Category: zerohedge

Submitted by Michael Every of Rabobank

What do you say about a Friday where nobody but Larry Kudlow Donald Trump cares a jot about the strong US labour market; where equities tumble again; where the US credit markets start to show stress; and where the 30-year US Treasury declines nearly 30bp in one day? What do you say when OPEC and Russia can’t agree on oil price cuts to match collapsing global demand?

What do you say about a Saturday where Saudi Arabia decides to turn the taps on full and increase output massively, and to offer discounts of USD8-10 per barrel to key customers? What do you say when oil prices collapsed nearly 10% on Friday and then a further 31% this morning in the first few minutes of Asian trading, and Brent was at USD35.76 at time of writing? That’s the biggest drop since 1991! What do you say when even US shale, and all the high-yield credit attached, is going to be under huge stress – to say nothing of the Saudi and Russian budgets, and oil-related currency pegs?

What do you say when the 10-year US Treasury has fallen another 24bp today and is right now as type below 0.50% energy and commodity prices collapse? What do you say when the Aussie stock market has fallen 6.4%, the Hang Seng is -3.5%, the Nikkei -5.8%, even though Japan is a huge energy importer, and S&P futures are -4.5% again, close to limit down? What do you say when EUR/USD is over 1.14, and USD/JP at 102.5?

“Oil vey”

This is without even mentioning that Italy has locked down 25% of its population properly this time – though apparently the orders are being ignored, and the decree was leaked early, allowing many to flee the virus zone before the cordon sanitaire came down.

Without mentioning that Israel, very small but ahead of the virus policy curve in some respects, is about to insist all arrivals must go into 14-day quarantine, which will effectively close off all incoming flights.

Without mentioning that Chinese exports for January and February were -17.2% y/y, taking its trade into a deficit: with nobody to export to as things look like they may stand, might we be seeing more such deficits even if China can genuinely get production up, rather than just leaving the lights on, and without a new virus outbreak?

Without mentioning that the shoe has now finally dropped and major events like SXSW in the US have shown that, yes, this virus matters too and it is not just $X$W: it has been cancelled at short notice.

Anecdotally, I am seeing/hearing three groups around me in how people react to all this:

1. The ones fighting over toilet rolls in supermarket aisles, which shows that in times of crisis people will still stick with fiat money given they obviously see actual toilet paper as a form of currency.
2. The ones who keep saying this is all an over-reaction, largely because they want to differentiate themselves from those who are fighting over toilet paper; but also because they are clinging to comforting facts like “This is just flu”, “More people due from slipping in the shower”, and the classic “98% of people will be OK”. Generally that means THEY will be OK, as they aren’t in the high-risk health or age bracket: yet there are also lots of elderly folks I know who are also happily saying “Keep Calm and Carry On” while making no changes to their lifestyle at all. In markets, this group tends to work in the kind of analyst space where you are always “bullish 12 months out” – the kind of people Keynes was laughing at when he made his “In the long run, we are all dead” quip: today it’s been inverted to “In the long run, we are all alive”.    
3. The ones who aren’t buying toilet paper but who aren’t buying that this is just a flu that will go away when the sun comes out either. Those who can see this virus is extremely easy to spread and very dangerous to some demographics – and that if they will be OK personally, if everyone gets sick at once (40-80% of the population), and 20% of those sick need to be in hospital (8-16% of the population), healthcare systems will be overloaded, ensuring even moderately ill people can’t get normal treatment and can hence die: so we can indeed end up with mass casualties of at least 2% of that 40-80% in short order, Wuhan- and Italy-style, albeit centred on the elderly and sick. (Which tend to be called ‘family members’ for most people.) The ones who also see that aggressive lockdowns/quarantines, along with mass testing, have managed to reduce the R0 (or infectiousness) of the virus from 2-3 to around 0.3 where they have been implemented, and hence recognise that is the route that governments will all eventually go down, even if the economic hit will be massive.

Now briefly back to oil. The bull argument du jour from our group 2 above is that lower energy prices will juice the global economy. Perhaps – unless you are an energy exporter. They will also ensure central banks are confronted by deflation, not inflation; and, as already noted, by severe credit stress in the energy sector.

