Zoltan Pozsar Takes On COVID-19: ‘Use The Swap Lines, An Uncapped Repo Facility And QE’

Zoltan Pozsar Takes On COVID-19: ‘Use The Swap Lines, An Uncapped Repo Facility And QE’

"Today’s liquidity conditions are like the waters receding before a giant wave", Zoltan Pozsar begins, kicking off #27 in his "global money notes" series for Credit Suisse. Pozsar — whose name is almost synonymous with short-term funding markets — famously warned that the September repo squeeze presaged a more dramatic seizure over the year-end turn if proper precautions weren't taken by the Fed. Thankfully, his worst-case scenario - where the “world stops spinning" - didn't play out.
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10 thoughts on “Zoltan Pozsar Takes On COVID-19: ‘Use The Swap Lines, An Uncapped Repo Facility And QE’

  1. The Fed is going to have to open up the spigots both on the rate side and balance sheet side as a lender of last resort. The other choice is to adopt an Austrian scenario and let the system purge debt through default. I prefer to take my chances using the first option…. the latter is a recipe for suffering. Look around on websites with that analysis. Many of these hard money jockeys are already chiding the Fed not to stoke inflation by increasing the balance sheet or cutting rates. It is not the way to go. If anything the FOMC and Powell were late to cut rates, and suffered from deficient communication.

    1. Inflation; now, wouldn’t that be a welcome change of affairs!

      While I have little sympathy for people who try to understand today’s markets using industrial-era, hard-money economic models, I do have to admit they have a point: in a world of infinite liquidity and cheap or free credit, how do we come to purge zombie corporates from the register? If debtors are squatting on capital, soaking up credit and not doing anything of economic value, aren’t we merely postponing the suffering of their inevitable failure? If we somehow manage to shamble into stagflation, won’t that potentially cause just as much suffering for the 90% as an Austrian-style purge would have?

      Business cycles are natural and inevitable, and it seems to me that the economic suffering associated their ending can’t be avoided, only translated/scaled along the time axis, or skewed so that particular segments of the population bear the brunt.

  2. 12 years on from the financial crisis and we are still vulnerable. Sure this is a strange out of the blue issue and there are tools to mitigate it (hopefully) but we really have not dealt with the underlying issues. Very whack a mole. They may not totally be the same but they rhyme. Of course dealing with the true issues is untenable so we’ll have to do what is needed and postpone the big event to another day in the future (hopefully). Good to have a rich uncle……………..

  3. “Combine rate cuts with open liquidity lines that include a pledge to use the swap lines, an uncapped repo facility and QE if necessary.”

    This is what the market wants, but even if all these policies are implemented I really only see the equity markets moving sideways to down for the next couple of months. Besides, appointed government officials react to events, they are rarely proactive and bold in creating policies, which means a delayed response.

    The only hope the markets have is the rarity known as Donald Trump. He’ll harass Mnuchin to goad the Fed into pushing the markets higher by any means necessary. And although I am not a presidential historian I think Trump’s behavior and tactics are without precedent.

    Vaccines typically take 2-5 years to develop, but let’s say with a global effort, 1 year. So possibly 9-10 months from now will be a good time to start buying equities all other things being equal.

      1. I said Trump is the markets only ‘hope’, not that I think it is the highest probability.
        The’ sideways’ move in markets will come if Trunp uses all possible force. The headline risk is just too high for any sane investor, Maybe a few trillion in real QE will push it higher. But ultimately if Trump botches the virus response he will not win the election. This will weigh on the market if the virus spread continues and future earnings potential erodes.

        Valuations only matter in a bear market. And people forget we’re in an ‘earnings’ recession already.

  4. Cool name & he’s clever. So was Oppenheimer. His prescription amounts to having the Fed life-support every bankrupt business in the world because the debt load is a cascade waiting to happen (happening). What’s the point? The Fed is simply the wizard of Oz trying to keep the illusion of integrity alive. A charade for the super rich and THEIR financial system to allow endless theft and destruction of the environment.

  5. In the trading book we have counterparty credit risk at it’s best. Your EAD increases as drawdowns happen. Your PD gets worse as downgrades happen. And LGD? It’s always hard to estimate, but recoveries will not improve in the current market.
    In the banking book we have also have a double whammy with the interest cuts and as payments are being missed.

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