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Next market crash: Two Fed-driven bubbles will burst in Q2, BAML says

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  • “Twin bubbles” in financial markets are poised to peak in the second quarter, according to Michael Hartnett, the chief investment strategist of Bank of America.
  • He explains the factors that could end these displays of “irrational exuberance,” and shares his investing strategy for right now.
  • Click here for more BI Prime stories.

The Federal Reserve has played an outsized role in simultaneously securing the longest equity bull market and economic expansion in history.

At every juncture since the Great Recession, the Fed has intervened with a lifeline. Most recently, it pumped billions of dollars into short-term lending markets last September when a cash crunch set in, and continues to provide liquidity. 

But there are unintended outcomes of these stimulative measures, according to Michael Hartnett, the chief investment strategist of Bank of America.

In a note Friday, he pinpointed two broad areas where “excess liquidity” is brewing bubbles. And he provided multiple examples of their manifestations. 

The first bubble is in scarce yield assets.

Sovereign bonds take the cake in this category. Bank of America data shows a record $481 billion flowed into bond funds in 2019 even as the value of negative-yielding debt soared to a record exceeding $16 trillion.

This misnomer — investors chasing assets with sub-zero yields — was so prevalent last year that another strategist concluded he was seeing “the greatest bubble ever.”  

While Hartnett does not size the trend as such, it is clearly a bubble in his book. 

The second bubble he flagged is in scarce growth assets.

For this one, Hartnett was armed with multiple examples of investments that have caught on like wildfire because of their prospective returns. 

Unsurprisingly, Tesla was his first example of present-day “irrational exuberance.”

Bulls like the company because it is a trailblazer in the electric-vehicle industry. But the past few weeks have been head-scratching: shares soared 141% and then fell 29% within just 25 trading days on no groundbreaking news. Many market watchers cited a combo of short sellers being squeezed out of their bearish bets and a contagious fear of missing out.

Besides the Tesla phenomenon, Hartnett cited the boom of exchange-traded funds as another example of irrational behavior. Despite all the cost and diversification benefits of ETFs, he noted that a whopping 2,712 of them have been created over the past two years.

Yet another sign of growth excess that Hartnett cites is the private equity industry’s bid to offload $1.5 trillion in unspent capital by lurching into shadow banking. According to PitchBook, the five-largest PE closes in 2019 were for buyout funds.

How the bubbles burst

Given the trends outlined above, the big question is when and how it all ends.

Hartnett pins the timing of a “big top” to the second quarter, at which point he says he will turn “rationally bearish.” 

As for the triggers, one that already gives Hartnett cause for concern is that the S&P 500 is soaring to all-time highs even though new capital goods orders, a forward-looking gauge of business sentiment, remains flat.  

A more distant catalyst is a reversal of the Fed stimulus that has helped markets stay afloat. Hartnett envisions a scenario where investors’ optimism about the election fuels animal spirits and prompts the Fed to scale back its liquidity support.  

An additional trigger Hartnett envisions is that investors completely underprice the biggest risks they have placed on the back burner for now, namely an economic recession, inflation, and credit defaults. 

Until these scenarios play out, Hartnett is staying “irrationally bullish” on risk assets during the first quarter. He sees the S&P 500 rising to 3,498 — a 5% rally from current levels that would mark the stock market’s longest and largest bull market in history.

But once these records are in the books, all bets are off. 



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Coronavirus: Family kicked off Air Transat flight after child’s cough

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  • A Canadian family of five was removed from a flight after passengers complained about their feverish, coughing child, according to local media.
  • Although two different doctors gave the 21-month-old their approval to travel, the airline disagreed and refused to let them fly.
  • The airline said it had nothing to do with the coronavirus outbreak. However, the family believe that staff did reference it, according to the newspaper L’édition du Soir.
  • Quebec’s director of public health said he was “flabbergasted” and warned about a “growing climate of paranoia,” around the coronavirus, reported L’édition du Soir.
  • Visit Business Insider’s homepage for more stories.

