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Post #1145 359

Forwarded from Dissident Thoughts

Dissident Thoughts Discouraging Supply Harris’ inclination towards higher taxes and price controls on groceries is likely to discourage the supply of goods and services. Raising taxes on high income earners and corporations has been a long standing platform of Harris ever…
Broader Presidential Power

The policy proposals of Harris reflect a belief system that has historically been negative for the economy and markets.

While much of Harris’ aspirations should require the cooperation of Congress, recent history indicates a broadening of Presidential power. For example, the White House has been able to increase the population by several million by neglecting to enforce immigration law. Similarly, the White House first paused repayment of Federal student loans and then cancelled the debt of some borrowers.

The willingness to selectively enforce laws or creatively interpret them has greatly expanded the power of the President, so a President Harris may be able to implement more of her plans than expected. Increasing demand while decreasing supply is a reliable recipe for stagflation, which is historically a bad backdrop for equities and bonds.

A Harris victory in November now looks to be a market negative event.

4/4
Post #1143 216

Forwarded from Dissident Thoughts

Dissident Thoughts Subsidizing Demand Harris has proposed measures that would stimulate aggregate demand by boosting home construction and increasing the consumer’s disposable income. In an effort to broaden homeownership, Harris floated a $25,000 first time homebuyer subsidy…
Discouraging Supply

Harris’ inclination towards higher taxes and price controls on groceries is likely to discourage the supply of goods and services.

Raising taxes on high income earners and corporations has been a long standing platform of Harris ever since she was Senator of California. In addition, she also appears to support significantly raising the capital gains tax rate to the ordinary income tax rate for at least a subset taxpayers. Higher taxes in effect reduce the income of companies and the most productive workers, which would have some negative impact on their incentive to produce. A range of studies support the common sense notion that there is a negative relationship between taxes and economic growth.

Price controls have been employed across the world and for thousands of years and almost always have poor results.

As early as 300 AD, the Roman Emperor Diocletian blamed higher inflation on profiteers and unveiled an edict that set maximum prices for a range of goods. More recently, President Nixon experimented with price controls for a few years the 1970s. The common result of price controls are shortages and ultimately much higher prices.

Some businesses respond to the controls by shutting down rather than selling at a loss, some hoard products, and some lower the quality of their products to reduce costs. When the price controls are eventually lifted, a combination of pent-up demand and shortages commonly lead to a surge in prices. The double digit inflation in the 1970s was in part attributed to the expiration of Nixon’s price controls.

3/4
Post #1141 133

Forwarded from Dissident Thoughts

Dissident Thoughts Kamalanomics Vice President Harris’ proposed economic plan essentially guarantees stagflation by both subsidizing demand and discouraging supply. While Harris has been shy about her economic platform, her recent speech and prior campaigns suggest she would…
Subsidizing Demand

Harris has proposed measures that would stimulate aggregate demand by boosting home construction and increasing the consumer’s disposable income.

In an effort to broaden homeownership, Harris floated a $25,000 first time homebuyer subsidy and the construction of 3 million affordable homes and rentals during her first term. A sizable housing subsidy would obviously boost demand for new construction homes, as would government contracts to build more houses.

Higher demand for new home construction also implies higher demand for a wide range of related sectors such as home appliances, furniture, basic materials, labor etc. Note that this may not increase affordability, as housing supply can be constrained by factors other than demand such as regulation or available land.

The debt forgiveness and middle class tax policies proposed by Harris would also boost aggregate demand because they amount to an income increase among cohorts that are most likely to spend.

Harris has floated the potential for the canceling of medical debt, and was part of the Biden Administration’s efforts to cancel certain student loans. She has also suggested tax cuts for middle to low income households. These efforts increase the disposable income among lower income cohorts, who tend to have a high propensity to consume. Some research suggests that the Biden Administration’s cancellation of student debt increases consumption by several billion each year.

