You might as well start a fund. Bianco doesn't understand money at all and they gave him a fund.
And I agree with you in the aggregate we've just entered the tipping point on liquidity, but even though a little early from a pricing perspective this past October - November was probably it in terms of an entry point. And with the 5% positive carry locked in on the treasuries we can wait.
conclusion: the FED will stop QT sooner than later. Not only, will also start to cut rates as soon as the chance to do it without excessive criticism will pop up. election year, banks ALM disaster, government funding...all points to lower short term rates other than the economy and inflation
I am thrilled to find you in substack. I listened to you last year on real vision. You are the true bond king. Thanks for sharing your knowledge with us.
So, to keep the flow into MMF, the Fed bias would be to continue the inverted yield curve? A bias to only slowly consider dropping short term rates, unless long term rates go lower first?
so would it be fair to say that most of the money printed in 2020-2021 went to RRF, from where they are migrating now to short term gov bonds / bills, meaning they are going back to the government to get recycled again but now from the fiscal side into economy ?
Thanks. In your opinion, what accounts for the seeming correlation between “liquidity” and asset prices? I’m not sure commentators who say the Fed drives stock prices are using a consistent definition of “liquidity” but generally when you ask for an explanation of the process of how “liquidity” generated by Fed actions finds its way into asset prices in near real time they don’t respond. Sven Henrich would be an example. Yet they provide a FRED chart that overlays their chosen liquidity metric on top of the S&P 500 and it does show some correlation. But “correlation is not causation”. Is there some indirect connection between Fed driven liquidity and asset prices? Thanks again.
This line of thought violates one simple rule of accounting, ownership of an asset. Here is why:
The reserves at the Fed is its liability. True
The reserves at the Fed is an asset of the depositing bank or credit union. True
The reserves held by a bank at the Fed are typically funded by customers' deposit accounts, usually demand deposits. True
Those demand deposits are assets of the customers. True
So how in the world does the government pay off a maturing T-Bill held by the Fed by vaporizing the assets of the depositing bank and therefore the assets of the bank's customers? It can't.
The government must pay off its liability (T-Bill) using one of its assets. In your T-account example, the TGA is the logical choice...NOT reserves!
Going the final mile and avoiding a bunch of T-Account figures, for now, when the Treasury issues new debt (on top of the rollover debt) and sells it to a bank buyer for the benefit of your new macro fund, the Fed will simply move the money from the bank buyer's deposited reserves into the TGA account.
So the Fed balance sheet doesn't grow and the Treasury's assets now match its liabilities.
Plus, the macro fund has moved a cash asset (demand deposit) to a government debt asset. The bank has reduced its liabilities (demand deposit outflow) and its assets (reserves that were posted at the Fed).
And everybody's balance sheets balance. Easy cheesy.
It is a very interesting and didactic article . Reminded us market players the mechanisms os markets liquidity . Cheers
This is excellent!
You might as well start a fund. Bianco doesn't understand money at all and they gave him a fund.
And I agree with you in the aggregate we've just entered the tipping point on liquidity, but even though a little early from a pricing perspective this past October - November was probably it in terms of an entry point. And with the 5% positive carry locked in on the treasuries we can wait.
conclusion: the FED will stop QT sooner than later. Not only, will also start to cut rates as soon as the chance to do it without excessive criticism will pop up. election year, banks ALM disaster, government funding...all points to lower short term rates other than the economy and inflation
Fantastic, Alf!! Is it similar in the case of the ECB?
Excellent insights! Great work.
Thanks Alf, very interesting and clearly explained. Cheers!
Please start the fund soon!
I am thrilled to find you in substack. I listened to you last year on real vision. You are the true bond king. Thanks for sharing your knowledge with us.
So, to keep the flow into MMF, the Fed bias would be to continue the inverted yield curve? A bias to only slowly consider dropping short term rates, unless long term rates go lower first?
Great work. Certainly, that shows how well you understand the ongoing process. Many thanks for sharing the wisdom, Alfonso.
It would be great to have the above info from a UK centric viewpoint.
so would it be fair to say that most of the money printed in 2020-2021 went to RRF, from where they are migrating now to short term gov bonds / bills, meaning they are going back to the government to get recycled again but now from the fiscal side into economy ?
Thanks. In your opinion, what accounts for the seeming correlation between “liquidity” and asset prices? I’m not sure commentators who say the Fed drives stock prices are using a consistent definition of “liquidity” but generally when you ask for an explanation of the process of how “liquidity” generated by Fed actions finds its way into asset prices in near real time they don’t respond. Sven Henrich would be an example. Yet they provide a FRED chart that overlays their chosen liquidity metric on top of the S&P 500 and it does show some correlation. But “correlation is not causation”. Is there some indirect connection between Fed driven liquidity and asset prices? Thanks again.
What happens when RRP hits zero? I wrote about it last month. https://newsletter.tuttleventures.com/p/what-happens-when-the-rrp-hits-0
This line of thought violates one simple rule of accounting, ownership of an asset. Here is why:
The reserves at the Fed is its liability. True
The reserves at the Fed is an asset of the depositing bank or credit union. True
The reserves held by a bank at the Fed are typically funded by customers' deposit accounts, usually demand deposits. True
Those demand deposits are assets of the customers. True
So how in the world does the government pay off a maturing T-Bill held by the Fed by vaporizing the assets of the depositing bank and therefore the assets of the bank's customers? It can't.
The government must pay off its liability (T-Bill) using one of its assets. In your T-account example, the TGA is the logical choice...NOT reserves!
Going the final mile and avoiding a bunch of T-Account figures, for now, when the Treasury issues new debt (on top of the rollover debt) and sells it to a bank buyer for the benefit of your new macro fund, the Fed will simply move the money from the bank buyer's deposited reserves into the TGA account.
So the Fed balance sheet doesn't grow and the Treasury's assets now match its liabilities.
Plus, the macro fund has moved a cash asset (demand deposit) to a government debt asset. The bank has reduced its liabilities (demand deposit outflow) and its assets (reserves that were posted at the Fed).
And everybody's balance sheets balance. Easy cheesy.