by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

For the first time in ages, it actually feels right to say, “Happy Wednesday,” given the historic surge in U.S. stocks yesterday (the Dow’s rise of more than 11% was its best daily gain since 1933).  Just as important, Republicans and Democrats in the Senate early this morning reached a deal on a $2 trillion economic support package aimed at mollifying the effects of the COVID-19 pandemic (see below).  As always, we review all major news related to the pandemic below.

COVID-19:  Official data show confirmed cases have risen to 436,159 worldwide, with 19,648 deaths and 111,847 recoveries.  In the United States, confirmed cases rose to 55,238, with 802 deaths and 354 recoveries (though the recovery data is lagging badly).  Here is the latest chart of infections from the Financial Times:

The rate of infections continues to grow exponentially as does the economic disruption from containment measures.  Spain has now become a key center of infections, with hundreds dying daily.  In the U.K., Prince Charles has tested positive for the virus; officials refused to say whether Queen Elizabeth has been tested since she last visited with the prince on March 12.  There are increasing signs that Russia is systematically underreporting its cases.  Fortunately, however, there are welcome signs of fiscal and monetary support being put into place.

• Real Economy.  As we’ve noted, a key risk is that infections spreading widely throughout the general population will lead to legions of sick elderly and other compromised individuals, overwhelming the nation’s hospitals and ICU wards.  That sets up a potential conflict between President Trump, who wants to end most lockdowns in the next couple of weeks, and state and local public health officials who want to control demands on their health systems at all costs.

• • Trump administration officials on Tuesday urged anyone leaving the New York metro area to self-isolate for 14 days to avoid spreading the virus to other parts of the country.
  • The U.S. Navy said several sailors on the U.S.S. Theodore Roosevelt tested positive for COVID-19 after the aircraft carrier’s recent port visit in Vietnam. Those sailors have been airlifted from the ship, while others are quarantined on board.  The incident highlights the risk that widespread infections could potentially compromise military readiness.
  • The global airline industry group IATA said total industry revenues this year will fall by $250 billion, or 40%, because of the pandemic.
  • In India, the government has ordered a lockdown of the entire country for the next 21 days, but the move may be backfiring as migrant workers who are potentially infected rush to return to their rural villages.
  • More positive news continues to come out of China, where a poll of 119 firms conducted in mid-March by the American Chamber of Commerce in China showed 22% of respondents said they have already resumed normal business operations. Another 13% expect a return to normal business by the end of this month, and 23% more by the end of April.  However, canceled orders from the Western retailers threaten to derail the ramp up in operations.

• Financial System.  With millions of Americans losing their jobs and suddenly finding it difficult to pay their mortgages, mortgage REITs continue to buckle under the strain.  At least four significant mortgage REITs have now said they can’t make margin calls as the value of their assets declines.  Since the Fed has only moved to buy obligations guaranteed by Fannie Mae and Freddie Mac, firms specializing in buying non-agency backed paper have been especially hurt.
• U.S. Fiscal Policy Response.  Key provisions of the Senate’s draft economic support package, which Majority Leader McConnell aims to pass later on Wednesday, remain under wraps at this writing but reportedly include:

• • A $500 billion fund to provide low-interest loans to large businesses and state and local governments, some of which will backstop Fed loans; the fund will be overseen by an inspector general and five-member congressional panel
    • Some $50 billion will be channeled specifically to the passenger airline industry
    • Airlines are banned from buying back stock or paying CEO bonuses while receiving funds and for one year after
  • Some $367 billion in low-interest loans to small businesses
  • Some $150 billion in additional resources for healthcare providers
  • Increased unemployment benefits of $600 per week for workers who lose their job, along with four extra months of benefits beyond the normal 26 weeks; jobless benefits would be extended to nontraditional employees like gig workers and freelancers
  • Checks in the amounts of $1,200 per adult and $500 per child paid directly to many U.S. citizens, with reduced amounts for those with higher incomes
  • Bans on any funds being used to support businesses owned by President Trump, Vice President Pence, members of Congress or other high government officials

