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The Reason Behind Wall Street’s Resilience




The Reason Behind Wall Street's Resilience

Looking back at the last few months, it seems that Wall Street has managed to remain extremely flexible and resilient under the onslaught of all the geopolitical upheaval that has been ricocheting around the world.

Some of the momentous events that have been hitting the markets in the recent past are:

To quickly refresh the memory, take a look at the chart used below. 

It shows the Standard & Poor’s 500 (S & P 500) reaction to the unexpected results of the referendum decision, by a narrow margin, to leave the European Union. 

This led to the pound plummeting to exchange rate lows and global markets experiencing a rapid domino knock on effect.


Continuing with charts that show how the geopolitical climate is a definite catalyst to cause and effect on the markets, used below is the chart for the expected USD/TRY (US Dollar to Turkish Lira) exchange rate immediately after the news of the Turkish military coup


And the final chart being used to display the markets seeming natural resilience is below.  


It can be seen from the charts above –  that Wall Street’s brief fainting spells were quickly followed by a recovery that saw it once again continuing to climb quite relentlessly.

To further illustrate this tenacious attitude, the yield on the ten-year Treasury note experienced a sharp fall on July 15, when the events of the attempted military coup in Turkey hit the news cycles. 

The coup attempt failed and by that Monday the ten-year Treasury note bounced back when investors were quick to unload treasuries and other haven instruments once the situation in Turkey seemed resolved.

In an even more marked display of recuperative stamina was the U.S. market’s rapid-fire recovery after the United Kingdom voted to leave the European Union. 

This result was unexpected and caused the markets around the world to shed $3 trillion of the market value in two nerve-wracking days. 

While some other countries and their respective markets were still licking their wounds, Wall Street was quick to regain lost ground and recovered in about two weeks.

The pound is still yet to recover, and is loitering around $1.31, which is a low not seen for quite a few decades. 

But, in the primary, bonds and stocks recovered in a relatively short space of time.

It all bears looking into a little deeper.

There is more than a fair share of opinions and theories for the reasons behind the market’s apparent strength.

Central bank liquidity has been very generous of late, in the view of chief economist at G+ Economics, Lena Komileva. 

G+ Economics is a London-based market consultancy and research company.

Komileva is referring to the floating facility of accommodative policies that have been handed out by The Federal Reserve, The European Central Bank, and The Bank Of Japan, in the aftermath of the 2008 calamitous financial crisis. 

Many investors viewed the bailout policies that were implemented then, as a safety net that will always be available when needs arise in the future.

When disturbances like the Brexit results threaten a possible temporary pause in global growth, the central banks have no other option other than to act as a circuit breaker to curtail the spread of the damage. 

This is what Komileva believes.

She goes on to further state in a research note posted earlier this week, which the central monetary figures and authorities in the world, are not tracking different and separate national cycles anymore. 

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Some of the banks like the BOJ, ECB, and the Fed still stay committed to maintaining lower rates for longer than usual to be able to offset the global volatility caused by:

  • incidents of terrorism
  • slow or lack of confidence
  • capital shocks
  • trade slow-downs

This is, in effect, camouflaging the natural market forces of capital and economic de-globalization and politics. 

These forces, Komileva says, should not be fought.

Mario Draghi, the President of European Central Bank, mentioned central bank policies as one of the reasons why the financial markets in the Eurozone were not equipped to handle the post-Brexit volatility. 

He further stated in a news conference, that the financing conditions were remaining highly supportive and that was contributing to a strengthening to credit creation.

The S & P 500 is up 6% this year to date. 

Equities are trading at historically high valuations and with respectable returns despite still declining earnings. 

Greater volatility remains a possibility, but any correction is set to be of a short duration because there is most assuredly a central bank put.

This refers to the belief in the markets that that policy makers will be continuing to respond pugnaciously to market turmoil by liquidity measures and easing measures. 

This approach is forming the investors attitudes, and the unusual central bank activism has been seen to elevate a few asset prices artificially.

Market stability is not policy criteria for major central banks, per se. 

It is merely regarded as a by-product of easing measures in practice. 

The Federal Bank held back from raising the rates in June this year only days before the Brexit vote, and news relays about the shock results began to pour in. 

At the same time, in comparison, the Bank of England was quick to hint that the cutting of rates was a very real possibility at the next meeting.

