Fed keeps buying bonds at $85 billion monthly pace | Page 2 | TigerDroppings.com
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TheDiesel
LSU Fan
Houston via Baton Rouge
Member since Feb 2010
2493 posts

re: Fed keeps buying bonds at $85 billion monthly pace

As someone who has a good math background but very little finance experience, the whole thing is fascinating to me.

Graphs and numbers typically make sense, but the social aspect of those numbers are what make it so different.

But to answer your question, I agree with everyone in this thread and it seems like no one knows what exactly to think so they are going back and forth without a clear path to follow.


Sorrento Muddbugs
LSU Fan
Member since Sep 2011
1021 posts

re: Fed keeps buying bonds at $85 billion monthly pace
The Dow down 200, 1.5 hours in. How long is this supposed to last? You guys that are about this, do you have money in the stock market now? Or are you guys just waiting for it to get low so you can jump back in?


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GenesChin
Georgetown Fan
The Promise Land
Member since Feb 2012
15984 posts

re: Fed keeps buying bonds at $85 billion monthly pace
It is called the liquidity trap and goes to the IS LM model for basic understanding. Essentially, there comes a point where since the interest rates are already so low , an increase in the money supply causes no change in money demanded. In the IS LM model the LM curve essentially is farther to the right than the IS so that an increase ib LM(money supply) does not affect the interedt rate and effectively has no effect on the market. Basically the feds main operatiom of interest rate targeting through conventional methods (money supply control) is unattainable.
This is whwre alternative methods such as Quantitative Easing come into play. They have very small effect in terms of cost per effect but it is the feds only option witjout deflation (which is really bad) Essentially the fed buys assets and other things and through this QE the IS curve shifts to the right to bring the equilibrium intersection above 0% interest and shifting money demand . That is essentially saying inceeases in money velocity in a round about way.


Hope that helps. I do research on the liquidity trap with a professor submitting his findings to the board of governors. Well I did I mean


BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4232 posts

re: Fed keeps buying bonds at $85 billion monthly pace
quote:

I agree with everyone in this thread and it seems like no one knows what exactly to think so they are going back and forth without a clear path to follow.

Nor does anyone on the street in terms of when it will stop, but people know what's been happening. Bernanke is communicating the tapering process so by the time that tapering actually happens it will be priced in, avoiding a '94 scenario. The problem isn't the Fed tapering in the market right now, its the endogenous factors of players in the market selling.

A lot of players were negatively convex, the carry trade was stupid crowded, and the risk parity funds base their volatility targets on historical correlations. When rates rise the negatively convex have to de-risk, the carry traders have to unwind, and the parity funds have to sell to stay within their volatility targets. When all three of these happen you create a huge sell-off exacerbated by positioning and technical factors. Rates should rise, but not by this much.



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GenesChin
Georgetown Fan
The Promise Land
Member since Feb 2012
15984 posts

re: Fed keeps buying bonds at $85 billion monthly pace
Essentially there comes a point where people both dont need more money but their excess money cant be lent out because of low interest rates/ doesnt make sense to lend out due to low interest rates. So essentially you are indifferent to more money as you have nothing to spend it on and interest rates are too low to make monry off it. That is the liquidity trap. Essentially the QE is to boost economy and by that increase the amount of money demanded so that people need more of it as the bigger the economy/gdp/national income the more money you need. QE works and basically necessary just is very shitty to be in a situation where you need to use it.

Basically were fricked


BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4232 posts

re: Fed keeps buying bonds at $85 billion monthly pace
quote:

Basically were fricked

Dramatic much?

The Fed tapering due to the supply side/demand side (debate is strong on that) liquidity traps you mentioned but it isn't the reason for the continued sell-off. The Fed may have been the spark plug but they haven't provided most of the powder. The powder is from the a-holes like me.


GenesChin
Georgetown Fan
The Promise Land
Member since Feb 2012
15984 posts

re: Fed keeps buying bonds at $85 billion monthly pace
Research into long term artificially low interest rates and quantiative easing have started to point towards depressed growth rates long term as seen in markets such as Japan. That is the research being presented in the next year at the Philly Fed.

Sell offs right here are inconsequential in the long term as they will correct long term to the long term equilibrium value. That is unless industries start failing. In terms of day to day month to month trading i am not a sociology/psychology expert and cant tell you. I was only responding to the money supply money velocity question


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LSURussian
LSU Fan
Member since Feb 2005
85143 posts

re: Fed keeps buying bonds at $85 billion monthly pace
quote:

essentially you are indifferent to more money

I have to confess I have NOT reached that point....


Blakely Bimbo
Alabama Fan
Member since Dec 2010
1172 posts

re: Fed keeps buying bonds at $85 billion monthly pace


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GenesChin
Georgetown Fan
The Promise Land
Member since Feb 2012
15984 posts

re: Fed keeps buying bonds at $85 billion monthly pace
quote:

I have to confess I have NOT reached that point....


More to do with the economy as a whole than on an individual basis.

Basically, liquidity trap indicates there are people with money who normally would lend it to others but such low interest rates means a very little return on the lending indicating they will just hold on to the money. They also dont have anything to spend the money on so they dont ffect the IS curve. Essentially they hold on to money affecting money velocity


Sigma
Michigan State Fan
Fairhope, AL
Member since Dec 2005
2331 posts

re: Fed keeps buying bonds at $85 billion monthly pace
So you ARE indifferent to more money?


GenesChin
Georgetown Fan
The Promise Land
Member since Feb 2012
15984 posts

re: Fed keeps buying bonds at $85 billion monthly pace
I mean i would rather have appreciating assets than money. Money is a depreciating asset to me due to inflation


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