It's true that mostly China is absorbing the tariffs and the effect at least for now on most retailers is minimal. The ones that do struggle do blame the tariffs mostly because it's an easy way out to not being blamed as much on their bad quarters.

Dec 15th when the new round comes in... those that were treading will be selling off/ bankruptcy when money is tight and investors aren't willing or able to speculate on a retail chain turnaround. The market may adjust (to increasingly online retailers) and it is a hope that the Chinese will eat 100% the tariff and not the Consumer.... lower spending lower earnings less domestic jobs combined with the repo situation and global slowdown....Its not like we have a booming supply sector that can pick up the slack from tariffs. Tariffs are beast meant as protectionary measures to insulate baby or emerging competitive industry and are almost always bad unless there is such a selling profit margin that it makes sense for the strong government buyer.

We really have no domestic industries to protect that compete at a global market price scale. We have been winning and benefitting from this trade arrangement, the only issue is China is running away with global commerce and development and the DD sees the economy as an acceptable sacrifice if they can survive and possibly engage in warfare with a hopefully economically weakened Chinese state. This issue is about the future of global control and not a trade imbalance. I fear the average person/non essential business may be caught in the balance

Vid from today.. very generous title

China will offer bonds and holdings based on their 3-7% growth, capital will and already has started flowing there (Goldman is already buying lots of foreign stock)... we are doing all we can to preserve market face but its an uphill battle hamstrung by bad inflationary monetary policy, longterm corruption/ lack of meaningful innovation, lack of domestic reinvestment investment.

These players will get all they can from the American system and then leave it high and dry for another market while the DD spins up their effort against CN.

Jodo et all,

Can we please focus on repo and short term lending market stuff?

I know the thread title is bait to spew about macro but there’s a macro thread.

I mean the thread started to talk about the shenanigans in the short term repo market and what it means for what assets and what we need to be looking at.

Then with the Zoltan letter I thought people who were smarter at interbank short term stuff might have opinions on the matter.

I don’t know exactly what I want but when I bumped it I did not have macro doom porn in mind.

Thanks for the write up, shuffle.

I feel like repo crisis means more QE in some iteration but not sure how it translates to stocks and bonds. To me it seems like every major economy will start acting like japan. The fact that the US says negative yields won’t be a thing makes me think that’s what breaks it unless the fed gives in. But zero to negative yield everywhere means that the way the panic manifests is more in markets where dumb money is shoveled in chasing that yield (eg corporate bond markets). A market “crash” with stocks at highs cuz QE is weird.

The following is something I copy/pasted from Zerohedge (I know, I know) to try to wrap my head around this repo stuff. It seems cogent to me, what do you guys think?





"This is actually a bit complicated but the repo crisis is actually the trigger for the subprime collapse.

In Capitalism, which Trumptards, Elizabeth Warren and Trump do not understand is that interest rates always self adjust. This is why price fixing NEVER WORKS.

The fundamental problem is simple enough. A Bank uses depositor's money and the fractional Reserve Banking to lend to customers. Usually this is a bank that is lending for mortgages on a longer term basis but it can be floor planning in retail stores and other types of finance. When they lend the money out, then end up with notes and obligations.

But the day to day business of the bank needs cash to keep your debit and credit cash float moving. So the Bank has to borrow money overnight to have it to clear all the pending transactions of the day. This is sort of a just in time inventory system but with money.

The trouble comes in when the fed itself runs out of cash to lend to the banks short term. The collateral the banks offer the Fed is the mortgage notes, lending contracts and of course US Treasuries.

The last subprime crash was triggered by a spike in the interest rates overnight and by a failure of the bank mortgage notes held which were backed only by hyperinflated housing prices. In response the Fed printed money and started buying assets in real estate mortgages, Treasuries nobody else would buy. That massive injection of printed liquidity prevented the subprime from becoming the Great Depression.

Then as the subprime resolved, the Fed began selling off their balance sheet into the public markets. What they did not anticipate was that by doing so, they were in effect destroying dollar liquidity. This is the killer.

Once dollar liquidity drops, other forms of shadow lending arise at much higher interest rates. This affects everything and has resulted in reduced Dollar Reserve Liquidity for commodity purchases. Thus causing a global economic slowdown.

This coupled with Trump's insane Tariffs which also reduce liquidity cause the dollar to rise then the vicious cycle of reduced liquidity continues. Each time Trump stirs geopolitical unrest, dollar hoarders speculate in dollars and that also decreases dollar liquidity.

Then you have consumer debt and corporate debt which is skyrocketing. This too reduces the liquidity of the dollar. Thus the Fed is not watching the real money supply but relying on overnight interest rates to project liquidity needs. That is where the trigger comes in.

When the overnight spike as they have done up to over 10% in certain instances, INSTANT INSOLVENCY RESULTS. This is the subprime Trigger that Bernanke never saw.

