The End game has begun. Stagflationary 1972-73 Price pump or Deflationary 2008 bust.? I am prepared for both ;)
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Disclaimer :
Apologies beforehand for a lot of verbose because of the final newsletter. For quick read up i suggest reading "Tl;dr section" ( headings ) and for the reasons behind it are included in the detailed "Experiment section".
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Intro:
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“I felt a great disturbance in the force as if millions of voices slowly and wildly got together and then there was an uprising against the government and the financial institutions” 

Sorry guys, I was supposed to send this the day before yesterday ( great movie ) but unfortunately I got caught up in a celebration we are having over here.
So it's the start of the weekend. Y’all know what that means. I'm not talking about having a party lol, that is for me. You guys have to decipher this long post so that you can protect yourself from the upcoming danger that I am seeing. In short you’re fucked if you don’t read this especially institutions and hedge funds. Just for this week please avoid strip clubs. This one's for you guys because you read my post. ( I like to think so )
Retail public especially retards i don’t have words for you guys. You guys can chill this weekend because all you do is sh9t on my post. Might as well sh9t on this too. I don’t care since all you’re obsessed with is Ryan Cohen and $BBBY. So when you’re finally over him after getting drunk this weekend then you can go ahead and read this post. Could be worth your time.
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As for people asking me why I don't give my opinions regarding meme stocks. Well folks the reason is simple. We are still in a bear market according to my calculations. So it's written somewhere in the gospel of investing that bear markets are the opportunities to analyze value companies, not meme companies which are about to be purge in the upcoming mega crash as an offering to please the gods of stock market.
Yes you “You-tube” folks the crash hasn’t even started yet. We still have -53% to go from here till March 2023 as my base case. Don't even ask me about my worst case. For that just open the Dow Jones 1929-1932 chart.
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Tl;dr and Td;du folks : ( Too long didn't read, Too dumb didn’t understand )
We have already discussed this : Buy 4 months/2 months/1 months puts i.e Dec 30/Oct 29/Sept 29 at the money with strike price near about "200 day moving average = 200dMA" in $SPY last week of august if it comes.
It already did one time on August 16 and i think the top is already in. So you’re gonna profit regardless.
Invalidation would be three white soldier candles above 200dMA of course in daily chart. For positions go scroll down. ( I will make you work for it at-least. xD )
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We have a long way to go friends.
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Now for those folks who want a detailed explanation about everything let’s dive in.
Respected Traders and Investors,
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How are you guys doing? It’s been a long time hasn’t it. God I was gone for a while and had Ni-san use my Reddit account for a few days. First of all, I'm gonna apologize for the Shzio post by my brother Itachi. Man, it felt like it messed up my brains for a while there. It was so damn trippy. So I highly highly advise you guys not to go and read it a second time. Please, it's for your own health.
Regardless i love my brother analysis coz he thinks like no other normal people do in the world of trading/investing. So, I take full responsibility for my actions and if things don't go as planned out in the above charts ( i.e the mega crash doesn’t happen you know ) then you’re not gonna hear from us.
P.s. We promised you that we will do these posts only in bear markets. Even if the USA goes into depression for 10 to 15 years we will post in a week or two until we visit ath ( all time high ) once again. One may ask why not do this stuff in the bull market? Guys you have to understand we are not bull market specialists. For bull markets it's generally advised to follow moon boys on twitter, tik-tok, You-tube etc. They are more educated and well informed than us in that department with a huge audience behind them. ( They spend so much on marketing lol )
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Recap : Predictions 2022 so far.
I don’t usually like to do this because my readers already know about this but it’s time to back-test how accurate we ( i.e. me and my brother ) have been this whole time especially to show random people who are new to reading these kinds of posts especially when it’s season finale.
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• We predicted the March 16 post Fomc rally.

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https://preview.redd.it/6n7xv1xs52j91.png?width=1851&format=png&auto=webp&s=ef518b9218d0bc29d830fc61927009ece8a66438

• We predicted the April top. Thought it was gonna last two to three days more but it lasted just one.

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https://preview.redd.it/ictvxtex52j91.png?width=622&format=png&auto=webp&s=1905d15b9028016b853e12dd817097c285d2eac7

• Then we predicted June Fomc bottom which we already mentioned in our first letter. Does “Dante cash deployment $SPX $3600-3700 at trend based 1 fib” ring a bell. ( But then later i said to just sell above 2% because Cpi 8.8% est and Atlanta Fed Gdp -2.1% est scared the sh9t out of me and i changed my strategy from "Riding to the top of the Bear market rally" to "Shorting at the top of bear market rally" )

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https://preview.redd.it/brojy4p462j91.png?width=743&format=png&auto=webp&s=a96db2532fe7643a3b03e3f2293102e8c28a06e2

• And now we finally did the same for August top at 15/16 i.e. 200dMA/ 50-61.8% fib retrace which is just a follow up to above June Fomc bottom. post.

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https://preview.redd.it/da60ccei62j91.png?width=818&format=png&auto=webp&s=ce9e342a4a1f31b7ed9cd4931c8511bdd9368ae5
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And then there were bond, commodity, Dxy calls that we are not even mentioning.
What this all means is that the stock markets have been performing as we had hoped for since February which is like 6-7 months ago. So i guess we are not a broken clock and actually do provide the exact days or should i say the time horizon.
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Am I a member of secret society i.e. "Illuminati” or have contacts in "Pay pal mafia" ?
No guys. I am not a member of secret society nor do i have any contacts. My brother do though. I do want to manage the portfolio of wealthy clients like my brother someday but I'm too lazy. I just want to take bets and watch anime and Tv shows my entire life. I just finished West world and now i guess i will watch episode 1 of “House of dragons”. ( Why did that producer said bad things about Emilia. Hmm ) As for anime recommendation man its getting hard to find good ones. I'm just waiting for Chainsaw man now.
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About my self.
Before all of this I was a Computer Science student whose only good skill was learning a hybrid application development platform called Flutter ( By Google ) but now I just write detailed and boring posts on Wall Street bets about anything that comes to my mind for you guys. My predictions come right because of you folks so thank you for taking trades and also I just basically copy pasted 2008 charts ( 32nd death week ) like I do with Git-hub while programming.
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Now will I be wrong in the future?
Of course I will be. I’m no economist. I just make cases i.e stock market = 1972-73 or 2008 and just bet on them. Also a big hedge fund guy might find my post someday and take the opposite trade against me wrecking people who followed my advice.
Hence i always tell you guys “Do your own research“ “This is not financial advice” even though it will be right most of the time. You absolutely should not follow anybody w/o checking out at-least 10 other guys.
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Why take my advice ?
So now that we have cleared some of the confusion which I couldn't in my Wsb guest talk appearance you might be thinking why we should even consider your advice in the top 10 folks we watch. You’re a nobody. Well folks in my defense i would say it's because I gradually improved myself. Earlier my posts were shitty but now they are getting better especially my T.A. And I'm also learning economics day by day. Do you know guys I didn't wanted to write this as final post coz I was actually busy working on other post like “Deciphering Stagflation 70's” and “Thermodynamics in Economics” as my farewell post. Yes it's true guys the US economy is one giant open system. That’s how Elon Musk and Jerome Powell do calculations about economics. xD
Well enough spoilers about the next season. I know you guys are getting bored. So lets now finally jump in what i wanted to actually talk about.
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Experiment :
Deriving conclusions about Nasdaq, S&P500 and rest other asset classes using other asset classes on weekly and monthly charts. I know it sounds insane right now but you will see. So just trust me on this. (My grammar is so poor)

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Tools :”
I mean the Technicals i will be using today includes :
-> Candle sticks
-> Elliot wave with Fibonacci
-> Stochastic Rsi
-> My favorite which never ever lies : Pvt(O)
-> At last my “Ketlner channels”
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Procedure :
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Step 1 : Forex Markets

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Eur-usd
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Eur-usd : Have you ever seen such a bearish chart in your life both on a weekly and monthly basis? I mean as much as I love European countries but I have to say your Eur-usd charts sucks equally much. Putin owns you guys this winter. Italy and Germany are already suffering so much with 10x bills gas + electricity if compared with 2021 so i can't even imagine about countries like Spain, Greece etc. Okay so I'm gonna stop myself now with the pessimism and dive into Technicals.
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Weekly Time Frame Analysis : ( Left chart )

• Eur-usd bull traders have to stop this deadly weekly close otherwise the whole world is f’ed.
• Elliot wave C wants to go 1.618 i.e. 0.924.
• Stochastic RSI are about to cross weekly and go down.
• Pvt(O) if it crosses the blue line and heads down means game over.’
• We aren’t even testing the Ketlner red upper band. That’s how bearish we are.

