Whenever the Fed raises/cuts interest rates, news is flying all over the market, which affects this market and that market. Why does the Fed's rate hike/cut rate have such a big impact on the financial market? What is its cause? Today we will focus on how these markets interact.
In the financial market, each market is like a gear, which meshes with each other. Where the hell is this drive wheel? This needs to be clarified.
Therefore, if we carefully analyze the turmoil in the entire market caused by the Fed’s rate hike/cut, we can see that the exchange rate market is directly affected by the rate hike. We can call it a shock transmitter, and the stock market is affected by it. Despite the external shocks, the real epicenter of the earthquake occurred in the bond market, which is the real core market that will cause problems.
Of course, when it comes to the financial market, most people think that it is stocks, because everyone is speculating in stocks, and thousands of households are actively speculating in stocks, so every move in the stock market will attract everyone's attention. Everyone is happy when stocks rise, and stocks fall Everyone is frowning, so this market is often considered by ordinary people to be the most important part of the financial market.
Of course, there is also a part that specializes in foreign exchange speculation. In addition to these two markets, there is also the bond market. Most people think that bonds are not a big deal, there are few ways to play, and it is not as exciting as the ups and downs of the stock market, because the bond market is the deepest impression on everyone. What is more is the national debt, and then there is no more. Everyone thinks that once you buy a bond and put it there, you will be waiting to receive interest.
This approach is rather boring, and the money (revenue) earned is also very low, 3% or 5%. Although it looks like there is a little profit, it cannot keep up with the rise in housing prices, and it may not be able to keep up with inflation, so everyone is not interested in this market. Too interested, this is how we ordinary people see it.
1. How the bond market works
But from the perspective of financial institutions, this market is very interesting. In fact, it should be said that the bond market in the United States is far larger than the stock market in such a country, at least twice the size of the stock market. All financial innovations and complex and interesting methods are derived from the bond market and it, and then spread to other markets. The stock market is relatively simple, and the real fun is in the bond market. In other words, whether it is stocks or funds, those games are imitated by the bond market or left over from the bond market. If you want to really step into finance, you cannot avoid the bond market.
In China's current market, the stock market and bond market are about the same size, but judging from the development trend, the size of the bond market will definitely be much larger than the stock market in the future, so this market is the core part of the entire financial market.
How do financial institutions play in the bond market? After ordinary people buy their money into bonds, the living money becomes dead money, and they can only put it there to wait for interest. But financial institutions have the ability to turn this kind of dead money into living money, and not only into living money, but also use the living money to invest repeatedly, and then roll and expand themselves, and finally use very little money to control a lot of money. Great assets for a very high rate of return.
Under normal circumstances, it is relatively stable, which is much better than fighting on stocks. This method is pledged repurchase of bonds .
How does bond pledge repurchase work? For example, if you are a financial institution and you have 100 yuan in cash, your first step is to use the 100 yuan in cash to buy a 100 yuan bond, and then put it on your balance sheet, and then You can't just sit there waiting for interest income on this bond, it's too stupid, so you will have a strong urge to use this money?
There is a market called the repurchase market . You can pledge your bonds to others in the repo market, and they will give you a discount on the bond. That is, I will give you a 20% discount or a 10% discount on the 100 yuan bond. Wait, and then lend you cash, so you use 100 yuan bonds to the market to mortgage, you can get back, for example, 80 yuan in cash, and then you can use the 80 yuan to buy 80 yuan bonds now, buy After you get it back, you can make a pledge, and then make a pledge in the market. For example, if you get back 60 yuan, you can do it again.
After going back and forth a few times, in this case, if you invest 100 yuan in cash, it will bring you a hypothetical 300 yuan of assets, and you will expand several times at once. At this time, your total rate of return will be high. .
If we calculate, when you make a mortgage, of course there is a cost, which is the cost of the mortgage loan. If it is 2%, and the return rate of the bond you invest in is 5%, then you will make a net profit of 3%, 100 yuan Earn 3% for money, and 9% for 300 yuan.
