ORDERED KAOS: Themes of the Week (3/19/23-3/24/23).
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ORDERED KAOS: Themes of the Week (3/19/23-3/24/23).
As always, I start with my Musings of the Day, followed by broad THEMES that bubbled up to the surface.
As always, I start with my Musings of the Day, followed by broad THEMES that bubbled up to the surface.
3/19/23:
Musings of the Day, 3/19/23:
Same Sentiment, Different Country:
Michael Kao @UrbanKaoboy
3/20/23:
Musings of the Day, 3/20/23:
I feel like its apropros to repeat this at this point if it's not already as clear as an icepick in the head:
Michael Kao @UrbanKaoboy
3/21/23:
Musings of the Day, 3/21/23:
PB analog for thinking about FX Swap Lines:
The Fed is PB to RoW's CB's.
CB's are SHORT USD, and it's become a hard-to-borrow.
Fed extends special borrow facility that is expensive but allows CB's to avoid getting bought in.
CB's still short USD.
3/22/23: FOMC Decision = 25 bps
Musings of the Day, 3/22/23:
Who will OUT-DOVE the Fed first?
US UK EU
GDP: 3% 0% 0%
Unemp: 3.6% 3.7% 6%
CPI: 6% 10.4% 10%
Count out the USD Wrecking Ball at your own risk.
Spoke on this Twitter Space Panel today:
3/23/23:
Musings of the Day, 3/23/23:
This is where "GOOD = BAD."
Remember that the Fed would like to see Unemployment at ~4.6%, which implies a loss of 1.5-2 mm jobs.
We are still going the other way ->
HIGHER FOR LONGER.
3/24/23:
Musings of the Day, 3/24/23:
I said yesterday to a friend that I kinda miss being in the HF manager seat right now given all the opportunity.
Nah, I take that back. 😎
THEMES OF THE WEEK:
THEME 1:
RISK-ON / RISK-OFF DRIVEN BY VOLATILITY IN RISK-FREE RATE EXPECTATIONS.
IF RISK-FREE RATE IS THE BEDROCK UPON WHICH ALL RISK ASSETS ARE VALUED, THEN THE VOLATILITY IN RISK ASSETS IS JUST THE “TIP OF THE WHIP”!
When you consider that the Risk-Free Rate is the financial linchpin for ALL ASSETS, this is akin to repeated pulling out/pushing back in of the bottom-most Jenga Block beneath a teetering tower.
Re-invoking this animation of Risk-Free Rate (Rf) expectations for one last Musing tonight:
If Rf is the BEDROCK of all things financial, be careful conflating these moves in EVERYTHING w/ meaningful signals.
You're just witnessing the TIP OF THE WHIP!
Michael Kao @UrbanKaoboy
THEME 2:
RIFLE-SHOT POLICY PRECLUDES BAZOOKA POLICY.
THESE RING-FENCED ACTIONS ARE NOT QE.
DEPOSITOR BAILOUTS ARE USUALLY TERRIBLE FOR INVESTORS.
BTFP ≠ BTFD AND FED IS NOT DONE.
BTFP ≠ BTFD!!!
As my good friend Lakshmi points out, "this liquidity isn't free money it is collateralized and high interest bearing...it will show up on all the charts as liquidity, but practically no because this is TIGHTLY RING-FENCED liquidity."
Reminder that FX swap line liquidity ≠ stimulative liquidity.
It is expensive and collateralized.
This is yet another SCARY sign that the real ICEBERGS are in SHADOW-BANKING SECTOR.🫣
Reuters @Reuters
Yes. I am 💯 in agreement.
Don’t Shrug The Rug.
Jason Furman @jasonfurman
THEME 3:
BY THE TIME THE FED FEELS THE NEED TO PUT OUT FIRES HERE, IT WILL LIKELY BE SCORCHED EARTH ELSEWHERE.
WHO IS GONNA OUT-DOVE THE FED?
Even if I am wrong about the Fed NOT pausing, there are 2 things I am confident of:
1. A full-blown FED PIVOT is highly unlikely anytime soon.
2. If the FED pauses, it will be a RACE for other CB's to see who can OUT-DOVE the Fed.
Zoe Katzayiannaki @katzayiannaki
Musings of the Day, 3/22/23:
Who will OUT-DOVE the Fed first?
US UK EU
GDP: 3% 0% 0%
Unemp: 3.6% 3.7% 6%
CPI: 6% 10.4% 10%
Count out the USD Wrecking Ball at your own risk.
Great work @charliebilello -- might I suggest you add GDP & Unemployment Rate columns as well?
Note who is already OUT-DOVING the Fed and then check the top of this thread to see why ECB/BOE might be about to join their ranks.
Charlie Bilello @charliebilello
Even BOE hiked 25 bps.
Note from my Musing yesterday that UK just showed 10.4% CPI. The problem is that their GDP is ALREADY straddling 0%.
Who's gonna OUT-DOVE the Fed?
