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 the key Real Vision themes. Whether that's macro, liquidity, market structure, and crypto, we cover it all.
Hi, I'm Jack Farley with Real Vision. We have Ash Bennington and Ed Harrison standing by ready to give their market analysis. But before we go to them, let's quickly go over the latest news and data on the coronavirus pandemic.
It's 3:30 PM Monday, April 6. The total confirmed case count is now at 1.3 million, set to breach 1.5 million by the end of the week. The total number of deaths globally passed the 70,000 mark today, and the number of active cases continues to rise, and it's set to exceed 1 million in total over the next two or three days.
There is some good news, however. Total recoveries are increasing as well with the total figure set to reach 300,000 by the end of the week. And in Europe, the situation seems to be improving with daily net cases having decreased since March 28. This decrease was driven by Spain, Italy, and Germany.
But the Europe curve is still ahead of the GMI forecast, and the New York curve has left the GMI forecast behind. Remember that the GMI forecast assumes a tight quarantine and strict adherence to lockdown protocols.
Despite the continued progress of the virus, the market today was in buoyant form. The S&P up almost 6% as of filming, and other equity indices showing similar strength. Now let's go to Ed Harrison and Ash Bennington with their market analysis.
ASH BENNINGTON: Thanks for the update, Jack. It's Monday, April 6. I'm here in New York, Ash Bennington for Real Vision. And I'm joined by Ed Harrison from the DC bureau. Ed, I'm looking at markets right now coming up to the close. We're up 5 and 1/2% on the S&P. We're up 6% it crossed on the Dow. And it's just economic carnage out there. I'm just at a loss for how to even frame this. What are your thoughts?
ED HARRISON: Yeah, I'm definitely at a loss. I think that it's continuing the narrative that I've been seeing for a number of days now which is that we have a pocket of time during which we are fully on the liquidity spectrum because of the Fed and, to a certain degree, because of the policymakers in Washington, and people are taking that and running with it. Because when you look at markets like credit markets as an example-- IG credit, Investment Grade. We had $200 billion of issuance over the last two weeks. We had $100 billion of inflows into IG credit, and now junk is being restarted as well.
So I think people are getting the sense that things are back to normal or they're normalizing in terms of the markets, and as a result, there's a bid out there for risk assets, equities included. But none of this takes into account any of the negative real economy things that we've seen and that we will continue to see going forward.
ASH BENNINGTON: Right. Exactly. Exactly my feeling as well. And let's frame this up a little bit, right? So the S&P peaked at an all-time closing high on February 19 at 3,386. And that had risen 49% from January 20, 2017, from Donald Trump's inauguration. And we've now drawn down about 22%. So 22% from a record all-time high, it's really hard to see how there hasn't been more real economic destruction than are represented by what we're seeing reflected in US equity markets.
ED HARRISON: Yeah, the way I look at it is that you're going-- let's talk about the future here because a lot of times we're looking at the present and we're thinking, what's happening with markets now? The real question is is what's going to happen into the future, and you can model out a bunch of different scenarios. I think that we can model out scenarios much better now than we could even a week ago.
I'll give you an example that Italy is-- and also Spain, they're cresting in terms of their coronavirus counts and also the death counts. And so the question now is becoming for them, what do we do in the backside of this? How do we get out of the lockdowns, and what is the potential for a second wave or mitigating that second wave?
I think the most optimistic answer you can get to that is probably May, and hopefully the second wave will be much less than the first wave and so there will be minimal disruption. And so you can take that, and as a wave, take it through the economy with China first, places like Italy second, places like New York, Seattle later, and then even later Washington, DC, and then even later the South and the Midwest of the United States. So it's a rolling backside reallocation which probably will last you into August.
I talked to Leland Miller earlier today, and he was talking about the supply-chain issues with China.
ASH BENNINGTON: This is Leland Miller of the China Beige Book.
ED HARRISON: China Beige Book, exactly. This was a Real Vision live spot that we did, and he was basically saying that we're looking at Q4 at a minimum in terms of almost getting to a more normal situation. So to me, that's more an L shaped recovery. And if you look at it from a worst-case scenario, that L continues on into 2021, well into it in a way that impacts earnings not only this year but next year and then also into the future. So I think that we're really looking at some serious earnings problems.
ASH BENNINGTON: You said a word that I think is so critical earlier in that discussion. You said wave. And I think that one of the things that concerns me a little bit-- first of all, I'm not an epidemiologist. I don't have a medical background. We've seen far too many financial guys get way over their skis talking about epidemiology. I'm not going to do that.
But there's one thing that does really concern me, right? We see this chart, the chart that's been shown above the case fatality rates and the total overall death rate that we've seen. It's a horrible phrase to even use, but this is the situation we find ourselves in, right? And we've seen it. Dr. Birx and Dr. Fauci have shown it at the White House. It's a chart that rises at a very regular rate. Then it peaks. Then it rolls over and declines. There's this neat little margin of uncertainty around both sides. It looks a little bit like the cone of uncertainty on a hurricane map.
