Rush to Cash

What you saw from Wednesday to Friday was a classic liquidation panic a la October 2008.  There was nowhere to hide being long.  Treasuries, which would usually thrive under a panic risk off scenario, were getting liquidated as a source of funds to raise cash.  That is a sign of extreme stress in the financial markets, when the most liquid safe haven asset gets sold to raise cash.  And not just any cash, but the dollar, as in a normal risk off scenario, the positive carrying currency gets sold (dollar), and the opposite side gets bought (euro).  But in times of extreme stress, where US dollars were needed, the dollar rallied huge off the initial carry currency selling to reverse most of its previous losses.  Crazy times. 

 In fact, as the SPX was melting down from 2880 to 2480 in 2 trading days, 10 year Treasury yields went up from 0.39% to 0.84%.  It was an even bigger bloodbath in 30 year bonds.  Risk parity funds were getting crushed this past week, which is something that has only happened to this degree in October 2008 and February 2018.  And February 2018 was not because of fears of a global recession, but an inflation scare.  So this situation has more similarities to October 2008, when Treasury yields were actually going up during the steepest part of the decline from October 6 to October 10. 

March 2020

October 2008

As you can see from October 6 to October 10, 2008, as the SPX plunged from 1100 to 840, the 30 year Treasury yield actually went up from 3.94% to 4.14%.  Long term Treasuries lost safe haven status in favor of cash. 

For those who are still stuck in BTFD mode and complacent from past shocks like February and December 2018, August 2015, August 2011, they will be in for a big surprise.  Those past shocks were short term financial corrections that had no effect on the US economy.  This will have a huge effect on the US economy.  This is not a market correction.  This is an economic correction that will lead to many credit downgrades, equity dilution among the energy, airline, and travel/leisure segment of the market, and much lower overall SPX earnings due to consumer retrenchment.  QE4, Fed commercial paper funding facilities, or repo injections will not change that.    Neither does the fiscal stimulus that will be coming, barring a giant helicopter drop of money out of Congress, which is doubtful considering the Democrats' reluctance to paper over the problems during an election year in an epidemiological crisis. 

This is not like anything we've seen since 2008, and before that, 2000.  This market is an odd mixture of October 1987, April 2000, and October 2008.  I am still trying to get my head around how the markets will trade for the next several months, and my base case would be something like this: 

After a liquidation Monday, there should be a bounce afterwards, but Monday could get quite ugly so hard to predict levels beforehand.  If it bottoms at 2350-2400, which probably give us an idea of the bottom of the new range, we should chop violently sideways till late March, and then make a push to retest the lows and break them marginally, probably down to 2300 area.  And from there, I expect a strong rally into the summer as the market hopes that the worst is over as coronavirus fatigue sets in.  Then as the market realizes that the economy is not doing as well as it expected, there should be renewed vigorous selling into the fall, and probably new lows for the year in October.  Just a rough guideline for what I project for now, things will of course play out differently.

If the Trump administration doesn't do mass quarantines and nationwide lockdowns no matter how bad it gets, then all bets are off and we could crash even harder. 
 
Getting ahead of myself here, there is still a lot of unknowns out there, but the feeling I get is that most Wall St. forecasters are still not taking down their earnings estimates enough this year.  In many ways, the GDP hit is probably going to be worse than what happened in late 2008/early 2009, just because back then, you didn't have mass sports and event cancellations or widespread travel bans.  The GDP numbers this year will shock people, too many are still in denial.  That is why there is still a lot of opportunity on the short side, after a brief oversold bounce plays out.

P.S. - Noticing the huge plunge in gold and 3-month LIBOR actually higher on the day despite the Fed cutting to zero.  Wow.  There is some serious liquidation going on here, be careful out there.