“One morning I shot an elephant in my pajamas. How he got into my pajamas I’ll never know.”

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


June 8, 2020 – DJIA = 27,110 – S&P 500 = 3,193 – Nasdaq = 9,814


“One morning I shot an elephant in my pajamas. How he got into my pajamas I’ll never know.”i


The stock market’s robust rebound continues.  In April and May, the S&P 500 completed its best two-month stretch since the last financial crisis in 2009.  Last week it added another 4.9% while the Dow Jones Industrial Average gained 6.8% and the Nasdaq Composite reached a new all-time high.

However, last week’s U.S. stock market party was tame when compared to the European markets.  The Euro Stoxx 50 (a continent-wide index) jumped 10.95%.  Here are the weekly performances of some individual countries – Austria +11.32%, Belgium +10.52%, France +10.7%, Germany +10.88%, Italy, +10.94%, and Spain +10.94%.  Greece was a laggard (only up 4.73% for the week) which proves that a sliver of logic remains – at least for now.

The European bourses were celebrating the announced €1.35 trillion ($1.52 trillion) ECB stimulus program.  This new package will focus on buying government and corporate bonds and will be added to the current €750 million plan.  Before this was released, forecasts called for a more than 8% contraction in European economies.

Critics have claimed that the ECB and European officials have not been aggressive enough in combating their economic and social challenges.  While they have not yet reached the size that have been implemented on this side of the Atlantic, European equities welcomed the effort.  Perhaps this is a new version of “Made in America”.

Of course, euphoric stock markets seem to contradict a backdrop of civil unrest and violence, deep social division, a record number of job losses, pandemic conditions, and a very uncertain economic path. The rally is partially based on optimism that the economy briskly bounces back, a vaccine can be developed, and our world returns to something resembling 2019.

Another important part of the stock market rebound is the role of global central banks.  The various multi trillion-dollar stimulus programs have provided increased liquidity which has eventually impacted stock prices.  A more cynical suggestion is that the Fed is directly supporting the stock market.

Despite the Fed’s mandated focus being restricted to inflation and employment, many have long suspected that it closely watches stock market prices.  The term ‘Plunge Protection Team’ or PPT is widely known among professional traders and refers to a department within the Fed whose alleged function is to buy S&P 500 futures contracts during times of intense selling and thus supporting the stock market.

Naturally, as the U.S. stock markets have rallied back to pre-shutdown levels, skeptics look for nefarious motives driving the move.  The tales encircling this latest rally is that the PPT has been active in the overnight trading sessions.

The S&P 500 futures essentially trade 24 hours a day beginning on Sunday evening (Monday morning in Asia) and stop when U.S. trading concludes on Friday afternoon.  During the overnight session (for the U.S.), trading volumes are lower than regular trading hours and it is here that some are accusing the PPT of interference.

Below are two charts showing the S&P 500’s move both during regular trading hours and during the overnight session.  The first shows the returns from the overnight session only in blue and the returns from regular trading hours in red.  The chart begins on April 1, 2020.  The difference is easily seen and the quote accompanying the chart states that the overnight trading is up 16.5% during this period while the regular (cash) trade time is up less than 1%.ii


The second chart is another version of this phenomenon but only covers from the beginning of May.[iii]  The point is that the majority of the price gains during the bounce from the March lows took place while the U.S. was snoozing.  Overall, the gains have been impressive and long-term investors have benefited as they are not concerned about when prices move higher as long as they move higher.


This overnight activity has resulted in a new investment fad which is called ‘pajama trading’.  This is trading the U.S. markets from home throughout the night presumably in our PJ’s.  Instead of getting comfy with a good book, households are slipping on their pajamas and logging into their investment accounts.

It’s difficult to determine what role (if any) the Fed has in the overnight price appreciation.  Given the lower trading volume levels during this time, they would likely get a bigger bang for their buck.  This leads to the question of what type of pajama does the Fed chairman wear?

As mentioned above, last week was very good for the stock markets.  Below is a table of the year-to-date returns as of June 5th.

