Touting the Success of Jawboning, Fed Steps Away from Corporate Bond Market, Having Bought Almost No Bonds & Bond ETFs

Fed’s ETF holdings fell for second month, corporate bond holdings barely ticked up: This “$750 billion” SPV is over before it really got started. But the hype had been huge.

By Wolf Richter for WOLF STREET.

The Fed’s super-hyped, glorified, deified, and ballyhooed $750-billion buying-program of corporate bonds and bond ETFs, including junk bonds and junk-bond ETFs, had triggered one of the most magnificent credit-market rallies ever. And then the Fed hardly bought anything. Now the Fed is touting its success in jawboning the markets into a frenzy without having to do hardly any actual purchases. And it put a number on it – what percentage of the bond market rally was caused by jawboning, and what percentage was caused by actual bond purchases. And now, the Fed appears to be winding down the program altogether.

In its data release today for transactions and holdings of corporate bonds and bond ETFs from August 31 through September 29, the Fed disclosed that for the second month in a row:

  • It bought no (zero) bond ETFs
  • It bought just a tiny smidgen of corporate bonds
  • It lost money on its bond ETFs because the market had gone south.

ETF holdings decline by $117 million in two months.

The last time the Fed bought any shares of corporate bond ETFs was on July 23, when it bought $2.3 million in bond ETFs spread across nine ETFs. Since then, it has bought zilch. On the Excel page where it would show the ETF purchases in September, it just shows this for the second month in a row: “No purchases were made over the current reporting period.”

The Fed is still holding the same number of 112.8 million shares of ETFs that it held at the end of July, but in September the market value of these shares dropped by another $52.8 million, after having dropped by $64.5 million in August, for a total decline of $117.3 million. This reduced its ETF holdings from $8.74 billion at the end of July to $8.62 billion at the end of September.

Obviously, anything that is counted in millions or single-digit billions on the Fed’s $7 trillion balance sheet is immaterial and gets lost in rounding – not only the decline in market value but its entire minuscule ETF holdings of just $8.6 billion.

Corporate bond holdings at cost inched up $394 million.

The Fed bought just $453 million in corporate bonds via about 260 small trades in September, spread across the big-name corporate bond spectrum, including some junk bonds. But $59 million of bonds that it had bought in prior months matured and were redeemed – the Fed’s SPV got its money back from the company – and so its total holdings of corporate bonds increased by only $394 million to $4.4 billion.

The Fed’s total holdings of bonds and bond ETFs in its Corporate Credit Facilities (CFF) SPV at the end of September amounted to $12.9 billion. A far cry from the ballyhooed $750 billion.

CFF program terminates on December 31?

In its revised term sheet, released on July 28, the Fed extended the corporate bond-and-ETF buying program to December 31, 2020. It “will cease purchasing” corporate bonds and bond ETFs “no later than December 31, 2020,” it said, unless the program is further extended. After its termination, the SPV will hold the securities until they “either mature or are sold.”

By the near-cessation of purchasing activity in September, it looks like the Fed is going to terminate the program on December 31. Those ETFs and bonds in the SPV will eventually and quietly be sold or will mature and roll off. It looks like this baby is done.

The Fed puts a number on the success of its jawboning.

The frenzy in the bond market, including in the junk bond market that was triggered by the Fed’s bond-purchase announcement on March 23 – and expanded on April 9 – allowed companies such as the airlines and cruise lines, whose businesses had collapsed, to raise $1 trillion in the US bond market.

What the Fed had done was inspire investors to chase bonds, no matter what the underlying risks, as investors were hoping the Fed would take those bonds off their hands.

The New York Fed has come out with an analysis to show what percentage of that crazy bond market rally was caused by the Fed’s jawboning (the announcement effect, as it’s called), and what percentage was caused by the Fed’s actual bond purchases. Turns out, jawboning did most of the heavy lifting, and actual purchases polished the results.

