Holy Frijoles
March 13, 2021 – Weekly comment
I saw three headlines this week that I am trying to wrap my head around. First, Household Net Worth was reported to have ended 2020 at a record $130.155 trillion, up by a whopping $6.9T in Q4. Annual GDP is only $21.5T. This net worth figure comes from the Fed’s quarterly Z.1 report (link below). Then, there is the story about a piece of digital art, “Everydays – The First 5000 Days”, by the artist “Beeple” that sold at Christie’s for just over $69 million dollars. Finally a friend sent me an article about Taco Bell launching a collection of crypto art NFTs for $1 each to celebrate the return of potatoes to the menu, some of which are now selling for thousands of dollars on, what we in the business refer to as, ‘the secondary market’. No, the potatoes aren’t selling for thousands. The NFTs. BC suggested I use the Taco bell bit in my missive. He was joking. I am not.
https://www.businessinsider.com/taco-bell-potatoes-return-celebrated-with-nft-crypto-collectibles-2021-3
When I was a kid, I had a piggy bank. Mine wasn’t a pig though, it was a cast metal horse, with the coin slot in the middle of the saddle. I still have it, somewhere. Later, my mom took me to the bank to open a savings account. Pretty exciting day, going to the teller window in Berwyn with cash, and getting a little passbook back showing my name and deposit. It was probably less than twenty dollars. That’s money to be put aside. Money that you can’t spend now, that you can’t really get at easily.
Now, I must assume that someone lists their digital artworks as ‘assets’ and that ‘assets’ are a part of household net worth calculations, offset by liabilities or loans. So, I buy a piece of taco bell crypto art for $1. Sell it for $1000, and the clown that bought it lists it as an asset of $1000. My wealth has increased. The aggregate net worth of the US Household Sector has risen. Can I possibly be framing this correctly? If Christie’s is selling this crap for $69 million, I think I am.
Ok, back to the savings account and the markets of today. My working theory is that savings are dollars held aside today for future consumption. There has to be a price, a benefit, in delaying immediate spending. Otherwise, the incentive is to go find the next NFT or digital sports clip and spend some stupid amount for it. My conclusion, therefore, is that the price of withholding savings for future consumption is too low. By a lot.
Let’s bring it back to the markets. Bond futures settled at new lows on Friday. The yield on the 30 year treasury ended at 2.4%. Investors, or savers, put money into bonds in a delay of present spending. That yield, although its recent ascent is being looked upon with trepidation in institutional money markets, is too low. Not only that, if our previously mentioned ‘investor’ borrowed money on his credit card to buy his NFT, and if he sees that similar works are now trading for $1500, his net worth has increased by $500. He has an asset valued at $1500, with a liability of just $1000. Of course, that debt, backed as it is by an NFT, is someone else’s [worthless] asset.
At this point, I figure it’s appropriate to add a definition of NFT, which I got from google:
An NFT is an asset verified using blockchain technology, in which a network of computers records transactions and gives buyers proof of authenticity and ownership.
Just because you use blockchain technology to verify that you own a piece of sh-t, doesn’t make it any more valuable. Just so that you don’t think I’ve gotten [more] stodgy, here’s another feel good story:
Rapper Azealia Banks sold her audio sex tape with her fiancé Ryder Ripps for $17,000 as an NFT, or a non-fungible, token, which essentially allows individuals to sell digital objects as one-of-a-kind via cryptocurrency. Now, the sex tape is being resold for over $260 million.
This, from a site called Insider, which I have linked below. I think it’s real. It’s on the internet. A friend sent me a chart that was from Gundlach’s Doubleline presentation. Investment grade debt in real terms is negative. (Thanks MJ). From 2015 through 2018 this real yield was positive, ranging from 1.5 to 2.0%. Investment grade borrowers are essentially being paid to borrow. That’s what a negative real rate means. Any ramifications to growth, or perhaps, froth in speculative assets from that?
OK, so I have a proposal, we start a SPAC which invests in NFTs. The portfolio of NFTs is to be highly diversified including pieces of art, sports clips, and the occasional sex tape in the name of inclusivity. Though some of the assets may be of dubious value, they are all unassailably backed by blockchain technology, so the ratings agencies feel compelled to list our bond offering at AA. And we can borrow at LESS THAN THE RATE OF INFLATION. I think we can christen this new enterprise under the “HowYaLeft” name. Of course, I already own howyaleft.com which I would be happy to part with… for a tidy sum. I will transfer ownership to the SPAC. However, I want to be paid in GOLD. *Other partners in side conference: “Can you believe it? This idiot is willing to exchange digital assets for gold” *
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Another couple of interesting tidbits from the Z.1 report. In 2007, Household Home Mortgages topped at $10.625 trillion. At the end of 2020, we’ve finally just surpassed the amount of HH Mortgage debt outstanding, at $10.935 trillion. Houses are worth a lot more these days, so of course that contributes to the increase in HH Net Worth, given stagnant mortgage debt. Now, for the sake of comparison, let’s take a look at Federal Gov’t Debt. In 2007, it was $6.074 trillion, less than 2/3rds mortgage debt outstanding. At the end of 2020, it is $23.621 trillion, more than twice mortgage debt outstanding. When we see that mortgages are tight to govies, there might be a good reason, even ignoring the Fed hoovering up MBS. Take a look at your elected officials. What’s more risky, a mortgage backed by a house, or lending to the House?
