Category: Notes

From exuberance to unwind

• War in the Middle East is interacting with prior market vulnerabilities
• The problem lies neither with the growth outlook nor with the risk of an inflation spike
• It is that investors suddenly have multiple reasons to shift from what had already been violent risk rotation to outright risk reduction

We need to talk about Kevin (and Isabel)

• Warshian balance sheet contraction need be neither psychological thriller nor horror flick
• Non-US jurisdictions combine lower reserves with less money market volatility
• It’s just a question of shifting from supply-led to demand-led liquidity provision

The radicalism of a Warshian Fed

• Markets are starting to recognize the radicalism of a Warshian Fed
• But they are pricing its impact too narrowly
• The key involves understanding the link between balance sheet, rates, and affordability

The enshittification explanation

• The more markets rise, the greater is the gap to consumer sentiment
• We are used to explaining this in terms of a K-shaped economy
• But together with record profit share and margins and the narrowness of the equity rally, it is also consistent with monopolization, regulatory capture and enshittification
• This helps explain why not only labour but also consumers are suffering, implies a critical role for politics – and ultimately paints a more fragile picture of society collapsing towards technofeudalism

When froth turns to fear

• Markets are reeling from a monetary triple whammy: repo tightness, a faltering of other forms of credit creation, and a record $900bn in reserves drainage
• But all these sources of monetary tightness ought to ease
• The question is whether this episode drives a more enduring reduction in risk appetite and fund flows

Why shutdown squeezes funding

• US repo rates have already spiked beyond year-end levels
• The squeeze seems likely to continue – and intensify – while the US government shutdown does
• The immediate consequences are $-positive and risk-negative – but mostly point to a deeper unwind of crowded hedge fund positions

The blinkered Fed

• In a narrow technical sense, the FOMC was indeed hawkish
• But in the cessation of QT and through questions, it more broadly reconfirmed a reaction function at once deeply asymmetric and completely oblivious to asset price inflation
• This paves the way for a further melt-up in risk assets and havens – and for more assets to exhibit the sort of exponential sawtooth boom-bust recently seen in gold

The long-bond problem

• The recent “bond rout” would be better described as a long-end bond technical
• It reflects dwindling pension demand more than existential fears around inflation or debt sustainability
• Governments should reduce their long-end issuance accordingly
• Investors should continue to hold steepeners until they do – without necessarily being short duration

Trading a decaying hegemon

• The more Trump exerts personal control over US organs of state, the more the US’ real power is eroded
• The main mystery is why this is still not being priced into markets
• Part of the answer revolves around the amorality of capitalism, and prospects for more easy money
• But much is attributable to the extreme and abrupt nature of credit repricings

When does liquidity turn to fumes?

• Commentators argue increasingly that tariffs matter little, and for the return of US and tech exceptionalism
• But this risks retro-fitting the explanation to the price action
• An examination of the monetary data points to the exceptional way in which fiscal stimulus has been fuelling equities