My understanding of all of this is so many levels below you. I am an engineer by trade who graduated in 2010. The job market was non existent. As such, I have always been interested in the GFC, what caused it and how we “got out of it”. I saw your posts after the Michael burry retweet and haven’t stopped following. I have more or less come to the conclusion that we did not recover, we simply kicked the can down the road and are being led through a jungle as the fed uses a dull knife and a broken compass to forge a new path through thick foliage.
Your posts really are much appreciated, but also terrifying.
Also, you say you are an engineer. So you should understand positive and negative feedback quite well. Society is a system. It is very much a mechanical(logistics, kinematics, etc), electrical(electrical, brain power, chemical, etc), etc system. It is the most complex system known to man which is why no one understands it.
But basically there are many positive feedback loops in the system. It is very much like a very poorly designed amplifier that constantly feeds back... but on a massive scale and very poorly understood, specially by the masses. These parts of the system that feedback will grow without bound, or practically until the system fails.
These systems, by there nature on the human mind, is what we interpret as "echo chambers". The people that run these systems live in their "echo system chamber". They surround themselves with like minded people who are ignorant of the real world. If they are generals then they surround themselves with war mongers who see the world as a battle and everything is about kill or be killed. If they are bankers then they surround themselves with people who are addicted to money and see the world only as how much wealth they can extract from others. The list goes on and on and it is an issue that transcends the individual(none of these people in these systems, or any system, can not be psychologically corrupted by the system). In this sense, humans are like water and the system is the container, they will conform to it... and if they don't the system will render them useless.
Human society is very much like a complex system. If you are a mechanical engineer then it is probably harder to see unless it's more like civics. I doubt a typical building is all that complex although they can have a lot of complexity it's generally relatively basic issues. If you are an electrical engineer then it's like, say, a computer motherboard. Here one has millions of components all of which can fail and produce any number of spurious results. The power supply module, if it fails, of course takes out the entire motherboard to any degree. Usually the first component in line will take the brunt of the power and fail unless it can handle it but then it goes to the next in line. The problem is that all these types of systems are extremely well designed and based on science, math, and experience. Our social systems are very poorly designed and they are more akin to what one might find in a Dr. Frankenstein lab.
The main point here is that society is a system and it can be understood using engineering and mathematical principles. One must learn enough about it though and see it in the "big picture" way not getting lost in the details. Society is an organism as it is made up of individuals(cells) who all act in a relatively constrained way. So in this sense chemistry and medicine can be used to understand the system. The finance system is suppose to regulate flow so it is akin to the circulatory system. The government is suppose to direct and control so it is akin to the brain. The MIC is akin to the immune system and it regulates interaction with the external world. All these have failed humanity and America. They are very poorly designed. They are, effectively, designed so that they rarely last longer that 250 years. The people that design them rarely have the ability to build such complex systems that last very long(of course it is an extremely difficult thing but something that can be done and given the nature of the importance of society on humans one would thing it would be our primary goal after basic needs).
What happens though is that the power centers are easily corrupted over time(there is a high probability after a few decades of the systems having significant corruption) and there is no way to recover after the corruption passes a certain threshold. Unfortunately we are at the point past the threshold. There are lag effects though which make it difficult for people to grasp the problems. We are actually still in 2000/2008. What we are experiencing now is due to those times. 2008 was likely actually a quake from 2000(Enron and others) and 2022 is the collapse from 2008. Of course it's a little different in that things could have went different but as I've explained, the people that are heads of those systems are insane and ignorant of reality and will do the exact same things that create the problems in the first place... so they actually reinforce the quakes so they are bigger each time. Most people generally cannot piece things together or only vaguely because they fail to understand the lag effect and do not have enough information/data to formulate proper logical deductions.
What caused the GFC is rehypothecation(duplication of assets on books, not real, fugazzi), massive over leveraging, massive fraud, massive gambling an risk, and a system that enables it all and protects its game.
The financial system, government, and military are a cancer on humanity. All the greedy arrogant moronic lunatics go in to those sectors and then all protect their grift. They steal from the masses which sucks out money from the part of humanity that needs it the most to keep humanity going. E.g., Farming/agriculture, housing, healthcare, etc. That is, these sectors are exactly like a tumor that diverts the blood supply cutting off organs that are essential for life. As the tumor gets larger so it's it's invasiveness.
