A cura di di Walter Snyder, Swiss Financial Consulting
Rapid fire is the order as the Fed shoots its bazooka in every direction to ward off a credit and liquidity crisis. The catalyst for the crisis was the Coronavirus. This is a black swan event since it was not expected even as Wuhan struggled with the virus early on in November 2019. The reasons for the crisis were already apparent. It was clear that stock prices were very high thanks to share buybacks and that corporate debt was excessive. Interest rates had been too low for too long, and the recovery was long in the tooth and slow. Consumer debt was extremely high. The federal budget deficit was going to be over $ 1 million, and the federal deficit was over $ 26 trillion.
The signal that something was wrong came in September when the repo rates shot up to 8%. The Fed came to the rescue by making large sums of liquidity available so that the market would not freeze up. Banks were having problems meeting reserve requirements while big hedge funds were making lots of money with the carry trade. The euro and yen were available at interest rates lower than those current in the US due to the Fed’s “normalization” programme.
At the same time the stock markets were hitting new record highs in January. Then investor sentiment began to change when it became clear that the Coronavirus was going to be a factor to be reckoned with. The pandemic was spreading fast in Europe, and that shook investor confidence. Then the stock markets began to sputter as evaluations fell at record speed.
At that point the US government decided that a care package should be readied to counter the effects of the virus while simultaneously the administration was preparing a series of facilities that would function as SPVs with the Treasury as owner and first looser and the Fed as the sugar daddy. The sums that would be made available were to be larger than what was handed out to Wall Street in 2008. The figure of $6 trillion was touted in the belief that such a sum would be more than sufficient to put an end to any crisis brought about by a liquidity squeeze. The Fed even struck agreements with other central banks to make swaps readily available to ensure a sufficient supply of US dollars to the global economy.
Whether this tsunami of liquidity will be enough to convince markets that there is nothing to worry about is a good question. The coming weeks will show if the bears have definitively frightened away the bulls.