This keeps going from bad to worse to even more worse. We cannot get around the simple fact that we lack the cornavirus testing capacity to learn the extent of the challenge in the U.S. and implement effective containment and mitigation strategies. That combined with the abject failure of leadership from the Trump administration to begin to develop a comprehensive humanitarian and economic plan to deal with the crisis increases the likelihood of widespread economic damage in the months ahead.

In a resounding vote of “no confidence” in response to President Donald Trump’s Tuesday night address to the nation,equity markets continued to slide on Wednesday with the S&P500 down 9.5%, the worst day since the 1987 crash. Stocks were only briefly supported by the New York Fed’s announcement of expanded market support to include $1.5 trillion of one- and three-month repo offerings across Wednesday and Thursday as well expanding the range of securities included in the monthly $60 billion reserve asset management program. The Fed has yet to cut interest rates again, but will almost certainly lower rates by the end of next week’s FOMC meeting. They should just take rates to zero and get it over with.

The Fed’s actions were intended to “address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak” according to the New York Fed. In other words, they are trying to ensure that the sell-off on Wall Street remains orderly in the sense that market functioning does not become impaired and lead to broad credit contractions. Preventing the turmoil from triggering a systemic crisis is the Fed’s number one goal right now. Eventually, easier policy will support demand more generally, but not until the crisis abates.

Distressingly, futures are red again tonight. It is not realistic to expect the Fed’s action will quickly reverse the slide in equities. The Fed can keep the financial markets functioning, but they can’t make investors buy what they don’t want to buy. Until market participants gain some confidence that they can see the other side of this crisis, they will remain risk averse.

Sadly, we are not yet seeing events that would bolster market confidence and apparently prices have yet to drop to a point where they incorporate all the possible bad news. The most pressing issue is that the virus is out in the wild and time is growing short in many nations to prevent illnesses from overrunning their health care systems as happened in Italy.

The rising acceptance of social distancing measures is a promising sign with corporations and sporting leagues taking the early and bold steps. State and local efforts are lagging. The slow decisions to close schools, for example, may prove disastrous in many communities. As Italy and Wuhan have proved, letting the problem fester only raises the overall costs of responding to the virus.

Markets may get some relief from fiscal policy, but I wouldn’t anticipate sustained gains just yet. The administration continues to dither while House Democrats push forward a fiscal policy response. Some combination of paid sick leave, increased unemployment benefits, Medicaid funding, and free testing appears to be in the works; we don’t yet know what will be acceptable to the Senate and the White House. This is likely to be only the initial package; I suspect (hope?) more direct cash aids to households will be coming.

Bottom Line: At the moment, market participants can’t see beyond the immediate crisis and continue react rationally to the flow of bad news. The Federal Reserve will do what it can to support markets and the economy – it’s the only game in town at the moment – but we all know it in the longer term it is playing a supporting role. The leading role falls to the fiscal authorities to craft a response to the humanitarian crisis and the economic cost. So far, the response has been woefully lacking. 

Markets are in motion overnight as we go into what promises to be another wild week. The coronavirus remains the focus of everyone’s attention, and for good reason. Unfortunately, the bad news seems likely to keep coming this week as testing ramps up in the U.S. In this environment, there seems to be little hope to expect stability in financial markets.

The blackout period ahead of next week’s FOMC meeting leaves us with no new planned guidance from the Federal Reserve. The expectation among market participants is that another big rate cut is coming. Strained credit markets will bring the Fed to the table more quickly. Given what is happening overnight, Monday morning the Fed could be pulled back into action.

The novel coronavirus Covid-19 is out in the wild; containment seems to be a long-lost hope. In the near term, we are hoping to suppress the pace of spread of the virus and limit the strain on medical resources. “Social distancing” will be the new norm for the next several weeks, the costs of which will fall most heavily on travel and tourism. For example, persons at most risk are now being advised to avoid large groups, long trips, and cruise ships. People will be encouraged (or ordered by employers) to work from home when possible. We will see more school closures. The University of Washington and Stanford University both closed campuses. This will likely be a theme this week

As testing kits become more available, the number of confirmed cases in the U.S. is likely to climb. This will be something of a double-edged sword. In the near-term, the rising numbers will fuel additional fear and uncertainty. But, over the longer-term, we can’t start thinking about the other side of this until we get a better handle on the size and scope of the challenge. 

