YouSaid · the spoken record

Felix Jauvin

lines on the record: 72
first: 2023-01-05
most recent: 2023-01-05
sittings or episodes: 1
sources: podcast

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“Yeah, so you know, they have certain benchmarks that the Federal Reserve is looking at to ensure smooth functioning of the lending markets, which is sort of a third hidden, some may argue policy goal of the Federal Reserve. And so they have these liquidity benchmarks that they want to make sure they're. And one of them is for commercial banks to just have ample liquidity. And if households are actually coming out and starting to allocate their money more so into T-bills, that's liquidity sort of shifting away from those benchmarks. So I know that was Joseph Wang's argument roughly around that. But I think that the debate on the other side of that aspect is that if the Federal Reserve started to get really concerned about that liquidity, they could simply bring down the rate on the reverse repo to below the, you know, say the one month by, you know, if they tacked it at 3.5 and the one month is yielding at 3.7, you'd pretty confidently see a lot of that grain on reverse.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Risk going in the reverse repo. It makes a ton of sense to see that number increase. I don't have a specific target in terms of where I see reverse repo going, but I could see us at least reaching a local high in the next bit. Right now, we just had the number come in at about 2.15 trillion balance today. That gets updated on a daily basis, but I could easily see that getting up to 2.3 over the next few weeks as well as we start to see that that spread coming in in terms of opportunity costs. And again, tying back to what he had mentioned from Joseph Lang's piece, which was fantastic, some of the analysis there, it really gets to the core of the matter of the fact that there's very little reason for money market funds to come out of the reverse repo and start to allocate into the short end of the yield curve.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Would be adrenaline liquidity. So if we call it just for simple arithmetic, we say that we're at 400 billion right now and we're going to get to 500 billion in the next few weeks. Well, that's $100 billion taken out of net liquidity. So we've got 95 coming out from QT. We got another 100 coming out from TJ. That's already nearly $200 billion over the next month or so. And then when we start to shift our perspective to reverse repo, the picture gets even more complicated. But effectively what's happening there is that my framework right now is that we just saw a recent hike from the FOMC committee, obviously. That's brought up the return rate on reverse repo up to 4.3%. That significantly higher than where we see the one month T-bill at 3.7. So the opportunity cost plus the fact that again, money market funds have zero, zero, like truly zero.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Right. So the TGA going Treasurer General account going up indicates that the Treasury is issuing collateral, issuing Treasury bills, notes, bonds, and receiving cash, receiving. Bank reserves and just real money exactly. Treasury is a real money too. But so that going up would be a drain on net liquidity. So you think TGA will go up to, say, $500 billion, and that will be a drain on liquidity too.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Had some sort of discrepancies in terms of the mechanics of how they account for the MBS that made it look like quantitative tightening was not happening, but it was happening. It's just that the plumbing of effectively how MBS is amortized and how that affected. But now we're right in the meat of it, that $95 billion is happening, generally speaking, every month fairly consistently. And the changes in the margin are really happening in the TGA account and where that is going, as well as the RRP. So the TGA has been actually coming down quite a bit, despite the fact that Secretary Yellen last month had guided towards having the TG account sit at 700 billion by the end of the year. We're not seeing that. You know, it's actually been coming down somewhat recently. We're hovering around that $400 billion right now. So if that were to happen, it's December 20th. That's very late in the game for that to occur. You know, I think best case scenario.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“I've used it to track things far out on the risk curve that are, you know, I view as effectively speculation vehicles for oncoming liquidity. So looking at Bitcoin, Ethereum, even looking at the ARC ETF. These are speculative vehicles that have somewhat been adopted as places to speculate on that forward liquidity. So if you overlie any sort of those.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely. So the shorthand equation that basically anybody with a trading view account can plug in for themselves and start to track is effectively the federal balance sheet, Soma portfolio minus the TGA account minus the balance of the RRP effectively. So that makes intuitive sense because as TGA account and RRP decrease, that is effectively stimulus coming liquidity coming into the market. And as they increase, that's liquidity coming out. Because if that balance of RRP increases, that's more liquidity that's being sterilized outside of the system. So that's the formula used. We can, you know, we can post the actual way you could input so everybody can track it themselves in the description. But effectively, what you can do is set up that equation and then start to track it against the NASDAQ index, the S&P 500 index.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“It's how much banks can earn from lending to each other overnight on an unsecure basis. And the Federal Reserve used to impact that by altering the quality of reserves. But in the wake of the great financial crisis, there's too many reserves. So they do this by this new means. And that is what my flawed conception was. It pretty much is the essentially a deposit facility. It's not actually that, but people can earn yield directly from the Federal Reserve. Okay, so now that we've gotten a little into the weeds on the plumbing, explain to me the connection between net liquidity and asset prices. What is the index that you use? Can you just give us sort of a simple? Equation or simplification of it. And then, yeah, what's the correlation between risk assets and what is liquidity doing right now? By the way, recording on the 20th of December.