You’ve probably seen the headline about the Fed introducing unlimited QE, more money being thrown into the repo market, buying municipal bonds, buying corporate bonds, buying more treasuries, buying bond ETF’s, billions for small businesses, etc.

My base case scenario was always when this crisis would hit (which no one could predict the date or the black swan event), the Fed would start off with $250B-$300B per month, and then increase from there. They did that and as of this morning, we can finally say that they’ve surpassed that as well. While it’s nice to be able to pat myself on the back for calling this, I am actually very saddened that I was right. Because what we are about to witness is not millions of people worldwide becoming sick with #coronavirus and many thousands dying. We are about the witness millions right here in America go through a financial suffering and other hardships that will make the Great Depression look like a cakewalk. And that makes me sad for all those people.

The Announcement

I’d like to have a look at just what the Fed is now doing, as of 8 AM today, and what the immediate effects have been. You can find the releases on the Fed’s website, titled “Federal Reserve announces extensive new measures to support the economy.”

The first thing the Fed announced is that it is canceling its $500B of Treasury purchases and $200B of MBS purchases. Instead, it will be unlimited amounts. This is unlimited QE. As Peter Schiff calls it, QE to infinity. This also means that in the last 6 months of “don’t call it QE” the Fed balance sheet went from $3.8T to $4.6T, and now we’re likely to see $10T in the next 12 months from the Fed alone, not including congressional fiscal stimulus.

Second on the list is $300B in undefined credit flow support, including $30B from Treasury. What that means is the Fed wants to help banks make $300B in loans to consumers and businesses. It doesn’t specify how it will give that support, though.

The third is establishing two facilities of support to large employers. The cutoff to be considered large is undefined, as well as the amount. However, here the Fed says it will buy new bond issues as well as secondary market bonds. That really means that anyone who wants to sell a bond will have a willing buyer.

Fourth is support for lenders, in the form of reopening the TALF program to various types of consumer loans including student loans and credit cards. That’s potentially close to $4T. It will also include small business loans and other loans as well.

Fifth, the Fed is standing ready to expand primary and secondary market municipal bond purchases to support money market accounts and CD’s.

Sixth is more municipal bond support.

Seventh, as soon as it can the Fed wants to establish a lending program to small and medium businesses to complement SBA lending efforts.

These are the biggest items in the announcement this morning, and there are several others as well. The biggest concern I have here is not just the sheer amount of additional debt the country will be adding to its obligations. This will probably add about $10+T to the national debt in the next 12 months. But there is also another item buried in the announcement that is quite worrisome, and that is “the elimination of reserve requirements”. Banks will no longer be required to hold any cash on reserve at the Fed! Not only will depositors be left three sheets to the wind. What this really means is that the Fed, in its desperation to avoid further deflationary pressure to asset prices, wants banks to get more cash into circulation. This is probably because the velocity of money is at an all-time low of 1.425 and falling.

Market Outcomes

The futures markets were already in freefall again overnight, before the Fed made this announcement, with equity futures hit the 5% circuit breaker as well. The Fed made its press release at 8 AM this morning, 90 minutes before the stock market opened. Let’s remember that the stock market is the most visible proxy for the economy. 

When the stock market opened, equities began falling precipitously, even though the announcement was made prior to the open. Most commentators believe that move like this should support stocks. They think that because in the past it happened that every new round of QE brought higher and higher numbers to stocks.

However, this move is so desperate that in combination with the fallout of the coronavirus, and it shows just how much the Fed has lost all control, that market participants finally see this move as an indication that the economy is in a total shambles. And it will become much, much worse before it begins to improve.

Other markets that were off this morning with equities were oil, the dollar, industrial metals like aluminum, and lumber. Most telling is agricultural commodities like sugar and pork bellies are rising and Dr. Copper is falling. This tells you what is happening with the economy and what will happen with food prices as the dollar falls further.

Also, notice what happened with precious metals. Gold is up by $80/oz! everyone knows that if the dollar is falling that is good for gold, and QE is also good for gold. As good as it was for gold from 2008-2011, it will be better this time around. That’s because 12 years ago the dollar rose at the same time as gold. This time, the dollar will fall.

Also noteworthy in the gold market is that the cost to buy physical gold bullion bars and coins no longer matches the spot price or the Comex future contract. The premium which was once $75-$80/oz is now as high as $200-$250 per ounce. If you want to buy gold and take delivery, dealers are all warning now that you’ll wait for 15-30 days for delivery. The premium for an ounce of silver is as high as $6/ounce, which is nearly 50%! And dealers are asking for minimum orders of as much as 500 ounces silver or 15 ounces of gold.

One more word of caution. Don’t throw caution to the wind just because you see headlines claiming stocks are cheap, stocks are on sale, stocks now represent bargain prices, or stocks are a steal. While that might be true compared to where prices were just 2-3 weeks ago, stocks are still overpriced by a long shot. There was a headline on MarketWatch.com today reading “You Can Be Practically Stealing Quality Stocks Now, According To Jeffries.” To his immense credit, the author also says not to fall for it. But I know how people go into the market. It’s called FOMO, or Fear Of Missing Out. They see a headline like this and think to themselves, “Shoot if I don’t get in I’m gonna miss the big run-up!”

My base case scenario was that stocks would retreat back to a total market cap of 50% of the size of the American economy, which means from the peak, stocks should drop 75%. I am on record as having said that, and I am repeating it again. 30K DJIA goes below 7500, S&P at 3400 falls to below 850, Nasdaq falls below 2450, and Russel 2000 falls below 430.

These measures will not support the economy. The best thing the Fed can do is allow the dust to settle and stay out of the way, allowing the economy to rebuild itself with capital deployed to the best places possible, rather than preferential places.