A year into the pandemic and while some things have cleared up, markets' reaction functions seem sick. Is the US economy doing well or struggling? What does stimulus mean for gold? How does Bitcoin fit in? Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss the latest moves, the action to come, and the role of the Fed in everything.
Yohay Elam: US economic figures have been mixed lately. Jobless claims badly disappointed while retail sales were superb. What does this mean for markets?
Joseph Trevisani: The US initial claims numbers were disappointing this week and the revision was worse. Is the US recovering as equities seem to think or is it all stimulus anticipation?
Yohay Elam: Bad news for the economy is good news for stocks due to higher chances of stimulus?. And vice versa, strong retail sales are bad news as they imply less stimulus?
Joseph Trevisani: I think we can lay a good deal of the retail figure to the stimulus $600, but the continuation depends on the job market.
Valeria Bednarik: Yeah, sales were boosted by checks. The number was right for the wrong reasons. And today employment figures proved it. Markets should cheer bad numbers which imply more stimulus, but that's not the case today, as policymakers seem to be comfy at current levels of easing.
Yohay Elam: Retail sales also bounced from a low base. November and December were weak in the holiday season.
Joseph Trevisani: The sales burst may save a few stores but it's not an economic program. Neither really is another stimulus.
Valeria Bednarik: Minutes showed no rush to add, neither to trim QE. Agreed, Joseph. The pandemic blows out plans.
Yohay Elam: As the Fed says, the path of the economy depends on the virus. And now on vaccines.
Joseph Trevisani: Interesting that the credit markets agree with equities...and that the Fed has permitted a modest increase in the 10-year...
Yohay Elam: I think the Fed sees an increase in yields as a sign of optimism. At least for now. Let's see what happens if stocks fall...The Powell Put will be tested.
Valeria Bednarik: I was thinking that, while the US and some dispersed countries are speeding up immunization, the distribution is too uneven still. And to cover the world will take much longer than expected, even if the current vaccines are capable to deal with new strains. Things won't get better for major economies if developing ones are too behind. What's the fun of taking holidays and spend a couple of weeks locked down? And restrictions are here to stay. The latest EU summit hinted at July as a probable date for easing restrictions.
Yohay Elam: Indeed, it's a globalized world.
Valeria Bednarik: UK PM Johnson talks and talks, but hey! still waiting for him to announce something on lifting measures.
Yohay Elam: February 22.
Joseph Trevisani: All the pandemic statistics here and elsewhere as dropping fast. The "Vid' as we call it in my family is behaving in a normal distribution for this type of virus. The decline in cases hospitalizations, etc, in the US, is not due to the vaccine as its use is still too limited, though advancing fast advancing.
Valeria Bednarik: So, on February 22 I can travel to the UK and not spend two weeks in quarantine? guess the answer is no.
Yohay Elam: No, but Boris will announce easing. Also in Israel, they're moving slowly.
Joseph Trevisani: I don't think there are any strict lockdowns in the US. California lifted its about 2 weeks ago.
Valeria Bednarik: Too slowly. Stretching it into summer.
Joseph Trevisani: It wasn't popular. The Governor is facing a recall election.
Yohay Elam: The British variant is almost a new disease. In places where it is common, the UK, Portugal, Israel, it caused havoc. Fears of the variant are delaying a return to normal travel.
Valeria Bednarik: Anyway! Wall Street in sell-off mode right now. And the greenback modestly recovering on risk-off?
Joseph Trevisani: Yes, but considering the equity level, it's minor. The 10-year Treasury is back above 1.3%. My guess is it has another 40 or 50 basis points before the Fed might get worried it was choking off recovery.
Valeria Bednarik: And the dollar gave up some of its recent gains, but for the most, major pairs remain stuck to familiar levels. The pound outstands in this picture, steadily advancing. Guess that after we left Brexit "behind" there are few reasons to sell it.
Joseph Trevisani: I don't think the dollar strength is risk-off anymore. I think it's interest rates...
Yohay Elam: There should be a more significant correction in stocks before the next move higher. That would be seen as healthy by the Fed and investors.
Valeria Bednarik: Yeah, indeed highly correlated.
Joseph Trevisani: Or perhaps... Brexit will benefit the UK economy.
Yohay Elam: Vaccines benefit the UK economy. The covid crisis overshadows Brexit.
Joseph Trevisani: Haha permit me a bit...
Yohay Elam: UK cases are falling sharply = vaccines + lockdown.
Valeria Bednarik: Brexit is an old story. yeah, covid developments seem more relevant.
Yohay Elam: EUR/GBP is tumbling. UK vaccines > EU vaccines.
Valeria Bednarik: Well, there's no real reason for the EUR to strengthen. It only advances when the dollar is down.
Joseph Trevisani: Cases are falling just as sharply here without lockdowns and probably fewer vaccinations y percentage, though I am not certain of that. The market has flirted with a return to economic currency comparison, but it has not made the full transition.
Yohay Elam: I think there are too many uncertainties about the disease, its variants, vaccines, stimulus correlations are broken all the time.
