Over the weekend I dove head-first into what the odds of another lockdown truly are and what it would actually look like. I came to the realization that it is probably going to happen. The government is trapped in an echo chamber. They are desperate to keep a stranglehold on the power that they got from the first round of lockdowns. In fact, roughly an hour ago, Posobiec tweeted again:
This time around, things are different. We have several vaccines available, some people now have had the virus and have natural immunity, and the public has witnessed the devastation that a lockdown has on the economy. To be able to pull off a repeat of the March 2020 lockdown, looks like a tall task. If it happens, I believe we will have a bifurcation. Blue states will jump at the chance to lockdown once more. Red states will be leery.
There is a chance that this is completely overblown and there will be no lockdown. The administration could authorize some other kind of emergency measure and avoid a shutdown of the economy.
Ultimately, my job as an investor isn’t to decide what policy is best, it is to see through the smoke and mirrors to understand what the market’s reaction will be. Unfortunately, we have only one instance of data on what a lockdown does to the stock market and that data isn’t good. The last lockdown saw a deep drawdown of the all the general market indices. Even silver crashed by 30%. Oil by 68%. However, had you bought at the end of March, you would be sitting on terrific gains. Since this lockdown could look different, it is anyone’s guess how the market will react.
Construction spending continues to decline from its pre-shutdown peak. This is bad news for the continued expansion of the economy.
Construction spending is split into two categories, residential and non-residential. A closer look reveals a big slowdown in non-residential construction. This tells me that businesses reliant on providing services to construction companies will begin to contract. This should worry anyone who believes in the skyscraper effect. The theory was put forth by a British economist named Andrew Lawrence in 1999. It has been refined over the years by Dr. Mark Thornton. Dr. Thornton has a book named, “The Skyscraper Curse” which you can read for free on Mises.org. I’ve not read it but I’ve listened to several of Mark’s interviews and read a few of his articles on the subject. These two stand out to me in particular; Skyscrapers and Business Cycles and this interview with the Mises Institute. The takeaway, when the construction of new skyscrapers stops, economic hardship is not far behind.
The Federal Reserve posted new data for the assets and liabilities of commercial banks in the US on Friday. The decline of commercial and industrial loans continues while non-commercial loans and leases saw a small increase.
It looks like the economy is running out of steam. How will the economy continue its expansion phase without new loans and business expansion? Where will new growth come from? Meanwhile, deposits at banks continue to run above trend.
Consumers are now sitting on a stockpile of cash in the bank. Ironically, the banks don’t want it. They’ve been furiously sending it back to the Fed in hopes of achieving any sort of return. Even if that return is 0.05%
Earlier this year, New York Fed President John Williams had indicated that the repo markets were working as expected. The Fed has spilled liquidity into the banks, now the Fed is mopping up the excess through these facilities.
Finally, I wanted to take a quick look at interest rates.
The 10-year minus the 2-year treasury is still in positive territory. The spread has come down sharply since the peak at the end of March.
Looking at the big picture, rates appear to be flatlining.
Typically, this is great news for investors. Flat/declining rates mean that investors should go long growth vs value stocks. Fixed income is also a good buy. Emerging markets and commodities would struggle. The trouble is that the rates at starting so low that they don’t have far to fall. This could be a very short rally for this trend.
