8 ms·

This will be blamed on COVID-19, but the problems go much deeper. Last year the Fed lost control of the repo market. the event was widely discounted at the time

by aazaa 7y ago

This will be blamed on COVID-19, but the problems go much deeper. Last year the Fed lost control of the repo market. the event was widely discounted at the time as an end-of-tax-year fluke. It wasn't. Six month ago, the yield curve inverted. People who should have known better said "this time is different." Speculators have been trained over the course of 10+ years to buy the dip. The Fed has your back. What we're seeing is the beginning of the end of that resolve. The last time this happened was during the GFC. It's not normal, and it's probably not a one-time event, either.

NikolaeVarius 7y ago
So what are you shorting?
- aguyfromnb 7y ago
  Why do you have to short anything? The idea was to get more defensive months ago. Long term treasuries are up almost 50% y-o-y. If you think it's easy to short things in a volatile market like this, then you've probably never tried to...
  - papito 7y ago
    I started getting defensive right after the election of 2016. Modern history does not have an example of you know which party going on a tax cutting, over-spending, self-dealing, deregulation binge that did not end in a catastrophe. Add to that complete lack of competency when it comes to dealing with a not self-made crisis (a matter of time), and only a chump would think the good times would keep on rolling. The market so far has absorbed the dumb trade war by pure optimism, and we only narrowly avoided a war with Iran. It all has been blind luck so far, and it just ran out.
- vikramkr 7y ago
  Your everyday investor probably shouldn't be shorting in ultra high volatility periods like this. Markets spike for one day in the course of leading to a recession leads to a margin call and you can't post collateral, then you're done. Doesn't matter if it goes to zero a week after.
- senordevnyc 7y ago
  Buying puts on SPY. Realized gains (so far) are $30k from an initial "investment" of $1k about three weeks ago. Currently have about $10k riding with expirations in April and May. If the market shoots up because the Fed announces stimulus, I'll buy more. It's pretty clear that the virus is going to decimate the world economy for many months, maybe years. And watching the complete mismanagement by the US only increases my confidence. I also moved $600k to cash, about 80% of it a month ago. Never done that in 20 years of investing, and probably wouldn't advise it to anyone now either. But when China locked down the whole country, I knew it was time to stand on the sidelines. Worst case, I'd lose out on a few percentage points of growth and jump back in once the threat had passed. I also still have significant indirect exposure through unvested employer stock. To be clear, this is all fairly risky and ill-advised.
aguyfromnb 7y ago
I'll add certain "tech companies" making no money doubling and tripling in a matter of months. The blow-off top was obvious, Covid19 was a mere catalyst.
whatshisface 7y ago
>Six month ago, the yield curve inverted. People who should have known better said "this time is different." How does your story jive with the fact that the yield curves went back to normal? Either they are an indicator or they aren't.
- aguyfromnb 7y ago
  >Either they are an indicator or they aren't. Because after the inversion the market (and Fed) reacted? No indicator is infallible or static.
  - rtkwe 7y ago
    I've been skeptical of the whole yield curve as metric thing because it's not directly tied to the actual state of the economy directly just to the sentiment about the market X years in the future. Given how much we know the whole market is prone to group think, self delusion, and outright manipulation I've grown very skeptical of any indicator about the market that comes directly from the market.
    - prmph 7y ago
      But the actual economy _is_ still about sentiment, no?
      - jakeinspace 7y ago
        From consumers and suppliers (to some degree), not so much from buyers of treasury notes.
      - rtkwe 7y ago
        In most places yeah which is why the kind of highly instrumented self reflection of the sentiment like the yield curve inversion can be dangerous. It's not a sign that says there's going to be a recession it's just a sign the people in that market think there will be one.
    - gmtx725 7y ago
cm2187 7y ago
I kind of think that the Fed will not let this go too far in the middle of an election year, particularly given Trump. But yeah, the market was clearly overextended, and stock price growth was accelerating.
- hn_throwaway_99 7y ago
