Stock Market

Stock Market Suspiciously Healthy. The Federal Reserve Does All It Can to Keep Economic Reality From Setting In.

The government is doing what it can to help out Big Money.

|

Despite 33 states with over 10 percent unemployment rates, gross domestic product quarterly dives of over 50 percent, and a resurgence of COVID-19 infection numbers making both those conditions seem unlikely to turn around soon, the stock market as a whole remains strangely healthy. The Dow Jones Industrial Average is actually up over 1,500 points since mid-March when the coronavirus shutdowns began in earnest (though still down more than twice that number of points from the optimistic beginning of 2020).

While ultimately the only sure reason why the stock market does what it does is "the people buying and selling stocks make decisions that lead to those prices," one very likely reason those making such decisions seem to think staying in and even buying more is a good idea right now is a concerted government effort to socialize the risk inherent in buying stocks across the economy.

The establishment market-watchers at The Wall Street Journal spelled out this thesis yesterday: "Expectations that the U.S. Federal Reserve will keep injecting liquidity into the market have helped fuel rebounds each time fallout from the coronavirus pandemic have sparked selloffs," with one analyst insisting that because of Fed policy, "There's a safety net under the bond market and the equity market."

This judgment that government policy wants to get stock buyers and sellers to ignore grim economic reality via what amounts in part to special favors to big corporations is widespread. One of the reasons why is the Federal Reserve's eager buying up of corporate debt this year.

CNN reports some of the implications of that:

In a note to clients Monday, Goldman Sachs said the Fed's announcement that it would buy corporate bonds in the primary and secondary markets was enough to quickly provide relief. "The mere presence of the backstops helped to restore the flow of private credit," chief economist Jan Hatzius said.

Lip service to the idea that these policies create problems for those not getting the help is given, as CNN notes. ("There are fears that an ongoing commitment to corporate bond purchases could create a so-called 'moral hazard,' encouraging companies to borrow more from less-selective lenders on the expectation that Fed intervention would limit risks.") But such considerations almost never stop the government from doing what it can to help out Big Money.

Hussein Sayed, chief market strategist at FXTM, was warning his clients this week, CNN reported, that "monetary policy stimulus which explains most of the recovery in asset prices from the March lows will become less effective going forward if it doesn't translate into a rebound in economic activity and better prospects for corporate earnings."

The Washington Post reminds us that the "central bank has said it launched the corporate debt program to support the markets," although it's "unclear what the implications of its actions will be" as "the Treasury Department has devoted $75 billion to the Fed's two corporate credit facilities as part of a pot of money allocated by the Cares Act….The Fed has bought almost $429 million in individual bonds," buying them both directly from the company and from investors or funds that already owned previously issued bonds.

Aaron Klein, policy director of the Center on Regulation and Markets at the Brookings Institution, is quoted in the Post asking: "Why is the solution buying Apple, Microsoft and Comcast debt? Or eBay or Google?…Is the problem in America that the holders of Apple stock need more help? Is the problem that investors in Google debt are likely to suffer catastrophic and unexpected losses from the covid shutdown?"

As Politico reported regarding this latest round of Federal Reserve corporate debt buying, "most of the debt has to be considered investment-grade by credit ratings services, meaning it carries minimal risk to investors. But otherwise eligible firms that have been downgraded a notch to junk status since late March will still be included in the program." Even if no actual straight-up losses to the government (read: all of us) arise from such debt buying, their very existence distorts where investment and growth goes, to the advantage of big business' being temporarily propped up.

As James Dorn of the Cato Institute further explained:

The promise of supporting corporate bond prices and making loans to highly leveraged companies undermines corrective market forces: real markets are supplanted by pseudo markets in which the central bank will be subsidizing distressed companies and politicizing the allocation of capital. Initially private investors may purchase more corporate debt, but if corporations use that credit to pay off existing debt, and do not invest in productive capital, losses may continue. Private investors then will have an incentive to offload their holdings to the SPV [the Fed's "special purpose vehicle" for such debt buys], effectively socializing those losses.  Those who value private, free markets recognize that the Fed's promise to revitalize corporate debt markets is, in reality, a step toward market socialism.

The Federal Reserve has since the 2008-09 economic crisis become more and more a holder of financial assets of all sorts, a change whose risks are detailed in this 2014 Reason feature, "How the Fed Got Huge," by Jeffrey Rogers Hummel.

Advertisement

NEXT: A Rosy End to Blue June

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Money, privilege, and power the Government Class is looking very like the old aristocracy, and We the People their serfs.

    Those dependent on government are as much a part of the Government Class as are the politicians and bureaucrats.

    1. ●US Dollar Rain Earns upto $550 to $750 per day by google fantastic job oppertunity provide for our community pepoles who,s already using facebook to earn money 85000$ every month and more through facebook and google new project to create money at home withen few hours.Everybody can get this job now and start earning online by just open this link and then go through instructions to get started…….Home Profit System

      1. ● Great article, Mike. I appreciate your work, I am now making over $15k every month just by doing an easy j0b 0nline! I KNOW YOU NOW MAKIG MOR DOLLARS online from $28 k I,TS EASY ONLINE WORKING JOBS…
        go to this SITE for more INFO just copy and paste…… Home Profit System

  2. Never bet against Americans.

    1. What if it’s a geography contest?

      1. stupid blue pie piece.

