In March of this year, capitalism officially ended when the Fed began buying otherwise unwanted bond ETF’s directly from the market.
In May, I entitled a report explaining the same, The Day the Music Died, and there was no pun whatsoever intended.
In fact, and as I’ve written elsewhere, Capitalism died long ago, for all the manifold reasons detailed therein.
Rest in Peace My Sweet Supply and Demand
Folks, even if you never took a semester of economics, most of you know that real markets run on what was once known as natural free-market forces of supply and demand.
This means when there is great demand, prices go up, and when there is weak demand, prices go down.
Similarly, when there is too much supply of a given asset, prices go down, and when there is a limited supply, prices go up.
It’s really that simple.
In natural markets, when there is no demand for a given security, their prices naturally go down—as they SHOULD.
This keeps markets from over-heating, bubbling and later collapsing—as we saw in March.
But in an era of absolute and unashamedly obvious Fed Fraud, our central bank can create money out of thin air to then buy assets that no else would otherwise buy.
The impact that such fraud (which the lipstick-on-a-pig soothsayers in DC call “accommodation”) has had on the bond markets is beyond disgraceful.
It is absolutely essential that investors understand why.
It’s All About Artificially Engineered Low Rates
For over a decade, the Fed has been buying US Treasuries (Uncle Sam’s IOU’s) with such artificial aplomb that prices have risen to the moon based exclusively upon artificial demand.
And here’s the key kicker of which I’ve written ad nauseum: When bond prices rise un-naturally high, bond yields (which move inversely to price) fall unnaturally low.
This is THE CRITICAL FACTOR which has kept our otherwise broken stock and bond markets ripping north as our economy tanks.
That is, low yields = low interest rates, and low interest rates, which allow for debt binges, are what allow otherwise zombie-dead companies to survive.
Debt, alas works. Until it doesn’t…
Moral Hazzard Is Everywhere
Again—artificial debt handouts and binges ain’t capitalism—that’s 100% Wall Street socialism and represents an historically unprecedented example of one big fat moral hazard.
That’s because this openly rigged system of artificially repressed rates rewards otherwise broke companies and allows CEO’s to thrive on an endless treadmill of debt rollovers to buy back their own shares and fatten executive salaries—which are pegged to share prices.
Once you understand how the sausage is made on Wall Street, this ought to disgust you—unless, of course, you’re the CEO of zombie company or a top-chasing market dreamer.
COVID Necessity or COVID Excuse?
Many, of course, will say that COVID necessitated such “support” for the markets, but these debt-driven tricks had been in play long before COVID, so don’t let the Fed fool you.
That said, the Fed has nevertheless exploited COVID to up the ante of stupid, as I warned in May.
Now, in the backdrop of COVID (and Section 13(3) of the illegitimately conceived Federal Reserve Act of 1913), the Fed is not just buying Treasuries, it’s buying junk bonds, corporate bonds and very soon enough—MARK MY WORDS—the Fed will start buying stocks too.
Again, that ain’t natural demand and that sure as heck ain’t capitalism.
That’s Wall Street living off a Fed respirator at a time when respirator metaphors aren’t intended to be funny.
It’s a total disgrace.
Doing the Math
In case you don’t believe anything could be this insane, let’s stick to the facts and not my rancor.
Earlier this year, when I first announced the Fed’s direct purchasing of US corporate bond/ETF’s, the Fed began buying high-grade corporate bonds, and by April, it began buying junk bonds as well—thereby bailing out the D- kids in the class with A+ levels of demand.
In other words: This was pure fraud masquerading as “support.”
By May, the Fed was spending hundreds of millions per day giving debt addicts more dope and reporting the same to our Congress with a straight face.
Needless to say, there was little response from our House of Representatives, who know as much about math and markets as my dog Aubrey knows about Platonic philosophy.
As of the end of October, the total tally of Fed support for US corporate bonds and direct spending into the US securities markets has come in at $8.6 billion of direct ETF purchases and another $4.8 billion of direct purchases of individual securities—i.e. buying (doping) the unwanted bonds of names like Amazon, Visa and Kroger.
As if Amazon really needed the “accommodation.” You really can’t make this crap up.
And trust me, the $13.4 billion in direct bond purchases (i.e. artificial demand) thus far unleashed by the Fed is just a drop in the bucket compared to what is to come.
One Big, Fat Fed Airbag—Risk ON!
The markets are now fully aware that anytime there is a genuine “uh-oh” moment in these artificially-doped, Lance-Armstrong markets, the Fed is there to act as one big, fat airbag.
But the Fed is also acting as one big, fat middle finger to the natural laws of price discovery and that once revered component of the American Dream—real capitalism.
In essence, the U.S. Central Bank is also turning the stock and bond markets into one big, nationalized 401K, eliminating natural price forces and replacing them with an un-natural buyer using money created out of thin air to make its purchases.
Has the Fed Made Bears Extinct?
Does this mean what we all think it means—namely, that the Fed has outlawed bear markets?
On its face, the short answer is “Yes.”
And what the markets want, the Fed delivers—as the Fed’s only master is Wall Street, not Main Street.
In case you don’t believe me—just compare the former’s condition against the latter’s in the current and shameful disconnect between record-high markets and our tanking economy.
So yes, markets will gyrate and fall, yet rise again on now open Fed support.
But here’s the critical rub: Where will the Fed come up with the cash to pay for an otherwise unwanted securities market?
You already know the answer: They will print it out of thin air under another euphemism known as unlimited QE.
If this seems to good to be true, that’s because it is.
Stated otherwise, there are massive risks ahead for our currencies and inflation prospects when the Fed becomes a spender rather than just a lender.
I warned of this critical shift (and explained its ramifications) in blunt detail here.
Furthermore, I also warned of the toxic ramifications of taking on too much debt paid for by artificial dollars, as this openly desperate policy leads directly to stagflation—that is, higher prices and sinking economic growth.
But hey, why worry about such boring inevitabilities like stagflation when the markets are inflating toward the moon?
Well folks, if markets are rising on printed dollars to pay for record high debt levels, the amount of printed dollars required to continue this sham masquerading as policy will absolutely crush the purchasing power of every dollar you own.
For this reason alone, the purchasing power of your currency has nowhere to go but down, which means the long-term trend for historical stores of value like GOLD, has only one way to go, and that’s UP—regardless of short-term price gyrations in the paper gold market.
Of course, portfolios should never fully trust such an openly desperate yet accommodative Fed. It will eventually end—and don’t ask me when. No one knows.
In the same breath, however, one would be equally foolish to fight this Fed, as it is now committed to far more “stimulus” when-and-as needed.
As always, our portfolio solutions are designed to both capture these insane yet predictable trends while simultaneously keeping one eye on the embedded risks and opportunities we see at the macro and market level via our complex trading signals made simple for subscribers.
As always, click here to learn more how we stay one step ahead of these openly and now entirely distorted markets.
Matt & Tom
P.S. Have a great Turkey Day and we’ll be back next week!