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#189: Liquidate or be Liquidated

#189: Liquidate or be Liquidated

micksonmatch
November 28, 2024

I want to thank 2 people for making my life so much richer.

Peter Brandt, not only are you regarded as one of the greatest traders of our time, but you are an honourable man with a good heart. Your endorsement of me and what I am doing has breathed renewed life into Signal2Noise and me personally. Thank you.

My newest friend from the industry is another trading veteran, Dale Pinkert, and his team at ForexAnalytics were kind enough to have me on their show yesterday. They have a wonderful community of traders, and there was a genuine feeling of community, fun, and a passion for the markets. More power to you guys and your community.

It was my second presentation of the week, and I realised how much I enjoyed talking about trading, investing, and the markets. If anyone would like me to do a talk to your community, I am willing and hopefully able. Time zone is not an issue. I did one talk at 4am and another at 1am. Sleep is overrated; let’s do it.

S2N Spotlight

I got a question yesterday from one of my throwaway comments at the end of the letter about Bitcoin liquidations. While the concept of margin call is well known in trading, the practice of liquidations on crypto exchanges is a margin call taken to a whole new level and obviously not as well known.

When you trade crypot futures (perpetuals), you are trading on leverage, i.e., with borrowed money, typically 100:1. I don’t need to tell you how volatile crypto is, so the difference between crypto and typical margin trading is that there is no warning given. If you hit the level where your margin is deemed in danger of being exhausted, then you are automatically liquidated out of your position. No friendly phone call or email warning. The liquidation level is calculated and updated in real-time and is transparent on the exchange and client portal. Furthermore, the amount of liquidations taking place is all transparent and updated for all to see in real-time.

In yesterday’s post, I quoted someone from X without doing the research and fact-checking. It is hard to validate, so here are November’s liquidation numbers from a reliable source. The green bars are liquidations of longs, and the red bars are liquidations of shorts. Over the course of the month, billions have been liquidated. Of course there have been many more paper billions created; actually, paper is a swear word to fundamentalists; I should probably say virtual billions, but we should remember that billions made on paper or virtually are very different from billions liquidated, as that means the money is gone.

If I can find a decent API to access this data, I will do some more research on this subject. My main interest is to simply see the % of crypto trading on margin versus spot through time.

S2N Observations

The BEA released inflation data yesterday. The one that caught my attention is the PCE (personal consumption expenditure) Core Services, excluding energy and housing. Services are a very important component of inflation, with wage inflation expectations very much built into the system now.

As you can see in the chart, there is a continuation of last month’s increase in service inflation at 3.51% year on year. We also learned from the Fed minutes that they wish to take rate-cutting slowly. Don’t be shocked if we saw the end of the rate-cutting cycle. 3.51% is a long way from the targeted 2% and it seems to be climbing.

If there is one thing you can see with the latest yield curve is that it is much flatter and higher than the curve a month ago. I think the bond market is in a real battle for direction. I think this battle is about to become a war.

With all the tarriff talk, I thought I would take a look at who are the big importers around the globe. I personally think Trump has got this one wrong for a whole host of theoretical reasons. As the biggest importer, picking trade wars with your trade partners is surely going to be inflationary. The reason for offshoring so much production was the comparative price advantage from less developed countries. I get reasons such as national security and preventing supply chain disruptions. It is just that it is likely to be inflationary. I will take my cue from Mr. Market.

The standout for me was the Netherlands; their export numbers are also huge. I had no idea that they are such a massive global trading powerhouse.

I am happily addicted to coffee, but it looks like my addiction is about to become even more expensive. Coffee has just hit new 47-year highs. I am faced with a dilemma, and no, it is not whether I have a cuppacino or my usual long black. The issue is what to show or use for my analysis. This might be a bit more complicated than you were hoping for. As you can see in the 2 charts below, I have the raw price future, which typically has gaps around the rollover period from one future to the next, and then I have the back adjusted, which smooths the rollover and makes the chart more continuous and easier to work with from a technical point of view. As you can see, the charts look very different. The back adjusted contract is far away from a 47-year high. I am pretty sure that back-adjusting is the best way to view things from a consistency point of view, the only issue being you may miss the headline of calling a new multi-decade high. I am probably going to scan both for completeness sake but would welcome feedback on this.

S2N Screener Alerts

There were many screener alerts today, most of which I have posted on X as today’s letter is already getting pretty long. It is now 8 days in a row the Russian stock exchange’s main index is down.

The Rouble also had a 3-sigma down day. I am a contrarian by nature, but even I wouldn’t risk buying Rouble and their stock index. I think this is going to be a very cold Russian winter for many Russians.