So method is coming and Paul has the Most difficult decision to make because The economy is already on the edge Working height grades further or will he Pause and this is the trillion dollar Question we have to understand how bad Things really are at just 4.5 percent we Already had svb a signature bank Collapsing with Credit Suisse also going Under and now the markets they are Pricing in the FED moving towards five Percent interest rates and this is not Good news we have 90 percent of Economies all forecasting that power is Going to push rates above five percent This coming may there's going to be at Least a 25 business points High coming And the markets they are reacting the Two-year treasury yield which reflects Near-term interest rate expectations Have sought by 75 business points and This tells us that investors they are Moving out of short-term bonds because Rates are going to head up let alone Even think about any rate cards I want Us to think of the economy as a game of Jenga the FED is taking the blocks from The base of the Tower and stacking them On top those are the interest rate high Likes the higher interest rate the Faster power can bring inflation down Through demand destruction but the Higher the rates go the base of the Tower or the economy begins to
Destabilize than if he isn't careful if The base gives way the entire economy Would crumble all it takes is one high Too many and the Jenga Tower collapses And this is where we need to revisit the Fed's law mandate once again because Even after all the huha and all the Speculation power hasn't really deviated From the game plan remember that the FED Has two Targets they need to maintain Price stability which means keeping Inflation in check now that doesn't mean No inflation it just means reaching two Percent inflation which is still very Far away and the second target is Maximum employment and as you'll quickly See things are still looking Rosy for The US economy The Superficial metrics Are looking good and this means power Has all the excuses in the world to keep Hiking because at least to the FED Inflation is still the big giant in the Room so so expecting the fat to Pivot or Even pause now is highly unlikely now Let's sit back and look at the facts and It's time to dissect why the market Myself included still believes the fat Has room left to hike now firstly the Rate of inflation is still too high and No I'm not talking about the CPI Headline that apparently has collapsed Down to five percent there are a lot of Hedonic adjustments done that make it Look much lower than reality I'm talking
About a sticky price CPI which is still At 6.6 percent and that is the rate of Inflation for basket of items that Change prices very slowly now the CPI Rate today is still unchanged from November 2022 which is a warning to the Fact that inflation expectations have Already crept in people and businesses Are starting to price in inflation more Into the real world and traditionally to Crush inflation you need to raise Interest rates above the rate of Inflation at least to the fat you have Sticky inflation at 6.6 percent and you Have the FED funds at 4.75 there's still A lot of allow problems for hikes left To bring rates above inflation so Another one or two more hikes to even 5.5 fat funds isn't unreasonable because The state of the economy at least on the Surface is booming right now maybe you Believe this is a phony economy or the Numbers aren't real the fact Still Remains the FED they are getting good News from all angles just in March alone The U.S economy added 236 000 jobs with The unemployment rate falling down to 3.5 percent sure we can sit here and Argue about if all those are genuinely Good quality jobs or not but the FED Doesn't care they are witnessing a Resilient economy with a robust labor Market there hasn't been any contraction Of jobs so far the non-farm payrolls are
Still positive with the unemployment Rate stabilizing and on the surface this Looks like an economy that is still Chugging along just fine and we know the FED is data dependent they have said it Multiple times over the past 12 months At this point the whole Market knows the Fat is reaction and waiting on data to Make a decision they don't have the Ability to think ahead until a collapse Or crisis happens but what about the svb Crisis Sean surely the FED won't hide Because it would collapse the banks Right now this is where things really Get dark because the fed and the Treasury they have worked out a bailout Plan which isn't exactly a bailout for The banks right in other words the Bagging system as a whole loan collapse Doesn't mean that individual Banks can't Go under but as a whole the FED is ready To save Wall Street they are going to Provide unlimited liquidity to the banks If there's an emergency remember that to Save the banks the FED actually posts Dr QT and increase Dr balance sheet by Almost 400 billion dollars that's how Important a financial system is to the FED let's record a ridiculous backstop The fact created the infamous Bank term Funding program or bftp is a horrible Mess that reached almost 80 billion Dollars in emergency loans given to the Banks it allows Banks to take their
Bonds which has lost their value and Then exchange them for cash at Power Value no haircut necessary but here's The crazy part of this backstop it can Last for as long as it's needed to pump Liquidity to the banks it says it is Still march 2024 but we all know the Truth is an indefinite build out window That the fact has simply reactivate and This is why the FED isn't afraid of the Backing crisis collapsing the entire System there's no systemic risk because The FED has committed itself to bailing Out the banks and this is what I call The fat Cedar mandate their third secret Mandate we need to keep inflation down But if the entire Financial system Starts to shake we must build out the Banks now that's not to say that Individual Banks like SVP can't collapse But according to Janet Yellen deposits That even the smaller banks will be Safeguarded and this is what she said Our intervention was necessary to Protect the broader U.S banking system And similar actions could be warranted If smaller institutions suffer deposit Runs that post the risk of contagion so The economy is still strong at near five Percent interest rates and the banks Will be saved but why is everyone Worried about a recession if that's the Case why is the Fed themselves Predicting one and the answer is simple
