Good day for out portfolio which is about 0.3% above the $SPX500 . The top winners are $SWKS and $DGE.L . I took the opportunity today, to buy some shares of $GME when the stock was in red. Now, we're already 5% in green in this position. $FB is the largest loser today as competitors such as $SNAP talks to the FTC . $AAPL is on the rise after announcing that they will make MacBooks in the US hence avoiding tariffs.
FED INJECTING MONEY into BANKING SYSTEM 💰
Last week, the Federal Reserve System, the FED, lowered the federal fund rate, interest rate. But this is not the most important thing that they did last week. The FED also injected $278 billion into the banking system on the repo market.
Let's say tomorrow Apple $AAPL fails, people will lose their jobs but eventually there will be a competitor which will take the market share of Apple. But now if Goldman Sachs $GS fails, millions of people will lose their jobs and many thousands will die. This is how the banking sector is and if it is failing, we should know what is happening and how we should react to that.
The FED has a dual mandate: Keep inflation rate low and keep unemployment rate low. They do this by monetary policies which includes the federal fund rate. The federal fund rate is what will determine all other interest rates. Therefore, it is very important. The interest rate is what the banks are supposed to be lending money to each other overnight. Let's say, for example, $GS needs money and they ask JPMorgan Chase $JPM for an overnight loan. The interest rate according to the FED should be 2% but if $JPM also has a shortage of money, they may rise the interest rate and lend money to $GS at 3%. If the liquidity problems persists, the interest rate will keep rising. This is what happened last week. The rates reached 10% and the FED had to intervene and inject money into the system.
Last week, companies had to pay taxes and were withdrawing money. There was also a sale of treasuries and the banks were buying. This is why they ran out of money. Then the FED had to inject money into the system by buying treasury bonds from these banks. That's why it is called repo(repurchase). They are not giving free money. They are just buying back treasuries. BUT WHERE DOES THE FED GETS THIS MONEY FROM? It was created out of thin air.
Should we panic? Buy $GOLD ? I don't think we should worry this time but if it happens again, then we can worry. If we look at Europe and Japan, things are worst. In Europe, the ECB is buying corporate bonds while the Bank of Japan is buying stocks.
Will this lead to a recession or stock market crash? The FED has to keep inflation and unemployment rates low. Both are at record low. In such an environment, interest rates should be going higher and not lower. How bad can free money be? It is easier for companies to take loans, they repurchase shares, pay dividends, there is no incentive for them to invest in the growth of the company. That's why all the big innovations from Apple $AAPL to Facebook $Fb are coming form the US and not Japan or Europe anymore. Interest rates are near zero there and there is no incentive to reinvest in the company. Everybody wants free money, especially shareholders. Economies don't grow without innovation. This can have political consequences as most of this free money goes to holders of financial assets, rich people. Wealth inequality grows and populism rises. That's why Ray Dalio said to buy gold because whatever happened in 1937 is happening again.
Should we buy gold? I believe it is a good thing to invest in commodity companies. But don't just panic and put all your money in gold. You can always find good companies to invest in. A company like Skyworks Solutions $SWKS doesn't have any debt and is not affected by a debt crisis. $BMW.DE , on the other hand, is spending one third of its free cash flow on dividends, it could have invested in autonomous vehicles to compete with Tesla $TSLA . $MCD is taking loans to buyback shares and pay dividends. Same can be said about $CCI . Even in banking, there are good banks and bad ones. $JPM took the opportunity of low interest rates to grow their credit card business.
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