- Europe Can Survive Throughout Summer Without Russian Gas
Europe Can Survive Throughout Summer Without Russian Gas
Authored by Tsvetana Paraskova via OilPrice.com,
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WoodMackenzie: European gas storage levels will likely be within the five-year range by the end of this winter.
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If Russian flows continue, the European Union (EU) and the UK will end this winter’s heating season with 27 billion cubic meters (bcm) of gas in storage.
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Increasing imports from Norway, Algeria and LNG may help to compensate lower gas flows from Russia.
If Russian gas flows to Europe were interrupted now, Europe would have enough gas to last it through the end of this winter and the following summer without having to curtail demand, energy consultancy Wood Mackenzie said on Friday.
European gas storage levels will likely be within the five-year range by the end of this winter, thanks to mild weather, more arrivals of liquefied natural gas (LNG) and sustained imports from Norway, according to WoodMac.
If Russian flows continue, the European Union (EU) and the UK will end this winter’s heating season with 27 billion cubic meters (bcm) of gas in storage, which is a level within the five-year range.
Although energy exports are not part of the sanctions against Russia currently, there is a risk that Moscow could stop flows as a countermeasure to intensifying sanctions over the Russian invasion of Ukraine.
“If Russian flows stop in the middle of March, gas in store would be sufficient for the rest of this winter and summer, without demand curtailment,” said Kateryna Filippenko, principal analyst on Wood Mackenzie’s Europe gas and LNG team.
While this winter and the summer could be easier for Europe without Russian gas, some demand curtailments in the 2022-2023 winter will be inevitable, according to WoodMac’s Filippenko.
Higher natural gas imports from Norway and Algeria, more LNG, slowing the phase-out of coal, and delaying maintenance shutdowns on nuclear power plants could also free up some gas for the power generation sector, perhaps as much as 13 bcm until the end of October 2022, according to Wood Mackenzie.
The EU is overhauling its energy strategy following the Russian invasion of Ukraine, and the European Commission unveiled last week a plan to make Europe independent from Russian fossil fuels well before 2030, starting with gas. The EU will seek to diversify gas supplies, speed up the roll-out of renewable gases, and replace gas in heating and power generation—all this can reduce EU demand for Russian gas by two-thirds before the end of the year, the Commission says. In addition, the Commission will propose that by October 1, gas storage in the EU has to be filled up to at least 90%.
Tyler Durden
Mon, 03/21/2022 – 02:00 -
- Latest Edition Of Psychiatry's "Bible" Labels "Excessive Grief" A Mental Disorder
Latest Edition Of Psychiatry’s “Bible” Labels “Excessive Grief” A Mental Disorder
The latest edition of the DSM, psychiatry’s “bible” of mental disorders, features an entirely new one: excessive grieving for a deceased loved one.
The NYT reported over the weekend that the inclusion of the new “disorder” marks an end to a prolonged debate within the field of mental health, prompting researchers and clinicians to view intense grief as a target for medical “treatment”, aka the prescribing of psychiatric medication, which would likely lead to a financial windfall for pharmaceutical companies. The disorder’s inclusion in the DSM-5, the latest edition of the manual, means insurers can be billed for the medication.
The new diagnosis, prolonged grief disorder, was designed to apply to a narrow slice of the population who are incapacitated, pining and ruminating a year after a loss, and unable to return to previous activities.
Its inclusion in the Diagnostic and Statistical Manual of Mental Disorders means that clinicians can now bill insurance companies for treating people for the condition.
Psychiatrists have been pushing for recognition of this “grief disorder” since the 1990s. And some of the experimental treatments under consideration involve drugs that have previously mostly been used for the treatment of alcoholism and opioid use disorder.
It will most likely open a stream of funding for research into treatments — naltrexone, a drug used to help treat addiction, is currently in clinical trials as a form of grief therapy — and set off a competition for approval of medicines by the Food and Drug Administration.
Since the 1990s, a number of researchers have argued that intense forms of grief should be classified as a mental illness, saying that society tends to accept the suffering of bereaved people as natural and that it fails to steer them toward treatment that could help.
Some examples of individuals suffering from grief disorder include widows or widowers who never overcome the loss of a spouse, and parents who struggle to overcome the loss of a child.
A diagnosis, they hope, will allow clinicians to aid a part of the population that has, throughout history, withdrawn into isolation after terrible losses.
“They were the widows who wore black for the rest of their lives, who withdrew from social contacts and lived the rest of their lives in memory of the husband or wife who they had lost,” said Dr. Paul S. Appelbaum, who is chair of the steering committee overseeing revisions to the fifth edition of the D.S.M.
“They were the parents who never got over it, and that was how we talked about them,” he said. “Colloquially, we would say they never got over the loss of that child.”
Unsurprisingly, many psychiatrists oppose the inclusion of this “grief disorder” in the DSM-5, arguing that it will inevitably lead to many “false positives”, since distinguishing between normal and abnormal levels of grief will be difficult.
Throughout that time, critics of the idea have argued vigorously against categorizing grief as a mental disorder, saying that the designation risks pathologizing a fundamental aspect of the human experience.
They warn that there will be false positives – grieving people told by doctors that they have mental illnesses when they are actually emerging, slowly but naturally, from their losses.
