A Warning From the Great Depression

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3.28 million.

That is the total number of unemployment claims Americans filed last week — nearly five times the prior record of 695,000, from October 1982.

“We’ve known this number was coming for a week and a half,” laments Tom Gimbel, who captains a Chicago employment agency, adding:

It doesn’t surprise me at all. When you see a city like Las Vegas get shut down, I don’t know what other options there were than seeing a number like this.

A fellow must take his comforts where he can find them these days. And precious few are on offer.

But if it is consolation you seek, here you have it: Some economists had forecast as many as 7 million claims.

Here is additional cheer, however transient: The stock market had itself another day at the races today.

Stimulus, at Last!

The Dow Jones recaptured another 1,351 points. The S&P gained 154, the Nasdaq 413.

Today’s stock market surge follows last evening’s Senate passage of a $2 trillion relief package. It is the largest ever in United States history. The vote was unanimous.

The bill includes, per CNBC:

One-time direct payments to individuals, stronger unemployment insurance, loans and grants to businesses and more health care resources for hospitals, states and municipalities. It includes requirements that insurance providers cover preventive services for COVID-19.

Qualified individuals will receive cash payments of $1,200. Couples will receive $2,400… with an additional $500 for each child.

A Lobbyist’s Dream

883 pages in length, we can only imagine the skullduggery and chicanery within, the sweet venoms the lobbyists put in.

But who has time to read all 883 pages while American life dangles by a strand? And who can say no?

The legislation next goes to the House of Representatives for the rubber stamp — which it will assuredly receive tomorrow morning when the vote is scheduled.

Then it jumps to the White House for the presidential signature. Mr. Trump has pledged to sign it “immediately.”

Treasury Secretary Mnuchin said today the checks will mail within three weeks.

But as we have questioned previously… what will they accomplish?

Say’s Law

The issue at hand is not one of demand. It is one of supply. And a shuttered-in economy produces little.

Filling an idle man’s pocket with fabricated money does not increase supply. It merely increases the bid for existing supplies.

Let us not forget Say’s law — that supply creates its own demand. “Products are paid for with products,” argued Jean-Batiste Say over two centuries ago.

One man produces bread. Another produces shoes.

The cobbler who requires bread for his dinner appears before the baker. And the baker who must clad his feet appears before the baker.

They may transact in money… but money merely throws an illusory veil across their transactions.

Ultimately the baker purchases his shoes with the bread he has baked. And the cobbler purchases his bread with the shoes he has cobbled.

Concludes Monsieur Say:

Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found that one kind of commodity has been exchanged for another.

The Government Attempts to Outlaw Say’s Law

Assume now a free economy in which supply and demand are allowed their unfettered reign. Assume an economy — that is — that does not presently exist.

You can expect supply and demand to come to terms, to come into rough equilibrium.

If there is less demand, prices will fall to meet it.

But when the government prints money with no production to match it… it attempts to outlaw Say’s law.

Consider the thought experiment of another 18th-century thinker David Hume…

Imagine a benevolent fairy slips money into all the nation’s pockets overnight. And so the money supply doubles at a stroke.

Is this nation doubly rich?

Alas, it is not. The money supply has been doubled, yes. But no additional goods have entered existence.

The new money will simply chase existing goods. We can therefore expect prices to approximately double.

The Real Source of Wealth

Explains the late economist Murray Rothbard:

What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor and capital. Multiplying coin will not whisk these resources into being. We may feel twice as rich for the moment, but clearly all we are doing is diluting the money supply. As the public rushes out to spend its newfound wealth, prices will, very roughly, double — or at least rise until the demand is satisfied, and money no longer bids against itself for the existing goods.

There you have the wisdom of classical economics. But then came the Great Depression, and out it went…

Out from under every rock slithered the cranks, chiselers, dreamers, something-for-nothing and wine-from-water men…

All promising salvation, all offering their quack medicines.

And they all found their way to Washington…

Destroying Food While People Starved

The farmers were in a bad way, they argued. These sad sacks could not fetch enough money for their produce or their livestock. And so they needed a hand up.

A program was therefore required to raise prices. The brain trust then in operation hatched a beautiful scheme. What was it?

To set fire to the crops and murder the livestock.

To be clear, they did not butcher the animals to bring to market — but precisely the opposite — to keep them off the market.

Ponder for one moment the reality of it:

While millions starved, entire crops were set ablaze. And millions of animals went into the ground… rather than growling bellies… all to raise the price of farm products.

What of the impoverished nonfarmers required to pay more for their basic sustenance? How would higher food prices benefit them? Or the overall economy? Might the money people saved on food allow them additional purchases from other industries?

The men with the grand pensees did not say… or did not care for the answers.

The same lunacy was brought to bear on other industries…

A Reign of Terror

Production above mandated levels was not permitted. Nor were prices permitted to fall beneath predetermined levels.

If a man flouted the rules… woe to him.

One man, a New Jersey tailor, was convicted and clapped into prison. What was this hellcat’s “crime”?

He pressed a suit for 35 cents. Law required the job be done for 40 cents.

Meantime, New York’s garment industry endured a mighty terror, explains 1930s journalist John Flynn:

The code-enforcement police roamed through the garment district like storm-troopers. They could enter a man’s factory, send him out, line up his employees, subject them to minute interrogation, take over his books on the instant. Night work was forbidden. Flying squadrons of these private coat-and-suit police went through the district at night, battering down doors with axes looking for men who were committing the crime of sewing a pair of pants at night.

(We acknowledge economist Thomas DiLorenzo for the source material.)

Examples abound. Here is the central lesson:

At a time when lower prices and greater production were most needed… lower prices and greater production were violently suppressed.

This was the economic wisdom of the day. And now in this, our own time of economic crisis…

A fresh roster of cranks, chiselers, dreamers, something-for-nothing and wine-from-water men will afflict us anew.

1930s Redux

They would treat us to another New Deal — green in color — to haul us up.

Modern Monetary Theory is our salvation, they will croon.

Medicare for All will be the promised cure for the next pandemic.

All war with the ancient and iron laws of economics that time has proven valid.

Yet as in the 1930s… a fearful and desperate America may yet embrace them.

Regards

Brian Maher
Managing editor, The Daily Reckoning

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The Only Way to Avoid Depression?

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Hope, it is said, springs eternal.

Today the stock market was up and away on hopeful wings… for it believes “fiscal stimulus” is imminent.

Nancy Pelosi gushed there was “real optimism” about a deal today. Sen. Charles Schumer conferred with Treasury Secretary Steven Mnuchin.

Said the senator:

There are still a few little differences. Neither of us think they are in any way going to get in the way of a final agreement.

At writing, no agreement has been reached.

The Dow Jones nonetheless regained 11.26% today, a full 2,093 points — its finest day since October 2008.

Both S&P and Nasdaq turned in comparable romps.

But when you want it bad, you often get it — bad.

Getting It Bad

We have no doubt the lobbyists have been busy. Crisis is when these swamp inhabitants sniff their chance.

Any legislation will be loaded to the rails with “stimulus” having nothing to do with the economic cataclysm before us.

But it will butter their parsnips.

Most in Congress who vote for the bill will never even read it… precisely as they failed to read the Patriot Act in 2001.

“Never let a good crisis go to waste,” as a certain Obama official said after the next crisis.

Coming home…

Taxpayer money will flow to the same corporations that took on record debts this past decade to conduct stock buybacks and other financial gimmickry.

Might corporations have rebuilt their balance sheets, restocked their acorns for winter, stored in reserves for lean times?

They might have, yes. Alas they did not. The lure of stock market riches tugged too strongly.

But it is laissez-faire in bountiful times — and aidez-nous when events swing against them.

But let it go for now. Consider instead this question:.

