changegonnacome

Indeed…not sure exactly like the 70’s but we are in a new paradigm as Howard Mark’s et al have said. SPY heading back to ~4100 post a banking crisis and weakening economic & company earnings that continue to disappoint....…………looks to me like a Pavlovian response…..one where bad news, is good news for equities…..the Greenspan, Bernanke, Yellen, Powell ‘put’ are in the rearview mirror….it was beautiful run for holders of long duration risk assets…….the ‘game’, as I’ve said over many pages, has subtlety changed…….buy great companies, at fair prices as always…..but this is market that punishes investing mistakes & missteps more cruelly than it has in the past where a rising tide lifted all equity evaluations. Cutting rates & doing QE in response to every financial and real economy stumble used to be an asymmetric trade for policymakers……….now it has to be balanced with an inflationary backdrop with all the negative societal issues that brings with it……equity valuations have lost a tailwind for sure, some more negative would argue they have headwind…….to be clear so you don’t have me confused as saying sell it all, go to cash panic monger …..I’m advocating for elevating your due diligence process….investing in things with more certainty attached, not less…..at prices that leave a larger margin of safety than you are used to. That is all.

True - risk weighting on US Gov debt securities is basically 0%....fair enough the carry works......but the agency mortgage stuff has a 20% RWA carry......still pretty capital light to support.....but enough for single digit bps...i doubt it https://capitalmarkets.fanniemae.com/mortgage-backed-securities#:~:text=In addition%2C Fannie Mae MBS,of very high credit quality.

That was my question - the wording above seems to pertain to broad Fed & certainly FHLB program collateral ......if the same terms are extended to the BTFP program (and given I find no reference to it being otherwise anywhere)....then its as was mentioned above a maybe 0.2% negative carry that provides a lot of liquidity support to banks.

True - and this was my kinda my point....I think about this banking kerfufle in terms of its economic impact not really interested in bank profitability per se...I think of cash in the banking system relative to its propensity at the margins to turn into credit which then turns into nominal spending/income in the real economy....or less interestingly its propensity to go into agency/sovereign securities to earn a spread which can influence the supply/demand in those markets, affecting pricing/rates, which in turn can affect the real economy (housing/gov deficits)......so totally agree here.....this is not 'true' cash.....and represents a kind of shell game where MTM losses on securities & liquidity issues at certain banks get to go away for a time........it's temporarily turning water into wine and a neat trick.......and where behind closed doors I'm sure the Fed & Treasury officials fantasize about conquering inflation and the latitude it would give them to cut rates & by extension shrink the MTM losses on the banks securities portfolios allowing them to lighten up on some of their duration mistakes. I should have been clearer....I have an economists disease which is thinking too much at the margins & in opportunity cost......its a destroyer of NIM's relative to a theoretical incremental retail deposit flow (when they were available!) that is/was happy to accept 0.2%....and where that deposit had multiple optionaility for a bank to earn a reasonable spread....-2pbs relative to that scenario is order of magnitudes worse & a destroyer of NIM's But is -2bps margin you outlined a kind of rose tinted scenario? Maybe just check my logic here. Now I know money is fungible so following a single $ inside a bank kind of ignores how a bank can manage/substitute its liabilities/assets across its book- but simplistically: >2021 -Brad deposits $100 in RegionBankCo @ 0.0% interest........RegionBankCo buys $100 agency mortgage @ 3% coupon.....NIM....+3%...Nice >2023 - Brad is gonna pull his $100 if he doesn't get 2.5% at RegionBankCo, RegionBankCo caves in pays him 2.5%.......NIM drops to - +0.5%....not bad, not great > However - RegionBankCo is having liquidity issues as depositors leave...... > securities portfolio is underwater on MTM basis selling them for a loss is not an option as it would destroy tangible book.....new deposits are scarce, expensive & difficult to secure.....BTFP program is the only option......Brad's $100 deposit, that went into an agency mortgage at 3% gets sent to BTFP as collateral for a cash loan....now my understanding in a normal collateral lending scenario is the 'new' owner of security (BTFP) collects the 3% coupon (is this the case with BTFP?????)......you've collected $100 par value on the security, paying BTFP 4.85% for the privilege to get your hands on that $100 cash you need, which you get to turn around and put on deposit with the Fed at 4.83%.....so -0.2% NIM bad but not to bad.......but the 3% coupon payment now goes to BTFP.........the ONLY problem is............ your still paying Brad 2.5% for the $100 he gave you in 2021 that flowed into an agency mortgage.......in aggregate across the journey of that $100...... thats a -2.7% NIM....which is just terrible. (Caveat of course is the above is a unique scenario and is clearly a bank under duress to solve for short term liquidity issues......given breathing space.....RegionBankCo starts marketing 3M 6M CD's paying 4.5% & wins incremental deposit flows........pulls back collateral from BTFP and gets to fight another day!)

