Right now, I don't know what exactly is the cause for the sudden turn in Bitcoin, and I already am happy with my exposure so I am not doing anything right now.
We have so much noise with Tether currently that I am not sure anyone can be sure of being right. What I do know is that GBTC is slightly removed from potential Tether "buck breaking" since no one who is trading it will be trying to get into or out of Tether to do so. Doesn't mean they won't get washed out if Tether does what the FUD pushers believe will happen, but anyone buying it we can be reasonably sure isn't doing so to escape Tether.
Thus, I am keeping a close eye on the discount levels to see how it is behaving relative to the value of its bitcoin holdings. And the discount right now as of this writing is still showing signs of turning around.
I am tracking the 14 day SMA right now, and even on that last dip prior to this weekend's price action, we didn't see the discount get back to the lowest point that it was in May. So momentum-wise, it looks like GBTC is closing the relative value gap with Bitcoin.
What does that mean? My guess is that some of this price action we are seeing at least is encouraging more people to participate on the long side. But real dangerous risks still exist, so tread carefully.
As stated in other articles, GBTC is easy to get into, but a poor way to play Bitcoin if you have alternatives. But if you are looking for the retail FOMO crowd to be at your back, this IMO is a good thing to keep an eye on. If this isn't trying to recover its premium, it is hard to make a case for retail being on board with this move in my view.
The discount is bouncing around 92-93% right now and the 14-day moving average of the discount is showing signs of bottoming.
Note: Views are my own, and based on my own work. And as always, consider me an idiot and don't believe what I say just because I have a high influence score. This is one of my tin-foil hat ideas and I really don't have any concrete knowledge, but based on how things are developing this is a guess as to what MIGHT be going on.
Also, I should point out that I really do not understand the Interest Rate Swaps market very well, nor do I understand very well what drives it. I have enough understanding to know what it is, but not so much that I could sit here and explain why the various products exist. I am in no way an expert, and any views here may be contradicted later as I continue to learn more and update my views.
Any views here are being shared and open to discussion. I am only writing about it because I think it is important, and no one is talking about it.
This is a continuation of the ideas expressed here:
By the end of this month, we will see most major money center banks switching from LIBOR to SOFR for the basic interest rate swaps markets.
Actual image of Janet Yellen talking about LIBOR
I still don't know what exactly the end game is for the monetary authorities, but have written previously that there are a few problems with SOFR that make it different than LIBOR:
LIBOR is an interbank lending rate, and takes credit into account because it is the rate banks are willing to lend to each other, and thus is not a centrally set rate. SOFR is set by the Fed, and is a domestic overnight rate. The rate is what the Fed says it is.
LIBOR has a term structure, SOFR doesn't (though it appears the CME will start providing one soon, so this may not be an issue)
This is kind of a big deal and something banks have been dragging their feet on implementing for quite a while. But paitence is at an end, and it is being forced into action after a lot of slow walking. It looks like in 6 months, LIBOR will finally be taken out back and shot.
The full-court press to move to SOFR is starting to happen in earnest.
This should be something we start paying some attention to because it is a really drastic change for the stuff I support and I don't fully understand how this CAN'T have side effects in the market we haven't factored in yet. Maybe not right away, but perhapse after the next crisis?
if the structure being formed is what I think it is, this is a step along the path towards nationalizing the short-term funding markets.
What I DO know is we are about to lose another signal that there is a problem in the wider markets. Unless we find a way to reconstruct it, the TED spread will stop having the same value as a warning about global dollar liquidity.
The TED spread is the difference between the three-month LIBOR and the three-month Treasury bill rate.
The TED spread is commonly used as a measure of credit risk, as U.S. Treasury bills are seen as risk-free.
The TED spread often widens in periods of economic crisis, as the default risk widens; the spread narrows when the economy is more stable and defaults are less of a risk.
When LIBOR goes away, the market is going to lose the primary means of measuring credit risk as seen between interbank lending counterparties. An effort to find an alternative is underway, but it is not yet clear if a method exists that will provide the same benefit. I imagine if the market wants it, they will find a way to reconstruct it.
The other concern I have is related to my worry that the Fed is putting itself into a position where it will be the defacto market for all SOFR lending. As far as I am aware, all of the products that trade under SOFR will not be "name give-up" in the market, so they will need to be centrally cleared. This means that you won't know if you are lending to Deutsche Bank, JPM Chase, or BAML when you execute a trade. The central clearer will know who the counterparties are, but not you at time of trade execution.
If something goes wrong with a counterparty in this system, the Fed will basically HAVE to step in and clean up the mess or risk secured overnight lending breaking down in the markets. But unlike in 2008 when stuff was blowing up everywhere and the Fed had to run around and figure out where the next blow-up was going to occur, all it will need to do is call the clearinghouses and work out who is fucked, then decide how to deal with that counterparty (or counterparties).
But this also consolidates the market into a few central points that the Fed can either outright control or "encourage" in the shadows. It wouldn't necessarily need to outright take over in order to have a heavy influence over the amount of risk counterparties feel comfortable with taking. Especially if there is an implicit or explicit backstop in place.
To me, this is a setup to make sure the next time something goes wrong, the Fed can step in and become the de facto central clearer and effectively BECOME the secured funding market guarantor. This would be the point where market signaling is lost potentially in the short end of the treasury market as well. I could be wrong, and I am in general distrustful of our benevolent overlords, but the tin foil hat portion of my brain senses that this is part of a longer-term plan to "fix" the inflation problem.
If I am right, in the end, It won't matter how dumb a borrower is, so long as they have the right collateral and so long as the Fed signals that it will come to the rescue, we basically would have a guaranteed short-term funding market. This means that every time the Treasury issues debt that you buy, you can effectively leverage that into short-term loans up to the limits imposed by the domestic authorities on how often you can rehypothecate the security.
