Author: admin

Authored by Charles Hugh Smith via OfTwoMinds blog,

The lifestyle you ordered in the euphoria will be out of stock in the panic.

Humans running Wetware 1.0 (which is all of us) love to gamble, and we are entranced by the thrill of victory and the agony of defeat. When there’s a market for speculation, these wild swings of emotion manifest as euphoria (I’m winning!) and fear (I’m losing).

Thus the soaring price of goats due to speculation in 1740 B.C. Babylon so vexed Hammurabi that he ordered the execution of those he deemed responsible for profiteering off their clever speculative manipulation.

Speaking of goats, let’s ask a GOAT (greatest of all time) question: what’s the greatest bubble of all time (GBOAT)? The easiest way to measure speculative bubbles is the starting price and the peak price, but that may not do justice to the question. Perhaps the number of people drawn into the speculative frenzy is a better measure of GBOAT: after all, if only a handful of speculators lose their shirts, how that can be the greatest bubble of all time?

To even qualify, a bubble must drawn the masses into the euphoria and then slaughter them as mercilessly as Hammurabi massacred the goat profiteers.

Another qualifying factor is the scale of disconnect from reality. Even if you overpaid for a goat in a speculative mania, at least you can still milk the goat and make cheese. But tulips, which drove the remarkably excessive speculative Tulip Mania in 1636 Holland, are not even edible.

At least tulips offer a bit of beauty in a world besmirched by speculative ugliness, but the shares of the South Seas Company that sucked in the best and brightest in 1720 Britain and proceeded to lay waste to their wealth did not even have that saving grace.

Another qualifying factor is the power of the delusion driving the bubble. To qualify as a contender for GBOAT, the mania has to be utterly convincing and persuasive to everyone involved. In other words, it isn’t even speculation to invest all your money in the bubble, it’s simply common sense due to the dead certainty of the proposition fueling the mania.

The 1999-2000 Dot-Com Bubble is a good example of the universality of belief in the obviousness of the gains to be reaped: the Internet was changing the world and would expand for decades, so obviously the companies involved would grow for decades, too, as would their profits (obviously!).

The chart of the dot-com bubble offers a textbook example of how a bubble gathers momentum, spikes to insane heights, falters as the smart money exits but soars to a lower high as true believers buy the dip. Once the buying is exhausted, the bubble collapses back to its starting level.

But not all bubbles follow this trajectory. Here is a current chart of IWM, the Russell 2000 index, courtesy of NorthmanTrader.com. (I added the black box and the red line in the center panel to indicate the previous bubble top.) The violence and amplitude of this speculative mania over the past year makes the dot-com bubble appear quaintly staid in comparison.

So let’s make the case that we’re experiencing the greatest bubble of all time in real time. The magnitude of the price movement is extreme: check. The number of people sucked into the mania is extreme: check. The power of the delusion is extreme: check. (The Fed will print trillions forever, federal government will borrow and blow trillions forever, the world is about to enter Roaring 20s, technology is changing the world, etc. etc. etc.) The gains to be reaped are extremely obvious: check.

History leaves no doubt that all speculative bubbles pop, and much sooner and more violently than the euphoric participants believe possible. Before Hammurabi shut down the mania in goats, a rare goat with distinctive markings could be traded for an entire house. After the bubble popped, it was just another goat.

The lifestyle you ordered in the euphoria will be out of stock in the panic. Everyone running Wetware 1.0 is prone to getting caught up in a mania in which a tulip or goat can be traded for a house. But then euphoria flips to fear and after the mania fades and the losses have crushed spirits, hopes and dreams, a tulip is once again just a tulip and a goat is one again just a goat.

NOTE: I made up the story about the bubble in goats and Hammurabi. That is fiction, not history.

*  *  *

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

*  *  *

My recent books:

A Hacker’s Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World (Kindle $5, print $10, audiobook) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 (Kindle), $10 (print), ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).

With yet another failed impeachment conviction under their belts, House Democrats have refocused their efforts, and are aiming for a Feb. 26 vote on President Biden’s $1.9 trillion stimulus plan, according to Bloomberg.

The tight timeline was announced on a call between House Majority Leader Steny Hoyer (D-MD) and fellow Democrats, and reflects a need to quickly approve another round of stimulus payments, along with enhanced unemployment benefits and – of course, money for schools which top infectious diseases doctor-cum Biden spokesman Dr. Anthony Fauci said is required to get teachers back into classrooms. Of note, several key benefits from the last round of pandemic stimulus will expire in four weeks on March 14.

