Category Archives: Economy and Meltdown

Morgan Stanley: As The Fed’s Balance Sheet Runoff Begins, The Withdrawal Of Liquidity Will Have Profound Impacts

Morgan Stanley: As The Fed’s Balance Sheet Runoff Begins, The Withdrawal Of Liquidity Will Have Profound Impacts

By Vishwanath Tirupattur, head of Quantitative Research at Morgan Stanley

The Devil Is in the Details

The first two weeks of the year have reinforced the key message from our 2022 Strategy Outlook – the policy training wheels are indeed coming off, and fast! The hawkish shift in the minutes of the FOMC’s December meeting, reinforced by the rhetoric from a number of Fed officials, signals policy tightening through more hikes. They are coming sooner than expected, and the timeline between the first rate hike and the beginning of balance sheet runoff will be compressed. Our economists now expect the Fed to deliver four 25bp hikes this year, at its March, June, September,and December meetings, in addition to an August start for the balance sheet runoff announced last July. Market pricing already reflects this hawkish shift, with the March liftoff nearly fully priced in along with 3-4 hikes in the subsequent 12 months.

Given the size of the Fed’s balance sheet (US$8.2trillion, consisting of US$5.6 trillion in Treasuries of varying maturities and US$2.6 trillion of agency MBS), the runoff has important market implications. However, quantifying its impact is far from straightforward. One could look to the balance sheet expansion in the post-GFC years with the view that if the buildup lowered interest rates, the runoff should have the opposite effect. A rule of thumb (with a lot of handwaving) suggests a 4-6bp change in the 10-year interest rate from a US$100 billion change in the balance sheet. However, we would argue that the market effects are unlikely to be symmetric and a simple sign reversal between the buildup and the runoff ignores the complexity of the modalities. We expect different impacts for Treasuries and agency MBS, given the different ways they were acquired during the buildup and the share of the Fed’s holdings in their respective markets.

During the balance sheet buildup, Treasury securities were predominantly acquired through the US Treasury’s new issue process. The Fed consciously decided how much duration to take out of the market by picking securities with varying maturities. In contrast, we expect the balance sheet runoff to be implemented by allowing securities to mature without reinvestment. That means the impact on the yield curve depends on how the Treasury responds to its increased issuance needs as the Fed decreases its Treasury holdings. Our interest rate strategists estimate that US Treasury issuance needs will rise by ~US$850 billion by the end of 2023and ~US$1,300 billion by the end of 2024. If we assume that the Treasury follows the advice of the Treasury Borrowing Advisory Committee, the optimal targets for increased issuance would be at the 7-year and 10-year points of the yield curve. Consequently, our strategists now forecast 10-year rates to reach 2.30% by the end of 2022.

The story with agency MBS is quite different. Agency MBS were purchased in the secondary market,and we expect their runoff to come through paydowns resulting from prepayments and amortizations of the underlying mortgages. Since the Fed has been a non-price-sensitive and programmatic buyer, the Fed’s portfolio of agency MBS would have received faster-prepaying mortgages (cheapest-to-deliver, in mortgage parlance). In addition, Fed holdings constitute a much larger share of the outstanding agency MBS market than of the Treasury market, hence the runoff will have a greater negative impact on agency MBS. In 2021, the Fed bought US$575 billion of agency MBS versus net issuance of US$875 billion, resulting in US$300 billion of MBS that the market absorbed. Our agency MBS strategists project that in 2022 the runoff will remove US$15 billion from the Fed’s balance sheet against projected net issuance of US$550 billion, implying that the market needs to absorb US$565 billion in mortgages, the largest amount of mortgages the private market would ever digest. What’s more, the market will have to find a more price-sensitive buyer for the cheapest-to-deliver mortgages. Putting it all together, the balance sheet runoff clearly will have more impact on agency MBS than other asset classes.

Of course, the markets have already begun to price in some of these effects,as mortgage spreads have widened about 20bp in the last two weeks. Still, our agency MBS strategists have advocated being short the mortgage basis for some time,and they think there is still room for modest widening (~10bp) in the mortgage basis from here, with mortgage rates rising towards 4%.

Do not underestimate the effects of liquidity withdrawal. The mammoth balance sheet the Fed has built up was a key determinant of liquidity across markets. As balance sheet runoff is put into motion, the withdrawal of liquidity will have profound impacts. Determining how it plays out is far from straightforward and will be determined by a variety of factors. Understanding the details matters. So hold on tight – there’s volatility ahead.

