How to NOT Understand What is Going On In Financial Markets
Read this thread. All the way through. It is full of claptrap and fear-mongering.
If you want, you can follow along in my thread.
Read this thread. All the way through. It is full of claptrap and fear-mongering.
If you want, you can follow along in my thread.
1/n: Yes. There is more debt now (outright or vs GDP) than 50 years ago. Problematic? Maybe. Cancel out financial debt financing financial assets? Less so.
Is the mkt seeing "debt deflation" (i.e. fall in asset prices due to debt bubble bursting?).
No.
Is the mkt seeing "debt deflation" (i.e. fall in asset prices due to debt bubble bursting?).
No.
2/n: Unencumbered assets in the past. Sure. Lots of UAs now tho.
"That's why their fiat currencies had value - assets were still available."
HOGWASH.
That is EXACTLY how "fiat" currencies don't work. It's in the name. The USD is not 'asset-backed.'
"That's why their fiat currencies had value - assets were still available."
HOGWASH.
That is EXACTLY how "fiat" currencies don't work. It's in the name. The USD is not 'asset-backed.'
3/n: "rising debt pushes up asset prices."
Fact Check: Yes/No/Maybe. All three.
"Debt has grown for ~50 CONSECUTIVE years..."
Sure. Also growing for 50 consecutive years?
1) western world population
2) number of violins in existence
3) total # of cars
Fact Check: Yes/No/Maybe. All three.
"Debt has grown for ~50 CONSECUTIVE years..."
Sure. Also growing for 50 consecutive years?
1) western world population
2) number of violins in existence
3) total # of cars
4/n: The bit about economists urging Fed & Fed govt to act in counter-cyclical manner? Yes. That's generally true.
The bit about debt contracting? No. Not in 2008. Not now.
Public+Corp+Household+NonProf Debt shows very stable growth.
The bit about debt contracting? No. Not in 2008. Not now.
Public+Corp+Household+NonProf Debt shows very stable growth.
5/n: This says "they" are trying to act counter-cyclically.
Yes. True.
...in order to counter the financial asset price correction that inevitably accompanies a credit contraction...
Maybe.
More importantly? To ensure GDP/employmt/voter stability.
Yes. True.
...in order to counter the financial asset price correction that inevitably accompanies a credit contraction...
Maybe.
More importantly? To ensure GDP/employmt/voter stability.
6/n: "Shrinking debt caused by capital destruction"
A lot to unpack here. Needs 2 twetes.
This refers to corporate debt. Not public or HH.
Her arithmetic works for ANY industry which a) has debt and b) has negative profits in any given year.
But...
A lot to unpack here. Needs 2 twetes.
This refers to corporate debt. Not public or HH.
Her arithmetic works for ANY industry which a) has debt and b) has negative profits in any given year.
But...
6a/n:
... most assuredly, it did not work for all of corporate US or corporate western world even in 2008. Lower? Yes. Negative incremental return on debt? Yes, but that's easy. And any business owner who has debt who earns less in one month than in a previous month knows this.
... most assuredly, it did not work for all of corporate US or corporate western world even in 2008. Lower? Yes. Negative incremental return on debt? Yes, but that's easy. And any business owner who has debt who earns less in one month than in a previous month knows this.
7/n: "the magnitude of capital destruction that was building all along is revealed".
[2 twetes here too]
In certain industries? Yes.
Across the western world? No. See above.
But... markets were down!!!
Yep. That happens, markets being markets.
[2 twetes here too]
In certain industries? Yes.
Across the western world? No. See above.
But... markets were down!!!
Yep. That happens, markets being markets.
7a/n:
"Why wasn't it evident as it was building? Bc interest rates are mispriced--artificially low"
No.
That's not how markets work. One does not attract investors in ever dodgier debt by lowering the nominal return.
"Why wasn't it evident as it was building? Bc interest rates are mispriced--artificially low"
No.
That's not how markets work. One does not attract investors in ever dodgier debt by lowering the nominal return.
8/n: #8-9 should be read together.
"this is why you see entire industries making the exact same [bad] biz decisions at exact same time...
what if decision to invest at 10% vs WACC of 8%? OK.
what if WACC rises to 12% vs return of 10%? Bad!!!
