2023 Year in Review
Doug Nolan
I’ll be frank.
This “Year in Review” piece just lacks the pizzazz of other publications.
For example, the New York Times’ “A Look Back at the Top Business Stories of 2023” ran with a provocative photo shot of a rather venerated pop star - “Taylor Swift Conquers the World”.
Their list also included “‘Barbenheimer’ Dominates the Box Office,” “Elon Musk Berates Advertisers Who Fled X,” and “Sam Bankman-Fried Is Convicted” – all newsworthy developments this recap won’t be examining.
Rather than the humdrum Taylor Swift craze, my review is focused on the riveting “Year of Treasury Debt, Money Market Fund Intermediation, Repos and the ‘Basis Trade’.”
Instead of boring “Barbenheimer”, I’m coming with mesmerizing asset inflation and Bubble analysis.
And if my advertisers don’t like it, they know what they can do with it.
They know what they can do.
TKWTCD.
The BBC’s “Ten Major Events that Shaped Business in 2023” was more chronological, with “November: WeWork Files for Bankruptcy Protection,” and “December: Purdue Pharma Settlement Reaches the US Supreme Court.”
Just seems the spectacular year-end market melt-up should have made the cut.
Bloomberg:
“AI Craze Driving Nasdaq 100’s Best Run Since 1999.”
“Nvidia and AMD Power Chipmakers to Best Year since 2009.”
“S&P 500 Bulls Drive Longest Weekly Win Since 2004.”
“Emerging-Market Rebound Yields Best Annual FX Rally since 2017.”
Equilibrium: “A state of rest or balance due to the equal action of opposing forces.”
The notion of equilibrium has captivated economic thinkers for 250 years, with the general meaning of the term evolving - and often modified - over time.
For our purposes, the Investopedia definition suffices: “Economic equilibrium is a condition or state in which economic forces are balanced.
In effect, economic variables remain unchanged from their equilibrium values in the absence of external influences.
Economic equilibrium is also referred to as market equilibrium.”
I certainly won’t be equating market equilibrium to economic equilibrium.
In pioneering economic analysis, profits were viewed as a key stabilizing force working to balance supply and demand throughout the economic system.
In the bond market, the supply of savings interacted with the demand for investment borrowings to determine market interest rates.
And market rates were fundamental to balancing the supply and demand for financial assets more generally.
But by their nature, markets are prone to speculative excess and boom and bust dynamics.
The concept of equilibrium is antithetical to market function – never more so than these days.
Artificially low interest rates, underlying monetary excess, and government intervention exert profound impacts on speculative cycles, rendering notions of stability and equilibrium inapplicable.
Getting to the heart of 2023 analysis, there’s absolutely no force of equilibrium associated with Bubbles.
They either inflate or deflate.
Moreover, the more entrenched Bubble excess becomes, the greater their immunity to policy tightening.
The Federal Reserve raised rates this year to the highest level since 2001.
Speculative markets scoffed.
When I began working for a hedge fund in 1990, there was an office joke about those uninformed people believing they could make money in the stock market by simply buying a mutual fund: “Yeah, just buy a Dreyfus.”
Today, tens of millions accept that simply buying mutual fund or ETF shares is guaranteed to make money.
A record 58% of American household own stocks today, up from the low thirties back in 1990.
Tens of millions trade stocks and funds online.
Millions have fallen prey to the seduction of options trading.
“Our actions have moved our policy rate well into restrictive territory, meaning that tight policy is putting downward pressure on economic activity and inflation, and the full effects of our tightening likely have not yet been felt.”
- Fed Chair Powell, December 13, 2023
The effective Fed policy rate was increased 100 bps in 2023 to 5.33%, with the final increase at the July meeting.
“Tightening” was paused despite growth accelerating to a 5% pace during Q3.
There is powerful evidence that argues against the assertion that policy was “well into restrictive territory… putting downward pressure on economic activity and inflation.”
Evidence of loose conditions includes extraordinary asset inflation.
Surging 14.3% during Q4, the Nasdaq100 returned (price and dividends) 55.1% for the year – the strongest performance since “terminal phase” Bubble year 1999.
The Semiconductors (SOX) returned 67.0%.
The S&P500 returned 11.7% during Q4 and 26.3% for the year.
The dovish Fed pivot stoked a powerful year-end rally, led by the broader market.
The small cap Russell 2000’s 14.0% Q4 return boosted 2023 returns to 16.9%.
