Gold: a hedge against future policy misfires

A new exchange traded commodity holds several advantages

David Stevenson

© Andrey Rudakov/Bloomberg

Gold has recovered some of its lustre as the go-to asset for turbulent times in the past few weeks. The immediate catalyst for rising prices is obvious to all but a cave dweller: the dreaded coronavirus.

There is a more interesting story lurking in the background, but one which, as something of a gold bear, I have struggled to accept. The first part of it is familiar to anyone who has ever stared at those amazing charts which show where global wealth is hoarded.

Property in all its shapes and guises towers over bonds and then equities. Gold at around $7tn is an afterthought in asset allocation terms.

This powers the narrative of gold bulls such as Incrementum, an asset manager which paints a picture of gold being an underowned asset at a time of unorthodox central bank intervention.

Gold bulls also point out that central banks, especially Russia’s, have been quietly hoovering up supplies even as traditional physical holders such as the Indian middle and lower classes liquidate their hoards.

So yes, gold is underowned but on its own that doesn’t mean very much. It could remain underowned for many more moons to come.

The next bit of the narrative is more technical. Look at any chart for the gold spot price and you’ll see that for much of the recent period — since 2013 at least — the precious metal has traded in a range between $1,150 to $1,350. Last summer it surpassed $1,400 and is now heading towards $1,700. Crucially, gold is now trading firmly above its 20- and 200-day moving average.

But this breakout has no parallel in terms of price volatility.

The main gold volatility index, ticker GVZ, has for long periods from 2017 through to the summer of 2019 traded in the 10 to 13 range but even with its latest breakout, price variability remains historically low. This is crucial.

A “safe haven” only feels safe if the price of said asset isn’t shooting around like crazy every few days or hours (unlike crypto and digital currencies).

The last leg of the story is that gold feels more and more like a hedge against that central bank unorthodoxy I mentioned earlier. Many years ago I wrote about one of the few gold-only funds managed by hedge fund manager Ben Davies who is still influential in those circles. He was also co-founder of gold app Glint.

He nicely summed up the case for gold last week, saying: “Asset classes, specifically US indices, are experiencing what the infamous Austrian economist, Ludwig von Mises termed the ‘crack-up boom’.

This is a manifestation of rising inflationary pressures as a function of excess periods of freely available cheap credit. Gold is underpinned by the same excess and rising negative real rates and at less than 2 per cent of global financial assets, holdings or the value of gold are set to rise significantly over the next few years.

”In layman’s terms, gold might be a great bet if you think that all that central bank loosening will at some point end in ignominy. That said, I’d be extraordinarily cautious about betting against further central banker ingenuity. Helicopter money, for instance, could make an appearance in the next recession.

It’s against this benign, arguably positive, backdrop for gold that we’ve seen a new product launch in the market here in the UK. The Royal Mint, in collaboration with specialist white label issuer HanETF, has launched a new exchange traded commodity (with the ticker RMAU).

Gold ETCs that own actual allocations of physical gold are not new and there is plenty of competition in this space. Some of the big ETF issuers boast either much bigger products in terms of assets under management — such as Wisdom Tree and its long established Gold Bullion Securities structure — or cheaper structures, especially Invesco and iShares with their 19 basis point charge.

This new product may be slightly more expensive, but it has a number of advantages. The first is the entity behind the product: the UK government, which has owned the Royal Mint for many hundreds of years.

Interestingly, this isn’t the first mint-backed gold product. In the US market the Perth Mint also sells a physical gold tracker product. For me that governmental backing is a killer advantage for ordinary private investors.

Another is the location in Wales, well away from big cities where most existing vaults are located. There’s one other plus: you can take physical delivery of bars and coins, with the latter being particularly unusual. This can be done in some circumstances with Gold Bullion Securities but not with the other peers in this competitive sector.

I’d also note that this product features gold that is only sourced responsibly based on new rules set out by the industry in 2012. Plus, pricing is based on a much smaller equivalent amount of gold. Each share entitles the holder to 1/100th of a fine troy ounce.

So, though you’re paying marginally more than the competitors for holding the shiny stuff, my hunch is that these more intangible benefits are quite literally worth their weight in gold — and even more if central bankers really do face a policy crisis in the coming years.

David Stevenson is an active private investor. He has interests in securities where mentioned.


The politics of pandemics

All governments will struggle. Some will struggle more than others

TO SEE WHAT is to come look to Lombardy, the affluent Italian region at the heart of the covid-19 outbreak in Europe. Its hospitals provide world-class health care. Until last week they thought they would cope with the disease—then waves of people began turning up with pneumonia.

Having run out of ventilators and oxygen, exhausted staff at some hospitals are being forced to leave untreated patients to die.

The pandemic, as the World Health Organisation (WHO) officially declared it this week, is spreading fast, with almost 45,000 cases and nearly 1,500 deaths in 112 countries outside China.

Epidemiologists reckon Italy is one or two weeks ahead of places like Spain, France, America and Britain. Less-connected countries, such as Egypt and India, are further behind, but not much.

Few of today’s political leaders have ever faced anything like a pandemic and its economic fallout—though some are evoking the financial crisis of 2007-09 (see article). As they belatedly realise that health systems will buckle and deaths mount, leaders are at last coming to terms with the fact that they will have to weather the storm.

Three factors will determine how they cope: their attitude to uncertainty; the structure and competence of their health systems; and, above all, whether they are trusted.

The uncertainty has many sources. One is that SARS-CoV-2 and the disease it causes, covid-19, are not fully understood. Another is over the status of the pandemic. In each region or country it tends to proliferate rapidly undetected.

By the time testing detects cases in one place it will be spreading in many others, as it was in Italy, Iran and South Korea. By the time governments shut schools and ban crowds they may be too late.

China’s solution, endorsed by the WHO, was to impose a brutal quarantine, bolstered by mass-testing and contact tracing. That came at a high human and economic cost, but new infections have dwindled. This week, in a victory lap, President Xi Jinping visited Wuhan, where the pandemic first emerged (see article). Yet uncertainty persists even in China, because nobody knows if a second wave of infections will rise up as the quarantine eases.

In democracies leaders have to judge if people will tolerate China’s harsh regime of isolation and surveillance. Italy’s lockdown is largely self-policed and does not heavily infringe people’s rights. But if it proves leakier than China’s, it may be almost as expensive and a lot less effective.

