YouSaid · the spoken record

Jack D. Schwager

lines on the record: 54
first: 2022-06-16
most recent: 2022-06-16
sittings or episodes: 1
sources: podcast

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“which is the denominator for the assets and the knowledge will become much more attractive if you can make a positive reality across the curve just by owning these dollars if the denominator goes up in value jack then all the assets denominated in this value in this denominator will mechanically have to move down so that is the environment where again one of the only few things you want to own is dollar cash and it doesn't sound sexy it doesn't sound attractive but guys a cycle is a cycle and i'm here to try and read it communicate it teach it for little like i can teach and try to equip ourselves not to lose our purchasing power too much”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“A bit like it's a volker like policy where you want to have nominal Fed funds rate above the levels of realized inflation or a foreseeable range. So that would mean that potentially he's telling us that if the market doesn't listen to him, the next term in the rate should be 5%. Assuming inflation expectation don't move is basically telling us guys, have you got the message? I want to see inflation expectation down at the front end. I want to see real yields positive across the curve. If you don't listen to me, I'm going to make it so. And higher alliance forcefully higher real yields, even at the front end, across the curve.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Ladies and gentlemen, either my tight, tight monetary policy stance gets reflected in inflation expectation straight away now, even in the front-end inflation expectations. So those go down and even if fields remain the same, then the mechanically realism will go up. Or if you guys don't want to listen to me, then I'll have to raise nominal yields effectively above inflation expectations.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Big statement. So if you pull the charge of the real yield curve, you will see why that is a big statement. And here you go. So he said, we'll feel comfortable if real yields are positive across the board because they will give us more confidence and inflation will slow down. Holy crap dude, what did you just say? That's what the reaction I had when he said. And I'm like, okay, so let me look at the real curve. And I know the top of my head that until three to four years it's negative how negative it is. The front end of the real yield curve in the US is minus one and a half percent on average. That is despite nominal yields already pricing in terminated at 4%. It's priced in this one to two year bonds, Jack, right, in nominal terms. It's negative because inflation expectations are higher than that for 1.5%, 5% at the front end. So what Powell basically told all of us, and I'm not sure everybody understood, but what he told us is”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Premium and a reserved weaponization premium attachable right now. And I'm looking at downsides, maybe puts, maybe puts spreading gold, I'm looking at implied volatility. I'm keeping my eyes and ears open. Anybody who wants to subscribe to the Magna Combus, it's free. They can comment, they can tell me, I don't know what I'm doing, I have looked at this market. It's an open community. And I love that kind of exchange. I love being humbled by the market and I've learned to be humbled by the market and never assume you will be right the whole time.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“I'm looking at the bond market. What is the point in which the demand destruction becomes extremely visible, so visible that there is a chance it actually gets into the inflation principles well? And at that point you will want it to be long loans because not only you're very close to a recession at that point or already in a recession you increase the probabilities that the Federal Reserve will have to step off a bit from their tightening cycle, which means the bond market can make a big, big rally. So how close am I to that point? I've been a bond bull for whatever years. I've been resisting the temptation to buy bonds. Actually, I've been shorting different formats by a flatner's, for example. Now I'm looking at the TLT and I'm like, should I not buy that? And gold as well is something that is also extremely, extremely well compared to where real is going and all the other macro circumstances. There is a war.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“At the derivatives market that I've traded for a while, you can see these crops appearing here and there. And so I'm starting to think, shall I try and prolong the JPY, the Japanese betting on the possibility that the Bengal will have to at least partially go? I'm”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Keeping your eyes open, listening to other people who disagree with you, actively listening to them. So right now I'm looking for new opportunities to automate my book because the book is basically, it's a short ad right now. It's a very directional book. I don't have external money to manage it right now, so I can run whatever I want from my perspective. I'm just short. There is no diversification. It's one short bet. It's been working great, but it's one short bet. So I'm looking at new trades. Put them in the article as well. I'm looking at Japan right now. And the BOJ is after the high from the Swiss National Bank today of 50 basis points. This is basically the only developed market central bank that is holding the ground. And I see some cracks appearing. I see backdated Japanese government bond futures starting to price probabilities that they will have to give it away. Swaps as well. So they're controlling ten yields.