Of course, due to regulatory regulations and so on, there are certain restrictions on your leverage ratio. But it doesn't matter, there are policies and countermeasures. Many people in the market use the method of asset custody . I can’t put it on my balance sheet, and I can transfer it to other balance sheets. So we see in the news that some financial institutions are fighting with another financial institution. It is said that there is no such thing as custody, we have no agreement with it at all, which involves 10 billion funds, and the like may be caused by custody.
In addition, you can also do capital allocation off-site . You can make a priority, make a list, and then increase the leverage by 10 times to do this repurchase. So it can be said that in this market, people are as bold as they are prolific. As long as you are courageous and you are not afraid of taking risks, you can do it with 10 times the leverage, or even higher. High, easy to earn dozens of percent.
How risky is your stock trading, and you can't figure out the ups and downs, which stock is what? As long as the interest rate market is stable and the macro environment is stable, the success rate of this kind of leverage is very high. Therefore, in the past few years, a large number of financial institutions, especially securities companies, have made a lot of money in this market. , because in their view, it is normal to play with leverage of four or five times, and it was even higher in the early years.
So in China's bond market, in such a huge market of 58 trillion yuan, at least 500 billion to 6 trillion yuan are used for repurchases. Well, big banks generally seldom use leverage. Their leverage ratio is relatively low. The main reason is that it is too big. It is so huge that it is very inconvenient to trade with others.
The courageous ones are mainly non-bank financial institutions, especially securities companies. These people are more courageous. So we see that in this market, among the repurchase funds of RMB 5 or 6 trillion, although the overall leverage ratio is not high, there are very obvious, Very serious leverage problem.
Especially in 2014 and 2015, this game was very successful and effective, so many people are playing this kind of bond raising , which is to continuously borrow money, continuously invest in themselves, and constantly expand themselves, and then use leverage This kind of gameplay is very popular in the financial market.
But in the past two or three years, the situation has changed suddenly. It is difficult to earn this money, and the risk is getting bigger and bigger. What causes this phenomenon? Dollar circulation . This affects the whole world as the dollar circulation reverses.
Under the hot circulation of the U.S. dollar, during the period from QE1 to QE4 in the United States, after the Federal Reserve lowered the interest rate very low, the money did not go out, and everyone frantically looked for investment opportunities. At this time, many countries, including China, had many People are greedy for the low interest rate of the US dollar, and the US dollar is depreciating, so they are crazy about borrowing US dollar debts.
For example, when the world's total US dollar debt was reversed in 2014, it reached US$9.2 trillion. How much US dollar debt did emerging market countries borrow? 5.7 trillion U.S. dollars. As for China, Chinese companies have also borrowed 1.4 trillion U.S. dollars for cheap.
After the end of the last round of QE, the Federal Reserve said to stop and stop printing money. How can such a huge dollar debt be repaid? Because if you borrow dollars, you have to repay them, and you can’t use other currencies, so when the Federal Reserve turns on the currency faucet, it means that there will be a shortage of dollars in this market, that is, if you can’t find dollars, you have to pay them back. To repay the principal and interest of the debt, this will cause trouble.
This will lead to these countries, these companies or these people having to sell their local currency assets, and then exchange them for the central bank’s dollars, which will lead to the shrinking of the central bank’s reserves, and then capital outflows, and then the local currency will fall, and if everyone does this together, Everyone is scrambling for dollars, which will lead to a shortage of dollars, and a shortage of dollars will make the exchange rate of the dollar rise in a straight line.
2. LIBOR interest rate and bond market
If we look at the international U.S. dollar market, we will find that there should be two U.S. dollar markets. One is the U.S. domestic U.S. dollar market . The other is the overseas U.S. dollar market outside the borders of the United States . Since the United States has supplied a large amount of U.S. dollars to the world since the war, they serve as everyone’s transaction currency and reserve currency. Two-thirds are sent overseas, so the overseas dollar market is very large. In this market, where is the interest rate of the dollar? Looking at London, there is an inter-bank lending market in London, which is the LIBOR interest rate.
