At the same time, the size of US Treasury bonds held by the Federal Reserve has increased by about $19 billion to a record $4.17 trillion in the past week, and MBS has also increased by $83.1 billion to $1.92 trillion, the largest weekly increase in the past five weeks.
It is the fall in both the currency swap agreement and the line of emergency credit instruments that gives the Federal Reserve new balance sheet room to increase the investment in MBS, corporate bonds and corporate bond ETFs. Marc Chandler said. Since the Federal Reserve adopted an unlimited number of QE measures, Wall Street financial institutions are deeply worried about the excessive expansion of the Federal Reserves balance sheet (which has increased by about 4 trillion US dollars in the past 3 months). On the one hand, they worry that the excessive liquidity of the US dollar is triggering the risk of asset bubbles and rising inflation pressure, which will trigger the speculation of policy arbitrage, and on the other hand, they are afraid of the United States alliance. The reserve has lacked enough room for monetary easing to cope with the resurgence of the epidemic and the slow recovery of the US economy.
On the evening of June 18, the chairman of the Federal Reserve, Powell, said that the current rapid expansion of the balance sheet of the Federal Reserve may not cause inflationary pressure and financial stability risks.
However, with the unexpected downsizing of the balance sheet size of the Federal Reserve, many American retail investors have chosen to profit.
After the release of fed balance sheet data, a large number of retail investors began to close their bullish positions in US stocks. An American stock broker told reporters. Because these retail investors copied the bottom and chased up U.S. stocks, it was completely for the sharp expansion of the balance sheet of the Federal Reserve, which led to the effect of rising asset prices of U.S. stocks. Once the above data is reversed, they will withdraw after hearing the wind, leaving a lot of hedge funds with high positions.
On the reasons for the decrease of balance sheet
Reporters learned that in the past week, the amount of currency swap between the Federal Reserve and foreign central banks has plummeted by US $92 billion, with the Bank of Japan and the European Central Bank playing an important role.
Previously, the Bank of Japan and the European Central Bank claimed more than $200 billion and $150 billion respectively, accounting for 70% of the $500 billion currency swap agreements signed by the Federal Reserve and foreign central banks. A Wall Street hedge fund manager told reporters. The reason for this is that in March April, the financial market in the United States was in violent turmoil, which forced a large number of highly leveraged yen margin transactions to withdraw dollar assets and return to Japan for hedging. As a result, Japanese financial institutions need a large number of dollar positions to help these yen margin transactions clear their positions and deleverage. Therefore, the Central Bank of Japan had to borrow more than $200 billion positions to provide them to Japanese financial institutions to prevent them from continuing Encounter dollar shortage.
European financial institutions are also faced with similar difficulties. In March April, the violent turmoil in the U.S. financial market caused the European Monetary Fund to encounter a large number of safe haven redemption applications from local investors and had to withdraw funds from the U.S. short-term funding market. Therefore, the European Central Bank also needs to borrow a large number of US dollar positions to assist the European Monetary Fund to raise enough funds to cope with the redemption pressure.
However, with the continuous rebound of US stocks and the sharp improvement of the US dollar shortage since May, the yen spread trade began to return to the US financial market, and the pressure on the redemption of the European Monetary Fund plummeted. The demand for the use of the US dollar swap line between the Bank of Japan and the European Central Bank plummeted. As a result, part of the unused currency swap line was repayable to the US Federal Reserve, which virtually promoted the assets and liabilities of the US Federal Reserve The scale of the watch has shrunk unexpectedly.
In the view of the above Wall Street hedge fund managers, another result of the improvement of the US dollar shortage pattern is that the demand for us financial institutions to borrow funds through the Federal Reserves emergency credit tools has plummeted, which has greatly reduced US $88 billion that the Federal Reserve has invested in US financial institutions through the repurchase agreement in the past week, becoming another driving force for the decline of the US Federal Reserves balance sheet.
