Non intendiamo aggiungere anche le nostre parole al caotico bla-bla dei media: ciò che c’era da evidenziare, da sottolineare ed analizzare noi di Recce’d lo abbiamo già fatto, con settimane e mesi di anticipo.

Troppo anticipo? Lasciamo a voi di giudicare. Il nostro giudizio è che è un grande valore, nelle fasi in cui i mercati vanno nel panico, avere chiarissima la situazione sottostante.

La situazione delle economie reali, della geopolitica internazionale, in sostanza della realtà del Mondo, oggi si presenta esattamente come noi di Recce’d vi avevamo anticipato 12 mesi fa. Non la BCE, non la Federal Reserve, non Trump, non Lagarde: noi siamo tra i pochi che nel corso del 2020 non sono stati costretti a cambiare visione, previsioni, lettura della realtà.

Detto questo, i mercati ad oggi sono andati in un’altra direzione? E’ una cosa seria, ma non grave, come scriveva lo scrittore Ennio Flaiano.

Non staremo qui a ricordarvi gli episodi precedenti: voi li conoscete, noi li abbiamo già messi in evidenza.

La situazione si ripete di settimana in settimana (come abbiamo commentato anche stamattina, nella pagina settimanale) e questo confonde le idee, toglie lucidità di giudizio, mette alla prova la pazienza, logora la resistenza.

La nostra risposta? Il Mondo è questo, oggi, questo tipo di situazioni limite si ripeterà, più volte, e non sarà sempre la Borsa di New York ai livelli record a tendere i nervi. Si ripeterà: il calcolo che ogni investitore deve fare, è se vale la pena di “tenere duro” e continuare ad investire, oppure se è arrivato il momento di “mettere i soldi nel materasso”, che in momento come questi non è solo un modo di dire.

Il nostro parere? Il nostro parere resta quello che le opportunità sono così grandi, che vale sicuramente la pena di mettere un altro po’ di pazienza. Le opportunità sono così interessanti, che vale la pena di tenere i nervi sotto controllo. Sappiamo di essere capaci di gestire una fase di eccesso, semplicemente per il fatto che noi lo abbiamo già fatto, e con successo.

In alternativa c’è il materasso, oppure ancora c’è l’alternativa di credere che “i nuovi record di New York” siano davvero un’opportunità di investimento. La terza opzione, per chi ha tendenze autodistruttive.

Chiudiamo questo Post proponendo in lettura un articolo pubblicato in settimana dal Financial Times, che non aggiunge nulla di nuovo (e come potrebbe? la situazione ormai è chiarissima) ma puntualizza alcuni aspetti che a nostri giudizio farete bene a tenere in conto.

Leggetelo con interesse: in particolare la parte conclusiva.

(Vi domandate perché così di frequente sottoponiamo ai lettori articoli presi dalla stampa anglosassone e quindi in lingua inglese? La risposta è semplice: perché in momenti di mercato come questi andiamo a cercare qualificati contributi che mettono il lettore in condizione di vedere oltre la cortina di fumo alzata dai mezzi di informazione tradizionali).

JANUARY 16 2020

It’s liquidity, stupid. Rephrasing the words of Bill Clinton’s adviser James Carville helps explain why many stocks are hitting record highs, why gold is breaking higher and why economies look set to rebound sharply this year.

About a year ago we described how modern financial systems have grown dependent on central bank balance sheets, and why another round of easing from the US Federal Reserve — a “QE4” — was vital for markets. Fed chair Jay Powell has so far proved sufficiently flexible to reverse the balance sheet shrinkage, to which his immediate two predecessors, Ben Bernanke and Janet Yellen, had been committed. The “Fed Listens”, as the name of its tour of US cities suggests and, true to form, recent worries in the repo market spurred the central bank to inject a further $400bn into the financial sector. It increased its balance sheet by about 10 per cent between last September and the year end.

Yet, the Fed’s spin-doctors are trying to persuade us that this is not quantitative easing. Certainly, it has not involved direct buying of US Treasury notes and bonds, but it has still led to a sizeable uptake of short-term Treasury bills. The difference between QE and “not QE” is mysterious, then, because liquidity has expanded and, in the process, relieved funding pressures and reduced systemic risks. As a result, the prices of haven assets, such as the 10-year US Treasury note, have fallen, while risky assets such as equities have gone up. We measure liquidity through the funds that flow through both the traditional banking system, and through the repo and swap markets. The global credit system increasingly operates through these latter wholesale markets, and often with the active participation of central banks. For some years now, the wholesale money markets have been fuelled by vast inflows from corporate and institutional cash pools, such as those controlled by cash-rich companies, asset managers and hedge funds, the cash-collateral business of derivative traders, sovereign wealth funds and foreign exchange reserve managers.

Today, these pools probably exceed $30tn and have outgrown the banking systems, as their unit sizes easily exceed the insurance thresholds for government deposit guarantees. This forces these pools to invest in alternative short-term secure liquid assets. In the absence of public sector instruments such as Treasury bills, the private sector has had to step in by creating short-term vehicles known as repurchase agreements, or repos, and asset-backed commercial paper. The repo mechanism bundles together “safe” assets such as government bonds, foreign exchange and high-grade corporate debt, and uses these as security against which to borrow. While credit risk is to some extent mitigated, the risk of not being able to roll over or refinance positions remains. At the same time, markets have remained fixated on policy interest rates, which are supposed to control the pace of real capital spending and, hence, the business cycle. That, at least, is what the textbooks tell us.

But the world has moved on. We must think of western financial systems as essentially capital re-distribution mechanisms, dominated by these giant pools of money that are used to refinance existing positions, rather than raising new money. New capital spending has itself become eclipsed by the need to roll over huge debt burdens. If debts are not to be reneged upon, they must either be repaid or somehow refinanced. However, not only is much of the new debt taken on since the 2008 financial crisis unlikely to be paid back but, more worryingly, it is compounding ever higher. Our latest estimates suggest that world debt levels now exceed $250tn, equivalent to a whopping 320 per cent of world gross domestic product — and roughly double the $130tn pool of global liquidity. This refinancing role means that quantity (liquidity) matters more than quality (price, or interest rates).

