There is an epidemic of panic.  Many are focusing on what they don’t know rather than what they do know.  Rationality is almost absent.

This too shall pass, focus on the positives and known information, not hyperbole and conjecture.  In many regards both big business and government is fanning the hysteria under the much over used line of “Abundance of caution.”

I must write that I am not Pollyannaish nor am I throwing caution to the wind.  As noted the other day most psychologists will state 99% of things we fear do not materialize.

As with every other crisis we will overcome and emerge stronger and unified.  We are Americans!  The strongest country, the most capable and ingenious country the world has ever known.  Faith, hope and the absolute knowledge of a better tomorrow has been our eternal hallmarks, engrained in our national culture.

We are the mutts of the world.  As the Statue of Liberty says we are “The Wretched Refuse.”  Mutts always win because they are survivors.

Changing topics, in some regards and based upon several market technical indicators, an argument can be made equities are stabilizing.  I must write also write, some are stating the Federal Reserve is no longer potent given how the equity markets plunged at the open and closed around their lows declining the most since October 1987 following the Fed’s drastic action.

I will argue the Fed’s massive intervention was not to stabilize the equity market but rather to add liquidity to the bond market.

I must write there are no rumors of any trading firms having any issues.  Banks are very well capitalized.

What is certain, there is a liquidity crisis in the bond market.  For example, one week ago a generic 10-year AA rated non-callable muni was yielding 0.88%.  Friday the bid side surged to 1.66% and today if there is a bid, the bid would be over 2.05%.  AA rated munis have never traded 120 basis points over the corresponding Treasury.

This is unprecedented.    The reason for this absolute killing of an investment that is/was viewed as “conservative” is the inability to find buyers for massive selling from ETFs.  Bloomberg writes the average bond ETF is trading at a 14% discount.  [Note:  Bloomberg did not distinguish the type of bond ETF]

In my view this is a systemic issue, the result of Dodd Frank that eviscerated money center banks ability to take risk and stabilize the market.  Money center bank bond inventories are down over 90% from 2008.  The bond market is over 4x larger.

This is an excellent example of the actions from yesterday’s crisis sowed the seeds for the next crisis.

Is this liquidity crisis a momentary issue?

Unfortunately, only history will answer this question but if history is to be used as a guise, there will be another change as to how bonds are traded.

All must remember that the bond market is about 20x the size of equity markets.  There are over 3 million distinct fixed income CUSIPs, each with different characteristics, as opposed to about 7,500 distinct equity CUSIPS.  In my view this effort to “Equify” fixed income trading is failing miserably.

Yesterday Dow Jones Market Watch quoted former FDIC Chair Sheila Bair that the Federal Reserve does have the authority to provide emergency lending programs or provide liquidity and purchase bonds in industries, not companies, the result of section 13-3 of the Federal Reserve Act which was modified in 2010 via Dodd Frank.  It avoids the problem of government picking the proverbial winners and losers.

Bair commented such a rollout would be approved in a “nano second” and would immediate benefit the travel, airlines, hotel and oil industries, four industries that is at the epicenter of the current crisis.

Wow!  In my view this is huge, much more effective than dropping interest rates to zero and embarking upon another QE program.

Will such happen?  President Trump and the G-7 have commented that “they will do whatever it takes.”

What will happen today?

Last night the foreign markets were up.  London was down 0.32% Paris up 0.14%  and Frankfurt up 0.09%.  China was down 0.34%, Japan up 0.06% and Hang Sang up 0.87%.

The Dow should open about 300 points higher following the biggest plunge since 1987. The 10-year is off 28/32 to yield 0.82% and the 30-year is off 2 ½ points to yield 1.39%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.