Paulo Macro Profile picture
Mar 19, 2022 21 tweets 4 min read Read on X
Friends tell me Blackstone already walked out on Trafi. Capital and LOCs is exceedingly hard to come by in this space and part of the reason you saw oil pricing blow out to $130 and then collapse back below $100. A thread 1/n
Following the initial invasion we saw mismatched books and back-to-back trades start to blow up as reflected in the Urals discount imploding vs skyrocketing Brent.
2/n
The requirements to post greater margin during the blowout in futures and associated liquidations created a level of volatility that blew through VAR and control limits, and forced both commodity desks and HFs/CTAs/systematic trend followers to cut exposure, both long & short. 3/
The ‘tell’ that this interpretation is correct would be to see a significant decline in Open Interest amidst high volume. This is in fact what has happened, as Open Interest has *collapsed* to lows not seen in over FIVE YEARS… see Brent ICE on left, Nymex WTI on right:
4/ ImageImage
Why does OI matter? Imagine it’s the 80s, you are looking out on a pit of 300 people screaming oil quotes at each other. Many participants. Lots of quotes and order book depth. Penny wide bid/ask, 10-20 contracts on each side. Heterogenous participants. Efficient. Continuous. 5/
Now imagine one day 250+ of them are dead. You see much less open interest. One or two contracts on the bid/ask which is now a nickel wide. Mkt topology is homogenous because the survivors operate similar styles in a thin order book. Inefficient. DISCONTINUOUS. 6/
This is precisely where the oil futures market is today. My suspicion is the culling of OI was completed in that final “look” below $100 this week. So what happens next? 7/
The market is now illiquid and discontinuous. Expect to see gapping on minimal volumes that pre-February would have been easily absorbed and executed without moving markets. Air pockets. 8/
The issue comes back to VaR, volatility, and risk controls. Market makers and trading desks do not have the balance sheet to make markets in sizes to which we grew accustomed. 9/
Previously if you bought a future, chances were good that a desk would open that contract shorting to you. Not so much now. So if you want to buy futures, you may have to go and find a guy who already owns a future to sell to you, but he may only sell a dime or quarter higher. 10
The price move from $130 to $95 had almost nothing to do with supply/demand modeling and is entirely attributable to the vol mechanics I described above: books were disrupted, vol went nuts, and traders cut size. 11/
But the fundamentals of the oil market have not improved. We went into the invasion tight on the inability of Opec+ to increase production as measured by growing “overcompliance,” difficulty in expanding shale due to labor/input shortages, plus roaring demand. 12/
If anything the market has only grown tighter due to disruptions which will *increase*, not decrease, from here as new trading routes need to be drawn up, tanks at Black Sea ports hit tops, and production is shut in. 13/
The oil market imho has now ceased mass OI liquidation, will now begin to reassume its primary function: price discovery.
14/
Now think about the psychology of participants here. Equity market bullsht “look through the conflict” has infected participants to the point where people are entirely misreading why oil collapsed from $130 to $95. The relief is palpable - especially among equity tech longs. 15/
But put yourself in the position of the head of jet fuel procurement at United. Oil ripped in your face to $130, you can explain to your CEO why you are not fully hedged and supply guaranteed through 2024 because “invasion.” 16/
Now the oil price washed out - emergency is over. The market will “find a way” from here. But then oil starts rising again - $2-3/bbl a day grinding higher. And then it gaps over $125. CEO calls you asking what you have been doing about it. What do you do? 17/
Simple. You try to save your job by panicking. You try to buy oil futures but they are illiquid. So you start calling Valero directly and ask them for 5mn gallons of jet next month and are shocked to hear “we might be able to do 200k.” 18/
This is when the “come to Jesus” moment happens and the DISCONTINUITY of a low OI futures market reveals itself in all its glory. Because now oil is at $150, and the red bar on Bloomberg hits reminding everyone that we are now at new all-time highs… 19/
… but them the commentary of “actually in real terms that $147 2008 high is closer to $200 today” starts coming in droves and everyone knows that if we go to $150, we are going to $200.

