Federal Reserve Turns To Big Data To Monitor Business Cycle
Federal Reserve officials are increasingly turning to big data to provide them with a more accurate snapshot of the economy, AP News reports.
The first evidence of this was during a government shutdown last year when officials turned to First Data, a payments firm that processes $2 trillion in transactions per year, for credit card data to gauge the health of the consumer, as it was evident the Fed was flying blind with most of its consumer datasets halted because of the shutdown.
“It was a big deal for the Fed in terms of having information about the economy when the retail sales data did not come out,” said Claudia Sahm, a former Fed analyst who compiled the First Data consumer data for officials during the shutdown. Officials were “extremely interested in what those readings were.”
The Fed is becoming aware that government data to assess the status of the business cycle is not as accurate as thought, and the 106-year old central bank must leap into the 21st century and embrace big data to stay relevant.
“We have been working with big data … with the purpose of better understanding the current position of the economy,” Chairman Jerome Powell recently said. “It’s an area of real interest for us.”
Billions of financial transactions are digitized and compiled by private firms and could be a solution for the Fed to monitor more accurately the business cycle for future policy adjustments.
The deployment of artificial intelligence, monitoring private data financial transactions, searching for anomalies, could be a new tool for the Fed to pre-emptively fight downturns.
“These data are becoming of increasing practical importance for figuring out the state of the economy for policymaking,” Matthew Shapiro, an economist at the University of Michigan who studies economic data, said at a conference last year. “The quality of official statistics is going to deteriorate without help from big data.”
Most government datasets are a long lag and rely on surveys, not helpful when trying to gauge current conditions of the business cycle, and maybe explains why the Fed is sometimes late to the game in terms of policy action.
Big data could allow the Fed to view the economy through a looking glass that is more real-time, as opposed to outdated surveys, which could also give the Fed tools to drop precise stimulus where it is needed the most, in terms of geographical region or a specific industry, a move that could thwart contagion.
Economists have pressured the Fed to adopt big data and private datasets as part of tools to monitor business conditions. It would make the Fed more accurate in policy deployment, considering they’ve been flying blind since December 23, 1913.
“Consumers shop online, summon cars for hire with an app, watch ‘TV’ without television stations or TVs, and ‘bank’ without cash or checks,” Shapiro wrote in a paper last spring. “Data could, in principle, be available with a very short lag.”
The rise of alternative data has allowed hedge funds to place bets on the economy more accurately. For example, Yelp takes its customer data, packages it up, and sells it to hedge funds for a costly premium. Those hedge funds use artificial intelligence to find trends in Yelp’s consumer data, which then allows them to trade on it.
In other examples of using alternative data to guage real-time economic conditions, we showed readers the collapse of China’s economy weeks before official data printed:
The Fed got a taste of big data last year during the government shutdown, it remains to be seen if the Fed will continue adopting alternative data as part of its monitoring toolkit.
Our society is now transitioning into panic about the coronavirus.
Universities and schools are being shuttered, sports activities and public gatherings are being cancelled, individuals are hoarding toilet paper and supplies, travel is being severely constrained, the stock market has crashed, and business activity is nose-diving. Major businesses are forcing their employees to work at home.
This blog will try to summarize the coronavirus threat, suggest that some of the panic-driven actions may not be well-founded, and that there may be a far better, more effective approach to deal with the virus.
Before I begin, let me note two things. I am not a medical doctor, epidemiologist, or viral expert. But I am a scientist with some facility with statistics and data, and my specialty, weather prediction, is all about helping people react appropriately to estimates of risk. And I have talked to a number of doctors about this issue. But don’t read any more if my background bothers you.
How Bad is the Situation Today?
If one steps back and looks at the actual numbers, particularly against other threats we face, the situation is far less apocalyptic than some are suggesting. As of today, the Centers for Disease Control and Prevention (CDC) notes 1215 cases and 36 deaths in the U.S. since January 1. This is a very, very small percentage of the U.S. population of 331 million. The number of U.S. cases no longer appears to be going up rapidly, as noted by the latest CDC graphic (see below). Note the drop after the peak in early March.
In China, where the problem started, the number of cases is rapidly declining (see below).
According to Washington State’s Department of Health, the state has had 457 coronavirus cases and 31 deaths. Most (23) of the death’s in Washington have been limited to one nursing facility in Kirkland with a large number of elderly, chronically ill patients. In fact, according to the NY Times, this facility would typically lose 5 patients a month.
This facility also represents about 50 of the coronavirus cases in Washington, since several first responders and staff were sickened (with no fatalities) due to exposure at this site. In many ways, the Kirkland facility represented an unfortunate random event–the random exposure of a group of extremely vulnerable patients. If this random exposure had not happened, Washington State would probably not be getting headlines as a center for this virus outbreak.
An extremely important element of this coronavirus outbreak is that it hardly sickens young people, and healthy individuals of middle age or younger generally do not face a life-threatening illness. To illustrate, here is the age distribution of cases in King County. Few folks under 40 are sickened and none of them died. The problem is with the sick and elderly. This age distribution is going to be very, very important. Similar statistics are found in China.
There are undoubtedly many, many cases of coronavirus infection in the younger, healthier members of society, many of which are not aware of their infection. But without testing, we don’t really know other than by indirect statistical approaches. Thus, the “death rates” are clearly far too high, and highly deceptive.
