For the trader, the draft abortion decision presents an important privacy narrative …

Our focus is primarily on the trader for trade or exchange of value.  Trade is the only reason humans bother with each other.  From the first engagement between one another we have come up with rules for settling our trades, for being transparent, for injecting trust into the markets.  An abortion decision would seem distant from this concept.  But is it?

The Constitution is a conservative document. The Constitution says nothing about abortion, nor does it provide for the federal government to involve itself in private decisions.  The irony is that those who allegedly want abortion to remain a private matter are asking the ultimate intruder to regulate in this area.  Abortion regulation is another mechanism for government expansion particularly where privacy is concerned. 

For example, I read Roe v. Wade before parsing through the U.S. Supreme Court’s draft opinion in Dobbs. I took this order in reading the opinions to avoid any taint from Justice Alito’s opinion.  My conclusion was that Roe is legal analytical trash.  After reading Roe and reading Alito’s opinion, I had to say that I was mostly in agreement with him.

The pains that the court in Roe went through to create a privacy doctrine that is not supported by the Constitution only to see the opinion sliced and diced by the legal reasoning in Dobbs and the analysis of the U.S. Constitution looked straight out of a horror movie. There is no explicit protection of privacy in the Constitution and in the narrower case it will be left up to state legislatures to guarantee it in their constitutions and/or define it in state law.

For the trader, especially the trader in crypto currencies where the concept of anonymity attracted her to that market, she has to ask, “Will this court’s attack on privacy provide more ammo for government’s attempts at looking at my trades?”

Government sees itself charged with managing all the resources in a country including human resources and maintaining that world view means piercing the veil of privacy.  I would not be surprised to see the courts take further action against privacy by reversing itself on a number of privacy cases that Roe was built on.  Traders should stay aware of this possibility that attacks on privacy could further cement threats to privacy in the markets.

 Alton Drew

6 May 2022

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CFTC Charges Archegos Capital Management and Three Employees with Scheme to Defraud Resulting in Swap Counterparty Losses Over $10 Billion

Regulatory and Legal News

April 27, 2022

Washington, D.C. — The Commodity Futures Trading Commission today announced it has filed a complaint in the U.S. District Court for the Southern District of New York against Archegos Capital Management, LP (Archegos) and its Chief Financial Officer, Patrick Halligan, of Syosset, New York, charging them with fraud.

The CFTC also issued two orders simultaneously filing and settling charges against two Archegos employees, William Tomita of Palm Beach, Florida, formerly Archegos’ Head Trader; and Scott Becker of Goshen, New York, formerly Archegos’ Director of Risk Management. Tomita and Becker have each admitted their roles in the scheme and agreed to cooperate with the CFTC.

“Honesty, integrity, and transparency are fundamental to the proper functioning of our swaps markets,” said Chairman Rostin Behnam. “The CFTC will take action against those who provide false or misleading information that undermines our markets.” 

“These actions demonstrate the CFTC will continue to work vigilantly to protect the financial integrity of transactions in the swaps markets,” said Acting Director of Enforcement Gretchen Lowe. “There is no tolerance for fraud in the derivatives market, including fraud by family offices like Archegos, which are currently not subject to direct CFTC oversight.”

Specifically, the complaint charges the defendants with engaging in a scheme to provide false or misleading material information and failing to provide such material information to swap counterparties of Archegos Fund, LP, a private fund managed by Archegos, regarding the size of its positions, the amount of its unencumbered cash, and the risk associated with Archegos Fund’s investment portfolio. The complaint alleges that as a result of the defendants’ and respondents’ misconduct, Archegos Fund’s swap counterparties collectively lost over $10 billion. The CFTC seeks restitution to defrauded swap counterparties, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and permanent injunctions against further violations of the Commodity Exchange Act and CFTC regulations, as charged.