Exactly to the extent extra incremental ‘cash’ is entering the banking system from FHLB & BTFP programs……this isn’t normal cash either…..it’s cash that’s being drawn down as a liquidity comfort blanket…..it’s a destroyer of NIM’s……cash under BTFP of course needs to be exchanged back for securities pledged in a years time…..put another way it isn’t cash that is turning into credit any time soon. Im sure somebody will do it……but this chart needs an overlay which is cash assets ex-FHLB & BTFP.

Plus at an even more macro level the Fed is rolling off the balance sheet......bonds are rolling off, cash is being given to the Fed at par and they are incinerating the cash they receive........the contestable market for money that can go on deposit (cheaply/cost effectively) is shrinking....inside that equation folks are choosing to send money into MM funds further shrinking the contestable market...the marginal dollar for deposit has just got crazy expensive to 'win'.........FHLB & BTFP programs 'fix' short term liquidity issues but I see folks confuse them with old style QE.......to extent it's technically like QE......its an upside down version......that actually cripples bank profitability.......reduce their appetite to lend......and all things being equal when they do lend a dollar it increases the loan interest rate they demand and the credit quality/collateral quality they demand.

You can guess from my posting pattern Long Portfolio: BFIT (5%) HSW (30%) LBTYK (10%) GLV (15%) BIRG (15%) MSGE (5%) Cash (20%) Various bearish puts/calls....& the theme of selling vol. in an at best range bound market type thing Gross market exposure on MTM basis on any day probably peaks at like ~90%.........my preferred exposure is 112.5% when the wind is at my back ala 2010's but especially in 2020/2021 period......last year and this year is not one of those periods IMO hence the exposure/leverage is reigned in....time will tell if I've left money on the table.

The lack of capital required by some modern businesses leads to overall sustainably higher corp. profits.....this plus the nature of winner takes most software verticals.....means i think higher percentages are here to stay to a certain extent but perhaps not this high........the only way they fall IMO is that certain 'winner take all' business models get identified as such and get broken apart by anti-trust or I think overall Federal taxation will increase on a specific grouping of US mega-cap tech companies which if not broken apart will find themselves in some special taxation bucket.....a little bit like BEPS projects attempted to target only large revenue groups for a minimum global corporate tax rate........so think FANGMA in a US taxation terms..

There is simply no way to solve a too much money problem chasing too few goods/services problem…..by creating more money. Nominal spending growth needs to drop significantly……..there is no benign ( & realistic*) way to do that without raising unemployment & creating something akin to a recession. No pain, no gain I’m afraid…..but like busting your gut at the gym….future you will thank you……..the same way future COBF will thank JP for just getting the US back to price stability & a slow moving predictable interest rate environment… * Unrealistic ways are opening immigration flood gates, a productivity miracle driven by I dunno free government sponsored childcare….or sweetheart tax credits for boomers to come back to the workforce. My personal & unrealistic favorite is some type of glitzy national savings scheme…that makes saving deeply attractive versus spending.

