Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

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000
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by 000 »

Northern Flicker wrote: Thu May 19, 2022 10:13 pm
000 wrote: Thu May 19, 2022 8:35 pm
Northern Flicker wrote: Thu May 19, 2022 7:17 pm Here is the sample rolling correlation of the GLD ETF with intermediate treasuries since 2004:

https://www.portfoliovisualizer.com/ass ... &months=36
Can you explain how you think that demonstrates this claim: "It has cash flows, just infinite duration. Gold is more, not less sensitive to interest rate moves than bonds, all else equal." and why 36 months, etc?
The modified duration D of a perpetuity with yield Y is given by D = 1/Y.

D -> infinity in the limit (diverges) as Y -> 0.
That is true, but a non sequitur from my response to your argument about backtested correlation. I tested some other time periods (going back further with ^GOLD and VFITX) and different rolling lengths, and got different results.

It is quite humorous to see the claim that gold is bad due to claimed implicit cash flow sensitivity when for years we have been hearing about gold being a bad speculative asset due to lack of cash flows. Which is it?

Are you claiming that all durable physical objects are perpetuities? Or just gold? Either way that would be quite a heterodox claim for something that does not produce anything at all.
Random Walker
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Random Walker »

Harmanic wrote: Thu May 19, 2022 9:12 pm
Nathan Drake wrote: Tue May 17, 2022 10:29 pm
ValuationsMatter wrote: Tue May 17, 2022 9:15 pm Money markets. This is going to continue to drag the market down. Just dodge the bullet and reinvest when CAPE is back to ~25 and TMC/GDP is less than ~130%. It may/should go further down, but get it in before it turns around. If it goes sub 20 & sub 100%, you can overqeight stocks in your AA. In the meantime, if you want to maintain the flexibility to reinvest into opportunity, you can't avoid inflation unless you already did through the stock run last year, IMO. It's an everything bubble. Tangible and paper assets are coming down as liquidity dries up & consumers/companies don't want risk with 7-10%+ loans.

The question you should ask yourself is, do you want to pay 20-30% more in sliding assets over the next year or two, or another 7% inflation for the next year minus return on MM while you wait?

If you're a BH, then don't do anything. Your AA should have prevented any spaz out. If not consider shifting your AA to accommodate. Just beware that reducing your AA now may cause you to miss out on regaining your losses.
There are many funds/regions/styles where CAPE is substantially lower than 25.

Your only option is NOT US TSM if you are concerned with valuations.
Often for good reason. Meb Faber used to tout Russia because of its low CAPE ratio. Along with several other basket case countries. Sometimes low PE ratios are for good reasons. I am glad I didn't listen to him.
Markets price risk. Lower P/E implies greater perceived risk and associated increased expected return. The risk may well show up.

Dave
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HomerJ
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by HomerJ »

Random Walker wrote: Wed May 18, 2022 2:39 pm
NoRoboGuy wrote: Wed May 18, 2022 8:04 am Markets are dynamic, not static. The degree of international stock correlation to US is not fixed in stone.

One can argue that the increasing debt-to-GDP ratio in the US has damaged that correlation. I am not claiming to know this is happening, just that it affirms my commitment to some exposure to international stocks.

The typical Bogle argument is "the US market has all the leading multinationals, so you already have that exposure with just the US TSM index." True, but is it enough alone? How is more diversification bad? Whether you believe the US is overpriced by 50% or not, even having the discussion is an acknowledgement that country-level economic conditions (yes, even the US) matter, and this underscores the benefit of having international diversification.
I feel that one’s international allocation is a pretty good measure of his true belief in market efficiency. If one really believes assets are priced efficiently throughout the world, there is no rational reason to avoid the potential diversification benefit of international diversification. In an efficient market, all investable assets should have similar Sharpe ratios.

Dave
Market is DEFINITELY less efficient in countries with dictatorships, state-run businesses, weaker property laws, and less transparent accounting.

I still have 20% of my stocks in International, but don't fool yourself that all International companies are priced efficiently.

And on top of that, you throw in currency risk.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Northern Flicker
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

000 wrote: Thu May 19, 2022 10:43 pm
Northern Flicker wrote: Thu May 19, 2022 10:13 pm
000 wrote: Thu May 19, 2022 8:35 pm
Northern Flicker wrote: Thu May 19, 2022 7:17 pm Here is the sample rolling correlation of the GLD ETF with intermediate treasuries since 2004:

https://www.portfoliovisualizer.com/ass ... &months=36
Can you explain how you think that demonstrates this claim: "It has cash flows, just infinite duration. Gold is more, not less sensitive to interest rate moves than bonds, all else equal." and why 36 months, etc?
The modified duration D of a perpetuity with yield Y is given by D = 1/Y.

D -> infinity in the limit (diverges) as Y -> 0.
That is true, but a non sequitur from my response to your argument about backtested correlation. I tested some other time periods (going back further with ^GOLD and VFITX) and different rolling lengths, and got different results.

It is quite humorous to see the claim that gold is bad due to claimed implicit cash flow sensitivity when for years we have been hearing about gold being a bad speculative asset due to lack of cash flows. Which is it?

Are you claiming that all durable physical objects are perpetuities? Or just gold? Either way that would be quite a heterodox claim for something that does not produce anything at all.
When rates rise, newly issued bonds are more attractive than bonds paying lower yields, pushing down the price of the lower yielding bond. The lower the yield of the existing bond, the worse it is. Very low yields give rise to higher duration— bond convexity at work. An asset like gold is the limiting case where the yield has gone to zero. Take it for what you will.
Last edited by Northern Flicker on Fri May 20, 2022 2:24 pm, edited 2 times in total.
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HomerJ
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by HomerJ »

Random Walker wrote: Thu May 19, 2022 11:04 pm
Harmanic wrote: Thu May 19, 2022 9:12 pm
Nathan Drake wrote: Tue May 17, 2022 10:29 pm
ValuationsMatter wrote: Tue May 17, 2022 9:15 pm Money markets. This is going to continue to drag the market down. Just dodge the bullet and reinvest when CAPE is back to ~25 and TMC/GDP is less than ~130%. It may/should go further down, but get it in before it turns around. If it goes sub 20 & sub 100%, you can overqeight stocks in your AA. In the meantime, if you want to maintain the flexibility to reinvest into opportunity, you can't avoid inflation unless you already did through the stock run last year, IMO. It's an everything bubble. Tangible and paper assets are coming down as liquidity dries up & consumers/companies don't want risk with 7-10%+ loans.

