Another Day, Another Federal Reserve BailoutPaul-Martin Foss
The bad news just keeps getting worse and worse. After a 100-basis point rate cut and $700 billion in quantitative easing, the Federal Reserve has announced that it is opening up a new Commercial Paper Funding Facility (CPFF) to provide a bailout of commercial paper markets. The new special purpose vehicle (SPV) will purchase commercial debt that is rated at least A1. While that’s good news for some companies, it’s not good for the numerous companies whose debt is rated BBB, just one step up from junk.
What the Fed’s new facility is, is a bailout of corporate America. With $10 trillion in corporate debt outstanding in the US, over 50% larger than the total amount of outstanding corporate debt during the 2008 financial crisis, that mountain of debt has been weighing heavily on corporations. And with the economy all but completely shut down as a result of coronavirus fears, numerous corporations will have difficulty servicing their debt as consumer spending grinds to a halt.
That’s one reasons the Fed has decided to start up the CPFF again, which last operated during the 2008 financial crisis. While its intent is to provide a liquidity backstop for companies facing difficulties, what the Fed is signaling once again by its creation of an emergency funding facility is that the economy is in a difficult spot that will only get worse. In fact, at this point it would not be at all surprising to see all the Fed’s various emergency funding vehicles brought back into play.
From the Term Auction Facility to the Money Market Investor Funding Facility, they will all return as this contagion will only get worse as the economy slows due to government actions to shut down economic activity. Investors who think they’ve seen the worst of things already need to brace themselves for even more cataclysmic drops in markets. The economy was already set to feel the effects from the coronavirus in China, but with the US shutting down as well, the risk is no longer that we’re going to fall into recession, but rather that we’ll fall into a depression.
If you haven’t already made plans to protect your investments, what are you waiting for? Many investors got out weeks ago, after the initial coronavirus fears began to subside only slightly. They saw the writing on the wall, feared the worst, and escape the recent stock market bloodbath. But many more investors saw the crash as an opportunity to buy, thinking that each “worst day ever” was the bottom. We won’t see the bottom for quite a while, possibly even for months. So those who stick to stocks will likely see significant future losses.
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