  The multi-trillion dollar question, though, is whether the Fed actually has much ability to help much with the current situation. Flooding the economy with cash probably isn't going to make people want to book a cruise anytime soon.
- jurassic 7y ago
  It's really not up to the Fed; they had an emergency rate cut last week and it was just a minor blip on the overall downward slide. This is a demand-driven crisis, not a liquidity crisis or credit crunch like 2008. Monetary policy isn't going to get you very far this time.
  - cm2187 7y ago
    No the Fed can push asset prices through QE
aswanson 7y ago
Correction is way overdue. Problem is, Fed has no ammo left with interest rates at near zero. We're in for rough days, people.
- rtkwe 7y ago
  Only if restricted to the relatively arms length levers like interest rates. There's still plenty of room for more drastic measures like buying stock directly in companies like Japan has done or huge prop ups like a new WPA.
- adventured 7y ago
  The Fed has as much ammo as there is wealth held in dollars. Which is to say, a lot. First, there is negative rates. Punishing people for holding cash. The ECB and Bank of Japan have done a lot of pioneering work there, the Fed will have already extensively studied what they did, what worked, what didn't work. Second, they have QE, monetizing debt & debasing dollar wealth, which is exactly what they'll unleash for the next recession. Inflation isn't much of a concern right now, so they'll feel free to 'print' rather wildly. Annual budget deficits will blowout, probably up to $2 trillion or more, with the next recession, so the Fed will have to print dramatically to fund that regardless.
  - steveeq1 7y ago
    I can practically just smell the inflation.
    - Majromax 7y ago
      > I can practically just smell the inflation. Then the Fed isn't out of ammunition. The purpose of Fed easing would be precisely to generate/maintain target levels of inflation. The idea that the "Fed is out of ammunition" is that its conventional policy tool (rate changes) is seen as near a limit, such that the Fed can't generate further inflation if it wants to. But here, you "smell the inflation," so by definition the contemplated actions are in fact ammunition.
  - 7y ago
ailideex 7y ago
> This will be blamed on COVID-19 Good. Because I don't buy for a moment that without COVID-19 the situation would be what it is now. Hindsight is 2020 and predictions of doom and stock market collapse is a dime a dozen.
- 76543210 7y ago
  In 2013 I wouldn't be predicting a recession. In 2017 after Trump announced tariffs and it was ~10 years since the last recession. I was concerned. Maybe stock prices were fine, but multiple companies I've worked for became unprofitable and got rid of tens of thousands of contractors. Recession? Definitions are toxic to the real problem.
  - ailideex 7y ago
    > Recession? Definitions are toxic to the real problem. Okay, then lets not use them. Is what we are seeing now primarily a consequence of of COVID-19 or not?
    - paulmd 7y ago
      > Is what we are seeing now primarily a consequence of of COVID-19 or not? "is the 2008 crisis primarily a consequence of mortgages or not?" In the grand scheme of things, no, it's a consequence of a bubbled economy that has been goosed with tax cuts, extremely low interest rates, and deregulation for too long and is overdue for a correction. The proximate cause is Covid but it just was the spark that lit the fire, there was lots of fuel building up. https://en.wikipedia.org/wiki/Necessity_and_sufficiency https://en.wikipedia.org/wiki/Necessity_and_sufficiency This is why you don't cut tax rates and keep interest rates super low when the economy is already roaring. Now we're out of options for dealing with a real financial crisis. Trump of course understands none of this since he's a narcissistic con man who just understands "tax cuts = economy more better!". Insofar as he can be said to understand anything - he's not a man that can be described as intellectually curious.
      - 7y ago
fancyfredbot 7y ago
This is widely being blamed on oil prices (edit: the virus would have been priced in last week to some extent, but the decision by Saudi Arabia to increase oil production happened over the weekend and hadn't been).
- treis 7y ago
  Oil prices going down is a good thing for the economy. I think people are confusing cause with an effect/correlation. Oil going down usually indicates a recession. Bad economy -> Lower demand for Oil -> Lower oil prices. In that case it's a signal/trailing indicator. In this case it's: Increased oil supply -> Lower oil prices -> Everything gets cheaper to make -> Increased economic activity
  - secfirstmd 7y ago
