The Devil’s Tuning Fork

(Notes): on Artemis Capital Management piece ‘Volatility of an Impossible Object’.

Volatility of an Impossible Object Risk, Fear, and Safety in Games of Perception

The blivet portrays two irreconcilable perspectives at once, creating a “lost” layer between the top two rods, and an impossible extra, vanishing rod in between the bottom two.

A blivet, also known as an “impossible fork,” is an optical illusion and an impossible object. It appears to have three cylindrical prongs at one end which then mysteriously transform into two rectangular prongs at the other end. Often, upon first glance, the blivet looks entirely possible, but upon closer inspection quickly becomes undecipherable. (New World Encyclopedia:

Blivet-New World Encyclopedia

–> “Modern financial markets are a game of impossible objects.” – Chris Cole

M.C. Escher’s 1961 ‘Waterfall’. –> It is intended to be an artistic abstraction of the self-reflexive mechanics of modern monetary theory.

–> “In a capitalist cityscape the aqueduct begins at the waterwheel of monetary expansion churning out a torrent of boundless fiat current that streams through the dense metropolis. The river of money flows from the edge of the aqueduct into the waterfall of deflation and then over the waterwheel suspended in a never-ending cycle of monetary expansion and crisis. Beneath the city the fires of inflation burn threatening to one day consume the monetary mechanism. “

Mr. Cole poses a question to the reader, ” Is the reflexivity of flowing fiat currency the solution or the very source of the paradox?”

Answer: T.B.A

Cole continues on the new market reality.

Likewise how certain are we that the elevated two-dimensional prices of risk assets and low spot volatility have anything to do with fundamental three-dimensional reality? In this brave new world volatility is an important dimension of risk because it can measure investor trust in the market depiction of the future economy. The problem is that the abstraction of the market has become an economic reality unto itself. You can no longer play by the old rules since those rules no longer apply. ”

The rest of the paragraph I found inspiring to say the least.

” For the next decade this market is going to reward philosophers over students of business. Why? Because the modern investor must hold several contradictory ideas in his or her head at the same time and none of them really make any sense according to business school case studies. Welcome to the impossible market where…”

The next section, which reviews the resurgence of the Global Currency Wars that have been ignited by the United. States Federal Reserve by the announcement QE3. This easing plan comes in the…

“form of unlimited $40 billion monthly purchases of MBS , low – rates until “at – least mid 2015”, and the continuation of Operation Twist in an effort to stimulate job growth.”


Moreover, Mr. Cole continues by noting what Mr. Mario Draghi (the silver-tongued fox) and his crew have done to save off a Euro-Zone meltdown.


“across the pond the ECB also agreed to fund unlimited purchases of Euro – zone debt to tame the sell – off in Spanish debt.”

The ECB was on “ready 5” to correct any fallout from Greece’s parliamentary election in July 2012. Markets where expecting the outcome of the election to fuel an equity rally, but that’s not what happened.

From Business Insider,

“To recap, the pro-bailout, New Democracy party won the elections assuaging fears that Greece could soon exit the euro in a disorderly fashion.

However, yields on Spanish debt soared ever higher today.  The slump in ten-year notes pushed yields as high as 7.2850 percent, a euro-area record, before falling back.  Other issuances also hit fresh highs, with two- and five-year yields topping 5.577 and 6.723 percent, respectively.

Part of the concern sending borrowing costs to these heights is the threat that Spain could lose access to the debt markets as its banking sector wobbles and creditors worry they could be subordinated to bailout guarantors.

The 10-year bond finished the day at 7.1580 percent, forming a bizarre middle-finger-like pattern.

Perhaps this is the bond market’s way of saying that the elections solved nothing. ”


Mr. Cole points out how,

“Massive injections of monetary stimulus by the world’s two largest central banks have reignited another round of international currency w ars motivating central bank action from Japan to Turkey.”

Back in 2012, the current market conditions were flattering and with all Central Banks stepping into the void, every global assets class has rallied in perpetuity.








Mr. Cole calls this environment of one as, ” a Goldilocks bull market of fear.” He explains further that the economic data prints are just bad enough to continue the Central Bank Put on global markets. But not bad enough to usher in the next deflationary environment as well as keeping inflation at bay.

In a recent article by Mr. Kevin Muir of “The Macro Tourist’ explained with great context why as Traders we should not care about what should be, as many academics hold on too tight at night, but should, as Mr. Muir coaches, “stay laser-focused on what is.”

Mr. Cole, at the time, was concerned that if the Fed follows through on their promise to purchase MBS indefinitely will own the entire market.

Flash forward to present day and ask Haruhiko Kuroda on how owning almost all the JPG yield curve is going?


Okay maybe don’t ask him. But I ( not me actually Mr. White of The Heisenberg Report) offers you this piece from Deutsche Bank on how important QE is….

This is How Much QE Matters…|

Via Deutsche Bank Circa The Heisenberg Report

” We employ a multiple regression to explain the level of 10yr Treasury yields. The three inputs into our model are the level of fed funds, Fed expectations (using the 2s-funds spread as proxy), and a capture-all Global QE Flow variable. The first two inputs allow us to “bootstrap” the 10yr yield and isolate it from the expected path of short-term interest rates. The third input attempts to capture the leftover portion of the 10yr yield, which we have pointed out in the past is closely related to the Fed’s ACM term premium. The right chart below shows the construction of our QE variable versus the 10yr term premium (inverted on the right scale).


The QE variable is calculated as combined Fed, BOJ and ECB purchases as a percentage of the global net sovereign bond supply over the next 9 months. At its peak, global QE was running at about 200% of the net supply. Today, the ratio is closer to 125%. Given the variable’s beta of -0.97, QE is currently responsible for depressing 10yr yields by 121 bps.

The beta for fed funds is 0.48, implying that roughly half of every basis point increase in the fed funds rate is transmitted to 10yr yields. The beta for the 2s-funds spread is 0.86. Since fed funds and 2s-funds tend to be negatively correlated, it would suggest that rate hikes are often countered by a narrower 2sfunds spread, which offsets their impact on 10yr yields. The adjusted R-square of the regression based on monthly data from 2006 to 2016 is 0.91.

By extension we can also model ACM term premium on the global QE purchase and net supply variables. The regression explains around three-quarters of the variation in the 10yr term premium (adjusted R-square is 0.73). Japanese QE seems to have twice the impact on the term premium compared to the Fed’s and the ECB’s. At their current pace, the BOJ’s USD 970 billion of bond buying per year lowers the term premium by 146 bps, while the ECB’s USD 630 billion annual target lowers it by an additional 49 bps.

On the supply side, net sovereign bond supply is growing by USD 1,220 billion annually, which pushes up the term premium by 149 bps. The recent decline in the term premium can be attributed to diminished prospect of the Trump administration delivering on a $5 trillion / 10-year fiscal stimulus package. The budget deficit increase of $500 billion per year was worth 60 bps higher in the term premium.


More to the point. Mr. Cole points out this factoid.

” To appreciate the cumulative effects of this stimulus consider a research report released by the Federal Reserve in 201 1 that concluded since 1984 a staggering 80% of the premium earned from domestic equity was achieved in the periods leading up to FOMC announcements. How ironic.”


I will be continuously updating these notes throughout the day. Holiday schedule and dealing with Grandma Millie.

Enron Traders |




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