4 ms·

Reddit theorizing that a complex Fed facility is flashing signs of market crash

15 points by harambae 5y ago

zhte415 5y ago
Table 2, Line 30 https://www.federalreserve.gov/releases/h8/current/default.htm https://www.federalreserve.gov/releases/h8/current/default.h... Not much of a change, and a fall if anything. This article summarises multiple points: https://som.yale.edu/blog/the-federal-reserve-remains-unconcerned-as-usage-of-its-reverse-repo-facility-approaches-1-trillion https://som.yale.edu/blog/the-federal-reserve-remains-unconc...
bloopernova 5y ago
Please forgive my ignorance on this subject, but something bothers me about the GME potential huge price gains. It seems, from my reading of various posts/comments that pop up on Reddit, that GME will increase massively in price based on short sale strangeness. But, hand in hand with that huge price gain will be a market/economic crash. Surely there won't be any buyers for these shares? Won't that make GME worthless, or at least worth much less? Why hold stock if the only way you might get rich is during a terrible economic crash?
- voisin 5y ago
  The point the Reddit guys were making was that the hedge funds that shorted GME would eventually capitulate and buy back the shares because the cost of borrowing them is astronomical (thanks in part to Reddit users instructing their brokerages not to loan out their shares). I think it is largely insulated from market behaviour.
TradingPlaces 5y ago
Wow. OK, here’s what happened When the Fed does QE, what that means is that they buy US Treasury debt and mortgage-backed securities at face value from banks, and put digital cash in the banks’ reserve accounts. They do QE to insure liquidity in the banking sector, something that is pretty important. Banks have to keep the digital reserves there, but dollars are fungible, so they can take non-digital dollars out if they like. But they have not been. Reserve balance are astronomical. Steve Mnuchin ran the Treasury account balance very high, because there was huge demand for short-term Treasury debt in 2020. If he didn’t, rates would have been negative on T-bills. There was about an extra trillion dollars in the Treasury account just to keep short-term rates from going negative. Janet Yellen had to clean this up, so she stopped issuing so much debt and let the balance fall to more normal levels (it even got low around the debt ceiling mess). But when she did that, that cash winds up as cash deposits at banks, giving them even more cash. Because Treasury issuance was low and QE proceeded on schedule, they could not buy risk-free assets with that cash, which was why Mnuchin was keeping the balance high in the first place. So now reserve balances spiked even higher. The banks have too much cash Every overnight, they need to trade some cash for US Treasuries in the Fed’s balance sheet to get right. That is what the reverse repo facility does. Now that the Fed is tapering and Treasury issuance is back to normal, it will work itself out.
- ryandvm 5y ago
  I hate reading about macro-economics on HN because there will be an incredibly informative post like yours that I read and everything kind of makes sense. Then it will be immediately followed up with a response that is equally eloquent explanation of why the situation is actually the exact opposite of everything you wrote. I always end up closing these tabs more confused than I was before.
  - TradingPlaces 5y ago
    LOL. Here’s the relevant charts https://fred.stlouisfed.org/graph/?g=INs2 https://fred.stlouisfed.org/graph/?g=INs2
- pxue 5y ago
  instruction unclear, bought more tsla calls.

15 points by harambae 5y ago

Table 2, Line 30 https://www.federalreserve.gov/releases/h8/current/default.htm https://www.federalreserve.gov/releases/h8/current/default.h... Not much of a change, and a fall if anything. This article summarises multiple points: https://som.yale.edu/blog/the-federal-reserve-remains-unconcerned-as-usage-of-its-reverse-repo-facility-approaches-1-trillion https://som.yale.edu/blog/the-federal-reserve-remains-unconc...

bloopernova 5y ago

Please forgive my ignorance on this subject, but something bothers me about the GME potential huge price gains. It seems, from my reading of various posts/comments that pop up on Reddit, that GME will increase massively in price based on short sale strangeness. But, hand in hand with that huge price gain will be a market/economic crash. Surely there won't be any buyers for these shares? Won't that make GME worthless, or at least worth much less? Why hold stock if the only way you might get rich is during a terrible economic crash?

voisin 5y ago
The point the Reddit guys were making was that the hedge funds that shorted GME would eventually capitulate and buy back the shares because the cost of borrowing them is astronomical (thanks in part to Reddit users instructing their brokerages not to loan out their shares). I think it is largely insulated from market behaviour.

TradingPlaces 5y ago

Wow. OK, here’s what happened When the Fed does QE, what that means is that they buy US Treasury debt and mortgage-backed securities at face value from banks, and put digital cash in the banks’ reserve accounts. They do QE to insure liquidity in the banking sector, something that is pretty important. Banks have to keep the digital reserves there, but dollars are fungible, so they can take non-digital dollars out if they like. But they have not been. Reserve balance are astronomical. Steve Mnuchin ran the Treasury account balance very high, because there was huge demand for short-term Treasury debt in 2020. If he didn’t, rates would have been negative on T-bills. There was about an extra trillion dollars in the Treasury account just to keep short-term rates from going negative. Janet Yellen had to clean this up, so she stopped issuing so much debt and let the balance fall to more normal levels (it even got low around the debt ceiling mess). But when she did that, that cash winds up as cash deposits at banks, giving them even more cash. Because Treasury issuance was low and QE proceeded on schedule, they could not buy risk-free assets with that cash, which was why Mnuchin was keeping the balance high in the first place. So now reserve balances spiked even higher. The banks have too much cash Every overnight, they need to trade some cash for US Treasuries in the Fed’s balance sheet to get right. That is what the reverse repo facility does. Now that the Fed is tapering and Treasury issuance is back to normal, it will work itself out.

ryandvm 5y ago
I hate reading about macro-economics on HN because there will be an incredibly informative post like yours that I read and everything kind of makes sense. Then it will be immediately followed up with a response that is equally eloquent explanation of why the situation is actually the exact opposite of everything you wrote. I always end up closing these tabs more confused than I was before.
- TradingPlaces 5y ago
  LOL. Here’s the relevant charts https://fred.stlouisfed.org/graph/?g=INs2 https://fred.stlouisfed.org/graph/?g=INs2
pxue 5y ago
instruction unclear, bought more tsla calls.