Fed JUST Pulled Rug on Bailout | How Bad is This?

hey everyone meet kevin here so the fed

just ended a bailout and i want to

explain

what the heck it means because you're

gonna hear this all over you probably

already have

and why are the banks selling off today

wells fargo bank of america jp morgan

down between two to four percent today

why what's happening and how does it

affect us

how does it affect bond yields how does

it affect the market what does it mean

okay so

here's this skinny let's go back to

april 1st april fool's day

2020. all right april fool's 2020.

fed says look we're in the middle of a

crisis

remember the two bottoms of our market

back then right march 23rd april 3rd so

we were like dead in the middle of the

bottoms of the market

april 1st rolls around all right hey

look fed goes to the bank and says

generally for every thousand bucks you

got in

assets like loans you make you know

things that have to be repaid to you

investments you make cash you have we

want you to keep an extra

three percent just sitting aside

somewhere in like a savings account

so as an example for every 1 000

dollars you have chase we want you to

put 30

aside in just a safe savings account

and that's the usual rule how things

have been but when this pandemic

happened the fed said you know what

we're going to tweak this rule a little

bit

we're going to let you exclude

treasuries

from that calculation okay so this could

get a little complicated so let's keep

it as simple as possible

first when you know a bank like chase

invests in treasuries

they're usually doing that just to park

their cash somewhere for

six months 12 months maybe two years and

then be able to have access to that cash

easily sell those bonds if they need to

or easily have access to the interest

that comes in on those

or just again dump them and have that

cash this is why they call them almost

cash and cash equivalents if you ever

look at a balance sheet

but anyway if the fed comes in it says

okay which they did

hey we're to exclude treasuries from

this calculation and let's say

and this is not what it is but let's say

half of all of jp morgan's

jp morgan chase's assets or treasuries

and that would mean

that instead of for every one thousand

dollars

they have to put thirty dollars in their

savings account they only have to put

fifteen dollars aside if half for

treasuries because we're excluding those

treasuries

in other words now jp morgan has access

to another fifteen dollars per

thousand dollars that they can go give

to people as loans or

you know make loans to people with or

invest in other things invest in

businesses or do whatever they want to

do

basically they have more money to play

with that's the big bottom line right

well the fed said we're going to give

you that opportunity we're gonna let you

do that we'll let you enjoy this rule

change

for one year and that deadline is march

31st

over the past couple weeks i have been

speculating

that the federal reserve is just going

to pull the rug out

from under banks and say yeah no we're

not extending this

you guys got enough money we're going

back to the old school way we want three

percent

of all of your investment or invested

assets or your loans outstanding or your

treasury bonds

in a savings account in other words we

want you to have a bigger cash

buffer again which is in some sense good

right the more

cash buffers banks have the more

resilient they'll be to a crash

in the future so it's actually kind of a

an important step in normalizing

but banks are like come on man can can

you just give us a few more months or

like

or like let's taper in let's just make

it nice and easy

well that's been the bank's arguments

but the problem is

the banks are looking at this look at

this here

this is from bloomberg here uh the big

get bigger u.s bank reserves at

the federal reserve ballooned last year

uh and you can see here this is a 2020

right here

and all of the cash that they have on

hand

actually just went straight up during

the pandemic

you would think that they would have

lost a lot of money and they would have

lost a lot of access to

capital which would have been bad hence

why the fed gave them that flexibility

in fact if we go back

to the april 2020 uh financial release

that jp morgan did

they were setting aside and and we made

a video on this

at the beginning of april when this was

released it's so weird

thinking that this is now a year ago but

this is what i wrote a year ago

that they were basically increasing

their loss expectations by

five and a half times they were setting

aside credit losses

of billions of dollars jp morgan chase

division set aside

uh 8.2 billion dollars in credit losses

for the consumer division

instead of setting aside 1.2 billion

dollars in credit losses last year

chase set aside 5.7 billion

dollars for the corporate side instead

of setting aside 98 million dollars they

set aside

1.4 billion dollars for corporate losses

and even on the asset and wealth

management division that you would

usually set aside

like in quarter 4 of 2019 they set aside

13 million

for losses they bumped that to 94

million in

lost provisions and this is basically

just the bank saying like we think

there's a chance we might lose a bunch

of money here

so let's set that money aside just in

case we do end up losing that money

so they're kind of taking this big

expense but what's happened over the

last year

their cash reserves have basically just

ballooned

and the banks here at the same time are

like hey um

you know can you give us a little more

time like don't mind that we have a

bunch more cash

but we also kind of believe that jerome

powell reads the wall street journal

every day

and it doesn't help that a big cover

story of this week

was bank's eye cash reserves for

profits u.s banks are sitting on a pile

of cash that could turn into

billions of dollars of profits bank

executives

aren't so worried about the economy

anymore the economy has outperformed

banks internal forecasts

vaccine distribution is ramping up and

then citigroup

chief financial officer there are a lot

of positive reasons to feel good about

the path to recovery

it's like literally the week before

the fed makes a decision on hey do we

want to give banks

more flexibility this runs on the front

page of the wall street journal about

how the banks are bragging about how

much cash

they have basically like you think the

fed's gonna give you some leniency

no so we saw this coming right we saw

this coming

i talked about this last week about i

don't think this is going to get

extended

