One Room, So Many Elephants…
So, what’s the biggest elephant to join this crowded room of crises?
My vote goes to: “Bad news sells better than good news.”
Admittedly, I tend to wax Johnny Mercer on these things by accentuating the positives in these notes. That earns me the rose-coloured glasses award. And I can understand the concern behind those votes.
Understand though, that it may just be I’ve seen so many of these "horrible things" unfold (or not), and then watch us all recover together that my patience with the next monster is a bit limited.
I’m not trying to disrespect the concerns. I see the negatives as clearly as you do, and the attention they’re getting.
Call me the balance on the other side.
We don't need another elephant in this room. We need someone to open the door and let a few out, which hinges on ignoring the financial news.
Gasoline: Good News & Fast Food
One high-frequency indicator of some improving good news is US gasoline usage, which continues to recover.
After plunging 43% from the week of March 13 through the week of April 24, gasoline demand has rebounded 51% from a low of 5.3mbd to 8.0mbd through the week of June 19.
That’s an impressive V-shaped recovery and is still on the road to a more normal pace of around 9.5mbd.
Apple’s Mobility Trends Report shows that routing requests have increased 23% in the US as of June 23 compared to January 13!
This good news isn't making the headlines.
(Call me Mr Balance.)
And just this morning, the company which owns Burger King suggested that even with limited seating and heavy drive-thru activity, they are nearly back to their normal sales levels for this time of the year.
The economy is not the equity market. This fact has existed for decades.
As I’ve said many times before, the market tells us what’s next. Human chatter, media hype and the crushing fear-laden narrative only tells us what’s now.
When Will We Learn?
Things that never change are the most important things to pay attention to.
But change gets most of the attention because it’s surprising.
Things that stay the same – how people behave, how they think, how they react at key times – is the real pathway of history and is usually completely overlooked as too simplistic.
To sum it up:
Will Durant said: “We spend too much time on the last 24 hours and not enough time on the last 6,000 years.”
Voltaire said: “History never repeats itself, but man always does.”
There is another perspective though, which involves trying to understand what’s going through people’s minds – and it may be easier, and possibly just as useful.
The world in 2020 looks nothing like the world of 100 years ago.
No part of the economy is the same, yet we hear repeated references to "worse than the depression" even today, most often when the landscape is scary, dark and filled with monsters under the emotional beds we’ve made.
Oddly, there was no mention of the Great Depression in January and February.
Now, however, the experts tell us we are not only worse than the Great Recession, but we will be that way for a decade.
Odd too how much the ability to read the future has improved for so many since December - when no one saw it coming.
Just the Facts...
Now, while no parts of the economy of decades gone by still exists, how people’s minds work and their emotional response to trauma hasn’t changed at all.
How they think about fear, greed, opportunity, scarcity, and affiliations hasn’t changed. If anything, the historical veins of reaction have only sped up.
And this won’t change in our lifetimes.
Rather than buy into predicting tomorrow it’s probably better to focus on the handful of behaviours (indicators if you will) that show up consistently through history.
Those elements that history has taught us have played a role in all the big moments, the major setbacks, the breakthroughs, the disasters.
The reality is that the earnings picture will likely heal far faster than total output of the GDP.
As we speak, companies across all channels are cutting costs which are not absolutely required. New ways, new processes, new tech. The last word being the most important.
A recent CFO survey of the top 1000 companies highlighted the shadowy silhouette one sees through the fog on the horizon ahead.
When asked the most important item on their corporate budget agenda, the answer was pretty basic - for 82% of those answering: More investment in new technology.
So, while there are many miles to travel for GDP recovery to new highs, the pathway up that mountain becomes more and more clear – embrace the powerful energy of the Generation Y side of the Barbell Economy©.
That age cohort knows only tech.
It's how they live, how they work, how they communicate, how they meet, how they solve problems.
Because of technology, the future we will all find ourselves in years down the road will be straight out of the movies.
As an investor, we have to embrace that perspective as the future unfolds even though it makes many feel queasy. Setbacks from here are the key areas where one can take advantage of the future leadership structure.
The 4th and even 5th Industrial Revolutions will be all about endless layers of technology.
The Summer Potholes
An educated guess tells me there are some potholes and heavy chop ahead, some setbacks, and a trade range as we cross over the July 4th holiday break and move into the even thicker haze of the summer.
That’s when we will see the Q2 data begin to flow.
Make no mistake, it will be the ugliest earnings data ever witnessed since the collection of data began.
Extraordinary losses will be felt across most industry channels.
But we all already know that.
Q1 GDP was unrevised at -5.0% in the third look at the data, and compares to -4.8% in the Advance number, and 2.1% in Q4 2019.
The Chicago Fed National Activity Index was +2.61 in May, up from -17.89 in April. All four broad categories of indicators used to construct the index made positive contributions in May, and all four categories increased from April. The index's three-month moving average, CFNAI-MA3, moved up to -6.65 in May from -7.50 in April.
The Richmond Federal Reserve Bank updated its monthly data on manufacturing activity in the region this week. The report showed manufacturing activity was unchanged in June as the index rose to 0 from -27 in May. That was the first non-contractionary reading since March. Further, the 27-point month-over-month increase was the largest one-month gain on record. That follows a very strong reading in May when it rose by 26 points, which at the time tied March of 2016 for the largest on record.
Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 46.8 in June, up from 37.0 in May, suggesting that the rate of contraction slowed further from April's record low. The decrease was the softest since February before the pandemic escalated.
Here are comments from Chris Williamson, Chief Business Economist at IHS Markit:
"The flash PMI data showed the US economic downturn abating markedly in June. The second quarter started with an alarming rate of collapse, but output and jobs are now falling at far more modest rates in both the manufacturing and service sectors. The improvement will fuel hopes that the economy can return to growth in the third quarter.
“We anticipate that the US economy will contract by just over 8% in 2020. The coming months will, therefore, see the focus turn to just how much recovery momentum the economy can muster to recoup this lost output.
“Any return to growth will be prone to losing momentum due to persistently weak demand for many goods and services, linked in turn to ongoing social distancing, high unemployment and uncertainty about the outlook, curbing spending by businesses and households. Continual vigilance by the Fed, US Treasury, and health authorities will, therefore, be required to keep any recovery on track."
Take patience with you through the long, hot summer ahead.