Where Does the Global Economy Go From Here?

[Viking]

Well the speculative excesses are continuing to get taken out behind the woodshed… time for Crypto to take its beating. Liquidity crisis? Was a $3 trillion market. Now $1 trillion. $2 trillion up in smoke. Anyone looking to buy the dip? (I am kidding.)
 

My favourite quote from the article: “There's nothing wrong with speculation in and of itself,” Sosnick said. “But you have to realize that these are assets without much of a use case right now.”

—————

see the bottom of the post for my favourite Crypto ad
—————

Things start to break:’ Crypto faces 'liquidity crisis'

 

It all started with inflation.

 

Monday’s crypto selloff is the latest example that cryptocurrencies are following the fortunes of riskier assets after May’s inflation reading on Friday came in hotter than expected. A rout followed into the weekend, a crypto lender halted transactions, and the drawdown ensued into the new week with the largest crypto exchange also pausing transactions and another crypto lender cutting a fifth of its staff.

 

Overall, the total crypto market cap has lost more than two-thirds of its value since peaking in November, according to Coinmarketcap, falling from $3 trillion at its apex to $962 billion as of Monday evening New York time.

 

How much farther the pain can spread is the big question on insiders’ minds.

 

“Inflation is running higher and that has led to a liquidity crisis in crypto,” Chris Matta, president of the U.S. side of Toronto-headquartered investment manager 3iQ Digital, told Yahoo Finance. “In moments of a liquidity crisis, things start to break.”

 

- https://finance.yahoo.com/news/crypto-faces-liquidity-crisis-225834338.html

—————

How the crypto crash exposed the sector’s lies – and left retail investors in the lurch

 

The best sales pitches are built around stellar stories, and the crypto sector concocted one for the ages: Buy bitcoin or any other digital asset, investors were told, or risk missing out on the future of finance. Maybe even of humankind.

 

Crypto.com, a major trading hub, filmed a Super Bowl commercial to caution viewers that “fortune favours the brave,” while Wealthsimple went more meta with its approach, hiring actors to play a primitive community that calls the invention of the wheel a Ponzi scheme. The message: Anyone who doubts crypto will eventually look just as foolish.

 

That retail investors believed the hype, helping send the amount invested in digital assets to US$3.2-trillion in November, 2021, isn’t all that surprising. They’re unsophisticated buyers.

 

But it all grew so feverish that major institutional investors started taking the bait, too. In October, the Ontario Teachers’ Pension Plan invested in FTX, another prominent crypto trading hub, and the Caisse de dépot et placement du Québec co-invested in a US$400-million deal that valued Celsius Network, a New Jersey-based cryptocurrency lending platform, at more than US$3-billion. “The way we look at Celsius is that it is the bank of the future,” Alexandre Synnett, executive vice-president and chief technology officer at the Caisse, told The Globe at the time.
 

- https://www.theglobeandmail.com/business/article-crypto-market-crash-bitcoin/

—————

I love this ad

 

 

Edited June 14, 2022 by Viking

[berkshiremystery]

 

 

Today's interesting NY Times cover

.....

 

Edited June 14, 2022 by berkshiremystery

[berkshiremystery]

[berkshiremystery]

[SharperDingaan]

BTC has a lot further to fall  ......

The current price is USD 22,175 - but gee whiz .. remember all that excitement back in 12/10/2017 when BTC 'peaked' at USD 20,089? However, today we have BTC options/futures!! and that USD 20,089 peak is less than 10% away.

 

What do think happens if/when BTC crashes below USD 20,089  .....

I love the smell of napalm in the morning! 

 

SD

Edited June 14, 2022 by SharperDingaan

[berkshiremystery]

11 minutes ago, SharperDingaan said:

BTC has a lot further to fall  ......

The current price is USD 22,175 - but gee whiz .. remember all that excitement back in 12.10/2017 when BTC 'peaked' at USD 20,089?. However, today we have BTC options/futures, and that USD 20,089 peak is less than 10% away.

 

What do think happens if/when BTC crashes below USD 20,089  .....

I love the smell of napalm in the morning! 

 

SD

The mother of the Black Swan might soon arrive....

 

[berkshiremystery]

THE HARDEST LANDING

 

Epic Fed policy error, groupthink pundits, and bailout-addicted investors are collaborating to create the hardest landing since 1929...

