In what is either something that happens all the time and I just wasn’t aware of it, or else an example of a man doing the exact opposite of what he should do when it comes to reassuring nervous investors, Steve Mnuchin decided to tweet out a press release on Sunday evening.
In it, Mnuchin details a series of “individual calls” he conducted with Moynihan, Solomon, Gorman, Corbat, Sloan and Dimon.
Mnuchin apparently made these calls on Sunday and the topic of discussion was liquidity. “The CEOs confirmed that they have ample liquidity for lending to consumer, business markets and all other market operations,” Mnuchin said.
Even if, by some Christmas miracle, it manages to bolster sentiment, this was an extremely ill-advised move. While there are unquestionably concerns among market participants about liquidity, it’s not clear that anyone is worried about banks’ ability to extend credit to consumers and businesses in the very near-term.
Sure, late-cycle jitters are proliferating and yes, investor demand is waning for risky loans (as evidenced by some banks getting stuck holding onto M&A debt), but nobody that I’m aware of was worried about a Lehman-esque systemic seizure.
Or at least nobody was worried about it until Mnuchin tweeted the following on Sunday evening:
Why was this necessary? Does Steve Mnuchin know something everybody else doesn’t? Or was this simply a ham-handed effort to jawbone the market and/or reinforce the idea that Trump’s economic “miracle” still has legs despite Jerome Powell’s tightening?
Stocks are of course coming off their worst week since 2011 and the VIX is back to levels last seen in February, but the above sounds like the government is in Defcon 1.
(Bloomberg)
Whatever the case, this seems like it has the potential to backfire. Again, our assessment here could be misguided, but even if this is something that’s normal, it’s not clear why Mnuchin felt the need to tweet it out just as Asia got going.
Maybe this reinforces BofAML’s contention that the Fed is on the verge of catalyzing a liquidity shock. “Currently, liquidity risk is at levels seen in April 2000 and August 2007, just prior to two recessions and when, in one instance, the Fed was already easing aggressively”, the bank’s Chris Flanagan wrote on Friday, adding that “when the Fed tightened policy into this level of liquidity risk in late 2015, it was only the first hike of the cycle but it then paused for a year [and] when liquidity risk hit these elevated levels in 2011, the Fed eventually responded with QE3 in 2012.” He was describing the following chart which we recreated on Saturday.
(Bloomberg)
In any event, we would argue that what Steve said in that press release would be best left unsaid until it’s absolutely necessary to go public with it.
Until then, this just raises more questions than it answers.
So why is a guy that has treasury auctions soaking up +1 trillion per year of dollars not looking into the mirror?
Is it because Trump is planning to fire Powell?
You beat me to it John.
For the most part, the American economy handles ups and downs just fine, without the need for comments from government officials. On those few occasions when the market needs some reassurance, it would be nice if the Treasury Secretary was someone that was credible and widely respected. In the event of a crisis, the team of Trump, Mnuchin and Kudlow will just be a reminder that the Keystone Cops are in charge.
This can only be a game, but I can’t think of a better way to threaten short term global liquidity with Twitter. Is Trump taking a try a financial terrorism to get his wall funding? And just giving him 5 billion really is a big come down from “The Great Wall of China” that we were hearing about.
I don’t agree that “nobody that I’m aware of was worried about a Lehman-esque systemic seizure”. Anyone who went through that must be assigning a non-zero probability to it, and we see that in the price of credit. And this same behavior from a SecTreas we respected, instead of Mnuchin, who is part of an administration entirely incapable of arresting a crisis, would be seen as pro-active, cautionary, and not ridiculed. While markets CAN impact economies (isn’t that what QE IS?) I don’t yet see a transmission mechanism where market behavior results in a systemic crisis, or a radical deterioration in the real economy. Yes, rates are higher, but not punishing. Markets are substantially compromised due to “year-end” behavior. And remember, $50b/month, $600b/year in balance sheet unwinds is a headwind, not a wall (there’s that word again), the same way QE was a tailwind. And its direct impact will be on financial and trophy asset valuations, not the real economy, as was the case during QE.
Meant to say….. $50b/month, $600b/year in balance sheet unwinds is a headwind, not a wall (there’s that word again), in the context of combined US equity and debt market caps of $60tln, the same way QE was a tailwind.
Amateur hour is my best guess. But could be a European bank or banks. But that is just a guess.
Mnuchin’s a smart guy IMO. A federal district court judge declaring the ACA unaffordable has basically trashed any further QE or TARP options to respond to another market crisis. That is probably what has made risky debt much harder to move recently, and with that Mnuchin”s nightmares.
Pardon me but the court’s ruling had NOTHING to with affordability. Where do you guys come from, anyway?
It’s Christmas Eve, so of course I pardon you. But I don’t pardon your ignorance. Read Paxton’s argument:
https://www.apnews.com/0d746d577b0741269cab18e8ef4cc571
Here is betting that Trump instructed the A team to do something so the huddle included Kudlow, Mnuchin, maybe Ross and perhaps, uber financiers, Ivanka and Kushner -and viola they decided this would be a great idea – from their holiday residences – without leaving the house.