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ParticleMan

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  1. Initially I was going to go with Keynes here: "In the long run we are all dead". On reflection however I feel your question's simplicity belies its depth - and is worth a far less glib response. At some level the rates market simply reflects the mismatch between supply (of stock) and demand (for the consumption of it). Tautologically, if you hold it true that on balance the net human condition is always improving, rates will end in a no-ask market (Zeno's paradox notwithstanding - we're always halfway there, and always have halfway left to go). I'd argue though that the floor is higher. Reality will out, and the interval between the creation of capital stock and the return of it will never be instantaneous, purely because physical things take time to build (or grow or mine) and distribute. But back on point: if the lending of capital stock is instant (we no longer have to bring cases and trunks full of cash to the kerbside), the only obvious supply side drag is the willingness to participate in the creation of credit. If you want a look through my crystal ball into the rates market of the future, ask yourself this: how confident are generation debt that "ok boomer" are actually a worthwhile credit risk, and, perhaps more importantly, how confident are they that the resulting consumption has net positive (income) expectancy (for themselves)?
  2. It's logical that a deeper rates market (where stock is more freely contributed) will be less volatile. Rates in the money market leading up to the 1907 panic were trending lower too.
  3. A good example! To restate: the stock of GPIF + Post Bank (~¥200 trillion combined, for arguments sake) is leveraged by the BOJ (who have borrowed ~¥1000 trillion, whether directly or through sleight-of-hand balance sheet expansion makes no real difference to me). The economy throws off a flow of ~¥60 billion in annual tax revenues from a ~¥500 trillion GDP. I'm of the opinion that the Japanese economy literally can't support much more reserve buying of its own paper and that spending must fall or GDP must grow or both. And I'm not alone. As a footnote, the tipping point in Japan was (wait for it) ... a proposed doubling of consumption tax - in order to balance the budget (it was so unpopular the DPJ lost control of the Diet). This whole episode kind of reinforces my point here, I feel...
  4. Ok. And that's my thesis. CB's will be chastened by exactly the social impact. Their model has faulty inputs. It's probable that generation debt don't care about supporting the price of assets they don't own, when the stark reality is that they can have asset price support or positive expectancy for savings but not both.
  5. I think the effect on yields is both a cost and a limit, however indirect (and I argue - it's quite direct). Reserves will discover that they can't loot the pensions industry twice, if they attempt it.
  6. This is exactly why a panic is likely. All it takes is for one participant to doubt that a repo will be honoured when due.
  7. As a side note the reserve's flow (and to a certain extent their ability to fund new nonsense) comes from the spread between GDP and the rate offered to net long bondholders. I feel that reserves may well have lost sight of this. We're not minting new net long bondholders. Generation debt have no assets. Everything has its limit.
  8. Let's agree to revisit this specific topic after a reserve with a material net long position on the bond finds itself navigating an actual, severe contraction in GDP.
  9. They absolutely do need to continue borrowing to deliver on promises. But remember, the promise we're talking about is the promise to backstop asset prices forever. The demagogues will appeal to the assetless poor on a platform of reduced taxation and deliver it by throwing the bondholder to the wolves. Concisely: I think it's highly likely the electorate will vote to default on the promises instead.
  10. Here's what happens to the bid if your ask crosses the market. (I agree with your first sentence, it's just that the second part isn't quite playing out how "to infinity and beyond" might've thought; my argument is actually about the supply side, in that I foresee less issuance due to politically chastened reserves, as the demagogues win elections in jurisdiction after jurisdiction)
  11. The likes of Cerebrus are only active in the CLO market because their "stock" holders (I use the term very loosely) have confidence in the return of whatever stock has in turn been lent to Cerebrus. Imagine for a second if you were promised an assured 60% haircut on any capital advanced to Cerebrus. Would this skew your pension investment decisions in any way? What if the imagined haircut was 100%? Why would the assetless poor vote to keep these plates spinning? The angular velocity of these specific plates is maintained through a linear growth rate in tax receipts.
  12. Essentially, when the interest rate market becomes no bid. As in, there is no flow sufficiently infinite one can promise, so as to entice the lending of the stock. We've been here before.
  13. Posit: "ok boomer" are convinced that their perpetual motion machine (supporting asset prices with perpetually increasing borrowing) is unfailing magic. So what happens when demography at the polling station (or the investors' AGM) tips towards generation debt? Tax receipts are only as sure as the political will to collect them. And in the private sector, bondholders only come first when nothing's left (ie: in administration). To restate, succinctly: the assetless indebted reason about the world differently to model. Conclusion: we're heading towards the mother of all liquidity panics.
  14. 1/ The Saudi Economy just plain isn't ready to absorb a loss of up to half its export earnings. House of Saud will be forced to give up more equity in Aramco than even their worst case projections. The alternative (cutting state deficit spending) will make 2011's sugar riots look like a Cinco de Mayo parade. 2/ This is a huge windfall for the Russian economy in general. 3/ Asia imports most of this oil. Catastrophic supply-side failure is never pretty. It always acts on input prices first.
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