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: 

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. 

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.  

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. 

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)! 

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.

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).    

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. 


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.”


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.