Coronabubble

Coronabubble

Global liquidity has been ramped up, in the wake of the coronavirus, which has propelled already inflated asset prices to the bubble stratosphere, thereby giving rise to the coronabubble. 

Global authorities have recently been firing distress flares.

The World Health Organization February 9 dashed any hope of containing the virus, albeit in the short term.

“The detection of a small number of cases may indicate more widespread transmission in other countries; in short we may only be seeing the tip of the iceberg,” said Tedros Adhanom Ghebreyesus, director-general of the World Health Organization.

Moreover, last month the usually nonalarmist International Monetary Fund warned that the global economy risks a return of the Great Depression. 

The impact of the coronavirus, a black swan event, is already rippling through the global economy. 

Central banks are responding, in the only way they know how with more liquidity, blowing even more air into a bubble, the Coronabubble

The People’s Bank of China has already injected $1.2 yaun worth of liquidity to prevent the Chinese SSE Composite Index from crashing. But helicopter money for the financial system has been on tap since the last financial crisis of 2008 with the Fed expanding its balance sheet by 500% in less than a decade. The Fed has been growing its balance sheet at about $100 billion a month through asset purchases known as quantitative easing QE. 

But here comes the zinger, September’s Repo crisis illustrates that central bank liquidity injections are merely a short term fix. Indeed, the Fed has recently monetized $4.1 billion in debt on top of its regularly monthly QE injections. 

The European Central bank (ECB) is adding another 20 billion euros a month to keep the asset bubble inflated. 

In 2016 Bank of Japan has supplied $1.475bn in dollar liquidity to Japanese Banks to tackle Brexit. Bank of Japan is now proposing to pump more liquidity, which will add more air to the coronabubble. 

But central bank liquidity isn’t going to cure the coronavirus or the already stuttering global economy.

The first economic indicator, the Baltic Dry Index (BDI), a predictor of future global economic activity, has collapsed into negative territory and it supports the view that stocks are in the coronabubble. The BDI plunged to 415, down 61.93% year to date at the time of writing this piece and it is an early warning signal that the global economy is in free-fall. 

Negative divergence is a sign of the coronabubble

Stock are experiencing negative divergence with stocks continuing to make new highs, based on nothing else but central bank liquidity injections. Meanwhile, the technical indicators are breaking down with the BDI being the latest. 

This coronabubble could have an extra bang to it

Before, the coronavirus hit the mainstream (one month later) financial markets were already frothy. 

As I wrote in a recent piece, entitled, The Lesser Risk asset, a decade of unprecedented monetary easing has created the bubble of bubbles. Stocks are overvalued by whatever matrix we use. 

The price-to-earnings (P/E) ratio, a popular measure, shows the stock price at their highest level in recent history with the S&P 500 index SPX, -0.40% trading at 18.6 times forward earnings. That is well above the average P/E ratio of 16.7 during the past five years and 14.9 over the past ten, according to FactSet data. S&P 500 is now more overvalued than ever, well above its dotcom bubble peak. 

Moreover, the number of bonds carrying negative yields increased to an all-time peak of $13.2 trillion in August 2019.

I would not be surprised to see the inverted 10-2 year treasury yields invert again, despite the Fed’s buying short maturity treasuries in its “not QE4” open market operations. 

An inverted yield curve often serves as a prelude to a recession because it suggests that capital flows are gravitating into 10-year treasuries away from relatively risky assets like stocks.

In other words, investors don’t believe stock valuations and dividends can be supported in a downward economic cycle so they would rather rotate capital into the security of fixed income from treasuries. 

Is remaining invested in the coronabubble dancing with lady luck for too long?

Goldman Sachs doesn’t think so and believes that the impact of coronavirus will be limited. The Investment bank is recommending investors to buy cyclical and value stocks.

Although the bank’s analyst also believes that the virus would hit the US economic growth by up to 0.5 percentage points in the first quarter, the drag would be recouped over the next two quarters and the global damage could be as low as 0.1 percentage points over the full year. “The impact of the lower global and US economic activity on 2020 S&P 500 earnings per share will be limited,” said the analyst. 

Should investors take heed to Goldman’s latest advice that the Coronavirus creates a buy the dip opportunity, in other words, it is not a coronabubble?

Goldman has somewhat of a controversial record and wrong calls. 

In 2008 Goldman admitted it defrauded investors during the 2008 financial crisis. 

Moreover, the investment bank has made several famous wrong calls.

For example, its dire commodities outlook in 2016 didn’t materialize. 

The investment bank also got it wrong in Spain in 2013.

“Relative to our original outlook, growth performance in France and Spain has exceeded our (weak) expectations,” the bank wrote in the November 14th report. 

Goldman Sachs got it wrong on Bitcoin in 2014. 

“Bitcoin is not a practical currency, its underlying ledger technology could hold promise,” the Bank wrote in a report. 

So when the investment bank tells investors to zig you are sometimes better off doing the opposite, zagging.  

Will the coronavirus translate into the coronabubble that when it pops will require a global solution to a global problem? 

Will the elites use this crisis to push for a one-world government with a global currency, or is this just another buy the dip (BTFD) opportunity?