Category: zerohedge

We’re all for free speech, but maybe the height of a global crisis isn’t the best time to “floss” your $8 billion net worth like you’re making a cameo in a Cash Money Records music video.

That’s the lesson someone should have told DreamWorks co-founder David Geffen, who pissed off the world when he posted photos of his “quarantine” on his superyacht on Instagram last week. Geffen posted photos of his yacht, which according to the Washington Examiner, cost $590 million, accompanied by a caption that said:

“Sunset last night…isolated in the Grenadines avoiding the virus. I’m hoping everybody is staying safe.”

Social media users instantly became outraged with Geffen, pointing out that his post was “tone-deaf” in light of the hardships that many people dealing with the coronavirus outbreak in the U.S. are facing.

The View co-host Meghan McCain tweeted: “David Geffen is worth 8 billion dollars! For God’s sake help this country get ventilators, our health workers masks and the medical supplies they need! Or no, just stay on your f—ing yacht instagramming. This is just shameful and grotesque.”

New Yorker writer Lauren Collins tweeted out Geffen’s photo with one word: “psychopath”.

psychopath pic.twitter.com/0tCQhuuhco

— Lauren Collins (@laurenzcollins) March 28, 2020

Film producer Robby Starbuck asked: “Is anyone shocked that Democrat donor David Geffen posted such an out of touch photo? He might as well have take a picture flipping everyone in America off.”

Starbuck continued: “David Geffen’s thought process: ‘Hey you know what, millions are losing their jobs, can’t pay their rent and they’re worried about a deadly pandemic, I bet they’d love to know how I’m doing. Fire up the copter so we can take some more pics of my yacht! They’ll love this!!!'”

Blog site A.V. Club destroyed Geffen, writing last week: “It’s getting to the point where it almost feels like some sort of cash-induced brain disease, a hideous and infectious need to say something about their vast reserves of wealth, safety, and power, when “nothing” would certainly have sufficed.”

Geffen has now locked down his Instagram account, but of course, the damage has already been done. With forward thinking and impeccable timing like that we’re surprised Geffen isn’t working at a portfolio manager at one of Wall Street’s “forward looking” long only funds. 

Via SchiffGold.com,

All eyes have been on the stock market in recent weeks as it has reflected the fears about the coronavirus-induced economic shutdown and the hopes of massive stimulus. It’s been quite a rollercoaster ride. But in his podcast on March 27, Peter Schiff said there’s an even bigger problem looming on the horizon that people aren’t paying any attention to – the potential destruction of the dollar. He said Americans are in for a rude awakening.

The Dow Jones finished its best week since the Great Depression with a 915.39 point drop. But even with that big plunge, the Dow was up about 13% on the week, all on the strength of the spectacular rally on Tuesday, Wednesday and Thursday. In fact, the Dow had a bull market condensed into three days. But Peter said it was not really a bull market. He called it a “vicious correction in a horrific bear market.” And he said that bear market is “a long way from over.”

But while most eyes are on the stock market, Peter said we’re missing a more significant looming bear market — the bear market we’re going to have in the US dollar.

Peter has already explained how the actions of the Federal Reserve and the US government has set the stage to devalue the dollar, saying the dollar is cooked. He said that with the central bank and government response to the coronavirus, hyperinflation has gone from being the worst-case scenario to the most likely scenario.

A bear market in the dollar can mask some of the other problems in the economy. Consider in the 1970s, the dollar fell by nearly 70%. That means that while nominal stock market losses in the decade weren’t terrible, the real losses were significantly larger.  It was a destruction of the value of US stocks and Peter said it’s going to happen again.

A plunge in the dollar means losses on all dollar-denominated assets — stocks, bonds, real estate. It also means price inflation and rising interest rates, which pushes down the value of bonds even lower. Peter said he thinks the dollar is going to be a lot weaker in this decade than it was in the 1970s.

