Bananas in Pyjamas (Source: Australian Broadcasting Corp)

Tuesday, March 3rd 

I’m in my jammies at an urban ryokan in Tokyo about to PTFO. Before I descend into dreamscape, I must call my banker and attempt to place an investment grade index CDS (credit default swap) trade. Unlike crypto, I can only trade this index during US market hours. Therefore, I’m holding my phone like a schmuck trying to put a limit order in for the open.

This ryokan vibe and the yukata have put me in a reflective mood. I read a piece in Global Macro Investor in early February, and all I have thought about since is buying IG CDS index protection. The article made me pick up the phone to my banker to ask if I could trade CDS. Following an hour long teach-in, I was almost cleared. I had to physically sign some docs, which was difficult because I have been spending the better part of this northern hemispheric Winter in the mountains of Japan. Last month, the index was at 44bps. Now it’s trading north of 70bps, and since the corona fear spread the trade has ripped in my face.

Wednesday, March 4th

The G7 have spoken, and things didn’t work out quite like I’d expected. I thought the markets might calm and trade higher on hopes of a further central bank stimulus. And then the IG index spread might tighten before hitting my bid. The Fed freaked and announced an emergency cut of 50bps. All the market could do is shrug and buzz the Bogdanoff twins to continue the dump. Luckily I got filled on my CDS.

This is the day I decided in my head the central bank omnipotence bubble popped. Many market commentators have arrived at the same conclusion and expressed themselves eloquently on various blogs and research pieces. But you have to personally believe before you spring into action. This might as well be my religion du jour.

It’s go time. I loaded up on some USDCNH 24 month 8.00 calls and some HYG Dec 20 65.00 puts. I thought the China and US high yield corporate credit would be feeling max pain in the upcoming deflationary disco. I also dumped my energy ETFs and bought some more uranium and gold miners.

My portfolio is losing money. But y’all really don’t care about what traditional assets and exotic derivatives I am trading. What you want to know is When Lambo? When Moon? I put this out there to describe my current state of mind. Nothing shows the true nature of a trader’s soul than what is and what is not in his portfolio.

Thursday, March 12th

I’m writing this in steamy Singapore. The energy complex is reeling from the Saudi vs. Russia oil price prize fight. Europe is about to look like Wuhan, and Trump just announced the US would refuse flights from continental Europe. Shit is getting real.

So while you are hunting for toilet paper, surgical masks, and hand sanitizer let’s talk about how our fearless leaders will “Protect” us … maybe? And how the high priests of finance will stimulate the economy in the face of a global twin demand and supply shock.

Fiscal Policy to the Rescue

The Fed meets again next week. They are almost out of bullets. They only have 100bps of room left before rates hit zero. They can obviously take rates negative, but as we have seen with various other central banks it is not very effective.

Since the narrative has turned on them quickly, I say the Fed should “Relax”, in the words of Duran Duran, for what is sure to come. But no one really knows whether or not monetary policy can cure a simultaneous supply and demand shock.

Fiscal measures like the Make Work projects and other transfer payments are more difficult, politically, to implement these days. Central bankers, due to an aura of invincibility and perceived independence, can change course unilaterally and quickly. That is why, since the GFC, policy makers have leaned on them to jumpstart the economy. The central bank pontiffs are no more effective than the European barber-surgeons of the Middle Ages. If a twin demand and supply shock affects the global economy, then rate cuts can do nothing to staunch an economic bloodletting. Once they are done, rates will go to zero everywhere.

That is obviously very bullish for certain safe haven assets. Gold, sovereign credit, and possibly Bitcoin will be buoyed by more liquidity. Bitcoin is more a question mark than a certainty. I believe it will perform well with more liquidity sloshing around the system, but that needs to be proven.

The real inflation will only begin once governing bodies get religious about fiscal policy, and the only two governments that matter in this situation are China and the US.

In China, Beijing will abandon their efforts to contain credit growth in order to make sure economic activity hits their 2020 GDP targets, which I believe are around 6%. They will allow banks to lend to SOE’s that build infrastructure, and lend to private real estate companies. Most of these projects will be wasteful and inefficient, but the numbers will be hit and jobs secured.

