Tag Archives: Financial crisis

Are these signs of a hedge fund blowing up?

A hedge fund might be blowing up the economy. Sure, there are real pricing swings based on expectation of the upcoming financial crisis, but the dramatic nature of the swings and the frequency of them is, well, unusual when it comes to being organic.

Long Term Capital Management, among other things, was brought down by a convergence trade strategy gone wrong: The idea to short the expensive on-the-run treasurys and buy the cheaper off-the-run treasurys and wait for them to converge made sense as a low-risk thing to do, even if there wasn’t a lot of money in it. By using a lot of leverage, they could boost the return on something that seemed so safe.

That whole thing blew up when people wanted the safest, most-liquid thing around (i.e. on-the-run treasurys) to the detriment of everything else. That hurt LTCM really bad as the spread grew wider instead of converging.

Let’s look at the 2-year treasury now and the 10-year treasury.

https://www.wsj.com/market-data/quotes/bond/BX/TMUBMUSD02Y retrieved on 11/5/2022 at 6:50pm PT
https://www.wsj.com/market-data/quotes/bond/BX/TMUBMUSD10Y retrieved on 11/5/2022 at 6:50pm PT

You should need encouragement to lock your money up for longer. Therefore, the yield on the 10-year should be greater than the yield on the 2-year. Historically, that’s the way it’s been:

https://ycharts.com/indicators/10_2_year_treasury_yield_spread retrieved 11/5/2022 at 6;55pm PT

But that’s not the sitch now, as you see in the chart above. Since July 2022, the spread has flipped. It’s now more lucrative to buy the 2-year than it is to buy the 10-year. You have a disincentive to buy the 10-year just in terms of the yield.

And the spread is more than 50 basis points. Yes, there has been a slight move toward convergence, but this is still out of wack.

It could be a convergence trade a fund has done that has gone horribly, horribly awry–and even more so if it’s a highly levered trade. It could be that they have had to vacate all kinds of short and long positions to meet margin calls. That would explain wild fluctuations in prices of things across sectors and the quick subsequent rebounds.

The economy may still be screwed. But could it be that a hedge fund has blown up in a really bad way and the rest of us just don’t know it yet?

The Recession – September 23, 2022

Disclaimer: None of this is investment advice. The logic here may be bad and should not be relied upon. My assumptions may be bad and should not be relied upon. This post reflects my opinion. I so may hold positions in securities I write about, and I believe in what I write.

Today the DJIA dropped another 486 points. That’s a lot of points! Earlier it had looked like it would be closer to 1000 points, but a late tempering reduced the losses. Also the new British government decided to cut income taxes, and the pound dropped immediately. Right now sterling is at $1.085, which is well below what the Euro was in 2014 when I went to France. The Euro was about $1.30 then. I know I picked the wrong time to go to Europe, but that’s how that goes. The idea to cut taxes now is crazy in my opinion. Sure, the British economy is in the toilet, but a stimulus right now would add to price inflation rather than coax people out of their hidey holes to start spending again when the economy is frozen. Also by cutting taxes in an ineffective attempt to turn the economy around, it means that tool can’t be used later. I had been writing about how inflation overall will continue as long as oil keeps going up. Well, today oil went down. Devon energy–which I have a stake in–dropped about 9%. Is that a good sign? Maybe! but the VIX went up more than 9%. So the options folks expect the market to go up by a lot in the next 30 days. If you believe that the election cycle is a big part of having a good market, then 30 days from now it must be good for the midterm elections on November 8. (Sidenote: I’m anti-Prop 27 and anti-Prop 26, but more on that another time.) Evofem–and I do own shares of EVFM–was up and down today and ended up closing below 20c/share again. News had come out that they got yet another patent for Phexxi. Of all my positions, TrueCar was the only one that increased on the day. My guess is that it’s the result of hedge funds buying to cover short positions. I don’t know that TRUE is doing anything particularly wonderful in this time, but I don’t mind anything offsetting losses on the day.

Exchange rates per WSJ
USD-Euro: $0.9690 (+1.53%)
USD-GBP: $1.0850 (+3.72%)
USD-CAD: $0.7359 (+0.75%)
USD-NIS: $0.2851 (+0.46%)
Yen-USD: 143.34 (-0.69%)
Won-USD: 1404.86 (-0.51%)

The Recession – September 22, 2022

The day after the Fed decision to raise interest rates another 75 basis points, the DJIA closed down 107 points. Overnight, the Bank of Japan decided to take action and sell dollars and buy yen. I had bought some yen a couple weeks ago at about 144, and I watched as it fell lower. I was confident it would come back up, and as of publishing, the rate I see is a little worse than 142. So hooray for that, I guess. but it didn’t happen without intervention, and most other currencies fell against the dollar today. Oil gained a bit, and I think it’s still far too low compared to where it should be. Winter is coming, and the SPR can’t be open forever. Today and yesterday, committees in both houses of congress asked the heads of banks if they would commit not to fund new oil exploration. They said no. Once we’re there with alternative sources of energy, we can get off the oil train. But for now, we still need oil. And since we still need oil, higher oil means higher prices for goods. I don’t expect inflation to stop until oil prices fall either by way of stopping reliance or increasing supply. And I doubt we’ll increase supply sustainably in the short term. And on the topic of shorts, I heard on BloombergTV last night that people are recommending getting out of short positions as interest rates rise. I don’t know if that sentiment was causal in Evofem’s (EVFM) increase by as much as like 20% today, though it closed up 13.33%. Top line results form the Evoguard trial are expected to come out in less than three weeks.

Exchange rates per WSJ
USD-Euro: $0.9838 (+0.01%)
USD-GBP: $1.1254 (+0.15%)
USD-CAD: $0.7414 (+0.19%)
USD-NIS: $0.2864 (+0.80%)
Yen-USD: 142.37 (+1.19%)
Won-USD: 1404.86 (-0.51%)

The Recession – September 21, 2022

Jerome Powell declared a rate increase of 75 basis points today. The market reacted immediately down and then went up and then went really down at the end of the day, dropping more than 522 points. But the market was expecting either a 75- or 100-basis-point drop. It was never going to be 50. So why such a bad reaction? Calah says maybe dead cat bounce. I personally think overreaction and selling leading to selling. I expect it to tick up some tomorrow or Friday. Rosh Hashanah starts Sunday night, so a few traders will be out of the market Monday and Tuesday. I maintain what I’ve felt recently in that the recession we will face will be deep and long. That’s why I had purchased 2022financialcrisis.com 2023financialcrisis.com 2024financialcrisis.com 2025financialcrisis.com 2023recession.com recession2023.com and for good measure/fun I bought qualitativetightening.com and qualitativeeasing.com. Oil prices also took a hit, and I think that’s backwards because we’re not in a world of renewables yet, and Russian gas and oil are not in the mix for many countries. The SPR release has been extended by 30 days, and my take is that this artificial depression in oil prices will catch up with us. I own some oil stocks and renewable energy stocks, and I don’t see oil really going down much. And because I don’t see oil going down much, I see raw materials staying high and inflation keeping on going.

Exchange rates per WSJ
USD-Euro: $0.9839 (+1.33%)
USD-GBP: $1.1271 (+0.98%)
USD-CAD: $0.7429 (+0.70%)
USD-NIS: $0.2887 (+0.44%)
Yen-USD: 144.08 (-0.25%)
Won-USD: 1397.73 (-0.35%)