Credit deflation and the reflation cycle to come (part 2)

[Heart's Ease]

Speaking of DH - forgot I hadn't posted this. Have not listened.

[Barnsey]

 

[Hunty]

Link

 

Links

 

https://thelykeion.com/chart/3667/

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Charts of the Month.

WDTCM - June '21

 

We went down the rabbit hole (again) with Jeff Snider, this time to figure out why everyone is talking about Reverse Repos (RRP).

After one email exchange, it was clear that few people actually know why this chart matters (classic FinTwit), so we put it to our contributor network and asked them all the same question, “Why Does This Chart Matter?”

To the standard RRP chart we added US Treasuries because, as Jeff pointed out, RRPs as a standalone statistic doesn’t tell the whole story. We can see on the chart that, on March 18th, right when yields went from reflationary to not reflationary, RRPs picked up, did not come back down to zero as they have always done, and then made their historic run up to today (as of June 14th they sit at $584 billion).

This time around, our contributors’ responses are closely aligned, but each adds their own valuable nuance (which is the exact reason we started this chart's publication).

Jeff Snider | Alhambra Investments
 

• Conventional theory holds that reverse repo use is a monetary policy accommodation to drain an excess of bank reserves from an overly abundant system. This was how it was used in 2008. But like 2008, there is more going on that has less (if not very little) to do with bank reserves and much to do with collateral scarcity for global repo and derivatives markets. [Editor’s Note: in a reverse repo, corporate and depository institutions receive collateral]
• Briefly, the combination of QE along with Treasury refunding of bills further combined with increased risk aversion left the global monetary system with scant collateral options. [Editor’s Note: with the ‘system’ telling us it’s collateral scarce, i.e., it’s fragile]
• This is why - and the only way - there can be an almost perfect positive correlation between reverse repo use and anti-reflation in bills and LT UST's. [Editor’s Note: this is why we see RRP begin to pick up on the same day that yields begin to flatten and eventually reverse (anti-reflationary)]
• "Too much money" would not produce this effect, one being replicated in markets like Eurodollar futures, too. [Editor’s Note: it’s not about too much money, it’s about not enough collateral]

If you want to see how deep the rabbit hole goes, take the red pill and enjoy the following content from Morpheus… I mean Jeff:

1. Emil Kalinowski & Jeff Snider: The Fed's Reverse Repo Program Surges!

2. Reserving Observations On The Reverse Repo Of Reserves

3. No Reserving Interpretation About Reverse Repo Collateral Connection(s)



Mike Green | Simplify
 

• The March date matters because this is when the Fed ended the increase in counterparty limits it enacted on a temporary basis in 2020 as the COVID pandemic hit. The ending of the increased limits meant that banks now must hold equity capital against reserves which incentivizes them to “get rid of them” in the overnight market. This increased incentive had the potential to drive rates permanently negative in the overnight market. So the Fed had to be willing to take them rather than force the banking system to absorb them. This gives us the mechanical explanation of what occurred.
• However, the second critical insight is that this is likely to continue to grow due to quarter end dynamics on June 30th. On this date, offshore banks with US branches have a “window dressing” event that incentivizes them to reduce leverage. That spike is likely to create some turbulence in the market unless the Fed aggressively supports market liquidity.
• Finally, this chart calls into question the concept of an aggressive recovery – the banks see limited use for reserves. In other words, loan demand remains weak.

Luke Gromen | The Forest for the Trees
 

• In the context of Basel 3 banking regulations regarding bank reserves, Fed QE has led to a situation where there is too much cash chasing too little collateral; this has put downward pressure on short-term interest rates.
• The spike in RRP balances is a symptom of the Fed acting (Reverse Repo-ing USTs) to make sure short-term rates stay positive (as negative rates would likely cause severe problems in monetary “plumbing.”)
• The spike in RRP balances is a “Band-Aid fix” – more structural options include tapering QE, having the US Treasury shift issuance to the short end, have the Fed shift QE to the long end, or have the Fed implement a Standing Repo Facility.
• A Standing Repo Facility would likely effectively nationalize US funding markets, which would likely NOT be deflationary or disinflationary.

