Posts
Federal regulations are simply not up to the task of designing and directing activities in a huge and complex economy like ours. The private sector, in contrast, is relatively adept at doing so. I think the market agrees, which is why stock prices surged 7% in the last hour as Trump's press conference unfolded.
Chart #1
This morning we likely saw the point of max panic. The Vix index surged to a new, recent high of 77.6, then closed down significantly at 57.8. The S&P 500 index opened a bit higher, then traded down to yesterday's low, which was almost 27% below its recent all-time high (i.e., a genuine bear market). But in the last hour prices surged as Trump unveiled a new approach to the coronavirus based on public-private partnerships and a serious and much-needed deregulation of the healthcare market's ability to innovate in times of emergency.
Chart #2
Chart #3
Charts #2 and #3 zoom in on the daily activity of the S&P 500 index and the Vix index (because it's a little hard to see in Chart #1). Yesterday, it now seems clear, was a day of maximum panic and pessimism. I felt sick to my stomach, and unable to imagine things ever getting better, and I'm sure many felt the same way. What a difference a day can make!
Chart #4
Chart #4 shows the daily action of high-yield credit default swap spreads, which are largely dominated these days by the bonds of energy producers. Spreads have soared in the past week or so, driven primarily by the abrupt plunge in oil prices. This added to the market's level of angst, since it greatly increased the risks of a cascade of bond defaults in the all-important energy sector. Trump's announcement at the press conference that the US will be taking advantage of cheap oil prices to fill the Strategic Petroleum Reserve saw these spreads contract almost immediately by 60 bps or so, which is the market's way of saying thanks. It's another demonstration of the power of market-based thinking: cheap oil prices present a great opportunity to buy, so why not have the government, with its gargantuan storage capacity, take advantage of the moment?
97 comments:
What were the public-private partnerships he revealed?
"I felt sick to my stomach, and unable to imagine things ever getting better"
No kidding Scott. With you on this, but tried to remind myself yesterday that when I get that feeling, it's usually the bottom. It took a lot of convincing yesterday, that's for sure.
Thanks again for the wonderful posts; always look forward to reading your thoughts.
Are you a buyer right now of us equities? Even with Q/E and another 50 to 75bps rate cut. The earning & supply chain impact. Hard to tell if its priced in
Scott, thank you! Your posts are so inspiring. Your investment experience and deep knowledge of economy is exceptionally valuable.
Thanks for your commentary Scott. It's one of the very few I follow. Your efforts are much appreciated.
If your time horizon is anything more than a few years you have to be a buyer now, even if it goes lower.... keep buying. Lots of upside from here looking out to 2021 and beyond.
Am I a buyer now? Yes. Even if this is not the absolute bottom, prices have fallen enough to create lots of attractive opportunities.
Scott, do you buy individual stocks or index trackers? Thanks.
Thank you Scott for your insightful comments now and through the years!!
That entire press conference was an ode to American ingenuity and the advantages of private enterprise over government red tape.
Trump's complete overhaul of the virus testing weeks ago shows he has no patience for Federal pencil pushers.
And more imprortantly, Trump wont take SLOW for an answer! And his team is fantastic.
Congress aid deal, Trump Executive action, and Fed on Tuesday should be a three pronged massive punch to help the country during this panic.
Percentage of stocks trading below their 10 week moving average has never been lower since WW2 than Thursday.
That indicator got maximum washed out.
Cramer says the market is going to crash on Monday. Never know!
I love everything Trump is doing...and how calm and positive he is.
Meanwhile, our coronavirus curve is ramping up slower than predicted.
I think it’s all wrong, something is amiss in the market and worst is yet to come. I worked at Lehman during the financial crisis and this reminds me of the day in 2008 when dow popped back 1000 and we all traders breathed a sign of relief right before leg 2 down began. The yield curve has had it the whole time, I like everyone else worried when it inverted last summer but then it passed and chalked it up to technicality no longer effective amid low rates. Well here we are in perfect timing 6-9 months later amid legitimate turmoil. Hard to imagine market knew virus was coming but conceivable saw stars aligning for something. Not just that but it’s the rapid steepening that’s the real warning sign. Look at 2000 and 2007. After inversion, when 10y2y started to rapidly rise positively back close to 100bps it was definitely not the bottom. Now here we are and after plunging to record lows, 10y is rapidly rising while short end is staying pretty calm. So yes steepening is generally thought of as a positive but not immediately. If that wasn’t enough, valuation even at 2700 is only average so personally I think leg 2 down is imminent and I see sub 2000 easily, potentially down 50% 1700ish depending on circumstances. Fed definitely going back to zirp asap but only so much they can do and market said it all other day, adding 1.5T isn’t enough, liquidity isn’t the issue, we can all see the swap rates tell you that. You can mark my words, we have not seen the lows yet
I also think market isn’t positioned well even after the downturn. The crowded trade for years was selling tail risk to generate small alpha and when buy the dip failed because the danger is real this time, that’s absolutely the reason market plunged so far so fast and VIX hit 75+. But it’s my sense that situation still hasn’t fully flushed itself out because higher VIX goes and steeper losses go makes it hard to unwind and if we dip again, it’s going to be fast and furious round 2.