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“The trick is that the traders have been making money are making a lot of money for exactly this reason because once I'm right, unless things change, I will try to keep my profits running and I will update every time information coming in and new profits and new targets. I have been wrong.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“For the wrong reasons at the wrong time. Well, guess what? It's a trade. So once it hits my stop-loss, which is calculated in a certain way, standardized for each position I have, I can lose X% of my management. That's it. I was wrong. Let's move to the next trade.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“If you scroll down, there is a list of closed trades as well that is less interesting. So trades are gone already. But in the list of the close trades, you will see some red orange red thingy there. This is where I was wrong. For example, short crude oil at $85. I will short crude oil. What an idiot. Yeah, exactly. That's a wrong trade.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Or podcasting about macro, there are a lot of folks who make non accountable calls. They'll say like, oh, I like goals. When a gold's at 1900, they'll say I like gold. And then when gold goes down to 1800, they're saying, I'm actually buying gold now. And then when gold goes from 1800 to 2100, they essentially bought themselves a free option in terms of credibility by not saying that they bought it until 2100. And there's all sorts of folks that are, you know, it's very easy to do unless you pro, not even if you want to be dishonest, but unless you proactively timestamp all of your calls and hold yourself accountable, it's very hard to do. So I just want to give you a shout out that I think that you are like the gold standard in the macro community for timestamping yourself and holding yourself accountable and also getting out of trades. Like, you know, you're short oil and like you stopped out of oil. You know, you didn't ride it being short from 90 to 130. Like you took your losses, you know, and yeah.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“There is one word, and I just wrote it down in big all capital letters that stuck out to me as I was reading this last section, and that was degross, which is even if you're on the right side of the trade where your long energy and your short ARKK, you can have vicious corrections. And we saw that yesterday. I mean, the liquidity not only in bonds, but also in stocks, is quite poor. And, you know, I'm not going to attribute all that to Qt or anything, but it's just a matter of fact that, I mean, like from 3 p.m. to 3.30, you had a vicious rally in SPY as well as sort of the high beta stuff that you said. So even if you're short the right things, they can rip your face off. And I think there was a lot of people who covered their shorts yesterday on the news. I actually covered a fair number of my single stock shorts, which obviously I'm regretting now. But Alf, I got to get this off my chest, which is I feel like in the world that you and I are in of writing newsletters.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“And I just keep updating my next target as new information comes in and as trade keeps working my way. So also there I try to let my profits run and take the stop losses when it's necessary, the same credit spreads. And as we discussed, the reason why I have the trades on is that financial conditions will need to tighten all the way until we see progress on inflation. There is no level, no outright level at which the Federal Reserve would say, yeah, that's enough. We can calm down now. We can only calm down if inflation is slowing down. Unless I see inflation momentum slowing down, I'm not going to change those positions.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“But in a low volatility regime, so you want to try to look for more diversifiers there. And I've been short BTP boons. The position has been closed yesterday. It's public on Twitter if you want to timestamp as well. And the reason there is that, you know, the Eurozone was under big pressure and Italy was the release valve. But the ECB told me that they're going to fix it. They told me they're going to do an ultra-fragmentation too and they're serious about it because once they clear that problem, they can create seriously. They don't want Italy to hamper that process. So who am I to spend in the way of a central bank? A central bank has an infinite balance sheet. I don't. Because of that, I think it's not market anymore to own that trade. I took profits there what I still own is a short on the S&P 500 and a short on US credit spreads via the LQDH portfolio. The one on the...”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Sorry because people will be asking me what can I buy? Nothing. You can buy nothing. You can buy some commodities, I think, and I will be releasing exactly what sort of breakdown you can do. Even there you have to be careful. There is always a demand and a supply. So on a cyclical perspective, you've got to be careful even in commodities. Generally speaking, guys, you can buy dollar cash and that will be probably the best thing you can buy for a while until things change. And when facts change, we will change our mind as well. I'm not a perma bear. I'm not a permaboo. I just look at risk reward of different asset classes. There are just cycles around and I need to respect them. When it comes to the more tactical portfolio, Jack, that is a one to three month portfolio that uses shorts leverage options. It's much more tactical as a nature. And it's designed to try and capture market opportunities also when markets are going down or when markets are going up.