The “average” stock Value Line Arithmetic Index returned 11.9% for the quarter and 17.5% for the year.
The Q4 rally was propelled by yet another powerful short squeeze – a market dynamic that held sway over markets throughout the year.
The Goldman Sachs short index (GSSI) surged 15.9% during Q4, 2023’s the third major squeeze rally.
From January 3rd lows to trading highs on February 2nd, the GSSI surged 36%.
Following a pullback, another squeeze saw the index jump 29% between June 6th lows and July 31st highs.
After reversing 36% lower, the GSSI then surged 44% off October 30th lows in a backbreaker squeeze to finish the year.
Jim Chanos, the surviving dean of short selling, whose career dates back to the 1980s, announced the closing of his hedge funds in November.
It was the year of the Everything Squeeze.
Active shorting and hedging also provided fuel for sharp bond market rallies.
After beginning the year at 3.88%, 10-year Treasury yields had dropped to 3.37% by January 18th.
Having jumped to 4.06% by early (pre-banking crisis) March, 10-year yields were back down to 3.31% a month later.
Yields then zigged and zagged higher, peaking at 4.99% on October 19th.
A major squeeze helped push yields 113 bps lower to 3.80% on December 27th – before ending the year at 3.88%.
The MBS marketplace, a bastion of hedging and derivatives strategies, was even wilder.
After beginning the year at 5.37%, benchmark Fannie Mae MBS yields were down to 4.66% on February 2nd, jumped to 5.73% by March 2nd, down to 4.85% on April 5th, up to 5.80% on May 26th, down to 5.43% and then up to 5.96% on July 6th, down to 5.43% on July 13th, up to 6.23% on August 22nd, down to 5.86%, then up to 6.66% on October 3rd, down to 6.38% then up to a 6.81% peak on October 19th.
Yields then collapsed into year-end, sinking 165 bps to 5.16% on December 27th – before ending 2023 at 5.27%.
Years of artificially depressed interest rates came home to roost early in the year.
A combination of reckless growth, dismal lending standards, and huge bond portfolios suddenly had the market’s attention.
Silicon Valley Bank succumbed to a spectacular bank run, a contemporary variety with origins in social media and unleashed by computer keystrokes.
Regulators took control of the bank on March 10th, with the stock trading at $271 on March 8th – down from a squeeze-induced 40% rally and $333 stock price on February 2nd.
Signature Bank and First Republic also succumbed, as a powerful bank-run dynamic imperiled the banking system.
From February highs to May lows, the KBW Regional Bank Index sank 37%.
The banking crisis policy response was arguably the year’s most consequential market development.
The Fed and FHLB combined to inject $700 billion of liquidity into the banking system.
This liquidity ameliorated bank runs while spilling into increasingly speculative financial markets.
Moreover, Washington essentially guaranteed all U.S. banking deposits in the process, while the Fed added to its menu of lending facilities (Bank Term Funding Program (BTFP)) that allayed market trepidation that runs would force the liquidation of bank bond portfolios (with huge unrecognized losses).
One cannot overstate the impact these extraordinary measures had on speculation and the global government finance Bubble, more generally.
No longer would the market fear that Federal Reserve “tightening” might weaken the Fed’s market liquidity backstop (“Fed put”).
Markets could stop fretting that necessary liquidity support might arrive too late and in inadequate scope.
Indeed, the specter of bank runs and domino bank failures had Washington moving early and aggressively to thwart potential de-risking/deleveraging.
In the end, three of the four largest bank failures in U.S. history only emboldened leveraged speculation and speculative excess more generally.
We witnessed in 2023 the unprecedented brute power of the global government finance Bubble, with forces that leave all previous Bubbles in the dust.
We saw confirmation of the incredible might of money-like instruments empowered by insatiable demand characteristics.
We witnessed the dynamics of a Bubble at the core of money and Credit, and how today’s Bubble Dynamics are distinct from previous more peripheral Bubbles (i.e., mortgage finance and corporate Credit).
From the Fed’s Q3 Z.1 report, Treasury Securities posted one-year growth of $2.180 TN to a record $28.649 TN.
Treasurys surged $4.399 TN over two years and an incredible $10.835 TN, or 60.8%, during the past 17 quarters (beginning Q3 2019).
Meanwhile, GSE Securities posted one-year growth of $460 billion to $11.902 TN, with two-year growth of $1.366 TN and 17-quarter ballooning of $2.638 TN (29%).
