The Corona Correction


It has been a challenging few weeks and our sympathy goes out to those affected and deepest gratitude to those on the front lines fighting against this urgent pandemic. Thank you and stay safe!


Jerome “Jay” Powell, the 16th Chair of the Federal Reserve, serving in that office since February 2018 pictured above on his exclusive interview on NBC’s TODAY. He was confirmed by the United States Senate after being nominated to the Fed Chair position by President Donald Trump.

March has been a wild ride, and it appears that there is a good probability suggesting that the worst may not be behind us yet. The Q1 data for this first quarter is likely to be only a glimpse of how bad Q2 of this year might be considering that January and February were mostly unphased by the news of a possible Chinese virus outbreak. As the country with the rest of the world began grinding to a halt in light of the spread of COVID-19, economists were sounding as if they are health experts and vis versa with the Federal Reserve ramping up their repurchase agreement (REPO) operations in addition to launching a slew of credit facilities to help buoy the markets and greater economy that went into turmoil as the epidemic turned into a full-blown pandemic. All in all, it means our central bank and Congress during this time is creating more money than ever before in a historic effort to dig our way out of a crisis with an unlimited supply of dollars. During a rare television appearance last week, Jerome Powell on NBC’s popular TODAY show morning news program speaking directly to an American audience reassured them about the lengths and measures that the government and Fed was willing to take in order to keep the credit and capital markets functioning as well as our economy as a whole.

HOW DID WE GET HERE?
This first quarter has been one of the most tumultuous in the history of the markets. Now, most of us are in the midst of the 2020 “coronavirus” disease pandemic (COVID-19) caused by the virus epidemic of severe acute respiratory corona virus 2 (SARS-CoV-2). The outbreak was originally found in the city of Wuhan within the Hubei province in China sometime in late 2019 and cases began surging earlier this year. As many people were largely unaware or unphased by the first inclinations that down played the seriousness that the virus carried, they went about their daily lives following their rituals and routines along with travel itineraries that would only further exacerbate the dilemma. This is culminating in public lockdowns and “stay-at-home” orders being issued across the United States to help prevent the spread through following social distancing and self-quarantining guidelines, which has taken the entire economy and capital markets to their knees with millions of people out of work or working from home while it plays out.

Source: Yahoo Finance S&P 500 (^GSPC) data displayed on logarithmic scale

100 YEAR MARKET CORRECTION FROM PANDEMIC
It was a volatile move down this last month for the traditional “stocks and bonds” end of the spectrum even to the so-called safe havens “gold and bitcoin” end of it since none of them had a pandemic priced in. Starting it all was the treasuries whose yields began falling sharply since mid-February and really accelerated over the first weekend of March before bouncing and viciously falling back into the 60 to 50 basis point range down about 64.5% year-to-date. Across the board there was a sell off as Wall Street clamored for cash, equities saw their worst month since the 2008 financial crisis with the S&P 500 index falling 12.5% in March and the Dow Jones Industrial Average had its worst month since 1987 as the rest of the global stock indicies crashed and oil posted its worst quarter ever. Bitcoin was not immune to the decimation and had its own crash from $9000 to about $4000 before rallying back towards $7000. As the longest bull market for equities in history ended, bitcoin had its own “1987 moment” and came back stronger than ever as much of the levered and short positions were either liquidated or covered.

Bitcoin volatility and average volatility, S&P 500 index volatility (charted vs. time)

CORONA BY THE NUMBERS
The figure that stuck out most signalling to doctors and scientists early that it was serious was the R0, pronounced “R naught,” number that tells you the average number of people (without immunity from a vaccine or built up from having previously contracted the disease) who will catch a disease from one contagious person. As it turns out COVID-19 has an estimated R0 between 2 and 2.5 according to The New England Journal of Medicine, which is stronger than the H1N1 Flu (2009) that’s comparable to the Seasonal Flu as well as previous diseases’ R0 numbers like SARS and Ebola (2014) yet not as voracious as Polio, Measles, or Smallpox. The scary part is not only the deadliness of the disease relative to other usual causes of death this year going by the numbers, but the real concern lies in the contagiousness of the people who are asymptomatic and generally feeling fine who may be unknowingly passing it along to the rest of the populace. Governors and political officials in response state-by-state have issued social distancing orders and border lockdowns to help prevent its spread. This has delivered quite a shock to capital markets as hundreds of millions people are stuck quarantined in their homes instead of being at work, shopping, and dining out. Volatility spiked to levels not seen since 2008 as major indexes nose dived taking only a number of days over the past couple weeks to wipe out a three to four years worth of gains, quickly putting an end to the warnings that bitcoin fluctuated way too much compared to bonds or equities. In addition to how well it has already recovered in contrast to other capital markets without any sort of bailout or stimulus money, bitcoin has the smart money rethinking their stance towards not owning any of the finite digital currency after observing the tandem response from both our central bank and government to quickly enact policies that create exponentially more amounts of money to supply the financial institutions and markets with what the Treasury Secretary described essentially as “unlimited liquidity” to further encourage lending and investment to try and keep the markets afloat during the shutdown.

