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What to know about Fed dis-ease?
What the Fed is going on here?
The US Government needs money to stay solvent. They have a ton of debt in the form of Treasuries. So, in addition to just printing more money, they can issue Treasury Bonds.
But who wants to buy them when your return for 10 years is going to be 0.68% per year?! The friendly Fed (which does announce these things). The Fed “balance sheet” rises, as it is full of purchased US Treasury Bonds.
Jerome Powell: the best customer
The Treasury issues bonds, and the Fed, chaired by Jerome Powell, is their best customer. Sometimes for years. Imagine if you had a clothing business and your parents told you they would buy most of what you produced. Pretty easy to keep earning revenue, eh?
That’s essentially what is going on here. It can continue longer than many professional investors think it should (myself included).
This chart shows it. Here’s what it says:
Fed buys massive amounts of T-Bonds (that T is for Trillion). That pushes interest rates down, since the market can relax because the government can safely issue more debt while it tries hopelessly to catch up from the massive debt it already has (many recent college grads will identify with this).
This, in turn, pumps up the stock market. A bubble is born!
But as investors, we can scoff at it and invest to “how we think things should be” or be realists. The latter involves looking at a diverse set of factors, being ready for anything, prioritizing avoidance of major loss (however you define that) and then making investment decisions based on whatever process you believe in.
But be sure to account for oddities like this Treasury sells/Fed buys thing. It is what creates bubbles, then busts them.
Related: The Nasdaq Is Partying Like It’s 1999. What To Do About It.