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Market Update August 5: Production Structure

Market Update August 5: Production Structure

August 20, 2020
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There still have been daily deaths past the mid-April peak, states are beginning to reopen, and gross domestic product (GDP) data is coming in. The data looks rough but has a general trend and we will continue to monitor it. In addition, there have been errors in reporting. This is not to suggest nefarious reporting. The changes were done in error on counting the deaths as COVID-19 versus other reasons of death.  

During a White House briefing, Dr. Birx stated, "The intent is ... if someone dies with COVID-19 we are counting that," This is probably prudent, but how do we look past possibly skewed data. How do we review the deaths in a slower-paced data gathering environment?

The Center for Disease Control publishes data regularly for COVID-19. When COVID-19 is reported as a cause of death – or when it is listed as a “probable” or “presumed” cause — the death is coded. This can include cases with or without laboratory confirmation. These numbers are different due to the amount of time death certificates take to be completed. Currently, 63% of all U.S. deaths are reported within 10 days of the date of death, but there is significant variation among jurisdictions. It takes extra time to code COVID-19 deaths. 

And has more deaths due to COVID-19 increase, the more rules are being put on community. This is causing an uproar in the political world. There is a ton of pressure to open back up, but politicians have to evaluate the risks when decisions are being made regarding opening or closing the community during this worldwide pandemic.  

Inflation Risk is High 

There has been concerns with inflation, being a key risk factor in our market. The Wall Street Journal talked about the feds weighing in on abandoning pre-emptive rate moves to curb inflation. As the market starts to get traction, the feds are not going to wait for inflation to show up in the Consumer Price Index (CPI) numbers. Instead, interest rates will move up as the economy gets stronger. But they are not going to do this anymore, as they want to meet the 2% target. What happens if we see three, four, or five percent? Is there a tipping point?

The feds are not going to slow down the money printing and it is likely they will continue to monetize the debt of the government to keep these prices elevated in the market. So, yes, we most certainly will have a pullback in the market, but most likely that will be met with. We have not seen this type of inflation from this type of policy for about three to four decades.

Three Stages to the Economy

The early stage of the economy is a creation of some type of capital tool. Then, in the second stage you add the labor to the capital tools. And in the last stage everything is derived from its use value creating capital goods. With these three stages comes the production possibility frontier.

Let’s say you have five fish. You can either consume or invest in them. The more you invest the more stages of production there are: boat, capital tool, labor, use value. But if you consume more fish you can increase your standard of living as you collect more capital tools. This will ultimately lead to investing less product than you earn.

Delayed gratification now comes in place. The wisdom of setting things aside because if you set a little aside now you will earn bigger rewards later. This sounds a lot like interest, which will be mentioned in the August 12th webinar.

US Dollar Index

We have had and still have concerns with the dollar. It has broken out of its range and it looks like we are going to go back to prices on the dollar that were present in the early 2000s. It is not a coincidence that gold is making new highs and as a reminder we did add gold miners to the portfolio in our webinar two weeks ago.

Gold is leading the near-term relative strength and technology is rising as technology companies do well. But on the opposite side of the spectrum, international markets are not doing so well. So far, our portfolios have been exactly where they need to be. We will continue to monitor these technical to see if there is any softness or reason to make any changes going forward.

Follow GWS on YouTube

For the full video recap of the webinar on which this blog post is based, follow GWS on YouTube. (If a recent episode isn’t posted there yet, it’s still in compliance review). And be sure to tune in to our weekly Gatewood Wealth Solutions Market Webinar to hear updates on the current state of the market and economy. As always, we welcome you to share our broadcast links on social media or with your friends and family. They are more than welcome to listen in and learn our perspective on the market and the economy.

If you have any questions, please contact your Lead Advisor or any other member of our team.  We are here for you.

Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

 

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