You would think by now, that everyone you know is paying attention. The fact is that many are not. I know, you probably know too, people still planning their next cruise, or discussing concerns evident of a simpler, less broadly aware lifestyle. Then there are the others. The ones who stock non-perishables, clean water, even surgical masks, but they also check to see where those surgical masks were made. Can't be too careful. Hmm.
Who's right? The ever-vigilant? Those slow to react? How do we know the answer to that? How can we know the answer to that? The bond market certainly thinks that this virus will touch us all. Even if we think of ourselves as physically robust, or somewhere between very young and very old, we all love people who are not quite so robust, or who are very young and very old. Even should the ailment somehow pass over our house, the economic impact will be felt down to the community level.
Financially, equity markets were at first slow to react, but are now getting in line with what debt markets had already signaled. The CDC seems to think that as a people, perhaps we better get comfortable with the very idea of disruption. Should the stuff hit the fan, I want you to write down what I always tell you, and post it somewhere where you can see it when you need it. Understand, Identify, Adapt, Overcome, and Maintain. This is not only for markets. That is about being whatever you have to be, whenever you have to be it. Someone counts on you. Be what they need.
Nancy Messonnier. Ever hear of her? If you haven't you will. Messonnier is the director of the National Center for Immunization and Respiratory Diseases at the CDC (Centers for Disease Control and Prevention). What happened to equities on Tuesday? The broader, large cap indices, at least early in the day, managed to flirt with rallying off of Monday afternoon's lows. Messonnier said "Ultimately, we expect we will see community spread in this country." She added that expansion of Covid-19 within the U.S. is not a matter of if, but of when. That was all traders needed to hear. That was all keyword reading algorithms needed to read. Sold to you heartthrob, with more behind. A lot more.
"What is the purpose of marking time?" ... "To get your cover and alignment, Sir." ... If you've ever stood upon the "yellow footprints" as a pimple faced teenager, you may have repeated this mantra 10,000 times. The rest of you have seen parades.
Ever notice a group of marchers walking in place. Knees high, boots hitting the deck in unison. What they are doing, is making sure that everyone is in step, that every head is covered down on the head in front, and that every shoulder is aligned to the shoulder aside. In other words, they are getting their act together, so they don't look like a mob.
This is what global economies are doing. This is what financial markets are doing. Forget about moving forward, they are realigning themselves in accordance to the environment provided. Economies and markets are adapting to the environment.
Using data provided by the IMF, China is easily the planet's second largest economy. That economy has arguably come "off-line." Many other large economies now face off against this virus, and through doing so, will have to force a reduced velocity of transaction relative to human interaction. Japan, is the world's third largest economy, Italy, the eighth largest, and South Korea, the 11th. Down the line, a Hong Kong measured alone, ranks as the 34th largest. Singapore is the 36th largest in terms of GDP. All of those nations are battling Covid-19 in real time.
The Japanese economy contracted 1.6% last quarter, ahead of this virus. The eurozone economy grew, but just barely. Within the monetary union, the German economy, which is the world's fourth largest, failed to grow at all last quarter. What if Germany or France (7th largest) join Italy on the Injured List? That leaves the U.S. and the UK. The virus has not severely impacted the world's largest or 6th largest economies as of yet.
Community spread? That will scare the heck out of a lot of folks. Messonnier went on...
"Disruption to everyday life might be severe." What does that look like? No school. No work. Less income. Shortages impacting medicine, or groceries. In general, worst case economically would be a broad scarcity of goods and services that for so long have been taken for granted.
I'll tell you what bothered me on Tuesday morning. A few days back, I did express some optimism regarding the potential of what could be the U.S. manufacturing base. With global supply lines for large cup multinationals becoming increasingly unreliable, both the Philadelphia and New York regional Fed surveys had shown strength precisely where we want to see it (New Orders, Unfilled Orders, Shipments, Inventories) for two consecutive months.
This gave me some hope that perhaps at least part of the global manufacturing base was moving toward North America. This would make sense, as I think some margin compression in order to maintain market share would seem a wise investment right about now.
