INTRINSIC VALUE WEALTH REPORT NEWSLETTER

Why People Protest (In Search of a Cause)

The violence and destruction that followed the protests that started as a result of the police incident with George Floyd in Minneapolis this past weekend has further hampered the economic recovery nationally and in many regions of the U.S. As investors, it is worthwhile exploring why people protest so that we can better understand this phenomenon and assess the impact that the protests might have on the current economic and investment environment and the likelihood of future such occurrences that impact the economy and the investment climate.

Peaceful protest is a fundamental right that we as Americans have. But why do people protest? The roots of protests and other group behavior are explained by various aspects of crowd theory and individual psychology in a collection of theories studied by sociologists, psychologists, and others. To begin with, humans prefer the status quo and safety. Accordingly, there must be certain conditions to get people to break out of this norm. Those factors are often feelings of helplessness, fear, and frustration. The perceived injustice of an event like the George Floyd incident can be a flashpoint for acting on these feelings and creating collective disorder.

Some of the necessary factors that can create the conditions for protests include shared grievances, lack of trust in government, crowd behavior, social or geographical proximity to others that share the same feelings, the ability of people to remain anonymous in crowds, the feeling of safety by being in a crowd, and a feeling of belonging. Given the need that many people have for association and identification with a crowd, some researchers have suggested that oftentimes people are simply in search of a cause. An interesting aspect of protests is that peaceful protests are often more effective than violent protests, as violence tends to drive people to the opposing viewpoint.

The violence, looting, and other social and economic disruptions that we have seen in the past few days are further hampering the ability of the economy to recover. Unfortunately, some of the hardest hit businesses are the ones in the lower income communities. Furthermore, the protests are taking attention away from the fight against the coronavirus. And the lack of social distancing that many of the protesters have been practicing further exasperates the spread of the virus.

Economic and Investment Highlights

Last Week

Global trade flows had a large decline in the first quarter.

Many people left their homes during the Memorial Day weekend amid warnings of continuing dangers from the coronavirus.

Japan fully lifted its state of emergency on the coronavirus declaring victory over the virus.

New coronavirus outbreaks occurred in Europe.

The U.S. economy is showing some nascent signs of recovery.

Amtrak is preparing to cut up to 20% of its workforce amid slowdown in train travel.

Boeing plans cuts of 13,000 employees.

GE said it is leaving the business of making light bulbs, a business it had been in for almost 100 years.

Disney plans to reopen it Disney World theme park at reduced capacity in July.

The U.S. surpassed 100,000 deaths from the coronavirus this past week.

There is some evidence that layoffs from the pandemic are easing.

China passed a law to impose national security laws on Hong Kong.

New York state drove virus cases down this past week. At the same time, several Southern states had an increase in coronavirus cases this past week.

U.S. consumers spent less and saved more in April.

Renault is planning to cut production capacity by one-fifth and cut more than 14,000 jobs globally.

The Dow, the S&P 500, and the Nasdaq all rose for the week. The Dow was up 3.8%; the S&P 500 was up 3.01%; and the Nasdaq was up 1.8%. The 10-year treasury yield ended the week at 0.650%. Gold closed at $1,736.90 for the week. Oil closed at $35.49 for the week.

The Week Ahead

This link takes you to Econoday’s Economic Calendar and Economic Events and Analysis which shows the upcoming economic reporting events scheduled in the week and months ahead.

Summary

Note: The models below may not capture the impact of COVID-19 beyond their impact on GDP source data and relevant economic reports that have already been released. They may not anticipate the impact of COVID-19 on forthcoming economic reports beyond the standard internal dynamics of the models.

Note: The comments that follow are derived from the economic indicators referenced in the Resources section of this newsletter and other sources in this report.

The Aruoba-Diebold-Scotti Business Conditions Index (ALS) had been trending up for several weeks from having dipped in 2019. Recently with the advent of the economic collapse, the index crashed. This is an extremely negative indicator for the economy on a short-term basis.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2020 is -53.8 percent. This reading continues to support the ALS model assessment of a deteriorating short-term economic environment.

The New York Fed Staff Nowcast stands at -35.5% for 2020:Q2.