• Foreign Fiscal Policy Response.  After a meeting of Eurozone finance ministers yesterday, Eurogroup President Centeno said there was broad support for using the bloc’s €500 billion sovereign bailout fund to combat the economic effects of the pandemic.
• Monetary Policy Response.  Moving fast to implement its new support programs for commercial loans, the Fed directed top money manager BlackRock (BLK, 371.70) to buy agency commercial mortgage-backed securities secured by multi-family home mortgages on behalf of the New York Federal Reserve.  The Fed also tapped BlackRock to manage the new Fed-backed facilities buying new and seasoned investment-grade bonds from U.S. companies.  Separately, the People’s Bank of China is consulting with Chinese banks on a possible cut in deposit rates, with the aim of boosting institutions’ profitability again after previously ordering them to cut lending rates and ease credit standards.

Odds and ends:  Some Russian oil firms are reportedly pushing back against President Putin‘s effort to boost production in his market share war with Saudi Arabia.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

As Tuesday dawns and financial markets surge, it’s important to remember that true market stabilization amidst the pandemic would probably require three things: 1) full support for the economy and financial markets by the Federal Reserve and other major central banks; 2) a credible fiscal support package from the U.S. Congress to cushion the economic impact; and 3) a slowdown in the rate of infections that would take pressure off national health systems.  Investors today are encouraged by yesterday’s progress on the first factor after digesting it overnight, but there is still work to do on the second and the third, as discussed below.

COVID-19:  Official data show confirmed cases have risen to 392,331 worldwide, with 17,156 deaths and 102,972 recoveries.  In the United States, confirmed cases rose to 46,450, with 593 deaths and 17 recoveries.  According to a new IPSOS poll, just 1% of Americans say they’ve been able to get tested for the virus, but 5% say they know someone who tested positive.  Here is the latest chart of fatalities from the Financial Times:

The key takeaway from the chart is that the rate of infections continues to grow exponentially, with hospitalizations and deaths rising in tandem.  Spain had more than 500 deaths from the virus in the last day.  In Belgium, new hospitalizations moderated a bit, but the number of victims going into intensive care surged.

• Real Economy.  As discussed in greater detail below, IHS Markit said its “flash” composite PMI for the Eurozone plunged to a record low of 31.4 in March from 51.6 in February.  According to IHS Markit, the figures are “indicative of an 8% annualized decline in Eurozone GDP, and it is unlikely that the index has hit rock bottom yet.”

• • German Finance Minister Sholz said the pandemic will reduce German GDP by 5% this year.
  • British Prime Minister Johnson finally succumbed to pressure and announced a stay-at-home order for all of the U.K., arguing, in part, that the move was necessary to keep the National Health System from being overwhelmed. Officially, the lockdown is for three weeks, but Johnson aides have admitted privately that it could last until May or even beyond.
  • Japanese Prime Minister Abe succumbed to pressure to postpone the Tokyo Summer Olympics until 2021 at the latest.
  • Major U.S. airlines are drafting plans for a potential voluntary shutdown of virtually all passenger flights across the U.S.  Government agencies are considering ordering such a shutdown as COVID-19 cases make it harder and harder to staff the nation’s air-traffic control system.
  • In contrast with the job losses in travel, tourism, and small businesses, major retailers facing a surge in demand for food and household products and have announced plans to hire at least 500,000 new workers in the coming weeks.
  • Highlighting the improved situation in China, authorities said they will soon relax travel restrictions into and out of the hard-hit Hubei province. However, there is some concern that the move could be premature, especially as China and other Asian countries report a surge in imported infections that could lead to new waves of the epidemic.

