Whether new to stock trading or an old hand, you’ve probably heard of the term “momentum trading.” While it may not be the most well-known investment strategy, momentum trading holds an important position in the pantheon of classic investment methods, especially among savvy technical investors.
But what is momentum trading? At its core, momentum trading is a strategy that pays close attention to technical indicators in the stock market to determine which stocks to buy and sell. The idea is to buy winners and avoid losers. The stock market will have price uptrends and downtrends at any given time, and most investors working with a traditional investment strategy will make an educated guess about a company's far-future success or failure. This classic investing style usually involves making bets when the company is in its infancy, hoping it’ll become a breakout company over time.
Momentum trading rejects that trading style entirely. Instead, it uses momentum strategies to predict price trends in shorter time frames. Using technical analysis, momentum traders investigate uptrends to identify stocks currently on the rise with the goal of buying winners and selling them after they reach their peak. Then, with automatic trading algorithms or expertise, the momentum trader buys the stocks according to their pre-set rules. Typically, momentum traders start with defined price changes they’re looking for, setting guardrails for their trading. These momentum indicators are at the heart of momentum investing and are often followed to the letter.

Understanding Momentum Indicators

Momentum indicators are the metrics used to track the performance of stocks. Often, they’re based on recent price movements and price action. While the period of time that momentum indicators will take into account may change, the main indicator is often the rise or fall of stock price. The most common momentum indicators are relative strength index (RSI) and moving average convergence divergence (MACD). Quick price swings are not what we’re looking for here; most skilled advisors looking to use momentum trading will look for steady upward market trends in a stock before purchasing.
Momentum indicators can also be negative. Often known as sell signals, there are plenty of times when a skilled investor practicing momentum trading will pull out of a stock because of its performance. Sometimes combined with stop-loss orders, negative momentum indicators are just as important as positive ones, often signalling trend reversals and a decrease in price momentum.

The Benefits of Momentum Trading

How profitable is momentum trading on average? Extremely profitable. A recent study that took into account stock prices and chart pattern data from as far back as 1801 reported that momentum investing delivers a 0.4% monthly return on investment on average.
However, the study also found that volatile markets affected momentum investing more than common investment strategies. The study's authors cited above identified seven decade-long periods where momentum investing wasn’t profitable. The first decade of the 21st century proved to be one of these periods. Therefore, momentum traders should carefully evaluate current and expected market volatility.
What’s more, momentum trading has begun to decline in overall effectiveness, and relative safety as market states get longer and longer. Long, predictable bull markets tend to generate worse returns for momentum traders than the first portion of a bull market. In other words, momentum effectiveness falls because the longer a bull market lasts, the closer we are to a quick decline into a bear market.

Trend Following vs. Momentum Trading

If you’re a savvy investor, you might think this sounds suspiciously like trend trading. However, these two strategies aren’t the same. While trend trading uses a similar overall philosophy to determine whether stocks will rise or fall, several key differences exist.
First of all, trend trading is a more macro-scale strategy, using trading platforms to look at the biggest possible picture. By looking at equities, fixed income, currencies, ETFs, and forex markets, trend trading is trying to accomplish the same goal in different arenas of the financial market. Momentum is more often focused on equities, although it can be applied to other asset classes like commodities, cryptocurrencies, and bonds.
Trend trading also focuses on time series momentum, which only considers each asset’s past financial history and returns. Momentum trading takes into account cross-sectional momentum, meaning that you can compare each asset to other assets in the same class.
Both types of investing can be extremely useful in their niches and, if used effectively, can be beneficial philosophies for stock trading.
Momentum trading is also different than swing trading. Swing trading typically looks at the gains that can be made by buying or selling at a particular moment. This naturally takes time into account. Momentum trading is almost completely focused on traders' rules and indicators. They won't buy or sell an asset if it doesn’t fit their pre-determined rules.

Risk Management in Momentum Trading

One of the greatest benefits of momentum trading and its greatest weaknesses is the rigidity of its own internal rules. For the strategy to work, you have to make non-negotiable rules for when you will consider a stock for a trade and when you will buy and sell it.
In other words, there’s no room for personal feelings in momentum trading. The rules are hard and fast. This rigidity is for the good of the strategy and allows the investor to make both long and short-term gains provided they did their research effectively. This also means that momentum investing can be a form of day trading, as long as the momentum indicators you’ve chosen to work with tell you to buy or sell in the right time frame.
Momentum trading can be a way to put guide rails onto your investment portfolio. How tight and defined your indicators are is up to you, especially when considering momentum trading alongside other investment strategies.

Momentum Trading with Composer

Composer was built to simplify and streamline the trading process for momentum traders of all sorts, and now is a good time to consider this investment strategy. Per the Composer investment team on the current market environment: “We are expecting continued dispersion in sector returns, and we prefer strategies like Sector Momentum, which have the potential to outperform a broad market portfolio.”
Our Sector Momentum strategy is diversified across all eleven stock market sectors, including health care, real estate, consumer staples, and more. However, as a momentum strategy, it invests monthly in just the three sectors that have seen the best performance over the past 200 days. It’s a good way to capture broad pricing trends across the market and take advantage of momentum trades across sectors.
Similarly, our Big Tech Momentum strategy invests every month in just the top two best-performing major tech stocks from the last month. That’s a list that includes household names like Amazon, Apple, Microsoft, Google, Meta, and more.

"The first person to make a million in the gold rush sold shovels." Don't forget to diversify your portfolio with high-risk/high-reward non-spooky October memes.

Strange Things Volume II: Triffin's Dilemma and The Dollar Milkshake

As the Fed begins their journey into a deflationary blizzard, they are beginning to break markets across the globe. As the World Reserve Currency, over 60% of all international trade is done in Dollars, and USDs are the largest Foreign Exchange (Forex) holdings by far for global central banks. Now all foreign currencies are crashing against the Dollar as the vicious feedback loops of Triffin’s Dilemma come home to roost. The Dollar Milkshake has begun.
The Fed, knowingly or unknowingly, has walked into this trap- and now they find themselves caught underneath the Sword of Damocles, with no way out…

Sword Of Damocles
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“The famed “sword of Damocles” dates back to an ancient moral parable popularized by the Roman philosopher Cicero in his 45 B.C. book “Tusculan Disputations.” Cicero’s version of the tale centers on Dionysius II, a tyrannical king who once ruled over the Sicilian city of Syracuse during the fourth and fifth centuries B.C.
Though rich and powerful, Dionysius was supremely unhappy. His iron-fisted rule had made him many enemies, and he was tormented by fears of assassination—so much so that he slept in a bedchamber surrounded by a moat and only trusted his daughters to shave his beard with a razor.
As Cicero tells it, the king’s dissatisfaction came to a head one day after a court flatterer named Damocles showered him with compliments and remarked how blissful his life must be. “Since this life delights you,” an annoyed Dionysius replied, “do you wish to taste it yourself and make a trial of my good fortune?” When Damocles agreed, Dionysius seated him on a golden couch and ordered a host of servants wait on him. He was treated to succulent cuts of meat and lavished with scented perfumes and ointments.
Damocles couldn’t believe his luck, but just as he was starting to enjoy the life of a king, he noticed that Dionysius had also hung a razor-sharp sword from the ceiling. It was positioned over Damocles’ head, suspended only by a single strand of horsehair.
From then on, the courtier’s fear for his life made it impossible for him to savor the opulence of the feast or enjoy the servants. After casting several nervous glances at the blade dangling above him, he asked to be excused, saying he no longer wished to be so fortunate.”
—---------------
Damocles’ story is a cautionary tale of being careful of what you wish for- Those who strive for power often unknowingly create the very systems that lead to their own eventual downfall. The Sword is often used as a metaphor for a looming danger; a hidden trap that can obliterate those unaware of the great risk that hegemony brings.
Heavy lies the head which wears the crown.

There are several Swords of Damocles hanging over the world today, but the one least understood and least believed until now is Triffin’s Dilemma, which lays the bedrock for the Dollar Milkshake Theory. I’ve already written extensively about Triffin’s Dilemma around a year ago in Part 1.5 and Part 4.3 of my Dollar Endgame Series, but let’s recap again.
Here’s a great summary- read both sides of the dilemma:

Triffin's Dilemma Summarized

(Seriously, stop here and go back and read Part 1.5 and Part 4.3 Do it!)

