June 4, 2020 | The V

If you’ve spent the pandemic with your butt in sweatpants and you money in cash, don’t feel too proud. It’s time to put on your pants.

From hitting a virus-induced low on March 23rd, stock markets have just had the best 50-day run in history. Like, ever. The gains have been 40% or better for the Dow, the S&P 500, Nasdaq and even Bay Street. And while investor confidence has been brimming, fear has been tanking. During its worst Covid Moment, the Vix topped out at 83 – the scariest reading since the 2008-09 credit crisis. By Thursday it sat at 25. So while stocks are up 40%, volatility’s down 70%.

Remember when this blog talked about a V-shaped recovery, back when the steerage section was dressing in hazmat and telling us a billion people would die? Well, does this look like a V to you?…

Of course it does. And this may well continue. There’s a sense markets will actually finish 2020 in record territory (unless Trump loses the election and starts a civil war). Just look at the latest news:

• The Bank of Canada’s shiny new boss took over the reins this week, saying the feds will start throttling back on stimulus spending because the peak of the virus impact has passed.
• Financial ETFs saw $123 million in net inflows last month. Investors have pumped almost half a billion into the banking sector this year, taking advantage of a plop in values that came after the virus arrived. The Big Banks have won huge gobs of confidence for the responsible way they dealt with the bug and have retained 100% of their dividend payouts. The worst is in the rearview.
• Jobless claims in the US are awful, but about as expected. Unemployment numbers on Friday morning will suck large, but are expected to represent Peak Virus.
• The European Central Bank just shoveled another 600 billion euros into markets, bringing the total since March to 1.35 trillion. (One euro = $1.53.)
• US mortgage applications are up 62% and approaching all-time highs.
• American Airlines will boost flights by 74% in July as demand from travelers swells much faster than expected. Load factor of just 15% in April surged to 55% in May.
• A new Nik Nanos poll finds 30% of Canadians who lost their jobs to the virus are working again. “Research suggests that the initial shock of job loss and fewer working hours is wearing off as some Canadians’ job prospects start to brighten,” says the pollster. “It is too early to tell whether this trajectory will continue to a recovery or flatten into a new more depressed jobs normal.”
• And look at oil. Traders had to pay people $30 a barrel to take the stuff off their hands in April. Now a barrel costs $37 US for the West Texas stuff. That’s a price recovery never experienced before, and my suspender-snapping fancy portfolio manager buddy Ryan is call for $50-60 crude next year as economies, and demand, spring back.

Is all this at odds with what you see around you at the mall, walking past shuttered eateries and in the historic stats about lost jobs, economic decline and millions on the dole or unable to pay their mortgages?

You bet.

At first it makes no sense. How can financial assets, commodities and portfolios roar when the real economy was chewed up so badly by the pandemic? Why is there such a disconnect between Bay Street and Main Street?

Well, as this pathetic blog has pointed out, the rich hold assets and the rest hold debt. Those assets have been massively supported by central banks and governments at all levels who chopped interest rates, spent trillions buying up negotiable securities like government and corporate bonds, plus dumped trillions more into the hands of consumers and businesses to replace money lost in wages and profits. Meanwhile all of the consumer and mortgage debt remains to be paid. Just deferred. Still owed. The lenders will be made whole.

When Covid came we told you pandemics are temporary. They pass. Demand is postponed, not destroyed. Since then the economic rubble has been huge and public spending without precedent. Now the curve has flattened. The health care system was not overwhelmed. Deaths were fewer than anticipated and eight in ten were among the elderly or compromised. (94% were people over 60, and who cares about those old hippies?) A second wave could come, of course. Society could re-open too fast. Freaked-out citizens could balk at returning to their old habits, or even wanting to work. Lots could go wrong.

But facts are facts. Anyone selling into this storm got whacked. Those who let the headlines and the politicians guide them went over a cliff. Moving to cash as the pandemic unfolded was a disastrous strategy. Forgetting the lessons of Nine Eleven, Y2K, the credit crisis, the Asian Contagion or Black Friday meant making paper losses real. Sitting on the sidelines, trying to time the market instead of staying invested, was an amateur folly.

It wasn’t different this time. Because it never is.

Garth Turner June 4th, 2020

Posted In: The Greater Fool

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