“A good hitter can hit a pitch that is over the plate three times better than a great hitter with a questionable ball in a tough spot”
-Ted Williams
If you’re the smartest person in the room, you’re in the wrong room is how the saying goes.
That’s not wrong, but it is over-specified.
The greatest professional and personal benefit (& highest ROI initiative) an employer can offer is a platform for self-actualization.
Then cultivate a culture and light-touch conditions set that helps accelerate that actualization for the chosen PSDs (poor, smart & determined).
With respect to building championship teams, the aspiration is to be the most prolific person in the room …. at whatever it is you do.
Take a moment to survey the core members of your team and consider their lead attributes.
If you can objectively say …. ‘you know what, I probably couldn’t do that’
You are probably in the right room.
Back to the Global Macro Grind …..
The world as a whole is a closed system.
If your global macro process can’t efficiently distill and internalize the high-frequency incrementals in the context of the cycle, you might be in the wrong process.
Let’s quickly contextualize the incremental high-frequency data in the context of what generated the most discussions/questions from our 2Q23 Mid-Quarter Macro Themes update on Wednesday ….
Debt Ceiling: This remains the ultimate intersection of sensational macro tourist fodder and actual short-term risk management. And the shadow of the X-Date specter grew more ominous with the Treasury cash balance down -$25B d/d to $68.3B and the GOP looking to change the locks on America with Biden out of country.
A frequent question following our mid-quarter themes presentation was around the interpretation and potential catch-22 consequences of the debt ceiling and the chart below.
There exists vagaries and nuance around the flows/plumbing of it all, but the broader intuition here is pretty straightforward:
The Treasury was drawing down its cash balance to pay obligations. The specific obligation could be ‘whatever’ but (after exchanging hands a number of times) the ultimately destination is likely to end up as bank reserves. In effect this equates to putting cash/liquidity into the system. At the same time, it hasn’t been issuing debt (and, of course, entities use reserves or cash to purchase that debt) so it hasn’t been pulling liquidity out of the financial system. In short, the net effect has been positive as the TGA balance dynamic has been adding liquidity without taking any out. And empirically, in recent years, those liquidity changes have tethered closely to asset price changes. What happens when the Treasury needs to source hundreds of billions of liquidity to purchase the newly issued debt once the cap is raised?
M2…. But, But, Levels: M2 growth is effectively at a 100 year low at -4.05% Y/Y. The primary pushback we get against this being net negative is that money supply went vertical in the peri-pandemic period and so from an absolute (i.e. a levels) perspective it’s still (very) historically elevated. That is true but is largely besides the point. We view the M2 data through the same rate of change-centric lens we use to filter everything. It’s also a mostly hollow oppositional argument since the most one can argue for is benignity. The notion that an accelerating contraction in money supply for a financialized, over indebted economy in an inflationary environment is somehow a positive is difficult to conjure.
And it's also all hopelessly and inextricably bound up in itself …. M2 is falling because deposits are leaving for money market funds ….. money market funds are attracting flows because the Fed raised rates and also because b/c they changed the rules on who can deposit at the Fed ….. those same higher rates and that Fed catalyzed deposit flight is fueling the existential risk for regional banks …. The rising fragility in the banking system is driving expectations for higher financial system risk and slower growth (in part due to curtailed lending from those same regional banks) …. Which is the primary driver of expectations for cuts from that same Fed and a reversal in the Fed catalyzed MM flows and M2 contraction.
Anyway …..
Odds of a June rate hike have now risen to 41% while simultaneously continuing to price in almost 2 cuts by year end. Which conveniently segues us to a second crowd favorite from the Macro Themes update presentation.
Time may or may not be a flat circle but soft-landing mongering remains timeless. Below are a selection of the soft-landing prognostications from 1989, 1999 and 2007. Enjoy …..
Crypto: Last week I mentioned the liquidation cascade in crypto catalyzed by a single (false) tweet around BTC movement in government-controlled wallets. The number of inquiries I received back was surprising. For crypto natives, this is a 101-type fact but for the non-crypto immersed, the data and implication is this …
The government takes ownership of any Bitcoin confiscated as part of criminal activity. As the chart below shows, the government holds ~205.5K BTC (~$5.5B at current prices), most of which was confiscated as part of the Silk Road prosecution. The wallets that hold the coins are public knowledge and are monitored by analysts and CT for movement.
The government sold 9.8K BTC in early March and catalyzed a mini-price cascade. Angst is (extra) elevated presently given that crypto market liquidity dropped significantly following the Terra-Luna spiral, collapsed further following FTX and big crypto market makers (Jump & Jane St) recently announced they will be largely vacating domestic markets.
The government has explicitly indicated they are going to sell similar significant quantities at quasi-regular intervals. Fears around the prospective price fireworks associated with the government market dumping ~$1B+ in BTC into an (extra illiquid) Friday night or weekend aren’t unwarranted.
And if you’re a government in the throes of debt ceiling brinksmanship and are searching for some spare billions to pay the bills and extend the X-date timeline as the TGA coffers get exhausted, then just maybe ……
Find your personal “prolific’ then take high probability swings at (macro) strikes.
Then work to do it better next time.
Count Blessings in the morning, Count Alpha after the close,
Christian B. Drake
Macro Analyst