In order to push legislation through by then, Democrats will likely need to amend certain provisions, including the $15 federal minimum wage requirement that at least two Democratic Senators – Joe Manchin of West Virginia and Kyrsten Sinema of Arizona – say they are opposed to. If the bill gets rejected in the Senate, an amended version would have to go through the House again, wasting valuable time.

The eagerness of congressional Democrats to move past Trump was evident from start to end of the shortest Senate impeachment trial in history. The agreement on the trial format between Senate Majority Leader Chuck Schumer and GOP leader Mitch McConnell kept the proceedings compressed, and the four days of arguments ended ahead of schedule.

After Senators voted on Saturday to allow witnesses to testify — a surprise result that risked delaying the trial’s conclusion by several weeks — House impeachment managers and the former president’s defense team agreed to enter a public statement into the record. That let the chamber move on to a verdict that day, acquitting Trump.

Although Democrats expressed disappointment in the outcome, they said they are ready to put the former president behind them and focus on Biden’s priorities. -Bloomberg

“We in Congress need to move forward with delivering the expanded unemployment checks, the stimulus checks, the reinvestment in our economy that the American people so desperately need and deserve,” said Sen. Chris Coons (D-DE) on ABC‘s “This Week.”

Biden, meanwhile, has been meeting with governors and mayors along with industry CEOs such as JPMorgan’s Jamie Dimon and Walmart’s Doug McMillon.

Last week, multiple House committees approved stimulus legislation under a fast-track budget reconciliation framework, which will allow them to progress through Congress with a simple majority in both chambers. The House Budget Committee, meanwhile, is expected to meet next week to assemble the individual bills approved in committee into the overall stimulus package, after which a vote will be held.

According to House Speaker Nancy Pelosi (D-CA), she will send the bill to the Senate as soon as it passes through the House, while Senate Majority Leader Chuck Schumer (D-NY) is apparently looking for ways to expedite the final bill once it reaches his chamber – including bypassing the Senate Finance Committee approval process for parts of the bill in order to get the legislation across Biden’s desk before the March 14 deadline.

Democrats’ next move will focus on an infrastructure and jobs package, according to the report, which will entail bipartisan discussions on physical infrastructure upgrades as well as rural broadband internet and investments in renewable energy, such as freezing windmills that require gas-powered helicopters to unfreeze using petroleum products.

Earmarks are back…

According to Bloomberg, “House Appropriations Chair Rosa DeLauro and Senate Appropriations Chair Patrick Leahy’s plan to restore lawmaker-directed spending, known as earmarks, which Congress banned a decade ago. The practice allows lawmakers to insert funding for pet projects into legislation and is seen as a useful tactic to get members to back large ambitious bills, but it has been the source of scandal and abuse by some lawmakers.”

Also looking towards earmarks will be Transportation and Infrastructure Chairman Peter DeFazio, who will have primary jurisdiction over the infrastructure bill.

And since Republicans lost the Senate following a January runoff election in Georgia (in which attorney Lin Wood advised Republicans not to vote until the candidates supported Trump’s election challenges), there’s nothing Republicans can do about said earmarks.

While bonds were making headlines on the business media, the real bloodbath was in Texas power markets with Spot Electricity hitting its $9000 cap..

Source: Bloomberg

But bond investors were really puking today, with 10Y up over 9bps testing 1.30%…

Source: Bloomberg

This is the biggest 3-day spike in yields since the election rebound…

Source: Bloomberg

The 7Y/10Y segment was the worst performer as we suspect swap and mortgage traders stepped into gamma- and delta-hedging…

Source: Bloomberg

As mortgage spreads have blown out the most aggressively since

Source: Bloomberg

Technicals seem to confirm 10Y breaking out also…

Source: Bloomberg

Is the market just full to the brim with fiscal and monetary largesse?

