What’s life without 10X leverage?

Good morning humans. This is a really fun edition of the Tipsheet full of thrills and chills. I hope you enjoy the links.


Leveraged love

Let’s say, you have Rs 100 and you want to make money in the stonk market, you can’t do much, can you? But what if you had the option to borrow 100 times on your capital of Rs 100? You now have Rs 10,000. You still can’t do a whole lot with 10K but enough to buy some weekly Bank Nifty calls. This magic money tree is called, “Leverage”. If you use levered money to trade and things go well, you make a ton of money. But if shit goes wrong, you become a potential movie script.

Now, if you are a big hedge fund or a family office, and say you want to go long or short Apple. You need not always buy or short Apple Shares. What you can do is get the same exposure through an instrument called Total Return Swap (TRS). The advantage with a TRS is that you get a lot of leverage here and you don’t have to disclose publicly that you have positions in Apple. 

So, you go to a bank like Goldman Sachs and enter into an agreement. Let’s say the term of your trade is 1-year. You will tell Goldman’s Sack to create a one-year TRS on Apple. At the end of one year, Goldman’s Sack will give you the return of Apple+dividends for that period. In return, you will have to pay Goldman a fee, a fixed or variable fee like LIBOR+X%.

When you buy a stock, you have to pay the full amount. But the advantage of TRS is that you can lever up easily by just putting up say 20% of the total trade value. Enter Bill Hwang and his family office – Archegos Capital. Bill had extremely large concentrated leveraged (as much as 1-5) positions in several stocks like ViacomCBS, Discovery, etc. Bad luck for Bill, shit went wrong in his positions. So the prime brokers like Goldman Sacks, Morgan Stanley, Credit Suisse, Nomura, etc who manage Bill’s trades asked Bill for more collateral – more cash or treasury bonds usually.

This story is still developing and details are pretty scarce. But looks like Bill didn’t have any money. So the brokers or Bill might have been forced to unwind other positions to cover the margins. They went ahead with several large fire sales of stocks that caused wild swings in stock prices.

People familiar with the transactions say the answer is former Tiger Asia manager Bill Hwang. Late last week Morgan Stanley, Goldman Sachs Group Inc. and Deutsche Bank AG swiftly unloaded large blocks of shares in those companies and others, part of the liquidation of positions at Mr. Hwang’s Archegos Capital Management.

The sales approached $30 billion in value, some of the people said, and fueled a 27% plunge Friday in shares of ViacomCBS—an unusually large decline in a widely held, large-capitalization stock on a day with no significant company-specific news. Billions of market value in other companies were wiped out as the sales continued, surprising market participants who called the size and speed of these stock sales unprecedented.

WSJ

Didn’t end there. Because of Bill, banks like Nomura and Credit Suisse warned that they will potentially face losses to the tune of billions. O boy, Bill done fucked up real good.

Moral of the story, don’t be like Bill.

The Two Tiger Cubs at the Center of Friday’s $35 Billion Meltdown

Here’s my perspective from someone who has used TRS countless times over the years with several counterparties globally.

Stock Market Update: Hwang’ing On By A Thread

Both “involuntarily selling to meet obligations” and “forced deleveraging” are like having your tonsils removed through your colon.

A Korean top prop trader Bill Hwang was liquidated of his entire 15B position on over 80B gross notional exposure yesterday

“In almost every case of catastrophic failure that we’ve observed, we believe the root cause can ultimately be boiled down to one or a combination of just five factors. The five factors are 1) leverage 2) excessive concentration 3) excessive correlation 4) illiquidity and 5) capital flight” Zeke Ashton

Mastersinvest

Boaty McBoatface

This week a bunch of Indians and Egyptians managed to get a 400-meter long boat stuck in the Suez Canal. This is a big deal because 12% of all global trade passes through this narrow canal. Look, my working theory is this. These Indians are from Bangalore. More specifically South Bangaloreans and they were sick and tired of the traffic at Silk Board and wanted to bring global attention. So they decided to disrupt global trade. True Bangalore patriots.

Matt Stoller who writes about monopolies had a really nice piece on the Suez Canal mess.

The downside of such mega-ships should have been obvious. Ships like this, which are in effect floating islands, are really hard to steer in tight spaces like ports and canals, and if they get stuck, they are difficult to unstick. In other words, the super smart wizard financiers who run global trade made ships that don’t fit in the canals they need to fit into. The rise of mega-ships is paralleled by the consolidation of the shipping industry itself. In 2000, the ten biggest shipping companies had a 12% market share, by 2019 that share had increased to 82%.