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Multiple driven stuff. You really don't want that because the performance of the asset class that has been stellar over 2020, 2021 has been stellar for a reason. The exact same reason is fully reverting. So this is the moment where you should be the further away you can from these kind of assets.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“And it is really very simple. It's been the case since six months from now where you are, when you are in a deleveraging or close to a deleveraging episode where the amount of credit that the real economy gets is less than before. When the central banks are tightening on top of that, There is almost no place where to hide. And that is not bad per se. It's just part of the cycle. In that part of the cycle, there are three things you want to do. You want to raise your cash allocation. If you're a long-long investor, you want to raise your cash allocation. If you are outside the US, you want to get some dollar cash to get some exposure to the dollar on top of it. And you want to have as little crop as possible in your book. And crop means high beta, valuation intensive, volatile.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Jack, I must be amongst the few guys on Twitter that put out portfolio positions, even when I'm stopped out. I used to run money. I know that you will get stopped out, that you will be wrong. I will be wrong. Everybody will be wrong. So I like to try and give concrete ideas to people who are following me, both on a long-term ETF portfolio, let's say a rather base retail investor, or to somebody who's more sophisticated, can take short position, can do options, leverage, futures, et cetera. So let's start from the ETF long only portfolio. I haven't released yet a breakdown of exactly how this portfolio is, but I've been given for six months basically a broad strokes ideas of what I am doing for my own long-on ETF portfolio. And it's in tribulate points a bit up in the article.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“There is no Fed put up until the level that would tighten financial conditions sufficiently to tame inflation. And we are nowhere close to that. The Federal Reserve has done so much work. There's financial conditions, there's the dollar, there's credit spreads, there's equity prices, and then there's Treasury yields, risk-free rates. The Federal Reserve only has partial control of one of those factors. And in terms of the short-term interest rates, the Federal Reserve has done its job. The terminal rate's at 3.9%. But there's the other factors. There's credit spreads and then there's equity valuations. And that has so much more room to go. And Powell is basically implying that. And that leads us to the final part of your article on the macro compass, the macrocompass.substack, which is what does it mean for your portfolio? So tell us how you're thinking about that.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Stopped in any meaningful downward cycle since the great financial crisis. And why? Because inflation expectations were below 2%. Inflation was below 2%. So central banks could always step in and provide a backstop. But now they can't. There is no Fed put at any level until inflation slows down on a month-on-month basis in a marked way. We'll all hope it does, so we don't have to receive enough damage from private sector perspective.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Extremely close to that point if you ask me, and the Fed will most likely have to push too much, make too much damage because they are not going to be looking at forward-looking indicators. Right now, they want certainties. They want to see the month-on-month inflation rate slowing down for several months in a row before they stop. Well, monetary policy works with a leg Jack. So in order to do that, they need to make enough damage for a long period of time until this maybe will turn out to be true, the inflation story is slowing down. It will be too late. You would have done way too much damage to the economy. We have already seen this movie plenty of times, 2006, 2007 as an episode, 2000, Japan in the 80s. We have seen this movie plenty of times. This is just our normal cycle works. And we are not used to see cycles anymore.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Exactly. And it's exactly the same. And borrowers will find these low nails pretty expensive compared to a year ago, but they will try still to keep the same level of leverage that they kept in the past to make sure they can generate the same earnings, et cetera, et cetera. Obviously, as you progress towards the end of the cycle, this mechanism will break very quickly because borrowing costs will become unaccessible. We are not generating enough cash flows to pay back this borrowing cost. So even if the bank wants to lend, the credit worthiness is declining per se and on top of it, there is no willing borrower anymore because rates are too high. And so you enter a deleveraging episode. At the very least, people don't lever up anymore. At the very worst, they pay back their existing liabilities because they want to be more defensive. And that is a situation where the economy really rolls over. And when you start having recession feelings, let's say, we are getting.