The Fed’s Shell Game
Federal Reserve Chairman Jerome Powell just finished back-to-back meetings with the House Financial Services Committee and the Senate banking committee.
It was exciting stuff … let me tell you. Kind of like watching paint dry.
It’s no wonder the financial media are still focused on the Wuhan coronavirus and the market’s fresh all-time highs.
But there were a couple of rather juicy tidbits buried in Powell’s testimony that I feel should not be overlooked.
First, the most obvious tidbit is that the Fed’s basically out of tools to deal with any potential recession. The fact that interest rates hover near 1.75% “means that it would be important for fiscal policy to support the economy if it weakens,” Powell told the House.
You’ll notice that Powell didn’t specifically say that the Fed was out of options. He passed that buck on to Congress by calling out “fiscal policy.” It’s funny how fiscal policy is the Fed’s focus now. I wonder what could’ve changed in Congress to make deficit spending suddenly matter again? Anyway…
Second, and not as obvious, is that Powell addressed suggestions from Congress that the Fed directly fund the government during a recession to cut taxes and boost spending.
“That’s really an untested and not widely supported perspective,” Powell said.
So, Jerome Powell doesn’t believe in directly funding the U.S. government? That’s very interesting … let’s explore why.
Right now, as we speak (Type? Read? Whatever…), the Federal Reserve is buying Treasuries.
But there’s a bit more to this situation. Typically, foreign governments and entities buy U.S. Treasuries. But with the low returns they get from Treasuries right now, nobody’s buying.
Wall Street banks are required to take up the slack and buy U.S. Treasuries. But the Federal Reserve is buying from these banks to help free up liquidity in overnight lending.
Remember all that talk about trouble in the repo market? About the Fed dumping billions to shore up liquidity and maintain overnight lending rates? That’s what we’re talking about here.
OK, Mr. Great Stuff, you’ve sufficiently confused me. What’s your point?
What’s my point? Well … what are Treasuries? Say it with me, class: Treasuries are government debt securities that earn interest until maturity.
Right? Treasuries are government debt. The Fed is buying government debt. It’s buying so much government debt that it basically funds the U.S. government … albeit with extra steps.
And the market knows. Just ask Banyan Hill’s expert economist, Ted Bauman:
Chairman Powell’s shell games in the repo market might fool Congress, but they aren’t fooling the market. As primary dealers, Wall Street banks have to buy the Treasuries flooding into the market because of the massive federal deficit. When the Fed is forced to buy those Treasuries from them to inject “liquidity” into the repo market, it’s printing money to pay the government’s bills as sure as sunshine.
Why bother? Just transfer new dollars to the government and be done with it. After all, that’s what the Modern Monetary Theory (MMT) embraced by Bernie Sanders and other assorted “socialists” is calling for anyway!
Anyone else find it ironic that the Federal Reserve is already stealthily implementing the “radical” MMT approach?
Deny it all you want, Chairman Powell, but the Fed is directly funding the government.
Your “this isn’t quantitative easing” shell game has no power here, Jerome — and neither I nor Ted Bauman will fall for your shenanigans!
If it’s not clear by now, Ted tells it like it is … no matter how painful. From calling out money policy malarkey to showing you must-know secrets to boost your nest egg, Ted Bauman is your guide behind Wall Street’s lies.
And if Ted’s no-filter news insights tickle your fancy, just wait until you see the man’s investing approach…
The Good: Victory Lap
Who’s awesome? You’re awesome! Today, Great Stuff readers are taking a victory lap!
Shares of e-commerce specialist Shopify Inc. (NYSE: SHOP) soared more than 12% today after its impressive fourth-quarter earnings report. If you bought SHOP shares back when Great Stuff recommended it, you’re up more than 43% right now!
By the numbers, Shopify reported a 59% surge in earnings and a 47% spike in revenue due to a stellar holiday shopping season. Both figures easily beat Wall Street’s expectations.
But the real pièce de résistance was Shopify’s guidance. The company expects full-year 2020 revenue in a range of $2.13 billion to $2.16 billion — well above the consensus target of $2.11 billion. In other words, it’s Christmas all year for Shopify.
In the company’s earnings call, it noted plans to spend $1 billion over the next five years in order to take on Amazon.com Inc. (Nasdaq: AMZN). That’s a tall order, but we all know that venders are looking for alternatives to Amazon’s online dominance.
While SHOP shares are a bit overbought right now, I like the company’s growth and ambition. Great Stuff recommends holding on to SHOP for now.
The Bad: Lyft Didn’t Smile — 1-Star Rating
Lyft’s quarterly loss of $1.19 per share was $0.19 narrower than expected. Revenue topped the consensus estimate. There were more active riders than anticipated, and revenue per active rider was above Wall Street’s targets.
Heck, even guidance was ahead of targets: a loss between $450 million and $490 million, compared to the consensus for a loss of $490 million.
So, why is LYFT plunging today? Because the company didn’t give lip service to analysts and Uber Technologies Inc. (NYSE: UBER). When Uber reported earnings, it moved up its profitability timeline. Lyft did not.
I find it hard to believe that Uber (which missed all of those same targets that Lyft just blew past) will be profitable before its key competitor. After all, the company posted a quarterly loss of $1.1 billion, compared to Lyft’s loss of just $130 million.
In fact, the only “bad” thing about Lyft is that it keeps getting compared to Uber. Which, if investors were saner, would be a good thing.
The Ugly: What, Am I a Joke to You?
That’s the only sane explanation for today’s 25% plunge in BBBY shares.
This morning, Bed Bath & Beyond warned of “short-term pain” and reported that December/January same-store sales fell 5.4%. The company also acknowledged inventory problems, noting that key products were “too low or out-of-stock” ahead of the holiday shopping season.
Bed Bath & Beyond warned investors last month that something like this was coming. You don’t just pull your forecast for a minor reason. The question is, can new CEO Mark Tritton deliver on his promise of “bold and broad-based changes” soon enough to make a difference for Bed Bath & Beyond?
Given how the rest of the company’s competitors are doing — and the potential for supply-chain disruptions out of China — I think there will be a few more nasty surprises for BBBY investors down the road.
It’s time to go to the polls gain!
Last week, we asked you: “What time of the day do you enjoy reading Great Stuff?”
The results are in, and it looks like about 47% really do enjoy Great Stuff for its dinner conversation, choosing to read after 5 p.m. That said, there is a strong group of morning readers (25%) including Great Stuff as part of your complete breakfast.
We are jam-packed with essential vitamins and minerals, after all … but I’m not sure if that comes across in the emails. Hmm…
The rest of you are scattered throughout the day. I assume you need a laugh on your morning or afternoon breaks. We’re glad to be of assistance!
Today, we delve deeper into what you like about Great Stuff — I mean, aside from the fact that it’s a great after-work snack and excellent dinner conversation:
Until next time, good trading!
Great Stuff Managing Editor, Banyan Hill Publishing