Dissident Thoughts
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Wall Street is a jungle of elusive, ambiguous & omnipotent networks designed to effect an institutionalized wealth transfer system.

The goal of this channel is to provide clarity on this for dissidents and inspire change for our kin.

GC: @DissidentChats
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Forwarded from Keith Woods
Crazy how much progress is being made normalising our ideas lately - truly no political movement punches above their weight more than ours.

Take it as inspiration to push even harder spreading our talking points everywhere you can.
Dissident Thoughts
Fool Me Once The market may finally be overestimating the expected path of policy after two years of persistently underestimating the Fed’s willingness to hike. Recent data suggests that economic growth and employment continue to steadily increase even as…
Almost immediately since the last FOMC, yields collapsed and stocks have exploded which, as a result, have significantly loosened financial conditions.

FED’S DALY WARNS AGAINST CALLING TIME ON RATE-RISING CYCLE TOO SOON - FT (archive):

“'What I worry about is that without a sufficient amount of information about whether we’re really on that disinflationary process that brings us back to 2 percent, we have to ‘stop-start’,' Daly said, referring to an outcome in which the Fed says it is done tightening monetary policy but then has to abruptly reverse course.

'People need to plan and if you’re in a ‘stop-start’ mentality, then that’s really disruptive. It also ultimately tears at credibility.'


The rate hikes are over... or are they?
The much funnier Osama Bin Laden letter is the one where he says they should kill Obama, but not Biden, because "Biden is totally incapable of assuming this office, and his assumption of power will push America into a deep crisis." [2010]

https://ctc.westpoint.edu/harmony-program/letter-from-ubl-to-atiyatullah-al-libi-4-original-language-2/

🔗 sean
Dissident Thoughts
A CTA is a Commodity Trading Advisor: a trader tasked with operating a Managed Futures Account (MFA). Often, MFAs are incorporated into hedge fund portfolios. CTAs predominantly follow some kind of trend following strategy (buy when it goes up, sell when it…
The party (three week rally in stocks) may be winding down.

GS (Nocerino): "CTAs...They have been very active: Over the last 10 days – CTAs have bought nearly $70bn of US equities... this is the largest 10d buying we have on record. Data goes back to 2014..."

GS desk: "we’ve seen an uptick in cautious commentary on the sustainability of the rally from here (though no panic or downside demand) as flow dynamics got hot, quickly. CTAs going to start running out of steam."

Strongly hinting it's time to take profits. We are still overall bullish into 2024, but this CTA read will probably dominate over the next week or two. Pain trade is higher still (for some complicated reasons that we will elaborate on soon).
Number of articles mentioning "soft landing", from Bloomberg.

Optimism tends to peak just before the downturn hits.
Forwarded from Market News Feed
JAPANESE DEPUTY FINMIN AKAZAWA: DON'T HAVE SPECIFIC FX LEVEL IN MIND IN DECIDING WHEN TO INTERVENE
- WON'T INTERVENE JUST BECAUSE YEN IS WEAKENING ...
Dissident Thoughts
Looking at the schedule for upcoming Treasury auctions, the 20-year bond auction on Monday, November 20 stands out. Long-dated UST bonds are notoriously difficult to issue, and that's simply because they will mature in two or three decades, and with that…
I still think Monday's 20Y bond auction will be a disaster. Possibly one of the worst in recent history.

Stocks abruptly sell-off following weak auction results (both recent tailing 30Y auctions were followed by a brief but intense selloff in the S&P), and none of this is priced-in: traders are back to long.

Treasury has a funding problem and I don't any reason for that to change suddenly. The weak auctions will probably continue as already dire liquidity conditions get even poorer, until something breaks and officials scramble.

🔗 Auction Announcement
Forwarded from Disclose.tv
JUST IN - Citigroup plans to announce major lay-offs, tens of thousands at risk of being eliminated from the bank — FT

https://www.ft.com/content/cbb60897-332a-4648-b846-b6509b0817aa#post-39c48aa1-1dbd-4590-b4c1-7195152ad5cb

@disclosetv
Dissident Thoughts
Zombie Banks Most banks, since the bailouts of the Great Financial Crisis, have seen their stocks rally after bottoming in early 2009. In other words, if you bought bank stocks in February 2009, you would be holding an open profit in most cases. There are…
The Teetering Three are the "ZIRP zombies": Absent cheap rates, they are exposed and start to melt like a vampire in the Sun.

I firmly believe that Citi and Deutsche Bank will follow the same path as Credit Suisse: signs of distress followed by death some months later. Yesterday, we saw a glimpse of this distress at Citi. In a year or two, the trillion-dollar G-SIB may not exist.