The Chicago Fed National Activity Index (CFNAI) showed a decrease in economic activity in April. The Chicago Fed National Activity Index (CFNAI) was -16.74 in April, down from -4.97 in March.

All told, these short-term economic indicators are a negative analysis for the economy, at least on a short-term basis.

Expectations that stock prices will rise over the next six months is now at 33.1% in a recent AAII Sentiment Survey. The historical average is 38.0% for the survey. 24.8% of the investors in the survey described their short-term outlook as neutral and 42.1% were bearish. Please see the AAII Sentiment Survey for the complete results.

The latest Gross Output (GO) reading (April 6, 2020) showed that Gross Output slowed significantly in the fourth quarter of 2019.

On a longer-term basis, the forecasters in the Philadelphia Fed’s Survey of Professional Forecasters (as of May 15, 2020) predict real GDP will contract at an annual rate of -32.2 percent for the second quarter of 2020; and increase at 10.6 percent for the third quarter of 2020, 6.5 percent in the fourth quarter of 2020, 6.8 percent in the first quarter of 2021, and 4.1 percent in the second quarter of 2021. On an annual-average over annual-average basis, the forecasters predict real GDP to contract -5.6 percent in 2020; and grow 3.1 percent in 2021, 4.1 percent in 2022 and 2.2 percent in 2023. The forecasters predict the unemployment rate will be above 10.0 percent over the next three quarters (16.1 percent in Q2, 12.9 percent in Q3, and 11.0 percent in Q4); will be 10.8 percent in 2020; 8.1 percent in 2021, 6.2 percent in 2022, and 5.1 percent in 2023. The next survey release date is August 14, 2020.

The National Association for Business Economics (NABE) released an Outlook Flash Survey on April 10, 2020. The NABE panel expects GDP declines in Q1 2020 and Q2 2020, and upticks in Q3 2020 and Q4 2020. The panel believes the U.S. economy is already in a recession and predicts real GDP will grow at an annual rate of -2.4 percent for the first quarter of 2020, -26.5 percent for the second quarter of 2020, 2.0 percent in the third quarter of 2020, 5.8 percent in the fourth quarter of 2020, and 6.0 percent in the first quarter of 2021. The forecasters expect unemployment to average 3.8% in Q1 2020. The median unemployment rate projection for Q2 2020 is 12.0%. The unemployment rate is expected to fall back to 9.5% at the end of 2020, and to 6.0% at year-end 2021. The panel’s forecast for the PCE price index less food and energy calls for a slowdown in the annual rate of change from 1.7% in Q1 to 0.8% in Q2 2020. The panel expects the rate to increase gradually to 1.7% in the last half of 2021.

For a more in-depth review and analysis of the economy, please see our mini-book on economic analysis and forecasting entitled: Simple and Effective Economic Forecasting.

Stock Market Valuations

Our estimates of the market valuations for two stock market indices, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500), can be found in the file below:

Conclusion

During this time of global flux due to the coronavirus, I am leaving the Conclusion discussion below the same as was posted on March 23, 2020. The March 23, 2020 discussion still adequately reflects my thinking on the current state of affairs.

Important Note: While I don’t believe it is time to jump back into the stock market in a big way because of the market’s overvaluation, I have been advising the last few of weeks in this Commentary and in my weekly podcast, Intrinsic Value Wealth Report Radio, that investors can continue building their investment portfolios by selecting individual securities that offer growth and value opportunities.

Reprinted from March 23, 2020

Up until the past week, the economy had been in a stable but somewhat vulnerable state. Nonetheless, it had remained fairly strong. In fact, robust consumer spending and strong labor market conditions had given us confidence that the economy, which had been in its tenth year of expansion, could continue to grow. But we were cautious on this outlook. There were several reasons for our caution. U.S. business growth had been mixed. And global economic growth had been mixed as well. The new coronavirus was becoming a global economic threat, although it was still too early to tell how much of an effect it would ultimately have. Debt is at high levels for consumers, businesses, and government (at all levels of government). Finally, this is an election year that will likely have significant consequences either positively or negatively depending on the outcome of the elections. And of course, it is still too early to tell what the outcome of the elections will be.

