Authored by MN Gordon via EconomicPrism.com,

About the time the most trusted man in America, Walter Cronkite, signed off from the CBS Evening News for the last time, something momentous happened in the U.S. credit market.  Few people, apart from Bill Gross and A. Gary Shilling, understood what was going on.

Hindsight is always 20/20.  And looking at a chart of U.S. interest rates several decades later it all seems so obvious.  Specifically, that the rising part of the interest rate cycle peaked out in 1981.

This one thing, in essence, changed everything.  Over the next 39 years interest rates fell as mega-asset bubbles were puffed up and floated across the land.

The relationship between interest rates and asset prices isn’t complicated.  Tight credit generally produces lower asset prices.  Loose credit generally produces higher asset prices.

When credit is cheap and plentiful, individuals and businesses increase their borrowing to buy assets they otherwise couldn’t afford.  As cheap credit flows into various assets, it balloons their prices in kind.

For example, individuals may use cheap credit to take on massive jumbo loans.  This allows them to bid up house prices.  Businesses, flush with a seemingly endless supply of cheap credit, may borrow money and use it to buy back shares of company stock.  This has the effect of inflating share prices, and the value of executive stock options.

When credit is tight, the opposite happens.  Borrowing is reserved for activities that promise a high rate of return; one that exceeds the high rate of interest.  This has the effect of deflating the price of financial assets.

More Pain to Come

In 1981, following a great wave of Federal Reserve manufactured inflation, credit was expensive.  At the same time, stocks, bonds, and real estate were cheap.  For example, in 1981, the interest rate on a 30-year fixed mortgage reached the unimaginable high of 18.45 percent.  That year, the median sales price for a U.S. house was about $70,000.

By comparison, in December 2020, the 30-year fixed mortgage rate dropped to a historical low of 2.68 percent.  Rates remained below 3 percent for most of 2021.  This allowed many borrowers to refinance or buy houses at extreme low rates.

Thus, the median sales price for a U.S. house peaked at $468,000 in Q3 2022.  Along the Country’s east and west coasts prices inflated much higher.

In 2022, as the Fed commenced hiking the federal funds rate in an attempt to contain the raging consumer price inflation of its making, the 30-year fixed rate mortgage spiked up to over 6.5 percent.  Consequently, U.S. house prices are now deflating and likely have much further to fall to complete this boom-and-bust cycle.

Similarly, the Dow Jones Industrial Average (DJIA) was roughly 900 points in 1981.  Then, on January 4, 2022, the DJIA hit its all-time closing high of 36,799.  That comes to over a 3,988 percent increase.  Since then, however, as interest rates have increased, the DJIA has started deflating to its recent close of 34,053.  Like house prices, we believe the DJIA also has much further to fall.

Without question, the 39-year run of cheaper and cheaper credit had something to do with ballooning stock and real estate prices.  Asset prices and other financialized costs, like college tuition, have been grossly distorted and deformed by nearly four decades of falling interest rates.

The gap between high asset prices and low borrowing costs have positioned the world for a great reckoning.  Certainly, 2022 was a difficult year for stock and bond investors.  Nonetheless, there is plenty more pain to come.

Only 37 More Years to Go

The Fed has strong influence over credit markets through its open market operations.  But it is not the credit market’s ultimate master.  The fact is, Fed credit market intervention plays second fiddle to the overall rise and fall of the interest rate cycle.

From a historical perspective, today’s 10-Year Treasury note yield of 3.39 is still extraordinarily low.  But if you consider just the last two years, it’s extraordinarily high.

The yield on the 10-Year Treasury note bottomed out around just 0.62 percent in July 2020.  At 3.39 percent today, the yield his increased dramatically.  In fact, the yield on the 10-Year Treasury note has increased over 446 percent over the last 31 months.  Quite frankly, it’s amazing there hasn’t been a major blow up of a major investment fund – yet.

The last time the interest rate cycle bottomed out was during the early-1940s.  The low inflection point for the 10-Year Treasury note at that time was a yield somewhere around 2 percent.  After that, interest rates generally rose for the next 40 years.

No one can predict the future.  But looking to past interest rate cycles for guidance provides a startling realization.  We may be less than three years into a 40-year period of rising interest rates.  In other words, everything the world has come to know and love about financial markets since 1981 has been stood on its head.

Between 1981 and 2020, each time the economy went cold, the Fed cut interest rates to juice financial markets.  In this disinflationary environment, asset prices increased while incomes stagnated.  Moreover, aided by an abundance of cheaply made goods from China, increases to consumer prices over this period were moderate.

The Fed, while conflating apparent success with luck, thought it had somehow tamed the business cycle.  Congress also discovered it could spend printing press money without consequences.  These takeaways couldn’t be further from the truth.

Your Broker Has No Clue

Not many people are still alive who remember how drastically different the effects of the Fed’s policy adjustments are during the rising part of the interest rate cycle than during the falling part of the interest rate cycle.

During the rising part of the interest rate cycle, as demonstrated in the 1970s, after the U.S. defaulted on the Bretton Woods Agreement, Fed interest rate policy became increasingly damaging.  Fed policy makers demonstrated they are politically incapable of staying out in front of rising consumer prices.  Their efforts to hold the federal funds rate artificially low, to boost the economy, no longer had the desired effect.