For example, how much is the cost of dismantling the U.S. dollar for a three-month period? If we look back, we will find that after the reversal of the US dollar circulation (July 2014), and then until October 2015, the interest rate was relatively stable at 0.2%. From October 2015, it (LIBOR interest rate) began to climb rapidly, and then in June and November 2016, there were two sharp spikes. By December 2016, if the LIBOR interest rate Compared with the first half of 2015, it has increased by four times. You must know that the pricing of most financial assets in the world depends on the LIBOR interest rate. For example, if you want to buy something in the United States or other countries, such as buying a car, Then someone handles a car loan for you, how can you calculate the interest for you? He will tell you how many basis points are added to the LIBOR interest rate. If you want to buy a house mortgage loan, he will tell you what is the interest rate plus what, and what is added is the floating part. What is this basis? The basis is the London Interbank Offered Rate, so it not only serves as the pricing standard for all national loans in the world, but also has a huge impact on the prices of many assets, whether it is stocks or bonds. They are all affected by it. If it rises four times within a year, it will of course have a significant impact on the markets of many countries. Especially the bond market.
For overseas dollars, we have clearly found that it is getting tighter and shorter. In a sense, it can be said to be a dollar shortage. So what about in the United States? The situation is the same. After the stop of QE, the Federal Reserve will raise interest rates in a series. We will find that the yield of long-term U.S. bonds, such as ten-year treasury bonds, has jumped sharply in 2015 and June 2016. From June to December 2016, in just half a year, the rate of return has doubled, which is amazing. And like corporate bonds or other bonds, their pricing standards are ten-year government bonds. If your interest rate doubles, everyone's interest rate will follow.
This phenomenon occurred before the Fed raised interest rates, that is, the United States also began to feel the tightening of dollar liquidity, so it responded in terms of long-term interest rates. After Trump was elected in November 2016, the yield on the 10-year Treasury bond jumped to a higher level immediately. What is the reason? It is because of Trump's New Deal. First of all, the country wants to cut taxes, and the boss’s name and the company’s business have to be reduced. This reduction of several trillion yuan will wipe out the income. Second, we need to invest heavily in infrastructure. If we want to build bridges and roads, we need to build docks and airports. This calculation, adding up the inside and outside, will cost trillions of dollars in the future, but the government is running a deficit, so what should we do? ? This means that the United States will issue trillions of dollars of additional national debt in the future (of course, some of the money must be borrowed, but it is impossible to borrow all of it). Who will pay? In the past, most of the U.S. Treasury bonds were bought by overseas investors.
Overseas investors, the largest creditor China. China can't do it now, because in order to defend the RMB exchange rate, we are throwing U.S. treasury bonds and cashing in cash. Throw dollars in the market and buy back renminbi. So in November 2015, if you are paying attention, China reduced its holdings of US treasury bonds by a large amount. Since 2014, it has basically been in the state of selling US treasury bonds. Therefore, China's foreign exchange reserves have declined rapidly, and the main reason is to defend the RMB exchange rate. The first big buyer, don't think about it. The second largest buyer is Saudi Arabia. Saudi Arabia used to be a local rich man, very rich, but now it doesn't work. Because the price of oil was cut in half at the end of 2016, not to mention other messy crude oil problems caused by regional conflicts and natural disasters. Now there is an epidemic. Saudi Arabia is a landlord and has no surplus food. His foreign exchange Reserves have also shrunk sharply. Now it is only by selling US treasury bonds to obtain cash that it can turn around, and the second largest creditor has not pulled it.
