Economy can handle $100 oil but 10% equity drawdown poses greater impact = Fed put higher than people realize

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STRATEGY: Economy can handle $100 oil but 10% equity drawdown poses greater impact = Fed put higher than people realize

STRATEGY: Fed “put” arguably closer to a 10% drawdown in stocks today…
Fortunately, oil is taking a breather. After soaring to nearly $140 per barrel, oil has settled in just below $100. And the surge in the past month, as many know, is due to economic sanctions imposed by the US and western policymakers after the Russia-Ukraine invasion.

– And as we noted, this surge in commodities is essentially a massive fiscal tightening, driven by govt policy
– amplified on top of this is the 10% decline in stocks, which is amplified by the PEP effect, forced selling by oligarchs

But on the topic of oil, we can see that in the past decade, $100 oil was fairly common. This flies in the face of the pundits who say $100 oil is going to “break the economy” into recession.

– between 2010 to 2014, oil was routinely $100
– I don’t recall calls for calamity due to this

…data by tireless Ken shows on a “cost per barrel-basis” oil is cheaper than Diet Coke or Orange Juice
Oil takes 100 million years to make. First, it starts off as organic matter, then turns to coal and after millions of years, becomes oil. While many ESG-minded folks wish to see oil use end (which it will), oil is widely used today. But the difference is now that oil is also becoming part of a national security issue. Russia-Ukraine war is reminding us of this.

– oil is $100 per barrel
– Diet Coke, at $1.33 per two liter bottle, works out to $157 per barrel
– Even bottled water is more expensive than oil at $331

So why do we think $100, even $200 per barrel is the peak for oil?

…But the fall in equity prices and surge in oil are hurting consumer sentiment.
As noted Monday, the latest University of Michigan Consumer Confidence survey shows an utter collapse of sentiment. Present condition is down to 59.7 which was only seen 2X in the past 40 years:

– 1980s around last Energy crisis
– 2008 GFC

So, consumers see today as bad as stagflation and the Great Recession. Does this make sense? I don’t know but I find this puzzling. In fact, I think this has a lot to do with not only oil but also the drop in stock prices.

…Bottom decile confidence = extraordinary upside for equities 12-months later
As for implications for stocks. At the extremes, consumer confidence is a contrarian indicator. Below are the deciles of consumer confidence and the corresponding forward return of equities:

– at bottom decile
– S&P 500 forward returns average 15%
– this is the single best time to own equities

See the point? While pundits are bearish and say the US economy will “break into recession” due to war + inflation and while consumer confidence is basically at the worst readings in 40 years — this is the time to counter trade consensus. By the way, the Feb 24 lows have held, which we also think is somewhat encouraging.

FED PUT: We think it is at much higher levels than the markets appreciate
The FOMC meeting starts Wednesday and a press briefing will be held Thursday. Consensus widely expects a 25bp hike and this is the first hike since the start of the pandemic.

– and as our Head of Technical Strategy, Mark Newton, notes
– Markets typically rally after the first hike
– so this will be the “rip the bandaid” moment

…Consensus sees Fed “put” below S&P 500 3,750 but we believe it is far higher
You might recall this chart from a February 2022 Bank of America Fund Manager Survey. It shows that consensus believes the Fed “put” is at S&P 500 below 3,750.

– this is about 15% below current levels
– we believe the Fed “put” is higher

We will explain below, but it has to do with the impact of a 10% drop in equity prices and its associated impact on consumer net worth.

Household ownership of equities is $45 trillion, or 188% of GDP = greater exposure to equity and drawdowns
The obvious reason is stock holding by households are now $45 trillion or 188% of GDP. This is the highest level ever and above the 100% levels seen during the GFC.

– think about that
– if equities are 2X the relative size to GDP
– a 10% drop in stocks has a far greater impact than in the past

…a 10% drop in equity prices is now a “net worth” hit of close to 20%, far higher than the past
It is for this reason we see the Fed put coming in at a higher level:

– a 10% drop in equity value for households today = 18% drop in net worth as % GDP
– this is far higher than in the past

– in fact, as the red dot shows, the Fed rate cuts happened with a 10% hit to HH net worth was far smaller to GDP

– the connection between “household net worth” to GDP is the wealth effect
– a portion of the change in net worth is spent (if there are equity gains) or reduced (if equities fall)

– thus, with stocks more than 10% off their recent highs
– US household net worth has fallen by $4.5 trillion

– that is a huge hit
– and the wealth effect implications are substantial

In other words, consumer spending will take a hit due to:

– higher gasoline
– extra soaring commodities (due to economic sanctions now)
– 10% drop in stock prices wiping out $4.5 trillion of net worth

Yet, somehow doesn’t it seem like an aggressive Fed hike program is not congruent with the above? That is why we think the Fed “put” is at higher levels than institutional investors believe.