The article was another one in the New York Fed’s systematic series of articles that rationalize and defend the Fed’s $3-trillion in asset purchases and portray it as the savior of the earth, to deflect from the actual results of those asset purchases, namely making the wealthiest even wealthier and increasing the already horrendous wealth disparity in the US by a massive amount. So yes, kudos.

There are three dates that are important in the analyses: March 23, when the programs were announced; April 9, when the announcement was made that the program would be expanded, and mid-May, when the Fed’s purchases actually began.

For its analysis, the New York Fed looked at the spread (difference) in yields between corporate bonds and Treasuries whose timing of interest and principal payments are similar (“average duration-matched spreads).”

From March 23 through mid-June, this spread narrowed dramatically by 140 basis points (1.4 percentage points), meaning that investors drove up prices of these corporate bonds and that thereby their yields fell in relationship to equivalent Treasury yields – the hallmark of a big rally in the corporate bond market.

This 140-basis-point narrowing of the spread occurred in three phases:

  • One-third occurred on March 23, the day of the announcement.
  • One-third occurred between March 23 and April 9.
  • And the last third occurred after May 12, when the Fed actually started buying ETFs.

In other words, two-thirds of the bond market rally was caused by the announcement effect as everyone was trying to front-run the Fed’s purchases; and one-third occurred after the Fed started buying ETFs. This is the power of jawboning: it did two-thirds of the job. And so the Fed didn’t actually need to buy many corporate bonds to accomplish the rest.

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  85 comments for “Touting the Success of Jawboning, Fed Steps Away from Corporate Bond Market, Having Bought Almost No Bonds & Bond ETFs

  1. MonkeyBusiness says:

    Will it backfire next time though?

    Next time it will not be debt out the wazoo. They’ll print money so fast, memes can’t catch up.

    • Wolf Richter says:

      That hope is exactly what the bond market is now running on. All markets are now running on this hope that the Fed will ALWAYS bail them out at the slightest dip. Not sure if the Fed will though.

      • MCH says:

        Hope, it’s the next best drug to fear.

        Just mix it in the right proportions, and it’ll do you wonders.

        I think JP has figured out the right mixture there.

      • andy says:

        The Fed is a bunch of nincompoops. The blind leading the blind. Only a couple of years ago they thought they were going to raise rates. Two years from now they will have never seen this bubble burst in their collective faces.

        • MonkeyBusiness says:

          Bernanke made an appearance today at the PIMCO Investment Forum and it’s not clear to him that stock prices are overvalued.

          Ok boom*r?

        • andy says:

          They play 5th grade level dots plots.

        • Rcohn says:

          The Buffet indicator is very close to an all time high set in early Sept.
          No other major country is close to the valuation in the US

        • wiley says:

          Wring,they know Exactly what they are doing. The raised rates a couple years ago was a probe,a test among other things much as a dr. Pokes and probes and examines a patient. Making the wealthy wealthier so they can concentrate power like Blackrock owning Spain and other things is a big part of the Real rationale. Didnt I read that the #2 at Treasury was supervising this buying spree back in April/May and that said man”s father benefitted fabulously from the junk bonds,etc. Purchased because #2 T. Guy just let his dad hold the hedgefund investments while he at the Treasury was allowed to directly benefit the father and himself? Also not mentioned are all the fees that Blackrock/heart collects for doing the bidding of the Fed,is this not a benefit?

      • Anthony says:

        I suppose the Fed will listen to its political masters, as always.

      • I do not believe the FED or any other Central Bank can relent back to ‘normal’ without the world’s economy collapsing. To me, it seems we are beyond the point of no return given levels of: sovereign debt, corporate debt and personal debt.

      • Cas127 says:

        If the Fed were smart and honest (hmm…) rather than just endowed with the power to extra-Constitutionally confiscate private post-tax savings through money printing, it would try very, very, very hard to develop a tool to partition that ocean of phony baloney BBB rated bonds that were the cutoff point for Fed salvation.

