“We’ve Reached The Tipping Point”—Guggenheim’s Minerd Warns Virus Will Deflate The Everything Bubble
The comments below are an edited and abridged synopsis of an article by Tyler Durden
Guggenheim’s Global CIO Scott Minerd said cognitive dissonance in the market is stunning, referring to the rising stock prices (and collapsing credit spreads) he sees in response to global fears about the coronavirus’s spread. “This is not a buy-the-dip market. It is a don’t-catch-a-falling-knife market,” he said.
He believes that the coronavirus poses a threat to corporate earnings and the US economy if the pandemic spreads.
COVID-19 has made for a crazy couple of weeks in the financial markets. Investors, fearing a slowdown in global growth, have reacted by taking out support for yields for the long bond and the 10-year Treasury note. Stocks are nearing correction territory, with more downside likely.
At the same time, credit spreads remain relatively tight. This makes no sense, given the fundamental backdrop that indicates defaults will rise significantly. Nevertheless, central bank liquidity continues to drive flows into bonds at a record pace. This is keeping spreads tight and, until there is an interruption of inflow, credit spreads will be contained.
In February, the overriding concern was that the Fed, by purchasing $60 billion in Treasury bills per month, was lifting asset values across the board in the fourth quarter and into the first. This form of QE was causing the ‘everything bubble,’ because virtually every sector was up over the past year.
Now the everything bubble for risk assets is in danger of deflating. The coronavirus is showing us the unpredictable path that an exogenous force can play in interrupting an economy that is already exhibiting many late-cycle symptoms.
Either the epidemic will be contained, or the world will slip into pandemic. From a US perspective, if their neighbors are infected, it will be an epidemic. If infections in the US begin rapidly transmitting, it will be a pandemic.
For now, the S&P 500 has support around 3,000, and the decline in the 10-year Treasury yield has stopped out at around 1.25%. Expect retracing in both markets as stocks and bonds stabilize, or even rise in price.
As Solomon said, “The wise man sees danger ahead and prepares himself.” There is certainly possible danger ahead; look for its cousin, opportunity, if this turns into a crisis. It may already be one.