"this is why you see entire industries making the exact same [bad] biz decisions at exact same time...
what if decision to invest at 10% vs WACC of 8%? OK.
what if WACC rises to 12% vs return of 10%? Bad!!!
9/n: Housing in 2008 did not see capital destruction because WACC rose. Profits went negative because sales dropped faster than costs did. And in shale in 2020, sales+profits are lower than plan, and asset life is too (i.e. faster asset amortization than plan = lower profit).
9a/n: But let's assume profits were fine, and WACC rose. Why was the project pursued? Why did biz make such a bad mistake?
"Because markets misled it."
Whuh?
Business makes plan. Presents plan to investors. Investors believe business plan, invest. All OK so far.
"Because markets misled it."
Whuh?
Business makes plan. Presents plan to investors. Investors believe business plan, invest. All OK so far.
9b/n: Investment vs plan fails. Capital destroyed.
It must have been because "the market" (i.e. investors in business).
No. Investors did not mislead shale business. This is a fundamental misunderstanding of how investors work, how markets work, and how businesses work.
It must have been because "the market" (i.e. investors in business).
No. Investors did not mislead shale business. This is a fundamental misunderstanding of how investors work, how markets work, and how businesses work.
10/n: But investors misled business because of the low cost of borrowing!
No. Investors still did not mislead business.
Business borrows at X rate, and investors invest in plan based on that. That happens all around the world, every day, at every rate, for thousands of yrs.
No. Investors still did not mislead business.
Business borrows at X rate, and investors invest in plan based on that. That happens all around the world, every day, at every rate, for thousands of yrs.
11/n: "Every single competitor made the exact same mistake."
Maybe. Maybe they thought they were special and existed in a vacuum and increasingly competitive production was meaningless to a cmdty price.
But this did not cause business to borrow more.
Maybe. Maybe they thought they were special and existed in a vacuum and increasingly competitive production was meaningless to a cmdty price.
But this did not cause business to borrow more.
11a/n: Business borrowed more and investors invested more because they were greedy. This is not new. It has happened to oil before. Many, many times. And to other commodities before. Many, many times. Even when public debt was tiny.
And they were always bailed out.
What?
No.
And they were always bailed out.
What?
No.
12/n: Oil+cmdty & housing sector cos have gone bankrupt time and time again. Every housing and oil/cmdtyentrepreneur worth their salt knows EXACTLY what happens in a bust. But if they make their mint before it does, they get rich. It's a call option.
13/n: 13&14 together. Needs two twetes.
"backfill" = countercyclical action.
a) Trump WH is not acting countercyclically. It has increased debt pro-cyclically.
b) Fed is not "adding debt" with this week's OM repo ops. Just no. Fundamental misunderstanding of debt/Fed.
"backfill" = countercyclical action.
a) Trump WH is not acting countercyclically. It has increased debt pro-cyclically.
b) Fed is not "adding debt" with this week's OM repo ops. Just no. Fundamental misunderstanding of debt/Fed.
13a/n: c) govt plans to spend vs covid19 so ppl can get tested, not lose their jobs/home if they have to take time off? a) not "MASSIVE",
b) not "backfill"
But... "For perspective, debt in US nonfinancial sectors (households, biz, govt) went up 10% in past 2 yrs!!!
b) not "backfill"
But... "For perspective, debt in US nonfinancial sectors (households, biz, govt) went up 10% in past 2 yrs!!!
14/n: Yes. it did. (even w/o the exclamation points). I am not sure of her numbers, but the chart above is here (fred.stlouisfed.org/graph/?g=qmT1) and shows US public+corp+HH debt rising 10.65% from $44.1trln to $48.8trln from 17Q3 to 19Q3. GDP was +9.85% in the same period.
15/n: She's been tracking it since 08. I've been tracking it more than twice as long. Doesn't change the data.
"Economy has been hollowed out"?
Sounds bad. What does it mean?
It references sentiments of offshoring. And emptiness.
But not facts.
"Economy has been hollowed out"?
Sounds bad. What does it mean?
It references sentiments of offshoring. And emptiness.
But not facts.
