Dissident Thoughts
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Wall Street is a jungle of elusive, ambiguous & omnipotent networks designed to effect an institutionalized wealth transfer system.

The goal of this channel is to provide clarity on this for dissidents and inspire change for our kin.

GC: @DissidentChats
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Forwarded from Market News Feed
Dissident Thoughts
Effective FFR (EFFR; the Fed's interest rate) is last trading at 5.08%, with the headline CPI hitting 4.9%.

EFFR minus CPI, also known as the real FFR, has been a negative number for almost five years. The Fed has never paused a rate hiking cycle when the real FFR is below zero. Today, it's just barely positive:

EFFR – CPI = real FFR
5.08 – 4.90 = 0.18

This image is a refresher on how it works. The new Treasury liquidity will help bring MOVE (which measures illiquidity & volatility in Treasuries) lower next year, potentially offsetting any Treasury market dysfunction in the foreseeable future & allowing the Fed to keep rates higher for longer.

The buybacks allow the Treasury to buy back older bonds from primary dealers (banks that participate in the market on behalf of the Fed). Many of these older Treasury bonds are less liquid (fewer buyers and sellers willing to engage) and have been the very source of recent freezes.

This is not QE, which is where the Fed buys US Treasuries (US debt) with newly created ("printed") bank reserves. Nor is it YCC. All it does is supply a buyer in a corner of the world's most important market where illiquidity was a looming threat.

I explained what Treasury buybacks are and how they work in my substack from October, The Great Sovereign Debt Intervention.

Forwarded from Market News Feed
Dissident Thoughts
The firms behind the three largest stablecoins – Tether, which issues $USDT, Circle ($USDC), and Paxos ($USDP) – began and continue to lobby Washington DC over the past year.

This is a relatively new phenomenon and is likely related to an increasingly popular genre of retail CBDC (rCBDC; a CBDC used in day-to-day consumer transactions) called synthetic rCBDC.

A synthetic rCBDC (sCBDC) is a stablecoin with reserves backing its value held in a central bank master account (where a bank keeps its reserves). This is not a CBDC in itself but an integral part of some hybrid CBDC models (which uses other intermediaries like banks to distribute and fulfill transactions; other models envision the central bank as being the sole and ultimate go-between).

A stablecoin is a cryptocurrency with its value pegged usually to government currencies (but also Treasury securities in some cases) in an effort to remain stable. BlackRock put its funds behind USDC last year.

Phillips Curve & Political Tightening

When judging policy, Fed officials pay attention to what's called the Phillips Curve, which plots inflation as an inversely correlated function of unemployment (higher inflation = higher employment, and vice-versa). The Phillips Curve would imply that the Fed cannot effectively reduce inflation (through rate hikes, etc.) absent a rise in unemployment. This is also why the Fed admits that it fears sticky (persistent) inflation with high unemployment. There is more to the Phillips Curve that we'll get to in a future post.

The Fed has a dual mandate, which is to balance price stability with maximum employment. When employment data comes in higher than expected, like it did for April, it signals to the Fed that the inflation fight is going in the wrong direction. The Fed believes in the Phillips Curve, which becomes a problem when the real number (inflation, employment) inconveniences the optics of the Biden admin.

In late January, UBS published a note calling out Biden & the BLS for outright deceiving the Fed and rendering non-farm payroll numbers (jobs reports) "totally unreliable." It's no secret that this is going on β€” remember the quiet revisions made in December?

Arguably, inflation "shocked" Main Street in 2022 because Biden officials had adjusted the CPI downwards to ease political pressure, leading the Fed to begin tightening way too late and for inflation to get as out-of-hand as it did last year. Is unemployment going to be the "shocker" of 2023 or 2024, as the Fed over-tightens? This is partly what UBS warns of.

They end with lamenting that, while everybody in the room knows the numbers are cooked, they will not see a correction until next February at least: "Unfortunately, what we, the BLS, and the Philly Fed staff see as overstatement in 2022, will not be corrected until February 2024."
Reserve Drain H2

Everyone is focused on the outlook should this current debt ceiling crisis not resolve itself and political kabuki takes the US into a technical default. Here's the problem: when the theater ends in raised borrowing limits (and even the staunchest BRICS bros are not expecting default), the Treasury General Account (TGA) will replenish itself $500b immediately and up to $1,200b in H2 (the second half of the year).

Recall back in January, we said the coming rapid drain in the TGA would work against QT, giving the market a tailwind into the year, and the drawdown would reflect in higher bank reserves. Citing work done by BofA, we said that changes in the TGA are largely absorbed by and reflected in equal & opposite changes in bank reserves.

The US Treasury expects to borrow $449b in Q2 (April, May, June) and another $733b in Q3 (July, August, September). This roughly means a rapid TGA replenishment of $450b, and up to another $730b soon after, for a total of up to $1.2t in the TGA.

