-Extremely light trading volume heading into the end of summer
-Record gain in sales of previously owned homes vs. record gain in late FHA loan payments
-Companies have borrowed a record amount, and they’ll eventually have to pay this money back
Hi there—here is this week's update!
Light Trading Volume
Trading activity has been extremely light, heading into the final weeks of summer. The year-to-date average is ~11.5 billion shares per day, and we’ve been seeing ~8.5 billion per day. While the markets and economy seem anything but normal these days, lower volume leading up to Labor Day is relatively common.
Filings for jobless benefits rose by 135,000 for the week ending on August 15, bringing the initial jobless claims number back over 1 million. The total number of Americans claiming ongoing unemployment assistance is a staggering 14.8 million.
“The fact that five months into the crisis initial claims are running at 1.1 million per week is, in absolute terms, very bad news,” said the Chief U.S economist at Maria Fiorini Ramirez.
Following up on last week’s update, Capitol Hill has had little movement regarding the new stimulus package.
A Tale of Two Homes
U.S. sales of previously owned homes grew a record amount due to the historically low mortgage rates.
In contrast to this, we’re seeing the share of late FHA loans rise to ~16% in the second quarter, which is the highest level since the 1970s. People on the lower end of the income scale are more likely to have FHA loans, which allow borrowers with worse credit to buy homes with smaller down payments.
This means we’re seeing millions of Americans not paying their mortgages after losing their jobs, while millions more are taking advantage of low rates to buy homes.
The Bond Market
Corporations have borrowed a record amount from the bond market over the last few months, and now businesses have more debt today than ever before.
While most of that money has helped companies stay alive during the pandemic, this poses a new problem. Businesses will have to start repaying their debts, while profits continue to sink. This will lead to elevated default rates in the long run.
Campbell Harvey, a finance professor at Duke University and a senior adviser at Research Affiliates, discussed the markets this week and nearly took the words out of our mouths.
He’s quoted saying, “We are in a deep recession, yet the stock market has completely blown it off... you see some green shoots in the bond market also… I said irrational exuberance in gold, but at minimum, it’s kind of a rose-colored glasses effect where people are not looking at the structural damage that’s been done to our economy, the potential cost of the QE, the potential cost of having to pay back all of the fiscal stimulus. That’s being completely ignored. And to me that’s very worrisome when you’ve got markets like this.”
There isn’t much for us to comment on this week, as there is extremely light trading volume, but we’re still maintaining our viewpoint. We think now is not the time to gamble. Instead, it’s time to position yourself safely and wait for the bubble to pop, or at the very least deflate.
See you next week,
-Saul & The Round Team
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