What will a deluge of fiscal stimulus accomplish… besides plunging the entire nation deeper into debt?

A Recipe for Inflation

The gears of commerce have wound to a violent and arresting halt.

The nation faces a “supply” shortage, that is — not a “demand” shortage.

It is not possible to purchase goods that do not exist.

And so massively more money will chase fewer goods. That of course writes a recipe for inflation. Potentially even hyperinflation.

Perhaps that is why gold takes impending fiscal stimulus rather differently than the stock market…

Gold went rocketing $92 today. Yes, $92.

We can recall nothing comparable.

And Goldman Sachs hollers it is time to buy this, “the currency of last resort.”

Meantime, our men inform us that acquiring physical gold is nearly impossible.

Jim Rickards warned his readers for years to purchase gold before the crisis came. It would prove impossible to find afterward, he said.

The crisis has come.

Plunging Into Depression

Morgan Stanley and Goldman Sachs estimate second-quarter United States GDP will plummet 30%. And unemployment will run to 13%.

Morgan Stanley economists:

Economic activity has come to a near standstill in March. As social distancing measures increase in a greater number of areas and as financial conditions tighten further, the negative effects on near-term GDP growth become that much greater.

These crackerjacks project a third-quarter recovery springing from the looming stimulus.

But what if social distancing measures remain in place? What if supply chains snap entirely under the load?

What if the dose of economic medicine fails to end the cardiac arrest?

The prospects of depression are suddenly and vividly acute.

Debt Is Already Too High

But before the Great Depression, United States government debt ran to $17 billion. Yes, of course the economy was far smaller.

But the nation’s debt-to-GDP ratio was a mere 16%. Even in 1941 — after all the New Deal borrowing sprees — the ratio stood at a fair 44%.

But today the United States debt exceeds $23 trillion. And its debt-to-GDP ratio already exceeds 105%.

The nation simply lacks the capacity for a debt extravaganza.

The dollar itself might not survive the deluge, all confidence lost.

“The pen shrinks to write, the heart sickens to conceive” the enormity of the coming toothache.

Meantime, the Congressional Budget Office (CBO) had previously projected economic growth to limp along at an average 1.9% per annum through 2029.

Yet that guttering 1.9% did not account for recession — much less depression.

Whence cometh the growth… should the United States economy sink into depression’s black depths?

Is there a way out?

There may be. We have presented the option before…

The Least Bad Option?

You may have laughed it out of court at the time. But laugh no longer, such are the depths of the hells before us.

We refer to a debt jubilee.

That is, the mass forgiveness of debt.

Heave the ledger book into a roaring fire. Run a blue pen over the red ink. Wipe the tablet entirely (or largely) clean.

It may be the best available way up, argues economist Michael Hudson:

Massive social distancing, with its accompanying job losses, stock dives and huge bailouts to corporations, raises the threat of a depression. But it doesn’t have to be this way. History offers us another alternative in such situations: a debt jubilee. This slate-cleaning, balance-restoring step recognizes the fundamental truth that when debts grow too large to be paid without reducing debtors to poverty, the way to hold society together and restore balance is simply to cancel the bad debts…

The way to restore normalcy today is a debt write-down. The debts in deepest arrears and most likely to default are student debts, medical debts, general consumer debts and purely speculative debts. They block spending on goods and services, shrinking the “real” economy. A debt write-down would be pragmatic, not merely a moral sympathy with the less affluent.

This Hudson fellow has looked into debt jubilees through history.

Why Kings Wiped out Debt

The practice began some 5,000 years distant in ancient Sumer and Babylon… where a newly enthroned king would delete the people’s debts.

Was it because the new king was a swell fellow? Or because he was an ancient Marxist?

No. He cleared the books to preserve his own head. He was alert — keenly — to social stability.

Hudson:

The word Jubilee comes from the Hebrew word for trumpet — yobel. In Mosaic Law, it was blown every 50 years to signal the Year of the Lord, in which personal debts were to be canceled…

Until recently, historians doubted that such a debt jubilee would have been possible in practice or that such proclamations could have been enforced. But Assyriologists have found that from the beginning of recorded history in the Near East, it was normal for new rulers to proclaim a debt amnesty upon taking the throne. Instead of blowing a trumpet, the ruler “raised the sacred torch” to signal the amnesty.

It is now understood that these rulers were not being utopian or idealistic in forgiving debts. The alternative would have been for debtors to fall into bondage. Kingdoms would have lost their labor force, since so many would be working off debts to their creditors. Many debtors would have run away (much as Greeks emigrated en masse after their recent debt crisis) and communities would have been prone to attack from without.

A Fairly Recent Debt Jubilee

But the United States, anno Domini 2020, is not Babylon, 3,000 B.C.

Is there a more contemporary example of a debt jubilee?

Yes, says Hudson. Look to West Germany in 1948:

In fact, it could create what the Germans called an “Economic Miracle” — their own modern debt jubilee in 1948, the currency reform administered by the Allied Powers. When the Deutsche mark was introduced, replacing the Reichsmark, 90% of government and private debt was wiped out. Germany emerged as an almost debt-free economy, with low costs of production that jump-started its modern economy.

Not a Perfect Answer

Is a debt jubilee a vast swindle, a rooking of honest lenders and the absolution of the wicked?

It may well be.

“The wicked borrows and cannot pay back”… as Psalm 37:21 informs us.

Who would loan anyone money at all — knowing one day he may be left holding an empty bag?

And who would lend money to the deadbeat United States government? How would it fund its bread and circuses?

We have no answers.

In short, a debt jubilee would unquestionably produce its own migraines.

But is it worse than the alternative?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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It Could Last 18 Months — “or Longer”

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547.5 days. 78.2 weeks. 18 months. “Or longer.”

That is how long the coronavirus scourge may endure. This we learn by way of The New York Times.

It has done us all a capital service by executing a rare feat of journalism.

For its spies have captured a government document “not for public distribution or release.”

From which:

A pandemic will last 18 months or longer and could include multiple waves of illness… Increasing COVID-19 suspected or confirmed cases in the U .S. will result in increased hospitalizations among at-risk individuals, straining the health care system… Supply chain and transportation impacts due to ongoing COVID-19 outbreak will likely result in significant shortages for government, private sector and individual U.S. consumers.

Potentially critical shortages may occur of medical supplies and staffing, due to illnesses among public health and medical workers, and potentially also due to exhaustion. SLTT governments (state, local, tribal and territorial), as well as health systems will be stressed and potentially less reliable. Health systems may run low on resources inhibiting the ability to make timely transitions between postures and maintenance of efficacy.

We are precious sick of the coronavirus after four days of home jailing.

How can any man withstand 18 months — “or longer”?

And how can the economy hold?

Consider one week of deadness upon the automobile industry. Reports auto man Eric Peters:

If people stop buying new cars for one week because dealers are forced to close shop – which has already happened in at least one state or because instantly unemployed people are no longer shopping for new cars it will cost the car industry $7.3 billion in earnings — and cost 94,400 Americans their jobs. It would also cost the government some $2 billion in taxes.

That’s one week. How about three months?

Indeed… how about 18 months?

We stagger and reel at the prospect.

Meantime, the National Restaurant Association — this organization has actual existence — projects its industry will shed “5–7 million jobs.”

We expect hotels and the tourist trade to withstand parallel holocausts.

In the immediate run…

JPMorgan’s primary U.S. economist, Michael Feroli by name, has hacksawed his second-quarter GDP forecast to a ghastly 14% drop.

The third and fourth quarters may yield a recovery. But that is far from certain if the virus remains amok.

And how about six entire quarters?

“If life doesn’t get back to normal for ‘18 months,’” argues catastrophist Michael Snyder, “we are going to witness a societal meltdown of epic proportions.”

