Federal Reserve Doesn't Need to be Profitable
Equities continue to get hit
Here is a quick mid-day snapshot of the markets we follow as the Nasdaq leading the equities lower and Silver the biggest lose on the day -3.16%:
With the Ukraine situation likely to continue to dampen any hopes of a peaceful resolution, equities took this cue right out of the NY open gate to hit the Sell button. We have seen continued pressure in all the complexes especially in the Nasdaq where the “buy the dip” crowd has been crushed each and every time. In the Nasdaq the 11150 is now the clear resistance with pressure and eyes on the 10861 area target/reversal area. We would like to see a trade down there to get some longer term players to nibble. A lot of what we think here is continued sell pressure from levered accounts that have been conditioned by a FED so willing to bail everything out. We know that time is over and maybe with each passing day, many more will come to that rationalization:
The SP500 is likely targeting the 3540 area which would be a key reversal area and a spot where we believe buying should support the market there. As we noted in our last piece with key supports once again giving away, it is a bear market and rallies will likely be sold into. We don’t expect the FED to digress to market hopes here and would rather play things from a defensive posture:
When we look at the SP500 future vs Nasdaq contract spread, we can see the continued SP500 outperformance. The breakout now above the 0.618 Retrace is targeting the key Reversal area up near -$25,379:
We continue to see social media posts on the Federal Reserve taking losses on their book and many are referring to this Haver Analytics chart:
We need to make a few points very clear:
The Federal Reserve’s portfolio is not marked to market per say, they have a portfolio that pays out RRP, IOER, etc. from their SOMA account in order to keep an orderly and targeted Federal Funds rate, so yes they have expenses…however they are not subject to market risk in the same way a levered hedge fund would be. There will be times where their interest income is insufficient to offset their payments, but it is not the FEDs job to make profits…
These losses are merely transitory in the normal course of business and if the Federal Reserve doesn’t make a profit, then yes the Treasury does not receive an interest payment, it is not a GURANTEED payment per say rather if their profits go negative, a “deferred asset” is created per their accounting rules. Once their profitable again and the deferred asset is paid off, then the remittances will resume. See this link for more details, The Federal Reserve’s Balance Sheet and Earnings: A primer and projections
As you can see the Federal Reserve went negative in 2011 in regards to their earnings remittances due:
4. The Federal Reserve’s Weighted Avg. Cost of Capital (WACC) is zero, they print money so the US Treasury can obtain cash and issue US treasury debt. That is our system, its a debt based system. The Federal Reserve uses this money to buy the US Treasuries and keeps them on their balance sheet. Right now they have $5.6T in US Treasuries earning interest and rolling off, these are assets that will be held to maturity.
So as you can see if it costs you nothing to buy something then you can never actually take a loss then can you
Speaking of printing money and its effectiveness, how bout this chart…nothing says failure more than printing $5T or so and gaining a mere 500k jobs:
Finally we just wanted to touch on Cathy Woods ARKK funds in particular the ARKK ETF. We know how touted she was for the last few years and her mega outperformance, but now look this thing it is down some 56% on the year and still going. The crazy thing is and as it currently sits, they still rake in about $56 million a year in fees! with that 0.75% expense ratio:
Using last months data they have a 5YR return now of just over 8.2%, what kind of risk are you taking, what’s the Sharpe Ratio to obtain this 8.2% return and in the long run is the risk worth dropping 56% in one year? Well $8bln or so in AUM tells us investors seem willing to accept this risk and the answer for us seems to be that it is an asymmetrical bet, something that is a small portion of one’s portfolio, so we get it. We just wanted to make sure you understood that.
We know Cathy has taken a lot of flack as of recent and we wanted to play a bit of Devils Advocate, that’s all. Its a tech heavy buy and hold strategy and many investors knew that going in, so volatility shouldn’t be the concern necessarily on something like this:
Ok that’s it subscribers, please share, please spread the word, as we are trying to educate investors in the only way we know possible, that is through years of RESEARCH, REFINEMENT, EXPERIENCE AND DEVELOPMENT!
Till next time!
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