Initial unemployment claims jumped 3,000% to 6.6 million last week from 211,000 for the week ending March 7, the Labor Department said Thursday. Businesses have closed in an effort to stop the spread of coronavirus, as millions of Americans practice “social distancing” at home.
“This kind of upending of the labor market in such a short time is unheard of,” said Heidi Shierholz, a senior economist and director of policy at the progressive Economic Policy Institute, a Washington, D.C.-based think tank. She called the latest numbers, “A portrait of disaster.”
The $2 trillion stimulus package, passed by the Senate last week, will help the U.S. through the COVID-19 pandemic, of which New York City is now the epicenter, Shierholz added, but she added, “This kind of upending of the labor market in such a short time is unheard of.”
“The spike at the end shows the unprecedented territory we are in right now,” she said, citing this graph (below), showing labor market trends over the last 50 years. “What the labor market is currently experiencing is far more extreme than anything we’ve ever seen, including the worst weeks of the Great Recession.”
The number of unemployed Americans is likely to surpass the prior record of 15.3 million, also seen during the Great Recession after the subprime-mortgage market crashed. Economists predict 25 million Americans or more could lose their jobs in the next few months, at least temporarily.
Shierholz said initial unemployment claims do not include many workers who are out of work due to the virus, including independent contractors, those who don’t have long enough work histories, those who had to quit work to care for a child whose school closed, so the actual number is higher.
‘The spike at the end shows the unprecedented territory we are in right now.’
“One of the most effective parts of the CARES ACT, the relief and recovery act that Congress passed last week, is a $250 billion expansion of unemployment insurance,” Shierholz said.
The $2 trillion stimulus package includes an increase in the level of benefits and the creation of a Pandemic Unemployment Assistance (PUA) program which would be available to many workers who are not eligible for regular unemployment insurance (independent contractors, for example).
The $2 trillion stimulus bill will pay workers $600 a week on top of whatever sum they receive in their state-level unemployment claim for a period of up to four months, according to provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Coronavirus had infected at least 216,768 people in the U.S. as of Thursday evening and killed at least 5,148 people, with 1,374 deaths occurring in New York City alone, according to Johns Hopkins University’s Center for Systems Science and Engineering. Worldwide, there were 962,977 confirmed cases of the virus and 49,180 reported deaths.
The global economy was already declining before COVID-19
The past two years were marked by a constant slowdown in the business cycle after the global economy peaked in the last quarter of 2017. The rise of uncertainty globally, with Brexit at first and quickly followed by the US-China trade war and political risk in the euro area (France’s yellow vest, Italian elections…), generated a rising demand for the traditional safe-haven assets: US Treasuries and the US dollar. We previously saw that the rise in uncertainty has historically been associated with a stronger USD (figure 1, left frame). Even though global growth has constantly been weakening in the past two years, the market did not react and the 20-percent drawdown we saw in the end of 2018 was followed by a sharp recovery in 2019 due to the significant increase in global liquidity.
However, we do not feel very optimistic in the near to medium term despite the massive liquidity injections from the Fed and other major central banks. In previous downturns, equities have usually fallen for a longer-than-anticipated period despite an increase in liquidity. Indeed, rising excess liquidity tends to usually lead risky assets such as equities (by 6 months), but the relationship breaks down during recessions. We do think that COVID-19 will mark the divergence between excess liquidity and global stocks (figure 1, right frame).
Source: Eikon Reuters
More bearish than bullish for now
Two narratives are currently making the headlines: the first one is optimistic and predicts that the economy will be back on track by early June and that the ZIRP policies combined with depressed oil prices will generate a significant push in consumption in most of the developed countries, leading to a sharp recovery in the second half of 2020. The second narrative is more pessimistic: unemployment skyrockets around the world, creating a huge demand shock leading to social unrests in most of the countries.
It is clear for us that economies will have to temporally deal with massive unemployment, and then the question of social unrests will depend on how well governments will manage the global crisis (helicopter money, MMT…). There is no way that the economy will recover sharply in the second half of this year as social distancing will be implemented in a lot of countries at least in the beginning. It is currently fair to assume that the uncertainty of employees’ working status has never been higher than today; therefore, how could we expect consumption to recover sharply in H2 2020 when household net wealth and real disposable income, two important drivers of real consumption, are falling?