        Because this is all going to happen again, for one reason or another.

        And the Fed will “fix” things again, because it has “worked” twice.

        (Of course, the same pathologies are unaddressed, leading to the cyclical catastrophes, spiraling down to true ruin…but hey, that is the essence of DC.)

        Since the BBB rating is the salvation cutoff (it *was* good to see that the Fed allowed at least *some* of the walking dead to go BK) it would be marginally sensible to subdivide that huge category further…and let an increased number of ratings agency payola clients be cast into the outer darkness of no Fed backstop.

        Ahead of time.

        It will save the Fed some money (marginally) and it will make the economy function better/more honestly (marginally).

        And if done in advance, it won’t cause any massive dislocations.

        There is little reason for the Fed to rely on the gross standard subcategories that the ratings agencies use…it is well within the Fed’s ability to design much more finely grained tools.

        Wolf, I wonder if there is any Fed chatter to that effect…the development of more precise credit evaluation tools within the Fed.

        If “Investment Grade” is to mean “Fed Backstopped During Inevitable Cultivated Crises” then maybe the Fed needs to promulgate open source standards and not rely on rating agencies’ conflicted interest/black box ones.

      • Timothy Kita says:

        So we should see yields rise, no?

        • Wolf Richter says:

          There has been a slight uptick in BB and BBB yields since the low of early August. I’m not expecting a surge in yields at the moment. This credit market is still red-hot.

        • Beardawg says:

          If BBB is junk and it’s STILL getting bought up after jawboning has been exposed as jawboning, are these investors hoping to own BK companies in the future? That makes no economic sense unless you are a takeover master. My impression is that no one entity is buying majority shares of the debt??

      • Mr. House says:

        What actions in the last ten years actually have you thinking they will not? Serious question.

      • Lisa_Hooker says:

        Does this mean that “pump and dump” plays are now legal? /s

      • sunny129 says:

        ‘What the Fed had done was inspire investors to chase bonds, no matter what the underlying risks, as investors were hoping the Fed would take those bonds off their hands’

        Fed has done the same thing with Equities since March of ’09, with investors, front running the announcement of QE 1, 2, 3 and now QE4 running. check the chart of S&P and the announcement (just before the FOMC meetings!)

        Remember those who followed blindly:
        Don’t fight the Fed
        Fed has your back
        Deficit doesn’t matter
        all winners, st least so far! Free mkt capitalism, fundamentals are out the window, for over 10 years! No logic or rational thinking needed!

        FED was and is the MARKET, then and now!

  2. 2banana says:

    Who gave them that authority and power?

    “What the Fed had done was inspire investors to chase bonds, no matter what the underlying risks, as investors were hoping the Fed would take those bonds off their hands.”

    • Wolf Richter says:

      Congress. And not only “authority,” but also equity capital for the SPV. The Treasury, under instructions from Congress, put the equity capital into the SPV, and the Fed lends to the SPV. At the moment, all the Fed used was the equity capital. The amounts of bond purchases are so small that the Fed didn’t even need to lend to the SPV.

      • YuShan says:

        “The amounts of bond purchases are so small that the Fed didn’t even need to lend to the SPV.”

        Does this mean that the Fed actions weren’t illegal after all? If they have only used taxpayer money it is simply a fiscal program. I wonder if this was always their plan from the start.

        It reminds me of ECB Draghi’s “whatever it takes” OMT program which is illegal too if actually executed, but the threat alone was enough to prevent a meltdown, so it never was activated.

      • MCH says:

        If you think about it for half a second, SPV sounds like some type of disease.

        The acronym has all sorts of connotations. That it is a spawn of the US Congress is somehow fitting.

  3. rhodium says:

    The Fed enforcing law and order. Don’t you dare sell or we’re going to double the price of everything.

  4. BobT says:

    I must congratulate Wolfstreet on being the only financial blog I follow (10 years now since T.P.) that has remained apolitical. Very refreshing to escape from the BS.