I think the US is certainly starting off the decade in a much worse financial position.”

The main reason the dollar fell in the 1970s was because the US went off the gold standard. But the dollar remained the reserve currency, even though it was backed by nothing.

It got marked down, but it didn’t get knocked out.”

During the 80s, the US enjoyed the privilege of being able to issue the world’s currency without having to back it by gold.

That basically gave us a license to print and we’ve been abusing that ever since.”

Peter said this time he thinks the world is going to kick out the dollar as the reserve currency. If that happens, the dollar will just be another currency.

And that means Americans are going to have to have to abide by the same economic rules that govern everybody else. That means if we want to consume, we’ve got to produce. If we want to borrow, we’ve got to save. And Americans are going to be in for a rude awakening.”

Peter said this may well crush the retirement dreams of many Americans. With the erosion of the dollar’s purchasing power, retiring simply won’t be an option for many people.

Most Americans who are already retired, well, they’re going to have to go back to work. And the people who were planning on stopping working, well, they’re just going to have to keep working until they’re dead, basically. Unless you can do something now to protect yourself.”

Peter also talked about the passage of the massive stimulus bill. He said it’s possibly the most socialist bill ever passed. Basically, America is already a socialist nation.

Last week, with stocks at 2016 lows, without a buyer in sight, with stock buybacks dead and buried, we first reported that according to JPMorgan calculations, some “$850 Billion In Stock Buying Is About To Be Unleashed” largely due to pension fund quarter-end rebalancing, which promptly served as the straw clutched by bulls everywhere who were hoping that with at least one set of investors forced to buy, the S&P500 may have hit a bottom, if only for the time being.

This is what we said:

According to JPMorgan estimates, balanced or 60:40 mutual funds, a $1.5tr universe in the US and $4.5tr universe globally, need to buy around $300 billion of equities to fully rebalance to 60% equity allocation.

At the same time the $7.5 trillion universe of US defined benefit plans, would need to buy $400 billion to fully rebalance and revert to pre-virus equity allocations.

Finally, there are the “balanced” sovereign pension funds such as Norges bank and GPIF, which before the correction had assets of around $1.1tr and $1.5tr, respectively, and which according to JPM would need to buy around $150 billion equities to fully revert to their target equity allocations of 70% and 50%, respectively.

Then, a few days later, as stocks exploded higher, entering a bull market a record short 4 days later, yet with nobody knowing exactly why, the same strawman reappeared and as we reported according to desk chatter, “Traders were Betting That “$850BN Buyer” Is In The Market.”

It didn’t take long for desperate permabulls everywhere, both institutional and retail, to hang their hats on the pension rebalancing strawman, with that relentless optimist, JPMorgan’s Kolanovic, doubling down and after last week’s bull market, betting that the forced buying would continue, with supposedly another $125BN in buying on deck.

JPM Kolanovic: We estimate that re balance for the month end which is Tuesday could be around $100-$125B now. We think 60% still needs to be done 40% in a relatively short period of time… Trump is now on point risk reward is to be long time to risk some $$$ GL

— FxMacro (@fxmacro) March 30, 2020

By now we had entered “make up numbers” territory: since nobody can determine for sure how much pensions are buying, may as well throw out very big numbers. After all, the whole point of the exercise is to spook the market into covering shorts, starting a buying cascade.

And while this self-fulfilling prophecy certainly worked last week and for much of Monday’s ramp, a glitch emerged late on Monday when Reynolds Strategy strategist, the eponymoys Brian Reynolds, said that this most transparent exercise in stirring stock euphoria may have just suffered a potentially terminal blow after “a large California pension has postponed their scheduled quarterly rebalancing” adding that as California pensions are the “thought leaders in the pension community”, it is likely that “others will either follow along in postponing or reducing anticipated rebalancing.”