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“A recession, we are right now slowing down to below trend growth levels, but we're still okay. It's not a recession yet. That is exactly the point where banks tend to lend more. I know it's counterintuitive, but because of their incentive scheme, low nails are high enough, people don't look to belly up already. And that's when banks will say, ah, here's your money.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Will leaning borrowers, eligible, willing, good credit worthiness like borrowers, then I'm not sure. Because again, business model or you buy the house and we'd be willing to get credit by a house depends from the mortgage rate effectively. If the mortgage rate is palatable, you'll be having more demand, otherwise you'll be having less demand. On top of it, because the economy is slowing down, there is a higher chance that unemployment will pick up, that people will lose job, that businesses will shrink. And so that credit worthiness angle has a bit sort of offset the trade-off structure I just defined before. Nevertheless, if you look at bank lending over the last six months as always in late cycle, they are going up. And why? Because low yields are going up. And from many angles, it still seems that the economy is handling it okay. So the economic growth impulse is lowing down, but we're not.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Means loan yields should be healthy enough for the bank to be paid for the risk it's taking lending money to Jack. That's the second thing. The third thing is regulation and balance sheet availability. So if the regulator is saying, hey, for every dollar of loan you make to Jack, you have to attach $10 of capital, then A, from a return on equity perspective is a horrible business. If this regulation gets eased, it makes it more attractive to lend and vice versa. It really depends from a lot of metrics that are again regulatory driven balance sheet metrics. So right now we are in a situation where low yields have gone up because treasury yields have gone up and credit spreads have widened. So from that perspective, banks would make more money by lending Jack, right? Because they can lend at much better yields than before. Great. Regulation, not really changing since the last year, year and a half. So from that perspective, let's assume nothing changed.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Yes, you can and banks can create money every time they lend. It is not an opportunity set where they either buy treasury bonds or they lend, that's not how it works. They don't use the same funds to buy treasuries or lend. Banks just create new money when they lend. But banks lend based on an incentive scheme trade-off effectively that I can quickly describe for you, Jack. Banks will be willing to lend if there is a willing borrower whose creditworthiness is solid. So it's true they create money, but they need to put capital against the money they just created. That's the loan, and they don't want to lose the capital. So, hey, Jack should pay me back. Okay, so we need a willing borrower with a good credit worthiness. Then we need a good reward for the risk we're taking, which”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Alf, you no longer are managing a $20 billion fixed income portfolio, but let's say you are, and let's say someone is, or someone's a bank manager at one of these big banks, when the rates are higher, treasury yields are higher, the Fed funds projected path is higher. What I learned at sort of macro 101 in college was that sort of sucks in money. So instead of JPMorgan lending to me, they're lending money to the US government by buying treasuries. But as I took the macro 102 class of studying this stuff, I learned that banks can create money if they lend money to me. If I go to a restaurant and use my credit card, like I just created money, you know, the bank just created money. So it's not really a problem that they don't have enough money. So what is the mechanism by which higher yields will result in mean not spending money at a restaurant and creating money? Like I can still create money.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“A bit less committed than priced in. That's enough for the bond market to rally. That's enough for the inflation swap market to reprice a higher probability of higher inflation. Central bank needs to be extremely, extremely careful here. And this bad cop, good COP strategy doesn't really help in my opinion. It increases implied volatility. It makes these moves sharper. It dents the credibility of the central bank. All they need to do here is the exact opposite. And I'm not saying it's going to be easy. There is going to be quite some collateral damage, much larger than what the Federal Reserve is putting in the summary of economic projections, in my opinion. But the bad cop, good co-op, the half-hearted measures here, this is not time for that.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Especially as the result of the Federal Reserve showing a bit less commitment than priced in, then inflation swaps go up as well, because it means the Federal Reserve isn't doing enough of a credible job to transfer higher borrowing costs to us, Jack, which means we will be less discouraged to take on credit, which means we will fuel the inflation fire. At this point in the cycle, the macro explanation works, although generally speaking, there are some mechanical adjustments, especially during the press conference where a lot of algorithms are trading and it's a lot of fast money. That is still true, but there is quite a solid macro explanations for which especially when the central bank credibility is tainted, when Powell says, yeah, we're going to go to terminal 3.8, but we're going to go that slow, we're going to be cautious. 75 basis point hikes are not the new normal e-sound.