Watch Live: White House Coronavirus Task Force Delivers Another Update
President Trump, Vice President Mike Pence, Dr. Anthony Fauci (after doing five interviews earlier in the day) and the rest of the White House Coronavirus Task Force will deliver their latest update on their efforts at 5 pm, following the latest team meeting in the situation room.
Will Trump & Pence announce an interstate travel ban? Dr. Fauci said earlier he’d be open to it, though it would create some Constitutional hangups.
Friday’s record 2000 Dow point surge will likely be cut in half if the spread bettors at IG are correct in indicating that the Dow is set to open about 1,000 points lower.
Meanwhile, in FX markets which are already open, moves appear relatively calm with the dollar modestly higher across most pairs expects the Yen, which however crashed on Friday as the US dollar funding squeeze hit levels not seen since the crisis.
Two caveats: this level is just indicative based on a handful of traders in a market vacuum, and ignores all the positional reflexivity and negative gamma that will emerge violently on the scene one futures do open for trading, where a crash as big as this will likely drag futures even lower… or not. The truth is nobody knows what happens next as the market has never before found itself in such a place.
Two: even if futs open about 4% lower, where they go from there will depend on the Fed. If, as BofA expects, the Fed announced a Commercial Paper facility, watch out above, as futures soar limit up as the dollar funding crisis is set aside for the time being. On the other hand, if the Fed does nothing and disappoints “whisper” expectations of a late Sunday intervention, then all bets are off.
Goldman Takes Out The Chainsaw: Cuts US Q2 GDP To -5%; Says Recession Has Begun
While it will probably not come as a surprise to anyone who read our earlier post to “Brace For A Record Decline in GDP“, but moments ago Goldman – which last week called the bear market just hours before it officially materialized, and cut its year-end S&P price target to 2,450 which the S&P almost hit late on Thursday – finally capitulated on its optimistic take for the US economy, and in a note published moments ago by its chief economist Jan Hatzius, Goldman said that it expects US economic activity “to contract sharply in the remainder of March and throughout April as virus fears lead consumers and businesses to continue to cut back on spending such as travel, entertainment, and restaurant meals. Emerging supply chain disruptions and the recent tightening in financial conditions will likely add to the growth hit.”
As a result, the bank is now expecting Q2 GDP to crater -5%, down from its prior forecast of 0%, and the biggest quarterly GDP contraction since the peak of the financial crisis when GDP cratered by 8.4%.
Goldman lays out the details of how it gets to this worst GDP print in 12 years below:
Over the last week, the number of coronavirus cases in the US has risen rapidly. In response, business and government leaders have begun much stronger measures to combat the spread of the virus. Even with monetary and fiscal policy turning sharply further toward stimulus—we expect a 100bp rate cut on Wednesday and a fiscal impulse of 1-2% of GDP—these shutdowns and rising public anxiety about the virus are likely to lead to a sharp deterioration in economic activity in the rest of March and throughout April.
Virus fears have already begun to lead US consumers and businesses to reduce spending on activities such as travel, entertainment, and restaurant meals. Airlines have eliminated a significant share of flights, conferences have been called off, major cruise lines have canceled all cruises, theme parks have shut down, and hotel occupancy has fallen sharply in cities with early virus outbreaks. Among sports leagues, the professional and college basketball, hockey, and soccer seasons have been cancelled, as have major golf and tennis events, and the baseball season has been postponed. Data from online restaurant reservations also points to a large drop in restaurant visits, especially in the worst affected cities such as Seattle.
While we are not assuming an Italy-style national shutdown in the US, the experience of countries like Italy, Spain and France offers some indications of the impact that extreme local-level quarantines could have. In Italy, for example, all retail stores except drug stores and grocery stores are closed, all restaurants are closed, hotel occupancy is at a small fraction of capacity, and some factories have closed temporarily while many others are operating below normal levels because workers are resisting going to work out of fear of getting sick.
Exhibit 1 provides illustrative estimates of how large the GDP impact of these consumption cutbacks could be at their peak in the worst-affected areas. The bottom of the exhibit shows our assumptions about the peak magnitude of cutbacks—for example, we assume an 80% decline in spending on sports and entertainment and a 50% decline in hotel and restaurant spending. We have scaled up some of our earlier estimates based on preliminary signals from US cutbacks to date and from the experiences of other economies that went through large outbreaks earlier this year. The bars in the exhibit multiply these assumed cutbacks by the GDP share of each category to estimate the impact on the level of GDP.
In total, our assumptions about consumption cutbacks in these categories imply a peak hit to the level of GDP in the worst-affected areas of 6-7%. Reductions in home sales of the sort seen in other virus-hit economies and in business investment would add to the hit to GDP. The impact on US GDP growth depends on what share of the country is affected at a particular time, how close the affected areas come to the peak hit shown in Exhibit 1, and how long the retreat from normal economic life lasts. Our baseline scenario assumes the largest impact in April, with many areas of the US experiencing about two-thirds of the peak effect shown in the chart.
Naturally, this being Goldman, the bank just has to error on the side of optimism, and so it does, noting that its baseline assumption is that “activity will start to recover after April and that H2 will see strong sequential growth, but the specifics depend on a number of important questions. Some are medical, including the extent to which social distancing and seasonally higher temperatures will reduce infections as well as whether good treatments will emerge. Others are behavioral and economic, including how quickly reduced infections will bring back everyday activities and how effective easier monetary and fiscal policy will be in providing support.”
And just to confirm it really has no idea, or visibility about what happens in the period it expects a super surge in GDP, Hatzius caveats that “the uncertainty around all of these numbers is much greater than normal.”
