May 15, 2020

So Many External Events

The Capital Markets are in a state of correction. The volatility that accompanies a correction is alive and well, and the curious number of external events causing that volatility is hindering a reasonable prediction of future outcomes that equities need for fuel. In short, affecting the future until the present gets its act together.

The broad indexes, which began the week in negative territory, finished the week on an upswing. But whether the buying was real would be counter to the continuing stretch of bad economic data. What I think is more in line with the current volatility begins with the bond market. This week Treasuries were sold as part of The Quarterly Refunding (QR), The QR is four times a year spectacle that has been around as long as the domestic government has needed to pay for all the money they print. The way it works is the Treasury announces the quarterly sale of 3yr, 10yr and 30yr Treasuries. The treasuries are sold as an auction to the lowest (think interest rates) bidder and is disproportionality the exclusive domain of Commercial and Investment Banks under the status of Primary Dealerships.  I bring this up because this week the treasury issued nearly $100 billion, the largest in quarterly refunding history, and with the knowledge that the street is responsible for purchasing and distributing the treasuries require substantial capital. So where do they get it? Well, how about the stock market, it is overbought after all? And if one wished to successfully sell treasuries, show them a negative stock market.  Well, today refunding trades settled and what happened. Interest rates went up as treasuries were sold, and stocks rebounded because that’s where capital prefers to be theses days.

Unemployment is a disaster of our own making. In the effort to contain the pandemic mandates from the highest to lowest levels of government imposed a lockdown that in high probability will result in permanent job losses. In the interim the government is working to keep the unemployed liquid enough to cover essential costs. But moving forward there seems to be little effort to address other avenues of employment such as infrastructure. Instead, money is being showered on cities and states that historically have burdened themselves on extremely high taxes and cities such as my New York who have so served the union army that excellent jobs aimed at building the city have come at the expense of jobs needed to clean it up. These are challenges that are becoming contentious with this week’s vote on another stimulus package, the mother of all external events.

One of the most profound impacts of the pandemic has been the enormous growth in jobs that easily migrated away from the office to the home. Another impact has been in the change of attitude to a number of familiar tech companies that have found their respective products and services essential to the needs of those caught in the widespread lockdown.  This impact however has been accompanied with a less welcome change in attitude, and that is towards many companies in the economy with little to no digital platform and whose products and services are needed but unfortunately much less efficiently delivered. Hopefully, this outcome will speed up the transition and, in the process, create the need for jobs.

Real Estate
Speaking of technology, I have on occasion referred to the idea that Silicon Valley is to technology what Cleveland was to the Industrial revolution. And with the loud challenges made by Tesla (TSLA) recently regarding the desire to reopen a California factory in opposition to government mandate to stay closed has resulted in a threat to move the said factory to Texas. Sound familiar? After the move of Standard Oil from Cleveland to Houston, Texas, other centers of petroleum production in Pennsylvania and Oklahoma moved headquarters as well. Technology can move wherever they want, but the move has more to do with where they don’t want to be, then where they choose to be, which usually comes to the highest bidder. One recent example is Amazons desire to open in New York. But Texas as a center for the damaged oil industry could probably use some alternative employment opportunities, so it’s an external event with potential.

Government is the most volatile source of external events and is anyone surprised. But unlike the other external events mentioned, those emanating from government have more impact on the markets in the short term, than the long term. Which brings us to stimulus capital. Lots of Americans like wine and poetry, but lots of Americans also like to work. So while debate rages in Washington to provide more free money to the unemployed, that result could very well become permanent as many of those unemployed may find themselves out of work when the economy begins to genuinely normalize. Much of the new stimulus package, reaching another $3 Trillion has already gone to debate, if not a set up for contentious political posturing. The new conversations leaking to the media regarding retaliation with China are also packed with needless adjectives. In the past two years threats of theses kinds have had negative impact on the markets and for now might be the remedy to work off some heat from the tech sector which is still pretty dependent of good global relations. Let’s hope a more productive distraction is introduced over the summer.

The markets overall are paying less attention to the present than to the future, and in that regard its important to carefully manage one’s investment strategy in the face of so many external events. For now, parts of the broad indexes are still overbought, and the resolution to any of the above external events make for a more compelling reason to be neutral, not bearish, and constructive, not bullish.

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