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“That happens to a point that it becomes quite tight, you will be pairing back your spending. You will be pairing back your second house buying, first house buying. You will be pairing back your business because maybe you can refinance your business. You'll have to shrink it. Hey, if it's too expensive to refinance, the business model doesn't work. Your only opportunity you have is to shrink it. So you're going to be firing some guys or cutting some expenses that is exactly what the Federal Reserve wants to make sure that aggregate demands lows to a point that enough damage is done, basically, to bring down inflation as well. That's why in this part of the cycle, if treasury yields rally,”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“You will be looking at the same loan you were looking at two years ago and you will be saying, oh crap, I can't afford it anymore because my model installment is too high compared to my disposable income or salary or whatever cash flow you have.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“And you are in an economy that is slowing down as well in the economic growth impulse. You as a private citizen need to pay a credit spread on top of treasury yields to borrow in whatever format. If you take a car loan, there's a credit spread on top, a mortgage, there's a credit spread on top, a private, a personal loan, there's a credit spread on top. And why? Because, hey, you're not the treasury. So you can default, you can lose your job, you might not pay back the principal. And so the banks or other lenders will apply credit spread on top. If the base layer, treasury yields are rising and your credit spread are also widening a bit because the economy is slowing down, right? That's what's happening. So there is a higher probability you might lose your job. So it needs to be reflecting in credit spreads. You're all in loan yield, borrowing yield, as a corporate, as a private citizen, as a house buyer, if it's a mortgage, will go up. And when it goes up, chatter is...”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“It's not always true. In this case, though, we are in the face of the cycle jack where marginally higher interest rates are designed and are a wish of the central bank to make sure that you and I and the listeners here on BlockWorks Can't access credit in an easy way. They have to find credit to be pretty expensive. So let me help you out what I mean here. If two-year treasury yields are going higher, let's say five year or 10 year to help people understand what I mean. Let's say five or ten year yields, they're going higher, treasury yields.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Bond market is going, you know, so Yeah, yeah. But I am very doubtful of the Federal Reserve's ability to actually control inflation itself, not the two-year treasury or the financial system, but the actual economy itself of people going to stores, buying stuff, going on vacation, all sorts of stuff. This fact that if you were to invert this blue line, it seems like as soon as the tier treasury yield goes down, the inflation swaps go up. And so if you were to invert the yield, they would basically fall on top of each other. And the economic, the macroeconomic interpretation of this is the lower treasury yields are, the higher inflation will be and the higher yields are, the lower inflation should be. But it really isn't that simple. I mean, so this has to be sort of an algorithm, right, that is using a model that makes the assumption that when yields go down, inflation goes up because it's not always true, right?”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“To price in a terminal rate lower than 3.8% is really taking a gamble that the Fed can't hike. The Fed can't hike. And that gamble has not been paying off. I also want to note that you use the word mechanically a lot, and I think that's really important because if we just go back to this two-year treasury and two-year inflation swap curve. So there are a lot of folks Afonso who doubt the Federal Reserve's ability to control interest rates and they think the bond market is sort of leading the Fed rather than the Fed leading the bond market. I actually think that up until this point from what I've seen, and I definitely could be wrong, that the Fed is kind of pulling the strings on the bond market. The Fed has the control of the Fed over the bond market is complete. And you mentioned earlier that the bond market is leading the Fed. And I think you're right, but the Fed is also leading the bond market. And the Fed likes where the...”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“So much to unpack there. So the terminal rate, as you said, is the highest point that the market thinks that the Fed can reach. It reached a peak of, I think, 4.05% on Friday or Monday. And the fact it decreased, as you said, but it can't get really go below 3.8 because as you said, 3.8 is the medium implication of that we got in the summary of economic projections. Let me just pull that up right here. Yeah, so in 2023, the median projection is 3.8 for the federal funds rate. And if you look at the range, the lowest projection is 3.1%. You noted that in March James Bullard was the outlier. He was the hawk saying, oh my God, I think we should go to 3%. Now, no one, no one on the entire FOMC board is projecting that they go below 3%. So the bond market to...”