In this latest issue of my weekly podcast, I discuss the epic market swings. As of Monday close, the SP500 is down -29.5% from its recent high 18 days ago. Over the last week, hundreds of stocks we're hitting circuit breaker limits every day. On two mornings, Monday and last Thursday, the entire NYSE hit it's negative 7% circuit just after opening. The VIX hit 83, an all-time record. It surpasses the 2 readings of 80 during the worst of the '08 crisis.
The yield curve is in turmoil due to Fed cutting. This weekend when Chairman Powell took the Fed funds rate all the way down to zero. So yes, the Fed has emphatically de-inverted the yield curve. The 3M is now 0.24% while the 10Y is still hung up at a relative lofty 0.73%. For the first time in a long time, we see a yield curve with a visibly positive slope. But the Fed sees this as a problem and is bent on stimulating the economy at BOTH ends of the yield curve.
We're entering a critical phase of the Fourth Turning. We're moving towards massive fiscal measures which will work through national mobilization of people and resources. Japan’s PM Shinzo Abe last week announced a $120 billion stimulus package. The South Korean and Australian governments are similarly proposing large stimulus programs. And the EU is expected to enact the "unusual events" clause of its constitution, which essentially scraps all the budget rules and allows national governments to spend whatever they want.
The virus, unfortunately, is doing just fine… and that's what's causing the havoc. At last count, confirmed cases outside of China is about 90,000--a number that is doubling every four days. And deaths outside of China is now over 3,000--a number that is also doubling every four days. A couple of days ago, deaths outside China exceeded deaths inside China (at least those we know about) for the first time.
The US delayed far too long. The federal government needed to mobilize public health services and the nation immediately. Most importantly, as many people as possible needed to be tested; everyone who's positive needed to be isolated; and data teams needed to track down all persons that they contacted. Simultaneously, the government needed to initiate social distancing and nationwide shutdown policies to suppress transmission and buy time
Economic data are at last pointing to the devastating impact of China's shutdown in FEB. From January to February, retail sales are down 20.5%. Industrial Production is down 13.5%. Fixed asset investment is down 24.5%. And vehicle sales are down an incredible 79%. Because China is just over a month ahead of the rest of the world in virus time. So, in a sense, by looking at the deltas in the China indicators, we are all looking at our own future.
Historically, epidemics favor an expansion in the power of political authorities. The sweeping and centralized mobilization of citizens in Singapore, Taiwan, and South Korea is already being compared favorably to the slower and less coordinated response of western Europe and the United States. Confucian societies respond well to epidemics because citizens sign on quickly and fully to top-down authoritarian policies. Western cultures have many strengths, but this isn't one of them.
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