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Bull Vs. Bear: Is The Market Headed Higher, Or Due For Another Collapse?




Market Collapse Continues Despite “Monetary Bazooka” From Fed, Rates Cut to Zero

With the stunning collapse of the stock market due to the coronavirus pandemic overshadowed by the equally-stunning rally since the March 23 lows, a heated debate has ensued.

Has the Federal Reserve and Treasury pumped enough money into the market to keep it afloat?

Or, just like every previous market collapse, will we retest the lows before finally entering a recovery?

Here are both sides of the argument. Take each into consideration. Then, let us know in the comment section below the article which camp you fall into. Are you bullish on the stock market and believe the worst is over? Or are you bearish and think there’s more pain to come?

Bulls (Rise):

David Kostin, Goldman Sachs analyst:
“If the U.S. does not experience a second surge in infections after the economy reopens, the ‘do whatever it takes’ stance of policymakers means the equity market is unlikely to make new lows.”

Gibson Smith, founder of Smith Capital:
“The Fed has really pulled out all stops in terms of keeping markets liquid and fluid. My expectation is over the next three to six months, assuming we get the virus contained … we’ll look back on this period of time and realize it was just a moment in time with a lot of volatility and we probably have better times in front of us than worse times.”

Marko Kolanovic, JPMorgan analyst:
“Unhindered by moral hazard, the response of fiscal and monetary authorities is and will continue to be unprecedented, with the goal of essentially making everyone ‘whole.’ We believe the significance of this development is underestimated by markets, and this reinforces our view of a full asset price recovery, and equity markets reaching all-time highs next year, likely by H1.”

Mike Wilson, Morgan Stanley analyst:
“Our base case is that the market already had its successful re-test the week of March 30, meaning that week’s lows of 2,450 should not be challenged again, especially with the extraordinary action by the Fed since then and flattening of the curve on COVID-19.”

Bears (Collapse):

Mark Mobius, founder, Mobius Capital Partners:
“Although there are some opportunities to buy, I would say it’s probably a good idea to keep some powder dry for another downturn,” he said. “We might see a double bottom.”

Michael Lee, chief strategist at Michael Lee Strategy:
“We are in a situation now where the technical and the fundamental are going to collide perfectly in what we’ve just seen, I believe, is a bear market rally. We saw several runs in 2008. We need to test the lows.”

Masanari Takada, analyst at Nomura Securities:
“The present rally should best be viewed as an unenthusiastic, inorganic bear market rally.”

Matt Maley, chief market strategist at Miller Tabak:
“This is more a bear market trap. I just think we’ve had a first period of liquidation. But I think we could have more of it.”

Lori Calvasina, RBC’s head of U.S. equity strategy:
“I’m concerned that we have not seen the lows yet. This surprisingly high level of bullishness supports our own view that we haven’t yet seen investor capitulation, echoing what we’ve seen in other data sets. We view capitulation as a necessary, though not sufficient condition for stock market bottoms in major drawdowns.”

Based on these arguments, which way, then, do you think the market is headed? Do you think the market will collapse again? Do you see light at the end of the tunnel?

Let us know in the comments below, and we’ll post your responses in a future article here on The Capitalist.

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Here’s When You Can Expect Social Security Cuts




Here’s When You Can Expect Social Security Cuts

Social Security is a retirement cornerstone for tens of millions of Americans. According to the Centers for Budget and Policy Priorities, every year it keeps 15 million retirees out of poverty.

Unfortunately, the program is facing massive financial hurdles. It has been collecting a net cash surplus for the last 38 years. However, starting next year, it is projected to run a $21.1 billion net cash outflow.

The program entered the decade with a reserve of $2.9 trillion in assets. Although, many expect the net outflows to increase each year and chip away at the reserve by $1.1 trillion. This leaves the program with only $1.8 trillion in reserves by 2029.

The program isn’t facing bankruptcy or insolvency. Instead, it is more and more likely that retirees will soon face reductions in their benefits to keep the program afloat.

