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Edmund Simms's avatar

$27.2M follower assets

Investor sharing value-oriented analysis of financial markets. Writer of Valuabl (valuabl.substack.com) and author of The Little Book of Big Bubbles (mybook.to/lbbb).
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Edmund Simms's avatar
$27.2m follower assets
Fed watch • Credit creation, cause & effect • August 3, 2022
(1) The Federal Reserve buys and sells securities and (2) sets interest rates to influence: (3) borrowing costs, (4) lending activity, (5) inflation and employment; (6) with varying effects.

•••

Latest data: August 3, 2022

TLDR: Last week, the Fed trimmed $5.8bn net from its Treasury security holdings and $10.7bn net from its mortgage-backed security holdings. The total amount of Reserve Bank credit shrank by $18.3bn net.
  • The 10-year Treasury yield fell by 5bp to 2.73%
  • The 30-year fixed-rate mortgage fell by 31bp to 4.99%
  • The market expects the federal funds rate to hit 325-350bp by year-end
  • The median price of new houses sold in America has dropped 12% in the past two months. In April, the median new house cost $457,000, but in June, it was $402,000. This drop is likely a harbinger for house prices falling more broadly.

•••

  1. The Federal Reserve buys and sells securities

  1. And sets interest rates

  1. To influence: borrowing costs

  1. Lending activity

  1. Inflation & employment

  1. With varying effects

•••

Why is this gobbledygook relevant?

The Federal Reserve creates money and uses it to buy bonds. They do this to push interest rates down and to put more money into the economy. Low rates mean people can borrow more, spend more, and afford higher prices. More spending and higher prices mean people feel rich, and businesses hire new employees.

But, if prices rise too quickly or people borrow too much, the Fed does the opposite. It sells the bonds it has and then destroys the money it receives. These sales push interest rates up and take money out of the economy. Higher rates mean people can't borrow or spend as much and must pay lower prices. It makes people feel poorer than before, stops them from being able to spend as much, and makes businesses trim employment.

In addition to this, the Fed borrows and lends to banks. If a bank doesn't have enough money for a day or two, it can borrow from the Fed. If it has too much, it can lend to the Fed. A group of people who work for the Fed, the Federal Open Market Committee (FOMC), decide the interest rate that the Fed will pay for, or demand of, these short-term loans.

The Fed does these because they believe in two objectives: first, a low and stable inflation rate is good for the economy, and second, that minimising unemployment is desirable.

•••

FAQs

Why is the Fed's MBS position still going up?
It takes mortgage-backed securities up to 180 days to settle. Increases in the MBS position are most likely old purchases settling. The Fed is letting $17bn of mortgages amortise off the balance sheet per month. The MBS position will shrink, but on a week-to-week basis, it will fluctuate.

W**hy do you look at weekly average balance sheet data instead of the Wednesday level?**
It takes time for asset settlement to occur. The holdings on any given day will fluctuate wildly—especially given that the Fed owns almost $9trn of assets. The weekly average is smoother and more indicative of the monetary policy trend.

•••

Sources:

Notes:
  • I will update this data weekly (usually Friday morning GMT).
  • Let me know in the comments if there is anything you would like changed or added.
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Edmund Simms's avatar
$27.2m follower assets
It's my birthday
Another year older and another year of discovering just how much I don't know.

To celebrate my lack of knowledge, I'm giving 31% off all annual subscriptions to Valuabl for the next 24 hours.


Peace and love, everyone
Edmund Simms's avatar
$27.2m follower assets
Hey Google, how do I fix inflation?
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Can I get productivity for $1 trillion pls?

It's so sad that America hasn't overhauled the education system in DECADES. College just does not prepare people for the industries of the future and that will only further hinder us. Social media doesn't help either... it's convincing kids especially that they're better off making dance vids for a living and being famous (TikTok) instead of solving real problems and creating new industries, which will subsequently make the US economy more productive.
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Edmund Simms's avatar
$27.2m follower assets
Celebrating the half-chiliad
My Twitter following just passed 500. It's a small milestone—especially compared to some of yours here on @commonstock—but it feels like a win to me.

To celebrate, I'm giving away three subscriptions to my newsletter.

It's a lot to ask, but if you want to enter to win a subscription, or you just feel generous, please share this Tweet (https://twitter.com/ValuablOfficial/status/1554503101834530823) and follow me there.