Comparison to the Flu
It is important to note that the coronavirus numbers are extraordinarily smaller than those of the flu.
Below is a flu graphic I got from CDC and added the coronavirus cases (see the gray dot). In fact, the gray dot should be much smaller. For example, we had 36 coronavirus deaths nationally so far compared to 61,000 flu deaths in 2017-2018. 45 million cases that year compared to 1200 coronavirus cases so far this year. In WA state, 75 have died of flu through the end of February and several years have brought 200- 300 deaths from influenza.
Coronavirus is not even in the same league as flu, which also kills the youngest among us. We did not close down universities, businesses, and more for flu.
Interestingly, many who are panicking about the coronavirus today, refused to get a flu shot in past years, or to practice reasonable hygiene when flu is around (e.g., washing hands carefully). Coronavirus is also not in the same league as auto accidents, which kill 1.25 millions a year (3287 deaths a day), with 25-50 million injured or disabled for the worldwide statistics, while about 38,000 die in the U.S. each year from auto wrecks.
Are our political leaders shutting down society for the flu or stopping auto travel because of deaths on the roadway? The answer is no. So why are they willing to close down society to deal with the coronavirus, which has represented only a small smaller risk to the general population? Life is full of risks that must be considered, mitigated, and dealt with. But society must continue to function.
Poor Response and Lack of Testing
As the virus began to spread in China, the U.S. needed to develop a coherent plan for understanding and dealing with the crisis. This did not happen. President Trump probably made the right call about cutting off travel to China, but the lack of coherent planning beyond that is apparent. The lack of testing is a major failure of his administration and others.
A key capability is to develop sufficient testing resources to determine the progression of the disease in the U.S. This was sorely lacking, and the flawed testing developed by the CDC was one example of it. Other countries have tested vastly greater numbers of individuals. Importantly, the U.S. has not begun randomly test the general population to determine the extent of spread among U.S. residents.
The Extreme Cost of the Current “Social Distancing” Approach
Currently, the “social distancing” approach is being stressed by politicians and others. The idea is that by canceling schools and large public gatherings, coupled with workers working online from home, there will be a reduction of coronavirus community spread, reducing the peak in the number of cases and put less stress on the limited resources of the medical community. This is illustrated by the figures below. You notice the number of cases doesn’t change (the area under the curve). And it has another issue: it greatly extends the period in which society is affected by the disease.
The cost of social distancing is immense, something many politicians do not seem to have thought through. The stock market is in free fall, the economy is tanking, colleges are poorly educating their students through questionable online learning, K-12 students aren’t being taught, business is contracting, and workers are losing salaries and being laid off. The lowest income folks are hurt worst, making “social distancing” highly regressive. I have read estimates that that the world economy could lose trillions of dollars and that recession is now becoming more likely in the U.S.
Social distancing may be attractive for a short period to slow the virus, but in the end it is not sustainable. It is also inefficient. In an attempt to prevent the virus from getting to elderly people with health problems, a huge population that does not have the disease or unlikely to get very sick from it is restrained from normal activity. Something more effective is needed, something I would call “smart quarantine.” More on that later.
A number of the local politicians and others have been motivated to try massive social distancing based on a modeling study completed by several local researchers, suggesting only extreme social distancing can prevent a massive increase in cases and up to 400 deaths in our region. This is a relatively simple model approach, which from my reading does not consider the variation of death rate with age, or the varying social interactions with age. It assumes a uniform death rate of 1.6 %. I think it would be useful to test an alternative strategy, based mainly on testing those that are not ill, and removing those people from social interaction.
Media, Politicians, and the Web: How and why they can promote panic
The tendency for stampeding the population into panic and promoting actions that are in the end counterproductive is a real risk of the current political and media landscape.
For politicians, there is the potential for endless attention, with opportunities to give sober pronouncements and promote increasingly harsh measures. Resources become freely available from a worried citizenry. And the situation provides fuel to attack political foes, as is apparent with the attacks on Trump for virtually every action he takes (and some have been reasonable, like the China ban). That said, President Trump is certainly guilty of underplaying the seriousness of the situation and providing inaccurate information. The lack of testing is a massive failure. There is, however, plenty of bipartisan blame to go around for ineffective responses.
For the media, the situation is a bonanza, with huge increases in attention, which promotes more “clicks” and revenue. An increasingly isolated and home-bound populace is glued to the constant media barrage, promoting fear and anxiety.
A highly connected population, unlike any population before, is unable to escape the incessant coronavirus coverage that is constantly featuring the latest death and shut-down.
Another Way
So it there another way to deal with the coronavirus epidemic that could be more effective and far less cost to society? I suspect there is. This approach would take advantage of several unique and new aspects of the current situation:
The fact that young and healthy people, the bulwark of our nation’s productive capacity, are only minimally affected by the coronavirus.
That most of the mortality is among the sick and elderly.
That the technology to test millions of individuals quickly is available.