Tyler Durden
Sun, 01/16/2022 – 19:30

American Students Organize Classroom “Walk Outs” To Demand Return To Remote Learning

American Students Organize Classroom “Walk Outs” To Demand Return To Remote Learning

This is only the latest indication of just how easily influenced young people are by their teachers.

Even though young Americans are perhaps the least susceptible to SARS-CoV-2 as a group, the ever-rebellious young people of America have decided once again to follow their teacher and protest by staging classroom “walkouts” intended to disrupt the school day.

Just when their parents could finally breathe a sigh of relief now that in-person classes had finally resumed, the “long-suffering” young people have America have taken it upon themselves to mimic the bad behavior of their elders (in this case, the teachers who function as de facto babysitters for millions of young people today). In Chicago, where a teacher’s strike had only just ended, a small group of protesting students staged a walkout, complaining that they were dissatisfied with the additional health protocols the teachers union agreed to earlier this week, ending its standoff with the Chicago Public Schools district and Mayor Lori Lightfoot.

“I think CPS is listening, but I’m not sure they’ll make a change,” said Jaden Horten, a junior at Jones College Prep High School, during a rally at district headquarters that was attended by roughly 1,000 students, according to Reuters.

Student walkouts have occurred at schools across Chicago, and in scattered areas across the country.

For example, about 600 young people from 11 Boston schools participated in student walkouts there, according to the school district, which serves nearly 52K pupils. Many protesting students returned to classrooms later, while others went home following “peaceful” demonstrations. Fortunately for the district, it looks like these protests have petered out as the city’s climate-focused Mayor Michelle Wu, who rose to prominence as a public education activist, praised the young people for letting their voices be heard.

Amusingly, an online petition started by one Boston high school senior branded schools a “COVID-19 breeding ground” and called for a remote learning option. This had collected more than 8K signatures as of Friday morning.

Echoing the Chicago Teacher’s Union, the Boston Student Advisory Council, a group representing students that claims to have organized the walkout posted a series of “demands” on Twitter, including two weeks of online instruction and more stringent COVID-19 testing for teachers and students. The kids are even holding their own press conferences now.

At least one student who spoke with a Reuters reporter said they no longer feel safe in school on account of them living with vulnerable grandparents.

Ash O’Brien, a 10th-grade student at Boston Latin School who left the building with about a dozen others on Friday, said he didn’t feel safe staying in school.

“I live with two grandparents who are immune-compromised,” he said. “So I don’t want to go to school, risk getting sick and come home to them.”

In a statement, Boston Public Schools said it supports students advocating for their beliefs and vowed to listen to their concerns.

The walkouts started in NYC, and have so far pushed Mayor Adams to consider a “temporary” remote learning option. But that’s about all of the “progress” the students can claim so far.

So far, it appears that the omicron wave in the US might just be peaking, as cities, typically the locus of spread, have seen cases start to turn over.

Earlier this week, students at several New York City schools staged a walkout to protest what they said were inadequate safety measures. Mayor Eric Adams said on Thursday his administration was considering a temporary remote learning option for a significant number of students who were staying home.

So far, roughly 5K public schools across the country have closed for at least one day due to the pandemic according to one website that tracks school closures.

Tyler Durden
Sun, 01/16/2022 – 19:00

Glenn Greenwald Exposes Deep State Effort To Stop Trump Pardoning Edward Snowden And Julian Assange

Glenn Greenwald Exposes Deep State Effort To Stop Trump Pardoning Edward Snowden And Julian Assange

Authored by Adam Dick via The Ron Paul Institute for Peace & Prosperity,

There was much speculation toward the end of Donald Trump’s term as president of the United States that Trump would pardon Edward Snowden, Julian Assange, or both of these men who were responsible for exposing vast amounts of wrongdoing by the US government. But, it did not come to pass. Why? Glenn Greenwald, who played a key role in helping Snowden expose information about the US government’s mass surveillance programs and who advocated in public and behind the scenes that Trump pardon both men, has some interesting thoughts about that.

The reason Trump failed to issue a pardon for either Snowden or Assange centers on the deep state trying to protect itself by placing Trump in jeopardy, suggested Greenwald last week in an episode of his System Update show.

In a written introduction for the episode, Greenwald notes that Trump, while president, had both “raised the possibility that he might pardon Snowden” and was “actively considering a pardon for Assange.”