The question you should ask yourself is, do you want to pay 20-30% more in sliding assets over the next year or two, or another 7% inflation for the next year minus return on MM while you wait?

If you're a BH, then don't do anything. Your AA should have prevented any spaz out. If not consider shifting your AA to accommodate. Just beware that reducing your AA now may cause you to miss out on regaining your losses.
There are many funds/regions/styles where CAPE is substantially lower than 25.

Your only option is NOT US TSM if you are concerned with valuations.
Often for good reason. Meb Faber used to tout Russia because of its low CAPE ratio. Along with several other basket case countries. Sometimes low PE ratios are for good reasons. I am glad I didn't listen to him.
Markets price risk. Lower P/E implies greater perceived risk and associated increased expected return. The risk may well show up.

Dave
So what's the CAPE conversion rate for each country?

If 25 is the magic number for the U.S. and we can't use 25 for some other countries, because they "have more system risk", what are the correct CAPE numbers for each country where buying becomes a bargain?

And I'm bit confused that a low PE implies greater risk. Does that mean a high PE implies less risk? Not quite sure I understand that point.

I think you are saying that some countries have more risk, and this is reflected in lower PE ratios (i.e. people give a lower price to those stocks for the same amount of earnings as a company in the U.S.) but we still need a way to tell how much the price has been lowered because of "system risk" and how much is because of normal economic factors specific to that country or region.

All of this is rhetorical of course... I don't even believe that CAPE gives us that much information in the U.S., let alone in Belarus.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
ValuationsMatter
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by ValuationsMatter »

Pretty good point, Homer.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Random Walker »

HomerJ wrote: Fri May 20, 2022 12:01 am And I'm bit confused that a low PE implies greater risk. Does that mean a high PE implies less risk? Not quite sure I understand that point.

I think you are saying that some countries have more risk, and this is reflected in lower PE ratios (i.e. people give a lower price to those stocks for the same amount of earnings as a company in the U.S.) but we still need a way to tell how much the price has been lowered because of "system risk" and how much is because of normal economic factors specific to that country or region.

All of this is rhetorical of course... I don't even believe that CAPE gives us that much information in the U.S., let alone in Belarus.
I do think that higher CAPE implies supposedly safer investment, whether it’s an individual stock, index, or country. Just as high P/E for a large growth company implies strong consistent earnings and growth, I think a high P/E for a country implies the same. But less risk would imply safer investment and lower expected return. I personally think high P/E or CAPE does subject the investor to a different risk. I think of it as price risk or bubble risk: the risk that investors will suddenly price risk differently and multiples contract when air comes out of the balloon.

Dave
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Harmanic »

HomerJ wrote: Thu May 19, 2022 11:48 pm
Random Walker wrote: Wed May 18, 2022 2:39 pm
NoRoboGuy wrote: Wed May 18, 2022 8:04 am Markets are dynamic, not static. The degree of international stock correlation to US is not fixed in stone.

One can argue that the increasing debt-to-GDP ratio in the US has damaged that correlation. I am not claiming to know this is happening, just that it affirms my commitment to some exposure to international stocks.

The typical Bogle argument is "the US market has all the leading multinationals, so you already have that exposure with just the US TSM index." True, but is it enough alone? How is more diversification bad? Whether you believe the US is overpriced by 50% or not, even having the discussion is an acknowledgement that country-level economic conditions (yes, even the US) matter, and this underscores the benefit of having international diversification.
I feel that one’s international allocation is a pretty good measure of his true belief in market efficiency. If one really believes assets are priced efficiently throughout the world, there is no rational reason to avoid the potential diversification benefit of international diversification. In an efficient market, all investable assets should have similar Sharpe ratios.

Dave
Market is DEFINITELY less efficient in countries with dictatorships, state-run businesses, weaker property laws, and less transparent accounting.

I still have 20% of my stocks in International, but don't fool yourself that all International companies are priced efficiently.

And on top of that, you throw in currency risk.
Wouldn't currency risk be decreased if you held a diverse set of securities from many countries in many currencies rather than putting all your eggs in one basket (USD)?
The question isn't at what age I want to retire, it's at what income. | - George Foreman
Harmanic
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Harmanic »

HomerJ wrote: Fri May 20, 2022 12:01 am
Random Walker wrote: Thu May 19, 2022 11:04 pm
Harmanic wrote: Thu May 19, 2022 9:12 pm
Nathan Drake wrote: Tue May 17, 2022 10:29 pm
ValuationsMatter wrote: Tue May 17, 2022 9:15 pm Money markets. This is going to continue to drag the market down. Just dodge the bullet and reinvest when CAPE is back to ~25 and TMC/GDP is less than ~130%. It may/should go further down, but get it in before it turns around. If it goes sub 20 & sub 100%, you can overqeight stocks in your AA. In the meantime, if you want to maintain the flexibility to reinvest into opportunity, you can't avoid inflation unless you already did through the stock run last year, IMO. It's an everything bubble. Tangible and paper assets are coming down as liquidity dries up & consumers/companies don't want risk with 7-10%+ loans.

The question you should ask yourself is, do you want to pay 20-30% more in sliding assets over the next year or two, or another 7% inflation for the next year minus return on MM while you wait?

If you're a BH, then don't do anything. Your AA should have prevented any spaz out. If not consider shifting your AA to accommodate. Just beware that reducing your AA now may cause you to miss out on regaining your losses.
There are many funds/regions/styles where CAPE is substantially lower than 25.

