Monday, March 29, 2021

The Archegos Domino

In a recent post I rang the alarm bell for Contracts For Difference (CFDs), a so-called derivative product that allows for enormously leveraged bets on anything from stocks, FX and commodities to whatever moves.  Such “products” are very old, they were the staple of all bucket shops in the US back in the late 19th and early 20th centuries.  You can read all about it in Reminiscences Of A Stock Operator, my all time favorite book on markets.

Guess what? A private hedge fund (an animal also known as a Family Office), called Archegos (Greek for Chief) just blew up, as such bucket shop CFDs turned sour.  Its prime brokers (Goldman, Nomura, Credit Suisse) had to liquidate $20 billion in shares (real ones, not the bucket shop kind) to cover massive margin calls. They, too, are expected to incur losses north of $1 billion. (Update: losses now estimated at $6 billion)

The impact of such large forced real sales (ie not the algo nonsense volume) was large, indeed: Stocks such as Viacom CBS, Baidu, etc were down as much as 30%+ in one day.  

One time event? Maybe, after all a hedge fund blowing up is not the real news here, it happens all the time.  The important news is in the tape: Archego’s brokers had to dig all the way down to -30% to -40% to unload a rather middling amount of shares; $20 billion may sound like a lot, but with market capitalizations in the trillions it should have been a drop in the bucket.  But, it obviously wasn’t.

What this means is this:  THERE ARE NO REAL MONEY BUYERS OUT THERE.  The market is very, very, very thin. 

Archegos is, I’m afraid, but the first domino to fall.


  1. *the link to the fund below up news is dead Hells.

  2. Family Office blowup = the billionaires bringing down the very system that created them. Poetic justice black swan. Though the S&P500 is still close to its all-time high. So no real general damage done for now...

  3. Dear Duck,

    I have a problem with my vacuum cleaner:

    Remember Marx? (Simplification) Since capital growth is exponential, running a capitalistic system means that the interest gained on capital will cause all money to be vacuumed up by one person.

    Maybe this is already happening. In that case, printing money does not cause inflation, because the vacuum cleaner will suck everything up....

    What is the cleaning lady doing with all that money?... Well, I think she might be using it to balance her portfolio of ever increasing asset values.

    Does this mean we can (in fact) should print more and more money, so that normal people get to touch it at least once before it is vacuumed up? Hey magic. =)

    Best Regards,

    1. You laugh, and rightly so... but they have already given this a “legitimate” economic name: Modern Monetary Theory.
      Google it, it would be a real joke in more rational times... but they mean it, and they are obviously using it 😱😱

    2. laugh... is that the same thing? If so, I think my explanation is better... =)

      If I can squeeze out the time, I will play with MMT over the weekend and see if something interesting comes out.

      Thanks Hell =)

  4. CMT: Chicken Monetary Theory

    Consumption collapse is a well studied problem, to which MMT suggests money printing as an answer. In this scenario, it is posited that there exist a free-lunch, in which the printed money will not cause inflation. At the time of this writing, this empirical finding does seem correct. However, this is so un-intuitive a conclusion that most people are hesitant to accept it. This leads us to put forward CMT, a theoretical model for explaining the empirical evidence without resorting to the free-lunch hypoothesis.

    This is written by Chicken, after careful study of Hell’s blog and can be considered an attempt to formalize Hell’s intuition that MMT is such a stupid theory that only the current academics could believe it.

    CMT is a (variant?) of MMT, which shifts the focus from the near-zero interest rate bound (NZB), to the case where most of the money supply is used to generate passive income (through stocks, bonds, real-estate) (MPI). NZB and MPI tend to co-occur but we feel that the latter, MPI case, is the causative agent of NZB. By interpreting events through the lens of MPI, CMT allows for simpler, more direct analysis.

    Observe that money has an ability to passively increase capital. Thus, in an MPI scenario, with large amounts of money being deployed for passive income generation, the compounding effect will act as a vacuum-cleaner which sucks the money supply from main-street. This has a strong deflationary impact, as the man-on-the-street will lack the means to consume and thus support asset values. In the extreme case, this can cause the price of assets to collapse.

