Submitted by Eric Peters, CIO of One River Asset Management
“What does it mean when stocks rally into the first shot of a trade war?” asked Yoda, high in the Rockies.
The S&P 500 finished Thursday +0.9%, the deadline looming. And certain his question did not require an answer, I waited quietly. “When that same market closes sharply higher on the day the trade war begins, what is it telling you?” asked Yoda.
In the distance, peaks everywhere, each unique in shape, though formed by identical forces. “The market never likes to be told what to do. It moves on its own terms, none other. And it was too short.”
“There’s plenty of anxiety in markets,” said Roadrunner, surveying the landscape. “Risk premiums aren’t cheap. The selling of volatility into rallies is no longer massive,” continued the market’s biggest equity volatility trader. “On the slightest fear in the world, the VIX jumps to 18 almost immediately.” Since mid-April the VIX index has oscillated between 11 and 20. “This is a healthier market than when the VIX gets stuck between 10-12. And it just trades like the market believes Trump will be more talk than action. I guess we’ll see.”
“There’s one market where the volatility selling is relentless,” said Roadrunner, his army of market makers filling the void left by investment banks. “There is almost constant selling of 5yr, 10yr and 30yr interest rate volatility. We keep getting buried.” Having pushed through 3.00% in May, 10yr bond yields are back to 2.83%, stuck amidst the 2.71% – 3.10% range since February. “Feels like it’s one of these big structural sellers, though hard to say for sure. All I know is that at these levels, I’d rather be long it than short.”
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“The resiliency of Bitcoin is impressive,” continued Roadrunner, building a presence in crypto trading. “It’s held up despite talk of bursting bubbles and exchange hacks.” Bitcoin is down 67% from its highs, which takes it back to last October’s price. “Down the road, everyone will hold some percentage of their wealth in digital assets. The winner may not be Bitcoin, but right now it feels like the one.” Bitcoin market cap is $112bln, Ethereum is #2 at $46bln, followed by Ripple at $18bln, Bitcoin Cash $12bln, EOS $6bln, and Litecoin $5bln.
“2017’s rally was total euphoria,” explained Roadrunner. “People anticipated a Bitcoin ETF at the end of the year.” It never happened and the price tanked. “People then were either unaware or underestimated their capital gains tax liabilities into April, and that cut prices in half.” Ever since it’s been in a $9,900 – $5,900 range (last price $6,500). “The futures market trades in light volume but it’s a start, a success. Coinbase (the dominant exchange) will go public at some point with a crazy valuation. And when the Bitcoin ETF arrives, the price will double.”
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And a bonus anecdote from Peters:
His passion for it was fading. He knew that much. “But what to do?” whispered the Economist, mostly to himself. For decades he’d examined every word, placing it into context, comparing the endless stream of Fed statements to their predecessors. He took great pride in not missing a single interview by all twelve voting members. While he couldn’t recite Fed Chair press conferences verbatim, he got close. And that impressed his employer’s biggest clients who considered him Rain Man. He loved it, even if more recently it felt narrow, hollow. In his early years, Greenspan had been exciting in a nerdy kind of way. Alan knew that in a fiat system it is vital that the central bank exude confidence, wisdom. But deep down the Maestro understood how little we know. So he hid that truth in obfuscation, erudite nonsense, saying much and nothing, all at once. Bernanke was an authority on the Great Depression’s monetary mistakes. And this assured that his zealous commitment to prevent a repeat blinded him to the far-reaching unintended consequences of his policies. Every major central bank followed Bernanke’s lead.
Politicians ceded control, central banks ruled supreme. As global interest rates fell to zero and below, debts soared while interest payments sank. This increasingly fragile construction proved stable provided nothing changed. Yellen inherited the bizarre legacy in 2013. She had previously invented the Dot Plot, an experiment in communicating expectations for the future by an economics team that consistently misjudged it.
The goal was to abolish policy uncertainty. But uncertainty is immutable, and escaping the central bank’s grasp, manifested in an anti-establishment political wave.
“What use am I now?” sighed the Economist, having devoted his career to Fed watching, still hanging on to every inconsequential word, as the age of the central banker passed, and power returned to politicians.
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