Market and Fed March 3, 2020

Volatility moves fast.  The 5.09% Dow increase yesterday was on 25.46% lower volume than last Friday and the Nasdaq volume was also significantly down at 19.34% yesterday.  The G7 made no fiscal stimulus commitments offering only words of appropriate policy action.

The Fed Repo Operations significantly spiked today with $108.608 billion 1 day term submitted and $100 billion accepted while $70.950 billion 14 day term was submitted with only $20 billion accepted.

The market started down a little over 200 points and started easing back basically on the G7 lack of fiscal stimulus action.  The European market were all up.

The the Fed makes an emergency rate cut of 50 basis points, which is what the market wanted and the market is still down and has gone down over 100 points as I write this at 9:19 AM Central time.

In my opinion the repo spike was the new driving data, but the Fed may find the 50 basis points too preemptive (and consequently less effective) and too much spent ammunition (25 basis points would not have satisfied the market but the that is not the Fed's job) to counter what could be a recessionary downturn as the global economic impact of the coronavirus infection multiplies and the infection grows in the United States.

Officially a recession takes two quarters of negative growth, which should be increasing apparent by the end of May going into June.  The first quarter is pretty obvious.  The Federal government needs to provide fiscal stimulus with direct effect on health care, employment, and support of economic sectors most heavily impacted by the coronavirus economic impact.  Additionally, the Federal government needs to start working with the international community to control and treat the coronavirus infection.  The United States is not in this alone.  If the U.S. does not start effectively cooperating and coordinating international response, including fiscal support, then the economic impact globally will be worse.

It begins.

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Coronavirus, Market Expectations, and the Fed

In the last half of 2018 (with a economic model driven Fed funds rate hike in December in which the Fed message was interpreted as rates will continue to rise) and the data driven Fed holding pattern through 2019 until August, September, and October Fed funds rate cuts of 25 basis points each month from 2.5% to 1.75% in order to tame and prevent inflation as the result of the Trade War economic disruption, the market expectations and self-serving political pressure were never completely satisfied, economic data realistic, or rationally predictive.  The market is irrational and reactive to human behavior much like an infant's terrible twos.

By Friday, February 28, 2020, we had seven consecutive down market days and the market had fallen into correction territory with an approximately cumulative 11.5% drop as the global economic impact of the coronavirus infection starting to sink in and the fears of a potential global pandemic.  As of Wednesday morning, the 26th, economists could see no data reason for the Fed to act.  By the morning of Thursday the 27th, economists were acknowledging the short run economic impact of the coronavirus infection but stating the obvious reality that the data was not present to indicate how long or how deep.  On Thursday the Dow fell 1190.95 points, after a Presidential televised message/presentation the night before raised many doubts as the competence of governmental leadership.  The need for the Fed to make a statement was necessary and Chairman Powell appropriately did so indicating the Fed stood ready to act in response to the evolving risks when appropriate.  By Friday morning, this had caused the economist Tim Duy to change his assessment from an appropriate wait for economic data to the need for a 25 to 50 basis point cut in the Fed funds rate and Goldman Sachs seeing stagnant earnings growth for U.S. companies through 2020 and three 25 basis points rate cuts from March to June of a total 75 basis points and Wall Street expecting at least 50 basis points in March. 

By the morning of Monday, March 2, Goldman Sachs aggressively stated there needed to be a 50 basis points cur in March and at least 100 basis points this year.  Marc Chandler, a forex and macro analyst, was accurately reporting the negative economic data and commenting that central banks words of assurance have a short life.  Tim Duy was concluding the Fed would need to cut 25 basis points in March with a tilt towards 50 basis points and sooner, although the Fed's initial response might be to expand repo operations.  In this same Monday morning, another economist was commenting that central banks are already doing enough for now and that the emphasis in combating a potential pandemic is appropriately directed fiscal spending by government to support the public health system and provide direct (not tax cuts which would come to late and often to the "special" people who do not need them) stimulus to economy as the global impact on the United States becomes more obvious.  As of this Monday the CDC has yet to deliver accurate testing kits to state, county, and local public health agencies and hospitals to provide timely testing.  By this Monday afternoon, general doubts were beginning to be raised that, while the market expects rate cuts, cuts will not work and that the Fed is more likely to cut rates due to a demand shock leading to inflation rather than a recession.  However, a demand shock can also be a supply shock and lead to recession.

By market end this Monday, March 2nd, the Dow finished up 1293.96 or 5.09%, despite European markets being up then turning down (except for UK) on coronavirus concerns.  Hope springs eternal in the market however fleeting the moment may be.

At this moment, I expect the Fed will hold the Fed funds rate in March, unless data between now and the meeting March 17-18 significantly changes.  The growth of the coronavirus infection will get much worse before it gets better.  Expect the Fed to look at the repo rates and repo operation (and the effect of hedge funds on the repo market) as well as bank liquidity throughout the system, particularly the largest banks which handle most repo facilities.  If the data does become more negative, there might be a 25 basis points cut.  This a wait a see how bad and how serious the public health problems impact the economy, prices, and employment --- and for what length of time.  The Federal government needs to listen to Congress and spend money to stimulate the public health response and directly stimulate the economy with spending which has more immediacy of impact than possible future impact.

