Zaps: January 9, 2022

Macro Update:

The Fed:

  • The Fed minutes for the December meeting were released and contained a more hawkish approach to monetary policy.
  • Possibility of an earlier rate hike and earlier wind down of the Fed balance sheet, which stands at 38% of GDP, up from 17.5% of GDP the last time a QE program concluded (September 2019).
  • This hawkish rhetoric lifted nominal and real yields (nominal yields minus inflation) as the majority of the market had expected a later liftoff date and delayed balance sheet reduction.
  • Thread on how this impacts Crypto markets
2021s biggest meme chart — Fed Balance Sheet as a Percentage of GDP (Bloomberg)


  • The real yield move (U.S. 5-year real yield moved 35bps higher in a week) amplified the rotation into Value from Growth — as real yields rise, Value stocks tend to outperform Growth stocks.
  • Banks and Energy companies tend to perform the best when real yields are rising due to their short duration (i.e. higher sensitivity towards real economic growth).
  • Software, other industries that carry high multiples, and long duration assets such as unprofitable tech companies (businesses with cash flows expected far in the future) tend to fare the worst — see Cathie Wood’s $ARKK down 11% YTD.

US 10y Real Yield (Y-Axis) vs. Russell 1000 Value / Growth (Y-Axis), 5y history


Fixed Income:

  • U.S. 10y nominal yields broke out of their recent consolidation range, furthering the case for Value stocks (and buying a home ASAP to lock in a mortgage rate!)
  • Inflation break-even yields fell as high frequency data hinted that goods-related inflationary pressure may be close to peaking; 5-year inflation break-even rate fell from 2.91% to 2.81% this week
  • Expectations of a March 16 Fed rate hike are getting increasingly cemented with the April fed funds contract pointing to a 90% chance of a hike at that meeting.


  • Faster supplier delivery times (i.e. thawing of supply chain issues) seen in U.S. Manufacturing PMI data
  • Average Hourly earnings continued to surge, rising 5.8% for production and nonsupervisory workers (who are more likely to be paid on an hourly basis) over the last 12 months.
  • A record 48% of respondents in the NFIB survey of small businesses reported raising worker compensation over the past two months.


  • While Nonfarm Payrolls increased less than consensus expected, the details of the report were very solid and signified a tightening labor market.
  • The unemployment rate (3.9%) fell below the Fed’s longer-run estimate of 4.0% and Average Hourly Earnings (AHE) topped expectations in December, coming in at 4.7% vs. estimates for a 4.2% increase.
  • The number of part‐time workers for economic reasons dropped to its second‐lowest level since August 2001.

ARKK (mostly unprofitable tech) vs. Real 5y Yields — 92% negative correlation!

Crypto Market

Crypto markets continue to grind down in the new year, with the Fed minutes and the outage in Kazakhstan pushing BTC as low as the mid $40,000 and ETH in the mid $3,000 (down almost 20% on the week). Despite the major sell-off this week, vols have only climbed slightly, increasing by 4 points on average across the entire surface. Short-term skew is back up, with puts trading on average 8% more expensive than calls in terms of IV but long-term skew remains close to 0. Funding remains slightly positive and liquidations over the past couple of days have remained tame. For those who are more pessimistic, this may mean that the bottom has not been reached yet, and any further move may cause a cascade of liquidations that totally washes out the market.

In the altcoins space, ONE and ATOM performed especially well over the last week, reclaiming highs despite the crash in the rest of the space. Investors have increasingly been more sophisticated in their purchases, rather than just simply buying the dip.

Genesis Trading commentary:

  • On derivatives, BTC front-end implied volatility (IV) has normalized to its pre-FOMC minutes level with the 1-week IV trading at 62%. As BTC and ETH trade above key price levels of $40k and $3k respectively, the vol market has not panicked — IV continues to be sold off to lower levels, with realized volatility (RV) remaining lower still.
  • BTC 1-month ATM IV trades at 68% vs RV 56%.
  • ETH 1-month ATM IV trades at 78% vs RV 68%.
  • The BTC and ETH volatility ATM term structures remain upward-sloping in the front dates until June 2022, flattening out at 74% (BTC) and 82% (ETH) toward Dec 2022. BTC and ETH 25D skews (put IV — call IV) continue to trade at over 10% favoring puts over calls as short-term downside protection is sought after.
  • Futures OI in BTC and ETH remains stable with the Mar/June basis trading around 6%. Despite the relative lower vol environment and the expectation of further vol compression in 2022, the desk saw two-way interest in taking advantage of market levels to establish positions as well as selling long-dated options.

US Equity Options & Rates:

When SPX broke out to new all-time highs at the end of 2021 and the beginning of 2022, it left behind support at 4700 — the area of the old highs. This level is now being tested with most of the pressure coming from a jump in Treasury yields as Treasury prices have come under pressure.

The possibility that the Fed could accelerate down the path to monetary policy tightening has been a main driver of the weakness in stocks, along with persistent inflation pressures.

The equity-only put-call ratios, meanwhile, remain on the buy signals that were generated in late December. As long as they continue to fall, that is bullish for stocks. Both the standard and the weighted put-call ratio buy signals are confirmed by the computer analysis programs that we use to analyze these charts.

Realized volatility of SPX (specifically, the 20-day historical volatility, HV20) has fallen back to 16% from a high of 21%. That is near the stop-out point for the HV20 sell signal that was generated in late November. But if SPX continues to bounce around like it did, this sell signal could remain in effect.

Finally, the construct of volatility derivatives remains solidly bullish. It has been the most bullish indicator all along. The VIX futures continue to trade at premiums to VIX, and their term structure slopes upward. The term structure of the CBOE Volatility Indices slopes upward, too. Those are all positive signs for stocks.

DeFi Update:


  1. Maelstrom — Arthur Hayes
  2. Premia thread by @brypto_
  3. mgnr AMA
  4. Electric Capital Developer Report (2021)
  5. Tokenomics Tips — Token Float by @rewkang
  6. Gorgeous list of the growing economy by @adampatel23
  7. @Adi_dommaraju’s thread about BTC and ETH’s implied vol
  8. A thread to explain Fed minutes by @biancoresearch
  9. Adam Cochran’s thoughts on the Fed
  10. Visualise Alpha: satsdart
  11. Hayden.eth’s thread covering 2021
  12. PsyOptions Quarterly Review: Q4 2021
  13. Highly opinionated stats on Defi heading into 2022 by @hansolar21
  14. IntoTheBlock predicting a potential short squeeze using OI/MC ratio
  15. The Year of the Decoupling by Captain Kole
  16. Predicting the future is hard by Kyle Samani
  17. The optimal token distribution by Coopahtroopa+Lstephanian
  18. Risk Management thread by @CoinMarketMan
  19. DeFi Dad’s thread about thinking before chasing high APYs
  20. What is Gamma? by Deribit Exchange
  21. Digital Asset Banking: The Natives
  22. An outlook at the turn of 2021 by Zeus ($OHM)
  23. How to get historical holdings of a wallet (tax purposes?) by @Darrenlautf (check comments for more tools)


  1. The Chopping Block… 2021 in Crypto: The Biggest Winners, Biggest Losers, and Best Memes
  2. Crypto 2022 Outlook: Where Will the Markets Go This Year?
  3. Multicoin Summit | 2021 | Multicoin Capital’s 2022 Outlook
  4. Bankless | 99 — Endgame | Vitalik Buterin
  5. Breakdown of said episode by @PastryEth
  6. Delphi Podcast: Tarun Chitra: Drinking 3 Redbulls a Day, Gauntlet’s Financial Modelling Platform, and the Future of Governance

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