The Fed is actually considering buying equities

[TheMotorcycleBoy]

https://www.cnbc.com/2020/04/06/yellen- ... ng-it.html

Talk about easing! It seems a bit surreal to me. Not exactly a Free Market, with the States' hands firmly gripping the steering wheel.

[Bubblesofearth]

https://www.cnbc.com/2020/04/06/yellen-says-the-fed-doesnt-need-to-buy-equities-now-but-congress-should-reconsider-allowing-it.html

Talk about easing! It seems a bit surreal to me. Not exactly a Free Market, with the States' hands firmly gripping the steering wheel.

Not really sure I see the point. Any such buying doesn't change the fundamental value or viability of the company. OK, a short-term uptick in share price but that would presumably be sold into and therefore be short-lived?

Or am I missing something?

BoE

[tikunetih]

They announced they were to buy corporate bonds (new issues and on the secondary market) a couple of weeks ago:

https://www.federalreserve.gov/monetarypolicy/smccf.htm
https://www.federalreserve.gov/monetarypolicy/pmccf.htm


If they bought equities it'd just be a further step along the path already taken, but it's just as likely sending up smoke signals to help put a floor in.

Recall, the Bank of Japan has normalized all this stuff previously, and via its equity purchases is already the largest shareholder in various top-flight Japanese listed companies.

What I wrote on that other "Inflation" thread:

The CBs may not just buy their own Govt's debt, they may buy private sector risk assets (corporate bonds, REITs, equities) as well in order to drive up their price and drive down yields, eg.
https://www.japantimes.co.jp/news/2020/ ... y-meeting/

For investors, from a medium/long term perspective, it's much easier to be aligned with rather than lean against central bank policy. "Don't fight the Fed" etc.

[ursaminortaur]

https://www.cnbc.com/2020/04/06/yellen-says-the-fed-doesnt-need-to-buy-equities-now-but-congress-should-reconsider-allowing-it.html

Talk about easing! It seems a bit surreal to me. Not exactly a Free Market, with the States' hands firmly gripping the steering wheel.

Not really sure I see the point. Any such buying doesn't change the fundamental value or viability of the company. OK, a short-term uptick in share price but that would presumably be sold into and therefore be short-lived?

Or am I missing something?

BoE

Maybe they mean buying new shares directly from the company rather than on the secondary market ie actually buying a stake in the company with new money in a similar way to the UK government/BoE buying bank shares during the financial crisis ?

Edit: Though since they talk in the article about buying ETFs which include shares that doesn't actually seem to be what they are talking about at least at the moment. So yes a bit of a mystery as to why they would really want to do this.

[TheMotorcycleBoy]

https://www.cnbc.com/2020/04/06/yellen-says-the-fed-doesnt-need-to-buy-equities-now-but-congress-should-reconsider-allowing-it.html

Talk about easing! It seems a bit surreal to me. Not exactly a Free Market, with the States' hands firmly gripping the steering wheel.

Not really sure I see the point. Any such buying doesn't change the fundamental value or viability of the company. OK, a short-term uptick in share price but that would presumably be sold into and therefore be short-lived?

Or am I missing something?

BoE

Maybe they mean buying new shares directly from the company rather than on the secondary market ie actually buying a stake in the company with new money in a similar way to the UK government/BoE buying bank shares during the financial crisis ?

Edit: Though since they talk in the article about buying ETFs which include shares that doesn't actually seem to be what they are talking about at least at the moment. So yes a bit of a mystery as to why they would really want to do this.

My guess is that their rationale is to protect their citizen's 401ks.

These are the Stateside version of ISAs, I think. Lots of Yanks use them as their pension ultimately.

With lots of redundancies ppl may be cutting their losses and flogging their 401ks. I guess the Govt. Would sooner that they didn't.

My issue is this means the US market had the potential to be even pricier.

Matt

[dealtn]

My issue is this means the US market had the potential to be even pricier.

Yes, government intervention designed to be "good" often has that side effect, and reversing it seldom proves easy.

Governments "must" protect the housing market, and have "help to buy schemes" but house prices are too high for many, and we can't let the market adjust which will hurt some, so we need to ensure their are new first time buyer schemes, and new developments must have, say 25% "affordable" housing...

Interest rates "must" be kept artificially low even if asset prices, which most people don't own, and can no longer afford are now overpriced...

Pension schemes "must" buy gilts, even though they are trading at negative real yields and guarantee real losses, because they "liability match", even if it makes the companies themselves riskier as that profit is no longer available to invest in the business, and as a result employees have less job security...

The cure might be worse than the medicine we don't know.

What is for certain is that the costs and problems are long term ones, the solutions short term. Politicians at a minimum want to look good now, not when they are dead and judged by the history books. At a minimum they are working to the electoral cycle, not the long term, and in practice much shorter than that I would think.

[dealtn]

The cure might be worse than the medicine we don't know.