Lunatics run the asylum. Literally the vast majority of people at the top of government and finance are proven criminals. You have congresspeople insider trading out in the open and absolutely nothing being done by any regulatory department(which proves the regulators are corrupt and likely doing the same). You have massive amounts of money being funneled in to the MIC which only amplifies war which is always going to be the end result when the lunatics are exposed(a war is the ultimate distraction). The financial system creates more and more "financial instruments" to funnel $$$ out of the working class strangling them. All these systems work hand in hand and every person in them is a psychopath(even the janitor that cleans the toilets as he is helping them literally destroy humanity and his ignorance is not an excuse). Of course at some point we will all have to work in one of these sectors to get any money since they will only be the ones that have any. Everything will(and clearly is) be taken over by these sectors because they will have all the $$$. Basically MIC will buy farms, banks will own hospitals, the government will run "management firms" to manage the slaves. This is where we are headed. This is the necessary logical conclusion when you let lunatics take over and give them all the power with no consequences. Of course it generally will all go to hell before that but some of them will make out like pharaohs.
What will happen, and is happening, is that as their grift/theft shows it's true colors they will steal more because why not? Everyone is doing it even more so just steal more and more. Even less accountability so steal more... and more... and more. This just tightens the noose on society more and more. Of course the lunatics stealing have their mansions, their cars, their gold bars, their expensive hookers and drugs, etc. So for them, why not? Clearly they are benefiting from it so there is absolutely no way they can't do it.... but humanity will pay the ultimate price. The MIC will end up with nukes and when everything goes to hell they will find someone else to blame and will need to have a "little war" to release all their tension from the situation. Of course the masses who are tired of war who are protesting it need to be shut down too as they must be Putin puppets so a bit of "modern urban warfare" will be necessary.
Again, lunatics run the asylum... the only thing to do now is watch it all crash and burn and for humanity to revert back to the dark ages for another 100-300 years if not longer. This is the price that has to be paid as the outcome was set in to motion decades ago if not centuries.
Jun 17, 2022·edited Jun 17, 2022Liked by The Last Bear Standing
"With liquidity policy, the Fed grabs an oboe and plays it with a leaf blower."
Great article, very informative. Well it was after I stopped to wipe the tears from my eyes after laughing so hard at this line.
Right now we're all at the Indy 500 and watching the cars races around, but it's just a matter of time until there's a crash. The only question is where will it happen on the track and what will be the cause.
Fabulous write-up. I started in biz trading FF in 1981 ( @jimdelisle) and thought I knew a lot, but your piece has prudently reminded me of how much I need to learn…and how relatively simple much of this learning can be with the right teacher framing the questions the right way.
Since 3Q21, it seemed apparent that the all in bet of Team Transitory was really risky with so many reserves already in the system and so many huge moving parts. I have been wondering and asking, as the wrongness of their bet became apparent in 1Q22, why they didn’t do an early end to the QE? It seems by your #s and logic, that an “aware” Fed would have realized it was already tightening aggressively behind the scene and have seen no purpose in such a public step.
Is that your belief (since I would love to retire that question without the “Jay Pow hadn’t been voted in again yet” conspiracy whiff)? And if that is so, does it not somewhat refute your assertion that the Fed really doesn’t understand these flows adequately to use them, let alone minimize the damage their misuse causes?
Interesting article, but with some misconceptions.
There is not much difference between different pools of liquidity. RRPs are just reserve accounts for non-banks, they serve the exacts same function and pay the same interest.
Prior to the GFC pretty much all of the Fed liabilities (="liquidity") were cash banknotes, but in the last 10-15 years depositary reserves have ballooned as a major fraction of liquidity/Fed liabilities.
QE policy liquifies higher interest-bearing assets into a liquid pool with interest that is about equal to FFR (but not lower). And with RRP they brought-in non-banks into the same pool. That may seem different than traditional liquidity (banknotes), which is generally thought to have a negative yield of ~ 0.5%, the cost of shipping, handling and storage of banknotes. However that's a misconception: prior to QE cash reserves were still positively yielding, because banks were lending them to each other and the Fed was successfully manipulating that rate on the open market (that's what target FFR actually is).
