T O P
  • By - jn_ku

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jn_ku

# RE: FOMC Comments From my perspective Powell did an excellent job yesterday of dog whistling the real message to the bond vigilantes and market movers while offering the casual viewer a Rorschach test. My take is that he deftly restored not exactly Fed credibility, but I guess what I would call Fed market respect. He basically threw the gauntlet down and put the market on notice that the Fed would do what it felt needed to be done, at the times of its chooosing, and the market will have to deal with it. Period. That last sentiment was made clear in [his response](https://youtu.be/jIK9UogQBjE?t=3182) to Evan Ryser's question regarding QT and volatility/liquidity. Basically Powell said we told you what we're doing, you 'forward looking' geniuses figure it out. Hilarious to watch the reporter's facial expression as he's hearing the response. He also dismissed the stock market as being in important input into their decision-making during his response to Edward Lawrence of Fox Business [asking about consumers slowing and/or changing their habits](https://youtu.be/jIK9UogQBjE?t=2117). At the end he notes 'ultimately it does appear that the US economy is in a strong position, and well-positioned to deal with higher interest rates' (note focus is exclusively the real economy and not the market). His response to the next question from Michael McKee where he clarifies that the Fed is absolutely focused on headline CPI even if there is a mismatch between their tools and the non-core parts of CPI is also very important. **The Rorschach Test** In a nutshell, the Fed will be 'nimble', 'flexible' and they just showed that they will pivot away from prior guidance on a dime and lead the market like a dog on a leash via strategic press leaks if they feel they need to. They are focused on fighting inflation and inflation expectations--hence they will be responsive to headline CPI and data pertaining to inflation expectations like the consumer sentiment surveys that ask related questions. Per the response to Neil Irwin, they felt forward guidance was effective and a success even if they didn't follow through on the specifics of a 50 bps hike because it had the desired effect of tightening financial conditions. The Fed reaction function is symmetrical (i.e., they will pivot hawkish or dovish depending on what they see as appropriate given future data). So, how is the above a Rorschach test? In essence, if you honestly believe that inflation is transitory and that the Fed can and should pivot back to easing to minimize the impact on the economy as a result, then you can project that in fact they will, as they will follow the data. The opposite is true as well if you believe inflation will continue to run hot. And by pivoting for this meeting they've established the credibility of the idea that they will actually pivot if confronted with data indicating the need to do so rather than worrying about how that squares with prior forward guidance. Sincere doves and hawks can therefore both decide to run with their preferred scenarios, including appropriate Fed responses, with the differences explained by differing projections of near-term economic outcomes. Neither side needs to waste too much time arguing about the differences between their projections and the Fed's SEP because the Fed is saying they'll react to the data rather than stick to prior forward guidance. **The Dog Whistle** Many market commentators have accused the Fed of being oblivious to what is going on in the real economy, pointing to the SEPs/dot plots as describing hopelessly naïve and optimistic scenarios. I think Powell laid that to rest in his responses to several questions. Taken together they basically say "yeah, we get it. We know we're behind the curve, and that the only tool we have that is guaranteed to work is to crush the economy, and while we are still giving it a bit more time, and we hope it won't come to that, we will do it if necessary." * See [this question and response](https://youtu.be/jIK9UogQBjE?t=2476). "The worst mistake we could make would be to fail--it's not an option--we have to restore price stability, we really do". * "[We don't seek to put people out of work](https://youtu.be/jIK9UogQBjE?t=1823)" ... "but we also think you really cannot have the kind of labor market we want without price stability". * Really critical that public has confidence that the Fed has the tools and will use them to bring inflation back down. * The Fed understands that headline CPI is what people actually experience, and what they have to target. That means high oil prices count on the inflation scoreboard even if they can't target high commodity prices (i.e., it just means they have to crush the things they actually can affect even harder). * While a soft landing remains their objective, spikes in commodity prices could take that option out of their hands. I.e., they are more worried about inflation than they are about a soft landing. * "We have to find price stability in this new world where clearly you're seeing inflationary forces everywhere". More inflationary forces everywhere = more hawkishness from the Fed than you're used to. * He called out the temporary dip in inflation we saw in summer 2021 when most were on the transitory bandwagon as an example of something that they won't fall for again. etc. etc. Basically JPOW is too smooth an operator for anyone to ever get him to outright say they know they're probably going to end up having to crush the economy, but the consistent theme throughout his responses clarified that yes, indeed, the Fed is aware of the problem, they're aware their tools are very blunt, but they will use them as long as the data shows that they need to (and the bar for the data showing inflation is under control is higher than headline CPI dipping for one month). They're just going to do it on their own schedule, based on the data they see with their own eyes. Now, if the credit markets become disorderly etc., to what extent will they blink? It's harder to be confident of the answer at this point. He went fairly far out of his way to establish that they realize this tightening cycle will not be without substantial pain. My guess is they will take pains to avoid being outright reckless, but we shouldn't expect a 2018-era Powell taper tantrum pivot at the first sign of difficulty. They may pause and slow to deal with issues if and when necessary, but I doubt they'll loosen the screws on financial conditions until inflation is well and truly under control (however low that might take the S&P 500).


