12 Mar IT IS REALLY UGLY
Equities plunged again following the World Health Organization’s declaration that the coronavirus is now a pandemic. Stocks were also jilted by the lack of follow up surrounding a potential stimulus plan. And then there is the evolving liquidity crisis in the bond market which I think is a greater threat to the markets than the corona virus.
Treasuries were extremely volatile with the 30-year closing down about 3 points at a 1.38% yield. Monday the yield on the 30-year Treasury fell below 1%. This is a sign of stress as institutions are selling the only product that has some type of liquidity…selling what you can rather what you want.
Yields on the bid side for the 20-year generic munis increased by around 100 basis points since Tuesday morning, rising from around “2% basis to around a “3% basis”. Liquidity is virtually nonexistent.
The liquidity issues in the corporate bond market commenced mid last week.
Wow! The volatility and fear is intense.
Armstrong William’s Ramsdell Brief discussed an excerpt from “The Psychology of Pandemics.”
Briefly, the corona virus is closely following the script, a script where fear begets fear. Mob psychology over rides rational thought. If everyone else is panicking, then I should panic as well.
Ramsdell utilized the hoarding of toilet paper as example of such behavior.
What is perhaps different today than from past crisis is the blogosphere, where rumor and innuendo rules and such is instantaneously broadcasted to the world. There are potentially 3 billion mouth pieces writing unsubstantiated stories, treating everything as fact.
This is also an election year and unfortunately the corona virus has become a political issue.
All politicians remember Katrina and how unsubstantiated stories and allegations paralyzed the Bush Administration. The overriding government psychology is to over react rather than suffer the potential consequences.
There are more questions than answers. What is known is that this is a new virus, one which natural antibodies may not have yet be developed. What is also known is the elderly and the infirmed are most at risk. What is also known is hand washing—that is washing your hands before eating or touching your face is perhaps the best preventive action.
Viruses are generally regarded as weak entities that have a life span of about 15 minutes.
It is my understanding a vaccine is about 30 days away and mass implementation is about 60 days away, utilizing Ebola, MERs, and SARs as examples.
The vaccine may not meet the stringent FDA requirements but would probably be used in other countries as was the case with Ebola, et, al.
We are nearing the end of the traditional flu season. It is regarded the potential outcome could be worse if this was early November.
I think it is safe to write the hyperbole is at manic proportions. Phycology 101 states fear and anxiety produces apocalyptic outcomes, outcomes that have an extremely small probabilities of occurring. I ask how many times have you woke up at 3:00 AM thinking “incredibly rational thoughts” and at 9:00 AM the rational mind than declares these 3:00 AM thoughts as incredibly irrational.
In my view any minor change in the corona narrative the markets can have an outsized response.
As with the corona virus, the economic outcome of the virus is also apocalyptic.
I would like to digress politically in an attempt to make a point.
Less than 10 days ago every political expert was declaring Bernie Sanders as the Democratic front runner with some suggesting the odds of a contested convention at around 50%.. South Carolina was viewed as too close to call. Biden crushed Sanders in the South Carolina primary ushering in Biden’s Super Tuesday resounding victory which ended the candidacy of Bloomberg, the proverbial white knight that would rescue the Democratic Party from itself.
Today Biden is widely accepted as the Democratic nominee after Tuesday’s night’s victories.
The future is never known but the major issue of today is the blogosphere which adamantly declares tomorrow’s future, a future that is perhaps based on nebulous variables at best.
Change is the only certainty and most psychologists will state 99% of things we fear never materialize at the levels envisioned at the emotional height of the crisis.
Are we there today? I think yes
What will happen today?
Last night the foreign markets were sharply lower. London was down 5.39%, Paris down 5.66% and Frankfurt down 5.77%. China was down 2.20%, Japan down 4.41% and Hang Sang down 3.66%.
The Dow should open sharply lower as the markets believe government fiscal responses are underwhelming at best. The 10-year is up 2 points to yield 0.70%. The 30-year is up 4 ½ points to yield 1.23%.