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In These Interesting and Unique Times

By Victor Sperandeo with the Curmudgeon The government – and the U.S. Federal Reserve – have been operating under a model since 2008 that is designed to keep the economy away from a recession. The problem with the model is that it was not designed to survive an unknown event, such as a pandemic. To make this point, Former Chairperson of the U.S. Federal Reserve Janet Yellen – after reviewing the results of a stress test in 2017 – was quoted as saying: "Would I say there will never, ever be another financial crisis? Probably that would be going too far. But I do think we're much safer, and I hope that it will not be in our lifetimes, and I don't believe it will be.” To be accurate she said financial crisis rather than recession, but if the Federal government and the Federal Reserve had not thrown an atom bomb at the coronavirus it would be a financial crisis, as well as economic Armageddon.

So far the government has authorized the spending of $2.25 trillion in “stimulus,” a.k.a. bailouts and giveaways, as well as $4 trillion in loans - really grants - to corporations on a need basis, in addition to increasing the Federal Reserve’s balance sheet to perhaps the $10 trillion mark. Moreover, this was only the first few salvos to be fired; there are other multi-trillion-dollar spending proposals being discussed.

It’s important to note that this virus has caused a deflationary problem, although gold was up 3.6% year-to-date as of March 31st. The CRB Commodity Index (PR) is now trading at February 1999 levels! While for years equities have been the darling of the rich, the government, and the Federal Reserve, commodities have been the black sheep of the financial community.

Some points of order: this is an equity bear market in the classic sense, and it likely hasn’t ended after 33 days. What would be typical is for the market to make an intermediate low in mid-April, into the poor earnings and 2nd quarter guidance horror show. Then we would see a rally of between 33% and 66% of the first leg down before making new lows or major bottom later in the year. However, it is critical to recognize that past performance is never necessarily indicative of future results, especially as the current market is far from typical as are the factors currently influencing it. Also understand this recovery, which has clearly just ended, will be classified to be at least 126 months long by the NBER. That’s the longest recovery in history.

Lastly, I believe the talk of a “V Bottom” when the virus passes is very premature. In March 1933 the highest unemployment rate in U.S. history was recorded at 24.9%, but in December 1936 it was still 19.97%. FDR threw the kitchen sink at the economy. In addition, prohibition ended, and with the passing of the 21st Amendment in 1933 tens of thousands of bars and restaurants with hundreds of thousands of new jobs were created, yet in 3¾ years the unemployment rate dropped only 5%. I do not believe It is likely to be a “V bottom” when so many bad experiences are taking place. Human nature calls for fear and caution to very slowly move back to normal spending. With 70% of the economy based on the consumer, are people going to go back to pre-pandemic attitudes in just four months? I don’t believe a return to normal is in the cards for President Trump, who is running for re-election and is letting his wishes dictate his statements. I’m not saying he’ll lose the election, but I do not believe the economy is likely to grow in any way close to normal again in the next four months.

The statements in this communication are the opinions of its author, Victor Sperandeo, and are not to be relied upon by anyone as the basis for an investment decision. Any investments made by a party in reliance thereon are made at such party’s sole risk. No guarantee of any kind is implied or possible where opinions as to past or future market conditions/events is provided. Past performance is not necessarily indicative of future results.


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