 

https://zensecondlife.blogspot.com/2022/06/the-hardest-landing.html

......

 

MONETARY FAILURE AT THE ZERO BOUND

 

In the perfect world for stocks, the Fed implodes the middle class, inflation comes down, and the Fed rescues markets before they collapse. This is what Wall Street now universally expects from the Fed, because it's been standard policy for the past 40 years. This time, they are flirting with disaster at the zero bound. Anyone who is now betting policy-makers can pull this off, deserves their certain fate...

https://zensecondlife.blogspot.com/2022/06/monetary-failure-at-zero-bound.html

 

......

THE END OF GLOBALIZATION

 

The day many of us thought would never arrive is finally at hand. It took fourteen years of continuous failure to bring about what was painfully obvious in 2008 - Globalization is over...

 

https://zensecondlife.blogspot.com/2022/04/the-end-of-globalization.html

[Gregmal]

1 hour ago, berkshiremystery said:

The mother of the Black Swan might soon arrive....

 

Yup. Ive been watching that VIX chart and for the past month or so playing for a super spike. Nothing yet but feel like its coming and the prices on the options dont really reflect it. Those are the 20-40x trades.

[Dinar]

1 hour ago, SharperDingaan said:

BTC has a lot further to fall  ......

The current price is USD 22,175 - but gee whiz .. remember all that excitement back in 12.10/2017 when BTC 'peaked' at USD 20,089?. However, today we have BTC options/futures, and that USD 20,089 peak is less than 10% away.

 

What do think happens if/when BTC crashes below USD 20,089  .....

I love the smell of napalm in the morning! 

 

SD

I had never thought that I would get a quote from Apocalypse Now on COFB.  What a great movie!

 

[Viking]

The most common comment i read is “the Fed can’t hike too much… there is too much debt in the system”. This might not be the problem lots of people think it is… especially in the short term (for a year or two). This suggest interest rates could continue to rise higher than most people expect (even from current levels) at least for a while.

 

This question is discussed at the 12:20 minute mark in the video below:

- it is helpful to separate public and private debt

1.) higher rates are not a big problem for public debt. Worst case scenario you get the Fed (central bank) to buy it.

2.) it is also not a problem for corporate debt. Interest expense is just another cost of doing business (like labour expense etc) and if it goes up businesses will pass the cost through (via higher revenue).

- there are some parts of the economy that are quite interest rate sensitive like housing and vehicle purchases. Higher rates will slow activity in these sectors… but that is what higher rates are SUPPOSED to do. 
- what about zombie companies? Yes, they will be impacted… but this is a small subset of businesses.

—————

3.) they don’t discuss the US consumer in the video. I think this is because the US consumer is in very good condition and carries low debt levels (compared to historical levels). The Canadian consumer is quite different - carrying historically high debt levels. But my guess is Canadian monetary policy will largely follow the US

—————

In the video also discusses what is going on in Europe today. Very informative. And quite the mess with no apparent solution (other than hope it doesn’t get ugly at some point).

 

 

Edited June 14, 2022 by Viking

[TwoCitiesCapital]

1 hour ago, Viking said:

The most common comment i read is “the Fed can’t hike too much… there is too much debt in the system”. This might not be the problem lots of people think it is… especially in the short term (for a year or two). This suggest interest rates could continue to rise higher than most people expect (even from current levels) at least for a while.

 

This question is discussed at the 12:20 minute mark in the video below:

- it is helpful to separate public and private debt

1.) higher rates are not a big problem for public debt. Worst case scenario you get the Fed (central bank) to buy it.

2.) it is also not a problem for corporate debt. Interest expense is just another cost of doing business (like labour expense etc) and if it goes up businesses will pass the cost through (via higher revenue).

- there are some parts of the economy that are quite interest rate sensitive like housing and vehicle purchases. Higher rates will slow activity in these sectors… but that is what higher rates are SUPPOSED to do. 
- what about zombie companies? Yes, they will be impacted… but this is a small subset of businesses.

—————

3.) they don’t discuss the US consumer in the video. I think this is because the US consumer is in very good condition and carries low debt levels (compared to historical levels). The Canadian consumer is quite different - carrying historically high debt levels. But my guess is Canadian monetary policy will largely follow the US

—————

In the video also discusses what is going on in Europe today. Very informative. And quite the mess with no apparent solution (other than hope it doesn’t get ugly at some point).