Air Transat removed a family of five Canadians from a flight after their child began coughing on the plane, prompting a demand for medical documents which they could not provide.

Emmanuel Faug, Clémentine Ferraton, and their three children were boarding Air Transat flight TS112 from Quebec to Paris when several passengers raised concern about their toddler’s cough, according to the TVA Nouvelles TV network. 

The couple said the girl, 21-month-old Lila, had been examined that morning by a doctor, who said she was fine to fly.

But when flight crew asked for a document to prove this, they could not provide it.

When a second doctor — another passenger on the flight — was asked to examine the baby, he also said her health also wasn’t bad enough to stop them from flying, TVA Nouvelles said.

air transat flight plane

An Airbus A330 aircraft of Air Transat airlines takes off in Colomiers near Toulouse, 2018.

Regis Duvignau/Reuters


However, they were still asked to leave.

Air Transat said that it made the decision to bar the family after asking Medlink, a service that provides in-flight medical assistance to airlines.

A spokesman for Air Transat said that the decision was a standard protocol and not down to “paranoia” from the virus outbreak.

In an interview with Canada’s CTV News, the spokesman said: “I don’t think it’s paranoia, it come to public attention because of the coronavirus outbreak but that is the standard protocol. We don’t want our passengers to be exposed for hours to somebody that’s contagious so that’s what we normally do.”

But Faug said that throughout the back-and-forth, the cabin manager repeatedly referred to the “current context,” which he took to mean the evolving coronavirus threat, the newspaper L’édition du Soir reported them as saying in a TV interview. 

“I think that is where her fears had been coming from,” Faug reportedly said. “I can understand it in a certain way, but I found it a bit excessive… I had the impression I was being thrown off a plane to avoid a scandal.”

Dr Horacio Arruda, Quebec’s director of public health, said he was “flabbergasted” by the incident, according to L’édition du Soir.

It added to his “fear of seeing a growing climate of paranoia in the face of the risk of spreading the coronavirus,” he said.

flight attendant steward coronavirus mask airplane vietnam airlines

An attendant wearing a protective mask guides the flight safety procedures before take off of a Vietnam Airlines flight, following an outbreak of the novel coronavirus, at Danang airport in Danang city

Kham/Reuters


Several airlines have taken stricter measures as the coronavirus outbreak grows. The Center for Disease Control and Prevention (CDC) issued its advice to airlines in January, but airlines are going above and beyond that, reported Business Insider.

Additional measures taken by different airlines include changing the way meals are served, issuing crew members with masks and gloves in high-risk regions, and disinfecting hard surfaces after each flight. 

According to CTV News, the airline contacted the family and has offered them a refund. Business Insider has contacted Air Transat for comment. 



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Coronavirus community spread in the US will test health systems

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  • A confirmed coronavirus patient in California had no travel history in China and no known exposure to anyone infected.
  • It’s the first potential case of “community spread” in the US.
  • One health official said this requires a transition “from trying to contain the disease to more of a mitigation approach.”
  • Visit Business Insider’s homepage for more stories.

A patient in Solano County, California, has gotten the COVID-19 coronavirus without traveling to China or having any known contact with someone sick, the Centers for Disease Control and Prevention confirmed on Wednesday.

“This person appears to be a community-acquired case of coronavirus, which would be the first here in the United States,” Bela Matyas, the Solano County health officer, said in a press conference on Thursday. He added, however, that he doesn’t think this is the only such case. 

“There are probably cases of coronavirus from community acquisition in multiple parts of the country right now,” Matyas said.

That means the virus is likely spreading undetected in the US, according to Amesh Adalja, an infectious-disease expert at the Johns Hopkins Center for Health Security.

Adalja offered a simple definition of community spread:

“‘Community spread’ reflects the fact that the virus is out there in the community spreading from person to person, meaning that it’s not just spreading from people who had contact with someone from China or a travel history, but that it’s something established in the community,” he said.

