Submitted by Michael Every of Rabobank
Not enough. NOT enough. NOT ENOUGH
So much – and not enough: of things to cover and space to write it in – among others.
Let’s recall that we return from the long Easter Weekend to a world where the Fed has begun a USD2.3 trillion liquidity injection into the US economy. A special purpose vehicle (SPV) will purchase 95% participations in loans through the Main Street Lending Program from banks, who would retain 5%. The Main Street New Loan Facility (MSNLF) is aimed at new loans originated by eligible banks, while the Main Street Extended Loan Facility (MSELF) is aimed at Main Street loans that increase the size of existing loans to businesses. A Paycheck Protection Program Liquidity Facility (PPPLF) will lend to all depository institutions that originate PPP loans to small businesses, with those loans as collateral. The Municipal Liquidity Facility (MLP) will purchase notes from states, large cities and large counties at the time of issuance. Finally, the Fed expanded the size and the scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) and the Term Asset-Backed Securities Loan Facility (TALF). The PMCCF and the SMCCF are now also open to fallen angels - and the SMCCF will now also buy ETFs of junk bonds, while the TALF was expanded to include ABS where the underlying credit exposures are leveraged loans and commercial mortgages.
So the scale is vast, and the usual complex technocratic acronyms coincidentally ensure that the public does not grasp what is actually happening, in the same way that Quantitative Easing (QE) is not “printing money” but an impossible to pronounce “asset swap”, where one of the assets is created out of thin air to bail out the other side of the deal. Indeed, let’s put it all in perspective. Even the Wall Street Journal has this to say:
“It is also putting the future of American capitalism at risk in a way even the financial panic did not. The Fed and Treasury are becoming the main lenders to American business, and in this storm there is no choice. But will they recede when the virus is defeated? Mr. Powell said Thursday that this is a “truly rare” intervention by the Fed, which will retreat when the virus plague is over. But that is what the Fed also said during the financial panic, and it never did come close to normalizing policy. If the shutdown lasts for many more weeks, the Fed could become America’s lender of first resort."
Indeed, this is not the same as the Fed back-stopping expanded fiscal expenditure during an unforeseen crisis/war. With junk being bought now, and with the Fed being the lifeline to Main Street as well as Wall Street, this is moral hazard and/or central planning being carved into the bedrock of the US financial system. As many voices have been asking, where is market price discovery if the Fed is going to backstop everything whenever it looks like investors might lose money? How exactly is this free-market capitalism?
Yet staggering as this is all is, it arguably isn’t enough. If we were to see a second virus wave later in the year then USD2.3 trillion is far too small a sum to save everyone. Moreover, if one listens to the cry for help which the BIS made recently, the Fed is soon going to be called on to offer trillions more USD right along the global Eurodollar pathway. Is there going to be a bailout for all USD junk, or just US USD junk? Obviously this deserves far more space than available in this Daily – but there are other pressing developments to report.
In Europe, we have seen a “deal” over the shape of the fiscal response to the virus. Once again this is acronym rich but, in stark contrast to the US, it is in every other respect extremely poor. The headline figure is EUR500bn will be rolled out to support the Eurozone economy vs. the EUR1.5 trillion that Reuters recently reported the ECB told the EuroGroup is required. Actually, the real spending increase is around EUR28bn and the rest is credit lines via the European Stability Mechanism (ESM) of up to 2% of a country’s GDP, plus an additional EUR100bn to countries who see a spike in unemployment – which has to be repaid once unemployment falls again. In short, we have a few percentage points of GDP in state spending being offered when the economic contraction ahead will be unprecedented - even the WTO is now projecting -5.2% EU GDP in 2020 in the best scenario, -10.1% in a U-shaped recovery, and -12.1% in an L-shaped one; worse, the ESM is still seen as political anathema to Europe’s south, so may not be used at all.
There was, of course, no political consensus to introduce debt sharing via ”coronabonds”, even in the face of the current crisis – although it was not a 50-50 split by any means. Indeed, underlining how the “deal” has not even papered over the usual cracks, the day after it was agreed Portugal’s Prime Minister stated “We need to know whether we can go on with 27 in the European Union, 19 (in the Eurozone), or if there is anyone who wants to be left out. Naturally I am referring to the Netherlands.” Again, this calls for space than I have available here – because even more is going on.
Specifically, we have a third issue: the US, Russia and OPEC have struck an agreement to slash oil output by 9.7 million barrels a day for the duration of the Corona-crisis. That is the largest such deal ever agreed, and a key sign of global cooperation to try to stabilise prices. Unfortunately, it also isn’t enough. It’s unclear if everyone is truly on board, with some US producers seeing it as un-American (like Fed bailouts for junk bonds?), and the Saudis slashing prices for key Asian importers even as they suggest they can cut output beyond that already pledged too. Yet global demand for energy is falling faster than these output reductions and as a result, oil was trading at USD23 a barrel this morning– hardly a stellar response.
Indeed, everywhere one looks it’s a case of too much and yet not enough: especially when virus lockdowns are still being extended into May (as in France, with the UK likely to follow).
Meanwhile, China is naturally still trying to send out signals that all is well. Its trade data today showed exports in USD were -6.6% y/y in March vs. -13.9% expected while imports were -0.9% vs. -9.8%. Those who think this is an accurate depiction of the actual state of economic affairs will no doubt be firm believers in the effectiveness of recent European and OPEC+ actions. More concretely, Aussie NAB business conditions dropped from 0 to -22 for March and confidence from -2 to -66, which is off the chart.