Yet will cheaper petrol/gas really encourage the group 1 people bunkered down at home to buy more of anything except toilet paper? Moreover, once this virus has passed which, yes, one day it will, even if it is perhaps not truly over until a vaccine is available in 2021 or 2022, then energy demand will go back up again and so will oil prices. In other words, cheap energy is a coincident and not a leading indicator for once, and it is not going to juice the economy right now any more than ultra-low (and about to get ultra-lower) interest rates are.

But what about fiscal stimulus, I hear group 2 people say? Well even that won’t do much beyond damage control. Don’t believe me again? Look at the share of household spending and business investment in GDP vs. public investment–it’s easy to do–and imagine how much the latter needs to rise to compensate for a coming collapse in the first two categories. An extension of paid sick leave, as proposed in the US, is better than nothing but also nothing much.

Like I already said, “Oil vey.”

Though Russia thus far hasn’t been as hard hit as other large countries, with 17 now confirmed out of a population of 145 million — among those likely are some initially evacuated from the epicenter in Wuhan province, China — authorities are not taking any chances, enacting extreme measures to prevent the spread.

The city government of Moscow has as of Sunday imposed a “high alert regime” of mandatory self-quarantine for those that have recently visited foreign countries with an infected population. The penalty for such designated citizens if they leave their homes and break the quarantine is up to five years in jail, Moscow city hall has threatened.

Authorities are reportedly even going so far as to set up closed circuit TV cameras in places of self-isolation in order to monitor conformity.

Over the two-day period of last Friday through Saturday Russian health authorities announced a total of ten new cases, taking the total number to 17, three of whom have now reportedly recovered. Most of the recent cases had traveled in Italy. Currently there are hundreds if not thousands across the country who have been ordered into quarantine.

So far there’s nothing to suggest city authorities have actually as yet handed down any legal or jail penalties related to the coronavirus crisis, or if they would follow through with it should someone break self-quarantine. Last month, however, 88 foreign nationals were deported over breaking quarantine protocols.

Return visitors from highly impacted countries will be especially monitored, Reuters reports:

Those who return from China, South Korea, Iran, France, Germany, Italy and Spain and other states showing possible “unfavorable” signs of coronavirus should self-isolate themselves at home for 14 days, Moscow city hall has said.

The Moscow healthcare department said on Sunday that those disregarding the regulation risked severe punishment including imprisonment of up to five years.

According to the Moscow Times authorities have even lately utilized facial recognition software to keep track of quarantined persons or suspected cases.

Last week Mayor Sergei Sobyanin initiated random screenings of Moscow Metro passengers’ temperatures at station entrances.

Given Russian numbers of infected have not jumped at exponential rates as they have in places like Iran and Italy, it appears the early response measures are working in terms of mitigating the virus’ impact across Russia.

We’ve explained that economic paralysis in China started in early February and continues to this day.

Alternative data first showed us the incoming economic crash developing in early February, only to be confirmed weeks later. Twin shocks plague the Chinese economy, which is a supply shock with manufacturers operating at less than full capacity, along with a demand shock, where consumers have been confined to their homes in forced quarantine, unable to spend. 

So, on Monday morning, when new data from the China Academy of Information and Communications Technology (CAICT) reveals Apple smartphone sales in China were halved in February, this really shouldn’t surprise ZeroHedge readers, considering they’ve been well informed about what would happen next. 

And it wasn’t just Apple with plunging activity, all mobile phone brands operating in China saw shipments halved over the month. 

CAICT said 6.34 million devices were shipped last month, down 54.7% from 14 million in the same month the previous year. This was the lowest level of February shipments since 2012, when the CAICT data first became available. 

Android brands, including Huawei and Xiaomi, accounted for most of the drop, collectively saw shipments at 5.85 million units for the month, compared to 12.72 million units last year. Apple shipped 494,000 last month, down from 1.27 million in February 2019.

The collapse of the smartphone industry in China was described well in advance, where we explained China’s smartphone shipments were expected to halve in the first quarter: 

• China’s Smartphone Sales And Production To Crater Amid Supply Chain Shock
• China Mobile Phone Sales Crash Most On Record

And while alternative data of China’s economy continues to print without a heartbeat, recently confirmed by crashing state data, consumption woes will likely plague the smartphone industry for the full year. 

