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Corporate CEO’s have earned their places in most, certainly many cases. If there is one thing we should expect from them, it is to know the business of the businesses they run. Sure, there are politicians in this coveted group, skilled managers who demonstrate more skill at managing others who might more completely grasp the relevant details. Even then, however, so much useful information must generally flow toward and reach any organization’s top.

It would seem to follow, then, that if a specific corporation found itself primarily in the business of retail, for example, there would be much to learn about both the current and future state of retail from that same firm’s leadership; particularly if this particular company has come to rule this industry. And by making it to the top of its crowded field through the deft employment of an ingenious low-prices pricing model, why wouldn’t anyone just take the CEO’s word on faith alone when speaking on the topic of consumer prices.


I’m speaking of Walmart and in this specific instance some very pointed comments made by its US division chief (CEO). “We're seeing cost increases starting to come through at a pretty rapid rate,” said Bill Simon, before continuing by warning how inflation is “going to be serious.”

Case closed. The nation’s largest retailer whose business model absolutely depends upon deftly navigating the macroeconomic pricing structure has made the statement of all statements as to the looming state of consumer price acceleration.

Except, no, this forecast – as the multitudes of others like it – was issued at the end of March…2011. It absolutely sounds like it must’ve been put out to the public just yesterday or last week; and that’s the point.

How could Walmart’s US CEO have gotten consumer prices, of all its things, so wrong? Yes, the benefit of hindsight has shown, proven, that inflation was never really the menace as had been universally declared a decade ago. It simply never once had a realistic chance no matter how many CEO’s and other business leaders kept on asserting.

But hindsight was never truly necessary; in real-time, there had appeared any number of warning signs pointing them and us in the exact opposite direction. Rising deflationary, rather than any inflationary, potential. Mr. Simon may have occupied the apex position in the retail business but his demonstrated knowledge, lack thereof, of the money business explains the huge miss.

Consumer prices may temporarily deviate, as they had in late 2010 and early 2011, true inflation is a monetary phenomenon.

Among the top end of primary indications directing attention toward the real state of affairs was the yields on Treasury bills.

Volatile, to say the least, the 4-week T-bill’s equivalent rate had gyrated wildly interestingly toward the end of December 2010; seemingly steady November into early December at double-digits in a relatively narrow range from 12 or 13 bps on the low side to 15 or 16 bps upside, a day or two here or there maybe one more above or below. Suddenly, December 20, 2011, the 4w rate dropped to just four. Up to nine the next day and then five again by the 30th.

It was one of those clear end-of-year type scrambles which had left the global system in precarious shape even as the systemic level of bank reserves was moving up toward $1.5 trillion and going higher with QE2 still “printing” them by the bushelful.

However, these wild moves in bills didn’t stay in that year-end window. The 4w – really all the maturities – went back into their same limited range for January and early February 2011 if only to make it seem (while commodities still on their last leg up) little more than a trivial, technical blip.

Beginning February 10, there would follow more days below double digits (4w) than above. By March 8, there wouldn’t be another closing yield greater than 10 bps for almost an entire year! In fact, getting to May 5, the 4w yield was down to just a single bip for the first time since the earliest days of 2010.

From that point forward, the highest the rate would achieve was just four and June 21st began a long unbroken stretch where the yield was only one. And this was all just the beginning.

Zero by August 15 with a lot more days of zero to follow until quarter-endSeptember 2011.

By then, though, in between June 21 and August 15 the eruption of a second global banking (meaning US$) crisis at whose center sat the repo market – and its collateral. The level of bank reserves sky high, the functional levels of effective global liquidity way down in the other way.

There were two major factors which contributed much to this unhappy yet predictable set of deflationary outgrowths. The first, what had been building since early 2010 – including the major repo disruptions wrongly blamed as a “Greek debt crisis” – in the form of dealer risk aversion feeding into reduced securities lending activities thereby shrinking the systemic collateral multiplier.

This goes down, the entire global repo marketplace gets herded more and more from the outside-in into the better-quality forms of collateral, T-bills sitting right on top of that list. The more who get herded, and more intensely herded, the higher bills price meaning the less they yield to the point, at certain key times, they yield way, way less.

