Tag: news

T Rowe Price trounced WeWork in a Securities and Exchange Commission (SEC) filing on Thursday, calling its investment in the shared office space startup a “debacle.”

The filing said WeWork is a “terrible investment” and has been nothing more than “outsized headaches and disappointments.”

T Rowe’s Mid-Cap Growth Fund, with offices in Baltimore City and Owings Mills-Reisterstown, Maryland, said their investment with WeWork began in 2014.

It noted that SoftBank made aggressive investments in the startup and pushed valuations higher, which ignored its advice on decreasing the startup’s growth expansion across the world.

“They took our advice for a few months, but new investors soon arrived who convinced management to put its foot back on the accelerator,” T Rowe said in the filing.

It appears T Rowe figured out that something was amiss with the startup, even dating back to 2017. The investment bank started offloading its shares, but when it came to selling a large block, WeWork’s management rejected the sale in 2019. Shortly after, the startup’s valuation collapsed, and here is what the bank said in response:

“Massive losses soon followed, but the CEO promised profitability was just over the horizon. We did not take him at his word, and we communicated to WeWork’s management and board our displeasure with its eroding corporate governance. In 2017 and again in 2019, we sold stock in tenders totaling about 16% of our shares and 50% of our initial investment. We also had a tentative deal to sell our remaining shares to a large investor in early 2019. Unfortunately, WeWork’s management had to approve the transaction, and they refused. In the wake of intense public scrutiny, WeWork abandoned its IPO plans this fall, leaving our remaining shares worth a fraction of their earlier valuation.”

“While it’s possible that WeWork’s new management will improve operations somewhat, we are ready to declare this a terrible investment,” the filing said.

And it’s stunning that a top investment bank has voiced so much of their frustration with WeWork on the public domain:

“We seek to learn from our missteps, and it is clear that we misread the motivations of WeWork’s management and our investment partners. Fortunately, our cautious approach toward the private market limited the damage. We have invested in more than a dozen private companies over the past decade, and many of them have performed quite well. These investments often provide us with useful insight into the changing dynamics of industries, the impact of technological disruption, and future competition facing our existing holdings that we need to consider in the management of our portfolio. Each investment has been small, however, and we ended 2019 with just 0.58% of our portfolio in non-listed securities. In short, we believe the WeWork debacle was an error in judgment, not in process.”

WeWork’s rapid late-cycle expansion is nothing short of a miscalculated move by the startup’s management and the investment bank, who had an abundance of liquidity from central banks that blinded every one of the positioning of the business cycle.

And here’s what we said in 2017: “Either WeWork is going to blow-up, or it’s the work of genius. If pushed, we’d probably side with the former.”

And just like that, all those hopes and optimistic dreams that the notorious killing machine designed by clowns, supervised by monkeys known as the 737 MAX will be returning to the air around June, following recent “hopeful” comments by the FAA, have gone poof.

One day after Southwest said it is extending its 737 MAX cancellations through August 20, the largest US airline (by available seat miles) United Airlines, also said it was pulling the Boeing 737 MAX from its schedule until September 4. Why September 4th and not September 8th for example? Good question:

Can’t they wait until September *8th*?

It would be really great if everyone could live through Labor Day Weekend! https://t.co/ohJMXdjnDe

— Mark B. Spiegel (@markbspiegel) February 14, 2020

Boeing stock dipped modestly on the news, seemingly ignoring the fact that as of this moment, almost three-quarters of 2020 will pass without most major airlines flying the “cost-effective” airplane, a gap which will likely stretch into 2021 if not forever, because a far more important question than when the 737 MAX returns to duty is whether anyone will ever fly this notorious airplane again, whose history of opting for cost-efficiency over, say, the life expectancy of its passengers has repeatedly made the front pages of most media outlets.

 

With Joe Biden’s 2020 aspirations melting like a Nazi who just opened the Ark, moderate Democrats who won’t vote for a socialist or are perhaps uncomfortable with ‘non-binary’ cabinet appointees are left with two choices; Pete Buttigieg or Michael Bloomberg.

And based on the most recent odds from PredictIt, it looks like the former New York mayor may have to dust off his standing box for a showdown with President Trump.

