Tuesday, March 31, 2020

Proposition of Safety

I say, we can dance if we want to
We can leave your friends behind
'Cause your friends don't dance
And if they don't dance
Well, they're no friends of mine
--Men Without Hats

Suppose that a group of people approaches you with the following proposal. They could help keep you safe. To do this, they would impose barriers on your behavior. They would tell you what you can do, and what you cannot do. You would have to remain relatively isolated, and limit your exposure to others.

If you do not follow their rules, then you would be punished--by the legal/judicial system, by social sanction, or both.

The group stresses that, although their policies should make you safer, they cannot guarantee your complete security.

In exchange for their rule making and rule enforcing services proposed to improve your safety, you would pay this group a portion of your income. If you do not pay, then you will be subject to punishment.

Would you agree to this?

Have you already agreed to this?

Monday, March 30, 2020

Policy Uncertainty in Stratosphere

"When you find something you've got confidence in, everything changes. It just doesn't make any sense."
--Jesse Bishop (Twelve O'clock High)

Doesn't appear to be Baker et al's economic policy uncertainty series that we've discussed before, but the picture is probably accurate.

Perceptions of policy uncertainty have likely never been higher. Until people can more confidently forecast the consequences (e.g., depth, duration) of the COVID-19 pandemic, they will be wondering what government policy interventions may still be forthcoming.

We might call this 'direct' policy uncertainty. For instance, people are wondering how much more stimulus the federal government might inject into the system.

People will also be wondering about 'indirect' policy uncertainty--i.e., how government policies, once implemented, will affect other factors. For example, people are trying to wrap their heads around how the massive amount of intervention already done will effect stock markets, general prices, trade, etc.

Absent better understanding here, perceived policy uncertainty levels will remain stratospheric.

Sunday, March 29, 2020

Fading the Dire

So glad we've almost made it
So sad they had to fade it
--Tears for Fears

I'm a contrarian by nature. As such, I like to fade 'conventional wisdom.' As Clay Travis observes, the 'conventional wisdom' w.r.t. COVID-19 is that public health outcomes will be extremely dire. The virus will be with us for a long time and result in millions of deaths, so goes the narrative.

It’s truly astounding how many coronavirus bros there are on social media who are rooting for the virus to triumph and refuse to accept any positive numbers at all. I’ve never seen anything like it. It’s wild.

The depth of the negativity is, as Travis notes, astounding. Many people, lots of them politically grounded and nearly all of them extremely emotional, are so committed to pessimism that they are having trouble seeing that their worst case scenarios could easily by altered by dynamic, adaptive responses already in motion.

Although uncertainty here makes outcomes difficult to forecast with confidence, the dire, worst case scenario space seems very crowded...and very fadeable.

Saturday, March 28, 2020

Disengaged and Indifferent

Charlotte Selton: You have done nothing for which you should be ashamed.
Benjamin Martin: I have done nothing. And for that I am ashamed.
--The Patriot

Thomas Massie with some back-of-the-envelope math on the cost that the multi-trillion dollar stimulus plan will levy on US citizens. The longer the economic lock-down drags on, the larger the costs of a collective bailout will be.

But does the average citizen care anymore? Perhaps they have come to expect government to have their backs whenever times get tough. Or maybe the numbers have just gotten so large that people figure there's nothing they can do. Just go with it...

Prospects of losing ever more liberty seems to find many people disengaged and indifferent.

Friday, March 27, 2020

From Thin Air

Sgt Roger Murtaugh: That's pretty thin.
Sgt Martin Riggs: Anorexic! 
--Lethal Weapon

With the Fed buying everything in sight, its balance sheet is going vertical. The Fed added nearly $600 billion in assets in the last week, and is now carrying over $5.2 trillion in assets.

This could go much higher depending on how long the COVID-19 lock down continues and the amount of economic destruction that the lock down leaves in its wake. While the over/under in my head currently stands at $10 trillion, I certainly hope for a downside surprise.

Meanwhile, it is important to remember that the Fed is doing all of this with money created out of thin air.

Thursday, March 26, 2020

Threat and Liberty Lost

Vasily Borodin: The crew know about the saboteur. They are afraid.
Captain Marko Ramius: Well, that could be useful when the time comes.
--The Hunt for Red October

Over the past few days, running near empty streets during what is usually early morning rush hour has been a strange feeling. No school buses. No traffic piled behind neighborhood intersections. No long lines of cars pushing up Observatory Ave. A deserted Hyde Park Square.

