YouSaid · the spoken record

Joseph Wang

lines on the record: 111
first: 2022-01-14
most recent: 2022-01-14
sittings or episodes: 1
sources: podcast

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“Some people gain, some people lose, right? It's a redistribution. If you are a lender at that time, you have to pay a bit more interest. You earn a little bit more interest. If you're a borrower, you pay five basis. It's not a big deal. And the thing is, manipulation, it's not symmetric. It's not like always high, always low. So it's really hard to see if there was any meaningful thing to it. But the official sector took advantage of that opportunity to create a new reference rate. when that they felt that could not be easily manipulated from the banks. So they took the power to set reference rates out of the private sector. They took it into the public sector. The reference rate that they created was called sofer, and that is an overnight reporter based on treasury collateral. So their official line is that first of all, this is reliable because we're the good guys, we do this. The second, of course, is that it's a market-based rate.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“During the GFC, there were some reports that the banks were manipulating LIBOR, and so LIBOR is not a trustworthy rate. Now, in my view, this is completely overblown because, first of all, let's say you move without manipulation was 6%, and let's say you moved it to be 6.5%. Well, it's hard to move that. 6.05%. Let's see you moved it 5 basis points.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“During the great GFC, so for pre-GFC heading into it, everyone used LIBOR as a benchmark as to how much they should borrow, what rates they could pay. It'd be like LIBOR plus a spread, LIBOR is the reference rate that everyone uses. And LIBOR was formed by a panel of banks in London basically submitting to a panel of what they think they could borrow at. The panel looks at this, you know, chops off the outliers, and comes up with a rate and saying this is the reference rate we will use for today. And everyone was okay with that.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“But the way the Fed works, it's almost everything is based on tenure, and it's like a university. You can only advance one retirement at a time. So you have a few people out the Fed who basically spent their entire lives building models, understanding the world through the lens of effort, and they just, you know, they can't learn anymore. So they just kind of force everyone to go along with them. Going to be a transition to sofer in the coming future, and sofa is basically the going to be the replacement for effort. Well, it's a replacement for LIBOR today, but probably one day effort as well. Libar is the London Interim Bank rate. It is an unsecured rake. So it's basically how much a bank can borrow for about three months is the standard term.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“They don't get IOR, so every day they have interest on reserves. Maybe they have a hundred billion dollars sitting at the Fed earning zero. So what do they do? They beg a big to take it. And so if a bank earns 15 basis points on IOR, okay, fine. You know, I'll give the home loan bank five basis points and I'll take 10 basis points or some other split. So they have this symbiotic relationship. It doesn't have any economic significance and it's been dead for many years. So every time you hear the Fed talk about Fed funds rate and there's a new series off the Federal Reserve Bank of New York talking about how the Fed implements monetary policy and it's all through the lens of effort. And that's really, really disheartening for me to see. And because if you study this, you know that it's a dead market.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“That kind of, there was some risk that banks were going to go under. So they were reliant on short-term liquidity that they could not roll over. And so they had to buy or sell their assets to make those payments. So there was a big push for them to not rely on short-term liquidity like the Fed funds rate, but rely on longer-term liquidity, let's say three months, six months, and so forth. Even if there was we were in a regime where there was low reserves like we were pre-GFC, there wouldn't be a Fed offense market because banks had been encouraged or forced by regulation to move away from the overnight market. So the Fed funds market is a zombie market. It's completely dead. It only exists because there are some entities in the financial system. They're called Federal Home Loan Banks.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Would go up and down every day. Like, you know, like any financial market that's alive. Today, Fed funds, if you look at a chart for Fed funds rate, it's a flatline EKG. It's the same exact rate. It's like it was hit by the Soviets, right? It's like a command economy. Fed says, this will be Fed funds rate. So the reason for this, well, there's two reasons for this. The first reason is that banks have a lot of reserves, so they're never really short for liquidity. There's really no reason for them to borrow from another bank. And the second reason is just as important, and that has to do with regulation. PostGOC, there's a set of rules called Baso 3 that basically encourages banks to not borrow from each other because during the GFC there is basically a bank run, right? And so banks were not banks had a run and”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Bank, let's say the martial funding cost of a bank, it's like say 1%, they would add a spread to that and then offer loan rates to their customers. So when the Fed wanted to raise rates, they would adjust the federal funds rate by adjusting quantity of reserves. Now, when the federal funds rate went higher, the opportunity cost of banks, marginal funding costs, went higher as well. So if the federal funds went from 1% to 2%, now banks would offer loans, let's say, 2% plus a spread. So that affected the rates that end users, borrowers faced, and that's how they adjusted, let's say, cooled the economy down. Post-GFC, banks don't borrow in Fed funds anymore. It's literally a dead market. So pre-GFC, Fed funds volumes would be like a couple hundred billion dollars. It'd be a very dynamic market.