Trump & Co Must Abandon The Stock Market To Save It

Posted on March 12, 2020 by macromon

No bottom in stocks or the economy until the test kits are ubiquitous.   We believe markets want an aggressive plan and action to treat the disease rather than focusing on the symptoms. Then markets will take care of themselves and find their appropriate levels.

WTF?  Where Are The Test Kits?

True story. A family member receives a text on the way to work this morning that her boss has a fever of 102 degrees with a diagnosis that she “ticked all the boxes for COVID-19.” They couldn’t test her because they didn’t have the test kits and she was put in quarantine for two weeks.

The Fed Steps Up

By the way,  this is from our Sunday night post, What Every Market Player Should Now Be Contemplating,

Can the U.S. government finance its $1.2 trillion plus annual deficits with an entire yield curve at less than 1 percent?  

We seriously doubt it and the Fed is going to have to step-up big time with QE, non-QE, or let’s just call it for what it is, monetization.

These yields are distorted and not true market rates, and now have become Airbnb rentals driven by haven flows, the MoMo crowd and ‘bots, and a proxy for stock shorts.

Long-term investors?  Think rent control distortions.   We will be closely monitoring  the monthly auctions for real demand.  – GMM,  March 8th

5D2486C7-969A-4847-A72B-110CE917E9D5

No Trillion Dollar Issuance At “Fake Yields”

After two shitty bond auctions this week showing tepid demand, bid/offer spreads blowing out in Treasury securities, and the 10-year yield spiking from 0.39 percent to 0.85 percent, the Fed steps up big time today.

 

Fed

The Federal Reserve Bank of New York will start adding fresh capital to money markets on Thursday to pad against coronavirus risks and ease stresses on the Treasury-bill market.

The extraordinary funding measure first involves a $500 billion injection at 1:30 p.m. ET on Thursday, the bank said. The cash will be added to money markets through a three-month market repurchase agreement, or repo operation.

One-month and three-month repos for $500 billion each will be conducted on Friday and continue to be offered weekly through the calendar month, the bank added.  – Market Insider

The term “capital” is a bit misleading, in our opinion.

Upshot

Marginal buyers, such as haven flows, momentum algos, and stock shorts using bonds as a proxy, who determine the price or bond yield on your screens, can set rates at zero or below.  But that is not a price or yield where $1 trillion-plus of new securities can be issued or where the market can liquidate an enormous position.

Just think of the S&P500 level at the peak of 3393-ish.  Marginal buyers drove the price there — irrationally in our view — and we all marked our positions and investments at that level but, in reality, it was not a level where all could liquidate.

Stay tuned as we are working on a more in-depth piece on this very important subject. We suspect all the distortions created by monetary policy and government intervention to prop up markets are coming home to roost at the worst time possible.

Marginal buyers set prices.  Make sure you know who are the marginal buyers.

Good night and good luck.

Posted in Bonds, Equities, Inflation/Deflation, Interest Rates, Uncategorized | Tagged , , | 1 Comment

Mr. Market Wants What Korea’s Got

Posted on March 10, 2020 by macromon

Posted in Uncategorized | 1 Comment

Potential Next Steps In The Coronavirus Crisis

Posted on March 10, 2020 by macromon

Washinton state lays out the next potential steps ” as its public-health officials are “at the ready” to order involuntary isolation and quarantines and are considering cancellation of major public events.

Coronvirus_Mar10

Patty Hayes, director of Public Health — Seattle & King County, outlined potential next steps in the area’s effort to slow the spread of the virus at a Seattle City Council meeting and said officials are talking about what to do.

Hayes shared a Washington State Department of Health chart that listed five levels of actions that officials could take. Gov. Jay Inslee hinted at the ongoing discussions Sunday on the CBS show “Face the Nation,” saying the state’s response could involve “reducing the number of social activities that are going on.”

Although King County’s first confirmed COVID-19 case was announced less than two weeks ago, the area’s response already has ratcheted through Level 1 and Level 2.  — Seatlle Times

Nobody knows the exact path of the current crisis or how and when it ends but it will end.  This too shall pass.

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Trump’s Presser Turns S&P Futures

Posted on March 9, 2020 by macromon

The S&P futures contract has turned up after President Trump’s press conference, which he laid out an economic relief plan, including payroll tax cuts.

The contract has moved in almost a 100 point range or 3.5 percent in the 90 minutes it has been trading.