Last comment, the blackstone news is already obviously out there but doesn’t mean they’re wrong or that it’s fully priced in. Again thinking back to pre-financial crisis, it is still widely accepted that they intentionally perfectly timed their IPO to cash out pre-crisis when they saw the warning signs. Point being, those guys are a lot smarter than me and have better insight into real time fundamentals and conservative or not, sounding the alarm on the economy while ordering companies they control to draw down their credit lines warrants close thought
Long story short, about to find out if we can have a recession and deep selloff without the hallmark financial stress leading the way. I wouldn’t have thought possible before but now I’m not so sure
Famous last words. We'll recess almost certainly. Just go to the local grocery store, Target, Walmart. Even the middle/upper middle class like Sprouts, etc. There's hoarding panic and fear. All kinds of places and events shutting down. This is very interesting.
I agree, so beyond my wildest expectations the reaction of society. Not that it shouldn't be taken seriously by any means, but the hoarding, the mass panic and fear is beyond my wildest guess by like 10 standard deviations. Either way, I kinda thing maybe the world would be better off just everybody stay home for 2 weeks, lose 2 weeks of GDP worldwide, see how is sick and who isn't and move on from there. Feels like the certainty that would bring would allow for stronger rebound then this endless unknown dragging on and on
This is what I expected reaction to actual nuclear war would be so hopefully that never happens because anybody's guess what the reaction will be then. This chart says it all and getting worse, I agree we aren't certainly already in recession, the damage is obvious, cancelled flights, hotels, cruises etc etc etc the list goes on, the economic plunge is real, when will it subside and what will the damage and recovery look like is the real trillion dollar question.
https://1.bp.blogspot.com/-WPWaG3wzv98/XmzmdfayONI/AAAAAAAA0L4/LPYxn1PY08MEVL8YhhyjiZx2880OG7YQwCLcBGAsYHQ/s1600/DinersMar122020.PNG
Great post.
I was immensely disappointed that House Democrats thwarted President Trump's idea for a payroll-tax (FICA) holiday through the end of the year.
In terms of economics, Trump was unable to offer much on Friday.
I hope Cramer is wrong, but I fear the market will again descend next week.
The Federal Reserve may drop rates to zero, and I hope they do, and the market may get a bump from that.
But then what? Entire industries are being destroyed (and for no good reason. See Great Britain's intelligent response to the coronavirus).
For those of you with a sense of humor:
https://youtu.be/PnWdGQyllys
@TJS Me too. I'm definitely not one to panic but a rational thinker has to wonder if they need to drastically adjust their behavior in the near term to keep water and food for the week. I had to substitute filet mignon for the week instead of chicken. Luckily I have the ability to do that. I was quite taken back during my weekly trip to Sprout's. Then I went to Target and Walmart and couldn't find any toilet paper. :)
Next, the market was about 26-29% down now about 20% down has discounted quite a bit. But initial claims haven't started to rise. Corporate profits haven't rolled over.
No question discounted quite a bit, but enough? not so sure. Valuations were very high going into this mess so that doesn't bode well for a bottom in my view. Certainly not as it stands with cancellations and panic only amazingly accelerating at this point.
LULD is all the sudden getting a lot of action but I see another limit down day sooner than later personally.
Economic data at this stage seems almost pointless, it was such a fast deceleration, by the time the data shows up, the market will have already decided in my opinion. Last week was the reference week for March BLS so that is useless and even initial claims will take time. Best case to see extent of damage I suppose is comparing the Markit Flash to March Final to get an idea of damage but even waiting another few weeks seems like an eternity given the speed we have seen in the prior barely over 2 weeks. I am just completely flabbergasted that it seems all but certain we are in a contraction from data showing a sharp acceleration immediately prior. Suppose this is the true definition of a black swan.
This is a definite exogenous event/shock/black swan. One for future textbooks for sure. I may have misspoken a little calling 20% discounting quite a bit. 29% discounted quite a bit but I'm with you it seems this will not be the bottom. Time will tell. :)
Also to elaborate on valuation, I have two models that look at various factors and although they have fair value currently ironically one at 2600 and one at 2800, if the market were to bottom on valuation in similar fashion to previous two recessions that leaves a lot of downside.
This setup feels very similar to 2000 dot com, absolute valuations were nearly identical at the top and although the following recession was relatively mild, stocks still dropped 50% and even at the bottom were only at good but not great valuations. So the subsequent rally to 2007 was relatively tame 100% or so compared to financial crisis when at the onset, valuations were actually somewhat reasonable but given the depth of the recession, stocks still dropped 50%, which got you close to once in a lifetime valuations subsequently leading to the 400%+ bull market we saw.