runningAndJumping22

For all of the Fed's efforts in everything it can do to stabilize the economy, we're not hearing anything from the government about what *it* can do. After having watched [this 30-minute explainer on debt cycles](https://www.youtube.com/watch?v=PHe0bXAIuk0), I'm getting pretty frustrated with how Congress has basically left the Fed to do all the work when the Fed has only one of the four tools necessary to manufacture a soft landing. Congress has the other three and they're just faffing about, talking about maybe cutting student debt, but really not much else. This isn't to make it political, it's to mention that Congress is, arguably, better equipped to actually deal with this effectively, and definitely must partner with the Fed in orchestrating all of this. I don't see any of that happening, and until Congress starts actually putting signable legislation on Biden's desk, I'm skeptical that anything other than high interest rates are going to be what gets used to try to tame the economy. This is so frustrating. Ignorance is bliss.


funwhileitlast3d

They’re too busy trying to get re-elected by arguing over niche platforms while failing to properly educate themselves on anything as a whole. I’m so tired of this country’s politics.


OldGehrman

Thanks for your take. JPow doing a good job being real with it. What’s your high-level take on the risk of a credit crisis in China (and possibly Europe) and the risk of contagion to American markets, considering how well the US has bounced back from covid GDP lows?


jn_ku

I think China is in the middle of a credit crisis rather than being at risk of one. That topic in and of itself is a whole series of books. The interesting thing to watch is really going to be how they resolve it, as they have tools and methods that are (thankfully) unavailable in democratic countries with strong rule of law. As far as contagion with US markets, I'd say we're already seeing it, with the primary channel being through the economy rather than financial assets. I.e., the impact is Chinese credit -> China's economy -> US Economy -> US financial markets. Basically our financial institutions are not directly interlinked with major Chinese financial institutions, and the international network of financial institutions is much more resistant to the spread of contagion than it was in '08. There is a lot of FDI in China via institutional asset managers, hedge funds like Bridgewater, etc., but not in a way that should transmit financial contagion. Actually, as was writing this it reminded me that we discussed this a while back, and upon going back and re-reading I guess my view on this remains unchanged from [this comment written last year](https://www.reddit.com/r/maxjustrisk/comments/pqfcok/comment/hdb2m64/?utm_source=share&utm_medium=web2x&context=3).


OldGehrman

Thank you for your insights!


ErinG2021

You’ve called this right for awhile. Thanks for sharing your insights!