While the stock markets have stabilized and bounced, other sectors of the capital markets remain in a much different state.  Bond yields, which plunged to record low levels, remain at absurd levels.  The 10-year Treasury note’s yield closed last week at 0.9% while the 30-year bond ended at 1.67%.  This is at odds with the confidence being reflected in the stock market as strong economic growth would typically be accompanied by higher interest rates.

Crude oil has enjoyed a bounce after trading in the single digits per barrel in April.  Last week West Texas Intermediate (WTI) was up 11% to $39.55 per barrel.  It is still down 35% year-to-date.  Natural gas was down 3.6% last week and is 18.5% lower for 2020.  There have been production cuts by energy producers as they struggle to reduce supply to match falling demand.

May employment data was reported last week and surprisingly showed job growth instead of expected losses.  While the unemployment rate jumped to 13.3% there were forecasts around the 20% level.  Unemployment benefits and stimulus checks help, but there will need to be sustained income in the form of paychecks to displaced individuals in order to help the economy.

There is much uncertainty about the path of reopening and rebuilding the economy.  The stock markets are expecting a smooth and healthy recovery.  Bonds and commodities are reflecting a different view.    The amount of turmoil and hostility expanding throughout the country makes economic forecasts educated guesses.  Unfortunately, beyond the demand for plywood, very little is clear.

[i] Groucho Marx
[ii] Hedge Fund Telemetry, May 28, 2020
[iii] Hedgeye, May 28, 2020


“Never Attempt to Win By Force What Can Be Won By Deception” -May 16th Newsletter


Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


May 18, 2020 – DJIA = 23,685 – S&P 500 = 2,863 – Nasdaq = 9,014


“Never Attempt to Win By Force What Can Be Won By Deception”i


The U.S. stock market’s breathtaking rally from the March lows shows the amount of faith the markets have in fiscal and monetary policies.  As our political and bureaucratic leaders announced larger and larger bailouts and stimulus programs, the stock market climbed higher.  As perception becomes reality, it’s as if the pandemic and economic shutdown never happened.

Of course, this confidence rises out of the fact that we did recover from the financial crisis of 2008 – 2009.  In our collective memories, there is an interconnection between Fed policies and the recovery.  In other words, our recollection is that the Fed saved the day and they’ll do it again.  Funny thing about our memory, it gets fuzzier with the passage of time.

Rewinding 10 years, the path out of the crisis was very unclear.  Initially, the Fed relied on their standard practices of cutting interest rates and printing money.  As that wasn’t effective, they turned to more aggressive programs which began a string of QE’s (quantitative easing) which involved buying treasury and mortgage backed bonds for the first time (as far as we know).

The QE policies, which were supposed to be temporary, turned into pesky weeds that kept growing.  Over several years the Fed continued to introduce new and bigger versions of QE with different names.  Wall Street referred to them as ‘QE’, ‘QE 2’, ‘QE 3’ and finally, realizing their permanence, ‘QE infinity’.  Obviously, they weren’t temporary.

Ben Bernanke and the Fed admitted at the time that these were radical monetary programs with unknown outcomes and consequences.  Further, our central bank leaders characterized themselves as “data dependent” which meant they were unsure of what they were doing.  In the end, the economy stabilized and improved, however, the effectiveness of the Fed is a topic of debate.   But, assisted by a masterful public relations effort, Ben Bernanke and global central banker were credited for saving the world.

Returning to the present, there is a confident belief that Jerome Powell, the Fed, and our elected leaders can do it again.  If they come up short, it won’t be from a lack of trying.  Washington, the Fed, and the Department of the Treasury have joined together to combat the impact of shutting down the economy.  The size of the proposed plans dwarf those previously used.

The Treasury recently announced that the Federal government will borrow a record $3 trillion just in the 2nd quarter.  This number will likely move higher throughout the year.  These figures are light years from any amount that we typically deal with and are almost impossible to comprehend.