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Between 4.25% and 4.50%, the headline number that everyone cares about is the federal funds rate, but that is a shadow of what it once was because we now are in an ample reserve regime. And so much of the actions happened in the reverse repo facility. And under the federal, when I was in college, when I first learned about it, it's like the Fed funds rate. I'm like, oh, that's how much banks can earn from the Fed. And I was actually wrong.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Individuals are actually buying treasury bills hand over fist because, and this is according to Joseph, money market funds are charging a fee. They're like, oh, we can charge a fee because the yields are so high. So individuals are going to the treasury. So it's actually individual households, you know, private investors who are buying treasuries, short-term treasuries, rather than the money market funds who are going flocking to the repo. And also reverse repo. I just want to say the reverse repo facility. A lot more centralized, at least on paper than the prior system of the federal funds rate. When the FOMC says, oh, we're hiking interest rates to”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Right, the yield curve is extremely downward sloping, not just in the 2s 10s, but very on the short end of the curve. So pretty much the most you can ever make on your money is going to be over the next six months because we're approaching the terminal rate and we're approaching it fast. So that makes sense why reverse repo would yield higher than a treasury bill also from a friend of the show, Joseph Wang's excellent piece on FedGuy.com called Trap Liquidity. Money market funds are flocking to the reverse repo, as you just said, for the reasons. Meanwhile,”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Sizable bear market rally and that has coincided quite significantly with a fairly sizable decrease in the reverse repo balance. And my general shorthand framework for how to analyze where that money is flowing is comparing the yield at the reverse repo with the yield of say a one month T-bill which is currently yielding actually below quite significantly after the recent rate hike the one month T-bill is yielding at 3.78% right now the reverse repo is at 4.3 and you have you know zero market exposure effectively it's completely outside the financial system so it makes a ton of sense for money market funds to allocate there right now especially when we're in such a volatile environment that we are”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Totally. So, yeah, what we've seen is that the biggest peak we've hit is just about 2.4 trillion dollars. So that really began in effectively late, you know, like April 2021 is when we started to see that yield occur that was slightly above the Fed funds rate. And that's where we started to see this transfer of assets into there. So, you know, from basically there up until now, we've seen this huge increase in deposits at the reverse repo up to $2.4 trillion. You know, we often get these quarterly window dressing exercises where we'll see funds flow more into the reverse repo at those end of quarter rebalancing effects. And then that'll start to shift after the quarter is over. But generally speaking, you know, for the past few months, we've been pretty flat there. We saw a pretty significant downtick in those balances there. So what if you think about the past two months, we've seen a pretty...”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“I do believe it's higher. I don't know if there's a limit. I know the reverse repo. Obviously, every time they hike Fed funds, they also hike the rate at the reverse repo. It's at 4.3% right now, I believe. Not 100% sure if there's a limit on interest and excess reserves. But overall, I think the calculus that you're getting at there is that there's a lot of opportunity costs that money market funds are analyzing and deciding where to allocate. And, you know, for now, I think what's really interesting about reverse repo is that it's the most risk-free yielding asset that we've ever seen. Because if you think about, if you're putting on your hat on as pretending to be a money market fund and you're trying to decide where to allocate capital, a lot, if you go and buy like a one-month T-bill, that still has a little bit of duration exposure versus something like reverse repo where there's none of whatsoever. It's completely aside. There's the least amount of risk that we've ever seen in something.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“It's existed, but there was no yield on it that was above the federal front, so there's no real incentive from money market funds to go there because there's no yield.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“You know, going for an incredibly aggressive quantitative tightening campaign, which was really, you know, they felt confident doing because they had that $2 trillion sitting in the reverse repo that they felt that as they started to increase quantitative tightening, that they could allow that to draw down and ensure that liquidity didn't get too broken, knowing that that was their potentially because what could occur is that as they're going through quantitative tightening, money market funds could actually exit that reverse repo and go and chase off higher yields potentially in shorter end bonds. So those two frameworks that I know that's a lot all at once, but it's really how I start to frame out how I think about things.