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March 11, 2020

Back on December 23rd of 2018, to counter the indiscriminate selling of stocks, we had a response from the U.S. Treasury Secretary. He had a phone call with the major banks. And the following day, he had a meeting of the “President’s Working Group” on financial markets (which includes the Fed). That was an intervention signal.

When stocks re-opened after Christmas the bottom was in — stocks rallied 7% over the last four days of the year — and +47% over the next thirteen months. Fair to say the banks received some marching orders to deploy some of the ultra-cheap Fed capital.

So, guess what Mnuchin has been up to?

Yesterday he met with the “President’s Working Group” (again, including the Fed). Today, he’s in the White House, with the President, meeting with the top bankers in the country.

That has been a formula for putting a bottom in stocks.

In 2018, the stock market decline was 17% in 16 days. This time, it’s 20% in 13 days. And we get the Mnuchin response to “ensure liquidity” and “properly functioning markets.”

Additionally, this time around, we have the kitchen sink of global policymaker intervention to support the economy and promote confidence (which tends to mean higher stocks).

Central banks have responded (including a 50 basis points cuts from the Bank of England today). And suddenly, fiscal stimulus is coming from all parts of the world. And importantly, Mnuchin said today that the U.S. Treasury is “coordinating internationally.” As we discussed yesterday, this “working together” globally for a global solution is a huge confidence signal the markets need.

Tomorrow, we hear from the ECB. I would not be surprised if the ECB responds to the health crisis by adding a new asset to their asset purchase mix: Equities.

Pro Perspectives 3/10/20

March 10, 2020

Yesterday may have been peak fear. With the crash in oil prices, we now have a global health crisis and risk of a corporate and sovereign debt crisis (oil dependent countries).

Importantly, yesterday’s events moved global policymakers into action on fiscal stimulus and aid.

The White House is meeting with Congress today on a package that will include aid for those individuals and companies impacted directly by the virus, AND, as I suspected, there is talk of aid for the shale companies, which became very vulnerable after yesterdays oil price crash.

That has stocks recovering more than half of the losses from yesterday.
Remember, as we’ve discussed over the past couple of weeks, the turning point for markets and confidence during the global financial crisis was the G20 meeting in April of 2009, when the G20 pledged to work together to resolve “a global crisis with a global solution.”

The good news: We now have global central banks and global governments in firing stimulus bullets. The problem: On the monetary policy side, it’s coordinated. On the government side, the response is there, but it’s fractured. I suspect the global confidence boost could be dramatically improved by signals that all governments are working together to contain the virus and to support the economy. Given the move from Russia yesterday, that may not be possible.

For stocks, after a 19.4% decline in the S&P 500 over just 14 days, we get a bullish reversal signal today (an outside day)!

Pro Perspectives 3/9/20

March 9, 2020

Last week, we were facing a virus-induced economic disruption. It's complicated, but from an economic perspective, the uncertainty: How long? Maybe a quarter, or two.

Today, the geopolitical landscape changed and so did the complexity of the outlook.

Russia was unwilling to cut production, to support the oil market, to support global stability. And in an act of retailiation, the Saudi's reset global oil prices, much lower.

For Russia, their move back-fired. A 30% plunge in oil prices destabilizes U.S. shale producers, and becomes a threat to U.S. banks and creditors. But it also destabilizes Russia and puts them on default watch.

This type of environment for oil prices alone (the level of oil prices) nearly plunged the world back into recession back in early 2016. Central banks had to respond. This time around, central banks are already pressing the accelerator. And today’s plunge in global markets, has global governments moving (now, rather than later) on stimulus plans.

The U.S. should be ready to support the shale companies with aid – to keep them afloat. But for countries (or regimes) that are highly dependent on oil revenue (economies funded by oil revenue), we have the makings of a cascade of global debt defaults.

Pro Perspectives 3/6/20

March 6, 2020

The 10-year yield over the past couple of weeks has been the most important market to watch for clues on how deep the stock market decline would be.

Remember, we looked at this chart of the record lows in the U.S. 10-year government bond yield …

Not only has this level given way, but we plunged to as low as 66 basis points today on the 10-year. Here's an updated look at that chart …

As we discussed a couple of weeks ago, this breakdown will bring about speculation of the U.S. going to negative rates. That's happening. And that brings about the deflation-forever, secular stagnation pontifications. That's a big threat to consumer and business confidence. This will force policymakers to do more.

Remember, historically turning points in markets like these, are marked by some form of intervention. I suspect we'll see more, bigger, bolder intervention. And markets can turn well before there is clarity on the outcome (the coronavirus, in this case).

Pro Perspectives 3/5/20

March 5, 2020

As we've discussed over the past month, with the coronavirus, we have an unknown outcome from a human welfare perspective.

But we have a known outcome for the economy and markets. That is, global policymakers, in coordination, will throw anything and everything at it, if necessary, to keep the confidence intact, to keep markets afloat and to keep the global economy moving. We're seeing it.

