What's up Federal Reserve Funding Mirage?

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