Focusing mainly on the dominant economies (France/Germany as EU proxies, UK, Japan), Real GDP still lags US despite the Fed's significant head-start in tightening.
China's GDP number I find highly suspect. Why is PBOC still stimulating?
Charlie Bilello @charliebilello
Note chart in lower right quadrant. I’m sure the BOE is watching. Gilt Crisis 2.0 coming?
Who’s gonna OUT-DOVE the Fed first?🤔 https://t.co/0wqDVBgfhL
Robin Brooks @RobinBrooksIIF
THEME 4:
OIL SUPPLY CURVE LIKELY TO BECOME MORE SUPPLY INELASTIC NEXT FEW YEARS BUT THIS DOES NOT MEAN YOU CAN’T HAVE SHARP DRAWDOWNS FROM DEMAND SHOCKS.
BE CAREFUL OF PROCYCLICAL PLAYS IN SHORT TERM.
@PauloMacro This is where I'd rather make a lot of $ with you being right rather than me being right about Oil in the ST.
Alas, absent action from OPEC+, I would be very cautious of ANY PROCYCLICAL commodity bets right now. Even wholesale CB reversals can't reverse demand on a dime.
Oil's aggregate Supply Curve is becoming more and more INELASTIC going forward, but what people forget is that the SWORD OF SUPPLY INELASTICITY CUTS BOTH WAYS.
I think there is potential for MUCH LOWER OIL PRICES IN ST BEFORE SUPER-SPIKE IN '24-'25.
This is what happens when you blindly believe that Oil can't experience BRUTAL DRAWDOWNS while in backwardation.
One is today's forward curve in Brent, and the other is the 1-month ago forward curve. Guess which is which.
IGNORE THE SWORD OF INELASTIC SUPPLY AT YOUR PERIL.
THEME 5:
USD FX SWAPS ARE A SIGN THAT USD SHORTAGE IS ACUTE AND HIGHLIGHTS HOW ENTRENCHED USD SYSTEM IS.
ANOTHER EXAMPLE OF EXPENSIVE, COLLATERALIZED RING-FENCING, BUT ONLY TO ALLIES.
Musings of the Day, 3/21/23:
PB analog for thinking about FX Swap Lines:
The Fed is PB to RoW's CB's.
CB's are SHORT USD, and it's become a hard-to-borrow.
Fed extends special borrow facility that is expensive but allows CB's to avoid getting bought in.
CB's still short USD.
@SantiagoAuFund @asegpi @Bellehos @JC_Investment @UrbanKaoboy Is it a coincidence that the long-term increase in the value of the dollar (and its greater stability) coincides with the first use of liquidity swaps?
@SantiagoAuFund @joefrancis505 @asegpi @Bellehos @JC_Investment Definitely not a coincidence imho. The tell is this the USD Basis spiked MUCH higher than the LIBOR-OIS spread during GFC, which is an indication of what actual USD funding costs would have been ex-swaps.
Bottom-line: the USD addiction is only getting more pronounced not less.
THEME 6:
CHINA SLOWDOWN/CNY DEVALUATION IS THE BIG ELEPHANT IN THE ROOM — ESPECIALLY WHEN WE DON’T EXTEND FX SWAPS TO OUR BIGGEST GEOPOLITICAL RIVAL.
@SantiagoAuFund @joefrancis505 @asegpi @Bellehos @JC_Investment Yet it's about the only way China can hope to defibrillate its economy, imho. Thx to Oil's collapse and the transferral of our SPR to China's, that path looks relatively better to PBOC now I think.
Michael Kao @UrbanKaoboy
So guess who's not invited to the party? Not to worry, though, I'm sure Xi's pals Putin, the Ayatollah, and Kim Jong-Un got his back.
European Central Bank @ecb
@SantiagoAuFund @joefrancis505 @asegpi @Bellehos @JC_Investment The more interesting question is what happens to CNY this time around WITHOUT the benefit of USD FX swaps.
Although I don't trust the official Chinese numbers, if you take their CPI of 1% at face value and rationalize it with how they've taken advantage of falling Oil prices, it does explain why the PBOC gov recently said that 7+ CNY was no longer unthinkable.
Michael Kao @UrbanKaoboy
THEME 7:
EPICENTER OF THIS CRISIS IS UNLIKELY TO BE IN BANKING SECTOR (AT LEAST DOMESTICALLY) AND MORE LIKELY TO BE IN LESS-REGULATED SHADOW BANKING SECTOR.
ICEBERGS IN SHADOW BANKING CAN TAKE A LONG TIME TO SURFACE.
☝️
Almost 18 mos passed between Thai Baht devaluation in 1997 and the Russian Default/LTCM Collapse.
Michael Kao @UrbanKaoboy
Reminder that FX swap line liquidity ≠ stimulative liquidity.
It is expensive and collateralized.
