this with a gloomier tone. He stated that the U.S. could be seeing a 30% decline in GDP during the second quarter, and that unemployment could rise to 20%. This is cause for another type of stimulus package from the government. Furthermore, Kaplan warned against disinflation, in which the rise in prices is slower than normal. This is looking likely for the next 1-2 years in the U.S. 
 
A Nation in Limbo. The lack of informed and cohesive guidelines on how and when to reopen the country from the federal level has left cities, counties, and states arguing amongst themselves as more Americans grow inpatient. Unfortunately, reopening a country with over a million people infected with a virus that has killed 65,000 people is not as easy as picking a day and there is no right answer. Until significant progress is made towards a vaccine or treatment, the decision to reopen will be a trade-off between human life and economic well-being. Gilead Sciences Inc. is the top story of the week. Gilead is an American biopharmaceutical company that specializes in antiviral drugs used to treat HIV, hepatitis B and C, and influenza. As of this writing, their stock is priced at $79.95, they have a market capitalization of $100 billion, and they are up 22% this year.
Earlier today, The Food and Drug Administration on Friday granted an emergency use authorization to Gilead Sciences Inc.’s Remdesivir. Remdesivir is an experimental drug that was first used to treat Ebola. This means that the drug can be used outside of clinical trials to treat patients with COVID-19. Remdesivir has been used to treat other coronaviruses namely SARS and MERS and was used in China back in January to test its effectiveness towards COVID-19. Since January, the drug has been used in several trials across multiple counties and the federal research agency found that on average, Remdesivir shortened the recovery time of patients with COVID-19 from 15 days to 11 days. While this new treatment is promising, it should be noted that its effectiveness is limited, and is by no means the treatment that the world is desperately waiting for. Despite its limited effectiveness, it has the potential to save lives, and demand is extremely high. Gilead announced that they could spend $1 billion dollars developing the drug and already plan to donate 1.5 million vials. As you read this, 50,000 courses of the drug are being distributed across the country, and results are expected as early as next week.

Bitcoin Halvening. Bitcoin prides itself on being a depreciating asset, which means that over timeless of it is being created. This is done through a halving cycle, which occurs every 4 years. The next halving is in approximately 10 days. This means that the block reward, the amount is given out ever nth minute, will be cut in half. The current reward per 10 minutes is 12.5 bitcoin, which will fall to 6.25 in 10 days. Bitcoin is statistically interesting as at any minute you know exactly how many bitcoin currently exist, how many will be mined that day, how many will be mined that year, and the total amount that will ever exist. This in conjunction with the halving creates a predictable scarcity. The potential price impact from a block reward halving isn’t completely known, as this will be the first since BTC has gained such popularity. I will personally be watching the halving, which I’m sure will be interesting. It is taking place exactly on May 12th at 4:40 pm PST, on block #630,000.

Defense Production Act. In times of crisis, many governments have measures in place that allow the national government to take control of industries deemed necessary to address the crisis at hand, whether that be a war, natural disaster, or pandemic. In the United States, this measure specifically is called the Defense Production Act of 1950. Enacted during the Cold War, this law allows the federal government to force businesses to produce materials necessary for war, as well as allows the federal government to take over “vital industries,” specifically allowing the President to seize control of necessary companies and factories. Additionally, this act was used to mobilize resources to industrialize the country in industries deemed lacking, yet necessary, providing low-interest loans that kickstarted the domestic aluminum and titanium industries and channeling research funds toward the development of new defense technologies. Famously, the act was invoked to nationalize the United States’ steel industry during the Korean War, as steel unions had decided to go on strike during the conflict, threatening the war effort.
 
Meat Plants told to stay open to ensure food supply. In the wake of the COVID-19 pandemic, many meat processing plants had suspended or reduced operations following numerous outbreaks at plants across the country. This has led to a potential shortage of meat in the United States, and as a result, President Trump has used the Defense Production Act of 1950 to force them to stay open, as they have now been designated as “critical infrastructure” during this national crisis. This has been just one of the numerous times that President Trump has activated the Defense Production Act during the outbreak, as it was used previously to order General Motors to use their industrial capacity to produce ventilators for critical patients. The use of this act underlines how serious the impact of COVID-19 has been across the United States, with the federal government instituting wartime measures and record spending bills to address the burdens created by the pandemic.
 
 
Keep Climbing,


The ACA Foundation