More Unbelievable
Doug Nolan
Quite a bit of Year 2026 theme ammo this week: “Expect the Unbelievable.”
How about a hedge fund started in 2024 by a 22-year old “wunderkind” who had worked at FTX’s Future Fund, the philanthropic arm tied to Sam Bankman-Fried.
At its recent peak, fund assets had inflated to a staggering $45 billion.
Unbelievably, after dropping 67% in July (desperate for a Citadel bailout), the (now $10bn) fund apparently is still up 80% y-t-d.
When you thought you’d seen about everything…
Leverage: genius on the upside, big trouble on the downside.
July 31 – Wall Street Journal (Peter Rudegeair and Berber Jin)
“Leopold Aschenbrenner’s hedge-fund firm Situational Awareness is down around 67% so far in July after incurring heavy losses on AI stocks, according to a person who saw a letter the firm sent to investors Thursday.
‘We let you down this month,’ Aschenbrenner wrote in the investor letter…
The deep losses prompted the firm to sell the bulk of its stockholdings to Ken Griffin’s investment firm Citadel as it raced to gather cash to cover margin calls from its lenders…
Situational’s gains earlier in the year were so large that, even including July’s losses, the fund remains up about 80% on the year, the letter said.
Through the end of May, Situational gained about 270%...”
July 31 – CNBC (Hugh Son)
“Two years ago, Leopold Aschenbrenner argued he was one of few people in the world who saw the future clearly.
In a sprawling, 165-page essay that became required reading in Silicon Valley, the former OpenAI researcher positioned himself as a kind of prophet for the coming age of artificial super intelligence.
But this week, the limits of Aschenbrenner’s vision were on display when the AI-themed hedge fund he runs — named Situational Awareness, also the title of his viral June 2024 manifesto — ran into the harsh reality of tumbling semiconductor stocks and Wall Street margin calls.
At its peak earlier this month, his fund sat atop $45 billion in assets.
By Thursday, however, after being forced to offload all of his leveraged stock bets — including hard-hit names like SK Hynix and CoreWeave — to Ken Griffin’s Citadel at a discount, the fund’s holdings plunged to around $10 billion…”
The Citadel bailout triggered a decent rally/squeeze.
The Semiconductors ended the week 8.4% above Wednesday’s intraday lows, with the Nasdaq100 4.0% off lows.
Some unbelievable volatility and moves.
Microsoft surged 21.8% this week, with Amazon up 17.0%, and Alphabet gaining 11.4%.
Meanwhile, Qualcomm dropped 11.6%, Micron 10.6%, and AMD 8.8%.
The MAG7 Index recovered 4.2% this week.
Oracle, CoreWeave, and technology bonds more generally rallied late in the week.
I expect worries to only build over time.
The first “bailout” is always the easiest.
Citadel and others will have less capacity in the future.
July 28 – Reuters (Marc Jones)
“The AI boom and the risk of a correction are emerging as major global credit risks, ratings agency Fitch has warned, adding to growing concerns that soaring tech valuations and unprecedented AI spending may be running ahead of uncertain future returns.
In its third-quarter Global Risk Outlook, Fitch said the credit backdrop remains dominated by two short-term risks: mounting vulnerability to an AI-related market correction and continued uncertainty linked to the U.S.-Iran conflict…
‘The scale of AI investment is such that the exposure of the economy and overall capital market to such a correction is significant,’ Fitch said.”
Thirty-year Treasury yields surged 12 bps this week to 5.27%, trading this week to the high back to 2007.
Global yields continue their march higher.
EM bonds remained under pressure, with notable weakness in dollar-denominated debt.
Yields in Panama, Peru, Colombia and Chile all posted double-digit increases.
Global “carry trade” stress is building.
The yen surged 4.1% this week.
And while not “unbelievable,” for the first time in three decades Japan’s Ministry of Finance and the U.S. Treasury coordinated market intervention to support the yen.
July 31 – Financial Times (Kate Duguid, Claire Jones, Katie Martin, Ian Smith and David Keohane)
“The US Treasury intervened in yen exchange rates on Friday, marking the first time Tokyo and Washington joined forces to support the Japanese currency via outright purchases in nearly 30 years.
The Federal Reserve Bank of New York undertook the unusual move of conducting a sale of euros to buy yen on behalf of the Treasury…
The sales were conducted through Goldman Sachs and Morgan Stanley…
The Treasury had earlier told several banks on Wall Street that it was considering an intervention to support the Japanese currency, which on July 23 hit its weakest level against the dollar since 1986.”
Not quite unbelievable, but Kevin Warsh is really struggling.
It’s almost as if central to his strategy was a belief he could simply smooth talk the markets.
Tense markets are having none of it.
Not the time or the place.
I hope an overconfident Warsh doesn’t think he can do the Greenspan thing and have the markets eating out of the palm of his hand.
This is such a different era.
At least markets trusted that Powell wasn’t trying to BS them.
There’s too much debt, speculative leverage and Bubble excess.
The system has too much underlying fragility for Warsh to push through major changes at the Fed.
We need traditional central banking and sound judgement.
Federal Reserve credibility is today at the greatest risk in decades.
A fractured committee.
And this is certainly not the time to tinker with inflation indicators.
Not the time to adjust the meeting schedule either.
