US Moves Patriot Missiles To Iraq – Outraged Baghdad Says “Consequences” Coming After Airstrikes
With coronavirus pandemic dominating the world’s attention, it’s easy to forget that the US is essentially in a state of war with Iran, just Thursday night conducting a major aerial bombing campaign against multiple Iran-backed militia targets across southern Iraq.
In response to prior rocket attacks on Camp Taji which killed two Americans on Wednesday the Pentagon declared that “all options are on the table” — suggesting there could be more strikes to come. The Pentagon said it initiated a “proportional” response against five Kata’ib Hezbollah weapons facilities.
Iraq’s government immediately condemned the attacks as not only unauthorized violations of its airspace, but as having killed and wounded several Iraqi security force personnel.
US Patriot missiles file image
Top US forces general in the region, Marine Gen. Frank McKenzie, brushed Baghdad’s condemnation aside, essentially saying it was Iraqi forces’ fault for being there. Many officers in the Iraqi Army essentially see Khatib Hezbollah as a de facto extension of national forces.
Iraq condemned overnight U.S. air strikes on Friday, saying they killed six people and warning of dangerous consequences for what it called a violation of sovereignty and targeted aggression against the nation’s regular armed forces.
The foreign ministry further summoned the US and UK ambassadors following the attacks. But the Pentagon is not backing down.
“These locations that we struck are clear locations of terrorist bases,” McKenzie said Friday. When asked about Iraq’s fierce response, he said, “If Iraqi military forces are there, I would say it’s probably not a good idea to position yourself with Khatib Hezbollah in the wake of a strike that killed Americans and Coalition members.”
Meanwhile, the Pentagon is moving Patriot air defense missile systems into Iraq to better defensed US personnel against any potential Iranian strike, even at a moment when Tehran’s real focus remains on combating the deadlier Covid-19 outbreak in its midst.
It was also reported Friday that Secretary of Defense Mark Esper has agreed to keep two aircraft carriers in the Gulf region “for a period of time”. They’ve been identified as the USS Dwight D. Eisenhower and the USS Harry S. Truman.
The US rarely maintains two carriers there, with the last instance coming about eight years ago, in 2012.
This is certainly one of the most important charts for the U.S. economy. Before COVID-19 outbreak, our leading indicator for the United States, credit impulse, was already showing signs of weakness.
It was running at minus 0.2% of GDP, which is its lowest level since early 2019. The recent unexpected contraction in demand for C&I loans (at minus 1% YoY in Q4 2019) constitutes a clear warning signal that credit generation is doomed to decelerate further, at least until mid-2020, and maybe beyond due to coronavirus uncertainty.
Lower credit generation is happening at a pivotal moment for the U.S. economy amidst surge in COVID-19 cases and industrial cycle downturn.
There is little question that the United States are far less prepared than other developed countries facing the crisis. Low case counts relative to other countries does not reflect an absence of the pathogen in the United States, but a woeful lack of testing. The expected supply chains disruption and demand shock resulting from the virus are likely to significantly impact the economy and speed up the downturn in the industrial cycle. U.S. manufacturing, known as an efficient coincident indicator of the industrial earnings cycle, remains very weak, at 50.1 in February, while it was standing at 60.6 the same month last year.
It tends to indicate that earnings growth in the United States will probably collapse in Q2 and Q3 before rebounding by end of year when the coronavirus outbreak will be contained. So far, the U.S. government action to tackle the virus has been highly insufficient, so we expect more bad data to come regarding new cases of coronavirus infection detected in the United States.
Our message to investors is that the crisis is likely to get worse before it gets better.
Late last year, BofA’s Chief Investment Officer perfectly predicted how far the market meltup that was unleashed by the Fed’s “NOT QE” would push stocks higher, when he said that the S&P would hit 3,333 by March 3. He was right, and more notably, he was early, because the S&P rose just shy of 3,400 by late February… at which point everything imploded.
