liquidity - What We're Reading - StockBuz2024-03-28T10:32:58Zhttp://stockbuz.ning.com/articles/feed/tag/liquidityThere’s Not Much The Fed Can Do To Address A Liquidity Crisishttp://stockbuz.ning.com/articles/there-s-not-much-the-fed-can-do-to-address-a-liquidity-crisis2019-06-24T18:32:16.000Z2019-06-24T18:32:16.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><strong>Ms. DiMartino Booth, why is the Federal Reserve bad for America?<br /></strong>Because of its intellectual dishonesty. The Fed noticed around 2009 that if they had had a more reliable and realistic inflation gauge on which to set policy, they would have seen the crisis coming. But despite that recognition, they chose to do nothing about it.</p>
<p><strong>Are there more realistic inflation gauges?<br /></strong>Several Federal Reserve Districts have come up with alternative gauges. The underlying inflation gauge from the New York Fed for example also includes asset price inflation. And it runs about one percentage point higher than what the Fed measure is – they prefer the core Personal Consumption Expenditures Price Index, the core PCE.</p>
<p><strong>How would monetary policy look like with a more realistic inflation gauge?<br /></strong>Monetary policy would be much different. The Fed would not have been able to maintain a monetary policy as easy as it has done over the last couple of years. Central bankers are hiding behind the core PCE being at 1,6%. They’re saying that this gives them cover to not normalize interest rates. But even the core Consumer Price Index has been north of 2% for 14 months.</p>
<p><strong>What does this mean for current monetary policy?<br /></strong>Former Fed Chair Janet Yellen lead the slowest rate hiking campaign in the history of the Fed. Had she been using a more realistic inflation gauge, she would not have left current Chair Jay Powell with having to play catch-up. He wasn’t able to normalize interest rates, nor to run down the balance sheet as much as he would have been able to otherwise – and had Ben Bernanke not insisted on the 2% inflation target.</p>
<p><strong>What is the reason behind the inflation target of 2%?<br /></strong>Alan Greenspan and Paul Volcker said that the best inflation rate as far as households and businesses are concerned is 0%. There is nothing that is damaging to a household about inflation being non-existent. As Greenspan and Volcker both pointed out: If you have 2% inflation steadily for 50 years, the value of the dollar in your wallet is diminished. Inflation is corrosive as a factor of time.</p>
<p><strong>What about the risk of falling into deflation?<br /></strong>A deflation in wages, as we saw during the Great Depression, is the worst-case scenario. But Japan has served as a modern-day reminder that households are not going to be injured by very very low levels of inflation. In a disinflationary environment with a decent level of growth, you’re not running that risk. You’re still going to have job creation and economic growth. But you’re not going to have the pressure of rising prices on households. Housing makes up 33% of the average US household budget, and housing inflation has gone through the roof in recent years. Not that it’s captured correctly in the metric that the Fed uses.</p>
<p><strong>So, why is the Fed aiming for 2%?<br /></strong>When Stanley Fisher was vice chair, he asked the same question during his first Federal Reserve meeting. He said, why do you insist on using this antiquated broken method? One of the staffers raised his hand and said if we didn’t use it, then the models would not work.</p>
<p><strong>Why has the Fed become more dovish recently?<br /></strong>Credit market volatility picked up appreciably last year as we moved from 2,1 trillion $ of global Quantitative Easing for the full year 2017 to zero in December. This drained liquidity from the system on a global basis. In December, we had had no junk bond issuance in the US for a record period of 41 days. There were outflows from bond funds and spreads started to widen.</p>
<p><strong>So the reason for the Fed being more dovish wasn’t the stock market?<br /></strong>Not as much as it has to do with how problematic and difficult it would be to address a seizing up in bond market liquidity with monetary policy, given that we have got nearly 250 trillion $ of debt worldwide. The fact that Powell completely changed his approach and started sounding like he was channeling a combination of Janet Yellen and ECB President Mario Draghi implies, that there’s not much the Fed can do to address a liquidity crisis.</p>
<p><strong>How liquid is the bond market now?<br /></strong>Some weeks ago the issuance in the junk bond market dried up for an entire week. After that, Powell had his Draghi moment at the Chicago Fed conference, saying the Fed would do whatever it takes to sustain the economic expansion.</p>
<p><strong>What do you expect at the Fed meeting on June 19th?<br /></strong>I expect the Fed to lower its expectations for economic growth and the labor market and prepare the financial markets for the possibility of a rate cut if conditions were to deteriorate. Powell will lay the groundwork for having as much flexibility as the Fed needs to cut rates. It’s quite clear that it is a global coordinated effort, given the communiques out of European Central Bank and the bank of Japan where we’re starting to hear about rate cuts from these two institutions.</p>
<p><strong>What is the state of the US economy?<br /></strong>The US economy is definitely slowing. The CEO confidence is at the lowest level since the last quarter of 2016.</p>
<p><strong>Is there a recession imminent?<br /></strong>It could just be a matter of either we are already in recession or it is coming very soon.</p>
