Like Germany, Japan was also hit exceptionally hard by the depression and became more autocratic in response to it.  Japan was especially vulnerable to the depression because, as an island nation without adequate natural resources, it relied on exports for income to import necessities.  When its exports fell by around 50% between 1929 and 1931, it was economically devastated.  In 1931, the depression in Japan was so severe that the country went broke—i.e., it was forced to draw down its gold reserves, abandon the gold standard, and float its currency, which depreciated it so greatly that Japan ran out of buying power.  These terrible conditions and large wealth gaps led to fighting between the left and the right.  In 1932 that led to a massive upsurge in right-wing nationalism and militarism to forcefully restore order and bring back economic stability.  To that end, Japan’s military took control and pursued military options to get Japan the resources it needed by taking them away from other countries.  Japan invaded Manchuria in 1931 and later expanded through China and Asia to obtain natural resources (e.g., oil, iron, coal, and rubber) and human resources (i.e., slave labor).  As in the German case, it could be argued that this path of military aggression to get needed resources was the best path for the Japanese because relying on classic trading and economic practices wouldn’t have gotten them what they needed.   

Shifting to more autocratic, populist, and nationalist leaders and policies during times of extreme economic stress is typical, as people want strong leadership to bring order to the chaos and to deal strongly with the outside enemy.  In 1934, there was severe famine in parts of Japan, causing even more political turbulence and reinforcing the right-wing, militaristic, nationalistic, and expansionistic movement.  

In the years that followed, this movement in Japan, like that in Germany, became increasingly strong with its top-down fascist command economy, building a military-industrial complex with the military mobilized to protect its existing bases in East Asia and northern China and its expansion into other territories.  As was also the case in Germany, during this time, while most Japanese companies remained outside government ownership, their production was controlled by the government.

It makes sense that no one would enter a war under the assumption they are going to lose more than they gain. Therefore, it is reasonable to conclude the increasing competition between China and the USA will not result in a war until one side clearly believes they can win. Nuclear weapons obviously complicate the calculus.

Political scientist Joseph Nye believes that the key trigger in the Thucydides trap is an excessive reaction to the fear of losing one’s power status and prospects for future development. In the case of Washington and Beijing, the relative decline of America’s power and the rapid rise of China’s power destabilizes their relationship and makes it difficult to manage. Gen. Martin Dempsey, then-chairman of the Joint Chiefs of Staff of the U.S. Armed Forces, even admitted in May 2012 that his primary task was to ensure that the United States did not fall into the Thucydides trap.

As a result of the slow but noticeable erosion of the U.S. position in the Western Pacific, it is highly conceivable that a scenario could emerge in which the current hegemon is tempted to conduct a strategic counteroffensive in response to an incident, even a trivial one, in the South China Sea or East China Sea, believing falsely that it has the edge over its inferior rival. This would trigger a modern Thucydides trap.

An in-depth reading of Thucydides’ work reveals a second trap, even more complex and dangerous than the first. Thucydides clearly warned that neither Sparta nor Athens wanted war. But their allies and vassal states managed to convince them that war was inevitable anyway, which meant that both city-states would need to gain a decisive advantage at an early stage of the escalating confrontation. Thus, they decided to enter the war after being urged to do so by their vassal states.

The discussions of the Great Game between China and the USA and many interlinkages across the global economy has been fodder for analysts for much of the last five years. I believe a much greater intensification of the competition between the USA and China is likely. Arguably it is already underway. However, for outright war to take place a number of additional conditions would need to be met.

The chancellor and Prime Minister Boris Johnson have repeatedly said they’re not planning on pursuing austerity policies to rein in government spending, and for now Sunak has focused on preserving jobs to avoid long-term scarring of the economy. He unveiled a 30-billion pound stimulus program last week, and plans a wider package in a budget in the fall.

Hughes said while there are upside and downside risks to inflation, they’re tilted toward it remaining below the Bank of England’s 2% target. He also warned that the debts being built up by companies to tide them over the pandemic could end up becoming a burden that leads to scarring of the economy.

“One of the concerns that we’ve had is that the longer the crisis goes on for, the more likely government-guaranteed loans becomes less of a facilitator of the recovery and more of a burden,” he said. “The more the debt is a burden on companies the less they will invest. We know from past crises that one of the reasons you see longer-term scarring on the economy is you have foregone investment, and that scarring can be significant.”

He suggested one way to mitigate for that effect would be to tie repayments of the government-backed loans to a company’s earnings and profitability.

Hughes said high frequency data pointed to a “a bit of good news,” with April representing the low point for the economy and output contracting by about 25% instead of the 35% initially forecast by the OBR. The question is how quickly the economy gets back that loss.

Current OBR projections are based on Britain and the European Union striking a free-trade agreement. If talks fail and Britain is forced onto WTO rules when the current transition period ends in December, there will be adverse “consequences” for growth and the public finances, he said.

The biggest challenge for every country as we look beyond the coronavirus-induced crisis is in what manner the debt will be paid back and how a drag on recovery can be avoided. The clear answer is to refuse to raise interest rates regardless of how powerful the economy is. Following that up with additional spending measures, to placate restive populations is also likely to be part of the solution.

Yet the book that has done the most to educate me about how China views America and the world today is, as I said, not a political text, but a work of science fiction. "The Dark Forest" was Liu Cixin’s 2008 sequel to the hugely successful "Three-Body Problem." It would be hard to overstate Liu’s influence in contemporary China: He is revered by the Shenzhen and Hangzhou tech companies, and was officially endorsed as one of the faces of 21st-century Chinese creativity by none other than … Wang Huning.

"The Dark Forest," which continues the story of the invasion of Earth by the ruthless and technologically superior Trisolarans, introduces Liu’s three axioms of “cosmic sociology.”

First, “Survival is the primary need of civilization.” Second, “Civilization continuously grows and expands, but the total matter in the universe remains constant.” Third, “chains of suspicion” and the risk of a “technological explosion” in another civilization mean that in space there can only be the law of the jungle. In the words of the book’s hero, Luo Ji: The universe is a dark forest. Every civilization is an armed hunter stalking through the trees like a ghost … trying to tread without sound … The hunter has to be careful, because everywhere in the forest are stealthy hunters like him. If he finds other life — another hunter, an angel or a demon, a delicate infant or a tottering old man, a fairy or a demigod — there’s only one thing he can do: open fire and eliminate them.

In this forest, hell is other people … any life that exposes its own existence will be swiftly wiped out. Kissinger is often thought of (in my view, wrongly) as the supreme American exponent of Realpolitik. But this is something much harsher than realism. This is intergalactic Darwinism.

Of course, you may say, it’s just sci-fi. Yes, but "The Dark Forest" gives us an insight into something we think too little about: how Xi’s China thinks. It’s not up to us whether or not we have a Cold War with China, if China has already declared Cold War on us. 

The Three Body Problem is an excellent read and The Dark Forest follows on well from where it left off. The third book in the series, Death’s End, was too meandering for me and I did not finish reading it. For a non-Chinese reader, the names can be a bit of an obstacle but the story is compelling.

Governor Perry Warjiyo said at Monday’s briefing that inflation is under control and the central bank regularly assesses price and growth dynamics.

“We see so far that demand is not yet strong and inflation is low,” he said. “However, if inflation recovers and the economy picks up, Bank Indonesia has the tools ready, we have
the policies.”

The agreement between the Finance Ministry and central bank allows the bonds to be tradable and marketable, Indrawati said, so Bank Indonesia can use the securities for its monetary
operations.

The burden-sharing scheme caps the upside risk for bond supply in the near term, as the bulk of the securities will be privately placed with Bank Indonesia, according to Citigroup Inc. economist Helmi Arman. There’s less likelihood of the central bank unwinding the securities this year or next even
though the notes are tradable, he said in a report.

Bank Indonesia already had been taking a more aggressive role in providing stimulus to the economy, buying sovereign notes directly from the government at primary market auctions since April. Under the latest agreement, Indrawati said the government will double the size of its auction, held every two
weeks, to 40 trillion rupiah.

Emerging markets are currently free to engage in quantitative easing because they are experiencing the same deflationary forces of developed markets. That’s an odd set of circumstances but it speaks to the deleterious effects of the global response to the coronavirus and the impact it has had on near-term inflationary expectations.

We also ranked them. It would have been nice to use profits or sales as the gauge of success. But the lag in reporting and different calendars made that impractical, even for public companies. So we stuck with a market measure, accepting that — in the saying attributed to value investing doyen Benjamin Graham — the market is only a “voting machine” in the short run, rather than a “weighing machine”.

But which market measure? For the main rankings of the top 100, we opted for equity value added. That list included some of the clear “winners” from the pandemic, such as Netflix and Zoom Video. But it has one obvious flaw: it favoured those that were already large. Companies including Nestle, L’Oréal and Alibaba made the cut despite single-digit percentage gains in value.

If we had used percentage gains, the list would have had the opposite problem, favouring smaller companies, penny stocks that can swing wildly on trades of modest value. However, we still wanted to assemble an alternative ranking to highlight some less known but still significant winners. To do this, we used percentage gains but with a $10bn floor for market cap.

This brings into the top 100 companies that escaped the original list such as Ocado, the UK online supermarket that has reinvented itself as a global tech supplier to other grocers, and Peloton, whose stationary bikes equipped with video screens for online classes have surged in popularity as gyms closed. But otherwise the top 100 has a lot of the original big names such as Tesla, Pinduoduo and PayPal.

If the floor is $1bn, there is a lot more shuffling around. On this measure, Novavax comes top, with a 1,900 per cent rise in value. There is little mystery behind this: Novavax has a vaccine candidate for Covid-19 and is racing to expand its manufacturing capacity. 

There is no doubt that for some companies the COVID-19 crisis has been a gift. It accelerated customer acquisition efforts while also lower lowering borrowing costs and boosting liquidity. High growth companies that reside online, instead on Main Street, were already gaining market share from brick and mortar. That process has not gone into overdrive as the number of retail bankruptcies surges.

To some extent, technology can help meet these new challenges. The costs of data collection and analysis are falling rapidly thanks to Internet of Things and AI. Satellites and sensors, for example, can generate highly accurate real-time data. A broader corporate data strategy aimed at collecting social and environmental cost data, in addition to the well-being of employees and local communities, might help fill significant gaps in measurement. Useful new corporate reporting that details progress toward a broader business purpose means building the prerequisite data capabilities first.

Governments also have an opportunity to leverage data generating technologies to enhance feedback. More than 20 countries from Singapore to Sweden have “smart city” initiatives, demonstrating how better measurement through data can improve public safety and citizen services, albeit not without risks. The UK’s National Health Service has dozens of partnerships with leading technology companies analyzing the vast troves of patient data to support the provision of its services.109 And big data techniques have also proved a significant part of the policymaking process when fighting the COVID-19 pandemic. Countries that successfully implemented track and-trace techniques using smartphones fared better in managing the deadly outbreak.

An inflection point is approaching, driven by necessity. Our industrial-era metrics are misaligned with the needs of a knowledge-based economy characterized by widespread technological disruption. We are on the cusp of a significant change in the way societies make policy and conduct business. Companies will either evolve to realign with new values, or risk dissolving as their social contract is withdrawn. There is no looking back.

The way in which we collect data about the economy is deeply flawed. That’s a well understood fact but we have not yet come up with a more effective way of measuring economic activity and potential. The problem with changing the status quo is it would completely upend the way in which economies are managed. That might well be inevitable because the populist uprising that continue to  spread are challenging the establishment already.

“Are you able to create a Work From Home/Stay at Home index for you/us to track on a regular basis. Today has been another big day for many of these stocks with Shopify for example up another 7% in here today, clearing the $1,000 level, Netflix up 5%, Amazon 4%, Peloton up 4, DocuSign up 4, and Wayfair 11%! Regretfully I’m not involved in any of these as I can’t get my head around valuations. When will this madness stop?”

Thank you for this email which highlights the dilemma of many people on the side-lines of the broad market rebound. There is always a crisis of confidence for anyone who has missed a rebound and is presented with the choice of buying a breakout or waiting for a pullback. That is amplified during accelerations where the fear of missing out is weighed against the fear of sitting through a reversal.

When I read that high house prices are a problem for the younger generation, I wonder whether the historical context is considered. I bought my first house in 1974 and I finally paid off the mortgage on my current home in1999. Over the 25 years that I had a mortgage the lowest interest rate I ever paid was 10% and the highest was 15%. Yes, for a quarter century I paid 10-15% interest on my mortgage, which frequently used up more than half my monthly income. Many of my age group went through a similar experience. My wife and I hardly ever ate out, and our children were treated to many years of cheap camping holidays. I had little spare cash at any time until the mortgage was gone.

Do today's new home buyers have any idea how we lived and struggled with finances? House prices today mirror the very low mortgage interest rate and I suspect that very few (if any) 20-40 year olds are using 50% or more of their income to pay their mortgage as we did. Their money goes on things we could not afford and did not regard as essentials. It's a matter of priorities.

Thank you for this perspective which I’m sure will be of interest to other subscribers. The personal experience you highlight is a testament to what can be achieved through resilience and frugality. If more people were willing to practice delayed gratification we would be in the very different world. As I see it there are two important trends that the younger generation face relative to the older generation. These are disinflation and globalisation.

