Apr 10, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙"The only yardstick for success our society has is being a champion. No one remembers anything else." - See who said it and why it matters at the bottom.

1 big thing: Fed rescues Wall Street, but Main Street's another story

Illustration: Aïda Amer/Axios

In less than a month, the Federal Reserve has unleashed a multitrillion-dollar tour de force to buoy the U.S. economy against the COVID-19 pandemic.

Why it matters: While it has steadied the markets, the Fed is poorly equipped to offset the hit being absorbed by small business owners and the close to 17 million Americans who have filed for unemployment in just the past three weeks.

Driving the news: The S&P 500 rose by nearly 1.5% on Thursday, capping its best holiday-shortened week since 1974 as the Fed unfurled its latest rescue plan, designed to deliver $2.3 trillion to cash-strapped cities, states and midsized businesses.

The big picture: In the places where the Fed has stepped in to provide funding — such as mortgages, municipal bonds and investment-grade corporate debt — order has been restored and markets have bounced.

  • In Thursday's announcement, the central bank expanded its reach, saying it would buy some junk bonds.

Between the lines: Because the Federal Reserve is the agency closest to the financial system, Congress asked it to deliver much of the funding promised to businesses in the $2 trillion CARES Act, Peter Ireland, an economics professor at Boston College, tells Axios.

  • But the central bank has no mechanism for getting money to the businesses directly, so it needs to use lenders as an intermediary.

Be smart: Even with the Fed supercharging the $350 billion Paycheck Protection Program (PPP) initiative meant to help small businesses, many of the firms most in need will miss out on it.

  • The program has been a debacle for desperate business owners — supply has far outstripped demand, and banks have been largely unable or unwilling to process loan requests or distribute the funds.
  • And the Fed's new facility will target businesses with up to $2.5 billion in annual revenue, leaving many smaller firms playing catch-up.

"Businesses that don’t have a money manager, don’t have an attorney at their disposal — those people are not going to be helped by the Fed," says Amanda Fischer, policy director for the Washington Center for Equitable Growth.

  • "The most sophisticated businesses are the best positioned to get the PPP loans and are probably going to snatch them up and the money will be gone."

The last word: "Ultimately the Fed doesn’t have the infrastructure to touch Main Street," Vincent Reinhart, chief economist at Mellon who spent 24 years at the Fed, tells Axios.

  • "The Fed touches Main Street by encouraging banks to lend. But ultimately the banks have to lend."
Bonus chart: Not impressed

Reproduced from CivicScience; Note: ±3% margin of error; Chart: Axios Visuals

Wall Street seems to unanimously approve of the Fed's actions so far, but most Americans are less enthused, a new poll from data firm CivicScience provided for Axios shows.

  • The data show that just 12% of respondents say they think the Fed has done "very well" in its response to the coronavirus outbreak, while 19% say the Fed has done "very poorly."

Why it matters: The Fed faced significant criticism for the belief among many Americans that it had bailed out big banks and wealthy financiers while average homeowners suffered after the 2008 global financial crisis. The central bank's reputation suffered greatly as a result.

What to watch: Jerome Powell has been very aware of this during his time as Fed chair, and particularly as the Fed has rolled out these sweeping new measures, Mellon's Reinhart says.

  • "What’s striking in all the policies is they’re careful to strike a populist tone, constantly reminding us of their Main Street lending program."
  • "They are concerned about their political legitimacy and working that better than they did in 08-09. They learned from that experience."
Double bonus chart: The Fed's balance sheet hits another record high
Data: Federal Reserve; Chart: Axios Visuals

Some market analysts and economists have gotten wary of the Fed's expanding laundry list of asset purchases.

Why it matters: The big worry for most is that the Fed is now manipulating larger and larger swaths of what is supposed to be a free market.

  • Just as investors reap gains in good times when the economy is strong, they are supposed to suffer losses when it weakens, and the Fed is artificially keeping that from happening.

What they're saying: "The Fed has redefined moral hazard by acceding its independence to the Treasury Department with the establishment of the Special Purpose Vehicle to purchase corporate bonds which is in direct violation of the Federal Reserve Act," Danielle DiMartino Booth, CEO of Quill Intelligence and a former adviser to the Dallas Fed, tells Axios in an email.

  • "Investors are wise to the Fed having crossed this red line ... and are acting under the auspices of the Fed continuing to expand the array of assets that qualify, down to junk bonds and eventually stocks. Investors are playing a timing game, shunning toxic paper they deem won’t survive to see the light of Fed purchases."

What's next: Having broken through a barrier by purchasing corporate bonds and even dipping into speculative-grade junk bonds and bonds owned by private equity companies, the Fed has been "pushing the envelope," Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, tells Axios.

  • "At this point, I wouldn’t say the Fed buying anything would be off the table."
2. Catch up quick

The White House is starting to develop medical criteria for safely reopening the economy, even as the U.S. has been urged to go slowly by state government and public health leaders. (Bloomberg)

Neiman Marcus, JCPenney and other retailers have reached out to creditors seeking extensions for upcoming hundred-million-dollar debt payments. (WSJ)

Democrats blocked Senate Majority Leader Mitch McConnell's push to boost small business aid, calling it a "political stunt." (Bloomberg)

3. Hedge funds outperformed the S&P in March

Reproduced from eVestment; Chart: Axios Visuals

Hedge funds outperformed the S&P 500 in March and have suffered fewer losses this year, showing their value during crisis periods, data from eVestment shows.

  • Still, March’s average loss was the second largest on record and largest since the height of the global financial crisis in October 2008 when the average fund lost 8%-9%.

The big picture: Hedge fund returns were highly differentiated and the 10 largest funds again managed to outperform the aggregate.

Major key: Managed futures strategies have been the shining star of the asset management world in 2020 after poor performance and outflows since 2016.

  • Managed futures strategies were "the only primary strategy with positive average returns in March and had by far the best proportion of products able to produce gains, with 53% of managers positive in March," Peter Laurelli, eVestment's global head of research, writes in a note.

What it means: Managed futures strategies are funds that can invest in many different asset classes and focus on systematic trends within assets, typically using derivatives and leverage.

Dion Rabouin

Quote: "The only yardstick for success our society has is being a champion. No one remembers anything else."

Why it matters: Boom! NFL great John Madden, a Super Bowl champion coach and legendary color commentator, was born on April 10, 1936.

  • Madden also once said, "Usually the team that scores the most points wins the game.” Which is true.