What isn't clear to me is if the BOE is at all going to still be involved with effectively unlimited rehypothecation after this change. I'm not sure if/how the LIBOR change affects them yet. I need to do more reading (and watching Jeff Snider videos). This part I am still iffy on, as the retirement of LIBOR is potentially more serious for the Eurodollar market than for the domestic market.
But it creates a nice neat mechanism for Treasury-issued debt to be a highly sought-after collateral asset. Maybe even more so than now (still to be determined).
Think window guidance in Japan as a potential outcome. Treasury borrows, creates the collateral, uses it to build infrastructure, then tells banking authorities that it would really like to see investment in XYZ businesses to grow that portion of the economy. Not explicitly, but by recommendations and thru signaling in the public.
Holding this collateral and then investing it toward projects that the government is basically TELLING you will grow and the Fed basically TELLING you that the SOFR market will remain liquid pretty much means you do what the fuck you are told and you make money. To do otherwise would be idiotic if you are a bank. Your short-term funding is secured and you know the money is there to grow on the long end. And if something goes wrong, your counterparty risk is eliminated with a few Fed TARP programs.
BTW, if you haven't watched this, you should. Japan's past is potentially our future. Credit to Hugh Hendy who is the first person to put me on to Richard Werner and this documentary.
This is potentially one of the pieces Russell Napier talked about that could actually generate real inflation. I recommend people watch this interview because this is a potential bridge to the world he envisions in 10 years. Props to Russell for calling it if that is how this plays out, cause even right now it is not obvious how the fiscal and monetary authorities get to this point without risking a political fight.
If you are an inflationist or believe in the exponential age, pay attention to this cause this is potentially HOW we get from here to there.
Random Thought:
Perhaps that is why Jamie Diamon is chilling in cash right now? He has a view on how this plays out and it involves the long end getting priced higher? No clue, I am guessing, but Jamie is pretty fucking good at his job and isn't buying the short end right now.
To hold Jamie's view, you have to really believe that the short end will never be allowed to go negative, and the risk is much higher that yields go to the upside. The pieces on the chessboard today are screaming disinflation/deflation at me for the near term, so either Jamie is an idiot (likely certainly I am the idiot between us) or Jamie sees a few moves ahead and is positioning 12-18 months out and doesn't think this deflationary cycle will last for very long.
He can't get a half-trillion into a market and get out in time, so is he sitting this one out and waiting for the next bus? If what I wrote above isn't complete horseshit, I think so.
Perhaps Jamie has figured out the path already and we don't see it yet. Everyone thought he was nuts when he took the whole bank long bonds a few years ago, and that was THE move of 2019 thru to the crisis.
A way to resolve the issue that doesn't involve waiting for the site owners to fix is as follows (credit to Hugh Han for putting in the work to validate that this works, which I just confirmed for myself)
Below are instructions for doing this in Google Chrome if you ONLY want to clear cookies for the realvision.com site. You will need to google "clear cookies for one site" for the browser you are using if it isn't chrome.
You will want to open a new chrome tab, copy and paste the below to your browser (I can't give you a link, chrome blocks that for security purposes)
In the upper right corner, is a search bar you can type "realvision" into. Delete all cookies involving the realvision site.
Hit F12 to go into developer tools.
Right click on the "refresh" button, hit "Empty cache and hard reload"
Log in, and hopefully, the magazine view should be back up.
Original Post:
Odd bug I can't quite figure out on my end with the landing page for the main realvision.com website.
Normally, when I log in, I expect to see a screen with the "Magazine" section that lists today's videos on it. I get the screen to come up on my work PC (which runs an older version of Google Chrome) and my Android. But on my home PC (running 91.0.4472.164 - the latest version) My home screen looks like below.
When I first load up, I can see the Magazine view shows up, but then it disappears after a split second and I only see the video list screen below.
Thought it might be a setting I fat-fingered, but I went thru the options under my account to no avail. I did a bit of debugging to see what loads on startup and I did still see the HTML generated for the Magazine (and as I said, it does load very quickly before disappearing), so it is there, but for some reason when the app finishes loading it hides it from view.
Best guess, something is not reachable on my end as there is an error of a google script not loading, however, I'm not running any IDS or proxy that would block this.
Hopefully, it gets fixed, cause I rather like that Magazine view to find out what videos were released that I might have missed. =)
Disclaimer: As always, assume I am an idiot and do your own work. These are my own thoughts, and I am admittedly a terrible trader, especially in the short term. Also, this is the second version, as the first version of this article which I pretty much wrote on the fly got eaten by an exchange bug. So this will be one of the few things I write with some idea on the direction it is going to go. I guess that makes this “Semi-Random Thoughts” =)
So I am having a look at a few months back of the CPI numbers. Everyone is up in arms because of Inflation, and my base case is that much of the inflation we are seeing has to do with the pains of closing and reopening the economy and the struggle our supply chains are going thru. So I wanted to break down what I think is going on in a few sections to see if that overall theme makes sense to me.
At first glance, the driver of this inflation is clearly energy and used cars. Those numbers jump out. I am going to save Oil till the end because I think something is going on there that no one is really considering, and while we can argue about if it is “transitory” or not, my argument is more about how much of this is monetary policy-driven, vs how much of this has nothing to do with Fed policy and thus the entire fintwit world needs to chill the fuck out.
Also, to be clear I am not a fan of current monetary policy, but I understand why it is in place and I think I understand what the goal ultimately has to be now that they have decided to go down this path. So any opinion here that winds up defending the Fed is doing so only because I think reversing now invites even more destruction than going forward. There are no good options, just less bad ones.. We have crossed the rubicon and pretending otherwise invites an even worse outcome.
