2020-Mar-26

Macro Dragon: 1,640,000...

Folks as a pin going forward during this turbulent times, let us please remember:

The Covid-19 crisis with all its challenges, stress, chaos & opportunities will also eventually pass. What defines humanity & ourselves as individuals is how we both individually & collectively act under adversity. Think of how you want to look back over this period, doing your part to keep your family healthy, society healthy & functioning. Keeping a cool head, when others are losing theirs, maintaining an objective list of positive aspects & negative aspects of the policy responses & economic shock the world is/could  go through. And lastly gratitude, sympathy & empathy for one another. Asia got/is getting through this & RoW.

The one big positive from all this, is it reminds us we are all One & we are not at the top of the food chain. Covid-19 does not care if you are rich, poor, what your ethnicity & skin color are, what passport/s you hold, nor what you age or profession is. Our greatest achievements are almost always those that we collectively do with others & sometimes as in this case, as a species. Lastly keep your mind open to growth & opportunities.

Top of Mind…

• Good Morning / Afternoon / Evening everyone, the Dragon is going to get a little more crisp until the end of next wk, as KVP has got some heavy lifting to do for our two presentations next wk (invites should be getting sent out today / tmr) – they will be Thu @ 09:00 CET / 16:00 SGT / HKT, as well as Fri @ 10:00 SGT / HKT, 12:00 TOK, 13:00 SYD

• Key objective is to do our best to give context to the Covid-19 Crisis (As well as opportunities), with comparisons to other crisis, as well as potential implications to expect (negative & positive) for the virus globally (heavy focus US & EU), global economic growth as well as the markets from a cross-asset perspective.

• Also hope to leverage the vast +30yrs experience, talent & resourcefulness of Saxo Bank’s CIO & Global Chief Strategist Steen Jakobsen who will join us for the Thu segment from Europe – which is catching up with what parts of Asia went through a few months back. We will do our best to hit that skew between being broad, yet concise given that a lot of our clients range from long-term investors to short-term traders. And yes, if KVP is on… we know we are likely going to here some views around positioning & potential scenarios to watch out for.

• It goes without saying, if you have come across some exceptional work with well thought out frameworks (please save the “Lambo-to-the-moon” works to yourselves) please feel free to share. At @SaxoStrats we are the epitome of solution oriented, are always learning on a daily basis, & do our best to have zero ego in the game. We are always happy to flag the few exceptional things we come across – giving credit to where it belongs…. Even if that is in credit market…

• …with LQD popping an +4.8% o/n, now +17% from the lows post a -22% drawdown (i.e. now only -9% from the 134.53 highs on Mar 6). MUB & HYG also popped +4.4% & +2.8%, trumping…     

• …S&P cash which closed up +1.2% at 2475, off the highs of 2571, yet the bulls will take what they can. We are now c. +11% off the closing price lows on cash (+13% if you are taking the bottom tick of 2192). On the futures, it is not to dissimilar – yet worth bearing in mind that latest low to high peak was c. +18%. Anyhow KVP still thinks that S&P cash can get to a close potentially in the +15% to 20% range (hopefully sooner rather than later, inertia is a double edged sword), with the c. 2670 to c. 2800 being super toppy as that would be c. +21% to +28% from lows… & yes those are fibo retracement lvls of 38.2% & 50% from the lows, whereby he would expect a reversal to the downside. Still he would not wait to finish loading up on puts, its about putting out a line & getting c. 50%-75% of the line done here feels right (remember the symmetry to this “prep for next big leg down move” is a long USD call basket, then when/if we do make another -10% to -30%? On SPX, look to reassess whether those hedges / directional views are to be closed, reversed, added to, etc.  

• Key risk in all this is that the markets have potentially priced-in the peak velocity spread of the virus that we will be getting in the US over the next few wks which implies its priced in all the economic slowdown & fall-out from all this…

• From all the phone calls that KVP has done since staggering back on deck (more calls in the last 1.5wks than a good chunk of 2019, with these calls talking at times +5% to +10% of the day!), he is of the view that most people just have not / cannot / will not or are just plain ignoring the rise of cases that we will hit the US. Trump overnight said something akin to NY in the hottest spot right now, i.e. 2 / 3 of cases in the US are from NY.

