In spite of a very ugly second quarter GDP number, the U.S. economy is clearly moving in the right direction. We need to look ahead, not back, to see where we are headed from here.
Casual observers may think that going through the worst quarter in history as far as GDP goes would tell us that the economy is pretty ill indeed right now, and be particularly puzzled that neither the stock nor bond market seems particularly worried about such a thing.
Where people really get confused here is that neither the stock nor bond market really care about what has happened, as that’s in the past now, or even necessarily are worried that much about where we are, it’s where we are headed that is what really matters, because that’s what changes in these assets actually represents.
We certainly took a big hit from the quarantine, both the state mandated version, where businesses were ordered to close, and the voluntary one, the reticence to do business in a normal way that is still pretty prevalent, but the cap on this damage was limited by practical concerns.
Even when the lockdown was in full effect, many speculated that this would be necessary for a long time, perhaps even a year or more, but this just wasn’t realistic. Perhaps people like Tony Fauci saw it that way, but Fauci admits he knows nothing about economics, even though he so often forgets this.
When you are recommending how long an economy can be shut down, this requires an understanding of both the risks of the pandemic and the risks of economic shutdown, and especially what our capacity may be to bear the burdens that so many were so eager to campaign for.
Our second quarter GDP results speaks to this capacity, showing us how bad what we did do was, and also giving us a better glimpse of how long it may be to dig ourselves out of this massive hole we have created. We could have made this a lot worse if we listened to people like Fauci, and embraced an economic view that was even admits he completely fashioned out of ignorance.
This crisis has made it all the more critical to ensure that the economic guidance we receive is sound, provided by individuals that are actually qualified to even speak on the subject, not just pretend that economics does not matter and where no prior knowledge of it is required to make economic recommendations.
Perhaps Fauci did not realize that demanding that our economy stay shut down has anything to do with economics, or even that telling us that he does not “opine” on recommending restrictions, even though he obviously loves to provide this sort of advice and does it all the time.
Fauci remarked when asked the question about whether we should limit protesting given that he admits that this helps spread the pandemic, that he does not wish to opine on government policy, but he sure does opine on these things normally, opining on just about every other activity where people congregate and advise prohibition. This rioting is even seen as special and untouchable even by him it seems, as evidenced by not being willing to advise against it.
While it may have seemed like we could have just listened to those who wished to restrict the economy for a lot more than we did, and simply try to ignore whatever economic implications would be involved, you can only ignore these things for so long before everything just falls apart.
Things haven’t fallen apart from this yet, but when we have both unemployment levels and economic losses of a magnitude not seen since the Great Depression, there’s only so much pain and damage that an economy can take. To those who think that we can do a lot more, those who fear the resurgence of this pandemic at some point, we really have emptied the tank already and we can’t just choose a suicide mission like the health authorities and the Democrats who are listening to them may wish.
The economic losses that we have taken on will amount to north of $10 trillion already, and we’re nowhere near finished counting up the losses. The government cannot just put the country on their backs and make up for the losses, as there is only so much that they can do. In spite of all the trillions that they have spent on this already, considerable suffering remains unaddressed, including claiming the loss of a great many family owned businesses which will not be coming back.
We Just Saw How Bad This Was, and Can’t Go Back
We need to realize that this quarterly 9% loss of GDP in the second quarter involved a considerable period of time where things were mostly back open after the lockdown wound down, and while we still have some restrictions, there are a lot less now. As we are seeing, the most this lockdown did was to prolong the pandemic in America, but we never really had to worry about their prolonging the lockdown for that much longer or especially it coming back into effect like it was in March, as we simply cannot afford very much more of this.
This played a considerable role in stocks making a comeback in late March and continuing to move ahead even as the number of daily COVID cases rose higher than ever. As regrettable as our simply ignoring the economic consequences of this lockdown has been, there are limits economically to how much we can self-mutilate before we can simply bear no more, and the second quarter GDP numbers tell us not so much now bad things are but how much harm we have caused and how much we need to be careful going forward.
The Fed does track the economy on a weekly basis though, even though this isn’t so much in the public eye. We dropped below zero during the week of March 21, at –3.33%, and bottomed at –11.48 during the week of April 25, a month of tyranny that may take years to recover from.
