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Kevin Muir: Longer Term Inflation Coming

Tom welcomes back private trader and newsletter publisher Kevin Muir of “The Macro Tourist” back to the show.

Kevin details how the Repo Markets function, their purpose, and what led to the September 2019 freeze. It’s the financial plumbing of the entire banking system where banks lend to each other. The front end of the curve acts as a temperature gauge for the system.

Quantitative Easing works with the Fed directly purchasing bonds. QE was marketed as a way to increase bank lending, but banks don’t lend based on having extra cash on their balance sheet. Today, QE continues at a rate of $120 billion a month, and we’re rapidly becoming numb to the size of these numbers.

Kevin studied market action and discovered that Fed Bond Buying coincided with stock market moves. QE doesn’t create inflation directly, but it does cause inflation in financial assets.

Kevin explains the purpose of the reverse-repo program to mop up excess liquidity in the system. There is so much liquidity in the system that there aren’t enough investment opportunities. They are withdrawing liquidity at the front end (tightening), but at the same time, they are pushing liquidity at the long end.

Kevin feels any loss of control in the long end of bonds is far off. As we advance, inflation will likely be the biggest concern for some stock market sectors and, therefore, on some investor’s portfolios. Investors aren’t that concerned about inflation since they haven’t adjusted their portfolios.

Over the long term, inflation will likely become a growing issue due to the seemingly ever-increasing amount of borrowing, fiscal spending, and continued stimulus. Figure out where things are heading and change your portfolio accordingly and try and stay open-minded.

Time Stamp References:
0:00 – Introduction
0:37 – Repo Market Overview
2:27 – Repo Arbitrage & Bonds
11:49 – Treasury General Account
18:02 – Tightening & Easing
25:47 – Reverse Repo Wind Down
32:51 – Crash Risk Factors
36:56 – Ephemeral Inflation
42:25 – Inflation & YOY
46:52 – Defining Inflation
51:23 – MMT & Fiscal Shift
58:02 – Trading Reality
1:00:05 – Concluding Thoughts

Talking Points From This Episode

  • Explaining the Repo and Reverse-Repo Markets
  • Quantitative Easing and ongoing bond purchases.
  • Short-Term and Long-Term inflation risks.
  • Adjusting your portfolio for MMT policies.

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Kevin Muir started as an institutional equity derivative trader for a big Canadian bank in the 1990s. In 2000, Kevin decided that bank-life wasn’t for him, so he traded his own account for the next two decades. Along the way, he started writing the MacroTourist newsletter – which he describes as an “almost daily” letter about the markets that still manages to have fun. The MacroTourist newsletter attempts to bring a unique take on a variety of different financial topics. Kevin’s tagline is “All I Bring to the Party is 25 Years of Mistakes.”

Kevin Muir is a CFA and a graduate of the University of Toronto economics program.

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