The Breakdown - 5 Numbers That Tell the Story of Markets Right Now

Episode Date: June 4, 2020

Every day that protests continue and the stock market goes up, more people ask what the disconnect between markets and the real economy is. In this episode of The Breakdown, NLW peels back the story of today’s economy by looking at five numbers: The growth of the S&P500 since the March 23 low Current unemployment stats and a Bloomberg Economics estimate of the number of jobs at risk The performance of the S&P500 in 1968, one of the most tumultuous years in American history The total percentage of the world’s debt denominated in dollar terms The number of flights between the US and China by Chinese airlines going forward

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by BitStamp and CipherTrace. The Breakdown is produced and distributed by CoinDesk. And now, here's your host, NLW. Welcome back to The Breakdown. It is Wednesday, June 3rd, and today we are going to be looking at a topic that has all, all of Twitter really talking, which is the disconnect between markets and the world around us. And the way that we're going to do it is by looking at five different numbers that tell the story

of markets right now. Each of these numbers is a stand-in for a larger representative force in markets. And I thought this would be a good way to explore a number of different dimensions all at once. So let's dive in. All right, the first number that we're going to look at is 37.7%. That is the return of the S&P 500 over the last 50 days. The important part of this is this is now officially the largest 50-day rally in history. The S&P's low was hit on March 23rd, and ever since then, there has been a steady climb as, effectively the Federal Reserve steps in and says they will backstop the entire economy no matter what it takes, no matter what strategy it takes.

that has been music to the market's ears, and right now, this is the only thing that matters in these markets, what the Fed is willing to do to make sure asset prices go up. Analysts like Mike Larson from Weiss ratings have said that the disconnect between markets and fundamentals is as high as anything they've ever seen. But even that fact, even that agreed upon fact, is not stopping people from going all in on this market. And they have historical precedent. The previous seven other largest 50-day rallies, in each case, stocks were higher both six and 12 months every single time. So effectively, the bet here, the bet on the stock market right now, is that the Fed will do whatever it takes

and the music will just continue. Ramp Capital, as he is want to do, put it even more bluntly. Dow jumps 300 points in third day of gains because it doesn't care what you think. Now, let's contrast that with our second number that tells the story of markets and the economy right now. 40 million. This one I'm almost positive you'll be familiar with. 40 million is one of the estimates, the most kind of commonly shared estimate of unemployed claims over the last few months in the wake of the COVID-19 shutdowns. Now, there are other estimates of the unemployment rate, but everyone has it somewhere between 23 million and 40 million. It looks to be something like 19.5% unemployment, which is the highest since the Great Depression. So by any measure, whether you

take the high end or the low end, you're still talking about historic unemployment. How does that square with the market story, right? The largest 50-day rally in history. Now, stock market bulls will tell you that's because the market lives in the future. It's not meant to price what's going on today. It's meant to price what's likely to happen in the future. And as the economy comes back online, as the economy opens up, a lot of those jobs that were lost are likely to return. At least that's the thesis. Now, there are other elements. There are portions of the stock market, particularly that have to do with at-home communications, working from home, etc., that have had huge, huge gains in real ways, right? Not just on the basis of cheap money and Fed money printing. But, of course, at the end of the

day, most people argue, even the people who are long equities right now, that it's really about the Fed. Here's another unemployment number that's honestly probably even more reflective and more important than the 40 million, which is 6 million. That's the number of jobs that Bloomberg economics estimates are on the line going forward with the next wave of job cuts coming out of COVID-19. Now, these job cuts aren't just the same sort of expected first wave cuts that you saw. The waitresses and waiters at restaurants were an obvious first wave cut, the people who worked at hotels in cleaning and things like that. This next wave is likely to be more white-collar, higher-paid supervisors in sectors that frontline workers were hit first, so restaurants and hotels.

But it's also about knock-on effects in related industries, such as professional services, in real estate, in finance. Think about it from the standpoint of marketing, right? If you're a marketer whose agency works 80% or 70% or 50% even with hotels and restaurants and the service industry, well, there's just going to be less demand for your services. So the point here is that Bloomberg is looking at a second wave of job losses that hit a very different demographic and are still talking about a huge number of people, six million jobs. So that's the second important number within the context of this unemployment story. Now, there's obviously a huge contrast in the stories that our first two numbers are telling us, with the biggest 50-day growth

in the S&P 500 on the one hand, and the huge historic unemployment numbers on the other hand, and the specter of even more unemployment hitting new sectors and new types of positions coming forward. Our third number is a look at how this has played out in the past. So in 1968, it was one of the biggest years of upheaval around the world, but in the U.S. Martin Luther King was assassinated. Robert F. Kennedy was assassinated. North Vietnam launched the Tet Offensive, which accelerated the Vietnam War. Lyndon Johnson announced that he wouldn't be seeking the presidency after being the early frontrunner to win, and ultimately Richard Nixon beat out Hubert Humphrey, the Democratic nominee. And this is to say nothing of the H3N2 Hong Kong flu, which was a pandemic

that killed something like 100,000 Americans that year. So what happened in markets? Well, between In January and March, the S&P 500 saw a 9% drop, and that's the period during which the assassinations happened. But then from there, the market rallied 24% and ended up with a price gain of 7.6%. So 7.6% is our third number that explains what's going on in markets. And basically, it's a reminder that there are just often huge disconnects between the things happening in the world and markets. and we can debate whether this is a feature or a bug, but it is a reality, historically speaking.

