Liquidity 02 incl QE, Twist, LTRO, APP etc (Jun 14 - Dec 25)

[winston]

NY Fed to pump $75 bn into money markets daily through Oct 10

The New York Fed -- which handles the levers that control the flow of money in the system -- has for the past four days had to pump billions into money markets after bank demand for cash pushed interest rates above the Fed's target

New York (AFP) - The New York Federal Reserve Bank said Friday it will inject billions into the US financial plumbing on a daily basis for the next three weeks in an effort to prevent a spike in short-term interest rates.

The Fed will offer up to $75 billion a day in repurchase agreements -- exchanging secure assets for cash for very short periods -- through October 10, it said in a statement.

In addition, it will offer three 14-day "repo" operations of at least $30 billion each.

Banks have struggled in recent days to find the cash needed to meet reserve requirements which has pushed up short-term borrowing rates, prompting the New York Fed to pump billions into US money markets with repo operations over the past four days.

However, in a sign a cash crunch could be easing, demand for liquidity on Friday did not significantly exceed the amount offered, as it had on two prior days.

After October 10, the New York Fed will "conduct operations as necessary to help maintain the federal funds rate in the target range, the amounts and timing of which have not yet been determined."

Federal Reserve Chair Jerome Powell this week downplayed concerns about the money market's cash crunch, saying it was not a sign of problems in the wider economy or a concern for monetary policy.

Economists say an array of conditions converged to dry up liquidity in the banking system -- including quarterly corporate tax payments and a surge in government debt sold to investors, which drained cash out of banks.

Banks borrow regularly in markets for very short periods, usually overnight, to make sure their daily cash reserves do not fall below the required level. But interest rates increase with demand.

The New York Fed adds or removes liquidity to keep interest rates in line with the desired target, but the cash shortage in recent days prompted it to pump funds into the short-term repo market as rates soared and threatened to break out of the Fed's target range.

The central bank cut benchmark lending rates interest rate on Wednesday, and also made some technical adjustments to try to keep the market rates from breaking out of the range, including cutting the interest it offers on bank reserves held at the Fed that are in excess of the minimum required level.

Source: AFP

https://news.yahoo.com/ny-fed-pump-75-b ... 43871.html

[winston]

by behappyalways

Why America’s financial plumbing has seized up
Central-bank action is failing to stem the rout

HOUSEHOLDS ARE frantically stocking up on essentials such as loo roll. But in financial markets, the staple that no one can do without in times of stress is cash—the flushing mechanism of the world economy.

In theory, it should never dry up; money can be printed. But when firms are desperate for cash it puts a potentially devastating strain on the plumbing of the global financial system. That is why in the past week America’s Federal Reserve has unleashed a huge amount of liquidity.

Foreign central banks have joined in. Many face the additional challenge of a strengthening dollar (see article).

Unlike the 2007-09 financial crisis, when problems in the financial system caused an economic meltdown, the spread of the covid-19 disease has caused a health and economic crisis that has caught banks, financial markets and business in its wake.

Big and small firms realise that they are facing— at the least—months of scant revenues, yet still have bills and debts to pay.

Some are better equipped than others (see left-hand chart). The operating expenses (opex), like wages and rent, of all nonbank S&P 500 companies in 2019 amounted to $2.6trn. The same firms held $1.7trn in cash and liquid securities at the end of that year.

On average, that was about seven months of opex. But this cash is unevenly distributed. Apple could pay for six years of opex with its $200bn war chest. Many big utilities, such as Edison International, carry only enough cash to cover a week’s worth.

The quickest way for investors, firms and banks to raise cash is to sell liquid assets. Investors moved first. Their priority was to liquidate holdings of risky assets, like stocks and high-yield bonds, and buy safe assets like Treasuries. Markets moved accordingly: the S&P 500 has sold off hard and fast (see right-hand chart) and bond yields rallied. But companies and banks tend to hold their liquid assets in Treasuries. When their need for cash became dire, they dumped even these.

Asset sales help reallocate the stock of existing cash. For every investor selling stocks or bonds to raise cash, there are those willing to take the other side—like Warren Buffett, the fabled “be greedy only when others are fearful” investor, who held $125bn in “dry-powder” at Berkshire Hathaway, his investment firm, at the end of 2019.

He has already snapped up shares in Delta, an American airline. But reallocation can only do so much. When all firms face the same economic shock, they need a vast increase in the supply of credit.

