JACK FARLEY: Welcome to the Real Vision Daily Briefing, where our team of journalists analyze the most important news of the day through the framework of key Real Vision themes. Whether that's macro, liquidity, market structure, or crypto, we cover it all.
Hi. I'm Jack Farley with Real Vision. We have our CEO, Raoul Pal, standing by with Ash Bennington, and they're ready to give their macro analysis of what's going on. But before we go to them, let's quickly go over the latest news and data on the coronavirus pandemic, as well as markets.
It's 3:30 PM, Friday, April 10. Today, the global death toll surpassed 100,000. Yesterday was the third day in a row that the world saw over 85,000 new cases. In Europe, we're seeing the five-day moving average of new cases leveling off, suggesting that we could be close to a peak.
While in the US, COVID continues to spread. 44 states now have more than 500 confirmed cases. And in 11 of these states, there were over 1,000 new cases just yesterday. And if New York were a country, the state would have the sixth highest death count of any country in the world. But perhaps the most ominous news of the day is a leaked memo from the Department of Homeland Security that projects a truly nightmarish scenario.
Obtained by The New York Times, this internal document models the damage if the quarantine in the US were to end immediately. The models found that a complete end to the shutdown would lead to around 125 million cases and up to 300,000 deaths. Perhaps more alarmingly, it found that ending the shelter-in-place quarantine in 30 days could lead to as many as 105 million cases, and that's if moderate mitigation methods were still in place.
In markets, it's Easter today, so I don't have a lot of price action for you. But there were some important stories I want to briefly go over before I turn it over to Raoul and Ash. Today, the credit downgrades continued, this time in the airline sector, with Delta, American Airlines, Southwest, United Airlines Holdings all getting significant downgrades by Fitch today. And with Delta being downgraded to BB, Delta is officially junk.
In other news, Warren Buffett's Berkshire Hathaway tapped the international bond market yesterday, borrowing 195.5 billion yen or $1.8 billion. The yen-dollar dynamics is fascinating. If you want to learn more about that, you should check out Raoul's interview with James Aitken today, where James goes over that dollar-yen trade as well as the cross-currency basis swap that underlines it. It really is a fascinating interview.
Lastly, over the past three weeks, at least 16.7 million Americans have lost their jobs. Meanwhile, this week saw the greatest stock market rally since 1974. To make sense of all this chaos, we've got Raoul Pal and Ash Bennington.
ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. I'm Ash Bennington. It's Friday, April 10. I'm here with Real Vision CEO and co-founder, Raoul Pal. Welcome, Raoul.
RAOUL PAL: Thank you, Ash. Good to be here with you.
ASH BENNINGTON: So here we are, Raoul. It's Good Friday. Markets in Europe and in the United States are closed in observation of Easter. Tell me, when you look broadly at markets, when you think about what's happened over the last few weeks, you've just come out with an important piece on Real Vision called The Unfolding where you unpack just your broad big picture view of all of the things that are happening right now with coronavirus with the macroeconomic framework and with markets. So share with our viewers what you're seeing in the broadest sense.
RAOUL PAL: So I'll try and distill it down. So basically everyone's seen the video. So the basic idea is, I think the potential is three phases-- the liquidation phase, the hope phase, and then the insolvency phase. The further along we go, the harder it is to project or forecast.
So the liquidity phase, the question is, all anybody needs to know now is, where are we? Are we still in the liquidation phase or have we finished it and are we in the hope phase? That's the debate the market's having. But it's actually relatively simple to me, and I think Roger's talked about this in the past is, we're at the 50% retracement of the entire Dow move.
I have a bunch of technical indicators in the shorter term that are diverging, suggesting it could rollover. Bitcoin has actually led a lot of this, seems to have rolled over today, while the S&P is closed. I seem to think that the narrative has been the Fed helping, things are getting better in New York, things are getting better in Spain and Italy.
Meanwhile, there's a sub-narrative just developing that I think is going to grip the markets over the next three weeks. One is Japan is seeing some acceleration. Singapore has seen new clusters and a growth in cases and has closed the economy down again. We've also seen somewhat similar of a second wave in Vietnam.
Then, when you look at-- Spain is struggling to try and decide whether to reopen or not. And again, it's probably too early to do it considering how many people have been infected in Spain and how many people had therefore become infected. Sweden is accelerating, Brazil is accelerating. These were economies that were less closed.
ASH BENNINGTON: Yes.
RAOUL PAL: Then, other states in the United States, there's about 44 states now that have over 1,000 cases. Now usually that's an accelerator, and we have to see how that plays out. They won't all be uniform, but my fear is the narrative is going to shift quite quickly to, this is not over, there's a second wave elsewhere, and so we finish the liquidation phase over the next three weeks. I could be wrong. It's a really difficult phase to trade.
ASH BENNINGTON: Yeah, it's a very scary progress progression that you're describing here, effectively, from illiquidity to insolvency.
RAOUL PAL: And I just did an Ask Me Anything on Real Vision Pro just to describe at the simplest level for people to understand. You're a restaurant. So restaurants in China reopened. And they asked for social distancing, which meant basically 2/3 less tables and a maximum of three people per table. The restaurant business is a small margin business. To remain open in a situation like that, for a restaurant, is basically a grind to bankruptcy because you've lost 2/3 of your revenue or more.
