Dear Valued Clients and Friends –
Please join our national ZOOM call this Monday at 11:00 am pacific time!
The market closed up almost 400 points today after an intra-day session that was surely one of the weirdest I have seen in a couple of weeks. Futures were down 100-200 all morning pre-market and went down further after the initial jobless claims number came in at 2.98 million (the number had been expected to be closer to 2.7 million). The market went down as much as 450 points before rallying back and really zigging and zagging (with no apparent news) throughout the day, closing at the highs into a rally.
* FactSet, May 14, 2020
Very positive health data to read today (see below), but a good portion of my focus today is on the Federal Reserve, the last section of the missive, so I encourage you to make it all the way through to the end.
As for health data, case growth of +1.5% yesterday continues the significant downward trend in such. We had 25k new cases last Wednesday and 21k yesterday, so the absolute level of new cases (which is still averaging 98.5% non-critical/non-severe, but the way) is declining, too, even with the big increase in daily testing. One analyst, I follow projects 17k new cases by next week and another projects 15k. These per-capita levels will be far lower than they were in other Asian and European countries that began re-opening their economies.
Our 7-day average for new testing is 313k per day, and the positive ratio is staying between 6-8%.
The decline of hospitalizations, deaths, and new cases in New York is a sight to behold, and extremely encouraging.
* Pantheon Macroeconomics, May 14. 2020
- Because all focus is on what COVID data looks like after various states re-open, we will continue to monitor global comparables wherever possible. Note Norway, which began re-opening three weeks ago:
* Pantheon Macroeconomics, May 14. 2020
- We will be watching Japan very closely as well, which has almost entirely re-opened now and who has had a rather impressive COVID performance throughout this crisis (and I might add, for whatever it’s worth, with very limited testing).
- I want to assure every single reader: If there is negative health data that comes in areas where restrictions have been eased and where economic re-openings have begun, I am going to tell you. I will not sugar-coat any data. I strongly suspect I will not need to. But I want to also say this: I do not believe where there is good, positive, and encouraging data around economic re-openings, you can count on such from the media. I simply have not seen any precedent for objective and holistic reporting from the press where it does not fit a sensationalistic and gloomy narrative.
- Today’s testing data shows 366,000 tests done today, with a positivity rate of only 6.8%
* The COVID Tracking Project, May 14, 2020
* Strategas Research, Policy Outlook, May 14, 2020
- Plans for a safe re-opening of the American economy are crucial. The largest chain of fast-food restaurants in the country has provided an update on their process changes and endeavors to ensure safety as they prepare for rolling re-openings. Other large casinos, hotels, and car manufacturers have gone public with their detailed planning, too, not just for the planning logistics of it, but as an expression intended to create public confidence.
- And finally, I have lost my instinct for why stories like this do not get more media attention (or maybe I haven’t?), but it seems to be a very positive development that plasma transfusions have proven to be a safe, side-effect free method for COVID treatment. The full medical report is available here.
In market technicals, the sell-off yesterday saw 32% of the market trade to new 20-day lows. Once that number reaches 50-60% we will have an over-sold condition, so I wouldn’t get too excited just yet. The S&P was off > 5% from recent highs, though that came in a little today. However, the average stock in the S&P has been off closer to 9%, speaking once again to the great dislocations and opportunities within the market. I am hesitant to share historical averages of draw-downs that follow market rebounds because the range is so wide as to be unhelpful (-5% to -17% is a pretty big range). That said, some draw-down after the market rally that follows a major market low is extremely common, and generally lasts a few weeks. You can see the range of outcomes here:
* Strategas Research, Daily Technical Strategy Report, May 14, 2020, p. 1
The VIX had unsurprisingly surged higher these last three days, reaching $39 this morning, but closing at just $32.61. Fear has not moved much below the high 20’s but has stayed within the ’30s. This range seems right to me.
* FactSet, May 14, 2020
On the public policy front, I am more and more convinced that the “onshoring” of many American company manufacturing efforts is going to be a major focus in the months to come, and will not be confined to a protectionist or partisan thread, but rather will be pursued from a national security and domestic health foundation. Bob Lighthizer is the U.S. Trade Representative, not a health advisor, but his op-ed the other day in the New York Times was a telling indication of where policymakers want to bring the conversation. It is hard to imagine this would ever have more public support than it does now. Pharmaceutical manufacturing will be ground zero in this debate, but whether it is phase 4, or more likely, phase 5, in stimulus efforts, I believe it is likely to be a paradigmatic transformation in the years ahead.
