One of the funniest and most memorable Saturday Night Live skits was John Belushi and The Olympia Restaurant. That New York diner provided customers with a full menu of food choices, but only served “Cheeseburger; Pepsi no Coke; and no fries, chips.” Regular patrons like Gilda Radner just ordered the “usual”. Newer customers started with tuna salad plate, or grilled ham and cheese on wheat toast, but always ended up with Cheeseburger. There was an illusion of choices but, if you were hungry and wanted to eat, only Cheeseburgers were served.
US Capital Markets Are the Eighth Wonder of the Modern World
Throughout my investment life in America, we have had multiple markets and multiple market makers ranging from the OTC, NASDAQ, AMEX, NYSE for equities to a Bond Market handling Govies, Munis, Corporates, and Mortgages. Specialty traders handled commodities, options and derivatives. U.S. Capital markets are admired worldwide for their liquidity and predictability. While the Big Recession reinforced the flaw of counterparty risk in many of the derivative markets for Collateralized Loan Obligations and Mortgage Backed Securities, most capital markets have remained dependable because counterparties are well capitalized and have the skill to maneuver downturns.
Imagination Has Led to Amazing Product Innovations
Endless products have also been invented to package and repackage these primary asset classes. Miliken invented High Yield. Nate Most at Barclays first introduced the ETF, but John Bogle and Vanguard are credited with selling them to the masses. Henry B. R. Brown came up with a money market product called Reserve Fund that paid interest on the equivalent of bank deposits. In 1924, Massachusetts Investors Trust first introduced mutual funds to America.
By the beginning of the 21st Century there was a full menu for the investor—Cheeseburger with Cheddar, Onions, Pickle and Mayo with fries and a Diet Coke backed up by a piece of pie and a cup of coffee. Unlike the Olympia Restaurant, you could even order eggs at lunch time.
Trading markets survived Black Monday in 1987, the Telecom bust in 2001 and the Big Recession in 2008, but each crisis revealed increasing liquidity and counterparty risks.
First Inning for Modern Monetary Theory
As the first inning of Modern Monetary Theory (“MMT”), is playing out in April 2020 with the Fed still at bat after taking 4.0 trillion swings, it occurred to me the only end game is Cheeseburger, Cheeseburger, Cheeseburger.
For a two day period in late March 2020, the Fed underwrote money market liquidity, unclogged “plumbing problems” in the bond market, stopped the bloodbath in high yield, and monetized untradeable “drek” in every asset class. It even had enough pine tar to reverse the mother of all stock market crashes. Jerome Powell is the only batter, the only market maker. The guy on deck is wasting his time and should head back to the dugout to catch the latest episode of “Stranger Things”. He won’t bat for a long time.
Where this goes is like solving a multivariable equation, where your confidence in the assumptions behind any single variable is low—sorta like Covid-19 testing. However, the one thing we cannot dispute is investment outcomes for every asset class are now being managed, directly or indirectly, by the Fed.
Some smart money is sitting on their wallets because we now have a single market maker and it is pure speculation to guess who will be saved and who will be sacrificed. Why speculate in any of those markets or products when you can invest in the one product that will be monetized as long as Jerome Powell is still swinging the bat: US government debt. Many naysayers say the US Dollar will lose reserve currency status, or the government will declare a debt jubilee on its own bankrupt promises, but that is the second inning.
We are in the top of the first and Chairman Powell is the only batter in the line-up, and while he may be selling leftovers in the second inning, right now he is all cheeseburger, cheeseburger, cheeseburger.