Your only option is NOT US TSM if you are concerned with valuations.
Often for good reason. Meb Faber used to tout Russia because of its low CAPE ratio. Along with several other basket case countries. Sometimes low PE ratios are for good reasons. I am glad I didn't listen to him.
Markets price risk. Lower P/E implies greater perceived risk and associated increased expected return. The risk may well show up.

Dave
So what's the CAPE conversion rate for each country?
Barclays has most major market CAPE ratios here:
https://indices.barclays/IM/21/en/indic ... c-cape.app
The question isn't at what age I want to retire, it's at what income. | - George Foreman
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HomerJ
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by HomerJ »

Harmanic wrote: Fri May 20, 2022 3:23 pm Wouldn't currency risk be decreased if you held a diverse set of securities from many countries in many currencies rather than putting all your eggs in one basket (USD)?
Well, I only SPEND US dollars, so I'm already in one basket. I only care how the US dollar does against other currencies in my International stocks.

If I was 100% U.S. stocks, I wouldn't have to care how the dollar is doing internationally. Maybe currency markets affect the U.S. economy and trade which impact my U.S. stocks earnings and profits, but there is no direct impact to me when the exchange rate of the dollar and euro changes.

Same with someone in Europe who earns and spends Euros.

I guess having multiple currencies in my International portfolio means maybe the Euro goes up against the dollar, and the Yen goes down against the dollar, so the currency risk could balance out that way.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Harmanic
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Harmanic »

HomerJ wrote: Fri May 20, 2022 3:39 pm
Harmanic wrote: Fri May 20, 2022 3:23 pm Wouldn't currency risk be decreased if you held a diverse set of securities from many countries in many currencies rather than putting all your eggs in one basket (USD)?
Well, I only SPEND US dollars, so I'm already in one basket. I only care how the US dollar does against other currencies in my International stocks.

If I was 100% U.S. stocks, I wouldn't have to care how the dollar is doing internationally. Maybe currency markets affect the U.S. economy and trade which impact my U.S. stocks earnings and profits, but there is no direct impact to me when the exchange rate of the dollar and euro changes.

Same with someone in Europe who earns and spends Euros.

I guess having multiple currencies in my International portfolio means maybe the Euro goes up against the dollar, and the Yen goes down against the dollar, so the currency risk could balance out that way.
I think there are good arguments for both approaches. The important thing is to pick one and stick with it.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
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HomerJ
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by HomerJ »

Harmanic wrote: Fri May 20, 2022 3:25 pm
HomerJ wrote: Fri May 20, 2022 12:01 am
Random Walker wrote: Thu May 19, 2022 11:04 pm
Harmanic wrote: Thu May 19, 2022 9:12 pm
Nathan Drake wrote: Tue May 17, 2022 10:29 pm

There are many funds/regions/styles where CAPE is substantially lower than 25.

Your only option is NOT US TSM if you are concerned with valuations.
Often for good reason. Meb Faber used to tout Russia because of its low CAPE ratio. Along with several other basket case countries. Sometimes low PE ratios are for good reasons. I am glad I didn't listen to him.
Markets price risk. Lower P/E implies greater perceived risk and associated increased expected return. The risk may well show up.

Dave
So what's the CAPE conversion rate for each country?
Barclays has most major market CAPE ratios here:
https://indices.barclays/IM/21/en/indic ... c-cape.app
Yes, but what's the conversion rate? Is a CAPE of 8 in Myanmar the same as CAPE of 8 in the U.S.? Or is equal to a 20 or a 40 CAPE in the U.S. because of the risk of government takeover of companies? Hard to quantify that.

You'd have to look at the CAPE history of Myanmar itself, which may not be very long, since the stock markets may not have been around very long, and the current government hasn't been around very long.

You can't just say a CAPE of 8 is a very low CAPE in the 140 years of stock market history we have in the U.S., therefore a CAPE of 8 in Myanmar must be a great buying opportunity too!
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Harmanic
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Harmanic »

HomerJ wrote: Fri May 20, 2022 3:47 pm
Harmanic wrote: Fri May 20, 2022 3:25 pm
HomerJ wrote: Fri May 20, 2022 12:01 am
Random Walker wrote: Thu May 19, 2022 11:04 pm
Harmanic wrote: Thu May 19, 2022 9:12 pm

Often for good reason. Meb Faber used to tout Russia because of its low CAPE ratio. Along with several other basket case countries. Sometimes low PE ratios are for good reasons. I am glad I didn't listen to him.
Markets price risk. Lower P/E implies greater perceived risk and associated increased expected return. The risk may well show up.

Dave
So what's the CAPE conversion rate for each country?
Barclays has most major market CAPE ratios here:
https://indices.barclays/IM/21/en/indic ... c-cape.app
Yes, but what's the conversion rate? Is a CAPE of 8 in Myanmar the same as CAPE of 8 in the U.S.? Or is equal to a 20 or a 40 CAPE in the U.S. because of the risk of government takeover of companies? Hard to quantify that.

You'd have to look at the CAPE history of Myanmar itself, which may not be very long, since the stock markets may not have been around very long, and the current government hasn't been around very long.

You can't just say a CAPE of 8 is a very low CAPE in the 140 years of stock market history we have in the U.S., therefore a CAPE of 8 in Myanmar must be a great buying opportunity too!
That is a very good point, not to mention different accounting methods could have a material impact on reported earnings.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
Random Walker
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Random Walker »

Harmanic wrote: Fri May 20, 2022 5:13 pm
HomerJ wrote: Fri May 20, 2022 3:47 pm
Harmanic wrote: Fri May 20, 2022 3:25 pm
HomerJ wrote: Fri May 20, 2022 12:01 am
Random Walker wrote: Thu May 19, 2022 11:04 pm

Markets price risk. Lower P/E implies greater perceived risk and associated increased expected return. The risk may well show up.

Dave
So what's the CAPE conversion rate for each country?
Barclays has most major market CAPE ratios here:
https://indices.barclays/IM/21/en/indic ... c-cape.app
Yes, but what's the conversion rate? Is a CAPE of 8 in Myanmar the same as CAPE of 8 in the U.S.? Or is equal to a 20 or a 40 CAPE in the U.S. because of the risk of government takeover of companies? Hard to quantify that.

