10 ms·

A decade after the crisis, The Fed plans to shrink its bond holdings

121 points by jpelecanos 9y ago

CaliforniaKarl 9y ago
It seems to me that it's unusual to see something be cleaned up, without that something also being totally destroyed. I hope this goes well!
- jarjar12 9y ago
  Eh. You have wrong it. Market keeps going up because we continue to have global growth. Over 66% of countries are showing positive GDP and growth. US growth is also fairly high. Historically GDP averages around 1.8%. The talk of 3% is just politics. In addition, technology has created a lot of efficiency providing healthy profits for businesses. In addition, there is a high feedback loop of spending by all major businesses. Example: apple produces phones that require a lot of software and hardware to work which means a lot of other companies involved which also creates competition among multiple phone companies to also produce something similar and so on. Yes we are at a fair valuations and I sincerely hope for a 10-20% correction. But we are in a 20 year bull run with minor bears in between. About money printing. Yes I agree some day one of the central banks will be trouble but other will bail it out. Also cheap money is good. It helps mid to lower income families come up. Micro loans are good example of it. Why can't lower income generating families have access to cheaper money ? Why do they have to pay 8-10% interest? Imagine if you were from a low to mid income family, wanting to go to school won't you want cheaper loans. And if people abuse that privilege then they will pay for it. If you are just getting out of school and need some house loan etc. won't be bette to have easy access to money? Or do you want 8-10% interest ? Yes I agree a lot of money has been printed but it has created healthy money vilocity that has gone appropriately to create value for everyone. World was much worse 15 years ago just go back and look.
  - novaRom 9y ago
    cheap money have created the next bubble of housing prices again
  - ThrustVectoring 9y ago
    >If you are just getting out of school and need some house loan etc. won't be bette to have easy access to money? Or do you want 8-10% interest? Not if everyone has access to easy money, no. House prices are roughly set by prevailing rents. Take the cost of renting and the cost of ownership and set them to roughly equal. Now, drop interest rates on mortgages a couple percent, what happens to house prices? Monthly payments of mortgages go down, renters and potential landlords see it and try to win bids for houses, driving housing prices back up again. Much the same thing is, IMO, going on with college prices: since they're largely financed, easier credit leads to higher bids. I'd much rather have college affordable period on a part-time entry-level salary than have interest rate times tuition be affordable on a white-collar salary. Basically, lower interest rates doesn't particularly help future borrowers. Falling interest rates helps folks who hold assets and can sell them or refinance the debt servicing them.
  - adventured 9y ago
    No, you have it wrong. > US growth is also fairly high. Historically GDP averages around 1.8%. The talk of 3% is just politics. The average annual GDP growth by the US since WW2 is 3.2%. That's for nearly 70 years. That's not politics, that's fact. That figure would be even higher if it weren't for the last ten year economic dead zone being included. Growth from 1870 to 1940 was even faster than that, due to growing off of a smaller base and the post Civil War rapid industrialization period.
  - userpass 9y ago
    >If you are just getting out of school and need some house loan etc. won't be bette to have easy access to money? That only hepls with non rivalrous goods where the price increase also causes the supply to increase. Unfortunately you can't manufacture land in a chinese factory and then ship it to where it's needed.
module0000 9y ago
Not the usual story you see on HN... but it's still interesting - if the trading of US debt is the kind of thing that gets you going. That said, it does get me going. What this story is telling you is: 1) Futures on US treasury bonds are going to fall, as the DOT unloads 42 million of them. This is a lot, and it will affect the value of your investments/401k in a non-trivial way. 2) Equities(and futures based on them, e.g. ES/NQ/DJIA) are going to rise, simply due to their inverse relationship with treasury bonds. 3) Commodities(such as oil, gasoline, natural gas) will increase in price. 4) Foreign interests will have a "fire sale" of US debt available to them for purchase. Whether or not they will buy it is anyone's guess. I'd say "if you know, you should tell us!", but we all know that won't happen. What does this mean for the average investor? Short on bonds, long on equities. Your 401k or other managed investment portfolio is likely taking this approach on your behalf anyway(if they aren't, fire them and find one that does). Edit: If you want to know what these particular financial instruments are and how they work(bonds and how they are traded), see here: https://www.cmegroup.com/education/files/understanding-treasury-futures.pdf https://www.cmegroup.com/education/files/understanding-treas...
- toomuchtodo 9y ago
  Can equities continue to rise in price? They already seem overpriced at current P/E valuations, disconnected from fundamentals.
  - module0000 9y ago