Central banks play a key role in determining liquidity, or this funding capacity, by expanding and shrinking their balance sheets, and in the US, of course, this is closely linked to the Fed’s QE operations. Consequently, more and more liquidity needs to be added to facilitate the re-financing of the world’s debt. QE is here to stay. We should expect QE5, QE6, QE7 and beyond. Take a step back, though. A rising tide of liquidity floats many boats, but we know from experience that liquidity-fuelled asset markets usually end badly, as they did in 1974, 1987, 2000 and in 1989 in Japan. In this regard, the scale of recent Fed interventions needs to be understood. Last year, US markets enjoyed their biggest effective inflow of liquidity in more than 50 years, by our measures.

That liquidity is already spilling around the world, with our global indices registering their sixth best year on record. So remember what former Citigroup chief Chuck Prince said about “still dancing”, on the eve of the 2008 crash. Enjoy the party, yes. But dance near the door.

The writer is managing director of CrossBorder Capital

Non intendiamo aggiungere anche le nostre parole al caotico bla-bla dei media: ciò che c’era da evidenziare, da sottolineare ed analizzare noi di Recce’d lo abbiamo già fatto, con settimane e mesi di anticipo.

Troppo anticipo? Lasciamo a voi di giudicare. Il nostro giudizio è che è un grande valore, nelle fasi in cui i mercati vanno nel panico, avere chiarissima la situazione sottostante.

La situazione delle economie reali, della geopolitica internazionale, in sostanza della realtà del Mondo, oggi si presenta esattamente come noi di Recce’d vi avevamo anticipato 12 mesi fa. Non la BCE, non la Federal Reserve, non Trump, non Lagarde: noi siamo tra i pochi che nel corso del 2020 non sono stati costretti a cambiare visione, previsioni, lettura della realtà.

Detto questo, i mercati ad oggi sono andati in un’altra direzione? E’ una cosa seria, ma non grave, come scriveva lo scrittore Ennio Flaiano.

Non staremo qui a ricordarvi gli episodi precedenti: voi li conoscete, noi li abbiamo già messi in evidenza.

Ci sembra invece utile alzare lo sguardo e guardare oltre, oltre l’emergenza, oltre l’incendio, oltre i danni che inevitabilmente l’incendio produrrà: come noi, lo ha fatto anche, questa settimana, il Wall Street Journal nel corso dell’ultima settimana, con un articolo che noi vi riportiamo qui sotto, e che illustra con grande efficacia perché il ruolo delle Banche Centrali è destinato a ridursi, in parallelo con la riduzione della loro capacità di influire sul destino delle economie e di coincidere sul comportamento dei mercati finanziari.

Nel corso del 2020, la perdita di credibilità delle Banche Centrali è stata verticale, per effetto della loro “svolta ad U”: adesso il gioco è scoperto, le prossime mosse non conterranno più alcuna “sorpresa”, e la loro efficacia sarà ridotta a ben poco.

Il pubblico ha dubbi fondati: e se fossero i pompieri, ad appiccare gli incendi?

Fino a quando si può andare avanti così? Fino a quel momento in cui si vedrà che i mercati finanziari non hanno più quella “fede cieca” nelle Banche Centrali. Da allora in poi, c’è l’incognito.

By Greg Ip

Jan. 15, 2020 10:57 am ET

The Federal Reserve and other central banks have long been the unchallenged drivers of financial markets and the business cycle. “Don’t fight the Fed,” goes one Wall Street adage.

That era is drawing to a close. In many countries, interest rates are so low, even negative, that central banks can’t lower them further. Tepid economic growth and low inflation mean they can’t raise rates, either.

Since World War II, every recovery was ushered in with lower rates as the Fed moved to stimulate growth. Every recession was preceded by higher interest rates as the Fed sought to contain inflation.

But with interest rates now stuck around zero, central banks are left without their principal lever over the business cycle. The eurozone economy is stalling, but the European Central Bank, having cut rates below zero, can’t or won’t do more. Since 2008, Japan has had three recessions with the Bank of Japan, having set rates around zero, largely confined to the sidelines.

The U.S. might not be far behind. “We are one recession away from joining Europe and Japan in the monetary black hole of zero rates and no prospect of escape,” said Harvard University economist Larry Summers. The Fed typically cuts short-term interest rates by 5 percentage points in a recession, he said, yet that is impossible now with rates below 2%.

Workers, companies, investors and politicians might need to prepare for a world where the business cycle rises and falls largely without the influence of central banks.

“The business cycle we’re used to is a bad guide to business cycles going forward,” said Ray Dalio, founder of Bridgewater Associates LP, the world’s biggest hedge fund.

In November, Fed Chairman Jerome Powell warned Congress that “the new normal now is lower interest rates, lower inflation, probably lower growth…all over the world.” As a result, he said, the Fed is studying ways to alter its strategy and develop tools that can work when interest rates approach zero.

Central banks are calling on elected officials to employ taxes, spending and deficits to combat recessions. “It’s high time I think for fiscal policy to take charge,” Mario Draghi said in September, shortly before stepping down as ECB president.

There are considerable doubts that any new tools can restore the influence of central banks, or that countries can overcome obstacles to more robust fiscal policy, particularly political opposition and steep debt.

Business cycles in the future might resemble those of the 19th century, when monetary policy didn’t exist. From 1854 to 1913, the U.S. had 15 recessions, according to the National Bureau of Economic Research, the academic research group that dates business cycles. Many were severe. One slump lasted from 1873 to 1879, and some historians argue it lingered until 1896.

