$25 Billion and just like that the first shots were fired. The Fed and Treasury blinked pretty damn quickly if you ask us, considering just last week JPow was on The Hill bloviating about "higher for longer". So, all systems go and rocket launch time? Not so fast.
Here are a couple of recent and very relevant posts from this platform:
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Yes, about those CDS. See below to note that Credit Default Swaps for Credit Suisse just hit a new all time high:
Credit Suisse is MUCH bigger and impactful than SVB or First Republic or any regional or local bank. As a reminder folks, the CDS is a reflection of the cost to insure against a default of the underlying, so hitting new all time highs is a very bad signal.
Here's a graphic that shows deposit flows into and out of Credit Suisse. Notice how it's a Nothing Burger the vast majority of the time - like fractional reserve banking. However, it's all based on fidence. Look at those outflows as more people got nervous:
It's not just Credit Suisse folks (which obviously is going under). Here's a chart showing an explosion in CDS across banking in general:
So, what will the Fed do if anything beyond this $25 Billion facility? We suspect quite a bit more and fairly soon as the BTFP program allows FOREIGN BANKS to play and it allows banks to use their collateral at par!!!! It's going to get interesting.
Depositors can get CDs at 4% or so (for now, until the Fed hammers down the front end) so no surprise that some are opting to pull cash from checking accounts to grab more yield. Here's what the market thinks is going to happen (hint: rate hikes gone, cuts coming):
And just like that, all focus is now on HOW MUCH EASING is forthcoming. As we have stated very consistently, the Fed WANTS inflation. Yes, that is correct. The Fed wants inflation. Inflation allows the Fed to conduct YCC and then say "hey look we lowered the debt burden" as NOMINAL levels of GDP rise to make the Debt/GDP ratio "look better". All it needed was a new crisis which it now has. Look for an adjustment to target rate of inflation along with a "pause" in hikes followed by YCC/QE.
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