More from whom:

If the entire world shut down for 30 days, this pandemic would quickly be brought under control. If only the U.S. shuts down, it is inevitable that the virus would keep coming back into the country as the pandemic continues raging elsewhere on the globe.

Of course we aren’t going to get the entire globe to agree to shut down simultaneously for 30 days.

So this outbreak will continue to spread and the case numbers will continue to grow.

It is a dismal mathematics.

Naturally the monetary and fiscal authorities are mobilizing on multiple fronts.

The Federal Reserve has executed the largest single market intervention in its hellish history. And the Department of Treasury is clearing for action.

The nation will plunge deeper and deeper into debt’s inky depths.

But how can it come up when chained down with so much debt?

The past 10 years offer high proof that debt does not translate to growth — not after a point, at least.

We may be articled off to prison for merely putting out this question. And the gallows after prison — and hell after the gallows…

But what if they allowed the economy and the stock market to go their own way?

Yes, the way would be down.

The going would be dreadful for a stretch. We will not pretend otherwise. Yet it would clear out much of the rot that presently infests us.

A new economy, strong and youthful and resilient, could come up from the rubble. And healthy shoots of growth could eventually grow into the towering oaks of tomorrow.

That is, what if the authorities did not do something… but merely stood there?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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“Hell Is Coming”

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We sense that we are among unrealities…

It is as if some hinge, deep within the national psychology, has suddenly given way.

The daily rites of life are suspended. Businesses, schools and arenas the nation over have gone dark. Travel is hopeless…. and borders are sealed shut.

Unemployment claims are piling up. Treasury Secretary Mnuchin has suggested they may ultimately scale a depression-level 20%.

San Francisco residents are under house arrest, confined to barracks 24 hours of the day. Emergencies and food shopping provide the only officially sanctioned furloughs.

(Our spies report large numbers of lawless who are flouting the ban.)

Rumors are on foot that other municipalities — New York City included — will follow.

USNS Comfort — a hospital ship — is presently plowing a course for New York Harbor, under presidential orders.

An identical vessel steams for the West Coast.

You Can’t Even Go to Church

Locally, a blanketing hush has fallen over the city of Baltimore. Residents have abandoned the streets. Dining and ale houses are shuttered.

Those who hazard a public appearance approach one another with suspicion… as if every stranger has a gun in his hand and murder on his mind.

Even the churches have suspended their Godly operations, their flocks scattered to the winds:

IMG 1

Even in wartime a fellow can take refuge in the comforting arms of God. But not when a pestilence is loose.

Yet the trees near our office are in blossom:

IMG 2

And old Washington keeps his reassuring watch over the city:

IMG 3

And we shall remain chained to our post… bound in solemn duty.

Three Years of Gains Wiped Out

The stock market went to the devil again today.

The Dow Jones slipped into the 18,000s today. It “recovered” to 19,899 by closing whistle… a 1,338-point loss on the day.

The S&P shed another 130 points; the Nasdaq 345.

Thus all market gains since Mr. Trump assumed his office are eliminated — three years of gains into the furnace.

“We’re only about halfway there,” hazards one trader. That of course being the bottom.

Gold, meantime, absorbed another slating today, down $30 and change.

But the 10-year Treasury yield went shooting in the other direction…

Yields vaulted 27% to 1.266%.

The reason is the promise of economic “stimulus” (more on which below).

The “Coronavirus Investment Summit”

Jim Rickards predicted the coronavirus scourge in early February, before markets caught the fever.

Wrote Jim in an email dated Feb. 5:

The real infection rate and death rate may be 10 times the official statistics… If you want to see how bad things can get, study the “Spanish flu” pandemic of 1918–20. Over 50 million dead.

And while the stock market was thundering down, Jim’s readers enjoyed the opportunity to nearly triple their money with one of his recommended trades — in one single day.

“Hell Is Coming”

We presently confront a springtime not of growth and life but of sickness and death.

And the carefree days of summer will likely yield to the careful days of summer… heavy with the mighty fear of a miniature bug.

The president — after all — let slip the other day that fortunes may only swing in August.

“Hell is coming,” shrieks Bill Ackman of Pershing Square Capital. He continued:

We need to shut it down now… This is the only answer… America will end as we know it. I’m sorry to say so, unless we take this option.

What precisely constitutes “this option”?

Chaining down the entire economy for 30 days. All gears of commerce must wind to a complete and immediate 30-day halt. More:

The hotel industry and the restaurant industry will go bankrupt first. Boeing is on the brink, Boeing will not survive without a government bailout… Capitalism does not work in an 18-month shutdown, capitalism can work in a 30-day shutdown…

Every hotel is going to be shut down in the country… If we allow this to continue the way we have allowed it to continue, every hotel company in the world is done. No business can survive a period of 18 months without revenue.

Will the president heed this fellow’s counsel?

“Wartime President”

Mr. Trump has now declared himself a “wartime president.”

And he has pledged to invoke the 1950 Defense Production Act (Pub.L. 81–774) — “in case we need it.”

The Defense Production Act is:

An Act to establish a system of priorities and allocations for materials and facilities, authorize the requisitioning thereof, provide financial assistance for expansion of productive capacity and supply, provide for price and wage stabilization, provide for the settlement of labor disputes, strengthen controls over credit and by these measures facilitate the production of goods and services necessary for the national security, and for other purposes.

“Other purposes,” of course.

From bull market to wartime economy within the space of one month — if you can believe it.

A journalist once asked British Prime Minister Harold Macmillan what could knock his plans off the course.

“Events, dear boy, events,” came his supposed response.

The president has been washed over by events.

Emergency Relief

Meantime, the administration proposes to write Americans checks — $500 billion worth in total.

The first would go in the mail April 6 — pending congressional approval of course. The second batch would go on May 18.

The specific amounts will depend upon a family’s income and number of children in residence.

“Millionaires,” we are told, are ineligible for relief.

Meantime, we are informed the Senate has the votes sufficient to expand paid leave and unemployment insurance.

The bill has already cleared the House of Representatives. Off it goes for the president’s signature once the Senate pushes it out.

But what will the rest of us purchase with the money we are to receive?

“The. Party. Is. Over.”

Our colleague Byron King laments we have “silent spring” on our hands, “courtesy of one too many imports from China.”

And the shelves may run thin by summer:

My maritime friends tell me that over the past two months, over 260 large cargo ships — 10,000–20,000 containers and more per each one — were canceled or sailed partly loaded (from China). Out of over 4 million containers that “should” have shipped, 2 million — about 50% — never made it.

What you see on the current shelves — the Chinese stuff — all showed up last fall and early winter. Looking ahead, those missing containers of Chinese goods will compound future shortages of all manner of things.

Expect to start seeing the effects in April, May and June.

Concludes Byron, with dreadful emphasis:

“The. Party. Is. Over.”

We hope he is mistaken. Yet we fear he is not.

We do not care one whit for this new America. Please, 1,000 times, please, return us to the former America — botched as it may have been.

But if our choices are reduced to death by coronavirus or death by hunger… we opt for the virus.

The end comes much faster.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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“Close the Whole Thing Up”

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“If this doesn’t work,” wonders Seema Shah, Principal Global Investors central strategist…

“What will?”

“This” is of course the Federal Reserve’s desperate harum-scarum yesterday afternoon.

Mr. Powell and crew knocked down rates one entire percentage point. The federal funds rate now squats between 0% and 0.25% — zero essentially.

And so as a dog returneth to its vomit… the Federal Reserve returneth to zero.

The scoundrels of Zero Hedge label it part of the “the biggest emergency ‘shock and awe’ bazooka in Fed history.”

But we are not shocked. Nor are we awed.

Our only surprise is the scheduling — our hazard was a return to zero later this week.