The Fed’s sway over the economy has also been weakened by a decline in durable manufacturing and construction, which are sensitive to rates, and the growth in services, which aren’t.

The causes of business cycles were diverse, Wesley Clair Mitchell, an NBER founder, wrote in 1927. They included “the weather, the uncertainty which beclouds all plans that stretch into the future, the emotional aberrations to which business decisions are subject, the innovations characteristic of modern society, the ‘progressive’ character of our age, the magnitude of savings, the construction of industrial equipment, ‘generalized overproduction,’ the operations of banks, the flow of money incomes, and the conduct of business for profits.”

He didn’t mention monetary or fiscal policy because, for all practical purposes, they didn’t exist. Until 1913, the U.S. hadn’t had a central bank, except for two brief periods. As for fiscal policy, U.S. federal spending and taxation were too small to matter.

When central banks were established, they didn’t engage in monetary policy, which means adjusting interest rates to counter recession or rein in inflation. Many countries were on the gold standard which, by tying the supply of currency to the stock of gold, prevented sustained inflation.

The Fed was established in 1913 to act as lender of last resort, supplying funds to commercial banks that were short of cash, not to manage inflation or unemployment. Not until the Great Depression did that change.

In 1933, Franklin D. Roosevelt took the U.S. off the gold standard, giving the Fed much more discretion over interest rates and the money supply. Two years later, Congress centralized Fed decision-making in Washington, better equipping it to manage the broader economy.

Macroeconomics, the study of the economy as a whole instead of individuals and firms, was born from the work of British economist John Maynard Keynes. He showed how individuals and firms, acting rationally, could together spend too little to keep everyone employed.

In those circumstances, monetary or fiscal policy could generate more demand for a nation’s goods and services, Mr. Keynes argued. Just as a dam regulates the flow of a river to counter flooding and drought, monetary and fiscal-policy makers must try to regulate the flow of aggregate demand to counter inflation and recession.

The Employment Act of 1946 committed the U.S. to the idea of using fiscal and monetary policy to maintain full employment and low rates of inflation.

The next quarter-century followed a textbook script. In postwar America, rapid economic growth and falling unemployment yielded rising inflation. The Fed responded by raising interest rates, reducing investment in buildings, equipment and houses. The economy would slide into recession, and inflation would fall. The Fed then lowered interest rates, investment would recover, and growth would resume.

The textbook model began to fray at the end of the 1960s. Economists thought low interest rates and budget deficits could permanently reduce unemployment in exchange for only a modest uptick in inflation. Instead, inflation accelerated, and the Fed induced several deep and painful recessions to get it back down.

By the late 1990s, new challenges emerged. One was at first a good thing. Inflation became both low and unusually stable, barely fluctuating in response to economic growth and unemployment.

The second change was less beneficial. Regular prices were more stable, but asset prices became less so. The recessions of 2001 and 2008 weren’t caused by the Fed raising rates. They resulted from a boom and bust in asset prices, first in technology stocks, then in house prices and mortgage debt.

After the last bust, the Fed kept interest rates near zero from 2008 until 2015. The central bank also purchased government bonds with newly created money—a new monetary tool dubbed quantitative easing—to push down long-term interest rates.

Despite such aggressive stimulus, economic growth has been slow. Unemployment has fallen to a 50-year low, but inflation has persistently run below the 2% target the Fed set. A similar situation prevails abroad.

In Japan, Britain and Germany, unemployment is down to historic lows. But despite short-and long-term interest rates near and sometimes below zero, growth has been muted. Since 2009, inflation has averaged 0.3% in Japan and 1.3% in the eurozone.

The textbook model of monetary policy is barely operating, and economists have spent the last decade puzzling why.

One explanation focuses on investment, the main driver of long-term economic growth. Investment is financed out of saving. When investment is high relative to saving, that pushes interest rates up because more people and businesses want to borrow. If saving is high relative to investment, that pushes rates down. That means structurally low investment coupled with high saving by businesses and aging households can explain both slow growth and low interest rates.

Richard Clarida, the Fed’s vice chairman, cited another reason during a speech in November. Investors in the past, he said, demanded an interest-rate premium for the risk that inflation would turn out higher than they expected. Investors are now so confident central banks will keep inflation low that they don’t need that premium. Thus, central banks’ success at eradicating fear of inflation is partly responsible for the low rates that currently limit their power.

While the Fed’s grip on growth and inflation might be slipping, it can still sway markets. Indeed, Mr. Dalio said, the central bank’s principal lever for sustaining demand has been its ability to drive up asset prices as well as the debt to finance assets, called leverage. Since the 2008 crisis, low rates and quantitative easing have elevated prices of stocks, private equity, corporate debt and real estate in many cities. As prices rise, their returns, such a bond or dividend yield, decline.

That dynamic, he said, has reached its limit. Once returns have fallen close to the return on cash or its equivalent, such as Treasury bills, “there is no incentive to lend, or invest in these assets.” At that point, the Fed is no longer able to stimulate spending.

A central bank can always raise rates enough to slow growth in pursuit of lower inflation; but it can’t always lower them enough to ensure faster growth and higher inflation.

The European Central Bank has tried—cutting interest rates to below zero, in effect charging savers. Its key rate went to minus 0.5% from minus 0.4% in September. At that meeting and since, resistance has grown inside the ECB to even more negative rates for fear that would reduce bank lending or have other side effects.

In December, Sweden’s central bank, which implemented negative rates in 2015, ended the experiment and returned its key policy rate to zero. Fed officials have all but ruled out ever implementing negative rates.

In a new research paper, Mr. Summers, who served as President Clinton’s Treasury secretary and President Obama’s top economic adviser, and Anna Stansbury, a Ph.D. student in economics at Harvard, say very low or negative rates are “at best only weakly effective…and at worst counterproductive.”

