At 21:00 on June 19th, Song Hongbing gave the latest prediction on the trend of the US financial market. Before the end of the year, there may be 500 billion US dollars of flood congestion in the currency market. New players are joining. The scale of the Fed’s overnight reverse repurchase may continue to rise. It may be a high probability event to exceed 1 trillion US dollars in the second half of the year. It is estimated by the end of the year. Nearly 1.3 trillion, or even higher.
When most market participants analyzed the Fed’s decision, they generally believed that the U.S. monetary policy was only a signal of a turnaround, but no real change occurred, because the federal benchmark interest rate and QE policy remained unchanged, while the excess reserve interest rate and overnight reversal The 5 basis point increase in the repurchase rate is nothing but a technical adjustment.
“However, judging from the actual effect, this technical adjustment has actually played a role in raising interest rates.” In the “Interpretation of How the Fed’s Interest Rate Meeting Understands the Tightening Signals” in the 172nd issue of the Hong Academy Micro Class on June 19, Song Hongbing said After the Fed raised the “ceiling” and “floor” interest rates, it was tantamount to raising the monetary policy interest rate by 4 basis points. This is a tangible increase in interest rates and simultaneously raised interest rates in all money markets.
The excess reserve interest rate is the ceiling interest rate, and the overnight reverse repurchase is the floor interest rate. As the core interest rate of monetary policy-the federal benchmark interest rate, it is suspended between the ceiling and the floor. For example, the current benchmark interest rate range is 0-0.25%, and the Fed’s expected target value is 0.1% between the two.
When the floor rate (overnight reverse repo rate) was increased from 0 to 0.05%, the repo market rate was immediately increased to 0.05%. why?
Because all those who have money and want to lend can lend money to the Federal Reserve and get Treasury bonds as collateral. There is no risk at all and a steady profit of 5 basis points. In the repo market, any transaction below 5 basis points cannot be done. This is the role of the overnight reverse repo rate as the “floor” rate. At the same time, the yield of short-term treasury bonds also rose immediately. For example, the yield of 3-month treasury bonds is often as low as 0.01% to 0.025%. After the local board interest rate rises by 5 basis points, the yield of 3-month treasury bonds immediately rises to 0.038%, which is 3 The highest value since the month.
At present, interest rates in several money markets have gone up across the board, and eventually the federal funds rate, the most important monetary policy rate, immediately jumped from 0.06% to 0.1%.
“For this reason, the Fed is currently turning itself into a’super pump’.” Song Hongbing said that while the Fed was forced to “release water,” it was also being forced to “pump water.” This self-contradictory approach will cause a huge financial idling and will greatly push up inflation.
According to current data calculations, the Fed will continue to inject about US$120 billion in liquidity into the financial market every month before reducing debt purchases. In addition, the U.S. Treasury Department has $765 billion in cash in the Fed’s checking account. According to the plan of Secretary of the Treasury Yellen, it should be reduced to the level of 500 billion US dollars by the end of June, which means that another 265 billion US dollars of “flood” will flood the financial markets. Although this plan may be slowed down to the second half of the year to be implemented, but in the next six months, there will be about a trillion dollars of currency floods that need to be discharged.
Considering that part of the funds may flow into the overseas US dollar market and the other part into the real economy, Song Hongbing predicts that there may be a flood of US$500 billion in the currency market before the end of the year. In addition, there are also the funding variables of “Two Housing” (Fannie Mae and Freddie Mac, two federal mortgage financing companies with government properties). Therefore, the scale of overnight reverse repurchase may continue to rise, and it may be a high probability event to exceed 1 trillion US dollars in the second half of the year, and it is estimated to be close to 1.3 trillion or even higher by the end of the year.
However, we know that all positive feedback systems are difficult to sustain, because it will require more and more external energy injection, and the scale will become larger and the speed will become more and more fierce. When the outside world cannot meet this energy demand, it will eventually become Self implosion is the end.
When short-term interest rates continue to approach and impact the red line of negative interest rates, the phenomenon that the extremes of things must be reversed will naturally occur. This is the sudden increase in the scale of the overnight reverse repurchase. The time is at the end of March this year. After April, the volume began to rise, and in May it entered a state of soaring. After June, it began to soar.
If QE money printing is to release water, then overnight reverse repurchase is a super pump. While the Fed is working hard to release water, the other side is desperately pumping water. The U.S. dollar flows out of the Fed and stays on the accounts of primary dealers and major banks for a while. The balance sheet has reached its limit, and these currency floods immediately overflowed onto the balance sheet of money market funds. However, due to the asset famine, these currency floods have nowhere to go. In the end, they can only flow back to the Federal Reserve through reverse repurchase overnight. This kind of idling of economically worthless funds has no meaning other than leaving Wall Street empty. . The point is, can this water-pumping currency game last forever? Can this positive feedback system work indefinitely? If it can operate indefinitely, this will be a state where Wall Street’s incomparably wonderful dreams come true. Stocks will always rise, financial assets will appreciate infinitely, and money will be made soft. This hearing violates the law of conservation of energy. The “blind spot” of this game mechanism is inflation. Logically speaking, if “water-pumping” continues to operate, and becomes faster and larger in scale, all money will be made by Wall Street, and the world’s wealth cake will eventually go to Wall Street. Theoretically speaking, it is impossible for currency to seal idling in the financial market. Whether it is stocks or national debt, the person who gets the money will spend it. If there is too much money and things cannot be bought, prices will naturally rise. Severe inflation will force the central bank to raise interest rates, thereby disrupting the operation of the positive feedback system. While being forced to constantly “release water”, while being forced to “pump water” continuously. This self-contradictory approach is brewing a bigger crisis
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