This gives the Fed greater balance sheet room to invest in MBS, corporate bonds and corporate bond ETFs, as well as the main street loan program for SMEs. The Wall Street hedge fund manager said. Earlier, many Wall Street financial institutions believed that the Federal Reserve did not dare to buy large amounts of corporate debt ETF and implement the credit of small and medium enterprises. There were two main factors. First, the related operation process was rather complicated. Two, it was concerned that financial institutions were worried that the Feds liquidity in the US dollar would be too fast, which caused the risk of rising asset bubbles and so on. As a result, financial markets are prone to instability.
Sam Laughlin, an analyst at mkspamp, a hedge fund, said that the Federal Reserve must increase its financial support for enterprises now, because as the epidemic continues to spread and social unrest intensifies, more and more American enterprises are facing the crisis of bankruptcy and reorganization since May, resulting in the pressure of industrial risk and unemployment surge. If the Federal Reserve can help by purchasing corporate bonds or credit support as soon as possible They have survived and played an important role in maintaining the gradual recovery of the US economy.
On the evening of 18th, Federal Reserve Chairman Powell said that the current US economy is in the early stage of recovery, the Federal Reserve will not soon end monetary easing tools, and will step on the accelerator before the US economy embarks on the road of recovery.
Retail investors put their bags in safety
Behind this, there are a large number of retail investors who are totally against the effect of asset price rise caused by the rapid expansion of the balance sheet of the Federal Reserve (releasing a large amount of US dollar liquidity), making a large number of bottom reading and chasing up US stocks. The Wall Street hedge fund manager told reporters. Over the past three months, the S & P 500 index, widely sought after by retail investors, has shown a highly positive correlation with the sharp expansion of the Feds balance sheet. Even during the rapid decline of the US dollar in May, the enthusiasm of retail investors to buy US stocks increased. The reason is that many retail investors think that the sharp fall of the US dollar just shows that the US dollar liquidity starts to flood, but it is the best time to catch up with the rise of US stock asset prices.
According to the data, as of the end of May, the number of new trading accounts opened by retail investors (retail investors) in the US stock market jumped to 12 million from 4 million at the beginning of the year, most of which were driven by the rising asset prices of US stocks in response to the massive release of liquidity by the Federal Reserve.
However, the success of the Federal Reserve, the failure of the Federal Reserve.
With the unexpected reduction of the balance sheet size of the Federal Reserve, many retail investors began to worry about the weakening of the rising space of US stocks and chose to put their bags ahead of time.
In fact, most retail investors also know that the high valuation of U.S. stocks is completely out of line with economic fundamentals. The shrinking balance sheet of the Federal Reserve just creates the best opportunity for them to sell at a high price. The hedge fund manager stressed. However, this makes it very difficult for hedge funds that have been short covering US stocks.
In early June, a survey of 212 Wall Street fund managers with total asset management of more than $598 billion found that affected by short covering US stocks, these hedge fund managers on the one hand reduced the proportion of cash assets to 4.7% from 5.7% in May, the fastest decline since August 2009, corresponding to the net exposure of these hedge funds to US stocks from 34% in May %It rose to 52%, the highest level since September 2018; on the other hand, more than 98% of the hedge fund managers interviewed believed that the current US stock valuation was significantly too high. Now that retail investors are making profits, its becoming a question whether hedge funds that are passively chasing U.S. stocks should withdraw quickly or become high price takers. Sam Laughlin points out. There was no parallel in history. The US Asset Management Co GMO co-founder JeremyGrantham is right. Today, the US stock market asset bubble is unprecedented. If it enters the market now, it is the same as playing with fire. Source: Zhang Mei, editor in charge of 21st century economic report_ NF2100
In early June, a survey of 212 Wall Street fund managers with total asset management of more than $598 billion found that affected by short covering US stocks, these hedge fund managers on the one hand reduced the proportion of cash assets to 4.7% from 5.7% in May, the fastest decline since August 2009, corresponding to the net exposure of these hedge funds to US stocks from 34% in May %It rose to 52%, the highest level since September 2018; on the other hand, more than 98% of the hedge fund managers interviewed believed that the current US stock valuation was significantly too high.
There was no parallel in history. The US Asset Management Co GMO co-founder JeremyGrantham is right. Today, the US stock market asset bubble is unprecedented. If it enters the market now, it is the same as playing with fire.