In this scenario, monetary inflation brought about consumer price inflation.  Fed policies were policies of disaster.

In July 2020, roughly 39 years after it last peaked, the credit market finally bottomed out. Yields are rising again.  In truth, they may rise for the next three to four decades.

This means the price of credit will increasingly become more and more expensive well into the mid-21st century.  Hence, the world of perpetually falling interest rates – the world we’ve known since the early days of the Reagan administration – is over.

This is something most politicians, consumers, and investors have little comprehension of.  Your broker also likely has no clue what has happened.

Many investors, having little experience beyond two decades, let alone four decades, are enamored with the vaunted salvation of a forthcoming Fed pivot.  This limited focus will compel them into strategic mistakes.  They may unwittingly put their hard-earned savings and wealth in a place of great danger.

Mission Accomplished?

Fed Chair Jay Powell has studied the on again off again inflation of the 1970s.  He knows how quickly consumer price inflation can flare-up if the Fed does not fully snuff it out.  He recognizes the dangers of taking his foot off the break too soon.  He doesn’t want a repeat of another decade of high consumer price inflation.

Still, Powell is human just like you.  He’s subject to influence.  Specifically, political influence.

After this week’s 25 basis points rate hike, the federal funds rate is now at a range of 4.5 percent to 4.75 percent.  Another 25-basis point rate hike in March will take the top end of the federal funds rate to 5 percent for the first time in 17-years.

Will that be the end of it?  Will it be mission accomplished?  Will the Fed then pause?  Will it then pivot?

Investors, the foolish ones, seem to think so.  This week, following the Fed’s rate hike and subsequent press conference, investors went all in on a variety of companies.  On Thursday, Grainger jumped over 30 percent, followed by Align Technology (up over 27 percent), Coinbase (up nearly 24 percent), and Meta (up over 23 percent).

What gives?

The U.S. economy appears to be slipping and sliding into a recession.  Consumers are tapped out.  They’ve maxed out their credit cards.  Technology workers are getting massively RIFed.  The depth and intensity of the economic contraction will test the Fed’s courage to act.

The political pressure applied to Powell may become too much to resist.  The Fed may, in fact, cut rates later this year.  This is what the fools are banking on.  Though the result may not be what they expect.

Because the Fed will be cutting the federal funds rate in an environment of rising interest rates.  The last time the Fed tried this, in the 1970s, the results were disastrous.

Certainly, yields on Treasury notes may periodically fall during periods of recession.  For example, they could fall over the coming months.  However, the long-term trend is up.

The experience of 2022 will repeat several times per decade until the cycle has concluded.  By our estimation, that will be sometime around 2060 – give or take a few years.

Investment decisions should be made accordingly.

*  *  *

Hoping for a Fed pivot to bailout your retirement is a fool’s strategy.  At this point in the credit cycle, the deck’s stacked against you.  But are things you can do.  If you’re interested in discovering several ideas, take a look at my Financial First Aid Kit.  Inside, you’ll find everything you need to know to prosper and protect your privacy as the global economy slips into a worldwide depression.

Russia and Iran plan to establish a joint drone manufacturing facility inside Russia, according to a weekend Wall Street Journal report, which comes following US and European efforts to target Iranian-made drones going to Russia with sanctions.

The Iranian kamikaze drones which have for many months now been pummeling Ukraine’s energy infrastructure, such as the Shahed-136 drones, cost as little as $20,000 to make. According the WSJ a plant established on Russian soil to ramp up Iranian-designed drone production would result in an additional 6,000 of them rolling of the line, for deployment by Russian forces in Ukraine.

Reportedly the agreement to establish manufacturing operations in Russia was inked with Iran back in November, when the Iranian drones and their devastating attacks in Ukraine were focus of international media attention and condemnation.

But the new plans for a drone factory could result in new, more effective UAVs, reports WSJ further. “As part of their emerging military alliance, the officials said, a high-level Iranian delegation flew to Russia in early January to visit the planned site for the factory and hammer out details to get the project up-and-running,” according to the report.

“The two countries are aiming to build a faster drone that could pose new challenges for Ukrainian air defenses, the officials said.”

The fake meat industry appears to be in a death-spiral as sales at plant-based ‘meat’ companies Impossible Foods and Beyond Meat have imploded.

As Axios reports, “after years of hype, the tide is turning against the first generation of plant-based protein makers.”

Last year, both companies were riding high – with prime placement on supermarket shelves, and Burger King even adding an Impossible Whopper to its menu.

Impossible Meat even began to branch out – looking to expand offerings to highly processed meats such as chicken nuggets and sausages.

Sales have collapsed, however, which according to a recent Bloomberg report, has resulted in Impossible Foods planning to lay off around 20% of its workers.

Impossible Foods Inc., the maker of meatless burgers and sausages, is preparing to cut about 20% of its staff, according to a person familiar with the matter.

The Redwood City, California-based company currently employs about 700 workers. The new round of dismissals could reduce that amount by more than 100. 

Impossible Foods also offered voluntary separation payments and benefits to employees at the end of 2022, said the person, who asked not to be named discussing private information. An internal document viewed by Bloomberg confirmed the separation packages being offered. The company previously reduced headcount in October, cutting about 6% of its workforce at the time. -Bloomberg

Beyond Meat’s sales fell over 22% in the third quarter of 2022, as the company is preparing to similarly cut 20% of its workers. The company has also lost several executives.

