U.S. Federal Reserve Ready To Buy Stocks - Yes Really.

Summary

• The Fed is allowing BlackRock to “manage, supervise, and direct the investments” for the Fed’s account. Exhibit B in below shows Fed is ready to buy stocks.
• Janet Yellen said, "but longer term it wouldn't be a bad thing for Congress to reconsider the powers that the Fed has with respect to assets it can own."
• The Bank of Japan and Swiss National Bank serves as a template for the U.S. Fed to copy should they really need to purchase stocks.
• Based on the latest Q1’20 holdings, the Swiss National Bank owns about $100 billion in U.S. stocks. The U.S. Fed is surely taking notes.

Watch YouTube Video Below on Federal Reserve's readiness to buy stocks

In this video, I will be providing a background on the U.S. Federal Reserve’s readiness for buying U.S. stocks, what some financial professionals are saying about this, and also explain what this means for investors. So please stick to the end of the video to find out.

If you’re new to the channel, please know that I work on videos covering stocks, economics, and other related financial news. If those things sound interesting to you, then please hit that subscribe button on my YouTube Channel as well as give me a thumbs up.

U.S. Federal Reserve Ready to Buy Stocks

According to the Federal Reserve’s website, they created a special purpose vehicle (SPV) in March 2020 and managed by BlackRock (BLK) to do the buying of bonds. Most people are well aware of the bond purchases that is already happening. You can view my previous videos on this. However, in the investment management agreement with BlackRock, most people missed the fact that the Federal Reserve also included language to allow them to transact in stocks as well. Essentially, the Fed is ready to go and buy stocks if truly needed. This is their hidden ace card.

(Source: Federal Reserve's website)

You can see that according to the Exhibit B, this is the power of attorney language for BlackRock to “manage, supervise, and direct the investments” for the Fed’s account. Clearly, the language in Exhibit B says, “transact in any and all stocks, bonds, cash held for investment and other assets.”

Scott Minerd's opinion -- The Fed will likely buy stocks

Let’s see how well-known financial people are saying about this. Scott Minerd, Global Chief Investment Officer at Guggenheim Partner said in a recent CNBC article, that “a reckoning is coming, and soon. He expects the S&P 500 will retest its March 23 low of 2,237.40 over the next month, potentially crumbling to as low as 1,600.” It should be noted that Minerd is one of the more bearish people on Wall Street right now. Scott Minerd further adds, "there's a point where the Federal Reserve is going to have to pull out a bazooka," Minerd said in an interview. "And I think the option of buying stocks on the part of the Fed is on the table." Clearly, if the stock market does continue to fall due to sustained high unemployment rates, then it would erode confidence among consumers, small businesses and CEOs.

(Picture: CNBC)

Janet Yellen's opinion -- "Buying Stocks wouldn't be a bad thing"

In early April, Janet Yellen (former Fed Chair) said, “Technically, the Fed does not have the legal authority to purchase stocks, although the US central bank should seek that power.” It is important to note that buying stocks would be a significant escalation in the Fed's mission to avoid a depression – it is truly their last resort. "I frankly don't think it's necessary at this point," Yellen said, "but longer term it wouldn't be a bad thing for Congress to reconsider the powers that the Fed has with respect to assets it can own."

(Source: CNBC)

Swiss National Bank & Bank of Japan have already been buying stocks

Some foreign central banks are already aggressively buying stocks in the market. The Bank of Japan owns more than 70% of Japan’s equity ETFs and has started buying since 2010. As well, based on the latest Q1’20 holdings, the Swiss National Bank owns about $100 billion in U.S. stocks. On this holding, you can see that the Swiss National Bank actually owns well known mega-cap technology companies (see below picture). According to a recent article, as the stock market crashed by nearly 30% in March, the Swiss National Bank went on a wild spending spree, increasing its top 20 holdings by nearly 22%. The Swiss National Bank has to disclose its holdings of US-traded stocks via a quarterly 13F filing with the SEC.