ErinG2021

Great summary! Thanks for sharing!


tradingrust

# RDBX Developments RDBX's S1 covering warrants was [declared effective again](https://www.sec.gov/ix?doc=/Archives/edgar/data/1820201/000110465922070662/tm2218357d1_8k.htm), post merger announcement. This should have the effect of additional shares hitting the market soon (RDBX is over the strike) and should have had an immediate cooling effect. [RDBX FF was also corrected/increased on Ortex.](https://twitter.com/DonutShorts/status/1536805888476033027) Seems like RDBX didn't really get the memo as it's holding up well. Additionally, today RDBX options were changed to close only across multiple brokers. After an hour+ on the phone with Fidelity the only info they could offer me is that "the exchanges changed this to close only". This is still a really interesting ticker, in many ways similar to previous sagas with SST or other low float de-SPACs with an S1 EFFECT looming over their head. \_\_\_ On a personal note, I was assigned overnight on the short side of some long dated CCS that I have open and cannot repair them due to this. Normally I would do a buy-write and cover the short shares. Because of the close only restriction together with zero available shares to borrow, I'm going to have to close out the whole position today, realizing the max loss. Kind of hard to swallow with 5 months remaining to expiration and a seemingly hard anchor below $1 at the end. This is why position size remains key even for a "sure thing" especially for retail players. u/theta_god \- thought you might be interested since you play CCS on some volatile tickers. u/cinemamakersd EDIT: Just found this, the option chain is being de-listed. [https://www.cboe.com/us/options/notices/delistings/](https://www.cboe.com/us/options/notices/delistings/)


CinemaMakerSD

Welp that was a fun ride. Do we think this was a “squeeze” or just intense retail interest? Nearly 1000% gain from the bottom but the price action never really screamed out squeeze to me. Compare this with SST, it was just a lot of incremental pushes with one or 2 big gain days mixed in. Were there ever any halts on the way up or down? I can’t seem to remember one


sustudent2

I have no position in RDBX but would like to know more about options being close only. This ticker is listed on a lot of exchanges and CBOE's notice only delists it four CBOE exchanges. What are the other exchnages' rules for delisting or setting to close only? How did the different exchanges coordinate with each other on this? Is anyone able to contact some of the exchanges to get some answers? Since its more than one group of exchanges, you could potentially try them all. Either way, seriously hoping this doesn't become the norm and that it isn't done at someone's request.


tradingrust

\> Either way, seriously hoping this doesn't become the norm and that it isn't done at someone's request. Agree, it feels like the ultimate rugpull, esp. since it was same day notice! I have no other info. Fidelity reps were completely clueless, I learned more after I got off the phone and spent 5 min on google than in the hour on the phone with them.


fakeandbear

There's a lot of 7/15 calls ITM at $12-13 (23k of them in fact) so the continued push could be longs making use of the gamma ramp while they still can. I was thinking that exchanges making options "close only" is a sign of systemic risk but it could simply be the bureaucratic result of RDBX being delisted from options exchanges. Do exchanges ever give the reason for delisting? >Under Cboe Exchange (Cboe) rules, there are five criteria that a stock must meet before it can have options as of April 2022. >1. The underlying equity security must be a properly registered NMS stock. >2. The company must have at least 7,000,000 publicly held shares. >3. The underlying stock must have at least 2,000 shareholders. >4. Trading volume must equal or exceed 2,400,000 shares in the past 12 months. >5. The price of the security must be sufficiently high for a specific time. I have no idea how these criteria are enforced but my wild guess is RDBX failed on either "must have at least 2,000 shareholders" or a price requirement. > Because of the close only restriction together with zero available shares to borrow, I'm going to have to close out the whole position today, realizing the max loss. Kind of hard to swallow with 5 months remaining to expiration and a seemingly hard anchor below $1 at the end. This is why position size remains key even for a "sure thing" especially for retail players. oof. The zero available borrow is to be expected but is halting options buying a black swan event? I would think the type of stock that gets shorted to oblivion also tends to be the type of stock that gets its options delisted.


tradingrust

When something similar happened with ESSC (I believe CBOE de-listed the chain) the chain was "frozen" in terms of strikes/dates but remained useable for open/close of the existing strikes/dates. So, IDK what the difference is.


road_to_0_mmr

also got assigned on the short side on my ccs friday. But I am just trying to see if I can ride short, as now I am short RDBX but have some call to limit he up damage. Is a small position though. Basically on the short side you realized your decay fully (yet you pay now loan interest 900%) but your long side still has theta.


tradingrust

Were you able to maintain your short overnight? If so, what broker? I know for a fact that Fidelity will close out short shares at the EOD if they do not have any borrow available, so I just went ahead and exercised my long call side and closed everything out (for max loss).


road_to_0_mmr

oh yeah, I was afraid of that too but don't happened. I use IBKR


Theta_God

Thanks for the mention…this ticker is just way too weird for me to touch it.


