Think inflation is the biggest threat to your investments? Perhaps not: One fund manager that successfully navigated the past two major stock crashes is bracing for an awful end to the year because it fears the Federal Reserve’s quiet exit from bonds. London-based Ruffer LLP is concerned that the accelerating runoff of the Fed’s Treasury holdings will suck liquidity out of the markets—just as rising rates and falling stock and bond prices increase the need for cash to smooth the drop. “It puts a pincer on equities and bonds at the same time,” said Alex Lennard, investment director at Ruffer. It could be “the sort of event you tell the grandchildren about.” Ruffer is far from the only investor growing queasy at the prospect of the Fed’s quantitative tightening, which is reversing the huge growth in the central bank’s balance sheet since quantitative easing began in 2008. Banks Still Have Lots of Reserves Fed reserves held by depository institutions Source: Federal Reserve via St. Louis Fed RECESSION Fed rescues overnight lending market2017'201.01.52.02.53.03.54.0$4.5trillion But it is perhaps the most surprising. Ruffer, which runs money for institutions and private investors, spent much of the past decade prepping for inflation by accumulating a massive holding in the longest-dated inflation-linked bonds available, 50-year debt issued by the British government. Now it is holding 40% of its assets in cash and equivalents, an investment that cannot keep up with inflation. Ruffer has a decent record when it comes to crises: Its funds barely dropped in the 2020 lockdown that took stocks down by a third, and made money as markets plunged in 2008-09. But it has underperformed in bull markets. The Fed doubles the pace of its bond runoff this month, aiming to reduce its Treasury holdings by $60 billion and its mortgage-backed securities by $35 billion monthly. Those concerned about the impact include hedge fund giant Bridgewater, which thinks markets will fall into a “liquidity hole” as a result. Bank of America equity strategist Savita Subramaniansays QT alone could lead to a 7% stock price drop as the boost from QE is reversed. Steven Major, global head of fixed-income research at HSBC, thinks the interaction of QT and the plumbing of the financial system is too complex for anyone to predict properly. “The truth of it is that no one really knows,” he says, including the Fed.<----- TRUE! The last time QT was tried, under Fed Chairwoman Janet Yellen, now Treasury secretary, it went perfectly—until it suddenly didn’t. Ms. Yellen said the predictable pace of balance-sheet reduction starting in 2017 should be “like watching paint dry,” and for two years it was. Then in 2019 the overnight lending market—crucial to the financial system and reliant on plentiful reserves—seized up, forcing an emergency rescue to prevent a full-on credit crunch. QT is a bit different this time, the main reason that Ruffer is so fearful. Before we get into it, a quick reminder on central bank reserves for those who haven’t delved into the monetary system for a while. The Fed creates reserves as a special form of dollars that can only be held by banks and some similar firms, that they use to settle debts to each other. (The rest of us mostly use bank-created electronic money, plus physical dollars.) Since QE began, reserves have ballooned as the Fed created reserves to buy bonds from banks. Unlike in 2017, large quantities of reserves have been returned to the central bank via money-market funds. These funds, which savers use as a liquid alternative to savings accounts, are allowed to deposit money at the Fed overnight using reverse repurchase agreements (RRPs), and have already sucked $2.2 trillion of reserves out of the system, up from zero at the start of last year. For now, the loss of reserves isn’t a problem. Banks had too many deposits and reserves anyway, and they still have $3.3 trillion of reserves, more than they had ever held until last year. But there are risks. Ruffer’s concern is that the loss of reserves will impede the banks’ willingness to take risks. That doesn’t matter too much when markets are calm, but, to put it mildly, they aren’t. Ruffer expects widespread withdrawals from fund managers after the terrible year they’ve had, forcing sales of stocks and bonds. If banks are constrained and unwilling to deploy money, they won’t cushion price declines and markets could drop suddenly. << I'm not sure about this same banks to restart and up dividends? >> A wonkier concern is that the loss of reserves to money-market funds will drain the banks so much that their reserve levels approach the minimum the Fed thinks is needed to avoid a repeat of the 2019 breakdown.Deutsche Bank strategist Tim Wesselargued in a recent note that the Fed would probably stop QT when the banks have $2.5 trillion of reserves. If money-market funds keep grabbing deposits and parking them with the Fed’s reverse repo facility, that could be reached as soon as January, he says—forcing the Fed into an embarrassing early end to QT. <-- YES! As an alternative, it could cut the rate it offers money-market funds to try to shift money back to bank deposits instead. Where this stops being wonky is that an early end to QT would mean higher rates would be needed for the Fed to tighten policy the same amount, something sure to hit stocks. UGH! The problem with these risks is that they’re real, but it’s impossible to say if or when they will hit. I don’t have enough confidence that trouble is so imminent that investors need to go heavily into cash the way Ruffer has. There are enough other issues—especially the market’s failure to prepare for weaker earnings next year—to keep me bearish on stocks, but inflation makes cash an expensive place to hide. Still, QT is a risk to watch closely, because it’s only boring until it suddenly isn’t.
