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The Fed Is Not The Problem. 

“If you put the federal government in charge of the Sahara Desert, in five years there would be a shortage of sand.” Milton Friedman.
Stephen Innes
congress

“If you put the federal government in charge of the Sahara Desert, in five years there would be a shortage of sand.” Milton Friedman

Markets

Investors were chapfallen by the massive Fed action that has not led to more of a market rebound, with equities struggling to bounce and the US dollar hardy worse for wear.

It certainly isn’t a problem of insufficient Fed action as this move trumpets in unlimited government spending financed by unlimited Fed purchases arriving faster than anyone could have imagined. The Fed unleashed it’s all in howitzer to fund an array of programs, including Fed backing for purchases of corporate bonds and direct loans to companies and promises that it will soon roll out a plan to get credit to small- and medium-sized businesses.

This deluge is as much liquidity support as markets could wish for as the Fed plans to add a $625 billion balance sheet this week. That equals a staggering annual pace of $32 trillion per year.

Sure, it’s a titanic task to amplify the historical significance of today and not necessarily in a good way.

The basic tenants of how a government influences the economic decision-making process in a capitalist society have been discarded as Asian investors awake to the most significant monetary experiment in the history of financial markets.

And the famous quote by Milton Friedman does resonate this morning, “If you put the federal government in charge of the Sahara Desert, in five years there would be a shortage of sand.”

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Congress failure to launch is the problem.

However, Nancy Pelosi is reportedly open to a 2.5 trillion deal that is being hashed out between Schumer and Mnuchin.

Fortunately, we are close to a Presidential election, so it doesn’t seem likely that opposition from the Democrats will last for long.

And while congress dawdles, it also means that once a deal is signed, the market reaction will likely be a strong one, even if it will most probably take several attempts to arrive at the necessary size of at least several trillion dollars.

But the problem is not the Fed; the problem is politics.

Millions of workers are in the process of being laid off. Hence, as the days roll by without a political deal to backstop the economy, it will end up being a very costly misstep for every shape and size of business and, more importantly, the hard-working folks across the heartland.

The US Senate should be drawing on the experience of its failure to act fast in the 2008 crisis. Instead, it has yet again failed to act responsibly in the 2020 crisis. The proposed economic stimulus package is massive, but the longer the delay, the more colossal it will need to be to appease the markets, mainly when US initial claims are digested.

Unemployment is the key measure.

Unemployment will measure the extent of US policy failure, and now market participants are bracing themselves for a horrific peek into their future this week when US initial jobless claims are released. The high-frequency data will undoubtedly confirm we’re entering a vortex of the fastest and most substantial rise in the US unemployment in modern financial history.

In many ways, initial jobless claims will be the signpost that matters the most in the coming weeks as it will be a near real-time measure of whether fiscal policy worked.

No endpoint still 

Almost every economic and market outlook written – is now in the format of scenario analysis. But mostly it depends on how long lockdowns last. But frankly, the only reports that that matter is the ones coming from scientists where the longer containment time frame seems more likely. Suggesting that social distancing will be in place throughout most of 2020, where more draconian type lockdown rules could be relaxed and then fortified to ringfence virus hotspots flare or a second wave hits.

There’s probably so much more pain to come as when the notional growth devastation number totals are projected, and the tallies still may fall well short of the actual sum of all the losses to Global, European, and US GDP. So, stock market bulls and those who are typically the perma bids like pension funds are nervous about stepping back in too early.

I think the Olympics getting canceled is only the tip of the iceberg when it to sporting and other cultural events. And more significantly, how we intend to go about our everyday lives for most of 2020 not only will this be costly in an economic context, but the human toll on families is unmeasurable.

Oil markets

Optimism over a huge US fiscal number has helped dampen the oil market sell-off as the US fiscal policy is targeted as mitigating the negative employment shock and will effectively put money in people’s hands to buy gas.

While Oil bulls continue to hold on to a glimmer of hope after US Energy Secretary Dan Brouillette said the possibility of a joint U.S.-Saudi oil alliance is one idea under consideration to stabilize prices after a 48 % haircut in March alone.

The problem is, however, all the money in the world is not going to get people back on planes so long as the virus is spreading, and travel bans are in place. The fiscal deluge is a sentiment play as opposed to an actual demand-side pop, so the budgetary bounce will likely have a short duration bump on oil prices. But it will certainly provide a massive tailwind when the virus passes.

News flow on the demand side continues to run dreary with the spread of Covid-19 across the developed markets. It is now reaching colossal emerging markets oil importer like India, which is triggering complete shutdowns of massive oil-importing economies.

While the anticipated lengthy absence of air traffic presents a significant obstacle in its own right, but with the expected ramp in supply, which suggests storage will fill very quickly, and then prices will plummet as physical demand continues to evaporate.

But this will also effectively turn the wells off. The first balancing signs and supply-side effect are the initial waves of CAPEX cuts with the Baker Hughes rig count showing a significant fall of 19 oil rigs last week.

As far as the Texas OPEC coordinated effort, with the proliferation of small-scale producers in Texas (and across the US), it always made a coordinated US response unlikely. Still, as we will see by the drop in weekly rig count data, the low oil price may ultimately achieve the same end goal.

As with most growth asset classes, it doesn’t remain very easy to call a floor in the oil price. I expect a high level of volatility as the market responds to news flow, both positive and negative. Still, we should likely place more emphasis on an extended period of oil in the $20 with the occasional dip lower.

Gold markets

Gold surged after the Fed committed to unlimited asset purchases.

Gold should trade higher in the medium to longer-term but may face some selling and resistance near the psychological USD1,600/oz level as much will ultimately depend on the USD given the massive Fed policy deluge has hardly made a dent in the US dollar resiliency.

But the key for gold is how quickly the Fed swap lines can relieve some of the USD funding pain across global markets as if dollar funding returns to normalcy, and this will probably remove one of the primary reasons to sell gold.

Currency Markets

The USD has been incredibly resilient on the back of liquidity shortages and forced hedging by underhedged corporates and real money. It’s inconceivable by any stretch and by any economic model that the greenback can survive today’s Fed announcement unscathed.

Granted, we’re now entering the most significant monetary policy experiment in world history, but doesn’t all these dollars getting added by the Federal Reserve computers, cheapen the USD?

The Malaysian Ringgit

Higher oil prices and a slightly weaker US dollar should release some pressure on the Ringgit today, but we should expect the MYR to remain in the autoclave due to the covid19 domestic economic shocks.

 

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