The Fed v. Covid-19

At the same time the first death (now 6) in the U.S. from the Coronavirus, President Trump was providing plenty of happy talk about his early response to the virus, the strength of American consumers, and an impending stock market bounce from last week’s market mudslide.   

Indeed, the DJIA rallied nearly 1,300 points today (March 2nd). Meanwhile, Danielle DiMartino Booth of Quill Intelligence tweeted this morning, 

Dr. Fauci: Coronavirus now at 'outbreak' and 'likely pandemic proportions' Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases and a leading expert on coronavirus, says the disease is now at "outbreak," and even "likely pandemic proportions.

Lacy Hunt, chief economist at Hoisington Investment Management Co., is not as sanguine about consumer health as the president, telling Ms. DiMartino Booth on Real Vision that the U.S. consumer is not so robust.  

[The] Consumer is not strong and we saw massive confirmation of that in the employment statistics. The Bureau of Labor Statistics has just told us that they found that the job count last year was 500,000 less than originally reported. At its peak in 2015, employment growth was 2.3%. It is now down to 1.3%. It's slowing very rapidly. It's not recessionary but there's clearly a loss of momentum.

He goes on to say the work week has been reduced, equating to a loss of 600,000 to 700,000 jobs. Plus, wage increases are decreasing. 

Hunt says, contrary to common wisdom, that the banks are not in a good place.  The amount of C & I loans are contracting. He continued, 

The yield curve is too flat. It's too close to the zero bound and profitability through normal banking channels is not an option in the current environment. It's not an option in Europe. It's not an option in Japan. It's not an option in China. It's certainly not an option in the United States. The fact of the matter is, the banks fundamentally know this.

All this weakness has something to do with coronavirus, in the eyes of socionomists.  In the March issue of The Socionomist, with the cover devoted to the virus, Matt Lambert and Mark Galasiewski quote Robert Prechter, “disease sometimes plays a prominent role in major corrective periods.”  

Lambert and Galasiewski write, “A depressed and fearful society is more susceptible to epidemics.” Lambert reminded readers,  

In China, the Shanghai Composite Index remains 40% below its 2015 high and 49% below its 2007 all-time high. China, therefore, is likely experiencing a period of elevated vulnerability to epidemics. Markets in the U.S., on the other hand, are near all-time highs, indicating a depressed probability for an epidemic to erupt stateside. A sustained fall in U.S. equities would signal the odds shifting toward greater epidemic susceptibility.

The map below reflects a depressed China as being the Coronavirus epicenter. 

The DJIA dropped 4,000+ points last week and while market blood-letting has stopped for the moment, it may not be over. As for China, economist Hunt says the country’s economic numbers are wildly inflated.  

economic growth in China in 2019 was at a 29 year-low and the only reason it's not worse than that is they only have 29 years of data. The Chinese economy was not going to recover this year, even before the virus. The fundamentals were not there, and redoing over and over again the same packages that they tried are not the answer. People may think that, but that's not how it's working.

Meanwhile, here in the U.S. of A, Google canceled a major meeting Las Vegas, schools in the Seattle area are being closed, and at least one large law firm has stopped overseas travel and will wait a month to determine if it will hold its 2020 partner retreat. 

Libertarian polymath Vijay Boyapti, tweeted over the weekend that Covid-19 is “our Spanish Flu.” He reminds us, 

A century ago the Spanish Flu infected 500 million people and killed approximately 20-30 million people - a mortality rate of about 4-6%. COVID-19 currently appears to have a mortality of about 2% but should be considered just as deadly…

His advice is “On a personal level the best strategy is to prepare yourself so that self-quarantine for several months is possible.”  

President Trump is looking for Fed Chair Powell to fix the market and all that ails us, tweeting,

As usual, Jay Powell and the Federal Reserve are slow to act. Germany and others are pumping money into their economies. Other Central Banks are much more aggressive. The U.S. should have, for all of the right reasons, the lowest Rate. We don’t, putting us at a.........competitive disadvantage. We should be leading, not following!

In contrast, clear-eyed bank analyst, Chris Whalen, told CNBC, “The market’s like a 2-month-old child. Every time it cries, it wants to be picked up. Sometimes you’ve got to leave the baby in the crib.” 

But, Powell may be listening to the President’s and the market’s wails. CNBC reports, “The market’s expectation now is for either 50 or 75 basis points to be sliced off short-term borrowing rates by April.”

Half or three-quarters of a point will not create a Covid-19 cure, but may quiet the 2-month-old, whomever or whatever that may be.