Tuesday, June 9, 2020

I Learned Early On, "Don't Fight the Fed"; 2020 Is A Perfect Example

From the Desk of Joe Rollins

The whole world seems to be shocked that the stock market has made such a quick recovery. In the middle of March, the broader indexes were down 37% and the media forecasted that things would only get worse as the year progressed. How could we possibly put 25 million workers in America back to work and what would the economic ramifications of the COVID-19 pandemic be on business? Surely those forecasts that things would only progressively get worse meant we were facing another Great Depression.

Ava at her 9th birthday party

As I forecasted, their concerns were completely overhyped. In fact, in early June the Standard & Poor’s Index has made it back to breakeven, gaining more than 40% since its March lows. Further, there has been rapid and significant progress in the economy, which is putting Americans back to work and surprising even the experts. The May unemployment report was a huge surprise to these so-called “experts” but reflected exactly what you see with your own eyes. Americans are returning to work because they want to work, they need to work, and the economy will return to its normal self after this self-imposed lockdown.

In this posting I want to discuss all of the matters above including the remarkable rebound in the markets, the remarkable rebound in employment, but I cannot do so without discussing the grave and fatal mistake we made in forecasting the potential risk of the COVID-19 pandemic. I was lucky enough to run across a publication by Alex Berenson titled “Unreported Truths About COVD-19 and Lockdowns”. This is posted in essay form on Amazon.com. It contains a lot of useful information regarding how badly the media has handled reporting this pandemic. I would like to give you, below, some of those facts and figures.

However, before I launch into all the interesting and useful information, I have to report again on the financial markets during the month of May. The month of May was an excellent month again following the excellent month of April. Over April and May, the S&P 500 has gained 17.6%; quite a rebound from the March 23rd lows. For the month of May, the Standard and Poor’s Index of 500 Stocks was up 4.8%. At the end of May that index was down 5%, but still had a one-year return of 12.8%. For the month of May the NASDAQ Composite was up 6.9% and is ahead year-to-date by 6.2%. That index has a one-year total return of 28.6%.

Carter, Josh, Ava and Dakota enjoying an outdoor meal
at Ava's birthday

The Dow Jones Industrial Average was up 4.7% in May but down year-to-date in 2020 10.1%. That index has a one-year total return of 4.8%. Just so that you can compare stocks and bonds, Bloomberg Barclays Aggregate Bond Index was up .4% in the month of May, up 5.8% for the year 2020 and the one-year total return on that index is 9.6%. I always believe that a 10-year average is much more informative than a one-month average. The S&P 500 has an average return over ten years of 13.2%. The NASDAQ Composite has a 10-year average 16.8%, the Dow Jones Industrial Average is 12.4% annually. The Barclays Aggregate Bond Index has a 10-year average of 3.9% and as you can see many multiples less than any of the stock indexes.

As I mentioned two months ago in this posting, you should never sell America short. As I indicated, if you turn loose the American worker, the “American spirit” will rise up. We have seen it every day since the lockdown. We have seen a host of new companies create interactive technology so their employees could work at home. I was shocked to see how well some of the technology companies did during the lockdown with almost no interruption of their business. Clearly, hospitality, airlines and other industries were significantly impacted, but technology was not. American ingenuity allowed those companies to continue to work even during the lockdown. Unemployment is still over 20 million Americans but is improving every day. So, the rebound in the stock market is not based on flawed philosophy, but on the realization that America is going back to work and when Americans go back to work the economy will recover.

It was quite a shock last Friday when the Bureau of Labor Statistics presented the employment report. The so-called “experts” had forecasted that during the month of May that 7.5 million additional people would be put out of work. Much to their surprise, not only were there no net decreases, there were actually 2.5 million new jobs created during the month. Of course, these are not new jobs, these are just people returning to their former jobs. As indicated, 1.4 million of this group was in the hospitality and restaurant industry. During May, only a few restaurants and hotels had opened, but in June more will open. In New York City, restaurants are not likely to open until July. So many more job gains are in the offering. We already see the signs of recovery. Hotel occupancy is up (40% compared to the 60% in January), airline flying capacity is up and homebuying is at record levels. How did we get from the level of despair that we were in in March of 2020 to the almost euphoria in June 2020?