As a result, last week, in his latest Flow Show note, Hartnett reversed by 180 degrees and preemptively declared that based on the market’s response to the ongoing coronavirus pandemic, “We are in a global recession.” Which probably would imply that one week later, following the worst market rout since the global financial crisis, Hartnett would call his latest note “We are in a global depression.“
He did not go that far – it would not be professional for a Wall Street strategist to admit just how bad it could get – although certainly would be justified in light of the latest asset performance which is as follows:
gold 7.7%,
government bonds 5.6%,
IG bonds 0.4%,
cash 0.4%,
US dollar 0.1%,
HY bonds -5.6%,
global equities -15.9%,
commodities -27.3% YTD.
Instead, Hartnett said that the “global recession began last week driven by virus + oil + asset prices…credit markets effectively closed, spreads discounting credit events in corporate debt, private equity/shadow banking, risk parity, emerging markets.”
The BofA CIO then summarized in 10 bullet points just how catastrophic to “American carnage” has been, to wit:
Thursday’s 9.9% loss in Dow Jones = 5th largest daily loss of all-time.
16 days from peak to US equity bear market fastest ever; comparable to 1929 & 1987.
Global market cap loss past 3 weeks $16tn, >China GDP.
S&P500 market cap loss equates to $28,066 per US citizen.
MAGA stocks (Microsoft, Apple, Google, Amazon) all in bear market.
Standard deviation in 30-year US Treasury yield largest since Lehman.
CDX on IG & HY bonds widest since US debt downgrade in 2011.
Record bond ETF liquidation despite QE (see MBV, MUB).
Final capitulation indicated by safe haven selling (see TLT, GLD).
NYSE index (NYA), which includes US stocks/ETFs, foreign stocks via ADRs, and all bond ETFs -30%…back at same level as 2007 peak (Chart 5).
Putting it together, one may want to just sniff some ether, which Hartnett’s recap references nicely: “Fear & Loathing: crash reflects fear of economic recession, debt defaults, forced Wall St liquidations, policy impotence/incompetence.”
“This Is Just The Beginning”: Shocked Wall Street Traders Respond To An Insane Market
After a week of insane, breathtaking rollercoaster moves, stunned, disgusted, speechless traders are quietly stepping away from their trading desks, unable to make sense of what they see, or unable to find liquidity when they try to trade something they do so.
Take the overnight session for example: after the Dow first plunged by 9.99%, its biggest drop since the Oct 1987 crash, the liquidation panic triggered trading halts in Thailand, South Korea and Indonesia, while Japanese equities sank as much as 10%. The crash prompted a barrage of central bank interventions, which turned everything around, with assets from Australian equities to gold seeing gains, and by 8:20 a.m. in New York, S&P 500 futures were trading limit up!
And while traders may have been speechless in response to a market that no longer makes sense, they found it in themselves to make some notable comments which were duly tracked by Bloomberg, as follows:
Brian Barish, chief investment officer in Denver at Cambiar Investors LLC:
“This is all coming to a head very rapidly,” said Barish. “Markets are making it loud and clear that a business-as-usual approach is untenable. We are buying cosmetics and booze and select industrial businesses with pretty durable forms of demand. We have not developed the courage as of yet to jump on airlines or hotels. But maybe getting close with those. At this point, no sane investor should be concerned with 2020 earnings – they are cooked! – but with getting through to the other side of this.”
Peter Cecchini, global chief market strategist at Cantor Fitzgerald LP:
“It’s simply too late to engage in new long volatility hedge strategies,” said Cecchini: “Equity markets tend not to move in a straight line. We’d be monetizing hedges aggressively. Both the volatility surface and index technical setups suggest this action is prudent. All the factors we look at are extreme and point to a near-term bounce, including spot VIX at the highest since 2008. We still maintain a sell-the-rally mindset, as fair value on the S&P remains roughly 2,450 on a base case but with significant risk to a downside overshoot.”
Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets:
“While there is no free lunch, investors are seeking cost mitigation as hedges become more and more expensive. Selling a call spread while buying a put spread “still allows investors to retain upside should we get a sharp reversal (e.g. we have found a Coronavirus cure); meanwhile, it provides a wide expanse of protection on the downside.”