Treasury and GSE “government finance” combined for growth of $2.640 TN over the past year, dominating system Credit growth and ensuring sufficient Bubble-sustaining system Credit expansion.
Through 2023’s first three quarters, on an annualized basis, Non-Financial Debt expanded $3.624 TN, easily surpassing 2007’s ($2.529 TN) pre-pandemic annual record.
Importantly, the ongoing massive inflation of Washington “government finance” continues to underpin household incomes and savings, along with corporate earnings and cash flows.
Q4’s 12% stock price inflation pushed Household equities holdings to all-time highs, with record Household Net Worth approaching $160 TN (vs. pre-pandemic $117bn and pre-crisis 2007’s then record $71bn). In the face of Fed “tightening,” Household Real Estate holdings inflated almost $2 TN over the past year to a record $50.064 TN.
December 26 – Bloomberg (Christine Maurus):
“Home prices in the US rose for a ninth straight month, reaching a fresh record as buyers battled for a stubbornly tight supply of listings.
A national gauge of prices rose 0.6% in October from September, according to… S&P CoreLogic Case-Shiller.
A seasonally adjusted measure of prices in 20 of the largest cities also rose 0.6%.
‘US home prices accelerated at their fastest annual rate of the year in October,’ Brian Luke, head of commodities, real and digital assets at S&P Dow Jones Indices, said... ‘We are experiencing broad-based home-price appreciation across the country, with steady gains seen in 19 of 20 cities.’”
We witnessed in 2023 ongoing effects of hyper-inflationary pandemic-period policy measures.
Despite the highest mortgage rates in two decades, home price inflation was underpinned by strong income gains and a lack of inventory.
And spending and fund flows were certainly supported by the unprecedented $6.025 TN, 39.4%, 16-quarter gain in Household holdings of “money” – deposits, money market funds, Treasurys and Agency Securities – to a record $21.304 TN (doubling over the past decade).
The U.S. labor market, pushed to unprecedented tightness by inflationary policymaking, proved resilient.
After ending 2022 at 3.5%, the Unemployment Rate had only inched up to 3.7% by November.
Job openings (JOLTS) dropped about 3.3 million to a still highly elevated 8.73 million.
And despite all the chatter of impending recession, weekly unemployment claims into year-end remained at historically low levels.
With the United Auto Workers and other labor unions enjoying hugely successful wage negotiations, “The Year of the Strike,” “The Year Labor Took the Lead” and “Why 2023 Was Such a Good Year for Labor” were apt year-end headlines.
Even during the Q4 rally, markets and the Fed weren’t going to allow extraordinary asset inflation and robust labor conditions to deter the seductive “immaculate disinflation” narrative.
CPI (y-o-y), after ending 2022 at 6.5%, was down to 3.0% by June and was reported in November at 3.1%.
Sinking energy prices helped.
“Core” CPI was stickier, declining from December ‘22’s 5.7% to November’s 4.0%.
Ongoing home price inflation underpinned sticky housing cost inflation, while wage inflation helped explain sticky services cost pressures.
Inflation is always and everywhere a monetary phenomenon, a consequence of excessive money and Credit growth.
This year presented myriad analytical challenges.
Especially after the March crisis, the Fed and analysts focused on tighter standards and a major drop-off in bank lending.
And while Bank Loan growth slackened from 2022’s off-the- charts $1.421 TN, lending will likely end 2023 in the ballpark of the pre-pandemic 2019 level ($460bn).
Some analysts also fixated on the contraction in the M2 monetary aggregate, largely explained by the drop in bank deposits.
Meanwhile, historic monetary inflation ran wild throughout the money market fund complex.
Money Market Fund (MMF) Assets expanded $1.174 TN this year, or 24.9%, to a record $5.886 TN.
This inflation crushed the annual record of $729 billion set in tumultuous 2007.
Moreover, 2023 was an acceleration of already historic ballooning that started pre-pandemic.
Over the past 15 quarters (12/31/19 to 9/30/23), money fund assets surged $2.141 TN, or 44.9%.
It’s worth noting that the Fed Z.1 category “Government Money Market Funds” rose $1.979 TN, or 52.7%, over 15 quarters, to a record $4.761 TN.
Over-simplified analysis might conclude that extraordinary growth represents a shift in preference away from uncompetitive bank deposits to higher-yielding money market fund shares.
