The Stock Market Ignores Chaos!

In spite of my predictions of a slowing economy because of the inability of the US to control the spread of the Covid 19 virus, the resulting chaos caused by the President refusing to concede the election,  a $3.5 trillion 2020 budget deficit and Federal Debt increasing to $23 trillion and counting;  for all of 2020 the S&P Index rose 16% and the NASDAQ rose a whopping 44%. The January 9th Economist Magazine explains the stock market as, ‘Melting UP!’  The ability of the stock market to rise and thrive in such an environment is probably due to the federal government’s $3.5 trillion stimulus packages, the cooperation of the Fed in keeping interest rates low (thereby creating equities attractiveness as compared to bonds) and the worst economic effect of the pandemic hurting mostly ‘small unlisted’ business.  Standard GDP forecasts show, that in spite of all the chaos, the US and world economy is expected to fall only 4.5% in 2020. In the US, because of pent up demand and increased savings; the economy is expected return to pre-pandemic levels by April 2021. HO HO HO! I continue to believe that the US and worldwide economies will be affected by Covid 19 pandemic well into 2022 and the recovery will be slow.

I continue to be concerned about the 20 million Americans that are unemployed because of the virus, (restaurants, travel, sports, small retail and theater), with only a few possible new jobs. How many restaurants, theaters and small business will reopen? How about the 6 million small family owned businesses that may not survive the pandemic and not reopen?  What about the business owner’s bank loans?  What about the people in the bottom 40% of the economy that recent surveys indicate don’t even have $400 for emergencies? Also, it has been reported that there are some 20 million people that haven’t been paying their rent or mortgages (there is a moratorium on evictions) and won’t be able to make back payment when the moratorium is discontinued.  Although there is a moratorium on evictions, what about the landlords who have to pay utility and mortgage payments? What about all the empty office buildings that are no longer needed? (Many now work permanently out of their homes.) The big unanswered question is therefore, what is the financial stability of the banks that hold these mortgages and loans and are not being paid? In 2008, Standard and Poor’s ranked all mortgages as AAA, until they were worthless. The problem with the banks won’t be visible until it is too late, just like what happened to Lehman Brothers bankruptcy in September 2008.

The Control of the Virus

The Covid virus continues to spread in many parts of the world as communities go on lockdown. Deaths in the US have increased to over 4,000 a day, for an unbelievable total of 360,000 dead. As of January 8, only 5.3 million vaccine shots have been given in the US, including to my wife and myself. Thank you Colorado. However, the vaccine is being distributed much too slowly in the US and throughout the world.  Pfizer and Moderna are expected to inoculate only 2 billion people, whereas the ‘yet to be approved’ ArtraZeneca-Oxford and the Novavax vaccine shots, are expected to inoculate some 5 billion people maybe sometime next year. So, with this slow roll-out, I believe the economic effect of the pandemic on a worldwide basis will continue to slow the world economies. However, it is interesting to note that where the pandemic began, in China and because of a realistic national prevention polices, the virus has been stopped and China’s economy is expected to show economic grow of 4.5% in the 4th quarter 2020. Also, because of  of ‘realistic national prevention polices’ the death rate in Taiwan, Singapore and the rest of Southeast Asia, is each in the single digests.  This brings up the political situation in the US.  Is it too late for the upcoming Biden Admiration to make a difference?

Will the Biden Administration Make any Difference?

