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Topic Author
Posts: 10
Joined: February 1st, 2018, 4:22 pm

Re: BTFD - Bank Term Funding Program Thread

April 2nd, 2023, 12:49 am

Look. The idea that the bond market is the “smart money” is a fallacy. It’s just different maths.

Im more of a tourist. A macro tourist. And we have leeway on what products and markets we can put money to work in.

The bond market is a strong indicator. But its the most Schitzophrenic market I’ve ever seen.

The fed will never reach 2% inflation target on (their favorite indicators PCE) without a depression.

The bond market has blown up.

I can’t tell you how many Hedge funds I knew that were short Eurodollar STIR SOFR futures for December 2024.

This makes a lot of sense why we saw a 12 sigma move in a day on the 2 year —-

So many funds were positioned short 2s and the STIR (short term interest rates) through various products.

That’s why the MOVE index exploded above 150.

Look. I’m not saying we will avoid a recession here. I’m not saying the fed will pivot, nor if they do will it be a good thing for capital markets?

I’m not the fed whisperer.

I knew a couple of PhD’s that worked at high level jobs at the fed that became hedge fund STIR traders and blew themselves up being over confident.

What I’m saying is.

I know my market moving size.

I am making 5% on cash and I’ve got collateral, and I’m a trader!

Like Paul Tudor Jones said, “I’m a trader!”

Im a trader too. And traders have to trade.

Is 2023 the toughest year? I honestly don’t know, for me personally, the first half really threw us for a loop.

That said. It’s a tradeable market considering you’re a good active manager, you understand your risk profile, you know how to position with correct size, you follow liquidity markers short term, you watch the data points as they come, and you know when to exit early.

You don’t have to be a rockstar in 2023.

we got a guaranteed 5%. I’m a trader. Know thyself.

This isn’t easy. If everyone who played basketball was Michael Jordan it would still be hard.

It’s not easy to be Michael Jordan even if you’re born with natural talent.

This market is tough. If you have a sense of humor about it and can ride volatility out.

If you protect your funds.

you can play around.

You win some and lose some.

I think Druckenmiller or Soros said something like, “it’s not about if you’re wrong or right. It’s about how much money you lose when you’re wrong and how much money you make when you’re right!”

I probably screwed that quote up.

I know this year will be tough worldwide. But some will do very well. But they need to be flexible and not married to a narrative.

On a given day next week we can have a circuit breaker moment.

Is it probable? Let’s say this. Given the macro conditions and the CB’s positions, the probability is very high you can blow up.

That’s why I say, 2023 could be the year of Tbill and chill and play a little poker if you want.

Just don’t get married to a narrative

CTAs and HEDGEFUNDS will blow up.

More banks may blow up.

The jobs story? I think that’s more of a 2024 story. Where the lag shows.

At the end of the day. The crisis results in the long term, if you ignore the noise.

I’m a trader.

If I were a fund of funds like Bridgewater or long/short, or even a quant ML style fund. I would be careful. I think 5% is fine in a bad year.

Even Renaissance capital medallion fund had 2% years and they had a lot of PhD’s working too hard.

Imagine your worst year is 5% in t bills? I think you can chill out. Because the opportunity clearly is in the waiting here.

If you’re a fund of funds moving around 100 billion or more —yeah, I think if you explain to LP’s you’re in the fund because you know that the big money is in the waiting, and knowing when to act and when to pause is why they invest with you, then you can float this year without redemptions.

Will there be a recession? It’s a random walk!

I just know we’re not going to blow up and we’ll survive.
Topic Author
Posts: 10
Joined: February 1st, 2018, 4:22 pm

Re: BTFD - Bank Term Funding Program Thread

April 2nd, 2023, 2:12 am

Looking just now at the US Treasury yield curve, I see 1 month rates of 4.74%, creeping up to peak at 4.97% at 4 months, then trailing down to 3.48% at 10 years, 3.81% at 20 years, and 3.67% at 30 years. And this general pattern -- high-ish immediate rate picking up for a few months and then dropping off -- has been holding for the entire month.

Frankly, this is just stupid: the bond market is stupid.


The Federal Reserve's target inflation rate is 2.00%. If we assume that they reach that (it's currently looking like we're around 3.6%) and that things look fairly stable at that level, then what are reasonable interest rates? Immediate rates might fall to around 3%: inflation plus a little sweetener.

If longer term debt is competing with cash, the longer term debt will be subject to risk that cash -- getting immediate rates -- isn't: if inflation creeps up, so should immediate rates. Now, inflation could creep down, too, but the value of longer term debt -- assuming no negative interest rates -- is capped at 100% of final payment amount. In the near term, this means there's not much upside -- not much room between $95 price and $100 final payment -- but plenty of downside. So there should be a rising yield curve for near terms ... barring some inorganic expectation (such as, legitimately, we probably have now) that rates will be falling in the near future.

In an ideal world, yields should increase as long as there is more downside than upside, but then where the magic present value of 50% of final payment amount is reached, there starts to be more upside than downside, so absent inorganic considerations, yields should fall off beyond that point.

But still, they should be consistent with an expectation of inflation stable around 2.00% (... and immediate interest rates stable over time at around 3.00%) ... which I wouldn't in a million years say the current long-term rates are. And again, there are limits: inflation is usually never negative, so a 5% jump from 2% in the inflation rate is very possible, but a 5% drop is awfully unlikely.

Maybe there's some very significant inorganic considerations at work: an expectation of a brutal recession and deflation?