Of course, these borrowings will be added to the current $22 trillion fiscal deficit (which has doubled in the past 10 years).  A combination of the media’s reluctance to report on these numbers as well as the talking heads telling us there is no other option has desensitized society to their significance.

Welcome to the world of Modern Monetary Theory.  This is an economic view that governments have an unlimited spending ability (kind of what we are doing now).  That’s right – they can spend whatever amount they want without repercussions.  An important part of the equation is the Federal Reserve because they will print the money to buy the Treasury bonds which supplies the spending.

According to MMT supporters (which includes Bernie Sanders), this apparent shell game does not do any economic damage.  The economy gets a steady boost from the federal government and everybody enjoys the benefits.  A presumed utopia.   In the case that inflation surprisingly rises, spending would be reduced until the supply and demand is rebalanced.  It seems, given the path that we are on, the MMT hypothesis could get put to the test.

In addition to anticipating an economic recovery, the stock market also gets excited on news of re-openings, vaccines, and, perversely, bad news (which means greater financial support from the Fed). Last week April retail sales tumbled 16.4% from March’s level.  Naturally, bad news was expected but this was far worse than the 12% drop that was forecast.

Stocks were lower last week but the selling was contained.  Below is a table of the year-to-date returns as of May 15th.


The U.S. stock markets have bounced over 25% from the March lows and are led by the Nasdaq which ended last week flat for 2020.  It’s interesting that the bounce seems to be uniquely American.  Other major developed and emerging stock markets have not had the rebounds that the U.S. has experienced.  In Europe, France is down 28% YTD, the UK is 23% lower, and Germany is down 21%.  Brazil is down 33%.  In Asia, Japan and Hong Kong are both 15% lower while India is down 24.6%

The U.S. is the largest economy in the world and our currency is used for almost all the global trade.  This may have a part in this development.  Nevertheless, the contrast of the U.S. stock market rebound vs. the rest of the world is noteworthy.  Below is a chart of the relative price of the U.S. stock market as compared to the other developed stock markets.

This ratio is the highest it has been in the last 70 years!  This shows the relative price of the U.S. markets being almost 2.5 times the level of the non-U.S. developed economy’s stock markets.  Not only is it at the greatest level, it is extremely out of place with the norm.  Currently it is approximately 3 standard deviations from the mean.

The two other high points were the Nifty 50 markets of the late 1960’s and the Dot Com bubble of 1990’s.  But even these examples are well below the current landscape.  These prior peaks were followed by drops in the U.S. markets and outperformance by international stocks.  Maybe it’s different this time, but this suggests that the international markets will outperform the U.S. at some point in the future.  Keep in mind, this outperformance could come in the form of international stocks declining less than a U.S. drop.

The U.S. stock markets seem to be anticipating a strong recovery and an economic landscape like 2019.  Given our culture’s entrepreneurial spirit, it is possible.  Our history has many examples of bouncing back and overcoming adversity.  However, there has been deep damage and the recovery could take longer than expected.

The Fed has announced mind numbing sized stimulus programs.  In addition, Powell and our political leaders have committed to do more if needed.  (Could buying stocks and negative interest rates be in their future?)  Investors believe in the collective abilities of our policy makers to be successful.  Let’s hope we haven’t overestimated their skills.

[i] Niccolo Machavelli


“Are you telling me that you built a time machine…out of a DeLorean?” -April 27th

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


April 27, 2020 – DJIA = 23,775 – S&P 500 = 2,836 – Nasdaq = 8,634


“Are you telling me that you built a time machine…out of a DeLorean?”


As the restlessness of limited social interaction expands to unbearable levels, memories of an unbounded life bring yearnings to a return to our unfettered ways.  Ahh, the good ole days – from just a couple of months ago!

As society looks to de-quarantine, there is a big wish to return to our pre-Covid-19 lifestyles.    But there are many unknowns.  What will be the ongoing health risks?  How do we address them?  What will be the impact on our society?  What will the economy look like?

