Below, we look at jobless claims, earnings outlooks and growth projections as a few of the many critical indicators going forward to realistically measure how quickly or slowly the US economy (and markets) will be climbing out of the current CV-Inflection Point.
First: Market Sugar High Despite Earnings Pain?
Recent and headline-driven “recoveries” in risk assets (i.e. stocks) have been superficially encouraging, and are driven almost exclusively by the Fed’s ability to support bond markets (and hence interest rates) via unlimited QE (i.e. money printing) earmarked to purchase our own government debt.
The fancy lads call this “debt monetization” and it works—for a while—to keep the cost of debt (rates) down and thus debt-driven balance-sheet expansion (i.e. stock buy-backs) up.
In layman’s terms, we are essentially solving a debt nightmare with, alas…more debt.
Globally, stock markets have been on a tear from late March to mid-April, but are now trending decidedly sideways (see yellow box below).
Beware, then, of what looks to us like an obvious “sucker’s rally,” as we still remember a thing called “earnings,” and they will be largely tanking despite the artificial eminence of the CTRL+P powers at the Fed.
Nordea’s analysts are looking for -20% EPS growth this year, and if we get anywhere near such horrific data, it’s just hard to see how the current sugar high from the Fed can be anywhere close to sustainable.
Undeniable Disconnect Between Markets and Facts
In a market so totally rigged as in the current disconnect between economic facts and central bank fantasy, it appears that Wall Street no longer cares about earnings.
But we do.
Call us old-fashioned, but folks: Earnings still matter. As we’ve warned for years, this is a Fed market, not a stock market.
The dramatic impact of Covid-19 has only made this sad reality even sadder.
Because Mr. Market will punish the Fed’s current, yet desperate hubris.
That is, it’s simply a matter of when, not if, before Mr. Market (once again) gets the last dark laugh over Fed money printing.
March was just the first “chuckle.” April and May are simply classic, even expected, sucker-surges.
For now, however, we will neither Fight the Fed nor Mr. Market—but simply build our portfolios as carefully as a Swiss watch-maker, namely: for long-term consistency and good-ol-fashioned common sense.
Toward that end, we invite our subscribers to click here for this week’s most updated portfolio allocation breakdown.
No Suckers Here
In sum, we are not falling 100% for the recent and current market “surges.”
Since February of this year, just shy of $4 trillion (6.6% of global GDP) has been created out of thin air by global central banks. Such money creation, as Milton Friedman reminds us, “always and everywhere” leads to inflation.
Furthermore, inflation has not been honestly reported for years, as we’ve argued mathematically so many times. Furthermore, the current deflation is entirely to be expected as a precursor to later inflation.
For now, the decline in demand for global assets relative to supply has kept inflation at bay—but it will by no means make inflation obsolete, which is just one of many reasons why our stance on gold remains unchanged.
The Debt Fantasy Continues
In addition, trillions more in deficit-spending measures (i.e. more Federal debt) also helps in keeping some investors hopeful.
We get this, and we also get that such critical government support is helping to keep many struggling Americans just above water.
But as we showed mathematically here, once national debt (i.e. deficit spending) relative to national income (i.e. GDP) crosses a critical threshold, tanking future economic growth is not just a projection, it’s a fact.
Deficit spending simply can’t sustainably solve for the harsh realities to come, and the harsh realities already before us.
And given such realities, to now go “all-in” in with your stock and bond portfolios would be like booking a bow-side cabin on the Titanic.
But if earnings, money printing, deficit spending and now OBVIOUS debt dangers aren’t enough to toss some cold water on your cheeks, let us finally turn your eyes toward the jobless claims we are tracking.
US Jobless Claims
Looking bluntly at US jobless claims, we see an undeniably accurate leading indicator for what lies ahead even as market conditions potentially “stabilize” (??) in what remains to be seen of the post-COVID world, whatever that is…
As of this writing, the current jobless claims guidance suggests the worst of the COVID impacts will have taken place between March and June, and that the economic “healing” can slowly begin this summer.
We hope so. Truly.
But our market signals work off facts, not hope, and here’s what some of those signals are telling us now.
The Damage Is Not (Fully) Done
The key unknown is just how much economic “tissue damage” has already been done to hamper even the most aggressive/best-case recovery scenario.
For example, even if barber shops, restaurants and other critical (and sorely bruised) retail sectors re-open for business, how many consumers will have both the desire and the income to frequent and spend?