The CFTC’s orders against Tomita and Becker find the respondents engaged in the scheme in order to secure additional capacity for Archegos to enlarge its swap trading positions, to obtain or maintain favorable margin rates, and to attempt to satisfy margin calls. In connection with the orders, Tomita and Becker each entered into cooperation agreements with the Division of Enforcement and admitted to engaging in the fraudulent scheme. The orders impose immediate cease and desist obligations with respect to Tomita and Becker, and further sanctions will be determined in future proceedings. 

Case Background

The complaint against Archegos and Halligan alleges that from March 2020 to March 2021, Archegos and others acting on its behalf repeatedly misrepresented material facts or omitted material facts relevant to assessing the risk of Archegos Fund’s portfolio, including the size of its largest positions, aggregate gross exposure, amount of unencumbered cash, and liquidity. The complaint further alleges that Halligan aided and abetted Archegos’ fraud by directing Archegos employees to misrepresent or omit certain of these material facts. 

To hedge the market risk associated with its long portfolio, Archegos Fund entered into short swaps with a total notional value of tens of billions of dollars referencing broad-based exchange-traded funds and broad-based custom baskets of securities. The complaint alleges that these short broad-based swaps were also critical to inducing Archegos Fund’s swap counterparties to allow Archegos Fund to continue to build on its highly leveraged, concentrated, and illiquid long positions.

As an example of the defendants’ numerous misrepresentations, the complaint alleges that Archegos and other employees repeatedly and consistently misrepresented to swap counterparties the size of Archegos Fund’s largest position. By March 2021, Archegos Fund’s largest position was approximately 70% of the fund’s net asset value, yet Archegos, at Halligan’s direction, misrepresented during that time that the fund’s largest position was only 35% of its net asset value. Archegos also misrepresented to swap counterparties that Archegos Fund’s portfolio was more liquid than it really was. By misrepresenting the size of Archegos Fund’s largest position and the overall liquidity of Archegos Fund’s portfolio, the defendants misrepresented that Archegos Fund’s portfolio was materially less concentrated (and hence materially less risky) than it actually was. 

During the week of March 22, 2021, virtually all of Archegos Fund’s largest long positions sharply declined, triggering margin calls from its swap counterparties totaling over $13 billion. The margin calls far exceeded Archegos Fund’s available cash, causing it to collapse, dismiss employees, and cease operations. The complaint alleges that during this week, Archegos made additional misrepresentations regarding Archegos Fund’s financial state. 

Tomita and Becker Settlements

The CFTC’s orders for Tomita and Becker find that each made numerous misrepresentations to Archegos Fund’s swap counterparties in connection with the fraudulent scheme. Tomita and Becker admitted to engaging in the fraudulent scheme, including intentionally and/or recklessly providing false or misleading material information and failing to provide such material information to Archegos Fund’s swap counterparties regarding, among other things, the size, composition, and liquidity of positions in Archegos Fund’s entire portfolio across financial institutions. 

Source: Commodity Futures Trading Commission

The trader should remember that democracy is a temporary portal. Political power is permanent …

Democracy is a tool that administrations and legislatures use to distract and amuse the mass citizenry.  The illusion of freedom generated by a right to choose political leaders has worked in keeping the barbarians from knocking down the gates over the past 246 years in America as demonstrated by political power passing peacefully from one administration to the next.  Stability in the transition of political power helps the United States stand out among most other nations.

But when democracy starts seeping into market discussions, we can end up with market disruptions.  Democracy means too many voices in the kitchen opining on how the cake batter should be mixed.  The paper wealth created over the last fifty years combined with progressive left politics has the mass electorate believing that they should take lead in managing the economy, at least via their rhetoric.  And they hope their rhetoric can influence elected officials and policy makers to craft policy that favors political spheres versus economic and financial spheres.

I say “political spheres” because democracy is a schizophrenic notion.  The supposed “big tent” means a variety of demands that tug administrations and legislatures in different directions on social and political issues. 

Whereas 250 years ago the English monarchy had the reins of the political economy concentrated in his hands, today “political” has been separated from “economic” and relative stability is found more in the economic and financial sphere.  No matter the goods and services traded, profit is the prevailing, bottom-line standard.

