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Ironically, It Needs To Get Worse

Feb. 23, 2020 10:33 AM ETMTUM, VLUE, SPY, TLT, TBT, IVE358 Comments
The Heisenberg profile picture
The Heisenberg


  • COVID-2019 is spreading beyond China, and the assumed deleterious ramifications for global growth have deep-sixed the reflation trade.
  • Markets have now succumbed to "a full capitulation into deflation assets," to quote BofA's latest global fund manager survey.
  • For the contrarians among you, I've a got a "pain trade" you might be interested in.
  • But beyond any tactical considerations, it's going to take a more severe shock to engender the type of policy response needed for a secular rethink.

"Perversely however, in order to see that capitulation into a 'stickier' fiscal stimulus willingness and drive an investor secular rethink, you would actually need to see things get worse first," Nomura's Charlie McElligott wrote Thursday.

Hours earlier, the PBoC cut both loan prime rate tenors, completing February's round of monetary easing. The one-year LPR was slashed by 10bps, matching the medium-term lending rate cut from February 17 and the reductions to the 7- and 14-day repo rates delivered earlier this month.

The one-year LPR is now at a 30bps discount to the old benchmark rate. The balance of the outstanding loan stock in China will be converted to the LPR rate over the next several months, so each cut to the LPR (which became the de facto benchmark back in August, when its calculation was revamped) matters not just for new lending but also for existing debt.


On Saturday, there were more nods to fiscal and monetary stimulus out of Beijing, as statements released following a Politburo meeting tipped proactive fiscal policy, accelerated construction projects and a move by the PBoC to allow some lenders to free up more reserves. China's last RRR cut came in early January. Another seems imminent.

But it likely won't be enough. Even before the coronavirus deep-sixed the pro-cyclical rotation narrative which defined the market zeitgeist in the fourth quarter of 2019, the market was already falling back into old habits, bidding up bonds, and rotating away from cyclicals in favor of the same "slow-flation" plays in equities.

The coronavirus epidemic accelerated this tendency. By mid-February, markets had fallen back in love with duration in what BofA's Michael Hartnett called "a full capitulation into deflation assets," detailed in the latest edition of the bank's closely-watched global fund manager survey.


This has, of course, inflated the

This article was written by

The Heisenberg profile picture
Perhaps more than any other time in the last six decades, the fate of markets is inextricably intertwined with the ebb and flow of geopolitics. It's become increasingly clear that one simply cannot fully comprehend market movements without a thorough understanding of concurrent political outcomes. Drawing on extensive experience in both politics and finance, Heisenberg will help demystify a world in which investors can no longer hope to conceptualize of markets as existing in anything that even approximates a vacuum.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (358)

Thanks for sharing this
I love this guy. Facts are good, but doom and gloom. Corrections are necessary, and that is what I see. After Jan, Feb highs pullback was imminent. You did not need a crystal ball to see this coming, all you needed was a bit of bad news and once again China did not fail me. Only thing this has done was wake up the world that a one country namely China monopoly does not help anyone. This only further strenghtens Thailand and India to become manufacturing centers and to rid China of their control that they have bult up. China only looks out for China and the sooner people realize that, the better off we will all be in the long run.
SPXS or SPXL profile picture
I'd love to invest in India but Ishares India ETF INDY has too large of an expense fee .7% I believe. I really wish there was an easier way to buy Samsung, Airbus and other foreign Equities.
Fuld Kronasson profile picture
You can ask your broker to authorize you to trade foreign securities @SPXS or SPXL Then you can buy and sell on the foreign exchanges directly. The broker will provide real time stock quotes and currency exchange services to facilitate the process. Fidelity has a good setup. You might want to check the Fidelity web site.
SPXS or SPXL profile picture
Thank you. I may do that, I'm with TD Ameritrade and Vanguard now so I'd need to look into Fidelity. @Where'sBeeks
24 Feb. 2020
Just twiddling my thumbs while waiting to get in...another 10% might get my attention
Secret Recipe profile picture
It Needs To Get Worse. Good. Cave Idus Martiae
surfgeezer profile picture
NV_GARY profile picture
Long Time Running profile picture
The US has a lot of trade and commerce protection policies that are socialist in nature.

Dairy, steel, autos, lumber, coal, corn, oil and gas , aerospace, military, banks, none of these are free enterprise markets.

