Pro Perspectives 3/23/20

March 23, 2020

As we await a massive relief/stimulus package from Congress, whatever holes were left in the Fed’s response were filled this morning. 

They promised to buy treasuries with no limits on the amount.  They also announced they would be buying corporate bonds AND ETFs that are tied to the performance of corporate bonds. 

As we discussed last week, in the Fed’s massive Sunday night action, where they slashed rates to zero and started a big bond buying program, they didn’t address the troubled commercial paper and corporate bond market, which started to bite them early last week.  Now they’ve backstopped each. 
The good news, as of Friday, it began to look as if the Fed was getting the Treasury market under control.  A 10-year government bond yield rising toward 1.30% on Thursday, after the Fed slashed the Fed Funds rate to zero, was a scary message that the most important market in the world had no buyers.  Today, the 10-year traded as low at 71 basis points.  So, again, it looks like the Fed now has this under control.  That’s a big deal (very good news for the function of financial markets and the economy). 

Something to note on the new moves made by the Fed this morning: With the addition of bond ETFs, the Fed is now explicitly in the stock market.

Japan started buying ETFs back in 2013, as part of their QE program.  They went on to triple the initial amount, and then double that amount.  The Nikkei did this along the way …

The BOJ now owns 80% of the Japanese ETF market, and close to half of the Japanese government bond market. 

Unlike Japan, the Fed doesn’t have the authority to buy ETFs that track any asset class (yet).  But if you want to follow the Fed money into the bond ETF market.  The LQD is the highest volume corporate bond ETF.  It was up 7.5% today. 

So, this is what “whatever it takes” looks like when the U.S. economy comes to a halt.  They backstop everything.

Combine this, with a $2 trillion fiscal package — that comes with cash drops to the American public and small businesses, and will likely come with the U.S government supplying cash to major corporations (namely airlines) for exchange for equity stakes — and you have: 1) the government explicitly involved in propping up the stock market, and 2) a brew for massive inflation when we come out on the other side of the virus. 

As we’ve discussed, historical turning points for stocks tend to come with some form of intervention.  With the approval by Congress of this relief/stimulus package, this will be the motherload of all interventions. 

With global governments and central banks following the “print and backstop everything/everyone policies” we have explicit devaluations of currencies.  That is fuel for gold. 

On that note, here’s an excerpt from my note last week:  “As the world’s central banks are printing money and governments are rolling out massive deficit spending programs, gold should be moving higher like a rocketship.  Yet it’s down 13% since last Monday.  Let’s keep in mind that the Fed has the printing press, and won’t lose the battle in the bond market.  In the very near future, the Fed will probably have the 10-year yield where they want it (maybe at 30-40 basis points), and be in complete control of the yield curve.   It may take that observation to turn around the price of gold.  When it does, we could see gold much, much higher (maybe $2,500ish).” 


We are indeed seeing the Fed gain control of the Treasury market.  And gold has indeed started to move.  It was up over 5% today, and I suspect it’s just getting started.  

If you have any comments or feedback, I’d love to hear from you:  You can email me at