Efficacy also depends on the structure and competence of health-care systems. There is immense scope for mixed messages and inconsistent instructions about testing and when to stay isolated at home. Every health system will be overwhelmed. Places where people receive very little health care, including refugee camps and slums, will be the most vulnerable. But even the best-resourced hospitals in rich countries will struggle.

Universal systems like Britain’s National Health Service should find it easier to mobilise resources and adapt rules and practices than fragmented, private ones that have to worry about who pays whom and who is liable for what.

The United States, despite its wealth and the excellence of its medical science, faces hurdles. Its private system is optimised for fee-paying treatments. America’s 28m uninsured people, 11m illegal immigrants and an unknown number without sick pay all have reasons to avoid testing or isolation. Red tape and cuts have fatally delayed adequate testing (see article).

Uncertainty will be a drag on the third factor—trust. Trust gives leaders licence to take difficult decisions about quarantines and social-distancing, including school closures. In Iran the government, which has long been unpopular, is widely suspected of covering up deaths and cases. That is one reason rebellious clerics could refuse to shut shrines, even though they spread infection.

Nothing stokes rumour and fear more than the suspicion that politicians are hiding the truth. When they downplay the threat in a misguided attempt to avoid panic, they end up sowing confusion and costing lives. Yet leaders have struggled to come to terms with the pandemic and how to talk about it. President Donald Trump, in particular, has veered from unfounded optimism to attacking his foes.

This week he announced a 30-day ban on most travel from Europe that will do little to slow a disease which is already circulating in America. As people witness the death of friends and relatives, he will find that the pandemic cannot be palmed off as a conspiracy by foreigners, Democrats and CNN.

What should politicians do? Each country must strike its own balance between the benefits of tracking the disease and the invasion of privacy, but South Korea and China show the power of big data and mass-testing as a way of identifying cases and limiting their spread. Governments also need to anticipate the pandemic, because actions to slow its spread, such as banning crowds, are more effective if they are early.

The best example of how to respond is Singapore, which has had many fewer cases than expected. Thanks to an efficient bureaucracy in a single small territory, world-class universal health care and the well-learned lesson of SARS, an epidemic of a related virus in 2003, Singapore acted early. It has been able to make difficult trade-offs with public consent because its message has been consistent, science-based and trusted.

In the West covid-19 is a challenge to the generation of politicians who have taken power since the financial crisis. Many of them decry globalisation and experts. They thrive on division and conflict. In some ways the pandemic will play to their agenda. Countries may follow America and turn inward and close their borders. In so far as shortages crimp the world economy, industries may pull back from globalisation—though they would gain more protection by diversifying their supply chains.

Yet the pandemic also puts doctors, scientists and policy experts once again at the heart of government. Pandemics are quintessentially global affairs. Countries need to work together on treatment protocols, therapeutics and, it is hoped, a vaccine. Worried voters may well have less of an appetite for the theatrical wrestling match of partisan politics. They need their governments to deal with the real problems they are facing—which is what politics should have been about all along.

What The Hell Is Going On?

by: The Heisenberg
- The Dow fell into a bear market (at least intraday) on Wednesday, another session that found the benchmark down more than a 1,000 points.

- This "yo-yo" price action is not as inexplicable as it seems, and regular readers are acutely aware of the dynamics that are exacerbating things.

- And yet, considering the circumstances (which are, in a word, extraordinary), I wanted to pen another "guide for the perplexed."

