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KRO Summary May 2020: Economy struggling to validate V-shaped Market Recovery


KRO Summary: May 1-31, 2020
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Economy struggling to validate V-shaped Market Recovery
Although the Covid-19 pandemic continues to spread in many parts of the world, the severe lockdown measures taken by many countries, including the United States, have flattened the infection curve and set the stage for a lockdown relaxation as summer approaches. During May general equity markets recovered smartly, defying predictions from professionals that it will take a long time for the economy to recover from the damage caused by the abrupt curtailment of economic demand. On June 5 the market was surprised by the addition of 2,509,000 jobs when the US Employment Situation report came out. Check out the US Jobs page for a graphical tour of which sectors gained and lost jobs.
There has been some speculation that the numbers were cooked in the style China does to keep Communist Party and its Leader for Life Xi Jinping from looking bad. Given that the US President dismisses all news that is bad for his re-election chances as "fake", one can't blame people for being suspicious. It is not yet, however, time to be suspicious about the modest job recovery relative to the devastating drop in April which captured what was already underway in March. There are simply too many data workers involved in collecting and funneling employment information over such a short period for anybody to assess whether the news is good or bad and interfere accordingly without triggering violent protests. The United States first needs to slip into an actual autocracy where top down intimidation structures have seeped into all aspects of government for malign data manipulation to be possible. That is unlikely to happen unless the incumbent contests the outcome of the November election and declares a national emergency from which the United States never exits. Half the rebound in jobs comes from the leisure and hospitality sector which was directly impacted by the lockdown and likely over-reacted during the March panic. The real question is how long will it take for a full job recovery?
Much will depend on the Covid-19 infection rate. The virus is seeping into rural America where Trump's base resides and where coronavirus was never really taken seriously, partly because the president dismissed it as just a liberal hoax to tank the stock market, and partly because these communities were too far from the spreading centers to be hit during the initial wave. The virus is also embedded in lower income communities where dense housing or close contact working conditions such as in meat-packing facilities foster transmission. The fact that these lower income "communities" are disproportionately black or brown is gaining attention in light of George Floyd's murder which has attracted a broad protest base so far focused on the idea that Black Lives Matter. The attempt to bury Floyd's murder as an outcome of a dysfunctional police system that needs to be reformed will fail. The nine minute video of a police officer kneeling on the throat of a powerless individual while three cohorts stand guard is a manifestation of raw power, the sort wielded by a thug culture. This video should not exist because the video taker should have interfered and distracted the officer. But with three fellow thugs standing by, such interference would have been useless, perhaps even fatal to a bystander who chose to act.
The real significance of George Floyd's death is not that an individual suffocated him - there will always be such deplorable outliers - but that it was a collective group with authority above and beyond what ordinary citizens possess which allowed this to happen by exuding a wall of intimidation. This is what autocracy is all about, the rule of thug power. George Floyd's plight resonates with people around the world because it symbolizes thug power of the sort exhibited by strongman leaders Trump admires. The economic consequences of the lockdown response to Covid-19 have instilled a sense of oppression, especially among the younger generations who are less likely to suffer a critical or fatal infection. There have been comparisons made to 1968, the year of protest, which Mark Kurlansky documents in his book "1968: the Year that Rocked the World". The sixties protest movement, however, never had the support of the general population and was largely run by the spoiled children of well off parents indulging in idealist fantasies at the peak of the post-war recovery. Their leaders mostly went on to become highly successful Boomers. The situation today is different. Despite the longest ever stock market bull run that emerged after the 2008 financial crisis there is a widespread sense that the End Times have arrived. Even before Covid-19 erupted Post Boomers felt left behind, lorded over by a Boomer generation eager to dismiss climate change as something they needed to sacrifice part of their well-being to mitigate, to stave off problems they will mostly not live long enough to suffer, easily done by dismissing the science as an elaborate hoax. The absolute failure of the President of the United States to heed the January pandemic warning signs now seems to have pushed the doors to the future closer together. George Floyd will not fade away as a symbol that Black Lives Matter because the predicament of African-Americans is one that looms for all Post Boomers, regardless of ethnic background.
