Repo volumes are rising in a similar fashion to the beginning of the crisis in February. Liquidity is leaving the system. Last two days, repos (O/N and term) rose above $100Bn. S&P500 topped on February 19 while repo volumes were about half of what we are seeing today. By the time we hit $100Bn in repos (March 3), the index had dropped 10%.
We had about two weeks (March 3-March 22) of repos printing about $128Bn on average per day. S&P 500 bottomed on March 23 as the Fed started stepping in with its various programs. Repos went down below $50Bn on average a day. More importantly liquidity started flooding the system. Reverse repos skyrocketed from $5bn on average per day to $143Bn a day by mid-April! Equities rallied in due course.
April/May, things went back to normal: repo volumes between $0Bn and $50Bn a day and reverse repos averaging about $2-3Bn a day->Goldilocks: liquidity was just about fine. Equities were doing well. Then in the first week of June, repos jumped above $50Bn, and last Friday and today they went above $100Bn. Reverse repos are firmly at $0Bn: they have literally been $0Bn for the last 4 days.
Again, just like in February, liquidity is starting to get drained from the system. By that level of repo volumes in March, equities were already 10% lower from peak. S&P500 is just a couple % below that previous peak, but Nasdaq is above!
I am not sure why the market is here. It could be that, in a perfect Pavlovian way, investors are giving the benefit of the doubt to the Fed that it will announce an increase of its asset purchasing program at this week’s FOMC meeting. If it doesn’t, US equities are a sell.
And don’t be fooled by no YCC or any forward guidance. The Fed needs to step in the UST market big way. YCC on 2-3 year will do nothing. Fed needs to do YCC on at least up to 10yr. As to really address the liquidity leaving the system, Fed needs to at least double its weekly UST purchases.
Fed is now probably considering which is worse: a UST flash crash or a risky asset flash crash. Or both if they play their hand wrong.
Looking at the dynamics of the changes in the weekly Fed balance sheet, latest one released last night, a few things spring up which are concerning.
1.The rise in repos for a second week in a row – a very similar development to the March rise in repos (when UST10yr flashed crashed). The Fed’s buying of Treasuries is not enough to cope with the supply hitting the market, which means the private sector needs to pitch in more and more in the buying of USTs (which leads to repos up).
This also ties up with the extraordinarily rise in TGA (US Treasury stock-piling cash). But the build-up there to $1.4Tn is massive: US Treasury has almost double the cash it had planned to have as end of June! Bottom line is that the Fed/UST are ‘worried’ about the proper functioning of the UST market. Next week’s FOMC meeting is super important to gauge Fed’s sensitivity to this development
2.Net-net liquidity has been drained out of the system in the last two weeks despite the massive rise in the Fed balance sheet (because of the bigger rise in TGA). It is strange the Fed did not add to the CP facility this week and bought only $1Bn of corporate bonds ($33Bn the week before, the bulk of the purchases) – why?
Fed’s balance sheet has gone up by $3tn since the beginning of the Covid crisis, but only about half of that has gone in the banking system to improve liquidity. The other half has gone straight to the US Treasury, in its TGA account. That 50% liquidity drain was very similar throughout the Fed’s liquidity injection between Sept’19-Dec’19. And it was very much unlike QE 1,2,3, in which almost 90% of Fed liquidity went into the banking system. See here. Very different dynamics.
Bottom line is that the market is ‘mis-pricing’ equity risk, just like it did at the end of 2019, because it assumes the Fed is creating more liquidity than in practice, and in fact, financial conditions may already be tightening. This is independent of developments affecting equities on the back of the Covid crisis. But on top of that, the market is also mis-pricing UST risk because the internals of the UST market are deteriorating. This is on the back of all the supply hitting the market as a result of the Treasury programs for Covid assistance.
The US private sector is too busy buying risky assets at the expense of UST. Fed might think about addressing that ‘imbalance’ unless it wants to see another flash crash in UST. So, are we facing a flash crash in either risky assets or UST?