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Get sterilized out of the market and onto the reverse repo balance sheet at the Federal Reserve. And this is at the same time that if you track risk assets and if you basically net it out, if you took the changes in federal balance sheet, took off the change in TGA account and the change in reverse repo, that actually started to fix your correlation. And you could see it track liquidity. For myself, that liquidity framework, just to sum it up, is really looking at those three factors and how they interplay and how that leads to increases or decreases in liquidity. And what we've seen so far is that paired with the second framework that I mostly use of thinking about where will rates go, where will monetary policy go, and where will fiscal policy go moving forward. So as we started to see them begin to transfer to this more hawkish stance of going through the quickest rate hiking policy in history.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“This is a place where primary dealers and money market funds can enter and effectively borrow T-bills and basically post up collateral in exchange for that. And what they had decided to do is provide a five basis point yield there. And this was at a time where yields were still at zero. The rates were still at zero. Fed funds rate were still at zero. So what this did is that it allowed them to effectively sterilize a ton of liquidity out of the market as they were drawing down the TGA account and letting that transfer effectively onto the reverse repo account, which is effectively outside of the financial system. It's not being used as collateral. It's just sitting on the federal balance sheet. It was a way to sterilize those assets. So this was all happening at that time where they were still doing quantitative easing, but they were actually decreasing liquidity at the same time, sort of, you know, only people that were really in the weeds of the plumbing could actually notice that occur. So this is where we saw effectively $2 trillion.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“one of the huge delta increase in terms of what that notional value of the tg account was at the time so we had reached this point where there is there was a ton of money in sitting in that tga account and you know due to outlook from from uh secretary yellen that they wanted to draw that down but if they wanted to draw that down that would have provided an insane amount of liquidity into the market at a time where we are already seeing you know these you know this was at the same time that game stop was was going off at some of these you know type of bubble bubble events that we kept seeing pop off if we saw you know a trillion dollars you know get run down from the dga account at the time that would that would just make things worse at a time where cpi was rising significantly so while that was all occurring what had happened is that on the side the federal reserve had come in and decided that they would actually start to provide a yield on their reverse repo policy so effectively what that they did is that this is”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Was that there was some significant changes happening in underlying liquidity dynamics. And if you were somebody that was only paying attention to the federal balance sheet, you would have missed that in your analysis. So there was two other components that were changing quite drastically at the time. The first one was the Treasury Journaler account, which is the U.S. Treasury is effectively checking account at the Federal Reserve when they issue debt. That is generally speaking where the money goes. And they can use that either to provide interest payments on that debt or to go towards basically fiscal spending effectively. So what had happened is that over those couple years, knowing where Congress is going in terms of their fiscal stimulus that they're providing into the pandemic, in terms of all that fiscal expansion, they had issued a ton of debt. And we saw the USTGA account actually rise up till $1.5 trillion at the time. And that was by far”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“We started to see people compare these charts. Well, look, you know, the NASDAQ is effectively tracking the federal balance sheet. And potentially all that's occurring here is that liquidity is entering the market at paces that have never been seen before. And that's causing equities to rise higher. And so we saw that occur over the following couple years in 2020 and 2021. But what was interesting is that what occurred following that. So, you know, what happened is that around December 2021, January 2022, we started to see the market send and risk assets start to roll over. But, you know, they were still, the Federal Reserve is still doing quantitative easing at that time. So there was a lot of questions occurring about what was really driving this. This is also around the same time that, you know, Jerome Powell started to come out and say, you know, we can retire the word transitory in terms of inflation. We're seeing CPI really creep up aggressively. But what was happening underneath the surface.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT
“Totally. So I view the world in two major frameworks. There's the framework around liquidity and how that affects assets overall from a global macro basis, as well as key inflection points in terms of key events within the macro and overall cyclical and secular business cycles. So overall, combining those two aspects to start to derive where I see assets moving forward. So for me, that first liquidity framework that I use is what myself and Manny call this idea of net liquidity. And for myself, that framework, it really came originally from you, you think about over the past few years, ever since the original onset of the COVID pandemic, where we saw the Federal Reserve balance sheet absolutely explode higher. And around that time, you saw a lot of people start to compare as we start to see the equity market bottom out and start to rebound higher.”
2023-01-05 · Forward Guidance · “Nightmare Scenario” For The Fed | Felix Jauvin · IDENTIFIED FROM THE TRANSCRIPT