1/9

Eric asks a reasonable question: what should be done about a future stock market slump? Specifically, should the Fed buy stocks?

🧵

tl:dr

* The legal process for the Fed buying stocks means the Treasury actually owns them, the Fed finances it by extending loans to buy the stocks.

* Trump will love this idea, as he wants a Sovereign Wealth Fund, and now has the Government holding several US companies. We suspect he will probably want these stocks as permanent government holdings, up to 20% of the stock market ($16n trillion of stocks).

* This would balloon the Fed's balance sheet to $25 trillion (from $6.7 trillion now).

* What would be the reaction to the balance sheet ballooning to $25 trillion? Bullish as that means massive buying of stocks? Bearish as the market fears another inflation spurt, and accompanied interest rate rise? Remember, 2022 inflation hit 9%, interest rates soared and the S&P 500 fell 25%.

* We think the Fed buying of 2008 and 2020 worked to "save" markets as deflation was the bigger concern than inflation. But now with elevated inflation (as in the last 6 years), anything that looks inflationary would be received badly by financial markets.

All these bullet points are detailed below.

https://x.com/biancoresearch/status/2074510947289358577

2/9

First, Eric is correct in his comment about the stock market:
--
The stock market increasingly functions as America’s de facto retirement system, with roughly 58% of Americans now owning stocks — a figure that could approach 70% as Trump Accounts add millions of investors. As equities become more central to household wealth, voter behavior, and financial stability, the political and economic cost of a prolonged bear market has rarely been higher.
---
He also goes on to say:
---
One could even argue it has become more important than Social Security, which is on track to exhaust its trust fund reserves within the next decade.

1/5

Yesterday, AI-related stocks hit a high as a percentage of the S&P 500.

The AI influence on the stock market has never been larger.
🧵 2/5

What are the AI-Stocks?

I use the list that J.P. Morgan's Michael Cemblast made last fall.

Here is a table with its details.

1/4

Yesterday I posted the thread below arguing that the market is repricing an inflation shock, not a recession scare.

10-year yields are rising, bond volatility is exploding, inflation expectations are jumping, and Fed pricing has swung from cuts toward hikes.

Follow up 🧵

https://twitter.com/biancoresearch/status/2035438163079119347

2/4

The immediate pushback is familiar: this “supply shock” will hurt real growth, so the Fed should cut rates.

This well-known economist has been making exactly that argument.

1/6

Ten seafarers have now been killed in 13 attacks on merchant vessels since the Iran conflict erupted on February 28 — more than the 7 U.S. servicemen killed in the war.

The focal point is shifting: can the Strait of Hormuz be reopened? Is the Administration pivoting to that mission?

Every day without a visible path to reopening, the market will price in more risk.

x.com/MikeSchuler/st…

@johnkonrad @mercoglianos 2/6

The problem: the Administration APPEARS to not be taking the Strait threat seriously. The contradiction is stark:

- Trump to tanker captains: "These ships should go through the Strait of Hormuz and show some guts, there's nothing to be afraid of..."

- The U.S. Navy, citing risk of attacks as "too high," says it is unable to provide escorts — despite near-daily requests from the shipping industry.

WTF!

x.com/foxandfriends/…
x.com/FreightWaves/s…

1/5

A 10% increase in energy prices that persists for a year would push global inflation up by 40 basis points and slow economic growth by 0.1-0.2%, International Monetary Fund Managing Director Kristalina Georgieva said.

So, what price measures "persists for a year?"

🧵 2/5

As the table below shows, crude oil futures prices for delivery into 2027 are trading in extreme backwardation.

1/4

I fear this is spot on.

@CryptoNobler's thread unpacks $BTC's "synthetic supply" problem. ETFs, structured notes (@CryptoHayes), futures, options, swaps, lending—all flood the system with "paper" BTC.

When it swamps real demand, price crashes.

x.com/CryptoNobler/s… x.com/coinbureau/sta… 2/4

@CryptoHayes: structured notes on $IBIT flooded $BTC with synthetic supply → forced liquidations turbocharged the dump.

Next rally? TradFi piles into ETFs → Wall Street "prints" more synthetics.

Price discovery decoupled from on-chain.

Volatility on steroids

1/6

10% of the outstanding $BTC is held by $MSTR and the 11 Spot BTC ETFs.

These are the ways normies hold $BTC in regulated brokerage accounts.

Collectively, the avg purchase price is $85.36K, meaning the average is now ~$8k underwater, with an unrealized loss of ~$7B.
🧵 2/6

The 11 biggest spot $BTC ETFs now hold 1.29M $BTC – worth over $115B (Friday PM).

These ETFs hold roughly 6.5% of all $BTC in circulation.

The 3 largest – iShares’ $IBIT (blue), Fidelity’s $FBTC (red), and Grayscale’s $GBTC (orange) – hold 5.65%.

1/11

What is Housing?

Affordable shelter or path to retirement?

It cannot be both.

