The irredeemable trash of a thousand shinplaster debt factories
Party Poker on LSD
“It’s only this post-Cold War model, where everyone just thinks, well, I've got a right to open a factory in any other country and bring the stuff in. Why? If it destroys American society, destroys American national security - why? And that seems to be the question that's being asked, and the policies will start to shift.”
Today’s title comes from an 1862(?) Salmon P. Chase quote (via Jim Grant) about the state of credit at the time. Seems to apply today too.
The second line is from Chris Whalen in the same interview, “That's what crypto is. It's Party Poker on LSD.”
The post photo is from the excellent TV series, Wormwood.
It’s a tragedy what destroying money over the past 50 years has done to young people.
"The Fed will be put under pressure to monetize the debt to keep interest rates from rising."
Ben Bernanke on monetizing the debt, 2012:
"No, that's not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending."
Mr. HENSARLING. Will the Federal Reserve monetize this debt?
Mr. BERNANKE. The Federal Reserve will not monetize the debt.
[FUTURE FRONTLINE NARRATOR]: In reality, they had monetized the debt.
"Don't tell me what he said, tell me what he does."
For paid subscribers, below are insights from Grant Williams, Kris Sidial, Cem Karsan, Mike Green, Mel Mattison, Louis-Vincent Gave, Dave Dredge, and Porter Stansberry, plus the usual eclectica.
“When an insider decides to sell stock, it’s rarely a good sign.”
Matt Maley, chief market strategist at Miller Tabak
NVIDIA
Since it’s the big news this week, so far, from Alyosha on Monday:
“Nvidia fell 17% and closed below the 200D MA on the highest volume in nine months. Usually, when prices close with this kind of authority under the 200-D MA, if you are still long… you’re in trouble.”
“The DeepSeek episode can be two things at once: (i) a reflection of impressive Chinese AI innovation in the face of US chip bans and other restrictions, and (ii) the by-product of probable terms of service and copyright violations by DeepSeek against OpenAI. A Shakesperean irony: OpenAI may have had its terms of service violated after spending years training their own models on other people’s data.”
Triple-Levered Nvidia Traders Are Gutpunched by 52% One-Day Loss
“Amid a bruising global rout sparked by anxiety over the rise of China’s DeepSeek AI model, the London-listed Leverage Shares 3x NVIDIA ETP slumped 52%, wiping out more than half of its $172 million in assets before trading was halted on Monday…
In Europe, investors have access to more highly-levered products, including some that offer five times the daily return of their underlying holdings. American traders, meanwhile, are limited to double-levered ETFs on single companies, though some triple-levered products exist.”
Doesn’t the Fed have some programs to help these poor overleveraged folks?
I mean, come on, the hyperbole is ridiculous. e.g.,
Here’s the S&P 500 “sinking” over the past month:
Beyond the silliness, I have no position ,and don’t care.
Alyosha on Tuesday, after a 9% Nvidia rally:
“Someone or a group wanted stocks higher today. Pick a name or a sector with common interests.”
“More importantly, the stock market has effectively become a single asset, like gold or oil. It is a mass of molecular-like parts, but its price is actually one price. Notwithstanding rotations, flows into it often appear to be contrived for cosmetic effect.”
Loved this quip too: “The stock market is never going down until it crashes, because the operators are batting 1.000, and if they start batting .999, they go broke. I have no idea when that will happen, but I know it will.”
“I think we are in a long-term bull market in Gold. I think we're seeing Reserve accumulation by central banks. I follow it closely. It's my biggest position.”
Treasury Secretary Scott Bessent, Nov. 4, 2024
How different Bessent is so far compared to the garden gnome who just left Treasury.
Supposedly the U.S. government owns over 8,133 metric tons of gold, or 261,498,926 troy ounces (held by the Fed.) At $2,749 an ounce, that's $718.86 billion, or about six months of Fed QE.
“In the latest Michigan sentiment survey, the number of people who expect that their income will actually outpace inflation this year fell to the lowest since the great financial crisis, so they're not optimistic that they're going to reap real income gains, and that presumably will serve to dampen their spending.” - Stephanie Pomboy
Wow.
Only 28% of Americans think they will have real income gains over the next 5 years, including just 19% of Seniors. The bottom third give it an 18% chance. Amazing.
