Was the Japan carry trade a nothing burger?

What looked like the beginnings of a huge market crash on Monday —and make no mistake, the numbers were scary even for market veterans—seemed to dissolve into "nothing burger".

Are you not entertained? —Maximus Decimus Meridius

It's worth mentioning that institutions bought the dig aggressively while retail was unable to access their trading accounts (yes, they are laughing at you)

Even though it was short lived, the acute spike in volatility was real and should serve as a warning of the current fragility of functioning markets.

The wrong takeaway would be to assume they'll always be able to put the genie back in the bottle.

What happened?

The collision of heavy leverage with sudden, unexpected market movements.

Write that sentence down because —even though they managed to contain it this time— that is the very phenomenon that could trigger the next market dislocation and it is by no means limited to the Japan Carry Trade

Specifically, Japan's Central Bank (BOJ) tried to raise rates by 0.25%, and that was enough to f*ck up the market because there was TONS of leverage tied to financial strategies that depended on Japan keeping a negative (or zero) rate policy.

In an unexpected and embarrassing about-face —Gov Uchida was probably refused a request to commit sepuku— the BOJ walked back their rate increase on Wed.

"We will not raise interest rates when financial markets are unstable…"
—Shinichi Uchida, Governor, BOJ

Even stranger, a few days later they also promised hinted they won't try to raise rates again this year.

Is it just me or does it sound like BOJ got a call from Sec. Yellen explaining they're not allowed to blow up the economy right before a US election?

But why is the Yen a US problem again?

Japan is now at the center of emergent worries — across everything, stocks, bonds, yen, credit, everything." —Stephen Miller, Grant Samuel Funds Management, formerly at BlackRock.

The weakness or strength of the Yen is important because Japan owns a LOT of USD denominated assets (including government debt, equities, hard assets, etc) and if the Yen gets too weak, Japan may be forced to sell some of these US-denominated assets in order to bring that money back home and prop up the Yen and contain local inflation.

If you want to understand why such a small change in an overseas market almost crashed the economy this is what you need to get:

the story from Monday is how quickly the entire spectrum of markets – stocks, Treasuries, corporate bonds, munis, currencies, and the derivatives complex – can dislocate into illiquidity

Quote above is from tweet below, which has a good link to a lot more info:

So, why did Bitcoin sell off so aggressively?

Some people like to say BTC is correlated to this or that market, not realizing BTC correlation to other markets changes over time.

But one thing BTC is —and I suspect always will be— highly sensitive to are liquidity crises.

A liquidity crisis occurs when there is a sudden, sharp decrease in the availability of credit or money in the financial system which can lead to panic and uncertainty among investors and borrowers, as they struggle to access cash or fund their operations.

One of the main features of a liquidity crisis is an urgent need for cash as traders get margin-called. Try selling real estate overnight, or gold bullion in size on a Sunday.

The bitcoin market's liquidity may not as deep as gold or oil markets but is available 24 x 7 globally, which means it's easiest (and thus first) thing to sell.

Luke Gromen calls Bitcoin "the last functioning fire alarm" in the market. Meaning, if you see BTC go down wildly, there's a good chance a deleveraging (usually followed by a liquidity crisis) is brewing.

Remember, wild price swings are often caused by (and always amplified by) leverage games. Trying to "overstack" (buying more you can afford) through leverage is a dangerous game.

Most long-term holders held tight as leveraged speculators were forced to sell.

To their credit, most ETF holders held tight too, good for them!

Of course, this makes even more sense when you consider the ETFs don't share BTC's liquidity profile (because they only trade during trad-fi market hours). Ironically, this point was absent in what would have otherwise been a banger from goldbug and anti-BTC engagement post professional, Peter Schiff:

And of course, the triple maxis are doubling down and getting ready to buy more.

Back in Fiatland

Craig Shapiro asks a good question: Who wants long term Gov debt under these conditions? Gromen: "idiots" (I'm paraphrasing a bit).

Gromen also connects the dots between the Yen crisis and last week's poorly received 10-Yr US Treasury auction, concluding the fragile balance required to keep markets from breaking not only makes sovereign long-term debt unappetizing but will lead to a point that can only be resolved by either allowing the markets to crash or firing up the money printer.

Epstein buddy and "Lolita Express" passenger ex Treasury Secretary Larry Summers says the quiet part out loud. Excessive debt is sapping US power

US debt's parabolic path to infinity and beyond has allowed interest payments to overtake military spending

The big takeaways from last week for me are:

• unexpected movements can easily upset the fragile balance of the markets.
• last week's deleveraging was an small preview, there is plenty more where that came from.
• liquidity crises can provide great buying opportunities if you have the cash, the stomach, and a trading platform that doesn't lock you out.

Oh yes

I almost forgot we're all about politics now. Kamala wants to reset her administration's stance towards crypto, so she started by reaching out to the sh*tcoiners because of course she did.

In a zoom call she did not attend they tried to pretend operation chokepoint was not a thing …that did not go well.

The rest of the newsletter has been redacted because I don't want to be arrested for WrongThink in the UK ; )

Price News

Bitcoin Surfing

After ending almost flat (despite a steep dive) last week, price is trying to reach for the Board ($61.4k), so far unsuccessfully.

Dip Fishing

After last week's swan dive price bounced back quickly and has been trying to regain the $60-$62.5k channel, %56k could still be in the cards.

Calm Chart

August remains red. I assume it'll remain so but it's hard to tell these days. PS. These kinds of resets make for very healthy soil for bull runs