  3. Of course, these articles never, ever, publish the percentage of “the stock market” that is held in 401k and other retirement plans, which means the percentage owned by the workers.
    A large number of “those evil rich folks” are workers; or at least they are when the governments let them work. When the stock market has a built in, legally required, source of new funds each payday, you have to work really,really hard to drive it down. Like make employment illegal hard.

    1. That’s a big part of the problem, workers having their 401k’s or pension trusts invested in equities. The government is incentivized to nationalize the stock market, as they are now, during times of crisis because so much of the population depends on it for their retirement. This is a deep structural issue, but best exemplified by the Fed’s treatment and control scheme over interest rates, both between banks and now all the way to corporate bonds.

      We are on track to become the next Japan economically. If you see interest rates go negative, then best try to find another country to spend your earning years in.

      1. “That’s a big part of the problem, workers having their 401k’s or pension trusts invested in equities…”

        Yep, we all need to invest in teddy bears, right? Or Girl Scout Cookies?

        1. Everyone knows beanie babies are they sure bet.

      2. Curious as to why you don’t specify either how you invest or in which country you plan to spend it. My guess is you don’t have much to invest and you live in Kentucky.

        1. Oh, s/he claimed earlier to have gotten out of the market in January; we all know how market-timers kick butt, right?

  4. The Dow Jones Industrial Average is actually up over 1,500 points since mid-March when the coronavirus shutdowns began in earnest mass hysteria forced an overcorrection in the market.

    FTFY

  5. We have a U.S. Federal Reserve because, uh…let’s see now…because it’s…ummm…due to the fact…uh…it’s for…
    Shit!
    I forgot.
    Can anyone out there tell me why we have the Federal Reserve again?

    1. “Not just a good idea, it’s the Law!”

    2. Because one single NYC bank went ape-sh*t with loaning money; had a run-on its bank of which it couldn’t cover — Soooo… The Communists (i.e. Democrats) pitched the Federal Reserve Act to “protect” peoples bank savings.

      What’s funny is within the same decade launched the Great Depression. Why just let a single NYC bank fail…. We’ll put the federal government in charge of banking and end up DESTROYING the whole “federal” economy…

  6. With all the world industrialized and pumping products out like never before you might expect the need to print more money to reflect the increased global productivity.

    1. The global company I work for has 40% of its production assets curtailed due to low demand.

    2. “With all the world industrialized and pumping products out like never before you might expect the need to print more money to reflect the increased global productivity.”

      With all your bullshit posts, we expect steaming piles of shit like that.
      Pretty sure even a government-schooled 8th-grade kid would wonder what sort of crap that was intended to convey.

    3. Right… Because heaven-forbid mass-production yield a lower-price (since it takes less labor) and leave a strong USD for its working citizens. No, no; all of them must cost the same as the very first handmade item created. We must make yesterday’s earnings worthless in today’s price market.

      USD “reflection” of mass-production.
      1956 $5000 cost of a new tractor.
      2020 $65,000 cost of the exact same mass-produced new tractor.

      Well heck – they’re only over printing 1000%.

      1. So much wrong with this simplistic statement.
        Median US Family income in 1957: $3,641.72
        Median US Family income in 2020: $78,500
        So the tractor has gone from “more than a year to earn” to “less than a year to earn.”
        The 1956 420 tractor lacked power steering and had a two-cylinder engine that generated 20hp (28hp with the power take-off belt).
        In the same time, your $65K 6105 tractor has added hydraulic power, climate-controlled cab, 2-wheel or 4-wheel drive, 12 forward/12 reverse gears, and a 4.5l engine delivering 105 hp. Not to mention weather radio, am/fm/mp3 player, turbocharged engine, and a TON of stuff the 1956 farmer not only couldn’t have imagined, but would have (at first!) found no use for.

        So yeah, mass production delivers a lower-cost product with more capabilities. Or was that your point?

        1. Actually; the US Census shows:
          1957 median family $5K
          2020 median family $60K

          And your comparison is WAY off base…
          The JD420 was $2300 (NOT almost $4k); a little 2-cyl 26.15hp “Lawn Tractor”. Your comparing it to a JD6105 105hp Tractor. If you’re trying to compare apples to apples. You’d be better off using the 1972 JD4010 $5.5K (84hp) and JD6105 cab-less price $63.6K (89hp).

          The point being is, “yesterday’s earnings worthless in today’s price market”… I assure you Grandma/Grandpa who saved for years to earn $5K feel ripped-off by the insignificant USD’s buying power today.

          In 63-years the USD is only 1/12th (8%) today than what it was in 57. Or one could say the USD has lost 92% of it’s face value.