Reynolds was referring to an article in P&I online, according to which “Los Angeles City Employees’ Retirement System’s board temporarily modified its asset allocation and rebalancing policies, which includes allowing the staff to defer rebalancing its asset allocation if deemed appropriate, said Rodney June, CIO of the $15.1 billion pension fund, in an email.”

“The market conditions are unusual and volatility is well beyond historical norms,” said a staff memo for the board’s meeting Tuesday. “Staff believes that while extreme market volatility is present owing to the decline in the total portfolio value … shoring up liquidity within the UCA (unallocated cash account) is important to ensure that LACERS can readily meet ongoing cash flow obligations of approximately $95 million per month.”

The memo also said suspending rebalancing during extreme periods of volatility is prudent.

“Understanding that an out-of -balance asset class due to large market swings may later ‘self- balance’ due to a stabilization of the market may help prevent premature rebalancing that may incur costly market impact and transaction costs,” the memo said.

To many efficient market supporters (what’s left of them now that the Fed has nationalized capital markets) this comes as a long overdue measure: after all, why do Pensions wait until the last few days of the quarter to buy stocks, knowing well that they will be frontrun by other investors who are all too aware of their buying intentions, in the process yielding far lower returns for their stakeholders by buying stocks at higher prices; which one can argue is a breach of their fiduciary duties as pension funds can easily get far better prices if only they kept their rebalancing times and dates a secret.

By the looks of things, that’s precisely what they are doing.

In short, pension rebalancing – which so many bulls have relied upon it to stir up buying demand in the last few days of the month – may have just gone extinct. The only question is whether this revision is effective as of this quarter, and are investors not frontrunning pension buying but merely themselves… first on the way up and then on the way down.

Via S&P Global Platts Insights blog,

Demand destruction from the coronavirus outbreak will be top of mind for power and gas traders this week, while the ripples in the oil market are being felt in Saudi Arabia and Vietnam, albeit in different ways. The iron ore market, which is faring better, rounds out this week’s pick of commodity charts by S&P Global Platts news editors

1. Lockdowns in Europe, Asia push TTF gas price to 16-year low…

What’s happening? The coronavirus lockdowns in Europe and now India are hitting gas prices hard, with the TTF month-ahead falling to its lowest level since S&P Global Platts began assessments in 2004 of just Eur7.15/MWh. Reduced industrial activity in Europe has led to lower gas demand while declarations of force majeure by Indian LNG buyers mean deferred cargoes are likely to land on European shores.

What’s next? With the lockdowns likely to endure for weeks if not months, the bearish sentiment is not expected to lift, especially as maintenance work on gas fields and pipelines offshore Norway has been largely shelved on coronavirus fears. That means a market share battle between Norwegian gas, LNG and Russian supplies is set to intensify.

2. …and US sees power demand decline as coronavirus pandemic spreads 

What’s happening? New York City electricity loads have been weaker year-over-year this winter so far due to milder weather, but are now trending significantly below the recent five-year average, indicating a virus-related slowdown, according to Manan Ahuja, manager of North America power at Platts Analytics. These demand numbers could slow down even further as people stay home and businesses remain shuttered to prevent spreading the virus.

What’s next? US power system impacts from the coronavirus pandemic are beginning to emerge, with shifting load patterns, significant load declines in a number of areas and projections that mild weather and business shutdowns will continue to suppress load during the coming weeks.

3. Saudi Arabia poised for ramp-up in production, exports

What’s happening? Saudi Arabia has directed state oil company Aramco to supply 12.3 million b/d of crude to the market starting in April, once the OPEC+ accord expires. Aramco CEO Amin Nasser has said that 300,000 b/d of that amount will come out of the company’s inventories, leaving 12 million b/d to come from production. That is Aramco’s maximum production capacity, and Nasser has said the company can maintain that level of output for a year without any additional investment.