Ironically, but logically, the precariousness of the UST market should have a higher weight in the decision-making progress of the Fed/US Treasury than risky markets, especially as the latter are trading at ATH. The Fed can ‘afford’ a stumble/tumble in risky assets just to get through the supply in UST that is about to hit the market and before the US elections to please the Treasury. Simple game theory suggest they should actually ‘encourage’ an equity market correction, here and now. Perhaps that is why they did not buy any CP/credit this week?
The Fed is on a treadmill and the speed button has been ratcheted higher and higher, so the Fed cannot keep up. It’s a dilemma (UST supply vs risky assets) which they cannot easily resolve because now they are buying both. They could YCC but then they are risking the USD if foreigners decide to bail out of US assets. So, it becomes a trilemma. But that is another story.
When we talk about the European Union, we often lament that there are no fiscal transfers from the ‘rich countries of the North’ to the ‘poor countries of the South’, assuming that indeed this is so. But is this really so, and how have things changed since the inception of the EUR?
To measure wealth across countries, economists normally use GDP per capita. This is how some of the major EU countries rank according to this measure.
More or less, as expected, the bottom is taken by the four Mediterranean countries, while the north and core are at the top. However, GDP is a flow variable, measuring how much economic activity was created during a specific year. It tells us nothing about pre-existing wealth or, in fact, current debts.
A much better measure to use for that purpose, would be CSFB data for net wealth per adult. CSFB publishes two sets of data: mean and median net wealth per adult. Here is the data for the same set of countries as above.
The two data sets give a slightly different view. Looking at the mean net wealth, the bottom three countries in 2000, Finland, Greece and Portugal, are still the bottom three countries in 2019, though in slightly different order. The Netherlands was the wealthiest country in both 2000 and 2019. However, the top three in 2000 was also comprised by Italy and Belgium, while in 2019, they were replaced by France and Austria.
According to median net wealth, however, two things stand out. First, the Netherlands was top three in 2000 but last in 2019 (the data for the Netherlands does look strange; the median net wealth collapses after 2011; I wonder if it is a question of CSFB changing something in their model). Second, Italy was top in 2000 but right in the middle of the rankings in 2019.
The other striking takeaway is that whether we look at mean or median net wealth, Germany is not that rich at all: it is much closer to the bottom of both sets of data. What about the North vs South divide? Portugal and Greece do seem poor but Span and Italy are more often seen in the top half of the rankings than in the bottom.
Part of the confusion when it comes to classification between the ‘rich’ North and the ‘poor’ South comes from looking only at the asset side of household balance sheets. Using BIS data for household debt and World Bank population statistics we can also calculate household debt per capita for each of these countries. This is the ranking according to this measure (the lower debt per capita the better).
The Mediterranean countries are better off than the core and the north as they have much less household debt per capita. This might be almost counterintuitive: the more assets one has, the more liabilities, they might also have.
We can also cross check the CSFB data above by combining the GDP per capita and the household debt per capita data to arrive at an approximation of a net wealth per capita. As discussed, we have to bear in mind that GDP is a flow variable, while debt is a stock variable, so we are not comparing exactly apples to apples. Here is the ranking according to the difference between GDP and Debt per capita.
The Netherlands is bottom just like in the median net wealth data from CSFB. Portugal and Greece bring up the rear which is also consistent with previous findings. The top three are slightly different. Ireland is top here and was second in the median net wealth data from CSFB. But here Germany is third while it was more towards the bottom in the previous case.
And here is the ranking according to ratio of household debt to GDP to capita ratio.
The Netherlands is bottom again, with Portugal and Finland bringing up the rear, so, similar to the CSFB data. The top is a bit more mixed but Ireland still figures in both sets of data.
Bottom line is that there is a much less clear differentiation between the North and the South when it comes to net wealth per adult/capita than what we tend to assume.
How have some of the other major countries fared?
Mean wealth (top table below) in the US is almost twice as big as the average mean wealth of these European countries, but median US wealth (bottom table) is less than that respective average. Japan’s median wealth has barely risen from 2000 (at least compared to any of the other countries shown here) but it is almost twice as big as US’. The median Brit is richer than the average median European but only marginally so compared to the Spanish or Italian. Finally, despite its phenomenal growth since 2000, China is still twice less rich that Greece, which is the ‘poorest’ of the European countries above.
