However, the Court did not grant the House of Representative’s petition (19-841).Why? Bethune-Hill v. Virginia State Board of Elections killed legislative standing–especially where only a single House brings the suit. There were not even four votes to grant the House’s petition.
The House will likely request argument time as an amicus curiae. The podium will already be quite crowded. California, the Solicitor General, and Texas will get argument time. The private plaintiffs from Texas may also request argument time. And the Court limited the case to a single hour. I think it is unlikely that the House gets time. Don Verrilli no doubt would have loved another round to defend Obamacare before the Supreme Court.
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As recently as two weeks ago, it wasn’t clear which infectious disease experts had the best handle on COVID-19’s likely path.
Among the optimists, one operation ran a model in February that showed the following maximum case counts by the “end of the epidemic.” (I’ve included the running case tally as well, using data from the Johns Hopkins dashboard.)
With the benefit of hindsight, these well-intentioned forecasts were clearly too low. But I’ve shared them anyway because they support the premise for this article—that it seems time to listen to those experts who were telling us all along that a pandemic is inevitable. In comparison to the misplaced forecasts above, the experts who expected a global health crisis can point to the chart below as validation:
So recent events seem to settle the question of which experts have the best grasp on what’s happening.
And recent data also provide another way to look into the future, one that doesn’t require complex epidemiological models. I’m suggesting the following:
Ignore the case data from China, which falls somewhere between glitchy and grossly incomplete.
Fit an exponential curve to the daily number of confirmed cases outside China.
Create a “base case” by following the curve’s trajectory until the pandemic reaches proportions expected by those experts who’ve been most accurate to date.
Experiment with flatter trajectories to map the interplay between the pandemic’s intensity and its duration.
This approach offers three advantages.
First, it produces plausible scenarios that are easy to rerun and calibrate to the latest data.
Second, it requires only a few assumptions.
Third, those assumptions are transparent and easily understood.
More to the point, while the approach doesn’t substitute for complex modeling, it gives reasonable answers to a few important questions. Essentially, I’m trying to answer the following:
How many new cases could appear each day (the intensity) at the pandemic’s peak?
How long will the pandemic last?
The endgame, in numbers
So let’s crunch the numbers. I’ll start with the predictions of Harvard epidemiologist Marc Lipsitch, who said in mid-February that he expected 40% to 70% of adults worldwide to be infected. I’ll apply that prediction to the world ex-China, using the following initial calculations:
Subtract 1.8 billion under-15s from a world ex-China population of 6.4 billion. That’s 4.6 billion adults.
Apply the 40% lower end of Lipsitch’s estimated infection rate to those 4.6 billion adults. That’s 1.8 billion infections.
Allowing that many cases will never be recorded, reduce the 1.8 billion infections to an even 1.0 billion. (Imperial College recently estimated that only about a third of infections outside China are being recorded. That proportion—should I say optimistic estimate?—should increase with more testing, but it should still fall well short of 100%, considering that 80% or more of cases are mild.)
Assume further that the growth rate slows after the number of cases reaches somewhere between 10% and 50% of the eventual one billion. Mathematically, the growth rate has to slow, since a growing number of infections means a shrinking number of people susceptible to new infections. Applying 10% and 50% to one billion, we’re looking for the growth rate to slow after it reaches somewhere between 100 and 500 million recorded cases.
(Note that I’m assuming all infected survivors build immunity. If that’s wrong—and according to variousreports, it could be at least partly wrong—that calls for a completely different analysis. It means the pandemic probably continues until a vaccine becomes available.)
Follow the curve
Now for the easy part. Here’s an exponential curve that fits the daily case data:
The next chart extends the fitted curve until late April, when it reaches the 100–500 million case count I estimated above. I’ve highlighted the point where the case count exceeds 500 million, which I’ll call “Half a Billion Day”:
To be sure, the first projection is a base case, not a likely one, and probably not even a realistic one. It simply answers the question: If the closest-fit exponential curve continues towards a 40% infection rate, when does the pandemic begin to run out of steam?
Moreover, the curve will need refitting as time passes. The actual case count might soar above it, and it will certainly fall below it, eventually.
One reason for the case count to overshoot the curve is that test kits are becoming more widely available and actively used. So the percentage of actual cases included in published statistics should rise.
On the other hand, the trajectory should eventually flatten, for at least four reasons.
First, the propensity to test suspected cases should level off and might even decline in some countries as resources become stretched.
Second, governments, businesses and other organizations are likely to impose stricter containment measures.
Third, the virus will eventually run out of unprepared communities to attack while their defenses are low.
Fourth, the pool of uninfected people will increasingly tilt towards those who take extreme precautions against infection.