So once again, the field of psychiatry is putting the interests of drug makers and insurance companies over those of patients, many of whom will now be prescribed drugs to treat “grief”, a normal – and for all people, inevitable – facet of life.
Tyler Durden
Sun, 03/20/2022 – 22:20 - From Record Selling To Panic Buying: A Week For The Hedge Fund History Books
From Record Selling To Panic Buying: A Week For The Hedge Fund History Books
If one had to describe last week’s turmoil in the hedge fund world it would be just two words: “sheer chaos”, because we have finally reached a point where smart investors have given up trying to predict what comes next and instead are merely trying to react (as fast as possible) to the newsflow.
As Goldman’s Prime Brokerage explains, “the desk has witnessed the increasingly high level of difficulty in terms of navigating this market (10 out of 10 difficulty?). Indeed, the most recent GS PB flows data suggests that “investors are now chasing trends – buying on rallies, selling on selloffs – instead of anticipating what comes next, as that has become virtually impossible.”
Witness the latest out of GS PB over recent sessions
- Prime Flow for Mar 11-14thth (SPX -2.03%) — Largest $ net selling since early January
- Prime Flow for Mar 15th (SPX +2.14%) — Largest $ net buying in 3 weeks
- Prime Flow for Mar 16th (SPX +2.24%) — Largest $ net buying since late January
- Prime Flow for Mar 17th (SPX +1.23%) — Overall book slightly net bought (1-Yr Zscore +0.2)
The numbers in terms of actual hedge fund activity are even more remarkable:
- Net selling from Friday (3/11) and Monday (3/14) combined was the 3rd largest over any 2-day period in the past decade (behind late Dec ’18 and early Jan ’22).
- Fundamental LS -6.0% (alpha -2.0%) vs MSCI TR -3.7%. Fundamental LS managers experienced negative alpha performance in 9 of the 11 trading days MTD.
- Fundamental LS Gross leverage has fallen -7.6 pts MTD – the 3rd largest decrease over any 10-day period behind Mar ’20 and Dec ‘18.
- Fundamental LS Net leverage has fallen -7.5 pts MTD – the largest decrease over any 10-day period on record (since Jan ’16).
It is this phenomenon of extreme swings that has underscored a “short gamma” market (however, as we noted on Friday, dealers are now slightly long gamma so the volatility may finally quiet down)…
…. which results in one thing: buyers higher, and sellers lower.
The same can now be said for the systematic crowd as well – with the moves over the past 48hrs, Goldman estimates that CTAs are decent buyers of global equities over the next week and next month…
… a shift we haven’t seen in some time.
The relentless, trendless rollercoaster in stocks, explains why yet again, hedge funds are painfully underperforming their benchmarks, with Equity L/S managers down -10% YTD on an asset-weighted basis and down around -6% on a simple average basis.
The problem is that with hedge fund positioning the lowest in two years both gross and net…
… any continued ramp higher will lead to another panicked, frenzied chase higher. Of course, if instead we see a reversal of last week’s furious stampede, brace for the selling as hedge funds – already shellshocked – resume their liquidating ways.
Tyler Durden
Sun, 03/20/2022 – 21:37 - The Great Depression II
The Great Depression II
Authored by Jeff Thomas via InternationalMan.com,
Whenever a movie has been a huge hit, the film industry tries to follow it up by doing a sequel. The sequel is almost invariably far more costly, as there’s the anticipation by those who create it that it will be an even bigger blockbuster than the original.
The Great Depression of the 1930’s is seen by most people to be the be-all and end-all of economic catastrophes and there’s good reason for that.
Although the economic cycle has always existed, the period leading up to October 1929 was unusual, as those in the financial sector had become unusually creative.
Brokers encouraged people to buy into the stock market as heavily as they could afford to. When that business began to level off, they encouraged people to buy on margin. The idea was that the buyer would only put up a fraction of the money for the purchase and the broker would “guarantee” full payment to the seller. As a condition to the agreement, the buyer would have to relinquish to the broker the right to sell his stock at any point that he wished, should he feel the need to do so to get himself off the hook in the event of a significant economic change.
Both the buyer and the broker were buying stocks with money that neither one had. But the broker entered into the gamble so that he could charge commissions, which he would be paid immediately. The buyer entered into the gamble, as he had been promised by the broker that stocks were “going to the moon” and that he’d become rich.
Banks got into the game, as well. At one time, banks took money on deposit, then lent that money out at interest. They would always retain a percentage of the deposited money within the bank to assure that they could meet whatever the normal demand for withdrawals might be. But, eventually, bankers figured out that, if they were prepared to gamble, they could lend out far more money – many times the amount that they had received on deposit. As long as very few loans turned bad, they would eventually get the money back, with interest.
And so, in the 1920’s, they loaned money to people so that they could buy into the stock market more heavily. From that point forward, an investor who was tapped out and couldn’t afford to buy more stock, then bought on margin. When he was no longer able to even afford to buy on margin, he borrowed money from the bank to buy on margin.
That meant that only a tiny percentage of the “money” that passed hands actually existed. The great majority of investment funds only existed on paper.
Of course, the very existence of this absurd anomaly depended upon a market that was thriving and moving steadily upward. If for any reason, there were a sudden loss of confidence in the banks, large numbers of depositors would demand to withdraw their deposits and there would be bank failures, as the banks had been playing with money that did not exist.
