THE FED JUST BAILED OUT THE STOCK MARKET

What's up you guys, it's Graham here. So, over the last few months, a lot has changed in the investment world. Interest rates have plunged to zero, trillions of dollars have been printed into our economy to help lift it back to life, toilet paper is now the hottest commodity of all time, and we're dealing with an unprecedented illness that's stifling our ability to get back to work.

However, throughout all of this, one thing has remained constant—besides my nagging ability to find very creative ways to ask everyone who watches my videos to smash the like button for the YouTube algorithm. That would be the Federal Reserve's continued efforts to make sure our economy does not entirely collapse and turn into a big pile of poop.

Now, in an unprecedented action that has never happened before in the history of history, the Federal Reserve is going to begin buying junk bonds and inadvertently bailing out the stock market. That's right! If people can get stimulus checks, small businesses can get interest-free money, big corporations could get billions of dollars, then why can't the stock market get some of those fun coupons too?

That's what's beginning to happen! Because on May 4th, news started coming out that the Fed was about to buy junk bonds, and that could potentially change the outlook on the stock market once this happens. So, in this video, I'm going to be doing my best to explain exactly what they're doing, why they're doing this, what this does to the stock market, and then how this affects you and me.

And seriously, you guys, if you enjoy videos like this—because something like this takes me forever to research—if you would not mind bailing out the like button for the YouTube algorithm, all you gotta do to bail it out is just click on it until it turns blue! I would greatly appreciate it. And if everyone else gets bailouts, let's bail out the like button! Thank you very much, and let's begin.

This all starts here on March 23rd, when the Federal Reserve announced that they would be purchasing unlimited assets in order to support the market. And then literally since that day, the market has slowly but surely begun going back up in price. Now, if you're confused about what unlimited support to purchase assets means, well, it's really simple, and here's the gist of it.

If a city, or a state, or a company is in need of money, they can go and issue what's known as a bond, which is just a really fancy term for it's an IOU. It's just an agreement that says, "We're gonna be borrowing this much money, we're gonna pay you this much in interest, and we're gonna pay you back by this date." It's really no different than your buddy Jimmy going to you asking to borrow a hundred dollars and then promising he'll pay you back a hundred and ten dollars a week from now.

That's much how bonds work as well. But what happens when your buddy Jimmy needs that hundred dollars because he's out of work? He needs to try to keep his business afloat, and no one wants to lend the money because everyone else is just holding on to their cash. Well, I guess in that case your buddy Jimmy doesn't get any money, and with no money, he might not be able to afford to keep his business open.

Which means his business might shut down, which means other businesses that rely on his business might shut down, and that could lead to a negative domino effect across our entire economy. So, from the Federal Reserve's perspective, it's in Jimmy's best interest he get that IOU so he could keep his business afloat, other businesses that rely on them can keep going, and business carries on as usual.

Now, I know that's a very basic example of how a bond works, but in a way, cities, states, and businesses do the exact same thing. And here's how that works: When companies need to take on some debt in order to stay afloat or expand, they do so by issuing bonds, which, like I said, it's like a very fancy word for IOU. But what this illness began spreading, everyone else who ordinarily would have bought those bonds and lent those companies money basically just held their cash and they said, "No, I'm not gonna take on any more risk with this money, I'm gonna hold this money that I have right here. I'm gonna keep it safe until I see how this all plays out. And then maybe when things get better, I'm gonna start to invest some of my money, I'm gonna pick this up."

Good going, Grim! Well, that's not good for the company who just shut down, is in need of money, and has bills to pay. And if those bills can't get paid, it spirals into a loss for everybody. So, the Federal Reserve stepped in, and they said, "Hey, don't worry, we'll buy those IOUs from you. We're gonna give you some money. You need some money over here? Okay, here's some money. Oh, oh, you know what? You get some money too! And yeah, you get some money, and you get some money too! I guess you get some—okay, everyone, everyone gets money!"

This is all I do! I literally take money out of the ATM just so I can film with it and throw it around for videos, and then I end up returning it back to the bank later. There we go! Now, technically when the Fed does this, they are issuing loans that will at some point need to be paid back. But because they control the interest rate that they loan money at, they could pretty much give states, cities, and companies interest-free money.

