In Focus: Everything is Not All Right
Updated: Aug 9, 2020
When Everything was All Right
In 1999 the Y2K issue was on almost everyone's mind. People wondered if modern society would be thrown back into a technological stone age because of a computer programming oversight. However, the fear of the Y2K issue was being neutralized by money, society's greatest stress reliever.
While many of the world's brightest minds and computer hardware and software experts were trying to figure out the Y2K problem in the late '90s, another set of bright minds and computer hardware and software experts were trying to cash in on the dotcom boom.
Once 1999 flipped to 2000 and the world's computer systems didn't shut down, the entire world let out a sigh of relief. The Dow Jones had hit its all-time high for the period in December 1999, and the S&P 500 would continue making new highs until March of 2000, and in the U.S. everything seemed to be all right.
Several months later the markets and the economy would realize that everything was not all right. The tech bubble would pop, costing investors millions of dollars and Americans their jobs, and security.
In 2007 in the U.S. we repeated the trend. Shell shocked from the dotcom bubble burst, people played it safe and invested in real estate. Real estate prices grew out of the ashes of the dotcom mess. Americans were marketed to, and told family wealth is in home ownership. With millions of new homeowners, city expansions, urban revitalizations, and gentrification taking place throughout America, along with the increased prices of real estate, we again believed that everything was all right.
Unfortunately we would learn that everything was not all right. Selling a house to everyone who wanted one no matter their job, income, credit worthiness, or financial status was not the foundation of a strong economy. This ultimately led to the Great Recession, which costs investors billions of dollars, left a trail of jobless and homeless Americans, and infected markets both to the east and west of the U.S.
Not mentioned in the last paragraph are the investment banks that made the Great Recession the international crisis that it became. But born from the ashes of the Great Recession were cryptocurrencies. Very smart computer people (funny how they always end up in the mix) created currencies that allow people to make financial transactions outside of traditional banks. Cryptocurrencies were mocked by investment bankers for a decade, but within that same decade Bitcoin moved up from less than $1.00 per Bitcoin to over $19,000 per Bitcoin.
When Bitcoin and other cryptocurrencies were on their massive run up in 2017, Bitcoin traders and investors, and everyone associated with cryptocurrencies believed everything was all right. To fans of cryptocurrencies Bitcoin had succeeded in disrupting the traditional markets and banking system.
But Bitcoin's price above $19,000 per Bitcoin would be short-lived. It's value would drop shortly after surpassing $19,000, again proving that everything was not all right. Traditional bankers created ways to short cryptocurrencies and went to work, and giddy investors with high hopes of getting rich from Bitcoin but little knowledge of how to speculate safely, lost millions.
Everything is Not All Right
Last week the Big 4 tech companies, Apple (AAPL), Amazon (AMZN), Facebook (FB), and Google (GOOGL) reported strong earnings for the second quarter of 2020. The four's amazing results, along with a rising stock market, is leading investors to believe once again that everything is all right.
Wall Street has put the case for everything is all right on the backs of Apple, Amazon, Facebook, Netflix (NFLX), Google, and Microsoft (MSFT). All wonderful companies, all play a big role in the lives of many people around the world, including mine, but they are not The Economy.
Lost in last week's earnings reports from the big four was McDonald's (MCD) Q2 earnings. McDonalds reported $3.76 billion in revenue during the quarter, a 29% decline from Q2 2019. The company also announced it will close 200 locations in the U.S., mostly restaurants located in Walmart, which are locations without drive-thrus.
Starbucks (SBUX) also reported earnings last week and reported revenue of $4.2 billion, which was down 38% from Q2 2019.
I had expected both McDonalds and Starbucks to experience sales declines following the pandemic. As more people transitioned to working from home full-time, I thought McDonalds and Starbucks would lose those sales to people commuting to work. But I didn't expect their declines to be this bad in Q2 2020, especially as it was being considered the recovery quarter in June by analysts and investors.
I find this concerning because I believe what's happening at McDonalds and Starbucks gives better insight into what's happening with the average guy or girl than an earnings report from a luxury tech company such as Apple.
Another Signal That It's Not All Right
This week gold hit an all time high and closed the week at $1,994.00 per ounce. Gold is typically the flight to safety trade for the people in the know, the big money. The price of gold traded around this price level back in 2011, when people fled stocks in the wake of the Great Recession. But in September 2011 when the economic outlook became a little less hazy, investors fled gold and went back into stocks.
What I've noticed this week as gold prices have increased is that people aren't talking about what high gold prices typically means for the markets. The people in the know, the investors with fortunes to protect are moving to gold for safety, these investors understand that everything is not all right.
We are not all right, the economy is not all right, the markets are not all right. Apple, Amazon, Facebook, Google, Netflix, Microsoft, and Zoom's successes have caused some investors and a sizable amount of professional Wall Street movers and shakers to believe that everything is all right. I've explained that just when markets start to believe everything is all right is when we get a reality check, and this is likely to happen again.