I think a lot of current actors in the market got hypnotized by the long span of time that inflation and interest rates remained close to zero, and regarded this as the new normal; SVB apparently did exactly that. But recent history is definitely not normal: I cut my teeth using 8% interest as the default assumption, and while this was on the high side due to coming out of the inflationary periods of the late 1970s and the 1980s, still, near zero inflation and interest rates are an anomaly.

So, someone tell me why it's me and not the bond markets that is stupid.
If it gets systemic or more hedge funds or banks with counterparty credit risks blow up. Then you can forget about the G7 central banks’ plan to curb inflation.

I think a lot of the inflation is structural, and it’s going to be sticky.

The question is. Will the central banks over tighten?

I think they probably already have.

I can’t fix inflation. I don’t think central banks can soft land the plane.

They can only “NO LAND the plane” for now.

And that goes back to the TGA & RRP & cross border liquidity flows & BTFP & 30 or more other programs.

Forget fundamentals. Forget historic parallels. This all about flows and liquidity.

And eventually things will break.

The idea I pose here is that it is possible it’s not that horrible, because everyone is hedged and prepared for it.

It’ll likely break in places no one is looking.

It’s an election year. No politician wants a global depression. So they’ll mend all liquidity issues.

I.e. the treasury is going to inject cocaine and not refill the TGA, despite debt cieling concerns.

The SPR will be dumped and not refilled.

And the federal reserve and their G10 partners will try to tighten by offloading their MBS & bonds to the actual market that demands a YIELD!

As for these coco’s. They are above my Pay grade and concerning to me. They are a product of NIRP (negative int rate policy) in EU, but this is all PUBLIC.

it’s so damn Public!

At the grocery store my checkout clerk asks me about coco bond contagion & European bank solvency.

I mean, this is PUBLIC!

—- the market will decide.

In the meantime. You can T bill and chill!

Why pressure over the global financial system? You don’t have to be early to make money. Being too early is unnecessary.

That’s why I try to say, don’t be a hero.

I’m not out here trying to sell a newsletter or advertise my competency as a manager.

We are going to survive 2023. We are going to survive 24.

Things will work out.

I hate to be like a greedy slime, but I only got into finance for one reason.

1). to make money for LPs and I’ll waive fees this year if we don’t do better than 20%.

But it’s guaranteed to get 5%.

It’s TBILL chill

But banks? Small Corporations? Small businesses? Yes there will be pain!

That’s the CENTRAL BANK’s message.

They don’t care unless credit spreads blow out.

And by then it’ll be too late.

Many believe that the recession already occurred.
If you were a 60/40 portfolio manager in 2022 you did have an axe in your head.

I think we’re going to make a lot of money. But I don’t know how others will do. I suspect there is a lot of built in moral hazard.
Topic Author
Posts: 10
Joined: February 1st, 2018, 4:22 pm

Re: BTFD - Bank Term Funding Program Thread

April 2nd, 2023, 5:31 am

I think I hijacked my own thread. I tend to ramble. Perhaps AI will help me in the future.

I’m sorry for taking an economics discussion and personalizing it to my own methodology of investing & trading.

To sum it all down.

1). I’m not a fed whisperer
2). I am not married to any narratives.
3). The fund is small enough to be nimble yet large enough to explore more exotic solutions.
4). I’m not an economist or an academic, I’m a gritty personality, hardened trader that would’ve been a pit trader if computers didn’t phase it out.
5). Inflation can’t get to 2% exogenously and certainly not with central bank tools.
6). Things have broken! And more likely to come.
7). Back door LIQUIDITY is cocaine for the tightening breakage.
8). Central banks are committed to inflation fighting up to a point.
9). The hikes in the system already have yet to run its course, meaning they can show up in 2H.
10). AMAZING opportunities await the patient or the clever or the bold.
11) the market is incredibly resilient in the most liquid assets.
12). Inflation nor the economy is not defined well by current statistics, but it’s what we have and we all are using this data to inform decisions.
13). Inflation in UK is troubling.
14). Banking in Europe is concerning, but are quickly addressed by accomadative governments & policy.

15). No opinión on global currency markets. Dollar & fiat neutral. Gold short term may be overbought. I’m a seller on the dollar end game.

16). The biggest difference between a bond and a bond investor is that a bond will mature over time, a bond trader never matures.

17). Know thyself. Hedge thy risk. Cap your upside. Don’t be too cute. Size appropriate.

18). Recognize your biases. —- the entire process is emotional. Even if you are using quantative methods. Even if you run ML algo high freq.

19). Liquidity is the most important factor today.

20) keep an eye on junk bond & high yield credit spreads. Then the reaction function of CB’s will be strong, but it’ll be devastating first.

21). 6% inflation. 5% yields. You’re still -1% real return.

22). Follow swap lines

23). EEM and hedged currency foreign markets may be interesting.

24). equities, especially ultra duration (Growth) are long term bond proxies with convexity, they are extremely yield sensitive.

25). TINA ( there is no alternative) is now TIRA (there’s a reasonable alternative)

26). Expect around 1.2 million jobs lost in the US economy, but it’s lagging to 2024.

27). No need to be a hero.

28). Cautiously optimistic. Long term optimistic.

29). Stay sane. Stay healthy. Spend time with family and cherish life if you are blessed.

30). Don’t lose money!

31). Have a plan

32). journaling and self improvement.

33). Don’t understimate meltup conditions.

34). Be prepared for unexpected downside volatility expansion, but accept premium loss as a defined risk and don’t overpay for insurance.

35). Dont overtrade.

36). Put all your eggs in one basket and watch them very carefully.

Stay safe. Happy weekend. Love all you.