1/It's the weekend, macro review, and time to post Reverse Repo making ATH last week and there will be wailing and gnashing of teeth across #fintwit over this rather uninteresting phenomenon so a 🧵on why it is so high.
2/Fed Balance Sheet Assets: prior to GFC this was <$1T and reflected NY Fed OMO to maintain Fed Funds, then Bernanke lost his mind IMO and started QE. The balance sheet grew from $946B to $4.5T ~8Yrs. We👀paint dry as the balance sheet shrank $700B until August 2019.
3/We had a bad cold/flu season in 2020, lost our collective minds, shut the economy down, and the Fed expanded the balance more using QE in the next 2 years than it did in 8 years following GFC.
4/Congress and Treasury doing Trump/Biden's bidding made drunken sailors blush with their spending thanks to flu season 2020.
5/Where did the Congress🤡get the 💵? They borrowed it of course issuing nearly $7T the past 2 years.
6/Who bought all those bills/notes/bonds? Banks! Bank Credit - Securities up 51% in 2 years.
7/Note Bank Credit Securities didn't rise as much as US sovereign debt levels. Why? J. Powell et all buying UST's in the secondary market. Fed balance sheet Treasury holdings more than doubled the past 2 years.
8/So the Fed buys some of the UST's banks are buying from Treasury. What happens to the federal government's proceeds from all those UST sales? They put it in their Treasury General Account (TGA) at the NY Fed where it balloons to $1.8T at the peak. This is not at a BANK.
9/The TGA declines from its peak then rapidly declines in spring 2021, why? Gimme that stimmie! $1,400, $600, etc times millions of recipients. What do the recipients do with it? Buy stuff, deposit it, pay debt, etc. ALL of which goes into BANKS whose reserves start to explode.
10/Refer back to item 2/ where I mentioned pre GFC the Fed conducted monetary policy via Open Market Operations, who remembers that? QE and OMO aren't compatible so the Fed needed a new system to maintain Fed Funds. One of which is the offer rate on Reverse Repo Transactions!
11/Which finally brings us to the almighty NY Fed Reverse REPO weekly ATH chart at $2.57T - hide the women and children.
12/For some perspective we'll overlay the Reverse REPO balance and TGA with a dashed line at a key inflection point.
13/So banks have all these excess reserves. It must be because the stingy bastards are getting a great deal from the Fed and not lending, right? right? Here's the eyewatering rate earned in a Reverse REPO transaction the past 2 years.
14/Refer back to mentioning using the offer rate on Reverse REPO to maintain Fed Funds Rate absent OMO. This is Fed Funds upper bound and Overnight REPO rate.
15/Back to the stingy bastards at the bank not lending. Bank Credit has been printing ATH since the end of cold and flu season.
•Bank Credit Total
•Bank Credit: Real Estate
•Bank Credit: Consumer
16/C'mon there's gotta be a nefarious reason this Reverse REPO balance is so high. Here is every interest rate I am aware of that matters in one tidy package, thank you @TheTerminal For reference I've highlighted TBill rates, note them in relation to RRP.
17/This is a very crude oversimplification of why Reverse REPO's are still printing ATH. The Fed is conducting as little QT as possible for what I think may be sound reasons. It will increase in September and I expect Reverse REPO may fall.
18/If you follow @Fullcarry@LongTplexTrader@LONGCONVEXITY@EffMktHype@FedGuy12 and other experts in this field (and if you are not, you are doing it wrong) you will understand this better than me. I hope they will criticize and highlight what I've missed so we all get better.
19/My apologies for bursting any Fed conspiracy bubbles. Do not despair the Fed is up to other interesting potentially very nefarious things that matter more than RRP such as Project Hamilton and Central Bank Liquidity Swaps.
Bring the heat, I can take it.
Soft Landing🧵: Ton of comments about landings. As a veteran of many 'hard' landings I try to think about this in objective terms I could potentially trade.
2/What is a quantifiable measure of a soft landing? Mine is that the PCE Core YoY trends to 2% and the FOMC can reduce short rates toward the estimate of the natural rate of interest without NBER declaring a recession. Graphically.
3/Regarding the current estimate of the natural rate of interest, the mythical R* I think a good estimate is Richmond Fed noted as the yellow dashed line with EFFR and 2Yr Yields.
The chain of arrogant incompetence.
•SVB's Becker is on the Board of the SF Fed
•Mary Daly is President of SF Fed
•Ms. Daly attends FOMC meetings in 2022, non-voter
•SVB stops hedging against higher rates in 2022
•SVB Texas Hedges lower rates
HTF does this happen?
The Fed claims they are going to investigate how SVB failed and the lapse in oversight. They will likely throw FDIC under the bus when they should be perp walking the DEI staffed SF Fed into the bay. And of course we get the bill for this in lower rates from our banks.
#GoWokeGoBroke may or may not have happened at SVB, but it damn sure happened @sffed
Headline Macro Notes:
Interest rate expectations pricing in slightly more than 25bps in February and slightly less in March. Translation: 25bps each at the next 2 meetings, pause.
After a brief respite this week all major UST coupon yields are <Fed Funds effective.
Yield curve inversion flattening and 3M/10Y deeper than 100bps.
Zoltan is on the street. It is wwaayyy long with some thought provoking points in the initial 6 pages. Will make Luke Gromen scream plagiarism.
Personal thought/bias: : Medvedev's propaganda thread and Zoltan's latest have too much overlap for coincidence. Either Medvedev's staff got Zoltan early or this is coordinated.
Is what Xi proposed in Saudi Arabia that Zoltan breaks down in the 1st portion possible? Yes. That someone who served in the USN in that region and studies/trades markets for living types that is cause enough for concern.
Treasury Tuesday Notes:
•Wholesale Inventories est +.4%
•FHFA Home Price est -.8%
•S&P Case Shiller
•Dallas Fed Mfg Index est -15👀
🌽Export Inspections
•3M TBill $54B
•6M TBill $45B
•52Wk TBill $34B
•2Yr TNote $42B
Treasury auctioning/refunding $175B today in a thin holiday market. The chart on 2Yr Treasury Futures looks weak this morning. Could be an interesting day.