The Breakdown - Bull vs. Bear: Who Has the Economy Right?

Episode Date: June 25, 2020

The economy is nothing if not confounding right now.  Across every domain, from real estate to oil to retail, there are bull signals and bear signals.  In this episode, NLW looks at those signals in the following areas: Markets - strong stock recovery vs. growth in cash deposits Employment - growth in jobs vs. persistent continuing jobless claims Retail - growth in foot traffic vs. demand destruction Oil - growth in demand (but not in economically productive diesel) Real estate - surge in mortgage applications vs. worst home sales since 2010 Dollar - declining confidence vs. there is no alternative  COVID-19 - reduced death rates in the U.S. vs. growing caseload What’s the answer? Is this just a narrative mirage recovery? Listen and find out.

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 24th, and today we actually don't have a brief. And the reason for that is that our main discussion is a question that I think many people have been grappling with, which is, who has the economy right? Is it the bears or the bulls? What are the signals

telling us across all these different economic domains? And what do we do with that information? I have seen so much confusion and contradiction in market data that I wanted to spend an entire episode just looking across that category by category and seeing what we might be able to figure out. and that really crowds out a lot of the space for what I would normally cover on the brief because it's going to be included in this. I think this point was really finally made yesterday when I asked my guest, Tracy Schuart, if she had contrarian opinions. And she basically said, what's a contrarian opinion right now when there's no conventional

wisdom, there's no consensus, there's just debates and data, and much of that data is bad and we just don't know. So hopefully this session, this episode is a chance to dig a little bit deeper across a number of different categories. First up, let's look at the markets themselves. I think that anyone will tell you that if there's a clear place where a V-shaped recovery is showing up, it's in the equities markets. They have recovered a lot better than most people expected.

I remember a tweet from Meltem to Mirrors from coin shares a couple weeks ago that basically threw her hands up and said, you guys, you beat me. I didn't think it was going to be this crazy a rip-up, but here it is. This is a V-shaped recovery. This is embodied obviously as well in the Dave Portnoy Davy-Day trader effect where stocks only go up and his kind of explanation of the fact that once he realized that the game was rigged, he just started winning because stocks only go up. The markets are now 70 or 80% recovered from where they are in the crash. So if you are looking for that sign of a V-shaped recovery and bull markets

to come, that's where you would look. Now the bear case, I think, has two factors. The first has to do with what Ryan Selkis called the COVID Fear Index. Effectively, Selkis made the argument that really everything was trading on the basis of our presumptions and assumptions about what happens next with the virus itself. And as you'll see later, there's certainly really good evidence for that. So that's part one, is the almost the fragility of this rally and this return to something approaching normalcy in the markets themselves. The second and even more compelling bear factor, though, has to do, I think, with what we're seeing people do with their money in terms of deployment. Money market funds and bank deposits basically moves to cash are at an all-time high.

There are $4.6 trillion in money market accounts right now, which is the highest since they've started recording in 1992. U.S. bank deposits, meanwhile, are up $2.2 trillion to $15.47 trillion overall. This is to say that people are putting their money in cash or the closest things to cash available to them, even though the equities markets seem to be doing great. This tells us that there is clearly some amount of doubt of the realness of this market rally that people are hedging against. Next up, let's look at employment, which is often held up as the counterpoint to the market's fee-shape recovery. First, let's talk about the bull signals.

It is undeniable that the hemorrhaging in U.S. employment seems to be slowing. Last week, we saw the lowest numbers in terms of both new jobless claims and continued claims. However, as I went over an episode last week, the numbers are still really stubborn. By way of example, economists anticipated a much more significant drop in continued claims. They had been at between $20.5 million and $20.6 million, and they expected a drop of something like 600,000 fewer continuing claims for a total of 19.9 million continuing claims. Instead, we only saw a reduction of about 60,000 of these continuing claims, which means they expected a 10x bigger drop in continued claims than they actually got.

