Category: zerohedge

Last week, when we looked at the latest shape of the Coronavirus curve, we said that even as US cases continue to soar, “the light at the end of the tunnel is now visible” and indeed as JPMorgan’s MW Kim writes in his latest Covid-19 update note published late last week, the global infection growth is showing early signs of slowing (53% W/W vs. 95% W/W two weeks ago), according to Johns Hopkins data, according to which the number of global confirmed cases is set to surpass 2 million in the coming days.

This reduction in new cases is the result of a sharp drop in the number of susceptible targets (i.e., cutting new contacts), which means that curve control is working with both China and Korea now well into the recovery stage, while Germany, Spain and Italy are at or near the curve peak, with US, France, the UK and several other nations close behind.

This is certainly impressive considering what the curve looked like just two weeks ago:

In other words, the first wave of coronavirus infections appears to be plateauing as a result of a sharp, forced reduction in secondary infection rates, or R-0. This has been achieved in three ways:

• Reducing susceptibles: an accurate vaccine targeting COVID-19 could reduce the initial susceptible (or S0) with smaller/slower infection development similar to seasonal flu.
• Shortening the infection period: certain therapies for COVID-19 could shorten the period of recovery (or duration of infection). As a result, this could lower the secondary infection rate (or Ro) compared to the initial infection curve experience without the treatment.
• Lowering the transmission rate: The transmission rate (or beat) can be reduced by encouraging a higher level of hygiene adoption including wearing masks. Given the transmission rate is the combination of (1) average contact rate between susceptible and infectious and (2) the probability of transmission, wearing a mask could lower the probability of transmission.

With that in mind, JPMorgan looked at some new development in the coronavirus therapeutic approach (or possible way to reduce the recovery period) and updates its thoughts on the wearing of masks (or possible ways to lower the probability of transmission).

• Control of Cytokine storm as a therapeutic approach. Cytokine storm, an overproduction of immune cells and their activating compounds (cytokines), is believed to be responsible for acute respiratory distress syndrome (ARDS) and multiple organ failure in severe COVID-19 patients. Therefore, some companies intend to develop drugs targeting the production of cytokine in COVID-19; including Siltuximab, an FDA and EMA-approved interleukin (IL)-6 mAB developed by EUSA Pharma with encouraging preliminary efficacy; Kevzara (IL-6 mAB) by Regeneron and Sanofi (currently in Phase II/III); TJM2 (anti GM-CSF) by Chinese biotech I-MAB (received IND clearance from the FDA); and Jakafi by Incyte (in collaboration with Novartis), a JAK-1/2 inhibitor approved for polycythemia vera (PV) and graft-versus-host disease (GVHD) (recently initiated Phase III trial in COVID-19).
• Masks or no masks in public places during COVID-19? JPM’s opinion is that reducing the number of people exposed to those infected should be the primary strategy for curve control. Wearing a mask as a supplementary measure to reduce the transmission rate is also topical. In countries like China and Korea, wearing masks is recommended in public places to reduce the risk of infection, while public health agencies in the West have generally recommended wearing masks only for healthcare workers and the sick. The US CDC recently revised its stance and  recommends people to wear face coverings in public places. We believe wearing a mask properly (which doesn’t require special skills and only takes education) will lower the risk of infection, given the transmission might occur via droplets, which can be controlled by preventing touching one’s face with one’s hands. 

JPM’s conclusion is that reducing the susceptible (i.e., cutting new contacts) should remain the prime strategy. Herd immunity might be considered an option once a vaccine becomes available. However, there are concerns about a possible series of infection waves following relaxation of social distancing rules. Hence, based on the bank’s epidemiology modelling framework, shortening the infection period (i.e., therapies: production of cytokine in COVID-19) and lowering the transmission rate (i.e., wearing masks) could be extra mitigating factors.

And speaking of the second wave of infections, there are some not so good news: China appears to be experiencing a rebound in new cases and the onset of the dreaded second wave, although it is still early to determine if there is a sufficiently high number of new cases for Beijing to seek a renewed shuttering of the economy (it is unlikely China will pursue this option until it is again too late and the real number of cases has soared). In any case this dynamic has to be watched closely.

Which then brings us to the $64 trillion (not that far off from global GDP) question: is the coming “second reinfection wave” going to be smaller or bigger – similar to the Spanish Flu pandemic – where deaths in the second wave were 5x greater than those from the first?

Here JPM believes that next waves could be at a smaller amplitude with lower mortality rate potential compared to the current first wave. This is due to (1) strong risk awareness among stakeholders; (2) faster government response potential at the infection tipping point; and (3) enhanced risk manual at the containment stage. However, even a substantially reduced amplitude of wave 2 (and 3 and 4), suggest that ongoing economic shutdowns will be recurring feature of life for quarters if not years!

The amplitude could be higher, however, a la the Spanish Flu pandemic, if it turns out that the life cycle of the coronavirus is far longer than assumed.  As JPM noted last week, the COVID-19 infection life cycle could last for 4-5 weeks including a 2-week incubation period.

The bottom line, and somewhat counterintuitively, the sooner the world declares victory against the Wu Flu, the faster the general population will rush back into “social un-distancing”, sparking new case clusters as the infection restarts from scratch, forcing authorities to re-establish social distancing once again, and so on, as the entire process repeats from square one.