Been kicking around the recent banking debacle in the context of inflation & the mark-to-market losses sitting on bank balance sheets…..which are being saved to a certain extent, if liquidity is required, by the BFTP program….which notably has a year long lifespan attached to it….now I don’t want to impute too much meaning in that timeframe….they set it up fast and nothing like this can last forever so an end date needed to be provided. But when you think now of the vast quantum of economic participants (banks, CRE, government itself) that really really really need rates to go back down to get back to par or trim losses on their balance sheets or maintain themselves as a going concern ….it’s immense…..however to get rates back down (responsibly), you need to tackle inflation and to conquer inflation it’s unfortunately clear you need to inflict some economic pain……mark to market losses only become real losses if one is forced to transact….. You put all this together from Powell’s perspective…..and you think about how he’s mentally preparing himself for the worsening economy to come…..and steeling himself in the knowledge that inflation is the thief of the poor and he’s doing the right thing….he can now also add to that pros & cons list…....that’s it’s clear that so much of the US economic & financial system has become dependent on low rates (in the case of some banks even for their very solvency). Getting the economy sustainably and permanently back to 2…such that Fed funds can be low also….has both a moral (helping poor people) & practical imperative (so much of the US economies balance sheet is hooked on & dependent low rates). My expectation then is that this SVIB debacle has actually strengthened Powell’s resolve later this year to hold the line in the face of economic weakness..…..perversely the SVIB debacle has raised the stakes in conquering inflation…….the banking system, commercial real estate holders, VC’s, the very Federal government itself…..desperately need a return to lower rates that are sustainably low! The price of in-action…is terribly high….to lose control of the long end of the curve (if long run inflation expectations were to become unanchored is so unbelievably dangerous to various balance sheets it would make the current mark to market losses/mini-bank crisis look like a joke). Put it all in the pot…..and JP should and will I believe be unbelievably & surprisingly resolute in not cutting as unemployment climbs into the 5’s and SPY heads to the low 3000’s….until he’s certain the inflation dragon is slayed…..a deep but short lived recession is the most optimal long term solution to our immediate inflation problem….but also the problem of a world that’s filled up with assets purchased at 3.x% FCF yields….you want to destroy families & institutions balance sheets….run inflation at 3.5%….and half ass-dly try to fix inflation by running Fed Funds at 3.75%…and watch what 10/30yr treasury starts to do…to mortgage rates etc.……it’s a one way ticket to destroying the long term mark to market balance sheet of American households, banks etc. The optimal solution….is indeed to get back to as close as possible to ZIRP (knowing that isn’t realistic of course) but we need to get as close as we can back to it…..doing so will require a journey through the valley of death for the economy…..but the greater good is optimized by that journey….I used to say it needed to be done to help the lowest decile of American’s by income and that’s still true…….to that list I can now confidently add Stevie Schwarzman & Blackstone, First Republic, Brookfield, Vornado, Sequoia, the broad US banking system that the Fed forced into treasury’s as a result of Dodd-Frank, the very Treasury & Josephine from accounts that bought a condo in Fort Lauderdale in late 2021 @ 90% LTV but now HAS to sell and move back to Boston …..you get my point. I don’t think we get back to ZIRP let me be clear…..but we need to get as close as we can….a whole bunch of stakeholders need it….the collateral damage will be the economy (briefly) and those forced to transact assets inside the valley of death!

Interesting then to consider that if Powell/Fed fails to address inflation in a meaningful way in a reasonable timeframe as per current inflation expectations....…..the long end of the curve would be forced to incorporate higher expectations….and things would get worse for the banks balance sheets....significantly worse....another reason perhaps why Powell et al will act with fortitude on rates in the face of weakening economic data later this year.........to fail to address inflation in this tightening cycle........would be to lose control of the long end of the curve but specifically the 10yr........turning a mini mark-to-market banking crisis like we have now into something much much worse......

