iftttwall

One month ago, the state of Missouri became the first in the nation to file a lawsuit against China over their role in the coronavirus pandemic. Also named in the suit were the Communist Party of China, the government of Wuhan City, and the Wuhan Institute of Virology, along with the Chinese Academy of Sciences. Filed in late April in the Eastern District of Missouri, Missouri Attorney General Eric Schmitt accused China of knowing that “COVID-19 was dangerous and capable of causing a pandemic, yet slowly acted, proverbially put their head in the sand, and/or covered it up in their own economic self-interest.”

Yet in a world where China has likewise accused the US of creating the coronavirus, why where there no lawsuits seeking similar damages from the US? Well, it now has: according to the Post, China’s legislature has proposed drafting a sovereign immunity law that would allow Chinese citizens to pursue legal actions against the United States over the coronavirus pandemic.

Citing China’s state-run media, the report said the Communist Party is seeking to amend an existing law that would allow legal action against “other countries.”

The Chinese lawmaker leading the efforts, Ma Yide, told the Global Times that the law would “ensure Chinese citizens’ and companies’ rights to sue the Us over its blame game and cover-up of information during the pandemic.” Ma said one of the things Chinese citizens should be able to sue over is the claim from the Chinese Foreign Ministry that the US military brought the coronavirus to China.

“Many believe that U.S. soldiers brought the epidemic to Wuhan. Others believe that the U.S. has hidden key information, which led to the global health crisis. Why can’t Chinese citizens and companies sue the U.S. government?” Ma told Chinese media.

If the proposal should pass, Chinese residents could move ahead with lawsuits that are beginning to surface.

Liang Xuguang, a lawyer from Wuhan where the first cases were reported in late December, has sued the US government, accusing it of spreading misinformation, the report said.

Liang wants the US to come clean on the number of “influenza deaths” caused by the coronavirus.

The proposal set forth in China’s National People’s Congress which concluded today, would naturally be in retaliation for lawsuits brought against China and the ruling Communist Party by several US states and a number of countries around the world.

The suits, one of which was noted above, accuse China of silencing doctors who were raising alarms that the coronavirus was a contagious respiratory disease in the early days of the outbreak and of pressuring foreign countries not to impose travel restrictions on Chinese nationals. They also claim China used its influence with the World Health Organization to downplay the severity of the outbreak.

In addition to Missouri, Mississippi has also sued the Chinese Communist Party, while Texas, New York and Florida have taken legal action against China.

Today’s stock action was dominated by a dramatic shift in Small Caps vs mega-cap tech as the US Cash open sparked a puke in the former and a panic-bid in the latter…but that all snapped when President Trump confirmed a China news conference tomorrow and commented in more detail on his intent to crack down on social media giants…

A serious shift in the recent regime…

Source: Bloomberg

Sell Small Caps Mortimer, Sell!…

On the week, Trannies are still best and Nasdaq the laggard…

 

Internet stocks v-shaped-recovered from yesterday’s opening drop…

 

FANG Stocks surged…

Source: Bloomberg

TWTR took a beating in the pre-open but was panic-bid as cash markets roused…

Treasury yields were mixed once again in a narrow range relative to stocks’ chaos (30Y +3bps, 2Y -1bps)

Source: Bloomberg

Steepening the yield curve back near the highest since Oct 2017…

Source: Bloomberg

The Dollar continued its recent demise to two-month lows…

Source: Bloomberg

…tumbling back below a key technical level (100DMA)…

Source: Bloomberg

Which helped lift oil prices (despite a huge crude build)

But the dollar doldrums didn’t help gold…

And silver outperformed again, pushing its ratio to gold lower still…

Source: Bloomberg

Bitcoin rallied further (chatter of Hong Kong capital flight)…

Source: Bloomberg

Hong Kong Dollar forwards are pricing in a serious devaluation in the currency (capital flight)…

Source: Bloomberg

Finally, we note that the chaos under the surface continues in quant-factor-land, with momentum underperforming value by the most since September…

Source: Bloomberg

As the recent surge in momo relative to value catches down to bond market reality…

Source: Bloomberg

Turn The Machines back on!!

There are no baseball, basketball, golf, equestrian, lacrosse, auto racing, and or other sporting events at the moment. Major League Baseball could restart in July, but there is still too much uncertainty. Football, if the season starts on time, won’t be seen until late August, and the 145th Preakness Stakes won’t be seen until October. 

