JACK FARLEY: Welcome to the Real Vision Daily Briefing. It's Friday, April 17. Yet another crazy day in markets. We have our managing editor, Ed Harrison, standing by with Real Vision's own Ash Bennington, and they're ready to give their macro analysis of everything that's going on. But before we go to them, let's quickly go over the latest news in markets, starting out with some price action.
It was another strong day for US equities, with all three major indices rallying. The big winners of the day were Boeing, up 14.7%, and Exxon Mobil, up 10.4%. So the markets were fully in risk-on mode. Apple was down 1.3%, as Goldman Sachs predicted a major decline in their iPhone sales.
And while we're on the subject of interesting charts, I want to draw attention to a stock that's been exhibiting some truly extreme price action. The name of the company is Liberty TripAdvisor Holdings. It's a holding company that owns 23% of TripAdvisor and 58% of the voting share. On Wednesday, the class B shares skyrocketed 2,200%. What a wild swing.
This on the same day that class A shares went up a mere 21%. That's a change barely visible if you view both securities on the same chart, despite class B shares having 10 times greater voting power. It's my understanding that both issues have the same economic rights, making the spread between the class A and class B shares all the more confounding. Nobody really knows why this is happening.
Liberty TripAdvisor is professing that it is as baffled as we are, insisting in a press release issued today that it, quote, "is not aware of the reasons for the recent volatility in its stock price." No mainstream press outlet has reported about this. It is a small cap stock, but man, what a crazy price dislocation, class A and class B shares normally trading in lockstep. It really is remarkable.
And on the subject of price asymmetry we're seeing some peculiarities in the gold market where prices have declined for the past three days, ending the epic rally that we've seen since mid-March. But more interesting are the price dislocations between the different gold markets. I'm talking specifically futures and spot prices.
Now, if you look at this chart, you'll see the dark blue lines are physical spot prices for gold, whereas the thin and red and orange lines are future prices. You can see there's a compression between futures and spot prices. That means the market is exiting the contango phase, and it's just beginning to enter backwardation. And this is interesting because if you look back over the last couple of months you can see that there's a strong correlation between backwardation in gold and S&P selloffs.
Whenever those futures become cheaper than the spot price, that's a time when the S&P is likely to sell off. You can see several of those pockets that I've circled there. So it will be interesting to see what this means going forward.
So wow, a lot going on with markets. Thanks for sticking with Real Vision during his wild times. And thank you for your comments on yesterday's video. We really do read your comments, and we really appreciate your feedback. Man, such a crazy time. The dominoes really are lining up. To make sense of it all, right now, we have Ed Harrison and Ash Bennington with their market analysis.
ASH BENNINGTON: Welcome to Real Vision Daily Briefing. I'm Ash Bennington. It is Friday, April 17. I'm here in New York City, joined by Ed Harrison, our managing editor in the DC bureau. Welcome, Ed.
ED HARRISON: Good to talk to you, Ash. And let me just say before we start, I'm feeling a bit punchy today. So if I seem like I'm a bit off, that's why. And also, I will say that, looking at you, I'm thinking "Full Metal Jacket" with your haircut, because I'm thinking that on Monday, that's the cut I'm going to be showing. That's what I want.
ASH BENNINGTON: Yours is looking a little long here, Ed.
ED HARRISON: Yeah, exactly. It needs-- I mean, we've got the coronavirus cuts coming, and mine's coming on Monday.
ASH BENNINGTON: Yeah, I wonder if we're going to have a new fashion thing that everybody's going to be sporting crew cuts because they're just the easiest thing in the world to do.
ED HARRISON: Exactly, they really are. That's how I'm going to play it.
ASH BENNINGTON: So one other technical note. Raoul was supposed to be joining us today, but he's having some slight technical problems. One of the challenges of living in paradise is sometimes we have some minor connectivity glitches. But we'll get him back next week.
ED HARRISON: Yes, exactly. I'm doing the Raoul position. You're in the me position now. So we've swapped roles a little bit.
ASH BENNINGTON: Yes. So Ed, here we are, close of the week. Obviously a tremendous amount of news flow this week. Relatively quiet Friday in terms of game-changer things. What are you looking at, and what's your outlook?
ED HARRISON: Yeah, so I have a number of different things I'm looking at. Let me tell you, because I have my other screen two or three stories that Gabrielle, who works in content, has sent to me. One's about China and how they're handling EM debtors in this virus crisis. Another is about the US states being threaten-- their budgets-- by coronavirus. A third I thought was very interesting that she sent over is about the Bank of Russia dropping rates. I want to talk a little bit about that in the context of EM, and also what the ruble looks like.
And then, finally, just as a preview of a conversation I'm having next week, Chris Whalen-- he had an article out talking about banks. He was talking about commercial real estate. I think that that's going to be very interesting, what's happening both in terms of commercial as well as residential in terms of write-downs for banks, and what it could mean for Fannie and Freddie as well.
