Stocks have taken a beating so far this week.  In the first two days of the trading week, the Dow lost about 2,000 points.

Luckily for Bernie Sanders, the coronavirus is taking most of the blame.  I have seen suggestions of the market pricing in a possible Sanders presidency, but most of the corporate media are blaming the virus more at this point.

Of course, there is almost always an excuse for stocks going down.  They call it a sell-off, but this isn’t quite accurate.  There are an equal number of shares bought and sold.  It’s just that the price of most stocks is lower.  Sellers are willing to sell for a lower price and buyers are less willing to buy at the old higher price.

I have no idea if this coronavirus has legs.  It may just be like any other version of the flu, except this has a special name and is getting special attention.  We don’t even know for sure if the death rate is higher than the regular flu.  There may be a lot of people who have contracted the virus that did not report it.

I suspect it will die out, especially as warmer weather hits, but I can’t be certain.  It has certainly impacted China to a great degree.  Maybe the action is in the reaction, as the Chinese government has effectively shut down business in a major city.

So I don’t think the virus is irrelevant, even when it comes to the economy.  At the same time, we don’t really know if the plunge in stocks was due primarily to the virus.  After all, stocks had been on a ridiculous run up.

The bigger question is whether this is a blip, or if it is the beginning of a recession.

Politics

I still expect Trump to blame falling stocks (should it continue) on the possibility of a Sanders presidency.

I am surprised the establishment, particularly the Democratic Party establishment, has not tried to pin blame on Bernie yet.  Maybe they figure that the Democrat voters cannot figure out that the market prices these things in, even if it is pointed out to them.  The Democrat voters obviously aren’t very smart when it comes to economics, so they may not be wrong on this point.

If stocks keep going down, Trump will have trouble on this one.  He has taken ownership of this economy, particularly the boom in stocks.  If he is going to take credit for the boom, he will have to take the blame for the bust, even though it is more a matter of previous Federal Reserve policy.

Trump will try to blame Jerome Powell. This isn’t altogether wrong, but it is for the wrong reasons.  Trump will say that he should have never raised interest rates.  The problem is the relatively easy money and low interest rates that took place for over a decade after the fall of 2008. The Fed did stop expanding its balance sheet in late 2014, but it still maintained ultra-low rates and has given an implicit guarantee that it will step in as needed at any time.

Trump will also try to blame Sanders, assuming he stays on track for the nomination.  This won’t be a tough sell to his base, but it will be a tough sell to most everyone else.

Stocks and Bonds

Long-term yields are hitting all-time lows.  The 10-year yield is now well below 1.5%.  The 30-year yield is below 2%.  The yield curve is once again inverted if you compare the 10-year yield to the 3-month yield.  It had already inverted in 2019.  The bond market is sending a strong signal for a recession.

Yields were already down before stocks plummeted this week.  There is a disconnect between stocks and bonds.  I would rather bet with the bond market, which says there is major trouble ahead.

When stocks fall, long-term yields go down.  But when stocks go up, yields have not been going up as much, if at all. This has been the pattern lately. Something is not right about this, and I am not betting on a spike in yields in the near future.  I think it will be stocks that will go down, and go down hard.  It is just a question of when, and whether this was the beginning.

Since there is not much fear of imminent significant price inflation, U.S. government bonds are seen as a safe haven.  When stocks fall, investors lock in long-term yields.

If you are considering refinancing your mortgage, I don’t know whether to tell you to do it now or wait for even lower rates.  I think it depends on your situation.  If you have a 4% rate and can reduce it to 3.25%, maybe it is better to wait, unless your lender is willing to do it for minimal closing costs.  If you have a 5% rate and can drop it to 3.25%, it is probably better to be safe and lock it in now.

Gold and Bitcoin

I like to see how the price of other assets react when stocks tumble as they just did. Gold went up like a rocket on Monday, but then it took a hard fall on Tuesday.

This tells me that Monday’s fall in stocks may really have been partially due to the fears of the virus.  Tuesday tells a different story.  Maybe stock prices were falling on Tuesday because of recession fears, as gold tends to perform poorly at the beginning of a recession.

Meanwhile, Bitcoin has sunk quite a bit this week, but I’m not sure that means anything.  It has been extremely volatile as usual. It had gotten back above $10,000 per bitcoin, but has since fallen.  I have no idea how Bitcoin will do in a recession, but I tend to think it will go down in terms of dollars.

Cash (and long-term government bonds) is still king in a recession.  People want money.  Most assets fall in price.

I think this week is a coming preview of the year ahead.