Does FRB's "hidden QE" continue the Dow's upward trend?
Hello, this is Koyama.
Starting with the US-Iran issue,
the coronavirus has shaken the world…
As 2020 began,even though only one month has passed
the world is incredibly noisy, isn’t it?
At the start of 2020it is an opening that makes me imagine, whether I like it or not, that it will be a year full of upheavals.
In fact,since the Lehman Brothers collapse
2020, which has passed more than 10 years since then,
is whispered in the financial industry that
there is a possibility of a financial crisis far surpassing Lehman’s collapse.
in the financial industry.
In the Japanese market as well,
there is talk that“consumption tax rebate campaigns ending will cause a sudden drop in consumption.”
and
“the economy after the Tokyo Olympics will be in trouble!”
is being said, and
2020 seems to be a year we must be cautious about,
no doubt about it…
However, on the other hand,this year's market
is also whispered to be a very big opportunity.
That is because…
the Fed is implementing
“quantitative easing in real terms” on the largest scale ever.
What do you think?
When you hear this, do you get it?
Perhapsmany people may not quite grasp it.
Because,in the news,
it isn’t reported proactively,
why it isn’t reported?
I hope you can imagine the reason yourself, but…
Anyway,as a fact
the Fed is now dispersing enormous amounts of money into the market.
The Fed’s balance sheet, which had declined temporarily,
has grown again significantly since last year.
“The fundamental belief is that
you don’t need to study finance or economics to make money in stocks.”
That is my basic view on investing.
Even if you have plenty of expertise,
future predictions tend to be off by a lot,
to the point of being useless.
However,the way the Fed’s money distribution is carried out
and how much money moves behind the scenes
are things you should know at least a little about,
There will be specialized terms, but
even those with no prior knowledge can understand,
I will explain in order, from the first installment and the next one,
in this and the next issue of the newsletter.
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It began with the “repo rate surge.”
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The story goes back to last September.
Last September,an incident occurred.
Please look at this chart.
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https://jp.tradingeconomics.com/united-states/repo-rate
Momentarilythe rate spiked clearly at a glance,but
the U.S. “repo rate”shot up.
“Repo rate”
You may not be very familiar with this term…
First, there exists the“repo market.”
In short,
it is a place where money is lent for a short period
but to convey its meaning more clearly,
I will put it in a familiar analogy.
Imagine one thing.
For example, you are trading stocks,
and you end up allocating most of your capital to trading,
and you have almost no cash on hand…
but you have to pay the rent and credit card deductions tomorrow,
and you’re in that situation.
That’s risky.
Of course,if you close your stock positions,
you would have cash on hand,
but if you’re still in unrealized gains and think it could go higher,
it would be a waste to close.
The next payday is near, butthere is still time until then.
In such a case,for a short period until payday,
a place that lends money at low interest would be very helpful, right?
Financial institutions are the same way,they occasionally face liquidity crunches,
and having a place to borrow money for a short period is very helpful.
And indeed such places exist.
That is the“repo market.”
From as short as 1 day to a few days,to meet short-term cash needs,
a place to borrow money is available,that is the “repo market.”
When financial institutionsfall into liquidity shortfalls,
it has a great impact on the economy, so
the repo market plays a very important role.
However, of course
you cannot borrow money for free.
Financial institutionsmust first provide collateral such as government bonds,
and interest accrues.
That interest isthe aforementioned“repo rate.”
Typically, the repo rate isset relatively low.
Even if a borrower defaulted,
the lender would still have the collateral such as government bonds,
so the risk of loss is extremely low.
Then,last September,
the normally low repo rate
spiked suddenly,causing temporary market turmoil.
Why did rates surge?
Because the balance of demand for borrowing money
and supply from lenders
collapsed drastically for a time.
The demand to borrow money
greatly exceeded supply,in other words.
Why did this happen?
Some financial institutions may have experienced a liquidity shortfall.
Also,
the majority of liquidity provision in the repo market
was carried out by
JP Morgan Chase
Bank of America
Citigroup
Wells Fargo
these four major U.S. banks,
but there were circumstances where they could not provide liquidity.
Jamie Dimon, CEO of JPMorgan Chase,
stated that
“the company had enough cash and the will to calm the repo market,
but was blocked by liquidity regulations for banks.”
(quoted from bloomberg
https://www.bloomberg.co.jp/news/articles/2019-12-09/Q27Y61DWX2PU01）
In any case, the supply-demand balance collapsed
and the repo rate surged.
As mentioned earlier,for financial institutions
the “repo market”plays a very important role, so
it cannot simply be left as is.
Thus, the Fed appeared.The Fed began supplying funds to the repo market
and started to calm the situation, but…
Since this has become quite lengthy,
I would like to move the rest to the next issue.
Rather than making a quick profit and disappearing,
I hope to see true traders who continue to profit no matter what happens,
and that is why I am writing this newsletter.
I would be glad if you would read the next installment as well.
With that, please enjoy the rest of today as well.
Keizo Shimoyama