Which brings us to the latest assessment made from Minneapolis Fed chief and former Goldman and PIMCO staffer, Neel Kashkari who has somehow also emerged as a budding epidemiologist and who today warned that without an effective therapy or a vaccine for the novel coronavirus, the US economy could face 18 months of “rolling shutdowns” as the outbreak recedes and flares up again.

“We’re looking around the world. As they relax the economic controls, the virus flares back up again,” the 2020 FOMC voter Kashkari said Sunday on CBS’s “Face the Nation.” Kashkari  “We could have these waves of flareups, controls, flareups and controls until we actually get a therapy or a vaccine. I think we should all be focusing on an 18-month strategy for our health care system and our economy.”

Kashkari warned that “this could be a long hard road that we have ahead of us until we get either to an effective therapy or a vaccine. It’s hard for me to see a V-shaped recovery under that scenario,” he said.

Of course, since Kashkari has been wrong about everything his entire career – most notably, in late January he asked “QE Conspiracists” to show him how the Fed is manipulating stock prices, which led to the Fed unleashing unlimited QE just two months later and demonstrating very vividly just how it is manipulating stock prices, this may be the most promising assessment of where we stand on the curve yet.

In his latest FX Special Report, Deutsche Bank macro (and market) strategist George Saravelos, like many others, appears to have reached his tipping point after last week’s unprecedented Fed takeover of capital markets, and writes that “there is no such thing as a free market anymore”, which of course is correct, but in a time when telling the truth is viewed as treason by many George may regret his harsh assessment of the current state of central planning (we know from over a decade of experience).

Below, we present his latest note, “The end of the free market: impact on currencies and beyond.“

There is no such thing as a free market anymore. All developed central banks have cut rates to zero and buying trillions of assets. Inflation is very low. A global liquidity trap may be in the making. In a world of international yield curve control and administered asset prices, what does that mean for FX?

Classical economic theory suggests low volatility in rates should mean low volatility in FX. If central banks can’t change yields or inflation, nothing changes in exchange rates either. We argue this effect will serve to greatly diminish FX volatility originating from bond markets. Central bank interest rate announcements will lose relevance for FX, just like the Bank of Japan has lost relevance for the yen in Japan. But lower “monetary” volatility may mean higher volatility elsewhere. Exchange rates also react to financial and real economy shocks. Central banks that lose power to cushion shocks could lead to much higher volatility in FX. If the Fed or ECB were absent during the Lehman or Eurozone crises, FX dislocations would have been much higher.

But will central banks be absent? In a matter of weeks policymakers have become a backstop for private-sector credit markets. At the extreme, central banks could become permanent command economy agents administering equity and credit prices, aggressively subduing financial shocks. It would be a bi-polar world of financial repression with high real economy volatility but very low financial volatility. A “zombie” market.

The impact on FX volatility of this scenario is far more ambivalent and could well be negative.

For now central banks are focused on subduing asset price volatility. But an emerging global liquidity trap also means that the exchange rate becomes an increasingly important instrument for central banks. Policymakers can always impact FX via selling infinite amounts of their own currencies. If central bank focus returns to FX, this could be a new source of volatility. The SNB’s huge intervention program is a case in point. The current environment may eventually sow the seeds for “beggar thy neighbour” policies similar to the 1920s Great Depression.

Our punchline is that the ultimate impact of the current environment on exchange rate volatility is ambivalent and depends on how far central banks are willing to go in pursuit of financial repression. The more central bankers control global asset prices, the more this could offset higher real economy volatility on exchange rates resulting from the exhaustion of policy space.

Our conclusion is critically dependent on the assumption that we are stuck in a zero inflation world and that central banks avoid targeting FX. If inflation or currency wars come back, exchange rate as well as broader FIC market volatility will almost certainly return with a vengeance.

Authored by Mike Shedlock via MishTalk,

The number of those age 65 and older and the size of their debt have risen. It’s the amount of debt that’s the killer.

The new retirement problem is Over 60 With Decades Left on the Mortgage.

A growing number of older Americans are carrying mortgage debt, and it will likely become more burdensome as the coronavirus crisis puts millions out of work and eats away at retirement accounts.

Many are still hurting from the financial crisis, which hit millennials when they were starting their careers and boomers during what were supposed to be their prime earning years.

In the U.S., some 9.18 million homeowners age 65 and over have mortgage debt, according to federal data analyzed by the Urban Institute. That’s up nearly 60% from 5.82 million a decade ago.

Housing Prices vs Wages vs CPI

This chart explains why the median mortgage debt has quadrupled since 1980.

Housing prices have dramatically outstripped wages and the CPI. That’s the problem for those who kept trading up or refinancing.

Those carrying a mortgage and depending on “inflation-adjusted” Social Security checks are likely to have a huge problem.

This setup is even more problematic for those unable to retire and now out of work due to the coronavirus.

The Huge Fear: How Do I Pay the Bills?

The huge fear now is How Do I Pay the Bills?

On April 6 in How High Will the Unemployment Rate Rise in April? I came up with an unemployment rate of 21-22% looking at job losses sector-by-sector.

In the last three week there have been 16.78 Million Unemployment Claims.

Unemployment claim analysis also leads to a 20% unemployment rate.

This is a huge debt deflation setup. How do the bills get paid?

This is yet another reason the Covid-19 Recession Will Be Deeper Than the Great Financial Crisis.

There will not be a V-shaped recovery.

