- Financial sector selling off heavily.
- While it's early to call a bear market, the exhaustion gap at an all time high is a reasonable signal for market reversal.
- XLF , XLE and FAAMG have been holding up the broader markets at this high... Cracks appearing?
- Institutions will invest based on 18 months into the future (Druckenmiller).
- There are 3 relevant possibilities for the banks:
(1) is sticky, interest rates will be raised in the future, within 18 months. This actually increases the banking sector's profitability, but the price is declining because they have been speculated above valuations.
(2) is transitory, interest rates will not be raised, and we will have negative real rates. This will hurt the banks' profit margins. This is a possibility due to the 40 year demand-push deflation the US has been in (see Oil / CPI ).
(3) More importantly, the economy will decelerate (deflationary). Liquidity components of the Fed B/S have been decelerating and global credit impulse (lending) has gone negative. No more easy lending, less loans, meaning less for the banks. Investors know this and are exiting the overheated trade.
Either way for , global liquidity and global credit impulse are turning down, so the Long trade seems to be ideal.
Why did global risk assets rise to such insane levels? Credit impulse - easy lending. Now that supply of sugar is gone. Only one thing left that can happen.
Any rallies now should be faded, barring dovish changes in monetary policy.
"only a market crash will prevent global central banks tightening next 6 months."
They don't change the narrative before the move... They shift the narrative after the regime has changed, underlying conditions have changed already.
After distribution is complete, they tell the population.
It took $900m of buying/hour to bid up the market to these levels... Now who is buying?
- June 30, G-SIB banks begin stock buybacks.
- Capital returned to investors nearing $200bn as estimated by Barclays.
- $200 billion less of banks’ demand for reserves, Treasuries, MBS, and deposits.
- "With a 5% SLR minimum at the holdco level, banks run 20-times leverage, which means that $10 billion in stock buybacks means $200 billion less of banks’ demand for reserves, Treasuries, MBS, and deposits" - Zoltan; That's 20x leverage = $4T of leveraged capital.
- $1T o/n RRP usage continually drains systemic liquidity.
- " So the sterilization of reserves begins, and so the o/n RRP facility turns from a largely passive tool that provided an interest rate floor to the deposits that large banks have been pushing away, into an active tool that “sucks” the deposits away that banks decided to retain."
- "And here is why the problem is similar to the repo crisis of 2019: soon we will find that while cash-rich banks can handle the outflows, some bond-heavy banks cannot. As a result, Zoltan predicts that next “we will notice that some banks (those who can not handle outflows) are borrowing advances from FHLBs, and cash-rich banks stop lending in the FX swap market as the RRP facility pulled reserves away from them and the Fed has to re-start the FX swap lines to offset.”
Bottom line: whereas previously we saw Libor-OIS collapse, this key funding spread will have to widen from here, unless the Fed lowers the o/n RRP rate again back to where it was before."
- "-the Fed turned “unlimited” quantities into “money for free” and started to sterilize reserves."
- "“we are witnessing the dealer of last resort (DoLR) learning the art of dealing, making unforced errors" - Zoltan