          Saving for retirement? The government will print that away….. Considering the JD4010 will sell today complete used and worn out for $5.5K (EXACT same as the original price). Grandma/Grandpa would’ve been just as well off buying up JD4010’s and running them to death just for the fun of it. The USD looses value just as fast as the usage of that tractor.

  7. The fed is solving a problem it made. If it hadn’t kept rates so low for the last 10 years it wouldn’t have had to bail out over leveraged companies. Anyone who thinks they haven’t set expectations of bailouts going forward is a fool. Powell’s fed has been fluffing this market for years.

  8. Maybe having the federal government stuff Trillions of useless USD’s into the monetary system is causing people to get rid of (not sit on a single dollar) and spend those dollars on something more concrete like stocks. Maybe they did learn something from the Obama Bailout and it’s following massive price inflation.

  9. ★My last month paycheck was for 1500 dollars… All i did was simple online work from comfort at home for 3-4 hours/day that I got from this agency I discovered over the internet and they paid me for it 95 bucks every hour on………See this site.Click Here For More Detail.

  10. This is enoug for me to Earn money at home on laptop ,Just work on laptop 4 to 6 hour par day and Make 50 Dollar Easily This is very nyc for me and my family….. Earning For work

  11. I’m not sure why people aren’t “woke” to the fact this entire BLM and Covid crisis is fabricated by corporations. In fact, most “crises” are a creation of corporations. When the Guardian newspaper a few years ago decided that climate change would be its priority coverage, I looked them up. Turns out, the Guardian falls under the Guardian Unlimited umbrella, a corporation with at least 10 subsidiaries, most of which hawk alternative energies, which have been proven ineffectual. Washington Post is owned by Jeff Bezos, CEO of Amazon, who just moved “second” HQ outside DC near the military industrial complex of Northern Virginia, one of the wealthiest areas in the western hemisphere. Now we have Covid, with Fauci continuing to push for lockdowns and masks, and he just happens to own ruling shares in companies that are profiting from the fear buying. Either the Left Wing is utterly clueless to what it’s pushing for, or they are part of the evil. But if blackish BLM activists really think they will do better under Corporate Communism than they have in the past when corps actually celebrated true laisez-faire capitalism, then I hope they are ready for real oppression and misery. The “man” is only going to get more powerful. Blacks will suffer the brunt since the Democrats have made sure they have almost zero generational wealth to fall back on.

  12. I Make Money At H0me.Let’s start work offered by Google!!Yes,this is definitely the most financially rewarding Job I’ve had . Last Monday I bought a great Lotus Elan after I been earning $9534 this-last/5 weeks and-a little over, $10k last month .EDs . I started this four months/ago and immediately started to bring home minimum $97 per/hrHeres what I do… Read More. 

  13. all worlds markets are down due to this pandemic and this is a very long term disease

  14. The people with their life’s savings in 401Ks are not big money people. And that’s a lot of people. The policies may or may not be sound or even sustainable, but all the beneficiaries are not fat cats.

    How goddam dumb is this article?

  15. In “BUT MUH PRIVATE PLATFORMS” news:

    The founder of Gab has been banned, by Visa,due to “hate speech”.

    Note, this ban is not JUST for Gab. The founder HIMSELF is banned. They banned his name. Address. Phone number. If he wanted to open a different business, he cannot process payments. If his WIFE wants to…well, she’s also out of luck. She couldn’t do so, either.

    Of course, Reason has no problems with large firms killing off the ability for people to make a living because they don’t like what they say (An example would be Laura Loomer, who cannot even order delivery food because she’s been banned from ALL online payment systems).

    Just go out and establish a new payment processing system, which is nigh impossible to do.

    Nonsense like this is why Reason-style libertarianism is a shitty concept.

    1. Great article, Mike. I appreciate your work, I am now making over $15k every month just by doing an easy j0b 0nline! I KNOW YOU NOW MAKIG MOR DOLLARS online from $28 k I,TS EASY ONLINE WORKING JOBS…
      go to this SITE for more INFO just copy and paste………….

  16. Well we the people have figured it all out, if capitalism works we get pollution, corruption, chronic crises and giant debt, if it doesnt work we get depression, unemployment and bankruptcy…an idiot can come up with a better system.

    1. Marx certainly tried and he was an amazing idiot. It’s just his system was worse in every way.

  17. Sorry Brian Doherty, but stock market investors are smarter than the Fed and you think they are. Where would you put your money now – bury it in your back yard? When the Fed injects trillions of dollars into the system, that money has to go somewhere. Making stock purchases now at least gives a person a chance of keeping up with the inflating of asset values. And yes, the Fed will always subsidize the banking industry, because they are family. Let the Fed try to control and direct the market – they can’t do it but they won’t stop pretending. In the meantime, smart investors will find ways to survive.

  18. Making Every month more than $13,000 by doing very simple Online job from home.i m doing this job in my part time i have earned and received $13572 last month .I am now a good Online earner and earns enough cash for my needs. Every person can get this Online job pop over here this site…,,

    This One⟶⟶⟶⟶ read more

Please to post comments