2/4
Post #1140 113

Forwarded from Dissident Thoughts

Kamalanomics

Vice President Harris’ proposed economic plan essentially guarantees stagflation by both subsidizing demand and discouraging supply.

While Harris has been shy about her economic platform, her recent speech and prior campaigns suggest she would favor measures that discourage supply such as higher taxes and price controls. It also seems she would like to increase demand by subsidizing housing and forgiving some types of loans.

A combination of stronger demand amidst lower supply suggests a stagflationary economy, which has historically been bad for equities and - more importantly - bonds. While Harris should need the cooperation of Congress to realize her aspirations, the recent expansion of executive power implies she may have more influence than expected.

This post highlights the two aspects of Harris’ economic plan including subsidizing demand & discouraging supply, and suggests a Harris victory in November would be a market negative event.
Post #1139 97

Forwarded from Dissident Thoughts

Dissident Thoughts Kamala unveiled some very interesting economic solutions...
Grocery stores have razor-thin profit margins and people are talking about them price gouging. 🤷‍♀️

🔗 Lyn Alden

Kamala Harris wants to "ban the price gouging" of groceries. A first-ever initiative authorizing the FTC to impose fines on grocery stores for “excessive” price hikes.
Post #1138 94

Forwarded from Dissident Thoughts

"many Fed cuts-a-coming"

Michael Hartnett on fiscal dominance driving interest rate policy:

"US national debt up >$1tn YTD to >$35tn;

interest payment on debt set to rise to $1.4tn by Jul'25 given debt dynamics if rates unchanged… even if Fed cuts 200bps (2%) interest payments rise to $1.2tn;

reversal of fiscal impulse (US govt spend -5% YoY) + cost of debt = many Fed cuts-a-coming."

🔗 BofA (Hartnett)
Post #1136 85

Forwarded from Dissident Thoughts

Dissident Thoughts Instead, the mystery lay within how these benchmarks varied in construction, with the major difference involving the type of collateral backing each repo loan. The Fed’s TGCR measures the average rate of borrowing cash in the triparty repo market but only…
In the secured standard — where financial entities are forced into accumulating U.S. sovereign assets — the overwhelming majority of triparty repos involve large dealers and banks borrowing cash secured against U.S. Treasuries and securities issued by GSEs (government-sponsored enterprises), such as Freddie Mac and Fannie Mae.

The latest spike in “other collateral” in OFR’s benchmark seems more of a bug than a feature. Whether the OFR’s triparty benchmark has gone haywire due to a technical blunder or not, this repo rate puzzle remains unsolved. Either way, the fact that the riskiest collateral is distorting the entire TPR benchmark suggests that officials will intervene.

Coincidentally, just as one repo benchmark has experienced a disconnect, the Fed’s major repo measure, SOFR (the Secured Overnight Financing Rate), which estimates the average rate across all repo segments, is about to turn slightly defective, according to its architects at the U.S. central bank.

As a major shift in repo market structure has commenced, arising from the transition to a centrally cleared era, the Fed has had to respond. Officials have proposed to remove an increased number of centrally cleared repos that will find their way into SOFR as this transition intensifies. Without modification, these repos will cause volatility in future SOFR readings due to where centrally cleared repo rates trade inside the Fed’s target band.

Even so, with the unsecured standard based on LIBOR about to fade entirely, SOFR will remain the undisputed king of money market benchmarks. But the new monarch is overdue for his first “major” rework, which history suggests will be the first of many to come.

4/4

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Post #1135 84

Forwarded from Dissident Thoughts

Dissident Thoughts Since July 18th, the two prominent benchmarks for measuring triparty repo rates — the cost at which the Fed’s primary dealers borrow dollars via repos from cash investors such as money funds — have dislocated. The Federal Reserve’s average triparty measure…
Instead, the mystery lay within how these benchmarks varied in construction, with the major difference involving the type of collateral backing each repo loan. The Fed’s TGCR measures the average rate of borrowing cash in the triparty repo market but only when secured against U.S. Treasuries on an overnight basis.

