credit fed Markets

$7 Trillion And Signs Of Addiction.

As ever, the whole thing is a bit of a paradox.

The Fed’s balance sheet topped $7 trillion in the latest update, a milestone that is all at once impressive and somewhat dubious.

Even if you didn’t know anything about the crisis that’s decimated the global economy, leaving tens of millions jobless and hundreds of thousands dead, you’d be able to discern that something was wrong simply by eye-balling the chart.

Pretend you’ve been asleep for the past three months, and last you heard, the Fed was still just buying a token amount for “reserve management purposes”. Then you wake up to this:

Clearly, something went awry.

But, as offensive as the Fed’s splurge is to so many critics, it’s been effective pretty much across the board when it comes to restoring a sense of normalcy, whether we’re talking about the cost of dollar liquidity, smooth functioning in critical funding markets or more pedestrian topics like reduced signs of stress in corporate credit.

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The Fed on Friday said it will trim Treasury buying to $5 billion per day in the week ahead. This has become a Friday tradition. Eventually, they’ll settle on a monthly amount, and likely pair that with an announcement of yield curve control.

It’s worth keeping yourself apprised of the weekly data from Lipper and ICI on fund flows, as you can divine something about the extent to which things have normalized.

Investment grade funds enjoyed a sixth consecutive week of inflows through Wednesday on Lipper’s data. The $5.33 billion haul came on top of similarly sized inflows over the previous two weeks.

The important thing to note about the chart is the extent to which the hemorrhaging in late March turned into a steady stream of inflows following the Fed’s announcement that it will buy corporate bonds, although it took a couple of weeks for things to turn around in earnest.

In high yield, you can see a similar dynamic. Junk funds took in $1.64 billion last week. That’s the eighth straight inflow.

So far, the Fed has bought $1.8 billion in corporate credit ETFs. The first purchase ($305 million) showed up in last week’s balance sheet update, with the remainder reported this week, current through May 20.

The figure gives you a snapshot of the mix vis-à-vis the Fed’s various liquidity facilities and programs aimed at fighting the crisis.

Finally, I would submit that it’s worth flagging the first outflow from government money funds since February.

The latest ICI data shows prime funds took in $13.84 billion last week, versus an outflow of $12.85 billion for government funds.

This is notable, as it’s yet another sign of normalization or, if that’s not quite right, let’s just call it “confidence”.

As ever, the whole thing is a bit of a paradox. The extreme abnormality evidenced in the explosion of the Fed’s balance sheet has paved the way for “normalization” across various markets. The problem (and this has been true since the financial crisis), is that these markets would likely start to malfunction again in the absence of Fed support.

It’s a sign of addiction – you have to be drunk (or high) to function properly.


9 comments on “$7 Trillion And Signs Of Addiction.

  1. I suppose the Fed will keep on pumping. And the more it does, the more the markets will be separated from economic reality. Mere money cannot stop a virus anymore then shining a flashlight up one’s ass or a bleach injection.

  2. is this a new type of jubilee? Necessary, unclear if sufficient, yet with unknown unintended consequences. I would feel calmer if this was a movie rather than our cumulative lives / livelihoods.

    • While there is uncertainty and there are bound to be unintended consequences – the addiction that Heisenberg alludes to is a fait accompli – from the Fed’s actions in the short to medium term the situation is quite straightforward: markets are headed higher.

      Of course, there is a possibility that rising tension between the United States and China may escalate into a grinding, non-military, conflict – a cold war, if you will – that presents a new black swan event for nascent markets.

      • And the Fed relentlessly signals to all these Hopium addicts that they are not sure of their control of the situation –every Fed official from the Chair on down has been liberally sprinkling their bromides with the word “uncertainity” in various and sundry forms –and in contrast to “risk”, “uncertainty can neither be measured nor managed.

  3. My wife at dinner last night:

    “A friend my age just retired. But he’s been at Apple for decades so he must have more money than God.”

    Me: “But does he have more money than Jerome Powell?”

    My wife, non-plussed: “I guess Fed humor isn’t my cup of tea.”

  4. Another big bankruptcy (Hertz). Interesting to see if this changes the funds flow.

    • There will be lots more, how can all these businesses with tight margins,(restaurants, retailers, etc) survive now with 50% less customers? I went out the other day and its a whole new strange experience, and not enjoyable.
      Instead of sauntering around shopping, usually buying stuff I don’t need, now I have to wait in line to get in, carefully find what I “need”, and get the hell out, to avoid germs and let some other poor shopper in. Can’t see it working ……

  5. Taper Tantrum 2.0. 5 trillion of issuance. Fed can monetize 70%. Who is going to buy the remaining 1.35 trillion?

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