“There’s a point where the Federal Reserve is going to have to pull out a bazooka,” Minerd said in an interview. “And I think the option of buying stocks on the part of the Fed is on the table.”
Should a stock market collapse happen, it would erode confidence among consumers, small businesses and CEOs alike. And it would make it harder for companies to borrow the money they need to survive because of the strong link between stock prices and corporate credit spreads.
“The Fed has basically told us they don’t have a stomach for this,” said Minerd. He warned his clients back in February — when US stocks were rising to ever greater heights — that there were “red flags” in financial markets.
“This will eventually end badly. I have never in my career seen anything as crazy as what’s going on right now,” he wrote on February 13.
Fed unfroze credit markets
Since the pandemic began, the US central bank has rolled out a series of emergency lending programs that make its 2008-era response look tame.
Foreign central banks are already buying stocks
Buying stocks would be a significant escalation in the Fed’s mission to avoid a depression — one that would face legal obstacles.
“I frankly don’t think it’s necessary at this point,” Yellen said, “but longer term it wouldn’t be a bad thing for Congress to reconsider the powers that the Fed has with respect to assets it can own.”
Some foreign central banks are already aggressively playing in the stock market.
The Bank of Japan has been buying equity ETFs for a decade and is now one of the biggest owners of Japanese stocks.
The past dozen years shows the Fed is willing in a crisis to push the boundaries.
“Every time the Fed has had to face a problem where the solution is something novel or new, they’ve been pretty creative in coming up with ways to get it done,” Minerd said.
Minerd suggested a similar mechanism could allow the Fed to eventually buy stocks.
A Fed spokesperson referred CNN Business to July 2019 Congressional testimony in which Powell dismissed talk of buying stocks.
“It’s not an authority we are seeking, or looking at, or think we need,” Powell said at the time.
Of course, diving headfirst into the stock market would be highly controversial, raising concerns about moral hazard and unintended consequences.
And it would mean the Fed could suffer losses when markets tumble, as they sometimes do. For instance, the Swiss National Bank recorded a loss of 31.9 billion Swiss francs ($33.5 billion) on stocks during the turbulent first quarter.
Minerd said he’s already worried the Fed’s corporate bond purchases are distorting the capitalist system.
“It’s a troubling precedent that the Federal Reserve is going to sit there and continue to fund these zombie companies that don’t deserve to exist,” he said.
Minerd called the Fed’s junk bond experiment an “almost socialist” program based on the notion that the government has an “obligation to keep companies liquid and finances,” as opposed to just keeping markets functioning.
Recovery could take four years
Minerd’s bubble call could prove to be wrong. Many doubted the early days of the last bull market, too.
“One thing about bubbles is they tend to go on longer and go further than people ever expect,” he said. “Timing it is extremely difficult.”
Yet he’s not the only sophisticated investor warning that the worst may not be over.
Fifty-three percent of global fund managers say this is a “bear market rally,” not the beginning of a new bull market, according to a survey released by Bank of America on Tuesday. And even more, 78%, say the stock market is overvalued. That’s the highest since the survey began asking the question in 1998.
Even the Fed is warning that the V-shaped recovery, which the stock market is betting on, may not happen.
Minerd said it could be “at least a good three- to four-year slog” before employment and GDP return to pre-coronavirus levels. Some jobs impacted by shifts in consumer behavior are “never coming back,” he said, potentially causing “permanently” elevated unemployment.
“People have totally underestimated how long this is going to take,” Minerd said.