Victor Dergunov:  The Second Wave Is Here And It’s Likely To Get Much Worse

While this article has little to do  with Turkey or EM at large, which are the primary occupations on PATurkey, we found it wort sharing with our audience. This is because in a “market” gone completely insane with profit lust and Fed doping, it is very hard to find sane sages who dare tell the truth.  If the second wave is going to crush US, with EU already at the threshold of recession, and China reeling back stimulus, EM and Turkey can’t resist for long. What goes around, comes around.


It looks like reality may finally be catching up with markets. Despite the recent optimism regarding COVID-19 vaccines, the U.S., key countries in Europe, as well as many others around the globe are continuing to see a remarkably high number of coronavirus cases. A vaccine available on a mass scale for the general population may not be available for some time despite promising preliminary results from several companies like Pfizer (PFE) and Moderna (MRNA).


The sky-rocketing number of COVID-19 cases is overwhelming hospitals in many areas of the world, including in Europe as well as in the U.S. Due to the spreading pandemic, we are starting to see new waves of shutdowns, and numerous economic indicators are starting to come in worse than expected.


I want to draw your attention to several key metrics we’ve received in recent days. First, retail sales. We see substantially lower MoM retail sales figures than were expected. This is particularly troubling, as the U.S. is largely a consumer-based economy, and if consumers are not spending, the economy is not growing. We also see crude oil inventories on the rise, coming in much higher than expected.


Next, CPI inflation figures coming in lower than expected is troubling, considering all the “stimulus” that has been poured into the economy. This implies that the economy is not recovering as robustly as was previously expected, and it very likely require more monetary as well as fiscal stimulus to keep inflation from going lower.


This is also partly why we are seeing some deflating going on in the gold market, as in the short term, gold can be impacted by lower than expected inflation. However, intermediate and longer term gold’s price tends to be more correlated with the expanding monetary base.


Moreover, numerous uncertainties remain, including the timeline regarding fiscal stimulus, how effective it will be, and what kind of impact all of the moving variables will have on corporate profits and the economy, in general, going forward.


We are starting to see vaccine optimism fade, which appears to be overshadowed by the new economic reality. The world is not likely going to get back to business as usual any time soon, and the “new normal” will likely include much higher national debt loads, and lower economic growth for longer. This will likely result in lower than anticipated profits and revenue growth for many companies in the foreseeable future.


The Bottom Line

With the SPX trading at around 40 times earnings, many stocks are extremely expensive despite the numerous hurdles and unknowns facing the global economy. Thus, a notable pullback or a possible correction of 10-20% or greater even could hit markets before year end or in early 2021. Therefore, it is likely a good time to get more defensive now, reduce some higher risk/high multiple positions, incorporate hedging strategies, and increase dry powder to purchase stocks and other assets at more attractive prices/valuations.




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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.