According to the report, supermarket sales fell by 15% y/y as of Jan. 1, according to market-research firm IRI, while orders in restaurants dropped 9% in the12 months ended in November, according to NPD Group. 

Meanwhile, data from consumer-experience strategy firm HundredX suggests waning interest in general – as the percentage of shoppers polled who have eaten Impossible products and say they won’t do it again has risen.

Beyond Meat stock is also down around 67% vs. one year ago.

Authored by Steve Watson via Summit News,

A new update to the popular “Sims” video game, where the player controls communities of simulated characters, now features transgender characters replete with chest binders and scars from having their breasts surgically removed.

The Update was recently announced by EA Games:

A base game update is here with new content including medical wearables, binders, shapewear, a light switch & more including bug fixes & console gameplay improvements 🥳💚

Read more about today’s update in the latest patch notes! https://t.co/4c4vZdfWBY pic.twitter.com/GYbQYijIIm

— The Sims (@TheSims) January 31, 2023

The game, which is aimed at children from age 12, also enables players to place ‘packing’ or ‘tucking’ underwear’ on their sims, garments that give or hide the appearance of male genitalia.

Rebel News editor Ian Miles Cheong notes:

The “Create a Sim” character creator now has a “Top Surgery Scar” subcategory, which can be added to male Sims characters aged Teen or older. Furthermore, chest binders can be found under the “Tanks” subcategory in the “Tops” section, while “tucking underwear” can be situated under “Bottoms” in the “underwear” subcategory.

In a statement, “The Sims 4” producer John Faciane called the update “a step in the direction of a more inclusive experience for Simmers.” 

It’s just a simulation though right?

Life’s too easy if people are acting like this pic.twitter.com/bIazh6gRHa

— Hodgetwins (@hodgetwins) February 2, 2023

The west is broken. pic.twitter.com/52wq1tAjYz

— Ian Miles Cheong (@stillgray) February 2, 2023

No one said his “daughter” couldn’t compete in boys sports. There’s no law against that. https://t.co/vJtGTyRjeR

— Ian Miles Cheong (@stillgray) February 2, 2023

“Trust the experts.” https://t.co/mBBp8LFIqe

— Ian Miles Cheong (@stillgray) February 2, 2023

Tolerance and apathy have brought you this. https://t.co/csgRMVjIsi

— Ian Miles Cheong (@stillgray) February 2, 2023

*  *  *

Brand new merch now available! Get it at https://www.pjwshop.com/

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“Central bankers think they are the masters of the universe because the world is looking to them (and only them) to deliver continuous stability and prosperity. There is no reason to suppose that they understand the modern financial system and economy to any greater extent than they did in 2007 (that is to say, not at all). Nevertheless, they plow ahead, expressing total confidence that what they are saying and doing is wise and not dangerous drivel…”

That’s how billionaire hedge fund manager Paul Singer described the elites’ arrogance in the past, that, we believe, we are seeing once again as Fed Chair Powell – whether under political pressure or his own hubris – practically declares ‘mission accomplished’ over inflation.

Singer had something to say about the threat of inflation too, forecasting years ago – as The Fed unleashed wave after wave of QE – what we have seen in the last two years…

“We believe that if and when inflation goes from being something that affects only a particular list of assets (a growing list, presently a combination of things owned by the well-off plus a number of things that are basic necessities) to a widespread “in-your-face” phenomenon affecting the cost of living of almost the entire population, then the normal yardsticks of risk, return and profit may be thrown into the garbage can.

These measures may be replaced by a scramble by citizens and investors to preserve value on a foundation of shifting sand, together with societal unrest that may make the current politically-useful “inequality” riffs, blaming the “1%” and attacking those “millionaires and billionaires” who refuse to “pay their fair share,” look like mere warm-ups for real class warfare.”

Since the start of the Biden administration, inflation has soared and all those threats have come to pass…

And while inflation looks to be slowing, the billionaire founder of Elliott Investment Management, warned a room of hedge fund managers and large investors this week that there’s likely to be a disorderly unraveling of markets.

Bloomberg reports that, according to people familiar with the discussion at the Managed Funds Association conference this week in Miami, Singer said the bear market isn’t over and that a drop of 20% is likely not enough.

More than a decade of aggressive monetary and fiscal policies can’t be unwound in a year, he explained, drawing parallels to ballooning debts as potentially wreaking havoc rivaling The Great Depression, despite growing hope for a ‘soft landing’.

Singer, 78, added that many valuation metrics in the market remain higher than in 1929 or the dot-com era bubble…

As we noted above this is not the firs time Singer has sounded the alarm bells, citing the Fed’s years of easy money policies.

In 2021, he said he couldn’t wait to say “I told you so” to the people who participated in the “head-smacking craziness.”

Singer also told the crowd this week that inflation is higher than what’s reported and that focusing on core metrics — which exclude food and energy prices — is unrealistic…

Finally, we return to Singer of the past, who offered this reality-check on the market’s apparent belief in central planners’ omnipotence…

“It is important to note that mass human behavior cannot be modeled or predicted with any degree of precision. When forces are brought to bear that suggest a possible shift in direction of mass human behavior (examples include oppression, tyranny, economic underperformance, inflation, incentives and disincentives), there is no way of telling if, how or when such forces will actually result in a change of vector.”

