Foreign exchange macro strategist James Aitken, in an excellent RealVision interview published yesterday, speaks to much of what we’ve been speaking to herein of late. Which is the reality that the system was essentially strained to the hilt prior to the arrival of this “exogenous shock” to markets:
“Years ago we all would’ve been blown away by the Fed buying $60 to $80 billion of treasuries a month, well they’ve been doing $50 billion to $80 billion a day and it’s barely keeping the bond market on an even keel.
This applies to so many things we’ve seen over the past two months. It’s not just treasury basis trades, we went into this exogenous shock with everything priced for perfection. We’d had ten years of leverage upon leverage, roll-down carry, short volatility, liquidity in duration, all boxed in on itself. We came into 2020 and all those heroes were saying “cash is trash”. And of course you cannot hope to unwind 10 years of cumulative risk and leverage and everything else in about two months.”
On a more optimistic note:
“But suffice to say, we have been able to remove a tremendous layer of excess over the past couple of months. And the very best news for the financial system is, thanks to these extraordinary central bank actions, we once again have a basically functioning financial system, and we have basically functioning risk-free curves in the treasury curve.”
And on a realistic note:
“But I very much doubt that any central bank is going to be able to step out of this for a long time to come.”
Again, paragraph 2 speaks to what we’ve been warning of for the past year+, to what we began hedging against late last summer, and to what has central banks the world over, per paragraph one, pulling out every conceivable stop to keep the credit markets functioning. And, not to mention, per my somewhat cynical note from earlier today, to keep high-flying risk takers in operation.
And, per paragraph 3, we’ve a lot more to manage through before this is over…