If you accept the setup is close to 2000 dot com, then it's going to be a rough decade. Keep in mind peak to peak 2000 to 2007 the index was only basically flat 1500 to 1500 so I am kinda in the camp that thinks thats where we are headed. A modest recession still leads to 50% decline and slow grind back over 5+ years to get back to 3000+ SPX
I just have to believe at a minimum we see under 2000 SPX
Well written explanation on valuations. Seems TMC/GDP and Shiller PE agree with you. But Scott had been explaining his NIPA profit valuations and seemed/seems to support those market levels. I have little idea where this ends up but I had excess cash for way too long and have gotten about 40-50% of it invested randomly since about the 27th of last month.
Scott, thanks for the post. And TJS, your words feel very wise to me. For all of 2019, I was short term bullish (based on the Fed, the most powerful input) and long term bearish. I started thinking something was very wrong when the repo market went haywire. But the Fed used it to launch another round of QE even though the word usage was comically semantic. Anyway, we never got an explanation that made any sense. So I started lightening up at the very beginning of the year. Of course, I didn't sell near enough. But now, as we face an onslaught of even more Fed easing, I'm going wobbly. Never before have I been staring a mammoth easing cycle in the face and not been rip-roaring bullish. But something isn't right here. The whole situation has an end-of-the-road feel to it. I haven't liked the way the bond market and yield curve have behaved in a long time.
The brightest people I know seem utterly lost in a way that I've not seen since at least the GFC. And, as always, the government is pathetic. I don't blame them for corona, or the response to corona. But the govt's lack of fundamental response to the GFC - a dozen years of kick the can - leaves me feeling something is very different this time. With the exception of Trump's tax cut, which was deeply flawed but still positive, I see no significant change since the GFC. The inability to get GDP up, while debt spirals...
I totally agree, like I mentioned, something is very much off but I can't explain it. Yes the repo market said something, the yield curve said something yet nobody can really explain it. Such a crazy time for the world and the markets, surely no matter the outcome next 6-12 months, this will be a business school case study for a long time to come. Probably a psychology case study as well given the human nature we have already seen exhibited.
Will the Fed rescuing repo pseudo QE4 continuation be enough to save the floor, I don't think even JP can answer that himself at this point.
Thanks to all for the interesting dialog. If 2/3 of the economy is consumer=driven, then the big question is will consumers keep spending. Went out for a walk this afternoon. Our town looks like the morning of January 1 minus the cold. Little traffic. Where is everybody? Folks are laying low.
Stock markets, recent bears
2007-2009: down 59% over 27 months
2000-2002L down 49.1% over 31 months
1973-1974: down 48% over 21 months
My own view is that reaction to coronavirus is a panic, and government and media have made it worse. What we have to fear is the fear.
Market down now about 25%.
The media and the public seem to think first responders in hazmat suits is a sensible reaction to a coronavirus case. The first responders will play it up, get those budget dollars.
My guess is another leg on the downside, and then another long bull market. How bad a leg down? I dunno. The market seems to deliver serious haircuts of about 50%.
I hope I am wrong. But the Fed is out of ammo, and the Donks want Trump to fail.
Helicopter drops are not a presently a policy option.
Government globally are suffocating their economies.
I was hoping people would overcome media-hyping the virus, but they have not.
Actually, this wasn't handled by the government because the GOP dismissed in 2018 the exact specific government group of professionals that was in charge of proactively figuring out such situations in advance and how to handle them and left it in the hand of someone with a serious mental illness and of course to the private sector.
at the end of the day, I think politics is messy and it doesn't need to be. Both parties politically have made mistakes over the decades and had success on all sorts of various economic as well as other policy issues. Deregulation has shown pros and cons just as well as over regulations has certainly impacted pros and cons as well. No question regulations were a little too loose pre-financial crisis but at the same time flipping to business crushing burdens doesn't do anybody any good either. If only we could ditch political parties all together and let candidates run on a platform themselves instead of a party platform we would probably all be better off on the whole.
Either way, in the end, from a market perspective, we have to go lower, I just don't see how its possible to not. The biggest truths in the market in my opinion are as follows: the number one killer of a bull market is a bad economy, pure and simple; they crave certainty of which we have zero right now and I don't think anybody can say they even see light at the end of the tunnel at this point so lastly and most importantly at this stage, markets go to extremes both ways. Human emotion and fear is a powerful thing, I am referring to markets but it's abundantly clear right now in the day-to-day world of TP shortages etc. that this is true. So while I think down at these levels we are finally at fair value, history has shown likely headed at least toward the extreme the other way before the next multi-year recovery gets underway
Therefore, it's is my belief that when economic expansions end, of which certainly seems to be the case that we are in contraction right now, markets take a beating like clockwork. Yes down 20% currently 27% at the low is already a beating fast and furious as the leverage unwind was brutal, but from such a high valuation point, I just gotta believe risk to the downside is still 2 to 1 at these levels, maybe worse. Also keep in mind too that if the rise in the long end of rates continues, that is going to hurt valuations even move
Here's a test for the supply chain and agility of Amazon. Can they deliver TP to our doorsteps before we run out?
