Time to Re-open the Economy?
As the economy began to re-open, the Center for Disease Control (CDC) began to report an increase in COVID-19 cases. In response, state and local governments began to shut down or restrict business and social activities again.
According to the CDC, one month ago, the number of daily new cases for COVID-19 was in the 15,000 to 25,000 range. During the last week, the number of daily new cases was in the 35,000 to 55,000 range. However, the number of weekly total deaths from all causes in the US has fallen by over 20,000 from its peak that occurred during the week ending April 11. The dichotomy is most likely due to the increase in testing and the nature of testing for COVID-19. Since testing has increased, more people are receiving results that indicate they have/had the virus.
There are now more than 30 different test kit providers for COVID-19. There are two basic types of tests. Some tests are designed to test for antigens – a specific virus, bacteria or other foreign substance that results in an immune response. Antigen tests indicate a current infection. Serology (or antibody) tests are designed to detect antibodies in blood serum which are proteins that can fight off infections. Serology tests indicate that there has been an immune response in the past but the virus itself may be absent. Some doctors have been critical of the CDC testing data that conflates the two types of tests and treats them equally.
The CDC is currently conducting surveillance of US serology testing by commercial laboratories. The surveillance should allow the CDC to develop a better understanding of 1) how much of the US population has been infected with COVID-19; 2) how it has been changing over time; and 3) how many people experienced mild illness or were asymptomatic. At the present time, the CDC is unable to predict to what extent the presence of antibodies will provide immunity to prevent future illness from the virus.
Given the increased testing and nature of the serology tests, the potential for illness is not as scary as some of the media reports would indicate. However, the policy response of various government entities has been to assume the worst interpretation of the data.
Investors Are Fed Dependent
While the global economy is struggling to recover from the impact of COVID-19 and recent social strife, the financial markets have reacted to the negative developments with aplomb. Corporations will start reporting financial results for the second calendar quarter soon and there will likely be some negative surprises.
On Thursday, Ray Dalio, founder of Bridgewater Associates, had an interview with Bloomberg. While his comments reflect the thinking of many professional investors, Dalio speaks his mind a little more freely than most. Some of his comments:
- “The capital markets are not free markets allocating resources in the traditional ways.”
- “The economy and the markets are driven by the central banks in coordination with the central government.”
- Unlike the 2008 financial crisis, now “the whole economy is systemically important. If they don’t go out and lend to companies… we would lose large parts of the economy.”
- Regarding stock market valuation levels: “Multiples shouldn’t be used in the traditional way of a frame of reference.”
- “You are going to see central banks’ balance sheets explode.”
- If a compelling alternative to the dollar emerges, “it would be probably the biggest disruptor not only to the markets but to the whole world geopolitical system.”
Nick Panigirtzoglou is an analyst at JP Morgan who writes their “Flows and Liquidity Report.” He estimates that the US Treasury will have net issuance of $4.1 trillion in new debt this year and the Federal Reserve will purchase $2.5 trillion of this new debt. That would leave $1.6 trillion of debt to be purchased by the public. The problem is that the purchase of this much debt by the public would require higher interest rates as an inducement to sell other assets (like stocks or certificates of deposit) to use them as a source of funds for the purchases.
Panigirtzoglou believes that the financial markets are already signaling the need for further monetary and/or fiscal policy stimulus. The writers at ZeroHedge opined: “Unless the Fed wants another market meltdown on its hands, it better pre-emptively stimulate and do so to the tune of trillions.” Indeed, that appears to be the path of least resistance for the Fed.
Precious Metals Update
COVID-19 has had an impact on mine production worldwide. The two countries with the largest silver mine production in the world are Mexico and Peru. Due to COVID-19 related mine closures, their combined production declined from 822 metric tons in February to 386 metric tons in April. Information for gold mining production was unavailable.
Craig Hemke, analyst with Sprott Inc., has written about the increased physical demand on the COMEX for both gold and silver. In the past, most COMEX contracts were closed prior to the contract’s expiration and there was no physical delivery of metal. In past years, an average delivery month for COMEX gold had 6,000 – 10,000 contracts (100 ounces each) that resulted in delivery of physical gold. In June 2020, there were 55,102 contracts (equal to 5,510,200 ounces or about 171 metric tonnes) that required delivery. Hemke writes, “the physical delivery crisis continues unabated and it appears that COMEX will be under delivery distress for the foreseeable future.”
According to Hemke, the story is very similar for COMEX silver. In the past, a typical delivery month had about 3,000 – 4,000 contracts (5,000 ounces per contract) that required delivery. May and June 2020 had 9,044 and 16,834 contracts, respectively, that required delivery. The amount of deliveries for the July contract on the first day of the month was 11,458, so there will likely be a new record amount requiring delivery for the month. Hemke writes, “The weight of all this delivery demand may eventually lead to a force majeure-style failure, but that’s very likely not coming this month or next.” He believes that the CME, LBMA, and bullion banks will work to protect the pricing scheme as long as they can. Given the reduced mining supply and higher level of demand for physical delivery of gold and silver, I expect higher prices during the remainder of the year.
If you have any questions or comments, please contact me. Happy 4th of July!
Robert G. Kahl
CFA, CPA, MBA