Anthony B. Sanders – Course Notes For Financial Markets
Hawaiian crooner Don Ho almost had it right. But instead of “Tiny Bubbles,” The Federal Reserve has blown BIG BUBBLES.
Momentum investing has shifted away from value investing, for the moment, and the NASDAQ Internet index (e.g., Grubhub, Chewys, Alibaba, etc.) has been rising rapidly.
With the help of The Federal Reserve, the NASDAQ Internet Index Forward P/E has skyrocketed.
And the QNET index is currently is at a P/E ratio of … 168.8.
The Fed’s new motto: “Don’t Think Twice, It’s Alright.”
There is nothing in the world that can change The Fed.
Federal Reserve officials had “many questions” about the benefits of yield-curve control when they discussed its pros and cons during their meeting in early June.
“Many participants remarked that, as long as the committee’s forward guidance remained credible on its own, it was not clear that there would be a need for the committee to reinforce its forward guidance with the adoption of a YCT policy,” minutes published Wednesday of the June 9-10 Federal Open Market Committee meeting showed. YCT refers to yield caps or targets.
Here is today’s Treasury yield curve versus the yield curve on December 1, 2005. Looks more like wholesale panic to me.
Furthermore, Powell and The Fed have signaled in the minutes that more long-term debt will have be issued … and purchased by The Fed.
The Fed dots plot from the recent meeting shows low interest rates until after 2022.
To infiniti … and beyond!!
Remember the rhetoric about The Federal Reserve using low interest rate policies to stimulate investment? Was it correct? Or did The Fed read the wrong book?
So now the USA has staggering levels of debt with historic low interest rates.
But corporations are letting their assets age rather than using low interest rates to purchase new assets.
Combine that with the
Apparently, Bernanke, Yellen and Powell read from the wrong book.
Here is Fed Chair Powell holding his “boomstick.”
Well, it was only a matter of time with foreign central banks buying corporate bonds … and stocks.
(Bloomberg) — The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.
The central bank also added a twist to its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility.
“This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria,” the Fed said in a statement. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”
The SMCCF is one of nine emergency lending programs announced by the Fed since mid-March aimed at limiting the damage to the U.S. economy by the coronavirus pandemic. With a capacity of $250 billion it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.
The Federal Reserve announced Monday it will begin purchases of individual corporate bonds.
The move comes nearly three months after first unveiling the Secondary Market Corporate Credit facility and one month after it began buying corporate-credit ETFs through the program.
The central bank will “create a corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds,” according to a press release. (Like Fed Chair Jerome Powell’s portfolio?)
The Fed’s late-March announcement of its move into corporate bond purchases set a floor for risk assets and helped valuations rebound from their pandemic-induced lows.
Speaking of setting floors on risk assets, does that apply to ETF or residential housing too? How about municipal bonds debt like Chicago’s??
Fed Chair Jerome Powell channeling Thurston The Great Magician!
Fed Chair Powell rejects using negative rates as a policy tool.
Speaking of Powell’s proclamation that negative rates are not appropriate for the US, the Rudebusch (SF Fed) specification of the Taylor Rule says that the Fed Funds target rate should be -13.52%.
That represents a spread of 13.77% over the current Fed Funds Target rate of 0.25%, the largest disconnect since 2000.
Apparently, Powell has gone as low as he will go.
Economists at the University of Chicago estimate that more than two-thirds of the workers on unemployment insurance are making more in jobless benefits than they did at work. Some are even hauling in two to three times as much.
Oof.
US GDP growth QoQ annualized plunged to -5% in the first quarter. Still not to the depths of The Great Recession (aka, housing bubble burst and ensuing financial crisis).
But you ain’t seen nothing yet.
The Atlanta Fed GDPNow estimate for Q2 GDP is -41.907%.
Why will Q2 look like a disaster? Take a peek at April’s preliminary durable goods orders: down -17.2%. Take out transportation and the decline is “only” -7.4%. In other words, the print (actual) are lower than the surveys. And while jobless claims clocked in at 2.12 million, it is the first decline in jobless claims so far.
Corporate profits shrank by 14% in Q1.
Now this is something you don’t see every day. A true market blitzkrieg at opening.
A 15-minute trading halt took hold after the S&P 500 Index fell 7% to 2,764.21 as of 9:34 a.m. in New York, triggering the breaker for the first time since December 2008 at the depths of the financial crisis.
And the US Treasury 10-year yield plunged 33.3% to 0.429%.
Leaving the entire US Treasury and Dollar Swaps curves below 1%.
Commodities are getting crush too. Thanks in part to Saudi Arabia turning on the oil flow (but not if spot price < extraction cost).
Put skew is in play.
The VIX is at its highest level since the financial crisis.
Where is Jerome Powell and The Federal Reserve?
The Federal Reserve said on Monday that it will increase the amount of money it is pumping into short-term borrowing markets during the current turmoil, reversing an attempt to wean investors off financing it has been providing.
Update at 4:00 pm EST. Dow down 2025 points or 7.83%. For today.
The Washington Post had a howler of a story yesterday: “U.S. markets post big gains as Joe Biden’s Super Tuesday surge offers coronavirus respite”
It that was true, it was a very short-term effect given that the Dow dropped 800 points this morning.
Or was it something else … like the IMF throwing $50 billion at the Coronavirus. And more stimulus from Central Banks like The Federal Reserve? But those effects were short-lived too.
The US 10Y Treasury yield fell another 12.6 basis points this AM to 0.926%. The lowest in history.
And Freddie Mac’s 30Y mortgage survey rate (green line) continues to follow the 10Y Treasury rate down the rabbit hole.
I want to thank Rick Sharga for remembering that I was one of the few that predicted what is happening today with interest and mortgage rates while most others predicted mortgage rates would rise above 8%.
The small firm effect is a theory that purports that smaller firms, or those companies with a small market capitalization, outperform larger companies.
However, since 2019, larger cap firms have been outperforming small cap firms with small cap firms having trouble beating Treasuries!!
The FAAMG index, Facebook, Amazon, Apple, Microsoft, Google, Alibaba, etc. has been skyrocketing in price.
The recent surge in FAAMG corresponds to the reversal in Federal Reserve tightening.
Of course, Apple (AAPL) just issued a warning Monday that it may fail to meet this quarter’s sales guidance thanks to slower production and weaker demand due to the disease known as COVID-19.
That is why we diversify!
According to a new study by MIT and State Street, there is a 70% chance of recession in next six months.
The researchers created an index comprised of four factors and then used the Mahalanobis distance — a measure initially used to analyze human skulls — to determine how current market conditions compare to prior recessions.
Using this principle, the researchers analyzed four market factors — industrial production, nonfarm payrolls, stock market return and the slope of the yield curve — on a monthly basis. They then measured how the current relationship between the four metrics compares to historical readings.
This recession measure is at odds with other recession probability forecasts which forecast a recession in the next twelve months at only 28% or less.
Recession is defined as two consecutive quarters of negative GDP growth. Well, it is possible that the coronavirus will damage China GDP and maybe US GDP, but the MIT/State Street study is based on Industrial Production, Non-farm payrolls, the stock market and the yield curve slope. Only the yield curve slope (orange line) and Industrial Production (yellow dashed line) are showing recession-like trends.
Unless of course, MIT/State Street are saying there is a stock market bubble that will burst.
Here is a visualization of the impending recession and Mahalanobis skull measure.
