Monday Morning Wrap Up: May 11, 2020

America is Resilient

As we move into the second month of the COVID-19 pandemic, it’s worth pausing to remember how our country overcame past crises. Remember the historical events that shook our country like the Spanish flu, the Great Depression, Pearl Harbor, 1970’s oil embargo, 9/11, the 2008 financial crisis and more.

America is resilient. We as a nation worked through previous crises and this too shall pass.  While the details and cause of the crises are different, focusing on the ideals our country is founded upon reminds us that America’s spirit is strong. We are a nation founded on courage, determination, optimism, rugged individualism and compassion.  Take heart. We will get through this.

Scars and Battle Wounds

Day after day there are still news stories about lives lost to coronavirus and jobs lost to businesses that are shut down. These are the facts. Our nation will emerge from this crisis, but there will be scars and battle wounds.

The labor market swung from full employment at the start of the year to one of the highest levels of unemployment ever seen in American history.

Last Friday’s April jobs report revealed a shocking 14.7% unemployment rate. The pandemic crisis forced Depression sized job losses on the U.S. economy in a matter of weeks. Jobs were lost in restaurants, bars, the arts, entertainment, recreation industries and hotels.

Last week another 3.2 million Americans filed for unemployment benefits, bringing the total number to 33.5 million since the crisis started. This is unprecedented for its speed and its scope. While these are data points they also represent people and families who have lost their jobs and a way to pay their rent or mortgage and put food on the table. The challenge that lies ahead is determining how quickly these 33.5 million people get back to work. It will take time. Some economists now estimate it could take up to a decade before the unemployment picture fully heals.

Wall Street versus Main Street

The economic news has been terrible. However, stock market investors are looking past that and seeing sunny skies. This is a classic divergence between Wall Street and Main Street.

Stocks staged a rally last week, fueled by the Fed’s punch bowl, easy money-printing policies. Is it a case of stocks going too far, too fast?

Many experts say yes.

Simply put, the Fed’s bond buying is driving stocks higher. The Fed purchased $625 billion of Treasuries and corporate bonds in recent weeks, an amount larger than the central bank’s normal purchases over an eight month period. As mutual fund companies rebalance their stock/bond holdings, the inflows into bonds cascaded and artificially inflate the stock market.

Many mainstream economists are publicly wondering if the recent gains in the stock market and on Wall Street are getting ahead of the reality that those on Main Street still face.

China Tensions Climb

It’s not just the trade war that the U.S. and China are bickering about these days.

Last week the U.S. Administration accused China of creating the coronavirus in a lab in Wuhan.  The Chinese government flat out denied this accusation calling it a smear campaign. While the origin of the global pandemic doesn’t change the result, the increased level of sniping between the world’s two largest economies creates new challenges in a world that needs cooperation across economic, health, environmental partnership.

Gold Remains Favored Asset

In this environment, gold remains a favored asset among global investors. The World Gold Council reported last week that global gold-backed ETF funds had inflows for the sixth straight month in a row.

This data underscores the deep trust that investors have in gold. However, investors who gain exposure to gold through an ETF are not ever taking physical ownership of the metal and thereby are depriving themselves of the actual true portfolio diversification value of tangible assets. If you have questions about the differences between physical gold ownership and paper gold ownership, please reach out to a Blanchard portfolio manager today.

“We like Gold as Part of a Well Diversified Portfolio”

That’s what the Wells Fargo Investment Institute said about gold in a May 4th research report. Here’s more analysis.

“Some may brush off gold’s 14% year-to-date return as gold being a defensive asset in a ‘risk-off’ world that is concerned with the coronavirus. We don’t see it that way. Gold has been performing well for a few years now. In 2019, gold was up by 20% and we upgraded our gold targets twice. We raised our year-end gold targets again in March 2020 and we did it again last week. Our new year-end target of $1,800-$1,900 calls for gold to test its 2011 all-time high of $1,900.”

The Wells Fargo Investment Institute added that “we believe that gold has a host of economic and market factors working in its favor. Of course, the increased volatility of 2020 is one. Gold’s prime macro driver, though, continues to be the direction and level of global interest rates and their persistent flirtation with negative.”

Gold: A Bond Substitute

The Wells Fargo Investment Institute also noted that gold is being utilized by investors as a substitute for holding long-term bonds as a perceived safe-haven investment. “With no particular ties to a government or other bond issuer, we believe gold looks attractive to long-term investors.”

Moving Forward

America is resilient, yet this pandemic will change us forever. It is changing people’s financial and health pictures and shifting the core principals of Federal Reserve monetary policy.

The coronavirus pandemic will also leave in its wake a sharp increase in public sector debt in the United States. We shifted from a thoughtful, effective and responsible Federal Reserve era in recent decades into a new wild west of money printing, QE Infinity and pledges to ‘do whatever it takes.’ While these policies may provide short-term liquidity to the economy right now, you will be faced with a government with unsustainable debt loads and devalued paper currency as a result.

As you decide how to protect yourself and your loved ones in this changing world, gold can provide a level of security and trust that is unmatched by any paper money churned out from a heavily indebted government printing press.

Take that to the vault.

Stay safe,

David

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