The Breakdown - Unlimited QE and Why Markets Can’t Price In COVID19

Episode Date: March 23, 2020

Last October, Ikigai Asset Management’s Travis Kling predicted that Central Banks would have to “juice QE to infinity” in order to save markets from recession. Yesterday on 60 Minutes, Fed President Neel Kashkari said “there is an infinite amount of cash at the Federal Reserve. We will do whatever we need to do to make sure there is enough cash in the financial system.”  This was followed this morning by an announcement that the Fed was giving itself effectively unlimited capacity to intervene in markets. Markets were...still not impressed. In less than two hours, an initial gain had entirely retraced.  On this episode of The Breakdown, @NLW looks at: Specifics details of the Fed Announcement Why FinTwit and Bitcoin Twitter are focusing on inflation  Why some think that this action amounts to a nationalization of markets How the ‘money printer go brrr’ meme is taking hold

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to the Breakdown. It is Monday, March 23rd, and today we are talking about the era of unlimited QE. The Fed has double, triple, infinity down on its commitment to injecting liquidity into the markets in ways. that are unprecedented and unique, and everyone is trying to now wrap their head around. So what we're going to do today is actually do basically a hot take reaction show, looking at what people from FinTwit and Bitcoin Twitter had to say about this new action. But where I want to start is actually with two contrasting audio clips.

The first comes from Travis Kling last fall on the Bitcoin macro podcast that we produced in advance of CoinDesk's Invest New York City event. In it, he talks about how the Fed is basically going to be forced to do ever more exotic forms of QE. So let's listen to that real quickly. But there are problems starting to show up here. The global economic data is undoubtedly turning down right now. It's all turning down at the same time.

It's all turning down at the same time because the whole world is now on this central bank trade and on this cheap money trade. But it's apparent that central banks are going to cut interest rates and juice QE into infinity to either prevent a recession or have the recession be as soft as possible. And those forms of quantitative using are going to be increasingly more exotic because in the same way that, you know, if you do heroin long enough, then you've got to keep taking a bigger and bigger shot of heroin, you need increasingly more exotic forms of QE to get a similar type of effect. Because if you're in Europe and you cut interest rates from negative 40 bibs to

negative 50 minutes, it just doesn't make that big of a difference. The key phrase there is the QE to infinity, right? They're going to juice QE to infinity. Well, now let's listen to Neil Kashgari, who is the president of the Federal Reserve Bank of Minneapolis last night on 60 minutes. Your ATM is safe. Your banks are safe. There's enough cash in the financial system, and there is an infinite amount of cash at the Federal Reserve. We will do whatever we need to do to make sure that there's enough cash in the banking system. So there it is. QE Infinity is officially real.

Now, to get a sense of how everyone reacted at first, I think you can look at Luke Kawa's tweet that says, The Fed is almost out of AM. Oh, my God. And that's really how this felt, right? So, okay, what actually was announced? What actually is happening? In effect, the Fed is now saying that the support that they announced last week, where they were going to buy at least $500 billion of Treasury securities, so Treasury bonds.

and at least $200 billion in mortgage-backed securities, they've now said that that is an unlimited capacity. They can do as much of that as they need to. It really is literally unlimited. They also announced that it would begin purchasing a different type of mortgage-back security, commercial mortgage-back security, issued by government-supported entities, which consists of debt on apartment buildings. So they're expanding as well what they can actually buy. Now, the Wall Street Journal makes the comparison to 2008 pretty bluntly. They say, by point of comparison, the Fed will buy more government-backed debt this week than it did during a controversial round of asset purchases called quantitative easing, or QE, that it undertook between

November 2010 and June 2011 when it bought 600 billion in securities. So I want to go back to this point of expanding the types of assets that it's involved with. The Wall Street Journal again discussing two new lending facilities that are designed to effectively help corporate funding markets. So one is a lending facility for investment-grade companies that provide bridge financing for up to four years, while a second is actually going to buy corporate bonds by U.S. companies and U.S. listed ETFs in the corporate bond market. So there's a huge new type of intervention, basically. Now, the sentiment all around FinTwit was basically summed up by this summary in Bianco research, which says, it is difficult to find a superlative to describe what the Fed announced this morning.

At first blush, it looks like they are nationalizing financial markets, except for equities in high yield. This better work in stabilizing financial markets, and I want to actually continue with this summary because I think it reflects a lot of what I saw on just regular kind of financial Twitter. So again, from Bianco Research, they say, the world has permanently changed. We are not going back. We are headed to a new reality. Stop thinking about mean reversion.

Markets understand this, and they are rapidly repricing to a post-virus world at historic speed. This is causing all kinds of problems as the markets move on from the old pre-virus reality. The Fed is attempting to stop this repricing from going any further. They are essentially announced that they are nationalizing the markets. They will set the price and provide the credit. They are hoping to stop the completion of the post-virus repricing. Will these new measures work? Can the Fed stop the entire financial world from repricing it to what it perceives as fair value?