• Financial System.  Real estate investment trusts that specialize in buying mortgage-backed securities are playing a prominent role in the current market turmoil, dumping their holdings in response to margin calls by their banks.  Expectations are that the financial system will see a surge in missed mortgage payments as more people lose their jobs.  Separately, major credit-rating firms have issued a wave of downgrades for corporate and government bonds, eliminating some triple-A designations and cutting many below investment grade.  In addition, reports now say powerhouses Goldman Sachs (GS, 134.97) and Bank of New York Mellon (BK, 27.49) both had to put money into their money market funds to keep from “breaking the buck,” which we see as the modern-day equivalent of a bank run.
• Fiscal Policy Response.  For the second straight day, Senate Republicans and Democrats couldn’t agree on the Phase III economic support package.  Showing they’ve learned the lessons of the corporate bailouts in 2008, the Democrats continue to insist that the support be weighted toward assistance for workers rather than working capital for companies.  Even though the failure to reach an agreement sent markets lower, it’s encouraging that all participants continue to express optimism that a deal will soon be made.  Separately:

• • EU finance ministers today formally approved a suspension of the Eurozone’s deficit and debt limits in order to allow countries full scope to boost spending to combat the epidemic.
  • A dozen countries in the Middle East, North Africa and central Asia have already approached the IMF for financial assistance to help limit the human and financial cost of the coronavirus.

• Monetary Policy Response.  Although the massive new asset purchases announced by the Fed yesterday weren’t enough to offset the disappointment over the failed fiscal support bill, we think they could end up being seen as a turning point in the crisis.  In general, the Fed is now saying it will do whatever it takes to support the economy and financial markets in the midst of the crisis.  Indeed, the program has appeared to have some modest success in the debt, precious metals and currency markets.  Now that more details are available, we think the key elements in the program, which will be backstopped by the fiscal program from Congress, are as follows:

• • To ensure sufficient liquidity in the financial system, the Fed will now buy U.S. Treasuries and mortgage-backed securities without limit;
  • To support the multi-family housing sector, the Fed will now begin purchasing commercial mortgage-backed securities issued by government-supported entities;
  • To support the consumer and business lending markets, the Fed will now relaunch the Term Asset-Backed Securities Loan Facility (TALF) of 2008, under which it will lend money to investors to buy securities backed by credit-card loans and other consumer debt;
  • To support the market for new, highly rated corporate debt, the Fed will wade into commercial banking by offering corporations bridge loans of up to four years, with limits on dividends and stock buybacks for firms that defer interest payments on their loans;
  • To unblock the market for existing corporate debt, the Fed will now purchase bonds already issued by highly rated companies and eligible exchange-traded funds;
  • To support the markets for municipal bonds, the Fed will expand last week’s commercial paper facility to purchase high-quality, short-term obligations of state and local governments;
  • To further support municipal obligations, the Fed will expand last week’s money market facility to purchase high-quality, ultrashort-term obligations of state and local governments.

Odds and ends:  After failing to convince Afghanistan’s rival presidents to form a national unity government, Secretary of State Pompeo said the U.S. will slash $1 billion from its aid budget for the country.  Secretary of Defense Esper says the U.S. military has conducted a raid in Honduras to rescue a U.S. citizen facing an undisclosed danger.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

It’s Monday.  Global markets remain in risk-off mode after the Senate’s first swing at the third phase of the rescue package fails.  BREAKING: FED GIVEN BROADER POWERS TO INTERVENE IN FINANCIAL MARKETS—MORE BELOW—S&P FUTURES RECOVER.  We update the COVID-19 virus news. Here are the details:

COVID-19:  The world now has 349,211 reported cases of COVID-19, with 15,308 fatalities and 100,165 recoveries.  Here is another link to a new site we have found on tracking the virus, along with a chart of infections from the FT:

The U.S. pace of infections is rising rapidly; this is probably more about increased testing. Sadly, there is no evidence of the bend we usually see when a country is getting on top of the spread.

