Without spending a dime, the New York Fed has single handedly propped up both the Dow and the junk bond market with its well-timed announcements on March 23 and April 9.
By Pam Martens and Russ Martens of Wall Street on Parade.
Thus far, the highly controversial corporate bond buying programs that the Federal Reserve first announced on March 23 have yet to spend a dime according to a spokesperson for the New York Fed, the regional Fed bank that is overseeing almost all of Wall Street’s emergency bailout programs today as well as during the financial crash of 2007 to 2010.
But as the above chart indicates, just a promise from the Fed to spend billions removing toxic waste from Wall Street’s mega banks is enough to put a bid back in the junk bond market.
Here’s the skinny on how the Fed propped up both the Dow and the junk bond market with its well-timed announcements on March 23 and April 9.
From the close on March 4 to the close on March 23, the junk bond exchange traded fund (ETF) which goes by the fancy title of “iShares iBoxx High Yield Corporate Bond ETF,” or symbol HYG, lost 21 percent of its value. But that weakness in the junk bond market did even worse damage to the Dow Jones Industrial Average. Over those same trading days, the Dow lost 8,498.93 points or a stunning 31 percent of its value in just 14 trading sessions. (See chart below.) That had apocalyptic overtones for what lie ahead for the balance of the year.
There are two key reasons for the correlations between the junk bond market and the Dow. The first is that two of the Wall Street banks that were a regular presence in the Wall Street syndicate that underwrote these junk bond offerings are components of the Dow’s 30 stocks. Those two banks are Goldman Sachs and JPMorgan Chase. The second key reason is that if Goldman Sachs and JPMorgan Chase are tanking, they will inevitably bring down the share price of every other major Wall Street bank because of their heavy interconnections as derivative counterparties to each other. (If all of those banks enter a serious selloff, the Fed could be looking at another 2008 financial crash after assuring Americans for years that these banks are “well capitalized.”)
In short, thanks to the repeal of the Glass-Steagall Act in 1999, which allowed Wall Street casinos to merge with the largest federally-insured, deposit-taking banks in the country, we now have a central bank (the Fed) that believes its job is to throw money at any market that pulls down the Dow. Because damage to the Dow might damage consumer confidence which might damage the wealth effect which might damage consumer spending which might damage the next GDP report which might damage the vision of American exceptionalism. In other words, we’re all just Labradoodles now in fealty to Wall Street…