The path the FDA outlines is a long one. It’s going to take a while to recruit and enroll 30,000 people in a trial and give half of them two shots in the arm — as Moderna Therapeutics Inc. intends to do to test its candidate. And until a sufficient number of subjects in the placebo arm of such a trial contract Covid-19, there won’t be any firm results. Any number of variables could cause further delays: bad luck, a poor vaccine performance, or slowing case growth.

The FDA is by no means ignoring the urgency of the moment. Its guidance includes a variety of concessions on safety data and other issues that are meant to speed the process. But the world can be grateful the agency is willing to bend only so far.
 

Setting a high standard for a vaccine that will be administered to hundreds of millions of people is imperative. It is the minimum requirement to instill faith in the population that it is worth accepting. I have every expectation that the advances in genetic sequencing and editing will deliver a positive result this year and that a true second wave will be avoided.

The impatience many people feel is perhaps the biggest obstacle to containing the spread before a vaccine has been delivered. I even find myself being less vigilant now than I was a few months ago. That is despite the massive swell of community spread and the greater likelihood of contracting it as a result. That’s a good example of how even the most extreme situation can assume an air of normalcy after a relatively short period of time. That’s one of humanity’s greatest survival instincts, although it is not especially helpful in the short term.

The 5 billion pounds Johnson allocated to hospital maintenance, school repairs and road improvements on Tuesday is not new money and is a fraction of the infrastructure spending announced in March.

What Our Economists Say:
“There was a lot of inevitable political bluster in Prime Minister Boris Johnson’s speech today, but for the economy there were two key takeaways. First, his pledge to accelerate 5 billion pounds worth of capital projects is money already allocated in the March Budget. He left plans for any further stimulus to Chancellor of the Exchequer Rishi Sunak’s update on the economy next week. Second, Johnson distanced himself from a quick return to austerity. That’s good news for the outlook.”

--Dan Hanson. For the full insight, click here

Carolyn Fairbairn, director general of the country’s biggest business lobby, the Confederation of British Industry, described the intervention as “first steps” only.

“Foundations are there to be built on,” Fairbairn said in a statement. “More is needed to prevent the uneven scarring unemployment leaves on communities.”

She called for more details on Johnson’s guarantee of apprenticeships and in-work placements for younger workers, as well as an extension of wage support to protect jobs and more funding for “future skills in high-potential areas such as digital, low carbon and health.”

Johnson described the planning reforms as the most “radical” since World War II. They include greater freedom for developers to change the use of buildings and land in town centers without planning permission, and would make it easier to convert unused commercial buildings into homes, his office said in a briefing.

Focusing more on regulatory reform to boost growth, rather than relying solely on big ticket spending is an encouraging sign the Johnson administration understands where the big gains are to be made once the UK is unshackled from the EU.

The spending measures in the March budget already imply significant spending. The challenge for the UK is in overcoming the raft of bureaucratic roadblocks to growth that focus on regulations for regulations sake, rather than prioritising productivity.

The secret service, best known as ASIO, confirmed in a statement that “search warrant activity occurred in Sydney on Friday as part of an ongoing investigation,” but would not comment on Moselmane or its involvement.

Less than two weeks ago, Morrison said that a “sophisticated state-based cyber actor” was targeting Australia in an escalating cyber campaign that was threatening all levels of government, businesses, essential services and critical infrastructure.

Most analysts said Morrison was referring to China, but the prime minister would not name the country.

Already high tensions between Australia and China have been raised by the pandemic.

China in recent weeks has banned beef exports from Australia’s largest abattoirs, ended trade in Australian barley with a tariff wall and warned its citizens against visiting Australia. The measures have been interpreted by many as punishment for Australia’s advocacy of an independent probe into the origins and spread of the coronavirus.

Australia’s foreign minister has accused China of using the anxiety around the pandemic to undermine Western democracies by spreading disinformation online, prompting China to accuse Australia of disinformation.

Australia depends on China’s demand for many of its exports. That’s represents a difficulty for the country in attempting to assert independence from China. For its part, China has a clear interest in securing its supply chains. That means ensuring Australia is at least amenable if not fully subservient to its wishes.

German Chancellor Angela Merkel made a pitch for a radical recovery proposal for the virus-ravaged European Union and warned her cohorts that there was no time to lose.

Her words carried extra weigh, spoken in person on Monday alongside Emmanuel Macron. The French president is the other heavyweight in the euro. He is a long-term advocate of ever-closer collaboration for a common position on international relations and a joint fiscal policy.

Germany has always been the more reluctant partner on both fronts, but there are signs the famously cautious Merkel is letting up.

“Talks won’t fail because of us,” Merkel told reporters in Meseberg, Germany. “But there will be no new proposal.”

Merkel’s exhortation comes before all 27 EU members gather in Brussels on July 17 to discuss a stimulus package that would see the bloc issue 750 billion euros ($845 billion) in joint debt and make 500 billion euros of that in grants to the nations most affected by the coronavirus crisis.

The plan, which needs the unanimous approval of all EU members, seeks to tackle divergences in the region’s internal market that have widened as a result of the uneven impact of the outbreak and differing national responses.

Here is a summary of what the director general of the WHO had to say today:

Tedros Adhanom Ghebreyesus, director general of the World Health Organization, said that living with Covid-19 is the “new normal” and that “we will need even greater stores of resilience, patience, humility and generosity in the months ahead.” He spoke Monday at a press briefing in Geneva. 

A link to the full report is posted in the Subscriber's Area. 

The biggest existential question in financial markets today is how likely are global interest rates to trend towards zero in aggregate. To date the Anglosphere countries have been adamant in their determination to avoid negative interest rates.

However, there is no avoiding the fact that interest rates are falling all over the world. Additionally, Poland, Ghana, Philippines, Chile, Turkey, Colombia, Thailand, South Africa, Egypt, Hungary, Romania, Indonesia and South Korea are all now engaged in quantitative easing.

Looking at the daily charts of the Dow Jones and S&P there appears to be potential "island reversals". Do these "islands" carry much weight in charting terms?

Thank you for this question which I believe will be of interest to the Collective. In order for an island reversal to form we need to first see a breakaway gap form which is generally consistent with a burst of enthusiasm. That has to be followed shortly afterwards by a breakdown gap which is consistent with a sudden bout of fear which nullifies the initial surge.

A link to the full report is posted in the Subscriber's Area.

The Dollar tends to attract interest because the USA is the largest capital market and the Federal Reserve is highly active in deploying support measures for the economy. The supply inelasticity argument supported its value until last year and the subsequently, desire for a safe haven has been a support.

“@DavidGHFrost
6/6 Finally, I want to be clear that the Government will not agree to ideas like the one currently circulating giving the EU a new right to retaliate with tariffs if we chose to make laws suiting our interests.We could not leave ourselves open to such unforeseeable economic risk.”

Frost’s comments come ahead of a fresh round of talks with the EU next week. The two sides are trying to break an impasse that risks a damaging rupture at the end of this year. Without a trade accord, Britain and the EU would default to trading on World Trade Organization terms from Jan 1. 2021, meaning steep tariffs and an economic shock.

A key sticking point in the talks has been the EU’s demand that the U.K. commits to tracking the bloc’s rules in areas such as environmental and labor protections and state aid, for fear that Britain would become a competitor on its doorstep. The British government sees the request as inconsistent with the principle of sovereignty that it argues was at the core of the vote for Brexit.

“This needs to be a real negotiation and some of the EU’s unrealistic positions will have to change if we are to move forward,” Frost said. “U.K. sovereignty, over our laws, our courts, or our fishing waters, is of course not up for discussion.”

The EU is deeply concerned at the prospect of the UK competing aggressively. There is a simple reason for that. Self-determination, which the UK has just recovered, is easier to manage than decisions by committee. Any counter measures the EU uses against the UK will need to focus on broad market access and tariffs because it is incapable to taking competitive steps on its own for fear of upsetting its own internal balance of relationships. The EU’s negotiations are aimed at ensuring the status quo is maintained.

Right now, our model thinks Joe Biden is very likely to beat Donald Trump in the electoral college.

No President in modern history has been more stock market friendly than Donald Trump. Since he won the election in 2016, the Nasdaq-100 has doubled. The fiscal stimulus, tax cuts and tax holidays on foreign income, regulatory roll backs and championing of the stock market have all contributed to positive returns. The simple fact he has continually pointed to the strength of the market as vindication for his policies is a clear sign of his efforts to boost sentiment.

After watching your latest insightful and thought-provoking long term take on the markets, I noticed on Friday there were daily downside key reversals both for the Dow Jones Utilities and Transportation indices. Could this be a straw in the wind for the main US indices?

Thank you for your kind words and this question which may be of interest to other subscribers. For a key reversal to occur, we need to see a new high reached for the move, only to be reversed and for the market to fall and close below the low of the previous day.

Questions like these can’t tell us for a fact whether an advance has been reasonable and current asset prices are justified. Buy they can assist in that assessment. They lead me to conclude that the powerful rally we’ve seen has been built on optimism; has incorporated positive expectation and overlooked potential negative; and has bene driven largely by the Fed’s injections of liquidity and the Treasury’s stimulus payments, which investors assume will bridge to a fundamental recovery and be free from highly negative second-order consequences.

A bounce from the depressed levels of late March was warranted at some point, but it came surprisingly early and quickly went incredibly far. The S&P500 closed last night at 3,133, down only 8% from an all-time high struck in troubled-free times. As such, it seems to me that the potential for further gains from things turning out better than expected or valuations continuing to expand doesn’t fully compensate for the risk of decline from events disappointing or multiples contracting.

In other words, the fundamental outlook may be positive on balance, but with listed security process where that are, the odds aren’t in investors’ favor.

The rise of earnings-agnostic investing has been a trend which has defined the bull market since 2008. Every major bull market thrives on a financial innovation. It would be tempting to think that in this case it was cryptocurrencies, but the answer is probably more mundane. ETFs have enabled factor investing and promoted the acceptance of Modern Monetary Theory. They have allowed companies like Blackrock and Vanguard to become titans of Wall Street on the back of value-agnostic investing.  

Prime Minister Boris Johnson called for people to be “less apprehensive” about Covid-19 as the U.K.
lowered the pandemic alert level and he promised to get all students back to school by September.
The new Level 3 alert indicates the virus is no longer spreading exponentially after almost three months of lockdown, and the guidance allows for some relaxation of social-distancing
measures.

Johnson hinted the rule that people should stay 2 meters (6 feet, 7 inches) apart may be relaxed to 1 meter for pupils -- as Northern Ireland has done -- to help re-open schools in England. He also said the track and trace system, and a new treatment for the virus, means the pandemic is entering a new phase.

“We’ve got to start thinking about a world in which we are less apprehensive about this disease,” Johnson told broadcasters on Friday. “On the social-distancing measures, watch this space, we will be putting in place further changes as the science allows.”

We have a lot more testing so the number of cases continues to rise. The protest movements that sprang up at the end of May and the end of lockdowns have also both contributed to the increasing pace of the spread of the coronavirus. The big question we all need to answer is does it matter?

FWIW I found this page on the AP website which seems to debunk the idea on BLM being used to fund Democratic candidates:

https://apnews.com/afs:Content:9043930562

Over here in the UK, I found this expressed aim of the BLM movement a lot more troublesome:

https://www.gofundme.com/f/ukblm-fund

"a commitment to dismantle imperialism, capitalism, white-supremacy, patriarchy and the state structures"

Has raised nearly £1M.

Thank you for this information email. The ActBlue Charities organisation was set up in 2004 and has been one of the primary routes through which the Democratic Party has sourced grassroots funding. It’s association with BLM, as you point out, is not funding Democratic electoral campaigns directly. However, it would be a gross misrepresentation to think that the two movements are not highly sympathetic to one another. This article from fivethirtyeight.com carries additional information on ActBlue’s success in raising money before the recent protests.

The announcement adds another major player to Shopify’s growing alliance against Amazon.com Inc.’s e-commerce dominance. Last month, I wrote how Shopify CEO Tobi Lutke has often said his company’s goal was to “arm the rebels” against the Amazon empire. The Walmart deal comes just weeks after Shopify signed a partnership with Facebook Inc. that allows Shopify’s merchants to sell on the social-media giant’s platforms under the newly launched Facebook Shops initiative. Before these moves, the aggregated online sales of Shopify’s U.S. customer base already ranked as the second-largest in the country after Amazon, according to the company. And now with Walmart on board and the expanded deal with Facebook, they mark significant steps to expand Shopify’s eco-system, making its platform a more viable and an attractive alternative to sellers.

Amazon is a facilitator of commerce by being a destination in its own right. When people shop, they go to Amazon in much the way we go to Google for information. Anyone who completes a transaction via Shopify’s network is ignorant of the company’s existence because it facilitates trade in the background. The big challenge in competing against Amazon is in easing the route to customer acquisition for Shopify sellers.

A link to the full note is posted in the Subcsriber's Area. 

There is probably no more important question than in which direction bond yields are likely to move. Is the Anglosphere moving increasingly towards negative yields or are we on the cusp of a revolt which will see interest rates rise?

Portnoy and his ilk have been part of one of the greatest rallies in history, adopting as a mantra the online slogan of “stocks only go up!” Market watchers are being forced to ask to what degree retail interest has become a self-fulfilling prophecy in many parts of the market -- and what dangers it poses for its sustainability. Thursday’s rout, the deepest in three months, offered a reminder that stocks do, in fact, fall, though equities rebounded in trading Friday.