    • andy says:

      One-party system; not much to debate. All powers relegated to money printers.

      • Mark says:

        “The “Two-headed uni-party” ……. RT’s very apt description …..

        Pull either lever

        • Andrew says:

          The patrician Gore Vidal said it was the “Business Party” which wins elections in America…

      • Cas127 says:

        That is why it is called a political *class*.

        In practice, it isn’t so much Left vs. Right (which are just costumes discarded/modified as DC interests get threatened) as it is In v. Out.

        The absurd, Constitutionally unfounded power to print money at will (inflicting inflation on 99% of the public) is the sacred, central principle of that distinction.

  5. Bobber says:

    The Fed’s jawboning was not successful in any meaningful sense. All it did was mask debt problems that will resurface when it becomes apparent the weak companies cannot service their debts. Plus, the Fed’s jawboning served to increase the total amount of corporate debt outstanding, thereby increasing the extent of the problem.

    • YuShan says:

      What they did achieve was prevent a meltdown from happening at the worst possible moment.

      However, when the Covid crisis is over they should allow the markets to deflate and return to normal monetary policy. But they never did that after the GFC, even when conditions to normalise where the best you could ever hope to achieve (with decent growth and very low unemployment in the years before Covid). So I have little hope they will do it this time.

      • Mr. House says:

        “What they did achieve was prevent a meltdown from happening at the worst possible moment.”

        Starting the fires and then putting them out….briefly! My heroes!

      • Lisa_Hooker says:

        Everything will return to normal when unemployment gets down to 6.5%, like the last time.

    • Beardawg says:

      Bobber

      As I asked in a similar thread above – jawboning is exposed now, so why buy? Is it sheik to own the bonds of a BK company (in a couple years)? Not understanding why investors will give you a dollar today for 30 cents in 2 years ???

      • Cas127 says:

        ZIRP is behind a lot of it…when the alternative to taking stupid intermediate term risks (blind BBB holding) is to lock in low-to-no returns (Treasuries) then a *lot* of financial intermediary decision makers will roll the dice.

        It isn’t their money (same attitude as political class).

        We’ve seen this multiple times before and we’re seeing it again.

        Plus, those dice-rollers believe there is political safety in herding together (collectively too BBBig to Fail).

        That is sorta my point in the post above…asking if the Fed is working on more finely grained credit backstop standards, rather than utilizing 6 or 7 credit rating agency categories that are black boxes, contaminated by the agencies’ fee revenue incentives.

        BBB is so huge and degraded at this point, there is little reason (once things calm down a little more) to cast some fraction of them into the outer darkness, outside the Fed backstop.

        Doing so will save the Fed some money and marginally roll back the perverted incentives the backstop has created.

        But to get back to your main question…think of ZIRP/NIRP as a forest of bayonets prodding investors (and especially their intermediaries) into the “risk on” direction the G wants, to “save” the economy.

        • Beardawg says:

          Cas127

          Excellent take. I did not think of it in terms of “creating” a TBTF investment. With enough mob investing in bad debt, perhaps the Gumbent and/or Fed simply feels cornered and bails out the Investment due to pressure.

          Still seems to be a helluva risk to take though. As for intermediaries….yeah….when it is OPM, no attachment I guess. Go for yield, change jobs when it’s ready to blow up and let your successor brokers take the heat. Sad. :-(

  6. PJY says:

    Doesn’t really matter if fed will bail them out not. The market is one way up. All the September losses will unwind by the end of Oct :)

    • Old School says:

      I am not sure about that. Buffet and Munger have seen a lot. They are holding enough cash to pay off all company debt. Having read a lot of Buffet stuff it tells me asset prices are so high that the risk/reward of buying anything is not there. Their belief is patience will be rewarded as better prices are in our future.

      • PJY says:

        Buffett is not always right. He missed out on the huge growth stocks during 2010-2020.