Once again, we look at Friday’s midcurve option expiration, with Blue March midcurve puts having expired with 907k open interest, which now goes away. Blue midcurves weren’t all that popular a year ago. Of course, just over one year ago, in the month of February 2020, the red pack to blue pack spread (2nd year forward to 4th year forward) averaged just above 11 bps. On Friday, reds to blues were over 121 bps, a new high. So there has been quite a bit of steepening. In fact, it was October of last year that featured a lot of the initial interest in buying blue March (3E) put structures. One dilly was the October 9, 2020 buy of the 9900/9912ps vs 9975/9987cs, paying 0.25 for the put spread in 50k ref EDH’24 price around 9946. This wound up trading well over 100k, adding a big chunk to 3EH OI. EDH’24 settled Friday at 9875. 3EJ, K and M on EDM’24 now have 1.475 million puts combined, and 3EN, Q and U on EDU’24 have over 800k.
The peak one-year ED calendar on the curve is 70 bps, with EDH23/H24 and EDM23/M24 tied at that level. These are new highs. Typically, one-year calendars widen in an environment of the Fed easing from a high FF starting point: near contracts swiftly fall in yield in reaction to cuts and expected cuts, while deferred yields fall much less quickly. Now the forward one-year calendars are rising for the opposite reason: expected future rate hikes. The Fed generally cuts faster than it hikes. So 70 bps is high for a far forward one-year calendar. If one were to assume the 2004/06 guide of 25 bps hike per FOMC meeting, with eight meetings a year, then 200 bps in a year is doable. But the market never prices certainty of all hikes. On the other hand… Taco Bell NTFs. It’s time to start thinking about the odds of a 50 bp hike in one shot in the not-too-distant future. Chalupa.
This week features Retail Sales on Tuesday, and the FOMC announcement and press conference on Wednesday.
OTHER MARKET THOUGHTS/ TRADES
At December’s FOMC, the projection materials have the following dot plots. In 2020 and 2021 all dots are at 12.5 bps. In 2022 one errant member indicated a hike, with one dot at 37.5 bps and the rest at 12.5. In 2023, there are 12 dots at 12.5, 3 at 37.5, 1 at 62.5 and the black sheep (who sees what’s actually happening), at 1.125. All wrong. All of them. All too low, starting in 2021. There is talk that some dots will move up, given the vaccine progress and stimulus, and that investment committees will convene and, in careful consideration and deliberations will react to this change in official circumstances… by puking bonds. I wouldn’t be surprised to also see Core PCE Inflation projections move up by 1/10 each in 2021, to 1.9, and 2022, to 2.0. The question is whether the existing shorts will take such an opportunity by covering some positions, or whether they will press. I expect the latter.
| 3/5/2021 | 3/12/2021 | chg | ||
| UST 2Y | 13.9 | 14.9 | 1.0 | |
| UST 5Y | 78.4 | 84.5 | 6.1 | |
| UST 10Y | 156.7 | 163.2 | 6.5 | |
| UST 30Y | 229.0 | 239.9 | 10.9 | |
| GERM 2Y | -69.0 | -68.7 | 0.3 | |
| GERM 10Y | -30.2 | -30.6 | -0.4 | |
| JPN 30Y | 66.9 | 68.7 | 1.8 | |
| CHINA 10Y | 324.9 | 325.9 | 1.0 | |
| EURO$ M1/M2 | 7.0 | 9.0 | 2.0 | |
| EURO$ M2/M3 | 45.5 | 45.5 | 0.0 | |
| EURO$ M3/M4 | 68.5 | 70.0 | 1.5 | |
| EUR | 119.13 | 119.55 | 0.42 | |
| CRUDE (active) | 66.09 | 65.61 | -0.48 | |
| SPX | 3841.94 | 3943.34 | 101.40 | 2.6% |
| VIX | 24.66 | 20.69 | -3.97 | |
https://www.federalreserve.gov/releases/z1/20210311/html/b1.htm
https://www.businessinsider.com/taco-bell-potatoes-return-celebrated-with-nft-crypto-collectibles-2021-3
https://www.insider.com/azealia-banks-ryder-ripps-nft-sex-tape-resold-275-million-2021-3
