What do markets look like when they are freaking out?
Answer, like they look this week.
Why? The realization/fear that the Fed is going to slam on the brakes ... hard. And the panic that the stock market is going to get thrown through the windshield.
A 🧵to explain
2/10
Let's start with Tuesday (Jan 18). The SPX was down 1.8% the same day the 10-year yield was up 9 basis point.
This has only happened seven times since 2000
3/10
And today
The S&P was up 1.53% at today's high. It closed down more than 1%.
Only 8 times since the Global Financial Crisis in 2009 has the S&P 500 been up more than 1.5% intraday and then finished down more than 1%. And 4 of the 8 were in March 2020 (bolded)
4/10
The RTY, it has been argued are a better metric of the state of the economy than the SPX. RTY is 10% foreign revenues where the SPX is 40% - 50%.
RTY is getting murdered, now corrected more than 17% (bear market down 20%).
The SPX is down just 6.5%
5/10
I'm going through the exercise to confirm what we all suspect; the stock market is indeed have unusual movements that you only see a handful of times a decade.
Something more than a standard correction is underway ...
6/10
... maybe a realization/fear that the Fed is going to "address" inflation and slam on the brakes ... hard.
Restated, if the Fed is going to slam on the brakes, you would expect markets to freak out. They are freaking out; this is freaking out!
7/10
Why is this happening? Professional managers "blew it." They continue to believe inflation is transitory and the Fed is merely "jawboning."
This is the Jan BofA fund manager survey, out Tuesday. Majority think inflation is STILL TRANSITORY!
8/10
The Ds are panic their polling is terrible, and they will get crushed in November. The #1 issue is inflation.
Biden said it clearly yesterday, he green lighted the Fed to "stop inflation." If that means slamming on the brakes hard, so be it.
Fund managers still think the Ds will be ok in Nov (chart), even though the betting markets expect a wipe out.
They failed, or are failing, this get that this year is about making 40% of the population with less than $1,000 in savings and rents "not mad" about inflation.
10/10
If the stock mkt has to be sacrificed, then it will. And if fund managers are not positioned for this reality, we would expect chaotic markets...like we now have!
This started 3 weeks ago when the bond market was crushed, explained in this thread
The table above has a mistake I just became aware of ... March 21 and March 22 are a repeat of March 20 (they are also a Sat and Sun). My sort accidentally included them.
So, it is 5 times since 2009 and twice in March 2020.
Here is the corrected table.
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A great piece by @EconTodd and James Carter about how the US Treasury messed up the last 15 years ago. (h/t @judyshel)
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Rather than issuing 50- or 100-year bonds when interest rates were at rock-bottom, the US Treasury dismissed this option and simply continued to borrow on a short-term basis. Now that US interest payments are ballooning, the scale of this blunder has become apparent, as have the implications for future generations.
This almost triggered me to read as I have been arguing the same thing.
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April 29, 2012
“I don’t get why the Treasury thinks floaters are a good idea with short-term rates at zero percent, as they only have one way to go, and that’s up,” said James Bianco, president of Bianco Research LLC in Chicago in an interview on April 24.
“They should be lessening the cost of financing the United States government for the taxpayers,” Bianco said. “The Treasury should be issuing 100 year or perpetual bonds until the market can’t stand it anymore to lock in these rates.”
In a 2019 op-ed I wrote for Bloomberg ...
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For more than 60 years, the Treasury has relied on a select group of primary dealers – currently numbering 24 - who are not only authorized to trade with the Fed, but are also obligated to bid at government debt auctions. That means they are expected to put their own capital at risk and buy the securities issued by the Treasury. This group of dealers accounts for a large chunk of the Treasury Borrowing Advisory Committee, or TBAC, which counsels the government on its financing needs.
The Treasury has historically placed a great deal of weight on this group’s recommendations. The TBAC has lately stressed the importance of regular and predictable securities issuance, along with demand for that issuance. When the Treasury brought up the idea of ultra-long bonds in 2017, the TBAC cautioned against the move and pointed to surveys of investors that suggested tepid interest.
As this chart shows, the current BTC price is the average purchase price of the Spot BTC ETF buyers. ~$57K to ~$58K
2/6
So, about $37 billion in Spot BTC assets (x-GBTC) now have no profits and maybe a small loss.
3/6
As I have been detailing, the 13F shows very little institutional buying of these ETFs. 95+% of the buyers are either hedge funds, institutional investors holding less than $100m, or retail degens.
It confirms my fear that the Spot BTC ETFs are effectively "orange FOMO poker chips" for paper-handed small-time traders (degens).
These degens are getting close to their breakeven, which could turn them in big-time sellers.
Let's dig in.
3/11
A Citi study shows that investment advisors (IAs) hold ~35% of all ETFs. The table shows the 4 largest BTC ETFs. IA's (blue ribbon) hold less than 1% of the New BTC ETFs.
For comparison, see the two popular non-equity ETFs, GLD and TLT. IAs hold 22% of HYG and 40% of TLT.
The deficit as a % of GDP (bottom), now 5.93%, is higher than in any period except the Great Recession (2007 - 2009) and the 2020 COVID shutdown (dotted line).
The government is borrowing to spend money like the economy is trying to recover from a recession.
2/6
This separates Federal revenues (orange) and spending (blue).
The difference is the deficit (middle panel).
The bottom panel (black) shows that taxes only cover 73% of federal spending. The other 27% has to be borrowed.
3/6
Yearly federal spending is $6.24 trillion or 22.3% of the US economy (or nominal GDP).
Like the deficit chart above, the only time the government has spent this much as a % of GDP is when trying to get the economy out of a recession.
The 13Fs are a disappointment. Very little wealth manager adoption so far (like 1%).
Unrealized gains are shrinking fast.
Why I've been skeptical of Spot BTC ETFs.
2/7
* March 11 = only $1B inflow day.
* March 12 = Brokerage report saying $220B of inflows over the next 3 years (effectively predicting constant inflows, forever).
* March 13, all-time high close (5PM ET price)
Since the mid-March frenzy, inflows peaked (top panel).
3/7
The 3/31 13Fs are coming out, and they are disappointing for those who thought a big boomer wave of buying BTC ETFs through wealth managers was underway. Only odd lots.
IBIT has only 27 13Fs with more than 10,000 IBIT shares (~$360k), way less than 1% of outstanding shares.