Pro Perspectives 3/25/20

March 25, 2020

As Congress continues to move toward a formal approval on a $2 trillion economic relief package, stocks continued to climb today. 

That shouldn't be too surprising.  Remember, as we've discussed in recent days, both the Fed and the U.S. government (through stimulus) are becoming stakeholders in the stock market.  The Fed, through corporate bond ETFs.  And the government, likely through equity stakes (or options on equity) in airlines. 

Speaking of the Fed's influence on stocks:  Let's revisit what Ben Bernanke – former Fed Chair, and the architect of the Fed's emergency policy response to the Global Financial Crisis – said about QE and stocks. 

When the Fed announced QE2 in late 2010, Bernanke penned a column for the Washington Post, titled, Aiding the Economy:  What the Fed Did and Why. 

In it, he wrote this about QE1:  "This approach eased financial conditions … Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." 

In short, as Bernanke acknowledged in the above, and more explicitly as he continued doing lengthy interviews to answer critics of QE, QE tends to make stocks go up – which is an intended consequence. 

Now, we heard from Bernanke last week, in an op-ed that he and Janet Yellen penned for the Financial Times, where they recommended that the Fed buy corporate bonds (a market that was becoming very ugly and threatening to financial stability).  
  
The corporate bond market bottomed a day after.  And the Fed complied on Monday, announcing they would buy corporate bonds. 

On Monday afternoon, we looked at the corporate bond ETF, LQD, as an easy way to follow the Fed tsunami.  Here's an updated look at the chart. It has already retraced 70% of the decline.  

Staying with the Bernanke theme today.  We heard from him again this morning, in an interview on CNBC.  We he speaks, it's a good idea to listen.  As a well-respected expert on the Great Depression, he was asked how this current situations compares? 
 
The good news:  He said it didn't. 
 
He compared it to a natural disaster.  That said, he agreed with the policy measures taken (monetary and fiscal), but emphasized the importance of executing on the health care strategy (slow the spread, identify treatments, find a vaccine).  Assuming that the threat begins to clear in the summer months, he was optimistic on an economic bounce back. 
 

Pro Perspectives 3/24/20

March 24, 2020

We still don't have an economic package from Congress, but we know it will be very, very large.  And markets are responding. 

Let's talk about why. 

As we discussed yesterday, the Fed is "all-in" pledging to backstop anything and everything by printing unlimited dollars.  With those dollars, among many assets, they are now buying bond tracking ETFs (i.e. they are now in the stock market).  Add to that the government is looking to infuse cash into failing industries by taking equity stakes (i.e. the government will now be in the stock market).  

No wonder, stocks had their best day since 1933.  Not to be outdone, in the spirit of central bank and central government intervention in the stock market, the Nikkei has risen 25% in just two days.  As we discussed yesterday, the Japanese stock market is familiar terrain for the Bank of Japan.

Who’s next in line?  Probably the ECB stepping in to put a floor under European stocks. 

 
Make no mistake, with global governments and central banks following the "print and backstop everything/everyone policies" we have explicit devaluations of currencies.  That makes it a “buy everything” market.
 

This is the global "debt monetization" event people thought we were witnessing during the Global Financial Crisis (GFC).  The difference?  In the GFC, people thought the result of the Fed's actions would be hyperinflationary, and therefore a defacto debt and currency devauation.  It didn't happen.  When you give people money in a debt crisis, they hoard it.  With that, we didn't get hyperinflation, instead we got a deflationary bust. 

The Virus War is the opposite.  Never has there been a more applicable environment to inflate away the value of everything (in the medium term) to keep the economy (the world) intact (in the near term).  It's the only option. 

Again, as we discussed yesterday, this is a brew for massive inflation when we come out on the other side of the virus.  That means, just as people are wanting to hold cash, it's the worst place to be.  The early evidence:  Almost everything (all global assets) was up today. 

With this backdrop, the first place you look, as a preservation of buying power:  gold.  We talked about this yesterday.  Gold was up almost 5% again today. And it's just getting started.  How do you play it?  You can buy a gold ETF.  GLD is the most widely traded gold tracking ETF – easy to buy, and tracks the underlying well.  
 

Pro Perspectives 3/23/20

March 23, 2020

As we await a massive relief/stimulus package from Congress, whatever holes were left in the Fed’s response were filled this morning. 

