Saturday, March 21, 2020

In These Times of Coronavirus, Wash Your Face

With COVID-19 raging worldwide, we are told to wash our hands often, which in this case means very often.  We are also told not to touch our faces.  But who doesn't touch their face?  Do you wear glasses?  Does your cheek have a little itch?  Do you have to brush back the hair that fell over your eyes? 

Oddly, we aren't told to wash our faces.  But do it anyway, especially if you touched your face with a potentially tainted hand.  It won't provide absolute protection.  If you rub your eyes, the virus could get inside the eye and take root.  Same if you touch your lip and then run your tongue over it to keep it moist.  But if the virus is sitting on the surface of your skin after you adjusted your glasses, then face washing might get rid of it the same way hand washing gets the virus off the skin of your hand.  Give it a try.  Not washing your face is no solution.

Monday, March 9, 2020

The Coronavirus Crisis: How the Trump Administration is Pushing Stock Prices Down

The financial markets hate uncertainty.  When the picture isn't clear, stock prices get wobbly.  Before today, the coronavirus epidemic had already pushed stocks into a correction (i.e., a drop of 10% or more).  To make things worse, the Trump Administration has been trying to downplay the scope, risks and impact of the epidemic while federal health officials have endeavored to be realistic.  (See  This informational squabble cast doubt where doubt could do the most harm.

The coronavirus epidemic is the largest driving force in the stock market today.  The disease has slowed the world economy and sharply reduced demand for petroleum, which has hit oil prices hard.  Major oil producing nations, including the members of OPEC and Russia, tried to work out a way to prop up oil prices this past weekend but failed.  This morning, oil prices plummeted into the $30 to $35 range for West Texas Intermediate.  That implies gas prices around $1.50 to $1.60 per gallon, compared to current retail prices around $2.20 to $2.50 in many parts of the country. 

The cratering oil prices exerted fresh downward pressure on stock prices today, so much so that a stock market circuit breaker was triggered for the first time after the S&P 500 fell 7%.  Trading was halted for 15 minutes and then resumed, with stock prices remaining moribund. 

When the markets don't have adequate information, investors are cautious about the prices they'll pay.  When a flood of selling takes place because of inadequate information, buyers will be reluctant to step forward and invest, even when prices drop significantly.  Holders of stocks, faced with uncertainty over the future, will be inclined to sell even more rather than run the risk of additional losses.  Fear spreads and selling increases.  Had the Trump Administration been forthright about the coronavirus epidemic, stock prices would have been impacted, but investors would have been more confident about stepping in and buying.  By creating an informational fog, the Trump Administration exacerbated selling pressure and dampened buying interest.  This is no way to restore confidence in the market.

The Trump Administration is certainly not the only government that has been economical with candor concerning the coronavirus epidemic.  The combined governmental obfuscation has been precisely what stock prices don't need.  But there are few signs of unvarnished governmental veracity on the horizon.  Expect more nausea in the markets.

Wednesday, March 4, 2020

Donald Trump's Very Bad Day in the Stock Market

Today, March 4, President Trump had a very bad day in the stock market.  Yesterday, Super Tuesday for the Presidential primaries, Joe Biden won a series of contests among the Democrats and took the lead in delegates over his principal rival, Bernie Sanders.  Today, the Dow Jones Industrial Average rose almost 1,200 points in celebration. 

Since before his inauguration, Trump has touted a buoyant stock market as one of the hallmarks of his Presidency.  To him, it signaled approval, achievement and prosperity.  Whenever the market showed signs of queasiness, Trump was quick to pummel the Federal Reserve Board for interest rate cuts to prop up stocks.  Trump equated stocks with himself, and stocks seemed to reciprocate.

But not today.  Today, the market loved Joe Biden.  And Trump could only watch the love fest. The market no longer needs him.  It can bounce up with Biden in the White House.  The contest for the Democratic Presidential nomination is far from over.  Biden's lead over Sanders is modest, with close to two-thirds of the delegates yet to be chosen.  Many of the remaining primaries are in Western and Midwestern states, where the demographics may be more favorable to Sanders.  But if Biden can maintain his momentum and secure the nomination, Trump won't be able to count on the stock market for support.

Tuesday, March 3, 2020

Coronavirus and the Federal Reserve's Political Policy

It's when times are tough that you see what's really going on.  Last week, the stock market fell 11% because of fears over the economic impact of the coronavirus epidemic, dropping into a correction in a matter of days.  President Trump called loudly for a Fed interest rate cut.  Always ready for another government handout, Wall Streeters also chimed in for a rate cut.  Yesterday, rumors that the Fed and other central banks would act together pushed the Dow Jones Industrial Average up over 1200 points.

Early this morning, the Fed indicated it was considering accommodative action, but signaled that nothing was imminent.  However, a few hours later, the Fed announced a surprise 0.5% cut in short term interest rates.  The Dow, instead of responding positively, promptly fell almost 800 points.

What gives?  It's hard not to think the Fed gave in to political pressure.  A rate cut won't cure coronavirus.  Nor will it vaccinate humans against the disease.  It won't quarantine the virus or establish barriers to its spread.  People who are avoiding traveling, large gatherings, restaurants, concerts, sporting events, and other potential infection venues won't start spending and exposing themselves to the illness just because of a rate cut.  Even if stocks had risen, people wouldn't have started to engage in risky behavior.  Of course, things were only made worse because the market fell after the rate cut.  The market wanted a bigger welfare check.  The President, perhaps too lazy to do the work needed for a fiscal stimulus, promptly called for another immediate Fed rate cut.