Interesting take and I think you could be right on that - supply chains and near shoring dont happen over night.......and against those, maybe to come, inflationary forces will be ChatGPT-esque disinflation.....interesting times for sure!

I think the great divergence....in this cycle defined by inflation....is that Fed for the first time in 40yrs wont be following the 2yr.......why?.....because the incoming recession is not a bug, its a feature.

Good I'm buying a house right now (seriously)....not because I think its gonna go up or down in the next 12 months......its because I need a house right now......which is usually, I find, the best time to buy one

Thats some workout ! And I agree with the sentiment btw

Home prices fell in February for the first time in 11 years: https://www.wsj.com/articles/home-prices-fell-in-february-for-first-time-in-11-years-73df0107 Bottom in in housing?

The more interesting question will be wether Powell.....'hangs tough'......as the banking crisis mutates into a recession and rising unemployment.....the book says, to put inflation in the grave and bury it so it doesn't come back, he needs to hang tough even while unemployment goes to 5%+ & the world screams in his face to get the punch bowl back out. You might not like Jay or you think he's an idiot who's made a shed full of mistakes......but outside a guy I know who empties grease traps for a living......I consider Jay to have one of the worse jobs in America right now. Damned if you do, damned if you dont.

Exactly

Problem for Fed/Jay is once it was clear we had an inflation problem that wasn't transitory but rather entrenched.....the FED had to get restrictive....the only restrictive Fed funds rate that I'm aware of is one where FF exceeds the inflation rate......the FED IMO had to race to ~5% there was no other choice............it had to set into the system a REAL interest rate (inflation adjusted) that was either neutral or restrictive to stop the expansion of credit fueled spending.......we have or are close to that now. Inflation IMO is contemporaneously floating around ~4.5%........they'll likely do 25bps Wednesday..........we'll get to 5% then on FF.....~0.5% into restrictive territory........and frankly this banking crisis will likely do the rest of the heavy lifting for them....... in terms of stemming the flow of incremental credit/spend into the economy as banks, regional and otherwise, pay more to maintain deposits, raise rates & credit standards resulting in a pull back in credit creation and demand. The speed at which the reduced credit creation feeds through into unemployment is the interesting piece of this......the headlines reminiscent of 2008....has probably reminded alot of business owners/execs of that period......and they will act accordingly with increased caution......certainly as regards incremental hires......which you would expect to see in JOLTS data in the next couple of months if true.

Curious what banks did this? Like you I think deposit rates/funding costs across the banking system are gonna go through the roof.......NIM's will get crushed......loans to the extent they are even available will come with a higher price tag reflecting higher funding costs.

I find myself, like you, agreeing with people at certain times, on certain subjects.....whom I know deep down are kind of lunatics. It used to worry me! But I take it as a badge of honor.....it shows a certain level of independent thought......I know people, we all do, where their opinion can be completely predicted based on their political leanings & what TV news channel they watch. They are prisoners of their dogma. Now on E.Warren's view.....she's right on one thing......the G.Cohen, Jay Clayton & Powell blessed row back on sub-$250bn stress tests/regulation was dumb.....but big picture US regulation versus EU regulation turned out to be dumb.....not stressing a banks balance sheet in its totality by 200bps move in rates up or down to see its effect on capital allowed for a duration delusion to take hold......the US GAAP bank accounting rules in the US it seems incentivized banks also not to hedge their treasury/MBS portfolios...crazy stuff....lots of unintended consequences spilling out of the system right now. I disagree with her on interest rates & inflation.....which wont surprise anyone......Elizabeth ought to keep her mouth shut.....long rates matter to her constituency most.........they buy homes on the back of long rates....the US gov funds social programs on the back of the long bond.......and during this inflationary bout long rates have moved up of course but if there was to be a sense that inflation was NOT under control or likely to get out of control, say via meddling print money politicians like Warren, they would spike ever higher......perversely hurting her constituency most. Thats to say nothing on the disproportionate damaging effects inflation has on that same group.