 

 

 

1) agreed in the short term higher rates matter little for public debt. Intermediate to long term they do and plays out explicitly via default risk or implicitly via inflation/currency risk. 

 

2) I'm not so sure corporations can just "pass it on". The data suggests that corporations have been struggling to pass along inflation with PMIs outpacing CPIs for the last year. If they can't even keep up with inflation, what makes you think they can tack onto that increased interest costs? Also, please look at the WSJ article from today that suggests inventories for many products are elevated and we'll likely see price cuts across various retail products DESPITE rising inflation and interest costs. 

 

3) uS consumers carry relatively low debts because they were essentially bailed out twice over the last 20-years and have used the opportunity of deferrals, stimulus, and etc to deleverage, so we agree there. That being said, what matters is the picture going forward and costs are rising faster than incomes for most and the savings glut that appeared from stimulus during covid is largely undone. 

 

4) the economy appears significantly LESS robust today than in 2018. 3.25% rates in 2018 were enough to break the repo market, start a manufacturing recession (in 2019), PMIs fell to negative growth globally, and invert the yield curve long before anyone has heard of covid. Maybe it IS different this time, but I'd like to know what gives anyone the confidence to think so? 

 

 

[rkbabang]

On 6/12/2022 at 3:01 PM, Paarslaars said:

I trippled my oil positions throughout Dec/Jan. Mainly based on discussions here..

 

Same.  All of my oil positions were purchased Nov-Feb based on a lot of discussions on this board as well as reading Kuppy's blog.  People DID see it and DID take advantage of it.  That and real estate stocks are the reason that I am not down anywhere near what the market is YTD.

[Viking]

1 hour ago, TwoCitiesCapital said:

 

1) agreed in the short term higher rates matter little for public debt. Intermediate to long term they do and plays out explicitly via default risk or implicitly via inflation/currency risk. 

 

2) I'm not so sure corporations can just "pass it on". The data suggests that corporations have been struggling to pass along inflation with PMIs outpacing CPIs for the last year. If they can't even keep up with inflation, what makes you think they can tack onto that increased interest costs? Also, please look at the WSJ article from today that suggests inventories for many products are elevated and we'll likely see price cuts across various retail products DESPITE rising inflation and interest costs. 

 

3) uS consumers carry relatively low debts because they were essentially bailed out twice over the last 20-years and have used the opportunity of deferrals, stimulus, and etc to deleverage, so we agree there. That being said, what matters is the picture going forward and costs are rising faster than incomes for most and the savings glut that appeared from stimulus during covid is largely undone. 

 

4) the economy appears significantly LESS robust today than in 2018. 3.25% rates in 2018 were enough to break the repo market, start a manufacturing recession (in 2019), PMIs fell to negative growth globally, and invert the yield curve long before anyone has heard of covid. Maybe it IS different this time, but I'd like to know what gives anyone the confidence to think so? 

My ‘angle’ is simply trying to understand the current spike in bond yields and how high they might go in the next 3 months. 
 

2.) regarding corporations my guess is interest costs are a very small cost item. So, yes, some pain, but manageable for most (especially if rates do not stay high which is what i expect to happen).

 

4.) i think the US economy is in a much better position today than any other major economy in the world. This is reflected in the strong dollar. They lead technology. Housing boom. Winner in deglobalization. Secure and cheap energy (compared to others). Investment/transition to EV coming. Pro business (Republicans will do well in fall elections and take back House and perhaps Senate). Not perfect. But lots to look forward to (especially once we get through the next 6-12 months).

[TwoCitiesCapital]

44 minutes ago, Viking said:

My ‘angle’ is simply trying to understand the current spike in bond yields and how high they might go in the next 3 months. 
 

2.) regarding corporations my guess is interest costs are a very small cost item. So, yes, some pain, but manageable for most (especially if rates do not stay high which is what i expect to happen).

 

4.) i think the US economy is in a much better position today than any other major economy in the world. This is reflected in the strong dollar. They lead technology. Housing boom. Winner in deglobalization. Secure and cheap energy (compared to others). Investment/transition to EV coming. Pro business (Republicans will do well in fall elections and take back House and perhaps Senate). Not perfect. But lots to look forward to (especially once we get through the next 6-12 months).

