TwoCitiesCapital

Bitcoin transaction count and volumes are absolutely exploding. 60-day rolling average of transaction count was ~300k transactions per day at the start of April. We're now seeing 500-600k transaction volumes today and the average is going vertical. It's held up extremely well amid the banking crisis and the run on stablecoins back in March. Today it is up 1.5% while the broader market is down 1.7%. One day doesn't make a trend, but it really does seem like it's breaking it's correlation with equities and moving to a regime more akin to its pre-2020 0 correlation relationship with equities OR slowly evolving into the digital gold/crisis hedge narrative.

High frequency data is noisier, but the trend over the last 1+ years is apparent. https://twitter.com/nsquaredcrypto/status/1651783439329157124?s=20 Bonds should do well here.

I don't necessarily expect them to happen again, but what we can say is inflation has never been "stable" once crossing the 5% threshold. Whether that's the result of knock on effects from wage/price spirals, or supply chain disruptions, or energy shocks, or war? I dunno. I'm sure there's always an excuse. It's just never been stable and I don't expect it to be different this time. Especially considering ALL of those are factors at this time. We're likely going to see these violent ups and downs.

These two sentences seem to conflict with one another. Because, if anything, what we're seeing is NOT stable. We went from a decade of inflation averaging sub-2% (the environment you describe) to one where it accelerated to 9+% and is coming back down to 5% all in 24-36 months. And as you pointed out, it's unlikely to stay at 5% given the falling housing and etc. So what part of 2 --> 9 --> <5 sounds stable to you? If anything, this is the environment I've described in prior posts. Inflation WILL be volatile. It'll average higher the last decade through various booms/bust cycles. And that has NEVER been good for equities historically. Especially in periods where it's accelerating above 4% or below 1%. Pick your spots. I own a ton of Fairfax, and EM, and commodity producers. I'm not saying sell every stock you own. But I AM saying that it seems to be reckless to be 100% in stocks in an environment that has not favored them historically just knowing they often sell off in sympathy with one another. If you really believe you're seeing deflation, it's long duration bonds you want to own.

My main point was that NIM impact being reduced doesn't magically make the loans at a value that improves the solvency of the bank. It helps the liquidity situation, which is STILL getting worse, but it doesn't solve the fact that deposits are fleeing the system, that they can't sell the loans to meet them as that results in insolvency, nor can they pledge the loans for additional liquidity even if that liquidity is no longer a drain on income. The provision at the Fed is only for treasury securities, right.

The only thing a rate cutting would do for them is cut the negative NIM by dropping the cost of their liquidity. But, since they're holding mostly loans and not treasuries, they may not get any extra oomph out of rate cuts helping loan values if its offset by widening credit spreads which I expect it would be so they'd still need the liquidity and still be paying for it all of the way down until the rates were below their NIM. Ultimately, I'm not there's a good outcome here unless if they're purchased by someone with low-cost liquidity who can pay off the liquidity loans and collect the NII. Losing half your deposit base is a tough pill for a bank.

An official recession? Whenever the NBER decides. My thoughts on timing? Probably sometime in the next 6 months given how bad leading indicators are, cracks starting to show in employment, and coincident indicators beginning to show stress. The bear market? Already been underway for over a year now. To continue for at least a few more months.

They're NIM went down 20% YoY with just 2 weeks of exceptional liquidity borrowings at a negative NIM. Those borrowings are still required until they can offload assets to repay those loans. How do you envision thats going to impact Q2 earnings with a full quarter of negative NIM under their belt. I have to imagine the Fed will try to organize a sale. They went into this at 110% loan-to-deposits and then subsequently lost ~60% of those deposits (before considering $30 billion bail out) AND have continued to lose deposits to the tune of $1-2 billion in April. They've got A LOT of assets to unload and will hemorrhage earnings until then. Or they could be bought by a major with better liquidity/deposits.

