I’m not an expert on the subject, but I’d like to dismiss the criticisms of the fed that many are making.
These cash injections give banks short term liquidity, which means that banks can complete transactions. These moves are not at all synonymous of a government bailout. The repo market is what is at concern here. In short, relatively safe financial institutions will loan money for very short term (a single day, for example) in return for a small percentage of interest. Trillions of dollars are moved in this market on a daily basis. When market trust lowers (or demand increases, but this is less likely. But, one example is quarterly taxes coming due), rates can increase. Repo rates are supposed to be low for the market to function properly.
The broader reason for this occurring is that the Fed post 2008-crisis requires banks to maintain higher relative liquidity. On the Feds view, they would rather continue to inject cash than allow banks to maintain pre-crisis levels of liquidity. At least in my opinion, requiring banks to maintain higher liquidity is a smart move.
As far as what this signals economically, I’ve yet to hear any credible answers. Certainly the banks will say regulation is the problem and the fed will respond that we can’t trust the banks that much.
Of course, if fed steps in to subsidize the market - which is what this does by holding rates extremely low despite the potentially systemic risks posed by the market - then you can keep pushing for every fraction of a point. But if the repo market goes down that is going to be very serious - and so there should be a bit more cost in the market to reduce the reliance on it.
My take is that the Fed is trying to be vigilant amidst indicators of a looming recession. If the repo market rate is too high, banks will hoard cash. Hoarding cash will devalue the banks, and we know that'll likely trigger a definitive recession.
This push to squeeze every nickle of profit out leaves almost no margin if stress hits. The repo market is huge. If there ever is a real scare and people are used to be able to get free money (or expect the fed to step in) the fed will have to step in on a HUGE basis.
Remember that banks have fractional deposits, so they might be left without money throughout the night and then have to literally be insolvent the following morning. So the Fed steps in to cover these situations.
This is important because the economy and the system in general is supposed to be doing “just swell” when there are symptoms of a disease
Where have I heard this before?
Basically there are actors borrowing at the low repo rates and using it on higher rate government backed mortgage products. Banks with money don't want to lend to these actors, hence the repo rate hike.
I didn't know higher risk firms like hedge funds, PE firms, and REITs are borrowing so heavily in the repo market.
So basically, this is the Fed just handing out cheap money to these firms. It's socialism for the super-rich.
Although, I must admit I don't understand the carry-trade dynamics that much. I hope someone else can throw some light on that!
“Powell has been adamant in pointing out that the T-bill purchases, though aimed at expanding the Fed's balance sheet and, correspondingly, bank reserves, this should not be confused with the quantitative easing that occurred during and after the financial crisis.“
We live in a fiat system; money is literally created out of nothing.
When money is created, it then needs to be injected into the system (economy)
This could be done any number of ways. The more transparent and straightforward though, the less of an advantage to the insider parties and the more meritocratic.
So an extremely complex, byzantine and opaque system has been created. People who are in this system will be happy to go into the many, many details of it. But they won't ever tell you why, it just is.
When I think of modern finance, I think of medieval Europe. Plenty of reasons were given as to why one person ranked above the other. Why one had access to certain things while others didn't. But in general, byzantine structures benefit the insiders at the expense of the outsiders. It's designed to be anti-meritocratic without having to claim being a decedent of the sun god.
I really fail to see why, other than avoiding meritocratic distribution, the fed doesn't open it's own lending window directly to the public.
They fret that lowering interest rates won't increase economic activity. I dare them to open those rates to the public and not see an increase in economic activity.
not out of nothing, all value is created out of shared assumptions about the future. money merely quantizes these assumptions.
Congress did not okay this, nor did the Fed need any permission due to their autonomy. I believed they infused over $200-billion this year. That is equal to giving $1-million in startup capital to 20,000 startups.
This isn’t the fed giving away money, it’s nothing at all like startup capital.
Economics are complex. Don’t be outraged that the fed is trying to maintain a stable economy.
Banks don't want cash. Cash sucks in terms of value. It's liquid, but it is constantly losing value due to inflation. Assets typically appreciate in value, so it is in the best interest of banks to maximize assets and minimize cash. You trade liquidity for value/earning potential. (Just thinking about opening a certificate of deposit at a bank compared to a money market or savings account. Lower liquidity == Higher interest rate)
The repo markets exists so that banks don't have to hold tons of cash. If it didn't, banks would need TONS of cash on hand for all of their transactions, and it would significantly devalue them.
In some sort of bad event won't the be unable to pay back the one day loan and so the fed is just helping them juke the required liquidity ratio?
The explanation for the FEDs doing the lending is it will spike short term rates or something. Why can't we be mad that the Fed is willing to do this? Like what if I'm one of the institutions waiting on the sidelines to make some money off of short term lending and the Fed keeps tamping down on what could be a source of profit?
That's the problem. If you are one of these institutions, you're setting your interest rate much higher than is healthy for the repo market.
Is that what you are saying?
They have their judgments just like every other entity in the market. They use their best judgement to know that the repo market needs a cash injection.
They're not infallible, but as regulators... their job is to regulate.
$200-billion could have been implemented for more worthy projects than the repo market. In my opinion, the FED needs more oversight from Congress and/or the Treasury.
Only if the startups are each going to pledge $1 M in treasury bonds, and return the money the next day (or in two weeks, the article also mentions the 14-day repo market).
No, it's not. The Fed is just providing short term liquidity.