Albert Edwards, strategist at Societe Generale:
“The toxic fallout from the coronavirus pandemic’s bursting of the Fed’s ‘everything bubble’ has collided with the grotesquely over-leveraged and vulnerable U.S. corporate sector — this puts equity markets in an even more vulnerable position. With an anomalously low testing rate the U.S. will as a consequence suffer a high headline death rate, although the true death rate will be no worse than elsewhere. The big death rate headlines will likely hit consumer confidence very hard indeed and deepen an already likely deep recession and equity market collapse, potentially causing a significant backlash against the current U.S. administration. These are dangerous times indeed.”
Tom Porcelli and Jacob Oubina, economists at RBC Capital Markets:
“While the market may have been disappointed that Trump did not break out the bazooka last night, the reality is the Fed came close to doing that today — though the market remained unimpressed. They promised to do $500 billion each in 1-mo and 3-mo repos for the foreseeable future and they are going to expand Treasury purchases beyond bills. For a market focused on liquidity issues, this is good first step. We continue to hear that liquidity is terrible in off-the-run Treasuries so by expanding their purchases beyond bills, they no doubt hope to alleviate that issue. The problem is, spreading around the $60 billion in monthly purchases they were already making may not be enough. We think this is just the beginning.“
Tai Hui, chief Asia market strategist at JPMorgan Asset Management:
“Market sentiment will remain jittery in the near term as the Covid-19 outbreak continues to accelerate in the U.S. and Europe,. As we have experienced in China and other parts of Asia, the right policies to contain the outbreak should work but this involves some sharp, short term pain. We are likely to go through such pain in the weeks ahead in the U.S. and Europe. For markets to be less anxious, we need to see the number of new infections stabilize, as we did with China (since mid-February) and South Korea (in recent days). We also need to see fiscal and monetary policy support implementation. Hence, we are not looking at specific time or valuation to advise investors to add back equities, but instead we are looking for the right conditions.”
Mark Haefele, chief investment officer at UBS Global Wealth Management:
“We no longer recommend investors overweight emerging-market equity positions relative to euro-zone stocks.”
Vishnu Varathan, head of economics and strategy at Mizuho Bank:
“There’s a whole host of uncertainties out there and markets aren’t sure that the policy measures they have seen so far are coherent, cohesive and coordinated enough to tackle what’s at hand. It’s beside the point that we’ve gone into an area where valuations are attractive until the fright stabilizes and is alleviated. It’s difficult for markets to be convinced to be taking the risk in catching falling knives.”
Eli Lee, head of investment strategy at Bank of Singapore:
“The fact that we saw gold — typically a safe haven asset — decline almost 4% during the session to below $1,600 levels suggested a ‘reach for liquidity’ moment for investors. Investors also expressed their firm preference for the safety of the U.S. dollar yesterday. The USD broadly appreciated against Asian currencies, even against the safe-haven Japanese yen. The equity markets have by now priced in at least a technical recession lasting two quarters, in our view. The larger question is whether we could see a longer fundamental recession.”
Finally, one optimist – Satoru Matsumoto, a fund manager in Tokyo at Asset Management One:
“The market needs to see clear signs of a peaking of patient count globally, especially in the U.S. and Europe. Given the track record in China, I am hoping that we may see some light at the end of the tunnel by early next month. I don’t personally think that this outbreak will slow global growth too much, since it doesn’t stem from a credit crunch per se. But it’s inevitable that economic activities will be hindered given the declines in asset prices. Should oil prices remain low like now, the Indian rupee will be among those that look attractive. Those with higher real rates will have room to ease further and that will spur hopes for further declines in yield. The biggest positive of all is that China is actually starting to show some signs of recovery.”
By now, it’s fairly obvious that federal bureaucrats slowed America’s response to the new coronavirus outbreak. As university researchers and private-sector labs tried to develop tests that might have given health care providers a jump start on containing the virus, they were repeatedly stymied by the Centers for Disease Control and Food and Drug Administration.
As the focus shifts from testing to treating, yet more red tape is poised to cause yet more problems.
The most acute of those problems: America simply doesn’t have enough hospital beds to handle the expected influx of patients suffering from COVID-19. In many places, that shortage of beds is the result of state-level regulations—known as “certificate of need” laws, or CON laws—that artificially limit the supply of medical equipment. Those laws help politically powerful hospital chains limit regional competition and inflate health care costs, but they also create shortages of medical equipment that could prove disastrous during a pandemic.