The marginal buyer of short-dated Treasuries (US debt) appears to be households (a catch-all group that includes hedge funds, pensions, private equity, etc). And since households are mostly financed via the banking sector, that $1.2t set for the TGA will mostly come from bank reserves. The constrained banking liquidity will equate to a similarly risk-off environment in markets.

One key difference between now and the 2011 & 2013 debt limit episodes is the existence of the Fed’s reverse repo facility (RRP), which last stood at about $2.27 trillion. As interest rates have risen, depositors have taken cash and shifted it to money market funds (MMFs), who then go to park the proceeds at the RRP for a superior, risk-free return. This further erodes bank reserves.

If MMFs were marginal buyers of Treasuries (they haven't been), the TGA replenishment would drain the RRP – a positive development for liquidity.

Of course this is all assuming the US does not stumble into a technical default – an "unthinkable" scenario.
Last month, Stanford Business published a study looking at bank run risks:

"(The above chart) plots the 10 largest "insolvent" (American) banks, and SVB. A bank is considered insolvent if the mark-to-market value of its assets – after paying all uninsured depositors – is insufficient to repay all insured deposits.

On the y-axis we plot mark-to-market losses as a percentage of initial bank asset value. On the x-axis we plot uninsured deposits as a percentage of mark-to-market bank’s asset value.

Out of the 10 largest insolvent banks, 1 has assets above $1 Trillion, 3 have assets between $200 Billion and $ Trillion, 3 have assets between $100 Billion and $200 Billion, and the remaining 3 have assets between $50 Billion and $100 Billion.

***Note that insolvency is NOT simply equal to unrealized losses on assets (that record is held by Bank of America).

As soon as the study came out on April 5, every hedge fund on Earth (including yours truly) sought to drill down the name of that $1 Trillion bank, which the study obviously omitted and even the authors would not reveal in private. There are only four to choose from: JP Morgan, Bank of America, Citi, and Wells Fargo.

After pouring through the bank call reports and 10-K regulatory filings for each, we realized that Citi is the insolvent, trillion-dollar G-SIB. US Bancorp, a $590 billion bank, comes in second place, which was noted by the same firm that correctly predicted SVB would get run.
Dissident Thoughts
Last month, Stanford Business published a study looking at bank run risks: "(The above chart) plots the 10 largest "insolvent" (American) banks, and SVB. A bank is considered insolvent if the mark-to-market value of its assets – after paying all uninsured…
Just 15 years ago, Citigroup/Citibank received the largest bailouts in US banking history during and after the financial crisis of 2008. Yet its stock traded at 99 cents in early 2009.

Sheila Bair, who at the time was the Chair of the Federal Deposit Insurance Corporation (FDIC), said this about Citigroup in her 2012 book, Bull by the Horns:
Forwarded from Nativist Concern
A few months ago in Poland, I met a girl with two parents from Russia and a brother fighting for Ukraine.

The sheer absurdity of this brothers war can only be explained by Jewish administration.

β€œDemography is destiny"

This phrase rings true in more ways than most might imagine.

Demographic decline has been a contentious topic for the past two decades in Japan, who’s population has been declining since the mid-late 00s, and more recently in the rest of the G7. Earlier this year, the yearly Chinese census showed the first decrease in natural change (births minus deaths) in nearly 60 years, while South Korea broke the record for the lowest fertility rate ever recorded for a sovereign country, again.

There has clearly been a lot of recent buzz on the dramatic demographic nightmare unfolding in East Asia, but markets have been slow to grasp just the serious long-term implications of East Asian demographic collapse.

In addition to China, Japan, and South Korea, Taiwan, Hong Kong, Macau, and Thailand now all shrinking countries who similarly suffer either from extraordinary low fertility (<1 children per woman) or terminally declining fertility in the midst of population decline.

There have been serious attempts to raise fertility in Japan, Taiwan, and South Korea for well over a decade now with little to no effect. Indeed, South Korea, the most egregious offender of infertility has spent over $200 billion over the past 16 years trying to get their population to have more children.

China is now attempting its own fertility incentive program, but will it be able to stem the tide of sterility where its regional competitors have failed?

If trends continue, the Age Dependency Ratio (ADP) - the ratio of the working age population relative to the dependent population (age 0-14 and 65+) - in East Asia will skyrocket from last decade's low of 42 to well over 300, turning the β€œdemographic dividend” into demographic quicksand.

In a nutshell, this is the problem of the 4-2-1 problem.

the time of East Asia's relatively high fertility, the ADP was around 80, where for every 5 working age citizens there were 4 dependents.

With a current age dependency ratio of 50, East Asia has roughly 2 working-age persons 1 per dependent.

