That's your easy way to think about what operations are (at least short-term) inflationary and which ones are asset price inflationary only.
Inside money never reaches the real economy.
Real-economy money does.
1/10
If the govt spends money it does not plan to collect taxes for, real-economy money has been created
A bank making a new loan literally credits your account out of nowhere (banks don't lend deposits or reserves)
This is real-economy, potentially inflationary money creation
2/10
Can you see how this might be short-term inflationary? Expansion of credit or net govt spending boosts aggregate demand temporarily.
Ceteris paribus and with a lag, this pushes prices up 2020/21 is a prime example: massive credit creation + supply bottlenecks = inflation
3/10
Real-economy money in the form of credit reaches the economy boosting aggregate demand.
Now let's talk QE.
QE only creates inside money.
The CB changes the composition of institutions' asset side: from say 50 bonds, 0 ''cash'' to say 20 bonds and 80 cash equivalent.
4/10
The CB creates reserves on the liabilities' side to match their bond buying on the asset side.
The private sector gets an asset swap: more zero duration inside money (reserves), less bonds.
Somebody MUST own these reserves.
NO, banks can't lend these reserves.
5/10
The idea of money velocity assumes that sooner or later those reserves will be lent out.
So ''velocity is now dropping'' and sooner or later it will increase.
The reserves simply CANNOT be lent out.
Banks create new money when lending, they don't use existing reserves.
6/10
Having zero or 1 quadrillion reserves is basically irrelevant for bank lending decisions.
Reserves are used to settle interbank payments and can be exchanged within the interbank system, but can never reach the outside world.
They are inside money.
7/10
Obviously, QE suppresses volatility and generates a constant bid for risk-free assets. And it also forcefully changes the composition of portfolios towards more zero-duration, zero-yielding assets.
This might encourage investors to increase their appetite for risky assets.
8/10
When risk-free real interest rates are negative and there is very little volatility + left-hand tails are cut short by CB intervention, the ''virtuous'' cycle of risky asset prices going up feeds itself.
While US mid-term elections draw quite a lot of attention, market commentators often overlook one of the most relevant political events: the Chinese Politburo meeting.
In Oct/Nov 2022, the CCP Politburo will hold its 20th National Party Congress.
A short thread.
1/6
To Xi or not to Xi?
Chinese officials are generally asked to retire when they reach 65-68y of age - this rule is often applied for some but not for others, and for sure Xi will not be upheld by this.
But there are other relevant CCP members who could be influenced.
2/6
Assuming we get another 5y of Xi, how will he handle the inevitable real GDP per capita slowdown China is and will be facing?
Even if you are China, you can't fight demographics: labor supply growth will turn negative (!) in this decade and real GDP growth converge to 3%
The most important thread of mine in 2021: the 5 must-follow food laws in Naples (mostly applicable throughout Italy).
I am from a small town close to the Amalfi Coast, where GDP per capita is $20k/year and youth unemployment rate is >30% but we know how to make a pizza!
1/6
Rule #1
NO cappuccino or any other types of coffee containing milk after 11am (the strictest Italians would say this is not allowed after 9am).
Milk after 11am is for kids, and adults are allowed to drink it in any format only early in the morning.
Later?
Just. Don't.
Rule #2
Pizza is not crispy, not crunchy, not <1mm thin
The proper Neapolitan pizza has a fluffy & airy outside crust, it gets thinner towards the center and it melts in your mouth
Looks different than what I described?
Then it's NOT Neapolitan pizza
One of the great privileges I had while running a large portfolio was to be able to network with super smart people in the industry.
Here are the most compelling quotes from the real, big risk takers out there - hedge fund PMs, big market makers, very large and active funds
1/5
Friend and successful PM at a top-tier HF, clocking in $25m P&L/year
“Alf, I don’t have a crystal ball. It’s all about risk management: I approach every trade as if I’ll lose money. I ask myself how much money I am willing to lose on the trade, and size accordingly.”
2/5
One of the biggest market makers in fixed income out there
“Every morning my alarm goes off, and my display asks me how much am I into consensus trades? When the dance floor gets crowded and the exit door is small, it’s very tough to get out if there is a fire…”
3/5
A shoutout thread for the best FinTwit people out there - those are all nice, and highly valuable accounts to follow.
No pr*cks allowed on this list.
I will miss many for sure, feel free to shoutout for your preferred global macro accounts!
0/11
First mention to my friend @AndreasSteno. A truly awesome guy, who is well versed at global macro and can change his mind as facts change (very rare!).
We all miss him, but a bird told me we won’t have to wait long!
1/11
A smaller but fantastic account is @dampedspring. I recently had a chat with him on @RealVision and it confirmed what I already knew: he has a solid framework, he can elaborate very well and he is honest with his P&L as he managed real money and knows the game.