Note: Figures show average daily discount window borrowing for the weeks ending on the dates shown. Average weekly borrowing exceeded $120 billion following the terrorist attack on September 11, 2001, during the financial crisis, and again recently in September 2019 before accelerating March of this year. 
Shaded areas indicate U.S. recessions. (Source)

DO THE MATH!
Despite the market losing its footing, there was a momentous push by the Federal Reserve and other central banks around the world to keep their economies and markets afloat by injecting record amounts of cash into the markets. The amount of newly created currency proves that the world’s reserve currency, the US Dollar, can easily be printed “out of thin air” and has no real value backing it except for “the full faith and credit of the United States government” (who’s shown when push comes to shove they not only can but will just print more when the going gets tough). Money printing and bailouts were featured solutions to the last financial crisis, although this time round they will be accompanied with checks are being sent out or directly deposited into bank accounts of tax paying Americans to the tune of about $1200 per person. It should be noted that the stimulus package allowing this was passed and signed by President Donald J. Trump was for a total of $6 Trillion. If it were equally split among the 330 million American citizens, each person would have been sent $18,000 if it weren’t for corporations getting the lion share of funds that really should go towards protecting and supplying those on the front lines fighting to save lives, the people who have fallen ill with COVID-19 and recovering in quarantine, and those who are out of work as a result of this crisis. Since the breakout, there has been a growing trend of people who are exclusively using card payments and more merchants accepting alternative forms of digital money over physical cash due to the fears of it possibly being a form of transportation of potentially harmful bacteria and other germs.

Source: Board of Governors of the Federal Reserve System (US), Currency in Circulation [CURRCIR], retrieved from FRED, Federal Reserve Bank of St. Louis; March 31, 2020. Shaded areas indicate U.S. recessions.

A CESSATION & CRISIS UNLIKE ANY OTHER
As the human toll this pandemic has risen to proportions not seen since 9/11, it has also financially been the worst event since some time and appears to be on par for a massive correction that has long been due looking at about a hundred year regression for stocks as they has became highly overbought in the past decade with so much “easy money” sloshing around the economy. While many have been arguing that the Federal Reserve acts too slow to prevent crises and may be “running out of ammo,” they seemed to disagree taking no haste in cutting interest rates to nearly zero while printing money to alleviate the crisis and cessation of many “non-essential” businesses in the economy seeing the United States Dollar as theirs to destroy or manipulate as necessary given the circumstances. It is ironic this administration has taken this stance after labeling China as a “currency manipulator” while they just turned around and did the very thing they used to accuse them of doing while also adopting a failing model from Japan’s central bank that includes “infinite” quantitative easing. Imagine the power to magically edit the amount of money in your bank account, this is what our government can do which leads many to wonder why anyone even has to pay taxes if they can just print more of it off to pay what each citizen owes. Though the reactions may not be instant for all of this freshly created cash now floating around the economy, there will be long-term consequences to it that not only exaggerate the problem with our economy but quite likely will continue to push the wealth gap further.

VIRES IN NUMERIS
We are living through beautiful, dark and twisted times that seem almost too fantastical for reality especially as the world seemingly is being run by immature leaders who believe in an child-like thinking, “Everything would be great if only everyone had twelve hundred dollars.” It’s as if there’s nobody is asking where the root of all this money lies, where the source of its existence is to reveal its true nature which has been obfuscated to many because they would otherwise become privy to the real value of fiat currencies. Since 1971, the United States Dollar has no longer been pegged to the value of another asset like gold or silver and since become a free floating currency that practically became digital with most of its supply laying on a bank’s database as 0’s and 1’s rather than physically as cold-hard cash in their vaults. At the time, economists thought we were embarking into uncharted waters and now they are debasing our currency by creating it out of thin air putting us deeper into the murky waters. Our Founding Fathers would probably be appalled by officials, some of whom were never elected to their positions, making these decisions deciding the fate and value of the money that so many hardworking Americans and people around the world worked for with their own abilities, ideas, skills, sweat and/or talent. Sooner or later, we’ll realize for better or worse the actual significance of the saying, “less meaning more,” when it comes to the value of our money.

The Federal Reserve system is untrustworthy because of its lack of ability to identify or signal any actual trouble ahead of crises, yet many of the Wall Street gurus know better after accounting for its true fire power and hence follow the old saying, “Don’t fight the Fed.” Shorting the market though is no real solution either given the state of affairs as well as lack of clear data at the moment coming out of the countries hit the hardest, the economy with people getting locked out of filing for unemployment with its crashed and overloaded government systems, and, not to mention, the healthcare sector that is releasing many suspect figures about the severity of COVID-19 after first dispelling people’s fears about it telling them they don’t need masks to only reverse that stance later after receiving their own stash of personal protective equipment (PPE). Trustworthiness, or the lack there of, has become an inherent part of our legacy systems that provide little transparency into the actual goings on and inner workings of the dominions that they are given power over with a prime example being the senators this month who dumped millions of dollars in stocks after a private all-senator meeting discussing the novel coronavirus just before the markets turned sour. Now that we are collectively discovering that our world’s reserve currency can be created and printed at will to ensure the banks never default is straight from the “Monopoly” board game rules that allows the banker to issue “new” money on ordinary slips of paper until the bank has enough paper money to operate. The only thing that truly can be trusted these days is math, and lucky for bitcoin it is entirely based off of it.

“Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, “Account Overdrawn.”

Ayn Rand, Atlas Shrugged (Francisco’s Money Speech)

As money gets easier, bitcoin becomes harder.

Due to its fixed supply of 21 million with no central governing authority, nobody could ever create or print more through any sort of “quantitative easing.”

The FED can print the dollar out of thin air, good luck trying that with bitcoin!


gold = ancient money
“the god’s money”

dollar = debt-based money
“the government’s money”

bitcoin = modern money
“the people’s money”