Current Macro View (Over) Simplified:
A quick thread 🧵
A quick thread 🧵
1/ Covid shutdowns lead to supply chain shocks.
Stimulus done in two ways.
Monetary -> which raises asset prices
Fiscal -> money given directly to consumer (inflationary by design).
Supply chain shocks + money handouts lead to “temporary”inflation spike.
Stimulus done in two ways.
Monetary -> which raises asset prices
Fiscal -> money given directly to consumer (inflationary by design).
Supply chain shocks + money handouts lead to “temporary”inflation spike.
2/Russia Invades Ukraine
Further exasperates supply chain shocks.
Bond yields move 200-300 basis points.
Fed panics and begins to raise rates at unprecedented speeds.
Inflation narrative is over-hyped (supply chain shocks correct with time)
Further exasperates supply chain shocks.
Bond yields move 200-300 basis points.
Fed panics and begins to raise rates at unprecedented speeds.
Inflation narrative is over-hyped (supply chain shocks correct with time)
3/ Banking situation:
You deposit money in the bank. In return you get a % back.
Banks then take these deposits and lend it out to the markets for a higher return (aka in bonds).
They hold these bonds to maturity.
Accounting methods allow them to hold through volatility
You deposit money in the bank. In return you get a % back.
Banks then take these deposits and lend it out to the markets for a higher return (aka in bonds).
They hold these bonds to maturity.
Accounting methods allow them to hold through volatility
4/ So banks now own bonds that are worth much less and that earn less than the current market rate.
Depositors also realize they can receive more with their cash and begin to move their money into shorter-term + higher return liquid assets (money markets etc)
Depositors also realize they can receive more with their cash and begin to move their money into shorter-term + higher return liquid assets (money markets etc)
5/ The drain on depositor money creates a skew for the banks balance sheet.
They no longer have the capital requirements to hold onto old bonds (bought in a low interest rate environment).
They must realize losses to make up for the short fall on the deposit side.
They no longer have the capital requirements to hold onto old bonds (bought in a low interest rate environment).
They must realize losses to make up for the short fall on the deposit side.
6/ Bank runs begin. This exposes the weakness behind the banking system.
Fed guarantees all deposits.
This doesn’t solve the problem.
The problem is that banks with older bonds aren’t able to produce a profit.
Rates need to be lowered - by a lot.
Fed guarantees all deposits.
This doesn’t solve the problem.
The problem is that banks with older bonds aren’t able to produce a profit.
Rates need to be lowered - by a lot.
7/ Economic lagging indicators have inflation at 5-6%
Leading indicators have “real” inflation closer to 4%
Expected inflation rate by end of summer is to be around 2%, based on the business cycle and leading indicators.
Leading indicators have “real” inflation closer to 4%
Expected inflation rate by end of summer is to be around 2%, based on the business cycle and leading indicators.
8/ This all paints the picture of massive cuts, possible real QE.
Why?
Real growth for NA is less than 2% as is (demographic based).
Issue: massive deflationary pressure in an already slowing economy prior to Covid.
Inflation was magnified from supply chain shocks.
Why?
Real growth for NA is less than 2% as is (demographic based).
Issue: massive deflationary pressure in an already slowing economy prior to Covid.
Inflation was magnified from supply chain shocks.
9/ Equities (growth) and areas of residential real estate have a real chance at providing some good returns over the next few years.
When? On the next correction down.
This usually occurs when the FED cuts rates - lagging real time data.
/ End Thread
When? On the next correction down.
This usually occurs when the FED cuts rates - lagging real time data.
/ End Thread
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