In just a few days, the coronavirus’s effect on the economy and the markets went from a ripple to a tsunami. Businesses are shuttering, events are being cancelled or postponed, grocery store shelves are empty, and people are being asked or ordered to stay home. The markets are now deep in bear market territory. The effects on the economy, even given the short time that the economy has been retreating, may be with us for a long time. There is now a much greater risk of a recession, and there has even been some talk of a depression. The government, the Fed, Republicans, and Democrats, and pretty much the entire country, is trying to get the virus under control and is coming up with plans to mitigate the long-term economic effects caused by the virus. But the virus has impacted the economy – in a significant way – in just a short time. How long lasting the effects will be no one can tell right now. The economy has been largely shut down and remains so today. It takes time to restart the economy after a situation such as what is occurring at the present time.

Given these events and the rapidly deteriorating situation, as I said last week, I would caution not to panic. The economy and the markets will get better. The situation is bad – there is no doubt about that – but it will turn around. The real question is when will it turn around? No one knows that at the present time. But it will turn around.

For now, review your investment portfolios. It is highly likely that all or most of your stocks are down. You should not consider selling the bulk of your stocks – only consider selling companies that are not sound companies. But do recognize that as the economy deteriorates, even good companies will be affected.

For stock market value hunters, we believe it is still too early to jump back in. We will be closely monitoring the markets using the many tools and models that we have developed over the years to assess the economy and the markets. We will use our best judgement and thoughts to let you know when we believe things are turning around. The turnaround hasn’t happened yet.

We believe it is important to maintain a long-term view toward investing. But for now, just sit tight. Eventually, this means that you should continue building your investment portfolio using the Cassandra Stock Selection Model to select individual securities that offer growth and value opportunities.

Chart for Review and Thought

Simple and Effective Economic Forecasting Model

Note: The table and chart below have not been updated. However, we believe that a recession is quite likely. In the chart below, the bottom green line shows what a recession could look like.

Notes (GDP Growth Chart):

1. See the July 8, 2019 Commentary for an introduction to this model.
2. Actual numbers 2007 through 2019; forecasted numbers thereafter.
3. Normal GDP growth is typically in the 2% to 3% range.
4. A recession is generally defined as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).

Thought for the Week

“Live as if you were to die tomorrow. Learn as if you were to live forever.” ~ Mahatma Gandhi

Announcements

The Intrinsic Value Wealth Report has started a new YouTube channel called Intrinsic Value Wealth Report TV. You can view the YouTube channel at Intrinsic Value Wealth Report TV.

The Intrinsic Value Wealth Report has started a new podcast called Intrinsic Value Wealth Report Radio. You can listen to the podcast at Intrinsic Value Wealth Report Radio.

Dr. Wendee spoke at the Investment Club of America’s annual economic summit, called Econosummit, on Sunday March 1, 2020 in Las Vegas.

Dr. Wendee attended the The National Due Diligence Alliance (TNDDA) investment banking conference, which was held March 6-8, 2020 at the Four Seasons Resort in Dallas, Texas. This is a conference held several times throughout the year for investment bankers and registered investment advisers to learn about new opportunities in the Alternative Investment asset classes.

We have been researching the use of crowdsourcing for investment ideas. We will be sending a survey out in the next few weeks to get your input on the economy and the markets; and to get any investment ideas that you would like to share. We will compile this input and distribute the results to you and our other subscribers. We have been testing our crowdsourcing models with students and have been having good success and results.

Dr. Wendee has been researching and writing a new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics). The full paper on Intrinsinomics will be published in the near future.

Finance 3350: Personal Finance-Portfolio & Risk Management– Dr. Wendee started teaching Finance 3350 – Portfolio & Risk Management at California State University, Los Angeles (CSULA) for the Summer term starting May 2020. Dr. Wendee teaches courses in Management and Finance at CSULA.

Business 548: Strategy and Decision Making – Dr. Wendee will be teaching Business 548 – Strategy and Decision Making at California Baptist University (CBU) starting at the end of June 2020. Dr. Wendee teaches courses in Finance, Business, Strategy & Decision Making, and Economics at CBU.

Dr. Wendee presented a paper on his new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics), at the International Leadership Association’s annual global conference which was held in Ottawa, Canada last Fall.

Dr. Wendee will present an updated paper on his new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics), at the International Leadership Association’s annual global conference which will be held in San Francisco, California in November.