The market is very oversold and a bounce is natural.  We believe the S&P500 moves lower over the next few months, however, until we get a better handle on the coronavirus crisis.

 

Globex

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Prediction Markets Begin To Price Blue Wave And Female VEEP

Posted on March 9, 2020 by macromon

Big moves on PredictIt in the past week and starting to price a Blue Wave in the November election.

The Democratic House & Senate contract is up almost 70 percent since March 1 after Montana Gov. Steve Bullock (D) put the state’s Senate seat in play

These contracts are volatile and fairly illiquid.  We look at trends as a signal and not spot prices.

These markets really nailed the resurrection of Joe Biden last Super Tuesday.  See our piece,  Biden Rocks, Bernie Flops In Prediction Markets, which we posted last Monday.

Predict_March 9

Democratic VEEP

In your case your wondering, here are what the markets are predicting who gets the nod for the V.P. on the Democratic ticket. 

Predict2_March 9

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What Every Market Player Should Now Be Contemplating

Posted on March 8, 2020 by macromon

Can the U.S. government finance its $1.2 trillion plus annual deficits with an entire yield curve at less than 1 percent?  

We seriously doubt it and the Fed is going to have to step-up big time with QE, non-QE, or let’s just call it for what it is, monetization.

These yields are distorted and not true market rates, and now have become Airbnb rentals driven by haven flows, the MoMo crowd and ‘bots, and a proxy for stock shorts.

Long-term investors?  Think rent control distortions.   We will be closely monitoring  the monthly auctions for real demand.

The dollar?  Yikes!

 

Posted in Uncategorized | 4 Comments

Congress Considering Shutting Down?

Posted on March 8, 2020 by macromon

One branch of the federal government tells us to buy the dip as the coronavirus is contained and is a hoax hyped by the Democrats while another branch is considering measures to protect itself, including shutting down.   Not exactly a positive to turn market sentiment.

We have crossed the tipping point from denial to panic, folks.

By the way,  in case you missed it, Senator Ted Cruz is in self-quarantine after interacting with a coronavirus patient at CPAC.

Posted in Politics, Uncategorized | Leave a comment

Markets Having A Jackie Moon Moment

Posted on March 8, 2020 by macromon

Everybody panic!  It’s just like the Titanic but its full of bears! – Jackie Moon

The global markets are having their first real Jackie Moon moment of this downturn.  We suspect many more to come.

What happens when they realize that the monetary policy transmission mechanism to stocks has mainly been a placebo effect?   Monetary policy is much more of a black box than the market geniuses realize, in our opinion.

IMF_Monetary Transmission

Will the Fed follow the Bank of Japan and start making outright purchases of stocks to prop up the market?

Bank of Japan

 

Analysts and investors in Tokyo have begun to question whether the programme, started in 2010 as a way to prop up the market in the wake of the financial crisis, still serves much purpose. The central bank now owns 80 percent of the domestic exchange-traded fund market, fanning fears that its grip over prices has become too strong.  – FT, Nov ’19

Here are a few clues and a potential roadmap,

“We should allow the central bank to purchase a broader range of securities or assets,” Rosengren [FRB Boston president] said in a speech Friday in New York. “Such a policy, however, would require a change in the Federal Reserve Act.”

U.S. law currently limits Fed purchases to “any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.” That translates to buying U.S. government and agency debt and mortgages issued by federal housing agencies.

The Fed has traditionally maintained a strong internal resistance to expanding its purchases beyond Treasury securities because such activities are essentially credit allocation and leave the central bank vulnerable to criticism of favoritism if it’s investing in the bonds or stocks of specific companies.

“New deal progressives are not going to tolerate this unless the unemployment rate has risen sharply,” said Mark Spindel, a co-author of a book about Congress and the Fed.  — Bloomberg, March 6th

Top 10 percent Own 88 percent of Corporate Equities

Good luck changing the Federal Reserve Act in the current populist moment that we find ourselves.   Remember, folks,  88.1 percent of all corporate equities and mutual funds are held by just the Top 10 percent of households.

Nikkei’s Gruesome 30-year Bear Market

By the way,  even with the Bank of Japan’s direct intervention in the stock market,  20 years of zero interest rates, massive fiscal stimulus, and quantitative easing, the Nikkei is still 50 percent below its December 29, 1989 high.

