The Fed’s response to COVID will zombify corporate America for a generation

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Photo by Nicki Eliza Schinow on Unsplash

In “The L-Shaped Recovery”, we predicted that a combination of demand destruction, job market uncertainty, rising debt, and a shift in consumer behavior would hinder the economy from achieving a rapid recovery from the COVID pandemic.

Since that writing, the Fed has taken the unprecedented step of intervening directly in support of the credit markets, producing a spectacular V-shaped rebound in the financial markets. But as we all know, the market is not the economy.

The economic template that the current public health crisis is most often compared to is the Great Depression of the 1930s, but a more instructive…


Despite a quick reopening, a crack in the Chinese currency suggests things are about to get worse for the world’s second-largest economy.

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Photo by Alejandro Luengo on Unsplash

The Chinese yuan finished last week near its lowest level in more than a decade as investors began to bet with their feet, heading for the exits over concern that the country is compounding its economic problems with geopolitical moves that are already generating widespread condemnation and even greater uncertainty.

The post-pandemic economic landscape presents a test for the regime that has long prided itself in delivering on an unspoken bargain where one-party rule is tolerated in exchange for consistent economic growth.

However, a sure tell that the government’s grip is slipping was its failure to set an economic growth…


Debt deflation starts the U.S. on a path to negative interest rates

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Photo by Ussama Azam on Unsplash

Last week, for the first time in the country’s history, the financial markets began discounting the possibility of negative interest rate policy.

On Thursday, the December Fed Funds futures contract settled above par (100.00), implying that traders have moved beyond talking in the abstract about negative interest rates and started betting with real money that the Federal Reserve will be forced by events into crossing a line they’ve long insisted they would not step over.

Japan, Europe, Switzerland, Sweden, and Denmark currently have negative interest rates, policy legacies left over from fighting the last recession in 2008. The theory was…


The largest position in the history of the financial markets is about to get squeezed.

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Photo by Vance Osterhout on Unsplash

Successful traders are always asking themselves two questions in the course of analyzing markets: 1) given a set of known inputs, are markets behaving as expected? and 2) if not, why not?

Since the COVID-19 pandemic crashed the world’s financial markets last month, central banks have responded with extraordinary measures to stabilize markets and prop up their respective economies

For its part, the Fed has undertaken policies on a scale unprecedented in the history of finance, radically expanding their balance sheet and going so far as lending directly to municipalities and buying junk bond ETFs in the open market. …


By A Trader’s Perspective on The Capital

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Photo by BRUNO CERVERA on Unsplash

Investors blindsided by the virus shouldn’t compound their problems by thinking that things will immediately return to normal once it passes.

Written April 11, 2020

It’s hard to predict the outcome of unprecedented events because, by definition, they’ve never happened before, and handicapping them is nearly impossible. The models used by scientists to justify a complete shutdown of the global economy to mitigate the spread of the coronavirus may turn out to be off by a factor of ten or more. It’s not meant as an indictment of them but an acknowledgment that like most investors trying to navigate the…


The Fed’s foot is on the gas but the economy is losing altitude

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Photo by Richard R Schünemann on Unsplash

Investors have gone all-in on the bet that the Fed and its central banking colleagues abroad will be successful in turning around a slowing global economy. The melt-up in the S&P since early last month is like Wall Street’s version of pushing all of their chips to the middle of the table. It’s not really surprising seeing that in October the Fed, the Bank of Japan, the European Central Bank and the People’s Bank of China all expanded their balance sheets for the first time in more than two years, giving the markets a massive shot of adrenaline.

As far…


Diverging paths of the economy and the market continues to be a study in contradictions

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Photo by Viktor Talashuk on Unsplash

In the weeks since our last comment the major central banks, led by the Fed, have ridden in hard to try and extend the life of what is already the oldest economic expansion in history. A confluence of declining corporate earnings forecasts, weakening industrial and retail activity, and persistent funding shortfalls in dollar-based securities markets has forced the Fed to administer CPR on the financial system. Despite the outwardly calm appearance, the Fed is very nervous, literally throwing money at both the economy and the markets in an effort to prevent a downturn in global growth from metastasizing into another…


Declining economic growth may become too much for equity markets to ignore

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Photo by Michał Parzuchowski on Unsplash

Yesterday’s sharp deterioration in risk sentiment is a sign that the equity market and its patrons at the Fed may have a couple of serious problems: 1) The latest numbers from the Institute for Supply Management (ISM) suggests the US economy may be close to, or already in recession and 2) the Fed has been too slow to recognize it. Neither of these issues is exactly new news but the stock market’s seemingly oblivious reaction to the growing danger has been nothing short of remarkable. Until now.

The continued erosion of benchmark ISM survey data on U.S. manufacturing, its worst…


Adequate funding a potential problem for markets

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Photo by Robin Spielmann on Unsplash

Just like the equity market’s general complacency over the uncertainty created by a potential presidential impeachment, it is exhibiting a similar lack of interest in the ongoing liquidity squeeze in short-term funding markets.

A sharp spike in overnight financing rates last week due to a scarcity of bank reserves was initially dismissed as an unexpected confluence of technical factors. Everything from quarterly tax bills, treasury auction settlements, and principal and interest payments were blamed for draining an unusual amount of money from the system and causing an acute shortage of free reserves. Overnight rates were said to have traded as…


Markets too complacent in face of political turmoil

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Photo by Markus Spiske on Unsplash

Despite a lack of facts, Washington has been consumed by accusations that President Trump acted improperly in a phone call with his Ukrainian counterpart, with many claiming that it qualifies as an impeachable offense. That conclusion may or may not be true. More will be known after acting Director of National Intelligence Joseph Maguire addresses the whistleblower complaint that sparked the controversy before the House Intelligence Committee on Thursday, September 26.

Odds for Trump’s impeachment spiked yesterday on the betting market Predictit to 57%, the highest level this year. …

A Trader’s Perspective

Simplifying macroeconomics and market trends.

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