What’s next? Aramco, which has the exclusive right to pump all crude within the kingdom, has never produced that much before, and some analysts doubt its ability to sustain such high volumes. Aramco may also have difficulty finding enough buyers for its barrels, with many refineries cutting runs due to the coronavirus outbreak’s hit to gasoline and jet fuel demand. Countries seeking to fill up their strategic reserves may snatch up the barrels, but for commercial buyers, inventory costs are getting more expensive, especially for floating storage, amid a growing crunch in tank space availability.

4. Low prices to hurt Vietnam’s sweet crude output and sales

What’s happening? Vietnam, a major participant in Southeast Asian spot trade, is suffering from low global oil prices. Crude sales and export earnings for the country are estimated to fall by $225,000/day for every $1/b decline in outright prices. If prices are quoted at around $30–$35/b, state-run PetroVietnam said the company is likely to lose $3 billion in annual sales. Platts assessed Vietnam’s Bach Ho crude at record lows in March. The grade had an average outright price of $42.45/b to date this month, falling more than $25/b from $68.34/b on average in 2019, Platts data showed.

What’s next? The Southeast Asian sweet crude market may witness spot cargo volumes decline sharply as Vietnam scales back exports. PetroVietnam aims to produce 10.62 million mt of crude oil in 2020, down 18.9% from 13.09 million mt in 2019. Vietnam will pay more attention to building crude reserves than exports as low prices open new opportunities for PetroVietnam to stock up at lower costs, general director Le Manh Hung said. Building strategic reserves to ensure energy security is becoming more relevant to Vietnam as its import requirements have risen sharply in recent years, according to JY Lim, oil markets adviser at Platts Analytics.

5. Iron ore prices hold firm in face of lockdowns

What’s happening: Iron ore prices have held firm in recent weeks on supply side factors, even as steel prices have slumped on weaker demand as automotive and other industries have closed amid coronavirus-related curbs.

What’s next: Disruption to shipments due to 21-day lockdowns announced last week in South Africa and India – where iron ore exporters have declared force majeure – and new government directives from Canada may continue to support iron ore prices, offsetting the current collapse in European demand, which accounts for 9% of seaborne iron ore demand.

In a veritable treatise on all that was wrong with The Fed’s actions, Jim Grant – founder and editor of Grant’s Interest Rate Observer – was somehow allowed nine minutes on CNBC’s Squawk Box to put America straight on what we are facing and the consequences of these unelected and unaccountable officials terrifying experiments.

Grant began by slamming Jay Powell’s seemingly blinkered proclamation that “he sees no prospective consequences with regard the purchasing power of the dollar” as “very concerning” adding more pertinently that he thinks “that wilful ignorance is a clear-and-present-danger for creditors of The United States.“

It appears his fears are starting to be warranted as USA Sovereign credit risk is rising…

“I am in favor of life going on,” says Grant when asked by the anchor, “shouldn’t The Fed do something amid this massive global shutdown?”

The alternative, the venerable bond guru exclaims is the direction we are heading – “shutting everything down and putting the government in charge.”

Bernie Sanders may (or may not) be out of the presidential race but, as Grant highlights, “his programs are being implemented in fact daily.”

“One can die of despair as well as disease,” warned Grant, reminding viewers of the consequences of mass self-incarceration.

“There are health consequences to isolation, and health consequences to unemployment.. and life as it must go on is is a precious thing too and we ought to at least consider what we are condemning ourselves to if we choose to shut everything down for another month or two or three.”

“I think it would be a fatal error.”

Once again, the CNBC anchor urged Grant to support massive intervention but exclaiming “desperate times call for desperate measures.”

His retort shut down her argument quickly:

“experts are not expert in a dis-positive way, there is no certainty about this, just as there is no certainty in finance or indeed life,” and Grant adds ominously that “the cure is prospectively worse than the disease.”

“The delegation of political and economic authority to the US government to suppress this crisis is a clear and present danger.”