But another immediate cut would only tell us that the epidemic is far worse than we thought, and that we'd best hunker down and isolate ourselves for a long time.  No travel, no restaurant meals, no public gatherings, no socializing, no contact with anyone we don't know and trust.  Romance would halt abruptly, as who'd want to meet new people in a time of epidemic?  Dating websites would collapse and singles bars would shutter. The President would be much better off committing billions of federal dollars to emergency medical research.  But he seems to have a problem with science, like he doesn't believe in it because it sometimes contradicts his political views.  So maybe the Fed will be bullied into another rate cut that will only instill even more alarm and panic.

There are powerful reasons for the historic independence of the Federal Reserve.  Most important among them is that an independent Fed can serve the public interest, not the short term scheming of politicians.  This means, among other things, that the long term vigor of the stock market is served by a rigorously independent Fed (see the story of Paul Volcker's career for further information).  Today's surprise rate cut gave the market and us discouraging news:  that the coronavirus crisis is much worse than we thought, that the Fed is becoming the sous chef of monetary policy, and that instead of focusing on medicine, the White House is focused on the political aspects of the coronavirus epidemic.  Now that the Fed is politicized, expect more poor policy and national distress.

Friday, February 28, 2020

Coronavirus and the Perils of Pricing Stocks for Perfection

The past week's tailspin of stocks into a correction is a reminder that the law of gravity has not been repealed in the financial world.  Until just recently, the high flying stock market, having steadily risen since 2009, was priced for perfection:  everything had to go well or gravity would assert itself.  In such circumstances, bad news can have an outsized effect.

Not surprisingly, the trigger for the downturn was a black swan--a stock market term for an unexpected event that is very bad for the market.  Typically, black swans are the triggering events for sudden market nosedives.  The 2008 bear market that coincided with the beginning of the Great Recession was triggered by losses hitting a poorly understood cobweb of linkages between and among the real estate, mortgage, bond and derivatives markets that concentrated real estate lending risks into the heart of the financial system.  Large mortgage losses were magnified into a tsunami of financial pain by daisy chains of supposedly offsetting derivatives contracts that wound up consolidating risk instead of dispersing it.

Coronavirus (or COVID-19) is today's black bird.  It calamitously began in the world's factory, China.  This meant that it would spread quickly because so much global commerce--and therefore global travel--would circulate through China.  Its high rate of transmission was not fully appreciated at first, and those giving early warning were treated as Cassandras instead of being taken seriously.  So the disease spread quickly and a massive shutdown of major parts of China was imposed.  Commerce slowed precipitously and corporate losses are piling up fast.  The World Health Organization has warned that the disease has become a very high risk.  In short, coronavirus is on the verge of becoming a pandemic, and the prognosis is guarded.

The stock market finally got the message, and had a hissy fit, dropping into a correction in five trading days.  More losses are likely in the near term future.  Opinion is divided on whether the current market is a buying opportunity or a septic facility to be avoided.  If you're set on putting money into this market, make sure it's money you won't need for at least ten years.  Medical science is getting a better understanding of COVID-19 by the day, and chances seem good that eventually we will learn to cope with the disease and contain its impact.  But when that day will be remains speculative, and you should speculate only with long term money that you can afford to lose.

Tuesday, January 14, 2020

The Vietnamization of America's Middle Eastern Wars

More and more, America's wars in the Middle East and Africa bear a disturbing resemblance to the Vietnam War.   The Afghanistan war papers revealed that the government hasn't been truthful about the U.S. military efforts in Afghanistan, and that there is no path to victory.  We earlier learned that the government's claim that Iraq had weapons of mass destruction--the justification used by the George W. Bush administration for invading Iraq in 2003--was also a lie.  These stories are reminiscent of the Pentagon Papers, which in 1969 revealed the Pentagon had lied to the American people about the Vietnam War, greatly inflating the prospects for victory while thousands of troops died for its lies.  But the Pentagon Papers didn't say much that surprised the troops who had fought in Vietnam.  They already knew the war was unwinnable.  Morale among U.S. troops in Vietnam was so bad that drug and alcohol use were rampant in the ranks, desertion was disturbingly frequent, and alleged fratricide in the form of killing officers an occasional measure supposedly taken to avoid seemingly pointless casualties and death. 

Now we are hearing that many members of the military oppose America's wars in the Middle East. and Perhaps some 50,000 or more troops have resisted service in these wars.
This military opposition to the war ominously changes the dynamics of the U.S. Middle Eastern wars.  When the troops themselves lose their sense of mission, the possibility for success evaporates.  Who wants to die to further Donald Trump's impulsive, strategy-light decisions? 

America's leadership can offer endless rationales for having some 80,000 U.S. troops in the Middle East and Africa.  But experience has taught that these rationales and $2 will buy a newspaper.  The government has no strategy for victory and our troops know it.  Refusing to acknowledge or deal with this reality didn't result in success in Vietnam, and it won't result in success now.  Even though America wisely stopped drafting men to into the military after the debacle of the Vietnam era, we can't expect that an all-volunteer military will blindly obey orders and die pointlessly.  Retreat and withdrawal are never easy.  But America's withdrawal from Vietnam, although deeply painful, also marked the beginning of a process of reconciliation, healing and growth.  America remained the world's most powerful nation and has enjoyed growth and prosperity since then. While there are many problems here that must be resolved, problems that may seem intractable at times, fighting unwinnable wars will only make things worse.  The wars in the Middle East and Africa have morphed into latter day Vietnam Wars.  Let's get out now.