The big event of the past week was undoubtedly the much-watched US non-farms jobs report on Thursday. It was a real shocker with a huge ‘beat’ to the upside. Stocks surged immediately on the news with the Nasdaq making another ATH (while all other major indexes markedly did not).
But with the pandemic playing havoc with accurate data collection, can we really trust the numbers? Certainly, the machine-learning algos can, as can the teenage Robinhood traders! But can rational humans please step forward and note that in the data, the claimed numbers ‘unemployed’ were significantly less than the numbers claiming unemployment benefits! How can that be? Unless many are gaming the system – or the definitions of ‘unemployed’ are too vague to mean anything.
No matter – the momentum players and the algos filled their boots as they continue to sniff a rapid economic recovery as lockdowns are being lifted.
But now the impressive ‘data’ is out, can this be the final capitulation to the manic bullishness that has prevailed for so long? Surely, only a miraculous recovery now being priced in can satisfy current stock valuations and any disappointment would very likely send the teenage Robinhood traders heading for the hills.
Once in a while I come across some revealing charts that show in one picture some stark facts. This one points to deflation ahead, not the inflation/hyper-inflation dreamed of by so many pundits many of whom believe Gold is heading for $3,000 (it has likely topped and is heading lower).
With the velocity of money heading south in this pandemic, so will go the CPI with consumer prices falling. Of course, some prices will rise in the mix. I see the price of puppies are in a strong bull market – but thankfully, they are not included in the basket of goods and services! (They are in their .own basket, though).
And here is a plot of stock prices against consumer confidence
They track each other very closely as the correlation conforms with my belief that it is social mood that determines stock prices. A positive mood equals rising stocks. But with stock prices still elevated and consumer sentiment depressed, the yawning gap sticks out like a sore thumb. They will certainly come together again at some stage – and although confidence may improve as lockdowns are eased, it is highly unlikely it will reach the levels seen earlier. So something has to give.
There was a lot of talk eleven years ago during the financial crash of ‘zombie’ firms. These are firms being kept on life support by the actions of the Fed and the government providing them with loans/grants so as to avoid bankruptcy – and keep jobs alive. They could not survive in the normal world of commercial competition. Well, after those eleven years and squillions in QE and now the pandemic hand-outs, their numbers keep rising!
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Most feet-on-the-ground observers know that this house of cards will topple over at some point – and that time may not be too far away.
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