And you have to wonder at some level to what extent this reflects reality and to what extent this is something that we can easily model. Look, in economics and finance we look at a lot of charts, and many of them purport to tell one story. And then when that time unfolds, it looks a little bit different.
You can go up just on the Wikipedia page for Spanish flu, and you can look. And when you look at the death rates from Spanish flu or the total amount of people who have unfortunately died from it, you see it peaks at around June of 1918, and then it peaks again in November of 1918, and then it peaks again in March of 1919. And obviously this is something that you hope doesn't play out again, but we really don't know. We just don't know. It's uncertainty. It's Knightian uncertainty. It's unmodelable uncertainty around what the trajectory of this virus will be.
And I wonder to what extent-- to get back into the domain of the things that we feel pretty comfortable talking about, I wonder to what extent that's been factored into the equation, thought about, planned for from an economic-policy perspective.
ED HARRISON: Well, it hasn't been. And also, I'm looking at it purely from an earnings and credit perspective because the timetable that I laid out was a best-case scenario. You're talking about the lesser than best case scenarios, the worst-case scenarios. That is a second wave which is large in terms of infection rates because you let go of your controls early and also the fact that the virus comes back in a more virulent form at some point later on. Those are the things that will make it even worse.
So a best-case scenario is this rolling economic restart that happens in June, July, August, and then you still have the supply-chain issues that you have to deal with, and that lasts throughout the end of the year. That's the best-case scenario, and the market isn't even really thinking about those scenarios.
For instance, look at the oil companies. And oil was being bid up into the $30s. I think that Brent is still into the $30s. Is that a realistic scenario given the oversupply that we have now and given the fact that we had a meeting for OPEC plus that was canceled? So there was a run-up on the back of this whole concept that we were going to have some supply cut, and it didn't happen. And yet we're still 60% of the way up into that run-up. We only retraced a little bit of that. So I think that there's a lot more downside risk as the numbers come forward.
ASH BENNINGTON: Yeah, and we also think about the broader context here. This is something we talked about. I slept about three hours last night because here in Manhattan's Upper East Side, I was being woken up by sirens every 15 or 20 minutes, and you begin to think about what that means. It's your neighbors being rushed to the hospital in grave condition.
I would describe this neighborhood where I am-- and I've gotten out a little bit, not too far-- as a quiet, peaceful, orderly economic train wreck. There are signs in the windows of stores that say please help us stay open. People are starting GoFundMe sites to try and raise money for their neighborhood businesses, relying on the goodwill of the people who go there all the time to lend a helping hand.
And the reality of the situation is when we start talking about the things that you're talking about, which are things like earnings and credit ability to service debt, all of those-- obviously that revenue that's lost is someone else's wages, and there's a feed-through effect with small businesses and the wage earners who work at those small businesses and own those small businesses pulling down large Fortune 500 corporate earnings, which obviously has an impact on credit quality, and so on and so forth, and this feedback loop just continues.
But what we see on the ground, it's really hard to feel optimistic about the ultimate feed through about where this goes. Is that what your experiences where you are in Washington, DC? Are you seeing similar things there, and how do you factor it into your broader context of the framework you're working on?
ED HARRISON: No, we're not seeing it yet. I think that-- here's how I look at it just from a personal perspective is that what's happening in New York is totally removed from what's happening in Washington, DC, which is removed from, say, what's happening in Oklahoma. And what I mean by that is you guys are having a tragedy, a human tragedy right now that we're not having. Yet at the same time when you hear where the next wave is going to hit, Washington, DC, is right on the map.
There's nothing happening at the convention center. The Javits Convention Center New York is now being turned into a hospital, essentially. That's not happening in DC. There's no preparation for anything like that. People are going out walking almost like it's a normal thing. The only thing that's preventing complete normalcy is the shutdown that's been mandated by the government here in this area.
So then you go to Oklahoma or a place like that, or Arkansas, where it's almost entirely normal where you can do almost entirely normal things. So the truth of the matter is is that people don't really live it until it actually happens to them, and then that's when the true consequence of it all comes into play.
Let me give you something that I thought was interesting I read today, speaking of small businesses and how it really does impact them. And this is why, for instance, Oklahoma is waiting until the last minute. Wells Fargo tweeted this out this morning. "Due to strong interest in the Paycheck Protection Program, we reached lending capacity and closed the intake form. We are lending to nonprofits and small businesses with less than 50 employees and will support nonprofits focusing helping other small businesses." That's it.