The OFR’s TPR benchmark, however, measures the rate on all triparty repos backed by any type of collateral — from U.S. Treasuries to agency MBS to CDOs — that cash lenders are willing to accept from borrowers, provided it’s compatible with the Bank of New York Mellon’s triparty platform (the only one to exist).

The OFR calculates TPR by combining the rates on triparty repos secured against various types of collateral, namely U.S. Treasuries, U.S. federal agency securities, corporate bonds, and “other collateral” — the latter being a euphemism for the riskiest securities.

On closer inspection, only the rate for triparty repos where the cash borrower pledged “other collateral” has tumbled, but it’s been enough to suppress the OFR’s entire TPR benchmark. Repos secured against collateral outside the “other collateral” category have been trading at ordinary rates, rendering other OFR rates — and the Fed’s TGCR — stable. What’s more, the volume of repos backed by “other collateral,” which could be anything from private-label MBS (mortgage-backed securities) to even equities, has rocketed by $50 billion.

If the data is accurate — and that’s a big if — some large lender with access to the triparty market and supposedly the Fed’s RRP has been willing to lend cash against the riskiest collateral from the largest dealers at a big discount for days, earning increasingly lower returns.

That's a very unusual development in the most systemically important market on the planet and, if it sounds absurd to you, you’re not alone.

This type of trading reflects the opposite of the true dynamic that plays out in the triparty repo market, where safety is everything. Only the prominent financial behemoths — mostly the Fed’s primary dealers — have gained admission to borrow in triparty because the major triparty lenders, MMFs, have learned their lesson from previous crises. They will only lend to entities too big to fail.

No considerable triparty lender, out of the blue, would likely loan $50 billion in cash against risky securities at a lower rate than lending against safer collateral, let alone avoid lending at a higher rate to the Fed, risk-free, via its RRP facility.

3/4
Post #1134 79

Forwarded from Dissident Thoughts

Dissident Thoughts The Repo Market Dislocation As financial markets have experienced widely unforeseen turmoil, dollar funding markets have remained surprisingly subdued. Out of the numerous events that triggered the unwinding of leveraged positions across various asset classes…
Since July 18th, the two prominent benchmarks for measuring triparty repo rates — the cost at which the Fed’s primary dealers borrow dollars via repos from cash investors such as money funds — have dislocated.

The Federal Reserve’s average triparty measure, TGCR, has printed in its normal tight range. Yet the TPR rate, the triparty benchmark published by the OFR (The Office of Financial Research), has descended rapidly (as shown above in yellow).

TGCR = triparty general collateral rate


The OFR’s triparty rate has fallen so far so fast that, initially, it appeared someone large had been willing to lend cash below the Fed’s risk-free repo rate. Why a major cash lender, the only entity with enough size to suppress a benchmark, would lend at inferior yields to what they’d receive at the Fed’s RRP facility (reverse repo facility) remained a mystery.

At first glance, the most compelling theory was that cash lenders were trying to front-run a greater certainty of rate cuts — and potentially emergency cuts as the early August turmoil in markets unfolded.

If repo rates were about to drop by 75 bps (0.75%) or so, sacrificing a few basis points would beat losing a few rate cuts worth in yield. Cash borrowers might have consequently been able to persuade cash lenders to lend cheaply below the overnight rate that the Fed pays on its RRPs (i.e. O/N RRP) or even under the lower bound of the U.S. central bank’s target range.


But as the Fed’s triparty benchmark and other Treasury repo rates failed to exhibit a similar descent, something else must have been afoot.

2/4
Post #1133 77

Forwarded from Dissident Thoughts

The Repo Market Dislocation

As financial markets have experienced widely unforeseen turmoil, dollar funding markets have remained surprisingly subdued.

