I've had a lot on my mind the past few days as I'm sure many others have had as well. As I am checking in with the markets this Sunday evening it seems the pain is certainly not over.
How many people are going to read about the spread of this virus on their phones or similar electronic device while at home on the couch, in their bed, while making dinner, or before they tuck their children in bed?
How many people are going to sterilize that circadian rhythm disrupting device when they get home for the day?
Gold and Bitcoin
Why are we not seeing more gold and bitcoin buying?
Because this is more than housing bubble or dotcom bubble bursting (or a tronics bubble for those that have taken a random walk). People are buying toilet paper and isopropyl alcohol to sterilize those devices I mentioned above.
A pandemic is not one of the scenarios at the top of the list for Basel III stress testing.
Just ask the bondholders who are frantically selling their global pandemic bonds for 70cents on the dollar. More on this later.
Catalysts vs. Causes
Markets are not selling off solely because of a viral outbreak. They are selling off because the valuations, which I would argue have become rather inflated at this point, are no longer sustainable in the economic environment we now find ourselves within. The velocity of the market drop has only been amplified by the suppression of systematic risk (market risk) via monetary policy for most of the last decade.
Systemic risks like a global pandemic are harder if not impossible to control. The writing has been on the wall for roughly a year. The stock market meltdown at the end of 2018 when the fed raised rates marked the end of what was, at least until that point, a market that was not completely manufactured by central bank policies.
This made ignoring all the warning signs in the months that followed much easier:
- An inverted yield curve.
- The Fed announcing intervention during the fall of 2019 in the form of repo market operations.
- Interest rate cuts at or near record highs in the stock market
- Subjective consensus of a stagnating economy. No wage growth.
I have not taken the subway a single time so far in 2020. Seems like a trend to continue indefinitely. Imagine being in a crowded car while your delayed 'because of train traffic ahead, please be patient' and someone is sneezing or coughing.
The state of the healthcare system in the US is going to be gasoline on the fire. How many people are going to avoid going to the doctor or hospital even though they are clearly sick simply because they cannot afford their insane deductible or do not want to be bankrupted. Some of them will even choose not to stay home from work since they cannot afford that either. This is the reality that Kleptocracy and the sheer disregard for humanity demonstrated by corporate America have created.
Beware the Bear
So far /ES is trading down close to 5% after having broken a major support line. Extrapolating the move is /VX to the VIX puts that price above $50. For context, the last time the VIX price sustained greater than $50, other than August 25, 2015, when then markets broke, and last week when a large position was liquidated and the price briefly touched ~$54, was during the financial crisis.
Long Toilet Paper
Cottonelle futures anyone?