I must say, I keep drafting posts and then things keep happening, so I get sidetracked and end up staying confined to X and DMs. I’ll have a full post (and an announcement on more trading/market related content shortly) re: Andrew Left and the Gamestop situation, but I thought I’d quickly repost some of the threads I wrote on the wild VIX print/NQ tape bomb from Sunday night for the non-Twitter readers, and pull out some old Japan commentary from the vault that’s relevant.
Sun, Aug 4, evening:
I understand everyone is antsy and at home but a 25 bip hike is not causing a global market crash during historically ultra illiquid trading hours…
My guess:
-Japanese banks actually having issues w/ m2m a la SVB (aka very levered off of ZIRP debt that’s valuation shifted and impacted their metrics — JP banks are ultra, ultra levered institutions ~ed.)
-someone got liquidated on some crypto/JPY carry trade, not sure what the catalyst was here
-NQ hit just bc nobody’s trading it, it probably reverts overnight but vol remains elevated (I wouldn’t hold through RTH)
I expect dispersion in all these movements when volume picks up in the morning - that doesn’t mean I think number goes up. I also think immediately going short vol is a bad idea, the way rvol works means that it’s “sticky” and will be expensive to put on that position
Mon, Aug 5, a little after market open:
A bit of old backtesting/live edge: it’s generally bad to be intraday short on TUE. Take any explanation you want (my guess is it’s something re: lack of meaningful WED opex/fundamental drivers), but for whatever reason, it always shows up to not short on TUE/follow trend
For a “spot vix touched 60” day absolutely nothing has happened intraday. Tomorrow I do generally expect a ludicrous trend day as a result, probably to the upside.
The TUE comment refers to trading signals, particularly those that indicate reversion trades/breakout shorts, not working particularly well on those days. There’s usually just not enough of a catalyst. I’ll elaborate more on this later.
Mon, Aug 5, a little after lunch:
Just a point of personal pride (and feeling like I’m the center of the Matrix), but I literally top ticked my Japan vacation — right after I left, USD/JPY moved ~10% against it.
Mon Aug 5, at market close:
Not to sound too conspiratorial, but a SUN OVN Vix print of 60 when there’s basically zero liquidity over “Japanese stocks” (which are owned/buoyed by the BOJ) and a 25 bips hike over a “carry trade unwinding” (that’s been losing for a month+) into a range day is incredibly odd. (re: this screenshot)
I have zero clue why this would take NQ across the board other than the fact that NQ is significantly less liquid than ES, especially on Sunday night. There doesn’t seem to have been any major non-crypto liquidations or vol blowups beyond retail. Just look at how fast vol crushed. (note: VIX is not vol! common misconception to equate the two)
I do think there is some fundamental issues going on in JP but, other than people realizing it’s a decent time to take profits — people are looking for a reason to sell — what does this have to do with US stocks? Yield curve/vol movement is macro, not single stock vol. Almost feels like someone intentionally took it down.
As much of a meme as the phrase is, increasingly this looks like a tape bomb on a Sunday night meant to explode a VIX print when things are totally illiquid. I wouldn't be surprised if we see 2.5%+ tomorrow, looks like OVN already under way.
Note:
I obviously can't prove anything but I think there are enough indications that people are closing out of the USDJPY trade and someone just took a shot and punted NQ down on the late night news prints. Usually futures liquidity is 10-20% of RTH, especially on Sunday night. Barely anyone is on the desks at that time. If you wanted a really high VIX print you either need pure chaos or pure illiquidity. Only thing I can conclude — someone tape bombed and closed out right at open. Anecdotally, this would happen a fair bit in the really slow trading days prior to 2020. VIX settlement trading and manipulating prints has been the subject of lawsuits, as well. Food for thought.
Mon, Aug 5, Evening:
On “emergency rate cuts”:
1) Why would a cut do anything? Any residual effect would be seen a couple months away min
2) Why does a 2-4% selloff triggered by illiquid BS on a Sunday night warrant a Fed response?
Connecting intraday movement to FFR on non-Fed days is like connecting your local Starbucks' sales to its real-time stock price. Monetary policy is not going to solve the core issue: there's very little non govt-subsidized growth and an exploding interest problem. The raw # doesn't matter, but the interest payments certainly do. Rates alone cannot stop the govt from spending to oblivion:
When you cut rates, it becomes cheaper to issue debt but harder to convince people to buy it. It makes currently-held debt more valuable, reducing the incentive to deploy the cash held in that yield. If you cut too much, then you get speculative issues. In what way does it make sense to cut? Note that I think Sep cut is possible (not anywhere close to guaranteed) and there is a rationale for a perfunctory 25-50 bips that wouldn't change the underlying situation as I highlighted prior. But an "emergency meeting" bc of "1000 points on DJI" and 4% on NQ OVN? Come on.
Last time, we talked about the main policy goals of the (US) central bank:
To control inflation, there’s two primary tools — raising and lowering interest rates, and quantitative easing/tightening. Raising interest rates incentivizes saving and reducing spending, while lowering rates incentivizes investment and capital allocation to seek returns… QE/QT is about the purchase and sale of (primarily) treasury securities between the Fed and major banks to increase/reduce the outstanding monetary supply to facilitate/slow down lending and backstop bond market liquidity.