 

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Exponential Growth 101

Posted on March 8, 2020 by macromon

I had a stunning conversation last night with a very good friend that went something like this:

It’s just the flu, bro.  You are glued to the fake news on CNN 

He is a restaurateur and I was trying to convince him to start making contingencies.

Upon hearing the above response,  I recommended he read my post,  Stages Of A Pandemic: Denial, Panic, Fear, and Rationality,  which was just loaded up to the GMM website.

Clearly, he is in stage one – denial.

I went on to explain, yes, he was partially right,  COVID-19 is a type of the flu, but a new or novel flu, which probably originated from animals and the human body has yet to build up immunities to help fight it off, unlike the seasonal flu.  Still many unknowns about this corona beast now infecting the world.

Exponential Growth

What struck me most was that he, like many of us have difficulty grasping the concept of exponential growth in a real-world context beyond finance.  I shared with him what is happening in Italy, which had only 3 reported cases less than three weeks ago to now 7,335 cases as of March 8th.   Of course, it is difficult to unpack the true growth of transmission and distinguish it from the ramping up of testing and counting.

We suspect the numbers will look much higher as governments begin and ramp up testing, which almost surely is and will be the case in the United States.

Elbow Of The Curve

COVID-19 starts with a few cases, morphs into clusters before moving beyond the elbow of the curve to an explosion of cases.   We both agreed there is so much we don’t know, such as how many people in our area are currently infected, and that we will survive and get through this crisis.

By the way,  he is first-generation Italian.

Italy COVID-19

Dow futures are down 900 points and April crude oil is down over 20 percent and printed at $30 bbl., stunning.

Seat Belts

We are ignoring Kudlow and strapping ourselves in.

Stay frosty, folks.

 

Posted in Coronavirus, Uncategorized | Tagged , | 1 Comment

Deflationistas About To Go Apeshit Over The Collapse Of Oil Prices

Posted on March 7, 2020 by macromon

The Saudi-Russian Oil War is going to set the deflationistas hair on fire.  What is wrong with the relative price of oil collapsing?

A big flop in the price of a headline commodity almost always brings out a deflation panic.  We have yet to see any sustained general deflation in our lifetime, however.

Yes, the price of big-screen televisions is tanking but rents and health care are screaming higher.  Furthermore, we have a strong conviction that the price inflation is under measured.   Please, folks, don’t mix relative price moves with deflation, where the general level of prices is falling over a sustained period.

It does seem the Fed, and, for sure, the market geniuses define deflation as falling stock prices, which is one of the very reasons they find themselves in the current unpleasant situation.   The central bank can’t even attempt to close the oven door due to fears the Japanese soufflé pancake will collapse.

Politics Of Falling Crude Prices

The fall in the price of oil is a very similar dynamic of the trade-off between the winners and losers of international trade.  More than 225 million American automobile drivers will benefit from the drop in price but the roughnecks and real estate speculators in, say, Midland, Texas are going to get hurt bad.

Should the U.S. government then implement policies to prop up oil prices to protect oil and gas mining jobs, which total only around 157K?   By now, I think you know our view.

Nevertheless, it depends on the political strength of domestic oil producers.

In 2019, about 142.23 billion gallons (or about 3.39 billion barrels1) of finished motor gasoline were consumed in the United States, an average of about 389.68 million gallons (or about 9.28 million barrels) per day.  – EIA

For every $.25 drop in the price of gas as a result of the crude price flop, domestic consumers are set to save about $100 million per day.   A nice tax cut, indeed.

 

Factors affecting gas price

Saudi Arabia plans to increase oil output next month, going well above 10 million barrels a day, as the kingdom responds aggressively to the collapse of its OPEC+ alliance with Russia.

…“This is going to get nasty,” said Doug King, a hedge fund investor who co-founded the Merchant Commodity Fund. “OPEC+ is going to pump more, and the world is facing a demand shock. $30 oil is possible.”

Oil traders are looking to historical charts for an indication of how low prices could go. One potential target is $27.10 a barrel, reached in 2016 during the last price war. But some believe the market could go even lower.

“We’re likely to see the lowest oil prices of the last 20 years in the next quarter,” said Roger Diwan, an oil analyst at consultant IHS Markit Ltd. and a veteran OPEC watcher, implying that the price could fall below $20 a barrel.  — Bloomberg

Saudi_Russian Oil War

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