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Macro combust today, what is the annualized implied volatility in five-year US bonds? If you look at that chart, one thing you can see immediately is that there is such a level of uncertainty and implied volatility being priced in the bond market. It's huge. It's 140 basis point analyzed volatility for a year. This is the same uncertainty levels that we saw during the great financial crisis. And when there is that much volatility, people can't take risks in the bond market. Imagine if they can take risks in credit market, high market, equities market. It all starts from the foundation. If the foundation is shaky, the foundation is volatile, that volatile, you can't take risks easily. You don't have the risk budget to do so. And so Paul didn't do anything to clear the volatility in there, actually gave us some more volatility.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Not that much volatile and yields better than the band that was also. If you are a leveraged investor, it's a similar thing because the bond market is the most liquid market in the world, is the biggest, it has the deepest repo market you can leverage up if the volatility in the very, very base market for us unleveraged investors and for leveraged investors starts to be extremely volatile. You can understand that the amount of risk you can take in that market is lower because people that are bound by let's say traders traders, risk takers, market makers, they're all bound by volatility. Their profit and loss goes up and down and there are volatility models, so-called value at risk models, for example. If the volatility increases, then the positions they can take in the same assets are lower because for the same position, the volatility will be otherwise bigger. So they are forced to reduce their positions in bonds. I charted on”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Building foundation is the building block of all risk taking activities across the board, leverage and unleveraged. So if you're a private investor, let's say an unleveraged guy, your opportunity cost, the first one you choose always is to have your money in a bank account or to buy treasuries. And a bank account is a liability of a commercial bank. It's guaranteed by the government up to $100,000. Anything above that, you are running banking credit risk. JP Morgan and Default, Wealth Farco and Default, you lose your money, no guarantees. You can always get out of that by moving that form of money into another form of money that is a treasury bond. Treasury bond is a liability of the government. It's safer from the perspective above 100K than a liability of a commercial bank. And it generally is a money-like instrument. It's very tradable.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Reaching the terminate, it should be 3.8 and something on top. So as soon as the market realized the bond market had rallied too much, and so the fuel for this relief rally in other asset classes was over. And in the matter of a few hours overnight, we sold back everything because ultimately, you know, it just can't work. And there is another strong reason why I think risk assets will have a hard time picking up a relief rally. This is a sustainable one, is volatility, implied volatility in bond markets. And I need to do some explaining here, but it's important for people to understand. The treasury market, guys, is the...”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“And we're going to take a little bit more time to get there. All right, big rally, terminate gets repriced. Well, gets repriced where, Jack gets repriced all the way down to 3.8%. Can take longer. So you move a little bit down the curve. It takes a little bit longer. But 3.8%, and that's it. So if that is the main reason why the stock market is rallying, you have basically a floor there. It's a credibility floor for the Fed because they are telling us they're going to get to 3.8%. But on top of it, as a bond trader, you need to price some risk premium that they will have to do more than 3.8%. Unless inflation is lowing down, what the Fed tells you is the base case. For the last few months, the bond market has been sort of guiding the Fed towards what is the level that they deem acceptable. So in this case, the inflation momentum hasn't slowed down. There is no reason for which the bond market would credibly attach a negative risk premium to the Fed not”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“The bond market and inflation swaps going up, that underpins a rallying the SB. But now one of the main reasons why I think this didn't have legs. I can use the past by now because at the moment of recording we have taken back all the gains and more is that you can try and believe Powell that they're going to be more gradual in reaching the terminal rate at 3.8%, but you can't reasonably prize as a bond trader that the Fed is not going to get to 3.8%. That can take a little bit longer. It can be a little bit shallower, Jack, but there is a sort of a flaw. I put a red line in there. I charted the US terminal rate on the right-hand side in orange in this chart. And it basically shows the market pricing for the highest peak in the hiking cycle looking at euro dollar futures. And that was above 4% before the Fed spoke. And then Powell came in and said, it's actually 3.8.