As of this week, we've had a globally coordinated message from finance ministers and central bankers. And we've seen action from global central banks, including an emergency 50 bps rate cut from the Fed.

Next up: Big and coordinated fiscal stimulus and aid is coming.

That's a green light for gold.

Two weeks ago, in my Pro Perspectives note (here), I laid out the three scenarios for gold, which all pointed north. We're now seeing two of the three scenarios playing out together.

Gold is being bought as a parking place of relative safety in the pandemic scenario (which was a low probability scenario — not low anymore). And gold is being bought as a hedge against the inflation penalty that many believe is inevitable, following the quadrupling in size of global central bank balance sheets since 2007, and the recent return to balance sheet expansion. On the latter, central banks will certaintly have to fire even more bullets.

But the magic word that's triggering the algorithms in gold (to buy) is "fiscal." Deficit spending is about to ramp up across global governnments to support the global economy. Gold will likely rise against all paper currencies.

The post-financial crisis highs of $1920 aren't far away – from today's levels about 13% away from the September 2011 high.

Where could it go?

For those that appreciate the value of technical analysis, the ABC pattern (from Elliott Wave theory) projects a move to $2,700. That would be a repricing of global assets (which would likely included stocks and broader commodities — higher) relative to paper money — which means inflation.

Pro Perspectives 3/4/20

March 4, 2020

Yesterday we talked about which industries might be the winners from globally coordinated government spending packages (and aid), in response to the coronavirus.

Likely winners in the U.S.: Healthcare (related to the healthcare crisis — hospitals, pharmaceuticals). Perhaps manufacturing, as an effort to bring the supply chain back home. And infrastructure stocks.

Today Congress agreed to an $8.3 billion emergency package to ramp up the fight to contain, treat and ultimately find a vaccine for the coronavirus. Importantly, hospitals will get government funding for those coronavirus patients that can’t pay.

With this funding (and more to inevitably to come) going toward healthcare, let’s take a look at the portfolio of one of the best healthcare investors on Wall Street.

Billionaire Larry Robbins has 40% of his $12 billion hedge fund in healthcare, which includes 8 of his top 11 positions. Here what his portfolio looks like …

Big institutional money (pension funds, hedge funds, endowments, etc.) tends to follow the government money and legislation. It worked for Robbins post-Obamacare. He’s been patiently waiting and reforming these names, and may be in for another big run. These all did very well today. Of course, it helps that Biden has overtaken Sanders (a toxic candidate for healthcare stocks).

For the economy, something much, much bigger will likely be coming in a government spending package. Mnuchin today said they are looking at “all tools.” To keep the consumer moving, expect expanded unemployment insurance, maybe direct aid (like a FEMA-like payment). Banks might be incented/directed to keep liquidity flowing to companies disrupted by the virus (short term loans, loan forbearance, etc.).

Remember, Trump’s economic agenda has always included a plan for a big infrastructure spend — modernizing and expanding the country’s infrastructure. This will be his opportunity, as Obama had with the American Recovery and Reinvestment Act in 2009, to allocate funding to his longer-term growth vision. That would bode well for engineering companies, heavy equipment/ machinery makers, metals producers, natural resource stocks and maybe some left for dead industrial conglomerates (GE?).

Overall, global policymakers seem to be waiting to see more of virus impact unfold, with an eye on acting at the right time (with fiscal stimulus). As a European official said today, in this situation you can’t act too early, and you act can’t too late.”

Pro Perspectives 3/3/20

March 3, 2020

Coming into the morning, we expected a coordinated response from the G7 finance ministers and central banks.

First came the phone call with the world’s leading finance officials. Then came a statement, pledging to “expand health services” and “take action” to “aid in the response to the virus” and “support the economy.”

A few hours later, we got a an emergency, intermeeting Fed rate cut, to the tune of 50 basis points.

Expect the Bank of Japan to do something tonight. And expect the European Central Bank to make a move tomorrow morning.

Will it work to shore up confidence? As I’ve said, it will probably take 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.

On that note, if we think back to the global financial crisis, we had the $800 billion “American Recovery and Reinvestment Act of 2009.” Despite what turned out to be a decade long weak economic recovery, there was one industry that boomed as a result of the stimulus package — Silicon Valley.

Specifically, the Obama administration doled out $100 billion worth of funding and grants for “the discovery, development and implementation of various technologies.” This turned into the launchpad of the “disrupters” in Silicon Valley. Why? Because big institutional money (pension funds, etc.), followed the government money — private market valuations soared.

Where might the Trump administration allocate stimulus funds? Probably healthcare (related to the healthcare crisis — hospitals, pharmaceuticals). Perhaps manufacturing, as an effort to bring the supply chain back home. And today, Treasury Secretary Mnuchin said they will focus on infrastructure if they do a fiscal package.

Pro Perspectives 3/2/20

March 2, 2020

Despite the increase in coronavirus cases in the U.S., stocks were up big today (as were global commodities prices).

