Category: zerohedge

Authored by Lance Roberts via RealInvestmentAdvice.com,

In a recent post, I discussed the “3-stages of a bear market.”  To wit:

“Yes, the market will rally, and likely substantially so.  But, let me remind you of Bob Farrell’s Rule #8 from our recent newsletter:

Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

1. Bear markets often START with a sharp and swift decline.

2. After this decline, there is an oversold bounce that retraces a portion of that decline.

3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

However, the “bear market” is only one-half of a vastly more important concept – the “Full Market Cycle.”

The Full Market Cycle

Over the last decade, the media has focused on the bull market, making an assumption that the current trend would last indefinitely. However, throughout history, bull market cycles make up on one-half of the “full market” cycle. During every “bull market” cycle, the market and economy build up excesses, which must ultimately be reversed through a market reversion and economic recession. In the other words, as Sir Issac Newton discovered:

“What goes up, must come down.” 

The chart below shows the full market cycles over time. Since the current “full market” cycle is yet to be completed, I have drawn a long-term trend line with the most logical completion point of the current cycle.

[Note: I am not stating the markets are about to crash to the 1600 level on the S&P 500. I am simply showing where the current uptrend line intersects with the price. The longer that it takes for the markets to mean revert, the higher the intersection point will be. Furthermore, the 1600 level is not out of the question either. Famed investor Jack Bogle stated that over the next decade we are likely to see two more 50% declines.  A 50% decline from the all-time highs would put the market at 1600.]

As I have often stated, I am not bullish or bearish. My job as a portfolio manager is simple; invest money in a manner that creates returns on a short-term basis, but reduces the possibility of catastrophic losses, which wipe out years of growth.

Nobody tends to believe that philosophy until the markets wipe about 30% of portfolio values in a month.

The 4-Phases

AlphaTrends previously put together an excellent diagram laying out the 4-phases of the full-market cycle. To wit:

“Is it possible to time the market cycle to capture big gains? Like many controversial topics in investing, there is no real professional consensus on market timing. Academics claim that it’s not possible, while traders and chartists swear by the idea.

The following infographic explains the four important phases of market trends, based on the methodology of the famous stock market authority Richard Wyckoff. The theory is that the better an investor can identify these phases of the market cycle, the more profits can be made on the ride upwards of a buying opportunity.”

So, the question to answer, obviously, is:

“Where are we now?”

Let’s take a look at the past two full-market cycles, using Wyckoff’s methodology, as compared to the current post-financial-crisis half-cycle. While actual market cycles will not exactly replicate the chart above, you can clearly see Wyckoff’s theory in action.

1992-2003

The accumulation phase, following the 1991 recessionary environment, was evident as it preceded the “internet trading boom” and the rise of the “dot.com” bubble from 1995-1999. As I noted previously:

“Following the recession of 1991, the Federal Reserve drastically lowered interest rates to spur economic growth. However, the two events which laid the foundation for the ‘dot.com’ crisis was the rule-change which allowed the nation’s pension funds to own equities and the repeal of Glass-Steagall, which unleashed Wall Street upon a nation of unsuspecting investors.

The major banks could now use their massive balance sheet to engage in investment-banking, market-making, and proprietary trading. The markets exploded as money flooded the financial markets. Of course, since there were not enough ‘legitimate’ deals to fill demand and Wall Street bankers are paid to produce deals, Wall Street floated any offering it could despite the risk to investors.”

The distribution phase became evident in early-2000 as stocks began to struggle.

Names like Enron, WorldCom, Global Crossing, Lucent Technologies, Nortel, Sun Micro, and a host of others, are “ghosts of the past.” Importantly, they are the relics of an era the majority of investors in the market today are unaware of, but were the poster children for the “greed and excess” of the preceding bull market frenzy.

As the distribution phase gained traction, it is worth remembering the media and Wall Street were touting the continuation of the bull market indefinitely into the future. 

Then, came the decline.

2003-2009

Following the “dot.com” crash, investors had all learned their lessons about the value of managing risk in portfolios, not chasing returns, and focusing on capital preservation as the core for long-term investing.

Okay. Not really.

It took about 27-minutes for investors to completely forget about the previous pain of the bear market and jump headlong back into the creation of the next bubble leading to the “financial crisis.” 

During the mark-up phase, investors once again piled into leverage. This time not just into stocks, but real estate, as well as Wall Street, found a new way to extract capital from Main Street through the creation of exotic loan structures. Of course, everything was fine as long as interest rates remained low, but as with all things, the “party eventually ends.”

