Who NOT to help
EDITOR'S NOTE
Well. No sooner had I shared Dave Zervos's great insight about how the government is carefully trying to separate the corporate wheat from the chaff than did the Fed come out this morning in support of the chaff, too.
We got two big pieces of news at 8:30 a.m: one, that another 6.6 million Americans filed a new claim for unemployment insurance last week, bringing the total to 16 million claims in just the past three weeks. And two, the Fed released details of its "Main Street" lending program along with several new moves to get a total of $2.3 trillion of financing into the economy. Hence the Dow opened up to a 300-point gain, paring earlier losses as it tries to extend its rebound this week.
If you're struggling to keep track of all of these programs, you're not alone, and the government wants us to feel overwhelmed--in a good way--by everything it's doing. Side note: notice how I'm now using the blanket term "the government" to capture both what the Treasury is doing and all the moves by the Fed? That's a very telling shift. As Peter Boockvar wrote this morning, "We can now consider 100% that the Fed and Treasury are one-and-the-same, and that monetary and fiscal policy are no longer separate."
Going back to the Fed's announcements, the Main Street program is meant to pick up where the small biz lending program that began last Friday left off--namely, by giving emergency loans to companies with more than 500, and up to 10,000, employees, via the banking system. This much we knew, conceptually, and the Fed filled in a lot of the details about how that will work today.
What jumped out to me--and everyone--though, is a different detail; that the Fed will now accept lower-quality collateral in its liquidity facilities, including from commercial real estate and collateralized loans, and will now start buying "high-yield" i.e. junk bond ETFs.
So much for the idea that the government is trying to separate and support the healthier parts of corporate America as opposed to heavily indebted, lower-quality sectors. It's not so much that I think this is a terrible idea as that it would have been better to just support everything at once from the start, to avoid confusing people about what the goals are.
There is a lot about this now that makes me go "hmmm." For one, to Boockvar's point, let's not pretend that taxpayers aren't ultimately on the hook for any losses that the Fed will incur from its support for these businesses. We most certainly are, via the Treasury's "indemnification."
The Fed's balance sheet is now highly leveraged, since it has limited (for now) Treasury capital available to cover its trillions in credit offered. Is the next step "to formally consolidate the U.S. sovereign balance sheet through legislation," as Pierre Ortlieb writes? Perhaps. Or Treasury will probably just provide more capital as needed, but the effect is the same.
Second, as John Briggs of NatWest told our Patti Domm this morning, now that the Fed is buying virtually every type of credit, "How do you get out of this? How do you price risk going forward, when they'll take anything?" No wonder junk bond ETFs like HYG are popping today (and equities too). The Fed is now your buyer of last resort.
See you at 1 p.m!
Kelly
P.S. The Exchange show is now available as a podcast! Click here to subscribe.
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