Yesterday in my post “Now there are two Puts supporting the market as the Vaccine Put joins the Powell Put.
Those two bets–that the Federal Reserve will continue to flood the financial markets with cash and will increase the flow if the markets start to wobble and that news of a coronavirus vaccine will raise hopes that the U.S. economy will recover quickly rather than sinking into another recession–are powerful forces for believing that record stock prices will move up to new records over the next couple of months.
But what if something goes wrong with one or both of those Puts? It would be only two reasonable to think that stock prices would tumble if something removed one or both of these two props from U.S. equities.
As always in this market, it’s extremely important to stipulate the time period of any forecast. In this case, I’m looking at the next 6 months.
First, what could go wrong with the Powell Put.
There’s been a lot–but still not enough in my opinion–attention directed at what could go wrong with the Powell Put. The Federal Reserve, which only directly controls very short term interest rates, could lose control of interest rates for 2 years or longer if the overseas investors who provide the cash to finance the ever higher mountain of U.S. debt lose faith in our ability/willingness to pay back what we owe. Inflation could spiral out of control busting through the Fed’s 2% inflation target so robustly that the central bank just has to raise interest rates. (Okay, this is extremely unlikely but still possible.) Congress and the White House could continue their feckless ways and they could allow U.S. government spending authority to lapse with the end of the 2020 fiscal year on September 30, setting off yet another government shut down. Any one of the large number of simmering bad debt problems–credit cards or mortgages or corporate borrowing–could go from simmer to boil–at which point the financial markets discover that some class of debtors is even more leveraged than we now suspect.
All of these are real dangers–but most of them are dangers for a time beyond my 6-month horizon. The only one that I see possibly roiling the waters in that period is the strong possibility of another government budget crisis and shutdown in the weeks before the November election. Even that, though, isn’t likely produce a crisis that undermines faith in the Powell Put. After all, budget pratfalls and government shutdowns are now par for the course. I don’t think financial markets would panic at the onset of a new one.
Second, what could go wrong with the Vaccine Put.
This is almost the reverse of the Powell Put–all the danger is in the near term and falls within the window of this post.
The faith, right now, is that on a schedule that ranges from the White House hope for a vaccine by the November election to still optimistic estimates of the end of 2020 to more realistic but still hopeful estimates of sometime in 2021, drug companies will be able to create a safe and effective vaccine that will be widely distributed across the globe.
There are just so many things that could go wrong with this scenario. No safe and effective vaccine is developed and tested and the leading candidates all fail. This schedule posits the ability to accelerate vaccine development and approval by chopping years off the historic average of 10 to 15 years. (The fastest vaccine development on record is for the Ebola virus and that took 5 year.)
The efforts of the Trump administration to push a vaccine through approval this quickly has already raised worries that the U.S. Food & Drug Administration will compromise its standards. Significant numbers of people in the U.S. and global population already distrust the whole idea of vaccination. If doubts about this vaccine’s safety meet up with already existing vaccine opposition, we could see a situation where the uptake of the vaccine is insufficient to get the coronavirus pandemic under control.
Two of the leading candidates for a vaccine, those from Pfizer (PFE) and Moderna (MRNA), require refrigeration. This makes distribution in the world’s poorer economies extremely difficult.
And after spending a week and talking to four different walk-in clinics who were supposed to have this season’s flu vaccine and didn’t, I’ve got my doubts about the ability of the U.S. healthcare system to successfully distribute a vaccine and conduct a mass program of vaccinations.
I can easily see a scenario where the headlines announcing a “successful” vaccine give way to headlines that stress how many people aren’t taking the vaccine and problems in getting the vaccine to even high risk populations.
Those headlines would be enough to blow up the market’s faith in the Vaccine Put with serious negative consequences for the stock prices of companies that had been bid up on a faith that “normalcy was just around the corner.”
My next post: So is there any way to hedge against the risk that the Vaccine Put will blow up and push the market into turmoil?