Of course, the economic story of 1968 was not all cheery. We saw the cracks in the Bretton Wood system of a gold-backed dollar as the World's Reserve currency start to show, as the demand for dollars increased in a way that would ultimately lead to the breaking of the gold standard in 1971, which is, I guess to say, a secondary reminder that there is more to understanding the health of an economy than the stock market. And while stock markets historically may not have reacted to big social unrest, it doesn't mean that a stock market alone shows that the economy is healthy. BitStamp is the original global cryptocurrency exchange. Since 2011, BitStamp has been the preferred exchange for serious traders and investors, trusted by over 4 million customers, including top. financial institutions. BitStamp is built on professional grade trading technology.

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Learn more at ciphertrace.com. Now for our fourth number that tells the story of the markets today, I want to actually go to something that's similar to that question of the dollar standard and the dollar as the world's reserve currency. And for this one, I'm going to actually use a few numbers. The first number is 79.5%. That's the percentage of the world's trade that is currently conducted in U.S. dollars. The second number is 84%. That's the percentage of all non-domestic debt globally that is U.S. dollar denominated debt. The third number is $100 trillion. That's the total amount of that global debt that is denominated in U.S. dollars. Regular listeners to the breakdown, will know that I think that this question of the U.S. dollar and its role in the world is one of the

most significant macroeconomic questions that we face. When the dollar is too strong, you can see corporate earnings go down because people in other countries can't afford American produce goods. You see local currencies have crises where if you have a net importer country that has its debts denominated in dollars but is paid in local currencies, if those balances break, as we've seen in Lebanon, you create this huge gap between what the cost of goods coming in is and what people can afford, which can wreak havoc and create huge problems with local currency regimes. Real Vision's Raul Paul has had one of the clearest voices on this. He wrote a threat about it, saying, the dollar will continue to rise as demand for dollars rises, and that in turn slows global

growth, making the dollar shortage worse and the solvency crisis worse as cash flows fall globally, which makes dollars in even more short supply. So the Fed print more money to try to replace cash flows via fiscal stimulus. The velocity of money falls as money is hoarded. All other central banks print more to offset their own systemic strains. This is a story that we're still trying to understand how it's going to play out. Over the last couple weeks, the dollar has backed off some of its extreme highs, but there are still huge questions about how the dollar scenario is going to play out

in the context of this larger global crisis, this larger end of a debt super cycle, as Linaldon would say. So I think that any accounting of trying to understand what the markets are telling us has to look at some aspect of the dollar. And this huge percentage of global debt that is denominated in dollars, I think, is a key part of that issue. The fifth and final of our numbers that tell the story of markets and the economy today is a big, fat zero. Zero is the number of Chinese airlines that will be allowed to service the U.S. starting from June 16th. So this is the latest from the Trump administration in the increasing return to a trade war that has even more ominous tones in the wake of COVID-19. This effectively is a response to a March 26 decision from China that limited foreign carriers to one flight per week, effectively banning U.S. airlines from flying to China. And so this just is sort of reciprocity,

at least that's one interpretation of it. It matters less, I think, to me, and the reason that I'm using this as an example is not so much the implications to the airline industry. It's that it's symbolic of a growing area, a growing dimension that we have to understand. This trade war is going to have an incredibly significant impact on the shape of the global economy. Before COVID hit, in fact, the fear of a U.S.-China trade war was one of the only things that had markets spooked. So now that we're on the other side of COVID, we still have serious questions about what the economy reopening looks like. We haven't even discussed on the show any threat or risk of second waves of viruses, you know, particularly exacerbated by mass scale protests. Add that to a growing, belligerent tone between these two nations.

And you have a recipe for significant economic fallout that will, will have real, not just narrative impacts on businesses. Ben Hunt from Epsilon Theory, in fact, tweeted out the article about the U.S.'s plans to block Chinese airline flights and said, The best short trade in the world right now is to set up for a full-scale resumption of a U.S.-China trade war. This is obviously part and parcel of a larger geopolitical question that relates to China as well. Tomorrow is the 31st anniversary of the Tiananmen Square Massacre, and for the first time, Hong Kong will not be allowed to demonstrate to hold a vigil to hold a remembrance event effectively. And that's just one of the symbolic but powerful gestures that China has made recently in terms of consolidating its control and its sort

of resorption of Hong Kong back into the Chinese fold. So there's a lot going on there. In fact, later this week, I'm going to have a primer on the U.S.-China relationship, which should be really good. But for now, those are the five numbers that I think tell some important part of the market story right now. A recap is the first was 37.7%, which is the returns of the S&P 500 over the last 50 days, the largest 50-day rally in history. The second was 40 million. That's the number of unemployment claims over the last couple months. Or if you prefer, 6 million, which is the number of jobs that are on the line, according to Bloomberg economics. The third number was 7.6%, which was the ultimate return of the S&P 500. in 1969, telling the story of how markets seem to just not react particularly to civil unrest.

The fourth is the amount of global debt denominated in U.S. dollars, which is something like $100 trillion or 84% of all debt denominated in U.S. dollars, and what the implications for global economies might be. Fifth and finally is zero. It's that number of flights between America and China from Chinese carriers that has, I think, to do more with the story of the U.S. and China than just the airline industry itself. Anyways, guys, that is the episode for today. I hope you enjoyed it. I will be back tomorrow with another excellent interview. It's one I'm really excited about. So until then, be safe and take care of each other. Peace.