International health officials were previously scratching their heads as to how Russia, a vast country of nearly 150 million people, had maintained such low COVID-19 numbers in the early months of the global crisis. Health experts have maintained suspicion over the country’s much smaller numbers when compared to Europe.

Many had attributed the early low numbers to the quick decision to shut the lengthy border with China, but other had criticized lack of actual testing, including in one notable moment the mayor of Moscow, who in late March when national numbers were only at 495 confirmed cases, told President Vladimir Putin in a meeting “the real number of those who are sick is much greater” than official numbers indicated.

That warning appears to be coming to fruition, as on Sunday Russia recorded it’s single greatest one-day record jump in new cases. 

“Russia confirmed 2,186 new coronavirus infections on Sunday, bringing the country’s official number of cases up to 15,770 and marking a one-day record in new cases. One hundred and thirty people have been killed by the virus,” The Moscow Times reports.

The vast majority of cases are centered in Moscow, which has been under a near total lockdown since March 30. 

Of the record Sunday spike in cases, 1,306 of these are in Moscow, home to 12 million people. Russia’s second-largest city, St. Petersburg, has currently reported 69 cases.

Chart via The Moscow Times

President Putin has recently extended a prior mandated ‘work at home holiday’ which has been the way the Kremlin has chosen to issue its national lockdown orders, though some regions which few to no known cases have been allowed fewer restrictions, depending on local authorities and provinces.

Excerpted from Doug Noland’s Credit Bubble Bulletin blog,m

Sitting at the dinner table, our eleven-year old son inquired: “If a big meteor was about to hit the earth, how much money would the Fed print?” I complimented his sense of humor. Yet it was a sad testament to the historic monetary fiasco that will haunt his generation.

Federal Reserve Assets surpassed $6.0 TN for the first time, having inflated another $272 billion for the week (to $6.083 TN). Fed Assets inflated an astonishing $1.925 TN, or 46%, in only six weeks. Bank of American analysts this week suggested the Fed’s balance sheet could reach $9.0 TN by the end of the year.

M2 “money supply” surged another $371 billion for the week (ending 3/30) to a record $16.669 TN. M2 expanded an unprecedented $1.136 TN over five weeks (up $2.123 TN, or 14.6%, y-o-y). For some perspective, M2 has expanded more during the past six months than it did during the entire nineties (no slouch of a decade in terms of monetary inflation). Not included in M2, Institutional Money Fund Assets expanded an unparalleled $676 billion in five weeks to a record $2.935 TN. Total Money Fund Assets were up $1.375 TN, or 44%, over the past year to a record $4.473 TN.

There was a sordid process – rather than a specific date – for When Money Died. But it’s dead and buried. There are a few things that should remain sacrosanct. Money is absolutely one of them. Money is special. Sound Money is precious – to be coveted and safeguarded. As a stable and liquid store of value, Money is the bedrock of Capitalism, social cohesion and stable democracy. Society trusts Money – and with that trust comes great responsibility and risk.

Analysis I read some years back on the Gold Standard resonates even more strongly today: Limiting the capacity for inflating its supply, the structure of backing Money with gold worked to promote monetary and economic stability. Yet just as critical were the officials, bankers, businesspeople, market operators and common citizens all adhering to norms and behaviors fundamental to sustaining the monetary regime and resulting Sound Money.

In particular, there was a crucial corrective dynamic that would emerge as a system began to stray from monetary stability. Recognizing that policymakers (fully committed to the regime) would be employing measures to defend stability, market participant behavior in anticipation of policy moves would tend to reinforce stability. For example, if market participants expected officials to respond to credit and speculative excess with tighter policies, markets would exhibit a self-correcting dynamic (reduced lending and risk-taking) prior to the adoption of restrictive policy measures.

I’ve been an avowed naysayer of this global experiment in unfettered global finance for more than 25 years. We have witnessed a unique period in financial history. Never before has the world operated without limits to either the quantity or quality of “money” and Credit. Global finance moved to a massive ledger of electronic debits and credits virtually divorced from real economic wealth – debit and credit entries backed by little; and little holding back the creation of Trillions of additional new “money.” Credit is inherently unstable, and this new “system” early on proved highly destabilizing.

As degraded private Credit turned increasingly unstable, government-based “money” (central bank Credit and government debt) was employed in expanding quantities in repeated attempts to bolster waning market confidence. Witnessing the extent governments were willing to go in post-Bubble reflationary measures, just about 11 years ago I began warning of the unfolding “global government finance Bubble.”

Early on in the Bubble reflation, I warned that QE would distort markets and fuel asset price Bubbles. I would repeatedly get similar pushback: “Doug, how is it possible for QE to be distorting the markets when these Fed liabilities are just sitting (inertly) within the banking system? How can Federal Reserve “money” be in two places at once?”.

Recent weeks have offered a rather straightforward example of the mechanics. When the Fed creates new liabilities (Rothbard’s “money out of thin air”) to purchase Treasuries (along with MBS, corporate bonds, bond ETFs, municipal debt and, going forward, junk bonds and “main street” loans), these “immediately available funds” flow into the banking system where they are exchanged for bank deposits (new bank deposit liabilities matched against an asset “reserves at the Fed”). Some of these deposits will flow immediately into the money markets, especially to institutional money funds after Federal Reserve market purchases from the institutional investor community. It is certainly no coincidence that M2 plus Institutional Money funds have increased $1.81 TN in five weeks as Fed Credit inflated $1.82 TN.

