The 2020 Wall Street Crash: A detailed narrative emerges

WASHINGTON – I think it’s fair to call the serious carnage that occurred in stocks and bonds in February exactly what it is: The 2020 Wall Street Crash. Or maybe “The Coronavirus Crash.” But contrary to popular opinion – a popular opinion largely driven by uninformed media and left-wing cheerleaders – the recent, and spreading, coronavirus outbreak was simply a catalyst. An excuse, if you will, for the serious technical damage the market sustained. **

Read the first article in this series: Stocks get pummeled again Friday. Plunge Protection Team intervenes

What can fairly be termed the current coronavirus epidemic is not an innocent bystander here. Travel, quarantines, and other measures meant to blunt its more rapid spread around the globe are, in themselves, badly damaging international trade, large international companies and commodity prices, which could bring us a flat, no-profit fiscal year at best. But developments that have long unfolded beneath the media’s topical surface have haunted our markets for quite some time. ZeroHedge recently posted a good, reasonably lay reader-friendly analysis issued by Goldman Sachs (trading symbol: GS). It examines in depth what’s been going on beneath the economic hood and how it created the conditions for last week’s Wall Street horror show. In fact, it puts a new, more complicated spin on the 2020 Wall Street Crash. What follows below is something of an executive summary, with directly quoted material from GS. To read the whole thing, just follow this link. ##### How the cross-asset selloff developed

(TP: I’ve been mostly concerned with common and preferred stocks in this column since I launched it back in 2010-2011. The GS analysis rightly points out, however, that last week’s massive selloff / correction also took down bonds and related defensive instruments. That’s what GS’ title refers to. Most investments of all kinds went to the slaughterhouse last week.)

*“A. Early January: Treasuries rallied and oil declined as institutional investors used these assets to reduce the risk of multi-asset portfolios to a global growth slowdown.*

*“B. Late January: China Equities began to decline in late January as COVID-19 cases increased in China.*

1. 1. 1. *arly February: Broad US equities rallied as individual investors bought ETFs and select Tech/Consumer stocks as the Iowa catalyst [the Iowa Democrat caucuses] passed.* 2. *onday-Wednesday of \[last\] week: US Equities, US Credit, Treasuries and Oil all declined in a correlated sell-off. This pushed Treasuries and Oil to even further extremes. US Health Care Equities sold off more than the SPX demonstrating that political risk was a significant driver of selling pressure."*

(TP: By political risk, GS is referring to investor fears that Bernie Sanders will be the Democrats’ presidential nominee. Should Sanders actually win the presidency, that win could quickly put the entire healthcare sector in serious jeopardy. PS: Edits / updates by me to GS material appear in square brackets. ) ##### The VIX again (GS text)

VIX as of COB Monday, March 2, 2020. Note the action at the right of this chart. The 2020 Wall Street Crash last week caused the VIX to leap into an "island formation," given the huge increase in volatility due to the selloff. Monday's monster rally was still not enough to reverse the selloff. Chart courtesy Stockcharts.com. Commentary by this columnist.

What we are watching now:

(TP: This is actually something of a disconnect, unless the Chinese aren’t telling us everything. Which, with a Communist government, is nearly always a given.) - - *reasuries and Oil prices were leading indicators heading into this broad equity decline; we will be closely watching these markets for evidence that investors are removing these hedges and positioning for a rebound in growth sentiment… Buying TLT [30-year bond index] puts appears attractive for investors that expect global growth sentiment to improve.*

Four Notable Derivatives Market Developments:

(TP: This section is a bit arcane for most investors, as most of us don’t have the time, the money, or the risk tolerance to engage in futures trading. It's a little like competing in a rodeo without any safety equipment. So let’s just look at the relevant high points.) ##### 1. SPX futures liquidity declined significantly on Thursday, reaching its lowest level since December 2018.

This supports the idea that the sell-off accelerated due to a lack of liquidity rather than an increase in fundamental investors selling. Single stock liquidity also declined...

(TP: To make a very long story short, both banking and US markets have experienced liquidity problems since at least last summer, and certainly since September 2019. What this means is that there simply isn’t enough money in the financial system to finance bank repos (repurchase agreements involving very short-term movements of funds) and leveraged equities and futures trading. I.e.,margin account trading, the market’s equivalent of buying a house with almost no money down. The Fed has regularly had to inject mass quantities of cash into this part of the financial system simply to assure business as usual.) 1. 2. ##### Systematic Options selling flows: Rolling of short put positions likely exacerbated SPX moves on Thursday.