 

Authored by Lance Roberts via RealInvestmentAdvice.com,

“When it comes to investing, it’s a losing proposition to try and be anything better than average.

If there’s no point in trying to beat the market through ‘active’ investing – using mutual funds that managers run, selecting what they hope are market-beating investments – what is the best way to invest? Through “passive” investing, which accepts average market returns ­(this means index funds, which track market benchmarks)” – Forbes

The idea of “passive indexing” sounds harmless enough, buy an “index” and be an “average” investor.

However, it isn’t as simple as that, and we have spilled a lot of ink digging into the relative dangers of it. Last week, investors saw those risks first hand.

The biggest risk to investors is when “passive indexers” turn into “panic sellers.” 

While the “sell-off” over the last couple of weeks was brutal, with the Dow posting some of the biggest declines in its history, as I will explain, it was exacerbated by the “passive indexing revolution.” 

Jim Cramer previously penned (courtesy of Doug Kass) an interesting note on the active vs. passive conflict.

“The answer is that there are two kinds of sellers in this market: hedge fund sellers, who react off of research, and portfolio shufflers, who buy and sell ETFs and index funds.

The former jumps on anything, right or wrong, as long as it is actionable. The latter, the index funds and ETF traders, rarely jump although they may press down harder on a bedraggled ETF, like one that includes the consumer products group.

But there are two kinds of buyers. The opportunistic buyers, and the index buyers. The opportunists think that the downgrades are noise and give them a chance to buy high-quality stocks with the money that comes in over the transom.

The index and ETF buyers? Well, they just buy.”

The dichotomy explains a lot of the bullish action, and isn’t talked about enough.

While Jim wrote this about those “buying” ETF’s, the same is true when they begin to “sell.” 

“The index and ETF sellers? Well, they just sell.”

It is often suggested that individuals who buy “passive indexes,” such as the SPDR S&P 500 Index (SPY), are they themselves “passive investors.” In other words, these individuals are willing to buy an “index” and hold it for an extended period regardless of market volatility.

Reality has been far different.

This was clear last week as the S&P 500 ETF (SPY) saw some of the biggest outflows in its history with the exception of the February 2018 market plunge as Trump announced his “Trade War with China.” 

The problem with individuals and “passive” investing is they are just “active” investors in a different form. They make all the same mistakes that individual stock investors make, such as “buying high and selling low,” but just using a different instrument to do it.

As the markets declined last week, there was a slow realization “this decline” was something more than another “buy the dip” opportunity. Concerns of the impact on the global supply chain, due to “COVID-19,” slowing earnings, economic growth, and a reduction of liquidity from the Federal Reserve, all culminated in a “panicked exit.”

As losses mounted, anxiety rose until individuals began to sell to “avert further losses” by selling.

Yes….it’s that psychology thing.

Individuals refuse to act “rationally” by holding their investments as losses mount.

The behavioral biases of investors are one of the most serious risks arising from ETFs as too much capital is concentrated into too few places. This concentration risk in ETF’s is not the first time this has occurred:

• In the early 70’s it was the “Nifty Fifty” stocks,

• Then Mexican and Argentine bonds a few years after that

• “Portfolio Insurance” was the “thing” in the mid -80’s

• Dot.com anything was a great investment in 1999

• Real estate has been a boom/bust cycle roughly every other decade, but 2007 was a doozy

• Today, it’s ETF’s and Bitcoin

Risk concentration always seems rational at the beginning, and the initial successes of the trends it creates can be self-reinforcing.

Until it goes in the other direction.

While the sell-off last week was large, it was the uniformity of the price moves, which revealed the fallacy “passive investing” as investors headed for the exits all at the same time.

The Apple Problem

Currently, there more than 1750 ETF”s trading in the U.S., with each of those ETF’s owning many of the same underlying companies. For an ETF company to “sell” you product, they need good performance. In a late-stage market cycle driven by momentum, it is not uncommon to find the same “best performing” stocks proliferating a large number of ETF’s.

For example, out of the 1750 ETF’s in the U.S., there are 175, or 10%, which own Apple (AAPL). Given that so many ETF’s own the same company, the problem of “liquidity” is exposed during a market rout. The head of the BOE, Mark Carney, warned about the risk of “disorderly unwinding of portfolios” due to the lack of market liquidity.

