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Members of D.A. Davidson & Co.

Recession + Deflation = Real Panic

“What's worse: a steep recession or falling prices? Answer: A steep recession AND falling prices. That's is the underlying reality that is shaking markets to the core right now. There are three factors which are creating those conditions: the coronavirus, government-ordered shutdowns, and a war between Saudi Arabia and Russia over oil production, and they are all inter-connected. We have to be getting very close to a resolution of this conflict, because the level of panic is rapidly approaching an intolerable extreme. 


…Bottom line: fear, uncertainty and doubt have reached epic heights. The market cap of global equity markets has plunged by over $30 trillion in just the last month. Nearly every major equity market is down between by 30-40% year to date, and some prices are plunging and surging at double-digit daily rates. 


…On the bright side, however, rising real yields on TIPS suggest that the market is beginning to look to the future and beginning to expect that fiscal and monetary stimulus—combined with a cessation of the oil price wars—will lead to a much stronger economy tomorrow. There IS light at the end of this dismal tunnel! 


A marked steepening of the Treasury yield curve is also good news. The curve is steepening not because the Fed is easing, but because the market  sees better times ahead. And anyway, 10-yr yields are ONLY 1.25%, hardly a level to worry about. The Treasury has plenty of room to sell loads of bonds and at a very low cost."


(Recession + deflation = real panic dated March 18, 2020 by Scott Grannis, Chief Economist with Western Asset Management from 1979-2007)


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