They cited several reasons why. Some households earn interest from bonds, money-market funds and bank deposits. If rates go negative, that source of purchasing power shrinks. Some people nearing retirement may save more to make up for the erosion of their principal by very low or negative rates.

Moreover, the economy has changed in ways that weaken its response to interest-rate cuts, they wrote. The economy’s two most interest-sensitive sectors, durable goods manufacturing, such as autos, and construction, fell to 10% of national output in 2018 from 20% in 1967, in part because America’s aging population spends less on houses and cars. Over the same period, financial and professional services, education and health care, all far less interest sensitive, grew to 47% from 26%.

They concluded the response of employment to interest rates has fallen by a third, meaning it is harder for the Fed to generate a boom.

The U.S. isn’t likely to plunge into another financial crisis like 2008, Mr. Dalio said, as long as interest rates remain near zero. Such low rates allow households and companies to easily refinance their debts.

More likely, he said, are shallow recessions and sluggish growth, similar to what Japan has experienced—what he called a “big sag.”

Former Fed Chairman Ben Bernanke this month estimated that through quantitative easing and “forward guidance,” committing to keep interest rates low until certain conditions are met, the Fed could deliver the equivalent of 3 percentage points of rate cuts, enough, in addition to 2 to 3 points of regular rate cuts, to counteract most recessions.

Mr. Clarida warned, however, that quantitative easing might suffer from diminishing returns in the next recession. Moreover, the next recession is likely to be global, he said this month, and if all major countries weaken at the same time, it will push rates everywhere toward zero. That would make it harder for the Fed or any other central bank to support its own economy than if only one country were in trouble.

With central banks so constrained, economists say fiscal policy must become the primary remedy to recessions.

History shows that aggressive fiscal policy can raise growth, inflation and interest rates. The U.S. borrowed heavily in World War II. With help from the Fed, which bought some of the debt and kept rates low, the economy vaulted out of the Great Depression. Once wartime controls on prices and interest rates were lifted, both rose.

Today, mainstream academic economists are again recommending higher inflation and deficits to escape the low-growth, low-rate trap.

Advocates of what is called modern monetary theory say the Fed should create unlimited money to finance government deficits until full employment is reached. Some economists call for dialing up “automatic stabilizers,” the boost that federal spending gets during downturns, via payments to individuals and state governments as well as infrastructure investment.

Yet fiscal policy is decided not by economists but by elected officials who are more likely to be motivated by political priorities that conflict with the economy’s needs. In 2011, when unemployment was 9%, a Republican-controlled Congress forced Mr. Obama to agree to deficit cuts. In 2018, when unemployment had fallen to 4%, President Trump and the GOP-controlled Congress slashed taxes and boosted spending, sharply increasing the budget deficit. Mr. Trump has pressured Mr. Powell to cut rates more and resume quantitative easing, which the Fed chairman has resisted.

Fiscal policy in the eurozone is hampered by rules that limit the debt and deficits of its member countries. It is also hamstrung by divergent interests: Germany, the country that can most easily borrow, needs it least. In recent years it has refused to open the taps to help out its neighbors.

Still, Mr. Dalio predicted that a weakened Fed will eventually join hands with the federal government to stimulate demand by directly financing deficits.

Once central banks have agreed to finance whatever deficits politicians wish to run, however, they may have trouble saying no when the need has passed.

The experience abroad and in the U.S.’s past suggests that once politicians are in charge of monetary policy, inflation often follows. In the 1960s and 1970s, Presidents Johnson and Nixon pressured the Fed against raising rates, setting the stage for the surge in inflation in the 1970s. Such a scenario seems remote today, but it might not always be.

Non intendiamo aggiungere anche le nostre parole al caotico bla-bla dei media: ciò che c’era da evidenziare, da sottolineare ed analizzare noi di Recce’d lo abbiamo già fatto, con settimane e mesi di anticipo.

Troppo anticipo? Lasciamo a voi di giudicare. Il nostro giudizio è che è un grande valore, nelle fasi in cui i mercati vanno nel panico, avere chiarissima la situazione sottostante.

La situazione delle economie reali, della geopolitica internazionale, in sostanza della realtà del Mondo, oggi si presenta esattamente come noi di Recce’d vi avevamo anticipato 12 mesi fa. Non la BCE, non la Federal Reserve, non Trump, non Lagarde: noi siamo tra i pochi che nel corso del 2020 non sono stati costretti a cambiare visione, previsioni, lettura della realtà.

Detto questo, i mercati ad oggi sono andati in un’altra direzione? E’ una cosa seria, ma non grave, come scriveva lo scrittore Ennio Flaiano.

Non staremo qui a ricordarvi gli episodi precedenti: voi li conoscete, noi li abbiamo già messi in evidenza.

Risulta però utile, se volete essere coscienti di ciò che accade intorno a voi, e consapevoli di ciò che si vede nei vostri portafogli, leggere con attenzione un documento pubblicato in settimana dalla Banca dei Regolamenti Internazionali.

La BRI è un Istituto che opera da Basilea, ed è la Banca Centrale delle Banche Centrali. Non ha però poteri diretti di intervento (non può andare direttamente a cambiare le decisioni delle singole Banche Centrali) ma esercita un potere di influenza emettendo pareri come quello che leggete qui sotto.

Il punto che noi vi abbiamo messo in evidenza vi aiuta a comprendere tutto ciò che vedete sui mercati oggi, e tutto ciò che avete visto sui mercati negli ultimi quattro mesi.

La decisione della Federal Reserve si riprendere con il QE, ovvero con le mensili immissioni di liquidità sui mercati finanziari nel settembre dell’anno scorso, fu una decisione di emergenza, e la motivazione autentica di quella decisione fu quella che spiega qui sotto la BRI.

A fine settembre più operatori stavano per “saltare”. Questi operatori facevano parte della categoria Fondi Hedge. Le loro operazioni a rischio avevano come contropartita le banche commerciali. Siamo stati ad un passo da una situazione identica al 2008. E la situazione non è risolta: le operazioni di finanziamento di emergenza della Federal Reserve proseguono anche adesso, anche oggi, ed ogni giorno.