(Source: Swiss National Bank's quarterly holdings)

(Source: SNB Top 20 Holdings)

Conclusion -- What it means for investors

Overall, this article is to really show to investors that the Federal Reserve is ready to buy stocks based on the agreement they signed with BlackRock. They are ready to act – yet there has really been no press coverage of this at all. What this means for investors is that the market is artificially “propped” up by the Fed. The Fed has reiterated multiple times that they will do “what it takes” to keep the market and economy afloat. The Bank of Japan and Swiss National Bank serves as a template for the U.S. Fed to copy should they really need to purchase stocks. The Swiss National Bank did not hesitate at all to purchase stocks in Q1'20, and this should be reassuring to U.S. investors if the Federal Reserve takes similar actions.

The reason why this would happen is if the market begins to fall precipitously, which would erode the paper value of people’s 401k accounts. This would induce fear and panic, and even cause psychological mindset of not wanting to spend in the economy. Therefore, the Fed still has this ace card, yet to be played. At this current level, it may very well not have to play their final “ace card” in buying stocks.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. This article represents my own opinion and is not a substitute for professional investment advice. It does not represent solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[BA Man]

Anyone read the Preamble of the U.S. Constitution lately? I find this within - “We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, . . . . . “.
PROVIDE for the common defense, and PROMOTE the general welfare. Too much of today’s government action appears to be providing the general welfare as it is. Maybe it’s time for people to put on their “big boy pants”, get back to the “laissez faire” approach to government, and let the stuff hit the fan. Of course that would require having our elected officials possibly suffering at the ballot box (which would not necessarily be a bad thing).

[kimbillro]

The government is promoting the general welfare @BA Man and ready to pass another $3 trillion Heroes bill. They are following the constitution.

[fusion150]

Until they go too far, and can't anymore...

[Kaliboo]

I'm asking a 2nd time. No response to my first request.

DOES ANYBODY HAVE A LINK TO THIS LETTER HE HAS INSERTED AND USED AS THE WHOLE BASIS FOR THIS ARTICLE? I did a l of word searching of all kinds using the words in the letter on the Fed's site and did NOT find anything remotely relating to this. So is this a hoax?

[kimbillro]

The Fed needs to be given the power to buy stocks, bonds, real estate, and personal property @Kaliboo and eliminate having to do it through SPVs (Special Purpose Vehicles).

[DinkSinger]

Sorry for the late reply. The document is an attachment to the March 25 agreement between the New York Fed and BlackRock. The full agreement can be found at:
www.newyorkfed.org/...

It is a boilerplate power of attorney form that BlackRock uses. The agreement itself includes "stocks" in a list of investments within the definition of the manager's authority. However this agreement is only an agreement for the management of "agency commercial mortgage backed securities (“Agency CMBS”)".

[DinkSinger]

The agreement that inspired this absurd claim that the Fed is about to buy stock actually concerns the purchase of agency commercial mortgage backed securities which are purchased by the New York Fed as part of the System Open Market Account and does not involve an SPV.

The reason for the SPVs is that they allow some party beside the Fed to take the first losses should any losses occur. In the Maiden Lane SPV that assisted JPM Chase in the acquisition of Bear Stearns JPM Chase was on the hook for the first $1.2 billion in losses out of a $30 billion investment. The Maiden Lane II that bailed out AIG, AIG subsidiaries put up $1 billion out of $20.5 billion and in Maiden Lane III AIG itself would have taken the first $5 billion in losses out of $29.3 billion invested. Those three all made money for the American people. This time around the party that would take the first losses are the American people. Under the CARES act it is the Treasury that is investing our money. We made a $75 billion investment in the Corporate Credit Facility, LLC, which is investing in corporate bonds, a $10 billion investment in the Commercial Paper Funding Facility II LLC, a $75 billion investment in MS Facilities LLC, the Main Street Lending program, which is being run by the Boston Fed, and a $35 billion investment in Municipal Liquidity Facility LLC which will lend to states and their subdivisions.