I wish I knew but I'm trying to figure it out. Some thoughts Post-GFC banking reforms with the focus on risk weight assets meant banks due to capital requirements & their own RoE math were 'forced' to hold only the 'safest' assets in the world....which meant......Treasury/MBS/Mortgages etc........but like the saying goes......no investment, no matter how safe/great can't be made a bad investment by sufficiently raising its price......and the price on bonds/fixed income got raised to extreme levels in 2020/2021.......at the same time banks got loaded with deposits that needed a 'spread' home.......they turned deposit liabilities into the 'safest' assets in the world to earn a spread - mortgages/MBS/treasury's........the only problem is they paid too much & took too much duration risk. Pre-GFC and Dodd-Frank & Basel III.......what might banks have done with the 2020/2021 deposit influx.....who knows.....but a bank back then had way more viable OPTIONS to earn a spread & get descent RoE .........they would have bought shorter duration high yield junk credit instruments and other such things that post-GFC they could never touch again. In some way this banking crisis is the child of the GFC banking crisis. The regulators possibly came up with the wrong solution to 08....in trying to make the banks safer on the asset side......they never foresaw that one day treasures & agency MBS assets could themselves become 'toxic'.......during a bond bubble on price alone......but also become toxic on the duration side too. They forced a bank's CEO into deploying deposits into only a few things.....and even though they were the safest things in the world....owning too much of them with too much duration could be poisonous. Put another way the OPTIONALITY that banks had pre-GFC was regulated away and the activity moved into the shadow banking system. Couple of thoughts: (1) Such well meaning post-GFC reforms have potentially zombified the traditional banking system for years to come to the advantage potentially of shadow bank-esque entities......if you've got a clean liquid short duration balance sheet & potentially an emerging deposit franchise or cheap source of funding.....your potentially going to be very nimble as compared to lots of banks that are desperately going to be trying to right size the duration on their b/s (2) Seems like all the indebtedness around at a sovereign level + all the duration (re-fi'd mortgage books at 3%) now sitting on the banking systems books.......has indeed put a kind of CEILING I think on how high interest rates can actually go.....6% or 7% Fed funds feels almost impossible now. Couple of actions: (1) FinTech players that were unbundling bank services might have a very interesting opportunity to steal market share as the traditional banking system spends years trying to unwind their upside down balance sheets (2) Try to find the healthiest shortest duration balance sheet banks out there with low funding costs.......they will be kings.....low loan to deposit ratios, low funding costs and the ones that importantly didnt take a lot of duration risk with their lending in 2020/21.........the ones that pivoted or tried to pivot to 5/1 ARM's....they might hurt for a year or two on their NIM's but the future is theirs as that stuff rolls off Anyway Sunday evening ramble...alot to think about where things go

Im with you…I’m usually at the table with tech evangelists saying ok “blockchain” so how does it change the world really over databases and trusted third parties etc….it’s cool some extra/speed efficiency but you ain’t knocking me over or turning the world upside down …..….maybe it’s my career experience to date inside orgs that has me a little skewed……but I play with GPT4 and see literally thousands of hours of colleagues ‘work’ getting torched by this thing…..and not like in 10yrs…..I think it could torch easily 50% of some folks current time spent right now if you let me loose on a GPT4 time and motion efficiency project.

And don’t forget the original sin……he like so many pretended COVID was still a thing when it was clear that via vaccination we’d turned it into the flu…….yet Powell’s Fed was still buying MBS’s in early 2022 like the world was going to end and only the Fed could save it with QE and 0% rates.

Yeah thats a good way to think about - knowledge/insights + the application of that knowledge in the 'real world' via physical application of that knowledge is the perfect 'un-AI-able' combo