<p><strong>But stock markets trade near record highs.<br /></strong>The market is expecting the Fed to be very aggressive in launching a rate cut campaign. Powell and others have given speeches recently that appear to advocate negative interest rates, as is the case in Europe and in Japan, and also more Quantitative Easing. A lot of the optimism in stock markets is based upon investors’ perceptions that if the Fed pumps enough liquidity into the system, that will allow for stock markets to never correct.</p>
<p><strong>So Powell will save the stock market.<br /></strong>That’s the reigning theory. Jay Powell will save the day. We have never seen an episode in US history when we technically are in a recession and when earnings decline quarter after quarter but we don’t see a negative impact in the stock market. But try telling that to the stock market.</p>
<p><strong>How will monetary policy look like in a couple of years?<br /></strong>I have no idea. We are falling further down into the rabbit hole of unconventional monetary policy.</p>
<p><strong>Is there any way to get out?<br /></strong>I don’t know. There is so much debt. They have created debt in order to resolve an over-indebtedness problem. So it’s the policy makers themselves that have made the situation that much worse. Think about insurance companies and public pension plans throughout Europe and Japan. How do you sustain yourself when interest rates are negative?</p>
<p><strong>What can the Central Banks do?<br /></strong>There are no easy choices to be made. If you’re Draghi’s replacement, what do you do? Do you just say, okay let Italy go, it’s only the third largest sovereign debt market in the world. Central Bankers have made their choices much more difficult by insisting on never normalizing. It was well-known in the US in 2008 that there was a liquidity problem that was seizing the market, not the cost of credit. The Fed didn’t even have to go below 2% in 2008 because what was plaguing the financial system was a lack of liquidity. Those problems were resolved with the facilities that were created by the New York Fed. The problems were not resolved by taking interest rates to 0%. The price of money at times of financial market disruption is irrelevant.</p>
<p>Courtesy of <a href="https://www.fuw.ch/article/theres-not-much-the-fed-can-do-to-address-a-liquidity-crisis/" target="_blank">Finanz and Wirtschaft</a></p></div>Economists Expect Fed to Start Shrinking Balance Sheet This Yearhttp://stockbuz.ning.com/articles/economists-expect-fed-to-start-shrinking-balance-sheet-this-year2017-04-14T16:03:58.000Z2017-04-14T16:03:58.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Most economists surveyed by The Wall Street Journal expected Federal Reserve officials to begin winding down their $4.5 trillion <a href="https://www.wsj.com/articles/the-feds-bond-portfolio-is-growing-up-and-that-means-less-support-for-the-economy-1486031403" class="icon none">portfolio of bonds</a> and other assets this year.</p>
<p>Nearly 70% of business and academic economists polled in recent days expected the Fed will begin allowing the portfolio, also called the <a href="https://www.wsj.com/articles/federal-reserve-readies-plan-for-balance-sheet-1491000013" class="icon none">balance sheet</a>, to shrink by allowing securities to mature without reinvesting the proceeds at some point in 2017. Of the economists who expected a shift in the Fed’s balance sheet strategy this year, the majority predicted the process would begin in December.</p>
<p>In last month’s survey, just 22.2% of economists expected the Fed to begin <a href="https://www.wsj.com/articles/fed-grapples-with-massive-portfolio-1485717712" class="icon none">shrinking its portfolio</a> this year. Fewer than a quarter of economists in the latest poll expected the Fed to wait until the first quarter of next year to start to whittle down its portfolio, compared to a third last month.</p>
<p>In recent weeks, Fed officials have said they are discussing plans to start gradually reducing the large bondholdings the central bank accumulated during and after the financial crisis through asset-purchase programs aimed at lowering long-term interest rates and boosting economic growth.</p>
<p>The Fed wants to shrink the balance sheet to an undetermined size now that the economy is growing moderately, although officials haven’t decided exactly how to do it or when to start.</p>
<p>The central bank currently reinvests the proceeds from its maturing assets, and could decide to taper the pace of those reinvestments over several months or cease them altogether.</p>
<p>Fed Chairwoman Janet Yellen and other senior officials have stressed that they want the process to be gradual and predictable.</p>
<p>“Expect the Fed to announce tapering strategy details at the December meeting with reinvestments beginning to decline in January 2018,” Deutsche Bank Chief U.S. Economist Joseph LaVorgna said in the latest WSJ survey.</p>
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<div class="wsj-article-caption" itemprop="caption"><a href="https://si.wsj.net/public/resources/images/OG-AM538_FEDSUR_FON_20170412154958.png" target="_blank"><img src="https://si.wsj.net/public/resources/images/OG-AM538_FEDSUR_FON_20170412154958.png?width=450" class="align-full" width="450" /></a><span class="wsj-article-caption-content">When Will the Fed Act? / Expectations for the next interest-rate increase in June have soared since the Fed last raised rates in March</span> <span class="wsj-article-credit" itemprop="creator"> Source: WSJ Survey of Economists</span></div>