That reality, Matyas said, means health officials have to transition “from trying to contain the disease to more of a mitigation approach.”

A delay in detection 

The California patient is now in serious condition, according to CNN.

She initially went to the NorthBay VacaValley Hospital on February 15. The 50-bed hospital is in Solano County, which is also home to the Travis Air Force Base, where some Americans evacuated from China and from the quarantined Diamond Princess cruise ship have been quarantined.

A surgeon at the base, who requested that he be kept anonymous, told Business Insider that it’s likely the new case has some connection to the the base, given the proximity.

But Matyas said no such link has been found and added that workers on the base were “scary meticulous” about safety.

“This individual has no connection whatsoever to that federal mission and to any of the personnel that have been involved in that evacuation process,” he said. 

travis air force base

Ambulances outside the Travis Air Force Base in California.

Hector Amezcua/AP Photo


The patient was not tested for COVID-19 at VacaValley during her four days there. After her symptoms worsened, she was transferred to the University of California, Davis Medical Center in Sacramento on February 19. But she wasn’t tested there either until four days later.

“Since the patient did not fit the existing CDC criteria for COVID-19, a test was not immediately administered. UC Davis Health does not control the testing process,” the center said in a statement.

Until now, the CDC has made decisions about whether to test people for the coronavirus based on whether they have recently traveled to places with outbreaks. 

But this case, Adalja said, shows that “when we have protocols set up to really identify patients only based on travel history, those are going to fall short of identifying all cases.”

Matyas said testing criteria are indeed changing now, and the CDC praised the doctors who diagnosed the woman in a statement on Thursday.

“This case was detected through the US public health system — picked up by astute clinicians,” the CDC said.

Dozens of healthcare workers were exposed

coronavirus california

Tien Nguyen wears a mask as she shops at the 168 Market in Alhambra, California, on January 31, 2020.

AP Photo/Damian Dovarganes


Health officials are working to trace and isolate anyone the patient had contact with — her family has been quarantined, and hospital staff are being evaluated and tested.

Aimee Brewer, president of NorthBay Healthcare, said any medical workers who had direct contact with the patient at VacaValley have been tested for the virus and are now on paid leave at home. So far, there have been no more positive tests, she said.

“As far as the headcount is concerned, at this time I can say it’s a moving target,” Steve Huddleston, vice president of public affairs at NorthBay Healthcare, said in a press conference Thursday. “We have identified dozens of employees on our health team, but it still remains less than 100.”

According to CNN, a University of California, Davis student is also under investigation, and the student’s two roommates are being isolated at their home off campus as well.

The CDC said in a statement on Thursday that “unprecedented, aggressive efforts have been taken to contain the spread and mitigate the impact of this virus.”

A question of when, not if

A day before this case of community spread was reported, CDC officials suggested it was imminent.

“It’s not so much a question of if this will happen anymore, but rather more a question of exactly when this will happen and how many people in this country will have severe illness,” Dr. Nancy Messonnier, the head of the National Center for Immunization and Respiratory Diseases at the CDC, said during a media briefing.

But thus far, the US lags behind other countries in testing — as of Wednesday, only 445 Americans had been tested for the virus.

The ultrastructural morphology exhibited by the 2019 Novel Coronavirus (2019-nCoV), which was identified as the cause of an outbreak of respiratory illness first detected in Wuhan, China, is seen in an illustration released by the Centers for Disease Control and Prevention (CDC) in Atlanta, January 29, 2020. Alissa Eckert, MS; Dan Higgins, MAM/CDC/Handout via REUTERS

An illustration, created by the CDC depicts the novel coronavirus

Reuters


“At first, CDC was the only place where testing could be performed,” Richard Martinello, an associate professor of infectious disease at the Yale School of Medicine, previously told Business Insider. “For a country of our size, when you only have a single site doing that, it limits the resources available for testing.”

The CDC sent test kits nationwide earlier this month, but those were also found to be flawed, so only about a dozen labs can currently run the tests, according to The Washington Post.