In the past, Singer has had a clarifying investment thesis:

“Although the levitation of financial assets has yet to levitate gold, we will grit our collective teeth on that score and await either ‘asset price justice’ or the ‘end times,’ whichever comes first.”

The recent gains in the precious metal – as the market prices in a pivoting Powell – may just be the sign of the ‘end times’ Singer has warned of.

Update (1615ET):

Network data from NetBlocks shows internet across Italy has mostly been restored after more than five hours of outages. 

Reuters confirmed the outage was due to “an international interconnection problem.”  

In a separate report, Reuters said that Italy’s National Cybersecurity Agency warned about a ransomware attack targeting servers worldwide. 

The hacking attack sought to exploit a software vulnerability, ACN director general Roberto Baldoni told Reuters, adding it was on a massive scale.

Italy’s ANSA news agency, citing the ACN, reported that servers had been compromised in other European countries such as France and Finland as well as the United States and Canada. -RTRS

The US Cybersecurity and Infrastructure Security Agency (CISA) was aware of the attack. The agency said:

“CISA is working with our public and private sector partners to assess the impacts of these reported incidents and providing assistance where needed.” 

Reuters pointed out that the cyberattack and Italy’s internet outage “were not believed to be related.” 

Meanwhile, here’s what people are saying on social media:

So Italy was the first in the West to do lockdowns… Now they’re the first to have the cyber attack ol’ Schwab has been monologuing about. What is it about Italy that the Globalists don’t like? https://t.co/VX8BiuuZJI

— MiggyMack 🙂 (@MiggyMackAttack) February 5, 2023

So in Italy, basically inly 26% of the people have internet at the moment! This is insane! It makes that global cyber attack agenda way more real. Things are going faster than expected! https://t.co/O7cheH5nST

— Radu Ocean (@raduocean) February 5, 2023

The covid pandemic started in Italy, exactly 3 years ago.
Would the internet outage in Italy right now be the start of the predicted cyber pandemic?
👇🏻#CyberAttack https://t.co/PeG5yp2MZz

— Ingrid 💫 (@Stingrid74) February 5, 2023

Italy is hit with a sudden internet outage. How the hell does the entire country of Italy lose the internet.

— Lauren McKenzie (@TheMcKenziest) February 5, 2023

Oh yeah, and there’s this video from last month. 

WEF – Klaus Schwab, warning of the next ‘pandemic’, a cyber attack so vast it disconnects the internet.

The new internet will only be accessible to those with biometric digital ID.

Almost as if this is a plan 🤷‍♀️

pic.twitter.com/xqgU7vDLgW

— Bernie’s Tweets (@BernieSpofforth) January 13, 2023

*   *   *

Update (1150ET):

Reuters confirmed “internet outages and glitches” across Italy on Sunday. The problem appears to be an “international link.”  

“An international interconnection problem impacting the service at the national level was detected. Analyses are underway to resolve the problem,” a Telecom Italia (TIM) spokesperson said.

Italy’s ANSA News agency reported there are no signs yet that hackers were responsible for the widespread outage. 

*   *   *

Network data from NetBlocks shows widespread disruption to internet service across Italy on Sunday. It’s been reported that the telecommunications blackout might stem from leading operator Telecom Italia.

NetBlocks’ real-time network data shows that national connectivity plunged from around 100% to 26% this morning. 

ℹ️ Update: Metrics show that the ongoing internet disruption affecting #Italy‘s international connectivity has impacted several major cities; the incident has frustrated users including those planning to stream to today’s #InterMilan match #TIMDown pic.twitter.com/cDFG7fAWNy

— NetBlocks (@netblocks) February 5, 2023

Another internet disruption tracking website shows a heatmap of the outages that appear to be nationwide. 

⚡ Moderato #disservizio Internet rilevato: #TIM in #Italia dalle 14.05

🇮🇹 Mappa e analisi live
👉 https://t.co/wIZ5umBKBb

Retweet se è down anche per te#tim_official #TIMdown #problemiTIM #senzainternet #Italy pic.twitter.com/sARKmufgi9

— Fing Internet Alert (@outagedetect) February 5, 2023

By Peter Tchir of Academy Securities

Why Do I Keep Thinking 0DTE stands for Zero Dark Thirty?

There is a lot to talk about this week:

• How we nailed the inflation story and got the Powell presser more or less right, but got the market reaction completely wrong. The rally on Thursday caught me completely by surprise (though in hindsight, it shouldn’t have – which brings in 0DTE). And, to be perfectly honest, who would have thought that with Treasuries down, earnings misses, and less than stellar guidance the previous night from some tech heavyweights stocks might close in the green? They did briefly, before fading into the close.

• We published a detailed report on the U.S. debt profile – link here and the Fed’s holdings of U.S. Treasuries. This was to give people a sense of how long it takes for higher rates to really increase our average cost of debt, and to provide a sense of the losses that Congress should expect from the Fed’s QE holdings. More on background than an actionable item, but as debt ceiling concerns are likely to mount, it is good to be armed with some facts and figures.

