Commodities are exploding higher.

Is the Fed losing control and credibility?

Thread.

1/ Over the last two weeks, commodities are absolutely ripping.

This is especially true for precious metals, but also copper or iron ore are trading well.

Volatility-adjusted moves between 1 and 3 (!) standard deviations higher: a big, fat rally!

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The Fed hiked rates above 5%, and yet the US economy doesn't break.

Here is why.

Thread.

1/ High interest rates are supposed to break something because an overly indebted economy will have to service a mountain of debt at expensive rates and it will have less money for income and spending.

The problem is that people are looking at the ''wrong'' debt.

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The yield curve is displaying a rare and dangerous pattern which often threatens financial stability.

All you need to know about the Bear Steepening.

Thread.

1/ There is a rare and powerful trend occurring in bond markets: the yield curve is bear steepening.

History shows that if left unchecked, it can cause serious damage to equity markets and the economy.

What's a bear steepening?

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Here is how the US is preparing to unleash even more liquidity.

Thread.

1/ The key player in this monetary plumbing operation won't be Powell and the Federal Reserve.

But rather Secretary Yellen and the US Treasury department!

How?

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Liquidity is going up, liquidity is going down, liquidity here, liquidity there.

Sure: but what is ''liquidity''?

Thread.

1/ ''Liquidity'' is the most abused word in macro and markets.

People use it to justify every market move, and yet they never explain what it ACTUALLY is.

And you often see misleading charts like this:

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The Fed tells markets they are tightening policy.
Yet Liquidity is up $500 billion in the last year.

We are witnessing a QT Sterilization.

Thread.

1/ The Fed has been running QT for a while and yet there is still abundant liquidity in the financial system.

Fed’s bond holdings are down $1.4 trillion from their peak, yet bank reserves (aka ‘’liquidity’’) are UP since June 2022 when QT started.

What?!?

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The Chinese economy has never looked more fragile than today.

Here is what's happening, and why it matters for global markets.

Thread.

1/ How did we even get here?

China joined the WTO in the early 2000s and benefitted from a wider access to global markets where they could leverage their internal competitiveness (read: low salaries) to gain shares – and they did.

But the inevitable demographics decline...

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The Bank of Japan just raised interest rates for the first time in 17 years.

Here are the implications for global markets.

1/ The Bank of Japan decided to raise interest rates by (a meagre yet still historical) 10 basis points.

The short-term policy range in Japan is now +0.00% to +0.10%.

Governor Ueda is highlighting why in his press conference, and this is what emerges so far:

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Do you feel like the way we are running our economy and financial system is unsustainable?

Then you should read this.

Thread: What's the macro end game?

1/ We often talk about what markets are going to do next month.

This obsession about short-term market performance puts investors at great risk of missing the forest for the trees.

Let's talk about where do we stand in the big macro picture, and what's the end game.

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Hear, hear: the bond market has three important messages for you.

Thread.

1/ One of the best ways to get important signals from the bond market is to look under the hood.

Instead of focusing on absolute yields, disentangling market-implied probabilities for several scenarios can be very informative.

2/

7 books that will fast-track your learning journey in global macro.

Thread.

1/ Let's start from monetary mechanics: if you don't understand money, you are going to have a hard time connecting the dots in global macro.

Pragmatic Capitalism from @cullenroche concisely goes through the different forms of money in an understandable way.

Must read.

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Fiscal Deficits + QE is one of the most powerful monetary combinations in the world.

You are going to see it more often over the next decade.

Here is how it impacts markets and the economy:

1/ Fiscal deficits are historically outsized.

In real terms, the US is spending the same amount of $ that it used to spend to fight the Great Financial Crisis.

Even though we clearly aren't in one.

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What's going on with the US job market?

Thread.

1/ On the surface, today's Non-Farm Payroll report produced another friendly outcome for the Fed and markets.

- 223k private sector jobs created
- Only 0.1% MoM wage growth
- Downward revisions to what seemed to be a super hot January

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Japan matters a great deal for global bond markets.

Here is why you should pay attention.

1/ Japanese investors are amongst the biggest capital exporters in the world: over the last decades, they have become large buyers of US Treasuries, European fixed income and other foreign bond markets.

They own $1+ trillion in Treasuries only.

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A primer on how a Central Bank balance sheet works.

Thread.

1/ We often hear about QE, QT, money printing, and similar concepts.

To fully understand these, it's important to go back to the basics.

Here is how the balance sheet of a Central Bank (Fed in this example) works.

I highlighted the most important items in blu and red.

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Here are the 5 largest economies in the world where things might break first.

1/ All countries in the world have followed the Fed hiking cycle pretty much in locksteps, and they're now imitating the Fed's higher-for-longer pause too.

But what's the issue with that?

2/

What's the fair value of Bitcoin?

Here is a valuation framework for crypto as a macro asset class.

1/ From a market perspective, so far Bitcoin exhibited two features:

- It does well when the Fed is very accommodative despite nominal growth picking up (2021)

- But it also trades somehow as a risk asset when poliy is tightened (2022)

Gold on steroids?

2/

Bloomberg is out with a story covering the yield curve.

In particular, they discuss how the popular curve steepening trade has NOT played out.

What's going on with the yield curve?

1/ A ''steepening'' of the yield curve can happen in two ways:

- Bull steepening (more common)
- Bear steepening (less common)

Bull steepening = lower yields, steeper curve.
Bear steepening = higher yields, steeper curve.

Very different regimes!

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The Fed has kept rates above 5% for quarters now, and yet the US economy fails to materially weaken.

Bond markets are back at pricing higher-for-longer.

What if: ''this time is different''?

1/ The most useful way to gauge signal from bond market pricing is to look at probabilities and scenarios.

Using option markets, we can derive what probabilities bond traders are attaching to certain outcomes and get important information.

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All they told you about money printing is wrong.

Thread.

1/ ''Central Banks print money and cause inflation''.
''The US must pay back its debt or it it will go broke''.

Mainstream media and universities have predicated such theories for decades.

But this is NOT how our monetary system works.

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A mysterious bond market concept could soon become a crucial point of discussion for the Fed and markets.

It's the equilibrium interest rate (r*).
How does it work, and why does it matter?

1/ The “natural” rate of interest, or r-star (r*), is the inflation-adjusted interest rate that is consistent with full use of economic resources and steady inflation.

R* is not observable, but it can be estimated with models.

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