Market Doom Delayed?

Why haven't the (equity) markets crashed yet, and will they?  After being convinced that we are on the edge of the precipice for the markets, I no longer think that. I think the markets have probably six or more months of happy days ahead. 

From Worldometer.org 23/7/2020

Cases around the world are surging. Yesterday’s was the biggest jump in cases globally to date, with something like 280,000 new cases, up from 240,000 the day before. The global death rate is increasing again, after its earlier peak in April. The seven-day trend lines are not looking good. The US of Amerika continues to lead the world (“USA, #1, USA, #1” I can almost hear them chanting) with over 70,000 new cases, again. Not a record for the US, but still a strong showing. This from the country that was listed as the top, best, first in the world, ready to deal with a pandemic. I think it is time to acknowledge that decades of self-delusion about Amerika’s standing in the world rankings of almost anything other than money and bombs has been a fiction.

Still, back to the pandemic for a moment. Cases are surging, and the US count of 4 million cases, as horrible as that may be, is still ‘only’ ~1+% of the population. And if the numbers are “10x higher” as some are projecting, then that is still only ~10+%, out of a “herd immunity” requirement in the 60% - 70% minimum. So we are looking at a 6x in cases and deaths before the US reaches “herd immunity” (if this is even possible based on the potential weakening of antibody loads after a few months).

Now, the case mortality rate as measured by the ratio of deaths to resolved cases is falling, at least in the developed world, and that is a very good thing. It tells me two things; that there is better identification of cases, many of which will be ‘mild’, and that therapeutics and medical responses are improving as the virus is better understood. That’s the good news.

The UK is an interesting counterpoint to the US of Amerika. The total cases count is at about .3% of the population, officially based on testing. And the number of people tested is running at almost 20% of the population. So I suspect that we can rule out a 10x infected rate because it should have shown up pretty clearly by now.

Conversely, the US of Amerika, where Trump continues to say that “if there were fewer tests, there would be fewer cases”, the percentage of people tested is actually lower than in the UK. This suggests that the US infection rate is higher than the UK (a former #1 shit-show in the Covid stakes) regardless of the number of tests.

And if we accept the premise that case mortality rates are declining due to earlier identification and treatment, then any delays through lower testing rates will actually directly lead to higher mortality rates. Trump is saying that he would rather have more dead people and a lower number of identified cases.

Meanwhile, the US markets continue to coast along and even edge upward, defying fundamentals and any expectation that markets are actually engaging in meaningful ‘price discovery’.

In the past month, I have completely changed my mind. I no longer think there will be the market crash that I’ve (and not me alone by any stretch of the imagination) been predicting. Every morning I look at the markets from yesterday and look at the futures for the coming day. Nothing seems to hurt these markets.

So in changing my mind completely, I’m becoming more convinced and confident in my thinking that the markets will not go down. Certainly, there will be blips, but I think the Covid-Crash is behind us, and that markets will now continue to hover for some time to come.

The Amerikan, and therefore world, markets are bifurcated. There are the equity markets (and luxury goods and property), and there are the corner shop and coffee shop markets.

The equity markets are the place that the Fed induced inflation is happening, with too much money chasing too few goods and services (equities and luxury goods and property). The money that the Fed has created to purchase corporate bonds is not stimulating the economy, it is propping up share prices and balance sheets, most of which are sham constructs waiting for reality to arrive, however slowly.

Government unemployment benefits are propping up the ‘real’ economy and ensuring that rent can be paid (and even then the amount of unpaid rent is staggering), groceries and coffee bought, and the flow of consumer goods and services can continue. That stimulus is keeping enough new money in the system to avoid deflation due to too little money chasing too many goods and services. Supply and demand still rules, and when the stimulus ends, the supply of money in the ‘real’ economy will fall like a stone, and the bottom of the economy will see real price deflation.

But at the top of the economy, the ‘market’ economy, there will still be bucket-loads of money with no purpose and nothing to purchase. So inflation will continue at that end of the market. So as people begin to starve, the markets will stay high, and the Wall Street and Executive Suite bonuses will continue to flow – for some time anyway.

And the Fed will keep pumping. It has little choice. It has limited tools, and cannot tell companies to take the money and spend it on the ‘real’ economy; only the Federal Government can do that. And patience at the Federal Government level is wearing thin. So even if the stimulus continues, it will be at a reduced level, and that will start the process of deflation in the ‘real’ economy.

The rest, well, I’m guessing that the ‘market’ economy will do just fine. For another six months or so? Forever? Who knows? But I’m not betting on it falling any time soon.