Fed Balance Sheet Will Be At $9 Trillion Next Year: BI's Jersey

Bloomberg dot com. There's a big question and it has been underpinning a lot of the market activity over the past few weeks, and that is the treasury market, this massive funding market and frankly offering benchmark rates for around the world, and it has been beset by incredible dysfunction. Ira Jersey has been covering it all. He's been covering it all for decades back at Credit Suite and beyond. Now he is our head of US interest rate strategy

at Bloomberg Intelligence. Ira, is the dysfunction over and I think that this is sort of the key question is people look at the lack of liquidity in this key market as being unprecedented and highly disruptive, regardless of what we see out of Washington, d C. Well, it's been better the last the last twenty four hours for sure, Um, but it's still it's still very spotty. It's not what it used to be. And I think a big part of that is not necessarily because the Fed is buying

a lot of bonds. In fact, I think that at some level that's helping at least a little bit UM. But I think it's just this lack of risk appetite. And and like you mentioned, Lisa, you know, there's gonna be a lot more bonds to come. I mean if if um, you know, even even if there's a smaller fiscal stimulus plan, like closer to a trillion than the two trillion, you're still going to have a massive um. Lack of tax receipts, for example, is going to be a big thing that you're going to see over the

next couple of months at least. So there's gonna be a lot more supply of treasuries over the next year, regardless of exactly how big the um the fiscal stimulus plan ultimately becomes. Well, all right, that's actually where I wanted to go. Okay, so we have some stability, still pockets of great illiquidity. But now the quick question shifts to financing this massive stimulus bill. That we're expecting, especially

without those tax receipts that you were talking about. With the deadline push back to July, how is the government going to do this? We've heard something about a twenty year bond, about a fifty year bond, but ultimately doesn't it come back to T bill issuance in the short run, just to stave off the cash deficit. Yeah, that that's a percent right. In fact, we put out a piece just just this morning about that very that very thing where um, basically T bill issuance is probably gonna go up,

but I'm gonna use this letter. Remember it's trillion, probably go up over one trillion dollars over the next six months or so. And one of the reasons for that is is twofold. One is it will take a little bit of time for the Treasury Department to ramp up the amount of coupon issues. So that's the amount of longer term death that they're going to issue. So they will be issuing a twenty year They said that. They said that it's going to debut in in May and kind of just in time for a lot of this

fiscal stimulus to be funded. Um. I think that there's a chance that they might do a longer term the fifty year ultra bond, but I still think it's there's a question about how much demand they'll have for that, so there's a shot. But yes, there is likely to be maybe up to three and a half trillion dollars

of T bills outstanding. Now what's interesting is even at those massive levels, that's about the same percentage of the treasury market um that the that that there was back before two thousand seven when the Treasury Department reduced the amount of tea bills that it issued so um, So basically you're going back to historical norms in terms of how much tea bills might be the size of the market, and I think that that's going to be something you to see. So so anyone who really wants super safe

assets can get them. What's what's neat about that now that the Treasury Department will like is t bolls. Right now in the short short end, so one month and three months te bills are trading at zero, so they don't yield anything. So you know, if there was a time to issue you know, short term debt, it's now when you can basically fund it for free. Are so in the treasury market, the market participants say, hey, the FED has done pretty much everything it can do, it

needs to do, it should do. Now it's really up to Congress and the administration to really push on the pedal of fiscal stimulus. Yeah. So so the so fiscal stimulus is needed for two reasons. I mean, one is because you know, the Federal Reserve is designed to kind of help market function and allow the financial institutions to be able to lend to other institutions. Right, So, so that's the job of the FED by going in and doing some of the facilities like they are doing like

buying corporate credit for example. It's not completely unprecedented, but it's pretty close. And and that has to be back stopped by the by the federal government because the Federal Reserve doesn't like to take credit risk. They basically make loans with big haircuts because they don't want to take credit losses. So fiscal stimulus needs to uh come to help like small and medium sized businesses where it's difficult for the FED to go directly to those businesses and help.