Yet the business was so urgent, all hanging in balance… it could not even wait for this week’s formal FOMC confabulation (now canceled).

Not Just Rate Cuts

We were further informed yesterday that quantitative easing (QE) is commencing anew.

The Federal Reserve will purchase “at least” $500 billion of United States Treasuries — and $200 billion of mortgage-backed securities — $700 billion in all.

We are betting high on “at least.” This merely represents the opening installment.

The Federal Reserve is also extending fresh ratlines — our apologies, swap lines — to foreign central banks.

That is intended to maintain dollar liquidity against the global coronavirus delirium presently obtaining.

Greg McBride, Bankrate chief financial analyst, in summary:

The Fed is dusting off the financial crisis playbook, returning to bond buying, coordinating with other global central banks to provide access to U.S. dollar liquidity, cutting interest rates to zero and opening the Fed’s discount window to ensure the flow of credit through banks to consumers and businesses.

“It’s really great for our country,” gushed the president.

But is it? Did yesterday’s “shock and awe” bazooka blast score a hit?

It did, yes. A direct hit — to the wrong side.

Shocked and Awed…

Stock futures went careening last evening, so shocked, so awed were they. They promptly went “limit down.”

The future arrived this morning at 9:30 Eastern. And markets remained shocked and awed…

The Dow Jones plunged nearly 10% from the opening whistle. The S&P and Nasdaq followed in lockstep.

Once again the breakers tripped… and trading was suspended 15 minutes.

“The central banks threw the kitchen sink at it yesterday evening, yet here we are (with deep falls in stock markets),” yelled Societe Generale strategist Kit Juckes.

“This is what panic looks like,” hollered Patrick Healey, president of Caliber Financial Partners.

Yet we are not surprised. Markets can see the beads of perspiration forming about Mr. Powell’s forehead. Markets are flighty birds easily frightened.

And what telegraphs fear more than a “shock-and-awe bazooka”?

The shock and awe deepened throughout the day…

Another “Worst Day Since Black Monday”

We grow weary of repeating it. But the Dow Jones once again suffered its mightiest whaling since Black Monday, 1987.

The index gushed another 2,997 points today to close at 20,188 — giving back another 12.93%.

The S&P lost 325 points, or 11.98%. The Nasdaq, 970 points and 12.32%

And so additional trillions of stock market wealth vanish into the electricity, lost.

Losses accelerated towards day’s end. Why?

Late this afternoon the president said the “worst of the outbreak” could stretch into August.

Fear gauge VIX went skyshooting to 83 today — within shouting distance of its record 90 from October 2008.

And so we return to our opening question:

“If this doesn’t work… what will?”

Alas, the question is easier asked than answered…

“Just Close the Whole Thing up”

One CNBC host even suggests shuttering Wall Street. Shrieks Mr. Scott Wapner:

How are folks supposed to focus on trading stocks when they’re dealing with nervous kids out of school, spouses working from home and scrambling to keep up, all while managing their own anxieties? Just close the whole thing up and start again later. It’s the right thing to do.

It may be the right thing to do or the wrong thing to do. Regardless, it has been done before.

The stock market was suspended 10 days during the panic of 1873 — and four entire months at the outset of the First World War.

Examples abound. Most recently in October 2012 when a hurricane, Sandy by name, closed the market two days.

But now the Federal Reserve confronts a different variety of hurricane…

“Very Serious Trouble”

“The Fed is now in very serious trouble,” gulps Graham Summers of Phoenix Capital — whom we recently introduced to you, our reader.

“Put another way,” he continues…

The Fed has gone truly NUCLEAR with monetary policy… and the market is STILL imploding…

The Fed can do NOTHING to stop this. No amount of rate cuts or stimulus from the Fed will make people want to go out and spend money if the country is on lockdown/facing a health crisis triggered by a pandemic.

The country is indeed verging upon a lockdown of sorts…

National Lockdown

The Centers for Disease Control and Prevention has recommended that all sizable gatherings and events be “postponed” for the following eight weeks.

New York, New Jersey and Connecticut — home to a fair number of Americans — have taken aboard its counsel.

All gatherings of 50 persons or greater thus are banned.

We remind you that restaurants frequently entertain crowds exceeding 50. As do other dens of vice including drinking establishments, casinos, theaters, concert halls, ballparks, gymnasiums and houses of worship — to name some.

Houses of ill repute, we assume, must ration admission ruthlessly… else court the wrath of the law.

New Jersey residents are now confined to barracks between 8 p.m. and 5 a.m. All travel is “strongly discouraged,” save in emergency.

Other States Follow

Meantime, Illinois bars and restaurants will close to the public beginning tonight. Their doors will not reopen until March 30.

Delivery and takeout services are available, however, as they are in New York, New Jersey and Connecticut.

Washington state has followed their example. As has the great state of Michigan. As has our own state of Maryland.

Massachusetts has exceeded even CDC’s draconian limit of 50. Gatherings of 25 or more are presently forbidden in this, the cradle of American liberty.

Meantime, over 30 million students in at least 31 states are exiled from the classroom. The Ohio governor has suggested his state’s may not come back until autumn.

Even the Supreme Court of the United States will no longer hear arguments — until early April at the earliest.

Do not forget, six of nine justices are aged 65 or above. And the coronavirus harbors a savage antagonism toward the elderly.

Thus a grateful nation is insured against a potential holocaust of justices.

A Ban on All Air Travel?

And now… rumors are on foot that a complete ban on domestic air travel is under active consideration.

We have assigned our men to investigate.

Regardless, the airlines are suffering damnably. Delta Air Lines claims conditions are worse than even the Sept. 11 afterblow.

“The speed of the demand fall-off is unlike anything we’ve seen,” laments Chief Executive Officer Ed Bastian.

The airline has gutted operations some 40%. And 300 planes are tied down to the tarmacs.

Meantime, all American cruise liners will remain tied up to the piers for 60 days.

A bailout of the air and cruise lines is on the way — depend on it.

So too, perhaps, is a bailout of the American citizen…

$1,000 Check Every Month

Sen. Mitt Romney (R-Utah) proposes to hand every American adult $1,000 per month so long as the coronavirus rages.

Reads a press release under his name:

Every American adult should immediately receive $1,000 to help ensure families and workers can meet their short-term obligations and increase spending in the economy.

Of course, the money must originate somewhere… as the government has none of its own.

In many cases it would amount to lifting money out of a fellow’s back pocket and lowering it into his front pocket.

But crises bring forth ideas that would never get a hearing otherwise. Many are of course lunatic.

Americans would acclimate rapidly to the monthly stipend. Who would take it away from them once the all clear signal goes out?

This is an election year, do not forget, when votes go up for sale. A monthly check can purchase many.

“The Worst Is yet Ahead for Us”

But just when might the coronavirus lose its stranglehold on American life?

“The worst is yet ahead for us,” warns Dr. Anthony Fauci of the National Institutes of Health.

We hope the fellow is mistaken.

We further hope the worst is behind for markets.

But we fear the worst is ahead for the economy.

And so again we ask:

“If this doesn’t work… what will?”

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post “Close the Whole Thing Up” appeared first on Daily Reckoning.

Will Coronavirus Usher in the “Reign of Saturn?”

This post Will Coronavirus Usher in the “Reign of Saturn?” appeared first on Daily Reckoning.

“There are decades where nothing happens; and there are weeks where decades happen” — said a man named Lenin.

This week has the color of a week where decades happen.

The stock market has withstood its lightningest plunge in history…

The aerial ways to Europe are closed…

Hand sanitizer is more precious than oil…

Disney World has locked its gates…

Universities, high schools, grammar schools and grade schools have locked their doors…

Broadway is dark…

Professional sports leagues have put the balls away…

“March Madness” has been canceled.

