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Friday September 30, 2022 - Issue # 24
Break. Yeah, the world is like Humpty Dumpty after 15 shots of tequila. Before this week the narrative was that the Fed was going to keep piling on until something breaks, and this week Humpty stumbled hard.
Things are looking so shaky that legendary hedge fund manager/one of the greatest minds in macro investing, Stan Druckenmiller made his first public appearance since last year. The reason for him stepping onto the stage at the CNBC Delivering Alpha conference this Wednesday was because he couldn’t sit back any longer without sharing his cautionary view of where he believes things are heading and what he believes policy makers got brutally wrong that got us into the position we’re in. As folks in the investment world know, when Druck speaks, you listen.
"I brought some cyanide if you'd like one."
Yikes. Here’s the full transcript…let’s just say, it doesn’t make me feel great about the timing on buying my first house earlier this year lolol…
This week, the Bank of England announced that it will carry out temporary purchases of long-dated UK government bonds starting September 28th. The BoE had to intervene in bond markets to try to “restore orderly market conditions” and stave off a “material risk to UK financial stability.” First the Bank of Japan (BoJ) and now the BoE…yield curve control is an attractive tool in a central bankers repertoire and I for one, wouldn’t be surprised to see the US Fed follow the same playbook at some point in the near future.
What got the BoE to pivot to QE amidst massive inflation and in a rising interest rate environment? I’m going to try and break this down as I understand it…The UK pension fund industry is one of the largest in the world sitting at ~$4 trillion in assets. The role of pension funds is to pay out retirement cash flows in the far future (~30 years+). So, in a rapidly rising interest rate environment, the funds are exposed to interest rate risk which needs to be hedged, at least to a certain extent. On top of dealing with hedging out their interest rate risks, pension funds also have to generate returns. UK pension funds bet on lower interest rates 30 years out and have been investing in riskier assets to try to make sure they actually have enough cash at the end of the day to meet their long term obligations (stay ahead of inflation). Essentially, these riskier assets weren’t good enough to be used as collateral for their hedging efforts and when rates exploded higher the pension funds were called on to post margin. The BoE was forced to step in to save what looked like a very possible doomsday situation in the domestic pension fund industry.
Mind the caption in the tweet below; I posted it because it’s the only tweet I was able to find that included a video clip of the “breaking news” around the BoE’s actions seen on British news.
How it started:
If you recall, 13 years ago these words were stamped in the Genesis block of the Bitcoin blockchain: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."
How it’s going:
"The Times 29/Sep/2022 Bank of England unleashes £65bn bid to avert crisis in debt markets."
Clearly things are out of control on many fronts and it’s getting easier and easier to get sucked into the echo chamber of doom and gloom and I suspect I’m not making it any better by writing on the above. So, forgive me if I’m adding to your bad news exhaustion, but when monumental events take place, it’s impossible to ignore as someone who forces themselves to put something out on a weekly basis.
Eh, at least I didn’t mention the Nord Stream gas pipeline debacle, hurricane Ian’s devastating impact on South Florida, the Russia/Ukraine war, etc etc..
What I wanted to write about today is why Bitcoin is looking more and more like a winner relative to fiat currencies, and alternative cryptocurrencies — thankfully, there’s always next week.