    Good for short/medium term economy, terrible for the environment though unfortunately. So probably bad for the long term economy when carbon/environmental risks take effect.
    - Mountain_Skies 7y ago
      Since when has Wall Street become focused primarily on the long term while ignoring the next few quarters?
  - kaiabwpdjqn 7y ago
    That makes a lot of sense to me, but it doesn’t seem to be the case and I don’t understand why. Is it oil prices down -> large oil based economies at risk due to vastly lower margins -> global instability from inability to make payments?
    - dariusj18 7y ago
      Maybe it's because the US is now a massive oil producer, but there are a lot of oil companies in a lot of debt, so depressed oil prices will force them to go into bankruptcy. Next step will be US government propping up the industry somehow, IMO, either with a bailout or by buying oil at above market prices and increasing strategic reserves.
snarf21 7y ago
You are correct. Equities have been propped up by free money for too long. I thought we would have to wait until the election to trigger this correction but better sooner than later. However, the Fed needs to raise rates and we need fiscal policy to fix this, not monetary. There is still too much money out there with nowhere to go. A ton of that money is going to come right back in and run it back up some. At least they are buying the dip even if earnings will crater.
dreamcompiler 7y ago
The Market is like a supercooled liquid. It's been poised to freeze for months, just waiting for a crystallization seed. COVID-19 and the Saudis gave it two.
gdubs 7y ago
Another way to put it is that Coronavirus is forcing people to realize that we’ve been papering-over weaknesses with easy money for quite some time. That said, “economists have predicted 5 out of the last 3 recessions” — people have been warning against one for years now. But the problem is that coronavirus is threatening the real “brick and mortar” economy — travel, restaurants, retail, etc. Its hard to address that without fiscal stimulus, and we haven’t seen much talk in terms of that yet. Add to the list sub-prime auto loans, a huge amount of student loan debt...
- tmpz22 7y ago
  It would be interesting to see what percentage of student loans are serviced by brick and mortar retail, bar tending, barista, etc. types of gigs.
  - toomuchtodo 7y ago
    https://www.nbcnews.com/news/us-news/student-loan-statistics-2019-n997836 https://www.nbcnews.com/news/us-news/student-loan-statistics... Check out the graphs presented, particularly the last one. Default is very likely for those most likely to have student loan debt (younger workers in lower quality service jobs), but there isn't a systemic risk as the federal government is the insurer of last resort. These are loans in name only; they are, in actuality, taxes you can't default on (or so was traditionally thought; we're making headway in having the ability to default on these obligations and get out from underneath them [1]). [1] https://www.natlawreview.com/article/student-loan-discharged-bankruptcy-just-blip-or-something-bigger https://www.natlawreview.com/article/student-loan-discharged...
dobleboble 7y ago
Do you have a reference for the claims about the repo market? I see so much FUD posted, and so few references to primary sources. Reader beware of grand proclamations and doomsday predictions, especially from new accounts, especially when they don't provide reputable sources.
- foota 7y ago
  Like... whether it happened? https://www.bloomberg.com/news/articles/2020-01-06/why-the-u-s-repo-market-blew-up-and-how-to-fix-it-quicktake https://www.bloomberg.com/news/articles/2020-01-06/why-the-u...
deleted 7y ago
[deleted]
voisin 7y ago
Is turning Global Financial Crisis into an acronym necessary? It certainly isn’t standard. Turning things into acronyms that are used a single time in a written statement without reference or explanation is one of the most obnoxious things in this industry. Paraphrasing grandmas everywhere, if you can’t write things properly, don’t write anything at all.
- Youden 7y ago
  I get your objection but I don't agree with it in this case. As someone who is neither you nor OP, I see GFC as a pretty well-known acronym, especially in this context (recessions, financial troubles).
king_panic 7y ago
Would it have happened without COVID-19?
throwaway713 7y ago
> This will be blamed on COVID-19, but the problems go much deeper This is a strong claim. Can you prove it?
- feistypharit 7y ago
  The quantitative easing that was going on is a start... https://www.marketwatch.com/story/the-federal-reserve-is-stuck-in-quantitative-easing-hell-2020-01-16 https://www.marketwatch.com/story/the-federal-reserve-is-stu...