"What the hell is goin' on?," my accountant half-shrieked, when I called him on Wednesday morning to make sure he'd filed my corporate return.
Norbert (not his real name, but close) is a lot like the rest of you: Flabbergasted by the sheer scope of the daily gyrations in US equities.
But, as regular readers are acutely aware, these "yo-yo" swings (as it were) are not wholly inexplicable.
Obviously, the coronavirus scare is the proximate cause of the market's consternation, but the stage was set for this kind of wild price action once we lost the vaunted "gamma pin" after options expiry last month.
It was at that point that stocks were "unshackled."
On February 24, I penned the following headline: "Gamma Collapse Opens Door For COVID-19 To ‘Shock-Down’ Stocks."
Time-stamp that, folks. Time-stamp it and put it on a chart. Or, actually, don't bother.
Because I did it for you:
To hijack and adapt one of the many memorable quotes from the Coen brothers' immortal classic The Big Lebowski: "Do you see what happens, Larry? Do you see what happens when dealers' gamma profile flips negative?"
On the morning of February 24, I wrote that the virus outbreak and still elevated equity valuations "need to be considered against a post-Op-Ex reality that finds the 'gamma pin' (colloquially: the force that’s kept spot 'sticky' and acted to damp volatility) losing a good bit of its influence."
That's a point I reiterated in multiple posts for this platform, including one that day (i.e., on February 24) and another one less than 48 hours later.
There was still some skepticism among readers about the extent to which this quant-ish (if you will) arcana "matters," but I imagine some of that skepticism has evaporated over the past week. As I wrote on March 8 in these pages, "any explanation you read purporting to explain [recent volatility] that doesn't reference gamma squeezes, systematic flows, a lack of liquidity provision and/or a dearth of market depth, can be dismissed out of hand."
Against that backdrop, things really didn't need to get any more precarious for markets, but they did anyway over the weekend, when the Saudis slashed OSPs across-the-board, sparking a price war with Putin in retaliation for Moscow's recalcitrance in Vienna last week. That facilitated the largest single-day collapse in crude since 1991.
The phrase "insult to injury" doesn't even begin to capture it.
Coming off the weekend, we were still miles away from levels that would flip dealers' gamma profile back positive and otherwise create a situation where systematic flows would again be supportive of markets. We had already thrown gas on the proverbial fire. The oil collapse was like tossing a grenade into a raging inferno.
"Imagine being a market maker who sold puts to major E&Ps and was already staring into the abyss after the last two weeks’ -25% move [and] now having to sell futures deep in-the-hole off the reopen gap lower last night/today," Nomura's Charlie McElligott wrote, on Monday morning, following a truly chaotic session in Asia.
Over the weekend, in the second linked post above, I mentioned that credit was starting to crack late last week. Just about the last thing a nervous credit market needed was a 30% collapse in crude prices.
I'll make two quick points in that regard.
First, CDX IG spreads (think of CDX.IG as the investment grade "fear gauge") jumped the most since Lehman on Monday. But that's not even the most astonishing part. Rather, the really shocking statistic is that the move wider was anomalous compared to the move lower in equities which was itself the largest move since the crisis.
Have a look at this scatterplot:
(Bloomberg, h/t Luke Kawa)
Second, high yield energy spreads ballooned 342bps wider on Monday.
That is the largest percentage move in history.
High yield CDX had a six standard deviation move that morning.
What does that mean? Well, it means that the market believes some folks are likely to run into operational difficulties going forward. And that's me being very euphemistic.
Again, that was insult to injury or, as SocGen put it in a Wednesday note which brings it all together, "the final blow." Consider this passage from the bank's latest volatility update:
The sharp drop in equity prices on 24 February sent the dealer positions deep into negative gamma territory, leading to daily amplitudes not seen since 2011. After that, all the other drivers went into play and enhanced the vol pick-up: deleveraging from passive funds (risk parity and vol.- target), short covering in the VIX market and forced selling in various assets to meet mark-to-market constraints among others. The plunge in the oil price came as the final blow.
That captures everything noted above - the negative gamma dynamic, the subsequent deleveraging from vol.-targeters, the forced selling and the "death blow" on Monday with oil's historic collapse.
The following visual from SocGen shows you the large absolute moves (i.e., higher and lower) in stocks since February 24 in the context of the gamma discussion. Note from the caption below the chart that the "Speed Index" is the spot move needed for aggregated gamma to flip from positive to negative when the Speed Index is negative (and vice versa).
Of course, once the benign dynamic wherein dealer hedging flows tamp down the selling in stocks "flips" (i.e., once dealer hedging begins to exacerbate directional moves instead of dampening them), it sets the stage for the kind of wild price action that drives up volatility, which in turn depletes market depth, in a pernicious feedback loop.
The "gamma trap" and the inverse relationship between market depth and volatility are two of the main reasons why you've seen such a dramatic escalation during this COVID-19/OPEC+ panic.
As alluded to in the excerpted passage from SocGen (and as I've detailed on countless occasions), it doesn't stop there.
Once spot careens through key levels for CTA trend and momentum strats, they deleverage into a falling market. That "abrupt unwind propagates their own negative momentum," to quote JPMorgan's Nikolaos Panigirtzoglou.
Once trailing realized starts to move higher, the vol.-targeting universe deleverages "passively" (if you will), and that selling continues to execute in the market until volatility resets sustainably lower or they run out of exposure to trim. Consider, for instance, the following updated visual:
In the space of roughly a month, the target-vol. universe has pared its exposure to equities to the tune of some $130 billion. Looking back three months, it's almost $200 billion.
Now then, if you're wondering what's going on during sessions like, for example, Tuesday, when stocks explode higher, you'll note that once some catalyst (in Tuesday's case, it was Trump promising to deliver an economic stimulus package to offset the hit to the economy from the virus containment measures) gets things moving, the same underlying market setup/dynamics work to accelerate the upside.
Consider, for example, this excerpt from the above-mentioned McElligott (from a Tuesday morning note):
Today has the feel of a standard “bear-market rally,” where selling is increasingly exhausted, monetization of dynamic hedging in futures shorts turns into a rather violent “squeeze”; as stated repeatedly, the enormous “Short Delta” via SPX / SPY options (-$560B, 0.6 %ile since ’13) will continue to act as a “core” catalyst for these raging UP trades (despite still-horrible sentiment and outlook from clients) as these options “have to” be monetized when they’re this in-the-money, especially as they’re expensive to roll.
All of the above has created a perfect storm for volatility and generally manic market action, the likes of which many current market participants have simply never witnessed before. After all, Lehman was nearly a dozen years ago, which means someone who's, say, 25 now, was just 13 years old when I was dumping the "gin-soaked ice cubes" in Mikey and Becca's sink.
Importantly, it's not just young folks who are shell-shocked. There is still a generalized unwillingness among many market participants to come to terms with what the evolution of modern market structure entails during periods of panic.
And just as I wrote that last sentence, the following headline crossed on the terminal:
I'll just leave it there for now.

Buffett and Occidental: We’ve Seen This Movie Before

Occidental boss Vicki Hollub’s hubris delivered a rich payday to Warren Buffet’s Berkshire Hathaway

By Spencer Jakab

Occidental Petroleum Chief Executive Vicki Hollub overextended herself when she got into a bidding war for Anadarko Petroleum last year. / Photo: alessandro della valle/Shutterstock .

Warren Buffett once quipped that it isn’t until the tide goes out that you see who has been swimming naked.

U.S. energy-industry executives are surely praying that the ebb tide is nearly over, and few as fervently as Vicki Hollub, who runs Occidental Petroleum. OXY -17.71%▲

Ms. Hollub doubled down last year on the U.S. shale patch with extraordinarily poor timing by outbidding much larger Chevron for Anadarko Petroleum for $37 billion.

Chevron got lucky by losing out, proving once again that it is better to be lucky than smart:

Who could have predicted a coronavirus pandemic and a Saudi-Russian price war?

But Ms. Hollub was decidedly not smart. She was so desperate to win that she boosted the cash portion of her offer to avoid a shareholder vote and left her company exposed, forcing it to cut its dividend for the first time in three decades after she said it wouldn’t.

Mr. Buffett isn’t only a sage voice in this story—he played an instrumental role by giving Ms. Hollub nearly enough rope to hang herself. His $10 billion in preferred stock used to finance the deal, worth almost as much as the entire company, pays him $800 million annually.

Ms. Hollub’s predicament is reminiscent of another executive who did a deal with Mr. Buffett after recklessly endangering a storied company: Andrew Liveris of Dow Chemical. In the summer of 2008, he got into a bidding war for specialty-chemical firm Rohm and Haas and financed it in part by agreeing to the sale of part of Dow to a Kuwaiti state firm.

Once markets collapsed, it pulled out. and Mr. Buffett’s Berkshire Hathawayput up $3 billion in convertible preferred stock that later gave him 6% of the company. Dow cut its dividend on its common stock for the first time in nearly a century to squeeze by.

