Lyn Alden: US Treasury To Trigger A Liquidity Crunch Once Debt Ceiling Is Raised

Overview of the Global Economy and Financial Markets

In this section, Lynn Alden discusses the current state of the global economy and financial markets. She talks about the liquidity challenges faced by the Federal Reserve, decelerating economic indicators, and storm clouds on the horizon.

Pivot Point in Liquidity

• The Federal Reserve has gone from aggressive tightening to running into a liquidity wall.

• They now have to balance financial stability with their attempts at fighting inflation.

• This pivot in liquidity is currently the big story in financial markets.

Stall Speed Area

• Economic indicators have decelerated without going negative.

• Some are mildly positive, roughly neutral, or even modeling negative.

• Other indicators are still pretty strong.

Multi-Month Window of Liquidity

• There is a multi-month window where liquidity looks okay between now and when they get to the debt ceiling.

• The treasury general account is still structurally drawing down its cash reserve as part of its extraordinary measures.

• When they actually do get to the debt ceiling and pass it, there will be a lot of new supply coming onto the market.

Interest Rate Sensitive Sectors

• Very interest rate sensitive sectors include real estate (residentially and commercially) and tech companies that rely heavily on issuing equity.

• Tech companies have sold their equity better than they sold their products by constantly selling new equity both to employees and investors.

Overview of the Fed and Interest Rate Sensitive Areas

In this section, the speaker discusses the current state of the economy, focusing on interest rate sensitive areas such as housing and autos. They also discuss the role of the Federal Reserve in propping up banks through loans while still raising rates.

The Role of the Fed

• The Fed is currently raising rates while pushing loans out to banks to prop up the system.

• There are concerns about interest rate sensitive areas such as housing and autos.

• Loans are helping with liquidity but not flooding into the economy like pure QE.

Treasury General Account (TGA)

• The TGA is pushing money out into the real economy.

• It is expected that the debt ceiling will be raised, which means that treasury will need to start refilling TGA by selling treasury bills and notes.

• This will stop pushing liquidity out that TGA has been doing.

Magnitude of Refilling TGA

• Hundreds of billions of dollars have been drawn down from TGA, so it's relevant enough to notice when that spigot gets turned off.

• When they want to refill it, their baseline number for where they want it is around half a trillion dollars.

Fiscal Accelerator

In this section, we learn about how fiscal policy can impact economic growth through government spending.

Government Spending Impact on Economic Growth

• Fiscal policy can impact economic growth through government spending.

• Government spending can lead to increased demand for goods and services which can lead to increased production and employment.

• Increased government spending can also lead to inflation if it outpaces the economy's ability to produce goods and services.

• The speaker notes that there is a lot of debate around the effectiveness of fiscal policy in stimulating economic growth.

Receding Liquidity and Tightening Credit Standards

In this section, the speakers discuss the impact of receding liquidity and incremental tightening of credit standards on the economy. They also talk about the Fed's recent rate hikes and how it will affect liquidity.

Concerns About Liquidity Contraction

• The speakers discuss how receding liquidity and incremental tightening of credit standards will be constrictive to the economy.

• Jerome Powell's statement that additional rate hikes are a substitute for these concerns is discussed.

• The lag effect of past rate hikes is mentioned as a concern that will hit the economy in the next couple of quarters.

• The speakers express their concern about a "Perfect Storm" scenario where all these factors coincide to be bad for liquidity and growth.

Eye of the Storm

In this section, the speakers discuss how they are currently in an "eye of the storm" where liquidity indicators look okay but express their concerns about what may happen later in Q3 or Q4.

Concerns About Future Liquidity

• The speakers mention that they are currently in an "eye of the storm" where liquidity indicators look okay.

• However, they express their concerns about what may happen later in Q3 or Q4 when many factors coincide to be bad for liquidity and growth.

Pivotal Decisions by Fed

In this section, the speakers discuss how human decisions will play a crucial role in navigating through this challenging environment. They also talk about quantitative tightening and its impact on liquidity.

Role of Human Decisions

• The speakers mention that how people navigate through this challenging environment will be crucial.

• They discuss how pivotal decisions by the Fed will play a crucial role in managing liquidity.