To show how the eventual flattening could affect the pandemic’s path, I created a second projection with an inflection point. As of April 30, I toggled the trajectory from exponential to linear, freezing the number of daily new cases. And between March 16 and April 30, I gradually flattened the trajectory to make the transition smooth. In other words, the projection now has three phases:
Up until March 15: Exponential growth along the fitted path
March 16 – April 30: Gradual transition to linear growth
After April 30: Linear growth, meaning the number of daily new cases remains at the April 30 peak
(Note that the March 15 timing for the transition to linear growth is subjective. The fitted curve steepened over the past week as testing activity increased, and testing activity continues to increase, so a transition towards linear growth seems unlikely during the next few weeks.)
The new curve pushes Half a Billion Day back to May 19. Labeling April 30 as “Peak Intensity Day,” here’s the picture:
Finally, the crux of the analysis is to examine the interplay between intensity and duration. I looked at eight possibilities for Peak Intensity Day, calculating the implications for both peak intensity (new cases per day) and Half a Billion Day.
Note that Scenario 1 fails to deliver a 40%–70% infection rate over the next year, which is how Lipshitz framed his prediction.
At the other extreme, Scenario 8 raises a question of whether it’s realistic for the pandemic to grow exponentially beyond Half a Billion Day.
So Scenarios 2 through 7 appear to be the most realistic 40% infection scenarios. They show the pandemic reaching peak intensity in the second half of April or the first half of May, with daily new cases running anywhere from a couple of million to just over fifty million.
Conclusions
At a first pass, if a 40% infection rate proves accurate (and I haven’t yet seen a convincing case that such an extensive global diffusion—whether 40%, 30%, 20% or in that general vicinity—can be prevented), the pandemic should continue to intensify for another couple of months. Daily new cases could reach into the tens of millions. Alternatively, daily new cases will flatten after reaching a peak of between two and fifteen million. But an early flattening would have the undesired effect of prolonging the pandemic. That’s just a mathematical observation—if COVID-19 passes through the population at a slower pace, it’ll remain active for longer before it runs out of targets.
As far as the economic implications, a 40% infection rate would mean COVID-19 persisting long enough to cause a global recession, and probably not a mild one. Call it somewhere between moderate and severe. In that scenario, we can only hope the shoes have already dropped—that people don’t get infected more than once, that the mortality rate doesn’t worsen, and that the health care sector moves quickly towards a vaccine.
More optimistically, those who stress that “this, too, will pass” will surely be proven right. The problem is that we don’t know when. We only know that the most optimistic estimates of just two weeks ago are clearly wrong. But we can use that information—together with a month and a half of data—to explore the possibilities. We can cast a cold light on the pandemic’s sudden exponential growth.
Senate Homeland Committee To Issue First Subpoena In Biden-Burisma Probe
Senate Homeland Security Committee chairman Ron Johnson (R-WI) plans to force a vote to issue the first subpoena linked to his probe involving Hunter Biden and Ukrainian energy firm, Burisma Holdings.
Johnson sent a letter to members of his committee on Sunday saying that it is his “intention to schedule a business meeting to consider a committee subpoena” of a former consultant for Blue Star Strategies, which Johnson noted worked as a U.S. representative for Burisma.
“As part of the committee’s ongoing investigation, it has received U.S. government records indicating that Blue Star sought to leverage Hunter Biden’s role as a board member of Burisma to gain access to, and potentially influence matters at, the State Department,” Johnson wrote in the letter to committee members. –The Hill
SCOOP: Chairman Senate Homeland Security and Governmental Affairs committee @RonJohnsonWI wants to subpoena witness tied to US firm and Burisma where the former Vice President’s son sat on the board. Letter obtained @CBSNews says government records indicate concerns warranted pic.twitter.com/BBoTB0lGh0
Specifically, Johnson wants to subpoena Andrii Telizhenko, a former Blue Star consultant who has indicated that he wants to “cooperate fully” with Johnson, but is limited by a nondisclosure agreement.
“Because Mr. Telizhenko’s records and information would be responsive to the committee’s requests, and Blue Star has refused to provide them, a subpoena to Mr. Telizhenko for these records is appropriate at this time,” reads Johnson’s letter. “Accordingly, I will be scheduling a vote in the near future to approve issuing the enclosed subpoena.”
Johnson noted in his letter that the subpoena was “narrowly drafted,” and would only pertain to documents related to Burisma and Blue Star.
“Blocking the receipt of relevant records, as any committee member voting against this subpoena would be doing, only heightens the risk of ‘disinformation’ because Congress would not have access to all pertinent information,” he added.
Objecting to the subpoena is Sen. Gary Peters (D-MI), the top Democrat on Johnson’s committee, who says doing so could bolster Russian disinformation efforts. With a GOP majority in the Senate, however, Johnson can tell Peters to go pound sand.
The subpoena would be the first in relation to the months-long GOP investigation into Burisma and Hunter Biden.
Biden, who has reinvented himself as an artist in a slobberingly fellacious New York Times PR puff piece, was paid upwards of $50,000 per month to sit on Burisma’s board while his father was Vice President, and Obama’s point-man on Ukraine policy – where he notoriously forced the country’s prior administration to fire a prosecutor investigating the energy giant.