A reminder, I think, of how readily people are willing to surrender freedom for some semblance of security when they feel threatened.

Early in my study of the Great Depression, the notion that people gladly consented to heavy-handed New Deal programs seemed incredible to me. Didn't these people realize that they were giving up liberties that would be difficult to claw back?

The phenomenon is much easier to understand after having experienced situations that elevate collective fear. 9/11. The Credit Crisis. Now the COVID-19 Pandemic.

"Give me liberty or give me death" is certainly not the common mindset in these situations. Instead, it is more like, "I will give up my liberty if you can guarantee my safety."

Unfortunately, those who do so are likely to wind up with neither in the long run.

Wednesday, March 25, 2020

Denominator Problem

Wasted, sacrificed for a new nirvana
Nighttime sends us on our way
--Icicle Works

It seems people at Stanford are among the few asking critical questions related to the accuracy of the 'official' COVID-19 assessment. Earlier we shared the 'evidence fiasco' thoughts of Stanford's John Ioannidis. Today two more Stanford professors of medicine voice their concerns in this WSJ piece.

They suggest what amounts to a massive 'denominator problem' in reported COVID-19 fatality rates statistics. As of this writing, the Johns Hopkins COVID-19 tracking site is reporting 802 deaths in the US from 55,243 total confirmed cases--a 1.45% fatality rate. Many people are using such fatality rates for future projections. If they suppose that 100 million Americans ultimately get infected, then 1.45 million would die using the above fatality rate.

The Stanford profs argue that those estimates are deeply flawed. The true fatality rate depends not on deaths from confirmed positive cases, but on the number of people who get infected. And the total number of people infected with the COVID-19 virus is likely to be far higher than reported cases indicate.

This is because of selection bias in the testing process. Testing for COVID-19 infection has largely been limited to those people who show symptoms of the virus, or who think they might have the virus. As the Stanford profs demonstrate using data from novel population samples from China, Italy, Iceland, and the US, prevalence of COVID-19 infection ranged from 0.9%-2.7% of all individuals in the sample. Applying that prevalence to the US population at large suggests that the number of people that might already be infected with the virus could be more than 10x the reported number of reported cases.

This would make the denominator of the fatality rate calculation much larger than the one currently employed--and the calculated fatality rate much lower. Using our data above, disease prevalence that is 10x the reported case level shifts the decimal point one place to the left for a fatality rate of 0.145%--that's only slightly higher than the flu.

The Stanford profs sense the true death rate may be even lower. The first Chinese COVID-19 cases surfaced in Wuhan in late 2019. Although the first reported US case was reported in mid January, tens of thousands of people travelled from Wuhan to the US prior to that. Assuming a highly transmissible virus that drives infection doubling rate of every three days, and an epidemic seed on January 1 in the US, the researchers estimate 6 million Americans infected by March 9. Assuming a two week lag between infection and death, and a COVID-19 death count of 499 on March 23, then the US mortality rate would be about 0.01%--about one tenth of the mortality rate from the flu.

The researchers suggest that if the true infection and mortality rates approach their estimates, then the epidemic is limited in scale. Measures that focus on reducing risks for older adults and at risk individuals, and on re-allocating health care resources to care for critically ill patients are sensible. Universal quarantines that impose large economic and social costs are not.

Their bottom line: Similar to Dr Ioannidis, we need accurate prevalence and incidence data in order to solve our denominator problem so that we can make intelligent decisions here.

Tuesday, March 24, 2020

Pandemics and Politics

But at night
When all the world's asleep
The questions run so deep
For such a simple man

Personal observation suggests that beliefs about the severity of the COVID-19 situation and about the extent to which draconian countermeasures (i.e., shutting down the economy and forcing people into the homes, etc) are more pronounced toward the progressive side of the political spectrum.

If there was such a relationship, then what might explain it? Perhaps it's simply the Trump Derangement Syndrome at work. Progressives who can't shake their Trump-related cognitive dissonance/psychosis  may perceive all social and economic problems as being worst case scenarios and exacerbated by the president. They might also see opportunity in crashing the economy in hopes that voters will take it out on Trump at the ballot box.

Of course, socialists all the way back to Marx have believed that torching social and economic fabric somehow works to their advantage. Because they expect that a utopian socialism would somehow rise from the ashes of societal breakdown, they don't mind lighting some fires.

