Sunday, March 15, 2020

Living History

First, a little thank you to those of you who took the time to reach out.  I really appreciate the fact that you're still checking this little blog after all of these years. If you find this helpful, go ahead and share the link with others on Facebook or Twitter -  - I'll be sure to update throughout the week. 

As I watched President Trump's speech on Friday with my daughter and she was following the Dow's meteoric rise (I'll get to that in a minute), I tried to relay to her that this is not normal.  I likened the markets right now to a fish out of water.  When a fish is swimming peacefully under water, it might go up or down in the water column easily and calmly.  However, a fish on the deck of a boat is much more prone to violent thrashing.  This is what has become of our markets.  A decade of unnatural intervention and support from governments and Central Banks has led to a market that is suffering historic swings - down 10%, up 10% on no real news.  This is not the way a healthy fish lives, this is the way a fish acts when it may be dying.

1) The outbreak - obviously, we have finally gone from "it's just the flu" to taking this seriously in the US.  Unfortunately, I think it may be too late to slow the spread of the virus and I'm very worried about what the next two weeks will bring.  I hope that I'm wrong, but it's my belief that by the end of this week many ICUs in the Northeast will be overrun.  I also worry that Americans on balance are not taking the threat seriously enough.  Look at the scenes of crowds in NYC parks, in bars and restaurants over the weekend etc.  I believe that there is a chance, that by late next week people will start breaking the self-imposed isolation and exposure rates will climb further.  This will lead state or Federal officials to impose curfews to limit interaction which will cause further panic.

I would be happy to be wrong on this issue, but every time we've had the chance to make the right call we've managed to screw it up.

There is a secondary concern of mine and that is the plan for society after the initial outbreak.  You can see the scenes from China of life returning to some version of normalcy but there is some research that indicates this virus may not act like the seasonal flu.  This virus may be with us throughout the summer and potentially come back again in the fall or the winter of 2021.  I am hopeful that we will have some sort of vaccine in 12-18 months but as we've seen this weekend people will fight over toilet paper when you talk about isolating them for 2 weeks, imagine what happens if this were to be 3 months or more.  We may need to learn to live with this virus and that is not a concept that I've heard discussed.

2) The markets - Three weeks ago, the Chairman of the Federal Reserve said he saw no risks to the economy right now and no reason to lower interest rates.  Three weeks ago Goldman Sachs said there is no risk of recession in the US for the foreseeable future.  Well, the markets have spoken and fell from all-time highs to a bear market in less than three weeks. 

I've been telling anyone that will listen that we've been in a shadow recession for about 18 months.  Excess government spending has been the only thing keeping the US out of a recession and it doesn't appear as though that will be enough to prevent a recession in 2020.  Our economy has been fragile and debt-ridden for the past decade fulled by speculative excess and those cracks in the foundation are now coming to light as a result of the COVID19 outbreak.

The Fed just announced an unprecedented set of efforts to stimulate the economy - Another $700 bil in QE on top of close to $2 trillion for the repo market, 150bps in interest rate cuts in 3 weeks and yet the market opened LIMIT DOWN. 

This is scary. 

This has many of my colleagues saying it feels like the Sunday before Black Monday in 1987 or the Sunday before Lehman collapsed.

However, our current administration is obsessed with the stock market and the daily report card that it provides.  One way to prevent a stock market crash is to prevent stocks from trading and I think all of these ideas are being discussed tonight -

1) A trading halt that just doesn't open stocks tomorrow or maybe for a week (like post 9/11).
2) Short-selling bans
3) Removal of limits for 401k purchases

However, here's the problem: What happens if the Fed loses control and credibility at the same time?  That's not something we've seen in our lifetimes, but we might be witnessing it now. 

This is the most important week in recent memory for the Federal Reserve because this is not a liquidity crunch, this is solvency crisis and they don't have tools to adequately address a solvency crisis.

There is also the matter of what the charts say.  If you remember, I've said for years that a significant amount of Wall Street is on autopilot because of the way technicians run large funds.  Well, that can cut both ways because a market run on charts is in trouble when the charts breakdown like they did this week. 

Tonight's failure by the Fed will cause some immediate carnage overnight but the real question will be how the bond market reacts in the morning.  The current game plan anticipated by most was a further rally for a few days before we breakdown again.  The ballpark estimate that I keep seeing is a rally to 26,000 on the Dow and then a collapse back down to 17-18,000.  However, this all goes out the window based on what happens tomorrow around 8am.

By the time many of you read this it may be old news. 

3) Miscellaneous - one other idea floating about is the concept of helicopter money for everyone to prompt spending.  It seems popular to say let's give $1,000 to every person in the US (excluding the top 5-10% of earners) and the cost would be $300 billion or so.  Yes, it would pump some money into the economy but it seems like an idea that is not very well thought out.

I believe that if we address the medical crisis, the stock market will eventually take care of itself.  Throwing money at this seems feels like we're trying to put out a fire, not with buckets of water, but buckets of cash and we'll just end up burning our cash.

You can follow me on twitter @brianlantier or check here for updates.

Thanks again!


No comments: