ASH BENNINGTON: Welcome to the Real Vision Daily Briefing, where a team of journalists analyze the most important events within the framework of the key Real Vision themes. That's macro, liquidity, market structure, and crypto. We cover it all.
I'm Ash Bennington. I'm going to start with the Real Vision daily coronavirus update. It's Wednesday, March 25, 2020. It's 3:30 PM here in New York, where I'm located. Today we saw the confirmed world case count rise to 454,942. That's an increase of 32,415 cases more than yesterday. This number is dynamic, with the total counts moving in real time.
So by the time you see this, the numbers may have already moved. The number of total confirmed deaths from COVID-19 is now 20,547. So far, we've seen 1,675 additional deaths from this disease since yesterday. Europe continues to be the epicenter of the COVID crisis, with over 250,000 official cases recorded.
But in the US, it's growing at an alarming rate, with 6,225 new cases today, pushing the total number of cases in the US above 60,000, with New York continuing to be the hotbed of the contagion, with 4,463. That's it for this part of the briefing. In the next part, we're going to talk about economics and financial markets. Thank you for watching.
Welcome to the second half of Real Vision Daily Briefing. We're just after market close on Wednesday, March 25. Markets are up. The Dow is now up about 2.5% on the day. S&P up about 1.15% on the day. NASDAQ, however, is in negative territory, down about half a percentage point, presumably some tailwinds here on the news that we're close to reaching a deal on a $2-trillion coronavirus aid package, which would be the largest in American history. It's getting quite close to passing.
We're here now with Roger Hirst. Roger, thanks for joining us from the UK after market closed in New York. So it's late your time.
ROGER HIRST: Yeah, it is. It's getting kind of quarter past 8:00 here, right.
ASH BENNINGTON: Yeah. Roger, you and I've worked closely here for years at Real Vision. And you've got this background of Goldman and Deutsche Bank and other places and in sales and trading strategy. So it's always great to hear your view, but especially at times like this. Roger, what are you watching today?
ROGER HIRST: Well, I think the interesting thing has been watching this bounce that's been unfolding. And obviously it mainly responds to the Fed package. But also I think last week I was talking to Ed and saying that I think we've seen two phases so far. We're coming to the end of that second phase.
One was-- the first one was the risk of economic shock at the very beginning, the first week and a half. And then from about March the 12th we saw the-- it was deleveraging phase. This is the phase when equities fell. Bonds started to fall as well. And this is where the dollar took off against everything.
I was looking for a low. And I'm looking for about two weeks ago for potentially-- I still say potentially because we still don't know after 1 decent, 1 and 1/2 decent days, looking for a potential low in and around the expiry, which is on Friday. Now, even trading the expiry date itself was an absolute nightmare. If you bought in the morning, you were off site.
So it was always a guidepost more than anything else. But I still feel that the first phase, which is the deleveraging phase, is probably coming to an end. What we're looking at now potentially here with that bounce yesterday is yes, it's a very, very large package, which we should come on to later. But I think we've got to the point where we were now thinking, maybe coming into month and four trading days left before the 31st of March, there will be some re-balancing going on here given the absolutely enormous size of the sell-off that we've had. Let's not forget 35% in very, very few days from the all-time high.
This has never really been seen before. So we should expect some bounces. And even if we got the basic Fibonacci bounce, 38%, that would take you to 2,640 on the S&P. We're still 3% or 4% away from that. So the size of the sell-off and the volatility we've had is in some ways defining the fact that we will have rebounds like we had yesterday.
ASH BENNINGTON: Right. And by the way, you were absolutely spot on about the rising dollar first against funding currencies and then against a much broader basket. You called that one ahead of time. So when you look now at currency markets, what are you seeing? And what's your outlook for the future?
ROGER HIRST: Well, the obvious first point is that we've seen this weakness in the dollar. In some ways I was surprised that we didn't get more weakness given the size. Well, we don't know the size because it's QE unlimited, QE infinity. So it's a vast package. And the fact is what I keep on saying, though, is that the other central banks, if they haven't already started printing, they will be printing.
There will be more non-dollars printed than there are dollars printed. So on balance, it should still be relatively positive for the dollar. And the other thing to really look at here is that the biggest moves have tended to be in the currency pairs that include the euro and the yen.
If you look at the DXY, 60% euro, 57% euro, about 50% yen. But when you look against emerging market currencies, we've had a bit of a bounce today. But overall the bounce has been quite lackluster against those. So to me this is still not giving us a clear indication yet.
ASH BENNINGTON: Yeah, DXY was off about 1% on the day. But obviously that's coming after several days of pretty steep rises.
ROGER HIRST: That's right. And it's getting back to the-- there was a very clear channel in place with the DXY. It's been grinding higher for a couple of years, finally broke, and is coming back to test that. But the big story still is that we are pricing out or pricing in, whichever way you want to look at it, that first initial shock, and that deleveraging has been sweeping through the market.