Two trusts actually make up Social Security. The first one is the Old-Age and Survivors Insurance (OASI) trust. It provides payouts to retired workers and survivors of deceased workers. The other is the Disability Insurance (DI) trust. This one supplies payments to workers that are long-term disabled.

When reporting on the state of the program, the Social Security Board of Trustees generally lumps the two trusts together. However, each trust is independent and faces individual risks.

Of the two, the OASI is projected to be in financial distress the soonest. The latest Trustee report estimates that the OASI will deplete its asset reserves by 2034. Meanwhile, the DI trust could possibly depleat its reserves in 2065.

But because the OASI is much larger than the DI trust ($2.8 trillion of the combined $2.9 trillion in reserves), the combined trusts are projected to become insolvent in 2035.

So expect the first major cuts to come in 2035 in an effort to avoid insolvency. Those efforts will involve a potential bitter pill for retirees to swallow.

Unless Congress finds a way to raise additional revenue and/or reduce outlays, retired workers and survivors of deceased workers can expect a 24% reduction in monthly benefits starting in 2035. While that seems a long time from now, it’s only 15 years away and will be here sooner than you think.

In real numbers, a retiree who receives the average monthly Social Security benefit of $1,503 today would see their monthly benefit reduced to $1,142 per month, or $361 less to live on. A married couple receiving $2,531 in monthly benefits would see their check cut by $608 per month, down to $1,923.

While the monthly reduction stings, looking at it from a lifetime benefit approach magnifies the worries for retirees trying to live out their golden years. A hypothetical worker who retires this year and starts receiving benefits would typically expect to collect about $500,000 in Social Security benefits. A 25% reduction means they would see their benefits cut by $120,000, down to only $380,000 in retirement benefits.

A married couple would see their projected $1 million in benefits reduced by $240,000 down to $760,000. That’s not an easily-replaced amount of retirement income.

If there is a glimmer of hope, it’s that Congress can take action to avoid – or delay – the day of reckoning. Yes, they’ve known since 1985 that the program would one day run out of money. But if there is one thing that the government is good at, it’s waiting until the last minute to really dig in and find a solution.

Let’s hope they can set aside their differences and put America’s retirees first.

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Corporate CEOs Sour On Economic Recovery, Varney Warns: No More Lockdowns




Corporate CEOs Sour On Economic Recovery, Varney Warns: No More Lockdowns

Corporate executives aren’t expecting a full economic recovery until the end of next year. This is according to the Q2 CEO Economic Outlook Survey conducted by Business Roundtable.

The bearish outlook coming from a generally optimistic group is concerning for those hoping that the economic recovery is slowly underway. The survey indicated that the executives are hesitant to increase capital spending, hiring plans or sales expectations for the rest of the year.

The index’s overall reading contracted to 34.3 in the second quarter. This is the lowest reading since the midst of The Great Recession in 2009.

As a group, expectations were for the country’s gross domestic product to shrink by 3.8% this year, and more than one-third of respondents expect it to take until 2022 for the economy to fully recover.

Joshua Bolten, president and CEO of Business Roundtable, said in a statement, “The outlook of Business Roundtable CEOs reflects the reality of current economic conditions. We appreciate the actions taken by the Administration and Congress so far to help American workers, small businesses and communities, but there is much more to do. We encourage policymakers to work together on additional measures that will help bring a rapid end to this public health crisis and encourage economic recovery efforts as business operations resume.”

No Round Two

If we are hoping for economic recovery anytime soon, we can’t shut down the economy a second time, says Fox Business host Stuart Varney.

“Quite simply, the economy couldn’t take it. Nor could all those people who have been locked in with abusive relationships. And all those people denied life-saving medical tests and elective surgery. We can’t go back to that,” said Varney.

Varney said efforts to minimize or lessen the effect of a second wave of outbreaks should be on a local, not national level.