Perhaps these facts allow us to deal with the situation in a dramatically new way. If a rational actor was running the response, perhaps they would:
1. Protect the most vulnerable with all available resources. All nursing facilities, retirement homes, and the like would be essentially quarantined, with all patients and staff tested for the virus, with those testing positive isolated from the remainder. All visitors would have to be tested. All individuals who are over 60 and possessing serious health problems would be asked to self-quarantine, with food and other assistance provided to allow them to reduce contact with the outside community.
2. Extensive random testing of the general population would be initiated, with millions of tests available for this purpose. Such general testing would allow a determination of the extent of COVID-19 spread and the isolation of affected individuals and their close associates. This is what I call “smart quarantine”– the use of massive testing to identify the carriers and currently sick and to take them out of circulation.
3. A fund to provide salaries for quarantined individuals would be initiated. This would encourage all individuals to be tested and encourage financially marginal individuals to isolate themselves.
4. Social distancing would end and all schools reopened within a month.. It is poor public policy to cripple education and the productive capacity of individuals that are the bulwark of the U.S. economy, particularly since most of them are not at risk for serious impacts of the coronavirus. Sustained social distancing is not a long term solution.
5. Federal grants will be initiated to support additional hospital costs, the acquisition of additional medical supplies and equipment, and the huge testing program.
This measures would help pull the nation back from the brink of economic disaster, effectively restrain the crisis, and restore normal life to most individuals.
The American people have a long history of panicking when they are threatened, at enormous financial and human cost. After 9/11, the American people agreed to loss of privacy and civil liberties, and allowed a tragic invasion of Iraq. And after the attack on Pearl Harbor, fears of a third column led to the internment and loss of liberty of over 100,000 Japanese Americans. Hopefully, fears of coronavirus won’t lead to the unnecessary destruction of our economy and the undermining of the prospects of many Americans. A creative solution to this crisis may be possible, acting as bridge to the situation a year from now when hopefully a vaccine will be available.
With the flood of virus announcements developing in King County, Washington; Santa Clara, California; Los Angeles; and the Tri-state area, Americans are still not taking the pandemic seriously.
Americans are perplexed by the severity of the virus outbreak, which was seen in the most recent Hollywood Reporter/Morning Consult poll, suggesting that many were split on whether movie theaters should shut down to prevent further transmission of the virus.
The poll found 38% of US adults believe shuttering movie theaters to contain the virus outbreak is a good idea, and shockingly, 44% opposed the containment measures. The survey was conducted from March 5-7 among 2,200 adults across the country.
Earlier this week, we noted the virus could stay airborne for 30 minutes and travel up to 14 feet, implying that movie theaters are significant breeding grounds, sort of like cruise ships.
The reason Americans feel indifferent about virus prevention measures is that the government and mainstream media downplayed the severity of Covid-19 for months, calling it no worse than the flu, which, by the way, ended on Wednesday, when Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases (NIAID), said the fast-spreading virus is “10 times more lethal than the seasonal flu.”
So now, major cities have community spreading and are past the point of implementing containment measures to control the outbreak, such as closing down 41,000-plus movie screens across the country.
What’s astonishing is that the rate of US containment measures is happening at such a slow speed compared to China earlier this year, who immediately shut down 70,000 movie theaters as confirmed cases in the country started to rise.
Despite the US government and corporations acting at snail-speed to protect their citizens, all because it would crash the economy and stock market, people are starting to recognize that maybe Covid-19 is more than just the flu. Theater stocks, such as AMC, Imax, and Regal owner Cineworld, have plunged in recent weeks on fears that consumers will stay home. About 46% of respondents in the study said they support the future “postponing all upcoming movie premieres.”
Some 40% of respondents said theater chains should do more to help in the fight to combat the virus. And in our view, that means theaters should be closed for the next two months, similar to what Carnival Corp. announced on Thursday morning by suspending its Princess Cruises Line. But again, in America, profits over human safety – so we’ll see if shutdowns actually come, or maybe people will follow the Centers for Disease Control and Prevention’s (CDC) guidelines of “social distancing.”
Roughly 43% of respondents said they agreed with the decision to postpone the new James Bond flick No Time to Die. We noted earlier this week that movie premiers and filming productions are being delayed or canceled across the world for the first half of the year.
There’s some evidence that the virus outbreak could greatly benefit online streaming platforms, such as Netflix and Hulu. About 21% of respondents in the new THR/Morning Consult survey signed up for streaming services since the virus crisis began, and 43% said they would be watching more movies at home during the pandemic.
And just like that – after a magnificent 11 year run – the bull market in U.S. stocks is dead. From its peak close of 29,551 on February 12 through yesterday’s [Thursday] close of 21,200, the Dow Jones Industrial Average (DJIA) has dropped over 28 percent – in just 30 days! RIP.
Death may mark the end. The completion of the circle of life. But it also marks the beginning of something new.
The death of the bull market, for example, marks the birth of a new bear market. By our estimation, the DJIA must fall an additional 30 percent – approximately – before the bear market dies and a new bull market is born.
Between now and then, the central planners in command at the Federal Reserve and the U.S. Treasury will do anything and everything to jumpstart the old bull market back to life. On Thursday, Fed Chair Powell grabbed Hank Paulson’s bazooka and fired off a cumulative $4 trillion repo bailout. But, alas, Powell’s bazooka was loaded with blanks.