They promised to buy treasuries with no limits on the amount.  They also announced they would be buying corporate bonds AND ETFs that are tied to the performance of corporate bonds. 

 
As we discussed last week, in the Fed’s massive Sunday night action, where they slashed rates to zero and started a big bond buying program, they didn’t address the troubled commercial paper and corporate bond market, which started to bite them early last week.  Now they’ve backstopped each. 
 
The good news, as of Friday, it began to look as if the Fed was getting the Treasury market under control.  A 10-year government bond yield rising toward 1.30% on Thursday, after the Fed slashed the Fed Funds rate to zero, was a scary message that the most important market in the world had no buyers.  Today, the 10-year traded as low at 71 basis points.  So, again, it looks like the Fed now has this under control.  That’s a big deal (very good news for the function of financial markets and the economy). 

Something to note on the new moves made by the Fed this morning: With the addition of bond ETFs, the Fed is now explicitly in the stock market.

Japan started buying ETFs back in 2013, as part of their QE program.  They went on to triple the initial amount, and then double that amount.  The Nikkei did this along the way …

The BOJ now owns 80% of the Japanese ETF market, and close to half of the Japanese government bond market. 

Unlike Japan, the Fed doesn’t have the authority to buy ETFs that track any asset class (yet).  But if you want to follow the Fed money into the bond ETF market.  The LQD is the highest volume corporate bond ETF.  It was up 7.5% today. 
So, this is what “whatever it takes” looks like when the U.S. economy comes to a halt.  They backstop everything.

Combine this, with a $2 trillion fiscal package — that comes with cash drops to the American public and small businesses, and will likely come with the U.S government supplying cash to major corporations (namely airlines) for exchange for equity stakes — and you have: 1) the government explicitly involved in propping up the stock market, and 2) a brew for massive inflation when we come out on the other side of the virus. 

As we’ve discussed, historical turning points for stocks tend to come with some form of intervention.  With the approval by Congress of this relief/stimulus package, this will be the motherload of all interventions. 

With global governments and central banks following the “print and backstop everything/everyone policies” we have explicit devaluations of currencies.  That is fuel for gold. 

On that note, here’s an excerpt from my note last week:  “As the world’s central banks are printing money and governments are rolling out massive deficit spending programs, gold should be moving higher like a rocketship.  Yet it’s down 13% since last Monday.  Let’s keep in mind that the Fed has the printing press, and won’t lose the battle in the bond market.  In the very near future, the Fed will probably have the 10-year yield where they want it (maybe at 30-40 basis points), and be in complete control of the yield curve.   It may take that observation to turn around the price of gold.  When it does, we could see gold much, much higher (maybe $2,500ish).” 

 

We are indeed seeing the Fed gain control of the Treasury market.  And gold has indeed started to move.  It was up over 5% today, and I suspect it’s just getting started.  

 
If you have any comments or feedback, I’d love to hear from you:  You can email me at properspectivesdaily@gmail.com.

Pro Perspectives 3/20/20

March 20, 2020

We've talked in recent days about the troubling U.S. Treasury market.  This is the most important market in the world, and it has been broken since last week.

So as we watch the back and forth in stocks, and follow the ebb and flow of the virus, it's the bond market that is most important right now for stocks (and the global financial system).  

As we've discussed, in a world of fear and uncertainty, global capital historically flows into the U.S. Treasury market (buys U.S. government bonds), the deepest, most liquid market in the world.  Why? If you're a Russian billionaire or an Asian sovereign wealth fund, when the world appears to be imploding, you have the best chance of seeing your money again by betting on the full faith and credit of the U.S. federal government. 

That said, over the past two weeks, as the global crisis heightened, bond prices have been going down, not up, and that has driven U.S. government bond yields up (as you can see in the chart) — which has been a flashing red emergency signal. 

In a time when the Fed is trying to force borrowing rates down, the Treasury market is doing the opposite for things like mortgage rates.  You can see in this next chart, with the Fed now at zero on the Fed Funds rate, mortgages should be going for 2.5%, if not 2.25%.  The average this week was 3.74%.  
What has caused this disconnect in the bond market?  As we've discussed this week, a lot of that has to do with 1) blow up of a few hedge funds, and the subsequent liquidations of positions that had been working for them (i.e. forced selling of their long bond positions), and 2) global central banks have been desperately selling Treasuries to meet the demand for U.S. dollars from their financial insitutions. 