I am also biased to believe that the talk of how bad inflation is right now is not benevolent in nature, at least not from all sources. Many of the voices who cheered the intervention in March of 2020 are now all of a sudden worried about monetary policy going too far. My bias is to believe that the true goal of getting everyone worked up about inflation is to cause the tapering that brings about the sudden deflationary shock that brings about another cycle of fresh QE and stimulus so that the Cantillon effect can begin anew. My investments are geared toward taking advantage of this goal, even though I don’t like it. I don’t have to like it to see it coming and position to make money off of it. In many ways, I think these past 6 months have not seen a more honest Jay Powell in his entire tenure at the Fed (notwithstanding the bullshit he said on 60 minutes). He is playing a role and sort of reminds me of the prisoner who is parroting the lines he needs to in order to not get killed, but he is dropping hints to let us know what is going on in the prisoner camp. I feel behind that role are a lot of hints about what is really going on here, and he appears to me to be trying to break the cycle, even if it risks persistent inflation.
So enough about my own bias, let me talk about what I am thinking about with a few of these categories:
Used Cars:
This is the most clearly supply-side driven problem in the entire index. And the inflation side of the argument is ignoring talking about it because they can’t square it with monetary policy. Nothing the Fed does in the next 12 months is going to make Taiwan Semiconductor companies shit out more or less chips than they are already trying to push out into the economy. Nothing is going to 3D print container ships to get them to the US any faster. You aren’t imagining this supply shortage, but the root causes of this shortage are what is important.
It isn’t a lack of capacity or raw materials to produce more chips. It is an inability to ramp up production and get the supply shortfalls filled fast enough to smooth out the problem. Adding new capacity doesn’t appeal because companies know this is a supply shortage brought about by closing the world economy for all intent and purposes for 12 months, and not necessarily growth in demand.
In that regard, to fix the issue involves either the supply issues to resolve (which will take time) or they persist long enough that companies decide there IS demand, in which case new capacity will be brought online and one way or another, the container ships needed to get from A to B will be secured or built. That too will take time. But none of this is caused or resolved by bitching about QE. It is a false narrative, and it is intentionally false.
We must ask ourselves who benefits from blaming a global supply issue on QE and who stands to benefit from the effects of that marketing campaign to understand the nature of why this is so omnipresent in our news cycle currently.
So prior to Feb 2021, we had a mixed bag of inflation showing up in the gas space. Then Texas had an unusually cold winter and their whole grid was impacted because of a lack of winterizing, and market rates went totally nuts. Follow that up with the West Coast basically trying to adopt conditions in Death Valley with their heatwave, and we have a lot of reasons why energy usage would have been higher than expected during this period. Oil prices being up at the time didn’t help matters either.
Also, since energy prices basically did a Bitcoin impersonation in Texas, I have not heard much about how energy companies dealt with passing on costs to the consumers. Could that “relif” promised actually be energy companies spreading out the pain over time and hoping people mistake it for inflation? Don’t know, but I have my suspicions.
So I fail to see how Fed policy fixes or causes this either, given what I will go over later on with Oil.
Food:
So, everyone sees food price inflation when they go to the grocery store, and I am no exception. The best steak is probably ~30% more expensive. But the more inexpensive cuts of meat are still on sale. And I shop for food in Clinton Hill, Brooklyn which is not a cheap place to do your grocery shopping.
I actually have been adjusting my food shopping habits as a result. But I think everyone has. Those really good ribeye cuts of steak? In my grocer, they remain on the shelf. They aren’t being bought nearly as often as they were prior. If they go on sale at any point, I keep missing it. My gut tells me the local restaurants are buying it, but I have zero proof.
So in this case, I have an upper limit I’m willing to spend on a Ribeye and I am choosing to exit the market till the prices come down to a more reasonable level. And from my own inexact polling of watching the meat department of my local grocer, I’m seeing that more often than I used to.
But no one really asks “why” these prices are happening. If you read the report:
The food index increased 0.8 percent in June, as did the food at home index;both indexes rose 0.4 percent in May. As in May, the food at home increase was mostly due to the index for meats, poultry, fish, and eggs, which increased 2.5 percent over the month. The beef index rose 4.5 percent in June, its largest 1-month increase since June 2020. The index for fruits and vegetables rose 0.7 percent in June after being unchanged in the preceding month. The nonalcoholic beverages index increased 0.9 percent in June after declining 0.5 percent in May. The index for other food at home rose 0.2 percent in June, as did the index for dairy and related products. In contrast to these increases, the index for cereals and bakery products was the only one of the six major grocery store category indexes to decline in June, falling 0.3 percent over the month after increasing 0.5 percent in May.
So things that require very long supply lines (farm to table) are increasing, and things that can be warehoused and moved without the need for refrigeration and can be moved much more easily in bulk and stored for long periods of time are actually falling.
Folks, that is the cost to transport I’m willing to bet. Meat can’t sit in a warehouse in a city for a month waiting for orders, it has to get from A to Z within a short period, which means smaller and more frequent shipments of goods on a more “just in time” basis. Grocers can’t over-order and stock up in bulk either to offset their own costs. So energy costs are bleeding into the food supply chain too, which to me makes sense. More on that later.
Medical Care & Services Costs:
Why is no one wondering why medical care isn’t increasing in cost? Do we assume because of COVID, the medical industry all of a sudden decided to cut everyone a break, even though the Fed is apparently destroying the currency to the point where food and energy prices are going nuts? Do we think the Medical Field is not impacted by rising supply costs? And did we oversupply medical commodities? Possibly, I don’t know. But clearly, Medical services and commodities didn’t get the memo.