Millennials and Gen Zs, the target audience of Barstool content, have long been under-invested in the stock market, said Julian Emanuel, chief equity and derivatives strategist at BTIG LLC.

That’s changing. Stuck at home with plenty of free time, government stimulus checks, no sports to bet on and, for better or worse, a figure like Portnoy turning investing into entertainment, more and more young people are wading in for the first time.

In the last 24 hours two different subscribers have drawn my attention to the role of day traders in supporting stock prices over the last few months. It’s an important phenomenon but it is not new. Investment heavy weights raising cash and warning about excess is a late stage phenomenon. The masses listening instead to proclamations “stocks only go up” is a signal of even later stage activity.

Liberal-market economies

Countries with liberal-market economies face greater short-term risks than do those with coordinated-market economies but have greater flexibility for long-term dynamism. The group includes Australia, Canada, the United Kingdom, and the United States. A key feature here is a limited framework of preexisting measures to protect households—the countries in this archetype spend 17 to 20 percent of GDP on social protection. Their economies skew more heavily toward big corporations than do those with coordinated-market economies, with a comparatively smaller role for SMEs, and flexible labor policies are dominant.

The limited degree of automatic coverage for workers and businesses drives a focus on emergency support-of-wage bills for companies and direct transfers to individuals. More companies will fail in such economies, and the reliance on massive cash transfers in those countries will increase the pressure to build a robust digital infrastructure. However, creative destruction in the least resilient sectors will provide more flexibility to pivot and emerge from the crisis stronger and more competitive, provided that economic shutdowns do not last too long, as unemployment can become sticky, driving up costs and dampening consumption in the longer term.

The clear message coming through from central banks is there needs to be additional and considerable increases in fiscal stimulus to put money in people’s pockets. That is a priority to both quell popular protest but to also reinvigorate demand.

European Central Bank Vice President Luis de Guindos said policy makers at the institution haven’t talk about creating a pan-European bad bank to manage the unpaid loans that are arising during the coronavirus crisis.

“We haven’t had any sort of serious discussion about this instrument,” Guindos said at a webinar hosted by the Institute of International and European Affairs

“I am a little bit surprised when I see this kind of information,” he said in response to a question about a report published by Reuters

Bad banks created after the last financial crisis in Ireland and Spain were “powerful instruments to clean up the balance sheets” of lenders

The potential for the EU to create a bad bank which would warehouse the large number of legacy and new bad debts is certainly a promising potential solution to the region’s systemic problems. Creation of a pan Eurozone body to issue debt and absorb regional debt would represent a significant step towards federalism. It would, however, be a massive step towards recapitalising bank balance sheets. 

Treasury Secretary Steven Mnuchin said the U.S. shouldn’t shut down the economy again even if there is another surge in coronavirus cases.

“You create more damage, not just economic damage -- medical problems that get put on hold,” Mnuchin said Thursday on CNBC. “We can’t shut down the economy again.”

Mnuchin added that he believed President Donald Trump made the right decision to urge states to ease social distancing rules that have crippled the U.S. economy. He said that in the event of a resurgence, it will not be necessary to impose restrictions again because Covid testing and contract tracing are improving and they understand more about how to contain outbreaks.

As restrictions are lifted across the country, signs of a second wave of coronavirus cases in the U.S. have been raising alarms. More than 2 million people in the U.S. have been infected so far.

The majority of coronavirus cases in the USA emerged on the coasts. The middle of the country was comparatively unaffected initially and was afforded the luxury of lax containment measures as a result. The uptick in locations which had large protests a week ago, like Los Angeles, and the rising infection rates in places that did not have a significant issue in March, suggest the first wave of infections is still rolling through communities.

According to the city’s transit manager, Transport for London (TfL), maintaining social distancing means that buses and London Underground trains will only be able to carry around 13–15% of the 9 million passengers who use the services daily. One of eight carriages on a Central line train can carry 131 people in a typical peak hour crush. Only 7% of these passengers could travel if 2-meter distancing was achieved.

TfL has imposed a limit of 20 passengers on its double-decker buses, that can usually carry up to 87.

To help alleviate this precipitous drop in passenger capacity, TfL and London Mayor Sadiq Khan unveiled their ‘London Streetspace’ program in May, which aims to accommodate a possible 10-fold increase in cycling and a fivefold increase in walking. “Many Londoners have rediscovered the joys of walking and cycling during lockdown and by quickly and cheaply widening pavements, creating temporary cycle lanes and closing roads to through traffic we will enable millions more people to change the way they get around our city,” Khan said.

I’m all for walking or cycling to work but a 90% drop in occupancy for the Tube and a 75% drop in bus occupancy is completely unworkable. The age of the Tube network has always mean ventilation is a problem. The 10 to 15 degree pick up in temperature when entering the network has long been a testament to that fact.

“We’re not even thinking about thinking about raising rates,” he told a video press conference Wednesday. “We are strongly committed to using our tools to do whatever we can for as long as it takes.”

The Federal Open Market Committee earlier said it would increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities “at least at the current pace” to sustain smooth market functioning.

A related statement from the New York Fed specified that the pace of the increase would be about $80 billion a month for purchases of Treasuries and about $40 billion of mortgage-backed securities.

“Acting on mortgage-backed securities and Treasuries underscores their belief that more support is needed,” said Diane Swonk, chief economist with Grant Thornton in Chicago. “The Fed does not see a victory in the employment bounce-back. The risk of deflation is still high and the economy needs more support to heal more fully.”
 

$120 billion a month for the next two years will add nearly $3 trillion to the size of the Fed’s balance sheet. It sounds like a lot but the Fed added nearly $500 billion to its balance sheet in May, so $120 billion is a significant deceleration of support.

At the heart of the speculative activity are smaller investors, according to Sundial. Small trader call buying made up more than 50% of total volume last week, the highest since 2000, it said.

Past instances when bullish small trader positions made up 45% or more of volume preceded a median loss for U.S. stocks of about 3% in two months time and 15% in a year, according to the note.

“Small traders are pushing their luck in a major way,” said Goepfert. “It seems increasingly risky to try to chase this rally along with traders who have traditionally been extremely reliable contrary indicators.”

Regardless of any mitigating argument, chasing the rally has been the right decision. The major Wall Street indices blazed through potential areas of resistance in short order. The Nasdaq Composite is now at a new all-time high and the worst performing, most at risk of bankruptcy companies, have staged spectacular rallies. The determination of retail investors to ride the coattails of the Fed while institutional investors stepped aside is a clear example of speculative fervour.

Assuming you don’t get government support to advance research in hydrogen production and carbon capture and storage, what will you have to do to make those viable?

Stay with the program a little bit longer. That’s exactly what we’re doing. You could take a negative view and say we knew that hydrogen was a good thing and we knew that CCS [carbon capture and storage] was needed, but it hasn’t happened. I’m not signing up for that approach. We need a lot of hydrogen in the mix. We need significant CCS. My prediction is that in the next few years you will see CCS projects come off the ground. You will see very large-scale hydrogen projects come off the ground as well. And I hope we will be associated and involved in each and every one of them.

Hydrogen is where traditional oil companies see their future. It does not produce emissions. That ticks a lot of boxes for companies long associated with being among the world’s biggest polluters in their own right while also facilitating emissions growth wherever there are internal combustion engines.

As a white, middle-aged, upper-middle-class immigrant, I’m hardly the person to speak to the politics of race in America.  So I turned to an African-American friend, the economist Roland Fryer, whom I’ve known since we were colleagues at Harvard.

In 2016, he published a brilliant but controversial paper which argued that the police did not disproportionately use lethal violence against black people, though they were more likely to use non-lethal force against them. (A paper published last year in the Proceedings of the National Academy of Sciences lent strong support to Fryer’s thesis.) He has a new, unpublished paper that looks at a perverse effect of investigations into police shootings. I asked Fryer to walk me through the argument.

“If you have a police shooting that goes viral online but isn’t investigated,” he explained, “then nothing changes — levels of police activity and crime are about the same. But if you have a viral shooting that is investigated, then police activity plummets, and crime goes up dramatically.” In just five cities – Baltimore; Chicago; Cincinnati; Ferguson, Missouri; and Riverside, California -- this led to excess homicides of almost 900 people in the subsequent 24 months, 80% them black, with an average age of 28. It's a dangerous Catch-22: You're damned if you don't investigate “viral” incidents, and in even worse shape if you do.

How does Fryer interpret the current protests? “People are fed up,” he told me. “They are frustrated by the disparities they see in educational outcomes. Frustrated by the disparities they see in criminal justice. Frustrated by racial disparities in life expectancy. We are all to blame — this happened on our watch.” And when you add to that the fact that Covid-19 disproportionately affected the black community: “Folks have had enough. People are very much on edge.”

Policing and the outcomes from tough to loose methods is endlessly debatable and not least because of the credit politicians claim for successes that may or may not be attributable to their policies.

That was one of the primary topics of discussion in the book Freakonomics where the coincidence of abortion legislation and the implied reduction in the number of unwanted children implied reduced crime figures twenty years later. A similar argument is made about the impact of removing lead from gasoline and how that improved mental health outcomes and, by extension, crime rates.

Greetings Eoin. Firstly, thank you for the daily commentary and Big Picture Long Term view. They remain the highlight of my weekend and are greatly appreciated. I’m interested in your comments regarding future expectations of inflation.

I hope I’m summarising you accurately, but in essence the thinking runs that the provision of vast amounts of monetary liquidity from Central Banks, combined with Government fiscal spending will at some point come home to roost, and drive up inflation.

If so, why then did we not see an inflation spike following the 2007/08 GFC, where massive (at the time) injections of liquidity and fiscal spending should have delivered the same result?

One view is that we did get inflation following the GFC, just that it showed up in asset prices, not in consumer prices. Equities, bonds, property, luxury goods, art and even later on precious metal prices all benefited from the increased liquidity following 2008. As you have previously highlighted, massive advances in technology, changes to the way we work and live, outsourcing of jobs to lower wage economies, and historically low interest rates have all combined to keep consumer inflation in check over the same period.

Are we to assume that this time is different, and we should expect consumer price inflation at some point, or is it safer to expect history to rhyme and that inflation will again show up in asset prices? If so, should we presume the liquidity will chase better returns and lower P/E multiples of Europe and Emerging Economies this time around? And finally, when investing I’m always conscious of the wise words from the famous British Economist, John Maynard Keynes “The market can stay irrational longer than you can stay solvent”. Spoken nearly a century ago, and never more relevant than today! Many thanks for your time

Thank you for this important email and your kind words. The global response to the 2008 global financial crisis was to bailout the sinners, and pass the bill on to savers. The massive liquidity provided and increases in government debt loads the bailout entailed, saved the global economy. However, it also exacerbated inequality, because, as you highlight the inflation benefitted the holders of financial and physical assets. The coronavirus has laid bare that divergence and it is fanning the flames of left-wing populism.

“You have been calling for some ‘consolidation’ for equity markets for a number of weeks now (which I expected too), but this just hasn’t come to pass. Instead we have seen a relentless charge higher in virtually every market. You’ve stated that it’s liquidity driven which until recently at least, little participation from the professional money managers. Short term yields no longer can be relied upon as a risk indicator with the Fed deliberately compressing yields at the front end. To what extent, if any, has this recent episode viewed the way you look at markets through a charting lense. A despondent sceptic of this rally here, it seems the only winning strategy is just to ride the liquidity train, and rotate one’s positions towards riskier assets (travel, emerging etc) as the new safe havens (tech) reach maturity.

Thank you for this question which may be of interest to other subscribers. In a response to a similar email on May 12th. I led with this observation. “The best time to buy is following a significant pullback. The next best opportunity is following the first reaction from an important low. The next will be when a breakout to new highs occurs.

Jeremy Hunt, a Conservative lawmaker and former foreign minister, opened a new front on Thursday with an op-ed in the Times of London warning that Taiwan, the separately ruled island that China regards as part of its territory, “should worry us more.”

“In its willingness to abandon Hong Kong’s ‘one country, two systems’, China may also be signalling that it has given up hope of a peaceful reunification with Taiwan in favour of a military solution,” Hunt wrote. “Were that to be the case the implications for western democracies would be extraordinarily dangerous.”

One potential bonus for Johnson in escalating tensions with China lies with the U.S., where the Trump administration has been prodding allies globally to adopt a more skeptical stance to Beijing. That includes shunning technological advances such as the 5G capabilities offered by Huawei, which Washington says are a security risk.

The world is quickly realising that decisions need to be made on how close a relationship we want with China. Passing the security law in Hong Kong on the 29th anniversary of the squelching of Tiananmen Square democracy protest movement sends a none too subtle signal China is not about to back down from imposing its will on Hong Kong.  

Without much fanfare, a second global monetary easing was unleashed in May as the dollar fell without anyone appearing to notice. The fact that the greenback fell of its own volition suggests that the unprecedented risk aversion seen in March is really beginning to unwind. If so, then the US$1.2trn sitting in US money market funds since February will be itching to find a home or asset class that can hold its value (see Global Asset Allocation: Too Much Money Chasing Too Few Assets). Throughout 2019, US money markets only accumulated US$555bn.