Ms. Hollub may not be as fortunate as Mr. Liveris, who retired recently as the company’s longest-serving CEO. Financier Carl Icahn, who blames Ms. Hollub for the debacle, revealed to The Wall Street Journal on Wednesday that he has raised his stake in the company to 10%. Occidental OXY -17.71%▲ should survive at least, though possibly at the cost of seeing Mr. Buffett convert some of his preferred stock cheaply to common equity. He always seems to appear when corporate America gets caught with its pants down.

Stock Shock: What Lies Ahead for Global Markets?

Wharton’s Jeremy Siegel and Moody’s Mark Zandi speak with Wharton Business Daily on Sirius XM about what’s ahead for global markets.

Uncertainties continue to multiply over the coronavirus outbreak. U.S. investors saw stock values plunge nearly 20% in the past three weeks. Cases of COVID-19, the new coronavirus, are proliferating outside China; at last count, the Centers for Disease Control and Prevention identified 647 cases in 36 U.S. states.

To add to the bedlam, during the past weekend a price war broke out between Saudi Arabia and Russia, leading to a 25% fall in oil prices. Question marks hover over its potential impact on the fortunes of energy producers.

These factors whiplashed U.S. markets this week, even as global stocks took a beating for similar reasons. Monday, March 9, saw a worldwide rout across markets, with values dropping in a precipitous one-day plunge reminiscent of the financial crisis a decade ago. By Tuesday, March 10, as the Financial Times noted, “Global markets stabilized from heavy losses as investors welcomed signs that policymakers would launch significant stimulus measures to soften the economic blow from the coronavirus outbreak.”

Though European markets recovered slightly that day, investors were still nervous about the nationwide lockdown in Italy, as that country sought to contain its COVID-19 crisis.

So what lies in store for U.S. and global markets in the weeks and months ahead?

Will the world economy sink into a recession? If so, will it be short and sharp — as some economists have predicted — or will we have to contend with a deeper, more protracted downturn?

Under either scenario, how should investors respond?

Should they “buy the dip,” as investment gurus often recommend?

Or should they batten down the hatches and lie low until the storms have passed?

Second, more stock market price corrections may occur, possibly heading into bear-market territory, where prices fall by 20% or more.

Third, more interest rate cuts are likely from the Federal Reserve.

Fourth, stalled hiring and layoffs could worsen unemployment to a point where the recession could grow severe. Siegel and Zandi also offered advice to investors on how they could respond.

Seeking Safety

Major stock indices — the Dow, Nasdaq and the S&P 500 — have shed some 18% in value since mid-February. Investors chasing safety thronged 10-year Treasuries, dragging yields down as they expected more interest rate cuts and offloaded corporate bonds, especially those of companies in travel and energy.

Earlier last week, the Federal Reserve tried to boost the morale of investors with an interest rate cut of a half a percentage point, but that brought limited cheer to the stock markets, as did the results of the Super Tuesday Democratic primaries. Central banks in Canada, Australia and elsewhere also cut interest rates, and G-7 finance leaders explored possibilities of coordinated actions in a conference call.

In order to contain the impact of the coronavirus crisis, Siegel and Zandi believe that governments should offer bridge loans and other forms of aid to small businesses; widen the unemployment insurance safety net; and maybe temporarily cut payroll taxes to give consumers more spending power. President Donald Trump said on Monday that he would work with Congress on tax cuts and other measures.
Looming Recession?

According to Siegel, “earnings [at companies will] be dramatically affected this year” as they grapple with declines in revenues and cost pressures. “We could have a 20% decline in earnings this year, which would be dramatic, and of a recession magnitude.” A recession is informally defined as two consecutive quarters of declining real economic activity, he noted. However, equity analysts “are always slow to put down earnings because they concentrate on micro factors,” Siegel noted. “They concentrate on firms. They are not really geared to try to project what’s going to happen [to the broader economy].”

Zandi said the stock markets “haven’t fully discounted … the possibility of a recession. But they’re on their way. You can see that in the equity market, and even more clearly in the bond market. Now 10-year Treasury yields are at record lows and falling. That’s a pretty clear window to what investors are thinking. If the pandemic is comparable to what the CDC seems to be suggesting will happen, it will be tough to avoid a recession.” The epidemic has resulted in closures of establishments such as schools and daycare centers, disrupted businesses and adversely affected their travel plans, he said. 
Positive Sign

The good news is, if a recession were to occur, the U.S. economy will enter it from a position of strength, said Siegel. As a case in point, he pointed to the latest employment report, which revealed a gain of 273,000 jobs in February, with the unemployment rate holding steady at 3.5%. “If a patient is going to get sick, what the doctors say is the most important thing is he goes into that sickness being healthy,” Siegel noted. “That will mean that he or she will recover the fastest. That is exactly what we see in the U.S. economy. The U.S. economy is going to receive bad bumps. There’s no question about it. But the fact that we are going into that as healthy as we can be is a very strong positive.”

Employment gains have been strong in the past two months — 225,000 jobs were added in January — but they have been “juiced” by mild weather and hiring by the Census Bureau, Zandi said. The jobs gains were disappointing in December at 125,000, to put that in perspective.

“If you abstract from the vagaries of the data, they were probably running around 125,000-150,000 per month,” he said. Job gains have ranged from 128,000 to 145,000 in the previous months, barring a jump to 164,000 jobs in November, according to Bureau of Labor Statistics data. “An employment gain of 125,000-150,000 isn’t bad … and that’s consistent with stable unemployment,” he said.

Still, if monthly employment gains fall below 100,000 on a consistent basis, unemployment will start to rise, Zandi warned. “Once unemployment starts to rise, even from a very low level, that’s the fodder for recession. People can sense that and they will pull back. Businesses will see that and they [too] will pull back. That’s how you get into a vicious cycle known as a recession. So, I don’t think we’re too far away from an environment where a recession becomes a real threat.”
Stock Market Outlook

According to Siegel, whenever investors consider long-term assets, they need to realize that “more than 90% of the value of stocks is dependent on profits more than 12 months out into the future.” He added that earnings reports may be “very bad” in this year’s second quarter and also perhaps in the remaining two quarters of the year, but they could change for the better after that. He noted that according to experts, viruses are self-limiting. “I’m looking at a pretty bad 2020, but I’m [also] looking for a bounce-back in 2021.”