Certificate of need laws are on the books in 35 states, but they differ from place to place. Their stated purpose is to keep hospitals from overspending, and thus from having to charge higher prices to make up for unnecessary outlays of capital costs. But in practice, they mean hospitals must get a state agency’s permission before offering new services or installing a new medical technology. Depending on the state, everything from the number of hospital beds to the installation of a new MRI machine could be subject to CON review.
“There have been artificially imposed restrictions on the number of beds, ventilators, and facilities in general that can exist. Some states might find themselves having a real problem,” says Jeffrey Singer, a medical doctor and a senior fellow at the Cato Institute, a libertarian think tank. (Singer is also a contributor to Reason Foundation, which publishes this website.)
In 28 states, hospitals must get state regulators’ permission before adding beds, according to data collected by researchers at the Mercatus Center, a think tank at George Mason University. Bed space in nursing homes and long-term care facilities are subject to CON regulations in 34 states. CON laws limit long-term acute care services—the sort of thing that many coronavirus victims may need as they recover—in 30 states. Specific medical equipment, such as ventilators, could be subject to CON laws covering the purchases of new devices.
Those laws are one reason why America has fewer hospital beds than most other developed countries.
The United States has only 2.8 hospital beds per 1,000 people, according to data from the Organization for Economic Cooperation and Development. That’s even less than the 3.2 hospital beds per 1,000 people in Italy, where the COVID-19 outbreak has been particularly devastating. In China, the figure is 4.3 beds per thousand people, and South Korea (whose response to the virus seems to have been the most effective so far) has a whopping 12.3 beds for every thousand people.
After the coronavirus outbreak in Wuhan, China, a new hospital with 1,000 beds was built in less than two weeks. It would be nearly impossible to duplicate that feat in America, says Singer—not because America lacks China’s top-down authoritarian structure, but because regulations (including CON laws) routinely prioritize protectionism over health. In recent years, a CON board in Virginia has blocked a hospital from building a needed neonatal intensive care unit because a nearby hospital complained about unwanted competition. A similar board in Michigan tried to restrict cancer treatments for reasons that had nothing to do with medical efficacy or patient safety.
Even when there isn’t a dangerous virus on the loose, CON laws are bad for patients. In 2016, researchers at the Mercatus Center found that hospitals in states with CON laws have higher mortality rates than hospitals in non-CON states. The average 30-day mortality rate for patients with pneumonia, heart failure, and heart attacks in states with CON laws is 2.5 to 5 percent higher even after demographic factors are taken out of the equation.
Singer says governors and state lawmakers should suspend any CON laws that might limit hospitals’ ability to respond to the COVID-19 outbreak. It’s likely too late to quickly expand the number of hospital beds available in the United States, but removing these impediments to expanding medical facilities should be a no-brainer.
After the coronavirus crisis has passed, those suspensions should be made permanent, so the market can adequately prepare for future pandemics without running up against protectionist rules.
“Let’s learn from this,” Singer says, “and not make this mistake again.”
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Even people who have been irrationally dismissive of the Corona pandemic up until this point finally had to wake up and smell reality yesterday. The NBA. Tom Hanks. European travel ban.
Our human brains, while magnificent and inspiring, are also wired in bizarre ways. We’re filled with countless ‘cognitive biases’ which affect our judgment, usually for the worse.
Among them is that human beings often cannot accept the possibility that tomorrow could be radically different than today.
Things that were completely unthinkable just a few days ago have now happened. And pretty much everything is on the table right now.
So I wanted to spend a bit of time today thinking through some potential outcomes that might have seemed inconceivable before this outbreak.
I’m not suggesting these are foregone conclusions. But they’re definitely possible.
1) Supply chains will break down
Nearly everything you buy at the store or online is the result of a ridiculously complex, global system of commerce, finance, and logistics.
This computer that I’m using right now was sourced from hundreds of different materials—plastics, metals, etc. that were mined and produced from dozens of places. The component parts were manufactured by different suppliers, assembled in China, and transported on boats and trucks to wholesalers, retailers, etc.
The whole process involves countless people, dozens of companies, and thousands upon thousands of miles.
This system works great under normal conditions. But it’s not resilient. It’s unable to cope with severe global shocks like we’re seeing now.