And while bank disintermediation has been a factor in recent quarters, total bank deposits are still $4.611 TN, or 30%, higher over 15 quarters.
I would instead argue that the money fund complex has become the epicenter of government finance Bubble intermediation and liquidity creation.
These days, the money funds are the pivotal “Wall Street alchemists”, transforming Treasury debt into perceived safe and liquid money-like instruments (MMF shares).
And while so-called “government” money funds hold Treasury bills, floating-rate Treasury securities and short-term Agency debt, through their “repo” lending operations they have become major intermediators of longer-term Treasury and Agency bonds.
Last week, I wrote, “It’s the ultimate ‘Fed put,’ ‘too big to fail’ and ‘Fed secures Treasury and ‘repo’ liquidity’ all neatly wrapped up in a historic Trillion dollar ‘basis trade’ levered speculation.”
Estimates have the so-called “basis trade” – where hedge funds lever Treasury cash bonds (commonly 50 to 1) while shorting Treasury futures – inflating rapidly this year to an unprecedented $1 TN.
Amazingly, the MMF complex has become the predominant financier to one of history’s greatest leveraged speculations – a speculative Bubble now at the heart of ongoing government finance Bubble “terminal phase” excess.
Even more amazing is the lax regulatory environment for such a critical – with well-recognized vulnerability – financial system focal point.
And this follows an inexcusable breakdown in banking system regulatory oversight, when unprecedented monetary stimulus should have had the Fed and regulator community laser focused.
One word we didn’t hear much from the Fed in 2023: “macro-prudential”.
This year’s $1 TN contraction in Federal Reserve “reverse repo” liabilities (where MMFs park excess liquidity) complicates the analysis.
But with MMF “repo” assets little changed through three quarters at $2.95 TN, we can assume a sharp increase in non-Fed “repo” lending.
And over the past 15 quarters, money fund holdings of “security repurchase agreements” (“repo”) ballooned $1.706 TN, or 160%.
As a percentage of fund assets, “repos” jumped from 31% to 48% over 15 quarters – to surpass holdings of debt securities (47%).
We can make industry inferences from the examination of the JPMorgan U.S. Government Money Market Fund.
After beginning the year at $205 billion, assets expanded rapidly following the March bank runs.
Assets had inflated to $280 billion by May.
Fund assets dropped back to $246 billion by mid-October, before a big November led to year-end assets of $270 billion (‘23 growth of $65 billion, or 32%).
From end of November holdings data, we can see that “repos” held at the New York Fed accounted for 16.7% of (net) fund assets.
Goldman Sachs “repos” totaled almost 11%, with 5.3% from the Fixed Income Clearing Corporation.
Another 21 financial institutions – including Citigroup and Bank of America, with several insurance companies and more than half foreign-based banks – accounted for “repos” of an additional 30% of fund assets.
Overall, “repos” accounted for about 63% of fund assets.
I believe speculative leverage became only more integral to the government finance Bubble in 2023, with MMF financing of Treasury and Agency Securities “repo” holdings (including the hedge fund “basis trade”) providing the powerful marginal source of marketplace liquidity.
This helps explain how markets displayed unmistakable effects of liquidity abundance in the face of an $804 billion contraction of the Fed’s balance sheet (QT) and weakened bank lending.
Yet it’s important to appreciate that liquidity abundance, asset inflation, and speculative Bubbles were global phenomena.
Japan’s Nikkei 225 Index ended the year up 28.2%, Germany’s DAX 20.3%, Italy’s MIB 28.0%, France’s CAC 40 16.5%, and Spain’s IBEX 22.8%.
Major equities indices were up 59.5% in Greece, 29.3% in Ireland, 18.6% in the Netherlands, 24.7% in Denmark, 18.5% in Sweden, and 12.8% in Norway.
In Asia, major indices were up 29.8% in Taiwan, 18.7% in South Korea, 18.7% in India, and 12.2% in Vietnam.
Emerging equities generally posted strong gains.
Major indices were up 22.2% in Brazil, 18.4% in Mexico, and 17.8% in Chile.
In Eastern Europe, stocks in Poland jumped 36.5%, Russia 43.9%, Turkey 35.6%, Hungary 38.4%, Czech Republic 17.7%, Romania 31.8%, and Slovenia 19.8%.
I suspect similar dynamics were afoot throughout global markets: further expansion of speculative leverage providing key sources of liquidity.
I often ponder the size of yen-based “carry trades” – borrow for free in a depreciating yen to finance speculative holdings of higher-yielding securities everywhere.
