Global Macro Monitor

In our March 7th post,  Stages Of A Pandemic: Denial, Panic, Fear, and Rationality, we suspected the country was about to move from denial to panic over the coronavirus pandemic.   It sure did and infected the global markets in a big way leading to today’s massive monetary package from the Fed.

Clearly, Jay Powell has more information than most of us as they saw the markets seizing up and had to act.  Hopefully, they won’t be bailing out the bad actors and will allow the necessary debt restructurings and some equity holders to be wiped out to prevent the zombification of the economy.   It won’t be the end of the world.

Trouble In Treasury Land

Last Sunday we posted this,

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.  – GMM

During last week,  bond/note auctions began to sputter, Treasury yields on the long-end spiked, and bid-offer spreads blew out.

Flying Blind

The only thing we are certain is that all of us, including the policymakers, are flying blind.  Much like a pilot trying to navigate an aircraft in a thick fog lacking credible flight instruments, which have been distorted by years of monetary and government intervention to prop up asset markets.  Most of the old trusted economic signals from financial markets are long gone.

What is fairly clear from the past week, at least to us, is that markets do not and will not finance the now expected $2-3 trillion annual USG budget deficit at the sub-1 percent fake interest rates and that the Fed will be forced to monetize much or maybe most of the shortfall.

To hear calls that Treasury should issue $5 trillion in 10-year bonds or refinance its debt with negative interest rates is probably the most absurd thing we have ever heard in our long journey in the financial markets.  WTF?

Yes, there are $10-20 trillion of fixed-income instruments marked at negative yields but don’t make the mistake of thinking that trillions of dollars trade at those levels or that trillions of dollars were bought at negative yields by market and price-sensitive players.

Yields are set by the marginal buyer.  And we suggest you get to know the marginal buyer of duration at close to zero yields — the momentum crowd, including the algos with zero context, haven flows, stock short-sellers using bonds as a proxy,  and the ultimate take-out sucker, the central banks.

Though there are holders of bonds at these yields,  we suspect governments cannot issue large down here without the central bank taking down a big portion of the issues, either directly or indirectly.   We believe the events of last week and the Fed’s action today confirmed it.

Running a pro-cyclical fiscal policy and boosting eficit spending over the past few years is going to prove to be a huge mistake.

Let’s move on.

The Coronavirus

The following charts bring some perspective.  That is, though COVID-19 is much more fatal and “not just the flu” we are not all going to die.

In fact, most of us who get infected won’t even require hospitalization.

The problem is the law of large numbers.

So many of us are going to be infected, even though a small proportion will need hospitalization, our healthcare system will be overwhelmed and fail.

That is why governments are locking down whole cities and governments.

Learn from Asia.

Test, trace, isolate and inform are keys to epidemic control – Bloomberg

Godspeed, brothers, and sisters.

Good night and good luck.

Not Just The Flu 

80 Percent Of Cases Should Be Mild

Are You Outraged Yet?