I don't believe that much in technicals and levels but it's hard to ignore that in economic downturns, the market seems to like down 50% . Not sure the reason, certainly possibly coincidence since correlation clearly doesn't equal causation, but with that said, maybe there is an emotional connection that says to people overall ok, down 50% I don't care the outlook, I'll risk it. Who knows
Well said TJS. Also, maybe 50% is the marginal cost of total uncertainty in the equity market. :-)
What is LULD, plse?
LULd is limit up limit down, the official trading curbs mechanism developed and implemented a few years ago in response to the flash crash in 2010. My point was I see even more vol ahead, likely tilted toward limit down days because of the over leverage.
The crux of the problem for the market and speed to the downside was one for the record books solely because of over leverage in combination with a black swan. The repo market exposed it last year, when JPM walked away from repo and decided to use their money elsewhere, Fed was forced into a no win situation where they let the repo market blow up and take the market with it or fund it themselves which we all know is what they did. The problem is not that but who was using the repo market, it was used primarily by leveraged funds so basically the Fed was funding leveraged funds which in and of itself not that big of a deal except like I said it exposed the over leverage. So the Fed and all the leveraged funds were hoping/expecting to be able to unwind the leverage before any problems. Now enter black swan where very few people were correctly positioned (eg vast majority of people not even on recession watch let alone imminent contraction) so nobody had unwound the leverage. So as I mentioned earlier, what happened was buy the dip failed because the downturn was real and now everybody with leverage was rushing to unwind at a time when the cost to do just that is skyrocketing.
So my sense is this short term bounce/stability is one where leverage is praying it holds so they can finishing unwinding but I get the sense it won't hold and it will be more big down days ahead until it is all flushed out. Not a huge Buffet follower but he has it correctly when he said it's not until the tide goes out that you find out who has been swimming naked. True that Warren, lots of skinny dippers out there in deep trouble right now.
So as it stands now, imo, at down 20%, even down 27% you have a valuation problem, you have a leverage problem and you now have this black swan event that is causing true economic damage that maybe 1 in a million investors were positioned correctly for. So like Scott mentioned he would be a buyer at these levels, I don't necessarily disagree with that and at 2500, it's obviously more attractive but I still think you will be holding losses for a long time until you recoup you money. Maybe 5+ years down the road, index in back near 3000+ and you rode it out and made low single digit total return cagr with dividends but you probably rode out a lot of downside and vol in the meantime is my best guess.
I kinda hope I am wrong though because investing will never be the same if it turns out to be what I think. Its nearly impossible to account for these black swan type events versus downturns associated with the traditional warning signs everybody was already looking for, swaps liquidity, CDS and credit weakening early/leading, not coincident/lagging etc
If this turns out to be a recession and deep market losses for which none of traditional swaps, credit or employment indicators was able to accurately forecast, then the cost of risk will need to be a lot higher for a long time to come.
This is difficult, to forecast the impact of current events and ripple effects. However, I feel confident in saying this is a cyclical type event and not structural, other than the new regulatory structure that develops (for better or worse). So in reality this is a game of analyzing the term structure of lost output and corporate profits for discounting purposes.
I really don't want to try that so just add my accumulated cash after significant market corrections. Could be 40-60%, who knows. I really never should have had excess cash anyway but my investing experience basically started with this long bull market.
Lest us not forget too amid all the drama of the virus impact, the economic oil warfare impact. Despite what Trump says, low oil prices aren't the boon for the economy they once were. The impact there if oil doesn't rebound is substantial. That is the end reason Russia stunned the market in the first place. Never underestimate Putin and his people, they are smart, they know the shale oil business is built on a mountain of debt dependent on 50sish oil prices that are not remotely sustainable in 30s. So by flooding the oversupplied market with more supply and crashing prices, he eats a little pain but gets the double win he is looking for, a US domestic market in turmoil, blowout in credit and in turn the real prize, more dependency on imports for the US which not coincidentally makes his position stronger and our national security weaker.
The NYT article doesn't delve into how 3 years of Federal mismanagement guaranteed exactly the type of delays noted, not to mention foot-dragging by this President and his lieutenants until late this week. When you also cripple multiple Federal response agencies via under-funding and under-staffing or simply disbanding them, as this administration did, well, those failures fall directly on this administration. If you claim it was intentional behavior, then how incompetent is it to replace a working system with nothing at all? Let's be serious, this is mismanagement pure and simple. If one is going to re-invent the wheel, one should have the replacements ready before burning all the old wheels.
The private sector response may or may not turn out to be great; but I do expect there will be heroic efforts on their part, as well as many other groups and individuals. Regardless, unless the stars align, the news over the next few months is not likely to be good. Another leg down seems likely.
