Bluff
March 30, 2025 – Weekly Comment
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This might not be the greatest analogy, but it’s a story I enjoyed hearing firsthand, so here it goes. There was a large filling broker in front month Eurodollars. This is, obviously, well before SOFR, and when 1 bp was the minimum tick, not 0.5 bp. It was at a time when the entire strip in futures would trade perhaps 100-250k, not 4 million like Friday’s volume.
At the time, there were no restrictions on dual trading. That is, a broker could be standing in the pit and trading his own position while filling orders for customers. Front-running was still a rule violation, you couldn’t get a big buy order and buy a couple hundred for yourself first, but other than that the rules were easier.
Anyway, this particular broker (not pictured; wasn’t PAT and wasn’t OPA) filled orders for Solomon Bros, and some other large houses. He told me he was short something like 1000 contracts in his personal account on a day that was slowly but unrelentingly bid. So, he offered 3000 contracts in an attempt to turn the tide. The pit generally would think it was a ‘paper’ offer, and at that time, such an order might have even been large enough to draw in some sellers. Open outcry! 3000 at 9… 3000 at 9! He offered for a couple of minutes, trying to hold the market down. Here’s the fun part: one local just looked him in the eyes and said ‘buy ‘em’. Never made eye contact again, just glanced down and impassively carded up the trade. Of course it’s immediately 9 bid, trading 10s. As my friend recounted this tale, he said every bit of air immediately exited his lungs, slumping his shoulders for added emphasis to convey the distress. The bluff (spoof) that didn’t work.
What made me think of this particular story is the NVDA/ CoreWeave entanglement. The IPO for CoreWeave, an AI data-center company backed by its supplier NVDA, occurred Friday. MSFT is CRWV’s largest customer. The IPO initially was supposed to value the company at $27 to $32 billion. On March 19, Reuters reported a planned IPO price of $47 to $55, to raise $2.3 to 2.7b. Every news clip I saw said the offering was oversubscribed. On March 26, FT reported that CRWV had triggered a technical default last year as it used loan proceeds from Blackstone to expand into Europe, when collateral for the loan was specified to be US assets. Blackstone forgave this ‘oversight’. On March 27 CRWV announced plans to cut the IPO size to $1.5b, and the price to $40, and NVDA announced plans to anchor the deal with a $250 million order to buy at $40. All of a sudden it’s as simple as the pit. NVDA’s already long. Now showing a big bid to bluff the market. “Hey Jensen, you’re filled. Want more? It’s 39 offer.” During this time, rumors continued to swirl about MSFT cutting back on AI and data-center investments. One report I read said MSFT cancelled a $12b dollar CRWV order, but Open AI jumped in as savior and took MSFT’s place. ‘Just Dario’ (blogger/podcast) amusingly refers to Open AI as being in “the money incinerator business.”
I am no expert on AI, etc. But I do remember Enron. Not that this is the same, but it might be prudent to stand aside. In a broader sense, US stocks have been supported by AI hype, deregulation, a benign Fed, and hopes that DOGE will correct the govt spending spree. AI seems vulnerable, DOGE might be doing too good of a job. The Fed just EASED with a cutback of QT and SPX is lower in the aftermath. If only there were a signal.
Survey data should be taken with a grain of salt, but U of Michigan’s Consumer Expectations provides backing for Powell’s comments at the press conference: “…we do understand that sentiment has fallen off pretty sharply…”
The chart below shows Expectations in white, oil in blue and SPX in green.
The Index of Consumer Expectations focuses on three areas: how consumers view prospects for their own financial situation, how they view prospects for the general economy over the near term, and their view of prospects for the economy over the long term.
There are just a few lower readings in expectations: 2008 at 49.2 and 2009 at 50.5 (GFC). 2011 at 47.6. 2022 is the lowest at 47.3 (Fed hikes, stocks breaking and oil bid). Covid was way up at 65.9. Consumers being squeezed by higher oil prices is a contributing factor to falling confidence. Not this time. Oil’s price is dropping.
I’ve written several times that I think the Fed will ease in May. Met with derision. However, there are two employment reports before the May 7 FOMC, Friday’s and May 2. SPX is down less than 10% from Feb’s all-time high. At the low a couple of weeks ago, Nasdaq Comp was down 11%. What if a slide to minus 20% occurs? Powell has every incentive to cut 25 in a nod to Trump. Of course, if the Fed does cut there will be MASS HYSTERIA claiming the Fed has lost credibility by easing after having raised inflation estimates. The ‘lost credibility’ phrase has been around as long as I have been in the business. We’re going into ‘Liberation Day’. What are we hanging on to?
On a more serious note, the Cleveland Fed and BLS publish a quarterly figure of ‘New-tenant rents’. (Noted by Danielle DiMartino Booth). At the end of Q4 this number was -2.4%. Shelter is 32% of CPI. Next release should be towards the end of April. The report notes: “Sample sizes for the New Tenant Rent Index are much smaller than for the All Tenant Regressed Rent Index or the official CPI; this is especially the case in the first and fourth quarters when fewer moves happen.”
The real concern over a Fed cut will be reflected by a surge in long-end rates. Indeed after the Fed’s ‘no policy implication’ QT ease on March 19, the 30y yield rose about 18 bps to 4.72%. However, this week’s close was 4.63%. I’m sure Bessent would prefer the Fed holding pat. The risk is that falling stocks, whether related to tariffs, a slowing economy, or employment deterioration (all of the above?) overwhelms every other consideration. Chart below of 2/30 is clearly in steepening trend, but actually low by historical standards.
Last week I wrote that the SFRU5/U6/U7 fly was tracking well with the recent move in ESM, but noted that the fly had made a new low while ESM had bounced. This week, another new low in the fly at -48.0 (from -47.0 last week). Stocks gave up the gains (caught down).
It’s not panic if you’re first (paraphrasing from the movie Margin Call).
Ease trades (mentioned last week) SFRK5 9600/9625/9637.5 c fly 1x3x2 settled 2.0. SFRM5 9600/9625/9643.75 c fly settled 2.75.
| 3/21/2025 | 3/28/2025 | chg | ||
| UST 2Y | 392.5 | 390.6 | -1.9 | |
| UST 5Y | 401.4 | 397.9 | -3.5 | |
| UST 10Y | 424.8 | 425.3 | 0.5 | |
| UST 30Y | 459.2 | 463.1 | 3.9 | |
| GERM 2Y | 213.2 | 201.9 | -11.3 | |
| GERM 10Y | 276.5 | 272.7 | -3.8 | |
| JPN 20Y | 226.2 | 224.5 | -1.7 | |
| CHINA 10Y | 185.2 | 181.5 | -3.7 | |
| SOFR M5/M6 | -59.5 | -62.5 | -3.0 | |
| SOFR M6/M7 | 5.0 | 3.0 | -2.0 | |
| SOFR M7/M8 | 14.0 | 15.0 | 1.0 | |
| EUR | 108.22 | 108.28 | 0.06 | |
| CRUDE (CLK5) | 68.28 | 69.36 | 1.08 | |
| SPX | 5667.56 | 5580.94 | -86.62 | -1.5% |
| VIX | 19.28 | 21.65 | 2.37 | |
| MOVE | 94.54 | 96.83 | 2.29 | |