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“The interesting thing is that the blue line, it's on the left-hand side, so that's inflation swaps. That's the market pricing for, let's say, let's call it average inflation over the next two years. On the left hand side, you can see that at the exact moment when the bond market rallied in the inflation swap market went to reprice up, higher inflation over the next five years. And why? Because Paolo had just committed to be less aggressive. He had committed to take more time, more gradualism to reach determinant array. And now when that happens, nominal deals go down very quick, inflation swaps go up, real yields as a result. They drop. They drop very, very aggressively. And when real yields drop that much, then all the asset classes that are related, that have cash flows to be discounted with real yields. So equities, for example, equities start to rally. And then you have that situation where do you see the S&P, the SMP is the blue line in this chart, left-hand side. And the S&P staged a rally that was a mechanical rally as real interest rates had been pushed down by the repricing.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“First of all, 75 basis point in July, and you gotta doubt that. I mean, you're going to have some doubts about that was 100% price in at that point. So first lag, it needs to be repriced down, and it means bond yields can rally because, you know, there is less to be priced in than it was already discounted back then. But going forward as well, once you reach two and a half, you need to take more time to reach determinant rate. It's a shallower path up, which also means you have to reprice that in front-end bond yields. So the orange line, the treasury yields, it's on the right-hand side of the chart here. You can see the huge drop from 3.43% to 3.20%. It's a almost 25 basis point rally in few hours. It's huge. I cannot count the standard deviation moves to the comparison to historical two hours rolling moves, but this must be like 10 standard deviations or so going top of my head. Huge move.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“To prefer rather a 25 basis point hiking path to go all the way to 3.8 than bigger steps. And so that's quite a surprise because the bond market is not a black or white. It's not a binary outcome machine. The bond market is basically a consensus-weighted probabilistic machine. It looks at different probabilities. It weighs”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“So that's when Power played the good cop. There is a bit more on the side overall, and I think it prevails in the narrative jack. And I think the relief rally of Horse Constance, it couldn't last, and we can explain why. But the good co-op play that released the relief rally, basically, started when the E said that 75 basis point are not expected to be the common practice going forward. That's what he said at some point. And then he also said something very nuanced, but people should pay attention. He basically said, oh, we're going to be around neutral by late summer. So that's two and a half percentage, right? And then, you know, once we get there, we might want to, you know, do some more hikes to go above neutral, but perhaps we're going to choose a pace of hikes that is less aggressive than a 75 basis point. So he was hinting that once you go to 2.5%, it's going to”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Was speaking, and that it exploded higher up until 3 30, and then we had a little bit of a fallback. And then now that we're eight minutes before the S&P 500 opens, and it's quite negative in pre-market trading. And you chart with great clarity about the macro forces that I actually think are very important. R squared is very high between if the short-term interest rates goes up or if it goes down. Like where the two-year goes, the S&P 500 goes, at least at least on FOMC Day. So let's actually take a look at some of these charts. Okay, so we got the two-year inflation swap in blue and the two-year treasury yield in orange, and of course the 15th of June is the FOMC day yesterday. So explain what happened here and how it relates to market action.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“To give the market a little bit of a heads up to what they're going to announce. So I think it was Monday night. Yeah, Monday night or Tuesday morning that there was a leak through Steve Leesman at the CNBC and Nick Timoros from the Wall Street Journal, who's been on for guidance and saying the Federal Reserve is considering doing 75 basis points. So before the press release, before Powell ever went on the podium yesterday, the market was pricing in like a 95% chance of a 75 basis points, with the risk being a 100 basis point hike, not 50. So the 75 basis point itself was not a shock as of yesterday. It was a shock on Monday and Tuesday after the huge disaster CPI release, inflation release. So the reason that the market rallied, although it's now crashing, and we had a pretty substantial rally starting at 2 p.m. when the statements were released and then that continued into 2.30 after Powell.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT
“Yes. And even if he did not say so directly, the implication was clear. He said, obviously, we never, the Federal Reserve never thinks that too many people have a job. However, we need to have a labor market that is in line with our financial conditions for inflation, yada, yada, yada. So he essentially was saying as much. And yeah, in your piece on the macro compass, you just wrote that in March, they said the committee expects inflation to return to 2% and the labor market to remain strong. And that has replaced by yesterday's statements, the FOMC is strongly committed to returning inflation to its 2% objective, no mention of a persistently strong labor market anymore. Alf, I just want to set the stage for folks who might not have been following this as closely. So the 70 paces point hike was a shock to what folks and the market had been expecting a week ago, but the Federal Reserve VA forward guidance always liked.”
2022-06-16 · Forward Guidance · Cash Is King During Fed's Hawkish Warpath, Says Former $20 Billion Fund Manager · IDENTIFIED FROM THE TRANSCRIPT