Decoding the Financial World: Uncovering the Interconnectedness of Interest Rates, Mathematical Models, Central Bank Policy, & Wealth Inequality.

Here is what macro news we are getting into today.

1. Rising Interest Rates, Jobless Claims, and Crypto Scandals

2. Balancing the Use of Mathematical Models in the Financial World.

3. The Fed's Profit and Loss & Interest Rates impact on the Fed’s Earnings and Remittances.

4. Wealth Inequality at Davos 2023 & The Risks of Central Bank Policy.

5. Crypto Bailouts by the Federal Home Loan Banks.

6. The BOJ Meeting & the Consequences for the Yen, JGBs, and Fixed Income Markets.

Newsletter: Grit Capital

Title: "Bad is good". works for the Fed, not earnings.
Link: https://gritcapital.substack.com/p/bad-is-good-works-for-the-fed-not

Here are the top takeaways:

• JP Morgan CEO Jamie Dimon stated that he believes interest rates will soon rise above 5%. This is due to what he sees as an underlying inflation that will take some time to resolve.

• Jobless claims have decreased by 15,000 for the week of January 4th. However, this number is still higher than expected, coming in at 4% compared to the 7% that was predicted.

• A little-known crypto exchange called Bitzlato had been caught up in a money laundering scheme totaling $700 million. The Russian founder of the company has been arrested and it is believed that the exchange was being used to facilitate illegal gambling and drug deals on the dark web.

• Binance has been named as one of the top 3 counterparties by Genesis. This comes as no surprise as the company has been making headlines recently for their involvement in a number of high-profile transactions. However, it seems that all is not well at Genesis, as they are reportedly preparing to file for bankruptcy. This comes after they recently laid off 30% of their staff and are now exploring the sale of their media company, CoinDesk.

• Finally, it appears that a large number of Bitcoin-shorts have been liquidated over the recent rally. In the last 24 hours, over $110 million worth of bullish bets on Bitcoin and Ethereum have been wiped out. This represents a 76% success rate for traders who were betting against the cryptocurrencies.

Newsletter: Exorbitant Privilege

Title: Exorbitant Chat: episode 2 - Donald MacKenzie.
Link:

Exorbitant Chat: episode 2 - Donald MacKenzie

Here are the top takeaways:

• The financial world is increasingly reliant on mathematical models to price and trade securities, yet these models often fall short of reflecting the real world. This disconnect can have harmful consequences.

• Donald McKenzie, (An Engine, Not A Camera author) argues that the relationship between financial participants, markets, and theorists is often performative, meaning that the use of models can actually shape market processes in ways that may be self-reinforcing or self-undermining.

• As we become more reliant on models to make decisions in finance, it is important to be aware of their limitations and to understand how they interact with the real world.

• There is a delicate balance to be struck between too much and too little abstraction.

• On one hand, oversimplification can lead to trivial models that are of no use in predicting real-world behavior.

• On the other hand, if a model is too complex, it may be impossible to solve. In practice, financial market participants are often under pressure to adopt standard models that may not be optimal, either because of regulatory pressure or because of the need to conform to market standards.

• High frequency trading (HFT) is a good example of this phenomenon. HFT algorithms are generally quite simple, but they are constantly racing against each other to execute trades before prices move too far.

• This arms race can lead to reduced safety margins and increased risk-taking, with potentially disastrous consequences. HFT creates incentives for firms to engage in speed races in order to gain an edge over their competitors which can lead to market bubbles and crashes. HFT is a major contributor to the increasing inequality in the financial system, as it benefits a small number of firms at the expense of the average investor.

Website: Wolf Street

Title: Despite Losses since September, the Fed Still Made a Profit for the Whole Year 2022, Remitted $76 billion to US Treasury Dept.
Link: https://wolfstreet.com/2023/01/13/despite-losses-since-september-the-fed-still-made-a-profit-for-the-whole-year-2022-remitted-76-billion-to-us-treasury-dept/

Here are the top takeaways:

• The Federal Reserve released preliminary financial information for the year 2022 today, which showed that the Fed started losing money on a weekly basis in September of that year. In the four months from September through December 31, the Fed lost a total of $8 billion. However, its net income for the first eight months of the year amounted to $78 billion, meaning that it still had a net income for the year.

• The problem that has arisen is that the interest rates the Fed pays on reserves and overnight reverse repurchase operations have increased, while the interest it receives from its securities has decreased. This has resulted in losses for the Fed.

• However, these losses don't matter to the Fed itself, as it cannot become insolvent. Instead, they matter to the Treasury Department, which is no longer receiving the weekly remittances from the Fed that it normally does.

• It is expected that the Treasury Department will not receive any remittances from the Fed again until the deferred asset created by the losses has been fully extinguished by future net income. This could take years. In addition, interest income is expected to surge by 39% to $170 billion in 2022 on the Fed's holdings of securities, while expenses are expected to explode by a factor of 19 to $112 billion.

Website: Zen Second Life

Title: DAVOS 2023: LETHAL COMPLACENCY
Link: https://zensecondlife.blogspot.com/2023/01/lethal-complacency.html

Here are the top takeaways:

• It is Davos 2023 and the ultra wealthy have almost doubled the wealth increase of the remaining 99%. This does not bode well for the future, as history has shown us that this sort of inequality rarely ends well.

• The central bank policy of inflating capital wealth while imploding the middle class has only exacerbated the problem, and now investors are faced with the risk of a central bank bailout. Nothing quite as obviously asinine has ever been believed in market history.

• This is starting to look a lot like the set-up that preceded the pandemic in 2020, with a melt-up followed by a meltdown. Gamblers are front-running central banks and not worried about the pandemic, but the greatest risk that investors face is not a pandemic, it's central banks themselves.

• In other words, investors are embracing the cognitive dissonance of ignoring central bank-caused tightening by believing in central bank bailout. Nothing quite as obviously asinine has ever been believed in market history.

• Homebuilders usually peak last right before a crash, and oil stocks are decoupling massively from the leading indicators. Wall Street's prevailing view that earnings will grow in 2023 is totally decoupled from consumer sentiment and Fed policy.