So H&M opened in China. We must get our shops open. Down 50%. There's a recent report out of a retail analyst who's basically saying, retail, particularly the specialist retailers who have the lower end of the market, it's better for them to remain shut than reopen. Because the moment they reopen, they can't negotiate rents and everything else and have to pay staff, and before you know it, they're bankrupt.
And that is the issue, is the incremental loss of growth doesn't generate enough cash flow to pay for debt. And that's it. And it's the same whether it's student loans, the same whether it's auto loans. And all the government's trying to do is backstop that for a period of time, three months. No mortgage payments for three months. Well there's a big, bloody assumption I keep telling people in that, that three months is, after that, it's all OK. It's not.
ASH BENNINGTON: Absolutely. I think you've hit on what I think is the critical point, which is the disconnect between the real economy and financial markets that we're seeing right now. I'm here on the Upper East Side in New York City, and you walk around and you see what is nothing short of absolute real economic carnage. Right? You see stores that are boarded up, literally in some cases. You see signs on the window, people saying, we love our customers. Please help us out. We've set up a GoFundMe site. This is the real economy.
And then you look at what's happening in financial markets-- I'm looking at some numbers from US equity markets. The S&P closed on Thursday now for the week, and it's up 12.1% since last Friday's close. S&P from total all-time high, which was February 19, is only off 17.6%. It's really--
RAOUL PAL: But bear markets are a bitch. They're always so hard. I never forget running a hedge fund in 2001 and realizing that in a big bear market, the market went up more days than it went down by a factor of 2.
ASH BENNINGTON: That's right.
RAOUL PAL: So it is so extraordinarily hard to trade bear markets.
ASH BENNINGTON: Right.
RAOUL PAL: And so a retracement of 50%, it's not uncommon. And so everyone's like, I don't understand it. But the problem is, is everyone's fueling it by trying to short it and then covering it. And that's really what's going on. It's everyone's going, this is madness, but they're all the same people who are buying back the shorts.
So that's what's complicated about bear markets. They're really, really difficult to trade. And particularly in-- I mean, I use a bit technical analysis in the Elliott Wave terms, this wave 4, wave 5 transition is super hard because you kind of never know whether the bottom's in or not for a period of time. So I don't think it is, and that's been my base case, but you just don't know. So you're just wracked with fear of, am I wrong, am I right, am I wrong, am I right, all day, all night.
ASH BENNINGTON: That's such an important point for people who may be relatively new to markets that have only been here for the ride up. The ability to describe what happens in bear markets and the unusual dynamics and the unusual properties and the difficulty that they present to trade is such an important point.
RAOUL PAL: Yeah, I mean one of the features of a bear market is how fast it rises. It actually rises often faster than it goes down. Some of the biggest days are often on the up days, and that makes it very hard. Shorting, it's not the same as buying a bull market, shorting a bear market. They're not inverse.
Don't forget why macro people love bear markets and the tops of cycles is because normally the bull market plays out over, let's say, eight years. So it's an eight-year return stream. All the returns in a bear market tend to come in 18 to 24 months. So you can make extraordinary returns.
But within that comes the volatility. A bull market is almost defined by low volatility, and a bear market is defined by really high volatility. So it makes it really hard. I had a really good friend of mine who, over the 2000 period, was very bearish, was short most of the time, but short-term time horizon. He lost 30% by being short in a bear market. It's because you get stopped out every time the market rallies, and it's really hard.
ASH BENNINGTON: Right. Those positioning dynamics are crucial, and the margin calls of liquidations that occur really change the dynamics and make them not a mirror image, not a flipped version of it. And the time frames get compressed dramatically.
RAOUL PAL: Yeah. So one of the things that I'm looking for now is I'm eyeing the bond market that looks like yields on a fall again. And I'm starting to build a thesis that, in the optimism phase that I think comes, whatever form that that takes, whether it's a three-month, one-month, six-month-- whatever it looks like rally, a stabilization-- is I have a feeling the bond market is going to go to negative yields.
And we'll hear a narrative of, this is wrong, it's a technical thing, it's nothing to do with this, blah, blah, blah, like we heard about the inverted yield curve, which ended up working every time, right? So I think we will see the bond market go negative in the US, which will be the bonds telling us insolvency is the big risk, the debt deflation. People are not going to want to believe it. So I was thinking, how do I know, in that hope phase, where the underlying reality has changed. And I think the bond market will be the answer because the bond market is almost always right.
ASH BENNINGTON: It has a much better predictive record, certainly, than US equities.
RAOUL PAL: Yes, because equities are based on earnings and emotion and blah, blah, blah. Well bonds are basically GDP plus inflation.
ASH BENNINGTON: Right.
RAOUL PAL: Bond yields are a function of GDP and inflation, really.
ASH BENNINGTON: The other big news story that's come out since we last had you on was the Fed effectively announced yesterday that they were going to be buying junk. I mean, the language that they used, it's like Oracle of Delphi kind of stuff, right? By expanding the size and scope of primary and secondary market corporate credit facilities, they're buying junk.
