Given the recent gains in the stock market over the last month or so, it is clear that stock market participants believe that the country will be back on its feet in no time. Over in the fixed income space, it is another story entirely. The question is which market will be right?

 

The betting in the bond market is that U.S. interest rates are not only going to zero, but there is a high probability that America, like Europe and Japan, will soon see negative rates, as early as next year. Six months ago, that was unthinkable.

 

On Wednesday, Fed Chairman Jerome Powell gave a virtual speech at the Peterson Institute of International Economics. He said, "The FOMC committee's view on negative rates really has not changed. That is not something that we're looking at." But he did not rule out that option in the future if the economy worsened. The bond market thinks it will.

 

He also warned that "the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems." That is Fed-speak for don't look for a recovery any time soon, and you may see a lot more bankruptcies. 

 

Negative interest rates are considered a tool that has failed the test of time. Both Europe and Japan have tried them, and while negative interest rates have staved off a severe recession up until now, they are a bad choice. The current opinion is that they should be used "when everything else fails." Unfortunately, that message has not dented the conviction of our real estate speculator-cum-president.

 

 "I disagree with him on one thing now and that's negative interest rates," remarked President Trump after Powell's speech. In Trump's mind, negative rates are a "gift." I understand where the president is coming from.

 

As a real estate magnate, one of the critical variables in any deal is interest rates. How much you can borrow at the lowest rate possible in order to sell sometime in the future at hopefully appreciated prices. While Trump has had a spotty record in doing so, his most successful deals depended on buying at the right price and borrowing at the lowest interest rates.

 

Trump looks at the U.S. economy in the same way, in my opinion. Even the naivest businessman recognizes that the U.S. economy is not a real estate transaction. In an economy, there are always three or four parties to such a transaction — the lender, seller, borrower, and buyer. If rates are too low the lender loses money. If the sale price is too low, the seller gets hurt. The borrower/buyer may make out but maybe not in the long run. Despite efforts from his cabinet, advisors, etc., Trump just doesn't get it and he won't be swayed from his penchant for zero interest rates.

 

In any case, the bond market believes the economy may be moving into dire straits, which is not the message we are receiving from the White House, nor many analysts on Wall Street. Presently, a debate rages on whether the economy will take on a "V"-shaped recovery, like the stock market, or instead, recover in a less rapid "U"-shaped fashion. In either case, the expectations are that it will recover, that COVID-19 is disappearing, and things will be back to normal by this summer, if we open the economy back up now.

 

That's the message from the president, much of the Republican leadership, and their constituency, both on Wall Street, as well as Main Street. Can one blame them? Business owners are terrified with nightmares of imminent bankruptcy. Most will do anything, including risking the health and possible lives of their employees, to open back up.

 

Politically, Trump's standings in the polls are dropping dramatically. Few, if any, presidents have been re-elected when unemployment and the economy are this weak.  Come to think of it, "weak" would be a great leap forward compared to the reality.

 

So, who has it wrong?  The stock jockeys, or the bond vigilantes? Maybe they both do. We could see virus cases drop but continue to linger with flare-ups in the fall. That would stretch out the "U" recovery, but it wouldn't knock us back into another Great Depression. The stock market, on the other hand, could come back down to earth at the same time, reflecting a more reasonable valuation of the economic circumstances.

 

In any case, last week, I warned readers to expect a correction "this week or next." It appears that the stock slide has begun. Throughout the remainder of May and into June, the markets could be unsettled with a bias to the downside. The decline, however, won't be in a straight line. Let's target 2,660 on the S&P 500 Index as a first stop. That would bring us to around a 9.5 percent decline from the recent highs. While that plays out, that should give investors enough time to ascertain whether the economic re-opening exercise that is underway will be a success or failure. Stay tuned.

 

If there was ever a time to flee to safety, the Pandemic of 2020 is a great excuse. Stocks tumbled, bounced back, tumbled again. The bond and credit markets have been in disarray. Yet, few have even mentioned the precious metals market as a place to be.

