It’s Not Enough. It’s Just Not Enough.

There’s a general sense among market participants, economists and analysts that no matter what policymakers and politicians do, it’s not going to be enough.

The White House and Steve Mnuchin are gunning for a $1 trillion stimulus plan to help cushion the blow to the US economy from the increasingly draconian containment efforts aimed at slowing the spread of the coronavirus.

Mnuchin on Tuesday said the plan includes cash handouts to Americans. Checks would be mailed within two weeks he told a press conference, adding that the April 15 tax deadline has been delayed for 90 days. Later, the Treasury Secretary said “We put a proposal on the table that would inject $1 trillion into the economy” including loans, direct checks and liquidity for small businesses.

Recession unavoidable

But it’s now occurred to everyone that a deep recession is inevitable.

“Even President Trump now expects there to be a recession, which must be a shock to that economic visionary Steve Mnuchin, who couldn’t see the same [on Sunday]”, Rabobank’s Michael Every quipped. He makes a good point about Mnuchin – it was just 48 hours ago when Steve went on national television and said his former colleague Gary Cohn is probably wrong to suggest the US is already in a downturn.

“All New Yorkers, even though a decision has not been made by the city or the state, I think that all New Yorkers should be prepared right now for the possibility of a shelter-in-place order”, New York City Mayor Bill de Blasio said Tuesday, underscoring the severity of the situation and the extent to which America’s largest cities are on the verge of completely shutting down.

Governor Andrew Cuomo said there are no such plans for New York City currently.

Whatever the case, there are now more than 5,075 US infections and 95 deaths. Mark Esper said the US is weighing activating the National Guard at the federal level.

Europe has agreed to close its borders to travel, apparently. German federal police have been ordered to stop non-EU citizens at Frankfurt and Munich airports, Der Spiegel reported, without citing sources.

Researchers at Imperial College London said Monday that for now, social distancing is a necessity. Without that – and other containment measures – 81% of people in the US and the UK would get the virus, and more than 2.7 million people would die between the two nations. It’s a somewhat bombastic headline but I’m just the messenger. You can read it for yourself – that’s what the links are for.

Toss out your forecasts

Given all of this, you can toss out your projections for growth. Goldman and Morgan Stanley have joined in when it comes to sounding the alarm about a grave risk to the global economy and, frankly, there’s little utility in attempting to make “forecasts”. For example, the range of estimates for annualized US growth in Q2 is now anywhere from flat to a 10% contraction.

Goldman sees the Chinese economy shrinking 9% YoY in Q1. The projection comes a day after Beijing turned in a set of horrific activity data for January-February.

Market participants are increasingly concerned. For instance, the March edition of BofA’s closely-watched global fund manager survey (out Tuesday) betrayed the biggest drop in growth expectations ever.

(BofA)

Equity allocations collapsed by the most on record, cash levels surged and, in a rare pseudo-rebuke of the normally reliable Bull & Bear indicator (which is now flashing a contrarian “Buy” signal), Michael Hartnett noted that the “scale and impact of [the] health crisis is unprecedented”, and as such, we would need to see a “belief that the virus is peaking in Europe and [the] US” to get a sustained rally.

Fed up

Meanwhile, skeptics abound as to the Fed’s capacity to alleviate the funding crunch which worsened materially on Tuesday, forcing the central bank to immediately reinstate its crisis-era commercial paper funding program, a move some front-end strategists have been effectively demanding for weeks.

“At OIS + 200, it does not work because then the rate cuts to zero are not effective, very simply put”, the incomparable Zoltan Pozsar said of CPFF2020. “All segments of funding markets — secured, unsecured and FX swaps — still show signs of stress”, Pozsar said, prior to the rollout. “The Fed needs to become a buyer of CDs and CP, but not through the CPFF”.

He also said the Fed should expand access to swap lines outside of the G-7, something others have called for repeatedly.

In a phone interview with Bloomberg, BofA’s Mark Cabana said the facility isn’t sufficient because although it helps issuers, it won’t do anything to help money funds that need to offload their own assets.

Long story short, Cabana notes that while dealers can tell issuers to simply go knocking at the Fed, money funds may still have a hard time finding someone to take their inventory if they need to fund outflows. “Money funds are still stuck”, Cabana remarked. “They’re worried about runs”.

Abnormal

All of this took stocks for a wild ride on Tuesday.

US equity futures were limit-up overnight, but pared gains aggressively as funding pressure materialized in cross-currency basis. Stocks rallied during the cash session at various intervals on hopes for Mnuchin’s trillion-dollar stimulus plan.

The dollar absolutely surged, as the funding squeeze propelled the greenback to a 1.5% gain on the day.