        • sunny129 says:

          Just like the investor lergend Jimmy Rogers said ‘ Give me a couple or more Trillions, I will show you good time’

          There is hardly any growth of ‘productive economy on an organic basis, save for the technology sector and financialization FIRE sector. Asset bubble in the mkts purely built on ‘debt on debt with leverage’ courtesy of Fed (CBers)

          These are the same gang whobrought us TWO boom-bust cycles alread in this century (2000 & 2008). Now they trying save this 3rd largest ‘everything’ bubble they created (as a cure for the previous 2!)
          But Covid 19 came from nowhere and just a catalyst for the needed ‘great RESET’, another year or two at the most! But again that could be different this time, right?

          No country in human history has prospered by ‘spending debt on debt’, yet!

    • Saltcreep says:

      As it stands I’m taking the other side of that bet, PJY. Maybe I’ll have the rug pulled out from under me. Time will show.

  7. Joe in LA says:

    I just went to the last showing at a local Regal theater. Movie ended, everyone fired — the manager walked out with a bag of hot dogs, obviously worried about feeding herself.

    The moral measure of any country is how it treats the poor and the weak.

    • BuySome says:

      An hour before those hot dogs were probably the highest price they’d been in the last 70 years when theatres began a battle against that newfangled Pay T.V. trend. Now gone at a bid of $Zero. Next month? Ounce of gold? Slug of lead? Or just the trash can which you have to pay to have emptied. So much for the basis of asset valuations and commodity pricing. Who needs amusement parks now…we’re already sitting on the roller coaster. Better hope the track don’t run out.

      • BuySome says:

        Ok..about 60 years, but we’ve been paying for television one way or another for 70. BTW…”immaterial” is exactly what everybody but Freddy Laker thought concerning a fouth bolt on the engines of DC-10’s. Remember what happened next? Small cracks lead to big shears and then the bottom falls out…gravity favors straight lines. Forward momentum tends to run out quick.

        • lenert says:

          (Gravity favors the parabola hence that quickly fading forward momentum). But this isn’t physics – it’s more like the group psychology of a thousand blind mice in a cheese factory.

    • Old School says:

      I agree, but US was founded on idea that citizens needed to be protected from government abusing it’s powers. Maybe it is a family’s responsibility to take care of its own and if not then looking after your neighbor. Economic dominance coming out of DC leads to a lot of corruption.

      • The Rage says:

        Nothing personally, but this post just doesn’t make sense. The US was founded on representative government with checks/balances. Government is irrelevant. The market abuses its powers all the times as Thomas Jefferson repeatedly said.

  8. Liquid Amber says:

    Yes, the Fed is not buying corporate bonds. But they have made it very explicitly clear that when/if the bond market runs into trouble, they will provide the backstop. And that is keeps the party going.

    • Wolf Richter says:

      The program expires Dec 31. If it’s not extended, it’s dead.

      • van_down_by_river says:

        “if it’s not extended” Haha!

        Your sarcastic sense of humor is one of the reasons I love reading your articles and commentary.

        It now costs the average worker about 150 hours to buy just one share of the S&P 500, almost a month of labor to buy one share with a near record low yield. But the Fed says income is for suckers, you have to get in the gains game. They have indicated they will inflate my assets to pay for my retirement and so far they have been good on their word.

      • Greg says:

        Hi Wolf, wanted to see your thoughts on your market short you took in June. Are you less confident, more confident in it today? Seems that nothing can bring this market down. Thank you in advance for answering!

        • Wolf Richter says:

          Greg,

          The market had the best August in many years, followed by the worst September in decades, followed by the best week in three months… You gotta take this in stride.

        • RightNYer says:

          The way I see it, people thought that nothing could bring the market down in February when “investors” were ignoring COVID explosions in Europe. And then suddenly, it tanked over a few week period.