Essentially, Triffin noted that there was a fundamental flaw in the system: by virtue of the fact that the United States is a World Reserve Currency holder, the global financial system has built in GLOBAL demand for Dollars. No other fiat currency has this.
How is this demand remedied? With supply of course! The United States thus is forced to run current account deficits - meaning it must send more dollars out into the world than it receives on a net basis. This has several implications, which again, I already outlined- but I will list in summary format below:

The United States has to be a net importer, ie it must run trade deficits, in order to supply the world with dollars. Remember, dollars and goods are opposite sides of the same equation, so a greater trade deficits means that more dollars are flowing out to the world.
(This will devastate US domestic manufacturing, causing political/social/economic issues at home.)
These dollars flow outwards into the global economy, and are picked up by institutions in a variety of ways.
First, foreign central banks will have to hold dollars as Foreign Exchange Reserves to defend their currency in case of attack on the Forex markets. This was demonstrated during the Asian Financial Crisis of 1997-98, when the Thai Baht, Malaysian Ringgit, and Philippine Peso (among other East Asian currencies) plunged against the Dollar. Their central banks attempted to defend the pegs but they failed.
Second, companies will need Dollars for trade- as the USD makes up over 60% of global trade volume, and has the deepest and most liquid forex market by far, even small firms that need to transact cross border trade will have to acquire USDs in order to operate. When South Africa and Chile trade, they don’t want to use Mexican Pesos or Korean Won- they want Dollars.
Foreign governments need dollars. There are several countries already who have adopted the Dollar as a replacement for their own currency- Ecuador and Zimbabwe being prime examples. There’s a full list here.
Third world governments that don’t fully adopt dollars as their own currencies will still use them to borrow. Argentina has 70% of it’s debt denominated in dollars and Indonesia has 30%, for example. Dollar-denominated debt will build up overseas.

The example I gave in Part 1.5 was that of Liberia, a small West African Nation looking to enter global trade. Needing to hold dollars as part of their exchange reserves, the Liberian Central Bank begins buying USDs on the open market. The process works in a similar fashion for large Liberian export companies.

Dollar Recycling

Essentially, they print their own currency to buy Dollars. Wanting to earn interest on this massive cash hoard when it isn’t being used, they buy Treasuries and other US debt securities to get a yield.
As their domestic economy grows, their need and dependence on the Dollar grows as well. Their Central Bank builds up larger and larger hoards of Treasuries and Dollars. The entire thesis is that during times of crisis, they can sell the Treasuries for USD, and use the USDs to buy back their own currency on the market- supporting its value and therefore defending the peg.
This buying pressure on USDs and Treasuries confers a massive benefit to the United States-

The Exorbitant Privilege

This buildup of excess dollars ends up circulating overseas in banks, trade brokers, central banks, governments and companies. These overseas dollars are called the Eurodollar system- a 2016 research paper estimated the size to be around $13.8 Trillion USD. This system is not under official Federal Reserve jurisdiction so it is difficult to get accurate numbers on its size.

https://preview.redd.it/92wcmhdb0uq91.png?width=691&format=png&auto=webp&s=20dbaf63f75ff6f2e255fff06e6f48c03170b11b

This means the Dollar is always artificially stronger than it should be- and during financial calamity, the dollar is a safe haven as there are guaranteed bidders.
All this dollar denominated debt paired with the global need for dollars in trade creates strong and persistent dollar demand. Demand that MUST be satisfied.
This creates systemic risk on a worldwide scale- an unforeseen Sword of Damocles that hangs above the global financial system. I’ve been trying to foreshadow this in my Dollar Endgame Series.
Triffin’s Dilemma is the basis for the Dollar Milkshake Theory posited by Brent Johnson.

The Dollar Milkshake

Milkshake of Liquidity
In 2021, Brent worked with RealVision to create a short summary of his thesis- the video can be found here. I should note that Brent has had this theory for years, dating back to 2018, when he first came on podcasts and interviews and laid out his theory (like this video, for example).
Here’s the summary below:
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“A giant milkshake of liquidity has been created by global central banks with the dollar as its key ingredient - but if the dollar moves higher this milkshake will be sucked into the US creating a vicious spiral that could quickly destabilize financial markets.
The US dollar is the bedrock of the world's financial system. It greases the wheels of global commerce and exchange- the availability of dollars, cost of dollars, and the level of the dollar itself each can have an outsized impact on economies and investment opportunities.
But more important than the absolute level or availability of dollars is the rate of change in the level of the dollar. If the level of the dollar moves too quickly and particularly if the level rises too fast then problems start popping up all over the place (foreign countries begin defaulting).
Today however many people are convinced that both the role of the Dollar is diminishing and the level of the dollar will only decline. People think that the US is printing so many dollars that the world will be awash with the greenback causing the value of the dollar to fall.
Now it's true that the US is printing a lot of dollars – but other countries are also printing their own currencies in similar amounts so in theory it should even out in terms of value.
But the hidden issue is the difference in demand. Remember the global financial system is built on the US dollar which means even if they don't want them everybody still needs them and if you need something you don't really have much choice. (See DXY Index):

DXY Index

Although many countries like China are trying to reduce their reliance on dollar transactions this will be a very slow transition. In the meantime the risks of a currency or sovereign debt crisis continue to rise.
But now countries like China and Japan need dollars to buy copper from Australia so the Chinese and the Japanese owe dollars and Australia is getting paid in dollars.
Europe and Asia currently doing very limited amount of non-dollar transactions for oil so they still need dollars to buy oil from saudi and again dollars get hoovered up on both sides
Asia and Europe need dollars to buy soybeans from Brazil. This pulls in yet more dollars - everybody needs dollars for trade invoices, central bank currency reserves and servicing massive cross-border dollar denominated debts of governments and corporations outside the USA.
And the dollar-denominated debt is key- if they don't service their debts or walk away from their dollar debts their funding costs rise putting great financial pressure on their domestic economies. Not only that, it can lead to a credit contraction and a rapid tightening of dollar supply.
The US is happy with the reliance on the greenback they own the settlement system which benefits the US banks who process all the dollars and act as gatekeepers to the Dollar system they police and control the access to the system which benefits the US military machine where defense spending is in excess of any other country so naturally the US benefits from the massive volumes of dollar usage.

https://preview.redd.it/yq1f1anq0uq91.png?width=1140&format=png&auto=webp&s=27447e2acec884848a5c70ab3651820e487fc0f3

Other countries have naturally been grumbling about being held hostage to the situation but the choices are limited. What it does mean is that dollars need to be constantly sucked out of the USA because other countries all over the world need them to do business and of course the more people there are who need and want those dollars the more is the pressure on the price of dollars to go up.
In fact, global demand is so high that the supply of dollars is just not enough to keep up, even with the US continually printing money. This is why we haven't seen consistently rising US inflation despite so many QE and stimulus programs since the global financial crisis in 2008.
But, the real risk comes when other economies start to slow down or when the US starts to grow relative to the other economies. If there is relatively less economic activity elsewhere in the world then there are fewer dollars in global circulation for others to use in their daily business and of course if there are fewer in circulation then the price goes up as people chase that dwindling source of dollars.
Which is terrible for countries that are slowing down because just when they are suffering economically they still need to pay for many goods in dollars and they still need to service their debts which of course are often in dollars too.

So the vortex begins or as we like to say the dollar milkshake- As the level of the dollar rises the rest of the world needs to print more and more of its own currency to then convert to dollars to pay for goods and to service its dollar debt this means the dollar just keeps on rising in response many countries will be forced to devalue their own currencies so of course the dollar rises again and this puts a huge strain on the global system.
(see the charts below:)
JPY/USD

GBP/USD

EUUSD

To make matters worse in this environment the US looks like an attractive safe haven so the US ends up sucking in the capital from the rest of the world-the dollar rises again. Pretty soon you have a full-scale sovereign bond and currency crisis.

https://preview.redd.it/72nlain01uq91.png?width=1141&format=png&auto=webp&s=cbaa411acc88acb3849949d84a36624d75d6cfc4

We're now into that final napalm run that sees the dollar and dollar assets accelerate even higher and this completely undermines global markets. Central banks try to prevent disorderly moves, but the global markets are bigger and the momentum unstoppable once it takes hold.
And that is the risk that very few people see coming but that everyone should have a hedge against - when the US sucks up the dollar milkshake, bad things are going to happen.
Worst of all there's no alternatives- what are you going to use-- Chinese Yuan? Japanese Yen? the Euro??
Now, like it or not we're stuck with a dollar underpinning the global financial system.”
—-------------
Why is it playing out now, in real time?? It all leads back to a tweet I made in a thread on September 16th.

