OSL Trader View | Weekend Digest

Friday, September 4, 2020

Moving the goalposts

Lael Brainard, considered by many to be the most dovish of the Fed governors, outlined the new frontier of federal reserve banking in her recent speech. She laid out three adjustments the Fed has made in the way it tracks economic data and also the triggers that have hitherto called for action, namely: 

i) "statutory maximum level of employment as a broad-based and inclusive goal and eliminates the reference to a numerical estimate of the longer-run normal unemployment rate." - i.e. there is no target. They’ll run with the punches

ii) "adopt a flexible inflation averaging strategy that seeks to achieve inflation that averages 2 percent over time… Flexible average inflation targeting (FAIT) is a consequential change in strategy" - i.e. They have no hard inflation target and have thrown in yet another acronym in the works.

iii) "Committee will now seek "to mitigate shortfalls of employment from the Committee's assessment of its maximum level and deviations of inflation from its longer-run goal." - i.e. Admitting that the oft-assumed link between employment and inflation no longer holds since they’ve depleted their arsenal of tools to prop up the market. 

The takeaway is pretty clear. They are moving the goalposts. The narrative of “unprecedented recovery” will definitely show the other cheek in the coming months as businesses resume BAU (by hiring back their workforce) and with M2 ever so close to the 19 trillion milestone. Even “The Oracle of Omaha” has pivoted away to gold - something he has deplored for lack of yield (albeit exposure through a gold miner rather than the cheddar itself) and he has flipped out of US banks into a $6B position with Japan’s five biggest financial institutions. The charts may give you a hint as to where his head is at: 

Down 11% and $2.7T, followed by an admission of fault and uncertainty of the efficacy of these new rolling targets, dare it be said, the Benjamins are looking much riskier. These measures also reaffirm, with near certainty, that the Fed overlords will continue to have the pedal to the metal as they try to print away their problems. Goldman Sachs is looking for policy “lift-off” around early 2025 with most other projections inline. 

Uncle Sam is also coming out to get you on your crypto bits and bytes. Be it $1 or $10K, he will tax you. 

Some unsavory news, reminiscent of the flash boys during the GFC with their colocation tactics skimming off John Doe, has metamorphosed into “payment for order-flow.” They are paying your beloved Robinhood, TD Ameritrade and all the other retail brokerage platforms for the execution business which is bizarre as it should be the brokers paying the quants. Put it simply, they are paying to front-run your trades.

Social media channels in China were a buzz earlier in the week, with some leaked screenshots of the DCEP from China Construction Bank doing the rounds before the bank could pull it from their offering. 

The collapse

Login issues triggered by the second major outage at Cloudflare in two months had users of Robinhood and Charles Schwab among a handful of other retail brokers unable to connect users 


Turning to the world of mining:

  • In an effort to reduce some of the emissions from flaring (burning off by-products) while refining oil, one of the world’s largest energy companies, Equinor, is turning to crypto miners to make use of this unharnessed energy production and pollutant. It’s a great result given mining is so energy intensive. Tapping into this will reduce costs but moreover limit the environmental costs associated with the current practice of flaring at the same time. 
  • Did you have to do a quick double-take as well, to check if you’d heard Canaan CFO, Quanfu Hong, right? He described 2Q20 earnings as “another quarter of solid financial results.” uhm… they were never that solid...


Amidst a backdrop where Micree Zhan is blocking customer-bound shipments and MicroBT tapped out of 2020 deliveries, there was a massive vacuum that they could’ve filled had they played their cards right but considering the founder had cashed out in SIZE on this IPO with compounding losses as the company focuses on AI, wondering if the tape outs slated at state-of-the-art geometries will cut it. 

A double whammy for the miners as they just recovered from record floods to be followed up by Inner-Mongolia officials cracking the whip. It is well known that the vast majority of Chinese miners camp out in Chengdu during the wet season (Apr~Nov) and move out to prevent the local villagers becoming agitated as the reserve load diminishes from weaker currents hitting the hydro turbines as well as the uptake in heating demand, they pack up and head out to Inner Mongolia and Xinjiang. The big boys will find a home but many of the smaller players will be outta luck. 

Alts and DeFi watch:

Judging by the DeFi TVL top ticking at $9.5B earlier this week retracing back under the 9-handle, it may appear that the hype looks to have taken a pitstop. But that has hardly stopped the development as FOMO drags in the centralized venues who want their piece too - case in point, we saw Binance listing wBTC, and other various wrappers continue to facilitate migration of $BTC on to the EVM.

As is with the wallet providers who are all rushing to deploy staking services to deter the mass exodus into, in some cases, four digit APYs offered by the open-beta DeFi protocols. It’s mind blowing to think of the trillions sitting on bank accounts earning sub-inflation rates when there is an (albeit highly speculative) alternative that generates more than your average active money manager… go figure. 

There were some welcomed rumblings from our friends at IOVlabs, after a prolonged silence the team has announced imminent Chainlink ($LINK) oracles integration taking them one step closer to their vision of having dApps on the oldest, most stable, battle-tested Bitcoin network. They’ve even released a disclaimer of sorts for the upcoming releases. They too will be getting in on the DeFi by offering RSK swap on uniswap.

Some additional news that caught our eye:

Have a safe and pleasant weekend.  

OSL Trader View and Weekend Digest are contributed by Stefan Chu and Santiago Nazaretti



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