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Jim Bianco Profile picture
@biancoresearch
Sep 15, 2021 • 6 tweets • 3 min read • Read on X
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A thread about transitory vs persistent inflation and why persistent might be actually be winning.

This comes from @economics And it breaks down CPI by reopening and non-reopening components.
Of the 5.25% inflation rate in the last year, only 1.62% was reopening components.

1/6
Breaking it down for August we find that reopening CPI components (or transitory inflation) FELL by 0.22% while CPI non-reopening components (or persistent inflation) ROSE by 0.35%

2/6
Detailing this we find that CPI non-reopening (persistent) components are surging to its highest monthly level since at least 2016.

Restated, this series of persistent inflation is trending higher, and is 78% of overall CPI.

3/6
The CPI reopening components (transitory) fell by the most since the lockdown.

Restated, this series of transitory inflation is falling and is just 14% of overall CPI.

4/6
So, why are the CPI reopening components falling? Is the Delta variant hurting the economy and sapping demand?

Consider these two charts.

Airline ticket prices collapsed by 9% annualized in August. Why? Because demand is also collapsing as measured by the TSA?

5/6
In sum transitory components are falling and their demand is off as Delta is hurting economic activity.

Meanwhile persistent inflation components are surging higher and higher.

Is this why stocks turnaround today? Weakening demand and higher inflation squeezing margins?

6/6

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More from @biancoresearch

Jim Bianco Profile picture
Oct 28
1/5
JP Morgan has identified 41 AI-related stocks, 8% of the S&P 500. These stocks now account for 47% of the Index's market capitalization, a new record.

The other 459 stocks, 92% of the S&P 500, are 53% of the Index's market capitalization. Image
2/5
The list of the AI-related stocks Image
3/5
ChatGPT was released on November 29, 2022.

Since this date, these 41 stocks have accounted for 74% of the S&P 500's total increase (blue). The other 25% came from the remaining 459 stocks (orange). Image
Read 5 tweets
Jim Bianco Profile picture
Oct 20
1/5
Over the weekend I posted the thread below noting that liquidity was getting “worrisome.”

On Thursday, SOFR was 4.30%, for a spread over IOR of 12 bps (the widest such spread since March 2020, not shown).

(All this is explained in the reposted thread.)
2/5
This morning Friday’s SOFR was reported at 4.18%, down 12 bps. (SOFR is reported every morning for the previous day.)

So, is the liquidity problem now over? Not exactly.

Here is a version of the last above, but it only shows the last 6 months, and the SOFR/IOR spread in the bottom panel is daily (not a moving average).Image
3/5
See the average in the first (repost) chart above, the SOFR/IOR averaged -8 bps back to 2022. See the chart immediately above, the SOFR/IOR averaged -5 bps.

A “normal” liquidity environment is one where the SOFR/IOR spread is around -8 to -5 bps. See the last five or six weeks, lots of “green bars” (positive SOFR/IOR spread). With some “red bars” interspersed in between. In Wall Street parlance, this spread “random walks” so look to the larger trend, not day to day movements.

What the larger trend shows is this measure of liquidity is still “worrisome.” Not a crisis, but worrisome. And note that over the last few months trend is moving toward larger green bars.
Read 5 tweets
Jim Bianco Profile picture
Oct 18
1/6
Are Banks Having a Liquidity Problem?

tl:dr, Liquidity in the plumbing of the financial system is getting scarce. It is not a crisis now, but it has been moving in this direction for weeks, and it is now at a worrisome point.

When the financial plumbing gets stressed, it is when bad loans (aka "cockroaches") get noticed.

(long thread, tried to write it so "normies" can follow.)
---

Wall Street is famous for diagnosing symptoms, not causes. I believe they are doing this again with the banking issues of the last few days., I do not think this is a "cockroach" problem (bad credit/loans) waiting to get disclosed publicly.

It is a liquidity problem that makes the "cockroaches" matter.

Banks (all 4,000+) hand out a trillion in loans. So, they will always have "cockroaches." So, it is not an issue of whether cockroaches exist; they always do. Instead, it is the environment in which such disclosures are made. Does the market care or not?

Now it cares. Why?

---

@NickTimiraos said below:

How to define "temporary" and "modest." Repo rates in the last two days have moved up to the top of the fed-funds range and around 10 bps above IORB, but it's only been two days.

---

I would argue it has not "only" been two days; worsening liquidity in the funding market has been unfolding for weeks. It just got noticed in the last two days.

This chart shows Secured Overnight Financing Rate, or SOFR (orange), and Interest on Reserves, or IOR (blue). The bottom panel shows the spread between these two, along with some metrics (dashed line = average, shaded area = standard deviation range).