Had a mental moment. The medicine might be worse than the disease might be a better description.

[TheMotorcycleBoy]

My issue is this means the US market had the potential to be even pricier.

Apologies, I meant,

"My issue is this means the US market now has the potential to be even pricier"

[odysseus2000]

My issue is this means the US market had the potential to be even pricier.

Apologies, I meant,

"My issue is this means the US market now has the potential to be even pricier"

We are heading into at best a severe recession, some say a depression, and you are worried that US markets have the potential to be pricier. As of now they have the potential to get a whole lot cheaper.

Regards,

[colin]

My issue is this means the US market had the potential to be even pricier.

Apologies, I meant,

"My issue is this means the US market now has the potential to be even pricier"

We are heading into at best a severe recession, some say a depression, and you are worried that US markets have the potential to be pricier. As of now they have the potential to get a whole lot cheaper.

Regards,

Well they got 7% pricier today!
Was listening to Rupert Harrison on PM radio 4, used to work with George Osborne @ The Treasury now with Blackrock seemed convinced that the UK government would have to write off loans to smaller companies and do a debt for equity swap with larger companies otherwise companies would be too indebted for the economy to function, maybe something similar was what Trump was talking about.

[odysseus2000]

Colin

Well they got 7% pricier today!
Was listening to Rupert Harrison on PM radio 4, used to work with George Osborne @ The Treasury now with Blackrock seemed convinced that the UK government would have to write off loans to smaller companies and do a debt for equity swap with larger companies otherwise companies would be too indebted for the economy to function, maybe something similar was what Trump was talking about.

Yes, they did, but the are still down over 22% from this years high.

It is of course possible that the bottom is in and it may be that the government finds a way to support business and takes no ownership as a result and current equity owners do well.

Alternatively the government takes some owner ship and dilutes existing equity holders and they do badly.

In investing I am always far more wary of the downside than I am of the upside as the latter keep coming around but if I have lost all my capital such opportunities are not accessible to me.

Regards,

[TheMotorcycleBoy]

Apologies, I meant,

"My issue is this means the US market now has the potential to be even pricier"

We are heading into at best a severe recession, some say a depression, and you are worried that US markets have the potential to be pricier. As of now they have the potential to get a whole lot cheaper.

Regards,

Well they got 7% pricier today!

I believe that Mondays price move occurred due to report of death rates in Europe recently flattening. US futures were up (before opening according to usnews.com) upon the general belief that a similar phenomenon would occur Stateside.

Yellen's idea won't happen until/unless Congress approve. But that probably egged ppl on.

My view is that the US markets are raring to Bull again. And that ppl there will disregard a couple of Quarters of lost earnings.

Was listening to Rupert Harrison on PM radio 4, used to work with George Osborne @ The Treasury now with Blackrock seemed convinced that the UK government would have to write off loans to smaller companies and do a debt for equity swap with larger companies otherwise companies would be
too indebted for the economy to function, maybe something similar was what Trump was talking about.

Sounds likely doesn't it? And prudent too IMO.

[TheMotorcycleBoy]

The cure might be worse than the medicine we don't know.

Had a mental moment. The medicine might be worse than the disease might be a better description.

Presumably the idea of the Fed purchasing US equities in a meaningful way presents a dilemma for them. On the one hand it strengthen Yanks' retirement savings, but on the other doesn't it don't encourage the rest of the World to hold dollar assets, which pushes up the dollar, and hence makes their export markets even trickier?

[odysseus2000]

The cure might be worse than the medicine we don't know.

Had a mental moment. The medicine might be worse than the disease might be a better description.

Presumably the idea of the Fed purchasing US equities in a meaningful way presents a dilemma for them. On the one hand it strengthen Yanks' retirement savings, but on the other doesn't it don't encourage the rest of the World to hold dollar assets, which pushes up the dollar, and hence makes their export markets even trickier?

I am beginning to think I am in a parallel universe.

In my universe many business are bankrupt: airlines, hotels, oils, cinemas, restaurants,...and with each a supply chain and with this comes cash issues for pensions, banks, insurance etc. A big wedge of the economy here and in most (all?) countries not commercially viable.

This is similar to what happened in the Great Depression when many went from good incomes and well paying jobs to a situation where there were no jobs and the unemployment rate was around 25%. If you are unlucky enough to be one of the people effected you may have a nice house, car etc all supported by borrowings that you could easily service until this it and you lose your job and have to go on benefits which are much less than your salary and so you and many others have to sell their homes and this crashes the property market which further hurts the banks and we enter very bad economic times..

Maybe the politicians do something that keeps all these business alive and the rest of the taxpayers say fine, no problem it is a necessary thing and we don't want the government taking equity stakes, or maybe folk say if the government saves them then they should hold equity stakes, essentially part nationalisation.

I have no idea what happens here, it is all with out president and maybe I have this all wrong.

If I am wrong why am I wrong?