 

Even writing about gold in this age of Zooming, digital breakthroughs, 5G technology, and the like, seems anarchistic. The precious metal has been relegated to an obscure corner along with conspiracy theories, old warnings, and a small group of goldbugs who trot out "end of the world" warnings on down days in the stock markets.

 

You usually see these ads to buy gold every time stocks fall 10 percent or more. I imagine they do a good business, although by the time you get around to buying that coin or other investment, gold has already spiked so high that you are left holding the bag (or coin, as it were). I mean really, the theory that you should hold some of the metal just in case the world ends does not make any sense, unless you have it buried in your back yard.

 

If society did collapse, that gold you were holding in some bank vault would be inaccessible. The coins under your pillow would be stolen or worse since there would be no law and order anymore. Besides, there are better safety trades — U.S. Treasuries bonds and the U.S. dollar come to mind.

 

And gold is costly to hold. It pays no dividend, but there are charges to safely secure it, hold it in a vault, or whatever. These costs are based on the prevailing interest rates at the time.

 

The other argument is that gold works well in inflationary environments. Have you looked at the rate of inflation, lately? It has been around 2.5 percent, or lower, during the last decade or more and seems to be falling further in this recession. Plus, in this pandemic, the demand for gold jewelry by the global retail trade has also fallen off. That should be no surprise since demand for most luxury goods have been hit hard by COVID-19.

 

I believe I have outlined the bear case in gold fairly well. But riddle me this: gold has gained 25 percent since I last suggested that readers keep 2-5 percent of their assets in this precious metal?

 

That was back on Feb. 15, 2018. In the meantime, I took a look at the performance of the stock market during that same period. The S&P 500 Index, as of today, is up 1.79 percent in comparison.

 

Yes, despite all the naysayers and the ridicule that advocates of gold have endured throughout the past two years, gold seems to have been the place to be. Why, therefore, were all these so-smart investment advisors wrong? For one thing, they have little to no long-term investment experience. Most of them were in diapers back in the seventies and eighties when inflation was a very real and dangerous variable in the investment world.

 

The second, and even more important reason, is that they are having difficulty understanding the new world of practically zero interest rates, plus the impact of a tsunami of global monetary stimulus. The best they can do is watch the results of these trends play out and react accordingly.

 

Given the global financial environment, therefore, where does gold fit in? While inflation is dropping, and the dollar keeps climbing, the bond market vigilantes are betting that here in the United States interest rates are heading toward negative rates of return. For gold holders, that means the cost of holding an ounce of gold is expected to drop to at least zero, if not lower.

 

At the same time, as government deficits balloon, gross domestic product declines, and tax revenues fall, the need to keep interest rates abnormally low (just to manage the interest payments) becomes extremely important. In an environment like that, how long will it be before investors figure out that the dollar is vulnerable to weakness?

 

There is an inverse relationship between the U.S. dollar and the price of gold. Right now, however, because COVID-19 continues to rage throughout our country and the world, investors are buying both the greenback and gold. Once the fear subsides, and the pandemic hopefully subsides, the country could be left with a long, protracted recession, huge debt, and a weakening currency. In the past, when this happened in other countries and regions, the only answer for governments was to inflate their way out of this kind of predicament.

 

Whether that will happen here in the U.S., as well as around the world, is just one possibility among many. But the mere thought that this scenario could play out is enough to keep gold interesting. If I were you, I would hold on to that allocation I recommended.

 

If ever one needed an example of the above saying, today's market would prove that point. Friday's unemployment figure for the month of April revealed that 20.3 million Americans are out of work, bringing the unemployment rate to 14.7 percent. The stock market gained more than one percent on the news.

 

While new cases of COVID-19 are reported and deaths multiply with no cure or vaccine in sight, the NASDAQ turned positive for the year. Corporate earnings have been abysmal and future guidance nonexistent for most companies, but their stocks went up anyway. How can this be, you might ask?