This is yet another SCARY sign that the real ICEBERGS are in SHADOW-BANKING SECTOR.🫣
Reuters @Reuters
I've been saying to watch out for problems in the SHADOW BANKING sector, and this is an ominous sign.
And yet I wonder what the forcing function/crystallization event would be for Life Insurers? A sudden spike in deaths?
boaz weinstein @boazweinstein
THEME 8:
FED WANTS UNEMPLOYMENT TO BE MUCH HIGHER.
TRADEOFF BETWEEN DUAL MANDATE IS SIMPLY NOT HERE YET.
I keep hearing how the Fed is fucking everything up and going to "break" things and cause job losses.
Unpopular Opinion:
The Fuckup was the ENDLESS LIQUIDITY LOTTERY. This is the ANTIDOTE to the Fuckup.
Michael Kao @UrbanKaoboy
The Fed WANTS to see Unemployment at 4.6%.
The delta from the current 3.6% is not 20k, or even 200k jobs. It's 1.5 mm to 2 mm jobs.
That is the ONLY way it can lower aggregate demand enough to have a shot at its 2% Inflation target, imho.
Better a Has-Been than a Never-Was @JMoore1123
Musings of the Day, 3/23/23:
This is where "GOOD = BAD."
Remember that the Fed would like to see Unemployment at ~4.6%, which implies a loss of 1.5-2 mm jobs.
We are still going the other way ->
HIGHER FOR LONGER.
Pretty much confirms what I’ve been saying last 2 weeks:
Fed’s Tradeoff not even close to being here.
Watch out for the Pivot Posse — so many Assets are simply mispriced on the misguided assumption that it is.
THEME 9:
USD/UST DOOMSAYERS OFTEN CONFLATE INTEREST RATE RISK WITH FUNDAMENTAL LOSS OF FAITH IN THE US, YET IN TIMES OF CRISIS THE WORLD INVARIABLY FLOCKS TO USTS AS THIS WEEK AS SHOWN.
SUPPLY INELASTIC COMMODITIES LIKE GOLD AND BTC CANNOT REPLACE USTS AS LIQUID RESERVES.
THE SWORD OF INELASTIC SUPPLY CUTS BOTH WAYS, AND IT IS A FATAL FLAW IN THE HAYEKIAN THESIS IN A WORLD ALREADY DEPENDENT ON FIAT.
Why do those “toxic” USTs that everyone is supposed to be dumping get A FLIGHT TO SAFETY RIP EVERY TIME THE SHTF?
As we said in our West Point paper, TRUST ultimately stems from NATIONAL POWER, and National Power has far deeper roots than mere Debt/GDP.
open.substack.com/pub/urbankaobo…
@LukeGromen @DanOBrienPoker You are conflating a basic law of finance (rates go up -> bonds go down) with loss of faith in USTs. I’m done with arguing you on this. It’s just completely wrong.
There seems to be confusion with the notion of USTs being termed "Risk-Free." Hope this clears it up.
To conflate INTEREST-RATE / DURATION RISK with SOVEREIGN CREDIT RISK is grossly incorrect.
Michael Kao @UrbanKaoboy
@SantiagoAuFund @LukeGromen @DanOBrienPoker Reasonable take. 👆
Of course China wants to diversify, but their degrees of freedom are limited. Gold simply does not have the liquidity nor the interest-bearing attractiveness of USTs.
If US/China relations weren’t so bad, Gold would not even be a consideration for PBOC.
@SantiagoAuFund @LukeGromen @DanOBrienPoker Remember that Gold has the same Supply Inelasticity problem of $BTC which makes it near impossible to serve as a GRC once the world is already awash in Fiat.
The Sword of Supply Inelasticity cuts BOTH ways. Watch out when CBs already short USD need liquidity.
@BurggrabenH
@steve_alarm @SantiagoAuFund @LukeGromen @DanOBrienPoker @BurggrabenH That’s where the Hayekian vision goes horribly wrong.
Yes it means continual debasement, but OVER TIME. The alternatives without that elasticity would crater IMMEDIATELY upon concentrated liquidity-necessitated selling.
Yep. If I was a betting man, and I certainly am, this is exactly where I think we are headed:
Conks 🥷 @concodanomics
THEME 10:
BEWARE OF SECURITIES HELD UP ARTIFICIALLY BY HIGH YIELDS OR IMPENDING MATURITIES/EVENTS, ESPECIALLY IF UNDERLYING CREDIT/FUNDAMENTALS ARE DETERIORATING.
Here is a Next Shoe:
Dividend cuts are coming across-the-board as debt costs of capital eat into margins and coverage ratios.
Michael Kao @UrbanKaoboy
Note to self and others:
“Impending events” can be bond maturities in dicey cap structures.😬 https://t.co/UXUKMs1qHk
Michael Kao @UrbanKaoboy
ORDERED KAOS: Themes of the Week (3/19/23-3/24/23).
Great piece. I have a hard time keeping up with everything you put out, despite wanting to read it all.
Problem solved.
Excellent post, Michael.