By Rudy Barnes, Jr.
The Federal Reserve has announced it will be buying corporate bonds to prop up the mega-corporations of Wall Street. Those Fed bond purchases will supply the oligarchs of Wall Street with the cash needed to attract investors in overvalued stock rather than investing in low return treasury bonds or certificates of deposit insured by the FDIC.
Large corporations raise cash for their operations with corporate bonds that offer investors a higher return than U.S. treasury bonds and FDIC insured CDs, but with greater risk. The Fed has taken the risk out of investing in stock by buying corporate bonds, and by keeping interest rates at close to zero it has discouraged investments in treasury bonds and CDs.
The partnership between the Fed and the mega-corporations of Wall Street is evidence of crony capitalism. It provides more power to the super-rich oligarchs of Wall Street at the expense of smaller businesses on Main Street and exacerbates the dangerous disparities in wealth between the rich and America’s diminishing middle class.
The national debt is soon expected to reach $30 Trillion, with the Fed balance sheet to exceed $7 Trillion; and the Fed is now propping up the stock market despite objections that it will only produce a sugar high for the economy. The consequences could be ugly, but the Fed has failed to explain the long-term economic impact of its aggressive new monetary policies.
The national debt will continue to rise to pay maturing bonds. While Fed monetary policies create new dollars without increasing the national debt, they dilute the value of existing dollars. Keynesian economists tell us not to worry about the massive national debt, and Trump has said that we can print money to pay our national debts; but there’s good reason to worry.
America’s inability to reduce its massive national debt and its continued creation of new money will lead to an economic meltdown. The crony capitalists on Wall Street who are the primary beneficiaries of misguided Fed monetary policies will be the first to see it coming. They have contingency escape plans, but most Americans will have to live with devalued dollars.
The Trump White House, along with a profligate Fed and a Congress beholden to its patrons on Wall Street all bear responsibility for the misguided monetary policies. They promote the illusion that they benefit all Americans, but they don’t. They have already motivated Americans to move their secure savings to a speculative stock market that is likely to collapse.
In propping up Wall Street, the Fed has insured investors a high-yield return on stock much as the FDIC insures low-yield bank accounts and CDs; but when mega-corporations fail, investments in their stock are lost unless the Fed or Congress bails them out as “too big to fail.” That happened in 2008, but will it happen next time? Don’t bet your savings on it.
CNBC has reported that “The Federal Reserve is expanding its foray into corporate credit to now buy individual corporate bonds, on top of the exchange-traded funds it already is purchasing.
....What it does primarily is continues to push fixed income lower and tighter and helps prop up the stock market, which is the real issue here” said Patrick Leary, chief market strategist at Incapital. “It’s a reminder to the marketplace that the Fed is here with its balance sheet and is going to deploy that balance sheet to try to support markets and market functioning.”
...The Fed has been deploying historically aggressive policy moves over the past three months, and Monday’s action again raised fears of overreach as the central bank helps prop up a credit market laden with “zombie” companies whose revenues don’t cover their debt payments. “I think [the bond purchases are a mistake, because they already achieved their objective,” said Christopher Whalen, former investment banker and head of Whalen Global Advisors. “The Fed doesn’t need to get distracted. What they care about is that markets work and spreads don’t go crazy. The Fed has to realize that other than assuring that market conditions are acceptable, they really shouldn’t go diving into this stuff.” See
According to Scott Minerd, markets may crash so badly that the Fed has to start buying stocks. After the Federal Reserve’s monetary policy to buy junk bonds and corporate debt ETFs as part of its campaign to revive the American economy, “Next on its shopping list are US stocks,”. The S&P 500 has skyrocketed 40% since March 23, when the Fed announced its unprecedented experiment with junk bonds. That surge, coming in the face of the collapse of the real economy, drove up market valuations to dotcom-bubble levels. It's a troubling precedent that the Federal Reserve is going to sit there and continue to fund these zombie companies that don't deserve to exist." Minerd thinks a reckoning is coming, and soon. He expects the S&P 500 will retest its March 23 low of 2,237.40 over the next month, potentially crumbling to as low as 1,600. That would mark a 49% collapse from where the index traded Tuesday during a strong rally. Minerd warned his clients back in February that there were "red flags" in financial markets. "This will eventually end badly. I have never in my career seen anything as crazy as what's going on right now," he wrote on February 13. This isn't the first time Minerd has warned of a brewing storm. In August 2007, he said the credit squeeze at the time could morph into a recession. Stocks hit record highs that fall, before beginning an historic collapse as the Great Recession began. ..."It's a troubling precedent that the Federal Reserve is going to continue to fund these zombie companies that don't deserve to exist," he said, and called the Fed's junk bond experiment an "almost socialist" program based on the notion that the government has an "obligation to keep companies liquid and finances," as opposed to just keeping markets functioning. ..."One thing about bubbles is they tend to go on longer and go further than people ever expect," he said. Even the Fed is warning that the V-shaped recovery may not happen: “Until the public is confident that the disease is contained, a full recovery is unlikely." Minerd said it could be "at least a good three- to four-year slog" before employment and GDP return to pre-coronavirus levels. Some jobs impacted by shifts in consumer behavior are "never coming back," he said, potentially causing "permanently" elevated unemployment. "People have totally underestimated how long this is going to take," Minerd said. See
