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Newsletter - 10/15/2023

While all eyes are on the conventional war developing in the Middle East, I remain focused on the real war, happening in the financial markets.  This is not to say that I have no concern or care for what is occurring in Gaza - you know I hate the loss of innocent lives for the benefit of the ruling class.  But ultimately, the war there will have no negative effect on the US economy.


The Week in Review

Purely from an economic and investment standpoint, the war in the Middle East will have no effect on the US economy.  The US imports nothing from the Middle East that is currently at risk.  Oil you say?  Those imports are not at risk as I will discuss below.  I am speaking purely from a macroeconomic standpoint here - as it affects the markets.

The atrocities, on both sides, are resulting in a tremendous loss of life.  But for now, they are contained within a part of the world that the US would love to see burn to the ground.  Especially if it burns to the ground without any loss of US life.  Further destabilization of the region only serves the US not harms it.  

While hearing that Saudi and Iran holding a first ever phone call might be alarming, it is a big fat non-issue because at the end of the day, the differences between them are religious in nature and will never be resolved.  Same goes for Egypt and Iran.  Or Jordan and Saudi.  Or all of them and Palestine.  Any of these countries can sign a "Peace Treaty" but none of the citizens will abide by it.  The Middle East is and always will be a region of conflict, and such conflict serves the US purposes of global control.

Perhaps this is why there has been such a sanguine response in global markets to the current conflict.  While, yes, an oil embargo by OPEC would damage the US economy in the short term, and markets would react accordingly, at the end of the day, because the US wields the ultimate weapon, further conflict is merely a sideshow to the real battle occurring.

When faced with geopolitical events such as these, it is very easy to take a seat in the echo chamber of MSM and reports out of the conflict region and start to extrapolate their effect on the markets.  I try to do this every minute I am awake.  But I strive very hard to step back and analyze what the "real" effect will be on markets, short term and long term, and everything in between.

The most consequential thing that happened this week occurred on Friday: the +20% move in the VIX.  The second most significant thing to occur this week was the "no-bid" 30 year bond auction.  And the third most significant thing that occurred was lack of any FED fingerprints in the currency and interest rate markets.  Let's take a look at each.


As I've discussed in live chat, the sudden jump in the VIX was interesting.  While I am of the opinion that the it was due to something "underneath" the markets and not the Middle East conflict, the sudden rise caught market participants off guard.  Immediately theories multiplied as to the "why."

But upon further reflection after I stepped out of the Echo Chamber of Fintwit and the MSM, I have arrived a different conclusion:It doesn't matter because it is not statistically significant.  The VIX trading right below 20 does not indicate significant risk insurance positioning. 


While yes, the move was quick and the level relative to recent levels was out of the ordinary, the VIX at 20 is not a level that historically has indicated significant risk premium.  

In fact, historically the VIX has traded between 20-22 and the markets were not in a flight to safety mode. 

Take a look at the chart below and it's very easy to see that VIX at 20 has not been a significant event: it has been the average.

vix historical.png

Therefore, I believe that the VIX move was merely a beginning of a reversion to the mean during a period when market participants have been largely unhedged from a risk perspective.  While it will be easy to "curve fit" some future event as the reason for Friday's jump and assign a correlation, the fact that market participants are freaking out, including me, tells me that assigning such a correlation would be wrong.  Therefore, I am not overly concerned with the jump.

"No-bid" 30 year Bond Auction:

First of all, "No-bid" does not mean the FED didn't find any buyers.  What it means is the FED did not purchase any of the bonds for themselves.  This is sort of a big deal because if you have been paying attention, and I know you have, the FED wants to keep interest rates down and one of their methods of doing this is by buying bonds, with the help of Japan et al, which makes yields go down.

The fact that the FED did not bid for any of the bonds means that they were willing to allow the 30 year rate to rise to the level of what market participants were willing to pay, which was almost 50bps higher than what they had been offered at.

The question is why?  Certainly the FED has not decided to throw in the towel regarding interest rates.  Perhaps the Fed has decided to intervene less on the long end of the curve, or long term interest rates such as the 30yr, and instead stay focused on the shorter durations.  But why?

