PETER COOPER: Welcome to the Real Vision Daily Briefing. I'm Peter Cooper. It's Tuesday, May 12th. We have Ed and Ash standing but first, let's go over the latest in the news. At yesterday's news conference, President Trump announced that the US's testing capacity is, "unmatched and unrivaled anywhere in the world", and that we "have met the moment and we have prevailed". The President and others compared their success to South Korea's testing efforts, with the implication that the US has done a better job. Today, the Senate had a hearing with Dr. Anthony Fauci, Dr. Robert Redfield, Admiral Brett Giroir and Dr. Stephen Hahn. Their testimony indicates that the premature reopening of the economy would lead to serious consequences. Some senators focused on the bottlenecks involved in administering the tests required to control the spread.
Yesterday, the US conducted over 388,000 new tests. However, public health experts are saying that the US needs to reach two to 3 million tests per day to curb the outbreak. Admiral Giroir stated that by September, the country will be able to conduct 40 to 50 million tests a month. In other words, it may take months to get the level of testing required to move the US and its economy back to normalcy as we wait for a vaccine and treatments. Also, today, the Fed is launching their corporate bond buying ETF program through the secondary market corporate credit facility or the SMCCF. It's the first time since the '50s that the Central Bank will be stepping into corporate debt to keep markets afloat.
The New York Fed released in a statement yesterday that the investment objective is to provide broad exposure to the market for US corporate bonds. The majority of holdings will be in ETFs, which primarily have exposure in US investment grade corporate bonds, and the rest of holdings will be in ETS which primarily have exposure in US high yield corporate bonds. There are also other conditions that these ETFs will have to meet in order to be purchased, such as the composition of investment grade and non-investment grade rated debt, management style, etc. For individual or corporate bonds, they need to have been issued by an eligible issuer have a remaining maturity of five years or less and were sold to SMCCF by an eligible seller.
More details about the program will be forthcoming from the New York Fed, but they're prioritizing the purchase of more liquid and lower risk ETFs through this program. However, it's not immediately clear that corporate spreads will actually tighten as a result of the Fed's purchasing or if the Fed's actions have already been priced in. With that, I'll turn it over to Ash and Ed. Ash?
ASH BENNINGTON: Thanks, Peter. It's Tuesday, May 12th, 2020. I'm Ash Bennington from New York, joined by Ed Harrison, our managing editor at Real Vision from Washington D.C. This is the Real Vision Daily Briefing.
ED HARRISON: Good to talk to you and I'm glad that you said it's Tuesday, May the 12th because since we're in lockdown still, sometimes you forget what day it is, what day of the week it is. Let me tell you a story actually, since I'm on that. My sister, I was talking to her and this was on a Saturday. She said, on that day, a friend of hers got up at like seven o'clock. She got her coffee. She sat down on her laptop. She was working literally for 45 minutes before she realized it was Saturday, and she didn't have to work at all. Because every single day is exactly like the day before.
ASH BENNINGTON: Well, it happened to me actually, as well a couple of Sundays ago, because we're all working all these crazy hours. I woke up, it was like nine o'clock in the morning. I looked at my phone and there were like three messages from you, from Jack, from some of the other guys and I had this panic attack that I'd slept in until nine o'clock on a Monday morning. I was working for about 15 minutes before I realized it too. It's not a fun feeling. Every day is a little bit more like the one before.
ED HARRISON: Yeah, yeah. We got to change that.
ASH BENNINGTON: Yes, we do. Okay, Ed. Now, despite the light opening, this is a day where it just starts to feel when you're reading the-- into the news cycle, when you're reading the blogs, when you're out on Twitter, it starts to feel like there's a moment of, I don't know what the right word is here, maybe like a moment of clarity, a moment of truth. There's a feeling that's beginning to set in that some of the things that we've been talking about now for weeks or months are starting to be felt more broadly, the sense that this recession is deeper, sharper, and more durable, potentially, than what we had thought earlier on. I can tell you, I for one, there's absolutely no joy and having been right about this.
ED HARRISON: Yeah, definitely. The image speaks 1000 words, an image that I'm thinking about as you say that is the one that I showed you right before we got on from Calculated Risk blog. This is a blog that was very good during the housing crisis, and it's still going strong 15 years later. Bill McBride, he's the editor there, he had a bunch of charts that he put out just after we got the jobless number on Friday. The one that I thought was the most incredible one is the one where it shows the percentage of job loss from the peak and overtime metric.
What you see, basically, if you look at it, that the 2007 recession was much worse than a lot of the other recessions in a post-World War II period in terms of the duration and the magnitude of job loss, but it's just a straight line down for this particular recession. If you look at this recession, and you compare it to the other ones, the concept that you could get a V-shaped recovery is pure, pure fantasy land. It's never going to happen, where it's an order of magnitude higher. Other than the 2007 recession, think of the double dip, the 80, 82. You're looking at an order of magnitude that's like 14 times more in this recession than in that recession. It's just off the charts crazy.
