fejau Profile picture
Sep 5, 2022 14 tweets 3 min read Twitter logo Read on Twitter
We're about to experience a sovereign debt crisis caused by the Europe energy crisis, all a capstone on the 100 year fiat expirement.

Here's how I think the next 6-8 months go down: Image
Putin strongarms Europe by shutting off Energy pipelines, causing a spike in prices.

This causes energy prices to skyrocket in Europe which is a major component of CPI - This causes inflation to explode higher
As CPI explodes higher, electricity prices get passed onto consumers. Eventually, at the risk of civil unrest/revolution over refusal to pay this, Euro government has two options:

1. Give into Putin and let him have Ukraine and stop the sanctions to get energy flowing again
2. Decide to deploy price caps on energy for consumers and print the difference. To achieve this I believe ECB needs to instill yield curve control to keep sovereign bond yields in tact and avoid fragmentation of EU sovereign bonds.
The game theory I've ascribed to this makes me think that the West is too far deep into this mess to give into Putin and would rather print the difference. The saying goes no government ever willingly went broke through austerity. They will always resort to printing
Printing the difference through YCC is going to cause DXY to explode higher because 58% of DXY is the Euro. DXY to $150 dollar milkshake theory type shit.
This dollar wrecking ball will cause emerging markets to begin potentially defaulting on their debt, forcing them to sell their US bonds to buy US dollars to defend their currencies.
As EM's sell US bonds to amass dollars to defend their currencies, US bond yields will explode higher causing systemic risks in US markets as everything is priced off US treasuries. Something will break.
The Fed then has two options to fix this which I believe they will explore both.

1. Swap lines with ECB and BOJ (they launched a standing swap line facility in July 2021 to make this easy.
This allows them to easily lend dollars via central bank reserves to these central banks which will help bring down DXY and stabilize sovereign FX markets.
They can then also use their new standing repo facility to provide overnight loans to stabilize funding/treasury markets on short duration bonds.

(they're making sure the NY fed staff knows how to do this)
The usage of this swap line facility and repo facility is net stimulative and will cause DXY to come down and markets to stabilize (though I believe everything will be nuking during this time as correlations go to 1 as insties unload risk to get their VaR's in line)
In conclusion, I think we're at the end of a major sovereign bond bubble and this energy crisis is the catalyst. The Fed will be forced to stimulate or risk full implosion of the monetary system.

What will be unique about this time Oil will still be going higher, not lower.
As the game theory plays out, our goal is to find the optimal moment to long the fuck out of our favourite crypto ponzis. I see many takes from people who think QE is never coming again but it will, just under other names. Get ready to max long after this coming flush.

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More from @fejau_inc

Mar 14
Let me tell you a story about the man with 750k uninsured deposits at his bank

You have 1m in a bank - that means 750k is uninsured, 250k insured

ur in a good bank but u look and ur like:
"damn, im only getting 1% bank yield at this bank and im exposing 750k to possible loss. i think my bank is fine but who knows. plus, i could take that 750k out and go to treasury direct and earn 5% in t bills instead of 1%, plus i would no longer have any sort of risk!"
"well shit that sounds like a pretty good deal doesnt it?
i should withdraw my money even though my bank is probably good. i forgot about fdic insurance but now im remembering how much i have exposed

i could earn more yield and be safe in treasuries"
Read 7 tweets
Mar 10
Mmk fine time for a thread on my thoughts of SVB and this banking crisis as a whole and where the potential landmines lie and what matters.
so i definitely put this in the category of "the fed will keeping hiking until something breaks" camp.

if it does properly break here this fits the bill of something that forces the fed to ease, the question being what does that easing look like
Issue rn is rate risk on unrealized losses which are being turned into realized losses because of a bank run forcing banks to sell their treasuries and realizing the mtm losses on that book. Unrealized losses on bonds are fine when u hold to maturity and only get bad if u sell
Read 11 tweets
Jan 23
Analyzing the current Debt Ceiling debacle and its impact on liquidity over the next few months - a thread from my recent report at @ReflexivityRes Image
Congress holds the power of setting a limit on the amount of National Debt that the government can have.

When the Debt hits the ceiling, Treasury shifts into using extraordinary measures to ensure that it can remain solvent since it can no longer issue new debt.
These extraordinary measures are the following: Image
Read 10 tweets
Oct 21, 2022
USD Central bank swap lines are the wrong tool for the ongoing global currency crises that are emerging and shows how the Fed is once again fighting the last war, not the emerging one.

A thread and thought experiment!
First, what are swap lines?

When a foreign central bank draws on its swap line with the Fed, the foreign central bank sells a specified amount of its currency to the fed in exchange for USD. The Fed holds the foreign currency in an account at the foreign central bank.
At the same time, the Fed and the foreign central bank enter into a BINDING agreement for a 2nd transaction that obligates the foreign central bank to buy back its currency on a specified future date.
Read 13 tweets
Aug 3, 2022
I see a lot of CT looking at the yield curve inversion and trying to figure out what's next.

Markets don't tank when we're inverted, it's the re-steepening of the curve as fed cuts while markets tank that does it.

A thread on possibilities below:

(2y-10y YC vs SPX below)
Yield curve inversions normalize through two ways:

- 2y yield (defacto current fed positioning) comes lower due to the fed either pivoting or cutting rates

- 10y yield goes higher back above the 2y yield (long duration bonds get bid during recession and growth fears).
So we have two options:

- the recession is coming fast and it will caused the fed to pivot (2y yields is rallying this week off fed members trying to dampen any pivot talk)

- recession fears abait alongside QT focused on selling bonds in long end re-steepen the long end
Read 7 tweets

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