QE and explosion of liquidity made it hard for the Fed to control the interest on liquidity/reserves only through FOMC operations on the open market, so they decided to pay the FFR directly, to be able to transmit the monetary rate policy.
Some interesting things from your article:
1. one-month UST yield slightly lower than reserves/RRPs. That is indeed strange.
Entities without access to the reserve/RRP window (individuals, corporates, hedge funds...?) holding 1mo USTs directly vs deposits at bank/MMFs is the likely explanation.
2. The liquidity flow between banks and RRP users (MMFs) in the past few months. Likely explanation is that tightening financial conditions reduced CP and corp note issuance, pushing more MMF deposit money into RRP, while lines of credit at banks got drawn out, reducing bank reserves.
However, I don't understand why you think this has some profound unintended economic or market effect? It is just liquidity moving from one pool to another...
Thank you for reading Responding to the last two points:
1. The reason 1mo UST have lower yields at this moment is because the rate hike just happened this week. If T-bill yields go up (which they have) MMFs would sell them at a loss, so instead they hold through maturity and reinvest the proceeds into the RRP. So its not like there is a massive dump of Tbills, but rather a rotation over time.
One stupid question: as MMF contains the money from investors which is now around 2 T USD, what could be the reason that those investors are not deploying those capital into the equity or bond market... the goal of MMF to provide a liquid and low risk but low return fund for investors to park their money but why are those investor not deploying those capital as bonds yield is spiking...... As RRR is increasing does this also mean that the money supply in the capital market is increasing?
I don’t want to sound like a moron, but I’m ok with that on these subjects. Any recommendations on where to start on my journey in learning more about the market and the ins and outs of investing, etc. I know it’s a huge subject and I only have experience in buying and trading some stocks and rudimentary knowledge on what makes a good company from my business degree.
Excellent piece, TLBS. Matt, here's the type of graph you can draw on FRED. It shows the Fed's securities held (asset side) minus the RRP balance, and looks at it from a $ change basis YOY: (https://fred.stlouisfed.org/graph/?g=QKiZ). It highlights the extent of the liquidity drain TLBS mentions. The Fed initially pushed all those excess reserves and deposits out into the system via QE. But the RRP started draining deposits out of the commercial banking system and sucked them into the RRP starting late last year. This dynamic in which rates paid on RRP exceeding rates paid by bank deposits means the RRP facility growth will continue unless/until the Fed realizes it has gone too far, and reverses rate hikes. Matt, another excellent free resource to learn more about what makes a good company, and just as important - how much to pay for its shares - consider this online trove of Mike Mauboussin's work. I was introduced to his expectations investing framework around 2004 and it has paid off through booms and busts. Combine those insights with knowledge of how the Fed's liquidity and rate-suppressing interventions have distorted the cost of capital, and you'll have a good start to your investing journey. https://hurricanecapital.wordpress.com/2015/02/01/links-michael-j-mauboussin/
A majority of the funding plan is bills rather than coupons. The idea is that this will be more likely to drain the RRP rather than bank reserves, and there is a decent chance that is the case. I guess as a base case I would guess 50/50 bank reserves and RRP
Great article, if only I had come across it earlier! Thank you so much for taking to the time to explain liquidity in such details.... an article on bank reserves would be interesting
Each of the B/S categories is available on FRED (https://fred.stlouisfed.org/) - though it takes a little side calculation to combine them all in the way that I did.
