Fed’s Rate Hikes May Shatter 14-Year Dream State
Bill Dudley thinks a US recession is "inevitable."
Not everyone agrees. Asset prices, for example, aren't as convinced as Dudley, or at least not according to a model developed by his former employer.
One thing that almost all market participants do seem to agree on, though, is that this Fed hiking cycle is destined to go awry somehow, even if it doesn't dead end in a downturn for the world's largest economy.
You might immediately note that all Fed tightening cycles end in tears for somebody,
Speaking of things going awry…
Twitter post I stumbled across Friday:
“Primary Dealers reported over $300B fails (FTD+FTR) last week (lateat avail FRB data). Pic is UST; there are another $27B fails in TIPS (Treasury inflation protected securities)”
Perhaps these fails aren’t related to recent Fed collateral credit swap stuff, or inversions, but there’s obviously trillions of invisible monsters under the bed, and those pennies in the piggy bank may be increasing in value, as the Fed dumps their treasure?
This episode of treasury fails reminds me of banks hoarding cash and reserves and liquidity concerns. Those collateral concerns generally take the form of someone dumping an asset to generate cash for some liability.
That chain reaction can cause repricing and impact valuation issues that aren’t always transparent. The magic show at fed SOMA has trading caps but as with any levy, what happens when the water rises way above capacity?
If the levy fails, the Fed can engineer and invent sandbags that can alleviate pressure, but, if the layers of sandbags are stacked too high, there may be an entropy problem, as the whole structure implodes into itself, in addition to all that backed up liquidity surging forward.
In a way, I basically trust that the 900 monkeys at the Fed will find a clever way to balance this zinga puzzle. However, as those monkeys slave away at writing their masterpiece, the clock will tick away on those that have precarious bets that require liquidity.
(1798) A poem by Samuel Taylor Coleridge about an old sailor who is compelled to tell strangers about the supernatural adventures that befell him at sea after he killed an albatross, a friendly sea bird. A famous line is “Water, water, everywhere, / Nor any drop to drink.”
Jeff Snider interview December 2017
“And there are times when a strain in bank balance sheet capacity has the effect of straining collateral flow. In other words, if you’re a securities lender, there may be times where you lend out securities – re-hypothecating them of course (which means that you lend the same Treasury to different counterparties at the same exact time) – where you’re not able to do that as freely and easily as you used to.”
Zoltanspeak
” Depending on who you lend to,
interest rates are different: fed funds is a rate of interest on interbank loans,
repo is a rate of interest on loans versus collateral, FX swap implied yields are
rates of interest on loans involving the swap of two different currencies.
Interest rates depend on the nature of the transaction (unsecured or secured),
the quality of the borrower, and the term of the loan. An overnight interest rate
(EFFR) is always the anchor, and a swap curve indexed to an overnight anchor
(an OIS curve) is the base against which all other interest rates are expressed (the EFFR-SOFR basis for repos and the OIS-OIS basis for FX swaps). “
I am definitely living in a dream world….I still dream/think the Fed will be buying US equities in my lifetime.
EN.
I really hope you are wrong about that possibility. Japan’s bank now owns control of a huge proportion of the country’s equities and really has no way of reversing that situation. The Fed is an institution of the state. Do we really want the government to own our (what would be formerly) publicly-held businesses? Wouldn’t that be a form of backdoor communism? If H is right, and I believe he is, we could just keep printing money enough to buy up control of American industry and put it in the hands of the Executive branch. Who knows who or what would be in charge of that — Kushner and Ivanka?
Metaphors, myths, and dreams.
References to these can all be found in abundance in H’s musings.
Metaphors bundle things on a small scale into a neat summary. Myths are large scale metaphors that summarize cultural outlooks. Dreams are unconsciously produced surrealistic videos of our mixtures of metaphors and myths.
Metaphors and myths do not possess much in the way of predictive power, but dreams do. They can warn you of the consequences of acting on the basis of metaphor and myth without the realization that these are not reality and that reality is mostly unknowable.
I reflect a lot on finance, so much so that some of my dreams can be interpreted in that context. I’m largely refraining from such reflections right now because I do not enjoy nightmares.
This is like when Godzilla has to battle some fearsome monster, unseen for generations and believed extinct, that has emerged from the sea.
As they roar and fight, people and property are scattered and crushed. The monster is terrifically strong. Its blows and jets of flame leave our hero slumped against a crumpled skyscraper, eyes dulled. All seems lost and only a few scientists still manning their instruments in a ruined lab still hope. “We believe in you, Godzilla-san!”. Godzilla’s eyes glow fiercely, it resumes battle with new strength and sends the monster retreating to its undersea home. The scientists emerge. The city is devastated but will be rebuilt.
The generational monster has returned, Godzilla has done its roaring, thrown its first blow to little effect, and the first buildings have been trampled. Let’s hope we dodge the collapses and explosions, and have cash to snap up prime, just-trampled real estate on the cheap.
There was a time before Godzilla. Now we can’t do without it. The system has become too financialized, leveraged, unstable – in short, too monster-attracting.
Good one, but maybe a little too optimistic. Like you, I still believe in the Phoenix, but with Central Banks, nuclear weapons, global warming, imperial competition and all, I’m thinking the number of reincarnations might be finite.
H-Man, it is just like a hurricane hitting Florida. You see it coming, you hope for the best. After it makes landfall, you assess the damage. No one wants to talk about the damage that may be inflicted in this storm because no one knows how bad the damage could be.
This is simply a tuff time for dreamers to be staring out the window. The Fed insanity as a macro background is kinda fuzzy, as is Ukraine disaster, and although the pandemic seems to be less threatening here, 25 million people in Shanghai in lockdown, which is one of those slow motion situations like a container ship illegally parallel parked in the Suez canal. The whole bottleneck thing seems to be expanding into a new mutation, just like transitory inflation.
“Data from VesselsValue shows an almost five fold increase in the number of ships waiting to load or discharge at Shanghai in the last two and half weeks.”
That was almost a week ago … Probably nothing?
“At this point, the best-case scenario is hiking in order to cut again — tightening to free up room for easing.” I am struck by how closely this equation mirrors what is standard and expected in the Russian war playbook: ‘Escalate in order to de-escalate’. The risk of things going not according to plan are immense.