Questions following Chairman Powell’s April 8, 2020, speech, “COVID-19 and the Economy”:

David Wessel, Director of the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institute: “The Fed has cut interest rates to zero – you’ve bought hundreds of billions worth of Treasury bonds and mortgages; you’ve launched an alphabet soup of lending programs – including some new ones today for state and local governments and mid-sized businesses – that you say could lend up to $2.3 TN dollars. Is there any limit to how much money the Fed can create – how much it can lend – without having some unwelcomed side effects – like inflation or asset price Bubbles?

Powell: “These programs that we’re using – under the law we do these…, as I mentioned in my remarks, with the consent of the Treasury Secretary and with fiscal backing from the Congress through Treasury, and we’re doing it to provide Credit to households, businesses, state and local governments, as we are directed by the Congress. And we’re using that fiscal backstop to absorb any losses that we have. And what we’ve been doing is looking for places that are very important to the real economy – things that really affect people’s lives and economic output – and where Credit to those parts of the economy has broken down… That’s essentially what we’re doing. And we can keep doing that as long as those needs arise. Our ability to do that is, really, limited by the law. We have to find unusual and exigent circumstances. The Treasury Secretary has to agree. And we are using this fiscal backdrop. But there are really no limits to how much we can do other than it must meet the test under the law as amended by Dodd Frank.”

Wessel: “Isn’t there a risk that with all of this money coming out of Congress – the money and lending – that we’ll end up with something that we don’t like, as in more inflation than we’d like or asset Bubbles?”

Powell: “Inflation has been an interesting phenomenon. Back 12 years ago, when the financial crisis was getting going and the Fed was doing quantitative easing, many people feared that the increases in the money supply, as a result of quantitative easing asset purchases, would result in high inflation. Not only did it not happen, the challenge has become that inflation has been below our target. So that is – globally the challenge has been inflation below target. Honestly, it is not a first-order concern for us today that too high inflation might be coming our way in the near-term. Far from it. These are programs that we’re developing at a high rate of speed. We don’t have the luxury of taking our time the way we usually do. We’re trying to get help quickly to the economy as it’s needed. I worry that in hindsight you will see that we could have done things differently. One thing I don’t worry about is inflation right now.”

The Fed Chair ducked the “asset Bubble” question – twice. AP: “Wall Street Caps Best Week Since 1974 on Fed Stunner” – and in only four trading sessions. Bloomberg: “U.S. Junk Bonds Rally Most in Two Decades with Fed Now a Buyer.”

There are important reasons why the Federal Reserve (and central bank generally) traditionally limited purchases to T-bills. Any central bank purchase outside of money-like instruments will impact its price along with market perception of safety. And the farther a central bank goes out the risk spectrum the greater the distortion. A popular high-yield ETF (HYG) surged 12% this week with the Fed announcing it would begin purchasing some junk bonds, a glaring example of a distorted market diverging from underlying fundamentals.

And the greater the divergence, the more destabilizing the eventual collapse back to reality.

In stark contrast to gold standard dynamics, contemporary markets move only further away from stability in anticipation of only more vigorous policy inflationary measures (unsound “money” promoting the opposite of self-correcting market dynamics).

Dr. Bernanke argues that had the Federal Reserve recapitalized the banking system early in the downturn, the U.S. would have avoided the Great Depression. I have posited the key issue was not replacing some finite quantity of depleted bank capital – but rather a much greater amount of ongoing system-wide Credit required to sustain maladjusted financial and economic structures following the historic “Roaring Twenties” Credit inflation.

Non-Financial Debt (NFD) expanded $2.485 TN in 2019. This was the strongest Credit growth since 2007’s record $2.521 TN, and 42% above average annual NFD growth over the previous decade. Asset markets (stocks, bonds, corporate Credit, residential and commercial real estate, etc.) have never been so inflated. The Fed, the Trump administration and Congress are determined to immediately reflate the U.S. economy and asset markets back to where they believe are sound and sustainable levels.

This will prove a Herculean endeavor. The Fed’s aggressive liquidity measures and resulting market recovery have created a precarious dynamic whereby badly distorted and inflated markets will require persistent liquidity support. Never have such incredible “money” creation operations been used only weeks from record stock prices and economic boom conditions. I believe to sustain recovery of such an economic structure will require unending massive fiscal deficits. Regrettably, there’s no end in sight to today’s reckless monetary inflation – consequences of this Scourge of Inflationism to unfold over months, years and decades.

I worry greatly about exacerbating already threatening inequality (a consequence of When Money Died). One of the cruelest aspects COVID-19 is how hard it is hitting our minority and poorer communities. The Fed will create Trillions and Washington will spend Trillions more, and large segments of our population will undoubtedly have issues with how all this “money” was allocated. The Fed knows better than to be in the allocation game – Credit, “money” or otherwise. And I doubt their new “Main Street” program will absolve the Fed of responsibility in the eyes of the general population. The Fed now “owns” these dreadfully unstable markets – placing its institutional credibility – and trust in “money” – in peril.

…

Fed and PBOC “money” notwithstanding, global financial conditions have tightened. Borrowers, stung by job losses, collapsing demand and risks unforeseen, will add debt more cautiously going forward. Lenders, shocked by the prospect of massive defaults across business lines, will extend Credit more cautiously. Unappreciated risks associated with myriad sophisticated financial structures have been exposed. Moreover, confidence in central banks’ capabilities has been shaken. Even in the face of massive central bank liquidity injections and market support, I still believe the risk vs. reward calculus for global leveraged speculation has been fundamentally altered. If this is correct, the Fed’s balance sheet will be getting a whole lot bigger as it continues to struggle mightily to sustain unsustainable market Bubbles.

