Rethinking The Narrative

Market participants are likely rethinking the narrative headed into the new week after Friday's payrolls shocker. Suddenly, the idea of a "V-shaped" recovery doesn't seem quite as absurd as it did just a week previous. (Some readers will say it's still a ridiculous notion, and I wouldn't totally disagree.) Of course, nothing says the rest of the data will play along. A month from now, we could very well discover that "the greatest comeback in American history" (as Trump called the May jobs repo
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15 thoughts on “Rethinking The Narrative

  1. Walt, regarding last week’s bear-steepening (long-end yields higher), I also read on Bloomberg that CTA’s hit a big sell trigger on 10-year futures after the 0.70% (-ish) level was breached, adding to the list of reasons for the move.

    I am in agreement with your recent argument that US Treasury rates are already being “set” by the Fed & Treasury (i.e. rates go wherever the Fed & Treasury ALLOW them to go). So, with this in mind, last week’s steepening must have been ALLOWED to occur. Perhaps to help the Banks/Industrials/Cyclicals continue their rally, and remedy the prior “bad breadth” issue in US Equities?

    Will be interesting to see where their line in the sand is located, near term. Also, with Residential Mortgage spreads still fairly wide, seems like they have to be mindful of this summer’s housing market activity. Not a good time for a giant pop in 30-year fixed rates!

    Thanks again for all the good info and commentary that you provide.

    1. Yeah, i saw that same little blurb on the terminal. I mean, bear in mind that when I talk about “administered” markets and what the Fed will and won’t “allow”, I don’t mean they’re sitting by a Bloomie and literally trying to micromanage every tick. It’s entirely possible that yields can spike abruptly — I just mean that generally speaking, we live in a world where central banks are going to get what they want in terms of market outcomes over the medium-term — or they’re going to die trying (figuratively speaking). What happens on any given day, hour, minute is obviously up in the air, though.

  2. Subscribed to this report because of astute commentary. And, you understand MMT! MMT is what’s happening now. When they turn to the printing press to ask how much they owe, they get no response.

    1. It is a response,no? Bonds want what stocks are getting.I may be a layman at bond markets but one would think that bonds are reading inflation expectations as part of the rise of stocks. Corporates being backstopped by the same bank being more attractive.

  3. I’m not sitting in front of a bunch of charts, but I think that in modern times, major market bottoms are usually pointy shaped, so that’s not weird.

    The rally has been fast, huge and relentless, that’s weird but explained by umpty trillion of liquidity plus backstops from a Fed that admits it has crossed many “red lines” and won’t rule out crossing others, and umpty trillion of fiscal stimulus from a Congress where both parties have incentives to keep sending checks to voters.

    Rotation from defensive hi-quality to cyclical lo-quality is also typical in major recoveries. Look back at 2009 after March, what were you buying – probably the junkiest, most stressed names you could find.

    The “V” in stock indicies is pretty much written already, the pen is in the final part of the upstroke.

    So we’re all wondering if stocks are going to head back into a “W”. That seems to me more like something frustrated bears are hoping for than something that is actually very likely to happen.

    The economy is very very bad so no reason for the Fed to withdraw liquidity. There’s an election in November so no reason for Congress to turn off fiscal support. Valuation alone is never a reason for stocks to reverse.

    By theway, I don’t know how the strategists see market valuation now, but when I do DCFs on a bunch of small/mid cap names, using pretty stiff discount rates and pretty modest terminal growth rates (typically 8-9% and 2-4% respectively), their current valuations don’t look high. Which makes sense when you think about how DCFs work.

    I think what’s more likely than a sharp U turn and nosedive in stocks is that they climb to wherever they’re going to, then look around and wait to see what the Fed, Congress, and economy do. If the economy – by which we mean corporate profits and buyside estimates, of course – climbs little by little out of this deep hole, and the Fed/Congress bazookas stay armed and ready, then maybe the stock market gets kinda boring in 3Q. Which would be fine with many investors, I’m sure.