This dealer risk aversion in 2011 was further amplified in collateral terms by the other factor which eats into systemic condition if from the other side. I’ll let the Federal Reserve’s System Open Market Account Manager of that time, Brian Sack, describe to you what it was (from the FOMC’s June 2011 meeting):

“MR. SACK. Some market observers are concerned that the looming debt ceiling is going to impose a substantial squeeze in the supply of Treasury bills, as the Treasury attempts to maintain its coupon issuance while its ability to borrow is limited. They believe that Treasury bill yields and GC repo rates could be driven negative in response, potentially inducing a number of unusual market issues.”

Shy dealers squeezing the collateral multiplier at the same time Treasury was reducing overall OTR supply, especially bills. “Substantial squeeze.”

I know what you’re thinking; this sounds very familiar.

Again, inflation in 2011 never really had a chance even if Walmart along with the vast majority of Corporate America was absolutely certain it did. The deflationary potential embedded within these collateral indications – right out in the open for anyone to observe – they are what ultimately determined the global economy’s direction and its general shape.  

History may not repeat, but its sure does rhyme especially at times like these. And 2011 was hardly the first instance in the post-August 9, 2007 financial world (un-Happy Fourteen!) when inflation “certainty” collided with deflationary potential being openly exhibited first by Treasury bills.

Going back to the Summer of 2008, policymakers like Ben Bernanke and his ECB counterpart Jean-Claude Trichet had been warmly looking ahead toward that autumn with cautious yet growing confidence. In fact, both were becoming far more distracted by inflation rather than any lingering deflationary outbreaks following the “successful” mediation of the Bear Stearns affair.

The ECB had even gone so far, in early July 2008, to hike its benchmark rates after judging more optimistic on the balance of risks.

Meanwhile, at that very same time as the ECB’s actions, the same months when the US CPI would register greater than 5% (three of these in a row that long, hot, confusing summer), the bill market was instead clearly demonstrating its same foreboding.

Bill rates had sunk. The FOMC set a federal funds target of 2.00%, yet the 4-week (and the other maturities) kept pricing substantially less in yield even though bills, particularly the shortest-term instrument, is a close enough substitute for federal funds and the like; meaning the rate should never stray very far from the target neighborhood.

By July 11, 2008, the 4w was yielding just 1.38%, an astounding 62 bps below its equivalent’s target! A few days later, it would trade lower still. Throughout the rest of the season, right on into September, this was maintained substantially below.

On July 24, the FOMC would hold one of those unscheduled conference calls all-too-common for crisis periods. Two major policy propositions were discussed, one extending the maturities on TAF auctions. Guess what the other had been? A somewhat novel way to address possible collateral shortages especially those which seemed to show up most explicitly around quarter-end.

“MR. DUDLEY. This proposal calls for selling options to primary dealers in a series of auctions beginning several weeks before each quarter-end. The options would be for the right to borrow Treasuries from the SOMA portfolio in exchange for schedule 2 collateral for a short period of time (a week or so) over the quarter-end period.”

The Federal Reserve’s Term Securities Lending Facility (TSLF) would act like a forward option on collateral transformation, auctioning off good quality collateral held in SOMA to be exchanged at known future intervals for less quality instruments. Why?

“MR. DUDLEY. I think we have seen a couple of quarter-ends over the last year that have been problematic and more difficult. Certainly, the September [2007] quarter-end was difficult, and the year-end [2007] was difficult. March [2008] somewhat less so, but that was a little colored by the fact that the Bear Stearns resolution happened just before the March quarter-end. June [2008] was actually pretty manageable. But we have definitely seen more stress over those periods.”

In short, crisis periods tend to produce unnervingly well-defined bottlenecks, like quarter- or year-ends, that become more definitive when balance sheet capacities are seriously strained (any modern monetary crisis in a nutshell). And collateral availability is absolutely one of the - if not the - major components or symptoms of that strain (like in December 2010 or, say, March 2020).

I won’t go into the details of their absurd TSLF option plan here; if you are interested in them you can read all about the proposal’s outlines in the conference call transcript (and I urge everyone to do so for reasons the Fed would rather these details and discussions remain undiscovered). Instead, I’ll get to the point by once again going back to

Mr. Dudley (who else?) for still more of his Hall of Fame-level famous last words:

“MR. DUDLEY. I also want to point out that for the banks that don’t have enough collateral today, that doesn’t mean that they don’t have collateral available. It is just that the collateral hasn’t been pledged at the window. So the bottom line is that we don’t think that the overcollateralization requirement is very constraining—to use economics terms, the shadow price of collateral is pretty close to zero as far as we can tell.”