It has been going on now for a year, at least: after stopping Chinese companies on several occasions from buying specific US assets, the US administration has been also looking into banning outward US investments in Chinese assets.
The fund in the spotlight is the Federal Government Thrift Savings Plan Fund (TSPF) – the largest defined contribution plan in the world with assets of about $558Bn. The assets are split in five core funds and one additional overlapping fund as following:
Of those above, it is the I Fund that is now in the spotlight. For the moment, it has no exposure to China as it is invested in MSCI ex US EAFE.
TSPF is an outlier amongst most large retirement plans that it still has no EM exposure. In June 2017, external consultants, Aon Hewitt, made a recommendation to the board to switch to MSCI ex US All Country which is a much broader index followed by all large retirement plans. One characteristic of this index is that it includes many EMs (and yes China). The board studied the proposal and made the decision to switch in November 2017 with a target for that sometime in 2019*.
As the US-China trade war was going in full swing, the threats of possible ramifications on US investments in China started coming in, and the I Fund never made that switch.
How big is this potential US investment?
The MSCI ex US All Country is still about 75% developed markets (DM). But China is about 11% weight (second largest now), which is rather big given the recent index inclusion (the weightings have increased progressively in the last two years). That means the I Fund would have between $6Bn exposure to Chinese equities.
Adding the L Fund exposure. The L Fund will have 9% in the I Fund (from 8% currently). Therefore, given the AUMs in each above, it will have between $1-2Bn Chinese equities exposure. So, total TSPF exposure will be max $8Bn. Note, however, the L Fund’s expected exposure going forward: projections are for a substantial reduction in the G Fund weights at the expense of all others. So, potentially the future Chinese exposure can grow substantially as also China’s weight in the MSCI ex US All Country index also grows.
What is that in the context of the big flow picture?
China is in the cross hairs of deglobalization which started before the Covid crisis, but now, that process is accelerating in direct proportion to the anger towards China amongst some of the major global players, especially the USA. In the USA, globalization coincided with financialization which promoted major capital inflows to offset the trade account outflows. Financialization is now on the wane in the USA (as per the regulations post 2008, and accelerated further post the Covid crisis), while on the rise in China (see flows below).
As the Chinese economy has been catching up to the US (and possibly the Covid crisis also accelerated this process as well), it is likely that we may see a reversal of some of these past flows, namely, a reduction in China’s current account surplus at the expense of net foreign inflows.
Last year passive index inflows in China A shares were $14Bn; total inflows were about $34Bn
Total foreign investment in Chinese A shares is about $284bn
Foreign equity inflows this year are still a positive $5Bn despite the Covid crisis: according to HSBC data, March recorded an outflow (largest ever) but all other months were inflows, with April inflow more or less cancelling the March outflow.
Total foreign holdings are also around $283Bn, 70% of which are in GGBs.
Inflows into GGBs have been consistently positive since the index inclusion announcements last year and the year before.
According to Barclays, YTD net Inflows are at $17Bn (5x more than at same time last year) despite a net outflow in March (but that was only because of selling in NCDs).
Average monthly inflows in Chinese FI is about twice that in equities.
March registered the largest domestic outflow ($35Bn) of any month since the 2016 CNY crisis (largely due to southbound stock connect flow (mainland residents bought the largest amount of HK stocks on record).
According to HSBC, FX settlement data shows that, most likely, domestic corporates have actually been net sellers of foreign currency in Q1 this year.
While Chinese exports are expected to decline going forward, in the short term, so are imports, especially after the collapse in oil prices. However, it is inevitable that if globalization does indeed start reversing, China’s current account will shrink and possibly go into a deficit.
What happens to the overall flow dynamics then, really depends on whether foreigners continue to invest in Chinese assets (and expecting that domestic residents might look to diversify their portfolios abroad once the capital account is fully liberalized, if ever). A potential ban on US Federal Government investments in China might indeed be driven by short-term considerations and emotions following the Covid-19 pandemic developments, however, unless it is followed by also a ban encompassing all US private investment, it is unlikely to amount to anything positive for the US. Moreover, it could actually give the wrong signal to foreign investments in the US, that the administration is becoming not so ‘friendly’. That could spur an outflow of foreign money from US assets, something that I discussed at length here.