Dr. Wendee is working on a financial planning modeling program which will be available in the near future. The modeling program is designed to assist anyone in creating a financial plan and is customizable for each person’s unique financial planning goals. A working draft of the model is currently in beta test with students. Click this link, schematic, to go to the clickable document under the subheading Financial Planning Process (Draft) in the Intrinsic Value Wealth Report to see a draft of the schematic for the new financial planning process.

Dr. Wendee has been developing an econometric model specifically designed to monitor and forecast the global economy as this current economic crisis unfolds. This new econometric model is based on other econometric models that he has designed and have used for many years. You can find some of these earlier models in Book # 6 – Simple and Effective Economic Forecasting in the sister website to this website which is called the Intrinsic Value Wealth Report. The new econometric model has been constructed with some additional tools and methods that he has learned and some that he has developed over the last several years. He will be talking more about this new econometric model in this Commentary over the next few months. His comments and forecasts on the economy and the markets going forward will be based to a significant extent on this new model.

We have begun raising capital for our fund-of-funds investment, Northwest Quadrant Opportunity Fund, LLC. The fund engineers and constructs an investment vehicle consisting of Alternative Asset investments. The fund’s objective is to build a diversified portfolio of strong, solid, steady- performing assets, with highly qualified asset managers who have proven track records that meet our underwriting requirements. To learn more about the Northwest Quadrant Opportunity Fund, LLC and to obtain an offering memorandum, please click Northwest Quadrant Opportunity Fund, LLC.

Intrinsic Value Wealth Creation pyramid

We always conclude our commentary with a discussion of the Intrinsic Value Wealth Creation Pyramid. The Intrinsic Value Wealth Creation Pyramid is designed to show some of the major categories for building wealth. It is the result of many years of study of the wealth building process; experience working with clients who have built considerable wealth; and my own personal experience building wealth. Newsletter subscribers should consult the Intrinsic Value Wealth Creation Pyramid as one of many useful investment tools while considering their investment plans.

The chart in this section is an expanded version of the Intrinsic Value Wealth Creation Pyramid Chart referenced in the Forbes.com article entitled, Nine Of The Best Ways To Build Wealth.

RESOURCES

See our Resources section for links to economic and other resources used in the preparation of this Commentary.

Are We Coming Off the Bottom or Is This a “Dead Cat Bounce”*?

*See the following link for a definition of a “Dead Cat Bounce.”

My comments in this article come from me the scientist – not from me the friend, not from me the business associate, not from me the libertarian, and not from any other “me.” It is strictly a scientific viewpoint that I am sharing after having done a lot of research and having followed the coronavirus situation pretty closely the past few months. I have many friends, business associates, colleagues, and others who will undoubtably disagree with me. But as has often been said: “Reasonable people can disagree.” My basis for this article is strictly an examination of the data. And the data is very clear as I will explain.

I believe that we as a global society are opening up much too quickly. And I believe that too many people have written-off the coronavirus situation as something that really is not very serious. That is a big mistake in my view. Here is my reasoning.

The number of cases worldwide and in the United States continues to rise. It is true that the rate of increase appears to be abating – but that is probably due to the effectiveness of the efforts of social distancing and lockdown that have been in place. In other words, it is not an accident or some chance event that Covid-19 is abating. It is the result of the extensive sacrifice and extreme measures that the world has put in place. Despite these efforts, we do not have a cure, a vaccine, or any real treatments for the virus yet. They will come, but we don’t have them yet. But now we are opening back up without a vaccine or a cure for the virus.

All fifty states have now started opening back up. Will they put into place and enforce the safeguards that have been recommended as necessary for a safe reopening? Or will they succumb to political pressure to do otherwise? Even more importantly, will the citizens of the world follow these guidelines and recommendations? My observations and conversations with people in Southern California and from other places globally that I have had recently, and over this Memorial Day weekend in particular, suggest otherwise. As I have already suggested, many people don’t think we are really in a pandemic situation and some either think the government is misdirected, or worse, trying to use Covid-19 as a way to control the populace.