The virus news:

• In a disturbing development, there has been a rise of new cases in Asia. It appears the majority of these cases are from travelers.  We would expect this development to encourage further steps to restrict travel.
• India has gone into lockdown as the virus begins to spread.
• Chancellor Merkel is in self-quarantine after meeting with a doctor who tested positive for the virus.
• The National Guard has been activated in three states.
• Rand Paul (R-KY) is the first senator to test positive for COVID-19.
• The limited amount of testing for the virus has led to a dearth of information about how it spreads. Only South Korea has engaged in massive testing.  An interesting natural experiment has emerged in the NBA.  After Utah Jazz center Rudy Gobert fell ill from the virus, eight other teams were tested and 13 players, coaches or staff were found to be infected.  Of these 13, seven were asymptomatic.  If we had better testing, it would be easier to limit isolation to only those most vulnerable and also allow us to isolate those who are not infected from those who are but are asymptomatic.  In the end, the real lesson from the pandemic may be that aggressive testing is the secret to containing the virus with the least economic damage.
• Iran is getting clobbered by the virus. Much of this is because it needed new trading partners after sanctions returned and those partners have been hit by the disease.
• British pubs have been closed. European isolation measures escalate as infections rise.  New Zealand and Australia join the rest of the world in restrictions; Greece, too.
• There is great hope that the onset of spring and summer will lead to a decline in the infection rate. Opinion is divided among epidemiologists.  However, even if it does, COVID-19 may return in the fall.

The policy news:

• As expected, the first attempt at a fiscal response has failed. Although this is a disappointment, we do expect a package before Friday.  McConnell crafted a law for his caucus and calculated that either (a) the opposition would swallow the bill, or (b) he could hang the disappointment on the Democrats.  He may have miscalculated.  Much has changed since TARP.  The narrative that emerged from 2008 was that the bailouts were only for the Establishment and the less affluent were left to bear the burden of adjustment.  This time around, the Democrats are pushing for a much broader set of measures that will help lower paid workers.  In order to do this, we expect the final bill to create restrictions for business that will make it much more labor friendly.
  • Uber (UBER, 21.33) is asking for its drivers to get help in the final package. The current package did not offer any support for “gig” workers.
  • More support for small business, including loans, will likely need to be expanded. There is nearly universal support among mainstream conservative and liberal economists on this issue.
• With apologies for burying the lede, the Fed is wheeling out the nuclear option, getting a mandate to buy debt broadly. This is a clear attempt to narrow credit spreads.  Signs of stress in the financial markets have become numerous:
  • Reports of stress in money markets have emerged. At least two sponsors have been forced to inject funds into money markets to prevent the “breaking of the buck.”  Money market fund shares falling below $1 is a modern-day version of a bank run.
  • A subprime mortgage specialist is seeking buyers for assets, a sign of stress.
  • Pimco is backing away from corporate bonds.
  • Blackrock (BLK, 354.72) and Vanguard (VTI, 115.19) announced higher costs for cash redemptions for some ETFs, an indication of tighter liquidity.
  • S&P projects junk bond defaults of 10% over the next year, a three-fold increase.
  • Dollar strength is a clear indication of funding strains globally.
  • In Britain, regulators are pressing companies to delay releasing earnings.
  • Complicated trades designed to offer higher yields in a low rate environment are being exposed to the risks they have taken.
• The recovery in equity futures suggests that much of the worry in the stock market was less about the drop in economic growth and more about the lack of liquidity. The Fed’s decision to expand its mandate to add other bonds to its balance sheet should quell some of these concerns and narrow credit spreads to more manageable levels.  This link discusses details of the Fed’s actions; it looks massive, although some of the plans will require additional support from the Treasury.  In our recent report updating the 2020 Outlook, we noted three threats—COVID-19, the oil shock and a looming financial crisis.  The Fed may now have the tools to prevent the third element.  This is good news but it doesn’t eliminate the other two risks.
• One of the problems policymakers face is the tradeoff between managing the spread of COVID-19 and the severe damage the mitigation measures have on the economy. There are signs that the White House may be concluding it is going to lean policy toward the economy at the risk of propagating the spread of the virus.  This is a difficult tradeoff; if restrictions are relaxed and infections and deaths surge, it would be catastrophic.  But, maintaining these restrictions could lead to economic outcomes that rival the Great Depression.