• We finished Friday with what was a Stunning Jobs Report. The word “stunning” was carefully chosen (at least by T-Report standards) because it can mean impressive (which the report was), but it can also “cause astonishment or disbelief” which this report managed to do as well! The ADP report was one of the worst reports in some time (though the methodology change could matter), while the NFP report was one of the best in the past year. However, there will always be “buts” when we have such bizarre ways of calculating this data and incorporating revisions. The Household number, which was strong, was almost entirely due to stacking the revisions into the January number and I’m told by people who dug into it that the real number was more like 80k. I haven’t seen the “response” rate, but that has been an issue plaguing many of these surveys. The response rate has been low, leading many to question if there is a “selection bias” that leads to inflated numbers. In any case, the Fed looks at this data and it should sharpen their “hawkish tongues” as they get back on the media and speaking circuit.

• A Chinese Spy balloon? Please see Friday’s SITREP (and update) for thoughts and comments from several members of Academy’s Geopolitical Intelligence Group. Academy continues to see a rift in U.S./China relations, but I certainly didn’t have “balloon delays Blinken visit” on my bingo card. We do intend to publish World War v3.1 (the battle over chips) early this week, but there were just too many more pressing issues on which to focus.

With all of that said, this weekend’s T-Report will focus on 0DTE or Zero Day to Expiration options. Zero Dark Thirty sounds “cooler” and is military “slang” for half an hour past midnight specifically or a time in the night where operations can be conducted under the cover of darkness – which again, seems to bring me back to 0DTE.

The Rise of 0DTE (first discussed by Zero Hedge last November in “What’s Behind The Explosion In 0DTE Option Trading“, and only now is everyone catching up)

“The Rise of 0DTE” sounds like a “Terminator” sequel, and in some ways it might well be!

Over the past two years we (as market participants) have been forced to understand some heretofore unknown phenomena in order to navigate markets: Meme stocks, Wall Street Bets, and Weekly Gamma Squeezes, to name a few.

We’ve highlighted the growth of trading in short maturity options for a few months now. It started in the past year and has accelerated. It has gone from a blip on our radar screen, to something that was pinging consistently, and now to something that is capturing our full attention.

Randall Forsyth summed up the current zeitgeist well in “Zero-Day Options Fuels Latest Frenzy in the Wall Street Casino”.
Very short-dated options are much more akin to “gambling” than investing. On Thursday, option volumes were dominated by options expiring on the 2nd (true 0-day options) and those expiring on the 3rd (originally longer-dated options that were set to expire on Friday). Friday’s pattern was similar to the vast majority of the most active options expiring that day.

I admit, I pull up MOSO (on Bloomberg) to follow the most active options during the day. It is a bit like watching a horse race. There is SPY Feb 2 410 in the lead. TSLA Feb 3 190 is running a close second. TSLA Feb 3 190 then takes the lead, but up pops TSLA Feb 3 200 from the back of the field. SPY Feb 2 415 is making a charge, but whoa, what happened here, TSLA Feb 3 200 is now the front runner. However, look at this field. Of the 20 top contenders, only one is a put and only one is longer than Friday maturity (an ARKK Feb 17 Call, presumably because ARKK doesn’t have a shorter dated option).

Thursday saw the heaviest call option trading ever recorded (see “Today Was The Largest Option Volume Session Of All Time”)! The relatively tiny premiums involved in 0DTE allowed massive notional lots be traded. It is the ultimate way to leverage your “portfolio”.

Put option volumes also ticked up and were relatively balanced with calls on Friday – which may be why the “rip” into the European close faded throughout most of the day. This could be an important feature of 0DTE options trading that differs from the “meme stock” crowd (which tends to be a “long only” trade).

Forget VIX

The VIX calculations use S&P 500 option contracts with more than 23 days and less than 37 days left to maturity. So, none of the 0DTE options trading impacts VIX.

You can stare at VIX all you want, but you are unlikely to get much useful information. Speculators, vol sellers, covered call sellers, and hedges have all moved their money from the more expensive options (included in the VIX options) to less expensive options. Some option purists will scream bloody murder that the daily option implied volatility is way more expensive than it is in the longer-dated options, but they are being too smart for their own good as this is about leveraged dollars, not trading implied versus realized volatility.

It may still be valid to look to VIX for a signal, but if those options that go into it are not the “trading vehicle of choice” then how should we expect a timely “early warning” signal? I don’t think that we can. VIX has been drifting lower and lower on my daily “market checklist” and risks dropping off of the screen entirely. I get far more information pulling up the MOSO screen compared to knowing where VIX is.

Ironically, VIX 0DTE calls were being bought on Friday during certain parts of the day (so there is still correlation), but I think that it will be a coincidental indicator at best and more likely a lagging indicator for any larger moves.

Why It Matters

So far, I’ve done little to explain why I think that it is so important. When we used to write about the “Gamma Squeeze” we focused on stocks and ETFs where early in the week you would see weekly option volumes tick up. You’d get large activity in a strike price that seemed unreachable (certainly in a week). Then you would see buying activity in the stock and options across the board. That would start driving the price higher causing more buying until (lo and behold) that previously “unreachable” strike is now in the money.

The 0DTE options trading has some advantages:

• It is less reliant on single stocks, which I think lets more people participate in the game.
• The low dollar price of these options lets even smaller players control more notional.
• You can do it every day! Literally every day is set up to try to gap things higher (or lower). I think lower is also a feature more likely to appear in 0DTE trading than even in the “traditional” gamma squeezes.