…Biden administration is using TikTok influencers to explain inflation
Hopefully the White House is using the proper tools to explain inflation and the coming second order effects of the economic sanctions. There was a press briefing last week. And it seems like the White House is turning to TikTok as well. This was a story first broken by CNBC last week. But as this example shared by @unusual_whalers shows, there are multiple TikTok stars talking about:

– Ukraine-Russia war
– rising gasoline

DATA ON RUSSIA-UKRAINE WAR: Tracking Russia-Ukraine war statistics — 1,834 Ukrainian civilian casualties so far

Our data science team, led by tireless Ken, is scraping data from several sources to track some high level data around the Russia-Ukraine war.

– Ukrainian civilian casualties
– Ukraine population movements
– Ukraine military losses, except personnel
– Russian estimated losses of personnel and material

Ukraine has lost an estimated 60% of its tanks and 83% of its aircraft
Our data science team, led by tireless Ken, has been tracking the casualties and losses associated with the Russia-Ukraine war. And while Ukraine has staged an impressive resistance, the reported losses of equipment show that Ukraine has lost a substantial share of its equipment:

– by our team’s analysis, using reported data
– Ukraine has lost 1,306 tanks or 60% of its equipment
– Ukraine has lost 110 aircraft, or 83% of its fleet

By these measures, the armament of that army is rapidly depleting. I am not sure if this is a well known fact. But this also highlights why the nation is seeking to replenish its equipment.

With each passing day, Ukraine is experiencing further losses of critical equipment.

The number of casualties is 73 on 3/15, and a total of 1,834 have been reported to the UN. This is after 2 weeks of information and could increase because there are simply lapses and lags in reporting.

The flow of migrations out of Ukraine had been steady at about 100,000 to 200,000 per day. And a total of 3 million have fled so far.

– 51% are entering into Poland
– curiously, 4% or 140k or so, have entered Russia

The UN publishes this data as soon as it is available from refugee-accepting countries. As a result, the most recent data point might be incomplete. We will continue to retroactively update our data as the UN does.

If one is wondering about reported losses of equipment, we are citing statistics provided by the opposing ministry officials.

– est. 110 Ukraine planes lost
– est. 1,306 tanks lost

– this seems like a lot of equipment

Russian losses are higher
– est. 13,500 Russian soldiers killed
– est. 389 tanks
– est. 81 aircraft
– est. 1,279 armored vehicles

Our team says this data is scraped and can be updated daily. So, we will post these figures for now. And that way, we can get a sense for the intensity of the hostilities.

Thomas Hu, of Kyber Capital, also shared this website which is a crowd sourced view of reported activities. There is a lot to the website, and I encourage you to check it out. The website URL is https://maphub.net/Cen4infoRes/russian-ukraine-monitor

For instance, if you click on one of the icons, a verified post is shown. There is geolocation and other data attached.

STRATEGY: 2022 theme –> BEEF –> Bitcoin (B) + Bitcoin equities (E) + Energy (E) + FAANG (F)
As for sectors, the pleas by Ukraine and sanctions are strengthening the case for our “BEEF” strategy. That is, BEEF is

– Bitcoin + Bitcoin Equities BITO 4.52%  GBTC 5.18%  BITW 2.35%
– Energy
– FAANG FNGS 1.83%  QQQ 2.13%

Combined, it can be shorted to BEEF.

PS: Homebuilders (Oct – Apr aka Golden 6 months) XHB

Why is this making stronger BEEF?

– Energy supply is now a sovereign priority
– this helps Energy stocks

– Ukraine and Russia both want access to alternative currencies
– this strengthens case for Bitcoin and bitcoin equities

– if Global economy slows, growth stocks lead
– hence, FANG starts to lead FB AAPL 5.94%  AMZN 0.82%  NFLX 2.52%  GOOG 0.29%

All in all, one wants to be Overweight BEEF

_____________________________

33 Granny Shot Ideas: We performed our quarterly rebalance on 2/3. Full stock list here –> Click here_____________________________

POINT 1: Daily COVID-19 cases 22,047, down -5,795 vs 7D ago…

Current Trends — COVID-19 cases:

– Daily cases 22,047 vs 27,842 7D ago, down -5,795
– 7D positivity rate 3.7% vs 3.9% 7D ago
– Hospitalized patients 21,072, down -26% vs 7D ago
– Daily deaths 1,163, down -14% vs 7D ago

The latest COVID-19 daily cases came in at 22,047, down -5,795 from 7D ago. All major metrics remain downward trends. The number of daily new cases in the US, measured by the 7D average, is approaching the level of 30,000. And it should fall below 30,000 tomorrow based on current speed of decline.

7D delta in daily cases turned negative…After being positive for one day (slightly), 7D delta turned negative again – it once again showed the overall COVID condition in the US continues to improve and the one-day spike in 7D delta was just due to some data fluctuation in a few states.

At the state level, a handful of states reported a higher case figure vs. 7D ago. NY and IL are the two with the largest case increase compared to 7D ago (btw, the “case rise” in SC was due to its new weekly reporting schedule). Admittedly, one data point is not enough for us to make definitive conclusion on the case trend. But it is definitely worth tracking the developments in these two states. In fact, CDC’s wastewater COVID surveillance system might give us some hints.

