US economy cracking under pandemic pressure

Local market rolled over into negative territory as long term vaccine and election optimism can’t fix the short term pandemic damage to the economy. Global investors on a currency/value trade are a knife that cuts both ways. Falling currency and valuation expansion meant the macro trade was against the local market. We may be at the start of this cycle after recent weeks of multiple expansion on long term optimism. Weak US economic data in the job market and consumer confidence backed recent weak retail sales and that points to the economic problems getting worse as the new pandemic wave starts to take effect. Bond market is pushing a reflation trade and that will force US Fed to burn more balance sheet to keep yields under control. Balance sheet expansion will debase USD and drive Gold and other commodities higher. Growth to value rotation is structural and it will play out. US Fed is going to debase USD to buy time to allow deleveraging but US corporates do not have a strong economic growth to execute that change. The result is likely to be higher unemployment and rising bankruptcies. Trump administration looks like cleaning house to prepare for the inevitable exit. Pardons are expected to be delivered like burgers at McDonalds to protect the insiders. Markets have priced in stimulus multiples and recovery earnings when both outlooks are uncertain and not necessarily correlated!!!

Interesting trend in the market as investors expecting earnings to recover to pre pandemic levels in the next 2 years while also expecting the bull market run to finish in the next 2 years. Markets are massively pricing in vaccine upside with little regard to execution risk in production and delivery on a global basis. The crowded trade believes everything will be done properly and has priced it in but as an investor the risk is that it doesn’t play out like that!!!

US market overnight had a Covid risk off day as investors started to pay attention to pandemic and economic issues after vaccine and election risks were discounted. NASDAQ is the only positive on WFH play as lockdown restrictions are likely in the next few weeks. House prices did better in falling borrowing costs and move to the suburbs while job data and consumer confidence keeps getting worse. Thanksgiving long weekend starts tonight as most take Friday off to make 4 days off. Covid cases and hospitalization is at record levels while mid-west is the worst affected with the weakest health system. It’s going to get worse no matter how you look at it. Bonds mainly flat, USD lower and commodities higher. Gold was the best sector while Energy was the worst. Expect ECB and US Fed to expand bond buying to keep yields running up. Nov pop eats into Santa rally. Remain cautious as macro clarity continues to improve while multiples continue to expand!!!

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!

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