RAOUL PAL: So what is happening here is-- look, we talked about this in the doom loop when I talked about it is, as soon as things get downgraded, the junk bond market cannot absorb it. So the Fed aren't trying to-- I don't think they're trying to stop price discovery. They're trying to stop an obliteration of the junk bond market or it freezes. So I think that's what they're trying to do, because they won't buy every single junk bond from Ford, for example. They'll just try and smooth the market, which is what the ECB have done, but probably more aggressively so.
The question is, is what happens if Ford goes bankrupt. Then it's on the Fed's balance sheet. Which companies get bailed out, which don't? They're looking at how to deal with the private sector. Look, it's a mess. And who the hell knows how this is going to lead.
But all we know is, I never get caught up in the detail of all of this stuff, the alphabet soup. All they're trying to do right now is try and stop the gap, the liquidity loss. We probably lost, from peak to trough, we lost 50% of GDP in stock market valuation plus probably 7.5% of GDP in actual economic loss plus the losses in the credit market plus, plus, plus. We're at 20% of GDP. I'm sorry, we're at $20 trillion. So the Fed have done $6. It's not stimulus.
ASH BENNINGTON: Yeah, it's interesting because in nominal percentage terms, the peak to trough max drawdown was only about 34% in the S&P but, as you point out, against US GDP. These are staggering numbers.
RAOUL PAL: Huge. But interestingly enough, that's exactly the same drawdown from the 1929 liquidation event.
ASH BENNINGTON: There's a chart that you show in The Unfolding that shows that point.
RAOUL PAL: Yeah. The other thing that's interesting news this week, you saw that this morning that Europeans basically rejected the idea of the eurobond.
ASH BENNINGTON: Debt mutualisation has always been the third rail of the eurozone project, hasn't it?
RAOUL PAL: So I don't know. How do you see that play out then? This is difficult for Italy now because nobody's to help them.
ASH BENNINGTON: I think we're in the middle of a-- I think this is a catalyst for an existential crisis that's been building in Europe for a very long time. And I think that-- look, this is a visceral emotional time, when you're seeing your friends and family lose older relatives, when you're seeing people, frankly, dying. There must be a sense of, are we in this together? Or is this just a bureaucratic structure that we're part of.
Because if it's a bureaucratic structure, what's really the advantage for the average Italian citizen, for the average Spanish citizen? And I really wonder if this is going to cause a reckoning, if there's some way that they can square the circle, split the difference-- however you want to phrase it-- between the camps that have developed between Germany and the Netherlands, on the one hand, and most obviously Italy and Spain on the other.
But this is an existential issue. It's a real philosophical issue. Do people who are Italians and Spaniards, they really feel like they're Europeans first and foremost, especially at times of crisis? If you're living in Italy, you're so attached to the Italian identity, to family, to the framework of culture. This is a big philosophical problem, and I don't think there's an obvious solution in the bureaucratic framework.
That said, look, Christine Lagarde was probably brought in at the ECB because of her skill and her nuance in handling these very tricky political issues. She's not an academic PhD economist. She's the kind of person who, if there's a deal to cut, will be able to make it. I don't know, Raoul. Is there a deal to be cut, though?
RAOUL PAL: Interestingly, I do think that having lived in Spain for 10 years and had a place there for 20, they do really think of themselves as Europeans. So there was a dual identity that goes on. Like New Yorkers think they are Americans.
ASH BENNINGTON: Sometimes.
RAOUL PAL: Sometimes, yeah. And so that strong sense, because Spain benefited so much from Europe.
ASH BENNINGTON: Right.
RAOUL PAL: But in this, it is really difficult, as you say, that they have to fight this and there's nobody to help them because the structure is not there.
ASH BENNINGTON: Right.
RAOUL PAL: The Economist ran an article today, and it's the right question. It's like, Europe's going to have to make a choice. It either goes to a full fiscal union or it breaks up. But this halfway house cannot continue. So I think-- and I'm bearish on the euro, and I have been and remain so. I just think the market is going to push this to get the answer.
ASH BENNINGTON: We've been in purgatory now for decades, right?
RAOUL PAL: Yeah.
ASH BENNINGTON: This was on 1999 to 2007 was the honeymoon period, so to speak, and then these underlying questions were unmasked during the great financial crisis, during the global financial crisis. And now they're coming to a head again. And these are very complicated issues, the idea of dual identity and how you identify as European versus Spanish versus Italian versus German and Dutch. These are really complicated questions.
RAOUL PAL: But also, this probably applies to most of the supranational organizations or the rules-based global order system, like NATO, for example.
ASH BENNINGTON: Right.
RAOUL PAL: Is NATO really there for you or not? How does it work when one of the aggressors may be Turkey? [INAUDIBLE] NATO. It's not clear that we have the right institutions for the world that we live in. And they're all getting tested.
ASH BENNINGTON: Look, absolutely. Article V has become more complex. But also, Raoul, to exactly your point, this is happening in the United States, right? One of the most staggering news stories