I often highlight how the “Terminal Phase” of Credit Bubble excess experiences an exponential rise in systemic risk, with ever-expanding quantities of increasingly risky Credit. I fear we’ve commenced the “Terminal Phase” of monetary inflation, with systemic risk now rising parabolically. When Money Died.

Tara Reader, the staffer who recently accused Joe Biden of sexually assaulting her when she worked for him more than 25 years ago, has now filed a criminal complaint against the presumptive Democratic nominee.

“I filed a police report for safety reasons only. All crim stats beyond limitations. Gratitude for all who have stood by me,” Reade tweeted out on Friday night. She filed the complaint with the Washington Metropolitan Police Department, according to the Washington Examiner.

Since it is illegal to file a false criminal complaint, the action represents “an escalation” of her accusations against Biden. 

Recall, in late March we first detailed the allegations against Biden. Reade accused Biden last year of inappropriate behavior when she worked in his Senate office in 1993 and says Biden touched her inappropriately when she was in her mid-20s.

“My life was hell,” said Reade when the accusations first broke. “This was about power and control. I couldn’t get a job on the Hill.”

Biden’s “hands were on me and underneath my clothes,” she said, after he “had me up against the wall.”

“I remember him saying first, like as he was doing it, ‘Do you want to go somewhere else,'” she said, adding “And then him saying to me when I pulled away, he got finished doing what he was doing, and I kind of just pulled back and he said, ‘Come on man, I heard you liked me.’ And that phrase stayed with me because I kept thinking what I might’ve said and I can’t remember exactly if he said ‘i thought’ or ‘I heard’ but he implied that I had done this.”

Reade then went on to say that “everything shattered in that moment” because she knew that there were no witnesses and she looked up to him. “He was like my father’s age,” she said. “He was like this champion of women’s rights in my eyes and I couldn’t believe it was happening. It seemed surreal.”

Reade then said Biden grabbed her by the shoulders and said, “You’re okay. You’re fine” and proceeded to walk away.

Reade says that after she revealed some of Biden’s inappropriate behavior, she was accused of doing the bidding of Vladimir Putin, according to The Intercept.  

Authored by Sven Henrich via NorthmanTrader.com,

We can’t print ourselves out of this crisis again, but that isn’t stopping the Federal Reserve from trying. Thursday’s intervention program, the latest in a string of panic moves to keep the financial system afloat, constitutes a complete takeover attempt of the market ecosphere, only the buying of stocks directly is last missing piece of eventual complete central bank control of equity markets. But seizing control of the bond market is the nearest equivalent step.

Not only that, the Fed is buying junk corporate debt propping up companies that should be let to fail as Chamath Palihapitiya pointed out poignantly this week. But not this Fed, no, with its actions it is again setting up the economy for yet another slower growth recovery, financed by even more debt.

QE doesn’t produce growth, that is the established track record:

Nobody wants to talk about the consequences to come following this crisis, but that doesn’t mean the consequences won’t be a real and present reality.

No, the Fed, while trying to save the world, is once again engaged in vastly distorting asset prices from the fundamental reality of the economy. It is in essence again laying the foundation for the next bubble, while the bursting of this bubble has yet to be fully priced in.

Even the Wall Street Editorial Board has made it perfectly clear what this is all about:

The @WSJ Editorial Board tells you what the new price distortion is all about: Save Wall Street and the top 1% and hope for trickle down economics later:https://t.co/kkd5YSSic1 pic.twitter.com/4XUC9sLPmY

— Sven Henrich (@NorthmanTrader) April 11, 2020

Asset price inflation to save markets in the hopes of trickle down growth to come.

Absurd.

The message the Fed is again is sending is to invite reckless behavior on the side of investors, the same reckless, TINA, fueled behavior that got us the bubble blow-off top in February.

The Fed’s actions are driving and creating these asset bubbles:

The Fed’s message to the market today:

If you are careless and invest in high risk debt we will bail you out.

If you are prudent and hedged in any way given the risk environment we’re in we will destroy your hedges.

The Fed is encouraging risky behavior and punishing prudence.

— Sven Henrich (@NorthmanTrader) April 9, 2020

And so, in the midst of the greatest economic crisis of our times investors are once again led to believe to chase asset price now back to 128% market cap to GDP:

Please. As of Thursday’s market close market valuations are back far above the historic norm on a GDP basis, a GDP basis that will be shrinking hard now which will lift these valuation ratios even higher. Based on what? Massive earnings growth? Give me a break. Past recessions brought valuations into the 50%-75% range, currently we are 20% above the peak of 2007, not the bottom, but the peak.

Look, I have zero problems with the recent rally. I’ve been clear on the technicals, the need for a technical rebalancing of a market that went through an extreme shock, and a realignment. Heck, I’ve even been pointing out the bullish patterns in the charts this last week for $SPX and $RUT and made the case for higher prices to come.

