What set me off today was this article which highlighted the Federal Reserve’s Financial InStability Report. They are screaming DANGER between the lines! But covering it up with their language.
It is most important to realize the financial markets were buckling PRIOR to the first coronavirus case and the combined financial markets were at an all-time extreme thanks to constant, ever-larger interventions by the Federal Reserve since 2008. But they are now saying everything was hunky dory prior to the virus in public.
I’m pissed in so many ways. In the last financial crisis, I saw it coming but was not really upset until I saw how it was being dealt with because I knew it was not to help people. It was all about the banks and the financial elite.
The last financial crisis unfolded slowly over many months, this one is happening much faster. Let me walk you through excerpts of the Bloomberg article Fed Warns of Significant Hit to Asset Prices If Crisis Grows. My comments are in [brackets]:
“The Federal Reserve issued a stark warning Friday that stock and other asset prices could suffer significant declines should the coronavirus pandemic deepen, with the commercial real estate market being among the hardest-hit industries.
[The Fed knew commercial real estate was a bubble and did nothing but “monitor it”. There job is to do more than monitor unstable situations developing. ]
…The document highlighted the central bank’s race to intervene in markets and temporarily dial back regulations on financial firms in response to the Covid-19 crisis.
[regulations not enforced have to be “dailed back” in a crisis caused by regulations not being enforced]
“Asset prices remain vulnerable to significant price declines should the pandemic take an unexpected course, the economic fallout prove more adverse [it’s adverse as it gets] ,or financial system strains reemerge” the Fed said in the report.
[ Add: …or the Fed stops bailing out ALL of the financial markets]
Though regulations put in place after the 2008 financial crisis have helped make Wall Street more resilient [not the economy], vulnerabilities in the financial system still worked to amplify the economic shock from the virus, according to the report.
The review also found that “prices of commercial properties and farmland were highly elevated relative to their income streams on the eve of the pandemic, suggesting that their prices could fall notably.”
[prices of stocks and bonds were extreme “relative to their income streams” but they don’t mention this… ever]
Abrupt Shutdown
Markets settled down as the Fed flooded the financial system with liquidity [liquidity = 2 trillion in one month ], but Chairman Jerome Powell said in a speech this week that the economy still faces unprecedented risks if fiscal and monetary policy makers don’t continue to act.
In a bid to cushion the economy against the ravages of the coronavirus crisis, the Fed has cut short-term interest rates effectively to zero, bought about $2 trillion worth of Treasury and mortgage-backed securities, and announced plans for nine emergency lending programs, five of which are up and running. It’s also funneled hundreds of billions of dollars to foreign central banks via swap lines and temporary Treasury securities purchases.
[$1,200 checks cost $300 billion, but the Fed has doled out $2 trillion to save the financial elite, nothing for the economy]
‘Forceful’ Interventions
“Forceful early interventions have been effective in resolving liquidity stresses, but we will be monitoring closely for solvency stresses among highly leveraged business borrowers, which could increase the longer the Covid pandemic persists,” Governor Lael Brainard said in a Friday statement.
Some hedge funds have been “severely affected,” according to the report, adding that this has been contributing to market dislocations.
[Screw these hedge funds, they are the problem. The “highly leveraged hedge funds bought Treasuries FOR the Fed to absorb the budget deficit and keep interest rates below inflation. Citadel and others WORK for the Fed and hired former Fed Chairs and pay them millions. The first action of the Fed was to bailout the markets these hedge funds were getting slaughtered in – repo markets]
Defaults on leveraged loans ticked up in February and March, and are likely to continue to increase,” depending on the path of the economy, the report said.”
So how does financial instability affect your TSP funds?
Well first, STOP listening to the Buy & Hope crowd… PLEASE!
Use common sense and look around. Earnings and cash flow determine stock prices after the corporate buybacks go away. The Fed is screaming DANGER and yes they “temporarily” provided liquidity (printed money) to halt the financial sell off. But they can NOT stop the economic damage that matters in the long run.
Stop listening to co-workers and family who only project the past years returns forward. Or the buy-the-dip crowd. You know this does not make sense. You know future returns are not good when the stock market is at extreme high valuations and an economic depression is not only knocking at the door but has invaded the casino.
You do not need to join my service to get my advice. I just told you the truth.
Why? Because if you wait a few months to act, it may be too late. And I want you to have a large balance when you finally join us.
It is going to be interesting going forward. There will be a time to re-enter, but there will be a lot of head fakes too. Be careful with your retirement funds. Invest safe…
…Invest Smart,
Michael Bond
TSP & Vanguard Smart Investor serving serious and reluctant investors
Join for warnings and allocation recommendations or to just inform your own decisions.
Categories: Perspectives, TSP Charts