Friends, nominations, and other things money can buy

How did Bloomberg, with his cardboard charisma and ‘Mr. Burns’ mannerisms, stage such a sudden and meteoric rise in the polls? Aside from Biden’s implosion leaving a giant moderate vacuum on the left, Bloomberg has been aggressively showering anyone within arm’s reach with buckets and buckets of money – so much that President Trump warned there would be revolution in the Democrat party if Bloomberg won the nomination.

“If a guy came in and bought the election, if he bought the Democratic nomination, I really think that you’d have a revolution within the Democrat party,” Trump told Giraldo Rivera on Thursday.

Explaining how Bloomberg is “using his fortune to fundamentally alter & manipulate U.S. politics to his personal advantage extends way beyond ads” is journalist Blake Zeff, who has “worked against” Bloomberg, “covered him as a journalist & worked with his top aides.”

Here’s the playbook:

But come on, it’s not like he can do that in *this* campaign. Sure he’s compiling a ton of random endorsements nationwide despite merely being a former mayor. But that’s because they loved his soda ban. Or his speaking style. Or…👇 3/17 https://t.co/vupRr0uMqp pic.twitter.com/ZSDzho8YD6

— Blake Zeff (@blakezeff) February 13, 2020

You may also see “community groups” back Mike’s candidacy. As mayor, non-profits supported him when he reversed a voter referendum on term limits & made a backroom deal to help himself get a 3rd term. How’d that happen, you ask? He applied himself.👇 5/17 https://t.co/oISYWjWap4

— Blake Zeff (@blakezeff) February 13, 2020

Forget endorsements: This campaign has grassroots support! Mike held events in various states recently & got huge crowds. They were clearly inspired by that “Mike Will Get It Done” energy. But *this* probably didn’t hurt, either…👇 7/17 pic.twitter.com/CzWXR4MMVR

— Blake Zeff (@blakezeff) February 13, 2020

Mike’s wealth even affects his rivals’ fundraising. Using his relationships with other rich donors, he’s personally asking them to sit the election out, so his rivals can’t raise cash. Because having $61b to spend, versus $20mil for the other Dems, is too close for comfort 9/17 pic.twitter.com/7Nrl8lTmBY

— Blake Zeff (@blakezeff) February 13, 2020

OK, let’s discuss the non-stop ads. Saturating the airwaves gives you the huge advantage of never needing media coverage – which means rarely having to submit to interviews or scrutiny. If they want, they can make sure this👇 never happens again 11/17 https://t.co/7iwvPbrCNc

— Blake Zeff (@blakezeff) February 13, 2020

The issue’s not just that Mike’s ads help him “get his story out more.” It’s that they enable him to *craft* whatever story he wants, blast it to every voter 1000 times, & bypass the media. And if the story takes creative licenses, oh well. How will viewers ever find out? 13/17

— Blake Zeff (@blakezeff) February 13, 2020

For example, they know Mike has real vulnerabilities in the primary on issues & his GOP past. But they also know Dems hate Trump. So, that’s where the campaign turns all its focus. This achieves several things. First, makes him seem “above” the internal primary bickering. 15/17

— Blake Zeff (@blakezeff) February 13, 2020

3 months ago, polls found Mike Bloomberg “widely disliked” with the highest negatives in the race. Now he’s a top 3 contender for the Democratic nomination. One of the richest humans ever is trying to upend every part of the process. And this is just the stuff we know about. /END

— Blake Zeff (@blakezeff) February 13, 2020

No wonder Trump has been on the offense against ‘mini Mike.’

With General Flynn battling nuance (and his previous legal team) in his case and Roger Stone’s case jumping from re-trial to nine years in jail amid rising anti-Trump controversy, it will perhaps come as a major surprise to those assuming “no one is above the law” or “equality under the law,” that The New York Times reports, former deputy F.B.I. director Andrew McCabe will not face charges in an investigation into whether he lied to investigators about a media leak.

As a reminder, the investigation into Mr. McCabe grew out of findings from the Justice Department inspector general, Michael E. Horowitz. He faulted Mr. McCabe in 2018 for misleading investigators when asked about the disclosure of information in 2016 to a Wall Street Journal reporter about an investigation into the Clinton Foundation.

According to the ubiquitous “people familiar with the matter,” NYT claims that a day after AG Barr complained about President Trump’s tweets, the decision not to charge McCabe appears to be a sign that Barr wants to show that the Justice Department is independent from Mr. Trump.