The reality is that households will save carefully in the coming months and consumption will remain depressed for a little while. As a result, it is hard to believe that we will see a sustained period of rising equities while consumption keeps deteriorating.
Hence, as we are heading towards a tough 18-month outlook, the buyers on dip should remain vigilant in the near to medium term. Figure 2 shows how Japanese investors would have performed poorly in the 1990s if they were rushing to buy the dip each time the market corrected.
Source: Eikon Reuters
‘This time is different’: we expect a stagflationary shock
To the difference of the 2008 Financial Crisis, the COVID-19 is a supply shock that will spill over demand in the coming months; as a result, these aggressive measures from governments will lead to more money in the system chasing fewer goods and could therefore generate an unexpected increase in inflation. We believe that COVID-19 will be stagflationary rather than deflationary and governments may have to eventually intervene to limit the appreciation of certain goods.
However, we agree that the services industry will suffer in the medium term as households’ spending will be significantly reduced in the coming months. For instance, as Variant Perception precisely mentioned in their latest report entitled ‘Recession and Shocks,’ it takes up to 16 months for employment in the hospitality and leisure industry to recover after an exogenous shock (figure 3, left frame). It may take even longer to recover this time due to social distancing; does it mean that restaurants will be forced to reduce the amount of tables for the first few months after the activity starts again? What about pubs?
Figure 3 (right frame) shows the performance of global food (retail & distribution) stocks relative to leisure stocks and clearly highlights the devastating effects of COVID-19 on certain industries or sectors. It indicates that investors will have to be very picky regarding the stocks they chose in the coming months as buying aggregate indexes will not be a profitable strategy as it has been in the past decade.
Historically, flat or falling growth combined with rising inflation has been the worst outcome for stocks (to the exception of few industries such as tobacco, food producers or healthcare). Therefore, we think that gold will perform well during that period and that the precious metal could trade at new all-time highs (in USD terms) in the coming months.
Source: Eikon Reuters, Variant Perception
Even though we are bullish on gold in the medium to long run as the ultimate hedge against rising money supply and equity selloffs, we expect the US dollar to appreciate against most of the currencies in the near term. Even though numerous drivers are pointing towards a lower greenback in the short run (higher reserves held at the Fed, recovery in cross currency basis swaps indicating less concerns on the global USD shortage narrative, lower US yields), we do think that the USD will outperform most of the DM and EM currencies as long as price volatility remains high.
Figure 4 shows that most of G10 currencies perform poorly when VIX is high (VIX > 20), to the exception of the two other ultimate safe havens: the Swiss franc and the Japanese yen. We also think that any bull bounce in markets could be seen as an opportunity to buy the yen against traditional crosses such as GBP, EUR or AUD.
Source: Eikon Reuters, RR Calculations
Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in USD over the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
TOKYO/NEW YORK (Reuters) – Oil prices retreated on Friday after massive gains, while stocks in Asia edged down, as doubts grew over an oil price deal between Saudi Arabia and Russia that U.S. President Donald Trump said he had brokered.
With the coronavirus pandemic raising the risk of a prolonged global downturn, investors continued to seek the safety of the U.S. dollar and government bonds, pushing U.S. Treasuries yield near their lowest in three weeks.
U.S. West Texas Intermediate (WTI) crude lost $1.14, or 4.5% to $24.18 a barrel in early Asian trade after having surged a record 24.7% on Thursday. futures dropped $0.70, or 2.67% to $29.24.
Trump said on Thursday he had spoken to Saudi Crown Prince Mohammed bin Salman, and expects Saudi Arabia and Russia to cut oil output by as much as 10 million to 15 million barrels, as the two countries signalled willingness to make a deal.
Saudi Arabia said it would call an emergency meeting of the Organization of the Petroleum Exporting Countries, Saudi state media reported.
The amount Trump talked about would represent an unprecedented cut amounting to 10% to 15% of global supply, if he meant output per day – a common unit of measurement.
But Trump did not specify and some analysts say the omission may be intentional.
“He is a business man and smart enough to know these things. A cut of 10-15 million barrel per day (bpd) would be simply impossible,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley (NYSE:) Securities.
