5 August

Evergrande may just be the first roach in the kitchen

the regulatory directive says that banks should stop lending to heavily indebted local-government financing vehicles (LGFVs), companies set up by city or provincial governments to finance building projects and public works. The groups, which have not so far been allowed to default, have about 48.7trn yuan ($7.5trn) in debts, 11.9trn yuan of which is held in fixed-income securities.

Archegos staff may face $500m loss after pay plan collapses

Employees of Archegos Capital Management face losses of about $500m after the value of a deferred pay plan set up by the firm crashed along with its other investments.

The family office run by Bill Hwang is yet to release money it owes to former staff, who saw the value of their deferred bonuses soar to about $500m before Archegos collapsed in March, according to two people close to the firm.

Archegos sent shockwaves through financial markets when it was forced to unwind several highly leveraged trades made using derivatives known as total return swaps. The episode left the banks with which it traded, including Credit Suisse, Morgan Stanley and Nomura, nursing losses of more than $10bn.

From the FT. The idea that a “family office” has a staff bill running into hundreds of millions is a joke.

Grid storage battery fire

A fire at one of the largest Tesla battery installations has drawn fresh attention to the risks of batteries used to store renewable energy for electricity grids.

It took three days for the blaze to be extinguished after it started during testing in a shipping container holding a 13 tonne lithium-ion battery, at Moorabool near Geelong in Australia, and spread to a second battery pack.

The Victorian Big Battery project using the Tesla Megapack is the largest in the country, with 210 packs capable of storing up to 450 megawatt-hours of energy for the electricity grid.

Probably bullish for Tesla.

South Korea’s economic miracle built on personal debt

The marginal worker in S. Korea is in a precarious position.

Square takes stake in ‘Buy now, pay later’ fintech

Square has bought Aussie fintech Afterpay for $29bn, a 40% premium.

Other news

• THG has bought Cult. Both rely on pyramid selling to move beauty merchandise.
• L&G had bumper earnings: good news for insurers,
• Global negative interest rate debt total exceeds $16tn
• Evergrande looks even sicker, short sellers circle. Yuzhou Group Holdings and Shimao Group Holdings are in the same boat,
• Clarida said the Fed should position itself for a rate rise at the start of 2023.

Rules of the game

Trading is not investing. This handy summary tells you what you should do if you want to make it as a trader:

• be realistic about your goals: recognize that if you take big risks, you must pay a bigger carry,
• try to have an asymmetric payoff: make your bad bets lose less than your good bets win. This is easy to say, but hard to do. Buying options gives you an asymmetric profile, but of course you pay for the hedging,
• use stops, maybe trailing stops. Works much better in a trending market than the noisy market we are in now,
• don’t use up all you margin on one position (and don’t assume that margin use is an accurate measure of risk),
• understand that “the only perfect hedge is in a Japanese garden,” or, in other words, don’t imagine that correlations won’t go to one (or minus one) in a panic, thereby rendering your hedges worthless,
• “kill your babies” (i.e. avoid becoming emotionally invested in any position),
• do not trade on a macro thesis until the market has woken up to the idea (or, in the immortal words of JMK, The market can remain irrational longer than you can remain solvent.

Japan and balance sheets

I was about to buy Richard Koo’s book “The Holy Grail of Macroeconomics” but it’s quite expensive in money and time, so I thought I’d at least try to find an outline of the thesis. I managed to find this by Diane Coyle. My summary of this is:

• Japan experienced a Hiroshima like explosion in asset prices, followed by an implosion which is unprecedented in global economic history: real estate fell 87% in price!
• The resulting pressure on companies to repair their balance sheets, caused dysfunctional debt-reducing behaviour, at the expense of producing profits for shareholders,
• the contraction in aggregate demand created the deflation that has plagued Japan for the last thirty years,
• the drive to save created a classic ‘Paradox of Thrift’ where everyone tries to spend but simply reduces his neighbour’s income,
• the govt. undertook a massive public spending programme, to take up some of the slack in the economy resulting from the savings binge,
• huge govt. insurance schemes for banks allowed depositors to ignore the fact they were lending to insolvent institutions.

I may read the book, but at least I now understand the outline of the theory. Central banks have blown huge bubbles in some asset classes, with very bad consequences for wealth inequality, but at least I can understand why the policy was adopted. (I still believe that wiping out equity holders, and some debt holders would still have been preferable in 2008/9.)