We strongly suggest that is a false assumption, but Mr. McCabe’s supporters viewed the investigation as politically motivated and inextricably tainted by Mr. Trump’s relentless attacks…. whereas, of course, probes into everyone whoever even breathed in the same room as Trump (or Putin) is not?

Of course, this anonymously sourced rumor-mongery – as usual – but we look forward to Barr’s strong denial, and/or Trump’s angry tweet at this decision.

 

 

 

 

 

 

 

 

 

 

 

Remember this guy?

His name is Ying Yong, and until Friday, he was the mayor of Shanghai, and in that capacity, presided over several important Beijing-approved experiments in capitalist market liberalization. One of those was recruiting (or rather, sheperding) Tesla to Shanghai in the middle of a trade war.

In other words, Ying was the man behind the infamous Elon Musk victory dance, and the man who has cost Tesla bears billions of dollars in losses (we think that makes him the Wizard of Shortsville).

From here on out, he’s also going to be the man spearheading Beijing’s COVID-19 containment efforts in Hubei, the epicenter of the outbreak and still the worst-hit province by far.

As Bloomberg reports, the 62-year-old mayor has been appointed the new top Communist Party official in Hubei after the scapegoating of its top two party officials.

One expert who spoke with Bloomberg explained what kind of message Ying’s appointment sends to the Chinese people: With a reputation as a deft executive and a protege of President Xi, the Politburo is telling the people that the President is putting his best and brightest people on it. He’s even willing to risk the reputation of one of his favorite proteges to protect them.

The choice speaks volumes about what President Xi Jinping values as he grapples with the biggest political crisis of his tenure. Ying, a former top judge who previously served under Xi in positions in Zhejiang province, is seen first and foremost as a proven loyalist.

“By sending a known ally to Hubei, Xi Jinping is also signaling the personal importance he attaches to Hubei’s recovery,” said Ken Jarrett, a former U.S. consul general in Shanghai who’s now a senior adviser for the Albright Stonebridge Group. “This is intended to reassure the citizens of Hubei that the central government will provide all necessary help as Hubei emerges from this public health crisis.”

It’s also a major gamble. Because, as we hinted at above, Ying’s perceived closeness to Xi, and the president’s willingness to delegate such a major responsibility to Yong, mean that the party leadership won’t be able to hide behind Yong’s scapegoated corpse: No matter what happens, they will be directly in the line of fire for public outrage.

The shakeup indicates increasing unease among China’s top leaders with the political fallout from the virus and their desire to regain control of events. Ying’s success could have particular consequences for Xi, since he’s vested his confidence in the former Shanghai mayor to save the party’s prestige at home and abroad.

“The assignment shows the party with Xi Jinping at its core highly trusts me,” Ying said after he took the post Thursday, with a obligatory nod to Xi’s paramount status in the party. He called the new job “a heavy responsibility” and “a major test.”

Bloomberg published a brief biography of Ying and his ascension through the ranks of the Communist Party. The biography emphasizes Ying’s loyalty to Xi through the years.

Ying, who joined the party in 1979, started as an official in the coastal province of Zhejiang, working for the Huangyan county industry bureau and the local police. He then spent much of his career in the province’s party-controlled legal system, rising to become president of the Zhejiang Higher People’s Court in 2006.

There, his career intersected with Xi, who led Zhejiang from 2002 to 2007. Ying later followed Xi to the neighboring metropolis of Shanghai and was appointed to lead the Shanghai Higher People’s Court in 2008.

Because of his overlapping experience with the future president in Zhejiang, Ying is often classified as a member of the “New Zhijiang Army,” a reference to the greater Zhejiang region. It’s a well of connections that Xi has repeatedly tapped since taking power in 2012.

“His appointment reflects the belief that the Hubei party apparatus has performed poorly and needs a good shakeup,” said Trey McArver, a partner at Beijing-based consulting firm Trivium China. “Ying is likely to focus on finding why the system performed poorly, and then taking steps to address the issue.”

In 2017, Ying was appointed mayor of Shanghai, a city of more than 20 million that has long been a key base of political power. While he maintained a relatively low profile, he nevertheless gained experience managing an economy roughly equal in size to Poland’s.

