Dimon’s cockroach… is it a start??

Dimon’s cockroach… is it a start??

Today, I’m writing with a little bit of a heavy heart. I was thinking that we need to monitor the private equity market, including the minutes of the FOMC meeting. It feels like that’s starting today.

And JPMorganization’s cockroach theory, as I mentioned in my essay on the 10th and 15th, as this theory slowly spread, today’s market showed a typical risk-off phenomenon: Russell plunges by a whopping -2 percent, gold goes up, Treasury yields go in the 3.9 percent range.

In a way, the reason why the Fed ended QT is quite right, and from another perspective, I think it’s monitoring it properly. Also, I think the market really feels the seriousness of the news when it comes out. (See the picture below.)

If this is the beginning of a cockroach… we’re probably never going to catch it with a rate cut, and we need something stronger than the market’s expectations. This reminds me of BTFP, which quickly quelled the SVB crisis. I think that’s the point of FOMC’s observation in October. What kind of mechanism will we have to put to rest the current unrest.. BTFP said it was the number one contributor to quelling market instability. I also introduced the results of the study. Let me quote it again.

“increased with OMO losses in the two weeks prior to the BTFP announcement but decreased with OMO losses in the two weeks following the announcement. For banks with high OMO losses, this decline was substantial. For example, for banks in the 90th percentile of OMO losses, the BTFP announcement almost fully offsets the increased risk perceptions in the two weeks prior to the announcement.

The BTFP strongly reduced investor risk perceptions of banks that carried large amounts of unrealized losses on underwater liquid securities on their books” – Fed –

And the selling of CTAs could ignite the pace of the decline, if you go a little further, the chain of cryptocurrency markets, and when the cryptocurrency market was in full swing in 2022, we had a lot of papers related to this. The cryptocurrency market is most correlated with the S&P 500 in times of crisis, which means it drops significantly together..

Now, the cryptocurrency market is not just a single market. It’s called Digital-Collateral. It’s used as a base asset for DeFi loans and leverage transactions. In other words, if events like cockroaches spread and the cryptocurrency market plummeted now, > forced liquidation occurs in derivatives and loan markets > This can extend to traditional financial markets.

Also institutional investors. Funds. Brokers are starting to use crypto assets as leverage collateral, and this price drop is likely to lead to a funding equity squeeze, not just asset losses…

We had the SVB crisis. SVB was the 14th-ranked bank. Now, there’s risk anxiety about the private equity market, not just the banking sector. You really don’t know this ripple effect unless you’ve experienced it.

But one lesson we can learn is that people’s “psychology” is very important in SVB situations, which is how the Fed responds to these situations. Maybe the current mentality is that the beta has gone up a lot, so we’ll have to look at what kind of communication the Fed is doing.

Here’s another thing I mentioned yesterday. If the uncertainty goes to the medium > high level, > the spending power of the entire class decreases. I think it’s time for the Fed to focus on how to communicate.

Conclusion: In order for this not to turn into a real crisis… BTFP may have to come out again first. Increasingly, there is polarization in credit as well.

(People’s beta changes according to news 1 / Consumption changes according to uncertainty 2 and 3)