Using Michaels and Stevenson of Sheffield baseline data summary we estimate that covid-19 peaks in NY State April 20 to April 25. The peak will result in 25% (“her Immunity”) of the NY State population being infected, 4,750,000. This will result in 190,000 cunulative hospitalization, with 20,000 to 30,000 dead. Already NYC seems to have peak, but 11 million of NY State populace has yet to do so.

The US will peak with 5 million to 8 million infected around May 11th 2020.

The sense the US covid 19 experience that a peak or plateau has been reached is not in synch with any other geography’s experience with covid 19 to date.

There has now been $3.1 trillion expansion to the Fed balance sheet - the largest such add in such a short period in history. Subsequently, the US Treasury 10 year is now at an extraordinarily low rate of .75% (at the time of this writing). And there is $4 trillion in fiscal stimulus or support to be coming from Congress. However, almost none of that spend will be for public investments and almost all of it for short terms releif payments, corporate bailouts and other transfer payments.

The Relationship Between Long Duration US Treasurys and US GDP (current dollars - NGDP)

The long US Treasury yield is equivalent (over time) to US GDP annual growth. The long duration US Treasury rate is anchored upon the expected Fed Funds over that tenor/time/maturity. And Fisher defines Fed Funds as instantaneous real GDP growth plus inflation (Fisher Effect). Keynes states that long duration US Treasury rates synch with US GDP growth as the Keynes Liquidity Preference has long US duration rates are at the level to induce savers to leave the Zero duration of cash and extend out taking duration risk. Right now the savings rate is climbing and at a high level as US Treasury rates, though higher than recent century lows, are unusually low.

The long US Treasury yield is determined by the monetary policy of the Federal Reserve - the Fed Funds rate set by the Federal Reserve over the comparable time period of the long US Treasury yield.

Risk Premium

The “risk premium”, the amount of yield required to compensate for extending one more year maturity is first derived. Most wrongly - including the Fed - see the risk premium as the yield increase per year in US Treasurys from 2 years to 10 years or longer. The 2 year maturity is too short as the Fed basically sets all rates under 3 year to 5 years. This report does not use the yield curve but “deconvexes” the curve well past 5 years adjusted using multiple inputs.

Another plotting of the risk premium, now over a shorter time period.

The risk premium is now about 12 basis points, after reacing a low of 8 basis points in Q3 2019. Any forward growth in NGDP implied by steepening risk premium is more than offset by increased volatility and the Fed “squashing” forward rates.

The Term Structure of Fed Funds/NGDP out to 7 Years

The first 2 years of the yield curve is efficient and is based on the market best assessment of Federal Reserve monetary policy setting of the Fed Funds rate. The risk premium derived is then used to build a Fed Funds yield curve out for 7 years. This is, according to Fisher, one and the same with NGDP.

The term structure of NGDP can be organized to show the progression of change from December 2018, when Powell announced that normalization ceased and that a steady ease would commence.

A close up of the Fed Funds term structure during the Trump administration where all the rise in furture Fed Funds anticipated, from the election to the March 2018 highs, has been undone so that now the term structure of anticipated Fed Funds is lower than the election and the term structure negatively sloped.

The term structure of US GDP at key dates:

The term structure of GDP currently and then for the last 8 months and then for November 2018 when Powell announced that the Fed would no longer normalize rates.

The term structure of GDP currently and then for the last 8 weeks.

With Term Structure of NGDP Growth, Expected GDP Level in 7 Years Derived

The term structure of GDP (NGDP) growth per year is used to derive a GDP level in 7 years.

The GDP level in 7 years is derived by compounding out the term structure of NGDP growth.

The 7 years forward GDP level is then compared to current GDP. This is the 7 year “basis” of GDP.

The “Basis” of 7 Years Forward GDP to Current GDP

The 7 Years forward GDP is netted against current GDP and a basis is calculated. This is the level (in billions here) of expected growth in GDP over the next 7 years.

The basis has dropped from peak level of 4.64 trillion, only recently achieved in 2018 to the current basis now at 0.09 trillion, a change of 4.55 trillion from peak to now.

Using Current GDP to Qualify the R2000

The below uses a current GDP level on a daily level. This is from a smoothed spline and disaggregated reported quarterly GDP with last GDP level coming from Federal Reserve “NowCasting” of GDP. )

The US Treasury Curve Flattens Jan 2019 to Q1 2020, But Then Steepened.

Most watch the yield curve from the 2 year. The curve from 2 years to 5 years is an administrated rate set by the Fed and does not reflect the US economy. The yield curve that does reflect the US economy is from the 5 years and this report uses the 20 years as there is a continuous time series - the 30 years stops in the 90s when the 30 years were no longer issued for a while.

The “Maturity” of R2000

The 7 Years Forward GDP Level Does Not Support Current R2000 Levels

A Significant Sell Off In R2000 Likely to Occur

The “Basis” of 7 Years Forward GDP to Current GDP

The 7 years forward GDP level difference to current GDP - the " GDP basis". The R2000 level prices an implicit growth rate of the US economy. It makes sense to compare the GDP basis to current R2000 levels. Note the forward GDP is in the then current dollars.

This suggests the Russel 2000 is currently close to being at fair value or even cheap in terms of forward GDP.

The Same Analysis Using 7 Year Forward GDP and the 7 Year GDP Basis to Qualify SP500

The above analysis is applied to the SP500. The ETF “SPY” is used for levels over time.

The level of the SP500 versus the R2000 is provided.

The SP500 level versus the R2000 level is at likely all times record wides, now almost 30% SP500 rich versus the R2000. The R2000 is perceived as a domestic US stock index, with the members not able to arrange tax avoidance strategies. The leading weights of the SP500 all are intent in using international tax avoidance schemes.

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From a Fisherian analysis, that the US Treasury rate curve and US GDP and US risky assets like R2000 or SP500 will, over time, be in synch.

It is probable that the Federal Reserve has evoked a “Japanification”, or a “Lost Decade”, similar to what Japan experienced from the 1990 crisis well in the 2008 crisis. This will mean that the Fed stimulus in response to covid-19 and that was not a classic Bagehot “discount window” solvency action lending freely against “good collateral”, will cap if not offset the fiscal policy, especialy the cash balances transferred directly via emergency small business loans and increased unemployment insurance payments.