Dunno whether to dca this month. Tiagong it is the fed buying and pushing up the price despite 1 in 4 americans being unemployed.
Let's talk about this, because it raises an interesting point. In short: the Fed just saved us all, whether you're in the US or Singapore or wherever, from a much worse crisis than the one we saw.
There was a really excellent episode of NPR's Planet Money podcast a few weeks back that talked about all the things the US Federal Reserve has done to, quite literally, stop an oncoming financial crisis in its tracks.
This is going to be a bit US-centric, but whining about "the Fed is pushing up the price!" is US-centric as well. (Which is another reason to ignore people who complain about the Fed.)
Firstly: why has the Fed been so gung-ho about propping up markets and the economy? Here's the thing: it's the Fed's job to keep inflation and unemployment down. Despite whatever Donny Two Scoops might be tweeting on any given day, the Fed has exactly two KPIs: "keep unemployment as low as possible", and
"keep inflation below, but close to, 2% p.a." "keep inflation low but positive".
When the 'rona hit, the global economy pretty much stopped in its tracks. Businesses suddenly had no money coming in the door; lots of people got laid off so they didn't have any money to spend; it was looking like we were going to tumble headlong into an economic abyss that would make the Great Depression look like the Slight Case Of The Mondays. Unemployment was skyrocketing and inflation was collapsing toward deflation; so the Fed was empowered to act.
It's the Fed's job to stop that from happening (in the US at least, though the spillover helped prop up every country around the world). In the Great Depression, the Fed screwed up; they withdrew their support for the banking sector too early and turned a recession into a wholesale banking-sector-led meltdown.
In the 2008 GFC, Ben Bernanke wanted to avoid those mistakes. Even after Lehman hit the skids, at which point things were pretty darn bad, there was about a three-day period where things could have gotten
worse. AIG was sucking wind from multi-billion-dollar losses in its AIGFP division, which, if it had collapsed, would have stuck surviving banks with those losses. The banks that were still around—mine included—were cutting our exposures to MS and Goldman, because we thought they would be the next to fail. And all the banks that lent to corporates in the short-term "commercial paper" market were calling those loans back in, which meant that huge non-financial companies like GE or Boeing or J&J (OK, GE wasn't really "non-financial" at the time) wouldn't have been able to make payroll.
Ben Bernanke smartly realized that if banks stopped lending, everything would seize up—so he said "OK, do whatever you need to do in order to get the banks lending again". And it worked; it took six months for the stock market to finally reach its lows, but he staved off a much broader collapse of the economy.
It's central banks' job to be the "lender of last resort"—the bank that steps in to keep money moving when nobody else wants to. Mario Draghi saved the eurozone by taking this role in 2011.
And in March, Jerome Powell did it as well. He said "OK, we're staring down the barrel of another 2008. Let's do the same thing that worked last time—but faster, and bigger." And it worked! The banks weren't the problem this time around; there wasn't going to be another Lehman, because banks are so much better capitalized now than they were then. The problem was, again, that banks were pulling back on lending, pulling back on risk, pulling back on everything, so the Fed stepped in to do what the banks wouldn't.
The playbook for central banks has changed. The days of non-interventionist central banks, where they set monetary policy based on the price of gold and just let it rip, are over. CBs now have a much bigger toolkit to stave off recessions and crashes, and they're not afraid to use them.
What does this mean for you? It means that on average, crashes will be shorter and less severe when they happen; and in most economies (except ones where the central bank takes a hands-off currency-board approach, AHEM), economic downturns will probably be milder.
And the Fed isn't stupid. The vast majority of this support came in the form of loans, which will be repaid eventually, so there won't be much effect on the money supply and there won't be much effect on inflation (so ignore anyone screaming "but hyperinflation!" Hyperinflation will not happen. I will bet against it in whatever size you like). And they'll be careful about withdrawing this support; they won't do it until the economy's ready, and they'll only do it slowly, like they did in 2015-2016. Everyone had a big ol' freakout (remember the taper tantrum?); but the end result was that everything was OK.
One last note to the people screaming "the Fed is manipulating markets!": would you have preferred they didn't step in, and the entire global economy ground to a shuddering halt? I think we can all agree that would be a Bad Thing.
Hi ST, I noticed my IBKR reports for the past 2 mths have a line that reads "Sales Tax". May I know what this deduction is for?
Which markets are you trading? IBKR has to charge sales tax on brokerage in some countries.
Hi all,
Quick question, I know we're only supposed to buy one counter with IBKR every month, but what is the rule if you're making your first lump sum investment?
I've split my lump sum over 2 months, but say I want my portfolio to be 90% the stock ETF and 10% the bond ETF, does that mean I invest 90% of my lump sum in the first month to buy the stock ETF counter and 10% the next month?
This isn't a hugely common situation, so just do whatever works. For a lump sum you could buy 90/10 in both months, or 100% the stock ETF in month 1 and 80% in month 2. Don't get too hung up on this.