As fears of the COVID-19 pandemic recede, the Federal Reserve is continuing to add dollars to the global monetary system at an unprecedented rate (see RHS chart). Just as importantly, US implied inflation expectations, as measured by the 10-year breakeven inflation rate, are rising after lurching into deflation. Coincidentally, this is occurring as the futures markets price in the probability of negative US rates. One of the most important turning points for the direction of equity markets is the shift into inflation (see US: Market Bottoms).

The upwelling of emotion that has poured out onto the streets of the USA, and elsewhere, is a symptom of a much larger issue. The reality is that globalisation has hollowed out the middle classes of most OECD countries. Simultaneously, the evolution of technology means we can do even more with less which is dehumanising the economy. That also concentrates the benefits of globalisation in the hands of the well-connected, wealthy and/or highly educated individuals, but also leaves millions of people behind with a degraded standard of living.

While the U.S. President Donald Trump’s speech Friday was heated in rhetoric, it lacked specifics around measures that would directly impact the city. He announced the U.S. would begin the process of stripping some of Hong Kong’s privileged trade status without detailing how quickly any changes would take effect and how many exemptions would apply.

“Trump’s comments gave no immediate measures on Hong Kong and leave room for negotiations with Beijing,” said Castor Pang, head of research at Core Pacific-Yamaichi International. “Trump’s comments have eased investors’ concern about the impact of potential sanctions on the Hong Kong economy.”

With significant domestic challenges the Trump administration has probably concluded that now is not the best time to further escalate tensions with China to the point where they are irredeemable. That has helped to support the Chinese markets.

There’s no sign yet that the stimulus package is anything more than a one-off response to an unprecedented crisis. Even so, investors are viewing it with a bullish lens. “It’s completely new territory for the European Union,” Michael Strobaek, global chief investment officer at Credit Suisse Group AG, said in a Bloomberg TV interview. “And that would make the European Union as an investment much more attractive for global investors.”

That would represent a shift for European markets, which have been unpopular compared with the U.S. For example, European equity funds suffered from outflows more than any other major region this year, losing about $31 billion, according to data from EPFR Global and Bank of America Corp.

Bond Buyers Toast EU Ambition in Moment They Were Waiting for Gary Kirk, a money manager at TwentyFour Asset Management in London, which oversees 17.8 billion pounds ($22 billion), is sticking with his U.S. bias. “It’s a bit early to get overly excited,” said Kirk, who’s waiting to see how the details are hammered out and whether it will pass muster with more austere governments in north Europe.

The Eurozone’s so-called sovereign wealth crisis arose because investments creditor nations’ pension funds made in private enterprises in the Eurozone’s periphery went bad. That was blamed on lax regulation and egregious behaviour with the result respective governments were forced to absorb private sector debts. That blew out sovereign debt ratios and caused a crisis. The response to the coronavirus could not be more different. Coupled with a willingness to loosen fiscal constraints, there is now also willingness to break the taboo of direct transfers to weaker nations. That is significant development even if it proves transitory in the near term.

Years of neglect had already hobbled Mexico’s health care system, leaving it dangerously short of doctors, nurses and equipment to fight a virus that has overwhelmed far richer nations.

Now, the pandemic is making matters much worse, sickening more than 11,000 Mexican health workers — one of the highest rates in the world — and depleting the already thin ranks in hospitals. Some hospitals have lost half their staff to illness and absenteeism. Others are running low on basic equipment, like heart monitors.

The shortages have had devastating consequences for patients, according to interviews with health workers across the country. Several doctors and nurses recounted dozens of preventable deaths in hospitals — the result of neglect or mistakes that never should have happened.

“We have had many of what we call ‘dumb deaths,’” said Pablo Villaseñor, a doctor at the General Hospital in Tijuana, the center of an outbreak. “It’s not the virus that is killing them. It’s the lack of proper care.”

The coronavirus has ripped through the perception of government effectiveness. That is particularly true of governments where lax standards of governance have been a systemic issue for decades. That makes dealing with a threat like the coronavirus all the more difficult because it is not something that can easily be overridden by false paperwork.

Dear Eoin, thank you for the excellent insights into market dynamics. There is one thing which you state from time to time - viz that you do not believe there will be a second wave of the virus in the Autumn. What leads you to believe that - we don't seem to know that much about the virus. So how can you know that there will not be a second wave in the Autumn? Although I definitely agree with you that authorities will do everything in their power to avoid more lock-downs. Many thanks, A

Thank you for this question which may also be of interest to other subscribers. Coincidence does not imply causation even though as humans we are hardwired to recognize patterns. In fact, we are so desperate to make sense of inscrutable situations that our minds will latch onto anything that provides a sense of security. However, the coronavirus is the not the 1917/18 influenza.

“We’ll have a better sense in a few days as we publish our numbers in early June, but it’s likely we will be in between the medium and severe scenarios,” Lagarde said when asked about the outlook in an online question-and-answer session.

The ECB is set to update its official projections for growth and inflation next, when the Governing Council also decides on policy. The central bank launched a 750-billion-euro emergency asset-purchase program in March, and economists are increasingly predicting it’ll be boosted at the June 4 session.

The asset-buying has helped rein in borrowing costs and made it easier for governments to fund stimulus.

And

“All countries around the world had to respond, and as a result of that had to increase their debt,” she said. In the face of the pandemic, “use of debt is not only recommended, it’s the way to go.”

Eurozone countries are being encouraged to break the fiscal strait jacket like never before, and now they have the perfect justification for spending. A decade of austerity has not resulted in debt ratio harmonisation as was hoped.

The coronavirus outbreak in Italy has struck overwhelmingly among the nation’s older population and those with preexisting medical conditions, according to the national health authority.

Almost 96% of the country’s virus fatalities had previous medical conditions, data from Italy’s ISS health institute show. The ISS, which publishes a range of studies on the outbreak including a detailed weekly report, confirms a trend seen since the beginning of the emergency, with the average age of Italians who’ve died from the virus at around 80.

“The latest numbers show that new cases and fatalities have a common profile: mostly elderly people with previous illnesses,” ISS chief Silvio Brusaferro said at a news conference Friday.

The coronavirus pandemic forces us to engage in some grizzly calculus to try and figure out how markets are likely to respond to unfolding events. The reality of aging is we develop chronic conditions, one of which is likely to eventually kill us. Whether that is high blood pressure, heart disease, cancer or diabetes, aging contributes to the ill effects of all these ailments.

One in five people who were working in February reported losing a job or being furloughed in March or the beginning of April, the data showed, and that pain was highly concentrated among low earners. Fully 39 percent of former workers living in a household earning $40,000 or less lost work, compared with 13 percent in those making more than $100,000, a Fed official said.

The U.S. economy began slowing in March as state and local governments instituted stay-at-home orders to tame the coronavirus’ rapid spread. That has most likely caused the steepest growth decline in the United States’ postwar history. Consumer spending has plummeted as stores and restaurants closed, and mass layoffs have become a feature of everyday life. Nearly three million people filed for unemployment benefits last week, pushing the two-month tally over 36 million.

And

While about 53 percent of those with jobs worked from home at the end of March, that was a highly educated group. More than 60 percent of workers with at least a bachelor’s degree worked completely from home, versus 20 percent of those with a high school degree or less.

Among those who had lost hours or jobs amid the pandemic, 48 percent were “finding it difficult to get by” or “just getting by,” according to the survey. Just 64 percent of those who had taken an employment hit felt that they would be able to pay their bills in April, compared with 85 percent of those without a work disruption.

Those challenges came as a large swath of Americans took pay cuts. About 23 percent of all adults, and 70 percent of those who had lost their jobs or their hours reduced, said their income was lower in March than in February.

“We’re All In This Together” has been the rallying cry of media outlets during lockdowns. However, that is no exactly true. Some people are doing fine working from home while others are in dire straits. For people who went into the lockdowns with little to now savings, they are likely to come with even less. That represents a challenge for societies everywhere because the issues of inequality that have been such a cause celebré for populists are going to be magnified going forward. 

Xi’s China is thus not the inevitable culmination of prior Chinese history. When he was elevated to head of the Party in 2012, many Chinese elites hoped that he would deal with mounting corruption—which he did, in a highly authoritarian fashion—but also lay the ground for a more liberal China that would permit more freedom to talk, think, interact, and even criticize their government. They were bitterly disappointed when he moved in the opposite direction, placing priority above all not on the welfare of the nation as a whole, but on the survival of the Chinese Communist Party. Why he did this was the result of his personal quirks and history; another leader may have gone in a very different direction. There was no historical inevitability to the present outcome.

The dangers of a regime that seeks totalitarian control were laid bare in the early days of the COVID-19 crisis, when speaking honestly about the unfolding epidemic, as Dr. Li Wenliang did, was severely punished. For all we know, the flow of misinformation is continuing today. It is wrong to hold up the CCP’s totalitarian approach in dealing with the virus as a model to be emulated by other countries. Nearby South Korea and Taiwan, both healthy liberal democracies, achieved even better results in the pandemic without the draconian methods used by China. One of the great dangers today is that the world looks to Xi’s totalitarian model, rather than a broader East Asian model that combines strong state capacity with technocratic competence, as the winning formula in facing future crises.

How then should the United States and other Western democracies deal with Xi’s China? The starting point is to recognize that we are dealing with an aspiring totalitarian country like the mid-20th century Soviet Union, and not with some kind of generic “authoritarian capitalist” regime. There is no true private sector in China. Although there are quasi-property rights and ambitious entrepreneurs there, the state can reach into and control any one of its supposedly “private sector” firms like Tencent or Alibaba at any point. Although the Trump administration’s campaign against Huawei has been clumsy and in many respects self-defeating, the goal is essentially correct: It would be crazy for any liberal democracy to allow this firm to build its basic information infrastructure, given the way it can be controlled by the Chinese state.

That word, resiliency, just popped up again. The one lesson we have learned from the coronavirus is how fragile the global supply chain. The simple fact is we are wholly dependent on an increasing antagonistic country for essential products. That is something that is going to change in the coming few years as the theatres of great power competition expand significantly. 

Bank Indonesia is using bond purchases to support the rupiah and help fund the government’s Covid-19 response. Too much quantitative easing, though, could backfire and fuel worries about the accommodation of unfettered government spending.

Critical for reassuring investors, in our view, is that the central bank stick to its pledge to cap bond purchases in the primary market at 25% and intervene only as a last resort. If these promises are broken, QE could weigh on the rupiah like a pair of cement shoes.

Emerging market central banks embarking on QE might already be skating on thinner ice than peers in developed markets. Bank Indonesia, for one, has a shorter track record for demonstrating independence from political interference.

The relative strength of the Rupiah is a standout relative in Asia and is mirrored by the stability of the Philippine Peso. Both countries have deployed quantitative easing to support their respective bond markets and short up their currencies.

Less than 24 hours after Angela Merkel and Emmanuel Macronlaid out a radical plan that would see the European Union collectively finance its response to a virus-induced recession, countries were already expressing disapproval, threatening to doom the nascent proposal.

The German and French leaders on Monday threw their weight behind a plan to allow the EU’s executive arm issue 500 billion euros ($548 billion) of bonds, with the proceeds going to help member states affected most by the pandemic. Controversially, recipients of the funds won’t need to pay the EU back and the securities would be financed collectively. That means richer countries, like Germany, would be bankrolling poorer ones.

Angela Merkel arrives to address a joint press conference with Emmanuel Macron, attending via video link, in Berlin, on May 18.The plan represents a remarkable about-face for Germany, and the proposal, which needs unanimous approval by all 27 members of the EU, faces stiff headwinds from the bloc’s more frugal members.

“We still have to convince other member states, four in particular: Austria, Denmark, Sweden and the Netherlands,” French Finance Minister Bruno Le Mairesaid on Tuesday. “And we mustn’t hide the fact that it will be difficult.”

Austrian Chancellor Sebastian Kurz immediately threw cold water on the Franco-German plan, saying that he had consulted with his Danish, Dutch and Swedish counterparts, and that they remained opposed to any money being given to fellow countries in the form of grants. Any funds would have to be repaid by the beneficiaries, he said.

Europe needs to come up with a clear vision for its existence or it will not survive. The founding rationale for the EEC was to put age-old animosities aside and to concentrate on trade. Everyone making money and delivering improving standards of living would help to foster peace. That was successful enough to encourage further cohesion.

I would like to ask Mr Treacy the following question:

Warren Buffet is currently holding relatively high proportion of Berkshire Hathaway holdings in cash. At the last shareholder meeting he cited the reason for not investing at this level as “The range of possibilities on the economic side are still extraordinarily wide,”

Would you consider his comments (and more importantly actions - high cash position) confirming the fact that overall market is still very far off lows that it will eventually reach? Or he holds high proportion of cash in large part due his business model - funding investments with funds generated through insurance (which potentially have high payouts coming due to downturn)? Or perhaps that he plays mainly in private equity hence the investment objectives are not very closely related to indices such as S&P 500 and Nasdaq?

I would very much appreciate your thoughts on this topic. 

Thank you for this question which others may also be asking. The facts are Buffett has sold positions in airlines and greatly reduced positions in banks like Goldman Sachs and JPMorgan, insurance companies like Travelers and energy stocks like Philips 66. He boosted his position in PNC Financial Services Group. 