by aazaa 7y ago

NikolaeVarius 7y ago

So what are you shorting?

aguyfromnb 7y ago
Why do you have to short anything? The idea was to get more defensive months ago. Long term treasuries are up almost 50% y-o-y. If you think it's easy to short things in a volatile market like this, then you've probably never tried to...
- papito 7y ago
  I started getting defensive right after the election of 2016. Modern history does not have an example of you know which party going on a tax cutting, over-spending, self-dealing, deregulation binge that did not end in a catastrophe. Add to that complete lack of competency when it comes to dealing with a not self-made crisis (a matter of time), and only a chump would think the good times would keep on rolling. The market so far has absorbed the dumb trade war by pure optimism, and we only narrowly avoided a war with Iran. It all has been blind luck so far, and it just ran out.
vikramkr 7y ago
Your everyday investor probably shouldn't be shorting in ultra high volatility periods like this. Markets spike for one day in the course of leading to a recession leads to a margin call and you can't post collateral, then you're done. Doesn't matter if it goes to zero a week after.
senordevnyc 7y ago
Buying puts on SPY. Realized gains (so far) are $30k from an initial "investment" of $1k about three weeks ago. Currently have about $10k riding with expirations in April and May. If the market shoots up because the Fed announces stimulus, I'll buy more. It's pretty clear that the virus is going to decimate the world economy for many months, maybe years. And watching the complete mismanagement by the US only increases my confidence. I also moved $600k to cash, about 80% of it a month ago. Never done that in 20 years of investing, and probably wouldn't advise it to anyone now either. But when China locked down the whole country, I knew it was time to stand on the sidelines. Worst case, I'd lose out on a few percentage points of growth and jump back in once the threat had passed. I also still have significant indirect exposure through unvested employer stock. To be clear, this is all fairly risky and ill-advised.

aguyfromnb 7y ago

I'll add certain "tech companies" making no money doubling and tripling in a matter of months. The blow-off top was obvious, Covid19 was a mere catalyst.

whatshisface 7y ago

>Six month ago, the yield curve inverted. People who should have known better said "this time is different." How does your story jive with the fact that the yield curves went back to normal? Either they are an indicator or they aren't.

aguyfromnb 7y ago
>Either they are an indicator or they aren't. Because after the inversion the market (and Fed) reacted? No indicator is infallible or static.
- rtkwe 7y ago
  I've been skeptical of the whole yield curve as metric thing because it's not directly tied to the actual state of the economy directly just to the sentiment about the market X years in the future. Given how much we know the whole market is prone to group think, self delusion, and outright manipulation I've grown very skeptical of any indicator about the market that comes directly from the market.
  - prmph 7y ago
    But the actual economy _is_ still about sentiment, no?
    - jakeinspace 7y ago
      From consumers and suppliers (to some degree), not so much from buyers of treasury notes.
    - rtkwe 7y ago
      In most places yeah which is why the kind of highly instrumented self reflection of the sentiment like the yield curve inversion can be dangerous. It's not a sign that says there's going to be a recession it's just a sign the people in that market think there will be one.
  - gmtx725 7y ago

cm2187 7y ago

I kind of think that the Fed will not let this go too far in the middle of an election year, particularly given Trump. But yeah, the market was clearly overextended, and stock price growth was accelerating.

hn_throwaway_99 7y ago
The multi-trillion dollar question, though, is whether the Fed actually has much ability to help much with the current situation. Flooding the economy with cash probably isn't going to make people want to book a cruise anytime soon.
jurassic 7y ago
It's really not up to the Fed; they had an emergency rate cut last week and it was just a minor blip on the overall downward slide. This is a demand-driven crisis, not a liquidity crisis or credit crunch like 2008. Monetary policy isn't going to get you very far this time.
- cm2187 7y ago
  No the Fed can push asset prices through QE

aswanson 7y ago

Correction is way overdue. Problem is, Fed has no ammo left with interest rates at near zero. We're in for rough days, people.