There have been two dominant trends in the last four decades. The breakdown of the Bretton Woods Agreement in the early 1970s, the teachings of Milton Friedman, and the policies of Ronald Reagan, eventually ushered in the process of US financialization in the early 1980s. The burst of the Japan bubble in 1990, the Asian and EM financial crises of the mid-1990s, the dotcom bubble, and, finally, China’s entry into WTO in the early 2000s, brought in the era of globalization. This whole period has greatly benefited US, US financial assets and the US Dollar.
An unwind of these two trends of financialization and globalization is likely to have the opposite effect: causing US assets and the US dollar to underperform. From a pure flow perspective, going forward, foreigners are likely to invest less in the US, or may even start selling US assets outright. They are such a large player that their actions are bound to have a big effect on prices.
Foreigners have played an increasingly bigger role in US financial markets. In terms of ownership of US financial assets, if they were an ‘entity’ on its own, they would be the second largest holder of US financial assets in the US, after US households.
Foreigners owned about 2% of all US financial assets between 1945 and the 1980s. That number doubled between 1980 and 1990 and then tripled between 1990 and 2019!
As of the end of 2019, there were a total of $271Tn US financial assets by market value. Non-financial entities owned the majority, $129Tn, followed by the financial sector, $108Tn, and foreigners $34Tn.
The financial crisis of 2008 ushered in a period of financial banking regulation (on the back of the US authorities’ bail-out), which has slowly started to dismantle some of the structures built in the previous period starting in the 1980s. The Covid-19 pandemic and the resulting government bailout of the whole US financial industry, this time, are likely to intensify this regulation and spread it more broadly across all financial entities. As a result of that, there have been already calls to rethink the concept of shareholders primacy which had been a bedrock of US capitalism since the 1980s.
In addition, the withdrawal of the UK from the EU in 2016, followed shortly by the start of a withdrawal of the US from global affairs with the election of Donald Trump, ushered in the beginning of the process of de-globalization. The US-China trade war gave a green light for many companies to start shifting global supply chains away from China. The Covid-19 pandemic intensified this process, but instead of seeking a new and more appropriate location, companies are now reconsidering whether it might make sense to onshore everything.
What we are seeing is the winding down of these two dominant trends of the last 40 years: financialization and globalization. The effects globally will be profound, but I believe US financial assets are the most at risk given that they benefited the most in the previous status quo.
De-financialization is likely to reduce shareholder pay-outs (both buybacks and dividends) which have been at the core of US equities returns over the years. The authorities are also likely to start looking into corporate tax havens as a source of government cash drain in light of ever-increasing deficits. As a result, and as I have written before, I expect US equities to have negative returns (as of end of 2019*) for the next 5 years at least.
De-globalization is likely to reduce the flow of US dollars globally. Foreigners will have fewer USD outright to invest in US assets. Those, which are in need to repay USD debt, may have to sell US assets to generate the USDs. Indeed, the USD may strengthen at first but as US assets start to under-perform, the selling by foreigners will gather speed causing both asset prices as well as the USD to weaken further.
For example, foreigners are the third largest player in US equities, owning more than $8Tn as of the end of 2019. See below table for some of the largest holders.
As a percentage of market value, foreigners’ holdings peaked in 2014, but they are still almost double the level of the early 1990s and more than triple the level of the early 1980s. Last year, foreigners sold the most equities ever. Incidentally, HHs which have been a consistent seller of equities in the past, but especially since 2008, bought the most ever. Pension Funds and Mutual Funds, though, continued selling.
Foreigners are the largest holder of US corporate bonds, owning almost $4Tn as of end of 2019, more than ¼ of the market.
As a percentage of market value, foreigners’ holdings peaked in 2017, but they are still more than double the level of the early 1990s and 8x the level of the early 1980s.
Foreigners are also the largest holders of USTs, owning almost $6.7Tn as of end of 2019, more than 40% of the overall market.
As a percentage of market value, foreigners’ holdings peaked in 2008, at 57%! At today’s level, they are still about double the levels of the early 1990s and early 1980s.