Tweet Thread about the Yuan

The Fed, rushing to avoid a financial crisis in March 2020, printed trillions. This spurred inflation, which they then swore to fight. Thus they began hiking interest rates on March 16th, and began Quantitative Tightening this summer.
QE had stopped- No new dollars were flowing out into a system which has a constant demand for them. Worse yet, they were hiking completely blind-
Although the Fed is very far behind the curve, (meaning they are hiking far too late to really combat inflation)- other countries are even farther behind!
Japan has rates currently at 0.00- 0.25%, and the Eurozone is at 1.25%. These central banks have barely begun hiking, and some even swear to keep them at the zero-bound. By hiking domestic interest rates above foreign ones, the Fed is incentivizing what are called carry trades.
Since there is a spread between the Yen and the Dollar in terms of interest rates, it thus is profitable for traders to borrow in Yen (shorting it essentially) and buy Dollars, which can earn 2.25% interest. The spread would be around 2%.
DXY rises, and the Yen falls, in a vicious feedback loop.
Thus capital flows out of Japan, and into the US. The US sucks up the Dollar Milkshake, draining global liquidity. As I’ve stated before, this has seriously dangerous implications for the global financial system.
For those of you who don’t believe this could be foreseen, check out the ending paragraphs of Dollar Endgame Part 4.3 - “Economic Warfare and the End of Bretton Woods” published February 16, 2022:

Triffin's Dilemma is the Final Nail

What I’ve been attempting to do in my work is restate Triffins’ Dilemma, and by extension the Dollar Milkshake, in other terms- to come at the issue from different angles.
Currently the Fed is not printing money. Which is thus causing havoc in global trade (seen in the currency markets) because not enough dollars are flowing out to satisfy demand.
The Fed must therefore restart QE unless it wants to spur a collapse on a global scale. Remember, all these foreign countries NEED to buy, borrow and trade in a currency that THEY CANNOT PRINT!
We do not have enough time here to go in depth on the Yen, Yuan, Pound or the Euro- all these currencies have different macro factors and trade factors which affect their currencies to a large degree. But the largest factor by FAR is Triffin’s Dilemma + the Dollar Milkshake, and their desperate need for dollars. That is why basically every fiat currency is collapsing versus the Dollar.
The Fed, knowingly or not, is basically in charge of the global financial system. They may shout, “We raise rates in the US to fight inflation, global consequences be damned!!” - But that’s a hell of a lot more difficult to follow when large G7 countries are in the early stages of a full blown currency crisis.
The most serious implication is that the Fed is responsible for supplying dollars to everyone. When they raise rates, they trigger a margin call on the entire world. They need to bail them out by supplying them with fresh dollars to stabilize their currencies.
In other words, the Fed has to run the loosest and most accommodative monetary policy worldwide- they must keep rates as low as possible, and print as much as possible, in order to keep the global financial system running. If they don’t do that, sovereigns begin to blow up, like Japan did last week and like England did on Wednesday.
And if the world’s financial system implodes, they must bail out not only the United States, but virtually every global central bank. This is the Sword of Damocles. The money needed for this would be well in the dozens of trillions.
The Dollar Endgame Approaches…
—-------------------------------------------------------------

Q&A

(Many of you have been messaging me with questions, rebuttals or comments. I’ll do my best to answer some of the more poignant ones here.)

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Q: I’ve been reading your work, you keep saying the dollar is going to fall in value, and be inflated away. Now you’re switching sides and joining the dollar bull faction. Seems like you don’t know what you’re talking about!
A: You’re mixing up my statements. When I discuss the dollar losing value, I am referring to it falling in ABSOLUTE value, against goods and services produced in the real economy. This is what is called inflation. I made this call in 2021, and so far, it has proven right as inflation has accelerated.
The dollar gaining strength ONLY applies to foreign currency exchange markets (Forex)- remember, DXY, JPYUSD, and other currency pairs are RELATIVE indicators of value. Therefore, both JPY and USD can be falling in real terms (inflation) but if one is falling faster, then that one will lose value relative to the other. Also, Forex markets are correlated with, but not an exact match, for inflation.
I attempted to foreshadow the entire dollar bull thesis in the conclusion of Part 1 of the Dollar Endgame, posted well over a year ago-

Unraveling of the Currency Markets

I did not give an estimate on when this would happen, or how long DXY would be whipsawed upwards, because I truly do not know.
I do know that eventually the Fed will likely open up swap lines, flooding the Eurodollar market with fresh greenbacks and easing the dollar short squeeze. Then selling pressure will resume on the dollar. They would only likely do this when things get truly calamitous- and we are on our way towards getting there.
The US bond market is currently in dire straits, which matches the prediction of spiking interest rates. The 2yr Treasury is at 4.1%, it was at 3.9% just a few days ago. Only a matter of time until the selloff gets worse.
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Q: Foreign Central banks can find a way out. They can just use their reserves to buy back their own currency.
Sure, they can try that. It’ll work for a while- but what happens once they run out of reserves, which basically always happens? I can’t think of a time in financial history that a country has been able to defend a currency peg against a sustained attack.

Global Forex Reserves

They’ll run out of bullets, like they always do, and basically the only option left will be to hike interest rates, to attract capital to flow back into their country. But how will they do that with global debt to GDP at 356%? If all these countries do that, they will cause a global depression on a scale never seen before.
Britain, for example, has a bit over $100B of reserves. That provides maybe a few months of cover in the Forex markets until they’re done.
Furthermore, you are ignoring another vicious feedback loop. When the foreign banks sell US Treasuries, this drives up yields in the US, which makes even more capital flow to the US! This weakens their currency even further.

FX Feedback Loop

To add insult to injury, this increases US Treasury borrowing costs, which means even if the Fed completely ignores the global economy imploding, the US will pay much more in interest. We will reach insolvency even faster than anyone believes.
The 2yr Treasury bond is above 4%- with $31T of debt, that means when we refinance we will pay $1.24 Trillion in interest alone. Who's going to buy that debt? The only entity with a balance sheet large enough to absorb that is the Fed. Restarting QE in 3...2…1…
—----
Q: I live in England. With the Pound collapsing, what can I do? What will happen from here? How will the governments respond?
England, and Europe in general, is in serious trouble. You guys are currently facing a severe energy crisis stemming from Russia cutting off Nord Stream 1 in early September and now with Nord Stream 2 offline due to a mysterious leak, energy supplies will be even more tight.
Not to mention, you have a pretty high debt to GDP at 95%. Britain is a net importer, and is still running government deficits of £15.8 billion (recorded in Q1 2022). Basically, you guys are the United States without your own large scale energy and defense sector, and without Empire status and a World Reserve Currency that you once had.
The Pound will almost certainly continue falling against the Dollar. The Bank of England panicked on Wednesday in reaction to a $100M margin call on British pension funds, and now has begun buying long dated (10yr) gilts, or government bonds.
They’re doing this as inflation is spiking there even worse than the US, and the nation faces a currency crisis as the Pound is nearing parity with the Dollar.

BOE announces bond-buying scheme (9/28/22)

I will not sugarcoat it, things will get rough. You need to hold cash, make sure your job, business, or investments are secure (ie you have cashflow) and hunker down. Eliminate any unnecessary purchases. If you can, buy USDs as they will likely continue to rise and will hold value better than your own currency.
If Parliament goes through with more tax cuts, that will only make the fiscal situation worse and result in more borrowing, and thus more money printing in the end.
—----
Q: What does this mean for Gamestop? For the domestic US economy?
Gamestop will continue to operate as I am sure they have been- investing in growth and expanding their Web3 platform.
Fiat is fundamentally broken. This much is clear- we need a new financial system not based on flawed 16th fractional banking principles or “trust me bro” financial intermediaries.
My hope is that they are at the forefront of a new financial system which does not require centralized authorities or custodians- one where you truly own your assets, and debasement is impossible.
I haven’t really written about GME extensively because it’s been covered so well by others, and I don’t feel I have that much to add.
As for the US economy, we are still in a deep recession, no matter what the politicians say- and it will get worse. But our economic troubles, at least in the short term (6 months) will not be as severe as the rest of the world due to the aforementioned Dollar Milkshake.
The debt crisis is still looming, midterms are approaching, and the government continues to deficit spend as if there’s no tomorrow.
As the global monetary system unravels, yields will spike, the deleveraging will get worse, and our dollar will get stronger. The fundamental factors continue to deteriorate.
I’ve covered the US enough so I'll leave it there.
—------
Q: Did you know about the Dollar Milkshake Theory before recently? What did you think of it?
Of course I knew about it, I’ve been following Brent Johnson since he appeared on RealVision and Macrovoices. He laid out the entire theory in 2018 in a long form interview here. I listened to it maybe a couple times, and at the time I thought he was right- I just didn’t know how right he was.
Brent and I have followed each other and been chatting a little on Twitter- his handle is SantiagoAuFund, I highly recommend you give him a follow.

Twitter Chat

I’ve never met him in person, but from what I can see, his predictions are more accurate than almost anyone else in finance. Again, all credit to him- he truly understands the global monetary system on a fundamental level.
I believed him when he said the dollar would rally- but the speed and strength of the rally has surprised me. I’ve heard him predict DXY could go to 150, mirroring the massive DXY squeeze post the 1970s stagflation. He could very easily be right- and the absolute chaos this would mean for global trade and finance are unfathomable.