However, as the region continues to age at a rapid rate with new record low fertility year after year, China, Korea, Japan, Taiwan, Thailand, Hong Kong, Singapore, and Macau all face the same problem:

If one grandchild must care for four grandparents and two parents, without children the ADP becomes a whopping 600 or SIX-to-one.

As of 2022, the average women in Taiwan πŸ‡ΉπŸ‡Ό, Hong Kong πŸ‡­πŸ‡°, Macau πŸ‡²πŸ‡΄, and South Korea πŸ‡°πŸ‡· is on average likely to have less than an 80% chance of only having even just one child in her entire lifetime. For Japan πŸ‡―πŸ‡΅, China πŸ‡¨πŸ‡³, and Thailand πŸ‡ΉπŸ‡­, things do not look much better, as the number average number of children a women will have during her lifetime hovers either at or just above one child per woman.

This, of course, is misleading - the real story is much worse. Fertility has been in a secular downtrend in every country worldwide for decades, with even the likes of Niger or Ethiopia breaking all-time lows in the average number of children born to a woman over her lifetime. This metric is called Total Fertility Rate (TFR).

TFR calculates the number of children born in a year relative to the number of women aged 15-45 (or in some cases 15-49) to estimate the average number of children a woman of child-bearing age in the present moment will have over her entire fertile lifetime.

TFR is more of just a real-time snapshot of the present fertility landscape in a given year and has not accurately on its own provided insight into what the future demographic landscape of a country, jurisdiction, or market may be.

General academic consensus has been, until recently, that once a country more or less develops and completes its demographic transition, its TFR will fluctuate slight below replacement to slightly above replacement with a more or less stable population.

Dissident Thoughts
PART 1 β€œDemography is destiny" This phrase rings true in more ways than most might imagine. Demographic decline has been a contentious topic for the past two decades in Japan, who’s population has been declining since the mid-late 00s, and more recently…
Empirical observation, however, has blown this presumption out of the water, with East Asia being the prime example as of current given the aforementioned jaw-dropping fertility implosion of the Far East. Every year, East Asian countries are making new TFR lows.

Korea alone with its current trajectory is in the very early stages of shedding ~8 million people of working age who will not be replaced by the up-and-coming younger demographic over the next 7-10 years alone.

Despite this, massive capital expenditures from foreign investors are still pouring into South Korea. These investments are 20, if not 30 or 40+ year long bets on South Korea. Domestic companies too like Samsung have recently committed to building the largest chip manufacturing facility in the world in South Korea.

Are investors expecting that a 51+ million strong country with more people than Spain or Australia who's population is likely to half within our lifetimes to remain competitive, let alone politically stable over the next few decades? Note that the workforce will halve far sooner.

South Korea is a G20 country whose economy is larger than Australia, Mexico, Indonesia, and Saudi Arabia. Its long-term issuer default rating is AA- according to Fitch Ratings. This is important, because South Korea is also one of the few countries that issues 50-year bonds in addition to 30-year bonds.

With current demographic trends, will Korea, Japan, China, and parts of South Asia be stable environments for continued growth? Or is current investor behavior completely decoupled from understanding the implications of a regional population collapse in the world's manufacturing center?

Indeed, of the aforementioned countries, only Korea has put any serious effort in into keeping up with the current hiking cycle, although they have since fallen off at a 3.5% overnight rate despite being one of the first developed economies to begin a hiking cycle in late 2021 along with Norway. (Note that the Fed took until March 2022 to start hiking).

With a complete collapse in the labor force in some of the largest manufacturing hubs in the world, what options does East Asia have? What options leave the region at least somewhat stable, if not intact? Is the region even salvageable, or are we sitting under the greatest geopolitical Earthquake in nearly half a millennium? How deep does this rot go? These are the questions I hope to at least preliminarily answer in the upcoming posts here.

To get a better idea as to what the future holds for East Asia, let us peer into the situation in the northern Chinese province of Heilongjiang. This industrial and agricultural province has been referred to in the South China Morning Post as β€œChina’s northeastern rust belt.”

Dissident Thoughts
Empirical observation, however, has blown this presumption out of the water, with East Asia being the prime example as of current given the aforementioned jaw-dropping fertility implosion of the Far East. Every year, East Asian countries are making new TFR…
The population of Heilongjiang Province was, in 2010, a little over 38.3 million. Since then, it has declined nearly 17% to a bit under 31.9 million in 2020, a decline roughly equal to the population of the entire state of Indiana. This phenomenon is not solely due to domestic migration. As a matter of fact, the lowest fertility ever recorded in any jurisdiction was in 2000 in Xiangyang district of Jiamusi city in Heilongjiang, China. The region is merely a leader in a broader national, and now regional trend. Even the most fertile of all the major cities in China, the manufacturing goliath of Shenzhen, is around an audacious 1.0 child per woman as of 2020. Other large cities like Beijing have started to decline while in Shanghai the situation has gotten so bad that only about one out of every eight mothers from Shanghai has had a second child.