So that's a bull signal with a little bit of a bare side, let's call it. However, firmly, in the bull column was the May jobs report. Economists had expected millions more job lists to show. up and expected a total unemployment rate of something like 20%. Instead, we saw 2.5 million jobs added. This blew people away to the extent that many people just couldn't believe it. And while many of these jobs were the sort of blue collar and service worker jobs coming back online for restaurants and things like that that were reopening, there were also segments of white collar jobs returning as well. The New York Times just featured an article called New Hope for White Collar Job Seekers. It depends on the job. And they use the exact

of a headhunter who had seen their business go way down in March and April, start to see it come back as corporations got back on the normal functioning of what they do day to day. However, those white-collar jobs also form, I think, one of the more important bear signals. White-collar jobs are at risk. Bloomberg Economics Research piece predicted that some 6 million white-collar jobs may be at risk, and there are really two categories for this. The first has to do with people who are higher up in industries that are most affected, and we're seeing this right now. So, for example, Hilton reduced their jobs by 2100. They got rid of 2100 corporate jobs just announced, and these are not sort of the front line people at their properties who maybe got hit first, but the higher ups, the account admins, basically the professional jobs where just based on the need to totally redesign the budget for a new reality, those are the second wave of people who are.

are going to get hit. Another category had to do with second order effect job losses in the white collar space, including professional services, consultants, things like that. All in all, the point of this report is that even if some of those frontline jobs return, there's another wave of jobs that could be at risk. There's this concept called economic scarring, and this is Martha Gimbel, who's an economist and a labor market expert at Schmidt Futures, said, what you're seeing right now is economic scarring starting to happen. Layoffs that happened at the beginning of this likely were intended as temporary, but if you're laying off people now, that's probably a long-term business decision. When it comes to really understanding what's going on with employment,

we're probably going to need to wait till a little later this summer and the beginning of fall after the PPP program has run its course to really see how many of these layoffs are continued and how many new layoffs are added. All right, let's shift over to retail now, the bullcase. According to Google foot traffic, as shared in a recent essay by Neil Ferguson, retail and recreation was down 49% nationwide in April, but is now just down 16%. So a major return of retail foot traffic. An even more important report came from the Commerce Department. The May sales report said that retail outperformed being up something like 17.7%. This was another one where people expected some amount of increase, but not that. Taken together, these are pretty strong signals that there was some amount

of pent-up demand. Now, the bear case, well, first of all, a lot of these categories within retail are still way down year over year, and that's economic activity that simply hasn't returned, right? just because we have recovered from what was a crazy total shutdown doesn't mean that things are doing well. It just means they're doing better. Another thing that we just don't know yet is which categories, if any, will have long-term demand destruction. In other words, a reset and a shift of consumer behaviors in such a way that demand never returns to where it was. One small example of this from Joe Wisenthal at Bloomberg, he tweeted out an article yesterday about how over Father's Day weekend open table bookings looked great. It looked like we had resumed, but in the wake of that, as it went on,

we're still way off where we were year over year. That, to me, indicates that perhaps, and this is just my speculation, we might see some amount of consumer behavior shift where people are willing to risk going to restaurants for important occasions. But those other times, when they would have gone to a restaurant otherwise, just based on convenience or tiredness or laziness or whatever it was, maybe out the window. If that's the case that looks fundamentally different for that industry. 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. Their platform is powered by a NASDAQ matching engine, and their APIs are recognized as the best in the industry. Download the BitStamp app, from the App Store or Google Play, or visit bitstamp.net slash pro to learn more and start trading today. That's bitstamp.net slash pro. CipherTrace helps grow the crypto economy by making it trusted by governments and safe for consumers and investors. How do they do it? By protecting VASPs, banks, and other financial institutions from crypto laundering risks while protecting user privacy. Years of research have created the world's best cryptocurrency intelligence with the best attribution and deepest token coverage.

So if your virtual asset business isn't using CypherTrace to manage compliance risks, you should start now. Learn more at cyphertrace.com. Let's shift over to oil, obviously a hugely important commodity in the global economy. In terms of bull signals, the first is that price has recovered pretty well, especially given that we were down in the negative range for the first time ever in April. And this price recovery goes for other commodities used in manufacturing like copper as well. This is a strong signal that when it comes to the industrial use case of these commodities, there is some return to normalcy.

What's more, the storage issues that were a part of that crash in April have been largely resolved. They don't seem to be a net drag on the space anymore. And perhaps most of all, overall demand has increased to within 18.8% of the five-year average demand in terms of millions of barrels per week. And this is actually from numbers from Art Berman on Macro Voices at the beginning of June. This is the weekending June 5th, so it could have gotten even better since then. Now, what about the bare indicators? Well, the problem with those increased demand numbers is that

the vast majority of that demand increase is gasoline, not diesel. Gasoline increased by 324,000 barrels a day, while diesel increased by only 18,000 barrels a day. Diesel demand is the reflection of orders, of shipping, of needing to move things around that people are buying. So, until that goes up, it's hard to really be happy about the recovery. To put it differently, gasoline is basically the least economically productive demand of all of the demand that you might see for oil. So when a huge part of the quote unquote recovery is in gasoline, all that tells us is that people are driving around more. And as Art Berman put it, unless they're driving to work, that's not really economically productive. Let's go to real estate. And in some ways, there is no better space to understand the