Until we can see the other side, there will be a rational tendency to focus on worst case scenarios. That implies the theme of risk aversion will continue. Stock rallies will be short-lived and market participants will lean toward safe assets – as evidenced by the fall in 10 year treasury yields to 0.5% Sunday night.

Markets are not looking good Sunday evening. Stock futures are off sharply; equities might open down in more than 4% Monday morning. Oil prices have collapsed, down a staggering 30% as Saudi Arabia meets weak demand with a price war. Note that this has mixed effects on the U.S. economy. Lower oil prices are good for consumers but will hammer energy producing regions and highlight credit risk in the sector.

Market participants clearly expect considerable economic pain in the months ahead. To be sure, we don’t how much of the action right now is overshooting. Memories of the last financial crisis run very, very deep and as a consequence market participants could be prone to excessive panic. Still, even if excessive, such panic can have very real consequences if credit markets begin to freeze. The Fed needs to be ahead of worsening problems in credit markets to prevent panic from becoming a reality.

The Fed may have to act again before the next meeting, like Monday morning. Although last week some Fed officials like St. Louis Federal Reserve President James Bullard floated the idea that the Fed simply moved up the March rate hike, such comments shouldn’t be taken too seriously (the blackout period couldn’t come soon enough).

There is just too much uncertainty for the Fed to try to hold off on further easing and a strong argument for delivering more easing sooner than later. Given low inflation low and market expectation that it falls further, the low-risk, high-reward policy position argues in favor of additional easing.

Realistically, the Fed should be discussing just taking rates to zero and getting very far out ahead of the data but they tend not to react that quickly. Bond markets are telling them to do it. I don’t have a strong argument for gradualism in this environment. If you take rates to zero, you maximize the odds of getting ahead of the weakness. If you can’t get ahead of the weakness, you are going to zero anyways. In either case, once you get back to the zero bound, then you need to look at QE, yield curve control, forward guidance, liquidity provisions, etc.

It would help greatly if the Federal government could pull together a fiscal rescue package sooner than later. Or at least look like they have a grip on the evolving situation. Good luck with that; we were lucky to the meager funds of last week. Sad to say, the Federal Reserve remains the only game in town.

Is there any good news? Yes. The U.S. economy was entering this crisis with some momentum as evidenced by a number of indicators including the March employment report. In addition, manufacturing had been firming and the housing market was set to make further gains. On housing, the demographics are in our favor and the market will be given a boost by lower mortgage rates. Those lower rates are also driving a refinancing boom and thus are providing additional support to the economy. 

All of this will matter on the other side. But no one cares right now. Even if we know there is another side to the crisis, we still can’t fully judge the depth and length disruption ahead of us. Anyway you cut it, the near term is ugly.

Bottom Line: As testing ramps up in the U.S. this week, so too will the number of confirmed cases. With more confirmed cases will come more disruptions. Lacking any clarity, fear remains the dominant financial market theme. If the Fed learned anything from 2007-09, they need to go big and go fast if there are even hints of credit market disruptions. That should drag them into action sooner than later. More rate cuts and/or liquidity measures to maintain market functioning could come very soon if not Monday morning.

A couple of quick items tonight.

First, yesterday’s Bloomberg Opinion column:

Financial markets met Tuesday’s emergency interest-rate cut with a fresh wave of equity selling and bond buying. This probably wasn’t the reaction Federal Reserve Chair Jerome Powell was hoping for. Did the central bank just make things worse? This probably isn’t the right way to think about the current situation…

Second, St. Louis Federal Reserve President James Bullard tried to throw some cold water on rate cut expectations. Via Bloomberg:

“It’s unlikely we are going to have that much different of information when we get to the March meeting,” he said Wednesday. “I am not sure you should put a lot of weight on the March meeting right now.”

