sicsempercomments | Below is a link to the growth in the Fed's balance sheet over the past few months. You will note that the Fed began expanding its asset purchases by $500 billion in the last quarter of 2019 even before the China virus hit our shores and shutdown our economy. Credit was already leaking and the Fed which has given itself the mandate to backstop financial speculation was already delivering on the Fed put. The China virus has brought out the bazooka adding nearly $2 trillion to their balance sheet just in the last 30 days.
The Fed has announced several new programs in addition to the repo program it had already initiated last year for liquidity squeezed banks. One is the purchase of investment grade corporate bonds many trading close to junk. The second announced today is the purchase of junk bonds via ETFs. This allows financial investors holding these credit instruments to sell them to the Fed enabling them to essentially not take or reduce their losses. The Fed will now hold credit instruments that could default. The third is to provide dollar liquidity to foreign banks with dollar liabilities through their central banks. Essentially the Fed is now willing to buy assets no matter how dodgy with significant credit risk.
An example is the shale patch debt. Shale companies raised junk bond financing to explore and produce oil & gas. With the crushing of the oil price, much of that debt got downgraded. Investors holding that debt were sitting on significant losses. The Fed will now buy that debt from investors with an opaque pricing essentially making them whole.
This is very similar to what they did during the 2008 mortgage credit crisis when they purchased mortgage-backed securities from investors enabling them to get out from their underwater positions. At that time Bernanke said that it was emergency action to prevent the collapse of the financial system and they would reduce their balance sheet by selling all the securities they acquired when the financial system was able to stand up again. Now they're significantly higher than at the peak of the 2008 crisis.
Chamath and others like Jack are upset because if the Fed really wanted to help the actual economy they could monetize (print money to buy up) infrastructure bonds issued by the various state, and local municipalities that could run various construction projects. They could also monetize Treasury, state and municipal debt that could be used to pay all those locked down and unable to earn a paycheck. What they're doing here as they did in 2008 is to backstop speculative losses of the financial sector.
The other story is that post-2008 it became clear to large speculators that risk taking is rewarded as long as the scale was large enough. The use of debt to buyback stock to the outsized benefit of management was immense in scale. So too was the revived CLO and other structured debt product financings. The impending downgrade of much of this corporate debt to junk meant that all those securities would have to be ejected from the portfolios that could only hold investment grade. Like most pension funds and life insurance portfolios. This was a huge crisis for the massively leveraged funds.
I work at an investment advisory firm providing services to pension funds and insurance companies. The word on the street is to expect the Fed balance sheet to be expanded by $6-$10 trillion.
Unfortunately Mom & Pop businesses most hard hit by the shutdown have no ability to get a Wall St bank to underwrite a junk bond offering that could be sold to the Fed.
Finally, I'd like to leave you with this story. This is why some are getting angry.
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