“How could Riyadh and Moscow agree on such a big cut, just about a month after they had fought over a cut of 1.5 million.”
In early March, talks over production cuts between the two countries collapsed, leading them to start a price war that pushed oil prices to the lowest levels in nearly two decades.
Nor did Trump make any offer to reduce U.S. production, now the world’s largest.
“Both Riyadh and Moscow will also be looking for participation from U.S. producers, and this may prove now to be the biggest obstacle to an agreement,” Royal Bank of Canada analysts said in a note.
As oil prices retreated, E-Mini futures for the S&P 500 also fell 0.78% in Asia.
MSCI’s Asia-Pacific index outside Japan dipped 0.15% while rose 0.3%, helped by overnight gains in Wall Street shares. On Thursday, the S&P 500 gained 2.3%.
SAFE ASSETS IN DEMAND
Investors sought the perceived safety of government bonds. Benchmark U.S. 10-year notes fell in price to last yield 0.593%, near a three-week low of 0.563% touched on Thursday.
More evidence of the damage from widespread stay-at-home orders to contain the spread of coronavirus emerged in the United States, with an unprecedented number of workers – 6.6 million – filing jobless claims.
Projections released by the U.S. Congressional Budget Office showed U.S. gross domestic product will decline by more than 7% in the second quarter as the health crisis takes hold.
Global coronavirus cases surpassed 1 million with more than 52,000 deaths as the pandemic further exploded in the United States and the death toll climbed in Spain and Italy, according to a Reuters tally.
Highly rated U.S. corporate bond issuers raised a record $110.502 billion this week, according to Refinitiv IFR data, as firms borrowed cash in fear the coronavirus crisis may soon limit their access to capital markets.
In the currency market, the dollar maintained its firmness against a basket of currencies as investors and companies continued to hoard the world’s most liquid currency.
The has risen 1.88% so far this week, even as extreme tightness for dollars in some markets since last month has eased.
The euro steadied at $1.0853 after four straight days of losses. The yen also stepped back to 107.95 per dollar from Wednesday’s two-week high of 106.925.
Gold prices rose ovenright as U.S. jobless claims hit a new peak, intensifying fears of the coming economic slowdown and drove investors toward the safe-haven metal.
traded at $1,613.5 per ounce after a 1.28% rise on Thursday.
Gosport, U.K. — As a long-distance swimmer, I love a challenge. Last August, I swam the Catalina Channel from Santa Catalina Island to Long Beach, Calif., a 21-mile stretch of water that’s home to great white sharks. In a bid to dodge the strong winds that build in the afternoon, I started at 11 p.m. and my body burned with adrenaline as I climbed into the inky black Pacific Ocean to swim alone though the night.
As I lowered myself down my pilot boat’s metal ladder, I knew I’d have eight hours before first light. I didn’t know how long it’d take. I’d just keep swimming until I got there.
As we face an indeterminate period of isolation, I’m drawing on the resilience and experience I’ve gained by taking on challenges like my Catalina Channel swim, which took 18 hours and 31 minutes to complete.
I swim in a regular swimsuit, cap and goggles under international marathon swimming rules. Nobody is allowed to touch me during the swim, and any contact would result in my disqualification. Half-hourly feeds to sustain my energy are passed to me in a telescopic net — to avoid accidental contact — as are painkillers to mask the searing pain in my shoulders after tens of thousands of strokes.
It’s just me, the ocean and hour after hour of monotonous swimming, with the cold biting to the bone and pushing me to the edge of consciousness.
Getting out of the water is not an option. I take it off the menu before I get in, eliminating the mental turmoil of deciding whether to carry on when it feels unbearable. It’s all about endurance, the ability to withstand adversity. It’s a sphere in which dogged determination often trumps self-preservation.
As we face an indeterminate period of isolation to contain the spread of COVID-19, I’m drawing on the resilience and experience I’ve gained by taking on challenges like my Catalina Channel swim, which took 18 hours and 31 minutes to complete.
In a televised address to the nation on March 23, British Prime Minister Boris Johnson announced that we must all stay at home for at least three weeks. We’re only permitted to leave home to buy essential supplies or medication, to take care of a vulnerable person, to exercise outdoors once a day or to go to work, but only if it’s impossible to do so from home.