And what about other services? Their inflation rate has been rising. I actually think this IS inflation. This is the effects of the stimulus and the reopening trade in action. To me, this is the portion of demand inflation that is actually demand inflation. People are going out again to get haircuts, eat out, go to all of the places they used to go to before COVID that they now can thanks to the vaccine being available. Why do people not make THIS connection? They just ignore its stark difference with the things that are more supply-driven as if this distribution is normal. But this too may pass if credit growth is nonexistent and stimulus rolls off. Demand needs money to “demand” anything. So we need to see if these numbers start to retreat. For me, "Services less energy" is the best number we have to follow the stimulus impulse and the reflation trade. It makes the most sense when I look at things.
Shelter:
Get ready, for the next 3 months you will be told that inflation is persistent, and the rising rents are PROOF. But again, I want to call bullshit on this. No, rents are going to rise, that is a fact, but not because all of a sudden we are all going out and renting second apartments because we are flush with cash.
Landlords have been taking a beating during COVID. Some have not received rental income for 15 months, and they have been unable to take legal recourse because the government has forbid it. What is more, the programs that are supposed to make them whole come with strings. Strings they aren’t allowed to refuse. (queue Godfather music)
The 2021 Act does, however, impose certain restrictions on landlords. If a landlord accepts aid through the program, the landlord may not increase the monthly rent or evict for reason of expired lease or holdover tenancy for one year after assistance is received, among other restrictions.[13] Even if a landlord does not accept rental assistance payments, the landlord will be deemed to have waived the amount of rent that would have been covered by the assistance.[14]
So to summarize:
Take the rent, but your tenant gets to stay for another year at the same rate now (no compensation for the carry cost of the non-performing asset for a year when supposedly all of this inflation is occurring, so we are giving them 2020 prices in 2021)
If you don’t accept the rental assistance, you give up your recourse to take the back rent.
So these programs are making landlords an offer they can’t refuse effectively. And if you want to evict? Get in line. In NYC it can take up to 2 years during normal caseloads to get thru the system and get a tenant out. Good fucking luck making that work when eviction court takes cases again.
So what are landlords to do? Take their units off the market and convert them to condo/coop. Raise rent? Sell to a holding company that can afford to deal with the legal issues?
Small-time landlords have been effectively neutered, and I expect many of them will simply take their apartments off the market, or increase the deposit requirements and/or the rent being asked to make up the difference.
Larger companies like Blackstone are going to buy up as many properties as they can and probably try to make inroads into this business. Have a leaking faucet? Good luck getting thru the red tape that is going to pop up now. Courts are packed, remember? And a large corporation can simply bleed you dry more than a small-time landlord can.
The net result is that costs of operating a rental business are going up, and prices will follow.
But the fault of this lies with the government, not with the monetary policy authorities. Even if they stopped tomorrow, nothing would change the dynamics of what is about to happen to anyone who needs to sign a new lease.
Think rent stabilization is going to help? Those are probably the best buildings for large property owners to buy. Those property managers will make sure you never even know WHO to call in order to get assistance. Your super will have no authority to do or say anything. But if you miss a rent payment, expect an army of lawyers coming to try to take you to court and force you into compliance simply because they know you can’t afford to fight them. And if you managed to take them to court and you do win? They will write it off as a loss or make it up thru creative accounting. The art of being a slumlord is not new. They made money during rent control, they will make money now.
Oil:
Ahh, the heart of it all. So what is up with Oil? Well, in my opinion, Oil has been artificially suppressed for 5 years. What we are seeing now is Saudi Arabia led OPEC running into reality. Their public balance sheets can’t afford to keep suppressing the price of oil in an attempt to kill US Shale. And thanks to what played out in 2020, they no longer have to. The market crash pretty much was the nail in the coffin for a lot of Shale Oil and Gas investment for the foreseeable future.
See, back when “Peak Oil” was a thing, we were on the path to $200 oil.
There is a "significant risk" that global oil production could begin to decline in the next decade, researchers said today.
Sound familiar? Well, back in 2009, we didn’t know about fracking and how all of a sudden two minor changes would make that supply issue go away.
In the 1940s, explosives were replaced with high-pressure blasts of liquids, and so “hydraulic” fracking became the standard in the oil and gas industry. It wasn’t until the beginning of the 21st century, however, that two key changes helped spark fracking’s current boom. One was the use of a certain type of fracturing fluid: slickwater, a mix of water, sand, and chemicals to make the fluid less viscous. The other innovation was the pairing of fracking with horizontal drilling , a technique that increases the productive potential of each well because it can reach more of the rock formation that contains the oil and gas. These advances, combined with an influx of investment amid high global fossil fuel prices, sent fracking into overdrive. Indeed, of the approximately one million U.S. wells that were fractured between 1940 and 2014 , about one-third of those were fractured after 2000.
So, two alterations to an existing process and all of a sudden the US is practically energy independent? Cool. Except we weren’t because our cost to get at this oil made breakeven prices higher than most OPEC nations. We needed somewhere between $45 and $55 oil prices to break even.
OPEC, not liking competition because that is why you make cartels in the first place, decided it was going to work to drive supply up in an attempt to keep US Shale from growing too fast. Suddenly, oil that was approaching $150 was now selling between $40-60.
See, that was kind of a problem for Saudi Arabia over the years because while their breakeven costs were around $50 per barrel, they had a lot of public entitlements funded by Oil profits and they were running a budget deficit.
Also, if you look at that chart on the bottom, you can see the US continue to grow their supply, and since the US has no mechanism to control oil producers even if they wanted to, US shale was a big problem for the Saudis. They didn’t take their state oil company public for no fucking reason. They did it to buy time till they could figure out a way to deal with the issue.
