08212020 :: Friday finance week in review

A partial digest of what we learned:

  • There is still no forthcoming stimulus package in the United States.

  • US initial jobless claims rose more than expected for the week ended August 15. There is a backlog of people attempting but unable to successfully file for assistance as state unemployment systems buckle under the pressure. We may continue to see larger numbers than expected as this shakes itself out.

United States Initial Jobless Claims
  • Gold took another large hit after topping below the “record” it set on August 6. However, some critical thinking amidst all the renewed exuberance is in order. For instance, it’s important to note that it was a record in nominal terms only. In 1980, the yellow metal achieved a nominal value of $667.50/oz before collapsing. Adjusted for inflation, that value today would be $2,098.91/oz. That eclipses the August 6 “record” value. Gold really peaked a second time in nominal terms in 2011, hitting a price of $1,823.30/oz at the time, before once again imploding. In today’s dollars, that comes out to be $2,100.21/oz, also eclipsing the value reached on August 6 but eerily inline with its inflation-adjusted value of 1980. In other words, both times, in spite of decades of separation and though they occurred during different eras of this country’s history, gold’s absolute peaks have been remarkably consistent in terms of inflation adjusted dollars. And now, for the third time, gold has neared that exact same level. Gold hit $2,069.30/oz on August 6. Just $31 more, and it would have joined ranks with its former selves from roughly 10 and 40 years ago, making what one is led to believe is arbitrary look anything but. In that case, it becomes all the more difficult to believe that gold has a $3k/oz. future, as some have posited, or that it is due to rise much more from here by any amount at all, as opposed to declining precipitously yet again. This, in addition to countless other issues with gold as an investment, make it something of a heartbreaker of an asset.

  • Man, that housing…

    • Housing starts surged for the month of July, as did sales of previously owned homes. The most likely driver remains white flight, and “low interest rates” is only facilitating it.

  • The S&P 500 has entered record territory. How is this possible with the global economy in shambles, some wonder. Inflation makes this possible. As stated last round, it is, by definition, a monetary phenomenon where too much money chases too few goods. Companies in the S&P represent the cream of the crop, and by definition, their ranks are limited. There is excess money in the system and it is increasing constantly; it has to be placed somewhere. Apparently, at least some of it is being invested in these (ostensibly) best of the best corporations that have the greatest chance of making it through to the other side of all this. Should one fall from grace, another takes its place. While their number remains the same, the amount of money in the financial system is growing -> too much money chasing too few goods. What that may mean for the future, then, is an S&P 500 index that continues to set records again and again, even as other large corporations, smaller businesses, municipalities, and households go bankrupt.

    What’s more, those corporations with access to additional cheap debt backstopped by the Fed can—should they have the luxury to do so—utilize that cheap debt for that which they have utilized it plenty of times before in the years prior to the global pandemic: the propping up of share prices with buybacks and the preservation of dividends. Regarding the latter, Exxon is fighting at this very moment to do just that, and is willing to cut whatever it can think of in the process, including project outlays and matching contributions to its own employees’ retirement funds. At a certain point, one may begin to envision a stock market that is replete with corporate entities that are more like shell companies than anything else.

  • What goes for the S&P 500 may go for the NASDAQ. The problem with the latter, however, is that it is comparatively non-diversified, making it more vulnerable in the event of a pullback. That said, tech is now perceived as a defensive sector and a growth sector and the sector of the future, all at once, and there are only so many such companies to stick one’s “wealth” in. If that accumulating capital is outpacing growth in the number of investable companies available, recall that this spells (rather visible) inflation, as evidenced by ever climbing share prices.

  • Sovereign matters:

    • Lebanon’s woes mounted in the wake of the Beirut blast as S&P Global Ratings cut their sovereign rating to D from CC and placed them on negative watch. The reasoning included a perceived ongoing default on their foreign currency obligations and the continuing economic distress exacerbated by the catastrophic port explosion.

    • Tanzania was downgraded to B2 from B1 by Moody’s, with weak governance at the root of it.