The Fed went to work on this problem last week, and threw more at it Sunday night, and even more this week — to combat a U.S. Treasury market that was lacking buyers.  Remember, the Fed has the printing press, so this is a battle they will win.  

The good news, with the behavior yields today, they may have won the battle.  Yields finish the day back below 1%, and down 40 basis points on the day from the highs – settling at 88 basis points.  This should be a very good signal for markets coming into next week.

 
If you have any comments or feedback, I’d love to hear from you:  You can email me at properspectivesdaily@gmail.com.

Pro Perspectives 3/19/20

March 19, 2020

As you know, we’ve had a massive monetary and fiscal response to this crisis, globally in an attempt to thwart an economic crisis.  That response continues to get bigger, and more global. 

And for the past week, the White House has been executing on a gameplan to moderate, if not contain the healthcare crisis. For markets and society, we’ve had a significant “rate of change” in the situation (from no plan, to a plan with hope).  We’ve gone from “nothing” to “something.”  That’s good news. 

What hasn’t been addressed publicly has been the encouraging treatment options for the virus.  This is likely by design, as they’ve been campaigning to build enough concern among the population, so that they comply with recommendations to “lay low.”  But today, the President, along the FDA Commissioner, finally let the public in on some treatments that have been shown favorable results (anecdotally and in testing) in reducing the impact of the virus and increasing recovery times. 

This is intelligence that has been shared on Twitter for at least the past month, by epidemiologists, virologists and doctors on the front lines. 

Perhaps the most interesting, with lowest barrier to entry, is a drug called Hyroxychloroquine (a malaria and rheumatiod arthritis drug).  And it was the first potential option Trump mentioned today.  It’s an FDA approved drug, but not yet for the treatment of coronavirus.  The FDA is currently looking at the trials. 

On that note, importantly, the bar for FDA approval is significantly lowered for serious rare diseases that have little-to-no treatment options. They look at safety. They look at efficacy (does it work?). By rule, the FDA must give a lot of flexibility on the latter (i.e. if it’s safe, they are inclined to approve it).  And given the long history of the drug, the understand the safety already.  It is considered to be safe, but dosage is critical to the safety, which the FDA is studying now.  Expect this to get approved quickly for use in the U.S. 

It has been used in China, South Korea, Japan and in Europe, with anecdotal success.  And there is research being produced on it, almost daily.  

This is good news for markets.  At this stage, to put a floor in sentiment, we just need to see a viable path to a return to normalcy (regardless of how long).  That takes the worst case scenario off of the table.  These treatment options would offer that. 

In the meantime, the Fed needs to, and continues to, fix broken markets.  They had to step in and backstop money market funds last night (as they did in the financial crisis).  They are continuing to battle to stabilize the Treasury market.  And, in doing so, they had to reopen dollar swap lines with central banks around the world today.

Here’s what that means: The Fed agreed to give foreign central banks U.S. dollars at a determined exchange rate for the currency of the respective foreign counterpart. And when the swap ends, the two central banks simply repay the same quantity of currency back. There’s no exchange rate risk and no impact on the demand for currency in the open market. 

This dollar liquidity solution was a very key step in repairing stress in the global financial system back in the GFC.  When the credit crisis was at its peak, banks around the world were hesitant to do any short-term lending with other banks. As a result foreign bank-to-bank lending rates for dollars, the world’s primary business currency, shot up. That restricted access to dollar borrowing and pushed a lot of consumer interest rates higher in the U.S. and abroad. 

By providing these currency swaps with other central banks, the Fed helped to inject dollar liquidity into banks around the world. And removed the fear associated with having limited access to U.S. dollars. This should be a big step, for the Fed, in resolving the issue of rising market interest rates (namely the U.S. 10 year yield).

 
For readers of Pro Perspectives:  If for any reason you are not getting my emails (as from time to time, getting emails to inboxes can be challenging), you can always find my daily notes here.    

Pro Perspectives 3/18/20

March 18, 2020

While most are watching the red numbers in stocks, hoping for some comforting plans to come out of the White House and Capitol Hill, the bond market continues to be the scary place that is spooking all markets.

