The Economy

After the Bank of England announced more QE (but don't call it QE!), there was euphoric buying.

The world can't afford rates above zero. After the BOE, the Fed Funds futures sent expectations for rate hikes back down. Markets have been conditioned for the last decade and a half. ... The BOE blinked, so they are now betting that the Fed will blink too at the first sign of any stress.

Keep this in mind: The UK has a worse inflation problem than the U.S. does. They made a halting effort to hike rates (but did less than the Fed did, which was killing the pound sterling) and had a plan to start selling down part of their balance sheet. ... and then a new idiot prime minister announced tax cuts, which would have been at cross purposes. ... and the bond vigilantes who have been thoroughly beaten into submission by central banks came out with a vengeance FINALLY. ... and the BOE did a complete U turn. So now they are going to do more of what caused the runaway inflation. The bet today (and it can change tomorrow; if Jay Powell keeps pretending to be Paul Volcker) is that is the path the Federal Reserve will take too. They will try to inflate away as much of the trillions of dollars of mispriced debt they are responsible for as possible, rather than approaching it responsibly, and everyday people are going to be the ones to pay the tax (via inflation) for their stupidity.

 

The Can Has Reached the End of the Road

 

I think his work is about the technology and its applications, and why he thinks it can be a good thing for society if we were to realize its potential.

I'm sure it's worked out fine for him. I don't think he's been the guy telling people to speculate on digital dogshit or NFTs to try to get rich quick. He's more of what you might call a crypto-academic.

 

Credit Suisse Turmoil Deepens With Record Stock, CDS Levels

This may or may not be another Lehman moment, but:

1) Credit default swaps don't blow out that way based on rumors. They have toxic debt that they are having trouble rolling over with funding costs rising in the wake of central bank tightening. And markets are reflecting the weakness.
2) There will be a bailout or some kind of forced merger or sale in the next few months.
3) Who knows exactly what kinds of risks they have been taking (were forced into taking, thanks to the Federal Reserve and ECB). I know two things for certain, though.
a) To borrow from Warren Buffett, when the tide goes out, you find out who has been swimming naked.
b) If the Fed keeps going with the tightening, there are going to be "too big to fail" kinds of failures that are going to freak people out and create financial instability. Which is why it's a safe bet that once again they will pivot and do a U Turn, same as they have done several times already.
c) What is different is that this time, pivoting means that they will be choosing runaway inflation rather than being adults and accepting the consequences of what they caused in the first place. Inflation is more of a hidden tax, which they can pretend isn't their doing.
d) This isn't just a Credit Suisse thing. The amount of toxic debt built up over the last 2 decades (which needed to go bad in 2008, but was stupidly propped up and magnified into trillions of dollars of additional debt with zero interest rates and asset purchases) is hidden in things we can't see yet, but will be visible when the failures happen. Interest rates normalizing just a tiny bit (while they still haven't rolled much of anything off their balance sheet). ... is enough to show cracks. They made the world unstable, and now without them price fixing interest rates so the cost of money is free, and debt is growing forever, a debt bomb is going to go off.

 

BTW. ... remember when collaterlized debt obligations, or CDOs, became part of everyone's vocabulary when the housing bubble imploded? The term du jour is LDIs, or liability-driven investments.

When the Bank of England was forced to turn tail and go from talking about reducing the size of its balance sheet to a 180 degree turn to buying more assets last week, it was because of a crisis with British pension funds that were having their trouble meeting their obligations thanks to being robbed of yield for a decade and a half by their central bank, so they had been forced into leveraged bets (way more risk than a pension fund would otherwise take) to make up the yield they needed. They received a fixed rate of interest in return for paying the floating rate leg of an interest rate swap, and that works fine as long as rates stay steady. But with central banks tightening, yields went up very far, very fast, and they got margin calls forcing them to put up more cash (that they didn't have). And. ... crisis.

I bring this up. ... because a major question now is how much exposure Credit Suisse has to the UK Gilt and LDI. ... It's worth keeping an eye on Deutsche Bank, too, because its toxic balance sheet has forced it into similar behavior. And then there is the shadow banking system, which is actually much less regulated. What giant funds have exposure to leveraged products and are under stress right now?

It always comes back to leverage. And that is what mispriced debt -- artificially low interest rates -- create. It's all great while the bubble is being blown, they can just keep rolling over debt for no cost and keep growing the leverage and everyone is getting rich on paper on the back of the asset price inflation it creates. But having that as a "policy" has been beyond reckless, because there is a price to pay, even if you keep pushing it off, and the farther you push it off, the more economic misery that has to come with the price. In the case of Credit Suisse, it is listed as one of the 30 "globally significant banks" by the central banks of the world and the Bank of International Settlements (and were supposed to have better capital requirements as a result), so if they are close to failing, they will step in with more of what caused the debt bomb in the name of them being "too big to fail." The world never learns.

 

That is interesting on your Wal-Mart and fits what they have been saying. The inventory build ups are a common theme. The latest was Nike, last week. All of the stimulus during the pandemic threw the signals out of whack for these companies, and they way overinventoried. ... into what turned into a slowing economy. Nike is significant, because it has been taken for granted for a long time that demand for their overpriced shoes is relatively inelastic and they are somehow immune. Not the case. Their profit margins started to get hit and now they are starting to dump product.

What this might mean for consumers is going to be sales -- earlier and probably bigger -- into the holiday season. The question is whether the consumer in the aggregate is going to be strong enough to take advantage, or if the overall inflation picture is hittting people hard enough that the excess inventory isn't going to clear quickly anyhow.

My best guess is that higher-end retailers are going to get slaughtered in the upcoming environment. Wal-Mart, Target, Costco will tread water, but times are tougher for them. And it could be a boon for the TJ Maxx's of the world, which will buy a lot of that excess inventory for pennies on the dollar and feast.

I don't know who these retailers are, but anyone with a strong balance sheet and little debt and can afford to sit on inventory could do pretty well. It's an industry that thinks in 12 month increments, but if there is anyone who can think in terms of 18 or 24 months, it's an opportunity to take market share from their competitors.