What you must realize about Deutsche Bank is that, even putting aside its history of corruption, it is the core of the eurozone. The JPMorgan of Europe. With it's death will come max pain in the EU. 2027 is my best guess, but it's difficult to estimate.

"Max pain" implies that it can't get any worse, i.e. the bottom is when Deutsche Bank goes.
Dissident Thoughts
The next short squeeze just dropped: Goldman Prime: "Hedge funds sold US Financials stocks at the fastest pace in 7 weeks, driven by short sales. The sector long/short ratio ended the week at the lowest level on our record." Also from Goldman: "US Single…
Elephant in the room is why did Citi's stock ($C) close on Friday at a three month high despite the news of their untimely downsizing?

The answer is what we pointed out a little over a week ago: hedge funds have been aggressively short banks. Pain trade flips to higher, and the short squeeze ensues. If there is ever a "crowd/herd mentality", you will see it in the hedge fund community (especially CTA funds).

Good example of a market driven by technical factors while ignoring fundamentals or reality. This phenomenon happens all the time and across all markets, even multitrillion-dollar FX.
Forwarded from Market News Feed
BREAKING: YEMEN'S IRAN-BACKED HOUTHIS SAY THEY HAVE SEIZED AN ISRAELI CARGO SHIP ...
Dissident Thoughts
The next short squeeze just dropped: Goldman Prime: "Hedge funds sold US Financials stocks at the fastest pace in 7 weeks, driven by short sales. The sector long/short ratio ended the week at the lowest level on our record." Also from Goldman: "US Single…
The squeeze is set to continue:

Goldman PB
: "US equities saw the largest net selling in 8 weeks, driven by long and short sales across Single Stocks. Single Stock short flow increased for a 15th straight week, the longest shorting streak on our record."

"From a sector’s perspective, (hedge funds) ramped up selling in Staples, which was net sold at the fastest pace since April ’20. Staples has now been net sold in 5 of the past 6 weeks.
"

Pain trade is higher still!

"In equities, we estimate nearly $140bn of global short length has been covered since the start of the month. We expect the buying to continue for at least one week in a baseline scenario."

Hedge funds really said "what rally?" LOL
Dissident Thoughts
I still think Monday's 20Y bond auction will be a disaster. Possibly one of the worst in recent history. Stocks abruptly sell-off following weak auction results (both recent tailing 30Y auctions were followed by a brief but intense selloff in the S&P), and…
Today's 20Y Treasury auction showed weak demand (BTC 2.58) but was still higher than expected.

US 20-YEAR BOND SALE:
- HIGH YIELD RATE: 4.780% (PREV 5.245%)
- BID-COVER RATIO: 2.580 (PREV 2.590)
- DIRECT ACCEPTED: 16.5% (PREV 15.2%)
- INDIRECT ACCEPTED: 74.0% (PREV 72.9%)
- WI: 4.790% ...

Yellen wins this one.
Dissident Thoughts
One interesting thing which Goldman's 2024 Equity Outlook notes is that hedge fund exposure to the "Magnificent 7" (Mega-cap tech companies that have basically been carrying the stock market) is all but tapped out: everybody is already long. The S&P 500 is…
De-Grossing

The most important event of the week, according to Goldman's trade desk, is Nvidia's ($NVDA) earnings report today after the market closes. While the AI-bubble-leader was already the event-risk of the week, Sam Altman's dismissal from OpenAI (amid rumors he was working on a AI-chip venture to rival NVDA) makes it even more critical for the entire market.

Some insight into hedge fund activity in the tech sector can provide some clarity on how $NVDA may react:

Virtually all hedge funds pair trade (also called a long/short or L/S trade) and fund their net exposure via gross, meaning the credit earned from the sale of the short positions will is used to buy the long positions. For example they may use the proceeds from shorting (selling) bank financial sector stocks to buy tech stocks.

A fund's net exposure is simply the dollars long minus the dollars short. For example a fund that's $120m long and $80m short has a net exposure of +$40m. A fund's gross exposure is the sum of the longs and shorts. Using the same example, the gross exposure would be $120m + $80m, or $200m in gross.

When hedge funds are short a stock (as part of a pair) that moves against them, that losing position gets bigger as a percentage of their portfolio. At some point, risk management protocols will kick in and they are forced to cover the short (buy it back). But once a stock gets covered, the hedge fund’s net exposure is now longer than it was previously.

Most hedge funds set net exposure mandates, and do not intend for it to change. To bring net exposure down, they are forced to sell down long positions. The resulting effects of covering shorts and selling longs brings about “de-grossing”, or forced selling, to meet margin calls, which Goldman notes was just recently seen in the info tech sector last week.

