Written by Michael Forrester – Founder, President, and CIO of High Note Wealth
The State of the States
2020 is the year of speed. While sitting home in quarantine with everything closed, the days have moved slowly but the issues being addressed are coming at us with rocket ship pace. We have moved from record levels of employment and stock market all-time highs to a global pandemic, shut down economies, record levels of unemployment, political posturing on reopening, a massive stock market rally, the unjust murder of George Floyd and subsequent protests around the country and world. It is a lot, to say the least.
In the moment, it can be overwhelming to consider what it all means, but history shows that things in our world tend to coast for long stretches of time then change seemingly overnight. We saw this with the formation of the USA from a colony, the industrial revolution, the abolition of slavery, the World Wars, the race to space and the technology revolution. All things that a year or two prior were given thought by some, but for the most part arrived seemingly out of nowhere. While drastic at the time, society figures out a way to adapt to the new normal and life continues. In 2020, we don’t necessarily have a single thing but rather a collection of things that combine to create one.
Since the stock market has largely shrugged off this information, we can set it aside for the moment and speak to the bigger picture. The outrage over the death of George Floyd and now weeks of protests feels different. On quick observation, one can hope that the tolerance for racism has finally reached its point of no return. That’s our hope (h/t DA). In addition to the brutal footage of George Floyd, the country watched this with the backdrop of 40 million unemployed, confusion over the coronavirus and direction from the government that is mixed at best, so people are in the streets in great numbers advocating for change. It’s always easier to try to identify a single problem that can be fixed so we see some simply pointing to racism alone or the need for police reform, etc. While singular arguments have their merit, what we see tying all of this together is the growing wealth gap. If we examine racism in any part of history, we can find a very distinct tie to wealth dynamics.
The difference between the haves and have nots is not an easy data set to monitor. It’s certainly not exact or real time but when observed with a safe margin of error it’s still easy to see that since the mid-1970s it has been growing. Events like the recession of 2008-09 tend to exacerbate the divide. With the fallout of the pandemic, this will be another one. Political opinions vary on the topic from “that’s a natural occurrence in capitalism” to “the government should fix it” but rather than going there we want to share what we, at High Note, feel that we can do.
Many have heard us say that part of the planning process is helping you spend your hard-earned money sooner than later. The idea being that with the continuous refinement of spending projections and stress-testing scenarios we can hone in on exactly what is needed to sustain a comfortable and safe retirement. This can identify a present-day surplus in some cases that can be passed on to future generations or even used for philanthropy today. We understand that it is easier said than done. We are under no delusion that one can look at a projection and immediately feel comfortable that they have a surplus. It takes time. It takes trust in the process. Many of us need to see it a hundred times before we believe it and that’s okay. There is a lot of uncertainty when looking ahead 20 and 30 years. The point being that for those who would like to better understand their options, we are here to help. We have the best clients in the world, and they are unbelievably generous. If additional philanthropy is something that bears discussion, we would thoroughly enjoy having that discussion.
We can call that the community side of the issue. On the business side, a country that gets too top heavy in terms of wealth gap can have other problems. In a consumption-based economy like America, businesses need a robust middle/lower class to grow. Economists think of it as a plethora mentality. If too much income flows to the top, it can sit there for long periods which stagnates growth whereas having a substantial consumer base helps all things grow. So, when we hear discussions around employment levels, it is really speaking to the status of the consumer base. As a group, if we have the luxury of getting money in the hands of kids or grandkids or charities it is overall energizing to the economy.
Market Week in Review
Monday through Wednesday this week was very much more of the same with “the same” being the continued rally from March lows. On Thursday, we got our first glimpse of a break in the trend with the S&P 500 falling almost 6%. That’s a big enough move down that almost no stocks were spared but the hardest hit were the sectors that are still very much in flux – airlines, cruises, hotels, travel, energy, etc. The work-from-home types that we have discussed fared better. Friday the market ended up gaining back about 1.3% but had a big swing to negative mid-day, a reminder that the incredible volatility seen in March is still in the shadows. It’s something we are watching closely as the rally in some parts of the market seems a little over done. While the economy is opening up and numbers are improving, there is still a lot to sort through with the recovery which is why remain cautiously optimistic with an emphasis on the cautiously.
More Cases + More Tests = FINE, More Cases + Same Amount of Tests = BAD
Second wave? Spike? Continuous climb of COVID cases? Call it what you like but we are seeing cases rise in various parts of the country. The heat map below shows states on the rise or leveling off. Texas and Arizona seem to jump out and have made some news this week. As mentioned last week, the idea of a second quarantine seems very unlikely, so states are trying to manage it through various strategies. It’s worth watching as some of the states out west that are in the dreaded, “dark orange zone”, are very important to the economy.
As the Dust Settles
The impact on the local Twin Cities economy following the recent riots is still being determined. Initial estimates have it in the range of $500 Million. If so, it would be the second costliest in American history second only to the L.A. riots of the early 1990s. The Star Tribune has an in-depth article with a map of businesses lost here.
Money for Nothing and Your Trucks for Free
Tesla stock has been a juggernaut all the while the fundamental analysis of the company has never looked great. As the stock has gone from ~$200 a share to hitting $1,000 this week, they are still yet to make any money. The amount of money they lose per car sold has come down but it’s still a loss leaving many observers left scratching their heads. Call it a bet on the future, a bet on Elon Musk himself or the centerpiece in the sustainable energy movement; it matters little as there are a legion of investors that believe and that keeps the stock price high. That brings us to a similar player in the field, Nikola. Nikola is a start-up electric and hydrogen vehicle maker that is focused on semi-trucks and pick-up trucks. They have been around for a few years but, unlike Tesla, they are yet to produce a truck to be sold. There is a waiting list for the trucks but it requires no deposit, so they have zero revenue. Delivery dates are still TBD. With those facts in mind, note that as of today the company is worth $21.4 Billion. In the last two months, the stock price has gone from ~$10 to $80. With no revenue. And no delivery date. This is of interest as it points to a couple of things. First, there is a very strong appetite among investors to be in sustainable energy. Like everything else in 2020, the move from carbon-based energy to green seems to be fast-forwarding 10 years every month. Perhaps not in adoption of cars on the street but investors are clearly showing that this is the future and the future is now. Second, this is very frothy and reminiscent of tech companies in 1999 where simply having a website of any kind, regardless of whether or not it worked, drove stock prices to crazy levels. While a single company like this doesn’t represent the proverbial “canary in the coal mine”, it is worth noting that if we see similar situations such as this it’s a sign some parts of the market are overextended. We will keep an eye on it. You can read more about Nikola here.
High Note Wealth LLC is registered as an investment adviser with the Securities and Exchange Commission (SEC). High Note Wealth LLC only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.
