Can You Repeat That?

July 16, 2020

The earnings rush is upon the markets and markets are taking all of the results in stride. In fact, it looks like the world is running normally. Equity prices, which generally assume increasing revenue and increasing profitability, continue to inch higher. The S&P 500 is just 15 points below where it started the year and only 180 points from an all-time high (that’s 5%). The Nasdaq is also doing well. It’s well above where it started the year and just 150 points from an all time high (which on the nasdaq is just a good move higher over lunch).

Meanwhile in Toronto, because I know Canadians worry that I don’t give them enough thought, they are seriously behind, a whole 12% off the all time high.

This blog has been highlighting the silliness of this market activity for some time, but I really want readers to overlook my comments and listen to Jamie Dimon. If you don’t know who that is, he is the CEO of JP Morgan, the largest bank in the United States.

The bank released earnings on Tuesday and they had an had an amazing, blow-out quarter. The quarter’s exceptional results were driven by significant trading and underwriting revenue (which Mr. Dimon expects to drop by about 1/2 after the COVID business dies down). But most importantly he made this comment during the conference call. This is verbatim from the conference call transcript.

“Yes. And just to amplify, in the normal recession, unemployment goes up, delinquencies go up, charges go up, home prices go down. None of that’s true here. Incomes go down, savings go down. Savings are up, incomes are up, home prices are up. So, you will see the effect of this recession. You’re not going to see it right away because of all the stimulus and the fact, 60% or 70% of the unemployed are making more money than they were making when they were working. So, it’s just very peculiar times.”

There is a lot more to the earnings of banks (they weren’t all good, and more bad stuff is coming, be sure of that), but the CEO of the largest bank just told the markets that the recession is still coming and of course the market went up. A LOT.

Meanwhile, the government is working on adding more stimulus. Back in late March (see: A Window Into The Future) and early April (see: On Saving the Stock Market) this blog commented on how the stimulus provided to date wouldn’t be enough and now it appears politicians are coming around to the same conclusion. Of course the head of the US Federal Reserve, Jerome Powell, highlighted this at his last post meeting press conference saying that fiscal action would be needed, but the current administration doesn’t seem to be able to do anything but blame and complain.

No matter, stimulus cheques run out in just two weeks, and the effects are likely to be a bit unsettling. (Catastrophic is a more apt description, but if you are reading this, you probably won’t care about the $600 a month that is saving 20-30% of the US population or the $2,000 a month 25% of Canadians are receiving.)

If you think things are okay, then you may want to consider what a crisis looks like. For example, if 20% of a population wasn’t paying rent (32% of US households missed their July rent payment), that would likely constitute a crisis. Another example would be if 20% of the working age population were unemployed, that would be a crisis. Some others might consider a pandemic that was infecting 50-60,000 people a day a crisis.

Currently, there isn’t A single crisis. There are at least three crises happening simultaneously. But the stock markets are up. There is no point even considering the leadership crisis, the constitutional crisis (yes, I mean 45) and the geopolitical risks that abound while the first world is distracted.

Unfortunately, it is estimated that at least 15% of renters in the US will face eviction by September, and those same people are currently choosing between healthcare, food and paying rent, not an easy choice. Additional stimulus cheques are not going to improve the lives of most of those people.

At the same time, today saw further data on unemployment and the market was quite pleased, despite the data being a little worse than expected. Unfortunately that data, seen as not so bad, is three times worse than the very worst of the recession in 2009. It is really, really bad. Below is the continuing claims. There are still at least 17 million people who are out of work.

Continuing Claims for Unemployment – Still over 17 million

To better understand why it is bad, note that early reports of unemployment were focused on service personnel. Restaurants, bars, hotel staff, those who keep the world working. The latest layoffs are coming once the US Payroll Protection Plan runs it’s course. Once that protection, offered by the government runs out, the layoffs are going to hit the high income folks. Pilots, medical staff, scientific types have already been notified … you get the picture. Bloomberg has a nice article on the effects if you want to dig into some details. Suffice it to say, that the economy should be expected to struggle for the foreseeable future.

Making all of this worse however is the simple fact that there is a pandemic going on and the leading economic engine of the world (at least historically), the United States of America, doesn’t seem to care. Cases have been rising rapidly for weeks now and seem to be hovering around 60,000 cases a day. That’s a massive number of sick people under any circumstances. The costs in terms of lives (those dying) and living (those surviving) is staggering at best. The economy will not get back to normal anytime soon with a scourge like COVID-19 worming its way through society.

COVID Cases from the Bloomberg Tracker

There are plenty of people defending the market highs, and a few crazy folks who are saying this is all unsustainable. Being on the crazy side of the argument may appear foolish, but it is worth considering that when something seems unrealistic, it may actually prove to be. Governments can’t continue to borrow money endlessly, and a very narrow bunch of consumers support the entire economy while growth and profitability are sustained.

The obvious market highs suggest that it can go on longer than seems reasonable, but it certainly can’t continue forever. Consider the consequences if it doesn’t continue much longer! For your own sake.

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