According to Siegel, stock prices were “already too high” in the weeks before the coronavirus outbreak began spreading worldwide. “We were riding too high in that momentum-driven market.” Estimates he made earlier this year about corporate earnings growing 5% in 2020 are no longer valid, he explained.

“That was without the virus. Right now we could get minus 20%. We could get minus 30%. We have not had a bear market since the Crash of 1929, which is defined as a 20% [decline from recent highs]. We could definitely have that. Would that shock me? Not in the least.”

To counter the impact of the coronavirus crisis, the Fed’s rate cut was “the right thing to do,” said Seigel. “Hundreds of billions of dollars of loans are pegged to the Fed’s prime rates, Libor rates, [and also] all sorts of business rates.” He noted that the rate cut of 50 basis points would translate into a proportionate fall in interest payments for small businesses such as restaurants. “It will help. It’ll give them a few thousand dollars more in these months.” He expects more interest rate cuts from the Fed in the future.

Zandi agreed that the rate cut was an appropriate step. “[But] I’m not sure about the execution,” he said. In hindsight, it wasn’t as effective as expected, he noted. The stock markets seemed to give it fleeting attention, and then they continued their free fall. “[It didn’t] go as well as I’m sure Fed officials had hoped.

The market sold off significantly. The Fed’s intent was to shore up confidence in the U.S. and it did the opposite. They kind of spooked investors, so if they had it to do it over again, maybe they do it a little bit differently.” Still, “the Fed doesn’t have a whole lot of room to maneuver here, given where rates are,” said Zandi. The low rates give the Fed little wiggle room to exert more influence with rate cuts.

Fiscal Stimulus

Given those limitations of monetary policy, the Trump administration should use fiscal policy to prime the pump, according to Zandi and Siegel. “[For instance], stepping up Small Business Administration bridge loans to small businesses that might have cash flow problems could very well happen,” said Siegel.

Added Zandi: “It’s about cash flow. Many small businesses don’t have those resources to weather a storm that lasts for more than a week or two.”

Siegel also called for “an emergency step [of] a tax cut.” That would leave more cash in the hands of small businesses and workers who may not get paid or get tips or be laid off. “I think despite the politics of the situation, both Democrats and Republicans are ready to do that,” he said.

“We already have some sort of a fiscal stimulus package that the Senate is looking at from the House. They’ve stopped this bickering back and forth. We may have to look for an emergency tax cut that that’ll give more cash to consumers.”

Zandi agreed. “A temporary payroll tax holiday is a tried and true fiscal stimulus,” he said. “It gets money to lower middle-income households so quickly. It shows up right in their paychecks.” Among the other measures he suggested was to expand unemployment insurance benefits, since many people may not be able to get to work.

Companies that need the most support include those in transportation and distribution, because “they are on the front lines of the hit to global trade” that the coronavirus epidemic is creating, said Zandi. Next in line would be the travel, hospitality and leisure industries, he added. Beyond that, almost every industry in areas where communities are shut down through quarantine or declared as disaster areas will be affected, he noted.

What Should Investors Do?

As stock prices seem low now, should investors try and pick up some on the cheap? Zandi and Siegel had different perspectives on that question. “Most people shouldn’t look [at the market now],” said Zandi. “They should have a long-term investment horizon of five or 10 years. These ups and downs are not relevant. They should just ignore it.”

Investors who are in their fifties and sixties, who are approaching retirement, should wait until the volatility settles down, said Zandi. “Then, it would be a good time to evaluate how invested you are in the stock market, given the volatility that exists there, because you’ll need that money for retirement sooner rather than later. Your horizon isn’t long enough to be investing a large share of your portfolio in stocks.” Zandi also advised investors to avoid trying to re-allocate their portfolios, trying to balance equities with safer asset classes. “[Do not do that] at a time like this,” he said.

“The markets are very volatile, and the S&P is already down almost 20%. I would caution [investors] not to do anything rash. This is a wake-up call for those who don’t like this kind of volatility and can’t live through it. When the dust settles, you can find investments that are more suited to your willingness to take risks.”

According to Siegel, “We all know which industries are going to suffer. I do want to warn people [to] get out of those in the stock market. Even though [those industries are] going to be hit, a lot of that hit has already been discounted in the prices.” He didn’t rule out stock prices in those industries declining another 5% or 6%. If people invest now in those industries, they will “most likely be rewarded a year from now with decent returns,” he added.

To be sure, uncertainty clouds the investment outlook. “Nobody knows how much earnings will be affected in 2020,” Siegel said. But beyond that, one might “assume that 2021 earnings will rebound to the same levels we saw in 2019. But virtually no one can buy at the bottom. Buying stocks at reasonable levels relative to history has always paid off for the long-term investor.”

The long-term prospects may well be why Chinese stock markets seem to be shrugging off the coronavirus impact and moving towards higher prices. Siegel noted that the Shanghai Composite Index is now higher than it was last November before China had had a single case of coronavirus. “How can that be? They’ve been in lockdown.

They’re going to have a recession,” he said. But even as China may be staring at a contraction in its GDP, the investors driving up the Shanghai index may have decided they are going “to look further out,” he said. “The experts say, and we know through experience that these viruses – they have their big impact, and then they’re self-limiting. And we bounce back in 2021.”

How close is the US economy to recession?

The Federal Reserve will be watching the labour market before pushing the panic button

Gavyn Davies

Jerome Powell, chairman of the U.S. Federal Reserve, pauses while speaking during a news conference in Washington, D.C., U.S., on Tuesday, March 3, 2020. The U.S. Federal Reserve delivered an emergency half-percentage point interest rate cut today in a bid to protect the longest-ever economic expansion from the spreading coronavirus. Photographer: Andrew Harrer/Bloomberg
Fed chair Jay Powell justified the rate cut on the grounds of the uncertainty sparked by coronavirus © Bloomberg

Two weeks ago, it would have seemed absurd to suggest that the US Federal Reserve would shortly introduce an emergency cut of 50 basis points in policy interest rates, with a further 50 basis points priced in by the forward market for the Federal Open Market Committee meeting later in the month.