Now, imagine that, rather than shoring up markets solely via guarantees, the Fed could push most short-term interest rates across the economy to near or below zero. Europe and Japan already have tiptoed into negative rate territory. Suppose central banks pushed back against today’s flight into government debt by going further, cutting short-term policy rates to, say -3% or lower…

,,,A number of important steps are required to make deep negative rates feasible and effective. The most important, which no central bank (including the ECB) has yet taken, is to preclude large-scale hoarding of cash by financial firms, pension funds, and insurance companies. Various combinations of regulation, a time-varying fee for large-scale re-deposits of cash at the central bank, and phasing out large-denomination banknotes should do the trick.

This is the economic equivalent of “use it, or lose it” when applied to money. The idea of forcing banks, pensions and insurance companies to invest is fine on paper but takes no account of the credit worthiness of the assets being purchased. The time to institute this kind of policy is after a major decline when bankruptcies have washed away high leverage and investors need an incentive to speculate. At today’s valuations, where asset prices have already been rising for 12 years, forcing speculation is a recipe for an asset bubble of epic proportions.

Eoin - appreciate your use of both the P&F and weekly chart against the moving average in your discussion of Microsoft.  When evaluating the consistency pattern of stocks (Microsoft and others), how do you "adjust" for circumstances such as COVID 19?  Clearly, Microsoft was negatively impacted like many other equities in the COVID induced meltdown, but has also rebounded more smartly than others.  Thanks, as always, for your insight and willingness to share same.

Thank you for this question which gets to the heart of a question I think most people are thinking at present. There are three important considerations when looking at market reaction. These are: where are we in the secular trend? Is liquidity expanding or contracting? What does the chart tell us about sentiment?

“The consensus out there seems to be: ‘Don’t worry, the Fed has your back,’” said Druckenmiller on Tuesday during a webcast held by The Economic Club of New York. “There’s only one problem with that: our analysis says it’s not true.”

While traders think there is “massive” liquidity and that the stimulus programs are big enough to solve the problems facing the U.S., the economic effects of the coronavirus are likely to be long lasting and will lead to a slew of bankruptcies, he said.

“I pray I’m wrong on this, but I just think that the V-out is a fantasy,” the legendary hedge fund manager said, referring to a V-shaped recovery.

Druckenmiller’s remarks are among the strongest comments yet by a Wall Street heavyweight on the bleak outlook facing the U.S. They also stand in contrast to the optimism that has pushed the S&P 500 Index to rally almost 30% since its March low even as the pandemic has brought the economy to a standstill, seized up credit markets and ended the longest bull market in history.

The damage spurred the Federal Reserve to unveil a raft of emergency lending programs and Congress to unleash almost $3 trillion in stimulus funds. But those programs aren’t likely to spur future economic growth, Druckenmiller said. “It was basically a combination of transfer payments to individuals, basically paying them more not to work than to work,” he said. “And in addition to that, it was a bunch of payments to zombie companies to keep them alive.”.

Have we just seen an impressive countertrend rally in an evolving medium-term bear market, or are we on the cusp of seeing an additional down-leg which could see new lows posted? It’s a multi-trillion Dollar question but another related one is how are investors responding to Jay Powell’s statement today.

The ECB is, of course, not subject to German law. As an EU institution it answers to the European Court of Justice. But this ruling is binding on the Bundesbank. I doubt that Jens Weidmann, its president, will want to fob off the German judges with a superficial response.

The ruling only allows the Germans to take part in the asset purchase programme for another three months unless they find a way to comply. Theoretically, the ECB could proceed without Germany. But I would strongly advise against it because that could precipitate a eurozone break-up.

Since its 1993 ruling upholding the legality of the Maastricht treaty, the German constitutional court has become more radical. But it avoided outright confrontation, until last week.

I find the most troubling aspect of this ruling is the assertion that the ECJ was also transgressing its competences by approving the bond buying and has gone ultra vires, in the Latin jargon of German constitutional lawyers.

This part of the ruling raises deeply troubling issues for the relationship between the EU and its member states. The German court accepts the principle that EU law overrides national law for areas they specifically recognise lie within the EU’s competence. But they reserve the right to decide whether the EU and the ECJ are operating inside or outside their legal remits. It sets a troubling precedent.

The smartest response to this ruling would be for the EU to address the problems of the eurozone head on: lack of convergence between north and south, debt sustainability and, most important right now, the issuance of mutualised debt to finance a recovery fund.

The emerging reality for EU member states is they gave up the essence of sovereignty when they accepted the idea of a European constitution. They can still go through the motions of national elections and get to issue their own debt but when it comes to big decisions about the fate of their economies, they now have little choice but to fall in line with the ECB.

Yelp shares are down as much as 15%, the most since late March, on a risk-off day for the market; JMP (market perform) in a note Wednesday highlights worries that the local search site will continue to suffer from social distancing and stay-at-home mandates affecting its advertising base.

This is another example of a company that has a reliance on brick and mortar businesses which is at severe risk of implosion. The experience of Tencent with outperformance in the Chinese gaming segment being counterbalanced by weakness in consumer finance is another example. Here is a segment from their quarterly report.

“If our employees are in a role and situation that enables them to work from home and they want to continue to do so forever, we will make that happen,” Twitter said in the post. “If not, our offices will be their warm and welcoming selves, with some additional precautions, when we feel it’s safe to return.”

The company has more than 35 offices worldwide, including in Paris, New York and Toronto.

“We’ve been very thoughtful in how we’ve approached this from the time we were one of the first companies to move to a work-from-home model,” Twitter said in a statement. “We’ll continue to be, and we’ll continue to put the safety of our people and communities first.”

I’ve been working from home for 13 years. In fact, as soon we got the internet at home when I was 19 years old I decided I was going to find a job I could do from anywhere. Here are my two cents. 

If you someone is a self-starter in the office that will not change when they work from home. If a worker is a lay about in the office or relies on virtue signalling to the higher ups in the office. that is a lot more difficult to maintain when working from home.

Most workers will also quickly realise it is a lot easier to do two things at once on a video conference than it is in a conventional meeting. That runs the risk of tuning out in the event someone starts waffling. Generally, people are more willing to tolerate long rambling meetings in person than when at home.

For workers it is important to realise that you are not working from home. You now live at work. It is inevitable you will put in longer hours when working from home because there is always the temptation to “just check something”. Having a dedicated space or office for work is essential in my view. You need to be able to close the door on the inside world.

If more companies adopt work from home policies, as seems likely, demand for larger dwelling seems inevitable. My home has been fine for our needs for the last five years but now everyone is working from home. Just about every room in the house has been repurposed as an office, schoolroom, gym or studio. We are actively looking for a bigger home. That’s also something that will likely spur a migration from inner city smaller dwellings to larger suburban ones. That also will have a knock-on negative effect for central city office values.

Something everyone has had to deal with in lockdowns is we see a lot more of our children and spouses. That’s a good thing, the most precious thing in the world to me is the close relationship I have with my daughters. I have been priveleged to be with them for almost every day of their lives. However, many relationships survive on spouses only seeing each other for a few waking hours a day and on weekends. Prolonged interaction definitely raises the risk of partners getting on each other’s nerves and lockdowns certainly throw focus onto who does what around the house. I can say from experience that talking about these kinds of challenges is time well spent. Simultaneously accepting that one’s work life and home life are now the same is another major transition because both will be significantly affected.

Personally, I can’t see myself ever working in an office again. I am much more productive at home and I hate wasting time in meetings. The lockdowns will allow everyone to find out which they are best suited to and also whether their family life can support their preference.

With respect to the second note, and knowing your own preference to stay with the "winners" and cut the "losers", at what point do you look to valuations and question the sky-high prices people are willing to pay for these "winners"? I personally have a tough time chasing stocks that have already run, but for now at least, they just keep going, proving highly frustrating!

Thank you for this question which others may also have an interest in. The best time to buy is following a significant pullback. The next best opportunity is following the first reaction from an important low. The next will be when a breakout to new highs occur.

A link to the full report is posted in the Subscriber's Area. 

Gold’s relative strength over the last year, coupled with a tight labour market were already starting to raise interest in inflation hedges a year ago. Then came the truce in the trade war, the halting of the Fed’s rate hikes, the repo liquidity crisis and finally the coronavirus recession. That has once again raised the spectre of deflation.

“We can’t let our guards down, but the numbers of new infection cases are falling, allowing people to formulate some sort of outlook, which is being welcomed by the market,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. “The market is moving based on a scenario that the June quarter will be a bottom for the economy, followed by a recovery from the September quarter.”

Optimism that economic stimulus measures will help cushion the blow from the virus also buoyed sentiment. The government and the ruling party aim to finalize plans for a second supplementary budget for fiscal 2020 during the current Diet session, the Yomiuri reported.

“The 2 trillion yen being touted is sizable and the government is taking action faster than expected,” said Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Institute.

 

The easing of lockdowns will allow the economies of the world to get off their knees and hopefully will allow some rationality to come back into public discourse. That’s not a guarantee by any means considering the emotionality in how coverage of the coronavirus is being reported. The equivalent of $200 billion in government supports is not all that large relative to what has been provided by other countries but it is supportive for asset prices.

The rate of labor force dislocation, albeit distressing, appears to be moderating. The weekly 3 million jobless claims number is the lowest in the last seven weeks and less than half the worst level.

The report highlights the urgent and important policy priorities of dealing both with the implications of such a terrible shock to jobs and with ensuring that short-term problems don’t become long-term ones that are much harder to solve.

With markets focusing on the improvement in the “second derivative,” that is a reduction in the rate of labor force dislocation, U.S. stocks rose. This widens an already considerable decoupling from the real economy and will fuel the debates on Wall Street versus Main Street, companies versus people and the well-off versus the marginalized. 

Didi’s CEO was quoted today stating the company has recovered to about 70% of the number of rides taken before the Chinese lockdown began. That’s an impressive rebound, particularly as we look at what the trajectory of recovery will be for countries only beginning to ease lockdowns today.

Then came World War I when warring countries ran enormous deficits that were funded by central banks’ printing and lending of money.  During the war years gold was international money as international credit was lacking because trust was lacking.  Then the war ended, and a new monetary order was created with gold and the winning countries’ currencies, which were tied to it, at the center of that new monetary order. 

Still, in 1919-22 the printing of money and devaluations of several European currencies were required as an extension of the debt crises of those most indebted, especially those that lost World War I.  As shown this led to the total extinction of the German mark and German mark debt in the 1920-23 period and big devaluations in other countries’ currencies including the winners of the war that also had debts that had to be devalued to create a new start.

With the debt, domestic political, and international geopolitical restructurings done, the 1920s was a boom period, which became a bubble that burst in 1929.

In 1930-45, 1) when the debt bubble burst that required central banks to print money and devalue it, and then 2) when the war debts had to increase to fund the war that required more printing of money and more devaluations. 

At the end of the war, in 1944-45, the new monetary system that linked the dollar to gold and other currencies to the dollar was created, and the currencies and debts of Germany, Japan, Italy, and China (and a number of other countries) were quickly and totally destroyed while those of most winners of the war were slowly but still substantially depreciated.  That monetary system stayed in place until the late 1960s. 

The purchasing power of fiat currencies is rapidly being debased. That is helping to support the nominal prices of stocks, property, gold and bonds. The $4 trillion surge in the total assets of central banks over the last couple of months has supported prices for just about all asset classes. The best performing assets have been those that have historically benefitted from deploying free abundant capital to fuel growth since 2009.

Almost every major crisis and recession has resulted in lasting implications. The 1973 oil crisis ended the Bretton Woods system and brought about the regime of floating currencies and exchange rate volatility. September 11 permanently changed the way we travel and raised the level of security in public settings and airports. Unprecedented monetary easing after the 2008 Great Financial Crisis further propelled the unlikely continuation of the 30-year rally in government bonds and facilitated the resurgence of tech stocks and credit markets. The Global Covid-19 Crisis will also leave its permanent imprints on consumers, markets and economies. Although we are only a few months into the crisis, it is key to look forward to the next economic cycle and ask: what are the structural changes created by the Covid-19 outbreak and who will be the winners and losers?

For companies, the focus will shift to building resilience
As the virus outbreak results in demand and supply shocks unprecedented in terms of speed, depth and breadth, many companies face tremendous pressure, and this will have a lasting impact on risk perception.  Companies will turn more cautious and focus on building resilience in terms of their business strategies and balance sheets, and shareholders will expect management teams to take steps to ensure that the business is strong enough to take the next big shock.

A link to the full report is posted in the Subscriber's Area.

Consumers are wondering about what the trajectory for their earnings are going to be. Nobody knows what the outlook for their businesses is likely to be in the aftermath of the lockdowns or how long recovery is going to take. There is a temptation to think corporations are going to be as cautious as individuals.

“We’ve come through the peak, or rather we have come under what could have been a vast peak, as though we have been going through some huge alpine tunnel,” Johnson said. “And we can now see sunlight and the pasture ahead of us, and so it is vital that we do not now lose control and run slap into a second and even bigger mountain.”

And

“As part of coming out of the lockdown, I do think face coverings will be useful both for epidemiological reasons and giving people confidence it’s safe to go back to work,” Johnson said. “We will be saying a lot more next week and in the coming weeks about how and when we propose to unlock the various parts of the U.K. economy.”

The government has announced more than 60 billion pounds ($75 billion) of direct aid to companies and individuals to help them weather the pandemic, and offered 330 billion pounds of loan guarantees. The Office for Budget Responsibility on Thursday said the government’s virus response has cost almost 105 billion pounds in the current fiscal year.

