2026!

Clearing up two things

First of all, there was a bad link in yesterday’s am/FX. For the excellent 5-minute short film, please see here. Thanks. Kind of scary, but in a kid-friendly way.

Second: In Monday’s am/FX, I showed YTD performance of currencies. I used the WCRS function, including carry. The function is designed to take the currency spot performance, and add the 1-year interest rate return, but it doesn’t subtract the USD carry. So for AUD it shows 8% spot gain plus 4% carry = 12% return. Obviously if you’re long AUDUSD, you don’t get the 4% yield. You get zilch. So every currency’s performance is essentially overstated by the US 1-year yield. It doesn’t change the rankings, but just figured I would let you know since the Bloomberg approach on WCRS is moderately sus.

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I will try not to write so much about silver next year

As much as the silver rally has some excellent fundamental support, the last $30 or so has mostly been the product of momentum chasing and speculative mania. Here’s the story, in a nutshell.

https://swaggystocks.com/dashboard/wallstreetbets/ticker-sentiment

This is not normal. 100 of the past 104 weeks, SLV and GLD would not have made the top 50 on WSB. We got more margin hikes from the CME as volatility explodes, the RSIs are all near infinity, and SLV volumes have spiked, as they do, right at the peak, every time precious metals enter the speculative consciousness.

Volumes this week are not as high as 2011 and 2021, but close enough. See SLV volume in blue.

That chart is weekly. One interesting thing to note is that retail interest in silver picked up during COVID and remained way above average for the ensuing five years. The insane money printing did not go unnoticed! Next, a similar chart, showing SLV and all the days when SLV volumes were greater than 8X average. Three exact peaks are marked by the volume spikes, and one came early in the big 2011 retail spike to $50.

The margin hikes are obviously making people nervous, and the BCOM rebalance next week is probably going to keep them nervous. I am not a commodities expert, so feel free to correct anything that’s wrong in here, but the basic gist of the rebalance is as follows.

BCOM rebalances once per year and a bit more than $100B tracks it. If silver prices rise 150%, the value of the silver holdings in the tracker funds have increased massively and thus silver’s weight is way too high. When January 2026 arrives, silver holdings need to reset to the new target weight. If silver should still be 4.5% of BCOM, the indexers need to sell a pile of silver. If you take 4.5% of 100B, silver started 2025 as 4.5B. Now, that pile of silver is worth about 11.8B. To get from 11.8 back to 4.5, they need to sell.

For January 2026, the relevant dates are determined by the 6th to 10th Business Days of the month. That is: to ease the pain, BCOM creates a 5-day execution window. Here’s how it plays out.

Jan 1 (Thursday): New Year’s Day (Holiday)
Jan 2 (Friday): Business Day 1
Jan 5 (Monday): Business Day 2
Jan 6 (Tuesday): Business Day 3
Jan 7 (Wednesday): Business Day 4
Jan 8 (Thursday): Business Day 5
Jan 9 (Friday): Business Day 6 (Roll Begins – 20%)
Jan 12 (Monday): Business Day 7 (Roll Continues – 40%)
Jan 13 (Tuesday): Business Day 8 (Roll Continues – 60%)
Jan 14 (Wednesday): Business Day 9 (Roll Continues – 80%)
Jan 15 (Thursday): Business Day 10 (Roll Concludes – 100%)

My guess is that the market will sell in Week 1 as people get nervous about the non-price-sensitive selling scheduled around mid-month. 2011 and 2021 both saw silver trade heavy into mid-month following epic gains for silver in 2010 and 2020. The buy zone for silver is the many converging technicals all in the $56/$60 area. We might get there by mid-January.

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A weird lack of economic narratives

I listened to the Odd Lots with Jan Hatzius last night and the biggest takeaway for me is how boring the story is right now on the US economy. Forecasts are all for a continuation of the existing trends. Gradual increase in unemployment while consumption remains steady because of high-end spending. Delinquencies a mild concern. Housing totally irrelevant as a marginal driver. The only real economic narrative right now is the k-shaped economy. The bottom end is struggling while the rich get richer. This has been a story for a few years, but I suppose at some point it can matter. I still feel like Initial Claims tell a story of soft landing continuation while inflation appears to be under control. The one-time impact of tariffs will start to bleed out soon too.

The base case remains steady state. Soft landing continues into Year 4. Watching for signs that the bottom end struggles matter for the aggregate economy. Not much sign of that yet.

And despite all the foofaraw and brouhaha over the Fed, they’re only priced to cut twice in 2026. With so few macro narratives to chew on, it’s not hard to understand why VIX is 14 and CVIX is 6.7. Here’s the chart of FX vol:

When one cannot even imagine what shocks might await… We are probably vulnerable to a shock in 2026!

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Final Thoughts

Thank you for reading am/FX this year. Here’s a poem to take us out. It’s more optimistic than it sounds, I think.

Good Bones
Maggie Smith

Life is short, though I keep this from my children.
Life is short, and I’ve shortened mine
in a thousand delicious, ill-advised ways,
a thousand deliciously ill-advised ways
I’ll keep from my children. The world is at least
fifty percent terrible, and that’s a conservative
estimate, though I keep this from my children.
For every bird there is a stone thrown at a bird.
For every loved child, a child broken, bagged,
sunk in a lake. Life is short and the world
is at least half terrible, and for every kind
stranger, there is one who would break you,
though I keep this from my children. I am trying
to sell them the world. Any decent realtor,
walking you through a real shithole, chirps on
about good bones: This place could be beautiful,
right? You could make this place beautiful.

2026! is…

Why does it end with 505 zeroes!? That’s weird!

Because factorials multiply lots of numbers together, and many of those multiplications introduce factors of 10 — which always create a zero at the end. A trailing zero comes from multiplying by 10, and 10 = 2 X 5. So the number of zeros at the end of 2026! depends on how many pairs of (2, 5) appear in its prime factorization.

In a factorial: Factors of 2 are extremely common (every even number has one). Factors of 5 are much rarer. That means the number of trailing zeros is determined entirely by how many times 5 appears.

Counting the zeros in 2026! : To count how many 5s appear, we use this formula:

Now compute:

Add them up:

good luck ⇅ be nimble