Geopolitical Update : Jobs data & Covid-resurgence – More market decoupling ahead?
By Christian Takushi, Macro Economist & Geopolitical Strategist. 2 July 2020 (truncated and delayed for public release)
- Labor data
- Can markets do well despite weak economic conditions?
- Personal remarks
Today marks the first day since the current Covid 19 crisis began when economic data clearly surprised on the upside.
US companies added almost 5 million jobs (see chart to the right). The hiring pace was impressive and it even surprised the optimists. Although I have been warning against too much pessimism, the numbers beat my own expectations. But in light of the rising US infection rates and continuing layoffs, many analysts said the market rise was illogical. More on it in my analysis.
I am commenting, because today’s US data, market reaction and events in Germany are giving policy makers a strong boost – A first clear sign that their radical policy steps are paying off and that the massive rescue package for Europe has passed a big hurdle. The German Bundestag approved the ECB programme and met the challenging threshold set by Germany’s Bundesverfassungsgericht (the Constitutional Court) in Karlsruhe. Last but not least, the massive policy measures face no more opposition.
Gold continues to be fought by policy makers’ allies every step of the way – and those allies try to make Gold vulnerable to price manipulation. If my analysis is right and current conditions endure, we may see in 2020 that both Gold and Equities will be positively correlated over significant periods. Under some circumstances both could end up with a decent positive performance over most of the year. That would be a highly unusual outcome that poses challenges to investors.
Serious economic implosion – strong markets: enter Labor Data
Economists and analysts with a negative macro assessment, have to acknowledge that US firms’ hiring in June shows they are more confident than what we have been thinking. The critics and pessimists say today’s data means nothing, because
- in the meantime US infections are sky-rocketing in economy-relevant states,
- lots of people are still being laid off
I think the market may be right in the short term to cheer this data though.
There are four reasons that suggest we should be cautious with “translating” the pessimistic macroeconomic-political outlook for America into a pessimistic US equity market scenario.
Can markets do well despite weak economic conditions?
Many observers say this stock market is totally out of touch with reality, so its implosion is imminent. While I agree with the “out of touch” part, I disagree with the conclusion. In a sense markets are acting rationally “within” the stringent framework set by policy makers. Here my four reasons to be cautious with too strong a negative stance on markets.
- In the current context hiring carries a bigger “weight” than firing. So, I wouldn’t simply net them against one another.This is also important for the current Political Process. While economists and media focus on the fact that the US economy will not reach the 2019 level before Q3 2021, voters are not focused on national statistics – they can be swayed by the “momentum” of an economy. I have written about this in the past: I think people underestimate how economic momentum can trump out the level of output. The economy might be smaller versus 2019, but a momentous economic recovery and a National Security event could boost US voter sentiment towards the incumbent in November. President Trump is not done & out yet.
- I am expecting that this infection resurgence (not the 2nd wave yet) will be less lethal than the one in March. There are some indications that later this year experts might be talking in hindsight about the “declining virulence or lethality” of Covid 19. Barring any new policy mistakes or lethal mutations, I have the feeling that lately frustrated US epidemiologists are being slightly too negative on the outlook for the country as a whole. While they may be right on the medical front, the economic sentiment and markets may not be as bad as the worsening virus outlook implies. This doesn’t mean that we will not see dramatic scenes at “overwhelmed” ICU’s in some US states during this Covid 19 resurgence or the second wave though. My focus is the economy and the political process, not the medical front.
- While the renewed outbreak will hurt the economy, there could be surprisingly positive bursts of momentum during the US economic recovery, setting off stock market rallies – this despite huge unresolved structural problems and systemic poverty in America. This would be perfectly in line with the 40 year-long macro trend in the USA: GDP, revenues, EPS are skyrocketing while average incomes (i.e. reality for most Americans) are stagnating. Thus, a stock market decoupled from the economic reality of most Americans in 2020 is not an aberration, it is the new normal since the 1980’s. Policy makers practically “force” investors to put the huge pool of excess money supply into risk assets.Yes, the USA has many flaws, but it tends to show incredible dynamism at turning points on the way up. What I am saying is that GDP and earnings are likely to jump at one point, while the real living standards of most Americans will fail to follow suit. And the fact is .. markets don’t care about the latter. Still, the latter will weigh on the deteriorating Political Process and come back on the stock, bond and housing markets with destructive force. As I wrote recently: stock markets and GDP are reflecting less and less the economic reality of a majority of citizens.
We are likely to see a remarkable increase in that divergence as a result of policy makers going to new extremes: they are aggressively seizing markets (controlling asset prices, volatility and yield curves). The adjacent chart depicts how GDP has decoupled from the earnings of average Americans. The closer G7 politicians, policy makers, economists and business executives follow their GDP, the more they get out of touch with the sense of stagnation and impoverishment that millions of their citizens face.
Indeed, relative to the huge expansion of the economy and corporate earnings, most US citizens have been “impoverished”. There is something deeply flawed in the way GDP is measured. The chart is even more remarkable when one considers that the Time Series of median income includes the top 10% of earners (which have seen strong gains) – The vast majority of workers have thus been impoverished in real and relative terms. How does impoverishment look like in practice? The bottom 90% of wage earners saw their income rise only 12% over the past 20 years while main costs of living rose sharply: Health Care, College and Housing rose by 50% to 120% over the same period. Something that will be exacerbated by the current policy response.
The political consequences of the policy-induced massive inflation in asset prices are going to be earth-shattering and system-killers. None of this of course is likely to bother investors in the short term. In their desperate efforts to rescue the economy, policy makers are ushering the end of the current system.
- When an economy is weaker than expected, a lot of the working capital and operational liquidity in the real economy sits idle. Economists speak of liquidity being freed up by the real economy. Such excess cash tends to flow to the most liquid risk assets that offer some upside. As a result a weaker than expected economy tends to feed the stock market – provided of course that ..
(truncated and delayed for public release)
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Kind regards and best wishes for your upcoming Summer breaks for those of you in the Northern hemisphere. For those in the Southern hemisphere, stay safe and warm during your winter months.
By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. 2 July 2020
Disclaimer: None of our comments should be interpreted or construed as an investment recommendation
A distinct broad approach to geopolitical research
(a) All nations & groups advance their geostrategic interests with all the means at their disposal
(b) A balance between Western linear-logical and Oriental circular-historical-religious thinking is crucial given the rise of Oriental powers
(c) As a geopolitical analyst with an economic mindset Takushi does research with little regard for political ideology and conspiracy theories
(d) Independent time series data aggregation & propriety risk models