But DraftKings, an American daily fantasy sports betting website, which recently went public, has seen its stock soar 273% since lockdowns began and all sporting events canceled. 

Howard Lindzon, the co-founder of StockTwits, tweeted: “The chart of the day is Draft Kings, which has quadrupled to $12 billion now since it reverses merged into a shell and then changed ticker to $DKNG…unbelievable outcome considering the long regulated road and the fact that NO SPORTS !? Face with tears of joy.”

The chart of the day is Draft Kings which has quadrupled to $12 billion now since it reverse merged into a shell and then changed ticker to $DKNG…unbelievable outcome considering the long regulated road and the fact that NO SPORTS !?😂 #amazinghttps://t.co/msvuJHt6ff pic.twitter.com/XbeB41oX9h

— Bearista (@howardlindzon) May 28, 2020

The sports betting site has a market cap ($12 billion) larger than Wynn Resorts and American Airlines.

DraftKings CEO Jason Robins recently told CNN Business: “We have a good story that resonates with investors for the long-term.”

Robins admitted that users placing bets on sporting events are down this year due to virus-related lockdowns and social distancing — but he said players have been betting on other types of events, such as Russian table tennis and esports. 

Which explains why the stock has risen 273% as all major sporting events across the world have been canceled? 

JPMorgan CEO Jamie Dimon beautifully summed up the latest V-shaped recovery in markets on Wednesday, indicating that, “Fed liquidity is propping up stocks, all asset classes.” 

And with the Fed blasting a monetary cannon at the stock market, there’s also Robinhood day traders buying every dip possible of the crappiest stocks.   

None of this seems sustainable… 

Authored by James Rickards via The Daily Reckoning,

The novel coronavirus has dominated the headlines for the past two months, as it should. There’s no bigger story in the world. And besides its human toll, I believe we’ll be dealing with its economic fallout for years.

But let’s not forget, this is an election year. Today I want to tie together the pandemic, the economy and the election.

What we are witnessing is a cascade of complex systems.

A pandemic is one complex dynamic system. The economy is another. A political season is still another.

Each complex system is highly unpredictable and capable of throwing out shocks (called “emergent properties” by physicists).

These three dynamic systems could exist on their own without affecting each other. But that’s not the case today.

A contagious virus, an unstable economy and a highly contested election are crashing into each other. Any one of these systems is difficult to model and predict. Collectively, it’s almost impossible.

All three systems go around in a circle affecting each other and being affected by each other. The pandemic has crashed the economy, and the economic collapse will affect the election. They all interact.

There’s no early end to this complex dynamic in sight.

There’s much that we don’t know about the pandemic and the political outcome. We know more about the economy because the specter of mass layoffs and business failure is already plain to see.

Even at that, we don’t know how long the economic distress will last and how long a recovery will take.

At this point, it’s fairly clear that the presidential election will feature Donald Trump versus Joe Biden.

There is some chance that Biden will stumble because of his cognitive disabilities, but it’s more likely the media will cover for him and he’ll be on the ballot on Election Day.

The principal factor in my election model this year was the probability of a recession before Election Day. No president seeking reelection to a second term has lost in the 20th or 21st centuries unless a recession occurred late in his first term.

Jimmy Carter and George H.W. Bush both lost their reelection bids, and both suffered recessions shortly before the election. Absent a recession late in a first term, the incumbent wins.

Until March, the odds of a recession before Election Day were less than 30% (many analysts set those odds even lower). This meant that Trump’s odds of winning were the reciprocal of 30%, which put the odds of winning at 70% (or higher).

And Trump’s odds would have likely improved by 2% per month. This means that if nothing changed, Trump would be an 86% favorite to win on Election Day.

Yet things did change.

Because of coronavirus, the odds of a recession switched to 100%. In theory, that would put the odds of Trump’s reelection at 0%. But Trump certainly has a better chance of reelection than zero. Basically, you have to set aside the rule book in this case.

This isn’t just a garden variety recession. It was deliberately imposed and accepted as a legitimate trade-off to prevent a massive public health crisis that could have overwhelmed the health care system.