Sul ruolo svolto dalle diverse parti in causa, e sulla compatibilità di questo ruolo con le loro responsabilità, lasciamo ai lettori di fare le valutazioni che ritengono. Noi vi lasciamo alla lettura di questo autorevole lavoro di analisi.

September stress in dollar repo markets: passing or structural?

BIS Quarterly Review  |  December 2019  |  08 December 2019

by  Fernando Avalos, Torsten Ehlers and Egemen Eren

The mid-September tensions in the US dollar market for repurchase agreements (repos) were highly unusual. Repo rates typically fluctuate in an intraday range of 10 basis points, or at most 20 basis points. On 17 September, the secured overnight funding rate (SOFR) - the new, repo market-based, US dollar overnight reference rate - more than doubled, and the intraday range jumped to about 700 basis points. Intraday volatility in the federal funds rate was also unusually high. The reasons for this dislocation have been extensively debated; explanations include a due date for US corporate taxes and a large settlement of US Treasury securities. Yet none of these temporary factors can fully explain the exceptional jump in repo rates.

This box focuses on the distribution of liquid assets in the US banking system and how it became an underlying structural factor that could have amplified the repo rate reaction. US repo markets currently rely heavily on four banks as marginal lenders. As the composition of their liquid assets became more skewed towards US Treasuries, their ability to supply funding at short notice in repo markets was diminished. At the same time, increased demand for funding from leveraged financial institutions (eg hedge funds) via Treasury repos appears to have compounded the strains of the temporary factors. Finally, the stress may have been amplified in part by hysteresis effects brought about by a long period of abundant reserves, owing to the Federal Reserve's large-scale asset purchases.

A repo transaction is a short-term (usually overnight) collateralised loan, in which the borrower (of cash) sells a security (typically government bonds as collateral) to the lender, with a commitment to buy it back later at the same price plus interest. Repo markets redistribute liquidity between financial institutions: not only banks (as is the case with the federal funds market), but also insurance companies, asset managers, money market funds and other institutional investors. In so doing, they help other financial markets to function smoothly. Thus, any sustained disruption in this market, with daily turnover in the US market of about $1 trillion, could quickly ripple through the financial system. The freezing-up of repo markets in late 2008 was one of the most damaging aspects of the Great Financial Crisis (GFC).

The liquid asset holdings of US banks and their composition have changed significantly since the GFC. Successive rounds of large-scale asset purchases reduced the free float of long-dated US Treasuries available to the market between the end of 2008 and October 2014. On the flip side, banks accumulated large amounts of reserve balances remunerated at the Fed's interest on excess reserves (IOER) (Graph A.1, left-hand panel, red line). After the Federal Reserve started to run down its balance sheet in October 2017, reserves contracted, quickly but in an orderly way as intended. Alongside, banks' holdings of US Treasuries increased, almost trebling between end-2013 and the second quarter of 2019 (blue line).

As repo rates started to increase above the IOER from mid-2018 owing to the large issuance of Treasuries, a remarkable shift took place: the US banking system as a whole, hitherto a net provider of collateral, became a net provider of funds to repo markets. The four largest US banks specifically turned into key players: their net lending position (reverse repo assets minus repo liabilities) increased quickly, reaching about $300 billion at end-June 2019 (Graph A.1, centre panel, red bars). At the same time, the next largest 25 banks reduced their demand for repo funding, turning the net repo position of the banking sector positive (centre panel, dashed line). The big four banks appear to have turned into the marginal lender, possibly as other banks do not have the scale and non-bank cash suppliers such as money market funds (MMFs) hit exposure limits (see below).

Concurrent with the growing role of the largest four banks in the repo market, their liquid asset holdings have become increasingly skewed towards US Treasuries, much more so than for the other, smaller banks (Graph A.1, right-hand panel). As of the second quarter of 2019, the big four banks alone accounted for more than 50% of the total Treasury securities held by banks in the United States - the largest 30 banks held about 90% (Graph A.2, left-hand panel). At the same time, the four largest banks held only about 25% of reserves (ie funding that they could supply at short notice in repo markets).

Cash balances held by the US Treasury in its Federal Reserve account (the Treasury General Account, TGA) grew in size and became more volatile, especially after 2015. The resulting drain and swings in reserves are likely to have reduced the cash buffers of the big four banks and their willingness to lend into the repo market. After the debt ceiling was suspended in early August 2019, the US Treasury quickly set out to rebuild its dwindling cash balances, draining more than $120 billion of reserves in the 30 days between 14 August and 17 September alone, and half of this amount in the last week of that period. By comparison, while the Federal Reserve runoff removed about five times this amount, it did so over almost two years (Graph A.2, centre panel).

Besides these shifts in market structure and balance sheet composition, other factors may help to explain why banks did not lend into the repo market, despite attractive profit opportunities. A reduction in money market activity is a natural by-product of central bank balance sheet expansion. If it persists for a prolonged period, it may result in hysteresis effects that hamper market functioning. For instance, the internal processes and knowledge that banks need to ensure prompt and smooth market operations may start to decay. This could take the form of staff inexperience and fewer market-makers, slowing internal processes. Moreover, for regulatory requirements - the liquidity coverage ratio - reserves and Treasuries are high-quality liquid assets (HQLA) of equivalent standing. But in practice, especially when managing internal intraday liquidity needs, banks prefer to keep reserves for their superior availability.

