Monthly Archives: April 2018


People across the political spectrum have been quick to discuss the echo chamber feedback loop reverberating between a certain cable channel and the POTUS. We have long held the view that a more subtle, but just as dangerous, agreement loop has been promulgated by the Federal Reserve.

When Roger Ferguson was charged with charting the "openness" at the FOMC, a slow slog into the choir preach began. Today, the once admired tea-leaf reading skills of a "Fed Watcher" amount to little more than regurgitating the carefully developed script under the working title "Don't Worry, We Got This."

Balance sheet roll off, funding rate tweaks and SOMA/TBAC objectives are just micro-bumps in the Fed/Media echo canyon that, "There's nothing to see here, move along." A random volatility explosion? Like the lady with plaque psoriasis, "It's fine." A relentless year and half rise in term LIBOR sets? Pulease, what's LIBOR? Something stinks.

I started thinking about this like minded agreement society while running some rates through my model. Just wondering, if the wind down is so simple and without cause for concern, why has the FOMC elected to stay 2 hikes behind a neutral calibration? Looks to me like the non-public view at the FOMC is actually caution and concern.

the Big Short

I've been re-watching Michael Lewis' 60 Minutes interview on the crash. And with that, I've studied various scenes from the very entertaining movie version. I enjoy it but the process also eats away at me, even secluded away on Howell Mountain.

You see, i was one of the 20 or so people Lewis talks about who didn't just talk about the coming crash but bet on it happening. I founded Cronus with the collapse in mind. Our purpose was to short SP futures and buy Ts. My best position was long 9925 Eurodollar calls when rates were posting at 5 and 4.75. My calculations at the time led me to believe a penalty rate would price Libor somewhere between .75 and .5 not a full fledged zirp. We paid a half a basis point for the calls and they ended up 50 ITM -250k/200m.

The most interesting scenes in the movie come when the shorts are finally right but the Street still won't value the securities up. We played on a regulated exchange so didn't have the same problem. We did have serious issues, however. We cleared at EDF Man and with the system failing and guys next door getting wiped out for clearing at Lehman, we were solicited by representatives for GSEC to take on our services. The IB, wanted us to trade 1m for him given our strategy also. We figured being under the GS umbrella would make us safer than EDF.

Little did we know, the IB was deep under water also and had diverted the monies through GSEC into a margin account at CBOE. Both the GSEC back office and our own London accountants were phonying up the daily balances. (when the Feds realized i had pass codes into GSEC clearing the jig was up and they plead guilty and paid $7m in fines) I returned the customer funds and shut the fund. Amazingly, if we had remained open, we would have been embroiled in the Corzine debacle shortly after. Think about that, a couple of nobodies from the floor of the CME bet on the end of the financial system, were right, and the 2 banking institutions they (we) used to do it both stole the money to cover their own losses !

When I returned the investor money, after working with the NFA to ensure it was done properly, all the NFA investigator could say was, "We are really glad for you, no one ever gets the money back." I'm worried why I keep re-watching, something is bugging me again. It's real hard to be early. I'm happy up here, away from it this time.


On China Holdings

The pre-packaged meme on the Trump trade policies with China is now on the shelf from several sources. it goes like this: "China could sell a chunk of its large holdings causing yields to rise, the ccy to fall, and all sorts of trouble."

The story sounds right but loses some hype when looked at correctly. One must think about why and how China comes to want/need to purchase such large quantities of US obligations in the first place. The Administration actions would act to reduce the source demand. China could sell off chunks but the question then becomes "to who?" LSAP provided a well structured environment to adjust holdings.

There is no doubt that the threat overhang of a $T in government holdings can have on the issuing country is significant. The idea that China weaponizes those holdings is a totally different animal. Remember, the Chinese were massive owners of defunct notes from the permanently insolvent Fannie/Freddie and made out just fine by hanging on.


I watched a mind numbing TEDx talk from 2014 by Brian Westbury called The Truth Behind the Financial Crisis. It's on Youtube if you want to get your year's intake of fake news.

See, Brian just happens to be the same guy who - outside of Cramer and Kudlow - did not see the hurt coming and then became the highest decibel cheerleader for the economy in the throws of and well into the burning of the biggest financial calamity of modern time. His denial interviews are classic historical blunders. Yet, here he is, mansplaining to an audience of god-knows-who; the "real reasons" behind the collapse. Um, that would be the Crisis you never saw coming, denied was happening and then had the ignorance to say did not even create a recession !, That one Brian?



In June, the ARRC announced its recommended alternative rate, the Broad Treasuries Financing Rate (“BTFR”). However, as the pronunciation of “BTFR” apparently is unsavory, the acronym is being replaced with “SOFR” (Secured Overnight Funding Rate). But it’s the same thing – a secured overnight Treasuries repo rate. 

"Apparently unsavory" is the new standard for short rates.

Couple a Things

Item: SOFR update - So the roll out of the new benchmark rate for money funding has arrived with little fanfare and even less understanding. I was chatting with a government bank examiner working at an extremely large bond house about the Secured Overnight Funding Rate and she mentioned something curious : "Neither she, nor the team at said extremely large bond house knew how the rate would be set." She asked my opinion. I said  that trillions of contracts were still set to the tar pit animal previously known as LIBOR so I hoped the new rate sets worked out, oh and the 2015 vintage is spectacular but in tight supply.

Sidebar - secured vs unsecured is key difference.

Item: Rates have calmed and corrected in March as the Lion/lamb transition has played out. April - and Q2 - seem less clear to us than the preceding 6 months. Our base case remains unchanged, however. Equity markets chasing around a wide and volatile range that by Fall will appear sideways and rates clawing higher. The Employment Report looked to put the data together, so this month's could be less accurate. We think the data after will be a better guide.