 

As I have said before, the stock market is a forward-looking mechanism. As such, investors are looking beyond this troubling period and anticipating that earnings, and ultimately the economy, will recover. At that point, we could see a typical "sell on the good news" event, but not now.

 

The economic data gave us some additional information on the victims of the pandemic. For one thing, the jobless rate would have been higher (by about another five percentage points), if workers had not classified themselves as "absent from work" instead of unemployed. Still, it was the largest, single monthly decline since record-keeping began back in 1948.

 

The leisure and hospitality industries led the declines, although every industry category experienced job losses. The majority of jobs lost were in low-paying areas indicating that wage earners at the bottom of the scale are taking the brunt of the virus fallout. It also explains why the average hourly wage gain suddenly increased by 4.7 percent, since, with so many low wage earners gone, those with higher wages predominate in the survey.

 

None of that mattered to the markets. From a financial point of view, the actions of the central bank in pouring trillions of new dollars into the financial system are why stocks continue to run. The Fed has all but nationalized the country's debt markets by buying or at least guaranteeing that they will be the buyer of last resort.

 

This week, I suspect that many investors, who tend to follow the headlines in making investment decisions (big mistake), and who sold during the recent downturn have been waiting for a chance to get back in on a re-test of those lows. threw in the towel. Those stock chasers are rushing back into the market now (and are probably late as usual).

 

One of the worries I have, however, is the overly large concentration of buying in a handful of mega stocks, especially the FANG names. The action is similar to the frenzied FOMO buying experienced at times when marijuana stocks or the meatless burger was "hot." I hope to see a broadening out of buying interest into more sectors and securities in order to feel more comfortable in the short-term.

 

Otherwise, like always, readers should soon expect to see some kind of corrective pattern descend upon the equity markets. We did have a 2-3 day sell off totaling about 4 percent from the highs a little over a week ago. The same thing could happen next week or the week after. That is the price of doing business in the stock market. The point is that until new data can show conclusively that the COVID-19 virus is on the waning, there will be that on-going risk of a 10 percent pullback. So, what?

 

During the last week or two, the federal government has done an about face concerning the impact of the ongoing coronavirus pandemic. From the nightly exhortations to social distance, work at home, and expect more deaths, the message has now switched to go back to work, re-open the economy and, oh, about those deaths, expect even more.

 

The Trump White House has "officially" left it up to the governors of the states to set a timeline for reopening their economies, since it is illegal to do anything else. The guidelines advise that each state should monitor the number of new cases. Only when they see hard evidence that those cases have not only plateaued but started to descend, then it would be safe to consider a gradual re-opening of the economy.

 

However, that is not what is happening. Informally, the president is doing everything in his power to convince, cajole, and threaten states to reopen, regardless of the human toll. As such, the president has once again turned a national crisis into a partisan battle for supremacy.

 

As a result, many states (mostly with Republican governors beholden to the president) are ignoring the guidelines, even as coronavirus cases continue to increase in some of their states. And while state residents are supposed to continue to socially distance, wear masks and follow other guidelines, many are not only ignoring those restrictions but are actively protesting against them.

 

While large and small businesses alike lobby to open, the labor force is expected to toe the line and show up for work. If workers, afraid for their health, balk at these orders there will be hell to pay. Aside from the threat of being laid off permanently, the states and companies have other means at their disposal.

 

Technically, if the state governments, for example, no longer consider the pandemic as a reason to claim unemployment, two things could happen. Workers would be unable to file for unemployment. Companies could also suspend health insurance benefits at the same time. Cruel, but effective. In addition, there is an added benefit to the politicians. The unemployment rate would come down, because those workers who refused to go back to work would not be "officially" counted as unemployed and would be taken off the jobless rolls.

 

From the administration's point of view, with just six months left to the election, the economy needs be on the mend by then, and unemployment dropping. However, over the last several days, many areas of the country continue to experience both a rise in COVID-19 cases and a higher death count. Given those facts, the political and economic argument has necessarily had to change from "things are getting better, so re-open" to "sacrifices must be made just like in any war."