I just walked down the Streets of Seattle, and other than wandering homeless figures, the only thing I saw were very nicely painted closed shops for miles and miles and more than one boarded window…
Consumers and retailers were nowhere to be seen, and haven’t been for a while. This is simply how it is.
Consumer behavior and strength matters, after all, and comprise 70% of our GDP (i.e. income measure); consumers on Main Street have taken the brunt of the viral spread and policy reactions.
Even the most optimistic bulls have been confessing that the jobless claims today, coupled with the already massive labor dislocations here and around the world, will make a V-shaped recovery impossible.
Bloomberg Economics doesn’t foresee output to return to our economy until 2022 at the soonest.
This outlook is based primarily on the Q2 jobless claims and a projected GDP decline (quarter-on-quarter) of at least -27%, which is simply, again, staggering in its implications.
Recovery speed will also be impacted by the depth of the recession itself, yet almost all agree, including members of the Fed as well as the cabinet and the Bloomberg analysts, that a harsher, longer-term lockdown will only make the depths of this economic nightmare that much worse.
How We Track Jobless Claims
Tracking jobless claims and data is one exceptionally valuable way of peeking into the economic future, and thus, by extension, the market future.
Obviously, jobless claims data informs the way we allocate assets and cash in our portfolios as well.
Toward this end, we track what is known as “continuing” as well as “initial” unemployment claims to measure displaced workers and jobless claims as a key leading indicator for our portfolio directives going forward.
Note, “continuing claims,” as the name suggests, refer to those who have already requested unemployment benefits and are seeking a “continuation” of the same.
From early March until now, continuing unemployment claims (filed, rather than approved) have skyrocketed from 2 million to 18 million.
“Initial claims,” however, refer to new folks seeking jobless claims and unemployment support for the first time.
From March until now, initial jobless claims (filed, rather than approved) for support have increased by nearly 27 million.
Putting this into even greater perspective, such figures mean that the rate of increase in continuing claims from a year ago until today has skyrocketed by 800%, and thus explains why many are credibly forecasting a GDP decline of possibly greater than 50% by mid-year.
Note, however, that such projections are predicated upon a continuation of the lock-down measures in place since March, which is unlikely to persist. We simply can’t be 100% certain of anything today.
Many states are already leaning toward re-opening their economies despite the dire (and admittedly questionable) health projections by recently de-famed virology experts like Neil Ferguson.
But, again, we are not here to soap-box our opinions on viral science. We just follow the math and the market indicators.
If, and we mean IF, lockdown measures fully ease, then some of the dire forecasts as to GDP and jobless claims above could be eased. We’ll see.
Currently, we are seeing a slow decline in initial jobless claims, which may indicate that the worst shocks are behind us.
A similar drop in continuing claims, however, has yet to be confirmed.
Furthermore, and when it comes to jobless claims, we are not even considering the millions of Americans who are (and have been for years) out of work and not even eligible to file a jobless claim or support request.
They are simply off the radar, and this concerns us.
Hope vs. Facts
We remain hopeful that many of those currently filing for initial unemployment benefits will slowly be re-hired.
But, hope, as you know, is not enough, and we will be tracking what happens in real-time to confirm how much risk to add or subtract from our portfolios based on data coming in rather than hope rising today.
Clearly, a key factor going forward will hinge upon lockdown measures.
As of mid-April, the broader U6 unemployment number, which includes those working involuntarily part time, was already at 22.8% and is likely to be much higher once the May data is confirmed by what I consider to be the not-so-reliable Bureau of Labor Statistics.
The actual U6 unemployment data is likely much higher than 25%, which clearly reflect Depression-era numbers.
Whatever your own views on the accuracy or inaccuracy of US jobless claims, the economic facts are clear—more lockdowns will economically cripple an already-crippled Main Street economy.
Needless to say, the Main Street economy still matters, and hence the current sugar-high we are seeing in the markets just feels surreal. Headlines may lead to further short-term bumps, but we stay clear of headlines when allocating long-term portfolio directives.
We won’t be chasing the markets “all-in,” as we take risk management and the protection of capital far more seriously than we do chasing a dangerous “surge” backed by little else than more egregiously reckless debt and money supply expansion.
At Signals Matter, we play the long game, and manage wealth the way we make it—slowly, steadily and based on rules, facts and signals rather than pundit-pablum, headlines and Fed-fantasy.
If such sober realism speaks to your own investment style, join the rest of us HERE. We’ll see you on the other side.
Matt & Tom