Flatten the Curve

361 Capital Market Commentary | March 16th, 2020

With much respect to Edward Hopper’s Nighthawks, this image is what future gathering places will look like as America moves to fight this terrible virus. To stop the spread and allow the maximum of social distancing, we will need to close schools, end seating in restaurants, shut theaters, concert halls, theme parks, conference centers, churches and wedding chapels. To make certain that we stop the spread, and save our (now) money-losing airlines, we will need to close the airports and stop all international travel. If you want to get from one coast to the other, it is going to take you a couple of days of cannonball driving. Grocery stores, drug stores and mass merchants will be the only retail doors open with everything else going online. It will take 6-8 weeks to make sure that our critical virus case load peaks, and that there will be light at the end of the tunnel by summer. Prepare to be working at home and helping your kids with their online school work and exercise. The more that we distance ourselves today, the sooner we can help our hospital system and its healthcare workers get through this.

The global central banks are doing their part to make sure the financial systems do not freeze. Over the weekend most every central bank took action alongside the U.S. Federal Reserve who cut rates a surprising 100 basis points, along with an expanded quantitative easing program. These actions will help keep the system liquid and flowing. But now it is up to Congress and the lawmakers in D.C. to do their part. I (and many others) would strongly recommend the following actions:

  • Cancel all tariffs on foreign trade. Let’s get everything moving back and forth across the borders.
  • Raise as many trillions of dollars as possible through the sale of 30- to 100-year U.S. Treasury maturity bonds at the current nil interest rates.
  • Commit to a multi-trillion dollar U.S. infrastructure package to build bridges, roads, solar fields, hospitals and put upgraded technology into every school and backpack.
  • Helicopter drop $1,000 per month to every adult American for as long as the virus has our economy stopped and people at home.

These actions would quickly help every American know that Washington D.C. has their back and instill a slug of confidence into the financial markets. Yes, it will increase future inflation expectations, but right now, we need to fix our house and stabilize the markets.

The emergency Sunday night Fed Rate cut meant to stabilize the markets…

@jsblokland: This is just massive! #FederalReserve cuts rate to 0.0%-0.25%, launches massive #QE program of USD 700 billion and announces swap lines with #BoJ, #BoE, #ECB, #SNB, #BoC. This is a #GFC response.

Federal Funds Target Rate

The Fed pulled out its bazooka and cuts the Fed Funds rate to zero…

In an effort to keep financial markets from spiraling out of control, the Federal Reserve came out with the big guns Sunday afternoon. This will not prevent the economic downturn that is already upon us. It will, however, create more accommodative financial conditions that will help support the eventual recovery. In the near term, however, the Fed’s action will – hopefully – support smooth functioning in financial markets and ensure that the problems on Wall Street do not feed back onto Main Street. The Federal Reserve has now passed the ball to fiscal policy makers, at least for the time being. This doesn’t mean the Fed is done; Powell & Co. have more ammunition if needed later…

Powell made very clear in the press conference that the Fed’s objective is to support the smooth functioning of financial markets. In particular, the Fed is reacting to the liquidity problems that crept up in the Treasury and MBS markets last week. Powell explained that the Treasury market is the foundation of the global economic financial system and keeping it functioning was the Fed’s primary objective. The MBS market is critical to keep credit flowing to households.


Now it is Washington’s turn. Neil Dutta at RenMac, Mitt Romney and many others also want to see a helicopter drop…

How the government can help people… give them money. Neil thinks direct cash payments to US citizens makes the most sense. The “drip, drip, drip” nature of a payroll tax cut spreads the benefit over too long a period of time. Moreover, a payroll tax cut is useful when we are staring at a plain vanilla recession when the goal is to encourage business to hire workers and workers to spend more money. However, this is not what the economy needs right now. We don’t want more people on the job; we want those who are sick to stay off the job; this is why direct transfer payments make more sense than cuts to payroll taxes.


Goldman Sachs estimates a 7% hit to GDP could take the economy to -5% growth in the Q2 before it begins to recover….

Exhibit 1 provides illustrative estimates of how large the GDP impact of these consumption cutbacks could be at their peak in the worst-affected areas. The bottom of the exhibit shows our assumptions about the peak magnitude of cutbacks—for example, we assume an 80% decline in spending on sports and entertainment and a 50% decline in hotel and restaurant spending. We have scaled up some of our earlier estimates based on preliminary signals from US cutbacks to date and from the experiences of other economies that went through large outbreaks earlier this year. The bars in the exhibit multiply these assumed cutbacks by the GDP share of each category to estimate the impact on the level of GDP. In total, our assumptions about consumption cutbacks in these categories imply a peak hit to the level of GDP in the worst-affected areas of 6-7%.

(Goldman Sachs)

Expect Major Cutbacks in US Consumer Activity

For the full year, expect economists to continue to cut their GDP forecast toward 1%…

US Consensus 2020 GDP Growth Estimate


J.P. Morgan also expects one quarter of GDP contraction…

@jsblokland: US #recessions have an average duration of 14 months, but J.P.Morgan expects the one that is developing now to take just 3-4 months.

