 Hi guys, Eddie here with another video. Today we're going to be discussing quantitative easing, liquidity and falling angels And if you haven't checked the content that the guys have put out over the last few days is fantastic So go on to the YouTube channel check that out and subscribe if you haven't already As a result of the coronavirus, of course, we've seen huge supply chain disruptions huge demand shocks to equity markets companies oil Everything and it's led to so many unprecedented things taking place Global central banks have stepped in to pump artificial liquidity and support markets Okay So the Federal Reserve balance sheet has exceeded six trillion to backstop this coronavirus crisis. It has tapered off their Treasury purchases somewhat But this is still going at an incredible pace. They're purchasing things like US Treasury's mortgage back securities Investment-grade bonds are more importantly junk bonds. So this is the lowest rated debt That a company can issue so they've expanded their purchases for this lower quality debt And this is as a result of basically companies tapping the debt markets for liquidity To basically offset their revenue shocks their cash flow shocks so they survive. Okay, and as a result of this companies have actually been Issuing their debt at a record pace To offset this and the Fed have basically taken the other side So they're gonna buy the debt that these companies are selling and this is forecasted the Fed balance sheet to hit nine Trillion by mid-year 2020 and this is the call coming from Evercore They actually got to a point where they're purchasing one million of assets per second. Okay, so this is extreme conditions leading to an extreme emergency response from the Federal Reserve and this is Basically to ensure that the credit markets the high-yield markets are functioning and their liquid Okay, so all central banks are doing this The European Central Bank the Bank of Japan the Federal Reserve They're all pumping artificial liquidity To these companies to these markets and we're seeing serious moral hazard On our hands as these companies are racing for liquidity because they know these central banks are gonna buy up their debt These are this is potentially keeping firms that should fail zombie companies in business And this is rewarding excessive risk-taking and undermining capital capitalism itself So it's extremely worrying that we're seeing this but it's necessary at the moment First of all, we have to understand liquidity. Okay, and this is basically a slide showing the bids So the buyers in the market and the offers. Okay So this is showing a very liquid market. Okay, and this is something like the US Treasury market Or the FX market in times of extreme stress and shock What we see is actually less buyers and sellers in the market And this is actually what we saw a few weeks ago in the US Treasury market And this is extremely worrying and led to the emergency responses from the Federal Reserve Basically when they're stressing something like the US Treasury market This is extremely worrying because lots of other assets and derivatives are priced off this Ten-year yield. So if there is stress in this market, this can cause huge problems for the global economy Okay, if there's less buys and sellers when someone places a trade or buys or sells a normal amount of this asset This could exacerbate price movements and this is basically what we saw with oil over the last few days where Speculators were holding these oil futures contracts the May ones and they were basically dumping them because they didn't want to take this Basically delivery of physical oil. So there was no one willing to buy this Futures contract they were trying to sell so the price went below zero, which is crazy So these bid-off or spreads tend to rise In volatile markets because banks and other basically intermediaries are reluctant To hold this inventory and the cost of training despite the Federal Reserve and other global central banks Stepping in is still about three times the average In investment grade credit that we saw before the corona virus And this has been exacerbated again by the move of some broker dealers Staying at home because of the virus locked down and this is reducing their ability to transact So what we saw out of the eurozone today is extremely poor PMI so this is the purchasing managers index So this is just another poor piece of data coming out of Europe and this has led to the European central bank Basically speculating that they're gonna take extreme measures So the Europe just like the whole global economy is in its intense contraction Economic activity is plummeting and actually markets have diverged quite considerably From actually the economy and this is something I was watching the Federal Reserve balance sheet that we referred to on any other slide Over the last 10 years the Federal Reserve balance sheet and the equity markets have basically gone in lockstep and gone up together Okay, what we saw in March was the equity market sell-off and that correlation break down quite dramatically Since then the equity market and the Fed's balance sheet as a result of its artificial liquidity Have both gone up again and that correlation has returned. Okay So now the ECB have actually stepped in to loosen their collateral roles to accept something called falling angels So what are falling angels falling angels essentially? Companies that are rated in the investment grade space. So you have this whole spectrum of credit ratings By lots of different rating agencies So S&P my old company Moody's Fitch and they rate companies according to the credit worthiness How how basically able are they and how willing are they to repay their debt? So when you see extreme stress so revenues cash flows drop off this puts companies obviously in severe Credit crisis is right. So they will be downgraded by the credit rating agency from this investment grade To the speculative grade high-yield junk space The markets have been downgrading these companies far faster than the credit rating agencies And there's going to be a lot more to come so UBS have come out of a great stat Since 2011 European bonds rated triple B minus one notch above junk status has ballooned from 330 billion to one point one four trillion yet double B rated bond issuance in the high-yield market has driven from seventy four billion to a hundred and eighty five billion in that time about 275 billion of non-financial corporate bonds could become falling angels and downgraded within the next year So this is extremely worrying And this is a result of the coronavirus affecting businesses activity so much the economy is shrinking considerably And actually as a result of that downgrade investment come companies investment funds are no longer some of them allowed to hold this Debt so they would invest in companies that are only allowed to be investment grade now when they're Basically downgraded junk. They won't be allowed to hold these assets anymore. So this is going to exacerbate the moves Further so the ECB has changed these rules and loosened them to basically accept these fallen angels Okay, so this is not yet As far as the Federal Reserve have gone where they are actually buying the junk bonds These are being taken as collateral and the central bank said it was prepared to go further if it's required To avert a eurozone debt crisis. So this is extremely extremely worrying We're in unprecedented times where this coronavirus situation is impacting markets Extremely considerably and then we're going to see a huge amount of falling angels. This poses huge threat Threats for all central banks across the world because they're meant to purchase assets that actually do not lose money So we're all watching the situation as it develops, but it's going to be extremely interesting to see I hope you enjoyed the video any concepts that you didn't understand Please write in the comment section below more than happy to answer questions any video requests I'm more than happy also to do so take care