Fed Saves The Day

Personally, I’m encouraged by the stabilization of the number of new cases in Italy per day. The number of new cases per day in America will likely peak in April. 

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The table above summaries each new Fed policy aimed at adding liquidity to the financial markets. The goal is to ease financial conditions. Some investors thought the Fed was done after it cut rates to zero, cut the discount window rate by 125 basis points (eliminating the stigma of using it), and expanded repo operations. However, that was just the beginning. The Fed is throwing policies against the wall and seeing what sticks.

A big policy was using special purpose vehicles to essentially borrow corporate bonds. Technically, the Treasury adds cash and the SPV borrows from the Fed. Either way investment-grade corporate bonds are being supported (announced on Monday) along with muni bonds (announced on Friday). 

Some are criticizing the Fed for going too far, which is a good thing. If the Fed would have been tepid, we would have been in the situation we were in 2 weeks ago where markets were crashing and illiquid. These policies don’t cure the coronavirus, but no one expects them to.

As you can see from the chart below, after the Fed announced it would buy corporate bonds, the LQD ETF, which had been crashing, increased. This is directly helping the market opposed to QE which we can consider to only boost sentiment. QE is nothing compared to the latest Fed actions.

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COVID-19 Shuts Down The Economy

This situation has led many to stray from the typical establishment and survey report data. They didn’t predict this recession because only someone following the Chinese outbreak closely could have done that. This doesn’t mean economic data is useless. It usually works, but this was an exogenous shock. It had nothing to do with the fundamentals of the labor market or corporations.

Because economic reports are much too delayed for a fast-moving market. So we're focused on non-traditional economic data that captures this weakness quickly. That’s why I personally follow Open Table restaurant bookings, which fell 100% in America from March 21st to the 24th.

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Disclosure: None.

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