Once again, during the distribution phase of the market, the analysts, media, Wall Street, and rise of bloggers, all touted “this time was different.” There were “green shoots,” it was a “Goldilocks economy,” and there was “no recession in sight.” 

They were disastrously wrong.

Sound familiar?

2009-Present

So, here we are, a decade into the current economic recovery and a market that has risen steadily on the back of excessively accommodative monetary policy and massive liquidity injections by Central Banks globally.

Once again, due to the length of the “mark up” phase, most investors today have once again forgotten the “ghosts of bear markets past.”

Despite a year-long distribution in the market, the same messages seen at previous market peaks were steadily hitting the headlines: “there is no recession in sight,” “the bull market is cheap” and “this time is different because of Central Banking.”

Well, as we warned more than once, all that was required was an “exogenous” event, which would spark a credit-event in an overly leveraged, overly extended, and overly bullish market. The “virus” was that exogenous event.

Lost And Found

There is a sizable contingent of investors, and advisors, today who have never been through a real bear market. After a decade long bull-market cycle, fueled by Central Bank liquidity, it is understandable why mainstream analysis believed the markets could only go higher. What was always a concern to us was the rather cavalier attitude they took about the risk.

“Sure, a correction will eventually come, but that is just part of the deal.”

As we repeatedly warned, what gets lost during bull cycles, and is always found in the most brutal of fashions, is the devastation caused to financial wealth during the inevitable decline. It isn’t just the loss of financial wealth, but also the loss of employment, defaults, and bankruptcies caused by the coincident recession.

This is the story told by the S&P 500 inflation-adjusted total return index. The chart shows all of the measurement lines for all the previous bull and bear markets, along with the number of years required to get back to even.

What you should notice is that in many cases bear markets wiped out essentially all or a very substantial portion of the previous bull market advance.

There are many signs suggesting the current Wyckoff cycle has entered into its fourth, and final stage. Whether, or not, the current decline phase is complete, is the question we are all working on answering now.

Bear market cycles are rarely ended in a month. While there is a lot of “hope” the Fed’s flood of liquidity can arrest the market decline, there is still a tremendous amount of economic damage to contend with over the months to come.

In the end, it does not matter IF you are “bullish” or “bearish.” What matters, in terms of achieving long-term investment success, is not necessarily being “right” during the first half of the cycle, but by not being “wrong” during the second half.

In what was by far his harshest criticism of the international agency to date, President Trump slammed the WHO in a tweet, accusing it of doing the bidding of China while taking the US’s money, and hinted that he would be giving American funding to the organization “a good look”, a statement that certainly won’t sit well with Trump’s critics, who will accuse the president of slashing funding to a vital public health institution in the middle of an unprecedented pandemic.

The W.H.O. really blew it. For some reason, funded largely by the United States, yet very China centric. We will be giving that a good look. Fortunately I rejected their advice on keeping our borders open to China early on. Why did they give us such a faulty recommendation?

— Donald J. Trump (@realDonaldTrump) April 7, 2020

Though the WHO has been helpful in providing tests around the world, the agency has faced plenty of criticism for appearing to kowtow to Beijing and parrot its lies and propaganda. Beijng also provides a solid chunk of the WHO’s funding, as the chart below shows:

Trump boasted that he did the right thing and ignored the WHO’s advice when he imposed his China travel ban, and as studies have shown in recent weeks, that was perhaps the best decision his administration made during the response so far.

Amid a surge in demand for the first tranche, the US Treasury is preparing to ask Congress for a further $200 billion for the small business lending program, the Washington Post reported on Tuesday.

This would increase the total size of the so-called Paycheck Protection Program (PPP) to $550 billion.

As WaPo notes, Banks and the Small Business Administration have been overwhelmed by applications since the program began operating on Friday, leading President Trump, Sen. Marco Rubio (R-Fla.) – who authored the program – and others to predict the need for more funds.

Senate Majority Leader Mitch McConnell (R-Ky.) on Tuesday said he would work with Treasury Secretary Steven Mnuchin and Senate Minority Leader Charles E. Schumer (D-N.Y.):

“Congress needs to act with speed and total focus to provide more money for this uncontroversial bipartisan program. I will work with Secretary Mnuchin and Leader Schumer and hope to approve further funding for the Paycheck Protection Program by unanimous consent or voice vote during the next scheduled Senate session on Thursday,” McConnell said in a statement.

The fact that Treasury would make the request on just the third day of the program’s existence underscores the surging demand for businesses to obtain financing as many of them struggle to avoid closing.

