THE DAILYALTS PLAYBOOK

June 1, 2020

DailyAlts Playbook: America on Fire, Goldman Shorts the Dollar, a $41 Trillion Hole, and the Death of Pensions.

PRIME OVERVIEW

Good morning,

Friday morning, I was out for dental surgery and now I have another surgery in two weeks. Three days ago, I would have told you that the biggest threat to the market rally was the renewed tensions between the United States and China.

I would have highlighted the troubling new report from the Federal Reserve that said the U.S.-China trade war had evaporated about $1.7 trillion in U.S. market value since its start in 2018. I would have said it cut U.S. investment in America by 0.3% at the end of last December.

And I’d have noted that the report tied the impact of tariffs to the expected 1.6% decline in U.S. investment by the end of 2020. With China likely to announce some sort of retaliation against the United States after the Trump Administration’s new positions released last week, it would make sense that investor sentiment start to show some signs of fatigue after the eye-popping run that we witnessed just last week. And that thesis would have stood as rational, clear thought on the state of the markets. And knowing that markets are more irrational than I am, I’d probably have been wrong, and the Dow would defy me and hit 30,000 by September.

But then the reality of the weekend set in.

The United States remains a tinderbox, ripe with lasting racial inequities that negatively – socially, politically and economically – impact tens of millions of African Americans. We now have a new Lost Generation of Millennials who have endured three economic crises in 20 years and face the worst economic outlook of any generation American history. We also have the 40% of Americans earning less than $40,000 who lost their jobs due to COVID-19, an economic chasm between rich and poor not seen in 100 years, and a dearth of real political leadership from mayor’s offices up to the highest halls of power on both sides of the aisle.

Simply put: The “fundamentals” aren’t very good.

Each month has only been worse than the last in 2020.

And it’s only June 1.

MORNING MOMENTUM

OPENING: The Dow Jones Futures projected a 25-point decline in premarket hours after riots spread across the nation, new tensions emerged between the United States and China, and concerns emerged about a resurgence of COVID-19 cases in America. Markets are preparing for this Friday’s official jobs report from the Department of Labor. Economists anticipate that the U.S. lost 9.0 million jobs last month. That figure would come on top of the 20 million jobs lost in April. The average forecast anticipates that the official unemployment rate will hit 19.6% for May.

PROTEST: The United States is picking up the pieces from a destructive weekend that saw peaceful protests over the death of George Floyd devolve into riots and looting by opportunists exploiting the public gatherings. Mayors of cities across the country instituted curfews and at least 12 states activated their National Guard troops in an effort to restore stability across the nation. In New York City alone, the NYPD arrested 350 people, while reporting injuries to at least 30 officers.

COVID: Over the weekend, the number of U.S. coronavirus cases topped 1.7 million, with the death total now surpassing 103,000. The ongoing uncertainty created by COVID-19 has created a new problem for the economy: Not enough Americans are consuming and spending money. According to data from the Bureau of Economic Analysis, the personal savings rate of Americans hit an all-time high of 33% in April. While cash-hoarding surged, consumer spending dropped by a record 13.6% for the month. Bank of America (NYSE: BAC) announced that the average amount of money in consumers’ checking accounts increased by 30% to 40% over the last three months.

TENSION: We will continue to focus on the ongoing trade tensions between the United States and China. Relations between the two nations could be deteriorating yet again on reports that Beijing may move to retaliate against the U.S. over its announcement Friday to end special treatments for Hong Kong. We’ll especially keep an eye on the technology sector, which could face renewed revenue and margin pressures due to supply chain concerns. Many analysts are concerned that China may move to use anti-monopoly laws to affect U.S. companies in industries where state-owned companies lack a large market share. This could target firms like Boeing (NYSE: BA), Cisco Systems (NASDAQ: CSCO) and Apple Inc.(NASDAQ: AAPL).

ACCRUED INTEREST

SHORT: Goldman Sachs announced it is shorting the U.S. dollar as economies around the globe lure investors out of the traditional safe-haven asset. In a note produced this weekend, Goldman said that it was too early for “outright and sustained Dollar downside given the balance of cyclical risks.” However, it said that shorting the greenback was an attractive play. I have been thinking a lot about what could be the next major geopolitical shock on this planet and one that might reverberate quite significantly. My expectation is some sort of downside dollar shock that makes utter sense in hindsight. The United States is on fire and we have expanded our Federal balance sheet and blown out our debt to levels once thought impossible. While there isn’t quite a suitable rival to the dollar right now, it doesn’t mean that someone like Saudi Arabia or Qatar wouldn’t de-peg its currency due to concerns about the stability of the United States. I’m simply talking about an event that generates enough international news for 48 hours that it creates enough havoc like the 2015 Swiss-Euro event. In fact, we’re starting to see rumblings about the pegs of the six members of the Gulf Cooperation Council.

DIRE: Or we could just talk about the fact that pensions now expect to run out of money by 2028.

VALUE: Cliff Asness says that it’s a very good time for anyone looking to profit off value investing. The strategy has struggled in recent years thanks to the strenght of momentum stocks and the ongoing support of the Federal Reserve to toss money from the sky. Fundamental Value index was off 12.7% through the end of February.

WINNER: Alan Howard has had a hell of a run during the COVID-19 crisis. The latest reports show that his hedge fund is up about 100% since the start of the year. The bulk of the gains came from when he bought in at the height of the crisis. With that in mind, Howard is one of the few male hedge fund managers who are beating their female rivals.

QUOTE OF THE DAY

“That hole in income is going to be filled unevenly. Some companies and some countries will feel the impact much more; some governments will be able to deal with it better than others. There is a massive differentiation inside the system.”

That’s Bob Prince at Bridgewater Associates. The hedge fund has identified a $41 trillion hole in global corporate income thanks to the COVID-19 outbreak, and things could start deteriorating quickly as filling lost income with fiscal policy is not the same as addressing the drop in consumer spending. This is a very important presentation.

CARRIED INTEREST

Here are the other stories generating interest on Tuesday.

• ARTIFICIAL INTELLIGENCE: Microsoft lays off journalists to replace them with AI
• DIGITAL ASSETS: Why Family Offices Should Consider Digital Assets for Their Portfolios
• ESG: The SEC, ESG, and Unbundling
• FINTECH: Meet The Woman Behind Okra, Africa’s First API Fintech “Super-Connector”
• HEDGE FUNDS: This under-the-radar hedge fund is riding e-commerce plays to a big return. Here are its next bets
• LIQUID ALTS: The minimalist investor and focus on simplicity
• PRIVATE EQUITY: Tough new takeover rules could rein in foreign swoops on UK tech
• REAL ESTATE: After flocking downtown to woo millennials, offices might be moving back to the suburbs
• VENTURE CAPITAL: Venture capital found its footing in biotech. Then came the virus.

SOCIAL RESPONSIBILITY AND THE DAILYALTS PLAYBOOK

SEND US A NOTE ON TWITTER.

DailyAlts Playbook: @DailyAlts

For tips and suggestions, please contact: Info@DailyAlts.com

ABOUT THE DAILYALTS PLAYBOOK

Garrett Baldwin is the author of the DailyAlts Playbook.

An economist and author based in Naples, Florida, Garrett has an extended history of financial analysis, business journalism, public relations and consulting experience in hedge funds, private equity, alternative investments, housing policy, commodities, and public equity coverage. He holds degrees from Northwestern University, Johns Hopkins University, Purdue University, and Indiana’s Kelley School of Business. He also has a Certificate in Global Business from Harvard Business School.

An avid Baltimore Orioles and Buffalo Bills fan, he would prefer to discuss other sports, please.