Expect “ups and downs”
As bad as the economic data has been, the news was even worse for Tesla shareholders. Elon Musk tweeted on Friday, “Tesla stock price is too high imo”. Tesla’s stock immediately fell -10% on this tweet. IMO it should have fallen 30% or more. For those that don’t write in internet slang, IMO means “in my opinion”.
PepsiCo CEO Ramon Laguarta summed it best on a call with investors when he said expect “ups and downs.” He went on to say we don’t think it’s going to be a straight line once people go back to moving around…with potential second waves in some particular markets.
IMO no matter when governments stay-at-home orders are relaxed business will not get back to normal. The source of the economic shock is not 100% the governments fault, it’s the pandemic. Over the last six weeks, 30 million Americans have filed for unemployment benefits. GDP growth showed the economy contracted 4.8% quarter over quarter. Companies and consumers are all preparing for a recession. U.S. banks have seen a sharp increase in both loans and deposits as people are taking out debt while they still can still show income. JPM and Wells Fargo put a stop to this practice as they are no longer offering home equity lines in fear that job losses will lead to in increase in defaults. The economic news couldn’t get much worse with almost 25% of the population now out of work. The conundrum we find ourselves in is the massive discrepancy between the horrible economic data and the rebound in the stock market. This begs the question, why would anyone want to own stocks in the worst economy since the Great Depression?
IMO the reason that you can still own stocks is that the Federal Reserve and Treasury are printing money at a level never seen in U.S. history. Below is a chart of the speed at which the Fed has printing money compared to the last 3 quantitative easing. The recent stock market recovery mirrors the rapid response of the Fed printing money. The Fed balance sheet ballooned by 50% to more than $6 trillion and economists believe that it will increased to over $10 trillion.
The unemployment benefits were most beneficial. For anyone who showed income in 2019 and lost their job or had their income substantially impacted by the coronavirus, they can collect unemployment plus an extra $600 a week for 13 weeks. If you own a business, the government will help pay your payroll for 60 days with no questions asked. There are moral arguments against accepting this money if you don’t need it. I believe that if the government is offering you free money then you should take it. Without people receiving extra money, the economy would never recover. Many people are actually making more money on unemployment as this chart below shows.
Moreover, the government dropped an extra $1,200 checks in the bank accounts of most Americans. With the increase of the supply of money, will this cause inflation?
IMO there is no inflation. The problem the economy is facing is deflation. Between the collapse in incomes, 20% drop in GDP, and 50% drop in energy, the biggest threat is deflation. I do expect inflation for food. There has been a shortage of meat due to the disruption in the food supply chain. With 30 million people out of work and companies slashing paychecks, deflation is starting to take hold. Companies are now in survive mode and they are going to continue to cut overhead and salaries. The only way out of this mess is for consumers to spend at the level of Christmas this summer. Hopefully, there is pent up demand and people are feeling flush as they have built up their savings over the last few months. Unfortunately, the consumer is likely to tighten their belts and hold off on going on a spending spree until there is a vaccine.
I’m not at all worried about inflation, but it could become a problem if the economy begins to overheat in a stronger economic recovery in 2021. I would welcome this problem and any inflationary pressure attached to it. I don’t believe that it will be this easy, but I’m hopeful that the economy will stage a rebound once we beat this virus. We all want life to get back to normal as quickly as possible and there has been positive developments in speeding up the manufacturing of the vaccine. Pharmaceutical companies are ambitiously targeting 100 million vaccines by the end of the year. In the meantime, expect “ups and downs” until there is a vaccine.