Out of the numerous events that triggered the unwinding of leveraged positions across various asset classes, the so-called reversal of the Yen carry trade has been touted as the major causality. Yet the $/¥ (yen-dollar) cross-currency basis — a sharp downward turn of which implies severe market stress — has barely dipped (see above), while other cross-currency bases have traded flat, signaling that the most recent "crisis" was forced selling & balance sheet deleveraging — not a funding panic.

The JPY/USD cross-currency basis (XCCY basis, or simply the basis) is the premium/discount associated with swapping yen for dollars in the FX swap markets. A more negative (tighter) basis indicates that the world is hungry for dollars (see: March 2023 bank panic above, which compelled the Fed to open its global dollar swap lines like it did during COVID).

The XCCY basis is structurally negative for dollars, meaning that there is always a "shortage" of dollars. The extent to which it is negative measures the degree to which dollars are needed.


Onshore money market rates for repos and Fed Funds continue to trade in their semi-zombified state. Compared to volatile FX and equities, money markets have been living in a parallel universe.

That is except for the most perplexing move in a repo rate benchmark since the infamous September 2019 "repocalypse". This time, instead of all major repo averages exploding through the upper limit of the Fed’s target range (as it did in 2019), just one has breached the U.S. central bank’s lower boundaries.

Recall that the Fed's ceiling on rates is generally fixed as the central bank can supply an unlimited amount of dollars as repo loans, but the rates floor remains leaky by design as the Fed does not control the supply of or demand for collateral.


That's pretty significant.

1/4
Post #1132 76

Forwarded from Dissident Thoughts

Ran into some problems related to mass reporting and other insane behaviors by miscreants, which is why the original group chat with all the members was detached and some other things have been rearranged. Hopefully we can get that resolved.

In the meantime, these are our favorite posts:

> The Mother of All Pain Trades (the hard landing) by Gerhard Schrader July 2023. A lot has changed in the 13 months since he wrote this, however, that we nor he could anticipate. If there's interest we might revisit this.
> Restoring Credibility — what motivated the recent interest rate hiking cycle (and what could motivate interest rate cuts)? Hint: it's not all about inflation.
> Dissecting US hegemony (the dollar)
> How the Chinese bloc's monetary divorce from the US bloc is supportive of the price of gold for years to come.
> Repo, Treasury market leverage, and the Basis Trade.
> The End of Unemployment: looking at how demographic trends will reshape economies in the future.
> Examining the Yen carry trade and how asset purchases by foreign non-officials are often funded in depreciating currencies. The carry trade is unhedged, which exposes them to losses when the funding currency appreciates against the investment currency.
> The government of Japan is itself arguably involved in a giant carry trade.
> How monetary and fiscal policy could change under a Trump administration.
> How mass immigration prolongs shelter inflation.
> The importance of energy and what "peak EROI" may mean for our future (and perhaps our recent past).
> Why is "this time different"? Because of the fiscal picture.
> Reasons why the US skirted recession (at least in official terms) in 2023 and 2024
> In many ways, we did have a recession in 2022.
> The Politics of Recessions and how a government shutdown could lead to contraction in the fiscal deficit (and thus recession).
> Learn about how money works and makes the world spin

And many others that I've left out.

We have some other ideas in the bag. For example we still want to cover more of China and the US-China trade war.

Feel free to leave a suggestion in the comments.
Post #1131 70

Forwarded from Dissident Thoughts

CPI 0.2% MoM, Exp. 0.2%
CPI Core 0.2% MoM, Exp. 0.2%

CPI 2.9% YoY, Exp. 3.0%
CPI Core 3.2% YoY, Exp. 3.2%
Post #1130 78

Forwarded from Dissident Thoughts

PPI 0.1% MoM, Exp. 0.2%
PPI Core 0.0% MoM, Exp. 0.2%

PPI 2.2% YoY, Exp. 2.3%
PPI Core 2.4% YoY, Exp. 2.6%
Post #1129 80

Forwarded from Dissident Thoughts

Dissident Thoughts Bank Lending Restarting Bank lending came to a standstill amidst aggressive hikes, but now appears to be resuming as the market increasingly anticipates a rate cut cycle. Recall, a tremendous bank lending boom occurred in 2022 as rates remained low and fiscal…
Full Throttle

The restrictive starting point of monetary policy suggests that there is room for policy to effectively pivot and push against recessionary pressures.