Real yields jumped to their highest since early January, led by gold…

Source: Bloomberg

Bitcoin topped $50k…

Source: Bloomberg

S&P hit the 3950 ‘Call Wall’ and stumbled…

TSLA tumbled back below $800 once again (as perhaps the limits of electrickery were exposed in the southern states’ chaos)…

Futures were holding up from yesterday’s gains but as Treasury yields surged, something snapped in stock-land. Small Caps and Big Tech were the day’s laggards and The Dow led with a green close…

Oil stocks led the way(again) along with financials (steeper curve)…

Source: Bloomberg

Notably the MSCI World index was up for the 12th straight day, its longest streak in 17 years (Nov 2004)…

Source: Bloomberg

Pot stocks managed gains today after a couple of ugly days…

Source: Bloomberg

And the original basket of WSB short-squeeze stocks sold off today ahead of the hearings…

Source: Bloomberg

VIX pushed notably higher today after crashing to a 19 handle on Friday…

As call buying continues to dominate put buying…

Source: Bloomberg

The dollar surged intraday, ramping to run stops from Friday before fading back…

Source: Bloomberg

Spot Gold prices fell back below $1800…

Source: Bloomberg

As the 50- and 200-DMA crossed over in a ‘death cross’…

Source: Bloomberg

Nattie prices jumped on the heels of the chaos across the southern states…

And the freezing temps wreaked havoc on Texas oil wells and refineries, sending oil production in the country’s largest crude-producing state plunging by more than two million barrels a day due to the storm, which has sent prices surging to $60 a barrel for the first time in a year. ..

Lumber has roared back to record highs on seasonally strong demand, prolonged maintenance, expansion delays, container shortages, and low producer stocks…

Source: Bloomberg

Finally, we note that stocks are the most ‘expensive’ relative to bonds since 2018 – is there an alternative after all?

Source: Bloomberg

Bye, Sue Herrera!

While it seems like only yesterday, this week will mark one year since the S&P’s pre-corona crisis high (3386) which as Goldman’s Rocky Fishman reminds us was then followed, less than four weeks later, by the VIX’s all-time high (83).

And while the VIX’s 19.97 close on Friday (it has rebounded back over 20 on Tuesday as a result of what Nomura’s Charlie McElligott said was signs of “crash-UP” chasing from buyers into the Equities call-wing/right-tails “which is in danger of adding to ongoing fragility in the Vol space”) was the first below 20 in almost a year, the VIX remains remarkably sticky and high: consider that a year later the S&P500 is 16% above its Feb-2020 high and 76% above its March low, yet “the volatile year has left a persistent overhang of risk aversion” and as Fishman notes, beyond the first three months of expirations, implied volatility is closer to its risk-averse pre-Election Day levels than to pre-virus levels.

Said otherwise, beyond the first month of maturities, implied volatility has been much more static, so curves are near record levels of steepness, and expectations of volatility 3-6 months in the future are comparable to pre-election levels. In other words, vol risk premium has been persistently high.

A little background.

Volatility risk premium trended downward across the 2010-2019 inter-crisis period, as option selling strategies consistently grew in popularity, culminating with a record stretch of sub-10 VIX in late 2017, yet which peaked around the 2018 VIX spike when the most popular inverse VIX ETF was wiped out in seconds.

However, everything changed in early 2020 when the outburst of volatility created enough aversion to short volatility strategies to drive vol risk premium (especially if measured via VIX or variance swap levels) to some of the highest sustained levels on record. Indeed, as Goldman calculates, even after falling 13 points in two weeks the VIX is 2 points higher than a regression vs. its most closely matching metric of realized vol would say it should be.

Also notable: the streak of 20+ closes was the longest since the GFC, but the aftermath of the coronavirus-driven VIX spike has seen a faster reversion to lower volatility than the GFC had even thoug hpeak levels of many implied and realized vol metrics exceeded GFC highs, according to Goldman which also notes that low correlation inside the SPX helped 1M realized vol fall to the 10% range in August and December, vs not falling that low until Dec-2009 following the GFC.

Aside from a psychological reluctance to get burned on another possible VIX spike, what is fundamentally behind this “sticky” high VIX? According to Goldman there are two growing sources of demand, reluctant supply.

Two growing key sources of demand for volatility risk have been the single stock option market (which has started 2021 with even higher volumes than it had in 2H2020), and inflows into long VIX exchange-traded products, particularly the UVXY (1.5x-levered VIX futures ETF). Incidentally, on Friday we discussed an interesting observation from Morgan Stanley according to which retail investors are flooding into long VIX ETP and calls, creating an upside “vega vacuum”, as they may be targeting the vol sector seeking to spark another short squeeze in the VIX.

