Joseph Wang
@FedGuy12
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The Fed is fast returning to a dual mandate bank as the labor market softens. Big increases in migrant labor supply and weakening demand can push unemployment up faster than the Fed expects, prompting a quick moderation in the degree of restrictiveness.
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SVB was just a badly run bank that went bust. Happens all the time.
What's special about SVB is that many influential people banked with them, and are now lobbying for special treatment.
Let's hope our system is fair.
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Studies find lockdowns were ineffective in reducing mortality. It was all for nothing.
And they bankrupted small businesses and harmed the mental health of a generation of children.
This huge disaster happened in part because those who disagreed were censored.
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In 2008 the banks got rich, went bust, and got bailed out. It was unfair, so we created a regulatory system to prevent it from happening.
SVB is a minor bank. We could have let the process play out and show how the system has been improved. But it seems nothing has changed
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Looks like SVB held $120b in securities but basically didn't hedge their interest rate exposure.
That's totally crazy. No wonder they failed.
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One reason why First Republic bank looks like its imploding could be because it actually can't benefit from the Fed's new bailout facility.
You need Treasuries and Agency MBS to tap the facility, and they barely own any.
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So $SVIB has $200b in assets, of which $116 are securities. About $80b of that are high quality liquid assets that could be sold or repo'd for cash. Looks good until..
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Sounds like the White House told Saudi Arabia earlier that they would refill the SPR to support oil prices. Saudis then realized they were getting played and took matters into their own hands.
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Gold still surging - kinda concerning. Maybe someone is preparing for a big geopolitical move as they know they'll lose their dollars and euros after the fact.
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Inflation is ultimately a political choice. It's easy to create inflation - just give away lots of money. And easy to create deflation - hugely raise taxes and interest rates.
The key to future inflation is not in an economic model, but the politics and culture of our time.
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Any competent corporate treasurer understands the 250k FDIC limit and manages cash with money market funds, sweep arrangements, repo, bills etc.
Maybe the guys who were pouring money into FTX and monkey jpeg "startups" aren't all that sophisticated?
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A CBDC is just a surveillance tool and has no place in a free society.
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All my life I have had to work harder to get to the same place as others - admissions deans and HR offices had a policy to discriminate against people who looked like me and would even brag about that policy on their websites
Good step towards dismantling institutional racism
Breaking: The Supreme Court has ruled against affirmative action in college admissions, barring universities from considering an applicant's race
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IRS tax code is 7000 pages, and there is another 70,000 pages in official guidance on how to interpret the code. The IRS can always find fault with your tax return if it wants to.
The paradox is the more laws you have, the less there is rule of law.
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Treasury decided to bail them out. The new facility provides cheap and under secured loans - the exact opposite of good central banking.
A bank can take collateral trading at $0.90 and borrow a $1 from the facility at below market rates.
Why even have bank regs at all?
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I'm not sure if what is being done is fully realized. Commodity prices are going to sky rocket with no end in sight. Inflation will be high and persistent. That could break the bond market, which would break all markets.
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The Administration has decided to socialize the banking sector. Tomorrow the well connected SVB folk will get their money, and the Fed will hold the bag.
This is a bad precedent.
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Still can't believe Fed was buying Treasuries and MBS when mortgage rates were sub 3% and home prices were going up 20%+ y/y.
Can't make this stuff up.
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Guys it appears we've hit the point where the Fed is in the red. After the latest rate hike the Fed's interest expense (IOR, RRP) now exceeds interest income from its QE portfolio.
This doesn't affect monetary policy, but I believe it's the first time it's ever happened.
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A potential change in leverage calculations could make banks a limitless purchaser of Treasuries just as future issuance is surging. This well worn path of sovereign financing would boost liquidity across markets and place upward pressure on asset prices.
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If you have 5 minutes:
I thought this exchange was pretty amazing.
Jon asks why the military cannot account for 850b in spending while soldiers are on food stamps, and the Deputy Secretary cannot answer and seems indignant at being asked.
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Brainard is the Fed's lead dove. Also, we've seen the biggest inflation surge in decades.
These people do terrible jobs and there is never any accountability.
BREAKING: Federal Reserve Vice Chair Lael Brainard (leading dove 🕊️ on FOMC) to depart Fed and become President Biden's top economic adviser
Unclear who will replace her as Fed Vice Chair
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UK just discovered their bond market cannot function without sovereign support.
Are there other countries like that too?
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This is straight up misinformation. QE increases settlement balances, but also bank deposits (which is what most people think of as money, not just currency).
The settlement balances are an asset of a bank, and it is balanced by a deposit liability.