Putting the science and medicine aside, there is a recognition that things will change.   Stopping by your favorite crowded watering hole for a happy hour cocktail will unleash condemnation.  Social distancing is here to stay.  The workplace will likely see a lot more online meetings as many will spend time working from home.

That is assuming that our workforce regains its previous strength.  We have had the lowest unemployment rate and the best job market in a generation.   But all the jobs created in the last 10 years have been lost in the weeks since the quarantine began.  Certainly, much of this will be temporary.  However, as not every business is going to reopen, higher unemployment could turn into an ongoing inconvenience.

Joblessness assures less money flowing into the economic system.  This will cause less buying by consumers.  In other words, there could be much lower demand for such things as gasoline, clothing, going out to dinner, travel, going to a concert or sporting event, a new car, vacations, and iPhones.

In the face of this risk and uncertainty, there are those who are working to turn our future into our past.  The Federal Reserve is doing everything in its power (and some things not within its power) to contain the economic damage from the shutdown.  They eagerly want to get the U.S. economy to return to something like January 2020.

The breadth and speed at which the Fed is throwing money at the system is unfathomable.  They have committed to buying a wider spectrum of the fixed income market than previous programs.  Newly targeted sectors are municipal and junk bonds. Furthermore, Chairman Jerome Powell has indicated that there will be more if needed.

The total amount of securities purchased and held by the Fed is expected to exceed $10 trillion.  To put this in perspective, this number was approximately $4 trillion at the start of 2020.  Prior to the financial crisis of 2008 – 2009, the Fed’s holdings totaled around $800 billion.  A $9 trillion increase in the involvement in our capital markets is a lot of manipulation.  Adam Smith please meet Karl Marx.

The Federal Reserve certainly has strong support.  Their fans reason that Fed’s QE programs after the last financial crisis worked so well (longest economic expansion in history) that an exponentially larger effort must be the answer.  And this time don’t spread the stimulus over several years, do it big and do it quick.  This, the optimists believe, will be the best and fastest way to get our economic future to go back in time.

The U.S. stock market did not waste any time second guessing our central bank and the various federal government assistant programs.  Stocks have had an amazing bounce from the March lows.  The S&P 500 had rebounded 23% by the end of last week while the Nasdaq has led the way during this rally and closed last week down less than 4% year-to-date.  Below is a table of the year-to-date returns as of April 24th.


While the U.S. stock market has the DeLorean cruising at 88 MPH, some other areas are stuck in 1955.  The bond and crude oil markets are not functioning properly.  Last week crude oil futures (May expiration) traded at negative prices. In other words, buyers of the contract not only acquired the contract they got paid (instead of having to pay for the contract).

The issue behind this anomaly is that there is too much oil and not enough storage.  Crude oil producers continue pumping oil while the demand for refined products has shut down.  At the current rates, forecasts are for the system to run out of available storage by mid-May.  Oil drillers can slow the rate that oil is pumped but complete closure is a lengthy and expensive process.  Unless the Fed starts buying it, crude will likely remain under pressure until demand returns.

For those expecting a quick and complete economic recovery, the treasury bond market is disagreeing.  The 10-year T-note yield closed last week at 0.56% while the 30-year T-bond ended with a yield of 1.17%.  Recognizing that the Fed is trying to suppress yields in this market, if the economy is to regain its strength in the upcoming quarters, treasury bond yields should be moving up.

International economies also conflict with the “V” shaped recovery theory.  Australia is in its first recession in 30 years.  Its main stocks market index fell 4.46% last week and is down 21.6% year-to-date.  Here are some other notable international stock markets’ YTD performances – Brazil -34.9%, France -26.5%, Germany -22%, and India -24.1%.

The Fed has committed a lot of ammunition to support the financial markets which they believe will help the economy make a quick and strong recovery.  If it doesn’t work, they claim they have more tools to use.  Stock market bulls are believers.  Critics point out they are using essentially the same policies that got us into this mess and that they are a big part of a flawed equation.  They predict much more damage.