Please don’t get me wrong. I generally don’t trust government either and I believe that government overreaches in all too many cases. While I do support the lockdowns and other restrictions that have put in place in this very unusual pandemic situation, I fear the all-too-likely “big government” mentality and acceptance of big government that may result from this crisis. But the exponential rate at which the pandemic could and has spread necessitates drastic measures. I summed it up this way in the May 11, 2020 Commentary of this newsletter: “…many people don’t trust government and other authority figures and believe that the government is just trying to control them. By the way, I agree with this conclusion in many situations – but not when it comes to forest fires; severe weather warnings; and pandemics that have reputable health officials giving the warnings.” In other words, these are scientists and professionals with nothing to lose except their credibility. For this reason, I believe they are telling us the truth.

Where do we now stand with respect to the economy. We are at a turning point. We have started to open back up. As I have been chronicling in this newsletter since the pandemic began, there has been very significant damage to the worldwide economy. Are we now at the bottom of the economic crisis and starting back up on the slow road to recovery? I believe the answer to that largely depends upon several factors: (1) how soon we get an actual cure and/or vaccine for the virus; (2) how many effective safeguards will states and other worldwide economies put in place and will they enforce those measures; and (3) how diligently will people follow the safeguards that have been put in place? I am not encouraged by what I have seen in any of these three areas. First, we are getting closer, but not close enough yet, to finding a vaccine and/or cure. Second, states seem to be bowing to political pressures. And finally, too many people have not been taking the virus as seriously as I believe the pandemic warrants. As I will discuss next, a second wave of the pandemic is very likely, especially given where we stand with respect to the aforementioned factors.

During this crisis, there are many people who I have been listening to for insight into the crisis and its consequences. There are two people that I have paid particular attention to – not just because they are very smart people, which they are – but because they are in a better position than most people to see what is happening with the coronavirus situation, and more importantly, because they are in a position to influence the outcomes. These two people are Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases and Jerome Powell, Chairman of the United States Federal Reserve. Both have warned of the dangers of opening the economy too soon and doing so without proper safeguards in place. Dr. Fauci has repeatedly warned of the danger of a “second wave” of the virus and of its effects on the economy as well as the health of the nation. Chairman Powell has warned of the extreme dangers to the economy if the country is opened too soon and the economy has to be shut down again. The forecasts that these two men and others are making are not difficult forecasts. The data shows very clearly the path of the virus and the adverse effects on the worldwide economy. The real problem is that too many people, including many of the world’s leaders, have not headed the warnings of the scientists, who like Dr. Fauci and Chairman Powell, have the access and the analytical capability to understand the data. Again, the data is very clear in its conclusions.

An additional concern that I have is that while many people, perhaps even most, have been taking the pandemic seriously, it only takes a relatively few people to start the pandemic over again. Remember, it appears to have been just a few people in China that started the pandemic in the first place. And it is worth reviewing again the example that I gave in the May 4, 2020 issue of the Commentary: “Here is a good example of what happens in situations with exponential expansion. It goes like this: how long does it take to fill a sports stadium completely to the top with water by starting with just one drop of water and doubling the volume of water every minute? The answer is that it takes less than an hour to completely fill the stadium. Left unchecked, Covid-19 could kill people around the world at a similar exponential rate. In my view, it is too early to reopen!”

We are at a turning point. Economies have started opening back up. Is it too soon? Only time will tell. If proper safeguards are put into place and enforced as economies open back up, it may go well. People will have to believe that there is still a significant risk from Covid-19 and adhere to the safeguards put into place. There is no strong evidence that either of these things will happen. As economists and investors, we must factor the reality of the situation into our forecasts. The point of this article is not to make a societal judgement. The point is to try to draw an accurate picture of where we now stand in a possible economic recovery and to highlight the very real danger that a second wave of the pandemic might occur and have disastrous results for the economy and the markets. As investors, we need to understand and assess all of the various possibilities. We need to be data scientists. We need to look at this situation from the standpoint of probabilities. And the probabilities do not look favorable in the short run for the health of the world’s population or for a global economic recovery.

I would like to end on this more philosophical note, however. While I support the restrictions that have been put into place to protect our health in this crisis, let us not lose sight of the very real dangers that these restrictions have posed for creating a “big government” mentality that could be difficult to reverse after the crisis. And let us never lose sight of our fundamental freedoms and our right to liberty. This crisis will pass, but our right to freedom and liberty must never pass!