ASH BENNINGTON: I'm looking at the same chart right now that you sent me earlier in the day and it's nothing short of devastating. When you talk about the fantasy of the V-shaped recovery, something that we've both been saying, seems incredibly unlikely to happen. The thing that strikes me looking at it just visually, and I think it's probably running on screen right now so you can do this at home as well, if you're looking at it on the screen and on a podcast. It's extraordinary to me that the down leg is not V-shaped, by which I mean it's not slanted in a 45 degree angle. If you look at the other recessions, they're not quite exactly 45 but you get the idea that they generally slope gently down, even dramatically down but it's a slope. This is just a vertical line. Nouriel Roubini, a couple of months ago with me in an interview for Real Vision, on an interview that we did, said this is an I-shaped recovery, straight down, vertical bar. ED HARRISON: That's what it shows, that is what it shows. They have a number of different ones. I think that's the one that I found the most compelling of the four charts in that particular site. Let me say, by the way, as I say that, because I'm going to use some data that I have from some other places, people have always talked about, can you put a link to the stuff that you're talking about? You and I, we were talking about this with the rest of the group, the content group, how we could on a blog, start a Real Vision blog and we can put out, these are the stories that we're looking at this day. This is what's informing the Real Vision Daily Briefing, so I think that's going to start up pretty soon and we can put stories out like that so that people can take a look at them.
ASH BENNINGTON: Yeah, that's exactly right. That's such a good point too. I feel like you and I and Jack and Drew and Max, we are on this, and Gabrielle as well, of course. We are on this 18, 20 hours a day, and we only get on the air for about 30 minutes to have this conversation. We're looking for a way to just try and communicate some of the other things that we're doing. Some of them are, especially the visual things, the charts, some of the diagrams are really best seen in something that's a little bit more static than a video. We're looking forward to getting that out to everyone really soon.
ED HARRISON: I think that's a good segue into what I'm thinking about and that is I'm thinking about the near term. To be honest, I'm surprised at how negative the sense that we're getting already is about this unlocking, that is leaving lockdown, because the numbers on the Dow-- it could be that it's a pure technical factor, but numbers were down today and you would think that people would say, okay, so now, we're leaving lockdown. Now, we're ready for the V, the V that they were talking about. That's not going to happen, instead, what we're seeing is that asset prices are starting to fall and people are starting to believe what we were saying before, which is that it's definitely not going to be a V, it's not going to be a U even, it's going to be at the best an L and it's going to take a very long time for that to happen.
One of the things that I'm looking at is over the near term, what does the release from lockdown look like, and what can we say about over the longer period of time, how likely are we to see another lockdown, or are we going to continue in this lockdown? That's where I'm at right now in terms of thinking about the near term future.
ASH BENNINGTON: Yeah, and I'm thinking about a lot of those points too, just to put some numbers around it for those tuning in. S&P 500 off about 2% on the day, they closed down to the 2870 level.
ED HARRISON: I think that's below the 61.8 Fibonacci retracement, still think that's above the 50% retracement level. We're still hanging in there at those levels.
ASH BENNINGTON: It's extraordinary, isn't it? How those numbers, the 50% and the 61.8% retracement levels are something that we just keep snapping back to resistance or support?
ED HARRISON: Yeah, it just goes to show you that, especially when the algos take over, that they have a tendency to circulate around certain areas, moving averages, and support levels and there are buy and sell signals that will give you a snap to that area but as soon as the data come in hot and heavy, when you break those support levels, then suddenly you're going to see the bottom fall out and that's in an algo driven economy, what you'd see in financial markets. I think in terms of the short term, there's the real economy and then there's the financial economy, today is the first day that the Fed said, okay, we're actually going to go and buy those ETFs.
Before it was that, we're thinking about buying, now they actually are buying the ETF. They're buying the corporate bond ETFs, high yield, and investment grade. I think that we're going to see the dichotomy there between those because they're not putting a floor under high yield, they're not looking to bail out junk. They're looking to add liquidity. I think that a lot of what we're seeing in terms of asset markets is a representation of understanding that liquidity can only go so far, that we are into the insolvency phase, and that not all people can be winners.
ASH BENNINGTON: It's such an interesting point. I know you've thought about this a great deal, Ed, so I'd like to ask you a follow up. Tell us a little bit more when you think about this, what do you think the potential to stabilize some aspects of capital markets are with this and also, I think you're touching on this a bit, what do you think the limitations are on a practical basis?