Bullard is saying that we got the March rate cut early and we should be happy about that and not expect something more. I wouldn’t take too much stock in Bullard. Clearly, it doesn’t take much imagination to see another wave of bad news coming down the pipeline in the next couple of weeks. The number of Covid-19 cases are certainly go to rise, there will be school and workplace closures, etc. Travel and tourism will certainly be impacted. That said, we should be on the watch for similar comments by other Fed speakers. I think such comments would be injudicious given the evolving situation.

Third, a refinancing boom is underway, also via Bloomberg:

A drop in interest rates in response to the coronavirus outbreak is adding urgency to a hiring spree across the mortgage industry.

Executives at four of the nation’s 15 biggest mortgage lenders, already gearing up for a busy 2020, anticipate hiring thousands of employees this year to keep up with what they expect to be a flood of demand for purchase loans and refinancings.

Refinancing will help support consumption and lower rates will support the housing market in general. A bit of economic good news amongst the gloom.

That’s it for tonight!

Despite the Federal Reserve’s 50 basis point emergency rate cut, equities could not build on Monday’s rally and instead crumbled. The allure of safe assets could not be beat as the 10-year treasury yield slipped below 1%. Financial markets will continue to struggle until market participants gain some clarity on the economic implications of the outlook. Fed rate cuts will be a necessity during this period, but won’t be a magic bullet. This crisis will take some time to work through. The less competent the federal response, the more time it will take.

The Fed’s statement was short and to the point. Policy makers decided that the coronavirus presented “evolving risks to economic activity” and justified a rate cut despite strong economic fundamentals. In the also-short press conference, Chairman Jerome Powell noted supply chain and travel-related challenges. The spread of the virus in U.S. cities made further disruptions more likely. A rapid response was judged appropriate.

The Fed’s rapid response reveals the extent of its evolution over the past year. Powell’s Fed has a heightened concerned about the risk of recession. With inflation still low – and too low in the eyes of some Fed officials – the Fed sees little downside risk to acting early and substantial potential upside reward. If early action short-circuits the development of recessionary dynamics, then they may squeeze through this episode without returning to the zero bound.

Financial market participants did not appear to find the Fed’s actions calming. Still, the action may not have reflected disappointment with the Fed. It is reasonable to believe that Monday’s rally reflected the anticipation of the Fed rate cut and with that cut in hand market participants re-positioned and shifted focus back on the economic implications of the coronavirus.

I suspect we will see that story play out more than once in the days ahead. We still seem to be a long way from having any clarity on the extent of the crisis. And the clarity we are getting so far isn’t all that encouraging. It appears that federal authorities bumbled the initial response with limited testing activity. The virus may have been circulating for weeks, undetected because no one was looking for it. Consequently, containment will be more difficult than would be the case with early and aggressive testing.

Considering the unknowns, market participants will tend to focus on the more severe of the potential outcomes. The sharp drop now being reported in Chinese manufacturing activity is not so much a surprise given the extent of the closures but still helps bring the downside into focus. Is that what is in store for the U.S.? We don’t know. What we do know is that incoming news is likely to be more depressing than not.

Given the lack of clarity, a risk-on environment will not come on the back of rate cuts alone. Easier policy is needed to support financial market function and create the accommodation that will support a return to activity when the crisis ends. But it might not diminish risk aversion in the near term. For the time being, we may be a in a one-step forward, twos-steps back phase of market reactions to news and policy.

Eventually, that will shift back to two-steps forward, one-step back. There will be another side to this crisis. We just can’t see it yet. If you are looking for some optimism, Bloomberg reports that rising pollution levels in China indicate the country is getting back to work.

Bottom Line: The Fed will deliver more rate cuts in the weeks ahead. Just because they are not met with immediate market gains doesn’t mean they aren’t necessary or won’t be effective in supporting the economy. In the near-term, the negative news flow and lack of clarity on the outlook will tend to depress risk appetites and thus market participants may not react as jubilantly to Fed policy moves as they might in a different economic environment.

Equity futures fluctuated overnight as market participants continue to grapple with the implications of the spreading Covid-19 virus and the anticipated policy responses.Unabated selling will eventually be met with Federal Reserve rate cuts. Given that we are in uncharted territory, we don’t know when those rate cuts will come. The Fed would prefer to hold off until the March meeting in just over two weeks, but a rate cut could come as early as Monday morning.