We did 𝐧𝐨𝐭 print cash to pay for the
#bonds
.
We bought the bonds with settlement balances – a kind of central bank reserve – not with bank notes.
What’s the difference?
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One thing I like about twitter is the many anonymous accounts that are sometimes trolls, but can also offer thoughtful and candid comments
I've noticed on less anonymous sites like LinkedIn everyone is smiling and saying things they think other people want to hear. Very boring.
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P&G is reporting that product pricing up 10%, while volumes down 3%. That is stagflation.
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Watch this:
Senator from Oklahoma asks Yellen asks if deposits in his community banks are all insured - they are seeing outflows to big banks.
Yellen basically says sorry - you ain't part of the club!
h/t
@Myrmikan
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There is a central bank put on bond prices, as declines in the price of these perceived safe assets will lead to the insolvency of the financial system. This post describes the problem and suggests a pause in the relentless bond selloff is close.
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It's not easy to get honest reporting on the Fed.
Reporters must say good things to maintain access, banks must say good things because they are regulated by Fed. In the past Fed has even blacklisted good reporters for asking tough questions. So you get a lot of propaganda.
'Jerome H. Powell, the chair of the Federal Reserve, blocked efforts to include a phrase mentioning regulatory failures in the joint statement released early Sunday evening by the Fed, the Treasury Department and the Federal Deposit Insurance Corporation.'
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I wrote CB101 in a cafe in Jersey City and published it myself on amazon. This is actually a pretty amazing outcome.
I owe it all to you guys - thanks so much!
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Games like Call of Duty basically model what war is like, but we wouldn't hire CoD esport champions as military generals. Models and real life are very different.
Yet we hire a bunch of folk who are good at building econ models to make important policy decisions.
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In a few months the RRP will be offering a risk free 4% yield. No interest rate risk, next day liquidity. Maybe it will even get to 4.5%.
That's a very competitive asset.
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If a major financial institution were in danger the gov would just step in and bail it out.
Thinking Lehman is fighting the last war.
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The holy grail of bank regulation is unlimited deposit guarantees and unsecured lending by the central bank. We will never have trouble with banks again!
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Lot of things happening today. But there is no financial crisis in the banking sector, just a few bad apples.
If the market is pricing in cuts in fear of some financial event it's going to be wrong.
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Here's a glimpse of why Treasury issuance is surging:
Compared to the same period last year, tax revenues declined 11% AND expenditures increased 10% 🙃
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This is why I believe a decade of persistently high inflation is inevitable.
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The problem with a data dependent Fed is that Fed actions (and inactions) directly impact future data.
By letting financial conditions to rapidly loosen, Fed creates the potential for the reacceleration of inflation.
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Today is Fed minutes day. Minutes are in part an account of what transpired at the last meeting, but also a tool of monetary policy. Fed looks at market reaction post meeting and uses minutes to correct misunderstandings. There is a lot to correct today.
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Wokeism is inflationary. It is essentially focusing on the concerns of a perceived vulnerable minority at the expense of everyone else.
In monetary policy, that means focusing on the few who become unemployed rather than the higher prices everyone experiences.
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Fed seems to be getting cold feet. It's beginning to worry about overtightening when inflation is still at 8.5%. Policy always has trade offs, if the fear of economic weakness is very great then the outcome will be biased towards higher inflation
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A Treasury buyback program funded by bill issuance would be mechanically equivalent to QE and risk positive. This post shows why it would be mechanically equivalent to QE and reviews two channel through which QE impacts markets.
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BOJ wasting tens of billions of dollars on a lost cause.
Much better idea would be to spend just a fraction of that on congressional donations, and ask them to pressure the Fed.
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Markets Outlook 2023
At year end 2023
S&P500 > 4100 (3815 today)
US 10 year > 4.5% (3.9% today)
EURUSD < 1.00 (1.067 today)
Gold > 2000 (1824 today)
Let's see how this ages in a year!
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All these guys looking for a banking crisis are fighting the last war. Regulation and policy response are just in a totally different place today.
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Some scary stuff happening in the rates market. Now I don't think a banking crisis in the US is likely, but I don't know about Europe. My assumption is they are like us and will just bail everyone out.
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I don't own any btc or follow it, but I took a peak today and was impressed by how stable it's been the past few months. Looks like a there's a steady bid around 20k.
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Wages begin to increase and improve the living standards of millions of people. Then the gov jumps into action to stop it by hugely raising interest rates and importing millions of foreigners. Kinda crazy when you think about it.
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This is so crazy
Biden Treasury Department says we need higher taxes on capital gains because it would hurt white people more and take away their wealth.
