Have ALL leading members of the Federal Reserve system lost their flipp’in minds? Just three weeks after former Federal Reserve Chairwoman Janet Yellen suggested the Fed should buy stocks, Boston Fed President Eric Rosengren this week also suggested that the Fed should buy “a broader range of assets” such as corporate bonds, and YES, STOCKS! So let me get this straight: The Fed’s irresponsibility creates a big fat massive credit market problem, but they want to instead fix to the stock market???
In the 47 years I have been following the markets, NEVER before have I seen a group of professional people with their heads buried so far up their proverbial butts than the current batch of dumb asses running the Federal Reserve (and other central banks)! Never before have I seen people so hell bent on destroying the dollar than these UNELECTED Federal Reserve clowns who control our nation’s money supply!
In 2008, Fed Chairman Ben Bernanke completely mismanaged the credit crisis by sprinkling QE “helicopter money” over a select range of financial institutions like Citigroup, Merrill Lynch, and AIG thereby temporarily rescuing those companies from the bottomless abyss of their own ineptitude. With QE1, the Fed officially recognized that the financial system broke in 2008. Later, they also applied economic currency printing patches QE2 & QE3, and most recently the “Not QE4″ (which is really QE4….but they don’t want to admit publicly that they have an BIG credit market problem).
The QE measures did NOT fix the credit bubble problems that caused the 2008/2009 financial crisis. All they did was patch over the problems, and kick the can down the road. As a result, we now have a multitudes larger credit bubble problem, where many in the financial industry are calling it “The Everything Bubble”, to include stocks, bonds, derivatives, AND real estate!
Because the problems have not been fixed, on September 17, 2019 the $2 Trillion overnight lending market between banks (aka the “repo” market) seized up, spiking those interest rates to as high as 10% in seconds, up from 2%. The Fed stepped in and began printing more currency to again rescue stupidly mismanaged banks who are likely still lending trillions of dollars to drunken gamblers on crack cocaine (aka “Hedge Funds”).
See the chart below that shows the BILLIONs of dollars the Fed is creating on a nightly basis to rescue the banks once again from themselves. The yellow lines are the amount of currency the banks are requesting, while the dark green is the amount provided (raw data can be found daily on the NY Federal Reserve’s website).
In a nutshell, the amount by which the yellow bars exceed the green bars represents “credit market stress”. The banks are not getting the money they want, and therefore the hedge fund gamblers they are lending to are also not getting the money they want.
When hedge funds don’t get the money they want, the stock & derivatives market casinos they gamble in begin to falter. As you can see in the chart above, as the credit markets began showing signs of stress, the stock market began its (black) swan dive, with its sharpest weekly loss (12%) since the 1929 stock crash, which heralded in the Great Depression. The coronavirus has really just been a trigger to pop an unprecedented credit bubble that has been massively growing since 2008!
The credit markets are over 100x the size of the stock markets. So when the credit markets sneeze, the stock markets get the flu. Similarly, the currency markets are over 100x the size of the credit markets. And the derivatives markets….the biggest banking casino of all time….are 100x the size of the currency markets! The value of all derivatives outstanding are in the QUADRILLIONS of dollars!
Rather than doing the right thing by unwinding all these risky banking and hedge fund bets that are the root source of the risk, the Fed is being complicit in extending the bubble by only masking the problems, providing these gamblers more drug in the form of more, and easier, credit! Now the credit stress problems are showing up in various other ways such as tent cities, repo market implosions, and now stock market corrections.
I am beginning to wonder how many more fingers the Fed has left to plug the holes in the proverbial dam, before either A) they lower the water behind the dam, or B) the dam bursts.
The current batch of Fed leaders seem intent on pursuing a course of plugging holes in the dam. They seem intent on printing all the currency they can, lowering interest rates to sub-zero levels, and using that printed currency to buy the bond market, the stock market, and who knows….possibly oil, milk, houses, and maybe even automobiles to keep asset prices artificially inflated and the appearance of a secure economy intact!
We already know how this currency-printing, asset-propping expenditure ends. So why would the Fed repeat the mistake by the Bank of Japan (BOJ)?
The BOJ has pursued a course of printing currency to prop up their stock market since 2013, and it hasn’t worked for them. In 1990, their stock index (the Nikkei index) was at 40,000. Their stock market bubble popped that year, and now 30 years later, it has only gotten back to 50% of that prior peak level at 20,750! The BOJ has spent trillions of Yen buying Japanese ETFs (Exchange Traded Funds) since 2013, and this is the best they could do? The BOJ now owns 80% of the outstanding ETFs! Imagine if the Fed owned 80% of our stock market! Would they then have a controlling seat on every corporate board of directors?? That would be dangerous to our republic!
The ONLY thing the BOJ currency printing has done is destroy the value of the Yen (in real terms). The Yen has been plunging against the value of real assets like gold, especially in more recent weeks as their credit bubble also continues to pop! Japan’s economy remains stuck in the mud, while their currency has become worthless.
The bottom line is that propping up your stock market by using freshly printed currency is a stupid idea! It doesn’t work, and it crowds out the ability of the free market to properly assess fair value.
In you are wondering about Wall Street’s mantras of “buying the dip” or “holding for the long term”, when our last credit bubble fully popped in 1929, the Dow Jones average didn’t recover until 1954, 25 years later! You had better hope you have nerves of steel when you talk about “buying for the long term” at the peak of asset bubbles!
History has shown there is no graceful way to let the air out of a credit bubble. All bubbles eventually pop, and the one we are in is no exception. By printing an unlimited quantity of currency to prevent asset prices from correcting to a proper fair value, all the Federal Reserve will do is destroy the value of the dollar! If something (like the dollar) has unlimited quantity and is freely available, it’s value is zero! What gives a currency value is its scarcity, and I am shocked that economic professionals at the Federal Reserve do not understand this simple fact!