Unfortunately, credit is not readily available. Funding strains have emerged across markets globally. In January American firms that issued risky high-yield debt paid around 3.5 percentage points more to issue a bond than the government did. This spread is now above 8 percentage points (see chart 3). But even if firms did want to issue bonds at such rates, they cannot. Corporate debt markets are virtually shut in America and Europe.

If bonds are unavailable, firms turn to banks. Many have credit lines enabling them to borrow whenever they need, up to a certain limit (akin to a credit card). Last week Boeing, an aircraft manufacturer, drew down its entire $13.8bn line in order to stockpile cash.

In America, there have been reports of firms of all stripes—from chipmakers to casino and cruise operators—doing the same. In Europe Aercap Holdings, an aircraft-leasing firm, said it was drawing down its $4bn credit line.

But banks have problems of their own. The first is that the thicket of global bank regulations imposed on them since the financial crisis may be exacerbating the funding crunch. Take regulations concerning “risk-weighted assets”. Banks must hold a certain amount of capital relative to the size and riskiness of the assets, such as loans, they have on their books.

But as volatility in the value of the assets rises, they become more risky, forcing banks to shrink their balance-sheets. Another example is the new Current Expected Credit Losses rule, which came into effect for public companies in January. It forces banks to provision for bad loans as the probability of default rises, rather than waiting until counterparties start missing payments before booking losses.

The second problem banks have is their own scramble for cash. As lenders make loans, their balance-sheets grow. But balance-sheet is a scarce resource, especially in the current climate. In order to issue more loans banks must either shrink other assets, or find extra capital and funding. They are doing both.

Banks have pulled back from market-making activity, as evidenced by the stubbornly high interest rates in the “repo” market, where firms and banks can swap cash overnight in exchange for posting Treasuries as collateral. Ordinarily banks might jump at the opportunity to arbitrage the difference away by hoovering up Treasuries.

Yet intermediating in the repo market is something they can ill afford at present. Banks are also retaining more of their profits in order to build up capital. On March 15th America’s six largest banks announced they were halting share buybacks for three months.

Their backstop is the Federal Reserve, America’s lender of last resort. It has gone out of its way to ease the blockages in the financial system by encouraging banks to lend. It started on March 12th when the New York Fed, a branch of the central bank, made $1.5trn (an ocean of cash) available for repo operations. In addition to cutting interest rates on March 15th the Fed announced it would buy up $500bn-worth of Treasuries and $200bn-worth of mortgage-backed securities.

By taking assets off the banks’ hands, it enables them to expand lending. It cut the rate on the “discount window”, a tool for banks to borrow from the Fed, and encouraged them to use it freely. It suggested that banks could dip into their capital buffers, worth $1.9trn, and their liquidity buffers, another $2.7trn, to lend to firms and households, which helped ease their regulatory constraints.

Then, on March 18th, the Fed announced it would start buying short-dated commercial paper, to provide direct support for big companies. It also relaunched a facility to lend directly to “primary dealers”, a group of financial firms that do not have direct access to typical Fed lending channels.

These steps are the right ones. Other central banks are taking similar steps. For banks that promise to lend cash the European Central Bank has cut the rate at which banks can borrow from the central bank below the rate at which they are compensated for deposits. It says it will also expand its bond-buying programme by a whopping €750bn ($818bn). The Bank of Japan, meanwhile, is buying up company shares directly, too.

The scramble for cash will continue. If enough liquidity is created quickly, the long-term damage to the real economy will be minimised, though. And if firms know that they can get cash whenever they need it, they might not need quite so much in the first place. Rather like loo paper.

Source: The Economist

[winston]

Stimulus Will Not Prevent The Next Leg Down In U.S. Stocks

by James A. Kostohryz

Summary

Fed and Treasury stimulus will not be able to prevent massive losses of income, production and wealth in the economy.

Despite stimulus, vast numbers of businesses in high employment industries, will disappear and/or take many years to recover.

No V-Shaped recovery. It will take years for former levels of production to be reestablished in many industries. It will take nearly a decade for a return to full employment.

There's no free lunch. Massive increases in public and private debt burdens will impose enormous impediments on future growth.

Source: Seeking Alpha

https://seekingalpha.com/article/433713 ... ent=link-0

[winston]

U.S. banks are ‘swimming in money’ as deposits increase by $2 trillion amid the coronavirus

KEY POINTS

A record $2 trillion surge in cash has hit the deposit accounts of U.S. banks since the coronavirus first struck the U.S. in January, according to FDIC data.