Shifts in repo borrowing and lending by non-bank participants may have also played a role in the repo rate spike. Market commentary suggests that, in preceding quarters, leveraged players (eg hedge funds) were increasing their demand for Treasury repos to fund arbitrage trades between cash bonds and derivatives. Since 2017, MMFs have been lending to a broader range of repo counterparties, including hedge funds, potentially obtaining higher returns. These transactions are cleared by the Fixed Income Clearing Corporation (FICC), with a dealer sponsor (usually a bank or broker-dealer) taking on the credit risk. The resulting remarkable rise in FICC-cleared repos indirectly connected these players. During September, however, quantities dropped and rates rose, suggesting a reluctance, also on the part of MMFs, to lend into these markets (Graph A.2, right-hand panel). Market intelligence suggests MMFs were concerned by potential large redemptions given strong prior inflows. Counterparty exposure limits may have contributed to the drop in quantities, as these repos now account for almost 20% of the total provided by MMFs.

Since 17 September, the Federal Reserve has taken various measures to supply more reserves and alleviate repo market pressures. These operations were expanded in scope to term repos (of two to six weeks) and increased in size and time horizon (at least through January 2020). The Federal Reserve further announced on 11 October the purchase of Treasury bills at an initial pace of $60 billion per month to offset the increase in non-reserve liabilities (eg the TGA). These ongoing operations have calmed markets.

NOTES On the same day, the effective federal funds rate increased only 5 basis points to 2.30% (above the upper limit of the federal funds target), but the intraday range spiked to almost 200 basis points, from a typical range of less than 10 basis points.  J Williams, "Money markets and the federal funds rate: the path forward", speech 332, Federal Reserve Bank of New York, 17 October 2019.  Concerns about market functioning due to depressed interbank trading activity in an abundant reserves regime were an important consideration behind Central Bank of Norway's switch to a quota-based system in 2011.  Markets Committee, Large central bank balance sheets and market functioning, no 11, October 2019.  See I Aldasoro, T Ehlers and E Eren, "Can CCPs reduce repo market inefficiencies?", BIS Quarterly Review, December 2017, pp 13-14.  On 18-20 September, it offered overnight repos to primary dealers of up to an aggregate amount of $75 billion against Treasury, agency debt and agency mortgage-backed securities collateral. From 15 November, at least $120 billion in daily overnight repos, in addition to at least $35 billion in two-week term repos, was offered twice a week and at least $15 billion for four- or six-week repos was offered weekly.

Molti (noi di Recce’d siamo tra le eccezioni) nella settimana appena conclusa sono stati colpiti dalla reazione della Borsa di New York alle notizie di un rischio di guerra aperta tra Stati Uniti ed IRAN, di cui oggi parliamo anche nella pagina settimana di ricapitolazione su questo sito.

Fin dal primo giorno, a proposito di questa vicenda, noi abbiamo scritto e detto ai Clienti di attendere e vedere: sarebbe stato del tutto sbagliato correre a conclusioni prima del tempo.

In particolare non ci sorprende che da parte dell’IRAN sia stata adotta una strategia di attesa: ciò che Trump cercava era proprio una giustificazione per alzare ulteriormente i toni dello scontro, e (dal loro punto di vista) giustamente gli iraniani non sono cascati in questa trappola ed hanno preso altro tempo. Temporeggiare in alcuni casi è la tattica vincente.

Tutto ciò detto, sarebbe un errore gravissimo ignorare il fatto che la reazione della Borsa di New York, la settimana scorsa, va spiegata anche con riferimento ad altri fattori, oltre che alla geopolitica.

In particolare, noi ci riferiamo alla reazione della Federal Reserve, che (dopo avere rallentato per due settimane) proprio negli ultimi cinque giorni di mercato ha rimesso l’acceleratore, sollecitata dalle stesse banche USA, riaprendo i rubinetti della liquidità sul mercato americano dei fondi interbancari.

Siamo più che certi (e non siamo solo noi a pensarlo) che non si è trattato di una coincidenza temporale.

Per un maggiore dettaglio di informazioni, abbiamo selezionato per voi il brano che segue qui sotto, le cui conclusioni sono a nostro giudizio particolarmente azzeccate.

Two days after we reported that a disturbance may be brewing below the surface of the repo market again, after the first oversubscribed term repo in over three weeks, when on Jan 7 the Fed received $41.1BN in submissions for its $35BN two week repo, we got another indication just how strong the market's addition to the Fed's easy repo money has become, when moments ago the Fed announced that its latest 2-week term repo operation was also almost oversubscribed, as $34.3BN in securities ($23.3BN in TSYs, $11BN in MBS) were submitted for today's $35 billion operation, as dealers continue to scramble to the Fed for liquidity which they are no longer using for merely "regulatory" year-end purposes (since it is no longer year-end obviously), but are instead using it to pump markets directly.

Today's operation, which was just shy of the maximum $35BN allowed, was the second highest term repo since Dec 16, and suggests that as repos are now maturing at a rapid burst, dealers remain as desperate as ever to roll this liquidity into newer term operations.

And just in case there was any doubt that the liquidity shortage isn't getting better, moments later the Fed announced that in its daily Overnight repo operation, it also accepted $48.825BN in securities ($24.2BN TSYs, $24.625BN in MBS) ... for a total liquidity injection of just over $83 billion!

The problem, as Skyrm explained, is that the market had gotten addicted to the easy Fed liquidity unleashed in September (via temporary repo ops), and then again in October (via permanent T-Bill purchases): "it's easy to see how the Repo market can get addicted to easy cash from the Fed when the stop-out rates for the RP operations are 1.55% - behind the offered side of the market." But, as the repo strategist added, as the Fed keeps injecting cash, the market gets used to it.

Which is great in the short-term as it sends risk assets soaring, but become a major issue over the long-term: "The long-term problem is that the some investor cash (real money cash) that was once going into the Repo market is now going elsewhere", Skyrm explains.

Indeed, the problem is that repo rates are trading in the lower end of the fed funds target range. When GC rates were higher in the range, Repo general collateral, as an investment, was more competitive than other overnight rates. But now that cash has gone to other markets.

