A thread
1/n
What could be the reasons for this risk asset rally? Liquidity? But where does it come from?
1/n
What could be the reasons for this risk asset rally? Liquidity? But where does it come from?
2/n
Banks had toxic securities which they lost 2 Trillion in value.
But the FED is providing cash on PAR for those underwater assets through BTFP on 4.9%/yr for 1 year.
Banks need to make up for 4.9% and these institutions lend the newly given cash through REPO.
Banks had toxic securities which they lost 2 Trillion in value.
But the FED is providing cash on PAR for those underwater assets through BTFP on 4.9%/yr for 1 year.
Banks need to make up for 4.9% and these institutions lend the newly given cash through REPO.
3/n
This cash is then reused to buy T bills which is rehypothecated multiple times in the REPO + money market.
THIS PROCESS EXPANDS SPECULATIVE BETS AND LIQUIDITY WITHIN THE FINANCIAL SYSTEM.
This cash is then reused to buy T bills which is rehypothecated multiple times in the REPO + money market.
THIS PROCESS EXPANDS SPECULATIVE BETS AND LIQUIDITY WITHIN THE FINANCIAL SYSTEM.
4/n
This ultimately results in increase in USD liquidity and carry trade in EM currencies.
This ultimately results in increase in USD liquidity and carry trade in EM currencies.
5/n
Should the loosening of the financial condition continue, risk assets will rally.
This will start to unwind the largest short positions on stocks.
ES future shorts and CTAs are about to be squeezed.
Should the loosening of the financial condition continue, risk assets will rally.
This will start to unwind the largest short positions on stocks.
ES future shorts and CTAs are about to be squeezed.
6/n
Deterioration in the real economy will only increase the hopium for FED policy pivot.
Bears will be overwhelmed bullish sentiment will take over.
Until something hits the fan within the financial system or the labor market.
Deterioration in the real economy will only increase the hopium for FED policy pivot.
Bears will be overwhelmed bullish sentiment will take over.
Until something hits the fan within the financial system or the labor market.
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