Last Thursday, we brought you news of what might have been the single worst economic datapoint ever published by a developed country. This week, that number has been more than doubled, as 6.6 million people filed for unemployment in the United States last week.

It's somewhat surprising that the market has once again rallied (the Dow Jones Industrial Index closed up 2.2%) after an extremely grim economic figure was released, but indicates that the market is pricing in extremely grim economic performance.

Oil Price Surges On Trump Comments

The price of oil, which has been severely depressed by lack of demand and intentionally excessive production from both Russia and Saudi Arabia, rallied today on the news that Donald Trump is beginning to broker production cuts. Trump tweeted that he had spoken with Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin, and expected a cut. The price of WTI oil rose by more than 20% (WTI closed up almost 22%) on this news.

As we've discussed before, a powerful third party brokering a cut in production is the most likely path out of the current price war. The US is certainly a powerful third party, and has a few levers it can pull on to influence Saudi Arabia and Russia. The Saudis, for example, enjoy massive military and diplomatic support from the United States, and rely on it for their position in world politics. All OPEC and OPEC+ members could be influenced by an agreement to also drop US production, in something like an OPEC++, which would bring the lion's share of the world's oil production under coordinated control.

Investing in oil is thus a double gamble: each side of the supply/demand relationship is uncertain and volatile. We don't know when planes will resume flying or the world will be let off house arrest, and we don't have a good way of knowing. We also don't have a good way of knowing when or if the world's largest producers will stop redlining production. At the intersection of those two uncertainties is the global price for oil.

One thing we'd like to note is that Donald Trump is not afraid to overstate the progress of ongoing negotiations, and did so repeatedly during the US/China trade war debacle. In fact, a lot of the old jokes still apply:

Market Outlook

It is unlikely that we have seen the end of the oil price war. As we've talked about before, both belligerents have taken on considerable costs to start and continue their production, and it's unlikely that one phone call with Donald Trump is going to get them to take the risks associated with cutting production.

We're also not sure that the effect of today's jobless claims have been priced into the market. 10 million Americans have lost their work in the last two weeks, and that's not including those who weren't able or willing to file for unemployment. We're likely to see the US break through the ceiling on unemployment that has powered its economy for 70 years, and while this is not the start of the Great Depression, it might be the start of something analogous.

We think that investing in companies that don't have a way to produce cash flow while the COVID-19 pandemic still rages is an extremely speculative move. The risk/reward relationship might make sense for some investors, but not for most people.

If you'd like to talk about these events or discuss your portfolio, don't hesitate to reach out to us at 604.643.0101.

Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.