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Fed Stretches Bounds In Corporate Bond Purchases: BI's Jersey · Bloomberg Intelligence

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  Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, along
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  Speaker 1: with my co host of Bonnie Quinn. Every business day
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  Speaker 1: we bring you interviews from CEOs, market pros, and Bloomberg experts,
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  Speaker 1: along with essential market moving news. Find the Bloomberg Markets
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  Speaker 1: Podcast on Apple podcast or wherever you listen to podcasts,
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  Speaker 1: and on Bloomberg dot com. We are waiting for the
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  Speaker 1: Fed Chair J. Powell testimony that will begin after the
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  Speaker 1: opening statements on Capitol Hill. The Fed Chair going to
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  Speaker 1: tell Congress really that it's a little bit uncertain the outlook,
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  Speaker 1: but of course we're getting in data day by day.
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  Speaker 1: Retail sales were up seventeen points seven percent, better than expected,
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  Speaker 1: but down six point one percent year over year. I
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  Speaker 1: think that's important to stress things like auto sales surge.
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  Speaker 1: I guess people are not going to be in public
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  Speaker 1: transportation as much these days, so that may account for
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  Speaker 1: some of that. Let's see what the effect on the
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  Speaker 1: markets is of the data, but also of the feds
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  Speaker 1: moves yesterday, and bring in Dave Wilson, Bloomberg Stocks editor.
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  Speaker 1: I mean, those are all pieces of the puzzle. V
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  Speaker 1: You no question when you look at the apartment store chains,
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  Speaker 1: and you see Cole's, Macy's, and Nordstrom all up more
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  Speaker 1: than ten percent of early trading. It tells you the
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  Speaker 1: retail sales figures are getting people's attention even beyond the
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  Speaker 1: economic data though, even beyond monetary policy, which Chairman pal
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  Speaker 1: is going to be talking about at length. You know, momentarily,
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  Speaker 1: you have to look at this story that we came
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  Speaker 1: out with overnight, uh, that the Trump administration is working
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  Speaker 1: on a trillion dollar infrastructure proposal. Now something like this
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  Speaker 1: has been kicking around literally for years, but at a
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  Speaker 1: time when people are looking for more physical stimulus, UH,
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  Speaker 1: got to bolster the economy here. Uh, let's just say
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  Speaker 1: this report is getting people's attention. And whether you talk
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  Speaker 1: about makers of construction equipment, uh, construction materials, you know,
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  Speaker 1: the actual builders, the engineering firms, even a company like
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  Speaker 1: United Rentals which rents construction equipment. All these stocks at
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  Speaker 1: the forefront of today's game. So you know, the idea
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  Speaker 1: that maybe there is in fact going to be an
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  Speaker 1: infrastructure program in the end getting people's attention. So there's
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  Speaker 1: a pretty broad based advance going on in stocks at
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  Speaker 1: this point, and those particular companies affected by the infrastructure
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  Speaker 1: proposal are a big piece of it. Bloomberg Stocks editor, So,
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  Speaker 1: Dave Wilson, I'm thinking about here when we think about
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  Speaker 1: the retail sales number here, I guess one of the
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  Speaker 1: issues for a lot of folks is how much is
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  Speaker 1: this is real kind of just pent up demand, kind
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  Speaker 1: of call it natural demand, pent up demand versus you know,
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  Speaker 1: the the effects of the stimulus, which came pretty early,
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  Speaker 1: you know, on average, for for for some folks into
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  Speaker 1: their checking account. How much is the market trying to
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  Speaker 1: figure out what's natural pent up demand and what's kind
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  Speaker 1: of fiscal stimulus. Well, for the moment, they're just happy,
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  Speaker 1: they're there's some kinds of demand. I mean, give what
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  Speaker 1: these retailers have been through the last couple of months,
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  Speaker 1: and there's no doubt there's going to be a lot
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  Speaker 1: of back and forth in terms of where did things
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  Speaker 1: go from here. You have the extra unemployment benefits that
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  Speaker 1: are due to expire at the end of July, and
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  Speaker 1: there's focused on that piece of the puzzle in terms
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  Speaker 1: of what it may mean for consumers willingness to spend
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  Speaker 1: down the line. You know, those checks are certainly part
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  Speaker 1: of that, uh put it all together. You know, people
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  Speaker 1: are happy enough. It would seem from the way the
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  Speaker 1: retail stocks are performing with what they saw in terms
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  Speaker 1: of the big picture, because like all the retailers in
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  Speaker 1: the SMP five hundred are higher at the moment, at
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  Speaker 1: least the ones that are in the retail index. So
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  Speaker 1: you know, take it and run with it and we
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  Speaker 1: see what happens as things unfold from here. And Dave, yeah,
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  Speaker 1: as you mentioned, like nords From is up twelve percent,
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  Speaker 1: It's been a long time since norths From has scene
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  Speaker 1: that kind of a move, but also Norwegian clues Line,