The economic news:

• Dire forecasts are becoming the norm. St. Louis Fed President Bullard made headlines suggesting that unemployment could hit 30%.  Millions of jobs are projected to be lost.  Firms are announcing mass layoffs.  We have been expecting a 10% drop in annualized real GDP for Q2; our forecast is looking rather conservative compared to others.
• Even if the U.S. government relaxes restrictions, state and local governments may not comply. After all, it is those governments that bear the cost of adjustment.  The key to saving the economy is massive fiscal stimulus—probably in the order of $2.0 trillion at least.  There are risks to doing this, which we will discuss in the coming weeks.  But, the risk of doing too little is very high.
• Despite everything, the Atlanta FRB GDPNow forecast for Q1 is still running at 3.1%. Given the problems seen in March, we expect that to come down but the real falloff won’t emerge until Q2.

Odds and ends:  The Marines are retooling their planning, preparing for war in the Asia-Pacific and reducing training for the Middle East.  Saudi Arabia intends to maintain the oil share war through borrowing.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Good morning and happy Friday!  “There are decades where nothing happens, and there are weeks where decades happen.”  This quote, misappropriated to Lenin, seems to capture much of how things feel right now.  It’s a “green screen day” with equity futures rebounding around the world and the dollar finally taking a pause from its recent strength.  We update COVID-19 news, including comments about global stimulus activities.  Here are the details:

COVID-19:  The world now has 246,275 reported cases of COVID-19, with 10,038 fatalities and 86,035 recoveries.  Here is a chart of infections from the FT:

The U.S. pace of infections is rising rapidly; this is probably more about increased testing.  Sadly, there is no evidence of the bend we usually see when a country is getting on top of the spread.

The virus news:

• States are announcing lockdowns. California has done so in the U.S., while Bavaria just announced it is doing the same in Germany.
• China is boosting its stature by providing medical equipment to Europe.
• Both the chief negotiators for Brexit appear to have contracted COVID-19.
• Nursing homes in the U.S. are being hit with outbreaks of the virus.
• Iran is about to celebrate its biggest holiday of the year. That will do nothing but spread the virus further.
• The U.S. warns against international travel.

The policy news:

• We have seen nations attempt to control the news flow about the virus. China is notable in this area.  The U.S. is engaging in some of this as well.  The White House is asking states to stop issuing early information on initial jobless claims.  We are watching this news with great interest.  As we have been working through the data, we are seeing other economists suggesting historic declines in Q2 GDP of over 10% and perhaps a 2.0 million jump in jobless claims.  If the government decides to stop the release of the data, we will all be “flying blind.”  In addition, it won’t work; organization theory suggests that if you stop the flow of real information, people simply make up their own.  Not only will it probably not be accurate, it will likely be worse.
• The Senate leadership is putting together a fiscal package of at least $1.0 trillion. Already, there is speculation this level will fall short.  And, the chance of getting something done quickly is starting to fade.  As one would expect, there is already squabbling over the details.  The White House has suggested that companies that take aid must give the government equity.  There is strong opposition to that idea, suggesting conditions haven’t gotten bad enough yet.
• One of the tensions in the Senate bill is where the benefits fall. The establishment (both left and right) tend to favor support for businesses first, on the idea that if businesses fail, the job losses will be even worse.  Populists counter that businesses have squandered support after 2008 and recent tax cuts by merely repurchasing stock to aid the capital-owning establishment.  As we noted yesterday, we would use the same tactic we employ when confronting a dessert table—try everything!  However, we do note a set of reports that will give the establishment a black eye: a couple of senators, briefed on COVID-19 in February, dumped their equity holdings.  These reports will tend to undermine the establishment’s case; look for aid to be tied to equity.
• Meanwhile, Germany and the U.K. have set up fiscal expansions.
• The central banks continue to expand their activities. The BOE has cut rates to record lows and is increasing QE.  The Fed is moving aggressively as well, buying $250 billion of the $500 billion of new QE this week.  This almost certainly looks like more will be coming.  The ECB has also indicated it will consider boosting its balance sheet
• Oil prices rallied on a few reports. First, President Trump suggested he may intervene in the conflict between Russia and the KSA.  There is some precedent for this action.  VP Bush reportedly did the same during the 1986 oil price collapse.  However, we note his intervention came after oil prices neared $10 per barrel and the parties were already in talks to end the overproduction war.  Second, as already announced, the U.S. will increase buying for the Strategic Petroleum Reserve.  Third, Texas is apparently considering dusting off its old production allocation mechanism used from the 1930s into 1970 which regulated the amount of oil that the state would produce.  Meanwhile, U.S. production remains at record levels.  As we noted in this week’s Weekly Energy Update, due to hedging, production will likely remain near record levels for the rest of the year without intervention.  What is unclear—if the Texas Railroad Commission restricts output, how will that affect debt servicing by oil companies?
• The PBOC surprised us by not cutting rates overnight. China’s stimulus thus far has been modest.

