Confidence
August 4, 2020
–Quiet Monday with yields edging slightly higher as Nasdaq made a new all-time high. Ten year up 2.6 bps to 56.1. The ten-year inflation indexed yield made a new low of negative 102.8 bps, bringing the ten-yr inflation breakeven to a new cycle high 159 bps. ISM Mfg came in at 54.2, better than expected.
–Yesterday also featured the Fed’s Senior Loan Officer survey, which unsurprisingly revealed that banks have tightened lending standards on C&I loans, CRE (commercial real estate) and loans to consumers. These tight standards are high relative to the midpoint since 2005, but not up to 2008/09 stringency, probably due to unprecedented support from the Fed. Clearly the Fed and Treasury are supplanting the private market for borrowing and lending. For example, there was a Bloomberg interview over the weekend with former Fed officials Simon Potter and Julia Coronado where they suggested direct digital transfers from the Fed to households (Recession Insurance Bonds) upon a given increase in unemployment. These payments would occur instantly and directly and would avoid congressional wrangling, thereby “supporting spending and confidence.” Current borrowing is being done for the sake of survival, not for growth. To say that money sloshing out of the Fed inspires confidence seems a bit of a stretch, though it rightly provides a bridge for reaching the other side (whatever that might look like).
–One of the things I loved about the CME floor was the vast array of characters. The euro$ area had hundreds of people so it would be impossible to know everyone. There was an imposing front month euro$ local I had never interacted with; he was big both physically and as a trader, wavy sandy hair capping a jovial face, on a hulking body; probably played college ball. He wore the standard issue red members jacket. I could only surmise his keen wit and imagination by the fact that his membership acronym was his first name spelled backwards. Anyway, I somehow got into a conversation with him, and he was disarmingly open and funny. Told me that his sister saw how well he was doing in the financial markets and was trying to give him some of her nest egg so that he could invest it for her. “Invest?! That’s not what I do. Here, do you want some money? I am glad to give you some money.” He was telling this story with a goofy grin, saying that his sister was really mad and frustrated with that response. She didn’t just want a handout. She wanted to buy into the financial wizardry embodied by her brother (who I would grant was likely quite sharp with arithmetic). Like Robinhood traders. Investment in innovative productive technologies is one of the core tenets of the modern economy. There is risk involved. Printing dollars and handing them out like confetti does not inspire economic confidence.
–By the way, it might sound like I am making fun of this particular trader, and I am, sort of. But he probably made more money on many days than I made in a year (who’s got the keen wit now?). Anyway, that’s what made the floor amazing.