“The president says no new national lockdown. Instead, put out the fires at the local level,” Varney said. “That’s what the bar and beach closings are all about. Wear masks, keep your distance, wash your hands. That’s the policy. Contain the outbreaks. Limit the spread.”

Numerous states, including California, Florida and Texas are either rolling back reopening plans or implementing new restrictions. These come as the number of coronavirus cases rises. Varney said we just need to live with the virus as part of our lives.

“We can argue all day long about whether it’s a spike in new cases or a surge, or a ‘serious’ increase’. But the fact is, the number of new cases is going up, especially in some of the states that started to reopen,” said Varney.

He added, “There will be some impact on the pace of the economic recovery. You can’t expand rapidly if there are still restrictions on economic activity. The virus will not go away completely any time soon. There are going to be local outbreaks. There will be local shutdowns. That’s the way it is. That’s what we have to live with.”

And he says absolutely no second shut down.

“Once was enough,” he said.

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Fed Buying Bonds Of Apple, Visa Raises Questions About Programs




Fed Buying Bonds Of Apple, Visa Raises Questions About Programs

Do bonds issued by Visa or Apple really need help from the Fed?

It’s a question many investors and analysts are asking after the latest disclosures from the Federal Reserve show the central bank is buying bonds of companies that face no liquidity concerns or challenges in the secondary market.

To be fair, the Fed is buying bonds of companies that are struggling. These companies are at risk of seeing the demand for their bonds dry up.

But bonds issued by Visa, Microsoft and Home Depot aren’t what many had in mind when the Fed announced it would buy bonds in the secondary market to ensure the market didn’t freeze up amidst the first wave of coronavirus shutdowns.

And other well-funded and stable companies like Apple and Goldman Sachs, who have bonds held in a handful of bond ETFs, have indirectly benefited. This happened as the Fed has bought roughly $6.8 billion of bond ETFs since the programs started.

Kathy Jones, director of fixed income at Charles Schwab, shares her piece about the situation. She says “It does sort of make you wonder if it makes sense for them to be buying bonds of Apple. Spreads are so tight and stocks are doing so well. You wouldn’t think they would need support from the Fed. The reasoning I guess makes sense. But when you look at the outcome, you scratch your head and wonder whether this is where we need the money to go.”

The Fed disclosures show it has purchased $430 million in individual bonds and $6.8 billion in ETFs. This, admittedly, makes up a small fraction of the $210 trillion corporate bond market and $961 billion fixed-income ETF market.

The Fed’s purchases, so far, remain limited to the secondary market. However, plans are for the Fed to soon start buying bonds directly from the issuing companies.

Goldman Sachs have bonds purchased by the Fed through bond ETFs. The said company not only sees the potential for moral hazard but two more challenges. These include a misallocation of capital and a diminishing appearance of independence for the Fed.

The bank believes, however, that the worries about moral hazard and a perceived loss of independence will diminish as time passes. They believe this will happen as long as the Fed continues to steer the markets properly,

Charles Schwab’s Jones doesn’t let the Fed off quite so easy. “I do think it’s a moral hazard. I think it’s something they’re going to have to deal with when things settle down. There will be accusations that they committed money in ways that didn’t make sense and didn’t help the average Joe.”

Former New York Federal Reserve Bank President William Dudley agrees with Jones.

During a recent interview with Bloomberg Television, Dudley said the Fed not only encourages bad behavior, but they also rescue those that made bad decisions.

“People who have high-yield debt that’s outstanding, a lot of times that’s happened by choice. So for the Federal Reserve to intervene and support those asset prices, is basically creating a little bit of moral hazard in the sense you’re encouraging people to take on more debt.”

“We had a number of players in these last few months that have essentially been bailed out by the Fed: Hedge funds that were invested in cash Treasuries, and short Treasury futures,” Dudley added. By purchasing Treasurys, the Fed helped “those entities unwind what turned out to be a bad trade.”

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