Distracted Economics: Opportunity

The economy entered the week of June seventh roughly three months after the initial shock tanked the market with the Dow dropping by more than two thousand points. Opening monday the market was up following a promising weekend of more announced openings and the rising price of oil. Tuesday the market dropped 7%, and has rallied for the rest of the week. The most recent release from the Bureau of Labor shows that while unemployment and the rate of it’s growth are still up from February they are both down from March. Economic policy has taken a back seat in the recent months to countries dealing with the Covid-19 pandemic, but with more and more nations opening their borders once again world leaders are looking to strike deals to boost struggling economies. Notably the Trump Administration is moving closer to a deal with Boris Johnson‘s UK government on a post Brexit Trade agreement. With Trump trying to shore up economic policy before the election and Johnson attempting to validate Brexit it’s likely that a deal will transcend ideological differences between the two leaders. For the United States, pharmaceutical companies would be the primary beneficiary of a bilateral deal, as currently US drugs are heavily regulated in the UK. Investments in Johnson & Johnson along with Merck & CO. could be advisable while Corona virus and protests crowd the media narrative away from trade deals. Johnson & Johnson is still trading down on the month, so purchasing calls expiring during election season offer a low capital investment with the opportunity for large pay off in the long run. It is worth noting that Johnson & Johnson, like most of the market, has recovered from it’s initial fall back in March. Which brings us to our commentary.

Most market signs currently point to a strong economy backed by solid corporations, some doing even better than before the Corona Virus outbreak. It then begs the question: With most of the economy still not operational and a two month pause on financial doings, why does the market seem to be so far from reality? Let’s start with the bail out. After the initial fallout most corporations panicked as revenue started to decline. It’s important to remember that the bulk of devaluation began before the actual decline of revenue, the perception of a closed economy and a devastated workforce pushed the narrative of total chaos. Whether your opinion on bailouts are, the United States is very much a corporate state, so it’s not surprising that printing trillions of dollars to inject into the economy happened very quickly and was mostly bipartisan. Unlike 2008 however, this bail out was arguably preemptive. Companies have not yet racked up substantial debt and were more concerned about the public perception of laying off the workforce than actual losses. As a result, the bailout allowed companies to pay their workers to essentially do nothing, but with no operational cost and no labor expenses companies didn’t actually lose money. Without the ability to distribute bonuses or buy back now government owned stock due to public perception, companies had one thing to do with now trillions of dollars that threatened to devalue due to inflation. Invest. A substantial amount of the actual bailout was invested right back into the market, injecting hundreds of billions of dollars into a market that does not now reflect a true economic status quo. Bailout Tracker from ProPublica estimates that 38.7% of 633.7 billion dollars of bailout that has been spent has been reinvested into banks or other financial institutions. That’s over 200 billion dollars of liquidity of bailout cash alone, not including other assets invested that companies already were planning on investing this year. All told, with weeks like this one, early major increases with slight dropps accompanied by major rallies, the market offers a facade of stability to the general public.

Even with short term gains the fact remains that Americans will run out of money soon. With unemployment still incredibly high and the economy reliant upon a socailist bailout program, exiting the last few months will send tremors through an economy resembling a house of cards. Puts expiring in December offer a unique advantage to invest while the market is a massive bubble while media attention is focused elsewhere. With most public attention focused elsewhere inflated stocks go unlocked, offering a keen opportunity to short to market for the end of the year. Remember, when it comes to economics perception is reality, as long as people can’t feel the impact of unemployment because everyone is on house arrest the economy will look strong. Get ready to see another massive crash around November early December.

Kiel, Paul, and Dan Nguyen. “Bailout Tracker.” ProPublica, 28 Apr. 2020, projects.propublica.org/bailout/.

Department of Labor. “THE EMPLOYMENT SITUATION — MAY 2020.” Bureau of Labor Statistics, 5June2020,www.bls.gov/news.release/pdf/empsit.pdf.

Bloomberg, Sarah Babbage |. “Analysis | What Trump, Johnson Want From U.S.-U.K. Trade Deal.” The Washington Post, WP Company, 11 June 2020, http://www.washingtonpost.com/business/what-trump-johnson-want-from-us-uk-trade-deal/2020 /06/10/e116d732-ab75-11ea-a43b-be9f6494a87d_story.html.