ED HARRISON: Let me take the second part of that first and use it as an example, as a segue into some articles that I've been looking at. I've been looking at the Belgian economy in particular. The Belgian economy-- Belgium has been fairly hard hit, but they're opening up already and the question is what does the economy look like now that Belgium is opening up? There are two or three-- there are three articles that I'm looking at in particular. The first article, this is from a newspaper called De Tijd which is a Dutch language Belgian newspaper and it says here that over a quarter of a million Belgian jobs are at risk as a result of the coronavirus. Even though the social safety net in Europe is better than it is in the United States, what they're saying is 250 thousand jobs are at risk for going away, poof over the long term, not just a short term thing.
The second article, I think that was interesting was they said that retail cannot overcome a second lockdown. Now, this is the article I found the most interesting to be honest, because what it basically says is that 9% of small businesses, they are saying that they're going to go to the wall without a doubt, and this is after lockdown has been released. What the article points out in the end is that basically, if we try to lock down the Belgian economy again, retail as a sector is going to go poof. These numbers are going to go even worse.
The conclusion that I have from that and various other things is that for the most part, we're in a permanent post-lockdown scenario. We can debate about this in a second, but the conclusion I'm coming to is that the medicine was so severe in terms of the lockdowns that we've already had, now that we're coming on the other side, I think that it you'd have to have the case counts, the deaths increased by a factor of 10 to get people to go back into lockdown, because the economic outfall, the fallout of that would be so great. This is what this article is saying in Belgium that the retail sector would be on its knees, it would on mass go bankrupt. If we went into lockdown again, we can't do it.
ASH BENNINGTON: You think that's a leading indicator, or perhaps an object lesson for what could potentially happen in the US as well?
ED HARRISON: Yeah. I'm thinking of it in terms of okay, so Belgium has a fairly good testing quarantine measure that they're looking at going forward, the numbers are falling. In the United States, the numbers are rising in a number of different states, including the state where I live in Maryland, because I'm just outside of D.C., and the question is what happens if those numbers keep on rising? I think Belgium is a leading indicator for what's going to happen the United States. There's no way when you look at that Calculated Risk chart, there's no way, no how that we're going back into lockdown given that.
The question becomes, over the short to medium term, what does that mean for the economy? The answer that I come up with is that you're going to see a selection of industries and of countries in terms of performance based upon the no-second-lockdown paradigm. That is that the United States, where you're going to see a spike in case counts, you're going to see the economy fall flat in those areas where you see that spike. A place like Iceland where they are testing like crazy, you're not going to see a second case.
In fact, actually, I was talking to someone online earlier today about Iceland as an example, in terms of the tourism industry. Apparently, they're prepared to give every single person who comes into the country a coronavirus test as soon as they come in, and apparently they can do it on the flight so quickly that they can analyze whether that person has coronavirus or not and allow them into the country or not. They are thinking that their tourism industry is going to be saved as a result of that. These are the things that I think that are going to play out over the medium term.
ASH BENNINGTON: It's so interesting. We've been having these discussions and thinking in similar ways and some different ways, not to play the devil's advocate here but let me just read something to you that I think is an important counterpoint that at least gives a sense of the position that we seem to be in right now. It's starting to feel like the classic case of the irreconcilable force meeting the immovable object. This is a testimony given today before the United States Senate by Dr. Anthony Fauci, Tony Fauci, the White House adviser on coronavirus, especially and head of the I guess National Immunologicals. He's a senior medical policy person, the person here in the US who's taking the lead on advising the White House in coronavirus.
This quote is devastating. "If states or cities or regions, in their attempt understandably to get back some form of normality, disregard the checkpoints that we put in our guidelines about when it is safe to proceed in pulling back on mitigation, I feel that if that occurs, you will trigger an outbreak that you might not be able to control", and he goes on to say that this will lead to and I quote, "suffering and death that could be avoided but that could even set you back on the road to economic recovery, because it could almost turn back the clock rather than going forward." That is my major concern.
ED HARRISON: Yeah, that's my major concern. That's where I'm coming out of this is that as I said yesterday, I feel like the consumer leads government, that is the consumer is telling you that people on the streets are telling you they want to leave lockdown and it's incumbent upon you to have, as a government, to have the systems in place to deal with that, and if you don't, then the response is going to be fear and panic, and it's going to collapse your economy. That's really what we're talking about right now.
That's what he's talking about. He's talking about a situation in which the governments aren't prepared, the testing's not there, the protocols aren't in place, and the case counts go up, the deaths go up, and then the economy shuts down, purely because a consumer led shutdown is happening.
ASH BENNINGTON: It reminds me of you and I and lots of our viewers and subscribers who have had training in economics think a lot about tradeoffs. We think constantly about tradeoffs, but it seems as though some of these tradeoffs are just, they're unacceptable. There are unacceptable outcomes on either side of the tradeoff, and by attempting to reduce x or increase y, sometimes you get neither result.
ED HARRISON: Yeah, I would say that that's the case. By the way, let me say that here's what [?] is telling me on Twitter. He's saying that Coalition Ministers, this is in Iceland, just announced they