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  Speaker 1: Carnival and so on United Rentals. Dave, what about the
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  Speaker 1: bond market? How much is that impacting things? Because the
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  Speaker 1: Fed did say it was going to buy old swath
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  Speaker 1: of corporate bonds yesterday. Well, that incentivize people to issue more,
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  Speaker 1: and I mean that that is a real question. We
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  Speaker 1: are seeing a whole lot of companies UH moving to
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  Speaker 1: the bond market as a way to kind of shore
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  Speaker 1: up their finances. If you look at high yield debt specifically,
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  Speaker 1: I mean we had to report out that Americans talking
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  Speaker 1: about a high yield debt issue with City Group and
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  Speaker 1: it would be backed by things like their airport slots
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  Speaker 1: and gates, so they're trying whatever they can to raise
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  Speaker 1: money and kind of keep things going. And when you
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  Speaker 1: look at the airlines, they're certainly UH having some pretty
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  Speaker 1: substantial gains. And today's trading American peven for example, of
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  Speaker 1: eight point three percent at the moment. So you know,
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  Speaker 1: the idea that the FED is going to be there
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  Speaker 1: to you know, backstop the investment grades side of the market, well,
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  Speaker 1: at the very least it's being received. As you know,
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  Speaker 1: here comes some more support for markets from the Central Bank,
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  Speaker 1: and that that's tended to go over well the past
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  Speaker 1: several weeks. Block Citor Davilson, thank you so much for that.
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  Speaker 1: We appreciate that. On this strong opening to the market today,
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  Speaker 1: on the backs of the strong retail sales. We are
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  Speaker 1: waiting UH FED Chairman j Palen just moments with his
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  Speaker 1: uh comments and Dana in Washington get a little bit
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  Speaker 1: of a preview. We welcome Ira Jersey, chief US interest
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  Speaker 1: rate strategist for Bloomberg Intelligence. So, Ira, we're seeing some
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  Speaker 1: of the headlines across the Bloomberg terminal here seems like
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  Speaker 1: status quo from Chairman pal Is that you read well,
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  Speaker 1: the status quo given that he only spoke to us
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  Speaker 1: last week after the meeting. He's reiterated a lot of
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  Speaker 1: the same things. Right, They're going to keep interest rates
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  Speaker 1: low for a very long time until the economy is
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  Speaker 1: UH is on a good trajectory. They do think at
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  Speaker 1: this point that inflation is going to be well below
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  Speaker 1: their target for a long time. So until you wind
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  Speaker 1: up seeing that type of activity where you see inflation
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  Speaker 1: move a bit higher and growth on a steady trajectory. Yeah,
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  Speaker 1: I think the Fed at this point is going to
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  Speaker 1: still remain pretty cautious in its outlook. Why did the
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  Speaker 1: Fed decide to buy corporate bonds across the board yesterday, Ira, Well,
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  Speaker 1: it's basically just making good on a promise that it
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  Speaker 1: made a couple of months ago, really when when the
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  Speaker 1: Care's Act was first um But when the Care's Act
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  Speaker 1: was first passed, the Treasury Department gave money to the
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  Speaker 1: Fed in order to UH in order to buy corporate bonds,
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  Speaker 1: and that was one of the things in their promise.
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  Speaker 1: And if you recall Chair Powell said at the at
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  Speaker 1: the April meeting, at the very end of April that
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  Speaker 1: they would be buying and that one of the reasons
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  Speaker 1: why they thought, why why the FED thought that the
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  Speaker 1: corporate bond market had been doing so well and why
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  Speaker 1: corporate bond spreads a tighten so much was because of
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  Speaker 1: the implicit promise that the FED made so they would
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  Speaker 1: be and be sure to enact that Now. I think
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  Speaker 1: one of the challenges that they've had is that they
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  Speaker 1: back then, had they been able to implement the program immediately,
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  Speaker 1: there would have been bonds that you could have considered
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  Speaker 1: cheap on certain measures or models that that you might
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  Speaker 1: have for where the debt should be versus say the
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  Speaker 1: survivability or or you know, making sure that this company
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  Speaker 1: didn't go bankrupt or go out of business. Today, that's
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  Speaker 1: much harder because the corporate bond spreads are so tight
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  Speaker 1: that you can't do that. So they've created this new
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  Speaker 1: index that they've done internally. Um so they could basically
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  Speaker 1: maybe buy you know, huge swaths of the bond market
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  Speaker 1: in order to uh in order to fulfill their pledge,
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  Speaker 1: but at the same time nacho favoritism and also not
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  Speaker 1: buy things that are you know, inherently very very rich,
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  Speaker 1: which is what some people are saying. Some of the
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  Speaker 1: investment grade debt certainly appears to be so Ira and
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  Speaker 1: your you know, you've been covering this stuff a long time.