Ava's 6th birthday with Liz Mercure, 
35-year client, at the Georgia Aquarium

There is no magic wand; what happened is clearly due to the effort of the Federal Reserve. Almost immediately when the crisis occurred, the Federal Reserve slashed interest rates twice to near zero between regular policy meetings. Not only did they agree to buy securities, if necessary, they never really got around to it, but the securities benefitted from the backstop of the Federal government. And oh yes, you cannot forget about the $3 trillion that the Federal Reserve has injected into the economy over a relatively short two-month period. Last month I explained about the velocity of money and that money is thought to be spent seven times prior to being saved. $3 trillion creates $21 trillion in potential GDP, which is almost 100% of the GDP in the United States in 2019.

So, when the unemployment report was reported, all the so-called “critics” came out of the woodwork to find fault. I must have heard from dozens of clients who wanted my input as to the inconsistencies in the report. I read the report in full and I guess I am less concerned regarding their inconsistencies. The Labor Department reported that many employee’s response to the survey was “employed, but absent from work”. The Labor Department can consider those people with that response as employed since they were being paid. The critics suggest that those people are not employed even though they are being paid and, therefore, the unemployment report is much worse. I have to agree with the Labor Department; it seems to me that if the employee is being paid, whether he is home or at work, to me the distinction means nothing. If he is being paid, he is employed, in my way of thinking. By the way, the 2.5 million new jobs were in a different survey altogether and was not corrected.

So, the unemployment rate fell to 13.3% in May, which, while terrible, was a huge improvement over he predictions. Yes, there continues to be 21 million Americans not working, but do not be surprised if the June employment report reflects 8-10 million new employees during the month of June. In early June, all of the automobile workers went back to work and are near full capacity. The combination of those workers and the suppliers to those workers alone constitutes close to 3 million employees. Throughout most of the United States restaurants are reopening and hotels are relaunching. I know 3 or 4 million jobs will be restarted and employees reemployed. There is no question about it that most of these jobs could not have been created, nor the companies reopened without the PPP loan program from the government. Essentially, the Federal government gave private industry grants to reopen their businesses and pay their employees. It is believed by many that this program saved 5 million jobs in America.

Old friend Craig Sager and his family with 
baseball player, Michael Jordan, in July, 1994

It is kind of interesting how the President has criticized the Federal Reserve for its lack of action in reducing interest rates. However, there can be no criticism that when the pandemic was announced the Federal Reserve jumped in with both feet and saved a very weak economy over the short term. There is an old saying in the legal business that you never want to fight with someone who is not paying his own attorneys. In the case of stock market investing, you should never bet against a country who can, on a whim, print $3 trillion of new money.

Make sure you make no mistake in understanding where this $3 trillion came from. Due to the speed in which they needed to distribute the money, there is no way they could have had time to issue bonds. This is classic printing of money and distributing that money to employers so they could keep employees working. Will it work? That remains to be seen. Over the short term, it has certainly been encouraging. There are many other encouraging signs that you can see if you actually look.

During this entire time of the lockdown, the 10-year Treasury has traded at unprecedented prices. Most recently that bond was trading at 0.6% over a 10-year period. If you put that in perspective, you could buy a bond for $10,000 that paid you a dividend every year of $60 and it had no potential to go up over the next decade. Just exactly who would make that conscious investment decision? However, that is beginning to change. Recently, the 10-year bond has moved up to 0.9%, which is still historically low, but a 50% increase over the most current rates.

You could never say anything regarding the U.S. economy without reflecting on the effect that COVID-19 has had on the economy and what its potential really is. I guess I have never been able to quite understand why the media is so terribly focused on this virus which has proven to be almost harmless to most Americans. There seems to be nothing but negative reporting on the subject, to the point of where it almost has become laughable. This morning I woke up to a Yahoo report that indicated in huge bold print “Texas Sees Record Spike in Coronavirus Cases After Reopening.” Of course, these same publications have been uniformly critical of the states for reopening their businesses, and therefore this record spike could reinforce their argument that the country should not reopen for business. However, if you read the article a little closer, it is much more informative.

In Dallas County, they reported an uptick in cases of 298 for the day. Remember, Dallas County has roughly 2.6 million residents and close to 6 million in the metropolitan area. Houston reported 180 new cases that day with metropolitan Houston having 7 million residents. Obviously, these numbers are totally insignificant as a percentage of the population. I have struggled to understand why the media is focused on this entire subject and why it is so important to them that they continue to report the negative but do not give you the real facts. Yes, a lot of people would like to dismiss it as truly political of the infamous liberal media, however there must be a more logical reason for their preoccupation with the subject.

