The Day the Fed Went to Infinity — and Markets Didn’t Care
The Federal Reserve went to infinity, and markets didn’t care.
It’s hard to say which part of that statement is more remarkable.
On the one hand, the Fed has promised to print endless trillions, if need be, to absorb whatever assets it needs to. That is mind-blowing.
On the other hand, the market took the Fed’s announcement in stride — and then decided to ignore it, which is even more mind-blowing.
Before we get into what happened on Monday, keep in mind we are living through one of the most extraordinary periods in all of market history.
In recent days, we explained how volatility records dating all the way back to 1929 have been smashed. New research from Bank of America Securities elaborates on the wildness of today’s markets.
After making a new record high on Feb. 19, the S&P 500 index fell 30% in just 22 trading days. That was the fastest drop of such magnitude in all of history, says BofA.
What’s more, the second, third, and fourth speed records for 30% pullbacks all occurred during the Great Depression era — in the years 1934, 1931, and 1929, respectively.
In December 2019, we presented our “Deadly Decade” thesis, in which we elaborated at length on why the 2020s, as a decade, would be a throwback combination of the 1920s and 1930s.
Given the strength of the evidence, we’re not surprised the call was dead-on.
We are more than a little surprised — shocked even — that 2020 isn’t even three months old and so much of the thesis has already been proven.
(In addition to 1930s-style market conditions, a collapse of the fossil fuel industry and trillions in mass stimulus were two other parts of the thesis. If you’d like to know more, and see what else might happen, we laid it all out in an e-book, the Deadly Decade Survival Guide.)
Getting back to the Federal Reserve: What we are dealing with today is a situation where the central bank is “out of bullets,” meaning they’ve used up all their monetary policy ammunition.
Except, in truth, the Federal Reserve has an infinite amount of ammunition in the form of a printing press — the means to buy assets with money created by keystroke — and the ability to expand its balance sheet to any amount.
In theory, the Fed could buy, say, $500 trillion worth of bonds if it wanted to. The system would melt or collapse long before that amount, but the point is, the Fed has no ceiling.
On Monday, the Fed reminded everyone of its theoretically “infinite” capacity, when it decided to fire the biggest bazooka the world has ever seen.
Here is how the Washington Post reported it (emphasis ours):
“The Fed said Monday it would purchase Treasurys and mortgage-backed securities ‘in the amounts needed to support smooth market functioning,’ effectively putting no limit on how many assets the Fed is willing to buy…”
WaPo’s headline was even more stark:
“Fed announces unlimited bond purchases in unprecedented move aimed at preventing an economic depression.”
And here is how the Wall Street Journal described it (emphasis ours once again):
“Federal Reserve Chairman Jerome Powell’s whatever-it-takes moment arrived Monday. The central bank signaled it would do practically anything — extending loans to big and small businesses, backstopping funds to municipalities and purchasing hundreds of billions of dollars of government debt — to help an American economy in a race against time.”
The Fed has promised to buy any amount of assets, and lend any amount of money, as it sees fit. As Buzz Lightyear from Toy Story might say, “To Infinity and Beyond!”
And yet, in the presence of that awesome display of firepower, the stock market didn’t care!
Heading into Monday morning’s open, stock index futures were a deep shade of crimson. After the Fed’s jaw-dropping, head-exploding announcement, the market indexes were lifted from the depths and the futures turned green.
But then Mr. Market pondered the situation a little further, basically said “meh,” and went deep red again.
So what is going on here? How is it that the market completely ignored the Federal Reserve, even as the Fed pulled out the monetary policy equivalent of galactic space weapons in its fight to save the economy?
The answer is that the market wants fiscal policy, not monetary policy.
It wants cash from Congress. Oceans of it.
One bizarre aspect of Monday’s spectacle was seeing Sen. Chuck Schumer, the minority leader in the United States Senate, exert more influence over stock market gyrations than the Fed.
This is because Republicans and Democrats are haggling over a trillion-plus stimulus bill.
Mr. Market more or less blew off the Fed as irrelevant, instead deciding to worry over whether or not a bipartisan stimulus bill would pass.
At first it didn’t look good — there were disagreements over how the cash would be divided up, and whether or not workers were getting a fair shake.
Democrats blocked the bill’s passage on the grounds of seeking a better deal for workers, which made the market very upset. But Schumer’s remarks suggested the bill was close to passing, which buoyed the market’s spirits temporarily and brought prices close to break even.
But then negotiations failed, and the market dropped again.
We haven’t seen a market this fixated on what Congress does since 2008, when Wall Street feared its own death if $700 billion worth of TARP legislation failed to pass. It’s the same deal now, but perhaps even more so: Government is where the action is.
By the time you read this — everything is moving at hyperspeed now — a trillion-plus stimulus bill (latest number $1.6 trillion, though that could change) may have been passed by Congress. This would make markets happy.
Or the bill might still be stuck in Congress, which would make markets very upset.
Either way, the market is betting all its chips on money from the government now. The trillion-plus stimulus, which is likely to be followed by many, many more trillions in our view, is seen as needed to save whole industries from oblivion, and take care of sick leave and mortgage defaults, and even put cash directly into consumer bank accounts.
To put it another way: The Fed’s galactic bazooka actions are nice, but the central bank is a sideshow compared to what Mr. Market wants now — helicopter money.
And it’s clear now that regular old helicopters won’t cut it. The market wants a fleet of CH-47 Chinooks that can carry payloads of 50,000 pounds each to start dropping cash bales as soon as possible.
Fiscally speaking, it’s a different world now. Nobody has ever seen anything like this. What the Federal Reserve and Congress are now attempting to do should not be classified as attempting to revive an economy, or attempting to reflate a bubble.
What they are doing, in terms of pumping trillions on the monetary policy side and fiscal policy side simultaneously, is so out-of-precedent, by literal orders of magnitude, we don’t even have a name for it. There is nothing in the history books to give us a sense of what happens now.
“To Infinity and Beyond,” indeed!