The Final Leap: America’s Overlapping Crises May Make Fed Stock Buying Inevitable
"If you don’t think that the mechanical processes that have been worked out over the course of the past month with the Fed now being a top-five holder in many credit ETFs was a test drive for equities purchases, you’re wrong", Nomura's Charlie McElligott said earlier this month, in a lengthy podcast interview.
McElligott was loosely referencing what some critics argue is an example of the Fed using semantics to skirt legal restrictions on what the institution can and can't do in a pinch.
M
I think the FED, Treasury (or their agents) are already buying stock futures…….they pop up most days after the close, when the market gets thin and easy to move.
Let’s not with the conspiracy theories — it’s misleading to readers who may not have the wherewithal to parse what’s real and what’s pure speculation, and it also perpetuates memes that have been popular on websites of questionable motives.
@TRH Are you also suggesting that the BoJ or Swedish SWF might not be the source of the overnight bounces? What about the Saudis, or UAE or some other ME concern with a vested interest in maintaining the facade of asset prices and capital velocity?
“Swedish” sovereign wealth fund?
You sure you got that right?
Or did you maybe mean Norway? Or the SNB (i.e., Switzerland’s foreign currency holdings)?
🙂
Lol, this is your brain on Sunday. Yes, either would have worked.
It’s likely hedge funds stepping in to screw the price-driven models. It’s relatively easy to move the futures to the model trigger points in a thin, overnight market. Sharks preying on other sharks!
It seems more than likely that the fed becomes the equity buyer of last resort further cementing momentum as the permanent winner, socializing the costs of wallstreet mistakes. The end result is a strange state where the wealthy are guaranteed to win at their casinos while everyone else is guaranteed to lose at their jobs. If the fed can go this far… surely it can also skip right to direct UBI but it won’t and that will drive extreme social unrest.
Most comments one reads are based on whom ever wrote them and their ideological inclinations….Looking on a longer term view there has been a radical level of acceleration in what I like to refer to as goalpost moves in recent years. If one were to go back to (arbitrarily ) about the time of the Greek Financial Crisis this would appear obvious..
So maybe we are talking about long term permanent changes and the viability of a system that is adapting or trying to adapt to levels of stress that can be construed in an (objective ??) analysis as potentially terminal… We as a group all derive a lot of benefit because there is a diversity in opinions expressed here and it is apparent no one has a solid lock on what the future will or should look like.. The discussions related to MMT over the past six months exemplify some of the above…Sorting out the self interests of the powers that are driving the actions that control the direction of change is the ultimate challenge …..
This is an excellent comment on our situation, thank you.
It’s ironic that MMT, UBI, and helicopter money seem like the best way to save capitalism
Touche!
Sorry, I might be a simple mind, but it is the credit market which is important, who cares if stocks have a downturn, who cares if Tesla crashes? Jerome Powell himself indicated something like it are the poor and middle class that needs help, implying not the stock market……
Credit and the stock market inextricably linked, so the stock market is just another “policy tool”. When you have an employment and inflation mandate, it’s not hard to see jumping from fallen angel credit support to outright HY and stock index purchases.
I agree. I fail to understand the rationale for the Fed buying stocks. Protecting pension funds? banks and insurance companies? The rich hold so much sway over politics that they even stifle the discussion on blog sites.
The question is, what stocks does the Fed buy. Do they index, with the resulting distortions? Do they buy FAANG type stocks regardless of valuation, or do they act as the equity buyer of last resort and buy moribund equities? And to what extent does it fulfill its primary purpose by propping up equities?
I would speculate the Fed would buy stocks of those companies of which they just bought corporate bonds.
In that case, one needs to sell everything else and buy those companies, hopefully front-running the Fed. It’s bigger than all the big hedge funds put together, and only the stocks it buys will go up, regardless of fundamentals, charts or stories. It would be a different market.
Heisenberg’s arguments for the Fed buying stocks:
Trump offends me, he hasn’t ‘played by the rules’ (I assume you still buy into the Russia conspiracy, which you’ve subjected readers to for several years now). If Trump doesn’t, then…..no-one needs to, so…. the Fed should be allowed to buy stocks?
