Epsilon Theory Professional
What’s happening today is not only a war between commercial banks and asset managers over credit provision to large US companies, it’s also a war between bank asset managers and non-bank asset managers over investment flows.
Lots of people are going to be squashed beneath the feet of these behemoths or crushed by the collateral damage of their combat. Let’s work together so that it’s not any of us.
The Fed is looking for an excuse to cut, and as soon as they have that excuse, they will.
There are two possible Narrative excuses, one immediate and one with a slower fuse …
My spidey-sense is no longer tingling like crazy about the overall rise in scale and scope of private credit. It’s a profound shift in the core social function of credit provision to the real economy, but I think it moves systemic risk around rather than creating new systemic risk.
The associated transformation of the insurance industry, on the other hand …
It doesn’t happen often, but every few years there’s a real-world shock that leaves the old narrative structures standing but eliminates all the people who believe strongly in them. These events are like neutron bombs for narrative-world, and that’s how I’d describe Iran’s attack on Israel this weekend.
I think everyone in Washington and on Wall Street is in the bag for nominal growth (ie, number-go-up) by any means necessary through November.
Washington is in the bag because their world ends if they don’t win in November. Wall Street is in the bag because it’s their last chance for a big score before a stagflationary vol event of enormous proportion hits the economy regardless of who wins in November.
That which we call QE by any other name would smell as sweet.
I think if Shakespeare were reincarnated as a Fintwit luminary, that’s how he’d rewrite the Juliet bit about roses, at least if he were thinking about what’s happening in bank regulation today.
This is the privatization of QE and debt monetization.
I got some more color from Rusty on the shift in our Narrative Monitors this month from hawkish to dovish central bank narratives, and I thought it was well worth forwarding to everyone.
Recording of last Friday’s private credit working group call, along with a transcript for those who prefer reading over video.
The main takeaway is that we are increasingly thinking that the expansion in private credit is less of a ‘bubble’ than it is a structural transformation within capital markets.
I think the reason real assets like commodities are typically so disappointing in their inflation-hedging reality relative to their inflation-hedging theory is that they have no inherent pricing power. They only have a market story – and a mechanistic one at that – that they are an inflation hedge. It works for a while because enough people tell the story and believe in the story, until it gets trounced by another story, like growth/recession or supply-and-demand.
Is private credit any different?
Once a truthy-sounding explanation for a market crash is widely publicized, the crash stops. It becomes safe to get back in the water.
That’s true for China today just like it was true for Bitcoin a few weeks ago.
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We’re starting to pick up the “no landing” macro scenario in The Narrative Machine.
Recording of the private credit working group conference call on Jan 26.
I think that we’re gearing up for Round Two of the Unmooring Trade.
The language FROM central bankers remains hawkish (“slow down on your projected 2024 rate cut schedule”), but the language TO central bankers is not only decidedly dovish but is starting to veer into “we need a Fed put” territory.
We’ve moved from the promise of cutting rates (mission accomplished on inflation and a soft landing, so now the Fed should cut rates by choice rather than by necessity … well done and take a bow, you geniuses!) to the threat of not cutting rates (if the Fed doesn’t cut rates soon, then it will cause a recession … hurry up and cut, you fools!).
Recording of our kick-off call for an ET Professional working group on private credit.
The Fed just raised their inflation target from 2% to 4% without saying that they raised their inflation target from 2% to 4%.
If the Fed cuts four times in 2024, it’s because we are having a nasty recession. If we don’t have a nasty recession, I don’t think the Fed cuts at all. Why not? Because Common Knowledge. Because everyone knows that everyone knows that inflation is still a thing, allowing companies to pass along higher prices to maintain/expand margins even as labor pushes for higher wages.
We are SOOOO not done with inflation.
Every macroeconomic data release will be parsed and presented by Wall Street and the White House to pressure the Fed to lower the price of money. That storytelling effort will be particularly strong when everyone is paying attention on a Day of Theater.
Like a CPI release.
Earlier this week, the BOJ ‘tweaked’ their YCC policies again, this time eliminating their hard commitment to buying unlimited amounts of 10-year JGBs to maintain a 1% cap on rates. Instead, 1% is now just “a reference”, not a hard and fast target. And with that, the yen blew past 150, weakening to 151 and change.
And now the story-telling begins.
I am increasingly convinced that it’s not only interest rates that have become unmoored in narrative-world, but also our banking system and our housing finance system … and our domestic political system and our international security system.
We’ve moved from an unmooring of long-dated interest rates to an unmooring of everything.
On Wednesday, October 11, the 30-year yield declined 13.8 bps (NY to NY last trade), its third biggest one-day decline in yields since November 2020.
Yesterday, October 12, the 30-year yield rose 16 bps. This was the biggest one-day increase since March 2020.
This is what unmooring looks like!
The narrative archetype “Supply and Demand” tm is typically trotted out to describe a market move that no one has a better answer for. It’s not particularly useful for a directional trade, though, as it is inherently cyclical and mean-reverting.
Narrative Monitors
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