I think we could see (and are already seeing) factory workers stop coming to work. Mail delivery could be curtailed. Or just imagine there’s an outbreak at an Amazon Fulfilment Center, and the company goes down to minimal staffing.
All of this will have an impact in the smooth production and delivery of goods around the world.
I don’t think we’ll have any sort of Mad Max shortages. But the virus effect could likely create scarcity, especially for anything that’s manufactured outside of your home country.
2) Rationing and Export Prohibition
Countries will become increasingly protectionist, especially with critical items like masks and medicine. We’ve already seen the German government blocking a shipment of 240,000 face masks to Switzerland.
And demand for several items is going to skyrocket. You might have heard about the toilet paper heists across Asia, or fistfights breaking out in Australia over antibacterial cleansers.
Here’s a photo that a friend sent to me a few hours ago of the hand sanitizer section at Walgreens– almost empty.
This isn’t going to stand for very long before the companies themselves start to limit purchases, or governments impose full-blown rationing. And that leads to…
3) Some people will become totally unglued. Others will be saints.
Let’s be honest— there’s already so much anger in the world. Strikes, riots, protests, Twitter rants… even armed thugs in the streets (Antifa) physically assaulting people with ideological differences.
Introduce a little bit of scarcity into all that anger and a few people will become totally unhinged.
Just think about how violent some shoppers can be on Black Friday, punching each other’s lights out in Wal Mart for the last big screen TV on special.
At the same time, this pandemic also has the potential to bring out the best in people. And countless others will be at their very best: respectful, generous, and responsible.
4) Curfews and martial law.
This one is extremely realistic right now given that we already saw martial law in China, and it’s happening in Europe now too.
It could easily happen in the US, with state governments deploying the national guard to enforce curfews, or even the federal government deploying the military to keep the peace. It already happened in New York state, and we could see a lot more of it soon.
5) The Federal Reserve intervenes directly in the stock market, cuts rates below zero
It’s not remotely unprecedented for a central bank to buy stocks. Central banks in places like Japan and Switzerland took their total equity holdings to more than a trillion dollars last year.
And it’s totally reasonable that the Fed begins printing money again and buying stocks directly to prop up financial markets.
I do think that negative interest rates are nearly a foregone conclusion. The Fed’s headline interest rate is already as low as 1.5%, and the real economic impact of the Corona Virus hasn’t even been felt yet.
Just imagine how low they’ll go once people start losing their jobs. They won’t be bound by zero for long.
6) Some incredible discoveries and developments will come out of this
I’ve written this several times before—the world is not coming to an end. But I think it’s reasonable to assume that all of our lives are going to be a lot quieter and simpler for the next few months. No big outings, no big trips, and a lot of time at home with the family.
And that’s going to be whatever we make of it.
Back in the mid-1600s after an outbreak of the Bubonic Plague (more than 300 years after it originally surfaced in Europe), the University of Cambridge made the decision to close its doors for TWO YEARS in an effort to reduce the spread of the plague.
Isaac Newton had just completed his degree at the time. But his budding academic career had to be put on hold because of the university’s closure.
So he threw himself into independent study, retiring to a small farmhouse where he spent the next two years developing calculus, optics, and gravitational theory.
In other words, some of Isaac Newton’s most profound and lasting work came from his own quiet period.
Appaloosa’s David Tepper Says Fed Needs To Conduct Targeted QE
Appaloosa’s David Tepper was heard on CNBC earlier this year, making bullish bets on the stock market. He emailed CNBC’s Joe Kernen in January, saying, “I love riding a horse that’s running.” He added, “We have been long and continue that way.” Tepper also said, “At some point, the market will get to a level that I will slow down that horse and eventually get off.”
So, several months later, the equal-weight S&P has crashed 18% in the last week, one of the most aggressive down moves since the financial crisis, and it appears Tepper is calling for the Federal Reserve to conduct targeted QE in the amount of $200 billion to start. In an interview on CNBC on Friday morning, Tepper said the Fed should purchase Treasuries and mortgages, a move that could relieve market stress, he noted.
Tepper’s call for QE is likely because he’s been turned into a bag holder, derailed by bat soup, after making risky bullish bets earlier this year. His solution to bail out his losing positions: Ask the Fed to print more money.
