Price Discovery In the Non-Fed World

Developments in the crude oil markets pre and post- pandemic are quite indicative of just how much supply and demand dynamics are almost immediately reflected in price. Compare and contrast this to the way that pricing is taking place across almost all of credit of late, with the introduction of The Fed as active buyers. As you may know, Crude Oil is a world-wide, fungible (generally) product whose utility is derived from its coincident products of gasoline, diesel, jet fuel, naphtha, etc.. For the most part, crude is extracted, transported, processed, and consumed in a relatively tight time frame given the just-in-time nature of both production and usage. The market is remarkably balanced in the way that dislocations in one part of the global supply chain are almost immediately reflected in sub-sections of the market, which in turn incrementally affect the global price. Because of this balance, shocks to the system such as the recent global pandemic cause even systemic safety valves to be strained to their limits, as is the case with global storage which sits at roughly 2 billion barrels. Overproduction by both the Saudis and Russia in the face of a cratering of demand has pushed global storage capacity to its limits and is projected to reach capacity over the course of the next 6 weeks, causing exactly what supply and demand would dictate: Price of crude oil falling to generational lows, some landlocked crude even falling into negative territory.  Contrast this with the Corporate Credit market whose price response to this sudden risk event was predictable in its its arc in that certain parts of the credit world fell over 30-50%. We say predictable in that as we have been pointing out for months, credit was priced for perfection and whatever just happened could at best be termed less than perfection. However, unlike the physical crude markets where price was allowed to find its natural level, the Fed rode to the rescue albeit under the guise of the Treasury as per its Charter it is not allowed to buy private assets. So, in addition to backstopping the commercial paper markets, the Fed now was stepping up and buying corporate bonds, Commercial Mortgages and a whole host of other credits whose bids outside of the Fed were non-existent. While this activity may be debated as to its merits,(I personally find it appalling particularly when just 6 months ago the same people begging for these programs now extolling the merits of Capitalism and decrying the evils of Socialism) lets be clear that these moves will do nothing to improve the conditions surrounding the underlying credits. Pure price discovery for some, socialization of losses and pain for the many (taxpayers ultimately).

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