The US Fed launches Mother of all QEs

[lee1009]

@vikkik Aus QE is here as well

https://www.rba.gov.au/media-releas...urce=share&utm_medium=ios_app&utm_name=iossmf

 

[heliumskylark]

@lee1009 Gov cranking up the printing press to the max. What else is new? No wonder we keep getting poorer with every passing day.

 

[hindsma]

@heliumskylark Printing money, by itself, does not cause inflation

 

[proverbs31womens]

@hindsma It does dilute value though.

 

[hindsma]

@proverbs31womens In terms of FX or Inflation?

 

[proverbs31womens]

@hindsma Value of the currency is diluted. So that in turn should produce an inflationary effect.

 

[hindsma]

@proverbs31womens Nope.. it has nothing to do with how much one prints but is based on demand and supply.

 

[nischansr]

@denisovic

More importantly, they've reduced reserve requirement ratios to zero percent effective on March 26.

This is the bigger deal than the rate cut for me.

And that's saying something already when the Fed could not wait a day more before announcing the rate cuts, which is something special in itself since it's the second such event since their last meeting.

 

[denisovic]

@nischansr Absolutely. They just fired their last bullet. Where do they go from here?

 

[nischansr]

@denisovic The USD being the most trusted currency in the world, they do have options that many others don't. Including flat out printing money. Isn't that what MMT proponents claim they need to do?

Given that Europe has already gone into negative interest rates, it's not impossible that US goes that way too. I'll be honest about how I don't really understand how negative rates are sustainable in an inflationary economy since it seems that right behind government papers, corporate bonds immediately follow the same path because they can - and that makes no sense - companies charging their lenders to lend money to them? Given that economies target slight positive inflation then it becomes easier to beat inflation (for retail investors) simply by not investing money, by hoarding literal cash.

Honestly, I thought I understood a bit of economics, but I guess I don't afterall.

 

[lamphuongnghi152]

@denisovic Could you please elaborate on these two statement?

Banks lend to each other to maintain reserve requirements.

Need to lend more from other banks to maintain reserve requirements.

Did you mean to use the word 'borrow' instead of 'lend'? It seems to me that they might have to borrow to maintain reserve requirement, no?

Also, you write that

Shitty loans go bust. Banks fail to receive payments. Need to lend more from other banks to maintain reserve requirements.

But if shitty loan go bust then banks will have its capital (and not cash reserves) adversely affected by it which will prompt banks not to lend to shitty borrowers. Loans going bust cannot be solved by borrowing more to lend even if reserve requirements are 0.

 

[denisovic]

@lamphuongnghi152 Yes. It should say borrow instead of lend. Fixed.

When shitty loans go bust borrowers fail to pay their monthly installments which result in a cash shortfall. This happens before the loan is written off.

 

[resjudicata]

@denisovic Your point is valid but I think that IS the intended consequence, at least for the short term.

Every borrowers risk profile goes up in times like these so the low rates force banks to lend and restart economic activity, because otherwise their assets lose value over time to inflation.

The problem starts when the crisis has died down but policy rates remain low and banks do not improve their underwriting standards. This then leads into the situation you’ve described

 

[lee1009]

@vikkik Reactions

d. Stock futures plunged even further, hit limit down (5%) on CME.

 

[elijah13]

@lee1009 F

 

[lee1009]

@resjudicata Powell probably wanted to please His Majesty.

https://www.nytimes.com/2020/03/14/business/economy/trump-powell-fed-chair.html

 

[heliumskylark]

@resjudicata Looks like Trump will go to any length to prop up the stock market. It's election year afterall.

 

[montse811]

@vikkik This was written by a Risk Analyst working in the US financial sector

Light Scenario: My Probability:35%

Infections: 1,000,000 Peak by April 30

Deaths: 20,000

Global Containment: 15 countries > 20,000 infected

Business Impact: -15% revenues in Key Sectors over 6 months

SPX low from high: -15% (2800)

Base Case Scenario: My Probability:60%

Infections: 35,000,000 Peak by July 30

peak rate (0.5% global population)

Deaths: 700,000

Global Containment: 50 countries > 100,000 infected

Business Impact: -25% revenues in Key Sectors over 9 months

SPX low from high: -30% (2300)

Serious Scenario: Probability: 5%

Infections Peak: 2-500,000,000, by Nov 1

peak rate (7% global population)

Global Containment: 100 countries > 100,000 infected

Business Impact: -35% in key sectors over 12 months

SPX low from high: -50% (1700)

Looks like market is now discounting as per the Light Scenario (at least till end of last week). If it gets more serious (which is the most likely scenario as per the risk guy), SPY will drop down to 2300.

 

[resjudicata]

@montse811 The sad part is that if you want to keep the infections from spreading you really have to clamp down on all kinds of public activity, kind of like Italy. But this brings almost all business activity to a halt.
- Add to this the extremely high levels of corporate debt and there is a higher chance that defaults go up even after the virus recedes because the economy hasn’t recovered yet. Cue bloodbath in the markets

Let’s say you don’t completely implement strong quarantines because you don’t want to disrupt business activity, every time a coronavirus headline goes up, you see more panic because investors are waiting for the other shoe to drop (cases going up). Cue bloodbath in the markets.

Last year when we had some concerns about slower global growth, the Fed cut rates like crazy, the ECB added to their QE. Companies refinanced and added debt because it was crazy cheap. Now just managing that debt is going be a problem

 

[thriftfabulous]

@resjudicata you don't just have to clamp down - you have to clamp down for 16 weeks.

That's just not possible to enforce in most countries

In China, they opened two towns in Hubei and had to shut them down again in 24 hours since new cases started popping up.