Regardless of what they say, the FED knows we are in a recession and that its going to get worse.  But in their hubris, they also believe they can engineer a quick exit from said recession.  Therefore, perhaps they are choosing to use their bullets to manipulate the shorter end of the yield curve, which is where credit cards and consumer debt is pegged to.  Also, since they think they can engineer a quick exit, they also know that long term yields will drop naturally in that event.

Where's the FED:

This is what really grabbed my attention.  The FED was nowhere to be found on Thursday and Friday.  Usually they are moving in the currency markets (the "FX" markets) and the bond markets.  But I couldn't find their fingerprints anywhere nor could other participants.

There is no way to know why this occurred but my mind does go to what the endgame could be.  And its not good.

If the FED is preparing to drop another QE bomb on the markets, then they know that they hold the ultimate weapon and therefore there is little need to stay as active as tey have been.  If the FED has decided to cross that Rubicon again, it will be terrible for you and I at ground level but will cause another run up in risk assets.  Bankrupt the US further but everyone's account statements go up, bigly.

SPY Commentary


Last week I said this: "The SPY has found support at the 420 level. And it has overhead resistance at 430.  Those are the two levels to watch."  

Early in the week the 430 level was broken and Bulls tested the 440 level and failed.  The reversal was confirmed on Friday BUT it was entirely a technical reversal in my opinion.  The 430 level is still the level that the Bears must take out.  

If the Bears fail then we will have a new channel of price consolidation between 430 and 440.

My best guess is that barring an expansion of the war in the Middle East, this is what will occur.  And it will drive both Bulls and Bears crazy, which supports this opinion even more.  If the 430 level breaks then we go down to 420.  I won't get excited unless and until the 420 level is broken.  Until then, I believe the market is treading water due to the war in the Middle East.  This also buys the FED time.  If the FED refrains again this week from intervening in the markets, then that tells me the FED at the very least, has no problem with the current market levels.

NOW, all of the above is off the table if an outlier event such as bank failures or an expansion of the war occurs, or some other grey swan.

It's good to be King:

Those thinking that the US is in danger of losing its status as the King of the world's economy are completely misguided.  While the US has certainly damaged its reputation as the cultural powerhouse of the world, it is in ZERO danger of losing its status as the economic leader of the world.

This graph shows that the US dollar remains THE only game in town when it comes to Nations' reserve currency holdings.  Nations hold the USD as a reserve currency so that they can trade globally.  They also use the USD to decrease the value of their own currencies which makes their exports cheaper which is supportive to their own economies.

If a country decided to go off the USD then they would effectively lost the ability to control export prices, finance their own debt, and generally do any business with the rest of the world.  

Russia was banned from SWIFT and the only reason they have prospered is because they are using "back channels" to fund and execute trade.


For those that are of the opinion that the US has lost power, the following graph shows that the USD is still the de-facto leader.  In fact, over the past 50 years, that figure has actually risen from 50% to its current level of 59%.

What's more, if you add up the first four countries, all allies, the US controls almost 90% of the world's currency reserves.

Finally, for those who believe that China will take over the world, that's not going to happen from a financial perspective.

The chart at the left shows how much the Chinese hold in foreign currency reserves, mostly USD by a long shot.

If the Chinese decide to FAFO the US can simply decide to weaken the USD to a point that it makes Chinese exports more expensive, and collapse their economy.

And for those that think the Yuan or some new global currency will replace the dollar, well in order for that to happen, the Yuan would have to be allowed to trade freely - which the Chinese will never allow.


The takeaway here is this: the ONLY way that the world can effectively attack the US is through conventional war.  By attacking the US, directly.  The rest of the world is completely beholden to the USD and has no way to cause any significant damage to the US empire.  Therefore, that leaves them with the only effective tool being war.  War against US allies and satellite states or direct confrontation with the US.

And this is important: This is why the US has no problem picking fights with Russia, with China, with anyone.  Because the US knows it is THE only bank in town and if it wants, it can bankrupt a country quickly and easily.

This is extrememly frightening to me.  It supports the theory that the US will continue to abuse its position as the leader and will subjugate any country that it feels like deserves it.  It gives the US free licnese to hurt anyone, anywhere.  At some point, you can only kick people around for so long until they rise up.

