Market Recap

Posted on May 15, 2020 by Gemmer Asset

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We Are All Moving On-Line


More confirmation that April was simply a brutal month for the economy came in today’s retail sales number. Sales nosedived a record -16.4% in April, a fair bit worse than expectations for a 12% decline. Sales fell almost 20% year-over-year (chart below).



The only bright spot, as you would expect, were sales at online retailers which surged 8.4%, the second largest increase on record. On-line sales now make up almost 20% of all retail sales (chart below).



Of course, all the data coming out is looking at what happened last month. The $64tn question will be what will happen in the months to come. J.P. Morgan has put together a number of so-called high frequency data points to get an idea if activity is picking up or slowing at the margin (chart below).



This paints a slightly more optimistic tone, but there is a long way to go. I’m also not sure what to make of the new business applications – back to 70% of their pre-covid level?


The Battle Between Deflation and Inflation


There has been much debate about whether the COVID crisis is more of a demand or supply shock. This is important in that it would imply something about inflation. A demand shock is inherently deflationary – when people stop spending prices fall. However, a supply shock can be inflationary if there are simply too few goods to go around. At least so far, deflation is winning. The core consumer price index (CPI) fell 0.45% in April, the largest drop on record back to 1958 (I could only find a chart going back to 1980).



A related report came from the National Federation of Independent Businesses. They survey smaller businesses on their pricing plans. It probably comes as little surprise that the fewest businesses in history think they will be able to raise prices in the months to come (chart below).



All very deflationary. Also, falling prices are typically associated with deleveraging (paying down or defaulting on debt). The chart below shows revolving consumer credit falling over $28bn in April.



Now whether this was voluntary or not is debatable, but it’s a big number and clearly deflationary.


But what about all the money the Fed is printing? To quote MRB:


“The market narrative originally equated QE to a ‘printing press’, but this is not what occurred (chart below). The monetary base mushroomed over the past decade, but it was due to a dramatic increase in reserves held at the central bank, and not an abnormal surge in currency in circulation. The same will be the case with recent central bank policies.”



Just as during the financial crisis, banks aren’t willing to lend the excess reserves and/or potential borrowers aren’t willing to borrow.


Could all the stimulus stoke inflation at some point? Without question, but so far the stimulus programs are only ‘filling in a hole’, rather than creating an inflationary impulse by stimulating demand.


Beyond the next few quarters, the inflation outlook certainly gets trickier. How quickly will consumers ramp up spending? Will businesses start investing again? How will onshoring impact production costs?


A Trillion Here and a Trillion There (Part 4)


Certainly, the market is not making the inflation bet just yet. For a time this week traders were briefly pricing in the possibility that the U.S. Fed would cut its policy rate below zero (chart below). This helped drag 2-year bond yields to all-time lows at one point.



However, speaking this week Fed Chair Powell threw cold water on the idea saying negative rates made little sense. However, he did basically call for more fiscal stimulus.


To quote J.P. Morgan:


“…Powell reminded viewers that the Fed has powers to lend, not spend. But as the recession wears on, liquidity problems can become solvency problems; in that case what is needed is spending, not lending. Powell concluded: ‘Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.’ While pulling up short of formally recommending more stimulus, it’s pretty clear which way Powell leans on this issue.”


As if on cue, House Democrats hope to pass a $3tn coronavirus package today. While the bill is largely symbolic–congressional Republicans have already declared the bill a non-starter in the Senate—it illustrates which priorities congressional Democrats might push for when negotiations begin in earnest on a “Phase 4” fiscal package. Key parts of the bill may include:


– The bill appears to include more than $1tn in measures for state, local, and tribal governments.


– Another round of payments to households also seems likely. The cost of the prior round was roughly $290bn, and the payments under this proposal look likely to cost about the same.


– Extra unemployment benefits are likely to be extended through January 2021 at a reduced rate.


It’s probably not a matter of if a bill passes this summer, but simply how large will it be?


Some Charts We Are Watching


1) Interesting charts showing infection rate trends in key cities.



2) Finally testing rates are starting to ramp up. And even with more testing, positive cases are trending lower.



3) At least so far, infection rates have not surged in Georgia after the state started lifting restrictions on 4/24.



4) In part this is because people are actually slow to return to past habits.



5) A similar point – people are not flocking back to restaurants in those states that have started to open up.



6) What will work look like in the months and quarters to come? How many people will keep working from home? At least in the Bay Area, the trend to remote work is being supercharged by the absurd cost of living. But can I live in Reno and still earn Bay Area wages?


Bloomberg Article “Tech Workers Consider Escaping Silicon Valley’s High Rents”



7) I didn’t say this, but I might have overheard it somewhere!!



Have a good weekend.





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