Instead, an alien madness stalks the land — the coronavirus madness.

North to south, east to west… even to ships asea… the fever builds.

And today the president declared a national “state of emergency.”

Forty-seven states and the District of Columbia have now reported coronavirus infections. Each day brings fresh cases.

How many Americans might it ultimately hook? The possible answer shortly.

Ironic, it is, that America’s biggest monster is visible only through a microscope.

Yet we fear the unseen greater than the seen…

The enemy bomber turns up on radar. The plunging barometer alerts you to the storm. The onrushing train does not approach in silence.

These are observable menaces. Since observable, defensible.

But the black bugaboos of night, the phantom-haunted shadows, the stealthy spirits of the air…

These unseen terrors fetch us most.

And an invisible fee-fi-fo-fum — like a lethal virus — is potentially everywhere at once.

Every person you encounter is a potential executioner, every surface you touch may harbor a plague.

The air itself may carry you to your grave.

Communists lurked beneath every bed once upon a time in America. The “Red Scare,” it was called.

Today we verge upon the “Invisible Scare.” But is it unjustified?

We know nothing of epidemiology… and would prefer to know even less.

But we have had our best men look into it. And they report that medical professionals — of highly sober aspect — give ominous warnings.

A certain Dr. Brian Monahan is the attending physician of Congress. This fellow has informed the Senate that 70–150 million Americans — one-third of the population — may potentially come down with the coronavirus.

If fatality rates run as low as 1%… the pathogen could claim 1.5 million American souls.

Yet our agents report scenarios suggesting the virus may invade up to 214 million Americans.

The variables are many. Much depends upon preparation.

The final death roster may run anywhere from 5,000… to 5 million… depending.

But assume for the moment the virus slips its leash…

Workplaces shutter, the truckers stay home, supply chains snap and the shelves go bare in the supermarkets.

Perhaps one month of shattered commerce could result in a general discombobulation.

What might happen?

Writer Brandon Smith sketches the scene in dark colors:

When the public can’t find an open grocery store, then you will see panic. When there are checkpoints in and out of major metropolitan areas stopping people from leaving if they have any symptoms of illness, then you will see panic. When COVID-19 continues to circulate through the population for a year or more and does not disappear during the summer months as some people theorize, get ready for anger and panic.

When your local banks announce a financial “holiday” for an unspecified amount of time because of a credit crisis and lack of liquidity, and all the ATMs are shut down, then you will see panic. When crime rates explode because of lack of supplies and people start fighting over access to the meager food lines… THAT will be panic.

And don’t think for a second that this is not possible in this country, because it absolutely is. All it takes is for the global supply chain to break down for one month and there will be chaos like nothing the average person has seen in their lives.

Alarmist? Perhaps it is.

And we do not believe the virus will rout us in the manner suggested. Yet…

How many truly anticipated 1987’s Black Monday? Or 1929’s Black Tuesday?

How many anticipated Donald Trump’s presidency of the United States?

Indeed… how many anticipated the coronavirus… or that the United States would fall under a state of emergency today?

“You think that a wall as solid as the Earth separates civilization from barbarism,” writes author John Buchan...

“I tell you the division is a thread, a sheet of glass. A touch here, a push there, and you bring back the reign of Saturn.”

Who is prepared for the reign of Saturn?

Below, Jim Rickards takes you to the year 2026. He reflects upon the great Panic of 2024… and a world drastically changed. Could it happen? You be the judge. Read on.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Will Coronavirus Usher in the “Reign of Saturn?” appeared first on Daily Reckoning.

R.I.P.: Requiem for a Bull

This post R.I.P.: Requiem for a Bull appeared first on Daily Reckoning.

For the longest bull market in history… it is a time to die.

For the Dow Jones, aged 11 years and two days, the soul quit the body yesterday afternoon.

Immediate cause of death: coronavirus disease (COVID-19).

Underlying cause of death: irrational exuberance.

The sickness was brief, acutely brief — a mere 19 days.

Only in November 1931… in the teeth of the Great Depression… did the index plunge from record heights to bear market depths in so short a space. Such was the violence of the death spasm.

Both S&P and Nasdaq joined it in the morgue this afternoon.

And so the flags over Wall Street flap at half mast today… and the black crepe is up.

Yet as we have argued previously:

The stock market is an ingenious device constructed to inflict the greatest suffering upon the most people… within the least amount of time.

In Memoriam…

The eulogies have already come issuiwwng…

Linda Zhang is chief executive officer of Purview Investments. Says she, a pearl of sorrow coursing down her cheek:

This bull market will go down in history as the one that nobody believed would last this long… What destroyed us in 2008 was overleverage. What brought us to where we are in 2020 is too much hope, sky-high valuations.

Doug Ramsey is chief investment officer of Leuthold Group. This fellow labels the late lamented decade the “steroid era” of the stock market — and identifies the supplier:

It was the most hated bull market — people said that early on. I think in the middle of the decade people [got] on board. Certainly in the last year they became believers. I’d also call the whole decade the steroids era because of all the help out of the Federal Reserve. I think it certainly did get a lot of help from the Federal Reserve. This was the steroids era of the stock market — the Fed propped it up.

Will the Federal Reserve attempt to blow life into the deceased? And how long can you expect the bear’s market to run?

Possible answers below.

But the exuberant, marauding bears desecrated the corpse this morning — before the Dow’s body was cold…

Another 15-minute Trading Halt

Within minutes of the opening whistle… the poor Dow Jones plunged another 1,700 points into eternity.

The S&P plummeted 7%, overloading the circuits and tripping the breakers — for the second instance this week.

For another 15 minutes the markets suspended breath.

Why this morning’s fresh stampede out?

The President Fails to Inspire Confidence

Apparently the president’s fireside chat last evening inspired little confidence. It failed to indicate a government response equal to the crying need.

Fifteen minutes after this morning’s halt, markets reopened for business. They should have remained closed…

The rout promptly resumed.

The market — meantime — places 83.4% odds the Federal Reserve will hatchet rates to between 0% and 0.25% next week.

That is, to financial crisis levels.

But dare we ask… is the worst over?

“You Likely Have not Seen Anything Yet”

“You likely have not seen anything yet,” wails Eric Parnell of Global Macro Research:

A potentially great fall lies ahead. Unfortunately for investors, conditions for the stock market have the potential to get worse, much worse, in the intermediate term. And all of the king’s policy horses and all of the king’s policy men may not be able to put this market back together again when it’s all said and done…

In short, you likely have not seen anything yet when it comes to today’s stock market.

After years of policy stimulus, stocks are trading at record-high valuations and bond yields are at historic lows. It is only a matter of time before reality returns to global capital markets.

But the coronavirus may merely be the tip of the berg that has gashed this Titanic down deep…

Think Lehman Bros.!

Phoenix Capital’s Graham Summers, introduced here this week, argues the bulk of the berg is invisible:

Now, let’s talk about the REAL crisis that is hitting the financial system…

[Global] debt-to-GDP is north of 200%. Leverage is higher today than it was in 2007. And the world is absolutely saturated in debt on a sovereign, state, municipal, corporate and personal level.

However, everything was running smoothly as long as nothing began to blow up in the debt markets [or] credit markets.

And despite a few hiccups here and there, the debt markets have been relatively quiet for the last few years…

Not anymore.

Someone or something is blowing up in a horrific way “behind the scenes.”

The Fed was FORCED to start providing over $100 BILLION in free money overnight back in September 2019. And even that massive amount is proving inadequate…

[Two nights ago], the Fed was forced to pump another $216 BILLION into the system.

You don’t get those kinds of demands for liquidity unless something is truly, horrifically wrong.

Think: LEHMAN BROS.