Then enters COVID, and all of a sudden there is NO oil demand, and Russia and Saudi Arabia decide to commit fiscal suicide for 2 months which ends up with WTI trading negative.
But by then, defaults in the Oil space pretty much soured the mood on “drill baby drill” more than any Democrat could ever hope to achieve.
So now, we see the price of Oil going up and OPEC once again controlling supply. What are the breakeven statistics for 2021?
Exactly where the Saudis want them to be. Enough to make some profit and repair their balance sheets, but not so high that US Shale rises from the ashes.
This is pretty much where my views lie. For everyone who screams about Fed manipulation and how bad they are for free markets, why does no one seem to bother to concern themselves with OPEC, and how they manipulate free markets? We didn’t lose the knowledge that created the US Shale boom, it just isn’t worth it to companies to fire up new wells right now. This to me puts an artificial CAP on oil prices, which everyone in the industry has a vested interest in maintaining.
If we get that GDP boom everyone is expecting to drive inflation, sure then we can see Oil go up as the demand for Oil will start to force the West to put pressure on OPEC, or a Republican administration will get into power and all of a sudden “drill, baby drill” will become “drill that fucking well, now”.
If we fall back into recession, and demand wanes again, then the Saudis really are going to have a problem as OPEC does not want to go back into a slowing growth deficit budget world. They are already having problems with UAE now when things are otherwise good for them. If dollar liquidity starts becoming a thing, we could see real problems in OPEC once again.
The Oil market is driven as much by politics as by economics, and blaming the Fed seems really stupid to me given that the Fed CANNOT supply dollars to these countries. The best the Fed can do is provide temp swap lines. Which stops an imminent collapse long enough for Congress to pass emergency legislation, but does not allow them to go on under those conditions indefinitely.
Oil is where it needs to be for the world’s suppliers to not feel like they want to undercut one another. The Fed did not cause the last 5 years of Oil price volatility, Saudi Arabia along with Russia and US Shale companies did.
Conclusion:
Inflation is fucking hard, and we have people arguing over “transitory” or not and acting like the Fed has any fucking power here. Honestly, the Fed in this case has nothing to do with current conditions EXCEPT when it comes to asset price inflation.
If you can tie asset price inflation to commodity inflation to inflation showing up in the CPI, then you can make an argument. But you have to account for the other forces at play here, and not simply take the easy way out. Not if you plan to invest.
Conversely, if making your year involves needing more stimulus and another manufactured crisis, or if you ARE the Fed and you know what needs to happen next, but you need Congress sufficiently shitting themselves in order to do it, then a taper is a great fucking idea right now. That ends with more QE, more stimulus, and at larger volumes than we got previously. Because QE needs more size each time in order to be effective.
We had the best excuse to let the system crash in 2020, and Jay Powell decided not to take it. COVID was a perfect excuse to blame 12 years of stupid policies on an external event and let the system reset. We would have still spent trillions helping people recover, and while a lot of people in finance would have lost money, others would have made it so who cares. That is the game you sign up for, no excuses.
Instead, we doubled down on a weak hand, even though we don’t have a good game plan for getting out of this mess. Our fate was chosen in March, and to turn back now is only going to make us jump out of the building from an even higher floor. And they don’t have that great excuse to do it this time.
These policies are happening, we need to accept them. Inflation will be transitory one way or another because either this will work and we will debase to a new level, or it won’t and the collapse will be massively deflationary.
But the current argument against inflation to me sounds like people who like the way things are and don’t want them to change. I don’t believe for a minute that the majority of those who make their living from the Cantillon effect want to see this party stop. And the best way to ensure that is to taper while the credit impulse is already waning outside of the US. So while there is certainly truth in every argument for and against persistent inflation right now, we need to examine the motives of those telling us these arguments before we claim to have ANY understanding of what is going on.
Beware of the people profiting off of the way things are telling you how BAD this is for YOU. Ask why they care, and what do they have to gain from convincing YOU of what is going on before you make your own decisions.
Standard disclaimer, I am an idiot and no one should ever listen to me when it comes to timing trades. I have good ideas that I struggle to time correctly. Seriously, don't follow me to the letter, every position I open usually winds up losing money first before it does anything else =).
If they can push that thru via reconciliation at the end of the year, that is another ~4 Trillion of borrowing that the Treasury has to do, and they will probably start as soon as they are allowed to. The debt ceiling is the final thing we need to hear about to know what is going on. We will need to see over what period of time the spending goes thru, but this is an actual signal if they can pass it.
That basically provides the means to free the existing liquidity hiding out in reverse repo. The debt ceiling still needs to be resolved, so we aren't out of the woods just yet. But once that hurdle is cleared, I expect Yellen to start borrowing sooner rather than later to build up the supply over time to smooth over the shock to the bond market.
That is going to drive reflation and the inflation we are seeing in commodity prices in Q3.
If you are looking for commodity inflationary impulse and someone to drive credit growth into 2022, this is what you were waiting for. We will now know what path the fiscal authorities want to take and what the dollar amount is going to be for the next phase. We just need to know over what period of time this spending will occur in order to know how drastic of an effect it is going to have on asset price inflation. But this is the excuse Treasury needs to start borrowing as soon as the debt ceiling is lifted.
Will it actually do anything besides drive asset prices higher? No clue. I hope so, but I have my doubts politicians will do much besides force liquidity thru till someone else uses it to come up with a good idea that actually works. But this is a check in the box for inflationists to continue to see commodities and reflation trades dominate the news cycle.
If all of this pans out, we will be back to watching duration get sold and asking at what point the Fed institutes yield curve control. I would not want to be short Bitcoin or Gold right now. Or anything in the commodity space that this infrastructure bill winds up putting a bid under.