Economic and Investment Highlights

Last Week

Auto makers opened their factories on Monday.

Fed Chair Powell said the U.S. economy could take more than a year to recover.

Saudi Arabia’s sovereign wealth fund has been investing billions of dollars in U.S. companies.

Uber is cutting thousands more jobs and closing 45 offices.

SoftBank recorded the worst results in its history.

J.C. Penney plans to close 242 department stores totaling 30 percent of its stores.

Oil prices have started coming back due to supply cuts and a global pickup in demand.

States are expected to ask the federal government to repay them $45 billion they spent fighting the coronavirus.

IBM is cutting part of its workforce.

Argentina defaulted on its sovereign debt for the ninth time in its history.

Hertz filed for bankruptcy protection.

The Dow, the S&P 500, and the Nasdaq all rose for the week. The Dow was up 3.3%; the S&P 500 was up 3.2%; and the Nasdaq was up 3.4%. The 10-year treasury yield ended the week at 0.659%. Gold closed at $1,734.60 for the week. Oil closed at $33.25 for the week.

The Week Ahead

This link takes you to Econoday’s Economic Calendar and Economic Events and Analysis which shows the upcoming economic reporting events scheduled in the week and months ahead.

Summary

Note: The models below may not capture the impact of COVID-19 beyond their impact on GDP source data and relevant economic reports that have already been released. They may not anticipate the impact of COVID-19 on forthcoming economic reports beyond the standard internal dynamics of the models.

Note: The comments that follow are derived from the economic indicators referenced in the Resources section of this newsletter and other sources in this report.

The Aruoba-Diebold-Scotti Business Conditions Index (ALS) had been trending up for several weeks from having dipped in 2019. Recently with the advent of the economic collapse, the index crashed. This is an extremely negative indicator for the economy on a short-term basis.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2020 is -51.2 percent. This reading continues to support the ALS model assessment of a deteriorating short-term economic environment.

The New York Fed Staff Nowcast stands at -35.5% for 2020:Q2.

The Chicago Fed National Activity Index (CFNAI) showed a decrease in economic activity in April. The Chicago Fed National Activity Index (CFNAI) was -16.74 in April, down from -4.97 in March.

All told, these short-term economic indicators are a negative analysis for the economy, at least on a short-term basis.

Expectations that stock prices will rise over the next six months is now at 33.1% in a recent AAII Sentiment Survey. The historical average is 38.0% for the survey. 24.8% of the investors in the survey described their short-term outlook as neutral and 42.1% were bearish. Please see the AAII Sentiment Survey for the complete results.

The latest Gross Output (GO) reading (April 6, 2020) showed that Gross Output slowed significantly in the fourth quarter of 2019.

On a longer-term basis, the forecasters in the Philadelphia Fed’s Survey of Professional Forecasters (as of May 15, 2020) predict real GDP will contract at an annual rate of -32.2 percent for the second quarter of 2020; and increase at 10.6 percent for the third quarter of 2020, 6.5 percent in the fourth quarter of 2020, 6.8 percent in the first quarter of 2021, and 4.1 percent in the second quarter of 2021. On an annual-average over annual-average basis, the forecasters predict real GDP to contract -5.6 percent in 2020; and grow 3.1 percent in 2021, 4.1 percent in 2022 and 2.2 percent in 2023. The forecasters predict the unemployment rate will be above 10.0 percent over the next three quarters (16.1 percent in Q2, 12.9 percent in Q3, and 11.0 percent in Q4); will be 10.8 percent in 2020; 8.1 percent in 2021, 6.2 percent in 2022, and 5.1 percent in 2023. The next survey release date is August 14, 2020.

The National Association for Business Economics (NABE) released an Outlook Flash Survey on April 10, 2020. The NABE panel expects GDP declines in Q1 2020 and Q2 2020, and upticks in Q3 2020 and Q4 2020. The panel believes the U.S. economy is already in a recession and predicts real GDP will grow at an annual rate of -2.4 percent for the first quarter of 2020, -26.5 percent for the second quarter of 2020, 2.0 percent in the third quarter of 2020, 5.8 percent in the fourth quarter of 2020, and 6.0 percent in the first quarter of 2021. The forecasters expect unemployment to average 3.8% in Q1 2020. The median unemployment rate projection for Q2 2020 is 12.0%. The unemployment rate is expected to fall back to 9.5% at the end of 2020, and to 6.0% at year-end 2021. The panel’s forecast for the PCE price index less food and energy calls for a slowdown in the annual rate of change from 1.7% in Q1 to 0.8% in Q2 2020. The panel expects the rate to increase gradually to 1.7% in the last half of 2021.