With new cases appearing in multiple U.S. states, it appears the community spread of the virus is underway. It is possible that it has already been spreading in Washington state for as long as six weeks. With testing ramping up this week, we should expect more confirmed cases. And, sadly, more fatalities attributed to the virus.

It appears that we are going to have to learn to live with this new virus and take rational measures to slow its spread. Schools will be closed, people will be asked to work from home if possible, travel will be curtailed, etc. We can expect more severe reactions and restrictions early on in the process as we assess the relative costs and benefit of various responses. Given the unknown costs, we should expect institutions to err on the side of overreaction for the time being.

The Fed is poised to cut rates, a stance made clear by last Friday’s statement. The ultimate amount of easing depends obviously on the economic outlook. Clearly the greater the extent of the disruption to normal life, the greater the economic cost and the greater the magnitude of the Fed’s action. Economists in the U.S. are busy slashing forecasts in anticipation that activity will slow substantially in the next six months. Goldman Sachs now anticipates 0% and 1% growth in Q2 and Q3, respectively. They also expect a 50bp Fed rate cut in March and another 50bp later in the year

A full percentage point of rate cuts is not unreasonable estimate, but given the rush to re-evaluate the outlook in light of last week’s market meltdown, they may prove consistent with only an overly pessimistic outlook.We just don’t know what portion, if any, of recent market moves are excessive because we don’t know yet how much the economic impact of the virus resembles that of a natural disaster. That said, there also exists the scenario in which more recessionary type-dynamics develop and push the Fed to take rates back to zero.

The question at this point is the timing and magnitude. The timing could be anytime between now and the March 17-18 FOMC meeting; it seems evident that the Fed could easily be forced by financial markets to act sooner – like this morning – rather than later.

I can see where the Fed will continue to hesitate to cut interest rates; they still may want to wait until there regularly scheduled meeting rather than appearing to panic and rush into a rate cut. In addition, central bankers may at least initially focus on the supply-side impact and be concerned that they don’t want to waste a policy response more suited for a demand-side shock. I don’t believe the Fed could use this argument indefinitely to avoid a rate cut, but in the near-term it might induce the Fed inclined to focus on credit market implications more directly if possible. It may be that the Fed’s first response is directed toward market functioning such as expanded repo operations.

Bottom Line: Lots of moving pieces here. The Fed now seems likely to cut rates at least 25bp by the middle of the month. As of tonight, the odds are tilted toward 50bp and sooner. I don’t know that we have a lot of idea about what the Fed is thinking exactly. Powell and his colleagues have really given us very little to work with. The reasonable assumption is that a rate cut is the first option We should consider the possibility that another credit market-specific tool is involved.

Short reminder:

I have seen considerable commentary that the Fed can’t do anything because the virus is a supply-shock and the Fed only has demand-side tools. This ignores that the nature of this supply-side shock produces a demand-side shock at agents delay spending or if the flow of credit from financial markets becomes impair. Hence the Fed does have a role to play here.

Worth reading is this short paper by Christina D. Romer and David H. Romer:

It is widely agreed that this record is far from perfect, and that there have been some major failures of monetary policy over the past century…In this paper, we present evidence that an unduly pessimistic view of what monetary policy can accomplish has been a more important source of policy errors and poor outcomes over the history of the Federal Reserve.

Paper here.

President Donald Trump couldn’t calm flailing markets. Now it’s Federal Reserve Chair Jerome Powell’s chance to give it a try.

The situation continued to worsen yesterday as virus-related concerns rocked financial markets again, plunging the S&P500 back to levels of last October. The market response is not unreasonable. The magnitude, both in terms of human and economic costs, of an outbreak in the U.S. remains very uncertain. It is not a surprise that market participants should fall into the “sell first, ask questions later” mode.

The Fed has a clear role to play in the current situation. This is not just about a supply-side shock. This is now about preventing the soft-patch on the demand-side of the economy from becoming a recession. That requires maintaining confidence among households. And, like or not, that requires putting a circuit breaker on Wall Street.