Despite its 5.9% Q4 rally, the yen was still down 7.0% for the year versus the dollar.
Many yen “carry trades” benefited from big currency appreciation.
Versus the yen, the Colombian peso appreciated 35.4% this year, the Mexican peso 23.6%, Polish zloty 19.6%, Brazilian real 16.9%, Hungarian forint 15.7%, and the British pound 13.3%.
The Euro gained 10.9% against the yen.
I wouldn’t be surprised to learn that “carry trade” (yen and other currencies) leverage has inflated into the Trillions, liquidity that continues to fuel historic asset inflation and speculative Bubbles.
Japanese institutional and retail “investment” flows have also been enormous, with Japanese buying critical in markets from peripheral European bonds, EM debt markets, and U.S. corporate bonds and CDOs.
I can only assume that Japanese-sourced finance has been embedded in derivatives leverage around the globe.
The Bank of Japan’s (BOJ) balance sheet inflated another 6.5% this year to $5.2 TN (up almost a third since the end of 2019).
The BOJ timidly clung to negative rates and yield curve control (YCC), solidifying the yen as the go-to source of speculative finance in a world of rising policy rates and market yields.
The ongoing BOJ inflationary policy train-wreck was a key 2023 Bubble development.
There’s a strong case to make that China’s deflating apartment Bubble actually supported global Bubble Dynamics.
A New York Times article estimated Chinese 2023 outflows at $50 billion a month.
Especially with most global central banks raising rates, cheap renminbi borrowings became an only more enticing source for financing leveraged speculation.
China’s deflating apartment Bubble took a turn for the worse in 2023.
Scores of developer defaults sparked worries for local government debt, along with China’s $3 TN “trust” industry.
Bloomberg estimates developer debt is over $12 TN, with another $12 of local government borrowings.
There are all the makings for an acutely destabilizing crisis of confidence.
Despite the long list of less than effective stimulus measures, confidence remains that Beijing can hold major crises at bay.
Ominously, China apartment Bubble deflation and general economic stagnation unfolded in 2023 despite ongoing massive Credit growth.
A solid December will see 2023 growth in Aggregate Financing slightly ahead of 2020’s record $4.9 TN, another year of compounding 10% growth.
Chinese bank assets inflated another $4.25 TN during the first nine months of the year to surpass $57 TN, posting 11% annualized growth.
Under pressure through much of the year, Q4 dollar weakness reduced the renminbi’s 2023 loss to 2.84%.
Beijing's superpower ambitions and, more specifically, its heated rivalry with the U.S. are viewed as ensuring that all mechanisms will be employed to sustain Chinese growth necessary to attain geopolitical objectives.
People’s Bank of China (PBOC) assets rose 6% in 2023 to $6.175 TN, with late-year liquidity injections surely contributing to global market liquidity and speculative excess.
Moreover, Chinese Bubble deflation likely placed some downward price pressures on key commodities and manufactured goods, playing a constructive role in this year’s weakened global inflation dynamics.
I’ll offer only brief comments on the deteriorating geopolitical backdrop.
With China’s economy failing to respond satisfactorily to stimulus - while global companies moved swiftly to de-risk from Chinese investments - Beijing hit the panic button.
I believe this explains China’s pivot to a somewhat less combative approach, including Xi Jinping’s November trip to San Francisco.
But beyond Beijing’s superficiality, the world became only more fractured in 2023.
The Russia/Ukraine war turned only more horrendous, as U.S. public support for further Ukraine aid increasingly split on party lines.
Meanwhile, the present-day “axis of evil” coalesced around Russian and Chinese anti-U.S. ambitions.
Top officials logged many a mile flying between Beijing, Moscow, Tehran, and Pyongyang.
Putin and Xi further developed their partnership without limits.
Putin and Kim Jong Un bonded as partners without morality.
If the geopolitical trajectory was not already frightful, the heinous October 7th terrorism attack against Israel has unleashed malicious forces that will be difficult to contain.
The world has become only more irreparably fractured.
While it hasn’t yet become a full-fledged regional crisis, further escalation appears inevitable.
The Houthis have become active combatants, Hezbollah has steadily escalated hostile actions, and the Iranians (and their other proxies) appear in preparation for ongoing hostilities (including accelerated uranium enrichment).
Meanwhile, Russia and China seek to take full advantage of rising anti-U.S. sentiment.