Likewise, if that loss of confidence were to take place with regard to the stock market, large numbers of stockholders would try to sell at the same time and the market would collapse, as the brokers had been playing with money that did not exist.
In the 1920’s, fortunes were being made by those who ran banks and brokerage houses – at a rate that greatly exceeded anything that had ever existed.
Unfortunately, they’d created the greatest financial bubble in history and, when it popped, as all bubbles do, it popped in a very big way.
Thousands of banks were wiped out. Thousands of brokerage houses were wiped out. And millions of investors were wiped out.
Not surprising that laws were then passed to assure that such a disaster could never occur again. Of particular importance was the Glass Steagall Act.
Then, in 1999, Glass Steagall was repealed. This was done under the advice of Fed chairman Alan Greenspan, and was accepted readily by then-president Bill Clinton, as he was assured that the repeal would mean a dramatic increase in investment, which would assure a shining legacy for him as he left office.
My own first reaction to the repeal was that, over the ensuing years, we’d see irrational investment in the real estate market, made possible through bank loans. This would lead to a crash in real estate, followed by a crash in the stock market. I believed that this debacle would be papered over by governments, eventually leading to a further crash, and that the latter crash would be of epic proportions.
But, why should this be? Why should the second crash be so much greater?
Well, the magnitude of a crash tends to be equal to the magnitude of the economic abnormality that preceded it. The crash of 1929 was greater than previous crashes, because bankers and brokers had found new ways to inflate the bubble beyond anything that had existed before.
Likewise, they’ve become even more creative this time around and have inflated the bubble far beyond what existed in 1929. The level of debt far exceeds anything the world has ever seen.
The 2008 crash was, in effect, a mini-crash. No correction ever took place. Instead, it was papered over by massive increased debt, assuring that, when the inevitable big crash did occur, the severity would be far beyond any other crash in history.
The sequel to the 1929 crash will be much like movie sequels. With movies, the producers invest more money into the sequel than they spent on the original movie, in the belief that, if they just throw enough money at it, it will somehow be better and make them even more money than the original.
Likewise in economic events, the assumption is that, if a great deal of money had been made in the buildup to the last major collapse, surely, by creating even more debt this time around, the profit to be made will be far greater than before.
And this has proven to be true. Financial institutions have entered into an era of profit that has historically been without equal. The original was a monster and the sequel will prove to be an even bigger monster.
Of course, there’s a difference between movies and economic events. With movies, the producers cash in when the moviegoers pay their admissions fee. With economic crises, the producers make their fortunes in the lead-up to the crash. The crash itself simply passes the bill for the disaster to the moviegoers.
The question that’s always asked prior to any crash is, “When will it happen?” Unfortunately, although crises can be analyzed and predicted beforehand, the date is more uncertain. The decisive factor is the loss of confidence by the general public. When they collectively get weak knees about the economic future – when they withdraw their deposits from banks and sell their shares in the market, the bubble will suddenly pop.
And so, the actual screening of this particular epic could be a year from now, or it could be next week. So, it might be premature to buy your box of popcorn now, but, when crashes come, they come suddenly and without warning.
Since it’s not possible to predict an exact date, those who don’t wish to be casualties of the collapse may wish to prepare for it – to get free of debt, to liquidate assets that will be devalued in a crisis, to turn the proceeds into real money (precious metals) and to relocate to a place that’s likely to be less impacted by the monetary and social crisis that will ensue.
* * *
How will you protect yourself in the event of an economic crisis? New York Times best-selling author Doug Casey and his team just released a guide that will show you exactly how. Click here to download the PDF now.
Tyler Durden
Sun, 03/20/2022 – 21:10 - "Criminal Tourists" Target Wealthy American Neighborhoods
“Criminal Tourists” Target Wealthy American Neighborhoods
A starling new development reveals South American criminal tourists are on home invasion sprees targeting wealthy neighborhoods across the US, according to Daily Mail.
South American thieves exploit the US’ immigration system for travel as they target multi-million dollar homes in liberal-controlled areas with relaxed criminal justice laws.
Police from around the country report some of these criminal tourists are from Colombia and elsewhere in South America. They have ransacked mansions in California, New York, Virginia, Texas, Georgia, North Carolina, and South Carolina.
Law enforcement experts say these professional burglars exploit a 2014 visa waiver program intended to promote tourism. Called the Electronic System for Travel Authorization, it’s an automated system that determines the eligibility of visitors to travel without obtaining a visa.
Earlier this year, the FBI busted one of these gangs in Virginia who stole an estimated $2 million worth of goods from mansions owned by Asian and Middle Eastern families. Officials said those homes were targeted because they had lots of high-value jewelry and cash.
The thieves chose Virginia because of the state’s lax bail laws and could skip bail and exit the country with the loot. The thieves were also connected to burglaries in Carolinas, Georgia, Texas, and a brazen $1.2 million jewelry heist in Southern California.
Police in Nassau County, New York, arrested criminal tourists from Chile who broke into multi-million dollars homes and stole jewelry and cash.
In the San Francisco suburb of Hillsborough, where a home’s average price is $5.4 million, a group of criminal tourists from Chile and Colombia looted homes in multiple neighborhoods. One of the incidents was caught on cameras as the thieves emptied a house.
