Plenty of dark clouds out there, but we have gone through pretty tempestuous economic times before, and this, too, shall pass.
Every morning I walk in, I say to myself, do not be a raging pessimist when lockdowns are getting lifted around the planet. Unquestionably this is excellent news for the markets, even if most of us are struggling to decipher what economic life will be like post-Covid-19.
I am talking simple things like golfing, meeting for a beer at the pub, and even jumping on the plane to KL, Singapore or Hong Kong again. All I can say is things are a lot brighter than they looked a few weeks ago.
Even with the economic clouds much gloomier than expected, the central bank’s money-printing machines and the endless stream of government financial support will see us through the gloaming.
This downturn is not normal. Imbalances in the economy cause typical slowdowns —and the path to recovery from an imbalance follows a relatively standard and arduously long route filled with many craters.
This is a policy-induced downturn and the speed and structure of the recovery could track a different path from previous recessions. The bounce-back will be much quicker but likely with just as many economic data craters. The difference this time around is the extraordinary global policy support that will fill in all of those cracks much quicker than in the previous recessions.
China’s consumer behaviour in recovery phase
China is providing evidence of different consumer behaviour in the recovery phase. Internal tourism has been surprisingly strong. Travel is an important signal, as it shows confidence about health risks, which should support morale around the workplace as health concerns abate. With delayed consumption and forced savings in a lockdown, trust is critical to shaping the recovery.
Initial jobless claims in the US fell a further 677k to 3.169 million in the week of May 2 (consensus 3.0m). New claims have been falling for four weeks and suggest that the worst of the labour market deterioration was in late March, so that too may have passed, which should lessen the impact of tonight’s payroll data.
Trade war de-escalation?
So far, the trade war fight has been limited to angry accusations, some and a bizarre stop motion Lego Mini-figure propaganda.
Chinese state media releases animated propaganda video mocking US coronavirus response
This risk will most certainly remain active going into the US elections. But when you think about it, there has not been a lot of flames to put out so far. But we know how trade war narratives evolve, it’s in fits and starts.
If you think this ruckus is little more than President Trump peeking around the curtain readying to storm the election stage, that is fine. And I hope your right, but any US escalation will most certainly involve tariffs.
So, let us hope no one is left ” hanging on the telephone” next week.
GOLD: The raging bull stares down deflation
I am still struggling to be that raging gold bull that I was back at the end of 2018 as deflation danger is all over the place. Back then, I was lifting offers when I walked in, but today I am on the bid but 25 dollars below the current rate.
On your recent grocery store soiree, you probably noticed that staples are a touch higher than before Covid-19 and that face masks are fetching a multiple what they cost a few short months ago.
And while central banks around the world are pumping in liquidity, if not printing money outright, as political leaders keep topping up fiscal stimulus programs, which means I should be buying gold every morning I walk in.
Sure, it’s early days in the deflationary narrative as the first CPI readings have merely fluttered.
But in my newly adopted home in Thailand headline prices tumbled 3% y-o-y in April, and Taiwan by 1%, with Malaysia, Singapore, Korea, and Japan all close to the waterline and expected to drop lower unavoidably.
As ex Oil, the deflationary effect from the demand collapse has fully kicked in, which takes longer to feed through to core than to non-core CPIs.
Over the short term, the deflation overhang could weigh on gold prices, but with interest rates at zero, gold comes out smelling like roses over any fiat currency any day of the week and will remain well bid on dips.
I am just not sure if it is going to fire higher until deflation reverses. While I continue to be bullish, I am waiting to buy more gold at cheaper levels.
What does this mean for gold’s long-term prospects, not much as the narrative remains onwards and upwards for no other reason than US dollar debasement is in full swing?
Fortunately for gold investors, we are not in ancient times when debasement was implemented by mixing a lower value metal to the gold content of coins, so gold will most certainly remain in demand.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp