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JPM's Kolanovic strikes again;
1, low rates leads to institutions rotating out of bonds into equities
2, creates downward pressure on volatility
3, which in turn creates a positive feedback loop where systematic and disc hedge fund strategies increase allocations to equities (this could play put for most of 2021)
4, if current below average exposure goes to historic percentile would result in $550 bn inflow from systemic and hedge fund strategies
5, add forgotten buybacks to the mix and Kolanovic argues for their 4400 SPX px target.
Below chart shows that average VIX levels closely follow levels of interest rates with a ~18-month lag. Conclusion is basically;
"Given the significant increase of monetary accommodation 9 months ago, we expect it to pressure volatility for most of 2021"
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The euro is putting in a massive shooting star candle today. We touched the huge negative trend line and are now back below the 200 day. Everybody has been busy loading up on euros and puking the dollar. Looks like we could see some serious short term pain here. Second chart shows how momentum chasers have been busy loading up on euro longs...
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The short term 3950-4050 range stays intact for now, but this bull is losing steam. A close below the 3950 support and we risk breaking out of a rising wedge. Not overly pretty.
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1. “Now, reality kicks in and investors will have to re-adjust their overly optimistic view on reopening,” said Lu Ting, chief China economist at Nomura Holdings Inc. “Related markets might be tumultuous this week. Reopening will be slow, painful and bumpy.”
2. Goldman sees 30% probability of reopening before Q2 next year
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The huge US equity net short is gone, but we are far from a meaningful net long. Noteworthy is the fact skew has caught some bids lately as people have closed out shorts. The increase in skew suggests people are switching into hedging the downside via puts, instead of running those delta 1 shorts.
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Volatility is mean reverting by nature. VIX isn't dirt cheap, but we have seen it come down quickly during the latest equity squeeze. VIX has traded inside the range this entire year. You do not "chart" volatility, but as we outlined last week, hedges have not been this cheap in months...
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We are learning more about the balance sheet, creditors and users of FTX through documents published in relation to the bankruptcy and hearings. The largest proportion of customers were registered in the Cayman (22%) and Virgin Islands (11%); we note that the locations likely host a large number of hedge funds from around the world. 8% of users were in China, despite historical limitations on trading crypto in that country. Great Britain (8%) and Singapore (6%) had the next largest proportion of users. Only 2% of FTX users were from the US, which may seem low but aligns with the assumption that US funds may have registered elsewhere and FTX.US was only 5% of revenue in 2021. There are more than 1 million creditors, with the 50 largest unsecured creditors owed $3.1bn, each owed from $21mn to $226mn, with 10 owed at least $100mn. We compiled a list of companies that have declared exposures to FTX here. Information relating to the case will be revealed and analysed by the markets in coming weeks and months.
Time to adjust the bids to even lower levels?
Sanford Bernstein has a decent write-up on crypto lending, basically concluding that it takes all the bad stuff from traditional lending and then makes it slightly worse.....Bernstein: "The big crypto leverage blowout happened because of off-chain lending. Off-chain lending is somewhat like pawn broking. You go to a physical pawn broker, offer gold as collateral. The lender evaluates the gold for its authenticity & value, offers you a loan amount at a certain loan-tovalue (LTV). In crypto, you offer your Bitcoin to a Crypto prime broker, who offers you a loan on certain LTV. Except, lender has to build in more cushion for Bitcoin's volatility and Bitcoin's authenticity is on the blockchain. However, there are a few things that can go wrong - 1. You can offer an aggressive LTV, not accounting for volatility. 2. You can build in some subjectivity, and say this borrower has a great balance sheet, and they have 1M followers on Twitter, so I might allow them to borrow more than the collateral. Thus, off-chain crypto lending is not very different from traditional lending, the lender has credit criteria and they apply judgement. And the judgement can be wrong and the risk filters are not built for extraordinary circumstances, which happen all too often in crypto frontier tech. Thus, crypto takes all the bad stuff from traditional lending and then makes it slightly worse" (Sanford Bernstein)
A month ago we suggested to look at elevated tech vols and use it for yield enhancement (here). We wrote: "For must be longs overwriting continues to look like an attractive "yield enhancing" strategy." Since then vols in stuff like Apple have reset big as the stock continues to do nothing...
VVIX is down over past sessions, but is not much below late October levels. Back then the VIX was at 26 ish. We are not saying VIX must trade at 26, especially not given the most recent implosion in realized volatilities, but you should watch the VVIX closely here.
Previous bear markets ended with the majority of addresses being out of the money, on-chain data shows. Just over 51%, or 24.6 million addresses of the total 47.9 million, are below purchase price on their investments, according to data provided by blockchain analytics firm IntoTheBlock. About 45% are in the money, which means they are boasting unrealized gains, while the rest are roughly at break-even. The percentage of out-of-the-money addresses stood at 55% in January 2019. Bitcoin bottomed near $3,200 around the same time and began a bull run three months later. The percentage of addresses out of the money rose to 62% during the depths of the 2015 bear market. (Coindesk)
Grayscale refuses to share proof of reserves due to 'security concerns' as shares of $10.5bn Bitcoin fund trade at a 45% discount to Bitcoin. GBTC’s share price has plunged 77% in 2022.
Coinbase shares hit an all-time low, now down 90% from ATH.
It wasn't long ago crypto was considered the new hot tech. We all know what happened since then. Technology changes, but not the psychology of the masses. BTC vs FDN (internet) short term as well as the longer term charts. Will FDN and other ex hot stuff follow cryptos?
Money matters for crypto...
Gaps between the SPX and BTC have had a tendency to "come in" over the past years. Will the horrible crypto mood spread beyond cryptos? SPX vs BTC log chart.
...the depressing hung over phase for a few months, or are we already there? That is how it should play out if we are to follow the 2017/18 wash out phase according to MS.
Nothing new really, but waiting to make a killing in BTC these days is naive. It was a big Fed BS trade...
Not overly surprising, but note we are printing the lowest levels since the chart started...
Exposure to FTX in a pic.
It is all about the money...and the big delta.
Most retail investors downloaded crypto trading apps when Bitcoin was worth more than $20,000. Assuming these investors purchased Bitcoin on the same day as the download, this suggests most of them may be in the red.
The physical stuff just sits there...
Bitcoin has so far put in a big hammer candle. Let's see how this develops, but a hammer could be the short term reversal signal that leads to BTC bouncing further.
And it's gone...
What goes up, must come down. Crypto is no different...
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Welcome to total volatility panic. Hard to say much about this panic, but remember a 1% move in the underlying corresponds to 16% implied volatility. Just choose your scenario...Chart showing 1 week and 1 month implieds.
The real vs the digital stuff...
...irrespective if you trade it or not. NASDAQ vs BTC short term gap getting very wide.