the fed's going to pull the rug out from

under them okay so

now you got the background you got the

the the detail on

on the rule which that part doesn't

matter so much you got that the banks

set aside a ton of money for losses

but a lot of those losses didn't

materialize a lot of those billions of

dollars they were setting aside for just

in case losses

now as you saw from that wall street

journal article they're like well we

didn't lose that money so or a lot of it

you know we didn't lose as much

as we thought let's just turn that back

into profits because they rode it off

last year

and now they're going to consider it in

earnings again

it's like income again so record profits

right again wall street journal article

so

what does this actually mean for the

market going forward now that you're

caught up to speed with what the heck is

going on what does this mean for the

market going forward well

it kind of doesn't mean much see a lot

of people are like wait a minute

if banks have less money that means

they're less able to buy

treasuries and that would be bad right

because if banks are less able to buy

treasuries then that means there are

less buyers of treasuries which

basically means the price

or i'm sorry the yields the yields of

treasuries could go

up as the price of treasuries goes

down because there are less buyers you

know that gets tricky but

people make this argument and there have

been some you know

reporters and news articles going oh my

gosh this could be bad it could

this could force yields up or the fed

pulling out the rug from under banks

here

i don't think so the reason i don't

think so is

banks do not actually make up as much of

a buyer

of treasuries as we think in fact the

biggest

buyer of u.s treasuries are actually

private individuals right here federal

debt held by private investors

uh the bank line like the u.s bank line

is actually this blue line over here

it's the lowest out of the three so we

have more foreign and international

investors buying

our treasury bonds than we have us banks

buying our treasury bonds

and of course we have way more u.s

investors

buying our bonds than international or

banks

so they make up a small percentage of

the buyers

for bonds who cares if they buy a little

less it's not that big of a deal

my opinion going forward is

we're going to see bond yields go up

it's gonna happen whether or not the fed

was pulling the rug out from under banks

or not

i don't think makes a difference i think

we're going to see this 10-year

go to between two and two and a quarter

percent and we're gonna sit there

and between now and the day that happens

we're gonna end up feeling a little bit

of a burn at some point

that is somebody's gonna come up one day

these bond yields this is the 10-year

chart right here one day this is going

to go from 1.73

up to like two or maybe it'll go 1.9

then it'll go one but then it'll go

you know to 1.95 then 2 then 2.1 and

it'll sit there

i don't think we're going to go above

2-5 we're not going to go to these crazy

levels

when we went to crazy levels which the

10-year was like two five to three

was when the fed was actively raising

rates so we're not

actually expecting the fed to actively

raise rates until we get to around

2023 so that's why i think we'll we'll

settle around two

to two and a quarter on uh the ten

10-year uh the five-year

will go up as well it'll go back to kind

of those

2018 2019 levels that we've seen

more like the end of 2019 uh beginning

of 2019

but anyway uh the point here is to say

that there is

going to be a bandage pull off there's

going to be a little ouchy moment

where these rates adjust up a few more

times

and that's going to lead to pain in the

stock market i don't think it's going to

be

because of this fed change here even

though this is

headline news about the fed uh changing

you know basically pulling the rug out

from under base

it's not that big of a deal the banks

saw this coming

the banks were asking for an extension

but they i can almost look

if i could make the expectation or if i

could come up with the expectation that

the fed's not going to give you this

extension especially after we get

articles like this and quotes like this

on the wall street journal

you know the bank ceos are like they're

not going to give us the extension like

nobody is really surprised by this for

some reason the stock market is a little

surprised by this

and you've got jp morgan and wells fargo

down already if i owned those i would

have sold before this because we knew

this would come

i think it's temporary anyway i mean two

and a half percent decline on the banks

nobody freaking cares the market's

already recovering anyway so we got the

news over here

you saw the sell-off the way banks went

down like four percent big deal

they're already recovering they're still

down two three percent but we're already

recovering in the day

short term this is not a big deal this

is quadruple witching day and as

expected the market's doing fine

it's rebounding off the bottoms that we

had yesterday

no big freaking deal here but

stay tuned even though this happened

with the fed and the banks and even

though that doesn't matter

what are you watchful of this is what

the big bottom line i always want you to

take away

especially in this environment that

we're in yes partially

don't squander the dips right don't

squander red days like i bought the red

early this morning i'm really happy i

did because what i bought is already up

very nicely

now uh as far as going forward though

even though part of us doesn't want to

squander the dips you know don't

squander a good red day

we got to be vigilant going forward

because we are going to expect that

volatility it's not going to come from

stupid announcements like this

it's going to come from those bond

yields actually moving today

that's not going to make a difference

it's going to come from those inflation

expectations and those fears

and we know those fears are going to

accelerate over the next three months or

at least we strongly believe

that they will and so i am expecting a

lot more volatility over these next

three months

this news doesn't matter the inflation

play

still something to be concerned about

we're gonna see that hyperinflation

you know my opinion on this anyway i and

just to recap

i don't think so but anyway thank you so

much for uh watching this so you have

sort of a breakdown as to what's going

on what this news actually means

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we'll see you next time

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