“Structural damage means activity and output resets sustainably lower, all else equal, which should then translate into lower earnings, and thereby falling equity prices” -> What that describes, is the market trying to do its job and (somewhat) efficiently price assets. I don’t know when that became a crime.
The “intersecting nature of the multiple crises facing the US means it may be more difficult for markets to shrug off political turmoil and societal unrest” -> So be it. I don’t know at what point equities going lower suddenly means in your eyes that a central planning authority should step it to prevent it. That argument’s as ridiculous as saying Netflix had a great quarter, investors are trying to price in a higher value, but some of this windfall was due to the virus, which wasn’t its fault, so let’s hike rates.
H, correct me if I’m wrong, but he’s not arguing that the Fed should buy stocks – only that they are setting themselves up to be able to do so. H has made it clear on numerous occasions that he thinks we need fiscal policy to address the challenges we have faced and continue to face or we will continue to see the primary causes of societal unrest get worse with increasingly worse consequences across the board.
As for letting the market collapse, the Fed has stepped in to prevent a repeat of the Great Depression while the federal government abdicates its duty to promote the general welfare of the country. Yes, in an ideal world, we’d let price discovery and market dynamics work their magic, but we don’t have to sit on our hands and let the entire market collapse because of some freak event like a pandemic and the unwillingness of the federal government to actually step up and address the problem instead pretending it doesn’t exist or is a hoax..
Yes the pandemic was a “freak event” as you mention. But what turned this freak event into a deep systemic crisis (apart from poor leadership from the West, in general), was the Fed’s terrible policies over the past 2 decades. They incentivised risk taking, piling on debt to buy back shares, punished saving, greatly expanded wealth inequality.
Boeing is the poster child for the Fed’s reckless decisions, and if it wasn’t the pandemic, the system would have collapsed on something else. Last time I checked, record corporate debt, record wealth inequality, record misallocation of capital, most people living pay check to pay check etc., isn’t a recipe for stability.
I agree and those dynamics have been documented extensively on this site. See here for the latest example: https://heisenbergreport.com/2020/07/10/lacy-hunt-on-pandemic-impact-prepare-for-years-of-low-inflation-high-unemployment-lackluster-growth/
That is why H and the people on this site keep harping on the idea of fiscal policy and creating a much stronger social safety net. That is the only way to get the Fed out of the business of trying to play the hero unless you would prefer Great Depression redux.
I would also note that the Fed’s hand has basically been forced. The market’s taper tantrums showed what happens when the Fed tries to normalize rates. Even if you think the Fed should’ve ignored the taper tantrums, Powell would have been quickly replaced by our president who would not have stood idly by while the market dropped. The president made it very clear that he expected an accommodative Fed.
I never said the Fed should buy stocks. This isn’t a prescriptive article and it’s not meant to be a policy recommendation.
Peter wanted an excuse to say something about Donald Trump, so he conjured one out of thin air in a bid to start an internet argument with anyone willing to engage.
Generally speaking, that is not how I would recommend spending one’s Sunday — bickering with others on the internet, that is. Other ideas include: Reading, writing, running, leaving constructive comments (and every other comment here is constructive, as are most parts of Peter’s comments) or anything that’s conducive to self-improvement.
It makes sense to needle those who write for public consumption when the articles appear on sites the author doesn’t control and/or in settings where the author is restricted in their capacity to respond. But, Peter, this is my house. I own it. You’re just a guest. And you’re certainly welcome to hang out. I’ll even feed you chips and salsa. But don’t sneeze in the salsa, Peter. That’s not a very nice thing to do.
If the elected officials of our country can not enact policies to fix these problems ( Congress) then we have other way more serious problems than worrying about whether or not the Federal Reserve ( not elected officials) will buy equities.
Presently, we are still a democracy.
Time for a new group of elected representatives who are willing to work hard to solve problems and have a vision for the future of our country- which hopefully finds a better way to reducing the wealth gap than just printing USD.
