2019 Outlook

Stocks took another beating last week as the scope of the coronavirus shutdown started to sink in. The S&P 500 was down 15% last week with most of that coming on Monday after the Fed’s emergency rate cuts. Our accounts performed much better than that, but were still down on the week as corporate and municipal bonds continued to get marked down.

The stock market has recovered most of its losses from the March COVID-19 induced sell-off and the enthusiasm with which stocks are being bought – and sold but mostly bought – could lead one to believe that the crisis is over, that the economy has completely or nearly completely recovered. Unfortunately, other markets do not support that notion nor does the available economic data.

As I sit here Monday evening with the Dow having closed down 2000 points and the 10-year Treasury yield around 0.5%, the title of this update seems utterly ridiculous. With the new coronavirus still spreading and a collapse in oil prices threatening the entire shale oil industry, recession is now the expected outcome. Most observers seem to question only the potential length and depth of the coming downturn.

Is it over? That’s the question everyone is asking about both major crises, the answer is more obvious for only the one. As it pertains to the pandemic, no, it is not. Still the early stages. The other crisis, the global dollar run? Not looking like it, either.

As I’ve said, it is a threefold failure of statistical models. The first being those which showed the economy was in good to great shape at the start of this thing. Widely used and even more widely cited, thanks to Jay Powell and his 2019 rate cuts plus “repo” operations the calculations suggested the system was robust.

Can we please dispense with all notions that monetary policy works? Specifically balance sheet expansion via any scale asset purchase programs. Nowhere has that been more apparent than Japan. Go back and reread all the promised benefits from BoJ’s Big Bang QQE that were confidently written in 2013. The biggest bazooka ever conceived has fallen short in every conceivable way.

The eurodollar curve’s latest twist exposes what’s behind the long end. To recap: big down day in stocks which, for the first time in a while, wasn’t accompanied by massive buying in longer maturity UST’s. Instead, these were sold, too. Rumors of parity funds liquidating were all over the place, which is consistent with this curve behavior.

There are three things the markets have going for them right now, and none of them have anything to do with the Federal Reserve. More and more conditions resemble the early thirties in that respect, meaning no respect for monetary powers. This isn’t to say we are repeating the Great Depression, only that the paths available to the system to use in order to climb out of this mess have similarly narrowed.