calling gary cohn…

Some thoughts from a note shared internally on the 'unusual' price action in bonds today!

Even if you think the trade deficit is a problem, this is a draconian solution -- one that doesn't appear calibrated in any way to limit the pain of adjustment to the US economy. Rebalancing down (less output = fewer inputs) not rebalancing up (more exports = more ouput) 5/

Just figured out where these fake tariff rates come from. They didn't actually calculate tariff rates + non-tariff barriers, as they say they did. Instead, for every country, they just took our trade deficit with that country and divided it by the country's exports to us. So we have a $17.9 billion trade deficit with Indonesia. Its exports to us are $28 billion. $17.9/$28 = 64%, which Trump claims is the tariff rate Indonesia charges us. What extraordinary nonsense this is.

Only a generous half reciprocal🙃

I’ve hesitated to say this at the risk of sounding hyperbolic, but with last week’s big GDP revisions, there is no denying it: This is among the best performing economies in my 35+ years as an economist. Economic growth is rip-roaring, with real GDP up 3% over the past year. Unemployment is low at near 4%, consistent with full employment. Inflation is fast closing in on Fed’s 2% target - grocery prices, rents and gas prices are flat to down over the past more than a year. Households’ financial obligations are light, and set to get lighter with the Fed cutting rates. House prices have never been higher, and most homeowners have more equity in their homes than ever. Corporate profits are robust, and the stock market is hitting a record high on a seemingly daily basis. Of course there are blemishes, as lower-income households are struggling financially, there is a severe shortage of affordable homes, and the government is running large budget deficits. And things could change quickly. There are plenty of threats. But in my time as an economist, the economy has rarely looked better.

Still seeing a lot of COPE on here about the Fed, so let's remind ourselves of the main takeaway from Jay Powell this week: "this is a commitment not to fall behind the curve". Until there is clear evidence to the contrary, that is bullish risk assets.

"An argument can be made for 50bps but the communications around that are complicated and there isn’t a compelling reason to take on that challenge," fmr Cleveland Fed president Loretta Mester tells @FT

this is proof we cannot cut the BLS' budget. give them whatever they need please

-Strong private sector balance sheets should prevent a rapid economic deterioration -Powell will take his time but ultimately will do too much rather than too little -Rate-sensitive industries are “dry-heaving” — the puke already happened in 2022-23

Also important to recall that the nature of this cycle is fundamentally different and all of the surefire recession indicators so far have failed. It’s always best not to put too much emphasis on a small number of indicators, but doubly so now.

It feels like markets went from pricing in a soft landing to a hard landing in quite literally a week or two.

I would’ve been right about my forecast of a full treasury market meltdown, an economic crash, a credit event, and the end of the dollar as a reserve currency, but Janet Yellen cheated by issuing an extra $50 or so billion a different part of the yield curve and is effectively running monetary policy from the basement of Treasury. GMAFB. Virtually every estimate of ‘$100 billion of 10 year equivalent treasury duration equals X bps in yield’ has been wildly wrong. Not only is the price elasticity of demand impossible to isolate and estimate, even if you could it would be highly unstable and context contingent. I get that people have try to estimate it, but that doesn’t mean we have to take these estimate seriously. The Fed has done about $2 trillion of QT, the treasury has issued massive amounts of treasuries, and the economy has been far stronger for longer than anyone forecasts. Yet treasure yields are far far lower today than almost anyone would have predicted given these inputs.

My story for what has happened to inflation and what it means going forward. TL;DR: Underlying inflation fell from 4.0-4.5% to 2.5-3.0% as labor markets loosened (through openings down not unemployment up). Last mile will be much harder than to date. A shortish 🧵

Out now - how Fed experts Lou Crandall & Joseph Wang see the future of the Fed's balance sheet: - leveraged Wall Street trade is (likely) causing money to be released from Fed's reverse repo (RRP) facility - @josephwang sees tapering of Fed's Quantitative Tightening (QT) likely to start "sometime around fourth quarter 2024" (in other words, the pace of reduction in the Fed's balance sheet will itself decline likely by end of the year) - "we're nowhere near where the size of the Fed's balance sheet is beginning to bite" notes @Fedwatcher - basis trade is devouring repo borrowing (and likely accelerating RRP drain) as real money investors pile into Treasury futures (and arbitrageurs short Treasury futures and go long cash Treasury bonds) - banks were using Bank Term Funding Program (BTFP) to obtain cheaper source of funds, Lou's prediction that Fed would not renew it has proven correct as BTFP is set to expire in two days (Monday March 11 2024) - potential government shutdown in U.S.?? - plumbing of tax refunds as tax season approaches - real interest rates and the U.S. fiscal situation This interview is brought to you by @vaneck_us, a global leader in asset management since 1955. I'm very proud to say that VanEck is @ForwardGuidance's exclusive sponsor - check them out! As always this interview is available on all podcast apps and on YouTube 🔊📽️ Enjoy 🔥

Check out this great blog by my friend and former colleague @JohnMcGowan1919, a 15 year veteran of the Fed's trading Desk. He chronicles a riveting insider view of what was happening during the GFC from his perspective siting at the center of the crisis. insideviewgfc.com/

Basis trades could start to take center stage again as Fed winds down its Treasury buying, igniting dislocations in cash/futures markets. Hedge funds start your engines...🏎 bloomberg.com/news/articles/… via @markets

Delighted to have Lorie Logan from the @NewYorkFed to discuss her work on the front lines of Fed policy, including the 'dash for cash', treasury market resiliency, the new repo facilities (SRF & FIMA), the future of the Fed's balance sheet and more. directory.libsyn.com/episode… (1/5)

In this post we describe the mechanics behind quantitative tightening and review the Fed's prior QT experience. fedguy.com/quantitative-tigh…