The bank concluded that “while these flows don’t necessarily mean a spike in volatility is going to repeat itself in the imminent future, as they grow, it does mean that the risks of future volatility squeezes remain elevated”, and concludes that whereas it “continues to like selling volatility to capture what should be a continued wide implied versus realized spread in the coming months… the above positioning dynamic creates a risk.”

Goldman shared its own thoughts on this surge in ETP inflows and demand for Vega:

Long VIX exchange-traded products (ETPs) have started February with over $1bln of net inflows, bringing the complex to its longest net vega position since before the coronavirus crisis began. The 1.5x-levered UVXY ETF is now by far the largest VIX ETP, just as the TVIX was prior to its delisting in June. The recent inflows have returned the VIX ETP market to a size and product distribution that is similar to how it looked prior to the coronavirus crisis, except that the UVXY has replaced the TVIX as the main levered long product. Because it has lower leverage (1.5x for the UVXY vs 2.0x for the TVIX), the UVXY’s rebalancing is significantly smaller at the end of the day than the TVIX’s would be for a given amount of VIX futures exposure (and current rebalancing would be a fraction of the lead-up to the Feb-2018 VIX spike).

There is another notable difference between Feb 2018 and now: whereas back then retail investors were flooding on the short VIX side, now they are doing the opposite, effectively betting on a VIX spike, a topic we discussed extensively last Friday.

Whatever the cause behind this dramatic inflow into long VIX exchange-traded products, particularly the 1.5x-levered VIX futures ETF UVXY, Fishman notes that “the incremental demand from these products furthers the supply-demand mismatch that has been created by reduced interest in option-selling strategies, leaving a persistently high volatility risk premium.”

As a result of these imbalanced flows, implied correlation “is unusually low for the current high volatility level”, and the VIX futures curve is extremely steep, reflecting the impact of the incremental demand. Touching on the first point, Fihsman explains that “single stock implied volatility has been very high relative to index volatility throughout the coronavirus period, leaving implied correlation lower than it usually is in a volatile environment.” The derivatives strategist expects continued low realized correlation going forward, “as the reopening theme and policy changes have sector-specific impacts.”

Which leads us to Goldman’s preferred trading themes, which center across: long gamma, short vega.

As the bank explains, “hedging remains expensive, but short-dated puts are better value than they have been for a long time with the VIX dipping under 20. Hedges add value by allowing investors to maintain larger long positions than they would unhedged. Given how steep implied vol curves are, we prefer short-dated puts and put spreads to longer-dated hedges, and see EEMoptions as particularly attractive relative to other indices.” In this, Goldman agrees with Morgan Stanley except for the disclaimer that this whole trade can go haywire if retail inflows into VIX ETPs accelerate, sparking a vol-wide squeeze.

One final trade reco from Fishman is outright vol selling strategies – especially longer-dated – which can be favorably asymmetric:

12M SPX variance swaps at 29.6% are 5 points below full-year 2020 realized volatility, but 12 points above the17% realized volatility during the event-filled last 6 months.

One final word of caution to anyone wishing to sell vol here. As Nomura’s McElligott warned earlier today, there is another reason – or rather several – why forward vol has been “bid only” for the following demand-over-supply reasons:

• Inability of Dealers to be short anything of real “size” in crash / tails, gamma, skew etc and any “term” iVol, as per risk mgmt stress-testing / regulatory regime
• New demand from fixed-income investors in Equities iVol, as a potentially “reflationary” future state may render USTs ineffective as hedges for the “static bond / stock correlation set” (i.e. risk-parity / balanced-fund universe)
• Remarkable inflows into VIX ETNs creating enormous and incessant demand for Vega (via buying of VIX 1m constant maturity)—the last 1w period seeing a massive $53.4mm Net Vega increase, with the aggregate Net Vega at 93rd %ile since 2011
• The aforementioned grab into “crash-UP” now contributing to higher implied vols, as the upside reprices higher

Of these, the last one is most remarkable: we may be approaching an August 2020 “gamma meltup” analog where the entire VIX complex surges, not due to SoftBank’s intervention however or easier financial conditions and continued stock upside, but precisely due to them, i.e., aggressive and outsized call buying is now the main catalyst supporting the VIX and may in fact lead to far higher VIX levels in the coming days, an outcome which some may interpret incorrectly as downside protection hedging and create a violent imbalance in the vix complex, leading to just the “market fragility” event that the Nomura quant spent much of his note warning about…

Several major international brokers have been sued by a Bermuda hedge fund that claims the brokerages coordinated “abusive” naked short selling and spoofing strategies in US and Canadian markets. The suit revolves around the former Concordia Health, which was highly leveraged and ultimately went bankrupt after controversy about price gouging. 