Helicopter money is truly here…

 

For the past six years, and especially in 2015 when Yanis Varoufakis tried to stage a mutiny within the Eurozone and using some truly convoluted “game theory” ended up causing a near collapse of the Greek banking sector and the loss of hundreds of billions in deposits which the ECB held hostage, Greece had found itself in the Animal Farm position of being part of the Eurozone yet somehow its bonds were not at first not eligible for ECB purchases, and later, did not quality as collateral for Eurosystem credit operations.

That changed on Tuesday afternoon when, as part of a “unprecedented” and temporary (yeah, sure) package meant to ease collateral measures to “mitigate the tightening of financial conditions across the euro area” (read push stock prices higher), the ECB said it would grant a waiver to accept Greek sovereign debt instruments as collateral in Eurosystem credit operations. In short, the debt which as everyone found out 5 years ago was worthless excluding its ECB backstop, will now serve as money good collateral for countless banks which borrow against Greek bonds.

But the ECB’s decision to include Greek bonds as eligible collateral is just part of it: perhaps the biggest surprise is that the central banks decided to “temporarily increase its risk tolerance level in credit operations” through a general reduction of collateral valuation haircuts by a fixed factor of 20%.

This adjustment aims to contribute to the collateral easing measures while maintaining a consistent degree of protection across collateral asset types, albeit at a temporarily lower level.

In short, asset values in Europe are collapsing, and since every asset is someone else’s liability, the ECB is scrambling to make sure that there is a sufficient buffer to withstand another sharp drop in risk prices.

Below is the full ECB presser:

ECB announces package of temporary collateral easing measures

• ECB adopts an unprecedented set of collateral measures to mitigate the tightening of financial conditions across the euro area
• Temporary increase in the Eurosystem’s risk tolerance in order to support credit to the economy
• ECB eases the conditions for the use of credit claims as collateral
• ECB adopts a general reduction of collateral valuation haircuts
• Waiver to accept Greek sovereign debt instruments as collateral in Eurosystem credit operations
• ECB will assess further measures to temporarily mitigate the effect on counterparties’ collateral availability from rating downgrades

The Governing Council of the European Central Bank (ECB) today adopted a package of temporary collateral easing measures to facilitate the availability of eligible collateral for Eurosystem counterparties to participate in liquidity providing operations, such as the targeted longer-term refinancing operations (TLTRO-III). The package is complementary to other measures recently announced by the ECB, including additional longer-term refinancing operations (LTROs) and the Pandemic Emergency Purchase Programme (PEPP) as a response to the coronavirus emergency. The measures collectively support the provision of bank lending especially by easing the conditions at which credit claims are accepted as collateral. At the same time the Eurosystem is increasing its risk tolerance to support the provision of credit via its refinancing operations, particularly by lowering collateral valuation haircuts for all assets consistently.

The emergency collateral package contains three main features.

First, the Governing Council decided on a set of collateral measures to facilitate an increase in bank funding against loans to corporates and households. This will be achieved by expanding the use of credit claims as collateral, in particular through the potential expansion of the additional credit claims (ACCs) frameworks. The ACC framework provides the possibility to National Central Banks to enlarge the scope of eligible credit claims for counterparties in their jurisdictions. This includes the possibility to accept loans with lower credit quality, loans to other types of debtors, not accepted in the ECB’s general framework, and foreign-currency loans.

In this respect, the Governing Council decided to temporarily extend the ACC frameworks further by:

• Accommodating the requirements on guarantees to include government and public sector guaranteed loans to corporates, SMEs and self-employed individuals and households in the ACC frameworks in order to also provide liquidity against loans benefiting from the new guarantee schemes adopted in euro area Member States as a response to the coronavirus pandemic;
• Enlarging the scope of acceptable credit assessment systems used in the ACC frameworks, for example by easing the acceptance of banks’ own credit assessments from internal rating-based systems that are approved by supervisors;
• Reducing the ACC loan level reporting requirements to allow counterparties to benefit from the ACC frameworks even before the necessary reporting infrastructure is put in place.

Second, the Governing Council further adopted the following temporary measures:

• A lowering of the level of the non-uniform minimum size threshold for domestic credit claims to EUR 0 from EUR 25,000 previously to facilitate the mobilisation as collateral of loans from small corporate entities;
• An increase, from 2.5% to 10%, in the maximum share of unsecured debt instruments issued by any single other banking group in a credit institution’s collateral pool. This will enable counterparties to benefit from a larger share of such assets.
• A waiver of the minimum credit quality requirement for marketable debt instruments issued by the Hellenic Republic for acceptance as collateral in Eurosystem credit operations.

