Wednesday, March 11, 2020

Not out of the woods yet

Markets are still very worried, and pricing is distressed. But no signs yet of a panic peak. Too many virus-related variables remain to be resolved. Here's a quick chart dump as of 10:30 PST:

Chart #1

Prices and fear are very close to their worst to date.

Chart #2

High, low, and closing price of the Vix index.

Chart #3

High, low, and closing price of the S&P 500 index.

Chart #4

Chart #4 shows that inflation expectations have plunged of late, as nominal yields have fallen while real yields are higher.

Chart #5

Chart #5 compares the real Fed funds rate (blue) with the market's expectation of what the real funds rate is likely to average over the next 5 years (red). The red line now exceeds the blue line, which means the real yield curve is once again positively-sloped, though not by much. The market expects the Fed to behave rationally in the face of a major decline in the price of oil. In other words, short-term interest rates are likely to decline by an amount roughly equal to the decline in headline CPI for a period.

Chart #6

Chart #6 shows how big swings in oil prices (blue) correspond to big swings in inflation expectations (red). 
Chart #7

Chart #7 shows how the big oil price declines of the mid-80s and mid-10s resulted in a significant, but temporary decline in headline inflation (blue). Underlying inflation was not much affected. We can expect to see a replay of these oil price shocks over the next year or so. Note that ex-energy inflation is currently running a solid 2+%. The Fed does not need to worry about inflation being too low. But a failure to cut rates as inflation falls would increase the real Fed funds rate, which is not called for given a virus-weakened economy.

UPDATE: as of 3pm EDT. It's getting VERY UGLY. The mood of the market could hardly be worse. The number of cases is shooting higher, deaths are mounting, air traffic is shutting down, public events are folding their tents, test kits are in very short supply in the U.S., it's a full-fledged global pandemic that can't be stopped, it's a real bear market ....  the Fed stepped in with both feet, but that only slowed the panic, nothing is going to work, we're all doomed .... there's no light at the end of this tunnel ....

If we aren't at max panic now, we're getting awfully close.

Chart #8

The current panic is right up there with some of the worst ever. The Vix index shot to over 100 briefly during the October 1987 crash, briefly hit 90 in late-2008, and registered a closing high of 80+ in November 2008 at the height of the financial panic. Back then, not only was the global economy in the grip of a deep recession, financial markets were melting down and big banks were evaporating. Today the markets are still functioning and there is plenty of liquidity. Yet the Vix is over 70 and rising.


Grechster said...

Chart #5 strongly suggests that the Fed is NOT asleep at the switch. But Chart #4 strongly suggests they the Fed has A LOT more work to do. It is not too soon to announce QE. And let us continue to hope that the form of QE is more egalitarian than rounds 1,2, and 3.

Scott Grannis said...

I HIGHLY RECOMMEND this article, which explains why our government has been fatally incompetent in rolling out testing for the Coronavirus:

This is why we can't afford medicare for all. Big Government can never be expected to react in a timely and effective manner to emergencies and unexpected disasters.

Ausgarry said...

If not the government who? It is the role of government to protect its people. It does not need to provide health services but it does need to be able to proactively act so as to ensure public health. You can’t leave it to the market because they do not have the right incentives.

Benjamin Cole said...

Excellent blogging.

Ask for a national health insurance, perhaps we should see if Canada responds better than the US to the coronavirus panic.

The VA, a communist healthcare program, takes care of a lot of old people, and old people are vulnerable to the coronavirus. Let's see how the VA does. A friend of mine had his cataracts fixed at a VA facility and said the care was excellent. He served two years as a clerk-typist at Fort Dix back during the Vietnam war

I sometimes wonder if we shouldn't have universal conscription and VA for everybody.

Scott Grannis said...

Re "If not the government who?" The very same article I recommend reading gives you the answer: local people who see things first hand in their own neighborhood. People who have a stake in getting things right, not bureaucrats who lives thousands of miles away. Local control, not federal control! Why in the world was the CDC not allowing doctors who saw the illness in front of them to administer tests? Why did they need to be "certified" before they could administer a test? That is outrageous and I hope we have learned a lesson, as a country. An expensive lesson, unfortunately, in how not to rely on government to fix our problems.

Rick Jones said...