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Monthly Time Frame Analysis : ( Right chart )

• Eur-usd bull traders couldn't stop monthly support i.e 1.03. Rejected it, retested it from below and rejected it again. The double top at 1.24 was deadly too coz you know when we break the support at 1.03 you go down equally much. Hence those red vertical lines.
• Elliot wave C wants to go 1.618 i.e. 0.81487 so is 0.834 vertical red line support.
• Stochastic RSI is in deep water. You ain't coming out of there any time soon before weekly readjusts.
• Pvt(O) wants to do nothing and stay flat for a while.
• We are hanging on the Ketlner upper red band.

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Result : I can confidently say with 1000% certainty that Eur-usd is going down. Thank you madam Lagarde. You’re doing such a fine job by selling German Bund and buying Italian bonds. Congratulations to you and your PEP tool (Lol, guys this woman is bat-sh9t crazy)
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Gbp-usd
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Gbp-usd : Well first Sir Mr Bailey. I have to say I'm a big fan of your honesty if you are reading this. I mean in today's world it's hard to find someone that honest in a government job. So guys we know inflation is double digit’s over here ( heading to 13% or was it 15% in coming months ) and in September the Bank of England is going with 50 bps. So we already know that Uk is gonna have more than 2Q of -ve Gdp. I hope you Uk folks survive considering you're gonna lose jobs, probably go into economic depression because recession is everybody’s base case even of Mr Bailey. So enough details let’s do analysis.
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Weekly Time Frame Analysis : ( Left chart )

• Gbp-usd is in a huge IHS pattern but that doesn’t mean it will go to the upside that easily. Currently the price is testing right shoulder at 1.19. If it breaks then the price will test the head 1.14 and if it doesn’t break and holds then the price will go to 1.42 to test the neckline. After that we shall see whether the IHS breaks or not. Also the volume is supporting the down move.
• There is no Elliot wave here. But the key thing to note is that if 1.14 breaks then you’re heading to 0.87 levels. Reason being two vertical red lines should be equal.
• Stochastic RSI has crossed weekly and is about to go down.
• Pvt(O) if it crosses the blue line and heads down means game over. If it doesn’t break only then you have a chance of at-least going to the neckline.
• The price action has occupied the whole Ketlner red band. Meaning we are in a bearish downtrend.

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Monthly Time Frame Analysis : ( Right chart )

• Just remember we are in the box lock of 1.14 to 1.42 range. The increasing volume is also supporting this downwards move. If i don't take any wicks into consideration then it looks like the price has broken 61.8% fib and would likely head downwards to 1 fib cause there is no support of candle closing. So watch out for monthly close here as well and an eye on higher high volume. Also don't forget those red vertical lines. 1.72 - 1.42 , 1.42 - 1.14, so 1.14 - XXX. Do the math.
• 12345 was completed in Oct 2007 ( Yah that old ) From then we are in the ABC corrective wave. Elliot wave C is still deciding what’s gonna happen with IHS. If it breaks down you’re looking at 0.95.
• Stochastic RSI is in deep water. You ain't coming out of here any time soon.
• Pvt(O) wants to do nothing and stay flat.
• We are hanging on the Ketlner red upper band.

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Result : I can confidently say Gbp-usd is going down. Mr Soros if you’re listening to this, let's break the “Bank of England” once again. Just for good old times sake.
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Usd-Jpy
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Usd-jpy : If i tell you anything about this forex pair I’m probably Bs’ing you. It’s true guys. Even Mr Kuruda the governor of Boj doesn’t know where the Usd-jpy is gonna go. But what we can speculate is if the dollar becomes so much stronger due to the weakness in the Eur-usd equation then Dxy is gonna pump past 110 and the dollar becomes stronger. Got it. So I could easily play this approach into my thesis by telling you yes this pair is just gonna go up. But I will not do that. Instead I'm gonna play a devil’s advocate here saying Usd-jpy will go down. So let’s analyze things which are a total waste of your and my time because I'm gonna reverse this forex you will see how.
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Weekly Time Frame Analysis : ( Left chart )

• Traders watch the 136. It’s a critical resistance. A clean break of it would mean 148 otherwise we go 125.
• Elliott wave 12345 is complete at 136 and now we go for the ABC corrective wave. A will hit you at 116 and the rest is just a made up wave.
• Stochastic RSI is on bottom and will go up.
• Pvt(O) too looks like it could go up.
• Here in this Ketlner channel we are hanging on a lower green band. That’s how bullish we are but I have chosen to take the bear case.

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Monthly Time Frame Analysis : ( Right chart )

• Traders watch the monthly close. If it closes above 136 we go to 148 otherwise down.
• Elliott wave 12345 is complete at 136 wave. Entire ABC is made up because it all depends on the monthly close.
• Stochastic RSI is on top flying and looks overbought but who can argue with their unlimited bond buying which in turn has caused the parabolic move.
• Pvt(O) too looks like it could touch the blue line. If it crosses we fall, if not we go up.
• Here in this Ketlner channel we are on an upper green band. That’s how extremely bullish we are but I have chosen to take the bear case.

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So since I took the bear case it doesn't look like any bearish to me. Don't you agree? So our devil in devil’s advocate looks weak. So to fit our thesis lets reverse this. This is kinda like physics or Math kind of stuff where we proof things by assuming inverse.
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Result : I cannot confidently say but I will say Jpy-usd is going up to 148 at my favorite dot com times where Dxy went 120. Hence i’m selling my Yen trust with ticker $FXY.
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Step 2 : DXY. A basket of forex currencies.

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You must be wondering, I'm gonna introduce another colorful RGB crayon drawing chart on both weekly and monthly. Sorry to disappoint you folks but I'm not doing that. Instead let’s use our brains.
We know that US dollar Index i.e. Dxy is used to measure the value of the dollar a/g basket of 6 currencies. The Euro, Swiss Franc, Japanese Yen, Canadian Dollar, British pound and Swedish krona. Now I'm not gonna explain you here why dollar is global reserve currency or dollar has more liquidity so let’s just assume that.
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So what happens now is when Eur-usd becomes weaker, investors usually go risk off and buy the safest asset in the world i.e Dollar. Hence the Dxy goes stronger which suggests the dollar is getting stronger coz european buddies will exchange for dollars coz its very liquid and due to interest rate differentials. ( Remember Gbp-usd is an exception to interest rate differential coz what's happening over there is interest rates will go up but their currency is still losing its strength )
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We have discussed a thesis in past letters already and came to a conclusion and I quote.
“Eur-usd is a mirror image of the Dxy chart.” Remember this for your lifetime. Especially you Gen-z.
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I wasn’t gonna post a chart but then I realized I should for new folks who are lazy to read past posts. Eur-usd breaks parity and goes 0.80 levels Dxy will be 120 for sure. In monthly Dxy is super bullish. And on a weekly basis it's trying to close above 107 i believe. Hence your Voldemort asset class dropped -8% i guess. Right ?
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Mirror chart : DXY vs Eur-usd
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Result : I can confidently say Dollar or DXY is getting stronger in comparison to Euro, Gbp and Jpy. Hence DXY to 120 is back on the table according to the “20yrs of wyckoff accumulation” pattern. If you cleanly break 110-112 i must say equities especially the Spx is gonna visit to my $3200 level.
Now some Cnbc or Bloomberg guys who stole my research and didn’t gave me credit 2-3 months ago used to come on tv and say things like “Oh in 2018 Spx visited 200wMA so it makes sense that this cycle which is even more tightening compared to last makes sense to visit this range.”
So folks now the Spx has shifted its 200wMA/50mMA = $3500-$3600. But these clowns oops economists don't know that we should take a look at the monthly chart. Once you open that. Your pants are about to drop coz in the last tightening we visited not 200wMA but 100 monthly moving average i.e 100mMA. Yeah let’s go visit makachev vs oliviera in oct 23rd ufc 280. So if we cross paths over there I will tell you we are going to Spx $2873 i.e. somewhere around $2800-2900 which my close friend Dr Burry suggested too. Hence he sold + he is shorting coz he has relieved every moment in 2008. So he knows what’s coming next. You guys don’t.
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Step 3 :Eur-usd Implied Fed funds 100-CME:GEZ2023 ( Not gonna use Elliot wave + Fib trend starting here now )