The third largest creditor, emerging market countries, is the former Southeast Asia, Turkey and so on. But the situation encountered by every emerging market country is the same as that of China, that is, after the reversal of the dollar, everyone owes dollar debts, and they have to find dollar cash to repay the dollar debts, so every country is dumping US treasury bonds. According to statistics released by the Ministry of Finance in December 2016, 2016 was the largest sell-off of US treasury bonds by overseas investors in the past 30 years from 1986 to the present. Relying on overseas buyers to purchase US treasury bonds as before, this purchasing power has been exhausted. Well, this means that it can only rely on investors in the United States, that is, ordinary people.
3. Bond repurchase market
What is the core part of the financial market? It is the bond repurchase market.
If the financial market is understood as a number of gears that drive each other, the bond repurchase market actually acts as a driving wheel, and all the gears are driven by it.
Regardless of how small this market is, in terms of scale, it is only five to six trillion yuan. Bank assets are much larger than others by more than 100 trillion yuan, and the stock market is tens of trillion yuan. Other markets are larger than it. All markets are different, it is the best trading, the most liquid, and the active trading is super sensitive to the market reaction. At the same time, the most important thing is that it has a powerful liquidity creation function, which is not available in all other markets. of. For example, banks have very large assets, more than 100 trillion, but these assets are very bloated and heavy, and are not sensitive to market reactions at all. It can be said that they are big and brainless. Although the stock and foreign exchange market is large and liquid Sex is also very strong, but these markets themselves cannot create liquidity, nor can they create new currencies. Repurchase is OK, what does repurchase create? Shadow money.
When it comes to currency, many people think that currency is money? Renminbi, for example, is a currency. In fact, in the monetary policy of the whole country, such as China, the proportion of currency such as banknotes is very small and can be ignored. The most important currency is created by the banking system, which is created by commercial banks. We can call it bank currency, which is what we call broad money. This word may be a bit unfamiliar, but if you put it another way: M2, M3, everyone should be more familiar with it.
To illustrate with a simple example, we can think of a national bank as a bank. This bank has a huge warehouse, and the warehouse is filled with properties entrusted to the bank by the whole society. What do these properties include? Land, real estate, gold, diamonds, and foreign exchange are all fine, and banks keep these assets for everyone. In addition, there are all kinds of bank loans, such as loans for buying houses, loans for buying cars, etc. Any IOUs you give to the bank are also considered as bank assets and put in the warehouse.
After the bank puts so many assets in the warehouse, it needs to issue a receipt to the owner of each asset. This receipt is the currency, so every banknote we get in society, or what we see when we open the electronic bank Deposits in a bank account, or you get a plastic credit card or some bank card, or you use Alipay WeChat payment, no matter what form it is, the essence is the same, it is a currency, a receipt, nothing more than an electronic It doesn’t matter whether it’s plastic or mobile, it’s the skin on the surface, and the core behind it must be that this receipt must correspond to an asset in the bank’s warehouse, and that asset belongs to you. When you buy something on the street, you hand over the banknote to another person, and then buy something from him, well, after the other person gets the banknote, he becomes the one in the bank warehouse that used to belong to you. The owner of the asset has changed, and the owner has become him. This is the most fundamental law of currency flow.
4. Shadow currency
What about shadow currencies? The reason is similar. In the repurchase market, these major players, such as securities companies and funds, we can also regard countless such institutions as one. They also have a warehouse. What is stored in the warehouse?
Bonds are piled up in his warehouse. If the broker bought the bonds with his own funds, he would write a receipt for himself, because there is one thing in the warehouse, and there must be a receipt for it. Bar? Then he holds the receipt himself, but when he makes a mortgage loan, he actually transfers the receipt to the creditor. What is this behavior called? In fact, this behavior is the same as the behavior in the middle of currency flow. It is equivalent to buying another asset with a receipt. This asset is cash and legal tender, is it possible? Yes, all exchange is an act of payment.
good. When the creditor gets your receipt, what should he do if he wants to use it? There is a way, transfer mortgage. When the broker mortgages these bonds to the creditor, the creditor can then use the bonds as collateral to pledge to other people. This process is called remortgage. The process of remortgage is like the creditor taking the receipt to another financial institution to buy his Assets, so currency flow occurs in this process. If we compare it with traditional banking and finance, you will find that when you pledge bonds, what is the discount rate? The discount rate is the partial reserve ratio, which is the percentage of your bank reserve, and how many times does it re-mortgage?
