The Fed’s behavior in recent months has been something out of a horror movie. The low interest rate, expansionary monetary policies introduced by former Fed Chair Bernanke and continued by former Fed Chair Yellen have dramatically accelerated under current Fed Chair Powell. Bernanke dealt in $Billions, Chairman Powell prefers $Trillions.
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“Print Baby Print” ought to be the Fed’s mantra. M2 has expanded consistently over time since moving off of the gold standard. The Fed’s expansionary monetary policy of course correlates to the Fed’s growing balance sheet and low interest rates. This three piece combination acts as a governor on GDP growth and is an implicit tax on American taxpayers as the U.S. Dollar’s purchasing power decreases with each dilutive action taken by the Fed. At the first whiff of COVID-19 the Fed launched into an expansionary monetary policy the likes of which history has never seen. M2 grew Chart 1: 18.2% in a matter of months to where it stands at $18.1 Trillion.
The Fed’s assets sit at $7.2 Trillion as of June 3rd, up from approximately $4 Trillion at year-end 2019. The Fed has aggressively flooded the credit markets with liquidity in an effort to combat the risk of a COVID-driven recession. Of course, the opposite effect has been true. The Fed’s loose monetary policy has: Chart 2: 1.) created moral hazard among corporate and main street America; 2.) created zombie companies that otherwise would have been purged from the economy; 3.) locked-up labor by tethering employees to zombie companies; 4.) delayed and lengthened the duration of the natural economic healing process (bankruptcies and the like); 5.) created asset bubbles particularly in the credit and equity markets.
The Fed has maintained low interest rates since 2001 with a small bump to 5% in 2007. The Fed’s low interest rate policy coincides with the equity market bubble of 1999-2000, the housing bubble of 2004-2008, the corporate debt bubble of the past 10 years and the current equity market bubble. Today’s equity bubble reflects a complete decoupling of the equity market from the underlying U.S. economy. Chart 3:
The Fed’s low interest rate policy has fostered the corporate debt bubble that has its roots in the 2008-2010 financial recession. It is this debt bubble ($6.6 Trillion as of March 2020 and likely sits around $10 Trillion today), that fueled the stock buyback programs that many public companies ran over the past decade. Technology company buybacks are an abomination in our view, stealing capital from Product Development/ Research & Development and strategic acquisitions. Chart 4:
Today’s home prices exceed those of the 2004-2008 housing bubble. We expect the housing bubble to pop as a weak U.S. economy is likely to persist for the remainder of 2020 and throughout 2021 and into 2022 in our view. Chart 5:
The current NASDAQ bubble represents the worst risk reward of any point in history. The underlying economy of 1999 was far healthier than today’s economy which is in worse shape than the bottom of the 2008-2010 financial downturn. We expect this bubble to be short-lived. Chart 6:
Long gone are the days of double-digit percentage real GDP growth. Double-digit GDP growth is nothing more than a dream in a world where the money supply expands in perpetuity, where debt balances grow faster than GDP and where artificially low interest rates (necessarily low to service debt), make it impossible for fixed income investors to consistently find meaningful yield. Equity bubbles are likely to persist for those than can afford to participate. Chart 7:
“I’m Forever Blowing Bubbles”