Kraft Heinz, Caesars and MGM are all tapping credit lines as signs of corporate stress proliferate and a health crisis morphs into a financial crisis. Boeing wants a bailout (read Brooke’s piece here) and Delta may be cut to junk by Moody’s.

“In light of what we’ve already been highlighting as systematic funds have little left to sell, the current selling risks continue to come from the still long Asset Manager position in S&P futures and hedge fund Long/Short, which are increasingly de-grossing it seems, judging by the negative reversal seen in ‘1Y Price Momentum’ factor and broad/massive short outperformance over longs in the past two sessions”, Nomura’s Charlie McElligott wrote Tuesday.

Ultimately, US equities ended the day sharply higher, but the move was anything but comforting.

Tuesday marked the seventh session in a row that stocks have moved at least 4% in one direction or the other.

That is the furthest thing from “normal”.


Leave a Reply to TomCancel reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

19 thoughts on “It’s Not Enough. It’s Just Not Enough.

  1. The government can not create ventilators, hospital beds, masks, a vaccine, etc. out of thin air. That is what is needed.

    1. Yes, sadly we can’t “create ventilators, hospital beds, masks, a vaccine, etc. out of thin air.” But we can prevent all the millions of newly unemployed from losing their homes, and make sure they and their kids don’t go hungry.

  2. Mr. H, I am a huge fan of your writings and insights.
    Can you or anyone here give suggestions of some recommended books to more clearly understand the inner workings of Monetary Policy, Investment Banking etc. and other language and strategies that you frequently reference? I follow everything for the most part but about 5%-10% of the trader lingo flies over my head.

    1. You could start by looking up macroeconomics on Wikipedia. If you find the summary and related entries there intuitive you can get a hold of a book on macro theory (preferably a text book) and teach yourself the basics (including monetary policy).

      Investment banking is a little less conducive to being self-taught. You could, of course, enroll in a school ( of some sort) and study finance for a number of years.

      I doubt, however, that you are really after a granular understanding of the subject. More likely you merely seek to understand the quantitative finance terms used by investment strategists whom Heisenberg frequently cites. My own understanding of ‘quant’ is superficial at best. I started my own brief foray into mathematical modeling with the Black—Scholes model in days of yore. Suffice to say, I am entirely unsuitable to guide anyone in the subject.

      At any rate, here are a couple of links from Investopedia:

      https://www.investopedia.com/terms/d/delta.asp

      https://www.investopedia.com/terms/g/gamma.asp

      https://www.investopedia.com/terms/d/deltahedging.asp

  3. Having violated all our own rules and seemingly no weapons left …we resort to the end all .. Throw the money (fish , meat , whatever ) at the Wolves ( word of your choice for Human equivalent) who are circled all around and pray they are pacified long enough for the miracle .
    The alternative is being dragged by ( your choice of words ..again ) through an Economic Cycle….God Forbid…!!! LOL…

    1. Wrong in so many ways. O2 systems provide about 10 minutes of O2, or just enough time for them to descend to lower more breathable altitudes. Also, the masks in the back just provide extra O2 not 100% of you needs. That means you take in a bunch of cabin air mixed with it on very breath. Then there is the exhaust after every breath that goes out into the cabin and of course lastly it would take forever to clean and replace each mask because there aren’t enough extra in the world to just change them out.

  4. Snarky comments aside the FRB is trying to stop a gigantic run on the international banking system. They are trying but so far no matter what they do, the forces in the market have at least as much power. Just announced a plan to loan dealers against securities, stocks and investment grade bonds for 90 days. They are not doing that out of the goodness of their hearts. There is a forest fire out of control and the shorts are consuming the market for the moment…

    1. If the shorts are “consuming” the market, why not simply ban short selling? Seems like a much easier solution than all this other stuff.

  5. H-Man, the CAT5’s are landing and it is turning into a humanitarian crisis. The good news. Our administration, after wearing blinders for a prolonged period of time, is finally getting off the dime. The bad news. We have no idea what the bad news will be and the market is clueless. This is looks more like a guillotine rather than a falling knife.

  6. For some reason the financial catastrophe part of all this reminds me of a Gary Larson cartoon wherein a big bull frog is telling a horror story to some youngins: “And as the net sloooooowly lifted him from the water, the voice kept whispering, ‘I want your legs….I want your legs.’ “

  7. Has anybody noticed that the number of cases reported from China has not budged from about 80,890 for over a week? Something is rotten over there.

    1. Hmmm. Maybe, just maybe…they have successfully contained the outbreak? Unlike the US and the clown that is in charge of it.

    2. Things are actually under control here in China. Most companies have already resumed office working. Stay-in order are being lifted across the country.

NEWSROOM crewneck & prints