Artifice
July 20, 2025
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In the languid days of summer, trading activity in the old CME Eurodollar pit stalled to a near halt. This is how a day might go: Get to the floor at 6:30. Data at 7:30, a modest flurry of business but little price movement. Leave the floor around 8:45 for a coffee. Sit outside at the Starbucks patio and admire the secretarial pool in willowy sundresses pouring out of the commuter train station. Their day was just starting at 9 or 9:30; but the trading day was essentially over. Back inside, a couple of locals ask if I can watch their butterfly orders, because they’re going golfing.
The rectangular pit was half a city block and held hundreds of order-fillers, locals and clerks. Options pit on the north end and back months stretching to the opposite south wall. On either side, brokers’ phone desks tiered up, holding hundreds more. On occasion, someone would blow up a huge, brightly colored beachball, and punch it high into the air, setting off a spirited volleyball game involving everyone. Floats up towards the desks and someone spikes it back towards center. A particularly high fly would generate ‘oohs’ and cheers. And of course, it also involved exchange personnel tasked with stopping this childish game, who would comically chase the bouncing ball, only enhancing the festive atmosphere. One of my favorite memories. Simple mind, simple pleasures.
In any event, the ‘trading floor’ has now moved to an electronic data center. Not nearly as fun. Is an electronic matching facility the same as a trading floor and do the rights of the B-share membership floor traders transfer (along with revenue considerations) to THAT trading facility? That’s the core issue of the current trial involving B-Share owners as plaintiffs against the CME. Seat prices have recently exploded pending the outcome of this trial, which should occur by the end of July. A friend has meticulously covered every day of the trial and it’s quite fascinating; several billion at stake.
The rush into data centers and AI ‘super-intelligence’ is perhaps at the opposite end of the spectrum from the physical trading floor. Meta is a leader, now constructing an AI center called Hyperion in Louisiana that’s been compared to the size of Manhattan, using 5-gigwatts. CNBC notes this is more power than some countries use. From The Deep View:
The scale reflects AI’s massive energy appetite. A single ChatGPT query requires nearly 10 times more electricity than a Google search. Goldman projects data centers will consume 8-9% of US electricity by 2030 up from 3-4% today. …Data centers will drive 20% of electricity demand growth.
Large data centers typically consume 200 million gallons of water annually, equivalent to 2000 homes. …Residents near Meta’s Georgia data center report wells running dry and water pressure dropping, with some homes left with non-functional sinks and toilets.
Is this a quest for knowledge or a replacement for intelligence? I can’t help but think of the classic 1964 Twilight Zone episode called ‘Time Enough at Last’. Henry Bemis is a bookworm bank teller with thick round glasses. He takes his lunch break in the bank’s vault, where he can escape to his books, undisturbed. “Moments after he sees a newspaper headline which reads ‘H-Bomb Capable of Total Destruction’, an enormous explosion outside shakes the vault, knocking Bemis unconscious. After regaining consciousness and recovering his glasses, Bemis emerges from the vault to find the bank demolished and everyone in it dead. Leaving the bank, he sees that the entire city has been destroyed, and realizes that, while a nuclear war has devastated Earth, him being in the vault has saved him.” He walks through the rubble of the city in despair, but at the very edge of hopelessness spies the Public Library, scattered books everywhere. Now he rejoices in the prospect of contemplating the world’s classics with all the time in world. He enthusiastically sorts the books for years of reading, but then stumbles, his glasses fall off and shatter. Utter despair.
At one time the Public Library was the repository of human knowledge. One develops intelligence by consuming knowledge. Carnegie funded a system of public libraries. “During the depression, DC’s Carnegie Library was called ‘the intellectual breadline.’” It was ‘dedicated to the diffusion of knowledge.’
In 1914 Henry Ford instituted “$5 Day” which doubled the wage of his workers, enabling them to buy the product that they were cranking out. (At the time employee turnover was a problem, however this program also helped build an industrial middle class). Today Zuckerberg is paying millions to poach top AI talent, which will likely end up replacing many workers in other industries. Accentuating wage disparity? Yesterday’s economic model had aspects which broadened wealth and knowledge. Not so sure about today’s.
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Back to markets: copper has made new all-time highs, partially due to tariffs. Huge electricity demands require industrial metals. For fun I created an overlay of the 10y breakeven and BBG’s industrial metals index. Could data center construction help drive inflation expectations higher? That idea is probably a stretch, but there does seem to be a loose relationship.