The Fed can’t let runaway selling on Wall Street like we have seen this week continue and shake confidence on Main Street. Eventually they have to step in and act.They don’t have to cut rates now, or even cut rates in March. What they need to do is make clear they are prepared to cut rates much as Federal Reserve Chair Jerome Powell did last June with his “act as appropriate to sustain the expansion” comments. The timing and the tone are what matters in these situations.

If Fed speakers today continue to come out with the unified message we have recently seen from central bankers across the globe – essentially, “it’s too early to say anything” – they risk aggravating the selling on Wall Street and worsening the public’s confidence in the economy.Instead, they need to come out with a much more dovish tone, signaling that they clearly see what is happening and are prepared to act. That will buy time for market fears to be realized or not before the Fed needs to make a decision on rate cuts.

Better yet, someone like Vice Chair Richard Clarida, or Powell himself, should give step in front of the cameras unexpectedly and offer a soothing message. That message would be heard.

I understand why the Fed is trying to avoid encouraging the idea that a rate cut is coming. The current fears may turn out to be overblown; there may be minimal or very limited economic disruption. It might be a hard couple of months of weak activity, but it will be followed by return to normalcy, much like is typically experienced after a natural disaster.

But current fears could be more or less justified. The U.S. might be headed for recession. Consider the example of 1991. The U.S. economy stumbled into 1991 weakened by tighter monetary policy and the savings and loans crisis. It only took one shock to end the expansion, and that shock was the war in Iraq and the associated spike in oil prices. You might think of that as a purely supply-side shock, but household spending suddenly retreated, tipping the economy into recession.

The current situation is similar. The economy entered the year on a soft note, but looked to be recovering. The virus outbreak is a supply-side shock like an oil price spike, but also produces demand-side weakness.

If households just delay spending for a few weeks as they assess the level of threat and then life reverts to normal, we will see only a soft-patch in the data. The longer consumers stay on the sidelines, the higher the probability that the negative impacts on the economy become self-reinforcing, and the greater the possibility that the soft-patch becomes a recession. A continuing panic on Wall Street only makes the latter outcome more likely.

The Fed still has a job to do. That means maintaining confidence in the economy, which in turn means saving Wall Street from its own worst fears.

I will start with the good news.

Just kidding. There is no good news.

Equity markets across the globe continued to slide as market participants react to the spread of the Covid-19 coronavirus. The S&P500 ended the day down just 0.38%, but realistically, further declines should be expected.Sadly, recent declines only take the S&P500 back down to average in my simple but so far fairly reliable tracking model:

In other words, it hasn’t really gotten interesting yet. The tape bombs are not going to stop anytime soon at this point. The virus looks like it is out in the wild in the U.S. now that we have a case in Northern California with no apparent direct connection to the outbreak. To be sure, this had already seemed inevitable earlier this week. The fact that many patients have no to mild symptoms means that it may have been circulating for many days yet been undetected. It seems likely that we will hear more such stories in the weeks ahead.

We are now heading into the unknown. Much now depends on how severe the outbreaks become and how much they disrupt the ordinary business of life. This in turn depends on the effectiveness of public health authorities to both manage the outbreak and maintain a sense of calm and normalcy.

Early signs are not good. Equity futures fell in the hours after President Donald Trump’s press conference today. Not exactly a vote of confidence. Market participants should recognize the danger of a government run by people who don’t believe in government. Such a government may do little short-run harm in the absence of a crisis. During a crisis, however, the incompetence of such a government becomes all too evident.

The best-case scenario is that a few hotspots of contagion appear, they are quickly isolated with minimal disruption and then warmer weather arrives and with it the natural dissipation of seasonally illnesses. On the other end of the spectrum is a more severe outbreak and the associated disruptions in activity as witnessed in China.

Hope for the best, plan for the worst. At the moment, market participants are beginning to plan for the worst.

U.S. treasury rates have descended as market participants prod the Fed to take action in the form of easier policy. The short end of the yield curve has inverted but the longer end has yet to follow suit:

My interpretation of this pattern is that market participants still believe the Fed can prevent a recession with two to three rate cuts. The Fed, however, is not inclined to move quickly. Nor are other central banks. The Bank of Korea, for instance, surprised by holding rates constant despite the growing number of cases in the nation. It seems that central banks are largely trying to treat the threat of the virus as if they would any other natural disaster. They may be able to do so if concerns soon ease. The longer the virus disrupts activity, however, the less tenable that position will be.

