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Month: June 2022

Russia Bond Default, Crypto Fund Blow-Up No Concern to Markets (Yet)

The following is an amended form of the Daily Contrarian briefing from June 27. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.

Over the weekend we received a couple of troublesome headlines about a Russian bond default and potentially the blow-up of a crypto hedge fund

Markets appear to have shrugged this off, moving higher in the pre-market. While this bounce faded at the open, major indexes are only down a few basis points at the time of this writing (0940 EDT on Monday). Cryptos are down a bit, with bitcoin dropping by about 2% to dip below $21,000.

Audio of today’s podcast

The defaults mentioned at the outset may yet be able to unwind without any systemic risk. Investors have known about Russia defaulting for some time and the crypto hedge fund is relatively small at ~$600 million. But if there are many more such events, somebody is going to be left holding the bag. This would typically be the type of thing investors can point to as the proverbial ‘canary in the coal mine.’

Except investors appear to have decided that it’s time for risk-on. That was the story of last week at least and so far in the early going today it appears to be the story now as well. Is it too early to be piling into risk assets? Or is this an opportune time to snap up bargains, as Oaktree Capital’s Howard Marks said?

Whatever your views on this, remember to do your own research and make your own decisions.

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Fed Will Reverse Course on Rate Hikes, And Soon: Deer Point Macro (Szn 4, Ep 17)

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Deer Point Macro joins the podcast to discuss his view that the U.S. Federal Reserve will only hike interest rates once more before easing.

Content Highlights

  • The Fed is not some magical organization that can control all parts of monetary economics (2:50);
  • The Fed can create demand for credit, but banks have to provide supply. And banks are pushing back (5:03);
  • What to make of the Fed’s rate hikes this year? How has that affected bank portfolios? (9:37);
  • The eurodollar market plays a significant role in Fed policy and its implications. An explanation (13:24);
  • The Fed stands to raise once more, at its next meeting in July, before having to cut rates in September (16:21);
  • Inflation is stubbornly persistent. Doesn’t this force the Fed to raise rates? (19:57);
  • Background on the guest (30:14);
  • Markets don’t really react to ADP employment data, but for economic detective work it can be vitally important (31:48);
  • How this all translates to asset prices: good for bonds but commercial banks are maybe not as safe as some would think. But regional banks may be a better bet (35:11);
  • What about cryptocurrencies? (36:34);
  • Quick discourse on the so-called ‘Fisher effect’ that posits that inflation rises as Fed funds increase — over the long term (39:14).
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Powell Testimony: What to Look For

The following is an amended form of the Daily Contrarian briefing from June 22. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.

Federal Reserve chair Jerome Powell starts two days of testimony in Washington, D.C. today. Powell addresses the Joint Economic Committee and take questions from the politicos. Don’t expect anything in the way of nuanced or educated questions from these folks. They’ll all be trying to score political points for the cameras.

Meme of Fed chair Jerome Powell: "There are no guarantees in life"

Still, some details may emerge regardless. Investors will be looking for any indication for when the Fed may stop its interest rate hikes and quantitative tightening. Specifically they’ll be looking for what Powell says the Fed will consider victory over inflationary pressures.

The Bottom Line

A lot of today’s direction will hinge on what Powell says. Ultimately it may not matter. For one, it’s just Powell. For another, it’s just talk. He’s been known to throw markets a bone during times like these but remember what happened the last time he did that? To refresh your memory: he said rate hikes of more than 50 basis points were not being actively considered. Obviously that lack of active consideration didn’t last very long as the Fed raised by 75bps at their last meeting.

Yesterday’s rally is now looking to fade as quickly as it surfaced. There doesn’t appear to have been a catalyst for a move in either direction. These swings happen sometime, especially during bear markets. We are still in a bear market, lest there be any confusion about that. It would be pretty odd if we had already seen the bottom. We still don’t know where the bodies are buried when it comes to cryptos, for example. Those assets are clinging to life right now but with no fundamentals to prop them up, it stands to reason we should see the bottom drop out before too long. That will bring all kinds of collateral damage.

At least, that’s the typical playbook for asset bubble implosions. Maybe this isn’t a typical asset bubble or not a typical implosion? Or maybe it is and this time will be different? Think we all know how that works out…

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