Professional thieves from abroad have found a ‘sweet spot’ in exploiting a travel program on top of relaxed criminal justice laws that have made targeting wealthy Americans very enticing without limited repercussions because they can easily flee the States if caught.
Tyler Durden
Sun, 03/20/2022 – 20:50 - Some Bad Ideas Just Won't Die
Some Bad Ideas Just Won’t Die
Authored by Michael Maharrey via SchiffGold.com,
This may be the dumbest thing you read today. Not my words, but this CNN article I’m about to tell you about.
Americans are struggling under the weight of inflation. The official CPI for February came in at 7.9%. Measured honestly, CPI is above 15%. So, what’s the best way to help consumers deal with rising prices?
More stimulus!
That’s the idea floated by Mark Wolfe in his CNN op-ed.
The fastest and most effective way to protect vulnerable citizens from the impacts of global economic instability is to provide a direct payment through the IRS, similar to the three stimulus checks that were sent to families during the height of the pandemic.”
I told you it was dumb.
By the way, this guy is an “energy economist.”
Now, I’m sure a lot of Americans would get on board with another round of stimulus checks. They enjoyed all three rounds of stimulus during the pandemic.
But you know what they’re not enjoying?
Paying for those stimulus checks.
Because that’s exactly what they’re doing today through these soaring prices.
So, Wolfe wants to address the inflation problem by literally creating more inflation.
Dumb.
Now, he would probably tell you that the rising prices we’re seeing today are the result of the pandemic, or supply chain issues, or maybe even Russia. These are certainly factors in the rising prices of some goods. But at the core, the general rise in prices is the result of the Federal Reserve printing trillions of dollars out of thin air and the US government handing out that money in the form of stimulus checks.
When you have more dollars chasing the same amount of goods and services, prices generally rise. This is economics 101. (Except apparently at whatever school Wolfe went to.) The government lockdowns during the pandemic exacerbated the problem by constricting supply. So, while supply shrank, demand actually increased because everybody had more dollars in their pockets even though they weren’t going to work. In effect, we had more dollars chasing fewer goods and services. Prices went up. This is entirely predictable — unless you are an energy economist.
Now, you’ll hear a lot of pundits telling you that inflation is the result of increased demand. That’s not entirely wrong. But what created the demand? Stimmy checks! In fact, it was by design. Stimulus is meant to stimulate demand. That’s the whole point.
My point is that yesterday’s stimulus checks were a major factor in today’s inflation problem.
Now, our intrepid energy economist wants the government to hand out more money that it doesn’t have to help Americans cope with the cost of handing out money that it didn’t have over the last couple of years.
Of course, that will necessitate more borrowing, meaning the US government will have to sell more bonds.
And who is going to buy those Treasuries?
Over the last two years, the Fed has been one of the biggest buyers. It prints money to buy these bonds. And that — by definition — is inflation.
Do you see? Wolfe’s “solution” is really the root of the problem.
The Fed has launched a war on inflation that is supposed to include shrinking its balance sheet. But how does the Fed shrink its balance sheet when the US government needs it to keep buying bonds to create the artificial demand necessary to continue funding its massive deficits?
Here’s a truth you should always remember – whatever the government puts in your left pocket, it took from your right pocket. You ultimately pay for every government action. You might pay through direct taxation. Or your kids might pay if the Treasury borrows the money. Or, you’ll pay through the inflation tax. Regardless, you’re going to pay.
Americans are paying for coronavirus stimulus today. If Wolfe has his way, you’ll pay for inflation relief with more inflation in the years to come.
It’s dumb.
But so much that is dumb is politically viable, so I wouldn’t be surprised if this notion gains steam.
Tyler Durden
Sun, 03/20/2022 – 20:20 - Supreme Court Justice Clarence Thomas Hospitalized With Infection
Supreme Court Justice Clarence Thomas Hospitalized With Infection
With the confirmation battle for Justice Stephen Breyer’s nominated successor, Ketanji Brown Jackson, about to begin, longtime conservative Justice Clarence Thomas has reportedly been hospitalized with an infection, according to media reports.
Thomas, the most senior associate justice on the nation’s highest court, is being treated with intravenous antibiotics, according to a spokesperson for the court. His symptoms are easing and he’s expected to recover, they said.
Officials said Thomas was admitted to Sibley Memorial Hospital in Washington DC on Friday evening after experiencing flu-like symptoms. Court officials said they expect Thomas to be released in a day or two.
According to USA Today, SCOTUS was set to hear oral arguments on Monday, but the court indicated that Thomas wouldn’t take part (remotely or in person). Instead, he would rather “participate in the consideration and discussion” through court records and audio of the arguments.
Thomas was nominated by President George H.W. Bush to serve on the Supreme Court in 1991. His nomination led to a contentious confirmation battle after Anita Hill accused him of sexual misconduct while he was her supervisor at the Department of Education and on the Equal Employment Opportunity Commission.
Tyler Durden
Sun, 03/20/2022 – 19:35 - The "Wealth Effect" Is Failing As A Key Fed Policy Driver
The “Wealth Effect” Is Failing As A Key Fed Policy Driver
Authored by Bruce Wilds via Advancing Time blog,
In a world where optimism and hope have dominated the investment landscape for over a decade, we should be prepared for reality to raise its ugly head. This time is not different and debt does matter. As pointed out by many economists over the years, low-interest rates and easy money, do not always result in a strong vibrant economy. Japan’s failure to recover from its bubble bursting decades ago remains proof of this.
