Something to hate for everyone

Mutual fund manager and permabear John Hussman is now formally petitioning the financial services committees within the Senate and the House to stop the Federal Reserve from buying corporate bonds as part of the CARES Act. Apparently, the petition has been collecting signatures for a couple of weeks now, but I first came across it today.

The Fed is working hand in glove with the Treasury on the financial response to the pandemic and related economic plunge, and part of what they said they’d do is buy the bonds of “fallen angels” – formerly healthy corporate issuers whose bonds have fallen on hard times. Hussman points out that the Fed is creating money outside the authority of Congress to do this and then it’s announcing the fact that it may even leverage this money while using these bonds as their own collateral.

John’s been betting on economic and stock market collapses forever. We finally got the 30% bear market he’s been prophesying for about ten years and 20,000 Dow points. Unfortunately, it only lasted like two weeks and the market immediately rebounded. That’s got to be frustrating, waiting all that time to be right and then being right for a different reason and then it comes and goes in a blink anyway…

In reading the petition, I actually think he makes some good points. I don’t see how buying the bonds of corporate issuers – bonds that are already trading – from other investors is a means toward ensuring full employment or stable prices in the real economy, the Fed’s “dual mandate.” If you tell me the Fed is directly funding systemically vital debt issuers (utilities during an energy crisis, banks during a financial panic), I might not like it, but it would at least appear to be coherent. I understand that the argument for this buying of bonds on the secondary market is “confidence,” but that seems a bit too magical and mystical to me.

One of the interesting things about the situation we’re in is that there’s something to hate in here for everyone: Conservatives distrust central authorities and are suspicious of institutions with the power to create and invest money. They also pretend to dislike a growing Fed balance sheet and larger debts and deficits – despite the fact this is the only shot their President has of getting reelected. Liberals don’t like programs that look like they’re adding to economic inequality and fueling the widening wealth gap, which is exactly what the Fed is doing (even if not deliberately). They also don’t want to see the President skate through this mess without consequences, especially if it’s “Fat Cats on Wall Street” that bail his administration out.

Should the Fed continue its program? Is it “illegal” as the petition’s author states? If not illegal, is it immoral in some way? Does it contribute to an excessively speculative environment? Does it “crowd out” private investment? Does it lead to lower potential economic growth?

It doesn’t matter. If you are an investor, then part of the investment process involves understanding (and accepting) that the Fed is one of the chess pieces on the board. And it’s like a Queen, with nearly unlimited powers. When the Fed tells you they are not going to allow the whole system to collapse, you should probably accept that and factor it into how you’re allocating. And then when they actually do “whatever it takes“, you shouldn’t act shocked or feel betrayed. They told you they were going to save the markets. They’ve done it before. They will do it again.

Anyway, read the Hussman petition here. He’s not wrong about everything he’s saying, even if he’s been wrong about market outcomes for a long time.

Oh, btw, the dollars that accrue in your investment accounts – they aren’t worth more because they were earned while the central banks were acting in alignment with your political or societal beliefs. Those dollars are worth the same amount regardless of your feelings, no more, no less.