During her latest testimony in Congress, when asked by rep Mick Mulvaney if the Fed has considered buying equities, Janet Yellen had a cryptic, yet open to interpretation answer: "the Federal Reserve is not permitted to purchase equities. We can only purchase U.S. treasuries and agency securities. I did mention in a speech in Jackson Hole, though, where I discussed longer term issues and difficulties we could have in providing adequate monetary policy. Accommodation may be somewhere in the future, down the line that this is the kind of thing that Congress might consider."
Then, the very next day, during a video conference Q&A, Yellen once again unexpectedly latched on to the topic of the Fed buying stocks, saying that "the idea of expanding into areas like equities might be “good thing to think about,” noting that (for now) The Fed is more restricted in which assets it can purchase than other central banks. If we found, I think as other countries did, that they could reach the limits in terms of purchasing safe assets like longer-term government bonds, it could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions."
Assets such as equities.
Then, jumping on to the idea of nationalizing the stock market, none other than the world's most farcical former econopundit, Larry Summers, who has plunged to such recent depths he has to retweet himself on Twitter to get page views for his blog, "floated the idea of continuous purchases of stocks as a potential ingredient in a recipe for the developed world to strengthen economies struggling with subdued growth and inflation."
Cited by Bloomberg, Summer said that among the proposals that deserve “serious reflection” is the purchase of a “wider range of assets on a sustained and continuing basis," Summers said in a lecture at a Bank of Japan conference in Tokyo Friday. "I’m not prepared to make a policy recommendation at this point,” he told reporters later.
It got even funnier when Summers said that “there are obviously important political and economic questions associated with government ownership of companies,” adding that "some critics could term such a policy as “socialism, while others could highlight that governments already buy stocks in other ways, such as in the U.S. for federal employee pension funds."
Still others could term such a policy as utter idiocy, because once a price-indiscriminate entity is unleashed on stocks directly and legally (as opposed to the current framework whereby the Fed merely intervenes by way of its HFT proxy, Citadel, at key inflection points to break selling momentum), it is game over for price discovery and for the concept of capitalism.
However, one would not find JPM among the "others." In a note released on Friday, the otherwise serious commentator Nick Panigirtzoglou, author of the closely followed "Flows and Liquidity" weekly publication, when discussing the limits of QE - a topic prominently touched upon by Bridgewater this past week, said the following:
How big are the QE capacity constraints facing central banks? One of the arguments put forward by some in explaining the BoJ's shift away from QE to yield targeting is for the BoJ to avoid finding itself in the same position as the ECB is currently: i.e. facing a QE cliff at a not too distant point in the future.
We believe that QE constraints are rather artificial. One of the channels via which QE operates is via bolstering the capacity of debt capital markets. Indeed, this year's big increase in spread product supply coincided with more QE by the ECB and the BoJ relative to the previous year. More bond issuance not only implies more credit creation, helping the economy, but also more QE capacity allowing central banks to purchase more assets in the future.
But QE need not be confined to bond instruments in our mind. By limiting themselves to bonds, central banks are indeed deemed to face quantitative constraints given declining government bond issuance even as spread product issuance has increased. This year's purchases by the ECB, BoJ and the BoE account for 75% of total net bond issuance globally excluding EM local debt.
And there you have it: first, a central banker, then a still somewhat prominent (if recently discredited) economist, and now a respected sell-side analyst, have all jumped on the "Fed should buy equities" bandwagon. We point this out just because it increasingly appears that the Fed is launching trial balloons at what its next, emergency policy may be at a time when the US central bank should, according to experts, be getting ready to hike rates. Which is why, something tells us that the market's 59% odds of a December rate hike as of December will be, as usually, dramatically wrong.