Despite today’s rally in stocks, look at what just collapsed.
One Hell Of A Collapse
March 30 (King World News) – Peter Boockvar: “With the news flow still so difficult both on the health front and in turn for the economy, I still will try to make a point to talk about the optimistic side of where we are with this virus spread. This is not to be a Pollyanna but to be a contrarian with the mood already so dour. The news over the weekend from Abbott Labs that they can test within 15 minutes is considered a “game changer” according to Scott Gottlieb. To highlight the importance, I’ll leave it to the foreign minister of South Korea where we know they’ve been hugely successful on containing the spread. He said last week:
“Testing is central because that leads to early detection, it minimizes further spread and it quickly treats those found with the virus” and he cited the rampant testing as “the key behind our very low fatality rate as well.”
Hopefully too we’ll get some good news in the weeks to come on the therapeutics currently being tested.
This all said, I also want to be VERY realistic about the situation we are in and for the purposes of my daily commentary, what it means for the economy and markets. While I’m hopeful that in May we will be passed the worst of the ‘curve’ and thus can begin the process of resuming our daily lives with big testing numbers a big part of this, it is obvious that until we have a vaccine and/or herd immunity and effective therapeutics, life will still be quite different. Just as we had to adjust after 9/11 in that security at the airports was beefed up, we had to go thru more metal detectors in more locations and even had to show ID to get into most places, things will change again. Restaurants will likely have less tables. Maybe for a time airlines won’t sell middle row seats and we’ll just have window and aisle. Those without the antibodies will be walking around with masks, we won’t be shaking hands, purell will be everywhere, there will be spacing on lines, ZOOM becomes the preferred choice of meeting venue, etc…
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What this also means is that we won’t be seeing a V bottom economic recovery (and thus for the markets). It will be gradual as resuming life and our daily routines will be staggered in how it unfolds. There will be set backs but hopefully two steps forward. The restaurant that previously employed 20 people might only hire back 15. That easy flow of credit becomes more demanding. The household that realizes they didn’t save enough for a rainy day going into this, wants to spend less and save more. Corporate America realizes the importance of a strong balance sheet and we can say goodbye to many stock buyback plans, and there will be less hiring and capital spending until those balance sheets are restocked with cash. Going from a world awash in debt with good economic growth to one still awash in debt with much slower growth is a tough transition. That deleveraging is also why monetary policy in terms of trying to stimulate more borrowing, will be highly ineffective.
Say Goodbye
As for markets, at least for now say goodbye to an earnings multiple of 18-20 times. Say goodbye, as stated, to those debt fueled buyback plans. And with this oncoming downdraft in earnings and likely muted rebound, who knows how long it will take to see those 2019 earnings level again. And I want to repeat again that I expect higher inflation to follow due to the supply shocks that have taken place and that the demand side will come back sooner than supply. And add in all the monetary easing that we can be sure overstays its welcome. This will be a discussion I believe in the fall, an unfortunate environment of stagflation. But, at least that is an analyzable situation for portfolios that we can adjust for unlike now with the virus.
One Hell Of A Collapse
The March Dallas manufacturing index completely collapsed to -70 from +1.2. The estimate was -10.
March Dallas Manufacturing Index Collapsed!
The internals were awful as were expectations for the coming 6 months with negative signs across the board. See below one of the special questions. There is not much to add here, especially for those companies in the oil patch and those that serve it. We know everyone is flying blind and a company in the ‘nonmetallic mineral product manufacturing’ sector said it well:
“I cannot answer the future outlook questions – too many unknowns.”
With respect to the markets, we know the news on the health front will be bad in the coming month as well as on the economy and I believe markets for now have priced that in. What markets haven’t yet is what the world looks like on the other end when life starts to resume again and to what extent.
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Man Who Predicted The Global Collapse
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