What gets in the way? We need to see if Mitch McConnell tries to fight it or if he stays quiet and lets it pass only to complain about it after. Mitch is a master of the rules and procedures of the Senate. And I still feel he will do something to extract a concession out of Dems even if he wants to see this pass so he can complain about it during mid-terms.
Anyone waiting for the imminent taper and collapse will need to wait a little longer. The market already has excess liquidity which needs the collateral something like this will create in order to move around and lever up. We may get a taper as lip service, but absent massive GDP growth from this bill they will still have a problem letting yields rise too high without having to put an explicit guarantee under duration.
Spent about an hour doing a writeup on the CPI for today from the exchange that I was working on in between tasks at work. Clicked on "Select exchange" to add to "Macro Chat", and your API refreshed my page and erased all of the work I put in.
You guys really need to get a better front-end. Preferably one that doesn't require me to make two separate category selections EVERY time I make a post, risking the loss of an article.
Maybe I'll redo later, but I don't have the energy or time to start from scratch so I guess my CPI hot takes will remain private for now =).
Normal disclaimer, I am an idiot and these are my own observations and guesses as to where we are going in the future. I wouldn't bet a wooden nickel on my timing of things, cause I am routinely shit at timing.
Permeant Standing Repo Facility talk:
The discount window is potentially going to be made obsolete if a permanent Repo Facility is stood up:
Federal Reserve officials continued to discuss in June how they could potentially structure a permanent facility for supporting U.S. money markets, according to minutes from the central bank's last policy meeting released on Wednesday.
A "substantial majority" of Fed policymakers reiterated their support for such a program, which would allow eligible financial institutions to borrow cash on a short-term basis as needed, saying "the potential benefits of such a facility outweighed the potential costs," the minutes from the June 15-16 meeting stated.
This isn't a super big deal, but it kind of is at the same time. The Fed has shown time and again that they will open Temporary facilities since 2008 (most recently in 2019) to deal with liquidity shortages. But they were supposed to be "temporary" and the discount window (which is public knowledge and usually if a bank used it, they would be attacked and killed in short order) was supposed to be the facility that was used for emergency liquidity.
So I can't fault them for realizing that no bank wants to walk thru those doors as it means their ultimate demise.
But making a permanent facility sort of puts the practice of backstopping primary dealers and banks with slightly above market rates for liquidity a normal occurrence. Not that it wasn't already, but it kind of is a big deal to make it official policy.
Now, you have unlimited funding providing you own the collateral to leverage and can pay the higher basis point rate that the Fed will charge as a penalty. That potentially makes US Gov debt even more valuable as it can be exchanged and leveraged at will even if NO one is lending, and you can be guaranteed that is always the case. The only limitations are the terms the Fed sets to the facility.
This sets a backstop in case you are so stupid that the rest of the market refuses to allocate credit limits to you as an institution. Basically, even if everyone things you make Softbank look like conservative bond traders and they want nothing to do with credit exposure with you, the Fed will help you so long as you continue to buy US Govt debt in sufficient quantities that you have the collateral to borrow.
So as the US gets less "thrifty", you can too so long as you play the game. Before now, it wasn't a "standing" facility so you still were worried that if you pissed off the wrong people, you would be made an example of like Lehman and Bear Sterns were.
What I am REALLY worried about and have my tin foil hat on for is if they change the reporting structure such that we can't see that activity on a daily basis. If they make changes to how this facility REPORTS, then we will lose visibility into a lot of what is going on in terms of stress in the repo markets, and it will be one more signaling tool taken away. Nothing indicates that is going to happen yet, but I am suspicious that this is a step they will want to take if their goal is to get markets to stop talking about Repo so much.
Additionally, depending on what the penalty rate is and what credit concerns are, even if there is a penalty rate, you could see people choose the Repo facility over the secondary markets if they are concerned they don't have a 100% accurate picture over what their exposure is to a certain counterparty. During periods of stress, you could see everyone try to pair up at the Fed and it effectively becomes THE market.
So why am I worried about reporting?
For example: no one mentioned they would stop reporting M3 aggregate data until they just up and did it as a footnote in 2006:
In March 2006, the Federal Reserve Board of Governors ceased publication of the M3 monetary aggregate. M3 did not appear to convey any additional information about economic activity that was not already embodied in M2. Consequently, the Board judged that the costs of collecting the data and publishing M3 outweigh the benefits.
So the cost of collecting M3 data isn't worth doing, but we can't figure out who we continue to have global liquidity issues and thus we need to make sure we supply an unlimited about of liquidity on demand to primary dealers and banks?
So knowing that this is a problem building up BEFORE it becomes a crisis isn't worth the administrative cost?
Right.....
Or....perhaps they knew that M3 would explode even WORSE than M2 once they started doing QE and they knew that a problem was coming, and if they reported those numbers it would have caused a panic. So best to hide the problem and try to fix it, and act surprised if you fail?
The market figured it out anyway, but still. To this day, we still don't have a great measurement of the Eurodollar market except for LIBOR (more on that in a minute). If anything, they should have invested MORE into trying to get an accurate picture of dollar liquidity outside of the United States. Not less. Knowing is always better than not knowing. They basically gave up on understanding what "money" was except for the domestic market, and they ignored the global dollar markets.
But you can't ignore them, they are inter related, and problems in one spill over.
What else?
PTNGU. Many products that have traditionally traded "name give-up" (meaning, an over the counter transaction is done and both parties know who the other is) are going anonymous under SEF regulations. I frankly don't all of the details and I don't know how this ultimately plays out to its final conclusion, but it feels like anything that is mandatory clearing is going anonymous eventually. And more things are mandatory cleared than in the past, effectively ending OTC trading on a lot of products that used to be over the counter. My gut tells me that this is a trend that continues as soon as regulators can wrap their minds around each market and get a handle on how it trades to the point where we may see an effective end to OTC trading unless someone creates a new asset that regulators are still behind on understanding (like crypto).
