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World Stock Markets Trading Discussion - Diligent dawdling

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All Ords 5-day chart

big.chart?nosettings=1&symb=AU:XAO&uf=0&

http://bigcharts.mar...com/default.asp

 

Not going anywhere fast today .. All Ords finished -0.4% with sectors ranging from Gold +0.7% down to REITS -1.8%.

Over in Asia, China -0.8%, Hong Kong +1%, Japan and India closed.

Minor green in UK/Europe: FTSE +0.1%, DAX and CAC both +0.3%.

 

big.chart?nosettings=1&symb=UK%3AUKX&uf=

  

  

big.chart?nosettings=1&symb=DX%3ADAX&uf=

 

 

big.chart?nosettings=1&symb=FR%3APX1&uf=

  http://bigcharts.mar...com/default.asp

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The big macro story almost nobody is talking about. Nary a hint in the NY Times, so no place else. Looming sanctions on China for continued oil purchases from Iran announce a week ago. If China bends on this it would be a stupendous strategic victory for the  administration.  Iran by the way is a lynchpin of China's Belt and Road Initiative.  This article suggests the sanctions would be in the area of Chinese investment flowing TO the US. Nuts. Then too why would China sign a trade deal in the face of new economic sanctions?  A political black eye or outright disaster for Xi. A Bloomberg article I saw seemed to believe China would fold. 

As unimaginable as it might seem a collapse of the China trade 'deal' is not impossible.

https://www.reuters.com/article/us-usa-iran-sanctions/no-wind-down-for-china-on-stopping-its-iran-oil-buys-trump-officials-idUSKCN1S2238

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New Fed idea. Standing Repo Facility. 

https://www.cnbc.com/2019/04/29/fed-looking-at-a-program-that-could-be-version-of-quantitative-easing.html?__source=twitter|main

My  initial idea is it's putting lipstick on the pig in that it is pretending to shrink its balance sheet. It does let the Treasury pay for the 'excess reserves' which would then not  be called excess reserves.  I'm not sure what to make of the apparent disappearance of the money that is the current reserves which is dead money as far as the economy goes I think, except for the interest the Fed is paying the banks for it. I guess that anything that is absolutely money good is money so on the liquidity front a wash.

 

This gem from the story is pretty funny.

"Beckworth said that under another recession or significant pullback “it’s almost guaranteed the Fed is quickly going back to QE. You can easily imagine the Fed doing QE4, QE5. The Fed’s balance sheet, if I had to bet money, is going to get pretty large in the next recession."

 

It's not large now?  Note he says recession "or pullback". In other words acting on the stock market alone is now totally normalized.

 

I have come up with a term for this all

State Capitalism

 

 

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Reserves are not dead money. That's an old shibboleth. It's money, period. Bank cash assets. Fed deposit liability. No different from any other kind of money. It circulates freely in the banking system.  Can be spent freely, saved freely.  What gets people confused is the name they're given I think. 

And yes, the IOER is free money that marginally boosts bank liquidity, but more importantly adds to their profit, and is a subsidy at the taxpayers' expense. 

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My god, the confusion in that article confuses even me. 

Banks aren't obligated to hold excess reserves. It's an accounting effect. The Fed created the reserves when it bought the bonds from the dealers. It paid for them by creating deposits in the dealer accounts at the Fed. The reserve deposits can't go anywhere until the Fed reverses that transaction by either redeeming or selling the bonds. 

Now what they are proposing would be to lend cash to the banks in the form of repo. The Fed would take bonds as collateral. That would then become a liability against the outstanding cash repo loan.  Huh? The Fed's balance sheet would expand because it would hold more repo loans. The bond collateral would become the offsetting liability.  So, yeah, it would be temporary QE. 

But instead of paying IOER, the Fed would be charging interest. I'm not exactly sure what this would accomplish, other than to reduce the immoral IOER subsidy.  

But why would any banks take this deal? Let's see. I'm a banker. Would I rather pay interest to the Fed to borrow cash that I did not need, or recieve interest from the Fed for cash that I did not need? 

None of this makes any sense whatsoever. Except in terms of a potential credit crunch and liquidity crisis.  

I need to think about this some more.  But I see no way this could work in the way that the proponents of the idea think it would. In fact, I just think that there would be no takers in any environment short of a full blown crash.  

If you have any ideas, let me know. 

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“The nice thing about the standing repurchase facility would be that the Fed would say to banks, ’Look, we stand ready in times of stress to supply reserves on demand. ... This would enable banks to decrease their hold of excess reserves, which is what the Fed wants them to do, increase their holdings of Treasurys, which is what [banks] want to do, while still guarding against a freeze-up of markets during times of stress.”

That's just gibberish. 

In a crisis, the banks need cash. Reserves are cash to them.  Using the standing repo would mean that the banks would lend their Treasury holdings to the Fed as collateral for a loan. They would NOT increase their holdings of Treasuries. 

Furthermore, in  reading the original paper by the two Fed homeless, unemployed graduate students, its clear that they are clueless about the most elementary concepts of balance sheet accounting.  It's all poppycock. 

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Jesus F Christ. In times of financial stress, Treasuries do not go to a discount. They go to a premium. They RISE in price because in crisis, Treasury demand soars because they are viewed as the safest asset to hold.  The whole premise is wrong. 

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