The Fed Is Buying These ETFs And Why It Matters (Part 1)

The Federal Reserve is doing everything it can right now to help prop up the US economy and minimize the impact of the Covid-19 pandemic has on the economy, including purchasing ETFs.. The Fed has, by almost all market participants' views, acted very quickly, very aggressively, and rather decisively in their attempt to limit both the short and long-term effects this pandemic has on the US economy, despite the country permanently shutting down for nearly two months.

The first move by the Fed was to reduce interest rates by lowering the Federal Funds rate. Then, they began buying Treasury Bonds and mortgage-backed securities, (they have of course performed a number of other 'lending' type activities that have lower rates for lending and made it easier for more money to flow into the system, but for the average person knowing that the Fed lowered interest rates and started buying Treasury bonds and mortgage-backed securities, that is really the gist of it. To read more about the exact things they have done, check this article out.) Both these moves the Fed has done in the past, so no surprise there when they announced their plans.

However, in an attempt to pump liquidity back into the market, maintain low-interest rates, give business leaders and consumers the confidence they need to continue spending the Fed is now also buying Exchange Traded Funds.

Why are they buying ETFs and not something else? Continue reading "The Fed Is Buying These ETFs And Why It Matters (Part 1)"

Disconnect? What Disconnect?

Over the past few weeks, the financial news media has been marveling at what it calls the “disconnect” between stock prices and the economy. Economic and health statistics are likely to go from bad – 30 million unemployed in the past month, a 4.8% drop in first-quarter GDP, an 8.7% drop in retail sales in April, more reported coronavirus cases and deaths – to worse – a nearly 40% drop in GDP and around 15% unemployment in the second quarter, according to the Congressional Budget Office’s latest projections. Yet the stock market has blissfully regained about half of the 34% drop it sustained between mid-February and mid-March.

But is there really a disconnect? Does the economy – now largely controlled by the Federal Reserve and the U.S. Treasury Department – still have any correlation to what happens in the stock market anymore, and vice versa? Well, the answer is yes, but not in the way it used to. What’s happening is that as the economy goes deeper into the red, the more it prompts the government to pump in more money and for the Fed to intervene more in the financial markets. That is unquestionably good for stocks.

We have been in an environment since the 2008 financial crisis where the Fed has played an unprecedented activist role in the bond market and, indirectly, the stock market. That role has grown further under Chair Jerome Powell, who seems to believe it’s the Fed’s job to rescue equity investors any time stock prices correct, never mind what’s going on in the economy. Now that we’re in the middle of an economic downturn that makes 2008 look like a garden-variety recession, the Fed has put its monetary policy and quantitative-easing engines into Continue reading "Disconnect? What Disconnect?"

Socialism's Dry Run

Is it any wonder why many millennials gravitate toward socialism? As children, many of them watched their parents lose their homes after the 2008 financial crisis and real estate crash. Then they entered college and are now stuck with tens of thousands of dollars in student loans that prevent them from getting a car loan or a mortgage. Now they're in the middle of an even bigger global financial crisis, one that may leave 30% or more of the workforce unemployed, either temporarily or perhaps for several years.

Thankfully, the government and the Federal Reserve have stepped in with a mammoth rescue effort that will hopefully tide many people over until the economy rebounds. So that means for a period of time, either several months or perhaps years, the government will be keeping many people afloat. We'll get a feeling for what socialism will be like, meaning lots of people are not working and the government paying their bills. How long this state of affairs can last without some kind of societal impact is anybody's guess.

The immediate consensus when this crisis started was that the economy would rebound nicely in a "V-shaped" recovery in a couple of months, but that idea seems to have lost some of its steam. Now there's a growing belief that many parts of the economy will take a very long time to recover, and many industries, such as restaurants, air travel, sports and entertainment, and tourism, may return only as mere shadows of their former selves. How long will it really take for people to get comfortable again in large crowds in close proximity to others? Continue reading "Socialism's Dry Run"

Will The Fed Buy Stocks Next?

Since he became Federal Reserve Chair two years ago, Jerome Powell has created a new mandate for the Fed above and beyond its “dual” Congressional mandate to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates” (that’s federal government math for you).

Powell has added putting a floor under stock prices, which usually has come to mean when the market reaches correction territory (i.e., prices fall by about 10%). When stocks reach that threshold, count on the Fed to cut interest rates or loosen monetary policy in order to restore order and investor confidence. So far in his tenure, the Powell Fed has been pretty successful in that regard. Even when overall economic conditions (GDP growth and unemployment) provide no justification for lowering rates, the Fed has stepped in to prop up the market.

Now, however, the current panic selling over the coronavirus has tested the Fed’s ability to wave its magic wand and restore peace to the market. As we know, the Fed’s recent decision to make an emergency 50 basis-point cut in the federal funds rate three weeks before its next scheduled meeting proved to be a dud. Investor confidence has now been so spooked by the uncertainty created by the virus that the rate cut caused barely a blip, and stock prices continued to tank.

Moreover, despite the market begging for the Fed to cut rates, Powell only opened himself up to criticism for actually delivering. The cut was either too small, some critics said, or a cut would have no effect in such a situation, so why bother doing it, others said. Yet the market consensus now seems to believe that another 50 basis-point cut is already baked in the cake when the Fed meets on March 17-18. But market anxiety being what it is, there’s no assurance that that will have any effect, either.

Already, many so-called experts are calling for some form of fiscal stimulus, as opposed to monetary stimulus, such as a Continue reading "Will The Fed Buy Stocks Next?"

"We Will Use Those Tools..."

Yesterday from Fed Chairman Powell…

Powell says Fed will aggressively use QE to fight next recession

Federal Reserve Chairman Jerome Powell said Wednesday the central bank would fight the next economic downturn by buying large amounts of government debt to drive down long-term interest rates, a strategy that has been dubbed quantitative easing, or QE.

Of course, they will. The fix is always in, isn’t it? Wouldn’t want to let a system and associated economy so far out on a brittle limb weighed down by exponential debt leverage go it on its own, now would we? Wouldn’t want anything like a naturally functioning economy because until an utter and complete crash and clean out, there can be no such thing. So more debt manipulation it is!

“We will use those tools — I believe we will use them aggressively should the need arise to do so,” Powell said.

The Fed has traditionally been able to slash interest rates to fight a recession often by as much as 5 percentage points. But that’s impossible now because the Fed’s benchmark rate is currently in a range of 1.5%-1.75%.

“We will have less room to cut,” Powell said.

Duh.

Now comes the money line Continue reading ""We Will Use Those Tools...""