The economic news:

• Food logistics have become paramount. As shoppers stock up to stay home, it has increased demand and strained supplies.  For the most part, the U.S. is managing this rather well.  The U.K. is another matter.  Food shortages could seriously undermine public order.  In addition, the delivery of restaurant food remains with the most vulnerable.
• Not all the employment news is bad. Retailers are increasing hiring.
• We continue to closely monitor strains in the financial markets. The dollar surge is worrisome, although we are seeing some relief  Corporate indebtedness is an area of concern.

Expect continued market swings.  Policymakers are moving in the right direction but the economic impact of battling the virus has been significant.  Enjoy the weekend.  We will talk to you on Monday.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Today is the spring equinox; it’s hard to say if this is a good or bad omen.  We update COVID-19 news.  Although there is much to say about the financial markets, to some extent, it can be summed up succinctly—there is a dash for cash.  Equities are falling again this morning.  Congress is working on a $1.0 trillion stimulus bill.  Don’t be surprised in a few weeks when we will marvel at how timid this action was.  We are paying close attention to today’s initial claims data as it is expected to show a massive increase in layoffs.  The weekly energy report is updated on our website.  Here are the details:

COVID-19: The world now has 222,643 reported cases of COVID-19 with 9,115 fatalities and 84,506 recoveries.  Here is a chart of infections from the FT:

The U.S. pace of infections is rising rapidly; this is probably more about increased testing.

The virus news:

• A disturbing trend is developing in infections. Although it is documented that COVID-19 has a higher mortality rate among older people, that doesn’t mean young people (a) can’t get seriously ill from the disease, and (b) can’t die from the virus.  In fact, 40% of hospitalizations are between the ages of 20-54.  It is clear that some are not taking social distancing seriously.  Sadly, they can become vectors of the disease.
• China had no new indigenous infections.
• Two members of Congress have tested positive. There are concerns that if the virus spreads among members of Congress, voting on critical bills may be affected.
• The U.S. is pushing social distancing to combat the virus and downplaying testing.
• Iran may be the hardest hit nation from COVID-19. There are warnings that “millions” may succumb to the disease.  Some of this development is due to Iranian government mismanagement.  As we have seen elsewhere, Tehran initially tried to downplay the pandemic.  In addition, the political class everywhere tries to use crises to boost their own agendas.  Internal fights have slowed the response.  However, sanctions have also played a role, undermining its economy and weakening its medical system.  The S. is adding additional sanctions in a bid to get Iran to release U.S. citizens being held by Tehran.  Our fear over Iran is twofold.  First, Iran sends operatives throughout the Middle East to project power; it is possible these operatives will become vectors for COVID-19.  Second, as political pressure rises on the Iranian leadership, the country may try an external war to distract its citizens.  Although it is evident that neither the U.S. nor Iran wants a direct conflict, as desperation grows in Iran, starting a conflict with the U.S. while Washington is distracted could occur.  We think this is a low probability outcome, but lately we have been seeing a lot of low probability outcomes occurring.
• The U.S. and Canada have closed its border.
• Putin is apparently using the virus as an excuse to clamp down on protests and ease his term extension.
• Another downside to just-in-time inventories is emerging; reports suggest that basic items required for COVID-19 testing are become scarce. These inventory models are great when everything is functioning well, but they fail miserably under stress.  Another worry: ventilators are in short supply in the U.S. and Europe.