In trying to reconstruct exactly what took place, I went back and reviewed the information in Alex Berenson’s book, “Unreported Truths about COVID-19 and Lockdowns.” The very first report of the virus was on March 16, when the Imperial College predicted 500,000 Britain’s and two million Americans would surely die if the governments did not act immediately to close schools and businesses. This was written by a scientist not a physician but was supported by the World Health Organization. I guess that would, by any definition, scare most politicians to death. However, what was clear at that time is that it had not happened in China. The pandemic had not moved to Beijing and no overall financial catastrophe actually occurred. Why was it at that point the media was so focused on reporting this potential huge loss of life around the world based upon the Chinese experience? In fact, in many cases China got back to work within 30 days and now their country is almost fully operational.

Ava's first swimming lesson at 6 months old

What we now know is that the Imperial College report professor, Neil Ferguson, has a long record of exaggerating his predictions. His prior predictions, which are legend, and in some cases, comical, have become largely forgotten. What is interesting about this matter is only two weeks later the very same scientist changed his projection. In less than a two-week period, he projected that in Britain, 20,000 Britain’s would die rather than 500,000. And more shockingly, he reported that of the 20,000 people expected to die due to the COVID-19 pandemic in Britain, at least half of those would have died anyway due to other causes.

So, in a period of just three weeks, his projection went from 500,00 to 20,000. I am just wondering as of right now why the media never bothered to report this major reduction in the estimated deaths from the pandemic. Would it have changed our thoughts? Probably, but now we will never know. For the record, as of this morning there are 40,548 reported deaths in Britain. As I will point out later, these death statistics are wildly unreliable.

Come to the United States, we all vividly recall Governor Andrew Cuomo proclaiming that the state of New York would need 140,000 hospital beds for COVID-19 patients. Almost hysterically, he demanded that the U.S. government provide 40,000 ventilators for their use. You will recall by Presidential decree, companies such as General Motors were mandated to make ventilators because the need was going to be so great. However, what we saw was that the field hospitals built and a huge expense to the state and federal government were never used and were dismantled, and in often cases, without serving a single patient. At the end of the day, New York never had more than 4,000 people on ventilators. You have to wonder how valid the information was when the estimate was wrong by a 90% difference. Needless to say, we have a lot of unused ventilators for sale.

What is not fully understood about COVID-19 is that it really only seriously impacts older people. It is now believed that 43% of all the people who have died from COVID-19 were in nursing homes. It is almost unscrupulous to now understand exactly how the death figures are calculated. I think a good example of this is a quote from the Director of the Illinois Department of Public Health explained in April, “If you were in hospice and had already been given a few weeks to live, and then you also were found to have COVID, that would be counted as a COVID death. It means technically even if you died of a clear alternate cause, but you had COVID at the same time, it's still listed as a COVID death.”

As mentioned before, there is a huge difference between dying of COVID and dying with COVID. However, many of our problems associated with COVID were of our own self-making. It has now been learned that the state of New York so much feared the overflowing potential hospital situation that in their haste to free up beds, they sent COVID patients to nursing homes. What we now know is that this was a fatal error. Once the patients were at the nursing homes, they spread the virus to not only the other people at that home, but also the staff. What is ironic about this matter is that these individuals were likely to die shortly anyway.

CiCi enjoying the beach buggy

In New York, it is estimated that the average stay for a nursing home patient is approximately five months. So, as it clearly could be demonstrated, in all likelihood these patients were going to die shortly anyway and the contracting of the coronavirus was meaningless to their death. However, in order to reinforce their position, each of these deaths are considered to be a COVID death. Remember, the reason for the lockdowns had nothing to do with stopping the spread but had everything to do with slowing the spread and not overrunning the hospitals. Now what we actually know is that the hospitals were never overrun, and it was never truly an issue. As of today, there are roughly 30,000 hospital cases of COVID in the entire United States and at its maximum, it was only 58,000 hospital cases.

In many cases, the hospitals were not only not overcrowded, they were empty. People were so scared by the media that they refused to go to the doctor even for normal health checkups. So basically, doctors, dentists and other healthcare professionals did not work for two months due to the fear placed in the American worker of the potential loss of life in COVID. As a good example of the progress that is being made, the increase in hospitalizations for COVID has been declining remarkably. Over the last six weeks reporting period, 33 days there have been net reductions in hospitalizations and only up eight actual days. The reporting on this issue has gotten so bad that even Washington state has in their records of COVID deaths two people that died of gunshot wounds.

