It’s been a while since I’ve written on anything macro; I’m probably not the most credentialed to write on it, but it is definitely a subject area of interest, so why not?
Last week we saw the forced liquidation of Bill Huang’s Tiger Cub, Archegos. Huang, a well-respected hedge fund manager who grew his AUM from $200 million to over $15 BILLION in only 7 years ($5B to $15B in the first 3 months of 2021 alone), was caught overleveraged when the Chinese Communist Party decided that Chinese equity markets were running too hot.
Huang was long Chinese tech and after the CCP actions dumped markets, he was margin called by his creditors - forced to sell billions in spot liquidity to cover his underwater positions.
Some of you might remember Long Term Capital Management, a successful hedge fund in the mid-90s whose strategy turned against it in 1998. LTCM was a much larger fund than Archegos with over $150B in assets before its collapse. But at the time one would never have imagined that its insolvency would lead to greater market turmoil. However, that’s exactly what happened - LTCM’s losses spilled over to 50+ financial institutions with whom LTCM was a counterparty. As a result, the Fed had to step in to bail LTCM out with a $3.625 billion package to stem the potential loss of over $1T in asset value. In many ways, this bailout was a precursor to the “moral hazard” of the Great Financial Crisis. Firms are encouraged to take on outsized risk, because the Fed will always step in as the “lender of last resort” - thus privatizing the gains and socializing the losses.
The point that I’m trying to make here is that nearly a quarter-century later and we still haven’t really learned our lesson. Leverage in our financial system is opaque. There are hundreds of billions of credit agreements in the “shadow banking system” that we don’t entirely understand. Thirteen years after the GFC and it’s still unclear who is exposed to who.*insert DeFi solves this crypto meme*
Archegos is much smaller than LTCM and may prove to be just an idiosyncratic case. This all may blow over quickly, but that doesn’t remove the real risk of financial contagion in our markets. What happens if a larger fund is caught offsides in the near future? Also, this wake-up call alone may be enough to shake markets as participants realize much of the gains of late 2020 / early 2021 were driven by overleveraged funds whose creditors need to tighten capital controls.
Let’s see what happens this week.
New Episode: Becoming the Clubhouse Icon with Axel Mansoor
“The quickest way to make somebody anxious or depressed, or feel lost or unfulfilled is to tell them...here's an emotion that you’re not allowed to have“
In this episode, Axel Mansoor and I discussed the lessons that he learned growing up as “third culture kid,” and singer-songwriter. We chat about his creation, Lullaby Club, one of the leading clubs on the new social app, Clubhouse. His work on Lullaby Club led him to become the literal Icon for the Clubhouse app in the app store. Axel shared his upbringing, his values, and broke down his music describing what his thought process was when he composed his latest songs.
What I’m Reading
Ideas
America Has Forgotten How to Forgive, The Atlantic
A Taiwan Crisis May Mark the End of the American Empire, Niall Ferguson
Markets
Why Chinese Education Stocks Collapsed Today, Motley Fool
China’s Crusade Against Risk Is Tormenting Financial Markets
Metaverse, NFTs, and Digital Collectibles
The Uniswap v3 “x*y="k” Animation Purchased by a DAO formed for this sole purpose
Alex Salnikov: Rarible - The NFT Transformation, Epicenter Podcast
Nifty’s, Backed by Major Investors, Buys into Meme
Circle Announces Comprehensive Platform for NFT Payments
Crypto
Uniswap v3: A New Era of AMMs?, Finematics
zkSync 2.0 - Launching zkEVM in May
Infrastructure Legos, the Middleware Thesis, by ZeePrime Capital
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