History of DXY

—----------
Q: The Pound and Euro are falling just because of the energy crisis there. That's it!
Why is the Yen falling then? How about the Yuan? Those countries are not currently undergoing an energy crisis. Let’s review the year to date performance of most fiat currencies vs the dollar:
Japanese Yen: -20.31%
Chinese Yuan: -10.79%
South African Rand: -10.95%
English Pound: -18.18%
Euro: -14.01%
Swiss Franc: -6.89%
South Korean Won: -16.73%
Indian Rupee: -8.60%
Turkish Lira: -27.95%
There are only a handful of currencies positive against the dollar, the most notable being the Russian Ruble and the Brazilian Real- two countries which have massive commodity resources and are strong exporters. In an inflationary environment, hard assets do best, so this is no surprise.
—------
Q: What can the average person do to prepare? What are you doing?
Obligatory this is NOT financial advice
This is an extremely difficult question, as there are so many factors. You need to ask yourself, what is your financial situation like? How much disposable income do you have? What things could you cut back on? I can’t give you specific ideas without knowing your situation.
Personally, I am building up savings and cutting down on expenses. I’m getting ready for a severe recession/depression in the US and trying to find ways to increase my income, maybe a side hustle or switching jobs.
I am holding my GME and not selling- I still have some shares in Fidelity that I need to DRS (I know, sorry, I was procrastinating).
For the next few months, I believe there will be accelerating deflation as interest rates spike and the debt cycle begins to unwind. But like I’ve stated before, this will lead us towards a second Great Depression very rapidly, and to avoid the deflationary blizzard the Fed will restart QE on a scale never seen before.
QE Infinity. This will be the impetus for even worse inflation- 25%+ by this time next year.
It’s hard to prepare for this, and easy to feel hopeless. It’s important to know that we have been through monetary crises before, and society did not devolve into a zombie apocalypse. You are not alone, and we will get through this together.
It’s also important to note that we are holding the most lopsided investment opportunity of a generation. Any money you put in there can be grown by orders of magnitude.
We are at the end of the Central Bankers game- and although it will be painful, we will rid the world of them, I believe, and build a new financial system based on blockchains which will disintermediate the institutions. They have everything to lose.
—------
Q: I want to learn more, where can I do? What can I do to keep up to date with everything?
You can start by reading books, listening to podcasts, and checking the news to stay abreast of developments. I have a book list linked at the end of the Dollar Endgame posts.
I’ll be covering the central bank clown show on Twitter, you can follow me there if you like. I’ll also include links to some of my favorite macro people below:

I’m still finishing up the finale for Dollar Endgame- I should have it out soon. I’m also writing an addendum to the series which is purely Q&A to answer questions and concerns. Sorry for the wait.
—-------------------
Nothing on this Post constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person.

Nexo's Business Model in Depth and at Length

Nexo has grown as a company, and so has our offering, but the underpinning principles remain the same. With this post, we would like to shed some light on Nexo’s business model and how it might differ from that of others.
Take a look at the chart below and let’s unpack it:
https://preview.redd.it/q687q4l1cq2a1.png?width=1200&format=png&auto=webp&s=ad85c3f6d489a00d1f6b0334c9aaafcec29c56b0
Since 2018 the core of Nexo’s business is the facilitation of collateralized credit. Where we differ from others is our battle-tested real-time risk engine. We require highly liquid collateral at appropriate loan-to-value ratios, regardless of whether we’re dealing with retail or institutional clients.
Nexo’s core services complement each other and make the enterprise profitable. Тhey include:

Crypto-backed loans, margin lending and institutional OTC loans made on a collateralized basis
Earn interest products and staking
Trading services (spot, futures, options, otc, etc.)

Let's dive deeper.
Nexo extends the assets from its Earn Interest product as loans to clients looking to borrow against their crypto in one form or another. Higher Earn rates are commonly subject to fixed terms, thresholds and token requirements to keep effective rates paid on our AUM well below the theoretical maximum.
https://preview.redd.it/bzt53f4hcq2a1.png?width=1614&format=png&auto=webp&s=629688d9f697fe790100790d0b3ca5d1d7e20dcc
On the other hand, the company profits on the positive net interest spread between the interest rate it receives and the yields it pays to interest-earning clients. Regardless of their nominal rates (e.g. 13.9% APR), loans are always conservatively collateralized.
https://preview.redd.it/afkcu2t2dq2a1.png?width=3200&format=png&auto=webp&s=f4c4d049128a8e4b67e7b704a57df1aef9dd96ad
https://preview.redd.it/yc16gvu4dq2a1.png?width=3200&format=png&auto=webp&s=8d45d400da7a97ca910bf36da9505837b5e35058
Example 1: Jane wants to earn interest on $130K in stablecoins (4-8% APY). John wants a Tesla and borrows Jane's $130K against his $260K in BTC. John transfers the BTC to Nexo and Nexo transfers Jane's stablecoins to John (13.9% APR). All transactions are collateralized.
The spot, futures, and options trading we offer via Nexo Pro and Nexo Prime accounts is a natural extension of our lending services, as margin is essentially a loan for the direct purpose of leveraged trading. Funding rates and fees can be significant in volatile periods.
Example 2: Mary has $100K in her Nexo Pro account and wants to go long BTC with 3x leverage. Josh has 300K USDC he wants to earn interest on. The 300K USDC is lent from Josh to Mary via Nexo. We charge her a fee which is then shared with Josh. All transactions are collateralized.
https://preview.redd.it/75p19sy9dq2a1.png?width=3200&format=png&auto=webp&s=9463d279db63e4f98839c59633e6f490463f18e2
To protect both clients that pay us interest and those we pay interest to, Nexo has the most efficient price-based collateral liquidations engine, and it has been battle-tested since 2018 in periods of high volatility without ever having lost a dollar.
https://preview.redd.it/fp0xbbgjdq2a1.png?width=3200&format=png&auto=webp&s=deeb9bcfa15c3ac446644b16fa5ac71d1e4f5174
In fact, Nexo’s automatic repayments system is similar to DeFi protocols like Aave or Maker. Should the collateralization ratio fall below 120%, portions of the collateral are automatically liquidated on several exchanges.
Compared to Aave and Maker, however, our liquidation engine is diversified across both centralized and decentralized exchanges, making Nexo much more efficient in execution and resilient to liquidity crunches.
Our trading services don’t rely on in-house matching engines and order books (like traditional crypto exchanges) but aggregate liquidity from various venues via smart order routing. Clients get best prices and access to cheap liquidity; Nexo can charge spreads and fees – a win-win.
All these activities – exchange services, crypto-backed loans, collateral liquidations, staking, etc. are revenue generators that require Nexo to hold on and move balances across a number of exchanges & DeFi protocols as part of our standard operations.
As a byproduct of Nexo holding balances across different exchanges and protocols, the company can seize opportunities for alpha generation in market-neutral ways for its clients and its own treasury.
Here are a few examples:
Example 1: Reverse cash-and-carry arbitrage, which combines a short position in an asset and a long futures position in that same asset, capturing the funding rate which at times can be substantial, especially during downturns.
Example 2: A market-neutral strategy in periods of heightened volatility involves price arbitrage – an asset is simultaneously bought and sold on two exchanges, capturing the spread. Few can capture that as it requires an inventory of various assets across different platforms.
Additionally, as PoS blockchains have gained prominence and market share (most notably after the Merge), staking has become a sustainable and scaleable source of yield offering fixed margins at any size.
Nexo’s products and market-neutral strategies add up to significant income and allow the company to offer a sustainable Earn Interest product without the need for uncollateralized lending. To capture the above opportunities, we keep balances on exchanges and DeFi protocols.
Counterintuitively, having a lot of idle assets in cold wallets implies business weakness as it suggests that the company is unable to generate returns on clients' funds. Nexo is in the business of generating value for its clients and thus needs to manage the entrusted assets actively.
In contrast, a traditional centralized exchange has its own internal order books and matches all of its clients' orders to buy and sell. It, therefore, must keep all its assets on-chain (which means the assets of its users, including companies such as Nexo).
Many exchanges are now publicly disclosing addresses in an attempt for Proof of Reserves. The shortfall is it only shows one side of the equation: the assets, omitting whether those assets exceed liabilities. Nexo is among the very few to show this.
To continue to provide the full suite of Nexo services, Nexo has assets both on-chain and off-chain for the above-described reasons. We, therefore, need an independent auditor to monitor all those assets and draw the necessary conclusions.
Proof of Reserves matter, and so to be as transparent as possible, in 2021, a PCAOB-certified auditor and leading US accounting firm helped Nexo pioneer a real-time attestation of custodial assets to show that our assets exceed customer liabilities.
With regards to the NEXO Token:

Less than 10% of our own assets are in NEXO Tokens and we have never used the NEXO Token as collateral for receiving loans
We also do not lend NEXO Tokens to institutions

The concentration of NEXO Tokens in clients’ balances in Nexo’s wallets is structural as clients get the most value out of NEXO when secured on the platform, just like BNB.
The events of the past months are a painful reminder that in order to generate returns in the markets safely, companies must adhere to stringent risk management protocols. Here we think that actions speak louder than words and would like to point to Nexo’s track record.
Our risk management ensured that we had $0 exposure to:

FTX/Alameda;
Genesis, Gemini;
Luno, BlockFi;
UST/Luna;
Three Arrows Capital;
Celsius, Babel, Hodlnaut;
Struggling crypto miners.