There is a big risk in all these markets if the trends of the last four decades start reversing. US authorities are very much aware of the large influence foreigners have in US markets. The Fed’s swap and repo lines are not extended abroad just for ‘charity’, but primarily to ‘protect’ US markets from forced foreign selling in case they cannot roll their USD funding.
The UST Treasury market seems to be the most at risk here given the mountain of supply coming this and next year (multiple times larger than the previous record supply in 2008 – but foreigners back then were on a buying spree). The risk is not that there won’t be buyers, eventually, of USTs as US private sector is running a surplus plus the Fed is buying by the boatload, but that the primary auctions may not run as smoothly.
It was for this reason, I believe, that the authorities exempted USTs from the SLR for large US banks at the beginning of April. If that were not done, PDs might have been totally overwhelmed at primary auctions given the increased supply size, the fact that the Fed can’t bid and if foreigners start take up less. It is not clear, still, even with the relaxed regulation, how the primary auctions will go this year. We have to wait and see.
This is my reading of an excellent paper by S&P Global, “Examining Share Repurchasing and the S&P Buyback Indices in the U.S. Market” by Liyu Zeng and Priscilla Luk, March 2020.
Over the past 20 years (up to end of 2019), the S&P 500 Buyback Index had outperformed the S&P 500 in 16 out of 20 years, or about 5.5% per year. YTD, it has underperformed, though, by about 14%! With that it, has managed to erase the last 10 years of outperformance!
We had similar underperformance of the buyback index in the early stages of the last financial crisis, in 2007; while in 2009, the S&P 500 Buyback Index had a significant excess return. Make your own conclusions where we are in this cycle.
Reality is that “buybacks tend to follow the economic cycle with increased or decreased repurchase activities in up or down markets while dividend payouts are normally more stable over time, the S&P 500 Dividend Yield portfolio tends to outperform in down markets, while the S&P 500 Buyback Index may capture more upside momentum during bull markets.“
Almost all of tech, financial sector and consumer discretionary companies engage in share buybacks. Less than 50% of utilities do (but they all pay dividends). As share buybacks tend to congregate in cyclical rather than defensive sectors, the buyback index tends to underperform during recessions (this year).
Since 1997, the total amount of buybacks has exceeded the cash dividends paid by U.S. firms. The proportion of dividend-paying companies decreased to 43% in 2018 from 78% in 1980, while the proportion of companies with share buybacks increased to 53% from 28%.
Compare to other developed markets. Despite an increase of share repurchases in Europe and Asia, as a % of all companies, buybacks still stand at about half that in the US. On the other hand, fewer Canadian companies engaged in share buybacks during that period.
For the S&P 500 Index, over the last 20 years, 2/3 of the total return has come from capital gains and only 1/3 from dividends. Before the mid-1980s, when buybacks became dominant, the opposite was true. Buybacks have been instrumental in driving equity returns since the mid-1980s.
After yesterday President Trump tweeted about it, there is today continuous noise about a possible OPEC++ (global coalition of all crude oil producers) meeting next week with the expectations of substantial cut in production, anywhere between 10 to 15mbd. On one hand, if this materializes, it will be an unprecedented (not counting the 1970s oil embargos). On another, it will barely go to match the lost demand from the (almost) whole world going on economic standby for at least a month, maybe much longer on the back of COVID-19.
Let’s put this into context. We got a 25% decline in oil prices (from low 40s on WTI to low 30s) when Saudi Arabia and Russia (OPEC+) could not agree on a 1.5mbd cut a month ago, and Saudi instead announced they ‘might’ increase production by 1.5-2mbd (but as of yet they really haven’t). Arguably, if they had agreed on a cut, oil prices may have rallied a bit, maybe to mid or high 40s.
But then we got another 30% decline (from low 30s to low 20s) when the negative effect of COVID-19 on demand became more evident. In an alternative reality if OPEC+ deal had happened a month ago, prices could have then collapsed to the low to mid 30s (30% off mid to high 40s). Don’t forget that oil had already sold off about 30% YTD at the time of pre-OPEC+ no-deal weekend. These are the milestones to keep in mind when considering the scenarios ahead of a possible crude production cut in the next few days.
