The other question to ponder upon, which Druckenmiller has been on... is the US getting to a point where it can't bailout bankrupt companies/sectors, because there is going to be a hell of an opportunity out there if it is.
Not sure that SVB has fully played out. The US government guaranteed all deposits in the bank and the expectation is that all deposits are from now on insured.
The FDIC has already pushed SVB onto First Citizen's Bank for the price of around $15B in subsidy.
As to whether all depositors are guaranteed from now on: a precedent has been set but there have been other, more significant actions taken to try and head off another bank run liquidity situation - the Fed created a new facility where any bank can turn in a bond and get face value for it. Mark to market as well as duration risk for bonds held by banks, removed.
Perhaps I am misunderstanding what the term "bailed in" means, but all depositors of SVB were guaranteed by the FDIC regardless of the $250K cap - and 88% of SVB depositors were over the FDIC cap.
The Fed also created a new facility that enables any bank to turn in a bond and get face value in cash - to greatly reduce the likelihood of a bank-run induced liquidity squeeze like those that took down SVB and FRB.
And lastly, SVB was sold off to First Citizen's via a ~$15B? ($19B was paid by the FDIC to resolve both SVB and Signature) subsidy.
These collective actions hardly seem the same as "letting SVB go".
Listed equity shareholders were wiped out - but yes depositors were spared. Politics is tough on that one... noone cares about the equity holders, but bailing depositors in may be a bridge too far.
I think when the government really starts to feel financial pressure then they may take a much harsher line on bail outs - but for the moment they seem happy to backstop markets. From my perspective it makes it easier to short treasuries...
I won't speak to USG financial pressure, but I don't believe there is any risk of a significant US bank failing.
If the Fed was willing to increase its balance sheet by ~$8T during the GFC, and another $6T for COVID - papering over the ~$700B mark to market losses in the bank held bonds is small potatoes. Note this doesn't require any government action or approval - the Fed is "independent".
I do agree that Pozsar's commodity encumbrance means structurally higher inflation in the US for the short/medium term future, in turn militating higher interest rates going forward, but between the 2024 election year and the massive negative economic effects of housing price deflation - it is a good question as to what the Fed and USG actually do in the next few years.
Plus the extra $1T of interest payments on Treasuries is not insignificant - so this is an Alien vs. Predator situation between negative real interest rates/a Zimbabwe spiral vs. massive negative economic fallout from falling real estate asset prices.
All things considered - shorting Treasuries is going where angels fear to tread IMO.
There are three way for overvalued assets to return to fair value across time. One the price falls, alternatively value moves up faster than price and the converge in the future, and three the value of the currency falls, in short the value falls relative to what it could buy. Following 2008, the government supported the bank so that value to catch up to price, while hyperinflating the currency. This was not noticed as at the margin an older (boomer) would save as would the banks the marginal dollar so velocity fell but the inflation was still there, so 6 years ago I wrote a series on this using AMZN as an example against BTC - BTC was at 2600 and AMZN at roughly 1000 at the time (pre-20/1 split). The inflationary short finally showed itself when the margin dollar flowed to younger people who wanted goods - now the inflation is everywhere and it is going to get worse looking at CBO projections of 5.5-7.0% for the next decade - that will double the price level before any of the foreign dollar make their way back.
1) to what extent has the return on short-selling been from "fat tail" (bankruptcy) being realised (ie: Enron, Lehman, Sub-prime) vs ongoing carry?
2) In a pro-labour era, wages will structurally rise. However there's also an aversion to unemployment - so in my view "zombie" companies are increasingly likely (unable to earn their cost of capital, but still listed and functioning). Historically Japan and Korea are full of examples like these. How would short-selling fare in such an environment?
Over the long term - carry has been the main driver of returns. For a few years when ZIRP started I used short selling to arbitrage cheap currency risk - but carry is very important.
Capturing fat tail returns requires government cooperation - Evergrande was always destined to be a zero - but it only went when the Chinese government wanted it to go....
The interesting question is where corporate America can be convinced to raise wages and pay taxes, rather than doing share buybacks....