  4. Assuming that the latest BLS unemployment report isn’t just intentionally fraudulent, it isn’t a good idea to pay much attention to it (just as you said about China’s trade data) since there are all sorts of reasons that people can be counted as employed (such as working one hour per week) along with sampling error (the BLS report is based on sampling 60,000 households). Because the effect of the Covid-19 layoffs are so concentrated in particular areas, normal survey methods could easily overstate or understate employment depending on the location or the type of household surveyed.

    Also any reduction in social distancing will increase Coronavirus cases (cases started a national upturn this week) and any increase in voluntary social distancing will have the same effect as mandatory social distancing. In addition the United States has NO plan (whether or not you would agree with any plan) for reopening the economy or controlling the outbreak. So I don’t place a lot of hope in a V shaped recovery.

    1. Throwing humanity out the window a quickening virus is not going to stall the economy as too few people perish, many are out of work and others are retired. The real risk to the economy is if ICU beds fill and the governors need to force distancing again. Is that going to happen? Well it certainly has done this in past epidemics. We are playing with fire with our cavalier attitude and if the virus is hampered by summer it is likely coming back with a vengeance come fall. Probably before any vaccine is widely available and before the election.

  5. I think we’ll have a virus “second wave” but don’t know how bad it will be. Masking and social distancing precautions should have “some” effect. Lower density/less urbanized places may be less vulnerable than NYC, and that describes many of the states that aren’t taking precautions.

    Can the US economy struggle toward recovery with 1,000 people dying each day? Sure. People can get used to lots of endemic tragedy. 1,000 / day, spread over 50 states, is different than 1,000 / day, in one city. Sigh.

  6. I suspect that A. Allowing PPP to end in July along with the unemployment benefits will show what the reality is, B. That the senate is going to be unwilling to pass any additional stimulus until another crisis erupts that threatens Trumps chances in November, and C. That the virus wave 1 never really ebbed, it stabilized after much social distancing and is set to skyrocket in June/July as we end social distancing measures. My factory doesn’t plan on sending remote workers back until October at the earliest due to cases on the mfg floor despite intense screening and cleaning. All this boils down to real economic hardship to persist this year. What that means for stocks and bonds who knows? Probably record prices.

    1. New national from CNN poll has Trump lagging Biden by 14 points. With poll numbers like that floating around, another stimulus package in July is pretty much a sure bet.

      1. Yeah, Trump/GOP need to hand out fiscal stimulus. Trump still leads Biden substantially in “handle the economy” poll questions (shockingly).

  7. Another thought, which I didn’t write before because it is pretty ugly, but oh well . . .

    Whatever the Covid death rate goes to, you can cut it by half. Because about 50% of deaths are elderly persons in nursing homes. It is horribly easy for many people to dismiss those deaths. Then cut the remaining deaths by another half. Because about 25% of deaths are non-institutionalized people with morbidities. It is easy for many people to consider themselves are personally healthy. In other words, if 1,000 die each day, for many people it only feels like 250, which they see as a negligible number.

    I’ve had many arguments with people who are 65-75 y/o and take a fistful of daily pills for chronic morbid conditions, yet insist the Covid deaths are all old or sick people not “like me” so, really, who cares?

    Empathy is in short supply, as are mirrors. Even scarcer is attention span for abstract concepts. Most people can’t actually pay attention to anything for more than a couple weeks, unless it is right in their living room. For them, Covid is already old news, just background noise.

    That’s why I think the virus can surge again (heck, not can, is) and that won’t make a whit of difference to the “reopening”. Too many people simply couldn’t care less. There are huge incentives (political, economic) to keep them indifferent and distracted.

    I think the average person has a close social circle of maybe 20-40 other persons. Defined as, he (or she) would actually be emotionally affected in a significant way if one of those people dies, as opposed to “oh, bummer, what’s for dinner”. So unless he is in NY, NJ, MA etc, the chances that someone in his close social circle has died from Covid is negligible. Unless he’s one of those with empathy and the ability to care about things that don’t affect him directly, the pandemic is already boring.

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