IT’S NEVER WHAT YOU THINK
Summary: With a little more hindsight, we can look back on the events of early April and appreciate them for what they really were: pure liquidations. All the telltale signs were there, now exposed with more perspective. Going back into some of the more infamous monetary events of the past decades provides some insights into two key common elements that very likely still apply to the current case. Even as the financial world cannot re-risk fast enough…because it can’t.
INTERFERNCE REVERSION
Summary: OPEC’s action and oil’s fall didn’t happen in isolation, nor were they unexpected. WTI closely corresponds with a range of financial signals starting with bond yields (2s!) and swap spreads. As much as central banks have been interfering in rates like the cartel in oil, it could never last given the growing deflationary confidence coming from the deep fundamentals. Knowing how and why OPEC and central banks get these wrong simply confirmed the eventuality. That collision on display yesterday in Riyadh was again on display today in Tokyo. BoJ moved one step closer to truth.
VISUALIZING THE INVISIBLE AT WORK
Summary: Following from negative Q1 GDP and final sales (of domestic product), the BEA and BLS came together to find negative productivity, too. Though this is merely a remainder between series on output and hours, its history closely aligns with economic trends throughout. Productivity measures also aid in explaining those trends which otherwise have confounded policymakers and Economists. What these now negative numbers provide is more concrete backing for the sharply negative sentiment expressed all over, including today’s latest from the Fed itself.
MAX MFI UNCERTAINTY
Summary: European bank data showed another massive increase in MFIs already-considerable government bond holdings. That makes three straight months, with mid-2020 the only period with more. The only other two comparisons are 2009 and 2012. In short, European banks are up to something serious. Recession risk is one thing, but what unites each of these prior times is monetary deflation, with crisis proportions. In addition to examining those, also an update to America’s Beveridge Curve and how it aligns with plummeting consumer confidence.
IT ONLY SEEMS LIKE A PARADOX
Summary: Faced with a prospective global downturn buffeted by the possible reverse to a stock bubble , the risks of financial volatility are slightly elevated, to put it mildly. This unfortunately puts central banks on the spot and back in the spotlight and raises several questions. It’s not can they be effective if push comes to shove, rather was the central bank idea ever viable at any point? The theory has been tested thoroughly if only due to what at first seems to be the central bank paradox.
THE ONGOING BASIS TRADE FALLOUT
Summary: While repo and the Treasury market are calm again today, the issue of liquidations in the market continue to be raised. Officials are pointing to a “toolkit” which includes regulatory changes as well as rejiggering bond/note auctions to enhance, supposedly, buying power. Also, we look at the potential for a “hedge fund” bailout and just as importantly why no one will address the real problem as it is at its source. Finally, should more basis trade, reserve-manager selling erupt, we’ll examine what that might mean for rates and Treasuries overall.
TIC AND A LOT MORE
Summary: More from TIC. Deflationary signals deepened in both central eurodollar nodes, Japan and Europe. First, we begin with a lengthy historical review of both if to better illustrate how interconnected the world has been for as long as it has. In fact, the Japanese were the first documented sellers of Treasuries in order to fill in a eurodollar funding gap all the way back in 1963. With that context, the current TIC lending stats point to the same if larger and more global for 2024 and worse during the first two months of 2025. And that deflationary view is reaching multiple angles and dimensions.
MELTDOWNS AND LIQUIDATIONS
Summary: Meltdowns coming in from everywhere. Strong indications of liquidations, including those tied to Japan’s carry trade. Stocks served margin calls and risky credit getting pummeled therefore collateral calls. Yields falling sharply, as are forward rates in spite of Chair Powell’s latest attempt to portray calm and even the same inflation bias. And the “experts” have the dollar all wrong. Again.
FORGOTTEN GASOLINE
Summary: The ‘growth scare’ has come roaring back to the mainstream forefront. That only means the data is catching back up with gasoline. Wholesale gas prices have been the one straight constant over the past six to eight month. Whereas interest rates and stock prices, other financial indications have been back and forth, the fact RBOB has gone nowhere was the most profound signal out of quite a lot of that noise. This is hardly new, as energy warnings more broadly have repeatedly been dismissed at everyone’s peril.