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.
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?
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).
>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.
I think its important to note that the Fed is not going to start selling their holdings, they are going to stop reinvesting the proceeds as much (they haven't bought any additional assets since 2014, reinvestment aside). This should have a much more muted effect on the market -- letting a ~1%/month of bond assets mature without reinvestment is not the same as selling 1%/month.
>4) Foreign interests will have a "fire sale" of US debt available to them for purchase.
Again, the Fed isn't selling anything. They are partially curtailing demand by reducing reinvestment which will likely affect bond prices and yields, but not nearly as dramatically as selling them pre-term.
Your point two is not absolutely correct. Falling bond yields do not inherently cause a rise in stock process "simply because of their inverse relationship." For one thing, this could further depress the value of the dollar and drove capital away from the US, hurting bonds and equities alike.
Equities are currently inflated by cheap and accessible debt alongside a low expected yield. Id say unwinding is more likely to bring a reverse in equity pricing. Reasonable odds of a sharp one.
And why point 3? Is this from expected currency devaluation?
Is the Treasury Department selling the bonds or is the Federal Reserve?
Wasn't the action being taken in the article simply a cap on the amount of reinvested bonds? Doesn't that lead to a gradual decrease in purchases of mature bonds rather than a "fire sale"?
I'm not challenging your position, I am just seeing a terminology mismatch between your comment and the content of the article. I, a financial layperson, am likely not the intended audience of the article, which appears to be targeted toward economists or otherwise well-informed readers.
> Commodities(such as oil, gasoline, natural gas) will increase in price.
How so? QE was heralded by critics as printing new money, leading to a price boost in equities and commodities since the money had to go somewhere in search of yield.
Wouldn't the opposite of QE decrease the supply of readily available USD, so the suppliers with a glut of a certain commodity are then forced to compete for whatever cash is left?
That logic doesn't hold. Look at the relationship between bonds and equities. You're saying that in "1) futures on bonds will fall.." which will cause "2) equities to rise" - well, historically yields have moved inversely to stocks but that hasnt always been the case - see http://www.marketwatch.com/story/the-disconnect-between-stoc...
All else being equal, rates going up will increase the value of the US dollar. If most US companies derive a majority of their revenue overseas, will that be good for US equities? And that's just one consideration. Point is,from a trading perspective, it's generally not helpful to make blanket assumptions as the market can stay irrational far longer than most think.
Does it make sense that equities would fall? It seems to me that interest rates on bonds should rise as the Fed adds to the supply of bonds, which should cause less investment in equities as bonds become more attractive.
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.
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.
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.
[+] [-] joe_the_user|8 years ago|reply
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|8 years ago|reply
[+] [-] gscott|8 years ago|reply
https://www.csmonitor.com/Business/The-Circle-Bastiat/2010/0...
[+] [-] module0000|8 years ago|reply
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-treas...
[+] [-] ac29|8 years ago|reply
I think its important to note that the Fed is not going to start selling their holdings, they are going to stop reinvesting the proceeds as much (they haven't bought any additional assets since 2014, reinvestment aside). This should have a much more muted effect on the market -- letting a ~1%/month of bond assets mature without reinvestment is not the same as selling 1%/month.
>4) Foreign interests will have a "fire sale" of US debt available to them for purchase.
Again, the Fed isn't selling anything. They are partially curtailing demand by reducing reinvestment which will likely affect bond prices and yields, but not nearly as dramatically as selling them pre-term.
[+] [-] duxup|8 years ago|reply
Also wouldn't it be pretty easy to make some money off of these oh so sure events?
In fairness I'm always wondering this when folks predict such things.
[+] [-] jimmyswimmy|8 years ago|reply
[+] [-] Gustomaximus|8 years ago|reply
And why point 3? Is this from expected currency devaluation?
[+] [-] linkregister|8 years ago|reply
Wasn't the action being taken in the article simply a cap on the amount of reinvested bonds? Doesn't that lead to a gradual decrease in purchases of mature bonds rather than a "fire sale"?
I'm not challenging your position, I am just seeing a terminology mismatch between your comment and the content of the article. I, a financial layperson, am likely not the intended audience of the article, which appears to be targeted toward economists or otherwise well-informed readers.
[+] [-] toomuchtodo|8 years ago|reply
[+] [-] shostack|8 years ago|reply
[+] [-] prostoalex|8 years ago|reply
How so? QE was heralded by critics as printing new money, leading to a price boost in equities and commodities since the money had to go somewhere in search of yield.
Wouldn't the opposite of QE decrease the supply of readily available USD, so the suppliers with a glut of a certain commodity are then forced to compete for whatever cash is left?
[+] [-] the_dude33|8 years ago|reply
All else being equal, rates going up will increase the value of the US dollar. If most US companies derive a majority of their revenue overseas, will that be good for US equities? And that's just one consideration. Point is,from a trading perspective, it's generally not helpful to make blanket assumptions as the market can stay irrational far longer than most think.
[+] [-] gregw134|8 years ago|reply
[+] [-] johnm1019|8 years ago|reply
[+] [-] unknown|8 years ago|reply
[deleted]
[+] [-] drunkpotato|8 years ago|reply
[+] [-] ngsayjoe|8 years ago|reply
[+] [-] gd1|8 years ago|reply
[deleted]
[+] [-] X86BSD|8 years ago|reply
[+] [-] sitharus|8 years ago|reply
[+] [-] paulpauper|8 years ago|reply
[+] [-] aaronhoffman|8 years ago|reply
[+] [-] pmorici|8 years ago|reply
https://lara-murphy.com/podcast/episode-42-feds-plan-unload-...
[+] [-] ChuckMcM|8 years ago|reply
Pretty much no matter what it is going to be something economists are going to debate for the next 100 years :-)
[+] [-] CaliforniaKarl|8 years ago|reply
[+] [-] jarjar12|8 years ago|reply
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.
[+] [-] tmaly|8 years ago|reply