We tried to make it both in the early 2000s and almost wrecked the financial system.

🧵 2/11

The average home price is $417K (above), an all-time high.

This means around 43% of a median household income (~$84K) goes to housing.

For the last three years, this has been comparable to the (unsustainable) housing peak in 2006.

1/5

Thoughts on market reaction to the Venezuela news.

tl:dr

The spigot in Venezuela waiting to be opened to flood the world with crude oil and lower its price has been broken for a while.

It will take several years to fix it. 2/5

Venezuela is a founding member of OPEC their official statistics show its production (blue) is down 71% from its 1998 peak.

Its sustainable capacity (max output in within 90 days and held for a year) is 1M barrels/day (orange).

Venezuela is at its maximum now.

1/7

This analysis concludes by saying "something is seriously wrong with the housing market."

Not based on this chart.

tl:dr - New home sizes are falling to account for this spread falling below zero. Adjust for that, and there is nothing to see here.

Short 🧵

https://twitter.com/KobeissiLetter/status/1994064962486935795

2/7

Same chart with prices in the top panel.

It is correct that the new home premium (green) above existing home prices (blue) has collapsed from 38% in 2013 to below zero today (the lowest in 54 years).

Why?

See new home prices (orange), they stalled.

1/8

Following @deanbaker and @ezraklein ...

Homeowners will not tolerate a "fix" that will lower prices. So, nothing will get done about affordability.
=
What is housing?

* Affordable shelter?
* Piggy bank that funds retirement?

Both cannot be true at the same time.

https://twitter.com/DeanBaker13/status/1993007225007440376

2/8

For the 50 years following WWII (box), home price gains kept pace with inflation ("real" prices), making housing affordable.

Starting in the late 90s, housing went into wild boom-bust cycles.

This is when housing started to be viewed as a piggy bank to fund retirement.

1/4

I assume Marks is referring to the 1-year forward P/E ratio for the S&P 500, the standard Wall Street valuation metric (which is closer to 25 now, but was 23 a few weeks ago).

Here is a long-term proxy for that ... the Shiller Cyclically Adjusted Price/Earnings (CAPE) ratio back to 1881. It is a 10-year average of P/E/ ratios.

At 40, it is one of the highest readings ever, even higher than 1929.

https://x.com/biancoresearch/status/1989722276007215467

2/4

What does it mean that valuations are this high?

The scatter graph below goes back to 1881.

It shows the NEXT (future) 1-year REAL (after inflation) return of the stock market on the y-axis.

The CAPE on the x-axis.

The red box is the returns when the CAPE is above 34. It's a mixed bag of positive and negative returns.
Restated, valuation is NOT a good timing tool.

1/6

The preliminary November University of Michigan Consumer Sentiment Survey was released this morning (blue). The "current conditions" measure of this survey set a new ALL-TIME LOW.

Before 2020 (COVID), the stock market (red) was the primary driver of the public's economic outlook. These two series moved up and down together. Since COVID, this relationship has completely disconnected.

This leads to some uncomfortable explanations.

Half of the country owns no assets and lives paycheck to paycheck. Have they now moved to being angry at a booming stock market that worsens inequality? Is this why socialists are getting elected? Do they want their agenda to knock the market down? Is a bear market now the goal, not the concern? 2/6

Why the anger?

Since the COVID recession ended in April 2020, cumulative price increases (orange) have outpaced cumulative wage increases (blue).

This devastates the bottom 50% of wage earners (and especially the bottom 30%) who own no assets and live paycheck-to-paycheck. They are having to do with less.

1/13

🧵on the stresses in the funding markets, why they are happening, and what it means. Be sure to see the last two posts (12 and 13).

Funding rates are rising relative to the Federal Reserve's administered rates (bottom panel arrow).

This signals stress in funding markets. 2/13

Another signal of stress is that the Fed's Standing Repo Facility (SRF) is getting used regularly, a new record on Friday.

If money is too expensive, banks can borrow from the Fed at 4.00%.

Note that only 40 banks are counterparties, no broker/dealers, no hedge funds. Limited

1/5

JP Morgan has identified 41 AI-related stocks, 8% of the S&P 500. These stocks now account for 47% of the Index's market capitalization, a new record.

The other 459 stocks, 92% of the S&P 500, are 53% of the Index's market capitalization. 2/5

The list of the AI-related stocks

1/5

Over the weekend I posted the thread below noting that liquidity was getting “worrisome.”

On Thursday, SOFR was 4.30%, for a spread over IOR of 12 bps (the widest such spread since March 2020, not shown).

(All this is explained in the reposted thread.)

https://twitter.com/biancoresearch/status/1979601309910106137

2/5

This morning Friday’s SOFR was reported at 4.18%, down 12 bps. (SOFR is reported every morning for the previous day.)

So, is the liquidity problem now over? Not exactly.

Here is a version of the last above, but it only shows the last 6 months, and the SOFR/IOR spread in the bottom panel is daily (not a moving average).