Japan historically was a great short selling market - not these days
Shorting zombies seems like good policy then, just like Japan in the old days
Wondering how attractive short-selling is now though, given the different return-risk profile.
Essentially, if I understand you correctly, short-selling is now a carry-type trade, and has to compete with other carry trades (like EM fixed income, commodity backwardation etc...) as opposed to trying to capture a fat-tail (like Venture capital or ARKK).
Short selling will really work well if US corporates are forced to re-equitise... that is capital gets so scarce that equity balance sheets become important. Apparently 5.5 on Fed Fund rate is not high enough, but at some point I think that will become the case. At that point short selling will be very attractive.
The million (billion?) dollar question is the catalyst that forces a re-equitisation of US mega caps. In the previous instance, it was the failure of the interbank system due to mortgage credit.
Perhaps a meltdown in the sovereign debt market this time?
Oh for sure buybacks are everywhere - even in HK now. However interest rates and tax alone, I don't think, fully explain the reason why US corporates buyback so much more aggressively than overseas counterparts.
I believe it has more to do with management incentives and renumeration.
Hi Russell. Big fan of your work. I was wondering if there was a course or library where you were able to collect all these historic parallels to draw upon.
I try and write only original stuff based on my observations. I am very harsh on copy and paste research, so would not want to be caught doing the same!
I would recommend Eric Hobsbawm's Age of Empire, Age of Capital and Age of Extremes for thoughts on shifts between pro-labour and pro-capital.
I look at your charts and think, when will investors stop investing in stocks with low yields in an environment of persistent inflation? Will everything grind sideways for a long time or will there be some sort of inflationary shock?
I think I am saying he (and myself to a degree) fed of the need for bankruptcy in a pro-capital world - but in a pro-labour world, bankruptcy is rare, but falling profits does occur - so you go to needing carry to be the main tool of short selling. This might be too boring for Chanos
The other question to ponder upon, which Druckenmiller has been on... is the US getting to a point where it can't bailout bankrupt companies/sectors, because there is going to be a hell of an opportunity out there if it is.
Well interestingly it let SVB go without any particularly negative consequences.... of course no depositor got bailed in - but it is interesting.
Not sure that SVB has fully played out. The US government guaranteed all deposits in the bank and the expectation is that all deposits are from now on insured.
So what happens next you think?
SVB has fully played out.
The FDIC has already pushed SVB onto First Citizen's Bank for the price of around $15B in subsidy.
As to whether all depositors are guaranteed from now on: a precedent has been set but there have been other, more significant actions taken to try and head off another bank run liquidity situation - the Fed created a new facility where any bank can turn in a bond and get face value for it. Mark to market as well as duration risk for bonds held by banks, removed.
Perhaps I am misunderstanding what the term "bailed in" means, but all depositors of SVB were guaranteed by the FDIC regardless of the $250K cap - and 88% of SVB depositors were over the FDIC cap.
The Fed also created a new facility that enables any bank to turn in a bond and get face value in cash - to greatly reduce the likelihood of a bank-run induced liquidity squeeze like those that took down SVB and FRB.
And lastly, SVB was sold off to First Citizen's via a ~$15B? ($19B was paid by the FDIC to resolve both SVB and Signature) subsidy.
These collective actions hardly seem the same as "letting SVB go".
Listed equity shareholders were wiped out - but yes depositors were spared. Politics is tough on that one... noone cares about the equity holders, but bailing depositors in may be a bridge too far.
I think when the government really starts to feel financial pressure then they may take a much harsher line on bail outs - but for the moment they seem happy to backstop markets. From my perspective it makes it easier to short treasuries...
I won't speak to USG financial pressure, but I don't believe there is any risk of a significant US bank failing.
If the Fed was willing to increase its balance sheet by ~$8T during the GFC, and another $6T for COVID - papering over the ~$700B mark to market losses in the bank held bonds is small potatoes. Note this doesn't require any government action or approval - the Fed is "independent".
I do agree that Pozsar's commodity encumbrance means structurally higher inflation in the US for the short/medium term future, in turn militating higher interest rates going forward, but between the 2024 election year and the massive negative economic effects of housing price deflation - it is a good question as to what the Fed and USG actually do in the next few years.