But the real news that is coming out of this matter is that there is almost no risk to younger people. For example, in Italy 32,000 Italians died by COVID-19 and the median age was 81. That means that half of the people were above 81 and half were below 81. In this number, 13,000 were over the age of 80 and another 5,400 were over the age of 90. That has been the case throughout the world.

In New York City, 40% of the 23,700 deaths were people over the age of 80. And even to the point that under the age of 15 across the United States, there have been only 19 cases of death from COVID-19, while 180 deaths from flu were reported. This statistic bears out the facts that under the age of 30, your risk of death is almost insignificant. To give you an example quoted by my friend, Marc O’Connor, “If you are under the age of 24, your odds of getting struck by lightning is 1 in 700,000. If you are under the age of 24, your odds of dying from COVID is 1 in 1 million. That does not mean you will not get sick, but you will not likely die.

You may remember the very famous case of where the Lake of the Ozarks had a huge pool party over Memorial Day. It was reported in every major outlet as a huge abuse of social distancing. The pool was shown crowded and the decks around the pool were also overflowing. The national media was outraged at this clear abuse of the lockdown. Just as a follow-up to that case. There have been zero cases of reported Coronavirus related to that party.

When I was president of Brown Steel, 
November 1979 - still writing newsletters

So, the question always beckons us, what does the future hold. Clearly, none of us know if we will have a second wave of Coronavirus. What we do know is that medicine is ready. There has been an explosion of Federal money supporting antibody therapy. This therapy does not prevent the disease but makes those early in recognition recover quicker. There are numerous companies making antibody medicines at the current time and many are expected to be available in the fall. The Manhattan Project of the Federal government relayed a vaccine is moving forward. There are numerous vaccines already in testing around the world and China now said that they would roll theirs out in a couple of months. I think it is more than reasonable that a vaccine will be available before the end of 2020.

So, there is no way to criticize what has already happened because we have already gone through the lockdown. But there is absolutely no emphatic evidence that the lockdown should continue. There was probably never any reason to close the schools and all the schools will reopen in the fall, except maybe in California. For reasons not known to most people, they have elected to ignore empirical evidence on the subject.

We can expect that the camps, sports leagues and schools will all open in the fall. Millions of workers will go back to work in June, and more importantly, in August. As previously mentioned, the extraordinarily lucrative unemployment benefits will run out in July 2020. This will make many employees go back to work by default. Employers around America are reporting that it is hard to get employees back to work since they are currently making more in unemployment than they made while working. All of that will end in July. In addition, with schools starting back and normal childcare opening back up in August, another 5-6 million Americans will be back on the payroll.

So, as we sit here today, we are at a crossroads of the investment year. It has certainly been a strange period thus far. The months of January and half of February was great. Half of February and most of March was horrible. The month of April was fabulous, and the month of May was very satisfactory. But it once again shows that you cannot try to time the market. At the height of dismay in March with the media pronouncing America in Depression, if you sold your stocks you made a mistake. Almost always, you are better off to ride out these markets when volatile. But as we approach breakeven on the major market indexes, I anticipate the rest of the year will be extraordinarily volatile. There will be periods of large gains and large losses, but at the end of the year we should still see gains.

As the economy picks up over the months of June, July and August, we will get back to normalized unemployment. My projection for the end of 2020 unemployment will only be 8%. While much higher than the beginning of the year, it is certainly within normalized range. Corporate earnings will be depressed in the second and third quarters but will rebound strongly in the fourth quarter. I know all of this sounds like we are talking about a tremendous period of time, but as I write this we are only three weeks away from the third quarter and only three and a half months away from the fourth quarter. It is going to happen faster than you ever expect it. But do not expect it to be straight up because the media is just refusing to let the COVID fears recede. However, as the correct information is dissimilated, eventually even the media will have to concede their mistakes. As to a question regarding his projection for the future, on May 25, Governor Cuomo said “I'm out of that business (forecasting cases of COVID-19) because we all failed at that business. Right? All the early national experts. Here's my projection model. Here's my projection model. They were all wrong. They were all wrong.” Truer words have rarely been spoken in America since February 2020.

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

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