Nexo’s treasury management ensures we have effective asset liability management. Nexo is resistant to bank runs because we have no currency, maturity, or interest rate mismatch.
We have consistently refused to extend uncollateralized loans to the high-flying crypto asset managers. It is a fundamental principle for Nexo that has resulted in no bad debt during market turmoils.
Instead of grabbing market share by uncollateralized business, we kept our focus on automated, collateralized credit facilitation. Positive margins, scaleable, sustainable.
Nexo is above all a product company, and we will continue to deliver on our vision of a crypto finance product suite – both custodial & non-custodial, while pushing the boundaries of transparency and raising the bar for the industry.
Born in a bear market, Nexo has mastered and thrived in more than one downturn. When the markets are experiencing maximum pain, it usually is the worst time to sell. That is why in 2018 we developed our signature instant crypto-credit lines.
We are now in a phase that is seeing organic consolidation that will allow Nexo to realize economies of scale, offer even better terms to our clients, and focus on building new products and features.
Stay safe and take care of each other.

Posting Here Now That I Meet Karma Req - The Game We Play: Gambling With Giants, The Myth of the Margin Call, and Why Dates Disappoint

tl;dr - Due to a web of contracts and shared responsibilities, prime brokers are in a prisoner’s dilemma with GME shorts and are incentivized to keep short positions open to protect themselves against losses. By neglecting to raise rates and ignoring events of default, prime brokers can manage the fallout of these toxic assets by enabling a relationship of inaction; this makes it difficult to use metrics like FTDs for price forecasting. We are winning: buy and hodl.
This is not investment advice and references my opinion. Seek a licensed professional for investment advice.
I’ve noticed some confusion over core concepts and relationships related to the institutional side of trading, so I set out to create a simple primer post. As I learned more about prime brokerage firms and their contractual agreements, I realized the margin call process is deeply misunderstood. No one seems to be talking about prime brokerage agreements or margin lock-up agreements, which are both critical elements that impact how shorts are held accountable and to what degree.
We have been repeatedly disappointed by forecasted dates and it’s my belief that understanding the above agreements will demonstrate how these predictions will never be reliable.

Part 1: Meet The Players and Learn The Rules

1.a - Meet the Player: Hedge Funds

Everyone’s favorite topic. You know what they are: a group of rich people pool money together to be managed by an investor. Hedge funds are notorious for utilizing aggressive investment strategies to secure high active returns. This is accomplished by multiplying a fund’s buying power through the use of margin accounts which allow for leveraged trading.
Margin and leverage are similar terms that are often found together, so for now understand that 1) margin accounts allow investors to make trades with credit, 2) margin is a form of collateral requested by the lender (cash deposited as insurance), and 3) leverage is a measure of credit utilization relative to deposited cash in their account (represented as a factor e.g.,10:1).
Think of a margin account as a credit card, but instead of having a credit limit that you pay towards, it's the inverse: you can only use a certain % of credit depending on how much money you have deposited into your account. In the above example, the money deposited into the account is the hedge fund’s “margin” and the amount they must deposit in order to use x% of credit is their “margin requirement”. Because requirements are measured as a percentage of value, brokers will require more margin to be deposited as the value of open positions (price of shares) rises. Similarly, because securities (or entire portfolios) can be substituted for typical margin deposits, if a hedge fund's portfolio starts to lose value they will need to deposit more margin. In short, it’s a balancing act.
This post will be focusing primarily on short selling and, while other institutions can short sell, hedge funds are the most typical example. For example, Citadel LLC is a multi-national hedge fund group. For the purposes of this post, assume that hedge funds = short sellers.

1.b - Meet the Dealer: Prime Brokerages

Prime brokerage firms are the middle man for big money bullshit. Prime brokerage firms are commonly compared to regular brokerage firms (Fidelity, Robinhood, etc.) but for institutional investors. This is not an accurate comparison.
Where a regular broker facilitates trades by matching buyers and sellers, prime brokers function as financing firms. In the past, hedge funds would utilize multiple brokerage firms to execute trades, so prime brokerages were created to route and clear these trades through a central broker. This meant hedge funds could manage finances through one firm instead of accounting for several. As time went on, prime brokers expanded their services to include margin and securities lending, trade settlement, execution of trades, and more. It should be noted that there is significant competition between prime brokers, which has resulted in more lenient rates and specialized services for clients. Nowadays, prime brokerage refers to a bundle of services provided by investment banks exclusively for hedge funds and other investment firms.
Prime brokerage firms use two primary investment methods to make money: rehypothecation and financing. Rehypothecation involves re-using the collateral of a client to fund the broker’s own investments. Financing broadly involves using the value of one client's portfolio as collateral to raise cash which is then lent out to other clients for interest.
Prime brokers supply hedge funds (and other institutions) with additional cash to increase their margin and also supply shares for short-selling, with a specific talent for locating hard-to-borrow shares. The importance of a prime broker's function as a financier cannot be overstated: on average, 50% of hedge fund financing comes from prime brokers, of which 35% is extended on an overnight basis. Additionally, modern prime brokers provide faster trade executions and clearing than traditional brokerages, which is one of the main reasons why high-frequency quant trading has dominated the market.
So if you know nothing else, know this: hedge funds need prime brokers in order to be effective.

1.c - Meet the Banker: Investment Banks

Investment banks are the big money institutions who supply prime brokerage services for institutional investors. In essence, they are large financial institutions that help high net worth traders access large capital markets. They include the likes of JPMorgan Chase, Credit Suisse, Wells Fargo Securities, and many more.
They are different from commercial banks in that they do not directly provide business loans or accept deposits. Instead, they serve as intermediaries for large financial transactions, provide financial advice, and assist with mergers and acquisitions—oh, and they’re regulated by the SEC instead of the Fed.
If you’re concerned about the conflict of interest for a single institution to a) loan money through auxiliary services, b) provide investment advice to members, c) oversee mergers, acquisitions, and IPOs, d) are themselves divisions of larger orgs, e) exist to make profit for these larger orgs, and, f) facilitate short selling via rehypothecation of client portfolios, then you are not alone. But don’t worry, they’re expected to use a figurative Chinese wall so that no two divisions can profit off of one another unjustly. It works as well as you'd expect.
You should remember that they control the prime broker services and supply large sources of cash and equity for margin trading.

1.d - Meet the Supplier: Pension Funds

When hedge funds want to short stonks, their prime broker finds a pension fund or mutual fund (oh fuck more funds). These funds function as massive stores of securities and have become the largest supplier of loaned shares in the market (especially pension funds). If the prime broker is lucky, the pension fund is already a client of theirs and they can freely loan out their shares and pay them rebates on the interest they collect—otherwise they borrow directly from the pension fund for a nominal interest rate.
Wait, my retirement fund may be shorting GME? Yep. Private pension fund managers are only beholden to their requirement to act as fiduciaries for their sponsors. There are no specific regulations in place to dictate investment strategy, though they traditionally invest in bonds, stocks, and commercial real estate.
But pension funds have not been doing well: at the end of its 2020 fiscal year, the PBGC (insurance org for all private pension funds) had a net deficit of $48.2 billion and the average state and local pension fund could only cover 70% of their sponsors. Oh, and they grossly overestimate annual returns and, also worth mentioning, have been some of the largest sellers of GME shares.
So you can understand why these funds have been making riskier investments in search of higher returns (lending shares, derivatives, and investing in hedge funds).
In our game, prime brokers borrow x amount of shares from a pension fund for a low interest rate, then lend them to hedge funds for a larger interest rate.

1.e - Meet the Pro Gamers: Market Makers

While hedge funds are the focus of our twisted story, market makers are there to provide the initial stakes to gamble on through the facilitation of derivative trading. However, by definition, market makers are fairly simple.
Investopedia defines market makers as:

a participant that provides trading services for investors, boosting liquidity in the market. Specifically, market makers will provide bids and offers for a security in addition to its market size.

Many people think of the stock market as a trading house where buyers are instantly matched with sellers and stocks are exchanged for the current share price. This isn't the case. Instead, market makers facilitate trading for brokerages through their willingness to both buy and trade assets. Without this service, traders would have to wrestle with liquidity risk, which is the inherent risk of not being able to locate a counterparty to trade with. This is good; market makers fundamentally serve a good purpose in this bare-bones framework.
Also, here are some articles explaining how market makers make money and how some market makers primarily serve their own self-interest over the interests of the market.

Market Makers and Derivatives

For our purpose, we want to focus on how market makers facilitate the trading of derivative contracts. Derivatives are securities contracts that derive their value from the price fluctuations of underlying assets (stocks, bonds, or commodities). Market makers serve a similar function by both creating and trading derivative contracts to boost the liquidity of the derivative market. Common derivatives include option contracts, swaps and futures.
The derivative market is seriously fucked up: the total notional value of the derivative market, which is the total underlying value of assets multiplied by associated leverage, is $582 trillion (or more than 7 times the amount of total cash in global circulation).
The value of the derivatives market is so incredibly high primarily due to leveraged trading, which is why hedge funds love derivatives. I don’t have much more to say about market makers, so here’s an article detailing how derivatives are commonly used to hide short positions.
All you need to know about Market Makers is that they provide a way for hedge funds to gamble and cover short positions. For example, Citadel Securities is a market maker.

