Plunge Protection vs. JPM's Brilliant Bonds
Pandemic? Buy stocks, sell Treasurys...
MORE GOOD NEWS, reports Brian Maher at The Daily Reckoning.
We learn by the United States Labor Department that the economy took on 273,000 jobs last month.
Consensus estimates came it at 175,000.
Unemployment slipped from 3.6% to 3.5%...equaling a 50-year low.
Meantime, December and January estimates were upgraded by no less than 85,000 jobs.
Thus there is more joy in heaven.
Now the bad news:
The stock market picked up the news...and heaved it into the paper basket.
The Dow Jones hemorrhaged another 800 points by 10am on Friday, despite the jobs news. The other major indexes also gave generously again.
VIX – Wall Street's "fear gauge," exceeded 48 on Friday morning. It had guttered along under 15 until late February.
In all, global equities surrendered $9 trillion in nine days – $1 trillion each day.
Never before have global equities retreated so swiftly and violently.
Meantime, the 10-year Treasury note achieved something of the miraculous this morning.
Many were flabbergasted when yields sank to a record 1.27% low in July 2016. Yet this morning, they were below half.
Well and truly...these are interesting times.
Michael Every of Rabobank shrieks we are witnessing a "Black Swan-dive, as yields and stocks tumble in unison..."
But at least the crackerjacks on Wall Street gave us advance notice of this thundering stampede into Treasuries.
A Bloomberg headline, dated Feb. 10:
"J.P.Morgan Says Bonds to Slump, Fueling a Return to Cyclicals."
And this, bearing date of Feb. 23:
"J.P.Morgan Says Rally in Treasuries May Be Nearing Turning Point."
May we suggest a new contrarian indicator?
The "J.P.Morgan Indicator",
The reference is to the famed 1979 BusinessWeek cover declaring "The Death of Equities".
Of course equities embarked upon the grandest bull market in history shortly thereafter.
Perhaps J.P.Morgan can provide a similar service.
As Zero Hedge reminds us, most hedge funds are clients of J.P.Morgan. Those who took aboard its advice are presently paying. And royally.
They "shorted" longer-term bonds – betting they would fall.
We imagine Mr.Jerome Powell is scratching his overlabored head today. His "emergency" rate cut Tuesday failed to fluster the fish.
But that does not mean more bait is not going on his hook...
Markets presently give 50% odds the Federal Reserve will lower rates to between 0.25% and 0.50% by April.
The central bank is already woefully unprepared to tackle the next recession. Yet it appears ready to squander what little ammunition that remains.
And Bank of America is already assuming a global recession is underway:
"[Our] working assumption is that as of March 2020 we are in a global recession."
A global recession can wash upon these American shores.
What is the Federal Reserve to do in event it does?
It has little space to cut interest rates, as established. And purchasing Treasuries has lost its punch. Recall longer-term Treasury yields presently dip below 1%.
Additional purchases could drag yields to zero...and below.
Eric Rosengren presides over the Federal Reserve Bank of Boston.
He moans these conditions "would raise challenges policy makers did not face even during the Great Recession."
Again, what could they do?
"In a situation where both short-term interest rates and 10-year Treasury rates approach the zero lower bound, allowing the Federal Reserve to purchase a broader range of assets could be important.
"...We should allow the central bank to purchase a broader range of securities or assets."
Full English translation:
The Federal Reserve should be authorized to purchase stocks.
But is it already?
We recently vented the theory that the Federal Reserve has been sneakily – and illegally – purchasing stocks.
Citing Graham Summers, senior market strategist at Phoenix Capital Research:
"For years now, I've noted that anytime stocks began to break down, "someone" has suddenly intervened to stop the market from cratering...
"[And] a year ago, I noticed that the market was behaving in very strange ways.
"The markets would open sharply DOWN. Seeing this, I would begin buying puts (options trades that profit when something falls) on various securities, particularly those that had been experiencing pronounced weakness the day before.
"Then, suddenly and without any warning, ALL of those securities would suddenly ERUPT higher."
Mr.Summers theorized that the Federal Reserve was purchasing Microsoft, Apple, Alphabet (Google) and Amazon stock.
Because these behemoths wield such vast heft, they can haul the overall market higher.
Did the Federal Reserve possibly resort to the same skullduggery on Friday?
At 3:08 we noticed the Dow Jones flashing 25,268 – another whaling to conclude the week.
We next looked in shortly after 4 to tally the final damage.
Yet we were astonished to discover the index had surged to 25,938 in that hour.
For emphasis: That is a 670-point spree in the span of one hour.
It settled down to 25, 864 by closing whistle. But the index closed the day only 256 points in red – a victory of sorts.
A quick look at Apple revealed it began rising around 3 o'clock...as if by an invisible hand.
Microsoft displayed a nearly identical pattern. And Amazon. And Google.
All mysteriously jumped at 3pm.
We leave you to your own conclusions.
The Federal Reserve Act does not authorize the central bank to purchase equities.
But financial emergency is akin to wartime emergency.
And as noted, the Federal Reserve took extreme liberties with the law during the last crisis.
It may be taking additional liberties at present. And it will again if necessary.
"Inter arma enim silent lēgēs," said Cicero – "In times of war, the law falls silent."