It is difficult, if not impossible, to know where the market sees fair value at this point. We believe these new Fed facilities will only work if the market is close to a perceived fair value level. If risk markets see still lower prices in a post-virus reality, then they will continue to head lower. The world has changed. If the Fed is trying to stop the market from reflecting this, it will not work. If the markets are close to what it deems fair value on risk markets, perhaps the Fed's announcement this morning will prove helpful. Okay, so basically, this is arguing that the world has changed and the Fed is trying to stop it from changing. it might not be able to. So the question is, how did the markets react? For that, let's turn it

over to Eric Townsend, who's the host of the Macro Voices podcast and the head of a macro strategy hedge fund. He says, news of arguably the biggest monetary intervention in world history broke just after 8 a.m. U.S. Fed announced unlimited QE to combat crisis. By 9.45 a.m., both crude oil and S&P 500 had fully retraced the spike higher. The half-life of massive intervention is now less than two hours. A little later, Bloomberg's Joe Wisenthal wrote, stocks are really tanking here. S&P down 4%. Sven Henrik wrote a few different tweets. He says, Now you know why Bullard went full Armageddon last night with his call for 30% unemployment and 50% drop in GDP. They're screaming fire in a movie theater of panicked people to be granted permission

to do anything. What he's referring to is an interview with St. Louis Fed President James Bullard, who predicted that the U.S. unemployment rate could hit 30% in the second quarter with an unprecedented 50% drop in GDP. So effectively, Sven is arguing that this was a way to scare people into seeing this Fed action as necessary. Now, going back to Eric Townsend and the fact that the market has sold off this very temporary bump so fast, Sven says the Fed is now zero for 10. Every policy announcement has been sold. Fed to the market. We've thrown everything at this. Market to Fed. It's not enough. Ben Hunt, who was on the show last week or two weeks ago, I can't even remember at this point anymore, said when all is said and done, the Fed will own every conforming mortgage

in the United States. Might as well go ahead and pull the trigger on nationalizing Fannie and Freddie. You can't unring this bell. The question then is, why are markets not reacting more? Why aren't they taking this incredible intervention as something that should make them feel better or more secure? Well, I think Preston Pish gets to the point in a tweet that he had. He says, now the government is going to try and create a new all-time high in the bond and stock markets. All while everyone is at home and not working. The craziest part is people still think these are free and open markets. So the point of this, I think, is that there are a couple things that we don't have answers to,

that are causing markets to be fundamentally unable to price in the economic impact of this whole crisis. The first is that we still haven't seen any action on the part of Congress and the Senate to pass relief in a major way, right? We don't know where the chips will fall in terms of support for regular tax-paying citizens. We don't know where support will fall for corporations who are cast asunder by this whole thing. So that is one major unknown that is causing continued chaos, and that's something that has to come in terms of a fiscal response, you know, passed through the legislature, not just a Fed response. So that's part one. Part two is that we don't have clarity on an end in sight in terms of the actual public

health issue in the containment of the virus. And this, I think, is especially scary because we have a situation where there is just so much mixed messaging going on, right? We have mixed messaging about the rights course of treatment. We have different states who are fundamentally taking different approaches in terms of how serious they're saying it is with their citizens. You have New York on the extreme end of seriousness and other states that are just basically continuing to blow it off, which creates this chaos, right, in terms of the actual public health issue. You have President Trump who's saying that after 15 days they need to reevaluate because the cure for the virus can't be worse than the virus itself. And that's a huge

mixed signal because it doesn't seem clear to, I don't think, anyone right now, how we're going to get from where we are today to having the health disperal issue solved in that time. Whatever you think about these issues, the reality is that there's no consistency, there's no clarity. And that is an extremely difficult situation for a market to react to, right, to have any idea about how to price in. This is totally unprecedented. In fact, the longer that this goes, it just feels silly to compare it to 2008 or to 9-11 or to anything. This is a fundamentally new phenomenon, really, I think, in the history of the world. On March 19th, Naval actually tweeted, for the first time in human history, the entire world is focused on one problem. This really is a

truly unprecedented event in not only our lifetimes, but I think in everyone's lifetime. So we should expect it to be chaotic for markets to try to understand and price in. However, there are consequences for this action from the Fed. And that I think is what Bitcoiners are mostly focused on. Alex Kruger sums it up really simply. He says, short-term MMT, i.e. Modern Monetary Theory, may have arrived. The devil is in the details. The Fed will be monetizing a limited government bond issuance, quote, in the amounts needed to support smooth market functioning. In other words, the government can now spend all at once. This Fed announcement laid the field for the government's 2 trillion stimulus package, currently under negotiations.

