Fed’s QE Unwind Reaches $535 Billion, Balance Sheet Drops to $3.94 Trillion, Old Autopilot Still Eng
- Thread starter Banjo
- Start date
Used to be lowering rates and money pumping were used to bring the economy/markets out of a funk. Now... same strategies to inflate the gas bag even further.
That is why next downturn will be like nothing anyone alive today have seen.
Seems a bit dramatic. 2000 was the top of a massive stock market bubble but the downturn as such was barely noticeable, outside of tech (and airlines after 9/11). 2008 was scary for a few months, but that was a huge global property bubble collapse leading to an international banking crisis.
What hidden bombs are going to go off to make the next downturn so severe? There may be a moderate bubble in corporate debt, and a large one in flawed capital-destroying business models (much of it in the VC space, the Teslas, WeWorks and Lyfts), but those don't seem likely to be meaningfully worse than the first tech crash.
They figure its cheaper to "circumvent" the funk, as opposed to coming up with even more unconventional policy measures. In hindsight, I view those three weeks of December 2018 as a sort of drawn out "flash crash" that has clearly been forgotten about just a few months later. Powell talked the markets down into it and then flipped the script as soon as 2019 started.
People can spin it anyway they like, but the complete 180 in two weeks is exactly what occurred.
I think catalyst will be China. Their cross debt guarantees are at insane levels.
This might be a reasonable catalyst, but China has one tool most other democracies don´t have: print literally UNLIMITED amount of monies. Contrary to central banks in the West, one phone call from Xi makes the central bank one push at the "money printing button" overnight.
Problem solved.
That´s what "hedge fund managers" like Kyle Bass do not understand: you try to fight a centralist Communist regime and think they will act according to monetary policy and currency policy 101? No, they won´t.
Recall the attack on the offshore Yuan a while ago? What did the PBoC do? Increase overnight rates until major players were bleeding and yelling and scrambling. Must still hurt their balls....
I saw it coming and bought all the way down - in intervals of 50 ES points - S&P 500 calls. Sweet trades! I was hoping for Powell´s 180 turn - which observing the international situation - was in my eyes "logic". But when I saw that Trump complained publicly and then to Mnuchin, the case was crystal clear. I bought some more S&P 500 calls.
Nice risk/reward by the way.
Two things will happen next:
1) Gap close above 2926.
2) Gap close under 2845.50.
Giving the BREXIT situation, I am more inclined that the gap below will be filled first....
So the problem is the Fed's balance sheet isn't shrinking fast enough, so what they're going to do is sell MBS in the open market to raise cash so that they can buy more Treasuries that are at shorter maturities than what they currently have, so that the shorter dated newly purchased Treasuries will run off at a more even pace than the longer dated ones? I know they're stupid and everything is run by committees of committees but there's no way they're that stupid.
The thing is that given the new post-crisis capital requirements (which require huge holdings of Treasuries on the part of banks, while also hugely limiting their leverage) the Fed's balance sheet will have to be substantially larger than before because there is a limited amount of capacity for the market to absorb the new Treasuries being issued, especially with a huge deficit like we currently have. They're worried about being able to continue to manipulate the rates markets, that's why they'd be concerned about not having enough shorter-dated Treasuries on hand. They just want to get out of MBS entirely and go back to their normal state of playing in the Treasuries market, that's all it is.
The thing is that given the new post-crisis capital requirements (which require huge holdings of Treasuries on the part of banks, while also hugely limiting their leverage) the Fed's balance sheet will have to be substantially larger than before because there is a limited amount of capacity for the market to absorb the new Treasuries being issued, especially with a huge deficit like we currently have. They're worried about being able to continue to manipulate the rates markets, that's why they'd be concerned about not having enough shorter-dated Treasuries on hand. They just want to get out of MBS entirely and go back to their normal state of playing in the Treasuries market, that's all it is.