You'd have to look at the CAPE history of Myanmar itself, which may not be very long, since the stock markets may not have been around very long, and the current government hasn't been around very long.

You can't just say a CAPE of 8 is a very low CAPE in the 140 years of stock market history we have in the U.S., therefore a CAPE of 8 in Myanmar must be a great buying opportunity too!
That is a very good point, not to mention different accounting methods could have a material impact on reported earnings.
Like I said above, one’s international allocation really is a measure of his belief in market efficiency.

Dave
Northern Flicker
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

Harmanic wrote: Fri May 20, 2022 3:23 pm Wouldn't currency risk be decreased if you held a diverse set of securities from many countries in many currencies rather than putting all your eggs in one basket (USD)?
The risk of a falling dollar is usually described as inflation risk. Currency risk is increased by ex-US exposure if your liabilities are denominated in USD.
000
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by 000 »

Northern Flicker wrote: Thu May 19, 2022 11:57 pm When rates rise, newly issued bonds are more attractive than bonds paying lower yields, pushing down the price of the lower yielding bond. The lower the yield of the existing bond, the worse it is. Very low yields give rise to higher duration— bond convexity at work. An asset like gold is the limiting case where the yield has gone to zero. Take it for what you will.
August 2021 - April 2022:
BND: -10.70%
EDV: -23.97%
SCHP: -3.82%
SGOL: +4.36%

source

That does not seem even remotely consistent with gold being MORE sensitive to interest rates than bonds.

But there is a useful lesson here. Trying to derive fundamental principles from something like past rolling correlations is a fundamental error.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

Interest rates are not the only driver of gold prices over short periods. As I said in my original posting on the matter, gold is more sensitive to interest rates, all else equal.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by HomerJ »

Northern Flicker wrote: Fri May 20, 2022 10:12 pm Interest rates are not the only driver of gold prices over short periods. As I said in my original posting on the matter, gold is more sensitive to interest rates, all else equal.
But ALL ELSE EQUAL.... is NEVER THE CASE.

That's the problem with economics. There's a thousand variables, and there is NEVER a case where 999 stay the same and only one changes.

That's why it's so hard.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
000
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by 000 »

HomerJ wrote: Fri May 20, 2022 11:03 pm But ALL ELSE EQUAL.... is NEVER THE CASE.

That's the problem with economics. There's a thousand variables, and there is NEVER a case where 999 stay the same and only one changes.

That's why it's so hard.
:thumbsup
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

HomerJ wrote: Fri May 20, 2022 11:03 pm
Northern Flicker wrote: Fri May 20, 2022 10:12 pm Interest rates are not the only driver of gold prices over short periods. As I said in my original posting on the matter, gold is more sensitive to interest rates, all else equal.
But ALL ELSE EQUAL.... is NEVER THE CASE.

That's the problem with economics. There's a thousand variables, and there is NEVER a case where 999 stay the same and only one changes.

That's why it's so hard.
You can see the broad relationship in the graphs of this backtest.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Gold has other shorter term drivers of acute volatility, but there is a similarity with bond return and broad drivers of return.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Nathan Drake »

HomerJ wrote: Thu May 19, 2022 11:48 pm
Random Walker wrote: Wed May 18, 2022 2:39 pm
NoRoboGuy wrote: Wed May 18, 2022 8:04 am Markets are dynamic, not static. The degree of international stock correlation to US is not fixed in stone.

One can argue that the increasing debt-to-GDP ratio in the US has damaged that correlation. I am not claiming to know this is happening, just that it affirms my commitment to some exposure to international stocks.

The typical Bogle argument is "the US market has all the leading multinationals, so you already have that exposure with just the US TSM index." True, but is it enough alone? How is more diversification bad? Whether you believe the US is overpriced by 50% or not, even having the discussion is an acknowledgement that country-level economic conditions (yes, even the US) matter, and this underscores the benefit of having international diversification.
I feel that one’s international allocation is a pretty good measure of his true belief in market efficiency. If one really believes assets are priced efficiently throughout the world, there is no rational reason to avoid the potential diversification benefit of international diversification. In an efficient market, all investable assets should have similar Sharpe ratios.

Dave
Market is DEFINITELY less efficient in countries with dictatorships, state-run businesses, weaker property laws, and less transparent accounting.

I still have 20% of my stocks in International, but don't fool yourself that all International companies are priced efficiently.

And on top of that, you throw in currency risk.
How so exactly?

VXUS is largely composed of EU and Japanese equities, with 25% for EM

In what way are that markets less efficient, and currency risk exists even investing in US assets only
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
000
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by 000 »

Northern Flicker wrote: Sat May 21, 2022 1:07 am You can see the broad relationship in the graphs of this backtest.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Gold has other shorter term drivers of acute volatility, but there is a similarity with bond return and broad drivers of return.
You are looking at a fairly short period mostly characterized by declining rates. Spurious correlations are a well known phenomenon; trying to draw a conclusion via a divide by zero does not make it past this observer. :mrgreen: Also, is 1992 cherry picked?

Trying to model gold as something other than itself is a classic "square peg in a round hole", but so far the better curve fitted relationship is with ideally levered TIPS, not nominals. Of special interest is the apparent divergence from 2020 on from a relationship that visually appeared to hold from 2014.

https://www.portfoliovisualizer.com/bac ... on4_3=-120
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

As I said, take it for what you will. Levered TIPS are also-bond like because TIPS are bonds. Leverage increases duration of bonds significantly (negative short duration cash flows), so this corroborates the original point. Nominal treasuries get an imperfect inflation correction referred to as the inflation risk premium. One difficulty with gold in longer backtests is the dropping of the gold standard.
000
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by 000 »

Northern Flicker wrote: Sat May 21, 2022 2:15 am As I said, take it for what you will. Levered TIPS are also-bond like because TIPS are bonds. Leverage increases duration of bonds significantly (negative short duration cash flows), so this corroborates the original point. Nominal treasuries get an imperfect inflation correction referred to as the inflation risk premium. One difficulty with gold in longer backtests is the dropping of the gold standard.
It may be reasonable to think of gold as a long "duration" asset, but its "duration" does not necessarily move with USD or CPI rates, just as TIPS do not necessarily move with USD rates. Until recently, TIPS and nominals very frequently had similar movements because there was a "hidden" (to backtesters, not fundamental analysts) variable (CPI adjustment) present in only one of them that remained small and range bound for that time period. Once that "hidden" variable broke out, the pattern no longer held. A similar decoupling is possible with the "rates" underlying gold, for example if one of the macro events for which one might hold gold were to occur.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Weathering »

Is balance sheet unwinding the sale of bonds (corporate, treasuries, or ?) or stocks, or ? by the Fed?

