The Printing Presses Are Rolling Again!

March 23, 2023

As I mentioned in my earlier newsletter on the Banking Crisis, this crisis may turn out to be a positive turning point for the stock market.  It may cause the Fed to reverse its recent policy of selling bonds to increase interest rates and, instead, forces them to buy bonds which will lower rates.  And guess what?  It has!

The presses are rolling – BIG TIME. In the last two weeks the Fed has printed almost $400 billion!! To be exact, $391 billion.  That is so much money that, in two weeks it has offset all of the Fed’s bond sales since January of 2022.  There has essentially been no decrease in the Fed’s bond holdings since the beginning of 2022.  NONE!    This may be a temporary surge in money printing but, you can bet your last dollar that it won’t be the last big money printing we see. 

Sure, the Fed can raise the overnight rate that it pays banks, but the interest rate that matters to the stock market and most businesses is the 10 year rate, which didn’t increase at all after the last increase in the overnight rates on March 22.  In fact, the 10 year rate has fallen since the beginning of March from 4% to 3.4% even after the 0.25% increase in the overnight rate to 5%.

This is nothing but good news for the stock market. 

More Good News for Stocks:  Government Borrowing is up 50%

There’s more good news for the stock market:  Government borrowing in the current fiscal year is up almost 50% compared to last year.  It would be hard to find a better combination for the stock market and the economy than massive increases in government borrowing and money printing.  Big recession?  Not likely under these conditions. 

The combination of massive borrowing and massive money printing has kept the US economy out of recession since the Financial Crisis and it will likely do the same for some years longer. 

Even More Good News for Stocks:  The Producer Price Index is Decreasing Rapidly

Inflation, as measured by the Producer Price Index, is coming down.  After hitting a high of 11.7% in March 2022, it is now down to 4.4%.  That’s a big decline.  More importantly, the Consumer Price Index almost always follows the Producer Price Index.  Hence, it’s likely the CPI will head down over the next few months.

As for the Banking Crisis, the Fed’s decision to bail out bank depositors by buying (or lending on) treasury bonds at full value, means that there is no longer a significant banking crisis.  Banks can still fail, but the elephant in the room -- $600 billion in unrealized losses on Treasury bonds -- has effectively disappeared. 

Having the Fed bail out the banks on Treasury bonds is far better than raising the amount of FDIC insurance.  The FDIC charges banks for insurance.  The Fed’s “insurance” is free.  What could be better!

This incredible level of financial irresponsibility on the part of the government will absolutely work to boost the banking system, the stock market and the economy until printing money creates double digit inflation and double digit interest rates.  It’s almost guaranteed to work for at least a few more years and maybe longer. 

The Fed’s recent moves to confront the banking crisis mean that, for stockholders, there’s a lot to look forward to in the next few years.  

DISCLAIMER:  Just because I think the government financial irresponsibility will work wonders in helping the economy and stocks for now, does not mean I think it is good policy.  Again, I think it is guaranteed to fail.