A Tale of Two Economies
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness,”
The Tale of Two Cities by Dickens in fact poignant when we look at what is currently happening in the US. The Reign of Terror according to Wikipedia was a result of Enlightenment “thought which emphasized the importance of rational thinking and began challenging legal and moral foundations of society, providing the leaders of the Reign of Terror with new ideas about the role and structure of government.” We are seeing this now in our streets with the protests sparked by the killing of Floyd. These have resulted by a two class society similar to that of pre French Revolution Paris. Yesterday we are told that the economy is recovering faster than expected and that the stock market it up, yet we have people in the streets trying to exercise their rights while being tear gassed. So what is the truth?
Jobs
Yes job numbers were “surprisingly good” but what exactly does that mean?
Looking at the past year of non-farm payrolls we see our surprise of 2.5million jobs created. The problem is that 22million had been lost in the previous two months, the jobless rate remains excruciatingly high at more than 13%. Many states had opened up in May and companies rehired employees so this may be the best month of rehiring for a while. Even if 2.5M is an average per month it will take an additional 8 months to get back to even(22million/2.5mil =8.8months). That is a long time for so many to be out of work.
Stock Market
The S&P is up to 3193 from its bottom of 2304 in mid-March, that is only 6% below its pre COVID 19 high of 3380. What has changed?
With the injection of 2.3 trillion in funds by the FED we have seen the cash reserves go up as well as the stock market. The problem is that the cash is not being put into the economy it is held as reserves. Reserves were going down over the past 5 years and then with the March sell off they have left the market. The Injection has replaced that which left the market but much of the replacement has resulted from a slide in the value of the dollar as well. The USD has slid in value 6% since March. The FED has printed money at an unbelievable rate. The M2 supply has increased from 15.6T March 9th by 16% to 18.1T
Banks are not lending this money to improve the economy it is only going back into the stock market.
Income Inequality and COVID
Our essential workers are required to risk their lives. Often times they are not given health care even if they are in the health care industry. Data shows that,” Nurses and orderlies, including those treating Covid-19 patients, are risking their lives every day for an average hourly wage of $14.25. Home health care workers are paid much less, averaging only $11.63.” Few have paid vacations. Distribution center workers were given hazard pay of $2/hr that is now been revoked even with COVID cases now rising faster than ever. This follows decades of building Inequality.
Summery
The COVID crisis has highlighted the inequality we have in our economic system. It was at fault before the crisis and when no fundamental changes are made then the fissures that embody it will eventually make it crumble. Though the messages seem rosy care must be taken. As investors we must realize these issues so that they can profit from them. The economy in the long term is going to be bumpy. When you hear any statements about the economy just remember Dickens’ words,
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness,”