I’m not going to get into a debate about whether it was necessary or not, but the point is it was a choice. It wasn’t because the economy suddenly collapsed on its own (although the economy was weaker than most people think it was).

So past comparisons don’t really hold up. This is a completely unprecedented situation.

But if you’re trying to forecast the election, how do you do it?

The best place to start the modeling process is to make the odds 50/50 (which really is just an educated starting place in the absence of better information).

That means Biden’s odds of winning are also 50% (for now).

In other words, the election has gone from being close to a sure thing for Trump to a coin toss.

Stock markets certainly have not had time seriously to contemplate President Biden and his pledges of higher taxes, open borders, the Green New Deal, late-term abortions and gun confiscations.

But that’s coming soon and is another huge headwind for markets.

So you can see how coronavirus, the economy and the election are all densely connected. Few would have imagined seven months ago where we’d be today. But here we are.

We still have nearly six months until the election. The best approach is to reserve judgment on what will happen six months from now.

Albert Edwards admits he is “perplexed.”

Writing in his latest Global Strategy report, the SocGen strategist admits that “until recently (ie the last few days), I had thought that the 35%+ rally in the S&P from its 23 March 2190 low would stall at around 2980 – the 62% Fibonacci Retracement level, as occurred in the previous two (2001 and 2008) bear markets. Hence, I was genuinely surprised to see the S&P climb above the technically important 2980 level, and yesterday power above its 200-day moving average.”

Instead, the S&P is now less than 10% from February’s all-time high, and with the US unemployment rate heading towards 20%, Edwards asks rhetorically: “At what point does the stark disconnect between Wall Street and Main Street become a political embarrassment for the Fed? Maybe never.”

Maybe never, but most likely soon: as Bank of America’s Michael Hartnett wrote last Friday, the absolute limit of bear market rallies in 1929, 1938, 1974 was a 61% rebound from lows (after an avg 49% drop), which would take the S&P500 to 3180 this rally, so another 120 points.

Edwards does not look that far back, however, and instead he reminds is that the rally from the March lows is similar to last year’s rally, which similarly was narrowly concentrated on the large cap ‘growth’ stocks aka the FAANGs (Facebook, Apple,  Amazon, Netflix and the stocks formerly known as Google, but now called Alphabet).

And while the bearish strategist offers a mea culpa, saying “I have been very wrong as I had expected to see a collapse in the FAANG stocks and ‘tech’ generally, as the recession exposed large parts of the tech universe as cyclical stocks masquerading as ‘growth’ stocks, … but how wrong I was, as the stay-at-home nature of this coronavirus-induced recession has instead given the FAANG and tech stocks a whole new impetus”, he advises his clients that he, too, has been here before, in the first half of 2008 to be specific.

Cast your minds back. The S&P had topped out in October 2007 – the bear market had begun and the US economy had slipped into recession. Do you remember the mantra that emerging markets had de-coupled from the global downturn and commodities would remain resilient as a result? Do you remember the touting of ‘BRIC’ EM investing? So, for most of H1 2008, commodity prices soared.

At the time Albert said this talk of de-coupling was nonsense, and is “what behaviourists call a bubble of belief as Fed liquidity had funnelled into this asset class as a last refuge from the cyclical meltdown.”

Fast forward to today when Edwards saying the current decoupling of tech/growth/momentum, or generally – the FAANG rally – too “will end in collapse in the same way EM and oil did in H2 2008. Indeed, the title and first paragraph above are taken  directly from my weekly of 5 March 2008 with FAANG replacing commodities and EM.” And just to make his point, we notes that his lead in sentence was taken directly from his weekly of 5 March 2008 with FAANG replacing commodities and EM. 

I have a high conviction that before the end of this year the EMs FAANGs will be unravelling, as the structural arguments supporting these bubbles turn to cyclical sand.

For those who prefer visual reminders, this is what the S&P did for the 6 months after the recession of 2007 had started:

Shifting to the here and now, Edwards then writes that in the run-up to the current recession, “US tech price outperformance far outstripped relative EPS performance.” As the SocGen strategist elaborates, “I felt this was yet another Fed inspired, liquidity driven bubble that would burst in the coming recession – like the late 1990s Nasdaq bubble.” It’s not just him though: even Goldman recently warned that the FAAMGs have gone far too far, and a moment of reckoing is coming as a result of the record concentration in just a handful of stocks as market breadth has plunged to near all time lows.

