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Speculation on my part as I still don’t fully grok repo markets and only have a vague sense of how the treasuries market impacts equities but I’ll continue. I

Speculation on my part as I still don’t fully grok repo markets and only have a vague sense of how the treasuries market impacts equities but I’ll continue. I see some people saying this should alleviate some of the losses incurred by the recent market crash. I however, don’t see how that is the case. To me this seems like a move from the fed to make sure we don’t enter into a liquidity crisis which doesn’t necessarily do anything to signify substantial move upwards in equities. Sure, the fact that investors and traders can now be fairly confident we won’t hit a liquidity crunch and therefore kill some fear in the market, but was that the biggest factor causing the fear and selling in the first place? My understanding was the selling, and rightfully so, comes from the affects of CoVid. Travel bans, event bans, trade bans, lower consumer activity, etc. I don’t see how injecting capital into the treasuries market alleviates any of these factors. If anything I think this would cause equity markets to sell off more in the mid to long term knowing that the fed had to do this to keep shops open and liquidity available to those that need it (I'm talking to you banks). On top of this factor, this move by the fed surely will push inflation higher and I would assume production would slow given all the virus affects mentioned above. This puts our economy in stagflation which has a lot of the hallmarks of a recession...

jaywalk 7y ago
Like you said, this is to make sure we don't enter a liquidity crisis. The market will stay down for a while, but this will allow businesses to weather the storm instead of going under.
- dev-ns8 7y ago
  I agree. I think I'll be adding to my shorts here. I'd still be very interested in hearing a real experts opinion on what this QE move does to inflation.
01100011 7y ago
Will the fed's move fail to move asset prices higher but also cause inflation? If they're only making funds available for short-term loans, I'd figure neither equities or inflation will be significantly affected by the fed actions today. I would not be surprised if we see inflation though. The virus is going to lower productivity due to all the extra overhead. Prices in many areas will probably go up even as the economy stalls. Hopefully the governments react appropriately.
- dev-ns8 7y ago
  Based on your opinion, you think productivity will slow and inflation will rise (regardless of cause) that is the definition of stagflation and by definition bad for the economy, bad for equities. Given these two things, higher inflation lower productivity, we would expect to see the price of equities go lower. Also side note which is interesting, but not entirely sure how it effects things. This article hints that the Fed might be moving to a longer term asset purchase plan https://www.morningstar.com/news/dow-jones/2020031215079/fed-to-inject-15-trillion-in-bid-to-prevent-unusual-disruptions-in-marketsupdate https://www.morningstar.com/news/dow-jones/2020031215079/fed...
jcfrei 7y ago
> Speculation on my part as I still don’t fully grok repo markets and only have a vague sense of how the treasuries market impacts equities but I’ll continue. From my understanding the US treasury market is the most liquid and largest market for any asset in the world. Up until recently these treasuries had a positive real interest rate, so if you are a corporation with large amounts of cash (typically a bank) you don't want to hold this as cash in a banking account but rather you want to hold treasuries and get a small return. If there aren't enough people trading treasuries anymore and liquidity dries up this can have devastating effects on companies because they might hold lots of assets in the form of treasuries but they need to convert them to dollars to pay their employees or suppliers and need to sell treasuries for that. The repo facility of the FED is a buyer (or seller) of last resort that can hand out dollars for treasuries thus ensuring that there's no shortage of dollars. > On top of this factor, this move by the fed surely will push inflation higher and I would assume production would slow given all the virus affects mentioned above. I don't think this will push inflation higher. This is not QE (though there is a meme that it is) where the FED buys treasuries (and MBS) outright and holds them until expiry. If a bank sells treasuries to the repo facility then it will have to buy them back until a pre-determined date. So if the repo facility works it will compress the spread in the treasury market and thus reduce funding costs for banks and ensure that enough dollars are around. Right now it seems like lots of companies are hoarding cash and drawing close to the full amount of their credit lines which means banks are short dollars. Because most of these credit lines will probably be used to fund ongoing operations (pay employees, etc.) or bridge a shortfall in revenues they are unlikely to cause companies to invest more or hire more and drive up prices. Christine Lagarde today announced TLTRO III (https://www.ecb.europa.eu/mopo/implement/omo/tltro/html/index.en.html https://www.ecb.europa.eu/mopo/implement/omo/tltro/html/inde...) which serves the same purpose. Helping companies and households to survive a shortfall in income. In short, you don't want to have a bunch of companies going bankrupt just because the economy stopped for a couple of months - the bureaucratic costs and resulting uncertainty for consumers would be much too costly.

