Thread by @gamesblazer06

You always can spot the weak hands with $TLT & $DXY ... it’s been like clock work. Any back up is a buying opportunity.. stuff never goes up or down in a straight line. People love to hate both.

Going all the way back to Late 2017...the intelligentsia was actually embarrassingly short $DXY & $TLT

The rationale?

1) Huge Deficits
2) QT & “Taper Supply”

Literally the two catalysts that made for a long face ripping rally.

So here’s a question if you hate $DXY & $TLT....even if Fed conducts $100 Trillion in Fed Repo by year end... How many incremental $DXY “Deposits” would be created as a result? Another question gives a clue.. will $XLF balance sheets expand, contract or stay flat with LCRs?

$XLF balance sheets & LCRs will not inflate.. u r just trading Collateral for $DXY reserves already on Dealer b/s..unlike QE QT & Reverse Repo that’s majority done with Non Banks, MMFs & GSEs ... hence...inflate or deflate Bank Balance sheets with Reserves & $DXY Deposits..

Fed Repo is theoretically just improving the quality of HQLA...with a higher $DXY coefficient but not the overall HQLA.. Collateral & Cash are basically both Level 1 Assets.. so GSIB b/s gets re liquified 4 LCR/RLAP purposes but don’t expand (key 4 $DXY to go to Zero)...

The Fed does a Command & Control top down $DXY liquidity jam job but money doesn’t flow through the Pipes coz of GSIB gross collateral calculations in Triparty...are tapped out at netted Sponsored FICC & reduce Sheet.. so $DXY reserves don’t flow & flatten in the system..

Then u r left with QE (Fed Buys Bills) which DOES create incremental Reserves AND Deposits in the $DXY system.. inflates Bank Balance Sheets & is $DXY kryptonite in a sense... but then as Bills richen to Fed RRP... all that $DXY kryptonite is Drained right out of $XLF Sheets.

Buying Bills would have at least fake Steepened the Curve for Banks but RRP is like a hole in the $DXY liquidity bucket the Fed was trying to fill on a top down basis...

So leaves Fed 10 year+ & $TLT purchases that expands Reserves & Deposits.. this then Crashes Curve & Inverts.

If Fed buys $TLT & Coupons...& expands LCRs, Bank Balance Sheets.. this should theoretically crush $DXY if the Fed goes back to $4.5T+ of Fed Balance Sheet (knee jerk sell $DXY myopia).. but in a #LateCycle environment.. Re Inverting Curve causes -Ve Carry again w tons of $DXY...

-Ve Carry 4 Banks causes them to lose money/pull back lending & balance sheet capacity....this again... creates a -Ve #Deflationary Doom Loop for growth at already Peak Debt. $DXY still highest yielding global currency.. & globe rushes to $TLT as a safe haven amplifying downside.

So what’s the Fed to do to get $DXY flowing top down & not right back out of system which is Problem 1 prior to Problem 2 which is Flattening of Reserves in system? They slash IOER to ZIRP to close the Bill/RRP arbitrage for MMFs GSEs & Foreign CBs that will drain $DXY further...

So even fixing Problem 1 will now Bull Steepen the Curve as Front End collapses with IOER...but Bank Balance Sheets are ~75% levered to LIBOR, PRIME & other floating indices that will kill “Asset Sensitivity” further.. NII gets crushed & Banks again stop lending at Peak..

Fixing Problem 2 of flattening reserves in $XLF system entails loosing Regs... but GSIB Surcharge, LCR, RLAP & 2020 SCB loosening AFTER Yield Curve Inversion v dangerous & reduces Bank safety at very worst time (increases Fed risk of looking dumb.. why wait 10 yrs at wrong time?)

What if Inverted Yield Curves are by chance right? Ironic cause they were 7/7 = 1 right & preceded all previous recessions.. Fed gonna loosen Capital Requirements & risk 10 years of systemic safety now???? Cost of not is some Regional Dealers go belly up w Hedgies? Why do I care?

These No Name Dealers & Hedgies at Sponsored FICC are infecting the Banking System in the first place.. & Sponsored FICC is an end around of the Spirit of GSIB Surcharges in the 1st place that looks at longs + shorts correctly.. unlike Sponsored that’s netted & big time risky.

The System is supposed to be Bail In able with Total Loss Absorbing Capital (TLAC) Bank Bonds & supposedly over capitalized in the first place.. so why not let chips fall where they may.. & let free market capitalism actually work.. instead of this Perpetual $DXY printing sham...

Perpetual QE has not led to real inflation for last 10 years ie wages with productivity with this game plan.. so doubling down only will make it worse.. u MAY (doubt it) get short lived Asset Inflation but that’s also $DXY & $TLT friendly.. coz of TVM basis of $SPY valuation..

What the Fed is doing isn’t capitalism.. it’s putting price controls on the cost of capital & subsidizing profligate binge public spending & solving for public crowding out... & in the process artificially crowding in buybacks.. u can’t cut share-count 2 sustained prosperity.