    1. What does MPI stand for AKOC? Nice theory, yes, inflation is avoided by flowing into financial assets, side-stepping Main Street completely. No?

    2. Yes... exactly... inflation is stopped by "the money being used for passive income".

      I was thinking of MPI as "most money being used for passive income". =)

      Btw, I re-write it in

      I thought I would keep some permanent post of the idea which we can slowly refine. =)

      Thanks camabron.

    3. No, thank you akoc! Will read it up, thanks for the link!


  5. As mentioned in the beginning, this scenario is also studied by MMT, who propose that the deflationary impact can be alleviated by printing money. Further, since the original environment is deflationary, money printing will not cause inflation, creating a free-lunch.

    CMT also suggests that printing money will have little impact on inflation; with the vacuum effect causing printed money to be taken out of the system and thus, limiting its inflationary impact on main-street (it may affect asset prices). However, in CMT, this vacuumed money will be added to the investment pile. This in turn, makes the vacuum effect stronger, forcing us to make a choice between even more aggressive money printing or an even bigger crash.

    In theory, CMT allows that we may permanently avoid both inflation or a crash by printing the appropriate (but growing) amount of money. However,
    as the vacuum effect grows stronger, it will mean less and less “original money” flow in main-street and more and more of what money there is on main-street would be derived from printing. If carried on ad-infinitum, this would severely weaken free-market forces, with profits and losses not being decided by quality of idea or product but by which direction the government would chose to direct the printed money to. Since the government is now the principle source of reward, energies that would be directed towards free-market enterpises, would not be directed towards trying to control or manipulate the government. Creating politicization in many spheres. In the extreme case, this may also result in everyone becoming a “government employee”, earning a passive income without working. Interestingly, UBI is a proposal that is currently being debated.

    By making the deflationary mechanics more explicit, CMT shows that the trade-off for printing money is not inflation but the weakening of market forces and the consequent lowering of productivity and capital miss-allocation. Taken to the extreme, this will likely, to also create inflation, when the system is no longer able to satisfy basic needs. However, this is likely an end-game scenario.

    If CMT is correct, the current monetary policy of pursing money printing until an inflationary stop-sign, is extremely dangers. It is possible that when inflation actually occurs the entire economy is already in terminal decline.

    By Fried-chicken (the result of putting a chicken in hell).

  6. I changed to a pompous academic style for fun... but more seriously, think CMT might be right?

  7. If CMT is true, we cannot wait for inflation to stop the printing "naturally". Political action is needed to force the printing to stop as soon as possible.

  8. Hi Hell,

    In case you found the previous post too loose, I have sharpened my thinking.

    My intention is to keep updating it until as the theory gets better.... or abandon it if wrong.

    Best Regards,

    1. Interesting concept. Yet, I think I will stick with monetarist axiom: Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output” Milton Friedman.

      But we must also explain the years of extremely low inflation, somehow.

      IMHO it’s all about China (plus a couple more low cost producers of consumer goods). China has kept its export prices artificially low, despite a rapidly rising domestic living standard. They do it by keeping their yuan FX rate low AND by accepting dollars for payment (ie lots and lots of Trasury bonds).

      When this ends - and it will - inflation in the West will soar.

    2. Hmmm... thanks for the reply Hell.

      I always felt Friedman had some belief about markets being somehow natural. I am not sure I subscribe to it. After all, to maintain a market, one must posses sufficient force; else why not plunder rather than trade.

      I think deep in my heart, I consider trade and markets as a continuation of war... and war as a continuation of trade.... money?... that is an illusion, a shadow on the wall.

      Btw, this your fault... It came from reading all those books you recommended.

      I read memoirs of a stock market operator.... aye... it is a good book. He was an instinctive man like yourself (and myself)... we feel the truth first and make the reasons up later.... (I am also explaining myself to you camabron) =)

      thanks for sharing your instincts, hell. i habitually argue everything round and round.... but deep inside I always believe that a logical argument does not make you right... nor does an illogical one make you wrong.... you just need to find the logical explanation for what you feel.

      I know, I know... its a very dangerous way to think... but if you operate on the edge of the unknown, the dangerous way is often safer than the safe way.

      Take care Hell, I will think about what you said.

  9. So Chimerica is still going strong Hells?