The externalities will be comrades rushing to their favourite inflation hedge. Apartments are already extremely expensive relative to median income, and food inflation is up and to the right. Those on the wealthy coasts definitely know about Bitcoin, and I expect the OTC trading platforms to receive large inflows of RMB seeking a home in the large cap magic internet money manifestations. Because the PBOC shut down the visible BTCCNY order books, they can claim with a straight face that on the margin Chinese punters are not expressing their fear of inflation and distrust with the government via their purchases of Bitcoin. Fine by me as long as number go up.

In America, Trump is fighting for his political life right now. He underplayed the seriousness of the virus. But Joe sixpack (definitely not his stomach, check the fridge first), is on high alert because now the televised spectacle of tall men dribbling balls is cancelled. Trump loves debt, and will launch some sort of fiscal bazooka in an attempt to keep the SPX at all time highs.

Imagine this: in American society where both parents work, what happens when schools close? Can cash strapped families afford daycare? Will daycares even open? What about single parents, how will they cope? Even if parents now work from home, imagine the productivity drain. It’s very difficult to work and take care of bored children. Maybe pharma companies will get a boost from parents looking to dope their kids into silence.

That’s just one example of the troubles facing society as certain services are no longer available due to public health concerns. The conclusion is that consumers won’t be spending, and that is the biggest ill for the American economy. Remember that shortly after 9/11 President Bush encouraged the nation to keep shopping.

Taxes won’t be going up … I hope … so in order to fund these programs central banks will directly monetise government debt. All hail Modern Monetary Theory (MMT). Simply, this piece of economic sophistry posits that printing money somehow isn’t bad but generates growth. It will be the academic buttress for direct monetisation of government debt worldwide.

The end game is always inflation, then Jubilee. This Debt Jubilee is an admission of failure by governments and central banks and it takes many forms, like the rebasing of global currencies with hard money, such as Gold, or the cancellation of the previous regime’s debts by a new administration. Credit claims that cannot be repaid due to insufficient growth and productivity will be extinguished in some chaotic fashion. This isn’t something that will happen this year, it will play out over the next decade.

Jubilee has started in Italy. Mortgage payments are on hold. While that sounds great for homeowners, someone’s debt is another person’s asset.

As Russell Buffalino would say, “The Virus; it’s what it is…” It is what it is. I am not a medical professional. I have no idea what the impact will be. Only the narrative matters. And the outpouring of negative sentiment over a demand and supply shock as governments shut their doors and economies is what matters. That fear will be the pin that pops the trust bubble of central bank prowess.

Back to Bitcoin

Will Bitcoin act as a safe haven as macroeconomic volatility returns? Even though it’s trading below $8,000, Bitcoin has outperformed most global equity indices in 2020. However, you gotta go down to go up.

The fear and uncertainty facing humanity is enough to inspire a global margin call. Bitcoin will not escape. While I don’t believe we will revisit $3,000, max pain probably resides somewhere between $6,000 to $7,000 Bitcoin. Any crypto hedge fund that allows quarterly or less liquidity will be getting distress calls. They will be dumping coins into a falling market. That will push the price lower on the margin.

I know all you HODLers say you love “cheap coins”, but will you really back up the truck if the S&P is flirting with 2,000? We shall see.

As central bank printing presses switch into beast mode, Bitcoin should enjoy a nice run back through $10,000 towards $20,000 by year end. Each central bank will cut rates to zero and announce open ended quantitative easing. But initially just like in 2008 and 2009, what seems like a no-brainer – central bank prints and risk assets like Gold and Bitcoin appreciate – will not transpire.

The time to back up the truck is when the futures basis goes flat or negative. That will signal an evaporation of optimism. Then you must surf the tidal wave of free money, and begin buying crypto with both hands. First fill your Bitcoin handbags, then acquire all the other dog shit … even CRipple might pop.

Long live volatility, and stay healthy.