Perhaps more importantly, he expressed vocal support for Xi’s key agenda items, once describing the most important consideration for reforming China’s state-owned enterprises as “maintaining the party’s leadership.” He also presided over “criticism and self-criticism” sessions in the Shanghai government last year, in line with Xi’s Marxist approach to political discipline.

Ying’s most high-profile moment was unquestionably the launch of the Tesla Model 3s last month, when he shook hands with Musk and congratulated him on the brand’s local success. “The cooperation between Tesla and Shanghai is just a beginning and has a promising future,” Ying said.

It was a rare moment in the limelight for a low-key loyal party operative. But as Xi faces down the greatest challenge of his rule in Hubei, he appears to have decided that quiet loyalty was what he needs most.

“Ying Yong’s strongest credential is a long affiliation with Xi,” Jarrett said. “Xi wants someone he trusts as Hubei gets back on its feet again.”

However, as Bloomberg reports, the reviews of Ying’s performance in confronting the virus in Shanghai have been mixed…

Ying’s tenure as a virus-fighter has received mixed reviews, even on China’s heavily censored social media, where some complained about what they said was Shanghai’s slowness in tracking infected cases compared to other regions. One Weibo user named Little Landlady in Shanghai said the city needed to “detail every confirmed case like Tianjin, disclose their tracks like Anhui and manage those returning to Shanghai like Suzhou.”

…But we suspect that’s the case throughout China.

Just days after OPEC slashed its oil demand forecast as a result of the slowdown in China’s economy due to the Covid-19, moments ago Goldman has doubled down on its bearish oil take and has cut its oil price target by $10 to $53 in Q1 through the end of the year, as a result of what it now estimates is a loss of as much as 4 million barrels per day out of China.

In a note from Goldman’s Damien Courvalin, the commodity strategist writes that fundamental uncertainty in the oil market is exceptionally high, adding that “the loss of Chinese and global oil demand from the coronavirus outbreak is significant but remains unknown in both scale and duration while the timing and scale of a potential OPEC+ production cut remains highly uncertain as well.”

As a result, in his first attempt at measuring this hit on Chinese demand points to a peak of 4 million b/d yoy loss in demand currently.

Assuming a gradual recovery by May would bring 2020 global oil demand growth to 0.6 mb/d yoy vs. 1.1 mb/d previously and the global market in a 1.0 mb/d surplus through 1H20, according to Courvalin. However, in case OPEC+ manages to agree to a 0.5 mb/d cut in 2Q20 with prior cuts extended through 2H20 that would lead to normalized inventories by year-end.

Focusing on China, Goldman writes that the current large oil surplus appears so far contained to China, “once again highlighting the importance of China and EM storage in smoothing out supply and demand shocks.”

These supply and demand assumptions lead Goldman to expect a global oil market in surplus in 1H20, with a global cumulative inventory build of 180 mb, four times its pre-virus forecast. The bank then expects the oil market to shift back into a deficit in 3Q20 with a greater than seasonal global inventory decline of 90 mb in 2H20, bringing the oil market back to our pre-virus path by end-2020. Courvalin expects that China (and to a lesser extent other EMs) will be able to accommodate half of this inventory build. Specifically, China has large crude spare storage capacity with satellite imagery pointing to c.150 mb of ullage (with potential for more, either underground or should new tanks be quickly built). India, Russia and core-OPEC producers have at least a further 35 mb of spare storage capacity as well, leaving for a moderate OECD inventory build of 0.5 mb/d in 2Q.

In terms of price, Courvalin writes that mapping the residual OECD inventory path to his pricing model “points to a gradual recovery in oil prices from current levels with Brent prices of $53, $57, $60 and $65/bbl for the rest of 1Q through 4Q20 vs. our prior $63/bbl forecast (with WTI $4.5/bbl lower).” The strategist also says that he will update these forecasts as details on the hit to Chinese and global oil demand and a potential OPEC supply response become available.

Yet even his Goldman’s base-case forecast play out, the bank still expects oil prices to lag the rebound in other EM/China exposed risky assets as it will take time to reverse the oil inventory surplus currently accumulated. Importantly, the bank warns that “there remain high risks that Chinese oil storage capacity could run out should the demand loss be larger than we expect.” This means that oil prices could overshoot even more to the downside, as risks to oil prices as skewed lower “despite its already notable underperformance.”