It doesn’t hurt that the Bank of Japan came out buying Japanese stocks in record amounts last night — and likely buying other global stocks and commodities. This (explicit engagement in financial markets) is already within the monetary policy toolbox of the Bank of Japan. And as we know, the central bank in China has been in the business of supporting markets since early February. Chinese stocks were up 3% over night.

So, we have major central banks propping up financial markets. And we have chatter over the weekend of fiscal stimulus coming in Italy, and supportive “ready to act” commentary from major central bankers.

But as we discussed last week, we need major governments to come together, in coordination, on a containment strategy and a stimulus plan for the global economy. Perhaps the most fear-inducing part of the pandemic story has been the lack of trust and lack of collaboration between countries — isolationist-like behaviors, which only increases the probability of a worst-case outcome. So, collaboration and coordination are key to restore confidence.

Good news: That global “coordination” has now, to a degree, been telegraphed. An emergency call with G7 finance ministers and central banks has been scheduled to take place tomorrow.

That said, the finance ministers and central banks is important, but I suspect we need to see G7 leaders convene and draft a statement.

Remember, we didn’t see a bottom in the markets during the global financial crisis, until the G20 leaders pledged to work together to resolve “a global crisis with a global solution.” That was the turning point for global markets and for global confidence. G7 officials need to deliver a message of unity and a promise to do “whatever it takes.”

Pro Perspectives 2/28/20

February 28, 2020

Stocks rallied sharply in the last 15 minutes of trading today.

Why? Given the carnage of the past week, there has to be a decent chance that we get some policy response over the weekend — whether it be a coordinated global central bank response, or some sort of coordination from global governments to strategize on containment, and/or support the global economy with a big fiscal stimulus response.

As we discussed yesterday, the turning point for markets and global confidence during the global financial crisis, was the G20 meeting in April of 2009, when the G20 pledged to work together to resolve "a global crisis with a global solution." Markets turned well before there was any visibility on a favorable outcome for the global financial system.

With that in mind, we end the week with the world now at "highest risk" of the global spread of the coronavirus, according to World Health Organization.

Interestingly, the head of the WHO wouldn't use the word pandemic today, but he does say the "greatest enemy is not the virus itself, but it's fear, rumors and stigma."

Why? And why do governments seem to be slow to react?

It may have something to do with what they already know about pandemics.

In short, there's not much that can be done to stop it, only to mitigate the effects. Reuters had a good piece yesterday that cited a 2011 UK government white paper on pandemics.

Here are a few interesting excerpts from that white paper:

"During a pandemic, the Government will encourage those who are well to carry on with their normal daily lives for as long and as far as that is possible, whilst taking basic precautions to protect themselves from infection and lessen the risk of spreading influenza to others."

"Modelling suggests that imposing a 90% restriction on all air travel to the UK at the point a pandemic emerges would only delay the peak of a pandemic wave by one to two weeks."

"There is very limited evidence that restrictions on mass gatherings will have any significant effect on influenza virus transmission."

"There is modelling data highlighting the potential benefit of school closures in certain circumstances, both in terms of protecting individual children from infection and in reducing overall transmission of the virus in the population" … but, "The impact of closure of schools and similar settings on all sectors would have substantial economic and social consequences, and have a disproportionately large effect on health and social care because of the demographic profile of those employed in these sectors. "

Bottom line, the research determined that social and economic costs are greater with aggressive quarantines, border closures, etc. Therefore, the focus, they recommend, isn’t on trying to stop it, but is on mitigating the severity of outcomes. That seems to be the script.

Pro Perspectives 2/27/20

February 27, 2020

The bloodletting continues in global markets, with the continuation of zero visibility on containment of the coronavirus.

At today’s close, we now have a 12% decline in the S&P 500 in just six days. And the big triple-bottom in the 10-year yield has given way, trading down to 1.24% today (new record lows).

Interestingly, as global markets are getting hit. The Chinese markets, the origin of the virus, have completely recovered the losses associated with the epidemic that began unfolding in late January. Why? Intervention.

Remember, in early February, the Chinese stepped in, proactively and rolled out a number of measures to shore up the economy and markets. They have a quarter of a trillion dollars of fresh liquidity flowing through their financial system, which undoubtedly is being used to stabilize and prop up markets (among many other things).

On the “intervention” note: With the lack of prospects that this, now, global virus will be contained, policymakers need to step up with some action. It was suggested today in an WSJ Op-Ed, written by a former Fed Chair candidate, that the Fed, BOJ, ECB, BOJ and BOE step in with a coordinated rate cuts and assurance that they are ready to do more. That may help.

But higher level coordination is probably needed. We need major governments to come together, in coordination, on a containment strategy, to be accompanied by fiscal stimulus.

If we think back to the global financial crisis, the turning point for markets and global confidence, was the G20 meeting in April of 2009, when the G20 pledged to work together to resolve “a global crisis with a global solution.”