Whether or not there is an actual emergency in the United States right now, President Donald Trump has declared one, to provide him access to up to $50 million by his own pen.
Looking back on how COVID-19 has played out around the world so far, it shouldn’t surprise us too much that this has provided a level of panic on such an unimaginable scale. You would think that the Spanish flu is back, the one that 27% of the world’s population came down with, and caused up to 100 million deaths.
However, all we have to do is look upon the way that the world got so spooked from SARS back in 2003, which only produced 8098 cases and 774 deaths. We need to keep these things in perspective, but we have a habit of blowing these threats way out of proportion, and we sure did back then with this virus.
Fast forward to 2020’s COVID-19 coronavirus, a much less potent virus but one that has expanded far greater than SARS ever did, with the amount of cases now over 145,000 and the number of deaths now exceeding 5,400 worldwide. We’re nowhere near the end stage of this as the number of daily infections continuing to grow and our being at least a couple of weeks away from this stabilizing enough to see the numbers decline enough to provide some comfort to the world’s terrified citizens.
When this first became a big story, and the spread of the virus taking off enough in China that they locked down Hubei Province, the epicenter of the outbreak, we worried about the economic impact of having all those factories over there shut down and how this would affect the supply chain.
China did an admirable job containing the outbreak initially to their own borders, with only a small percentage of the overall number of cases occurring outside China, but these things do get around and it was just a matter of time before it made its presence very well known in other areas of the world as well.
If SARS had us panicking, it would only make sense that this fear would be multiplied many times with COVID-19, given the current prevalence and expansion. The death toll for this one is already 8 times larger than SARS and growing. The U.S. is now up to 6.9 infections per million people, with a total of 49 deaths now.
From the way that people are acting, you would think that the risk of contracting this would be very high, alarmingly high perhaps, as people are sure alarmed. This has caused an unprecedented amount of fear of people being in public, and just like with China, all the hiding that is going on how does have a real impact upon the economy.
No one is sure yet how much of an impact that staying away from large public gatherings or not travelling will have on the U.S. economy, but we do know that it won’t last very long. There are drug companies working feverishly on treatments for this virus, and they are telling us that they may have something that can help ready in as little as 4 months, but the fact that this virus likely won’t even be making a dent in things that far out doesn’t seem to concern them.
If we had such a thing now, this may help, as there are currently over 6,000 serious cases of this out there. Perhaps it’s scarier to look at the big number, the number of active cases, and this is all about scaring people as much as we can it would seem, and we certainly are pulling out all the stops to exaggerate this threat to the frontiers of our imaginations and beyond.
There will be some economic consequences from not only China’s impact but everyone else limiting their activity as well, dropping the demand for certain industries such as airlines, travel and now sporting events pretty drastically. We need to be very careful not to look to overdo the help here as we may be left with much more economic harm than this virus could ever produce even if everyone locks themselves in their homes for a few weeks.
This is not a discussion that very many people are having or even thinking about as they clamor for more, more, more. The Fed cut rates by a full half a point, a double helping, and that isn’t seen as enough, as the market wants and even now expects a full point more. This is a thought that should scare us considerably more than this virus, even if it takes the lives of thousands more Americans than the 41 that it has claimed already.
As we have pointed out throughout this crisis, more rate cuts are not the answer as this is about people reducing their spending out of fear, not out of rates that they consider to be too high. We aren’t going to borrow our way out of this one, and few that know anything about how monetary policy works will tell you it will not help much, and we already know that that half point already will come back to bite us down the road.
It is not that we want to stand by and do nothing either, as this panic will be affecting a lot of businesses that will need help to survive this storm, and we definitely do not want to see a lot of defaults from this because that is dangerous economically.
It is not that we are at that much risk of any sort of widespread default from this, although this does become an issue later when we have to put rates back up, and we’ve already racked up 1.25% worth of that in just the last 7 months. Another percentage would be truly regrettable and may even hearken a recession in itself as well as taking away the weapons that we would use to fight it.
What we need instead is a little fiscal stimulus, especially one targeted at the businesses that are taking a real hit from the degree of voluntary quarantine that so many Americans have put themselves under. There is always a very small percentage of people that are afraid to go in public, those suffering from phobias, but when the majority of the country is suffering from phobia, this is a serious condition indeed, a real epidemic and not just some imagined one.
6.9 people per million is just not a meaningful number, both in terms of overall significance and overall risk. Neither is 69 or 690, if this blob somehow grew 100 times bigger than it is now, which is extremely unlikely and well beyond any reasonable estimate based upon the data we have. If you instead ignore the data and let your imagination run wild enough, you can become plenty scared indeed. 100 times 41 deaths are still only 1/73 of the number of people that the common flu takes every year in the U.S. and we mention this comparison often because nothing exposes the sheer insanity behind this panic better.