In March, [Mr. Kuroda] doubled the BOJ’s annual ceiling for its purchases of exchange-traded funds to the equivalent of $115 billion. That was the month the stock market began surging after a pandemic-induced dip. It closed Thursday at a 29-year high, up 60% from this year’s low.
… the market value of its holdings stood at the equivalent of nearly $400 billion as of Sept. 30, which represented an unrealized profit of $56 billion over what it paid.
and noted how there is an issue
When the wealth creation mechanism becomes the source of wealth itself, it rests on the faith that the currency has some innate, tangible value that cannot be replaced with a denomination of any other kind. Japan in particular has had the relative homogeneity and cultural reinforcement over the past couple of decades for this to have at least existed though it hasn’t encouraged natural growth particularly successfully.
I generally consider ZIRP to be the equivalent of financial heroin — as we saw throughout the 2010s, particularly toward the end, financiers from Silicon Valley to SoftBank and companies everywhere in between ruthlessly exploited cheap debt to blast cash every which way in hopes of acquiring dominant market share. Of course, as any seasoned viewer of Requiem for a Dream or The Basketball Diaries would have an inkling of, weaning yourself off a heroin habit is a harrowing task, and for an economy, to do the same with financial heroin is no different. Of particular concern is how to exit these positions:
For large equity positions, the same rule applies to valuing your position as it does for private equity positions. Your paper P/L assumes that there is enough liquidity at the current level for you to sell your position with zero slippage - this, naturally, is not the case. In the case of WeWork for example, Softbank found themselves at the top of a castle in the air with the $47 billion valuation their own purchases had assigned the company (and then proceeded to try and pawn that pile of shit on the public markets) - to cash out on the 11-12% profit the BoJ has made without losing any money on the execution, somehow 6% of the total market would need to eat this trade, a practical impossibility. But it’s even worse - when a central bank is buying, naturally, investors note that an institution with unlimited funds can endlessly purchase. Thus you will get a lot of piggy-backing, which purportedly was the intention of this program. However, who would buy if the central bank is selling?…
The BoJ’s goals here, apart from controlling inflation in line with a 2% target, are twofold — one is to backstop bond market liquidity, obviously, and the other is to stabilize the JPY, which has been shorted to oblivion this year. The yield curve move is an obvious admission of the fact that, when the world’s deepest government debt market is paying a much higher yield than yours, you have to incentivize some non-central bank purchasing of your debt. Indeed:
…the BoJ’s decision was based in part on a bond market survey conducted in November that showed market conditions were deteriorating to the worst level in 15 years. The central bank now owns more than half of outstanding bonds. On some days, no bond trades take place at all — a sharp contrast with other major bond markets in the US and Europe where billions change hands every day.
The contradiction lies in the fact that bond purchases and rising rates are contradictory policies relative to the overall goal to maintain an inflation target. However, with Japanese bond market liquidity so utterly iceberged, tapering is impossible in its current state. Thus, yields must rise to stimulate trading so, eventually, maybe, the BoJ can begin to consider halting bond purchases, though whether they would ever do so remains to be seen. I shudder at the thought of how to downsize a position in a market when you hold the majority of the holdings — it’s the FTX FTT problem but on a government-sized scale (though, admittedly, Japan debt is not bullshit fake internet money.) Truthfully, I’m not sure a position of this size can ever be liquidated, especially if future-issued debt is at a higher yield than currently-held debt.
The differences between Japanese market behavior and American market behavior in low rates environments is fascinating to me, and will be delved into in the Year in Review to follow. Truly, the American ingenuity in exploiting every angle possible to milk the government drip of artificially subsidized debt to manipulate market returns knew no bounds, and, predictably, all these assets came crashing down once reality struck as rates rose. However, Japanese market behavior is notably more conservative. The nature of Japanese business culture itself is almost inverse that of their American counterparts, as the novel financialization of sophisticated parties and the maneuverability of individuals and their risk-taking is comparatively non-existent. Instead, Japan serves as a sort of live-test as to what happens when debt continues to grow at a sweltering pace in a low- (or post-) growth economy, which is why so much time is devoted to observing an otherwise tepid, boring market. A question I ask myself, to which I have no real answer, is what happens when growth genuinely stops?
Remarkably prescient, in a sense, isn’t it? I’m sensing a bit of a pattern — every time I travel to Japan, everyone freaks out over yields and BOJ policy changes.
That being said, I do think this is warranted. Those questions about what happens when growth stops and debt is increasingly issued to pay more debt have only gotten more serious. Amidst the “carry trade” discussion is the fact that the dollar is going to have to weaken if there is to be domestic investment: the strong dollar pushes $ outwards (as evidenced by my Japan travels), and one administration is much better for yields than the other, though I think both are net dollar-weakening options. Increasingly, there doesn’t seem to be a way out — at least not a coherent one through rational policy — without a recession of some sort, and even that won’t change anything if government spending and debt issuance doesn’t come down. And that’s what this selloff boils down to — sure, it’s a tape bomb, but there are plenty of reasons to be looking to sell, at the moment. Going forward, I expect wide ranges, lots of intraday reversals, and elevated vol, which at least means trading will be more fun, if that’s your cup of tea.
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