    Every time I find myself thinking "these are too high...", that's when my short stops start getting hit. When we talk about the equity indices at work, we have been referring to them as "defying reality" for the last 6 months. Just my 2 cents, but I think they are a huge bubble, and at some point they've got to pop. I wish I had the equity for a very-long-term short, but unfortunately I don't.
    - deleted 9y ago
      [deleted]
    - 9y ago
aaronhoffman 9y ago
Good podcast on this topic: https://itunes.apple.com/us/podcast/the-lara-murphy-show/id1084202846?mt=2&i=1000391675152 https://itunes.apple.com/us/podcast/the-lara-murphy-show/id1...
- pmorici 9y ago
  Non-iTunes version https://lara-murphy.com/podcast/episode-42-feds-plan-unload-feds-bonds/ https://lara-murphy.com/podcast/episode-42-feds-plan-unload-...
joe_the_user 9y ago
Color me completely skeptical - not that it won't happen (though it might not) but that it will mean what the WSJ seems to say. One of the things about the "winding" which started all this was that it involved bailing out institutions considered too-back-to-fail. And that bailing out altogether meant that such institutions had the "full faith and credit of the US government", just like what's printed on dollar bills and these institutions could effectively print money more or less like the Fed. So the Fed itself has said it will start selling it's particular portfolio, with the proviso that it will stop if anything seems to be going wrong. Which is to say that this is "privatizing the bubble" since the too-big-to-fail institutions can effectively "print" any money that leaves via the Fed's action. Obviously, there are micro ways that this will play out, this will change the color and emphasis of the "Greenspan Put" or it's many latter-day equivalents but those are small adjustments, not fundamental shifts - ie, we're still in bubble-nomics, well, unless the Fed really fumbles this.
- linkregister 9y ago
  I've seen this used as a pro-bailout talking point: "the government made a large profit off of the institutions it bailed out." I haven't had the time to evaluate it. Is it credible? If so, would it change your view? Or are the valuations non-GAAP or otherwise not transferrable at the same value?
  - joe_the_user 9y ago
    It doesn't matter if the Fed makes a profit. The Fed can print money - the Fed's job is stabilizing the market and the economy, not making money (which it can literally do at a touch of a button). And as a note, the Fed has stabilized markets very well for the last eight years - at the price of speculative distortions to the real economy.
    - wallace_f 9y ago
      >The Fed has stabilized markets very well for the last eight years It's very hard to really know this. We can't experiment, and we are a really long way off from accurately simulating the real world mathematically. The most academically accepted hardcover on the Great Depression (A Monetary History...) stated the Fed was most responsible for it. The thing about the Fed is that money represents real goods and services. That's real product of labor that does something useful for someone else. The Fed, at face value, tells us it can pull some levers and create an alchemy where it produces more real value in the economy. That is called magic, or economics, and it doesn't really work. Their actual role is to serve as a nanny state subsidy institution for the big banking empires. There is the Keynesian argument that the Fed needs to mamage aggregate demand, but there's no way to test if that's really true. Personally, I'd much rather take a money supply controlled by a k-percent rule, get rid of the Fed, and make all those "smartest guys in the room" working in finance go do something useful instead.
sitharus 9y ago
Same article without the paywall: http://www.msn.com/en-us/money/markets/the-fed-a-decade-after-the-crisis-is-about-to-embark-on-the-great-unwinding/ar-AAs8lnh http://www.msn.com/en-us/money/markets/the-fed-a-decade-afte...
paulpauper 9y ago
Since 2008, given all the failed past predictions about the fed being unable to wind-down its balance sheet, failed predictions of TARP being a failure, failed predictions that rising interest rates would hurt the US economy, and failed predictions about how the fed ending QE would hurt the economy, I have every reason to believe, even without knowing all the details of this story or having any claim to clairvoyance, that this too is nothing to worry about and will pass like all the other doom and gloom premonitions. Against all odds, policy makers keep pulling through, defying predictions of doom. It doesn't always make sense, but sometimes you have to suspend skepticism and put your faith in IQ and policy. The EMH also stipulates that this is wind-down is already priced into the bond and stock markets, so betting against the bond market in anticipation of these bonds flooding the market, is far from a sure-fire strategy.
ChuckMcM 9y ago
A blendle link for those with Blendle : https://blendle.com/i/the-wall-street-journal/the-fed-bracesfor-the-great-unwinding/bnl-wallstreetjournal840-20170919-1_4?sharer=eyJ2ZXJzaW9uIjoiMSIsInVpZCI6ImNodWNrbWNtYW5pcyIsIml0ZW1faWQiOiJibmwtd2FsbHN0cmVldGpvdXJuYWw4NDAtMjAxNzA5MTktMV80In0%3D https://blendle.com/i/the-wall-street-journal/the-fed-braces... Pretty much no matter what it is going to be something economists are going to debate for the next 100 years :-)
tmaly 9y ago
I do not believe they will do this. The US has 20 trillion in debt right now. If you notch the interest rate up just a little bit, you will create chaos in the financial markets.