And now, financial market news related to COVID-19:

• There have been a series of curious moves in financial markets, which we will discuss below. But, as noted above, they are all tied to a singular desire—cash is king and there is a scramble to acquire it.  Risk-off assets have been falling in price.  The dollar is on a tear as those who have dollar obligations are scrambling to acquire the greenback.  Emerging markets are getting hammered.  Mortgage REITS are being hit on funding concerns.
• The ECB announced a €750 billion bond-buying program to narrow the spreads between the north and the south of Europe. We are seeing a rally in bonds this morning in both Europe and the U.S.
• The Fed announced a new backstop for the money market industry. The White House is asking Congress to support money markets as well, likely to prevent a run on this part of the market to prevent a repeat of 2008.
• The administration and Congress are working on programs to support the economy. Paid leave has passed both houses.  The president has invoked the Defense Production act.  There is a growing sense that the economy needs a massive stimulus package.  One of the lessons of 2008 is that it is easy to undershoot stimulus.  Another is that cash injections, either in the form of grants, transfers, loans or equity stakes, are the most efficient way to prop up the economy.  Shovel-ready projects are a myth.  It is politically difficult to execute stimulus in a crisis.  The fastest way to deliver funding is to businesses via the financial system.  However, if businesses hoard the cash and layoffs occur anyway, it appears that the government doesn’t care about the less affluent.  But, getting cash to households, although effective, is slow.  Perhaps the best way to attack this problem is to use the same method as dealing with a dessert table—try everything!  This will entail a larger stimulus, but, given the sudden stop the economy is facing, it may not be possible to overdo it.  In fact, that may be what the financial markets are waiting for.  It is worth noting that, similar to what we saw in 2008, state and local governments are facing a major cash crunch; this would be a good time for the Federal government to step in.  The claims data, as we show below, is likely to deteriorate further.  Households are going to face a serious cash crunch.  Again, offering support for firms to keep employees on the payrolls would be good for business and workers.  We are starting to also see articles worrying about U.S. debt capacity.  This fear is profoundly misplaced.  As WWII showed, the Fed could simply set the interest rate across the yield curve and buy any bonds the public didn’t want.  Will this eventually be inflationary?  Probably, but this is a problem that can be dealt with later.
• The other problem this virus event has illustrated is that the financial markets are not functioning well. The industry has become so obsessed with speed that it ignored the problem of depth.  In other words, we have an industry full of algorithmic trading that wants to buy fast but feels no need to support a broadly functioning market.  This factor is contributing to market volatility.  This issue will be exacerbated tomorrow; we are seeing a quarterly “quadruple witching day.”

Odds and ends: The journalism spat between the U.S. and China continues, with Beijing expelling some U.S. reporters.  The trade war continues as the U.S. increases tariffs on European aircraft.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST]

Well, it’s Wednesday, and we face another day right out of a post-apocalyptic zombie movie.  While there is still no sign of zombie armies marching on Washington, there is a more worrying sign that global financial markets are seizing up in a desperate scramble for liquidity.  Policymakers around the world are pledging in unison to do “whatever it takes” to rescue the global economy, which is a good thing, but markets will remain volatile until real results are visible.  Below we review all the key news from the crisis and beyond.

COVID-19:  Official data show confirmed cases have risen to 203,529 worldwide, with 8,205 deaths and 82,107 recoveries.  In the United States, confirmed cases rose to 6,496, with 114 deaths and 17 recoveries.  Most disconcerting, the slowdown in the real economy is exposing or exacerbating financial weaknesses.  There are increasing worries about businesses and individuals not only having trouble paying their everyday bills, but also covering the high levels of debt they took on during the boom of the last decade.