Finally, Grant, whose wife is a physician, reminded the anchors that the current actions (and consequences) have a direct analogy with the opioid crisis, as “in the early 2000s, the medical profession got it into its head that pain was the vital sign, and that no one ought to be in pain… this led to the deadly over-prescription of opioids.”

By the same token, Grant analogizes, “The Fed has intervened at ever-closer intervals to suppress the symptoms of misallocation of resources and the mis-pricing of credit. These radical interventions have become ever-more drastic and the ‘doctor-feel-goods’ of our central banks have worked to destroy the pricing mechanism in credit.”

Simply put, credit and equity markets “have become administered government-set indicators, rather than sensitive- and information-rich prices… and we are paying the price for that through the misallocation of resources.”

Grant ends on a hanging chad of a rhetorical question “what do corrections correct? Is there no salutary role for recessions and bear markets?”

Of course there is, he answers, “they separate the sound from the unsound, they separate the well-financed from the over-leveraged and if we never have these episodes of economic pain, we will be much the worse for it.”

Watch the full interview below:

With an unprecedented 66,000 coronavirus cases now reported in New York State, an emergency hospital was erected in tents in Central Park Sunday, as New York City’s staggering toll of coronavirus deaths rose to at least 776, pushing the statewide count past 1,000.

“We’re going to be using every place we need to use to help people,” Mayor Bill de Blasio said. “This is the kind of thing you will see now as this crisis develops and deepens.”

As SCMP reports, the emergency site will open at the park’s East Meadow on Tuesday and house 68 hospital beds for coronavirus patients, according to de Blasio. He said the Mount Sinai Health System, the faith-based charity Samaritan’s Purse – run by Franklin Graham, son of the late televangelist Billy Graham – the Central Park Conservancy and his own office were collaborating on the undertaking.

Graham put out a call for help on Twitter Sunday, and posted a video of workers building the tents to house the field hospital.
“If you are a Christian doctor, nurse, paramedic, or other medical professional interested in serving Covid-19 patients in our @SamaritansPurse Emergency Field Hospital in NYC, please visit http://samaritanspurse.org” he wrote. Samaritan’s Purse built a similar temporary facility in Italy to help deal with the crisis there.

If you are a Christian doctor, nurse, paramedic, or other medical professional interested in serving COVID-19 patients in our @SamaritansPurse Emergency Field Hospital in NYC, please visit https://t.co/EEw1jNtrrk. pic.twitter.com/5i7EeKxLDi

— Franklin Graham (@Franklin_Graham) March 29, 2020

As reported previously, US federal officials are also building an emergency 1,000-bed hospital at the Jacob Javits Convention Centre in Manhattan. The Army Corps of Engineers has also identified sites in Westchester County, home to the state’s first large cluster of coronavirus cases, and on Long Island for emergency hospitals.

The number of confirmed coronavirus cases rose 10.8 per cent during the same time span, from 29,158 to 32,308. Between 9:30am and 4:15pm Sunday, another 98 people died and 1,166 more people were diagnosed with Covid-19, bringing the number of dead to 776.

“It’s so painful for everyone that we’re going through this and we have to fight back with everything we’ve got,” de Blasio said. “Every death is painful. I feel a particular sense of loss when it’s one of our public servants.”

It took Spain 18 days to go from its first death to its 1,000th, according to data compiled by Johns Hopkins University. Italy took 21 days. New York state took 16 days.

New Yorkers are hearing a constant wail of sirens as weary ambulance crews respond to a record volume of 911 calls. New York medical staff are struggling with long hours and a dire need for hospital-grade masks and other protective gear.

The city’s ambulances are also responding to about 6,000 calls a day more than 50 per cent more than average. Fire Commissioner Daniel Nigro said Sunday that the last five days have been the busiest stretch in the history of the city’s EMS operation. “This is unprecedented,” de Blasio said. “We have never seen our EMS system get this many calls – ever.”