As usual, the economic insights at this site are top notch, and much appreciated. Certainly I think many of us felt a little sick to our stomachs at the volatility of the market and the long term potential damage Corvid-19 can do to our friends and family. As for our investmetns, I'm personally optimistic that we are on the mend by the end of the 2020, but certainly we all have to keep in mind that it could drag out several years and another 50% down. Regardless, I will certainly be rebalancing into stocks shortly, and more so as stock prices decline.
As my post name suggest I was buying this week.
I was a seller at 2800 3100 3300. For the last 2 years it has been awesome. Time to plan for the next 10. Only sell on new highs. Next one for S&P 500 is only a question of when.
Fed just cut rates to 0 and restarted QE. Wow. Markets had better soar. Got to give them credit for staying ahead of the curve.
That said, most people still in denial. Bars and restaurants still well attended. I don't like where this is going.
Futures limit down, that didn't take long. Lookout below, Fed is powerless right now
Scott -
What do you think of gold miners here? Once the deflationary scare is over (few months?), I would think there are major tailwinds for gold with the money spigots wide open.
Limit down.
Only hope for market is if indexes hold Friday lows.
Otherwise it’s free fall.
The panic culture wins.
Are we going to create all this economic destruction every flu season, from now on?
32 million flu cases so far this season. 360,000 hospital stays. 20,000 dead.
All from the flu.
Something is strange about this reaction.
Maximum or near max level of pessimism, if you're an investor (not a speculator) keep nibbling and buying. Anyone think Buffett is bailing right now? Anyone think he's starting to put his $120b to work?
GS just cut Q2 GDP to -5% and on top of CDC now recommending cancelling all events with over 50 people for 8 weeks, it's going to be ugly before it's better. No where near max pessimism, the market will go lower.
My expectation is tomorrow, open at limit down, quickly hit 7% limit down during trading hours then further downside from there. No light at the end of the tunnel and over leverage not a good combination.
Not to mention apparently schools are considering cancelling for the rest of the year. I have to admit this all sounds so crazy to me, the insane response and economic devastation left in its wake, but I still have to call it like I see it from an investment perspective. 2000 before 3000, that's my call
Gotta agree with Johnie here. Crazy over reaction. That said, it can always get crazier.
Side thought for anybody.
Scott Grannis has correctly pointed out several times that investors, even before coronavirus scare, were risk-averse.
I can only imagine how risk-averse investors will be coming out of the coronavirus age. At any time, given government response and hysteria, the stock market may go down 25% to 50% on the basis of a generally harmless virus.
I guess that means wait for the coronavirus scare to blow over and then generally concentrate your investments in risky assets. Perhaps risky assets offering a yield. I see some master limited pipeline partnerships are offering double-digit dividends now. I expect inflation to be extremely low for years---meanwhile you pick up double-digit dividends?
It may or may not turn out to be a good investment with decent yield, but it is highly unlikely you will collect double-digit dividends is the catch. MLPs appear to offer that yield because prices have plummeted with oil and the broader market while dividends are backward looking but you can be assured that in a weak economy, especially with oil at $30 barrel, those dividends are surely about the meet the axe big time
A VIX at or near 77 is not "nowhere near max pessimism." We are talking about Great Financial Crisis levels, that's pretty damn pessimistic. My guess is we get back to 70 plus again tomorrow.
Correlating the VIX with max pessimism makes no sense to me, the reason the VIX is blowing out is as I said over leverage is rushing to unwind before they are blown out. Pure and simple that is the reason speed to downside has been so vicious on top of the overiding reason that few people saw it coming so the leverage was high and few had reduced and prices and vol moved too quickly to unwind. Next leg down will be further deleveraging and VIX will stay high but that by no means the fundamental issues with plummeting demand and GDP will ease.
And if you are correlating VIX with bottoms to financial crisis, you are misinformed, peak VIX was nowhere near the bottom of the financial crisis, the peak VIX around 90 after LEH in Oct 2008 was nowhere near the bottom, stocks still plummeted a very long way from there even as the VIX fell rapidly
Harmless virus? Over-reacting snowflakes? According to the World Economic Forum, coronavirus has a higher case-fatality ratio and higher reproduction ratio than flu. That means it spreads easier and more people can get it. We know flu will subside later in the spring as it does every year. We don't know if that will be the case with coronavirus. Unlike the flu, this is new. Nobody knows how it will end up and that's why markets are freaking out. Be well.
https://www.weforum.org/agenda/2020/01/coronavirus-flu-healthcare-symptoms/
TJS-- my understanding is certain pipeline master limited Partnerships make their money not on the price of oil, but by transporting oil.
Ergo....?
I mean the pipelines weren't even a good investment when things were rosy. Look at AMLP and it's a consistent loser. Pretty sure TJS is right, you're trying to catch a falling knife.