We are on our way though as this has been coming up ever since, although the latest numbers show us still in at –7.24%. This weekly number doesn’t suffer from the lag that the quarterly one does, but as we can see, this recession is alive and well, but at least improving.
Greg Daco, chief U.S. economist at Oxford Economics, points out that this quarterly GDP loss is only meaningful to show us how deep the hole was, not to show us how we are climbing out of it. This was a very deep hole though and one that we do not want to ever visit again.
Jay Powell, on the other hand, the Chairman of the Federal Reserve, has been making all sorts of remarks that suggest that our economy is still at the mercy of this coronavirus, but his remarks miss the fact that we neither have the means nor much of an appetite to hurt ourselves much more over this. This virus didn’t shut anything down, states did, but they need to be very careful not to do too much more damage as they cannot even bear what they have caused already.
Joshua Shapiro, chief economist at MFR Securities, remarks that “anyone who thinks that they have a firm handle on the economy’s path is either delusional or lying.” We have no idea why he thinks this, and especially why he believes that our economic path is so unclear in his mind, but the path is at least fairly clear if anyone really cares to set aside their preconceptions and view it objectively.
The recovery is clearly underway, and there does not appear to be anything that substantial to interrupt it from an economic standpoint at least. We don’t quite know how widespread that COVID-19 infections in the U.S. have been, other than it isn’t possible that it hasn’t affected a substantial percentage of the population already. Our snapshots have shown us that 8% of all those tested have had it, and when you consider that this has to be at least several times higher, because of the sampling, this thing can only go on for so long.
If 8% of the people that we test today have it, we know for sure that those who have had this virus must comprise a much larger percentage, given how long this virus has been widespread. Of the 92% that are found to be negative on a given day, a great many of these people would have been exposed to it previously but no longer have an active infection to show up on a test.
Regardless, we just can’t go back to where we were and the fears of the country locking down until there is a vaccine is not something we could manage even if we were prepared to ignore the consequences. This angry bear has already mauled us and bearing its full power for another sustained period cannot be borne. In theory we could go deeper, if we were insane enough, and cripple our economy much worse than the Great Depression did, but the people would never stand for that and would push back and put a stop to this before too long.
If you fail to account for this, and economists should certainly know better if anyone can, then perhaps you can hold such strong views as Shapiro, where you can’t set aside this imagined risk of a bigger catastrophe simply because you haven’t considered its probability. Things can only get better after your house has burned, with much of it being blackened, but we just won’t be setting it ablaze again like that by our own hand, which is what is feared by those who see such uncertainty.
Harvard University has been tracking the decline in small businesses, and as expected, these losses are continuing to mount for now at least, but this effect has been more than offset by the recovery we have seen in the economy as a whole, as evidenced by the Fed’s weekly numbers.
We Are on the Right Path Until We Get Knocked Off It, Which We Might
There is no question that the progress we’ve made will slow down, because you get the most growth when you go from closed to open, but the projections of the Fed do look reasonable, showing a steady improvement through the end of 2021, a year where we’re going to make back the better part of what was lost in 2020, and they just don’t make these numbers up. Even if all we knew were the basics, that we shut things down but are mostly re-open and trying to repair the damage from the lockdown, their numbers would appear reasonable enough.
According to S&P Global Market Intelligence, the loss of PPP money is expected to cause a loss of 16,000 jobs, but that’s too small a number to even show up on the charts and will be more than offset by all those people who have been paid more to stay home and will at least see this incentive to stay out of work gone.
Economists are also speaking of the big hole that the loss of this extra unemployment money will cause, but we need to account for the fact that many of these workers have jobs waiting for them now that we won’t be paying them to stay out of work, so the only real hole here is the excess amounts that the benefits paid, which aren’t really that significant.
While the discussion continues between the two parties, as we predicted, the amount of extra unemployment benefits as well as the size of further bailouts to the states is proving to be very difficult, with neither side budging an inch on the matter throughout the discussions so far. The Republicans aren’t going to be intimidated this time, and both sides have dug themselves in now.
As far as what investors should do against this backdrop, Jeff Klingelhofer of Thornburg Investment Management advises to go more with what he believes are lower risk assets in times of uncertainty like gold. Gold is not a lower risk asset as he suggests though, although it is one that may provide more insulation against political and economic risk, and this economic risk is indeed mostly political, brought on by political decisions essentially.