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“That's a really detailed question. It's from DCANA's, right? One of, I think, one of the best money market accounts on Twitter. So I'll give you guys some background of the effective Fed's funds rate, and then I'll tell you why it's just absolutely insane that they keep caring about it. So let's say pre-financial crises, the Fed's target rate was and is the effective Fed funds rate. And the effective Fed funds rate is basically the opportunity costs for banks. It's a market where banks can borrow overnight from another bank. The Fed would control that rate as a way to control broader interest rates. So let's say”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“That has an impact, but If you look at the distribution of financial assets in the country, they are held by, you know, let's say the top 10%, right? So when you compress the value of financial assets, you're impacting the wealthy a lot more than you're impacting everyone else. And the wealthy weren't spending their money to begin with. People who are lower income, they don't have a lot of financial assets, but they buy lots of stuff. People who are wealthier, they don't buy lots of stuff. So you make them a little bit poor, but that doesn't mean they're going to spend less money because they weren't spending that much money to begin with. If you are a billionaire, there's only so many houses you can buy. So I think it has an effect on sentiment. I think that over the medium term, I think that it will not help inflation.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Deficit will be at least a trillion dollars every year for the foreseeable future. And if you raise rates, interest on that deficit goes higher, and that means more money is printed, right? That's the one aspect of the inflationary hikes. If the world's largest borrower has to pay higher interest, then they're just going to print more money to pay that interest, right? So you have this Doom loop dynamic here. So I'm skeptical that inflation, that rate hikes would solve real economy inflation. to the extent that it's a supply chain thing, as you mentioned, it's not really going to do anything. But rate hikes do have a very strong impact on the financial economy. If you hike rates and you crash the market, that's going to have some effect on inflation because in a sense you're not as wealthier as you were before. Maybe you are like, you know, you'll owed into like a fortune in Tesla. You're going to buy a new house. Now maybe you have to buy a check. So, okay.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Are issued by the US government, super liquid, super safe, accepted throughout the world. So it basically prints money when it does deficit spending. And it's been doing that at an increasingly large pace. Over the past year or two, it was 3.5 trillion dollar deficit. Going forward, you have a lot of spending on the books that won't change.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Because they're already so low at an absolute and historic level. I'm skeptical that that does anything. And I think bigger picture though, from my perspective, what really drives inflation these days is the fiscal spending. Because when the government is spending money that it doesn't have, In the past, what it would do was raise taxes, right? So it would take money from someone to spend to someone else. But what's been happening for the past decade is it just does deficit spending. So what issues treasuries? Or you can think about treasuries as a form of money.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“So, I don't think Rate Hacks would be supportive. So from my perspective, rate hikes have a much, much stronger effect on the financial economy than they do have on the real economy. So these are two separate things. So like I alluded to earlier, it's hard for me to imagine a circumstance where, let's say, even if the Fed were to raise rates to 2 or 3%, that a company would change their investment decisions, because that's only one aspect of what drives what they do is the price of money, the other is things like demand, technology, regulatory costs, so forth. I mean, if I told you that, you know, rates instead of 1%, you can borrow 2%. I mean, without really change your business plans, it's a small factor that's increasingly small factor”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“And how effective do you think Rate Hikes will be in fighting inflation, you have your own theory about inflationary hikes, which maybe we can revisit, but also if the deflationists are right and the real reason we have inflation is not because of any monetary phenomena, but because there just aren't enough ships in the world and oil companies aren't drilling as much because of ESG and other reasons. In other words, that it's supply driven. If deflations are right, that inflation is mostly driven by supply side issues and supply chains, then is hiking rates to 1%, 2% really going to stop inflation in its tracks like hiking rates in 81 did epically in the case of Paul Voker.