After a brief paring back of losses, the DJIA resumed its downward trajectory, closing the day down 2,353 – or nearly 10 percent. The stock market, you see, knows something that Powell doesn’t know. That is, the damage being done to businesses, in an effort to control the spread of coronavirus, is destroying the economy.
Layoffs. Shuttered doors. Empty ports. Quiet railroads. Suspended sports and entertainment venues. No Disneyland. Oil price collapse. No March Madness. More layoffs. Tom Hanks. Bankruptcies. Empty shelves. Panic. Sovereign debt crisis. And soon to be empty bellies…
The ultimate impact, in terms of GDP contraction, will tailspin the economy into a depression…perhaps, The Great Depression II. The stock market, regardless of what Powell wants, is pricing this reality accordingly.
There’s no escaping it…
Can’t Run, Can’t Hide
You can’t run. You can’t hide. Remember, no one here gets out alive. Though you aren’t totally helpless…
You can tempt fate. You can rage against the forces of destiny. By this, you can place bets that are at odds with the madness of crowds. Of course, this must be done before the inflection point; before the herd runs off the cliff…not after.
For example, during periods of economic chaos, physical gold and silver and arable land are proven vehicles for wealth preservation. No doubt, those with the means and fortitude to do so have already diversified some of their savings into these established crisis hedges.
Those who haven’t can only blame themselves. There have been ample warning signs over the last year – or more – that financial markets were ripe for a crisis. It didn’t take half a brain to clue in on this.
And it didn’t take much in the way of resources to place a bet or two that something ‘might could’ go wrong. Even the lowly working stiff, with a small inkling of what was coming, could have taken a pass on shares of Apple and traded a small wad of paper bucks for a junk silver bag or two.
With a little luck, these proven wealth preservation vehicles will safely traverse the valley of the shadow of death to whatever economic order emerges when the crisis abates. At that point, we suspect paper dollars will trade at par with fire kindling, whereas silver and gold will retain their stored value.
Indeed, gold and silver have gotten shellacked this week. But, as night follows day, once this panic liquidation episode subsides, and the implications of fiscal and monetary currency debasement are realized, gold and silver will take off. You can count on it.
In the interim, escaping to a country house or a mountain cabin is an appealing option to ride out the depression – assuming you have one to escape to. If not, the months ahead may validate the wisdom of having freeze dried food storage and a productive vegetable garden. Assuming you’re prepared with a little food storage and gold, you can calmly hunker down and avoid large crowds.
Other than that, the best thing to do is to try and stay out of the way as the traveling circus blows through town. Hence, what follows are several proven, practical ideas, including a 12-Point Great Depression II Survival Guide, that anyone can follow to avoid taking this crisis square on the chin…
Your 12-Point Great Depression II Survival Guide
On November 21, 2008, when the sky was falling, and following many reader inquiries, we attempted to offer – from the heart – practical, discretionary advice on what to do to survive the economic crisis. At the time, it served our readers well.
For your benefit today, and by reader request, we’ll revisit it…with some minor touch ups. We recommend printing this out, and tacking it to your office corkboard, so you can refer to it during the darkest of days, which are headed our way.
Your 12-Point Great Depression II Survival Guide:
Always take what’s yours…plus a little bit more. You’ll undoubtedly need it with Donald J. Trump running riot during an election year.
Never shake hands with your right hand, without first crossing the fingers of your left hand securely behind your back. You never know when you’ll need a do-over.
Always look out for No. 1, save stepping in No. 2.
Never give a beggar your pocket change, except when to do so is to buy them a drink.
Know the difference between honesty with yourself and honesty with others. The former must be rigorous; the later must be flexible…especially when applying for insurance.
Never kick a man when he is down; so too, never hasten to help him up.
Never stiff your barber. He’ll be your last resort for relief via bloodletting and fire cupping, should things get bad enough.
Never con widows and orphans; all others are fair game.
Do not worry about money; what you don’t have should be of little concern.
Never forget that there’s a fool on every corner and a sucker born every minute. Avoid being one of them when at all possible; for it is both demoralizing and expensive.
Do not take it personal when you lose your job. This economy’s circling the toilet bowl; before this is over a lot of other good people will lose their job too.
Remember, always, that this too shall pass; though never fast enough. So keep your head up. For even during a depression the birds still sing, the flowers still bloom, and those of sound mind and body get through it a little wiser…if not a lot slimmer.
After 79% Sales Crash In February, China Automakers Beg Government For Bailout
We had been reporting China’s February auto sales numbers on a week by week basis, so Zero Hedge readers knew they were going to be ugly for the month. They just didn’t know how ugly.
Industry wide, sales fell 79% in February, marking the biggest ever monthly plunge on record, according to Reuters.
And the industry is starting to panic. Automakers are now asking the government for relief after the industry’s collapse, which occurred in the midst of an already-in-progress global recession for automakers. Specifically, they are asking for cuts on the purchase tax for smaller vehicles and support for sales in rural markets, in addition to the easing of emission requirements.
Sales for February fell to just 310,000 vehicles from a year earlier, marking the 20th straight month of declines.
Chen Shihua, a senior CAAM official said: “China’s auto sales for February returned to levels not seen since 2005.”
And the once silver lining of EV sales is no longer. New energy vehicles contracted for an 8th month in a row as the CAAM pleaded the government for more subsidies on NEVs.
