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Wed, 06/10/2020 – 15:56
In recent days there was speculation whether Powell would acknowledge frothy investor mentality as observed by the daily insanity on Robin Hood and other daytrading platforms, resulting from the massive surge in central bank liquidity resulting in a 40% spike in stocks, and whether it would prompt the Fed to at least concede that it is in the process of blowing another bubble. As a reminder, just yesterday SMBC Nikko analyst Masao Muraki said that “soaring risk asset prices (ie imbalances) have reached a point where the Fed may be forced into some kind of action.”
Alas, whereas this question did come up during the FOMC press conference, here is what Powell did say:
“We’re not focused on moving asset prices in a particular direction at all, it’s just we want markets to be working and partly as a result of what we’ve done, they are working.”
He also said that “we are not looking to achieve a particular level” for any asset price, instead, “we want the markets to be working” and that’s what Fed policy has been working toward as part of its effort to lift the economy.
His conclusion, however, was ominous: “we want investors to price in risk like markets should” and explained that the Fed would never hold back support for economy because it thinks asset prices are too high: “We would be prepared to tolerate or I should say to welcome very low readings on unemployment without worrying about inflation.”
This comment was in the response to the final question in the presser, and confirms that the Fed doesn’t care if they goose the stock market so long as they believe their actions are going to lead to progress on full employment and 2% inflation.
So there is the answer: the Fed will never voluntarily pop the asset bubble it has created by unleashing trillions in liquidity, loans and guarantees, not to mention purchasing corporate bonds, as that would somehow hurt job-seekers even though as we observed last week, companies that managed to load up on debt thanks to the Fed’s emergency actions used the proceeds not to retain workers – in fact they ended up firing millions – but to pay dividends.
And that’s fine, the only question is what happens once the current market euphoria finally ends, and judging by what’s going on in retail brokerages such as Robin Hood…
… it will be with a bang, not a whimper, and how will another generation of daytraders, who will suffer massive losses when the hyperinflation in asset prices finally comes crashing down, respond to the loss of so much of their net worth? And how long until we get American streets flooded with angry protesters demanding that “speculator lives matter” too?
Today was a historic day.
The Fed has fully embraced its capitulation to everything markets.
It implicitly encourages asset price bubbles while lying about its role in exacerbating wealth inequality.
It will keep printing with no end in sight & has no exit strategy.
— Sven Henrich (@NorthmanTrader) June 10, 2020