But I still haven’t explained “why it matters”, so let’s try to do that here.

I will use SPY (S&P 500 ETF) because that seems to be a fan favorite in the 0DTE space.

Let’s say SPY opens at $412 on Monday (it closed $412.35 on Friday).

I buy a SPY 420 Feb 6 Call. It should cost a few cents, let’s say 10 cents. The SPY Feb 6 415C closed Friday at $0.60 and the 420 is a full percentage point more out of the money than the 415.

I could buy that from an existing options holder, from an options market maker (who may delta hedge it), from someone writing a covered call, or from someone selling it “naked” to get some premium.

The “delta” or the amount of SPY represented by a 420 call expiring that day when the stock is at 412 is minimal no matter what volatility assumption you use.

So, I’m buying this option as a lottery ticket. Presumably most others are as well. At some point, there will be sellers that didn’t hold the options. Let’s look at their behavior:

• Market Maker. They sell the option and buy 2% of the notional of the stock (the “delta”). That’s not the “correct” amount, but close enough. At this stage they sold the option and created a tiny amount of buying interest in the stock.
• Covered Call Writer. They sell the option and they’d be okay if SPY gets called away at 420 (they tend to focus more on single names, but let’s simplify for now).
• Naked Call Writer. The proverbial “picking up nickels in front of a steamroller”. They are going to collect some premium income on these “crazy” trades people are willing to spend money on.

Now, lets say we get “good” news and suddenly SPY is at 416. This will have impacted everyone in the 415 Calls in the same way we will demonstrate on the 420 and that may well be why the news got us to 416 in the first place, but this is getting complex and circular (because it is).

SPY jumps to 416.

• Market Maker. Has been buying stock on the way up. Maybe 1% out of the money is a 20% delta, so they had to increase their stock holding from 2% to 20% of the notional (would have added pressure).
• Covered Call Writer. Starts wondering if they really wanted to let go of the stock at 420 because things feel so good.
• Naked Call Writer. Little nervous here. Do they buy some calls? Buy some stock? Sit on their hands? Definitely a wildcard.

This complex interplay of gamma and 0DTE options across a number of strikes and a number of similar stocks/indices gets SPY to 422.

• Market Maker. Would have been buying more and the delta is likely much higher than 50% or they would be buying all the way up and would have to start buying more for every tick higher. This adds real buying pressure.
• Covered Call Writer. Do some buy the stock or try to buy back the call because they regret not holding it? It wouldn’t take many people doing this to put further price pressure on the stock because the bulls would be fully in charge of the price action.
• Naked Call Writer. PAIN. Many will cover or be forced to cover as not everyone can sit there accepting that selling something for 10 cents might cost them $5 or more (currently costing them $2).

Like everything else in trading, this doesn’t work in isolation.

Positioning plays a crucial role in helping this sort of strategy work. You don’t need to “share the idea” because it is so visible that it attracts attention, but sharing the ideas and “profitability” helps (my social media stream is getting clogged up with “turn $500 into $100,000” with 0DTE). Thursday was ripe picking for this strategy for many reasons and it worked!

Puts Can Work as Well

This strategy can work (and has been working) in either direction and there were some high put activity days. 0DTE trading tends to amplify moves in “both directions”.

On Friday, it seemed like many got sucked into the “this only goes up” mantra (which almost worked), but 0DTE is different than meme stocks in that respect.

Windshield Wipers

I’m thinking of 0DTE as a “windshield wiper” strategy.

• It can push higher and if something cracks, it can drive it a lot higher.
• If nothing cracks, then they can push it lower. If something cracks, then they can drive it much lower.

This is a game of high leverage where you spend 50 cents knowing that you will lose on a bunch, but you can hit a few $5 tickets and be an overall winner.

What Stops It?

More prudent options sellers. The weekly gamma squeezes seemed to stop working once market makers decided what realistic vol was. Then they doubled that to be safe, doubled it again to be extra safe, and then doubled it one more time for good measure. Suddenly squeezes didn’t work as well.

We are far from that occurring since I suspect a lot of today’s readers will dismiss the focus on 0DTE as the “ravings of a madman”.

It won’t be the first time, but I suspect that within weeks this will be the biggest topic of conversation out there (helped by the fact that we can stop talking about the Fed for a few weeks and the debt ceiling issue is still a bit distant). It is occupying 90% of my conversations and not just because I bring it up.

I do not think that this is an “up” only strategy, so be careful next week. The one lesson (even for those who don’t really believe that 0DTE is important) is that it helps drive stocks higher. That, I think, is not the correct lesson, though it certainly was true on Thursday!

Bottom Line

For me (and I haven’t been positioning aggressively) it means running smaller risk and covering when it is going against you, or at least waiting longer to add to losing positions as the 0DTE option trading will extenuate moves!

On the bright side, it was fun to think about something other than central bank policy, if only for a few hours!

In January this year, Tesla made the surprising announcement that it would be cutting prices on its vehicles by as much as 20%.

While price cuts are not new in the automotive world, they are for Tesla. The company, which historically has been unable to keep up with demand, has seen its order backlog shrink from 476,000 units in July 2022, to 74,000 in December 2022.