U.S. stock markets have bounced sharply form the March lows.  At some point, when the economy reopens, pent up demand from a quarantined population will provide an economic jolt.  The hope is that it provides a sustainable return to an upward trajectory and not a short-lived celebration.

As much as we want to return to our pre-pandemic society, that’s not likely to happen – even if we had a time machine.  It is hard to predict the changes that will take place to our lives but things like social distancing and working from home could become normal conduct.  These cultural adjustments will take time and we will adapt.  Actually, there are some people where practicing social distancing would be a blessing.


Is It Safe? -April 13th Newsletter

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


April 13, 2020 – DJIA = 23,719 – S&P 500 = 2,789 – Nasdaq = 8,153

“Is It Safe?”

During the 1976 movie Marathon Man, Dr. Christian Szell (Laurence Olivier), asks the question “Is it safe?”  Szell is a Nazi war criminal who wants to know if he is still being pursued.   He asks the question to Thomas Levy (Dustin Hoffman) as he is torturing Levy.  Like everyone currently enduring a different torture, Levy doesn’t know the answer.

Is it safe?  Is it safe to leave the house?  Is it safe to go to a store?  Is it safe to go to work?  Is it safe to go to church?  President Trump, health officials, politicians, citizens, society, and of course, Wall Street want to know “Is it safe?”.

The world is searching for answers to situations that we have never encountered before.  How does the country function when so little is known about the cause of its closing?  What are the proper steps to ensure the safety of as many as possible?  What is the right balance of safety and civil liberties?

Here are some of the economic goings-on as we grope for solutions.  The entire country has been declared a federal disaster area.  The Cheesecake Factory restaurant chain announced in mid-March that it would not be paying April’s rent.  There are other chains and retailers who will not be making their April rent payment.

There has been an unprecedented amount of job losses.  Weekly jobless claims have totaled over 22 million people during the past four weeks with each week’s new claims exceeding 5 million.  These are astonishing numbers as the previous record 4-week total of jobless claims was 2.7 million (about 10% of the current run rate) which was in the fall of 1982.

Crude oil has plummeted to 20-year lows as demand disappears.  Entire industries are asking for assistance or a complete bailout.  Treasury bond yields have nosedived to unthinkable levels in a race to safety.  For the first time, the 3-month and 6-month Treasury bills recently showed negative yields.  Thankfully this only lasted for a brief time.

Everyone dislikes uncertainty and the markets especially detest it.  This partially explains the reaction when the news on Covid-19 started to break.  The stock market suffered its worst quarter in 12 years, and it was one of the fastest drawdowns in history.

Since then the stock markets have stabilized somewhat.  On the other hand, the credit, currency, and commodity markets have not.  Last week the stock market strongly believed that ‘it is safe’ as the S&P 500 was up 12% which was its best weekly gain since 1974.  The Dow Jones Industrial Average had its best week since the 1930’s which included a 1,600-point one day jump.  This happened in a 4-day trading week as the markets were closed for Good Friday.

Below is a table of the year-to-date returns as of April 9th.  Also included is last week’s gains for the major averages.


Is it safe?  As with Thomas Levy, we don’t know.  The bulls point to the news on Covid-19 getting less worse.  But perhaps more importantly, the Federal Reserve has been using bazookas to support the markets.  Last Thursday, as another horrible jobless claims report was announced, the Fed unveiled a new $2.3 trillion program for addition loans.  This is in addition to the previous trillion-dollar packages.

As part of this decision, the Fed also said it would be buying and supporting riskier debt than the previous efforts.  Junk bonds, states, and cities would be funded by the new program.  Many on Wall Street also viewed this as a wink and nod from the Fed and the Treasury Department.  In other words, don’t fret if this doesn’t work because we’ll keep printing money to throw at the problem.  For supporters of Bernie Sanders and Modern Monetary Theory, this is a real time version.

Since its birth in 1913, the Fed has had its critics.  Today is no different.  Current skeptics look at central bankers as both arsonists and firefighters.  Their policies have a hand in creating the economic and financial calamities that they eventually attempt to fix.