>The very same article I recommend reading gives you the answer: local people who see things first hand in their own neighborhood...An expensive lesson, unfortunately, in how not to rely on government to fix our problems.

But suppose for a minute that the Cornonvirus happened to be some biological warfare agent that accidentally escaped the lab and got into the general population. Or suppose it wasn't an accident at all...suppose it was an actual attack.

Are you suggesting that local governments should be the ones that plan for, prepare for, and deal with it?

Of course not.

One of the Federal government's explicit roles is to "provide for the common defense" (not to mention, "promote the general Welfare"). And unfortunately, in today's very highly interconnected world and globalized economy, it's pretty much impossible to prepare for something like biological warfare on the one hand and ignore a natural pandemic on the other.

The more relevant lesson was that the government (and CDC) were not prepared for a biological attack, and that we need to make them more responsive if we're going to take the role of "provide for the common defense" seriously.

Ausgarry said...

Yes but a local neighbourhood response will not cut it. Who will make sure there are enough test kits and protocols, who will close off transportation who will set up emergency treatment facilities? The analogy with a war situation works _ would you recommend a local militia determine your defence response. By the way love your blog anh have followed for years!

amritsari said...

Why do old people love medicare if a government run program is a bad thing ?

Benjamin Cole said...

Well, arguments about government and health care aside (and I respect all views), what I want to know is....can we go bottom-fishing yet? There has been a huge drop in the market, and the outlook for some industries, travel/hospitality, is as grim as can be.

Sorry to ask a mercenary question, but when the hour is darkest...and prospects are the time to buy.

Good luck to all, health and financially.

PS I realize "calling the bottom" is a mugs game. But are we in the ballpark? I think so....

steve said...

I think we can all agree that the CDC dropped the ball-big time. I agree with both perspectives on this; if ever we need government whose primary function is the protection of its citizens it's now. But government agencies should listen to local agencies and allow for coordination. Good luck with that. This has been going on since Washington had to rely on local militias to help fight the British!

Ron T said...

Blood in streets and shaking out the weak hands, time to start adding to equities for the long term rational investor.

Ron T said...

Can certainly go down further but the prices have just gotten too low to pass up.

Charlie said...

President Trump has proven himself able and willing to cut through government red tape. I suspect the problem is that there was no one near him (in January) with the correct domain of knowledge to tell him what needed to be done. Dr. Helen Y. Chu should have been on Fox news telling the president directly.

The Cliff Claven of Finance said...

"China's President Xi Jinping Visits Wuhan, Coronavirus Epicenter"

China is a leading indicator of the COVID-19 virus in other nations.

The headline above strongly implies COVID-19 met a communist dictator, and the dictator is now winning the fight.

Watching what is happening in China makes more sense than wild guessing what will happen in the U.S.

Charlie said...

Yes, watch China. But Italy is good "short-leading" indicator to see how things will be in 11.5 days. Japan is an interesting model for what could happen if we took action before things get bad.

If the goal is to reduce the coming hospital overload and all that entails, this tweet is relevant:
"Work by colleagues at
that takes current best estimate for number of active #COVID19 infections and simulates forward under different degrees of social distancing. A 25% reduction in mixing results in more than a 50% drop in cases after 1 month relative to baseline."

Grechster said...

Cliff: I think the spirit of your point is wise. I've been using the same input to guide me. The data from China, as always, is murky at best. But the visit by Xi seemed important.

Grechster said...

I think I hear the Fed's bazooka being loaded... I know more liquidity doesn't cure a virus. But let us not forget how powerful the US Federal Reserve is...

Charlie said...

I think I just heard the president say "Frankly, testing has been going very smooth". He also said that travelers to US are being tested and "We're not putting them on planes if they are positive."

I've been told that I'm imagining things. Did I imagine these statements?

Rick Jones said...

>I've been told that I'm imagining things. Did I imagine these statements?

I don't know...I didn't see or hear that.

On the other hand, I see the market made a sudden shift upward at about the same time news broke that some Brazilian who met Trump at Mar-a-Logo on Saturday has tested positive for the virus. Coincidence?

JDonley said...

just heard on Fox Business. old: "When blood's running in the street it's time to buy". now: "when they're out of toilet paper everywhere it's time to buy".