This has been attributed to Tesla’s robust production growth, which saw 2022 production increase 41% over 2021 (from 930,422 to 1,313,851 units).

With the days of “endless” demand seemingly over, Tesla is going on the offensive by reducing its prices—a move that puts pressure on competitors, but has also angered existing owners.

Cranking up the Heat

But, as Visual Capitalist’s Marcus Lu details below, Tesla’s price cuts are an attempt to protect its market share, but they’re not exactly the desperation move some media outlets have claimed them to be.

Recent data compiled by Reuters shows that Tesla’s margins are significantly higher than those of its rivals, both in terms of gross and net profit.

Our graphic only illustrates the net figures, but gross profits are also included in the table below.

Price cutting has its drawbacks, but one could argue that the benefits for Tesla are worth it based on this data—especially in a critical market like China.

Tesla has taken the nuclear option to bully the weaker, thin margin players off the table.

– BILL RUSSO, AUTOMOBILITY

In the case of Chinese EV startups Xpeng and Nio, net profits are non-existent, meaning it’s unlikely they’ll be able to match Tesla’s reductions in price. Both firms have reported year-on-year sales declines in January.

As for Tesla, Chinese media outlets have claimed that the firm received 30,000 orders within three days of its price cut announcement. Note that this hasn’t been officially confirmed by anyone within the company.

Tit for Tat

Ford made headlines recently for announcing its own price cuts on the Mustang Mach-E electric SUV. The model is a direct competitor to Tesla’s best-selling Model Y.

Chevrolet and Hyundai have also adjusted some of their EV prices in recent months, as listed in the following table.

Source: Observer (Feb 2023)

Volkswagen is a noteworthy player missing from this table. The company has been gaining ground on Tesla, especially in the European market.

We have a clear pricing strategy and are focusing on reliability. We trust in the strength of our products and brands.

– OLIVER BLUME, CEO, VW GROUP

This decision could hamper Volkswagen’s goal of becoming a dominant player in EVs, especially if more automakers join Tesla in cutting prices. For now, Tesla still holds a strong grip on the US market.

Thanks, Elon

Recent Tesla buyers became outraged when the company announced it would be slashing prices on its cars. In China, buyers even staged protests at Tesla stores and delivery centers.

Recent buyers not only missed out on a better price, but their cars have effectively depreciated by the amount of the cut. This is a bitter turn of events, given Musk’s 2019 claims that a Tesla would be an appreciating asset.

I think the most profound thing is that if you buy a Tesla today, I believe you are buying an appreciating asset – not a depreciating asset.

– ELON MUSK, CEO, TESLA

These comments were made in reference to Tesla’s full self-driving (FSD) capabilities, which Elon claimed would enable owners to turn their cars into robotaxis.

Authored by Mark Jeftovic via BombThrower.com,

The Oracle of Omaha’s second banana has pronounced judgement on crypto.

It was even more unhinged than previous attacks (“rat poison”), as Munger applauded communist China’s technocratic dictatorship as a sensible ideal we should be following here in the West.

“the communist government of China recently banned cryptocurrencies because it wisely concluded that they would provide more harm than benefit…What should the U.S. do after a ban of cryptocurrencies is in place? Well, one more action might make sense: Thank the Chinese communist leader for his splendid example of uncommon sense.”

The fact that Munger is able to aggrandize a communist police state that maintains concentration camps, engages in organ harvesting and forced labour with impunity is a testament to his insular position (not to mention the lopsidedness of our political zeitgeist).

Munger is a Cantillionaire – after Richard Cantillion who wrote one of the first economic treatise in the eighteenth century describing how proximity to the monetary inputs of a society confer special advantages at the expense of wider populus.

The Cantillon Effect

Munger’s crocodile tears for those who lose out in the economic game of life are ironic, given that Berkshire Hathaway’s mantra (and Westco, Munger’s sidecar conglomerate) for decades has been to buy often distressed businesses that are out of fashion but have a “durable competitive advantage ” or “moat”.

Those are euphemisms for monopolies, and both Buffet and Munger love owning them. They don’t seem to care if those monopolies draw rentier like returns on monetizing low income housing or opioid addiction.

Munger and Buffet’s dynastic wealth was built on the crest of three structural tailwinds:

If there is such thing as “structural inequality”, it has more to do with the way the monetary system is constructed to benefit people who are already super-wealthy than anything else. “Fix the money, fix the world”.

The first of these pillars below is more of a dynamic than a structure, and one that there’s nothing wrong with, actually.

But it seemed odd to hear Munger, a man who made his fortune exploiting valuation gaps in publicly traded companies, singing on the virtues of  England’s “bann[ing of] all public trading in new common stocks and kee[ping] this ban in place for about 100 years.” .

That happened back in the 1700’s when Richard Cantillon was figuring out that the monetary system was structurally rigged, even then.

So while Buffett and Munger’s investing acumen is not in dispute, these three forces acted as the lubricant, if not steroids, for their astonishing returns over the decades:

1) Value investing

…is the foundation upon which Buffett (and Munger) built Berkshire. It is buying companies or assets below their perceived intrinsic value.  The fact that other investors have lost money on it is a prerequisite, otherwise they wouldn’t be “value plays”. “All this wild and wooly capitalism”  that Munger is ruminating about in his WSJ op-ed is what created the valuation asymmetries that Berkshire Hathaway has exploited ever since the duo took it over, in 1965.