• Folks take a step back, you cannot even factually verify this… i.e. there is no systematic measuring of Covid-19 across the country (lack of coordination, resources, etc). Its being measured in patches of where clear cases had/have/will emerge… & where local governments have been super proactive giving this crisis the respect, attention & response it deserves. This is akin to looking at the North East corner of an abandoned warehouse & saying, we only really have a rat problem in the North East corner. The key delta here of course is that rats are not an apex predator, viruses are.  

• Lastly on thoughts around have we bottomed? It’s not to say that there are not potential “floors” emerging in parts of the financial markets eco system, i.e. Fed/Treasury has basically back stopped the bond & credit market in the US as we have discussed… this has Godzilla to infinity implications… i.e. Frontrun Fed Capital (FFC). And China is coming back on line which will also have positive implications for parts of Asia, especially in 2H20. There is so much Quasi-Sovereign paper out there, anyone with a few brains cells would jump to a credit fund with dry powder & hands untied in this environment in a heartbeat.

• Yet KVP still does feel the worst is behind us from the Peak Covid-19 fears in the US & more specifically in US equities. And again, we all know that eventually the market cares until it does not about something (i.e. ”complex systems always find an equilibrium”) – the likeliest earliest point is going to be mid Apr to end of May (i.e. if/when we get to other side of peak velocity). Its rare that the US is that much more in the cross-hairs of a crisis than the rest of the world & that’s likely part of the problem. For a lot of people who run money & invest out of the US… virus outbreaks, mass layoffs & economic shutdowns are the stuff of fiction & frontier markets. I.e. It does not happen to us… The paradigm shift & dislocation that is occurring, is just too colossal for some to process… millions of jobless claims?  

• If KVP is wrong, you’ve missed picking the lows in equities & you blew a good chunk of premium. Yet the worst case scenario is you feel we’ve bottomed, you load up & we tank another -20% to -40% in US equities potentially leading to blow ups & selling out at the lows. There will be plenty of opportunities for the upside later. Anyhow, lets see what the next few days & weeks bring.  

• Its worth noting that at the very extremes of everything, there can be (& should be) a massive divergence in people view points – this always creates opportunity & costs.

• If you have not already, please make time for Macro Dragon’s High Probability Pathways, The Future is Already Here, Clues from China’s Covid-19 Timelines… these are some of not just KVP’s best works but super key for the current environment

• Lastly 1,640,000 is the jobless claims numbers expected today in the US, to put that into context that’s from a previous figure of 281,000. We are about to go from c. 3.5% U/R (50yr low) to blow-out numbers, forget the 10% that we saw during the GFC… again, people cannot process scale well…

   

Anthems & Flag Waving...

• Once again re-flagging some recent great works for my colleagues that are essential readings with some shelf-life consequences in this environment.

• Fed’s Shock & Awe, check it all out on Steen Jakobsen’s latest Macro Digest

• Corona Bonds & Helicopter money, Dembik’s excellent Coronavirus Economics: The case for coronabonds & one of KVP’s absolute favs. A G7 Policy Tracker that Dembik keeps updated with the latest policy measures to combat the Covid-19 crisis. These are all key super positive, historic & structural initiatives that are going to be key in regards to how the economy & more importantly those who lose jobs take the hit.

• John Hardy’s latest FX Update: Fed floods system with liquidity, USD finally responds

• Ole’s super timely high light on Silver, he has been talking about this since end of last wk & we +15% on the “super gold” Silver to benefit from renewed gold strength

• Peter’s latest thoughts on equities Have global equities turned a corner?   & Rebalancing and extreme oversold S&P 500 could fuel equities

• Also if you are not catching our hands down one of the best markets podcast out there when Europe starts, please check it out here on apple podcasts or here on spotify. Its quality, with a lot of love, blood, sweat & tears going into it – it can also be helpful to gauge the changing tone of the speakers on.

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We could continue to be in a gang buster period of volatility both to the up & down side until at least mid-Apr to back-end of May. Some, time decay is needed in the system, both from a Covid-19 spread (past peak velocity upwards), even bigger & even better government / fiscal / monetary policy response, to overall heads of governments giving this the 2^nd & 3^rd order consequences thinking that it needs. This will also pass. Keep you minds & hearts open.  

Good luck to everyone out there, be nimble & position accordingly 

Namaste,

-KVP