So you know the fact that they've announced that they want to do a facility through the SBA through the Small Business Administration to help those uh, those types of businesses which the Federal Reserve can help fund. But ultimately it's a governmental organization that needs to really focus on that.

And that's one of the reasons why we're looking at um this fiscal stimulus plan to maybe even add more ammunition to what the FED has been doing, um and uh and and provide the more equity capital so they can even help help more. Just real quickly here, Ira, I'm looking right now at the Fed's balance sheet, which surged on March eighteen, last week to four point six seven trillion dollars. How big is it going to get

by the end of all of this? So I'm actually looking at the spreadsheet right now that I've been working on, So I can't tell you the exact number, but I can say much much larger double at least, yeah, at least double. So in other words, you're expecting at least a nine trillion dollar Federal Reserve balance sheet I say this time next year. Uh, that would not surprise me. Yeah, that that's kind of in line with what we're talking about.

I think a big part of that is how how what is the take of of some of these new facilities. So even if the Federal Reserve, you know, kind of slows down its purchases of mortgages and treasuries, which I think eventually it will do, is the SBA facility, for example, which is really where the pain point is in this whole uh, in this whole mass with the central distancing um is uh is that going to get to a trillion dollars or not? And that's going to be a

big question. All right, Jersey, thank you so much for joining us. We really appreciate your commentary here and what has been a very busy period in the U S. Treasury markets. Our Jersey chief US interest rate strategist for Bloomberg Intelligence joining us on a phone. Lisa, Yeah, that was enough that at me more than doubling. Uh you know in terms of the balance sheet, Wow, that means more than nine trillion dollars that will be the it's

balance sheet. And I believe that that will be a hot potato political issue for a lot of people and yet viewed as crucial and stabilizing the market right now. Yeah, absolutely, and that market uh a much stronger day today, Lisa's we've been saying, uh, the dall up seven. That's four hundred points on uh the DAL so again a risk on day today as a market tries to price in where this is all going. This is Bloomberg. All right, let's talk to a professional about what to do with

these markets. Matt Maylei, chief market strategist at Miller Tebec Joints us here, Matt, thanks so much for joining us. Wow. Okay, so we've got the green on the screen today, but just help us put into perspective what we're seeing in the markets really over the last couple of weeks, but

certainly over the last several days. Well, if you know, it's it's it's funny because back in when the thing first to hit, uh, we were saying that people should raise some you know, the market was priced for profession and people should raise some cash because if we get a severe downturn, you'd be able to you know, be

able to put that cash to work. And now we're kind of seeing the the the the opposite situation where we're gonna be a little bit more comfortable, uh, not saying that the bottom is going to is in and today's markets doing better. But you can't, you can't, I think it's impossible to grab the h uh, the exact pick,

the exact bottom. So if you're tipping your toe back in here and usual in buying more on a very gradual scale down basis, Uh, you know a year now or a year from now or two years from now, you're gonna look quite good because uh, once it does mound, it's gonna be impossible to chase it. So you do have to take advantage of it whence down. Man, I want to follow up on that, the concept of once

it bounces, you won't be able to chase it. That sort of implies that we are going to see some massive recovery, and that doesn't seem to be the consensus right now of my at least economists who I speak to. Can you talk about the market recovery and how it might look versus some of the economic estimates that we're hearing that are not so optimistic. Well, we've always got to understand that that that that the stock market moves, especially on the way back ups, and in this case

it was only was a very mild delay. Usually there's a big uh the stock market rolls over, but you know, six months in front of the uh, the economy. Now, you know, because of this kind of you know, black swan event, it only happened shortly after uh it became

evident that it was a rear its ugly head. And but the thing is when the when the market uh tends, it bounces a lot earlier, I mean, and and the simple reason is is that it sells off very much more quickly than the economy slows down, so it prices in some of the worst case scenarios much more quickly. Now again that's not to say that this market can't go down further, uh, but the important thing is for investors to do is to uh separate what's going on in the stock market to what's going on in in