There was a sense of relief that the British government had finally introduced definitive measures to control the spread of the virus, after crowds of people gathered at parks and beaches last weekend to soak up the long-awaited spring sunshine after a miserable, wet winter. It seemed that self-interest was winning over collective responsibility, fueled by confused messaging over what people should be doing to contain COVID-19.
Eventually, Johnson was left with little choice but to act decisively as the number of infections continued to rise and the National Health Service faced being overwhelmed. The U.K. had 34,173 confirmed cases and 2,926 deaths as of Thursday evening, John Hopkins University said. Hampshire, the southern county with a population of 1.4 million where I live, had 699 confirmed cases, according to data compiled by Public Health England.
I only ever focus on swimming to the next feed, and then the next, until I eventually reach the end. I don’t wear a watch, and my support crew are briefed not to tell me how far there is to go.
It has become clear that the current measures may well be extended, so we’re all in uncharted territory, trying to adjust to a new reality with no idea how long we’ll be cooped up. And as an endurance swimmer, I have some advice as we enter this unprecedented period of confinement.
First, don’t become overwhelmed by the magnitude of what lies ahead. Stop thinking about the weeks and months to come, and just focus on how you will organize yourself today and for the rest of the week. I never allow myself to think about the entire distance when I start a long swim. If I did, I would be paralyzed by the enormity of it.
I only ever focus on swimming to the next feed, and then the next, until I eventually reach the end. I don’t wear a watch, and my support crew are briefed not to tell me how far there is to go. It’s irrelevant — I just swim until I get there. We have no idea how long these measures restricting our freedoms will be in place, but one day at a time, we’ll get there.
Use your energy to focus on the factors you can control, and not those which you cannot. I can’t control the ocean or the weather, but I can control my mindset and preparation for a swim. You can’t control the fact that you’re confined to your home, but you can control what you do with your time while you’re there. Organize your time, set a routine and take one day at a time.
Stay positive, as your mindset will determine how you cope. Reframe confinement as an opportunity to reconnect with family, sort out the loft or pick up a mothballed creative project. While I swim, I make mental lists of everything I’m grateful for to keep fear and self-doubt at bay. Negative thoughts can quickly spiral and impact your overall well-being, so steer clear of news and social media if they derail you.
I’m self-employed and expecting my first baby in September. On Saturday, I entered the period when my income would be assessed to calculate the maternity pay I’ll be entitled to after my child is born. This is supremely bad timing, as all my work as an open-water swim coach and motivational speaker has been canceled due to the pandemic. This puts me in a precarious position financially as I count down to one of the few things that can’t be canceled or postponed in the current climate: the arrival of my baby.
Last month, the U.K. government’s chief medical adviser, Chris Whitty, announced that pregnant women were deemed vulnerable, which meant I needed to avoid all non-essential contact for 12 weeks. (The Royal College of Obstetricians and Gynecologists notes that “as yet, there is no evidence that pregnant women who get coronavirus are more at risk of serious complications than any other healthy individuals,” but says officials made their decision as a precaution.)
In 2013, I became the fourth person to complete a 56-mile nonstop swim around the Isle of Wight off the south coast of England, a feat that took 26 hours and 33 minutes. Toward the end, I had to swim against the tide.
Although a bombshell at the time, Whitty’s advice was quickly followed by the new restrictions on movement and social contact that applied to everybody. The upshot is that I’ll be spending much of the remainder of my pregnancy alone, confined to my home.
The good news is that my baby seems oblivious to all the mayhem that’s unfolding. I saw my midwife recently and we listened to a strong heartbeat. The maternity unit was being cleaned to within an inch of its life, and the only other mum-to-be in the waiting room arrived wearing two pairs of latex gloves. Who knows what sort of world our babies will be born into?
In 2013, I became the fourth person to complete a 56-mile nonstop swim around the Isle of Wight off the south coast of England, a feat that took 26 hours and 33 minutes. Toward the end, I had to swim against the tide. In the middle of the night, I was swept back two miles in a single hour. I kept pushing on despite this soul-crushing battle, knowing that the tide would turn. We will all have to push on over the next few weeks — until the tide turns on this pandemic.
