OUT NOW - @RealJimChanos saw firsthand the excesses of the late 1990s telecom cycle.

He now estimates that unprofitable CapEx in AI cycle is even larger now & vulnerable to funding drying up.

Apple🔊shorturl.at/NaeRG
Spotify📽️shorturl.at/QaSv2

1/5 To be clear, Jim's point isn't just the nominal number of unprofitable CapEx being larger than late 1990s telecom boom (obviously true, numbers go up over time), but that *the percentage* of unprofitable spending is higher now too. This surprised me...

It surprised me for two reasons:
1) I thought of the dotcom bubble frivolous spending being from Pets.com and other no-revenue bubbles and

2) that the majority of the spend now in AI CapEx is from very profitable companies such as $MSFT $GOOGL $AMZN and $META.

I was wrong on 1) - as Jim taught me during this interview, the bulk of the spending from the late telecom boom of 1990s was from profitable corporate America - the Coca Colas, General Electrics, etc.- not dotcom stocks.

On 2) Jim is referring to the END CUSTOMER of the compute - namely OpenAI, Anthropic, and other VC-backed firms that are losing lots and lots of money. My statement of "AI CapEx is from very profitable companies" is technically correct but $MSFT $GOOGL and $AMZN are selling that compute to the unprofitable VC-backed firms.

2/5

We now have hard data showing major Japanese investors sold foreign bonds in size the week of tariff "Liberation Day."

But that's not the whole picture.

1/12
🧵 FT article this morning cited data showing that Japan's major investors were a net seller of $17.5 Billion Dollars worth of foreign fixed-income securities from March 30 to April 5.

A "substantial portion" was U.S. bonds (Treasurys/Agencys) per rates strategist.

2/12

Out now - @Citrini7's "Trump basket: is up 87% since inception.

Here's what he thinks will work (and what won't) in Trump's second term:

Apple 🔊 rb.gy/1427k2
Spotify 🔊 rb.gy/2mciep
YouTube 📽️rb.gy/hch614

1/8
🧵 Trump Market Neutral basket up 1 rom March 4 to November 8

Trump Market Neutral basket up 31% over same time horizon

2/8

Zion Bancorporation courageously acknowledging their models on how rising interest rates would boost their earnings were too optimistic.

$ZION willingness to "read the room" on higher-for-longer interest rate regimes has been rewarded with net interest margin expansion

1/10 Realizing they were hedged the wrong way, $ZION is taking their losses on (receive-fixed interest rate swaps) & replacing them w/ (pay-fixed swaps)

Another way of saying this - terminating hedges on variable rate loans, entering hedges on fixed-rate securities

2/10

Losses mount on some regional banks' derivative books

Interest rate hedges (receive fixed // pay floating swaps) on variable rate loans have steep losses as rates have risen

A few examples from today...

1/8
🧵 Regions Financial Corp $RF lost $82 Million in Q3 hedging its commercial & CRE loan book

Including this effect, loan yields on commercial & CRE went DOWN this quarter (!!)

As a result, yield on total earning assets budged up ONLY 2 bps (& net interest margin got crushed)

2/8

Veteran banker calling for "TARP 2.0" in Op-Ed to help banks with steep unrealized losses on their securities holdings

Proposal would lend up to $1 Trillion against securities that have lost value to Fed's "meteoric increase" in interest rates

1/5 It would be a "Trapped Asset Relief Program" instead of "Troubled Asset Relief Program."

Author wants U.S. gov to allow banks to borrow on a secured basis by pledging investment collateral & borrowing at the weighted average rate of that collateral.

h/t @TheBondFreak

2/5

Banks own substantially more duration (interest rate exposure) than meets the eye.

Their willingness to buy U.S. Treasurys could be lower than anticipated.

Quick thread 🧵

1/7 Nominally (blue line), U.S. commercial banks own as much agency mortgage-backed securities (MBS) now as they did in January 2021.

But the same holdings give roughly 3 times as much interest rate exposure, or duration.

2/7

It's truly stunning that in 2020, with rates near 0, many U.S. banks could buy an option to insure against an interest rate shock.

The cost of this option: 0.02% (!!)

A similar option for U.S. homeowners is now nearly 100x as expensive.

Here's how it worked: 🧵

(1/31) Most banks are members of the Federal Home Loan Bank (FHLB) system, a financing vehicle with the implicit guarantee of U.S. government.

Established in 1932 during Great Depression, the FHLB system allows member banks to borrow at near-market rates to meet liquidity needs
2/31

It's VERY rare for the yield curve to undergo prolonged bear-steepening while inverted.

The last time bond market saw meaningful "quadruple bear inverted steepening" was during early Volcker years of 1981 & 1980.

Tended to happen at or around a local top in yields.

1/8 Before I share methodology, a huge caveat:

This isn't a predictive model. Over past 18 months, far smarter & more experienced people than I have had sophisticated backtests incorrectly indicating bonds were a buy... I have no reason to believe this backtest will do any better

The banking system's "dash for cash" that began in March has *likely* stopped.

I went through Federal Home Loan Bank (FHLB) data and made 4 charts that indicate an easing of funding pressures on U.S. banks

🧵
(1/8) CHART #1:

After huge surge in March, FHLB net issuance of bonds has declined and even went *massively* negative in June.

This means FHLB no longer has to secure new net funding to make loans ("advances") to banks.

