I thought it might be handy to do a quick TLDR of the fed's beige book just to keep myself (and hopefully you) up to speed on where the economy stands and where we might be headed. Let me preface this by saying I'm not an economist and most of you probably already know most of this stuff. If you want to read the whole thing, it's here and is a good way to get a broad outlook on the US economy as a whole. I read it almost every release and it's quite an easy read and pretty enjoyable. Alright here we go:
The Obvious Part:
The economy is in the shitter (duh). Employment is down across the board, but certain industries are hit harder than others. Some of the hardest hit industries for reasons that should be obvious are:
- Hospitality and tourism
- Retail sales/establishments
- Auto sales
If the reasons aren't obvious, it's cause everything is closed. Residential home sales also dropped significantly from their already depressed levels mostly due to restrictions on showings as well as sellers deciding maybe the best time to sell their home isn't during the middle of a global pandemic when 20% of the country has no income and the 80% who do might be infected with something that could kill you.
A Little Light ... But Not Much:
Interestingly auto sales actually saw a little boost, but they had declined something like 95% as of the last beige book in April, so I'm not sure a boost really matters when you're being boosted from zero. Turns out people don't buy cars and houses when they're unemployed, even in debt-obsessed America. Speaking of debt, it seems pretty much the only lending going on is PPP loans and forbearances for those who can't make their payments. This extended into the commercial real estate market which is concerning especially considering the renewed reporting on the whistleblower complaint from last year that banks like Wells Fargo (of course it's Wells Fargo...it's always Wells Fargo isn't it?) and Deutsche Bank are engaging in systematic manipulation of commercial mortgage backed securities which effectively means that a boatload of commercial renters (read: hotels, office buildings, etc) that already have debt out the wazoo (a highly technical financial term) might not be able to pay their bills...but I digress
A Few Other Notes:
Prices in general were down. Certain things saw boosted demand and mildly inflated prices, in particular essential retail items like cleaning supplies, meat, fresh fruit and veggies, etc. Basically, things you need during a pandemic. Aside from that, almost everything is priced lower due to lower demand and supply chain interruptions. Some of the higher pricing on things like PPE, food and medical supplies is offset by the fact that the firms selling them now have additional costs due to social distancing regulations and decreased foot traffic. As far as employment and wages, wages that are still in place are mixed at best: the fed reported that in general, wages were flat or down in non-essential sectors but many firms reported temporary or even permanent wage increases, or at least not cuts, for essential workers.
Where We're Going:
The short answer is no one really knows. Everyone hopes that we're out of the woods, but the reality is that we aren't. We don't know if a second wave of COVID-19 will force us to shut everything down again, and most firms don't seem to know how soon they'll be returning to full employment, or if they will need to make more cuts and issue more layoffs. I think the fed themselves said it best:
Although many contacts expressed hope that overall activity would pick-up as businesses reopened, the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery.
But LazyFA, what's that mean for our precious stonks?!
Yes yes I know. Fed go brrrr and all that. I believe the market will continue to drift upwards from here despite the current economic climate, and even if we do see a temporary pullback in the near future. The two primary emotions in the markets are fear and greed, which often both manifest themselves as fear: FOMO (fear of missing out) and FOFL (fear of further loss). At this point I believe the fed action of inflating its balance sheet more than 70% to over $7 trillion in just three months by buying basically everything in sight including ETFs holding junk bonds - and despite its unknown consequences for the long term health of the economy and the US dollar - has squashed the second type of fear into oblivion. There is no more widespread fear of further loss as we are nearly back to where we started with tech stocks leading the charge (as is custom...all hail our Amazonian overlord). I believe the average investor knows that even if we begin to drift back down, there are so many people who missed the first rebound ready to BTFD at the first sign of a retracement that it will take a mass panic to overtake the dip buyers.
That means the only thing left is FOMO, and a bunch of bears who have been sitting on the sidelines and are now salty about missing out on 50% gains on bankrupt and debt-laden companies that were bailed out by the fed. By all accounts, the bears are right. The market should be in the dumps with the economy, but it's not, because everyone believed that's exactly where it would go, and the rebound was so ferocious that it caught everyone but the most YOLO-prone investors off guard. So I'm not saying we're out of the woods yet - we're clearly not as evidenced by the findings in the last two beige books - but the fear of further loss is gone. The panic is gone. The only thing that's left is FOMO, and a bunch of people with cash they didn't put in at the bottom who are now filled with regret and get closer and closer to just saying "fuck it, I'm in" with every gap up. IMHO, the only thing that can bring the market back down with any sort of force is a second shutdown. Rising cases won't do it on their own but if we have to shut down again things will get ugly because it will mean that the future is even more uncertain, and if there's one thing the market truly hates, it's uncertainty.
So there ya go. My TLDR of today's beige book and (probably mostly useless) thoughts on where we're headed. Now, cue the bad news so the market can gap down 4% tomorrow and make this whole post look like nonsense.