Hopefully, the new Biden administration can make a difference from the Trump administration, which basically ignored any Covid ‘realistic national prevention polices.’ So far, the Biden Administration has asked for 100 days of ‘realistic national prevention polices.’ This may, on the short term, slow down the economy, but these measures are expected to be accompanied by a new stimulus package. With the Democrats control of the Presidency, the House and the Senate; the Biden administration legislation should be a lot easier. A week ago it appeared that without control of the Senate, Biden would only be able to make appointments to government agencies and execute executive orders. Now, it appears that Biden can get quick confirmation of his judiciary and Cabinet positions and go directly to sweeping reforms and maybe even increasing taxes on the rich and using the proceeds for the ‘common good.’ I can dream! Although the ‘filibuster rule’ of 60 votes will still prevail, the Biden administration may be able to get legislation through via the 50 + Harris vote ‘reconciliation process.’ This depends on how much the Republican will comply to the Trump stranglehold on the party. Before the Trump inspired capital ‘insurrection,’ 65% of Republicans believed in the myth that Trump had won the election.   Trump has a 90% approval rating among Republicans. However, his lies, his disregard for the constitution and his demagoguery lit the fuse of a brainwashed mob that stormed the capital building. His initial message to the rioters was, “We love you, you’re very special.” It remains to be seen if the 74 million Republican’s that voted for him, can break loose from the death grip he has on the party.  We can only hope that the long ‘nightmare’ is over!  It would seem not, as party members at a gathering of the Republican National Committee in Florida, endorsed President Trump as the man to lead the party forward, ignoring the turmoil in Washington.

Currently the rioters that disgraced the capital building are being arrested and charged. However, the responsibility for this ”insurrection’ must also surely rests with the President and his enablers. Ted Cruz, John Hawley, Kevin McCarthy and others, tried unsuccessfully to overthrow the constitution and the the votes of our citizens. They should be punished or democracy will fail. Otherwise, as Anne Applebaum says in her new book Twilight of Democracy “Maybe new information technology will continue to undermine consensus, divide people further and increase polarization until only violence can determine who rules.” I believe that progress is a journey of process and sometimes like a spring, we have to fall backward to re-compress, in order to spring forward again. Let’s hope so!

Debt

A lot of un-repairable damage has been done. It seems that Trump has initiated a ‘new economic policy,’ (Ever Expanding Debt) It has created the illusion, that increasing debt will eliminate the US from ever going through another recession. Just issue more debt (print money), spend it and the economy will thrive!!! History indicates that like the 1922 German Wiemar Republic, an economic disaster will follow. The Trump administration ‘goosed’ the economy before the pandemic with $8 trillion of debt. Trump’s businesses always used debt to finance his bad decisions and went bankrupt 4 times. However, the US cannot go bankrupt! Trump loves printing money and all the ‘conservative’ Republican voices have been eliminated. Now, that using debt to save the economy is needed, because of the pandemic, the US finds itself in debt at the dangerous level of 100% of GDP. If interest rates go up again, we are screwed. Except nobody seems worried. See the book, This Time its Different, Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth S. Rogoff. This book is one of my favorites. It tells the story that each time after a catastrophe, such as the Great Depression or 2008, economists agree that it could never happen again. Who could be so stupid as to let debt go to 100% of GDP and let six banks control 70% of the US assets (too big to fail) and allow all the economic growth to go to the top 1%, (and then give them tax cuts creating huge budget deficits), while eighty people own 50% of the world’s wealth? Reinhart tells about lessons from history, to show us how little we have learned and we should prepare for future economic challenges, which are bound to happen again.

China

China is an autocratic state and is a wonder of economic growth, even though it ignores free markets and abuses human rights. As the US stumbles, China has made big gains in making countries trading partners. In 2000 the US had 40 trading partners compared to China’s 5. Now China has 64 trading partners compared to the US’s 18.  In the same time China’s economy has gone from 3% of the world economy to 18% and own 10% of our bonds.  It now feels embolden, as it has just arrested 50 Hog Kong patriots under their new national security laws. The US, Europe and other democracies still encompass 50% of world GDP. It is time to get our act together. That last sentence summarizes the way I feel about my country.  Let’s hope for the best, but prepare for the worst.

Investment Strategy

I suppose the delusion of unsupportable debt can go on. However, See ISL #736 for The Problem with Printing Money. The big unanswered question is  what is the financial stability of the banks that hold these mortgages and loans that are not being paid? In 2008, Standard and Poor’s ranked all mortgages as AAA, until they were worthless. Even with a new and better Biden administration, I believe the markets are overdue for a big selloff.

Carl M Birkelbach  1/29/2021

DOW 31,098  S&P 500 3824  NASDAQ 13,202  Watch out below!

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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