Benjamin Cole said...

I would like to say that Scott Grannis has not, like so many others, engaged in fear-mongering.

John Cochrane (who is not a fear-monger) is discussing the live possibility of a financial collapse.

The US commercial banking system has largely been rebuilt nearly to original specs, and is inherently fragile. Summing up, banks borrow short to lend long on illiquid assets, and lend 700% of what they borrowed (through the endogenous creation of money.)

So, summing up:

1. Children are largely immune to coronavirus

2. Non-elderly middling healthy adults in general are not at risk from the coronavirus.

3. The elderly, who are largely not in the labor force, can be at risk from the coronavirus, although fatality rates are rather low.


Collapse the economy and financial system to fight the coronavirus!

Good luck everybody.

Rick Jones said...
This comment has been removed by the author.
Rick Jones said...

>An expensive how not to rely on government to fix our problems.

It seems that the governments of Singapore and a few other Asian countries provide a stark counter-example to your conclusion.

It seems that the governments of Singapore and a few other Asian countries learned from the earlier SARS and H1N1 epidemics...took their defense-of-the-nation duties seriously...and put processes and procedures in place that allowed them to handle the COVID-19 virus with relative ease and effectiveness.

So again, I would say the real lesson is that in the U.S. the government had simply failed to takes its defense-of-the-nation role seriously with respect to biological threats, and that it needs to review what went wrong...draw from examples that worked...and ramp up efforts for next time (and there WILL be a next time).

Check it out:

Scott Grannis said...

Rick, re whether more or less government control of healthcare is a good idea. Cato's Dan Mitchell gives examples why it is not:


The virus originated in China, where government controls the healthcare system. It’s also spread most significantly in nations such as Iran and Italy, where government also plays a dominant role in health care.

…officials at the Food and Drug Administration (FDA) and the Centers for Disease Control and Prevention (CDC) stymied private and academic development of diagnostic tests that might have provided an early warning and a head start on controlling the epidemic that is now spreading across the country. …the CDC required that public health officials could only use the diagnostic test designed by the agency. That test released on February 5 turned out to be badly flawed. The CDC’s insistence on a top-down centralized testing regime greatly slowed down the process of disease detection as the infection rate was accelerating. … On February 29, the FDA finally agreed to unleash America’s vibrant biotech companies and academic labs by allowing them to develop and deploy new tests for the coronavirus that causes COVID-19.

Read the whole thing

Rick Jones said...

Scott, what’s that article demonstrates is that some governments were not able to handle this. What the Wired article that I cited demonstrated is that some governments were, in fact, able to handle it. So it’s not really a question of whether governments can or cannot, because obviously some can. The question is whether governments should prepare to try to handle something like this. And once again, if a principal role of the government is the defense of the nation, and if the coronavirus is a proxy for a biological warfare attack, then I don’t see how you can draw any other conclusion than that the government should be preparing to deal with something like this.

So here are a few questions:

Do you think in its role of defense of the nation that the government should be prepared to defend the country against a biological warfare attack?

If you do, how do you propose that the government prepare to defend the country against a biological warfare attack while at the same time outsourcing the defense against natural pandemics to local and state governments?

And finally, at what point is it clear that something is a natural pandemic as opposed to a deliberate biological warfare attack?

Charlie said...

>The virus originated in China, where government controls the healthcare system. It’s also spread most significantly in nations such as Iran and Italy, where government also plays a dominant role in health care.

Keep in mind that current number in any country is irrelevant. What matters is the constant of the exponential curve. This is mostly impacted (at this stage of the pandemic) by social distancing.

Also, China and Iran both engaged in massive information suppression and government "happy talk." Hence, we can now see Iran's mass graves from space. Difference in US is that information suppression is impossible and everyone knows to disbelieve Trump's happy talk.

Charlie said...

To be fair, Trump's decision to ban travel from China should get credit for the fact that we are 11.5 days behind Italy in the viral expansion. However, it is here now. You can't stop at one good decision. Travel bans won't do much now. Most effective actions now are things that lower the curve so hospitals can handle folks who need it.

Charlie said...

Btw, please keep up your great work here Scott! I follow for the data and education. I don't agree with your politics, but I certainly don't begrudge exposure to them.