“Short sellers are the market’s police officers. If the idea of short selling were to go away, the market would levitate even more than it does.”
— Seth Klarman
What’s in a “narrative” anyway?
Over the past few weeks, we’ve been preoccupied with summer stuff… a few conferences…college visits… getting new apartments set up… some beach time for the kids (even though our own more-Northern skin hides under hats and umbrellas).
We freely admit that we took our eye off the ball a bit. Nothing compared to trying to get stuff done during August in France… but enough to be surprised upon our return.
During our summer siesta, the narrative regarding America’s “most telegraphed” recession in history has, well… shifted.
A month ago, the Chicago Mercantile Exchange’s (CME) FedWatch Tool dinged a 52% chance that interest rates would hold steady until March 20, 2024. The only chance rates would be brought down is if American banks and corporations showed significant stress through “contraction” … or recession.
Today, according to the CME tool, the Fed is likely to keep rates high until May’s meeting next year. The minutes from the last meeting even indicate more rate hikes are likely either during the next FOMC meeting September 19-20 or during the October 31-November 1 meeting.
Jerome Powell indicated they didn’t think they’d “whipped” inflation yet, as then-President Gerald Ford proudly boasted he’d do in 1974.
So… the most-telegraphed recession will have to wait a few more months.
Here’s Shah Gilani from our recent Wiggin Session:
As rates have been working their way higher, the problems that existed for banks in March have gotten worse. The value of the loans on their balance sheet, the value of the securities they held, and yes, U.S. treasuries —risk-free treasuries — the value of those treasuries that they held… all that comes under stress.
Rates are continuing to tick up — and [the Fed tells us] we’ll see them going higher for longer now. The value of those loans on bank balance sheets, the value of the securities that they hold are under stress already. Treasuries, for example, that they hold yield 2%, when you can get five, 4% now in a 10-year… so they’re already underwater.
The problem that banks are having is, as rates continue to tick higher, their balance sheets look worse. And worse.
In other words, we haven’t seen the end of the banking crisis of 2023.
In fact, the Fed’s plan to keep rates “higher for longer” is a recipe for what’s known as “balance-sheet recession.” With consumer’s burning through their pandemic savings and racking up credit to keep up “appearances,” big consumer stocks, like Target (TGT) this morning, are projecting lower earnings for the first time since 2019.
At the rate consumers are getting tapped out, the question regarding a recession now is “when-and-not-if.”
Stock losses accelerated into the close yesterday after the minutes from the Federal Reserve revealed “most” officials still see upside risks to inflation.
So, what do you do?
We asked the same question of Shah. He's convinced of two things: first, that the Wiggin Sessions are host to a gaggle of “gloom and doomers,” perhaps, but that he’s also convinced there are — always — ways to make money in any market.
You can look at the VIX and tap on volatility signals for answers — or take a look at some substantial bets being placed by the “whales.”
A whale, as you may already know, is a trader or hedge-fund manager who may or may not agree with you on the market’s direction, but when they put their bets down it’s in the billions.
Well, the whales are also back in town. We might be back from Memphis and Boca Raton. They’re back from their toodling around the Mediterranean in their uber yachts.
One of them… Michael Burry of The Big Short fame, played by a scruffy Christian Bale in the movie… just bet $1.6 billion on a stock market crash… sort of.
Burry placed bets that the S&P 500 would drop below 4,000 and the Invesco QQQ ETF (QQQ) would drop below 300.
If you want to get technical, his hedge fund, Scion Capital, made the bets by buying put options on the SPY, an ETF which tracks the S&P 500, and the aforementioned QQQ, which tracks the top 100 stocks on the Nasdaq.
It’s not clear the amount Burry paid for the puts. Or the expiration date. He did lay down a combined total of $1.6 billion on the two trades.
The bets Scion Capital made represent a formative action against the American economy.
Because Burry made a boatload of money in his famous big short — he made a personal profit of $100 million and some $700 million for investors in his fund — a lot of traders are following his lead.
You could even say that since 2008, Burry is one of the main actors that has made betting against the American economy “cool.”
You might remember a scene we observed at the New York Stock Exchange in April. From the April Missive:
On the wall a picture showed four young men— traders, presumably— gussied up in suits with ties pulled out from their necks in tired exasperation, half the frame covered by a Wall Street Journal paper emblazoned “Market Bloodbath.”
But they didn’t want to hide their faces. In fact, the photo gave the impression that losing money was actually something to be proud of, getting in trouble for some perverted spectacle.
The economist John Maynard Keynes once called this market dance a “beauty contest.” Keynes, in his General Theory of Employment, Interest and Money, 1936:
It is not a case of choosing those faces that, to the best of one’s judgment, are really the prettiest, nor even those that the average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligence to anticipating what the average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.
How predictive can a whale like Burry be?
You may also remember, he recommended in January 2023 that people “sell the market” … only to recant and apologize in March.
Some other notable bears right now… the usual suspects, Jeremy Grantham and David Einhorn.
So it goes,
Addison Wiggin
The Wiggin Sessions
P.S. Oh, but Fear of Missing Out (FOMO) creeps in… and we have to admit we spent a fair amount of time yesterday considering options on SPY and QQQ ourselves.
Michael Burry, did, after all, make a lot of money subverting the market narrative once before. And you only really need one of those trades to go your way… hmmm…
This article was originally published on The Wiggin Sessions.
About the Author
Addison Wiggin is an American writer, publisher, and filmmaker. He has been covering the financial markets, the economy and politics for three decades. An acclaimed New York Times best-selling author, his books include: The Demise of the Dollar, just released in its 3rd Edition covering the dollar from the "bailouts to the pandemic and beyond. Mr. Wiggin is also the co-author, with Bill Bonner, of the best-sellers Financial Reckoning Day, Empire of Debt. He wrote The Little Book of the Shrinking Dollar in the Wiley Little Book series. Addison is also the writer and executive producer of the documentary I.O.U.S.A., an exposé on the national debt, shortlisted for an Academy Award in 2008. He lives in Baltimore, Maryland with his family. Addison started his latest project, The Wiggin Sessions, powered by The Essential Investor, in March 2020. He films from a homegrown studio in his basement.