Rural areas are not faring better, in China or elsewhere in the region. Births among the rural youth have fallen faster than their urban counterparts. In Japan rural school closures have accelerated. In fact, China’s only short-term demographic advantage against any developed country is 20% less urbanized than say the United States for example. When China taps out that remaining rural population around the early 2030s, central planners in Beijing will be faced with the choice to either become geopolitically irrelevant in the midst of a rapidly declining workforce and population or embrace an unrelenting torrential flood of migrant workers to offset their critical manpower losses.

Korea and Japan have already started down the road of the latter as the reality of the former begins to set in. From 2013 to 2018 the number of foreign workers in Japan doubled. Recent reforms to immigration have sought to attract digital nomads in addition to more foreign labor in both Korea and Japan.

Even in the event of artificial womb technology becoming viable by magic in the immediate future, it would still take 15-20 years for these children of Marx liberated from the family to come of working age.

As to what are the social and political implications of either East Asia’s total economic collapse or total demographic reshaping from hundreds of millions of migrants puts the entire region into the crosshairs of danger not seen since the fall of the Bronze Age Collapse. With broad nuclear arsenals, rouge states like North Korea biding its time until Seoul’s annexation, and the largest die-off event the region has ever seen in recorded history, the world is asleep at the wheel as the artillery of history takes aim at the head of the Orient.

Forwarded from Joel Davis
Why is the governor of the Reserve Bank so happy about the immigration-induced housing crisis? I'll tell you why - due to all the government spending during covid to compensate for the economic damage done by the lockdowns we had surging inflation. This is because surplus government spending increases the money supply, and increasing the money supply causes inflation.

The only way to solve this is by jacking up interest rates to reduce the money supply by increasing everyone's debt (particularly mortgage) repayments, taking money back out of the economy. If your mortgage repayments are higher you have less money to spend on other shit, lowering demand across the economy and therefore lowering inflationary pressures on prices.

This is bad for the banks though because higher interest rates means less people borrow, and their business model is based upon people borrowing money, particularly mortgaging real estate. So what's the solution? Pack the country full of pajeets so that rent demand goes up, enabling property investors to cover the costs of high interest rates on the mortgaged properties they rent out by charging higher rents.

This is why the finance lobby (which pumps more into campaign financing than any other industrial lobby in Australia) loves immigration, and the major parties want that campaign financing so this is also a big reason why they love immigration even though it's wildly unpopular with voters.
Goldman Sachs’ online bank, Marcus, is the only large bank offering a competitive interest rate on its savings accounts – over 400 times that being offered by JPMorgan Chase, Bank of America, and even Citibank.

Marcus is the online banking platform offered by Goldman Sachs Bank USA – which is the FDIC-insured unit of Goldman Sachs that holds trillions of dollars in derivatives, including the kind of credit derivatives that unraveled & threatened the global economy in 2008.

According to table 24 of the most recent report from the Office of the Comptroller of the Currency (OCC), Goldman Sachs Bank USA holds $487B in assets and $5,264B in derivatives – topping the list. Credit derivatives tally up to $653B, which even exceeds the bank's assets.

We suspect that the competitive rates are meant to attract deposits for the purpose of shoring up enough capital to meet margin requirements on its derivatives.

Not a good sign at all if true. The April Stanford study suggests they're the third largest insolvent bank.
Pakistani Rupee racing Turkish Lira to the bottom.

We've covered Pakistan but Turkey deserves its own post for being geopolitically unique.

Turkey's central bank net reserve balance tumbled negative last week. A black market for currency has formed, reminiscent of Venezuela.

Could see a scenario Γ  la Venezuela since 2016 in Turkey over the next several years, where Lira goes to 30 (30 Lira per US dollar; it's at 20.7 this morning) and then 300 when the hyperinflation kicks in. Without a change in Turkey's interest rate policy (Erdogan is committed to keeping rates far below inflation), baseline is USD/TRY to 26-28 by the end of the year.

Second chart on the right shows by comparison how hyperinflation evolved in Venezuela. Each vertical line (after the first) is a 99% devaluation in bolΓ­vars.

With rupees, expect 350+ PKR per USD if China lets them default in June. China may take-on Pakistan's dollar-denomenated IMF debt obligations, preventing default.

Erdogan has a way of punishing short sellers with face-ripping, central bank-sponsored short squeezes (at least two examples from 2021). If you are positioned, have enough margin to survive.

You can read more of the details in this weekend note from MS.
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