If the economic impact grows more negative over the next two to three months, we may see the data showing that a recession could start in May-June.  Notice the use of the word "may" and not "will".


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2020 Important Tax Facts and Dates

Morningstar has compiled a succinct informational listing of important tax facts for individuals, investors, and important tax dates throughout the year.  I see no reason to write my own list as it does not require any professional originality.  You can find the information here.

This link will enumerate the twelve tax deductions and credits you need to evaluate for tax planning and their effective use to you.

Lastly, there are eleven tax deductions you can still take if you use the standard deduction.

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Required Minimum Distributions and The Secure Act

There is continuing confusion on how RMDs are treated since The Secure Act became law.

If you turned 70 1/2 years old in 2019, you are still subject to the old law and required to begin RMDs.  If you turn 70 1/2 in 2020, you do not need to take RMDs until you turn 72 years old.  If you have been doing RMDs, you need to continue.  Always use the IRS worksheet.  If you receive an RMD notice from your broker/dealer or retirement account custodian or trustee and you did not turn 70 1/2 years old in 2019 or have not been taking RMDs but you will be 70 1/2 in 2020, you should probably ignore it.  The IRS has issued Guidance here.  You should never just accept  an RMD notice with a calculated amount from a retirement custodian or trustee or broker/dealer; you should always

Is High Corporate Credit An Inceasing Risk to the Economy?

 Last year, the Fed commented on the historical level of corporate credit with rapid growth concentrated in the riskiest firms.  One risk is a market dislocation which causes an increase in credit spreads and a contraction of credit market liquidity.  In January 2020, Moody's Analytics questioned if overvalued equities increase the risk of high corporate debt, because the debt could impact profits and/or cash flow and this might promote a equity market downturn and increase pressure on companies with high debt.  At the present time, the market overvaluation is not at the level of 1999-2000.  Moody's Analytics has published a second commentary entitled, "How Corporate Credit Might Burst An Equity Bubble".  The article continues the discussion of a market downturn amplifying corporate leverage and the two feeding on each other.  The one data set you should watch

America Has Squandered the Economic Recovery

The Harvard Business School has just released a report which finds current business and political leaders have squandered the economic recovery with loss opportunities for a stronger future economy

BIS Quarterly Review (December 2019) and Repo Markets

The December 2019 BIS Quarterly Review is out and it includes some very interesting articles.

There is one on the evolution of OTC interest rate markets.  Given these are an indicator of market volatility, the research is important, because the turnover of interest rate derivatives has increased for a variety of reasons; some of which are the changing structure of the market.

Collateral is king in the euro repo market.  Repo markets provide liquidity, but the euro repo market has seen activity which indicates investors are seeking particular securities rather than just liquidity and the availability and price of those particular securities has become a factor in the euro repo market.

One article receiving a lot of attention is one on the September stress in the U.S. dollar repo market

2020 Form W-4 Is Complicated and Invasive

 In June, I wrote about the proposed new Form W-4.  The final Form W-4 for 2020 can be found here with an explanation on how to fill it out.  Be prepared for a long process using a worksheet or an IRS calculator (which will not have 2020 tax information until 2020).  It is as complicated as filling out the new tax forms and requires an invasive amount of information about your incomes.

If you have multiple jobs, a employee job and a self-employed business, are a new employee but not

Beware: New Medicare Plan Finder Tool Misadvises

The new Medicare Plan Finder Tool has been found to have glitches which could result in consumers choosing more expensive plans by mistake.

It ranks plans by lowest premium without consideration to out of pocket copay expenses. 

In the past the Tool calculated total cost making the new Tool even more misleading if you have relied upon it in the past.

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Italian Mini-BOTs Would Be Liability Swaps

In the last two weeks there has been a flurry of economic/financial writing about the Italian proposal for a parallel currency in the form of mini-BOTs by an Italian Lega politician, Claudio Borghi, who, as a former Deutsche Bank person, should understand the implications of a parallel currency deployment and who has been quite vocal in his desire to exit the euro.  Since Italy is the third largest economy in the eurozone, the impact would be significant unlike Greece.

Most of the writing has been monetarily critical --- concentrating on perceived debt increase to unsustainable levels and legality.  Papadia and Roth have tried to review the competing viewpoints through existing literature, but they omit the earlier 2015 Andresen and Parenteau electronic TAN proposal, which was the basis of the Varoufakis plan via Galbraith.  Papadia and Roth would have us believe the paper form would be better than the electronic form, because it would be less likely to be used criminally.  In fact, the electronic form is even less like currency, less expensive and simpler to implement, and not subject to counterfeiting.  Papadia and Roth make a good listing of what makes currency and what makes a security.  In their conclusions, they worry about the mini-Bot enabling an