The S&P 500 has climbed over 30 percent since its closing low on March 23. Remarkably, it stands only about 18 percent shy of its all-time high on February 19. Could it be that the worst is behind us and brighter days are on the horizon?
Why not? Fed Chair Jay Powell is energetically controlling monetary policy, Treasury Secretary Steven Mnuchin is reassuring his Wall Street connections, and Congress is aggressively pursuing a $4 trillion deficit.
Given this influx of cash into the financial markets, it seems like an opportune time to invest in stocks… right? However, that answer largely depends on whether you consider yourself lucky.
Unlike many, billionaire investor Carl Icahn isn’t feeling lucky. He sees stocks as overvalued. With decades of experience navigating market crashes since the Great Depression, Icahn knows a thing or two about market valuations.
Rather than buying stocks, Icahn is stockpiling cash, shorting commercial real estate, and bracing for significant downturns resulting from the coronavirus. Yet, he also recognizes the opportunities created by government distortions. According to Bloomberg:
“A savvy trader, Icahn saw a unique opportunity amid the market turmoil. On April 20, when oil prices plummeted to an unprecedented minus $40 a barrel, he seized the chance to buy.”
“With CVR Energy Inc., one of Icahn’s key investments, requiring oil for its refineries, he recognized a chance to profit from the chaos, instructing the Texas-based company to prepare for 1 million to 2 million barrels at negative prices he doesn’t anticipate seeing again.”
How oil futures dipped to minus $40 a barrel is indeed baffling. We’ll delve into that shortly. But first, let’s provide some context…
An Assault on Free Markets
Like Icahn, we too cast a wary glance at the stock market rally. The Federal Reserve is injecting liquidity into financial markets, while Washington is flooding the economy with artificial money. But these interventions fail to address a core issue stemming from the coronavirus shutdown—the forced disruption of supply and demand. Here’s what we mean…
We are graced—and burdened—with an abundance of hair. Our locks are thick, wild, and unruly. They grow outward but never down.
We visit our barber, an old sailor, approximately every three weeks for a ‘high and tight’ cut and more chatter than we bargained for. Yet California’s Governor Gavin Newsom—Nancy Pelosi’s former nephew—has halted haircuts in line with his statewide shelter-in-place order.
Currently, the demand for haircuts is high, but their supply has been artificially restrained. In a bid to protect us from the pitfalls of the coronavirus, authorities have severed the free-market connection between supply and demand.
While the Fed and Congress inject money into financial markets and the economy, their counterparts at the state level are imposing restrictions on its flow. As a result, markets aren’t operating under the invisible hand described by Adam Smith. Instead, they are manipulated by a heavy governmental hand, leading us down a troubling path.
Haircuts illustrate just one of the many absurd examples of how the government shutdown disrupts free markets. Numerous instances abound across the economy, all equally absurd.
One of the most notable examples resides in the oil market, where prices spiraled down to minus $40 a barrel. The situation began well before the coronavirus, but the government’s response has distorted these price discrepancies beyond recognition.
Buckle Up for Economic Destruction
On March 6, we shared a simple anecdote about the growing economic devastation we were witnessing. From our viewpoint overlooking San Pedro Bay, the main entry point for Chinese imports into the USA, we noted fewer foghorns. From this simple observation, we deduced:
“Supply chain disruptions lead to consumer good shortages, which lead to declining sales, which lead to reduced cash flow, which lead to layoffs, which lead to fewer Ford F-150 sales, which lead to decreasing tax revenues, which lead to unmanageable public and private debt, which lead to mass bankruptcies, which lead to game over.”
Sadly, the economic fallout has far surpassed our expectations over the past two months. The government shutdown has devastated the economy in ways not seen since the Great Depression. This destruction has emerged in bizarre and unpredictable forms.
Just recently, we were jolted from our early morning slumber by a chorus of foghorns. Yet these weren’t due to the return of container ships laden with cheap goods from China. Instead, they heralded a group of 27 oil tankers anchored offshore.
The pandemic has caused oil demand to plummet by over 30 percent. This surplus oil has overwhelmed local storage capacities, leading producers to stash excess oil in tankers. Soon, there won’t be any room left for storage, compelling oil producers to cease operations.
A sharp drop in oil demand—a direct result of shelter-in-place orders—contributed to the staggering plunge of oil futures to minus $40 a barrel. This represents one of the most significant price collapses ever witnessed.
However, the oil market was already a ticking time bomb. A decade of low credit from the Fed encouraged oil producers to operate under conditions that would typically be unsustainable. Now, government intervention has pulled the rug out from under them, sending the broader economy—also drowning in Fed-induced debt—down with it.
According to Reuters, Chesapeake Energy, synonymous with heavily leveraged shale production, is preparing for bankruptcy. They are just one of many.
Undoubtedly, COVID-19 is a serious threat. However, it has become increasingly clear that the government’s shutdown was a short-sighted miscalculation. The dire consequences of a shattered economy—with immense human suffering—far exceed the impact of the virus.
The notion that the economy will quickly recover once shelter-in-place orders are lifted is pure fantasy. The reality is that we are far more compromised than we fully recognize.
This is a pivotal moment, everyone. Prepare yourselves.
Sincerely,
MN Gordon
for Economic Prism
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