          Therein lies the problem. The Fed’s ZIRP policies and jawboning has made the market so unstable, that it won’t take much to cause it to collapse. Valuations are obscene, and many people know it. They’ll be rushing to the doors at the same time when whatever the external factor that shakes the sand house comes.

  9. Rcohn says:

    The IEF( 7- 10 year Treasury) is trading at 121.07 down from 121.98 on Aug,11
    The LQD( high grade corporate bonds is trading at 133.59 down from 134.62 on Aug,11
    The JNK( junk bonds) has increased in price since Aug,11 from 104.44 to 105.36
    What is most interesting is that both the IEF and the LQD trade at slight discounts their NAV, while JNK trades at a large premium

  10. Mark says:

    It seems the Fed may not have heard the story of the boy who cried ‘wolf’.

  11. Diogenes says:

    Spoofing is what it’s called.
    JPM just got fined $920m for spoofing.
    Don’t see much difference between JPM and Powell.
    Powell does JPM one better.
    At least JPM put in an actual order.
    Powell just opens his mouth.
    Fed’s version of a sucker punch to pension funds buying bonds.
    But who cares.
    It’s only grandma’s retirment that will get blown out.

  12. Old School says:

    The Fed didn’t get power to set interest rates til around 1960 if I am not mistaken. This seems to be a huge mistake as basically they are given the power to administer asset prices until something breaks. For individuals there is no escape except possibly precious metals or as wall street does being connected enough to front run Fed. I think reality is we are debt saturated and economy is going to be sluggish the rest of my life. Just saw where Japanese savings rate was at 20 year high. That’s what zero rates got them, people saving more money to make up for loss of interest income. That’s perfectly logical.

    • Lisa_Hooker says:

      That’s when FRB policy changed from controlling the quantity of money to controlling interest rates.

    • Harvey Mushman says:

      “Just saw where Japanese savings rate was at 20 year high. That’s what zero rates got them, people saving more money to make up for loss of interest income.”

      I think I’m turning Japanese – I think I’m turning Japanese – I really think so…

      The Vapors 1981 ish

  13. Michael Engel says:

    1) The blew whale will swallow the JNK groupie guppies.
    2) Fear of the giant whale will send US 10Y yield down, glued to 3M.
    3) There will be no space to hide in the big ocean.
    4) The Atlantic salmon will survive in their fish farms.

    • Paul says:

      Maybe the FED Emperor has no clothes and why not continue bluffing because they have no fallingalo$

      Af

  14. Bewildered says:

    I thought the problem with bonds was the underlying asset, not the resale market. At some point the borrowed money will have to be payed back, whether in 1, 5, or 10 years, or however long. I understand how jawboning can support the secondary market, or maybe the rollover market, or even the new issuance market. What I do not understand is how jawboning can affect the underlying bond market unless the Fed buys the bond with a promise for unlimited, low cost rollovers as they have done with Treasuries.
    If a company was lucky enough to have their debt come due between March and September of this year, they could refinance. If a bondholder was smart enough to unload his holdings during that timeframe he would make a profit. But didn’t someone have to buy that, and won’t they be holding the bag when the bond issuer can’t pay the underlying bond? Won’t the company that rolled over have to pay back the underlying asset in some amount of time. How did jawboning do anything except give a 6 month reprieve to unload assets with no underlying worth to a greater fool?

    • Lisa_Hooker says:

      Have you ever played the game of “hot potato?”

    • Cas127 says:

      “pay back the underlying asset in some amount of time”

      Although occasionally companies pay down debt individually, the aggregate stats show that perpetual rollover and expansion of debt are the rule.

      The Keynesian Krowd Konsiders the perpetual expansion of debt as growth/evidence of growth.

      Plus, there is the “Magic of Zero”…at zero (or very low rates) incremental growth of debt is costless (see DC) or very low cost (corporates).

      Under ZIRP, there is no annual increase in cost to an infinite expansion of debt and rollover is never a problem…so long as rates are never allowed to rise above zero (see money printing).