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This is like gonna be super high level stuff even far above my pay grade. Only Zoltan can explain this using repo markets but since he is busy I will try to explain it in a funny way. So if you might have watched Cnbc this past week two economists were arguing about how Fed funds have priced in 4% already but one might be saying no it has only priced in 3.4-3.5%. So who is right?
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If you watch “Everything money” by my suggestion then Mo came to the conclusion that the reason he is saying 4% is because the Fed is doing QT + rate hikes which Mo still does not believe.
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So who is right and what is the right explanation for 4% ?
Imo they both are right but the explanation is wrong. The reason one should present about the 4% Fed funds argument is that in Eur-usd implied Fed funds went to 4%. Hence the market has priced 4% in the euro dollar banking system. But if you take only the dollar banking system in Usa then we look at yields of 2 yr and 10 yr which are hinting that Fed funds 3.4-3.5% is already priced in by the markets.
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Eur-usd implied Fed funds.
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Monthly and weekly time frame analysis :

• Both look strong on a monthly and weekly basis. If monthly candle closes above resistance i.e. 3.50 this month then we are looking past 4% Eur-usd implied fed funds
• Stochastic Rsi on weekly and crossed and is heading up while on monthly they are about to cross and hover above for a while.
• Pvt(O) on weekly looks promising as compared to monthly.
• Both of them don’t wanna lose their lower green Ketlner band.

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Result : I can confidently say that we are going up here technically. So J. Powell, could you please back me up on this. Zoltan agrees with me. Snyder doesn’t.
( Just remember implied fed funds can go up due to Eur-usd weakness. So its kinda like indirect interest rate hike for markets. Add QT on top of that. Hence Fed is dovish in Fomc minutes for rate hikes )
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Step 4 : HYG & LQD : The corporate bonds

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HYG
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Hyg : This product is designed to replicate a benchmark which provides a broad representation of the U.S. dollar-denominated high yield liquid corporate bond market. The high yield bond space has been cracked wide open by ETFs, as these products have offered numerous ways for investors to take advantage of this space. High yields can be a great addition to a yield-starved portfolio, as they can offer yields into the double digits for those willing to take on the risks that come along with it. The high returns come from riskier bond choices who have to pay out higher ratios to compensate investors for high risks. This means that the holdings of these ETFs will have higher chances of defaults, and could potentially leave investors out to dry. But those who have done their homework on the holdings of a particular “junk” bond fund have the ability to generate strong returns from these powerful products. HYG keeps most of its assets inside of the U.S., though it does offer a slice of international exposure as well. The ETF is dominated by corporate bonds, the majority of which have investment grades between B and BB. This product will make a great income addition to any investor who is fully aware of the risks a high yield bond product carries.
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Weekly time frame analysis :

• Weekly is gonna print bearish engulfing candle. Also there is a volume divergence. Price going up but volume going down which leads to fall. Trend line break candles will be the nail on the coffin.
• Stochastic Rsi on weekly crossed and now are heading down.
• Pvt(O) on weekly is also done after releasing supply and now will head down to accumulation..
• Ketlner middle line changing band rejected the price action suggesting bearish continuation.

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Monthly time frame analysis :

• Monthly rejected its previous to previous top of the candle and is gonna print another st. down red monthly. Again price ascending volume declining.
• But interestingly stochastic Rsi on monthly going up..
• Pvt(O) on monthly also about to cross its blue line later sometimes.
• As for Ketlner, well it's pretty much occupying the entire red lower band.

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LQD : I leave it up to you guys. Cmon at least do one.
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Result : I cannot confidently say that we are going down on a monthly time frame ( i need to see more data ) but yah sure on weekly we are going down because of that deadly candle that folks have been talking about.
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Step 5 : IEI/HYG : Government bond price / Corporate bond price.

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IEI/HYG : Double check below thing.
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IEI/HYG : If it goes up then credit spreads are widening. ( Bad thing i.e risk off )
IEI/HYG : If it goes down then credit spreads are tightening. ( Good thing i.e. risk on )
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Weekly time frame analysis :

• Weekly is about to print a bullish engulfing candle. Also volume isn’t supporting downwards move i.e. price is going down but volume is going down as well.
• Stochastic Rsi on weekly crossed and now are heading up.
• Can't comment about Pvt(O) weekly. Mixed signals
• Ketlner middle line changing band supported the price action and is green. Meaning bullish continuation

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Monthly time frame analysis :

• No complete data on monthly that we can make assumptions.
• But stochastic Rsi crossed on monthly and suggested going down.
• Pvt(O) flat.
• As for Ketlner, well we had rejection from an extremely bullish green band i.e. we haven't gotten permission for capitulation but we got support from middle Ketlner to make the price go up again.

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Result : I cannot confidently say that we are going up on a monthly time frame ( i need to see more data ) but yah sure on weekly we are going up.
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Step 6 : ( Super scary ) : Velocity of m2 or m1 money supply i.e v = us gdp / m1 or m2.

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Velocity of M2
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This is a very debatable topic. Only the pros have the right to argue about this stuff and no one else. Peter lynch once told me during my time travel visit that people worry that the velocity of money supply is going up way too fast then we are gonna have depression and if the velocity of money supply goes down then too we are gonna have depression. So which one is it?
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Anyways Q3 2020 : 1.149 was the highest reading. Currently we are trying to break it. Q2 2022 : 1.147
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"The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. This is called an expanding economy." ~ By Fred website.
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So go out there and ask your banking friends and tell them please explain the concept of money supply in today's terms. Not an old term. So I too went to my brother for advice. He told me “ F off “
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Result : “F off”
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Step 7 : Gold

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We are not gonna do weekly and monthly time frame analysis on this. Some of you guys may be like “Dude, I'm an old man with agricultural land. I wanna own gold like my ancestors from 18th century coz i believe in stagflation, parabolic move, end of the world, negative debasement hedge blah blah” So i need charts.
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Old man's Gold :
Old man you need to chill. We are gonna use our brain like Peter Schiff. So we know, gold doesn't love that his nemesis dollar is going up. Now if you can tell me how high Dxy will go up then i can tell you that the top of Dxy will be the bottom of Gold. Also gold doesn’t love financial crisis or bank runs. In my world gold is a phoenix who rises from ashes. Meaning if we plunge into the abyss then gold is gonna drag us out of there first. Then indices move and other asset classes.
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Digital Gold :
As for young folks, you love the King of Voldemort asset class don’t you? So go buy it at amazon bottom i.e. $4-5k or my favorite Richard heart level -83% i.e 10,690. Or if you really don't have the patience like probably 99% of the entire world population you buy some % of this commodity for whatever reasons these guys are selling you at $20k. I shall rest my case now.
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Result : Dollar i.e. Dxy up = Gold down and vice versa.
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Step 8 : TLT/JNK : It’s kinda like IEI/HYG

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Can you guys do this please?
Hint : Bullish divergence on weekly and monthly. Meaning TLT ( 20yr treasury bond etf by black rock ) buying over Junk bonds i.e. JNK
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Step 9 : US Oil.

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Let's go Brandon and the government. Just how much are you gonna manipulate the best inflation hedge alive. You guys have already killed my Gold. Yes you J.P. Morgan traders, I hate you. May your bank dies in upcoming crash and have Panic of 2023 just like Knickbocker crisis in 1907. Only then I shall have my vengeance a/g those rumors you circulated back in the days.
So guys you probably would know this that our Usa Government try to manipulate oil market just to please people and ask for votes. These are some of their stupid tactics.
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• Releasing SPR ( i.e. Strategic petroleum reserve ) in the market.
• Pressurizing Saudis to find oil. ( Btw Saudi Armaco alone made profits greater than all Usa mega cap tech combined )
• Windfall taxes on Oil companies.
• Distributing E.V. credits to people. But even E.V. companies are smart. They instead increase their price. Ford I mean what the f you guys are doing.