Warsh needs to quickly right the ship.
July 30 – Bloomberg (Bill Dudley)
“Federal Reserve Chair Kevin Warsh seemingly wants to outsource monetary policy to financial markets.
In his telling, the central bank’s job is to be the referee, not the one influencing market expectations.
Warsh says he wants markets to play the ball, not the Fed.
To ensure that outcome, he argues that not only is it essential that the Fed provide no forward guidance about the future path of interest rates, but also that the Fed not explain how it would likely respond as circumstances change, that is, not explain the central bank’s monetary policy reaction function.
I have no quarrel for ending forward guidance when the Fed is not at the zero lower bound for short-term rates…
But when Warsh goes considerably beyond that and refuses to provide information about what is important to him and the Fed in conducting monetary policy, that’s where I get off the bus.”
July 30 – Financial Times (Editorial Board)
“Warsh is seeking to square a circle.
He has bemoaned persistent inflation over the past few years and vowed to pull it back down to the central bank’s 2% target.
But he has not adequately explained why he and the committee he chairs were reluctant to raise interest rates to achieve that goal.
Markets are already suggesting persistent above-target inflation and higher interest rates lie ahead.
He did not seek to correct this interpretation, stating instead that ‘the message from markets is the message from markets’, sparking concerns that his reticent style is already backfiring.
It is possible, as they have been in the past, that political considerations are at play.”
July 30 – Wall Street Journal (Sam Goldfarb)
“The bond market has a message for Kevin Warsh: Don’t try that again.
Yields on longer-term U.S. Treasurys held near their highest levels in 19 years Thursday, a day after the Federal Reserve chairman jolted the market by failing to persuade investors that he was willing to support rate increases to fight inflation.
The moves were unusual—and alarming.
Even as yields on longer-term bonds surged, those on short-term Treasurys fell, indicating concerns that the Fed would wait too long to lift rates and then have to raise them aggressively down the road.
For the new Fed chairman, the action amounted to a warning shot.”
July 30 – Reuters (Jamie McGeever)
“The plunge in long-dated U.S. bond prices reveals two things about how investors view Federal Reserve Chair Kevin Warsh: his honeymoon period is over, and his inflation-fighting credibility is under serious scrutiny.
The 30-year Treasury yield surged above 5.20% on Wednesday, the highest in two decades.
The move snowballed in the wake of Warsh’s press conference rather than immediately after the central bank’s decision to keep interest rates on hold, a sign that bond investors were unimpressed with his plans – or lack thereof – to get inflation back to the 2% target, which it has been above for five years and counting.”
July 30 – Bloomberg (Enda Curran and Greg Ritchie)
“Tucked into Federal Reserve Chairman Kevin Warsh’s eventful press conference… was a suggestion the US central bank could shift its approach to assessing inflation — a remark that’s sowing angst among some investors…
‘We’re going to deliver 2% inflation and not a whisper more,’ Warsh said.
‘But to achieve that, I’m looking at a broader set of inflation data than PCE.’”
July 31 – New York Times (Colby Smith and Ben Casselman)
“Kevin M. Warsh is considering reducing the number of regularly scheduled meetings at which the Federal Reserve sets interest rates, a potentially seismic move that would mark the most significant change in how the central bank operates in years.
The Federal Reserve’s 12-person policy committee meets eight times a year and votes on whether to lift, lower or hold borrowing costs.
Mr. Warsh raised the idea of changing the frequency of those meetings at the Fed’s gathering this week, according to four people…
Mr. Warsh… left the impression that a revised schedule could be decided on before the next meeting in mid-September, even if the changes would not be carried out until later.”
July 31 – Financial Times (Claire Jones and Myles McCormick)
“The Federal Reserve will face a bigger challenge in taming inflation unless the central bank quickly raises interest rates, according to the three dissenting officials…
Beth Hammack, president of the Cleveland Fed, and Neel Kashkari of the Minneapolis Fed said… on Friday that they had rebelled against the majority decision to hold rates steady because of concerns that inflation had been too high for too long.
‘The longer that high inflation persists, the more challenging and costly it can be to bring it back down,’ Hammack said.
Kashkari said: ‘I increasingly believe that monetary policy does have an important role to play in addressing a series of successive supply shocks that might lead to entrenched higher inflation.
‘If inflation remains elevated, in my view, a potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary.’
A third dissenter, Dallas Fed president Lorie Logan, echoed their remarks…, saying: ‘Modest action in the near term would reduce the likelihood of needing to take sharper action later.’
‘Every month of above-target inflation compounds the strain on the budgets of American families and businesses,’ Logan added.”
July 31 – Financial Times (Claire Jones)
“A top Federal Reserve official has warned this week’s sell-off in US Treasuries is a signal that the central bank must earn its ‘credibility’ on fighting inflation by backing up its rhetoric with interest rate rises.
‘Mr Market spoke this week, and I took [a] signal from it,’ Alberto Musalem, president of the St Louis Fed, told the FT.
‘The signal emphasised to me that we need to continue to earn our credibility every day with both effective communications and actions as needed.’
The yield on 30-year US government debt hit its highest level since 2007 this week, peaking at 5.28% amid concerns that the US central bank will struggle to contain the inflationary shock from President Donald Trump’s Iran war.”
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