the most footnoted blog posts in history. thank you again for the education. Its probably the number one reason i watch zero news. I wait for the outcomes to trickle down to me. The only ones that actually matter are the ones that withstand the average news cycle. Also love seeing again a side by side of major news media reporting and looking at it like “he chatgpt give me 10 possible versions of a headline blurb about 390,000 job increase” and viola, instant mass media reports that all say the same exact thing with different adjectives. Sounds a lot like some pre-fourth turning action. 🫶🏼
Really appreciate the write-up Balaji. In much of your articles you make explicit what I've felt intuitively over the past decade or so which is incredibly helpful. It also feels like, the establishment has increased pressure (mainly through censorship and spreading fear) to buy into their less and less credible narratives.
As an old market making trader, I sometimes might want to agree, but I also like to take the other side. Often when I traded, I didn't care if I bought or sold, as long as I got the edge.
It's pretty hard to say the 10 yr isn't liquid. It depends on the definition. I haven't seen any problems delivering 10yr's at futures expiration (10 yr futures is NOT cash settled unlike the SOFR). If I had to unload a massive adverse position in the 10 year vs Bitcoin, I'd prefer to unload it in the 10 year. I'd get hurt a lot worse unloading Bitcoin.
I also think that in your metaphor on Apple, what if Best Buy could have hedged??? Virtually none of the banks hedged their treasury portfolio. Idiotic, especially because Powell was pretty transparent that rates were going up. Instead, they sat on their hands---so is that shitty data? the Fed's fault? Or is it unqualified management teams making gigantic mistakes at the bank thinking if they got free money from increased deposits due to Covid spending and invested at 1.5% they couldn't lose? I guess I am disagreeing with you that the bank failures weren't caused by devaluation, but failure to hedge duration risk.
There are plenty of liquid counterparties to hedge against. I disagree with you again. Not only could they go to private OTC markets and hedge, but they could have used plain vanilla standardized futures markets where they would find plenty of counterparties every day. They also could have been more sophisticated and hedged in the interest rate futures options markets, and rolled their hedges.
I don't think that sophisticated traders and money managers buy into right or left wing conspiracy theory when it comes to their portfolio. Unqualified bankers do.
I do agree now, when I used to vehemently disagree, that the BLM is probably massaging the numbers to make Biden look good. They were accused of doing it with Obama as well, and the left accused them of doing it with Trump. Now, it doesn't pass the smell test based on what we are experiencing on the ground. However, I am not totally bought into that opinion.
One big issue that I penned an article at The Epoch Times about is liquidity being leaked out of the the interbank repo system. Essentially, the Fed has to auction off billions and billions in bonds over the next seven months. Who will buy them? That will pull a lot of money out of the market and sideline it. Then what happens?
I really do appreciate you writing this because I agree with some of what you say and in my disagreement, it forces me to critically think instead of nodding my head blindly. Keep doing it.
I want to focus on this point on hedging if possible
Banks in 2021 were given historic amounts of cash, encouraged by regulations to invest in “high quality liquid assets”, told by the media that expecting inflation was paranoid, told by the Fed that rates would be kept at zero, told by Buffett to bet on America for the long run, and generally incentivized in countless ways to invest in treasuries
If we can only focus on one counterargument: when hundreds of banks are insolvent, is this really a failure of individual banks to hedge rather than the central bank to set policy?
Also, Powell wasn’t transparent that rates were going to go up. As late as Nov 2021 there were Bloomberg articles quoting him as saying that rates would be held at zero. After he got renominated on Nov 22 2021 then he suddenly pivoted to rapid hikes.
He surprised everyone that was left holding an enormous bond position in a “safe” asset that had just suddenly gotten devalued.
