Treasury Secretary Mnuchin’s Actions Should Not Hurt Markets
On Thursday Mnuchin asked the Fed to Return Unused Cares Act Funds. Basically, the Treasury extended some programs at the Fed, but requested that some programs expire on December 31st as originally scheduled. The Fed, according to reports, prefers that the programs be extended, and the amount of Treasury money in play seems to be in the neighborhood of $400 billion (just a rough synopsis).
For full disclosure, Academy Securities is involved with several of these programs (Academy is an Eligible Seller on the SMCCF for example).
The initial reaction to these headlines was a “risk-off” move. Certainly, virtually every economist seems to be saying that this is the worst possible thing that could be done. While I don’t want to take the other side of what economists are saying (ok, maybe I do), this announcement could play out positively for markets.
Against the doom and gloom headlines we should all think about a few things (and I remain bearish on stocks here, for a myriad of other reasons, but this Treasury/Fed news isn’t a big factor for me).
· Bond markets are functioning very well, and I suspect little of that performance, at the moment, can be attributed to the Fed’s ongoing purchases. The Fed/Treasury quite literally “saved” the various bond markets back in March and the ongoing support helps, but isn’t critical. Having the backstops in place (and I’m particularly supportive of the ability to buy ETFs to keep any discount to NAVs from appearing and unlocking another ETF Spiral™) are good and should be left in place, but it is not critical if this change is likely to end with a transition in Washington in January.
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· The money is there until December 31st. It isn’t going away tomorrow (if it goes away at all) and there are many reasons to believe that in January it could be turned back on. Also, they aren’t forcing unwinds, they have just requested the return of unused money.
· The Fed can buy many assets without the Treasury “equity” investments. For programs like the SMCCF, the Fed loaned money to the vehicle which is supported by an “equity” (or first loss) position provided by the Treasury. The Fed can purchase many assets, like Treasuries, without any of this money from the Treasury. If the Fed was concerned, they could immediately up their purchases of other assets, like Treasuries, to maintain the size of balance sheet they deem appropriate. Those purchases might not translate directly to munis and corporate bonds, but they certainly help.
Lots of mitigating factors.
Back on October 15th Academy wrote about Charlie Brown & Stimulus. Maybe, just maybe, Mnuchin is tired of having the ball pulled at the last second and thinks that by pulling back this money, either he can allocate it directly (or via Executive Orders) and get something done, or that it will force the House and the Senate to truly carve out at least a “skinny” deal quickly.
With lockdowns increasing, though hopefully mitigated by COVID vaccines in the coming months, now is a perfect time to get at least a “skinny” deal done.
So maybe Mnuchin has figured out a way to get the money out directly or is betting that this forces the hand of Congress. I think this might be what the economists who are harshly criticizing this move are missing.
In general, yes, I’d prefer to see the money stay with the Fed, but:
· The Treasury money isn’t critical, at the moment, for monetary policy or markets.
· If pulling the money can get some sort of stimulus (direct from Treasury or with Congress), then it is well worth it.
Stocks prices may go lower, but Mnuchin’s actions aren’t as dangerous as many seem to believe.