Or perhaps it's a cognitive thing. Maybe progressive ideals appeal to fast thinkers who are more prone to reactive, emotional decision-making. Under conditions of threat, fast thinking progressives might be more likely to narrow information channels and rely more on central authority, and are less likely to visualize dynamic, adaptive responses to problems that are enacted voluntarily rather than coercively. As fast thinkers, they would be less likely to weigh the costs of various alternatives to combat a public health threat.

In any event, survey/polling research in this area might yield interesting findings.

Monday, March 23, 2020

Unlimited QE

"Those are not Mulligan's mortars anymore. Those are German eighty-eights!"
--Little Joe (Kelly's Heroes)

With bonds tanking and credit spreads blowing out, the Fed has announced several new programs with alphabet soup titles reminiscent of 2008 aimed at 'supporting the economy.' These programs amount to unlimited QE with the twist that corporate bonds, including bond ETFs, are fair game this time around.

This is monetization of debt like we have never seen before.

Inquiring minds wonder when the scope of Fed buys will be extended to stocks.

Sunday, March 22, 2020

Publish or Perish

Six o'clock, TV hour
Don't get caught in foreign towers
Slash and burn, return
Listen to yourself churn

Following up on yesterday's post, Stanford prof John Ioannidis has written a paper on the harms of exaggerated information related to COVID-19 and of countermeasures grounded in such information. He includes recommendations for improving evidence-based decision-making related to the pandemic.

It has been accepted for publication in European Journal of Clinical Information. The peer review process was almost certainly expedited in this case to facilitate timely release of a meaningful contribution to the extant problem.

pdf of manuscript here.

Saturday, March 21, 2020

Evidence Fiasco

With a boulder on my shoulder
Feeling kinda older
I tripped a merry-go-round
With this very unpleasing
Sneezing and wheezing
The calliope crashed to the ground
--Manfred Mann's Earth Band

A Stanford MD and professor of biomedicine discusses the 'evidence fiasco' associated with the COVID-19 pandemic. His central premise is that we lack essential data on infection rates that enables effective decision-making. Draconian countermeasures adopted by many countries may be doing more harm than good.

As these pages have suggested, extant data on number of people infected and how the epidemic is spreading are unreliable. Limited testing underestimates the positive case count; number of true infections may differ from counted cases by orders of magnitude. Three months after the virus outbreak, no country has reliable data on the prevalence of the virus in a representative sample of the general population.

That is mind numbing.

The evidence fiasco creates extreme uncertainty about predicting how many will die from COVID-19 because case fatality rates are meaningless when selection bias causes patients with disproportionately severe symptoms and bad outcomes to be tested. Currently, reported death rates from positive cases are far higher than they would be if more tests were administered (the denominator in # deaths/# total cases goes up).

The author suggests that the Diamond Princess cruise ship situation presents an interesting example of a single, closed population where all of its and passengers were quarantined and tested for COVID-19. The author does not include all of the data in his discussion, so I am drawing from reports here. About 3,400 crew and passengers were quarantined on the ship off the coast of Japan for about two weeks. During that time, 696 tested positive for an infection rate of 20%. Of those cases, 410 (59%) were asymptomatic. Seven deaths were attributed to COVID-19, translating into a 1% case mortality rate and a 0.2% death rate for the population. It is also important to note that this population was skewed disproportionately toward elderly people who are much more susceptible to severe COVID-19 effects.

Projecting the Diamond Princess mortality rate onto the age structure of the US population, the author estimates the death rate among people infected with COVID-19 to be 0.125%. However, because the small sample size widens statistical confidence intervals, he estimates that the true death rate ranges from five times lower (0.025%) to five times higher (0.625%). If other uncertainty factors, such as frequency of chronic diseases for tourists and the possibility that some infected passengers in the sample might die after the quarantine period ended, then a reasonable case fatality ratio estimated from the Diamond Princess situation might vary from 0.05% to 1% for the US population at large.

The results suggest a large range of severity possibilities associated with this pandemic. If the true population fatality rate is indeed close to 0.05%, then it would be lower than the seasonal influenza death rate. Locking down the world based on such a death rate would be completely irrational given the economic, financial, and social consequences associated with this countermeasure. Indeed, concerns that the lock down approach constitutes an overreaction to the COVID-19 pandemic are increasingly being raised.

The author's recommendation is straightforward. The best information for good judgment here comes from data on exact levels and trends in prevalence and incidence of epidemic activity. Prevalence of the infection can be understood by testing a random sample of the population for the presence of the COVID-19 virus. I would think tagging those cases as symptomatic/asymptomatic would add further utility. Incidence of the infection can be understood by repeating the exercise at regular intervals to estimate the rate of new infections.