Much of the rationale behind QE has been that it creates what the Fed calls a “Wealth Effect.” For years this has been a key driver of central bank policy. This view is firmly embedded in the macroeconometric models used by the Fed. The notion, widely adopted by central bankers, is that by inflating asset prices to make the wealthy (the asset holders) even wealthier, these people will spend more of what they see as free money from asset price inflation. The premise is that this additional spending will create additional demand for goods and services thus providing jobs for the masses.
Sadly, several times over the years the wealth effect formula has slid off the tracks and most likely will again. Consumption does not create wealth, it creates debt. The example that stands out in the minds of most people is from back in 2008. By loaning money against homes with little scrutiny as to the borrower’s ability to repay them the Fed created a financial bubble with broad implications. It could be argued that since 2008, Fed policy has never really addressed that mess but attempted to paper over it by printing money and expanding debt through quantitative easing.
Wealth Effect Policies Have Failed To Generate Enough Growth
Looking back at how pursuing policies that breed the Wealth Effect can slide off track or lose their effectiveness, we see it always centers on the risk they create. At some point, the combination of easy-to-borrow money at low-interest rates tends to morph into a high-risk environment of increased speculation and leverage. In short, savers and investors seeking a return on their savings are forced out of traditional accounts because such investments get ravaged by inflation.
Many Consumers Bought Into This
The 2008 financial crisis resulted in the worst economic disasters in modern times and caused the biggest recession since the great depression of 1930. It is also referred to as the global financial crisis (GFC). Over the last several years, the Fed has been getting a great deal of well-deserved bad press for driving inequality and fracturing society. Since 2008 it has become apparent the Fed has created an unfair system that is broken, unfair, and corrupt. This has affected different generations in rather specific ways.
It is again becoming very apparent the wealth effect policies are failing. Not only have they failed to create a healthy economy but they have brought the financial system to the brink of collapse. Following the GFC the Federal Reserve and the Bush administration spent hundreds of billions of dollars to add liquidity to the financial markets. They worked hard to avoid a complete collapse. They almost didn’t succeed. Today we are spending not billions, but trillions of dollars to keep the same corrupt policy moving forward.
History shows investors should treat the wealth effect with caution because it is susceptible to reversals. Since the GFC, attempt after attempt has been put forth to change the tide, but still, we have watched the middle class shrink. The elephant in the room when it comes to growing the economy is how “the broken window theory” is spun and interpreted. The gist of this theory is that if a window is broken, the subsequent repair expenditure will have no net benefits for the economy. Still, it is not uncommon to see destruction touted as a good thing because it promotes spending. In truth, the idea destruction is good discounts several facts.
One has to do with where the money is coming from but whether it is from an insurance company or someplace else, it still means the money is diverted from being used on another purchase. Repairing a broken window is maintenance spending which doesn’t improve growth because it doesn’t improve productivity. This expenditure would have occurred anyway. The only thing a broken window does is cause maintenance spending to occur earlier and lower the useful life of the window. Maintenance spending may keep the economy going it doesn’t provide a boost. Instead, it is better to invest the money in something which creates wealth by increasing productivity.
Many people and even economists have real misconceptions as to how the economy works. Where money flows and who it enriches is a key component of economics. The failure to consider this is a blind spot many people have. Years of being told everything revolves around spending has diminished the important role savings plays in the scheme of a balanced economy. Fans of Keynesian economics that encourage government spending to stabilize the economy during a downturn tend to discount the importance that where and how money is spent matters a great deal.
Wealth Effect Policy Has A Poor Record
In the end, this all comes back to the fact current policies are presenting us with diminishing returns while increasing risk. Sadly, financial corruption has played a huge role in getting us here. Never before in our history have Presidents, Fed Chairs, and politicians in general been able to exploit their power and gained massive wealth following their time as so-called public servants. A big part of our current problems is the elite top-down efforts to control our society has created a permanent government. Today an army of government workers, most un-elected have been empowered to nibble away at our rights.
Bubbling up to the surface is the recognition the Fed has to shoulder a huge responsibility in pushing inequality higher. Powell has even gone so far as to claim there was little demand for loans below $1 million. Sadly, the same policies that dump huge money into larger businesses because it is an easier and faster way to bolster the economy give these concerns a huge advantage over their smaller competitors.
The long-term ramifications of destroying smaller businesses will hurt America in the long run. It eliminates competition, reduces opportunity, and over time fuels inflation. This drives my angst directed at companies such as Amazon and big tech. The policy of making people feel better so they spend more than they can afford is part of voodoo economics. So is sending jobs abroad and increasing our consumption of imported goods which has resulted in a massive trade deficit. Good economic policy encourages personal responsibility and is rooted in saving not spending.
Tyler Durden
Sun, 03/20/2022 – 19:30 - Turkey Says Ukraine, Russia "Close To An Agreement" As Moscow Delivers Ultimatum To Surrender Mariupol
Turkey Says Ukraine, Russia “Close To An Agreement” As Moscow Delivers Ultimatum To Surrender Mariupol
Another day, another glimmer of hope there we may soon see a ceasefire in the Ukraine war: on Sunday, Turkey said that Russia and Ukraine had made progress on their negotiations (ostensibly the same negotiations which, if they fail, could lead to World War 3 according to Zelensky) to halt the invasion and that the two warring sides were close to an agreement.