The Fed and other global central banks have suppressed the level of interest rates for the past decade.  This encouraged corporations to sell more debt at lower interest costs.  The companies then used the proceeds to buy their stock in the open market which provided a floor under their share price.  It clearly helped the stock market as well as anyone in top management whose compensation was tied to their stock price.  As a result, these companies don’t have the financial flexibility when a catastrophe happens.  As a result, they plead to the government for a bailout.

Part of the markets’ belief that ‘it is safe’ is the view that 2020 will be like 2008.  The Fed got us through that disaster so they should be able to steer us through this mess and everything will be back to what it was.  Maybe it’s as simple as that.  Besides the Fed has told us they’ll keep printing dollars and do whatever it takes.

While there are some parallels, there are some crucial differences.  The U.S. economy has never been shutdown to this level.  While this may lead to a huge amount of pent up demand that will be unleashed in the months ahead, there could be a large amount of demand destruction.  Permanently closed businesses, lost jobs, lower incomes, and higher inflation are economic possibilities.  A change in cultural behavior that offer new and different challenges would make 2020 vastly different from 2008.

In some respects, we are hopefully getting safer.  Concerning the financial and economic systems, the answer depends on one’s confidence in the Federal Reserve and our government leaders.  Those with confidence believe that Jerome Powell has the answers and the ability to address the problems.  Those without confidence believe the Fed is using the wrong or ineffective tools and that the consequences to their decisions will cause larger systemic damage.  The key question remains, “Is it Safe?”

“I’m Turning Japanese, I Think I’m Turning Japanese” -April 6th Newsletter

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


April 6, 2020 – DJIA = 21,052 – S&P 500 = 2,488 – Nasdaq = 7,373


“I’m Turning Japanese, I Think I’m Turning Japanese”i


Following World War II, the Allied forces occupied Japan until 1952.  After this the Japanese post-war economic miracle began and the recipient of the two atomic bombs recovered to become the world’s second largest economy.   The Land of the Rising Sun’s influence eventually reached across the globe in industries such as steel manufacturing, electronics, appliances, and automobiles.  “Made in Japan” took on a new meaning.

The Japanese system was widely held out as the new model of economic success.  Their management methods were studied, and books were written on how to duplicate their achievements.  As Japanese business and culture continued to spread throughout the world, it acquired high profile assets.  Within the U.S., Japanese entities bought iconic American landmarks such as the Empire State Building and Pebble Beach Golf Course.  It seemed that it was only a matter of time before Japan overtook the U.S and its declining rust belt to become the largest global economy.

This exhilarating climb in world stature was naturally reflected in Japan’s stock market.  The Nikkei 225 (the main Japanese stock market index) traded in the low 6,000’s in the early 1980’s.  It ended the decade within a whisper of 40,000.  The Nikkei had a string of 7 years of double-digit gains during the 1980’s.  This included a 23% gain in 1983, a 42% jump in 1986, and a 40% rise in 1988.  The Nikkei averaged a 20% annual advance for the 10 years of the decade. This was a remarkable and historic stock market move.

Unfortunately, markets don’t go up forever and the Japanese stock market was no exception.  The Nikkei’s record closing price was 38,957 on December 29, 1989.  Within a year (by December 1990), it has dropped 35% to below 22,000.  In 1992 it traded down to 14,300 which marked a 63% plunge in just 20 months.

The Nikkei spent much of years between 2000 and 2013 below 14,000.  In the 30 years since this collapse, the Nikkei has never gotten back above 28,000.  Books were written about Japan’s post World War II economic accomplishments.  Likewise, books have been written about Japan’s historic stock market bubble.

Below is a 40-year chart for the Nikkei 225.  It’s easy to see the miraculous 1980’s with its peak in 1989.  Of course, the plunge also stands out. Incredibly, Japanese stocks have spent 30 years in a wide range but have never approached the levels reached in the late 1980’s.