So instead of unwinding the balance sheet the Fed is now forced to expand the balance sheet.

If you are an investor you have your new David Tepper moment. Asset values will float higher with the float.

China did something very smart over the last 4 years. They essentially intentionally slowed their economy and crushed the shadow banking system. They essentially deleveraged moving their debt to GDP ratio down from 58% to roughly 48%. US debt to GDP is 110% and rising. The highest in history was 120% during WWII. Japan is now at 235% and they are on the verge of a potential total economic collapse.

You will also note that Saudi, aside from murdering Americans in Pensacola has their Aramco IPO out. Saudi is essentially cashing in. The Fed is buying that Stock and the Saudis are buying US Treasuries with the proceeds.

Nobody on earth knows the Assets of Aramco. It is a complete dark pool. Then look at Chevron with an 11 Billion write down... Oil looks like a ponzi scheme to me.

All this scheming is to bolster the current lack of dollar liquidity. The greatest danger of the dollar reserve is the situation you have now. 40% of the world population being sanctions by the USA preventing the use of the Dollar Reserve. Now the dollar loss of liquidity takes the other 60% down into a recession.

The Fed Spigots are now wide opened. That is why you keep hearing there will now not be any recession.

Undoubtedly the so called China Deal has a secret sweetener. China may also open the flood gates of liquidity. But they won't do it until all tariffs are gone and the Huawei girl is returned to China."

Trouble On The Horizon?

https://www.seeitmarket.com/is-repo-...o-get-serious/

I didn't major in "high finance" or economics so I don't understand most of this, but I can sense when something doesn't sound (or feel) right. If we're on the verge of another financial crisis (or worse), Trump may go down as the 21st century's version of Herbert Hoover - even if he does manage to get re-elected.

P.S. I like the quote from the Clint Eastwood movie, (i.e. "Don't piss on my back and tell me it's raining".)

I found this recent interview of Jeffrey Gundlach pretty interesting:

Yeah I came to post this and didn't even know this thread existed

Definitely not my expertise but the subject has been popping up recently and I think it's worth paying attention to

Former Fed Governor's Analysis of Repo Market Disruption

https://www.brookings.edu/wp-content...Disruption.pdf

This is a long (as in very long) read - of which I understood maybe a third to a half of the points Mr. Tarullo raised. However, there was one observation/comment that really got my attention, summarized in the final sentence of the next-to-last paragraph on page 5:

Of course, all the considerations that have been discussed for years in debates on the right size of the balance sheet are relevant here, including how much of the increased supply of Treasuries resulting from the larger budget deficits the Fed wants to monetize.

Admittedly, I'm not an "expert" on any of this, but this is something I've wondered about for quite some time … If the CBO is correct in their projection of annual TRILLION dollar budget deficits for [at least] the next ten years, are we sitting on an economic powder keg that could explode at any moment?

A couple of factors to consider … There is already evidence that some creditor nations who have been financing our debt via Treasury purchases, especially China, have been cutting back. If more countries follow China's lead, the Fed will have to either: (a.) raise interest rates to attract buyers, or (b.) monetize the debt by printing money. Raising interest rates will increase the cost of all that borrowing - even I understand that. Printing money could lead to a repeat of the 1970's, (i.e. runaway inflation). Both are unpalatable options.

Then there's the issue of the economy. So far, we've been lucky … We're now in the tenth year of (more or less) sustained growth, low unemployment, and a booming stock market. The pertinent question: How long can our economy continue to defy gravity?

The CBO projections assume no recession over the next ten years. How realistic is that? If we get a serious recession while simultaneously running TRILLION dollar deficits, who can predict how bad things might get? Answer: Nobody.

Maybe what we have in the repo market is the canary in the coal mine. The canary is telling us to get our fiscal house in order - before it's too late.

It's a bit ironic that Republicans (and fiscal conservatives) dismiss Bill Clinton as a failed President, but who was in charge the last time we were actually running a budget surplus?

The rise of criminal cartel China (and Clinton, Bush and Obama enabling it) destroyed the budget and caused the GFC and US debt problems. A massive wealth suck taking >$1 trillion/year out of the US via needless duplication of capital and deliberate targeted predation on the US economy. At the core of it lies that; money is just a second order effect that papers over economic realities for a time. When is eventually? I was assured that hyperinflation was around the corner in 2011, 2012, 2013, 2014....2019, 2020 now due to QE. What happened?

Again, have to agree with Tooth. What inflation?

Shuffle:

I'm no more (or less) prescient than anybody else, but I don't see an easy or painless way out of this dilemma. The only question now, I suppose, is how soon do we start feeling the pain and seeing visible signs of the damage?

I can't believe that people who used to call themselves "fiscal conservatives" are saying things like "Deficits don't matter!" (Dick Cheney) and "The deficit is not my problem." (That would be our beloved Idiot-in-Chief President.)