Quantitative Tightening and Liquidity

• The speakers talk about the repo rate spike of 2019 and how it was caused by quantitative tightening.

• They mention that they are currently in a similar environment where the Fed is still trying to be tight with its balance sheet but offsetting it by loans.

• The speakers express their belief that quantitative tightening is likely to stop later this year because there's not much else liquidity that can come from the system.

The Role of Banks in Transactions

In this section, the speaker discusses how banks provide arbitrage between slow-moving assets like gold and the fast-moving transactions that occur within a global ledger. They also rely on people wanting to keep their money in the banking system to benefit from its speed.

Banks' Role in Transactions

• Banks provide arbitrage between slow-moving assets like gold and fast-moving transactions.

• People want to keep their money in the banking system to benefit from its speed.

• Settlement speeds have increased with technology, making it easier for people to move their money around quickly.

• This has changed liquidity needs for banks, and low liquidity thresholds don't cut it anymore.

The Fed's Impact on Liquidity Needs

In this section, the speaker talks about how the Fed is pulling liquid out of the system at a time when technology requires more liquidity. He also discusses different levels of liquidity among fractional reserve banks.

The Fed's Impact on Liquidity Needs

• The Fed is ironically pulling liquid out of the system at a time when technology requires more liquidity.

• Different levels of liquidity exist among fractional reserve banks.

• As settlement speeds have increased, low liquidity thresholds don't cut it anymore.

Recent Banking Failures and Stress on the Banking System

In this section, the speaker discusses recent banking failures in both Europe and the US. He talks about how these failures were due to idiosyncratic reasons but that many banks are vulnerable due to low interest rates set by central banks.

Recent Banking Failures and Stress on the Banking System

• Recent banking failures were due to idiosyncratic reasons but many banks are vulnerable due to low interest rates set by central banks.

• Banks have adapted to a borrow short, lend long model optimized around low interest rates.

• The Fed raised interest rates faster than at any point in history, causing stress on the banking system.

• Tightening elements are placing greater stress on the banking system.

The Impact of Duration Transformation on Banks

In this section, the speaker discusses how banks that did the most long duration types of securities ran into problems during the financial crisis. He also talks about how loans are less liquid and transparent than securities, which makes it challenging for banks to deal with liquidity problems.

Banks' Challenges with Duration Transformation

• Banks that did the most long duration types of securities ran into problems during the financial crisis.

• Loans are less liquid and transparent than securities, making it challenging for banks to deal with liquidity problems.

• Small and medium-sized banks have a higher percentage of their assets in loans and fewer tools to deal with liquidity problems compared to larger banks like JPMorgan.

• Larger banks can hedge better by having a bunch of short-duration securities to offset some of their long-duration loans.

The Gap Between Deposit Rates and T-Bill Rates

In this section, the speaker talks about how historically when the FED raises rates, bank deposits don't increase much. However, if there is a prolonged gap between deposit rates and T-bill rates, more deposits will flow towards higher-yielding and safer options. This forces smaller banks to raise deposit rates in a way that large banks like JP Morgan don't have to.

The Gap Between Deposit Rates and T-Bill Rates

• Historically when the FED raises rates, bank deposits don't increase much.

• If there is a prolonged gap between deposit rates and T-bill rates, more deposits will flow towards higher-yielding and safer options.

• Smaller banks will have to raise deposit rates to avoid deposit flight, while larger banks like JP Morgan don't have to.

• Smaller banks that lent at low durations and low rates will start to have pressures on their profitability, making them more likely targets of M&A activity.

The Future of Banking

In this section, the speaker talks about how after the current round of banking dyspepsia, there will likely be fewer banks. He also mentions that the too-big-to-fail banks will probably become even bigger.

The Future of Banking

• After the current round of banking dyspepsia, there will likely be fewer banks.

• The too-big-to-fail banks will probably become even bigger.

• Smaller banks are more vulnerable than larger ones due to their exposure to commercial real estate and potentially higher defaults in a challenging second half of the year.

Concerns about Commercial Real Estate and Autos

In this section, the speaker discusses concerns about commercial real estate and autos in the current economic environment.