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This is the most manipulated market I have ever seen in my 100 yr+ of lifetime. So traders if your conclusion from my above observation was that we should short Oil lemme tell you something in double quotes.
“Be afraid of Putin’s Winter Oil boogeyman”. "Contango is a dangerous thing that futures creates"
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You don’t short Oil in winter. Period. Heck you shouldn’t even trade Oil. Only the expert can do this because it's called “Widow Maker” i.e. the losses in this commodity trading could be catastrophic planetary devastation like.
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Tip : Btw currently oil is in downwards wedge and it could break to upside and we go up in winter but Oil too like gold doesn't love Dxy going up. So kinda mixed signals i guess. Let's see who shall prevail bulls or bears of oil.
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Result : Dollar i.e. Dxy up = Oil down and vice versa but Winter is coming/ Contango = Maybe Oil up.
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Step 10 : Powell curve i.e.10 yr - 3 month, 2 yr - 3 month ( Pvt(o) and Elliot wave doesn't work here )

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Do you guys remember the talk we had with Powell earlier this year when he was trying to explain us that the inversion of the 10 yr - 2 yr curve doesn't mean anything and unless the near term curve inverts it's all okay. Well folks Powell near time curves are close to getting inverted. Therefore you’re seeing these Fed officials talk dovish recently. Coz if they invert Fed will lose their remaining 0.0000001% credibility. So let’s analyze them on a weekly time frame because on a monthly time frame they look super super bearish to me and there is no chance that the curve won’t invert at some point later on.
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J Powell/ Fed Curves : Us10y-Us03m , Us02y-Us03m
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Weekly time frame analysis :

• The current weekly candle in both curves are going to close lower than previous week which could suggest further downside risk.
• Stochastic Rsi on 10yr-3m looks flat dead whereas on 2yr-3m it looks like it is rising.
• MacD in both of them is showing us that the downwards declining move is losing its strength.
• As for Ketlner, well in both of them they are staying in the lower red band suggesting they are still in a bearish trend.

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Larry Summers former Fed chairman came recently to Bloomberg saying that the Fed has shown in latest minutes that they don’t even know what they are doing. Hence they Bs’ing us in their statement. I mean guys just read these hawkish and dovish points yourself. Also do check out the hidden statements in minutes which are pieces of advice for billionaires about liquidity and t-bills. Don’t forget my warning about bank runs. They are coming. My bet is Well’s Fargo Oct 2022/23 = Lehman brothers Oct 2008 or you could also go with lowest read by a bank in Fed stress test.
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Hawkish vs Dovish vs Billionaire's ( Highlighted in blue ) Fed minutes.
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As for individual bonds and overall yield curve :
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Bonds :

• Well 10 yr yields looks so good on both weekly and monthly time frame. So we go up in yields.
• 2 yr yields look so good on weekly and waiting for monthly close making it bullish. Meaning on September Fed is gonna be dead. ( Yields will rise meaning bond prices go down with stocks )

Note : Once again i'm telling yields is going up due to Eur-usd down i.e. Dxy up and markets front running 95B/m QT. We are quite unsure about rate hikes coz its nearly 50-50 b/w 50 and 75 bps. It will all depend on Cpi and Jobs data in September.
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• Institutions and Hf’s are also buying Chinese bonds like crazy or maybe Chinese themselves because of fear of recession and growth slowdown i.e. flight to safety trade. They have deflationary recession but the thing is they have balance sheet recession. So their government is creating a liquidity trap by cutting rates. But don't forget they can always do exuberance amount of liquidity coz they have very less inflation. In Usa you're getting rekt in both stocks and bonds.

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Yield curve :

• As for the entire yield curve here look at these beauties that Powell has created in these charts.

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Credits : Eurodollar University. By Jeff Snyder
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Note : Yield should be higher if the time horizon is higher. Meaning shorter end like 2 yr to 5 yr should yield less than 10 yr and 20 yr normally due to unknown risks associated in far future. But look here in these charts. A 52 w t-bill is yielding more than 20 yr and 10 yr bonds. That’s insane. It tells us there is a danger in next 1-2yrs as compared to far in future. The curve has gone banana's b/w 26 w t-bill to 10 yr bond. After 10 yr to 20 yr curve looks so good and why won't it. Because after the most horrible decade in entire history of Usa will come a little less horrible decade. Haha.
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Result : I can confidently say yields are going up in respective bonds. But will basic yield curve i.e us10y-us02y will steepen or invert more is out of my pay grade.
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Step 11 : VIX. It looks so ready to pop anytime.

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I mean what do i even say here. This whole year traders are buying Vix calls in 20 and shorting equities and as the Vix goes 30 they sell their calls and buy puts. Meanwhile longing their equities position.
So smart Vix traders, it's time to integrate the mega crash in your calculations. Meaning do the first phase of second part but leave tf out of second phase of second part i.e. don't buy puts on Vix and don't try to long equity in 30 coz this time folks are going to promised Vix 40+.
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Result : Vix is going up. Reason : It's mid terms + Putin x Jinpig x Biden at G8 = Volatility in Sept - Nov.
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Conclusion :

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Financial derivation = Take those steps into consideration that you are confident in your analysis.
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So I chose my Eur-usd pokemon.
Reason : I am quite confident in my analysis and Lagarde. Plus Fed minutes made a commentary about this that dollar is looking so strong as comparison to Euro. Maybe this too played a part in their recent dovish commentary.
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Assuming : Eur usd is going down coz Europe is f’ed. ( We were most confident about this in all of our steps. Also my birdie told me 0.93 eur-usd traders have risen from their grave in options market )
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Above assumption ( proving in step 1 t.a. ) will mean :

• Dxy go up due to the mirror chart theory. ( 0.80-0.90 levels in eur-usd = 120 move in Dxy )

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• So now equities, commodities, metals and rest other asset class will fall down.

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But what about bonds?
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• Well when the dollar strengthens then the countries who have dollar denominated debts have to sell their bonds and buy new bonds to refinance. Something like that. I think i butchered it. But yah it happens. Other reason being when dollar strengthens due to ext factors then its kinda like a rate hike. So since bonds don't like rate hike they sell off. Now add QT on top of it i.e 95B/m + Us treasury will issue more long term bonds and cut treasury bill issuance. So 10yr to 20yr bond yields will go up.
• So now remains the case for 2yr bonds. The Fed will hike rates but it's kinda hinting that they won't go aggressive now coz they don't wanna overshoot and bring depression. Hence the 2yr bond will not go up more than the back end i.e. 10yr bond. Meaning us10y-us02y will move from inversion territory to steepening territory.
• T-bills is getting bought more instead of rrp. Hence t-bills are trading below rrp. Meaning billionaires or banks fear about incoming liquidity crisis or collateral shortage. So t-bills it is or cashola. Or you could go to a money market fund and park your money there coz banks don't give you anything. Let's cause bank run together next year.

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• Also vix will pop up in this scenario due to asset classes being sold off

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• The velocity of m2 is gonna go up suggesting economy expands. Nope. Imo its suggesting dollar milkshake theory coz m2 is going down. Less dollars will be in circulation but exchanges will remain same. ( Long shot. I really don't know. Just guessing )

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Final Result :

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Every step we proved above using technical analysis on weekly and monthly time frame is being backed by my financial derivation except one thing. Will us10y-us02y curve invert more or steepen.? Coz steepening is bad for dollar strength whereas more inversion is good for dollar strength i.e. Dxy.
P.s. I think i'm so confused. Damn these bonds are tough to read.
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Note : I forgot Dr copper. Lol. Why is it going up when Gold and other metals is going down?
*** Illuminati said : "Coz Dxy move up or bond yields move up is not because of rate hikes. They all are priced in. It's because of pseudo rate hikes on the Global market that is causing dollar to strengthen. This is due to QT + Eur-usd , Gbp-usd going down. Throw Japanese yen in there too but its chart is going up coz its Usd-jpy pair not Jpy-usd. Just like i said before too.
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Farewell :
Thank you guys for your patience in reading an 8yr old post with naruto references w/o even mentioning Naruto anywhere coz Itachi stole the show. xD I am so tired guys coz i was busy writing stuff for you guys whatever was coming to my mind and leaving no mistake in my final calculations.
Take care guys. I hope one of you becomes a billionaire in this Wsb group and then pump meme stock for future generations. So suck the life out of me in the comments section. I will reply to every single one of your queries one last time.
( Now playing David Guetta : Just one last time )
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Again like i always say. Don't forget your friends and family. Call them once every week. Be humble, stay safe and eat healthy.
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With lots of love
Regards
Uchiha
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x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x
THE END
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Sayonara...!!!

