End of the Lockdown
Posted on Sunday, August 2nd, 2020
It’s the end of the pandemic lockdown. Maybe not for everyone but, sadly, for us it is. Our oldest, my daughter, is headed back to school next Saturday. So, sadly, the pandemic lockdown is over. I have to say I don’t know what to tell her. Can she come back home between now and Thanksgiving? You know that her college town is going to be rampant with positive Covid. Her coming home only increases the risks of spreading. I must say I have enjoyed the time with her immensely. It is time I didn’t expect to have. I will always cherish that stolen time. We are moving her back in next Saturday. Reilly’s Rules – I must say that in the top five would be Always pay for movers. Well worth the money. I’m breaking a rule. Somehow I got roped into driving the truck. We dads would do anything for our daughters. For the boys I will be paying for movers.
From Jesse Felder at the Felder Report comes a note that the Big Three – Apple, Microsoft and Amazon make up 16% of the S&P 500 and 1/3 of the NASDAQ 100.Their value exceeds that of the entire German economy and almost that of Japan. That reminds us when the Japanese blew a big real estate bubble in Tokyo in the 1980’s. The real estate under the Emperor’s palace was worth more than all of California’s real estate. That was the top of that bubble. These three stocks are 3 standard deviations above their traditional cash flow valuations. One standard deviation is fine. Two is overvalued. Three is a bubble. Do we have another bubble in US Growth stocks? I think we might be close. If we are in 1968 and inflation is coming ala the 1970’s then value and not growth would be the place to be. Growth has outdone value stocks for 20 years. It might be time to look at Europe, value stocks, emerging markets and small cap. Keep an eye on value. Keep an eye on inflation.
Overvalued markets don’t turn down on their own. Something usually triggers them. What could it be this time? … the added unemployment is still set to expire at month-end. Negotiations are underway so maybe we’ll know more later this weekend or next week. But what happens when/ if that stimulus goes away? We should by now realize jobs are not going to come back to where they were a mere six months ago. We will still be in recession-level unemployment well into next year. The rest of the world is reeling… Now, also eventually, we will get a vaccine or herd immunity. We will begin to come out from our isolation cells. But the world will look significantly different, and businesses, from the very smallest to the very largest, will have to adjust. That means earnings are going to have to adjust. The world is getting ready to be repriced. Everything is going to seek a new value. Real estate, stocks, commodities, food, medical costs, college costs, government, entertainment, sporting events, clothes… Everything. John Mauldin
We agree with Mauldin that overvalued markets do not turn lower on their own, We need a catalyst to correct from these sky high valuations and perhaps the unemployment bill is it. Congress is not going to let a potential crisis slide by without taking advantage of it. The market still believes that Congress will enact further unemployment benefits otherwise we would have seen a selloff. That gives Congress further room for debate. Remember, the democrats can hold firm here because republicans will be looking to protect the market and its gains in front of the election. Democrats have the advantage. If Congress does not put forth more benefits in a bill next week then it begs the question – How will the market react? A market stumble here could be a good place to put more money to work given the immense stimulus from governments around the world. However, we may have to change how we bet. Inflation is coming. Why? Because the stimulus is now monetary heroin and cannot ever end. It is a political issue and monetary and fiscal policy is in the hands of politicians around the world. The Fed is no longer independent of Congress. There will be no political will to end the spending and easy money policy. Inflation is coming.
A lack of benefits bill out of Congress could give bears the ammo they need to push back towards 3000. But that is what everyone is hoping for – another chance to buy more stock. The chart gurus would say that our recent trading range and its break out measures out to a move to 3500 on the S&P 500. That is another 7% higher from here and would mark a new all time high. That would bring in more buyers. Hang on tight. This could go either way. August is usually a pretty volatile month while September and October are usually the scariest.
Stay safe.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.