 

 

 

 

 

 

[Majorpain]

1 hour ago, ThoughtCriminal said:

David Hunter 

 

Summary: Everything is GREAT 

There is currently $750bn parked at the Fed with no home to go to, usual financial leverage (a lot....) and that would probably do the trick.

[macca]

9 hours ago, BWW said:

Did you just accept the 3% from existing supplier or is that the comparison with others/uswitch etc?

 

I got done by the Yorkshire energy bust and ended up with a £1000 bill.. nobody can explain how it happened. Scottish power cant get the readings from Yorkshire and the insolvency company only have a bill that they are chasing me for. 

I am past fuming.. £1000 for 4 months electric and gas! like i had a weed farm in my attic.. 

[JimmyTheBruce]

4 minutes ago, macca said:

I got done by the Yorkshire energy bust and ended up with a £1000 bill.. nobody can explain how it happened. Scottish power cant get the readings from Yorkshire and the insolvency company only have a bill that they are chasing me for. 

I am past fuming.. £1000 for 4 months electric and gas! like i had a weed farm in my attic.. 

I've had very similar.  It's taken a while but I've just had confirmation from Scottish Power that they're reducing my bill by 60%.  I've got the email address for the top secret onshore customer support team who seem to be able to sensibly address a complaint.  If I can figure out how to, and my newbie status allows it, I'll PM it to you.

[leonardratso]

nay lad, weed farms in attic cost much less than that. Try zero for bypassed meters.

[wherebee]

Something for you lot to be aware of: Australian tax year ends June 30th.  There is often a dip in the Aussie stocks as retail investors sell underperformers to crystallise losses, to enable offsetting in the tax return.  

So - if you are watching any aussie stocks (for example miners or oilies) you might see a nudge down before they jump up again after the 30th.

As usual, DYOR, etc etc.

[Lightscribe]

6 hours ago, PrincessDrac said:

I'm underwater with Fres. I'll hold. Well got no choice.

My brother sank £150k in at £8.10 this afternoon. Ballsie or stupid. Guess at 4.30pm tomorrow we'll know.

Never thought I'd see Fres  in the low low 8's with silver where it is.

Volumes today were well up. II buying maybe?

 

I got in with my last tranche at £8.07. Think your bro has called it there. Miners are suffering all over, Harmony is back into ‘buy territory also.

Mr.Market is very confused at the moment. It has all this stimulus but at the same time, IR rate hike talks, reverse repo etc signal all is not well.

Were meant to be in the booming bounce back in the economy, (hence the PM and miner drop) but at the same time money doesn’t listen to politics and smells a rat.

[Lightscribe]

https://www.bloomberg.com/opinion/articles/2021-06-17/america-should-become-a-nation-of-renters

‘You will own nothing’ not even being subtle now. 
 

https://www.moneysavingexpert.com/news/2021/06/mortgage-rates-low-remortgage-check-save/

This is where IFA’s and Martin Lewis gets it so wrong. They advise on the here and now with no thought to the wider economic circumstances. He did the same when Iceland imploded and people were left trying to claw they’re money back. 

By advising people to fix for two years will land then smack bang into inflation territory in 2022/3 on SVR. The Fed have already signalled what they are going do FFS.

https://www.forexlive.com/news/!/us-dollar-jumps-after-fed-pulls-forward-forecasts-for-rate-hikes-20210616

He’s even got a small disclaimer for the ‘mortgage prisoner’ IO idiots, plenty more to add to that in a few years. We did try to help, but we’ve been a bit busy...

[nirvana]

DXY is at 92....there's an IR rise coming?

I knew the £ was fecked at 1.42 BUT i listened to some cunts on the internet 

and now it's at 1.38 

PS and Silver got fecked and I keep saying that's a load o shite too and like a knob I hold loads o that cac too, not having a good week 

[Barnsey]

I'm just going to throw this out there, but the more hawkish tone at the FOMC regarding tapering could well be the early stages of the much touted "policy mistake".

Trying to read the road here, but seems there's more inflation fears already kicking around than I would have expected at this early stage, and I can't help sense a degree of melancholy rather than jubilation about the recovery. Like the mother of all hangovers. I guess things weren't great prior to this saga, but throw China's diving credit impulse into the mix, with many commodities turning downwards, I think there's a very good chance we're now going to hit some kind of lull for a while.