This is how free money looks. But there is no such thing as a free lunch, is there? Society pays for this via inflation. The price to pay is inflation in the long run. Inflation expectations are popping, and the long end of the treasury curves is already pricing it in. Meltem de Mirrors added, another day, another $2 trillion on the Senate floor. Mind you, less than 20% of this would go directly to American workers and taxpayers.

The bulk would go to private corporations, banks, and hedge funds as a bail in. What's a couple trillion among friends? Money printer go burr. Money printer go burr, by the way, is most definitely the meme of the moment as it relates to Bitcoin. This is something we've talked about a bunch over the last couple weeks, but it really does make the point very crisply when fiat is going through this hugely inflationary period at exactly the same time that Bitcoin is going through its having. The Bitcoin Twitter account actually wrote, Fed announces unlimited QE. This is why Bitcoin was crucial. created. Now, of course, narratives do not a market make, and Larry Sermak was quick to point out that

the decoupling narrative that had been kind of trying to come back into play along with this inflation fighting narrative was not necessarily reflected. In fact, the last 30 days have been the most correlated that Bitcoin has ever been. And even as we saw over the last few hours, Bitcoin has moved pretty in sync with the markets, at least initially. It started to break out and break away a little bit again now, but I think that it's a good reminder that narratives are long-term phenomenon that we constantly add new short-term inputs to, but we should never let those short-term inputs totally make us go wild in terms of how much those narratives have shifted. Either way, I do think that as the unlimited QE idea comes in, there is going to be

attention focused on Bitcoin for its sound money properties more than anything else, for the fact that it has this fixed supply, for the fact that there's this halving coming up where that emission is going to get cut in half. It just stands out as such a contrast as opposed to other things in the market. It's interesting, we're already seeing some anecdotal evidence of this. One I pointed out this morning is that for most of the podcasters that I know who are in the Bitcoin space, they've seen significant growth over the last couple months in their podcast downloads, while across the podcast industry, listens are down something like 20% on average across a huge array of different industries and spaces. And maybe that's the lack of commutes, maybe that's

whatever, or maybe that's, you know, people who are interested in learning more about Bitcoin coming into the space. Now, that's not scientific at all. It's just an interesting little bit of evidence. Another one came from Michael Casey, the chief content officer at CoinDesk. In response to a tweet of mine about this over the weekend, he said that that company had seen a pretty big uptick, or noticeable uptick at least in its Bitcoin 101 resources. So there are these indicators that there is an interest growing in Bitcoin. And it seems understandable as the Fed gets into this unlimited money printing era. Ultimately, though, we've seen this pattern over the the last few weeks where the beginning of the week are dominated by news in the markets,

and the middle and back half of the week are dominated by news around the actual health crisis itself. So what I'm watching for this week, what's worrying me a little bit is a few things. I think we're seeing frustration at the inability of Congress to do anything. You're starting to see people who are actually voicing this incredible frustration. There was an interview on Farrow TV with Elizabeth Warren, where the host of the show actually said, stop coming on here to blame Republicans, because on another network, they're blaming you, and the reality is that you're all to blame. You have to do this.

You have to move things forward. So I think that you're seeing that sort of energy and frustration as this drags on, and I think that that's going to start to spill over into people ignoring rules around lockdown. Because, again, not only do you have that, you have that non-action. You also have the inherent frustration about this. You have legitimate concerns around civil liberties, particularly as it relates to surveillance via technology. And you still have this desperate tightrope walk of getting people to do the social distancing

thing to flatten the curve of the actual crisis, of the actual virus, that is, while not wanting to have to use enforcement actions around that. And that's a very difficult spot. If you start to see masses of people in different places ignoring those rules, you're going to see an uptick in enforcement. You're going to see even more state power exerted and not just state power in terms of kind of surveillance or whatever, but state power in terms of actual violent force. And that scares me a lot. I'm worried that ignoring the rules becomes politicized, that you start to have a subsection of people ignore the rules or say it's fake on the basis of

political party rather than continuing to work to figure this out together. I think that simultaneously to all this, this is the week that we're going to start to potentially see. hospitals overwhelmed, just, again, based on math. Now, in some ways, I think that it's lucky in a way that New York is the farthest out in front of this because I think in a lot of ways it has also had the most aggressive response to it. It's got FEMA up here transforming hotels into hospitals and things like that. But the point of all of this is that we're talking about this kind of inflationary market narrative while also still in the midst of this hugely fundamentally world-shaping event that is not going anywhere. So if you're wondering why markets are

having a hard time pricing it in, it's because we are in totally uncharted territory. It's not just that we don't remember other crazy things. It's that there is no collective memory to draw on for anything like this. So we're just going to have to keep waiting and seeing. All I can offer is that I will be here to break it down every day. Tomorrow, Mark Yusko from Morgan Creek is joining the podcast. It should be a really good one. Later in the week, I have to be. have some other really exciting guests. So keep listening, keep subscribing, share this out on Twitter at NLW. I appreciate you listening. I hope you're staying safe. I will catch you tomorrow.