As shown in the chart below, five counties within the two states have seen 15D % change of COVID RNA levels > 1000%. They are:
– Nassau County, NY
– Cook County, IL
– McHenry County, IL
– Whiteside County, IL
– Adams County, IL

Illinois also has more wastewater sampling sites that have 15% change of COVID RNA load > 100%. So, it’s worth watching if later case data would show any local outbreaks in those counties.

As our clients know, throughout the pandemic, we referred to the wastewater viral load tests many times. The trend of viral load in the wastewater serves well as a leading indicator of case trend. As the pandemic transitions into the endemic stage, the wastewater surveillance system is also a crucial tool to quickly identify local outbreaks and prevent the endemic from becoming a pandemic again.

All US states are seeing decline in daily cases now… 49 states have seen daily cases fall over 90%…
*** We’ve split the “Parabolic Case Tracker” into 2 tables: one where cases are falling (or about to fall), and the other where cases are rising

In these tables, we’ve included the vaccine penetration, case peak information, and the current case trend for 50 US states + DC. The table for states where cases are declining is sorted by case % off of their recent peak, while the table for states where cases are rising is sorted by the current daily cases to pre-surge daily cases multiple.
– The states with higher ranks are the states that have seen a more significant decline / rise in daily cases
– We also calculated the number of days during the recent case surge
– The US as a whole, UK, and Israel are also shown at the top as a reference

Daily deaths, positivity rates, and hospitalization rate are falling rapidly…
Below we show the aggregate number of patients hospitalized due to COVID, daily mortality associated with COVID, and the daily positivity rate for COVID

-Net hospitalization and positivity rates have plunged – both have fallen to the pre-Omicron levels
– Daily death finally started to decline after the daily cases peaked for a month. And as you can see below, daily deaths have also dropped rapidly, consistent with we have seen in other metrics.

POINT 2: VACCINE: vaccination pace has slowed recently… likely due to the improvement in COVID situation

Current Trends — Vaccinations:
– avg 0.3 million this past week vs 0.3 million last week
– overall, 29.3% received booster doses, 65.1% fully vaccinated, 76.4% 1-dose+ received

Vaccination frontier update –> all states now above 100% combined penetration (vaccines + infections)
*** We’ve updated the total detected infections multiplier from 4.0x to 2.5x. The CDC changed the estimate multiplier because testing has become much better and more prevalent.

Below we sorted the states by the combined penetration (vaccinations + infections). The assumption is that a state with higher combined penetration is likely to be closer to herd immunity, and therefore, less likely to see a parabolic surge in daily cases and deaths. Please note that this “combined penetration” metric can be over 100%, as infected people could also be vaccinated (actually recommended by CDC).

– Currently, all states are above 100% combined penetration
– Again, this metric can be over 100%, as infected people could also be vaccinated, but 100% combined penetration does not mean that the entire population within each state is either infected or vaccinated

There were a total of 269,498 doses administered, as reported on Monday. The vaccination pace continues to fall and now is the lowest level since the mass rollout of COVID-19 vaccines. But it is also understandable that less people are seeking vaccination given the improvement in overall COVID situations..

This is the state by state data below, showing information for individuals with one dose, two doses, and booster dose.

In total, 557 million vaccine doses have been administered across the country. Specifically, 253 million Americans (76% of US population) have received at least 1 dose of the vaccine. 216 million Americans (65% of US population) are fully vaccinated. And 97 million Americans (29% of US population) received their booster shot.

POINT 3: Tracking the seasonality of COVID-19
***We’ve updated the seasonality tracker to show figures from the last 9 months, from this calendar day, in each of the last two years***

As evident by trends in 2020 and 2021, seasonality appears to play an important role in the daily cases, hospitalization, and deaths trends. Therefore, we think there might be a strong argument that COVID-19 is poised to become a seasonal virus.

The possible explanations for the seasonality we observed are:

– Outdoor Temperature: increasing indoor activities in the South vs increasing outdoor activities in the northeast during the Summer
– “Air Conditioning” Season: similar to “outdoor temperature”, more “AC” usage might facilitate the spread of the virus indoors
– Opposite effects hold true in the winter

CASES
It seems as if the main factor contributing to current case trends right now is outdoor temperature. During the Summer, outdoor activities are generally increased in the northern states as the weather becomes nicer. In southern states, on the other hand, it becomes too hot and indoor activities are increased. As such, northern state cases didn’t spike much during Summer 2020 while southern state cases did. Currently, northern state cases are showing a slight spike, especially when compared to Summer 2020. This could be attributed to the introduction of the more transmissible Delta variant and the lifting of restrictions combined with pent up demand for indoor activities.

HOSPITALIZATION
Current hospitalizations appear to be similar or less than Summer 2020 rates in most states. This is likely due to increased vaccination rates and the vaccine’s ability to reduce the severity of the virus.

DEATHS
Current death rates appear to be scattered compared to 2020 rates. This is likely due to varying vaccination rates in each state. States with higher vaccination rates seem to have lower death rates given the vaccine’s ability to reduce the severity of the virus; states with lower vaccination rates seem to have higher death rates.