Perspective on Risk - May 9, 2022
Brilliant Rift; Margin Calls; Inflation; Financial Warfare; Deglobalization; China Reading; Climate Change; Behavioral Science; This Weeks Recommended Podcast; My New Favorite Substack
No big picture thinking this time; just a collection of updated information.
Brilliant Rift
Elon Musk’s Billionaire Games - Between the Scenes | The Daily Show (Youtube)
Trevor Noah brings the truth
Margin Calls
We’ve simultaneously got the potential for large margin calls as commodity prices rise, and a declining value of USD collateral as rates rise. You don’t raise rates so quickly without something breaking. I imagine there’s quite a bit of trades being termed out - extend & pretend. Interestingly, the Treasury has been cutting bill issuance. Something will break, hopefully nothing major; guess we’ll find out in about 6 months.
A Bitcoin margin call. (Fortune)
If the world’s leading cryptocurrency drops below $21,000, Michael Saylor’s MicroStrategy will be forced to pay up
Inflation
Fed's Kashkari Reveals an Uncomfortable Truth (Bloomberg)
Basically, if we don’t resolve the supply issues, demand will need to be constrained to prevent inflation; the worst of all worlds (higher rates, contracting demand)
Global Supply Chain Pressure Index: March 2022 Update (NY Fed Liberty Street blog)
The Pace of China’s Trade Slowdown Is Coming Into Focus (Bloomberg)
Saudis Say Low Refining Capacity Causing Fuel-Price Jump (Bloomberg)
Financial Warfare
Maritime Insurance, Russia, and the Ukraine War (Youtube: Zeihan on Geopolitics)
Deglobalization
China will step up infrastructure construction to boost growth - President Xi (Reuters)
Exactly the opposite of what they need to do
Where Do We Find The Next $10 Trillion (Milken Institute Conf.)
Top Infrastructure Needs: Electrification as part of Decarbonization, Grid Edge, Flood Infrastructure, Digital
China Reading
Chartbook #118: China's growth prospects (Adam Tooze)
Will China catch up with the US in terms of GDP in terms of current dollars? It is a simplistic question but that is the nature of the beast. GDP is a brute force aggregate measure and it permits one to easily sketch competing scenarios.
Hofman’s answer is, maybe. If China takes advantage of its many opportunities, it could easily overtake the United States by the mid 2030s. That depends on choices made in Beijing and on broader political economy. The big downside risk is not so much of uncoupling (on which Hofman is reasonably optimistic), or stagnation, but of a major debt crisis that could cripple growth. Either way, there is no determinism here, politics and political economy matter.
Does China have hidden reservoirs of growth potential? (Noah Smith)
Anyway, to sum up, the continued bull case for Chinese growth rests to a large degree on optimistic assumptions about two things:
China’s ability to counteract extremely unfavorable demographics by having old people stay in their jobs longer, and
Xi Jinping’s ability to invent whole new and wildly successful forms of industrial policy.
I don’t think I quite buy this case just yet.
Climate Change
"The Emergent Political Economy or Climate Change" (Santa Fe Institute 2022 Science Board Symposium)
Current global price of carbon: $2/tCO2
Optimal US Cost (moderate constraints): $8-11/tCO2
Behavioral Science
Temptation Bundling and Behavior Change with Dr. Katy Milkman (Decision Education podcast)
This Weeks Recommended Podcast
Epsilon Theory on Tape: The Three-Body Problem (Soundcloud)
Bees, derivatives, and the basis risk bees bear.
No closed form solution for turning basis uncertainty into basis risk.
My New Favorite Substack
Those who know me know that I like to look for evidence that contradicts my held position. What The Other Side Is Saying by Nathan Bork is dedicated to trying to lay out the best arguments for each side of a challenging topic.