[Alpha Leo]

The only real threat if any is for USD, as long as usd enjoys its power, Jerome Powell can print trillions at will and buy whatever the heck he wants..

[kimbillro]

That's a fact @Alpha Leo .

[doglesby17]

Minerd seems off his rocker. The market tanked to ~2200 because of uncertainty. The uncertainty is largely gone and there's zero appetite for more lock downs. What is the catalyst for dropping to 1600? That's just crazy talk.

[kimbillro]

Any bad news has been discounted @doglesby17 .

[halj78727]

If by "discounted" you mean "completely ignored."

[Experience Counts]

The Fed.(and the American Government) will at least get a better return by having stocks, rather than having cash, bonds, and bills.

[kimbillro]

That's right @Experience Counts .

[Level Head Martin]

THIS VIDEO IS INACCURATE. The paragraph referred to in the video clearly states those purchases are to be in accordance with Appendix A which basically refers to various types of eligible bonds or shares in ETFs that hold those same bonds. The market commentators did not miss anything as stated by the author of this article. Rather, the author of this article did not read the full agreement.

[kimbillro]

The Congress needs to give the Fed the ability to buy stocks, junk bonds, and real estate @Level Head Martin .

[Tall Kitchen Bag]

Pretty sure this is not the result of having the Fed Chairman, not be an economist but a Wall Street insider, with sizable financial holdings in BlackRock and Carlyle.

Nothing to do with it whatsoever.

[kimbillro]

Of course not @Tall Kitchen Bag .

[SuperPac]

Every institution in America is a ''Wall street insider''....the major politicians, the major think tanks, the military industrial complex....

Its an oligarchical nexus...their network. If you have bought into silly myths that's wholly your problem. Get a cure.

[SilentRage]

The S&P 500 would have to precipitously fall to 666, the 2009 low, before the Fed would even consider buying SPY or other equity ETFs. The Fed is a lender of last resort in the credit and debt markets, not a speculative buyer of risky assets like bottom-of-the-totem pole common stocks.

The Fed doesn't have to waste a single dime on equity indexes, ETFs, or lowly common stocks. To stop any stock market decline, all the Fed would need to do is make short term interest rates negative...very negative. This would force institutions and savers to completely give up on fixed-income and load up on risky assets like equities.

[kimbillro]

The Fed will start buying stocks soon @SilentRage .

[SuperPac]

I agree with @kimbillro ...its going to happen sooner rather than later. Also, negative rates....that too will occur sooner than we think. The ground is now prepp'd.

[Actionable Conclusion]

The big question:

And what is the Feds exit strategy?

[coppertj]

why do they need an exit strategy?

[Sundance Utah]

@coppertj
It just takes a couple of keystrokes on the Apple laptop sitting on Jerome Powell's desk and a trillion or two in gov. debt is gone.

[Actionable Conclusion]

Apparently some folks have no problem with the Fed buying stocks near an all time high in a depression economy...

Trillions to support asset values, billions to support the other 90% that don't own any assets. Def a handout to Blackrock and cronies.

PS. I'm being rewarded by the Feds actions. Still, this market is far from organic and stable... mostly due to Fed and govt policy. This is not healthy and long term detrimental to the Dollar, markets and capitalism.

[halj78727]

Remember when Obama was trying to save auto manufacturers and assist alternative energy producers and the right-wing cried socialism because government was owning the means of production and picking winners? Seems strange not to hear any of that push-back on this now. And where is the transparency so they don't use this capability to prop up cronies either directly or indirectly? Isn't this all exactly the opposite of an open/free market?

[Presbyopic]

@halj78727

Because conservatives are hypocrites. It's as simple as that.

