Non sono molti, tra gli investitori, quelli che hanno compreso la ragione per la quale la Federal Reserve a partire da settembre 2019 è tornata a fare operazioni di QE, ovvero ad acquistare sui mercati Titoli di Stato in cambio di liquidità.

Inizialmente, ai mercati è stato detto che si trattava di operazioni di “emergenza” il cui scopo era di rispondere ad una “temporanea esigenza di liquidità delle banche”.

Sono trascorsi cinque mesi: gli interventi della Federal Reserve proseguono, ogni giorno. La Banca Centrale degli Stati Uniti ha ripreso a fare operazioni di QE, senza spiegare il perché, e per un importo MOLTO superiore a quello (che è invece ufficiale) operato dalla BCE in Eurozona.

L’immagine di apertura ci ricorda che questa politica è già arrivata a toccare i propri limiti, e questo sta quindi per aprire una fase nuova, diversa, più problematica, come spiega il Wall Street Journal.

Gli investitori che fanno le proprie scelte senza avere consapevolezza di fatti come questi operano sui propri soldi senza sapere ciò che fanno.

Riteniamo un nostro preciso dovere professionale colmare (almeno in parte) questo vuoto informativo che unisce TV e quotidiani, Reti di promotori finanziari e Reti di private bankers.

Per questa ragione, mettiamo a vostra disposizione una analisi del noto analista Jim Bianco, pubblicata da Bloomberg.

Se siete lettori pigri, e vi fate scoraggiare dalla lingua inglese, potete scorrere rapidamente ed arrivare alla frase finale: che in modo efficace riassume tutto.

With their best intentions in mind, central banks and governments have instituted rules to ensure that financial institutions have enough liquidity to withstand another crisis. But liquidity coverage ratios, high quality liquid assets rules, Basel 3 compliance, global systemically important bank charges, and the soon-to-be-implemented net stable funding ratios have made supplying the all-important repo market’s needs so byzantine that no one really knows what exactly is required, least of all the Federal Reserve.

The Fed understood these new rules posed an uncertainty risk, which is why they regularly surveyed and consulted primary dealers for feedback. And yet, with no real experience with these new rules, everyone was essentially guessing. Add massive issuance of U.S. Treasury securities to meet trillion-dollar budget deficits and by mid-September the all-important repo market broke, unable to handle ever-increasing demand.

The simple fix is to roll back the regulations. Treasury Secretary Steven Mnuchin proposed just this in late October. That was quickly followed by a letter from presidential candidate Elizabeth Warren, who warned him that “These rules were designed to ensure that banks have enough cash on hand to meet their obligations in the event of another market crash,” and that “Banks are reporting profits at record levels, and it would be painfully ironic if unexplained chaos in a small corner of the banking market became an excuse to further loosen rules that protect the economy from these types of risks.”

Warren was not alone. Former Fed Vice Chairman Alan Blinder and former Federal Deposit Insurance Corp. head Shelia Bair also warned that the rules should remain in place.

Instead, the Fed intervened in the repo market by doing what it does best, burying a problem with more money until it goes away. It did this by supplying repo to the primary dealers directly and reserves to the banking system via Treasury bill purchases.

Unfortunately, the Fed made a critical design error in its daily interventions. They are offering to supply repo to the dealers at prevailing market rates. In other words, they are giving the dealers every incentive to take repo from the Fed as opposed to the market. In essence, the Fed has become the lender of first resort when it should be the lender of last resort and offer repo at a penalty rate. The Fed should be willing to help a dealer in need, but it should come at a price.

So, after four months of these Fed repo operations, new problems are emerging. More specifically, the Fed might be going too far and oversupplying this market. The effective federal funds rate is signaling there are enough reserves in the banking system. This month it traded at 1.54%, breaking below the interest on excess reserves (IOER) floor of 1.55% for the first time in 14 months. This is happening as the Fed announces it will continue to plow ahead with Treasury bill purchases and supplying hundreds of billions of dollars of repo supply until April, if not later.

What should the Fed do? It has already telegraphed it will raise the IOER rate by five basis points to 1.60% at the Federal Open Market Committee meeting next week. Presumably, it will also raise the repo offered rate by five basis points to 1.60%. Policy makers should raise the repo rate even higher. Stand ready to offer liquidity, but at a penalty rate.

This won’t fix the problems in the repo market; only rule changes can do that. But at least this will allow the Fed to identify how much supply is needed to get the market back in balance rather than risking a loss of control of the federal funds rate altogether.

The Fed should not be looking to permanently insert itself into the repo market via a standing repo facility. Repo is still a credit market, and, in times of stress, it requires a credit decision when deciding who gets a collateralized loan and at what terms. Central banks are not equipped to make these decisions, and their involvement could create a moral hazard, making things worse.

The repo market’s problems are far from over.

Come scritto in un altro Post pubblicato oggi, il 2020 sarà l’anno del risveglio: i mercati saranno obbligati a riprendersi da quello che molti hanno definito “il sogno” e realizzare che la realtà dei fatti è così complessa e così articolata da rendere impossibile per le Banche Centrali di procedere con le loro politiche monetarie ultra-espansive ed ultra-accomodanti.

Proprio su questo, si è registrata al recente World Economic Forum di Davos una significativa convergenza di opinioni, specie tra i massimi dirigenti delle banche commerciali, sia europee sia degli Stati Uniti.

Tra gli altri, ne ha scritto la settimana scorsa il Financial Times, con un resoconto che riteniamo di riproporre qui sotto: nulla, come le parole pronunciate direttamente dai massimi vertici delle banche, vi può restituire un’atmosfera di allarme che (curiosamente) è del tutto in contrasto con ciò che scrivono nelle loro “ricerche” gli analisti delle medesime banche che questi signori citati dall’articolo dirigono.