1-month yields can also be found on FRED on daily basis (https://fred.stlouisfed.org/series/DGS1MO), which you can compare to the stated rate on the RRP, which is posted with each FOMC meeting
What I want to know and is a very significant risk coming soon is when the interest on excess reserves and the RRP EXCEEDS the interest earned on the treasury portfolio and MBS portfolio. My back of the envelope calculation using the first Q income statement from the Federal Reserve is a 3.15% rate on excess reserves and RRP is the cashflow neutral point assuming the amount of federal reserve notes (AKA Dollar Bills), which a zero cost liability for the Federal Reserve stays constant. I view QE as effectively an interest rate swap by a central bank, whereby they buy for example a 10 yr bond and issue an overnight reserve that they pay the overnight rate on. What happens when a central bank runs cashflow negative because the coupon interest isn't great enough to pay the increasing overnight rate on excess reserves and RRP? Answer: The treasury bails them out or the Central Bank puts a deferred IOU on the balance sheet and the treasury won't see a reimbursement from the Central Bank until that IOU goes away. Think about the assumption that the CBO had for $30B per QUARTER of Federal Reserve reimbursement to the Treasury? That will be gone for quite awhile and will increase the deficit along with the increased cost of Treasury debt rolling over. Now for the punchline: If you think it's bad with the Federal Reserve's balance sheet yielding approx. 2% on its portfolio on the asset side, think about the BOJ and their monster balance sheet of 0% - .25% yielding debt financed by overnight yen reserves. Think they can raise rates or give up on that YCC? And so many folks wonder why the yen is in freefall. That is a financial accident waiting for the world to witness and experience. Very scary stuff in Tokyo.
You have a really cool way of explaining stuff, that even a noob like me can understand. I would pay to read more content like this. Keep up the good work!
Thank you TLBS for taking the time to write this stuff. I definitely have to read this again a few more times slowly. I enjoy the comments section as I (like a few others) attempt to understand this environment better.
Do you think it makes sense to use an increasing monetary base as entry signal for stocks/bonds? Staying out market as long as the monetary base is shrinking ?
My understanding of all of this is so many levels below you. I am an engineer by trade who graduated in 2010. The job market was non existent. As such, I have always been interested in the GFC, what caused it and how we “got out of it”. I saw your posts after the Michael burry retweet and haven’t stopped following. I have more or less come to the conclusion that we did not recover, we simply kicked the can down the road and are being led through a jungle as the fed uses a dull knife and a broken compass to forge a new path through thick foliage.
Your posts really are much appreciated, but also terrifying.
Thanks again TLBS and keep it up
Also, you say you are an engineer. So you should understand positive and negative feedback quite well. Society is a system. It is very much a mechanical(logistics, kinematics, etc), electrical(electrical, brain power, chemical, etc), etc system. It is the most complex system known to man which is why no one understands it.
But basically there are many positive feedback loops in the system. It is very much like a very poorly designed amplifier that constantly feeds back... but on a massive scale and very poorly understood, specially by the masses. These parts of the system that feedback will grow without bound, or practically until the system fails.
These systems, by there nature on the human mind, is what we interpret as "echo chambers". The people that run these systems live in their "echo system chamber". They surround themselves with like minded people who are ignorant of the real world. If they are generals then they surround themselves with war mongers who see the world as a battle and everything is about kill or be killed. If they are bankers then they surround themselves with people who are addicted to money and see the world only as how much wealth they can extract from others. The list goes on and on and it is an issue that transcends the individual(none of these people in these systems, or any system, can not be psychologically corrupted by the system). In this sense, humans are like water and the system is the container, they will conform to it... and if they don't the system will render them useless.
Human society is very much like a complex system. If you are a mechanical engineer then it is probably harder to see unless it's more like civics. I doubt a typical building is all that complex although they can have a lot of complexity it's generally relatively basic issues. If you are an electrical engineer then it's like, say, a computer motherboard. Here one has millions of components all of which can fail and produce any number of spurious results. The power supply module, if it fails, of course takes out the entire motherboard to any degree. Usually the first component in line will take the brunt of the power and fail unless it can handle it but then it goes to the next in line. The problem is that all these types of systems are extremely well designed and based on science, math, and experience. Our social systems are very poorly designed and they are more akin to what one might find in a Dr. Frankenstein lab.
The main point here is that society is a system and it can be understood using engineering and mathematical principles. One must learn enough about it though and see it in the "big picture" way not getting lost in the details. Society is an organism as it is made up of individuals(cells) who all act in a relatively constrained way. So in this sense chemistry and medicine can be used to understand the system. The finance system is suppose to regulate flow so it is akin to the circulatory system. The government is suppose to direct and control so it is akin to the brain. The MIC is akin to the immune system and it regulates interaction with the external world. All these have failed humanity and America. They are very poorly designed. They are, effectively, designed so that they rarely last longer that 250 years. The people that design them rarely have the ability to build such complex systems that last very long(of course it is an extremely difficult thing but something that can be done and given the nature of the importance of society on humans one would thing it would be our primary goal after basic needs).