In order for this enemies to band together, they must replace each other with a new common enemy they hate even more.  If the world ever decides that they hate the US more than each other, then it will be truly game over for all of us.  Because the US would rather burn it all then not be the leader.

Also, that is why I expect more terrorist attacks on US soil.  But that is a conversation for another day.


The market public was celebrating the new "short sale" reporting rule on Friday.  However, as it is with everything the SEC does, its a bunch of bullshit that doesn't really solve the problem.

The new rule is designated the 13F-2 rule and is supposed to make it harder for firms to abusivley use short selling to manipulate a stock.  Yeah - it doesn't.

I am not an attorney (because I have a soul) but reading through the rule, my initial response is: its seriously lacking.  I oringally posted this on Twitter so for those of you that follow me there, it will be a review.  For those of you that don't, what the hell are you waiting for??

Looking at the rule, here's the problems with it:

  1. A firm has until 14 calendar days AFTER the month in which it meets the threshold to report. That's a long time. Especially when the firms are able to trade in nanoseconds. This will not stop a firm from driving a share price down. They can still do so, cover, and then report it after the damage is done.

  2. The Rule does not require reporting of synthetic long or short positions.

  3. If a firm holds a convertible bond in XYZ and the conversion is based on a fixed dollar amount and not a share count, they could short the stock and receive more shares. The SEC noted that if the shorting activity is concentrated enough then the firm could avoid the reporting requirement by avoiding the reporting threshold for average position size. (page 285 of the rule)

  4. Firms still have a window of 3 days to screw around with a stock before they are required to report due to T+2. (See below also). A firm could short the crap out of a stock and as long as they have covered by the settlement date enough of their short position to avoid meeting one of the "gating" requirements listed below, no reporting is required. In fact, a firm could do this over and over again and never have to report.

The big issues are the length of time to report and the threshold requirements and the T+2 "loophole."


There are two tests for reporting:

  1. A gross short position of $10m or more at the close of any settlement date during the month OR

  2. 2.5% of total shares outstanding.

Others may look at it as "well its a start" but seriously, if you think this is just a start, then you are going to be waiting a looooong time for any other action. The SEC has fulfilled their requirement set by Congress with this rule.

And the rule does not speak to many things but one that I was pondering was what about "Dark Pools?" Primary brokers use these to run large block trades anonymously using algorithms - does this rule cover those trades? If it does, then that would be interesting indeed.

Oh, one more thing: good luck trying to decipher the reports. Oh, and one more thing - not all stocks will qualify to be covered under this rule. Non-reporting stocks don't qualify so think low priced stocks - they can still be easily manipulated without any requirement to report the short selling.

The rule does provide me with stocks to avoid:

  1. Non-reporting

  2. Any stock with a convertible bond out there


I will be watching the same things I was as last week: 10 year yields, the Japanese Yen.  But  I will also be watching the regional banks this week as they report earnings.  There is no way that ALL of them will be able to gloss over CRE losses on their balance sheets; remember, it will only take one domino to start the rest falling.

And of course I will watching for the FED - to see if they get back to business as usual.

I remain steadfastly of the opinion that the market is going to go down.  Bigly.  Waiting is always hardest part and guessing what the trigger will be is near impossible.

Longs need to be nimble and shorts do also.  Remember that bear market rallies are the most violent rallies that occur.  It take much more conviction to be a bear then it does to be a bull.

I also will be keeping an eye on Middle East but ONLY as it relates to EXPANSION.  Any expansion of participants or geography will make market participants more bearish.

Finally, don't be surprised if QE2.0 is announced in the next 6 months with the ongoing warS as the reason.  The Fed will never admit it is wrong and increased spending due to multiple conflicts is a great "cover" and one that the US public still firmly gets behind, sadly.


I did a post on "How to Trade Macro Events" this week.

The Blog post library is here.


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Nothing above is investment advice nor should it be construed as investment advice.  It is offerred for entertainment purposes only.  Always consult your advisors before investing any money.  Do not "follow" or "mirror" any trade ideas provided.  Mr.NotAdvice is not a licensed or registered investment advisor.  Do your own research.

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