I've been thinking it is the sale of corporate bonds by the Fed but now I'm not certain.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by ClassII »

Weathering wrote: Sat May 21, 2022 11:55 am Is balance sheet unwinding the sale of bonds (corporate, treasuries, or ?) or stocks, or ? by the Fed?

I've been thinking it is the sale of corporate bonds by the Fed but now I'm not certain.
Not just selling but simply letting the bonds mature. By doing that the returned money gets "destroyed" by the fed thus decreasing the money supply. All they really have to do is stop buying new debt and the process will take care of itself.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by jeffyscott »

According to this they have begun selling, as well as just letting them mature which started earlier. Also indicates that it's Treasury and mortgage bonds, maybe whatever corporate they had was already sold?

https://www.marketplace.org/2022/04/06/ ... onomy/amp/
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

000 wrote: Sat May 21, 2022 2:27 am
Northern Flicker wrote: Sat May 21, 2022 2:15 am As I said, take it for what you will. Levered TIPS are also-bond like because TIPS are bonds. Leverage increases duration of bonds significantly (negative short duration cash flows), so this corroborates the original point. Nominal treasuries get an imperfect inflation correction referred to as the inflation risk premium. One difficulty with gold in longer backtests is the dropping of the gold standard.
It may be reasonable to think of gold as a long "duration" asset, but its "duration" does not necessarily move with USD or CPI rates, just as TIPS do not necessarily move with USD rates. Until recently, TIPS and nominals very frequently had similar movements because there was a "hidden" (to backtesters, not fundamental analysts) variable (CPI adjustment) present in only one of them that remained small and range bound for that time period. Once that "hidden" variable broke out, the pattern no longer held. A similar decoupling is possible with the "rates" underlying gold, for example if one of the macro events for which one might hold gold were to occur.
Traditionally, gold has other drivers of return that drive shorter term volatility. My comment about all else equal was not to be a disclaimer big enough to drive a truck through but that the shorter term drivers of return average out not to be a driver of long term return, so that they are a source of volatility, not return.

The reason the backtests above are fitting gold so well for longer term return is that it is a period of near zero real return for nominal bonds (positive return earlier in the period, negative real return later in the period). Gold has an expected real return of zero. This would also explain why gold lagged in the first part of the backtest when bonds had a positive expected real return and caught up in the latter part when they had a negative expected real return.

The volatility of gold held in isolation certainly is not compensated by its return. I consider it to be a very long duration asset with an expected real return of zero. Motivations to hold it have to be based on its shorter term correlations with other risky assets and the effect of that on portfolio volatility.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by nedsaid »

billaster wrote: Tue May 17, 2022 6:06 pm
Kevin K wrote: Tue May 17, 2022 9:46 am Beware the Fed's balance sheet unwinding

"Historical data shows that stock markets have reacted poorly when the Fed has contracted its balance sheet and reduced liquidity – and the effect is more pronounced when Fed actions deviate from what the market expects."
Beware the correlation implies causation fallacy.

There has been extensive research about the effects of Quantitative Easing on monetary policy. The effect is pretty mild. QE only reduces long term rates by about 20 basis points or 0.2%.

This small effect isn't surprising. At its maximum the Fed was buying about $4 billion of treasuries daily in the open market which trades more than $600 billion per day. So the Fed's purchases are just a fraction of one percent of treasuries traded each day, barely enough to move prices.

So why does the Fed do QE if the effects are so small? It's because it's only the last resort after all it's other tools have reached their limit with short rates at zero.

The effect of balance sheet expansion is small and you would expect balance sheet contraction to have a similar small effect.

What is really happening is that the Fed is now using its primary guns, raising short term interest rates, to slow the economy and the stock market is reacting to the expected slowdown. It just so happens that the Fed is contracting its balance sheet at the same time, but that isn't what is causing the slowdown. Correlation is not causation.

You could interpret the balance sheet unwinding as perhaps having a signalling effect. Since QE is the last thing the Fed tries after lowering short term rates, reversing QE is the first thing it does when raising short term rates.
The U.S. National Debt is now at $30.4 Trillion. The Fed Balance Sheet is now about $9 Trillion. This has increase from about $1 Trillion just before the 2008-2009 Financial Crisis, that is an expansion of $8 Trillion in about 13 years. Most of the Fed's Balance Sheet are US Treasury Instruments, I just checked, the number is now $6 Trillion. The Fed has purchased $5 Trillion in Treasuries in 13 or so years and that has to have had an effect. Quantitative easing was not insignificant.

My belief is that the Fed will unwind this to a small degree, they aren't going back to a $1 Trillion Balance Sheet, that would take too much money out of the economy. Interest rate hikes on their own on their own will depress money creation in the Private Banking sector. Less private lending and a slow unwinding of a smaller portion of the Fed Balance Sheet will do plenty to reduce the money supply.

The current level of the Federal Debt.
https://www.pgpf.org/national-debt-clock

The Fed Balance Sheet.
https://fred.stlouisfed.org/series/WALCL

Federal Debt owned by Federal Reserve Banks.
https://fred.stlouisfed.org/series/FDHBFRBN
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by billaster »

nedsaid wrote: Sun May 22, 2022 10:58 am
billaster wrote: Tue May 17, 2022 6:06 pm
Kevin K wrote: Tue May 17, 2022 9:46 am Beware the Fed's balance sheet unwinding

"Historical data shows that stock markets have reacted poorly when the Fed has contracted its balance sheet and reduced liquidity – and the effect is more pronounced when Fed actions deviate from what the market expects."
Beware the correlation implies causation fallacy.

