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I think they did the worst thing possible which is they took the middle path should have done the opposite they should have raised 50 bips it would have created a little bit more chaos in the short term but it would have set us up to understand what was fundamentally broken and still give the Federal Reserve the ability to use their balance sheet we're going to be in this very choppy neither here neither their situation and I think that is what causes the real damage let's start with the FED hiking rates by 25 basis points and the general feeling in the country that maybe the FED doesn't know what they're doing and maybe it's time for regime change the FED increased rates by 25 basis points yesterday Wednesday I think they did the worst thing possible which is they took the middle path if you think about what the Fed has the ability to do they obviously have the ability to raise and lower interest rates but what we don't talk about is they have a balance sheet that can absorb assets foreign for the last 10 or 15 years we've had a phenomenon called quantitative easing and for folks that have don't understand what that means that is essentially the Federal Reserve buying assets out of the market and giving people money for it so that that people can then go and buy other things with that money last June they started what's called quantitative tightening which is essentially reversing that policy and restricting the liquidity in the system so if you look at those tools and you sort of play a game Tree on what the FED could have done I think that you have two choices one is you massively let inflation run amok where you have no tools to fix or you have massive illiquidity in the financial system but you actually do have tools to fix that which is through some combination of quantitative easing and tightening depending on how much liquidity you want in the system so I think actually I disagree with Saks I think they should have done the opposite they should have raised 50 bips it would have created a little bit more chaos in the short term but it would have set us up to understand what was fundamentally broken and still give the Federal Reserve the ability to use their balance sheet and use liquidity in the future to solve the problem they took the worst option which is neither did they cut nor did they raise enough and so this problem that sax represents actually is the fundamental problem now which is you won't have enough Clarity and signal to really know whether this 25 base is point enough look I've maintained now for nine months that rates are going to be long higher than we like and longer than we want and so I think it's high time that we acknowledge that we have a sticky inflation problem whose back we have to break we've known since Volker era what we need to do to do that which is you need to get interest rates to be greater than terminal inflation which means that if five percent fed funds rate is insufficient so we're gonna need to see a print of five and a half 5.75 percent and that's when you're going to have enough contraction and then the FED can come back with liquidity but if they don't take these steps we're going to be in this very choppy neither here neither their situation and I think that is what causes the real damage because it's the corrosive effects of uncertainty and what that does to lending to risk taking and that I think is really bad for the economy we'll have started to talk about the next shoe to drop we obviously had this time-based liquidity issues with Silicon Valley bank now the Wall Street Journal is talking about commercial real estate and how much debt there is since covid obviously people are doing more remote work a lot of the skyscrapers it's not just San Francisco but in many locations remain empty or underutilized people are now having their leases come up uh every year more and more of these leases will become vacant and then we'll see if these buildings are worth what people paid for them smaller Banks hold around 2.3 trillion in commercial and real estate debt including rental apartment mortgages almost 80 percent of commercial mortgages are held by Banks according to this Wall Street Journal story sax you are an owner of you can see it in the credit default spreads of these Banks it's in the water table already so you can Nick you can just throw it up if you look at any Bank that's lending and that has a portfolio this is Deutsche bank's you know Euro denominated CDs but it's the same for Barclays it's the same for sock gen it's the same for a bunch of American Banks there is a risk in the system that sacks articulated that is now getting priced in there are all kinds of loans whose payments which the banks need cannot necessarily be insured which means that then there could be illiquidity there there could be a flow of deposits out from those Banks which would then make their ability to pay their debt holders lower you also have this complicated issue already where it's really like the first time in a long long long time where debt holders actually got wiped out in the Credit Suisse debacle before the equity holders did and that's created all kinds of Ripple effects so this credit bubble is here and it's being manifested right now in these very sophisticated parts of the market and eventually they'll Ripple to the broader economy at large but how a person feels this is they're not going to be able to get a car loan or a mortgage or the interest rates they pay will go up and then how bondholders will react to all of this stuff is they'll just start to find different assets probably the front end of the curve money market Cash Gold and they'll just abandon all these assets and then the other problem is that it's just really really bad for risk assets so the things that we invested startups technology companies either in a world of inflation run amok because the FED isn't hiking fast enough which just destroys future cash flows or in a world where the FED pivots in a moment like this and Nick you can show the second chart both result in the same outcome which is that you just see these massive drawdowns in the value of risk assets so we're in a really complicated moment and this is why I think again the FED needed to take leadership this past week and actually do the hard work of either cutting 50 bips or raising 50 bips and this middle path is the absolute worst path because trying to thread a needle in this complicated economy I think is just going to be impossible and then what happens is then the markets move around them right the markets have completely said we now discredit what you did and they're basically banking that the FED will be forced to cut rates massively in short course because the crisis will be so severe that it'll outweigh the risk of inflation think about that yeah so all this real estate comes on the market there's no buyers for it but the reason that we print so much money is sort of what freebrook says which is that we just want a well-functioning society and the simplest and shortest way to do that is to make sure that there aren't any winners and losers anymore and the most effective way to do that in the markets is with money print a bunch of money and there are no more winners and losers and so everybody can kind of win some people may may win more but nobody really ever loses so I think that's the that's the mo that we're operating under the thing is I know something unhealthy to Natural math you're sort of a losing yeah but no losers that's a more philosophical and a commentary on capitalism and a bunch of other things and you're right I don't think it makes sense I do think you need winners and losers to really make Society function well but the other part of it is like does it reinforce or does it decay U.S dollar hegemony and I think it actually reinforces it and the reason is just very practically speaking when you look at how dependent other people other countries are on the US dollar in times of stress they actually become more dependent and that has a lot to do with their boring patterns the amount of dollars central banks need outside the United States and so what did you see in a moment of stress actually the FED opened up swap lines to all the central banks that they work with uh their most important operating partner so Europe Canada Japan Etc Switzerland and they moved the liquidity window from weekly to daily and they pounded the swap lines so I don't know I think that most people that that kind of like it's like a boy crying wolf maybe at some point somebody will be right but you're gonna lose so much money trying to take a point of view around this topic that it's more practical to just look at Dollar flows and dollar flows go up in moments of stress not go down and they go up in a distributed manner across the monetary Plumbing of the world foreign foreign
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