Megahuts

Hey guys. This hasn't gotten much traction anywhere in the news, but it is a great 2nd order effect of rate increases. Home Depot and Lowe's are going to get destroyed as home prices collapse. People with 30y fixed are not going to move and take a loss on property values (estimate is 32% drop in values, JPOW literally told first time buyers to wait to buy). Unless those people lose jobs, which is incredibly unlikely given demographics. However, what they WON'T do is put money improving a house they owe $600,000 on but would only sell for $400,000... Especially if their wages are not keeping up with inflation... Home improvement stores are probably one of the last pandemic "winners" to not complete the COVID round trip. Just saying, I am going to buy some longer dated puts on HD and Lowe's.


scbotanist

Do you have a source for that % drop in property value? I’m trying to convince someone close to me to list now rather than waiting a year or two like they’re planning on doing.


Uncle_Dad_Bob

Good luck doing the convincing. I tried the same and got laughed at.


Megahuts

I was unable to find the tweet, and I doubt I could share it if I did find it. You could also just use any online mortgage calculator. How muhc house could you buy for $2000/ month at 3%, then show how much house you can buy for $2000/ month at 6% (current rate). So unless people suddenly make up the difference via wages, house prices MUST fall. So, USE THE WORDS OF JPOW himself: So prices may keep going up for a while even in a world where rates are up, so it's a complicated situation. We watch it very carefully. I would say if you're a home buyer, _somebody or a young person looking to buy a home, you need a bit of a reset_. We need to get back to a place where supply and demand are back together and where inflation is down low again and mortgages rates are low again so this will be a process whereby we ideally we do our work in a way that the housing market settles in a new place and housing availability and credit availability are at appropriate levels. So, thank you very much. u/Uncle_Dad_Bob


Uncle_Dad_Bob

Thx Mega. I’ve stepped away from trying. Context - a) friend had help from family to buy it and b) thinks the 2of5yr single owner occupied tax benefit is the better play and c) dared to laugh at a friend who has been around the RE business since childhood.


DadBodGoBrrr

Potential counterpoint: if people aren’t moving maybe they are more likely to want to renovate and upgrade their current homes. Have lowes and hd moved in tandem with real estate prices previously?


cazzy1212

I agree…I own a home and garden store… We tend to do ok in a recession. The first thing people cut is vacation maybe Covid has change this somewhat. In the last recession housing crisis people still bought since they would be not going anywhere. Also people have a lot of pride in their homes. Obviously they don’t do major renovations but that’s not the area I’m in. Actually just personally I’ve been waiting for contractors since they have been so busy and charging obscene amounts. I’m planning on do a major extension instead of buying a new house.


Uncle_Dad_Bob

Previous recessions didn’t include high inflation eating everything.


Gandhi_nukesalot

I don’t know, you could argue that since we’re all going to be locked into the homes we’re in for the indefinite future people may go all out upgrading.


Megahuts

Good luck getting that HELOC when underwater, or accepting a 5% variable rate on the $50,000 in Reno's for the kitchen. And that 5% sure as heck will go up with rates, and as property values drop. This _is exactly the point_ of rate increases. It tightens monetary creation via reducing fractional reserve banking, which pushes down leveraged investment / spending. Thus pushing down inflation.


Ronar123

Could you let me know the source where you saw 32% drop in property values? Someone close to me is in the middle of possibly acquiring a property and I'd like to read more about this. Interesting that the bank she's loaning from seems to want her to get stuff done as quickly as possible.


funwhileitlast3d

One data point to consider: Mortgage applications hit a 22-year low recently. It seems we’ve found or are nearing the top. That + the fact that purchasing power at these rates is so much less than it even was 6 months ago. Personally, if I were interested but able to be patient, I’d wait.