Hunter Biden, artist
He is currently living in a $12,000 per month rental in the Hollywood Hills while engaged in an ongoing paternity battle with an Arkansas stripper he impregnated.
Would @DonaldJTrumpJr be able to work for a foreign oligarch, Europe’s most corruption corporate, and for the Chinese… THEN be afforded a 2000-word hagiography by the New York Times to discuss his new painting hobby?
With the coronavirus outbreak continuing to spread around the world, employees and employers are already responding. On Glassdoor, we’re seeing several new jobs coming online showing how certain organizations are preparing to tackle the virus, while employees in different countries are commenting on what they’re hearing from their employers to keep safe. In this post, we briefly examine evidence of how employees and employers are reacting on Glassdoor’s platform.
More Jobs Responding to the Outbreak
The global public health response is beginning to show up in Glassdoor data. Dozens of job postings for health care workers, scientists and data specialists are popping up as organizations prepare for the outbreak. In addition to health care workers, employers are also hiring communications specialists and consultants to address this sensitive topic with the public and other stakeholders. Several jobs posted on Glassdoor are quoted below:
[Microbiologist – Austin, TX] “I am currently recruiting for a Microbiologist to assist with the Coronavirus testing.”
[Registered Nurse Coronavirus Screening – Fairfield, CA] “… in need of RNs for Public Health Emergency Support in response to 2019 NOVEL CORONAVIRUS in the airports and quarantine at military base with Department of Health & Human Services.”
[Coronavirus Data Specialist – Remote] “The Coronavirus Data specialist coordinates TWB’s language data and mapping efforts in response to the coronavirus/COVID-19 outbreak. The Data Specialist will be responsible for curating, cleaning, sharing, and mapping language data in countries affected by the COVID-19 outbreak”
[Quality Assurance/Lab Technician – Atlanta, GA] “Provide routine and surge QA support for special investigations and outbreaks, including, but not limited to, the 2019 novel Coronavirus (nCoV) emergency response…”
[Lead Researcher – COVID 19 – United States] “The Lead Researcher will manage the implementation of an Information Ecosystem Assessment focusing on Thai-language social media and other online sources of information about COVID-19, working with a team of field researchers and translators.”
How are Employees Reacting?
Employee reviews on Glassdoor discussing the outbreak report a variety of workplace challenges from disruption of business operations to cancelled interviews to lack of work-from-home arrangements. Notably, some reviews cite serious economic consequences including diminished business outlook or pay cuts. Excerpts from select reviews are quoted below:
“Travel downturn with coronavirus etc. adds more challenge”
“She told me that due to the coronavirus outbreak, my employment could only commence in March.”
“Vulnerable industry and business – Hit by the coronavirus in 2020 and immediately start sagging staff and cutting salaries on a significant amount”
“It took 3 weeks after coronavirus for employees to be able to work from home because the company is so cheap they won’t even get people laptops during emergency situations.”
“I was told [by] the staff the interview was cancelled due to the coronavirus outbreak which I can totally understand”
“Coronavirus causing fear of travel.”
“… relies on international manufacturers, and we all feel the squeeze when production issues happen. With Coronavirus and Brexit, that might become even more of an issue – but it’s something that’s no doubt felt by most businesses in the UK at the moment.”
“Recent coronavirus outbreak and no work from home arrangements or flexibility. Putting everyone at risk, especially those of us with children and elderly to look after.”
Conversely, we have seen several employees praise their companies’ response. Some unifying themes from these responses have been a combination of transparent communication and substantive action. Excerpts quoted below:
“Impressed with the way our company is handling the coronavirus outbreak situation. They are very efficient in taking all the necessary measures to ensure utmost safety and precaution. We have been provided with surgical masks, Dettol spray, vinyl gloves, hand wipes and temperature is being taken 2 times a day. HR is also tracking very closely those who have travelled anywhere (not just to China) during this period, as well as any staff who has come into close contact with anyone from China. Our MD has had a talk with us to ensure that our company will do the best it can and take necessary measures to keep the employees safe. I feel very reassured that the situation is taken so seriously and is well under control in the place where I spend more time than anywhere else.”
“Recently, I was worried about my salary and job security with the emergence of the coronavirus in China but the school acted quickly and provided a reasonable online schedule allowing me to continue to teach English via my computer. All of the equipment has been provided to me and they continue to pay my full salary, so they have turned what could have been a terrible experience for me, into a very positive one.”
Additionally, business outlook ratings—as reported by employees on Glassdoor—are trending down for companies and employees based in affected countries: China, Singapore, Japan, South Korea. While the decline so far has been modest, reports from workers on the frontlines are one way to get an understanding of how confident employees feel that businesses can get back on their feet once the outbreak is contained. Employee confidence will be a metric we watch closely in the coming weeks.