Meanwhile we are making decisions that cost trillions of dollars without the benefit of essential information, which raises the probability that current measures to counter the pandemic will be worse than the disease itself.

Friday, March 20, 2020

Public Health and Active Agency

"If I'm right and we can stop this thing, then, Lenny, you will have saved the lives of millions of registered voters."
--Dr Peter Venkman (Ghostbusters)

Public health problems are breeding grounds of active agency. Public health officials, and the politicians who they work with, are the agents. They are employed by citizen principals. The principals would like their public health agents to keep them safe from illness and disease while not overreacting and cause needless upset to everyday life.

Public health agents, however, have personal goals that may not align with those of their principals. For instance, public health agents generally prefer to remain employed, advance their careers, and garner recognition and prestige. Because the principals are unable to accurately monitor their agents' behavior all of the time, an 'agency problem' arises where public health officials might act in manners that are not in the best interests of the citizenry.

Now, suppose a potential threat to public health arises, like a novel new virus. Little is known about the virus early on. Infection rates, mortality rates. effects on particular demographic groups are uncertain. There is also a significant time lag between cause and effect, i.e., it takes time for the virus to spread and the consequences to become empirically understood.

Given the uncertainty of the situation, what are public health agents to do? How should they act today to best address a potential public health crisis in the future?

Imagine a 2x2 matrix. On the horizontal axis are two general responses for public health agents today: don't act (declare that there is no threat and do nothing), or act (declare that a public health threat exists and enact countermeasures).

On the vertical axis are two possible general futures: no significant public health threat occurs, or a significant public health threat occurs. Keep in mind that these are future outcomes. In the present, prospective outcomes are uncertain. Public health officials must act today on limited information.

Now, put on your public health official hat and consider your options. If you do nothing and no significant health threat occurs, then you will be perceived as sagely doing your job. You weighed the information available and prudently decided that declaring a public emergency and enacting countermeasures would have squandered economic resources responding to a false alarm. However, if you do nothing and a significant public health crisis does occur, then you will be chastised as incompetent and not doing your job--and perhaps blamed for many deaths. To most public health officials, this is a worst case scenario. Many people die plus you get fired (a.k.a. career risk).

On the other hand, if you act and no significant health threat occurs, you might be able to get away with it if you can convince your principals that the countermeasures that you enacted actually led to no significant outbreak of illness of disease. "No public health crisis occurred because we acted." Of course, there may be no way to prove that--but naysayers may not be able to disprove it either. If you act and a significant health crisis does occur, then you can take credit for reducing the severity of the effects. "It could have been a lot worse had we not acted." Even if many people die, you may be able to take credit for saving some lives.

It should be readily apparent that acting, i.e., declaring a public health crisis and implementing countermeasures, is favorable for public health agents regardless of subsequent outcome. Unlike not acting, which offers the unpleasant scenario of getting blamed/fired in the event that a crisis arises, acting presents public health agents with opportunity to advance their self interests regardless of outcome.

Acting, therefore, is the preferred choice, what game theorists refer to as a 'dominant strategy,' of public health officials.

It should also be clear that, in order to avoid being found out, public health agents will be prone to muddy the information waters--to make it difficult for principals to monitor the situation to accurately assess the public health risks on their own. For example, agents are likely to drag their feet on expediting vital biomedical studies of infection rates and other important factors, because data from such studies might reveal that officials had grossly overreacted to the situation.

Further, it is probably that public health agents will seek to perpetuate some measure of fear among their principals because the agents understand that a fearful state of mind impedes capacity for rational thought.

Uncertainty is the friend of public health agents. Maintaining conditions of uncertainty for as long as possible benefits them, and fosters conditions of active agency where officials pursue their own interests--perhaps to the detriment of their citizen principals.

Thursday, March 19, 2020

Reason Awakens

Jared Cohen: This is weird. It's like...a dream.
Sam Rogers: Oh, I don't know. Seems like we actually may have just woken up.
--Margin Call

My sense has been that hysterical, fast thinking related to COVID 19 will wane as people begin to engage their more analytical slow thinking processes. There is evidence that this is occurring.