The next chart is clearer. The reign of the ‘King of Debt’ (Trump) appears strongly correlated with a steepening of the 5/30 treasury spread.
The last Fed cut to the current target of 4.25 to 4.50% was December 18. At that time 5/30 was just above 25 bps. On Inauguration Day, 5/30 was around 41; it dipped to 35 in mid-Feb and has been trending higher ever since. I did a ChatGPT search which revealed that every time Trump calls Powell ‘stupid’ the 5/30 spread gains 1.12 bps. Just kidding. But it’s starting to look that way.
A couple of more thoughts…
BBG’s Macro Man, Cameron Crise, notes ”…the explosion higher in uber-speculative assets certainly does not provide much support to the notion that monetary policy or conditions are remotely restrictive…” He cites the ‘BUZZ Index’ which is ‘Next Gen AI US Sentiment Leaders’ [huh?]
Crise: I should note that when the BUZZ index has a three-month Sharpe that is a) above 4, and b) more than 1 point above the SPX, as is the case today, it has only been higher in absolute terms four weeks later around 41% of the time, with an average return of -2.3% (median -1.6%). That doesn’t guarantee that the top is in, but it’s not exactly a compelling proposition that you should pile in here. It also rather suggests that the public’s animal spirits are sufficiently feral that the notion that monetary policy is really restrictive rings rather hollow.
Related concerns: GS Non-Profitable Tech Index (GSXUNPTC) has soared 69% off the April low (though it’s still only half the price of the 2021 high). BBG’s Credit Weekly: Junk Bond Investors Pile into the Riskiest Debt. “Bonds rated in the CCC range have gained 0.75% this month …outpacing all other ratings tiers… The highest rated junk bonds, in the BB tier, have turned in the worst performance…implying that investors are trading out of the less risky junk bonds and into the securities paying the most yield.”
Waller didn’t touch upon these signs of speculative excess when arguing for a 25 bp cut at next week’s FOMC. He just deems the current FF target as restrictive and is concerned about the labor market. Small silver lining in the upcoming week: It’s the Fed blackout period.
OTHER THOUGHTS/ TRADES
A couple of large highlight trades: +50k SFRU5 9593.75/9600cs for 1.375. SFRU5 settled 9583.5, down 1.5 on the week even as Trump again threatened to fire Powell (and replace him with an easy money proponent) and Waller called for a cut. This call spread settled 1.0. FFQ5 settled 9568.5. A cut in July would be 9592, while unch’d policy is 9567.
2QH6 9800/9825cs was bought 140k for 1.0 or slightly below synthetically. Underlying future is SFRH8 which settled up 3.5 on the week at 9659.0. Disaster trade. 2% strike; expires 13-March 2026.
USU5 108.0p bought 41k, synthetically 28.5 and 34.5. Settled 24 vs USU5 112-14, which was down from 112-29 the previous Friday. The only reason I mention this trade is because that strike is now the largest open interest in Sept bond puts with 51k. 0.15 delta. As yields go higher the duration of the USU contract will increase due to change in cheapest-to-deliver.
| 7/11/2025 | 7/18/2025 | chg | ||
| UST 2Y | 391.2 | 387.3 | -3.9 | |
| UST 5Y | 399.0 | 396.1 | -2.9 | |
| UST 10Y | 442.1 | 442.9 | 0.8 | |
| UST 30Y | 495.6 | 499.9 | 4.3 | |
| GERM 2Y | 189.6 | 186.4 | -3.2 | |
| GERM 10Y | 272.3 | 269.4 | -2.9 | |
| JPN 20Y | 250.7 | 252.4 | 1.7 | |
| CHINA 10Y | 166.4 | 166.6 | 0.2 | |
| SOFR U5/U6 | -86.0 | -91.0 | -5.0 | |
| SOFR U6/U7 | 4.0 | 2.5 | -1.5 | |
| SOFR U7/U8 | 21.0 | 24.5 | 3.5 | |
| EUR | 116.90 | 116.27 | -0.63 | |
| CRUDE (CLU5) | 67.04 | 66.05 | -0.99 | |
| SPX | 6259.75 | 6296.79 | 37.04 | 0.6% |
| VIX | 16.40 | 16.41 | 0.01 | |
| MOVE | 85.48 | 83.29 | -2.19 | |
https://en.wikipedia.org/wiki/Time_Enough_at_Last