In short, just as the market got addicted to QE and the result was a 20% drop in the S&P in late 2018 when markets freaked out about Quantitative Tightening, the Fed's shrinking balance sheet, and declining liquidity, Skyrm cautions that "it will take pain to wean the Repo market off of cheap Fed cash" since "it's a circle" which can be described as follows:

For the Fed to end daily RP ops, they need outside cash to come back into the Repo market. For the Repo market to attract cash, Repo rates need to move higher. For rates to move higher, the Fed needs to stop RP ops.

The problem is that stopping RP ops could spark another repo market crisis, especially with $259BN in liquidity pumped currently - more than at year end - via Repo. It also means that the Fed is now unilaterally blowing a market bubble with its repo and "NOT QE" injections, and yet the longer it does so the more impossible it becomes for the Fed to extricate itself from the liquidity pathway without causing a crash.

Or stated simply, the longer the Fed avoids pulling the repo liquidity band-aid, the bigger the market fall when (if) it finally does. The question then becomes whether Powell can keep pushing on the repo string until the November election, because a market crash in the months preceding it, especially since it will be of the Fed's own doing, will result in a very angry president

La nostra Lettera al Cliente spedita oggi si concentra sul tema dei rimpianti. I rimpianti che non ci sono, i rimpianti che non abbiamo.

Ma partiamo dal valore dell’esperienza. L’esperienza aiuta: in particolare, è utile nelle fasi di massima eccitazione.

Nelle fasi di massima eccitazione sui mercati finanziari, aiuta ricordare ciò che si diceva, ciò che si leggeva, ciò che si ascoltava nelle precedenti fasi di massima eccitazione. Le e-mail che circolavano a quei tempi, le considerazioni che ci venivano rivolte allora, le conclusioni alle quali molti arrivavano in quei momenti. In qualche caso, rileggerle fa sorridere.

Sul piano professionale, quotidianamente, noi di Recce’d ci imponiamo un esame di coscienza: se abbiamo lavorato a sufficienza, nel modo giusto, e nella totale trasparenza vero il Cliente.

Questo esame di coscienza è più faticoso e doloroso nelle fase nelle quali per noi le cose vanno BENE. In quei momenti, si sente fortissima la paura di sbagliare.

Al contrario, se le cose non vanno come noi vorremmo, se le cose vanno meno BENE, l’esame di coscienza risulta MENO difficile per noi. Dal punto di vista della coerenza, del rigore professionale, della trasparenza verso il Cliente, nella gran parte dei casi ci sentiamo a posto (anche se si potrebbe sempre fare di più, ovvio).

Oggi, ad esempio, gennaio 2020, la situazione ci risulta chiarissima: e non abbiamo alcun rimpianto.

Avremmo potuto fare di meglio? Sempre e comunque, ogni giorno, si potrebbe fare di più. E questo che cosa dimostra? Solo che non siamo né maghi né fenomeni. E allora?

Avremmo DOVUTO fare scelte di portafoglio diverse, forse? No, nel modo più assoluto. Su questo, abbiamo le idee chiarissime. Non è mica qui ed oggi, che si tira la riga: il film non è ancora finito.

In Recce’d abbiamo le idee chiarissime sul film, e su come finirà: su dove siamo oggi, e su dove andremo nel prossimo futuro. La situazione di oggi è quella che viene riassunta, in modo perfetto, dall’articolo che leggete di seguito.

Oggi, le cose sono queste: non si tratta di idee oppure opinioni, questi sono i fatti, i fatti duri e concreti, quelli che si toccano con mano ogni mattina andando in ufficio, sui mezzi pubblici, nel traffico, sul treno oppure sull’aereo. La realtà.

Avremmo potuto ignorare questi fatti, e “andare con l’onda”? Si, avremmo potuto. Lo facciamo? No. Lo faremo in futuro? mai.

Perché? Perché è contrario all’interesse dei nostri Clienti.

Chi oggi suggerisce al Cliente di “andare con l’onda” fa il danno del suo Cliente, commette un gesto irresponsabile, e dimostra scarsa professionalità.

Perché? Perché i fatti sono quelli descritti qui sotto nell’articolo a firma Mohamed El Erian, uno del massimi commentatori al Mondo di cose finanziarie. Non c’è bisogno di dilungarsi oltre. Ma durante la prossima settimana, questi stessi temi saranno sviluppati nel nostro The Morning Brief che dedichiamo ovviamente ai nostri Clienti.

(E, per una volta, non vi costringeremo a tradurre dall’inglese!)

SEATTLE – Dopo un anno che ha visto una delle più grandi inversioni di rotta nella recente storia della politica monetaria, adesso le banche centrali sperano di avere pace e tranquillità nel 2020. Ciò è particolarmente vero per la Banca Centrale Europea e la Federal Reserve degli Stati Uniti, le due più potenti istituzioni monetarie. Ma la realizzazione di pace e quiete dipende sempre meno dal loro diretto controllo; e le loro speranze sarebbero facilmente vanificate se i mercati dovessero soccombere a una qualsiasi delle numerose incertezze a medio termine, molte delle quali si estendono ben oltre l’economia e la finanza fino ai regni della geopolitica, delle istituzioni e delle condizioni sociali e politiche nazionali.

Poco più di un anno fa, la BCE e la Fed erano in procinto di ridurre gradualmente i loro bilanci ampliati in modo massiccio, e la Fed stava aumentando i tassi di interesse dai livelli inizialmente adottati nel mezzo della crisi finanziaria globale. Entrambe le istituzioni stavano tentando di normalizzare le loro strategie monetarie dopo anni di politiche basate su tassi di interesse ultra bassi o negativi e acquisti di attività su larga scala. La Fed aveva elevato i tassi di interesse per quattro volte nel 2018, aveva segnalato ulteriori aumenti per il 2019, ed impostato l’assetto del proprio bilancio sul “pilota automatico”. Inoltre, la BCE aveva concluso la propria politica d’espansione di bilancio, ed iniziato a evitare ulteriori stimoli.