the economy because there's always that lag. And one of the key reasons why people, I mean people I don't really want to have a lot of conference to buying these stocks until things feel better. But you know something, history shows us that when things really feel better, the markets already seen a big bounce and a big move up. So to gradually buy stocks uh and on over the

next few months. And I'm not just saying to the next week or two, over the next few months is going to be a good way to take advantag of this severe downturn. So as you think about it, you know, the volatility that we've seen in the market, we continue to see in the market some um, you know, sectors really at historically low valuations. Um. I'm thinking about you know, some of the cruise lines and some of the leisure

lines that got hit the most and earliest. How would you suggest people do get back into the market to the extent they want to kind of dip their toes or dollar cost average or however you gonna swing it, right, I mean, one of the things, of course, we we know that these cruise lines are the the airlines, etcetera. You know, when they turn around, boy, you're it's going to be a Grand Slam home run. Whoever can pick that bottom. But like I said, it's almost impossible to

do that. The thing is, with so many high quality names, uh, and you know companies with great balance, she's of great managements, uh and things like that, you're still gonna be able to hit a two run homer. So why you know, why go for the Grand Slam when you can hit two run homer. Usually you only get an opportunity where jeez, I can get a beaten down stock or beaten down group because it's separate from what's going on in the

rest of the world. Therefore, the best I can do in the really quality names as a single, the boy I can hit a grand slam with this other one. Now, if you can hit a home run or a double, why not go with the high quality names? And that's why, you know, uh, there's much less risk, but still a lot of reward and those uh, those high quality names. We're speaking with Matt Malee, chief market strategist at Miller

Tabac and Matt, you know, your argument sounds compelling. It makes sense based on the by the dip kind of mentality that we've seen over the past decade. There's a question, though, that the disruption here is fundamentally changing the economic outlook and fundamentally changing the balance sheets of a lot of companies, and it doesn't seem like all of them will be rescued.

How do you sort of get confidence that this time will be like the others and by the dip will work at a time of such incredible uncertainty just about you know how quickly this will recover, whether we might be heading into a depression, Well, I think one of the things that's going to be you know, first of all, you know again, I just want to admit to say that I I you know, when when the markets started heading down, I was saying, you know, sell sell, sell

the bounces. So you know, I was early calling for UH investors to be careful, raise some cash. And really when the market is still down twenty I was saying the same thing, raise cash on bounces. However, the thing is, and you're absolutely right, the at least the one of the things that we people will stay as your jeez, I can go back in and it's much more than a dip this time, it's a big it's a crash basically.

But what do I do do I just buy the stock market and buy everything like I've I've done it. I did in two thousand and eighteen, I did in two thousand and sixteen. That works like a charm. Now you have to be much much more careful. Uh, it's now becoming a stock Because market people have been saying that was gonna happen for a while, it's happening now. Uh. You know, I believe that to a certain degree that the passive investing is gonna be is dying. Uh and

and so therefore investors need to be thinking about specific companies. Uh, not just specific industries, but specific countries within the best industries. And you know you talk to your investment advisor. Uh. Use the mutual funds uh that that have traditions of having really good stock pickers. Is not that there's not a huge amount of those, but there are several they

are very very good. And that's why I think people can can dip their toes back in and cost U dollar cost average down rather than jump back in and say, geez, I'm just gonna buy the smpor or some sort of etf uh with my eyes with my eyes closed somehow, What are you looking at right now? What are the names today that you're looking at, or the sectors today that you're looking at. Well, one of the things it's funny, is this whole toole technology thing. And I've been a

little surprised by this, but I shouldn't have been. Now, this whole technology thing, this whole smart phone, it's just amazing. I mean the funny but in years, Paddy, when I you know, in the in the nineteen eighties, nineteen ninies, even into the especially after the tech bubble, uh in the in the in the next stecond in two thousand's

