It's How Civilizations Fall

The SOFR is an acronym which stands for, "Secured Overnight Financing Rate," and is the replacement to LIBOR (which stood for "London Interbank Offer Rate"). LIBOR was deemed too prone to manipulation (try to hold your laughter) and thus the SOFR calculation was tweaked a bit from the LIBOR. But, essentially, SOFR acts like LIBOR did, as a benchmark for short-term interest rates among banks lending to each other. It is used for pricing of interest rate swaps, currency rate swaps as well as mortgages.

Recently, SOFR has been on the upswing, which means short-term borrowing costs have been rising and thus placing more pressure on banks. This is all happening as markets are beginning to price in a much more hawkish future than The Fed currently indicates, as June rate cut odds are fading as we speak. 

And now gold, silver, and oil are rallying, too, as well as copper, which all point to further inflation risks. 

As we have noted here and with Members over the years, inflation is a scourge and needs to be taken seriously from the get-go, having destroyed some of the most powerful civilizations in world history. I was surprised at the manner in which Powell backed off his hawkish tone last year, as the short-term festivities would undoubtedly lead to a much more painful outcome in the end as inflation resurfaces for another wave higher. We know Congress and the Treasury keep spending like wildfire, but austerity is always the last shoe to drop during inflation--That is par for the course. 

However, seeing a Fed with this little backbone means that the majority of Americans have been suffering unnecessarily for quarters on end with sticky, high prices in every day items because Powell listened to the talking heads on CNBC discussing how inflation at 3-4% per annum would "not be that bad," all the while he tries to stick an unlikely soft landing amid political pressure in an election year. 

The net result is that we have arrived at the rubber-meets-the-road moment, as banks feel the squeeze amid ephemeral overnight funding and inflation rears its ugly head for another round of higher prints. 

Volatility, meaning the VIX and, yes, those dastardly volatility ETFs like UVXY, should finally wake up and become the place to be, or one of them, as the market oscillates between worrying about inflation one moment and the bank funding squeeze the next. 

If The Fed sides with the banks like they did in March 2023 with the BTFP then we should see rates on the 10-Year spike up to 5%, then 6%, in the blink of an eye, as inflation is on the upswing this time around whereas last year it was slowing, but still entrenched.