Whites own too many stocks and businesses, so they need to pay.
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The policy response since the GFC is to always socialize the costs. That cuts off deflationary tail risks, and thus skews potential outcomes towards higher inflation, higher asset prices. There is no political will to bear any pain.
IMO this is the big theme of the decade.
This long weekend for bank geeks is just starting:
*US regulators open to sharing losses to smooth sale of SVB and Signature (FT)
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First Treasury buyback operation will take place tomorrow.
Very small amounts - just making sure the system works. A regular buyback program will then be rolled out later in the year.
$200MM TREASURY buyback tomorrow afternoon, Long-End:
"This debt buyback operation will be conducted by Treasury’s fiscal agent, the Federal
Reserve Bank of New York (FRBNY), using its FedTrade system. Treasury will conduct buyback operations only with primary dealers as…
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Failure to foresee high inflation was not unique to the Fed - other central banks and the private sector also failed. What they all have in common is reliance on the "expert" PhD macroeconomists.
Maybe the fault lies with the economics profession - maybe they aren't experts.
Economists ALWAYS believe
#inflation
will quickly fall to 2%.
Forecasting inflation is incredibly hard!
It is impacted by demographics, supply chains, productivity, war, monetary policy, globalization, and luck
Too many factors to correctly ‘model.’
chart via
@biancoresearch
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Fed is a business that can't fail run by people who can't get fired - there is no incentive to perform well.
IME at FRBNY many were completely unqualified for their jobs. Good people leave for better opportunities and the the bad people are not fired. Eventually the org dies.
An independent
#FederalReserve
is critical to the well-being of the US
#economy
. Having said that, it is getting harder to justify such independence when four big operational errors (of analysis, forecasts, actions and communication) are accompanied by a lack of accountability.
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One thing to keep in mind about 7% mortgages is that in the U.S. mortgage interest is tax deductible, and can be refinanced any time. 7% is higher, but is it "high"?
7% is close to 5% after tax, when inflation is also 5%. And when the Fed cuts rates you can just go refi.
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They bent the rules to protect SVB depositors. It only makes sense to go all the way and announce blanket FDIC insurance for everyone.
Then we can go back to thinking about CPI tomorrow.
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Markets Outlook 2024!
No recession
6000 S&P 500
5% Ten year yield
2400 Gold
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Listen to this interview from Dudley, former FRBNY Pres and Chief Goldman US Economist. "Reverse wealth effect" is a policy tool. Fed needs risk assets to go lower to tame inflation. They will keep tightening until it goes lower.
Don't fight the Fed.
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Weird price action. Stocks down, gold and oil up - maybe geopolitics?
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Disinflation was transitory.
Friends, every month I make the same post. Inflation stopped going down 9 months ago. Wage and price inflation is embedded well above target.
I don't know why this is so hard to understand.
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Hard for me to see how a "hard landing" is even possible with a 7% budget deficit.
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Dovish surprise for QT - the cap is down from $60b to $25b. I believe the expectations was $30b.
Treasury didn't cut coupon sizes, so Fed in effect did it for them.
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The Fed has suggested changes to its QT framework that would allow QT to continue for 3 years. It now views RRP and reserves as fungible, and is open to QT during rate cuts. This post reviews the shift and suggests it is an effort to steepen the curve.
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Importing millions of people who are willing to work for less pushes wages lower and hurts our most vulnerable citizens.
I don't trust any "expert" that claims otherwise, nor do I believe their "studies"
Strange that there is almost no legacy media coverage of this.
About 2 million people – from every country on Earth – are entering through the US southern border every year.
The number is rising rapidly, yet no preventive action is taken by the current administration.
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Fed and CBs have been aware that segments of the market may break while tightening, but they are prepared to support those segments while maintaining tightening.
As the BOE saved the gilt market through purchases and kept tightening, so the Fed can save banks and keep tightening
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As a content creator, nothing infuriates me more than plagiarism. It takes a lot of time to create good work.
When you share content, please give credit.
There have been too many reports of someone stealing content and then charging for it.
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This is why I think stock will crash up.
IMO if we get into a recession then the gov will just spend even more.
Pretty incredible to see covid-period like deficits being run at a time when unemployment is at secular lows and the economy is growing above potential.
In the short-term this helps delay any recession incoming. Long-term it will make managing an eventual recession difficult.
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This is the benefit of dollar dominance. A strengthening dollar does not have a big impact on our import prices since stuff is already priced in USD. But foreigners face higher prices in their currency, and cut back on demand.
They tighten their belts to lower our inflation.
