Since the onset of the pandemic, the Fed has entered into the most aggressive monetary campaign. Its goal was to bolster asset markets to restore confidence in the financial system. However, the trap is the Fed is in a position where they can never stop QE as interest rates can’t rise ever again.
As we discussed previously, Jeremy Siegel already declared the end to the 40-year bond bull market.
“History has shown that this liquidity has to come out somewhere, and we’re not going to get a free lunch out of this. I think ultimately, it’s going to be the bondholder that’s going to suffer. That’s certainly not the popular notion right now.” – J. Siegel via CNBC
However, this is not a new sentiment, but it has existed since I started calling for rates to fall below 1% as far back as 2013. The reasoning then, and is the same today, is the linkage between the debt and economic growth. Read More
The world is currently navigating through uncharted economic waters as the coronavirus lockdown has sent many economies globally into a significant recession. Historic monetary and fiscal policy has been deployed these last few months, which seems to be far from over.
Now many economies are beginning to consider negative interest rates due to the lack of options to combat a recession. Historically, Central Banks would have the option to dramatically cut rates to help stimulate the economy, but today throughout all major economies, interest rates are already at extreme lows. Read More
In a word: Gilead. It’s the optimism associated with the company’s experimental Covid-19 therapy which has supported risk assets as this week nears the final stretch. Overnight, equity futures hit new post-crash highs (2965 for the S&P) as investors take solace in the progress being made to combat the outbreak. While Remdesivir (we’re never going to correctly pronounce that) isn’t a vaccine nor a silver-bullet to end the pandemic, the development of such a drug has shifted investor sentiment and points toward a potential path back toward a version of normality. While risk assets have benefited on the margin from this news, Gilead cannot be credited for the rally in domestic equities which has trimmed the year-to-date losses in the S&P 500 to just 9%. It’s well within the realm of conceivable outcomes that May is the month stocks breakeven for 2020; leaving behind the volatility of March and April. For context, the Nasdaq is already effectively flat on the year…CLICK for complete article
Just how much lower can they go? To Zero. And the ECB’s negative interest rates are driving them closer to it.
Over the past three weeks, stocks in Europe have plunged by 22.5%, their worst decline since the collapse of Lehman Brothers. The sell-off has been across the board but the worst of it has been reserved for the banking sector, whose shares have been relentlessly crushed and re-crushed for 13 years.
On Monday, the Stoxx 600 Banks index, which covers major European banks, plunged 13%. Today, after a knee-jerk bounce-back that then fizzled, the index closed essentially flat, back where it had been in March 2009. It has collapsed in a nearly straight line by…Click for full article.
Because “the coronavirus poses evolving risks to economic activity,” despite the “strong” fundamentals of the US economy, and despite stocks being off just 7.8% from all-time highs, the Fed’s FOMC announced during trading hours this morning, following the G-7 conference call, that it had voted unanimously to cut the target for the federal funds rate by half a percentage point to a range between 1% and 1.25%: Click for full article.
In recent testimony to Congress’s Joint Economic Committee, Jerome Powell stated:
“The debt is growing faster than the economy — that’s unsustainable. It’s not the Fed’s job to say how the government should cut the deficit, but we need to get the economy to grow faster than the debt. Otherwise, future generations will be paying more of their taxes to cover the government’s debt costs than for other things like health care, etc.
I think the new normal now is low interest rates, low inflation and probably lower growth. Even with the lower interest on its debt, the government still needs to reduce its budget deficit.”
Interestingly, these were not the first time we heard these words. In 2012, then-Fed Chair Ben Bernanke told Congress:
“Rising federal budget deficits are posing a significant threat to the U.S. economy and are likely to cause a crisis if not brought under control. Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences. Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth.”
Looking back now, it was clear that Bernanke was correct. Over the last 30-years, the rising level of Federal Debt relative to National Income has retarded Productivity in the U.S. CLICK for complete article