Spoofing the world

September 5, 2021

From the Financial Times, citing Bank of Russia’s monetary report from Thursday.

Russia’s central bank says a new financial crisis on the scale of the 2008 collapse could happen in less than 18 months if global inflation is not kept in check. A surge in public and private sector debt levels during the recovery from the pandemic could cause the global economy to “deteriorate drastically and rapidly” if the US Federal Reserve has to jack up interest rates to quell inflation, the Bank of Russia warned in its annual monetary policy forecast… “Risk premiums will increase significantly, the most indebted countries will struggle to service their debt, and a significant financial crisis will begin in the global economy in the first quarter of 2023 — one comparable to the 2008-2009 crisis, with a long period of uncertainty and a protracted recovery,” the central bank said. The prediction is not the central bank’s central scenario.

On Wednesday, China’s leader Xi addressed the Central Party School and said, “The great rejuvenation of the Chinese nation has entered a key phase, and risks and challenges we face are conspicuously increasing.” “It’s unrealistic to always expect easy days and not want to struggle.”

Russia is widely expected to raise rates this week to stem inflation.  Changes in China are much more far reaching.  The days of Trump applying pressure to China are over.  Covid provided cover for increased government control across the globe. China has shifted into high gear for dominance.  No more video games.  No more effeminate men on TV.  Chinese billionaire actress Zhao Wei has been scrubbed from all internet references and film credits. (Imagine if that happened with LeBron).  In the words of Dean Wormer, “No more delta! And if you wiseguys do one more thing, one more, I’m going to kick you out of college!  No more fun of any kind!”  The increasingly used phrase “common prosperity” isn’t meant as a joke, as the concept is when described by the US political class.  Xi has cracked down on tech companies and excessive wealth.  At Monday’s meeting of the central committee he approved measures to “…fight monopolies, battle pollution and shore up strategic reserves.” (BBG) On Saturday, Chen Yulu, deputy governor of the PBOC said that loopholes in financial tech regulation will be closed, and we will “…build all kinds of firewalls to resolutely prevent systemic risks.”  These shifts are huge.  Preparation for a cold winter.  As D-day told Bluto, “War’s over man.  Wormer dropped the big one.” 

The BBC posted an interesting piece this weekend, “Why China’s bitcoin miners are moving to Texas”.  The story quotes Kevin Pan, CEO of Poolin, the 2nd largest bitcoin mining network in the world. “We decided to move out [of China] once and for all. [We’ll] never come back.”  In what is being called the ‘Great Migration’ bitcoin miners are flocking to Austin for cheap energy in the context of light regulation and strong legal rights. 

Is that good because the US benefits from China’s brain drain?  Or bad because of increased estrangement between the globe’s superpowers and largest traders?

Since the year’s high in February, the OMX China tech index is down 37% while the Nasdaq is up 13% from the same starting date.  With China clamping down, is it reasonable to expect US stocks to simply continue marching higher?  Everyone is familiar with the Warren Buffet indicator of market cap to GDP, which is at a record high of 207%.  I narrowed it down a little and just used MSFT, AAPL, AMZN, GOOGL and FB.  At the end of 2015, when the Fed first tightened, US GDP was about 8.6 times higher than the market cap of these five companies.  In every year since then the ratio declined.  Currently GDP is just 2.4x more than the market cap of these five companies.  I saw a snippet on Investopedia that said that, in terms of valuation, a stock’s Price-to-Sales ratio is great at 1, and a bit on the high side at 2.  MSFT has a price-to-sales ratio of 13.5.  By the way, the BBG Commodity Index closed Friday within a fraction of the year’s high, which is also at the highest level since 2015.  BCOM on Friday: 97.11.  Last time it was here was July 2015, but that was on its way down.  Post-GFC high in 2011 was 175. 

