Bonds!

[Gregmal]

10 minutes ago, gfp said:

So it seems like the Fed will have to announce an end to Quantitative Tightening today, which will then look a lot like "stealth QE" since it requires them to buy treasury securities to offset MBS paydowns just to stay even.  Standing repo facility has gotten some action recently.  Bank reserves are below their magic line in the sand of $3T and show signs of tight money here and there.

 

Jobs market is in the dumps and will stay in the dumps for what looks like a decade or more.  Rate cuts will keep coming.  You have to go out 20 years before you find a "4" on the yield curve...

 

Outside of the AI-industrial-complex there are some pretty desperate Americans out there.  I sure am glad I'm not a graduating senior at university right now.  Unless I had majored in air conditioners or something sexy like that.

 

I hope Blake Hampton is OK out there - he was studying computer science in Oklahoma and working for the TSA.  Its a rough world for entry level CS majors and petroleum investors.

So in other words you didn’t need to be an engineer or a rocket scientist to buy long dated bonds? 
 

Im just checking cuz for some weird ass reason all those corporate bonds I was led to believe would be the end of me are showing…lotta green? And as you mentioned, the real fun ain’t even started yet. Fun times!

[gfp]

6 minutes ago, Red Lion said:

 

Is the job market so bleak for the foreseeable future because AI is going to result in a loss of jobs, or is this for demographic or other reasons? And are you referring to the total size of the labor market, or just the percentage of unemployed? It seems like immigration can make a big impact on this especially over a period of a decade. 

 

I feel that eventually rate cuts are inevitable to try to slowdown the compounding of the national debt. I know that the FED's dual mandate today is to avoid inflation and keep the unemployment rate low, but in 15+ years it's reasonably foreseeable that the FED may care more about preserving the status quo on entitlements which requires growing the economy and keeping low borrowing costs. 

 

I'm not an economist or historian, but it seems like we had this same scenario playout after world war 2. Let GDP and inflation run hot, keep interest rates down through something akin to quantitative easing, and grow out of the problem. I think this inevitably plays out sometime in my lifetime. AI could perhaps accelerate this trend. 

 

AI will probably cause fewer jobs to be created before it outright destroys jobs on its own.  It may be hard to measure "the hiring that wasn't" but pretty easy for entry level job seekers to feel.  I saw a great graph the other day showing how for the first time, temp employment and Jolts hires both diverged from S&P eps after correlating quite well for a long time.  I'll try to track down the chart..

 

Total earnings might look fine, as the lucky ones make a bunch of money.  But the K shaped thing is real and getting worse

 

Here are the charts I saw - not super helpful but I did track them down

Above is Jolts hires vs. SPX eps

 

 

This one is # of temp employees plotted against the same SPX eps line (different time scale)

Edited October 29, 2025 by gfp

[Red Lion]

19 minutes ago, gfp said:

 

AI will probably cause fewer jobs to be created before it outright destroys jobs on its own.  It may be hard to measure "the hiring that wasn't" but pretty easy for entry level job seekers to feel.  I saw a great graph the other day showing how for the first time, temp employment and Jolts hires both diverged from S&P eps after correlating quite well for a long time.  I'll try to track down the chart..

 

Total earnings might look fine, as the lucky ones make a bunch of money.  But the K shaped thing is real and getting worse

 

Here are the charts I saw - not super helpful but I did track them down

Above is Jolts hires vs. SPX eps

 

 

This one is # of temp employees plotted against the same SPX eps line (different time scale)

 

Fascinating. This is consistent with anecdotal evidence I've seen and read as well. 

 

Really interesting to see META and AMZN doing these large layoffs while still expanding growth Capex. I do wonder about the K shape too if more and more white collar workers get canned and AI really does take off. 

 

Everyone says that the younger generation can insulate themselves by going into the trades, but I have to wonder if we can start replacing programmers, lawyers, and fund managers with AI, how far out can we be from a plumber robot. 

 

I'm not trying to be alarmist, but it really does feel as if we are going through an exponential growth phase with AI, and ultimately the TAM of AI starts by the replacement of employees. I know that human history is littered with examples of the same type of industry/worker obsolescence, but AI seems poised to hit a broad swath of the best compensated jobs out there. 

[Eldad]

3 minutes ago, Red Lion said:

 

Fascinating. This is consistent with anecdotal evidence I've seen and read as well. 