For a more in-depth review and analysis of the economy, please see our mini-book on economic analysis and forecasting entitled: Simple and Effective Economic Forecasting.

Stock Market Valuations

Our estimates of the market valuations for two stock market indices, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500), can be found in the file below:

Conclusion

During this time of global flux due to the coronavirus, I am leaving the Conclusion discussion below the same as was posted on March 23, 2020. The March 23, 2020 discussion still adequately reflects my thinking on the current state of affairs.

Important Note: While I don’t believe it is time to jump back into the stock market in a big way because of the market’s overvaluation, I have been advising the last few of weeks in this Commentary and in my weekly podcast, Intrinsic Value Wealth Report Radio, that investors can continue building their investment portfolios by selecting individual securities that offer growth and value opportunities.

Reprinted from March 23, 2020

Up until the past week, the economy had been in a stable but somewhat vulnerable state. Nonetheless, it had remained fairly strong. In fact, robust consumer spending and strong labor market conditions had given us confidence that the economy, which had been in its tenth year of expansion, could continue to grow. But we were cautious on this outlook. There were several reasons for our caution. U.S. business growth had been mixed. And global economic growth had been mixed as well. The new coronavirus was becoming a global economic threat, although it was still too early to tell how much of an effect it would ultimately have. Debt is at high levels for consumers, businesses, and government (at all levels of government). Finally, this is an election year that will likely have significant consequences either positively or negatively depending on the outcome of the elections. And of course, it is still too early to tell what the outcome of the elections will be.

In just a few days, the coronavirus’s effect on the economy and the markets went from a ripple to a tsunami. Businesses are shuttering, events are being cancelled or postponed, grocery store shelves are empty, and people are being asked or ordered to stay home. The markets are now deep in bear market territory. The effects on the economy, even given the short time that the economy has been retreating, may be with us for a long time. There is now a much greater risk of a recession, and there has even been some talk of a depression. The government, the Fed, Republicans, and Democrats, and pretty much the entire country, is trying to get the virus under control and is coming up with plans to mitigate the long-term economic effects caused by the virus. But the virus has impacted the economy – in a significant way – in just a short time. How long lasting the effects will be no one can tell right now. The economy has been largely shut down and remains so today. It takes time to restart the economy after a situation such as what is occurring at the present time.

Given these events and the rapidly deteriorating situation, as I said last week, I would caution not to panic. The economy and the markets will get better. The situation is bad – there is no doubt about that – but it will turn around. The real question is when will it turn around? No one knows that at the present time. But it will turn around.

For now, review your investment portfolios. It is highly likely that all or most of your stocks are down. You should not consider selling the bulk of your stocks – only consider selling companies that are not sound companies. But do recognize that as the economy deteriorates, even good companies will be affected.

For stock market value hunters, we believe it is still too early to jump back in. We will be closely monitoring the markets using the many tools and models that we have developed over the years to assess the economy and the markets. We will use our best judgement and thoughts to let you know when we believe things are turning around. The turnaround hasn’t happened yet.

We believe it is important to maintain a long-term view toward investing. But for now, just sit tight. Eventually, this means that you should continue building your investment portfolio using the Cassandra Stock Selection Model to select individual securities that offer growth and value opportunities.

Chart for Review and Thought

Simple and Effective Economic Forecasting Model

Note: The table and chart below have not been updated. However, we believe that a recession is quite likely. In the chart below, the bottom green line shows what a recession could look like.

Notes (GDP Growth Chart):

1. See the July 8, 2019 Commentary for an introduction to this model.
2. Actual numbers 2007 through 2019; forecasted numbers thereafter.
3. Normal GDP growth is typically in the 2% to 3% range.
4. A recession is generally defined as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).

