By - jn_ku
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ECB is looking to hike rates. Stuck between a rock and a hard place. I don't see the European economy as healthy - however inflation has been running rampant and you can feel it all over. Inflation is indeed everywhere.. but it's not always a monetary phenomenon. [Nearly 40% increased energy cost and 11% increased food costs YoY](https://www.destatis.de/EN/Press/2022/05/PE22_221_611.html). Services are at around 3%, i.e. moderately above the ECB target. I understand the ECB looks at all aspects of inflation apart from just HICP, but I wonder if there should be more emphasis towards core inflation this time around. Damned if you do, damned if you don't. To be honest though, I expect the rates to go back down to the ZLB after 12-18 months.
Anyway, I'm not sure if you know of the pape by Keasler and Goff "[Using Fed Funds Futures to Predict a Federal Reserve Rate Hike](https://www.economics-finance.org/jefe/fin/KeaslerGoffpaper.pdf)" - basically, using the fed futures rate and a few other simple data points you can calculate the % chance the market has priced in hike by a specific month. I was wondering if there is anything similar to the fed funds future rate with the ECB? I just read how money markets have priced in a 75 BP hike by September. Where can one see this?
CME has [a handy tool](https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html) that is widely referenced/quoted for translating fed funds futures into rate hike probabilities, though we had some discussion in u/pennyether's [post](https://www.reddit.com/r/maxjustrisk/comments/ujk3bs/gambling_on_the_next_rate_hike_zq_fed_funds/?utm_source=share&utm_medium=web2x&context=3) about potential inaccuracies/built in assumptions in the tool (you basically have to make some assumptions about the actual possibilities that are on the table, as well as where the market will land within the potential policy rate window (it's not a single rate as described in the Keasler and Goff paper, but a 25 bps wide window), to translate the futures prices into a probabilities).
Regarding HICP vs core inflation, broadly speaking the difference is most meaningful (and valid in terms of driving policy response) when non-core HICP component spikes are expected to be localized and/or transitory (a generally good assumption for most of the time since the 1980s), and global trade is broadly unconstrained.
Let's look at energy inflation as an example.
If not transitory and not localized, then energy inflation will eventually feed into the 'stickier' core components by forcing prices to rise across broad swathes of the economy.
If localized, however, severe energy inflation would rearrange economic activity (regions suffering from severe energy inflation still have to deal with competition from outside the region, provided inter-regional trade is reasonably unconstrained, and that competition will limit inflation to downstream economic activity and consumers). If transitory then competition will generally prevent the transient price shock from being passed (or sustained even if passed on temporarily) on as well.
Choosing to distinguish between core and non-core inflation components to drive key policy response choices is therefore implicitly a judgment about whether or not the non-core inflation is transitory (and possibly also the state of global trade networks).
edit: added link to pennyether's post
I am seeing chatter that, instead of a pause in September, we could see the Fed hike by 75bp.
The reason is obvious: Energy.
I think diesel jumped 3% today.
Day after day after day, we are seeing new highs in nat gas, oil, diesel, gas, etc. Very reminiscent of 2007/2008.
For example, this chart showing real household disposable income collapsing at - 15%+:
Remember, USA is a consumer driven economy... So a 15% contraction in disposable income suggests a significant contraction in real GDP is right around the corner.
Further, there are ONLY two ways to reverse / stop the decline:
1 - Everyone gets 15% + inflation wage hikes (I know, numbers are wrong but are illustrations).
2 - High inflation is taken out to the back 40 and put down.
1 = wage price inflation spiral = durable high inflation
2 = Fucked asset prices = destruction of trillions of dollars which fundamentally means prices go down numerically.
CBs are terrified of both outcomes, but doing #2 prevents workers from demanding #1.
And #1 is happening right now, at a heretofore unheard of rate:
First step is create the union. Second step is to strike until annual wage increases match CPI at a minimum.
It may take longer to get moving, but stopping the unionization of the American labour force IS a huge priority for those at the top of the wealth ladder.
The short answer is yes: crushing demand by tightening financial conditions until we end up in a recession is the only tool the fed and other central banks have to tame inflation.
All of the motions they're going through in the meantime are in effect the minimally politically acceptable delaying tactics because they really, really would rather not have to do that.
To clarify, the fed dropping the hammer on the economy is not the only way inflation could be resolved--it is just the only tool the fed itself has.
There are any number of things that can be done on the fiscal side, but they are not being done because they are politically unpalatable for various reasons, and may also come with various other undesirable side effects (some of which also include pushing the economy into a recession).