But we suppose that is why the Federal Reserve answered the klaxons this afternoon, dripping icy sweat…and rounded into action…

QE4 Is Here

Shortly after 1 p.m., it announced it is hosing in a staggering $1.5 trillion of liquidity today and tomorrow.

Between September and December it expanded its balance sheet at a rate unseen even during the financial crisis.

But the flow was but a trickle compared to the torrent on tap:

IMG 1

What is more, the Federal Reserve will conduct purchases across a “range of maturities.”

A full range of maturities includes longer-dated Treasuries. Thus it can no longer deny it has resumed quantitative easing…

Its purchases since September centered exclusively upon shorter-term Treasuries. Since QE targeted long-term Treasuries, it could throw out a smokescreen of deniability.

But no longer. Thus today we declare the onset of “QE4.”

The Rescue Doesn’t Hold

The drowning stock market seized upon the life ring thrown its way. And it rapidly made good half its losses on the day.

But it began to lose its purchase on the ring, on life… and resumed its slide into depths.

The Dow Jones finally settled at 21,200 by closing whistle — a 10% loss on the day — its worst since Black Monday, 1987.

Perhaps history will label this date “Gray Thursday.”

The S&P hemorrhaged an additional 9.51% on the day; the Nasdaq 9.43%.

The Leaders up Are Leading the Way Down

Are ruptures within the credit markets why stocks continue plunging, Mr. Summers?

This is why the markets are failing to rally. It is why every major central bank is out talking about launching new aggressive monetary policies. And it is why the Fed is privately freaking out.

Below is a chart showing [a proxy for] the credit markets (black line) relative to the stock market (red line).

As you can see, the credit market led stocks to the upside during the bull market. And it is now leading stocks to the downside. Credit is already telling us that stocks should be trading at 2,600 or even lower.

IMG 1

This is a real crisis. And from what I can see, the Fed can’t stop it anytime soon.

The Fed’s One Option

But if the prospect of rate cuts and additional QE cannot hold the line… does the Federal Reserve wield any options at all?

So what could stop this?

A globally mandated intervention in which the Fed and other central banks start buying corporate debt.

However, in the U.S., the Fed CANNOT buy corporate debt…

It would need authorization from Congress to do so. And from what I can tell, no one is even suggesting this.

I don’t mean to be a fear-monger, but this is a very dangerous situation.

We would have to agree. It appears a very dangerous situation.

But how long can you expect the bear’s market to endure? The answer in one moment.

But first… will the Federal Reserve actually attempt to reanimate the corpse?

Perhaps not.

The Fed Wants to End the Market’s Dependency

As our own Charles Hugh Smith claimed in a recent reckoning, it has grown fearful of the monstrous bubble it inflated.

But it did not wish to shoulder blame for draining the air out.

Thus the coronavirus has done it a great service by seizing the sharpened pin.

And it may not wish to risk blowing another bubble. Do we speculate?

No. Here former Dallas Federal Reserve President Richard Fisher speaks for himself:

The Fed has created this dependency…

The question is do you want to feed that hunger? Keep applying that opioid of cheap and abundant money? The market is dependent on Fed largesse… and we made it that way…

But we have to consider… that we must wean the market off its dependency on a Fed put.

The question is worth considering. But how long can you expect this bear to run amok?

Here is the answer, says history:

Roughly seven months for the S&P… and perhaps nine months for the Dow Jones.

Of course it could end sooner. But it could also end later.

More tomorrow…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post R.I.P.: Requiem for a Bull appeared first on Daily Reckoning.

Whiplash!

This post Whiplash! appeared first on Daily Reckoning.

Markets rediscovered their fighting elan today. Impassioned pledges of government support stiffened their nerves… and steeled their spines.

But will they soon be taking to their heels again? We cannot say.

We are nonetheless unsurprised that the S&P counterattacked to a 136-point gain today.

Take in the history from 1952:

The S&P has withstood trouncings of at least 5% or more on 10 previous Mondays. This Monday’s was its 11th (7.60%).

In each previous instance the S&P advanced the following day — all 10 of the 10.

Nor were these gains measured in centimeters, inches or feet.

Sayeth the Bespoke Investment Group crackerjacks who ran the numbers:

Remarkably, following all 10 of the Monday 5%-plus drops since 1952, the S&P has gained the next trading day. And not just gained but gained more than 2.2%.

The S&P gained 4.94% today.

The Dow Jones and Nasdaq advanced on parallel fronts today, unsurprisingly.

The former hurled 1,161 points ahead, making good nearly half of yesterday’s losses. The latter, the Nasdaq, gained 393 points.

Hence our whiplashed neck from following the action these two days.

Whiplashing Sentiment

Meantime, investor sentiment has whiplashed from “extreme greed” to “extreme fear” within two months’ space.

On a scale of 1–100, CNN’s “Fear & Greed Index” presently gives a reading of 4 — extreme fear.

In late January it scaled 90 — extreme greed.

And so swirl the variable, gusting winds of sentiment…

All is peace while the warm, favoring trade winds push investors along.

But suddenly, out of a bright sky, a wintry gale comes barreling in from the north.

Most are caught in short sleeves, dreadfully unprepared for the frosting.

Mark Twain’s observation thus springs to mind:

“There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.”

A Coming Ice Age

But 10-year Treasury yields recovered today…

Yields ran up to 0.748% today after yesterday’s inconceivable 0.318%. They nonetheless remain beneath 1%.

And yesterday the entire yield curve — all the way out to 30 years — plunged beneath 1% for the first occasion in history.

The bond market still appears to warn of a severe economic winter ahead. A severe winter? It suggests a coming ice age.

But we are pleased to announce that the 30-year yield poked its head up above 1% today — to a blossoming 1.284%.

But why did the stock market come storming from the trenches this morning?

“Very Dramatic” Support

Late yesterday the commander in chief stood tall before the troops, rallied them to the colors… and pledged “very dramatic” support.

That very dramatic support will evidently take the form of a payroll tax cut. It will further include “very substantial relief” for businesses knocked back by the coronavirus.

Thus the prospects of reinforcements put heart into the market.

But by sheerest coincidence… a “fiscal response” may also let Mr. Trump retain his throne this fall.

The president’s reelection odds have sunk to 50.5%, say the betting markets — a coin’s toss. They had previously stood near 60%.

The Verge of a Credit Crisis

The gallant response comes none too soon, says Stephen Innes, chief market strategist at AxiTrader. And not merely because of the stock market:

We are on the verge of a credit crisis. A fiscal response could be justified not because S&Ps are down, or oil is down, but because we are potentially on the cusp of a credit crisis driven by cash flow shortages and bankruptcies across a meaningful list of industries.

The roster of imperiled industries certainly includes the energy industry…

Oil withstood a 25% lashing yesterday. It clawed out a $3.46 gain today… but the damage runs deep.

The energy market creaks and sways under a load of risky debt. Many of the large banks are tied up to it.

Most United States shale oil producers only find production profitable with oil at perhaps $50 per barrel.

Today oil trades at only $34 and change. Hence production is immensely unprofitable.

Should defaults and bankruptcies begin issuing from the energy sector, they could potentially spread through the larger credit markets… like prairie fire through a parched land.

A prediction? No. We merely suggest a possibility.

Passed the Point of Diminished Returns

With interest rates so low as is, monetary policy has passed beyond that point of diminished returns.

More rate cuts are coming, yes. The market expects them. If the Federal Reserve fails to come through, the market could go to pieces again.

In that sense, the market holds a loaded pistol to Mr. Powell’s temple. He must go along.

But assume a fiscal response is on the way, despite the fact that the administration has provided few specific details — and that it would require Democratic blessings.

Will even a fiscal response be adequate to requirements?