Finally, given still relatively long net speculative positions, Goldman believes the oil market is not sufficiently concerned about this potential gap risk lower in prices, which means that a speculative capitulation could potentially send Brent into the $40s or even lower in case of a full-blown puke by CTAs and other levered accounts.

Blain’s Morning Porridge, submitted by Bill Blain of Shard Capital

“All political lives end in failure…”

What a week: Covid19 virus out of control? Fears of global recession? Tesla doing a $2 bln rights issues (which I can’t fault: impeccable timing and signposted clearly by Mush when he said 2 weeks ago the company did not need money and would definitely not raise any)?  Yield curve inversions? Greek bonds tumbling below 1% as a Europe stumbles into another slowdown? Nothing to worry about.. the Chinese have the virus in hand, (really?) and Central Banks are poised and ready to save us all.

Lord have mercy on us all…..

For years now, The Morning Porridge has been arguing one of the clearest dangers to markets is the Atrophy of Politics. Quality has fallen. Markets tend to panic about the left – fearing muddled political lightweights like Jeremy Corbyn might just get elected and destroy Western Civilisation over an afternoon. Not going to happen. Recent events in Ireland aside, the risk of populist political shifts to the Right are more dangerous, fuelled by protectionism, isolationism and political vanity.

If there is one article you should probably read this weekend it’s this from the FT – The revenge of the middle-class anti-elitist. If you don’t recognise yourself or someone close – then get out from under your stone and spend some time among your fellow humans and listen to what peeves them. Economics and politics are about the behaviour of crowds.

The political landscape sets the tone for growth and the mood driving consumption. If the political classes deliver and please their voter, then economies are likely to thrive – it’s a circular argument, a virtuous circle. The problem is – politics have never looked so broken and dismal. The political picture is bleak with political solids are hitting the fan everywhere from Aberdeen to Zetland. The political mess is likely to impact market sentiment.

Here at the Morning Porridge, my job is predict just how the current political disappointments are likely to morph into market moves. Tricky. But let me throw some risks at you –

The UK

After my note about Javid’s dismissal and Rishi Sunak’s appointment, I’m not best popular with the political classes here in the UK.  I was bluntly told Sunak is there to deliver what he’s told to deliver. Yep, I get that. Nobody else seems concerned at his lack of obvious political background, his sudden explosion onto the political scene, or who and how wealthy his father-in-law is. Maybe I am just an angry anti-elitist?

Javid was forced out because he refused to accept the Treasury being run by Dominic Cummings from Boris’ office. Under the new Boris “Presidential” model, government has shifted British Politics from Cabinet to direct rule through Boris and Dom. It’s a path unlikely to appeal to authority hungry MPs, overturns the traditional check and balances through the Civil Service, and breaks the cabinet lines of accountability.

It does mean Dom and Bor can flood the papers with headlines about tax cuts and spending plans, and glossy photo spreads about our new high spending Chancellor this morning, but a cabinet full of yes-men rubber stamping the decisions from inside No 10 is not particularly appealing. Creative tension is a good thing. I would not be surprised if it doesn’t provoke considerable resentment within the Conservative parliamentary party – especially when it starts going wrong.

And go wrong it will.

Dom and Bor are dedicating their presidency to Getting Things Done. What happens when they don’t happen and fail to deliver? When negotiations with Europe stumble, when projects are delayed, when departments fail to deliver? Accountability and the buck stops with Boris.

Personally, I like the idea of shaking up the way things are done in Westminster. But, there are limits…

Risk Prediction:  Political instability in the UK is not over. The parliamentary majority has been squandered to demonstrate control. Last year we saw the Tories self-destruct as the May government collapsed. Political infighting is likely to continue and escalate, unbalancing hopes for a Brexit Bounce, and hold back the UK as it tries to re-enter the global economy as a free-player. The Nationalists face their own legal problems in Scotland, but will see Bor/Dom distractions as political opportunity. There are elevated risks for gilts and sterling.

The US

Surely there are no political threats in the US? Markets are currently utterly unconcerned about the 2020 election. The simple and obvious assumption is Trump is going to win because the Democrats have already so conclusively beaten themselves.

Bernie Sanders might appeal to a limited number of Wobblies in the North East. Biden looks a lost cause – tired and irrelevant before the thing even started. Elizabeth Warren wasn’t near the top 3 in the New Hampshire primary. Who are the other two? Paul Buttigieg and Amy Klobuchar? National poling suggests, despite wall-to-wall advertising, Bloomberg is even lower on the voter preference scale.