Trump seems to have pinned his re-election hopes on a V-shaped stock market recovery even though only the top 10% of households own 90% of the value of the stock market. The pie chart above depicts the distribution of household assets which totaled $134.9 trillion at the end of 2019. Updated data for the numbers as of March 31, 2020 will be published on June 11 - check the US Household for a visual tour of how the value of these categories evolved since 1980. The June 11 update will show a hit for sectors such as stocks, but a good part of that loss has already been wiped out by the V-shaped rebound which is caused by the Federal Reserve buying bonds to the point where they are near zero yielding, pushing cash into households that has nowhere to go but stocks. While 90% of the population is indebted or counting on the next pay check to pay the rent and other essentials of life, the other 10% is "burdened" by a savings glut. The savings glut is even worse today because the lockdown situation has made it difficult to spend money on consumption.
Roughly half of household assets is represented by three categories: pension entitlements at 21%, stocks at 16%, and net real estate equity at 14%. Which generation controls these categories? Pension entitlements is a complex category that includes the value of retirement accounts, defined benefit pension plans, and social security where everything except social security is currently invested in stocks which are near all-time highs or bonds which are close to yielding zero unless they are corporate bonds. Only a fraction of the $28 trillion pension entitlement accrues to Post Boomers. The same is likely true about the $21.1 trillion worth of stock portfolios. Net real estate equity is the difference between the market value of your residential real estate and the associated mortgage. Most of that value accrues to Boomers who have enjoyed decades of real estate price appreciation and generally own their homes outright. The $10.6 trillion in mortgage debt will be largely held by Post Boomers. The younger you are, the smaller will be your net real estate equity, if it is even positive, as will be the case the lower your income for you will be living in regions where real estate tends not to appreciate in value, the main method by which net real estate equity increases. Already the 10% stuck with a savings glut and leery about how much upside is left in the stock market are getting their knives sharpened for the juggernaut of real estate foreclosures if there is not a rapid and full rebound in jobs. The knee of oppression on George Floyd's throat won't physically be on the throat of most Post Boomers, but its crushing presence in the form of a foreclosed future needs to vanish quickly if the protests of 2020 are to become as inconsequential for the elites as they were in 1968.
Gold had a great run during May with the SPDR Gold Trust accumulating additional ounces on all but one day, though during the first week of June as stocks headed higher gold weakened and the GLD began to lose ounces. The US Jobs jump on June 5 helped the stock market higher and gold lower, as though the two are inversely related. Oddly, the US dollar stopped rising in May and during the first week of June even as gold weakened dropped against most currencies except the Chinese RMB, and sharply against the Australian and Canadian dollars.
The rush of capital into the US dollar during the worst of the first Covid-19 wave was not overly helpful to Trump's trade war against the rest of the world, so the retreat against most currencies is beneficial to America's trade goals. But the failure of the Chinese currency to gain against the US dollar may reflect China's weakened hand as the entire world points its finger at Xi Jinping for failing to deal with the arrival of Covid-19 openly and effectively, as if he were writing the subsequent playbook for Trump. China did subsequently impose a much harsher lockdown than the United States, and while its reported infection count of 84,196 cases as of June 9, 2020 is not believable, whatever the real number might be it will be considerably lower than the 1,968,221 cases in the United States with 111,375 deaths. China's economy has been recovering since March while America's economy is only just starting to recover. Whatever trade deal China and the United States thought they had at the end of 2019, it is dead because China cannot even meet its commitments to buy agricultural products. China has pissed off the rest of the world with its disinformation campaigns, its aggressive bullying, its shipment of shoddy protective gear, and now, with its breaking of a 50 year legal agreement with the UK with regard to Hong Kong's autonomy. From a legal perspective imposing its own national security law on Hong Kong is worse than invading and annexing Taiwan to which it has some claim as an illegal breakaway province of China. As Trump invoked the military to clear Black Lives Matter protestors from the perimeter of the White House so that he could send a message to evangelicals against the backdrop of a boarded up church, China mocked the hypocrisy of American support for protests in Hong Kong. Thugs around the world have used the pandemic chaos and America's lack of unifying leadership to push the envelope of autocratic rule. Now we have the pathetic image of a presidential term that began with caged immigrant children ending with a caged man-child "inspecting" his bunker whenever things get harry outside the White House. China no longer cares what America wants, and neither do most of America's allies, which was very evident when Germany's Angela Merkel snubbed Trump's impromptu call for a G7 Summit to which he planned to invite Vladimir Putin, whose effort to build the Nordstream 2 gas pipeline to Germany Trump has derailed, but who remains in Europe's bad books for his annexation of the Crimea. China is no longer trying to keep its currency below 7:1 to the US dollar for a "new cold war" is now underway.
