“We’ve Reached The Tipping Point” – Guggenheim’s Minerd Warns Virus Will Deflate The Everything Bubble
Last week, Guggenheim’s Global CIO Scott Minerd exclaimed that “the cognitive dissonance in the market is stunning,” as he reflected on the ever-rising stock prices (and collapsing credit spreads) he was seeing in the face of growing global fears of the virus’ spread.
And as the market began to waken from its dissonant slumber, he warned:
“This is not a buy-the-dip market. It is a don’t-catch-a-falling-knife market. “
As he detailed to CNBC the threat the coronavirus poses to corporate earnings and the U.S. economy if the pandemic spreads.
And now, after an unprecedented collapse in stock prices and Treasury yields, Minerd details his portfolio positioning with coronavirus on the brink of pandemic.
The impact of the coronavirus has made for a crazy couple of weeks in the financial markets. Now spreading beyond Italy into other parts of Europe, it is on the brink of a pandemic and investors, fearing a sharp slowdown in global growth, have reacted by taking out support for yields for the long bond and the 10-year Treasury note. Bonds are comfortably below 2 percent and the 10-year Treasury yield is hovering around 1.3 percent. Unlikely as it may seem, technical analysis now indicates a target yield on the 30-year bond at 1 percent and the 10-year note at 0.25 percent. Stocks are nearing correction territory, with more downside likely.
At the same time that long Treasury yields are making new historic lows, credit spreads, while widening, remain relatively tight. This does not make any sense given the fundamental backdrop which indicate that defaults will rise significantly, particularly in energy, airlines, retailing, and hospitality. Nevertheless, central bank liquidity continues to drive flows into bonds at a record pace. These flows are keeping spreads tight and, until there is an interruption of the inflows, credit spreads will be contained.
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