Conclusion
We’re beginning to see early evidence of the reaction to the coronavirus outbreak on Glassdoor. New jobs are being posted for health agencies, companies and international organizations as they gear up to respond to the outbreak. Additionally, employees are paying close attention to their employers’ response to the outbreak and are sharing their thoughts on the topic in Glassdoor reviews. Many employees report concerns with disruptions to their workplaces and the outlook for their businesses, while others have praised their companies for transparent communication. While the global trajectory of the coronavirus outbreak is a big unknown, we’ll be watching Glassdoor’s platform closely for more evidence of how employees and employers are reacting.
The Conservative Political Action Conference (CPAC), a large annual gathering of the American Right, promised to wage war at this year’s event: “America vs. Socialism” was the theme. It’s a strategically savvy move when considering that democratic socialist Sen. Bernie Sanders (I–Vt.) is leading the delegate count for the 2020 Democratic presidential nomination. But notably absent from the CPAC agenda was anything pertaining to the debt, deficit, or current levels of absurd government spending—an odd choice for a conference that sought to position itself as a banner carrier for responsible fiscal policy.
There was plenty of time allotted for main stage performances by incendiary characters like Diamond and Silk, Charlie Kirk, and Candace Owens, who do more to caricature the Right than provide constructive policy ideas. Also present were panels on immigration restriction, impeachment, social media, and a live reading of FBI Lovebirds: UnderCovers, a new play about the Peter Strzok-Lisa Page FBI scandal. And there were a few meetings on the ills of socialism. But if you wanted to hear people talk about our immediate slide into deficit hell, you were at the wrong conference.
Perhaps that’s because President Donald Trump is helping drive up America’s debt despite campaigning in 2016 on a promise to eliminate the $19 trillion debt within 8 years.
Trump has “fully embraced the idea that deficits don’t matter,” writes Steven Greenhut for Reason, with fantastical budget proposals that fail to right America’s fiscal ship. His 2021 budget, for instance, requests $4.8 trillion in spending—a 21 percent increase from when Trump took office.
Republicans have often criticized Democrats for their expensive policies and rallied behind spending cuts, but now that Trump is in the White House, many conservatives seem to have abandoned the idea entirely. Rush Limbaugh, the inflammatory right-wing radio host and recent recipient of the Presidential Medal of Freedom, regularly railed against former President Barack Obama for his reckless approach to fiscal issues. In July, he appeared to have changed his position.
“How many years have people tried to scare everybody about [the deficit]?” he said on his show. “Yet here we’re still here, and the great jaws of the deficit have not bitten off our heads and chewed them up and spit them out.”
“America vs. Socialism,” it turns out, was real-life clickbait.
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The Conservative Political Action Conference (CPAC), a large annual gathering of the American Right, promised to wage war at this year’s event: “America vs. Socialism” was the theme. It’s a strategically savvy move when considering that democratic socialist Sen. Bernie Sanders (I–Vt.) is leading the delegate count for the 2020 Democratic presidential nomination. But notably absent from the CPAC agenda was anything pertaining to the debt, deficit, or current levels of absurd government spending—an odd choice for a conference that sought to position itself as a banner carrier for responsible fiscal policy.
There was plenty of time allotted for main stage performances by incendiary characters like Diamond and Silk, Charlie Kirk, and Candace Owens, who do more to caricature the Right than provide constructive policy ideas. Also present were panels on immigration restriction, impeachment, social media, and a live reading of FBI Lovebirds: UnderCovers, a new play about the Peter Strzok-Lisa Page FBI scandal. And there were a few meetings on the ills of socialism. But if you wanted to hear people talk about our immediate slide into deficit hell, you were at the wrong conference.
Perhaps that’s because President Donald Trump is helping drive up America’s debt despite campaigning in 2016 on a promise to eliminate the $19 trillion debt within 8 years.
Trump has “fully embraced the idea that deficits don’t matter,” writes Steven Greenhut for Reason, with fantastical budget proposals that fail to right America’s fiscal ship. His 2021 budget, for instance, requests $4.8 trillion in spending—a 21 percent increase from when Trump took office.
Republicans have often criticized Democrats for their expensive policies and rallied behind spending cuts, but now that Trump is in the White House, many conservatives seem to have abandoned the idea entirely. Rush Limbaugh, the inflammatory right-wing radio host and recent recipient of the Presidential Medal of Freedom, regularly railed against former President Barack Obama for his reckless approach to fiscal issues. In July, he appeared to have changed his position.
“How many years have people tried to scare everybody about [the deficit]?” he said on his show. “Yet here we’re still here, and the great jaws of the deficit have not bitten off our heads and chewed them up and spit them out.”
“America vs. Socialism,” it turns out, was real-life clickbait.
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And so castles made of sand fall in the sea, eventually. – Jimi Hendrix
There’s a widespread belief out there that the U.S. and the global economy in general is on much sounder footing ever since the financial crisis of a decade ago. Unfortunately, this false assumption has resulted in widespread complacency and elevated levels of systemic risk as we enter the early part of the 2020s.
