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A Health Crisis, A Fed Chair, A New Bubble And One Largemouth Bass

"One might, perhaps, see the recent price-action of the Tesla as supportive of this idea."

As the new week dawns, the death toll from coronavirus in mainland China has reached 908. The number of confirmed cases is now nearing 36,000.

The PBoC is set to roll out the first round of specialized lending aimed at supporting efforts to combat the disease. One study suggests the epidemic may be on the verge of peaking, at least in Wuhan, the epicenter. A series of cases in France, the UK and Spain confirmed over the weekend have been traced to a French ski resort, stoking “super-spreader” fears.

And, finally, Kyle Bass decided it would be a good idea to get into a Twitter feud with Xi’s media man, Hu Xijin, editor-in-chief of the Global Times. “You ungrateful bastard”, Kyle shrieked at Hu. “We should take our supplies and go back home. Let the Chinese virus rampage through the ranks of the GT and the rest of the communist party”.


Asked by Bloomberg what, exactly, he was thinking (that’s not how the exchange went, but you get the idea), Kyle explained that although he deleted the original tweet, he would not be apologizing.

“[It was] too harsh” to suggest that the “rank and file” of the Global Times deserve to die from the Wuhan virus, Bass reckoned, but when it comes to Hu, he will “never apologize to a self-righteous, attempted manipulator of public opinion”.

So, that’s how things are going on the virus front.

Markets, meanwhile, are still on edge, despite last week’s blockbuster rally. Friday was a bit of a rough ride, and the fact that risk assets failed to respond favorably to another good US jobs report quite clearly suggested investors are loath to carry risk into the weekend.

Still, a dovish Fed and investors’ Pavlovian instincts to buy dips in a liquidity-fueled bull market makes it hard to call time on the rally. Calling tops is everywhere and always a fool’s errand, but when central banks are expanding their balance sheets, suggesting the good times are over is an even more precarious endeavor.

Powell will chat with lawmakers on Capitol Hill this week, and as detailed on Friday, the virus is likely to come up.

Read more: The Coronavirus Infects Fed Communications

Beyond that, some members of Congress are still pretty keen to understand exactly what the Fed thinks happened with short-term funding markets in September.

In a letter to Powell last week, lawmakers went so far as to suggest banks may have gamed things in order to get themselves some regulatory relief. To wit, from the letter:

Since September 2019, has the Board discussed the possibility of weakening or otherwise altering liquidity, capital, or other regulatory and supervisory standards in order to address this issue? Does the Board continue to consider any such changes? Has the Board or FRBNY considered the possibility that market actors refused to lend into the market, sacrificing short-term profits in order to raise questions about prudential regulation? Would it be feasible for the small network of primary dealers to do so?

Spoiler alert: Yes. Yes, that would indeed be “feasible”. Whether or not it’s likely is another issue, but it’s a question Powell is going to have to field, along with a multitude of others about the Fed’s ongoing repo operations, and growth of the balance sheet.

“Dallas Fed chief Kaplan thinks the FOMC should ‘beware elevated valuations’ and partly blames the Fed’s massive balance sheet growth for recent asset price inflation”, Nordea reminds you, adding that by contrast, “Kashkari sees no link between the B/S and asset prices whatsoever”. For their part, Nordea notes that “both excess liquidity and the size of the balance sheet matter, at least for psychological reasons”.

We’ve been over this ad nauseam, but a shift to coupon purchases (i.e., “real” QE) is all but inevitable. The T-bill buying is eventually expected to “soak up” the outstanding repos, but with recent term ops coming in oversubscribed, the moral hazard is readily apparent.

“It’s still a cheap source of funding”, NatWest’s Blake Gwinn said last week. “And it’s all the more reason why I think the Fed was too timid in pulling back repo operations. This is becoming a piece of dealers’ day-to-day funding strategy rather than a tool”.

That’s a bit disconcerting, depending on your perspective. The Fed said last month it will keep conducting repos through at least April. One issue going forward is that the bill buying for reserve management purposes (which, again, “should” eventually obviate the need for the repos once excess reserves are returned to pre-September levels) is going to run up against supply issues, where that just means the size of the Fed’s purchases will risk affecting market liquidity. At that point, they’ll have to buy something else.

“[It’s likely] that due to the distortions which are being created in the Bills market that the Fed will need to extend purchases into short coupons by April, and ultimately, front-end USTs thereafter, in order to created ‘ample reserves’ and ease funding conditions”, Nomura’s Charlie McElligott said last week.

In addition to being compelled to weigh in on the virus and what he continues to insist are merely “technical” operations that shouldn’t have any impact on the prices of risk assets (as ever, the bit about the “technical” nature of what the Fed is doing is unequivocally true, but liquidity is liquidity, so downplaying the possible impact on risk assets is an exercise in futility), Powell will be pressed on everything else under the sun. Some of the questions will doubtlessly have political overtones, given the Fed chair is widely expected to come under heightened criticism from Donald Trump ahead of the election.

Although one would be inclined to think that queries about asset bubbles will be lower down on the list of things lawmakers want to discuss with Powell, Nordea’s Martin Enlund, Andreas Steno Larsen and Joachim Bernhardsen offered this over the weekend:

We’ve also argued earlier that central banks (& the Davoisie) may be creating a new bubble. The Fed’s 1998 easing helped boost the dotcom bubble, and the easing of 2019/20 may be contributing to a new bubble, perhaps this time a green one (you know – to save the climate). One might, perhaps, see the recent price-action of the Tesla stock as supportive of this idea.

Yes. “Perhaps”…


1 comment on “A Health Crisis, A Fed Chair, A New Bubble And One Largemouth Bass

  1. Largemouth Bass. Excellent.

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