People get all jazzed up about the Fed, but Banks have to play along Basel III.
Not saying a new crack will not break the system in 2020, but the Fed injection is somehow a side twist in this play.
Same goes for ordinary foreign currency transactions. If you want to short negative-yielding Eurozone bonds and buy positive-yielding US treasuries, you borrow the bonds and sell them, receiving EUR in the process. Then you transfer the EUR to a US bank and receive dollars. Then you use the dollars to buy US bonds. Your European counterparty is now long European bonds and short euros. Your U.S. banking partner receives the euros you got from them and gives you currency. You give the currency to the U.S. government and buy the bond. To make the currency transactions net out, the U.S. government then needs to give currency to the bank to replace the reserves you took out to buy the bonds.
(In reality, the Fed doesn't have to make the transactions net out, because it can adjust the money supply. But if it wants to maintain the current interest rate in the face of strong demand for dollars to arbitrage away interest rate differences, it needs to hand out a lot of dollars.)
The Fed has said nothing about which entities had trouble borrowing in the repo market. It has only discussed a couple of suggestions why banks might have refused to lend to the repo market, and has said that it is still investigating why banks had refused to lend to it. The whole thing is still shrouded in mystery, and speculation is all around it.
These firms than use the cheap money (interest rate < 3%) to make leveraged bets on risky assets (mortgage backed securities, CMOs, etc).
From 870 billion in 2008 to 4 trillion now.
More details: https://www.fisherinvestments.com/en-us/marketminder/everyth...
the fed issues treasury bonds (am I right?)
then some bank buys them, i.e. the bank gives the fed money and the fed pays it back with interest until the bond's maturity (because that is what bonds are, right?)
then the bank can do whatever it wants with the bonds. As far as I undestand "bond securities", whoever holds the security (bond) recieves the interest from the issuer (this is an assumption, is it correct?)
but now, the fed buys the bonds back (?) through the repo (repurchase agreement), which means that whomever sold them will buy them back from the fed in a few days?
So the fed will (temporarily) owe itself the interest? what!? needless to say, I am slightly confused..
Better yet, you can just opt to buy 67.7 Adam Neumanns! What a steal.
That is a steal. Count me in.
Last chance to rush for the exit.
The question is of course: where do you park your money before the big one hits so as to minimize the damages.
 : not sure why the downvotes, this is a legitimate question: if you anticipate a recession in the next 2 years (I do) how do you structure your portfolio to minimize the damage?
Don't need the money right now or for any time in the foreseeable future. Have the appropriate emergency savings to handle short-term needs. Paid cash for my house, so don't need to worry about making a mortgage payment.
Personal feeling is that if the market implodes to the point that this strategy doesn't work, everyone has much bigger problems to worry about.
I know many of us are still emotionally scarred from the last credit crisis...but storing cash under your mattress is the wrong way to respond to those feelings. It was dumb when my grandparents did it 80 years ago after the Great Depression, and it is still dumb in 2019.
Of course, the world is uncertain and could end tomorrow. If you're uncomfortable with that idea, perhaps try religion?
Incidence of "black swans" is much higher than we except. Not only it's a valid strategy, it's how massive fortunes are made, as long as you control losses.
To profit off of a black swan event, you need to do 3 insanely hard things. You need to 1) predict both the exact timing of the the crash & the recovery after 2) predict the scale of the move downward and 3) actually go short and expose yourself to massive asymmetric risk.
Massive fortunes are also made at the casino once in a while. That doesn’t mean it’s a repeatable strategy. Paul Tudor Jones and John Paulson know a thing or two about this.
I don't know if this is that situation though, or if this is part of what he calls "pushing on a string".
It's hard to make sense of all this. Supposedly, every 75-100 years there are Big corrections, but I thought the idea was that that was what we went through ten years ago, with the debt crisis and the "beautiful deleveraging" etc. So if that's true we're more looking at a run-of-the-mill recession coming at some point. But on the other hand maybe that crisis ten years ago wasn't actually the Big One.
I'm not saying you are uninformed or Ray Dalio recommended it to uninformed investors. However, these things then get picked up and parroted by less scrupulous individuals.
Dalio has so far made sense to me, but man... trying to figure out how to dip into gold as a run-of-the-mill investor is not easy, at least not through Fidelity. It's either high fees or buying into gold mining stocks which doesn't seem quite right.
So, in the absence of going full-time into the investor rabbit hole, I'm guessing I'll be in the same boat as everyone else, trying to keep my stock/bonds allocation model rebalanced every few months as it theoretically all goes through the floor together. :-/
The one asset in limited supply is land, and the one commodity that we all are fundamentally dependent upon is food and water. Both require the appropriate land.
But not a simple endeavor.
Need to park your money? I have plenty of room!
I am asking the HN crowd, not most people.
My guess is, given how many seem to work in the valley, they do have a little more money than most people and therefore skin in this game.
If you have less, generally the best advice is to do nothing and weather it out, because the truth of the matter is that practically nobody can time the market, not even on the horizon of years and any attempts to do so will cost you more than doing nothing would have.
There is no silver bullet unfortunately. Think of it like this, if there was a cheap and easily accessible protection against crashes, people would pile into it and make it ineffective or expensive. Which is exactly what happens.
It seems to contribute greatly to the four year cycle that bitcoin has followed so far. Hit play on the graph to see where we are now. The blue lines are the halving dates, where mining rewards are halved, reducing supply.