"A point is reached where the trend is reversed and becomes self-reinforcing in the opposite direction."
- George Soros
What Georgie boy is talking about is what people perceive to be true. The stock market's truth is that central banks and in the US, the Federal Reserve will have the market's back. Back in the day, when you had unemployment offices, people could see immediately the state of the economy. In fact, they even found themselves on the line. Today, computers help mask the state of the economy. However people get their information today, the one central theme is central banks will keep interest rates low to help housing, business and consumers. They will also buy bonds from the market. It does not matter whether the issuing firms are worthy of purchase. By the way, a similar report says that 19% of loans are not being paid, but the firms have continued to exist due to the last government stimulus. This is a market condition tell. We, at Evolution have been adding the pluses and minuses of our present economy. This is what we see...
December's Claims:
Dec 4th. = 712,000, Dec 10th. = 835,000, Dec 16tn. = 751,000, Dec 23th. = 803,000 and Dec 31st. = 787,000. This equals about an average of 780,000 unemployment claims per week. I remind you that during the Christmas selling season, retail, as well as, all delivery and warehouse companies hire seasonal help. To have 3.88 million file for claims during this season is a tell. The post Christmas time is also busy with returns. This will end around the time President-Elect Biden has his inaugural. If we are right, we expect a huge spike in unemployment claims around that time. Biden will push for a new stimulus program. Politicians forget the truth of science, "For every action, there is an equal reaction." Stimulus is money printing. Every dollar that is printed lowers the value of the currency. One can see this very clearly in the recent rally in commodities. When the dollar declines, prices rise, especially in commodities. If you recall in past pieces, we posted a report by the St. Louis Fed in the 1980s. It stated the lag time for new money to circulate is around 12-months. The Fed knows this. They will let inflation ride with the gamble that they can control the narrative until the spike in inflation abates. This would indicate that inflation will appear, but for how long will be the point of contention. There is a new debate about this effect and report. Harry Dent says the Fed's money printing is an attempt to fight deflation. Harry is a leader in forecasting an economy based on demographics. He has a simple truth and it leads to a dual tell. The first is that we are in agreement in the economies outlook and even the timeline, but for different reasons.
2cd. Opinion
Harry Dent's theory is a reflection of the birth to grave cycle. When babies are born, diapers are selling. Teenagers drink soda and eat chips. When one reaches twenty or so, cars are flying off the lots. By the time thirty hits the calendar, people look to purchase their first home. This ignites the real estate cycle. As time moves along, some get second cars and vacation homes as well as insurance. The last years might include some travel, but liquidation appears. This is where we are in his cycle theory. One no longer needs a second or vacation home. Medical concerns begin to rise until the call comes to the funeral parlor. According to Dent, our demographics point is the call to the morgue. We are not selling diapers, sodas, cars, real estate, whatever. The lack of buying will cause overpriced products to die in store. The overvalued stock market will crash by 40% in late April says Dent.
Our View
We, at Evolution use a hybrid of fundamentals as well as charts. The charts are at highs, however there is a huge gap with high volume last March. This needs to be tested. This is the first point. The next is a fundamental point. It is the retail catastrophe due to the internet. The mall is dying by a thousand cuts. The last stimulus has prevented many firms from declaring bankruptcy. The airline industry has lost over $35 billion in 2020. Millions of renters were saved by the moratorium on evictions as well as homeowners with foreclosure. The stock market is at highs, but the market has many deceptions. The Dow is manipulated as well as the S&P 500. For example Tesla is added. Apple gets an oversized percentage of the theory. In the meantime, there is no longer 5,000 firms listed. Where did they go? Some have merged, but most are out of business due to imports. I know that I have bounced around with details, but getting back to stimulus and the consumer. When someone has a job and spends in their region, this is the movement or velocity of money. The better the economy, the higher the rate. Today, the Fed's low interest rates barely moves the velocity of money. Consumers need money for basics like food and shelter. The rate of velocity is minimal. This is a serious flaw in our economy. This is another tell.
Oil
This is the most important commodity. When people stay home, they do not need their vehicle. Gas stations sell less gasoline. Stores sell less product. Keep in mind that plastics use a lot of oil. When oil declines in price, airlines save money on fuel. This is good unless no one is flying and no one is flying due to the pandemic. The market sees hope in the vaccine. They look beyond the day-to-day problems like the low rollout of vaccinations. In addition, they will give the new administration a honeymoon period. The virus will cut short the expectation period. Biden's picks are all old cronies. You cannot go back in time. Government needs new thinking and direction. The Democrats won't help and the Republicans won't help the democrats. Gridlock won't help Americans. The outlook is bleak. Back to oil, it acted like the canary in the coal mine. It points to a shrinking economy. We have more oil than we need. The whole industry is being challenged by climate matters and electric cars. Not good as the industry offers high wages to an economy suffering from the loss of middle-class jobs. Another tell.
CORVID-19
The virus news seems to get worse and worse. It will be over soon. It is always darkest before dawn. The market keeps a positive look in this respect. However, it fails to see the real effects to Main Street. We lost almost four million jobs in December which is usually a job creating time. The downturn in jobs that the end of January brings will begin to enter the psyche of the market. This point will grow with every bad news revelation. The point of reversal that Soros talked about will enter into the equation. The Ides of March will assassinate many a portfolio. The crash will follow.