Perhaps most important is growing realization that resources should be focused on the most vulnerable rather than on the masses. Congressman Thomas Massie:

And even sports show host Clay Travis:

As Travis notes, the economic costs of across-the-board quarantines and shutdowns must be considered (particularly in highly leveraged systems such as ours):

There is also growing realization of the size of the COVID 19 'pandemic' vs common cold, flu, and the adaptive response and flexible capacity of the health care system to the current situation:

Finally, interesting perspective by a Nobel laureate who forecast the slowdown in Chinese COVID 19 infection rates. His basic premise, similar to one advanced in these pages, is that parabolic epi curves are unlikely to last. One interesting twist in his explanation is the idea that, because people have limited social networks in a physical sense, infection rates wane after those people who routinely interact get exposed. People are unlikely to meet new people outside of their routine networks at the same rate as inside their network, causing infection rates, after a peak, to fall.

Reasoning minds are waking up.

Wednesday, March 18, 2020

Extreme Correlation

This is the biggest band you'll find
It's as deep as it is wide
--The Who

In leveraged systems, selling builds on itself as margin calls drive investors to sell anything that isn't nailed down. That's what we're seeing. Everything's being sold--including  asset classes considered 'safe' (e.g., Treasuries, gold).
That means  correlations are going up as everyone scrambles to accumulate the single uncorrelated asset: cash. We're at correlations not experienced since the credit crisis.

When correlations reach extremes like this, we're probably late in the selling game. Many stocks I'm watching are beginning to resist further lows during selloffs.

I continue to be constructive and nibble around.

Tuesday, March 17, 2020

Getting Constructive

"I'm starting to feel a little better about this whole thing."
--John Tuld (Margin Call)

Another ugly day yesterday with the Dow down -3000. The 13% loss in one day ranks third all time. Dow is off more than 30% in a month.

Fund manager equity allocations and economic outlook:

Nasdaq sentiment index:

While there is good cause to be bearish, I'm growing increasingly constructive. The COVID 19 situation is driving emotional, fast thinking processes that are prone to overreaction. As time progresses, human reasoning is likely to kick back in and recognize the dynamic responses--many of them well underway--that enable adaptation to the health situation. I sense that this point of recognition may be sooner rather than later.

While a whoosh or two lower may be necessary to clear things out, it seems entirely possible that a sustainable low is quickly approaching. As such, I continue nibbling here and there.

Monday, March 16, 2020

Gloves Off

They stack the odds 'til we take to the street
For the kill with the skill to survive

The monetary policy gloves are officially off. Last night, the Federal Reserve and other central banks announced extreme measures aimed at combating economic and financial consequences of coronavirus countermeasures worldwide. Three separate announcements were released.

In the first announcement, the FOMC preempted policy actions anticipated at its previously scheduled mid-week meeting by dropping the fed funds rate 100 bips to the 0 - 0.25% range (essentially zero). It also announced programs of additional asset purchases by $700 billion (a.k.a. 'quantitative easing') and further expansion of overnight repo and money market activities.

The second announcement signaled Federal Reserve intentions to keep credit systems functioning under conditions of curtailed business activity, It encouraged financial institutions to tap the Fed's discount window for credit to meet demands for households and businesses. To encourage activity, the primary credit rate was dropped 150 basis pts to .25 percent. It also reduced bank reserve requirement ratios to zero percent (!) to encourage more bank lending within the regulatory framework.

The third announcement concerned coordinated action among central banks worldwide to improve US dollar liquidity via swap arrangements. This addresses concerns arising last week that USD were increasingly hard to find for trades among institutions.

All of these policies are clearly inflationary. I would expect even more extreme measures should the public health measures persist or escalate.

Markets not impressed, btw. US stock futures traded limit down last night and circuit breakers went off with the opening bell this am with Dow off nearly 10%. Many stocks not even on the board when breakers kicked in.

Sunday, March 15, 2020

Dynamic Response

Dr Peter Venkman: Ray has gone bye-bye, Egon. What have you got left?
Dr Egon Spengler: Sorry, Venkman. I'm terrified beyond the capacity for rational thought.

A motivator of coronavirus panic is fixation on the epidemic, or 'epi,' curve. The epi curve shows the cumulative count of virus cases over time. Because of network effects associated with transmission of infections, most epi curves take on a parabolic shape in the early going. Here is one from a recent WHO COVID 19 situation report:

Rest assured that epi curves for influenzas assume similar shapes as flu seasons commence.

Because human tendency is to extrapolate past trends into the future, epi curves plotted during early phases of illness transmission are prone to provoke fear. "At this rate, millions will be infected soon," the analyst is tempted to conclude.