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Of that could be because there are people in the equity market who don't believe them, that's fine, but if that's what they're communicating and there's no pushback, Cherpel has a lot of opportunity to push back. It's just the start of the year. He did not push back yesterday. He has many opportunities to push back the coming press conferences. Then that would be my baseline case. And the Fed has a lot of control over market expectations. They watch that closely and if they're comfortable with that, then they're comfortable with doing that. After the first rate hike, I would expect Qt to probably begin maybe in June or September. Again, it's going to depend on whether or not inflation recedes like their models are praying for, or if it just remains high.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“So, the way that markets work is once it's priced in, it already exists. The Fed doesn't have to do anything. So if you're pricing in Ferrara hikes, then you go in, let's say you're a borrower and you go to the market, those rates are already there. It's already in the market already. So that's done. So if the Fed were to not carry out those 40 rate hikes, then let's say the market would adjust and basically the market would cut rates for the Fed. So if the market so far... Seems to be able to handle four hikes”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“I think that the comment that we are at or close to employment is very, very important. And that tells you that that opens up the possibility of a mark track to me.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“So, I think the Fed has made great strides in its communication. Now, back in, let's say, the Greenspan days, you really didn't really know what he was talking about. Fed tries really hard to be transparent these days. And the way that you can see this is the press conferences now, right? Back then, they didn't have press conferences. JPAW was taking questions. JPAO was trying to manage the short-term interest rate market so that they won't be surprised. He's willing to tell you that, you know what, maybe a QT this year. So I think they're pretty transparent today. You just have to realize that they're subtle in what they say. Not going to go out and tell you that I think the SP is too expensive. Let's not miss it, but they'll be like, yeah, maybe valuations are high.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Plan on doing this. Anything else that, when a reasonably educated person hears a central banker, if a Fed person say something, they think it means one thing, but actually if you're in the know and you speak Fed speak, it means an entirely different thing.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Got a question, which is earlier you said when the Fed said valuations are a little bit stretched, it's a little bit overvalued. That's their way of saying we think that it's too overvalued and there's a little bit of a bubble. In the same way, you just said might do this is the same state, but we will do this.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“The stated sequence that they've said is that we're going to do one rate hike, and then afterwards we could open the possibility of Qt. And if follow sailing yesterday that we would start, we might start QT this year, what he's really saying is we're going to start QT this year. That's how they communicate. So chair of the Federal Reserve knows that he moves markets. He's not just going to go casual and be like, yeah, maybe we'll do this. Maybe it means yes. That's the plan at the moment.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“And back in 2017, about, I think we did taper first, then tightening of the balance sheet, then quantitative tightening, and then rate hikes. Whereas now the outlook looks like taper first and then rate hikes, and then maybe later tightening. But typically the Fed doesn't do Q2 and raising hikes at the same time, right? That's a little bit in overdrive.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“The matured structure of the Fed, it's lumpy. So I think There's someone else, I think Nick from the Wall Street Journal did a great back of the envelope calculation from this on Twitter. So he shows that the maturities are lumpy. For the most part, we won't get above $100 billion a month in redemptions. Sometimes we will. So in theory, there's not enough to go at the fast pace that they want. But the second thing the Fed could do is they could do outright sales, which they have not done in some time, which I think would be very, very hawkish. So I don't think they would do that. So I'm inclined to think that maybe they would just set, let's say, let's say 80 a month. And if it doesn't reach that, if let's say only 60 billion in redemptions happened 20 below the 80 billion cap, then that's fine too. We just won't do the full 80 billion. So that's another way they can do this. So they can either just set a cap and not meet it every month.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“So, quantitative easing is the growth of the Federal Reserve balance sheet, treasuries, mortgage-backed securities, stuff like that. Right now we're slowing quantitative easing, also known as tapering, but we're not reducing it when it's being reduced. That's QT quantitative tightening. And when the Fed reduces its balance sheet via QT, it just lets the bonds that it owns expire because all bonds have a maturity and then not buy more to replace them. You noted in your most recent posts at fedguy.com that there's a limit. The Fed can do unlimited QE essentially. And we saw that the Fed's balance sheet balloon in March of 2020, April of 2020. But there is a limit to how much it can do quantitative tightening because there's only so much paper that expires. Is there enough bonds? Are there enough bonds on the Fed's balance sheet for the Fed to do $100 billion of tapering? Excuse me, of tightening.