The inability for the stock market to breakout of this endless sideways slither is not because of a lack of efforts.  Japan’s government and central bank (the Bank of Japan) have thrown everything at the markets over past 30 years.  The Japanese have run large fiscal deficits, loosened monetary policy, lowered interest rates, and supported stocks.

They were among the first to try negative interest rates.  It has gotten so extreme that there have been many instances where Japanese government debt out to 10 years of maturity traded with a negative yield.

When the other programs didn’t appear to be working, the Bank of Japan turned directly to the stocks market.  The Bank of Japan (BOJ) began buying exchange traded funds (ETFs) in 2010.  Currently, the central bank’s holding in Japanese stocks is over ¥25 trillion and it is estimated that they are a major shareholder in over 40% of the Japan’s listed companies.

Despite the constant introduction of programs aimed at energizing the economy, Japan has little to show for it.  GDP (gross domestic product) growth has been less than 1% per year for much of the last decade.  While Japan remains the world’s 3rd largest economy, they have never recovered from the financial market bubble of the 1980’s.

This review of Japan’s struggles could provide help in looking at how the U.S. recovery will develop.  First, the U.S. will see much larger economic damage than what happened in the Great Depression.  Goldman Sachs and Morgan Stanley are estimating 24% and 30% drops respectively in 2nd quarter GDP.  To put this in perspective, there was nothing close to this type of contraction during the Great Depression.  The only other similar circumstance would be the Civil War but nobody kept these numbers then.

GDP wasn’t calculated in the 1860’s and there was no Federal Reserve.  And while some may yearn for such days, today’s landscape is much different.  The world’s central banks are very involved in the global economic system and the capital markets.

The Federal Reserve has distorted interest rates through their bond buying programs.  The intention was to stimulate the economy by providing liquidity to the credit markets.  Also, these bond purchases kept interest rates below levels where they would otherwise have been.  This process distorted the markets by setting one of most important economic elements (interest rates) in a manipulated structure.  The result is that a lot of mispriced debt was created.

This excess leverage becomes an exceptional burden when dealing with shocks such as the one caused by Covid-19.  Our political and monetary leaders’ response to this crisis is a case of Déjà vu.  The Fed has lowered interest rates to 0% and reinstituted bond buying programs.  Washington is setting up widespread industry bailouts, small business grants and loans, and expanded unemployment benefits.

The announced responses have been both quick as well as large.  The multi trillion-dollar packages rival the total of the various QEs (quantitative easing) that were implemented over many years.  There seems to be no limit to how far the Fed is prepared to go.

While the Fed has resisted negative interest rates (so far), the market chose to do it for them.  The 3-month and 6-month Treasury bills traded with negative yields recently.  But this was more of a flight to safety than a planned monetary effort.  Nevertheless, the Fed has included bond ETFs within the types of securities they will be purchasing.

Jerome Powell, the Fed chairman, has used the stock market as a barometer and, no doubt, that continues and has influenced this flurry of reactions.  With the S&P 500 having its worst quarter since 1938, the Fed wants to do all it can to stabilize equities. Here are the year-to-date returns for the major averages as of April 3rd.

U.S. policy makers are focused on doing everything possible to deal with this historic situation.  Many expect the recovery to result in an economy that acts like the one we had before this outbreak.  However, it is more likely that society’s behavior is changed and that our consumption habits are tempered.

Japanification is a term used to describe Japan’s deflationary bust following the collapse of the 1980’s economic bubble.  Low growth and struggling markets are the characteristics of the subsequent lost decades.  There is a debate over whether government policy made things better or worse.

The U.S. appears to be following a similar game plan as the Japanese.  An important question is will we see similar results?  Obviously, there are cultural differences that could alter our outcome from that which Japan experienced.  However, an economy dominated by government programs and management will dampen growth potential.  In this instance “Made in Japan” is not something you want to copy.

i. David Fenton, 1980


“Is There a Doctor in the House?” – March 20th Newsletter

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


March 16, 2020 – DJIA = 23,185 – S&P 500 = 2,711 – Nasdaq = 8,784

“Is There a Doctor in the House?”