jaywalk 7y ago

Like you said, this is to make sure we don't enter a liquidity crisis. The market will stay down for a while, but this will allow businesses to weather the storm instead of going under.

dev-ns8 7y ago
I agree. I think I'll be adding to my shorts here. I'd still be very interested in hearing a real experts opinion on what this QE move does to inflation.

01100011 7y ago

Will the fed's move fail to move asset prices higher but also cause inflation? If they're only making funds available for short-term loans, I'd figure neither equities or inflation will be significantly affected by the fed actions today. I would not be surprised if we see inflation though. The virus is going to lower productivity due to all the extra overhead. Prices in many areas will probably go up even as the economy stalls. Hopefully the governments react appropriately.

dev-ns8 7y ago
Based on your opinion, you think productivity will slow and inflation will rise (regardless of cause) that is the definition of stagflation and by definition bad for the economy, bad for equities. Given these two things, higher inflation lower productivity, we would expect to see the price of equities go lower. Also side note which is interesting, but not entirely sure how it effects things. This article hints that the Fed might be moving to a longer term asset purchase plan https://www.morningstar.com/news/dow-jones/2020031215079/fed-to-inject-15-trillion-in-bid-to-prevent-unusual-disruptions-in-marketsupdate https://www.morningstar.com/news/dow-jones/2020031215079/fed...

jcfrei 7y ago

> Speculation on my part as I still don’t fully grok repo markets and only have a vague sense of how the treasuries market impacts equities but I’ll continue. From my understanding the US treasury market is the most liquid and largest market for any asset in the world. Up until recently these treasuries had a positive real interest rate, so if you are a corporation with large amounts of cash (typically a bank) you don't want to hold this as cash in a banking account but rather you want to hold treasuries and get a small return. If there aren't enough people trading treasuries anymore and liquidity dries up this can have devastating effects on companies because they might hold lots of assets in the form of treasuries but they need to convert them to dollars to pay their employees or suppliers and need to sell treasuries for that. The repo facility of the FED is a buyer (or seller) of last resort that can hand out dollars for treasuries thus ensuring that there's no shortage of dollars. > On top of this factor, this move by the fed surely will push inflation higher and I would assume production would slow given all the virus affects mentioned above. I don't think this will push inflation higher. This is not QE (though there is a meme that it is) where the FED buys treasuries (and MBS) outright and holds them until expiry. If a bank sells treasuries to the repo facility then it will have to buy them back until a pre-determined date. So if the repo facility works it will compress the spread in the treasury market and thus reduce funding costs for banks and ensure that enough dollars are around. Right now it seems like lots of companies are hoarding cash and drawing close to the full amount of their credit lines which means banks are short dollars. Because most of these credit lines will probably be used to fund ongoing operations (pay employees, etc.) or bridge a shortfall in revenues they are unlikely to cause companies to invest more or hire more and drive up prices. Christine Lagarde today announced TLTRO III (https://www.ecb.europa.eu/mopo/implement/omo/tltro/html/index.en.html https://www.ecb.europa.eu/mopo/implement/omo/tltro/html/inde...) which serves the same purpose. Helping companies and households to survive a shortfall in income. In short, you don't want to have a bunch of companies going bankrupt just because the economy stopped for a couple of months - the bureaucratic costs and resulting uncertainty for consumers would be much too costly.