New York Governor Andrew Cuomo offered a faint glimmer of hope in the crisis, saying the rate at which new cases was doubling slowed to once every six days, down from once every other day earlier this month: “The doubling rate is slowing and that is good news, but the number of cases are still going up,” Cuomo said. “So you’re still going up towards an apex, but the rate of the doubling is slowing.”

Nevertheless, he extended the state’s “pause” order shuttering most businesses and urging New Yorkers to stay at home as much as possible.

New York State’s confirmed number of coronavirus cases reached 66,000 on Monday – roughly 7,000 new cases according to Cuomo’s office. That came as US President Donald Trump extended nationwide guidelines urging residents to stay home and avoid social gatherings to April 30, and as US health officials warned the country’s coronavirus death toll could top 200,000 people.

The USNS Comfort, a US Navy hospital ship with 1,000 beds, 12 operating rooms and a full medical staff, arrived in the city on Monday, much to Rachel Maddow’s dismay. It will be used to treat non-coronavirus patients to free up space in city hospitals.

This just might be the funniest thing you watch today.

Sorry this is happening to you @maddow pic.twitter.com/5hYLNRHSRW

— ALX 🇺🇸 (@alx) March 30, 2020

Submitted by Peter Garnry, Head of Equity Strategy, Saxo Bank

Summary:

The energy sector has lost extraordinarily $1.15trn in market value this year as oil prices have plunged to almost unimaginable levels.

In this equity update we provide investors with different ways to play the havoc in the energy sector. We also take a look at earnings this week with especially Carnival earnings being the most interesting to watch as the cruise industry is in a severe crisis due to COVID-19.

Lastly, we focus on consumer credit and the apparent weakness observed in China and how that could be a forewarning of what to come in the US and Europe. As a result we recommend investors to add Mastercard and American Express to their watchlists.

The global energy sector has been punched in the gut by first a slowing economy last year and then this year by an oil price war between Russia and Saudi Arabia. Making things worst the sector is now experiencing an abrupt 20% oil demand reduction equivalent to 20mn barrels a day or the entire consumption of the US. The oil futures curve is in steep contango as the active contract in Brent today went below $23/brl and stories have recently surfaced that physical oil is being transacted at $8/brl and oil storage is running out of capacity. As we talked about on our Market Call this morning the constraint on physical storage and ongoing demand destruction could push the front-end of oil futures down even further.

The current oil price creates extreme shareholder destruction with the MSCI World Energy Index losing $1.15trn in market value this year.

High yield bonds in the energy sector have seen their option adjusted yield spread to Treasuries widen to the highest levels on record and implied default probabilities are rising fast. But how should investors play the energy sector from here? One way is to buy call options on ETFs tracking the US or European oil and gas industry preferably with expiry during the second half. Another option is to get long-term exposure through single stock but here we recommend opting for only the highest quality names (see table below). The most risky strategy is to buy into those names that have the highest bankruptcy risk when the market rebounds, but here we recommend traders to apply some short-term filter (moving average or the like) to get confirmation during the rebound phase.

This week many Chinese companies will report earnings such as Geely Automobile and Air China, but also outside China interesting names such as Dollarama, Carnival, Walgreens Boots Alliance, CarMax, H&M and Constellation Brands will report earnings hopefully providing a picture of the demand situation in the US and Europe as these geographies are impacted by strict lockdowns due to COVID-19. With Carnival shares down 75% from this year’s peak in January and the trouble regarding many cruises during the last two months related to infected passengers with COVID-19 there will be a lot of focus on Carnival’s earnings. The main question is whether the cruise industry can stage a comeback and survive this serious threat to the industry.

In past couple of weeks we have highlighted many times on our Market Call podcast that investors and traders should watch oil, USD and VIX for guidance on market temperature. We have had focus on credit as well but with central banks stepping in the bleeding has stopped for now, but in other parts of the credit market outside corporate bonds there are now cracks happening.

