The U.S. stock market surged on Friday because of late news about Gilead Sciences’ (NASDAQ: GILD) promising coronavirus treatment, remdesivir. Is the market’s response warranted?
One economist said Friday that the stock market already considers 2020 to be economic toast. It is now pricing in economic recovery for 2021, but I want to ask if it has yet priced in the economic failure of 2020?
To see if the stock market is sniffing glue or breathing fresh air, look at what is already in the pipeline economically and what has not entered the pipe yet but certainly will soon.
If you think the market has new room to roar, consider how winded this rally looks. The Dow has traded along or below a ceiling of 24,000 points for five consecutive trading days. With news of a promising treatment for coronavirus, the Dow did spike 264 points above that right at the close on Friday, but is hope of a COVID-19 cure going to keep pushing the market up, or is it a one-off for the algorithms?
Consider, also, how extraordinary the Fed’s effort was, compared to any time in history, just to get a bear-market rally to happen:
That’s more Fed muscle than we’ve ever seen just to lift the dead bull halfway from its fall, even though all kinds of twinkly wires filled with algorithms spark to every Fed word. They are rigged to game the market up by tricking each other, and they reprogram themselves to whatever works. The algos take all headlines that are routed as inputs to their database as a fact set at face value.
So a coronacure headline uploads during a high-amperage Fed feed, and the market levitates; but the algos don’t think through the facts. They don’t make conjectures or deductions. There’s no deep understanding of reality in their wired world.
As a result, we may soon have a market so fake that bankrupt companies are traded as empty shell corporations on an electronic game board at a trillion dollars a nanosecond.
All of which means you can no longer take the stock market as a barometer of where the economy is headed. Welcome to the Wonderland Matrix. I wouldn’t bet on the stock market’s recovery, much less the economy’s.
The economy is all real-life stuff, and there’s a lot of seriously odorous effluent already in the economic pipeline.
We already have unemployment of about 15% –the worst since the Great Depression. Granted, it’s likely temporary, but it’s also still rising. While it has been the fastest rate of rise in history, its increase has actually been slowed by the government’s inability to process applications. So, we know a backlog of additional unemployment is already pouring down the pipe.
Let’s get real about this problem like Charlie Munger , Warren Buffett’s partner:
This will cause us [Berkshire Hathaway] to shutter some businesses…. It’s quite possible that never again — not again in a long time — will we have a level of employment again like we just lost. We may never get that back for all practical purposes….
We also have almost three-quarters of a million confirmed coronavirus cases in the U.S. and are climbing rapidly. Even if Gilead’s treatment for coronavirus proves to be all that and gets fast tracked, look at how quickly the pandemic spread in a month’s time even under extreme containment efforts.
We’ve seen consumer sentiment fall off a cliff, and many economists said that was the glue holding the economy together before the coronacrisis. Sentiment could bounce right back if everyone is re-employed in a month or two, but this coronavirus treatment has a lot of production and distribution pipeline to travel to get to us, even if approved today. Sentiment will keep dropping.
We were already three years into a Retail Apocalypse before the coronavirus hit. Are those brick-and-mortar stores that remained as marginal going to re-open when they already struggled to survive? Are marginal malls going to return to business? If they close, what remaining stores do they take out? Restaurants run on thin margins as it is. With fewer returning stores, there will be fewer shoppers, so fewer returning restaurants.
Will people return to hotels and airplanes and cruise ships anytime soon? If no, then fewer jobs will be returning there, too.
The unemployment rate could come down quickly with a cure for COVID-19, but it will take years to return to the level it sustained when it gave America a paltry 2% GDP growth rate before coronavirus. Now many banks are saying we’ll have to recover from a -20% GDP growth rate.
Some local governments are now asking that all summer events be cancelled as a precaution. That’s another full quarter of planned downturn after the present quarter. Even if Gilead’s new treatment rapidly clears all studies, it cannot be approved in time to save summer. The loss of summer employment and economic activity hasn’t even entered the sewer pipe yet.
Massive local and state government tax losses will force governments to make permanent layoffs. They don’t have free Fed funds like the federal government.
Defaulting consumer debt, defaulting home mortgages, defaulting commercial mortgages. That slough of sludge hasn’t even entered the pipe yet, but it certainly will. It takes 90 days for loans to enter “default.” Then credit ratings get downgraded, and it takes a lot of time to rebuild credit once you’ve lost it. In a credit-dependent world, that means diminished economic activity for a long time.
Then there will come the flow of defaulting banks into the pipeline as they choke on all the above defaults. What happens when the first bad bank like Deutsche Bank–one of the world’s largest and oldest–goes under? It was already on death row for years due to problems it created for itself.
Deutsche Bank is now practically a penny stock, and the recent bear-market rally didn’t help it. How will it raise capital to cover loan defaults with such a reputation for money laundering and so many years of decline? If not Deutsche, there are plenty of other black swans flying over the horizon like Messerschmitts .
What about Carmageddon? Detroit has been misfiring for years. Are presently unemployed people going to take out a big loan to slam it down on a new Ford or Chev as soon as a coronavirus cure gets them back to work? I’m thinking they are going to cling to any credit they have left for months to come in case the emergency isn’t over, and they may need to keep feeding themselves off of any credit they have until they make up all their back payments.
How can anyone claim that a stock market that is only down about 15% from its formerly overvalued level has come close to pricing in all that we know is in the pipeline for 2020?