Tue. Dec 7th, 2021

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Good morning. Na Unhedged’s China effects an editor who landed yesterday sent an email from London asking if it was now accurate to call the Evergrande meltdown China’s “Lehman moment”. I do not think so. In a Lehman Brothers moment, to exaggerate slightly, all correlations go to one – everything is sold and all anyone wants is cash. For now, sales in China remain concentrated. More on China soon. Email us in the meantime: Robert.Armstrong@ft.com and Ethan.Wu@ft.com


Here’s a surprising set of facts, from the Bank of America equities derivative team Tuesday:

“The S&P has (i) reached new highs in each of the past eight trading days, which has been the longest series since 1964; (ii) has risen 17 of the last 19 trading days, an achievement surpassed only once in 90 years plus, and (iii) for only the second time since 1950, which has taken less than a month to recover from two fragility cooks. ”

The series of new highs broke on Tuesday, but markets remain furious (a “fragility shock” is when an oversized market, characterized by overcrowded trades, suddenly reverses). BofA thinks we are in a “fear of missing out” market: investors simply get exposure to US equities as much as they can, for fear of underperforming competitors as the market roars at year-end.

Action in the stock options market supports their view. For one, cash flow in options on individual stocks – $ 27 billion in premiums last week, a multi-year record, overwhelmingly mentions:

The flow of money is not all. Premiums for far-from-the-money calls on the Nasdaq have risen – implied volatility of the market is up, in jargon – reflecting a strong upward demand, should the market rise.

The crazy streak of market exposure is also reflected in the cost of rolling out S&P futures contracts: loosely speaking, it is the implicit “fee” charged by market makers for maintaining the futures contract position. Rolling costs fluctuate with supply and demand for market exposure, and are close to a record this quarter, only competing through the rally following the 2016 presidential election:

All these option market phenomena are indicative of a “momentum chase”, Nitin Saksena of BofA told me. “Through the lens of the derivatives market, it appears that there is an upside-down leverage race going on. . . It is more a Fomo trade than fundamentals that suddenly justifies the almost absurd price action we see.

I think for the first time I understand what is meant by that famous Wall Street chestnut: “A little correction will be healthy here.”


Bitcoin reached another high on Tuesday: $ 68,494, giving it a market capitalization of just under $ 1.3 billion. The cryptocurrency market is worth more than $ 3 billion. Shiba Inu coin – the second most important dog-based cryptocurrency – is worth more than Delta Air Lines.

a bubble? George Monaghan of GlobalData, an analytics firm, thinks bitcoin should not be the eighth largest asset on earth (right between silver and Tesla):

“Investors are washing away bitcoin in the hope that it will gain value, rather than using it as a currency. A product’s value should rise because people use it, not because they invest in it. .

“Bubbles have repeatedly caused financial crises. While some may argue that the usefulness of the technology justifies the valuations, I would like to ask how many bitcoin holders can tell you what the utility is. . . The publicity surrounding these bullies attracts the naive / desperate / vulnerable. ”

Right enough. But bitcoin’s “market capitalization” of $ 1.3 billion is not the same as, for example, Apple’s market capitalization.

First, a staggering amount of bitcoin included in that market capitalization is lost forever. Cane Island Digital Research estimates that 28 percent of the supply was discarded, stranded by a forgotten password or dead owner, or accidentally sent to a decomposed address. This implies an “available” market capitalization closer to $ 900 billion (Cane Island thinks another 4 percent of available tokens are lost each year).

Market capitalization is also a misleading concept when applied to bitcoin, because the market for it is so strange. Less than 20 percent of the supply is actively traded. Of the bitcoin that does trade, 85 percent of the dollar value is dominated by some big money “whales”, according to Chain analysis. Bitcoin is something like a stock with a large stock count and a very small free float: its price may not tell you much about what the asset would be worth if it had a less limited market structure.

Unhedged believes people should be free to bet the house on bitcoin (and maybe lose). The Bitcoin bubble question that interests us is how much a devastating collapse in the bitcoin price will affect other markets. We’m not sure. (Ethan Wu)


General Electric is divided into three companies, and it’s a big thing. For much of the late 1990s and early 2000s, it was the most valuable company in the world, and was considered the best managed company by Jack Welch. It appears that there was no magic management sauce at GE under Welch. Mostly there was leverage, and the problems that leverage created took two decades (and more) to clean up.

It was all foreseeable. I know this because my colleague John Plender provided it in August 2000, when Welch was at the height of his splendor, preparing to retire. In an FT column entitled “GE’s Hidden flaw”, Plender wrote:

“General Electric is the world’s most valued company, with a market capitalization of $ 503 billion. Jack Welch, the chairman and CEO who has led more than two decades of relentless growth, is arguably the world’s most admired manager. . . Can it maintain its extraordinary dynamism and capacity for self-renewal after the departure of a man who rediscovered the company? “

GE was known at the time for its culture and management structure. But none, Plender argued, had much to do with the growth of GE Capital, the company’s financial unit:

In the five years to the end of last year, the contribution of GE Capital’s 28 operating companies to GE’s earnings increased from 36.7 percent to 41.5 percent, making it much more important than any other GE business. . .

“GE Capital dominates the group’s balance sheet, which accounts for 85.1 percent of the group’s assets and 89.6 percent of its liabilities.”

This in turn made GE vulnerable to financial shocks:

“At the end of last year, [GE’s] balance sheet contained $ 330 billion in tangible assets. Of this total, $ 168 billion consisted of loans and receivables, including investments in the financing of leases in industries such as aircraft, railways and automobiles. A further $ 80 billion consisted of investment in corporate, government and mortgage-backed debt, and shareholding. It will only take a 3 percent drop in the value of tangible assets, or a 5.9 percent drop in the value of debtors, to wipe out its tangible capital base of $ 9.9 billion.

“None of this means that the company will probably come to a standstill tomorrow. But it is a very slim safety margin against recession and financial shocks. ”

Nailed. Plender asked (and correctly answered) the question to be asked in every exuberant market: where is the leverage?

So where is the leverage now?

A good read

The Economist visual explainer about different methods of measuring inflation, and their proposed new measure, are good.

FT Asset Management The inside story about the shifts and shakes behind a multi-trillion-dollar industry. Sign in here

Free dinner – Your guide to the global economic policy debate. Sign in here

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