“It’s not easy to negotiate while the war is ongoing, or to agree when civilians are dying. But I want to say that there is momentum,” Turkey Foreign Minister Mevlut Cavusoglu said from the southern Turkish province of Antalya, AFP reported. “We see that the parties are close to an agreement.”
Cavusoglu this week visited Russia and Ukraine as Turkey, which has strong bonds with the two sides, has tried to position itself as a mediator. The foreign minister, who hosted his peers from Russia and Ukraine this week, said Turkey was in contact with the negotiating teams from the two countries but he refused to divulge the details of the talks as “we play an honest mediator and facilitator role.”
In an interview with daily Turkish newspaper Hurriyet, presidential spokesman Ibrahim Kalin said the sides were negotiating six points: Ukraine’s neutrality; disarmament and security guarantees; the so-called “de-Nazification”; removal of obstacles on the use of the Russian language in Ukraine; the status of the breakaway Donbas region; and the status of Crimea, annexed by Russia in 2014.
Turkey’s pro-government Hurriyet newspaper reported that the two countries were edging towards agreement on Kyiv declaring neutrality and abandoning its drive for Nato membership, “demilitarizing” Ukraine in exchange for collective security guarantees, what Russia calls “denazification” and lifting restrictions on the use of Russian in Ukraine.
Two people familiar with the discussions said it was likely a compromise would involve token concessions from Kyiv on what Russia calls “denazification”. But Linda Thomas-Greenfield, US ambassador to the UN, accused Moscow of failing to fully participate in the talks. “The negotiations seem to be one-sided,” she said. “The Russians have not leaned into any possibility for a negotiated and diplomatic solution.”
Hopes that an agreement is close were dashed, however, after the Russian military delivered an ultimatum for the surrender of Mariupol, the besieged city in southern Ukraine and the scene of some of the heaviest fighting since Russia launched its invasion of Ukraine more than three weeks ago, according to the National Defense Control Center of the Russian Federation as cited by Tass.
Colonel-General Mikhail Mizintsev said all armed units of Ukraine must leave Mariupol from 9 a.m. to 11 a.m. local time on Monday, according to Tass, after which any fighters remaining would “face a military tribunal.” It said humanitarian convoys would deliver food, medicine and other essentials to the city. The Russian statement demanded a written response from Ukraine’s government by 4 a.m. Kyiv time.
The eastern port city has been devastated by relentless shelling, with whole neighborhoods reduced to piles of smouldering rubble. Electricity, gas and water have been cut off and trapped residents are without food.
Ukraine’s armed forces said the situation in Mariupol which located in mostly Russia controlled territory around Donetsk, was “difficult: there is famine in the city, street fights, people are trying to leave”. Local authorities in Mariupol said “civilians are still under the rubble” after the school bombing.
Russia’s advance in Mariupol came after Kyiv said it had been cut off from the strategically important Sea of Azov, a conduit to the Black Sea. Capturing Mariupol would give the Russians control of a swath of Ukraine’s southern coast.
Kyiv also accused Moscow of using its new hypersonic missiles against civilian areas elsewhere in Ukraine, in the first confirmation that the Kremlin had deployed the weapons in the conflict. Moscow said it used the Kinzhal, which it claims can travel at 10 times the speed of sound, twice in the past three days: to destroy a fuel depot in southern Ukraine and to target a munitions storage facility in the country’s west.
Russia said Andrei Paliy, deputy commander of its Black Sea fleet, had died during the battle for Mariupol. Paliy’s death makes him the seventh high-ranking Russian officer Ukraine claims to have killed during the war.
Kyiv and its western allies fear Russian president Vladimir Putin could be buying time in peace talks to replenish Moscow’s forces and launch a broader offensive.
Meanwhile, as the FT notes, Mariupol’s status is a sticking point in the ongoing Turkey-mediated peace talks because it is part of the Ukrainian-held territory claimed by Moscow-backed separatists, according to two people briefed on the peace efforts.
Ukrainian president Volodymyr Zelensky said the talks were worth pursuing even if they had a “1 per cent chance of success” and warned a failure of negotiations would risk “a third world war.” “We have demonstrated the dignity of our people and our army . . . But unfortunately our dignity is not going to preserve lives. So I think we have to use any format, any chance, in order to have the possibility of negotiating,” he told CNN. Zelensky said western leaders had told him Ukraine would not be allowed to join Nato or the EU although “publicly, the doors will remain open”.
US president Joe Biden will visit Europe this week to attend Thursday’s Nato summit in Brussels, but will not travel to Ukraine, the White House said on Sunday.
Tyler Durden
Sun, 03/20/2022 – 19:00 - Escobar: The 'Rules-Based International Order' Is Unraveling Much Faster Than Expected
Escobar: The ‘Rules-Based International Order’ Is Unraveling Much Faster Than Expected
Authored by Pepe Escobar,
The “rules-based international order” – as in “our way or the highway” – is unraveling much faster than anyone could have predicted.
The Eurasia Economic Union (EAEU) and China are starting to design a new monetary and financial system bypassing the U.S. dollar, supervised by Sergei Glazyev and intended to compete with the Bretton Woods system.