Thanks, Jerome, Janet, and Congress! (Voters too)
Grant Williams
“My good friend Steve Diggle…had a vol fund through ‘08, and those guys did tremendously well. And he’s steered clear of vol for 15-odd years now, yet now he says it’s time to get back involved. And that tells me something, someone that is a practitioner, who has seen no opportunity whatsoever, for 15 years, despite all the stuff been going on, when I see stuff like that, that tells me this is something we need to be paying attention to again. And so, this idea of vol markets being pulled around by equity markets feels, to me, like that’s the way it should be, that vol should be dictated by what happens in the markets, and not necessarily the other way around as it has been.”
Kris Sidial
“Fast-forward going into 2025 now, at the beginning of 2025, you are seeing more of elevated vol naturally in the rates market and the FX market relative to where it has historically traded at, but equity vol has not moved at all. So, it’s like the FX market is repricing risk, the rates market is repricing risk, but the equity market is still not repricing risk.
And there’s been that disparity for the last three years here, because the rates market and the FX market started repricing risk in 2022. And equity vol never followed. Which is why you see people posting charts like VIX overlaid with the MOVE index or VIX, or a five year CDX, or something like that. And they say, “Hey. Well, bonds and FX are moving, commodities are moving, but equity vol is not moving.” And I think it’s just a relationship that cannot continue. And I’m the biggest believer in like, “Hey. Correlations break, things in markets change. You have to be able to adapt to it. You can’t look at two relationships in a linear respect.”
But then you also have to think like what the implications of these things mean where it’s like, “Well, the bond market is slowly becoming unhinged” in a time where there’s, clearly, a huge fiscal deficit that’s going on in the United States, and you have a new administration that’s very aggressive with their policy revisions.
I just don’t see how that just calms down out of nowhere. It’s like this looming fire that’s going on under the hood, and also when you think of FX, things in the FX market are moving every single day. You have three different markets that are all indicating one thing, and one market is not. Again, commodities, FX, and rates are all demonstrating higher vol relative to where they usually trade.”
More from the Dave Dredge/Cem Karsan interview I mentioned in my last post
Dredge: “These guys are so overloaded with bonds they bought with infinite leverage at ridiculous levels, and they don’t mark to market. So, they’ve got these ginormous unrealized losses and the supply keeps coming. And then, as we said a year ago, and I think I said a year before that, the good outcome is the recession because then people will buy the bonds. But if you keep trying to avoid the recession and you cut interest rates too early, people won’t buy the bonds because the guys who bought them all, when the price was wrong, bought them because they were regulated to do so with an incentive to pay themselves for annual accrued income while they destroyed capital generation for somebody else’s money. And those guys are full, they’re full, they’re not buying.”
Niels Kaastrup-Larsen: “I just want to add to that because we were talking about bonds here. I mean, let’s not forget that we have something like $10 trillion of refinancing coming in this year in the US given the infamous wisdom of funding themselves short when interest rates were practically at the lowest level ever. So, there’s going to be a lot of bonds coming.”
Dredge: “I wrote about it in November. [The Fed] announced that they’re commencing their framework review. And so, they’re going to go and review the framework that last came out in August 2020 with the inclusion in the framework of average inflation targeting. I assume they’ll be taking that out in the new framework. Whether they issue a formal apology or not, I’m skeptical, but I think it’s coming out.”
Speaking of “average-inflation targeting”, watch this video and then try to tell me that the Federal Reserve should not be disbanded:
If you remember last time, David Dredge was comparing today to 1995-1999. Check out Cem Karsan’s comments below, and compare them to Kris Sidial’s above:
“You know, if you look at a big picture analysis, we’ve been hammering on this idea for years now that, well before FX and interest rate vol picked up, that those volatilities, for a decade (this is a secular opportunity in our view) should be dramatically higher. It’s a function of rising interest rates, inflation, deglobalization, all the things that are tied up with this big populist protectionist wave we are in the midst.
And again, last time we saw this, in the late ‘60s through the ‘70s, these same effects, equity vol, ironically, dramatically underperformed. Things like commodity vol dramatically underperformed.
It’s the FX, the precious metals, the bond and interest rate vol, those are the things that were dramatically higher. And so, I think that’s going to continue to be a trend, the areas and the cross-country kind of flows and opportunities. I know you’re likening it a lot to the late ‘90s and that is a possible path. I hear you on that. But I actually think it probably goes even further back to a period, and it’s probably more dramatic than that, because the same pressures that drove the late ‘90s are at play in terms of driving, strong dollar kind of braking everything else globally. But this time we have a much bigger structural inflation issue, and that’s different than the ‘90s.
And the Fed has much less control in this environment, which creates, actually, more volatility…
I think the Fed is going to lose control of the long end of the curve and lose the ability to push people, and everything, the markets, around. And you haven’t seen that for 40 years. I just think that’s a wow, what an opportunity for convexity, and rates, and FX.”