Especially consumer credit in China is weaker as the weaker employment is spilling into repayment ability and is likely an indicator of what is coming for the US and Europe. So we recommend investors to put Mastercard and American Express on their watchlists.

In China loans to households have risen by 22% annualised and our worry is that at some point this credit expansion will lead to an abrupt halt like we saw in 2008 in the developed world.

Neel Kashkari, famous for coming out several days ago and giving one of the most bizarre 60 Minutes interviews of all time (an interview in which he claimed that the Fed had “infinite” cash) is now out giving life-lessons about when and how the American people should be worrying about moral hazard.

In an op-ed written late last week in the Washington Post, Kashkari made his argument that throwing as much money at the problem as possible, even if we don’t have a complete understanding of where that newly-printed cash is going, is the solution.

In other words, we’ve got the cash and so now, we can be the moral authority as well.

Kashkari stated: “If there is a principle policy makers need to keep in mind going forward, it’s this: Err on the side of helping as many workers and businesses as possible rather than on prudence. This is not the time to worry about moral hazard or whether people are incentivized not to work.”

He continued: “When the Covid-19 crisis is behind us, if our biggest complaint is that some workers and small businesses got help when they didn’t really need it, that would be a wonderful outcome for our country.”

Kashkari seemed to make the argument that since the Fed was already printing unlimited amounts of cash, they might as well use it to shore up as many liabilities that existed prior to the crisis anyway: “Policy makers should use the full authority Congress grants to immediately make sure that states have the health-care resources and equipment they need, that businesses have the wherewithal to preserve their staffs, and that individuals and families can make ends meet until the virus is contained”

“The highest priorities must be to enable the health-care system to catch up and control the spread of the virus — and to maximize the number of jobs saved. It is far better to spend taxpayer money to help small businesses retain their workers than to spend the same money helping workers after they’ve been laid off,” he continued.

Recall, during Kashkari’s 60 Minutes interview a week ago, Kashkari, when asked if the Fed would just “literally print money”, admitted: 

“That’s literally what congress has told us to do. That’s the authority they have given us, to print money and provide liquidity into the financial system. We create it electronically and we can also print it, with the Treasury Department, so you can get money out of your ATMs.”

Kashkari’s God complex continued when he was asked: “Can you characterize everything the Fed has done this past week as essentially flooding the system with money?” 

To which Kashkari responded simply: “Yes. There’s no end to our ability to do that.”

Gov. Andrew Cuomo is delivering his latest press briefing…NY’s case count has climbed by 6,894 cases to 66,497…

At the Javits Center in New York City giving a briefing on #Coronavirus. WATCH: https://t.co/Zx7b6P8wag

— Andrew Cuomo (@NYGovCuomo) March 30, 2020

Submitted by Nick Colas of DataTrek Research

While Donald Rumsfeld may not be one’s go-to guy for decision making paradigms, his 2002 mention of “unknown unknowns” is worth considering just now as an investment framework. The idea here is that we all make judgments based on a tripartite spectrum of available information. Specifically:

Known knowns (entirely baked into asset prices):

• COVID-19 both spreads easily and is sufficiently harmful to require countries to limit economic activity dramatically in order to contain the virus before it overwhelms their health care systems.

• Policymakers have responded by providing large scale fiscal and monetary stimulus in the hopes of tiding over economies during the worst of the outbreak.

• Medical researchers are working on improved therapeutic treatments as well as vaccines. Testing is becoming faster and more widespread.

Known unknowns (partially baked into asset prices):

• The exact duration of national lockdowns around the world and their impact on labor markets.

• The pace of economic recovery once the immediate danger has passed/possibility of reinfection during a restart.

• The size and timing of further fiscal/monetary stimulus (NY Governor Cuomo highlighted this in his press briefing today with respect to state budgets, an important source of US fiscal spending).

Unknown unknowns (not in asset prices and near-impossible to assess today):

• Inflation rates over the next 1-3 years, a push-pull of fiscal/monetary stimulus and uncertain consumer/business confidence.