the odds, I guess, as they call them. Uh, the people would say, oh, geez, you know when you go back in, you don't want to go right back into the tech area because that's the most real more risky Yeah, more more reward. But it's a very very risky area, uh this time. And therefore they tend to do better on the on the way up, and then they get clobbered on the way down. But now technology has become so such a backbone of our economy. It's not the

risky part of it. Uh. You know, there's certainly parts of technology they are more risky than others. But you've got some great companies out there that they're the backbone of the U S industry. It's not general motors anymore, it's not general electric anymore. It's the Apples and the

Microsoft's of the world. Uh, that are the backbone of of our and and we've seen that in the way that the market has gone down instead of underperforming it the Nasdaq, which is obviously heavily weighted in technology shares, it has gone down the same amount of the SMP. It didn't underperform on the way down, even though it did outperform nicely on the way up. And that's encouraging to me that some of the names you'd wanted to

avoid it avoid in past sell offs, at least early on. Uh, these technology names, especially the high qualit ones, are the ones you do want to be buying, and they have outperformed over the last six trading days. And so I think that tells you something right there, Matt Maylee, thank you so much for taking the time. Matt Maylee, chief market strategist at Miller, Ta Back and Company, joining us

on the phone. And Uh, those iPhones. I think that I think that the smart phone industry is onto something, Paul. I think people are going to still use their their smartphones after this coronavirus disruption catch on to be a thing, I think. So I think that that might be a place of of of use. Actually interesting to think about how much actually cloud computing and all tech is going

to get a boost from this. Time to check in with Bloomberg Opinion, we're joined by opinion calumnist Gary Shilling. No better person here to chat to in terms of getting some long term perspective on the US economic condition and how it may fare given this coronavirus. Gary, thanks so much for joining us. We just heard Larry Cudlow make the comments that he believes the An administration believes that this stimulus package will set up the US economy

for strong second half. Do you uh entertained that type of optimism. No, I don't. I think the kind of disruptions we've had people pulling their horns. You look at what happened after nine eleven. I mean, it was over in a matter of minutes, but people worried about follow on attacks and so on and so forth. I think this is going to have a decided impact on on confidence of consumers and and and businesses in this country.

And there are other important things too. I think that it's uh, it's marking a further pull away from globalism. Had bloom another Bloomberg column on that one. And you know the point is, with the disruption of supply chains and so on, I think this place of the hands of people like Trump who are very protectionists, the idea

of more self sufficiency, pulling away from globalism. Dr Schilling, Gary, it's wonderful having you because you have had a forecasting record like no other, and in nine you're one of the few people who thought that a recession would start late in the year it did. Looking out now at the same site of the same type of foresight, I'm wondering, do you see a similar sort of downturn, protracted downturn that monetary policy, fiscal policy just can't stop. Yeah, I

think that's the case. I mean, you know, this is a big debate. Now, do you have a you have a v bottom. I think it more maybe looking more like an endless l you have a decline and then a very slow recovery. Sure you get the initial drop, a lot of money being put into people's hands. Uh, and low income people will spend it. They spend at least of their incomes. But other people, businesses, I think are going to be a lot more, a lot more

cautious on this. And also to restart all these supplies change. I mean, China is you know, they're talking about people going back to work, but to get things re established and get the supplies, it's a very supply chains are very intricate. You can have you can have a semiconductors producing Korea. They go to Taiwan for siginal assembly for our sub assembly, than to China to go into cell phones, and in our export of the US. You have all these supply chains and it takes a long time to

get those things re established. So it's interesting Gary the you know, a lot of the Wall Street economists are kind of looking for that V shaped recovery. So it'll be interesting to see whether that comes to fruition. Give us your sense of what you think the FED has done. Fed had a very busy day yesterday, really came on strong with more quantitative easing. Give us what your your thoughts on how you think the FED is handling this. Yeah, they used to call this pushing on a string, you know,