(TP: Again, very complicated, and something I usually don’t mess with because it requires maximum investor attention all day, every day. Basically, a “put” is an option, which is, essentially, a bet that an underlying stock might tank. So strong was negative sentiment last week that as existing puts that had expired the previous Friday were “rolled,” i.e.,rewritten / reissued at a new, later expiration date to ensure that the negative bet on that underlying stock remained active. In other words, the investors, institutions and high-speed machines that did this remained intensely bearish.) 1. 3. ##### Investors have rushed to hedge single stocks, showing a fear of further sell-off acceleration.

(TP: If you want to hold a stock but defend it against likely near-term declines, you can either buy a put – which allows you to dump the stock on someone else at a stated price – or you can hedge positions with something like the double-short S&P 500 ETF, symbol SDS. This happened on a massive scale in recent weeks.) 4. ##### Healthcare stocks underperformed the SPX early this week showing that investor worries about political risk increased sharply following the results from Nevada on Saturday.

(TP: Yep, it’s Bernie and America’s Socialist Party once again. Most rich guys contribute massively to Democrats and almost not at all to the GOP. Then they get terrified about what the Democrats they’re funding are threatening to do to American businesses – as in “let’s nationalize them.” This has been an ongoing phenomenon for decades, and the logic behind this habit has always mystified me. At any rate, it’s Super Tuesday, so let’s see what happens....) ##### *xhibit 6: Options pricing suggests Health Care sentiment is at bearish extremes*

We believe that investors have reduced Health Care exposure and implemented hedges this week in anticipation of Super Tuesday as a catalyst and will see fewer near-term catalysts after we pass Super Tuesday. .. we believe a wide variety of potential outcomes are likely to lead to an improvement in sentiment for Health Care stocks.

(Note: I’ve clipped most of these exhibits and accompanying charts and verbiage. Check the original if you need more detail.) ##### (And now for a very key GS passage)

However, amid all this chaos, NorthmanTrader.com's Sven Henrich, highlights the real tragedy in all this...

...the real message will likely get lost in all this. Most likely the popular narrative will be to blame the coronavirus as the unforeseen event, nobody could have seen this coming, this was not something anyone could have prepared for.

*While that’s true on the surface it completely misses the larger point: The Fed, with it liquidity operations masked all the underlying issues in the markets over the past year. We had no earnings growth in 2019, we had multiple expansion. The bond market never confirmed the reflation trade, Gold had been rallying for months signaling something was amiss.** And now the Fed left itself vulnerable to not being able to deal with a real crisis and basically openly invited people to TINA chase stocks into high valuations.*

*The Fed gave no warning to investors, instead it cheerlead investors off the cliff. Even last week Fed officials defended valuations and saw nothing wrong with anything adding to the atmosphere of complacency.*

*And now everyone will blame the virus, but not the reckless chase into stocks into historic valuations to begin with.*

My Final Summary:

Nasty stuff has been going on underneath the hood for many months. This article only grazes the surface. The problem in this country is that the monetary and banking systems have become so complex that no one save for a few Deep Staters understands it anymore. Which is why it gets out of control, leading to things like it did last week during the 2020 Wall Street Crash. And also, lest we forget, the Great Recession. As for “no earnings growth” in 2019, I predicted this in 2018 as one result of the massive 2017 GOP tax cut which included considerable corporate tax relief. The big bottom line in most corporate financial reports mostly occurred in 2018 as the tax cuts took effect. I predicted that 2019 would be relatively flat simply because all the miracles in the world would not allow a similar rate of improvement as we experienced in 2018. I predicted we’d start to grow again in 2020, assuming the Socialists Democrats failed in their amateurish attempt to impeach Trump. But this is where the coronavirus will have its day. The worst effect of this growing epidemic / pandemic is happening right now as international travel, international commerce, international supply lines and anything else you can think of will remain largely in suspended animation for quite some time. We could experience 2 quarters of this. Meaning the remaining 2 quarters of FY 2020 will get spent just restoring equilibrium to the system. ##### Postponing growth?

So, given the 2020 Wall Street Crash, maybe I’d better postpone that return to US economic growth until 2021. Assuming all the other messes get cleaned up, that is How this will affect Election 2020 is anyone's guess right now. Maybe we'll reassess after Super Tuesday.

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This article is the second in a series. It was postponed and revised prior to publication due to market developments.

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*NEXT:*The Evil Party’s viral economic plot sickens

* Headline image: Did the coronavirus really caust the 2020 Wall Street Crash? Cartoon by Garrison, reproduced with permission and by arrangement with grrrgraphics.com.*