Greenwald, in the introduction, zeros in on a recent interview of Trump by Candace Owens. In the interview, Trump stated he came “very close” to pardoning one of them but did not ultimately do so. Why? Trump said the reason was because Trump “was too nice” to issue the pardon.

Greenwald isn’t buying that explanation. He writes:

The question that obviously emerges from that answer: too nice to whom? To the U.S. security services — the CIA, NSA and FBI — which had spent four years doing everything possible to sabotage and undermine Trump and his presidency with their concoction of Russiagate and other leaks of false accusations to their corporate media allies? Too nice to the war-mongering servants of the military-industrial complex in the establishment wings of both parties who were the allies of those security services in attempting to derail Trump’s America First foreign policy agenda? Too nice to John Brennan, James Clapper and Susan Rice, the Obama-era security officials most eager to see both Assange and Snowden rot in prison for life because they exposed Obama’s spying crimes and the Democrats’ corruption in 2016? Trump’s “I’m too nice” explanation is, shall we say, less than persuasive.

In the System Update episode, Greenwald further explains that Trump’s enmity toward these deep state forces that helped lead Greenwald and many other individuals to think that Trump may issue the pardons:

Now the argument for why President Trump not only should have pardoned Julian Assange and Edward Snowden, but why some of us believed there was a chance that he could didn’t rely on the benevolence of President Trump. It relied on the fact that he knew better than anybody how deceitful and abusive and dangerous these agencies are. The agencies that were exposed by Snowden and Assange and the ones that were demanding that they be imprisoned forever. He knew, as well as anybody, the treachery and the illegal interference in our domestic politics because he was one of their targets.

Yet, the pardons did not materialize. Why? Greenwald states that Greenwald “knew that Trump wanted to pardon Edward Snowden and had strongly considered pardoning Julian Assange.” But, continues Greenwald, Trump “got scared into pardoning neither of them for reasons I’m about to explain to you.” Greenwald then argues that ultimately Trump gave in to deep state pressure applied through Republican Senators’ threat to convict Trump on the impeachment brought against him in his final weeks in office. Says Greenwald:

They were making very clear to him explicitly clear Republican senators like Lindsey Graham and Marco Rubio and Mitch McConnell that if you do any of those things that you are considering doing, pardoning Assange and Snowden, declassifying JFK files, declassifying other secrets that should have been declassified long ago because they’re from decades old treachery on the part of the US government, we will vote to impeach you. They had this leverage the sword of Damocles hanging over his head….

“This is the story of why the deep state yet again got its way,” concludes Greenwald in his System Update episode, “even with a person in the White House who knows firsthand just how evil and destructive and toxic they are.”

Watch the System Update episode, and read the introduction and transcript, here.

Tyler Durden
Sun, 01/16/2022 – 18:30

Crypto Options Suggest Bitcoin Bottom Is In As Hash Rate Hits Record High

Crypto Options Suggest Bitcoin Bottom Is In As Hash Rate Hits Record High

After two months of brutal, constant pain for crypto longs on the back of fears the Fed is about to yank the punchbowl and drain enough liquidity to end the party (at least until the next recession and market crash, when the Fed will double-down on easing, launch NIRP, buy equity ETFs and upgrade helicopter money to tactical money ICBMs, finally sending all cryptos to the moon and beyond), the tide may finally be turning at least according to the options market.

After bitcoin suffered its biggest drop since May 2021 as it tumbled more than 40%, sending the price to the most oversold level since the covid crash – traditionally a failsafe bullish indicator…

…. the world’s largest cryptocurrency rebounded this week after falling below $40,000 for the first time since September on Monday and has bounced as much 10%, just as we said last weekend it would.

In short, Bitcoin appears to have stabilized, and options activity suggests investors believe the test of $40,000 – a critical support level below which Mike Novogratz said last week is where he would buy more (and appears to have done just that)…

… is over, and more upside is ahead, according to Genesis Global Trading including Noelle Acheson.

For one, the skew – or difference in implied volatility of bullish and bearish bets – has recently dropped from double-digits to near zero, and revealed a decrease in investor demand for put options and an increase for call options, Genesis data show.

“That shift in preference may be bullish for the price of BTC, all else equal,” Acheson added, and indeed a look at the option-implied probability cone shows an upside target just shy of $10,000..

