Black Swan-Dive

Submitted by Michael Every of Rabobank

Markets continued to tank yesterday despite a pricing in of US rates rapidly going towards zero, and of general easing all over, which we have said loudly won’t work, and despite the incremental roll-out of fiscal packages, which we have said just as loudly won’t work in the form and scale presented. The S&P was -3.4%, as the market’s bipolarity continued, and S&P futures are -1.4% again as I type; we saw US 10-year yields collapse to 0.82% (and 30-year US mortgage rates to a record low of 3.29%); and we saw JPY surge to 105.8.

None of these things say what some large Wall Street banks are saying: this is just a passing problem, and rate cuts and fiscal policy will make everyone good: perhaps the issue is that what makes THEM good does not work on public health. Of course, they aren’t the only ones singing that song. US President Trump, who in many ways is probably running against this virus in 2020, called it a ‘flu (not a “Sleepy flu” or a “Little ‘flu” or a “Shifty ‘flu”), and appeared to imply it was OK to work through it.

Of course, that suits the hundreds of millions of US workers with little or no holiday time, or sick leave, or in the gig economy, for whom paying USD1,600 to be tested for Covid-19, and then for two weeks of treatment with no income, is going to be a very hard sell…and therefore surely so is keeping Covid-19 from being a pandemic in a US population not short of the elderly or those with the heart, lung, and kidney problems that are such a high risk factor for morbidity is going to be so very hard. So many voices increasingly sound like that guy trying to keep control at the end of Animal House (“Remain calm! All is well! Wash your hands!”). But do wash your hands, of course.

“Now’s the time to pull out the stops,” says the WHO chief, in contrast, threatening to name names of those who aren’t preparing. But it’s *still* not a pandemic, apparently, and it’s still OK to allow people to keep flying to the vast majority of locations, taking potential infection with them. Indeed, governments around the world are mostly taking slow, incremental steps that evidently allow Covid-19 to stay ahead of them. We all get real politik, and the bottom line, and how rare Black Swans are supposed to be. So it’s understandable why the chairman of a certain low-cost airline was on UK TV yesterday saying ‘just wash your hands and keep flying all over the world as if nothing is happening’ – or, in spirit, ‘This is just a ‘flu”…

…even when the WHO says it is 34 times more deadly, and Imperial College analysis (and Trump) say perhaps 1%, therefore also implying vastly more infections than we already know about.

Yet governments have of course co-opted the message that a short-term hit to GDP in some areas is somehow worse than a pandemic risk that destroys far more GDP in far more places longer term. The pattern we are seeing is still of the virus acting furiously under the water while the public sector too often glides along serenely like a swan (because markets), and hence the virus is spreading like a swan spreads its awesome wings. And hence we are now seeing a jagged swan dive in markets. Or rather a Black Swan-dive, as yields and stocks tumble in unison, and credit spreads widen.

Throw in another 50bp Fed rate cut this month, why not? What is it going to do at this stage? Juice the housing market? Juice stocks? Encourage firms to invest more? Narrow credit spreads? Of course, one can say that it “couldn’t hurt” – but it won’t help.

Even if people remortgage at these historically low rates, and put cash in their pockets, it will stay in their pockets – perhaps to save for possible hospital costs for Covid-19 if I didn’t have full coverage. That will mean higher US savings. And that, absent more public spending, means some combination of either lower US GDP growth or a lower US trade deficit. And good luck getting access to easy USD liquidity internationally despite low rates if the US is in recession and not buying your widgets anymore: the USD trade channel will be choked, as container shipping already is, and risk-off will predominate.

I repeat this message for the CNY ‘market’, which is somehow once again trying to show that it is the real risk-off safe haven and future reserve currency.