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“To like 20 billion in QT. Maybe he gets information like this and he wants to help reset expectations. So again, a lot of Fed policy is shaping the expectations of the market.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“I'd be in a lot of trouble if I was J. Powell because, oh my gosh, inflation is running at 6% and my gosh rates are at zero. Not just rates are at zero. I'm still doing Kiwi. So what am I doing, right? I'm really screwing up big time. And I go on the news. All these politicians are just complaining, you know, inflation is high, I have to do something, do something. So that in my mind is probably going to spur the Fed to be more hawkish than they expect. But listen. Fed does things very slowly. So they've been gradually tuning up the Hawkish language. That doesn't mean that they're going to stop doing this. It just might be to prepare the markets for more. So when Boston goes and says we're going to do $100 billion in QE, and QT is starting QT, it just might be that he's trying to message expectations in the markets. Maybe he reads people saying, hey, so the Fed never hike. And you know what? Maybe they'll...”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, no, so equity prices are not offensive mandate, but financial stability is. So these small corners of the market are just not that important. What's important would be things that could damage the financial system as a whole. So things like, let's say, for example, disorder in the treasury market, that threatens financial stability. So disorders in a debt market possibly as well because it's not as liquid and equity market I would focus on the larger indexes, but SPACs, things like that, that's just not something they think about.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Saying that's on a broad level in terms of the SP 500, let's say you said they don't care about SPACs. They don't really care about rotation. If the SP 500 were to stay at 4,700, but it were to flow out of technology stocks and all into industrial and cyclical stocks, they wouldn't bat an eye, right? That's the way it works, right?”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“And my impression is that when the Fed looks at the market, it's really focused more on the large indexes like the S&P, DAO. These corners of the market, like the SPAC, things like that, that's just not that important to them. So they care about markets in the sense for financial stability concerns. That's just so much a very small part of the market. It's not a big deal. I don't know where the PELO put is right now, but it's not something I don't think they know either. It's something that you have to look at the totality of the circumstances. So it's not just equity prices, but you can look at, let's say, credit or rates, volatility, things like that. I don't think you can just make a just a blanket statement as to where the power put is except that it's low, lower, much lower than it is today where the S&P is today.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Some nonlinearity to this because of leverage, you can go down 20% and then afterwards you lose control and things could go down very poorly. But at this point, you know, I have they would be fine with a 20% correction or something like that. So I don't think that's really a concern. The concern to them right now is that asset prices are elevated”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely. I agree with you completely. I was on the desk back then. And so what the desk does is that we are basically the market intelligence source for the Fed, right? So I could sense back then that they were actually quite scared about what's happening. Stock market goes down every day. What can we do to solve this? They were scared today is very different. Now, if you look at, so the way that you would understand how the Fed perceives asset valuations is to look at their financial stability report. The one in November says that they think assets are overvalued. Now, Fed is always subtle. They're trying to tell you that this stuff is crazy. So the Fed put, so to speak, the strike price is going to be much, much lower than where we are today. The fear is that you don't really get a clean 20% correction.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Don't like risk acids to go down. That's completely true. But there's a reason for that, though. The reason since the GFC was because when the Fed was at the zero lower bound and it wanted to push inflation up, it felt that one of the ways that it could do this was bullying an asset bubble. Why? Does bullying an asset bubble work? Because when you blow an asset bubble, you are basically giving more money to people to spend and invest. And that boosts growth, that boosts inflation. So the Fed just can't give everyone free stimming checks, right? But if you, let's say, lower interest rates low, do quantity, the portfolios of people, they go higher. There's a wealth effect, as Bernanke would say, and maybe you go and you buy a house, maybe you buy a car, that's similar to the economy. Fast forward to today, we have an economy that bio accounts fairly strong and inflation very high. We're in a very, very different context. We don't need a wealth effect.