Gaming the system
May 26, 2021
–Another new historic low in 3 month libor yesterday at 13.85 bps. Yesterday’s Fed Reverse Repo operation totaled an astonishing $435 billion. (Going big). Given the magnitude of excess reserves, yields again fell and the curve flattened, with tens down 4.4 bps to 1.562%. The red eurodollar pack was +2.0 on the day (second year forward) while greens, blues and golds (3rd, 4th, 5th years) were +4.25, +5.5 and +5.75. The red/gold pack spread made a new recent low, just over 154 bps.
–They say that the cure for high prices is high prices, and some commodities, like corn, were bashed yesterday. Housing may be undergoing sticker shock which could slow activity, as evidenced by the tumble in New Home Sales which fell 5.9% yesterday. However, the monetary authorities appear to believe that in the case of stocks, the cure for high prices is higher prices. Yesterday, speculative darling Gamestop closed at 209, the highest since March. We’re back baby! After the upward burst to 483 in January, it languished around 50 for much of February. Does GME have anything to do with excess liquidity engineered by the Fed and federal government? Nah. There’s a story that Biden is being urged by the chief of righteous indignation, Elizabeth Warren, to dump Quarles, who is the Fed’s man in charge of bank supervision, because he missed the Archegos blow-up. (By the way, Quarles speaks on the economy at 3:00pm today). Um, Senator Warren, short rates are being pounded to dust and government spending has engendered excess liquidity that could threaten financial stability. Archegos was but one manifestation. Just keep your eyes on that tree.
–At the same time, taper talk is heating up again, with Zoltan Poszar saying rates don’t necessarily have to rise due to tapering, if the Fed unleashes the Wells Fargo balance sheet from its regulatory shackles simultaneously. That’s a great solution! Let Wells buy the rich mortgages, being underpinned by record housing prices, so that we can keep asset price plates spinning. Certainly we don’t want the economy to continue to labor under a stifling ten year treasury yield above 1.5% any longer than is necessary. The USD dollar is trying to sidle quietly out of the circus tent, unnoticed. However, CNY is at a new high this morning at 6.3926. June Gold is holding above $1900.