Because we are starting to move towards A credit Crunch and this is the real Risk that everyone is slowly waking up To the Federal Reserve has high grades The fastest in modern history and we are Talking about zero to five percent in 12 Months and because of this there's a big Reshuffle in how people are allocating Their cash investors they are swelling To money market funds they are piling in Their cash there it's all about chasing You the average Bank deposits only use One percent but money market funds pay On average 4.5 percent and as the Federal Reserve continues to hike rates This is going to trigger a greater Deposit flight money is going to leave The banks towards money markets where They can get four to five times more Yield and because of this now the banks Are getting more exposed because their Cheaper source of funding is drying up You are their cheapest source of funding They can't take grease anymore by Lending money for home mortgages or God Forbid commercial real estate that is Improving as we speak and this is a Double gut punch to the banks that we Need to appreciate deposits they are Living and they can't make risky loans But at the same time they need to make Payroll while staying liquid it is the Worst case scenario for Wall Street so Where can they go they must make money
Without risking their liquidity and the Only place that makes sense is either The reverse repo Market or short-term Bonds and this is where things get Really crazy what we are witnessing is a Massive run from the banks towards Collateral great Investments they want Investments so liquid they either Matures the next day or they can load it Out immediately for cash we just need to Look at the auctions of the four week Treasury bill which is one of the Highest quality collaterals that are on Wall Street because it matures only in One month the risk of default by the US Government is small so many places will Accept the four-week treasury bill as Collateral so they will loan you the Full amount of cash with as little Haircut as possible and this is the big Difference between us and Wall Street to Us physical gold is the ultimate Collateral because we value well Preservation about the Wall Street it is The four week treasury bill because they Value liquidity but this is how bad the Rush for collateral is getting only 19.3 Percent of bidders for the four week Bill got it at the highest possible Yield of 3.2 percent that means over 80 Percent of bidders overpaid for the four Week bill in fact we have a portion of People buying treasuries at such a high Price that the return is zero they just
Want their hands on the highest quality Collateral possible they don't even care About losing yield and this Insanity Tells us how scared the market really is Of a credit crunch so why is the market So fearful because they know more rate Hikes are coming and there's also the Fear of a debt default now the U.S Probably isn't going to default that That is all political theaters the doc And pony show but the markets can't take That chance and that's why we are seeing Investors is showing against the U.S Default because if it happens use for Spike and bond values good collapse in a Hurry and this this is what's causing a Sudden rush to the Quality collateral Once again but this time it is coming From the money market funds and let me Review the truth about money market Funds now these are funds that invest in Short-term bonds they include treasuries Or even corporate debt now the big issue Is if a debt default happens or if There's any stress in the system Confidence could collapse and that could Trigger a run of money market funds as Well where investors start to pull their Cash out to Simply sit on it and this Could cause the funds to stop Withdrawals and liquidate their assets At fire sale prices so money markets Aren't 100 safe you can still lose money If things get really extreme and this is
Why all the funds they are rushing Towards collateral like the four week Treasury bill if you find yields Dropping suddenly in your money market Funds this is probably the big reason Just take a look at the tradition EU Curve just a few weeks ago we had a Classic yield curve inversion the Shorter term bond yields were higher Because the markets piled into Treasuries on the longer end like the 10-year they are predicting a recession But fast forward to this week the yield For the one month treasury has collapsed We are seeing widespread fear of either That default or another bank run or Maybe even both so money everywhere is Flowing to these short-term collaterals And it is depriving the real economy of Credit in short money is not flowing Into businesses and Loans it is flowing Into the U.S treasury and this situation Is going to get worse money market funds Are now looking to use the fast beavers Repo facility as well because it makes Total sense you can buy Securities from The fed and sell them back the next day At a higher price while still staying Liquid the reverse repo rate is at the Mouth watering 4.8 percent yield frankly Guys if I access to the fast reverse People facility as well I will power all My money there the FED can never be Default and I can get my money back
Overnight it's very important that we Wrap our heads around the monetary Policy and its lag effects now the Longer the FED hikes rates and keeps Them High the longer damage is Compounding beneath the surface now back In 2020 after the Federal Reserve Printed trillions it took 12 months for Inflation to catch up with the stimulus Just because power printed money didn't Mean inflation suddenly picked up Tomorrow it took more than a year for Inflation to manifest as a real problem The same thing is going to happen with The rate hikes we likely haven't seen The worst of it yet because power is Still going to high interest rates up This is why a massive credit crunch is Building the economy is suddenly finding It hard to get loans and a reasonable Rate small businesses are really finding It harder to get the financing they need To survive and listen to this a net nine Percent of business owners are reporting Lending conditions have tightened and if This trend continues it will reach the 08 recession levels which is very on Years bankruptcies are so sorry among Small private companies and these are The Beating Heart of the U.S economy Small Enterprises are starting to wind Down because money is much harder to get Companies closings are already above the 2020 lockdown levels which tells us that
Trouble is truly brewing and get this Guys according to Morgan Stanley a Credit crunch has already started the Data suggests that a credit crunch has Started one trillion dollars in deposits Have been withdrawn from U.S banks since The Federal Reserve first started hiking Rates so we have to watch what the FED Does in May chances are they're gonna Still hike by another 25 basis points And will this be the Tipping Point that Pushes the economy off the cliff it Might just be and I'm quite sure the Collapse of svb and Credit Suisse won't Be the last so let me know what you Think in the comments below will the FED Hike in May or power drive the economy Off a cliff let me know in the comments Below stay safe be sure to smash that Like button and subscribe as we navigate Through these crazy times