schizophrenia of this market moment than real estate right now. There are some pretty serious bull market signals when it comes to real estate from a residential perspective. There has been a surge in mortgage applications. That pent-up demand clearly was there. This is buoyed by the fact that there are big picture shifts around where people actually want to live. Cities have had a rough run of it and anyone in their 30s or 40s who was thinking maybe about getting out sometime in the next five or ten years is now accelerating those plans and looking for places that aren't just cities. You're seeing that surge in mortgage applications that is probably driven by a structural shift as well. Now, what about the percentage of mortgages in forbearance programs? Well, the number of those that are still making payments,

even though they're in forbearance, is better than anticipated, according to a lot of the folks who live in that space. According to Quicken Loans, 40% of mortgage, that are in forbearance programs, in other words, delayed payment programs or something, are actually still making payment. So that means people who apply for mortgage forbearance are still actually able to keep up with some amount of payments, which is a really good signal in terms of the overall state of the economy. Now let's talk about the bear signals, and these are really strong as well. U.S. sales of previously owned homes are the lowest since 2010. Closing transactions last month were down 9.7% for an annualized estimate of 3.91 million homes sold.

Economists had predicted that we would be on track for 4.09 million homes. Year over year, we're down 26.6%, which is the biggest annual slide since February of 2008, which is a very notorious time to be associated with. Bloomberg wrote an article called Eerie Calm Settles on Housing Market, defying doomsayers for now, and I think that perfectly captures both sides of this, right? There are really big questions around the sustainability of these bull signals. The $600 per week pandemic payment is set to end in July, and frankly, consumer confidence in terms of ability to meet mortgage payments is a little shaky.

Around 9.1 million borrowers told the Census Bureau in June that they hadn't made the previous month's mortgage payment after their household lost income during the pandemic. What's more, 10.7 million said they had, quote, slight to no confidence that they'd be able to make their payment next month. So these are really dicey numbers. Renters even scarier, and frankly, even more scared. About one in four rental households that lost income said they missed last month's rent payment, and one in three said they have little to no confidence they'll pay next month. So to recap, you had about 9 million borrowers who said that they weren't able to make last month's mortgage payment, and another 10.7 who said that they were unlikely to be able to make

the next month's payment. One in four rental households had had that rental payment issue, and that was increasing to one in three who didn't think they'd be able to next month. So there may be delays in these numbers, which brings us to this forbearance issue again. The forbearance numbers are also showing signs of cracks. Even though. though that forbearance rate has flattened, more borrowers in these programs are starting to miss their payments. In April, 46% of borrowers and forbearance still paid their mortgage. By May, it was 28% and by June 15th, only 15% of borrowers had made their payment for the month. This is according to Black Knight. So again, even though that bull signal was about how many people were still

making payments and how it was better than anticipated, we're now starting to see numbers that are much, much lower. And this makes sense, right? If people still aren't back at work or their work is reduced or whatever it is, being able to pay for this huge part of their life could be really, really difficult. Home mortgage delinquencies in May were the highest level since November 2011. And the number of borrowers who were more than 30 days late swelled from 723,000 in March to 4.3 million in May. More than 8% of all U.S. mortgages are past due are in foreclosure right now. And to be clear, this is all just residential, and when it comes to commercial, it's looking even dicier. There was a major article in the Wall Street Journal yesterday about how there

is a bipartisan group who is pushing to include commercial real estate in whatever the next set of stimulus is. And that's a whole issue on its own. In fact, there are many people who think that if we're going to see real serious fallout anywhere, it may be in commercial real estate. Now, just a couple more domains that I'll go through really quick. First, the dollar. We've talked a lot about the dollar here. Will the dollar depreciate? Will it have a rough time of it? Because people look around and say, hey, look at how much the U.S. is printing. Look at how in debt they are. We're not going to have the same sort of confidence in it. Or are we in a situation where it's all about the alternatives. And in the context of those alternatives, it doesn't really matter. And the

is going to continue to strengthen. We've heard both sides of that argument. Stephen Roach, who is a Yale University Senior Fellow and former Morgan Stanley Asia Chairman, is out here screaming that the dollar could fall 35%. And basically his argument is that the people say that there is no alternative really strikes him as just wrong in the context of U.S. retreating from the world, growing debt-to-GDP ratio, increase in the monetary supply. At some point, basically, he thinks all these things add up to just have incremental losses in confidence and moves to use other currencies. And as that happens, we lose our exorbitant privilege. And the point that I wanted to note about this, especially actually, comes from Luke Gromman,