All it takes is a cursory amount of research to discover nothing was “reset” or fixed by the government and central bank response to that crisis. Rather, the entire response was just a gigantic coverup of the crimes and irresponsible behavior that occurred, coupled with a bailout designed to enrich and empower those who needed and deserved it least.
Everything was papered over in order to resuscitate a failed paradigm without reforming anything. Since it was all about pretending nothing was structurally wrong with the system, the response was to build more castles of sand on top of old ones that had unceremoniously crumbled. The whole event was a huge warning sign and opportunity to change course, but it was completely ignored. Enter novel coronavirus.
Visa Slashes Q2 Revenue Outlook By 2.5-3.5% On Lower Asia Travel; Microchip Pulls Guidance
With stocks desperate to put the coronavirus crisis behind them, and pretend as if the earnings impact will be non-existant, moments ago the world’s largest payments processor, Visa, joined the guide-down crew including its competitor Mastercard which cut guidance just last week, when it announced that it now sees 2Q net revenue growth to be about 2.5% to 3.5% percentage points lower than the outlook shared just one month ago, on January 30.
In an announcement after the close, Visa said that “cross-border growth rates have deteriorated week by week since the coronavirus outbreak in China, and trends through February 28, 2020 do not yet fully reflect the impact of the coronavirus spreading outside of Asia.” As a result, Visa anticipates “that this deteriorating trend has not bottomed out yet.” Full statement below:
“Visa has been actively monitoring the coronavirus, or COVID-19, situation and its impact globally. Our priority has been the safety of our employees, including comprehensive plans to support employee wellness, as well as support for our clients and the communities affected.
Through February 28, 2020, the most significant impact has been on travel to and from Asia. This has resulted in a sharp slowdown of our cross-border business, in particular travel related spending in both card present and card not present. Cross-border eCommerce unrelated to travel has thus far not been significantly impacted, except in some Asian markets. In markets where Visa processes the majority of our transactions, domestic spending growth, both credit and debit, remains largely stable with the exception of some impact in Hong Kong and Singapore.
Cross-border growth rates have deteriorated week by week since the coronavirus outbreak in China, and trends through February 28, 2020 do not yet fully reflect the impact of the coronavirus spreading outside of Asia. As such, we anticipate that this deteriorating trend has not bottomed out yet. Because the situation remains fluid, it is not possible to accurately forecast the growth trend for the rest of our second fiscal quarter or the remainder of fiscal 2020.
Based on trends through the end of February, and assuming some continuing deterioration in March, Visa expects second fiscal quarter net revenue growth to be approximately 2.5-3.5 percentage points lower than the outlook we shared on our January 30, 2020 earnings call.
Given the uncertainty surrounding the magnitude, duration and geographic reach of the coronavirus impact, we will update our views for future quarters and the fiscal full year 2020 on our second quarter earnings call in April.”
Following the news, Visa shares slumped and were trading down about 2% after the close.
And just to make sure investor ire wasn’t targeted on Visa alone, Microchip Technology also pulled the corona card when it announced that it is withdrawing its prior EPS guidance, and now sees 4Q net sales about flat sequentially down sharply from the previous guidance which saw net sales up 2% to up 9%.
DoubleLine Deputy CIO: “The Coronavirus Outbreak Is Way Beyond The Fed’s Control”
Submitted by Christoph Gieger of TheMarket.ch, an NZZ publication
Jeffrey Sherman, Deputy Chief Investment Officer at DoubleLine, expects the Federal Reserve to give in to the pressure from Wall Street. He advises investors to keep their emotions in check and shares his best investment ideas in an environment of fear.
The Interview
It’s not for the faint-hearted: Due to the global outbreak of the Coronavirus epidemic, the US stock market has lost 12% in one week. International equities have suffered similar losses. Despite the violent turmoil, investors shouldn’t be led by emotions, advises Jeffrey Sherman. “Make sure you are patient. No move is better than a bad move,” says the deputy chief investment officer at the renowned investment boutique DoubleLine.
In this in-depth interview, Mr. Sherman explains why markets are primarily driven by fear of the unknown. Despite the flight to high-quality assets, he believes US treasuries are overpriced after the strong rally in recent days. He also spots risks in supposedly safe US investment grade corporate bonds.
According to his view, there are better opportunities in the structured credit markets. He also likes corporate bonds in Latin American countries such as Mexico, Brazil and Peru. If the outlook clears up and fear recedes, he believes commodities are the best place to bet on a rebound.
Mr. Sherman, the US stock market had its worst week since the financial crisis, the yield on ten-year treasuries dropped to a record low. What is your assessment of the situation?
There has been a lot of complacency within the financial markets, especially in the U.S. Now, something exogenous has started to wake them up, and having stretched valuations, people got nervous: Rates have started to move down and the stock market started to fall apart. The whole idea of nothing bad can happen got eroded very quickly. All of a sudden, fear is ramping, and it’s fear of the “known unknown”: We know the coronavirus outbreak is bad, but we don’t know how bad it’s going to get.
