Bubble Watch: The Fed Will Give Wall Street Another $2.1 Trillion to Play With
Yesterday, the stock market roared higher when Fed Chair Jerome Powell announced…
- The Fed will hold rates near zero for the foreseeable future
- The Fed is extending its dollar repo and swap line to March 31
- The Fed will continue to use its “full range” of tools to support the economy
- The Fed will continue to perform its QE programs at the “current pace” of $125 billion per month ($1.5 trillion per year)
- The economy, household spending, labor market, and business fixed investments are in various stages of recovery.
Let’s provide some perspective here.
Prior to its COVID-19 policy response, the Fed’s largest balance sheet expansion was $3 trillion over the course of eight years.
The Fed has spent more than this in just three months.
Prior to its COVID-19 policy response, the Fed’s largest QE operation was $80 billion per month.
At its peak in March 2020 the Fed was spending $125 billion per day.
It has now reduced this to $125 billion per month. And it intends to keep it there until there is a full recovery (which the Fed currently believes will be sometime in late 2021).
So… the Fed just told the market that it intends to provide, at a minimum, $2.1 trillion in additional liquidity to the financial system over the next 18 months.
In simple terms, the Fed will continue to backstop the financial system in ways that far exceed its policy response to the Great Financial Crisis of 2008. And the Fed will do this until the US has experienced a full recovery (Fed speak for “forever”).
This is why the markets refuse to fall, no matter how horrible the economic data gets.
This was an EXTREMELY dovish Fed FOMC announcement. It calls to mind European Central Bank (ECB) Mario Draghi’s famous claim that the ECB would do “whatever it takes” back in 2012.
Extreme Monetary Policy Just Got More Extreme
Indeed, the only thing hawkish you can point to from the entire Fed announcement is Fed Chair Powell’s claim that the Fed hasn’t discussed “equity buying” (buying stocks outright).
However, even this is a bluff.
By law, the Fed isn’t permitted to buy municipal bonds, corporate bonds, or any of the other items it is buying via its QE programs. So it signed a contract with financial firm BlackRock to perform the Fed’s current QE programs. And this explicitly states that the Fed is giving BlackRock authority to buy stocks.
See for yourself:
Subject to this Agreement, including the Investment Guidelines (as defined in Section 5.1), the Manager is hereby appointed as the FRBNY’s agent in fact, and it shall have full power and authority to act on behalf of the Account with respect to the purchase, sale, exchange, conversion, or other transactions in any and all stocks, bonds, other securities, or cash held for investment subject to the Agreement.
Source: New York Fed
Let me ask you…
Why would the Fed authorize BlackRock to buy stocks if it wasn’t planning on eventually doing this?
The Fed could have easily said it was authorizing BlackRock to ONLY buy ETFs, bonds, and the other investments that it is currently purchasing via the nine credit facilities it set up with the US Treasury in late March.
So why include stocks… an asset class the Fed has yet to approve for ANY purchases WHAT-SO-EVER?!
Because the Fed will be buying stocks at some point, most likely whenever the markets begin to break down again.
Preparing to Profit…
Bottom line: The Fed is backstopping EVERYTHING and will do so at a pace of $125 billion per month from now on. And if things worsen, the Fed will increase its purchases and eventually start buying stocks outright.
With that in mind, the No. 1 trading strategy going forward is to get ahead of the Fed.
And we’ve developed a proprietary options system that does precisely this.
More details coming soon…
Editor, Money & Crisis