Absolutely unreal. Either things are worse than people are letting on, the Fed is simply refusing to let the market drop any further due to optics, or both.
I hope anybody who is bearish on stocks has closed out any short positions because at this point, I can't see how stocks will be allowed to go down.
At the end of July, when the CARES Act unemployment benefits expire, people will have to tap into savings to pay their living expenses. If those savings are held in the form of equity (via Robinhood or whatever), then the markets will face a substantial amount of selling pressure.
At that point the corporate bond purchases make little difference.
As others have mentioned, this suggests there is large scale dilution of currency happening. When people realize that, it can be extremely destabilizing. We are somewhat protected just because everyone else trades in Dollars and there’s good demand for it, but there’s a limit to how far that goes. At some point, sentiment catches up to fundamentals.
Also isn’t this a sort of nationalization by financial instrument?
Can anyone explain how this doesn’t lead to hyperinflation in the long run? The Fed is saying outright that they’ll continue to print more money whenever the stock market drops. At some stage that money will have to hit consumer prices, right?
This will lead to hyperinflation in assets and depreciation of the dollar. If we were any other country, we would have hyperinflation but we won't because the US dollar is the reserve currency. True hyperinflation will only happen if other countries refuse to accept US dollar or send all printed dollars back to Homeland.
Does that mean we have a free pass? No. This printing may cause
1. French revolution style riots (only 300 years ago)
2. Weimar republic style hyperinflation in assets (only 100 years ago)
3. Massive depreciation of US currency so now in the league of rich countries, US falls further behind
4. Other countries (China, EU, Russia) feel shafted and refuse to trade in depreciated dollars
Already seeing a lot of price increases on stuff like consumer electronics and electric bicycles. A lot of resellers are getting rich selling at 50% increased prices. Stuff like motherboards, CPUs, game controllers, and graphics cards on Newegg are all selling like hotcakes. Rad powerbikes is seeing a 300% increase in sales.
Right now the supply side is going to be scrambling to catch up for a while.
The counterpoint may well be that this is a safe way to put money into the system during a deflationary period, because it maintains retirement savings, corporate assets, university trusts, etc, and that allows spending to continue.
The real risk IMO is deflation, not inflation. If money represents production and production goes down, then the money supply (in terms of circulation) is actually being reduced. If money represents activity and people stay at home without spending on much aside from essential costs, the same logic applies.
We have seen slight deflation for the last three months.
Simply printing more money doesn't impact consumer prices. The "where" and "when" and "how much" all matter. If you print the money and give it directly to rich folks who don't change their spending habits and simply add the new money to their coffers, it's almost like you haven't printed anything at all.
The Fed announced these measures on March 23, and they are just now going to start buying these issues.
The Fed is trying to just "replace the wealth destruction that has happened". Keep in mind that even though the equity markets are back up close to pre covid levels, a lot of companies have had to take on Debt to weather the storm. This debt needs to be paid back with interest and in general can be a drag on company earnings.
The fed is also being somewhat judicious and buying shorter term securities (less than 5 years), so in essence they are only creating the money for the term of the bond they buy - they can choose to remove the money from the system when these bonds mature.
I also think that people are confusing the Fed trying to keep businesses solvent by providing short & medium term liquidity with them trying to raise equity prices.
Also the ECB & JCB have been doing this for the last several years with no inflation on the horizon there.
> The fed is also being somewhat judicious and buying shorter term securities (less than 5 years), so in essence they are only creating the money for the term of the bond they buy - they can choose to remove the money from the system when these bonds mature.
I don’t think the Fed has any plans to shrink its balance sheet in the near future or probably ever. And what happens when these BBB- bonds turn out to be junk and the companies default?
I hope anybody who is bearish on stocks has closed out any short positions because at this point, I can't see how stocks will be allowed to go down.