So this program that the government designed to help small businesses has basically been shut down overnight at Wells Fargo, and I'm sure the same is true elsewhere. These small businesses are going to go out of business. Many of them, they're going to go bankrupt. And so when you talk about people's livelihoods, their wages, et cetera, that's exactly what's happening. So the numbers that we got from week one and two, 10 million, could easily become 20 and 30 million over the next four to six weeks.
ASH BENNINGTON: Yeah, I was just about to bring that up. We saw a similar thing happen at Bank of America. They, were the first to get their online form up, and they were absolutely inundated, massive amounts. I think $22.8 billion in loan requests, 58,000-some-odd lending requests. The numbers were extraordinary.
You cited a statistic, I think earlier this morning, that there's an estimate that there's 29% of economic activity already offline in the United States.
ED HARRISON: That's right. I write every morning to help me here on a site that I have, and I was saying that we're seeing 29% already. Those are the estimates of what we're seeing shut down. So you can take that on an annualized basis. That's a 29% drop in GDP. If that goes for four quarters, that's a 29% drop in GDP total. So that's the level that we're talking about right now. That's a level that I just-- when you talk about 22% down on equities, it doesn't really compute to me.
And speaking of equities going down, I want to talk about JPMorgan Chase as an example because JPMorgan Chase's CEO, Jamie Dimon, said he's thinking about eliminating their dividend entirely. So he's getting ahead of the regulators. He's getting out in front of the coming credit write-downs that we're going to see. That's what's going to happen.
So all of these things are occurring, and the market is rallying 5% and 6% ahead of that. It's like a train wreck that you can see coming ahead.
ASH BENNINGTON: Yeah, and I think that we've already seen that happen from UK banks, and they've also all vowed that their senior executives will not draw a bonus this year.
Speaking of the UK, I think, again, talking about how markets can seem out of touch with what's going on, one of the most extraordinary things was seeing that the designated survivor in the UK, who's the gentleman named Dominic Robb who's the foreign secretary, has said the prime minister is resting comfortably. Boris Johnson is resting comfortably in a hospital. The fact that this is something that we've all assimilated-- and against that backdrop investors think, well, boy, this looks like a time to buy the dip. It's really hard to connect those things.
This is the thing-- I said to a friend, this is like a Stephen King novel, right? This is something that it would be difficult to imagine. If I told you this scenario 60 days ago, it would be impossible to believe. And now we're seeing it, and yet equity markets are rising against that backdrop, against that context. And you have to wonder, is the moment of reckoning coming?
ED HARRISON: Yeah. My basic trade, if you will, that I still think is intact, is valid, is HYG against LQD. The Fed will backstop investment-grade credits, but they are not going to go down into the high-yield department. So small- and medium-sized businesses, they're not going to have a backstop, as I was just saying before. And even large companies that are lower credit rated, they're not going to have a backstop either.
So that's where the carnage is going to be, and then at some point there's going to be a line where the policymakers say cut. We're going to do something for you. We're going to help you in some capacity. That's going to be at investment-grade credit. And the question is, how are equities affected? I would say that equities are affected because they are residual, and that means that there's less residual left over for equities after investment-grade credit gets the backstop.
ASH BENNINGTON: Well, to stay on the fixed-income side for a moment before we get into equities a little bit more, I'm curious. It almost seems like an invisible line in the sand between IG and HY because obviously there are broader macroeconomic feed-throughs than a company that's rated VV versus AA. This is the point I was making earlier, which is that wages and revenue are two sides of the same flow. And there's going to be a feed-through effect, and how does that impact the broader economy? And does that basically put this weird macroeconomic distortion in place where you have the Fed or the Treasury in conjunction lending through some liquidity facilities to the highest-credit-rated companies, and how does that work? We just don't know, right?
ED HARRISON: Yeah, so there's going to be a distortion. That line in the sand, it's hard to know where the slippery slope-- where the Fed makes the cutoff, especially with regard to the 50% or more of paper that is BBB.
The thing that I find interesting is people are now talking about the ratings agencies now, and we know from the 2007-2009 crisis that the ratings agencies were behind the curve. They were giving ratings to companies that were inflated in the early 2000s. We now see that that's exactly the case here.
A lot of people were talking about if you look at the metrics of BBB-rated companies and you assess them compared to, say, BBBs in the early 2000s, then you would see that they were actually junk-rated companies. And so now they're starting to trade like junk. Carnival, which I mentioned, was one of the places that went out-- they came out to market. They had to pay up like a junk company, much worse than Yum! Brands.
So we're going to see stuff like that, and eventually the ratings agencies are going to just start downgrading. But when they start downgrading, it's too late. They're reactive. They're not proactive. You have to do your homework to understand which of these companies are going to fall into junk, and that's where the line is. Once those companies are down there, that's it. They're out.
As I say, it's almost like the European sovereign-debt crisis. Greece is not eligible,