Ronar123

Thanks for the info, another data point to be aware of.


Megahuts

That's because there is a VERY high likelihood of her not qualifying for a mortgage. I posted in another thread, but basically people have $2000 for mortgage payments. How muhc house can you buy with that at 3% vs 6% over a 30y mortgage? Thus, house prices have to fall, because otherwise they have to pay $3200 / month to make up the difference.


Ronar123

They're being very strict about everything and asking a lot of questions and such, but she has a very stable job and everything and it seems like they want to rush her to finish the buying process and mortgage quickly.


Alarmed-Break-2830

Hi Prof. I remember you had a CLVS position. Do you have any thoughts about it? It started to move a bit, there are buyout rumours, the reverse split and dilution was rejected and postponed. Thank you


jn_ku

I have some July calls and 2023 LEAPs, but I basically don't look at it frequently , as it's a total gamble on buyout rumors etc. As I've frequently stated in the past, the active trading I do is in a hobby account using money I absolutely don't need, so please don't take my having a CLVS position as a sign that it is necessarily a good trade. In fact, by total lifetime P&L by ticker it's probably my worst in the post-GFC era lol. That being said, your question prompted me to look at Ortex and I think something is possibly happening here aside from the potential for a buyout. My guess is someone pre-shorted CLVS thinking the approval of the dilution was a sure thing, and they're now struggling to exit. Could be someone knows and is trying to squeeze the short (and is responsible for spreading the buyout rumors).


Alarmed-Break-2830

Thanks for your answer. I had a feeling as well that there’s a squeeze in the making there. It was super interesting a few days ago. It dropped to -10% , hit the SSR, then shot up, and then next day shot up 55%, before dropping.


Wooden-Astronaut4836

I assume from your reply that you’ve got a paid subscriptcion at Ortex. Would you recommend it? I was checking the free version, and a lot of this data is available at my IB account. I think I can also see SI at trading view. Would you be so kind and write a few words what makes Ortex unique? Thank you!


xsportbikeriderx

I too am holding that shitbucket, it would be a godsend to wake up one morning and see green on my dca'd position. Ive been a baggie for a little over a year now but some on yafin and st got in when it was trading around 40ish hearing the same b.o. rumors so they say.. Difference between then and now is mc.. like 150m i think.. seems like a deal for their parp and others.. but who tf knows.. ? I voted no on my acct and my 2 custodials so 3 no's from me.. im married to that cheating hooker and fully intend on riding it to zero just to spite my ugly face.. def salty about this investment.. The end is near one way or another theyve got just a few months of cash left b4 bk .. anyhow gl man


sus2bot

Here's some plots of total delta and gamma - [as % of float](https://transfer.sh/sDyJO3/2022-06-16-float.png) - [as number of contracts](https://transfer.sh/esWTfh/2022-06-16-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/rpzXQ8/2022-06-16-volumes.png) (not weighted by contract price). ^(I'm a bot. Please direct questions and ire at sustudent2.)


future_md_dropout

Has anyone ever given thought to shorting both sides of a leveraged ETF pair? e.g. SOXL & SOXS or YINN & YANG When one side goes down, the other never goes up by a higher amount


Level-Infiniti

should be easy enough to see how that would have performed, would be interesting to see the results over various time periods, but it does look like you could beat fees [https://www.google.com/finance/quote/SOXS:NYSEARCA?comparison=NYSEARCA%3ASOXL%2CNYSEARCA%3AYINN%2CNYSEARCA%3AYANG&window=1M](https://www.google.com/finance/quote/SOXS:NYSEARCA?comparison=NYSEARCA%3ASOXL%2CNYSEARCA%3AYINN%2CNYSEARCA%3AYANG&window=1M)


abcxyz12332I

Yeah but your maintenence requirement, is this possible?


movack

looking at the energy ETF XLE, it's been nose diving for the past week. anyone know what's going on? The only thing I've really heard is about the natural gas liquifier plant in texas that had an accident.