      In essence, the Fed’s Infinite Farce is funded by means of hidden inflation…which if ever effectively exposed can be blamed on some third party in the private sector (Asset Speculators! Greedy Landlords! Health Insurance Companies!)

  15. Michael Engel says:

    1) In the 70’s women bought tons of Italian gold chains and put
    them on their chest.
    2) When gold hit 700-800, they melted the gold.
    3) Smelters open windows operations shut their doors after 1M – 5M/
    turnover per day were sold.
    4) They became more invincible than Warren Buffett.
    5) The stashed their cash & gold in large vaults, bought RE in expensive areas, spend good $’s on renovations, prostitutes and ==> doctors to save them from VD and heart attacks.
    6) Silver can tarnish the sensitive skin.
    7) Nowadays women spend their cash on tattooing their chests.
    8) Women chests might sag, but tattoos forever stay.

  16. van_down_by_river says:

    They have printed 7 trillion, they have artificially enlarged the pool of currency available to buy assets and forced investors to buy corporate bonds at outrageously inflated prices. Dollars are fungible, and flow like water, when they create more currency it flows into every nook and crack of the asset markets. It’s about the available supply of currency, not about jawboning.

    I’m a curious cat who really wants to know, did you cover your short position?

  17. How much of this bond buying is rehypothecated? Just prior to the 87′ crash bond players were getting in on 10%. The problem is a plethora of money and a scarcity of stock ( shares in float lost through buyback) Then the dollar swings higher when Fed allows the market to set rates (within limits) and foreign buyers return. Bond buyers dump shares and buy stocks, and when they run out of stocks they buy bond ETFs. Rinse and Rehypothecate.

    • historicus says:

      As long as the 3 of Hearts and the 7 of spades can hold up the 10 of Diamonds, all is good.

  18. Wendy says:

    If congress can subsist on hot air, then surely jawboning is sufficient for the Federal Reserve.

    Not to worry, the helicopters are ready, and the ink cartridges are full if jawboning stops working.

  19. sunny129 says:

    The DOVISH singing has already begun!

    Fed’s Evans Says More QE Coming “If The Recovery Slows Down”

    ZH

    • RightNYer says:

      Is anyone EVER going to rein these terrorists in?

      • Lawefa says:

        @RightNYer

        Domestic terrorists? May need the FED organization as a whole on the list if this nonsense keeps keeps up…

        Regardless, uninformed investors chasing bad money.

    • Wolf Richter says:

      Other Fed heads have said the opposite.

      Plus, if the government adds another $4 trillion to the debt in 2021, someone has to buy it, and this will absorb a huge amount of liquidity. The Fed might have to buy half of it to keep the system from collapsing… but that’s not QE, and won’t have the impact of QE. That’s desperate monetizing of the debt because no one wants to buy it.

      • The Rage says:

        Then the dollar goes collapse and so does the US. The only other option is to get rid of the Fed and just have the government get rid of debt and usury. That would end any crisis though the wealth ponzi-effect from debt based capitalism would be gone.

        That is the paradox Wolf. You can’t “liquidate” to prosperity either. The great innovation wave of 1870-1970 is over. Bernie Madoff didn’t run too much different scheme which has been going on since the 1600’s. When Tech innovation/scientism is providing the background for keeping the ponzi scheme alive, it feels great. But after 1970, the party really did end. Many big innovations are really public kind of innovations and not ones that can privately be made for profit easy. So all he get left is crony capitalism and excessive debt expansion.

        • nick kelly says:

          The micro-computer (the one you are using to comment) didn’t exist in 1970. That whole revolution, putting computing in the hands of most people, only BEGAN in 1974.

          Oddly, it also came after mainstream thought was that no game- changing innovation was likely to come from small private business, or even lone individuals.

          There would probably be no more Marconis who as an early 20’s year old, began fiddling around in his father’s garage with the primitive spark-gap transmitter that could affect things a few feet away.