and you pull on the string, you get results. You're tight monetary policy. But when you push on a string, it just goes limb. I think that's a situation. I mean, the FET is basically made uh. Plenty of money available, uh, and and the question is it is and so much a question of liquidity as a question of solvency, and the question of of who wants to borrow, who wants to who wants to spend h So you really shift over to fiscal policy. As having to carry the have

to carry the the the water. The FED just the Fed is just I mean they've done vertaly everything they can except literally dumb money out of helicopters. Yeah. Well, and given the fact that you have served on the staff that the San Francisco Fed, UH Bank of America, I'm wondering how concerned you are about the idea of the IRA. Jersey was just talking about that the Fed's balance she could climb beyond nine trillion dollars in short order here. Well, uh, you know the thing is that

that people are have gotten very callous to this. You say, have a big concern. You go back to the days of Paul Ryan and the sequestering, the idea that big devas its big monetary ease would result in inflation and higher interest rates. Well, of course, what's happened is you've had these deficits now a trillion dollars and headed much much higher with the reaction of the coronial coronavirus, and interest rates to come down. So you've got they call

that modern modern monetary Uh theory. You know, theory follows fact. You have the facts, you dream of a theory to make them so so there's literally there's literally no concern about devicits. And right now, you know the world is is lusting for dollars. That's why you saw the strength and the dollar. You've seen the strength and treasuries. Uh, this is where people want to be. These are the safe havens. And also I think we're the prospects of

of lower inflation even deflation. Uh, you have less reason to worry about about the deficits and reserve action. Gary Shilling, thank you so much. Too. Sure. Unfortunately we have to go, but I could speak with you all afternoon. Gary Shilling as the president of a Gary Shilling and Co. Also

a Bloomberg opinion columns. We look at some of the stability that we're seeing in certain markets and the surge in US equities, and there is still a huge question mark around the mortgage market, really a huge pain as we see funds including investual Mortgage Capitalal the latest saying that they are unable to meet margin calls. Is the value of mortgage debt falls plummets. Logan Modashami, covering the mortgage market for years, senior loan officer at a MC Lending,

contributed to Housing Wire. I want to get your sense logan, what exactly is it that's causing the incredible pain within the housing market, within the mortgage market. That goes beyond a lot of the other declines that we've seen another asset classes. The mortgage margin meltdown really happened when rates collapsed, and I think the first thing we have to think about is that the e e p O risk early

payoff risks just blew out the entire system. So what you saw was that UH mortgage companies cannot afford to push rates lower, and they I think March nine, we saw about a one percent increased in rates that week, even though the ten year yield went all the way down to a thirty two basis points. The business of being in the mortgage business basically collapse on everyone. So you're starting to see credit freeze. All the non QM mortgage lenders are gone, not none of them are around,

are there? Some of them might come back, but they're gone. QM being QM being mortgages eligible for Fanny Freddy No non q M are those that are outside the Freddy and Fanny guidelines. So basically the only lender right now the government. Everyone's basically a loan process or for government loans. UH, and Freddie and Fanny are still under government grips, so they could still function somewhat normal, but it was a complete meltdown. Uh. There's not enough money in the mortgage

business to offset these margin calls. And I wouldn't be surprised if we have more casualties going out. But the Fed Federal Reserve obviously saw what was going on and they're going to be aggressively going back into the mortgage backed securities. But I'm not sure this is going to UH end without more casualties in the mortgage industry. All right, So logan, is there anything in the stimulus plans that there's a house plan, there's a cent a plan that

you've seen that will try to address the mortgage market. Well, we're looking at basically twelve months of mortgage payments not being need to be made if you're part of this coronavirus UH plan that facilitates that you can show your job or the abil need not to pay. So the housing, it's really interesting. The housing market is on fire. It is literally the best first two months of the year. UH. And for myself, as somebody who's talked about years, is