Yale Zhang, head of Shanghai-based consultancy AutoForesight, said: “The government will consider these proposals but it is unlikely they will launch so many policies. Measures like cuts to the purchase tax, support for rural markets and easing purchase restrictions on new energy vehicles are reasonable and would have an immediate impact.”
Auto makers are also asking the CAAM for improved logistics and the support of a resumption of production in Hubei province, where the coronavirus outbreak began. In Hubei, production for China’s automakers had resumed to about 40% of normal output levels, according to a CAAM survey.
The CAAM predicts sales numbers will “definitely” rebound in March. A CAAM official said last month that sales are likely to plunge 10% for the first half of 2020. Containing the coronavirus outbreak is going to be key in whether or not the industry rebounds, and by how much.
And remember, as production comes back online in China, demand globally will likely be falling off a cliff as other major countries deal with their “Wuhan moments”.
As the coronavirus panic heightens, the price of items like hand sanitizer and medical face masks – to the extent they are still available – are skyrocketing.
CBS News reported last week that “Online, sales of virus protection products have skyrocketed, up 817% in the last two months. Two large bottles of Purell hand sanitizer were on sale for $299 on Amazon. That size normally sells for about $9 a bottle. Another listing, for four boxes of masks, is usually about $20 — it was being sold for more than $1,000.”
In response, some state governments have already vowed to punish “price gouging.”
“California’s attorney general told businesses that if they violated price gouging laws, ‘You’d better be prepared to pay the price for your lawbreaking.’ New York City is issuing $500 fines to any stores found price gouging, starting this week,” CBS reported.
Indeed, even the Department of Justice issued a warning that they “stand(s) ready to make sure that bad actors do not take advantage of emergency response efforts, healthcare providers, or the American people during this crucial time.”
The trade group The Consumer Brands Association praised the DOJ’s response, saying “We appreciate the Department of Justice’s swift response to Consumer Brands’ request to combat price gouging and ensure American consumers have access to critical products at affordable prices.”
But does preventing ‘price gouging’ during times of distress actually help ensure that critical products will remain available at affordable prices? Basic economics tells us no.
Price controls in times of emergency have negative consequences, just as they do during normal times. When prices aren’t allowed to move in response to changing economic conditions, those who most urgently need these critical items will likely find the shelves empty.
In the current situation, fear of the spread of the coronavirus has caused demand for virus protection items to skyrocket. But if the sellers of these items are not allowed to raise their prices out of fear of government punishment, the result will be that the first wave of customers will clear out all the available supplies.
During times of distress like this, people’s demand curves shift. They are now willing to buy more of a good (like hand sanitizer) at any given price. Without a higher price, the first buyers will stock up, leaving no supplies for others in need. There is no incentive to economize; in fact there is incentive for those first in line to buy up more than they actually need to potentially take advantage of shortages and make a profit by selling to those willing to pay a higher price in the black market.
If prices are allowed to rise to reflect the greater urgency of demand, however, consumers will limit their purchases to just what they truly need. Those first in line will be far less likely to clean out the shelves, but rather buy the minimum amount needed to ride out the virus scare.
I’m w/ Prosecutor @JakeHudnut + JCPD issuing tickets for price gouging. We won’t accept people taking advantage of residents. Tissues, Clorox, cleaning items, all doubling +. Rubbing alcohol went from $2.99 to $6.99. People sometimes can be terrible in how they treat eachother.. pic.twitter.com/GarSAkAW35
As a result, more people will be able to acquire at least some of the highly-valued products, and supplies are more likely to be available to those who most urgently need the product. As Robert Wenzel at EconomicPolicyJournal.com wrote:
“If someone wants to buy a mask to travel by subway to go to a movie and the mask is $200, the consumer might think twice and not buy the mask, thus leaving it for someone else. At the same time, a heart surgeon may want to buy a mask to travel the same subway to perform heart surgeries. He might be very willing to pay $200 for a mask.”
Moreover, freely adjusting prices send important signals to producers about the intensity of demand, providing incentive to suppliers to devote more resources to the production and distribution of the critical items in such high demand.
Manufacturers of masks and hand sanitizer will be willing to outbid manufactures of other products for the inputs they need to produce the finished product. They may also be willing to invest in more speedy delivery mechanisms to more quickly acquire their needed inputs so that they can increase supplies in a shorter time frame.
Allowing for prices to freely adjust to market conditions sends vital signals both to consumers to economize and producers to marshal resources to increase supply. Shortages will be avoided and the most urgent needs will be met.
Emotions are running high during the current panic. Part of the emotional response is directed at sellers of critical items like hand sanitizer and medical masks, who are seen as exploiting the desperation of the situation. But government price controls will create shortages, causing those who most urgently need such products, like medical personnel, to do without.
As usual, when the government interferes in the market, they can only make a bad situation worse.
Nomura: “The Market Has Only Just Begun Staring Into The Abyss”
While many post-mortems will be written on what, despite Friday’s torrid 9% rebound, has been a historic, unforgettable week which saw the US stock market plunge the most since the worst days of the global financial crisis, one of the more detailed and impactful was that of Nomura’s quant Masanari Takada who put the week’s events in simple, easy to understand context: “In little more than the blink of an eye, the situation has come to look like the 2008 Lehman Brothers crisis all over again.”