Unfortunately human minds, particularly ones operating under conditions of uncertainty and threat, are prone to static analysis. They assume the current situation keeps unfolding as the current picture projects. Fast thinking minds have limited proficiency for dynamic projections--i.e., accounting for path-altering future changes, many of them adaptive in nature, to the situation.

In the case of COVID 19, such dynamics might include:

People choosing to alter their social behavior to reduce probability of transmission.

People taking action to protect those most vulnerable to the disease, which btw would render an epi curve based simple on total infection counts less meaningful as infection:mortality ratios drop.

Hospitals and other care givers creating flexible capacity (e.g., special temporary treatment centers with concentrated care resources) to enable handling more acute cases than many pundits forecast possible.

Other sources of innovation that improve treatment processes in significant ways.

Warming weather that reduces viral seasonality effects.

Mutation of the virus into less potent forms.

Greater recognition of dynamic responses inevitable to pandemic situations would likely attenuate the hysteria flowing from fixation on the parabolic shape of the early COVID 19 epi curve.

Saturday, March 14, 2020

Fear and Power Grabs

"What we need right now is a clear message to the people of this country. This message must be read in every newspaper, heard on every radio, seen on every television. I want everyone to remember why they need us!"
--Sutler (V for Vendetta)

It is one of the first lessons in the political playbook. Make people fearful and they will be willing to sacrifice liberty in the name of security. Under conditions of threat, people are prone to think less critically and centralize decision-making authority (Staw, Sandelands, & Dutton, 1981)--part of what Kahneman (2011) refers to as 'fast thinking'.

Because emotions dominate thought process in threatening situations, and those emotions drive us to cede power to government in hopes of quelling those threats, politicians lick their chops when 'crisis situations' arise. Knowing this, government officials might even be willing to create or prolong threatening situations in order to assimilate more power.

Rookie House member Mark Green, a doctor from Tennessee, learned a hard lesson in this regard last night as the House rushed a 110 page, multibillion dollar bill to quick vote after midnight. No analysis, no discussion.

Why the rush? We have a 'national emergency' related to COVID 19, you see, as declared yesterday afternoon by the president. Careful thought and consideration? We can't afford that. Those in charge have to do something right quick.

Politicians indeed acted quickly, seizing the opportunity to fill the bill with special interest agenda items, knowing full well that their largesse would not be questioned in the name of expedience.

As in crises past--Civil War, WWI, Great Depression, WWII, 9/11, Credit Collapse to name a few--we have once again surrendered freedom for the illusion of safety.

Friday, March 13, 2020

COVID 19 Data

Here I am in silence
Looking 'round without a clue
--Information Society

For those seeking objective data about the COVID 19 'pandemic,' the situation is frustrating. Mainstream media is, predictably, far more focused on sensationalist headlines than on tracking hard data on infection rates, mortality, etc.

Even the supposed 'source' organizations for information on infectious disease, such as the CDC and WHO, make data beyond the most basic of statistics such as infection and death counts difficult to find on their websites. For example, I can find no updated data on infection and mortality by age group on either site, although we know that infections are skewed toward the elderly. There is also no readily available updated information on either site related to severity (e.g., number of people hospitalized or in an acute state of illness).

The fact that neither site presents such data raises questions that reasoning minds seek to answer. We will certainly do so forthcoming. In this post, however, I wanted to create a lander page for some links that do provide information for future reference.

WHO COVID 19 main page
WHO situation reports

CDC COVID 19 main page
CDC US case summary

Johns Hopkins COVID 19 main page
Johns Hopkins interactive map

Coronvirus Tracker (sources, methods of some measurement unclear)
Worldometer coronavirus info (sources, methods of some measurement unclear)

WSJ article coronavirus vs flu comparison

Interesting analysis of present situation with links to other analyses. Tuberculosis connection proposed, linked at end.

Bear Claws

I wanna glide down over Mulholland
I wanna write her name in the sky
I'm gonna free fall out into nothing
Gonna leave this world for a while
--Tom Petty

The amazing thing about the chart below is not the depth of the dive (markets dropped 50%+ during credit crisis), but how quickly markets have dropped--not just from near term highs but from all time highs.

Worst performers: energy, banks, industrials (materials).

Thursday, March 12, 2020

Illiquid Scenario

"1929. It'll get worse now 'cause it'll go faster. Money markets will dry up round the world by the end of the week."
--Julie Steinhardt (Wall Street: Money Never Sleeps)

When people are not working, they lack income to pay their bills. If they don't have savings, then they have nothing to fall back on. If they are in debt, then things are worse because a portion of their bills are loan repayments. If they miss those payments, then they are in default.

