Friday’s jobs report was another reminder of the disconnect between equity markets and the economic realities that people are facing. The payrolls data were much worse than expected, with -140k jobs versus forecasts of -37k and yet markets still moved higher.
Market sage and generally good guy Mohamed El-Erian has called the market a ‘rational bubble’, saying that markets have never been so at odds with the actual state of the economy, but that he understands why that’s the case – the Fed’s massive stimulus – hence it being rational, but no less a bubble. His number to watch at the moment is the ten year treasury yield, which has been moving higher and higher of late, despite the Federal Reserve’s massive bond buying efforts.
The ten year yield being on the climb could start to take the steam out of the mover higher, because it means that fixed income investments are more attractive than they were previously and if that trend continues then investors might reach a point where they say ‘I’ve made enough out of stocks for now, let’s cool it down and park my gains in bonds, where they’re making money and there’s no risk’. That is all well and good, but if everyone does it at the same time, there’s a big move south.
Another indicator that there is a bubble has to be Tesla, which is now an S&P500 stock and it’s still behaving like a penny share, moving up 25% in value just last week, which put the market cap above $800bn, which is more than the nine largest car manufacturers in the world, combined – and yet they make less than 1% of the cars that those others do . I’m not doubting the genius of Elon Musk, but owning Tesla doesn’t give you the upside to his brilliance like owning Amazon gives you direct upside to Jeff Bezos. Tesla gets you an amazing charging infrastructure and a fraction of global vehicle sales at a 130x earnings multiple – so how much higher does that go? Any answers on a postcard, or alternative thoughts really welcome on this one please.
Still, if the rational part of the equity bubble is stimulus, then we’re only getting started: Joe Biden reacted to the payrolls number by talking stimulus and saying, “in order to keep the economy from collapsing this year, getting much, much worse, we should be investing significant amounts of money right now to grow the economy”.
Mr Biden’s first few weeks in office could be slowed down a little though, if the impeachment proceedings that are being touted against Trump get under way this week. Nancy Pelosi is hell bent on it and there is a possibility that they’d get enough of the two-thirds majority required to get the job done. The problem is that they won’t get it done in the nine days that Trump has left and as such it means it would drag into the new presidency and risk overshadowing those crucial first few weeks. The pros and cons for impeachment are lengthy, but Democrats want to pursue primarily because it would ban him from any future public office. Reuters has a good run down of what we might see.
Closer to home: Rishi Sunak is said to be considering dropping plans for tax rises in the March budget, as he doesn’t want to risk upsetting any kind of recovery. Pushing these plans back until the autumn should mean that by that point every adult in the UK has been offered a covid vaccine – a timeline that Matt Hancock committed to on Andrew Marr on Sunday – and that we are finally in a big rebound phase.
Vaccines delivered are above two million and we’ll get exact data at today’s update. Getting the vaccination out quickly would not only bode well for our sanity, but also for the value of the Pound. With currency markets being relative, what we’ve seen is a continued favouring of the Australian and New Zealand Dollars, as life in that part of the world resembles normality. If the UK can get vaccinated more quickly than elsewhere then the Pound would possibly stand to benefit as a result.
This week’s themes include a busy economic calendar, more political movements out of the US and also pressure being piled upon leaders to take a tougher stance on China, following the mass arrests in Hong Kong last week. In additions, the Conservative Human Rights Commission will release a report this week on the plight of the Uighur minority under Chinese rule and will accuse China of torture, slave labour and other heinous acts. We’d expect this to garner some significant attention when it does land and perhaps some more tough talk out of Beijing and might force Boris and co. to take more affirmative action with sanctions.