Week InReview
Friday | Mar 1, 2019
People are worried about bond market liquidity

The standard story of bond market liquidity is:
  1. Big banks used to trade bonds by buying a large slug of bonds from a customer and holding on to them for as long as it took to find another buyer, smoothing out the market but also taking a lot of price risk for themselves.
  2. Since the financial crisis, new regulations (higher capital requirements, rules against proprietary trading, etc.) have made it more difficult for banks to trade bonds on their own books as dealers.
  3. Instead, banks have just matched up buyers and sellers without intermediating risk themselves, which is less convenient for the buyers and sellers. Also if anything goes wrong, the banks will not be there to take on their historic dealer role of smoothing out price moves, and there could be an ugly crash.
  4. People who do not want there to be an ugly crash tend to think this is bad.
  5. Other people think it is fine, though: If bond prices go down and someone has to lose some money, much better for it to be long-term fundamental bond investors with stable funding than for it to be banks. Banks are systemically risky, as we know, because losses at banks caused a massive systemic crisis in 2008.  

I’m not saying that this story is true, and you could object to many of the particulars, but it gives you a rough sense of the controversy. In simplest form, the controversy is that post-crisis regulation has made the financial system safer at the cost of making the market worse. That might or might not be a good tradeoff, depending on the magnitude of the two effects — both quite hard to measure! — but it intuitively seems like it could be a real tradeoff.

in case you missed it...
U.S. companies are finally listening to stock and bond investors that have been pressing corporations to cut their debt loads. (Bloomberg Deals | Feb 27)

While subprime-mortgage CDOs may be resigned to the dustbin of history, participants at the securitization industry shindig in Las Vegas this week couldn't avoid grappling with another ominous parallel to that decade-old moment in time: The impending end of a credit cycle and all the frothiness and risk that comes along with it. (Bloomberg Markets | Feb 25)

It’s not often accounting rules come up on company earnings calls. But that’s what happens when banks face the biggest change to their loan-loss declarations in decades. A new set of rules upending how banks report losses on loans and set aside reserves to cover them is no ordinary bookkeeping change. (Bloomberg Tax | Feb 25)
Feds Powell sees 'conflicting signals'
(Feb 27) -- Federal Reserve Chair Jerome Powell told the House Financial Services committee that the demand for reserves is going to be “very substantially higher” than before the crisis and will not go back to those levels. On Tuesday, Powell told the Senate Banking, Housing, and Urban Affairs Committee that the Fed doesn’t have a “precise notion,” but said the public estimates of about $1 trillion plus a buffer are “a reasonable starting point.” In prepared remarks for his Senate Banking testimony, Powell said the U.S. job market “remains strong” and “we are seeing signs of stronger wage growth.” Some highlights:
  • “While we view current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and conflicting signals.”
  • “Financial markets became more volatile toward year-end, and financial conditions are now less supportive of growth than they were earlier last year. Growth has slowed in some major foreign economies, particularly China and Europe.”
  • “And uncertainty is elevated around several unresolved government policy issues, including Brexit and ongoing trade negotiations. We will carefully monitor these issues as they evolve.”
  • On monetary policy, he said “going forward, our policy decisions will continue to be data dependent and will take into account new information as economic conditions and the outlook evolve.”
  • Powell said Fed expects inflation to run close to 2%.
  • He repeats that Fed is ready to adjust balance-sheet normalization if needed, size of balance sheet to be driven by liabilities such as reserves, currency demand.
Current swaps rules pose risk: Giancarlo
(Feb 27) -- Commodity Futures Trading Commission Chair J. Christopher Giancarlo — speaking at an industry conference in New York — said his plan to overhaul swaps trading rules aims to "create a better and more durable regulatory framework." Some highlights:
  • Giancarlo said he won’t rush to finish the rules before he leaves the commission, as he is expected to do later this year.
  • “I want to see the rules made right, not done under any specific time frame.”
  • Giancarlo said he also plans to move ahead with rules on cross-border trading and commodity speculation limits.
  • Limiting ways to execute swaps “has stymied market innovation and, when the next crisis comes, will exacerbate loss of trading liquidity.”
  • The current situation could end up being “a source of systemic risk.”
binge reading disorder
Smart is the ability to solve hard problems, which can be done many ways. Stupid is a tendency to not comprehend easy problems. It’s also is a diversified trait. Here are a few kinds of stupid prevalent in business and investing.
- Collaborative Fund

A research paper that examined the relationship between the amount of “discretionary time” people had and how pleased they were with their lives found that employed people’s ratings of their satisfaction with life peaked when they had in the neighborhood of two and a half hours of free time a day. For people who didn’t work, the optimal amount was four hours and 45 minutes.
- The Atlantic

(part of the 'Axes of Evil' series)
Poor blockchainers. Most of them just want to raise a couple-hundred mil so they can empower the poor or save journalism or cure cancer. Yes, they might get a bit cross when people don't understand that blockchain is going to be bigger than the internet, but they don't want to take things too far — they want to be taken seriously and really don't appreciate hype, hyperbole, or hocus-pocus.
- Financial Times Alphaville
220 x 128 px