Welcome we will be reviewing macro events from this past week from The Post I made at the beginning of this week on 10/11/22.
I have added a Definitions page which will include all of the terms and abbreviations that I use from now on and will be referred to on every post.
Substack’s Android app has finally been released. I must say that it is a major improvement in terms of helping me find the content I’ve subscribed too. I rarely scroll through my email inbox. Suggest giving it a try if you are one of the chosen ones with green bubble text like me.
I was recently a guest on the Against The Mob Podcast where we discussed the changes in international forex invoicing over the past decade and how this impacts global commerce and currency value over time. Specifically in relation to the Petrodollar. If Section 1 and 2 of the post from 9/5 confused you or you want more detail, definitely give this one a listen.
Table of Contents
British Cowardice
Credit Suisse
FOMC Minutes
US Inflation
Crypto Macro
Conclusion
1. British Cowardice
Surprising no one this groundhogs day, the Bank of England saw it’s own shadow and decided to they would rather see the island descend further into economic winter then to come out and face it. We’ve already discussed how the BoE had to start “temporarily” printing pounds to buy long term UK gilts (their word for treasury bonds) in order to stop yields from rising. This week they announced that they had to expand the volume of their purchases in order to keep yields down. And as of Monday launched a “temporary” repo facility that banks can access until November 10th to borrow printed Pounds in exchange for specific asset classes (bonds). This allows the BoE to temporarily buy bonds from these banks instead of having these banks sell them on the secondary markets which would drop the yields even further. This is a bad sign as right now it’s Thursday night, and they are supposed to be closing these purchases down tomorrow (10/14). I suspect that once they cease their purchases that we will go back to seeing bond yields rising in the UK despite the temporary repo facility staying up until 11/10.
The Bank of England has only succeeded in temporarily stopping yields from rising with the 10 year still ranging from 4-4.5%. This is a problem because as we discussed earlier, these pensions had toxic leverage they have to unwind which they can’t afford to finance since Gilts have fallen this much. There is over £1 trillion in leveraged exposure in the UK pension system, of which £150 billion is presumed to be at risk. But the BoE has only committed about ~£50 billion to buying bonds. This is not nearly enough volume to really hold the gates, and with the purchases ending only a few hours from now (10:40pm Thursday CST) I would expect for more toxicity to emerge in the British treasury system. Increasing the size of their purchases isn’t enough to avert the crisis. If they are intent on causing more inflation and pillaging people’s savings to stop irresponsible fund managers from losing their jobs, then they may as well go in whole hog. The BoE only knows half measures.
Either go all the way, or don’t go at all. The BoE is printing, but not enough to save the gilt market with the way things currently stand. If they botch this up horribly enough they may end up collapsing the pension market AND causing significant inflation. I get it, they are faced on all sides by terrible choices, all come with consequences. But if you are managing the currency of a sovereign nation, you don’t get the luxury of not making a decision. Choose your consequence. The bank needs to decide and they need to live with the consequences of their actions. They have so far spent over a decade of just half measures. Sometimes I wonder if the Book of Revelations is speaking to the Bank of England directly.
I know your deeds; you are neither cold nor hot. How I wish you were one or the other! So because you are lukewarm—neither hot nor cold—I am about to vomit you out of My mouth!
You say, ‘I am rich; I have grown wealthy and need nothing.’ But you do not realize that you are wretched, pitiful, poor, blind, and naked. I counsel you to buy from Me gold refined by fire so that you may become rich, white garments so that you may be clothed and your shameful nakedness not exposed, and salve to anoint your eyes so that you may see.
Cowardice. Pick your struggle and pick your consequences. They waffled for the last 8 years from the Brexit vote until today, doing nothing but devaluing their own currency as they tried to straddle the middle. They are doing the same now with their pension crisis. They wish to have it both ways because they are incapable of accepting a consequence. It’s been years of this. We all struggle as adults, we hesitate, we sometimes fail to make decisions we know we need to make. There is nothing wrong with that. But you can’t be a central banker and straddle the line. There is simply too much at stake to risk putting your country through both consequences. Pick one consequence and eliminate the other consequence entirely. Don’t leave both open as potential consequences.
The direct gilt buying will end on Friday, but the Temporary Repo desk will be doing the exact same thing, just in a slightly different form until November 10th. Continuing to do this is the worst move in the long term, but in the short term it has the smallest visible consequence (And the largest invisible one). The BoE is the epitome of what Mark Rylance Character was disparaging in the movie Don’t Look Up. Youtube removed the video in that section but it still fits. The Eunuchs running the BoE lack the courage to let toxic financial actors fail. As such, they undermine the financial sector and the currency as a whole. When faced with hard options, they bend. They’ve been bending their whole lives.
Keep reading with a 7-day free trial
Subscribe to Flirtcheap’s Asymmetric Economics to keep reading this post and get 7 days of free access to the full post archives.