rtkwe 7y ago
Only if restricted to the relatively arms length levers like interest rates. There's still plenty of room for more drastic measures like buying stock directly in companies like Japan has done or huge prop ups like a new WPA.
adventured 7y ago
The Fed has as much ammo as there is wealth held in dollars. Which is to say, a lot. First, there is negative rates. Punishing people for holding cash. The ECB and Bank of Japan have done a lot of pioneering work there, the Fed will have already extensively studied what they did, what worked, what didn't work. Second, they have QE, monetizing debt & debasing dollar wealth, which is exactly what they'll unleash for the next recession. Inflation isn't much of a concern right now, so they'll feel free to 'print' rather wildly. Annual budget deficits will blowout, probably up to $2 trillion or more, with the next recession, so the Fed will have to print dramatically to fund that regardless.
- steveeq1 7y ago
  I can practically just smell the inflation.
  - Majromax 7y ago
    > I can practically just smell the inflation. Then the Fed isn't out of ammunition. The purpose of Fed easing would be precisely to generate/maintain target levels of inflation. The idea that the "Fed is out of ammunition" is that its conventional policy tool (rate changes) is seen as near a limit, such that the Fed can't generate further inflation if it wants to. But here, you "smell the inflation," so by definition the contemplated actions are in fact ammunition.
- 7y ago

ailideex 7y ago

> This will be blamed on COVID-19 Good. Because I don't buy for a moment that without COVID-19 the situation would be what it is now. Hindsight is 2020 and predictions of doom and stock market collapse is a dime a dozen.

76543210 7y ago
In 2013 I wouldn't be predicting a recession. In 2017 after Trump announced tariffs and it was ~10 years since the last recession. I was concerned. Maybe stock prices were fine, but multiple companies I've worked for became unprofitable and got rid of tens of thousands of contractors. Recession? Definitions are toxic to the real problem.
- ailideex 7y ago
  > Recession? Definitions are toxic to the real problem. Okay, then lets not use them. Is what we are seeing now primarily a consequence of of COVID-19 or not?
  - paulmd 7y ago
    > Is what we are seeing now primarily a consequence of of COVID-19 or not? "is the 2008 crisis primarily a consequence of mortgages or not?" In the grand scheme of things, no, it's a consequence of a bubbled economy that has been goosed with tax cuts, extremely low interest rates, and deregulation for too long and is overdue for a correction. The proximate cause is Covid but it just was the spark that lit the fire, there was lots of fuel building up. https://en.wikipedia.org/wiki/Necessity_and_sufficiency https://en.wikipedia.org/wiki/Necessity_and_sufficiency This is why you don't cut tax rates and keep interest rates super low when the economy is already roaring. Now we're out of options for dealing with a real financial crisis. Trump of course understands none of this since he's a narcissistic con man who just understands "tax cuts = economy more better!". Insofar as he can be said to understand anything - he's not a man that can be described as intellectually curious.
    - 7y ago

fancyfredbot 7y ago

This is widely being blamed on oil prices (edit: the virus would have been priced in last week to some extent, but the decision by Saudi Arabia to increase oil production happened over the weekend and hadn't been).