There has been extensive research about the effects of Quantitative Easing on monetary policy. The effect is pretty mild. QE only reduces long term rates by about 20 basis points or 0.2%.

This small effect isn't surprising. At its maximum the Fed was buying about $4 billion of treasuries daily in the open market which trades more than $600 billion per day. So the Fed's purchases are just a fraction of one percent of treasuries traded each day, barely enough to move prices.

So why does the Fed do QE if the effects are so small? It's because it's only the last resort after all it's other tools have reached their limit with short rates at zero.

The effect of balance sheet expansion is small and you would expect balance sheet contraction to have a similar small effect.

What is really happening is that the Fed is now using its primary guns, raising short term interest rates, to slow the economy and the stock market is reacting to the expected slowdown. It just so happens that the Fed is contracting its balance sheet at the same time, but that isn't what is causing the slowdown. Correlation is not causation.

You could interpret the balance sheet unwinding as perhaps having a signalling effect. Since QE is the last thing the Fed tries after lowering short term rates, reversing QE is the first thing it does when raising short term rates.
The Fed has purchased $5 Trillion in Treasuries in 13 or so years and that has to have had an effect. Quantitative easing was not insignificant.
Extensive research on quantitative easing says that long term Treasury yields were reduced by about 0.2%. The effects of quantitative easing were more significant for riskier corporate debt and mortgage backed securities, about 1.0%

As large as you might think Fed purchases were, they are pretty small in the context of the enormous bond market. The Fed was buying about $4 billion in Treasuries a day when the market was trading over $600 billion in Treasuries per day. That's a fraction of a percent of daily trading.

I would assume in accordance with research that quantitative easing lowered Treasury yields by 0.2%. When they stopped buying this month, it increased rates by about 0.2%. When they start selling next month, I would expect it to symmetrically raise Treasury rates by another 0.2%. Keep in mind that these rate increases are superimposed on the short term rate increases of the Federal Funds Rate, 0.50% this month.

Quantitative easing is relatively ineffective compared to the Federal Funds rate, but it's all you've got when short rates are already at zero.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

billaster wrote: Tue May 17, 2022 6:06 pm You could interpret the balance sheet unwinding as perhaps having a signalling effect. Since QE is the last thing the Fed tries after lowering short term rates, reversing QE is the first thing it does when raising short term rates.
That’s not correct. So-called QE is not part of the process for raising the Fed Funds rate. The schedule for accelerating the toll off of bonds from the balance sheet and the raising of the Fed Funds rate are more or less independently scheduled, and the unwinding process they have started and have announced is not the mirror image of the easing operations that were implemented.

Here is some info about the unwinding:

https://www.federalreserve.gov/newseven ... 20504b.htm

At $60B/month it would take over 8 years (100 months) to reduce the balance sheet from $9T to $3T. That rate is not cast in stone— it depends on how the economy responds.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by nedsaid »

billaster wrote: Sun May 22, 2022 11:41 am
nedsaid wrote: Sun May 22, 2022 10:58 am
billaster wrote: Tue May 17, 2022 6:06 pm
Kevin K wrote: Tue May 17, 2022 9:46 am Beware the Fed's balance sheet unwinding

"Historical data shows that stock markets have reacted poorly when the Fed has contracted its balance sheet and reduced liquidity – and the effect is more pronounced when Fed actions deviate from what the market expects."
Beware the correlation implies causation fallacy.

There has been extensive research about the effects of Quantitative Easing on monetary policy. The effect is pretty mild. QE only reduces long term rates by about 20 basis points or 0.2%.

This small effect isn't surprising. At its maximum the Fed was buying about $4 billion of treasuries daily in the open market which trades more than $600 billion per day. So the Fed's purchases are just a fraction of one percent of treasuries traded each day, barely enough to move prices.

So why does the Fed do QE if the effects are so small? It's because it's only the last resort after all it's other tools have reached their limit with short rates at zero.

The effect of balance sheet expansion is small and you would expect balance sheet contraction to have a similar small effect.

What is really happening is that the Fed is now using its primary guns, raising short term interest rates, to slow the economy and the stock market is reacting to the expected slowdown. It just so happens that the Fed is contracting its balance sheet at the same time, but that isn't what is causing the slowdown. Correlation is not causation.

You could interpret the balance sheet unwinding as perhaps having a signalling effect. Since QE is the last thing the Fed tries after lowering short term rates, reversing QE is the first thing it does when raising short term rates.
The Fed has purchased $5 Trillion in Treasuries in 13 or so years and that has to have had an effect. Quantitative easing was not insignificant.
Extensive research on quantitative easing says that long term Treasury yields were reduced by about 0.2%. The effects of quantitative easing were more significant for riskier corporate debt and mortgage backed securities, about 1.0%

As large as you might think Fed purchases were, they are pretty small in the context of the enormous bond market. The Fed was buying about $4 billion in Treasuries a day when the market was trading over $600 billion in Treasuries per day. That's a fraction of a percent of daily trading.

I would assume in accordance with research that quantitative easing lowered Treasury yields by 0.2%. When they stopped buying this month, it increased rates by about 0.2%. When they start selling next month, I would expect it to symmetrically raise Treasury rates by another 0.2%. Keep in mind that these rate increases are superimposed on the short term rate increases of the Federal Funds Rate, 0.50% this month.

Quantitative easing is relatively ineffective compared to the Federal Funds rate, but it's all you've got when short rates are already at zero.
The Fed owns 20% or so of the National Debt, that is not insignificant. All of that bond buying did have an effect. Yes, $600 billion in Treasuries trade every day, but certainly $600 billion of Treasuries are not created each day. The National Debt is $30.4 Trillion, if $600 Billion are traded each day, the entire debt will turn over in less than three months. If you take, $3 Trillion and divide it by 365, you come up with about $8.2 billion of new Treasuries created daily. If you allow for business days, let's say 250, that is a creation rate of exactly $12 billion a day. So the Fed, by your numbers, was buying 1/3 or more of the new Treasury Debt being created each day. That my friend, is a lot. We also have to account for the fact that the Government is rolling over debt every day, replacing a matured Treasury instrument with a new one. (My numbers assumed a $3T deficit which won't last, but help make my argument. When the deficits are smaller than $3T the percentages of new Federal debt bought by the Fed increase even more).

