The Black Swan Coronavirus

Nothing like getting texted at dinner last night about how the Dow futures were down over 1,000 points. Then I get home and they’re at lockdown 1,300 points – down 5% for all three major, indices including the Nasdaq 100. They just opened up down 7%, triggering a second circuit breaker to stop trading… Damn. 

The culprit this time is more the oil price war between Russia and Saudi Arabia, with overnight prices hitting as low as $27.59, nearing the 2008 crash lows of $26. OPEC is breaking up given the global slowing, but in turn, having a lot to do with the coronavirus (COVID-19) spreading more rapidly outside of China... 

Russia and Saudi Arabia are also aiming straight at our shale oil producers who are higher cost. Defaults there would be nasty for our corporate bond and leveraged loan markets. 

Hence, although the 20% to 30% sudden oil price crash grabs the headlines, it still comes back to the impending pandemic and a growing global slowdown in reaction! 

All of this, along with the biggest crash in Treasury bond yields, down to as low as 0.47% last night screams global recession… Who’s the safe haven here? Certainly not Bitcoin, down 26% since mid-January. Not even the U.S. dollar, down 10% vs. the yen and 5% vs. the euro. Gold has done well, up about 3% since stocks topped, but more mixed lately – and I’ve been calling the rally in gold and still see $1,720 – $1,800 on the upside. 

But it’s really been all about the 10-year Treasury bond, up near 20% since stocks topped. Even high-grade corporates have only been up about 4% since then, although they have been up 23% over the last year vs. 10-year T-bonds up over 40%. 

The truth here still comes back to the black swan coronavirus. It is the first thing central banks can’t stop with massive money printing… Take that Kuroda, Draghi and Powell! 

They can stop banks and companies from failing, and can stop a recession or most stock crashes. They can even cushion the economy from the impacts of quarantines and business shutdowns… but they can’t stop the virus from spreading!!! 

You would think the fact that China has already seen a peak and that moderation would be a good sign. But recently, it has suddenly spread to many places, and it is exploding in the colder ones where the virus is favored vs. warmer temperatures in mid- to southern China and Southeast Asia. 

South Korea was the first to see the strongest surges outside of China. But its strong testing program has kept the death rate out of near 7,000 cases to only 42, or only 0.6% versus the 3.8% death rate in China… 

But now the big story is northern Italy, with a 16 million-person lockdown – one quarter of its total population. That’s in response to now over 7,300 detected through massive testing and a very dangerous death rate of 366, or 5.0%! Now that’s scary. 

South Korea and Italy are in colder regions that are still seeing the last days of winter. That means the dangers are likely to be the worst in the northeast, upper Midwest and northwest in the U.S. ahead, and northern Europe. 

The U.S. has now seen 500 cases and 19 deaths for a rate similar to China’s at 3.8% — not good. 

The trillion-dollar question now: Do governments and central banks respond strong enough for the markets to see a strong initial rebound out of this crash? Do we get that bounce to new highs in the Nasdaq, or does this rout continue into that typical 42% down in 2.6 months? I outlined both of these scenarios in the March Boom & Bust. 

Stocks are jus2%-3% below the February 28th first crash lows at the open, and so oversold that a strong bounce is still clearly likely… but they need to hold near here! 

I will update you on Wednesday after we see what the markets do, and again in Friday’s video rant after I get an update on how much the Fed ups its money printing by Thursday’s report. That figure last week was up$75 billion, and still most people didn’t notice.