121 points by jpelecanos 9y ago

It seems to me that it's unusual to see something be cleaned up, without that something also being totally destroyed. I hope this goes well!

jarjar12 9y ago
Eh. You have wrong it. Market keeps going up because we continue to have global growth. Over 66% of countries are showing positive GDP and growth. US growth is also fairly high. Historically GDP averages around 1.8%. The talk of 3% is just politics. In addition, technology has created a lot of efficiency providing healthy profits for businesses. In addition, there is a high feedback loop of spending by all major businesses. Example: apple produces phones that require a lot of software and hardware to work which means a lot of other companies involved which also creates competition among multiple phone companies to also produce something similar and so on. Yes we are at a fair valuations and I sincerely hope for a 10-20% correction. But we are in a 20 year bull run with minor bears in between. About money printing. Yes I agree some day one of the central banks will be trouble but other will bail it out. Also cheap money is good. It helps mid to lower income families come up. Micro loans are good example of it. Why can't lower income generating families have access to cheaper money ? Why do they have to pay 8-10% interest? Imagine if you were from a low to mid income family, wanting to go to school won't you want cheaper loans. And if people abuse that privilege then they will pay for it. If you are just getting out of school and need some house loan etc. won't be bette to have easy access to money? Or do you want 8-10% interest ? Yes I agree a lot of money has been printed but it has created healthy money vilocity that has gone appropriately to create value for everyone. World was much worse 15 years ago just go back and look.
- novaRom 9y ago
  cheap money have created the next bubble of housing prices again
- ThrustVectoring 9y ago
  >If you are just getting out of school and need some house loan etc. won't be bette to have easy access to money? Or do you want 8-10% interest? Not if everyone has access to easy money, no. House prices are roughly set by prevailing rents. Take the cost of renting and the cost of ownership and set them to roughly equal. Now, drop interest rates on mortgages a couple percent, what happens to house prices? Monthly payments of mortgages go down, renters and potential landlords see it and try to win bids for houses, driving housing prices back up again. Much the same thing is, IMO, going on with college prices: since they're largely financed, easier credit leads to higher bids. I'd much rather have college affordable period on a part-time entry-level salary than have interest rate times tuition be affordable on a white-collar salary. Basically, lower interest rates doesn't particularly help future borrowers. Falling interest rates helps folks who hold assets and can sell them or refinance the debt servicing them.
- adventured 9y ago
  No, you have it wrong. > US growth is also fairly high. Historically GDP averages around 1.8%. The talk of 3% is just politics. The average annual GDP growth by the US since WW2 is 3.2%. That's for nearly 70 years. That's not politics, that's fact. That figure would be even higher if it weren't for the last ten year economic dead zone being included. Growth from 1870 to 1940 was even faster than that, due to growing off of a smaller base and the post Civil War rapid industrialization period.
- userpass 9y ago
  >If you are just getting out of school and need some house loan etc. won't be bette to have easy access to money? That only hepls with non rivalrous goods where the price increase also causes the supply to increase. Unfortunately you can't manufacture land in a chinese factory and then ship it to where it's needed.

module0000 9y ago

Not the usual story you see on HN... but it's still interesting - if the trading of US debt is the kind of thing that gets you going. That said, it does get me going. What this story is telling you is: 1) Futures on US treasury bonds are going to fall, as the DOT unloads 42 million of them. This is a lot, and it will affect the value of your investments/401k in a non-trivial way. 2) Equities(and futures based on them, e.g. ES/NQ/DJIA) are going to rise, simply due to their inverse relationship with treasury bonds. 3) Commodities(such as oil, gasoline, natural gas) will increase in price. 4) Foreign interests will have a "fire sale" of US debt available to them for purchase. Whether or not they will buy it is anyone's guess. I'd say "if you know, you should tell us!", but we all know that won't happen. What does this mean for the average investor? Short on bonds, long on equities. Your 401k or other managed investment portfolio is likely taking this approach on your behalf anyway(if they aren't, fire them and find one that does). Edit: If you want to know what these particular financial instruments are and how they work(bonds and how they are traded), see here: https://www.cmegroup.com/education/files/understanding-treasury-futures.pdf https://www.cmegroup.com/education/files/understanding-treas...

toomuchtodo 9y ago
Can equities continue to rise in price? They already seem overpriced at current P/E valuations, disconnected from fundamentals.
- module0000 9y ago
  Every time I find myself thinking "these are too high...", that's when my short stops start getting hit. When we talk about the equity indices at work, we have been referring to them as "defying reality" for the last 6 months. Just my 2 cents, but I think they are a huge bubble, and at some point they've got to pop. I wish I had the equity for a very-long-term short, but unfortunately I don't.
  - deleted 9y ago
    [deleted]
  - 9y ago

aaronhoffman 9y ago

Good podcast on this topic: https://itunes.apple.com/us/podcast/the-lara-murphy-show/id1084202846?mt=2&i=1000391675152 https://itunes.apple.com/us/podcast/the-lara-murphy-show/id1...