In short, while Goldman has no idea if and how the V-shaped recovery will take place, it is certain it will, and it now sees Q3 GDP surging +3%, up from +1%, and even higher, or +4% in Q4, from +2¼%, with further strong gains in early 2021.
Yet despite the sharply higher second half GDP forecasts, the bank still cuts its 2020 GDP forecast down to +0.4%, from 1.2%, which even in this optimistic, V-shaped recovery scenario, would be the worst annual GDP since the crisis.
What is perhaps most amusing about Goldman’s note is that it manages to incorporate a discussion of whether this catastrophic contraction – which will magically be limited to just one quarter – is classified as a recession.
Would the NBER business cycle dating committee classify our new forecast as a recession, given that it involves only one quarter of strictly negative growth? It is not entirely clear, but we think the answer is probably yes. The committee has noted previously that even a contraction of just a few months can meet its recession definition if it is sufficiently deep.
One shudders to think what the real GDP will be at the end of the year, when Goldman’s V-shaped recovery never materializes, and instead the far more probably L-shaped “recovery” emerges.
New Zealand Unexpectedly Slashes Rates by 75bps To Record Low 0.25%; Warns Kiwi QE Coming
Following in the footsteps of the Bank of Canada which on Friday was the latest bank to announce an “unexpected” rate cut, following a barrage of central bank easing on Friday morning, moments ago New Zealand became the latest bank to join the “emergency” rate cut fray when the RBNZ announced an unexpected, whopping 75bps rate cut bringing the policy rate to just 0.25%, the lowest on record.
Dipping into armageddon calendar guidance, in its statement, the RBNZ said the rate will remain at this level for at least the next 12 months, suggesting it may well go lower.
The central bank also said the negative economic implications of the COVID-19 virus continue to rise, warranting further monetary stimulus, noting that “since the outbreak of the virus, global trade, travel, and business and consumer spending have been curtailed significantly. Increasingly, governments internationally have imposed a variety of restraints on people movement within and across national borders in order to mitigate the virus transmission.”
And since “financial market pricing has responded to these events with declining global equity prices and increased interest rate spreads on traditionally riskier asset classes”, the “negative impact on the New Zealand economy is, and will continue to be, significant. Demand for New Zealand’s goods and services will be constrained, as will domestic production. Spending and investment will be subdued for an extended period while the responses to the COVID-19 virus evolve.”
Of course, that’s the same identical script followed by every major central banks which has been quick to blame the coming economic Armageddon on the viral pandemic.
And since the rate cut will do nothing to stabilize the economy, which is crippled as a result of the pandemic, the Monetary Policy Committee also “agreed that should further stimulus be required, a Large Scale Asset Purchase program of New Zealand government bonds would be preferable to further OCR reductions.”
Translation: Kiwi QE coming (say that fast 5 times), and the currency has reacted appropriately, with the NZD plunging as low as 0.5944 after closing 0.6134 on Friday, the lowest level since May 2009.
New York Governor Cuomo To Trump: Mobilize The Military
In an opinion piece published Sunday by the New York Times, New York Gov. Andrew Cuomo, who is presently presiding over the second-largest outbreak in the US, asked President Trump to mobilize the Army Corp of Engineers to help expand hospital capacity to fight the outbreak.
Cuomo cited one projection claiming that as many as 214 million people in our country could be infected over the course of the epidemic, and 21 million could require hospitalization, far outnumbering the ~914,000 hospital beds available in the US, which only has about 2.8 beds per 1,000 people on average across the county.
Since states don’t have the power to take decisive action, he asked the president to mobilize the Army Corp of Engineers to start retrofitting existing buildings like military bases or old college dorms into hospitals/quarantine centers, kind of like China did with the 14 improvised centers in Wuhan, not to mention the 2 hospitals they built from scratch during the early days of the outbreak.
Using the corp of engineers in this way wouldn’t violate federal law, Cuomo said, and it’s the best hope to help prevent unnecessary deaths.
Unsurprisingly, the editorial contained many backhanded criticisms of the administration’s response to the crisis.
Here’s the key excerpt:
States cannot build more hospitals, acquire ventilators or modify facilities quickly enough. At this point, our best hope is to utilize the Army Corps of Engineers to leverage its expertise, equipment and people power to retrofit and equip existing facilities — like military bases or college dormitories — to serve as temporary medical centers. Then we can designate existing hospital beds for the acutely ill.
We believe the use of active duty Army Corps personnel would not violate federal law because this is a national disaster. Doing so still won’t provide enough intensive care beds, but it is our best hope.
In short: Localize testing, federalize shutdowns and task the Army Corps of Engineers to expand hospital capacity.
The coronavirus pandemic is now upon us, and data from other countries shows us clearly where we are headed.
Every country affected by this crisis has handled it on a national basis. The United States has not. State and local governments alone simply do not have the capacity or resources to do what is necessary, and we don’t want a patchwork quilt of policies.
There is now only one question your team must answer for you: Can we slow the spread of the disease to a rate that our state health care systems can handle? The answer increasingly looks like no.
But that does not mean we should not try. There are fewer options available at this late date, but the federal government should move to implement them swiftly. There are three clear imperatives we need to address.
Testing
Slowing the spread of coronavirus is a function of testing and reducing the density of public gatherings. So first, Mr. President, you must stop the Food and Drug Administration and Centers for Disease Control and Prevention from overregulating the testing process, and authorize states to certify a wider array of testing labs and methods.