Jay Powell, the Fed’s chairman, justified this week’s rate cut on the grounds of the uncertainty sparked by coronavirus. But normally, only in the case of a sudden, unexpected nosedive into recession, would such a turn of events make any sense.

As yet, there has been almost no stress in the financial system, usually the proximate cause of an economic crash. So what is happening?

It is always difficult to determine whether a recession is under way. Economic commentators frequently use a short-cut, which is to call a recession only after observing two successive quarters of declining real gross domestic product.

Since the first quarter of 2020 will probably record positive GDP growth, this definition will be triggered only if the second and third quarters are both negative. This cannot occur until the figures are published at the end of October. That is far too long to wait.

Alternatively, the generally accepted official announcement of a recession is done by the romantically named National Bureau of Economic Research dating committee, chaired by Robert Hall. This group determines that a recession has started by judgmental observation of some key monthly economic data releases.

In the past, its announcement has occurred between six and 21 months after the recession actually started. Again, this is useful for economic historians but not for today’s policymakers.

What are the alternatives that could help the Fed right now? Statistical models can provide probabilistic assessments that the economy is near a recession. At present, Fulcrum’s model assesses that the US economy is only 2 per cent likely to fall into a recession within the next 12 months.

But these and similar models often differ, and sometimes predict a higher chance of recession even when one does not occur. For example, the New York Fed’s model, which is based on the yield curve — a measure of the level of long-term interest rates relative to short-term rates — indicated a recession probability of 31 per cent, as of February. False signals are a familiar problem.

Economists at the Federal Reserve Bank of New York have recently tried to address these issues by examining many statistical and econometric methods that can help identify the start of a recession as early as possible in a downturn.

The signal likely to be preferred by policymakers in the real world, such as the Fed’s interest rate setting committee, is disarmingly simple and related to the labour market.

The New York Fed authors who developed this method point out that when the unemployment rate has historically jumped by 0.35 to 0.50 percentage points from its lowest level in the past 12 months, the US economy has almost always entered a recession.

It really is that simple. The authors say their method is also reliable and stable for the US economy, even in real time.

On this extremely intuitive rule, there has been no indication lately that the US is yet in recession. The unemployment rate has dropped to 3.5 per cent, the lowest reading in the current cycle and one of the lowest in the postwar period.

The good news is that it can therefore be quite clearly concluded that the US economy was not in recession, or even near recession, when coronavirus arrived in the country in February.

The bad news is that the virus has shown in China, South Korea, Italy and elsewhere that it has the potential to cause extremely disruptive and recessionary forces in any economy where it takes hold (see box for recent GDP forecast revisions).

Although monetary policy should not be the first-order response to coronavirus, it can nevertheless help stabilise markets. The question now is how long the Fed should wait before firing the last of its precious monetary ammunition.

Without clear evidence of a recession, a little patience in the FOMC meeting may be needed.


Possible revisions in GDP forecasts following coronavirus shocks

Macroeconomic forecasters have already decided to revise downwards their GDP growth forecasts for 2020 following the China PMIs for February and the much greater spread of coronavirus in many advanced economies.

Kristalina Georgieva, the director-general of the IMF, has warned that her organisation will reduce the global growth forecast for the 2020 calendar year to below last year’s 2.9 per cent rate.

Many of these revisions are not yet published in full, but we can estimate the likely eventual extent of the changes in consensus forecasts by examining early releases from market economists, including JPMorgan and Goldman Sachs, and also the results of the latest Fulcrum modelling.

Indicative estimates (prepared by Rahil Ram at Fulcrum) suggest that forecast GDP growth for the major advanced economies may be revised down 0.6 percentage points to only 0.8 per cent in calendar year 2020, with Japan clearly experiencing a two-quarter recession, and the EU very close to it.

The US, by contrast, is still expected to maintain positive quarterly GDP growth throughout the year.

Growth in the global economy, including the emerging markets, has been revised down by more than growth in the advanced economies.

Based on the recent PMIs, Chinese GDP growth is likely to be revised down by as much as 2.0 points to 4.7 per cent, with global GDP growth revised down by 1.2 points to only 2.3 per cent.

These results would represent the lowest global growth rates since the Great Recession in 2009.

The writer is co-founder and chairman of Fulcrum Asset Management

Dow Escapes Bear Market With a 6% Rally

The blue-chip index is now up 20% from its low, qualifying as a new bull market

By Anna Hirtenstein, Caitlin McCabe and Chong Koh Ping  

U.S. stocks soared higher Thursday, even after data showed the ranks of unemployed Americans surged in the past week, signaling that investors remain hopeful that a $2 trillion stimulus package can help save the country’s weakening economy.

The Dow Jones Industrial Average climbed 6.2%, putting the blue-chip index more than 20% above its recent low, a move that starts a new bull market and marks the shortest bear market in the index’s history.

The S&P 500 gained 6.1%, and tech-heavy Nasdaq Composite added 5.6%.

Investors had been jittery leading up to the release of the latest unemployment benefits data, unsure of how severely the coronavirus pandemic had ripped through the U.S. labor force. Futures tied to U.S. stocks had declined steeply earlier in the morning, yet pared their losses after it was announced that an unprecedented 3.28 million workers filed for unemployment benefits—five times the previous record high.

The surge in all three indexes after the opening bell marked the third time this week that U.S. stocks opened higher, following a month of steep losses and wild turbulence as the fallout from coronavirus worsened. And even as Thursday’s jobless claims revealed that the economic toll of the outbreak is as severe as anticipated, some investors were already looking ahead to the ultimate passage of the largest fiscal stimulus package in the U.S. in recent memory.

The Senate on Wednesday approved the relief plan, which would provide direct payments to Americans and loans to large and small companies, among other measures. The House is expected to consider the bill Friday. If approved, it would head to President Trump.

“Investors believe data like today will make it more likely that the House will pass the stimulus bill,” said Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co. “The deeper and the worse the numbers are in the near term, the more possibility there is for a [fiscal] response, which powers the rebound on the other side.”

If the Dow industrials are to reach a bull market Thursday, it would occur just three days after the index reached its recent low. The S&P 500 and the Nasdaq still remain far from a possible bull market.
Gains throughout Thursday morning were broad, with all 11 sectors of the S&P 500 up for the day. Dow heavyweight Boeing Company surged 13% on news that the aerospace giant could receive billions of dollars of assistance from the stimulus deal.

