From ISL #731: A RALLY IS OVERDUE- USE IT TO SELL
Last week, saw the biggest stock market rally since 1938. Great up 12.84%! Wall Street is saying, “The worst is over, come on in, the water is fine.” Don’t believe it, or you could drown. States and cities have done all they can to stop the spread of the virus by encouraging personnel ‘stay-at-home lockdowns.’ The Federal Reserve has done all it can (lowered interest rates to zero, added trillions of dollars of liquidly to the banking system, bought $2 trillion more bonds for quantitative easing, offered $500 billion in a three-month repo, etc. etc.). Also the Federal Government has done everything it can to stimulate the economy, as it has passed massive tax cuts and a $2.2 trillion Stimulus Package. There is an old saying on Wall Street “buy on the rumor, sell on the news.” Well, the good news is out. Now what? Will this stimulus be enough to prevent a recession, or more importantly will the growth of the virus be stopped by the lockdowns? In my opinion, all that has been done won’t be to enough to stop the growth of the virus or prevent a severe recession.
DEATHS IN THE US DOUBLED IN 72 HOURS
Last Sunday there were 30,000 case of virus in the US, today there are 124,686 confirmed case and 2,100 deaths, which has doubled in 72 hours. Still most of the country is not affected, ‘yet.’ The key word here is ‘yet.’ Some 75% of the reported cases are in metropolitan areas that voted for Clinton; therefore the Trump areas want an early end to the ‘stay-at-home lockdowns’ and business closures. For example, Jerry Falwell Jr. has decided to reopen Liberty University in Lynchburg Kentucky. From a public health standpoint, he is inviting into this small town, 16,000 ‘petri diches’ of student, from all over the country, that have possibly been expose to the virus. This will be the first test to see how the public of this small ‘Republican’ town reacts to an early end to regional quarantines. I think we are 60 day away from any real lifting of the ‘stay-at-home shutdowns.’ This creates a dilemma, as a 60 day further shutdown will be devastating to the economy, in spite of the recent $2.2 trillion dollar ‘Stimulus Package.’ However, the lifting of the shutdown would also have a devastating effect on deaths, from the virus. This should not be a difficult decision. However, there is an old Jack Benny joke “You’re money or your life” says a robber. Jack Benny pauses and says, ” Wait, I’m thinking.” Not funny!
Atlantic Magazine reports that the actual figure of those infected by the virus could be 245,000 (not 124,686) and growing exponentially. The actual cases are unknown as many with the virus particularly in rural area, just stay home and fight it out. They believe the pandemic is now accelerating beyond the capacity of our health care system, which is tragically not ready for this crisis, even though the US spends 18% of our GDP on health care. Hospitals are short of testing kits, masks, gowns, gloves, respirators and healthcare workers are themselves becoming infected. See https://www.theatlantic.com/health/archive/2020/03/how-will-coronavirus-end/608719/ How will the pandemic end? By Ed Yong in Atlantic Magazine.
WHAT WOULD AN EARLY END TO THE STAY-AT-HOME POLICY DO?
In response to the worsening economic situation President Trump has said, “Our country wasn’t built to be shut down. America will, again, and soon, be open for business. Very soon. A lot sooner than three or four months that somebody was suggesting. Lot sooner. We cannot let the cure be worse than the problem itself.” President Donald Trump then said that he wants the nation “opened up and just raring to go by Easter.” This date is just two weeks away and few health experts believe this will be sufficient time in containing the spread of coronavirus. For years pundits wanted to know how Trump would react to a cries, now we know. As unusual he uses ‘spin,’ self-praise, blames others, lacks empathy, disregards expertise, distorts facts, is impatient with criticism and dismisses science. He cannot ‘bully’ COVID-19 into submission. The President has reputably played down the problem telling us earlier “we have it well under control’ and has touted unproven medications. If we end the ‘stay-at home policy’ early Imperial College has concluded that if left unchecked, that by the end of summer, the pandemic, “will directly kill 2.2 million Americans.” I hear some saying (Republicans in Texas for example), that some 2 million deaths is a small part of our population and is worth the price of saving the economy. Sure let us old geezers die. However, letting the virus spread, may in the long run, have a worse effect on the economy and the lives of Americans, than any 60 day extension of the quarantine would have. I believe that either way, (end or extend the stay-at home policy’), the effects of the virus on the 2020 economy will be devastating.
THIS COULD BE WORSE THAN THE BUSH 2008 GREAT RECESSION
It is estimated that only 10% of workers can successfully work at home and many who cannot work from home, have already been laid off. That’s why last week 3.3 million people filled for unemployment payments. As the layoffs have just began mid-month, there are probably many that who have not yet applied. Also there are many workers off the grid, who don’t qualify for unemployment benefits; such as part-time and low-wage workers, independent contractors and the self-employed. For those, the $1,200 check won’t go very far to meet living expenses, especially for rent and mortgage payments. The full repercussions of business being shut-down and some 200 million people self-quarantining is still to be felt in economic terms. The worst case scenario would be devastating to the country and will take years for us to recover! Estimates of GDP contraction in Q2 2020 range from -11% to -30% for the US and US unemployment is forecast from 10% to 20%. ver. We are still feeling the effect of the Bush 2008 economic ‘Great Recession.’ I believe, the effects of the economic shutdown could be worse than 2008, both financially and emotionally.
HOW DO WE PAY FOR THE $2 TRILLION STIMLUS PACKAGE https://www.cbsnews.com/news/coronavirus-stimulus-package-pay-united-states/
Last year, 83% of Americans told the Peterson Foundation pollsters that politicians should try to lower the U.S. debt. When President Trump took over the presidency, Federal debt was $19,428 trillion. Because of giving tax breaks to the rich, US debt soared to $23 trillion. The new Stimulus Package will increase total US debt to $25 trillion. This will create five problems: Problem 1) This brings US total debt at over the warning line of 100% of GDP. Problem 2) In order to finance this debt, the Fed will borrow the $2 trillion from investors by selling U.S. government bonds. The money that investors use to buy the bonds could come from their cash accounts, but more likely it will come from selling other investments, like corporate bonds or the stock market. Problem 3) The Fed may buy some of these bonds itself. During the last 2008 crisis, the Fed bought some $4 trillion in bonds (Quanative Easing) and still holds some $3 trillion of these bonds. Recently the Fed has vastly expanded its purchases of various bonds as the coronavirus crisis weighs on the economy and strains our financial system. The Fed now holds some $6 trillion of corporate bonds and other securities tied to assets like real estate and auto loans. This artificially props up their long-term value of these bonds, as investors exit those markets for the presumed safety of government debt. How much of this debt that the government holds, will be worthless? Problem 4) The federal government paid $580 billion in interest in its last fiscal year on $22 trillion of debt. What will happen when interest rates go higher and the interest on this debt costs us more the entire budget does now? Problem 5) How will we (the taxpayers) ever pay down this debt?
MY PROJECTIONS HAVE NOT CHANGED
If thing get as worse, as I think they will, real support won’t develop until at least the 2016 Dow lows of 16,000-18,000 and maybe lower! I am now thinking that under a ‘worst case’ scenario my Dow prediction is 10,000 – 12,000, my S&P prediction is 2,000 or below and my NASDAQ prediction is 5,000 or lower. This Bear Market will probably last six to nine month or longer, so don’t expect everything to happen at once. The pain will probably be drawn out until at least the end of the year! “Read ’em and weep! These are the cards we have been dealt.
Carl M Birkelbach 3/29/2020
DOW 21,636 Down 915 Down 4.06%%
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Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com