For months now the U.S. and global economies have been showing signs of stalling after the initial euphoric rally post the Covid-related lockdown. An economic recovery from zero was bound to be seen in the economic data, after all the entire world was literally at a standstill, and of course it was going to be V-shaped. However, over the past month or so, the data has been showing signs of levelling off and it seems the market, and the economy, is in need of further impetus. One would argue that $3 trillion of liquidity injected would be enough to get things moving. What we did in 2008 we did in a matter of weeks in 2020, wouldn't one think the bounce would last longer than three months? Such is the state of affairs that the market is an insatiable beast that needs constant feeding. Now it has so gotten used to it, it does not even know how to manage without it, nor any incentive to do so either especially if Daddy Powell keeps enabling every time it looks tired.
The central banks want inflation as they do not know anyway else to get out of this problem. Deflate away the huge wall of debt and then it shall fade away altogether. The central banks have failed to get this desired inflation over the past decade, but be careful what you wish for, they might just succeed this time, but not in the way they would like to. We are already seeing effects of higher inflation in Gold, Silver, and a consumer basket of goods. It is just a matter of time not if, but when. If this inflation is not met with significant growth, that is the worst of all combinations, namely stagflation. One where there is falling GDP growth and higher prices, Certainly not a good environment for risk assets or cyclical/commodity sensitive commodities. To make matters worse, the Fed won't be able to raise rates either to combat that hyperinflation and could eventually lead the economy into a depression. It is all very temperamental and one big giant experiment.
U.S. economic data is showing signs of a slowdown and the job market is in a mess. After the recent ADP job additions, today we just printed 661k jobs vs. the 868k expected, and half of the 1.45 million number we had been seeing before. More importantly, the permanent job losses rose massively. That is not a healthy economy. The Fed can throw all the money it wants to boost up asset prices like LQD, bonds and MBS and Treasury securities, but it does not mean that the economy will do well. It cannot force companies to hire. If one were to look at job losses on Bloomberg, every sector and industry is laying off people, not furloughed. How are we to have a genuine consumer growth when the unemployment benefits have expired and fiscal stimulus faded? The extra money in the system is just being kept there and hoarded by the banks, and they are not lending it out.
A stagflation scenario would mean lower Oil, Copper and other base metal prices. Oil prices have been weak to the detriment of OPEC+ that keeps curtailing their production, hoping and wishing, that demand picks up so that their precious prices can rise. This is a demand problem, not supply. They are just delaying the inevitable because they do not wish to let the market be a true market and let demand and supply determine its true fair value. Too much is hinging on it. Copper on the other hand is the gauge for the overall health of the economy and it has been holding up very well. It finally broke down yesterday catching most by surprise. If lumber, Iron ore, Steel, and Oil are all falling, why should Copper be holding up?
Thanks to China's liquidity injection in July and August to boost their economic growth, Copper specs had been adding to Copper even when other parts of the economy were slowing down. It is one of relatively tighter commodities given its demand vs. supply balance. But make no mistake, when there is stagflation, it too shall face the same fate as its other brethren.
Until we can pass a new fiscal stimulus deal or the Fed is convinced to do more QE, there will be no genuine recovery. A vaccine and getting people to change their behavioral patterns is far off. Maybe President Trump testing positive for Covid-19 shall convince Pelosi, Republicans and Democrats to come to a mutually agreed number and pass the bill before the election. It remains to be seen as U.S. politics is all theatrical at the moment. We have resorted to kindergarten tactics, shamefully enough. But the longer we remain in a state of vacuum, the worse it will be for the "value" space and sectors, no matter how cheap they appear on your screen.