We shake our heads and grin when we see people trying to decide these things ahead of time this way, and the stock market is doing fine thank you. If such terrible things happen to it, we will know soon enough. Gold is still climbing but must be approached with a lot of care right now as the climb as been steep and there is a lot of money in it that is in for a good time not a long time, which could cause a significant profit taking selloff that may not require much to set off. This is not advice to act on without a plan, and none is offered here.
You always need both an entry and an exit plan, a very simple lesson that all traders are well aware of. You can’t even enter a trade with some sort of exit plan, even if that just means when you get a feeling that you should get out. If people want to invest without a plan, that’s up to them, but this means just hanging on, not switching and then being clueless when it’s time to go but you don’t know, which just serves to turn you into a terrible investor by doing something that you do not know what to do.
Guidance on both when to get in and when you may need to get out when providing these recommendations should never be optional, as if you are willing to guide someone into a trade, you need to be responsible enough to not just let them take up the offer with no further guidance..
Stocks and gold are both doing well right now, and we never want to sell our investments out of a fear of something yet to come, even the big worries such as the Democrats burning our already scorched land even more. There’s no fire going on now, and it is foolish to run from a fire that may come later, especially if you are making real money waiting for it to happen, if you are in the right stocks that is, which is another matter.
We could see the stock market go down quite a bit and still be able to find some real nice stocks to weather this storm in, not ones that lose less but ones that still make plenty. This must always be kept in mind when people warn you about stock market pullbacks, and the average stock isn’t even doing that well even now as we await what may come.
How the so-called stock market may be doing should only concern us very much if we actually want to own the “stock market,” like being invested in the S&P 500 and being worried that it may be not moving along the way you hoped, and may continue to do so for a while. There may be particular stocks or types of stocks that may be doing great, and given that our mission is to be in good stocks, we should actually be looking for these opportunities.
If and when we see the flames and smell the smoke, and everything is burning and not just most things, that’s the time that we are at risk of being burnt, that’s the time to evacuate the building, when we are burning that is and not just houses down the street. It’s fine to look upon the horizon and speculate on what things might be like when we get there, but this is no excuse to guess and then put our money on them.
Klingelhofer considers it a “fool’s errand” to try to predict where things are headed right now, and we could not agree more, as only fools act upon these predictions at the best of times. The wise person instead just watches and is guided by things that actually are happening rather than what may happen. We might have a weaker looking starting hand, but we need to actually see the cards dealt to see how it stacks up in real time before we toss it.
Predicting that things will be good or bad or uncertain are all predictions, and just believing that uncertainty should have us wanting to put our money in something else runs this errand as surely as those foolish enough to act now upon any predictions in the future. This is always a fool’s errand, and Klingelhofer is placing himself among them well without realizing it.
We can’t take away his future predictions because there wouldn’t be anything for him left to do, and predictions can actually be quite valuable if they are good ones, to better prepare us for whatever comes but never to wish to pre-empt it, which is what he is seeking to do.
Even though we are extremely concerned about where the economy and the stock market are going over the next several years, not based upon the coronavirus recovery whose path has been at least fairly marked out already, but by the specter of the political change that is going on now, but even expecting an inferno doesn’t mean it is time to leave yet.
We still like gold but we don’t want to be seen as recommending it beyond its present merits, to provide crude and static recommendations like this that aren’t even needed now, and may or may not be appropriate given the landscape at the time of whatever big fires we may run into soon, as this is all too presumptive and we do not wish to run fool’s errands.
These things are far easier to figure out and manage than most people think. The stock market is holding up so while it holds up and especially while it moves forward, this can make us money so we may wish to continue to make some. If something else like gold, or bonds, or anything is outperforming our stocks, it’s time to move over to something doing better. We do need to check though and don’t want to go from one fire to another, even a lesser one.
When we do see the flames though, we run. The mistake that the overwhelming majority of investors make isn’t acting too soon when trouble is a possibility, it is acting too late and doing too little, or often nothing at all, breathing in all that smoke as they watch their money burn without even considering grabbing it and running.
The flames have been mostly put out from the last fire as far as the economy goes, even as it continues to smolder, and the stock market has long put this fire out. It’s just better to smell the smoke first than imagining it coming at some point later and running now, but when the fire does start, by all means do it then.