The ancient Lao Tzu proverb espouses that the journey to bailing out Wall Street begins with one freshly printed Federal Reserve Note. A chief tenet of the Powell Putsch in 2020 is to ensure the survival of the fat cats residing in the corridors of financial power by any means necessary. As health authorities continue to battle the nursing-home epidemic and the government tries to curtail the nationwide riots, the U.S. central bank is quietly executing the neo-Keynesian interventionist edict of socializing losses and privatizing gains. When America burns, monetary policy takes a back seat to everything else.
Fed Bails Out Wall Street
The Federal Reserve adopted the age-old political tactic of the so-called Friday news dump: releasing terrible, awful, no good, rotten developments. The Eccles Building published data from the first week of its Secondary Market Corporate Credit Facility (SMCCF), and it was not a good look for the Fed or The Street.
According to the first detailed disclosure from May 12 to May 18, the central bank acquired $1.3 billion of shares in 15 exchange-traded funds (ETF) in its first week of operation through 158 trades. They were revealing transactions because it highlighted that the Fed is bailing out some of the largest companies in America, and it is exposing itself to junk bonds.
As of May 19, its biggest holding was $326.3 million in the iShares iBoxx U.S. Dollar Investment Grade Corporate Bond ETF. This is an important trade because the fund’s largest holdings are bonds from JPMorgan Chase, Goldman Sachs, Wells Fargo, and Bank of America. These are not companies hanging on the ropes and one punch away from being knocked out.
The institution’s biggest junk ETF holding was the iShares iBoxx High Yield Corporate Bond ETF at a little more than $100 million. By scooping up shares in this ETF, the Fed is now in possession of Sprint and Tent Healthcare bonds. While these types of investments provide higher yields, junk bonds are debts that maintain low credit ratings. Overall, junk bonds accounted for 17% of the Fed’s latest bond-buying spree.
Fed Chair Jerome Powell’s purchases seemed to have helped the two ETFs. The former climbed 2.5%, while the latter surged approximately 5% in May.
But with about $2 trillion ready to deploy, why has the Fed made only nominal purchases that account for only 1% of the overall $252.7 billion market? The Fed is ostensibly sending the signal that it has started to make purchases, but it will damn the torpedoes only when it is necessary. Indeed, the announcement in April was enough to spur demand for corporate debt, which explains why these kinds of bond sales exceeded $1 trillion in the open market last month.
Powell recently told a Princeton University webinar that the Fed “crossed a lot of red lines that had not been crossed before.” But he is doing a lot more than that. The Fed mandate has transformed from stabilizing financial markets to shielding Corporate America from reality. Powell and Co. are merely propping up the struggling private sector instead of allowing the invisible hand to slap deeply indebted and irresponsible businesses in the face, even if the country faces a public health crisis.
So, what now? That is the $64,000 question, and the answer could help you front-run the market.
The Fed chair has repeatedly hinted that the central bank is prepared to unleash a tidal wave of policy tools to stimulate and rescue the world’s largest economy from the point of no return. Well, except for subzero interest rates, likely because the head Swamp monster is saving that beauty for when the bubblemania pops. By employing a tsunami of unconventional and unprecedented measures, the Fed is crafting an economy that socializes losses and privatizes gains. But while this was America’s dirty little secret in the aftermath of the Great Recession, the Fed no longer even conceals it anymore. Corporations now fully understand that all their actions will be covered up by an organization that has the keys to the most powerful doomsday machine in the world: the printing press.
Read more from Andrew Moran.