Sanders proposing some tougher regulations, better medicare wont stop commerce, in fact it could help with certainty for workers.
Wolfstar profile picture
Yes. Correct. Very much worse.
Pandemic is about to be declared. Chinese numbers are all faked by the party. China has totally lost control of this mess of theirs. It is appearing in great numbers all over the world. This will run for several years now.
Whatever China declares, expect 10x worse.
rgtichy profile picture
Folks, 7 of 833 in SKorea; <1% mortality rate for confirmed cases. You cannot believe everyone is lying...
soleprop profile picture
Too early to calculate mortality rate. People being treated are included in the denominator, but until you know how many of them die versus recover, the numerator is meaningless.
papaone profile picture
In addition to the virus, the folks (older and wiser adults) who invest are starting to realize there is a potential for a Socialist government run by Bernie. It would start out kind of benign and then progress to something that most of us really do not want. I'm old enough to recall Cuba's turn to Socialism, --some say that can't happen here, well that as been said elsewhere. This is political I agree but in this case political is going to impact the economy/investing.
I'll be selling out soon. I can buy back after the elections.
Why is it that the "socialist" examples are always Cuba, Soviet Union etc and not the Scandinavian countries? Also think about this if the Corona virus starts infecting the US copulation how long before an out of control epidemic becomes a deadly one? Think about this people who have no health insurance don't seek medical care until the last minute, by then how many people have they infected? Opposing universal health care is the stupidest things the republicans and right-win democrats can possibly support.
AutoTech profile picture
I completely agree with your last sentence.........US is paying grossly overpaying for health care, prescription drugs, etc:

Stockmaven profile picture
Maybe the Scandavian Countries are NOT Socialist at all. Just have large welfare programs.
kindkath profile picture
I like reading @The Heisenberg . I really do. I always learn something. But sometimes, try as hard as I might to understand, I just don't get it. I'm a pharmacist by trade so I can use jargon....just not financial and economic jargon. I google terms, but H's jargon plus his somewhat literary style of writing means some of it is just plain ungooglable. So, maybe some of you would help me parse this paragraph which seems to be rather meaty. In particular, I'm seeking help with "bear steepener" and confirmation that "unwind" means to sell your position over time, right? And "if the long end of the US curve were to suddenly sell off"....does that mean if people start selling long-term bonds, corporate debt, etc? How long is long? 30 years? 10? My goal here is to translate this into something actionable if possible.

None of this is to suggest that H's writing style should change. I like the challenge; but I'm phoning my SA friends today for a lifeline. And maybe I just need to take a macroeconomics class (or get the whole degree?)

This is the paragraph.....

"For the contrarians among you, just know that if, for whatever reason, the long-end of the US curve were to suddenly sell off, the attendant bear steepener would mechanically force an unwind in all manner of equities expressions tied to the "duration infatuation," including, but not limited to, min. vol. vehicles, momentum products, secular growth, defensives and, obviously, traditional bond proxies."

More conservative equity holdings would also sell off
Mintster profile picture
Good question - I don't have the best grip on it for explanation, but I found this (using DuckDuckGo, not Google): www.investopedia.com/...

Also: when the yields on long-term bonds start increasing (or any bonds), the valuation drops. As an individual investor, I have what I think is a reasonable amount invested in Vanguard's VWETX fund (long-term investment grade bonds) - it includes a rollover from when GE offered to buy out my pension a couple of years ago (~5 years of work as a junior engineer, a long, long time ago). The amount of VWETX shares I bought in 2017 initially paid dividends the size of my expected retirement payment from GE. So it's been weird that the principal in VWETX increased, because the dividends decreased due to the decreasing yield since I opened . My contrarian reaction to a long-term IG yield increase might be "huzzah! buy the bond dip!" even if the principal decreases sharply - my expectation from VWETX was to provide a dividend equal or better than the planned GE retirement payment. (Also: happy to not be at GE!)

However, if I were running a company (I'm not IRL) that was somewhat stressed and had long-term IG debt that was at the lower end of the scale for credit rating, I'd be sweating bullets if a bear steepener situation started and my company's production rate was not up to par. My LT IG loan would be a burden if I was planning to roll it over at some point to another LT IG loan, which would now be at a higher rate. I'd have to look for ways to cut costs (stress!). Or I might have to start looking for a buyer for the company, but potential buyers might be under the same types of business stress during a yield increase situation. Well, there goes my business sector's momentum.

I'm a non-professional at this, but HTH (hope that helps).
Just keep reading. I remember when I first started reading scientific journals in grad school, it all seemed gibberish. But after a while you catch on. You just have to put in the study time and effort.
SBgal profile picture
24 Feb. 2020
Layoffs are another sign of a downturn: Macy's, 3M, Amazon Prime Air partner Pinnacle Logistics, Caterpillar, Textron, LL Bean, 23andMe, etc plus tech is starting to falter. Read this: www.nytimes.com/...

