A Man’s Most Valued Possession — Thoughts on the Fed’s Recent Reactions

 

 

Okay, so what did happen today? And what will happen now?

With a deeply saddened heart, I write this:

In an unprecedented move, the Federal Reserve today announced another 625 Billion of purchasing program of Treasury securities, municipal bonds, MBS, and ABS — all to be completed in this one week. This comes in addition to the 700 Billion repurchase that it announced in earlier weeks.

What’s more important is that the Fed has announced that future purchasing (aka. money printing) programs are to be expected and the amount is “unlimited”. The Fed also said that it would open another lending facility, this time focusing on small and medium businesses. This once again, is completely unprecedented.

All this stuff the world has never ever seen before. In ‘09, the Federal Reserve had its first taste of the QE program, but it was done so with relative caution. Maybe it was warned that it was a gateway drug, or maybe the Federal Reserve’s tolerance was yet low. In the 10 years that followed, the Fed would go on to put in 3 more QE, with the last two being in completely bullish markets. Additionally, every time the market would dip on any uncertainty, Yellen would reduce the interest rate to stimulate market activities and heighten valuations.

For many years now, bears have been calling bubbles: debt is too high, valuation is too high, you name it… However, the “Fed put” (a put option is to hedge in market downturns) has been in full effect. Every time the market dropped on uncertainties, the Fed was there to catch and deliver us right back to new highs.

That brings us to today.

Today, the Fed made a new move, called “Everything and More” (Yes, I coined this term lol). Because a week ago, when the Fed dropped rates to 0%, everyone including their grandmother if she studied Economics or Finance said that the Fed had just expended its last bullet in the chamber. I said, “the Fed is done”, “no more room to move”. But JP proved everyone wrong, by expanding the Fed’s power onto the fiscal side and enacting unlimited, literally, unlimited money printing programs.

The market did not bite much today. I think the market is confused. People are still worried about the virus and now the Fed is behaving irrationally, well, quite out of character to say the least. The market gave back all the pre-market gains and then some. However, I truly think that some portions of the market will start to rebound very soon. After all, it makes no sense to drop further when the monetary regulator in the whole economy has completely set its mind onto protecting the valuation of the capital markets. I believe the rebounds will be fast and furious and it wouldn’t surprise me that the NASDAQ, at least, finished the year in the green.

If so far, you haven’t been able to detect the sarcasm in my words, then let me be more direct: this is completely disgusting.

The Federal Reserve was designed with two purposes: to control inflation and unemployment rate; at least that is what College Economics books teach us. But this is clearly untrue. In fact, it couldn’t be further from the truth. Yellen and Powell have shown us that the Fed today does not care about inflation. Maybe in the future, it will again, but as things stand now, controlling inflation, simply isn’t a part of the Fed’s job. That led us to dramatic asset price inflation, which saw the creation of some of the monster bubbles the world has ever seen: bitcoin, the entire VC industry, gigantic PE funds, you name it…

Amazingly, as the Fed would tell you, the actual CPI inflation has actually been quite low. Well, let’s take a look deeper. The Fed put in QE, which buys assets from the markets and gives money to the banks, investors, funds, and a variety of other market participants. Now the Fed is directly lending money to companies, mutual funds, and small businesses. Correct me if I am wrong, but that sure seems like a very exclusive part of the economy. As a matter of fact, most of this money has been fed into market participants. While many Americans have 401K pension that is in the form of the stock market, the overwhelming benefactor of these programs has been the ones who are holding lots and lots of stocks.

I own more stocks than the average Joe in America, so I have benefitted more than the average person in the country. At the same time, VC fund managers, entrepreneurs with shitty ideas (the equivalent of Soundcloud rappers in Silicon Valley), the creator of yet another coin, have benefitted to an insane degree. In Biology, there is a theory that, in an ecosystem or a Petri dish, given enough nutrition, all sorts of organisms will grow and thrive. There will be no more evolution since organisms do not need to maximize in order to survive. You start to see animals and organisms that do not “deserve” to exist thriving anyways.

What happened after ’09? We saw record levels of asset valuations for years to come. But we saw income inequality widening to a historical margin. Yes, unemployment rate has been low. Yes, people had jobs. But, in a distasteful analogy, the “unemployment rate” during slavery was also low. People who do not own assets make dimes while asset owners make millions. That is what happened before the French Revolution. The fact of the matter is what we have today is the result of ’09, ’10, ’12, ’16. The populist movement on both sides, especially on the Left, led by Bernie Sanders and AOC have been quite emblematic of the income inequality that has been artificially created by Fed policies.

QE by itself, is monetary policy on steroids. The policies today, are QE on steroids. What makes me say that? For one, the Fed is directly giving money to businesses, instead of buying Treasuries and MBS from the markets. Secondly, in ’09, when the Fed and the Treasury department bailed out Goldman Sachs, AIG, etc., they demanded the stock price to go to zero. Yes, all of those equity holders lost all of their money. However, what we have today, is the Fed extending lending programs directly to jeopardized companies to pay back their debt. This saves the current equity holders, who lie in the last place of the capital claim seniority chain, who would probably stand to lose most, if not all of their investments.

This is Irresponsible Parenting 101. Companies like Boeing have been utterly incompetently managed. Last year, Boeing spent 100B buying its own stocks and has now left itself stranded with a -9B net equity value today. In the trailing 12 months (this is without any adverse effect from the outbreak of the virus), the company saw a -4B in free cash flow. Why would any management with a sane mind buy back stocks in this case? Well, you know, kids misbehave, I guess… On the investor side, SoftBank has been completely unhinged in the manner in which it has been making investments, if you can even call it that. What consequences do they face? Likely none, because Federal Reserve is here to the rescue in its shiny armour, once again.

This in fact, reminds me of China, a planned economy, but in an even more morbid fashion. A planned economy means that asset allocation is done by the central power, be it governmental or monetary. Market participants have little power to discover valuations. For years, shorts and longs have been able to duke it out in the battlefield here in the US, exposing fakesters among true values. Many have become rich and many have lost everything. But that is the game; that is the point of the game. With these recent policies, the Fed, in effect, has announced that it is simply not interested in price discoveries anymore. It is only interested in an artificially propped up market, that serves the rich.

You only find out what a man’s most valued possession is when his house goes on fire. In this outbreak of coronavirus, what did we find out about the US’s most valued possession, is it human lives or the stock market for the rich?

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