‘The cat’s out of the bag in terms of it having spread’

Solano County and the nearby San Francisco and Santa Clara counties have all declared emergencies.

Matyas said the declaration frees up resources to “allow us to investigate this incident more effectively and more efficiently.”

But he added that containment is “only possible when you’re dealing with a disease condition where you know everyone who’s sick, and they get sick before they spread, and you can contain them — and that’s a rare reality.”

Coronavirus face mask



Manuel Silvestri/Reuters


Now, he said, efforts must focus on mitigation because “we know the cat’s out of the bag in terms of it having spread, and what we’re trying to do is slow the spread as much as possible.”

California Gov. Gavin Newsom announced Thursday that 33 people in the state have tested positive for the virus — including citizens repatriated to military bases — and 8,400 people are being monitored. He stressed that the risk to the public is still low, but added that the state needs access to more resources. 

“We have just a few hundred testing kit,s and that’s surveillance testing as well as diagnostic testing. That’s simply inadequate to do justice to the kind of testing that is required to address this issue head on,” Newsom said.



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Coronavirus: First possible case of ‘community spread’ in the US

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  • The first case of possible “community spread” of the coronavirus — meaning the origin by which a person was infected is unknown — was detected in the US.
  • The patient is being treated at UC Davis Medical Center after being transferred from VacaValley hospital in Vacaville after her condition worsened, KGO reported.
  • A UC Davis internal memo said medical workers requested that the person be tested a week ago, but the CDC declined to test the patient as the person did not meet the required criteria for a test.
  • The patient had not recently traveled to China nor had any known contact with another person infected with COVID-19.
  • Visit Business Insider’s homepage for more stories.

The Centers for Disease Control and Prevention has confirmed what may be the first case of community spread of the coronavirus in the US — in which the origin by which a person was infected is unknown.

The CDC said the woman “reportedly did not have relevant travel history or exposure to another known patient with COVID-19.”

The patient, who is the 15th confirmed case of the coronavirus in the US, is being treated at UC Davis Medical Center after being treated at VacaValley hospital in Vacaville, California, KGO reported.

“At this time, the patient’s exposure is unknown,” the CDC said in a statement. “It’s possible this could be an instance of community spread of COVID-19, which would be the first time this has happened in the United States.”

A UC Davis internal memo said that the woman was transferred from another hospital on February 19 but that the CDC declined to test the person, who had not traveled to China or had known contact with another person infected with COVID-19.

“Upon admission, our team asked public health officials if this case could be COVID-19,” the memo said. “We requested COVID-19 testing by the CDC since neither Sacramento County nor CDPH is doing testing for coronavirus at the time.

“Since the patient did not fit the existing CDC criteria for COVID-19, a test was not immediately administered. UC Davis Health does not control the testing process,” the memo continued.

UC Davis Medical Center said it suspected a viral infection and had implemented “droplet protection orders” and on Sunday, when the person was tested, “airborne precautions.”

The hospital said this was not the first coronavirus case it had treated and believed there was “minimal potential exposure.” The memo did say that some healthcare workers were told to stay home and monitor their temperature.

Rep. John Garamendi of California, who represents the district where the patient is being treated, tweeted that he was in “close contact” with the CDC and the state regarding the situation.

“We all have the responsibility to protect ourselves and others by washing our hands and carrying out procedures to avoid infecting ourselves and others,” he continued. “Please monitor CDC’s website and Facebook for further information.”

At least 60 cases have been reported in the US: 15 US cases; 43 Americans who were repatriated from the Diamond Princess cruise ship, which was under quarantine in Japan; and three people who were evacuated from Wuhan, China, the origin of the novel coronavirus outbreak.

As of Wednesday, the coronavirus has amassed a death toll of over 2,800 people and infected over 82,000 worldwide, with the vast majority of cases and deaths in China.

Business Insider could not immediately reach UC Davis Medical Center.





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