In their pursuit of votes, the schizophrenic political class attacks the low hanging fruit of economic and financial profit, describing profit as the problem that only legislation and regulation can address.  The factions within the schizophrenic political class then vie for the vote asserting that only their faction can best address the evils of profit.

Democracy is disruptive to trade in the above way. To counter the schizophrenia, the trading class has to execute political power.  The shenanigans of democracy have to be quelled by a faction within the political class who acknowledge the dangers of overactive democracy.

The trading class should finance the political action committees (note, political action committees not democracy action committees) that can identify and finance candidates that understand the dilemma democracy introduces into markets.

Democracy is a marketing campaign and marketing campaigns change.  Political power is permanent.

Alton Drew

27 April 2022

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To stay ahead of the regulator, be prepared to offer some TEA …

In my years serving on regulatory staffs, I always appreciated the industry liaison that presented a new product or explained their company’s position on public policy or a consumer complaint in the clearest and most cogent manner. These professionals were selling me TEA: Thought, Education, Advocacy.

The best advocates for any position are aware that they must paint a picture for the regulator that depicts how the position or product best serves the public, the regulator, and the company. In the public utility space, for example, an advocate has to make the argument that the regulator’s need to maintain balance between the company’s goal of a reasonable return and the consumer’s interest in reasonable prices and clear terms and conditions. When an advocate engages regulatory staff, the first words out of the advocate’s mouth, post the usual pleasantries, should reflect acknowledgment of this balance of stakeholder interests.

Keep in mind that while regulatory staff has a heavy docket, it doesn’t mean that staff wants to be led with fast talk. No staffer wants to feel like they are being sold on an idea or proposal even though the reality is the advocate is doing that. Remember, the staffer has to present your company’s position to other decision makers in the agency before your position gets approved. The TEA has to be served just right. Clarity has to be a priority.

Keep in mind that the staffer looks forward to being educated on what’s happening in the markets. The staffer’s ability to comprehend the information you present, combine the information with what he or she has learned on their own, and present information and insights to policymakers serves the staffer’s interest in growing their own expert power. This expert power can be leveraged by them when pursuing future opportunities within or outside their agency.

Presenting the best TEA also facilitates the advocates access to staff. Again, staff looks forward to the opportunity for further education and expert growth and is more than willing to listen to an advocate that is clear, concise, cogent. This is an exchange of ideas and insights; an opportunity to garner trust through transparency and clarity.

So, brew the TEA with the best ingredients of knowledge and serve it with clarity.

Alton Drew

14 April 2022

Government administers the trading post: The underlying philosophy of the law of markets ….

Commentary

Government’s role is to administer the trading post by managing the masses with a law-and-order scheme; broadcasting the value of its money through a regulated banking system; and expanding into and protecting new markets with its military and diplomatic corps.  Government, specifically western government, operationalizes the tenets of western philosophy: that man is at war with himself and nature and to alleviate the uncertainty of extermination, man must divide up the world and seek the most yield from the resulting parts.

Humans have no other reason to engage each other but to extract value from one another.  To garner the most yield from this engagement, the exchange, the trade, needs to be unencumbered by conflict.  Where it is impossible to obtain the means for survival by staying in one’s lane and exchange is necessary, humans then put in place customs, practices, rules designed to reduce conflict. 

Government promulgates the statutes, codes, and policies that manage the day-to-day mitigation of conflict.  It stays “in the money” by optimally maintaining the physical and social infrastructure that facilitates and expands its tax base.  It’s ability to effectively manage infrastructure and expand its tax base makes its money more attractive to traders.

Unfortunately, government has taken on a life of its own, going beyond its mandate to manage infrastructure and ensure law and order to regulating society on an increasingly micro level.  More of its policy and legislative initiatives appear intended to replace private market judgment with its own government judgment.  This imposition of government judgment on market judgment was not part of the original deal between traders, market makers, and government.  The imposition has seeped into the act of establishing price, an act that is best left to markets. 

Government now wants more than its cut in the form of taxes.  It now wants to weaponize price discovery and price setting for the purpose of expanding its cut by garnering more votes from the electorate.