By now, it’s fairly obvious that federal bureaucrats slowed America’s response to the new coronavirus outbreak. As university researchers and private-sector labs tried to develop tests that might have given health care providers a jump start on containing the virus, they were repeatedly stymied by the Centers for Disease Control and Food and Drug Administration.
As the focus shifts from testing to treating, yet more red tape is poised to cause yet more problems.
The most acute of those problems: America simply doesn’t have enough hospital beds to handle the expected influx of patients suffering from COVID-19. In many places, that shortage of beds is the result of state-level regulations—known as “certificate of need” laws, or CON laws—that artificially limit the supply of medical equipment. Those laws help politically powerful hospital chains limit regional competition and inflate health care costs, but they also create shortages of medical equipment that could prove disastrous during a pandemic.
Certificate of need laws are on the books in 35 states, but they differ from place to place. Their stated purpose is to keep hospitals from overspending, and thus from having to charge higher prices to make up for unnecessary outlays of capital costs. But in practice, they mean hospitals must get a state agency’s permission before offering new services or installing a new medical technology. Depending on the state, everything from the number of hospital beds to the installation of a new MRI machine could be subject to CON review.
“There have been artificially imposed restrictions on the number of beds, ventilators, and facilities in general that can exist. Some states might find themselves having a real problem,” says Jeffrey Singer, a medical doctor and a senior fellow at the Cato Institute, a libertarian think tank. (Singer is also a contributor to Reason Foundation, which publishes this website.)
In 28 states, hospitals must get state regulators’ permission before adding beds, according to data collected by researchers at the Mercatus Center, a think tank at George Mason University. Bed space in nursing homes and long-term care facilities are subject to CON regulations in 34 states. CON laws limit long-term acute care services—the sort of thing that many coronavirus victims may need as they recover—in 30 states. Specific medical equipment, such as ventilators, could be subject to CON laws covering the purchases of new devices.
Those laws are one reason why America has fewer hospital beds than most other developed countries.
The United States has only 2.8 hospital beds per 1,000 people, according to data from the Organization for Economic Cooperation and Development. That’s even less than the 3.2 hospital beds per 1,000 people in Italy, where the COVID-19 outbreak has been particularly devastating. In China, the figure is 4.3 beds per thousand people, and South Korea (whose response to the virus seems to have been the most effective so far) has a whopping 12.3 beds for every thousand people.
After the coronavirus outbreak in Wuhan, China, a new hospital with 1,000 beds was built in less than two weeks. It would be nearly impossible to duplicate that feat in America, says Singer—not because America lacks China’s top-down authoritarian structure, but because regulations (including CON laws) routinely prioritize protectionism over health. In recent years, a CON board in Virginia has blocked a hospital from building a needed neonatal intensive care unit because a nearby hospital complained about unwanted competition. A similar board in Michigan tried to restrict cancer treatments for reasons that had nothing to do with medical efficacy or patient safety.
Even when there isn’t a dangerous virus on the loose, CON laws are bad for patients. In 2016, researchers at the Mercatus Center found that hospitals in states with CON laws have higher mortality rates than hospitals in non-CON states. The average 30-day mortality rate for patients with pneumonia, heart failure, and heart attacks in states with CON laws is 2.5 to 5 percent higher even after demographic factors are taken out of the equation.
Singer says governors and state lawmakers should suspend any CON laws that might limit hospitals’ ability to respond to the COVID-19 outbreak. It’s likely too late to quickly expand the number of hospital beds available in the United States, but removing these impediments to expanding medical facilities should be a no-brainer.
After the coronavirus crisis has passed, those suspensions should be made permanent, so the market can adequately prepare for future pandemics without running up against protectionist rules.
“Let’s learn from this,” Singer says, “and not make this mistake again.”
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“The Biggest VaR Shock In History”: Here’s The Reason Behind The Market’s Insane Moves In One Chart
Less than two months ago, when we pointed out how virtually every investor class was all-in the stock market (something which we are certain they wish they could now undo), we highlighted that “among the systematics, the bullishness of risk parity is now almost literally off the charts.“
However, what goes up in a straight line usually comes down even more violently.