What do you think will happen next?
Bull markets are not always dying because of their own demise. Exogenous factors tend to help end them. For instance, think about the tech boom back in the late nineties. People always say that tech stocks just blew up, but an important catalyst was Y2K. It was this idea of something exogenous that panicked people and then fed into a selling frenzy.
But the Nasdaq Composite Index didn’t peak until March 2000.
I’m not saying Y2K crashed the world, but when you have fragility, it’s typically these exogenous things that can cause a change in sentiment. Y2K caused people to take a second look at those very stretched valuations and made them skeptical. All of a sudden, they started asking themselves: “Wait, why do I own all this stuff?” I’m not saying, we should panic or this is the end of the bull market. We’ve had other pullbacks before. But the crux of the matter is that valuations have been stretched for a while, we have been building massive debt loads and the fragility is there.
What are the biggest risks with respect to the coronavirus epidemic?
We haven’t seen something like this in a long time. Back in 2003, we had SARS. That virus incubates quickly and you are only contagious when you show symptoms. But when you have a Coronavirus infection, you are contagious without showing symptoms for a long time. That’s what has panicked people. It’s fear more than anything. With treasury yields this low, it’s undeniably a flight to quality.
Yet, other safe haven assets like ten-year government bonds in Germany, Japan and Switzerland didn’t hit record highs last week. Why not?
If I want to hide in cash in Europe right now, I have to pay a negative yield. Here in the U.S, I have at last a chance to make some money: People are buying treasuries because it’s a high-quality asset with a positive yield. Interestingly, many international investors are not even hedging their currency risk at this stage. We believe this is also the reason why there was some resilience in the dollar last year and this year until recently.
What is going on in the credit markets? Do you see any signs of stress?
Down the capital stack, lower quality stuff is being sold. The pressure is significant on the high yield market where stress is coming from anything leisure related: hotels, gaming, and definitely energy. It’s a complete sentiment shift: People want to own quality. But for me, it’s hard to want to buy treasuries when the entire yield curve gives me a negative real yield. At DoubleLine, we think inflation will end the year at almost 1.9%. Today, that’s greater than yield on the long bond. If you go out and buy treasuries, you have to think we’re going to have a global pandemic which is going to lead to a global recession. But that’s way too early to tell.
What are the chances of a global recession?
China’s contribution to the global economy is four times of what it was during SARS. Also, it’s hard to believe the Chinese data. We just don’t know if people are really getting back to work. Supposedly, Shanghai is almost back to full employment, but we won’t see it until the data comes through for another couple of months. We were recovering from the bad economic data of the summer, and this looks like another wrench in it. That’s why you see German data deteriorating once again, even if the latest PMI headline number went up. So here’s an outlandish idea of what the Coronavirus does: Maybe what you start to see is fiscal stimulus in Europe. The Germans may say: “We don’t have to run a surplus right now; we need to get money in people’s hands”. Maybe this is a catalyst for Europe to start stimulating the economy on the fiscal side, because the ECB cutting rates is not going to solve the problem.
With the financial markets in turmoil, all eyes are on the Central Banks. What are your expectations when it comes to monetary policy?
The market is bullying the Federal Reserve. Absent the Coronavirus outbreak, the Fed would have no reason to cut interest rates. Economic data was improving, the job market is strong, and wage growth is back at 3%. So I feel really bad for Mr. Powell. At the FOMC meeting on March 18th, he was hoping to go out there with bravado, pounding on his chest like King Kong and say: “Man, I saved the economy”. Now, the Fed has another challenge, but this is something way beyond its control. The Coronavirus can’t be fought with interest rates. This is a matter of confidence.
How about the chances of an emergency meeting?
I don’t think they have an emergency meeting to cut interest rates. But they are going to have to look at how fearful the market is. And, if there is still a lot of fear, they will cut interest rates because the market needs it. If it gets worse, the Fed may even give you a 50-basis-point cut. As of now, we’re running a death toll of less than 3000 people globally. That’s very unfortunate, but that doesn’t make it a pandemic. So if sentiment changes, bond yields could move up thirty or forty basis points in a month. That’s why we’re worried about duration. Maybe you want to own treasuries against fear. But at this stage, it’s hard to really want to buy more.
What is the Fed going to do in terms of its “Not-QE”-program?
We criticize the Fed a lot, but they did what they had to do. They had a problem back in September when the effective Fed Funds Rate was outside of their target range. So they came in quick and heavy. The liquidity facilities have undeniably got the market back in line. But after the Fed’s balance sheet is back up again, they’re not going to rewind it; not in this type of market. Then again, we also have an election coming up and the Fed doesn’t want to be perceived as helping President Trump.
We’re heading right into Super Tuesday with no less than fourteen states voting on March 3th. How will the presidential election impact the financial markets?
