Coronavirus: By the Old Gods and the New

The new gods are jealous gods and they were not pleased with the graven image of Trump’s name on stimulus checks. All glory must be to them.

The coronavirus event is too big for most,maybe any, to fully comprehend.  Becauseof this, the U.S. appears to have turned to a kind of magical thinking that canbest be described as religious. 

It is unsurprising that we have reacted in this way.  The same thing happened during the Black Death which saw the rise of all kinds of cults as well as the Flagellants, who challenged the Church.

When we can’t comprehend and control our world, it leaves us in a state of psychic unease.  To release this stress it helps us to give a name to the unknown.  We embody this name with the power to explain what we can’t (although others have to speak for it) and we beseech the name to resolve the unknowable in our favor.  This is wired into our DNA.

Right now, we can’t comprehend and control ourworld because of the coronavirus.  Wehave named the unknowable “Central Bank” and Jerome Powell speaks for it.

The religion of the Central Bank is afundamentalist religion, meaning that it is beyond reason.  Either you believe in what is written in theBeige Book, or you do not.

Central Bank disciples prove their faith bybuying the S&P 500 and other risk assets. (Blessed are the disciples for theirs is the kingdom of infinitemultiple expansion.)

Members of the Central Bank flock know why thestock market rises.  The stock marketrises because it pleases the Central Bank, which makes it so. 

The Cognitive Dissonance of the Infidel

The infidels don’t know why the stock marketgoes up.  They are doomed to the hell ofbuying later, at higher prices, and spend their days gnashing their teeth andmocking the Central Bank on Twitter.

Ironically, the infidels aren’tfundamentalists, but they do follow economic and market fundamentals, whichscream for lower prices on risk assets.

Their work is logical.  Most economic data are the worst in their series.  That means ever.  The data that aren’t the worst ever are close to it.  However, stock valuations are still at record highs.

The CAPE Ratio (a 10-year, inflation-adjustedprice/earnings ratio) has only been higher twice in the past 150 years: duringthe technology bubble and before the Crash of 1929.

Chart 1:  CAPE Ratio[1]

bantam inc jack duval multi-family office manhattan new york - cape ratio index

Another indicator is to compare the currentdecline to previous serious market corrections.

Chart 2:  S&P 500 Long-Term Log Price[2]

bantam inc jack duval multi-family office manhattan new york - LT SPX Chart

Chart 2, above, shows the monthly price of theS&P 500.  In the Tech Wreck, thedecline was 46 percent, in the Global Financial Crisis, 53 percent, but afterthe recent rally, it’s only down 10 percent.

One of these is unlike the others.  Why?

The Old Gods and the New

In a nod to Pascal (and Game of Thrones) ourcurrent religious fervor involves the old gods and the new.  The old gods are the government, the church,and the big firm.  All of theseinstitutions have fared poorly over the past 70 years and the coronavirus hasfurther eroded our faith in them.  Thenew gods are technology and the central banks.

I will be focusing on the central banks.

Jerome Powell is our Pope, the Fed Board ofGovernors our cardinals, and we obsess over their every utterance, parsing eachword for meaning and each variation of word from previous decrees for insightsinto what the gods have revealed to these high priests.

Jerome Powell has been hedging his bets byoffering sacrifices to the old gods by lowing interest rates, and the new godsby intoning 123 separate liquidity programs.[3]

Trump has offered sacrifices to the new gods bysending checks to everyone.  But the newgods are jealous gods and they were not pleased with the graven image of Trump’sname on stimulus checks.  All glory mustbe to them.

More assets will have to be purchased by theFed to remedy the name of this false god appearing on fiscal stimulus checks.  Indeed, the Fed have not given the new godstheir full measure.

Chart 3:  Federal Reserve Balance Sheet per Stock Market Dollar[4]

bantam inc jack duval multi-family office manhattan new york - federal reserve balance sheet v. US stock market capitalization

Chart 3, above, has two panes.  The top pane shows the Federal Reservebalance sheet (white line) and the U.S. stock market capitalization (yellowline).  The bottom pane is a ratio of theFed’s balance sheet to U.S. stock market capitalization.  This ratio can be interpreted as the amountof support the Fed are giving stocks.  (Iknow the Fed are not buying stocks, but the market reaction is the same as ifthey were.)

The Fed are way behind.  In the Global Financial Crisis("GFC") the Fed increased their balance sheet by three times as much(relative to U.S. stock market capitalization) as they have during thecoronavirus panic.

In the GFC, the ratio of Fed balance sheet toU.S. stock market capitalization increased by 269 percent.  During the coronavirus, it has only increasedby 89 percent.

This will not appease the new gods, for theyare good at math.

Their wrath will be seen in the declining stockmarket and, for the high priests looking at goat entrails dot plots,higher volatility.  This will increasethe ratio in Chart 3 (by reducing the denominator) and force the Fed to gorgeon more assets, which will also increase the ratio (by increasing thenumerator).

The new gods demand a fatted Fed, not anemaciated one.  The Fed must gorge themselves on all assets:

  • Treasury bills, notes, and bonds;
  • Investment grade corporate bonds;
  • Municipal bonds;
  • CLOs, and;
  • Junk bonds.

Some whisper that even the forbidden fruit may needto be devoured, the last debauchery (dare I even write it?): equity.

The Price

As is the way with the new gods, the sacrificeswill not be paid by those offering them, but by their children and theirchildren's children for generations to come.

As the old gods used to say, the iniquity ofthe fathers will be visited upon the third and fourth generations after them.[5]

There are no free lunches on Wall Street, not even for the new gods.  Countries burdened by huge debt loads don’t grow.  Just ask the Japanese, who now spend 25 percent of their annual budget on debt service, and consider one percent GDP growth a great year.

In order to keep current risk asset prices high, we are endowing every child and unborn child with maxed out Federal debt credit cards they will have to service.

Will it Work?

The new gods might be able to pull a rabbitfrom the hat.  The Central Bank couldsave every overleveraged:

  • Company;
  • State;
  • Municipality;
  • Pension, and;
  • Investor.

Chart 4:  S&P 500 v. Fed Balance Sheet/U.S. Market Capitalization Ratio[6]

bantam inc jack duval multi-family office manhattan new york - SPX v. Fed Balance Sheet to US Market Cap Ratio

Chart 4, above, plots the S&P 500 (blueline), and the Fed balance sheet/U.S. market cap ratio (the green line).  The S&P 500 goes up when the ratio goesup, and stalls when the ratio stalls.

If risk assets are to keep rising it will takemuch more appeasement of the new gods. By my reckoning, at least another doubling of the Fed balance sheet toaround $12 trillion.  Ironically, riskassets will have to decline to get that.

[1]      Cyclically Adjusted PE Ratio; Robert Shiller.  Available at:; Accessed May 1, 2020.

[2]      Source: Bloomberg

[3]      COVID-19 Financial Response Tracker.  Yale Program on Financial Stability.  Available at:;  Accessed April 28, 2020.

[4]      Source: Bloomberg.

[5]      Exodus 20:4. The Bible; New King James Version; Available at:;  Accessed May 1, 2020.

[6]      Source:  Bloomberg.


Jack Duval

Quod dolore qui. Consequuntur laborum molestias quia nemo sit sed quibusdam ut. Qui sit ipsam. Et

We honor your privacy. No spam.
No sharing of your information. One-click unsubscribe.
Thanks for subscribing!
Oops! Something went wrong while submitting the form.