Wednesday Briefs – 29 July 2020

A weekly commentary on current events. Follow populyst to receive notification.

This week: Southern surge fading; Gold price; S&P 495.

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Southern surge fading

The number of reported cases appears to have peaked in Arizona, Florida and Texas. Each surge lasted five to seven weeks before it started to fade. The arrows in the chart show six-week time spans.

This is longer than the New York State surge of March-April which lasted less than four weeks from onset to peak. But the availability of tests in New York at the time was not as broad as it is now in these Southern states. It is very likely therefore that the New York surge started earlier than the numbers showed, perhaps as early as February.

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As noted in previous briefs, deaths lag reported cases by approximately three weeks. And we should therefore expect deaths to peak (or have peaked) in Arizona, Florida and Texas on or around July 27th, August 7th and August 12th respectively. The Arizona number is already declining as expected.

The peaks for the seven-day average for deaths would end up at 77 for Arizona (it is already past that peak and down to 70), 166 for Florida (now 132 and still rising) and 208 for Texas (now 156 and still rising). These estimates are based on the current ratio of deaths to three-week-ago reported cases in these states, 2% for AZ, 1.4% for Florida and 2.1% for Texas.

Edited 1 August 2020: the ratio has been rising in Florida and we have revised the peak 7-day average deaths to 210, still on or around August 7th.

Gold price

The dollar price of gold made new highs this week to top its former peak of $1,900 per ounce seen in September 2011. It is difficult to predict its course going forward, in particular in the near-term. Gold is correlated to several factors but not consistently so over long periods. The weak dollar, low interest rates, a soaring budget deficit and geopolitical tensions all have played an important role in previous bullish periods. Today we have all four of these vectors and more.

Generally speaking, it is best to see the price of gold as a barometer of trust in institutions, even if this approach is not precise enough to assist traders in their near-term decisions. At the end of this 2016 article, we listed some questions that may help determine the direction of gold. Here they are, supplemented by two more:

  • What actions will the next US President and Congress take to restore trust?
  • Will GDP growth improve in the US and other developed countries?
  • Will cronyism be beaten back in the US and Europe?
  • Will there be more terror attacks in the West?
  • Will US tensions with Russia and China subside?
  • Will the war in Syria reach a settlement? Will ISIS be defeated?
  • Will the wave of migrants into Europe continue and how will it be handled?
  • Will China continue to deliver 6-7% GDP growth?
  • Will the pandemic subside within the next six to nine months?
  • After the pandemic, will the federal budget deficit be brought back under control?

Considering the likely answer to each, current conditions seem supportive of more increases for gold.

From an investor demand perspective, the entire value of gold in the world as a percentage of total investable assets must be well below what it was at the last peak of 2011, considering the large inflation seen in other asset classes during the past nine years. Because of its recent acceleration, gold may be due for a near-term pause. Beyond that, it could enter an explosive upward phase if its main drivers intensify. As volatility increases, a spike to $3,000 or higher is not impossible.

S&P 495

The stock market is holding on to its recovery gains with the S&P 500 now flat and the Nasdaq up 16% in the year to date. As noted previously, the bulk of this gain was effected by the top five market caps, Apple, Amazon, Alphabet/Google, Facebook and Microsoft.

A chart from Goldman Sachs last week shows that the “S&P 495”, which is the S&P 500 minus the five leaders, is still down 5% in the year to date.

This suggests that there would be significant upside for several sectors within the next year if the economy gets past the pandemic and recovers some degree of normality. Among severe laggards are travel and hospitality, restaurants, energy and many others.

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Elon Musk’s Tesla Rocket

This article is published at National Review.

What it will take for Tesla’s stunning rise to end with a successful landing.

“Wow, Elon Musk!”

That was the cathartic cheer and cry of relief in millions of American homes on May 30, after two months of forced confinement, when the SpaceX Falcon 9 rocket and Dragon Capsule lifted off from Cape Canaveral carrying two American astronauts bound for the International Space Station. It was the first ever manned SpaceX mission and the first time since 2011 that an American-made rocket had taken Americans into space. SpaceX is of course one of Elon Musk’s companies.

bangabandhu_satellite-1_mission_284202549897229As if on cue on the very next day, Musk’s other monster rocket, Tesla stock, blasted off again and shot out of its range, adding nearly 8 percent to reach $898.10, a level that was more than double its March low of $361.20. Days later, the boosters fired again and lifted the stock above $1,000 and then once more, after a two-week pause, to $1,500, where it is now taking a brief respite in the orbit of companies valued at $300 billion.

There in the stratosphere, the stillness of space envelops the investor as it does the astronaut. Escape velocity has been achieved for shareholders, some with many, many millions in profits, leaving the earthbound shorts (people who bet against the stock) but a small and distant memory to be mockingly blotted out of view.

These shorts, hopelessly weighed down by what’s left of traditional investment discipline, have (so far) lost a cumulative $18 billion in vain expectation that the Tesla rocket would reverse, crash, and burn. All they can do now is stare at their screens and argue to whomever will still listen that this stock rocket will eventually come back to Earth.

Not necessarily. Consider Amazon, Apple, Microsoft, launched long ago and now heading deeper and deeper into the trillion dollar galaxy.

The question then is whether Tesla, though much smaller today, can one day join the outer reaches traveled by these companies, or whether it will crash as so many hot stocks have in the past. Tesla bulls are confident that it can maintain its current trajectory, a belief that is owed in no small part to the faith that they have in Elon Musk. Read the rest at National Review.

Why the Market is Rallying

This article first appeared at National Review.

Some sectors have fared better than others. The general market thrust was greatly assisted by the trillions of dollars of stimulus.

A shrewd market participant, and one whom we know as a fine fellow, recently quipped that he would stop researching companies and instead start investing by acting on signals from the cover stories of prominent magazines. He would sell when the cover was exuberantly bullish and buy when it was all doom and gloom.

There is a whimsical theory that by the time the media gets sufficiently excited about a stock or investment theme to place it on a cover, such stock or such theme has already played itself out in the market and is therefore on the verge of reversing itself. The examples abound.

In February 2000, weeks before the beginning of the three-year bear market, a BusinessWeek cover screamed “The Boom”, cheering on the stratospheric dotcom bubble. In June 2013, Barron’s chose to worry on its cover about “Trouble Ahead at Tesla” — but the stock nearly doubled that summer. In September 2009, Fast Company celebrated “Nokia’s Plan to Rule the World,” adding, combatively, a subtitle on its “bold plan to trounce Apple.” Kindness compels us not to dwell on what happened next.

So the financial media is not the best guide to identifying major turning points in the markets, although it can be a useful reverse indicator. Read the rest at National Review >>>

Camus Against the Virus

Decency is of little value without a foundation of honesty.

Albert Camus’ masterful novel La Peste (The Plague) is enjoying a resurgence in the current pandemic. Published in 1947 in the immediate aftermath of WW2, it was not, or not only, about a biological plague but also about the plague of Nazism or other ideological cancers and their equally devastating effect on humanity.

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Albert Camus

Among the many different citations recently lifted from the book, this particular one has appeared in several articles and countless social media posts:

“It may seem a ridiculous idea, but the only way to fight the plague is with decency.”

Coming from Camus, this sentence looked unusual because there is no direct literal word in French for decency as we mean it in English. The closest are décence and pudeur but these words convey different meanings.

In the original French text, Camus had written: Read more