 

Really interesting to see META and AMZN doing these large layoffs while still expanding growth Capex. I do wonder about the K shape too if more and more white collar workers get canned and AI really does take off. 

 

Everyone says that the younger generation can insulate themselves by going into the trades, but I have to wonder if we can start replacing programmers, lawyers, and fund managers with AI, how far out can we be from a plumber robot. 

 

I'm not trying to be alarmist, but it really does feel as if we are going through an exponential growth phase with AI, and ultimately the TAM of AI starts by the replacement of employees. I know that human history is littered with examples of the same type of industry/worker obsolescence, but AI seems poised to hit a broad swath of the best compensated jobs out there. 

I’m still highly skeptical of all of this. The Economy is slowing. Seems like a great way to scare the crap out of existing employees and then call their increased productivity from longer hours “AI gains”.
 

Hard to know. It’s all smoke and mirrors at this point. 

[Cigarbutt]

1 hour ago, gfp said:

 

AI will probably cause fewer jobs to be created before it outright destroys jobs on its own.  It may be hard to measure "the hiring that wasn't" but pretty easy for entry level job seekers to feel.  I saw a great graph the other day showing how for the first time, temp employment and Jolts hires both diverged from S&P eps after correlating quite well for a long time.  I'll try to track down the chart..

 

Total earnings might look fine, as the lucky ones make a bunch of money.  But the K shaped thing is real and getting worse

 

Here are the charts I saw - not super helpful but I did track them down

Above is Jolts hires vs. SPX eps

 

 

This one is # of temp employees plotted against the same SPX eps line (different time scale)

Other similar "pictures":

even a more 'sensational' one:

On a more serious note, the job picture has been changing (diverging, bifurcating, call it what you want). i've been following targets in the temp staff space (private and publicly traded) and they are struggling. Really strange in a so-called humming economy. Is the job market still a lagging indicator?

----

Is this a part of you in the corner?

 

[gfp]

10 minutes ago, Cigarbutt said:

Is this a part of you in the corner?

no that's Jordi.  I'm very good looking but Jordi is not

[Spooky]

26 minutes ago, Cigarbutt said:

Other similar "pictures":

even a more 'sensational' one:

On a more serious note, the job picture has been changing (diverging, bifurcating, call it what you want). i've been following targets in the temp staff space (private and publicly traded) and they are struggling. Really strange in a so-called humming economy. Is the job market still a lagging indicator?

----

Is this a part of you in the corner?

 

 

I'm not sure we should look at the market level like this and take it as gospel - we all know Mr. Market can be manic depressive. 

[gfp]

4 minutes ago, Spooky said:

 

I'm not sure we should look at the market level like this and take it as gospel - we all know Mr. Market can be manic depressive. 

 

The charts I posted above used S&P 500 earnings per share, not the price of the index itself.  Cigarbutt's charts look similar and capture the same dynamic but use SPX itself.

 

The point is, employment is decoupling from corporate earnings in an interesting way that coincides with the very beginning of large scale AI adoption that is just in its infancy.

 

 

[gfp]

1 hour ago, Eldad said:

I’m still highly skeptical of all of this. The Economy is slowing. Seems like a great way to scare the crap out of existing employees and then call their increased productivity from longer hours “AI gains”.
 

Hard to know. It’s all smoke and mirrors at this point. 

 

 

There's a good saying out there for the early years of AI adoption - "you aren't going to lose your job to an AI, you are going to lose your job to a person who is good at using AI" 

[Eldad]

12 minutes ago, gfp said:

 

The charts I posted above used S&P 500 earnings per share, not the price of the index itself.  Cigarbutt's charts look similar and capture the same dynamic but use SPX itself.

 

The point is, employment is decoupling from corporate earnings in an interesting way that coincides with the very beginning of large scale AI adoption that is just in its infancy.

 

 

Spooky’s point is still valid even if it is earnings. The increase in S&P earnings are really just AI CAPEX that may or may not actually be doing anything productive and could easily melt away. Also, they will start showing up as expenses in the form of depreciation going forward. 

[Eldad]

28 minutes ago, gfp said:

 

 

There's a good saying out there for the early years of AI adoption - "you aren't going to lose your job to an AI, you are going to lose your job to a person who is good at using AI" 

Ha maybe. A “saying” sort of implies to me that it has proven wisdom through the passage of many years. Some 35 year old podcaster talking about AI maybe doesn’t apply at this point in time. We will see.  

Edited October 29, 2025 by Eldad

[Marco Van Basten]

3 hours ago, gfp said:

So it seems like the Fed will have to announce an end to Quantitative Tightening today, which will then look a lot like "stealth QE" since it requires them to buy treasury securities to offset MBS paydowns just to stay even.  Standing repo facility has gotten some action recently.  Bank reserves are below their magic line in the sand of $3T and show signs of tight money here and there.

 

Jobs market is in the dumps and will stay in the dumps for what looks like a decade or more.  Rate cuts will keep coming.  You have to go out 20 years before you find a "4" on the yield curve...

 

Outside of the AI-industrial-complex there are some pretty desperate Americans out there.  I sure am glad I'm not a graduating senior at university right now.  Unless I had majored in air conditioners or something sexy like that.

 

I hope Blake Hampton is OK out there - he was studying computer science in Oklahoma and working for the TSA.  Its a rough world for entry level CS majors and petroleum investors.

And I am desperate for a plumber and electrician.  These "desperate" Americans don't seem too desperate to become skilled tradesmen.  Which means that they are not desperate.  My friend from college (Ivy undergrad, Oxford MBA) could not get a job in 2009, and he went and washed cars until he got a real job.  That's desperate.   

[Spooky]

1 hour ago, gfp said:

 

The charts I posted above used S&P 500 earnings per share, not the price of the index itself.  Cigarbutt's charts look similar and capture the same dynamic but use SPX itself.

 

The point is, employment is decoupling from corporate earnings in an interesting way that coincides with the very beginning of large scale AI adoption that is just in its infancy.

 

 

 

The EPS chart is definitely interesting. This is lining up with some of the current reporting out there that companies like Amazon are basically stating they will not grow their workforce going forward. Something to watch for sure. If this does happen though there will be huge societal consequences that we are not ready for.

[Eldad]

AMZN layoffs were 0.9% of its workforce. Remember they need to sell their book just like all the other AI darlings. 

[Spooky]

https://giftarticle.ft.com/giftarticle/actions/redeem/c5e84f6d-edc3-4c17-a28d-b37ebc8fbc39

 

Quantitative Easing is back! Can any bond wizards explain the implication?

[wabuffo]

Quantitative Easing is back! Can any bond wizards explain the implication?

The Fed has stealthily set a lower bound for total system bank reserve balances at $3T.  That level has been breached in recent weeks so the Fed has announced that it no longer wants its balance sheet to shrink.

 

It's important to note that the Fed can't stop the liquidation of its MBS portfolio (nor does it want to).   That portion reduces the Fed balance sheet by a variable amount ($10-$20B) through monthly P & I payments on the underlying mortgage pool.

 

So to keep the balance sheet from shrinking, the Fed will have to offset the MBS reduction by being a net buyer of an equivalent amount of Treasury securities every month. It has said it will do this with T-Bills to reduce the avg duration of its Treasury securities portfolio.

 

And sure enough, here come the howls of "QE" from the conspiracy theorists.  Overall, it’s a nothing burger because the Fed is merely trying to keep its balance sheet flat.
 

A final note - there are two other liabilities on the Fed’s balance sheet it does not directly control:

1) Curency in circulation - that tends to go higher perpetually at a very slow rate based on private sector demand for bank notes. So no impact.

2) The US Treasury’s general account - that seems to be at a level where the Treasury wants it to be ($800B - $1T) so it will fluctuate here and there around the level it is at now.  Depending on what happens, the Fed may have to supplement reserves with additional T-Bill purchases if it rises significantly (at the expense of reserves) usually during a big tax receipt month.

 

Hope that helps.

Bill

Edited October 31, 2025 by wabuffo

[Hektor]

37 minutes ago, wabuffo said:

Quantitative Easing is back! Can any bond wizards explain the implication?

The Fed has stealthily set a lower bound for total system bank reserve balances at $3T.  That level has been breached in recent weeks so the Fed has announced that it no longer wants its balance sheet to shrink.

 

It's important to note that the Fed can't stop the liquidation of its MBS portfolio (nor does it want to).   That portion reduces the Fed balance sheet by a variable amount ($10-$20B) through monthly P & I payments on the underlying mortgage pool.

 

So to keep the balance sheet from shrinking, the Fed will have to offset the MBS reduction by being a net buyer of an equivalent amount of Treasury securities every month. It has said it will do this with T-Bills to reduce the avg duration of its Treasury securities portfolio.

 

And sure enough, here come the howls of "QE" from the conspiracy theorists.  Overall, it’s a nothing burger because the Fed is merely trying to keep its balance sheet flat.
 

A final note - there are two other liabilities on the Fed’s balance sheet it does not directly control:

1) Curency in circulation - that tends to go higher perpetually at a very slow rate based on private sector demand for bank notes. So no impact.

2) The US Treasury’s general account - that seems to be at a level where the Treasury wants it to be ($800B - $1T) so it will fluctuate here and there around the level it is at now.  Depending on what happens, the Fed may have to supplement reserves with additional T-Bill purchases if it rises significantly (at the expense of reserves) usually during a big tax receipt month.

 

Hope that helps.

Bill

Thanks @wabuffo

 

If SHTF again, how do you feel about the Fed's position to mount a rescue (i.e. do a QE)?

[Spooky]

35 minutes ago, wabuffo said:

Quantitative Easing is back! Can any bond wizards explain the implication?

The Fed has stealthily set a lower bound for total system bank reserve balances at $3T.  That level has been breached in recent weeks so the Fed has announced that it no longer wants its balance sheet to shrink.

 

It's important to note that the Fed can't stop the liquidation of its MBS portfolio (nor does it want to).   That portion reduces the Fed balance sheet by a variable amount ($10-$20B) through monthly P & I payments on the underlying mortgage pool.

 

So to keep the balance sheet from shrinking, the Fed will have to offset the MBS reduction by being a net buyer of an equivalent amount of Treasury securities every month. It has said it will do this with T-Bills to reduce the avg duration of its Treasury securities portfolio.

 

And sure enough, here come the howls of "QE" from the conspiracy theorists.  Overall, it’s a nothing burger because the Fed is merely trying to keep its balance sheet flat.
 

A final note - there are two other liabilities on the Fed’s balance sheet it does not directly control:

1) Curency in circulation - that tends to go higher perpetually at a very slow rate based on private sector demand for bank notes. So no impact.

2) The US Treasury’s general account - that seems to be at a level where the Treasury wants it to be ($800B - $1T) so it will fluctuate here and there around the level it is at now.  Depending on what happens, the Fed may have to supplement reserves with additional T-Bill purchases if it rises significantly (at the expense of reserves) usually during a big tax receipt month.

 

Hope that helps.

Bill

 

Thanks Wabuffo! How / why has the Fed set the lower bound of $3T for bank reserves? Is it tied to the size of the economy / demand for money? If the balance sheet were to contract or expand rapidly, would there be an impact in the real economy?

[gfp]

4 minutes ago, Spooky said:

 

Thanks Wabuffo! How / why has the Fed set the lower bound of $3T for bank reserves? Is it tied to the size of the economy / demand for money? If the balance sheet were to contract or expand rapidly, would there be an impact in the real economy?

 

(I'm not Bill, but here is my 2c)

 

Their rule of thumb is based on a certain percentage over average daily Fedwire volume but in reality the level of bank reserves doesn't matter as much as the Federal Reserve seems to think it does.

 

Basically, they gradually shrink reserves and then something happens and then they say - "gee, that level must be a little less than "ample" - when in reality it is tightness in bank money, not reserves, that causes the bumps in the road.

Edited October 31, 2025 by gfp

[Cigarbutt]

The following is just for fun (financial plumbing can be interesting!? and relevant???). There is no ominous undertone or, hopefully, any conspiracy-driven intent. 

i'm just someone preparing for Halloween whose main activity these days is to play pickleball so (obvious disclosure) i'm no 'expert'.

-----

An interesting aspect has been that QE happened mostly (about 90-95%?) not simply and directly through banks but through private market participants who happened to hold available Treasury securities. This aspect resulted not only in balance sheet adjustments between commercial banks and the Federal Reserve but also between banks and private participants. With the Federal Reserve buying the security, a bank balance sheet expansion occurs, cash is created as an asset and a (uninsured) demandable deposit is created. As an aside, recently, with some banks trying to match these newly created liabilities with longer term Treasuries, the unrealizable part of the mismatch was a cause for concern/trouble.

See the following:

Because of the above, two things happened during easing:

1-Banks ended up with a new profit center: interest paid on reserves more than interest paid on deposits

2-Private market participants looking for securities earning more than interest on deposits

i wonder if banks, somehow, are resisting the reversal (tightening) of this profit opportunity. In many fields, it's easier to adapt to easing than to tightening. Some even suggest some kind of dependence.