Saudi Arabia – perpetrator of bombing, famine and genocide in Yemen, weaponized by U.S., UK and EU – is advancing the coming of the petroyuan.
India – third largest importer of oil in the world – is about to sign a mega-contract to buy oil from Russia with a huge discount and using a ruble-rupee mechanism.
Riyadh’s oil exports amount to roughly $170 billion a year. China buys 17% of it, compared to 21% for Japan, 15% for the U.S., 12% for India and roughly 10% for the EU. The U.S. and its vassals – Japan, South Korea, EU – will remain within the petrodollar sphere. India, just like China, may not.
Sanction blowback is on the offense. Even a market/casino capitalism darling such as uber-nerd Credit Suisse strategist Zoltan Pozsar, formerly with the NY Fed, IMF and Treasury Dept., has been forced to admit, in an analytical note:
“If you think that the West can develop sanctions that will maximize the pain for Russia by minimizing the risks of financial stability and price stability for the West, then you can also trust unicorns.”
Unicorns are a trademark of the massive NATOstan psyops apparatus, lavishly illustrated by the staged, completely fake “summit” in Kiev between Comedian Ze and the Prime Ministers of Poland, Slovenia and the Czech Republic, thoroughly debunked by John Helmer and Polish sources.
Pozsar, a realist, hinted in fact at the ritual burial of the financial chapter of the “rules-based international order” in place since the early Cold War years: “After the end of this war [in Ukraine], ‘money’ will never be the same.” Especially when the Hegemon demonstrates its “rules” by encroaching on other people’s money.
And that configures the central tenet of 21st century martial geopolitics as monetary/ideological. The world, especially the Global South, will have to decide whether “money” is represented by the virtual, turbo-charged casino privileged by the Americans or by real, tangible assets such as energy sources. A bipolar financial world – U.S. dollar vs. yuan – is at hand.
There’s no surefire evidence – yet. But the Kremlin may have certainly gamed that by using Russia’s foreign reserves as bait, likely to be frozen by sanctions, the end result could be the smashing of the petrodollar. After all the overwhelming majority of the Global South by now has fully understood that the backed-by-nothing U.S. dollar as “money” – according to Poznar – is absolutely untrustworthy.
If that’s the case, talk about a Putin ippon from hell.
It’s gold robbery time
As I outlined the emergence of the new paradigm, from the new monetary system to be designed by a cooperation between the EAEU and China to the advent of the petroyuan, a serious informed discussion erupted about a crucial part of the puzzle: the fate of the Russian gold reserves.
Doubts swirled around the Russian Central Bank’s arguably suicidal policy of keeping assets in foreign securities or in banks vulnerable to Western sanctions.
Of course there’s always the possibility Moscow calculated that nations holding Russian reserves – such as Germany and France – have assets in Russia that can be easily nationalized. And that the total debt of the state plus Russian companies even exceeds the amount of frozen reserves.
But what about the gold?
As of February 1, three weeks before the start of Operation Z, the Russian Central Bank held $630.2 billion in reserves. Almost half –
$311.2 billion – were placed in foreign securities, and a quarter – $151.9 billion – on deposits with foreign commercial and Central Banks. Not exactly a brilliant strategy. As of June last year, strategic partner China held 13.8% of Russia’s reserves, in gold and foreign currency.
As for the physical gold, $132.2 billion – 21% of total reserves – remains in vaults in Moscow (two-thirds) and St. Petersburg (one-third).
So no Russian gold has been frozen? Well, it’s complicated.
The key problem is that more than 75% of Russian Central Bank reserves are in foreign currency. Half of these are securities, like government bonds: they never leave the nation that issued them. Roughly 25% of the reserves are linked to foreign banks, mostly private, as well as the BIS and the IMF.
Once again it’s essential to remember Sergei Glazyev in his groundbreaking essay Sanctions and Sovereignty:
“It is necessary to complete the de-dollarization of our foreign exchange reserves, replacing the dollar, euro and pound with gold. In the current conditions of the expected explosive growth in the price of gold, its mass export abroad is akin to treason and it is high time for the regulator to stop it.”
This is a powerful indictment of the Russian Central Bank – which was borrowing against gold and exporting it. For all practical purposes, the Central Bank could be accused of perpetrating an inside job. And subsequently they were caught flat-footed by the devastating American sanctions.
As a Moscow analyst puts it, the Central Bank “had delivered some volumes of gold to London in 2020-2021. This decision was motivated by a high price of gold at that time (near $2000 per ounce) and could hardly be initiated by Putin. If so, this decision can be qualified as very stupid, or even part of a diversionist tactic (…) Most of the gold delivered to London was not stored but sold and transferred into foreign currency reserves (in euro or pounds) which were frozen later.”
No wonder a lot of people in Russia are livid. A quick flashback is in order. In June last year, Putin signed a law canceling requirements for the repatriation of foreign exchange earnings from gold exports. Five months later, Russia’s gold miners were exporting like crazy. A month later, the Duma wanted to know why the Central Bank had stopped buying gold. No wonder Russia media erupted with accusations of “an unprecedented [gold] robbery”.
Now it’s way more dramatic: RIA Novosti described the American-dictated freeze as – what else – a “robbery” and duly predicted global economic chaos. As for the Central Bank, it’s back on the gold buying business.