And the hope is that those loans will help keep them afloat, and then when the times are good, those loans and debts can be repaid back. It's no different than you going to your parents for money, and they give you a hundred dollars, and they just say, "You know, don't worry about it. Just pay us back what you always pay us back that hundred dollars when you can in the future, and we're good."

But where this starts getting unusual is that now the Fed is going to start buying corporate bonds, which is another word for them lending money to companies directly, and not just states and cities. And even more alarming, they're gonna start buying junk bonds, which is another word for saying they're giving companies money that have a riskier likelihood of not being able to repay back those loans.

This is also where some of the drama comes in because when it was announced on March 23rd that the Fed would provide unlimited resources to help companies, it apparently eased people's concern so much that investors began piling back into bonds because they felt if the Fed is gonna be going and buying them, then hey, probably we should too. And that single message meant that once people started buying bonds again, then there was really no reason for the Fed to step in and actually go and buy those bonds.

Think about it for a second: The only reason why the Fed would step in to give companies money like this is if no one else is willing to step in and give them money. But as soon as the Fed says, "Hey, we'll loan you money," and everyone else says, "Well, wait a second! Well you know what? They can have some of my money too!"

The Fed is able to then just back off and let the markets do their thing again. The billionaire Jeffrey Gunlock openly called them out on Twitter, saying that they basically bluffed their way into providing liquidity into the markets because they hadn't actually bought any corporate bonds.

But now I'm sure the Fed saw this, so they're coming back and they're saying, "Well, you're wrong! We're about to begin buying these bonds very shortly! Just wait and see!" And that looks, of course, like it's actually gonna be happening.

So, the Fed cannot go and openly just buy corporate bonds like this because if they do that directly, it's gonna be in violation of the Federal Reserve Act of 1913, which prohibits them from taking any direct ownership of a company's debt. So instead, they're attempting to circumvent the existing law by loaning money to a new company known as a special purpose vehicle.

And then that new company is able to go and buy these bonds. It would be like if I were banned from going and buying Tesla stocks, so instead I just started an LLC and then I fund that LLC, and then that LLC just goes and buys the Tesla stocks, where I'm not owning the Tesla stocks directly—the LLC is the one that owns the stocks, and then I just happen to own the LLC.

Doing something like this is unprecedented because in the history of the Federal Reserve, they've never bought corporate bonds like this. And now they're beginning to buy junk bonds on top of which is where things start getting very interesting.

So, here's what a junk bond is: Now just like how people have credit scores that show their credit history and the likelihood of them repaying back a future loan, well, so too do companies. A company's credit score could be investment grade or an A rating, which means the company has an extremely high likelihood of repaying back that loan.

Then it goes down to average or B rating, which means that company is most likely going to pay you back. And then from there, you get into the B minuses and below, which is another word for junk because there's a high likelihood of them defaulting and not paying you back.

Well, the Fed just stepped in and said, "You know what? We're gonna be buying all of these junk bonds. We're gonna be giving companies that are in need of money; we're gonna let them borrow as much money as they need."

But with a few conditions: Those companies must be known as a fallen angel, which is another word for saying they had a credit score of at least triple B before March 21st, and they have to be at least a BB- at the time of purchase.

These are pretty much companies that were investment grade prior to the illness, but now with everything going on, they're experiencing some financial difficulties, and maybe there's a little bit more risk now than there was before.

There's also a few other details, regulations, and restrictions that come alongside this, so if you actually want to go and read the full term sheet on this, I'm gonna link it down below in the description right where you can also get two free stocks we need to deposit $100 on Webull, where one of those stocks can be valued up to $1400.

So, what? Yeah, the link to that is also down below in the description. Check that out. Anyway, the concern here is that the Federal Reserve is supplying money to declining companies who, in any other market, which shut down would fail and then allow other businesses to step in and take their place.

And really, in a way, this is just free-market capitalism. Some companies just won't survive, other companies will restructure how they do operations, and new companies will step into their place. But the Fed's intervention means that those companies can stay afloat and stay alive much longer than they otherwise wouldn't.

And that means inadvertently that company's stock price is also going to be doing pretty well alongside with it, and that poses a very unique situation that we haven't really seen before.

One scenario is that if the Federal Reserve does not come in with unlimited money, so many businesses will shut down, even more people are going to be out of work, and the recovery process could potentially take a very long time, during which we could end up in another Great Depression. But eventually, things will recover, new businesses will take their place, things will be restructured, and in the end, things will balance themselves out.

