Market Waves, Demand, and Disinflationary Trends

Stock Prices Wave – bearish

Stock Prices / Volume Waves – bearish

Stock Prices / Volatility Waves – bearish

Momentum Wave – neutral

Stock Prices Intermediate Price Trend – bearish

Economic Demand

Participation Rate

The labor force participation rate decreased to 61.4% in September 2020.

Claims

After falling steadily for months, first-time unemployment claims have been elevated since early August, hovering between 800,000 and 900,000 and leading economists to fear the jobs recovery has lost steam.

Slightly more than half the 22.1 million net jobs lost in early spring as states shut down nonessential businesses to curtail the outbreak. 

The good news is that millions of jobs that were lost in the spring were in fact temporary. The bad news is that we are not even close to a bottom in the rise in permanent job losses which is happening at a faster pace than the Great Recession.

Recovery – Permanent Jobs

Openings

Total nonfarm payroll employment rose by 661,000 in September, below its February level by 10.7 million, or 7.0 percent. Employment in leisure and hospitality increased by 318,000, accounting for almost half of the gain in total nonfarm employment in September.

In April there were 18 million more unemployed than job openings. Since then the gap has closed somewhat, there are 7.1 million more unemployed than available job openings. As a result, there were just over 2 unemployed workers for every job opening.

Middle Class Income Expectations

Middle- and lower-class people continue to experience job loss, food insecurity, unable to pay bills, and eviction or foreclosure. The Census Bureau’s latest Household Pulse Survey shows 59.2 million Americans expect someone in their household to have a loss in employment or take a pay cut ahead of the presidential elections.

AND the need for a second stimulus package is presently mixed with Senate majority leader McConnell saying that many Republican senators believe the economy has already seen enough stimulus. 

Demand

The reality is demand/GDP has been on a downtrend since before the Great Recession and we may very well had been headed for recession before the pandemic.

Deflation

Euro Zone

The eurozone’s pandemic-hit economy sank into its second consecutive month of deflation in September, intensifying pressure on the European Central Bank to consider injecting more monetary stimulus.

Headline consumer price inflation fell to a four-year low of minus 0.3 per cent in September, below the expectations of economists surveyed by Reuters and down from minus 0.2 per cent in August.

It is the first time the eurozone has had two consecutive months of deflation since 2016, despite the ECB subsequently launching successive bond-buying programs totaling trillions of euros and cutting interest rates deep into negative territory.

The ECB’s money pump (bottom graph) has run at breakneck speed as total assets at rose six-fold from 1999 and then spiking above €6 trillion this year. All the major central banks put up hundreds of billions of emergency funding from early February to mid-March, providing trillions in liquidity operations.

The ECB cut interest rates an unprecedented 39 times alongside other central banks. These collective actions, though, did not underpin stocks — which collapsed 40% over that time. The view that the ECB, the Bank of England, or even the Fed can bolster stocks by printing money runs contrary to all available evidence.

Japan

In August, the Consumer Price Index (CPI) inflation fell to 0.2%. CPI excluding food prices fell to -0.4% plus energy fell to 0.1%.

US

Now everything depends on US stimulus: The stock market, the wealth of the wealthiest, and consumer spending – thereby not only the entire US economy but also imports from other countries, and thereby the economies of China and the rest of the world.

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Since 2008 money and credit growth have been slowing.

Recently, credit card balances and other revolving credit fell “unexpectedly” by $3 billion in August, to $950 billion, the lowest since July 2017, and a level first obtained in September 2007.

Credit card balances and other revolving credit fell a devastating 9.5% from a year ago.

Money velocity has dropped over 30% year over year through September 30th.

Conclusion

A 2nd stimulus will obviously prolong the temporary recovery. Temporary in the sense that the jobs that haven’t returned by now will not be coming back means that the more reasonable U-6 unemployment rate combined with low productivity will continue to dampen consumer demand and inflation, short, intermediate, and long-term. The only question remains when will deflation hit the US.

Secular Outlook

The charts above reflect deflationary headwinds and thus increased downward pressure lies ahead for prices.

Stocks should trend lower due to deflationary concerns, and below-average returns are ahead of us as the larger secular bear unfolds.