Third, the Governing Council decided to temporarily increase its risk tolerance level in credit operations through a general reduction of collateral valuation haircuts by a fixed factor of 20%. This adjustment aims to contribute to the collateral easing measures while maintaining a consistent degree of protection across collateral asset types, albeit at a temporarily lower level.

These measures are temporary for the duration of the pandemic crisis and linked to the duration of the PEPP. They will be re-assessed before the end of 2020, also considering whether there is a need to extend some of these measures to ensure that Eurosystem counterparties’ participation in its liquidity providing operations is not adversely affected.

In addition, as part of the regular review of its risk control framework, the Governing Council decided to adjust the haircuts applied to non-marketable assets, both in the general collateral framework and for ACCs, by fine-tuning some of the haircut parameters. This adjustment, which is not linked to the duration of the PEPP, applies in addition to the temporary haircut reduction and thus further supports the collateral easing measures while maintaining adequate risk protection. This leads on average to a further haircut reduction of this type of collateral by around 20%.

Furthermore, the Governing Council has mandated the Eurosystem committees to assess measures to temporarily mitigate the effect on counterparties’ collateral availability from rating downgrades arising from the economic impact of coronavirus, while continuing ensuring collateral adequacy.

Authored by Simon Black via SovereignMan.com,

In the early 1980s, doctors and medical researchers around the world were confounded by the growing number of young, otherwise healthy patients who were dying of rare infections that typically only occurred in people with very weak immune systems.

The situation was so alarming that the CDC in the United States set up a special task force in 1982 to study the condition and stop its spread.

By 1983 the medical community had found the answer: they discovered a terrifying new retrovirus that utterly and permanently vanquished the human immune system.

This retrovirus eventually became known as the Human Immunodeficiency Virus– HIV. And nearly four decades later, while there has been substantial progress in treatment and prevention, there is still no vaccine.

Then there’s shingles – an infection caused by the varicella-zoster virus– which is brutally painful for older adults.

GlaxoSmithKline produces a vaccine for this virus called Shingrix that took them more than 10 years to develop and test. And the company has stated repeatedly that they are overwhelmed with demand: hundreds of millions of people want the vaccine.

A few months ago, Glaxo announced that they already reached maximum production capacity of the vaccine, and they’ll have to build a new bioreactor facility just to increase production to ~20 million units per year.

That new facility won’t be online until 2024.

Obviously the novel Coronavirus is different. Its biology is different, the circumstances are different.

But there does seem to be a prevailing attitude worldwide that there will be a vaccine ‘within 12-18 months.’

We can certainly hope so. Fingers crossed.

But this “12-18 month” estimate has been repeated so many times by politicians, reporters, etc. that the public now views it as a foregone conclusion.

And there seems to be zero consideration given to the possibility that, maybe just maybe, vaccine development could take a lot longer.

Or perhaps, even if a vaccine is rapidly developed, that it would take at least five years to produce, transport, and administer BILLIONS of vaccines.

Think about it– Glaxo will spend the next four years building a new facility just to be able to produce 10-20 million annual units of its Shingles vaccine.

How many biotech facilities worldwide will be needed to produce billions of coronavirus vaccines?

And even if existing production centers are able to quickly switch from producing other drugs and start producing coronavirus vaccines– what will be the opportunity cost?

If the world manages to be able to produce billions of vaccines, who will be left to produce cancer drugs? Or antibiotics? Or the countless other life-saving drugs that people depend on?

I’m not writing all of this to be negative. Far from it. And it’s important to remember that absolutely every scenario is on the table right now, including positive and favorable ones.

But there are clearly a number of reasons why this pandemic could last much longer than most people probably think. So it’s prudent to be physically, mentally, and financially prepared for that reality.

If this virus has taught us anything, it’s that tomorrow can be radically different than today.

This goes against some of our most basic human tendencies, what psychologists call ‘cognitive bias’.

The bottom line is that our brains cling to the idea that tomorrow is going to be just like today. And we have a very difficult time accepting rapid change.

And even when radical changes do take place and we eventually become accustomed to our new realities, we still cling to the belief that things can’t get any worse.

They can. Again, anything is possible now. All scenarios are on the table. So it would be dangerous to assume that it can’t get any worse, or that the pandemic won’t drag on for a longer period of time.

Back in early February before the virus became a global concern, I suggested that you stock up on food and masks before it all hit the fan.

I want to suggest the same thing again today– at least the food part.

It is entirely possible that we could see supply chain disruptions. It’s not a certainty—nothing is certain right now. But there are pretty obvious risks.

