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Alf

@MacroAlf

20 Dec

What's going on in USD/TRY?

Erdogan just promised to refund all mark-to-market losses in xxx/TRY if those losses would exceed the interest rate you can gain by owning deposits denominated in TRY.

If you believe him, you now have free carry in TRY/xxx without P&L risks.

1/4

FX carry trades (once upon a time, TRY was considered as an FX-carry candidate) work well if the interest rate differential is more than enough to offset the MtM and volatility across FX pairs throughout the lifetime of the trade.

Recently, that didn't work well...

2/4

A 10%+ yearly interest rate differential between TRY and any other ''funding'' currency like EUR or JPY was not enough to compensate even for a week of MtM losses and volatility.

Erdogan now promises to fund all your MtM losses and let you eat the pie (the carry).
How?

3/4

Read 4 tweets

Alf

@MacroAlf

19 Dec

Tapering and quantitative tightening will be prominent topics in 2022, so I feel we need a reminder here

Central banks DON'T print money

QE simply forces the private sector to swap away duration intensive, coupon bearing bonds for 0 duration, 0 yielding deposits/reserves

1/9

Central Banks expand their balance sheet by creating reserves and buy bonds from the private sector.

The private sector now has less bonds and more reserves.
That's it, just a swap.

No ''money'' has been created.
Yeh, but what if the CB buys from another entity?

2/9

Same story, one difference

Pension funds and asset managers can't hold reserves, so they now have new bank deposits

Those are still inert, 0 duration, likely 0 yielding assets that don't find their way to the real economy

They find their way in M2 though, be careful...

3/9

Read 9 tweets

Alf

@MacroAlf

17 Dec

The support I've received here on FinTwit since I came back has been huge: thank you!

I also got quite a lot of requests to share tips that helped my career to progress quickly.

Here you go!

0/7

#1: Use mentors.

Select them carefully.
They've been there before you.
They know the game, listen to them.

#2: Be curious.

If your job is just your job, it will be hard to excel.
If you are curious and eager to learn every day, you are already 10 steps ahead.

Read 8 tweets

Alf

@MacroAlf

15 Dec

As promised, here is the bond market 101 thread!

Answering the top 10 questions I received in a previous tweet, here we go!

1/10

Question #1: ''Why is 10yr not going up with Fed about to finish QE/star hiking/inflation printing high?''

A: 10y yields are roughly the sum of 10y real rates, 10y CPI expectations and term premium. When the Fed tightens, the medium/long-end of the bond market extrapolates lower nominal growth going forward (= lower rates) and more certainty about this outcome (= lower term premium)

Read 22 tweets

Alf

@MacroAlf

14 Dec

Plenty of people are calling for an imminent stock market crash, but they are missing a key point: inflation-adjusted interest rates are still way below the estimated equilibrium levels!

Why does that matter?

1/11

Real yields are very relevant for savers, investors, borrowers and asset class valuations: it's not only the absolute level that matters though, but also the relative level against the equilibrium real interest rate (r*).

A low absolute risk-free real interest rate matters as:

1) It punishes savers and investors by rewarding very little (or even inflicting negative returns) on savings and risk-free investments

Read 11 tweets

Alf

@MacroAlf

10 Dec

Over the last few years, I had sometimes the chance to meet and talk with very high level decision makers - sometimes even PMs and Central Banks’ board members!

Here is a couple of fun episodes.

1/5

Once I had dinner with the former Prime Minister of a G10 country.

We were half drunk, and I asked him why his country was not investing in financial literacy, education and other long-term easy wins. His answer?

2/5

“Young man, I have to get re-elected in few years, and the benefits of those reforms would be huge but I won’t be there to reap the political benefits. So we’d rather do some short-term unproductive but easy-to-market stimulus to get some votes”.

Incentive schemes are vital

3/5

Read 5 tweets

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