However, what both Goldman’s David Kostin and Albert Edwards missed, is that the unusual stay-at-home nature of this coronavirus-driven recession has boosted IT and media related expenditures generally in a way that could not have been anticipated. Interestingly, US tech sector profits have only really outperformed decisively in the past few months (see chart
below), but rather than profits merely catching up with previous heady price outperformance, IT stocks have continued to surge higher relative to the market, especially in the rally since March.

This is not the first time we have seen this pattern: in the late 1990s, Edwards writes, tech stocks also enjoyed a period of massive outperformance that had hugely outstripped what was also a moderate outperformance of their EPS relative to the market (see chart below), “and just like recent times, what propelled US tech valuations to stratospherically high valuations back then was ample Fed liquidity and a bubble of belief.”

Then the 2001 recession hit, and many tech stocks suffered a “totally unexpected” fall in profits. These were not growth stocks at all and shouldn’t have been on 40x+ PEs. “These were in reality cyclical stocks trading on peak multiples on peak cyclical earnings when they should have been trading on top of the cycle, single-digit PEs” Edwards booms, but of course it is easier to make such observations in retrospect when the frenzy is long gone. Of course, when the market “discovered” these stocks were on the wrong PE ratings based on the wrong forward earnings, the Nasdaq bubble collapsed. And even the true growth tech stocks collapsed in price as all around them earnings bombs were exploding. At that point, “investors rushed for the hills throwing their true growth tech babies out with the bathwater”, gloomy Albert concludes.

Yet it may (not) come as a surprise that Edwards is even gloomier now, even though as he admits, “his expectation of a similar fate for tech in this recession has been proved wholly wrong. To be honest, I have been left scratching my head. I feel I am suffering from that awful psychological affliction virtually unknown on the sell-side – namely self-doubt!”

For if the large-cap US indices are increasingly dominated by growth sectors such as IT, or specifically the FAANGs (see left-hand chart below), that typically benefit when bond yields fall (and I expect the US 10Y bond yield to fall to -1%), why can’’t the S&P carry on rising in line with falling bond yield? Maybe ever higher PEs are consistent with low bond yields after all if the market is stuffed full of growth sector bond proxies?

This, of course, is taking the Fed model to its ludicrous extreme, one where negative rates would in theory at least, presuppose infinite stock prices. After all if discounting future cash flows using negative discount rates, prices rapidly approach +∞.

Edwards had considered this possibility last year in the run-up to this recession, and while he thought quality stocks (with sound balance sheets) and defensive sectors would continue to re-rate higher with falling bond yields, the IT collapse would surely help lay the overall market low – this is a rehash of Goldman’s bearish April thesis. For even with soaring stay-at-home expenditures on IT, profits for the tech sector have actually fallen. But something was different: unlike 2001, the decline is at a much slower rate than the overall market (see righthand chart below).

Putting it together, Edwards says that we have now reached a permanent market and profit divergence, where the FAANGs specifically, and IT and growth stocks generally, have continued to outperform the market, taking PE valuations to extremes not seen for many a year; which makes sense: after all it is the small, soon to be insolvent “value” companies that trade at a depressed multiples, and as they fail and are removed from the S&P, multiples will only rise. But here a thought: keep in mind that the FAAMGs are for the most part ad-revenue driven. In a world where just the 5 tech megacaps survive (enabling market multiples to approach 30x) and where most small and medium business have collapsed, who will need, or pay for advertising? What will be the FAAMGs business model after the coming tsunami of defaults has wiped out trillions in ad spending? Just a thought to keep in mind as everyone rushes into tech names.

And while everything contemplates this dilemma, Edwards takes us back to a topic familiar to most, namely the massive outperformance of just a handful of stocks vs everyone else, something we discussed most recently in “The FAAMGs Are Up 10% In 2020; The Remaining 495 S&P Stocks Are Down 13%.”

Edwards here reminds us that earlier this year, just before the market peaked in February, SocGen’s quant Andrew Lapthorne, published the charts below showing how the largest cap stocks in the US had outperformed the overall market so comprehensively over the last three years – only.

The word only is a very important caveat and emphasises just how unusual this period of market domination by a small number of stocks really is (the top 5 being the FAANGs). We have been here before with investment fashions like the BRICs, the nifty-50 or indeed the famous five (maybe they weren’’t an investment theme after all, but why let the facts spoil a good acronym!).