US macroeconomic performance

The quick slowdown in GDP caused an incredible week in the Stock Market…

Tweet from @RyanDetrick

Visually, it is mind boggling (and not on the chart is today’s -11% performance)…

S&P 500 Index

CNN’s Index has moved from Greed to Extreme Fear in only one Month…

Tweet from @TommyThornton

After today, the fastest and largest drop from peak, ever, in the U.S. markets…

@Callum_Thomas: History made: fastest 20% decline from peak ever for the S&P500.

S&P 500 has dropped 20% from peak

If the closest parallel market is 1987’s, then expect plenty of volatility for the next few months…

@RenMacLLC: Overlays are dangerous, dual scaled are fraudulent, but here’s today’s market indexed 1yr earlier overlaid with 1987. It remains the most analogous to today’s market in terms of price, duration and run-up prior. file under: FWIW

Today's market indexed 1 year earlier

A possible market path laid out by Goldman Sachs (but we did close below the 3-month target today)…

@ISABELNET_SA: S&P 500 in 2020 Goldman Sachs has set a price target of 3200 by the end of 2020, and a mid-year S&P 500 target of 2450 (28% below the market peak)

Path of the S&P 500 market Path of the S&P 500 market

Watch credit spreads. This is a very important thermometer for all risk taking…

Tweet from @DriehausCapital

Another angle on such an important series of data…

@bespokeinvest: The only other time high yield spreads have widened out by more over a four-week period was in 2008.

BofA Merrill High Yield Master Index

The only goal right now: ‘Flatten the Curve’!

Tweet from @BullandBaird

Why outbreaks like coronavirus spread exponentially, and how to “flatten the curve”…

A super dynamic article in the WaPo to help illustrate to the kids (or self-interested 20-year olds) why we are working and schooling from home this month.

Working from home

Apple’s move is an urgent and necessary move that all companies will follow…

Tweet from @dwyerstrategy

Social distancing is crushing Open Table restaurant reservations…

Open Table Daily Restaurant Bookings

Airbnb bookings are also under much pressure…


There will be silver linings…

Tweet from @neilchriss

Food for thought on commercial real estate…

Tweet from @ferventfinance

Few industries are looking at a worse headwind than Energy…

Global oil consumption is in free-fall, heading for the biggest annual contraction in history, as more countries introduce unprecedented measures to fight the coronavirus outbreak. Travel bans, work-from-home, canceled vacations and disrupted supply chains all mean reduced demand for fuel. As societies respond to the virus, oil demand — already hammered by China’s decision to shut down swathes of the economy — is falling further. Oil traders, executives, hedge fund managers and consultants are revising down their forecasts dramatically.

The growing fear among many traders is that oil demand, which averaged just over 100 million barrels a day in 2019, may contract by the most ever this year, easily outstripping the loss of almost 1 million barrels a day during the great recession in 2009 and even surpassing the 2.65 million barrels registered in 1980, when the world economy crashed after the second oil crisis.

“This global pandemic is something the world hasn’t witnessed since 1918,” said Pierre Andurand, who runs oil hedge fund Andurand Capital Management LLP. “I do not see how the demand drop wouldn’t be multiples of the drop witnessed during the global financial crisis.”


Consumption Engine

Good news for consumers and transportation costs is that gasoline is in freefall…

US Retail Gasoline Average

Bad news for some in healthcare devices is that all elective medicine will stop for many months…

Tweet from @NickKristof

And the pause in global tourism will affect many…

@trevornoren: Tourism directly supports 319m jobs worldwide. It generates 10.4% of global GDP. Over last 5 years, 1 in 5 new jobs globally created by tourism industry…My thoughts on the COVID-19 tourism threat from last week’s WILTW.

Tourism Sector

How did Disney World become a virus hot spot last night?

@WDWNT: Current crowds at the Magic Kingdom for tonight’s showing of Happily Ever After… #DisneyWorld

Disney World

Great marketing campaign. Very curious what content is on that cellphone.

@AlecMacGillis: Powerful new ad campaign from the Baltimore City Health Department.

Baltimore City Health Department Social Distancing promo

Life without sports…

Tweet from @IsoJoeJR

Plenty of ways to build goodwill right now if your business has the resources to do so…

@poloconghaile: Fair play to @HotelDoolin in Co Clare, looking after its community. #CoronavirusIreland #COVID19ireland

Hotel Doolin promo

Norway twitter trolls America…

@martior: Meanwhile in Norway.

Toliet Paper in Norway

College towns were not planning on this…

Not only did they just lose all of their college kids until the fall semester, but very likely that out of state students do not return either from increased safety concerns or from a desire to save on their tuition. State schools are highly dependent on out-of-state and out-of-country students to cover much of the cost. What will happen now?

Tweet from @TimDuy

Ready to spend 8 to 12 weeks at home with your kids?

@andrewrsorkin: I’m printing this out for my kids and taping it to the refrigerator. #CoronavirusPandemic #COVID

COVID-19 Daily Schedule

Someday we will forget about March 2020. For now we just need to get through it and stay at home. Be safe all.

@GaryHershorn: Golden towers across midtown Manhattan after the sun set in New York City Sunday evening. #newyork #newyorkcity #nyc @EmpireStateBldg #sunset @agreatbigcity

NYC Skyline

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