I dunno. Despite companies' "beating expectations" those expectations were only recently lowered and still tracking for -7 or -8% YoY on earnings which is an acceleration down from last quarter. At the index level, I do NOT want to be paying 19-20x earnings for trailing earnings that are getting smaller when I can get 5-7% in short duration bonds. Still picking and choosing my spot in the equity markets, but in general prefer to own fixed income that pays low-ish equity returns without the risk while the economy keeps slowing. In a receding tide, most boats will go lower with it. Am just fine getting monthly income at attractive rates waiting for that tide to go to something that more reasonably reflects the environment.

Didn't they USE to do that and this is a vestige of regulatory changes post GFC when MTM on bonds was done away with given that agency mortgages were in the toilet at that time? I could be wrong, but I was under the impression this is exactly how it was prior to 2008.

But it's not against the fixed income portfolio. It's interest AND dividends. It's the whole $52B portfolio.

I want more details before getting too excited. Maybe the fragility in the banking system and the slide in rates was the motivation needed... That being said, $1.5 billion was the annual run rate from December report. That represented a ~2.9% yield on the portfolio at that time. Current yields on a 3-year Treasury are 3.8%. So we're expecting to under-earn a static 3-year Treasury over the next 3-years despite 1) knowing they own some spread products that pay 5-6% and 2) the expectation that the portfolio would grow from reinvestment of dividends/coupons/maturities over that time Seems to me that this still very much suggests that they're barely inching out from the 1.6 years disclosed in Q4. Can't think of any other way they are under-earning a 3-year treasury otherwise. Would feel more comfortable if we were at least locking in a yield of a 3-5 year treasury over that time, but $1.5 billion consistently for the next 3 years isn't bad. It's just not GREAT relative to what it could be without much risk.

Hard to say what would happen again, but in 2011 when US debt was downgraded the first time, it was treasuries that rallied and stocks that sold off. Can't say it'd play out the same again, but if that's your scenario we DO have a historical precedent of bonds doing well. Secondly, I don't know many people here suggesting long-duration bonds as an alternative to cash deposits. They're talking about money markets, short term corporate paper, or 1-2 year type bonds. None of these would have a material mark down even if rates went significantly and credit spreads blew out because the rate and spread duration are very limited on 1-2 year type paper - especially after being down 5-7% last year which dramatically reduced the duration risk already. Is it more than the move in a deposit account? For sure. Is it enough for people to forego multiple points of interest over the next 12-24 months? Doubtful.

What's interesting is how the structured the purchase. $200 million upfront with annual payments for the next 4 years. Seems like they have something in mind for this cash that WASN'T the purchase of GIG. I think you're right on Allied World along with another few hundred million in share repurchases.

There was an interesting piece in the WSJ discussing how Arab nations like UAE and Saudi Arabia have been buying quite a bit of Russian oil to refine it themselves and capture the spread from the required discount from sanctions. An interesting outcome and just another avenue that keeps Russian supply available in the market. Still believe we ultimately have a shortage, but probably not from Russia coming off market

https://www.wsj.com/articles/bitcoin-blockchain-hacking-arrests-93a4cb2 More evidence and stories suggesting the "BTC is for criminals" story is simply fiction.

I don't disagree. If they'd go back to being a lender of last resort to banks in crisis, I'm ok with it - but f*cking with interest rates and money supply hasn't proven to be their strong point. Definitely in camp Gundlach that you can basically just follow the two-year Treasury and save all of the noise.

I get it. I don't really trust their long term judgement either, but they are the ones in the driver seat here with rate hikes and I think it's notable that they've now stated that it's the base case. When have they ever done that before? Regardless of the accurate, I think it gives important signalling on their view of rates and trajectory given their willingness to continue to hike despite that being the outlook - not coming down for at least a few months.

Fed minutes show Fed officials base case appears to be a mild recession this year. They're still hiking and talking about more if you listen to Bullard. A Fed that expects a recession and is still hiking into it seems like the type of Fed who will hold higher for longer before cutting and isn't exactly concern with capital markets at this time. The longer they hold, the more economic pain there will be and the longer the recession will last IMO. My guess is it may not be so mild and will last more than a year.

