ASH BENNINGTON: Welcome to the Real Vision daily briefing, where our team of journalists analyze the most important events of the day within the framework of the key Real Vision themes-- that's macro, liquidity, market structure, and crypto. We cover it all.
ASH BENNINGTON: I'm Ash Bennington, here with the daily Real Vision coronavirus update. It's Friday, March 27, 2020. I'm reporting from New York City, which is now the epicenter of a global pandemic. The global confirmed case count is now 586,473, and it's on pace to exceed 600,000 by the end of the day. Yesterday, there were over 2,700 deaths globally, bringing the total death count to 24,068.
The US reported over 17,000 new cases yesterday, the biggest daily increase we've seen in any country since the inception. The US now has more total cases than any country in the world.
I'm Ash Bennington from the New York bureau, this has been the Real Vision daily coronavirus update. Please stay safe.
ED HARRISON: Happy Friday, Raoul. I'm here in the DC area, you're there in Little Cayman. You have to move as little as possible, by the way, because I know that you have terrible internet there.
RAOUL PAL: Yeah, the worst internet. It's kind of got like 1 meg of upload speed, which is why everyone keeps complaining about the quality of my videos. But I literally am on an island of 140 people in the middle of nowhere.
ED HARRISON: It does look good, though, compared to what I've seen in the past. So let's hope that the internet gods are with us here.
RAOUL PAL: Yeah. Who knows, maybe everyone on the island is having a siesta or something right now, so they're not using Netflix.
ED HARRISON: You know, the market gods were with the market-- at least the equity markets-- for the majority [AUDIO OUT], but we ended on a down [AUDIO OUT]. --that equity markets were down like 3% today, QQQ down, the S&P was down, we also saw the Dow. What do you make of that? First of all, what do you make of the rally up, which is like 20%, and then this pullback today?
RAOUL PAL: Well, look. Having gone through many of these similar-- not an event of this magnitude, but similar kind of market panic response mechanism-- so you have the panic, you get the response. So we waited for the monetary response, then the fiscal response. That was all done, the market rallies, and then it kind of says, OK, well what's next?
ED HARRISON: Right.
RAOUL PAL: It's the uncertainty that tends to roll the market over. I mean, my view is, probably, that it might go down further again, even though many market participants are saying hey, listen, there's some probably really good bargains out there now, some good opportunities, if you think there's a return to normalcy even over the next three months. You know, something less bad than this means that the stock market probably rises.
So that's kind of how I think of it, and i think people in the market are the same. They're kind of saying, listen, the governments have done everything they can, so let's give it a chance, I guess.
ED HARRISON: Well yeah--
RAOUL PAL: What do you think?
ED HARRISON: Well, yeah. I was playing it out. I was saying, you know-- because I talked to some of the bulls in the past. I'm trying to one guy, from Federated Investors, who I spoke to, who had a price target that was maybe 6% to 7% above where we started the year. He was saying it wasn't going to be a blow-off the way it was last year, but still-- you know. And people were talking about 19 times S&P earnings on a 195 figure.
The numbers that people come up with to justify where we are, you have to peg that down, at least for this year. And then you're saying to yourself, OK I'm just discounting this year, and then I'm going to get into next year. But to me, the discount that we're getting to this level right now is a best-case scenario. Meaning that if we get out of this in six weeks, and we start to fire on all cylinders, and we a U-shaped recovery because of that, and growth comes completely back, that's where we are right now.
If it's worse than that, you know, levels have to go down from there. Because then you're talking about L-shape, where it's not just the one-year hiccup in S&P earnings, but it's a second year. And then you have bankruptcies and all sorts of other things that go into--
RAOUL PAL: Yeah. And I think the key point is, for investors, is you don't need to worry about that next phase yet. We're kind of just, you need to worry about, are we at the, somewhere around the place where we might have a more constructive market price action for a period of time. Because it's very difficult to know, are we going to go for the big deflationary credit crunch credit events? Or do we have a slow, smoother glide up?
You know, it's very difficult to tell at this point. I know my bias is, and different people have a different bias in this equation. But I think right now, it feels that yes, there's going to be some more volatility. But over the next month or two, it feels that hearing, speaking, to a lot of people who are big allocators of capital, there's going to be some money put to work.
ED HARRISON: Right. Now, you know, for me, the question then becomes, how much of what we've seen thus far was a liquidity-driven liquidation followed by a technical rally, versus any discounting whatsoever of the fundamentals? Because the sense that I get is that, during this past week, at a minimum, all of the fundamental news was discounted.
