Lecture Notes: Banking Reserves and Liquidity with Michael Howell

Introduction

• Host: Felix
• Guest: Michael Howell, Crossboard Capital
• Topic: Deep dive into banking reserves, liquidity, and central bank policies.

Banking Reserves

• Central banks discuss regimes: ample, scarce, abundant.
• Current situation: Likely near a dangerous threshold where liquidity might run out by September.
• Indicators: Repo markets show widening spreads, indicating stress.

Liquidity and Collateral

• Financial system modernization over decades requires focus on collateral, not just bank reserves.
• Repo market central to liquidity and collateral, important for understanding current financial vulnerabilities.

Pump and Dump Analysis

• Concept: Hidden stimulus by Powell and Yellen potentially to influence political outcomes.
• Chart Analysis: Orange area represents hidden QE activities of the Federal Reserve.
  • Activities outside stated QT: reverse repo fluctuations, Treasury General account changes, etc.
• Treasury funded US deficit with short-dated tenors and bills.

Economic Impact

• Stimulus effects began to taper off in 2024, leading to slower economic growth.
• Analysis suggests a correlation between hidden stimulus and economic indices like the Philly Fed survey.
• Global economic slowdown evident in world GDP growth analysis.

Definitions and Clarifications

• Liquidity Needs: More liquidity means expanding financial balance sheet capacity.
• Debt-driven economy demands consistent central bank balance sheet growth.
• Debt to Liquidity Ratio: More meaningful than debt to GDP; signals financial crises or asset bubbles.

Policy Recommendations

• Central banks should expand balance sheets rather than reduce them.
• Terming out existing debt poses financial risks; QE-like processes are needed despite different naming.

Central Bank Strategies

• Federal Reserve's QE disguise: may use different terms, but will need to expand balance sheet.
• Historical crises linked to debt refinancing challenges; proactive measures required to avoid crises.

Credit Market Dynamics

• Tight credit spreads; potentially influenced by past interventions in commercial paper markets.
• Credit markets potentially facing threats from rising term premiums and liquidity constraints.

China and Gold

• China's response to economic pressures: significant policy shifts to stimulate economy.
• Chinese monetary policy may be linked to efforts to adjust the yuan gold price, which impacts broader gold markets.

Cryptocurrency and Liquidity

• Bitcoin and gold have correlated movements; liquidity and risk appetite are key influencers.
• Global liquidity increases may lead to Bitcoin rallies, but long-term caution advised.

Conclusion

• Federal Reserve's actions remain uncertain; timing and nature of interventions will shape liquidity and market dynamics.
• Economic caution warranted for 2025 due to unresolved structural financial challenges.