What happens though is that the power centers are easily corrupted over time(there is a high probability after a few decades of the systems having significant corruption) and there is no way to recover after the corruption passes a certain threshold. Unfortunately we are at the point past the threshold. There are lag effects though which make it difficult for people to grasp the problems. We are actually still in 2000/2008. What we are experiencing now is due to those times. 2008 was likely actually a quake from 2000(Enron and others) and 2022 is the collapse from 2008. Of course it's a little different in that things could have went different but as I've explained, the people that are heads of those systems are insane and ignorant of reality and will do the exact same things that create the problems in the first place... so they actually reinforce the quakes so they are bigger each time. Most people generally cannot piece things together or only vaguely because they fail to understand the lag effect and do not have enough information/data to formulate proper logical deductions.
What caused the GFC is rehypothecation(duplication of assets on books, not real, fugazzi), massive over leveraging, massive fraud, massive gambling an risk, and a system that enables it all and protects its game.
The financial system, government, and military are a cancer on humanity. All the greedy arrogant moronic lunatics go in to those sectors and then all protect their grift. They steal from the masses which sucks out money from the part of humanity that needs it the most to keep humanity going. E.g., Farming/agriculture, housing, healthcare, etc. That is, these sectors are exactly like a tumor that diverts the blood supply cutting off organs that are essential for life. As the tumor gets larger so it's it's invasiveness.
Lunatics run the asylum. Literally the vast majority of people at the top of government and finance are proven criminals. You have congresspeople insider trading out in the open and absolutely nothing being done by any regulatory department(which proves the regulators are corrupt and likely doing the same). You have massive amounts of money being funneled in to the MIC which only amplifies war which is always going to be the end result when the lunatics are exposed(a war is the ultimate distraction). The financial system creates more and more "financial instruments" to funnel $$$ out of the working class strangling them. All these systems work hand in hand and every person in them is a psychopath(even the janitor that cleans the toilets as he is helping them literally destroy humanity and his ignorance is not an excuse). Of course at some point we will all have to work in one of these sectors to get any money since they will only be the ones that have any. Everything will(and clearly is) be taken over by these sectors because they will have all the $$$. Basically MIC will buy farms, banks will own hospitals, the government will run "management firms" to manage the slaves. This is where we are headed. This is the necessary logical conclusion when you let lunatics take over and give them all the power with no consequences. Of course it generally will all go to hell before that but some of them will make out like pharaohs.
What will happen, and is happening, is that as their grift/theft shows it's true colors they will steal more because why not? Everyone is doing it even more so just steal more and more. Even less accountability so steal more... and more... and more. This just tightens the noose on society more and more. Of course the lunatics stealing have their mansions, their cars, their gold bars, their expensive hookers and drugs, etc. So for them, why not? Clearly they are benefiting from it so there is absolutely no way they can't do it.... but humanity will pay the ultimate price. The MIC will end up with nukes and when everything goes to hell they will find someone else to blame and will need to have a "little war" to release all their tension from the situation. Of course the masses who are tired of war who are protesting it need to be shut down too as they must be Putin puppets so a bit of "modern urban warfare" will be necessary.
Again, lunatics run the asylum... the only thing to do now is watch it all crash and burn and for humanity to revert back to the dark ages for another 100-300 years if not longer. This is the price that has to be paid as the outcome was set in to motion decades ago if not centuries.
"With liquidity policy, the Fed grabs an oboe and plays it with a leaf blower."
Great article, very informative. Well it was after I stopped to wipe the tears from my eyes after laughing so hard at this line.
Right now we're all at the Indy 500 and watching the cars races around, but it's just a matter of time until there's a crash. The only question is where will it happen on the track and what will be the cause.
Fabulous write-up. I started in biz trading FF in 1981 ( @jimdelisle) and thought I knew a lot, but your piece has prudently reminded me of how much I need to learn…and how relatively simple much of this learning can be with the right teacher framing the questions the right way.