[Michael Foley]

There is when people hear about it. But like the author said, there hasn't been any mainstream news coverage of this. Despite the fact that this happened back at the end of March it is probably the first time most people here are hearing about it. A few niche podcasts I listen to discussed it then, but that was from an anti-capitalist perspective, definitely not laissez-faire. Also, most conservatives smart enough to have platforms of influence were taking note during the TARP bailouts in 2009 and learned that the limits on how much liquidity the Feds can add to the market without negative consequence is much higher than they had assumed.

[kimbillro]

They are spending 10X more than Obama did @Michael Foley @halj78727 .

[Jan K.]

Safeguards need to be in place to ensure that the fed, only buys, fair-valued or under-valued companies. so they do not overinflated overly-valued companies. also the Fed would need an exit strategy, to rotate out of companies that have risen from fairly valued to over-valued status. and not be a greedy pig on the way to slaughter and eventually bursting the bubble

[SLCPUNK]

@Jan K.
"...fair-valued companies" according to who? The reason the 1913 Federal government overseeing the creators of the Federal reserve made buying stocks and ETFs explicitly illegal is because they knew the moral hazard was too big for all Fed chairmen to resist. And they were right. These recent men and women running the Fed are all crooks.

[pantherdoc]

If the Fed Reserve buys stocks do you think that would be prioritized above the common stock owned by the masses in a bankruptcy proceeding?

[Michael Foley]

I would think that it would have the lowest priority. The Fed has learned that they have nearly limitless liquidity and don't have to care if they lose a lot of money.

[kimbillro]

The Fed can't lose @Michael Foley . They print the money for free.

[nopilikia]

@kimbillro
Fed doesn't print money, U.S. Treasury does. However the Fed does have the ability to magically create credit out of thin air.

[nopilikia]

Fed already violating their charter. Stock buying would be another one. Time for some very serious debate on abolishing the Fed

[susan58]

"Fed already violating their charter. Stock buying would be another one. Time for some very serious debate on abolishing the Fed"

The Fed is paying Blackrock to buy stocks on behalf of the Fed. In regard to stock buying, this public/private partnership enables the Fed to avoid violating its charter. This is explained in the article.

[kimbillro]

@nopilikia didn't read the article @susan58 .

[nopilikia]

@susan58
In reality nothing more than Fed "mission creep" and clever use of semantics.

[bikeeagle1]

Has SPY Become The New Dollar?

Here's my logic:
1. In my grandparents' day, savers put money into savings accounts and earned a decent rate of return. When they needed money, they pulled dollars out of their savings account and spent it.
2. In our day, dollars are being created to prop up the stock market (indirectly for now, but soon will be directly).
3. If we put money into savings accounts, we are losing with respect to spending power due to little or no interest.
4. We therefore put savings into stocks, many of us through vehicles like SPY.
5. While SPY fluctuates in value much more than the old savings accounts did, it at least earns a return over time similar to what our grandparents earned from interest, and stays ahead of inflation.
6. When we need money, we sell SPY shares to generate cash to spend.
7. Therefore, SPY has become for us what dollars in a savings account used to be for our grandparents.

In other words, if the FED is artificially distorting the value of dollars and stocks in such a way as to weaken dollars as a store of value while simultaneously removing some of the risk from stocks, then stocks and/or funds (like SPY) have become the new store of value (i.e. the new dollar).

[kimbillro]

It sounds like grand plan for the Fed @bikeeagle1 .

[DVNDLuvr]

@bikeeagle1 this is the comment I came for. And add option trading on this ETF as icing on the cake.

[bikeeagle1]

@DVNDLuvr Interesting idea. How do you implement option trading? I have done it by selling cash secured puts and covered calls, but these days I mostly just own the ETF. Or do you mean that you leverage the position through long calls?

[PreCambrian]

A stock market crash wouldn’t cause a depression, it would cause an expansion of the economy. The Fed has caused these problems by confusing the stock market with the economy. Why invest in the economy if you can make more money in the stock market?

[kimbillro]

Mr. Permian, the stock market is better than the economy @PreCambrian .