Isn't the number of re-mortgages the currency multiplier? Isn’t the supply of the created shadow money the same as the principle of the bank creating the supply of money? There is a big problem in the middle, most people can't understand, what can shadow currency be used to buy? Of course, you can't go to the supermarket to buy chickens, eggs and fruits like grandpas and aunts. You cannot buy that with shadow money, but shadow money can buy any asset in the financial market, so the main circulation of shadow money is within the financial system, and it can circulate, expand, and magnify continuously.
The mainstream way of creating currency in modern society and modern countries is to create repurchase, which is the big head, especially in countries like the United States. Only by using the theory of shadow money, can you explain why the Federal Reserve has created so much QE and created so much base money, why did it not cause inflation? (This refers to triggering hyperinflation. After all, it is several trillion, and it has no effect on inflation, which is false)
Inflation is very low all over the world, what is the main reason? The main reason is the liquidity created by the Federal Reserve through the purchase of bonds. These base currencies have not flowed out of the financial system, and they have been deposited in the Federal Reserve’s excess reserve account through the bank. But don’t think that the money is in It didn’t move, of course he did. He used the money to exchange for bonds by participating in the repurchase transaction, and then used the bonds to pay for a series of purchases in the market. Therefore, from the point of view of the bookkeeping principle, the money stays in the reserve account, but in the actual operation process, it has flown outside, and it has been fried in the financial market for several rounds, which is why there is quantification in the United States. After the easing, inflation did not rise, but its asset prices began to skyrocket, which is the so-called asset reflation. The financial market was extremely active, and then the stock market rose sharply. What is the reason?
It is because the shadow currency can buy these assets, but it does not flow into the real economy, so what impact will this have on the common people? This will of course affect the distribution of wealth in the entire society. The reason why ordinary people do not understand finance and are deceived is because this mechanism is too complicated.
For example, how does the shadow currency divide your property? In reality, one of your banknotes corresponds to one of your assets in the bank warehouse, but when the shadow currency is being created on a large scale, people are trading with each other within the system, and the asset price has been very high. This means that without the awareness of people outside the system, the ownership of the financial asset corresponding to your one dollar has changed n times, and it no longer belongs to you, and you are completely ignorant. This is why the quantitative easing policy in the United States will definitely lead to a stable social differentiation, which is an inevitable result of the design of the entire system.
In forums or other places, we often see people say that China’s M2 is much larger than that of the United States, and the total economic system of the United States is larger than that of China, so China’s currency is over-issued, and the US currency is well managed. , The person who said this doesn't understand finance at all, because he doesn't even understand how the shadow currency is created.
In fact, the creation of money in the United States no longer relies on traditional banks. The total amount of money created by shadow banks, according to data released by the U.S. Department of the Treasury in 2013, is that 33 trillion shadow money is created through this system (repurchase), which is three times the M2 created by traditional banks. The effective money supply can no longer just look at the M2 created by banks. You have to add SM2 (Shadow money) to M2, which is the so-called shadow money. Adding these two together is the overall money creation of a country. So from this perspective, the effective money supply in the United States is $45 trillion, not a dozen trillion. This amount is twice as much as China's shadow currency plus bank currency. In other words, China is half of the United States, which matches the economic scale between China and the United States.
So when we discuss this issue, we must see the root of this issue. You need to know what is a repurchase and what does it mean behind it? You have to realize that the expansion of shadow currency is the most essential cause of many financial problems.
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