With all this talk of flattening the curve, there is one meander that will never be straightened: The Federal Reserve’s balance sheet. What was tightening a little more than a year ago is now expanding at an unprecedented rate, topping $6 trillion in a single month. While Washington has placed everyone under indefinite house arrest, lawmakers have free reign to douse the pandemiconomy with kerosene and set the nation on fire by nationalizing parts of the market. The primary strategy of the Powell Putsch has been to fire off the bazookas to rescue America from devastation and destitution. In the process, the Fed has unleashed the kind of stealth socialism about which Senator Bernie Sanders (I-VT) has for years fantasized.
What’s $2.3 Trillion Among Friends?
Before millions of Americans celebrated Good Friday from the confines of their quarantine, Fed Chair Jerome Powell announced another injection of $2.3 trillion into the economy. This time, officials are attempting to shore up Main Street by establishing new lending instruments and bolstering existing apparatuses to support small- and medium-sized businesses that have been walloped by COVID-19.
Under this initiative, the Fed and the Treasury Department are forming a tag team. One of the duo’s finishing maneuvers involves a new $600 billion Main Street Lending Fund, targeting borrowers with up to 10,000 employees and or up to $2.5 billion in revenues. The package consists of four-year loans that will defer principal and interest payments for one year. The critical thing about this plan is that these loans will originate with banks, but 95% of the funding will come from the Fed and the Treasury. Are some good, old-fashioned unintended consequences in the making here?
The Fed is bailing out states, counties, and cities by acquiring up to $500 billion of short-term notes. It stopped short of providing details regarding its muni-bond purchases. But what else can be said other than that the Fed is just adding it to the ever-growing pile of assets on its balance sheet?
Powell announced that the Fed is expanding another facility that buys new issues of collateralized loan obligations and commercial mortgage-backed securities. As part of its corporate bond-buying blitzkrieg, the Fed will start scooping up debt from sub-investment-grade issuers – junk-rated companies. The caveat is that they must have been rated as investment-grade before the Fed’s programs were released in late March. The big move by the Fed is that it could begin pouring into exchange-traded funds (ETFs) that possess this type of debt. Put simply; the Fed is purchasing junk bonds.
By the time the madness ceases, Goldman Sachs estimates the Fed’s total bond purchases could hit $1.8 trillion. Its bond-buying tentacles will extend to utilities, technology, industrial, energy, health care, communications, and basic materials sectors with up to five-year maturities. All sorts of ETFs will be eligible for Fed purchases, including some of the big box benchmark indexes, such as the Bloomberg Barclays US Credit Corporate ETF, the ICE BofA 5-10 Year US Corporate ETF, and iBoxx USD Liquid Investment Grade.
The latest addition to quantitative easing is being marketed as a Main Street lifeline, but the Fed may have been rerouted to Wall Street. Zero Hedge recently asked a pertinent question: When will the finance industry put together an ETF that consists only of ETFs that are now bought by the Fed? Indeed, the best way to make money in this market is to front-run the Fed. But how can you front-run the institution if the central bank is on a shopping spree with a credit card that has no limit?
The next bullet to fire in this newest QE round is buying stocks. Perhaps like subzero interest rates, the Fed is waiting for the next financial crisis to take such drastic action. Powell did concede the Fed has no limit to what it can do, so it is unclear what other godly power the Fed will wield in the coronapocalypse.
Unlimited Power
Before the Easter long weekend, Powell delivered a webcast speech to the Brookings Institution. His remarks were meant to produce optimism about an economy that will soon slip into a deep recession. But as he tried to persuade everyone that America will be great again on the other side of the lockdown, Powell made an interesting admission: “There is no limit of what we can do as long as it meets the test of law as amended by Dodd-Frank.”
He seems to be correct, and the Fed is not even getting any pushback by lawmakers in Washington.
If you thought the Fed would be tapering anytime soon, then we have a gold-backed Federal Reserve Note to sell you. He assured Wall Street junkies that fixes will be constant and that “we will be in no rush to pull back on asset purchases or our lending program” until the rout is over. Additionally, the Fed may do even more in the aftermath, noting that its role is to “support robust recovery when it does come.”
“We will continue to use these powers forcefully, pro-actively and aggressively until we are confident that we are solidly on the road to recovery,” Powell said. “The thing we will be looking for is to make sure the economy really is on a solid footing before we start pulling back.”
Does all of this seem confusing? Well, here is the CliffsNotes edition of everything the Fed is doing:
https://youtu.be/O1hCLBTD5RM
Made in China?
For all the justified complaints about China, how is this any different from what Beijing is doing? The People’s Bank of China (PBoC) is employing a wide variety of monetary stimulus tools to support banks, cushion the stock market, facilitate fiscal stimulus, and bail out its friends. Everything from lowering interest rates to slashing the reserve requirement ratio to approving local bond issuances, the PBoC is either serving as a blueprint for the rest of the world or it is mirroring everything the Fed has done.
The Soviet Bats Are Coming!
Are the bats a bunch of hippie socialists on a crusade to realize Karl Marx’s dream? These flying creatures did not just spark an international pandemic, Chiroptera also made sure that we can all declare that we are socialists now. Policymakers in Congress and the mad printers in the Fed’s vaults have contracted a bout of socialism; choosing to quasi-nationalize nearly every facet of the world’s largest economy by bailing out hedge funds, scooping up junk bonds, taking federal equity stakes in companies, and dropping bags of cash from helicopters as if they were … bats.
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Read more from Andrew Moran.
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