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  Speaker 1: You've been following the Fed and the interest rate markets
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  Speaker 1: for a long time. It's just the most creative, slash
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  Speaker 1: aggressive that you've seen the Fed Reserve in terms of
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  Speaker 1: its market participation. Well, it is, but it's also you know,
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  Speaker 1: we've kind of blurred the lines a little bit. So
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  Speaker 1: so in many ways. You know, when we talk about
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  Speaker 1: things like the main street lending program or the corporate
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  Speaker 1: bond buying program, the FED is implementing those programs, but
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  Speaker 1: in reality, it's not only a FED program. It's really
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  Speaker 1: a joint program between the Treasury Department and and the FED.
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  Speaker 1: So while the Fed is levering up some of the equity,
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  Speaker 1: the FED is not taking the first tranche of of
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  Speaker 1: the fault risk. So let's say that the Federal Reserve
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  Speaker 1: does buy two fifty billion dollars in corporate bonds and
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  Speaker 1: you know, ten percent of them go um go bankrupts, right,
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  Speaker 1: and there's there's tempers and the losses in that portfolio. Well,
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  Speaker 1: ultimately the FED doesn't actually take that loss. The American
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  Speaker 1: taxpayer does through the money that the Treasury Department gave
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  Speaker 1: to the FED. So so we have to keep in
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  Speaker 1: mind this isn't a FED program, this is a government program.
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  Speaker 1: It's a government program, but it can be levered ten times.
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  Speaker 1: Is there anything unsafe about any of this? Um? Well,
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  Speaker 1: is there anything unsafe? That's a good question. I think
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  Speaker 1: the answer is from the Fed's perspective, not really, because
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  Speaker 1: if the FED took a lot of losses in these portfolios,
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  Speaker 1: the Treasury Department would have to prop that up. Now,
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  Speaker 1: could we be saying the government be involved in buying
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  Speaker 1: things from the corporate market. I think that's more of
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  Speaker 1: an existential question, and certainly one that is uh um,
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  Speaker 1: predicated on your own political beliefs. I mean, the tenet
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  Speaker 1: of central banking is to provide liquidity to markets, and
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  Speaker 1: this is going a little bit beyond that, I think,
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  Speaker 1: in my personal opinion. Um, But they also have to
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  Speaker 1: do it because they said that they would, right, So,
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  Speaker 1: so I think that's where they're going. Will they buy
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  Speaker 1: two and fifty billion, I don't think so. I think
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  Speaker 1: that the ultimately they'll buy far less than that, may
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  Speaker 1: be closer to a hundred billion dollars in bombs, but um,
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  Speaker 1: it's still at something that I think they feel they
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  Speaker 1: need to do to fulfill that promise and not um
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  Speaker 1: potentially widen credit spreads if they were to say that
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  Speaker 1: we're not not buying any corporate bombs at all. So, boy,
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  Speaker 1: the FED. It just from my perspective, I've been in
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  Speaker 1: this game for thirty years, and it just seems this
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  Speaker 1: FED has been I think the most aggressive and the
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  Speaker 1: most creative that I can remember. Um, are there's tools
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  Speaker 1: left in the toolbox for the FED that you think
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  Speaker 1: should we see a you know, a second wave and
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  Speaker 1: maybe even some lockdowns in the fall in the winter
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  Speaker 1: that this FETE has or is it kind of used
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  Speaker 1: most of its tools? Well, first, they could certainly expand
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  Speaker 1: some of the tools that it's currently been using. But
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  Speaker 1: but I think that a lot of anything that they
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  Speaker 1: would they would do in a major way going forward
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  Speaker 1: when it comes to UM things like you know, help
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  Speaker 1: to the household sector that would have to come from
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  Speaker 1: another fiscal stimulus plan where maybe the Federal Reserve administers
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  Speaker 1: it or levers it up like they are the main
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  Speaker 1: street lending program. Um. But but the other things that
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  Speaker 1: they can do is things like yield curve control, so
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  Speaker 1: they can say that if let's say, the Treasury Department
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  Speaker 1: issuing so many bonds that there is a buyer strike.
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  Speaker 1: The Federal Reserve could go out and say we're going
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  Speaker 1: to um, you know, cap five year bond yields at
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  Speaker 1: seventy five bases points at zero point. If they were
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  Speaker 1: to do that, then they would wind up basically becoming
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  Speaker 1: the backstop buyer all the time for that part of
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  Speaker 1: the yield curve, and in doing so, they would definitely
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  Speaker 1: signal that they would are keeping interest rates low for
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  Speaker 1: a very long period of time. And you've heard a
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  Speaker 1: couple of FED speakers talk about that and how something
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  Speaker 1: like yields curve control might be implemented in the future,
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  Speaker 1: and I think probably it will be. It's just a
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  Speaker 1: matter of when. All right, our thanks to our Jersey
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  Speaker 1: from Bloomberg Intelligence, Chief industrate Strategists. Thanks for listening to
• 11:22
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