Monetary policy was stuck at 0% after the 2008 crisis, but it is now at 5.5% with plenty of room to move lower. Higher rates had kept bank loan growth to a standstill, but the anticipation of rate cuts is spurring bank loan growth. This is a concrete channel where lower rates could boost the moderation in economic growth. At the same time, private lending continues to boom and fiscal spending remains historically high.

The economy is slowing, but there is much reason to think that it is softly landing.

4/4
Post #1127 52

Forwarded from Dissident Thoughts

Dissident Thoughts Dark Credit Credit risk been muted despite historically high interest rates in part due to the rapid growth of private credit. While higher interest rates would suggest greater risk of default, credit spreads have remained low and around pre-pandemic levels.…
Bank Lending Restarting

Bank lending came to a standstill amidst aggressive hikes, but now appears to be resuming as the market increasingly anticipates a rate cut cycle.

Recall, a tremendous bank lending boom occurred in 2022 as rates remained low and fiscal stimulus supercharged the economy. In 2023, bank lending was very subdued and loan growth was almost non-existent. Demand for loans was discouraged by higher interest rates, while the supply of loans was impacted by trauma from the regional banking panic.

However, bank lending has steadily resumed in recent months as interest rates (longer-dated bond yields) have declined. Loan growth is not as rapid as 2022, but appears to be normalizing towards a pre-pandemic pace.

Loan growth may further accelerate as the supply of loans increases with gradual lowering of bank lending standards.

The Fed’s most recent Senior Loan Officer Survey survey shows that banks had been gradually tightening their lending standards throughout the hiking cycle, but are now moderating the pace of tightening. History suggests banks are at a turning point where they are set to gradually loosen lending standards.

The survey also shows demand for loans declined throughout the rate hiking cycle, but appears to be poised to resume growth. The decline of the 10 year yield from as high as 5% last year to below 4% today is likely driving the change by both increasing loan demand and reducing the credit risk of borrowers.

3/4
Post #1125 69

Forwarded from Dissident Thoughts

Dissident Thoughts Turning A Corner Commercial bank loan growth paused last year amidst high rates and the regional banking panic, but looks to resume just as economic growth concerns are surfacing. The credit tightening of impact of higher rates has been muted overall as…
Dark Credit

Credit risk been muted despite historically high interest rates in part due to the rapid growth of private credit.

While higher interest rates would suggest greater risk of default, credit spreads have remained low and around pre-pandemic levels. This has partially blunted the restrictiveness of policy despite multi-decade high interest rates.

Part of the reason for the resilience of credit is to be due to investors focusing on the absolute level of rates rather than the narrow spreads. But another reason appears to be the rise of private credit that has kept lending available. Private credit refers to direct lending to businesses by non-bank institutions, usually financed by long term capital from by institutional investors.

Private credit has blunted the impact of tightening impact of monetary policy by actively lending to a wide range of businesses.

Research suggests private credit has grown by both competing with public debt offerings and by willing to offer credit to companies who have difficulty borrowing from banks. The rate hiking cycle has been a boom to private credit because their loans tend to be made on a floating rate basis. Investors have poured hundreds of billions into private credit funds where returns have been strong as higher interest rates off-set higher default rates.

Borrowers find private credit attractive due to their quick execution and bespoke loan terms. Private equity borrowers in particular have been fond of private credit where middle market LBO loans are increasingly dominated by direct lending. The surge in private lending helped fill the void created by the decline in bank lending.

2/4
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