1/6

Are Banks Having a Liquidity Problem?

tl:dr, Liquidity in the plumbing of the financial system is getting scarce. It is not a crisis now, but it has been moving in this direction for weeks, and it is now at a worrisome point.

When the financial plumbing gets stressed, it is when bad loans (aka "cockroaches") get noticed.

(long thread, tried to write it so "normies" can follow.)
---

Wall Street is famous for diagnosing symptoms, not causes. I believe they are doing this again with the banking issues of the last few days., I do not think this is a "cockroach" problem (bad credit/loans) waiting to get disclosed publicly.

It is a liquidity problem that makes the "cockroaches" matter.

Banks (all 4,000+) hand out a trillion in loans. So, they will always have "cockroaches." So, it is not an issue of whether cockroaches exist; they always do. Instead, it is the environment in which such disclosures are made. Does the market care or not?

Now it cares. Why?

---

@NickTimiraos said below:

How to define "temporary" and "modest." Repo rates in the last two days have moved up to the top of the fed-funds range and around 10 bps above IORB, but it's only been two days.

---

I would argue it has not "only" been two days; worsening liquidity in the funding market has been unfolding for weeks. It just got noticed in the last two days.

This chart shows Secured Overnight Financing Rate, or SOFR (orange), and Interest on Reserves, or IOR (blue). The bottom panel shows the spread between these two, along with some metrics (dashed line = average, shaded area = standard deviation range).

See the arrow; this spread (3-day average, so it is less noisy) has been tightening for weeks. This spread moved to positive territory in early September and has remained there for weeks. The last time it was positive for this long was in March 2020 (not shown). 2/6

A positive spread is typical around month- and quarter-end "window dressing," when financial institutions need to report their positions and want to show conservative cash positions. Now it has been weeks, and it is in the middle of the month.

This chart shows that liquidity has been worsening for weeks. It was two days ago that it finally got noticed.

But note that Jay Powell noticed it, because in his speech to the NABE Conference three days ago:

Some signs have begun to emerge that liquidity conditions are gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates.

SOFR replaced Libor (London InterBank Offer Rate) two years ago; it is the rate charged in the funding markets (that is, financial institutions that need cash and will borrow to get iInterbank Offer Rate) two years ago; it is the rate charged in the funding markets (that is, financial institutions that need cash and will borrow to get it) for overnight loans collateralized by Treasury Bills) on overnight loans collateralized by Treasury Bill ("Secured"). So these loans carry no credit risk. They are compared to the IOR rate, which is the interest rate the Federal Reserve pays banks on their reserve balances. This means that the spread between SOFR and IOR is purely driven by supply and demand. SOFR comprises three components.

* General Collateral repo Loans
* Tri-party repo (biggest part)
* Fixed Income Clearing Corporation (FICC) cleared bilateral repo

As the bottom panel shows, the SOFR market is now $3 trillion of overnight loans a day. It has doubled in the last two years.

The SOFR market has never been bigger (strong demand), and spreads are moving higher (insufficient supply).

1/4

JP Morgan has identified 41 "AI-Related" stocks.

As this chart shows, they are now 45% of the S&P 500. 2/4

A list of the stocks

1/6

Recessions and financial crises can have a profound and lasting impact on an economy for years to come.

We had both in 2020. This changed the economy.

Change does not mean worse or dystopian. It means different. This economy differs from 2019 (pre-COVID).
🧵

https://twitter.com/BobEUnlimited/status/1962171277403210013

2/6

Following every recession, the tenor of inflation shifts.

The current post-COVID recovery, as shown in blue, indicates inflation has reached a significantly higher level, with more volatility (wider standard deviation) than during the post-financial crisis period.

1/8

In this post about rising inflation, some replies suggest that housing prices are falling, which will help hold down inflation.

The problem is that most metrics are saying home prices are booming to all-time highs. This is why we have an "affordability" crisis.

🧵

https://twitter.com/biancoresearch/status/1962143909208879456

2/8

Case-Shiller National Home Price Index.

All-time high.

Home prices have been 🚀 for years.

The problem is not mortgage rates, it's inventory (not enough).

Cut rates and home sellers raise prices, and monthly payments remain unchanged. The affordability problem remains. Greedy boomer homeowners get richer.

How to fix affordability?

Reduce zoning and building regulations to increase inventory. The problem is that selfish boomer homeowners wield these laws to restrict supply and drive up the price of their homes. The Atlanta Federal Reserve calculates a Housing Affordability Monitor.

The median income in the United States (blue) and the income needed to qualify for a mortgage (detailed below the chart). The bottom panel shows the difference.

At 58%, this means one needs 58% more than the median income ($ 83k) to qualify for a median mortgage ($ 130k).

This is a new record, even greater than the peak before the housing crash from 2007 to 2009.

Home prices are too high. Cutting mortgage rates will only incentivize home sellers to increase their asking prices, and the problem persists.

We need more supply, that is what the record "unaffordability" is saying..