Friday Speedrun: June 9, 2023
All news is good news.
Hello. It’s Friday. Thanks for signing up. I’m Brent Donnelly.
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Here’s what you need to know about markets and macro this week
Global Macro
All news is good news these days as the market was so hardcore bearish for so long and doubled down on the banking crisis in March. Now, momentum is strong, shorts are dead, flows are one way, volatility has collapsed, carry is king, and nobody is making money except passive index investors and momentum funds.
Most of the publicly-available hedge fund returns data shows punters up 0% to 6% this year while 60/40 is up 7.5%, SPX is up 12.5% and the NASDAQ is up 27.5%. These are tough and unfair comps, but generally when stocks are ripping higher in a straight line and volatility is falling, hedge funds underperform.
It’s not just about positioning. The weird thing in a nominal world is that high inflation can be great for earnings as long as it doesn’t get totally out of control. It was about to get out of control, but now just about everything that was pushing prices higher has reversed momentum. But companies can keep prices and margins high—except TSLA. :]
Strong data last week? Stocks up! Weak data this week? Stocks up!
Remember when people were freaking out about lumber, and European energy prices, and eggs, and shipping costs, and fertilizer prices? Here’s an update:
Lumber and European energy prices, 2019 to now
Those charts look like ARKK! Or shitcoins!
Excess monetary and fiscal stimulus can combine to create massive bubblicious distortions. It is unlikely that any lessons will be learned from the 2020 policy response to COVID because finance is the only field where we never learn from history and we never learn from past mistakes and we never build upon past ideas.
We just repeat the same cycles… Over and over.
But… If there were a lesson to take from this cycle, it’s that MMT is a purely theoretical framework that has no place in actual reality because politicians’ idea of solving inflation is to create subsidies and payouts to help those hurt by the inflation. You don’t cure inflation by spending more money. That’s not how the machine works.
MMT suggests the cure for inflation is fiscal tightening but in the real world of highly-polarized democracy, austerity is not a viable election platform. Not yet, anyway. We need years and years of inflation pain before the politics of austerity will flip.
Anyway. The main theme this week was another face ripper in equities and a concomitant tumble in vol. The drop in the VIX is particularly interesting because the prior runs in equities never saw volatility drop this much because degen gamblers call buyers provided steady demand for vol.
The implication is that we need to prepare for smaller ranges in equities until eventually Minsky’s ghost rises and all hell breaks loose. The VIX isn’t predictive, it’s descriptive. It’s telling you we are in a lower-volatility regime here. Trade accordingly.
Bigger positions, tighter stops, and mean reversion tend to work in low VIX regimes. People like to think low VIX is a sign of complacency, and it is. But that complacency can sometimes last a long time. Like… Years.
VIX falling down like William Foster
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Stocks
Despite the commentary above, my view is that this low-volatility regime doesn’t last very long as we are more likely completing a repeat of the 1999 dotcom cycle where stocks saw a face-ripper rally just like this one. Here’s the comparison, for your viewing pleasure.
While the magnitudes are comparable, the 1999/2000 bubble happened at light speed compared to the 2021 bubble. Here is how they played out, using the start day as 50% of the high.
You can see they both doubled, then dropped around 60% and in 1999 the last rally was 86% of the high while the current rally (14739) is right there at 88% of the 16768 NASDAQ high printed in 2021. It’s just a bunch of numbers, and may have no predictive value, but the parallels have been pretty striking throughout, whether it was the stadium naming or the Superbowl ads, or “Company X gonna change the world” language, etc.
I think it’s worth considering that this wave right here in the NASDAQ is the equivalent of the year 2000 rally from 2901 to 4186.
One mind-blowing aspect of the ’99 vs ’21 comparison is the rapidity of the 1999/2001 bubble in both directions. Never before and never again will so many day traders have so much fun. If you weren’t around in 1999, and you thought 2021 was stupid or fun… 1999 was 3X crazier than 2021.
Risk managing a bearish view based on an analog like this can be tricky because the analog is never going to be perfect. For me, if NQ takes out 15,000 or NVDA makes a new high, my view is wrong and I’m out.
ALL BEARISH VIEWS SHOULD BE TACTICAL. Stocks tend to go down fast and up slowly. Stocks tend to go up over time. Stocks earn a yield and puts are very expensive. Permabears don’t make money. Negativity bias is the most costly bias in finance. So whenever I am bearish the stock market, I have a specific level where I will give up and move on. It’s OK to be wrong. It’s not OK to be bearish all the way up.
To read more about why a dogmatic bearish bias is trader and investor kryptonite, check out this short excerpt from Alpha Trader.
And here is this week’s 14-word summary of this week’s stock market action:
Volatility falls to post-COVID low as stocks rip on flow and momo FOMO.
Next week es mas grande with US CPI and FOMC, plus the ECB and Bank of Japan meetings.
Bonds
US yields were pretty much unchanged this week and the big story was a pair of unexpected rate hikes in Australia and Canada. Those central banks are unpleased with their progress on inflation and decided to keep tightening the monetary vise.
I am unsurprised by the RBA’s move because they have been slow to hike and their inflation is very high, but the Bank of Canada surprised me given inflation there is lower and the BoC has already jammed their policy lever above the inflation rate.
The blue lines and the red line show Canada’s inflation converging towards the central bank policy rate while the green lines show a big disconnect. When policy rates are low relative to inflation, that’s called negative real rates and usually that means policy is loose. There are more sophisticated ways to estimate real rates but (policy rate minus current inflation) is a nice heuristic / sniff test / finger in the air.