• Real Economy Impact.  In a Financial Times Op-Ed, former Fed Chairs Yellen and Bernanke warned the world’s central bankers and governments to focus on making the virus crisis as short-lived as possible.  In their view, the main danger is that if the crisis is prolonged, established economic relationships will get broken and healthy businesses will go bankrupt.  Then, it would be difficult for people to find the same jobs, for businesses to get new credit lines, and for the economy to get back to the way it was.  They emphasized that the central banks need to make sure credit remains widely available for firms and individuals under stress.  The Yellen/Bernanke warning comes as reports show imported infections spiking in some Asian countries where it previously seemed the pandemic had been brought under control.  Preventing imported cases will likely become even more difficult now that the pandemic is spreading even in Africa and Latin America.  Even as imported infections loom, a survey shows one-third of manufacturers in southern China are facing supply shortages despite the recent sense that the country had passed the worst of the crisis.
• Financial System Impact.  Despite the loosened monetary policy around the world, we continue to see signs of a desperate dash for dollars.  Fund managers are selling even the most liquid safe-haven assets to raise cash, so government bond prices are slumping all over the world this morning.  The selling is reportedly being exacerbated by investors’ concern about burgeoning debt issuance in the coming months as governments seek to fund their crisis fiscal plans.  At the same time, heavy selling has left both Vanguard’s and Blackrock’s total bond market ETFs trading at steep discounts to NAV.  Commodities, including gold and other precious metals, are also being sold off to raise cash.  As long as margin calls and debt repayment concerns persist, even the supposedly safe-haven assets could remain volatile and under pressure.
• Fiscal Policy Response.  The Trump administration yesterday said it was working with Senate Republicans on a Phase III economic support package totaling some $1 trillion.  That would include up to two direct payments to individuals costing $250 billion each, some $50 billion in aid to the airline industry and as much as $500 billion to help small businesses and cover other expenses.  The first payment to individuals would come around the end of April and would be means tested so it doesn’t advantage the wealthy.  Some Republicans are still uncomfortable with the provisions, but Senate Majority Leader McConnell is pushing for passage, saying, “My counsel is to gag and vote for it anyway.”  The Phase III legislation would supplement the Phase II package consisting mostly of paid sick leave, which has already passed the House, and the earlier Phase I package of about $8 billion focused on vaccine research and other medical initiatives.  In contrast, investors are increasingly worried that Chinese policymakers don’t have the stomach to launch a big, new monetary or fiscal stimulus like they did in 2008.
• Monetary Policy Response.  To help ease financial conditions, yesterday the Fed said it would revive the Primary Dealer Credit Facility used in the 2008 financial crisis.  The facility is designed to expand cheap loans to primary dealers (the 24 large financial institutions that serve as the Treasury’s exclusive counterparties in financial transactions), by allowing them to borrow against some stocks, municipal debt and higher-rated corporate bonds.  However, just as with fiscal policy, some major institutions are hesitating about how far to push monetary measures.  In controversial remarks published today, Austrian Central Bank Governor Holzmann said that the ECB shouldn’t step in to support the bonds of heavily indebted countries like Italy, and that a recession might have a useful “cleansing” effect on the economy.  In a stunning throwback to the traditional Austrian school of economics, Holzmann said, “One should be careful that only the firms capable of surviving do survive, and that others that would have failed even without a crisis don’t survive.”  Eurozone leaders are also at odds over using the ECB’s massive, €500 billion “European Stability Mechanism” to offer credit lines to multiple states.  Germany and the Netherlands, in particular, are resisting the move.

United States:  In yesterday’s Democratic Party primary elections, former Vice President Biden won all three key races.  With his wins in Florida, Illinois and Arizona, it appears he would only have to win 42.8% of the remaining delegates to the party’s summer convention in order to win outright in the first ballot.  The wins heap even more pressure on Vermont Sen. Bernie Sanders to drop out of the race.

Argentina:  President Alberto Fernández has proposed a further hike in the country’s soybean export tax to 33%, just months after he increased the tax to 30% from the previous 25%.  However, the powerful farmers’ lobby is now starting to push back by launching protests.  Along with the global coronavirus panic, the tension is negative for Argentine stocks and bonds.

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