Trying to make sense of the global financial ecosystem been tuff over the last 45 days. The question of the global economies being in simultaneous recession is well agreed by across the board. The goal of this piece is to make sense of this historic impulsive move by the Federal Reserve in the last 45 days. Printing money is digging the whole deeper in an over leveraged market that closed 2020 desperate for gains indulged in high-risk financial instruments. They should have paid the price, but instead have been saved the same way that various institutions were saved from public margin calls with public money in 2008.
The wave of stimulus has been historical to say the least. I'll put it simple for comparison. The $11 trillion by the: FED, ECB, Boc, BoE, BoJ, etc is roughly 20% of the current $58 trillion in public debt owned by governments. This was all done in 45 days.
This last week the total projected injection by the Federal Reserve Bank topped $6 trillion (not counting future REPO agreements that could be expanded). The most recent increase of $294 billion of securities funded by the Dept. of Treasury was added to the SOMA portfolio. The System Open Market Account (SOMA) contains dollar-denominated assets acquired through open market operations. In addition, the Fed added $650 billion in temporary credit lines to fellow banks, a slight decline form last week— but stagger never the less. The Feds injection in their balance sheet this month accounted for the entirety of the QE3 injection from 2019. My personal estimation at the stimulus total by the Fed alone with be over $7 trillion. Data since the Feds swap lines turned online last indicates an increase in an average $10 billion in federal swap lines between federal and regional banks to $358 billion— a +358% increase.
The Fed announced a new facility for municipal bonds and their details on a good amount of other planned programs. The most notable— the Main Street Business Lending Program (MSBLP) has been appropriated $750 billion for loans and $75 billion in equity. Termed the “fallen angels” credit facility program, the Fed has opened $600 billion to purchase ETF’s in the secondary Market Corporate Credit Facility. These ETF I’ve covered significantly and most notably issued sells on both 3 week’s before their respective crashes.
The HYG and JNK (the two most popular ETF’s for junk bonds) surged. This was similar to what happened in 2009. The speculation between the correlation going forward is questionable, but nevertheless pretty obvious right now at least. The performance on the U.S. dollar (DXY) in relation to the Euro is creating a tension for competition between the EUR and USD for capital inflows to their respective economies.
The FED is considering a fifth stage of stimulus, which is why my estimates right now are for a $5 trillion influx by the Fed alone. The problem right now is that the lack of synergy between the Fed and the other major central banks right now is causing the same stagnation that happened in the gold and bond markets recently with bids and asks not being on the same speculative timeframe. Inflation I assume will be around 5% because of this influx.
My expectation is that the recent 27% is a pullback in the current downtrend will sustain a bear market going into the next few monthly prints. Statistically speaking, looking at this bullish should only be done in lower time frames. This market is made up of different perspectives, risk-spectrums, ages, etc. Sentiment needs to be watches closely and this is why comparing a variety of intercorrelated financial instruments from different classes can lead us in the right direction.
Going into next week: Europe, Australia, and other markets will be closed for holiday, but the U.S. and other Asia Pacific markets will be online. However, Monday won't be worth trading and most smart money won't be online. However, if there is a gap up or down, then the speculation that a gap on a Monday that historically shows prints of little to no change in the rate change, then this could bring around 4% of volatility is a gap down or gap up happens.
Something work point out here is how quickly the balance sheet has grown recently. This can be better seen by overlaying the Fed’s weekly balance sheet over the performance of the price for the S&P500 and can see an indirect correlation that’s pretty profound.
Financial Venerability
Since May of last year I’ve watched closely the corporate debt—leveraged loans— and fixed income asset classes. I called in mid January that record inflows into HYG in a single day was driving an over-leveraged MBS and swap market that was on thinner and thinner pins as the US500 ascended to Trumps appraisal. The inflows that were seen well before the COVD-19 virus was relevant in financial market’s in mid January, with that Wednesday seeing a new all time record for inflows. It told me at that time that the market was desperate for debt and through highly leveraged assets backed by leveraged fundamentals that was the risk the market was beginning to take.
The venerability right now lie in over leveraged debt— credit market’s that relate to corporate junk bond, sketchy municipal projects, a housing market on 2 months back-pay with interest on (Triple net properties, no tax; interest only income models), and lastly ETF’s with a printing press creating guaranteed bills for any ask (LQD,BND,VCIT). The OTC released a report that global corporate debt reached $13 trillion. Naturally, if you’re looking to issue debt in a low risk environment you would do so. The downside is that they received a triple B rating— a few notches away from junk. This being said, the recent outflow and downgrades are because — as Darwin would agree— those companies and entities that were using over-leveraged and simply dubious business models (regardless of your market cap) have proven which companies in which sectors have actually had over priced PE’s for a valid underlying reason.
The problem when these corporate bonds default, which will then bankrupt and liquidate firms resulting in jobs being lost. When this is multiplied into trillion of dollars, the impact foreseen on both the U.S. and especially the emerging markets and Europe which will have much more of a downside risk as the upside risk they entered into years ago than was perceived. The housing market is about to collapse and it will start in the feds balance sheet.
Very interesting read! I 100% agree with you... Do you think we will see a bull trap as in 2008 and 2000 with regards to further downside and the market pulling back to the 2900 level which correlates to the 618 level on the fibo... There is something fundamentally wrong in this market
TayFx
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@MDasoo23, yes, it's high leverage due to late money that was desperate for returns in the late 2019's but now want a bailout
MDasoo23
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@TayFx, As much as the Fed injects into this market it can’t be saved, it’s just going to cause major inflation problems by them printing money... The major downfall I would say with this market is greed, People saw all time highs for a good period but want to continue chasing it
Ziggyst
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Really good read, thank you for the commentary which is very detailed!
TayFx
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@Ziggyst, thanks alot for this. would you like more?
rk4kT
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@TayFx, YES. Thank you! can you also include some kept s&p levels and where you think the market is headed short term and long term?
thank you!
stockmarketupdate
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Your commentary is spot on and very through. The devil of Fed bailout consequences is hidden in the details of damage done to the US dollar, and the gradual disconnects of sovereign countries form the US treasury. The ensuing global depression (though not in tradition definition) is now guaranteed. The only reason other countries still holding US Treasury is their economy is the same dire state and they can't break the tie with the US$ overnight. What many people don't realise is that when short term rate is zero reducing them further has diminishing impact. Fed knows this that is why the invented QE unlimited to bail out the 1% and in doing so closed all doors to monetary normalisation. Global economy is essentially on a one way MMT road to oblivion with SPX at the most extreme valuation with zero prospect of long term return.
@stockmarketupdate, I think this will be a deleveraging that hasn't been seen for 30 years
stockmarketupdate
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@TayFx, You are correct. Market reactions to fundamentals are delayed by stupidity of the masses. Majority of investors and traders have no idea about price discovery, the effect of over $6 trillion dollars Fed deficit on the US dollar and Forex havoc that is yet to be unleashed and deleveraging of life time as you pointed out. Many are buying stocks because they have SPX Anchoring Bias to ATH of 2020. A rude awakening with massive tidal wave will wash over all ilusion in coming month.