"told by the media" "told by Buffett" et al. Just because you are told anything by anyone you don't abandon best practices. There is no good reason to borrow at 0%, invest at 1.5% and not recognize the everyday risks that come with doing it. It was a total failure of bank management who had their eye on another prize, and used accounting (we can't lose if we hold to maturity) rather than economics (what happens if rates change up or down) to analyze their business position. None at SVB that I saw were qualified to even be in that position. This is not a left/right wing position but when your risk manager gets their degree from Harvard public policy and "worked for the Fed" instead of being a quant or at a minimum an MBA with on the ground retail banking experience, you are derelict in your duty to shareholders. To people in the business, it was NOT a surprise. For an example of that, I suggest you look to trading activity after unemployment in Feb 1994 when the Fed did in fact move unexpectedly.
The important one is "told by Fed and Treasury" that interest rates would be held near zero indefinitely.
What they did is similar to banks selling AAA mortgage-backed securities despite knowing they didn't have value. Yellen and Powell teamed up to sell Treasuries and then devalue them -- after saying through all of 2021 that they wouldn't.
Thanks for your thoughtful response, Balaji. You always see the forest from the trees. Woke is a distraction that destroys value in multiple layers, so it's hard to measure exactly how much of a factor it is to going broke. The network state is a refuge for those escaping the zombie state.
@balaji, I will give you a "tin foil" hat theory that I first heard from an old SEC lawyer friend of mine. Signature, SVB, and FRP bank had to go because they were the largest on/off ramps from fiat to crypto. Gary Gensler went on a seek and destroy mission and killed them.
What is your take on the Wagner/Treason/Immunity transgression? Is it real? Staged? Why would this happen? What re the motives? I don't think Prigozhin is dumb enough to do this, he never would have made it this far? If it is real, what is the over under on his number of days on earth?
I traded bonds for 25 years. There had never been government intervention directly in markets before. 2008 x long term capital. They came in big. As some of us in the business felt, 'they stopped the depression but we will pay for it with a long recession'. The QE, increasing the treasury balance sheet, etc stalled it more but the treasury, student loan, consumer etc. debt issues are here. If not in this minor rate rise then the next for sure.
You’re a smart dude but your post is simply testament to a lack of understanding of what duration risk and convexity is. Selling treasuries that yield next to nothing is not a “rug pull” by the Fed. Bond holders will receive their coupons and the full par value.
There is only one measure of employment that I want to see - the number of paid hours worked each month by all workers in the US. You can normalize that to population if you like, but even that makes me a bit suspicious.
1. I don't know finance, and even I shorted bonds in 2021. So any bank CEO should've known 1) to not buy 10yr bonds heavily, 2) pro tricks to hedge duration risk. Entities who don't know banking would've been happy to take bank CEOs money hedging the "world's safest" Treasury bonds.
2. I blame bank CEOs, because everything Balaji wrote here is the *exact same* in the medical industrial complex. Any competent bank CEO knew *why* Powell was giving totally wrong interest rate advice, just like any competent doctor knew *why* Fauci was giving totally wrong covid advice. Outsiders think Powell or Fauci "didn't know". But insiders know why the wrong advice was intentional.
The beauty of the positive jobs headlines is that the Fed desperately wants unemployment to go up, but it obviously looks bad if they admit as much. If unemployment *doesn't* go up, then they might lose complete control of inflation as wage inflation spirals relentlessly upwards (much harder to tame than price inflation). If wages go up, economic productivity goes down and the administration cans the Fed chair who's made them look bad!
iPhone analogy is great
the most footnoted blog posts in history. thank you again for the education. Its probably the number one reason i watch zero news. I wait for the outcomes to trickle down to me. The only ones that actually matter are the ones that withstand the average news cycle. Also love seeing again a side by side of major news media reporting and looking at it like “he chatgpt give me 10 possible versions of a headline blurb about 390,000 job increase” and viola, instant mass media reports that all say the same exact thing with different adjectives. Sounds a lot like some pre-fourth turning action. 🫶🏼
"QE isn't printing" + "We won't hike rates --> immediate hike". It was like watching a Monty python sketch on a global stage.
