Friday, May 5, 2023


Quick update for the weekend. Happy Cinco de Mayo to everyone...

This week, bulls narrowly escaped meltdown, with the assistance of end of week options expiration and the associated options-driven "gamma" unwind caused by Fed, ECB, Apple earnings and the jobs report. That's a lot of "gamma", meaning a lot of expiring put options that drove market makers to buy stock in an upward feedback loop that has become a common occurrence on Fridays. Next week is a whole other story. As I showed on Twitter, the exact same confluence of events marked the top three months ago: 

As expected, both the Fed and ECB raised rates again this week. Notwithstanding more dominoes falling across the banking sector.

In a week of foolish commentary, one of the dumbest ideas of the week was European pundits asserting that the bank collapse is a U.S. only problem. They have already forgotten that Credit Suisse collapsed a few weeks ago. And they've forgotten that in 2008 what started in the U.S. very quickly went global. 

But the buffoonery did not stop there. Jerome Powell asserted that the banking sector is "sound and resilient". Jamie Dimon asserted that with JP Morgan's takeover of First Republic, the bank run is over. 

When this all explodes to the surprise of everyone, the question for this era will be why did so many pundits believe it's their job to sugar coat bullshit for public consumption? Did they really think they could avoid a global credit collapse by lying constantly?

Yes, they did. This article very adeptly impugns some of today's infantile narratives:

"If Jamie Dimon was pondering a career change as a fortune-teller, he’d be wise to stick to the day job...the speed with which Dimon’s words have come back to haunt him comes as a shock"

The reality is that the establishment is in no position to offer any guarantees...when customers take fright, bank runs are practically impossible to stop"

"Regional lenders successfully persuaded the Fed and the FDIC that they were not systemically important"

Indeed. Careful what you wish for. 

You see another false narrative circulating is that unlike 2007, there is "no subprime" this time around. Back then, large banks were laden with junk mortgages packaged up into Wall Street time bombs. 

This time around, banks ARE the subprime. Their massive asset duration mismatch combined with today's high interest rates have turned banks into ticking time bombs.  

And, what have our policy-makers done this week? They conspired to raise the cost of capital to a three decade high.

The "good news" is that Fed futures are pricing in a pause in June and rate cuts by September. 

By which time, this will all be a smoking fucking crater: