A constant theme at NOTES FROM UNDERGROUND has been that the lunacy of Federal Reserve Chair Jerome Powell finding his inner Volcker belongs in the pantheon of fantasy. As I have said before: Paul Volcker wouldn’t be able to find his inner Volcker in a financial system plagued with HUGE amounts of leveraged risk, coupled with a huge overhang of both PUBLIC and PRIVATE DEBT. And yet FED officials are still out there pondering whether to raise 25 or 50 basis points at the next meeting.
I would bet any FED president there will be a pause at the next meeting as the financial system needs to operate with a lag effect to sift through the potential of systemic collapse and I care not a bit about the role of a central bank in a fiat currency world. It was Powell who said at an appearance years ago that the ECB had no credit issues because it has a printing press — the absolute logic of a fiat currency system.
In the last 10 podcasts I’ve recorded with Richard Bonugli, I’ve had two questions: Who has been buying 10-year Treasuries, and why was GOLD rallying as real rates were approaching zero, in relation to overnight/short-term money.
Now it appears that I guessed wrong on Treasuries. The 2/10 was not inverting because investors were buying 10s. It was that nobody was selling 10-year notes because there were huge losses, if realized (just like Chris Whalen has been writing about).
The GOLD HELD IN BECAUSE ALL CENTRAL BANK CREDIBILITY IS SUSPECT, EVEN AS POWELL PRESSES AHEAD IN AN EFFORT TO REGAIN FED CREDIBILITY. However, the SILICON VALLEY BANK EPISODE BRINGS IT RIGHT BACK TO CENTER STAGE.
MAKE NO MISTAKE, THE FED IS RESPONSIBLE FOR ANOTHER MINSKY MOMENT AS IT KEPT LIQUIFYING THE SYSTEM CREATING THE BACKDROP TO PRIVATE FINANCIAL BALANCE SHEETS BEING LADENED WITH CRAP TREASURIES IN AN EFFORT TO EARN SOMETHING WHILE PAYING NOTHING. It wasn’t INFLATION THAT WAS TRANSITORY but rather the value of of zero risk-weighted SOVEREIGN DEBT.
Powell said he wasn’t pointing a finger at anyone for the rise in INFLATION because he was aware there would be three fingers pointing back at the Powell Fed. Eric Peters from ONE RIVER ASSET MANAGEMENT had a wonderful piece out this weekend wondering about where stops in the market will be. I advise watching the two-year notes for during the recent inversion of the curve the TWO YEARS have been the easiest instrument to short with all the FED HAWKISHNESS.
Do your own technical work for everyone has their own risk parameters. There will be headline after headline about a resolution to SVB but that is not the critical issue. As Dennis Gartman has warned for decades: THERE IS NEVER ONE COCKROACH and for us this raises the question about how the FED will react. This is the critical element. Not a pivot, but a pause mindset.
I discuss all of this with Peter Boockvar of The Boock Report. Click here to listen.
Tags: 2/10 yield curve, debt overhang, Federal Reserve, Silicon Valley Bank, SVB, yield curve inversion
March 12, 2023 at 8:07 pm |
Ladies and Gentlemen, we have just stepped off the time machine. Over the weekend’s emergency meeting, Hank “Maalox” Paulson (now played by Janet Yellen) and Ben “Helicopter” Bernanke (now played by Jerry Powell) have just declared SVB and Signature Bank “systemic”. A former Lehman CFO, (now Chief Administrative Officer at SVB), and former chairman of the U.S. House of Representatives Financial Services Committee, (now Director of Signature Bank) just round out the flashback.
I’m going back to dropping acid. The hallucinations were much more pleasant than today’s reality.
March 12, 2023 at 10:52 pm |
Professor—no not you .Mr.orange sunshine at home with a scratched copy of in a goda divida—who would have thought
March 13, 2023 at 8:49 am |
Time to go to the mattresses…… I’ll make the gravy
March 14, 2023 at 6:01 am |
but Bigman don’t forget the canoles but leave the funding mechanism and the printing press
March 13, 2023 at 10:21 am |
Good article….doing away with MTM accounting for HTM securities….whose the genius who came up with that?
March 14, 2023 at 11:16 am |
IDK whether HTM accounting was a part of this, but doing away with MTM accouting (an international fundamental standard of GAAP generally accepted accounting principles) is largely US-only as US policymakers forced it on US FASB in early 2009 by holding a gun to FASB’s head to help “resolve” the US Financial Crisis of 2008-09 with smoke & mirrors and money printing.
We’re in a deeper and broader hole today. I mean financially and economically, not the US banks, many of which are more sound now than 15 years ago.
March 13, 2023 at 4:33 pm |
It was clear Elon had no chance of gaining insider access.
March 14, 2023 at 11:22 am |
Someone said that this banking situation is also an unintended consequence of Dodd-Frank. It incentivized banks to hold way more Treasuries and MBS and less commercial loans.
Then, because treasury yields got pinned down so low, banks took on excess duration risk to earn at least a little yield, and voila. In contrast, commercial loans would have performed much better in this rising rate environment because they’re predominantly floating-rate.
Is the top in for yields? Temporarily, but otherwise I say NO. Unless they do yield curve control. Imagine the unintended consequences of that! It has been a fiasco for Japan, and it’d probably be worse for a nation like the US with twin deficits. But they’ll likely try it sometime.
So I think some select EM bond markets look better as some look DM in their performance. Whilst the US fiscal picture looks very EM to me. Rock meet hard place.