Thank you to everyone here who has helped me extend the reach of my otherwise small voice.
Edmund Simms's avatar
$27.2m follower assets
Debt cycle monitor
Private debt, the loans made to businesses and households, is a better economic crisis indicator than public debt. High and rapidly growing levels of private debt weigh on aggregate demand. Interest rate rises make debt maintenance more difficult and can kick off a deleveraging when the debt burden is too big.

The countries with the highest risk of crisis are:
  • High risk: France, Hong Kong SAR, Korea, Singapore, Sweden, Switzerland

Followed by:
  • Medium-high risk: Australia, Austria, Belgium, Canada, Denmark, Finland, Ireland, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Thailand, United Kingdom, United States
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Edmund Simms's avatar
$27.2m follower assets
Monetary impulse is slowing
The monetary impulse estimates the rate of money creation using the annual change in total central and commercial bank assets. It is slowing down.
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Edmund Simms's avatar
$27.2m follower assets
Fed watch • Credit creation, cause & effect • July 27, 2022
(1) The Federal Reserve buys and sells securities and (2) sets interest rates to influence: (3) borrowing costs, (4) lending activity, (5) inflation and employment; (6) with varying effects.

•••

latest data: July 27, 2022

TLDR: Last week, the Fed trimmed $798m net from its Treasury security holdings and trimmed $2.6bn net from its mortgage-backed security holdings. The total amount of Reserve Bank credit shrank by $4.1bn net.
  • The 10-year Treasury yield fell by 26bp to 2.78%
  • The 30-year fixed-rate mortgage fell by 24bp to 5.3%
  • The market expects the federal funds rate to hit 325-350bp by year-end
  • The Case-Shiller national house price index rose 1.7% in May. After adjusting for inflation, prices have risen 10% in the past year.

•••

The Federal Reserve buys and sells securities

And sets interest rates

To influence: borrowing costs

Lending activity

Inflation and employment

With varying effects

•••

Why is this gobbledygook relevant?

The Federal Reserve creates money and uses it to buy bonds. They do this to push interest rates down and to put more money into the economy. Low rates mean people can borrow more, spend more, and afford higher prices. More spending and higher prices mean people feel rich, and businesses hire new employees.

But, if prices rise too quickly or people borrow too much, the Fed does the opposite. It sells the bonds it has and then destroys the money it receives. These sales push interest rates up and take money out of the economy. Higher rates mean people can't borrow or spend as much and must pay lower prices. It makes people feel poorer than before, stops them from being able to spend as much, and makes businesses trim employment.

In addition to this, the Fed borrows and lends to banks. If a bank doesn't have enough money for a day or two, it can borrow from the Fed. If it has too much, it can lend to the Fed. A group of people who work for the Fed, the Federal Open Market Committee (FOMC), decide the interest rate that the Fed will pay for, or demand of, these short-term loans.

The Fed does these because they believe in two objectives: first, a low and stable inflation rate is good for the economy, and second, that minimising unemployment is desirable.

•••

FAQs

Why is the Fed's MBS position still going up?
It takes mortgage-backed securities up to 180 days to settle. Increases in the MBS position are most likely old purchases settling. The Fed is letting $17bn of mortgages amortise off the balance sheet per month. The MBS position will shrink, but on a week-to-week basis, it will fluctuate.

Why do you look at weekly average balance sheet data instead of the Wednesday level?
It takes time for asset settlement to occur. The holdings on any given day will fluctuate wildly—especially given that the Fed owns almost $9trn of assets. The weekly average is smoother and more indicative of the monetary policy trend.

•••

Sources:

Notes:
  • I will update this data every week (usually Friday morning GMT).
  • Let me know in the comments if there is anything you would like changed or added.
post mediapost media
Edmund Simms's avatar
$27.2m follower assets
Rise and shine
The Federal Reserve has raised interest rates by 0.75 percentage points for the second consecutive month. The central bank is raising rates at one of the fastest paces in its modern history.
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Edmund Simms's avatar
$27.2m follower assets
"In any diversified portfolio..."
“In any diversified portfolio, there will be both winners and losers, and the consideration that should determine which you should sell, if any, is certainly not the price at which you bought it originally.”
— Daniel Kahneman
Is that really a Kahneman quote? One of my all time favorite thinkers but didn’t know he touched on finance much versus broadly behavioral economics
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