Disclaimer :
- This series is gonna be about some of the greatest minds in the current financial world talking about their opinion regarding Global Macroeconomics.
- This topic will be discussed in series of questions so you can easily skip the part you know the answers of. Reason : Highlighting, Re reading and paragraphing are not the best techniques of learning things in college or school education. Diagrams and question framing are.
- This post is about to be super lengthy and is probably gonna be boring too. I don't expect you to read this but I want you to know that this post is gonna be super helpful for you as a Wall Street tradeinvestor who have just started their journey into the financial world.
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FYI : No short term trade signals available down below, so without any further delay let's begin but first let's check out their works.
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Credits : Blockworks macro. Left : Joseph Wang Right : Michael J Howell
Now let's finally begin.
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Q1 What is the meaning of the word Liquidity? Explain the difference b/w Liquidity and M2 money supply?
There are two types of liquidity.
- Funding ( Accounting ) Liquidity : Company ability to pay off debt. ( short term liquidity and debt capacity are the two types )
https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/liquidity
- Market Liquidity : Spread b/w ask and bid.( More spread : Illiquid, Less spread : Liquid )
https://www.investopedia.com/terms/b/bid-askspread.asp#:~:text=The%20bid%2Dask%20spread%20is%20the%20difference%20between%20the%20highest,spread%20will%20have%20high%20demand.
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Liquidity in terms of balance sheet perspective is as follows
For Banks : Deposits at Fed checking account
Not Bank : Deposits at Banks, mmf or t-bills
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Liquidity is not a money supply. Money supply is a retail bank concept. It's effectively a deposit at a retail bank.
M2 (Less liquid than M1) = M1 (cash + demand deposits + traveler's check) + savings + time deposits + Certificates of Deposits (cd’s) + Money Market Fund (mmf)
Liquidity is just something different. It's a measure of the financing capacity of the financial sector and its ability to fund positions. Generally speaking, liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself.
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So Liquidity = Total amount of credit in system + access to savings
There are also other dimensions of Liquidity.
- Includes what the Central Bank does.
- Includes what the private sector does.
- Includes what shadow banks can create in credit terms.
- Includes cross border flow.
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Q2 Why do investors look at Liquidity ?
Too see where money was moving and hence you could predict where asset markets are likely to move. For ex : Currently money is parked in rrp.
Risk assets and Liquidity moves in lock step. Hence
Normal monetary correction : -15 to -20%
Recession as well : -30 to -40%
Banking crisis : -50 to -60%
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Q3 How does the Fed look at markets ?
The Fed oversees financial system stability & ultimately the health of the real economy. The Fed can only do QT until something breaks. And something will definitely break because the Fed is focused on fighting inflation.
Hence it's an assumption
Next 6m : Front load this interest rate.
In 12m : Reverse course and go back to QE. ( Suggested by Dr. Burry )
So keep buying for 1 or 2yrs in drips. Don’t rush all in at once.
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May reading : Mid 40's. (3yr low) Latest reading : 40 (-55% drop from 85-90)
Goldman Sachs report : Depth of S&P mini-futures is -67%
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IPO market is down
As the rates are rising it's not just that the cost of capital is rising. It's also about the capacity of capital being decreasing.
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Q4 Which is more important to fight inflation tsunami, QT or rate hike. Explain the difference between banking from the 18th century and this century?
Minor movements in rates can lead to huge movements in liquidity. The financial system is the financing system for new capital. It's a refinancing mechanism for debt.
The amount of debt outstanding is 300T worldwide.
Average 5 yr duration : Roll 60T/yr.
60T is 6x the new issue in the market in both fixed income + equity.
Global capEx is : $100T. GDP of the Usa is about : $20T
Half of capEx is raised through capital markets at about $10T.
But refinancing burden is 6x
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In refinancing positions interest rates are not a key thing.
Think of it as refinancing your mortgage or rolling your mortgage payments. What really matters is whether you're going to roll and whether a bank will take up a new mortgage and not what interest you pay. If you can't get a mortgage, then you're basically unhoused.
Bigger the debt burden the bigger the problem. That’s why you need liquidity.
All Central Banks kept interest rates low at y2k and 2008. They all wrongly read inflation dampening pressure as monetary deflation. But it was actually cost deflation caused by China entering the trade organization. They competed aggressively, which bid down prices in the goods market and on the high street worldwide. So Central Banks panicked because of this monetary deflation. So they all cut interest rates which encouraged more and more debt ( low interest rates are an incentive to debt )
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Let's go back to the British financial system. There was a credit crisis in the 19th century. In May 1866 Overend, Gurney and company (largest bill broker) collapsed owing about £11M equivalent to £1084M in 2021. It was a bankers bank kinda like today's shadow bank. Also, the Bank of England refused to lend them. So there was no lender of last resort.
This inspired Walter Bagehot, and he wrote a book called Lombard Street : A description of the money market, and published it in 1873. It was the dawn of the financial system. He came up with this idea called the Bagehot rule. A bank capable of lending freely to the system at a higher rate of interest against good collateral.
Right now, look at where we are. The Central Bank is doing the opposite. Lending at low interest rates against poor collateral.
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Q5 What does it mean when Fed lends and Fed raises rates through Fed funds. Is QE-QT like buying and selling and not lending.
Before the Fed founding in 1913 the banking system would get into panic time after time. People used to come to the bank and ask for money and eventually they used to run out of money and everyone used to panic and then the bank failed. Hence the idea of the Fed was to tackle this liquidity problem and lend to banks freely through discount window.
So what happened now was if you're a bank and there was a liquidity problem you used to call the Fed and go to the discount window and you'd have this folder of loan that you have on your balance sheet and you'd ask for loan against this collateral. This discount window used to accept a wide range of collateral.
But now the Fed has flooded the system with so much liquidity that banks don't have these problems.In the capital market it's often the refinancing mechanism. The new issue, net issuance doesn't grow that much. It's just the same company, the same people just rolling over the current debt.
The new money injected comes from the commercial bank or the government. Basically when you refinance you need someone's money to lend it to you. So like bank deposits. You can also have money come out of banks and banks can make that loan or if the money has already been created by Fed then someone else will reallocate those bank deposits through capital markets transactions like a hedge fund.
Taking your money and lending it to a corporation. That's another way liquidity can move.If you're doing QT then you're taking away the second part of the money supply. It creates tightening conditions where quantities come to play and it's not just about price.
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https://preview.redd.it/u0xg0tan26991.png?width=1447&format=png&auto=webp&s=d7d03b05a6616dbe4592c43f7997ed3543512162
They are all similar.
All marketplaces are driven by liquidity. The correlation has tightened over the last decade. Earlier 0.6 now 0.8.
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Net liquidity injection by Fed in US markets
Reported balance sheet nope think effective balance sheet ( How much liq Fed put into system ) Tracking b/w liq. and s&p 500 is closer than ever before.
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Q6 Is the Fed realistic in what it intends to do with the balance sheet?
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Fed Balance sheet
Nyc Fed came out into documents on Open market operations in 2021. In that projection you're looking at a sizable drop in something called Soma ( System open market account ) It's also called the amount of treasury Fed holds.
Sci Fi reference : Soma drug in "Brave new world". A feel good drug everyone has. So Soma = Fed monetary drug. Soma account will drop from 9T to 6T basically 3-4 yrs. The Fed intends to remove $1T/yr. If this goes through successfully you will have a huge drop in treasuries price. You've also got a reverse repo which could move up simply because rates are rising. Hence Money market fund rates might go up faster than bank deposit rates because of a lot of demand for reverse repo. So there is a risk of rising rrp to $3T by eoy.
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Reason :
- Not many investments yielding above rrp.
- People move out of their checking account because banks will give them 0% whereas the money market could give as high as 3% by eoy.
This will all suck a lot of liquidity into rrp and hence you could see M2 contract a lot in absolute terms because you're going to get disintermediation out of the banking system to mmf. So someone needs to be aware of these risks considering inflation is encouraging bank to make high demand for loans
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So at the end where is the bank gonna get funding from? This is all building upto bank reserves danger which are parked with Fed cashing accounts.
Refer S&P500 Fed liquidity chart above