 

2) small relative to revenues, sure. But waht matters is how small they are relative to net profits because that's where it'll come from of they can't be passed along and the data is suggesting that they may not be able to in aggregate. 

 

4) those items were all basically true in 2018 too. Didn't stop the economy becoming incredibly fragile and a recession from occuring. The US might be in a good 'relative' position, but that doesn't mean it's in a good 'absolute' position and equities were priced for perfection in 2021. 

 

The 1970s/1930s (inflationary/deflationary) environments saw single digit P/Es in aggregate by their end. Even if we only get half-way there, it'll be incredibly painful. To justify today's market levels, you have to believe we'll thread the needle and keep inflation averaging 2-4% per annum over the next decade - anything higher or lower than that threatens significantly lower equity markets. 

 

I still believe deflation is the risk, but if I'm wrong and this inflation remains persistent, that is still NOT good for stocks. As we're seeing now, it can result in suboptimal inventories where companies get whipsawed and/or the inability to pass increases in production costs onwards. We're seeing both at the moment. 

Edited June 14, 2022 by TwoCitiesCapital

[Viking]

2 hours ago, TwoCitiesCapital said:

 

2) small relative to revenues, sure. But waht matters is how small they are relative to net profits because that's where it'll come from of they can't be passed along and the data is suggesting that they may not be able to in aggregate. 

 

4) those items were all basically true in 2018 too. Didn't stop the economy becoming incredibly fragile and a recession from occuring. The US might be in a good 'relative' position, but that doesn't mean it's in a good 'absolute' position and equities were priced for perfection in 2021. 

 

The 1970s/1930s (inflationary/deflationary) environments saw single digit P/Es in aggregate by their end. Even if we only get half-way there, it'll be incredibly painful. To justify today's market levels, you have to believe we'll thread the needle and keep inflation averaging 2-4% per annum over the next decade - anything higher or lower than that threatens significantly lower equity markets. 

 

I still believe deflation is the risk, but if I'm wrong and this inflation remains persistent, that is still NOT good for stocks. As we're seeing now, it can result in suboptimal inventories where companies get whipsawed and/or the inability to pass increases in production costs onwards. We're seeing both at the moment. 

I do expect more pain in economy and markets (next 6 -12 months). But i am starting to get positioned for the other side (down to 55% cash). 
 

i am starting to wonder about the deflation narrative from the past 25 years or so. I was listening to a podcast and the person on the other side suggested much of the deflation was driven by

1.) China and the massive disintermediation of labour.

2.) last 10 years, underinvestment in physical things especially commodities.

As deglobalization happens and investment in physical things picks up we may see a more inflationary environment moving forward. Interesting perspective as it is not mainstream. 

Edited June 14, 2022 by Viking

[TwoCitiesCapital]

4 hours ago, Viking said:

I do expect more pain in economy and markets (next 6 -12 months). But i am starting to get positioned for the other side (down to 55% cash). 
 

i am starting to wonder about the deflation narrative from the past 25 years or so. I was listening to a podcast and the person on the other side suggested much of the deflation was driven by

1.) China and the massive disintermediation of labour.

2.) last 10 years, underinvestment in physical things especially commodities.

As deglobalization happens and investment in physical things picks up we may see a more inflationary environment moving forward. Interesting perspective as it is not mainstream. 

I agree, but I still think it's a few years away. Debt and demographics and productivity are the three other deflationary factors and they're still with us. 

 

Deglobalization doesn't happen over night and I expect commodities to charge forward in fits/sputters as recessions kill demand but shortages will persist. So while inflation will exceed the average of the last decade, I don't believe it'll be out of control this decade because recessions/demand destruction will contain it

[PJM]

16 hours ago, Viking said:

The most common comment i read is “the Fed can’t hike too much… there is too much debt in the system”. This might not be the problem lots of people think it is… especially in the short term (for a year or two). This suggest interest rates could continue to rise higher than most people expect (even from current levels) at least for a while.

 

This question is discussed at the 12:20 minute mark in the video below:

- it is helpful to separate public and private debt

1.) higher rates are not a big problem for public debt. Worst case scenario you get the Fed (central bank) to buy it.