When stocks are plunging and the future is uncertain, money tends to plow into bonds (bonds higher, yields lower).  We’re seeing the former, but not the latter.

Last week as stock were plunging, so were bonds.  This sent yields higher, in the face of a recent surprise rate cut by the Fed. 

With that, the Fed came back in Sunday night with a massive response, slashing rates to zero and starting a $700 billion bond buying program.  And Powell warned that his desk at the Fed would “go in strong” on Monday buying Treasuries across the curve. 

That kind of statement should spook any speculator out of the market immediately, and should be more than enough to normalize the market.  It hasn’t.

With the fed funds rate at zero, the 10-year yield traded as high as 1.26%.

This is clearly a battle ground for the Fed, to maintain stability in global markets.  So far it hasn’t gone well.  Last week, a few large hedge funds were said to be in forced liquidation.  When this happens, they tend to sell what they can, not what they want to.  In this case, they are purging what has been working:  the long bond and long gold trade.  

Which is also why, we have this chart in gold …

  
As the world's central banks are printing money and governments are rolling out massive deficit spending programs, gold should be moving higher like a rocketship.  Yet it's down 13% since last Monday. 

Let's keep in mind that the Fed has the printing press, and won't lose the battle in the bond market.  In the very near future, the Fed will probably have the 10-year yield where they want it (maybe at 30-40 basis points), and be in complete control of the yield curve.   It may take that observation to turn around the price of gold.  When it does, we could see gold much, much higher (maybe $2,500ish). 

 
For readers of Pro Perspectives:  If for any reason you are not getting my emails (as from time to time, getting emails to inboxes can be challenging), you can always find my daily notes here. 

Pro Perspectives 3/17/20

March 17, 2020

As we discussed yesterday, in historical crises Wall Street panics well before Main Street panics. 

In the case of the Global Financial Crisis, Wall Street started panicking in mid-2007.  Main street didn’t start feeling it until late 2008 to mid 2009 (stocks bottomed in March of 2009). 

In this case, the panic on Wall Street started a month ago.  Main Street just started panicking three-to-four days ago.  The panic on Wall Street was driven by the complete unknown outcome of the health crisis, and the uncertainty surrounding the impact it would have on the economy.  Ironically, it’s just as potential solutions start emerging, to the unknown outcome, that panic ensues on Main Street. 

This may give us a clue as to where we are in this crisis, for markets (the bottom?). 

We’ve had a significant rate of change on the health crisis front (from no plan, to a plan with significant hope).  Wall Street likes “rate of change.”  From “nothing” to “something” is a big rate of change. 

Also remember, as we’ve discussed, historically major turning points in markets are associated with some sort of intervention.  And markets can turn well before there is clarity on the outcome (the coronavirus, in this case).  Over the past week, we’ve had a global bazooka of intervention. 

With this above in mind, let’s take another look at how this big trendline is holding up on the S&P 500 — the trendline that represents the recovery from the Global Financial Crisis…

This line comes in around 2,485.  We get another close ABOVE it today.  

Pro Perspectives 3/16/20

March 16, 2020

With the surprise move yesterday by the Fed, they made it clear that they will do whatever it takes to keep money flowing, and available, to banks, businesses and individuals (i.e. keep them liquid). 

The Treasury and the the White House have already made it clear that they will do whatever it takes to keep banks, businesses and individuals solvent. 

In addition, we now have clear coordination among countries, and the commitment to continue coordinating, not just on monetary and fiscal policy, but on public health measures.  Today, in a call with G7 leaders, they pledged to make efforts to increase the availability of access to medical equipment, to share epidemiological data to better understand the virus, and to work together to facilitate trade and keep the supply chain working.  

We’ve been talking about the importance of global leaders coming together and pledging to resolve a global crisis with a global response.  We finally have that commitment.  Remember, it was this type of pledge by global leaders in 2009 that marked the turning point for global financial markets. 

So, all of the above should all be working to stabilize markets and restore confidence.  Despite the performance today in stocks, I think it is.  Wall Street panics well before Main Street panics.  Wall Street panic was a month ago.  Main Street just started panicking two-to-three days ago.  