Asked whether the government would need a new period of austerity, including cuts to public services in order to restore the country’s finances, Johnson rejected the approach.

“I think the economy will bounce back strongly, I think that this government will want to encourage that bounce back in all kinds of ways,” he said. He added that he’d “never particularly liked” the term “austerity,” saying “it will certainly not be part of our approach.”

Very few mainstream parties have been able to evolve enough to appeal to the growing populist fringes of political discourse. The Conservatives in the UK and Republican’s in the USA have been able to co-opt the revolutionary agenda by embracing fiscal easing.

On their own, Kelleher’s purchases don’t amount to much. But combined with similar decisions by tiny investors around the country, the buying represents a formidable force that has helped the market claw back more than half the ground lost in its fastest bear-market drop. A trio of giant retail brokerages, E*Trade Financial Corp., TD Ameritrade Holding Corp., and Charles Schwab Corp., each saw record sign-ups in the three months ending in March, with much of it coming at the depths of the swoon.

“I’m a complete noob when it comes to stocks,” the mother of high school senior twin boys said while sheltering at home. “It’s not thousands and thousands of dollars that I invested, but it’s a start. We’ll see what happens. I hate to say it, but it’s like gambling, isn’t it?”

There may be something to that. “When the casinos/sport betting closed down, some of that action went to stock markets,” speculated Nicholas Colas, cofounder of DataTrek Research, in a note Wednesday. “Google Trends data supports that idea.”

When I started receiving stock tips from the twentysomething working at UPS a few weeks ago, my contrarian heckles rose.

The trend of zero commissions, promise of massive quick profits and the confidence built up from a decade of watching buying the dip be successful has emboldened legions of new investors into the market.

A link to the full report is posted in the Subscriber's Area.

It is probably true that Australia is about to have a technical recession. The fires, lockdowns and collapse in Chinese demand are all contributing factors. However, it is also worth remembering that the medium-term response to the coronavirus is likely to be an epic infrastructure development spending spree which will be global in nature. For commodity exporters like Australia that is likely to be good news.

A link to the full report is posted in the Subscriber's Area.

The US consumer is holding up for good reason. With an additional $600 a week in unemployment benefits, on top of the $1200 sent to 90% of the population, many people are making more money than if they were working.

Long time since I have sent an email to you, however I have kept my subscription up (joined in 2006) and always look forward to your daily audio/video etc.

In your last audio on 24 April I believe I heard you describe Australia’s Covid-19 rate as rising. I have to say that Australia is rightly proud of its success in fighting this virus and you can see from the following chart, from the Australian Financial Review, what a great job the Australian and state governments have done. I understand we have the second highest testing rate in the world and, so far, we have had only 93 deaths, compared with 20,319 deaths in the UK and 54,161 in USA. Boris and Donald should hang their heads in shame!

Just wanted to set the record straight!

Keep well!

Thank you for this graphic which, as you say, highlights Australia’s success in curtailing infection growth before the “knee” of the exponential curve was reached. Thanks also for setting the record straight.

There has been significant dispersion between early actors and late reactors in their success rates in containing the viral spread. That was the primary reason I was so critical of the UK’s approaching more than a month ago. Since then almost every country has introduced lockdowns which has significantly reduced pressure on healthcare sectors.

Australia has announced they are increasing petroleum reserve stocks. Small steps in the global oil market. We have lots of gas not much Oil. Government argument oil prices are low. Think I can see political / defense US / Australian ambitions in this move.

The Governor of the RBA made a speech a few months back the RBA will support all local banks. That investors should feel confident about the security of their bank deposits and securities. Can I trust these comments? I almost fell out of my chair when Glenn Stevens made this statement

Thank you for this email which may be of interest to other subscribers. It makes sense that Australia should build up an oil reserve when prices are cheap. It certainly beats doing it when prices are high and a significant reserve is a geopolitical imperative during a time when stress between the great powers of our day is only likely to increase.

Although it's true that millions of hospitality workers now are out of work and available for immediate employment, the generous unemployment benefits passed by Congress in the $2 trillion rescue bill may make some of them less interested in going back to their old jobs. Ernie Tedeschi of Evercore ISI notes that between state insurance and the federal supplements, the average weekly unemployment benefit for workers in states such as New York, California, Washington and Massachusetts will be more than $1,000. That's the equivalent of $25 an hour for a 40-hour work week. For restaurant workers who earn significant tips, returning to work may offer enough economic incentive to be worth it. For lower-paid dishwashers and line cooks, unemployment might be a better deal -- at least through the end of July, when the benefits are set to expire. That means restaurants may have to pay much higher wages than in the pre-virus market level to staff up.

Combining these two dynamics -- restaurants aren't going to be able to serve as many patrons and they will have higher labor costs -- and it's likely that many restaurants won't survive. The most obvious way for the survivors to make up for this is to charge more for the same menu offerings, perhaps much more. The good news for the restaurants that do survive is that between fewer seats available at each restaurant, and fewer restaurants competing for customers, eating out might become a scarce, coveted experience, particularly after weeks or months of much of the population sheltering in place.

Not everyone is a good cook and few are ever likely to be. If eating out and receiving full service becomes inordinately expensive then the law of supply and demand means dark kitchens will proliferate. Uber was helping to pioneer this trend ahead of the virus outbreak and the sector is likely to pick up a lot of the slack from fast casual dining.

“We haven’t actually seen the stress emerge,” she said on a call with analysts. “What we took in the first quarter was our best estimate of future losses.”

Banks also have to determine how many lending commitments will turn into funded loans as companies tap previously unused revolving credit facilities. Wells Fargo CEO Charlie Scharf said commercial clients had tapped $80 billion of loan commitments just in March. JPMorgan said customers had drawn more than $50 billion of existing revolvers and were approved for $25 billion in new credit in March.

U.S. banks have maintained that they are much better positioned for this crisis than in 2008. JPMorgan’s key capital ratio was 11.5%, within its medium-term target range. Wells Fargo’s was 10.7%, above its internal target. Still, shares of both banks slipped in New York trading by 10:30 a.m. in New York as the broader market rose, with optimism the pandemic is slowing driving up the S&P 500 more than 2%.

“We like to be conservative in reserving,” Dimon said. “Plan for the worst so you can handle it.”

The virus did not impact economic activity until about the middle of February for most countries, so 1st quarter earnings include 3 weeks at most of lockdown conditions for US companies. Ahead of the lockdowns economic activity was still expanding, after the lockdowns it will take time to recover but we won’t get 2nd quarter earnings until July. However, it is reasonable to conclude banks are going to be where some of the heaviest impacts from constraining consumer ability to service debt are going to hit.

A link to the full report is posted in the Subscriber's Area. 

Let’s set aside for the moment questions of timing and think about what changes we can expect to be durable from the virus-induced recession.

The first thing that springs to mind is a loss of income which will take a while to recover. For some that will be quite soon, for others who need to find a new job it will take longer. As we go from full employment in many countries to something less that necessarily represents lower growth overall and by extension lower corporate earnings.

Many thanks for your continuing high-quality service, exemplified by the comprehensive Income ITs spreadsheet you produced yesterday. It will be invaluable for Private Investors such as myself. On a separate topic, do you have any views on the banks in the light of the suspension of dividends? In particular, I see that HSBC shares are approaching chart support from 1997-98 and 2016.

Thank you for this question. There is no denying that bank shares have declined significantly so it is logical to question whether they are close to a low. With dividends being eliminated, a rise in defaults inevitable, a moratorium on buybacks, and tight margins from low interest rates the big question is whether the bad news has been priced in.

The coronavirus crisis has transformed the fiscal landscape at a stroke. Britain was on course for a budget deficit of 55 billion pounds in the fiscal year starting April. Now, according to the Institute for Fiscal Studies, borrowing could be as much as 200 billion pounds as an economy on course to shrink at least 5% this year hammers tax revenue and drives up spending on welfare.

That could leave the deficit just below the 10% reached in the aftermath of the financial crisis and push up already elevated debt levels.

The chancellor announced his first economic package to deal with the outbreak when delivering the budget on March 11, unveiling 12 billion pounds of measures to mitigate the effects of the outbreak on the economy.

As evidence mounted that the crisis was snowballing, he followed up with a 350-billion pound stimulus package comprising government-backed loans as well as 20 billion pounds of grants and tax cuts for struggling companies.

Then, last Friday, he announced 7 billion pounds of extra welfare spending and said the government would pay 80% of salaried employees’ wages up to a maximum of 2,500 pounds a month -- a plan Bloomberg Economics estimates will cost 17.5 billion pounds.

Announcing further details of the job-retention program today, the Treasury said the government will also cover employers for the National Insurance and minimum auto-enrolment pension contributions of furloughed workers, saving firms 300 pounds a month per employee on average.

The trouble with the coronavirus is not so much in the mortality rate but in the speed with which it is spreading. Overloading hospitals with scarce resources and scary reports of tens of thousands dying has put a great deal of pressure on the economy. However, it is also worth considering that despite the scale of the challenge faced in Italy, they have seen the peak in the infection growth rate. That suggests the problem is unlikely to get worse.

The SARS epidemic did not become a pandemic. Its effects were limited to a relatively small number of countries and, even then, the majority of infections occurred within the hospital setting. The trough in markets evolved when the growth rate in new infections moderated which eventually contributed to the peak in new infections. COVID-19 is global and has infected many more people that SARS ever did and particularly because the large numbers of serious cases have overwhelmed healthcare systems.

Liquidity is vanishing for U.S. equity futures. Traders of S&P 500 e-minis are now only offering to buy or sell a few contracts at a time -- often numbering in the single digits -- compared with an average of more than 1,000 just a month ago, data from Deutsche Bank Asset Allocation show.

Drastically thin markets are alarming because they can fuel outsize price swings. With futures markets being halted almost every day in the wake of wild swings, the lack of liquidity is so severe now that it’s fueling concern even among the pros who’ve lived through the worst market crashes in history.

“There’s no liquidity in any market,” said Rick Bensignor, the founder of Bensignor Group and a former strategist for Morgan Stanley, who has traded the futures market for 40 years. “When you’re talking about restructuring a portfolio too, you have to think about the potential slippage that’s involved to get anything done.”

Of course it’s no surprise that markets would thin out when investors, strategists, and economists alike are unsure of the ultimate impact of the coronavirus pandemic. And it’s not clear if the low liquidity may be feeding upon itself -- i.e., are traders staying away because liquidity is so horrible, or is it just a natural side effect caused by all the uncertainty?

“‘Thinly traded’ now an understatement considering how much liquidity in futures market has collapsed,” tweeted Liz Ann Sonders, the chief investment strategist at Charles Schwab. U.S. contracts hit exchange-mandated halts for the ninth time in 10 days overnight Sunday, before an announcement of unlimited quantitative easing from the Federal Reserve ignited gains that lasted just 20 minutes before turning negative again.

Strategists at JPMorgan Chase & Co. have estimated liquidity in U.S. futures markets is seven times worse than the poorest levels during the financial crisis. According to Bensignor, typically when it comes to size, anywhere from 200 to 500 blocks trade on both the bid and offer side of a wager at every tick. Watching his screen Monday morning, there were fewer than 10.

“You are going to have to deal as you restructure portfolios,” he said in an interview on Bloomberg Television. “You’re also going to have to realize that doing so is going to cost a lot of money compared to what you had to do in the past, where you could basically just do it for no cost because of the liquidity.”

One of the reasons stock markets have sold off so aggressively is because the spike in volatility initiated an epic deleveraging in the macro hedge fund sector. The knock-on effect of that deleveraging was to inhibit the ability of high frequency traders to make markets. That exposed, again, the limitations of the Volcker Rule.

A link to the full report is posted in the Subscriber's Area. 

The Dow/Gold ratio has clearly broken its decade-long uptrend. In the last month it has broken below the 1000-day MA. That’s a monumental event because it has never happened in a secular bull market before. This has been achieved by the gold price going nowhere while the stock market has collapsed by approximately 30%

The Coronavirus crisis, the most serious event since the Global Financial Crisis (“GFC”) of 2008/2009, has set in motion a series of governmental policies whose unfortunate effect is to choke both demand and supply in the global economy.  These policies - prudential measures taken by governments united in their desire to appear to be “doing something”- are likely to be worse, economically speaking, than the disease itself.  Relief comes only with the passing of time or the finding of an anti-viral remedy, the latter a distant prospect at this stage.

Earnings news, monetary news, fiscal news and pandemic news are all following the disheartening course that we feared.  An emergency Fed meeting last Sunday, slashing rates to near zero, failed to reassure.  The next day, Wall Street produced the second of 2 record points drops in a week, falling -13%.  Equity markets have fallen by an average of about -30% from their January highs.

Equity markets are now oversold and distorted by panic.  The market finds it hard, if not impossible, to “price” risk when an end to the crisis is undefined and earnings unknown. And what discount rate should one use in a global panic when rates are near zero?  Many stocks trade under “fair value” on “normalized” earnings.  But the risks being taken by governments are such that there may be worse to come: bankruptcies in directly affected sectors like leisure, hospitality, airlines, hotels and “bricks and mortar” retail.  There may even be nationalizations in troubled sectors.  On the other hand, other sectors, also hit hard by the same waves of panic selling, may emerge as new long-term leaders in a changing world where personal safety, health fears, depersonalizing technology and e-commerce may enjoy further and more widespread adoption.