15bis/n:
"So, to put this week's multi-trillion$ monetary & fiscal stimulus into perspective"
This week did not see "multi-trillion$ monetary" or "fiscal stimulus". It saw the Fed ensure the repo market works. It saw no large number of fiscal action.
"So, to put this week's multi-trillion$ monetary & fiscal stimulus into perspective"
This week did not see "multi-trillion$ monetary" or "fiscal stimulus". It saw the Fed ensure the repo market works. It saw no large number of fiscal action.
15bis a/n:
"how much of that $7.5 trn of new debt in just 2 yrs do u think produced a real economic return?"
Hmmm... no relation to first clause of sentence to second clause. That new debt (I see as $4.7trln) accompanied $2trln of new GDP. Good? No. But...
Public +2.5trln
"how much of that $7.5 trn of new debt in just 2 yrs do u think produced a real economic return?"
Hmmm... no relation to first clause of sentence to second clause. That new debt (I see as $4.7trln) accompanied $2trln of new GDP. Good? No. But...
Public +2.5trln
15bis b/n:
Of that $4.7trln in new debt, it was...
Public Debt +$2.5trln
HH +Nonprofit +$1.0trln
Nonfin corp +$1.2trln
So private debt +$2trln, GDP+$2trln.
Meh...
Of that $4.7trln in new debt, it was...
Public Debt +$2.5trln
HH +Nonprofit +$1.0trln
Nonfin corp +$1.2trln
So private debt +$2trln, GDP+$2trln.
Meh...
16/n: Debt raised from investors to buy back stock from investors has zero net impact on the mark-to-market capital (the enterprise value) of a company. They could have paid giant dividends.
In case she hadn't noticed, investors invest in energy debt at their own risk/peril.
In case she hadn't noticed, investors invest in energy debt at their own risk/peril.
16a/n: Fed's "bazooka" "stimulus".
I agree on "bazooka."
Stimulus it was not. Nor even real QE.
Not sure how she says "stimulus hasn't worked". If looking at auction results, no stimulus. If you know WHY repo mkts are wonky, you know it's tough.
Bazookas sometimes miss.
I agree on "bazooka."
Stimulus it was not. Nor even real QE.
Not sure how she says "stimulus hasn't worked". If looking at auction results, no stimulus. If you know WHY repo mkts are wonky, you know it's tough.
Bazookas sometimes miss.
17/n: Fed & Govt "pushing on a string because debt bubble is even more staggering in size"
No. Just no.
That's not how markets work. It's not what the Fed did, nor what the govt did.
Doug Noland? Never heard of him til today. He writes a "Credit Bubble Bulletin" blog.
No. Just no.
That's not how markets work. It's not what the Fed did, nor what the govt did.
Doug Noland? Never heard of him til today. He writes a "Credit Bubble Bulletin" blog.
17a/n: Doug Noland? Never heard of him til today. He wrote/writes a "Credit Bubble Bulletin" blog. Was until not that long ago a fund mgr. One fund exists - down every year for 10. Another reorganized, another disappeared.
Macro short mgr talking short macro? Tell me more.
Macro short mgr talking short macro? Tell me more.
17b-18/n: next financial crisis the Fed's balance sheet will balloon from $4trln to $10trln?
Maybe. I don't know.
Writing off last two years of bad debt? Not $10trln to "fill the hole."
1) not all debt is bad debt. a large chunk is USTs
2) other side of balance sheet? GDP?
Maybe. I don't know.
Writing off last two years of bad debt? Not $10trln to "fill the hole."
1) not all debt is bad debt. a large chunk is USTs
2) other side of balance sheet? GDP?
18a-19/n: "What does this mean? Strap in for some serious volatility" "I've read a lot of history abt what happens when credit systems die."
I've read a fair bit of markets history. I'm not sure what it means that a credit system dies.
Does all debt go bad? Is it erased?
I've read a fair bit of markets history. I'm not sure what it means that a credit system dies.
Does all debt go bad? Is it erased?
19a/n: Does currency as a concept disappear? Assets? This is entirely unhelpful to the aspiring (or already there) financial analyst figuring out "HOW TO UNDERSTAND WHAT'S GOING ON IN FINANCIAL MKTS"
Vol goes from 5% swings to 20% swings to 50% swings intraday, up and down.