Alas, for every such period of massive outperformance by a handful of stocks, the detox is especially painful, and Lapthorne notes that “history shows that periods of extreme outperformance by the 5 or 10 largest cap stocks are eventually counterbalanced by periods of huge underperformance when bear markets occur” (right-hand chart above). In fact, over the long term Andrew noted that the ten biggest stocks have lagged the market by 150bp per annum on average since 1990, while the top five stocks lost 100bp per annum vs the benchmark  link.

Albert concludes by expanding on this topic of super concentration, and using a concept spawned by Gerard Minack, author of the Downunder Daily, namely adding Microsoft to the FAANGs (calling Google by its correct name Alphabet) to form the
FAAANMs (Facebook, Apple, Alphabet, Amazon, Netflix & Microsoft), Gerard and Edwards highlight that the massive outperformance of the S&P versus the MSCI rest of the world (RoW) is almost entirely attributable to the FAAANM, top 6 stocks. The S&P494 ex FAAANM, is almost as dull as the RoW. “This is significant as it is shocking” in the words of everyone’s favorite permabear.

Extending this analysis to fundamentals reveals the same pattern: as Edwards puts it, “the pedestrian price performance of the S&P 494 (ie S&P 500 removing the FAAANM stocks) in line with the RoW stock markets is entirely in line with both their sales and profits performance. Remove the FAAANM stocks and profits are back to 2015 levels.“

Echoing Goldman’s April note, Albert exclaims that “it is shocking quite how reliant the US equity market has become on just six mega-cap stocks because it emphasizes the risks if, for any reason the bubble in the FAAANM stocks burst as I believe it surely will. Indeed, as Andrew showed earlier, history supports that view.”

So how do these massive divergences resolve themselves? One, arguably the simplest way, would be for bond yields to keep rising, value stocks to surge, and growth names to plunge. But Edwards expect bond yields to first fall further (before exploding higher).

Instead the SocGen strategist believes that what is really going on, is that profits in the FAAANM stocks are falling (above right chart) in line with the chart shown earlier of forward EPS in IT falling (intuitively this makes sense because as the economic recession gets worse once stimulus payments fade, ad spending will plunge, as will ad revenues for the FAAMGs.

Edwards concludes by repeating what he said two months ago, namely that “this recession will ultimately expose these and the tech sector to be far more cyclical than appreciated. And it will be difficult in that environment to maintain their 32x forward PE (see chart below).”

Furthermore, echoing Minack, the SocGen analyst writes that “it is curious why the S&P494 enjoys a superior rating compared to the RoW when its sales and profits are no better than the RoW. History suggests there is no justification for this and it is part of the bubble of belief driven by Fed liquidity. “

In conclusion, and going back to the “tsunami of liquidity” theme that made this all possible, Edwards ends where he started with a quote from his Global Strategy Weekly from 2008 when the market thought EM and commodities had decoupled from the RoW. This is what he said on 5 June 2008,

“Too often at the height of a bubble, liquidity is used as an explanation. This is voodoo strategy. Much of the ‘liquidity’ that supports markets at the height of a bubble is merely investors leveraging up on the back of long-established price momentum trades (often in cyclical risk assets). And even as the fundamentals deteriorate, investors keep borrowing and investing. But like Wile E. Coyote in the Road Runner cartoons, reality eventually catches up and the ocean of liquidity evaporates overnight until the next cycle. Poof!”

US equity markets legged lower after President Trump confirmed that he will hold a news conference tomorrow on China.

No details were revealed but it’s pretty clear he’s not going to walk back any of the recent rhetoric over the “China virus”, the human rights abuses of Uighurs, or the implicit political invasion of Hong Kong…

 

New York City has been the epicenter of the COVID-19 pandemic, and now Mayor Bill de Blasio has made remarks considering a phased reopening of the city by the first half of June. When New Yorkers emerge from their homes, they will see an entirely different world, one where social distancing will reshape the landscape of many public areas and commercial spaces. 

Though the Big Apple is a ways off from opening its bars and restaurants. One eatery in the Financial District has offered a view into what the post-corona world of the restaurant industry is going to look like. 