On Friday, you said that your administration had agreed to allow New York State’s public health department to authorize local labs to perform the state’s approved coronavirus test — a good first step. Your administration also approved high-volume automated testing by the Swiss diagnostics maker Roche.
But these moves are insufficient. Because of the high demand for testing kits nationwide, many labs with Roche machines will be unable to obtain enough of the company’s testing kits for weeks or even months. There are other labs that can do high-volume coronavirus tests that do not use Roche kits. But these machines cannot be used without further F.D.A. approvals, of the sort Roche received on Friday.
That means that while New York is conducting thousands of tests a day, we are still below our full testing capacity because many labs still rely on low-volume manual testing.
Mr. Trump, don’t let bureaucracy get in the way of fighting this virus. Break the logjam, let states fully take over testing so they can unleash hundreds of labs tomorrow and bring testing to scale. It is the only way we will have a chance of keeping up with the rapid spread of this contagion.
Risks to hospitals
Third, you must anticipate that, without immediate action, the imminent failure of hospital systems is all but certain. According to one projection, as many as 214 million people in our country could be infected over the course of the epidemic. Of those, as many as 21 million people could require hospitalization.
This would crush the nation’s medical system. New York State has just 53,470 hospital beds, only 3,186 of which are intensive-care beds. Our country as a whole has fewer than one million staffed hospital beds, fewer proportionately than China, South Korea or Italy.
Ask your experts, how many intensive-care beds do we need for our vulnerable populations, and how many do we have now? The scarcity portends a greater failing and a worse situation than what we are seeing in Italy, where lives are being lost because the country doesn’t have the health care capacity.
States cannot build more hospitals, acquire ventilators or modify facilities quickly enough. At this point, our best hope is to utilize the Army Corps of Engineers to leverage its expertise, equipment and people power to retrofit and equip existing facilities — like military bases or college dormitories — to serve as temporary medical centers. Then we can designate existing hospital beds for the acutely ill.
We believe the use of active duty Army Corps personnel would not violate federal law because this is a national disaster. Doing so still won’t provide enough intensive care beds, but it is our best hope.
In short: Localize testing, federalize shutdowns and task the Army Corps of Engineers to expand hospital capacity.
I make these suggestions not as a Democrat but as one of the nation’s most senior governors and a former cabinet secretary who knows the capacity of the federal government.
We have had disagreements about your actions against New York, which we can pursue at another time. Today, let’s work together as Americans. Time is short.
As of Friday, there were already 1,000 national guard troops deployed across the US as several governors called up the reserves to aid with the crisis response.
Fed Expected To Announce CP Bailout Facility Within Hours Or Risk Money Market Panic
As Bank of America’s rates expert, Mark Cabana – formerly of the NY Fed – writes on Saturday, “the Fed has been on fire” lately, which in light of the Fed’s activities in the past two trading days of the week, may be an understatement: the Fed announced a $5 trillion (assuming max allotment) expansion to its monthly repo operations and executed purchases on Friday of $37BN out of their $80BN/month in UST firepower across the curve. As we explained at the time, the Fed needed to do this to unfreeze an increasingly broken Treasury market and to facilitate a relatively orderly unwind of highly leveraged UST positions that have likely reached loss risk limits with recent market volatility, which sparked an unprecedented VaR shock (as Cabana note, “the dealer community could not facilitate the unwind of such trades since their balance sheets were full of duration + limited ability to expand them under current regulations).
And yet, despite the unprecedented large Fed UST purchases the Fed isn’t done, because as Cabana points out, not all highly leveraged UST trades have been unwound which is reflected by the fact that:
30Y USTs vs OIS have only richened marginally over recent days
30Y swap spreads have only widened back to levels last seen prior to the Fed’s shift in UST purchase strategy yesterday
implied funding costs on long-dated futures contracts has not materially eased.
And hinting that more is to come, the Fed said that “the composition of the remaining purchases will be announced on Monday, March 16, 2020, around 9:00 AM.”
However, with FRA/OIS exploding despite all the Fed’s emergency interventions, and even JPM now admitting the world is facing a $12 trillion dollar margin call…
… the Fed will have to do more before funding markets finally stabilize.
The problem is what does the Fed do. On one hand, as per the recommendation of Credit Suisse repo expert, Zoltan Pozsar, the Fed should “open liquidity lines that include a pledge to use the swap lines, an uncapped repo facility and QE if necessary.” With the Fed already restarting QE, that just means a full blast of unlimited swap lines re-opened with the world’s central banks coupled with a standing repo facility to bailout any and all financial intermediaries who are still caught on the wrong side of the Treasury basis trade that has crushed so many last week.
However, if the Fed does pursue this “kitchen sink” approach, and if it fails to boost confidence (especially if the market deems the fiscal response by Congress as insufficient), Powell would be out of ammo, his last bullet being to buy stocks (and oil) in the open market, a precursor to full-blown systemic collapse.
That said, there is one intermediate step the Fed can do.
According to BofA’s Cabana, the Federal Reserve may announce measures on Sunday night aimed at bolstering liquidity in the commercial paper market, used by companies for short-term loans, or as Cabana puts it “the commercial paper market will likely be the Fed’s next target to unfreeze.” The last time the Fed issued such an was in 2008 when the Fed bought commercial paper from issuers directly, when it also rolled out a Commercial Paper Dealer Purchase Facility in which the Fed would buy commercial paper from dealers directly.
To justify his point, the BofA rates strategist looks at the explosion in CP rates and 3m LIBOR-OIS spreads to levels last seen in the financial crisis, similar to what is going on in FRA/OIS.