USD strength is merely exporting inflation, to quell domestic inflation. I have to think at some point Yellen/Powell decides not to blow up the global economy
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A rising RRP and QT will likely drain ~$1t in bank deposits by the end of the year. At the same time, demand for cash is surging as investors sell both stocks and bonds. This post describes the mechanics and suggests the selling will continue.
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Have you guys checked out the homebuilders lately? Looks they they all going to the moon. I'm guessing if mortgage rates come down a bit home prices are going to surge next year.
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One interesting thought: basically every senior Fed official has a million+ 401k and owns a home. On some level this probably creates a conflict of interest as their decisions directly impact their wealth.
Would you do something that would jepordize your retirement?
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All that hard work tightening financial conditions is melting away.
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A strong USD doesn't mean there is a dollar "shortage." Fed is hiking steeply (2s at 4.2%!) - USD should be appreciating against other FX. It's more becoming more valuable.
Fed is willing to supply virtually unlimited USD via its swap lines- so USD "shortages" are very unlikely.
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Here's latest Treasury supply estimates from public and private sector analysts. Bill issuance is heavy next few months, so Treasury will soon be at their 20% recommended level. Then trillions in coupons each year forever
IMO I can't see anything but structurally higher yields.
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This administration seems wiling to do anything to boost election chances - eg student loan forgiveness, SPR releases.
What if they did a huge back buy program funded by bill issuance to push down yields and goose markets?
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I benefit a lot from twitter - it's an amazing platform that gives me access to the thoughts of some of the smartest people around.
Totally happy to pay a little bit a month to support the platform. Even better that it also helps my followers avoid imposters scamming them.
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Looks like the $150b of their deposits are uninsured. That means those people could lose everything if it goes under. They have an incentive to RUN.
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Bond yields can't rise indefinitely without raising financial stability concerns.
There is a central bank put on bond prices (otherwise we all going back to the stone age). That put went in the money in the UK, perhaps Eurozone is next.
“A portfolio manager at one of Germany’s largest insurance companies said, “It’s a global margin call. I hope we survive.”
JFC.
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By weaponizing the banking system against enemies outside and within, advanced economies are losing their 'risk free' status. This may not change the global currency order for now, but could lead to a wild scramble for gold and other tangible assets.
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What if before market opens - UBS buys CS, and Buffet takes a stake in a few regional banks.
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We need to stop listening to the people who just get everything wrong.
Summers, Dudley and Furman got it right and they're still saying it's not going to be this easy.
This figure from Torsten Slok at Apollo suggests to me that consensus inflation views are more likely too optimistic than too pessimistic.
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The Treasury has hinted at a potential buyback program to improve market liquidity, but buybacks could do much more. They could also reduce the market's duration and redistribute Fed liquidity, making them a powerful tool to facilitate a smooth QT.
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Fed's latest Financial Stability Report is out. It's always worth a read.
Here are some things I found interesting.
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Rates are likely still too low as wage growth, credit growth, and wealth levels remain exceptionally robust. This post reviews the strength in those areas and suggests the market's eagerness to price in a dovish Fed pivot is a mistake.
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Guy who thinks policy is most restrictive in 25 years and also marked rate cuts in his dot plot is telling you he's not really talking about rate cuts.
Do you believe him?
"We're not really talking about rate cuts." - Fed's Williams on CNBC
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A declining labor force from aging may imply secular inflation and change the policy reaction function to inflation and recession. This post reviews the theory behind aging and inflation, looks at pandemic retirements, and notes the policy implications
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Bravo to Powell for standing up to the vocal minority trying to use the Fed as a vehicle to implement their political goals.
Powell: "We are not, and will not be, a 'climate policymaker.'"
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Interesting paper suggesting the wave of early retirements was due to boomers experiencing huge home price appreciation. They thus felt wealthy enough to not work anymore.
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Stocks down, rates up, and dollar up.
Yet gold is up too. Maybe something happening there.
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Bank liquidity crisis are basically impossible post Basel III and (mega) QE. FRA-OIS doesn't really matter because banks don't fund themselves in wholesale unsecured markets.
If there are funding strains it would be with shadow banks. I would watch OIS-OIS FX swap basis instead
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IMO you will be hearing more and more discussion on raising the inflation target and it will happen.
My latest
@WSJopinion
advocates a hawkish pivot to a higher inflation target.
A higher target has many benefits but would be terrible if it deanchored expectations.
The better the Fed can do now on inflation the more room it will have to adjust long run.
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Looks like the new FIMA Repo facility for foreign central banks got its first big drawdown - $60b.
It's confidential, so we don't know who drew down. You'd think the Swiss, but they also have FX swap access so wouldn't really need this.
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