Below we repost some of the key points from his note as we brace for another historic week, especially since something tells us – perhaps the Fed’s failure to normalize the funding situation – that the events from next week will be even more memorable.
The plunge in US equities yesterday (12 March) pushed weekly returns down to 7.7 standard deviations below the norm. In statistical science, the odds of a greater-than seven-sigma event of this kind are astronomical to the point of being comical (about one such event every 160 billion years).
Setting aside legitimate quibbles over the statistical significance of this, we can say with confidence that we are witnessing a history-making market disaster in real-time.
Looking back at the performance of the DJIA since 1900, market shocks have exceeded the current rout in magnitude on only three occasions: in 1914 (when a growing financial crisis caused trading in US equities to be halted), in 1929 (the historic market crash that led to the Great Depression), and in 1987 (the Black Monday event).
US stock market sentiment has also seen a jarringly swift collapse, as equity sentiment has now gone beyond the low point marked during the 2015 renminbi shock. In little more than the blink of an eye, the situation has come to look like the 2008 Lehman Brothers crisis all over again.
The Fed has resumed its QE-in-all-but-name in response to the financial market meltdown. Many observers have questioned how effective the aid will actually be, given that there seems to be no way to put a conclusive stop to COVID-19. Expanded QE did help lift sentiment in 2015-2016, and therefore think that the Fed can at least help limit the risk of an extreme credit crunch. However, the paralysis in the international circulation of people and goods already being observed will almost inevitably undermine the market.
DM equities worldwide are in bear markets now. Going by our own data analysis, the pace of the present sell-off has broken all norms. When a downshift in the market is characterized by unusually steep declines, the usual driver is an outflow from longer-term investments.
The present market rout is unconventional in that major hedge funds (global macro hedge funds, CTAs) appear to be behind the curve in their selling [ZH: just as Goldman warned this week]. If anything, we see a risk that short-term players may mount an attack on the downside, ramping up their selling in an attempt to push the market down further.
For example, global macro hedge funds’ net exposure to DM equities (estimated from 30- day rolling beta) is still currently flat or even slightly long. It may be that these investors had been unable to fully imagine a pandemic-driven recession scenario, having no experience in that vein to draw upon. Global macro hedge funds may have taken this week’s abnormal market movements as their cue to simply offload their long positions in DM equities in their entirety.
There is a growing risk that global macro hedge funds, after liquidating their long positions, will proceed to aggressively build up short positions. Global macro hedge funds tend not to make spur-of-the-moment trades, but they do tend to stake out positions that are consistent with the macroeconomic outlook.
In that respect, the S&P 500 dividend yield appears to already reflect market expectations for a slowdown in the US economy. If the ISM Purchasing Managers Index (average of the readings for manufacturers and non-manufacturers) were to drop to the level recorded around July 2009—as the dividend yield seems to imply—there is a high likelihood that global macro hedge funds would then (with some confidence) start expanding their short positions in pursuit of the market downside.
Similarly, CTAs appear to have failed to fully keep up with the drop in share prices in major countries. CTAs have of course been selling futures to unwind their long positions during this downward move in share prices. But when share prices shift downward abruptly, the short-term surge in volatility can often hinder trend-followers’ ability to participate in short-selling. This is because systematic trend-following strategies tend to build positions that balance: (1) the strength or weakness of trends; and (2) the level of volatility. This means that CTAs often wind up following one step behind when trends shift suddenly.
CTAs have turned short on DJIA futures. Because of the rapid pace of the Dow’s drop, CTAs have been able to build sufficient short positions. As they had already preferred short positions with the DJIA below 28,000, CTAs look likely to build short positions rapidly at current share price levels.
It may be, then, that the market has only just begun staring into the abyss.
House Democrats have introduced legislation that would undo President Trump’s travel bans from coronavirus stricken areas, despite the fact that the director of the National Institute of Allergy and Infectious Diseases (NIAID) has said that the impact of the crisis would be much worse had the travel bans on China and Iran not been in place.
Democrats want to strip the President of the authority to implement the bans, introducing a bill titled the “No Ban Act,” which would allow travellers from Wuhan and other infected areas to keep arriving in the US unimpeded.
“This bill imposes limitations on the President’s authority to suspend or restrict aliens from entering the United States and terminates certain presidential actions implementing such restrictions,” the bill summary reads.
The legislation vaguely says that Trump should only be able to “issue a restriction when required to address a compelling government interest.”
The bill further declares that before any travel ban is imposed, the President would be mandated to “consult with Congress.”
Democratic Presidential contender Bernie Sanders also said this week that he would not impose any travel bans during the coronavirus crisis.
The action flies in the face of advice from Dr. Anthony Fauci, director of the NIAID, who told lawmakers during a House Oversight and Reform Committee hearing Wednesday that “I believe we would be in a worse position,” had such travel bans not been imposed by Trump.
Fauci’s comments come at the 1:00:39 mark
“Whenever you look at the history of outbreaks, what you see now in an uncontained way and although we are containing it in some respects, we keep getting people coming into the country that are travel-related, we’ve seen that in many of the states that are now involved.” Fauci said.