Regards,

[TheMotorcycleBoy]

@ody

Well in my OP I did say it seemed surreal to me. I've only been in private investing for 2 years, so my ideas/attempted explanations probably don't hold that much weight, so don't ask me if you're right or wrong!

Perhaps another possibility for the Fed considering buying equity, is in addition to it fortifying 401Ks, it will also push up asset prices, which could encourage big Stateside money holders to invest more into their economy instead of stocks.

[odysseus2000]

@ody

Well in my OP I did say it seemed surreal to me. I've only been in private investing for 2 years, so my ideas/attempted explanations probably don't hold that much weight, so don't ask me if you're right or wrong!

Perhaps another possibility for the Fed considering buying equity, is in addition to it fortifying 401Ks, it will also push up asset prices, which could encourage big Stateside money holders to invest more into their economy instead of stocks.

For investors to invest there has to be a good chance of a good return. If we are entering a recession or worse it doesn't seem to me that the odds on a good return on any investment are high.

Regards,

[dealtn]

@ody

Well in my OP I did say it seemed surreal to me. I've only been in private investing for 2 years, so my ideas/attempted explanations probably don't hold that much weight, so don't ask me if you're right or wrong!

Perhaps another possibility for the Fed considering buying equity, is in addition to it fortifying 401Ks, it will also push up asset prices, which could encourage big Stateside money holders to invest more into their economy instead of stocks.

For investors to invest there has to be a good chance of a good return. If we are entering a recession or worse it doesn't seem to me that the odds on a good return on any investment are high.

Regards,

Some of the best times to invest have been in recessions, what makes you think the odds aren't good?

[odysseus2000]

@ody

Well in my OP I did say it seemed surreal to me. I've only been in private investing for 2 years, so my ideas/attempted explanations probably don't hold that much weight, so don't ask me if you're right or wrong!

Perhaps another possibility for the Fed considering buying equity, is in addition to it fortifying 401Ks, it will also push up asset prices, which could encourage big Stateside money holders to invest more into their economy instead of stocks.

For investors to invest there has to be a good chance of a good return. If we are entering a recession or worse it doesn't seem to me that the odds on a good return on any investment are high.

Regards,

Some of the best times to invest have been in recessions, what makes you think the odds aren't good?

Unknown time frames, unknown numbers of people losing jobs, unknown level of government support for folk forced out of job, collapsing of service industries supporting all the bigger business that have no turnover, banks under pressure from none performing loans, housing price crash etc...

We are currently in an unknown situation. Hopefully it resolves positively but for now it is hard for me to see any reason to risk cash when there could be much more serious trouble to come unless governments were to say they would guarantee a return and as far as I can tell this hasn't happened.

Regards,

[dealtn]

For investors to invest there has to be a good chance of a good return. If we are entering a recession or worse it doesn't seem to me that the odds on a good return on any investment are high.

Regards,

Some of the best times to invest have been in recessions, what makes you think the odds aren't good?

Unknown time frames, unknown numbers of people losing jobs, unknown level of government support for folk forced out of job, collapsing of service industries supporting all the bigger business that have no turnover, banks under pressure from none performing loans, housing price crash etc...

We are currently in an unknown situation. Hopefully it resolves positively but for now it is hard for me to see any reason to risk cash when there could be much more serious trouble to come unless governments were to say they would guarantee a return and as far as I can tell this hasn't happened.

Regards,

So do you think the market will stay low for you once all those "unknowns" become "knowns"?

[tikunetih]

The market is not the economy.

If you approached investing as if they were one and the same and moved in lockstep you'd be buying stocks in Jan 2000 and selling them at the end of 2002, only to repurchase in 2005 as global real estate boomed, just prior to the San Diego market peak, then selling again in late 2008 as the economic data became dire.

Some people do behave that way and get horrible returns, but hopefully no one around these parts is quite that bad!

We're all susceptible to behaving like that to some extent though because what we're trying to do (anticipate what others are doing, even as they themselves are anticipating others, who are anticipating others etc) is so complex and difficult.

Maybe a good time to (re-)read Howard Marks memo on 2nd-level (2nd-order) thinking:

"Re: It's not Easy"
https://www.oaktreecapital.com/docs/def ... t-easy.pdf

• First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”
  
  
• First-level thinking says, “The outlook calls for low growth and rising inflation. Let’s dump our stocks.” Second-level thinking says, “The outlook stinks, but everyone else is selling in panic. Buy!”
  
  
• First-level thinking says, “I think the company’s earnings will fall; sell.” Second-level thinking says, “I think the company’s earnings will fall far less than people expect, and the pleasant surprise will lift the stock; buy.”

If you cannot on average, over time, be a better 2nd-level thinker than other market participants, then you shouldn't be attempting it as it will negatively impact returns: in that case, either invest passively, or if you posses no tolerance for risk or have insufficient time horizons, then you probably shouldn't invest at all.

Surely this cannot be news to anyone here.