The Reason for the Panic Might Not Be Real, But the Panic Itself Sure Is
The effects of this panic are real though, and we do need to do something to address the economic impact of it. Instead of throwing the kitchen sink at this, we need to be careful to ensure our response is measured, doing enough to combat the problem but not overdoing it so much to invite inflation back into the room. Inflation is a much harsher beast then the great majority of people realize, and when we overindulge in stimulus, the economic hangover from this is inevitable.
This is the big problem with using the rate cuts to fight this virus, as they will remain in place long after COVID-19 is gone. Even if it actually does help things a bit now, it will hurt more than this later, and the same needs to be said for excessive fiscal stimulus, although that can be targeted much better, if we only help those truly in need and only during the time where they actually need it.
If the Fed empties its gun again by taking rates down to zero like they did in response to the 2008 crisis, this will indeed spur a lot more borrowing and companies are really going to expand their debt as a result. This will take us to 2.25% higher than we were less than a year ago, and we were at a level that kept inflation nicely in check and right around the target 2% that the Fed seeks.
Once this virus scare is over, which will happen sooner than later because we’ve already seen this virus outbreak virtually stop in China was well as seeing things draw closer to a conclusion in South Korea, all this new economic stimulus is going to cause the economy to run too hot. This is a lot like turning up the heat to cool down a room that has an open window, and when the window finally gets shut, the heat in the room will soon become unbearable.
There was a good reason why we added this 2.25% to Fed rates after the economy recovered from the financial crisis enough that zero became too hot, and in spite of what some may think, they only overdid this by a bit, perhaps by just a quarter point. Higher inflation is dangerous enough though that the Fed will err on the side of caution here to prevent too much of it and are famous for overdoing the hikes.
President Trump did declare a national state of emergency Friday, probably not because he thinks this is an actual national emergency, and probably less of one than all the illegal immigration crossing the Mexican border, but this is all about accessing the money that this provides, as he wanted to do in order to fund the Trump Wall.
Donald Trump gets a bad rap it seems no matter what he does, and even in the face of this, doing all he can because this $50 billion is the most he can get his hands on without approval from Congress, he’s being soundly criticized for doing too little. We instead need to make sure he isn’t doing too much, although those who see this as a potential slaughter surely have an appetite for this that will not be quenched so easily.
If this causes inflation to travel from the optimal levels we saw before this to much more unacceptably high levels, this is going to visit the American economy with some serious pain. The worst of this isn’t just the intended contraction, making it more expensive to borrow and reducing the amount of credit in the system and seeing this put the brakes on economic growth, it will also stress companies considerably, as they have borrowed more than they would have at our behest but now have to figure out a way to pay it back at much higher rates.
This will serve to increase the default rate, and that’s what brings on recessions. There’s no real reason to expect one from this virus, and we applaud those such as Keith Banks, vice chairman of Bank of America, in trying to allay our fears of this by telling us that his bank does not expect that things will get this bad.
The only real economic damage worth mentioning from this virus outbreak is not from the infections themselves, but in our efforts to reduce them, which also includes our fiscal and monetary policy response. The 1.25% hike is worrisome enough, but if we go to the felt with this, we have a great deal to worry about down the road, even though hardly anyone is giving this any real thought, with so many being drunk with fear right now. The piper always needs to be paid and may collect a very princely sum if we are not careful.
We can only hope that the Federal Reserve will retain at least enough sensibility to realize that further cuts are not going to do much good and would instead cause a lot of harm in the future. It’s not even that the future is all that far away with this, as the moment that this virus threat subsides, we are already in trouble if we go down to zero, and may be in plenty enough even if we decide not to get ourselves in hotter water over this.
In Times This Volatile, Timing is Really Everything
To say that the stock market has been in a panic over this would be an understatement, but Friday’s rally, the biggest point gain of all time by a long shot, at least served to dull the pain of the day before, the market’s biggest one day loss of all time. The over 9% that stocks went up on Friday almost erased Thursday’s 10% loss. Much of the gain came very late in the day in response to Trump announcing his fiscal plans, but we have to wonder whether this rally is just another interlude from all this fright and whether the weekend’s increasing cases will swat us back down again and then some, which has been the trend lately.
We’re now back to just a plain bear instead of the supercharged one that took us 10% beyond the entry to their lair. With the number of cases now breaking 11,000 as Friday wound down, in addition to all the repressed fear that will be expressed on Sunday night through the rest of next week, it would be a surprise if we can hold this ground and mark the bottom on Thursday.