In looking at the Oil and Energy world, it is hard to not continue paying attention to the price action of crude oil in the face of a big risk-off week. WTI closed at $28 today (+9%), and up well over 100% since April 28.
As for Housing, it is surreal to report this, but the data shows what the data shows. After a total collapse of new home purchases when COVID shutdowns began, the purchase index has risen for four straight weeks. New homes are being bought even in economic collapse, though the mortgages used to pay for them are almost exclusively in the conforming category.
* Strategas Research, Daily Macro Brief, May 14, 2020
And in Fed news, there has been no comment from the chairman on potential plans to implement Yield Curve Control (YCC), and as one of my favorite analysts pointed out, there has been no attempt to ask him about such. It remains my thesis that YCC is almost inevitable and that all things being equal it will be a more potent policy tool than some of the other interventions the Fed may consider.
Powell’s references to the economic risks that exist and the various data points they are watching all suggest that he is willing (even if not eager) to push the envelope further. And while this has caused some to wonder if “negative interest rates” are on the table, my view is both that (a) This is a God-awful idea, and (b) It is not a tool this Fed is going to be inclined to use. So, some suggestions as to where the Fed can go from here when they have already fired a pretty big bazooka in the last eight weeks of American economic life:
(1) Yield curve control (explicit targeting of certain desired interest rates at various points of the yield curve, short, medium, and long maturities – and then subsequent buying and selling of bonds to achieve those targets). Hyper-interventionist; not used in our country since WW2; one could argue QE itself and Operation Twist are minor versions of this; I believe it is highly likely to happen. This gives assurance to the market that the cost of financing the post-COVID recovery interventions will come with hyper low-interest rates in perpetuity.
(2) Credit risk and support (expansion of the various facilities already in play to support lending and capital markets). I wrote yesterday of Congressional efforts to expand the Fed’s support to the municipal bond market. I would simply add that I am not at all convinced the Fed is stuck in place with their current plans for Main Street lending, TALF, and other forms of capital markets support. You will recall the key issue is that the Fed is not allowed to take losses. They have used their printing press legally by (a) Citing “unusual and exigent circumstances” – the emergency provisions of Section 13.3 of the Federal Reserve Act, and (b) Setting up special facilities for lending that are first funded with protective equity from the Treasury Department (loss-absorbing protective equity). What do I mean by the potential expansion of these efforts? The Fed could always go back to Congress and ask for more money. But one very trusted source of mine this week expressed the idea that the Fed could use the $900 billion of remittances to the Treasury post-financial crisis as accounting offsets.
Now, this latter move would be utterly shocking, but I am not at all sure that it is illegal. The Fed DID make $900 billion of profit in its post-crisis efforts with the Bear Stearns book and Fannie/Freddie interventions, etc., and it did (as required by law) pass those profits on to the Treasury Department. If the law is against loss absorption, and you are starting $900 billion ahead, that buys you a lot of “losses” before you have a “loss.”
This would create unfathomable amounts of additional capital in their war chest, but it also would be perceived by the markets (understandably) as quite desperate (and certainly dubious from a legal and accounting standpoint).
(3) Negative interest rates (this is not to be ruled out from the list of potential Fed actions, because these days, nothing appears to be totally or permanently off-limits).
There will be more still on the Fed in tomorrow’s Dividend Cafe. My view continues to be that the Powell-led Fed is earnest and sincere, even if the tasks in front of them are not always possible with the toolbox of a central bank. That said, there is little the central bankers of the world do not feel they can impact, and I believe they have an aversion against using all weapons at once, but I also believe there are very few weapons (or perceived weapons) they would not use. The real issue, though, is not just what this means for the COVID era, and not even just what it means for the risk assets we as investors most focus on. We also must analyze in the months ahead of the long-term implications of what this 21st century Fed looks like. It is a bigger deal than any investors or advisors have yet realized.
Fox Business appearance talking economic re-opening and investor response
We will have an extensive Dividend Cafe tomorrow, but not COVID & Markets missive. Reach out with any questions.
Be well, be safe, be free.
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet