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April 30, 2020 | Is The Government About To LBO The Private Sector?

John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What To Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website in 2004 and sold it in 2022.

So it’s early 2021 and we’ve bought back most of the extant Treasuries, a big chunk of investment-grade corporates and agency bonds, even a significant part of the junk market. And the damn economy is still flat on its back. Guess ten trillion dollars isn’t what it used to be!

But giving up isn’t an option unless you like the idea of falling into a deflationary abyss, so we need to keep going. And it’s not like currency is hard to create, haha. Looks like we’ll have to revisit the trial balloons we launched last year:

Yellen says the Fed doesn’t need to buy equities now, but Congress should reconsider allowing it

(CNBC April 6, 2020) – Former Federal Reserve Chair Janet Yellen thinks the central bank is not in a position where it needs to buy equities but thinks lawmakers should give it more leeway for the future.

“It would be a substantial change to give the Federal Reserve the ability to buy stock,” Yellen told CNBC’s Sara Eisen on “Squawk on the Street.” “I frankly don’t think it’s necessary at this point. I think intervention to support the credit markets is more important, but longer term it wouldn’t be a bad thing for Congress to reconsider the powers that the Fed has with respect to assets it can own.”

Normally, the Fed is only allowed to own government debt and agency debt with government backing, Yellen said. The central bank has also received special powers during the coronavirus outbreak to buy other assets such as corporate debt through exchange-traded funds. The Fed has also cut rates to zero and launched an unlimited quantitative easing program to help stabilize markets. Still, the Fed would need additional authority to buy exchange-traded funds holding stocks.

Other central banks — including the Bank of Japan — have been purchasing some of their countries’ stocks to mitigate the recent carnage sparked by the coronavirus outbreak.

“The Fed … is far more restricted than most other central banks,” Yellen said. “Even with respect to owning corporate debt, the Fed is not allowed to directly own corporate debt and most other central banks are.”


U.S. weighs taking equity stakes in energy companies, Mnuchin says

(Reuters, April 24, 2020) – The U.S. government is considering taking equity stakes in U.S. energy companies as it seeks to help the nation’s oil and gas sector amid the coronavirus outbreak, Treasury Secretary Steven Mnuchin said on Friday.

President Donald Trump, speaking at a White House event with Mnuchin, said he wants to help industry and suggested the federal government could buy fuel for the country in advance as well as purchase airline tickets in advance.

“We’re looking at a whole bunch of alternatives,” Mnuchin said.

“You can assume that’s one of the alternatives, but there’s many of them,” Mnuchin said, referring to possible equity stakes.

Now back to the present, where we can discuss this next stage of monetary experimentation as a future possibility rather than a fait accompli.

Governments buying equities is a sort of Twilight Zone version of the greater fool theory, in which you buy something that is admittedly overpriced in the expectation that someone even more exuberant will come along to pay even more for it. This is a vote of no confidence in both the asset in question and the intelligence of the broader public. But it’s frequently profitable in markets dominated by speculators (and idiots) rather than investors.

In today’s case, a rational investor might look at the value of US equities and conclude that they’re overpriced, given the utter chaos of a hyper-leveraged, virus-ridden world. But then he might notice the Fed, which has both an unlimited monetary printing press and (soon) a mandate to buy equities, not in order to turn a profit by buying low and selling high but to artificially inflate prices, causing gullible consumers to borrow more money and buy more stuff.

Viewed through that lens, stocks become a screaming buy because the ultimate greater fool is now prowling the market with unimaginable amounts of money.

This is exactly what the government is trying to accomplish in the short run. But it’s also a death knell for capitalist wealth creation since the leveraged buyout (LBO) of the private sector by the government will cripple the capital markets’ price signaling mechanism and bring innovation to a screeching halt. This second point is lost on the desperate folks at the Fed and Treasury. Which means the ultimate fiery end of this system will come as a complete surprise to them, though maybe not to the people on the other side of the LBO trade.

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April 30th, 2020

Posted In: John Rubino Substack

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