However, in scenario two, if they do come in with unlimited money, they're gonna be keeping businesses alive and afloat during a time of which they would ordinarily just be going out of business. They're keeping people employed who otherwise would have been laid off, and they could help us to a smooth landing, at the expense of taking on more debt.

However, in the long run, it might cost us more in the form of increased taxes, inflation, or an economy that's so dependent on low and free money that we could never really truly wean ourselves off of it. And that is what I would say people are concerned about.

This is also something that Warren Buffett openly talked about just recently when he was asked about what's going on here. Was his response? Buffett said he had received calls from companies looking for support but found none of the opportunities attractive. After the Fed acted, the calls stopped.

Then, a number of them were able to get money in the public market, frankly, at terms we wouldn't have given to them. See, typically what would happen is that failing companies like this would be bought by someone else for a good deal, like Warren Buffett, and then from there, Warren Buffett's company would give them a lifeline back to profitability.

That's basically been Warren Buffett's entire lifelong value investing strategy. He'll just sit there holding a whole bunch of cash waiting for a good deal, and then when that good deal comes up, he'll strike.

If a company begins failing, they can always borrow more money and really cheap interest rates from the Fed and stay afloat and continue on as usual without the need for people like Warren Buffett. The same could also be said about any value investor that's sitting on the sidelines right now, just waiting for a good deal, because that good deal might just end up being right now.

If the Federal Reserve continues pumping money into the markets, raising values, keeping companies afloat until everyone gets back to work, honestly, this is probably one of the situations that would have definitely been worse had they not done this and maybe even worse later if they did. But no one knows for sure. As Warren Buffett says, we're doing things that we don't really know the ultimate outcome to.

I think in general they're the right thing, but I don't think they're without consequences, and I think they could be of extreme consequences if pushed far enough. But there would be kind of extreme consequences if we didn't do it as well.

And really, at the end of the day, whether it's intended or not, when the Fed goes on a shopping spree of junk bonds, it's inadvertently going to boost up stock prices alongside with it. When struggling companies get really cheap, attractive financing, it sparks news. And when those companies get positive news, that translates into higher stock prices.

And since the Federal Reserve almost has an unlimited supply of money, they can continue doing this as long as they deem necessary. My guess is that they're going to be doing this long enough to get the ball rolling, and then once things can start moving on their own, they’re gonna hope that eventually those companies will be able to repay back the debts.

The risk with this is that there's no longer any market discovery where struggling companies are just naturally left to fail. And since the Federal Reserve really has no collateral with the company that they loan money to, they're really at the mercy of that company to actually pay them back.

And if that doesn't happen, well, I guess too bad! It'll be absorbed by somewhere, and things will carry on as usual. The other concern with this is becoming so addicted to 0% interest, free money, and unlimited loans that it becomes very hard to be self-sufficient and wean yourself off of it.

Arguably, the prices adjust accordingly based off 0% interest, so when one day interest rates are no longer 0%, if that ever actually happens, valuations will have to come down accordingly.

And that's a risky move. We're definitely in a very interesting time right now, and honestly, who knows what's gonna happen? If this keeps going, stocks can definitely continue rising for the foreseeable future.

So, it's probably in all of our best interest to continue dollar-cost averaging into the markets, diversifying as much as we can, keeping an emergency fund, and as always, most importantly, from everything, smashing a like button for the YouTube algorithm. But also really quick, Ryan Scribner has a great video detailing this in depth as well!

We highly recommend you go and watch the video as well because it helped clarify some of the concepts that I mentioned here in this video. So with that said, you guys, thank you so much for watching! I really appreciate it! As always, make sure to subscribe, hit the notification bell, feel free to add me on Instagram! I post there pretty much daily, so if you want to be a part of it there, feel free to add me there.

As my second channel, The Graham Steffen Show, I post there every single day I'm not posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. And then I've got some really good news about Webull, use only down below in the description, and when you deposit $100, they're gonna be giving you two free stocks.

That first stock is now gonna be valued up to $250, and that second stock can now be valued up to $1,400. So, if you want a chance to get two free stocks potentially valued up to a lot of money, all just for depositing $100 on the platform, use that link down below in the description!

Let me know which two free stocks you get! Again, thank you so much for watching, and until...