Monday, 16 March 2020

Beware the Ides of March!

According to wiki:

"The Ides of March is the 74th day in the Roman calendar that corresponds to 15 March. It was marked by several religious observances and was notable for the Romans as a deadline for settling debts. 

In 44 BC, it became notorious as the date of the assassination of Julius Caesar which made the Ides of March a turning point in Roman history."

That led to a civil war.

"The final defeat of Mark Antony and his ally Cleopatra at the Battle of Actium in 31 BC, and the Senate's grant of extraordinary powers to Octavian as Augustus in 27 BC – which effectively made him the first Roman emperor – thus ended the Republic."
So the Ides of March were the turning point for Rome to move from a Republic to a form of dictatorship. 

So did we see a policy framework turning point yesterday? Perhaps, yes, that no one is allowed to go bust and the Fed will do whatever it takes to avoid a meaningful recession and do whatever it takes to get ahead of markets.

As Bob Janjuah previously observed, the reaction function now is to avoid a bad recession/ financial crisis at all costs, as the main Central Banks know they will be blamed and will lose their independence.

But so far markets not initially reacting well to emergency FOMC. Which makes me think most active traders are positioned for things to get worse. So therefore the alpha is for the market to take a more constructive view on the outlook.  Particularly now that banks like Goldman have spent a week selling 'bear trades' to their clients at multi-standard deviation volatilities.

The fact is we are at 0% rates (250bps 9m change) at full employment with QE restarted and a >$1Tn fiscal deficit. Just need the USD to fall against the majors now. 

As for Corona, the economic disruption is as real as people want it to be, but the actual healthcare impact is trivial. 

Powell knows what the NY Fed will be doing this week: '...go in strong and buy across the curve'

As for the longer term market and economic implications, if no one can go bust, and there is no meaningful recession, and we have combined low rates and fiscal stimulus, then we should remain at full employment. 

If that happens then over time wage inflation should creep up, corporate margins normalise and corporates will be forced to invest in productivity/ capex to survive. Ie we have an economic cycle underpinned by wage inflation/ investment and productivity growth, and not a cycle led by credit and asset markets.


Some comments on Corona

Corona has spread in dry, moderately cold places. 

In cold and wet or really cold places it has not spread. Why? Because in the latter people are indoors in 20 degrees plus heat and it doesnt spread in 20 degrees heat, just as it has not really spread in hot places like Singapore, Taiwan, Thailand. 

Its only really spread in places at 5-10 degrees and where there are people outside, interacting a lot and the virus can survive 5-10 minutes in the air, long enough to be transmitted. 

So as we move into Spring in most of the cold places, the weather window for large scale transmission is closing out rapidly. 

There will still be small numbers getting it, and for sure its a worse illness than common flu, but at a systemic level, it will have blown over. 

Michael Cembalest's report from earlier this week shows how trivial the numbers are in China outside of Hubei where the virus got a chance to break out before a response happened.

https://www.jpmorgan.com/jpmpdf/1320748251986.pdf
 
 

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