Both sides are kind of crazy:We got crazy Bernie, and we got crazy Donald. So the Democrat’s plan is to fight crazy with crazy. I don’t think Bernie can get his socialist agenda done, but I don’t know how to read him. Bernie is true to his roots and he has a very big fan club, also here in California. And, his supporters are sticky, like Trump’s people. So it’s very hard to predict what’s going to happen at this stage. The market thinks Bernie is going to win the Democratic nomination, but that he can’t beat Trump – and “can’t” is a very dangerous game. In investing, it’s like thinking “I can’t lose”. It’s gambling at that point. Remember, a lot of people couldn’t see Trump winning in 2016, either. It’s way too early to tell and more importantly: You wouldn’t want to bet your portfolio on it, either way.
What’s your outlook for the U.S. economy against this backdrop?
A big-time slowdown in China will also hurt the U.S. But if we grow at 1% instead of 2%, that’s not going to kill us. It’s all about the job market and jobless claims where we are still very near the lows of the cycle. Also, you’re talking of a budget expansion of about 4.5% of GDP. That’s an eerie number since it’s essentially where nominal GDP came in last year. So this is a financed scheme: All of our growth is coming from the expansion of public sector debt, and I don’t even bring in private sector debt or personal loans like mortgages. Since the financial crisis, the whole economic expansion was fueled on debt. It’s been a completely financed ride. I don’t see that stopping. Trump wants to spend more money, and the Democrats are good at spending as well.
What should investors do in this environment?
Make sure you are patient. No move is better than a bad move. Sure, this correction makes things more attractive, but you don’t have to step in after week one. These are just things you can’t really forecast. For instance, think about what happened with 9/11. That hurt travel for about three years. Heck, we still have to take off our shoes and keep our plastics in there at the airport. So keep watching, reassess the situation and don’t get caught in emotions which is the hardest thing to do. Assume this is going to take longer than you think. If you didn’t chase this latest rally, you’re in a good position. That’s my advice: Just make sure you don’t feel you have to check your portfolio every day. If you have to, you are off-sides.
Where do you want to be extra careful?
Don’t chase the investment grade market. There’s a hidden risk in there called duration. For the U.S. Aggregate Bond Index, the duration is north of eight years. That’s the longest since its inception. What scares me about Corporate America is that we have extended the leverage out very high. Today, leverage ratios in the investment grade space commensurate with a recession: They’re not foretelling of a recession, but today’s leverage levels are typical to what you see in the middle of a recession. Usually earnings have to collapse to get you to these levels. So the leverage continues to get higher, the yields get lower and the quality of the asset compared to the leverage doesn’t look as good. Interest coverage is fine, but interest coverage will deteriorate in a recession because earnings go down. So I’m not scared of defaults, I just don’t like the risk-return tradeoff.
Where do you spot better opportunities for investors?
There’s a lot of ways to still bet on the U.S. The securitized credit market is one area where we’re taking those bets. It performed decently last year, but lagged other credit markets. The interesting thing about the securitized market is that the bulk of it has physical assets behind it. Think about solar, wind farms or hydroelectric plants. You can invest in freight, cargo or shipping deals. There’s a lot of stuff out there with physical assets that back the cash flows, the leverage is a lot lower and there is more flexibility if we get some inflation. You can also go into the residential mortgage market: You have people that need to buy, that need to move and there’s physical property behind it.
Where else are good places to invest right now?
Another thing that we look at as a credit play is emerging markets. Here, you want to focus more on corporates because the sovereigns have too much duration. You can take dollar denominated investment grade debt for a commensurate credit risk versus a U.S. company, and you get a yield pickup of hundreds of basis points with less duration. So if you look at EM corporates, you can buy a decent quality investment grade portfolio with attractive yields, and maybe even put 20% of it below investment grade.
On which countries are you focusing on in the emerging markets world?
I would not try to catch a falling knife right now. So I would not be in Hong Kong or in Korea. Looking at companies that have good businesses, you are going to have to buy some commodity producers just because they have been really beaten up. Our EM team feels like Mexico, Brazil and Peru are the places to be right now. They have a little exposure to Eastern Europe, but they are not heavily invested in Eastern Asia.
Based on the Barclays Shiller Cape Sector Index, you’re also managing a fund which invests in stocks. What are the most attractively valued sectors right now?
Since we’ve just rebalanced the fund, I can only name two of the sectors that have been in there for a long time: Tech and communications, and they will continue to be in there for sure. We’re not owning energy. Even though energy is cheap, the momentum is horrible. I think the U.S. needs to wake up to the idea that it is the new swing producer. Despite all these OPEC output cuts, the U.S. still sets new records in terms of production. We need to learn to dial the spigot back a little bit, but these E&P companies are levered and have problems. So you can easily see crude going down to $40 which will cause even more trouble for these companies.
And how about commodities in general?