1.f - Setting Up the Game (A Recap)

A hedge fund walks into the casino that is institutional trading and finds a table. They tell the dealer, a prime broker, that they want more casino chips so they can play high stakes poker with the big boys.
The prime broker wants to make money off the game, so they go to the casino banker, an investment bank, and show the banker how many chips the hedge fund has already won and ask for a loan. The banker’s books look a lot nicer when their chips are loaned out (because of interest) so they happily loan the chips to the prime broker.
The prime broker returns to the table with the extra chips and lends them to the hedge fund for a modest rate, but asks to hold some of the chips as collateral. Now that the hedge fund has lots of chips, they want to start gambling and ask the prime broker to deal them in.
The prime broker goes to a pension fund, who manages the casino supply closet, and asks for a full deck. The pension fund lends the prime broker a deck of cards but charges some interest on it—mainly to ensure they’ll get the cards back.
The prime broker goes back to the hedge fund and deals them a hand, but not before charging more interest than they are responsible for paying back to the pension fund (the house always gets a cut).
A few market makers pull up to the table and start placing bets. The hedge fund waits for a nice looking setup and places a bet. The game begins.
Oh fuck the hedge fund is broke.

1.g - Rules of the Game

You’ve probably seen margin calls described like this: a short seller borrows stonks and sells the stonks back to the market, hoping the price will go down. When the stonks go up in price, the broker who lent out the stonks margin calls the short seller and says, “pay up, Fucko". The short seller is broke and can’t post more collateral so they must buy shares to cover or else they'll be liquidated by the broker, who would then be responsible for buying shares.
This description may get the fundamental points across, but when talking about institutional trading this is akin to using a crayon to draft up architectural blueprints. In fact, it’s even worse than that. It’s just plain wrong.

Part 2: How the Game is Played

2.a - The Typical BorroweLender Relationship

It has been confirmed that no DTCC members defaulted in January, which seems crazy considering the $500 share price and rapid run up (note the post confuses a margin call with a default). This means that, despite the likelihood of brokers making margin calls, no shorts failed to post margin. While one short firm was saved by a $2.8B bailout, it's hard to believe that a 26:1 run-up wouldn't have caused at least one other DTCC member to default. To understand WTF happened in January, we need to understand the underlying principles of a borrowelender relationship.
When a borrower asks for a loan, the lender must evaluate the short-term risk of the borrower defaulting on the loan vs. the long-term profit gained from interest. Likewise, a borrower must evaluate the long-term cost imposed by interest vs. the short-term value of the loan. This fundamental understanding creates a system of checks and balances that ensures both parties enter into a mutually beneficial agreement. When there is shared exposure to evenly weighted risks and rewards, both parties have reasonable assurance that the other will adhere to the terms of the loan and continue to act in the best interest of the borrowelender relationship.
Let’s talk about that last part: “both parties have reasonable assurance that the other will adhere to the terms of the loan and continue to act in the best interest of the borrowelender relationship.”
Imagine you are renegotiating a business loan with your bank after an unexpectedly bad quarter. Per the original terms, you risk missing payments and defaulting, which will expose you to a cascading effect of increased rates. The bank recognizes this and, since your credit and payment history is good, offers you a forbearance agreement that pauses payment until the next quarter. Even though the bank had no obligation to pause payments, this amended agreement serves the interest of the borrowelender relationship because, 1) it’s more profitable for the lender if you finish paying off the loan than it is for you to go bankrupt, and 2) the lender can better secure the return of loaned assets through delaying payments, further reducing their risk exposure. Both the borrower and lender have benefited more from acting in the mutual interests of the relationship, rather than had the lender acted only in self-interest.

2.b - The Prime Broker BorroweLender Relationship

The lack of defaults in January makes more sense when viewing the prime broker as a lender. While prime brokers have a reputation for callously cutting off smaller defaulting funds, they seem to be much more risk-tolerant of bigger, more established funds with large diversified portfolios and access to robust alternative financing options (remember, prime brokers make most of their money through rehypothecation and financing).
However, unlike our bank loan example, securities loans don't have expiration dates and can remain open as long as margin is posted (or the original lender requests their shares, which never happens). The longer that these positions remain open, the more profit brokers stand to make as they continue to reap interest. In fact, as financing organizations, prime brokers assume zero market risk from the underlying position of loaned assets. Instead, they are only exposed to risk if a borrower defaults. Most importantly, because prime brokers continue to profit off of short-seller interest at a greater rate than what is owed to lenders, prime brokers are exposed to less risk the longer a position remains open and have less incentive to raise collateral requirements (especially if it would interfere with payments).
Even if prime brokers wanted to raise rates, it’s unlikely they could. Wait...what?

2.c - Rigging the Deck: Prime Brokerage Agreements and Margin Lock-Ups

You’ve probably heard before that Wall Street is competitive at the moment. Nowhere is this more clearly seen than the competition between prime brokers. When investment banks have excess liquidity and interest rates are low, they are free to offer more competitive prime brokerage financing and amenities.
This increase in competition has had the notable effect of unbalancing the lendeborrower relationship by shifting more power into the hands of hedge funds (borrowers). Hedge funds are now empowered to negotiate for more lenient prime brokerage agreements and attractive margin lock-up agreements are more widely available.
Here's a random fact: the National Bureau for Economic Research estimates that, despite excess liquidity, the six largest US banks can not withstand 30 days of a liquidity crisis as caused by either deposit runs, loss of repo agreements, prime broker runs, or collateral calls. (This means investment banks are overleveraged).
Now back to our scheduled programming.

2.d - Prime Brokerage Agreement

Investopedia again:

A prime brokerage agreement is an agreement between a prime broker and its client that stipulates all of the services that the prime broker will be contracted for. It will also lay out all the terms, including fees, minimum account requirements, minimum transaction levels, and any other details needed between the two entities.

At its base, this agreement exists as a templated prime brokerage agreement (which differs from broker to broker). A template agreement typically only requires the broker to extend financing on an overnight basis and gives the broker sole discretion to determine margin requirements. This means that a fund's broker can pull financing or significantly increase the manager’s margin without notice. Additionally, template agreements tend to provide brokers with broadly defined default rights against borrowing parties, which allows the broker to put a fund into default and liquidate their assets with considerable discretion.
These template agreements are no bueno for hedge funds, as being put into default can create a cascading effect for any other trade agreements that contain a cross-default provision&firstPage=true) (ISDA and repos). This is a common provision in trade agreements which states that when a party defaults on an agreement, it simultaneously counts as a default in other agreements—even third-party agreements.
Because of this, most hedge funds seek to negotiate the terms of a prime brokerage agreement. Depending on the pedigree of client, most brokers are fine with providing borrower-friendly amenities within the agreement. A prime broker's ideal client is one that uses generous amounts of leverage, employs a market neutral strategy, shorts hard-to-borrow stocks and has high turnover percentages (high volume of trades). Quant funds are particularly attractive as they often execute trades directly through prime brokerages.

2.e - How Agreements Are Negotiated

Financing Rates

On longs, a prime broker extends financing, thereby allowing a manager to “lever-up” its fund’s positions. The more leverage a manager employs, the greater the financing it needs. When lending, a prime broker will charge the fund an interest rate as follows:

Interest rate = [Benchmark rate] plus a [Spread]
- e.g.: = [Overnight Bank Funding Rate (“OBFR”)] plus [35 basis points]

On shorts, a prime broker lends the fund stocks, which the manager then sells in the market. The prime broker will charge stock loan fees, often expressed as interest earned on the proceeds generated from the short sales, calculated as follows:

Interest rate = [Benchmark rate] minus a [Spread]
- e.g.: = [OBFR] minus [30 basis points]

Funds are then charged interest on open positions at a rate determined by the contract.
Negotiating financing terms is pretty straightforward: lower rates.

Margin Requirements

Margin requirements are whatever is greatest between the regulatory requirement or the house requirement.
The regulatory requirement is the minimum margin required by regulation. In the U.S., the relevant regulation is either Reg T: 50% margin requirement of position, or Portfolio Margin: 15% margin requirement of portfolio. I’ll touch on the difference between these in section 2.l.
The house requirement is the minimum margin required by the prime broker determined from a risk perspective. Essentially, brokers have their own proprietary ways of calculating risk for both individual positions and portfolios; if the house requirement overshadows the regulatory requirement, you pay more margin.
It’s also worth noting that many prime brokerage firms offer cross margining or bridging, which is the ability to cross margin cash products with synthetic products (e.g. cash equities with equity swaps), which can lower the overall margin requirement.
The SEC requires $500,000 of minimum net equity (comprised of cash and/or securities) to be deposited in a prime brokerage account, meaning brokers should have access to at least this much collateral at any given moment. Hedge fund managers commonly try to negotiate for this minimum to not be raised further. Similarly, prime brokerage accounts can be subject to other minimum requirements imposed by agreements outside of the prime brokerage agreement, such as an ISDA master agreement.
Note: info from the above two sections was primarily taken from this source (and checked with other sources).

