Unlimited QE from the FED while the US Senate blocks CARES

Overnight, in the US Senate politicians did not agree on the Coronavirus Aid, Relief, and Economic Security (CARES) help program. It is a shame how careless politicians try to use this aid program for election purposes… The Fed stepped in with an unlimited QE program.  Meanwhile we see finally a lockdown in the UK.

I have just read an article about the Spanish flew. There were similar measures and in the first time period people did not follow the recommendations (social distancing). But the key point after the first wave is over, everything must be done so there is a much lower and less severe 2^nd wave of the spreading of the virus. Otherwise we are repeating history: i.e. much more people got infected in the 2^nd wave!

Fig. 1: Risk-Off for basically all asset classes

There is no guarantee but when everything looks dark there is always a silver lining. Or to free quote Warren Buffett: Be fearful when everybody is greedy and be greedy when everybody is fearful.

This might still be early but, yesterday a strategist made the following point: we are going to see a bear market rally, not because of good news but because of a lack of sellers. If everybody is risk-off, assets are now owned by people who (at least on average) want to hold them until they have profits. And all others probably did sell the assets in the last couple of weeks.

Fig. 2: UBS Chief Economist puts it straight to the point

Well this is everything I try to say in a nutshell from an expert. We need fiscal stimulus, aid programs and cash cheques to consumers and only after we get people back to work stimulus. What he normally says as well is that the actual ECB and FED monetary programs have only one real important point: Keep the markets working so that governments can finance their fiscal programs.

Fig. 3: GS has revised its GDP forecast from last week to minus 1% for the year 2020

 

As we got some feedback let us share a simple example what that could mean for Q1 to Q4 global GDP in 2020

Q1	Q2	Q3	Q4	2020
2%	-5%	0%	2%	-1%

 

This is done additive; it should be geometrically linked. But for illustration purposes this shows the key point very well. If Q1 were to be 2% instead of above 3% and Q2 will be minus 5% we would need a substantial acceleration in Q3 versus Q2 and as well in Q4. This would be a V-shaped recovery.

However, based on such an approximation minus 1% for the whole year 2020 starts to look challenging. Nevertheless, if you run money the level of GDP (which after all revisions we might only know in two years from now!) is not relevant. Relevant is when do markets start pricing in such a recovery.

Yesterday the Fed announced, partially forced by the inactivity in Washington, to increase its buying program to levels we have never seen before. It did however, not hinder markets to fall further. One other reason why they did this, is that the treasury market did not function properly! I believe the experts do know that monetary stimulus is not solving the lockdown. But markets need to function and in the US the repo market and to a certain extent the treasury bond market need support.

Fig. 4: JPM believes that this growth shock will be one of the largest on record but also a short lived

Fig. 5: S&P 500 has tested the support level at 2’200

Based on European trading and US futures we are going to see a bear market rally. It is not over but it gives us some air to breathe before the support level will be re-tested. For technicians there was a spike in volume, i.e. we might have had a wash out. But have we seen already capitulation?
I doubt…

Published: 24/03/20 by Blackfort CIO Dr. Andreas Bickel

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