You are a free subscriber to Me and the Money Printer. To upgrade to paid and receive the daily Capital Wave Report - which features our Red-Green market signals, subscribe here. On First Down, The Media Fumbles the Ball in Jackson HoleThe host of the symposium just said the plumbing of global finance is being rebuilt. Bloomberg asked him about Kevin Warsh instead for the next 20 minutes.
Dear Fellow Traveler: Good morning… Did you know that Fed Chair Kevin Warsh will speak this morning? I’ve spent an entire week reading previews for the Jackson Hole Symposium, the major central banking conference that kicked off last night in Wyoming... I’m wondering if the media and sell-side desks have a different agenda than me. This is a very exclusive event, and one that I’ll admit that I’m jealous I’ll never attend unless they drop their hand way into the mud and start inviting independent journalists (not going to happen…) And it’s a shame… I’m genuinely interested in this entire event. But yesterday, one of the media’s top outlets missed an opportunity to really dive into why this is one of the most consequential symposiums in its history… one that has little to do with Kevin Warsh’s speech today. The FumbleJackson Hole this year isn’t about the current yields of 30-year bonds. It’s about one of the largest changes to financial plumbing since the post-2008 reforms. The entire focus is how finance must adapt as settlement gets faster, collateral has to move more efficiently, and liquidity has to be available almost instantly. So, last night, I turned on Bloomberg’s all-things podcast Odd Lots. The guest was the host of the party, Kansas City Fed President Jeffrey Schmid. Three minutes in, Tracy Alloway asked the exact question that matters around this conference. Whether this payment theme connects to recent high bond yields… Schmid wanted to park the point about yields and focus on payments, then explaining the significance of the theme. Here was the host of the event… who knew every speaker down their CV… answering that the Federal Reserve moves about $5 trillion to $10 trillion every day through its traditional payment pipes. All this weekend, there will be many new financial papers released that set the agenda and the debate for the future of the financial system. The research this weekend will discuss “atomic settlement,” where the cash and asset legs are linked so both settle or neither does, alongside the push toward real-time settlement. As financial settlement moves toward “instant,” Schmid said there must be proven liquidity behind it. He said that there are two things that the central banks will wrestle with under these conditions. Duration… And liquidity. He explained that this shift in settlement will be somewhat disruptive, which to be honest… for a Federal Reserve Bank President… is a form of screaming. That statement was first down for this conference. The ball was on the one-yard-line, and there was an opportunity to punch the ball into the endzone by continuing the conversation about the structural changes of markets, and how that acceleration in settlement impacts balance sheets and asset prices. What happened? The hosts took a knee and went back to asking about Kevin Warsh and the economy for the next 20 minutes. Now, I know that the audiences want to talk about interest rates and the Fed… but I continue to stress that the Treasury is driving this bus now… and the fed funds rate is increasingly less important to market plumbing than SOFR, which barely gets discussed in these conversations. If I had that seat, I would have chained myself to Schmid’s “atomic” answer for the rest of the interview. We can talk about 25 basis points anytime we want… because this is more or less a conversation about weather. Schmid was talking about rebuilding the entire airport from almost scratch. What Schmid Was SayingTo remind you of what is happening… There is a massive amount of the financial system that does not settle the moment a trade happens. Cash and securities can settle later, and that delay serves an important purpose. That delay gives institutions enough time to move cash, borrow from markets, and find collateral needed to finance these moves. It also gives a traditional clearinghouse a little bit of time to realize that Bank 1 owes Bank 2 $50 million, while Bank 2 owes Bank 1 $30 million. In a simplified netting example, only the $20 million difference may ultimately need to move. This is basically a way to preserve liquidity during the day by making sure that the financial system can see the offsets. Now, I want to explain the two things happening. First, we want to discuss this idea of “Atomic.” That’s a computer science term. It means “indivisible” in that there’s a relationship between the cash leg and the asset leg of a transaction. So, either both happen in the deal… both move… or neither do. Then, there’s speed, our second element. Settlement is moving toward real time… So when you combine these two things, you now have the real challenge at hand. There must be settlement liquidity available when the transaction settles. And that’s the challenge for the central bankers. If I owe someone $1 million right now, I need $1 million of available, usable settlement liquidity RIGHT NOW. It either has to be available in an account or accessible immediately through financing or collateral. It used to be that I’d owe $1 million tomorrow, and I had time to get my affairs in order. Now, the new system says that I owe $1 million RIGHT NOW. Duration and Liquidity, in EnglishSchmid used two words… First, liquidity. This isn’t the same definition we use in terms of all capital and credit in the system, falling back on the CrossBorder Capital definition. We’re talking about the other meaning… that you can get all of the cash together at the exact moment that you need it. That’s what is used to settle… right now. Then, there’s “duration.” This is another term that can be hard to define. The cleanest way to view duration is as a measure of how sensitive the value of an asset is to changes in interest rates. If you own 10-year Treasuries as collateral, and interest rates spike out of nowhere, the value of those bonds goes down. That matters because changes in rates can alter the market value of assets being used to obtain liquidity. The Kansas City Fed President didn’t really