This week's Alpha Trader features hosts Aaron Task and Stephen Alpher talking with Jim Bianco of Bianco Research about the "nationalization" of large swaths of the financial markets.
Prior to the chat with Bianco, Task and Alpher mull the major bounce in stocks over the past few sessions. They note that the bear markets of 2000-2002 and 2007-2009 had any number of "face-ripping" rallies, only to reverse and make new lows shortly after. The easy call for now is that this too is another face-ripper, but Task reminds that we've seen plenty of historic moves this year. It's probably not likely, but maybe the trillions being thrown around by the Fed and the government did help put the bottom in last Monday.
In case anyone forgot, Bianco reminds that the Fed is only allowed to buy securities directly guaranteed by the federal government. What's unique about the current rescue plan is the central bank's move to buy investment-grade corporate bonds and ETFs that mostly hold such bonds. How? By creation of a special purpose vehicle which the Treasury has capitalized, and the Fed has made financing available to.
So here we are. What started in 1987 - when Alan Greenspan ended the crash by stating the Fed's willingness to support markets - has progressed over the years to the point where now the central bank (in conjunction with the Treasury) has had to more or less nationalize financial markets in order to stop the bleeding.
Any number of market watchers over the past thirty years have looked at exploding government deficits, and come away bearish on bonds. Jim Bianco isn't one of them. The massive stimulus program this time around, however, might have Bianco changing his tune. The new spending alone is going to make the current $1T deficit seem puny, and if it happens to work - if the economy gets moving again - we're bound to see some move higher in inflation.
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