Too Much Existing Debt to Provide Stimulus

Do not elevate your hopes, says Jim Rickards, taking the overall view:

After Monday’s massive market sell-off, many are calling on the Fed to rush in with additional rate cuts and possibly resort to other monetary tricks, even negative interest rates. They’re also calling for the federal government to unleash new stimulus in the form of fiscal policy to offset the adverse economic impacts of the coronavirus.

But here’s the problem: Central banks are largely irrelevant now (except as lenders of last resort). That’s because rate cuts no longer affect the economy.

We had zero rates from 2009–2015 and we only had 2.2% average annual growth versus the long-term 3.5% trend. And negative rates don’t work as central bankers think. Despite what many academics believe, people don’t spend more but actually save more. And fiscal policy doesn’t stimulate when the debt-to-GDP ratio is greater than 90%. Ours is about 105%.

What if the Fed Let the Financial Crisis Complete?

We wonder yet what would have transpired one decade ago — had the monetary and fiscal authorities stood paws off — and let the crisis run its course.

It would have been rough going for a stretch, certainly.

But it would have cleared out the dead and rotting wood… and killed off the termites munching their way through the foundations.

The economy could have rebuilt upon new, sturdier foundations of oak, of walnut, of the harder woods.

Total debt, public and private, would be a slight fraction of today’s $75 trillion.

Today’s debt-to-GDP ratio would be drastically less than 105%. And the economy would be far more resilient to “shocks.”

But rather than letting time and gravity complete their necessary work… the authorities rushed in with the supports.

The Cost of Every Pleasure

They prevented a collapse. But it left the deadwood in place — and the termites doing a brisk trade.

That is why annual growth pegs along at some 2%, unlike the 3.5% previously obtaining.

The economy groans under too much unproductive debt to push along. And debt is only rising.

Yes, it is true…

The decade-long, debt-fueled bull market in stocks has been a thing for the ages, an immense and exhilarating thrill.

But the nation way learn yet:

“The cost of every pleasure” — as the great Buddha probably never said — “is the pain that succeeds it.”

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Whiplash! appeared first on Daily Reckoning.

“The Most Critical Time Since the Financial Crisis”

This post “The Most Critical Time Since the Financial Crisis” appeared first on Daily Reckoning.

“We’re faced with the most critical time since the financial crisis.”

This we have on the grim authority of money man Sven Henrich.

Last evening prepared us for this morning’s hells…

In overnight trading, S&P futures plunged 5% in four hours. The selling frenzy tripped the “circuit breakers.”

These fail-safes were installed after 1987’s “Black Monday” to prevent encores.

Thus S&P futures trading screeched to a halt, suspended… lest the fever deepen.

But the opening whistle blew this morning. And the delirium resumed precisely where it had ended…

A Trading Halt

The S&P went instantly careening. It shortly sank 7%.

Once again the violence tripped the circuits (the threshold for regular-session trading is higher than after-hours trading).

The referee called a halt at 9:34 — the first ever under existing rules — and administered a 15-minute standing count.

For 15 minutes the market fought to recapture its legs… and its wits.

At 9:49 the ban came off. Though woozied, the market “stabilized.”

But the battened and bludgeoned market could scarcely maintain the vertical.

The Worst Day Since “Black Monday”

Both S&P and Dow Jones went along, 5% down through noon. The remainder of the afternoon worked little improvement.

The Dow Jones tumbled 8% at one point this afternoon — the most since another Monday, long distant — “Black Monday” in 1987.

It closed the day down 7.79% to 23,851, a 2,014-point waylaying.

The S&P gave back 226 points on the day, for a 7.60% loss.

The Nasdaq similarly absorbed a 625-point trouncing, losing 7.29% on the day.

Thus the three major averages presently camp upon the doorstep of a bear market. One more slip… and they go in.

A bear market is a 20% plunging from recent peaks.

European stocks officially crossed over today — down over 22%. Not three weeks ago they traded at record heights.

Meantime, 10-year Treasury yields plunged to a starvation-level 0.318% this morning.

Words fail us.

“The Path of Least Resistance is Still Down”

Is the worst over?

“The path of least resistance is still down,” shouts Liz Ann Sonders, chief investment strategist at Charles Schwab.

Once again we must point our accusing finger at “passive investing.” The computers caught a fever, unloading positions at electronic speeds.

But there are few buyers on the other end to take them in.

That is why — we theorize — “corrections” have attained great ferocity in recent years.

That is also why markets have gone from record heights to bear market’s doorstep within three weeks.

But what happened this morning? Why did the bottom drop away?

Oil Collapses

Oil is the explanation most widely on offer. Investors Business Daily:

Oil prices began to collapse on Saturday as negotiations between Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries, and Russia over production quotas failed. The breakdown in talks led the Saudis to sharply slash prices in the onset of another price war. The Saudis also said they would abandon OPEC’s current production curb, a move that opens the same door to other OPEC members, threatening to flood the already-oversupplied oil market with possibly more than 3 million barrels per day in additional production.

Oil prices had already sold off for three straight weeks, losing more than 37% as global markets grappled with the potential impact upon demand of the coronavirus outbreak begun late last year in China.

Crude oil hemorrhaged 25% today — its heaviest rout since 1991. It has come all the way down to $30.93. And oil stocks took a savaging today.

Two “Black Swans” Converge

Thus two “Black Swans” pooled their mischiefs… and came swooping in this morning.

These nightmare birds are the coronavirus and oil. Combined they account for this sudden terror.

So argues Seabreeze Partners Management president Doug Kass:

Over the weekend one old Black Swan (coronavirus) and a new Black Swan (substantially lower energy prices) joined forces in the pond as the collapse in yields and energy prices is serving to crater global equity markets this morning. In scope and rapidity, the accumulated declines in bond yields and stock prices are unprecedented…

There will be enormous fallout where large bets have gone wrong — ranging from bond, equity, commodity and VIX positioning.

Adds one Chris Rupkey, chief financial economist at MUFG Union Bank:

[Stock market investors] want out. Big-time. The sky is falling. Get out, get out while you can. Wall Street’s woes have to eventually hit Main Street’s economy hard.

A Minefield of Debt

The energy sector is soaked through with debt. A fair portion is “high yield.” That is because it is, as the professionals say… risky.

Many of the big banks hang on the other end of it. Bank stocks absorbed some of the heaviest slatings today — not coincidentally, we hazard.

What if losses pile up in the energy sector? Defaults could go barreling through the credit markets.

And woe to ye of earth and sea once they do…

Nordea’s global chief foreign exchange strategist Martin Enlund:

If “unforeseen losses” show up in the high-yield sector (very energy-heavy), it might damage the credit cycle… and if the credit cycle cracks, forget about buybacks, mergers and acquisitions and the S&P’s current valuation.

Buybacks are the chief gimmick behind the market’s gorgeous multiyear spree.

Who will buy if the corporations do not? Who will pick up the standard… and carry forward?

The questions nearly answer themselves.

Next we come to a central actor in the drama unfolding before us — the central bank.

Heading Back to Zero

What can you expect from the Federal Reserve in the days and weeks ahead?

Its recent “emergency” 50-basis point rate cut came thudding down… like a zeppelin of lead.

But of this you can be certain: More is ahead.

Goldman Sachs chief economist Jan Hatzius is convinced the Federal Reserve will hatchet another 50 basis points at this month’s FOMC meeting.

It will proceed to another cut in April, says he:

We now expect a 50bp cut, in part because the bond market is already priced for a large move and the FOMC will likely be reluctant to risk further tightening in financial conditions by refusing to deliver. We are also penciling in a final 50bp cut at the April 28-29 meeting.

At which point rates would hover between 0–0.25% — all the way back to post-crisis lows.

Remember “Normalization?”

And so Mr. Powell’s previous designs to “normalize” rates now appear a cruel, cruel jest.