 

FOX 5 New York reports the Brooklyn Chop House has redesigned its dining hall with social distancing in mind. 

Owner Stratis Morfogen said customers can expect to wear a facemask, eat between dividers, and be screened at the door, all moves that will hopefully limit virus transmission risk. 

Morfogen said before the patron steps onto the dining floor, they will be screened by an ultraviolet thermal body scanner. 

“The ultraviolet kills anything that’s on your clothing,” he said. 

He said the scanner will take the guest’s temperature and if someone registers over 99.7 Fahrenheit, staff would immediately deny them access. 

Morfogen also said he’s building a second restaurant that will be “contact-free with the staff.” Customers at the Brooklyn Dumpling Shop will soon have the ability to order via app or phone and pick up through food lockers. He assured this way there will be “zero human interaction.” 

In the last several months, we have allowed readers to peer inside what a post-corona world could look like and how public spaces are rapidly changing with social distancing in mind:

• “Social Distancing Walls” – Gym Reveals Future Layout In Post-Corona World
• McDonald’s Reveals Future Layout Of Restaurants In Post-Corona World
• Future Economy Class Cabins In Post-Corona World Could Look like This…
• “Disinfecting Tunnels” Are Headed To Supermarkets In Post-COVID World
• Supermarket Dunks Shopping Carts Into Giant Vats Of Disinfectants To Protect Customers From Virus
• Spanish Beaches Completely Redesigned In Post-Corona World
• Is This The Post-COVID-19 World? Cashiers Work Inside Plastic Tents At Supermarket

Social distancing will completely reshape how consumers and businesses interact in the economy. Welcome to the post-corona world… 

Authored by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

One of the few good things to come out of the government-mandated shutdown is that many parents have started homeschooling their children. Many of these parents are likely to continue homeschooling after the government schools reopen.

Last week, the Centers for Disease Control and Prevention (CDC) did its part to encourage homeschooling when it unveiled “guidelines” for schools to follow when they reopen. Among the CDC’s guidelines are that schools put tape on the hallways, directing children which direction to walk and how much distance to keep between themselves and their classmates. The CDC also recommends children do not share electronic devices or learning aids. The guidelines even say children should wear masks at school.

The CDC’s guidelines instruct schools to close playgrounds and cafeterias, and to cancel all field trips and assemblies. Instead, students are to spend all day at their desks, not even leaving classrooms for lunch or recess.

The CDC’s guidelines may not have the force of law, but it is likely most government schools will adopt them in order to ensure continued access to federal funding. Schools will do this even though children are at a very low risk of being seriously harmed by coronavirus. In fact, by forbidding children from going outside to play, exercise, and get sunshine, the guidelines actually endanger children’s health. The guidelines also harm children by limiting their ability to interact with their fellow students and develop social skills.

Opponents of homeschooling claim that homeschooled children lack proper socialization. Like many attacks on homeschooling, the claim that homeschoolers are not “socialized” is the opposite of the truth.

Education researcher Corey DeAngelis recently told journalist John Stossel in a Reason interview that “children who are homeschooled get much better academic and social results than kids in government schools.”

Mr. DeAngelis pointed out that “homeschoolers score about 30 percent higher on the SAT test than kids in regular schools.”

Parents looking for a homeschooling program that includes an introduction to the ideas of liberty should consider my homeschool curriculum. My homeschool curriculum provides students with a solid education in history, literature, mathematics, and the sciences. It also gives students the opportunity to create their own websites and internet-based businesses. The curriculum is designed to be self-taught, with students helping, and learning from, each other via online forums.

Starting in fourth grade, students are required to write at least one essay a week. Students also take a course in public speaking.

The curriculum teaches history from a pro-liberty perspective, and the economics section is taught from the Austrian viewpoint. But, unlike government schools, the curriculum does not compromise education quality or distort facts in pursuit of a political agenda.

Students using my homeschooling program develop a love of learning, study superior communication skills, and gain real-world business experience. They also develop the critical thinking skills necessary to see through the lies peddled by government officials and their sycophants in the mainstream media. The skills and knowledge students gain will enable them to succeed in whatever careers they choose to pursue.

Parents interested in giving their children a well-rounded homeschool education that includes sound economics and the history and philosophy of liberty can get more information about my curriculum by going to RonPaulCurriculum.com.