If the Fed takes $2T out of the balance sheet the level s&p 500 will go is $3200. There is also a chance of another loss of $800B-$1T due to money sucked by rrp. Hence $2500 can easily come according to this logic. ( Michael burry came with $1800 S&P500 range )
This all hasn't even factored the real economy situation.
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Q7 Have you seen tightening this rapid or atleast the velocity at this level?
This QT is so rapid that $1T out of bank reserves are gone. Tga is also moving down. Soma hasn't moved yet because it's not plunging.
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https://preview.redd.it/7hb7euy406991.png?width=1443&format=png&auto=webp&s=67bf48d41d740779b9f0174522de610f491713a6
On paper this QT is 5x faster than before. But if you look at the chart it's similar to the y2k liquidity bubble. 1997-2003
So now where to take the position ? Go to the front end of the treasury curve and maybe start to dip a toe in the back end.
This judgment will all depend on where inflation settles, what underlying level of inflation is, global backdrop ex : Europe and Japan.
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Q8 Is the chances of pivot by the Fed so much lower now considering inflation is so much high.
The Fed is going with the approach whatever it takes and that includes crashing the stock market. Fed cares about mechanics of financial system so they want market to function
- orderly buying and selling.
- corporations able to refinance debt.
That's how the financial system impacts the real economy. Corporations need to borrow money on a short term or long term basis to make a payroll. As long as these functions are all fine. The drop in equity doesn't matter. It will rather help in tamping down the animal spirit of investors. People buying less will help demand inflation go down. So ans is yes its lower.
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Q9 Why is Vix still at 25-30 when you have a vicious sell off.
Right now we have vicious moves in 1-2month scale, not on a daily scale. We still haven't had a huge spike in daily realized volatility like netflix snowflake on indices. Hence as a result Vix hasn't spiked.
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Q10 Is an orderly selloff of -1% every week better than a dramatic selloff that could start panic.
Liquidity recedes correlation to Vix spike. Hence huge selloff over the course of year but Vix hasn't spiked.
Orderly demolition of risk assets is bad if you own puts. When you have these volatile moves there is a chance that something can break but you won't know where. Reaching s&p 3000 over the next few months is good compared to reaching in the next 2 days. Because then that would mean QE the next day.
Vix :
Volatility tends to begin in Fixed income or forex markets and then it gets created in equity.
You have started to see this sequencing. You have got high volatility in the Move index which is Vix for fixed income. And so now you're starting to get more volume in currency markets. Ultimately in the end it will all get triggered into the equity market when recession arrives.
So now the question is "Is recession coming" ?
Many of the investors are already convinced it's coming if not it's already here. Asia is already in a recession. Europe is just entering one and in the USA it will probably reach in 2-3 months time. Recent earnings reports out of Walmart and Target show whopping increases in inventories. (30%-40% jump)
All points to a slower economy in future.
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https://preview.redd.it/r60ungr706991.png?width=1432&format=png&auto=webp&s=db7d8fe307db97b4097993fff69e859531ad600b
There is also an important concept of spillover that we need to know about in month over month inflation numbers in Usa. The persistence levels of inflation are up if compared with 1970's rate.
Meaning for every 1% in monthly US inflation you get a spillover of about 0.8% in the next month and 0.6% in the month afterward. So that's a huge amount of persistence right there.
Last time we needed volcker to get us out of this persistence.
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Q11 Does QT moderate the amount of rate hike so that we don't need volcker?
Right now, the treasury fed fund rate that's implied by forward curve is about 3.6%. (now 2.9%) It's pretty hard to imagine if the Fed can get to these levels. Everyone views are around 3% because no one thinks the Us economy can handle much more than that.
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Q12 Fed and Ecb projection of balance sheet is showing QT and reduction in balance sheet by 2025. So will 95B/m rolloff inflation. ( $1T/yr )
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https://preview.redd.it/gnjdpqoe06991.png?width=1301&format=png&auto=webp&s=103dbb8a284f42f4f4fe017d041e7c60d73e51e3
First let's discuss Ecb. They will never be able to shrink their balance sheet. They are more worried about spread blow up ( Germany Italy 10yr bond spread )
As for Fed projection :
Nyc Fed projection 8 6 9 T by 2030. So if you're an investor the main question you should ask is, are these Central banks here for the long run. If yes then these balance sheets are only going to get increased as years pass on.
Hence start thinking about asset classes that you need to hold in an environment where CB's major aim is to continue to be the major player in the market.
So logic would say Gold and king of voldemort ( V king ) deserves a place in the long term portfolio.
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Q13 Why isn't Gold responding to CB's ballooning their balance sheet. Is the part of the reason that the market hasn't woken up to this fact or it's the case of a stronger dollar or it's just a timing issue.
If you combine assets that respond to monetary inflation. The answer is Gold+V king together. They match the gyration in liquidity 1:1. The fact that Gold did not go up when liquidity was expanding meant most of the impetus was showered in Voldemort assets.
But if you average the two out, it looks reasonable.
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Q14 Fed current power level = 3 X 2008 power level. Is it real power or not real power at all going forward.
The Fed 's main objective right now is to get the balance sheet down which in turn has strengthened the dollar.
We know that Fed and Treasury policy impact markets. Now think about what's important in the world for them. The answer is liquidity and global power. We all know what liquidity is, so let's talk about global power. It's also termed as economic power the ability to move capital around. Hence currency and credit are important.
So the dollar credit system is paramount within this world system.
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Q15 B. wood 1 vs B. wood 2 debate ? How does Boj fit here ?
This is nonsense. B. wood 1 never went away. Bretton Woods was the dominance of the dollar, basically setting it up at the heart of the world system so that trade flows and capital flows would move around the free world. It excluded China and Russia at that stage. We had the IMF and world bank to police that and you would happen to have a corollary of a fixed rate system. Now from that we got rid of the fixed exchange rate system but everything remains the same. So as the time went by the dollar remained more and more important.
There was a speech Janet Yellen made at Atlantic council. It's called friendshiring. What this meant was either you're a friend of America or you're a foe. There is no middle. Friends get access to dollar swap lines and foes don't.
Currently we have the world financial system divided into two bits. One controlled by Usa and the other nascent one by the Chinese. Ultimately what it means is there will be a challenge to the dollar system by china. Hence China is setting up equivalent swap lines to lure people into the yuan system.
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https://preview.redd.it/cvd81u5l06991.png?width=885&format=png&auto=webp&s=59952d82fa95f860b50460fce39ad7a5e9ced8aa
So Us is responding to this thread. We all know how everything in world is connected. Look at yen. It has devalued over 40 trading days by annualized rate of 83%. Markets can never do that to such a big currency only governments can do. So someone is shaking that tree by the orders of government. What you have seen in last 5-6 yrs across asian markets is something called Shanghai accord which came out in Shanghai G-20 meeting in spring 2016. It was an attempt to get strong dollar down. What happened was currencies went static across rate in asia with no volatility.
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https://preview.redd.it/3q950pqm06991.png?width=1426&format=png&auto=webp&s=c8d57bf5640861c40ae7dc26c8eda6647825f0a9
In the last 8-10 weeks that trend has broken. Someone is shaking up things in japan. Currency volatility in Asia has leapt higher. Yen is a trojan horse so China is being forced to tighten liquidity right now.
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https://preview.redd.it/adp80i3q06991.png?width=1425&format=png&auto=webp&s=bdde5c72b21e091dc01100e5cf900eefa3111c70
No one really knows what Ccb and Pboc will do next. April and May are normally the months for China to inject liquidity into the financial system. So what did they do in the last 2 months ?
They have taken 800B yuan out of the system. That is $120B dollars. That is a lot of money for them to do tightening.
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Q16 Why are Chinese tightening when their manufacturing Pmi is down and they are already in a recession. Shouldn't the Chinese govt., like the USA govt. in 2008, inject liquidity?
To try and stop devaluing your currency through Seven ( The Group of Seven i.e. G7 is an intergovernmental organization made up of the world's largest developed economies: France, Germany, Italy, Japan, the United States, the United Kingdom, and Canada.)
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Q17 Why is Fed 3x or 4x important right now ?
- Because of Basel 3 regulations. These regulations put constraints on bank's ability to lend.
- With Fed you get access to repo and standing repo facilities.
- Tax control of Eur-usd market ( About 5yrs ago under trump money was repatriated back to Usa )
- Importance of the fx-swap market.
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Q18 Does the Fed have reins. Is it a good thing or bad ?
Goodness : Everyone expects
