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2020-03-17

bearhaus.substack.com

2020-03-17

Fed bazooka and the wait for fiscal

James O'Beirne
Mar 17, 2020
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2020-03-17

bearhaus.substack.com
Twitter avatar for @archillect
Archillect @archillect
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5:11 PM ∙ Mar 16, 2020
61,926Likes21,700Retweets

Hi, good morning.

  • The Fed shot its shot.

  • I am almost religiously short everything.

  • I took some profits yesterday and am not looking to buy overpriced options (thanks to high implied volatility).

Nothing in here is financial advice. This is a cataloging of my inevitable financial loss purely for entertainment.

Outlook

The Fed has done all the easing they’re going to do.

the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent […]

over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.

- Fed release

Two interesting notes here. First, as I was listening to the phone conference that JPo held in lieu of an in-person meeting tomorrow, his message was essentially “okay, we’ve done literally everything we can, so the onus is now on Congress to get some fiscal stimulus ready.” He knows that Treasury purchases aren’t going to effectively transmit capital to where it’s needed in the “real” economy - small businesses and individuals who can’t go to work.

Now, you asked about households. It's true we don't have the tools to reach individuals and particularly small businesses, and other businesses, and people who may be out of work, or whose businesses may experience a period of very low activity. We don't have those tools.

- JPo

Maybe more interesting, he emphasized numerous times that the Fed is not looking to go to negative rates, and is not seeking additional ability in terms of the kinds of assets that it can purchase.

You know, we looked at negative policy rates during the global financial crisis. We monitored the use in other jurisdictions. We continue to do so, but we do not see negative policy rates as likely to be an appropriate policy response here in the United States.

[…]

We don't have the legal authority to buy other securities other than the ones we already buy. And we're not seeking authority to do so. We haven't discussed that at the FOMC. And it's not legal authority that we're seeking.

- JPo

One of the measures I’ve long thought that the Fed would eventually have to resort to is loading up on bad corporate debt and basically anything that pensions own which is getting significantly marked down. It sounds like JPo doesn’t have much interest in doing that, but let’s see how things develop.

The bottom line of all this is that the Fed has shot its shot and markets are waiting on fiscal. My estimation of the likelihood of that happening in a way that convinces markets for more than a few seconds that things are going to get better is not good.

Twitter avatar for @jamesob
James O'Beirne @jamesob
The next positive shock to the market is going to have to be fiscal policy. The outlook does not seem good to me.
Twitter avatar for @kasie
Kasie Hunt @kasie
CONGRESS (TEMPORARILY?) PARALYZED — House still finalizing technical corrections to coronavirus bill — @replouiegohmert currently holding it up anyway, insisting bill be read on the floor, which would require House returning — Senate fighting about other issues
6:29 PM ∙ Mar 16, 2020

Based on the lowish utilization of last week’s $1.5T in repo, I think the Fed knows that the glut of QE they’re about to do isn’t necessarily a game-changer for primary dealers (big banks), but I think this is a move to get ready to accommodate the purchase of heightened Treasury issuance for a huge fiscal deal to be announced from congress.

Twitter avatar for @Schuldensuehner
Holger Zschaepitz @Schuldensuehner
NY Fed takes $19.4bn of securities in additional $500bn overnight Repo operation. Its earlier action was also undersubscribed, w/dealers submitting less than maximum of $175bn. NY Fed increased size of its overnight repo operation for Tue to $500bn from $175bn on Mon. (via BBG)
Image
8:16 PM ∙ Mar 16, 2020
100Likes65Retweets
Twitter avatar for @jamesob
James O'Beirne @jamesob
Idea: Fed knows QE is ineffectual at face value, but has done so to load the chamber for big fiscal response. There's gonna be a lot of debt to monetize and the $700B of headroom will (maybe?) mostly be used to buy recently issued Treasuries replenishing the general account.
5:32 AM ∙ Mar 16, 2020

(Error in my tweet - that should be '“$500B of headroom.”)

In any case, the market response to the Fed’s bazooka was lukewarm to say the least. Yesterday was historic with the S&P getting slammed down 12%.

Twitter avatar for @ErikSTownsend
Erik Townsend 🛢️ @ErikSTownsend
An important moment in world economic history just happened. This was the moment the Fed Put expired and markets lost confidence in central banks ability to cure all woes with printed money. Market closure is now a serious risk factor. @biancoresearch @chigrl
10:09 PM ∙ Mar 15, 2020
1,257Likes345Retweets

I remain almost religiously short everything for the next few weeks as the real economy continues to crumble and policymakers prove unable to keep the wheels on the wagon.

Twitter avatar for @DiMartinoBooth
Danielle DiMartino Booth @DiMartinoBooth
Unemployment benefits, Laid off, Collect unemployment - Explore - Google Trends FASCINATING (but not in a good way) Thank you for sharing ⁦@EverywhereData⁩ trends.google.com/trends/explore…
2:59 AM ∙ Mar 17, 2020
40Likes13Retweets
Twitter avatar for @JavierBlas
Javier Blas @JavierBlas
The data from @OpenTable on restaurants bookings (updated now up to Sunday, Mar 15) continuous to show the rapid deterioration in services sector activity: U.S. booking down almost 50% now. [By the way, kudos to OpenTable to make the data publicly available] #OOTT #CoronaVirus
Image
3:30 PM ∙ Mar 16, 2020
275Likes125Retweets

If you weren’t already horrified at our economic prospects, check out this (unverified?) summary of a Goldman Sachs client update call.

Twitter avatar for @GuidoFawkes
Guido Fawkes @GuidoFawkes
Goldman Sachs just held a conference call for clients with their forecasts for #coronavirus impacts globally. 1,500 clients were on the conference call. Highlights follow;
7:50 PM ∙ Mar 15, 2020
1,061Likes630Retweets

Trading

I’ve got a fellow Bearhaus lieutenant with me here in Ohio and we spent a good chunk of yesterday debating how to play this going forward.

Since I last wrote, I’ve taken profits on maybe 30% of my options allocations. I closed out my Mar’20 303/310 strangle at a good profit.

The Dec’20 Eurodollar futures I was holding also hit my mid-term price target of 99.7 after the Fed pump. Sadly I made a classic mistake, got greedy, and didn’t let them go until the next morning when they came down to 99.63. Still a good trade.

It’s hard to justify buying options now with volatility so high. I priced out another strangle because I wanted to continue betting on vol, but the moves necessary to make it work in the market are truly huge.

So, like an absolute moron, my only recourse is to continue naked shorts of /MES (S&P futures). Because I am so pigheadishly confident that we are in for absolutely massive downside in almost every major asset market (maybe bonds excluded) I’m going to try maintaining this position for a few days, tempting though it may be to take profits.

It’s a long way down from here. Cash is king.

Be cool, honeybunny.

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2020-03-17

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Krag Klages
Mar 18, 2020

Where do you see HYG go from here and in what time horizon?

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