It’s not just option traders and billionaire investors who see $40,000 as a bottom- it is a view echoed by many analysts in the famously optimistic world of crypto. Quoted by Bloomberg, Martin Gaspar and Katherine Webb at CrossTower said in a Friday note that Bitcoin’s reserve risk, a measure of confidence of long-term BTC holders, is currently lower than it was at the coin’s last bottom in July 2021, and now stands in the “buy” zone, which could give “more weight to the indication that this is a bottom.”

The $40,000 level “has been the key pivot point,” said Bloomberg Intelligence’s famously bullish crypto analyst, Mike McGlone. Up next, $50,000 comes into play before Bitcoin resumes its upward trend toward his forecast of $100,000, he said.

“Demand and adoption are increasing and supply is declining,” McGlone said. “Something has to reverse the increasing Bitcoin adoption trend or the rules of economics point to higher prices. I expect demand and adoption trajectories to remain favorable.”

McGlone isn’t alone in his calls for Bitcoin to more than double from current levels. According to Bloomberg, Jonathan Padilla, co-founder of Snickerdoodle Labs, a blockchain company focused on data , expects Bitcoin to hit that level by the end of 2022, and also said that $40,000 is likely a floor, given the level of institutional capital he expects to flow into the market this year.

“The institutional nature is dramatically different from the primarily retail focus in 2017, 2018,” Padilla said. “That shows the strength of institutional buying and the demand from the long-term perspective.” Of course, this cuts both ways, because when institutions are deleveraging, they dump those assets first that have outperformed in 2021 – such as cryptos – which is also why crypto’s correlation to risk assets has exploded as institutional adoption has grown.

David Tawil, president of ProChain Capital, was ready to watch the $38,000 level in this past week’s sell-off. But, he hoped to see U.S. tech stocks start to rebound, which signals to him that “the bottom is in” for Bitcoin, he told Bloomberg’s “QuickTake Stock” broadcast.

“This is a pretty good buying level, especially if we go ahead and just retrace the losses — you’re talking about a 50%-plus gain from a year,” Tawil said.  

A surprising view comes from some of the biggest crypto skeptics around – JPMorgan, and specifically their clients, who have recently initiated a new target price for Bitcoin for this year of 2022. In a recent report, America’s largest commercial bank asked its clients where they see Bitcoin by the end of 2022. Based on the results, nearly 41% of clients believe that Bitcoin could be trading at $60,000 or above by the year-end, or about 50% higher than the current levels and more than what other asset classes can offer.

Others are less bullish. Another 23% of JPMorgan clients believe that BTC will be available at a 50% discount from the current levels i.e. $20,000. While another 20 percent believe that Bitcoin will be trading flat at $40,000. Only a mere 5% believe that Bitcoin will be trading above $100,000 levels.

Marko Papic, chief strategist at Clocktower Group, is another skeptic – he warns that Bitcoin’s correlation with the S&P 500 remains at one of its highest readings in the past 12 months; this is happening just as tech names have swooned amid fears of a hawkish Fed.  In this environment, “you don’t really want to own high-beta risk assets,” he said. “You want to own things that are much more sensitive to value, much more sensitive to global growth and cyclicals, and that’s why I don’t think crypto and Bitcoin are going to really do great over the next three to six months.”

In his latest Crypto Keys note (available to professional subs), UBS FX strategist James Malcolm has turned quite bearish on crypto, writing that the recent drop in bitcoin prices is the result of disappointment with the SEC not approving ETFs, as well as three other reasons: 1. It’s not better money; 2. The technology may prove subpar; 3. Regulation is a rising hurdle. While we disagree with all of these points, UBS does point out something notable: whales now own more bitcoin than ever before.

Meanwhile, as debates rage what’s next for crypto, one thing that is certain is that China’s attempt to crush the largest cryptocurrency last year when it banished all crypto miners has now failed (and backfired) spectacularly:

Bitcoin’s hash rate has returned to all-time highs despite losing a key hash rate contributor. Meanwhile, amid lackluster price action, Block CEO Jack Dorsey confirmed the creation of an open Bitcoin  mining system. according to CoinTelegraph, while Kazakhstan, the network’s second-most important BTC mining country, experienced an internet blackout last week due to civil unrest, the hash rate faltered no more than 13.4% before regathering to reach all-time highs.

As shown in the data below from Glassnode, with the price checking into the $42,000 range on Thursday, the mean hash rate hit 215 million terahashes per second.