With positioning in $NVDA at extremes (and expectations at extremes), along with de-grossing overall in the mega-cap-tech market, the potential for a forceful reaction — regardless of direction — is increased manyfold.
Regs Will Increase Until Liquidity Improves

The Fed’s recent Treasury market conference offered three notable insights that suggest Treasury market liquidity will continue its structural decline:

First, dealer balance sheet constraints have moved from ones that could be solved through central clearing to those that would require other adjustments. Secondly, mandatory Treasury repo clearing may reduce market liquidity by raising the cost of financing due to higher collateral haircuts. Lastly, mutual funds may not become significant marginal investors in cash Treasuries as regulations encourage them to invest using Treasury futures.

This post discusses each point and suggests that Treasury market liquidity will continue to deteriorate.

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Dissident Thoughts
Regs Will Increase Until Liquidity Improves The Fed’s recent Treasury market conference offered three notable insights that suggest Treasury market liquidity will continue its structural decline: First, dealer balance sheet constraints have moved from ones…
Gross Assets

The binding balance sheet constraints on the activity of securities dealers today appear to be moving to those that would not be solved by central clearing. A binding constraint limits the extent to which a unit can expand, thus affecting the profits that a marginal increment of capital generates.

The image above shows how cleared repo reduces net balance sheet size, but not gross. Some regulations look at net balance sheet size, but others look at gross size.

Recall, the scale of dealers’ activity in markets is constrained by costs imposed by a number of rules that are each calculated differently. Market participants have often pointed to the supplemental leverage ratio (SLR) as discouraging Treasury market activity because it imposes costs in proportion to the net size of a balance sheet without regard to asset quality. Dealers have been optimizing against this constraint through central clearing, which allows them to net down trades and thus reduce the size of their balance sheet under the rules.

In short, "netting" incentivizes Treasury repo activity, which creates demand for Treasuries.

But it now appears that their binding constraint has moved to regulations that are instead applied on a gross basis, such as the GSIB Short-Term Wholesale Funding score. This suggests that the official sector’s push towards cleared repo may not improve dealer capacity.

Note that the proposed Basel III endgame rules are also expected to further raise dealer costs and potentially reduce their market making activity in the Treasury market.

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Dissident Thoughts
Gross Assets The binding balance sheet constraints on the activity of securities dealers today appear to be moving to those that would not be solved by central clearing. A binding constraint limits the extent to which a unit can expand, thus affecting the…
Bigger Haircuts

The SEC’s proposal for mandatory repo clearing may reduce Treasury market liquidity by raising the cost of repo financing.

Recall that hedge funds can purchase a security, simultaneously enter into a repo agreement to borrow against that security, and then pay for the initial purchase of the security using proceeds from the repo loan. For example, a hedge fund who wants to invest $100 in Treasuries can put down $1 of its own money and end up borrowing the remaining $99 in a repo transaction. This is repo financing (for an example, see p.106 here).

Hedge funds cannot sell $100 in Treasuries for the full $100 because the dealer will ask for a small haircut to protect itself from any changes in the collateral value. The haircut may be 1%, so the hedge fund sells $100 in Treasuries for $99 to the dealer.

The repo market is comprised of different segments and a sizable volume of transactions are within the uncleared bilateral segment, which is largely comprised of trading between hedge funds and dealers. One notable aspect of the uncleared bilateral repo segment is that haircuts are around 0%.

In contrast to dealers, clearinghouses will demand some amount of margin (money up front) depending on the characteristics of the trade. This means that mandatory repo clearing will essentially impose large market wide haircuts and increase the cost of repo financing.

A recent Fed study suggests that 2% haircuts would double the capital hedge funds need in their relative value trades and thus require a doubling of spreads to maintain the same level of return.

A more likely result may be for them to scale back activity — leaving the cash Treasury market with even less liquidity.

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Dissident Thoughts
Bigger Haircuts The SEC’s proposal for mandatory repo clearing may reduce Treasury market liquidity by raising the cost of repo financing. Recall that hedge funds can purchase a security, simultaneously enter into a repo agreement to borrow against that…
Investors Wanted

Mutual funds may not increase investments in cash Treasuries because they prefer Treasury exposure via derivatives rather than cash.

Mutual funds could increase cash Treasuries holdings using repo financing, but repo loans were historically counted in mutual fund leverage limits with loan interest flowing through their expense ratio.

In contrast, mutual funds could gain comparable exposure using Treasury futures with fewer limitations. The two positions are functionally equivalent, but think of repo loans as “on balance sheet” while futures are “off balance sheet.”

The difference in regulatory treatment encouraged mutual funds to express Treasury exposure through futures. The SEC has recently updated regulations on leveraged positions, but mutual funds appear to continue to prefer Treasury exposure through futures.

Treasury futures positions of asset managers have surged since mid-2022, so mutual funds (or any real money investor) will likely not become a significant marginal buyer of cash Treasuries.

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