As China restarts its economy there has been a sharp rebound in three key commodities that underpin the global economy: iron ore, oil and copper. Iron ore is recovering because Brazilian supply is still compromised, creating a boon for iron ore from Australia's Pilbara region. Brazilian iron ore producers are still dealing with fallout from Vale's tailings dam disaster, but Brazil itself, under siege by its own thug leader who is trying badly to outdo his kindred spirit in a rush to autocracy, is coping with the consequences of a herd immunity approach to Covid-19 which Jair Bolsonaro dismisses as a fake problem. He has even ordered an end to disclosures about cases and deaths while his "team" investigates if the various states who oppose the herd immunity approach are submitting fake case and death reports. Oil is rebounding because Russia and Saudi Arabia have abandoned their price war and are maintaining supply cuts, which is enabling the US shale oil producers to pull back from their own bankruptcy cliff. China meanwhile has been importing and stockpiling oil as much as it can. Copper is recovering because of a resumption in Chinese demand but also because mines in Latin America are not yet fully operational. It looks like Trump was right: Covid-19 does prefer the cooler seasons which is what the southern hemisphere is experiencing, though that does not bode well for Covid-19 staying away when the flu season resumes in October in the northern hemisphere a month from the US election. While the global economy still has a long way to go before activity is back to its level at the start of the year, the price rebound for base metals is removing the pall that settled on juniors with a base metal focus while their gold-focused cousins drew the market's attention.
The V-shaped rebound in general equities and the early June retreat by gold has stalled the uptrend for gold producers, which is probably a good thing for the long term sustainability of a gold uptrend, because it allows a broader audience to accumulate a position in a sector they may never have touched. It is not inconceivable that the Dow claws its back toward 30,000 as if to show that Covid-19 was just a giant fakeout, but it is hard to imagine general equity markets heading beyond 30,000 until after the November election and the next flu season. Trump in his irresponsible manner has already signaled that it is impossible for him to lose unless there is election fraud. In fact he has never retracted his unsubstantiated claim that the 3 million votes by which he lost the popular vote to Hillary Clinton were cast by illegal immigrants. His recent attempt to turn the US military into a campaign tool did backfire, but he is doing his best to minimize mail-in voting even though studies indicate that this does not favor either party. But if mail-in voting is suppressed, a second wave of Covid-19 is underway by late October, and lockdown rather than herd immunity is once again the policy response, it is conceivable that the election will be "postponed" to "save democracy", indefinitely if allowing the election to happen is linked to a definitive Covid-19 "all-clear" ruling. The problem for Trump is that the suspicion about rigged elections cuts both ways. While Biden Democrats might accept another Trump term - it spares them from taking the blame for the post-Covid cleanup - alienated Post Boomers might not be so accepting. If Trump and his thug allies were able to turn peaceful protests about the George Floyd murder into violent encounters with "law and order" authorities, what might happen if there is an explosion of violent protest? My guess is that Trump won't even be on the ballot for the November election. He will find a reason to resign, or the Republicans, facing an existential threat, will find it for him. In these difficult times the United States, and the world, needs a unifying leader, though it is unclear who the Republicans would steer into that role. So one really needs to start thinking about how gold and the global economy will react should the Democrats sweep the Presidency, House and Senate. Regardless of the outcome of the November election, I doubt anybody will be singing "happy days are here again".
The 2020 KRO Favorites Index did well throughout May, achieving a gain of 32.3% on June 1 before settling back to its current level of being up 29.2%, unlike the Gold Producer Index which is up 13.5% after peaking up 24% on May 20. The difference is due to the broad mix of the 29 Favorites, some of which are responding to market interest in discovery exploration, some with advanced projects to the price of gold, and some due to their exposure to other metals which are tracking hopes for a global economic recovery. One disappointment for May is that for TSXV listings the non-resource sector regained the upper hand in terms of traded value during the second half and continues to dominate early in the second week of June. Traded value in the resource juniors is still not exhibiting the critical mass needed for an across the board breakout. Gold needs to break through $2,000 to turn the inflow of new risk capital into a tsunami. Good stories are, however, attracting investor interest at price levels that allow doubles or triples before the real gains begin. Alternatively, discoveries could do wonders to ignite the market even while gold tracks sideways. It is a very good time for newcomers to discover what makes resource juniors tick and for burned refugees to put a toe back in the water.
KRO Summary: May 1-31, 2020
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