There Oughta Be a Law
January 31, 2021 – Weekly Comment
Finally, a tweet that had some real value in the context of the week’s action. Abishek Raju tweeted an excerpt of The Securities Exchange Act of 1934, Section 9. I searched for this section and the link is here (Abishek said he got it from the FT):
http://www.columbia.edu/~hcs14/SX9.htm
https://twitter.com/Abishekraju/status/1355361591680634888
“It shall be unlawful for any person, directly or indirectly, by use of mails or any means of instrumentality of interstate commerce, or any facility of any national securities exchange… (2) to effect, alone or with one or more other persons, a series of transactions in any security registered on a national securities exchange creating actual or apparent active trading in such security or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others”
According to Reuters, a 1996 law known as Section 230 protects Message Boards and internet sites. Quoting Eric Goldman, a prof at Santa Clara University School of Law, “The whole point of Section 230 is to enable sites like Reddit to allow conversations to take place… Knowing that some conversations will be antisocial and in some cases illegal, section 230 says that’s not the responsibility of the service that creates the venue of those conversations.”
So these are the Gamestop battle lines. I am sure that Robinhood will be one of the first casualties. There have obviously already been some spectacular losses and gains. Of course, there will be unforeseen consequences apart from the oft repeated “This will end in tears”. For example, JA brought to my attention a tweet from Holger Zschaepitz noting contagion from the short squeeze is forcing some hedge funds to sell longs in order to cover losses from shorts.
The question is, how much responsibility does the Fed have in all of this, and Powell answered that question at Wednesday’s press conference. “None.” When asked about financial stability, in a broad reply he referred to banking stress tests for the system as a whole. When Steve Liesman pressed and asked whether “super easy” monetary policy has created a bubble, Powell responded that what was primarily ‘driving asset prices’ was vaccine progress and fiscal policy, NOT monetary policy. Of course, the Fed has been vocal in urging more of a fiscal response, but never mind that. He said the Fed had not at all considered raising margin requirements, and that issues of financial stability could be handled with macroprudential tools (without specifically naming any of those tools). It could be construed as somewhat disingenuous for the Fed to take credit for reducing employment while shunning blame for asset price instability. In an interview on Friday, Mary Daly of the SF Fed took that issue head on: “I am not willing to pull that bridge [monetary accommodation] away and injure, in my judgment, the livelihoods of people – because they don’t have jobs, they don’t have income, they don’t have wage growth – simply to ensure that some people who already have stock market wealth don’t get more.”
Clearly Powell was miffed at Dudley’s assertion that a taper tantrum would be “inevitable”. It was during that part of the press conference that Powell went to great pains to say that the Fed is a long way from exit and would communicate such plans well in advance. He also gave some insight into the Fed’s thinking on present conditions. First, he echoed Brainard on upcoming strength in inflation measures due to base effects, as weak March and April data from last year fall out. The Fed will look past the data as there are significant pockets of unemployment and slack resource use. Regarding strength in housing, he mostly considers it a one-time shift with transitory effects. In short, he emphasized long-term disinflationary forces, including demographics, technology, and globalization.
It’s somewhat interesting to juxtapose Powell’s performance, with a paper written by Ray Dalio on the topic of bitcoin. He wrote:
There aren’t many alternative gold-like assets at this time of rising need for them (because of all the debt and money creations that are underway and will happen in the future). Because of what is going on in the world, besides there being a growing need for money or storehold of wealth assets that are limited in supply, there is also a growing need for assets that can be privately held. Because there aren’t many of these gold-like storehold of wealth assets that can be held in privacy and because the sizes of their markets are relatively small, there exists the possibility that Bitcoin and its competitors can fill that growing need.