The merchant trader, to protect her lane, should inform herself daily on the political process and support efforts that push back on government efforts to intervene in her ability to set price and other terms and conditions within and via the markets.

Alton Drew

27.03.2022

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The Federal Reserve System’s message to American society: Start investing in more productive economic activity

The implicit agreement between the United States government and American society is that the United States government will maintain a financial and resource management infrastructure that facilitates a taxpayer’s ability to find opportunities to create income.  As the underwriter for the United States government, the Board of Governors of the Federal Reserve System has a mandate to pursue stable prices for goods, services, and assets and full employment of labor.  The Board of Governors via its Federal Open Market Committee (FOMC) employs a number of monetary policy tools to achieve this mandate with a federal funds target rate serving as indicia for how well its tools are working.

Yesterday, the Board of Governors raised this target rate to a range of .25% to .50%; in other words, an overnight rate that the Board of Governors would like to see its member commercial depository institutions lend to reach other the excess reserves they hold at their district federal reserve banks. The problem here is that at this printing, the Board of Governors has reduced to zero the amount of reserves a depository institution is required to keep at its respective federal reserve district bank.  Traders would have to look at other indicia to determine how well Board of Governors policy is doing in pursuing the federal funds target rate.

For example, traders should be looking at changes in the discount window rates that the federal reserve district banks are charging to lend money to their commercial member banks.  Traders should also look at changes in central bank liquidity swaps or changes in rates for federal reserve district bank lending facilities such as the term deposit facility or overnight reverse repurchase agreement facilities.  These are some of the monetary policy tools that the Board of Governors and its 12 federal reserve banks use to move rates toward their federal funds target and thus control the money supply.

As rates increase, American society will be put on notice.  I expect an increase in market discipline as banks and other investors seek out opportunities to increase returns on capital.  Lots of capital has gone into non-productive endeavors such as the tools and platforms riding the internet.  Amazon may have made purchasing goods and services more efficient, but can we say that Twitter and Instagram have raised American productivity and provided any societal solutions that lead to greater employment?  As the Board of Governors tackles inflation with its monetary tools, interest rates will start ticking up and entrepreneurial gimmicks that provide nothing in terms of increased yield, employment, or solutions will be and should be shunned or abandoned. 

Alton Drew

17.03.2022  

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The Executive Office of the President appears more about narrative development than policy development …

I did a review of the Executive Office of the President to identify any pertinent messaging on the currency markets. Almost 14 months into Joe Biden’s first term and I could not find any major policy proposals regarding the currency, at least from within the EOP. The EOP appears to amplify the President’s most important political tool: the power to persuade. Created in 1939 by President Franklin Delano Roosevelt, the EOP is the day-day extension of the “bully pulpit”, from whence data-supported arguments are supposed to be made and woven into the President’s narrative.

Two of the most important units within the EOP are the Council of Economic Advisers, which is chaired by Dr. Cecilia Rouse, and the National Economic Council, which is headed by Brian Deese. The CEA was established by the Congress in 1946 to advise the president on economic policy. Along with Dr. Rouse are two other council members who together are expected to analyze economic events and provide the President with policy recommendations. Almost 50 years later, President William J. Clinton established the NEC to coordinate domestic and foreign economic policies and implement policy according to the Administration’s economic agenda. In American football parlance, Mr Deese is supposed to be President Biden’s offensive coordinator.

For the purpose of the trader who is trying to parse pertinent political information out of the noise coming out of Washington, she should be mindful that Washington is about narrative building, maintenance, and transmission. The EOP’s explicit mission is to support the messaging and policy agenda of the President and this support helps the President win votes. The implicit mission of the EOP is to convince the electorate, and more specifically those who trade in the American political economy, that this jurisdiction is superior to the other 200 countries on the globe. America is supposed to be the better business model.