Now, I don't pretend to understand the intricacies of everything as this is VERY much over my head to the point where I need people to explain it to me, but to me this means that if you are a bank, you are going to be entering into a transaction with another entity, but you have no idea what your risk is on that specific position in counterparty terms. Now, there are credit limits in place so there is some way to manage exposure overall to different counterparties, but on an individual trade, you won't know who is the counterparty.
That could potentially be no big deal, or it can be a very big deal depending on if you know what is up with that counterparty and if you find out that they are borrowing all over town thru back channels. But each institution has to do the work for themselves to actively manage this. You won't be able to just refuse to trade with someone OTC.
When word got around that Lehman was up to games trying to hide their liquidity issues via the repo market, that market dried up for them pretty quick and they were done. So while you can in theory limit exposure to a counterparty, will you still know to do it in time if these transactions are anon? I don't know the answer.
This to me only works if the Fed becomes more involved in backstopping everything. If this goes sideways, and I'm a primary dealer, I'd rightfully be pissed off at the Fed for taking this information away from me. So I suspect however it winds up working, it is going to need more direct involvement with the Fed trying to control everything in order for that to work, otherwise if people start getting nervous that they can't control their exposure, it could cause them to withdraw early from markets. But thankfully, the Fed will be there 24/7 with a standing Repo facility to backstop when that happens.
Which leads me to....
LIBOR going away and SOFR is replacing it as a reference rate for many products in Interest Rate Swaps and Credit at the end of 2021. LIBOR is a Bank of England rate which effectively involves ICE (the administrators of the rate) polling a bunch of banks and asking them what they would be willing to lend money at on that particular day to another bank.
Note: don't shoot me, I know I am oversimplifying it, so here is a link which uses more words but is more accurately described. I might as well be writing this in crayon because I am trying to break the concepts down so that I can understand the bigger picture for myself.
So what I am personally concerned about is this is the last remaining indication that global liquidity might be having a problem is going away. The spread between 3M T-bills and 3M LIBOR (the TED spread) was a very strong indicator that shit was hitting the fan outside of the United States
SOFR is completely useless as a replacement because it is an administrated rate, not a market polled rate. SOFR and LIBOR go in opposite directions when things are going wrong. Thus, we are losing yet another signal that something might be wrong if LIBOR is made unnecessary.
As LIBOR is used less, it will likely eventually stop being reported entirely and we don't as of yet have an alternative that works quite the same way.
Random Thoughts
In isolation, none of these events are groundbreaking, but when looked at together as part of a structural shift in the markets, I am concerned that we may be slowly losing our ability to recognize just how bonkers our current markets are. Or how much more out of wack they will be in the future.
Thus any time I read something like this that is being changed, I add it to the list of things to follow to see what the end game might be. So if you are looking to credit or bond yields for guidance, we need to be aware of how those signals might change for us going forward in the intermediate to long term. Stuff like crypto may one day be the only "Free" markets that offer us some insight as to what is going on in terms of speculation. I still believe Bitcoin's drop this past year was an early indication of stuff only now showing up in Bonds and USD pairs. Not because it is tied to it, but because it is less "controlled" of a market and thus ebbs and flows with less resistance due to it's global nature.
Increasingly, many of the markets that provide funding for the economy as a whole are becoming more centralized and many of the signals that experts use to tell where problems might be occurring are slowly being altered in ways that may fundamentally change their behavior. By 2023, we may not notice a blow up in credit till the Feds are walking thru the door at Lehman and taking conservatorship of the bank. Or, until Bitcoin drops 50% because liquidity in Asia dried up suddenly.
Thus it will be more important than ever (in my belief) to be cognizant of the fact that we may not be able to properly gauge our counterparty risk into the future. Or spot when something external to the US is happening until it hits us.
It is going to make volatility spikes more of a problem because they will happen with less warning than even seasoned investors are used to, and it is going to be harder to be in markets in general because you will have less detailed information as to what might be going on out there.
But when things are NOT blowing up, it will be very hard for any professional money manager to be bearish. More and more, explicit guarantees are replacing implied guarantees.
With Gamestop and AMC both sliding, and the rest of the meme stocks failing to catch a bid, those wondering where the WallStreetBets crowd is focusing its attention today should look no further than Newegg Commerce (NEGG) which soared by 155% just minutes after the open, before being halted.
China is starting to shoot its own aspiration as the primary superpower in the world in the foot if its goal was to achieve this thru economic means.
Jack Ma was the beginning of what is increasingly looking like a concerted effort to regain control of their capital investor class. If you tie that to Ant Financial, Bitcoin mining expulsion, the digital RMB, and now this most recent move against a brand new IPO of a "Uber-clone", and based on the way Xi was dressed up as Mao for the 100th Anniversary of the CCP, and it is starting to look to me like they are in the process of transitioning away from any pretense of capitalism and back into an authoritative regime where the CCP controls everything, including the major companies.
Add that to their continued buildup of military assets, including copying American tools of force projection:
And we have the beginning of what could be a problem in the next 10 years.
These moves look to me to be efforts to cut off any potential avenue of capital leaving the country for good. They are going back to a closed economy, which probably means we will be seeing a new global economic regime appear in the next decade that routes around China.
I've never been accused of being a China bull, but I have never been an outright bear either. I just fundamentally disagreed with the way the government controls the population. But this would make me bearish of any company that has its entire future tied up in the requirement of being in the good graces of the CCP.
If this road continues, no matter who is President I expect to see a continued policy of isolating China much the same way we did the USSR. The fact that a new Cold War is starting is not new, but the fact that the Chinese are actually going to take steps to look more like the USSR did economically is interesting.