a former guest of this show, who retweeted the article and said, The most interesting thing about this article to me has been the reaction from FinTwit. And he clarified in the comments that it was about how people were just treating it with scorn and derision, like it was a joke. Like no one thought this was possible. That's always scary to me. When everyone thinks the same thing and no one thinks something is possible, that's when I start to wonder if that thing is possible. We've just seen it too many times. So that's the dollar. Food supply chains, another issue we've touched on occasionally here,

the bull case or the bull indicators is that a lot of the shortages, in fact, most of the shortage that we were seeing before have recovered. Some of the bigger worries about meat processing in particular haven't come to pass. The bear case is that there are still serious issues with COVID. China just suspended poultry imports from a specific Tyson factory in Arkansas because people tested positive to COVID in that processing plant. And that brings me to the main economic factor that will shape whether we have a bull or a bear market in the year to come, which is COVID-19 itself, the coronavirus. We have since the beginning of this thing been treating it as though there were somehow a way to divorce health outcomes from economic outcomes.

And we're now about a month into playing that out in the U.S., where we loosened restrictions on the basis really in most places of us getting bored of those restrictions, rather than real thoughtful policy. And this is not commentary on whether shutdowns and lockdowns are the right approach to doing this. But I think it's pretty undeniable that in the vast majority of places, the question of when to reopen had entirely to do with political will and nothing to do with changes in health outcomes. So that's the backdrop. It's been, like I said, a month plus in many of these places. So what is the data telling us? Again, let's go back to Ryan Selkis' idea of a COVID-fear

index. Well, there are some bull signals. Specifically, I think the overall U.S. death rate is down. The 14-day moving average of death rate was down 43% as of Sunday. However, unfortunately, most of the signals are not good right now. Bear signals. We have U.S. cases up 15% over the last two weeks. We've seen California have the highest daily increase since March. We've seen numerous southern states like Florida and Arkansas and Phoenix, Arizona, have serious growth in their issues. The White House official channels have been saying that,

they're bracing for fall and trying to stockpile medical supplies. Globally, one of the largest day increases yet was just recently as per the World Health Organization. Brazil is now crushing the U.S. and everywhere else in the world in terms of new cases, 54,771 new cases on Sunday alone. India has started turning people away from hospitals with 15,000 new cases per day. And today's Wall Street Journal headline was U.S. stocks opened lower as coronavirus infection surge. So what do I think when it comes to all of this? Well, it's very clear, very, very clear that the data is confused and tells lots of different stories. I also think it's clear that the extremes of both

points of view, the bulls who said we were nothing but headed for a V-shaped recovery where everything was going to be fine, have been proven to be wrong. It's simply more complicated than that when we have an ongoing public health crisis. The bears, I think, though, the perma bears have also been defeated a little bit. They underestimated people's demand for the normal interactions that they used to have and for the normal types of spending that they used to have. And while there are these serious health issues, I don't think that America's willingness to plod through is necessarily just an indicator of bare sentiment. It suggests to me that there is an intrinsic demand, and really the question is how we handle the health outcomes and the health need in such a way

that we don't have to shut down economic activity, which there is clearly so much demand for, again. Still, if forced to be put into one of these camps, I go back to a phrase that Jeff Lewis used a few weeks ago where he said, this is a narrative mirage recovery. That's what it feels like to me. It's not that it's illegitimate. It's that it's premature, and we haven't actually addressed the underlying causes and, more importantly, the underlying threats to ongoing economic activity. We continue to just try to bulldoze our way through these things as though we can will them out of existence, and I simply don't believe that's the case. Does that mean we should go back into lockdown?

Absolutely not. There is simply no way politically or otherwise to get Americans to go back into lockdown. There have to be solutions that are smarter than that, that are more sophisticated than that, that don't require people to threaten their own livelihoods to preserve health outcomes. But until we start having that actually smart conversation, rather than the same sort of invective and stupid rhetoric and political point scoring that we always get, we're just destined, I think, to tread water at best economically and otherwise. Hopefully we figure our sh** out and start acting smart like the country we could be. But with that, guys, I am off for the day. I will be back tomorrow with another episode of The Breakdown.

I'm currently thinking about trying to do a primer on CLOs, collateralized loan obligations, is that something that's coming up a lot in the news? I decided to not include it in today's rundown, but if that is interesting to you, let me know on Twitter, and I'll look into it more. As always, guys, be safe and take care of each other. Peace.