Yes of course those MLPs make money mostly on transport but not production but they are directly tied, this is one case where correlation equals causation. What do you think will happen to transportation when shale producers slash production and shut down wells because oil isn't remotely viable to them at $30/bbl. Add in the fact to build pipelines they have debt like everybody else in the industry and seems inevitable barring a miraculous recovery that they will be slashing those dividends quickly as earnings erode.
If you haven't seen it, here's a good site for checking infections, deaths and recoveries.
https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6
It's going to see a huge jump when American testing finally kicks in, but the Chinese line leveling off is what makes me optimistic. If the pessimists were right, China would have bodies piling up in the streets all over the country by now.
I don't trust their reporting to be fully accurate, but I trust it to be accurate to within a factor of 2 or maybe 4. Even if you multiply theirs by 4, the line is nowhere near the exponential growth the pessimists predict.
Give it 4 weeks in the US to shake out. Cases will skyrocket as testing becomes available and then they will level off as they did in China. This is a massive body blow, but its temporary.
And here is libertarian Cliff Asness saying, "There is not a purely libertarian solution to the Coronavirus...
https://heisenbergreport.com/2020/03/16/cliff-asness-there-is-not-a-purely-libertarian-solution-to-the-coronavirus/
@TJS, I'm correlating the VIX with near market bottoms. I've seen it too many times since 1987 and understand the risk to the downside from here. My time horizon is not the next 6 months; it's many, many years from now.
Scott,
Do you think corporate debt could be the equivalent of the banks in 2008 ? It has been said that much of the investment grade debt is just one downgrade from junk which would set off a downward spiral. Does it look that bad to you?
Kenneth
Actually KT, since China locked down Wuhan and we're far from that scenario, a better model is Europe which is is complete disarray. Right now, it's hard to see an end point but it most certainly will come. The only question is how disruptive will it be before we get there and no one knows that answer to that.
"Do you think corporate debt could be the equivalent of the banks in 2008 ?"
Bingo. I sure hope I'm wrong, but I fear that all those firms that loaded up with debt - during a strong economy - in order to engage in stock buybacks will be lining up to whine for big gubmint money.
About the only thing I'm confident of is that it's time to do some tax loss harvesting. The developing events are going to make it more likely we have a democrat president. And there will be pressure to change capital gains rates especially. Without the senate that can't happen, but the momentum will be for higher taxes not lower.
Re corporate debt: There are quite a few reasons corporate debt needn't be the problem it was in 2008. For one, interest rates have been very low for many years. Whoever issued debt in recent years was able to get very good terms. Debt burdens are low as a result. Household debt burdens were at all-time lows going into this crisis. Two, the Fed was too tight going into 2008 and was slow to ease. It took three rounds of QE to get markets back on solid footing. Today, the Fed has moved relatively aggressively to ensure that money is not too tight. The Fed is initiating another round of QE, and stands ready to lend freely with appropriate collateral as backing. Three, the government is likely to offer help to the industries most affected (e.g, airlines, travel-related). Four, there is good reason to believe that the current crisis is going to be short-lived, especially given the degree to which people everywhere are self-isolating and changing their habits. Five, the government should have no problem funding efforts designed to help the private sector, notable among them a payroll tax holiday for employees and employers alike. The world is clamoring for more Treasury debt and interest rates are at historically low levels. The burden of our national debt is very near all-time lows today.
This is need not be a financial crisis for all the above reasons. It is a confidence crisis and a temporary "act of God" that has forced a major scaling-back of economic activity for a relatively short period. The best solutions are those that buy time for virus containment strategies to work: lend freely to those with cash flow problems, declare a payroll tax holiday for the majority of workers and employers to support demand and encourage a resumption of work effort. The worst solution would be to expand entitlement programs, since they encourage non-workers and are very tough to unwind when they are no longer needed.
Finally, we should strongly resist the allure of pleas for more and bigger government, e.g., Medicare for all. The CDC had one mission: to protect us from pandemics. They failed miserably. We can't trust Big Government to fix complex problems.
Scott Grannis
IMHO, excellent comment that you should fashion into a post. Especially and foremost, the payroll tax holiday.
TJS and Steve: You scared me out of pipeline stocks.
I'm surprised they didn't get a payroll tax holiday together in the first place, but supposedly both parties balked so who knows. $700B price tag seems better spent that way then most any other way the government seems to blow it inefficiently. Saying this from a neutral political position where I would think the same if it were reversed, but I wondered beforehand how much would get done in Congress, highly doubt Democrats are looking to save Trump months before the election. Lets be honest, either party would probably have no problem letting the economy crash and burn if it meant strong party gains at election time.