Martin Hutchinson has asserted that the Fed’s funny money makes the economy go flat. He says ”Artificially low interest rates cause inflation ...yet not all inflation appears in official price statistics. In 1995–2000, inflation went into stocks, which reached valuations never before dreamed of. In 2002–07, it went into housing. Since 2009, it has gone into assets of all kinds. To show the level of distortion: If the Dow Jones Industrials Index were to trade at the same level as in February 1995, adjusted for both consumer price inflation and economic growth, it would today trade around 11,000. The difference between that and the Dow ‘s current price of 27,000 reflects the effect of ultra-low interest rates over a quarter-century. ...By keeping rates far below their natural level for a decade or more, central bankers have encouraged a mass of ill-advised investment. Not only does this suck up resources, but it starves the entrepreneurs and small businesses, who have less access to cheap capital than big businesses.
...The lesson is clear. Apart from their unpleasant social effects, artificially low interest rates kill productivity growth and thus prevent the improvements in living standards on which we have come to rely. Far from keeping rates at zero until the end of 2022, as it has promised, the Fed must quickly raise rates to their historically normal level, some 2 percent above the rate of inflation.” See
Richard Bernstein has predicted that Fed policies are setting markets up for long term problems. “Bernstein warns unprecedented Federal Reserve policies may eventually cause serious harm. He cites near record deficits and aggressive efforts to increase the money supply among the biggest problems. ‘I’m surprised that people aren’t more concerned about what huge monetary growth means for the economy in the United States now,’ the CEO and Chief Investment Officer of Richard Bernstein Advisors told CNBC’s “Trading Nation” on Wednesday. Bernstein is particularly concerned about the vast bond purchases the Fed is making right now. “They’ve effectively turned the bond market into third grade soccer,” Bernstein said. ‘There are no winners or losers. Everybody gets a participation medal, and one has to wonder by taking out the risk return consideration from a huge market — what that means for misallocation of capital, where a bubble is going to form and things like that.’ …’There’s some pretty nutty stuff going on. ...We don’t necessarily worry about that in the next two days. But I think in the next year, two years [or] three years, that’s going to be a big concern people should have.’” See https://www.cnbc.com/2020/06/17/fed-policies-may-spark-a-bubble-all-star-investor-rich-bernstein-warns..
Jeremy Grantham is a stock market legend who has called 3 financial bubbles and says this one is the ‘Real McCoy.’ This is crazy stuff.” Gratham has painted a very dire picture of the investment landscape in the U.S., suggesting that rampant trading by out-of-work investors and speculative fervor around bankrupt companies, including car-rental company Hertz Global Holdings Inc., reflects a market that may be the most bubblicious he’s seen in his storied career.” Grantham noted “that monetary stimulus from the Federal Reserve, whose balance sheet has jumped from $4 trillion in March to $7.21 trillion last week, and efforts by the government to help average Americans has been a factor that has helped boost equity values amid this crisis. ‘Clearly, the Fed scattering money around has created a favorable environment.’ Even before the CNBC interview that aired on Wednesday, Grantham and those at his firm had been bearish. “Uncertainty has seldom been higher…oddly, neither has the stock market,” See https://www.marketwatch.com/story/stock-market-legend-who-called-3-stock-market-bubbles-says-this-one-is-the-real-mccoy-this-is-crazy-stuff-2020-06-17.
Stephen Roach has a warning for U.S. dollar bulls. The prominent economist says that the era of the U.S. buck may be coming to an end and, is forecasting a 35% decline soon in the U.S. currency against its major rivals, citing increases in the nation’s deficit and dwindling savings. “The dollar is going to fall very, very sharply,” he told CNBC. “The era of the U.S. dollar’s ‘exorbitant privilege’ as the world’s primary reserve currency is coming to an end.” ...Worries about the global economy have traditionally encouraged buying of dollars along with other havens because of the perception of the U.S. as a stable economy and currency. Roach, however, says that growing deficits will eventually change that perception and deliver a gut punch to the greenback. See https://www.marketwatch.com/story/the-dollar-is-going-to-fall-very-very-sharply-warns-prominent-yale-economist-2020-06-16?mod=article_inline.
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