“Market adjustments to date have occurred without significant stress. However, the risk of a sharp and disorderly reversal remains given the compressed credit and liquidity risk premia. As a result, market participants need to be mindful of the risks of diminished market liquidity, asset price discontinuities and contagion across asset markets.”

Howard Marks, also noted in ‘“Liquidity:”

“ETF’s have become popular because they’re generally believed to be ‘better than mutual funds,’ in that they’re traded all day. Thus an ETF investor can get in or out anytime during trading hours. But do the investors in ETFs wonder about the source of their liquidity?’”

Let me explain.

There is a statement often made by individuals about the market.

“For every buyer, there is a seller.” 

The belief has always been that if an individual wants to sell, there will always be a buyer available to execute the transaction at any given price.

However, such is not actually the case.

The correct statement is:

“For every buyer, there is a seller….at a specific price.”

In other words, when the selling begins, those wanting to “sell” overrun those willing to “buy,” so prices have to drop until a “buyer” is willing to execute a trade.

The “Apple” problem, using our example above, is that while investors who are long Apple shares directly are trying to find buyers, the 175 ETF’s that also own Apple shares are vying for the same buyers to meet redemption requests.

This surge in selling pressure creates a “liquidity vacuum” between the current price and the price at which a “buyer” is willing to step in. As we saw last week, Apple shares fell faster than the SPDR S&P 500 ETF, of which Apple is one of the largest holdings.

Secondly, the ETF market is not a PASSIVE MARKET. Today, advisors are actively migrating portfolio management to the use of ETF’s for either some, if not all, of the asset allocation equation. Importantly, they are NOT doing it “passively.” The rise of index funds has turned everyone into “asset class pickers,” instead of stock pickers. However, just because individuals are choosing to “buy baskets” of stocks, rather than individual securities, it is not a “passive” choice, but rather “active management” in a different form.  

While “passive indexing” sounds like a winning approach to “pace” the markets during the late stages of an advance, it is worth remembering it will also “pace” just as well during the subsequent decline.

The correction had the “perma-bulls” scrambling to produce commentary as to why markets will continue only to rise. Unfortunately, that is not the way markets actually work over the long-term, and why the basic rules of investing are REALLY hard to follow.

Despite the best of intentions, individual investors are NOT passive even though they are investing in “passive” vehicles. When these market swoons begin, the rush to liquidate entire baskets of stocks accelerate the decline making sell-offs much more violently than what we have seen in the past.

This concentration of risk, lack of liquidity, and a market increasingly driven by “robot trading algorithms,” reversals are no longer a slow and methodical process but rather a stampede with little regard to price, valuation, or fundamental measures as the exit becomes very narrow.

February was just a “sampling” of what will happen to the markets when the next bear market begins.

Are you prepared?

Does God have a sense of humor? It’s starting to look that way…

Several pedestrians commenting on social media in downtown Washington DC on Monday noted that an actual dumpster fire appeared to be burning at the corner of 14th and G Street, just around the way from 1600 Pennsylvania Avenue, the most famous address in America.

A dumpster fire today a block from the White House, sent by a friend. pic.twitter.com/NPq1qXxgqD

— Alexander Marquardt (@MarquardtA) March 9, 2020

Meanwhile, in a fit of pique, it appears President Trump has just seized on the ‘it’s just the flu’ line of reasoning, promising to be the latest in a string of messaging missteps from the president since the novel coronavirus arrived in the US.

So last year 37,000 Americans died from the common Flu. It averages between 27,000 and 70,000 per year. Nothing is shut down, life & the economy go on. At this moment there are 546 confirmed cases of CoronaVirus, with 22 deaths. Think about that!

— Donald J. Trump (@realDonaldTrump) March 9, 2020

It’s a literal dumpster fire to commemorate one ‘dumpster fire’ of a trading session.

Shortly after we posted a prediction from Goldman’s David Mericle that the government and/or the Fed will need to immediately step in with monetary and fiscal stimuli to try and manage the recent chaos in the markets, VOA’s Steve Herman reports that the White House will be holding a meeting to discuss economic stimulus later this afternoon.

Economic stimulus meeting to held here at the @WhiteHouse after @POTUS returns this afternoon, according to officials.