“What else was unique about ‘95 to ‘99? Well, the US, courtesy of Bill Clinton and Newt Gingrich, reduced debt to GDP and ran a surplus. Imagine if DOGE reduces deficit, and that makes US bonds relatively more attractive in the world, and more money gets sucked out of the rest of the world and the dollar gets even stronger.
You mentioned the dollar went up 50%. DXY went from 80 to 120. We’ve only got up 10% since Trump won the election so far. Imagine if we went up 50%. It would absolutely tear the world apart.”
- Dredge
Cem Karsan finishes up with a banger:
“You have to have that crisis right before people are forced to do something. And I do think that’s probably coming. It’s just going to be, before that comes, you’re going to have the some pain.
I think this is, when I say big, I think Bretton Woods type big. I think we’re going to have some really incredible… And this is not, we’re not talking in 10 years, I’m talking in the next 2, 3 years. It’s going to come to a head much quicker than people realize because, like we were talking about on the bond side, once it gets started, that’s when the speed accelerates. You get a first move where the vol is well supplied. That move breaks things a little bit, but vol was well supplied. The second move is the one that gets you. That’s the one where, you know, there’s no more vol available, it’s too expensive to hedge.
And then, the next move is a five sigma, six sigma type event. So, I think when it comes to rates, you know, debt to GDP can’t handle 7% to 10% yields. And I think we’re going to 6.5% this year. So, you know, I think if we get to 7% to 10%, and I don’t think it happens at a straight line, I think we’d go into recession before we got to that next level.
But I think if we start getting to those types of numbers, which people think is crazy for me to say, but people thought what I said five, two years ago, that that was crazy. And so, I just think that it’s going to force some real, real big conversations.”
Mike Green with Grant Williams
“Again, another academic paper that has come out since you and I first started talking was Marco Sammon’s, “Who Clears the Market when Passive Trades?.” And it turns out that the provider of liquidity to passive when people try to buy in are corporate insiders. It’s just insider selling. What was begun with 401(k)s as a tool to provide for the retirement of the average American, and designed specifically for people below a certain level of income and asset wealth, hence the limitations on tax deductibility and contributions, has now turned into effectively a naked grab by an elite segment of our society that is effectively able to print wealth for themselves and sell it to all the rest of our Americans. That’s very Roman in its construction, and unfortunately, I think that’s the direction that we’re going to continue to head.”
This part also sounded ominous:
“…the FDIC came out last year and told Vanguard and BlackRock, “You will not be allowed to get to above 15% holdings in some of the bank holding companies.” Which is under the FDIC’s regulation, and the rules for that are very straightforward. They don’t want controlling entities in chartered bank entities that could potentially influence behavior in an undisclosed manner.
And the reaction from Vanguard and BlackRock was not to say what you would think, like, “We got to figure out how to deal with this within the spirit of this regulation.” Instead, they simply said, “Well, you can choose to do that, but then we’re just going to have to use derivatives to gain exposure to the securities.” And that’s exactly what they’re doing. And so they have become almost overnight among the largest users of total return swaps, which are simply banks providing leverage to their clients. You’ve seen this in what’s called the growth in lending to non-depository financial institutions, NDFI, that has replaced all the other forms of leverage gain in our economy. No other form of leverage on net is growing in terms of bank lending except for this lending to NDFI, which is private credit, levered funds, total return swaps that are being provided to financial players, et cetera. It’s just the game is playing out exactly as you would expect it to once you remove the limitations of, “Well, the FDIC told you you can’t buy more of them.” And so your answer is, “Well, we’re not going to stop buying more of them, we’re just going to use derivatives to buy them, because that would be the one thing we could do that would make this outcome even worse.”
Mel Mattison
“If you look at any basket of real goods that people buy, you can tell that those CPI numbers are pretty much junk.”
“I had done a little search of what was the average price of a home in San Francisco in 1971, using Google AI, and it told me it was $16,000, and then it said, adjusted for inflation, that would be $180,000 in today's dollars, and of course they're using CPI. So they're basically saying a home in San Francisco - based on CPI numbers - would be $180,000 for a single family home. We know it’s at least ten times that, right? So the CPI numbers when it comes to major purchases - whether it's cars, homes, you know, if you look at a certain basket of goods that they put in there - if you look at some some food items, some basic items like clothing and food, you know the things that people actually need to live, maybe those CPI numbers are generally in the ballpark, but once you start going into what are the big expenditures - Education, Health Care, homes, cars - I mean, they're all multiples of what the actual CPI numbers are,
I say that just so that, you know, if I reference I don't think we're heading into a recession because of fiscal stimulus, that people understand if we had real CPI numbers, we probably would have been listed as in a recession for most of the last couple of years, but we don't, and so using government numbers we have a strong economy.