ASH BENNINGTON: Yeah, Chris Whalen one of the sharpest guys looking at bank stocks, looking at bank operations, and also looking at Fannie and Freddie. Of the stories that you mentioned, the one that I thought was the potentially most ominous was the state government budgetary shortfall. I mean, basically, the lede of the story is that there's the potential to have a $500 billion hole in state tax revenues caused by the ferocity of the shutdowns. And it's-- again, we get tired of saying this phrase, but there's some suspicion based on the preliminary modeling that it looks worse than what we saw a decade ago with the great recession.
As of this point, we've got $150 billion that has been approved by Congress on this. Obviously, we're about a third of the way there. And the article also goes on to say that new legislation is going to be focusing on replenishing that $350 billion from the shortfall for the Small Business Association. Ed, when you look at those gaps, what do you think?
ED HARRISON: So, I mean, the first thing that's on my mind, honestly, is the retirement crisis. I don't know if you remember, we ran a series a little while ago on retirements. And one of the things that stuck out to me was about pension funds for US states. If you compared Canadian pension plans to US state pension plans, you saw that there was a huge gaping hole in US pension plans.
So when we think of 2008, 2009, you can think about Meredith Whitney as an example of someone who people thought she was out to lunch, and that her call on municipal bonds was incorrect in the great financial crisis. But my feeling at the time was that what she was talking about was if we continued down in a very negative trajectory in the economy, then those things would come to the fore.
Now, here we are a decade later, and we're in the middle of a huge downturn. I think those same issues are going to come up. So I'm not as concerned, per se, about the budgets themselves, because I think that the federal government can make whole on the budget. The real concern for me is any sort of impact it would have on the retirement, on the pension plans in those states.
ASH BENNINGTON: Right. When Whitney came out with that report, people in muni land were a little bit dismissive of her, and said, stay in your lane. We do this every day, and we know better. But, as you suggest, that call may have been prescient, though early.
ED HARRISON: Yeah, exactly. And so, I mean, the only thing that is positive in terms of thinking about it from that perspective is that the market is doing as well as it is. I think we ended at 2,874 today on the S&P. And I think I was looking at the 62% retracement. It's 2,920. So we're still a bit a ways from that level yet.
And to the degree that we stay in that range, we don't have another precipitous drop, that's positive for those pension plans. But if the financial economy follows the real economy down, then I think you're going to be in trouble in terms of state and local pensions.
ASH BENNINGTON: Well, that's really it, Ed. You've just hit on the key point there. This question of whether the relative resiliency of the market is, in fact, a blessing or a curse. Obviously, it helps to support pension plans to have those levels in US equity markets be where they are. But again, and this is the conversation that we've talked about so many times on this show, which is, is the financial economy out of step with the real economy?
ED HARRISON: Yeah, I had a conversation with Kevin Muir about it. It was very interesting what he had to say. He was talking about guns blazing, basically, from a fiscal and monetary perspective, especially the fiscal perspective. And he was somewhat sanguine about the ability for markets to continue to somewhat levitate. Maybe there's some pressure down, but there's not a huge downdraft move coming forward.
I'm a little bit less sanguine. I think that there is the potential, especially if you look at some of the models in terms of COVID-19, how they've played out, what would have the United States. I saw that Cathy O'Neil, who we've actually had on here at Real Vision, she was doing some modeling. She was looking at Spain and Italy and what the path of COVID infections looked like. And what it looked like was a ramp up that you see in a bell curve.
But then on the backside of the curve, the ramp down wasn't symmetric with the ramp up. It was a much more gradual dispersion down in terms of the case count. And so that would suggest that the ability to release yourself from lockdown, especially if you've had a huge ramp up, is less. And so the real economy impact is going to be greater as result. And the United States is more akin to, say, Spain or Italy than it is to Denmark or New Zealand, which have done much better in that regard.
ASH BENNINGTON: Yeah, we've talked about this as well, which is there's obviously a lot of complexity in these models. There's a lot of uncertainty because there's really no known data set to draw on. Maybe for that reason, I like to keep things a little bit simpler. Obviously, neither of us are experts in epidemiological modeling. This stuff gets pretty abstruse.
But the one thing that I think we can see is a pretty reasonable starting point is the number that you mentioned earlier, Ed-- the 2,874, the Friday close. So we had a holiday-shortened week last week, and the S&P closed Thursday, April 9 at 2,789. So we've risen 3% this week.
And two of the key dates that I look at-- and again, this is just plain, vanilla, incredibly simple, basic stuff, right? Wednesday, February 19 was the all-time high in US equity markets on the S&P. The close was 3,386. Another key date. The all-time low-- post-crisis low, rather, I should say, on the S&P-- was Monday, March 23 when it closed down, at 2,237. So some really basic numbers.
We have gained since the low, post-crisis, 28.5% on the S&P as of Friday's close some 20 minutes ago. And if you look from the all-time high for the S&P, we are down 15.1%. 15.1%. Minus 15.1%.
