Just as February 3, 1959 is known as the 'The Day The Music Died', April 9, 2020 will come to be known as the day capitalism died. The Fed's extraordinary actions this morning, measured at $2.3 trillion, essentially amount to a government takeover of the fixed-income markets. Fed Chair Jerome Powell and his confederacy of dunces stopped short of including equity purchases in his all-encompassing plan, but if the Fed is not buying stocks, it is certainly buoying stocks. The difference of one letter in those two verbs almost seems inconsequential.
But how to play socialism? How to invest in a market in which the "gubmint" is bailing out every small business (I own two of them, I am not going to pretend the Fed's actions don't help me), most municipalities and a large cohort of medium-sized businesses?
Buy risk. As Christopher Cross announced his Covid-19 positivity last week, the lyrics from his Arthur's Theme echoed in my head "I know it's crazy, but it's true."
This is the problem with government takeovers. The normal risk/reward balance is totally skewed. Companies that generate cash flows (capital producers) are crowded out of the capital markets in terms of capital consumers. When that capital is coming from a source with a limitless supply (The Fed with an assist from the Treasury's money printing capabilities), private markets for capital will be, as we learned in freshman macroeconomcs class, "crowded out."
So, you really should be buying bonds here. This morning I burned most of my single-stock hedges (long puts) and poured money into the riskiest securities I own. That risk is measured by discounts to par on bonds or preferreds. It makes no sense academically, but I have been doing it all morning. As Christopher Cross would say, it's "the best that you can do."
What does not work in the face of this extraordinary government intervention in the markets? MAFANG. Why on earth would you commit fresh capital to Apple (AAPL) stock when much riskier companies are now (via the (HYG) high-yield debt ETF, part of the Fed's newly-implemented asset purchase plan) seeing their debt bought by the Fed? Microsoft (MSFT) is in a similar situation. For the past five years, those MAFANG stocks not only worked, but they drove the majority of the gains in the U.S market. That trade died today.
Microsoft and Apple are simply too well-run. Companies that aren't well-run -- or have exposure to commodity markets -- are going to see capital incremental flows from return-seeking investors. Similarly Amazon (AMZN) , Alphabet (GOOGL) (parent of Google), and Facebook (FB) are simply too prudent with their massive cash generation -- i.e., they don't pay dividends. Companies that are cash flow burners, like car companies -- GM (GM) , Ford F, Fiat Chrysler (FCAU) and Tesla (TSLA) -- and energy mavens like Exxon (XOM) , Chevron (CVX) , and Occidental (OXY) , are now en vogue.
Exxon may not be able to afford its current dividend, but you can't afford not to get the free 8% annualized return it affords you. Why on earth would you buy AMZN or GOOGL and forgo a dividend when the Fed is essentially backstopping the dividends (buying debt) of companies that borrow to pay them? That head start finally matters, especially since share buybacks -- a major driver of returns at Apple, among others -- are not "woke" in the current environment of working for the greater good.
So, I am buying risk today and selling protection I had owned in the form of puts on financials and overvalued names like Tesla and Zoom (ZM) . The banks are going to bear the brunt of this extraordinary slowdown in U.S. economic activity and the extraordinary joblessness, as shown by this morning's report of 6.6 million weekly jobless claims. But I covered shorts on weaker players like Wells Fargo (WFC) , Citi (C) and Comerica (CMA) this morning, because, simply, I don't like losing money on trades. Companies like Tesla, Zoom, Beyond Meat (BYND) , and Virgin Galactic (SPCE) are just going to keep destroying cash and economic value, but I am not going to risk the capital of my firm by betting against those companies and in effect betting against the world's largest balance sheet (The Fed's.)
The music just stopped. The extraordinary innovation that has driven U.S companies to create such incredible innovations in technology, medicine and communication in the past 30 years is now going to be replaced by the inevitable cronyism and winner-choosing that has accompanied every nationalization of industry in every country in the past 150 years.
It's sad in a way, but the seeds of this government takeover of markets were planted more than a decade ago with the extraordinary government intervention in the markets post-Lehman in 2008 and 2009. Only a fool would ignore the reality of the current situation.