All eyes on Jackson Hole in August now.

Thoughts?

[jamtomorrow]

9 minutes ago, Barnsey said:

I'm just going to throw this out there, but the more hawkish tone at the FOMC regarding tapering could well be the early stages of the much touted "policy mistake".

Trying to read the road here, but seems there's more inflation fears already kicking around than I would have expected at this early stage, and I can't help sense a degree of melancholy rather than jubilation about the recovery. Like the mother of all hangovers. I guess things weren't great prior to this saga, but throw China's diving credit impulse into the mix, with many commodities turning downwards, I think there's a very good chance we're now going to hit some kind of lull for a while.

All eyes on Jackson Hole in August now.

Thoughts?

Zoom out.

Markets are in a state of hair-trigger sensitivity where they'll sh*t the bed just because Jay Powell has his eggs different for breakfast that day. This is not normal, and it might mean we're close to the final divide-by-ZIRP.

It's important to consider whether there's even any point trying to figure out the exact mechanics of the final policy error.

It's like when a car fishtails out of control. It'll eventually veer beyond the driver's ability to correct and crash left or crash right, and the difference between left and right might well matter (e.g. ditch vs cliff).

You can be 99% sure the driver has "lost it", but your chances of calling "left" or "right" correctly are no better than 50/50, at least until the final move is locked in, but you won't know when that is either until it happens.

[ThoughtCriminal]

China credit impulse in more detail. 

 

Shit about to hit the fan? 

[Harley]

1 hour ago, nirvana said:

DXY is at 92....there's an IR rise coming?

I knew the £ was fecked at 1.42 BUT i listened to some cunts on the internet 

and now it's at 1.38 

PS and Silver got fecked and I keep saying that's a load o shite too and like a knob I hold loads o that cac too, not having a good week 

On the monthlies: Cable's bounced off long term resistance.  DXY looks like it could rise!  DYOR!

[Harley]

1 hour ago, Barnsey said:

......with many commodities turning downwards

Indeed.  The broad index is up but several components (e.g. the grains and industrial metals) look weak on the monthlies and the others often overbought.

[Majorpain]

10 hours ago, PrincessDrac said:

I'm underwater with Fres. I'll hold. Well got no choice.

My brother sank £150k in at £8.10 this afternoon. Ballsie or stupid. Guess at 4.30pm tomorrow we'll know.

Never thought I'd see Fres  in the low low 8's with silver where it is.

Volumes today were well up. II buying maybe?

It has been on a reasonable down trend for the while, if i was in his position i would rigidly put in place now some levels at which i would sell or not, there is nothing worse than watching it slide, panic selling, then it bounces up and starts a rising trend.  That sort of stuff depends on individual financial situation and other portfolio allocation, im PM heavy but have enough Oil and Telcos to comfortably survive if AU/AG go to zero.

[nirvana]

1 hour ago, Barnsey said:

Thoughts?

what the FED are doing has echoes of the Weimar Republic.......then all that inflation led to WW2

so in all probs WW3 incoming.....I think nato want to fuck with Belarus now

The world is truly fucked! Run away now before it's too late 

[DurhamBorn]

A lot of these people on Twitter etc are trying to guess where things are going in a few days or at longest months.Saying a reflation trade is over is ludicrous when the money supply is going up 50%.There will be severe pullbacks along the way,very severe maybe,but by 2028ish inflation trades will likely be the only areas to of delivered good returns.

Crypto will likely mostly be down 99%,bonds maybe 25% to 40% inflation adjusted,growth stocks,70% etc.

We are at the liquidity injection part of the cycle now.Soon we will enter the distribution part as incomes lose ground against prices and assets are slowly sold to consume.A long grind down in most assets prices.

 

[Harley]

59 minutes ago, jamtomorrow said:

Zoom out.

Markets are in a state of hair-trigger sensitivity where they'll sh*t the bed just because Jay Powell has his eggs different for breakfast that day. ......

