Liquidity Drain Coming? MegaCaps Keep Winning?
Powell basically sealed the deal on any further rate hikes, or at least his jargon seemed to have suggested as much. However we know they cannot be trusted now to keep the pedal to the metal, but rather 25bp hikes are nothing more than painting the tape at this point, 500bp in a year seems adequate enough, but inflation still remains high, asset prices still remain elevated and with the Nasdaq > 13k and the SP500 > 4000 well, why should the FRB be worried about hiking? Their job should be to drive down speculative risk taking, drive down inflation and they should keep hiking till that is solidly in place, or that is at least what main stream economics would say.
However we feel that the current hike regime used the inflation excuse to pour on a hot and heavy dose of higher rates, more than likely forced upon to keep US Dollars and US assets in favored status. We can see now that it is working as both the Yuan and Yen have been weakening, which means the PBOC will have to let the Yuan continue to weaken, or intervene and sell dollars.
So with the higher for longer firmly entrenched we now know that pressure will continue to be on banking reserves.
We know the critical level in overall banking reserves and we know every time we get down to that level, the banking system is on the verge of collapse. We also know that central banks have stepped in every single time with some sort of BTFP, RRP or RRR (PBOC) Qe-lite market saving liquidity.
The banks do not have a temporary liquidity problem, they have a solvency problem and the “higher for longer” will continue to force depositors to seek out MMMFs and generate a higher return. This will in turn continue the liquidity drain, but then again, maybe the FRB knows this and each and every time will use it as an excuse to enact new Qe-Lite programs and or stall QT or give up on it for good.
It is Magnelibra’s base case that by December of 2024 the FRB balance sheet will be > $10T. We aren’t sure of the catalyst, nor do we care, it could be a GSIB collapse, it could be hard landing recession, global war…the what doesn’t matter. The only thing that matters is that the FRB has been consistent in 12% annualized asset accumulation over the last 25 years and the sheer mathematics of our monetary system, REQUIRES IT! The global central banks may have everyone else fooled, but we are not, we know the real goal is wealth concentration, control and keeping a narrative of necessity.
It will only be a matter of time before we can post this picture, which we will do so the minute the FRB balance sheet is > $9T:
Although Powell may step down by then as we know he truly doesn’t believe in QE but is being forced by those really in control.
Ok we know with liquidity headwinds ahead as the TGA gets drained and reserves continue to fall it will be interesting to see how our MegaCap Tracker holds up. We know that is where all the capital has been placed and we know Nvidia is a lofty 29x to sales and the overall Nasdaq price to sales is 5.4x which is up from the 4.2 low at the start the year, but down from the high of 8.5. So we must keep things in context.
Here is how the MegaCap Tracker closed out the week, our options hedge gained $940 overall and we added a new options sale of the May 26 expiry SPY 422 Calls:
Ok we will continue to bring this information daily, we will have our daily settlement page back up soon, we apologize as we are undergoing some data cleansing and will bring it to you daily once again soon.
BTW Russia took full control of Bakhmut this weekend and we suspect US media to be fully behind further arms and capital deployment to Ukraine, which we also know will just suffer the same fate as the prior deployments, PMC Wagner fully expects to turn the blue part of the map RED, but western media will keep telling you Ukraine is winning. We know one thing, nobody wins in war, human life is lost and it is tragic, plain and simple. Magnelibra always prefers diplomacy and peace negotiations and believe it is always paramount to death and destruction and you should think that way as well:
We do not take war lightly and we do not care about peoples preference for one nation over another, rather we put human life ahead of all else and all death and destruction should be absolutely avoided and counter measured as much as possible. So do not take this as Magnelibra is ProRussian, ProAmerican, Pro or Con anything, rather we want you to make your own assumptions as to the who, what, why when it comes to these things and try and put humanity first. We have seen our own dose of tragedies in life to know that peace is a rare commodity to be hoarded when possible, yet it doesn’t have to be that rare, but it is…
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