This has all left many investors in a difficult spot, being afraid to hang on to their positions as well as being afraid not to. A day like Friday does nothing to make this decision any easier for them, as it fuels the side of hanging on and not wanting to miss out on a 9% up day. You don’t make 9% in a lot of years, so getting this in a single day is at a level that is simply breathtaking to investors.
There isn’t any doubt that investors digging their heels in the way that they do certainly adds a lot of stability to big downward trends like this, as if people really did think about this more, they would all have been fleeing for their lives back in the early part of this move. We’d have a real crash then, one that would dwarf this one, and while that in itself wouldn’t be a bad thing, and actually would increase the opportunities for investor returns significantly, it would put investing skill at much higher of a premium than it is now, because the risk would become much higher than it is.
People speak of how investors need to stay the course in good, bad, and terrible times, and the story behind this is mostly that we just can’t time the bear markets. We’ve always told you that when the stuff comes around so bad that you should run, like when a transport truck is speeding down the highway toward you while you are standing in the middle of the road, you will know it, and everyone will know it.
This was clearly the case during the crash of 2000 and 2008, and most certainly is with this one. No one in their right mind would deny this, but Keith Banks is using another approach to confuse investors about this, one even more silly.
With a straight face, he told us Friday that if you took all of the biggest down days we’ve had over time and add them all up, we get 95%. He compares this to the 15,000% gain that stocks have had over this same period.
This is horrible reasoning, starting with the fact that being out on the worst days of all time doesn’t mean that you are out all the time and are stuck with just this benefit of being out. To benefit from being out, you have to be in the rest of the time, and given that this model just addresses a few select terrible days, you’d be in the rest of the time.
If we did have a crystal ball that worked well enough to somehow avoid the worst days, this could only mean that we would be up an additional 95% because we’d be around for the long-term gains that they buy and hold strategy would provide. Investors don’t step out for just a day though, and the amount that could have been avoided by avoiding most of the bear markets this century adds up to more than 95%, and each time, we’d be avoiding more than just a day of pain because this lingers considerably longer than that.
Investors that have been around for this century so far will surely remember the level of fear during the 2000 and 2008 market collapses, which was at an extreme level early in these moves. For those who do not remember these times, this coronavirus scare is plenty enough to demonstrate that you do not need much of a brain to spot real trouble before the flames turn a lot of our money into ashes.
The 30% that we were down at the end of trading Friday did at least get us to the point where the buyers really got together and pushed stock prices up, but their opponent, the bears, still have a lot of life in them and they feed off of the escalating case numbers. That last-minute move to end the day Friday was simply something to behold for traders, and you don’t usually see 5% gained in less than a half an hour.
This was straight up as well, instead of the usual wiggles that we see this time of day. This is normally a tough time to trade, second only to the opening half hour, but not when things are shooting up to the sky. This was similar to what happened on Wednesday after Trump spoke, only this time, the move was even cleaner.
While good traders had an absolute field day on both Thursday and Friday, investors need to be much more careful as they aren’t the sort that can move in and out of stocks well like traders can. This is no time to learn to be a trader with no lessons or even much of an idea besides just winging it, because the punches that are being thrown right now are so huge.
If an investor really wanted to get back in right now, it is essential that they have one hand on the plug to get out if conditions warrant. The good thing though right now is that when it is time to bail, the fist that is pointed at our heads is so big that we can’t miss it if we are looking at all.
Look to the futures session on Sunday night and Monday morning to tell the story of where the mood starts the week at, although you also need to be aware that the regular session brings a different crowd to the table, the big money, and that’s the people we want to focus on the most.
The big money said yes to Trump on Friday, but we’ll really have to see where the first hour takes us on Monday to see if they are still around from Friday or have taken another day off like on Thursday. Daily bars are too long for this environment, because so much goes on within these bars these days, although 4 hour bars would be fine and keep people from having to sweat very many decisions while keeping them in for most of the time we should be in and out for most of the time we should be out.
For those who are particularly open minded, playing index ETFs when we’re running up and inverse index ETFs when we’re moving down is an especially nice way to go, as you get to cash in on the dance with this bear as well as the pushback from the weaker bulls.
After losing a couple of games last week, the bulls are at least returning serve again, although the monster serve that the coronavirus bashes at them is not an easy ball to handle and the bears are scoring quite a few aces lately. You can always follow the ball and play the side that is up if you want though, and while the progression of this is far from certain, you can count on lots of action at least.
This will all end soon, and as far as where we have our money during this time, we have only ourselves to blame for our losses or the fact that we’ve refused to team up with the bears when they are playing so well. They will be going home soon, as well as all that extra opportunity that they brought. If you really want to win, you have to pick the right side to play with.