Valeria Bednarik: Not as long as worldwide policymakers remind us it's all about the pandemic.
Joseph Trevisani: Agreed... but the various waves have behaved in a very similar and well-established fashion. Sans vaccines. And the politicization of the pandemic has made it triply difficult to separate science and fact from the public health tactics.
Valeria Bednarik: Uncertainty once came from the US-China trade war, Brexit, and a long list I don't want to make. Now is the pandemic. Wonder what it would be a market without uncertainty.
Joseph Trevisani: Boring.
Yohay Elam: Exactly.
Valeria Bednarik: lol.
Yohay Elam: Gold is a good example of changing narratives and uncertainty. The stimulus is good for gold because governments are printing more money. The stimulus is bad for gold as it pushes yields higher and gold has no yield.
Joseph Trevisani: Do you think the overwhelming interest in cryptos is a passing fad or something more substantial?
Yohay Elam: We still cannot pay taxes in crypto. And I don´t see why a business would accept payments in such a volatile asset but prices can go higher and higher FOMO.
Joseph Trevisani: It is true, the volatility makes it hard to establish an economic value. FOMO?
Yohay Elam: Fear of missing out.
Joseph Trevisani: Forgive me. My education is last century. Ah thanks
Yohay Elam: I want to buy crypto just because I think someone else will buy it. Decentralized Ponzi scheme.
Joseph Trevisani: That seems to be the rationale.
Valeria Bednarik: Totally agreeing with Yohay. there's a long way ahead before cryptos become a common exchange coin. Until then, is just speculation and not an educated one.
Yohay Elam: Blockchain will likely have a growing role in logistics, international trade, and perhaps also "vaccination passports." So, the firms that make and sell the technology have a fundamental value. But not cryptocurrencies.
Joseph Trevisani: I have been looking for a fundamental angle on cryptos. So far it's difficult.
Yohay Elam: But if Tesla, BNY Mellon, Morgan Stanley, and Mastercard are all showing growing interest, then others could also jump in.
Valeria Bednarik: There's some sort of safe-haven behavior Joseph if you want to link it to something, but still a weak correlation
Joseph Trevisani: The acceptance of bitcoin in an economic role will help stabilize its value. Val, yes, I have considered that, and it's true. It's sort of the Armageddon angle on gold.
Yohay Elam: The end of the world will have to wait.
Valeria Bednarik: You think so?
Joseph Trevisani: I know, but there is always science fictión.
Yohay Elam: Speaking about doomsday scenarios, it seems the classic safe-havens are out of order: bonds, gold, yen.
Valeria Bednarik: Yeah, as said earlier, is yields leading the greenback and pretty much nothing else.
Yohay Elam: That Mayan end of the world, from back in 2012.
Valeria Bednarik: Ha!
Joseph Trevisani: We have cults here that are always predicting the end. I wrote a paper in college on fashion in the year 999 to predict the end. It had a good run in Europe that year. Bonds are interesting, the incessant central bank intervention since the financial crisis has largely destroyed the market's reactive ability.
Valeria Bednarik: Yeah, but since it has been with us for over a decade, a turn-around on this behavior seems unlikely.
Joseph Trevisani: Totally agreed... it's a bureaucratic iron rule, once power is gained over something it is never surrendered.
Yohay Elam: The Fed placed a bottom under stock markets. It happened in March and then with the policy review in the summer, the bank officially allows inflation to overheat.
Joseph Trevisani: We have seen the result, any time the economy twitches the central banks get involved.
Yohay Elam: The Fed will keep markets buoyant until full employment is reached.
Valeria Bednarik: At this point, policymakers are wishing it overheats.
Yohay Elam: Yeah, they'll believe inflation only when they see it.
Joseph Trevisani: Yes, the arena for free economic action is shrinking and shrinking.
Yohay Elam: Voters want protection.
Joseph Trevisani: No... they will just call it something else.
Yohay Elam: Everywhere.
Joseph Trevisani: Too much protection is stultification.
Valeria Bednarik: We are a bit doom and gloom today, I see... something optimistic to share?
Yohay Elam: And too much jungle capitalism is also nasty. I think we're in the process of swinging from one extreme to another. In Argentina, former President Carlos Menem has recently died. He went to one extreme. Kirschner went to the other.
Joseph Trevisani: Haha yes. sorry... I think the spring and especially summer will see a strong recovery here in the US, almost despite the government.
Yohay Elam: Israel vaccine data is more and more encouraging with every day that passes. Here's a dose of optimism. Percent of the elderly among the critically ill is falling as more of them get vaccinated.
Valeria Bednarik: Indeed, that's good news. Better weather ahead in the northern hemisphere and cases dropping. Now another challenge: A piece of good news for markets?
Yohay Elam: February 26 is the date when Democrats plan to pass the stimulus bill. Mid-March is the next Fed meeting. Markets money.
Joseph Trevisani: Here is the US graph...The vid From the New York Times.
Yohay Elam: Great news indeed, I've been following that closely.
Valeria Bednarik: Lol Yohay, you summarized it perfectly.
Joseph Trevisani: Indeed, it is good news.
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