Loading up with theft bucks

Published: Fri 11 February 2022
Updated: Sun 01 January 2023
By steve

In Markets.

Friday 11, February 2022

Theft bucks

I am in awe of Matt Levine. His articles (which are sort of op-eds) are small masterpieces of communication, and nearly always on topics which are interesting to read about. His latest piece talks about the Bitfinex hack, but through the lens of a discourse on the nature of money itself and how ‘real’ dollars differ from Tesco loyalty points or air miles. Crypto is a fascinating topic, not because of the technicalities of how the blockchain works, but how these non-currencies have some, but not all, of the characteristics of what we have traditionally viewed as money. Oddly enough, the topic overlaps a lot with the latest episode of The Market Huddle which features Joseph Wang, The Fed Guy himself. Wang points out that what counts as money depends on who you are. He gives the example of a member of the public who is probably fine with the idea of a deposit in a commercial bank being money, because of the deposit guarantee, but for Amazon, that really is of no value, so they will probably have a stack of T-bills on their balance sheet, which are extremely money-like, especially since QE got going.

Why the Fed might keep its balance sheet long

This article explains why the Fed is so reluctant to unwind its QE∞. Basically, it’s now a giant hedge fund, borrowing almost costlessly to invest in speculative assets. With AUM of $9tn (yep, $9e12), a small spread between its own carry and the yield on its assets turns into a huge number, which it remits to the Treasury. This is magic, until it loses control of the long end of the curve. It also explains why it will do everything in its power to keep the curve flat as a pancake.

We live in interesting times.

Wrap

There is something very odd going on with oil prices. There is a high backwardation, which is an equivalent of a negative discount rate. Spot is now close to $90 for WTI, but goes down to $68 four years out, around 25% reduction. This doesn’t make sense to me. My expectation is that we’ll see oil at some point move to contango, as nominal interest rates go more strongly negative, even if real interest rates remain negative. Probably, the same goes for a lot of commodities, but oil seems to be the one which has had the biggest demand shock as the world gets moving again after the pandemic. The near month future went up 4.5%, to $93.92. This is very big move!

Gold is now catching a bid, up 1.5% to $1865 (near month future).

Stocks are spooked. The Nasdaq is down 3%.

day chart

Tiger Cubs

My instinct is to short everything that Tiger Global buys. I don’t do it, and neither should you. Nothing I write here should be construed as investment advice!! I was amused by this:

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