U.S. investment strategist for Allianz Global Investors, Kristina Hooper, said in a posting regarding the Brexit market repercussions, that the results pushed rate expectations in the United States out further while the economy was still growing. 

That was positive news for the stock market in the short term. 

For stock gains to continue to be sustainable, it will be needed to see less artificial improvements in growth earnings.

The Federal Bank has a dual mandate i.e. the following will help understand:

  • Full employment
  • Price stability or inflation.

But the Fed is unable to ignore any serious market turmoil.

The Fed has so far been able to invoke international instability, and this includes any concerns about the Brexit implications, to delay further increases in the current benchmark interest rate. 

In 2015, falling commodities prices and the possible slowing of growth in China was deemed sufficient cause for the Federal Bank to postpone increases until the end of last year.

Come September, there are speculations or hints that rate increase in definitely in the cards.


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Next Wave of Stimulus Could Be $2 Trillion Infrastructure Bill




Next Wave of Stimulus Could Be $2 Trillion Infrastructure Bill

“Phase 4” of the government’s economic stimulus plan could include spending up to $2 trillion on improving America’s infrastructure.

The bill already has bipartisan support, and could be voted on as soon as April 20th when representatives of both the House and Senate return to Washington, D.C.

During his 2016 campaign, President Trump said he would make improving America’s roads, bridges and airports a top priority during his time in office.

“The only one to fix the infrastructure of our country is me – roads, airports, bridges,” Trump tweeted on May 12, 2015. “I know how to build, [politicians] only know how to talk!”

While previous attempts to pass a major infrastructure bill have failed, both sides seem willing to try again in an effort to help America’s economy rebound from the coronavirus outbreak.

House Speaker Nancy Pelosi, who is often at odds with the President, said she is “pleased the president has returned to his interest” in the issue. She called an infrastructure proposal “essential because of the historic nature of the health and economic emergency that we are confronting.”

She added “I think we come back April 20, God willing and coronavirus willing, but shortly thereafter we should be able to move forward.”

The Democrat’s proposal is part of a five-year, $760 billion package that includes money for community health centers, improvements to drinking water systems, expanded access to broadband and upgrades to roads, bridges, railroads and public transit agencies.

The plan designated $329 billion for modernizing highways and improving road safety, including fixing 47,000 “structurally deficient” bridges and reducing carbon pollution. It also aimed to set aside $105 billion for transit agencies, $55 billion for rail investments such as Amtrak, $30 billion for airport improvements and $86 billion for expanding broadband access.

“I could provide the legislative language in very, very short order for this package. It’s the funding that’s been holding us up, and if the president insists on funding, then I believe that Senator McConnell and Leader McCarthy will move on this issue,” said Democratic Rep. Peter DeFazio of Oregon, who chairs the House Transportation and Infrastructure Committee.

During an appearance on CNBC yesterday, Treasury Secretary Steven Mnuchin said he is talking with Congress about a potential infrastructure bill.

“As you know, the president has been very interested in infrastructure. This goes back to the campaign: The president very much wants to rebuild the country. And with interest rates low, that’s something that’s very important to him.”

He added “We’ve been discussing this for the last year with the Democrats and the Republicans. And we’ll continue to have those conversations.”

Earlier this week President Donald Trump said he wants to spend $2 trillion on a massive infrastructure package.

He tweeted that “With interest rates for the United States being at ZERO,this is the time to do our decades long awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4.”

“The president very much wants to rebuild the country, and with interest rates low, that’s something that’s very important to him,” Treasury Secretary Mnuchin added.

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Stocks Will Head Lower, Warns Billionaire Bond Investor




Stocks Will Head Lower, Warns Billionaire Bond Investor

Billionaire bond investor and DoubleLine Capital founder Jeffrey Gundlach is the latest Wall Street veteran to warn that the worst is yet to come for stock prices.

He joins famed investor Jim Rogers, who said on Tuesday that he expects the market to stay elevated for a while, but ultimately another stock market route is on the way.

“I expect in the next couple of years we’re going to have the worst bear market in my lifetime,” Rogers said in a phone interview.

Gundlach may not be as bearish as Rogers, but he did say earlier in March that there was a 90% chance the United States would enter a recession before the end of the year due to the effects of the coronavirus pandemic.

In the short-term Gundlach said during a webcast on Tuesday that he believes that the lows we saw in March will be eclipsed in April due to the uncertainty around the coronavirus outbreak and when we can expect the number of new cases to slow.

