We are living in historical times.  The S & P 500 has moved a record 4% or more in eight consecutive sessions.  The previous record of six days was set in 1929.  Moreover, yesterday the markets stopped trading twice because of declines.

The speed and extent of this decline is also unprecedented. It was one month ago today the S & P 500 was at a record.  Today it is 31% lower.  Talk about the velocity of change!

Can a case be made that the worse is already factored into prices, perhaps the result of technology-based trading that lacks the rationality of human thought processes?  Data suggests 95% of trading is the result of algorithmic trading where computers have gone manically amuck.

I think the odds of such is about 65%.

The volatility in the bond market is worse.  Eight days ago, the benchmark 30-year Treasury was 0.99%.  Today it is 1.85%.  The annual negative return as per Bloomberg is negative 31.79%.

I will argue there are systemic issues in the bond market, issues that are considerably greater than the corona virus.  This huge increase in yields may be the result of firms selling the only vehicle they own to meet liquidity demands…the US Treasury.

I am surprised that I have not heard any rumors any firms experiencing financial crisis.

I could also argue the bond market is suggesting a potential inflationary spiral when this crisis end.  The amount of liquidity that has been injected is unprecedented.  Inflation is a two-part phenomenon…too much money chasing too few goods fearing higher prices tomorrow.

What are the odds within 30-45 days the economy enters into an inflationary growth spiral, the result of latent demand and broken supply chains amplified by today’s massive liquidity measures?

Wow!  This is radical but is it?  Former Fed Chairmen Greenspan and Bernanke have both opined that this is a possibility.

I would like to digress and talk about Italy. Yesterday I read several frightening and apocalyptic stories.  I was first disturbed but after further thought they reminded me of the anti-smoking movies I watched in seventh grade.

To place things into perspective, Italy’s population is 61 million. There are 31,506 cases, up 12% from yesterday and the slowest rate of increase since the pandemic commenced on February 21.  Deaths are 2,503.

In other words, only 0.05% of Italy’s population has contracted the illness.

I understand logarithmic math.  I understand this is a novel virus.  But I ask is the cost worse than cure, the cost of shutting down the economy and society?

In my view society has about 7-10 days before it begins breaking.  At this juncture most are scared.  The next emotion is anger, anger perhaps focused on government acting in the extreme.

Change is the only certainty.  This too shall pass just as every other crisis has passed.

Keep the faith and yes hope is a strategy.  The opposite of hope is despair and I remind all that psychology states that 99% of things that we fear do not materialize.

What will happen today?

Last night the foreign markets were “nominally” lower.  London was down 1.45%, Paris down 0.28%  and Frankfurt down 0.72%.  China was down 0.98%,  Japan down 1.04% and Hang Sang down 2.61%.

The Dow should open nominally lower. The 10-year is up 17/32 to yield 1.14%


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. 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. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.