Opinion

Fed Panic Attack

Nothing speaks of panic more than a gamble doubling down after a losing trade. And that’s what the Fe dis doing here. After seeing their emergency rate cut of 50bp going over like a lead balloon and every other central bank emergency action fail (think the BOE’s 50 bp emergency rate cuts and today’s failed ECB additions of QE and liquidity, the Fed felt forced to launch their biggest bazookas yet:

$1.5 trillion in liquidity injections today and tomorrow and at least $500B in repos scheduled until mid April at least:

And no wonder. Global markets are crashing. Look no further than the UK’s $FTSE crashing to its 2012 lows of 8 years ago:

Heck look at the broad US $NYSE crashing all the way below the US election lows of 2016:

Oh yes, it’s panic time at the Fed, the same Fed that said the economy is in a good place just 3 weeks ago and there was no need for rate cuts and that they will taper their “temporary” repos in March.

The second they did that everything fell apart. Blame the virus if it makes you feel better, but fact is the excess of the last few years is becoming unwound, a global reset I called it:

And it’s scary. Central bankers have to prove that they can keep the lid on things and not lose control and so far they are all flailing badly.

The Fed for years has claimed it doesn’t target asset prices. I happen to think that’s a bold face lie. Why? Because they always magically show up at precisely the right time when things look to break down.

Just look today, with in 45 minutes of me showing this chart they showed up with their announcement:

Sure, call it all a coincidence, I’m not. Too much history there in these charts and correlated Fed action.

But now the Fed’s panic may itself lead to panic. If markets perceive central banks to lose control then nothing will stop this southward bound train.

Yes we’ve had a massive correction and crash, but, and I hate to break this to everyone, markets are still highly valued relative to GDP. In February we reached 158%, a figure I’ve been warning about. I posted this warning literally on the day before the top:

Yesterday markets closed at 133.9% market cap versus GDP. While much lower than in February, if this business cycle turns in earnest, we’re still nowhere near a reversion to a historic mean.

And that continuous to be the risk here. Central banks out of ammunition and currently with their backs against the wall. What if they can’t stop the business cycle turn? They couldn’t in 2000 or in 2007. Then we are at the beginning of the journey, not the end.

I can’t know how we close today or tomorrow, but the Fed has only until next Wednesday to convince markets that is still has the goods to avert the very crisis Janet Yellen in 2017 claimed would never happen:

Well here it is. And it’s staring a hapless Fed, desperate to keep the wheels from falling off, straight in the face only 3 weeks after claiming everything was fine and dandy.

Now markets have crashed and the wheels have come off and the Fed’s having a panic attack. How confidence inspiring.

Tick tock Jay Powell. You’re running out of time. The financial damage that has unfolded in the past 3 weeks is so broad, so deep that it may already be too great to reverse.

Frankly, from my perch: If they can’t get markets under control in the next 24 hours and we’re staring at another Friday horror show, then the global recession may have already begun and then there is nothing the Fed can do about it. So today and tomorrow are key, next Wednesday is the Fed’s last chance, but at the rate things are going the Fed doesn’t have until next Wednesday.

And I think they know that. Hence they acted today to the tune of $700B in repo and another $700B tomorrow. So far the market is saying: That don’t impress me much:

$DJIA down 2000 despite a $1.5trillion liquidity announcement. Whatcha gonna do when the bears come for you? Put up or shut up Fed.


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Categories: Opinion

10 replies »

  1. To be fair to the Fed, they do not do their economic analysis and predictions based on pandemics. What strikes the most is the perfect timing of extreme overvalued markets about to release an earthquake and the corona virus tsunami that followed, total devastation. As if someone knew markets were about to crash and needed something to put the blame on… amazing timing.

  2. You lucky, lucky people. Gold (spot) currently stands at $1568.5, (20:20 GMT) it always takes a hit from co-liquidation when other markets crash, this is probably as low as it gets. Upside over the next 3-9 months should be 50-100%, could be more if things get bad. It’s difficult to see much downside, 10% probability of low from here of -10% before going up is my guess.

    Coronovirus: Italy almost certainly hasn’t peaked yet, UK not expecting to peak for 2-3 months. USA has a welfare and public health system exquisitely designed to maximise the damage from epidemics like this. Add an incompetent buffoon of a president who ignores scientific advice, lies constantly so can’t be trusted to relay accurate information. When USA does half decent testing we might glimpse the real picture.

    Once Italy peaks its number of cases will likely double from there and deaths increase a bit more than that. You can then take those estimates and multiply by 10 to 50 (to account for population and USA factors) to get the probable US ultimate outcome, but it may well be worse.

    We’ve made my initial target of below SPX 2500 but it was far, far too quick, I honestly have no idea of where this stops. There must be a decent bounce soon just to temper the plunge else we could be revisiting the 2009 lows.

    Feds repo binge? They had to do it, heck what’s a few $trillion when staring at possible systemic collapse. As I’ve said before: jaws, vertigo. Let’s hope the poop levels hold.

  3. Is there a chance this time is different (in a worse sense) and we don’t see a bounce like we would expect?

    Sven, you do mostly equities analysis but the move in bonds (treasury yields) today and yesterday is disturbing. Is there a chance fed loses control of yields and we see rising yield?

    In that case we expect the fed to print more? That would be pushing harder on the string which wouldn’t move bonds down but would be a problem for currencies?

    Literally every asset class is down except for shorts on the market. This is hard to trade. I was positioned for this but not for a move this fast and aggressive.

    • The probabilty of yields moving up much in the short-medium term is very low. Longer term, 1+ years, plausible. No one really has a compass in situations like this, this time is different in a worse sense, very much exacerbated by Fed’s actions over last year.

      Yes, current Fed reactions are pushing on a string, they are doing whatever they must to prevent the markets’ collapse, it’s akin to Oct 2008 but worse and less easy to counteract. All currencies are more or less in the same boat (except for gold), how they fare in the longer term depends on how their economies weather this storm. Urgent fiscal action is required to stabilise things, I think UK had a fair stab at it yesterday, monetary tools are really just hopeful sticking plasters presently.

      • PS I would not be surprised by a closure of US markets for maybe a week in the near future if this rout continues.

      • “The probabilty of yields moving up much in the short-medium term is very low. ”

        In a liquidity crisis everything is sold. There is nothing magical about bonds or gold. There is no reason a Rembrandt can’t be sold for a $1 if someone is hungry enough.

        Rule #1 of the investing game is preservation of capital.

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