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The Mainstream Suddenly Spots the Market Bubbles

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The Federal Reserve’s monetary Hail Mary is blowing up bubbles throughout the economy. Peter Schiff has been talking about this for months, but the phenomenon has been mostly ignored by the financial media. The Fed’s monetary stimulus is almost universally spun as prudent and necessary. But last week, the mainstream media suddenly spotted the bubbles. Reuters declared, “Federal Reserve’s $3 trillion virus rescue inflates market bubbles.”

Even before the pandemic, Peter was talking about how Fed’s monetary policy had blown up a big, fat, ugly bubble. Back in January during an interview on RT, Peter said we were in the midst of an inflation-driven bubble.

It should be coming down. The only thing really supporting it is the Federal Reserve and all the money they’re printing with their stealth QE program, although it’s not stealth really. Everybody knows they’re doing it. They just refuse to admit it. But there’re no earnings behind this. There’s no strong economy behind this. This is an inflation-driven bubble, but the air should be coming out.”

The coronavirus pandemic put the monetary policy into hyperdrive. The Fed quickly cut rates to zero and launched QE infinity as the stock market crashed in March. And the central bank has gone beyond the standard quantitative easing strategy of buying government bonds and mortgage-backed securities, dipping its hand into the corporate bond market.

As Reuters put it, this monetary stimulus is “fueling excesses” across US capital markets.

The US central bank has pledged unlimited financial asset purchases to sustain market liquidity, increasing its balance sheet from $4.2 trillion in February to $7 trillion today. While the vast majority of these purchases have been limited to U.S. Treasuries and mortgage-backed securities, the Fed’s pledge to bolster the corporate bond market has been enough to spur a frenzy among investors for bonds and stocks.”

As one analyst told Reuters, coronavirus is now inversely related to the markets.

The worse that COVID-19 gets, the better the markets do because the Fed will bring in stimulus. That is what has been driving markets.”

Stocks have soared even as the economy continues to struggle under the impact of government shutdowns and millions of Americans out of work. Since the bottom in late March, both the Dow Jones and S&P 500 have risen more than 40%. The Nasdaq has fared even better, soaring some 60%. That index is actually positive on the year. According to Reuters, “The S&P 500’s forward price-to-earnings ratio is currently 21.5, a level last seen during the dot-com boom 20 years ago.”

The economic fundamentals don’t support these stock valuations. This is all a product of Fed monetary stimulus.

The Fed’s money printing and cash injections into the economy have also fueled an IPO frenzy. US equity capital markets raised a record $184 billion in Q2.  According to Reuters, over $8.9 billion worth of IPOs priced above their target range during the quarter. That’s the highest number since Q3 2014.

Again – the economic fundamentals don’t support this. As one analyst told Reuters, it simply doesn’t make sense.

Why anyone would buy Nissans at Bentley prices is beyond me, but that’s what happens generally with any sexy IPO. Sure the Nissan has four wheels and it’s fine transportation, but is it worth a Bentley valuation?”

Some people may look at increasing market valuations as a positive, but on the other side of the coin, the Fed has fueled a massive debt binge.

When the Fed began buying corporate bonds, we said it would create artificial demand for corporate debt by boosting bond prices higher than they otherwise would be and holding interest rates down. We said ostensibly, the Fed’s tinkering would make it easier for corporations to borrow money.

Indeed, according to Reuters, the second quarter was the busiest ever for corporate debt issuance.

Some $1.2 trillion of investment-grade paper was sold in the first half of the year, the highest issuance volume recorded by the Securities Industry and Financial Markets Association. Even though the Fed refrained from buying most junk-rated bonds, issuance was at $200 billion through June, more than double last year’s rate.”

Corporations were leveraged to the hilt before the pandemic. So much so that the Federal Reserve issued warnings about the increasing levels of corporate indebtedness late last year.

Borrowing by businesses is historically high relative to gross domestic product (GDP), with the most rapid increases in debt concentrated among the riskiest firms amid weak credit standards.”

The Fed’s response to COVID-19 has only exacerbated the problem.

In a nutshell, the Fed conjured up trillions of dollars out of thin air and blew up a stock market bubble, an IPO bubble and a corporate debt bubble. A lot of people seem to think this is good news. They look at their stock market portfolio and assume everything is great. But there is one big problem with bubbles — they pop.


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