Bottom Line: For the time being, the Covid-19 virus will dominate headlines. It will depress activity in the short run. We don’t know how long the short-run will last, nor do we know what trip wires we may hit along the way.

P.S. New home sales climbed in January, reaching their highest level since 2007. There remains some fundamental momentum in this economy, but that momentum will remain hidden under the virus news in the near-term.

Still uncertain about the magnitude or persistence of any negative economic shock, the Fed resists a coronavirus-induced rate cut. Unless credit markets stumble more severely, it will try to delay a cut until justified by the data.There will be skeptics about the efficacy of a rate cut. Don’t make the mistake of thinking that a Fed rate cut won’t have a positive impact on the economy. Fed inaction would only worsen the outlook.

In the wake of this week’s turmoil market participants are now pricing in at least two rate cuts for this year. A wide range of Federal Reserve officials, however, have pushed back on the idea that they are poised to cut interest rates this year. The latest was Fed Vice Chair Richard Clarida, who today said “…it is still too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook”

This is completely unsurprising. Fed officials are naturally inclined to embrace the “temporary shock” scenario.The Fed positioned itself to leave rates unchanged for the year given that the economy had regained its footing. The Fed will worry that the fears evident in the markets this week will ebb as quickly as they swelled, leaving them in a position of having cut rates unnecessarily and just ahead of a large inventory correction phase for the global economy. In addition, the Fed may view the stock market declines as expected given concerns that asset prices had become elevated.

Consequently, we are in a familiar place. Market participants and the Fed are on a collision course. Typically, market participants win that game. It often takes time for the Fed to get there, but once they do, they move quickly. They will move more quickly if they perceive that credit markets are at risk of tightening substantially, so watch that space. Otherwise, they will be watching the data flow.

Realistically, the Fed will eventually need to fall in line with market expectations.The ongoing anxiety about the virus and its potential impacts looks likely to continue for the time being and the longer it continues, the greater the negative impact on activity. Absent a rapid reversal of recent events, Fed will eventually need to provide some cushion for markets and the economy.

But would a Fed rate cut even do any good? After all, the primary concern is the potential disruption to the supply side of the economy. The Fed can’t restart factories. The Fed can’t make a vaccine. And on the demand side, the Fed can’t make people spend if they are too scared to leave their homes.

I don’t believe this would be a dominant view holding back Fed action should the economy or markets stumble meaningfully.The Fed can certainly help prevent the financial sector from choking off the economy even further. Falling long term yields suggest the neutral rate of interest, at least for the near term, is falling. To just hold financial accommodation neutral, the Fed needs to react by reducing policy rates. Failure to do so would lead to tighter financial conditions and worsen any coronavirus induced downturn.

In addition, the Fed can short-circuit panic on Wall Street and in turn prevent that panic from spreading to Main Street.If the populace becomes more concerned about the potential impacts of the virus, those concerns would only be heightened by crashing markets or a sharp contraction of credit. Fed easing to support financial markets would be essential to prevent such a chain of events.

Bottom Line: All told, we are in a familiar place. The Fed wants more information before acting, while market participants have already decided action will be forthcoming. The Fed still hopes there is a reasonable chance that market participants reverse their bets before too long and hence is prepared to bide its time. Be prepared that the Fed will likely continue to shrug off market concerns without seeing a more imminent threat but that per usual when they move, they will move quickly. Also be prepared for easing to have a positive impact should the Fed decide it is needed.

I have been a bit under the radar lately. Largely due to an excess of University-related work and partly because conditions had turned somewhat boring, being neither boom nor bust. Fairly unexciting near trend growth.

Conditions are no longer boring.

Still, I hesitate to comment. I am not an epidemiologist. I am also not prone to panic, a trait which doesn’t match well with the current mood. I am not inclined to play the game of ramping up the hysteria. Moreover, this is a low-information environment, making any comment risky and vulnerable to being overtaken by events.