What we haven't probably seen yet is the outage of the global system that's coming, even if it's two or three weeks, but it's more likely to be three or four months in some areas, certainly two months in the UK, I think. We talk about three weeks, but it'll be longer. Some of this is going to be a complete outage. And for a lot of that period, it's going to be a partial outage in a world which is serviced by dollars.
So to me, that's still the big story here is that over the longer term, over the next three or four months, it's the world that will be starved of dollars, even with the Fed doing what it's doing. Remember, lots of other places are going to be pumping liquidity. I've talked about the cross-currency basis between yen and dollar. This is I've got lots of yen. I want to convert it to dollars.
It costs a lot at the moment compared to history. It's off the wides. But it's still expensive. People want dollars. And other funding spreads remain under pressure, even as we've seen the bounce in equities.
So when you look at the thing as a whole, rather than just the extreme moves in equities, both down and up, the funding issues, the overall issues, they're still there. The real-world issues are where we're going to now. What we've seen has affected the financial shadow banking issues unwinding.
ASH BENNINGTON: That lends itself very naturally to the question of what central banks are doing. And obviously the Fed has extended some central bank liquidity swap lines to attempt to offset some of that, the dollar funding pressures internationally. How large of an impact do you think that's having, in your view, in that?
ROGER HIRST: It's a huge, huge chasm that's opened up in the whole fabric of the financial system. And they're pouring money into it. And there is one risk that comes out of that, which is inflation, which we can talk about in a minute. But overall, the framework I think is broken. And this is how we should think about the bounceback that we're seeing, that we partly seeing at the moment, but over the longer term, which is has the fabric been completely ripped apart and changed? And is the central bank response certainly that? I think it is.
They're adding liquidity. But $2 trillion? Yes, it sounds like a lot compared to 20 years ago. It's even a lot compared to what the US did in 2008. But $2 trillion in the context of $14 trillion of debts-- this is dollar-denominated debts outside of the US, $25 trillion potentially, including off-balance sheet numbers as well. That $2 trillion's really for the US domestic market. Yes, they're going to do swap lines.
But we're not going to even touch the edges here. And then the bigger picture is the unfunded liabilities in the future, which is $100 trillion. So this is just another brick in the wall, as it were, of this nightmare that's been ongoing for 10, 20 years of a system that was fundamentally flawed.
ASH BENNINGTON: Talking about debt and liabilities, let's turn the page a little bit to talk about something else that you covered in the last piece, which is what's happening on the corporate side. Obviously there have been a whole rash of downgrades. We're looking at debt that was issued as investment grade being downgraded to effectively fallen angels cut to junk. What's your view on that? And what's your outlook?
ROGER HIRST: Well, I think the whole thing there is-- and the Fed is right to come in and support it. It looks like they're really targeting the companies that you could maybe argue didn't deserve to blow up based on what's been happening, i.e. the high-quality end. But the real issue is that these are corporates.
The corporate landscape overall has been running very, very low cash levels for a very long time. And as we all know, leveraging-- debt to buy back shares. That game is over. But more importantly, the cash flows-- we're in a zero cash flow situation.
What the Fed needs to keep working capital going so they can pay wages and keep effectively the supply lines and the production lines at least fluid. So we don't want these to be completely mothballed, even though some of them are. But should they provide stuff which supports risk assets, where those risk assets are still being held by really the few-- and I'm not talking about the 1%. It is a 10%.
But then the moral hazard is if you don't support those assets, you start to blow some of the pension system. And I've seen this over the weekend in the UK, where in the UK, in 2015, people could move towards a personally invested, privately invested pension plans. So this is where the SIPPs, Self-Invested Pension Plans, SIPPs.
Basically you could take your money and invest it how you wanted to. Most people put it into equities for dividend yield. Those dividend yields have been falling. The capital has been falling. This is happening the world over.
Money into pensions is going to fall because income is falling. That's one of the pillars of the system that's just no longer there. The money central banks are providing is to support the immediacy of the collapse today. But it's not to change or replenish this framework, which now looks to me to be broken.
ASH BENNINGTON: Right. To pick up on one of the points that you just made, you were talking about this forced rotation into US equities. We briefly touched on the negative yields today. Federal funds rate obviously is between and 25 bips. And the yield on one- and three-month treasuries are priced below zero on a yield daily basis today. And so it's part and parcel of this broken system that you're talking about.
You have people who are rotating actually into higher-risk assets. There's a squeeze on pension funds. This is a very tricky and challenging time.