2.f - The Fine Print: Margin Lock-Up Agreements

Here’s where shit gets fucky.
In a competitive lending market, margin lock-up agreements are frequently offered as a way to entice prospective clients (note: margin lock-up agreements and prime brokerage agreements are separate agreements). Here’s an example of one.
Margin lock-up agreements lock-in a prime broker’s margin requirements for anywhere between 30-180 days based upon the client’s credit history and the riskiness of the position. The lock-up prevents the prime broker from altering pre-agreed margin requirements or margin lending financing rates, or demanding repayment of margin or securities loans or any other debit balance. Effectively this means that, should a hedge fund’s position change and the prime broker would like to implement a stricter margin requirement, the prime broker is contractually obligated to give the hedge fund x days' notice. Within this period, the broker cannot demand any repayment—so no interest or returned shares. This is big, as funds also pay interest on margin debit.
Now remember when I said that there’s a lot of competition between prime brokers? It’s typically not in the broker’s interest to actually impose an adjusted margin requirement. Instead, these lock-up agreements function as a 30-180 day notice period for hedge funds to adjust portfolios to fit within the original margin requirement. Actually imposing an adjusted margin requirement is considered detrimental to the business relationship and will prompt the hedge fund to take their business to a more lenient broker. This has the added adverse effect of impacting the broker's reputation amongst other clients.

2.g - Margin Lock-Up Termination Events

Termination events are clauses that allow the prime brokerage to terminate the margin lock-up agreement and adjust margin requirements as needed. Typically these events include net asset value decline triggers or a removal of key persons. It’s also important to note that these margin lock-up termination events apply specifically to margin lock-up agreements, and not the prime brokerage agreement as a whole. So if a hedge fund pulls something shady, the prime broker reserves the right to terminate the lock-up agreement (but this doesn't mean they will necessarily have the right to terminate the prime brokerage agreement).

2.h - Terminating a Prime Brokerage Agreement Without Cause

Now let's talk about how a prime broker could terminate the overarching prime brokerage agreement. There are two types of termination: without cause and with cause.
Either party can terminate the prime brokerage agreement without cause, meaning at any time the hedge fund or prime brokerage can decide to stop doing business with the other for no stated reason. However, a prime broker must usually give a notice period before terminating the agreement, which is often the same period as the margin lock-up period. Because of this, bigger hedge funds often have multiple brokerage accounts with different brokers, should they ever need to transfer balances.

2.i - Terminating a Prime Brokerage Agreement With Cause (Events of Default)

Since margin lock-ups fundamentally increase a prime brokerage’s exposure to risk, the broker tries to include as many fail-safes in the prime brokerage agreement as they can. These fail-safes are commonly called termination events (not to be confused with the aforementioned margin lock-up termination events) or events of default, and allow the broker to terminate the contract with cause.
Hedge funds want as few events of default included in their agreement as possible because, when triggered, they give brokers the power to take control of a hedge fund’s account (usually for liquidation). Notably, this power is used sparingly. If a contract is terminated with cause, the hedge fund has seriously fucked up or the market is crashing.
Common events of default include: failure to pay or deliver, non-payment failures, adequate assurances or material adverse change provisions, and cross-defaults.
Last thing to note is that most of these agreements contain something called a fish or cut bait provision, which is akin to a statute of limitations. If an event of default occurs, this provision states that a prime broker has x days to act on it or else they waive the right to act on it.
Info regarding the above two sections is primarily taken from this source.

2.j -Termination Events vs. Events of Default

Wait, aren't these terms used interchangeably? Yes, in general application they can mean the same thing. However, there are some nuanced differences, explained in this white paper (p.6):

Events of default were historically viewed as circumstances where the defaulting party was to blame, while termination events were viewed as something that happened to the affected party. While triggering an event of default or termination event tend to lead to the same end result – the ability of the non-defaulting party to early terminate and employ close-out netting – there are three key differences under the Master Agreement, explained Rimon Law partner Robin Powers:
1. An event of default will result in the early termination of all transactions, whereas certain termination events only result in the early termination and close-out of affected transactions.
2. Under the 2002 Master Agreement, a party is required to notify the counterparty when it experiences a termination event but not an event of default.
3. Section 2(a)(iii) of the Master Agreements makes it a condition precedent for the non-defaulting party to continue to make payments on transactions for which no event of default has occurred and is continuing. A similar condition precedent does not exist with respect to termination events

I'll touch on this more in the comments, but just know that these differences affect who is responsible and/or obligated to close out, notify, and make payments on transactions post-default. It's also worth noting that this white paper is specifically discussing ISDA master agreements, which is an adjacent agreement that influences the prime brokerage agreement.

2.k - ISDA Master Agreement vs. Prime Brokerage Agreement

Published by the International Swaps and Derivatives Association, ISDA master agreements specifically dictate terms that govern over-the-counter (OTC) derivative transactions.
Unlike a prime brokerage agreement, which can vary widely from broker to broker, ISDA master agreements are standardized. These preprinted forms are signed and executed without modification, while a second "schedule" document houses any negotiated amendments. Finally, a third contract is added to the mix called a Credit Support Annex (CSA), which outlines collateral arrangements between the two parties. In most cases, all three contracts fall under the ISDA master agreement moniker.
What’s important about ISDA agreements is that they are negotiated in a considerably similar fashion to prime brokerage agreements, using identical language, identical provisions, and serving near-identical purposes. This is great, as there are more publicly available resources and insights available for ISDA agreements than for prime brokerage agreements and these insights are largely transferable between the two—especially with respect to how margin is treated.

2.l - Margin Calls: Initial Margin vs. Maintenance Margin

While margin lock-up agreements require 30-180 days' notice prior to a given margin rate increase, it does not protect against minimum maintenance margin requirements.
Initial Margin: the collateral that must be in your account to open a position. Looking back at our base minimum regulatory requirements for stock markets, Reg T establishes that initial margin must be 50% of a position's value.
Maintenance Margin: supplemental margin needed to maintain an open position. Reg T establishes this as a minimum of 25% of the current value of a position.
Reg T vs. Portfolio Margin: created as a response to the Crash of 1929, Reg T has been around for a long time and had little in the way of changes (its margin rate was last adjusted in 1974). Because of its age, Reg T is incredibly simple: 50% initial margin, 25% maintenance margin, and every position is financed separately. Finalized in 2008, portfolio margin is the hot younger sister of Reg T and provides an alternative method of margin financing based on the estimated risk of a portfolio. With portfolio margining, initial margin and maintenance margin requirements are the same and also considerably smaller (between 8 - 15%). Funds are given the option between the two systems; most opt for portfolio margin.
Regardless of which system they use, whenever the price of a shorted security goes up, margin must be deposited based on whatever the agreed upon rate is. A failure to maintain appropriate margin results in a margin call. Failure to post margin within two to five days of a margin call results in an event of default.

2.m - What Happens When A Hedge Fund Defaults?

Once a default occurs, the prime broker has the power to liquidate a fund’s portfolio (here are some fun example default clauses) or, at least, close out positions in default. Notably, the prime broker doesn’t have to act upon an event of default and can simply ignore it. Regardless, hedge funds typically require a notification requirement and a default and remedies clause. We’ve already discussed notification requirements, so let’s cover the default and remedies clause. This fairly standard clause states that any private sale using their liquidated assets should be done in good faith and not unjustly benefit competing firms or entities. This article explains more about liquidation, albeit from a voluntary perspective.

Part 3: What's Next?

3.a - Wrap Up

If it isn't obvious yet, prime brokers are incentivized to keep margin rates manageable for clients as long as they have reason to believe their client can continue to make payments. While they have the option to increase rates, it's often not in their best interest to exert additional pressure on a borrower (nor is it easy to do). Prime brokers and short sellers have found themselves in a prisoner's dilemma where, as long as everyone is making payments and nothing moons, the situation is at least manageable. The critical issue is that for a prime broker to enforce their right to amend the situation, they have to assume the responsibility of closing out open positions and—with only the client's portfolio to help cover—could find themselves footing the bill for massive losses. Depending on the size of a given position, this could be a large enough loss to bankrupt a major institution.
With the deck rigged, the situation can seem daunting—but it’s important to remember that the fundamental game hasn’t changed: whoever is short on GME is juggling a losing position. At this point, we are watching these bad bets get shifted from player to player and they are bleeding out at every ante. the difference in magnitude of market cap between a $4 and $200 share price, and a $200 and $1000 share price is massive. Literally by a factor of 45 (50-5).
One thing we should take away from all of this is that, while clusters of dates can provide good general estimates and support pattern analysis, we should avoid forecasting dates or using specific dates as indicators. As shown by the sheer flexibility of these confidential agreements and the impetus for brokers to not enforce their own terms, retail traders simply do not have access to enough information to accurately anticipate institutional responses.
Instead, let’s keep in mind that buying momentum with GME has remained high since Jan, OBV trend is solid, the price floor is higher making it increasingly hard to drive the price down, the abundance of liquidity in the market is a greater risk to institutional investors than retail, the regulatory changes support retail, GameStop has no debt, $1bn+ in cash, and a leadership team driving significant industry-leading initiatives. Shorts have to cover: buy and hodl. (extra DD in comments)

The Game We Play: Gambling With Giants, The Myth of the Margin Call, and Why Dates Disappoint (Updated DD)

Part 1: Meet The Players and Learn The Rules

1.a - Meet the Player: Hedge Funds

1.b - Meet the Dealer: Prime Brokerages

1.c - Meet the Banker: Investment Banks

1.d - Meet the Supplier: Pension Funds

1.e - Meet the Pro Gamers: Market Makers

a participant that provides trading services for investors, boosting liquidity in the market. Specifically, market makers will provide bids and offers for a security in addition to its market size.