I walk outside of my apartment building here in Manhattan, and I see businesses closed. I see people wearing masks. I see my doorman behind a layer of Plexiglas that makes him look like the bank teller. And I mean, it's just extraordinary. The economy is shifting. Small businesses are being devastated. And I look, and I see we're in moderate correction territory.
It's really hard for me to reconcile these two things. And maybe I'm looking at this too simplistically, but it really does feel, at least to me, like there is a colossal disconnect between the real economy and US equity markets.
ED HARRISON: I would say as well, but let's look at it from the other side of that, OK? So you might have a predisposition as we do to say that there's going to be a meeting on the downside between the economy and markets because the staying power of the negativity in the economic activity is large. But what about the concept that the Fed is buying up risk-free assets and actually has moved somewhat down the curve in terms of the assets they're prepared to buy, and that's pushing people out the risk curve in a way that can cause them to maintain a level of buoyancy in markets until we actually see the real economy catch up to some degree?
So there's going to be a disconnect. The way you could pop possibly look at it is a lack of market signal that, because the Fed has basically gotten all in and they're in all of the markets, that there are fewer market signals that are real. So you have some level of levitation. And then the question is, is how long can they do that? And will the real economy catch up eventually?
ASH BENNINGTON: Right. And I might add also, at what cost? If you're forcing investors further out on the risk curve, you're talking about people who desperately need to get some yield. And they're going out away from traditional safe assets. Their typical asset allocation between bonds and equities has shifted as a consequence. That's obviously baking in some additional risk.
Look, I think that all of the things you said are spot on. There's a lot of not just theory but data to support that. But for me, that's the case in a plain vanilla recession. And we really just don't know if the impact of the structural changes to the US economy caused by the coronavirus crisis are going to be. And as a consequence, the fear is, are we setting ourselves up for another shoe to drop?
ED HARRISON: Yeah. And I mean, mentally, what I'm thinking about-- I'm thinking about the Kobe earthquake in-- I think it was '95. This was six years after the Japanese market peaked. And what you saw was is the ability for the Japanese policymakers to levitate the market. It took a hit. And so you had these waves over a very long period of time of the market going down, re-accelerating for a relatively long period of time before the next downturn hit, and the market went down again.
So, on some level, I do think that perhaps the Fed can-- and also fiscal policy, I might add, in particular-- can keep us in a buoyant mood for a longer period of time than we might think. But how long, is the question. And whether the real economy catches up, we just don't know yet.
ASH BENNINGTON: Yeah, it's such a fishing metaphor, a natural disaster, like an earthquake, because that seems to be the metaphor that seems to work in many ways in terms of the actual shifts of the economy on the ground. Of course, the distinction here is that this is a global synchronized earthquake, which we've never seen before. Maybe some of the metaphor, to extend from Japan, is the absence of recovery and secular stagnation that's lasted-- it's now lost in decades, with an s. What can we say? Unprecedented, again.
ED HARRISON: You know, when we're talking about buoyancy, I'm thinking about these stories that Gabrielle sent. In particular, let's look at the Bank of Russia story that she was talking about, where the bank of Russia has said that it's going to cut rates. And actually, people are getting into ruble assets, into government bonds. Government bond yields are falling as a result of that.
Now, what we normally see is that people say, OK, look. Actually, you're cutting and you need dollars, or you're an emerging market. You need to increase your rates to attract their money. But it's the opposite now. So on some level, when we think about people moving out the risk curve, this is the perfect example of that.
I looked, actually, also at the same time at the ruble-US dollar relationship. And what I saw over the last year is we were trading about 65 USD. RUB was trading about 65 up until around January, in which case there was a massive move, a spike up to 80. And that spike was right up until we got the Fed. As soon as the Fed came in and they said, we're going to backstop markets, including the AAA paper, including all IG credit, then we saw a move back up in the ruble to this 73 range.
And that's about where we are now. We're slightly higher than that for the US dollar. But the point is, is all of this buoyancy that we're talking about, it isn't just about US assets. It's not just about the US equity market. It's having an impact around the world. And you can see that if you just look at that particular scenario. Russia, as an example.
ASH BENNINGTON: Right, yeah. And then, of course, obviously, the Fed moved down the curve to start supporting and purchasing in the junk market I don't follow Russian ruble levels as closely as you do, Ed, but I am-- just listening to you talk about it, you make a really interesting case, which is, is this market is saying we believe that the currency risk of depreciation is going to be compensated for or outstripped by the rate of progress in Russian equity markets. Is that the play?
ED HARRISON: I mean, I don't know how you can massage it because, ultimately, not only has the ruble strengthened from its lows before the Fed came in, but you're getting a lower return because they're cutting rates, and they're saying to you that we're going to leave rates lower for longer. And so you're also getting a lower return.
So you're getting a lower return, and perhaps maybe the currency will compensate not