Marine shipping down: marine-transportation.capitallink.com/...
AutoTech profile picture
Trump (pathological liar and recurrent Fed arm twister) has the Dysfunctional Fed bent over --- Buffet summarized it accurately:

“It makes no sense to lend money at 1.4% to the U.S. government, when it’s government policy to have 2% per year inflation. The government is telling you we’re going to give you 1.4% and tax you on it, and on the other hand we’re going to presumably devalue that money at 2% per year. So these are very unusual conditions.”
@AutoTech - Fed has been killing savers for 10+ years now by keeping the FFR below inflation. Hard to blame Trump for that as it has been going on since 2009!
May be so but hasn't Trump being beating the FED to lower them even more?
@Robespierre - yes, presidents can say whatever they want, but it doesn't mean Fed will listen to them. Fed has been uber dovish since 2009 for over a decade now, and they are trapped and will continue to be that way for the next decade. Has nothing to do with Trump
Long-Short Manager profile picture
Investors have been utterly complacent about this virus. The odds were greater than 50/50 that it would go global and it has. As Italy shuts down, Greece is right next door - the two most indebted parts of the EU. And the EU has open borders. If it gains similar hold in the US, we're going to have a global, coordinated recession. The reflation trade will have to wait a good while. And while demand drops are deflationary, supply chain breakage is stagflationary, not deflationary. You will see weird movements in prices, with commodities other than precious metals collapsing but certain product prices (such as masks and essentials) will spike.
Kershaw profile picture
To say that a true bear market is long overdue would be the understatement of the century. History Always catches up and perhaps COVID-2019 will be the primary catalyst this go around. The triggers for bears aren't always in plain sight, that's for sure. Not even the U.S. will be able to avoid the coming global slowdown if COVID-2019 can't be better contained.

Conditions have been almost perfect for U.S. equities for so long, we've been lulled into a bull market high so to speak. If things do head south, recent highly unfavorable investments like cash, ultra and short-term bonds, short-term high grade notes, MM and the like will be King, if only for a time.

Could this be the point where value stocks finally begin a cycle of outperforming growth? It's going to be interesting to watch.
Hudson Investments profile picture
@The Heisenberg
I am staying in the game. Come on Fed. and let's get the vaccine that innovative company are working on.
It took a year to develop the SARS vaccine. Just saying.
There was already an article floating on facebook that said the USA had made a vaccine. Personally I thought it seemed a little fast and probably something sent out to placate the masses. But I didn't actually look into it to see if it was real or not.
24 Feb. 2020
Good news out of Australia - already testing a potential vaccine.
I_Am_The_Walrus profile picture
When the vaccine hits the market in the next week of so, shorty will know what it means to be hit by a freight train..
"Several groups are working on a vaccine for the new coronavirus, but there’s no guarantee that it will be ready before the end of the current outbreak.
One group says they may have an experimental vaccine ready for initial testing in just a month.
But experts caution this expedited timeline doesn’t always allow for careful evaluation of the safety and effectiveness of the vaccines."
tompbl profile picture
Not to mention the time to scale up to produce hundreds of millions of needed doses of any successful vaccine.
On a different front, several existing antiviral drugs are also being tests for efficacy against COVID-19. Some have been effective against other coronavirus species. But those trials will take months, and again there's the issue of ramping up the supply of any drug found to be effective.
Science and medicine will figure it out, but don't hold your breath. And do support better funding for CDC and our grossly underfunded public health infrastructure.
Henry_22 profile picture
Dow destruction!!! It's beautiful.....
Think of all the buying opportunities
The Heisenberg profile picture
Well, it's a good thing it needed to get worse.
SPXS or SPXL profile picture
Agreed it needs to get worse as in at least 10% worse and now we're only down 4-5% from high with today's pre market. I'm going to slowly $ cost average in my 40% cash in case the irrational exuberance returns, but I would like to be 10% cash by the time the carnage is over, unfortunately I think that'll be tomorrow and it may only be a dead cat bounce. FOMO is going to be strong when the market snaps back. It would be wonderful to get S&P 2800 this week but it is not going to happen. The question is do you think it will sometime during the next two years? For today, judging by Europe, likely down 2% or perhaps down 3.XX% at most. Tomorrow is a snap back day for sure.

@The Heisenberg
@The Heisenberg

Oh, come on, what would it hurt? One basic, simply piece to help those who have never seen a market debacle. FWIW, you seem to be a reasonably talented writer and have a reasonable grasp of the equities market-cum-roulette-wheel. If you aren't comfortable being a prognosticating hero (and I well understand why a sensible person would balk at that), at least be Socratic. No, you cannot instruct the stubborn, but you can educate the willing. Just one person's off-the-cuff thinking, do with it what you will.
Dale Roberts profile picture
I wrote on this Feb. 1, then the markets shrugged off the coronavirus. Not that we should ever invest based on short term predictions and noise. But the warnings provide opportunity.

How to prepare your portfolio for the coronavirus outbreak.

Headline over gold bars image.


Dale Roberts profile picture
Gold at highest level since 2013. Wow. I sold all of mine from 2010-2012.


Dale Roberts profile picture
Is your portfolio designed to hold up with a major economic shift, economic regime change?

Most of us do not take those steps. We suffer from recency bias. Count me in. We invest for the conditions we've seen in the last 5,10 years for the most part. Most do not even consider 20 years.

Scary moments provide the opportunity to take a very big picture view of world economic and investment history, moving back decades.

Hopefully this coronavirus is contained, there is obviously nothing more important than the human tragedy. We might consider protecting our portfolio as well.

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