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Now your second point about how some people don't believe that the Fed can hike rates. Maybe I've even heard people say that they can just hike one and done. Yeah, I really think that's just kind of a disconnect between market participants. So again, people who trade in these short-term interest rate markets have a very good understanding of the Fed. People who trade equity markets probably don't. I mean, if you're buying a lot of these VEMP stocks, you probably are not in tune to what the Fed does. It might be your first cycle. So I think they're going to be very, very surprised the Fed, you know,”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Right now, we will not be able to handle two and a half back then, I would think that we would, the threshold, the market threshold for pain is going to be lower than back then because we have more debt. And so the impact of every rate hike becomes stronger.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“That's to me that is according to their plan, but if I have one thing to note is that it's possible that the terminal rate that the Fed is planning is higher than what they iterated in the past. So in the past there are, let's say, 2.5%. I don't remember something around there. But that's based on the assumption that inflation is just going to dissipate very quickly. So going forward, if inflation is not going to dissipate very quickly, so which basically it doesn't seem like it will, and their projections have been very wrong for a number of months, then they might have to change that a little bit. So that presents... Some dangers to the risk assets because then you have a higher hiking cycle.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Actually, it began to price a little bit of that inside, and then the market just couldn't handle it. And they reverse very promptly in January. So right now, the short-term interest rate market is pricing in. I think a terminal rate that's close to what the Fed is, and again, the Fed is massaging the pace of the rate hikes forward.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so you raised two really good points. So the market doesn't always believe the Fed and the second point you raised that is really good is that each market has different market participants that have different perceptions of the world and probably different levels of sophistication. So the short-term interest rate market, people are very sophisticated and they're good at guessing what the Fed would do. Back in 2018 So at that point Fed Effective was think about close to a half percent and the Fed was telling you that they would hike rates more. The market didn't really believe them. Okay, fine they don't always believe the Fed but in the December FOMC dot plot in 2018 the Fed basically reiterated the precision that we're going to hike rates in 2019 and I think at that point the short-term interest rate market was like fine if that's what you want and so they did”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Fine, you know what? They can handle it. But that's not really where all the losses lie. Sometimes they are in very highly levered funds. So what happens if you are a highly levered fund and you're losing money on your bonds? Then you have to sell your stocks to rebalance because portfolio management and so forth. Well, then that means that people who hold stocks, they're losing money and maybe they sell. So you have a dynamic that can potentially become unstable. In my personal view, that's what happened in quarter four, 2018. Back then the Fed was basically intent on hiking. Market was pricing that, but it could not handle it. You can see risk assets basically melt throughout, let's say, Nomeva and December of 2018. So there's a good chance that that could happen again in the coming months.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“From an investment standpoint, it's very real. Let's say you're a portfolio manager, you hold equities, you hold bonds, when the Fed raises rates, what they're mechanically doing is that they're imposing losses on your portfolio, on parts of your portfolio. So how the system handles that really depends on where those losses are distributed. So it's really hard to know. First, the magnitude of the losses has to do with how large the debt market is and it's enormous. So if you're thinking like, say, the Fed did Fed funds rates to 20% in the 1980s, I can do it again now. Oh, the debt market was much smaller back then. Market's huge today. So when you hike rates just a little bit, the losses that you are creating are very large. And you really don't know where they are. If they're all into all cash investors,”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Controls the quantity of certain types of money, and that is the asset value of treasuries. Now let's say you have a portfolio full of short-term, short to medium data treasuries. When the Fed is communicating that we're going to hike, yes, rates go higher, but that translates into quantities as well. That means if you have, let's say, $100,000 worth of two-year notes, well, that's worth less now. It's not $100,000 anymore. So there's this two impacts. There's price and there's quantities. Ben never thinks about quantities. It's really not in their models.