On the one hand we have positive GDP prints ahead of us, just like we have in the past, and I was saying this last year, even in the summertime when people were worried and a lot of it really is the fiscal juice in the economy. It's the trillions of dollars that are being pumped in every quarter just to keep the engine roaring. We just yesterday, as we record this on the 15th, yesterday the Treasury released complete numbers for the first fiscal quarter of 2025, which runs from October 1st until December 31st, and the the deficit is already in three months $711 billion, whereas last year that number was $510 billion. That's a 39.4% increase, a 40% increase in the deficit in the first quarter, and if you do an annualized run rate you're approaching a three trillion deficit, so that is where we're sitting right now.
We've got an economy that with real CPI numbers and no government massive deficit-spending would be in a major recession right now.”
“I think once we really start to see the whites of inflation's eyes, and you start saying, ok, we're going to have three, three and a half percent CPI prints, which are really going to be four and a half, five percent inflation, then we get one or 2% in real growth, you're going to get to 7% as a fair value of nominal GDP over the long run, and that's that's where the 10-year should be. Basically the 10-year should probably be at 7%, but it's not because of all this manipulation, with Bill issuance, and different forced buyers of treasuries.
If you look at mortgage-backed securities, which are more or less government guaranteed, they're trading at seven and a quarter percent, and I think that big spread between mortgages and the ten-year is primarily due to the fact that the treasury yield is already being manipulated. The actual risk-free rate on a 10-year is probably closer to what the mortgage is indicating, which is around seven and a quarter percent, and 30-year mortgages - because of prepayment it actually has a similar duration to a 10-year treasury bond - so even though it's a 30-year piece of paper, because of prepayment risk the duration is closer to a 10-year, and so basically the market is telling you 7% nominal GDP potential, and that's not that's not priced in the market at all.”
Porter Stansberry
“I think the Warren Buffett approach to finance is more attractive than the Rick Rule approach to finance, and I'm not saying that Rick isn't a great investor. He absolutely is a great investor, and if Rick says, hey Porter, I'm gonna have a partnership to buy uranium, trust me, I'm in, but I think that for most people the trick to being very successful as an investor is just not that hard. Just wait until you see a business that you can easily understand, and that's trading at a price that is so obviously below its intrinsic value that you don't have to even run a discounted dividend model, you just know it's got to be too cheap.”
“I think you'll make more money in Treasury bills over the next decade - at least on a nominal basis - than you'll make on the S&P 500. I think the S&P is is overvalued to the extent that it was in 1972, and 1999, and 2008. I think it's it's probably more overvalued than any time I have ever seen.”
“I don't think the dollar has been this overvalued in my lifetime.”
Meet the man picked to succeed Warren Buffett
Greg “Abel joined Buffett’s orbit a quarter-century ago when Berkshire entered the energy field. As CEO of Berkshire Hathaway Energy (BHE) starting in 2008, Abel assembled a colossus that covers the universe of utilities, pipelines, natural gas plants, wind and solar farms, and sprawling transmission networks that together make up a pillar of the Buffett empire. Today, the businesses under Abel’s stewardship are generating roughly $270 billion in annual revenues—as a stand-alone company BHE would rank in the Fortune 500 list’s top 10, above Microsoft and Chevron (Berkshire itself ranks fifth).
Along the way, he won Buffett’s trust, showing the same knack for building trust, spotting deals, and skirting big risks that the Oracle of Omaha himself possesses. “There’s a lot of smart people in this world, but some of them do a lot of dumb things,” Buffett declared in 2021. “Greg’s a smart guy who will never do a dumb thing.””
“Harvard also estimates that between 2025-2035, 15.6M boomers will no longer need housing here on Earth. Between 2035-2045 we will lose 23.4M more. By now most have read articles about our abysmal birthrates. There is much debate as to exact causes, but honestly, many youngsters I chat with simply cannot afford to have babies.”
According to the Fed, there are 871,000 homes for sale right now in the U.S.
The fall of TGI Fridays
"You just really have a lot of different challenges. And then eventually private equity looks at businesses like this, and they're like, 'Let's load it up with debt, and that's how we're going to make our money,'" Jonathan Maze, the editor in chief of Restaurant Business Magazine, said. "That's really kind of what happened here."