So, this is the way I am looking at this:
The likelihood of ‘everyone’ (not just Saudi and Russia, but OPEC++) really agreeing on a 10-15mbd cut is very close to nil;
But the likelihood of a ‘fudge’ agreement is very high.
‘Everyone’ benefits from a ‘deal’, even the oil importers as crude has become the main sentiment indicator and that would help risk assets: OPEC++ could decide to announce a ‘deal’ simply to stabilize the market with the idea that no one is expected to really cut production (perhaps negative effects of COVID-19 eventually wear off and demands comes back0.
Reality is that, in a similar manner to Saudi Arabia not really ‘wanting’, or, arguably, even being unable to hike production by 2mbd (they have never really managed to sustain production above 12mbd), no one really intends to, or is willing to go the other way (cutting production may actually entail lost capacity for ever). So, in both cases, everybody is playing the waiting game and hopes to do nothing. But the trick is in delivering the right message.
But what could happen to crude prices if there is an announcement of a 10-15mbd cut?
One would expect that the low range point of a bounce would be the low-to-mid 30s on WTI (where prices would have been, had a cut happened between Russia and Saudi Arabia a month ago, and the demand lost we can project at the moment from COVID-19). We are just above 30 on WTI as of right now, on Friday close. But given the much larger cuts this time, the high point of the range could indeed be the low 40s where prices were before the Russia – Saudi deal fiasco.
What happens if there is not even a ‘fudge deal’ in the coming few days? We go back to the low 20s immediately and then we wait to see how much more demand is destroyed.
I think we should distinguish between dollar shortage and dollar funding stress. We have a lot of the latter and much less of the former compared to any previous crisis.
‘Dollar shortage’ is your classical EM currency crisis stemming from a balance sheet currency mismatch: borrow in dollars to fund a non-dollar asset. Cue Mexico’94, Asia’97, Russia’98, Brazil’99, Turkey’01, Argentina’01. There are fewer of them nowadays.
A ‘dollar funding stress’ stems from borrowing in dollars to fund a dollar asset – that’s the problem today (see for ex. Z. Pozsar’s latest). It feels like the old EM currency crises because a lot of dollar assets are owned by foreigners but it is very different at the same time as there are no balance sheet currency mismatches.
That distinction is important because the market is treating it as if it is a dollar shortage crisis while it is a classic ‘Mark-to-market (MTM)’ crisis. If the dollars were borrowed through the swap market, refinancing would widen the basis and move the currency. If the borrowing was in the loan/bond market, it would be a credit story, not a currency story.
There is also a break even price for dollar funding above which foreigners would choose to sell the dollar asset and repay the loan, rather than continue to finance it (probably they will have to top up if the MTM has moved too much from where they bought it). All this is a very different situation from a dollar shortage crisis whereby they would need to sell a local currency asset and actually convert proceeds into dollars.
The Fed is well aware of all this and has acted very swiftly to respond to the recent strengthening of the dollar by improving massively the terms of the five existing central bank swap lines and by adding today nine more to the frame. The extraordinary moves in some DM currencies, notably NOK and AUD, has also prompted the respective central banks to verbally intervene (Norges) or ‘not to rule out’ intervention (RBA).
Some people have mentioned to me that a new Plaza Accord is needed. I am not so sure. In my opinion, it would be counterproductive. From a behavioral point of view, a weak dollar is not necessarily beneficial for US assets given that a big chunk of them is owned by foreigners. Just like a worsening of the dollar funding terms may push these people to sell, so could an attempt to substantially weaken the dollar. We shouldn’t forget a small but very much overlooked fact of the 1987 stock market crash: on the weekend before Black Monday, the US Treasury Secretary threatened to devalue the dollar.
Bottom line is that a dollar funding crisis should have a much smaller effect on weakening the local currency than a dollar shortage crisis.The market does not need a dollar devaluation, rather a stable dollar. Policy makers should make sure foreign dollar funding does not blow up.And finally, market pundits should be careful exaggerating the dollar shortage issue.
The response from the two most powerful central banks could not have been more different. ECB is innovative, using fine tuning and precision in tiered rates and targeted lending; Fed is still throwing the kitchen sink at the market by flooding the banking system with liquidity.