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Conducts media blitz and tells people that, hey, hey, you know what? Maybe rates are too low. We might hike next time and the market prices it. The same thing is happening now. So Team Fed is fading out, communicating to the media, giving speeches, letting the market understand we are going to be a bit more aggressive than you thought we were earlier. So this short-term interest management expectations management is very much part of their playbook. If the market is pricing this, that's what they want the market to think. So I think you are right that they're probably going to do four rate hikes. Now, the other argument is can the market handle this? And I don't think that the market can. So I've spoken to you about this before, but the Fed perceives its tool as a tool of the price of money, so controlling interest rates. But there's another way to think of this as well. And that's the Fed.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Well, that could be for hikes, but it could be just somebody at the very, very pricing and tail risk of a lot of six or seven hikes. So it's hard to know what exactly is in that price. Is that the median expectation or is it just being pushed upwards by bets to the upside? So the Fed does all this work try to figure out what's in the market. And if the market is pricing something that they don't they don't want to communicate or the market is basically getting it wrong, they'll do something about it. So in the past you can see many examples, let's say the fig market didn't think the Fed will hike. Okay, so Team Fed goes out.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Going to hike, what do you think is in the market? So it tries to create like a distribution as to potential outcomes to get a better sense of just what exactly is in the price. So as you mentioned, let's say we have four hikes fully priced into the euro dollar futures.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“I think there's two questions here. One is what will the Fed will do? And two is whether or not the markets can handle it. So I think when it comes to your first question here, whether or not the Fed will hike for rate hikes, I think that's actually in the cards right now. And I'll give you some insight as to how this works. So the Fed So as I mentioned before, it has strong control over overnight rates and it extends that control throughout the short tip curve by communicating what its path would be and that gets priced into the market. So the Federal watches the short-term interest rate futures very closely and it does this in a lot of ways. It has all the Plumberg data that we have, but it also conducts surveys to market participants. So it will send out surveys to hedge funds, investment managers, banks, and so forth and ask, so how many times do you think that we're”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“Let's stick on the short end of the curve. So, yeah, as you said yesterday on the 11th of January, Powell to the Senate Banking Committee, he said quite clearly, if we have to raise interest rates more over time, we will. We will use our tools to get inflation back. It's an exact quote. And he said, yeah, to get the kind of very strong labor market we want with high participation, it's going to take a long expansion. And for a long expansion, we need price stability. So high inflation is a severe threat to the achievement of maximum employment. So it's like a year ago, they wanted to see inflation because inflation was compatible with maximum employment. Now that inflation is so high, it's incompatible with maximum employment. And as such, Joseph, as you alluded to, we've seen a huge repricing on the short end of the curve. Just looking at the CME implied futures rate a month ago, December 10th, about a week before we filmed our first interview, the percentage”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“It's not clear to me that there's really enough buying power to do that in an orderly way, so you can kind of see that people I think price that in a little bit.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“If you listen to President Bostick, he's saying, I'm going to do at least $100 billion a month. And so just to refresh everyone, the max that we ever did last time around was about $50 billion, and we started out, let's say, $6 billion in treasuries. It's kind of increasing the pace to a comical level. Now, I don't know if he's trying to scare the market, or even if he knows what he's talking about. I think that has some impact as to how people perceive the supply of treasuries, of longer-dated treasuries. Let's call them coupons in the coming year. And if the Fed is doing QT at a massive pace, what that really does is that increases the supply of treasury debt to the private sector. And the market is going to have to absorb that.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“So I think of these structural supply and demand forces being more important for longer data treasuries. Just speaking to that, something else that the Fed is doing is that they're rolling out quantitative tightening.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT
“You also asked about let's say the longer term rates, and that's a bit different because you know what is the path of policy 10, 20 years from now? You know, nobody really knows. So that's a lot of it has to do with other structural impacts. For example, one of the things that JPAL likes to talk about is hey, you have all these people, let's say pension funds in Japan and Europe, they have negative rates. For them, you know, coming to the US, even on an FX hedge basis, buying a 10, 30-year treasury, it's a really good deal. So it's not high, but it's not negative. So you have these structural forces that kind of determine structural supply and demand forces that kind of determine what happens in a longer data segment. That becomes more important than Fed policy because it's hard to know what Fed policy would be in the future.”
2022-01-14 · Forward Guidance · The Powell Put Won't Save Stocks | Joseph Wang · IDENTIFIED FROM THE TRANSCRIPT