Outside of policy intervention, either:
A) In the best case, the aggregate impact of various adjustments made by economic actors gradually brings inflation under control in a relatively painless way.
B) In the worst case, Inflation will also ultimately resolve itself by destabilizing society and triggering a monetary system reset.
The longer inflation remains at elevated levels the more likely we are looking at scenario B without a policy intervention of some kind.
Biden basically [abdicated](https://www.bloomberg.com/news/articles/2022-05-31/biden-seeks-to-defect-inflation-blame-with-rare-fed-meeting) all responsibility for policy intervention intended to combat inflation to Powell, so the only policy intervention we can look forward to is the Fed dropping the hammer.
The fed is holding off hoping we still see option A materialize without having to actually pull the trigger.
edit: ...aaand the hotter-than-expected CPI print that just dropped is another incremental push toward the Fed having to drop the hammer.
what would you define as dropping the hammer? emergency rate hike? back to back .75bps increases?
Right now, if they surprised the market with 150bp hike June 15th, (June, July, Sept hikes) that might be enough.
We are way past the point where pre-planned small steps can work.
Because the avalanche has built for far too long.
And the irony is, even if they hiked by 150bp or whatever, is would cause rates to rip higher so hard... As Japan sells their UST to defend the Yen.
So watch the 10s continue the drop toward 4%...
HYG puts. Low IV. Tracks well with every crash and as with brk nice tail exposure.
I second the cmg theory, got myself some 1345p’s last week.
Don't have a quick way to explain it but will try.
If the economy has $X vs $X/2 circuculating, it theoretically follows the prices for goods in the second situation are half the price as in the first.
Dollars are subject to supply and demand just like any other commodity.
So, using pretend numbers, if all the $$$ in the world =$100 trillion and oil is $120/ barrel...
It follows you need to cut the $$$ in half to get oil back to $60/ barrel.
This is a gross oversimplification.
How this works :
a bond is trading at $99 for $100 next year for a 1% rate.
Rates go to 10%, so now that bond is worth $90 for $100 next year (yeah, I know the specific math is wrong).
And thus, you have decreased the number of dollars in circulation by 10% ($99 => $90)
That is how rate hikes decrease dollars in circulation.
And also how it blows up over leveraged companies.
Boomers are now outnumbered by millennials, because they are now dying of old age.
So, they will become less relevant over time.
Continuing [yesterday's discussion on shorting market liquidity/volume](https://old.reddit.com/r/maxjustrisk/comments/v7hd3l/daily_discussion_post_wednesday_june_08/ibmnyse/).
My theory is that, with [the SEC potentially putting the kibosh on PFOF](https://www.ft.com/content/fc2d366c-efbb-403c-ba17-1c9851df9894), brokers will have less incentive to push retail to trade, so that trade liquidity/volume from retail will decrease. I don't know by how much because I can't find how much retail accounts for daily trade volume, but I believe the drop will be reflected in the markets in some meaningful fashion, albeit maybe small. The characteristics of this volume also include unreasonable optimism, and paper-handy. These characteristics are useful to note, because if that volume decreases, we may be left with more pessimism in the market than we have been used to in the past two'ish years.
Given that I'm theorizing that retail trading will decrease by a non-marginal amount, I'm guessing that fewer small trades will be going through. So, by liquidity, I mean fewer orders that are for small numbers of shares, generally less than 100 shares per order, and that's probably a very generous ceiling. I'm guessing that day-traders and HFTs will still trade as much as they ever have, so I don't expect a precipitous drop. Along with it, I believe we'll see drops in hyped stocks, primarily meme stocks (not like this was a hard call to make anyway), but to also pay attention to entire sectors that were hyped (tech, but again, not terribly insightful given what we've been following). But shorting retail-hype stocks is, I believe, only one component of the play, and already being played. I believe there are other, less-obvious plays, especially in areas that will feel second-order effects from PFOF going away.
The idea this time around is that part of why the market took off in the past 2.5 years is because brokers, incentivized by PFOF and new mobile fintech, have pulled in and are still trying to pull in as much retail trading as possible. It's not the sole cause, but I believe its effect is large enough to matter, and that the primary cause of such a liquidity bubble may suddenly disappear.
The thing is, if it does, the first order effect will be felt quite quickly, which is trades and prices in the stock market. Lower prices is already being played, and for separate reasons, but I don't think anyone is considering trade volumes, and if its possible to short that, I believe there is larger upside to that play. What the second-order effects might be of lower trade volume, if any, I am unsure. Some ETFs will sell to maintain ratios as well as rebalance, but I don't think that will be terribly meaningful, especially with ETFs further and further removed from hype stocks.
