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    Volatility Reports 4/29/24

    April 28, 2024

April 28, 2024

Volatility Reports 4/29/24

The talk between the Bloomberg favored hedge fund managers is dire but like most they are kicking the can down the road.

Its a rehash of the 2008 narrative but worse because today central banks have painted themselves into a corner. The logic is old school, as follows: for bookkeeping there is no need to “mark to the market.”  In other words, the US banking system permits banks to own US Treasuries account on ‘hold to maturity’ basis and never having to mark to the market any losses to their income statement.

So market fluctuations do not count and the practice is common throughout the world. So it is a means for the Fed to encourage banks to use Treasury debt securities, which should facilitate their leading practices, thus helping the economy grow.

So, in 2006 a portfolio of diversified US mortgages was a very safe investment. They did not figure that US house price could decline simultaneously across the continent of the US, which led to the near bankruptcy of the entire banking system.

So this should be clear to everyone that “higher interest rates create huge losses for the banks on their ‘held-to-maturity’ Treasury portfolios if they can not hold to maturity. At the same time, the higher return from money market funds encourages bank depositors to transfer money from their checking accounts into higher return money market funds. This happened early last year and forced the most vulnerable banks to liquidate their Treasuries and book a huge loss which wiped out their equity.” For example,

In early 2024 headlines read “New York Community Bank’s stock price is plunging, but that won’t tell you if it’s on the brink of failure.”

So while the bulls were pointing at the big trend up in the growth on Money Market assets, as pent up buying power for risk investments, it was and is a run on deposits, safe money not earmarked for risk or equity investments.  So the situation remains fragile but obvious with no more rate hikes expected but the chances of rate cuts are nearing zero as well.

As I’ve pointed out here to my membership that CT’s goals are to find low to no risk investments that can deliver high returns, massive 5 to 1 or better returns. This is how the big names in the hedge fund industry do it and it is the same way the greats have done it from the year dot.

In their words, “However, my hedge fund gains were derived from imagining low-cost strategies that would deliver huge returns should the unforeseen occur.” And they did, and Hugh, George, Paul, and Stan to name a few, made 30% plus with little drawdown.

Today the danger is in the booming US Dollar market. Please read my “Volatility Reports” 3/14/24, projecting the USD index to 120 ob. This is the train that few see that can take a fragile system down.

No one can argue that the stock market has not been very strong over the last year and most investors are bullish.

However, as just pointed out there is a dangerous development brewing in the FX markets. The hated US dollar is rising, especially against the currencies of Asian export power houses China, Japan, and most others.

The advance of the major averages world wide into the March 21/28 highs, is predicated on interest rate cuts, because the market believed a goldilocks soft-landing story.  But there was and is no economic slow down at all, rather its boom city and rates are breaking high approaching 5%.

So if rates don’t come down, were the Fed follows the market, which has always been the case: what ever the bond buyers want the bond buyers get. So it is conceivable that real estates and stock prices could fall sharply, given the amount of leverage out there and competition from safe assets. If that is the case, no rate cuts, investors would quickly become more cautious, and it is conceivable that they might transfer more money from bank deposits to higher yielding non-bank assets, money market funds.


So the problem is high rates for longer than expected pulling funds in internationally and the leading market is the USD index, but there is more. A repeat of 2008 is what everyone is planning for, it’s how they made their fortunes, and Black Wednesday in 1992 on the pound sterling.

Because of the big tax cut in 2018 the US Treasury would not be able to accommodate the huge bank bailouts like 2008. So, they are thinking goes that “investors would be most unlikely to fund new stock issues from weak banks. Many banks would fail and their stockholders would be wiped out.”

Even the biggest bear thinks the government of either party would step in and prohibit withdrawals from banks and prohibit investments into money funds, to stop the implosions. What they see wrongly is someone that is visionary as they are, and therefore would be proactive instead of reactive in the high places of the FRB and Treasury.

What they project is the Federal Reserve shocking the market with unexpected rate cuts to bail out the international economic environment which is causing the dollar to appreciate against other currencies. In their attempt to stave off a depression caused by Pac rim countries going into hyper inflation. Or if the BOJ is not bluffing and hikes rates again to stop of short selling of the yen. With the mountains of zero rate debt how would they manage the next 1/8 of a point?

Market Scenarios for May US Averages

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