Views From the Floor

In this week’s issue: why we believe the US is not heading for a liquidity crunch; and another V-shaped recovery, this time for US temporary payrolls.

Quote of the Week:

"Credit default swaps ‘encouraged the growth of a finance of chance and of gambling on the failure of others, which is unacceptable from the ethical point of view."

Pope Francis in 2018. Three years earlier, a Vatican portfolio bought structured notes containing CDS as part of a bet that a car rental company would not default on its debts by April 2020, according to documents seen by the Financial Times. That same car rental company filed for bankruptcy in May 2020.

 

Liquidity Crunch?

Over the past four months, the Federal Reserve has hardly injected any liquidity into the economy (Figure 1), compared with the cUSD3 trillion injected between March and May.

Does this mean we are heading for a liquidity crunch?

We believe the answer is no, for two reasons.

First, there has been a spike in the US Treasury General Account – or the government’s current account – to USD1.7 trillion (Figure 2). This is money that is waiting to be unleashed into the US economy. Of course, there is no guarantee that this money gets released given the current US political situation. However, if there happens to be an agreement, then this is a big quantity of money that will be injected into the US economy.

The second source of liquidity is M&A (Figure 3). In April 2020, the volume of M&A deals fell to USD96 billion, the lowest level since August 2009. However, since then, we have seen a bounce back in M&A activity, both in terms of volumes, but also as a proportion of market cap.

Figure 1. Central Bank Monthly Purchases (USD Billion)

Central Bank Monthly Purchases (USD Billion)

Source: Man Solutions, Bloomberg; as of 30 September 2020.

Figure 2. US Treasury General Account (USD Billions)

US Treasury General Account (USD Billions)

Source: Man Solutions, Bloomberg; as of 30 September 2020.

Figure 3. Global M&A

Global M&A

Source: Man Solutions, Bloomberg; as of 30 September 2020.

Note: M&A is (LHS) monthly periodicity sum of all announced transactions across the respective month. (RHS) sum of all announced transactions on a daily periodicity.

 

Another V: US Temporary Payrolls

After falling to a 10-year low in April 2020 in the midst of the coronacrisis, US temporary payrolls have exhibited a spectacular V-shaped recovery. Indeed, US temporary payrolls have regained about half of those lost during the depths of the pandemic in just six months.

Of course, temporary payrolls would be expected to recover faster than permanent payrolls since they provide more employer flexibility. Still, the speed of recovery has been unprecedented. As a comparison, it took about 15 months for the US temporary payrolls to regain about 50% of those lost during the Global Financial Crisis.

Figure 4. Temporary Payrolls Recover

Temporary Payrolls Recover

Source: Bloomberg; as of 30 September 2020.

With contribution from: Henry Neville (Man Solutions, Analyst), Teun Draaisma (Man Solutions, Portfolio Manager), Ben Funnell (Man Solutions, Portfolio Manager) and Ed Cole (Man GLG, Managing Director – Equities).