This is the situation developing in corporate America right now. Because many businesses are no longer working--or working at fractions of capacity--due to coronavirus concerns, their incomes are drying up. Cash flows may be insufficient to meet current obligations. Moreover, nearly all firms are leveraged, meaning that the less they produce and sell in this environment, the closer they get to missing debt payments due to lack of cash.

Not surprisingly, short term money markets are showing signs of stress as businesses scramble to tap credit lines to make ends meet.

Investors are beginning to discount the illiquid scenario.

New Normal

Panic bells 
It's red alert
There's something here
From somewhere else

Another morning with some breathtaking action as the circuit breakers were activated almost as soon as trading opened. Dow has been flirting with -2000 (~ -8%) most of the am.

Funny how these outsized moves are beginning to look like the new normal.

Once again nibbling here and there.

Wednesday, March 11, 2020

Chopped Up

I took it all for granted
But how was I to know 
That you'd be letting go
--Bryan Adams

Epic volatility continues as 1000 pt range days in the Dow have become commonplace.

Traders betting on directionality that lasts more than a day are getting chopped up and carried out in pieces. Fortunately, I'm not playing that game.

Instead, continue to nibble here and there on income producers selling at yields far above fixed income space.

Tuesday, March 10, 2020

Reclaiming Control

"I'll look for you on the field."
--Capt Nathan Algren (The Last Samurai)

Bulls couldn't hold on, as DJI and SPX go negative on the day. Reports have surfaced that Democrat-controlled house not ready to deal on fiscal stimulus measures.

Bears have reclaimed control of the field.

Holding the Gains

Just hold on loosely
And don't let go
If you cling too tightly
You're gonna lose control
--38 Special

After yesterday's historic day that saw the Dow down about 1800 pts and oil down 25%, chatter of monetary and fiscal bail outs (naturally) got loud. President Trump did not disappoint. In an evening press conference he sought to soothe market nerves with specters of tax roll backs and other stimuli.

Those positive presidential vibes, coupled with extremely oversold near term conditions, ignited big rallies overnight and we woke up to domestic futes gapping higher 3-4%.

Some of the initial bloom has come off the rose, however, as indexes are significantly off their highs. Purists might argue that a more bullish set-up would have been a whoosh lower pre-market to strike more fear into investors before a tradeable bottom was put in.

Now it seems imperative that bulls hold their gains here. If markets should happen to reverse lower intraday, then the bears will be surely be emboldened.

Monday, March 9, 2020

Margin Call

"Margin call, gentlemen."
--Exchange president (Trading Places)

Coronavirus panic coupled with fears of oil oversupply find markets cratering this am. US equities are down about 7% out of the gate--near circuit breaker levels. In fact, the SPX just hit 7% and trading has gone on a mandatory 15 min break.

Oil is down 20%. Ten yr yields are down 33% to 0.43.

Thus far, gold is not showing much 'safe haven' affinity amidst the wreckage. It is up less than a percent to about $1685.

I should add that my charting site is completely dysfunctional as well.

Feels like a worldwide margin call.

position in gold

Sunday, March 8, 2020

Oil Shake Out Coming

Sarah Connor: What did he just say?
Gas Station Attendant: He said there's a storm coming in.
Sarah Connor: I know.
--The Terminator

Credit spreads are widening. Now OPEC can't get coordinated, meaning that more pressure on crude is coming. Add the two together, and this means trouble for leveraged players in the energy patch--particularly smaller ones.

The thought has crossed my mind in the last week that the coming shakeout bodes well for the major oils such as Chevron (CVX) and Exxon Mobil (XOM) that have slack resources to weather the storm. XOM in particular--as its aggressive investment plan in what currently seems to be an oversupply situation may turn out to be prescient if many producers leave the market over the next few years.

positions in CVX, XOM

Saturday, March 7, 2020

New Bonds

"Negative! Negative!"
--Lt Chris Burnett (Behind Enemy Lines)

Real 10 yr yields are at -1.5%. Lowest since 1980. This means that T-note owners are losing money on their bond coupons.

For those seeking income, dividend stocks look increasingly attractive. Falling stock prices up the ante even more.

As long as bond markets remain the object of monetary policy manipulation, it is hard to ignore the income generating capacity of dividend-paying equities here--particularly for investors less sensitive to fluctuations in underlying account value due to volatile markets.

