Reprinted from www.unz.com
1 Investors are cashing in and heading for the exits
According to Bloomberg News: "Investors made their biggest dash for cash in history" in the last week. "They channeled $137 billion into cash-like assets and a record $14 billion into government bonds in the five days through March 11"..(while) money managers are liquidating en masse." ("Investors Liquidate Everything in Record $137 Billion Cash Haul", Bloomberg)
Why are investors exiting the market?
Because the psychology that drives business investment ("animal spirits") has been dramatically impacted by the coronavirus. Expectations for future prosperity have been dampened by the fog of uncertainty. When uncertainty prevails, confidence wanes and investors cash in and get out. Coronavirus is fiendishly designed to push stocks and bonds lower in response to the staggering deluge of bad news.
2-Stocks have been walloped, but consumer confidence is just now starting to drop
According to the University of Michigan, consumer sentiment fell from 101.0 to 95.9 in February. These calculations were made before the "Thursday's stock-market plunge - the worst since 1987 - and the rapid shutdown of university campuses, public schools, major sports and entertainment venues over the last 24 hours". the data suggest that additional declines in confidence are still likely to occur as the spread of the virus continues to accelerate." (Bloomberg)
Stocks will undoubtedly reflect investor pessimism in the months ahead, pushing prices lower while the virus spreads.
3- The Fed's $1.5 trillion liquidity announcement triggered an impressive 2,000 point rally, but the policy badly misfired
On Thursday, the Fed announced that it would provide more than $1.5 trillion in short-term loans to repo market traders. Fed chairman Powell believed that this would ease tighter lending conditions in a market that is a critical part of the system's financial plumbing. Surprisingly, the demand for these short-term loans was weak and the Fed only provided a meager $119 billion. In short, the Fed did not accurately identify the source of the problem which obviously lies elsewhere.
In order to conceal its mistake, the Fed launched another round of Quantitative Easing on Friday. According to the Wall Street Journal: "The Fed announced Friday morning that it would purchase later in the day roughly half of some $80 billion in Treasury securities that it had said Thursday would be purchased over the next month." (Wall Street Journal)
In other words, the Fed fired its $1.5 trillion policy bazooka at the repo market and missed the target entirely. The next day, the Fed resumed its QE money printing operation and investors piled back into stocks. This hit-or-miss approach shows that the Fed does not completely understand the issue it is dealing with.
4-The real economy was weak even before stocks started crashing
This is an excerpt from an article at Marketwatch by economist Stephen Roach: "The problem also lies in weak real economies that are far too close to their stall speed. The International Monetary Fund recently lowered its estimate for world GDP growth in 2019 to 3% -midway between the 40-year trend of 3.5% and the 2.5% threshold commonly associated with global recessions.
As the year comes to a close, real GDP growth in the US is tracking below 2%, and the 2020 growth forecasts for the eurozone and Japan are less than 1%. In other words, the major developed economies are not only flirting with overvalued financial markets DJIA, +9.36% and still relying on a failed monetary-policy strategy, but they are also lacking a growth cushion just when they may need it most. In such a vulnerable world, it would not take much to spark the crisis of 2020." (Marketwatch)