No Good Answers (Crunch Time)

It's pretty simple, really. Or at least according to BofA's Michael Hartnett it is. July will be "choppy" with a bias higher for equities. 2% is the top on the long bond going forward. 60 is the low on CDX IG spreads. And one should "sell-the-rip" in the S&P above 3,250 and a "buy-the-dip" below 2,950. Sounds reasonable enough, I suppose. The figure (below) is from the latest edition of Hartnett's popular weekly "Flow Show" series and it speaks for itself. The Fed has unleashed some $2.3 t

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8 thoughts on “No Good Answers (Crunch Time)

  1. Earlier on McConnell said another bill would not come till late July. He was betting on the warm weather virus fade and the Southern Republican stronghold being safe from the “first round” of the virus. With the Governor of Texas instituting a mask policy it may be time for the Republicans to admit the obvious. With all of the bad news on multiple fronts I doubt there will be much selling the rip at 3250 unless McConnell acts. Divide and conquer is not always a good plan. Now we are a divided Nation and the virus is winning.

  2. The global solution since at least 2009 has been to pump money into the economy by those countries that can. Try and remove the money and the markets scream NO. And on it goes. There appears no way to stop this cycle without major systemic change, but when has that ever happened without extreme pain.

  3. “No one can accuse me (a political scientist originally) of not understanding the president’s dilemma.”

    Sadly, H, you understand it far more than him. Ergo, an acutely serious problem.

  4. Chart 2, with deaths showing classic curve bottoming behavior is sobering. Seemingly on cue 8-10 days after cases curve shows bottoming behavior.

  5. After the GFC, the Fed’s short term rates remained at effectively zero while the Fed’s balance grew (from about $1T prior to the GFC) to about a max of $4.5T by YE2014. The Fed first started raising short term rates in 12/15 and got in five 25 bps increases before starting to shrink (run off only?) the balance sheet in 1Q2018. After four more 25 bps increases (basically every quarter) and the balance sheet down to ~$4.1T, the Fed had to change its tune on at least interest rates (after the market had a tantrum/meltdown with S&P500 declining almost 20% over 4Q2018). Three quarters later, with interest rates flat and the balance sheet down to about $3.8T, the Fed decided to (“had to”?) stop shrinking and instead stared growing the balance sheet once again.

    I understand the notion (but not necessarily the mechanism) that shrinking the Fed’s balance sheet constitutes monetary tightening in and of itself (and is additive to the Fed’s changes in short term interest rates).

    I firmly believe in my bones that the government’s monetary/investment presence in markets should be minimized. Maybe once the economy stabilized, the Fed should lead with shrinking the balance sheet (in order to tighten monetary conditions) ahead of materially increasing short term interest rates.

  6. Thanks for your article. I know you focus on the macro economic picture but but I wish you could investigate the impact that the biggest banks are having by reducing credit to the economy. I fear this will have a greater impact, quicker than I’d the government extends the $600 payment.
    In fact because the banks have started making credit harder to get, if the government does not extend the $600 payment, the default rate should start to skyrocket.

  7. Excellent post as usual, I cannot imagine a president or administration in recent memory less equipped to deal with a “Sophie’s Choice” type of dilemma, so I’m currently pessimistic about the outcome for the US economy and population near term. Markets will likely be fine even if volatile, the Fed has the only working vaccine for Covid and will continue to deploy it if(when) the indices catch the virus again with the rest of the country.

NEWSROOM crewneck & prints