Leperflesh posted:

A big problem is that the central bank is paying attention to failures of some large banks, because of the systemic risks of more big bank runs they represent if these large uninsured depositors are not bailed out; but they have not been bailing out the small banks that fail nor their large >$250k depositors, over the last couple of decades. If they do this more, they are basically telling all depositors "never bank at small banks" and that will destroy small banks. They need to either just admit that we're guaranteeing large depositors now, across the board, at all banks... or not. Piecemeal poo poo that is just paying attention to the immediate problem this month is bad policymaking.

More broadly, I am still seeing unqualified statements like in the above quoted article like "...and First Republic’s assets are mostly loans. Those loans tend to be pretty safe — they are mostly mortgages to rich people — but they are very exposed to interest-rate risk, so they have lost a lot of value. And it can’t use them to borrow from the BTFP."

Who could have anticipated that taking on massive amounts of very low interest rate mortgage debt could lead to a problem if mortgage rates rose? Whoever could have anticipated that there was interest rate risk? Surely not... bankers?

There is massive negligence here, and it's a failure to hedge against interest rate risk. The FED should not be bailing out the people who made this critically bad decision. So the correct answer, regardless of whether you do something to rescue uninsured depositors, is to let the directors of these banks and the shareholders that invested in them and empowered them, to go pound sand, financially. The SVB example is illustrative. First Republic should be taken over by the FDIC if it's insolvent. If we need to decide to raise the cap on insured deposits, fine, do it for everyone, but in no world should the bank managers who chose to take on large portfolios of unhedged low interest loans and did nothing about their exposure to interest rate risk get to keep their jobs, and if we want markets to function properly, investors are supposed to see the consequences of their risks as the counterbalance to the lucrative rewards they receive for taking on risks.

hypnophant posted:

even a fairly aggressive narrow banking proposal isn’t going to let you put a quarter million+ into a payment account, so it won’t protect anyone who isn’t already going to be made whole by the FDIC

LostCosmonaut posted:

uh oh

drk posted:

The big table o' inflation is below. Eveyone's got a hot take on inflation numbers, but it appears to me that the primary driver of services inflation is increases in shelter costs (rent and owner equivalent rent). Transportation services has a higher %age increase, but a much lower weight.

Baddog posted:

I had to check, S&P has maintained that downgrade, I thought they might have popped it back up at some point in the last 12 years.


The fact that the "jewish space lasers" lady appears to be 2nd in command in the house of representatives makes things seem not nearly as guaranteed as they used to be. I'm wavering a bit here. 2011 went down to the day before treasury said that they would be out of money. This time it might actually go to the day of. Or they might even try to see if yellen is bluffing and can pull some more money out of her rear end.

Btw, I don't think she has been definitive enough on the date. When she says "early june, maybe as early as June 1", I think some of these dumbasses interpret that as "we have until June 10 or 15 or so before something bad actually happens". I don't remember the treasury statements on the debt being as waffly in the past.

Leperflesh posted:

The primary goal was and still is and always will be, throwing around weight to show who is boss, so they can later make big claims about how strong and powerfully they owned the enemy.

I'm just glad that we seem to be nearly past the point where people will keep asking what happens when the US "defaults" on its debts. Until the impending federal budget fights, which are going to be a revisiting of the same poo poo, just with "we fail to pass a budget" as the threat.

LanceHunter posted:

In more global economics news, it seems like China's real estate crisis is getting worse...

An interesting side-note is that the NY Times now has its own sub-section on "China's Stalling Economy", under which this story was published.

Baddog posted:

Fedwatch has 20% hike in Dec, 26% by Jan.

I'm with you though, I feel like the chance is significantly higher. We seem a bit stuck here. But I'm not feeling strongly enough to do much about it. Probably will keep nibbling on fixed income, because if we aren't at the top we are very likely close to it.

quote:

Some of the increase in debt is well understood and driven by policy changes, including in response to 2007 – 2010 Great Recession, the Tax Cuts and Jobs Act of 2017, and more recent Covid-19 stimulus. Some of the projected debt increase was due to underestimates in entitlement program spending arising from faster-than-expected growth in the population of retirees and their Social Security and Medicare benefits. A decomposition of the exact causes goes beyond this brief. What Figure 1 clearly documents, however, is the secular rise in the debt-GDP ratio relative to past projections rather than an up-and-down relationship consistent with counter-cyclical policy.

quote:

China's biggest lender, the Industrial and Commercial Bank of China, paid a ransom after it was hacked last week, a Lockbit ransomware gang representative said on Monday in a statement which Reuters was unable to independently verify.

ICBC, whose U.S. arm was hit by a ransomware attack that disrupted trades in the U.S. Treasury market on Nov. 9, did not immediately respond to a request for comment.

