by Louis Navellier

July 28, 2020

Even though interest rates remain near zero and the cost of servicing the national debt remains low, our national debt keeps rising. I did a MoneyShow presentation last week entitled, “Why 0% Interest Rates May Last Forever.” Some of the slides I showed were truly eerie. A slide that illustrated how “Debt Will Equal Size of Economy This Year” was chilling, since it forecasted a debt-to-GDP ratio that would rise from 100% this year to 107% in 2025 as our federal government deficit approaches $30 trillion!

Debt will Equal Size of Economy This Year Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

My favorite economist, Ed Yardeni, published a report entitled, “A Billion Here, A Trillion There,” in which he talked about how Modern Monetary Theory (MMT) started with the European Central Bank (ECB) and their unlimited money printing and zero percent interest, which is now spreading to the U.S.

Specifically, Yardeni cited how former Fed Chairs Ben Bernanke and Janet Yellen are now apparently “proponents of MMT.”  This essentially means that because the central banks are flooding the world with money, asset prices are rising, which is why housing and stock prices are rising. I should add that the lack of confidence in central banks is the primary reason why gold reached a new all-time high above $1,910!

As an example of what liquidity can do for markets, on Wednesday, the National Association of Realtors reported that existing home sales surged 20.7% in June to an annual rate of 4.72 million, which represents the biggest monthly gain since 1968, when such records began. Existing home sales had declined in the previous three months, so existing home sales are still down 11.3% in the past 12 months. However, low mortgage rates are definitely stimulating existing home sales, and this trend is expected to continue.

On Friday, the Commerce Department announced that new home sales surged 13.8% in June to an annual pace of 776,000, the fastest annual pace in almost 13 years. May’s new home sales were also revised up to an annual pace of 682,000, up from 676,000 previously announced. In the past 12 months, new home sales surged 6.9% and have erased all of March and April’s slowdown from the coronavirus restrictions.

Fed Liquidity is also Pumping up “Fad” Stock Mania

Fed liquidity is also pumping up stock prices, but unfortunately a lot of that money is going into “fad” stocks. As an example, I thought I would give you some insights into Tesla’s second-quarter results.

Even though the company beat analyst sales and earnings expectations on Wednesday, Tesla’s second-quarter sales declined 4.9% compared to the same quarter a year ago. The key to the company’s second-quarter earnings surprise was that Tesla made $428 million from regulatory tax credits. The company’s free cash flow was $418 million in the second quarter, so virtually all of its net cash flow was derived from regulatory tax credits. This may explain why Tesla wants to continue to open new manufacturing plants, like its Cybertruck plant outside of Austin, Texas, since it can receive more from carbon-emission regulatory tax credits by building more vehicles. However, Tesla is now losing its global market share in electric vehicle sales, so its fanatical investors are now hyping its lead in “autonomous driving.”

There are a few problems, however, with “autonomous driving.” A few months ago, Elon Musk promised “Level 5 autonomy” in Shanghai. Automotive engineers define Level 5 as “Full Self-Driving” and do not consider that Tesla is anywhere near Level 5, since it is not even at Level 4 yet. The experts at Automotive News interviewed Musk and said his Level 5 allegations “border on the preposterous.”

The leader in self-driving technology is actually VW Group, which worked extensively with Stanford University on its self-driving technology via its Audi division. Also, Apple’s Titan self-driving project is widely reported to be behind the development of the VW ID.3 and ID.4 models. The VW ID.3 is now on sale in Europe and is expected to pass the Renault Zoe as the top selling electric vehicle in European markets. I should add that VW Group, prior to accepting new reservations on its ID.3 model, was outselling Tesla in Europe this year via its other electric Audi, Porsche, and VW models, so if you want to invest in the electric vehicle and self-driving revolution, I think VW Group will be a safer investment.

Navellier & Associates does not hold Tesla, or Volkswagen, but we do own Apple in managed accounts.  Louis Navellier & his family do not own Tesla, or Volkswagen, but own Apple in a private account.

The Re-Opened Economy Awaits Vaccine Progress

Despite all the Fed’s money pumping, the Labor Department announced last Thursday that new claims for unemployment rose by 109,000 to 1.416 million in the latest week, the first increase after 15 straight weekly declines. Obviously, this is a disturbing development and indicative that as several states reimpose restrictions to fight coronavirus, unemployment may naturally rise. However, continuing claims for unemployment declined by 1.1 million to 16.2 million in the latest week.

Obviously, we need a vaccine to more effectively fight the coronavirus, and there is some good news on the vaccine front, since AstraZeneca has been working with Oxford University on a coronavirus vaccine that so far has “mild to moderate” side effects. Specifically, AstraZeneca is now moving to a large-scale study and may be first to market, followed by other favorable vaccines by Moderna, Pfizer, and possibly other companies. I should add that the federal government on Wednesday agreed to pay Pfizer and German biotech company BioNTech $1.95 billion for 100 million doses of coronavirus vaccine.

Pfizer and BioNTech are working on four different coronavirus vaccines and two of the four are already in “Fast Track” by the FDA. So far, the federal government via “Operation Warp Speed” has invested $1.6 billion with France’s Novavax, $456 million with Johnson & Johnson, $486 million with Moderna, $1.2 billion with AstraZeneca, and $628 million with Emergent Biosolutions for vaccine manufacturing.

Navellier & Associates does own AstraZeneca, Pfizer, and Johnson & Johnson in managed accounts.  Louis Navellier and his family do not own AstraZeneca, Pfizer, and Johnson & Johnson in a personal account but they own AstraZeneca in Navellier managed accounts.

I live in Reno in the summer and I noticed some disturbing trends related to coronavirus. First, Nevada is paying state workers the highest pay for leave days (without showing up to work) of any state and now beats both New Jersey and New York for paid leave days. Nevada also took money away from schoolteachers to pay other state workers, so property taxes will now likely soar to make ends meet. I should add that Nevada also imposes a “personal property tax” on vehicles, so it will be interesting how much Nevada raises taxes on other assets, since it imposes no state income tax.

Last Tuesday, I played golf with an influential economist and we discussed how California is being transformed. Almost all colleges in California, led by the state college system, are expected to hold classes online. There are some exceptions, like UC Berkeley, which may hold 10% of its classes in person for students that want to attend classes. However, most California college classes will be held online.

Furthermore, we discussed how the coronavirus is mutating and how easily it spreads because many infected people are asymptomatic, so until there is an effective vaccine, life may not return to normal anytime soon. One thing that might interfere with the success of vaccines is the possible mutations of the coronavirus, so we are in for some very unpredictable and “interesting” times ahead.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

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The Federal Government is Pushing Higher Inflation

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What a Difference a Year (or More) Makes

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Louis Navellier CHIEF INVESTMENT OFFICER

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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