ECB is also going more direct partially because the banking system there is in shatters, but also because it makes sense regardless. Plus, the ECB is already taking credit risk by buying corporate bonds. Surely, the next step is literally direct credit lending and massively expanding the ECB counterparty list.
Fed is still stuck in the old model of credit transmission, entirely relying on the banking system. That model died in 2008, in fact, even before that, in the early 2000s, as the first Basel rules came into effect and the shadow banking system flourished.
Post 2008 it became much more common for financial institutions, like PE etc. to get in the credit loan business. Needless to say, this carries a big risk given that they don’t have access to Fed’s balance sheet like the banks.
The US banking system is now flooded with liquidity. If the new repo auctions are fully subscribed, this will double banks’ reserve balances and will bring them to the peak post the 2008 crisis. But do banks need that liquidity? It does not seem so: the first $500Bn repo auction yesterday had just $78Bn of demand. But that liquidity from the Fed is there on demand, plus the central banks swaps lines are open, and as of March 12, none has been drawn. And finally, the foreign reverse repos pool balance at the Fed has not shown any unusual activity (no drawdowns). All this is indicating that USD liquidity is at the moment sufficient, if not superfluous, so, it should have a negative effect on USD, given long USD has been a popular position post 2008.
All this liquidity, however, may still do nothing to stocks, as seen by their performance into the close yesterday, because balance sheet constraints prevent banks from channelling that liquidity further into the US economy where it is surely needed. From one hand, the Fed is really pushing on a string when it comes to domestic dollar liquidity, but, on the other, it is providing more than plenty abroad.
Risky assets are still a sell on any bounce, and the USD is probably a sell as well, as the Fed will be forced to keep cutting but it is now running a risk of foreign money exiting long established overweight positions in US assets.
China went through three main changes to stem the spread of the Coronavirus:
In the ‘West’, we’ve added ‘Self-quarantine’ first, in some countries. Others are in the delusional phase of ‘Delay’, because, apparently, they are worried that ‘people will get bored and break out of self-isolation if it last too long’. In fairness, there is a logical reason to delay because as China and Italy will find out, the economic costs of going through those stages above are enormous. That reason is that scientists could be able to find vaccine in time. That is a very dangerous bet for the infections grow exponentially, and if a vaccine does not come soon enough, the health care system of the country will be overwhelmed (and no, the coming warm weather in the Northern Hemisphere is unlikely to slow down the infections, like in the normal flu, because this is not the normal flu, and infections have shown to grow also in hot weather like Singapore or Iran). Then, not only the economic costs but also the societal costs will be unspeakable.
Finally, one other country’s leader still thinks this virus could be ‘fake’…
WHO went on a fact-finding mission to China and released a report on February 28. The report is unequivocal:
“China’s bold approach to contain the rapid spread of this new respiratory pathogen has changed the course of a rapidly escalating and deadly epidemic.”
There are also stories about two different strains of the virus, apparently stemming from the desire to explain higher number of infections/deaths in some countries and lower in others. I don’t know. To me this is simply a function of testing more people and proper reporting. It also makes sense to run with that story in countries which have chosen to be in the ‘Delay’ stage. Occam’s razor: even if there were two strains, I don’t see how they can be country-specific.
“Everywhere you went, anyone you spoke to, there was a sense of responsibility and collective action, and there’s war footing to get things done”
~Bruce Aylward, the epidemiologist who led the WHO mission to China
There is no doubt that even in the best cases in the ‘West’, the ones which added ‘Self-quarantine’, it will take longer to get through this also because of culture, different societal structure and more liberal thinking. For example, the talk in Italy is that if things don’t start improving in a couple of weeks the country might have to go to the next stage, ‘Rationing’ (only one person per household can leave the house to replenish supplies).
After decades of general peace, no major natural disasters in the ‘West’, and used to thinking only in financial terms, we cannot comprehend what is happening to us and are unable to quickly make the right decision how to proceed forward. For almost everybody, understandably, limiting our movement is at minimum uncomfortable and for a lot of people, unacceptable. To go through rationing is unimaginable (even though for some of us, who grew up behind the Iron Curtain, this was a feature of daily life). But seriously, it’s not like we have been asked to go to war, like our grandparents; we are just told to sit on the couch at home and play video games!