The Institutional Risk Analyst

Brent was down to about $94/barrel ($103 last week). Gasoline prices also fell to $4.39 vs $4.52 last week, with diesel down to $5.52 vs $5.63 last week. But technology stocks are at all-time highs led by the likes of Micron Technology, Inc. (MU), which is up over 800% in the past year. Are the US equity markets approaching an inevitable reset?

We all need to remember that shrinking the Treasury portion of the Fed balance sheet is the easy part. The $2 trillion in notional amount of MBS held in SOMA, which now has an effective duration that is much, much bigger than the rest of the portfolio combined, requires some subtlety. The good news is that the agencies and Ginnie Mae are thinking about a potential Fed MBS swap with Treasury. Wall Street can make it all happen and profit handsomely by selling a lot of “AAA” ra

As we told Bloomberg TV last week, not only has the President's attacks not forced Powell out, but he has made this decidedly mediocre Fed chief a progressive martyr. As a result of Trump’s ill-considered attacks, Powell will likely remain as a Governor through 2028, depriving the President of an opportunity to appoint another governor for a 14-year term. How does this mess serve the agenda of President Trump?

Imagine if the Fed had to tell the public that federal deficits were bad for bank safety and soundness? We haven't had a Fed chairman since Arthur Burns who would speak publicly about the inflationary aspect of federal deficits.

When you see a bank with more than 10% of total assets in MBS, that's a big red flag in our book.

In 2019, the FOMC essentially nationalized the US money markets, eliminating private price discovery for a representation of a market.

Instead of seeking authority from Congress, Chairman Bernanke and other members of the FOMC merely turned on the public spigot.

As the scale of Fed open market operations grew since 2008, volatility has increased, rendering the adjustment from QE to QT problematic

Remembering that former Fed Chairs Bernanke/Yellen et al dispensed with the inverse relationship between stocks and bonds as a result of QE, the next surge for the exit may look different from December. When we see all of the yields on the Treasury curve heading higher, this under the dead weight of new issuance, then the great unwind in equities may also accelerate.

So is now the time to pick up exposure to US financials? Maybe. Will refinance volumes return to the US mortgage sector? Deo volente. Bank OZK? Thinking (see below). Readers of The Institutional Risk Analyst know that credit metrics for all manner of bank real estate exposures are dramatically skewed in the too-good to be true direction. When will the proverbial pendulum swing the other way?

Our contributor Ralph Delguidice ("Are Leveraged Loans a Problem? Yes, and No. And YES") reminds us that noted economist Zoltan Pozsar has long argued that QE-created bank reserves are not --and have never been --“excess.” In fact, he notes, they remain the ONLY settlement medium that can be used to meet the now binding (intra-day) liquidity requirements and all the other regulatory constraints on bank capital and assets. Pozsar wrote in his paper “A Macro View of Shadow B

Volcker specifically chides Bernanke and Yellen for their fixation on a two percent inflation target, one of the main ornaments on the data dependent Fed Christmas Tree. “How did central bankers fall into the trap of assigning such weight to tiny changes in a single statistic, with all of its inherent weakness?” he asks. Good question. Volcker writes in Bloomberg. Deflation is a threat posed by a critical breakdown of the financial system.

Large Cap Financials & Asset Inflation