Plus the extra $1T of interest payments on Treasuries is not insignificant - so this is an Alien vs. Predator situation between negative real interest rates/a Zimbabwe spiral vs. massive negative economic fallout from falling real estate asset prices.
All things considered - shorting Treasuries is going where angels fear to tread IMO.
There are three way for overvalued assets to return to fair value across time. One the price falls, alternatively value moves up faster than price and the converge in the future, and three the value of the currency falls, in short the value falls relative to what it could buy. Following 2008, the government supported the bank so that value to catch up to price, while hyperinflating the currency. This was not noticed as at the margin an older (boomer) would save as would the banks the marginal dollar so velocity fell but the inflation was still there, so 6 years ago I wrote a series on this using AMZN as an example against BTC - BTC was at 2600 and AMZN at roughly 1000 at the time (pre-20/1 split). The inflationary short finally showed itself when the margin dollar flowed to younger people who wanted goods - now the inflation is everywhere and it is going to get worse looking at CBO projections of 5.5-7.0% for the next decade - that will double the price level before any of the foreign dollar make their way back.
Hi Russell, some thoughts
1) to what extent has the return on short-selling been from "fat tail" (bankruptcy) being realised (ie: Enron, Lehman, Sub-prime) vs ongoing carry?
2) In a pro-labour era, wages will structurally rise. However there's also an aversion to unemployment - so in my view "zombie" companies are increasingly likely (unable to earn their cost of capital, but still listed and functioning). Historically Japan and Korea are full of examples like these. How would short-selling fare in such an environment?
Cheers!
Over the long term - carry has been the main driver of returns. For a few years when ZIRP started I used short selling to arbitrage cheap currency risk - but carry is very important.
Capturing fat tail returns requires government cooperation - Evergrande was always destined to be a zero - but it only went when the Chinese government wanted it to go....
The interesting question is where corporate America can be convinced to raise wages and pay taxes, rather than doing share buybacks....
Japan historically was a great short selling market - not these days
Shorting zombies seems like good policy then, just like Japan in the old days
Wondering how attractive short-selling is now though, given the different return-risk profile.
Essentially, if I understand you correctly, short-selling is now a carry-type trade, and has to compete with other carry trades (like EM fixed income, commodity backwardation etc...) as opposed to trying to capture a fat-tail (like Venture capital or ARKK).
Very different audience for the two.
Short selling will really work well if US corporates are forced to re-equitise... that is capital gets so scarce that equity balance sheets become important. Apparently 5.5 on Fed Fund rate is not high enough, but at some point I think that will become the case. At that point short selling will be very attractive.
The million (billion?) dollar question is the catalyst that forces a re-equitisation of US mega caps. In the previous instance, it was the failure of the interbank system due to mortgage credit.
Perhaps a meltdown in the sovereign debt market this time?
Shell has been buying back shares - Even HSBC has started too. As has Diageo... maybe US corporates are just more aggressive?
Oh for sure buybacks are everywhere - even in HK now. However interest rates and tax alone, I don't think, fully explain the reason why US corporates buyback so much more aggressively than overseas counterparts.
I believe it has more to do with management incentives and renumeration.
Hi Russell. Big fan of your work. I was wondering if there was a course or library where you were able to collect all these historic parallels to draw upon.
Help would be appreciated thanks!
I try and write only original stuff based on my observations. I am very harsh on copy and paste research, so would not want to be caught doing the same!
I would recommend Eric Hobsbawm's Age of Empire, Age of Capital and Age of Extremes for thoughts on shifts between pro-labour and pro-capital.
Thanks!
I look at your charts and think, when will investors stop investing in stocks with low yields in an environment of persistent inflation? Will everything grind sideways for a long time or will there be some sort of inflationary shock?
At the moment in the US capital still seems ascendant
Are we seeing Chanos shut down while capital is still in charge because this is a transition?
I think I am saying he (and myself to a degree) fed of the need for bankruptcy in a pro-capital world - but in a pro-labour world, bankruptcy is rare, but falling profits does occur - so you go to needing carry to be the main tool of short selling. This might be too boring for Chanos