Jerome Powell would have been incredulous had you told him back in mid-2018 that by the second quarter of 2020, he and his colleagues would be forced to answer questions about the relative merits of the Fed buying stocks and cutting rates below zero.
As hard as it is to believe, it was less than two years ago when Powell was busy piling rate hikes atop the tightening impulse from balance sheet run-off.
Ultimately, he managed to engineer the single-largest tightening (roughly 550bps) of any cycle in modern history, if you measure from the lows on the shadow rate.
Given that, it’s hardly surprising that things went awry for emerging markets in the summer of 2018, and then for the developed world later that year.
But when Powell began to reverse course early in 2019, he had no conception of the extent to which the Fed’s U-turn would end up morphing into the biggest easing push ever witnessed in the US.
That visual could simply be labeled “PANIC” and for many, if represents the end of the proverbial road.
Yes, the balance sheet will continue to balloon, but we’re in cartoon territory at this juncture, and when it comes to the policy rate, the market is likely to keep pushing the issue on negative rates until such a time as Powell explicitly rules it out, which he may or may not do in remarks later this week.
The two Fed speakers the market heard from on Monday were at pains to weigh in on the chances of stock buying and a prospective adventure into NIRP-ian Neverland, where Haruhiko Kuroda holds court with the Lost Boys and a “wise owl” named Christine confers “wisdom” on visitors.
“[We’re] doing all we can to make sure we don’t get to a depression-type outcome”, Raphael Bostic said, while speaking to the Rotary Club of Atlanta.
With all due respect, that “outcome” has already been witnessed, Raphael – stocks just haven’t caught up (or down) to it yet.
Commenting on negative rates, Bostic said “I am not a big fan”.
“Negative rates is one of the weaker tools in the tool kit”, he added. “I am not anticipating supporting that anytime soon”.
But markets are – anticipating it, that is.
During a virtual discussion with the Lansing Regional Chamber of Commerce, Chicago Fed president Charles Evans said the following of negative rates: “At best, we’d have to study it more, but I don’t anticipate that being a tool that we would be using in the US”.
Forgive me, but that’s a bit disingenuous. There are a lot fo things you can say about the notion of NIRP in the US, but I’m not sure “nobody has studied it” is one of those things.
As far as the Fed gorging itself on SPY and QQQ, Bostic remarked that “My first impulse is that is not something we would entertain”.
That’s a shame. Because at “just” ~26 times Goldman’s downside EPS case and ~31 times a worst-case profits scenario (in which EPS remains severely depressed by a sluggish recovery in 2021 and the Trump tax cuts are watered down as part of a Democratic sweep), US equities are a steal!
Besides that, the Fed could easily justify a push into stocks using the same rationale they’ve employed for other emergency interventions.
The rally notwithstanding, market participants remain wary based on consolidated positioning, which is just barely off the lows. “The rise in positioning has been mostly driven by systematic strategies, in particular Vol Control funds, while discretionary positioning has turned down and equity fund outflows have resumed”, Deutsche Bank wrote, in their latest asset allocation update.
“The pattern within flows continues to be very defensive, with large continued inflows into money market funds and bonds, while equities have seen outflows for the last three weeks, especially from cyclical sectors and styles”, Deutsche goes on to say.
At the same time, liquidity is severely impaired.
An absurdly illiquid market lacking participation from carbon-based lifeforms – that’s an excuse for Fed intervention if I’ve ever heard one.
I just – sort of.