The wall of money flowing into banks has no precedent in history: in April alone, deposits grew by $865 billion, more than the previous record for an entire year.

Deposit gains were concentrated at the very top of the industry: JPMorgan Chase, Bank of America and Citigroup grew much faster than smaller firms in the first quarter, according to company data.

One consequence of the boom: Banks will likely lower their already paltry interest rates.

Source: CNBC

https://www.cnbc.com/2020/06/21/banks-h ... KW,420DP,1

[winston]

Liquidity:

We have $3.3 trillion in fiscal stimulus now working through the economy. And the Fed has pumped $3 trillion into the system since March. That’s a total of $6.6 trillion.

And it’s estimated that, with the Fed’s other facilities, the Fed could inject up to another $3 trillion-plus.

This doesn’t even include the massive amounts of money the banks are creating, with a zero reserve requirement.

On that note, if we look back at the Global Financial Crisis response, where the Fed expanded the balance sheet from $870 billion to $4.5 trillion, the money supply grew from $7.4 trillion to almost $14 trillion. That’s a double in the money supply.

If the money supply doubled this time, we’d be looking at more than $15 trillion of new money circulating in the economy.

Source: Forbes

[winston]

Crazy easing may put markets in tight corner

by Andrew Wong

The European Central Bank is continuing to invest in corporate bonds to the tune of 272 billion euros (HK$2.58 trillion), with monthly purchases averaging six billion euros, enough to absorb the bulk of net issuances.

By end-November, delinquency rates for commercial mortgage-backed securities were close to financial crisis peaks, with hotels near 23 percent and retail properties near 12 percent.

New issuance in the US dollar corporate bond market hit a record high.

Quantitative easing, especially in Europe and the United States, has distorted the stock market, or even the prices of corporate bonds and properties. That will trigger a big problem, which is if central banks in future fail to effectively control and reduce sequela brought about by quantitative easing, then not only will stock, bond and real estate markets be likely to see rapid adjustments, and that brings serious systemic risk to financial markets in the future.

Source: The Standard

https://www.thestandard.com.hk/section- ... ght-corner

[winston]

Speculative traders add billions to ‘meme’ stocks at new records

Stocks have added more than $6.8 trillion globally in six weeks.

Digital currencies have boomed to a market cap of more than $1.4 trillion.

Cathie Wood’s tech-focused ETFs now manage over $50 billion and counting.

Source: Bloomberg

https://www.thestar.com.my/business/bus ... ew-records

[winston]

The world’s free-spending, money-printing spree will cost us dearly in the end

The world has mortgaged its economic and monetary future to uncertainty in the hope that the global economy will come roaring back after the pandemic

In reality, the cost of these well-intended but ultimately irresponsible policy actions could be inflation, financial crisis and a deeper recession

by Anthony Rowley

The IMF’s recent “Fiscal Monitor Update” cites the latest figure for fiscal support globally at US$14 trillion while central bank balance sheet expansion in the so-called G10 advanced economies has been around US$9 trillion plus a further US$160 billion in emerging markets.

Source: SCMP

https://www.scmp.com/comment/opinion/ar ... dearly-end

[behappyalways]

Liz Ann Sonders
Staggering global equity inflows this year ... 2017 & 2013 upticks don’t even come close
@SoberLook

@EPFR @BankofAmerica

https://mobile.twitter.com/LizAnnSonder ... 6773727235

[winston]

Liquidity Is Evaporating Even Before the Fed Taper Hits Markets

by Lu Wang

Roughly speaking, it’s the gap between the rates of growth in money supply and gross domestic product, an indicator known to eco-geeks as Marshallian K.

It just turned negative for the first time since 2018, meaning GDP is rising faster than the government’s M2 account.

“Put another way, the recovering economy is now drinking from a punch bowl that the stock market once had all to itself”.

Research from UBS Group AG showed that should the Fed turn off the spigot on its annual $1.4 trillion in quantitative-easing spending, the hit to the S&P 500 would be a paltry 3% decline in prices.

While the broad market has been strong -- the S&P 500 closed Wednesday at a record for the 46th time this year -- fewer stocks are participating in the latest leg up.

Source: Bloomberg

https://finance.yahoo.com/news/liquidit ... 54138.html