The market value of the world’s equities has risen above the dollar value of the global economy, which some investors say is a sign of overheated markets. Total stock-market capitalization reached $87.83 trillion on Sunday, compared with the 2019 gross domestic product of all countries at $87.75 trillion. With this, stock values have returned to where they were earlier this year, even though the Covid-19 pandemic has dragged many countries into recession.
This is not that surprising given that US GDP never really recovered from the housing bubble / financial crisis Q4 2007 – Q2 2009. And all the money printed via QE only created massive asset bubbles, not a vibrant economy.
Neel Kashkari doubles down on a zero velocity strategy.
The U.S. dollar’s decline may be just getting started, according to a widely-watched technical indicator. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 of its major peers, formed a death cross pattern on Friday, with its 50-day moving average dropping below its 200-day one. The gauge has tumbled more than 3% this month amid concern over the spread of the coronavirus in the U.S. and wrangling between lawmakers over the next stimulus package.
But against gold …
(Bloomberg) — Bond investors keep getting bombarded with fresh reasons to stay bullish after another record-breaking week in Treasuries.
As the five-year yield plumbs near all-time lows, the 10-year benchmark is again testing levels notched in the depths of the pandemic despair. Leveraged-funds keep pulling back their bearish bets to the lowest since early 2018.
With U.S-China tensions raging again, Wall Street is telling clients to stay constructive and investors are finding it tough to wager against securities they deem the most overvalued in decades.
And Fed policies are likely to keep Treasuries yielding less than the inflation rate.
According to the Atlanta Fed’s GDPNow forecast of Q2 GDP, US GDP is expected to sink -34.7% QoQ. With the blistering growth in M2 Money Stock, the result is a historic low below a reading of 1 … at 0.7.
Let’s see where are today. The Federal Reserve is printing money at a rate of 25% YoY. Meanwhile, the Atlanta Fed GDPNow forecast for Q2 is -34.7% QoQ. This will be the WORST M2 velocity is history.
Even worse, the 10 year Treasury yield is near its all time low (orange box). Meaning that mortgage rates are near their all-time low as well.
Meanwhile, The Federal Reserve is merrily purchasing corporate bonds … with the largest two of the top four purchases being German automakers, Volkswagen and Daimler (Mercedes). Japanese auto maker Toyota is at 6th and German automaker BMW is at 8th.
Negative M2 velocity and The Fed buying foreign bonds? Add in Joe Biden’s Federal spending wish list of over $10 TRILLION …
Yes, there are many central banks around the globe. But the US Federal Reserve is leading the way with a staggering 24.9% YoY growth in M2 Money Stock. M2 growth barely exceeded 10% during the US financial crisis and Great Recession.
In terms of Treasury holdings, the Fed is beating all other major central banks.
“It is possible, though not certain,” that the Fed will implement yield-curve control, they wrote on the Brookings Institution website, laying out testimony delivered Friday to the House Select Subcommittee on the Coronavirus Crisis.
The Fed has looked into the possibility of capping yields on short- to medium-term Treasuries though policy makers have suggested that further study is needed before deciding whether or not to go ahead.
Yellen told the committee that it would be a “catastrophe” if Congress decided not to continue enhanced unemployment insurance that is due to expire at the end of this month. “We need the spending that those unemployed workers can do,” she said.
Under the program, unemployed workers receive an extra $600 a week. Yellen said the program could be restructured to cap total insurance payments at a fixed percentage of regular income.
In their Brookings posting, Bernanke and Yellen said they expect the Fed to provide clearer guidance on its plans for short-term interest rates as a way to provide more stimulus to the economy.
“To maintain downward pressure on longer-term interest rates, the Federal Open Market Committee likely will provide forward guidance about the economic conditions it would need to see before it considers raising its overnight target rate,” the two former policy makers, both of whom now work at Brookings, wrote. “And it likely will clarify its plans for further securities purchases.”
The Fed has pledged to keep short-term interest rates effectively at zero until it is confident that the economy has weathered the pandemic shock and is on track to achieve its maximum employment and price-stability goals.
The former Fed chairs also called for more action on the fiscal front, including aid to state and local governments and a continuation of enhanced unemployment insurance.
“If the pandemic comes under better control, economic recovery should follow. However, the pace of the recovery could be slow and uneven,” they wrote. ‘’Fiscal and monetary policies must aim to speed the recovery and minimize the recession’s lasting effects.”
Here is a chart showing monetary stimulus AND fiscal stimulus (in the form of public debt).
The markets were waiting for some goods news during the Covid-19 pandemic (although I am certain that Dr. Fauci (nee Strangelove) will produce some dire forecast about new swine viruses to rattle confidence). The good news is … Non Farm payrolls jumped +4.8 million in June.
And the number of working Americans rose for the second straight month and the unemployment rate dropped to 11.1% in June.
As a result of the decrease in the unemployment rate, the Taylor Rule (Rudebusch variation) now calls for a Fed Funds rate of -7.07%.
Pfizer seems to have a vaccine that works and United Airlines is scheduling more flights (not that I can fly anymore). And more good news …
(Bloomberg) — A closely watched measure of U.S. manufacturing jumped in June to the highest in more than a year, signaling the resumption of growth as pandemic-related lockdowns ended.
The Institute for Supply Management said Wednesday that its gauge jumped by 9.5 points, the most since August 1980, to 52.6 last month. Readings above 50 indicate that manufacturing is expanding, and the latest figure exceeded the 49.8 median projection of economists in a Bloomberg survey. More factories reported growth in orders and production.
The data mark a turnaround from just two months earlier when the factory gauge tumbled to an 11-year low as states closed most non-essential businesses to help contain the coronavirus. At the same time, the level of manufacturing activity, like much of the rest of economy, will probably remain below pre-pandemic levels for some time.