I was talking to Roger about this yesterday, when we had the jobless claims-- 3.28 million, which was double the amount that the median estimate was, and yet the market rallied. So I don't really think that that's happen, going forward.
RAOUL PAL: Again, the market knows that we've got terrible data now, right, so that's all in the price. There's almost no data that could come out that could upset the market, because we've all gone, we have no idea. This is the worst economic data set we're ever going to say in our lifetimes, or maybe in all recorded history, so that's in the price. What's not in the price, that I keep raising, is what happens a few months out?
If growth stays negative because of a number of factors, such as the coronavirus still rolling around the world with closings, shutdowns of different cities, or travel restrictions, or whatever it may be, a change in the human psyche that dampens growth. Let's say the baby boomers are much more nervous now because they would think, I don't want to go out, I don't want to spend money. I'm losing my money in the markets, right. Anything that dampens consumption, and let's say, keeps growth subzero on a year-on-year basis, well then we've got a different issue, because then we start to get a solvency crisis.
So that is my whole thesis is, we really don't know that next bit. But any economic data, now, is all well and good. It's the next bit where the expectations matter. Because half the market-- I would say 90% of the market-- is going to go for the usual, it'll be OK, we'll be out, and the monetary stimulus, and fiscal stimulus, means we should be in a boom by the end of the year. Well, I think there's a risk of something much more insidious happening.
ED HARRISON: Well, when you say that, immediately what comes to mind is what I would call the Japanification of the world. And that is, is that, Japan needed a massive catalyst in order to make the demographic bust a hole. And you did see rallies, 25%, you know, but then you had lower highs, consistently, as you went through that. I mean, it could well be that, when we talk about-- people talked about secular stagnation.
The only thing that stopped it from happening was this blow-off that we had, this debt bubble, if you will. And now, that's perhaps not possible. That we're entering a new paradigm where it's a Japanification of the world. We've reached the zero lower bound, and the demographic issues are going to come into play.
RAOUL PAL: And what's your hunch, Ed? What does the world look like in six months from here?
ED HARRISON: Yeah, so I mean, I'm thinking about it in terms of, OK, let's say that you have a best-case scenario. And I'm completely discounting the V, because I don't think that the period between entry and exit is enough to make it a V, it's going to be more of a U at some point. So then the question becomes, this particular point, this part of it, how much can you get back up to the initial trajectory?
And the sense that I get is that it's going to take at least a little while to get up to the initial trajectory in a best-case scenario. If you think about supply chains, and you know, how they've changed dramatically over time. If you think about the hysteresis of massive unemployment, and then reemployment, and how that inhibits people's ability to have productivity after the fact. To me, what that says is, it's not a U. It's not going to come right back up at a delayed time. It's going to be a somewhat L-shape.
And then the question becomes, how L-shaped is it going to be? How long is it, in terms of coming back to where we used to be? We might not even get there for a very long time.
RAOUL PAL: Yeah. And the length of the L, I think that's a great point. The length of the L, to me, is a matter of how big a debt crisis you can have. If you can write off a bunch of the debts in this whole mess, and let's say, do the usual recession-- 18 months to two years-- then you have a chance of getting out the other side and whatever. But my guess is, in the world of central bank intervention, you end up with a flatter line for longer, which doesn't have the extremes, because they stop the extremes. But what you get is, without having the extremes, you don't get the upside, as well.
So it's going to be-- it's fascinating, what the US, particularly is going to look like. Because don't forget, Europe and Japan have been like that for a while now. I mean, the European stock market peaked back in 2000, and Japan, 10 years before that. So these are-- [AUDIO OUT] I know people don't, can't, believe that could happen in the US, but it's kind of one of my things.
It will also be interesting in countries which have these huge pension systems, like Australia. The superannuation system in Australia, that has been a big driver of their markets, too, you know? I just-- I just think the world may change after this.
ED HARRISON: You know, so the real question is-- I mean, because let's put it this way, we were just talking about a best-case scenario. Remember, we weren't talking about a worst-case scenario, we were talking about a best-case scenario. And what we came out with is, there's no V, because you know, the gap between when we enter and exit out of the coronavirus period means, by definition, you're going to have a U. It's not going to be, you know, two weeks and you're done. China had two months and they're trying to recover, so that's where we are. And then the question is, is it a U or an L?
So then, the next question has to be what's a more reasonable, or even a worst-case scenario? When you were talking about the bust, immediately, what I thought of is, I thought of triple-Bs, high-yield, small businesses in particular. So that's where the debt crisis comes into play.