This week’s post will be relatively brief, as today is about the two B’s at Kayfabe Capital Towers - beer and basketball. When one of the first two days of the NCAA March Madness happens to fall on St. Patrick’s day, it is like having New Year’s Eve and Christmas on the same day!
I shared this graphic on Twitter this week, in which I chronicled events when things got crazy in September 2008:
As I mentioned in the tweet, note the wild swings that emerged day to day, as intraday volatility spiked. During this cycle, the real wild action has been in the interest rate and fixed income markets:
With recent bank failures and concerns over potential contagion via bank runs, the volatility of short term rates markets cascaded to be comparable to the height of banking crisis in late 2008 and early 2009. Policymakers responded in a variety of ways, but one of those was the Federal Reserve opening up its balance sheet to allow banks to swap underwater high quality bonds like US treasuries as collateral to receive a loan for the full value of the bonds at maturity.
For example, a bank may have purchased a 30-year UST in late 2021 for $1,000 with a yield of 1.75%, and with interest rates having moved dramatically higher in the subsequent period, the value of the bond may be closer to $700. The Fed will take the bond as collateral and give the bank the full $1,000.
Yes, this is a form of a ‘bailout’ of sorts, but it is via the Discount Window and more in line with Bagehot’s Dictum. As a parent of two mixed-race children, I am surprised the DEI officer at the Fed allowed policy derived from Bahegot to be deployed - apparently, bank runs supersede such considerations…
Some form of this chart has been making the rounds the last couple of days, with a Pavlovian response the declare “QE” is back and a signal to buy higher risks stocks!
I will not get bogged down into the semantics of whether the $300+ billion in lending facilities is technically quantitative easing, but I will argue it is ‘fake’ relative to the narrative that the Fed’s balance sheet growth is an all-clear to buy risk assets.
The risk is in conflating all balance sheet expansions as ‘equals’ as it relates to potential financial market impacts. Most of the QE post-2009 has been deployed deliberately, with the Fed engaged in a duration swap in financial markets by buying US Treasuries and government-guaranteed mortgages. Those would go on the Fed balance sheet and the ‘market’ would be left with cash to then have to do something. The policy was one of financial repression and trying to stimulate economic activity via the supposed wealth effect, or at least that is one story.
Mechanically speaking, it pushed people out of the risk curve, as it was combined with interest rates near or at zero. In effect, it is a large part of how we go into this mess. The injection of cash became zero-yielding hot potatoes, which I conceptualize as increasing the ‘velocity of money’ as relates to risk assets like stocks, real estate, wine, art, classic cars, NFT’s, crypto, etc. The post-pandemic injections of liquidity combined with massive fiscal stimulus sent this velocity into orbit, with manias occurring all over the place.
Will banks accessing the Discount Window amidst potential bank runs result in a similar dynamic? How many hot potatoes will be tossed around seeking out risk by the banks receiving the cash? What about when commercial real estate and other asset-backed loans likely have default rates accelerate in the coming months?
In the near term, the fake QE was actually real in a way, as it helped catalyze a sharp rally in “higher risk”- various AI narrative-driven technology stocks in particular.
I think it would be unwise to get caught up in the QE hype - this is not “The Ben Bernanke’s” Quantitative Easing.
Happy St. Patrick’s Day and may your bracket endure better than mine!
I like your stack -- quick and packed with quality information
Haven't confirmed the exact amount, but I understand at a minimum, $100 Billion in paper tied commercial property needs to be refinanced this year. Full disc -- I am short BX
Good Luck
Opinion: Relative to the Fog of Cycles and the three “Ps”. Is there a select set of indexes or commodities that you focus on? I see last weeks breakdown in oil as pronounced, and it might be hard to find a single entity that could “likely” signal deflationary recession and hard landing more than oil... It appears that Oil bottomed just before the S&P during the GFC. What do think about the odds of this playing out again and for someone like me ( investor not trader) what proxy for oil do you like? I was looking at USO. Thanks Kayfabe. Also, it was good to see that Ric Flair is looking good. A lot of miles on that body!!