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<p>Some of the business and academic economists polled this month said they view shrinking the balance sheet as complementary to tightening monetary policy through gradual increases in the Fed’s benchmark short-term interest rate, the federal-funds rate, since shrinking the balance sheet would likely cause long-term rates to rise.</p>
<p>Scott Anderson at Bank of the West said he expects the Fed to raise the fed-funds rate in June and September and then pause rate increases “for a while as they start to scale back their balance sheet.”</p>
<p>Gregory Daco of Oxford Economics expected the Fed to hold off on raising rates in the final quarter of this year once it begins addressing the balance sheet. “The Fed is eager to mop up excessive liquidity,” he said.</p>
<p>On interest rates, most economists surveyed expected the Fed to hold short-term interest rates steady at its May 2-3 policy meeting, and next raise them in June.</p>
<p><a href="https://www.wsj.com/articles/fed-raises-interest-rates-remains-on-track-to-keep-tightening-1489600935" class="icon none">Fed officials raised the fed-funds rate</a> last month by a quarter percentage point to a range between 0.75% and 1% and penciled in two more moves this year.</p>
<p>Nearly 80% of the economists surveyed expected the Fed will raise rates at its June 13-14 policy meeting, up from nearly 70% in last month’s survey. Just two out of 61 economists polled in April expected the next rate increase in July, 10 expected it in September and only one predicted officials will hold off until December to next raise rates.</p>
<p>While most economists forecast the next rate rise in June, they were divided over when the Fed will move after that. More than half, 55.7%, expected the central bank to increase interest rates to a range of 1.25% to 1.5% in September. Just under a third, 31.1%, expected the third rate increase of 2017 in December.</p>
<p>Economists saw just an average 14% probability of a rate increase in May.</p>
<p>The Wall Street Journal surveyed 61 economists from April 7 to 11, but not everyone answered every question.</p>
<p>Courtesy of <a href="https://www.wsj.com/articles/wsj-survey-most-economists-expect-fed-to-start-shrinking-balance-sheet-this-year-1492092000?mod=e2twe" target="_blank">WSJ</a></p>
</div>Stocktwits Concede: "It's Time To Lay Low"http://stockbuz.ning.com/articles/stocktwits-concede-it-s-time-to-lay-low2011-11-26T20:00:00.000Z2011-11-26T20:00:00.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><span style="font-family: comic sans ms,sans-serif;"><em>Even the most bullish of bulls have finally seen the light.  From this weeks <a href="http://stocktwits50.com/2011/11/26/stocktwits-50-november-28/" target="_blank">Stocktwits post.</a></em></span></p>
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<p>A banking (currency) system is an act of faith: it survives only for as long as people believe it will” – Michael Lewis, Boomerang, 2011</p>
<p><a href="http://stocktwits50.com/wp-content/uploads/2011/11/fxe-monthly.png"><img class="alignleft size-full wp-image-4700" title="fxe monthly" src="http://stocktwits50.com/wp-content/uploads/2011/11/fxe-monthly.png" width="322" height="169" /></a></p>
<p>Only 15 days ago, there were so many charts that looked ready to break out and participate in a year-end market rally. Fast forward two weeks of political inaction in the face of rising European sovereign debt yields and equity markets across the world look like Niagara Falls. A typical story of 2011 – the obvious rarely happens, the unexpected constantly occurs. Constant false breakouts and breakdowns that 2011 brought has gradually conditioned market participants to shrink their investing horizons. For better or for worse, we have all become traders.</p>
<p>There is an apparent crisis of confidence in capital markets. No one wants to own European bonds, which makes the cost of borrowing unattainable for countries like Italy and Spain. The lack of trust often leads to liquidity crisis and a liquidity crisis is the shortest way to solvency crisis. In such an environment, no one can blame investors for being defensive. People are just going to cash until the political mess in Europe is resolved in one way or another.</p>
<p>For the week, the St50 momentum index lost 5.7%. <a class="ticker" href="http://stocktwits.com/symbol/QQQ" target="_blank">$QQQ</a> and <a class="ticker" href="http://stocktwits.com/symbol/SPY" target="_blank">$SPY</a> fell 4.6%. There is no point highlighting certain sectors or giving individual assessment to stocks at this phase of the market. Relative strength is a powerful stock picking criteria, but there are times when equity selection is a waste of time and stocks just move together in groups. This characteristic is typical for downtrends.</p>
<p>Market sentiment is at a point where the major indexes can either crash 10%+ or rally 5-10% on some unexpected news. Fundamentals play little role here, obvious levels of support and resistance are irrelevant, and stocks trade on headlines and pure emotions. This is certainly not a time to be aggressive and for many it is wiser to just sit it out on the sidelines.</p>
<p>Capital constantly flows somewhere. In times when the return <em>of</em> principle is considered more important than seeking higher return, capital goes to perceived safety – U.S. dollars, U.S. Treasuries, Japanese Yen. The return that those asset classes provide is minimal, so money will not stay there forever. Sooner or later, capital will find a higher yielding asset to flow into. It has always done it and this time won’t be any different. Price action will be a safe leading indicator. We just have to lay low until the market makes her next move.</p>
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