See the arrow; this spread (3-day average, so it is less noisy) has been tightening for weeks. This spread moved to positive territory in early September and has remained there for weeks. The last time it was positive for this long was in March 2020 (not shown).Image
2/6
A positive spread is typical around month- and quarter-end "window dressing," when financial institutions need to report their positions and want to show conservative cash positions. Now it has been weeks, and it is in the middle of the month.

This chart shows that liquidity has been worsening for weeks. It was two days ago that it finally got noticed.

But note that Jay Powell noticed it, because in his speech to the NABE Conference three days ago:

Some signs have begun to emerge that liquidity conditions are gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates.

SOFR replaced Libor (London InterBank Offer Rate) two years ago; it is the rate charged in the funding markets (that is, financial institutions that need cash and will borrow to get iInterbank Offer Rate) two years ago; it is the rate charged in the funding markets (that is, financial institutions that need cash and will borrow to get it) for overnight loans collateralized by Treasury Bills) on overnight loans collateralized by Treasury Bill ("Secured"). So these loans carry no credit risk. They are compared to the IOR rate, which is the interest rate the Federal Reserve pays banks on their reserve balances. This means that the spread between SOFR and IOR is purely driven by supply and demand. SOFR comprises three components.

* General Collateral repo Loans
* Tri-party repo (biggest part)
* Fixed Income Clearing Corporation (FICC) cleared bilateral repo

As the bottom panel shows, the SOFR market is now $3 trillion of overnight loans a day. It has doubled in the last two years.

The SOFR market has never been bigger (strong demand), and spreads are moving higher (insufficient supply).Image
3/6
In a normal SOFR market, when the balance between supply/demand is maintained, SOFR loans should trade at a slight discount to IOR rates (see the average and standard deviation range in the bottom panel of the spread chart in the first post). This is because IOR should act as a ceiling on money rates. Banks will not lend out below the IOR rate. Why should they when parking money (reserves) at the Fed offers a better rate?

In a normal market, non-bank (broker/dealers, money market funds, and Government-Sponsored Enterprises, or GSEs, etc.) with money to lend, who cannot park it at the Fed to get IOR rates, will offer it at slightly lower than the IOR rate to anyone that needs cash (to settle trades, needs to put up margin on derivatives, or money for other transactions). They will offer a better deal than IOR, so they do not have to compete with banks for interest on their cash.

Typically, eight basis points below IOR will do it (as the bottom panel shows in the first post), which is the same spread Dallas Fed President Lorie Logan noted in Timiroas' tweet above. Note that before the Dallas Fed, Logan ran the NY Fed Open Market Desk.)

In other words, a negative spread indicates that funding markets are "liquid" and functioning normally. Conversely, an uptrend in the SOFR/IOR spread, which tips to a positive spread, indicates that the supply of cash (aka liquidity) is falling behind the demand for money. So the price (rate) is rising relative to the IOR benchmark.

Restated, liquidity in the plumbing of the financial system is getting scarce. It is not a crisis now, but it has been moving in this direction for weeks, and it is now at a worrisome point.

Remember, financial institutions are highly leveraged; these seemingly little moves can have a significant impact on the P&L and capital ratios.

Why Now?

Why is this happening now? And why should we believe the uptrend in SOFR/IOR will not stop its two-month uptrend?

The answer to the first question is Quantitative Tightening (QT). This is the Fed pulling out liquidity since 2022 by reducing its balance sheet.Image
Read 6 tweets
Jim Bianco Profile picture
Oct 6
1/4
JP Morgan has identified 41 "AI-Related" stocks.

As this chart shows, they are now 45% of the S&P 500. Image
2/4
A list of the stocks Image
3/4
ChatGPT was released on November 29, 2022.

Since this date, these 41 stocks have accounted for 70% of the increase in the S&P 500's value (blue). The other 30% came from the remaining 359 stocks (orange) Image
Read 5 tweets
Jim Bianco Profile picture
Sep 1
1/6
Recessions and financial crises can have a profound and lasting impact on an economy for years to come.

We had both in 2020. This changed the economy.

Change does not mean worse or dystopian. It means different. This economy differs from 2019 (pre-COVID).
🧵
2/6
Following every recession, the tenor of inflation shifts.

The current post-COVID recovery, as shown in blue, indicates inflation has reached a significantly higher level, with more volatility (wider standard deviation) than during the post-financial crisis period. Image
3/6
Something more may be at play, as larger trends in inflation seem to have shifted with the COVID pandemic. Image
Read 6 tweets
Jim Bianco Profile picture
Aug 31
1/8
In this post about rising inflation, some replies suggest that housing prices are falling, which will help hold down inflation.

The problem is that most metrics are saying home prices are booming to all-time highs. This is why we have an "affordability" crisis.

🧵
2/8
Case-Shiller National Home Price Index.

All-time high. Image
3/8
Median home price

Seasonally adjusted, all-time high Image
Read 8 tweets

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