This is a game changer: The Fed is buying Junk

Picture credit: Federalreserve

One thing is for sure, the Fed under J. Powel is a very different beast. Yes, his predecessors started the unconventional monetary policies that have become the norm. However, Powel has brought it to a whole different level by nationalizing the whole credit market (not the whole, but close).

From an economic perspective, the move is bold and on the spot. It’s aimed at closing a huge dislocation that was happening in the credit market, as I’ve mentioned earlier, we were witnessing a de facto credit tightening provoked by the lockdown.

From a market perspective, this will inflate the everything-bubble even more, and without a surgical unwinding, it will likely end in tears. In other words, this might be the reignition of inflation and the beginning of the end of the US dollar as a reserve currency.

I must concede that for the next few hours, maybe days (hope not weeks), I’ll be lost on how to position my portfolio. I was defining this leg-up on the stock market as a bear market rally, but with the huge stimulus prop-up, a new meltdown might not materialize. I’m pretty much in shock about this because my instinct tells me that the right strategy, from now on, is to buy those distressed companies that could be heading to bankruptcy, and that is so counterintuitive for me. I’ll be closely watching the developments, and I’ll try to work on some thesis during the weekend.

2 thoughts on “This is a game changer: The Fed is buying Junk

  1. Hello N. Alves,
    it is an ugly squeeze – out and the President wants to be re-elected at any price.
    The big picture means that the stock markets will be lifted by any means until the end of October.
    My favorite are best quality stocks because they will outperform and take-over interesting competitors (with distressed debt).
    Now is the time of stock picking (the winner takes it all).
    BTW: Daimler didn’t accept any support by the government. I was wondering and I researched for which conditions the fiscal help is granted to the German Mittelstand: the companies have to repay in between 5 years.
    So all over the world time has been bought and the price is expensive : further debt.
    Take care

    1. Thanks for passing by FoxSr!

      The whole situation is very fluid. At this point I’m lost about how much stimulus has the Fed introduced. They are already in the several trillions mark, while EUrope has failed to agree on a meager 0.5 trillion package.

      However, my main issue is to understand what to do here. Is this the beggining of an historical rally, or just a steep rally in a bear market. I believe that there is pain to come, but with a package of this size, I wonder if the stock market will feel anythin at all.

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