"They paid a ransom, deal closed," the Lockbit representative told Reuters via Tox, an online messaging app.

The blackout at ICBC's U.S. broker-dealer left it temporarily owing BNY Mellon $9 billion, an amount many times larger than its net capital.

The hack was so extensive that even corporate email at the firm ceased to function, forcing employees to switch to Google mail, Reuters reported.

"The market is mostly back to normal now," said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management.

The ransomware attack came at a time of heightened worries about the resiliency of the $26 trillion Treasury market, essential to the plumbing of global finance, and is likely to draw scrutiny from regulators.

A spokesperson for the U.S. Treasury Department did not immediately provide comment on Monday.

The Financial Services Information Sharing and Analysis Center, a financial industry cybersecurity group, said financial firms have well-established protocols for sharing information on such incidents.

"We are reminding members to stay current on all protective measures and patch critical vulnerabilities immediately," a spokesperson said in a statement, adding: "Ransomware remains one of the top threat vectors facing the financial sector."

Bar Ran Dun posted:

Overseas demand destruction.

Senor P. posted:

Isn't it obvious?

Baby Boomers are finally exiting the work force.
and because the birth rate has dropped and immigration is frowned upon in the US, there is literally not enough person(s) to be able to take up the work.

Still a lot of consumer demand from the boomers, and commercial and industrial demand.
But not enough labor to make up the gap.

Like taking a big turd to the toliet.
SPLOOSH. Now the market wants to eat something and can't find enough food.

Hadlock posted:

Sorry am I posting in the wrong reality again? God damnit

Is this the reality where Hillary was president and covid was just SARS3 and contained to the island nation of Hong Kong (again)

In my home reality we had 10% inflation over three years, more like 30% inflation for housing and food, after a decade of sub 2% inflation

Bar Ran Dun posted:

Add the supply chain crisis and the reaction of a new trend of supply chains starting to move to be more regional and in country rather than global.

Add the pandemics effects on the labor pool, regarding child care, elder care, retirement, death.

Add the effects of the IRA and CHIPs acts.

Hadlock posted:

Inflation is the outcome of basic market forces. At the start of covid we pumped a ton of money both directly into the economy via literal covid stimulus checks, covid payroll loans (many/most of which were immediately forgiven). Plus borrowing money was free. M2 money supply

If you have more money (demand) than supply then prices will go up. We had more money + reduced supply due to covid, prices rose. Corporate profits in 2022 were some of the highest ever.

Then they stopped QE, supply caught up, and

Seems like a cooling of inflation to me

Yeah labor has been tight, eating out costs about double what it did in 2018. I don't think I've paid less than $17 for a cheeseburger all this year outside of the drive though. Used to pay $10. Even with those prices food service is a shell of it's former self, like half of all small restaurants failed during/after covid

Inflation went to the moon (for our generation at least) and after prices adjusted... Of course it would soften, demand weakened due to higher prices, and we stopped pumping extra money into the economy

Leperflesh posted:

we're going in circles

Hadlock posted:

Mortgage rates going to 8% was in no way a volcker shock. Painful yes but they boiled the frog so slowly it gave companies a chance to shed costs early

quote:

The Container Price Sentiment Index (xCPSI) serves as a valuable metric for assessing the prevailing market sentiments among supply chain professionals on the anticipated trajectory of container prices in the upcoming weeks. In the first quarter of 2023, the index values were in the range of -6 to -11, indicating a prevailing sentiment that the majority expected a decline in container prices during that period.

However, the landscape has witnessed a remarkable shift if compared on a year on year, month on month basis. As of January, the xCPSI values have surged to historic highs, ranging between 67-71. This substantial increase signifies a complete reversal in sentiment, with the majority of supply chain professionals now anticipating a notable upswing in container prices.
The scale values were fluctuating within the moderate range of 25-40 in the month of December, on a 100-point scale.

This significant escalation in market expectations regarding an imminent increase in container prices is a clear indicator of the industry’s perception of how the Red Sea crisis is poised to impact container pricing dynamics in the foreseeable future. The heightened values on the xCPSI underscore a shared anticipation among supply chain professionals that the unfolding events in the Red Sea will likely exert upward pressure on container prices in the coming weeks.

Industry’s Way Forward: Overcapacity, Ever Given Comparison, and Potential Challenges

“The freight rates are tripled since roughly a month ago, and the container prices are also expected to rise further in the short to midterm. The anticipated impact is significant.” Added Roeloffs.

“However, it’s crucial to remember that our supply chains currently hold a surplus capacity of over 6 million TEUs, accumulated over the last two years due to a demand deficit. This excess capacity acts as a vital cushion to absorb potential shockwaves in the supply chain.”

