Fed panic was just confirmed with its anticipated 50 basis point rate cut on March 3 in the wake of the COVID-19 fallout, which has now become a global pandemic sending shock waves to the global economy and financial markets.
The black Swan event, COVID-19 becoming a reality has triggered a Fed panic 50 basis point rate cut, and a U-turn in the Fed’s narrative regarding the US economy
But less than a month ago, February 11 Fed chair Jay Powell stood on stage to sing praise about the economy and the success of the monetary policy.
“Fed panic was just confirmed with its anticipated 50 basis point rate cut on March 3 in the wake of the COVID-19 fallout”
The economy is in a “very good place” said the Fed chair
But the Fed chair’s great optimism just didn’t jive with the reality. Why were we seeing the ongoing retail apocalypse with 9,302 store closures in 2019, a 59% jump from 2018? Why too was every bellwether indicator from US trucking to the Baltic Dry Index trending downwards?
The bond market, often a heads-up where stocks are heading, was not jiving with the Fed’s “very good place” tune, so a Fed panic was likely to be the next chapter
If players in the Repo market reckoned that the economy was in a very good place then why did overnight rates skyrocket to 10% in September of last year, which led to a Repo crisis and more of the Fed’s “not QE”. The 2s10s inversion, the great recession indicator, was yet another shot across the bow that the “very good place,” the Fed chair was talking about was a mere fantasy.
“The bond market, often a heads-up where stocks are heading, was not jiving with the Fed’s ‘very good place’ opinion”
So COVID-19 provided the backdrop for a Fed panic, a 50 basis point rate cut
A Fed panic rate cut is now justified.
There is ample anecdotal evidence that suggests an unprecedented contraction in business activity, albeit in the short to medium term is in play.
COVID-19 is a bigger problem to the economy than what was previously thought, in other words, it is worse than the consensus. Quarantine, in Italy’s most industrial region and so near (just across the Alps) Germany Europe’s economic engine could not be worse.
We have no yardstick to measure the economic fallout to a modern economy that quarantine will have on the economy. It is wrong, from an economic point to compare this as a war, there is no wartime production-there is no production. More people could die from the economic collapse triggered by quarantine, than the virus itself.
Quarantine is grinding social and economic activities to a standstill.
“The tourism industry is in freefall and is first to see a rise in bankruptcies and unemployment” – Win Investing
So the Fed panic cut underscores slowing business activity going forward which will very likely lead to a sharp rise in unemployment, a clear sign that the economic cycle has turned downwards
The tourism industry is in freefall and is first to see a rise in bankruptcies and unemployment. Tourism is 10% of GDP in France, 13% in Italy and 15% in Spain. What’s more, the calamity is occurring just weeks before the high season is about to get underway. Now millions of people have decided, or will be forced to stay at home, Europe’s once largest and growing tourism economy is being shutdown.
So the Fed rate panic cut is likely to be followed by the ECB cuts into further negative territory
The BoE is also likely to follow suit. The major central banks appear to be now racing towards zero and negative interest rate policy.
As the Fed rate panic cut plays out in tandem with other central banks rate cuts watch out for falling knives financials and transport
Travel shut down will collapse transport stocks.
Financials are likely to be adversely impacted by zero and negative interest rate policy. The BoJ’s negative interest rate policy is a good case study that proves the above. Moreover, in Europe, since the financial 2008 crisis (which we never recovered from) the ECB’s negative interest rate policy has reduced banking profits. So the financial sector is under performing again now because we are heading towards zero interest rates from the Fed. Moreover, when the treasury 10-year yields tumble banks are unable to make profits.
“The Fed panic rate cut is an attempt to prevent seizures in the corporate bond market” – Win Investing
But perhaps the real reason for the Fed panic rate cut is due to the pending bond bubble burst
We have just experienced the coronabubble in stocks play out, but it is the corporate bond bubble burst that will make the 2008 financial crisis look benign by comparison.
The epicenter of the coming depression will be corporate debt in the corporate bond market. The high yield bond market yields are widening, which could lead to illiquidity in the bond market.
The Fed panic rate cut is an attempt to prevent seizures in the corporate bond market
The Fed is hoping that a 50 basis point cut will prevent liquidity tightening.
But the scale and scope of this crisis might be outside the Fed’s already exhausted policy tools.
Perhaps the Fed panic rate cut is symbolic and a prelude to the Fed’s request for Fiscal stimulus
Fiscal stimulus will not make sense long term, bearing in mind that there is already a budget deficit blowout. The G7, with aging populations, are mocked as the insolvent 7. Most of the G7s are running historic public deficits due to the previous 2008 financial crisis. “The only bubble forming in financial markets is in sovereign debt,” said JP Morgan Chase CEO Jamie Dimon.
But we have the bubble of everything, stocks, bonds real estate are all in a bubble.
So the Fed panic rate cut is for good reason and it took COVID-19 for the Fed to cease peddling fiction.
Emergency monetary policy, which entailed unprecedented monetary easing in the form of ZIRP, NIRP and trillions of dollars of QE created the bubble of everything and massive wealth inequality as those with assets benefited from the hyperinflation in asset prices.
But a debt-fueled economic recovery and phony wealth created by bubbly asset prices are unsustainable.
Could the Fed panic also be about fearing a popular uprising to end the Fed?
Perhaps that is wishful thinking as COVID-19, the event which will eclipse all events will cull the movement. How can farm animals assemble when they are in quarantine death zones?