We never believed he would succeed. The market is so entirely dependent on abnormal interest rates… it would collapse without the backstop.

He attempted to pull it out gradually after he came on duty. But he put it back after December 2018, when the market wobbled badly.

Now it is riveted into place and reinforced with cement.

But recession menaces — greater than at any point in years.

And like a blunderbuss artillery man who squanders his ammunition ahead of the main action… the Federal Reserve is blasting its remaining “dry powder” ahead of time.

As we razzed last week:

The Federal Reserve will be reduced to scraping powder off the floor. If recession swept in tomorrow… it could scarcely fire off a cannon.

Monetary policy is a spent cartridge, an empty shell casing.

Central banks will be forced ultimately to surrender command to the fiscal authorities.

Prepare for Fiscal Policy

“Helicopter money,” Modern Monetary Theory, some variant of the two, these we will see.

Depend on it.

We opened today’s reckoning with a lament from analyst Sven Henrich:

“We’re faced with the most critical time since the financial crisis.”

And so we conclude with Mr. Henrich:

The constant subsidy of markets and the economy has led us to the largest credit and asset bubble in our lifetimes and the architects of the monstrosity have left themselves weak and depleted. They are now begging for fiscal stimulus from governments that are traditionally slow to react. The big bazookas will come, the question is whether it will be too late.

That is our question as well.

More tomorrow…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post “The Most Critical Time Since the Financial Crisis” appeared first on Daily Reckoning.

Did the Fed Bail out the Market Today?

This post Did the Fed Bail out the Market Today? appeared first on Daily Reckoning.

The good news first:

We learn by the United States Labor Department this morning that the economy took on 273,000 jobs last month.

Consensus estimates came it at 175,000.

Unemployment slipped from 3.6% to 3.5%… equaling a 50-year low.

Meantime, December and January estimates were upgraded by no less than 85,000 jobs.

Thus there is more joy in heaven.

Now the bad news:

The stock market picked up the news… and heaved it into the paper basket.

“Black Swan-dive”

The Dow Jones hemorrhaged another 800 points by 10 a.m. The other major indexes also gave generously — again.

VIX — Wall Street’s “fear gauge,” exceeded 48 this morning. It had guttered along under 15 until late February.

In all, global equities have surrendered $9 trillion in nine days — $1 trillion each day.

Never before have global equities retreated so swiftly and violently.

Meantime, the 10-year Treasury note achieved something of the miraculous this morning…

Yields collapsed to an eye-popping 0.664%.

Many were flabbergasted when yields sank to a record 1.27% low in July 2016. Yet this morning, they were nearly half.

Well and truly… these are interesting times.

Michael Every of Rabobank shrieks we are witnessing a “Black Swan-dive, as yields and stocks tumble in unison…”

A New Contrarian Indicator

But at least the crackerjacks at Goldman Sachs gave us advance notice of this thundering stampede into Treasuries…

A Bloomberg headline, dated Feb. 10:

“JPMorgan Says Bonds to Slump, Fueling a Return to Cyclicals.”

And this, bearing date of Feb. 23:

“JPMorgan Says Rally in Treasuries May Be Nearing Turning Point.”

May we suggest a new contrarian indicator?

The “JPMorgan Indicator.”

The reference is to the famed 1979 BusinessWeek cover declaring “The Death of Equities.”

Of course equities embarked upon the grandest bull market in history shortly thereafter.

Perhaps JPMorgan can provide a similar service.

As Zero Hedge reminds us, most hedge funds are clients of JPMorgan. Those who took aboard its advice are presently paying. And royally.

They “shorted” longer-term bonds — betting they would fall.

If You Don’t at First Succeed…

We imagine Mr. Jerome Powell is scratching his overlabored head today. His “emergency” rate cut Tuesday failed to fluster the fish.

But that does not mean more bait is not going on his hook…

Markets presently give 50% odds the Federal Reserve will lower rates to between 0.25% and 0.50% by April.

The central bank is already woefully unprepared to tackle the next recession. Yet it appears ready to squander what little ammunition that remains.

And Bank of America is already assuming a global recession is underway:

“[Our] working assumption is that as of March 2020 we are in a global recession.”

A global recession can wash upon these American shores.

What is the Federal Reserve to do in event it does?

Dwindling Options

It has little space to cut interest rates, as established. And purchasing Treasuries has lost its punch. Recall longer-term Treasury yields presently dip below 1%.

Additional purchases could drag yields to zero… and below.

Eric Rosengren presides over the Federal Reserve Bank of Boston.

He moans these conditions “would raise challenges policy makers did not face even during the Great Recession.”

Again, what could they do?

In a situation where both short-term interest rates and 10-year Treasury rates approach the zero lower bound, allowing the Federal Reserve to purchase a broader range of assets could be important.

… We should allow the central bank to purchase a broader range of securities or assets.

Full English translation:

The Federal Reserve should be authorized to purchase stocks.

But Is It Already?

This Tuesday we vented the theory that the Federal Reserve has been sneakily — and illegally — purchasing stocks.

Citing Graham Summers, senior market strategist at Phoenix Capital Research:

For years now, I’ve noted that anytime stocks began to break down, “someone” has suddenly intervened to stop the market from cratering…

[And] a year ago, I noticed that the market was behaving in very strange ways.

The markets would open sharply DOWN. Seeing this, I would begin buying puts (options trades that profit when something falls) on various securities, particularly those that had been experiencing pronounced weakness the day before.

Then, suddenly and without any warning, ALL of those securities would suddenly ERUPT higher.

Mr. Summers theorized that the Federal Reserve was purchasing Microsoft, Apple, Alphabet (Google) and Amazon stock.

Because these behemoths wield such vast heft, they can haul the overall market higher.

Did the Federal Reserve possibly resort to the same skullduggery today?

The Smoking Gun?

At 3:08 we noticed the Dow Jones flashing 25,268 — another whaling to conclude the week.

We next looked in shortly after 4 to tally the final damage.

Yet we were astonished to discover the index had surged to 25,938 in that hour.

For emphasis: That is a 670-point spree in the span of one hour.

It settled down to 25, 864 by closing whistle. But the index closed the day only 256 points in red — a victory of sorts.

What happened?

A quick look at Apple revealed it began rising around 3 o’clock… as if by an invisible hand.

Microsoft displayed a nearly identical pattern. And Amazon. And Google.

All mysteriously jumped at 3 p.m.

We leave you to your own conclusions.

A Record of Mischief

It’s long been argued that the Fed shouldn’t and doesn’t buy stocks.

However, the fact is that the Fed does a lot of things it’s not supposed to do. According to the Fed’s own mandates, it should never monetize the debt by printing money to buy debt securities.

The Fed’s already done that to the tune of over $3.5 TRILLION.

Moreover, we know from Fed minutes that as far back as 2012, the Fed was shorting the Volatility Index (VIX) via futures, or options. Here again, this runs completely contrary to the Fed’s official mandate. And if you think this is conspiracy theory, consider that it was current Fed Chair Jerome Powell who admitted the Fed was doing this!

Simply put, the Fed has been skirting its mandate for years in the name of “maintaining financial stability.” In fact, what usually happens is the Fed does things it shouldn’t, denies it for years and then finally admits the truth years later, by which point no one is outraged.

I believe the Fed is currently engaging in precisely such a practice when it comes to the outright rigging of the stock market today.

The Laws Fall Silent

The Federal Reserve Act does not authorize the central bank to purchase equities.

But financial emergency is akin to wartime emergency.

And as noted, the Federal Reserve took… extreme liberties with the law during the last crisis.

It may be taking additional liberties at present. And it will again if necessary.

“Inter arma enim silent lēgēs,” said Cicero — “In times of war, the law falls silent.”

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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