connect the two in that interview, as that should have been the next question. But we’ll hear more this weekend. With settlement, think about what a bank might own. It could have billions of dollars in 10-year bonds. But a bond isn’t necessarily a settlement asset. If a bank suddenly needs $250 million of settlement liquidity, it needs either the cash immediately or a way to do something with its assets. It might sell bonds, pledge them as collateral, or use repo to get financing. This is an issue about how fast assets on a balance sheet can get turned into liquidity to settle a transaction.What I just need to stress is that it can put the entire financial plumbing under pressure, and these guys are trying to figure out where those pressure points will exist before they start stapling the wings to the plane during liftoff. Six Sessions, One QuestionI’ll be looking for links to watch and papers as they arrive. The papers will start posting as sessions begin. Yes, Warsh opens the conference, and there are bets on what sort of language he uses. I don’t care. They’re going to explore the plumbing and how changes in settlement, banking, collateral, and digital money could create new liquidity pressures within markets. If liquidity problems can develop faster, future market stress could unfold faster too, with plumbing and liquidity shocks feeding into the momentum and mechanical buying and selling that increasingly shape markets. “But, GaRRetT… dO yOu ThINksEs KEVIN WARSH WILL BE HawKISh or DOWISH?” I don’t care what Warsh says. That’s just another temporary market reaction that signals how far away people are from understanding the consequences of this event… and I’m serious… I’m jealous because what comes after Warsh is fascinating, and these people are on the ground worried about 25 basis points in three weeks. This conference really starts when Eswar Prasad at Cornell and Brookings Institution starts with a conversation on the international monetary system. He’ll likely frame his conversation around his continued work on stablecoins, and the argument that they may reinforce dollar dominance rather than displace it around the globe. In essence, crypto might not destroy the dollar, and instead embolden the empire. Then, Darrell Duffie at Stanford talks. This is one of the people policymakers turn to when they’re trying to understand why Treasury-market plumbing is cracking. He’s going to talk about tokenized finance with a response from the European Central Bank’s Isabel Schnabel. Duffie released a paper in March called, “The Payment System Puts a Floor on the Fed’s Balance Sheet.”: Basically, Duffie argues that banks’ need for reserve balances to make payments puts a floor under how small the Fed can make its balance sheet under the current system. Change the payment architecture, and you may change that floor. On Saturday, Christine Parlour at UC-Berkeley will discuss the future of banking. The response will come from Itay Goldstein at University of Pennsylvania. He’s an expert on bank runs and the fragile nature of financial systems. That’s the one that I have circled on my calendar. If we look back at Silicon Valley Bank, it lost more than $40 billion in deposits, roughly 25% of its deposits, in a single business day. So, when it comes to the future of crisis, what does it mean when financial rails have no closing bell? How fast can unwinds and runs go? That’s the point. We also have a panel with Markus Brunnermeier from Princeton on financing innovation, answered by Raghuram Rajan at University of Chicago. In 2005, Rajan was the Chief Economist of the International Monetary Fund (IMF). He presented a paper called “Has Financial Development Made the World Riskier?” It was heavily criticized at the time despite his warning that financial innovation and changing incentives inside the financial system could concentrate risks in ways markets were underestimating. It is now considered one of the cleanest early warnings ahead of the 2008 crash. This whole conference needles through a massive shift in balance sheet capacity, the challenges facing banks and dealers, the questions of financing governments and the AI cycle, and the impact of faster settlement on the liquidity and balance-sheet capacity that ultimately feed into stock and bond markets. And then… at the beginning… yes. Kevin Warsh talks. In BofA’s latest fund-manager survey, 31% expect Warsh to sound hawkish, while just 7% expect a dovish tone. Yes, we can trade the response… but we are still trying to make sense of the real threat and opportunity that lie ahead from Jackson Hole. My point is that markets and bond yields rise and fall every day… But this conference is about a generational change in the market infrastructure… I’ll be reading the papers as they post this weekend… Once again, I’ve discussed all of the names involved over at Postcards from the Edge of the World. Those names include CME Group (CME), ICE (ICE), BlackRock (BLK), State Street (STT), and JPMorgan (JPM). But I added one name on the platform side to the Postcards portfolio. And each morning, we’ll be following Broadridge Financial (BR) over at Money Printer Pro. Please pay attention to this story. People get all wound up about a defense company that secures a $1 billion contract. These companies now sit at chokepoint layers connecting the enormous Treasury market to a U.S. repo market carrying roughly $12.5 trillion of daily outstanding positions. Stay positive, Garrett Baldwin About Me and the Money Printer Me and the Money Printer is a daily publication covering the financial markets through three critical equations. We track liquidity (money in the financial system), momentum (where money is moving in the system), and insider buying (where Smart Money at companies is moving their money). Combining these elements with a deep understanding of central banking and how the global system works has allowed us to navigate financial cycles and boost our probability of success as investors and traders. This insight is based on roughly 17 years of intensive academic work at four universities, extensive collaboration with market experts, and the joy of trial and error in research. You can take a free look at our worldview and thesis right here. Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. 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