Thursday, June 4, 2020

Beyond Surreal

In the middle of March, just as we were beginning the lockdown of the American economy, I wrote a blog post entitled "Surreal Is Our New Reality".

Here are a few excerpts from that post.
Surreal is our new reality. All sporting events cancelled. Schools closed. Cruise lines shut down. Air travel at a near standstill. Restaurants and bars shut down. Shopping malls closed. Millions trying to work from home. Millions of others suddenly out of work.
I have to believe that we will soon experience unemployment rates that will exceed anything that most of us have seen in our lifetimes.
Over $12 trillion of stock market value has been wiped out in less than a month in the United States alone. Global values have taken somewhere near a $25 trillion hit.
That value evaporated faster than in any stock market sell-off in history.

Since I wrote that post 42.6 million people have filed for unemployment in the United States.

However. despite that number of people going without a paycheck, personal income actually rose by 10.5% for the month of April. That is the largest monthly increase in history.

To put that in context, here are the monthly changes in personal income since January, 2019.

Personal income increased 3.7% during the entire calendar year of 2019 in the middle of an economic boom. It increased 10.5% in April, 2020 in the midst of an economic lockdown when over 20 million lost their jobs during that single month.

This is not surreal---it is beyond surreal.
How is this possible?

It is a result of government benefit payments made to individuals during the month in the form of Covid-19 relief payments and additional unemployment benefits. All in all, government payments to individuals increased by 90% during the month.

In addition, consumer spending dropped 13.6% for the month since there were not a lot of places open where people could spend their money.

Combining the increase in personal income and the decrease in consumer spending resulted in the personal savings rate in April surging to another record----33%.

U.S. Personal Savings Rate

What about the stock market that was flat on its back in the middle of March and had seen the fastest evaporation of value in history?

The NASDAQ 100 which comprises a large number of familiar names in the modern economy such as Alphabet (Google), Apple, Amazon, Starbucks and Tesla is up 38% from its March lows.

It is up over 10% since the beginning of the year.

The NASDAQ 100 actually hit an all-time high on Thursday morning at 9,741.91 before retreating to close at 9,629.66 on June 4.

NASDAQ 100 Index

The Dow Jones Industrial Average is up 41% from the lows in March.

It is higher today than it was one year ago.

Dow Jones Industrial Average 

All of this in the midst of the largest economic contraction and unemployment numbers since the Great Depression.

It is hard to explain other than pointing to those federal government dollars and an accommodative Federal Reserve policy that has supported all of it. Never has so much money been printed and thrown at a problem. 

This is not surreal---it is beyond surreal.

The question is where does reality take us?

A case can be made that with the personal income gains, the personal savings that was put away and the stock market surge, the economy could come roaring back if the Covid-19 fears ease.

The case can be also be made that all of this is a mirage and any building blocks for economic recovery are built on a foundation of shifting sands.

The recent stock markets gains in the face of the riots in America's cities suggests that Wall Street believes that most Covid-19 fears are behind us.

One fact supporting that view is the news today that there has not been but one Covid-19 case traced to the massive crowds at the Lake of the Ozarks over Memorial Day weekend. There has been one case identified who was in these crowds but he appears to have been infected before attending the Ozarks weekend events.

When this picture was circulating many were stating that we were going to see an explosion of cases in the next 7-10 days.

Many are expressing similar concerns of what may come out of the masses of protestors and rioters who have taken to the streets in recent days. This is of particular concern since a lot of these crowds have been in urban areas that have seen the highest Covid-19 infection rates.

Has a whole new wave of Covid-19 cases just been seeded in those crowds?

A crowd in New York's Times Square.

Protestors in Lafayette Park near The White House.

Demonstrators in downtown Los Angeles.

Protestors in Portland.

Marching in New Orleans.

We will know more in a couple of weeks.

Will all of this result in new lockdowns and further economic destruction?

Or will the protests and riots mark the end of the Covid-19 nightmare we have been living through since mid-March? How ironic would that be?

Whichever way it goes in all of this it will not be surreal---everything is beyond surreal right now.

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