Since the March crash, the financial markets have been living in „La la land“. While the street is screaming with agony due to one of the worst crises in recent history, investors on Wall Street are partying on money enjoying an early recovery.
Deconfidence is partly responsible for that. But, without a doubt, the Federal Reserve’s rescue plans are taking the big prize. An ocean of liquidity is falling on the markets and investors have been riding the wave. But we’re already getting to a point where the disconnect between Wall Street and Main Street is simply too much. This is not about being alarmist. But we look at the challenges that the month of July presents.
The increase in contagion
Before the coronavirus pandemic, the economy was doing very well. There’s no denying that. Times were not bad. However, not everything was rosy. Pessimism was already being felt, because many were talking about a very bleak outlook for the future. The economic slowdown was evident, and the stimuli were no longer working as before. We were „fine“, but the concern was great, because we all felt that the crisis was knocking on the door. The pandemic came and struck a deadly blow.
From the economic point of view, the measures taken were fatal. Necessary, but fatal. Confinement paralysed economic activity. Demand fell to the ground. Deflation engulfed the world. And the markets, of course, collapsed. Businesses closed and losses and layoffs began. The crisis came.
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But, after a few long and complicated weeks, the quarantine was gradually lifted and that brought a new optimism. Hope invaded the markets and prices began to rise again. Now, this story is not over. The contagion continues to grow. And the epicentre is now in the Americas. Texas and Florida have reversed some of their opening measures, because the increase in those infected has been too much lately. This is obviously a worrying situation, because a second lockdown would be deadly for the economy.
Then what we have is the harsh economic reality. Unemployment is the big elephant in the room. Unemployment means social unrest, political tension, falling consumption and low growth. High unemployment means that current valuations are unsustainable over time. Unemployment is essentially deflationary. And deflation generates unemployment. April was one of the worst months in history. The United States went from almost full employment to its worst rate since the Great Depression in a few weeks. May, however, surprised us with an improvement. Suddenly, this improvement is not directly related to an improvement in the economy, but simply to the situation of the lack of jobs.
We will see this this week. Because the U.S. Labor Department will be publishing Bitcoin Trader its monthly report on Thursday, July 2. If the improvement is significant, this would be great because this positive data would be complemented by the May data. Then, there would be an air of optimism, because, even though we are in bad shape, at least we are doing well. And the future is what motivates investors. On the other hand, if the data confirms the suspicions of the more pessimistic, the spell would be broken and investors might start to feel fearful. And from fear to panic, there’s a passage.