“I think we are going to get something that resembles that panicky feeling again during the month of April,” while adding “The low we hit in the middle of March, I would bet that low will get taken out.”

Mark Hackett, chief of investment research at Nationwide agrees with Gundlach and warns that there is compelling evidence that nearly every bear market has a few rallies before plunging lower.

“Last week’s double-digit gain for markets was a welcome relief rally, though market bottoms are rarely as clean as this one has been. In 2000/01, there were four rallies of greater than 20% before ultimately reaching a bottom, and in the financial crisis, the S&P 500 had a false breakout of 27% before hitting a bottom.”

Gundlach also said that any projections that the US economy will quickly recover once the spread of the virus slows were too optimistic and that the hopes of a quick recovery were causing the markets to act “somewhat dysfunctionally.”

“We will get back to a better place, but it’s just not going to bounce back in a V-shape back to January of 2020,” he said.

Gabriela Santos, JPMorgan’s global market strategist agrees with Gundlach that we aren’t going to get the quick “V-shaped” recovery that most are predicting.

She believes that we’ll start a slower “U-shaped” recovery once coronavirus infection rates peak.

“A ‘V-shape’ I think we should unfortunately discount at this point, because even when infection rates peak for COVID-19 around the world, what the China experience is teaching us is even though the government begins to relax some social distancing guidelines, individuals themselves are still very careful about how exactly they go back to their day to day lives,” she said.

“So demand was quick to shut down, but it’s actually much slower to come back online,” she added. “The better analogy here is a U. There’s a very sharp drop in activity in the first half, there’s a bit of a stall in the second, and then in 2021 is when that strong rebound begins.”

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Fed Bank Predicts 53 Million Americans Out of Work, 32% Unemployment Rate




Fed Bank Predicts 53 Million Americans Out of Work, 32% Unemployment Rate

As we covered here on The Capitalist last week, during an interview with Bloomberg News, Federal Reserve Bank of St. Louis President James Bullard said that he is forecasting the U.S. unemployment rate will hit 30% in the coming months as the coronavirus pandemic continues.

The comments understandably raised a few eyebrows at the thought of such a staggering unemployment rate, which would be nearly triple what we experienced during the Great Recession.

Bullard tried to soften the blow in a later interview with CNBC, stating that although the unemployment number will be “unparalleled” we shouldn’t get discouraged.

“…if we play our cards right and keep everything intact, then everyone will go back to work and everything will be fine.”

Now, one of Bullard’s colleagues at the St. Louis Fed has an even more dour prediction about what America will face in the coming months.

In a research paper published last week, Miguel Faria-e-Castro, an economist at the St. Louis Fed, titled his article “Back-of-the-Envelope Estimates of Next Quarter’s Unemployment Rate” and estimated (remember, this is one man’s estimates) that nearly 53 million Americans could find themselves unemployed due to the coronavirus.

That works out to an unemployment rate of 32.1%. At the peak of the Great Depression nearly 100 years ago the unemployment rate topped out at 24.9%.

Faria-e-Castro acknowledges that it’s a massive number, and states “These are very large numbers by historical standards, but this is a rather unique shock that is unlike any other experienced by the U.S. economy in the last 100 years.”

He points to previous research that identifies 66.8 million workers who are in “occupations with high risk of layoff” that include sales, production, food preparation and services. He then looks at additional research that found 27.3 million workers in “high contact-intensive” jobs at risk such as barbers, stylists, airline attendants and food and beverage services.

Faria-e-Castro then averages those two numbers and adds in the existing number of unemployed Americans to arrive at his estimate.

While we are nowhere near reaching that unimaginable number, we are at the very beginning of a massive wave of initial jobless claims filings.

Just last week initial jobless claims hit a record of 3.3 million and another 2.65 million are expected to join them this week, according to economists surveyed by Dow Jones.

Some are even more pessimistic.

Thomas Costerg at Pictet Wealth Management has the highest estimate at 6.5 million, while Goldman Sachs estimates 5.25 million and Citigroup is at 4 million.

Moody’s Analytics predicts that initial unemployment claims from last week, which will be announced Thursday, could reach 4.5 million.

“COVID-19 has caused unemployment to surge and we look for U.S. initial claims for unemployment insurance benefits this week to total 4.5 million, compared with the 3.283 million in the week ended March 21,” Moody’s Chief Economist Mark Zandi said in a statement.

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