The S&P 500’s energy sector also continued to see sharp gains Thursday. Marathon Oilsurged 11%, Exxon Mobiljumped 2.8%, and Chevrongained 8.5%. Stocks in the sector had been particularly battered by weeks of market downturn, pushed lower, in part, by evidence that the pandemic is leading to an unprecedented decline in energy demand.

Still, oil prices slid Thursday. Brent crude, the global gauge of oil prices, dropped 2.7% to $29.19.

Even as investors looked ahead to the stimulus bill, there’s no guarantee that it will be enough to blunt the economic fallout from the coronavirus outbreak. Nearly 70,000 people have been infected by the virus, and more than 1,000 have died. The U.S. now trails only China and Italy in the number of confirmed cases, even as emergency measures to contain the outbreak has shuttered businesses and sidelined workers.

“The reality is that there’s still a lot of uncertainty to the degree to which the virus disrupts economic activity. Markets are digesting that,’’ said Anthony Rayner, a multiasset fund manager at Premier Miton. “There’s almost a point where the more policy makers do, whether it’s monetary or fiscal, the more people panic in a way.”

Federal Reserve Chairman Jerome Powell said Thursday morning that he expected economic activity to decline “pretty substantially” in the second quarter, following estimates from economists last week that U.S. GDP could shrink during the period far worse than it did in the Great Recession.

The central bank is taking unprecedented action to help ensure economic activity can resume as soon as the coronavirus pandemic is under control, Mr. Powell added in a rare television interview on NBC’s Today show.

Still, some market observers cautioned Thursday that the U.S. stocks rally could likely be temporary—especially as more economic data emerge. Analysts also expect a sharp decline in corporate earnings in the month ahead.

“The market is showing a little bit of relief, but frankly, that doesn’t mean that it’s going to persist,” said Solita Marcelli, deputy chief investment officer for the Americas at UBS Global Wealth Management. “We still have a lot of things that are unknown.”

Investors moved into government bonds Thursday, causing the benchmark on the 10-year U.S. Treasury to retreat to 0.826%, from 0.854% Wednesday.

Outside of the U.S., the pan-continental Stoxx Europe 600 rallied 2.6% after declining for part of the day. The European Central Bank “broke new ground,” said Florian Hense, an economist at Berenberg Bank in a note, after it gave itself more flexibility on its additional €750 billion ($821 billion) bond-purchase program.

Meanwhile, most major stock markets in the Asia-Pacific region closed lower. Japan’s Nikkei 225 lost 4.5%. Singapore’s FTSE Straits Times Index shed 1% after the country forecast that the economy could contract by up to 4% in 2020 in its first full-year recession since 2001.

