Emphasis mine…
“…there’s something to be said for the idea that liquidity is not the same as solvency, and in the fullness of time it’s the latter that will matter for all parts of the capital structure. Whether the sharp bounce in high yield and equities represent a meaningful low or a liquidity sugar high is a question left for the reader.”
The Fed, right on cue, resolved (via massive money printing and the promise to buy junk bonds) phase one (the illiquidity, or liquidity crisis, phase) of the present bear market. While a stock market bounce characterizes your typical phase 2 (the hope phase), judging by traders’ positive reactions to Fed-speak of late — and much of what I’m gathering from the permabull camp — the prevailing group-think confuses liquidity with solvency. You see, the Fed buying the bonds of malfunctioning issuers (when they do) will not relieve said issuers of their obligations, it merely relieves the previous holders of said issuers bonds of the devastating consequences of their risky forays. I.e., the Fed is happy to be left holding the bag. Whether or not the Fed holding said bag ultimately represents a cost to the taxpayer is a question left for the reader…