CIBC, Bank of America, UBS and TD Bank are among those named as defendants in a lawsuit filed by Harrington Global Opportunity Fund in the US District Court for the Southern District of New York, according to Securities Finance Times. 

The suit alleges that the institutions “manipulated markets and drove down pharmaceutical company ADVANZ PHARMA’s (formerly Concordia) share price in 2016”. The company has since recapitalized and rebranded. 

The suit alleges that “several unnamed US and Canadian individuals, allegedly flooded the market with false sell signals by simultaneous naked short selling”. The suit runs of the gamut of naked short selling related allegations, notably that there were millions of “phantom” shares created by brokerages failing to borrow stock before allowing it to be sold short. 

Harrington alleges this is part of the reason Concordia’s stock fell from $34 to $2 in just 11 months:

It is alleged that in 2016 there were approximately 238 million shares of Concordia stock that were sold short on the Canadian and US exchanges, constituting around 58 per cent of the approximately 410 million Concordia shares traded during the period in question.

However, Harrington argues that only 40 million shares were actually issued for trading, meaning the short sale turnover rate was approximately 600 per cent.

“The enormous discrepancy between the 40 million shares issued by Concordia for trading and the approximately 410 million Concordia shares traded during this period represents an astonishingly high turnover rate of 1,000 per cent,” the suit says.

Recall, Concordia was a target of well known short seller Marc Cohodes, who in April 2016 took his criticism of the company’s management to national television on BNN.

Subsequent to the appearance, Concordia CEO Mark Thompson sued Cohodes, before stepping down from his position in October 2016 and the company eventually going bankrupt. 

 

 

Authored by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

Last week’s second impeachment trial of former President Trump should serve as a warning that something is very wrong in US politics. Far from a measured, well-investigated, rock-solid case against the former president, America was again abused with day after day of character assassination, innuendo, false claims, and even falsified “evidence.”

The trial wasn’t intended to win a conviction of Trump for “incitement” because the Democrats already knew that the votes were not there.

So, just as with the last impeachment trial, the goal was to fling as much dirt at Donald Trump as they could while the cameras were rolling.

Their hatred of Donald Trump is so deep and visceral that probably a psychologist would have been more beneficial to them than yet another impeachment trial.

It would be incorrect to say that the House managers’ case fell apart, because they had no case to begin with. They never had a case because they made no effort to develop a case. The Chief Justice of the Supreme Court saw from the beginning that this was no legitimate impeachment trial and informed Senate Majority Leader Chuck Schumer that he would not preside. Without the Chief Justice, there was no Constitutional impeachment trial. So they put on a show trial instead.

As Constitutional law professor Jonathan Turley kept asking, why didn’t the House schedule a single hearing to investigate what really happened up to and on the day of the Capitol melee on January 6th? They had weeks to do so. Professor Turley believes they might even have been able to make a decent case if they had tried.

Why did they not call witnesses? Were there no rioters who could be called to explain under oath how Trump’s speech had inspired them to enter the Capitol building to overturn the election?

Were they afraid that under cross-examination we might have found out more about Trump chief of staff Mark Meadows’ claim that Trump offered to deploy 10,000 National Guard troops in Washington before January 6th but that his offer was rebuked? What about reports that Capitol Hill Police were left without back-up and unprepared for what happened? House and Senate leadership is responsible for security at the Capitol and they obviously failed. Why?

The House and Senate Democrats (and a few Republicans) did not succeed in their ultimate goal: preventing Trump from ever running again for political office. But that doesn’t mean they are giving up. They are not about to give citizen Trump a moment of peace. They are intent on continuing their witch hunt but it looks less and less like any desire for justice. It looks like fear. They are afraid if he is allowed to run again he may be elected. So they cannot allow that vote to happen.

And they accuse Trump of undermining democracy.

There were a number of reasons to impeach and convict President Trump while he was in office. Bombing Syria on bogus grounds without authorization was one of them. But Democrats love war as much as Republicans so they weren’t about to uphold their Constitutional obligations.

Impeachment 2.0 may be over, but those blinded by hatred for Trump are not about to give up. They are irrational and obsessed. They are also dangerous.