Markets completely giving up on the Fed cutting rates in 2023. Virtually 0% chance of cuts by December now. Also hearing large hedge funds unwinding insurance trades put up to hedge against recessionary cuts.

A real blast with my friend @kevinmuir on The Market Huddle! We solved the mystery about ''liquidity'', talked about my investment process and had a super interesting discussion about the stupid mistakes Kevin and I still fall for when macro trading. Ah, and pizza. Enjoy!

Hear me out. Mistral AI, a French AI company was just valued at ~250 million: - Company created a month ago - They don’t even have a product - Employees have barely started working No frenzy to see here, all rational behavior and valuations…..

When it comes to inflation, all you should care about is what Powell is watching. Core services ex-housing inflation is trending at a 3-month annualized pace of 3%, down from 6.5% in October. 3%...

One of the most misunderstood concepts in finance is that you need 0% rates to have animal spirits run loose in markets. That’s not necessarily the case. The 2000 dot-com and 2007 housing mania happened with 5-6% Fed Funds. It’s all about FOMO and your neighbor getting rich.

The Fed literally published a paper on how FinTwit sentiment correlates with market returns and financial conditions. So what, Powell's job is now to convince FinTwit he is serious about inflation? Gotta love this :)

In my hometown in Southern Italy the average salary is EUR 1,000/month and nobody can afford Teslas. Yet every time I am here I see people enjoying the little things and always ready to step up to help others. And I wonder if this is a deeper form wealth than just money.

Public service announcement: the stock market is not the economy.

''Wow look at the VIX, it's so low!'' Yes mate, the S&P 500 is moving by a millimeter a day. Where do you expect implied volatility to trade when realized volatility is this low?

“Bro we are fked now bro”

Banks create money when extending loans to the real economy Banks lend more if prospective returns look good against the risk they take and the capital that regulators demand they put up against that risk Increasing capital requirements will tighten credit conditions further

If nobody wants/needs/can afford a security or an asset, cutting the supply won’t push the price up. Fewer houses for sale won’t push prices up because affordability remains a headwind. Bitcoin still has limited supply but demand isn’t there as much as 2021. Oil…you continue.

A simple regression analysis shows that changes in ''liquidity'' explain only 3% of the variability in S&P 500 returns. It's hard to predict the stock market using one single variable, but if you broaden your horizon... 14/

I also provide bespoke coverage and 1-1 access to institutional investors: my DMs are open if you want to get in touch. Enjoy the rest of your weekend, FinTwit! 16/16

...to global bank reserves and include a thorough macro analysis in the picture you get a much better shot. If you want to regularly access my data-driven macro insights and actionable investment strategy, you can join thousands of investors here 15/

On the contrary, less reserves are often associated with banks taking a more defensive investment stance and in providing markets with less liquidity. So, is it as easy as saying that the TGA rebuild will for sure drain liquidity from the financial system? 13/

...and hence a bigger reserve balance might encourage banks to take more risks in their liquidity portfolio for instance by buying corporate bonds – this compresses credit spreads and enacts a more favorable environment for equity investors. 12/

The more reserves out there, ceteris paribus the easier for banks to engage in repo markets and provide liquidity to market participants. Reserves are also part of banks’ high-quality liquid assets (HQLA)... 11/

If the government issues bonds without spending real economy money and banks/private sector must absorb the new issuance without any fresh new resources, bank reserves take the brunt. But why are bank reserves referred to as ‘’liquidity’’ in the first place? 9/

Bank reserves are money for banks: they use reserves to transact against each other and with the Fed, and you can think of them as the lubricant of the monetary mechanics pipes. 10/

RED: the government issues $100 in bonds without spending anything in the real economy, and banks have to absorb the new bond issuance by depleting existing bank reserves ($ -100). 7/

GREEN: the government refills its Treasury General Account (TGA), and that is reflected in the composition of the Fed liabilities: TGA up $100, bank reserves down $100. This is how a TGA rebuild drains ‘’liquidity’’ (e.g. reserves) from the financial system. 8/

But what happens instead if the government issues bonds solely to refill its Treasury General Account as in a typical post-debt-ceiling-deal period? 6/

BLUE: the government spends $100 (deficit spending) and it injects net worth into the private sector and so households now have $100 more bank deposits These bank deposits end up as a liability for banks, and the corresponding increase in asset is a boost of $100 in reserves 4/