It's not for lack of trying. I am stunned about the Federal Reserve's incredible $2.3 trillion facility that will be used to buy high-yield bond and municipality notes. The news, which came almost simultaneously with the hideous plus 6 million new jobless claims, was stunning. It amounted to an across-the-board backing of everything on the credit side of the economic ledger.
This is incredible. If some municipality is being bankrupted by Covid-19 it won't have to file for bankruptcy and restructure and scald the taxpayers because they had to offer a huge coupon to get investors.
Now if the Fed, I presume is willing to buy second-rate munis that's terrific for an area of the economy that I was worried about. Some state munis are going to be threatened by the possibility of a depression.
Second area I was concerned about? High-yield credit. There simply was no way that all of the companies that need credit could get it from the banks. An airline can now raise capital without having to sell a stake to the government, something they were going to have to do if they didn't get forbearance. Again, taking the risk off the table.
Tougher one -- retailers. Don't know what they are going to pick to live or die. But Wednesday Nordstrom JWN sold some five- year paper with an 8.75% coupon. Before the Fed's action today I might have been concerned that it's too risky. Not now.
Companies that were doing high great until Covid-19 should have a right to get money. These are viable, terrific and important companies for our economy, They need to be funded, including many of the higher yielders. Watch the (HYG) index, which is an index of high-yield bonds. It's soaring today. That's a great sign. This index had been at death's door falling from 88 on the 21st of February to 68 a month later. It's now back to 81 up almost five points. There were many people justifiably betting against this index, and it just turned out to be a really bad short.
The Fed did not want to be blamed for causing a depression. I think that Jay Powell understands the history of the Fed and the mistakes it has made. I remember when I thought that things were falling apart in the economy in 2007 and the Fed was buying Treasurys, and I asked Ben Bernanke if he was going to buy mortgage bonds. He looked at me as if I had two heads. Not that long after he had to buy them because the mortgage market was collapsing. He could have stopped that from happening.
Powell learned what to do, and he did not make the same mistakes recognizing that not only mortgage bonds had to be bought, but plenty of other paper, too.
Treasury's not going to be outdone. Steve Mnuchin, too, doesn't want to be the Treasury Secretary known for causing a depression. He's out there making sure that the real base of the economy, the 85% of people who are connected to small-to medium-sized businesses can get a grant and a loan that will be forgiven if you stay open. There are plenty of articles that say it is a bust because it is so delayed.
Give me a break, there have been millions of loans filed for. The Small Business Administration is part of the backlog but they will get it right. The community banks don't have as much to process. Their clients are getting money. The bigger banks have bigger lines, but the money will come.
Three years ago, Mario Draghi famously said he would do "whatever it takes" to get the EU moving.
The Fed and the Treasury? They are using a famous Malcolm X dictum: By any means necessary.
I think it is going to work as a bridge for the economy until we get a cure.
While the populace flattens the curve, the Fed and Treasury are skating ahead of the curve. Congrats to all involved.