With regards to max fear, I agree VIX at 80+ can't go higher, but what I do not agree with is that peak VIX equal market bottom. It may in fact, but it is mere coincidence. I believe you are referring to during the bull market, VIX spikes and bottoms occurred concurrently which is typical of the 'buy the dip' during expansions. However, history is very clear that when buy the dip ends eg economic contraction, that theory falls apart very quickly. Again this time maybe the case, however, as I mentioned, I remember the times very clearly in 2008, VIX peaked right after we filed bankruptcy, but the market still had a very long way to go to the downside for the next 4-5 months even as the VIX during that same period fell from near 90 to 40s at what became the bottom devilish 666. Situation was very different then obviously with near total financial meltdown, credit annihilation etc. versus now a sudden economic stop that could in theory end quickly and rebound much faster which may very well coincide with bottom of the market and the VIX peak but I just don't believe it is a given is all.
With regards to MLPs, definitely not trying to scare anybody out of investments, I was just playing devils advocate in a way as I would appreciate if it were me on the side. Obviously up to you to make that decision and may very well turn out to be a good investment, somewhat a bet on the overall speed and shape of the economic recovery, but with that said, I think there is a slim to none chance those dividends will be near what they appear to be in trailing terms. Surely those producers are going to be in a scramble to cut costs rapidly, both employees and dividends to save cash until market recovers
>I'm surprised they didn't get a payroll tax holiday together in the first place
The so-called payroll tax holiday has a number of flaws:
1. It would have a huge impact on the social security fund, and risk undermining income to seniors (many of whom rely on it heavily).
2. It would not help those who rely on tips.
3. It would only help people who are working now. If a person lost their job, they would lose this benefit.
4. It would be incredibly expensive, with some estimates being around $90 billion a month. By the end of the year, that would amount to almost a trillion dollars.
5. Finally, many people see this as a backdoor way to de-fund Social Security.
I wonder why no one is proposing cutting taxes on social security payments? I realize that social security is a pay-as-you-go system, but since income is taxed before payroll tax deductions, taxing social security is essentially taxing twice.
The governments in Singapore and South Korea were in complete control of the situation -- not the private sectors -- and have done a marvelous job.
The government in the USA has dismantled its pandemic response team in 2018 and put in place an incompetent and corrupt group of people who don't really believe in science, and so it failed miserably.
The private sector in the USA would not have handled it better. Did anyone stop the private sector from loading up on masks and ventilators over a month ago?
When you read 10Qs, you know what is the common contingency plans for such events? Insurance.
Well, at least there is some good news, it seems that Fox News talking heads have finally started to acknowledge there's a problem. One can hope the GOP, who apparently gets its data from Faux news, will follow up accordingly.
I'm surprised they didn't get a payroll tax holiday together in the first place, but supposedly both parties balked so who knows.--TJS.
My take is the Donks only want bigger government and more welfare, and the 'Phants think only rich people deserve tax cuts.
Then also, the Fed is happy to do helicopter drops on Wall Street but not Main Street.
I have my pitchfork in hand....
What is needed right now is suspension of interest, penalties and fees on credit cards. Suspend the payment period for sixty days too. A bold move that will put money in the hands of everyday people right now. The Fed can support the credit institutions and the credit industry funnels credit to the economy.
Payroll tax holiday is too little too late.
>What is needed right now is suspension of interest, penalties and fees on credit cards. Suspend the payment period for sixty days too.
I think that's a great idea. Is this in discussion anywhere that you've seen?
Benjamin Cole,
The Dems want to support the unemployed and soon to be millions of more unemployed (consumers). The payroll tax holiday is not going to help with that.
It should be clear that every dollar that these unemployed will receive will go straight back into the real economy and support it.
Also, you know what's going to happen if we don't take care of the inevitable rising inequality following this? All these people can vote, We'll get AOC or someone like her as president. So we better compromise and do the right thing, now.
Send $1000 to every social security number with the promise to repeat the process every six months so long as the PCE-core or, even better, the 10-year breakeven is below 2%.
This would be simple and efficient. It would also be a small step toward narrowing the gap between the rich and the poor.
For those of you who are instinctively opposed to this, consider the alternative: we buy Treasuries and MBS. Not only is this pushing on a string, but the holders of these securities are disproportionately rich.
(I'm saddened that the awful Mitt Romney is on board with the spirit of this idea. Yuck.)
The Yang Freedom Dividend. Is that different than helicopter drops?
It's the recognition that you're doing it for monetary reasons and that the first four rounds of QE were not as effective as they could have been, especially with respect to the inequality question. But make no mistake, the proposal is part of the overall effort to combat deflation or disinflation.
The desire to have 2% inflation is a very debatable point. (I'm for zero inflation.) But the Fed says it wants 2% inflation. Fine. The first thing to do is agree on a measurement. I choose the beakeven on 10-year Treasuries. Others choose PCE, PCE core, gold, or something else. I like big liquid markets to determine what inflation expectations are. I'd resist using CPI. But in any event, if inflation is running below your mark, it's easy to fix. Just print money. I say print money and send it to every American. Other forms of providing liquidity have worked to a degree but could be improved upon, imo. Also, we need to recognize that previous forms of QE are probably nearing the end of the road in terms of effectiveness.