March Madness has reached new levels of psychosis.  From basketball to baseball to Broadway, from ice rinks to restaurants, from Dublin to Disneyland, the world has stopped.  Welcome to a pandemic.  Beyond the crucial health issues, Covid-19 has also exposed some economic blotches.

These issues have been hiding in plain sight for some time.  Record amounts of corporate debt, burdensome levels of consumer obligations, and, of course, over $22 trillion of federal government debt with no plan to address it.  These are not shocking revelations – we’ve known about these issues for some time.  And while a growing global economy can look past such issues, shocks to financial markets have a way of changing everyone’s focus.

This is part of the reason that stocks had one of the worst weeks in history.  Stocks tumbled as the Dow Jones Industrial Average fell 10% (S&P 500 and Nasdaq Composite down more than 8% each).  Losses of this size are noteworthy enough but even more remarkable is that there were two stunning rallies within the week.

The Dow lost 2,000 points (7.79%) on Monday (March 9).  The next day the Dow rebounded over 1,100 points which happened in last couple of hours.  This was followed by a 1,400 point fall on Wednesday and another 2,000 point plunge on Thursday.  This second 2,000 point decline was the largest one day point loss in history.  On Friday the Dow jumped almost 2,000 points which was another unexpected and fast rally that took place within one hour!

In other words, the Dow’s five-day summary saw Monday fall 7.8%, Tuesday rallied 4.9% (in the last 2 hours), Wednesday dropped 5.8%, Thursday plummeted 10% and Friday jumped 9.3% (again in the last hour of trading).  Absolutely maddening.

During the week, the S&P 500 moved up or down by at least 4% for five consecutive days which is the longest stretch since 1929.  Twice within the week, stocks nosedived so fast that trading circuit breakers were triggered which halted trading for 15 minutes.  It was the first time this happened in 23 years.  These trading time-outs were intended and designed to restore calm to the exchanges.  Last week they appeared to magnify the panic.

The major stock averages have fallen from the record levels in February and show losses for 2020.  Here are the year-to-date numbers as of March 13th.


Uncertainty concerning the impact and potential damage (both health and economic) from the Coronavirus drove a lot of the selling.  The glass half full view is that the difficulties are only temporary and that stability plus a return to growth is around the corner.  Of course, the opposing view is that this we are entering unchartered waters with elevated risk of systemic problems.  The scarcity of definitive information on Covid-19 added to the media hysteria is resulting in increased the guessing and conjecture.

Of course, an encumbered system has a harder time overcoming such obstacles than a system with little or no debt.  And the current environment is a world that is awash with debt.  Below is a chart a chart of total U.S. debt as a percentage of GDP.



This chart measures debt as percentage of GDP.  As we know, GDP has been growing since the financial crisis in 2008 and 2009.  However, as the graph shows, the amount of systemwide debt has been growing at a much faster rate.  In other words, we are at record levels of debt and leverage.  Clearly this is an added burden as the markets deal with all of the uncertainty.

Global central banks have implemented emergency interest rate cuts to assist the financial system.  The Federal Reserve announced a cut in the overnight lending rate on Sunday night.  This moved the targeted rate from 1% – 1.25% to 0.0% – 0.25%.  Many Fed critics believe it was a panic move that was unnecessary.  Further they think that this decision used up their remaining ammunition.

These cuts have been largely ineffective.  In fact, some interest rates have unexpectedly moved up (Australia) after the central bank easing.  One cause of this could be financial players filling liquidity needs by selling what they can and, as the government bond markets have the most liquidity, this is what they sell.  This selling is causing pressure on bond prices and bond prices and yields move inversely.

The battle to contain and control the coronavirus is putting unprecedented stress on the economy and the financial system.  The world will overcome this crisis, but the forthcoming changes will be long lasting.  The resulting cultural landscape will be a much different one and will force many adjustments.  Unfortunately, the journey may not be near an end.