And after the pointless distraction that was the impeachment trial, the Democrats seem to have thrown away their prime advantage – just how polarising and detached from consensus Trump has become. Trump can say whateva he wants about criminal trials, the DoJ and act more and more like a Roman Emperor.

The market – even though no one will admit it – likes Trump. He makes participants rich. He may say outrageous things, lacks self-control and have the moral compass of a jack-ass, but he delivers the right noises to line market pockets. Tax cuts have fuelled prices higher. His harangue of the Fed to cut rates and boost markets hits the right chord with investors who want to see prices go up forever. Who cares that his trade wars have pushed back growth by years – it’s the fact China played to him that counts.

More to the point, Trump is lucky – he got lucky on Iraq. His approval rating soared after the impeachment trial.

Which is where this gets interesting. What are the chances the Democrats stop being idiots, stop trying to replicate the recent stunning success of the UK Labour party by not adopting unelectable candidates and non-sensical policies, and actually get back on track to fight the election to win? That would require a centrist moderate candidate who is unlikely to do anything radical to upset the current market, appeal to voters as a good compromise, and show willing to unite the country… does such a woman exist? A decent compromise Democrat could yet over-turn expectations of Trump infinity.

Risk Prediction: A turnaround in Democrat prospects seems unlikely, it definitely looks a long shot, but it may yet happen. Trump may push too far, or a serious contender may arrive, or more likely be crafted – which I why I’m reading up on Buttigieg and Klobuchar. If the Election looks to be a contest – it’s likely to get interesting in market terms.

Yoorp

The biggest danger to Europe is a distracted Germany – which is exactly what we have as the Merkel wends into political senility. A looming recession, her succession planning tumbling into irrelevance, and massive problems likely within the EU underlie the problems. Germany threatens to branch right and left, leaving a vacuum just as Europe gets more difficult. Yet another recession in Italy, pressures in Spain, France continuing to struggle with domestic strikes and budget issues, and the entire Northern, Germanic part of Europe begining to see the light as to why the UK chose to exit Europe.

The big questions about fiscal policy, banking union, and who will make up UK budget contributions, are tough to answer when Germany and others are increasingly distracted. How will Europe cope with a Covid19 generated wider recession?

Risk Prediction: Europe is always a fine balance politically – it’s been held together because the ECB was able to step in and sort it. However, the credibility is stretching thinner and thinner – and will be stressed if we see another summer of immigrants triggering right-wing issues, a rejection of Lagarde’s efforts to politicise the ECB, and insularity from Germany. The Euro could weaken further and Europe’s economy is still going nowhere.

Five Things to Read Today

BBerg – UK Political Shock Opens the Door to Trump-Style Stimulus

BBerg – German GDP Report Shows Economy Stagnating

FT – Barr says Trump Tweets make it impossible to do his job

FT – Global Shipping market reels from coronavirus

WSJ – Tesla Raising More than $2bln, Discloses New SEC inquiry

Have a great weekend!

Bill Blain

Shard Capital

Guggenheim Partners’ Scott Minerd warned in a new market outlook titled “Peace for Our Time: The coronavirus is a looming economic problem” that the Covid-19 outbreak in China is the latest red flag for investors could prick the corporate debt bubble. 

Minerd says, “cognitive dissonance in the credit market is stunning.” He compares today’s uncomfortable and eerie stillness in the corporate bond market to the late 1930s, right before the Nazis started bombing Britain.

But the larger-than-life CIO spoke even more ominously during an interview with CNBC, warning that “I have never in my career seen anything as crazy as what’s going on right now,” adding “this will eventually end badly.“

Financial markets, he warned, show a “cognitive dissonance” from economic reality that has created a dangerous bubble among debt assets.

“In the markets today, yields are low, spreads are tight, and risk assets are priced to perfection, but everywhere you look there are red flags.”

Investors are underestimating the impact that the outbreak will have on the Chinese economy.

“In that sort of environment, people are not going to go to work. You’re not going to get output, and it’s unlikely that we’re going to return to any sort of level that was consistent with the pre-Lunar Holiday,” Minerd said.