Un anno dopo, tutte queste misure sono state invertite. Invece di aumentare ulteriormente i tassi, la Fed li ha tagliati per tre volte nel 2019. Invece di ridurre il suo bilancio, negli ultimi quattro mesi dell’anno la Fed lo ha ampliato in misura ben superiore rispetto a qualsiasi periodo comparabile dopo la crisi. E lungi dal segnalare un’eventuale normalizzazione della sua struttura dei tassi, la Fed è passata con forza verso un paradigma di “tassi più bassi più a lungo”. Anche la BCE ha spinto ulteriormente la struttura dei tassi di interesse in territorio negativo e ha riavviato il programma di acquisto di attività. Di conseguenza, la Fed e la BCE hanno aperto la strada a numerosi tagli dei tassi di interesse in tutto il mondo, producendo alcune delle condizioni monetarie globali maggiormente accomodanti mai registrate.

Questa drammatica inversione di tendenza è stata particolarmente strana per due ordini di ragioni. In primo luogo, si è materializzata nonostante il crescente disagio – sia all’interno che all’esterno delle banche centrali – in merito al danno collaterale e alle conseguenze indesiderate di una prolungata dipendenza da una politica monetaria ultra espansiva. Anzi, questo disagio era cresciuto nel corso dell’anno, a causa dell’impatto negativo dei tassi bassissimi e negativi sul dinamismo economico e sulla stabilità finanziaria. In secondo luogo, la drammatica inversione non è stata la risposta ad un crollo della crescita globale, né tanto meno ad una recessione. Secondo la maggior parte delle stime, nel 2019 la crescita è stata di circa il 3% – rispetto al 3,6% dell’anno precedente – e molti osservatori prevedono una rapida ripresa nel 2020.

Invece di agire sulla base di chiari segnali economici, le principali banche centrali hanno ceduto ancora una volta alla pressione dei mercati finanziari. Basti citare, a titolo di esempio, il quarto trimestre del 2018, quando la Fed ha reagito ad un brusco selloff del mercato azionario che sembrava minacciare il funzionamento di alcuni mercati in tutto il mondo. Un altro esempio si è verificato a settembre 2019, quando la Fed ha risposto a una crisi improvvisa e imprevista sul mercato dei finanziamenti all’ingrosso (“repo”- “pronti contro termine”) – un segmento di mercato sofisticato e altamente specializzato che comporta una stretta interazione tra la Fed e il sistema bancario.

Ciò non significa che gli obiettivi delle banche centrali non fossero a rischio in ciascuna occasione. In entrambi i casi, tensioni generalizzate sui mercati finanziari avrebbero potuto compromettere la crescita economica e la stabilità dell’inflazione, creando le condizioni per un intervento di politica monetaria ancora più accentuato in futuro. Questo è il motivo per cui la Fed, in particolare, ha formulato la sua inversione di rotta in termini di “assicurazione”.

Ma le sfide che devono affrontare i banchieri centrali non si fermano qui. Consentendo nuovamente ai mercati finanziari di dettare i cambiamenti di politica monetaria, sia la BCE che la Fed hanno versato ulteriore carburante su un incendio che infuria da anni. I mercati finanziari sono stati spinti da un record all’altro, indipendentemente dai fondamentali economici sottostanti, perché i trader e gli investitori sono stati condizionati a credere che le banche centrali siano i loro “BFF” (“best friends forever”). Le banche centrali si sono dimostrate ripetutamente disponibili e in grado di intervenire per eliminare l’instabilità e mantenere elevati i prezzi di azioni e obbligazioni. Di conseguenza, la corretta strategia degli investitori è stata quella di acquistare ogni volta che il mercato scende, e di farlo sempre più rapidamente.

Tuttavia, date le crescenti incertezze a medio termine, i banchieri centrali non possono presumere condizioni distese nel 2020. Sebbene una liquidità ampia e prevedibile possa aiutare a calmare i mercati, non rimuove le barriere esistenti ad una crescita sostenuta e inclusiva. L’economia della zona euro in particolare è attualmente soggetta a ostacoli strutturali che stanno erodendo la crescita della produttività. Inoltre ci sono profonde incertezze strutturali a lungo termine derivanti dai cambiamenti climatici, da stravolgimenti di carattere tecnologico, e dai trend demografici.

Inoltre, in tutto il mondo, si è verificata una perdita generalizzata di fiducia nelle istituzioni e nell’opinione degli esperti, nonché un profondo senso di emarginazione e alienazione tra segmenti significativi della società. La polarizzazione politica è più intensa e molte democrazie stanno attraversando transizioni incerte. Inoltre, sebbene le tensioni commerciali tra gli Stati Uniti e la Cina siano state temporaneamente alleviate da un accordo sulla cosiddetta “fase-uno”, le fonti di conflitto sottostanti difficilmente sono state rimosse. E il mondo si è trovato improvvisamente in ulteriore crisi allorché le tensioni tra gli Stati Uniti e l’Iran sono aumentate, con l’Iran che promette ulteriori ritorsioni per l’uccisione mirata da parte dell’America del suo principale leader militare.

Per il benessere economico a lungo termine e la stabilità finanziaria, questa litania di incertezze richiede una risposta politica che va ben oltre il mandato tradizionale delle banche centrali. Richiede un ampio impegno pluriennale con l’impiego di strumenti strutturali, fiscali e transfrontalieri. Senza questo, i mercati finanziari continueranno ad aspettarsi interventi da parte delle banche centrali, che un numero crescente di prove indica non solo come sempre più inefficaci per l’economia, ma anche potenzialmente controproducenti. Indipendentemente dal fatto che le banche centrali evitino i riflettori nel 2020, è probabile che debbano affrontare sfide ancora maggiori per l’autonomia politica e la credibilità di strategie tanto cruciali per la loro efficacia.