2)  Fiat currency debasement

The Cantillon Effect makes inflation acutely pernicious, widening wealth inequality as the asset values of the ultra-wealthy get higher, it drives up the cost of living for everybody else.

Buffett and Munger have been playing inflation like a fiddle for decades. They both know that all fiat currencies are headed for zero, so they gravitate toward “inflation proof” assets with “pricing power” and “moats” (…because inflation-proofing goes better with monopolies.)

Then when things run too hot, they can play the populists and urge government to raise taxes on the wealthy (suggesting tax structures which would barely impact themselves, if at all) and chide the central bank to “reign in inflation, even if it causes a recession”. Like nearly all super-wealthy elites, they love to make policy recommendations that impact everybody else, yet put them in a position capitalize on the second-order effects: Recessions cause unemployment, bankruptcies and a plethora of valuation asymmetries where they can reload on durable assets and businesses at discounted prices.

3) A 40-year decline in cost-of-capital

At the age of 52, Warren Buffett’s net worth was 0.3% of what it is today, and the correlation of Munger’s personal wealth to Buffett’s is basically 1.

That was 1982, which marked the beginning of a bond super-cycle that saw the cost of capital decline to zero by the end of it.

Real rates are still negative today, and all of this compounded with the fiat currency debasement that lifted Buffett and Munger’s boats and accentuated their returns for decades.

I’m not saying that currency debasement and secularly suppressed cost-of-capital are the sole factors for Berkshire Hathaway’s success.

But they were indisputably beneficiaries of the fiat system structure over decades. Also during periods of dislocation, like when it was weaponized against the plebes during lockdowns and the Fed started buying up Berkshire’s debt (along with every other billion and trillion dollar juggernaut) while lending rapidly devaluing dollars to small and independent businesses (that is, if they weren’t simply banned from operating).

Berkshire Hathaway was built atop a system that Bitcoin was created to destroy

Many years ago I found myself sitting in a Bay St. conference room at one of Canada’s “Big Four” banks. There was a representative there from three of those Big Four, plus an Entrepreneur-in-Residence from the Business Development Bank of Canada (BDC) who shall remain nameless, and had organized the meeting at the behest of another BDC contact.

We were there to talk Bitcoin.

He told me a story. More of a parable. Maybe it was just the facts of life.

He said, basically this (paraphrasing),

“when a new disruptive technology comes along, you want to be out front with big investment money behind you, you want to engage with government, the banks and policy makers right away, from the start – and you develop your relationships and your platform, all the while you are engaging with policy makers and the system incumbents to develop the rules.

When the government finally moves on regulating the new space, you are already there and you are on the right side of it, because you helped shape the policies.

Then the regulatory hurdles keep getting higher, and you’re always on the right side of it, while all the later entrants are playing catch up or falling behind.

In other words (and I remember this exactly, along the with the big, smug smile he had on his face when he said it):

“You get to turn around and pull the ladder up behind you!”

I left that meeting not sure what had just happened and nothing more ever came of it, at least with me.

But Bitcoin is more than a disruptive technology. It’s a decentralized counter-attack against a structurally unsustainable and predatory financial system.

Whenever I hear Buffett, Munger, Jamie Dimon, Larry Fink or any other High Priests of the Gerontocracy complaining about Bitcoin specifically, or crypto-currencies in general, I feel like that’s what I’m listening to: a bunch of super-rich Sith Lords frantically  trying to pull up the ladder behind them.

Because the last thing they want or can fathom, is to wind up back on a level playing field.

*  *  *

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If you had “Netflix partnering with GM” on your unlikely corporate tie-up Bingo card for 2023, you can now cross that square off.

That’s because last week it was announced that the streaming giant would be partnering with General Motors to get more of the Detroit automaker’s electric vehicles in movies and television shows that are featured on Netflix. 

Netflix said it will increase the presence of electric vehicles in its original programming “where relevant”, Yahoo Finance reported this week. 

Netflix Chief Marketing Officer Marian Lee said last week: “At Netflix, we create shows and films that can influence culture and spark meaningful conversations. From the TikTok dance trends inspired by Wednesday to thoughtful discussions about climate change with Don’t Look Up, we know that entertainment can drive fandom and inspire connections.”

Because saying “we need the cash” doesn’t quite have the same nice ring to it…

Nevertheless, models like the Chevrolet Bolt EUV, GMC HUMMER EV Pickup, and Cadillac LYRIQ will all be slated to appear in a slate of Netflix shows that sound like a Democratic party diversity and inclusion seminar: Love is Blind, Queer Eye and Unstable.

The companies are also going to be launching a joint commercial during the Super Bowl on February 12 that will not only feature their products, but also (of course) their “commitment to a more sustainable future.”

Because what’s good old fashioned capitalism and marketing without slathering it in faux-ESG virtue signaling, right? We all know that NFL fans are hard left environmentalists to begin with, after all. 

And if you’re a Netflix creator, prepare to have your creative plans altered. The streaming giant says it is going to help its creators “better understand how EVs can complement and enhance their stories.” 

In other words: “Put this EV in your movie or you’re fired”.