Credit Contagion

• The speaker is less concerned about overall credit contagion but is still worried about pockets of bad credit.

• Banks that are very exposed to auto lending and commercial real estate are at risk.

• Different types of commercial real estate have different levels of risk. For example, office spaces and certain other types of real estate are suffering while some travel spaces, warehouse spaces, and restaurant bases are doing well.

Problems with Debt

• High valuations when financing with low interest rate debt can cause problems as more debt matures and comes due.

• Small and medium banks face higher exposure to commercial real estate which can lead to defaults.

Impact on Economy

• Concerns about commercial real estate slow things down and cause problems while other parts of the economy remain unaffected or even benefit from it.

• Liquidity and rates tightening due to problems in those sectors allow other sectors that are not harmed by some of those problems to keep carrying on.

Deposit Flight

In this section, the speaker talks about deposit flight in banks due to safe assets providing a better return than savings accounts.

Blame Game

• The Central Bank policy is blamed for deposit flight.

• Banks are also blamed for being too greedy in not raising their deposit rates despite getting a better return on their interest on excess reserves at the FED.

Profit Maximization

• As a general rule, corporations are greedy and always try to maximize their profits.

• Smaller banks face disadvantages compared to larger banks like JPMorgan who can hold rates at zero because no deposits want to flow out of them. Banks only raise deposit rates when they have to.

Bank Greed and Market Forces

The speaker discusses the theme of bank greed and how it is a market-driven phenomenon. They also mention that smaller banks, such as local credit unions, tend to serve their communities well without excessive compensation.

Banks and Greed

• Bank greed has always been a theme.

• Smaller banks, such as local credit unions, tend to serve their communities well without excessive compensation.

Market Forces

• The market settles where it goes, and if it starts to drain out, then banks have to raise rates to keep it in.

Reaction of Central Banking Authorities

The speaker discusses the reaction of central banking authorities (the Fed, Treasury, FDIC) to bank failures and general concerns of the populace. They note that the response shows what happens when no one is really in charge but everyone is a little bit in charge.

Federal Reserve Response

• The Federal Reserve's response so far has been nothing unusual; they provide liquidity facilities at punitive rates.

• If any bank uses the new fed liquidity facility, they are having a bad time.

FDIC Response

• The FDIC's response was more of a group decision that shows how arbitrary it is.

• There is flip-flopping on what deposits are insured or not.

• Changing rules on the fly encourages more bank runs.

• Big banks already have advantages over small banks; free extra insurance favors big banks even more.

• Deposits look safer than they really are.

The Fed's Target Inflation Rate

In this section, the speaker discusses the Fed's target inflation rate and the possibility of more things breaking.

The Fed's Target Inflation Rate

• The speaker mentions that the Fed's target inflation rate is two percent.

• However, the current inflation rate is higher than what the Fed wants it to be.

• The speaker suggests that we should expect more things to break in the future.

Odds of a Rate Hike

In this section, the speaker talks about the odds of a rate hike and whether we are entering a pause phase.

Odds of a Rate Hike

• The CME tool predicts an 86% chance of no hike for the May 3 meeting.

• Many people are wondering if we are now entering a pause phase.

What Can/Will The Fed Do?

In this section, the speaker discusses what he thinks The Fed can/will do at this point in time.

What Can/Will The Fed Do?

• The speaker believes that The Fed is currently at a pause phase.

• He thinks that they may try to push further with another 25 basis point hike around the margins.

• However, he agrees with market pricing that they will have trouble with anything other than a pause or gradual moves.

Dealing With Fiscal Driven Inflation

In this section, the speaker talks about how central banks deal with fiscal-driven inflation.

Dealing With Fiscal Driven Inflation

• The speaker mentions that the most effective way to deal with fiscal-driven inflation is to reduce fiscal deficits.

• He explains that raising rates doesn't necessarily address it because the government won't spend less just because rates are high.

• The industry channel is not a very effective way to deal with fiscal-driven inflation.

The Fed's Limited Tools to Address Inflation

In this section, the speakers discuss the limitations of the Fed's tools to address inflation and how they dealt with it in the past.

The Fed's Limited Tools

• The Fed has limited tools to address inflation directly unless they want to cause an outright recession.

