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March Madness or Spring Forward?

Super Tuesday was really Super with Fed reducing rates by 50 basis points and Biden becoming front-runner. The week ended with clarity on democratic nomination with race between Sanders and Biden with momentum clearly behind Biden. With 3 more contests in March, the race is entering into decisive phase - if Biden wins Michigan and Florida, it would be over for Sanders. That means one of the potential risk of Sanders presidency I mentioned in my blog about "Black Swan" would be over!
That leaves other major risk of Coronovirus spread. We already saw major increase of infections in South Korea, Italy and Iran. All these countries are using various mechanisms of quarantine, cancellation of public gatherings as well as workers staying home to stop the spread. There has been 100+ cases in USA and major companies like Google, Amazon, Facebook, Microsoft and Apple are asking their employees to work from home. They have also cancelled major events avoiding potential spread. These moves are prudent and timely since Chinese style quarantine is impossible (and un-warranted) in USA. Travel related sectors like airlines, cruise companies and even new age taxi companies like Uber/Lyft are taking major hit to their businesses. However now the fear had gone beyond just spread of Coronavirus, it has become a real threat to world economy entering into recession. Let's look at two possibilities how world could react which could have significant consequences.

March Madness:
Governments and companies could over-react to every new case reported by media and take drastic steps of curtailing the movement of humans even for perfectly healthy ones. This itself creates panic among citizens causing hoarding of goods (as seen during rush at Costco), not going out to cafes, games, movies or restaurants. The freeze in commerce could lead to closure of many small to medium businesses causing unemployment to spike leading to downward spiral and recession. Basically this could be real March Madness! (in fact the March Madness NCAA basketball games also could be impacted). All of this fear could lead to markets tumbling by another 10-20%. We already see this fear playing out in treasury markets - 10-year treasury yield falling nearly 50% in 2 weeks. 70 basis point on 10-year treasury is unheard of and never happened.

Spring Forward:
Governments, companies and citizens make informed calls based on facts. They take precautionary and prudent steps but don't cause un-necessary panic. Basically they go on with their usual lives with additional precaution of washing hands multiple times and avoiding contact with really sick people. Also informing authorities and taking steps of self quarentine if symptoms are seen. Yesterday I was at Italian restaurant and was glad to see people coming out and enjoying the evening with family and friends. Spring is near and hopefully warmer temperatures as well as steps taken till now will help in stopping the COVID-19 spread. Media also has responsibility of reporting but not causing panic. This would help economy get its footing and avoid recession.

The week reminded me of exact same week in 2009. In fact coincidently during financial crisis markets reached its bottom on exact day of March 9, 2009. On Monday March 9, 2020, it would be 11 years. It's foolish to even predict if markets are near bottom. However if you believe in long-term, it does not matter (as I wrote on March 15, 2009 Blog "Have Markets reached bottom - don't know and does not matter"). For next few weeks, it depends if world enters into March Madness or look to Spring Forward!

/Shyam




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