Here’s a fun quote from your central bank (NY Fed): “The uncertainty around the pandemic and the consequent volatility in the data have posed a number of challenges to the Nowcast model.  Therefore, we have decided to suspend the publication of the Nowcast while we continue to work on methodological improvements to better address these challenges.”  More than a few analysts suggested that this admission of not knowing what the fu heck is going on, along with weaker than expected NFP on Friday (235k vs 733k expected) throws the whole idea of a taper this year out the window.  I disagree.  Part of the Fed’s job concerns financial stability.  Even Elvira Nabiullina is worried, and she doesn’t look like she scares easy.  In contrast with weak NFP, yoy wage gains were +4.3%, higher than any level from the GFC to 2020.  Of course, since covid, this data has been extremely volatile, hence the NY Fed’s abdication of responsibility.  To its credit, the Atlanta Fed’s GDP Now report simply advises that its model “does not capture the impact of Covid and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released.  It does not anticipate…”  From August 23 to Sept 2, Atl Fed’s GDP Now estimate for Q3 went from over 6% to 3.7%.  Next estimate is Friday.  

One other amusing report last week concerns a July 23 phone call between Biden and the former Afghan leader Ghani. From Reuters: “In much of the call, Biden focused on what he called the Afghan govt’s ‘perception’ problem. ‘I need not tell you the perception around the world and in parts of Afghanistan, I believe, is that things are not going well in terms of the fight against the Taliban…and there is a need, whether it is true or not, there is a need to project a different picture.’  Spoofing!  Biden spoofing with Ghani.  Put a big bid in…make it look like you’re a serious buyer!  But cancel if it starts to trade.

The themes of the global environment seem to be uncertainty associated with both covid variants and monetary/fiscal policies that were instituted with the onset of covid-19 that now have become unwieldy to control and project a wide array of possible outcomes.  On the other hand, I watched a bit of the Georgia Clemson game Saturday, and the packed stands suggested little fear of delta, lambda, mu or zeta (coming).   


The US treasury is set to auction $58 billion in 3s, $38b in 10s and $24b in 30s starting on Tuesday.  Perhaps the results of these auctions will suggest a bit more about taper timing than NFP.  Economic news is fairly light, though PPI is Friday, following July’s sizzling 6.6% yoy rise ex-food and energy.  CPI is Sept 14, Tuesday. The 20 year anniversary of the 9/11 attack is Saturday. 

Friday featured a brief knee-jerk rally after weak NFP but by the end of the day the curve had steepened with 2/30 closing the week at 173.5, up 3.3 on the week but well off the year’s high (March) of 229.  There was a bit of pressure on near one-year calendar spreads as the market pushed odds for a hike slightly further out.  For example, EDZ1/EDZ2 settled 23.5, the lowest in 22 sessions.  In Fed Funds, FFF’22/FFF’23 settled 19…less than one hike over that year’s timeframe.  Red/gold Eurodollar pack spread settled just over 115, the highest since early July, but the last two-month range has been pretty well contained by 100 to 115.  High in March was 182. 

VIX closed at 16.4 Friday, near the post-Covid low of 15.07 set in July.  The NY Fed can’t figure out what’s going wrong with the model and China’s in the midst of a crackdown that could reverberate globally.  Seems like insurance is relatively cheap, as is the case with interest rate vol.  50-day historical vol on TY is just under 4%, which is where I marked TYZ on Friday.   


UST 2Y21.520.6-0.9
UST 5Y79.878.4-1.4
UST 10Y131.0132.11.1 w/I 132.5
UST 30Y191.7194.12.4 w/I 194.3
GERM 2Y-73.5-70.72.8
GERM 10Y-42.3-36.16.2
JPN 30Y64.764.6-0.1
CHINA 10Y287.3283.3-4.0
EURO$ Z1/Z224.523.5-1.0
EURO$ Z2/Z358.055.5-2.5
EURO$ Z3/Z435.538.02.5
CRUDE (active)68.7469.290.55






Posted on September 5, 2021 at 10:45 am by alexmanzara · Permalink
In: Eurodollar Options

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