This should actually dovetail into a change in economic conditions in the US too. The United States is going to have to reconstitute its manufacturing prowess in order to have the infrastructure to support a major conflict should one arise. This means that they are going to need to fundamentally change the structure of the economy over the next 10 years. This leads us into more evidence that we are going into a Cold War period of growth that will largely be driven by government policy, more capital controls, and higher corporate taxes.
Now, I hear your disbelief about corporate taxes. But one thing people fail to realize is that compared to the alternatives, there is no better defender of capitalism and property rights in the world than the United States if China does this, and the capital class will HAVE to go along with it in order for America to be strong enough to deal with the alternative. As will our allies.
The global minimum tax regime is a step in that direction, to provide the framework to continue to allow the global economy to function in peacetime while limiting the benefit of playing jurisdictional arbitrage. A country like Ireland that doesn't want to go along with the program because it benefits from being a corporate tax haven will be brought to heel thru creative tariffs that won't be called tariffs but will be so in effect all the same.
The United States tends to follow policies of containment because it is preferable to open warfare. The risk of any conflict between major powers these days involves the potential for a desperate enemy to rely on Nuclear Weapons as a means of striking back as well as a defensive measure. I still believe the only thing on planet earth that stops the First Armored division advance is a nuclear detonation in front of it.
But America is also worried about how much force it would have to use to bring a country like China to heel thru kinetic warfare. It would be terrible for us, but absolutely horrific for a population that is effectively hostage to the CCP. We will try to appease them as much as possible to avoid conflict until the point where the powers that be decide conflict is unavoidable.
Given that America's military goal is not to conquer or kill its enemies, but instead turn them into allied regimes that cooperate within a global cooperative framework, economic warfare will be the preferred weapon of choice.
I expect to see some new hybrid of a global economy with 1950's characteristics in the next 10 years if we continue down this path. We will need to start rebuilding manufacturing capacity not only in the US but with our allies. We will want to diversify supply chains so that there are no single points of failure. COVID taught us that. And this will require a massive amount of public spending over probably 15 years.
So as time moves on and we start to see these infrastructure spending bills, it will be interesting to see where that money goes. Beyond bridges and roads, America will need to build dual-purpose heavy industrial capacity, both domestically and thru allies abroad.
I suspect China is going to provide the reason to spend our way out of this current economic situation thru its actions. And it will be their own policies of population controls that likely limit their ability to do much more than secure their own borders and threaten the global order. Because of their population growth concerns.
India is going to be a natural ally for the US to strengthen over the next decade, and there will be a continued interest in cooperation on both sides between the US and India regardless of how political disagreements play out. Much of the growth in this would have to be based out of India in order to bring India up to sufficient strength to act as a counterweight to China and their own strengths. It is the only country in the world with sufficient manpower to match China, and they are natural adversaries given their proximity and history with one another.
For China's part, they will continue to try to court South America and Africa since these are areas that are ignored or have a history of apprehensive relationships with the US. Both locations however have American or European influence, so it is unclear how successful this belt and road strategy will be. Many of the countries already in China's sphere have deep structural problems, and it will be difficult for China to find strong allies from this group. Though it will allow them to find economic markets to trade with and foreign bases from which to establish their own trade lanes in.
Russia is actually interesting. Unlike in the past, they are more right-wing authoritarian than left-wing authoritarian. I am not sure Russia would not just sit back and play both sides as its two primary competitors are distracted with one another. This would be the sort of long-term thinking Putin is known for, and this could see eastern European countries start to feel more like Ukraine. I think Russia knows that if China actually won against the US, they would be next on the list to be made to heel, so I don't expect Russia to be very committed to any partnership with either side. But given America's short-term nature and gullible politicians, we could see a Russian appeasement policy in exchange for more direct cooperation against China. That might be bullish as all fucking hell for Russian assets. But not so great for countries who traditionally get forced into Russia's sphere of influence against their will.
Posting here too because I owe an apology and I want to make sure it was seen.
I allowed my general frustration about the topic of wage pricing and my personal feelings to blur the lines between talking about a topic and making a directed comment. I didn't mean for my comments on the Daily Briefing thread to be so harsh, but they were and I want to apologize.
My father went thru a lot of things in life as I grew up and this is a very sensitive topic for me. That shouldn't have been something I took out on you guys, and it isn't an excuse. But I wanted to tell you that it was coming from an emotional place and not a rational one.
Honestly, at the time I was more talking on a soapbox in my head than no one in particular. That is not how it came out on paper though. I didn't actually intend my words to be targeted but re-reading them they came out that way so I need to own that. I was raging against the machine, and in hindsight, they were much harsher than I intended and they shouldn't have been directed in your direction like that.
So I want to apologize. I wish I could say that I will never put my foot in my mouth ever again, but that probably isn't true. I was wrong though, and I wanted to acknowledge that.
I especially do regret pissing off @Weston Nakamura to the point where he felt I was attacking him personally. This I never intended to do and is what I really wish I could take back that reaction as it was not at all deserved. I have nothing but respect for him, and I really hope he accepts this apology in the spirit it is given.
I also want to apologize to the new guy Sam, it was your reaction that sort of triggered me. No excuse for it, but it wasn't personal. I've heard the argument before, and it was the faceless commentators on news media who have been talking about this topic that led to my ranting. I hardly know you, and I hope you ignored me as I rightly deserve.
@Jack Farley you were more listening and not contributing, but I made a general comment which looped you in too, so I also owe you an apology.
Nothing else to say really, I was an asshole and didn't even realize I was being one till I saw the reaction and reread what I wrote. I was wrong, and I am sorry for that.