Related Podcast: The Epic Mess at TGI Fridays
Did a Private Equity Fire Truck Roll-Up Worsen the L.A. Fires?
“One of the reasons that the recent Los Angeles wildfires were so hard to contain, according to Los Angeles Fire Department (LAFD) Chief Kristin Crowley, is that more than half of the LAFD’s fire trucks have been out of service. It’s become a bit of a scandal; while fires burned through Palisades and Eaton neighborhoods, more than 100 of the LAFD’s 183 fire trucks were apparently sidelined.
Why couldn’t the LAFD keep its equipment in working order? A lot of people blame budget cuts, but there’s another root issue - increasing prices and metastasizing production delays for these vehicles. The cost of fire trucks has skyrocketed in recent years––going from around $300 -500,000 for a pumper truck and $750-900,000 for a ladder truck in the mid-2010s, to around $1 million for a pumper truck and $2 million for a ladder truck in the last couple years. Meanwhile, the time it takes to get a fire truck delivered has grown dramatically, from less than a year before the pandemic to anywhere between 2 and 4.5 years today…
What I’ll show you in this piece is that the increasing price is a result of a private equity firm, American Industrial Partners, consolidating the fire truck industry and forcing up prices across the board.”
Rob Urie: On Being Censored for the Last Four Years
“Yves [Smith] here. This important post fills out the picture of how extensive censorship became under the Biden Administration. I hope you’ll circulate his piece widely, since it demonstrates the campaign went well beyond social media and included disappearing disfavored content from Internet searches. What is remarkable is Urie’s evidence of a dramatic shift in search results after the dissolution of the Biden State Department censorship program. This indirectly confirms that Google’s change in its algos to prefer mainstream sites and the quick reversal was the result of government intervention, and not Google acting out of its own profit motives.”
The Cantillon Effect Redux
“The Fed’s goosing the money supply first increased asset prices, and who owns the assets? Well, rich people own assets, so the the rich people got a lot richer as a result of that. The ones who aren't so rich and have balance sheets that probably are negative - on balance they don't own anything - they're probably in debt on a net basis. Those people saw their income, adjusted for inflation, actually go down, so I think this is one reason we we saw the election turn out the way it did in November last year. One reason we see Trump being inaugurated yesterday is because a lot of people resented this.”
The problem with Hanke’s comments above is that on Trump’s watch - remember, he wanted more QE, and negative rates - the Fed’s balance went up by about $3 Trillion, while under Biden’s reign the balance sheet went down a half trillion dollars (although, under Sleepy Joe, the “reverse repo” operation did get to $2.5 trillion, up from $0.)
Of course the President (supposedly) can’t control what the Fed does, but the Cantillon Effect is clearly a bipartisan effort.
Someone asked me about Pets.com this week. This is from the book, dot.con, by John Cassidy:
Blodget:
"If we are to tame darkness, we must first face that it exists!"
China
I don’t spend a lot of time trying to analyze China, because I don’t even trust the data coming out of Washington, D.C. However, there are those who do make the effort.
Jeff Snider: China’s Economy is COLLAPSING, and Even the Government is Panicking
Louis-Vincent Gave: Something Strange Is Going On In China's Financial Markets (I’ll note that the original title of this podcast was “Why Chinese Bond Yields Have Collapsed?”
Two smart guys, two completely different views (I definitely lean to LVG. I love his non-U.S. centric takes.)
Gave’s interview is a very nice China overview. Here he is discussing Chinese consumption:
Speaking of A.I.
A bitter little story made the rounds during the closing days of the Vietnam war:
When the Nixon Administration took over in 1969 all the data on North Vietnam and on the United States was fed into a Pentagon computer—population, gross national product, manufacturing capability, number of tanks, ships, and aircraft, size of the armed forces, and the like.
The computer was then asked, ‘When will we win?’
It took only a moment to give the answer: ‘You won in 1964!’
The JP Morgan note sums up the DeepSeek situation nicely imo.
On another note, looking at inventory increases WOW in CA and across the country get ready to see a very interesting Spring.
Thank you as always.
I love LVG's work too.
It strikes me that the west thinks that China is 2008 US with a debt deflationary spiral, while missing that China might actually be a lot more like the Gilded Age US - incredible debt, but going through a productivity boom of the likes the world had never seen. China is making things cheaper and better than the west. Not just the cheap crap of the 2000s and 2010s - real high valued goods/ equipment etc.
What is shocking to many this last week is that the one moat the US was perceived to have (Tech) is looking very narrow and very shallow.
It seems pretty inevitable that BRICS take over global leadership - so long as the hot war in the middle doesn't take us all out...