2.) it is also not a problem for corporate debt. Interest expense is just another cost of doing business (like labour expense etc) and if it goes up businesses will pass the cost through (via higher revenue).

- there are some parts of the economy that are quite interest rate sensitive like housing and vehicle purchases. Higher rates will slow activity in these sectors… but that is what higher rates are SUPPOSED to do. 
- what about zombie companies? Yes, they will be impacted… but this is a small subset of businesses.

—————

3.) they don’t discuss the US consumer in the video. I think this is because the US consumer is in very good condition and carries low debt levels (compared to historical levels). The Canadian consumer is quite different - carrying historically high debt levels. But my guess is Canadian monetary policy will largely follow the US

—————

In the video also discusses what is going on in Europe today. Very informative. And quite the mess with no apparent solution (other than hope it doesn’t get ugly at some point).

 

 

Higher rates will impact the public debts immensely. Currently 25% of US govt debt needs to be rolled over in next 1 year and 60% (around 14t) of US govt debt will need to be rolled over in next 4 years. A 1% increase in interest rate raises the interest burden by 140b just on the short term maturing debt, creating substantial fiscal deficit. The CBO is already projecting a deficit of 4% annually for next 10 years without factoring in the higher rates. Foreign demand for US treasuries have shrunk dramatically in last decade. Only 12% of total increase in US debt since 2014 has been purchased by foreigners.

 

So the tough choices are -  fiscal consolidation (higher taxes and lower public spending) which does not seem to be popular path with the politicians or financing the debt by the FED which means money supply putting pressure on inflation and the currency.

 

Historically inflation has never been tamed without tough fiscal measures which is completely missing currently, so the FED actions will not have meaningful impact unless accompanied by tough fiscal measures. 

[berkshiremystery]

More interesting charts from Mac10 @Twitter.com

 

 

[backtothebeach]

1 hour ago, berkshiremystery said:

More interesting charts from Mac10 @Twitter.com

 

 

 

All these doomsday graphs almost make me bullish again.

 

I'm sure there are valid points in there, but when you combine data with two y-axes left and right with different scales you can show almost anything.

 

Also, with linear (not logarithmic) scales everything tends to looks like a hockey stick.

 

[brk64311]

Gregmal, Do you mind sharing your VIX -spike related trade? Thanks.

[TwoCitiesCapital]

19 hours ago, TwoCitiesCapital said:

 

2) I'm not so sure corporations can just "pass it on". The data suggests that corporations have been struggling to pass along inflation with PMIs outpacing CPIs for the last year. If they can't even keep up with inflation, what makes you think they can tack onto that increased interest costs? Also, please look at the WSJ article from today that suggests inventories for many products are elevated and we'll likely see price cuts across various retail products DESPITE rising inflation and interest costs. 

 

 

Retail sales fell 0.3% in May despite CPI rising 1% MoM.

 

Corporations will NOT be able to pass along increased costs and it eat some of the bottom line. 

[Gregmal]

2 hours ago, brk64311 said:

Gregmal, Do you mind sharing your VIX -spike related trade? Thanks.

The basis is a pattern repeating in which we've seen things that rarely occur or have never occurred, occur. So, twice we've seen what? VIX 80 or something? So you can buy your self a month of coverage, at say the July 60 strike for 40c. So just look around at the dates and strikes and see whats interesting. VIX goes to 80 or 100 and you've got yourself a few new homes. I also think if you wanna be a little creative, you can short some of the 25-30 VIX puts to fund it. 

[RichardGibbons]

It's worth noting that the VIX options are European exercise, not American exercise. That makes it much harder to bet on a 3-sigma event and get the value you hope for.  e.g. if you own the $60 strike calls and the VIX is trading at $80 two weeks before expiration, those options will be bid at much less than $20.

[Gregmal]

They typically trade a bit lower. Historically at least. However a lot of the times I’ve played stuff like this where it works, you can lock in some by selling ATM. So you may own 60s with a .40c basis and at 80 you’re getting a bid of 14…but you can probably(just pulling a number out of my ass) sell the 80s for $5. 

[Cor]

What about VXX as an alternative to the European exercise for this play? Does it track the VIX spikes closely?