Make it public and let the public know what you're targeting. This will boost the sense of stability and root expectations in something, as opposed to the ad hoc nature of things we have today.
Finally - and this would not be part of my calculus - I wold think the political considerations would auger for doing it since it would be so popular to the regular folks.
Remember, the reason why printing money should be avoided (from a textbook perspective) is that it will result in inflation. But if inflation is precisely what you want, what's the reluctance?
The bond market is screaming BOTTOM! 10 year blasted past 1%.
Germany's bond market is encouraging too.
Yes. Happy to see 10 yr increase marginally. Hope it sticks.
Yeah, "Private Sector and Deregulation To the Rescue"...
In addition to libertarian Cliff Asness's primal scream (posted earlier), here's another libertarian screaming: "Government...please help!"
https://www.washingtonpost.com/opinions/2020/03/17/libertarians-unlikely-pandemic-plea-subsidize-everything/
What I like is in the comments: A Democrat is a libertarian staring into the face of 20% unemployment
Roy--- I won't say you are wrong.
My preference is for a payroll tax holiday so that we can keep people working.
I also favor a $1,000 payment to anybody who agrees to be inoculated against coronavirus through natural infection. Even children, with parental permission. Evidently, once the population has 50% to 60% inoculation, the virus retreats. A type of reverse exponential growth
I prefer both actions to be funded as helicopter drops.
I weary of the idea that we can do helicopter drops on Wall Street but not on Main Street. And commercial banks can print money every time they make a loan, but if we give money to ordinary people through tax cuts that will cause a runaway inflation.
To the self-righteous inflation mongers, I say: PU.
Good Lord, they're selling T bonds along with stocks. This is NOT good...I thought the action yesterday was encouraging but turns out bond selling was independent of stock buying.
Unfortunately long rates are rising rapidly because of the amount of money they're having to throw at the problem, don't really have a choice clearly
@Rick Jones
No it's not. It's my idea. Everyone can take credit for it if we can just get the idea to the right people. Issuing Checks is Dumb. Imagine the panicked crowds at banks and money exchanges. Credit Cards will work. Consider it a public/private parnership that can save people, the economy and capitalism!
Credit cards will also stop the spread as the equipment used can be cleaned and the cashiers don't touch anything. As you recall China was burning contaminated cash. We don't want more cash circulating.
TJS said: "I think leg 2 down is imminent and I see sub 2000 easily, potentially down 50% 1700ish depending on circumstances."
Astounding how quickly we are getting there. Just massive uncertainty. Wish I had something useful to share.
This is full on panic now for sure, the pain will likely ease, just had a feeling the trade last friday was same as 2008, way to much leverage to sustain that pop, but not this death spiral is probably going to slow as surely the deleveraging and margin calls are working through pretty quickly.
We are left with obviously tons of uncertainty and full on economic disaster, so mind-boggling that the world is self destructing willingly. I am no epidemiologist but at some point you have to wonder if there was a better way. Lives are precious but destroying economic lives at a far greater pace makes you pause to think.
Lipstick on a pig right now but getting into long term attractive valuations finally so if we can get some sort of clarity, anything then could argue for a bottom. But if not, then not a ton of reasons to jump all in. Side note, the free fall of Boeing is unreal. Debt in a recession is always dicey, but I mean geez
Also, oil @20, not sure any property in the US is profitable at that level and most shale is close to $50 so gotta expect that will stabilize as supply will be dropping very quickly at these prices which should at least help market confidence
Kinda gotta believe though here at 2300, down 30%+ in less than a month the market is due to stabalize and maybe even rally. Even if the market ultimately goes lower, down 45-50%, right now all the selling is based upon nothing in a way, no clarity. So pricing in worst possible outcome which it may become, but it also might ease and economy might recover quickly, hard to know and hard to price. At least in 2008, you knew what was happening. Like Lloyd said in Dumb & Dumber.. Hit me with it! Just give it to me straight!
Mlp's may well cut their dividends, but that doesn't make them bad investments at their current prices. Look at the insider buying of EDP, it been steady and in size, significant size. That said, for mlp's or any common stock, it seems that the best strategy is to slowly leg in with available cash, avoiding large moves, using a disciplined approach to cash management. IMO the world has changed. Corporate debt for some will soar as firms borrow to keep their core business functional. Buying firms that were highly indebted at the beginning of this crisis will probably be a poor strategy. Credit lines will be drawn down, but fortunately interest rates are through the floor so the damage to firms that had low initial debt may not be as severe. No one knows how long this crisis will last, but eventually it will ebb, and firms with relatively strong balance sheets will start to prosper. 1 month, 2 months, probably not. 6 months, 1 year probably so. My plan is to slowly keep buying, spreading my available funds over another 10 weeks. One thing for sure, I know I will never guess the bottom. Another thing for sure, it won't last forever.
All my personal approach, of course.
Correction:
EPD
Post a Comment