Weekend Reading #209
Photo by Johnny McClung on Unsplash
This is the two-hundred-and-ninth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 18th March 2023.
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What we’re thinking
The streak of action-packed weeks that the market is delivering is absolutely monumental, and we suspect that with hindsight we would look back upon this period as one of the most memorable in our careers. The only lingering thought at the back of our heads is that almost all "historic" occasions in markets end in the same dramatic fashion.
Two questions occupy our thoughts at the moment.
The first is whether we just went into QE again. Remember that QE doesn’t need to be open ended as it was for some time, but can be occasional too. Ostensibly, the Bank Term Funding Programme is simply a liquidity measure, made to ensure that the banks' mark to market losses on their duration risk exposed book of high-quality assets don't impair their ability to function, and effectively spread the word that the banks are sound, guaranteed by the Fed. But the market isn't exactly convinced by this: rather, it seems to be looking through this and saying hold on a second, if you guarantee that for a year, ALL qualifying collateral including treasuries and MBS can be posted at collateral value of Par, then the size of the guarantee is something around US$4.4tn at the maximum – on the assumption that the full par value of the entire treasury and agency MBS markets are covered.
Is this QE? Does QT continue? What is the Fed is going to do at the FOMC meeting next week? The variety of opinions that are coming from all directions - including calls for rate CUTS - is cacophonous, but if we were to think about that US$4.4tn in the context of the monetary expansion post COVID (c. US$4.2tn), it not only looks rather significant but in fact is larger than the covid stimulus!
Will we see an incremental US$4.4tn hitting the markets? Probably not under BTFP – if we did, it would mean the market value of all treasuries and MBS went to zero, which is unlikely and a bigger problem in itself. But even the perception of the availability of massive liquidity, backstopped by effectively the government as depositor of last resort, demanding the 1yr rate + premium to backstop the deposit base of these banks, is a positive enough signal for the liquidity situation in markets. Markets are about rate of change and in this case the rapid shift from relative tightening to relative easing is a big deal.
On this side of the pond, the jitters around bank security seem to also have calmed down after a tumultuous week. The 50bps rate hike from the ECB appears to still be within the realms of tolerable for most banks with the exception of Credit Suisse, whose fortunes seem to be getting from bad to worse.
With all of this happening, it's easy to take a view that the world is ending. That may not be an invalid view, but more pertinent is liquidity. The tide is rising, and it's hard to sink while that happens.
On the other hand, crypto's moment of glory could be something celebrated everywhere but in the US, where the regulators seem absolutely determined to stamp out all access to the USD system for anything crypto, and every couple of days another fiat ramp pathway gets taken out. Look no further than State Street cutting ties with crypto custodian Copper, or the FDIC mandating that any buyer that takes over Signature Bank's business commit to jettisoning its crypto business.
The second question that has come out of all of this is crypto. On one hand, liquidity = numba go up, and nowhere more so than in the world of crypto. Does Bitcoin finally have its day in the sun as a hedge against fiat debasement, especially if the narrative so carefully constructed of the Powell Fed being like the Volcker Fed - credible and firm against the evils of inflation - seems to now be under fire?
Most certainly it will be much more difficult in the future for USD to flow into the crypto ecosystem. Yet perhaps in an act of defiance, opportunistically grabbing the initiative, the UK is officially putting crypto onto tax forms. And yes, that's good news - until now, crypto has been grouped under "other assets". If it has a place on the tax form, at the very least it's a sign that it's here to stay, at least on this side of the pond.
What we’re reading
One could say that BitMEX founder Arthur Hayes has been on a bit of a hysterical writing spree lately, but his latest article Kaiseki is quite the read, particularly where he explains the difference between Omakase and Kaiseki - both Japanese meals which are prepared at the discretion of the chef, but the latter, the Kaiseki, expressly prepares the diner for a Matcha tea ceremony following the meal. At least in his view, what we're seeing in terms of Fed action at the moment is simply preparation for an eventuality that he has been vocal about for years: fiat debasement. Trouble is that what started as a bit of a wild theory years ago isn't so wild anymore.
I’d never ever read a Wilbur Smith book before until a good friend recently recommended one to me. Being in between books and not feeling like a heavy read, I started reading River God a few weeks back. River God is the first in the Ancient Egypt series. Much to my surprise I raced through it and I really enjoyed it. The story is set in Ancient Egypt, with the protagonist a eunuch slave who happens to be a polymath. The story trundles along rapidly and the slave, Taita, is a wonderful character. It is also a great education on Ancient Egypt. I would however say that given that Ancient Egyptians, especially those in power, had very different moral compasses to what we would consider to be acceptable today. So if you are easily offended, don’t bother. It gets not only rather violent, but rather racy too. DC
What we’re listening to
I listened to a great chat between Tyler Cowen and his guest, a Chinese MIT professor named Yasheng Huang. Yasheng written a number of books which Cowen recommends, “Capitalism with Chinese Characteristics” and “The Rise and Fall of the East”. The conversation covers his views on the cultural and historical differences and similarities between China and Western nations. He talks about centralisation of power and the Keju (China's exam for those wishing to succeed in the civil service) and much more. One interesting anecdote is that despite all the differences over the past many years, he believes that Chinese students still view America as the no 1 place to be. He also gives a great recommendation of what to do in China for a two-week trip – go to Xian (imperial capital) and Shenzhen (modern tech mecca) to get a sense of the China’s past and its future. Interestingly he believes the future will be more like Shenzhen than Xian. DC
What we’re watching.
As a devoted fan of The Mandalorian and other Disney+ Star Wars content since the beginning, I'm thrilled to dive into Season 3. This season, we witness the deepening bond between Din Djarin (Pedro Pascal) and Grogu as they navigate their paths in the Star Wars universe. The show continues to captivate us with its rich storytelling and character development. Without giving too much away, Season 3 explores Din's quest for redemption and identity while balancing the father-son dynamic that has become the heart of the series. The show cleverly combines episodic storytelling with a plot-focused direction, keeping us on the edge of our seats and eagerly anticipating each new episode. I'm excited to see how Din and Grogu's journeys unfold this season, as they navigate the complexities of faith, loyalty, and self-discovery. The Mandalorian has consistently delivered a compelling narrative, and Season 3 promises to take us on yet another exciting adventure through the galaxy far, far away. HS
I've been hooked on the Netflix original series "Outer Banks," a thrilling, sun-soaked adventure that critics and fans alike can't get enough of. This coming-of-age story follows the "Pogues," a group of teenagers embarking on a high-stakes treasure hunt amidst the stunning backdrop of North Carolina's Outer Banks. With a gripping plot, dynamic characters, and praise for its strong performances, "Outer Banks" masterfully blends suspense, romance, and teenage struggles, making it the perfect binge-worthy experience. If you're craving an exhilarating journey packed with twists and turns, don't miss out on this captivating ride. HS