The Fed’s Wild Ride

And why are they buying ETFs?

I was surprised to see that the Fed actually bought $300 million worth of ETFs. I knew they had planned to launch this buy program, the ultimate YOLO, but I actually did not think they were going to do it. As Hank Paulson once said at the depths of the Financial Crisis, “If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out.”

Looks like the Fed really wants everyone to know:

In this post, I want to share my thoughts on why I think the Fed is buying ETFs, and at the end, I’ll tell you my thoughts on the situation.

This Isn’t Your Grandpappy’s Market
Imagine how salty investors from 1929 would feel if they could see the Fed buying ETFs today. I don’t blame them. An investor in 1929 is no different than you and I except this time, the chairs at the Fed have a bullzooka and they’re launching rockets filled with cash. We entered a new paradigm of Central Bank intervention over the last 10 years and this is just the reality. At this point, we should expect nothing less.

It’s Not Worth Not Trying
The thinking might simply be that this is an experiment worth taking. Maybe it’s the perfect time to try something this crazy, even if that only means learning through experimentation. Perhaps the perfect time to try something this bold is during a downturn that is arguably no one’s fault. I know I will be watching markets to see how they respond.

About Those Pension Funds
The pension situation is not great. Some states have huge unfunded pensions and hefty promises to a lot of people. These pensions largely rely on public markets for an annual return to help cover the gaps. The Fed might feel that it’s necessary to do whatever it takes to support this corner of the system. A financial market crisis can turn into a pension crisis really fast in this enviroment.

Buy All The Bags
Markets have never been more popular. I lean on the side of that being rather concerning. Davey Day Trader is swinging millions around like nothing matters. Markets are going viral like a Buzzfeed listicle about cats wearing top hats. With so many people invested at this moment, markets have become that much more systemic. Injecting some cash into a few ETFs might actually be a bailout for everyone who has chips on the table. If you lost money buying MoviePass or some other sketchy stock all these years, here’s your chance to get it back.

The Battle of Central Banks
If every other Central Bank is going all out to save their economy, then not doing the same is potentially even more perilous. Letting your economy fall while everyone is doing whatever it takes is how you can fall behind especially fast. In a strange way, it’s choosing ideology over national security. I personally believe that most major Central Banks are in a war of attrition. They are all trying to wear each other down with various forms of easing and stimulus. The irony is that while they are all trying to wear each other down, they are all also cancelling out their desired intentions. If everyone is cutting interest rates, no one is cutting interest rates.

It’s An Election Year
There’s an election coming up and the Federal Reserve probably has a ton of pressure to do whatever is necessary to get cash into the hands of markets. The goal probably being to have an election where things are relatively calm. In this era, calm markets mean calm politics. That’s what’s needed to have a clean election as important as this.

My Musings on the Bullzooka

When I was in college, I tried to buy the dip in Washington Mutual. I lost all of my burrito money after they went bankrupt. That sucked, but I learned from it and moved on. The Fed did not bail out my bad stock pick. I also don’t think they should have. There would have been no learning process, no growth, and no drive to push onward. If the Fed is buying public equities, and if we rebound massively, I personally believe it will drastically change the definition of risk. It’s almost impossible to lose.

I am believer in free enterprise and the democratic process. I don’t think the Fed buying ETFs helps either of those things. In my view, this is just more of the same since the Financial Crisis. It is preferential treatment to the investor class with very little explanation or analysis ever shown to the general public. Still, to this day, no one has ever shown me stats that these type of actions actually help anyone except a few small circles. Not only is the Fed redefining the meaning of risk, they are also giving benefits to one group of people far more than other groups. Each aggressive measure by the Fed, in my view, tilts the scale of the economy’s equilibrium. No one gets more socialistic support than financial markets.

As of this writing, the S&P 500 is down about 15% year-to-date. This is not out of the ordinary. Drawdowns like that happen a lot. The Nasdaq is actually GREEN on the year. That’s also not out of the ordinary. Why start buying ETFs now? Save it for when things get really bad.

I have no idea what’s next for markets and, as I wrote on my blog earlier in the month, I am not interested in trying. They could go up down or sideways, but right now it’s the last thing on my mind. I wrote this post to talk about the Fed and what I think. Including why they would do it and why I still disagree with it. So if you find yourself chatting about the Fed, its wild actions and its wild ride, I hope this post helps inspire a good debate.

Thanks for reading and leave some comments below if you’re interested in sharing your thoughts on all of this.

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