Implicit in this excerpt is an opposite assumption about inflation. Debt and money creation erodes purchasing power, thus causing the need for a store of wealth. Maybe that’s what the reddit crowd is on to with respect to the new squeeze campaign targeting silver. But as Keith Weiner notes: “GME market cap was under $3B prior to its runup… To make math easy, assume at least 3 billion ounces [of silver] in bullion form. That means the total ‘market cap’ of silver is 25 times greater than that of GME…”
The market’s reaction to the week’s events provided support for short end instruments, but relative weakness on the long end. 5/30 treasury spread finished at 141.3 bps, just below last week’s high of the move of 142.8. The red/gold Eurodollar pack spread (2nd year forward to 5th year) closed at a new high of 100.5. The VIX surged to 37.5 but closed 33.09, up 11.18 on the week. Treasury vol firmed modestly, most notably on the long end. With the Fed accommodating the short end, and Treasury considering longer maturity bond issuance, a steepening trend isn’t much of a surprise. In 5/30, 161 bps is halfway of the move from the 2010 high to 2018 low, and should provide significant resistance. Red/gold posted its high of 306 bps at the end of 2013 with a low of -6 at the end of 2018. The halfway mark is 150 bps; 107 to 115 should provide strong initial resistance.
News this week includes ISM Mfg and Services on Monday and Wednesday. Payrolls on Friday with NFP expected 50k. Average Hourly Earnings yoy expected 5.0%.
OTHER MARKET THOUGHTS/ TRADES
The EDU3 9950c settled 18.75 on Friday, versus 9947.0. That’s down 1 on the week with futures also down 1. 2EU 9937/9912ps settled 5.25, unch’d.
The trend in options trading on fixed income is dominated by long put/short call risk reversals. In spite of sloppy price action in stocks, there was an exit seller last week of 30k TYH 138 calls at 10; settled 7 vs 137-01.
As Cameron Crise, Bloomberg’s Macro Man said last week, “This is what happens at the intersection of overabundant liquidity, a commitment to financial repression, and the madness of crowds.” Well put. I don’t know if this is “the big one”, but I do know that from here I would rather be long treasury vol than short it. April atm TY vol closed under 3.6. When things get crazy, it’s not a stretch to see 6%.
Here’s a clip of Robinhood accounts trying to access their funds…
Just a little sidenote about low interest rates. I received one of those innocuous e-mails from Chase about changes to credit card terms. I usually just delete these but glanced at this one. “Penalty APR and when it applies: UP TO 29.99%…” I don’t know what it was before, but 30% seems a little steep. The section below that was for “My Chase Plan Fee (fixed finance charge).” Not sure what this plan is exactly, I think it may be a way to stretch payments on larger purchases. Anyway, here’s the change: “Monthly fee of 1.72% of the amount of each eligible purchase transaction or amount…” MONTHLY FEE. I guess that’s how the Fed’s commitment to low rates trickles down to the little guy.
| 1/22/2021 | 1/29/2021 | chg | ||
| UST 2Y | 12.3 | 11.3 | -1.0 | |
| UST 5Y | 43.3 | 44.1 | 0.8 | |
| UST 10Y | 108.7 | 109.1 | 0.4 | |
| UST 30Y | 185.6 | 185.4 | -0.2 | |
| GERM 2Y | -70.7 | -73.3 | -2.6 | |
| GERM 10Y | -51.2 | -51.8 | -0.6 | |
| JPN 30Y | 64.9 | 65.7 | 0.8 | |
| CHINA 10Y | 312.6 | 318.5 | 5.9 | |
| EURO$ H1/H2 | 0.0 | 1.0 | 1.0 | |
| EURO$ H2/H3 | 10.5 | 11.0 | 0.5 | |
| EURO$ H3/H4 | 40.0 | 42.5 | 2.5 | |
| EUR | 121.75 | 121.38 | -0.37 | |
| CRUDE (active) | 52.27 | 52.20 | -0.07 | |
| SPX | 3841.47 | 3714.24 | -127.23 | -3.3% |
| VIX | 21.91 | 33.09 | 11.18 | |
https://www.reuters.com/article/idUSKBN29Z0HI
