People who have been paying attention to the Fed for a while know that it lost credibility a LONG time ago. This is something different though. The Fed's lack of credibility is going mainstream.
"Let me tell you something about the Fed; they're Schrute Bucks. We're dealing with Schrute Bucks at this point. Let me ask you this, if governments can just print unlimited money like Schrute Bucks why doesn't every government do it? Guess what? Your buck, your dollar literally becomes a Schrute Buck. [..] If you flood the market with quatrillions (?), the quatrillions mean nothing. That's basic economics."
- Dave Portnoy; Internet Mogul, Day Trader, Leader of the Common Man and your Uncle Marty's former employer (thanks for letting me leech off your studios in the early days of Tales from the Crypt)
The Fed has drifted further into unchartered territory this week. Up to this point, the unchartered territory being explored was the expansion of the list of assets they would purchase in an attempt to prop up markets in reaction to the freeze on our economy. Jerry Powell and crew stayed steady on that course by adding to the list this morning.
Now, in addition to buying corporate debt and officially initiating QE Infinity the Fed will now be purchasing Corporate Bond ETFs (WTF?), municipal bonds, and *checks notes* HIGH-YIELD CORPORATE BOND ETFS?! INSANITY.
We've been saying it in this rag the last few weeks, the only move the Fed has left at this point is to add to the amount of purchases it will make and the list of assets that will be included in those purchases. This is exactly what happened this morning, but my God. I was not expecting them to jump straight to buying ETFs, and high-yield corporate bond ETFs at that.
The inclusion of the high-yield ETFs is really perplexing. Especially considering what Powell is said during his speech this morning. Our friend Dan McArdle points out a terrible logical inconsistency from today's speech.
For those of you who are not aware, high-yield corporate debt is junk status. The riskiest type of corporate debt one can buy. Many people expect that the debt accrued from the issuance of these bonds will not be paid back in full, if at all. This move is nothing more than a bailout of corporations who took undue risk, which was incentivized by the Fed in the first place. The Fed is openly contradicting itself.
What you are witnessing is the Fed trying to fix a terrible problem that it created in the first place. The US finds itself in a doom loop that I fear cannot be stopped at this point. Especially considering the fact that the economy is currently shut down. The inevitable outcome of the course the Fed is currently on is the continued expansion of the list of assets they will promise to buy and their balance sheet. I wasn't expecting ETFs to happen this quickly, so don't be shocked if individual stocks get added to the list sooner than anyone is currently imagining.
What's more troubling about the trek into more unchartered territory is something the Fed has no direct control over; public perception. At the end of the day, the Fed is engaged in a confidence game. Since there is nothing backing the Dollar anymore, the Fed's whole operation depends on whether or not people are confident in their ability to keep the dollar stable. Confidence seems to be eroding. When your complex monetary policy has been reduced to “BRRRRRRR” and "Schrute Bucks" by the plebs, you have lost all credibility and control. Once the Dave Portnoys of the world start calling out the Fed, it is hard to save face.
People who have been paying attention to the Fed for a while know that it lost credibility a LONG time ago. This is something different though. The Fed's lack of credibility is going mainstream. No amount of posturing and asset purchasing can stop that. In fact, it probably makes things even worse.
Speaking of posturing, here's another snippet from Powell's speech this morning, "Inflation is not a first order concern for us." Sounds a lot like Bernanke ensuring markets that "subprime is contained."
Hold on to your butts, freaks. We're about to accelerate into this uncharted territory and I don't think it's an journey many people are going to enjoy.
I will have Kanye West on my podcast one day.