And some of these higher prices may still come. But make no mistake here, these prices are entirely inconsistent with the fundamental earnings and growth picture. $NDX is now down only 5.66% on the year, and back at December 2019 levels when $NDX made all time highs driven by a handful of stocks and fueled by the Fed’s ill conceived liquidity programs then. They didn’t just start printing yesterday, they started printing last year. Have things improved since then? Of course not, they have collapsed. There is no fundamental justification to see prices back at these levels.

The reasons we are here now is partially technical based and partially driven by insane liquidity thrown at these markets in the form of stimulus and Fed intervention. 2008 was child’s play compared to what is happening now and is still to come:

But be clear: NONE of this is producing economic growth, it’s propping up zombie companies, it’s exacerbating valuations driven by a Fed that never is willing to let the system sort itself out and of course it is again skewing the wealth inequality equation. None of these trillions are going to the American workforce who is suffering greatly as a result of this shock trigger and the excess that has been created in the favor of the top 1% over the past 10 years.

This shock will not magically cleans itself out of the system. Spending behaviors and financial realities will be much different than coming out of this crisis compared to just a few months ago. Yes you will have a catch up in spending once the crisis is over but $1,200 in rescue funds is not making up for the lost wages, incomes and financial well being of American families. Not even close. Spending will be curtailed especially as there remains lots of uncertainty going forward.

No, this renewed rescue attempt is again missing the mark:

Wealth inequality is accelerating even further.
The lower income brackets are getting laid off and their livelihoods destroyed and the majority of rescue packages and bailouts are geared toward stockholders and the investor class.

Business as usual.

— Sven Henrich (@NorthmanTrader) April 10, 2020

And suddenly we find ourselves at a critical juncture of control. Valuations once again driven above the fundamental reality of the economy, fueled by ungodly sums of liquidity and technical chart patterns that leave room for more upside in markets but also distinct bearish patterns in charts that suggest the possibility of an entirely different out come in the weeks and months ahead: The possibility that this rally here is simply a bear market rally and that the Fed’s efforts will be greatly challenged by fundamental reality, a reality that suggests that valuations are way too high still and that the real cleanse in markets still has to filter through markets no matter how much the Fed tries to prop asset prices up in its latest attempt of saving capital markets.

The message: This takeover of capital markets may fail. But whatever happens be aware there is no way for the Fed to come out. They will never able to extract themselves from this monstrosity no matter how confident Jay Powell may claim it is only temporary. We’ve heard this lie too many times. We heard it in 2009, we’ve heard it on the road to QE2 and QE3, we’ve heard it during during balance sheet roll-off on autopilot in 2018, we heard it last year during repo. All lies. The truth is the Fed’s only weapon in preventing reality from taking hold is to ever farther disconnect asset prices from fundamental reality and they are trying again, never learning their lessons and never taking responsibility or accepting accountability.

Don’t get me wrong: Yes, the Fed should intervene in this crisis, they are supposed to, that was their original charter, to be the lender of last resort. But now they are the lender of permanent resort, never able to extract themselves. And by doing so they are hurting the economy, making it weaker cycle after cycle, settling it with ever more debt, encouraging ever more risky behavior as a result of TINA, all of which creates ever greater financial bubbles, ever slower recoveries and ever more wealth inequality.

Coronavirus is the virus that infects our bodies, but the Fed is the financial virus that has infected our entire financial and economic system. And there is no cure, except for the Fed to lose control and the consequences to be revealed to the population at large which is largely unaware of the Fed’s role in creating a zombie economy. Only then can structural changes be made that can set us on the path of improvement and eventual higher organic growth to come to fruition. But first the pain must be endured. The Fed is selling a fantasy that is doesn’t.

But while this battle is unfolding investors and traders can follow technicals and they continue to matter greatly even in this Fed driven environment.

This week’s technical market assessment:

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With 17 million Americans out of work in under three weeks, consumer sentiment crashing the fastest on record, and the economy sliding into a depression, households are starting to crack.

The evidence of the “working poor” crushed by the economic downturn is starting to be realized with huge runs on food bank systems across the country. On Thursday alone, the San Antonio Food Bank, located in San Antonio, Texas, aided about 10,000 households with food.

Does this remind you of the great depression?

To confirm our thoughts that the evolution of the virus crisis has morphed into a financial crisis, now a social crisis. We turn to a recently published study via the career advice site Zety.com has confirmed what we’ve been saying for years: Households don’t have the financial cushion to weather an economic storm.  

The study polled about 1,000 working Americans last month, asking them about their financial well-being.

In the first series of questions, respondents were asked about how long their savings could bridge them if they lost their jobs. Shockingly, 36% answered 0-1 month, 24% answered 1-3 months, and so forth. That means at least 60% of respondents had only enough savings for less than three months, and judging by today’s lockdowns, we could extrapolate those numbers and conclude that many people might not survive the economic downturn currently underway, despite government UBI checks.

With financial conditions of households quickly deteriorating, their savings are limited, have insurmountable debts, and mounting expenses could force some into liquidating assets to build cash.

The survey had this to say:

“Women were more likely than men to sell certain items for extra money, including their clothing and shoes (57%) and jewelry (41%). In contrast, men were slightly more willing to part with their laptop (21%), collectibles (36%), blood plasma (36%), car (23%), and sports equipment (22%).”

You read that correctly, more than a third of Americans who are in a financial bind are willing to sell their blood to make an extra few dollars to cover rent payments, service bills, and even maybe use the money to cover student loan payments. However, the government has unveiled new economic hardship deferment plans for working-class poor that could alleviate some short-term stress.