Anna Wardley is an endurance swimmer, motivational speaker and open-water coach based in Gosport, U.K. You can find her on Twitter
The ProShares UltraPro Short S&P 500 ETF (SPXU) is one of the most popular instruments to short the broad market for trading or hedging purposes. However, its -3x daily leverage factor is a source of drift. It must be closely monitored to detect changes in the drift regime. This article explains what “drift” means, quantifies it in more than 20 leveraged ETFs, shows historical data on SPXU, and finally concludes that it is better to avoid it in current market conditions.
Why do leveraged ETFs drift?
Leveraged ETFs often underperform their underlying indexes leveraged by the same factor. This relative decay has several reasons: beta-slippage, roll yield, tracking errors, management fees. Roll yield may be prominent for commodity ETFs, but beta-slippage is usually the main source of decay. However, it doesn’t always result in decay. When an asset is trending with little volatility, a leveraged ETF can bring an excess return over the leveraged asset. You can click here to learn more about beta-slippage and examples.
Monthly and yearly drift watchlist
A few simple formulas and data definitions are necessary before going to the point. “Lev” is the leveraging factor. “Return” is the total return of an ETF (including dividends). “IndexReturn” is the total return of the underlying index, measured on a non-leveraged ETF (also with dividends). “ETFdrift” is the drift of the ETF relative to the leveraged index. “TradeDrift” is the drift relative to an equivalent position in the non-leveraged index. ETFdrift and TradeDrift are calculated as follows, where Abs is the absolute value operator.
ETFdrift = Return – (IndexReturn x Lev)
TradeDrift = ETFdrift / Abs(Lev.)
“Decay” is negative drift. “Month” stands for 21 trading days, “year” for 252 trading days.
A drift is a difference between 2 returns, so it can be below -100%.
*TVIX is an ETN with a higher counterparty risk than an ETF.
The best and worst drifts
The inverse leveraged gold miners ETF (DUST) has the worst monthly decay with a drift of -32% normalized to 1x the underlying index exposure. The underlying index (GDX) has lost 16%, and the theoretically inverse ETF is also in loss by 48%.
The highest positive monthly drift is in the leveraged energy ETF (ERX), with a normalized drift of almost +9% in a large loss.
The leveraged volatility ETN (TVIX) has the worst decay in 1 year with a normalized drift of -52%.
Leveraged ETFs in energy, long (ERX) and inverse (ERY), have the highest positive drifts in 1 year. Their drifts are both close to +23% normalized to 1x the underlying index exposure, in a large gain for ERY and a large loss for ERX.
SPXU: my warning is confirmed
SPXU has a positive drift on long periods, as reported in this article. However, I have issued a warning on 3/10 (and on 3/5 for subscribers) against SPXU and generally against all leveraged equity ETFs. Trading or hedging with SPXU has worked very well in the first week of the market meltdown (2/21 to 2/28): SPXU has gained 39.98%, significantly more than SPY return on the same period of time (-11.16%) multiplied by the leveraging ratio (-3). It is a 6.5% excess return due to beta-slippage. Since then, whipsaw has resulted in a heavy drag. In 1 month, SPY has lost 17.5% and SPXU has gained only 15.54%. It means shorting SPY was a better trade than buying SPXU, despite the leverage factor!
The 1-month and 12-month trade drifts of all long and inverse leveraged ETFs in major US stock indexes are negative now (the worst one is SDOW). The next chart plots the 1-year normalized drift of SPXU since it is calculable (1 year after inception). The average is about +1%.
SPXU 12-month drift is at the worst point in its history
SPXU may be a cheap instrument for hedging a portfolio in a bull market compared with other derivatives. However, its drift became negative last month and history tells it may suffer a significant decay as long as market daily returns stay volatile. In the current environment, it is better to use other hedging instruments. Once again, I extend this warning to all leveraged equity ETFs, long and inverse.
Quantitative Risk & Value (QRV) closely follows risk indicators to get clues about the outcome of this black swan. Besides our usual value and dividend stock lists, we have added a 5-stock mega-cap portfolio to weather the crisis, and some opportunities in closed-end funds resulting from volatility. Moreover, we plan to add a new stock list based on all-terrain quant models to help navigate the future market regime. Get started with a two-week free trial and see how QRV can improve your investing decisions.
Disclosure:I am/we are long TLT.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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