“The degree of impact hinges on the duration of the Red Sea crisis. Should it persist for an extended period, and the excess capacity continues to be absorbed, we could potentially face serious challenges. Drawing a comparison to the Ever Given situation, where disruption occurred during a period of extreme difficulty in securing capacity and historic peak demand, rates skyrocketed to 10 times pre-pandemic levels. While we aren’t currently at those historic highs, the recent rate surge is noticeable when viewed in the short term.”

Bar Ran Dun posted:

drk posted:

China Evergrande ordered to liquidate, owing $300 bln: https://www.reuters.com/business/embattled-china-evergrande-back-court-liquidation-hearing-2024-01-28/

Sounds... not great, but everyone knew this one was going to blow up. Honestly, I thought it already had

Cyrano4747 posted:

To be honest I'm surprised it's being allowed to happen.

My money was on them quietly getting bailed out and becoming more or less a state run enterprise, with a gentle wind-down over the next decade or so.

Leperflesh posted:

naked filthy men scrabble in the shadows through the discarded detritus of collapsed civilization

Nothingtoseehere posted:

On bubbles, there's some evidence that the rise of passive stock investing has increased the duration/durability of bubbles. When every holder of a stock is a active investor, then buying in out of greed, or selling out of panic, can happen to a greater % of shareholders at any one time. When 30% of a stock is held by passive investors who aren't making active pricing decisions, then a rout requires a higher % of the active investors to panic and sell to trigger a rout.

Baddog posted:

hah!

True, true, and funny. But isn't "needing to have some poo poo to brag about" unfortunately the crux of everything humans do?

mrmcd posted:

Today in lol Turkey:

https://archive.md/sSJFp

Hey guys you can backstop a depreciating currency by just handing out sacks of that same currency to cover fx losses, right? That's how money works? Asking for a friend.

quote:

Under the existing mechanism, lira depositors can hedge against currency losses by getting state-guaranteed compensation for any depreciation that exceeds the interest on the accounts. The costs stemming from the program — previously split between the Treasury and the central bank — were fully transferred to the monetary authority in July last year.

quote:

The program still has the equivalent of about $70 billion in foreign exchange-linked savings.

quote:

So, what you've done is you've increased the proportion of market participants that are truly valuation insensitive, or price insensitive is another way to think about it. As a result, what you've done is you've actually increased the inelasticity of the market. The ability for prices to change in response to relatively small changes in supply and demand. That's really the primary dynamic. You removed that historical filter in which investors would react to higher prices by saying all else equal, the information content that I've now received is that future returns will be lower. Therefore, I'm more willing to sell.

For passive investors, you actually receive the opposite signal. As the price goes higher, relative to other securities, it becomes relatively more attractive. It's presumed that there's information content there. As a result, you actually allocate more capital to those names that have gone off the most.

quote:

As you push values higher and higher and higher, and you concentrate the resources in vehicles, like the Vanguard total market index that carries no cash whatsoever, it's a $1.6 trillion fund that carries $80 million in cash. If an active manager were to come into your office and say, “We're running a $1.6 trillion fund with $80 million of cash”, you would throw them out of your office and say, “Don't ever talk to me again.” That's completely irresponsible. But we look at that with Vanguard, and we're like, “Oh, yes, of course, this is the safe way for people to invest.” So, the problem occurs when people try to take money out. When they try to take that money out, Vanguard has no choice but to turn to the market for that liquidity. The scale of these entities are now at the size that just like the XIV, you could actually cause yourself to exhaust the order book and a crash to commence.

quote:

Their tests show that the largest companies, those that make up the top of the S&P 500 or the Nasdaq-100, paradoxically, are the least elastic. And as they become larger and larger, and the index becomes concentrated amongst those names, the indices themselves, the markets themselves are becoming significantly less elastic.

quote:

Cameron Passmore: Why are flows into a cap-weighted index fund different from flows into the overall aggregate of active which obviously holds the market?

Mike Green: So, first of all, that's not obviously true. The second part of your statement that all active managers match all passive managers in aggregate, is an untrue statement that's predicated on the idea of fully complete markets with no regulation that doesn't have requirements around diversification, et cetera. That's honestly just a misframing of the reality that, unfortunately, gets repeated over and over and over again.

Look at some of the most successful investments until very recently would be entities like the Tiger Funds that were very active in non-public equities. There's non-public equities. There's non-public real estate. There's non-public companies. There's non-public debt. None of those can actually be represented within the indices. So, it's really quite disingenuous. Actually, use the language of Bill Sharpe and say that they’re just the same thing, because they're not. The second component is that it's not really so much that you're waiting on the basis of market capitalization, although, that does have a disconnect. This is again, under the academic work of JP Bouchaud, who showed who highlights that liquidity does not scale with market capitalization. It scales with volume and volatility.