Brilliant piece - too many are missing the forest for the trees (s/o Luke Gromen)
Really appreciate the write-up Balaji. In much of your articles you make explicit what I've felt intuitively over the past decade or so which is incredibly helpful. It also feels like, the establishment has increased pressure (mainly through censorship and spreading fear) to buy into their less and less credible narratives.
Sociologist Tim Jordan wrote a whole book about how conflicts over information have become a major deal in modern politics and culture.
As an old market making trader, I sometimes might want to agree, but I also like to take the other side. Often when I traded, I didn't care if I bought or sold, as long as I got the edge.
It's pretty hard to say the 10 yr isn't liquid. It depends on the definition. I haven't seen any problems delivering 10yr's at futures expiration (10 yr futures is NOT cash settled unlike the SOFR). If I had to unload a massive adverse position in the 10 year vs Bitcoin, I'd prefer to unload it in the 10 year. I'd get hurt a lot worse unloading Bitcoin.
I also think that in your metaphor on Apple, what if Best Buy could have hedged??? Virtually none of the banks hedged their treasury portfolio. Idiotic, especially because Powell was pretty transparent that rates were going up. Instead, they sat on their hands---so is that shitty data? the Fed's fault? Or is it unqualified management teams making gigantic mistakes at the bank thinking if they got free money from increased deposits due to Covid spending and invested at 1.5% they couldn't lose? I guess I am disagreeing with you that the bank failures weren't caused by devaluation, but failure to hedge duration risk.
There are plenty of liquid counterparties to hedge against. I disagree with you again. Not only could they go to private OTC markets and hedge, but they could have used plain vanilla standardized futures markets where they would find plenty of counterparties every day. They also could have been more sophisticated and hedged in the interest rate futures options markets, and rolled their hedges.
I don't think that sophisticated traders and money managers buy into right or left wing conspiracy theory when it comes to their portfolio. Unqualified bankers do.
I do agree now, when I used to vehemently disagree, that the BLM is probably massaging the numbers to make Biden look good. They were accused of doing it with Obama as well, and the left accused them of doing it with Trump. Now, it doesn't pass the smell test based on what we are experiencing on the ground. However, I am not totally bought into that opinion.
One big issue that I penned an article at The Epoch Times about is liquidity being leaked out of the the interbank repo system. Essentially, the Fed has to auction off billions and billions in bonds over the next seven months. Who will buy them? That will pull a lot of money out of the market and sideline it. Then what happens?
I really do appreciate you writing this because I agree with some of what you say and in my disagreement, it forces me to critically think instead of nodding my head blindly. Keep doing it.
I want to focus on this point on hedging if possible
Banks in 2021 were given historic amounts of cash, encouraged by regulations to invest in “high quality liquid assets”, told by the media that expecting inflation was paranoid, told by the Fed that rates would be kept at zero, told by Buffett to bet on America for the long run, and generally incentivized in countless ways to invest in treasuries
If we can only focus on one counterargument: when hundreds of banks are insolvent, is this really a failure of individual banks to hedge rather than the central bank to set policy?
Also, Powell wasn’t transparent that rates were going to go up. As late as Nov 2021 there were Bloomberg articles quoting him as saying that rates would be held at zero. After he got renominated on Nov 22 2021 then he suddenly pivoted to rapid hikes.
He surprised everyone that was left holding an enormous bond position in a “safe” asset that had just suddenly gotten devalued.
"told by the media" "told by Buffett" et al. Just because you are told anything by anyone you don't abandon best practices. There is no good reason to borrow at 0%, invest at 1.5% and not recognize the everyday risks that come with doing it. It was a total failure of bank management who had their eye on another prize, and used accounting (we can't lose if we hold to maturity) rather than economics (what happens if rates change up or down) to analyze their business position. None at SVB that I saw were qualified to even be in that position. This is not a left/right wing position but when your risk manager gets their degree from Harvard public policy and "worked for the Fed" instead of being a quant or at a minimum an MBA with on the ground retail banking experience, you are derelict in your duty to shareholders. To people in the business, it was NOT a surprise. For an example of that, I suggest you look to trading activity after unemployment in Feb 1994 when the Fed did in fact move unexpectedly.
