Delphi Office Hours Call (September 29th, 2022)

Below is the full recording and transcript of the Office Hours call our team held on Thursday, September 29th, 2022.

• Markets Update (01:30)
• Crypto/Equities Correlation (20:40)
• Are Oversold Equities Indicating a Reversal Is Near? (29:02)
• Why Has ETH Declined Since the Merge? (37:49)
• The Decline of Currencies Relative to the Dollar (49:55)
• Q&A (55:46)

Transcript

00:34 • Brian  

All right, everybody. Welcome to the September edition of Delphi Pro’s Office Hours. Thank you as always for joining us. We have another stacked show for you today. A lot going on in the world, a lot happening in the macro landscape and in the markets. This is going to be a pretty market heavy episode, but we think you’ll find it extremely useful. A lot of good data that we’re going to dive into. As usual, we’re going to get started by kicking it off to Jason. Jason, on a scale of 1 to 10, with 1 being Tom Lee and 10 being Michael Burry. How bearish are you currently?

01:11 • Jason  

It’s a loaded question. Being bearish at the lows is never really the way you want to go. But I’m probably closer to Burry than Tom Lee, significantly. Things are just getting more and more complicated as I’m sure you’ll get into in a sec.

01:33 • Brian  

Yeah, we have a bunch of great charts here. But I think the first one we want to touch on is this one, which was from Bianco Research regarding the Bond Market “Move” Volatility. The move index is essentially, as far as I understand it, the VIX for the bond market. As you can see, it has spiked up quite high recently. And if you look back through history, the other large spikes of this magnitude were all during really, really bad periods in the economy; the global financial crisis, the COVID crash. And it’s just been a bunch of bad news. And I’m wondering what you make of this. I think the bond market is something we’re going to dive into pretty deeply during this episode. So we’ll get into some other charts here. But what does this tell you about what the bond market is saying about the economy and the macro landscape in general?

02:22 • Jason  

Yeah, I’ll give you my thoughts on that. I’m curious to see what Kev also has to say on this one, but the way I look at this chart, you’d be like: markets are exploding. And to some extent, some markets are starting to explode. We saw that with the Bank of England yesterday. It was the latest shoe to drop. But generally, the way I look at this is, yes, the bond market and things are screaming like, things are pretty close to breaking as we can tell. One big difference between now and these other periods in time is the breaking is occurring in other places right now. It’s not occurring really here. To the extent that it has been in these previous regimes of bond market volatility. 

03:16 • Jason  

So the question remains: Will Fed Chairman Powell and the Fed look at what’s going on in these other foreign markets as a sign of Oh, do we need to slow down and provide some relief with dollars? With the dollar strength at multi decade highs, it hit like 1.14-1.15 the other day? So I think the question pivots back to the Fed. There could be a few different takes on this right? I know a lot of people are saying, Oh, the central Bank of England’s panic pivot, in terms of its gilt market participation, is a precursor to the Fed doing it. And I can see that argument. But I also see the flip side to that argument very much. We saw how markets rallied yesterday at the first sign of the Bank of England blinking here and stepping in to help the solvency of their bond markets. And markets just rallied, you saw a bunch of leverage taken on right it, paints the exact picture that Powell was afraid of. As soon as I say something good, all of you degen’s are going to jump back into the market and start buying everything again. And we’re going to be at the same problem that we were before. It reiterates to me that the Fed has, at this point, run out of good options. And at this point, it’s thinking about what’s the least worst option we can do and what makes the most sense both for our mandate as well as for just financial stability with dollars.

04:58 • Brian  

Yeah, touching on The Bank of England events that happened yesterday real quickly for anybody who did not see what exactly occurred with that? And what are the implications of that? And how bad was that situation exactly?

05:13 • Jason  

I’ll give a high level and then can hop into shore up any loose ends that I might leave out here. Generally speaking, the Bank of England stepped back into the market yesterday to buy up to 65 billion pounds worth of government bonds with maturities 20 years or more. And I think they started with about a billion dollars. I don’t know if they used all of it or a little more, but it was roughly around a billion dollars they stepped in. And the reason was because a lot of these government bonds, which are called gilts, the prices of these bonds were dropping dramatically. Like as we’ve seen, we’ve seen Bank of England bonds, German bonds, we’ve seen our bonds, we’ve seen all these bonds sell off dramatically. And so this was brought to a head last week when England came out. They’re facing really high inflation, really tough financial positions. And it came with a fiscally loose budget. That just sends markets into a tail when they’re like, Okay, well, this makes no sense. Coming out with this fiscally loose budget while you’re trying to fight inflation and raise interest rates. It doesn’t make sense here. The market wasn’t buying it. 

06:29 • Jason  

So then this, this caused that huge dramatic sell off in gilts last week, and then this caused a liquidity crisis in this market simply because you have what are called liability driven investment funds or LDIs, that are huge buyers of these bonds. But what they do with these bonds is since they’re generally very good collateral, they use these bonds as collateral to raise more money and buy more bonds and other assets. So then as the prices of these bonds go down, these leveraged, or liability driven investment funds, which are leveraged have to either come up with more collateral, or sell off assets to maintain their margin requirements and things like that. So this culminates in what we see, you see that huge sell off in this market. You see risks of insolvency to other institutions that hold these instruments as they’re selling off, such as pension funds, and things like that. So it puts the Bank of England in a really, really, really tough spot, right. So they stepped in, in the short term to shore up the solvency of this market, and to make sure at least the short term solvency here was able to act as it should. I don’t think this is a long term thing. 

07:51 • Jason  

We saw many of these like short term solvency programs, in previous financial situations or stressful situations come into play. And you still see knock on effects later on. This is just a short term stopgap so companies don’t go bankrupt or insolvent unnecessarily. So yeah, and reading through some threads last night, some news articles after all of this had happened and some hours had passed. The general consensus seems to be that this was actually a pretty bad thing that could have happened yesterday had the Bank of England not stepped in to provide the short term liquidity relief in these markets. I wasn’t really around for Lehman, in the sense that many, many of these older bond market traders were but that was the way that they were describing the likeness of these two situations had this played out without Bank of England intervention. So it should be really interesting to see how this plays out. The way I look at it is the Bank of England essentially paints a ta