With the virus outbreak worsening, and China shockingly reporting a massive jump in new infections on Wednesday-Thursday due to a “change in the definition” of how it counted confirmed cases, resulting in a surge of nearly 20,000 cases over the two days, Minerd warns: “Covid-19 is much more deadly than SARS and if not contained threatens to become a global pandemic.” 

The economic impact of the virus outbreak will result in China’s GDP for the first quarter to be slashed to sub 6% annualized from an already sluggish 6% in the fourth quarter, Minerd said. He added this would have a profound impact on the global economy: 

“At the same time that China is being forced to shut down factories and quarantine workers, interruptions to the supply chain in the United States and Europe have yet to be felt. By most estimates, if the Chinese extend the lunar new year by two weeks it would not meaningfully impact the global supply chain, but if it went beyond two weeks then we would start to see problems for materials and consumer goods outside of China. Even if the virus does not turn into a pandemic, to think it isn’t going to impact what’s going on in the world is irrational.” 

He said the impact on corporate profits and free cash flow “will be dramatic.”

As we wrote earlier this month in “Is Tech About To Suffer A “Dot Com” Bubble Collapse? It’s Suddenly All-In China’s Hands”, the one sector with the most significant exposure to Greater China and the Asia Pacific in general, is also the sector that has outperformed the most in recent months. Tech.

Minerd goes on to warn that “oil could plunge to $25 a barrel unless OPEC or other producers decide to cut production.” 

It was written in “Coronavirus Triggers “Biggest Shock” To Oil Markets Since Lehman Crisis” that could have severe implications for investment-grade securities rated BBB or lower have increased by at least fivefold from the depths of the last recession. It will only take one accident to trigger a cascade of downgrades pushing hundreds of billions of investment-grade bonds into junk, setting off a fire-sale that would make the 2008 financial crisis look like child’s play.

This is exactly what Minerd is saying:

“Yet as a major economic problem looms on the horizon, the cognitive disconnect between current asset prices and reality feels like the market equivalent of “peace for our time.” The average BBB bond yields just 2.9 percent. A recent 10-year BB-rated healthcare bond came to market at 3.5 percent and subsequently was increased in size from $1 billion to $1.7 billion due to excess demand.”

“For those investors who perceive the disconnect between risk assets which are priced for a rosy outcome and the reality of the looming risks to growth and earnings, any attempt to reduce risk leads to underperformance. It is a mind-numbing exercise for investors who see the cognitive dissonance. The frantic race to accumulate securities has cast price discovery to the side. In the world of corporate bonds and asset-backed securities, issuers are launching deals and then tightening spreads to Treasurys by 25 basis points or more relative to where the last similar new issue was priced just a day before. They are also upsizing deals, as it has become common to see new issue bond underwritings ten times oversubscribed. The giant flood of liquidity is driven by virtually every central bank in the world injecting reserves into the system. And many investors today don’t even buy individual bonds, they purchase a basket of bonds that can be traded versus an exchange-traded fund (ETF). The quality of the bond doesn’t matter; no one is actually negotiating a rate or a price. In the ETF market, prices are set by pricing services that frequently use stale data when no price discovery has occurred. The result is a non-market price determining where a security is trading and there is no additional price discovery, meaning nobody is negotiating individual bond prices. If it is in the index, buy it! This is what price discovery has become.” 

Minerd says, “Covid-19 is just one example of exogenous events that could prick the bubble” that is lurking in the corporate bond market.

Several months ago, Minerd said a Minksy moment for markets is coming a lot sooner than anyone believes, and that could be the truth as Thursday’s liquidity warning from the Federal Reserve could start next week. Term repo, which this month dropped from a max of $35 billion to $30 billion, would be reduced by another $5 billion to $25 billion and that starting in March, term repos would be reduced by another $5 billion to just $20 billion.

A perfect storm could be developing, one where a Covid-19 shock could send China’s and the global economy into a tailspin while unraveling all the junk in U.S. corporate bond markets, but at the same time, lead to liquidity gaps in the stock market as term repo is wound down. 

What could possibly go wrong? 

We give Minerd the last word…

“We are either moving into a completely new paradigm, or the speculative energy in the market is incredibly out of control. I think it is the latter. I have said before that we have entered the silly season, but I stand corrected,” Minerd said at the end of his recent letter.

“We are in the ludicrous season.”

Ludicrous indeed!