As first discussed two days ago, the “Late Day Treasury Futs Crash, Sparks Speculation Of Risk Parity Liquidation“, and as Morgan Stanley picked up one day later, there were numerous signs of a breakdown in stock-bond correlation, with stocks underperforming 10-year yields by nearly 5 standard deviations on Tuesday. This put stress on all multi-asset portfolios, but as MS cautioned, “Risk Parity funds in particular are likely struggling, having the worst 3 day period on record on QDS’s model.”
Some background for those unfamiliar: as we have previously explained on various occasions, Risk Parity funds are the class of the systematic strategies that tend to run very high leverage, especially when the VIX is low and markets are stable, effectively assuring a violent unwind when a “fat tail” (or “black bat) event occurs. This means they could have $10bn or more of stock to sell per day in these kinds of environments – and since they often will be selling stocks and bonds together, their flow can reinforce correlation breakdowns like what we have seen in the past weeks.
With that in mind, and considering the chart at the top of this post, today we wanted to bring attention to what happens to risk-parity leverage when a market crashes. To do that, we show the following chart from Nomura’s Charlie McElligott who writes today that the story yesterday was Risk Parity, which was “by far” the largest culprit in the cross-asset deleveraging purge, with Nomura’s model estimates showing aggregated gross-exposure slashed from 450% (61st %ile since ’11) down to 305% (2.9%ile) on the session.
And so, to help out BMO which earlier today said that “The Disconnect Between Treasuries And Stocks Is The Most Widely Debated Topic At The Moment”, as well as anyone else who is still confused, here is the chart showing the culprit behind this week’s chaotic, disorderly moves: the Risk Parity VaR shock, in one picture.
We hope that none of this is a shock to our readers. After all, over the weekend when discussing the aftermath of the Crude crash following the start of the oil price war by Saudi Arabia, we said very clearly that “once Brent craters on Monday to the mid-$30s or lower, the accompanying implosion in 10Y yields could make the record plunge in yields seen on Friday a dress rehearsal for what could be the biggest VaR shock of all time.”
And that’s exactly what happened, because as JPMorgan writes this morning “effectively nine years of previous equity-bond overweights have been unwound in only three weeks.“
What happens next – will these Risk Parity funds relever, resuming their purchases of both bonds and stocks, and under what conditions would that happen? To answer this question we go to JPM quant Nick Panigirtzoglou who looks at the biggest VaR shock since the Lehman crisis, and explains what needs to happen for the VaR shock to finally end:
This week’s worsening is less about investors taking a fundamental view on the economy or responding to virus news. In our opinion this week’s worsening is more about investors responding to the biggest VaR shock since the Lehman crisis.
This huge rise in volatility likely induced position reduction by VaR sensitive investors, not only asset managers but also dealers and market makers, as they breached their VaR limits.
And with the lack of liquidity in markets, one is feeding the other: as volatility rises market makers step back from their market making role and raise bid offer spreads inducing low market depth and lower liquidity which in turns creates even more volatility.
For the market rout to stop, we need VaR-insensitive investors to step in, such as pension funds, insurance companies, SWFs, endowments, households or large companies via share buybacks.
As usual, it will be up to the Fed to spark that all important moment of “this is the bottom” confidence… and if as many claim the Fed’s credibility and ability to impact markets is now gone, then it may be time to quietly get out of Dodge.
Several democratic presidential candidates have proposed fracking bans, but oil companies have room to breathe easily knowing that killing off fracking in the US is a bit too big of a bite for any political party to handle.
But as environmental issues continue to remain front and center in the media, fracking has become a rather easy target that offers political candidates a juicy platform from which they can woo voters.
But is their plan to ban fracking really feasible? And doesn’t the American shale patch already have enough – and bigger – enemies?
Fracking Explained
Fracking–also called hydraulic fracturing–is a drilling process that involves injecting a high-pressure mixture containing water, sand, and chemicals into shale rock, which fractures the rock and releases the oil and gas that is trapped inside. The process often involves horizontal drilling.
