Fed's "Infinite Supply of Money" forces a floor in the markets?

[kmiklas]

If the Fed now has an "infinite supply of money," this forces a floor in the Dow and S&P?

The DJIA shall not fall below 18000, and the S&P shall not fall below 2200.

They simply act as the counterparty in all trades at a price level on the buy side.

Example: A decision is made that AAPL will not fall below 200. The Fed's traders just buy any and all offers at 200, preventing the price from dropping? Apply this principle to all the companies in the Dow and S&P... and we have a floor.

Does this not drastically limit, or even remove the risk of any downside?

 

[dozu888]

don't over think it...

just buy.

if you are scared, just buy less.

eventually greed will take over fear. just matter of time. always does.

 

[Axon]

Since the announcement, I've seen much consternation but little understanding from the Elite Traders here. If I may, the fed has no choice but to act in this manner otherwise the corporate bond market will seize.

To partly finance borrowing, corporations use bonds which must be paid in full including interest upon maturation. Typically this is done with cash and often by issuing new bonds.

But in part due to otherwise well intentioned regulatory hurdles, banks cannot presently issue these new bonds. The banks are constrained from lending cuz the risk rating on these bonds has increased. They actually have to sell said bonds to lower their risk exposure perversely exacerbating the problem.

So who's left? The fed. That's who is now acting as lender of last resort directly to the major corporations. Without this the corporations start fire selling assets else face technical default. They face technical default the covenants on their other bonds trigger and those become callable. This cannot be allowed to happen at large on corporations with massive assets and prior to the current crisis, strong businesses. What happens when these defaults cascade across the entire economy? And the covenants, these massive bilateral agreements, cannot simply be changed on the fly lest parties lose confidence in the entire system and investors get fidgety wondering which asset class is next, triggering even more massive selloffs in EVERYTHING.

The fed and the US government absolutely should be acting to avoid this kind of rapid deleveraging. Japan went through this process of systemic economic zombification over 2 decades and without intervention the US could undergo the same process in a matter of months. The American populace would be thrust into deep poverty only comparable to the Great Depression.

Bottom line is the bailouts are happening and the powers that be understand the stakes. The house will not be allowed to fall. Moreover, the money isn't being thrown to the wind. When the dust settles these businesses and their massive asset bases will be here and the government will be repaid.

It's understood, attaching this much importance to the corporate bond market doesn't exactly have a noble ring to it but it is vital. It may sound good to "just let 'em fail" but do appreciate the consequences of the profound violent deleveraging that will result.

 

[NY_HOOD]

well said Axon.
however, i still see another 10-15% down from here.
the fed is preventing another 30-50% crash from here.

 

[gaussian]

So who's left? The fed. That's who is now acting as lender of last resort directly to the major corporations. Without this the corporations start fire selling assets else face technical default. They face technical default the covenants on their other bonds trigger and those become callable. This cannot be allowed to happen at large on corporations with massive assets and prior to the current crisis, strong businesses. What happens when these defaults cascade across the entire economy? And the covenants, these massive bilateral agreements, cannot simply be changed on the fly lest parties lose confidence in the entire system and investors get fidgety wondering which asset class is next, triggering even more massive selloffs in EVERYTHING.

Your write up is good. I would just like to point out the absurdity of this situation:

1. Small, medium, and even large businesses are required to maintain capital and ability to produce in all forms of economies.
2. Businesses needing cash issue loans (risk). If they default, the covenants put in place to protect investors are activated and businesses are forced to liquidate thereby returning to the investors the book value left in the company.
3. If your business is large enough the people will collectively take on the risk of your mismanagement.
4. For all other businesses, perhaps even more viable businesses, this option is not available.

So businesses spend billions in buybacks, raises, and bonuses for only their top brass and then the Fed comes in with trillions in taxpayer dollars that could've funded medicine, science, and education in order to continue to compensate companies who have failed at (1).

Yes, we should "let them fail". If we, the people, offer these businesses an emergency loan three things must happen:

1. Immediate firing of the entire C and V suite. Ideally, blackball them from ever serving on the board of a publicly traded company again.
2. All patents, technology, innovation, etc are forever owned by the people. Any new innovation after payback of the emergency loan can be owned once again by the corporation. Transfer of all intellectual property rights into the public domain is the only way to compensate taxpayers for their money.
3. The company must pay back in full within a set (small) amount of time with interest the total sum of the loan. The people have the option to petition their senators for forced liquidation of the company regardless if performance on the bond is not satisfactory.

Regardless of the case, buy backs should be looked at with serious scrutiny and perhaps be heavily regulated.

These companies must be transferred to the public domain for this exchange to be fair. We cannot continue to allow bailouts to companies who have historically shown they are incapable of running a surplus margin capable of sustaining the company in times like these. The revolving door politics (and yes, these loans are not out of the kindness of the heart of the people, they are bought and paid for with lobbying) must stop. This situation is absurd to a level I'm not even qualified to understand. The free market has no solution for these people trying to enrich themselves on the back of the taxpayer. We need the iron hand of regulation to bring these children into line. Otherwise it will just be business as usual until the next panic, and the C-suite will get their golden parachutes on schedule another decade from now.