Fated
September 2, 2020
–Stock futures are at new highs this morning, causing modest pressure on fixed income. Yesterday tens ended at 67 bps, down 2.3. Curve edged flatter, implied vol fell. Brainard gave a boilerplate speech outlining the new Fed framework…basically that the Fed fell short previously and will be flexible going forward, in the form of FAIT (Flexible Avg Inflation Targeting). Which is part of Fait accompli. Which means we’re F’ed. Fated, I guess.
–“They pretend to pay us. We pretend to work.” There were two stories yesterday that give an indication of where we are in terms of market signals. One, the CDC halted evictions of renters through the end of the year to prevent disease spread. Two, the Federal Reserve now owns 30% of outstanding MBS. According to the Fed’s Z.1, Household Mortgage Debt totaled $10.7 trillion at the end of Q1. Just since March, the Fed has bought $1 trillion of MBS. These are staggering numbers. By the way, you might recall that after the last crisis, there were a lot of empty houses. According to the Atlantic, “…the gov’t incentivized Wall Street to step in. In early 2012, it launched a pilot program that allowed private investors to easily purchase foreclosed homes by the hundreds from the gov’t agency Fannie Mae.” Blackstone, among others, became huge landlords. Now the CDC tells lessees don’t bother with rent, but the Fed tells landlords, ‘not to worry, we’ll cover your interest carrying costs’. No WONDER stocks are going up. Of course, I am joking. But when Fed officials continue to say that more fiscal stimulus is essential (Barkin chiming in this morning), it highlights the fact that traditional payment agreements and markets of all sorts have ceased to function at the margin. The question is, how big is the margin? I don’t know, but if a risk should now develop that endangers the new “wealth” created in equities, that margin will get bigger, and so will the Fed’s role.
–News today includes ADP, Factory Orders, Durables and Fed’s Beige Book. ISM mfg yesterday at 56.0 was the highest since late 2018, and Prices Paid at 59.5 also highest since late 2018.