The Richmond district (includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia) is an important one, and had already offered up a strong print for January. We looked forward to an upside surprise from Richmond for February that never materialized. The headline number (-2) hit the tape in a state of contraction, as did New orders, and Backlog of Orders. Shipments barely grew. Only inventories remained strong. In all, a stinging disappointment. For that region. For my theory. For now.
The Fed & The Treasury Department
We all know that the FOMC has been in a "wait and see" mode since before any of us even thought very much about the city of Wuhan. Those talking heads that have come out of their holes have told us repeatedly that it is still too early to extrapolate much from the slowdown now in progress. Really? Is it really too early to make some kind of material reassessment of the situation at hand?
I do not know how much good an economic policy response can do, in an environment that deters velocity, which will be critical, even more now than it ever or always has been. The Fed will have to continue to provide overnight liquidity. The Fed will have to forget about targeting inflation. That will be a fool's game as the yield curve remains horrendously inverted, which implies little to no growth as well as little to no consumer level inflation. Even among these implications, we have to understand that scarcities will provoke unwelcome changes in price discovery completely unrelated to medium to long term expectations.
The Fed will have to sustain the balance sheet expansion program precisely where it is. This is absolutely no time to stop buying T-Bills, that would allow potential upward movement in short-term interest rates. In fact, not only should the Fed continue to stay away from Notes and Bonds, but Treasury should overload supply in this arena. In nearly alarming size. Best case? By doing so, Treasury might flatten the curve, which right now would be a good thing. Should that not work... at least the issuance of large quantities of this sort of debt would cost very little to borrow. The proceeds could be used to ramp up preparation regarding health care, as well as provoke a build-out of domestic production capability. Seems a no brainer? One would think.
Back to the central bank. Futures markets are now pricing in 25 basis point reductions made to the Fed Funds Rate in April, July, and December. That's a change from earlier this week from April, September, and a 44% probability for December. What the Fed needs to do, in my opinion, is make a 50 basis point reduction to the FFR target on the hop, as in right now. Do not wait for March 18th. If the curve does not look better by then, or if the virus is having a perceptible impact on domestic communities at that time, then consider another 25 basis points.
You all know that at heart, I am an Austrian style economic thinker. It does pain me to take such a dovish stance. Make a simultaneous announcement outlining a plan to back a flexible portion of the monetary base with a hard assets. That will draw global investment into the domestic economy.
Should conditions worsen, first-responders will leave their homes to protect you, even with their spouses and their children begging them not to leave the house. Should we expect any less from decision makers? The Federal Reserve Bank and the U.S. Treasury Department are not actually in the position of being first-responders, but they can be anticipatory, they can be pre-responders. A press conference can be held to explain that these measures are temporary if the potential for crisis passes quietly. These actions require an aggressive brand of courage. Make it so.
While you slept, equity index futures have literally been all over the place. Up and down many, many points as foreign financial markets have opened and closed. By now, you all know that Bob Iger has moved aside at the Walt Disney Co. (DIS) , you all know that Keith Block has stepped down at Salesforce (CRM) . You all know that Mastercard's (MA) Ajay Banga has made plans to do the same.
While managing core positions has become a difficult chore, there is money to made by day-trading the various names that are making headlines. This may be the very difference between beating the market or just taking your lumps.
I have been active overnight, and do not expect to change that behavior anytime soon. Opportunity is where you find it, not where you want it. Opportunity is part of step number two... Identify. They'll come for us at some point today. Let's give them the fight that they'll remember for generations. Give and take is a two way street.
Economics (All Times Eastern)
10:00 - New Home Sales (Jan): Expecting 711K, Last 694K SAAR.
10:30 - Oil Inventories (Weekly): Last +414K.
10:30 - Gasoline Stocks (Weekly): Last -1.971M.
The Fed (All Times Eastern)
09:35 - Speaker: Dallas Fed Pres. Robert Kaplan.
13:00 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
Today's Earnings Highlights (Consensus EPS Expectations)