Chances are high that whatever you ate for breakfast this morning probably originated in some far off place.

The food on your plate can easily travel hundreds if not thousands of miles before it arrives to your table, starting off in a farmer’s field, to an inspection center, and then to the port where it is shipped/trucked/railed/flown to a regional distribution center and ultimately to your grocery store.

The global food supply chain is incredibly complex and not especially resilient; I’ve seen this firsthand over the past few years from running a large agriculture business.

I don’t think it’s likely that the global supply chain would shut down completely. But there’s definitely a risk for hiccups, i.e. slowdowns that cause delays and sporadic shortages.

This kind of scarcity could create some high stress situations in the grocery store; just take a look at Black Friday videos on YouTube to get a sense of what I’m talking about.

It’s best to avoid that kind of environment altogether. So I’d definitely encourage you to stock up on food, and remain stocked up.

This isn’t about being paranoid. We can hope for the best, but still acknowledge this pandemic could last a lot longer, and understand that the supply chain wasn’t designed to function under such stress.

Nothing is certain. But stocking up on food is a simple precaution to offset some obvious risks… which is the cornerstone of any good Plan B.

And to continue learning how to ensure you thrive no matter what happens next in the world, I encourage you to download our free Perfect Plan B Guide.

For two weeks in a row the clients of top Wall Street firms – first Goldman then Morgan Stanley – had just one question for their highly paid financial advisors: was March 23, the day the Fed went all in and announced unlimited QE and corporate bond buying, the market bottom, similar to the start of the Great Depression or in a repeat of 1987, will stocks stage another sharp drop – similar to the events after Black Monday – only to recover faster?

The truth is that for all the highly convicted debate – especially among the bulls none of whom foresaw this crash but are now absolutely certain it is ending – nobody knows what happens next, especially since following the Fed’s latest barrage of market bailouts, any link between asset prices and underlying fundamentals has been completely severed and replaced with Fed promises, backstops and excess liqiudity which is keeping all risk assets propped up artificially at least until a new round of questions about Fed credibility emerges.

As such the most probable answer for what is behind the violent rebound in the past two weeks belongs to Nomura quant Masanari Takada, who writes this morning that the steep rally in global equities is nothing more than a giant “bear squeeze” rally, driven by panicked exits from shorts that investors accumulated during the downturn, something we pointed out yesterday when we showed that Monday’s action was the 2nd biggest marketwide short-squeeze in history.

As Takada notes, “it is not as though worry over the coronavirus pandemic has been swept away” but since investor sentiment was finding support in signs that the virus’s spread in Europe and the US is on course to peak and start slowing, “this was already set to be a week in which CTAs were likely to back out of short positions in US equity futures,” so Nomura thinks “it is best to assume that the rally is largely technically driven.”

If indeed this is nothing more than short profit-taking, Nomura cautions that it is very much unclear whether the market gains will hold up once the bear squeeze has run its course, and notes that “projecting scenarios based on longer-term  fundamentals onto the present market is something best avoided.”

Here are some additional details on who was squeezed most from Takada:

The squeeze on CTAs’ short positions has been led by speculative investors recently making contrarian trades, and here we would single out absolute return funds and event-driven funds, both of which favor short-term trades with a strong element of seizing on opportunities.

It appears to us that a powerful wave of contrarian trades by quick-moving investors such as these has left trend-chasing CTAs without an  incentive to stick with their short-term bear trades.”

As Nomura suggests, it may help here to look in detail at CTAs’ positions in US equity futures markets. The Japanese bank estimates that CTAs’ net short position as in S&P 500 futures is now about 20% smaller than it was at its 3 April peak. Given how volatile the market has been, it makes sense to think in terms of broad ranges rather than precise numbers, but
the bank thinks that the S&P 500 could rise to around 2,700 if CTAs were to exit their short position in its entirety. And with the S&P now trading well above that as of Tuesday morning, one can argue that the CTA short squeeze is over and no more forced liquidations are coming.

In DJIA futures, meanwhile, CTAs in the aggregate had built up a fairly substantial net short position, but as with S&P 500 futures, Takada estimates that the short position shrank by about 11% amid the market’s gains yesterday (6 April). Should CTAs continue being squeezed out of their short positions, the DJIA could rise to around 24,000.

