Heisenberg Report

Pandemic Fears Meet Fed, Impeachment, Tech Earnings With Stocks In Stratosphere

Mideast stocks on Sunday reflected the generally sour mood, as a jittery world ponders a pandemic.

Aramco traded around its lowest levels on a closing basis since the IPO, among other things.

Saudi shares fell for a fourth session, and are well on the way to erasing the “no World War III” rally.

The bottom line appears to be that until reports suggest the Wuhan virus is no longer spreading, market sentiment will reflect at least a little trepidation.

The headlines on Sunday were considerably worse than Saturday’s, which is saying something. California became the third US state to report an infection. The person – who traveled from Wuhan – is in good condition. There are now suspected cases in Africa and Austria. Canada reported its first case over the weekend. The death toll is up to 56 and more than 2,000 people have been infected. China has banned the wildlife trade and is considering extending the Lunar New Year holiday.

This will dominate the news cycle in the new week, alongside defense arguments in Donald Trump’s impeachment trial. Democrats will continue to push for witnesses, particularly John Bolton who has, of course, indicated a willingness to testify if called. Trump says he’ll block any such effort on national security grounds. Anyone who needs a refresher on why Democrats are so keen to get Bolton in front of the Senate need only know one name: Fiona Hill.

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Republicans have reportedly been warned that breaking ranks will result in their “heads” being placed on “pikes”, figuratively speaking – maybe. “I think it’s very likely I’ll be in favor of witnesses, but I haven’t made a decision finally yet and I won’t until the testimony is completed”, Mitt Romney said Saturday.

The Fed is on deck, and they’ll obviously stay on hold, but the likely reiteration of the “good place” characterization of policy belies all manner of underlying tension.

There are still questions around how repos will be tapered and the existing stock “absorbed” (if you will) by T-bill purchases. The bill buying is itself a source of debate, and it’s now assumed that a transition to short-coupon purchases is a matter a “when” not “if”, given expected negative net bill supply and liquidity concerns.

 

BMO’s Jon Hill and Ben Jeffery said last week that the Fed could go ahead and tip the change next month or in March. Privately available bill supply in Q2 will be -$321 billion “which would be the largest quarterly drop on record”, they note, adding the following: “The path of least resistance is for the Fed to alter its purchase schedule at the February or March operational announcements to reduce the risk of unnecessary liquidity deterioration [in the T-bill market]”.

Of course, that increases the chances that market participants will insist the Fed is, in fact, engaged in QE “proper”. Folks will be watching for any IOER tweak next week as well.

Meanwhile, the debate continues around the inability of central banks (including the Fed) to bring inflation sustainably to target and ensure the toolkit includes enough options to stave off disaster in the event of another 2008, or some kind of deflationary spiral. Bloomberg has a good piece documenting all the recent proposals, many of which are enough to drive an Austrian to leap off the nearest bridge.

“Former New York Fed open market account manager Simon Potter and economist Julia Coronado are working on a proposal where the Fed would engage in direct transfers of cash into consumer accounts to stimulate spending in a recession”, the piece reads. It goes on to note that “other proposals in recent years that are still resonating include one by Rutgers University economist Michael Bordo and Dartmouth’s Levin in 2017 that the central bank issue digital currency to accounts held by people and businesses at regulated banks”.

Those are, of course, on top of growing calls for coordination between monetary policy and fiscal policy in the style of MMT. The bottom line is that sooner or later, Stephanie Kelton will be proven correct, at least in terms of projecting that MMT (or something like it) is the wave of the future. If you don’t believe Kelton, ask Harley Bassman.

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The Fed debate is set against an election year and Donald Trump continues to pound the table on the need for more rate cuts.

Jerome Powell’s clear preference for keeping policy on hold notwithstanding, the Fed has not traditionally been shy about moving ahead of elections.

Other things to watch in the new week include bonds’ reluctance to selloff (and the Wuhan headlines could well catalyze intermittent safe-haven bids), tech earnings (with the space trading at 23X on a forward multiple) and the BoE, which will need to weigh horrible inflation and retail sales data against a laughably sharp PMI inflection in deciding whether to cut rates.

I’ll leave you with this: