Next massive crash, I think the Fed will buy...

It's going to happen, you know it is

I listen to 10 or 15 financial podcast episodes a week. If nothing else this gives me a good idea of what people in macro-sphere are thinking about. One theme that’s becoming increasingly prevalent is that we’ve reached the end of the fairy tale. The central banks are out of bullets and the money-printing bubble has finally burst. Cathie Wood please shut the lights off when you leave.

While I understand the rational reasons for claiming that the party is over, I tend to believe that we’ve got one last hoorah left. When I lived in New York there was a popular club called 1 Oak. A small hole in the wall that nonetheless catered to the wealthy and famous. At 4 am 1 Oak would shut the front doors and nobody could get in. Party over? Not so much… If you were already inside you could party for another hour. I assume, having never seen it firsthand, that this last hour was the height of debauchery and sinful decadence. The players ball for socialites, hedge fund managers and athletes du jour.

To draw a comparison between 1 Oak and the state of the economy, I feel like we’re at 4 am, we’ve got one last blow out left before it all shuts down at 5. Here’s why.

2000 - Fed lowers interest rates

2008 - Fed lowers interest rates and does QE

2020 - Fed lowers interest rates, does QE infinity and buys corporate bonds*

2023 - Fed lowers interest rates, does QE infinity, buys corporate bonds and buys…

*I understand that they didn’t actually buy all that many bonds. Nonetheless, buy bonds they did

The Fed still has one bullet left, a hefty little number too. I think you can guess where I’m going with this. The way I see it, for the previous two decades our glorious government leaders, and those precocious scamps at the Federal reserve, have proven that they’ll do anything to stop the short term pain and bail out the markets.

When push came to shove, the Fed bought corporate bonds and astonished the markets. Never mind mind that it wasn’t in their mandate and may have actually been illegal. Where there’s a will there’s a way, so is it really so difficult to imagine that they won’t buy stocks next time?

My hypothesis is the following: the party will not end until the Fed cannot stop it from ending. I don’t believe we’ve reached that point. I believe that the Fed’s last great swing for the fence will find them dipping their toes in the equity markets, and their gambit will work. Once. The second part of my thesis is that sometime in the next few years we’re going to get the real crash, the Fed won’t be able to stop the bleeding and it’s going to be the mother of all that’s wicked and painful. However, that’s a topic for another article.

Push back

There’s lots of very viable vituperation that you could invocate to vanquish the validity of my views. lol… But seriously, off the top of my head I can think of four great arguments that would invalidate what I just wrote.

1 - Volcker

Are you insane? J Pow Pow is raising interest rates like a mad man. He’s willing to do whatever it takes to fight inflation, including putting the economy into a recession, and you think he’s going to pivot from holy inflationary crusader to stock picker? Get real.

2 - It’s illegal

I don’t know the details of the Fed charter, but I’m assuming that buying equities is verboten.

3 - This is America

Whatever else has happened up to this point, we still have some semblance of free market capitalism here. This isn’t some socialist hellhole like Denmark (kidding… Energy crisis aside, Denmark is the most pristine country I’ve ever visited).

4 - The people will never stand for it

The Fed is facing increased blow back for all the QE that they’ve done. What with propping up asset prices, creating inflation and widening the wealth gap, it’s absurd to imagine that the American people will stand by while the FOMC yolos the S&P.

Fair point to all you bubble haters, but…

I think that when the SPX is down 12% on a Tuesday, 8% on Wednesday and by all accounts Thursday is going to be even worse, the Fed will blink. They’ll try all their usual tricks, and if they don’t work, they’ll announce that they’re going to buy stocks. As un-American as it is, those scallywags in charge of our economy will buy the SPX.

To be clear, I don’t want this to happen. If I could snap my fingers and guarantee it would never happen, I’d do it. Right, fucking, now. But I don’t have that power, and last I checked ol’ J doesn’t have my phone number.

These are desperate times we’re living in (at least, policy makers seem to believe they’re desperate) and if there is one thing I think we can all agree on it’s this… Just because something has “never happened before,” doesn’t mean it can’t happen in the future. Buckle up, shit’s gonna get weird.