Finally, while of secondary importance to the broader market, Nomura also estimates that CTAs are in the process of covering short positions in most major agricultural commodity futures markets, and have in fact already swung net long on CBT wheat  futures and CBT soybean meal futures. Why does this matter? Because as Takada says, As far as wheat prices and soybean meal prices are concerned, then, we think attention should be given not only to the impact of fundamentals but also to the activity of trend-following investors in futures markets

d

 

Authored by Paul Joseph Watson via Summit News,

Authorities in Paris have announced they will ban outdoor exercise between the hours of 10am and 7pm as the coronavirus lockdown tightens.

“All physical exercise – running, walking – will be banned in Paris between 10am and 7pm from tomorrow (Wed April 8) as part of ever stricter Coronavirus lockdown, by order Paris Police Prefecture & city council,” tweets Paris-based journalist Peter Allen.

“Aim is to keep crowds down. What about pre-10am & post-7pm crowds?” he asks.

All physical exercise – running, walking – will be banned in Paris between 10am and 7pm from tomorrow (Wed April 8) as part of ever stricter Coronavirus lockdown, by order Paris Police Prefecture & city council…Aim is to keep crowds down. What about pre-10am & post-7pm crowds?

— Peter Allen (@peterallenparis) April 7, 2020

Indeed, respondents questioned whether the new rule would just create a bottleneck of joggers and cyclists in the early and later hours, making social distancing even harder.

Others pointed out that the rules are designed to prevent people congregating in parks to sunbathe, something that has been a big issue in other cities such as London, and will also protect elderly people doing early morning grocery shopping.

Earlier today, France reported 833 new coronavirus deaths over the previous 24 hour period, the highest daily total since the outbreak began.

France, which forces its citizens to carry papers explaining why they are outside, is imposing further lockdown measures despite other European countries like Austria beginning to relax them.

Chancellor Sebastian Kurz announced plans to begin to re-open the economy starting next week, starting with shops and then other industries, including pubs and restaurants which will open by the end of next month.

Austria closed its border with COVID-19 stricken Italy on March 11, which undoubtedly contributed to the fact that the country has lower total coronavirus infections than its neighbors.

*  *  *

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Infamous for his massive (winning) “big short” bet against mortgage securities before the 2008 financial crisis, Michael Burry, the doctor-turned-hedge-fund-manager has been on a multi-day Twitter rant claiming that the lockdowns intended to contain the COVID-19 pandemic are worse than the disease itself.

Echoing the thoughts of many, Burry opined in a series of tweets over the past two weeks that the government-enforced lockdowns and business shutdowns across America may trigger one of the country’s deepest-ever economic contractions, and further still, are not necessary to contain the epidemic (on March 22nd).

COVID-19 policy cannot be settled by CYA politicians career ID docs. Too much hammer/nail and too little common sense. 

POTUS must reflect the interests of the working class and small business here – the economy cannot crash 30% to save the 0.2%.

Set America Free!

If COVID-19 testing were universal, the fatality rate would be less than 0.2%.

This is no justication for sweeping government policies, lacking any and all nuance, that destroy the lives, jobs, and businesses of the other 99.8%.

Furthermore, Burry – who earned his M.D. at the Vanderbilt University School of Medicine – has also dared to say that some controversial treatments for COVID-19, such as the malaria drug hydroxycloroquine, should be made more widely available (on March 24).

Prudent plan:

1) Standardize on chloroquine and azithromycin -cheap and available

2) Sick and elderly voluntarily shelter in place. 

3) Americans lead their normal lives with extra hand washing and special care if around elderly.

Saving the economy means life, not murder.

Additionally, in an email to Bloomberg News, Burry wrote that “universal stay-at-home is the most devastating economic force in modern history… And it is man-made. It very suddenly reverses the gains of underprivileged groups, kills and creates drug addicts, beats and terrorizes women and children in violent now-jobless households, and more. It bleeds deep anguish and suicide.“

Additionally, as Bloomberg’s Reed Stevenson reports, Burry responded to questions via email to offer more thoughts on the pandemic and the response to the outbreak…

How the Pandemic Happened

“This is a new form of coronavirus that emanated from a country, China, that unfortunately covered it up. That was the original sin. It transmits very easily, and within the first month it was likely all over the world. Very poor testing infrastructure created an information vacuum as cases ramped, ventilator shortages were projected. Politicians panicked and media filled the space with their own ignorance and greed. It was a toxic mix that led to the shutdown of the U.S., and hence much of the world economy.”

“In hindsight, each country should have immediately ramped up rapid field testing of at-risk groups. But as I understand it, the CDC was tasked with some of this, and botched it, and other departments were no better. The bureaucracy failed in a good number of countries. Turf wars and incompetence has ruled the day. So the political cover for that failure on the part of the technocrats and politicians is a very harsh stay-at-home policy.”