Since 3Q21, it seemed apparent that the all in bet of Team Transitory was really risky with so many reserves already in the system and so many huge moving parts. I have been wondering and asking, as the wrongness of their bet became apparent in 1Q22, why they didn’t do an early end to the QE? It seems by your #s and logic, that an “aware” Fed would have realized it was already tightening aggressively behind the scene and have seen no purpose in such a public step.
Is that your belief (since I would love to retire that question without the “Jay Pow hadn’t been voted in again yet” conspiracy whiff)? And if that is so, does it not somewhat refute your assertion that the Fed really doesn’t understand these flows adequately to use them, let alone minimize the damage their misuse causes?
Don't you think Fed will reduce interest on RRP soon? This may help money to leave RRP to other investments.
Interesting article, but with some misconceptions.
There is not much difference between different pools of liquidity. RRPs are just reserve accounts for non-banks, they serve the exacts same function and pay the same interest.
Prior to the GFC pretty much all of the Fed liabilities (="liquidity") were cash banknotes, but in the last 10-15 years depositary reserves have ballooned as a major fraction of liquidity/Fed liabilities.
QE policy liquifies higher interest-bearing assets into a liquid pool with interest that is about equal to FFR (but not lower). And with RRP they brought-in non-banks into the same pool. That may seem different than traditional liquidity (banknotes), which is generally thought to have a negative yield of ~ 0.5%, the cost of shipping, handling and storage of banknotes. However that's a misconception: prior to QE cash reserves were still positively yielding, because banks were lending them to each other and the Fed was successfully manipulating that rate on the open market (that's what target FFR actually is).
QE and explosion of liquidity made it hard for the Fed to control the interest on liquidity/reserves only through FOMC operations on the open market, so they decided to pay the FFR directly, to be able to transmit the monetary rate policy.
Some interesting things from your article:
1. one-month UST yield slightly lower than reserves/RRPs. That is indeed strange.
https://fred.stlouisfed.org/graph/fredgraph.png?g=QJhb
Entities without access to the reserve/RRP window (individuals, corporates, hedge funds...?) holding 1mo USTs directly vs deposits at bank/MMFs is the likely explanation.
2. The liquidity flow between banks and RRP users (MMFs) in the past few months. Likely explanation is that tightening financial conditions reduced CP and corp note issuance, pushing more MMF deposit money into RRP, while lines of credit at banks got drawn out, reducing bank reserves.
However, I don't understand why you think this has some profound unintended economic or market effect? It is just liquidity moving from one pool to another...
Thank you for reading Responding to the last two points:
1. The reason 1mo UST have lower yields at this moment is because the rate hike just happened this week. If T-bill yields go up (which they have) MMFs would sell them at a loss, so instead they hold through maturity and reinvest the proceeds into the RRP. So its not like there is a massive dump of Tbills, but rather a rotation over time.
2. CP is very small fraction of MMF holding (about 4%). This figure has not changed materially over the past two years. The RRP uptake is coming from UST and public repo allocations. This is clear in the Feds data: https://www.federalreserve.gov/releases/efa/efa-project-money-market-funds-investment-holdings-detail.htm
One stupid question: as MMF contains the money from investors which is now around 2 T USD, what could be the reason that those investors are not deploying those capital into the equity or bond market... the goal of MMF to provide a liquid and low risk but low return fund for investors to park their money but why are those investor not deploying those capital as bonds yield is spiking...... As RRR is increasing does this also mean that the money supply in the capital market is increasing?
I don’t want to sound like a moron, but I’m ok with that on these subjects. Any recommendations on where to start on my journey in learning more about the market and the ins and outs of investing, etc. I know it’s a huge subject and I only have experience in buying and trading some stocks and rudimentary knowledge on what makes a good company from my business degree.