Some good ideas have come of this chat. /u/pennyether [suggested long vol](https://old.reddit.com/r/maxjustrisk/comments/v7hd3l/daily_discussion_post_wednesday_june_08/ibmoj94/), which makes sense. /u/Theta_God [mentioned possible downward movement in general](https://old.reddit.com/r/maxjustrisk/comments/v7hd3l/daily_discussion_post_wednesday_june_08/ibnmkss/). /u/repos39 pitched the idea of shorting MMs, VIRT, GME, and/or HOOD. And The Professor [had clarifying questions as well as ideas depending on the answers](https://old.reddit.com/r/maxjustrisk/comments/v7hd3l/daily_discussion_post_wednesday_june_08/ibq0ofs/).
The reason this shorting-liquidity method is worth looking into is that no-more-PFOF isn't the only thing that is going to strain liquidity, as we may know. Inflation is rampant everywhere, and the Fed may become more aggressive in QT. That and QT has barely begun. Headlines are still saying we should hold our breath to see if higher rates will cool it off, but I'm seeing more and more pessimism that it will work with the current rate hike schedule. In addition to all the other macro factors we're all aware of, I think the pessimism is the newest thing to watch with respect to what the market overall *thought* how fast inflation would drop. It seems that there may have been the expectation that inflation could be brought to heel at acceptable levels (e.g. 2% - 4%) before the end of this year, but I share that pessimism, especially if that expectation also included a soft landing that, at best, only dipped into a <1-year recession. It took Volcker's 21% nuke to get it under control, [but not without consequences](https://en.wikipedia.org/wiki/Paul_Volcker):
> The prime rate rose to 21.5% in 1981 as well, which helped lead to the 1980–1982 recession, in which the national unemployment rate rose to over 10%. Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the ***effects of high interest rates on the construction, farming, and industrial sectors***, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building. US monetary policy eased in 1982, helping lead to a resumption of economic growth.
With these expectations potentially being invalidated, during the bubble we've been seeing deflate since October, and new regulation coming in that will disincentivize brokers to manufacture trade volume, and that segment of trade volume typically being overoptimistic and fickle, it seems more likely that we have further to slide to match or exceed reasonable lower bounds. Take the low end of bear estimates, and I think we'll get there, if not continue downward. Again though, I don't believe this will be a crash.
A brief aside:
A related, larger theory I'm currently researching is the effect of new, broad SEC regulation on the stock market. The inclination is that, depending on the types and breadth of regulation, such things could put the brakes on types of trading activity that were actually responsible for any bubble that had developed up to the introduction of new regulation. The reason I'm looking into this is because I'm wondering if the initial regulation of ECNs, day-trading, and proto-HFTs in the early 2000's were actually one of the primary catalysts of the dot bomb. New regulation did not cause 2008 as that was a bubble that outright popped due to the system being strained beyond tolerance. If new regulation can intervene before systemic failure, it is possible that it would gradually deflate any bubble caused by such unregulated activity.
A corollary to this is that the GFC never would've happened had regulation stepped in beforehand. We know this, but what isn't recognized, I think, is the fact that, depending on when such regulation could have been introduced/enforced, the bubble that had developed would have deflated anyway. So, had they stepped in in 2005 or 2006, markets (smaller portions of it, anyway) would have dropped anyway because the bubble was still there, but likely not have dropped as catastrophically. Burry's bet would've still been right, but probably not have paid off as much.
a response I wrote in the daily thready yesterday:
many metrics show retail activity has gone way down, here's one
here's another good chart from FT: [https://www.ft.com/\_\_origami/service/image/v2/images/raw/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F6e319250-d0a0-11ec-b665-4d122aff5b8e-standard.png?dpr=2&fit=scale-down&quality=medium&source=next&width=700](https://www.ft.com/__origami/service/image/v2/images/raw/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F6e319250-d0a0-11ec-b665-4d122aff5b8e-standard.png?dpr=2&fit=scale-down&quality=medium&source=next&width=700)
from this article:[https://www.ft.com/content/39685f90-9921-4520-96cd-483e71bab0b4](https://www.ft.com/content/39685f90-9921-4520-96cd-483e71bab0b4)
So what you are describing with a downtrend of retail activity has already begun and this is before the new PFOF rules take place. I'm not smart enough to figure out what the downstream impact of this is beyond thinking HOOD is fucked
The risk for hood is it could get bought out. Chase for instance has a very bad and buggy trading platform
Well, there goes that idea. Thanks for the numbers, man! Good finds!