As he further explains, during the last crisis, the CP market froze due to similar dealer balance sheet constraints as the UST market but with a different genesis. Dealer CP balance sheets are clogged because of elevated macro risks caused
increased or anticipated corporate CP issuance to secure cash
MMF to sell CP as a means to raise cash in anticipation of large institutional outflows.
Why CP? Corporations rely on the CP market as a reliable source of short-term cash for unanticipated funding needs. COVID-19 has provided a sharp downward shock to revenues and many issuers either sought to increase financing or the market anticipated the need for this. The expected CP supply shock + growing credit concerns then pushed spreads wider and reduced overall investor demand. This then made it harder for non-financial corporates to issue and for dealers to move any new issuance off their balance sheet.
U.S. money market funds took in a record $87.6 billion in the week to Wednesday, data from Lipper showed.
Meanwhile, as Reuters notes, investors are demanding the highest premium since March 2009 to hold riskier commercial paper versus the safer equivalent. The spread between the overnight AA-rated paper of nonfinancial companies versus riskier overnight P2 paper rose to 73 basis points on Thursday, the most recent data available from the Federal Reserve.
Without access to the commercial paper market, companies could turn to banks to draw on their lines of credit, potentially putting even more stress on lenders. At the end of 2019, banks had roughly $1.4 trillion of unused corporate credit commitments according to a recent analysis by Credit Suisse.
Already last week we saw Boeing, Hilton Worldwide and SeaWorld Entertainment draw on or increased the size of their credit lines in recent days, perhaps in anticipation of just such a worst case outcome. All three companies are in sectors directly affected by reduced tourism and discretionary spending due to the coronavirus.
Which is where the Fed steps in: in short, the Fed would effectively backstop the most urgent and short-term form of corporate funds. one which many companies in the past have used to repurchase their own stock, and as such any such corporate bailout will spark a huge political debate as Americans – rightfully – demand to know why the Fed is now in the business of bailing out companies that spent like drunken sailors on buybacks, only to demand a rescue now that they have no cash left.
In any event, at the same time corporates have been seeking to tap CP markets to fund short-term funding gaps, money market mutual funds (MMF) have been trying to raise cash in the secondary CP market. MMF are raising cash to build liquidity buffers ahead of an expected increase in investor outflows. We have already started to see outflows from prime institutional funds and this may spill over into government MMF depending on the severity of quarantines around the county & concerns over access to cash. With a backdrop of extremely volatile markets, MMFs may be concerned that outflows will continue as we have seen around market closures in the past.
And so, in anticipation of outflows, prime MMFs have already started to increase their liquid assets and reduce CP holdings, but this will only become more difficult as dealers struggle to find buyers and move risk off their clogged balance sheets… unless the Fed steps in.
What the above means in English is that in a repeat of the Lehman crisis, the financial system could see a bank run, only not in conventional deposits, but rather in money market funds: as Cabana explains, “the clogged CP market poses risks to higher bank funding costs and could result in an MMF run akin to that in the aftermath of the Reserve Fund breaking the buck in ’08.” To be sure, U.S. money market funds took in a record $87.6 billion in the week to Wednesday, data from Lipper showed. It coulf get much worse, as the market turmoil could spur nervous investors to withdraw from money market funds en masse, creating a run like that seen in 2008 with the Reserve Primary Fund, a $65 billion fund which saw its net asset value “fall below $1 thus resulting in investors receiving an amount of cash lower than what they originally deposited.” More below:
… the clogged CP market also poses increased risks for a MMF run. The source of the MMF run would be fundamentally different than during ’08. Recall, in ’08 the Reserve Fund experienced losses on its CP holdings sufficient to cause its NAV to fall below $1 thus resulting in investors receiving an amount of cash lower than what they originally deposited (i.e. “breaking the buck”). These fears sparked a run on MMF and forced the Fed to intervene in CP markets and the MMF industry.
The source of the current potential MMF run is not around “breaking the buck” but is about investors not being able to access their MMF cash on demand. Concerns around “breaking the buck” have largely been solved through post crisis MMF reforms that allows for institutional prime funds with credit sensitivity to have a floating NAV that can fall below zero. However, all prime funds have a weekly liquid asset minimum of 30% NAV (Table 3). If “weekly liquid assets” falls below 30% of NAV the MMF board can impose a liquidity fee of up to 2% for all redemptions; if the liquid assets fell below 10% the prime fund would be required to impose a liquidity fee of 1%. To ensure that MMF are not required to impose a liquidity fee most MMF maintain liquidity well above the 30% threshold.
The current concern is that if the CP market is frozen, prime MMF could see their weekly liquid assets fall below 30% as they experience outflows. If weekly assets fall below 30% this would need to be reported to the SEC, would be in the public domain, and could result in a liquidity fee. Such a drop in liquidity would like result in a run on the MMF which experienced a drop in their liquidity and could result in a run on the prime MMF industry more broadly. This type of run would then result in more forced liquidations which would worsen CP liquidity, increase front-end credit spreads, and weigh on market sentiment. We strongly suspect the Fed wants to avoid this.
Which is Cabana “expects the Fed to act quickly to avoid both stressed outcomes.”
What, specifically, would the Fed announce?
To address the current frozen CP market BofA expects the Fed to announce two CP facilities, likely on Sunday night. These facilities include:
a reintroduction of the 2008 “Commercial Paper Funding Facility” or CPFF
a facility that would specifically target purchases of CP on dealer balance sheets which we will call a “Commercial Paper Dealer Purchase Facility” or CPDPF.