Net issuance = (total bond issuance) - (redemptions)
(2/8)

"Banks hedging their interest rate risk is actually very uncommon"

- @StevenKelly49

Looking forward to interviewing Steven about this a few days before the banks report earnings 👀 note: a fuller quote would be "hedging their interest rate risk WITH SWAPS"

assumptions about deposit beta, loan volumes, prepayment speeds and many other things are often much more important than swaps

Out now- Michael Howell @crossbordercap on:

- Fed's toolkit has created "stealth liquidity"

- Rebound in liquidity cycle supports new bull market

- Quantitative easing (QE) is "coming back, big time"

Apple 🔊
Spotify 🔊https://t.co/MpVWp6Bqwm
📈🧵1/n https://t.co/MFEyd26ujNrb.gy/9curl
rb.gy/vncw8
Michael's measure of Fed liquidity (red line) bottomed in October 2022, and he argues this has been supporting the stock market (NASDAQ in orange)...

YouTube

2/ https://t.co/dTCuC4m9TQrb.gy/tei0m

Yet more evidence that regional banks failed to hedge for the surge in interest rates

<$50B banks trading swaps w/ GSIBs would've tanked their NIM... esp when mortgages prepaying 40%

Natty hedge is lagged deposit costs... working out for some, for others, not so much
(1/6)

https://twitter.com/ForwardGuidance/status/1668646800780083200

Cinch quote right here.

From my 3 month crash course in banking, I think deposit beta, lifetime of non-maturity deposits, and the change in assumptions about these two variables, are often of greater weight than swaps...

https://twitter.com/ForwardGuidance/status/1668646804685037568

(2/6)

Just out - former Dallas Fed Pres Robert Kaplan on:

- Fed won't cut anytime soon
- Is a "hawkish pause" incoming?
- banks "not as well capitalized as Fed thought"
- why he defied Fed's easy money promise in Sep 2020 ("Jay was not pleased")

rb.gy/k5tc0

(1/4) - fiscal stimulus is offsetting tight monetary policy, meaning "higher for longer" is the law of the land

- held-to-maturity is an "accounting fiction hiding in plain sight" that bank regulators "tolerated"

Spotify rb.gy/c0i8i
YouTube rb.gy/iln1r

(2/4)

Out now- Eric Crittenden, trend-following whiz on:

- How his fund has beat the S&P 500 since inception
- How AI overpromises & under-delivers for investors
- Short oil, long stocks, long gold

Apple rb.gy/ku7x7
Spotify rb.gy/dh9jw This is his fund which has outperformed the S&P 500 since inception in January 2020

Significant less volatility, too

His "secret" is very simple... going to have to watch it to find out how 😃

Stay tuned for episode w/ former Dallas Fed President Robert Kaplan airs today

Out now- @FedGuy12 & @EtraAlex on:

- Odds of June Fed hike
- Mechanics of Treasury basis trade
- Do global flows support equity melt-up?
- $Trillion of Treasury issuance could impair liquidity
- ^Unless RRP drain is immaculate (Joseph opines)

rb.gy/s34ci
(1/6) A few notes...

RRP = reverse repo, an (effective) deposit facility for institutional investors to park money with the Fed

^it's not actually deposit facility as it is collateralized repurchase agreements

Spotify 🔊 rb.gy/21lim

(2/6)

Just aired- my interview w/ @michaelxpettis on:

- the end of China's "economic miracle"

- the collapse of Chinese real estate prices

- if China fails to boost consumption, Japan-style economic decline awaits them

Apple 🔊 rb.gy/fp6fr

Quick thread 🧵 I'll share a few thoughts below but before I do, I want to give a big thank you to @vaneck_us for helping make interviews like this one available to all.

Check out their yield and bond tools here 👇 vaneck.com/ForwardGuidance

VanEck is a paid sponsor of Forward Guidance.

The world as @DiMartinoBooth sees it:

- Bank failures NOT systemic
- Recession will get "very ugly"
- No rate cuts coming anytime soon
- The Fed won't save regional banks
- Powell will refuse to bail out private equity

My latest interview👇
rb.gy/olmwj Danielle's thesis is that Powell will not rest until the "Fed Put" is dead.

In her view, Powell will not back down to monied interest or bow to the Fed staff who took him down the "transitory" path to hell.

Spotify rb.gy/ogy1p
YouTube rb.gy/cetma

Did $FRC's debt & preferred equity just get "bagel"-ed? 🥯🥯🥯

JPMorgan Chase will NOT be assuming $FRC's debt or preferred stock.

This is unlike its acquisition of Bear Stearns in 2008, where $JPM fully assumed Bear's preferred stock
1/4 First Republic preferred stock trading at a $0.28 cents in pre-market. This is just over "1 cent on the dollar" as par of $25.00 is typical for preferred instruments.

Don't know abt debt.
More details on 8:30 ET $JPM call I'm sure.

$JPM release:
rb.gy/igkjb
2/4

The Fed's report today on Silicon Valley Bank reveals that it made (at least) three giant mistakes in managing its interest rate risk.

A quick thread 🧵
1/4 Giant Mistake #1: Silicon Valley Bank (SVB) started to take OFF its interest rate hedges in March 2022.

The exact same month when Fed started raising interest rates. From Zero.

Unfortunate timing, to say the least...
2/4

Regarding headline "First Republic Faces Potential Curb on Borrowing From Fed":

It's worth reading what the law actually says about limitations on availability to the discount window based on capital requirements:

(1/3) As of March 31, $FRC is using the discount window ($16.3B) a lot more than BTFP ($2.3B).

Source of ^^screentshot: 12 CFR 201
Extensions of Credit by Federal Reserve Banks ecfr.gov/current/title-…
(2/3)