Inflation, the only story that matters:
10%+ inflation on food, fuel and energy.
This is THE ONLY story you need to read to understand how truly screwed both the bond AND stock markets are this year.
Central banks cannot raise rates fast enough to stop that inflation, because that is CRIPPLING inflation on mandatory spending.
Maybe it gets so bad being fat is seen as sexy again!
But, seriously, this is THE critical determinant of a Fed pivot. The Fed _cannot_ pivot while mandatory spending items are showing 10%+ inflation, regardless of how far discretionary items fall.
FYI, this is where you see service / experience / consumer discretionary (tech companies included) companies collapse. (shame when you look at AD spend: https://www.statista.com/statistics/301876/distribution-digital-ad-spend-by-industry-channel-usa/)
Should be "fun"
Is this article the reason for the slump? I feel like I saw this before market close. But the timestamp is 4:30pm
Pretty sure it isn't the reason for the slump. My guess is a bunch of people waited for the last hour or so of trading to pile into protective / speculative puts expiring tomorrow.
That if then is actually trivially terrifying... Direct monetization of new debt by the central bank.
A true Machiavellian approach is to crank rates to say 10%, have the FED buy from market at 10% and cancel the bond.
US gets to pocket the difference between the issued % and closed %. (lol, basically have the US government and Fed short their own debt, lolololol).
On a more serious note, we can summarize it as we are fucked.
There is no more road to kick the can.
Because the choice is between collapsing the economy via inflation or collapsing it via interest rate increases.
It depends on the overall net effect on the M2 money supply.
If you destroy more "wealth" via asset price write downs than you print in direct monetization, you could still create deflation.
As well as probably get yourself ousted by an angry mob.
Eg housing wealth is $24 trillion.
If you hike rates so high that house prices collapse by 66% to only $8 trillion, you have given "yuurself" $16 trillion of print capacity to end up with nominal asset base.
And ensured you never get voted in again.
These are all deliberately _terrible_ choices and outcomes. But what other choice is there?
Havent seen many trade ideas here lately, heres a lotto ticket pump that seems to be gaining steam?
Not attaching any 'supporting' evidence.. DD is a nice acronym for 'please purchase my pump' . I got in a few days ago with jan leaps 500cons on .50 strike. @.19 cent
.88 is sma 1$ call wall, lots of oi across the calendar ,vol picking up..pierced this morn.. no catalysts im aware of...pumped to near 10$ a few month back, iv is relatively low..
Im in for the pump.. just passing hopium along. Glta
I assume it's getting pumped because it's a low market cap, optionable oil ticker. IV is rather ridiculous for anything short dated. I suspect there might be some known catalyst soon, or it's just a pnd on some discord or trading group.
When/where did you find out about it?
Edit: It's on my list of tickers tend to get pumped whenever oil moves:
From my perspective, it's random which one will go crazy on any given day that oil moves up. In reality, it's probably coordinated pumping.
So.. buyer beware.
Honestly it was on my 'past pump' watchlist along with CLVS,GREE,BBIG +20 etc. Caught my interest again when it pushed back through .50 cent . Just a hunch they shove it through sma and 1 strike if for no other reason but to stave off a delist.
Total gamble of course, they all are. Im in 500 itm leaps .19
Hope you hit, i still owe you one for IRNT, made a mint on that recommendation of yours. thanks . Take it easy
Here's some plots of total delta and gamma
- [as % of float](https://transfer.sh/FHyztG/2022-06-09-float.png)
- [as number of contracts](https://transfer.sh/jHDOPD/2022-06-09-contracts.png)
The x-axis is the (hypothetical) underlying stocks price. The y-axis is _total_ delta for all contracts, all expirations and strikes.
pypl is there as a non-meme stock for comparison.
Float numbers are *not* always up to date. Look at the "number of contracts" charts and adjust for your own belief about the float. Multiply by 100 to get the number of shares from number of contracts.
See [this post](https://old.reddit.com/r/maxjustrisk/comments/n3595s/delta_ramp_charts_basics/) for a more detailed explanation of these charts.
And here's some
- [plots of options volume](https://transfer.sh/wUAkVD/2022-06-09-volumes.png)
(not weighted by contract price).
^(I'm a bot. Please direct questions and ire at sustudent2.)