The Fed's MOAB
Many a market pundit believe that this Market is disconnected to fundamentals so much so that it has become consensus among talking heads. When that happens its usually wrong, so lets examine why could this be wrong?
The simple answer is the Fed, and the Treasury. I was on the TD Ameritrade Network today discussing it.
Through the creating of several special purpose vehicles the Capital markets have been flooded with liquidity.
First was The Fed resumed is US Treasury Bond Buying Program
These bonds can either sit on bank balance sheets or The Fed Balance Sheet
When the Federal Reserve owns these bonds it gives banks, particularly the largest banks, additional balance sheet to take risk and stay solvent
As Fortune 500 & 1000 companies, and many small business’s draw on their credit lines and cash reserves banks need this liquidity to stay solvent
This also free’s up capital to acquire risk assets for other players such as dealers and large asset managers
The Fed has also
Opened the window to non-financial companies, for first time ever large corporations can now post collateral for liquidity
Entered the Commercial Paper market
Companies there were investment grade prior to crisis, but are now junk can access these programs
Started buying Corporate Bonds
Created a main street lending program
Why is the so significant? The bottom of the business cycle is typically marked with widespread bankruptcies, as result of a lack of liquidity, compounding the problems of contracting economy. The Fed actions have dramatically reduced the number of would be bankruptcies. As a result, the economic contraction and job losses will be far less that what normally occurs.
This almost guarantees some form of V shaped recovery – with vast amounts of liquidity available for risk assets resulting in higher than normal stock prices.
Lastly - Jerome Powell is on 60 minutes saying this won't stop until the problem is gone. The Federal Reserve is several Trillion dollars deep on this and will keep going. P/E Ratios matter, but as the old saying goes, don’t fight the Fed.