These are discussed in greater detail below:
CPFF: the CPFF would likely be structured similarly to the facility in the financial crisis. In 2008 3m L-OIS widened to around 350bps amid mounting credit concerns. The Fed announced the CPFF to purchase CP directly from issuers and allow corporates to continue funding themselves despite market stress. After this facility was announced, L-OIS and Fin CP to OIS spreads started to tighten, though NonFin to OIS spreads continued to widen until the purchases were implemented.
CP was purchased at a discount rate of 3m OIS + 100bp plus either an additional 100bp surcharge or a collateral arrangement with the issuer. The Fed would provide 3m loans to a specially created LLC, which would use those funds to purchase CP directly from issuers. This LLC held the CP to maturity and used the proceeds to repay its loan from the Fed. US issuers of CP were eligible to use this facility and they were required to register with the CPFF. In short, Cabana expects that Fed will launch a CPFF similar to the ’08 facility. This CPFF would be targeted at to re-open CP issuance markets and to alleviate the potential bank funding strain from having numerous credit lines drawn over a short period of time.
CPDPF: a proposed “Commercial Paper Dealer Purchase Facility” would essentially entail creating a special Fed vehicle aimed at purchasing CP directly off of primary dealer balance sheets, similar to the current UST purchases discussed above. The purchase program would likely need to be relatively small and short lived in its existence. The facility would only be used to clear existing inventory off dealer balance sheets and provide an outlet for additional prime MMF sales until they had built sufficient liquidity buffers. There is roughly $9.5bn of CP on dealer balance sheets according to primary dealer data as of March 4. We might imagine prime MMF might only need to sell $20-$40 bn more to build their liquidity buffers by another 5%. Therefore, according to BofA’s calculations, it is likely that the size of the Fed’s CP dealer facility might only need to total $30-$50 bn.
There is a potential hurdle in that both of these facilities – which would seek to explicitly bail out corporations in need of funding and MMFs – likely cannot be unilaterally authorized by the Fed due to law changes since the financial crisis. The existence of these facilities would only occur through the authority of section 13-3 of the Federal Reserve Act. The Federal Reserve used the “unusual and exigent circumstances” clause (i.e. “section 13(3)”) of the Federal Reserve Act to extend credit to financial firms during the Global Financial Crisis in 2008. Using this broad authority, the Fed created and implemented five funding facilities to provide liquidity to primary dealers and act as a backstop to the commercial paper and asset-back securities markets. BofA explains further:
Congressional action has reined in some of the Fed’s emergency lending powers. The new guidelines do not eliminate the Fed’s lending authority but raise the procedural bar. The new law still allows the Fed act as the “lender of last resort” and create broad funding facilities to help market functioning. However, there are more hoops to jump. The Fed is also restricted from providing “tailored” help to individual firms.
To recap, the Dodd Frank Act of 2010 changed the Fed’s 13(3) authority and requires programs established under this authority to have:
Approval from the US Treasury Secretary
“Broad based eligibility” is meant to include a program or facility that is not designed for the purpose of aiding any number of failing firms and in which at least five entities would be eligible to participate. It also suggests programs should not be for the purpose of aiding specific companies to avoid bankruptcy or resolution.
Limited risk of insolvency: the definition of insolvency to cover borrowers who fail to pay undisputed debts as they become due during the 90 days prior to borrowing or who are determined by the Board or lending Reserve Bank to be insolvent.
All three conditions would easily be met in the current market panic.
Which brings us to the question of “when” will the Fed announce these facilities? Here, as above, BofA repeats that “time is of the essence on these facilities and expect the Fed will announce them this coming Sunday night.”
We believe it imperative the Fed roll out these facilities on Sunday night given the looming expected prime MMF outflows and necessity of their ability to sell CP in order to raise cash. If the Fed waits too long the MMF outflow pressure could mount and the risk of a large scale MMF run could increase.
Finally, how will the market respond if the Fed acts? Here is BofA’s conclusion:
We expect that 3m LIBOR-OIS and FRA-OIS spreads would tighten sharply if the Fed rolled out these facilities on Sunday. It is also expected that swap spreads and credit spreads further out the curve would tighten. Finally, we would also expect to see significantly less USD demand in the currently very strained cross currency basis market. Recall, offshore banks and other entities frequently use the cross currency basis market as a source for USD when the commercial paper market is less readily accessible (such as around year-end).
The flipside, of course, is that the Fed does nothing today and tomorrow all hell breaks loose, forcing the Fed to do even more to restore confidence, especially after Friday’s historic 2000 Dow point surge. In any case, the Fed is cornered and whether it wants to or not, it will have to fire an even bigger bazooka in the coming 24 hours or else risk everything it has done in the past 107 years come crashing down.
“We Can’t Go On With Business As Usual”: NYC Comptroller Calls For ‘Citywide Shutdown’ As Virus Hits City Schools
After NYC Mayor Bill de Blasio said during an interview on CNN earlier that he “all options are on the table” when asked if he was considering closing city schools and shutting down restaurants and other non-essential businesses, NYC Comptroller Scott Stringer, the former Manhattan Borough President who defeated Elliot Spitzer in his primary for for the comptroller job a few years back, called on the Mayor’s Office to move ahead with the shut down.
During a series of tweets, Stringer said the city must “act logically and strategically” and that “out of an abundance of caution, I am calling for a city shutdown.”
Only essential services should remain open. No bars, restaurants, or movie theaters.
And I am again calling for NYC schools to be shut down.
Stringer called for a city-wide shutdown on Sunday, including closing bars and restaurants, while only essential services should remain open.