[SuperPac]

''The Fed has caused these problems by confusing the stock market with the economy.''

The Fed is the visible arm of the Oligarchy that rules you. They always know what they are doing. Your confusion about their intent doesn't matter to them in the least bit.

[jtom]

The fed being able to purchase stocks is not what really matters. It’s how, when, and most important, why. State governments have been in the financial markets, including stocks, for a long time by virtue of investments made by their state pension plans.

If the fed plans to buy and sell stock as investments, fine. The more players, the better. If the fed plans to buy and sell stock to manipulate markets, not fine. The SEC should raise holy hades if they do. Otherwise, they might as well just lock the doors go home.

[Real Finance]

@jtom Wouldn't you argue that the Fed is an un-natural participant in the market though?

[User 51775005]

It’s how, when, and most important, why.

not true all the fed has to do is say we are buying equities to shift sentiment thats all that matters

[jtom]

@Real Finance
Yes, and I think their intent is to manipulate the market. I just wanted to point out that governments participating in markets is not in, and of itself, necessarily bad. Local governments and municipalities have been players for a long time. It is the intent to manipulate the markets that would create problems.

[Ray Meadows, CFA]

Congress has not given the Fed authority to purchase stocks. Once non-government bond purchases exceed the amount appropriated by congress in the CAREs act they will be breaking the law regardless of the SPV workaround of the law. So maybe they think U.S. doesn't apply to them and they can do whatever they want. But in a town full of lawyer/politicians, that is risky.

[Michael Foley]

If it makes rich people more money, it's the safest thing they could possibly do. Fed governors would be more likely to be punished for negligence for not doing this than they are for breaking the rules.

[kimbillro]

There is no limit how much stock the Fed can buy @Ray Meadows, CFA .

[kbalovesinvesting]

A very good article explaining the unexplicable rise in the stock market.Good luck to all investors!

[Real Finance]

@kbalovesinvesting Thank you for reading, I do appreciate that.

[Jared Krongold CMT]

Swiss National Bank is buying stocks for profit though

[Real Finance]

@Jared Krongold CMT At what point does that become dangerous though?

[kimbillro]

The Fed should buy for profit too @Jared Krongold CMT . It will never be dangerous @Real Finance .

[Jared Krongold CMT]

I'm a fan of capitalism... so I find it "dangerous" in the sense that the government is an unlimited source of money, and if every government printed money to buy stocks for profit, it would take away from free markets.

[Brent Ericson]

According to the Investment Management Agreement between the Federal Reserve and BlackRock, only CMBS purchases is allowed. The purchase of stocks is not allowed by the agreement.

The very beginning of the agreement and its subsequent provisions reinforce this limitation.

"This Investment Management Agreement (“Agreement”) dated March 25, 2020 (the “Effective Date”), is made between the Federal Reserve Bank of New York (“FRBNY”) and BlackRock Financial Management, Inc. (“Manager”) with reference to the following facts:
A.The Federal Open Market Committee (“FOMC”) has authorized and directed the FRBNY and its Open Market Desk to purchase for the System Open Market Account (“SOMA”) agency commercial mortgage backed securities (“Agency CMBS”) as part of its domestic policy directive.
B.The FRBNY determined that the purchase and management of the SOMA Agency CMBS would bedone through the use of one or more investment managers. The FRBNY has selected Manager to support theFRBNY in its implementation of the FOMC’s directive." (Page 1)

"The Manager's sole authority with respect to the Account is to enter into transactions (buy or sell) involving U.S. dollar denominated Agency CMBS. This includes fully guaranteed CMBS issued by Fannie Mae, Freddie Mac or Ginnie Mae." (Exhibit A)

The excerpt (Exhibit B) shown in the article is just a boilerplate template that would be governed (and limited) by the actual terms of the agreement. The Federal Reserve is not buying stocks.

[kimbillro]

The Fed will buy stocks shortly @brent_ericson .