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.
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.
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.