At this point in the electoral cycle, the EOP is still trying to keep the electorate supportive of President Biden’s Build Back Better legislation, which is currently still in the Senate. While the pandemic has been a constant cloud over Washington politics, the issues of inflation and the invasion of Ukraine by Russia have sucked the policy oxygen out of the room. The infrastructure legislation passed last year goes into effect today and while touted as a way to expand productive capacity leading to reduction in inflation, effects from that plan, having just gone into effect this year, will take a while to germinate.

One final note is how to avoid the narrative cross fire. Take inflation for example. There are two competing narratives regarding the cause of inflation. The Democratic Party are selling the narrative that supply chain issues are the major cause of inflation and if the United States is to reduce inflation head on, the infrastructure deal and broader social net agenda contained in Build Back Better are necessary in order to expand the economic and social infrastructure thus reducing physical and social supply congestion and constraints.

The Republican Party, on the other hand, are making the argument that inflation is more closely related to the supply of money, where there is too much money chasing too few goods, and that increased fiscal spending will only make inflation worse.

The trader, again, should keep in mind that she should separate out the “vote buying” aspect of the narrative from the “market making” aspect of the narrative. The focus should be on how whether fiscal or monetary policy provides better insights on where inflation and interest rates are going.

Right now, nothing out of Executive Office of the President is helping to quell the noise.

Alton Drew

07.03.2022

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No surprises out of Powell’s nomination hearing …

The real economy isn’t supposed to support everyone. It is supposed to employ an optimal number of employees that produce the most income at the least cost for the individuals investing the capital. This is my response to the expected drivel coming out of U.S. Senator Sherrod Brown, Democrat of Ohio, during today’s hearing on the re-nomination of Jerome Powell as chairman of the Board of Governors of the Federal Reserve. Senator Brown in his opening statement expressed his concern that Wall Street banks were enjoying over a decade of high profits while individuals on Main Street were facing the threat of unemployment and rising inflation.

Senator Elizabeth Warren’s line of questioning followed a similar vein to Mr Brown, although the Massachusetts Democrat seemed to go all in on “corporations” versus her usual culprits, the banks. Mr Powell probably determined it was best not to interrupt Mrs Warren by pointing out that the Board of Governors has oversight of banks and not your run-of-the mill corporations. Silence is best. Let her ramble on. Besides, Mrs Warren was likely on a stage of satisfaction having her favorite Fed governor (Lael Brainard) as nominee for the Board’s vice-chair, thus having an embedded check on a “dangerous man” (Warren’s words) in the form of Mr Powell.

If any topic out of the Senate was going to peak trader interest, it would be the topic of inflation. Politically, about a third of the Senate would love to have the ability this election year to say that they did something about inflation, but the Senate along with the House of Representatives, punted away their constitutional power over coin and commerce over a century ago. Although Senator Richard Shelby, Republican of Alabama, and Senator Jack Reed, Democrat of Rhode Island, raised the issue of inflation and the Federal Reserve’s policy timing to address it, none of the senators offered policy recommendations or hinted at legislation designed to mandate requirements for addressing inflation. A number of senators acknowledged the Federal Reserve’s dual statutory mandate of bringing about price stability and generating full employment, but that was the extent of serious discussion on inflation.

In just under 14 hours from this writing, the US Bureau of Labor Statistics will issue its year-over-year estimate on overall inflation. Consensus forecast is at seven percent, relatively in line with last month’s annualized rate of 6.8%. While I don’t do market analysis here, I expect that after the inflation print, the morning will be filled with banter on whether the Federal Reserve will have three rate increases or even four.

Otherwise, Mr Powell will be advanced from the Senate banking committee to the full floor of the Senate where he will likely see his nomination approved. He will likely look more hawkish. He may not have a choice if tomorrow’s number ends up being what we expect.

And as for the usual drivel on the economy and the working man, the inflation number will provide the usual fodder for campaign messaging.

Alton Drew

11.01.2022

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Toward Public Policy Support for High-value Trade

21 August 2021

I prefer a society that is biased toward trader/merchants; where one lives on the spread and retains the majority of her earnings.  Wage earning is a fancy term for slavery where many in the labor market are subjugated to selling a precious commodity over which they have illusionary control: time.

