So here’s what a junk bond is, just like how people have credit scores that show their credit history and the likelihood of them repaying back the future loan. Well so do companies, a company credit score could be investment grade or on A rating which means the company has extremely high level likelihood of repaying back that loan, then it goes down to average or B-rating which means the company is most likely to pay you back and then from there you get into the B-Day and below which is another word get junk because there’s a likelihood of them defaulting and not paying you back.
Well the Fed just stepped in and said you know what we’re going to be buying all of this junk bonds, we’re going to be giving companies that are in need of money were going to let them borrow as much money as they need but with a few condition, those companies must be known as a fallen angel, which us another word for saying, they had a credit score but at least BBB before March 21, and they have to be at least a BB- on the purchase.
These are pretty much companies that we’re investment grade prior to the illness but now with everything going on, they’re expanding to see some financial difficulties and maybe there’s a little bit more risk, now then there were before.
There’s also a few other details and restrictions that come alongside this, anyway the concern here is that the Federal Reserve supplies money to declining companies, so in any other market, which shut down would fail and then allow other business to step in and take their place and really Inna way this is just free market capitalism, some companies just wait survive, other companies would restructure how they do operations and new companies would step into the marketplace but the fed intervention means those companies can stay afloat and stay alive much longer then they otherwise would have and that means inadvertently that company stock prices also going to be doing pretty well alongside with it.
And that poses a very unique sliding that we haven’t really seen before, one scenario that if the Federal Reserve dues not come in with unlimited money. So many business would shut down even more people are aging to be out of work and the recovery process could potentially take a very long time to during which we can end up in another great depression but eventually things would recover new business will take their places, things would be restricted and in the end, this would balance themselves.
However in scenarios 2, if they do come in with unlimited money, they’re going to be keeping business alive and afloat during the time of which they would ordinary just be going out of business for keeping people employed who otherwise would have being laid off, and they can 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 in an economy that’s so dependent on loan and free money that can never really truly ourselves of it and that is what I would say, people are concerned about, this is also something that Warren buffet openly talked about just recently when he was asked about what going on, typically what would happen is that failing companies like this would be bought by someone else for a goof deal, like Warren Buffet and then from there, Warren Buffet company would give them a life line back to problems. That’s basically Warren buffet entire life long value investing strategy just sit there, holding a whole bunch of cash waiting for a goo deal and when that good Deals comes a whole bunch of Cash waiting for a good deal and when that good deal comes up he’ll strike.
If a company behinds failing then they can always borrow more money at really cheap interest rates from the fed and stay afloat and continued to as usual without the need for people like Warren Buffet.
The same can also be said about finding value investor who’s sitting on the sideline and just waiting for a good deal because. That’s goofs deal might just end up being right now if the Federal Reserve continued pumping mommy into the market, raising value, keeping companies afloat, Until everyone gets back to work.
Honestly this is probably one of the situation that would have definitely being worst had they not down this, and maybe even worse if they did and no one knows for sure.
As Warren buffet says, we’re doing things that we don’t ultimately know the outcome I think in general they’re the right ting but I don’t think they’re without consequences and the consequences can be extreme, if posted for enough.
But then it would also be junk bonds consequence it we didn’t do it as well, so at the end of the day whether it’s intended or not, but when the fed goes on a sloppy spree of junk bonds, it’s inadvertently going to boost up stocks prices alongside with it, but when struggling companies get really attracted to positive news and when those companies gets positive news that translates to higher stock prices and signs the Federal Reserve almost has enough limited supply of money, they can continue this as junk bonds enough to get the ball rolling and then one day it can start moving on its own.
They’re going to hold fit eventually those companies won’t be able to relax back the debt. The risk with this however is that his not longer any market to discover where struggling companies are just naturally left to fail and since the Federal Reserve really had no collateral with the company that they loan you thrust really at the mercy of the company to actually pay them back and if that doesn’t happen then I guess it’ll be absorbed by somewhere and thing would carry on as usual.
Bit the other concern with this is becoming so addicted that zero percent interest free money and unlimited loans, that it becomes very hard to be self sufficient in and weight yourself off it.
Arguably the prices suggested based off zero percent in interest, so when one day interest rates are no longer zero percent of that ever happens, validations would have to come down accordingly and that’s a risky move in a very interesting tine right junk bonds and honestly who knows what’s going to happen, if this keeps going sticks can continue to keep rising for the future.