Vineviz shares your opinion that Quantitative easing had less effect on interest rates than what was generally believed. Keep in mind though that the economy is very complex, lots of things that determine such things as interest rates and inflation rates. Hard to say exactly what the effect of Quantitative easing really was but it was a lot. It helped re-inflate the depressed Stock and Real Estate markets. It certainly helped the Bond Market. Hard to quantify exactly what the effects were but they were significant.

Pretty much, when new debt was issued to deal with Covid-19, the Fed bought ALL of it. That had to have had an impact.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by billaster »

Northern Flicker wrote: Sun May 22, 2022 11:59 am
billaster wrote: Tue May 17, 2022 6:06 pm You could interpret the balance sheet unwinding as perhaps having a signalling effect. Since QE is the last thing the Fed tries after lowering short term rates, reversing QE is the first thing it does when raising short term rates.
That’s not correct. So-called QE is not part of the process for raising the Fed Funds rate. The schedule for accelerating the toll off of bonds from the balance sheet and the raising of the Fed Funds rate are more or less independently scheduled, and the unwinding process they have started and have announced is not the mirror image of the easing operations that were implemented.
I never said that QE is part of the process of raising the Federal Funds rate. It is part of the process of raising rates across the yield curve. QE and the Federal Funds are two separate mechanisms for raising the yield curve. The stronger mechanism is the Federal Funds Rate and the weaker is QE. The Fed announced way back in January that they would end QE and begin selling Treasuries. That has a small effect on raising borrowing rates. And now they are also raising the Federal Funds Rate, which has a much stronger effect on raising borrowing rates.

The point I was making is that QE is a weaker mechanism but the last resort when the Federal Funds Rate is already zero. Likewise, the Fed is going to reverse QE first and then continue in the future with Federal Funds rate hikes.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Weathering »

Why did the Fed choose to raise interest rates first instead of reducing their balance sheet first? I realize that going forward they will be doing both simultaneously, but it seems like they would have been able to reduce their balance sheet a lot if they did that first?
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by billaster »

nedsaid wrote: Sun May 22, 2022 12:02 pm Pretty much, when new debt was issued to deal with Covid-19, the Fed bought ALL of it. That had to have had an impact.
Yes, it had an impact, but a small one.

When the pandemic hit, the Fed reduced their Federal Funds Rate by 1.5% to zero. They also simultaneously began their quantitative easing. 10-year treasury rates went down by about 1.5%. So which mechanism do you think had the most impact on Treasury rates?

I would say that almost all of the decrease in Treasury rates was due to the cut in the Federal Funds rate and then a small bit extra because of QE. All of the research indicates the same.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by billaster »

Weathering wrote: Sun May 22, 2022 12:32 pm Why did the Fed choose to raise interest rates first instead of reducing their balance sheet first? I realize that going forward they will be doing both simultaneously, but it seems like they would have been able to reduce their balance sheet a lot if they did that first?
The Fed didn't want to stop their QE purchases all at once by slamming on the brakes. The goal is a soft landing. So since December they have been tapering their monthly purchases toward zero, which they reached this month. So they have been in the process of reversing QE for 6 months by gradually taking their foot off the accelerator. And next month they will begin selling, applying the brakes.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by alluringreality »

billaster wrote: Sun May 22, 2022 12:22 pm The Fed announced way back in January that they would end QE and begin selling Treasuries.
billaster wrote: Sun May 22, 2022 12:44 pm next month they will begin selling, applying the brakes.
Treasury runoff has been suggested to begin next month. Far as I can tell, net sales of Treasuries by the Fed is not currently expected for June.
https://www.federalreserve.gov/newseven ... 20504b.htm

EDIT: It looks like there are some additional FAQs regarding current plans.
https://www.newyorkfed.org/markets/trea ... llover-faq
Last edited by alluringreality on Sun May 22, 2022 3:19 pm, edited 4 times in total.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by billaster »

nedsaid wrote: Sun May 22, 2022 12:02 pm that is a creation rate of exactly $12 billion a day. So the Fed, by your numbers, was buying 1/3 or more of the new Treasury Debt being created each day. That my friend, is a lot.
Another way of looking at it is that the market was gobbling up the other two-thirds of new debt every day without even a burp.

Never underestimate the market's appetite for safe assets. Low interest rates/high prices are just another way of the market saying they want even more.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by billaster »

alluringreality wrote: Sun May 22, 2022 1:19 pm
billaster wrote: Sun May 22, 2022 12:22 pm The Fed announced way back in January that they would end QE and begin selling Treasuries.
billaster wrote: Sun May 22, 2022 12:44 pm next month they will begin selling, applying the brakes.
I've seen some online debate about how exactly the Fed expects to accomplish the following, based on current holdings. Treasury runoff has been suggested to begin next month. Far as I can tell, net sales of Treasuries by the Fed is not currently expected for June.
https://www.federalreserve.gov/newseven ... 20504b.htm
What the Fed is saying is that they will primarily shrink their balance sheet by eliminating rolling over some of their maturing Treasuries into new Treasuries. Whether they sell Treasuries or don't roll over maturing Treasuries, the net effect is exactly the same, both for their balance sheet and for the market effect.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

billaster wrote: Likewise, the Fed is going to reverse QE first and then continue in the future with Federal Funds rate hikes.
This already did not happen. Two FFR hikes have occurred already. As noted in the linked announcement I included above, they will start selling consistent with a $30B/mo. shrinkage June 1, increasing to a $60B/mo. shrinkage. This would take over 6 years to cut the balance sheet in half.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by billaster »