• Any change of personal/corporate tax rates to stabilize government deficits (both at national and state levels).

• The political implications of COVID-19 on the November US general election. Worth noting: President Trump’s latest Gallup approval rating out on March 24th were the highest of his presidency and may have helped boost stock prices last week.

• The effect of exploding deficit spending around the world on the cost of capital.

• How emerging market economies with large dollar-denominated debts will handle a slow global economic recovery or how the European banking system will deal with a sharp recession in its most vulnerable countries.

• Just as the Great Recession did lasting damage to younger job seekers, will the current global downturn affect those finishing/just out of college right now?

You probably have many other “unknown unknowns” you could add to this list, but that’s exactly the point when considering how well US equities have held up; the S&P 500 at 2541 implies:

• No structural damage to US large cap earnings power. We’re trading at 20x the trailing 10-year average S&P earnings of $122/share, not the 10x we saw in 2009.

• Confidence that visibility into that $122/share earnings run rate will be there in November 2020 (near term equity prices tend to lever off 6-month forward economic/profit conditions).

• That the CBOE VIX Index over 60, even on large up days, is only a sign of near-term potential volatility rather than a sign equity prices are fundamentally wrong.

• That markets will continue to ignore bad economic news or disappointing corporate profit reports because either they are temporary or they will spur further monetary/fiscal stimulus.

As for how this is playing out in our 2008 Playbook construct, once again using September 29th 2008 and March 9th 2020 as starting points (the first +5% “crash day” move in each sequence):

#1: Because policymakers now both “own” the COVID-19 Crisis (unlike Q4 2008 when there was a US election pending) and learned from 2008 to go big/early (both in fiscal and monetary policy), the damage to the S&P 500 has not been as bad in 2020 as it was in 2008:

• The index is down 7.5% from September 29th, 2020.

• In 2008, the S&P was 15.0% lower on October 17th from September 29th, the same number of trading days as we’re including in the prior point.

#2: From this point in 2008, for the next 19 trading sessions the S&P 500 was in a very broad band but went essentially nowhere.

• The index closed at 940 on Friday, October 17th 2008.

• 19 trading days later, the S&P closed at 911, down 3.1% from that 940 level. In between October 17th and November 13th the index had an +11% day (October 28th) and four +5% decline days (October 22, post-election November 5/6, and November 12).

#3: The real crack for US stocks in 2008 came right after this waiting period, happened very suddenly, but bounced back relatively quickly:

• After holding the 900 level, the S&P went to 752 in just 5 trading sessions (November 14th to November 20th), a 17.5% decline. The headlines at the time centered on which financial institutions/auto makers would receive TARP funding, and how much.

• The S&P then came roaring back over the last 27 trading days of 2008 and closed at 903 with just one +5% crash day (-8.9% on December 1st).

This experience is emblematic of how markets behave when “unknown unknowns” shove their way into asset prices, and it continues to serve as our template for what to expect now. Specifically:

• Markets think they have a solid handle on the known knowns and the known unknowns. That should make for a period of notionally stability, even if the day-to-day price action feels otherwise.

• When economic events outrun policymaker’s responses, however, there is a sharp (18% in 2008) decline that doesn’t last long but creates an investable crisis low.

• Yes, the S&P did not really bottom until March 9th 2009 but you would not have wanted to sell at that 752 low on November 20th given the sharp bounce back through year end.

Bottom line: the 2008 playbook says we should see volatile but generally sideways US equity price action this week and next. Should there be a sudden shock from an unknown unknown that creates a +15% decline (2100 on the S&P, in round numbers), that would also fit with the 2008 playbook. Buying that new low would feel awful, but it would also be a signal to policymakers that they will need to take further steps. In the end, that’s why we lean on the 2008 playbook so much: in periods of crisis capital markets drive policy response.