— Steve Herman (@W7VOA) March 9, 2020

Trump, meanwhile, is blaming an oil-driven spat between Saudi Arabia and Russia – not coronavirus fears – as “the reason for the market drop!“

Saudi Arabia and Russia are arguing over the price and flow of oil. That, and the Fake News, is the reason for the market drop!

— Donald J. Trump (@realDonaldTrump) March 9, 2020

Good for the consumer, gasoline prices coming down!

— Donald J. Trump (@realDonaldTrump) March 9, 2020

To review some of the options on the table, according to Goldman:

Beyond funding for virus testing and treatment, the most direct avenue is aid to corporates and small businesses, especially in sectors hit by the virus shock. A US precedent is the post-9/11 help for the airline industry, which involved $5bn in direct payments and up to $10bn in loan guarantees.

Another avenue—at least in the US where the central bank is very limited in what it can legally buy—is for the Treasury to backstop credit easing facilities for the Fed; however, it would probably take a material further deterioration in market conditions and functioning for such facilities to be reestablished. 

On the Fed side, Goldman expects easing in March and April, with 100bp on the table. That said, it may have limited impact given where rates already are.

So far there’s been virtually no reaction to news of the meeting.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Everyone with a pension fund or 401K invested in stocks better hope the Fed becomes the buyer of last resort, and soon.

Much has been written about what the Federal Reserve cannot do: it can’t stop the Covid-19 pandemic or reverse the economic damage unleashed by the pandemic.

But let’s not overlook what the Fed can do: create U.S. dollars out of thin air and use these dollars to buy assets either directly or through proxies.

Let’s also not overlook how much the Fed can print/buy. The Fed’s balance sheet currently stands at $4.24 trillion. Doubling this to $8.5 trillion would bring the balance sheet to 39% of U.S. GDP ($22 trillion) and 7.5% of total U.S. household assets ($113 trillion). In the context of GDP and household assets, doubling the balance sheet would be extraordinary but not destabilizing.

Note how the the Fed’s balance sheet remained flatlined for 10 weeks and only popped higher this past week:

• 12/25/19 $4.165 trillion
• 1/1/20 $4.173 trillion
• 1/8/20 $4.149 trillion
• 1/15/20 $4.175 trillion
• 1/22/20 $4.145 trillion
• 1/29/20 $4.151 trillion
• 2/5/20 $4.166 trillion
• 2/12/20 $4.182 trillion
• 2/19/20 $4.171 trillion
• 2/26/20 $4.158 trillion
• 3/4/20 $4.241 trillion

Why would the Fed double its balance sheet? One reason would be the Fed moves from being the lender of last resort to the buyer of last resort, that is, the buyer of iffy assets no one else will buy such as junk corporate debt and junk bonds.

Why would the Fed become the buyer of last resort? To keep the entire financial system from collapsing under the weight of junk debt and fast-evaporating collateral.

Much has been written about the divide between financialized assets and the real economy, including many posts on this site. The financialization of the economy has richly rewarded the top 10% at the expense of the bottom 90% (and rewarded the top 0.1% at the expense of the top 10%), and this has generated socially and economically disruptive wealth and income inequality.

But even as we decry the widening gap between the financial sector and the real-world economy, we have to deal with the reality that the entire economy has been financialized and is now dependent on debt, leverage and asset bubbles.

If the stock market drops 50%, that wipes out pension funds, 401Ks, and mountains of leverage.

In other words, the Fed has to save all the asset bubbles to save the real-world economy which is now dependent on the excesses of financialization that have enriched the few at the expense of the many.

Everyone with a pension fund or 401K invested in stocks better hope the Fed becomes the buyer of last resort, and soon, as once stocks crater 50% or more, there’s no way to recover the $16 trillion that evaporated, or stop the dominoes from falling.

My COVID-19 Pandemic Posts

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Going for what seems like the world record of massive f*ck ups in a month’s time, retail brokerage Robinhood, which left all of its customers fuming mad with outages while the market swung wildly over the last two weeks, has once again said it is “experiencing issues with trading”. As a reminder, last week Robin Hood was again down allegedly due to bad (and/or missing) coding to account for the leap year; perhaps it also forgot to properly code for Daylight Savings Time?

Robinhood’s account confirmed the outage, which was first reported by Downdetector on Monday morning.

