Rabobank: "If You Had A Button To Press To Eject Now, Would You?"

Submitted by Michael Every of Rabobank

Don't count your chickens

YouTube and Twitter contain some of the best ways to waste time and rot one’s brain known to man. They also contain rare gems to stimulate and delight. Indeed, watching Nassim Taleb disembowel his intellectual opponents in real time is the closest one can get to experiencing the atmosphere of febrile 18th century London coffee houses, or perhaps even ancient Athens.

On a similar note, the other day I was watching on YouTube Eric Weinstein—whom I met with his brother Brett at a convention once briefly in Sydney—discuss everything from pro-wrestling to US elections to cultural preferences to the unfortunate anatomy of bed bugs, and he also came out with this timely gem.

Tonight, for those who know, is Passover, the ancient Jewish festival which celebrates liberation from slavery in Egypt and avoiding a deadly plague. This year it happens with Jewish communities around the world locked down or under curfew - in order to avoid a plague. Some irony! (“Why is this Seder night different from all other Seder nights?”)

As Eric pointed out, this tradition does one basic thing well: it reminds its celebrants every single year that sometimes one needs to get out while the getting is good, even if the bread hasn’t finished rising. Of course, this isn’t literally about bread. It’s about recognizing that sometimes one needs to accept that the overarching structures around us are wrong, unsustainable, or even dangerous even while they are comfortable: and then it’s time to “move” accordingly regardless of what can be seen as high costs.

One can interpret that as being brave in markets, as this is a markets Daily, or in life in general. Yet as Eric points out, we are currently surrounded by structures that are not fit for purpose. We have a British PM in intensive care after plugging herd immunity and boasting that he shook hand with Coronavirus patients. We have leading scientists telling us there will be zero, then 250,000, then 5,700 deaths; and Dr Fauci, who is lionized today, was telling us in January and February that COVID was nothing to worry about at all. We have economists arguing the economy needs to come first at some point - as if opening it up will not see the virus wreak havoc and just end up with it closing down again.

More broadly, we have socioeconomic systems that didn’t work pre-virus. Yet we seem eager to run back to where we were three months ago - when three months ago many were screaming that mankind was cutting its own throat via global warming; that inequality was building to dangerous levels; and that so were international tensions.

So what’s the point? First, “eat something, already!” Second, try to take a step back and look at the bigger picture. What really makes sense? What doesn’t? If you had a button to press to eject now, would you? And if you don’t, can you make one?

In markets terms, what will the world look like in 18 months? Do you know? Do you like what you foresee? If not - move!

For many market participants yesterday was an opportunity to express relief that in some countries the level of new coronavirus cases was levelling off allowing a few governments to consider loosening lockdowns. That said, shockingly the number of deaths is still rising and the stark reality of this appeared to halt the two day stock market rally in Asia overnight. Even though the S&P 500 had briefly re-entered a bull market in yesterday’s trading, it had already closed slightly lower yesterday, led by movements in the oil price. The IEA shook the market yesterday by slashing its price forecasts for WTI in 2020 by 20%. That said, already the oil market is this morning finding its feet on the hope that tomorrow’s virtual OPEC+ meeting will settle on production cuts.

Day ahead

The stock market rallies of the past two days are despite the fact that neither economic nor earnings data have really begun to unveil the enormity of the economic crisis that the world has been plunging into in the past few weeks. A glimpse of this has been provided by recent US labour data and huge claims for welfare in countries such as the UK and Canada last month. This morning the Bank of France issued a sobering forecast of a 6% decline in GDP in Q1 2020. Even though investors have been appeased by the massive policy responses of governments and central banks around the world, this will not be cost free. The weakness at the long end of the US curve yesterday is likely related to the Treasury’s plans to resume sales of 20 year notes. The deteriorating position of public finances of governments can be expected to bring a reaction from credit rating agencies in various countries. S&P marked out Australia this morning with a reduction in its AAA credit rating outlook to negative.  Unsurprisingly, the decision was based on the anticipated sharp rise in public debt and the fact that the country is facing its first recession in almost 30 years. On Tuesday, Fitch had already downgrading the credit ratings of the country’s big banks from AA+ to A- on the expected rise in bad debts as business fail. The news threw cold water on yesterday’s sharp recovery in AUD/USD.

Inevitably, there has also been an increase in finger pointing from politicians this week as they take a step back from their initial panic reactions. President Trump has singled out the WHO for being late in warning about the virus outside of China. Trump, who will be keen to shift any blame away from himself ahead of the November election, has threatened to withhold funding for the WHO. The UK’s chief medical officer has admitted that the decision of PM Johnson’s government not to roll out mass testing was a mistake. Having little to no idea how far the virus has spread in the broader community will hamper any plans to allow the economy to normalise in the coming months.

After 76 days the lockdown in Wuhan has now been lifted. 50,000 people have reportedly already purchased train tickets to leave. The world will be watching with interest since reports are circulating that Singapore and in Hong Kong are now suffering a second wave of infections of COVID 19 which is potentially worse than the first. Hong Kong has extended indefinitely a two week closure of its airports to foreign arrivals that was due to end on Tuesday and is extending its relief package. This comes as Japan PM Abe declares a state of emergency for Tokyo, Osaka and five other virus hotspots in the country.

In Europe, yesterday’s meeting of EU finance ministers failed to settle on a compromise as to how to deal with the financial costs of the virus. Ahead of the meeting, which dragged into the early hours of this morning, Spain’s PM Sanchez had warned that nothing less than the future of the European project could be at stake. Talks will continue tomorrow.  

For the most part, economic data releases continue to reflect a pre-crisis situation. That said, today’s release of the minutes of the Fed’s March meetings can be expected to display how panicked policy makers were last month. The minutes are expected to bring detail of the Fed’s decisions on March 3 and March 15 and the slate of measures that were taken then. This should be another sobering reminder of the enormity of the current crisis.