Canada is not Australia, but they both hiked anyway
Fiat Currencies
Mostly a low-vol chopfest in G10 these days. Here’s USDJPY, for example.
USDJPY 5-minute chart in June
Sometimes currencies are just like: “Hey, we’re happy here. Tell us when there is some REAL news.” And everyone tries to slap them around and push them down and make them move and they’re like: “Dude. We said tell us when there is REAL news.” That’s FX right now.
AUD, NZD, GBP, and MXN are four currencies that typically do well when risk appetite is high and volatility is low. They all had a lovely week, though it’s worth noting that AUD, NZD, and GBP still trade below their May highs and stocks were way lower in May. So they are underperforming despite the 45-degree angle appreciation this week.
AUDUSD 5-minute chart this week
In the previous paragraph, I mistyped “45-degree angle” as “45-degree angel.”
What do you think midjourney would make of that? Let’s see.
Pretty dope. Reminds me of this beautiful and haunting black and white.
I'm not like them, but I can pretend
The sun is gone, but I have a light
The day is done, but I'm having fun
I think I'm dumbOr maybe I'm just happy
Think I'm just happy
Crypto
It is OK to have some opposing thoughts in your head at the same time.
For example, you can believe that the SEC has done a clownshow-bad job: bad communication, non-enforcement, failure to offer the most basic protections to consumers, antagonistic gaslighting of those who try to be legitimate actors in crypto, etc. But you can also believe that Binance is probably a criminal organization, SBF should be in jail for life, and 90% of crypto is grift. I believe all those things.
Overheard at Epsilon Connect today … “Some of the best people I know are in crypto. Unfortunately, all of the worst people I know are in crypto.”
That’s the weird thing about crypto. It’s a bunch of solutions and a bunch of problems all wrapped into one big rent-seeking, fraud-happy Rube Goldberg machine. But it’s also a possible bridge from the current unsustainable MMT world of infinite fiat money creation to whatever comes after The Reset.
Then again, if you envision the post-Reset world as a dystopian technofuture like Ready Player One or Snowcrash avec face computers, and all that… I would bet real estate, farmland, cigarettes, Glocks, and other hard assets are a better bridge than a finite digital coin.
Anyhoo! Crypto prices went down a bit this week as two more rent-seeking leaders of centralized Big Crypto (Coinbase and Binance) were prosecuted by US authorities. When FTX went bankrupt, BTC suffered only briefly. I don’t see any reason why Binance getting prosecuted should matter.
Imagine a gold exchange went bankrupt. Would you sell gold on that? If the CBOE went bankrupt would you sell bonds? If NYMEX was convicted of fraud, would you sell oil? No, no, and no. And don’t give me: “This proves it’s all a fraud.” If that is your view, you held that view before and after. If it wasn’t, this changes nothing.
People are losing interest in crypto at the margin. Volumes are contracting and global volatility is low across all assets. This is not permanent; it’s just what’s happening now. If bitcoin was supposed to be a hedge for monetary insanity… You don’t really need the hedge in the short run. Rates are above 5% in the US. If it’s a long-term hedge (which I think it probably is) … It’s an expensive one but whaddya gonna do. Insurance is often expensive. But you can’t buy earthquake insurance after the earthquake. You gotta own it before.
So bitcoin remains a good long-term hedge against fiat monetary debasement but it’s not as much of a useful macro trading plaything these days because QQQ’s and NVDA (for example) are moving so much more. The true degens and gamblers are pivoting from crypto to AI.
NVDA volatility is now consistently higher than bitcoin.
BTC vs. NVDA, 90-day volatility
Commodities
Saudi Arabia wants oil to go up. Oil is going down. They threatened speculators going into the OPEC meeting, which is the stupidest thing you can possibly do to a market. It’s like saying : “Hey! Watch out for my big surprise attack next week!” Then wondering why your surprise attack next week doesn’t work.
NYMEX Crude Oil, March 2023 to now
Reminds me of this Bushism:
"There's an old saying in Tennessee—I know it's in Texas, probably in Tennessee—that says, 'Fool me once, shame on... shame on you. Fool me—you can't get fooled again. '" – GWB; September 17, 2002.
I miss the good old days when people just laughed at politicians instead of spending 80% of their time raging against them. Federal politics in the USA is like shark attacks. It gets much more media coverage than it deserves. It’s much less important than most people think. If you ignore it, it mostly goes away.
Alright. That was 6.8 minutes. You’re done.
Get rich or have fun trying.
Links of the week
Nerdy economics humor
https://twitter.com/pineconemacro/status/1666507671162462208?s=20
A song from 1994 that still rocks
The song and the video both hold up well, 29 years later.
A song I didn’t expect to like
I don’t generally like country music, but I like to keep an open mind ‘cuz ya never know. This song is bluegrass, and it’s cool as shit. Listen to all the instruments and harmonies. Awesome.
Smart / philosophical
https://erinkissane.com/tomorrow-and-tomorrow-and-tomorrow
If you like Post Malone and/or Billy Strings
I like the first comment on this YouTube video:
“Post Malone did the opposite of selling out. He made mainstream music, got big, then went on to do whatever he wants musically. Much respect.”
He can do pop, Nirvana, or country. Solid.
Trading is about making money not being the smartest man in the room. Chapeau BD
As usual, my favourite piece of the week. Overall, not just on substack ;-)