More Than 3 Million in U.S. Filed for Unemployment Last Week: Live Updates

Right Now
The Labor Department released data on last week’s unemployment claims, some of the first hard data on the pandemic’s economic toll.
Here’s what you need to know:
More than three million file unemployment claims, the most ever in a week.
Credit...Bryan Anselm for The New York Times
Nearly 3.3 million people filed for unemployment benefits last week, sending a collective shudder throughout the economy that is unlike anything Americans have experienced.
The numbers, released by the Labor Department on Thursday, are some of the first hard data on the economic toll of the coronavirus pandemic, which has shut down whole swaths of American life faster than government statistics can keep track.
Just three weeks ago, barely 200,000 people applied for jobless benefits, a historically low number. In the half-century that the government has tracked applications, the most applications filed in a single week had been fewer than 700,000.
“In the whole history of initial claims, there’s never been anything remotely close to that,” said Ben Herzon, executive director of IHS Markit, a business data and analytics firm.
As staggering as the figures are, they almost certainly understate the problem. Some part-time and low-wage workers don’t qualify for unemployment benefits. Nor do gig workers, independent contractors and the self-employed, although the emergency aid package being considered by Congress would broaden eligibility. Others who do qualify may not know it. And the sudden rush of layoffs led to jammed phone lines and overwhelmed computer servers at unemployment offices across the country, leaving many people unable to file claims.
The worst could be yet to come. Mr. Herzon said he expected a similarly large number next Thursday, when the Labor Department releases its report on new claims filed this week.
The Fed chair says the United States may be in a recession already.
Jerome H. Powell, the Federal Reserve chair, said during a rare television interview on Thursday that the United States “may well” be in a recession already, but that it should get the coronavirus under control before getting back to work.
“The first order of business will be to get the spread of the virus under control, and then to resume economic activity,” Mr. Powell said, speaking on NBC’s “Today” show. “The virus is going to dictate the timetable here.”
Mr. Powell’s comments contrast those of President Trump, who has suggested that he wants many Americans to get back to work as soon as Easter, less than three weeks away, and that efforts to slow the spread of the virus by shuttering large parts of the economy should not be worse than the disease itself.
European stocks fall despite progress with U.S. rescue package.
European stocks were trading lower on Thursday, even after lawmakers in Washington advanced a highly anticipated $2 trillion rescue package to bolster the American economy.
Major markets lost about 2 percent by midmorning in Europe, after a mixed day of trading in Asia. Futures markets were predicting Wall Street would open lower too.
Investors had already bid up shares in previous days after the United States began preparing a spending and support plan to help households and companies cope with the coronavirus outbreak.
The Senate passed it late on Wednesday, and it was expected to get approval by the House and President Trump shortly after.
But questions remain about the timing of the support plan and whether lawmakers should do even more, and that left investors nervous. Prices for longer-term U.S. Treasury bonds were up, sending yields lower and suggesting investors were looking for safe places to park their money. Oil prices, a proxy for the outlook for the world economy because they indicate demand for fuel, fell on futures markets.
In Asia, Japanese stocks fell strongly after authorities announcement more confirmed coronavirus infections there, and the Nikkei 225 index fell 4.5 percent.
Other markets moved modestly. Hong Kong’s Hang Seng Index was down 0.7 percent. South Korea’s Kospi index fell 1.1 percent despite the country’s central bank announcing further action to keep its economy supplied with money.
An F.A.Q. on the stimulus bill and your pocketbook.
How much money will individuals get — and how will it be distributed? How are unemployment benefits changing? Are gig workers included?
The Senate unanimously passed a $2 trillion economic stimulus plan on Wednesday that will offer assistance to tens of millions of American households affected by the coronavirus. Its components include payments to individuals, expanded unemployment coverage that includes the self-employed, loans for small businesses and nonprofits, temporary changes to withdrawal rules from retirement accounts, and more.
The House of Representatives was expected to quickly take up the bill and pass it, sending it to President Trump for his signature.
We collected answers to common questions about what’s in the bill.
Trump weighs postponing tariff payments to help businesses.
The Trump administration is considering postponing tariff payments on some imported goods for 90 days, according to people familiar with the matter, as it looks to ease the burden on businesses hurt by the coronavirus pandemic.
Some businesses and trade groups have argued that the levies President Trump imposed on foreign metals and products from China before the outbreak continue to raise their costs and weigh on their profits as the economy is slowing sharply.
But even after the global pandemic hit the United States, Mr. Trump and his advisers have denied that cutting tariffs would be one of the measures they would undertake to buoy the economy.
The White House now appears to be considering a proposal that would defer tariff duties for three months for importers, though it would not cancel them outright. The administration’s consideration of a deferral was reported earlier by Bloomberg News.
It is not clear which tariffs the deferral might apply to, or if the idea will ultimately be approved. But the proposal appears to be separate from a plan announced on Friday by the U.S. Customs and Border Protection that it would approve delayed payment of duties, taxes and fees on a case-by-case basis.
The coronavirus pandemic sweeping the globe with lethal and wealth-destroying consequences has proved so jarring to the powers-that-be on the European side of the Atlantic that they have discarded deep-set taboos to forge atypically swift and pragmatic responses.
“This pandemic is really like a war,” said Maria Demertzis, an economist and deputy director of Bruegel, a research institution in Brussels. “In a war, you do what you have to do.”
The British prime minister, from the party of Margaret Thatcher, has effectively nationalized the national railway system, while forsaking budget austerity in favor of aggressive public spending.
Germany has set aside its traditional detestation for debt to unleash emergency spending, while enabling the rest of the European Union to breach limits on deficits.
The European Central Bank has transcended a legacy often marked by calamitous inaction in the face of crisis to produce something that has frequently seemed impossible: a decisive and timely response.
Beyond the current moment of emergency, some argue that the crisis will be squandered if it does not prompt meaningful change in the structure of economies after life returns to normal.
They portray the rescues as an opportunity to transform the nature of the state’s role in the economy.
“It’s about changing the way we do capitalism,” said Mariana Mazzucato, an economist at University College London.
The oil keeps flowing. Where can it go?
The world is awash in crude oil it doesn’t need, and is slowly running out of places to put it.
The coronavirus pandemic has strangled the world’s economies, silenced factories and grounded airlines, cutting the need for fuel. But Saudi Arabia, the world’s largest producer, is locked in a price war with its rival Russia and is determined to keep raising production.
So storage facilities around the globe are filling up. Huge tankers filled with crude are anchored off coastlines, with no place to go.
“For the first time in history, we are seeing the likelihood that the market will test storage capacity limits within the near future,” said Antoine Halff, a founding partner of Kayrros, a market research firm.
As storage space becomes harder to find, the prices, which have already fallen more than half this year, could drop even further. And companies could be forced to shut off their wells.
The crucial question is not how bad economic numbers will get in the next few months. What matters is whether this will be a severe-but-brief disruption to economic life, from which the United States and other major economies can quickly recover, or the beginning of a long, scarring depression.
To reach the more optimistic outcome, the U.S. government is trying to build, at great speed, a three-legged stool. All three components need to come together to make it plausible to return to prosperity reasonably quickly once the coronavirus outbreak is safely contained.
First, the nation needs to ensure that those who lose their jobs do not experience personal catastrophe with long-lasting effects. Second, it must ensure that businesses with sound long-term prospects don’t collapse in the interim. Third, the system of borrowing and lending needs to remain functional to avoid a freeze-up of credit that would make the other two goals impossible.
The $2 trillion relief package that is on the verge of passing Congress and a series of extraordinary actions by the Federal Reserve constitute the United States government’s efforts to bolster each of those legs.
London hotels, starved for business because travel has ground to a halt, are being enlisted to provide temporary shelter for homeless people to isolate themselves during the outbreak.
The mayor of London, Sadiq Khan, booked 300 rooms for 12 weeks in two hotels that are part of the InterContinental Hotels Group. The move aims to secure places for homeless people to self-isolate as coronavirus cases in Britain surpassed 9,500 on Thursday. Another 200 rooms were booked with other hotel groups.
Matthew Downie, director of policy at Crisis, a national homeless charity, welcomed the effort but said it was nowhere near the scale it needed to be. The number of homeless people across England surpassed 280,000 in 2019.
India, on nationwide lockdown, unveils $23 billion relief package.
On the second day of India’s nationwide lockdown to reduce the spread of the coronavirus, the government announced a relief package of 1.7 trillion rupees, or $22.6 billion, to ease the economic pain that it will cause India’s 1.3 billion residents.
The centerpiece of the plan unveiled on Thursday is an increased ration of free food for the 800 million poorest Indians. The government will give each family an additional 5 kilograms of rice or wheat and 1 kilogram of pulses per person per month for the next three months. The food would supplement existing food allocations poor families already receive.
The most vulnerable people — poor women, farmers, widows, and senior citizens — will also receive small direct cash transfers to their bank accounts.
The extended lockdown is expected to be particularly hard on poor workers, most of whom feed themselves from their day’s earnings. With everyone ordered to stay inside and virtually all businesses closed, these workers no longer have a way to make a living.
For medical workers and others on the front line of the coronavirus response, the government said it would provide 5 million rupees, or about $67,000, of health insurance coverage.
For wealthier workers employed by corporations, the central government will make all the required contributions for the next three months to their state-sponsored retirement accounts.
Reporting was contributed by Vindu Goel, Neil Irwin, Tara Siegel Bernard, Ron Lieber, Peter S. Goodman, Patricia Cohen, Ben Casselman, Geneva Abdul, Amie Tsang, Carlos Tejada, Alexandra Stevenson, Su-Hyun Lee and Heather Murphy.