The Fed has more power than anyone thinks of. They are the lender of last resort. This has basically expanded to everyone. It has expanded its role from lender of last resort back in Gfc to euro dial system through fx-swaps. It has also expanded its role as lender of last dealer to money market funds and also to the shadow banking system. If you look back at 2020 they have further extended lenders of last resort not only to banks but also to corporations.There is a corporate credit facility now. It has also tried to become a lender of last resort to businessmen and individuals through the ppp loan facility which basically works with the government. ( Asking banks to make loans to small business and people )
The Fed does not have the infrastructure to give money to people individually so they have to work through the banking system.
Badness : Forced by politicians
They have become more influential as well through regulatory aspects. Basel 3 expanded the regulatory power of Central Banks around the globe. Now they are moving to a role where the Fed may be able to suggest to banks that they have to do a certain type of lending. For ex : Making green loans to support green infrastructure. This model is not new. 30 yrs ago in Japan and much of South east Asia CB's operated in this manner. They would direct domestic banks to lend to certain key industries. Central banks don't stand in elections and if you work there you can never be fired. So you also don't know if they are making good decisions or not.
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In nutshell they have reigned
- Eur-usd system.
- They have complete control over reserves which they can manipulate with the wand of QE or QT.
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Q19 Discuss the importance of commercial banks?
These banks are important in driving inflation after Gfc 2008. Commercial banks lend to real people which in turn drives businesses. We cannot force banks to lend even though it does enforce an explosion of reserves which can then lead to an explosion of deposits. But these deposits aren't loans they are deposits from bank buying treasuries + Mbs from their own customer or must i say government. But if this inflationary cycle keeps on repeating then disaster is soon to happen. After the disaster , the Fed won't be able to stimulate bank lending. Hence questions we must ask is will Fed not be able to moderate bank lending and what if we have banks lend out way too much in 2022-23. Does Fed even have control over that?
So many economists are betting that the next phase would be introductions of digital currency. It would be a toolkit for the Fed to be able to do things like above.
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Last year Saule T Omarova, a professor in law from one of top bank regulator was nominated for paper on how economy would operate in CBDCs
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3715735
In nutshell :
The Fed would make loans and determine who gets the money or not. We're not there just yet or we're still building technology and infrastructure for it. If you look at 20 yrs in the future you would think the Fed would certainly be in fashion for political want. Meaning politicians would have more influence over who gets money. So make sure you have friends in politics.
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https://preview.redd.it/fb5dlcjs06991.png?width=1511&format=png&auto=webp&s=3c4955924292ad0291fe4b247a2f1016925308dd
Less bank credit creation in 2022 rivals historic growth since last year. Bank deposits look set for first annual decline since early 90's which sounds deflationary but that decline from bank deposits is due to QT & reverse repo and not credit creation itself. ( Creating money using alchemy )
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Q20 The Fed doesn't have the ability right now to stop banks from lending. What happens if inflation goes to 10-12% because of this ( lending is like creating money ) ?
There are some segments in the economy which are still okay. Bank credit creation is strong. At least well enough to lend people. We're still in an inflationary environment where everything costs more. Everything costs more hence everyone needs to borrow more to buy things you used to buy.
We are definitely going to have a slower economy in the next 2-3 years with a recession somewhere. It will be then you would expect credit creation to slow down. So we don't see disasters in this manner but yes the storm clouds are approaching.
The hurricane Dimon was probably talking about is if there is a recession, still the large corporations will help accelerate loans in the near term because they will draw down predetermined loan credit lines when they need them. This is feasible. But the main issue is how banks will fund their balance sheet and that kind of lending in a recession environment where deposits must be shrinking and money markets are tightening hugely. And then there is also the bigger problem of the Fed accident during QT.
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Q21 Who to buy what in treasuries i.e. bond market and why ? And why not if so?
There are a number of moving parts when you decide to go on shopping for treasuries.
- What is the underlying inflation
- Will growth actually slow
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The most likely scenario is we are gonna have a repeat of what we saw precovid.
Let's discuss inflation part :
In Usa we have 2-3% inflation targets. That's largely demographically driven because of an aging society as all west have low inflation. The deflation of Japan shows us that. But it will take time to get there due to the persistent nature of inflation. Bond market will price near term surge and hence we will not get an unnecessary hike at the front end. Hence the Fed fund would go as high as 4% only and not above.
Now for growth part :
Back end of the treasury is driven by the term premium. Term premiums are already very negative. And they can go more negative as well. What we investors need to know is equity never rallies until there has been a subsequent or previous surge in the fixed income market. 10 yr bonds prices have to move significantly up before equity begins to turn. In other words you're gonna see a drop in long yields at some stage. And that my friends is a recession driven environment where first long bond yields go up while stocks fall and then we will see that turn or rally up in equity.
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Another way to look at it is through a S&D and B&S lens which could be contradictory to above.
Supply :
So if you account for QT the supply of treasuries is gonna be $1.5T each. That's a lot for the market to handle in this slowly decreasing liquidity. Hence we are seeing large moves with small volumes.
Demand :
For the past few years we had different sets of marginal buyers. Precovid : It was Hedge funds doing basis trade. Comparing today to that time they have taken exposure down by $1T. Past 2020 : Fed (doing QE) and commercial bank (picking QE cash to work) Now : All have gone away.
We are going to have a new buyer somewhere down the line. We just don't know who it is. Foreigners aren't gonna buy because when they do they have to Fx hedge it. When you Fx hedge it's based on front end rates and front end rates are going higher too like back end. So it's not worth it for them. So we don't know who it is gonna be hence there is going to be a phase of price discovery that is probably gonna be volatile and probably much higher in yields than the marginal buyer of past years.
The Hedge funds buy these treasuries as part of a spreadsheet. They don't care where yields are by themselves. Fed too doesn't care and neither does commercial banks which are regulatory driven. Foreign banks are partially regulatory driven and in part what they have at home is negative notes. So if you want it to move to common folks who look at it as fundamentally then you're gonna need higher yields. Hence rates will go higher than normal levels.
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Q22 Discuss aging demographics in 2022. Is it really deflationary like Japan taught us or something has changed and we are starting to see its actually inflationary? How does it affect bonds and stocks?
This idea of the aging demographic being inflationary and not deflationary is a very fascinating concept. Basically what these new papers are saying is when you have lower supply of labor and if you decrease the supply of labor in the labor market what you're gonna get is higher prices because wages will go higher due to shortage of labor.
Ex : A person is retired at 60 who no longer is producing goods and services into the economy. However he continues to consume products or buy yachts or whatever else by living a high standard of life or the same standards he used to when young.
So monetary demand for more goods and services reduces supply of labor. This means higher prices.
But these so-called old economists point to Japan as to how the aging demographic can be deflationary. People who hold these views believe that in a global world, labor is a global pool. So even though Japan was itself aging globally there was still an enormous supply of labor from China and from developing countries. But that's changed now. Going forward, China is also aging pretty quickly because of the one child policy. So you're seeing more people buying and consuming but fewer fewer people working. So structurally it seems inflationary.
So bonds will be bought and you should dca whereas you don't touch stocks until bond yields peaks.
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Q23 Discuss what other factors you must think about making your first bond purchase.
Summary : What Central Banks will be doing.
Although in the previous statement we have dismissed foreign banks like Ecb and Boj but they still do play some role in the bond market.
Reason :
a) Bonds tend to correlate much more than equities do. The fact is if Ecb loses the battle on inflation which it looks like it is right now rapidly what effect does it gonna have on Bund. The charts don't look great and could easily feed into the treasury market.
b) The other thing to look at is the devaluation of Yen. It continues to devalue itself as we speak. Add more bond buying ( they have yield controls ) by them recently. At some point reality will hit Boj and they are gonna have to tighten policy and that is going to create a ripple effect in the bond market.
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Hence we may get pressure on bond market through these two shocks. Hence we need to dip a toe in the long end of the market but it would be more comfortable to be on the front end.