Thought for the Week

“A mind is like a parachute. It doesn’t work if it is not open.” ~ Frank Zappa

Announcements

The Intrinsic Value Wealth Report has started a new YouTube channel called Intrinsic Value Wealth Report TV. You can view the YouTube channel at Intrinsic Value Wealth Report TV.

The Intrinsic Value Wealth Report has started a new podcast called Intrinsic Value Wealth Report Radio. You can listen to the podcast at Intrinsic Value Wealth Report Radio.

Dr. Wendee spoke at the Investment Club of America’s annual economic summit, called Econosummit, on Sunday March 1, 2020 in Las Vegas.

Dr. Wendee attended the The National Due Diligence Alliance (TNDDA) investment banking conference, which was held March 6-8, 2020 at the Four Seasons Resort in Dallas, Texas. This is a conference held several times throughout the year for investment bankers and registered investment advisers to learn about new opportunities in the Alternative Investment asset classes.

We have been researching the use of crowdsourcing for investment ideas. We will be sending a survey out in the next few weeks to get your input on the economy and the markets; and to get any investment ideas that you would like to share. We will compile this input and distribute the results to you and our other subscribers. We have been testing our crowdsourcing models with students and have been having good success and results.

Dr. Wendee has been researching and writing a new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics). The full paper on Intrinsinomics will be published in the near future.

Finance 3350: Personal Finance-Portfolio & Risk Management– Dr. Wendee started teaching Finance 3350 – Portfolio & Risk Management at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA. He will be teaching Finance 3350 – Portfolio & Risk Management at California State University, Los Angeles (CSULA) during the Summer term of 2020 as well.

Business 4970:Strategic Management – Dr. Wendee started teaching  Business 4970:Strategic Management  at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA.

Business 218 – Macroeconomics – Dr. Wendee started teaching Business 218 – Macroeconomics at California Baptist University (CBU) starting January 2020. Dr. Wendee teaches courses in Finance and Economics at CBU.

Dr. Wendee presented a paper on his new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics), at the International Leadership Association’s annual global conference which was held in Ottawa, Canada last Fall.

Dr. Wendee is working on a financial planning modeling program which will be available in the near future. The modeling program is designed to assist anyone in creating a financial plan and is customizable for each person’s unique financial planning goals. A working draft of the model is currently in beta test with students. Click this link, schematic, to go to the clickable document under the subheading Financial Planning Process (Draft) in the Intrinsic Value Wealth Report to see a draft of the schematic for the new financial planning process.

Dr. Wendee has been developing an econometric model specifically designed to monitor and forecast the global economy as this current economic crisis unfolds. This new econometric model is based on other econometric models that he has designed and have used for many years. You can find some of these earlier models in Book # 6 – Simple and Effective Economic Forecasting in the sister website to this website which is called the Intrinsic Value Wealth Report. The new econometric model has been constructed with some additional tools and methods that he has learned and some that he has developed over the last several years. He will be talking more about this new econometric model in this Commentary over the next few months. His comments and forecasts on the economy and the markets going forward will be based to a significant extent on this new model.

We have begun raising capital for our fund-of-funds investment, Northwest Quadrant Opportunity Fund, LLC. The fund engineers and constructs an investment vehicle consisting of Alternative Asset investments. The fund’s objective is to build a diversified portfolio of strong, solid, steady- performing assets, with highly qualified asset managers who have proven track records that meet our underwriting requirements. To learn more about the Northwest Quadrant Opportunity Fund, LLC and to obtain an offering memorandum, please click Northwest Quadrant Opportunity Fund, LLC.

Intrinsic Value Wealth Creation pyramid

We always conclude our commentary with a discussion of the Intrinsic Value Wealth Creation Pyramid. The Intrinsic Value Wealth Creation Pyramid is designed to show some of the major categories for building wealth. It is the result of many years of study of the wealth building process; experience working with clients who have built considerable wealth; and my own personal experience building wealth. Newsletter subscribers should consult the Intrinsic Value Wealth Creation Pyramid as one of many useful investment tools while considering their investment plans.

The chart in this section is an expanded version of the Intrinsic Value Wealth Creation Pyramid Chart referenced in the Forbes.com article entitled, Nine Of The Best Ways To Build Wealth.

RESOURCES

See our Resources section for links to economic and other resources used in the preparation of this Commentary.