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Macronomics profile picture

"When you combine ignorance and leverage, you get some pretty interesting results." - Warren Buffett

While enjoying some much-needed R&R (Rest & Recuperation) basking under the sun far away (hence our lack of posting recently), we still managed to look at market gyrations with the continuation of outflows from US High Yield as well as weaknesses in Investment Grade Credit. When it came to selecting our title analogy for this first 2nd Quarter musing, we reminded ourselves, of "Fandango" being a lively couples dance from Spain usually in triple meter, traditionally accompanied by guitars, castanets or hand-clapping which can be sung and danced. The "fandangos grandes" (big fandangos) are normally danced by couples, which start out slowly with gradually increasing tempo. Many varieties are derived from this one. As a result of the extravagant features of the dance, the word "Fandango" is used as a synonym for "a quarrel," "a big fuss," or "a brilliant exploit." Given the return of heightened volatility in 2018, following years of "financial repression" from our central bankers/planners, we thought our analogy would be appropriate given the earliest "Fandango" melody dates from 1705, and was probably the first "dance battle" and it also appeared also in the third-act finale of Mozart's opera Le nozze di Figaro (1786). As we reiterated in our early March conversation "Intermezzo" CITI's Chuck Prince had a nice dancing analogy in July 2007:

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing" - Chuck Prince

We also added at the time:

"To some extent, early market jitters such as the ones caused by the explosion of the pig's "short-vol" house of straw amounted to an "intermezzo" we think. A larger musical work is at play and

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Macronomics profile picture
During my career I have had different roles within various banks, covering various products, from FX to High Grade Bonds. I have always been passionate about markets and particularly on Macro trends. I am currently working in different role in another company and still in contact with the credit market business.

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Comments (12)

The Nattering Naybob profile picture
Martin - another masterpiece, it doesn't get any better, does it??? Please keep up the excellent work.
Salmo trutta profile picture
Chairman Alan Greenspans’ N-gDp LPT targeting (dropping legal reserves by 40 percent), viz., the mis-named Great Moderation, exported domestic aggregate demand abroad and exacerbated President Bill Clinton’s massive trade deficits and thereby imported unemployment.

The savings-glut represented trade surplus countries’ recycled capital inflows, FX reserves, which were money “laundered”, or recycled in the US (filling the trade gap).

The demarcation between credit and savings is explicit. Lending by the DFIs is inflationary, increasing both money and velocity. Lending by the NBFIs is non-inflationary, ceteris paribus, as borrowers are matched with savers, strictly a velocity relationship.

If voluntary savings are not expeditiously activated and put back to work (outside of the payment’s system, the only place where saver-holders (and thus their monetary savings) can invest/spend directly or indirectly), a dampening economic impact is exerted and metastasizes. This is the *sole* source of (1) stagflation and (2) secular strangulation.

Contrary to every single economist today, from a system’s belvedere, commercial banks (DFIs), as contrasted to financial intermediaries (non-banks, NBFIs): never loan out, & can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits, or time “savings” deposits, or the owner’s equity, or any liability item.

When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially, the creation of an equal volume of new money (demand deposits) - somewhere in the payment’s system. I.e., commercial bank deposits are the result of lending, not the other way around.
Salmo trutta profile picture
N-gDp targeting by Alan Greenspan was the direct cause of President Bill Clinton's massive trade deficits. Great Moderation - not! Why do you think we just set a "US trade deficit rises to near 9½-year high"? How do you think we got a "savings-glut"?

Martin Wolf explained it in his book: "The Shifts and the Shocks".
Macronomics profile picture
Hi Salmo, the "savings- glut" theory is hogwash IMHO. The "Savings Glut" view of economists such as Ben Bernanke and Paul Krugman needs to be vigorously rebuked. This incorrect view which was put forward to attempt to explain the Great Financial Crisis (GFC) by the main culprits was challenged by economists at the Bank for International Settlements (BIS), particularly in one paper by Claudio Borio entitled "The financial cycle and macroeconomics: What have we learnt?".

"The core objection to this view is that it arguably conflates “financing” with “saving” –two notions that coincide only in non-monetary economies. Financing is a gross cash-flow concept, and denotes access to purchasing power in the form of an accepted settlement medium (money), including through borrowing. Saving, as defined in the national accounts, is simply income (output) not consumed. Expenditures require financing, not saving. The expression “wall of saving” is, in fact, misleading: saving is more like a “hole” in aggregate expenditures – the hole that makes room for investment to take place. … In fact, the link between saving and credit is very loose. For instance, we saw earlier that during financial booms the credit-to-GDP gap tends to rise substantially. This means that the net change in the credit stock exceeds income by a considerable margin, and hence saving by an even larger one, as saving is only a small portion of that income." - source BIS paper, December 2012

Their paper argues that it was unrestrained extensions of credit and the related creation of money that caused the problem.


Salmo trutta profile picture
Thanks for the link to your blog.

But M2 money velocity is not only a contrived metric but one that conflates stock with flow. The deceleration in non-M1 components has counterintuitively (counterintuitive to 13D.com’s analysis), increased money velocity, and therefore AD, reflecting the expenditure of prior idle and impounded balances (ultimately reflecting a Hyman Minsky "displacement" preceding the next Great Depression).

Taking a katallactic approach (the science of exchanges), aka as George Garvy pontificates: “Ideally, only balances subject to check or, even better, balances shown on checkbook stubs of depositors should be used to compute velocity rates.” So you should construct your own money velocity metrics.

Higher interest rates are both a cause and effect of higher money velocity.

Stagflation is the result of stagflationist's thinking back in June 2017 (targeting N-gDp LPT). Targeting N-gDp caps real output and maximizes inflation.


And the resultant $ weakness, and increased inflation, is more associated with increased trade deficits, stagflationist’s polices which rely more so on Reserve and commercial bank credit, rather than voluntary savings, identical to those of Alan Greenspan’s Great Moderation (viz., Larry Summer’s demarcation: ”Since the 1990s, he says, the U.S. has alternated between bubbles and busts.” or what I call FOMC schizophrenia -- Do I stop because inflation is increasing? Or do I go because R-gDp is falling? ). This period is the result of the DIDMCA, which destroyed the non-banks and gov’t insurance for small-savers’ pooled non-bank lending.

From a trading standpoint it is better to watch the expansion or contraction of real money balances.

The contraction in flow will shortly reverse by April 11.
153972 profile picture
"We have to confide that we are part of the crowd that believes QT could prove to be inflationary as we indicated back in February 2018."


You are in the minority on SA. It is an opinion that I share at times then I am persuaded by various data that it may not. What missive of the three in February that you wrote on SA may indicate inflation due to QT?
Macronomics profile picture
Hi 153972,

I talked about it in my post "Harmonic tremor":

Read this:


153972 profile picture

Thx for the two links.
153972 profile picture

An outstanding missive. I don't have a vote on SA but it should be considered the best article of the month. Admitedly it is still early in the month, but you've set a very high bar....
Macronomics profile picture
Many thanks for the praise 153972, much appreciated.


Thanks Macronomics.

Much to digest here, definitely reading it again over the weekend. Leverage and debt, debt and leverage. If the market is a carnival ride, we may be approaching the point where folks start puking up their deep fried twinkies and hotdogs.
Salmo trutta profile picture
Impressive. I liked: "Historically, this proxy proved to be a warning signal in Q3 2007 and Q4 2014 when net tightening in lending standards reached +5 to 10% while spreads were still relatively tight"

Documentary proof of macro-conceptualization.

"Polarization" is driven by secular strangulation.
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