The disconnection between the wall street economy and main street economy in America has never been so obvious and it represents everything that is wrong with the country. The economy has been in trouble for awhile, and the virus is the pin for this debt fueled credit bubble which is only just beginning to unwind no matter what this headline says.
Let’s start with a timeline of the events of the past couple months:
December 31, 2019: Chinese officials notify World Health Organization of the novel coronavirus
January 30, 2020: WHO declares the outbreak a global health emergency
February 2, 2020: First death due to coronavirus outside china is recorded
February 28, 2020: US president says coronavirus is contained, it will disappear soon
March 11, 2020: WHO calls the coronavirus outbreak a pandemic
Today: March 26, 2020: USA reports the highest number of coronavirus infections in the world, as millions of people file jobless claims and are ordered to stay shelter in place as most businesses close
The USA has done an embarrassingly terrible job at containing this pandemic so far. There is not doubt about that. Especially the mainstream media who has went from “this is just the flu” to admitting the seriousness of the pandemic and spreading fear, to now printing things like this saying we are back in a bull market all after only 3 weeks!
We now have the emergence of a full blown pandemic. There is an exponentially growing case count of COVID-19 infections worldwide, with almost every single country recording at least 1 case or death from the virus. And this is only the beginning. The seriousness of this need not be repeated, except to say unless we want our healthcare systems overrun and thousands of people dying per day we need to do everything we can now to curb the spread of the virus.
I was encouraged by a change in tone here last week as many people, companies and state governments mobilized to help the efforts to increase awareness, PPE production and distribution, anti-viral research, and testing to gather data, protect the people and shine the light on where the infections are. I have so much faith in people to step up and do the right thing in times of need.
During this time, the stock market in the USA dropped around 30% from 3300 to 2300 on the S&P 500. Given the wide shutdowns here in the USA and worldwide, massive layoffs and expected decline in US GDP to -20% or lower it makes sense for the stock market to sell off to price in new earnings and growth projections for each company given this crisis.
What doesn’t make sense is how fast it happened. It was the quickest loss of 30% in the stock market in history, all within around 3 weeks. Credit markets froze and interest rates dropped to zero. All of a sudden it became obvious that in our levered up, debt-fueled system reliant on cheap money, most companies had not saved for a rainy day and could not withstand any loss in revenue for even a short period. With all this debt, any prolonged shutdown would bankrupt most companies, given all the short term thinking. And now the Fed has to be the buyer of last resort for, well… everything. Greatest economic expansion ever apparently! That’s what happens when it’s based on debt and cheap credit. It’s fragile.
Predictably, the federal reserve came in to try to rescue markets, releasing a 2 trillion dollar package earlier this week, and promising “QE infinity” and buying bad corporate debt, bonds and treasuries (effectively monetizing debt) to prop up markets as much as possible. Whether this was warranted or will actually work is another story (it likely won’t due to problems in the repo market and shadow banking system), however when this was announced the stock market has now rallied 20% over the past 3 days as investors cheered the free money and they provided liquidity and a buyer of last resort for all the assets people did not want. Now we have calls to “open up the economy” and “the worst is over.” I see a lot of people calling for a V-shaped recovery thinking this was a bottom and a short term thing. As the president of the US recently said: “I want people back at work by Easter Sunday.”
Enter this headline: “Stock market rallies 20% out of bear market, and we have a new bull market.” In the beginnings of a pandemic. What a joke.
One thing is completely clear. The price of the S&P 500 is going lower. Also, the price of the stock market does not reflect the health of the economy. I repeat, the price of the stock market has very little to do with real economic growth. Many have known this for awhile, since the 2008 crash the main buyer of stocks have been companies themselves using stock buy backs. These buy backs artificially inflated stock prices and enriched the corporate executives who’s bonuses were tied to the stock price. It also was fueled by the rehypothecation and financialization of assests on top of cheap money and historically low interest rates. So many companies decided that instead of using this new found access to cheap money re-invest in the company or save for a future rainy day fund (maybe for a global recession?) was used for a short-term pump in the price. Effectively capital which has been destroyed that could have been put to use. All this mismanagement is happening in a global backdrop where more baby-boomers are retiring every day to underfunded pensions.
So as we rally for 3 days and the Wall Street Journal is telling us to buy stocks and we are in a bull market, let’s go over some things that happened while wall street was buying up stocks and which back up this cheery headline of a “bull market”
- Today the chairman of the Federal Reserve admitted the USA is headed toward a recession
- Today it was reported that during the week ending March 21st, 3.3 million Americans lost their jobs, thus their income stream and healthcare. During a pandemic. This was an all time record.
- Today the USA become the world leader in the number of diagnosed coronavirus cases, on a trajectory higher than any other country
- Today someone from the FDIC had to come out and tell people that all their funds in their bank accounts were safe and there was no way the banks would lose them
- Today it was announced that after the 2 trillion dollar package, average everyday Americans would get a 1 time cheque for $1200 to help. Yep that’ll cover it. Hell that won’t even pay for the average COVID-19 test.
- Today worldwide cases of COVID-19 topped 500 thousand with no sign of stopping
- Today it was reported their are massive PPE shortages in even the finest hospitals in America (who spends 18% of GDP most by far on healthcare), and in New York Presbyterian, doctors have had to resort to not wearing N95 masks and wearing garbage bags for protection
- Today it was reported their is a global shortage in physical gold as overwhelming demand for real assets, and “insurance” gold provides during tough times dries up the market
All of this was today. And the pandemic is still in the early phases worldwide.
Worldwide, in the background of this headline, there is an accelerating death count and global shutdown of borders and trade for every single country in the world. And they think they can convince people to buy stocks? We are back in a bull market the stock market is rallying?
The average everyday, hardworking American does not own stocks. Or if they do, very little. There is already massive income inequality. Many people are counting on stock market returns for their retirement so it is understandable why the federal reserve would want to try to prop up markets any way they can. By promising to bail out every company, even the damn cruise lines!
The reality is though that this cannot happen. Many companies will go bankrupt anyway. And this will hit the everyday American the hardest.
And we will learn a hard lesson. The returns in the stock market do not reflect the real economy. The people and their actions and behaviors represent economic activity.
Bailing out billion dollar companies will not save America’s precious stock market and economy. Using that money to invest in people, their small businesses and lives directly is the most important thing. Economic growth will take care of itself, we have so many amazing and hard working people in this country. Healthcare workers saving lives. Grocery store workers and farmers distributing food. Shipping companies delivering packages. Utilities and construction workers keeping the power on, the streets clean and the water clean. Police and Fireman as first responders. The list goes on and on. I would place my money with them. Invest directly in them! It’s them that makes America what it is, not the companies themselves, or the stock market, but it’s the people.
No matter what, the stock market will recover someday and very likely someday we will have another true bull market. But it is definitely not now. Right now saving human lives and bailing out the people and not the companies is the most important thing. Bailing out the billion-dollar, multinational companies is only rewarding the bad, short-term planning behaviors which got us here in the first place.
Back to this headline, which is in my opinion, purposely misleading Americans to think everything is going to be okay. This headline shows, all the people running this country seem to care about is one thing:
Stock market go up.
At all cost.
Many of our grandparents died for our country during world wars, and proudly fought to represent the freedom and ideals of this nation. Now they want us to die and sacrifice ourselves to prop up the stock market. Become the buyer of last resort so the people in the know can dump their stock on us and sail away.
I hope people know better.