As calls for blood plasma donations are increasing due to the pandemic, search term “blood plasma” has hit a new record high. Maybe the working-class poor can sell their blood for cash to put food on their tables. 

The survey was published in the third week of March, and at that time, about 43% of all respondents were “somewhat worried” about a recession. That figure has likely jumped to near 100% today.

Before the depression, millennials were already selling their blood to fund “shopping addictions” and travel. Now it appears people could be heading to blood plasma facilities to fund their rent payments and put food on the table. It seems the good times are over for tens of millions of Americans, as the Great Depression 2.0 unfolds.

Authored by Jonathan Geach via Medium.com

This post does not deny the effectiveness of social distancing or quarantine for COVID-19.

I am not encouraging people to suspend these practices before official determinations have been made public.

This post is to help physicians, thought leaders, and public officials understand and weigh the risks and benefits of extended lockdowns versus more measured and earlier return to work measures.

1. We have already flattened the curve

We have gone from predictions of millions of deaths, to hundreds of thousands and now we are predicting about 60 thousand deaths. This is with the likely over reporting of death. Dr. Birx admitted the attribution of death to COVID-19 has been liberal (her word). If the death count were limited to deaths directly caused by COVID-19, it would likely be even lower than this.

The most effective time for social distancing is early in a pandemic. Lockdowns also slow the development of herd immunity, which helps a society move past the virus.

We can still practice good hand hygiene, wear masks in public, and continue social distancing for the elderly and high risk, while we develop protective herd immunity for those most at risk. By the time the lockdowns began, COVID-19 had already been seeded in the US for months, limiting the effectiveness of the lockdowns in the first place as the virus was already widespread.

2. Economic collapse and unemployment are destroying families

Each day the shutdown continues, we are losing approximately one million jobs, as evidenced by 16.5 million initial weekly jobless claims in three weeks (since March 26). Many of these lost jobs will never return. If the lockdowns continue through April (essentially, a best-case scenario), we’ll be lucky if job losses are limited to 25 million. Many people see 6.6 million people as just a number , as Len Kieffer put it, it is the size of the state of Missouri. Twenty five million is almost the size of the state of Texas!

The 16.5 million jobs lost thus far are only counting people who have filed jobless claims that were processed through April 8, 2020; it’s likely that the real number is quite a bit higher than this. In addition, there are millions of people not-technically-unemployed who have seen their incomes plummet. One example would be so-called gig workers, such as Uber and Lyft drivers. It’s almost certain that realtors are suffering the same fate.

3. We have not saturated the health care system.

In New York We came close.

Although, the ER and ICU capacity has increased in many locations, overall healthcare system capacity has decreased dramatically, as all non-COVID and non-emergent care is being neglected. This has led to layoffs of healthcare workers and delays in care for countless patients, which will result in a range of negative consequences. Assuming the need for healthcare services has remained constant while availability of such services has plummeted, countless patients are not receiving the care they need in a timely manner. In medicine, timing is of the essence, so even receiving the same exact in the future comes at a price. Many important services are being delayed: blood donations, organ donations, screening colonoscopies, and many other elective procedures. It is very important to note that elective medical care is not useless medical care; rather, it’s simply meaningful and necessary medical care that is scheduled in advance and not performed on an emergency basis.

4. Suicide may kill almost as many people as COVID-19 this year.

In 2018, there were 48,344 recorded suicides. Economic ruin results in a wide range of health problems, suicide, mental health issues, loss of health insurance, reluctance to visit doctors in light of financial hardship, and increases in substance abuse. This is on top of the delay in non-COVID care.

5. The mortality was likely overestimated

The IHME model, as well as Dr. Fauci have recently decreased the likely deaths from this pandemic to around 60,000 from earlier estimates of 1–2 million.

The early reports of 3–4% case fatality rate (CFR) are likely misleading. The numbers miss those who are asymptomatic or recovered at home without seeking testing. What we really need to know is the infection mortality rate (IFR). Fortunately we have some good clues. Looking at the data from the Diamond Princess cruise ship, the infection fatality rate on the cruise ship was 1%. However, the average age of people on the cruise ship was much higher than the age of the average American. When you adjust for the differences in age between the cruise ship and America, you see that the IFR should be about 0.1%. There was a recent study out of Germany in the city of Gangelt where they tested 80% of the population, the IFR there was about 0.37%. The way we are testing now, we cannot know how many people have been infected with COVID-19 since we are missing those who had the disease and recovered. Antibody testing is needed to know the true number of people who have been infected. There is a good chance this number is well above 10 million, which drives the IFR down even further.

6. Children are at almost no risk from this disease.

The CDC estimates 37 to 187 children die every year, not from Covid-19, from the flu. This year we have lost 105 children from the flu. Yet, we have closed every school in America. Education is vitally important and a whole generation will miss a fourth of this school year. Closing schools also goes a long way towards limiting the development of herd immunity.

7. PPE was limited but is now becoming more available

This article is not meant to diminish the pain and horror this disease can bring to those who get it. I am a physician in one of the highest risk specialties for contracting the disease in the hospital. The lack of personal protective equipment (PPE) facing US healthcare workers is unfair and wrong. Yet, as the curve has flattened, it seems more hospitals have found adequate PPE. The CDC estimates a possible second wave would be at least 150 days from the end of the lockdown, possibly this fall. Ending the lockdowns would have no effect on the PPE for the current crisis.