It’s hard to be in the commodity space today. But fear can subside or erase too – and that would be a good time to look at commodities again. If there is a place that should see the rebound it is commodities. We also like them for the anti-dollar play, but we have to get through this global turmoil right now. I want to see some stabilization globally to be more constructive. What’s more, you should own precious metals for a “what if”-scenario. But I’m not a buyer of gold here. Unless the world is going to get more dire, I wouldn’t add to gold at this point.
A bill moving through the Tennessee state legislature would reform the state’s harsh drug-free school zone laws, which were the subject of a 2017 Reason investigation.
The Tennessee House Judiciary Committee advanced a bill last Wednesday, sponsored by Republican state Rep. Michael Curcio, that would reduce the sizes of the zones. They currently cover the area within 1,000 feet of any school, park, library, or day care; the legislation would reduce that to 500 feet. It would also remove the mandatory minimum sentences for drug offenses within the zones and give judges discretion to waive sentencing enhancements in certain circumstances.
Tennessee’s laws blanket large swaths of the cities, turning minor drug violations into mandatory sentences that rival—and sometimes exceed—punishments for rape and murder.
“While this was well-intentioned, unfortunately this policy has not been accomplishing the outcome that the legislature intended,” Curcio said during Wednesday’s committee hearing. “The main reason for this failure is that drug offenders are not often affected by deterrence-based policies.”
“It would also be my argument today that these zones cast far too wide a net in our communities,” Curcio continued. “While 1,000 feet might not sound like a lot, over a quarter of the state’s total land area within city limits are within a zone.”
Curcio cited Reason‘s data showing that more than a quarter of the state’s total land area within city limits is covered by drug-free zones. For example, drug-free zones cover 38 percent of Memphis and 58 percent of East Knoxville.
Drug-free zones spread across all 50 states throughout the 1980s and ’90s, as legislators clamored for ways to keep drugs away from children. But civil liberties groups, and even some prosecutors, say the laws are rarely if ever used in actual cases of dealing drugs to minors.
In Tennessee the laws apply even when school is out of session, when the defendant is in a private residence, or he or she just happens to be driving through a zone.
“The unintended consequence of such a large zone is that the law affects more individuals than the general assembly meant to target,” Curcio said.
One such case was Calvin Bryant, who at age 20 was sentenced in 2008 to 17 years in Tennessee state prison—15 of them mandatory—for selling ecstasy to a confidential informant out of his Nashville apartment, which happened to be within 1,000 feet of a school.
If Bryant had been convicted of second-degree murder, he would have been eligible for an earlier release. That crime carries a minimum 15-year sentence but includes a possibility for release within 13.
After serving 10 and a half years in prison, Bryant was released in 2018 after prosecutors struck a deal to release him on time served. Bryant now mentors inner-city youth through a nonprofit organization he started.
“I hold myself accountable for participating in a drug transaction, but do I feel like I should have gotten 17 years?” he testified at Wednesday’s hearing. “I don’t.”
Reason found another case of 20-year-old first-time offender who was sentenced to a mandatory 15 years in prison for selling psychedelic mushrooms to a confidential informant for $80.
Bryant told lawmakers that while he was incarcerated, he and other drug-free school zone offenders were ineligible for classes or other educational programming because of their mandatory minimum sentences.
“There were no chances for me to take classes with this charge because I was serving 100 percent, a mandatory minimum,” Bryant testified. “Due to us not earning good time, we don’t get to participate in classes, so it’s hard to better yourself in that kind of situation.”
Currently, 358 Tennessee inmates are serving sentences for drug-free school zone offenses, according to data from the Tennessee Department of Corrections obtained by Lauren Krisai, a senior policy analyst at the Justice Action Network. (Krisai is also the former criminal justice director of the Reason Foundation, which publishes this website, and she co-authored Reason‘s 2017 investigation.)
That number does not include cases where prosecutors dropped school zone charges in exchange for a guilty plea. The threat of a drug-free school zone charge gives prosecutors enormous leverage to extract plea deals.
“With the enhancement, what was happening was somebody might have a couple grams of cocaine, and they’d go to court, hoping to get probation for simple possession,” Nashville District Attorney Glenn Funk told Reason in 2017. “Their lawyer would then tell them it’s a school zone case, and they’re looking at 15 to 25 years in prison. The state offers them eight years to serve at 30 percent, or a 10-year probationary period or something. If the client persists, the lawyer has to say, ‘Do you feel lucky? Because if you go to trial and lose, you won’t be home for the next couple of decades.'”
Part of Funk’s platform when he ran for district attorney included prosecuting drug-free school zone offenses only in cases that involved child endangerment.
State lawmakers introduced similar legislation in 2018, but that bill died in committee when district attorneys pulled their support.
Bryant told state legislators that he hopes future bills will include relief for those still incarcerated.
“It’s kind of rough when you’re sitting in prison and your injustice is being used for other people’s justice that haven’t really committed crimes yet,” Bryant said. “I pray there’s some relief for them down the line.
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