Just to consider some risks: 1) the US may NOT refill the SPR. Plenty of analysts think that with our newfound domestic production that it doesn't need to be anywhere near the size that it was. Also, the Biden administration has seemingly hesitated on refilling it despite the positive arbitrage opportunity that existed that would've netted tax payers a gain 2) I don't follow Russian supply super closely, but my guess is that most of that curtailment is over and that the oil has found new supply chains to flow to India and China. So no real net reduction in supply at this time, though that was the initial impact. 3) the global economy is slowing and many signs suggest a recession which may curtail demand in the short term I'm bullish on oil intermediate and long term, but I do think there is the possibility for near term disappointment if some of the above plays out. Will add to my exposure if that's the case as this is the most obvious trade to me over the next 5-years.

Not surprising anyone? I guess all of those companies who hired those workers expected to fire them within 12 months? Or the people who took those jobs expected to be jobless shortly thereafter? I suppose everyone who bought equities or bonds in 2022 expected to lose double digits, or more, as inflation climbed while nominal earnings fell? Surely everyone saw the banking crisis in liquidity/solvency coming which is why there was a bank panic that took down multiple banks, and nearly a few others, in a matter of days... I guess all of our manufacturers are prepared a prolonged contraction? Or all of those companies that boosted inventories last year were/are prepared to liquidate them at losses? The fact is, you're talking with the benefit of hindsight. If people SAW this coming, they sure didn't behave that way. Recessions are ALWAYS a contraction back to some more reasonable baseline. Even 2008 was ONLY a 4% contraction in GDP - and yet it brought the global financial system to its knees. People extrapolate current conditions outwards, overextend and overspend expecting those conditions to continue, and then get surprised when there is a modest contraction back to normal levels. Covid and stimulus doesn't change that - if anything it suggests the contraction back to the base will be larger. And I still can't, for the life of me, understand how talking about it magically changes the impact of those contractions in spending/credit/asset values/etc on the economy.

I suppose the argument is that all of the economic data that correlates with historical recessions, job losses, and declining earnings should simply be ignored because people are talking about it? Or is it that by talking about it, the impact of negative PMIs, contracting home prices, contracting credit, declining manufacturing, and etc is more muted than if the same data weren't talked about?

It was just the only fixed income option that made sense at the end of 2021. 7% govt guaranteed and NO price risk and tax deferred!?! In an environment where everything else still basically yielded 0%. The relative to return to equities AND fixed income since has been absolutely insane. But now, almost everything else yields higher and you probably want a little price risk going forward to hedge an environment/economy that the Fed cuts in. Just really about the opportunity cost of losing 3-months of accrual verses the yield pick-up you get. If short -term bonds will still get me 5-6% YTMs in 3-6 months, it might be a worthwhile swap.

Was a bit pessimistic on the rate reset - Bloomberg is estimating 3.8% for the upcoming reset. I Bonds Lose Their Luster With Yield Set to Plunge Below 4% https://www.bloomberg.com/news/articles/2023-04-12/i-bonds-interest-rate-for-2023-yield-is-expected-to-fall-below-4-in-may Was dead right on 2-years @ 4.9% that have now been bid down to 4.0%. Ultimately - it does look like it was the right call to eschew adding more of these @ 6.9% when I suspected we'd be resetting majorly lower as I've been able to lock in marginally higher yields elsewhere for the year AND have a slight duration exposure if the Fed cuts.

It's up 8.6% if you lag the rising prices over the course of 12-months AND look back 12-months for that YoY comparison. It's a legacy of how imputed rents are calculated and is also precisely WHY inflation/CPI is a lagging indicator and not a leading one. Just because home prices go up 25% overnight doesn't mean rents go up overnight - so the Fed trickles on that price impact over the course of the next 12-18 months to more accurately reflect the monthly rising costs to renters. So yes, by the way the Fed lags in the impact of rising home prices, you're still seeing the prior housing price rises being accounted for NOW when they were previously NOT accounted for. But in coming months you'll see the impact of falling prices start to filter through, like we've been seeing now, as implied by my post. Nobody is lying about inflation - they just calculate it looking in the rear view instead of looking concurrently or on a forward looking basis.