Ad esempio Jamie Dimon, numero uno di JP Morgan, descrive in modo efficace la “trappola dei tassi bassi”, proprio mentre i suoi “analisti” spingono invece i loro Clienti (e quindi anche le Reti di promotori finanziari in Italia) a mettere più rischio nei portafogli degli investitori finali che si fanno trascinare da questi meccanismo di marketing, senza capire ciò che stanno facendo.

Per questo motivo, la lettura dell’articolo che segue vi sarà molto utile.

David Crow in Davos JANUARY 23

Eurozone bank executives have launched a fresh lobbying push to convince policymakers of the dangers of long-term negative interest rates, warning they will hurt savers and pensioners while fuelling price bubbles in riskier assets. Bank chief executives have spent the past two years trying to force the European Central Bank to reverse its negative interest rates, which were first introduced in 2014.

Other European central banks including Switzerland and Denmark also have negative rates. Rates below zero have slashed the amount that the region’s lenders earn from bread-and-butter lending and crushed their profit margins. But bankers’ entreaties have fallen on deaf ears, with policymakers concluding that the benefit to the eurozone economy outweighs the pain for lenders. One of Mario Draghi’s parting acts before standing down as ECB president last autumn was to tell banks to stop “being angry” about negative rates and instead focus on fixing their flawed business models.

Now European bankers are taking a different approach. In a series of private meetings with the region’s regulators and politicians at the World Economic Forum in Davos, bankers have warned of what they see as the broader perils of long-term negative interest rates, according to several people briefed on the discussions.  They pointed to data showing the impact of ultra-loose monetary policy is petering out and urged politicians to cut taxes and increase spending to boost economic growth. Ana Botin, executive chairman of Santander, the Spanish bank, praised Mr Draghi for “saving” the euro but said: “From here onwards it is critical to look at data and behaviours.”

In an environment where for a long, sustainable period of time interest rates have been zero, and money has basically been free, it pushes people out [along] the risk curve “It seems in many [eurozone] countries the pros of negative rates don’t outweigh the cons,” Ms Botin said in an interview with the Financial Times. “People are not taking out more loans, and savers are understandably getting more worried about how they’re going to plan for the future.” Ralph Hamers, chief executive of ING, the Netherlands-based bank, said that “no industry can live with raw materials that are more expensive than the price of finished goods”. Mr Hamers also pointed to the impact on pensioners, some of whom are having to put more towards their retirement to offset the loss of income from bond yields — investments that have traditionally been used by fund managers to pay for future liabilities. He added: “The industry is saying that [ultra-loose monetary policy] doesn’t work any more. It is so detrimental to savers’ confidence that it is having the reverse effect, and consumers are starting to save even more to make up for losses in their pensions.”

Two chief executives of large eurozone banks said they were also working on plans to pass the cost of negative rates on to a much larger chunk of retail savers, setting the stage for a political backlash that the banking industry hopes will lead to wider public awareness of the ECB’s policy. So far the majority of banks have charged a fee only to corporate depositors and wealthy clients with balances over €1m, but the executives said this could be extended to all customers with more than €100,000, the limit for most deposit guarantee schemes in Europe. “The whole market is looking at this,” said one of the executives. “Over time, we need to decrease the threshold at which we charge.”

Thomas Jordan, head of the Swiss National Bank, on Thursday defended Switzerland’s five-year policy of negative interest rates and signalled a willingness to keep borrowing costs at minus 0.75 per cent or cut again if necessary. Switzerland needs negative interest rates, the central banker said on the sidelines of the Davos meeting.

But some bankers point to price bubbles in riskier assets such as equities and illiquid investments like private equity and privately held companies, which could tumble in value in the event of a recession. “Fund managers . . . looking for yield have put their money to work into credit like commercial real estate and leveraged lending,” said Huw van Steenis, an executive at UBS and a former adviser to Mark Carney, the outgoing Bank of England governor. David Solomon, chief executive of Goldman Sachs, cited the impact of negative rates in the eurozone and low rates in most other developed economies as a factor in the inflated, multibillion-dollar valuations that private companies such as WeWork have been able to attain. “In an environment where for a long, sustainable period of time interest rates have been zero, and money has basically been free, it pushes people out [along] the risk curve,” he said. “One of the consequences of that is people chase growth, and people start to overvalue growth.”

Meanwhile, bank executives have also been lobbying politicians in countries with budget surpluses — most notably Germany — to loosen fiscal policy in the hope that more public spending and tax cuts will boost growth and inflation, paving the way for the ECB to start raising rates. One chief executive involved in the effort said it was a “long game” designed to push policymakers to “reflate” the eurozone economy, noting that the ECB had “stopped listening” to complaints about bank profitability. Jamie Dimon, the chief executive of JPMorgan, said he viewed negative rates with “trepidation”, describing them as “one of the great experiments of all time” and warning “we still don’t know the ultimate outcome”.

“I think it’s very hard for central banks to forever make up for bad policy elsewhere,” Mr Dimon said in an interview with CNBC. “That puts them in a trap. We’re a little bit in that trap today with rates so low around the world.” Banks have also been supported in their effort by the US administration’s Davos delegation, which has also been urging European politicians to implement a fiscal stimulus. Larry Kudlow, the White House’s top economic adviser, told a panel that Europe needed to cut taxes and regulation on business — in effect mimicking Donald Trump’s stimulus in the US — rather than keeping rates in negative territory.  “Negative rates are not a good idea, they are really bad for banks, and they are not good for savers,” Mr Kudlow told a panel this week, adding, jokingly, that Mr Trump disagreed with him because he would have benefited from ultra-low or negative rates when he was a real estate developer.

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.