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Ukrayinska Pravda Ukrainian Armed Forces repel Russian attacks near 8 towns and villages General Staff report Ukrainska Pravda Sun, September 4, 2022, 12:13 AM OLHA HLUSHCHENKO– SUNDAY, 4 SEPTEMBER 2022, 07:13 The Armed Forces of Ukraine are holding Russian forces back [on several fronts] and were able to repel Russian attacks in and around Bohorodychne, Pasika, Dolyna, Bakhmut, Pokrovske, Bakhmutske, Pisky and Pervomaiske. Source: General Staff of the Armed Forces of Ukraine on Facebook, information as of 06:00 on 4 September Details: Russian forces are continuing to mount an offensive on the Bakhmutand Avdiivka frontsand are extensively using air defence systems to cover the actions of their troops. The Russians are using UAVs to conduct extensive aerial reconnaissance. In addition, Russian troops are attempting to improve their logistical support. Over the course of the past 24 hours, the Russians conducted over 10 missile strikes and over 24 airstrikes on military and civilian targets across the territory of Ukraine. Civilian infrastructure in and around Peremoha, Husarivka, Novomykhailivka and Bilohiria sustained damage. There is an ongoing threat of extensive systematic Russian airstrikes and missile strikes on military and critical infrastructure targets across the entire territory of Ukraine. Due to a shortage of high-precision missiles, the Russians are increasingly deploying outdated anti-aircraft guided missiles used in S-300 missile systems. Russia has already launched over 500 of those missiles [on Ukraine] but only some of those missiles reached their targets. Russia has several thousands of S-300 in its arsenal, though most of them are unusable. Over the course of the past 24 hours, Russian forces fired on military and civilian infrastructure targets across all fronts using tank guns, combat vehicles and tubed and rocket artillery. In particular, the Russians attacked areas in and around: Mykhalchyna Sloboda (Chernihiv Oblast) and Stukalivka (Sumy Oblast) on theSivershchyna front; Kozacha Lopan, Kharkiv, Slatyne, Sosnivka, Udy, Petrivka, Velyki Prokhody, Staryi Saltiv and Andriivka on theKharkiv front; Bohorodychne, Dolyna, Krasnopillia on theSloviansk front; Sloviansk, Siversk, Raihorodok, Donetske, Ivano-Darivka, Vesele on theKramatorsk front; Zaitseve, Bakhmutske, Soledar, Bakhmut, Bilohorivka, Vyimka, Rozdolivka on theBakhmut front; Avdiivka, Novokalynove, Berdychi, Vodiane, Pervomaiske on theAvdiivka front; Russian forces did not undertake offensive operations on theNovopavlivka front, but fired on areas in and around Krasnohorivka and Orlivka; On theZaporizhzhia front, the Russians fired on areas in and around Bilohiria, Olhivske, Zelene Pole, Novopil, Novosilka and Vremivka; On thePivdennyi Buh front, Russian forces fired on the positions of the Ukrainian Armed Forces along the entire line of contact. Russia is attempting to improve the logistical support of its troops in southern Ukraine. Units of the Ukrainian Defence Forces are maintaining their current positions and preventing Russian troops from advancing further into the territory of Ukraine. They were able to successfully repel Russian attacks in the vicinity of Bohorodychne, Pasika, Dolyna, Bakhmut, Pokrovske, Bakhmutske, Pisky and Pervomaiske. In order to support ground troops, Ukrainian aircraft conducted six airstrikes which targeted areas where Russian military personnel, military and special equipment, electronic warfare and air defence systems, and logistical support targets were concentrated. Information about the losses suffered by Russian forces as a result of these airstrikes has yet to be confirmed. Units of Ukrainian missile forces and artillery units of Ukrainian ground troops are continuing to engage in counter-battery fire and to inflict damage on Russian command and control systems and logistical supply systems. Over the course of the past 24 hours, Ukrainian forces were able to strike a Russian command post and several areas where military equipment and personnel of a Russian tank battalion were concentrated. In addition, they destroyed a Zoopark counter-battery radar system, a Zhytel electronic warfare system and killed a large number of Russian soldiers.
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Hey if anyone has Baron's drop this art- MARKETS FEATURE Stocks Could Have a Messy Fall. Time to Embrace the Risks. By Nicholas Jasinski Updated Sept. 2, 2022 5:56 pm ET / Original Sept. 2, 2022 2:22 pm ET SIGN UP Continue reading this article with a Barron's subscription New Season. Fresh Insights. $4 per Month
To see how much stress is building in financial markets, consider Goldman Sachs Group Inc.’s gauge of US financial conditions. After easing since mid-June, the measure has become tighter again, with its increase over the past 150 days ranking among the fastest in decades. “The falling stock market, fears of recession, those are going to affect the way that consumers behave and the financial decisions that they take regarding larger purchases and buying up houses,” Fiona Cincotta, senior financial markets analyst at City Index, said by phone. “The bull run that we’ve had over the last decade has driven consumer behavior. But now I think we can expect this economic slowdown to ripple out across the economy.”
Gee... who said that 3 months ago? If Goldman would let me where shorts and flip-flops, I might consider their offer. Plus I'm demanding an air-taxi in or no deal!