http://sg-stock.blogspot.com/2019/12/the-recession-constellation-are.html
Some people said we got lucky. Some said it was just a fluke. However, have you ever thought about why the lady's luck stood on our side instead of yours? This is because we analyze better than others. This also explains the rationale behind our motto: We are not always right but we are also seldom wrong.
Some people in the US must have also reached the same conclusion as us and they tried to capitalize on it by planting the covid-19 virus in Wuhan. The US CDC had not come out to explain how the US had the 1st (H38) and 2nd-generation (H3) covid-19 viruses but these 2 earlier generations were not found in Wuhan. The US has all the 5 generations of covid-19 cases now. No wonder Japan and Russia alleged that covid-19 originated in the US.
http://sg-stock.blogspot.com/2020/03/japan-and-russia-alleged-that-covid-19.html
http://sg-stock.blogspot.com/2020/02/japan-and-russia-alleged-that-covid-19.html
Thus, the US recession constellation really aligns with our prediction because the US invisible hand is at work.
So what's gonna happen next after Q1 2020? This is the coveted answer that many people want to know.
The 4 US interest rates (1orr, Effr, Ioer and on rrp) dropped immediately after the US FED cut the rates to 1%-1.25%. The 4 US interest rates range from 1 to 1.1% now. The FED cut also caused the risk-free rate (10-year yield) to fall to 0.74%.
The US FED can fulfill almost all the 1-day and 3-day repo orders but only partial fulfillment for 14-day repo orders.
1-day repo order:
14-day repo order:
What is on rrp? It is a 1-day FED debt (backed up by US treasury & MBS) that investors can buy in the repo market and the FED will buy back the debt the next day by paying 1% interest. Basically, this is a risk-free 1-day investment with a 1% return. In other words, you buy the 1-day FED debt today and wake up tomorrow with a 1% return.
Why can't the FED fulfill all the orders?
Yes, there are overwhelming investors in the repo market but the fundamental problem is the US FED doesn't have enough US treasury and Mortgage-backed securities) to back up the 1-day debt that it is selling in the repo market. In a nutshell, the US FED is short of USD to buy the treasury and MBS while the treasury department is flushed with USD because the investors are buying a lot of US treasuries in turbulence times like now since the treasuries are considered haven assets.
With the low-interest rates and huge money supply in the US treasury, the USD is bound to depreciate and it is depreciating as we speak.
As monies flow from a low-interest rate yielding country to a high-interest rate yielding country, there will be a capital flight in the US when other countries do not follow the US in cutting rates because investors will search for higher yields outside of the US. Subsequently, the US will need to prevent such a phenomenon from happening by getting the US credit rating firms to downgrade the creditworthiness of other countries and companies.
Generally speaking, a lower credit rating will impose a higher financial cost (higher interest rate) on future funding. Thus, other countries will have to cut their interest rates to neutralize the higher financial costs imposed on their lower credit ratings to stimulate their own economies and also shield their companies from the financial impacts.
This is the US invisible hand at work again.
Notwithstanding the US factor, many firms and countries will also have their credit ratings reduced because of direct and indirect financial losses due to the covid-19 outbreak and we are seeing many GDP downgrades right now.
Thus, I see massive credit rating downgrades happening in Q2 2020 at the earliest or Q3 2020 at the latest. If the US cut its rates to Zero, the repo market would be wiped out because it was the easiest way to make money. The repo market is a US$4T market and investors can make at least US$40B risk-free return with just a 1% interest rate now.
https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/repo-and-collateral-markets/icma-ercc-publications/frequently-asked-questions-on-repo/4-how-big-is-the-repo-market/
It will be very difficult to make a decent return for the banks and investors when the interest rate is at Zero or below.
5 comments:
Some people asked me to give an explanation of the repo market.
Here it goes:
The repo programme means the FED will buy the 1-day debts (backed by treasury & MBS) from the investors (Sellers). If the FED cannot find high quality 1-day repo to buy, then the buyers will have to offer higher interest rates to compensate the FED for taking the higher risk. However, the repo interest is at 1.1% now which indicates there is no such issue. Thus, the only reason that the FED is not buying everything is that the FED is short of USD.
When the FED doesn't have enough treasury & MBS, it also cannot sell a lot of 1-day reverse repo too. This will affect the liquidity in the monetary system in the short-term.
The reverse repo programme is the exact opposite whereby the FED will sell the 1-day debts (backed by treasury & MBS) to the investors (Buyers). The FED is paying an interest rate of 1% for the 1-day reverse repo now.
I hope this further explanation will provide a further clarification.
There are 3 highlights from this post:
1. FED is short of USD.
2. Treasury dept is flushed with cash.
3. Massive credit rating downgrades are coming.
You can use these 3 highlights to predict the future economic situation and financial market movements.
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/s-p-cuts-boeing-to-bbb-keeps-ratings-on-negative-watch-57609123
S&P has started to its credit rating downgrades for companies.
enlightening report on us repo operation. thanks !
You're welcome!
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