The man just could not catch a break – if only because he was so very bad at his job. And that job just so happened to be System Open Market Account manager, the very person to whom the rest of the FOMC always turned for technical details and advice.

Dudley’s claim and bill yields were in direct opposition (no surprise). Those exceptionally low rates would only have indicated “the shadow price of collateral” at the margins must’ve been exceptional high rather than zero as Dudley was alleging.

Though the system was far from normal, July 2008 wasn’t exactly full-throated crisis, either, and still yields indicated what they had. No, full-blown collapse would come not two months later when dealer aversion would again combine with, yes, another quarter-end bottleneck to absolutely devastate collateral chains, to simply implode the collateral multiplier leading to the mother-of-all-scrambles for collateral.

Or what’s called the first Global Financial Crisis.

The 4-week T-bill rate unsurprisingly (once you get your money worldview oriented properly) would drop to seven bps on September 17, 2008, two days after Lehman while the fed funds target was still two full percent. The shadow price of collateral at that point wouldn’t have quite been infinity, but it might as well have been given what was about to follow.

The Fed’s regular TSLF, the new optioned TSLF, TAF, overseas dollar swaps, and everything else the “central bank” threw at the problem proved utterly worthless and powerless against the deflationary developments specifically forewarned.

Needless to say, those 5% CPI’s quickly disappeared, just as the attention-grabbing US CPI’s in 2011 would when it came their (deflationary) time.

But, you ask, if the Federal Reserve knows about collateral and even the potential problems related to these calendar bottlenecks, why hasn’t the public heard anything about either? There’s only been subprime mortgages. Why haven’t “monetary” officials fixed these real fractures and then highlighted the full details of their success?

The answer to both questions is actually the same: bank reserves. On the one hand, expectations policy requires little technical detail, as little as possible, voluntarily offered especially when so utterly devastating and contradicting to the required proposition of an all-powerful central bank. The focus on bank reserves in the public imagination comes before everything else, including whether or not reserves actually accomplish anything monetary (they don’t).

The bigger problem is the other, that the Federal Reserve isn’t really a central bank at all. Instead, all it has at its disposal are interest rate targets and then bank reserves, each only parts of a program of psychological manipulation – which is really what bank reserves are largely intended for. Since they can’t fix collateral, and their proponents don’t really understand the full nature of it, it all comes down to just reserves as the sole policy choice in the vain hopes positive sentiment outweighs actual serious, systemic monetary breakdowns.

Even the TSLF idea comes out from this perspective rather than collateral chains and multipliers.

Dealers, by the way, absolutely know all this – having repeatedly experienced the difference - which is one key reason for their ongoing, periodic spasms of gross inhibition, whether or not made worse by those times when Treasury amplifies the negative deflationary potential by further cutting back on topflight collateral supply.

As I already wrote, all of this should sound eerily familiar to our experiences of the previous few months of 2021. Really going back to mid-March, this has been a stretch of nearly five months when CPI’s have exploded upward, back to 5% and more for the first time since Summer ‘08, yet T-bill rates have done otherwise as dealers have become more and more wary at the same time Janet Yellen’s Treasury has been refunding bill (and other OTR) offerings yet again. Those bill yields have often sunk below key thresholds (like the RRP rate), and still are, once more directly undercutting the renewed message of inflationary certainty being dispensed by more and more CEO’s around the economy.

Now, this does not necessarily mean we are repeating 2008, or even 2011. What it does already propose is how monetary conditions share far too much in common (deflationary potential) with those episodes. Only starting with bill behavior.

Corporate executives know best their own business in a micro sense. From any useful macro perspective, they derive their perception and make forecasts from mainstream Economists which is about as useful as pulling each from the Federal Reserve (in fact, pretty much the same because modern central bankers are Economists).

The money business, on the contrary, whether acknowledged outside of it or not, this rather than corporate dart-throwing is what has determined our collected future over and over and over again. To this point, there is just no reason to believe near-enough is different this time. On the contrary, there is so much, too much, just enough the same.


Jeffrey Snider is the Head of Global Research at Alhambra Partners. 

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