We would have plenty of time to prepare for a possible second wave.

8. Authorities should show clear evidence regarding the benefits of indefinite lockdown

Those who want to continue the lockdown indefinitely should show clear evidence regarding the benefits of indefinite lockdown. There needs to be a clear reliable model that shows how many additional lives will be saved considering we have already flattened the curve and there is essentially no further risk of overwhelming the health care system. The previous models were wrong. The consequences of indefinite lockdown are quite staggering, to the tune of one million jobs lost per day.

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Jonathan Geach, M.D.

Ankur J Patel, M.D.

Jason Friday, M.D.

Lacy Windham, M.D.

Ashkan Attaran, M.D.

Jennifer Andjelich, D.N.P.

Perhaps due to ideological principles, perhaps due to its massive oil hedge that stands to make billions in profits if oil stays at its current depressed prices or drops further, perhaps because Mexico’s president AMLO plans to revive Pemex and so is unable to cut oil output, but four days after OPEC+ announced it had “reached a deal” in which all oil producing nations, including non-OPEC G-20 members would cut production by 23%, Mexico is still refusing to sign the dotted line and is threatening to trigger another oil price crash when the black gold reopens for trading in a few hours.

To be sure, there were some signs of progress with Bloomberg reporting that as diplomatic wrangling between Mexico and Saudi Arabia entered a fourth day, a group of OPEC+ ministers were due to speak at 5 p.m. London time and delegates said two possible fixes would be discussed. However, as Energy Intel deputy bureau chief Amena Bakr, writes, almost an hour after the scheduled call, Mexico’s energy minister Rocio Nahle had yet to join the call.

Sources say that Mexico’s minister isn’t on the call yet #OOTT #opec

— Amena Bakr (@Amena__Bakr) April 12, 2020

And as the world wait, the stakes are getting higher by the hour: oil prices have already collapsing under the weight of an oil glut that amounts to about a third of the market’s overall size, as the coronavirus pandemic has shut down the global economy and sent India’s oil demand plunging 70%. That’s threatening the U.S. shale industry, wrecking the budgets of oil-dependent nations and making it harder for central banks to respond to the virus shock; it has also made Trump an especially activist participant in this negotiation which he is hoping works out as Trump knows very well that without Texas his reelection odds will follow the price of oil.

That has not escaped the Kremlin, which earlier today warned of “unmanageable chaos” if negotiations fail. “The whole world needs this deal,” Dmitry Peskov, spokesman of President Vladimir Putin, said in comments broadcast on Sunday, while also hinting that Trump may have the most to lose if a deal is not reached: “With layoffs looming for the U.S. oil industry and shale oil companies on the brink of bankruptcy, the nosedive in crude prices acquires political significance as U.S. elections approach”, Peskov added ominously.

The OPEC+ alliance on Thursday agreed a plan to cut its output by 23%, or 10 million barrels a day, equal to a 10th of global supply. The deal would end the month-long price war between Saudi Arabia and Russia. However, it still needs the approval of Mexico, which is part of the alliance, but until Sunday had yet to endorse it. Mexico has agreed to cut just

On Sunday’s call delegates expected a compromise solution proposed by President Donald Trump last week – initially rejected by Saudi Arabia – would be discussed again. Another idea has also emerged, to focus on Mexico’s exports rather than production. Negotiations then escalated to the highest level, with Trump intervening to speak to leaders including Crown Prince Mohammed bin Salman.

Late last week, a deal looked close until Mexico raised objections. Populist president Andres Manuel Lopez Obrador has pledged to restore his country’s oil-pumping prowess with its politically symbolic state oil firm, and so he is reluctant to cut output. Trump offered a compromise – by which U.S. cuts would count as Mexican – but it was rejected by Saudi Arabia. Talks between the kingdom and Mexico continued through the weekend as no a single nation was willing to back down from the Mexican standoff.

Confirming that Trump is especially invested in getting some deal done today, in an attempt to break the impasse, the US president offered a diplomatic solution that includes some “creative accounting” with Mexico counting some of the U.S. market-driven supply decline as its own. According to delegates, most OPEC+ countries back the Trump compromise – even if they acknowledge it’s a face-saving mechanism that doesn’t translate into actual cuts. But Saudi Arabia insisted that Mexico cut its production as much as everyone else.

That said, even if a deal is reached – and one likely will be – it may not be enough to put a floor under oil prices. While a 10% reduction in worldwide crude output would be unprecedented, it would barely dent the surplus that continues to build and has reached as much as 36 mmb/d  of global demand according to Trafigura.

Needless to say, traders will inspect any agreement for details of where real cuts are coming from, and how much of the headline figure might come from moving baselines and reductions that have already been forced on producers by the market.

On Friday, G-20 nations followed the OPEC+ meeting and said they would take “all the necessary measures” to maintain a balance between oil producers and consumers, but made no commitment toward specific steps on production cuts.

Riyadh had wanted the G-20 meeting to yield at least 5 million barrels a day of cut commitments from producers outside OPEC+, however it is now clear that the only production cuts the US is willing to shoulder – besides what the administration has defined as organic cuts over the next two years as some 2mmb/d in shale production are eliminated – are those to backstop Mexico. The reality, as shown in the table above, is that real cuts when ignoring accounting gimmicks, amount to just over 7mmb/d, still a record amount, but hardly enough to put an even modest dent in today’s massively oversupplied market.