Vol goes from 5% swings to 20% swings to 50% swings intraday, up and down.
19b/n: Cate: 5% swings in both directions we see now is nothing!
Reader: What should we look for?
Cate: Try 20%. In one example, near the end the swings were 50%. YES, 50% INTRADAY SWINGS UP & DOWN!!
Reader: Will that happen here?
Cate: Dunno, but don't be surprised if yes.
Reader: What should we look for?
Cate: Try 20%. In one example, near the end the swings were 50%. YES, 50% INTRADAY SWINGS UP & DOWN!!
Reader: Will that happen here?
Cate: Dunno, but don't be surprised if yes.
19c/n: Excuse me? Huge multipliers. ALL CAPS!! Exclamation points.
Will that happen here? "Dunno"
I assume Cate is all in VIX long at 70.
Will that happen here? "Dunno"
I assume Cate is all in VIX long at 70.
20/n: Aha. Now we get to the crux.
Control of the factors of production moves from...
Translation: In financial/debt crises, some ppl go bankrupt. Productive assets are bought by those who didn't go bankrupt.
Control of the factors of production moves from...
Translation: In financial/debt crises, some ppl go bankrupt. Productive assets are bought by those who didn't go bankrupt.
21/n: "Sounds scary". Which part?
The "50% INTRADAY SWINGS UP AND DOWN!!"?
or betting on that and not having it pay off?
Again... talk of stimulus more than 50% of GDP.
Really? I'm open to examples where stimulus equal to 50% of GDP has been seen in a open currency economy.
The "50% INTRADAY SWINGS UP AND DOWN!!"?
or betting on that and not having it pay off?
Again... talk of stimulus more than 50% of GDP.
Really? I'm open to examples where stimulus equal to 50% of GDP has been seen in a open currency economy.
22/n: And the hook. A podcast with Pomp where they will discuss solutions, which will be related to 'alternative systems of storing your wealth'.
Read history. Educate yourself. Don't worry, there's a paid newsletter promoting their products.
"You'll feel better!"
Read history. Educate yourself. Don't worry, there's a paid newsletter promoting their products.
"You'll feel better!"
22a/n: You too can invest in Bitcoin, and hold it outside the "fiat" system where your assets will be much safer.
Because digital currency doesn't get stolen, there is no "credit risk" to putting your crypto assets in someone else's hands, and crypto is not volatile.
Because digital currency doesn't get stolen, there is no "credit risk" to putting your crypto assets in someone else's hands, and crypto is not volatile.
23/n: So... into the finale...
APHORISM: "These situations favor those who embrace change and ignore the advice of those stuck in the old paradigm"
TRANSLATION: You can't trust anyone else. I've got no evidence for my claim.
APHORISM: "These situations favor those who embrace change and ignore the advice of those stuck in the old paradigm"
TRANSLATION: You can't trust anyone else. I've got no evidence for my claim.
23a/n: CLAIM: Huge opportunities are already opening up!
TRANSLATION: Buy my crypto.
If you act now, you'll also get this fabulous authentic official reproduction non-metallic non-fiat coin which you can collect to build your wealth.
TRANSLATION: Buy my crypto.
If you act now, you'll also get this fabulous authentic official reproduction non-metallic non-fiat coin which you can collect to build your wealth.
24/n: My Closer:
What none of these crypto shills (I assume anyone making their living off crypto is a shill, not someone who actually believes moving the world from current state to non-fiat limited supply crypto is a) good, b) possible) gets is how their dream is achieved.
What none of these crypto shills (I assume anyone making their living off crypto is a shill, not someone who actually believes moving the world from current state to non-fiat limited supply crypto is a) good, b) possible) gets is how their dream is achieved.
24a/n: They are the effective equivalent of the characters in Boiler Room.
It is an extraordinary grift. And when it doesn't "work", those who sold it to you will own the thing they warned you about to convince "you" to buy crypto. And it will be "THEY'RE" fault.
It is an extraordinary grift. And when it doesn't "work", those who sold it to you will own the thing they warned you about to convince "you" to buy crypto. And it will be "THEY'RE" fault.
24b/n: And no, that is not a typo. Theirs always a there they're.
Done.
Done.