One hundred large vessels are lost every year because the maritime industry won’t apply the lessons of aviation.

Seldom does a ship get stuck in the Suez (though it does happen every few years), and seldom does a maritime disaster attract such attention. But even though the world is incredibly dependent on ships like Ever Given—a reality that pandemic-related disruptions have suddenly made visible—major maritime incidents are surprisingly common. According to the insurer Allianz, 41 large ships were lost in 2019, and 46 in 2018. Over the past decade, about 100 big vessels have been lost annually.

A History of Boats, Canals & Finance



Where innovation happens

Another interesting piece by Matt Stoller on innovation. This one is for the “India growth story” people.

In an authoritarian system it will be all too easy for incumbent businesses, even those that started out as plucky outsiders, to raise barriers to entry against innovation. China’s spell at the top of the leader board for innovation will come to an end. Maybe not this decade, but soon.

Who then will pick up the challenge? My money is on India. If it can sort out its rickety infrastructure, corrupt administration and chaotic communal relations, India has enormous potential: a vast country that speaks English, allows a measure of freedom, values education, and has a long tradition of enterprise and spontaneous, bottom-up development. Then the innovation will have come full circle, back to where it first started.


Life beyond tickers

Feels a bit silly to even write this. But unless you are an investment professional, there are zero benefits to constantly fussing over the moves of markets, stocks, and news headlines. Robin Power wrote this piece with some commonsensical advice that we all need to hear once in a while.

Instead of trying to second guess those prices, you could make your first step just accepting them as the market’s best estimate of future returns and then build your portfolio around them, without trying to time the market or bet against it. 

By using the information that’s in prices and diversifying as much as possible, you’re increasing your chances of success. And you can then spend your spare time fishing or listening to music or dining out with friends instead of worrying your way through the newspaper every day.

It’s called getting a life.

Coincidentally, I wrote something on the same topic, sorry for the shameless plug😅


Chartgazing

If you are freaked about the massive 1.6% fall in Nifty 50 last week, here’s where we are in this bull market 👇

Charts and Thoughts on the Current Market Scenario

This is why Technical Analysis works


End of the road for equity analysts

The equity analyst job used to be one of sexy jobs that we all coveted. Largely because of the glamorized movie and TV treatment. These guys used to be highly paid too. This is also the most common path to becoming a fund manager. But it looks like these jobs will soon be extinct. Morningstar is automating the job of generating investment reports. How long before humans are totally replaced?

The machine-generated reports that began rolling out this week set out the rationale behind Morningstar’s so-called analyst rating on a fund, which run through gold, silver and bronze to neutral or negative. The ratings, similar to Wall Street buy or sell recommendations, are separate from Morningstar’s more famous star ratings system, which just measures funds’ past performance.

Computer-generated ratings apply to a further 37,962 funds that account for $14tn of assets under management, and it is these funds that will now start to get written reports penned by robots.


You can love me or hate me, but you can’t ignore me

This week’s edition of Freefloat dissects NFTs.

It’s hard to understand the popular culture that makes something a collectible. But, what’s definitely understandable is – what makes a digital artifact a limited edition. The NFT standard says nothing about NFT’s being limited edition. It just says that there should be a way to create NFT’s, transfer ownership, and show their uniqueness. So, we have to trust the NFT platform that it will somehow enforce the limited edition nature of these tokens.

If you are sick and tire of not understanding this whole crypto, NFT bullshit and want to understand what the hell these things are, start here👇

What the F**k is Bitcoin anyway?

Cryptoassets: The Guide to Bitcoin, Blockchain, and Cryptocurrency for Investment Professionals

On the Bitcoin is making climate change worse debate

Crypto and Climate Continued

A gaggle of links

Investing & markets

Interest Rates, Earning Growth and Equity Value: Investment Implications

A Meta-Strategy Is Absolutely Necessary

Learning From Cornelius Vanderbilt

Stalking Bubbles: Paul Tudor Jones, 1987-1990

Economics

Inflation hawks and doves are at it again. The hawks warn we’ve done too much and risk inflation. The doves counter that doing too little will scar people.

The Containerization of the World

There’s a fun podcast on just how profoundly containers affected global trade.

Fintech & startups

Cash App is Culture

Inside BitClout, the Dystopian Social Network with Big Backers and Vocal Critics

Stupid virus

Yes, experts will lie to you sometimes

Oddities

How Fanta Was Created for Nazi Germany

Visuals

Quartz

Videos

Panic: The Untold Story of the 2008 Financial Crisis

In 2 years, this is how your managers will look like. Boston Dynamics: Inside the workshop where robots of the future are being built.

Tweets

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