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On the road again

On the road again

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This article was originally published by Califia Beach Pundit
Good news: the economy is beginning to reopen. Unfortunately, the prediction I made April 12th (The shutdown of the US economy will prove to be the most expensive self-inflicted injury in the history of mankind.™) is still looking spot on. Thankfully, the coronavirus never proved as lethal as feared, and its principal victims are, we now know, a relatively small sub-group (people over the age of 65 or so with co-morbidities); so economy-wide shutdowns were unnecessary and extraordinarily expensive. In the face of great fear, uncertainty and potential risk, our leaders over-reacted. As I also predicted, they are proving reluctant to reopen, but the reality on the ground is forcing their hand.

People are figuring out that the worst has passed. Although official reopening orders are still few and far between, there’s mounting evidence that the Great Shutdown has ended (22 states now meet the reopening criterion of 14 days of declining new cases, and 29 states meet the criterion of a 14-day downward trajectory of positive test result percentages), and people are rather quickly beginning to get out and about. Equity markets worldwide figured this out over six weeks ago, in fact.

Here’s a collection of charts that document the reopening based on statistics and key financial market indicators:

Chart #1

Chart #1 shows the amount of motor gasoline supplied to the retail market, with the latest datapoint being May 1st. Based on the recent surge, we can infer that people are spending about 30% more time on the road and out and about in just the past three weeks. That matches the impression I got while spending an hour or so on the freeway the other day. The wheels of commerce are spinning up and animal spirits are once again on the move after being shuttered for over a month.

Chart #2

Chart #2 is a timely indicator, compiled and released every day by Bloomberg, of the overall health of the US financial market. Conditions hit bottom right around the time the equity market bottomed, and have since surged in what can correctly be called a very V-shaped recovery. The recession we’ve been living through will no doubt be the most violent and short-lived of all time.

Chart #3
Chart #3 made its first appearance here in early February (see Chart #8 in this post), when the world was just beginning to worry about the novel coronavirus. If you look closely at the most recent moves in the 10-yr Treasury yield (red) and the copper/gold ratio (blue), you can see tentative signs of a bottoming. If things really are on the mend, I would expect to see copper prices moving higher (as global economies strengthen), gold prices declining (as risk aversion declines), and 10-yr Treasury yields moving higher (as confidence in the long-term outlook for the US economy improves). 
I should remind bondholders of my early-April prediction that “bondholders might be the biggest monetary losers” when the bill for this shutdown comes due. With inflation still running 1.5% or so and 10-yr Treasury yields at 0.7%, real yields are negative: to own a 10-yr Treasury is to be assured of losing purchasing power. Yet the market is gobbling them up by the trillions. Treasuries are a sweet deal for the feds and a rotten deal for bondholders.
Chart #4
Chart #4, my favorite way to track market panics, shows that although stocks have recovered more than half of what they lost to the coronavirus shutdown, there is still a lot of fear, uncertainty and doubt (FUD) priced in. The market has looked across the valley of despair and has priced in an eventual recovery, but the strength of that recovery is still very much in doubt. For now it looks like we have a V-shaped recovery, but it will need to broaden and strengthen before prices move significantly higher. Regarding a recovery, the market is now in “show me” mode—the economy needs to recover just to justify current prices. I’m quite optimistic a strong recovery is underway, but there are sure to be setbacks and more “walls of worry” to climb before this is all over.
It’s worth pointing out that cash yields almost nothing in nominal terms and is thus a wasting asset in regards to purchasing power. Faced with the strong likelihood of an ongoing recovery (however weak or strong it might be), plus an extended period of low interest rates directed by the Fed, a decision to hold on to cash is equivalent to taking an extremely expensive anxiolytic.


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