Millions of people just lost their jobs in the retail and restaurants sector. Weekly jobless figures are reported with a two-week lag, so today’s 281,000 increase is reflective of the week ending March 7th. Most cities in lock down made the decision over last weekend so next week’s figure will be higher but the release on April 2nd is likely to take jobless figures to new highs. The only limiting factor is the ability of people to sign on for benefits given the system’s capacity restraints.

It strikes them as preposterous that you could achieve anything close to the threshold level of immunity - ultimately 60pc - over the six month window of time available to us before the second (more dangerous?) wave hits in the autumn.

The explosive rise in cases - with 13pc needing intensive care in the Italian region of Lombardy - would smash the system.

As a sample, I offer extracts from an email received on Sunday from consultant cardiologist at a top British hospital, with high-powered credentials, who is working in the front line.

His Whatsapp group of 10 fellow doctors has a Wuhan sense of frustration about it. Things are going horribly wrong. Covid-19 is taking off among NHS staff.

“One of them seems to probably have Covid, as has multiple symptoms. Two of them have personally treated a patient with Covid before the patient was diagnosed, eg with no protective measures in place. It is clear that there are certainly multiple cases amongst staff and patients in every NHS hospital today, and they are actively spreading, with nothing stopping them.

"One of the 10 is in his 50s, and has somewhat restricted lung capacity because of an orthopaedic problem – he spent this weekend making a will and putting his affairs in order. He had realised that with the current NHS leadership, there was basically nothing he could do to avoid catching it in coming days. Crunching the statistics, he realised that several consultants in the hospital will probably die.

“We have received no advice at all to take any measures to reduce spread in the hospital. Where the South Koreans were attending hospital in full hazmat suits, I will be arriving in my suit and
tie tomorrow with nothing to prevent me catching it, and working in an operating theatre that a Covid patient was in on Friday, nobody aware that he had it, and the staff members I will be working with, will all have been in contact with that patient.

“Panic early” or “Keep Calm and Carry On”? That is the decision provided to the UK government last week and they went with the latter, which was the wrong move. They are now, belatedly organising a change of heart. Social distancing is now top priority and not before time. What we now need to see is a clear follow through on shutting down contact between infected people and a massive ramp up of testing.

Lagarde told European Union leaders on a conference call late on Tuesday that without coordinated action Europe “will see a scenario that will remind many of us of the 2008 Great Financial Crisis,” according to a person familiar with her comments. With the right response, the shock will likely prove
temporary, she added.

Lagarde said her officials are looking at all their tools for Thursday’s policy decision, particularly measures to provide “super-cheap” funding and ensure liquidity and credit don’t dry up, said the person, who declined to be identified because the call was private.

Still, she stressed that central-bank measures can only work if governments throw their weight behind them too, with steps to ensure banks keep lending to businesses in affected areas, said the person. An ECB spokesman declined to comment.

Lagarde spoke hours before the Bank of England became the latest central bank to take emergency action. It announced a 50 basis point interest-rate cut early Wednesday, combined with measures to help keep credit flowing, and said it still has more policy space to act if needed.

The ECB has been cautioning Eurozone governments for much of the last decade that fiscal stimulus has to be part of the solution to the region’s debt/growth challenges. That exhortation has fallen on deaf ears as the region’s creditors imposed fiscal conservativism on the most profligate debtors.

Chancellor of the Exchequer Rishi Sunak announced 30 billion pounds ($34 billion) of fiscal stimulus and pledged to spend 600 billion pounds by 2025 on a massive infrastructure program, alongside measures to help businesses and the National Health Service weather the disruption from the disease.

The European Central Bank is expected to join the easing this week after President Christine Lagarde warned leaders on Tuesday that the crisis has echoes of 2008.

“The bazookas are loaded and the BOE just fired their first salvo,” said Luke Hickmore, investment director at Aberdeen Standard Investments. “It seems unfeasible that the ECB does not also find ways of supporting the banking system. Europe needs to get its act together -- and act together.”

The predictable 50 basis cut to the Bank of England’s interest rates is the first volley in a range of supports. The announcement of massive infrastructure spending, fiscal deficits but less bond issuance than originally anticipated is all designed at making the best of a bad situation. That final point where less bonds were issued than expected was probably aimed at countering the claim Modern Monetary Theory is being deployed.

Boeing obtained the loan from a group of banks last month to help it deal with its cash burn while it prepares to return its 737 Max plane to the skies. It initially tapped about $7.5 billion of the debt, and is now expected to draw the rest, said the people, asking not to be named discussing private information. Boeing plans to draw the remainder of the loan as a precaution due to market turmoil, one of the people said.

Companies affected by the virus are increasingly turning to banks for short-term financing to provide a safety net. United Airlines Holdings Inc. raised $2 billion in new liquidity with a secured term loan, while Norwegian Cruise Line Holdings Ltd. recently signed a new $675 million revolver. Should credit conditions worsen, more firms may start to draw down their credit lines, market watchers say. Boeing’s loan came about before Covid-19 spiraled into a global crisis and was expected to be fully drawn eventually.

“They want to have cash on the balance sheet,” said Bloomberg Intelligence’s Matthew Geudtner. The Max grounding, the company’s joint venture with Embraer SA and looming debt maturities will also weigh on Boeing’s cash hoard, he said.

The easiest way to determine where the biggest risks reside in this market is to use this metric: Whatever people were worried about in 2019, the coronavirus makes things worse.

“It’s literally as if the market makers didn’t show up for work,” Curnutt said in a Bloomberg Television interview, referring to options and junk-bond exchange-traded funds such as the iShares iBoxx High-Yield Corporate Bond ETF, known by its ticker, HYG. “The posted bid-offers on the screens illustrated that there was no one in the market posting for something that is one of the more liquid -- usually -- hedges to use.”

Banks have been constrained by rules created after the 2008 financial crisis. That has pushed some market-making activity to other types of financial institutions including Citadel Securities and Virtu Financial Inc., which was one of a handful of firms that rose in trading Monday as the S&P 500 slipped
7.6%.

“The traditional liquidity provider in times of stress -- the bank -- really isn’t there,” John McClain, portfolio manager at Diamond Hill Capital Management, said in an interview. “Banks themselves have a lot more regulation around what they can be doing.”

Still, for all that, trading was relatively orderly in HYG and other debt ETFs, especially compared with the underlying bonds. The liquidity concerns still didn’t mean there was a “full-blown breakdown in markets,” Curnutt said.

Philipp Hildebrand, vice chairman of BlackRock Inc., agreed. “I was there in 2008, and the difference is the financial system essentially seized up, which is not what happened, at least not so far,” he said. “It’s an important signal that the ETF market functions.”
 

ETFs have been a wonderful innovation which have opened up asset classes which were never previously available to retail investors. They have also allowed the cost of investing to come down and reduced performance deviation from the broad market averages. The challenge is ETFs can often be more liquid than their underlying indices and instruments. That represents a significant challenge in times of stress and particularly during bouts of contagion selling.

The downbeat assessments come amid a meltdown in financial markets not seen since the height of the global financial crisis in 2008. It marks a grim start to the week for European Central Bank policy makers, who meet in Frankfurt and may be forced to lower interest rates and step up bond purchases. The U.S. Federal Reserve has already acted, with an unexpected easing last week.

“I want a strong, massive, coordinated response,” Le Maire said on France Inter Radio as the central bank slashed the outlook for the country’s economic expansion this quarter to 0.1% from 0.3%.

“We should work on a stimulus plan with fiscal and budgetary measures, and tax cuts, so that when the epidemic crisis is over we can relaunch the economic machine,” he said. The virus is another blow to the euro area’s second-largest economy, after disruption from strikes caused output to shrink at the end of 2019.

“This slowdown is potentially severe but temporary,” Bank of France Governor Francois Villeroy de Galhau said in a rare statement accompanying the report.

The markets tend to test new central bankers and Christine Lagarde’s honeymoon period is definitely over. The ECB will be expected to lay out what kind of assistance it is willing to provide. While room for interest rate cuts is limited because they are already so low, there is plenty they have do to ensure ample liquidity in the system.

This article highlights widespread testing as one of the primary reasons South Korea has been able to make headway against the outbreak. Here is a section:

South Korea has borne its virus outbreak relatively well despite the scale of the spread. The country has been testing people for the virus at the fastest pace in the world, which appears to have allowed early detection of cases and keep its mortality rate lower than average. Infections have also been largely contained to Daegu and surrounding areas, although the government has not imposed restrictions over people’s movements like in China and Italy.

“New cases of coronavirus have been continuously slowing down, to 248 yesterday, after reaching a peak of 916 on Feb. 28. We should continue this trend,” President Moon Jae-in said in a meeting with his senior secretaries Monday. “Still, we need to stay vigilant as sporadic small group infections in Daegu, North Gyeongsang and other areas continue.”
 

The growth rate of South Korea’s cases appears to have peaked which suggests the measures put in place so far have helped contain the spread. The Kospi Index pulled back sharply today to test its recent lows.

A link to the full report is posted in the Subscriber's Area. 

The Credit Suisse team do an excellent job of highlighting where the risks are and provide a handy list of instruments to monitor to get an idea of how liquidity flows are functioning.

The repo market illiquidity in September was a signal to everyone that the tightening program had gone too far. There was nowhere near enough available capital in the system to allow the global money market to function. The Fed stepped in with a large swift injection of liquidity; inflating its balance sheet by $400 billion in four months.

Unfortunately, because of Sequoia’s presence in many regions around the world, we are gaining first-hand knowledge of coronavirus’ effects on global business. As with all crises, there are some businesses that stand to benefit. However, many companies in frontline countries are facing challenges as a result of the virus outbreak, including:

Drop in business activity. Some companies have seen their growth rates drop sharply between December and February. Several companies that were on track are now at risk of missing their Q1–2020 plans as the effects of the virus ripple wider.

Supply chain disruptions. The unprecedented lockdown in China is directly impacting global supply chains. Hardware, direct-to-consumer, and retailing companies may need to find alternative suppliers. Pure software companies are less exposed to supply chain disruptions, but remain at risk due to cascading economic effects.

Curtailment of travel and canceled meetings. Many companies have banned all “non-essential” travel and some have banned all international travel. While travel companies are directly impacted, all companies that depend on in-person meetings to conduct sales, business development, or partnership discussions are being affected.

It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing. Some of you may experience softening demand; some of you may face supply challenges. While the Fed and other central banks can cut interest rates, monetary policy may prove a blunt tool in alleviating the economic ramifications of a global health crisis.

The knock-on effect to consumer confidence from the coronavirus and most particularly its influence on social interaction is a wild card for the global economy. It should help to focus minds on how best to deal with the situation but the global response, so far, has been haphazard. 

I hope you and the family are enjoying a normal coronavirus free lifestyle?

I was looking at some 2 year charts recently, and I know you are not always   fan, but I noticed quite large volumes spikes on some individual co charts, but especially on the DJ and the NASDAQ. Near the end of 2018 and again last week major volume spikes. My experience over the last 50 years has taught me though it's not 100 0/0 accurate, volume spikes can be a very useful tool for gauging tops and bottoms, more so for lows. I just thought subscribers might find this food for thought!!

Thank you for your concern. I’ve got some travel coming up over the weekend which I am not especially thrilled about but it falls into the necessary category. I intend to take a number of infection prevention measures while travelling. Other than that, it has been business as usual since we have stocked up on just about everything.

Over the last five years, Baric, working closely with Vanderbilt University infectious-disease specialist Mark Denison, tested almost 200,000 drugs against SARS, MERS and other bat coronavirus strains.  He found at least two dozen that appeared to hinder the virus.

Among the most promising was Gilead’s remdesivir, a drug that fared poorly when used against a recent Ebola outbreak in Africa. In the lab, it worked against numerous coronavirus strains, including SARS and other bat coronaviruses that are similar to the new strain. Every coronavirus it was tested on, “it had high potency and efficacy,” Denison says.

That work was fortuitous. In early January, Baric got an urgent call from an infectious-disease colleague to send his unpublished data on remdesivir to colleagues in China who were dealing with a then-mysterious outbreak. Baric says he “was shocked” to see how fast the coronavirus was spreading.

Since then, work at his lab has been virtually nonstop. Each scientist puts in from one to six hours inside two different clean rooms equipped to handle the virus. The lab’s workday begins at 6 a.m. and often goes until 11 p.m. Individual sessions are short for safety and practical reasons — researchers aren’t permitted to eat, drink or visit the bathroom once inside the lab. Everyone has to pass an FBI background check and undergo months of safety training.

The WHO has stated remdesivir is their best bet for a suitable treatment for coronaviruses. It’s another question whether Gilead will make money form that evolving market since it will be under extreme pressure to provide an affordable range of treatments ahead of a vaccine being developed over the next year. 

Eighty-four percent of Chinese cases, 97% of critical cases and more than 96% of deaths are within the province, which was placed under mass quarantine by the government on Jan. 23 to slow the virus’ spread to the rest of the country. The ongoing lockdown of the region of 60 million people has led to widespread suffering and scores of preventable deaths as the local medical system collapsed under the strain.

The lockdown also meant that China’s fatalities from the pathogen have been confined almost entirely to the province. As of Wednesday, 4.3% of people who were confirmed to have the virus in Hubei have died, while that rate is 0.8% in China outside Hubei.