Lower stock prices provide opportunity to buy more income. Perhaps stocks are becoming the new bonds.

Friday, March 6, 2020

Collapsing Yields

Jump back, got to get out of here
Been too, too long this time
Jump back, got to get out of here
When will, when will we fall down
--Toad the Wet Sprocket

If falling 10 yr yields can be viewed as a measure of fear then we're getting a pretty good dose of it this am. T-note yields have collapsed more than 15%, and the TNX was wearing a 6 handle (that's .6% for the uninitiated) for a while before lifting some.

Some folk are saying that the zero bound is inevitable and not too far off. A different view is that we're in the midst of a blow off bottom--at least in the near term.

Thursday, March 5, 2020

Fatality vs Infection Rates

"Have you ever had a close encounter--a close encounter with something very unusual?"
--David Laughlin (Close Encounters of the Third Kind)

Interesting plot of fatality vs infection rates for various illnesses.

While confidence in the data can certainly be questioned at this point, the window produced by current estimates do not suggest coronovirus as an outlier on either scale.

Wednesday, March 4, 2020

Echo Chamber

"Not only did you not save this dude's life, you done made best friends with Cyrus the damn Virus." 
--Baby-O (Con Air)

If you're getting 'information' about the coronovirus thru online channels, then remember that social media is an echo chamber. Ideas, beliefs, and agendas are reinforced thru circulation and repetition in mindless fashion. Attempts to think things thru and seek out disconfirming evidence are feeble at best.

Does the spread of false information about the virus outpace the spread of the virus itself?

Tuesday, March 3, 2020

Emergency Rate Cut

I took it all for granted
But how was I to know
That you'd be letting go
--Bryan Adams

Speaking of volatility, less than an hour ago the Federal Reserve did something that the central bank has done only eight times previously: it announced an emergency rate cut. The last time the Fed did so was in August 2008 in the midst of the Lehman collapse.

The emergency 50 bip cut lowers the target Fed Funds Rate to 1 - 1.25%.

Stocks jumped nearly 2% on the news but have since pulled back as traders ponder what/why. Gold, however, seems more decisive, and is up nearly $35 on the news.

The Fed Put, it seems, is alive and well.

position in gold

Breathtaking Volatility

Breathe deep the gathering gloom
Watch lights fade from every room
--Moody Blues

When markets approach the cusp of major change, one characteristic that is difficult to remember until you're experiencing it once again is the volatility. Chunky intraday moves that often finding indexes jumping or falling 0.5-1.0% in a matter of minutes. Between days, 3%+ moves are not uncommon.

Sometimes the volatility suddenly dissipates and the dominant trend resumes. Other times the volatility translates into major trend change.

The outcome of our present case remains to be seen. Meanwhile, the volatility is breathtaking.

Monday, March 2, 2020

Rising Dividend Yields

You want a friend you can rely on
One who will never fade away
And if you're searching for an answer
Stick around I say
--Paul McCartney

Plummeting stock prices and bond interest rates have driven S&P 500 dividend yields above 10 yr Treasury yields.

As noted last week, this is one plus for equities as scads of income-hungry investors seek alternatives to shrinking fixed income coupons. Exxon shares, for example, currently flirt with a 7% dividend yield.

Stocks paying rising dividends in the face of falling bond yields should find some bids in the buy side queue.

position in XOM

Sunday, March 1, 2020

Less Trade, Higher Prices

We stand to lose all time
A thousand answers by 
In our hand

To answer your question, Liz, yes. Two natural forces in particular have been keeping price increases at bay over the past couple of decades--despite escalating inflationary policies of central banks seeking to do otherwise. One has been the broad integration of several powerful innovations, particularly with respect to info tech, into production processes. Small computers, the internet, wireless, et al have dramatically improved worker productivity. As output/hr goes up, there is downward pressure on prices.

The second natural force has been expansion of global trade, which allows world economies to realize gains from specialized production. When division of labor increases, learning effects and lower switching costs boost productivity. When specialized producers exchange their output, those productivity gains are collectively shared. Those shared productivity gains exert downward pressure on prices.

Restraints on global trade, whether those restraints come from protectionist tariffs, bans to quell the spread of illness, or other sources, eliminate a big source of downward price pressure.

As such, a big wind in the face of aggressive central bankers seeking to 'create inflation' ceases to blow, and higher prices of goods and service become more likely.