While many economists are busy discussing whether we will have either a “V” or “U”-shaped recession once our country’s economy opens again, the man who runs the world’s largest hedge fund says we have a much more painful road ahead.
Ray Dalio, who’s Bridgewater Associates manages an estimated $160 billion, says we are headed for a depression, with a “d”.
A recession is when we see economic productivity slow for a few quarters. A depression is when the economic productivity slows for a few years.
Dalio says the economic slowdown we are just now starting to experience closely resembles the Great Depression from 1929-33. During the Great Depression, unemployment rates topped out at 25% and the country’s output (GDP) dropped by almost 30%.
“Do I think we’re in that? Yes,” Dalio responded during an interview on Wednesday when asked about the likelihood of the country dipping into a depression.
He says he expects the country will soon see an unemployment rate that is “double-digits” and a quarterly GDP decline of more than 10% with knock-on effects that could last for years.
“I think you could look at this like a tsunami that hit — the virus itself and the social distancing — and then what are the consequences in terms of the wreckage [from that],” Dalio said during the interview. He said the “wreckage” are the long-term effects the shutdown will have on businesses’ balance sheets and individuals’ finances who have lost their jobs or been laid off.
Dalio added that “a lot of people are going to be broke” as a result of the downturn.
“This is bigger than what happened in 2008,” Dalio said, referring to the 2008 financial crisis that turned into the Great Recession. During that recession, GDP fell 4.3% and unemployment topped out at 10%.
Compare that to today’s crisis, where in just the last 3 weeks, almost 17 million American’s have lost their jobs, which is roughly 10% of the workforce. By mid-summer Goldman Sachs predicts an unemployment rate of 15% and a GDP decline of 34% in the second quarter.
JPMorgan economists just came out with an even scarier forecast. They see a 40% decline in GDP for the second quarter and a 20% unemployment rate with 25 million jobs lost.
Dalio also says the fallout from this slowdown is wider reaching than anything we saw during 2008.
“This is more complex than , because there are the banks and then there are all of those that are beyond banks. All of the little businesses, all of those in all the different places that are beyond it,” Dalio said.
Dalio wouldn’t commit to a recovery timeframe, but says that it will take “a long time” for the economy to get back to where it was before the shutdown.
Millionaires Sign Petition To Voluntarily Increase Their Own Taxes
A group of millionaires has signed a petition asking for the government to force them to pay higher taxes. They did so in an effort to help the global recovery from the coronavirus pandemic.
The group, which includes the likes of Ben & Jerry’s co-founder Jerry Greenfield, Walt Disney Co. heiress Abigail Disney and former BlackRock managing director Morris Pearl, call themselves “Millionaires For Humanity.” Their sole objective is to encourage governments to increase taxes on the world’s wealthiest individuals to help pay for the billions of dollars needed to support health care, schools and security.
The letter states: “As Covid-19 strikes the world, millionaires like us have a critical role to play in healing our world. No, we are not the ones caring for the sick in intensive care wards. We are not driving the ambulances that will bring the ill to hospitals. We are not restocking grocery store shelves or delivering food door to door. But we do have money, lots of it. Money that is desperately needed now and will continue to be needed in the years ahead, as our world recovers from this crisis.”
Millionaires Call for Higher Taxes
The letter continues by asking governments to raise taxes on “people like us. Immediately. Substantially. Permanently.”
The group warned that the impact of the crisis will last for decades. They also mentioned that it could push 500 million people into poverty. Hundreds of millions of people are at risk of losing their jobs, many permanently, the group said. Nearly 1 billion children are out of school due to the pandemic. They also mentioned that many of these kids lack any resources to continue their education.
The petition adds, “Unlike tens of millions of people around the world, we do not have to worry about losing our jobs, our homes, or our ability to support our families. We are not fighting on the frontlines of this emergency and we are much less likely to be its victims.”
“So please. Tax us. Tax us. Tax us. It is the right choice. It is the only choice.”
This petition serves as Pearl’s second attempt to make millionaires – himself included – pay higher taxes.
A Similar Call
He wrote a letter last year supporting the “millionaire’s surtax” introduced in Congress. In it, he said any new tax plan has to be “relatively easy to enact and relatively hard to avoid.”
“Rich people like me are good at dodging taxes. We can lobby to stop new taxes from ever becoming law, or if they do get enacted, find loopholes to get around them.”
“Any plan to tax me and my fellow wealthy Americans needs to be relatively easy to enact and relatively hard to avoid,” Pearl also said.
The millionaire’s surtax, as Pearl points out, would only affect married couples making more than $2 million per year. Alternatively, it also affects a single tax filer making more than $1 million.
“This tax would simply add 10 percentage points to the existing tax rates paid by couples making over $2 million a year and singles making over a million. Though it would only apply to the wealthiest 0.2 percent of taxpayers like me (or about 330,000 taxpayers) the millionaires surtax would raise an estimated $635 billion over 10 years, according to the Tax Policy Center.”
Pearl, undoubtedly knowing that many will doubt his motives, says he’d rather pay higher taxes than see his country falter economically.
“You may well ask: Why would anyone push to pay higher taxes, like I’m doing by supporting the millionaires surtax? It’s because I know it’s not actually in my long-term economic interests for the United States to become more and more like a developing nation, with a tiny elite at the top of the mountain and everybody else struggling for a foothold.”
Thus far, 80 individuals have signed the Millionaires For Humanity petition.
As Earnings Season Begins, Prepare For A Bumpy Ride
The stock market has rallied nearly xx% in the second quarter of the year. However, don’t expect the upcoming corporate earnings season to paint an equally rosy picture.