Trading is currently down on Robinhood and we’re investigating the issue. We’re focused on getting back up and running as soon as possible and we’ll update the status page with the latest https://t.co/mON07oWvHy.

— Robinhood Help (@AskRobinhood) March 9, 2020

The retail brokerage, likely replete with inexperienced traders all rushing to crowd through the market’s exits at once, said that it is having “issues with equities, options and crypto trading,” according to Bloomberg.

Oh, that’s it? Well that leaves – well, nothing – left to trade.

Recall, the brokerage faced scrutiny not only from traders but from regulators after its massive screw ups over the last two weeks which left nervous millennials unable to panic sell their Tesla shares as U.S. markets crashed. 

Recall, a couple weeks ago, it was Fidelity shutting down, not allowing investors to trade during the market crash. 

And if this was the mood last week from Robinhood customers…

Switching back to @TDAmeritrade

Good work today @RobinhoodApp #RobinHood pic.twitter.com/0IodtmQIHK

— Will [PurdyAlerts] (@WillPurdyAlerts) March 2, 2020

…what’s it going to be like after yet another outage?

With all eyes focus on the stock market indices, crude oil, and credit markets, VIX is feeling left out and so have exploded back above 60 for the first time since Dec 2008…

As Sven Henrich noted over the weekend, we’re faced with the most critical time since the financial crisis. That’s not my opinion, this is what the $VIX says. It’s behaving in a very unusual and rare way and everyone better pay very close attention. When I made the $VIX 46 call in January it seemed like an idiotic call to make for $VIX moves into the 40’s are extremely rare. But it happened and $VIX hit 46 a week ago and now on Friday $VIX hit 54 before again reverting below the trend line I had originally drawn in January (see Big Calls).

What’s the $VIX really saying here? That the Fed and every central bank on the planet are at high risk of losing total control over these markets in which case $VIX could go to 90 and $SPX could ultimate drop to 1800-2000. That’s not hyperbole, that’s what the charts say, the same charts that told you $VIX 46 was coming and that suggested a big drop was coming.

Last week’s panic rate cut by the Fed was a complete failure.

Again the Fed misread the market and the incompetence is stunning. On February 20 and 21 Fed speakers were arrogantly cheerleading and arguing no rate cuts were necessary. Two weeks later they panic cut. The Fed has been wrong and chasing reality for years now. Everything they’ve done has been in response to markets, the balance sheet roll-off was a failure and now they have expanded to record treasury holdings, their rate cuts since 2019 have all been ineffective and now coronavirus, which in fairness they couldn’t have possibly seen coming, is wreaking havoc on the entire market construct.

Nobody can blame the Fed for the coronavirus, but what I will blame them for is the asset bubble they have created. The multiple expansion they unleashed on markets in 2019 and into early 2020 were a complete reckless disaster and now we’re possibly staring at the greatest bull trap ever.

None of this is normal, none of this speaks of control or calm. These are signs of panic and price movements utterly out of control. A crash in various asset classes.

The risk:

That some funds are getting wiped out and over-leverage and unpreparedness and fear among retail investors will cause the calm passive investing trend to turn into ‘get me out at all cost’ panic selling. A systemic deleveraging the likes of which we have never seen before. And then it wouldn’t matter if the virus situation improves. The damage will already have been done, companies would have to tighten belts, lay off people and the business cycle would turn in earnest:

Nobody can know how this plays out. But be sure they will try to save it and global stimulus is coming. The Fed will be eager to want to rectify its embarrassment last week. They will meet again in March, so will the ECB and the BOJ. The question is: Can they afford to wait this long? Can global fiscal authorities wait this long without offering massive stimulus packages?

The $VIX says they may not be able to afford to wait.

$VIX over 60 was the highest $VIX reading since the financial crisis. This could mean a lot.

There is clearly an opportunity for control to be re-established. Central banks have managed to control volatility every single time it reared its head since the GFC. But right here and now they are challenged more than ever since the crisis. This is very binary. They either retain control or not.

In 2008/09 when they didn’t retain control this happened:

$VIX ran to 90. What’s notable here is that the $VIX 90 spike did not happen at the beginning of the bear market. It happened later when $SPX was already down 30% off the highs. 