The U.S. Policy Response

“If there was ever a time for the government to stimulate with fiscal and monetary policy, it is now. Unfortunately, the U.S. has been adding $3 for every $1 of new GDP over a very long time, and interest rates were already near zero. Still, nothing is more important now that loans to small and mid-sized businesses, and the U.S. Treasury, backed by the Fed, is providing that liquidity, which is vital.”

Potential Treatments

“It’s pretty clear that hydrochloroquine is doing something good for many Covid-19 patients. The standard in medicine is a placebo-controlled double-blind study. But there is no time for that. The technocrats at the top are getting this wrong. Do the studies, make the vaccines, but allow doctors to have what they feel is working now. Don’t take tools or drugs out of the treating doctors’ hands. Trump should use the Defense Production Act more liberally in this area.”

“A more nuanced approach would be for at risk groups — the obese, old and already-sick — to shelter in place, to execute widespread mandatory testing, and to ID and track as necessary while allowing society to function. Again, Trump should get the massive contract manufacturers like Flextronics to make testing machines.”

Getting Back to Normal

“I would lift stay-at-home orders except for known risk groups. We already know certain conditions that are predictive of severe disease. Especially since young healthy lungs tend to be resistant, I would let the virus circulate in the population that is not likely to get severe disease from it. This is the only path that comes close to balancing the needs of all groups. Vaccines are not coming anytime soon, so natural immunity is the only way out for now. Every day, every week in the current situation is ruining innumerable lives in a criminally unjust manner.”

“When it comes to vaccines, coronaviruses are not known for imparting enduring immunity, and this will be one big challenge. It seems the genetic code is relatively conserved, and this will help the development of the vaccine. But we’re still looking at the end of the year. In the meantime, the world is an innovative place, and I expect many effective treatments — both new and repurposed — shortly. The question then will be regulation, expense and availability.”

“Medically, the new normal will be the old normal. As long as innovation continues, medicine will conquer everything in our way.”

Japan’s Response

“I believe Prime Minister Shinzo Abe is trying his best to manage through the situation without shuttering the economy. He sees what it has done to the U.S., and would rather not force a shut in, but instead asks for common sense. Japan has certain features — such as a largely lawful and well-educated society — that make this more possible. As do Taiwan, Singapore, Korea.”

Business Recovery

“Economically speaking, we have to realize the policy-driven demand shock will be resolved by 2021. But Japan and the U.S. are putting more than 20% of the GDP into new fiscal stimulus, and easy money will be the rule. Those things will all bring stock and debt markets back.”

“Countries will also look to bring supply chains home, and many employees will need retraining with higher cost. When we start working and playing again, inflation may be in store. The other big point is that consumers have learned new behaviors, which will drive business churn.”

Finally, on the investment side, Burry told Bloomberg News last month that he placed a “significant bearish market bet that is working out for now,” without providing details except to say it was a trade of a “good size” against indexes. He said the pandemic could unwind the passive investment boom, which he has compared to purchases of collateralized debt obligations that fueled the pre-2008 mortgage bubble.

There was some good and some bad news in today’s JOLTs/job openings report.

The good news was that coming in at 6.882 million, down modestly from 7.012 million in January, the number smashed consensus expectation of 6.5 million which in turn was a surprisingly low number which we attribute to the fact that most analyst forgot that i) JOLTs is delayed by an extra month and ii) there were no adverse covid impacts in February.

The bad news is that since the number is for February, it is completely meaningless, especially since we now know that according to much more recent unemployment claims, the US economy has now lost over 10 million jobs in just the past two weeks.

According to the DOL, the job openings decreased in real estate and rental and leasing (-30,000) and information (-29,000). The number of job openings was little changed in all four regions.

The surprisingly strong job openings number meant that for the 24th consecutive month, there were more job openings than unemployed people. That, however, is set to change next month because we already know that the number of unemployed workers soared in March so all we need is the matching data from the JOLTS report, at which point the longest stretch of more job openings than unemployed people will be over.

There was some more good, if meaningless news, in the number of hjires, which dipped by a modest 29K to 5.896MM, even as the matched number of 12-month rolling job change suffered a sharp drop in March. The number of hires was little  changed at 5.9 million while the rate was unchanged at 3.9. percent. The hires level increased in durable goods manufacturing (+29,000). As above, expect to see hirings to slow in March and then grind to a halt in April.

In short, a good report if now totally irrelevant since the entire world changed in March, when we expect to see a collapse in the next JOLTS report which will be released one month from today.