• If rates are kept too low during inflation, it can encourage excessive bank lending.

• A mix of keeping interest rates low or moderate and doing capital or lending controls is generally used.

Dealing with Inflation in the Past

• In the 1940s, rates were kept low despite high inflation. However, this can encourage excessive bank lending.

• Doing capital or lending controls is a big problem in its own right.

Macro Outlook for Rest of Year and Market Outlook

This section covers macro outlook for rest of year and market outlook.

Macro Outlook

• Worst supply side shocks are behind us but there will be a more grindier type of problem now rather than an impulsive one.

Market Outlook

• Expect tighter Bank London going forward.

Thoughts on Crypto Resurgence

This section discusses thoughts on crypto resurgence.

Crypto Resurgence

• Discussion about crypto may happen later as it could be too big of a story to cover now.

The Fed's Dilemma

In this section, the speaker discusses the Federal Reserve's dilemma of having to choose between fighting inflation and preventing a recession.

The Fed's Dilemma

• The Fed is faced with a dilemma of having to give up on inflation if they want to prevent a recession.

• They will only choose to fight inflation if it means saving the system from melting down.

• People want disinflationary growth, which means more jobs and production without inflation.

• If the Fed causes a recession, they may have to turn to more stimulus or less tight monetary conditions when accelerating out of that recession. However, underlying inflation dynamics are still present and ready to come back as soon as we accelerate out of that recession.

• Prolonged enough recessions with high debt can lead to system meltdown problems.

High Inflation and High Debt

In this section, the speaker talks about how high inflation and high debt can lead to periods where the central bank is unable to tighten even though inflation is above their target.

High Inflation and High Debt

• High inflation and high debt are punctuated by periods where the central bank is unable to tighten even though inflation is above their target.

• Tax revenue starts falling off a cliff while deficits are already at a trillion and a half during prolonged recessions with high debt. This leads to problems in commercial real estate cascading through, resulting in weird situations like those seen in 1940-style combinations of high inflation and high debt.

• The guilt market last year was an example of the central bank being unable to tighten even though inflation was above their target.

• The Fed has had to decelerate some of its tightening efforts because certain powers are out of their hands. They may have to respond to broken treasury markets, and they can say that these are the frameworks they're working with and that they're stuck here.

The Future of the Fed

In this section, the speaker talks about what we should expect from the Federal Reserve in terms of recession and monetary policy.

The Future of the Fed

• A recession is probable as long as the Fed doesn't step in with a systemic rescue.

• We should expect the Fed to continue having its foot on the brakes for the rest of the year but periodically stomping on the gas at episodic times when dealing with something that might be breaking and it's trying to fix it like a spot fix.

The Current State of the Economy

In this section, the speaker discusses the current state of the economy and how it is being managed.

The Stall Speed

• The dollar is coming off its high liquidity, but it's still operating at stall speed.

• The Federal Reserve wants to keep things afloat for longer than expected without outright breaking anything.

• They want to be tight and see low unemployment rates and high headline inflation meet.

Impact on Regular People

• It's unclear how regular people will be impacted by the recession.

• There may be an increase in layoffs and a decline in the housing market.

• However, it depends on how those in charge deal with the situation.

Bifurcated Market

• This recession is more sector-specific, with tech and real estate being hit hard.

• Other areas like restaurants or travel companies may not experience a cataclysmic recession anytime soon.

• There could be two different worlds for a period of time where some people are heavily impacted while others don't feel much change.

Introduction

The video is part one of an interview with Lynn Alden. The speaker encourages viewers to subscribe to the channel and turn on notifications by clicking on the bell icon. They also mention that replay videos of a recent online conference are available for purchase at wealthyon.com.

Bell Icon Notification

The speaker explains that some viewers have reported not receiving alerts when new videos are released on the channel. They encourage viewers to turn on notifications by clicking on the bell icon and hitting the like button.

Portfolio Review

The speaker suggests scheduling a free portfolio review with a financial advisor who can help manage your wealth based on trends, risks, and opportunities mentioned in the interview with Lynn Alden.

Conclusion

The speaker concludes by announcing that part two of the interview will be released soon and says goodbye.