          But with the micro-computer revolution that’s almost exactly what happened. Two differences: the kids were even younger but
          it was several groups or clubs ( e.g. the Home Brew club)

          Bill Gates and crew arrived at Altair’s office 1974. The secretary thought they were the kids of the adults who had an appointment to make a presentation.
          Altair was selling a kit computer. Only prob, the processor, like all of them, only understood binary, so the user had to enter long strings of 0’s and 1’s on the keyboard.

          The Gates complier (translator) was loaded, 2+2 was entered, and the screen showed 4. The suits looked around and smiled. No one had seen the machine do anything before.

          Even later, Big Business like Big Blue showed little interest in micro-computers and government showed none.

        • sunny 129 says:

          @ The Rage

          ‘Then the dollar goes collapse and so does the US’

          Premature death of $ has been predicted for every year since 2000 if not earlier. Yes, it’s purchasing power being eroded, every year since 1913!

          TBut there are 3 Trillions in loans issued in US $ abroad, which keeps the support for $. Beside US $ is the global currency 61% compared 30% of Euro, 12% of Yen and 2% of Yuan.

          TINA. No other currency or even UN’s SDR (where US $ is weighted more than others.) come close!
          In any kind of global or market crisis, every one seeks safety of US $ or Treasury bills. Read history!

      • MonkeyBusiness says:

        What are “allies” for Wolf? The ECB, the JCB, etc will print money to buy 2 to 4 trillion.

        Heck it’s almost like a swap. We’ll accept their Euros, Yens for Dollars. As long as everyone prints in lockstep, there will never be any problems ….. for the rich.

      • DanS86 says:

        Yup, that’s why money velocity is at historic lows: the Fed is sucking money out of the real economy.

        • another way of saying the Fed expands credit but the credit does not result in any meaningful economic activity? I think the Fed would blame the banks for not lending the money, and they would blame savers for not spending money, and they would blame government for not providing incentives (lower marginal tax rates) for business to invest that money. They would add they have kept interest rates low for a long period, (done their part) to aid in the recovery. They would also add they have expanded the monetary base by several factors, which puts more liquidity in the system. Fed is self assured they have done everything they can.

        • sunny129 says:

          @Ambrose

          The so called ‘liquidity’ provided by Fed is NOT getting into real (productive) Economy or in consumers directly (yet!). Banks find very few credible borrowers and those who are qualified, don’t need. Those who need it but not good creditors, are out of luck.

          ZRP also made the Bankers’ profit on loaning difficult. B/c of Financial repression, savers (who are up to their neck in debt) have begin to save more besides reducing the debt burden whenever they can. Can you blame them?
          WINTER is coming!

          European Banks are virtually insolvent. Banks are facing the challenge to their capital ration margin considering the coming defaults in CMBS ( malls, high rise offices and apt/condo complexes)

          All these were brought by Fed’s policies since 2000 and are in denial!

  20. DanS86 says:

    So big traders can’t jawbone but its ok for the Fed to do it. Sounds about right for our criminal culture.

  21. sunny129 says:

    Re Fed and the Corp credit mkt

    Blackrock who is the agent in charge for various purchases of credit bonds are still in business!

    HYT ( Blackrock’s Highyield ETF) was at $7.44 on March 16, just before the Fed’s ‘jawboning’ campaign. Today it is around $11.11 (52 wk high at 11.73) PE ration around 15 and the yield/div is around 8.4%.

    THose who bought in late May made 45%+ in gain todate. I have reduced my position in High yield bonds now. I still invest in credit grade Corp bonds short, intermediate and to a minimal extent longterm. there are so many choices in the ETF world, beside the Vanguard.

    I will worry ONLY when the HYT ( and LQD) start cratering.

    Without the Corp Credit mkt, there will be NO healthy Equity market. Fed just cannot afford to ignore it away! They are always there for the rescue, once the liquidity tightens!

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