Monday, June 29, 2020
In the world of finance, we’re witnessing an unstoppable force colliding with an unmovable object, and that impact between such massive things is causing all sorts of interesting behavior in the markets.
On one hand, we have the biggest global economic contraction of the modern era, the highest unemployment level in post-WW2 American history, and a virus that continues to affect consumer, business, and government behavior. The world went into this crisis with record debt-to-GDP levels, which made what could have been a manageable situation into a more extreme situation. This is the unmovable object; an incredibly heavy economic anchor that was built over decades and triggered by a random event.
On the other hand, we have the biggest-ever collective fiscal injection by countries around the world including in the United States, and rapid debt monetization and asset purchases by central banks to facilitate those sovereign deficits and smooth out volatile markets. The Federal Reserve has crossed the Rubicon into buying individual bonds including some junk bonds, as well as muni bonds, in addition to the Treasuries and mortgage-backed securities they already have a long history of buying. This is an unstoppable force; the ability to use an infinite balance sheet to print money and buy assets.