He also repeated his call for the city schools to be shut down, despite the pressures on millions of parents to find child care and figure out how to react.
“We cannot go on with business as usual…This is about all of us. This is about protecting our most vulnerable. Lives are at stake and there’s no time to waste. We have to flatten the curve.”
One would hope that, seeing the dangers of young healthy people spreading the virus to the elderly and the vulnerable, most would stay home. But so many people packed into bars in New York over the weekend that Congresswoman AOC tweeted a plea for them to stop going out and obey the state’s request that healthy people avoid large gatherings.
To everyone in NYC but ESPECIALLY healthy people & people under 40 (bc from what I’m observing that’s who needs to hear this again):
PLEASE stop crowding bars, restaurants, and public spaces right now. Eat your meals at home.
…not all liberal young people have been as considerate as their support for idealists like Bernie Sanders would suggest. In Queens, the borough president asked city families to keep their kids at home.
The informal schools and subway policy are (for now) the same: keep them open, hope most people won’t come. https://t.co/TqqOs4SRzH
— Nicole of Hell’s Kitchen (@nicolegelinas) March 15, 2020
The decision came after a student at a Queens school was confirmed to have the virus.
P.S. 306 in Queens (27Q306) is undergoing cleaning and disinfection due to a confirmed case of coronavirus in the school community.
Mnuchin Says Covid-19 Pandemic Won’t Trigger US Recession
Treasury Secretary Steven Mnuchin made the rounds on national media on Sunday, telling anyone who would listen that the Covid-19 pandemic wouldn’t shift the economy into recession, even though even perpetual optimists JPMorgan now expect the economy to slide into a technical recession in the coming quarters, while the former chief economist of Alliance Bernstein is bracing for a record crash in US GDP.
“Later in the year, obviously the economic activity will pick up as we confront this virus,” Mnuchin told ABC News. “The real issue is not the economic situation today. The real issue is what economic tools are we going to use to make sure we get through this.”
NEW: Despite forecasting an economic slowdown, Treasury Secretary Steve Mnuchin tells @jonkarl he does not think the coronavirus pandemic will cause a recession: “Later in the year, obviously the economic activity will pick up as we confront this virus.” https://t.co/XkLFkSaaAppic.twitter.com/sBm0lCojMh
“I can’t predict where the market is this week,” Mnuchin said. “But what I can tell you is people who bought stock after the crash in ’87, people who bought stocks after the financial crisis did really well.
“We can’t ever predict the bottom of the market or the top of the market,” Mnuchin said. “There’s no question there are businesses that will be severely impacted. We are focused on helping those businesses that need liquidity.”
“There’s some businesses that are booming,” the Treasury secretary continued. “I mean, you look at the stores and the people that are buying certain consumer products. What we’ve seen from the credit card data, travel is down extraordinary.”
He said businesses are making the necessary preparations to contain the fast-spreading virus, adding that cruise lines were suspending operations for a month to limit transmission risk.
Mnuchin said the Trump administration is laser-focused on providing relief for airlines, hotels, cruise ships, and other industries that have been heavily impacted by the virus.
“This is a unique circumstance,” Mnuchin was quoted by Bloomberg at a Saturday press conference at the White House.
“There’s no question, because of the things that we’re requesting to do, there are parts of the economy shutting down or slowing down dramatically.”
At the press conference, he said that an $8 billion emergency spending bill and an economic relief package from the House could cushion the economy.
“We have a lot more we need to do with Congress,” Mnuchin said. “We will make sure the economy recovers.”
Mnuchin and Federal Reserve Chairman Jerome Powell were busy last week, making sure the economy has enough stimulus to thwart a hard landing. However, Mnuchin’s latest cheerleading isn’t shared by Alan Blinder, an economist and former Federal Reserve vice chairman, who recently told CNBC that the economy could already be in a recession.
“I wouldn’t be one bit surprised if when we look back at the data, it is decided … that the recession started in March,” Blinder said. “It takes months to get the data that would be relevant to a call like that. But it wouldn’t be a bit surprising to me.”
As we noted earlier on Sunday, investors should prepare for a steep decline in GDP in the first half as social distancing could lead to negative growth, hence why the Trump administration is pumping as much liquidity into markets as possible to cushion the decline. While the boost in liquidity could provide temporary stabilization in risk assets, Bank of America’s CIO Michael Hartnett already called it : our “working assumption is that as of March 2020 we are in a global recession.”
Covid-19 cases are now above 120,000 worldwide, and the World Health Organization has officially determined it’s a pandemic. It’s torn families apart, tanked the global economy, and world leaders are calling it the biggest global crisis in decades.
So, uh, how’s the coronavirus affecting crypto? Though some claim that Bitcoin doesn’t track regular markets – this week it… did. Just as global markets sharply dropped this week, on early Friday morning, the price of Bitcoin sunk to its lowest since March, 2019, briefly below $4,000, according to metrics site CoinMarketCap. Like global markets, it’s recovered slightly, now valued at around $5,425.
So, are people getting rid of magic money so they can feed themselves under quarantine? Or will Bitcoin’s price pump back up as global markets decline, proving it to be a safe haven after all? We asked the crypto-experts, in the latest edition of Bulls vs Bears.
Bitcoin and the coronavirus: the bull case
Eric Wall, CIO at crypto investment firm Arcane Assets, told Decrypt that this short-term volatility is down to people de-risking their portfolio—crypto’s a risky asset, even when the economy’s doing well. But in the longer term, Wall said, “coronavirus-related stimulus packages from governments are likely to further bankrupt fiat’s reputation as a form of store-of-value.”