Anyways, for the longest time this ample reserves regime didn't seem to be necessary but there does not seem (at least clealy and so far) any significant cost to this growing need for centrally driven liquidity but who really knows? If dependence is a component, sometimes it takes a while for true and authentic recognition.

(just a simple reflection here, i remember Mr. Buffett and Mr. Munger stating it was weird that two parties could both recognize an accounting gain while sharing a derivative transaction)

 

Edited October 31, 2025 by Cigarbutt
spelling

[wabuffo]

How / why has the Fed set the lower bound of $3T for bank reserves?

 

As gfp correctly stated - its based on Fedwire transaction volumes.   Fedwire is the Federal Reserve's bank clearing/settlement system.  Basically all value transfers between US (and US-domiciled banks of foreign bank companies) as well as between the US Treasury and the banks are done via Fedwire.  The settlement currency to do this....is.....drumroll....reserves.   

 

IOW, each bank has a "checking account" at the Fed with reserve balances.  If you pay gfp by check for $1000 and your bank is JPM and his bank is BAC, that $1000 creates a movement of $1000 in reserves from JPM to BAC.   The total annual volume of value transfers is over $1 quadrillion dollars (cue Dr. Evil laugh).   That's 40 times US GDP.

 

https://www.frbservices.org/resources/financial-services/wires/volume-value-stats/annual-stats.html

 

So - back to where the $3T level comes from...  the Federal Reserve did a study and published the results in July of this year.   The conclusion was that the lower threshold was at 65% of average daily Fedwire value transfers.  That corresponds to a level of ~$3T.

 

https://www.federalreserve.gov/econres/notes/feds-notes/what-can-public-fedwire-payments-data-tell-us-about-ample-reserves-20250718.html

 

Of course, that's not a hard "floor".  The level will necessarily fluctuate from day-to-day based on economic events.  But it guides the Fed and allowed us armchair Fed watchers to predict that the end of QT was very near.

 

Bill

Edited October 31, 2025 by wabuffo

[wabuffo]

If SHTF again, how do you feel about the Fed's position to mount a rescue (i.e. do a QE)?

 

I can predict with 100% certainty that the Fed will always act to add reserves to the system if some bank falls short.  People think that all the Fed does is set interest rates - but job 1 is making sure that every Fedwire transfer successfully completes.   

 

The Fed does this for two reasons:

 

1) it doesn't want a receiving bank to fall short and cause a cascading problem.

 

2) if a bank falls short of reserves it will start to bid up the price of reserves from other banks because it is desperate.  That will cause the IORB to rise above the Fed's target.  The Fed does not want to lose control of its short-term rate.   This happened briefly in Sept 2019. ("Repo Madness").  So it will act to add reserves and bring the IORB back to target.

 

Bill

Edited October 31, 2025 by wabuffo

[wabuffo]

With the Federal Reserve buying the security, a bank balance sheet expansion occurs, cash is created as an asset and a (uninsured) demandable deposit is created.

 

Yes - but a Treasury security has been lost.  There is no private sector balance sheet expansion.  And the cash is/are reserves stuck at the Fed.  

 

Banks ended up with a new profit center: interest paid on reserves more than interest paid on deposits

 

In what currency does the Fed pay the interest on reserves?  It pays in the only currency it has - more reserves!  Which again are stuck at the Fed.   Doesn't help with interest paid on deposits which are paid with USDs.   
 

For this reason, I think there's no resistance by banks to the Fed lowering reserves.

 

Bill

Edited October 31, 2025 by wabuffo

[Hektor]

2 hours ago, wabuffo said:

If SHTF again, how do you feel about the Fed's position to mount a rescue (i.e. do a QE)?

 

I can predict with 100% certainty that the Fed will always act to add reserves to the system if some bank falls short.  People think that all the Fed does is set interest rates - but job 1 is making sure that every Fedwire transfer successfully completes.   

 

The Fed does this for two reasons:

 

1) it doesn't want a receiving bank to fall short and cause a cascading problem.

 

2) if a bank falls short of reserves it will start to bid up the price of reserves from other banks because it is desperate.  That will cause the IORB to rise above the Fed's target.  The Fed does not want to lose control of its short-term rate.   This happened briefly in Sept 2019. ("Repo Madness").  So it will act to add reserves and bring the IORB back to target.

 

Bill

Thanks Bill @wabuffo

[DooDiligence]

Is this normal? Asking for a friend.

 

https://www.newyorkfed.org/markets/desk-operations/repo