Yep, too much yap a sign of nervousness.  I just look at the data, not listen to the noise.  This is a data business, not the effing X Factor!  I'm having a nice spring clean and just switching off the noise whether than be financial pundits, crooked media, polos, NLP type ads, etc.  I would say to listen to the birdsong but the effing pigeons have arrived!  It was the cows yesterday being entertained by the bullock!  The stock markets are not signalling a reversal to me just yet but have lost some momentum and I only found one thing (a Russian energy play) to buy this week.  Maybe some Hong Kong (even Japanese) stuff next week if they complete their corrections.  Longer term bonds (IBGL/IBTL, VGOV, GILS, etc) may be getting close to a bottom so I'm waiting for a clear buy signal (had one possible fake so far)!!!!   I'm more concerned with the loss of capital (by whatever means) at this point.  DYOR!

[nirvana]

5 minutes ago, DurhamBorn said:

Crypto will likely mostly be down 99%

nah the whole system is setting up for such a good feckin the only thing most plebs will be doing is using crypto on their mobiles to buy veg, chickens, moonshine and even the odd 'tramps leg' for sunday lunch......

black markets incoming on a massive scale! Tesco will be far too expensive.....watch this space! you have been warned!!! 

[Harley]

25 minutes ago, Majorpain said:

It has been on a reasonable down trend for the while, if i was in his position i would rigidly put in place now some levels at which i would sell or not, there is nothing worse than watching it slide, panic selling, then it bounces up and starts a rising trend.  That sort of stuff depends on individual financial situation and other portfolio allocation, im PM heavy but have enough Oil and Telcos to comfortably survive if AU/AG go to zero.

Still looks weak to me on the monthly although just about entered oversold (DYOR).  How long will it stay there (the longer the worse for price)?  Not a hard chart to read.  Only a 2.2% yield but a bit more weakness and it might get close to my 3% target which would make it hard to resist (st. my other checks)!  Just to make it macro - the PM miners are a bit bouncy atm but have the numbers on their side for the longer term.

[DurhamBorn]

 

4 minutes ago, nirvana said:

nah the whole system is setting up for such a good feckin the only thing most plebs will be doing is using crypto on their mobiles to buy veg, chickens, moonshine and even the odd 'tramps leg' for sunday lunch......

black markets incoming on a massive scale! Tesco will be far too expensive.....watch this space! you have been warned!!! 

So good for telco stock owners then ? 

[DurhamBorn]

10 minutes ago, Cattle Prod said:

The reaction is unbelieveable, people are way too zoomed in. Nothing has changed at the Fed action wise, they've bought more assets this week than ever, and said clearly they will continue to do so. Just words. Some committee members think there will be two rate rises in 2023, so what? Have people learned nothing about forecasts in the last year?! First big stock market correction, that is all off the table again. Fed has also acknowledged that inflation is not transitory after all, i.e. buy inflation stocks. But the reaction is to dump them because acknowledging this means the Fed is preparing to taper or raise rates. It's like Prof Ferguson and his crystal ball. For me, I watch what they do not what they say. When they taper purchases I will sit up and take notice. For now, they are still boxed in and the rest is noise. I bought a ton of GDXJ calls yesterday, thanks Jerome.

All that reverse repo liquidity will he handed to inflation ,thats what people are missing.There is no liquidity sloshing when oil goes over $120 as it will etc.Fed is re-setting fiat against real assets here so tax increase faster than spending.

[Harley]

13 minutes ago, DurhamBorn said:

Crypto will likely mostly be down 99%,bonds maybe 25% to 40% inflation adjusted,growth stocks,70% etc.

But nothing in a straight line.  I see bonds, etc having one more pop as a safe heaven trade and crypto (in its various forms) has value in terms of the financial flexibility it can offer in an age of regulatory repression (despite what they may try, a risk worth taking part of IMO).  The adoption in Asia is an eye opener.  The West is massively behind.  If goes crypto, honestly why not PMs?  Time to zero base all thoughts and opinions in case this time it's different (and it seems more so than ever after the countless false starts I've witnessed).  Inflation assets, defo, but I like to look far and wide too and then there's the transition from the current overall buoyant market to a bifurcated one we have to survive.  Inflation causing the time decay of money, a looming BK, etc - it's like we're all in the options market now!