He thinks that the crisis will reveal to investors that cryptocurrencies “represent the only non-inflatable monetary asset that exist in a digital form that we have access to.” COVID-19 is a much greater stress test to the fiat currency system than to cryptocurrencies, Wall pointed out: “In a way, they’re excellently positioned to benefit from this tragedy.”
Jack O’Holleran, CEO of SKALE Labs, a decentralized application startup, thinks it’s business as usual for Bitcoin, “except we’re doing more virtual events and less handshaking.” He acknowledges that public market drops will “certainly affect new financings in crypto and overall assets flowing in,” but that crypto won’t feel the economic shock as much as the travel, oil, and gas industries.
If anything, the funding shortages that follow the coronavirus will cut the fat off of the crypto economy, “allowing well funded and well executing projects to come out of this in an even stronger position.”
Mike Alfred, CEO and Co-Founder of Digital Assets Data, which builds software for crypto hedge funds, told Decrypt that Bitcoin is “setting up for a very bullish 18-20 months, and I don’t think coronavirus will have any long term impacts on it.” He thinks that Bitcoin “has behaved well amidst coronavirus scares; some days it appears to be correlating with certain assets, but in the long run it is not correlated with anything,” he said.
If anything, Alfred said, the recent interest rate cuts are “bullish” for Bitcoin, as they create more liquidity for investors. And in 2020, Bitcoin has the highest daily average price over any year of its existence, he said. Granted, 2020 hasn’t lasted that long, but this “further supports a more bullish backdrop” for the upcoming Bitcoin halving—when, in mid-May 2020, the supply of Bitcoins issued as mining rewards will cut in half. (Some think the halving will lead to a price bump for Bitcoin.)
Bitcoin and the coronavirus: the bear case
Dan Schatt, CEO of Cred, a crypto loans company, told Decrypt that “the euphoria that had been predicted in the run-up to Bitcoin’s May halving looks to have been dampened.” He pointed out that governments around the world are creating fiscal stimulus packages, including the delivery of so-called helicopter money. But aside from further rate cuts, which are already historically low, “there’s not a lot else that policymakers can do,” he said. He expects high volatility over the next few weeks, though thinks that the market will pick up following the Bitcoin halving.
Brian McCabe, Head of Market Insights at Paxful, a peer-to-peer crypto marketplace, takes a cautious approach. He thinks that Bitcoin could benefit from economic pain caused in countries that must pay debt back in the US dollar.
If the coronavirus continues to weaken local currencies and makes the dollar stronger, McCabe said, “money will continue to flow out of these economies and their relative debt will increase.” That could lead to Bitcoin once again becoming the alternative, if these economies continue to come under pressure and people are unable to preserve wealth in their own currency.
But equally, McCabe said, “Margin calls and investors losing money in equities and other higher-risk markets should lead to more people having to close positions in Bitcoin to reduce overall risk exposure.” He notes that it’s a similar “flight to safety” to that which caused the yield on US 30-year treasury bonds to reach a record all-time low this week.
David Gerard, blockchain critic and author of Attack of the 50 Foot Blockchain, pointed to the impact of the coronavirus on crypto conferences. “Conferences are important for generating buzz around coins and new crypto financial instruments as well,” Gerard said. “Video can replace the main sessions, but it can’t replace the “hallway track”—meeting people you didn’t expect to and talking,” he said.
The death of conferences is not, of course, fatal to crypto, but if companies can’t meet investors, then business can’t flow, and deals won’t be made. Decisions might be postponed until the conference circuit is revived, whenever that may be.
New challenges
Of course, with Bitcoin forming such a minor part of the global economy, crypto’s future may be out of the hands of a group of pundits. According to Ido Sadeh Man, founder and chairman at the board of Saga, a reserve-backed global currency: “If coronavirus teaches us anything is that we live in a hyper-globalized world, whether we like it or not. The exact same virus in the 1980’s would have been a Chinese crisis, not a global one.”
Sure, Man adds, “in such unstable times, people seek first to regain the security they feel is not provided by their national institutions.” But perhaps a truly international currency like Bitcoin will show its worth. “As uncorrelated as it maybe, Bitcoin may reside in the side of crisis opportunities,” he said.
But one thing’s for sure, as Sinjin David Jung, founder and Managing Director at the International Blockchain Monetary Reserve, a social impact economic development reserve and advisory, pointed out: “There are no bulls or bears when the entire global economy is being brought down to its knees as the very issue of life and death now take center stage.”
With Americans having far bigger concerns on their minds, we doubt many will have time for prayer today, although there is one person who certain could do with some divine assistance: Fed chair Jerome Powell.
And there is a specific reason for that… or rather 12 trillion reasons.
But first, let’s back up to a post we write back in October 2009 explaining how the Fed’s emergency response during the financial crisis – which included credit facilities backed by corporate bonds and even stocks, all the way to unlimited FX swap lines with foreign central banks – was first and foremost in response to a massive dollar margin call that resulted in the aftermath of the Lehman and AIG collapse as conventional cross-border funding pathways froze up, forcing the Fed to step in and flood the world with dollars to avoid a catastrophic surge in the dollar as the entire world scrambled to obtain the world’s reserve currency.
Back then the BIS published a paper titled “The US dollar shortage in global banking and the international policy response” which explained how then-Fed Chair Ben Bernanke in essence bailed out the entire developed world, which was facing an unprecedented dollar shortage crisis due to the sudden deflationary shockwave unleashed by the financial crisis, which also ground the global economy, and conventional dollar funding pathways to a halt while heightened counterparty risk after Lehman’s collapse and liquidity concerns compromised short-term interbank funding, resulting in a lock of shadow banking conduits and money market funds “breaking the buck.” In short: an unprecedented crisis as a result of a global dollar margin call.