Northern Flicker wrote: Sun May 22, 2022 2:16 pm
billaster wrote: Likewise, the Fed is going to reverse QE first and then continue in the future with Federal Funds rate hikes.
This already did not happen. Two FFR hikes have occurred already. As noted in the linked announcement I included above, they will start selling consistent with a $30B/mo. shrinkage June 1, increasing to a $60B/mo. shrinkage. This would take over 6 years to cut the balance sheet in half.
The Fed Quantitative Easing taper began in December, before the rate hikes.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

The taper gradually stopped further expansion of the balance sheet and reinvestment of interest and returned principal. This has led to about a $56B shrinkage of the Fed balance sheet so far from the absolute peak value, but the level today is still higher than when the taper started. I can’t tell if the peak value occurred before or after the announcement of the first rate hike, but it doesn’t matter either way.

https://www.federalreserve.gov/monetary ... esheet.htm
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

The way it looks to me is that the unwinding process was designed so that the Fed would be generally out of the treasury note/bond market as a buyer or seller when the first two rate hikes were implemented. I think those are the hikes that create the most market volatility. By the time of the first hike in the Fed Funds rate, the taper process had completed, and the Fed is only still buying bonds if the interest and return of principal cash flows exceed the rolloff rates they have established.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by nedsaid »

billaster wrote: Sun May 22, 2022 12:36 pm
nedsaid wrote: Sun May 22, 2022 12:02 pm Pretty much, when new debt was issued to deal with Covid-19, the Fed bought ALL of it. That had to have had an impact.
Yes, it had an impact, but a small one.

When the pandemic hit, the Fed reduced their Federal Funds Rate by 1.5% to zero. They also simultaneously began their quantitative easing. 10-year treasury rates went down by about 1.5%. So which mechanism do you think had the most impact on Treasury rates?

I would say that almost all of the decrease in Treasury rates was due to the cut in the Federal Funds rate and then a small bit extra because of QE. All of the research indicates the same.
Huh? A small impact? When the Fed bought all of the new debt created to deal with the Covid-19 crisis, that created trillions of new money. Don't you think that might be a big reason we are now seeing higher levels of inflation? It can't all be supply chain issues. This was the classic too much money chasing too few goods. I would say that had a substantial effect but not quite what the Fed hoped for.

It also doesn't follow that reducing the Fed Funds rate to zero caused longer term Treasury rates to fall. I think a big drop in demand in the economy had a lot to do with that. Conversely, when the Fed raises short term rates, it doesn't necessarily mean that long term rates will go up. If the Fed raises rates aggressively, this can cause an inverted yield curve as the market already is starting to anticipate recession.

What research are you citing?
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

billaster wrote: I would say that almost all of the decrease in Treasury rates was due to the cut in the Federal Funds rate and then a small bit extra because of QE. All of the research indicates the same.
It is difficult to separate the effects. Ultimately, the market sets the rates of bonds. Bond rates started rising in response to inflation well before the Fed executed the taper or started raising rates, also corroborating that the market is responding to economic conditions in setting rates.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

000 wrote: Sat May 21, 2022 2:05 am
Northern Flicker wrote: Sat May 21, 2022 1:07 am You can see the broad relationship in the graphs of this backtest.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Gold has other shorter term drivers of acute volatility, but there is a similarity with bond return and broad drivers of return.
You are looking at a fairly short period mostly characterized by declining rates. Spurious correlations are a well known phenomenon; trying to draw a conclusion via a divide by zero does not make it past this observer. :mrgreen: Also, is 1992 cherry picked?

Trying to model gold as something other than itself is a classic "square peg in a round hole", but so far the better curve fitted relationship is with ideally levered TIPS, not nominals. Of special interest is the apparent divergence from 2020 on from a relationship that visually appeared to hold from 2014.

https://www.portfoliovisualizer.com/bac ... on4_3=-120
The tendency of gold prices to be inversely related to interest rates has expressed itself this year:

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by nisiprius »

Nathan Drake wrote: Sat May 21, 2022 1:57 am...In what way are that markets less efficient, and currency risk exists even investing in US assets only...
If "US assets" means "US dollar denominated assets," how can there be currency risk for a US investor, investing US dollars, in US-dollar-denominated assets?

Currency risk means the additional fluctuation in value introduced by the need for currency exchange, when investing in assets denominated in a foreign currency. A Euro investor buying Euro-denominated stocks is exposed to a certain amount of stock risk, an investor whose home currency is US dollars is exposed to an extra layer of risk on top of that, due to exchange rate fluctuations between the US dollar and the euro. It is bidirectional risk, but it is probably uncompensated risk due to the "law of one price" and purchasing power parity.

No currency conversion, no currency risk.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Northern Flicker »

nisiprius wrote: Sat Sep 24, 2022 5:41 pm
Nathan Drake wrote: Sat May 21, 2022 1:57 am...In what way are that markets less efficient, and currency risk exists even investing in US assets only...
If "US assets" means "US dollar denominated assets," how can there be currency risk for a US investor, investing US dollars, in US-dollar-denominated assets?
The revenue of multinational US-based companies is not 100% in USD at the source. I think GM generates more volume of sales in China than in the US. Likewise, Toyota for example has more sales in the US than in Japan.
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by afan »

Random Walker wrote: Wed May 18, 2022 2:39 pm
In an efficient market, all investable assets should have similar Sharpe ratios.

Dave
Well, no.

First of all, asset prices reflect EXPECTED, not REALIZED, risk adjusted returns. The realized returns will differ from expectation due to unforseeable events. I.e. noise. It would be impossible to predict all events and thus have the forecast risk adjusted returns be correct.

Beyond that, Sharpe ratios only capture standard deviation and ignore higher moments and comoments of risk. The literature is clear that these higher moments are priced.

One should not equate Sharpe ratios with risk adjusted returns. See the article "Sharpening Sharpe Ratios."
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Re: Beware the Fed's balance sheet unwinding - latest from Larry Swedroe

Post by Random Walker »

Agree on different facets of risk. That’s why I used the word “similar” as opposed to same; left myself a little wiggle room for other dimensions of risk.

Dave
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