money and graphs

Weekly Market Comment: July 31, 2020

It was not a surprise to learn that the U.S. economy contracted by a record 32.9% annualized, the ugliest drop since 1947. The actual GDP contraction for 2020 when factoring in the other three quarters will be something far less dramatic (note: we aren’t fans of annualizing a short-term return or loss). Here is a chart of historic U.S. GDP by quarter:

chart of historic U.S. GDP by quarter

(New York Times)

One of the simplest ways to measure fear and expectations is automobile traffic. For us to revert to the level of fear we saw in March would require traffic to dramatically attenuate. Driving in mid- to late March felt like driving on Christmas Day.

When in doubt, gold

But there does seem to be a growing fear of abnormally hot inflation rates at some point in the future. This week gold broke through the peak of the last gold market. That last peak of $1,923/oz. in September of 2011 resulted in a massive stock market bubble in mining stocks, driven by the narrative that hitherto unprecedented central bank money printing would lead to hyperinflation. It never materialized, as inflation remained low and even went lower.

Today, a similar inflation narrative is at play but today’s gold bullion surge has more to do with the U.S. dollar falling in value. The Fed keeping policy accommodative this week (they kept rates unchanged) helped keep the USD weak.

market chart
(source: MarketWatch)

For what it’s worth, UBS predicts bullion will hit $2,000 by the end of the summer while Bank of America is sticking with the call it made last April of gold hitting $3,000 over the next 18 months. Remember, these are predictions. As Yogi Berra used to say, “It’s tough to make predictions, especially about the future.”

Another factor worth mentioning are negative real interest rates for U.S. Treasuries across the board. For example, the U.S. 5 year Treasury yields 0.23% these days. If inflation, which ran at 1.81% last year, drops to 0.62% as predicted by Statista, the real yield will be -0.39% (0.23%-0.62%). If you own an investment that loses money net of inflation, perhaps you might not want to own it anymore or perhaps you’ll want to invest in some gold to help off-set the bleeding?

What are U.S. politicians smoking?

Marijuana stocks jumped on Tuesday on what one fund manager said was the market pricing in a Biden victory. Biden is on record of calling for federal legalization.

In Congress, politicians on both sides of the isle paraded and beat up on America’s tech leaders, the most prolific contributors to the US economy around. At the same time Congress decries the power of Silicon Valley it is decrying the growing clout of Chinese technology firms. It can’t have it both ways, can it?

Silicon Valley probably does need better regulation and policing and criticizing them when they make mistakes is valid. But let’s not go too far in demonizing them. Besides, recent earnings from Apple, Facebook and Amazon goes to show just how popular and essential their services (often free) are to the average consumer.

Noteworthy links:

Musings Beyond The Markets

Is the new cliché “stand up for what you truly believe!” necessarily good advice? After all, a lot of people believe a lot of crazy things.

Far better advice would be to “stand up for what is right” or for what is “good”.

Similarly, it has become laudable to “be yourself”. That’s great if you are a high-quality person, which probably involves a mix of virtue, ethics, compassion, work ethic, respect, patience, knowledge, curiosity, humility and other possible traits.  People who lack such qualities would be better served trying to be like the people who possess them.  

In other words, strive to “be a better version of yourself.”

Word of the Week

hitherto (adv.) – until now or until the point in time under discussion. “Towering genius disdains a beaten path. It seeks regions hitherto unexplored.” – Abraham Lincoln

The TSX Composite rose 1% while the S&P 500 gained 1.7%.

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