The first quarter of 2020 will go down as one of the most consequential stretches in modern history, both for markets and for humanity in general.

The new year began with the loud beating of war drums after the US assassinated Qassem Soleimani, and ended with virtually all nations engaged in a fight to vanquish an invisible, biological foe which, through March 31, had claimed nearly 41,000 lives globally.

On Tuesday, New York surpassed Hubei (where COVID-19 originated) for total cases. The state has nearly 76,000 total infections.

In the face of this, virtually all economies – both developed and emerging – are operating under some manner of containment regime, if they’re operating at all.

Q2 will witness some of the worst data in the history of modern economic statistics. That much we know.

We’ve already seen a preview stateside (see top pane below), and it’s about to get much worse by all accounts. Goldman on Tuesday slashed an already dour outlook for the US economy. The bank now sees a 34% contraction in Q2.

This was the worst quarter for US equities since the crisis. And it would have been far, far worse. A short squeeze and likely rebalancing flows helped the S&P rally some 12% (cumulatively) over the last seven sessions. Even that was a bumpy ride, though, with sizable losses logged on three of those seven days.

For the Dow, it was the worst quarter since 1987.

The bull market is dead, and so is the expansion.

True to the adage, it wasn’t “old age” that did it. But inconsistent with that same adage, the murderer wasn’t the Fed.

Rather, both the geriatric bull and the longest expansion in US history succumbed to a literal plague.

Credit spreads ballooned wider, as a cycle that’s been kept in suspended animation by years of central bank largesse finally looks set to turn. Q1 witnessed the largest quarterly widening for high yield since the crisis.

Crude fell 67% for the quarter. Just try to wrap your head around that. Prices are barely holding above $20. It was the worst quarter ever – literally.

Here’s the kind of quarter high yield energy had:


In IG credit, Q1 was a catastrophe. In addition to spreads blowing out, raising the specter of the “BBB apocalypse” coming to fruition, the high grade ETF snapped, trading at a discount to NAV not seen since the crisis (it was hardly alone in that regard).

Thankfully, the Fed stepped in with a promise to buy corporate bonds, including via ETFs. That calmed things down, but credit markets remain distressed. Nobody knows what’s next, and many corners of the market are still frozen.

The idea that the VIX was near an 11-handle just ~four months ago is surreal and speaks to the power of the pernicious volatility-flows-feedback loop which was activated during the biggest VaR shock since Lehman.

Since Wuhan was locked down in late January, global equities have fallen some 23% and US 10-year yields are down 105bps.

We came into the quarter with the vol.-control universe running the highest exposure since the January 2018, post-tax cut melt-up. The de-leveraging was epic.

In risk parity, the “shock-down” (if you will) was the stuff of nightmares for those who have spent the better part of a decade insisting the RP de-risking ghost story wasn’t real.

What you see in the visual below is, in a word, unprecedented:


This was also a quarter when many of the demons from the GFC returned, as dollar funding stress manifested in widening cross-currency basis, which then spilled over into the spot market, causing the greenback to go “vertical”.

The Fed was forced to enhance and extend its swap lines, going so far on Tuesday as to launch a new repo facility for foreign central banks in an effort to make absolutely sure that USD liquidity is available.

The commercial paper market effectively froze and the Treasury market “broke“.

The Fed – which just one year ago was still getting used to the idea of halting balance sheet rundown – was buying at a breathtaking pace last week. The balance sheet ballooned to more than $5 trillion.

As rough as the first three months of the new decade most assuredly turned out to be, the next three months are likely to be even more trying.

Steel yourselves and don’t listen to that voice in your head imploring you to build a doomsday bunker in the backyard.


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7 thoughts on “Requiem.

  1. I mean if you did need a bunker it is too late. What worries me is supply chain deterioration as more people get sick and cities become higher risk. Truck drivers are operating outside normal restrictions already. Amazon may have to close operations in NY. What happens when a city has extended periods without resupply of critical items? What happens when hospitals are out of staff due to illness from lacking ppe? We’re starting to take actions but I am not certain systems won’t break before we see the other side of this.

  2. I have a doomsday bunker of put spreads and will not come out until McGelliot reports that hedge funds are going long with leverage.

  3. The second quarter is really going to be interesting- isn’t that a Chinese curse? “May you live in interesting times”…As an investor it feels like whack a mole….the flip side is in 4 weeks we should have a much better read on what is to come. One positive sign is that investment grade corporate issuance is up quite substantially of late. Of course “leadership” and empathy coming from the US executive branch is sorely lacking

  4. I’m a pessimist by nature, but, this is a time to be studying Japan and negative yields and stuff like debt to GDP. Japan is still making cars and technology and their society has stability. Their sent has gone up over 200 percent in a few decades, but life goes on, somewhat normally. I’ve never studied that whole enchilada but it’s not a bad place to look for recovery ideas

    1. @Viss Indeed, but Japan has a pretty homogeneous culture with a strong sense of duty and honor. Not so much the United States. Considering that money is just a tokenized manifestation of trust with the ability entangle past, present and future value, the level of inherent trust in the culture through money is being transacted must be considered.

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