It almost seems Federal Reserve Chairman Jerome Powell has been watching too much "Austin Powers," with Dr. Evil serving as his mentor. Clearly the idea of how to use the Fed's monetary tools and the timing of them has evaded Powell entirely.
The Fed knows only one thing: keep printing more money and then some more. What difference does it make if the number is $700 billion or $4 trillion? Right now they are all just numbers floating around.
In just a week the Fed has cut U.S. interest rates down by 150 basis points. We are back down to 2008 levels and we haven't even seen a big Bear Stearns or AIG type event. The Fed has just thrown the entire house, including the kitchen sink, at the problem in the hope (hope being the operational word) that the problem goes away to try and support the financial markets and to stoke the world's biggest inflation we have ever seen.
Last week the Fed did an emergency cut of 50 basis points, then announced it was buying $1.5 trillion a week in term repos via daily auctions for another three weeks -- $4.5 trillion in all, potentially. Then rather than wait for its usual Federal Open Market Committee (FOMC) on March 17, the Fed announced the bazooka of all bazooka monetary accommodations -- it cut interest rates down to 0% (a cut of 100 basis points overnight) and promised to make another $700 billion in asset purchases, including mortgage-backed securities.
Talk about instilling confidence when even the Fed has no clue what to do other than just keep adding more and more zeros to the amount of money it is printing. Powell has become as laughable as Dr. Evil; no one is taking him seriously. The problem is the Fed is fixing an entirely different problem with the wrong set of tools and the market knows it, with the market going down the 7% limit before Monday's open Has the Fed just been check-mated?
After the gargantuan $4.5 trillion announcement on Thursday with the market rallying 10% into the close, one wonders whether we would have opened higher on Monday morning if the Fed had refrained from announcing anything on Sunday. Instead of inspiring confidence, the Fed is instilling fear, as it can be heard in its voice.
Powell states that the Fed's role "is to freeze up liquidity and support demand through lower interest rates". Of course, President Trump is glowing with pride at this point as this is his dream come true -- 0% rates and even negative rates to come.
After the Fed's action, Trump said on Sunday, "I think there are a lot of people on Wall Street that are very happy." That statement shows both the President and the Fed are entirely clueless.
Right now the only way to support or calm the markets is to first ease average citizens and smaller businesses that their income and livelihoods will be subsidized, perhaps by giving each household $1,000 a month so they can at least buy food and groceries as most live paycheck to paycheck.
What is the point of buying Treasury bills and throwing money to the banks? They will not rush to pass on cheap lending, nor is the consumer ready to spend. This money needs to go into healthcare infrastructure and hospitals and basic necessities.
It is good for the Fed to backstop a potential credit freeze, but the markets are signaling that they have lost all trust in the Fed. Because this situation is so uncertain, especially the timing of it all, it would have been better if it had waited two weeks for the number of cases to stabilize as serious lockdown measures have just started. It would have been much more effective.
Here on Monday morning China reported the sharpest drop in industrial output in 30 years; it fell 13.5% in January-February versus the year-earlier period, the worst performance since 1990.
Retail sales collapsed 20% year over year, with fixed-asset investment plunging 24.5% year over year. But this was a foregone conclusion as China's economy ground to a halt.
Thanks to China's draconian measures, it seems to have stemmed the slide and now it is stabilizing. The government has also cut its lending rate several times and pumped tons of liquidity into the system.
Overnight we have seen a global coordinated effort from the Bank of Japan, Bank of Canada, Bank of England and various other central banks in one of the most synchronized measures since 2008. To put it mildly, there is so much liquidity pumped into the system even the slightest news of stabilization will see the mother of all rallies and hyperinflation at some point.
But those are worries for the latter half of this year. For now we are unsure what happens in the next few weeks. That is the problem. Are we at July 2007 levels or March 2009 levels? That remains the unknown.
To make matters worse, the infamous March triple-witching expiry is this Friday. There is tons of open interest exposure around strikes 2500-2700 in the S&P 500. Funds that bought this protection earlier this year never imagined it would be here now. Banks that sold them this downside, are now short the downside themselves.
What this means is that as we breach 2500-2600 to the downside, the move is violently down. As we breach 2600-2700 to the upside, we violently move higher. On top of all the Fed and corporate debt bubble news, this hedging is exacerbating the moves even more.
This situation is not to be taken lightly as dealers need to be flat risk and they wake up each morning not knowing if they are long or short $100 billion of the market. They don't even want to be long or short, but have no choice. The FOMC is the day after, so this week is far from over.
Meanwhile, investors are confused about what is happening in the oil market amid the coronavirus-related economic slowdown. On top of the travel and manufacturing slowdowns, the oil market has its own separate physical market excess supply dilemma as the U.S., Saudi Arabia and Russia are all pumping at will. Even if equity markets stabilize, oil would still not be a buy until its market soaks up the excess inventory.
Copper is linked to China and is holding up relatively well, but its respective equities are down much more. Copper is one of the tightest commodities in terms of supply and demand, so when markets stabilize it will rally first and the fastest.
The next two weeks are critical. The U.S. and Europe are two weeks behind the rest of the world in terms of their lockdown approach. Even China, which is about 45 days into this crisis after its Lunar New Year holiday, still has not seen demand return. So what does that imply for the U.S. and Europe?
We are still at least a month away from demand picking up. If governments manage to contain the number of new cases and stabilize the rate of spread, markets then can focus on demand slowly return. The oil bomb was something entirely different and new thrown in that is tipping the corporate debt market bubble to burst. The longer we stay in turmoil, the more the risk that debt blows up and no amount of Fed liquidity will be able to help. It is like a Jenga tower that could come falling down.
It is tempting to buy solid equity names, but right now there is no logic or fundamentals. It is about pure capitulation, and it seems it is not over. We could be in the middle of the largest margin call ever.