 

Submitted by Jacques Simon,

In our last post we touted a too-big too fail return in the commodity-sector (a name nobody dare to pronounced. Today prices are down but market volatility is up (VaR is up, prices are down). Capital one, a FDIC-insured bank is allowed to skip a $1B margin call related to energy exposure of an undisclosed nature.

Zero Hedge suggested that the CFTC (Fed by extension) was quietly bailing out Capital One.

`As part of that business, Capital One enters into commodity swaps with its commercial oil and gas clients to help them mitigate the risk of energy price swings and the related borrowing risks. Typically, those trades do not bring Capital One’s swaps exposure anywhere close to the CFTC’s registration threshold, according to the CFTC’s Friday notice“.

But the 50% plunge in crude oil prices caused by the coronavirus and a flood of supply by top producers has seen its exposure on those swaps balloon, putting it on course to hit the threshold by the end of this month, the CFTC said.

As Reuters details, the threshold kicks in if a bank has $1 billion in daily average aggregate commodity swap exposure that is not secured by collateral, such as cash margin. Which, it appears, was the case with CapitalOne.

“Why was Capital one spec-ing long crude anyway” asked a trader?

He noted that they cannot really call it a “hedge“ as they are directly hurt by falling prices…

– Capital One is not registered as a swap dealer, nor is a major swap participant with the CFTC. -How in the course of normal lending can they be long the equivalent of 50,000 Nymex contracts.

“The cumulative exposure facing Capital One would be many billions, and could potentially render the bank insolvent“.

The Virginia-based lender with less than a 1.5% exposure to the U.S energy and 3-sig worst case scenario prints a $1B loss or (is it more a $2B). These inputs can be left for further scrutiny.

• Moreover raising the risk ceiling instead of triggering a margin call shows that FED-BIS enacted rules (VaR, minimum capital requirements) are malleable.

• In other words, the people in charge of stability are avoiding the institution realizing its loss and they are now MTM (at a loss) somewhere on the balance-sheet.

• Meanwhile, NYMEX Traders are frisked; initial margins are now at 50%…

• Minimum 1/4 of the liquidity has evaporated. Volatility is bigger, this is not too good for hedgers but some of it might just be self-inflicted we muse.

The Capital One pseudo-bailout remains the greatest mystery since the loss of the merchant card processing with Costco wholesale. Jokes aside, nobody really knows what is exactly their exposure to energy, only that they raised a white flag, “we surrender.”

What’s in the left tail, and why the the CFTC won’t let the CME liquidating the long positions (self-liquidate this risk)?

We muse that behind Capital One’s $1B m-t-m (soon to become loss) exposure there is a structured deal that was not recognized fully as a commodity exposure by the bank regulators. It was only uncovered in the recent times, when the energy prices drastically dropped. Risks can often be the biggest movers in these energy sell-offs. Jacques, S and Simondet, A. (2016)“Traders or Commodity Finance Banks”, explains the role of the commodity prepays, simplify their mechanics and link them to market risk.  We focused on the role of the traders, using the prepays to lend money.

Traders using prepays to offshore producers, lack a credit rating have utilized the commodity pre-financing to open their document letter of credits collateralized by the oil. A lot of these deals have squandered: with inadequate cash sufficient to preserve the prepaid transaction’s cash flows, the physical flows were brought to a halt.

By contrast in the U.S, the commodity prefinancing facilities are asset-based. The pre-pay would be linking the financial institutions with a credit rating to utilities purchasing natural gas with a gas supply agreements tied to a swap line.

In these gas supply agreements, the physicality is very minimum except for one thing; the take-or-pay(s) feature in the contracts. Take or pay is a type of provision in a purchase contract that guarantees the seller a minimum portion of the agreed on payment if the buyer does not follow through with actually buying the full commodity.

Pipelines cannot be easily stop so the deltas between the contract prices (and tied to the loans) require a cash settlement. Utilities are rate-based, and cannot pass their loss to their customers (fuel cost adjustments).

Likely that’s how Capital One would be long (namely on the Henry Hub) through the exposure of a debt laden utility ( both forced to hedge long NYMEX in any times), but rejecting gas (forced by capacity planning).

It suggests this interpretation on what those Commodity pre-pays are: margin calls funding on a long.

Capital One doesn’t have to be necessarily trading to lose; simply its gross nominal swap exposure can increase by the mere fact that it agreed to fund margin calls (it is part of the commodity pre-pays, the name of bank, as a guarantor, enables the utility to fund it’s gas purchases).

The CFTC knows that these funding agreements cannot be easily unwound so it prefers to wait for markets to return to a normal state below the bank $1B limit.