All that said, this is how I am thinking about the current state of play:

The basic situation can be quickly summarized. Efforts to contain the virus have substantially disrupted the Chinese economy. This disruption quickly spills into the global economy due to the reliance on Chinese manufacturing in the global supply chain. Containment efforts also severely impacts the travel and tourism industry. The longer the containment continues, the more damage the global economy will suffer.

In theory that damage should be largely temporary. Once containment ends – presumably with the threat of contagion ebbs – we would expect a substantial push to rebuild inventories. That gives rise to the V-shaped recovery scenarios.

This story works reasonably well if the virus can be contained. Worrisomely, this may not be the case. Outbreaks in Italy, Iran, and South Korea, for example, reveal it spreading; the Italian situation is especially worrisome given they authorities reportedly can’t track down the original source of the local infection. The World Health Organization already worries that the virus can no longer be contained.

If containment fails, that failure would likely be attributed to an initially slow response in China and the nature of the disease. According to reports, for many the virus has mild symptoms or the carrier may be asymptomatic. The virus could already be spread much farther than we realize. On the upside though, the mortality rate might then be much lower.

I am happy to be wrong on this (remember, not an epidemiologist), but I am working on the assumption that this virus is now out in the wild and can no longer be contained. If so, we will need to adapt to it as we have to other seasonal illnesses.

While that may be my base case, that isn’t necessarily yet the base case of public health authorities. As long as the focus remains on containment, and the virus continues to spread, we should expect further disruptions to the global economy. Containment – travel restrictions, closure of public spaces and factories, etc. – is costly. More containment efforts will yield greater economic and social costs.

The extended and rolling nature of containment efforts appears to be the greatest concern of market participants.That concern was likely the proximate cause of Monday’s market action. I think we should keep in mind though that, at some point, the economic and social costs of containment become too much to bear. There is only so long authorities will be able to hold the global economy hostage for a virus that can no longer be contained and has a potentially fairly low death rate. At some point, the focus shifts from containment to mitigation (good thread here), supply chains come back to life, and the inventory correction begins.

If containment is still possible, but takes longer than expected, then the V-recovery becomes a U-recovery.The longer it takes to shift from containment to mitigation, the wider the base of the “U” and the higher the chance that the bottom of the “U” is a recession. In any scenario, I would expect persistent weakness in travel and tourism activity. It seems reasonable to expect international travel, particularly to Asia, to be depressed until people become more familiar with the nature of the virus (I am still assuming it is out in the wild).

In either case then – containment or mitigation – what this comes down to is a waiting game.How long until the virus is contained? How long until authorities shift to mitigation? I would assume that one of these two outcomes happen by the end of the second quarter. Either the warmer weather helps reduce the pace of new infections, or the ongoing containment efforts become too costly, or some combination of the two.

To be sure though, this is all guesswork. Clearly, we have limited information to work with. I don’t know how an admission that mitigation is the option will be met by a public already fed a daily death rate. Will they panic? Or take it in stride? The risk in either containment or mitigation in the U.S. is that the process is completely botched by the Trump administration. Early signs are not encouraging.

Federal Reserve officials are likely asking many of the same questions. Until the last few weeks, it was evident that the economy was on the mend. They were comfortable holding rates at current levels for the foreseeable future. They are not prone to rapid policy shifts and the equity decline has yet to be of a magnitude to justify concern. Indeed, I suspect that many will believe equities were a bit frothy and set for decline anyways. A credit event, however, would likely get the attention of policy makers. They won’t want to cut rates too soon and then immediately see the pace of new infections quickly diminish and an inventory correction occur suddenly. Some officials may even question the usefulness of a rate cut in the face of a supply side shock.

Bottom Line: This is a low information environment. We don’t know how long this virus issue will be with us. The uncertainty will leave us susceptible to panic. Best case scenario is obviously that the virus subsides soon. If it doesn’t subside soon and instead the spread widens, the next best scenario is that the shift from containment to mitigation happens sooner than later. My baseline scenario lies on the mitigation part of the continuum (does this make me an optimist or a pessimist?). I don’t see that authorities will let the global economy collapse with ongoing containment efforts if the virus is already out in the wild. That said, I also cannot ignore the possibility of a more pessimistic outcome. Fed will bide its time absent a credit event or signs the economic foundation is weakening.