It seems that politics has played an oversize role in the development of this quagmire. Both Democrats and Republicans, after a hard day's work cutting taxes and passing blowout budget bills, must stop by the bar for a drink and [maybe] get the queasy feeling that "somebody" (i.e. our constituents) is going to pay for our irresponsible profligate spending. If all this starts going south in the next 6-9 months, it will be interesting watching how the blame game plays out. We can count on Trump to explain how all of this is Nancy Pelosi and Chuck Schumer's fault. (Donald Trump is the Jennifer Cappelletti of politics. Being the Donald means never having to say you're sorry.) For the Dems, it will all be Trump's fault.

Here's a good opportunity to gaze into our crystal balls and predict the future. Somebody, (not me as I would need help constructing the choices and options), can create a poll asking participants to predict what the CPI will be six, nine, and 12 months from now. (I agree with you that it's going to be higher than what it is now.) After a long pause, currency debasement and inflation is on its way to being back in vogue. Common sense says you cannot run annual TRILLION dollar deficits for the next ten years and expect to come out smelling like a rose. Sooner or later the piper has to be paid.

Shuffle: I'll be happy to exchange ideas on the construction of such a poll via PM, if you think a poll would be a good idea.

We are in the middle of a 20 year bull market, think 1980-2000, only this time without a 20%+ flash crash 3 month bear market in the middle of it. This time really is different because the smartphone has changed everything. A strong economy is based around the efficient allocation of resources and now every individual has their own personal resource demand unit, optimizing resource spread.

Timing is everything. There is very little difference between being early and being wrong.

I was browsing through some old books not too long ago and came across one published in 1985 titled something like "The Coming Disaster" -- on the cover was a chart showing the exponential growth of US debt. The math was exactly right. The debt had doubled over the last 5 years, and nearly quadrupled over the last 10. How could that possibly continue? Wasn't it obvious that collapse was inevitable, and soon?

And yet, with a brief pause in the late 90s, we kept running deficits, and the debt kept growing. It's now 10 times what it was when that book was written. The economy has grown, but hasn't kept up with the debt. We went from 40% debt/GDP then to 104% today. And yet, no hyperinflation. Japan's debt/GDP is 236%, and their central bank has been intentionally trying to stoke inflation for a decade and has kept failing.

I don't know when that changes. It does seem inevitable but it has also taken longer than anyone imagined. Whoever guesses right will be rich. But the Level 1 thinking of "High deficits -> High inflation" is absolutely wrong.

it's probably a good idea to just keep running with the bulls until japan implodes. and if and when japan implodes then you poke at the remains and decipher when and how that translates to other global markets. cuz it certainly seems like everyone is hell bent on japanification.

https://www.cnbc.com/video/2019/12/1...s-anymore.html

as this guy puts it:
it's insane - but it's gonna carry on.

Shuffle:

At the 9:10 mark of the interview, Carl Quintinia asked Mr. Greenspan a direct question about the repo market and, specifically, whether all the "hand wringing and worry" over [repo market] volatility has been overhyped? Carl wanted to know Mr. Greenspan's opinion concerning whether or not the repo market is (and will remain) stable.

This is subjective on my part, but Mr. Greenspan's response seemed evasive - either that or he misunderstood the question. Rather than a direct answer to the specific question, Greenspan made a comment about "... the 20-year bull market" and then vectored off into a speech about how the Fed analyses price/earnings ratios.

For the life of me, I don't know what P/E ratios have to do with repo market volatility. Excuse me for being cynical, but I wonder if that was a question/issue Mr. Greenspan preferred not to address. A really cynical view might be that Mr. Greenspan avoided a direct answer to the question because he has no idea whether the repo market is stable or not. He doesn't want to be pinned down with an answer, or opinion, that might turn out to be wrong; so he dodges the question. (Either that or he's showing the first signs of dementia.)

Clayton:

No less a sage philosopher than Warren Buffett is reputed to have counseled investors that the best time to sell [equities] is when the market is hitting all time record highs, and the best time to buy is when there is blood on the streets. If Mr. Buffett's wisdom is still relevant, the "smart money" (or the clairvoyants) would be selling right now.

I'm directly involved in a bunch of imports of building materials from China and I can definitively say that prices in China haven't changed and the tariffs are being eaten by the American companies doing the importing. Chinese stuff is still really really cheap overall though... just not as cheap as it was.

This sounds a lot like moral wishful thinking -- Americans, and Boomers in particular, have lived beyond their means and must inevitably be punished. The world doesn't work that way.

More particularly, the national debt is already being monetized. The Fed owns $2.4T of it, and is currently buying $700B of our annual $1T deficit. Why hasn't the disaster happened yet?

I'm not saying it can't happen, or never will. I genuinely want to understand why this type of thing hasn't caused inflation here or Japan or Europe.

Whatever you mean by "Demographics", Japan's are worse.