“We will see more cases and things will get worse than they are right now. How much worse they get will depend on our ability to do two things: To contain the influx of people who are infected coming from the outside and the ability to contain and mitigate within our own country. Bottom line, it’s going to get worse.” he added.
Fauci’s comments regarding travel restrictions have been echoed by The New England Journal of Medicine, which recently reported: “At least on a temporary basis, such restrictions may have helped slow the spread of the virus.”
Trump extended the travel ban Wednesday night to most of Europe (but not the UK) for at least 30 days.
“The European Union failed to take the same precautions and restrict travel from China and other hot spots,” the president said, adding “As a result, a large number of new clusters in the United States were seeded by travelers from Europe”.
Trump’s words, and the announcement of the travel restriction drew anger from some European officials, who reportedly described it as “unbelievable” and “very strange.”
Taking an emergency such as the #Coronavirus epidemic as another opportunity to wage his personal war against #China and the #EU … that says everything!
Any attempt to contain the #CoronaOutbreak is welcome, but the decision of @realDonaldTrump to exclude the UK from a European travel ban is nothing short of irresponsible. Viruses do not recognise borders. Decisions should be based on facts, not politics.
The European Commission and Council issued a joint statement declaring that “The European Union disapproves of the fact that the US decision to impose a travel ban was taken unilaterally and without consultation.”
“The Coronavirus is a global crisis, not limited to any continent and it requires cooperation rather than unilateral action.” the statement continued.
Trump was unwavering in his belief that his administration can mitigate the spread of the virus:
I am fully prepared to use the full power of the Federal Government to deal with our current challenge of the CoronaVirus!
….Together we are putting into policy a plan to prevent, detect, treat and create a vaccine against CoronaVirus to save lives in America and the world. America will get it done!
The Media should view this as a time of unity and strength. We have a common enemy, actually, an enemy of the World, the CoronaVirus. We must beat it as quickly and safely as possible. There is nothing more important to me than the life & safety of the United States!
As Covid-19 steamrolls across the world, widespread social, political, and economic disruptions have developed. Each country affected by the fast-spreading virus has followed a similar blueprint of implementing containment measures to control spreading.
Here’s a summary of virus prevention measures on a country by country basis:
China – With 80,932 cases and 3,169 deaths, strict quarantines in the last several months could be working, that is if you trust government data. For anyone entering the country, 14-day quarantines are mandatory. The government has asked citizens to obey strict social distancing rules and ramped up mass surveillance to monitor the public.
South Korea – With 7,869 cases and 66 deaths, government officials have enforced social distancing rules, companies have allowed employees to work at home, and the military has been disinfecting public areas.
Japan – With 639 cases and nine deaths, the government has passed strict border control measures, halted all travel from China and South Korea, and has enforced mandatory quarantines for recent China and South Korean arrivals.
Iran – With 10,075 cases and 429 deaths, public gatherings and prayer sessions have been canceled, education and school systems are closed, all forms of public transportation have been disinfectant, and 70,000 prisoners have been released.
Italy – With 12,462 cases and 827 deaths, all public gatherings and sporting events have been canceled. Schools and universities have been closed as strict travel restrictions within the country have been implemented to contain virus spreading. Closure of public services and curfews have been seen in some regions.
France – With 2,284 cases and 48 deaths, mass gatherings have been banned, sporting events canceled, and schools remain closed in some areas.
Spain – With 2,277 cases and 48 deaths, schools and universities are closed, flights to Italy restricted, sporting events postponed, and working hours have been reduced to limit the virus spread.
United Kingdom – With 596 cases and 10 deaths, schools will remain open, events and social gatherings are still allowed, and the government has advised anyone who feels sick to stay home.
Belgium – With 314 cases and 3 deaths, mass gatherings have been banned, school trips canceled, and social distancing measures are required to be followed by all citizens.
Ireland – With 43 cases and 1 death, mass gatherings have been canceled, schools and colleges closed, along with the expectation that public facilities will be shuttered in the near term.
United States – Mass gatherings restricted in California, National Guard deployed in New York, education systems in some states closed, CDC has asked citizens to follow social distancing rules, and travel from mainland Europe canceled.
The US has been the slowest to implement virus prevention measures, likely missing the containment window by weeks if not a month for many large cities, as community spreading has been reported. Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, was quoted by Reuters on Friday morning as saying, “the next few weeks, for most Americans, what you’re going to see is an acceleration of cases.” And with that being said, is America about to transform into Italy or South Korea?
President Rodrigo Duterte’s cancellation of key strategic pact with US has opened the way for Chinese infiltration
As President Rodrigo Duterte moves to boot US troops from Philippine soil through the cancellation of a key defense pact, China’s People’s Liberation Army (PLA) is quietly moving in to take their place.
Duterte’s recent decision to abrogate the Visiting Forces Agreement (VFA), which allowed the US to rotate troops and position equipment in the country, is opening the way for China to solidify its competing strategic position in the country.
That’s at least according to early findings of investigations into China’s undercover and illicit activities, ranging reputedly from espionage to surveillance to money laundering, now being spearheaded by Philippine Senator Richard Gordon.
Those probes have included scrutiny of the hundreds of thousands of Chinese citizens now employed in the burgeoning online casino sector, known locally as Philippine Offshore Gaming Operations (POGOs), many of which are clustered close to key military camps and strategic bases in Manila, the national capital.
