Declaration of War
Happy Friday,
So much happening, so fast, in so many different areas - how to stay on top of it all?
At TPWIM, we have created a live, internal Good News, Bad News document. Structure helps & so we tie it back to our Global Risk Nexus (GRN) work: Economics, Politics, Policy & Markets and add a Health section. Below are some thoughts - I hope they are of help. Please reach out with Qs/comments.
HEALTH:
If references to war are any indication, then policymakers & populaces are finally taking the coronavirus seriously. China reporting no new domestic cases is the ray of sunshine. But as in Good News, Bad News, Italy's continued case expansion and the US waffle between testing and social distancing is the bad. CA lock down and positive market reaction suggests much is discounted.
ECONOMICS:
Economists also appear to have gotten the war memo with recession calls proliferating and truly scary Q declines forecast (JPM). A week ago it was Q2 US GDP -2%, now its -14%.. UER fears were 5%, now 10% + and Mnuchin’s 20% scares everyone. China’s horrid Jan - Feb data dump set the stage for these shifts - lets hope its recovery does the same (China reportedly now 75% + back in operation). Again, much is discounted.
POLITICS:
Big Govt is BACK. US election likely to turn on who best represents a safe pair of hands; China - US tussle for influence leaning in China’s direction as US plays catch up to virus; Europe has a huge opportunity to take big steps in safe asset creation, joint fiscal policy etc. Tri Polar World implications are significant > a story for another day.
POLICY:
War references pour fast & furious from Pres, PM, MOF etc. Rolling Thunder indeed. Much easier to respond to public health emergencies than to bail out bankers. No global coordination but 40+ rate cuts & roughly $4T in CB balance sheet and fiscal support is a lot of firepower. How much is enough is & will remain unclear; the key is that Govts (ex China which is keeping its powder dry) will do whatever it takes, even in Germany.
MARKETS:
Gyrations like we have witnessed across assets and geographies these past two weeks update the 1929 Crash story in ways that hit close to home. Personal story: my Grandfather was in the markets then: He got married, went on a transatlantic honeymoon cruise and returned home to find himself busted. Selling the family silver indeed.
In 2020, we have lots of price discovery, massive, machine led, deleveraging by volatility traders, systematic managers & risk parity players leading markets from “record breaking” to “broken”. This market, structure, fund etc is “broken”, the US credit market and dare one say it, the UST market, the most liquid safe asset in the globe… dysfunctional if not broken.
Good news is the Fed has the GFC playbook & is using it. Value players are talking up a generational opportunity. VAR players have delevered. Top down tough given EPS uncertainty; 10% off 2020 US EPS of $170 gets $150 or so which puts SPY at 2400 on 16x forward. ROW was and is cheap; Japan eq cash rich; EU banks at .4x BV.
UPSHOT:
A lot has been priced in, policy makers are on war footing, positioning is much cleaner, family silver has been sold, starting to get our arms around the various impacts of coronavirus.
WATCH:
Volatility (needs to stabilize/decline), hedges (need to act like hedges), correlation of one needs to come in (1 month implied SPY @ .98 mid-week). Next week: March PMIs, low 40s whisper #, Quarterly rebalancing (MS suggests $160B to buy eq). Peak (EU-US) cases remain key missing variable. Italy in focus - potential case peak in next week or so.
OPEN QUESTION:
Will the bear market will lead to new leadership? As the health, economic, policy and market parameters stabilize then one can start to visualize the future. While today it's blurry as heck (WFH has not caused an early happy hour); a return to status quo ante seems unlikely.
Rest up, be well and hopefully find some quiet time to digest everything….
TPW Investment Management Team