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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.

Iranian lawmakers and senior regime officials, “Corona Ted” and President of Portugal aren’t the only international VIPs to catch – or be exposed to – the coronavirus.

Sveriges Riksbank Deputy Governor and Stockholm University economics professor Martin Floden has tested positive for the novel coronavirus, the virus that causes the illness known as Covid-19, according to Omni Ekonomi.

Martin Floden

Sweden has confirmed 203 cases of the virus since January, though no deaths have been recorded. The country’s public health officials have been widely praised for tracking down vacationers who visited Italy over the recent holiday only to be infected with the virus.

Bloomberg reported that Floden tested positive for the virus on Friday. He is feeling well and is working from home, according to the Riksbank’s spokesman Tomas Lundberg.

Here’s more from BBG:

In addition to the recommendations of the country’s health agency, “the Riksbank has taken further precautionary measures regarding its employees,” the central bank said in its statement. For example, employees who have traveled to the worst-affected areas “must work from home during the two weeks immediately following their return home.”

The news comes amid increasing speculation about what measures the central bank may need to take to tackle the impact of the virus. Danske Bank analysts said last week they expect the Riksbank to cut its repo rate by 25 basis points in April, as Swedish workers risk a poor outcome in central wage negotiations amid the fallout from the virus. That easing call was echoed by Capital Economics on Monday.

The Riksbank ended half a decade of negative rates in December, despite a slowdown in the Swedish economy. Since then, some policy makers have signaled they’d rather expand an existing bond-purchase program than once again resort to subzero rates, should there be a need for further stimulus.

Floden is one of 248 people in Sweden to have been diagnosed with the virus, as of Monday. The central bank’s next monetary policy meeting is set for April 27.

Hopefully, the rest of the central bank’s leadership will remain healthy – for who else will save the Swedish economy if not for its heroic central bankers delivering helicopter money for all.

Authored by Bill Blain via MorningPorridge.com,

This is going to be a challenging week.

Coronavirus is the dominant feature, and its unknowable.  As an exogenous shock its out-with-normal market experience.  The speed at which it’s apparently taking hold in Italy is properly scaring the pants off the authorities across the Occident. The media can’t help itself fuelling fear. The vibe around the virus has become fervid! While the Daily Mail is saying we’re all going to die horribly, it’s unlikely anyone is going to pay attention to government advisors on the TV telling us; 

“Relax, drink plenty of hot tea, take vitamin C and it’s all going to be fine if you just take simple precautions like washing your hands.” 

Next few days, maybe weeks, are going to be driven by escalating fears of the unknown – to which markets are proving they are not immune.  Don’t be in the least surprised to see a string of advisories about not travelling, don’t use the tubes, and locking yourself in tall dark towers.   Nothing we can do about it except be Boy Scouts. Be prepared. 

About half the staff here at Shard are working from home today to test the robustness of our systems and comms to make sure we can respond in a resilient fashion – whatever happens next. We prepare for bad, expect it to be OK, and hope it will turn out better than expected. Personally, I am not going to be using the tube for the next few weeks….

The reality is the virus, or more correctly, the response to the virus, is causing significant real economic damage – therefore market reactions are justifiable. Unfortunately, as always happens, Markets over-egg the downside. We are into a classic negative loop – some participants are still looking for feedback, but most players get to a stage where they start to wildly anticipate moves – panic first, consider later.  The time for positioning was last week. This week… the best I can suggest is: enjoy the ride.. if you can.

The macro picture is clearly beginning to deteriorate on busted supply chain, production slowdowns, fears about corporate cashflow, and cascading consequences.  The US jobs number on Friday was fine, that was for a US economy as yet largely untouched by the crisis through February. Other nations are showing clear strains. China exports crashed through Q1. They might be posting some minor signs of normalisation, but elsewhere the news is unremittingly bad – and likely to get worse. 

The 30% weekend collapse in oil prices – largely a result of the Saudi / Russia breakdown – will certainly trigger fear this morning. It further hints at slowdown on crashing demand, but it will cause massive pain for US marginal shale producers. As the Alex Salmond trial gets underway in Edinburgh, I wonder how the SNP will sell Scottish financial independence as oil tests $27 a barrel. (The French might not be so keen to finance an independent Scotland anymore.. not after we crushed their Grand Slam on Sunday.)

Crashing oil raises the threat level on Saudi – analysts are increasingly concerned what Crown Prince MBS’s increasingly despotic behaviour means for regional stability. Locking up his rival family members on trumped up Treason charges reads like a Shakespearian tragedy. Its unlikely low oil prices will prove an economic boost in this environment.  

With the VIX back up in the big numbers (spiking to 54 on Friday), corporate bond markets going into lockdown – liquidity has dried up completely as lethargic investors suddenly awake from complacency and start to panic about the possibility of cascading corporate defaults into a recession– and stock markets look at the charts and worry if the markets can be supported around current levels, or are about to take a tumble down 20% to the next support levels, the vibe is all about “how low can we go”, rather than thinking about buying opportunities.

We are past the Buy The Dip moment. This is about something far deeper – but it’s always the right time to be thinking about what comes next.

No matter how bad the virus generated fears are – the sun will come up tomorrow. Tomorrow might not be till sometime in April or May, but as crisis will start to moderate (and the media gets bored with scaring us), the pressure will lesson. Markets will have priced in the effects. 

The time to be looking for bargains is… all the time. 

I’m looking! Solid investments with real cashflows that will remain valid even through a 2-3 month global viral lockdown. Sectors most likely to benefit from government support and bailout. Even aviation isn’t going to end forever over the next few weeks. Global shipping has never looked so cheap – maybe its time to look at cheap as chips containers? I can’t remain invested in zero rate government bonds for long, and you simply can’t eat gold… The trick will be as much knowing when to close Govt and Gold positions to buy corporate debt on the sly. 

The big question will be stocks… not quite a reset moment, but certainly time to look at fundamentals and really understand growth stories.