> Just because you are told anything by anyone
The important one is "told by Fed and Treasury" that interest rates would be held near zero indefinitely.
What they did is similar to banks selling AAA mortgage-backed securities despite knowing they didn't have value. Yellen and Powell teamed up to sell Treasuries and then devalue them -- after saying through all of 2021 that they wouldn't.
That was a material misrepresentation.
We can agree on that! Yellen is for sure a backstabber, backbencher. It doesn't relieve management of the responsibility to hedge against risk.
ESG and DIE are the sludge of the toxic waste. They destroy capitalism and democracy. Both were prominent in the SVB implosion: https://yuribezmenov.substack.com/p/svb-linkedin-receipts
1) I agree that wokeness is bad, and that many companies that go woke end up broke, etc. But that's not actually what killed SVB.
2) Specifically, this point is not the core issue:
> SVB did not understand Econ 101 interest rate risk
It's not just SVB -- **hundreds** of banks are dead or walking dead. This one isn't primarily a woke thing. It's a central bank thing. See here:
https://siepr.stanford.edu/news/many-us-banks-face-same-risks-brought-down-silicon-valley-bank
Thanks for your thoughtful response, Balaji. You always see the forest from the trees. Woke is a distraction that destroys value in multiple layers, so it's hard to measure exactly how much of a factor it is to going broke. The network state is a refuge for those escaping the zombie state.
@balaji, I will give you a "tin foil" hat theory that I first heard from an old SEC lawyer friend of mine. Signature, SVB, and FRP bank had to go because they were the largest on/off ramps from fiat to crypto. Gary Gensler went on a seek and destroy mission and killed them.
“wokeness” just means “Black” and this is a really bad read of linguistics, history, and sociology.
What is your take on the Wagner/Treason/Immunity transgression? Is it real? Staged? Why would this happen? What re the motives? I don't think Prigozhin is dumb enough to do this, he never would have made it this far? If it is real, what is the over under on his number of days on earth?
I traded bonds for 25 years. There had never been government intervention directly in markets before. 2008 x long term capital. They came in big. As some of us in the business felt, 'they stopped the depression but we will pay for it with a long recession'. The QE, increasing the treasury balance sheet, etc stalled it more but the treasury, student loan, consumer etc. debt issues are here. If not in this minor rate rise then the next for sure.
You’re a smart dude but your post is simply testament to a lack of understanding of what duration risk and convexity is. Selling treasuries that yield next to nothing is not a “rug pull” by the Fed. Bond holders will receive their coupons and the full par value.
Create financial crisis to justify the urgent need for FedNow?
There is only one measure of employment that I want to see - the number of paid hours worked each month by all workers in the US. You can normalize that to population if you like, but even that makes me a bit suspicious.
Balaji or anyone -
1. I don't know finance, and even I shorted bonds in 2021. So any bank CEO should've known 1) to not buy 10yr bonds heavily, 2) pro tricks to hedge duration risk. Entities who don't know banking would've been happy to take bank CEOs money hedging the "world's safest" Treasury bonds.
2. I blame bank CEOs, because everything Balaji wrote here is the *exact same* in the medical industrial complex. Any competent bank CEO knew *why* Powell was giving totally wrong interest rate advice, just like any competent doctor knew *why* Fauci was giving totally wrong covid advice. Outsiders think Powell or Fauci "didn't know". But insiders know why the wrong advice was intentional.
Bush 1 and 2 rly screwed it up
The beauty of the positive jobs headlines is that the Fed desperately wants unemployment to go up, but it obviously looks bad if they admit as much. If unemployment *doesn't* go up, then they might lose complete control of inflation as wage inflation spirals relentlessly upwards (much harder to tame than price inflation). If wages go up, economic productivity goes down and the administration cans the Fed chair who's made them look bad!