Gibbon famously concluded that the decline and fall of the Roman Empire was largely attributable to the loss of civic virtue in its population. A lot of civic virtue was traded in for a neoliberal-monetarist idea of capitalism about a half century ago now, and it has been rationalized for so long against empirical evidence that the internal contradictions have built up to this point of acute irony – with this final leap of buying stocks, the FED will complete its nationalization of the corporate sector. Right-wing ubercapitalism will in fact have delivered Sovietization. The paradox will likely not be appreciated. America will continue to see itself as fundamentally different from China, despite the close similarities of the two economic systems. At some point, or perhaps gradually, fed up with the self-serving hypocrisy and corruption of the ruling class, oppressed Americans will lose their civic virtue as well, and there will be none left.
@Anaximander I have been saying the same for years to anyone who would listen. Sadly, no one seems to care so long as they have their iPhones and Netflix.
It continues to amaze me that nobody cares. Belief and psychology are all powerful.
This may sound old fashioned–but the Federal Reserve act needs to be changed in order to buy stocks. True, the Fed has bent its authority under the guise of restoring “functioning” to first Treasuries and MBS and now into IG and HY. It used the SPV work around. Can they do that for equity ETFs? Maybe. In April, Yellen said the Fed would need Congressional approval. I am asking more than anything else. I suppose the cynic just imagines the Fed, a body that has hardly any legislative accountability, can pretty much do whatever they want and the Yellen objection is not really an objection at all. I want to hope, for the sake of the country, that the prohibition on buying stocks is a higher bar than it appears to be for the BOJ.
From what I have read elsewhere (SA), through June 30, the Fed has purchased $9.6B of corporate bonds out of the $250B facility.
The universe for corporate bonds is $10.5T.
At the current pace of $1.0B corp. bond purchases/week– a lot of bonds will get purchased before the Fed moves on to equities.
Can the Fed print enough USD to purchase equities, let alone a meaningful chunk of the corporate debt universe? Seems unlikely.
There is a non-zero chance that the elections in 113 days will bring in a Democratic president and a Democratic majority in the senate, to add to the existing Democratic majority in the house. There is also a non-zero chance that the Democratically-controlled senate will suspend filibuster rules, once seated in January 2021. One would imagine that in that circumstance, you might hear of more imaginative proposals for investing in America, besides simply allowing the Fed to buy the stock of publicly-traded companies. There are in fact many interesting possibilities that you might see as hybrids. Why not buy out poorly-performing publicly-traded manufacturing companies and use them to both increase employment and manufacture strategically-important goods, such as medical supplies (PPE), generic drugs, etc? Invest in Boeing–to manufacture solar panels, wind turbines, etc. Call it socialism or state capitalism–if it’s going to happen in some form or another, there are many who beileve that it might as well go towards making the country more resilient and boosting employment, rather than simply increasing the fraction of wealth owned by the wealthiest Americans.
A bear market is “nature’s way” of cleansing and resetting our financial economy, much like a fever kills viruses. Is there anyone who deep down doesn’t really believe that we’re just prolonging our misery, with very deleterious long-term effects, with these (potential) market shenanigans? At what point did it become so God-awful for our policy makers to even consider the possibility of a significant reset in the markets. It’s truly sad and suggests that the framework must be truly rotten underneath the facade…
Joey: this is called « Corporatism » and has been practiced by Europeans (France and Germany) until circa 1990/2000. Worked well for them.
About the « legality » of central banks buying stock, how have the other central banks worked around? On its practicalities, how have these central banks voted (asking for a friend)?
When you add the discussion on tax reform that would include taxing capital gains and dividends more like normal income or raising corporate tax, you see that essentially the government will end up being a bigger shareholder of the « public « sector in what form or another, which form is preferable? Again, how would or should they vote at SH meetings?
the Fed buying stocks anchoring purchases at a PE of 20 with debt to equity no greater than 1 ought to bring the tech stocks back to earth