Just yesterday alone they added $122B in non-risk assets to Depositories:
CNBC's Steve Liesman said with additional Fed action just announced, today will be a record $122 billion in purchases and a record $322 billion for the week. $SPY $TLT $GLD— Streetinsider.com (@Street_Insider) March 20, 2020
Market down 5% on that action alone yesterday... and makes it $322B added for the entire week... Which results in the largest weekly reduction in risk asset prices since they last did this in Sept. 2008 and caused the GFC:
LATEST: The S&P 500 falls 15% in its biggest weekly drop since October 2008. U.S. stocks fall 4.4% to their lowest in three years https://t.co/gspkN0JbCa pic.twitter.com/IQoJnzZ7A0— Bloomberg (@business) March 20, 2020
Why do they have to regulate the amount of Central Bank liabilities the Depositories possess as assets against the retained earnings of the Depositories? Why?
I don't see any functional need to do this and every time they add non-risk Reserves like this they cause a severe reduction in the prices of risk assets which is destabilizing to them...
Meanwhile the FRA charges them with "stable prices"... so hence they cause unstable prices...
Why do they do this? "banks need money to lend out!"???
Large increase in rate of UST issuance ahead so "you have to do a Reserve add before you can do a Reserve drain"????
Even so why regulate that against Retained Earnings? Why?
They are still going to add AT LEAST about another $350B in the short term so get ready for EVEN LOWER risk asset prices as a result...
We're going to be lucky if they don't stop here at their current plan for $700B total and double down and then REALLY cause a BIG problem with eventually a shutdown of the credit markets...
Then you'd have everyone looking for credit due to the Chinese virus shutdown and the banks wouldnt be able to make any loans...
Treasury would then have to add capital to the Depositories like last time (TARP) and then that should be the bottom...
Buckle up there is no telling what these unqualified and incompetent people are going to do... no way to predict their behavior...
3 comments:
I'm really confused:
"I don't see any functional need to do this and every time they add non-risk Reserves like this they cause a severe reduction in the prices of risk assets which is destabilizing to them..."
So the Fed is buying Treasurys -- other stuff now as well, but correct me if I'm wrong for thinking that these purchases were Treasurys. Why do we think that swapping Treasurys for assets will crater the price of equities?
E,
The functional relationship is (A-L)/A = CsubL
(notice no figurative language being used here)
A is total assets of the Depositories (no figurative language)
L is total liabilities of the Depositories (no figurative language)
CsubL is some regulatory constant of total leverage, not important what the constant is but just important that it is recognized as a mathematical constant <1 ... iirc its around 0.1 or so if you examine the Depository's regulatory filings... just recognize it as a constant less than 1 ... promulgated by govt regulators (no figurative language)
So if Fed buys USTs, they increase both A (Reserve Assets) at the Depositories and L (Deposit Liabilities) at the Depositories... former USD savers in USTs are left with USD savings in bank deposit accounts... (no figurative language)
the two Accounting entries at the Depositories when Fed does asset purchases are credit Reserve Assets (LHS) and debit Deposit Liabilities (RHS)... (no figurative language)
So you can see that ex post of this transaction, (A-L) in the numerator is unchanged and A in the denominator is increased so the ratio is decreased from the target constant level... (no figurative language)
So the risk asset component of the Depository's total assets A has to be reduced (in either price or perhaps quantity ... either is "bearish") so that then ex post of that adjustment internal to the Depositories, the Depositories come back into equality with the regulatory constant level ... (no figurative language EXCEPT "bearish")
At some point if Fed keeps adding these non-risk assets fast enough (first derivative dt) then banks cant add any more assets at all and the credit market shuts down until Treasury adds capital via investment like TARP was back in 2008... (no figurative language)
When Treasury does this investment the accounting at the Depositories is A is increased while L is not increased (Treasury does not demand a Liability for the transfer of its USD reserves in the terms of the agreement) so the numerator (A-L) increases and the denominator A increases but since the constant is less than 1 the change in the numerator has larger regulatory effect .. (no figurative language)
Its hard to predict what these people are going to do at any time but what you want to do generally is try to figure out when they are going to stop adding Reserves or perhaps when the Treasury is going to make a large capital investment in the Depositories to try to predict the timing of the nadir in prices... (no figurative language)
(or God forbid they would actually make a regulatory adjustment then you have to re-evaluate ... but his is highly unlikely as they are all Art Degree people there who were never trained to make adjustments...)
If you could do that you could probably make a lot of "money" (figurative language here for sure with use of the figure of speech "money!")
Hi Matt,
I'm with you until this part-
"So the risk asset component of the Depository's total assets A has to be reduced (in either price or perhaps quantity ... either is "bearish") so that then ex post of that adjustment internal to the Depositories, the Depositories come back into equality with the regulatory constant level ... (no figurative language EXCEPT "bearish")"
Could you flesh this out a bit more? Much appreciated.
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