 

The issue for workers is that they are on the front line. Reported cases of virus-infected employees at various "essential" businesses such as Walmart, Amazon, and several meat processing plants throughout the country, make the danger all too apparent. What is worse, few of these establishments have done much, if anything, to attempt to safeguard returning workers from catching the virus.

 

What makes the situation even worse is the continued lack of testing throughout the country. Not only does that dilemma understate the number of cases/deaths attributed to COVID-19 but leaves workers completely at the mercy of whomever walks through their doors. This lack of testing has already led to multiple cases of the virus in some stores, plants, and other companies, especially where workers are packed together.

 

And yet, as the government ignores its own medical experts, and urges businesses and workers to return to work, is there any recourse? Out of work, worried about how to support their families, it appears laborers will be forced "to do," and maybe die, or at least get real sick as a result.

 

I suspect that if this scenario does play out, lawyers will be busy from here to eternity as individual employees and worker class action lawsuits proliferate. Of course, as a next step, the government could rule that companies in this situation would be held harmless. That sort of legislation is being discussed presently. If so, workers may have no recourse at all.

 

 

Despite the expectation that earnings this quarter and next were going to be a disappointment, stocks have been gaining. That is because results have not been as low as some analysts have projected. However, when is better than bad not good enough for investors?

 

It appears we have found out this week. It is a known fact that mega-cap, technology companies (the FANG stocks) have been leading the market throughout this rebound. This week, several of these companies reported and while the results, in some cases, have been stellar, (given the overwhelming economic negatives in the economy), others were simply "acceptable."

 

Two of the largest market darlings, Amazon and Apple, reported after the close on Thursday night. The verdict appears to have been disappointment, despite both companies accomplishing a mammoth task to produce the numbers they did.

 

But sometimes the market just needs an excuse to go up or down. I suspect that the FANG stocks are that excuse for traders to finally take some profits after an almost 20 percent uninterrupted series of gains. There could also be a couple of other factors that contributed to this week's decline.

 

For instance, we know that stocks discount future events. The market began to climb while we were all in the throes of lockdowns, stay-in-place orders and death counts. That's because the market was already looking beyond these events and discounting the future -- the re-opening of the economy. This week, more than 37 states announced plans to do just that. Good news, for sure, but news that the markets had already discounted, in my opinion.

 

What, you might ask, is the market discounting now? It could be the realization that this virus is not going away any time soon. The latest medical reports seem to indicate that COVID-19 could be with us for at least the next two years. If so, what impact will that have on the economy, on earnings, and on the labor force?

 

Those calculations, those "what-if" scenarios, are presently the grist of the stock market's mill. Then there are the elections, now only 6 months away. The poor handling of the pandemic has dented Donald Trump's chances for re-election. He knows that and so do the Democrats.

 

With so little time, and the knowledge that a recessionary economy usually spells doom for the incumbent, Trump needs to go on the offensive.

 

Blaming others for mistakes has always been part of his repertoire. Americans, you see, love to cast blame on anyone and everyone, as long as it is not themselves. Trump learned how to use that knowledge to his benefit. Who could be Trump's "go-to" whipping boy?

 

China. I expect to see a mounting crescendo of threats, accusations, and Chinese conspiracy theories erupt from the White House. After all, didn't COVID-19 originate in China?

 

What other excuse does a campaign in trouble really need?

 

We all know how two years of China-bashing impacted world markets. Trump's tweets sent markets up or down continuously. Economies slowed, tariffs were raised, and in the end, Trump bragged about a "Phase One" deal that was largely symbolic. By the way, that strategy did not work out too well for him in the mid-term elections.

 

Doing that again, combined with the real issue of an on-going pandemic, may be worth discounting now, or so the stock market seems to think. Last week, I said if the markets decided to head south, we could see a 5-10 percent correction. We have already logged in about 3 percent of that decline between Thursday and Friday's sell-off. I do not think that we are going to re-test the lows, however, unless the re-opening of America backfires and COVID-19 cases re-escalate.