Market Makers and Derivatives

1.f - Setting Up the Game (A Recap)

A hedge fund walks into the casino that is institutional trading and finds a table. They tell the dealer, a prime broker, that they want more casino chips so they can play high stakes poker with the big boys.
The prime broker wants to make money off the game, so they go to the casino banker, an investment bank, and show the banker how many chips the hedge fund has already won and ask for a loan. The banker’s books look a lot nicer when their chips are loaned out (because of interest) so they happily loan the chips to the prime broker.
The prime broker returns to the table with the extra chips and lends them to the hedge fund for a modest rate, but asks to hold some of the chips as collateral. Now that the hedge fund has lots of chips, they want to start gambling and ask the prime broker to deal them in.
The prime broker goes to a pension fund, who manages the casino supply closet, and asks for a full deck. The pension fund lends the prime broker a deck of cards but charges some interest on it—mainly to ensure they’ll get the cards back.
The prime broker goes back to the hedge fund and deals them a hand, but not before charging more interest than they are responsible for paying back to the pension fund (the house always gets a cut).
A few market makers pull up to the table and start placing bets. The hedge fund waits for a nice looking setup and places a bet. The game begins.
Oh fuck the hedge fund is broke.

1.g - Rules of the Game

Part 2: How the Game is Played

2.a - The Typical BorroweLender Relationship

2.b - The Prime Broker BorroweLender Relationship

2.c - Rigging the Deck: Prime Brokerage Agreements and Margin Lock-Ups

2.d - Prime Brokerage Agreement

Investopedia again:

A prime brokerage agreement is an agreement between a prime broker and its client that stipulates all of the services that the prime broker will be contracted for. It will also lay out all the terms, including fees, minimum account requirements, minimum transaction levels, and any other details needed between the two entities.

2.e - How Agreements Are Negotiated

Financing Rates

Interest rate = [Benchmark rate] plus a [Spread]
- e.g.: = [Overnight Bank Funding Rate (“OBFR”)] plus [35 basis points]

Interest rate = [Benchmark rate] minus a [Spread]
- e.g.: = [OBFR] minus [30 basis points]

Funds are then charged interest on open positions at a rate determined by the contract.
Negotiating financing terms is pretty straightforward: lower rates.

Margin Requirements

2.f - The Fine Print: Margin Lock-Up Agreements

2.g - Margin Lock-Up Termination Events

2.h - Terminating a Prime Brokerage Agreement Without Cause

2.i - Terminating a Prime Brokerage Agreement With Cause (Events of Default)

2.j -Termination Events vs. Events of Default

Wait, aren't these terms used interchangeably? Yes, in general application they can mean the same thing. However, there are some nuanced differences, explained in this white paper (p.6):

Events of default were historically viewed as circumstances where the defaulting party was to blame, while termination events were viewed as something that happened to the affected party. While triggering an event of default or termination event tend to lead to the same end result – the ability of the non-defaulting party to early terminate and employ close-out netting – there are three key differences under the Master Agreement, explained Rimon Law partner Robin Powers:
1. An event of default will result in the early termination of all transactions, whereas certain termination events only result in the early termination and close-out of affected transactions.
2. Under the 2002 Master Agreement, a party is required to notify the counterparty when it experiences a termination event but not an event of default.
3. Section 2(a)(iii) of the Master Agreements makes it a condition precedent for the non-defaulting party to continue to make payments on transactions for which no event of default has occurred and is continuing. A similar condition precedent does not exist with respect to termination events

2.k - ISDA Master Agreement vs. Prime Brokerage Agreement

2.l - Margin Calls: Initial Margin vs. Maintenance Margin

2.m - What Happens When A Hedge Fund Defaults?

Part 3: What's Next?

3.a - Wrap Up

Hyperinflation is Coming- The Dollar Endgame: PART 5.0- "Enter the Dragon" (FIRST HALF OF FINALE)

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Hello, I have a homework and I really mix up between them all the professor wants two example of each 1. pure and diversifible risk 2. pure and non diversifible risk 3. speculative and diversifiable risk 4. speculative and non diversifible risk

"Diversify your portfolio to manage risk". Thanks, investopedia.

ELIF: The difference between diversifiable risk vs non-diversifiable risk

Endogeneity is a non-diversifiable risk. Have the integrity to accept that and the courage to continue in the face of adversity.

Diversify your Holdings - Do not trust the government. This is a Sprott White paper discussing risks and alternatives for international storage. For non-Canadians, PSLV is such diversification. For big stackers, please read.

Momentum Stock Trading Explained

Understanding Momentum Indicators

The Benefits of Momentum Trading

Trend Following vs. Momentum Trading

Risk Management in Momentum Trading

Momentum Trading with Composer

"The first person to make a million in the gold rush sold shovels." Don't forget to diversify your portfolio with high-risk/high-reward non-spooky October memes.

Strange Things Volume II: Triffin's Dilemma and The Dollar Milkshake

(Seriously, stop here and go back and read Part 1.5 and Part 4.3 Do it!)

The Dollar Milkshake

Q&A

(Many of you have been messaging me with questions, rebuttals or comments. I’ll do my best to answer some of the more poignant ones here.)

Nexo's Business Model in Depth and at Length

Posting Here Now That I Meet Karma Req - The Game We Play: Gambling With Giants, The Myth of the Margin Call, and Why Dates Disappoint

Part 1: Meet The Players and Learn The Rules

1.a - Meet the Player: Hedge Funds

1.b - Meet the Dealer: Prime Brokerages

1.c - Meet the Banker: Investment Banks

1.d - Meet the Supplier: Pension Funds

1.e - Meet the Pro Gamers: Market Makers

Market Makers and Derivatives

1.f - Setting Up the Game (A Recap)

1.g - Rules of the Game

Part 2: How the Game is Played

2.a - The Typical BorroweLender Relationship

2.b - The Prime Broker BorroweLender Relationship

2.c - Rigging the Deck: Prime Brokerage Agreements and Margin Lock-Ups

2.d - Prime Brokerage Agreement

2.e - How Agreements Are Negotiated

Financing Rates

Margin Requirements

2.f - The Fine Print: Margin Lock-Up Agreements

2.g - Margin Lock-Up Termination Events

2.h - Terminating a Prime Brokerage Agreement Without Cause

2.i - Terminating a Prime Brokerage Agreement With Cause (Events of Default)

2.j -Termination Events vs. Events of Default

2.k - ISDA Master Agreement vs. Prime Brokerage Agreement

2.l - Margin Calls: Initial Margin vs. Maintenance Margin

2.m - What Happens When A Hedge Fund Defaults?

Part 3: What's Next?

3.a - Wrap Up

The Game We Play: Gambling With Giants, The Myth of the Margin Call, and Why Dates Disappoint (Updated DD)

Part 1: Meet The Players and Learn The Rules

1.a - Meet the Player: Hedge Funds

1.b - Meet the Dealer: Prime Brokerages

1.c - Meet the Banker: Investment Banks

1.d - Meet the Supplier: Pension Funds

1.e - Meet the Pro Gamers: Market Makers

Market Makers and Derivatives

1.f - Setting Up the Game (A Recap)

1.g - Rules of the Game

Part 2: How the Game is Played

2.a - The Typical BorroweLender Relationship

2.b - The Prime Broker BorroweLender Relationship

2.c - Rigging the Deck: Prime Brokerage Agreements and Margin Lock-Ups

2.d - Prime Brokerage Agreement

2.e - How Agreements Are Negotiated

Financing Rates

Margin Requirements

2.f - The Fine Print: Margin Lock-Up Agreements

2.g - Margin Lock-Up Termination Events

2.h - Terminating a Prime Brokerage Agreement Without Cause

2.i - Terminating a Prime Brokerage Agreement With Cause (Events of Default)

2.j -Termination Events vs. Events of Default

2.k - ISDA Master Agreement vs. Prime Brokerage Agreement

2.l - Margin Calls: Initial Margin vs. Maintenance Margin

2.m - What Happens When A Hedge Fund Defaults?

Part 3: What's Next?

3.a - Wrap Up

Hyperinflation is Coming- The Dollar Endgame: PART 5.0- "Enter the Dragon" (FIRST HALF OF FINALE)

Updated Complete Table of Contents:

“Enter the Dragon”

PART 5.0 “The Monster & the Simulacrum”

The Inflation Serpent