The Benefits of Fracking
The benefits of fracking are numerous. In the United States, the introduction of fracking has completely turned the energy industry upside down, increasing the amount of oil and gas produced in the US “faster than at any time in its history,” according to the EIA, and increasing America’s energy independence in the process. Fracking has also brought down energy prices. Environmentally speaking, fracking has managed to lower carbon emissions by displacing a fair amount of carbon-intensive coal, which is now on the skids.
Nevertheless, fracking has its drawbacks, and environmentalists–and the Democratic party that serves them–have singled out fracturing as a one-dimensional evil that must be stopped, at all costs.
The argument against fracking is that the process of fracturing the earth to release tight oil causes earthquakes. The other argument is that injecting chemicals into the earth is polluting nearby aquifers. Both issues have long been debated.
All Aboard the Anti-Fracking Movement!
If you’re a Democrat of the far-left leaning variety, you’re likely already on the anti-fracking train. Political candidates such as Bernie Sanders and Elizabeth Warren–the latter of whom is no longer in the running for President–jumped on board early and were extremely vocal against fracking.
That leaves Sanders, who is also having a bit of trouble in the polls, as the anti-fracking movement’s best champion.
“Any proposal to avert the climate crisis must include a full fracking ban on public and private lands,” Sanders tweeted last September.
Sanders even teamed up with Alexandria Ocasio-Cortez and others to propose a federal bill to “phase out” fracking nationwide, known as the Ban Fracking Act. The act would start with banning new federal permits for fracking-related infrastructure immediately. Then, by 2021, fracking within 2500 feet of homes and schools would be banned. By 2025, the act would ban fracking in the United States completely, according to Sanders’ website.
But some have argued that neither Sanders nor Warren understands the issue of fracking.
It is also possible that neither Sanders nor Warren fully understands the implications of standing on a platform that would seek to ban fracking.
But what would a fracking ban mean?
The Wrath of the States
A nationwide ban aside, which federally would be problematic as the states are the ones that regulate fracking, fracking-dependent states may not be too excited to endorse a candidate–democratic or not–who opposes fracking outright.
First, Pennsylvania, an important swing state, has enjoyed sucking off the fracking teat, much like it sucks off the coal teat. Democrats tried to take an anti-coal stance there during the last presidential election, but failed to win over the swing state, with Pennsylvania residents opting instead for the more fiscally minded “Trump digs coal” stance. Any anti-fracking candidates will struggle to swing this state back into blue territory.
Colorado, too, may prove challenging for candidates heralding the benefits of a fracking ban. Although a purple state, Big Oil has managed to do quite well here with quashing anti-oil ballot proposals in the past. Voters were asked in 2018 to weigh the merits of increased setbacks for oil and gas wells, which would have taken a significant portion of land off the table for oil and gas drilling. The environmentally friendly measure, however, was defeated.
But Sanders managed to win the Democratic primary in Colorado taking this unforgiving stance, despite the fact that the American Petroleum Institute said a fracking ban would mean a loss of more than 350,000 jobs in Colorado.
New Mexico, too, would take a severe beating from any ban on its bread and butter activity of fracking. According to a study from the US Chamber of Commerce’s Global Energy Institute found that a fracking ban could cost the state nearly 16% of its workforce and cut away $86 billion in cumulative GDP through 2025.
Is it Even Feasible?
CNN recently provided a fracking ban “fact check”, pointing out that banning fracking would require an act of Congress. A president without Congress could maybe ban it on federal lands, but private-land fracking would take more oomph than a president has.
Yes, a president could make fracking on private lands a far more difficult endeavor, but Big Oil (and the API) has already proven a worthy foe over other anti-oil legislation, and Big Oil’s win is near certainly. Warren and Sanders are unlikely to be in the dark on this near-certain outcome.
Fracking regulations on federal lands have already been proposed in the past but were consequently ruled unlawful.
Like Sanders and Warren, surely the API must know that any full-on fracking ban proposal is a no-go. Still, the API is already putting on the gloves to go another round, with a passionate campaign to bring to light what it considers to be a devastating effect on the US energy industry and the whole economy.
A Far Greater Nemesis
A far greater foe to fracking than any political candidate would be the market itself–the coronavirus and OPEC’s complete failure to reach a deal with Russia over production cuts have sent oil prices falling to scary lows. These low prices are likely the only immediate thing that the US fracking industry has to worry about at the moment.
