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Crash Continues

03-16-2020

The crash continued today despite yesterday's action by the Fed. The market has now shrugged off (when combined with last week) a 150-basis-point rate cut, $700 billion worth of QE, and $1.5 trillion worth of repo programs, which aren't actually QE until financial institutions take the Fed up on that "offer."

A Sinking Tide Grounds All Ships Regardless, the combined impact of 150-basis-point rate cuts (to 0%) and over $2 trillion of QE/potential QE has not been enough to stem the tide, because the market structure was so crash-prone and so many have been (incorrectly) trained that stocks can't decline.

In fact, they can, as it took all of four seconds for the market to open about 10% lower, when trading was halted for about 15 minutes. From there, stocks rallied briefly, but then rolled over and were back to the lows, with most of the subsequent trading taking place with the indices between 8% and 10% lower until the last 30 minutes, when they fell again, basically closing on the low tick, down about 12%. That doesn't bode well for tomorrow.

Away from stocks, green paper was weaker, fixed income was stronger, and the precious metals were initially a few percent higher last night before they were hammered a couple of hours before New York opened. At one point, silver was down nearly 20% while gold was about 5% lower. Once the stock market began trading, however, the metals lifted and gold got back to down just 1% before it fell again, losing 2% on the day. Silver gave up around 12%.

From the Ground Up As for the miners, they were all pretty strong after opening with large losses. In fact, they actually turned green quite early, basically rallied all day, and were the only group that was in the plus column. Probably some of that was due to the complete dislocation that occurred last week, thanks to the illiquidity of the mining-related ETFs and the 3x levered ones. Whether the fact that they were so cheap brought in other buyers, or the unwinding/adding of more arbitrage helped them, it's not possible to know at this juncture.

Lastly, on a humanitarian note, it is really sad to think of the tens of millions of people that are in some way associated with the service industry that will get no paycheck for the next two weeks to two months. It's very difficult to know how long because we're not testing enough for the virus to know where we actually are. As I've said for the last two months, since this virus made itself known, all the data we're looking at is two weeks old, except for the live testing that is occurring.

The Rate of Transmission The moral of the story is that the Fed has precipitated can-kicking of all major financial issues, encouraged people to behave recklessly (even if they didn't realize they were doing so), and went out of its way to punish prudence. As a result, we had a stock market bubble and a bond market bubble (which is yet to burst) implode at the same time that the world economy is coming to a screeching halt. On top of that, most people don't have any kind of a savings cushion, partially due to reckless central bank behavior. (Thus, the rant I just shared.)

Once again, people are looking to the central banks as saviors because they cut rates, when in fact they are the reason we're in this mess. No, they didn't create the virus, but the financial chaos that will go on for many years in the wake of this is definitely a function of their errors.

I know everyone is probably unhappy with how gold has performed, but now, knowing that risk-parity types are having to reduce leverage and other people are selling what they can, I can understand gold being weak in the short run. After all, when the stock markets of the world are shut, gold keeps trading. So, it has provided cash for those who owned it and needed more money on hand. (The current selling in everything is more about protecting capital than it is a liquidity crisis, as 2008 was.) For those of us who own it for insurance and appreciation, our time is right in front of us. We just have to get through all the prop wash first.

Now Arriving: the Last Place On Earth On a related note, I have been asked many times if I thought mines would be shut down because of the coronavirus and I have repeatedly said I thought they'd be the last places to be impacted because they're so remote. While I still believe that, what I had not thought about was that a country, in this case, Peru, would shut down all businesses, which would close mines temporarily even if no one had the virus. Peru did that late last night, but then today said mines would remain open. I have not yet been able to find out exactly how these contradictory statements might impact miners, such as Pan American, which have a lot of assets there.

In the long and intermediate term, it won't make any real difference, but in the short run it could impact psychology. So, the readers that were worried about this were right to some degree, even if it was for the "wrong" reasons, at least thus far.

Positions in stocks mentioned: long PAAS.