The irony is that what one earns for their time is inversely related to the wealth of knowledge they have amassed over time.  Unfortunately for the wage earner, the valuation of their labor is made not by the ultimate end user of their product but by the middle man corporation that employs them.  Rather than selling time to the corporation, time should be another input that labor uses to create and sell their product.

Today’s technology makes such a self-ownership approach increasingly feasible depending on the wage earner’s vocation.  Some of us can transition from wage earner to merchant due to digitalization and that sector of the information/knowledge/problem solving industry that we sit in.  So used are we to selling time that we must now start to think of the utilities, database subscriptions, and equipment costs incurred in producing an information product and sell that product at a sufficient margin; to live via the “carry trade.”

The trader wants a profitable balance sheet, one where she has a healthy surplus.  Bankers that provide liquidity to traders also want traders to enjoy a profitable balance sheet because it assures repayment of leverage.

But bankers also want to fund activities generating high returns and I think to ensure that traders are disciplined enough to seek out information on high return activity, banks will want to assess higher interest rates and other margin requirements in order to weed out low-return low value activity.  The Federal Reserve could encourage high-value search behavior by increasing the fed funds and discount window rates.  The Federal Reserve could also start driving up rates by unwinding its monthly purchases of $120 billion in US Treasury and agency-backed mortgage securities.

Higher rates will encourage living on the spread and the seeking of higher returns.

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Interbank Market News Scan: The Fed speak not providing much to shift foreign exchange markets …

A Bloomberg interview with Federal Reserve Bank of Dallas president Robert Kaplan along with remarks by Federal Reserve Board vice-chair Richard Clarida and Federal Reserve Bank of Atlanta president Raphael Bostick did not provide much information to attribute to any shifts in the foreign exchange markets. 

In a 9 August 2021 interview with Bloomberg, Mr Kaplan expressed confidence about where the fed funds rate, the overnight rate for loans between Fed member banks, stood.  The current target range of the fed funds rate is between 0 and .25%. 

Mr Kaplan expressed caution that the fed funds rate and the effects of asset purchases by the Federal Reserve be looked at separately.  Currently the Federal Reserve is purchasing $120 billion a month of US Treasury securities and agency-backed securities as part of a strategy to keep liquidity in the credit markets while keeping borrowing rates low.  The Federal Reserve’s monetary policy is designed to add fuel to U.S. economic growth by making lower cost credit available to businesses.    

In remarks made the following day, Federal Reserve vice-chair Clarida noted that the U.S. was out of the recession precipitated by government lock down of the economy in March 2020.  He expects the economy to continue its expansion through next year while cautioning that growth will be tempered by a variant of the coronavirus responsible for the Covid-19 pandemic.  Vice-chairman Clarida does see unemployment continuing to fall through 2023 along with inflation which he forecasts to be around 2.2% in 2022 and 2023.

The Federal Reserve is today following a flexible rate policy that will allow the economy to run periodically over its inflation target of 2%.  Dallas Fed president Kaplan did note that businesses are expecting to raise prices, in line with Federal Reserve forecasts on inflation.  Mr Kaplan also noted that there was an active debate regarding when the Federal Reserve would start cutting back on its monthly $120 billion a month asset purchases. Mr Kaplan also believes that adjusting asset purchases now would put less pressure on the fed funds rate.

As Federal Reserve Bank of Atlanta president Bostick shared today, the two percent inflation target number is thought by the Federal Reserve to be the appropriate numerical goal to mitigate the risks of deflation.  The rate, as a pre-condition to a healthy economy, is seen as appropriate in assisting households protect themselves from any changes in purchasing power.

The takeaway for traders is that sluggish growth in the US in 2022 and 2023 may result in tempered appreciation of the dollar’s value in those years.  So far, the Federal Reserve is seeing little change in relative income or price changes.  Nor does the Federal Reserve seem to signaling much in relative interest changes, at least in the short to intermediate term.  

For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at altondrew@altondrew.com for information on consultation rates and to reserve an appointment.