This is how the BIS quantified the peak dollar shortage at the heights of the financial crisis:
… European banks’ US dollar investments in nonbanks were subject to considerable funding risk at the onset of the crisis. The net US dollar book, aggregated across the major European banking systems, is portrayed in Figure 5 (bottom left panel), with the non-bank component tracked by the green line. By this measure, the major European banks’ US dollar funding gap had reached $1.0–1.2 trillion by mid-2007. Until the onset of the crisis, European banks had met this need by tapping the interbank market ($432 billion) and by borrowing from central banks ($386 billion), and used FX swaps ($315 billion) to convert (primarily) domestic currency funding into dollars. If we assume that these banks’ liabilities to money market funds (roughly $1 trillion, Baba et al (2009)) are also short-term liabilities, then the estimate of their US dollar funding gap in mid-2007 would be $2.0–2.2 trillion. Were all liabilities to non-banks treated as short-term funding, the upper-bound estimate would be $6.5 trillion (Figure 5, bottom right panel).
Had the Fed not stepped in with a barrage of liquidity-providing instruments and facilities, the rest of the world would have simply collapsed as the $6.5 trillion dollar funding gap closed in on itself, causing an indiscriminate sell off of all dollar denominated assets. It also triggered the first ever launch of virtually unlimited dollar swap lines between the Fed and all other central banks:
The severity of the US dollar shortage among banks outside the United States called for an international policy response. While European central banks adopted measures to alleviate banks’ funding pressures in their domestic currencies, they could not provide sufficient US dollar liquidity. Thus they entered into temporary reciprocal currency arrangements (swap lines) with the Federal Reserve in order to channel US dollars to banks in their respective jurisdictions (Figure 7). Swap lines with the ECB and the Swiss National Bank were announced as early as December 2007. Following the failure of Lehman Brothers in September 2008, however, the existing swap lines were doubled in size, and new lines were arranged with the Bank of Canada, the Bank of England and the Bank of Japan, bringing the swap lines total to $247 billion. As the funding disruptions spread to banks around the world, swap arrangements were extended across continents to central banks in Australia and New Zealand, Scandinavia, and several countries in Asia and Latin America, forming a global network (Figure 7). Various central banks also entered regional swap arrangements to distribute their respective currencies across borders.
The newly created swap lines which served as a “letter of credit” underwritten by the entity that prints the US currency…
… soared in usage in the early days of the financial crisis, and were critical to contain a far greater liquidation cascade.
Why do we bring all this ancient history up? For two reasons.
First, it may come as a shock to some but ever since the financial crisis nothing has been actually fixed, and instead the Fed stepped in at every market stress event to inject more liquidity, aiding the issuance of even more debt, and kicking the can while while helping mask the symptoms of the crisis, only made the underlying financial instability even more acute. Meanwhile conventional wisdom that the US banking system was rendered more stable now are dead wrong, with the public and countless financial professionals fooled by the nearly two trillion in excess reserves (we all saw what happened when this number dropped to a precarious “low” of “only” $1.3 trillion in September of 2019) injected by the Fed in recent years. All this liquidity upon liquidity has only made the system that much more reliant on the Fed’s constant bailouts and liquidity injections.
Ssecond,as the events of last week so ominously demonstrated, the dollar shortage is back with a vengeance, as confirmed by last week’s concurrent surge in both the Bloomberg Dollar index and the FRA/OIS spread, a closely followed indicator of interbank dollar funding availability.
Indeed, as of Friday, and following a rollout of various “bazooka” interventions by the Fed including a massive $5 trillion repo facility and the launch of QE5, as well as an emergency six POMO operations on Friday to unlock the freezing Treasury market which failed to boost risk sentiment, the FRA/OIS not only failed to respond but surged to the highest level since the financial crisis.
At the same time cross-currency basis swaps – especially for Japan – are screaming dollar shortage…
… which is not worse only thanks to the trillions in excess dollars already sloshing in the system as well as last week’s emergency liquidity injections which boosted the Fed’s balance sheet by over $200 billion in just a few days in the form of expanded repos and quantitative easing.
And yet – as the market’s response to the Fed’s bazooka announcement demonstrated – it does not appear to be enough.
Why?
Because, and going back to the original topic of a massive dollar margin call, there is now – in JPMorgan’s calculations – a global dollar short that has doubled since the financial crisis and was $12 trillion as of this moment, some 60% of US GDP.
So what can the Fed do? For one possible answer we go to Zoltan Pozsar who last week laid out precisely why the coronavirus pandemic (and subsequent oil crisis) would led to a historic run on the dollar (as he so aptly put it “the supply chains is a payment chain in reverse… and so an abrupt halt in production can quickly lead to missed payments elsewhere”), and concluded that to offset the dollar scramble, the Fed would need to “combine rate cuts with open liquidity lines that include a pledge to use the swap lines, an uncapped repo facility and QE if necessary.“
So far the Fed has already launched stealth QE, which will likely transform into an official, full-blown QE5 this week when the FOMC meets, and all that’s missing are swap lines and an uncapped standing repo facility, both of which cross beyond the purely monetary realm and have political implications. Whether those are also announced today will depend on if the Fed will pursue another intermediate step first, in the form of a Commercial Paper facility, which Bank of America believes will be unveiled in just a few hours.
