Liquidity Reversal: The Rotation Trade Speed Bump

Published on
November 30th, 2020
Duration
39 minutes


Liquidity Reversal: The Rotation Trade Speed Bump

Daily Briefing ·
Featuring Jack Farley and Ed Harrison

Published on: November 30th, 2020 • Duration: 39 minutes

Real Vision managing editor Ed Harrison is joined by editor Jack Farley to evaluate the value rotation trade and the challenges it will face in the coming months. As November comes to a close – a month that saw record-breaking appreciation in value stocks, cyclicals, and small-caps – Ed and Jack analyzes how rising COVID-19 hospitalizations will impact economic behavior. They then look at liquidity going forward, and how monetary conditions will affect markets over the next few months, incorporating Ed’s interview with Michael Howell and Jack’s upcoming interview with Teddy Vallee. Ed and Jack close by discussing the Government Accountability Office’s report on incorrect jobless claims data, as well as GM’s partial back-pedaling out of its deal with controversial electric vehicle manufacturer Nikola.

Comments

Transcript

  • MB
    Matt B.
    1 December 2020 @ 12:18
    Really like Ed and Jack. Better macro analysts than most traders.
    • JF
      Jack F. | Real Vision
      1 December 2020 @ 17:25
      Thanks Matt!
    • MB
      Matt B.
      1 December 2020 @ 20:58
      @jackf just calling it as I see it, sir.
  • TC
    Tim C.
    1 December 2020 @ 01:21
    Not sure I agree with the liquidity commentary vis-a-vis the Fed. This is where I think the K shaped recovery effects are misunderstood. The market seems like it will be dystopian. It's $62B of money that purchased OTR treasuries. It's not liquidity "sucked out of the market" per se. It is pristine collateral being purchased that can be put to use (or not). During May/June the Treasury issued something like $2T mostly bills and the Fed didn't gobble all that up and no one batted an eye. I'd like to hear an explanation as to why that giant sucking of liquidity had no impact... I think the correct question is where the balance or inflection point is, what factors influence that, and what the knock on or deleterious effects are. It's an ecosystem after all... On COVID, I totally agree with Ed on the hospital front. If hospitals get overloaded, we have major issues. I don't think people understand this. For example, one of the side-effects patients have are clotting issues. There are a plurality of ways to treat clotting, all with various risks, the application of which is based on historical understanding of patient conditions. The associated meds are complicated for various reasons. Imagine the hospital staff having 4x the number of patients on such meds... I'm skeptical of the rotation trade, but I could be wrong. It conflicts with the K-shaped narrative. Not disputing it is happening, but I'm not biting...
    • JF
      Jack F. | Real Vision
      1 December 2020 @ 15:58
      Hi Timothy, thanks for this. To be clear, the Fed did not purchase $62B of OTR securities. It was the Treasury who, in October, issued $1.5575 Trillion of bonds, and retired $1.4949 Trillion, for a net cash raise of $62 Billion. So this is liquidity that was "taken out" of the market. Of course it's more complicated than that, but they are swapping $62 billion word of bonds for $62 worth of dollars. So it is liquidity negative, I believe
  • PC
    Petros C.
    1 December 2020 @ 13:47
    RV team AUDIO is missing
  • DS
    David S.
    1 December 2020 @ 01:06
    IMO we are entering a scorched earth monetary era. The Treasury had a lot of funds saved to be release when President Trump was reelected. These funds would have been a lifeboat for small business and/or personal pandemic relief. If President Trump would have won, IMO there would be moves underway for pandemic relief before the inauguration. Since it seems that President Trump will not win reelection, nothing can happen until after inauguration. IMO the Republicans will win the senate seats in Georgia giving them control of the Senate. IMO Senator McConnell will follow in his former footsteps with stopping as many Democratic programs as possible. I am already hearing Republican Senators talking about fiscal conservatism - stop the money presses. This translate to me as stopping additional pandemic relief. This will lay the groundwork for a poor performance of the Democratic administration and set up positive motivations for a Republican victory in two years. This will not be good for the country, but if it is good for the future of the Republican Party it will be done. It worked before. I am not saying this as a partisan, just trying to figure out what to do with my money. Any ideas how one should invest with a deadlocked Congress. DLS
    • MB
      Matt B.
      1 December 2020 @ 12:19
      The Republicans love fiscal conservatism only whenever The Democrats are in power.
  • RD
    Richard D.
    1 December 2020 @ 04:24
    Need Audio file to download.
  • JF
    Jack F. | Real Vision
    30 November 2020 @ 23:33
    Hi all, I hope you enjoy this latest installment of RVDB. If you're interested in the liquidity dynamics that Ed and I mentioned, stay tuned for my interview with Teddy Vallee, which airs first thing tomorrow. Also - if you have any ideas of questions you think I should ask James Litinksy, the CEO of MP Materials, please let me know, either as a comment or in the Exchange: https://exchange.realvision.com/post/need-your-help-5fc5813dc8e33407eecbc72b Thanks! JSF
    • SW
      Suzanne W.
      30 November 2020 @ 23:49
      Can't wait!
    • DR
      Derrick R.
      1 December 2020 @ 04:12
      Thanks Jack. Enjoyed today’s update.
  • NI
    Nate I.
    1 December 2020 @ 02:31
    Textbook perfect answer from Ed on the real rates question; however, my question is how does the Fed raise rates without rendering the Federal government incapable of servicing their debt? Normally I would be selling PMs right now, but I think selling gold, silver, bitcoin, etc. is a bad idea because it's a nothing but a pipe dream for the Fed to raise rates. Powell got one hike before he crapped his drawers and reversed course and that was pre-pandemic. Quite the opposite, they will suppress rates. I'm buying hard assets (gold, silver, btc, ...) into the weakness.
  • BH
    Bradley H.
    1 December 2020 @ 00:47
    An awkward question... would a doctor ever prescribe an unnecessary or undesirable medication, procedure or even a hospitalization? Perhaps out of vested $ interest or maybe because of cya legal concerns? Not denying that covid is bad, just pointing out that so is our medical system. Wrong incentives abound.
  • NB
    Nabil B.
    30 November 2020 @ 23:57
    I think, perhaps, Teddy Vallee's point may be that, in the short term, the inflation rate falls (this occurring due to "liquidity reversal") much more than the interest rate, thus leading to an increase in real rates.