MegaCaps March On, Banks tap BTFP and More
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Alright what a day, the markets continue to funnel all alpha generating mechanisms to the MegaCaps. The Nasdaq futures were higher while both the SP500 and R2K were lower on the day. We will get to that later, but let’s look at the US Treasury auction today where they issued $21Bn long end 30 Year paper with another $5.7Bn going into SOMA. This auction was well bid and stopped thru the WI noon print by 1.5bps. Strong demand and obviously many bond market participants continue to disagree with Yellen and Powell that everything is just fine!
If you haven’t been watching and listening to Hugh Hendry, you should, his insights and delivery are always a joy to watch, check him out on Twitter and YouTube if you can. He has been pounding the sand about the TLT etf and long duration bonds, and we couldn’t agree more with him!
Trading wise, the US yield curve was hit today as perhaps many participants want to take a little bit of the steepening off the table considering the resiliency of the equity market, or shall we say just the Nasdaq, which if you read yesterday’s post, “Is the only game in town!”
First let’s look at how things shook out today US Yield Curve wise with the 2s30 getting hit the hardest down 6 bp:
As we talked about yesterday, perhaps the FRB will stay with the higher for longer and try to slowly reduce the balance sheet, while supporting deposits with the new programs. We aren’t sure how the debt ceiling will shake out, but if the FRB isn’t careful, then they will need to increase their balance sheet again with a new program to support the US government expenditures. The newest H4 report shows that the FRB continues to support the banking system as another $25.5Bn has been tapped this week at the BTFP and the “other extensions also known as FDIC support, not QE” -despite paying par for securities worth less…
Ok back to the equity markets today which saw the Nasdaq Futures end up on the day 37 points while both the SP500 and R2k Futures lost 8.25 and 15.20 points respectively. Just to show how ferocious the concentration of wealth has been take a look at our butterfly chart of being Short both the SP500 and R2k Futures and Long a single Nasdaq Future:
Using one lots this trade is +$40k on the year! We know this wealth funnel is long in the tooth, but we aren’t here to pick tops. As yesterday’s note proved, we are here to teach and expose the fallacy of our financial markets and their alleged price discovery mechanism. Rather we take the financial markets for what they are, a function of central bank authoritarian regime monetary policy instituted via the single mechanism of Quantitative Easing. This is easily proved and needs only look at the factored growth of the balance sheet over the last 20 years!
So we promised we will keep track of this very crowded trade and keep an educational P+L of this mega cap trade and you can view along with us.
Alright, we will continue to monitor the banking situation as PacWest is another victim and we suspect a lot more to come. The flight out and into the MMMFs is a no brainer and a direct result that the FRB knew would happen, this is the setup for the next round of QE. We already have QE again with the new programs, but its not obvious, yet it is if you know what to look for. Here is the chart of the MMMFs vs Bank deposits (inverted scale) from Zerohedge:
We aren’t really seeing asset sales in the banking sector and that is only because of the FRB programs. We will see what happens here as we move along in time, but rest assure, the setup is there and as soon as the FRB doesn’t hike by 25bp we suspect the next round of trouble to begin. This is bigger than 2008 btw in terms of monetary scale, the issue is not broad based commoner speculation that is at risk, but rather large levered players that are reluctant to give up a game they know has been rigged in their favor.
The QE mechanism is a powerful one and who doesn’t love money, yet in a world where the US Govt is spending $1T on both, Defense and Interest, well something has to give and the inevitable is the FRB will have to burn things down a bit, so the cost of the future bailout isn’t so expensive…its the same decadal story over and over again. You remember Covid and the SP500 dropped to the low 2000s, yea that is what we suspect will usher in the next round of QE and we suspect it this year and by next year the FRB balance sheet will be $10.5 Trillion and all will be back to normal!
Till next time. BTW we will post free versions now and feel free to share and subscribe and support our work, we know we live in the everything for nothing society but education is too valuable and should be worth something, especially the kind of insight we bring you which you cannot learn from inside a lab or a classroom setting, but rather built over decades of risk, research and analytics through practice! There was a time where people would pay 25c a day for yesterday’s news…now education and a chance to learn is essentially free, you owe it to yourself to stay the course with us!
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