I’m not so convinced that global Bubble inflation and geopolitical deterioration are coincidental.
To be sure, 2023 was a year of acute Monetary Disorder.
From my analytical perspective, it was a fateful year of globalized “terminal phase Bubble excess.”
Here at home, our system was in desperate need of tighter conditions, slower Credit growth, and some speculative Bubble deflation.
The bond market needed to begin disciplining spendthrift Washington.
Powell and Fed comments notwithstanding, conditions instead loosened.
Washington continued to borrow and spend recklessly, while Bubbles succumbed to speculative “melt-up” dynamics.
It was the worst-case scenario clothed in brilliant bull (market) attire.
A few Bubble manifestations deserve special mention.
The AI mania could not have been more Bubble perfect.
Rather than tighter conditions and de-risking/deleveraging dynamics spurring a system cleansing of scores of uneconomic enterprises in the broader tech universe, the A.I. mania unleashed speculative dynamics and associated loose conditions that only exacerbated historic industry excesses.
The only thing more popular than Taylor Swift concert tickets were company conference calls with CEOs trumpeting plans for incorporating AI throughout their companies.
It was the type of spending black hole that really stirs Wall Street imaginations – and speculative impulses.
What’s more, the Bubble in the likes of Nvidia (up 239%), Meta Platforms (194%), Microsoft (57%), Amazon (80%), Tesla (102%) and Alphabet/Google (58%) fueled melt-up dynamics in stocks and indices that are popular options trading and derivative targets.
Nvidia ended the year with a market capitalization of $1.22 TN, or 27 times revenues.
The Nasdaq100 Index's market value inflated $7.5 TN, or 58%, to $19.75 TN – with much of the gain from “magnificent seven” stocks.
How much market liquidity was created from related speculative leverage, especially from hedging in-the-money call options (buying underlying stocks to hedge against options written).
Bloomberg: “Musk Leads World’s Richest to $1.5 Trillion Wealth Gain in 2023.”
On the subject of writing options, 2023 saw the proliferation of ETFs and other strategies that capture premium income by writing option contracts.
The year experienced a further surge in options trading.
0DTE – “zero-days to expiration” – options continued to take the world by storm.
The crypto Bubble came back to life with a vengeance, with Wall Street gearing up for crypto options trading and a plethora of new vehicles for speculation.
Bloomberg: “Crypto Options Trading Volume Hits Record as ETF Deadline Nears.”
In the lending realm, the Bubble in private-Credit continued its formidable inflation to the point of providing a meaningful offset to tighter bank lending.
The absence of marketplace de-risking/deleveraging in 2023 offered an extended lease on life for “decentralized finance” (De-Fi) and “shadow” lending more generally.
What could have – should have – been a tightening of precariously loose consumer finance never came to fruition.
The “buy now, pay later” craze became only more deeply embedded in consumer spending habits.
The average car payment hit a record $736 during Q3 (Edmunds).
The year ended with financial conditions the loosest since pre-Fed rate increases.
After beginning the year at 130 bps, investment-grade spreads to Treasuries closed Friday at 99 bps – the low since January ‘22.
High yield spreads collapsed from 469 bps to 323 bps, trading this week at the lows since March ‘22.
Investment-grade CDS dropped from 82 bps to 57 bps – the low since January ‘22, with high yield CDS sinking from 484 bps to 356 bps – the low back to early-February ‘22.
After beginning the year at 80 bps, JPMorgan CDS closed out 2023 at 44 bps – the low back to November ‘21.
Indicative of the global nature of loose conditions, European Bank (subordinated) CDS dropped from 175 bps to 123 bps – the low since January ‘22.
Emerging Market CDS sank from 239 bps to 167 bps – the low back to September ‘21.
It's a challenge to comprehend why the Fed would abruptly pivot dovish with markets in the throes of historic speculative excess.
Was the FOMC afflicted with “basis trade” worries, with year-end money market funding pressures on the horizon?
And how significantly did the “Powell pivot” embolden the $1 TN “basis trade” (lever long Treasuries vs. short Treasury futures) and other leveraged speculation?
December 29 – Bloomberg (Elizabeth Stanton):
“Speculators increased their net short position in 10-year Treasury note futures by an amount equal to $7.7m per basis point change in yield, according to CFTC data released Friday for the week up to Dec. 26…
Their net short position increased by 117,412 to nearly 805,000 contracts, approaching the biggest on record over the past decade.”
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