Said otherwise, Bitcoin miners continue to show resilience, and as Fidelity Digital Assets observed, the network is even “more widely distributed around the world.”

As testament to this, Jack Dorsey’s Block confirmed it would develop open-source Bitcoin mining systems in 2022. In the Twitter thread, Thomas Templeton, a general manager at Block, addressed issues relating to the availability, reliability, performance and products pertaining to BTC mining. In sum, Block’s goals for BTC mining are the following:

“We want to make mining more distributed and efficient in every way, from buying, to set up, to maintenance, to mining. We’re interested because mining goes far beyond creating new bitcoin. We see it as a long-term need for a future that is fully decentralized and permissionless.”

Building a BTC mining system “out in the open” and alongside the community is no mean feat. Econoalchemist, an established home BTC miner and BTC magazine contributor, tweeted that developing products in open source would “build trust where no reputation exists currently and also might shift consumer expectations in that direction.”

Ultimately, Block’s mining solutions may pave the way for more DIY miners to enter the space.

Ultimately, it seems the sky’s the limit for Bitcoin’s hash rate, at least until the next 2,016 blocks, when the network difficulty resets.

Tyler Durden
Sun, 01/16/2022 – 18:00

Is Masking Kids At School Working?

Is Masking Kids At School Working?

Authored by Ian Miller and Michael Betrus via The Brownstone Institute,

Kids in California, New York, Illinois and a number of other states are required to wear face masks every day at school. Nearly 40% of school children nationwide are required to do so. Other states leave it up to local rules, which means about half the kids in the country are wearing face masks every day, social distancing, eating lunch outside, and performing athletics in masks. 

Close to 30% of all schools are legally prevented from implementing mandates, or face pending legal challenges to restrictions, which means few in those states are imposing restrictions like we saw in 2020-2021.

Below are those states with and without face mask requirements in schools.

There are two things that would almost assuredly amaze most parents across the country. Many parents in states like California or Illinois with mask mandates would likely be shocked how normal school protocols are in Texas, Florida, Utah, Iowa and other states shown in dark green or orange. Those with school-aged children in the green states would be stunned to learn that those in blue are requiring kids to wear face masks in school, socially distance, and eat outside in the cold or rain.

Some universities are requiring students to wear masks while on campus, even outdoors, including the University of Southern California and the University of Arizona.

COVID-19 is currently surging all over the country. Fortunately, a combination of a less lethal variant, recovered immunity and vaccinations are preventing many from the highly serious conditions we have seen in the past. You can see below that positive tests have skyrocketed over the past few weeks. Why so many people who aren’t sick are waiting in long lines and panicking to buy at-home tests is the subject for another article, but it’s clear that millions are currently contracting COVID-19:

In looking at the grouping of the states (CA/OR/WA/IL/NY/DE/MA/CT/NJ/MD/NV/NM/VA/RI) with required masking in schools compared to those without mask mandates (UT/FL/AZ/TX/OK/MO/IA/AR/TN/SC), where very few students are wearing them, we see nearly identical trends, and those with little to no masking have lower current case rates: 

The proportion of pediatric positive tests is similar in all parts of the country right now, about 20% of all positive tests across the three 0-17 age groups shown below. This is about the same regardless of weather (seasonality) or restrictions:

It made us wonder. Are the school restrictions in some states working? It’s not about cases; cases are really a product of community spread and how much testing we do. It is about sickness. Are more kids getting hospitalized for or with COVID-19 in the states with normal school protocols than those requiring face masks?

We reached out to Josh Stevenson (@ifihadastick on Twitter), who has repeatedly produced amazing data analysis throughout the pandemic. Below is what he uncovered. This is an original compilation you won’t see anywhere else. For the states requiring masks, COVID-19 pediatric hospitalizations are averaging 4.23 per 100,000 kids:

For the states not allowing face mask mandates (or close to not requiring), COVID-19 pediatric hospitalizations are averaging 4.90 per 100,000 kids:

The hospitalization rate is nearly identical. There is no discernible difference between outcomes of infection or hospitalization for kids in communities where face masks are required in school and those where face coverings are optional.

Kids should be in school with normal protocols.

They should be in class without masks, without plexiglass dividers, socializing while they eat lunch and participating in sports without face masks. Logic clearly tells us this, and this data overwhelmingly proves there is no health benefit to requiring kids to wear face masks in school.

Tyler Durden
Sun, 01/16/2022 – 17:30