The final piece in the U.S., for markets, might come this week, as significantly more testing capacity is due to come online.  We should see a better representation of the real infection rate. That has been the big unknown. And while that will spike the numbers, it will also finally give some visibility on the outcome.  Couple that with the containment efforts of the past four days, thought to be unfathomable in the U.S. just a week ago, and we may have a positive surprise (the first in a while) — and a big turning point in confidence.  We will see. 

This all leaves us with this performance of global markets, year-to-date: 
 

Pro Perspectives 3/13/20

March 13, 2020

Yesterday we discussed the policy response we’ve seen on the economy, but as we discussed, the other piece we’ve needed is visibility on a gameplan and action on the health crisis front.  

Today, we got it.  

Trump’s press conference late this afternoon, positively surprised markets with a big, bold private-public partnership to address the health crisis, which includes widespread drive-through testing.

This follows a morning interview of Mnuchin (Treasury Secretary), where he committed a whole of government approach to do whatever it takes, including virtually unlimited liquidity (from the Fed).  For those looking for another shoe to drop, some sort of blow-up event for markets, like in corporate bonds, Mnuchin is telling us, it’s not going to happen.  I think it’s pretty clear that the Fed would be in buying corporate bonds or working with banks to do workouts. 

On that note, Mnuchin also made clear that they are committed to helping industries “get through this.”  That means airlines, cruiselines, hotels.  As Trump said this afternoon, they are important to the country. He’s also had the heads of the airlines in the White House.  

So, you can follow the government money in these stocks and buy them for a fraction, if not pennies on the dollar, of where they traded two months ago: 

Norwegian Cruiselines: -84% 
Carnival: -72%
Royal Caribbean: -78%
Delta Airlines: -46%
United Airlines: -62%

Trump also announced he’ll be buying oil at these prices for the Strategic Petroleum Reserve. 

This is a bazooka response.  

What’s left?  A fiscal response looks like it could be done over the weekend. And I’ve said over the past couple of weeks that we need “a signal from global leaders (Presidents and Prime Ministers) that they are working together on a containment strategy, AND are committed to support the economy and those suffering with big fiscal stimulus and government aid.  Today it was announced that the G7 leaders will hold a video conference on Monday to discuss a coordinated response.  The boxes have all been checked.

All of this leaves us with this chart of stocks as we head into the weekend …

Remember, yesterday, we talked about this big line that represents the recovery from the Global Financial Crisis-induced lows of 2009.  We close today about 8% above this line. 
 

Pro Perspectives 3/12/20

March 12, 2020

The pandemic threat has been clear in markets since mid-February.  The markets have been pricing in an economy that slows if not plunges temporarily, as a large portion of the population is either sick, quarantined, or trying to avoid getting sick.

But it took a while for the American people to wake up to the reality that has been playing out globally, and in global markets.  

I think that turned yesterday.  After refusing, for weeks, to call the coronavirus a pandemic, the head of the World Health Organization finally relented yesterday.  That seemed to open the flood gates.  But even with the President’s address to the nation last night, I suspect it became real for a pop culture-driven population when pop icons (Sports and Hollywood) validated it.   

So, today we get more widespread panic in markets as the broader population responds.  With that, stocks had their worst day since 1987.  

And that leaves us with this chart …

Stocks end the day on the lows, trading into this very important trendline from the 2009 lows.  This puts the index down about 28% from the highs.  Keep a very close eye on this big trendline support.  It has major significance, given it represents the recovery from the global financial crisis-induced lows.

As we know, the markets have been looking for the right policy response.  So far, they’ve given all of the signals they know how to flash (monetary and fiscal stimulus).  But based on historical observation, policymakers are better at reacting and fixing things that break, than they are at avoiding breakage through proactive policy.  

On that note, when markets start doing low probability things, as they are now, we tend to see things break.  The Treasury market started flashing one of those warning signals yesterday, with yields rising in the face of widespread market chaos.   The Fed responded today with a massive liquidity injection. 

So, we’re getting aggressive responses from policymakers on the economy and markets.  The other piece we’ve needed is visibility on a gameplan and action on the health crisis front.  Properly informing the public, without creating panic has been the needle the White House hasn’t been able to thread.  The public seems to get the message now.  

In this environment, if people aren’t sufficiently worried (enough to make efforts to stop the rate of spread), then we should be worried.  If people are sufficiently worried, then we can be less worried.