Expectations are for Q2 corporate earnings to be the worst in more than 10 years. It dates back to the depths of the financial crisis.
Adding to the uncertainty for investors, a significant number of companies have withdrawn their guidance – including almost a third of S&P 500 companies – and many more have yet to provide quarterly updates ahead of their scheduled earnings release.
“There’s a deficit of information that needs to be filled at some point,” said Sebastien Leburn, senior portfolio manager at Boston Private, during an interview with MarketWatch.
A Possible Disconnect from Reality?
That means investors will only be able to start matching up actual corporate performance with the stock performance on the earnings call. That could lead to some massive repricing if the stock prices have disconnected from reality.
“That’s why I think earnings will be very important, because they’ll provide a dose of reality,” said Brad Cornell, professor emeritus of finance at UCLA. “They are going to tell us exactly whether a company is on a path that justifies this run-up.”
“It’s all about clarity and having some guidance,” said Boston Private’s Leburn. “Without that, you have nothing to work with.”
Particularly worrisome are the expectations for year-over-year growth estimates for earnings per share. On March 31, expectations were for an 11.1% decline in EPS growth during Q2.
As of yesterday morning, that decline in EPS growth has ballooned to a -44.6%, according to FactSet data. That would be the largest decline in earnings since the fourth quarter of 2008. In that year, earnings fell 70% in the depth of the financial crisis.
Somehow, this massive decline in EPS growth since the end of Q1 has coincided with the stock market rallying xx%. This provided bearish investors with more proof that a detachment exits between the markets and reality.
The Rally’s Vulnerability
The stock market rally could be particularly vulnerable should just one or two of the larger S&P 500 companies post disappointing numbers.
Just five companies now make up more than 20% of the index. These include Apple Inc., Microsoft Corp., Amazon.com Inc., Google parent Alphabet Inc., and Facebook Inc. Additionally, a poor earnings report from any one of those companies could drag the index down. It can even bring the rally to a grinding halt.
It’s unlikely that one of those five companies will decide to “kitchen sink” the quarter. However, you can expect many companies to take advantage of the pandemic to flush all the bad news, bad ideas, and bad decisions out at once.
“Second-quarter earnings will likely be a ‘kitchen sink’ report from many companies,” said Marc Lichtenfeld, chief income strategist with the Oxford Club, an independent investment newsletter publisher. “They can throw in all of their write-offs and other expenses and know they will likely be forgiven for an earnings miss due to the extenuating circumstances.”
Most importantly, investors need to view corporate performance and stock performance as two completely separate indicators of a company’s overall health.
James Gellert, CEO of Rapid Ratings, a data and analytics company that assesses the financial health of private and public companies, says “Nobody should equate strength in the S&P 500 with underlying corporate strength.”
Buckle up, the next few weeks could be a bumpy ride.
Gold Is Soaring Along With Stocks, Here’s Why
The stock market remains on a seemingly endless bull market run since the March lows. With this, investors would typically expect gold to perform poorly. Many traditionally view gold as a “safe haven” asset that sort of muddles along during good times. However, it outperforms in a time of crisis as investors look to protect their wealth.
So it’s been a bit of a surprise to see gold up by 18% this year. It’s also closing in on an all-time high while the stock market has rallied.
But gold’s performance this year has little correlation to how the stock market is performing. Additionally, it has more to do with interest rate policies around the world.
Gold in the Current State of the Economy
Here in the US, economic activity has ground to a halt due to the coronavirus pandemic. Because of this, the Federal Reserve pushed interest rates to near-zero. Other central banks around the world have done the same. Also, a few have turned to negative interest rates in an effort to boost their economies.
When you add in inflation, it means that investors here in the US who own gold aren’t missing out on the trade-off between holding gold – which always offers no yield – and earning a yield from bonds.
“As real yields turn negative, opportunity costs for holding non-yielding assets essentially vanish, particularly when viewed through the historical lens of fiat currencies and their purchasing power. This provides a continued tailwind for gold,” said Jeff deGraaf, chairman of Renaissance Macro Research.
Gold closed as high as $1,820 an ounce last week, its highest price since September 2011.
Georgette Boele, a precious-metal strategist at ABN Amro, agrees with deGraff. She says gold is moving in lock-step with stocks. Boele also mentions that gold is acting more like a “risk-on” asset instead of its usual role of a “risk-off” investment. She says this is due to low interest rates.
She adds “Firstly, central bank policy is a strong driver behind higher gold prices. Not only are official rates close to zero in a large number of countries, they will unlikely go up in our forecast horizon,” and says that all of the money printing by central banks around the globe “sounds like music to the ears of gold bugs as money floods into the market and currencies begin to decline.”
A Very Bullish Signal
Boele says it’s a very bullish signal for gold prices that investors have bought every dip by the precious metal during the rally.
“Now the psychological resistance of $1,800 per ounce has been surpassed. It seems that investors will only be satisfied if the former (intraday) peak in gold prices at $1,921 per ounce is reached and taken out. Above that, the important psychological level of $2,000 per ounce is within reach.” she said.
Boele’s employer, ABN Amro, has raised its year-end gold target from $1,700 an ounce to $1,900 an ounce. ABN Amro also says any dip in gold prices should be bought.
“We still expect a sizeable correction in gold prices in a risk off environment when the dollar is back in favor. It is likely that this correction will be short-lived and be a buy-on-dips for investors eagerly waiting to step in,” said Boele.
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