going to look good. It even surprises me. Thirteen year highs and existing home sales, new home sales three months sales is on is on fire. We have eight percent existing home sales median sales price growth that is way too hot. And then this happened. So I think once you get mortgage backed securities being purchased, once lockdown protocols are taking off, people can go walk the earth without

social distancing. We can get back to a more traditional housing market that it was hot, hot, hot, The sector was hot, the economy was fine before this virus. But you're gonna have to deal with some of the casualties and the mortgage business. And you know, we're gonna have to see how much does inventory actually move up when people cannot functionally put their house on the market. So look, and let's unpack some of this. The whole idea of

the casualties in the mortgage market. You're talking about the mortgage market outside of the Fannie and Freddie backing, and I'm wondering what that means for people looking to buy a home. Does it mean that their rates go up if they're more ridges are above a certain amount, Does it mean that they're just generally is going to be less capital around for home loans. How does that translate.

We're we're right now seeing the market get a little bit better because races jumped up one cent on everyone and all the banks were raising rates. So it's starting to get a little bit better. So over time, whatever is left in the industry should be able to function normally now that the FED is in the system. So we'll see. But there are for for example, when you have when you lose an entire branch of a mortgage industry, be non qu on lenders that stress nobody was going

to give them money. Credit has froze, so some of the non traditional lending is gone not happening. So I think that's that's the first blaming aspects. But can you talk about who they lent to? In other words, what niche did they fill that won't be filled if these

companies go up, go belly up. Here's a here, here's a people that are over forty three debt to income ratios, people that have bank statement loans, people that don't traditionally get verified through a self employment or W two taste of those loans that are not part of the qualified mortgage are gone so bank statement loans and and higher debt to income rat shows those loans are not going to be around this year. Uh so that I think

that's the marketplace that gets hit. Now we're looking at probably less than three of all mortgages that are being done, especially with bank statement loans, but that marketplace right now is permanently shut off. Logan, how would you compare what we're experiencing the mortgage market now versus two thousand two nine, And does that give you any roadmap for how it

may recover? You know, in two thousand eight. I remember when in August of two tho remember Wells Fargo did a flash showing eight percent mortgages everywhere, and that was basically, we don't want to do business anymore. Now you see some of the mortgage rates increase, you know, to try to stem the remember the refinance demand booming, purchase application

demand booming, so you have some capacity constraint. It's a much different marketplace because you don't have this over leveraged credit bubble on the consumer side and on the on the on the financial side. So it's different in the sense that more traditional lending will move on. Find Freddie and Fannie are still under the governmentship protection. That'll be fine. Back then, you know, you had no idea what was

going to happen every single day. So the traditional side of lending, basic, fundamental sound home lending is still here, but some of the niche players are gone right now. And I don't see as long as the government is holding Freddy and Fanny's hand, this will be okay. If they were fully publicly traded companies that weren't under the protection of the government, that might have been a different story.

I think that's the most important thing we have to We have to be very grateful that the government is still part of Freddy and Fanny right now, because the mortgage market itself is still functioning when you just have the niche players taken out. Logan Mota, thank you so much for joining us Logan as a senior loan officer at AMC Lending Group, also a calumnist for the Housing Wire, joining us from Irvine, California. And again, Lisa, once again we get into a crisis mode in the financial markets.

We see pain in that wortgage market, just like we did back in two nine. Well, to me, it was just striking that there's some mutual funds that got pretty top ratings from morning stars as far as their performance went. Seeing forty drops in days last week, I mean this massive, massive declines that we saw as margin calls were not met,

as redemptions had to be met. And this is the bid lists that we saw over the weekend with commercial property and uh some prime mortgage debt that had been repackaged that was trying to be sold at fire sales. Really interesting. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Um All Sweeney, I'm on Twitter at PT Sweeney. I'm Lisa Abram Wohits.

I'm on Twitter at Lisa Abram Wohits. One Before the podcast, you can always catch us worldwide on Bloomberg Radio