WEEKEND WRAP: Superficial Stability In Markets Mask Advancing Underlying Economic Issues

Wildfires are raging across the state of California, devastating hundreds of thousands of acres of land, buildings, homes, ruining lives, killing farm animals and wildlife.

While the natural disaster besieging the Golden State, the man-made disaster forwarded by Governor Andrew Cuomo and New York city mayor Bill De Blasio is wreaking havoc in the Empire State.

People are fleeing the Big Apple in record numbers as crime statistics have gone through the roof. Many people are afraid to leave their homes or apartments at night in the city. More than 13,000 apartments are now vacant in the city's five boroughs, the most in 14 years and the trend continues as violent crime spirals out of control. Last week, there were a reported 60+ shootings in the city, leaving 76 people injured.

All of New York's cultural attractions, from Broadway shows, to art galleries and museums, to Lincoln Center have been closed since March. Most restaurants and bars are closed. Those that have managed to reopen can only allow outside dining. According to the state liquor authority, dancing has been banned at bars and social gatherings, even wedding receptions. Ticketed or advertised live entertainment has been banned statewide. Comedians have been barred from performing.

All of this is the response from out-of-touch politicians, Andrew Cuomo and Bill De Blasio, who are killing the state and the city economically and socially. Food banks are overwhelmed, just trying to keep up with burgeoning demand as layoffs and business closures have thrust thousands into poverty. New York’s top property owners and managers are lobbying some of the city’s biggest employers -- including the likes of Goldman Sachs, Blackstone and BlackRock -- to speed up the return of workers, but only about a quarter of workers at the 146 major employers in the city are expected back by year-end, and roughly half by next summer.

With many companies realizing the multitude of advantages of having employees at remote locations, i.e, working from home (reduced office space rent, fewer managers needed, less wasted office socializing), its possible that up to 35% of distanced workers will not be returning to the skyscrapers of Manhattan and the other borough any time soon. The strain on commercial landlords, and in turn, mortgage payments and tax receipts will have a long-lasting negative effect on the vibrancy of New York and other large city business districts.

While the official statistics say 32,000 people died from the coronavirus, New York's response to the disease is likely to kill many more. Similar circumstances are playing out in big cities across America.

That's the real story of the pandemic. Cities like New York, Chicago, Seattle, Los Angeles, Atlanta, Minneapolis, Houston, Portland, and elsewhere are teetering on the verge of financial insolvency. Social unrest throughout the summer, highlighted by violent protests, looting, arson, and rioting, have led to police forces being neutered, many cops retiring early or leaving for work in other places. Large cities are fast becoming free-fire zones, with hoodlums and criminals operating without much in the way of deterrent. Assaults are becoming common, as are holdups, burglaries, rapes and shootings. The level of violence in some cities is unprecedented.

Meanwhile, sleepy Wall Street had another ho-hum week, its second in a row. With the Dow flatter than a pancake, the S&P and NYSE traded gains and losses of 0.72%. Only the NASDAQ showed any sign of life, rising another 2.65% to multiple record closes.

Retesting support, gold and silver lost a bit of their luster during the week. Spot gold fell from $1945.12 per ounce the prior Friday to close slightly lower, at $1940.48 on the 21st of August. Silver actually gained marginally, rising from $26.45 to $26.79 on Friday's close.

Oil prices continue to gradually rise. WTI crude oil on the NYMEX saw its highest price per barrel in five months, trading as high as $42.93 before settling out at $42.34.

Treasuries rallied following the prior week's blood-letting. Yield on the 30-year bond fell 10 basis points to 1.35%, while the 10-year note shed five bips, to 0.64%. 2s-30s steepened to 119 basis points, with all of the action on the long end. 2-year yields have been stuck between 0.13 and 0.16 for two weeks. Meanwhile, the Fed has been sopping up every loose fixed income security it finds, especially corporate high yield (HY) and investment grade (IG) bonds.

According to Bloomberg, "US corporate investment-grade issuance reached a record $1.346 trillion Monday, surpassing 2017’s full-year total in less than eight months." Companies binging on cheap credit threatens to put a lid on any nascent recovery in the US economy as more money will be directed at paying off debt than expanding business facilities or re-hiring laid-off workers.

The dollar's role as the global reserve currency, long viewed by market participants as "conspiracy theory" or other disingenuous terms, now has some real numbers to back the claim that the US is no longer viewed as the only dominant currency in the world. According to the Financial Times, "in the first quarter of 2020, the dollar’s share of trade between Russia and China fell below 50% for the first time on record… The greenback was used for only 46% of settlements between the two countries. At the same time, the euro made up an all-time high of 30%, while their national currencies accounted for 24%, also a new high."

The story remains the same, however, in the precious metals space. Limited supply and incessant demand have kept premiums elevated. The most recent prices on eBay in our weekly survey (including shipping) are listed below and on our historical survey page with prices of the same items starting in April, when Money Daily began tracking:

Item: Low / High / Average / Median

1 oz silver coin: 31.00 / 38.99 / 35.06 / 35.00
1 oz silver bar: 28.99 / 43.98 / 36.32 / 35.95
1 oz gold coin: 1,898.99 / 2,306.00 / 2,105.96 / 2,099.63
1 oz gold bar: 2,004.75 / 2,161.14 / 2,063.90 / 2,061.95

What can be gleaned from these prices pad is that silver is still carrying, on average, a premium of roughly eight to nine dollars over spot, and gold's premium is over $150 for one-ounce coins which appear to be in shorter supply this week, and $120 beyond spot for silver bars. Numismatics and collectibles, never represented in the Money Daily sampling, are approaching astronomical levels.

Closing out this edition of the WEEKEND WRAP, it appears that Meredith Whitney, who predicted a municipal bond blowout on CBS' 60 Minutes back in December of 2010, saying there would be "50 to 100 sizable defaults" in the U.S. municipal market in the coming year, totaling "hundreds of billions of dollars."

Whitney may be guilty of being too far ahead of her time, which Howard Marks, chairman and co-founder of Oaktree Capital Group LLC famously said in 2007, "is indistinguishable from being wrong."

This year, more than 50 municipal-bond issues worth $5 billion have defaulted, the most since 2011, according to Municipal Market Analytics. Whitney was right about muni defaults a decade ago; she just had the magnitude wrong. With interest rates surrounding the zero-bound globally, the muni market is stressed out to the point at which no muni issuance of 30 years or less offers a yield of more than two percent.

While munis are tax-free, combined with the real, growing possibility of default (i.e., as if getting minimal return on your money wasn't insult enough, you may not get a return of your money, the ultimate injury) and low interest rates, they may not be making as much sense for the high-income investors as corporates might. It's a matter of risk preference and tax brackets. Airports and cities, the main drivers of municipal bond issuance, are suffering like never before, a condition that is not likely to find resolution soon or soon enough to bail out the muni bond market.

Well, channeling both Peter Falk as Columbo and Steve Jobs as himself, "just one more thing..."

Legendary investor Jim Rogers expounds upon current and future economic conditions, investing in what you know best, what peasants always do, and the importance of due diligence in the video below.



At the Close, Friday, August 21, 2020:
Dow: 27,930.33, +190.60 (+0.69%)
NASDAQ: 11,311.80, +46.85 (+0.42%)
S&P 500: 3,397.16, +11.65 (+0.34%)
NYSE: 12,809.07, -3.79 (-0.03%)

For the Week:
Dow: -0.69 (0.00%)
NASDAQ: +292.50 (+2.65%)
S&P 500: +24.31, (+0.72%)
NYSE: -93.43 (-0.72%)