https://fred.stlouisfed.org/
Fred. Just explore. There is an incredible amount of data that is easily accessed here. IMO it’s the best way
Excellent piece, TLBS. Matt, here's the type of graph you can draw on FRED. It shows the Fed's securities held (asset side) minus the RRP balance, and looks at it from a $ change basis YOY: (https://fred.stlouisfed.org/graph/?g=QKiZ). It highlights the extent of the liquidity drain TLBS mentions. The Fed initially pushed all those excess reserves and deposits out into the system via QE. But the RRP started draining deposits out of the commercial banking system and sucked them into the RRP starting late last year. This dynamic in which rates paid on RRP exceeding rates paid by bank deposits means the RRP facility growth will continue unless/until the Fed realizes it has gone too far, and reverses rate hikes. Matt, another excellent free resource to learn more about what makes a good company, and just as important - how much to pay for its shares - consider this online trove of Mike Mauboussin's work. I was introduced to his expectations investing framework around 2004 and it has paid off through booms and busts. Combine those insights with knowledge of how the Fed's liquidity and rate-suppressing interventions have distorted the cost of capital, and you'll have a good start to your investing journey. https://hurricanecapital.wordpress.com/2015/02/01/links-michael-j-mauboussin/
Given the debt ceiling and need to fund and refill the TGA, which parts of the the financial system do you think provide the funding?
A majority of the funding plan is bills rather than coupons. The idea is that this will be more likely to drain the RRP rather than bank reserves, and there is a decent chance that is the case. I guess as a base case I would guess 50/50 bank reserves and RRP
Thanks! With that base case, do you think we see further tightening of liquidity through the TGA refill?
Great article, if only I had come across it earlier! Thank you so much for taking to the time to explain liquidity in such details.... an article on bank reserves would be interesting
I want to begin with a huge thank you for the info above and the weekly posts.
I have a couple of questions about the post:
1) where can I see the updated FED's balance sheet by the categories above?
2) where can I see the spread between the 1-month UST to the RRP?
Thank you again for everything
Thanks for reading:
Each of the B/S categories is available on FRED (https://fred.stlouisfed.org/) - though it takes a little side calculation to combine them all in the way that I did.
1-month yields can also be found on FRED on daily basis (https://fred.stlouisfed.org/series/DGS1MO), which you can compare to the stated rate on the RRP, which is posted with each FOMC meeting
Question that I have been pondering is: How does this impact other currencies (Rand, Lira, Rupee, etc) where central banks hold $'s as reserve?
What I want to know and is a very significant risk coming soon is when the interest on excess reserves and the RRP EXCEEDS the interest earned on the treasury portfolio and MBS portfolio. My back of the envelope calculation using the first Q income statement from the Federal Reserve is a 3.15% rate on excess reserves and RRP is the cashflow neutral point assuming the amount of federal reserve notes (AKA Dollar Bills), which a zero cost liability for the Federal Reserve stays constant. I view QE as effectively an interest rate swap by a central bank, whereby they buy for example a 10 yr bond and issue an overnight reserve that they pay the overnight rate on. What happens when a central bank runs cashflow negative because the coupon interest isn't great enough to pay the increasing overnight rate on excess reserves and RRP? Answer: The treasury bails them out or the Central Bank puts a deferred IOU on the balance sheet and the treasury won't see a reimbursement from the Central Bank until that IOU goes away. Think about the assumption that the CBO had for $30B per QUARTER of Federal Reserve reimbursement to the Treasury? That will be gone for quite awhile and will increase the deficit along with the increased cost of Treasury debt rolling over. Now for the punchline: If you think it's bad with the Federal Reserve's balance sheet yielding approx. 2% on its portfolio on the asset side, think about the BOJ and their monster balance sheet of 0% - .25% yielding debt financed by overnight yen reserves. Think they can raise rates or give up on that YCC? And so many folks wonder why the yen is in freefall. That is a financial accident waiting for the world to witness and experience. Very scary stuff in Tokyo.
You have a really cool way of explaining stuff, that even a noob like me can understand. I would pay to read more content like this. Keep up the good work!
Thank you! and thanks for reading
Thank you TLBS for taking the time to write this stuff. I definitely have to read this again a few more times slowly. I enjoy the comments section as I (like a few others) attempt to understand this environment better.
Thank you for reading!
You should write for the Financial Times
But then you would need a FT Subscription to read it!
Do you think it makes sense to use an increasing monetary base as entry signal for stocks/bonds? Staying out market as long as the monetary base is shrinking ?
Yes, (while not the only factor) its a huge factor for equity markets. as they say, don't fight the
Fed.