Maybe it's not a pandemic after all

For about 4 weeks, beginning in late February, stock markets around the world faced the growing realization that the virus that originated late last year in China (AKA coronavirus, covid-19, Chinese virus, CCP virus, and Kung Flu) might prove to be a global pandemic that could kill tens of millions of people within the span of several months. Epidemiologists frantically revved up their models to calculate how fast it might spread and how many lives might be affected. Geometric growth, it was noted (e.g., a doubling of cases every 2 days, as many feared) gets you from 100 to a million cases in less than 2 weeks. Yikes!

The peak of the prediction frenzy probably occurred around the time I turned on the TV and saw California's governor, Gavin Newsom, declare (on March 10th) that in the absence of strong countermeasures, 25.5 million Californians could contract the covid-19 disease within the next 8 weeks, resulting possibly in a million deaths and many hundreds of thousands of seriously ill citizens flooding California's hospitals. Obviously, as he and many other governors, presidents, and prime ministers around the world concluded, something had to be done—and quickly—to "flatten the curve," to delay the spread of the infection in the hope that therapeutics and vaccines could be developed, and to avoid dangerously overcrowding hospitals in the meantime. The result was the rapid onset of shutdowns, lockdowns, closures, and quarantines that caused economic activity around the globe to plunge almost overnight. Meanwhile, the media's anti-Trump bias and love of all things terrifying combined to fan the panic.

Perspective: After at least one month on the job, this killer disease has resulted in the deaths of only 85 Californians out of a population of 40 million. Since the normal flu season began last October, the CDC estimates that as many as 45 million Americans have come down with one form or another of the flu, and roughly 45,000 have died from complications of the flu. That works out to about 250 deaths per day. In all of the US, and for the year to date, covid-19 has been tied to only 1700 deaths. Simply put, this is not a pandemic, and is very likely not going to become one, especially given the draconian measures that have been imposed across the country to date.

Nevertheless, pandemic panic sent interest rates into free-fall, stock markets entered bear market territory in a matter of days, corporate bonds (especially those issued by oil producers, who faced near-extinction as plunging demand caused oil prices to return to collapse) cratered, and fear and panic resulted in a sudden and unprecedented demand for money and safe assets. Fear and panic, as measured by the Vix index, reached a peak in the mid-80s on March 16th, a level last seen at the height of the 2008 global financial market meltdown, when investors feared the imminent collapse of global markets and an extended global depression.

And now here we are, just 11 days after max panic, and the stock market is up almost 14% from last Monday's low.

What is driving the sudden onset of optimism, at a time when global covid-19 cases are on their way to 600,000, global deaths are almost 27,000, and Italian and Spanish deaths are more than 4 times China's deaths? Ah, you might say, the answer is easy. It's the passage this week of a $2 trillion US virus rescue plan, coupled with central banks' massive injections of liquidity. Maximum fiscal stimulus and maximum monetary stimulus surely have saved the day! (No doubt markets are also looking forward to Spring weather in the Northern Hemisphere, since that will most likely render the virus less potent.)

But you might be wrong. Fiscal and monetary "stimulus" doesn't send consumers out en masse to work and spend as if nothing had happened; stimulus surely doesn't cure the flu. Fiscal stimulus of the sort cooked up in the Senate only works as a backstop for all those who have been laid off, locked up, and shut down. Monetary "stimulus" only ensures that all those who want the safety of cash can find it, and all those who fear the onset of a global credit collapse can worry less. The virus rescue package is like a strong pain reliever, but not a cure.

What is beginning to make a real difference is the growing realization that the covid-19 virus is not nearly as deadly as the early projections suggested. That, and the rapidly growing list of therapeutics—led by chloroquine—and the accelerated development of vaccines and the fact that covid-19 test kits are on the verge of being distributed by the millions. The private sector really is coming to the rescue, and the media hype is being eroded by the reality on the ground. Dr. Birx herself is coming to this conclusion.

The shutdowns have certainly helped "flatten the curve," but it's impossible to purge this virus from our shores. Sooner or later most people will be infected, as has happened with nearly every new virus.

What we really need right now is to recognize that this virus is not a pandemic or a mass killer. It's probably more like an unusually nasty flu. We need to lift the economic shutdown as soon as possible and get back to work. Trump is right.

Following is a collection of updated charts which track the financial progress of what I believe will become our national nightmare, from which we will most likely wake up soon.

Chart #1

As Chart #1 shows, we reached peak panic on March 16th, and stocks bottomed a few days later (March 23rd). Since then the S&P 500 is up almost 14%. The Vix index has backed off from its eye-popping highs, but remains very elevated as stocks see-saw daily. I'm guessing the market will remain very nervous for at least another week or so, but eventually we'll see prices moving higher and the Vix moving lower.

Chart #2 

Chart #2 shows a macro definition of money demand: the ratio of M2 to nominal GDP. I've estimated the GDP number for the first quarter, and it is a conservative estimate. What stands out is the incredible surge in the demand for money and money equivalents relative to income. It's a replay of what we saw in the wake of the 2008-2009 Great Recession. This is likely to persist for awhile and increase further as nominal GDP is likely to drop significantly in the second quarter. When the market wants tons of money, central banks are compelled to supply it, lest disaster ensue.

Chart #3

Chart #3 shows another measure of money demand: the 3-mo. annualized growth in the sum of bank savings and demand deposits. There's been a literal explosion in the demand for safe money in recent weeks.

Chart #4

 Chart #4 shows the spreads on 5-yr Credit Default Swaps, which are a highly liquid and timely indicator of the market's concerns about the health of corporate profits. Peak panic saw these spreads soar, but they fell sharply in the wake of the Fed's announcement of massively accommodative monetary policy and a 100 bps cut in short-term interest rates. The Fed is doing the right thing.

Chart #5

As Chart #5 shows, the demand for 3-mo. T-bills has been so intense that their yields have gone negative (i.e., they sell at a small premium to their face value). By cutting the rate it pays on excess reserves to near-zero, and by stepping up its purchases of notes and bonds massively, the Fed is effectively supplying massive amounts of T-bill equivalents to the market in the form of the bank reserves it uses to purchase securities from the banking system. This is the right thing to do in a panic.

GAME CHANGER:
Coronavirus cure: French researchers completed new additional study on 80 patients, results show a combination of Hydroxychloroquine and Azithromycin to be effective in treating COVID-19

We now have a very effective treatment protocol for covid-19. This renders obsolete all previous projections/forecasts of the disease's evolution. This is a very big deal. There is a bright light at the end of the tunnel.