Imagined Entities

“It’s chaos. It’s crazy,” a gas and power trader told Bloomberg, describing wild price moves and generalized disarray in the wake of a deep-freeze that left millions of Americans fumbling around in the dark for mittens and matches.

Texas spot power prices hit the $9,000 cap for a fourth straight day. Governor Greg Abbott chided the Electric Reliability Council of Texas as “anything but reliable over the past 48 hours,” and called for emergency investigatory reform.

By Tuesday evening, the situation had turned dire and deadly. At least 20 fatalities related to the cold snap were reported. There will surely be more. The excerpts (below) are from a summary published by The New York Times.

In Houston, a woman and a girl died from carbon monoxide poisoning after a car was left running in a garage to generate heat, the police said. A homeless man was also found dead at an overpass. In Sugar Land, Texas, a grandmother and three children were killed in a house fire early Tuesday in a neighborhood that was without power, according to local news reports.

A man in Louisiana died after slipping on the ice and hitting his head, officials said, and a 10-year-old boy died in Tennessee after falling into an icy pond. And the authorities in San Antonio said that weather conditions contributed to the death of a 78-year-old man.

Slippery roads were responsible for 10 deaths in Kentucky and Texas, including a pileup in Fort Worth that involved more than 100 vehicles and killed six people.

A separate piece published by the Times called this “a glimpse of America’s future.”  “Systems are designed to handle spikes in demand, but the wild and unpredictable weather linked to global warming will very likely push grids beyond their limits,” the subtitle read.

The dilemma in all this was captured by Bloomberg. “Extreme weather events are happening more frequently, a shift that’s attributed to the changing climate,” a feature piece said. “In response, electrifying sectors like transport and heating to use green power is seen as vital to eliminating harmful emissions, but the world’s grid infrastructure may not be ready.”

More colloquially: These are the kinds of unfortunate outcomes and vexing quandaries that can occur when you wait too long to address a critical problem.

In any case, it’s a disaster. Hopefully, it will abate. These kinds of events are worrisome for those with children and grandchildren. I’m not such a person, but if I were, I’d be concerned. A century from now, it’s going to be much worse. Two centuries from now, humans may find that Earth is uninhabitable. Maybe Elon Musk can get us to Mars. Tweeting about Dogecoin all day isn’t going to help, though.

Bonds were Tuesday’s other big story, although compared to the read-through for the planet from anomalous weather events, tracking 10-year yields felt a bit trivial. And yet, track them we must because, in a testament to just how absurd humanity’s thinking has become over time, bond yields are an ostensible constraint on our capacity to fight climate change.

This provides a perfect opportunity for me to drive home a point I often make without much success.

The way we think about things goes something like the following. Note that everything in parentheses is meant to underscore the inherent absurdity of it all.

1. Fighting climate change (which humans caused) costs money (something humans made up).
2. We need to borrow in order to obtain that money (even though we’re the sole legal issuer of it). So, we issue bonds.
3. The cost of borrowing is thus one of several constraints, another being the deficit (which is meaningless when you have a monopoly on issuing the unit of account in which it’s denominated).
4. We have to keep the cost of borrowing low, so if bond yields rise too far, we purchase bonds from ourselves via a group of technocrats who create money (the same money we supposedly needed to borrow in the first place).
5. This, among other ideas, is how we plan to fund the climate initiatives that will help ensure we don’t freeze to death (or burn alive, depending on the season).

Does any (or all) of that strike you as absurd? I certainly hope so. If not, below is the passage from “Sapiens” I often use while making the same point:

Ever since the Cognitive Revolution, Sapiens have thus been living in a dual reality. On the one hand, the objective reality of rivers, trees and lions; and on the other hand, the imagined reality of gods, nations and corporations. As time went by, the imagined reality became ever more powerful, so that today the very survival of rivers, trees and lions depends on the grace of imagined entities such as the United States and Google.

Turning to those imagined entities, Treasury yields surged Tuesday. 10-year yields rose 9bps to 1.30%, which Bloomberg’s Edward Bolingbroke noted was a level cited for a “potential wave” of convexity paying flows. 10s peaked at 1.3073%.

Tuesday was the worst day for the Treasury ETF (TLT, I mean) since “blue sweep”/”insurrection” day. It’s down nearly 5% this month and more than 8% in 2021. The figure (below) gives you some perspective vis-à-vis key events since the election in November.

In their daily summary, BMO’s Ian Lyngen and Ben Jeffery framed the situation as a series of “trillion-dollar questions.”

The first is whether this move was just a delayed concession to the refunding. That might seem like a stretch, but they noted that “this is compelling primarily because the issues in question richened steadily throughout last week.”

Second, Lyngen noted that another trillion-dollar question is whether TGA rundown might be driving the move to the extent it “result[s] in cash flooding the front-end of the market, driving bill rates even lower, and providing a pro-growth/ inflation boost.”

Third is just the possibility that markets are continuing to price in the imminent realization of a new, nearly $2 trillion fiscal stimulus package.

Whatever the case, TD’s Priya Misra has seen enough. “While there is nothing magical about the 1.30% level and financial conditions are still easy, we take profits on the shorts as the risk-reward is not as compelling,” she said.

For equities, the question is whether this backup in yields counts as “too far, too fast.” During this year’s opening days, I suggested that 1.25% (on 10s) by the end of January would be pushing it for stocks. Whether 1.30% halfway through February will prove to be problematic remains to be seen.

The answer on Tuesday was “not quite yet” if the question is “are rates a threat to equities?”

You could also posit that the benefits of steeper curves and rising yields to some sectors (e.g., banks) will help offset the presumed hit to duration-linked equities expressions. Oil and breakevens are engaged in the usual chicken-egg dynamic, which needn’t be resolved in order for energy shares (laggards) to press higher.

Naturally, this all raises knock-on questions for the dollar, which bounced as US yields rose. It might not be safe out there much longer, especially with risk-taking hitting extremes.

Unless of course you think TGA release is the next catalyst.

Read more: Bitcoin At The Center Of Risk-Addicted Markets