And then the market is a complete and total sh*tshow. 20/
Side note: what goes through equity investors’ minds when they start thinking of $150 oil as not an aberration spike but rather a ‘new normal’?

/End

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More from @PauloMacro

Mar 19
While everyone screws around with AI this week, this glorious year for macro continues unabated. Will try to drop a note on the Fed via the blog in my bio tomorrow, but meanwhile here is a rare drop from behind the wall/chat earlier for those who care about the BoJ and yen:
1/
JPY - just occurred to me maybe I have had this all wrong. I should have been listening to myself from early 2022 all along when I dropped the Velociraptor thread that many of you liked back when JPY was <125 on its way to 150.
2/
BOJ will slow walk this to 50bps next year. This still makes yen the ultimate carry trade. And weak jpy works for them in lieu of negative rates. It’s a form of easing.
3/
Read 4 tweets
Feb 10
I would like to express my gratitude once again to all who subscribed to the blog in my bio. It means so much that I can write for and engage with people who value it.
1/5
I had intended to stay somewhat connected here and post interesting one-offs, but I owe it to those who took the leap of faith and were willing to sign up in support of me to focus my energy and attention on them.
2/
I will alert followers here periodically to new posts at the blog, but going forward my writing efforts will be dedicated to that initiative. DMs here will be checked infrequently, and retweets/one off posts will be near non-existent.
3/
Read 5 tweets
Jan 13
I am beginning a new chapter in my life.

As a recently released “free agent” (nothing to do with this account), I now find myself at a crossroads for what comes next.

A thread 🧵(but worth reading to the end for NY buysiders!)

1/
Over these past few years, I have found my writing to be valuable not just to my own flywheel (writing helps me think, which helps me invest better, which makes me want to write), but also for meeting exceptional people & gathering feedback.
2/
I also sense my threads are what my followers truly value — the arc of my thinking over time, the development and evolution of frameworks like “DMs become EMs / we are speaking Portuguese,” or more trading and positioning-oriented commentary around Holy Grails and such.
3/
Read 17 tweets
Jan 12
This point gets lost on a lot of Recession Bros who keep waiting for claims to explode to 350k+ and unemployment to rip in some disinflationary morass:
1/3
When your deficit accelerates *in an expansion* as it is now, your private sector needs to shrink at that much faster a pace for production/sales/incomes to decline.

Absent that, inflation needs to accelerate faster than fiscal growth to crowd out Private on a real basis.
2/
You cannot have it nothing ways. Either you believe inflation explodes to tip the economy into recession (inflationary recessions create monetary illusions), or there is no recession and we play “just the tip” for another few quarters. No other option.

Make up your minds!
/Fin
Read 4 tweets
Jan 5
Ironically people’s market narratives in making sense of what they see are usually late/backwards. Nobody cared about term premium and bond issuance in 1H23, and suddenly in Q3 it mattered (and bonds cratered)…just at the time one should have started worrying about growth.
1/7
The move back down in long-term bond yields since then is really about growth — and the Fed blessed this view in December (remember the Fed is *always* late). But like the market, people are skating to where the puck is now, or the wrong puck entirely.
2/
They should be thinking about Inflation/Reflation now, but instead we get the following consensus views around the Growth narrative (all charts BAML):
3/


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Read 7 tweets
Dec 22, 2023
Year end Xmas comment 2023:

It occurred to me yesterday that everyone sees Powell’s pivot last week the same way: politically motivated. Regardless of motivation, there is something deeper here, a 3D chess move, maybe he didn’t realize it when he did it.
1/9
Long dated rates and spreads collapsing has been a boon for bank accounting and cleaning up the AFS/HTM issue from March. If you are BAML/SCHW/regionals, this is your window to rerack the books.
2/
Think about it this way. BoJ has been walking back the ‘imminent’ removal of YCC and ZIRP every time the market gets carried away, but for over 6 months every Japanese CEO (esp banks) has been saying “we know it’s coming, be ready.” Because that was the msg behind the curtain.
3/
Read 9 tweets

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