ROGER HIRST: I think it's an incredibly difficult one because right now what I think everyone's trying to work out is, is the bounce that we're seeing, or is the bounce that we're going to get, whether we're seeing it or not right now, is it going to be one which is akin to the V shapes that we saw in 2018, 2016, which were the Fed realizing that was a problem and fixing it with liquidity? I would say that the key issue here is what was that framework before? And the framework was, and I alluded to it just now, one, there was the pension money.
So I had money. Part of that money went into a pension fund, which went into equities and bonds. Well, that's drying up now. The second one was the rules-based funds, which often got this money and then put it into the system based on levels of volatility. And this was realized volatility, not VIX as an implied volatility.
The triggers that these guys had with the rules based, smart B to min vol, vol targeting, most of the trigger points now sell equity. And even though vol's coming down into month end and re-balancing is needed, but the triggers in the market will-- the switches in the market are sell. And all of that works in an environment where the biggest beat was the corporate buyback bid. Well, that's gone.
So should we expect this to suddenly rebound and continue rebounding? Or is this one where that framework has been fundamentally altered? Now, the other question is, if you do QE unlimited, QE infinity, are they going to step into the breach and offset that?
So if you get $2 trillion of QE, $3 trillion of QE versus $1 trillion a year of buybacks, does that offset and so the old framework holds true? I don't think it does because I think that the breakages that we've seen and the players that are now going to be absent for an extended period has fundamentally changed the fabric from the last 10 years.
ASH BENNINGTON: You touched on some interesting points in your last piece. And we get some of the smartest comments on the web, and I always read through them. One of the questions that came up, talking about the market structure issues you were just alluding to right now-- so we talked about effectively the shift from active investment to passive indexation and passive investment strategies. And you said something that was really interesting, and I think it would be great if you could expand on it.
The reality is that in smart beta strategies and some of the passive strategies, investors don't have cash buffers, effectively, the way an active manager would, just step in and take advantage of some opportunities. How does that impact market structure? And how does that accelerate sell-offs on the way down?
ROGER HIRST: I think we've just seen it. The 34% from all-time high to 34% down, 35% down, with a few what looked like algo-driven rebounds, but they never lasted I think is exactly that. They don't carry cash. And active managers are emotional creatures. And they kind of go, oh, 10% down. Not that there's value here. 20% down, definitely more value.
So they're always the bit in the market that we've always seen. And I think the hardest thing for everyone right how is should we be applying the rule book from 2008 or 2000 and those sell-offs to today, when the biggest players in the market aren't active managers, and those active managers have genuinely been bleeding capital towards the passive side? The passive side doesn't have cash. They're rules based. The rules have flipped. I don't know how that's going to pan out. But to me, they're on the sell side now.
ASH BENNINGTON: Yeah, to switch gears here a little bit, one of-- we've been talking about the financial aspects of this liquidity in the system and the financial plumbing. One of the things that's very different today than during the great financial crisis is the absolute devastation and the speed of the devastation that we've seen in the real economy itself. I'm here in New York. And when you walk down the street you see restaurants that are closed.
I just read a statistic that on a week-over-week basis there's been a 97% decline in revenue from box office receipts from ticket sales. This is something that's hitting Main Street immediately. It's not a feed through from a financial crisis. It's the actual destruction of end demand. And how do we factor that in? And how do you think about that when you're also thinking about the financial system and the liquidity issues?
ROGER HIRST: Well-- phase-- coming through. And the third phase is that the real economy is going to be in outage for an extended period of time in a way that we've never seen. And even if we try and get back to normality in a month's time, it'll be a guarded normality because the coronavirus isn't going to suddenly go away.
And I think this is a bit that's got to be factored in is that a lot of people look at this as this sort of an impact from the coronavirus, that once we work it out, things rebound. And that will certainly be the case, to a certain extent. But what we had behind that was a very, very unstable system that was driven by central banks capping volatility, allowing these rules-based systems to rise to the surface.
If they're now broken, and at the same time, we have an economy that's broken, then that double whammy will play out over the next three or four months. I think it'll be playing out in a very unfortunate, very negative way for cash flows into the real economy but also cash flows into the financial economy as well.
ASH BENNINGTON: Yeah. And obviously we have the potential to set up feedback loops between the two, right?
ROGER HIRST: Yeah. And one of the other things that I'm really unsure about, but I'd love to try and work out is that this looks like a complete deflationary bust. The system's broken. But in the very short term, the fix that's being put in place might actually be a very negative fix, which is you're seeing this huge monetary and fiscal stimulus today on a workforce which is going to be kept away from production for the foreseeable future.
So you have a complete supply crunch. We know that. You might actually push up demand. And you might push up demand for essential items. In UK, Tescos and a few other supermarket chains have started pushing up some of their prices. Now, they're saying it's because they had these three-for-two deals. You can't buy more than two items in a shop. So they had to reduce those.
But nonetheless, you can see in some agricultural prices, things like coffee is going