Gordon has claimed that the POGOS have been infiltrated by PLA soldiers for intelligence gathering and other activities. Those claims were validated when two card-carrying PLA members attached to a POGO were were arrested in a shooting incident in Manila late last month.
Anti-China protesters during a demonstration in front of the consular office of China, Manila, April 9, 2019. Photo: AFP/Ted Aljibe
The Senate investigations have revealed a tangled web of official corruption and conspiracy which has allowed countless Chinese citizens, including allegedly between 2,000-3,000 PLA soldiers, to illegally and secretly reside in the country.
Under the so-called “pastillas” scheme, exposed by whistleblower Allison “Alex” Chiong of the Philippine Bureau of Immigration (BI), Chinese nationals pay roughly 10,000 pesos (US$200) as a “service fee” for special treatment and ease of entry into the country.
While around $40 of that fee goes to immigration officers, the rest is allegedly spread among senior officials and other allies of the president who oversee the alleged syndicate run out of Manila’s Ninoy Aquino International Airport.
The money, according to the whistleblower, is rolled inside a sheet of bond paper, similar to how the Philippine milk candy delicacy “pastillas” is packed. That, the investigations claim, has paved the way for so-called Chinese “immersion missions” by PLA members.
Public anger against the POGOs has recently spiked, fueled by the Duterte government’s belated imposition of a travel ban on Chinese citizens amid the coronavirus outbreak that started its deadly global spread in late January.
Many believe that wayward officials who benefit from the POGOs and import of illegal Chinese workers played an outsized role in the decision to allow thousands of Chinese citizens, including from Wuhan, the outbreak’s epicenter, to enter the country even after Beijing quarantined all of Hubei province.
Senator Panfilo Lacson, chairman of the committee on national defense and security and a former police chief, said that he has recently received information from security agencies claiming that thousands of undercover PLA members are engaged in “immersion missions” in the country, with Chinese spies operating under the guise of POGO workers.
“The intelligence community should exert extra effort to gather information in this regard,” Lacson recently said.
Chinese-run gambling operations in the Philippines are under growing scrutiny as potential spy havens. Image: Facebook
Lacson, Gordon and Senate Minority Leader Franklin Drilon have all recently warned that China aims to take advantage of the new and growing security vacuum caused by Duterte’s recent abrogation of the VFA with the US, a move that has undermined the legal status of the two sides’ 1951 Mutual Defense Treaty (MDT).
The US and Philippines stage thousands of bilateral military activities and exercises each year, including war games that include mock invasions of islands that aim to send a strong signal to China in the South China Sea.
“That may confirm a yet unvalidated report that a good number of PLA members are on ‘immersion mission’ in several parts of the country, although the reason for it is still unclear,” Lascon said.
“The police as well as the intelligence community should lose no time in exerting serious efforts to authenticate the discovered PLA using sources independent of the Chinese government, for obvious reasons,” warned the senator.
Lascon has also claimed that 47 Chinese individuals recently smuggled US$446 million into the Philippines over a recent five month span, whereby the Chinese money launderers paid and made connections with bent Philippine officials.
Senator Gordon, long seen as a Duterte ally, has warned of large-scale money laundering going hand-in-hand with a potential “fifth column” infiltration of Chinese security forces.
“There is tolerance. I don’t know where it is coming from,” said Gordon, implying the Beijing-friendly president is partly responsible for the threat, according to media reports.
“The shenanigans of what we see here, all happened because of the policy decision to allow overseas gaming operations in our country,” said Drilon in directly blaming the Duterte administration.
“What is happening in our country is apparently rooted in the very presence of POGOs run by the Chinese. If there were no POGOs, all of these nefarious activities would have no purpose,” he added.
An aerial photo depicting the location of Chinese-run POGOs and the Philippine military’s headquarters. Source: Defense Forum
Fears of systematic Chinese espionage activities were sparked last year when netizens shared images showing the suspicious proximity of Chinese-run POGOs to security and law enforcement agencies in Manila.
Those include POGOs situated near the Philippine Air Force and Navy headquarters, Philippine National Police headquarters at Camp Crame, and Camp Aguinaldo which hosts the Philippine Army and National Defense Department offices.
“When you already see many people [at the POGOs], who are always there…it’s very easy for all these [Chinese] people to perhaps shift their activities to spying,” Philippine Defense Secretary Delfin Lorenzana said last year. “They are near [military facilities].”
Philippine National Security Adviser Hermogenes Esperon, meanwhile, raised alarms last year over the entry of thousands of undocumented Chinese as a potential security “threat”, including through possible PLA surveillance and espionage.
“You’d also start getting worried when a whole building, condominium, tower is occupied by only one nationality where you would not be able to guard all their activities,” the national security adviser said. “Some unwelcome activities could transpire there so we need to prevent those.”
It’s not clear yet that Duterte’s pro-China administration will undertake any concrete measures to address these concerns and reputed threats.
“He [Duterte] told me…We really need the funds from those [POGO] operations,” presidential spokesperson Salvador Panelo said amid an escalating call for their closures. “Because the money we get from whatever [Chinese] sources is for the government, so the government can use that in any undertaking.”