pmorici 9y ago
Non-iTunes version https://lara-murphy.com/podcast/episode-42-feds-plan-unload-feds-bonds/ https://lara-murphy.com/podcast/episode-42-feds-plan-unload-...

joe_the_user 9y ago

Color me completely skeptical - not that it won't happen (though it might not) but that it will mean what the WSJ seems to say. One of the things about the "winding" which started all this was that it involved bailing out institutions considered too-back-to-fail. And that bailing out altogether meant that such institutions had the "full faith and credit of the US government", just like what's printed on dollar bills and these institutions could effectively print money more or less like the Fed. So the Fed itself has said it will start selling it's particular portfolio, with the proviso that it will stop if anything seems to be going wrong. Which is to say that this is "privatizing the bubble" since the too-big-to-fail institutions can effectively "print" any money that leaves via the Fed's action. Obviously, there are micro ways that this will play out, this will change the color and emphasis of the "Greenspan Put" or it's many latter-day equivalents but those are small adjustments, not fundamental shifts - ie, we're still in bubble-nomics, well, unless the Fed really fumbles this.

linkregister 9y ago
I've seen this used as a pro-bailout talking point: "the government made a large profit off of the institutions it bailed out." I haven't had the time to evaluate it. Is it credible? If so, would it change your view? Or are the valuations non-GAAP or otherwise not transferrable at the same value?
- joe_the_user 9y ago
  It doesn't matter if the Fed makes a profit. The Fed can print money - the Fed's job is stabilizing the market and the economy, not making money (which it can literally do at a touch of a button). And as a note, the Fed has stabilized markets very well for the last eight years - at the price of speculative distortions to the real economy.
  - wallace_f 9y ago
    >The Fed has stabilized markets very well for the last eight years It's very hard to really know this. We can't experiment, and we are a really long way off from accurately simulating the real world mathematically. The most academically accepted hardcover on the Great Depression (A Monetary History...) stated the Fed was most responsible for it. The thing about the Fed is that money represents real goods and services. That's real product of labor that does something useful for someone else. The Fed, at face value, tells us it can pull some levers and create an alchemy where it produces more real value in the economy. That is called magic, or economics, and it doesn't really work. Their actual role is to serve as a nanny state subsidy institution for the big banking empires. There is the Keynesian argument that the Fed needs to mamage aggregate demand, but there's no way to test if that's really true. Personally, I'd much rather take a money supply controlled by a k-percent rule, get rid of the Fed, and make all those "smartest guys in the room" working in finance go do something useful instead.

sitharus 9y ago

Same article without the paywall: http://www.msn.com/en-us/money/markets/the-fed-a-decade-after-the-crisis-is-about-to-embark-on-the-great-unwinding/ar-AAs8lnh http://www.msn.com/en-us/money/markets/the-fed-a-decade-afte...

paulpauper 9y ago

Since 2008, given all the failed past predictions about the fed being unable to wind-down its balance sheet, failed predictions of TARP being a failure, failed predictions that rising interest rates would hurt the US economy, and failed predictions about how the fed ending QE would hurt the economy, I have every reason to believe, even without knowing all the details of this story or having any claim to clairvoyance, that this too is nothing to worry about and will pass like all the other doom and gloom premonitions. Against all odds, policy makers keep pulling through, defying predictions of doom. It doesn't always make sense, but sometimes you have to suspend skepticism and put your faith in IQ and policy. The EMH also stipulates that this is wind-down is already priced into the bond and stock markets, so betting against the bond market in anticipation of these bonds flooding the market, is far from a sure-fire strategy.

ChuckMcM 9y ago

A blendle link for those with Blendle : https://blendle.com/i/the-wall-street-journal/the-fed-bracesfor-the-great-unwinding/bnl-wallstreetjournal840-20170919-1_4?sharer=eyJ2ZXJzaW9uIjoiMSIsInVpZCI6ImNodWNrbWNtYW5pcyIsIml0ZW1faWQiOiJibmwtd2FsbHN0cmVldGpvdXJuYWw4NDAtMjAxNzA5MTktMV80In0%3D https://blendle.com/i/the-wall-street-journal/the-fed-braces... Pretty much no matter what it is going to be something economists are going to debate for the next 100 years :-)

tmaly 9y ago

I do not believe they will do this. The US has 20 trillion in debt right now. If you notch the interest rate up just a little bit, you will create chaos in the financial markets.