The market cap is only peripherally related to volume and volatility. If I looked at the number of shares and quantity of trading from Microsoft, for example, relative to Delta Airlines, while their market capitalizations are roughly 100 times different, their trading volumes are only about five times different. That's actually a by-product of market structure, how trading activity actually occurs. If I'm a market maker, I have to put capital up against trades to facilitate those trades. The profitability of that capital is determined by the spread between the bid-ask and the quantity of shares that are being traded. If there's only five times as many shares being traded on Microsoft, and it has a tighter bid-ask spread than Delta Airlines, then it's less profitable for me to put capital up against Microsoft in proportion to its market capitalization.

As a result, it actually becomes less liquid, or more inelastic is the easiest way to think about it. When you try to shove through trades in the size that you have to for a market cap-weighted index, it overwhelms and actually causes those names to rise more than they otherwise would be expected to.

quote:

The real issue again, and just go back to the diversification component, it's hugely valuable to have people transact for different reasons. You may want to buy a house, therefore you sell. I may look at a valuation and say, “Well, that's too high. Therefore, I'm going to sell.” Somebody who has even more conviction may say, “Wow, that valuation is so crazy. I'm going to short it and synthetically make more shares available for people.” That's what shorting really is. That diversity creates robustness within the market. Really, all we're describing with the growth of passive and more importantly, the regulatory support for the growth of passive, is that we're effectively narrowing down the diversity and heterogeneity of the marketplace and making it more and more homogeneous into a group of strategies that basically boiled down to, did you give me cash? If so, then buy. Did you ask for cash? If so, then sell.

quote:

So, under the Pension Protection Act of 2006, we switched 401(k)s from opt-in frameworks. In other words, you had to choose to participate to opt-out frameworks. In other words, you had to choose not to participate. That was a substantive change in the market that was done under lobbying from primarily Vanguard and BlackRock.

The second key change was the designation of qualified default investment alternatives. So, if you're going to default somebody into participating, you have to put them into something. It actually turned out that the vast majority of people or not the vast majority, but many people, when they chose to participate in their 401(k), would look at the plethora of choices available to them and say, “Man, I have no idea,” and just hold cash.

So, the QDIA changed that. It started to force people into the market and therefore led to far greater participation. Interestingly enough, when that was done in 2006, that led to the explosion of the growth of firms like PIMCO, that could manage balanced funds that combined bonds and equities into a single product. That was then replaced as the Qualified Default Investment Alternative, QDIA in 2012, by target date funds. Today, I want to say the number is somewhere in the neighborhood of 95 cents of every retirement dollar in the United States now flows into a target date fund.

quote:

Because of the growth of passive. It's not because active managers have a harder job or because there's fewer idiots out there, et cetera. There's plenty of idiots. Just look at GameStop. But what we're actually experiencing as a market that is being distorted from the growth of passive. As that becomes larger over time, it creates this exponential curve of rising valuations, that in turn forces mechanically the alphas lower for active managers, which causes us to fire the active managers because they're idiots, and replace them with the oh-so-efficient passive investing, which further exacerbates the problem.

quote:

Now, perversely, we're at the same stage, we bought ourselves capacity by changing the markets from cap-weighted to float-adjusted cap weights. But now we've exhausted it. So, we're seeing the same underlying behaviour, and people are, of course, waking up and saying, “Hey, this whole value thing, boy, that was stupid. I should be a momentum investor. I should be a technology investor. Just get me some of that sweet, sweet AI stuff and I'm going to be rich like Croesus.” Right now, ironically, all they're doing is accelerating the termination point. But that's what's underway right now.

quote:

So, doing things like buying call options, which historically had delivered significantly negative returns, now actually largely offer positive returns, because the market has shifted in that drift feature. That would be one way that you incorporate it. You embed long-term or you embed call option-type strategies that capture elements of this drift and are candidly not properly priced for those underlying dynamics.

The other way that you identify this or you deal with this is you recognize that the information content that we're receiving on the health of the economy, and the health of individual securities is actually wrong. It's being corrupted by these underlying dynamics. That's trickier because it effectively requires you to start saying, “Where do I start to bet against this? Where do I think this starts to unwind?” Now, my models would suggest that what this largely means is that markets are increasingly reliant on employment, that contribution from 401(k)s, and ultimately, that you start unwinding this process. Again, it is really tricky because there's multiple levels to thinking through how this plays out.

quote:

That is the core issue. And most people have kind of woken up to the giant joke. You can't allow a retirement system to fail, and the US markets have become our retirement system. So, the US government is going to be forced to intervene. Now ironically, if we know that the US government is going to be forced to intervene, that makes us more comfortable investing, therefore, we push prices up higher, which in turn means a larger sell-off is required for the US government to intervene, and how the game plays out. And that moral hazard, I got to be honest with you, is beyond my IQ.