treis 7y ago
Oil prices going down is a good thing for the economy. I think people are confusing cause with an effect/correlation. Oil going down usually indicates a recession. Bad economy -> Lower demand for Oil -> Lower oil prices. In that case it's a signal/trailing indicator. In this case it's: Increased oil supply -> Lower oil prices -> Everything gets cheaper to make -> Increased economic activity
- secfirstmd 7y ago
  Good for short/medium term economy, terrible for the environment though unfortunately. So probably bad for the long term economy when carbon/environmental risks take effect.
  - Mountain_Skies 7y ago
    Since when has Wall Street become focused primarily on the long term while ignoring the next few quarters?
- kaiabwpdjqn 7y ago
  That makes a lot of sense to me, but it doesn’t seem to be the case and I don’t understand why. Is it oil prices down -> large oil based economies at risk due to vastly lower margins -> global instability from inability to make payments?
  - dariusj18 7y ago
    Maybe it's because the US is now a massive oil producer, but there are a lot of oil companies in a lot of debt, so depressed oil prices will force them to go into bankruptcy. Next step will be US government propping up the industry somehow, IMO, either with a bailout or by buying oil at above market prices and increasing strategic reserves.

snarf21 7y ago

You are correct. Equities have been propped up by free money for too long. I thought we would have to wait until the election to trigger this correction but better sooner than later. However, the Fed needs to raise rates and we need fiscal policy to fix this, not monetary. There is still too much money out there with nowhere to go. A ton of that money is going to come right back in and run it back up some. At least they are buying the dip even if earnings will crater.

dreamcompiler 7y ago

The Market is like a supercooled liquid. It's been poised to freeze for months, just waiting for a crystallization seed. COVID-19 and the Saudis gave it two.

gdubs 7y ago

Another way to put it is that Coronavirus is forcing people to realize that we’ve been papering-over weaknesses with easy money for quite some time. That said, “economists have predicted 5 out of the last 3 recessions” — people have been warning against one for years now. But the problem is that coronavirus is threatening the real “brick and mortar” economy — travel, restaurants, retail, etc. Its hard to address that without fiscal stimulus, and we haven’t seen much talk in terms of that yet. Add to the list sub-prime auto loans, a huge amount of student loan debt...

tmpz22 7y ago
It would be interesting to see what percentage of student loans are serviced by brick and mortar retail, bar tending, barista, etc. types of gigs.
- toomuchtodo 7y ago
  https://www.nbcnews.com/news/us-news/student-loan-statistics-2019-n997836 https://www.nbcnews.com/news/us-news/student-loan-statistics... Check out the graphs presented, particularly the last one. Default is very likely for those most likely to have student loan debt (younger workers in lower quality service jobs), but there isn't a systemic risk as the federal government is the insurer of last resort. These are loans in name only; they are, in actuality, taxes you can't default on (or so was traditionally thought; we're making headway in having the ability to default on these obligations and get out from underneath them [1]). [1] https://www.natlawreview.com/article/student-loan-discharged-bankruptcy-just-blip-or-something-bigger https://www.natlawreview.com/article/student-loan-discharged...

dobleboble 7y ago

Do you have a reference for the claims about the repo market? I see so much FUD posted, and so few references to primary sources. Reader beware of grand proclamations and doomsday predictions, especially from new accounts, especially when they don't provide reputable sources.

foota 7y ago
Like... whether it happened? https://www.bloomberg.com/news/articles/2020-01-06/why-the-u-s-repo-market-blew-up-and-how-to-fix-it-quicktake https://www.bloomberg.com/news/articles/2020-01-06/why-the-u...

deleted 7y ago

[deleted]

voisin 7y ago

Is turning Global Financial Crisis into an acronym necessary? It certainly isn’t standard. Turning things into acronyms that are used a single time in a written statement without reference or explanation is one of the most obnoxious things in this industry. Paraphrasing grandmas everywhere, if you can’t write things properly, don’t write anything at all.

Youden 7y ago
I get your objection but I don't agree with it in this case. As someone who is neither you nor OP, I see GFC as a pretty well-known acronym, especially in this context (recessions, financial troubles).

king_panic 7y ago

Would it have happened without COVID-19?

throwaway713 7y ago

> This will be blamed on COVID-19, but the problems go much deeper This is a strong claim. Can you prove it?

feistypharit 7y ago
The quantitative easing that was going on is a start... https://www.marketwatch.com/story/the-federal-reserve-is-stuck-in-quantitative-easing-hell-2020-01-16 https://www.marketwatch.com/story/the-federal-reserve-is-stu...