Over the past three weeks, China’s number of recovered patients has surged both in Hubei and the rest of the country, with the government sending in thousands of health-care workers to help in Hubei. Almost 65% of those who’ve been officially diagnosed with the disease are now better and out of hospital, according to the data from the National Health Commission on Thursday.

Loosening restrictions comes with a significant number of risks because the viral infection rate has capacity to ramp up again as people get back to work and particularly in the cramped conditions of factories. The bigger question is whether China is willing to tolerate community spread on the assumption most workers will recover in a relatively short period of time. I believe that is the most likely scenario considering the continued risk from domestic or imported infections.

A link to the full memo is posted in the Subscriber's Area.

There is no doubting we saw evidence of contagion selling last week with everything selling off as quantitative strategies headed for the exits en masse and ditched ETF positions in the process. The growth of passive investing and the ease with which positions can be exited is contributing factor in the speed with which declines take place in today’s market.

In politics, you have to win to win. And in the crucial Super Tuesday primaries in 14 U.S. states, Biden did just that, and Democratic voters singularly obsessed with defeating Trump finally began coalescing around their candidate.

There’s still a long road ahead for the former vice president. His chief rival, Bernie Sanders, won California -- the biggest prize of the entire nominating race -- where a runaway victory could give the Vermont senator enough delegates to blunt Biden’s gains on Tuesday. And the former vice president’s turnaround was made all the more remarkable because of his plunge from front-runner status, bruised and battered by a meandering campaign, lackluster fundraising and trademark gaffes.

Still, the whirlwind three days following Biden’s convincing win in South Carolina -- which propelled top rivals like Pete Buttigieg and Amy Klobuchar back the former vice president -- underscored the extent to which Democrats were ready to unite behind anyone perceived as ready to take on Trump.

“Just a few days ago the press and the pundits had declared the campaign dead,” Biden told supporters in Los Angeles. “I’m here to report, we are very much alive.”

The rise of Bernie Sanders to front runner status about ten days ago was a significant catalyst for profit taking in the wider stock market and was potentially the motivating factor behind the pricing in coronavirus fears.  
 

“The coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower,” Lowe said. “It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path.”

In this case, though, Australia’s central bank isn’t going to have to face the downturn alone, with fiscal support in prospect.

“The Australian government has also indicated that it will assist areas of the economy most affected by the coronavirus,” Lowe said. Before the RBA meeting, Prime Minister Scott Morrison said the Treasury is working closely together with the other agencies “to address the boost that we believe will be necessary.”

Morrison urged major banks to pass on any RBA cut. The four top lenders have all since confirmed that mortgage rates will be reduced by the full amount.

The RBA now has only one 25 basis-point cut left in the locker before it reaches its effective lower bound of 0.25%. Lowe will find himself dragged toward quantitative easing, should the economy need further monetary stimulus.

The Australian Dollar has bounced over the last few days to partially unwind its oversold condition relative to the trend mean. The big question is whether the RBA will continue to hold the zero bound for interest rates and if it does that greatly increases scope for quantitative easing.

Though the Fed met Wall Street’s hopes for aggressive action with its half-point reduction, Chairman Jerome Powell seemed to unnerve markets by saying it’s unclear how long the virus’s impact will last. Traders were already pricing in another rate cut later this month, with more to come in June.

“The market is trading right now on a lot of fear and uncertainty,” said Gary Pollack, head of fixed income at DWS Investment Management. “The Fed certainly didn’t bring calm, and the virus continues. The Fed’s relatively large move also made people wonder what they know that we don’t.”

The central bank’s decision came a few hours after Group-of-Seven finance chiefs issued a coordinated statement saying they were ready to act to shield their economies from the virus. Policy makers faced pressure to act after the OECD warned the world economy faces its “greatest danger” since the 2008 financial crisis.

The market is pricing in the assumption the US economy is going to lock up in exactly the same fashion as the Italian or Chinese economies did as coronavirus concern/paranoia spreads. There is no doubt the virus is dangerous for at-risk groups, but the bigger question is whether its effects will persist beyond the first quarter or perhaps second quarter, not least because warmer weather will likely curtail its spread as temperatures rise.

A more urgent consideration is today is Super Tuesday. The biggest issue investors are worried about is the potential Bernie Sanders is going to be the next President of the USA. The range of proposals he has tabled include breaking up the banks, financial services taxes, capping interest rates, breaking up internet and cable companies, Medicare negotiations for drug pricing, importing foreign drugs, capping prices, end health insurance, banning fracking, insist on 100% renewable utilities and railroads, cars and manufacturing. It’s very unlikely any of these will become law without the Democrats retaining the control of the House and also winning the Senate. However, President Trump has demonstrated just how much power the executive branch has and therefore there are grounds for worry.

After a week characterised by selling across the board, a great deal of profit taking has taken place and many overextensions relative to the trend mean have been unwound. The question I believe many people will be concerned with is whether the coronavirus is going to be the catalyst for an economic contraction? I thought it would therefore be worth monitoring the kinds of instruments that offer a lead indicator for that kind of concern.

A 61-year-old Brazilian man who lives in Sao Paulo was infected during a recent trip to Northern Italy and tested positive upon returning to the country, Health Minister Luiz Henrique Mandetta said Wednesday at a news conference in Brasilia. The patient, who traveled via France on the way back to Brazil, is doing well and is at home, a Sao Paulo state official said.

“We’ll have to see how the virus reacts in a tropical country in the middle of summer,” Mandetta said. “We still can’t say how lethal this virus will be.”

Maybe they should ask how Singapore has successfully contained the spread of the virus? The stock market lost now time pricing in the fear of a wider spread with the iBovespa dropped nearly 8% to test the region of the trend mean and the four-year sequence of higher reaction lows.

Contagion experts Peter Sandman, Ian Mackay, and Jody Lanard sum up my view in this passage from Past Time to Tell the Public: It Will Probably Go Pandemic, and We Should All Prepare Now:

“We are near-certain that the desperate-sounding, last-ditch containment messaging of recent days is contributing to a massive global misperception about the near-term future. One horrible effect of this continued 'stop the pandemic' daydream masquerading as a policy goal: it is driving counter-productive and outrage-inducing measures by many countries against travellers from other countries, even their own citizens back from other countries.

“But possibly more horrible: the messaging is driving resources toward 'stopping' and away from the main potential benefit of containment – slowing the spread of the pandemic and thereby buying a little more time to prepare for what’s coming.”

For readers who can spare the time, I suggest tuning out media noise – much of it dwelling on the malevolent distraction of which individual may have been spreading Covid-19 – and going straight to research papers being released daily by PubMed Central, the data bank of the US National Library of Medicine.

That way you avoid the sort of misunderstanding I just heard on the BBC, which stated that the death rate is comparable to flu. No, it is not. The average morbidity of flu annually is 0.1pc; Covid-19 is an order of far greater magnitude.

The latest tracking data as of Feb 22 (unreliable, but the best we have) is that the mortality rate is 4pc in Wuhan, 2.8pc in Hubei, and 0.8pc in other regions of China, though all figures are creeping up as slow deaths hit the data.

There can be long lag times after infection so it is too early to infer ratios from South Korea, Italy and Iran, but this is surely more like the Spanish Flu of 1918 than anything we are used to. Chinese data suggests that roughly 14pc of those infected over the age of 80 are dying.

You can read most of the PubMed abstracts free and can see what is coming out of labs in China – some of them excellent – or in Hong Kong, Korea, Japan, Europe and North America. There are already 80 peer-reviewed papers. The unfiltered findings are arriving almost in real time. They give you an extra edge.

The annual seasonal flu becomes a pandemic every year. The coronavirus shares enough similarities with the flu in how it spreads to become a pandemic. Meanwhile, it is far more deadly.

This graphic, produced by the New York Times a few weeks ago gives us a good picture of what we are dealing with. The mortality rate is anything from 8 to 40 times more deadly than flu while the transmission or contagion factor is about the same or higher.   

“Our overriding priority is to retake control of our laws,” Slack told reporters in London as Barnier spoke in Brussels. “The British public were promised we will take control of our fishing waters and that’s what we’re going to do.”

The EU does have level playing field conditions in other trade deals -- including its tariff-free agreement on goods trade with Canada that the U.K. wants to replicate -- but they aren’t as stringent. The EU says it needs to be tougher with the U.K. because the British economy is so close and so large.

That is reflected in the final negotiating mandate European ministers approved on Tuesday. In it, the bloc requires the U.K. to broadly follow any future changes in EU rules on competition policy, environmental protections, tax, and labor law.

Access to the UK’s, and Ireland for that matter, fisheries is worth billions to the Spanish and French economies every year. It is logical that allowing access should form part of any trade negotiation between sovereign entities. The UK deserves a significant reward for granting that access and financial services are likely to be part of the price.

A link to the full report is posted in the Subscriber's Area.

“The Fed has got your back and they will do whatever is necessary to support asset prices” That is the mantra of stock market investors who have been following a diversified or balanced investment strategy for the last decade. In between there have been occasions when the mantra was challenged, particularly following Jay Powell’s appointment as Fed chair. However, the pivot to easier policy and the response to the repo tightness in Q3 have reasserted belief in the mantra.

Remdesivir is the “one drug right now that we think may have efficacy,” Bruce Aylward, an assistant director-general at the World Health Organization, said at a briefing in Beijing. WHO officials and international scientists are in the country assessing the outbreak.

The spread of the coronavirus accelerated internationally over the weekend with exponential growth in South Korea and Italy. Right now, there are no cures for the ailment and therefore any whiff of a successful treatment is likely to be rewarded with investor interest.

Masahiro Kami, an infectious diseases expert, said he was skeptical that the suspension of some public events would have a significant impact on the spread of the virus. “Commuting on a packed train, for instance, is way worse than taking part in the Tokyo marathon,” he said.

Dr. Kami, who heads a nonprofit organization called the Medical Governance Research Institute, said a media focus on the few cases of serious illness from coronavirus infection in Japan had created a panic over the need to cancel events.

While Japan initially had a handful of cases involving people who had come from Wuhan, the center of the epidemic in China, or had direct contact with someone from Wuhan, a surge of cases in the past week included many whose path of infection wasn’t clear. The cases span from Hokkaido in the north to Okinawa in the far south.

More than 1,000 people disembarked from the Diamond Princess cruise ship between Wednesday and Friday, and they entered Japan without restrictions on their movements. All of those passengers tested negative for the virus, but in some cases people have tested positive after a negative test—including two cases reported Friday in Australia, which sent a flight to Japan to repatriate citizens who had been on the ship.

The coronavirus popping up in unrelated areas in Japan is not exactly good news. Additionally, the lax quarantine imposed on the passengers of the Diamond Princess cruise liner greatly increases the potential for the virus to spread even further. At a minimum the potential is for much tighter measures to contain the spread across Japan and other countries. This is also going to create a headache for Abe’s government.

“When you take a bull market and juice it with zero commission trading, we can expect it to generate interest among retail accounts. That, it did,” said Jason Goepfert, president of Sundial. “Retail traders have become manic.”

Individual investors were seen as indifferent participants for much of the 11-year bull market. No more. The latest leg of their emergence times closely with October, when E*Trade, Charles Schwab and TD Ameritrade slashed commission fees to zero. Not that it’s firm proof of anything, but since the start of that month, the S&P 500 is up 13% and the Nasdaq 100 has surged 24%.

Conversations with a handful of clients found lots of praise for zero-commission trades but mostly conservative purchases -- index funds and blue chips. Matt Hermansen, 23, who works for a concrete company in Oakland, California, said the absence of fees makes him more willing to trade.
“I’ll invest smaller amounts. Before I never really invested anything less than $1,000, $500 minimum,” he said in a phone interview. “Now if I have enough to buy an extra share, I’ll do it. I’ll do like $300.”

Welcome back! Remember Caveat Emptor! Retail investors have been absent for the majority of this bull market because they did not have the financial wherewithal to participate. Zero fee trading and accelerating trends are exactly the kind of combination that spurs retail interest in the stock market. Concurrently, low interest rates, the mortgage refinancing boom that began in Q4 and full employment mean retail investors increasingly have the available cash to participate. The downside is the return of retail investors, in force, is a late cycle phenomenon.

If the impact of the outbreak can’t be contained this quarter, annual growth forecasts will need to be revised down, Huw McKay, BHP’s vice president of market analysis and economics, said Tuesday in a blog post. “This would then flow directly through to lower commodity demand and price expectations.”

BHP forecasts China’s growth to slow to about 6% this year and as low as 5.75% in 2021 based on a swift recovery from the virus outbreak. In a worst-case scenario that combined a lingering impact from the virus and a re-escalation of trade war tensions, the nation’s economic expansion this year could slip to 5.5%, the miner said.

Goldman Sachs Group Inc. and Macquarie Group Ltd. are among banks who’ve cut China growth forecasts for both the first quarter and the full year as a result of the outbreak. China’s gross domestic product will grow 4% in the first quarter, according to the median of 18 forecasts since Jan. 31, which would be the lowest level since 1990.

The working assumption most investment models are relying on is the trajectory of the coronavirus outbreak and recovery is going to follow that of SARS. Even though the number of cases and deaths is larger and the coronavirus is more contagious, the measures taken to contain it have been much more aggressive. Therefore, the majority of investors have concluded that a V-shaped recovery is the most likely scenario.