So be clear: Just because $VIX makes a high does not mean markets bottom. It has meant that in recent years when central banks remained in control. It does not mean the same thing when they are not in control.

Bottomline here:

We’re witnessing the most profound challenge to central bankers since the GFC. Their appeasement of markets since 2009 has left us all vulnerable. The constant subsidy of markets and the economy as led us to the largest credit and asset bubble in our lifetimes and the architects of the monstrosity have left themselves weak and depleted. They are now begging for fiscal stimulus from governments that are traditionally slow to react. The big bazookas will come the question whether it will be too late.

Fact is markets last week failed to recapture the big trend line:

Unless they can recapture this fast, i.e. this in this next week or two it looks to be a massive bull failure.

The $VIX is screaming from the top of its lungs: Intervene NOW! There is massive damage inflicted underneath with potential for far reaching systemic ramifications and the very same people the called for calm and higher prices in February are suddenly waking up to all this.

Markets are massively oversold at the moment, but oversold can stay oversold if systemic selling commences in earnest. The up and down of last week highlights not only the bear market nature of this market at the moment, but also accentuates an important tactical message: Don’t be stubborn about anything. There is massive risk to the downside as well as the upside.

With everything, literally everything, crashing, traders (at least of the bullish persuasion) have one final hope: that either the Fed or the government will step in and – as has happened every time after even a modest correction in the past decade – bail them out.

Goldman is no different, and as the bank’s US economist David Mericle writes, here are some of the monetary and fiscal stimuli the government can pursue as soon as this morning, together with some considerations:

Monetary

1. Expect the Fed to ease in March and April, but only have 100bp to go
2. Forward guidance (once cut to zero), but will have limited impact given where rates are
3. Start asset purchase programme (but can’t buy corporate debt)

Bottom line: Goldman thinks impact of monetary easing from here is between 50% and 75% of medium past recessions
 
Fiscal

Need to address 3 issues:

1. Lost aggregate demand –  Income tax cuts, payroll cut, policies to keep local governments spending
2. Lost jobs – Extend unemployment and under-employment insurance (as per GFC).
3. Cash shortage – Re-allow carry back of operating losses. Increase funding for small business lending. Direct aid or loans to airlines.

Goldman also notes that in 2008 congress passed a stimulus package despite a divided government.

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In a separate note published shortly after,  Goldman’s chief economist, Jan Hatzius disclosed his own updated views on the shape of “The Policy Response”, in which he ominously notes that while “monetary policy is probably not particularly effective at the moment” he expects a 50bps cut in March “in part because the bond market is already priced for a large move and the FOMC will likely be reluctant to risk further tightening in financial conditions by refusing to deliver.” He is also “penciling in a final 50bp cut at the April 28-29 meeting” even as he writes that fiscal policy is “probably the more potent tool”, which in turn goes back to market whispers over the weekend that nothing short of a $1+ trillion package will rescue the market.

Here are the key excerpts from his note:

… monetary policy is probably not particularly effective at the moment. Not only are lower borrowing costs unlikely to induce spending by people who are afraid of face-to-face interactions, but in addition, many central banks are already close to the effective lower bound on interest rates. Nevertheless, monetary policymakers will want to do what they can. Tuesday’s FOMC statement that the committee “will act as appropriate to support the economy” points to further easing at the March 17-18 FOMC meeting.

We now expect a 50bp cut, in part because the bond market is already priced for a large move and the FOMC will likely be reluctant to risk further tightening in financial conditions by refusing to deliver. We are also penciling in a final 50bp cut at the April 28-29 meeting.

Outside the US, we expect further easing from central banks including the ECB (10bp on rates plus increased QE purchases), the Bank of England (50bp), the Bank of Canada (another 75bp), and the Reserve Bank of Australia (another 25bp).

Fiscal policy is probably the more potent tool. Beyond funding for virus testing and treatment, the most direct avenue is aid to corporates and small businesses, especially in sectors hit by the virus shock. A US precedent is the post-9/11 help for  the airline industry, which involved $5bn in direct payments and up to $10bn in loan guarantees. Another avenue—at least in the US where the central bank is very limited in what it can legally buy—is for the Treasury to backstop credit easing facilities for the Fed; however, it would probably take a material further deterioration in market conditions and functioning for such facilities to be reestablished.