Overall : A shock by Boj to let their 10yr bond go to 50bps ( current 0.22% ) could surprise a lot of people and most of them won't be prepared for that. Idea being global bond investor will then look at german 10yr bund in same way as they look at 10yr treasury yield. They just hedge risk 10yr jpy government bonds. So if bund goes from 1 to 3 ( current 1.51% ) then 10yr treasury will go from 3 to 5 ( current 3.2% )
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Q24 Till now we have established conservation on how high the Fed funds go (max 4%) or how high short end go. But if you look at financial conditions in the Goldman Financial index which is related to GLI and has a lot more factors like dollar, interest rate, Fed tightening monetary conditions. Does equity have more room to downside? Does credit spreads need to widen and can you discuss more about why 3.5% or 4% is the highest Fed fund note 5%. ( A tail risk scenario )
You don't necessarily have to look at the Goldman financial index. Just look at the treasury market and dissect it.
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https://preview.redd.it/etimorbv06991.png?width=1098&format=png&auto=webp&s=65c8c4037e283452cc23e95ebc353c71484d5bec
Front end (interest rate exp) : 1-3 yr , 1-5yr spread for what markets are pricing for Fed rate hikes.
Back end ( Term premia ) : 5-10yr is for whats a crude measure and not a bad measure for what term premia on bonds will be.
Right now the yield curve is steepening on the front end (very vicious ) and flattening ( very vicious ) on the back end.
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https://preview.redd.it/zw8wp7ly06991.png?width=1427&format=png&auto=webp&s=50865b9993f2b7355b51c885a6591ac7e864f00b
This is telling us that the rate expectations are going up and the term premia is collapsing. Collapsing term premium is all about changing risk appetite.
It's all telling us that bond investors don't want to take any risk. They want the safety of a safe asset which is a 10yr bond.
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Now let's look at what it's telling us from a corporate point of view. Corporate raise money in about 3-5yr areas. So the first point being the cost of financing has gone up because of the front end rise. Secondly the appetite for debt has collapsed because of much more negative term premia.
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https://preview.redd.it/n8ens8t716991.png?width=1443&format=png&auto=webp&s=47f69b146209ad61dc85ac4c1981f951006bb00b
So this configuration of flat yield curve with giant belly around mid duration yields is the worst outlook for any bond investors. Much worse than inverted yield curve.
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https://preview.redd.it/1p68iika16991.png?width=1472&format=png&auto=webp&s=0141dd142f78d14e19e1e7ddd1eae1b3ca5dad03
Now you need to dissect the front end and back end movement.
So now you're seeing a black line ( rate exp ) i.e. 1yr fwd 10yr out suggesting terminal fed funds around 3.5%. Now this orange line is term premia measuring risk appetite of investors in fixed income market. This has collapsed.
Now what youre seeing here is black line cross orange line called the credit market death cross. This tells us within 12m a big problem will arise in credit market. Hence youre seeing credit spread widening about 6-12m after this above pattern unfolding.
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Red : Down below is a chart that have z score of different credit spreads like high yield, junk (CCC-B, B-AAA) , quality spread (BAA-AAA) these sort of things in index
Yellow : 10-5y US treasury yield inverted and advanced by 12m.
What happening this is tracking exactly the movement what the treasury yield curve is suggesting.
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https://preview.redd.it/ziqd088c16991.png?width=1325&format=png&auto=webp&s=c92f0b6efb1083c257063a9feb2be43c4b35d80d
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Q25 Is HYG down -10% Ytd because of credit spread widening or rate hikes ? Do you think the Fed thinks about term premia? Do they want it to go up or down ?
Credit markets are imploding. But this is due to rise in risk free rate which is fed but not widening of credit spread as every noob on twitter or wsb will say.
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https://preview.redd.it/wptg4icd16991.png?width=1403&format=png&auto=webp&s=db9c176346c39e94a40427653173260a00d63a97
There is a hedged version of HYG called HYGH. ( interest rate version of HYG )
You can clearly see whether it's because of credit spreads widening or because of interest rates.
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The Fed does care about term premia and they want it to go wider. That's what QT is all about.
QE : Compress term premia. So people shift portfolios to other assets and take out loans for housing.
QT : Expand term premia and Fed let markets digest more treasury.
QT for treasury is a bit strange. See Mbs for example. Once we know it's gonna be QT then markets become aware of it and spread b/w agencies and 10yr widens significantly. For treasuries it hasn't been much. We don't know if markets are slow or something else is happening that we don't know of.
Over the coming months a lot more treasury will come into markets. Hence term premia will expand a lot more. Who knows what credit spread will do going forward but everyone's guess is it should widen a lot. If this doesn't happen then that would mean departure from history.
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Q26 What is the difference between good liquidity and bad liquidity? How does it result in a change in the FX market , currencies as well as the yield curve?
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https://preview.redd.it/lkglbx6e16991.png?width=935&format=png&auto=webp&s=2315e108013158d20017db014ee8b57e92044a12
When we think of liquidity we should think of quality and quantity. Now this is what drives the fx market, fixed income market and also where we take the yield curve as probably the best measure of the fixed income market.
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Look at the graph below
Good liquidity is created by the private sector. Corporations create a lot of cash or households manage to produce lots of savings. This cash generation is coming from a vibrant economy. A vibrant economy then causes currency strengthening.
Bad liquidity is created by Central banks. It's bad from a forex point of view and hence the currency weakens.
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So what you want to look at from a currency perspective is to subtract Fed liquidity from private sector liquidity creation. And that will tell you how the forex market will be moving. What traditional academics do is they lump all money or liquidity together and start to compare US liquidity with let's say Canada, Japan or Mexico. This way above is a more accurate way of predicting currencies. (Looking quality mix and then taking that relative)
The other dimension to look at is what drives fixed income market.(sum of liquidity which is pure quantity and not quality)
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So the private sector creates liquidity. It's creating a lot of cash. The Fed is the one that creates that cash. Domestic investors are not bothered where it came from and if there's a lot of equity they can just go and use that liquidity and go down risk of bonds, stocks, voldemort asset class, commodities or lets say credit.
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In layman terms :
When corporations do liquidity they go to banks for borrowing which in turns creates goods and services. Meaning a good debt will be invested.
But when Central banks do liquidity it's providing money to the government to spend. They will then give it to friends or people with special interest. This in turn creates bad debt.
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Q27 Why is PBOC ( People's Bank of China ) not stimulating given they are in a recession ? Why is their strategic priority stability if China has many trillions of dollars as reserves ? Are they really afraid of yen-like depreciation that they don't want to stimulate right now and suffer the same fate as them ?
To answer these questions we need to look at the evolution of capitalism. As capital in this regime becomes mature you want to export itself and go international. For this you need purchasing power and hence a strong currency gives you that.
The Chinese want yuan to be used as a vehicle and savings currency. So basically a strong yuan will enhance that situation. So they want stable currency because they look for stability.
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In capital wars we learn that the goal of Chinese authority is to challenge the dollar. They want to get rid of it particularly in Asia (India recently purchased oil from Russia in yuan ~ Market Insider) and the route to do it is basically by three paths.
- Re-denomination Chinese trade in yuan.
- Open Bond market to foreign
- Creating a digital currency
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Q28 Why is China setting up so many swap lines around the Asia region ?
The purpose of swap lines is for yuan denominated trade. So basically they are preparing for Euro-Renminbi.
To stop that someone is shaking up the tree in Japan vigorously to put pressure on yuan. Yen is your Trojan horse from Troy which is trying to break that stability that the Chinese government is so proud of by putting pressure on China given the integration of the Japanese economy with china.
Look at Korea, India. Their currency has been devalued too recently. The Chinese are trying to stop this storm. This long term geopolitics macro politics objective is to take this as no1 priority over the strength of the Chinese economy i.e. health of real estate, steadying credit market, stock market etc.
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Q29 Discuss the Chinese balance sheet ?
Pretty much everyone is saying China will do a monetary ease. They did a big one after gfc. They haven't really done anything since 2016. They do a very tiny stimulus ( did this yr in april ) hence their balance sheet is flat line.
They love growth and stability over injecting Soma drugs into the system.
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Thank you guys
Sorry for ruining your Saturday day or night w/o any jokes. I really have no clue when to post this kind of sh9t. I’m still figuring it out.
“Keep enjoying life. Stay in cash and park with mmf in rrp if you really wanna be in safest asset or just take out your money from bank coz if we are going into depression there’s gonna be bank run”
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With lots of love
Regards
Uchiha