None of the above though explains some “missing” gold that de facto is not under the possession of the Russian Central Bank. And that’s where a somewhat shady character such as Herman Gref comes in.
Let’s check this out with State Duma deputy Mikhail Delyagin, who had a few things to say about the gold-exported-to-London bonanza:
“This process has been going on for the past year. Exported, according to some estimates, 600 tons. [Head of Russian Central Bank] Nabiullina said – whoever wants to sell gold to get cash, or if you mine gold and trade it, keep in mind that the state, in my person, will not buy gold from you at a market price. We will take it at a big discount. If you want to get honest money for it, please export it. The world center of gold trading is London. Accordingly, everyone began to export and sell gold there. Including Mr. [Herman] Gref. The head of the formally state-owned Sberbank sold a huge part of his gold reserves.”
Look here for fascinating details about Sberbank’s Gref shenanigans.
Watch for the gold-backed ruble
It may be a case of too little too late, but at least the Kremlin has now established a committee – with authority over the Central Bank nerds – to handle the serious stuff.
It boggles the mind that the Russian Central Bank does not answer to the Russian constitution as well as to the judicial system, but in fact is subordinated to the IMF. A case can be made that this cartel-designed financial system – implying zero sovereignty – simply cannot be tackled head on by any nation on the planet, and Putin has been trying to undermine it step by step. That includes, of course, keeping Elvira Nabiullina on the job even as she duly follows the Washington consensus to the letter.
And that brings us back to the ultra high stakes possibility that the Kremlin may have wanted from the start to go no holds barred, forcing the Atlanticists to reveal their true hand, and exposing their system in a “The King is Naked” spectacular for a worldwide audience.
And that’s where the EAEU/China new monetary/financial system comes in, under Glazyev supervision. We can certainly envision Russia, China and vast swathes of Eurasia progressively divorcing from casino capitalism; the ruble reconverted to a gold-backed currency; and Russia focused on self-sufficiency, productive domestic investment and trade connectivity with most of the Global South.
Way beyond its confiscated foreign reserves and tons of gold sold in London, what matters is that Russia remains the ultimate natural resource powerhouse. Shortages? A little austerity for a little while will take care of it: nothing as dramatic as the national impoverishment under the neoliberal 1990s. And extra boost would come from exporting natural resources at premium discount prices to other BRICS and most of Eurasia and the Global South.
The collective West has just fabricated a new, tawdry East-West divide. Russia is turning it upside down, to its own profit: after all the multipolar world is rising in the East.
The Empire of Lies won’t back down, because it does not have a Plan B. Plan A is to “cancel” Russia across the – Western – spectrum. So what? Russophobia, racism, 24/7 psyops, propaganda overdrive, cancel culture online mobs, that don’t mean a thing.
Facts matter: the Bear has enough nuclear/hypersonic hardware to shatter NATO in a few minutes before breakfast and teach a lesson to the collective West before pre-dinner cocktails. There will come a time when some exceptionalist with a decent IQ will finally understand the meaning of “indivisibility of security”.
Tyler Durden
Sun, 03/20/2022 – 18:30 - Shenzhen Scrambles To Ease Lockdown As Port Congestion Persists
Shenzhen Scrambles To Ease Lockdown As Port Congestion Persists
The CCP continued to ease lockdown restrictions on Shenzhen over the weekend as the municipal government claimed that the spread of COVID in the city is “overall controllable.”
Shenzhen’s municipal government said it would resume normal operations and production, according to a notice posted to its WeChat account on Friday.
As factories reopen, citywide bus and subway services will also resume, according to the notice, which said the reopening would be effective starting March 21 through March 27.
The city’s COVID situation is still grim, but it’s overall controllable, according to the notice. The move follows a partial lift of restrictions for five districts of Shenzhen on Friday, as President Xi Jinping said.
The reopening comes as China seeks to minimize the economic and social disruption to the economy from its COVID zero policy.
But the city’s reopening hasn’t been quick enough to prevent a backlog at Shenzhen’s critical ports. Cargo ships are accumulating at one of the busiest ports in the country after another COVID outbreak shut down factories and warehouses, raising the prospect of a new round of bottlenecks that could push up freight rates and slow deliveries.
There are more than 35 ships waiting to dock in Shenzhen and another 30 farther north in Qingdao, according to shipping brokers. The Port of Shenzhen, which serves a major manufacturing and export hub, includes the Yantian terminal, which handles about 25% of all US-bound Chinese exports. Manufacturing plants and warehouses in the city were ordered to close this past week, while another container load is falling fast as fewer trucks are arriving.
“I’ve got a load of bicycles, but stuck 16 kilometers on the highway coming into the port for almost two days,” said Wei Wu, a truck driver moving boxes for a European container and logistics operator. “Very little moves in Shenzhen. You need to test repeatedly, and I don’t know if the ship will be allowed to come in.”
The lockdown in Shenzhen was partially lifted Friday after President Xi Jinping told a Politburo meeting that while sticking to its COVID-zero policy, the government should “minimize the impact” of the pandemic on the country’s economy.
According to WSJ, the Danish boxship company AP Moller-Maersk said that although terminals in Shenzhen are operational, the shipping giant had come up with contingency plans that could divert ships if the COVID restrictions there remain.
Tyler Durden
Sun, 03/20/2022 – 18:00 - Grains Cheatsheet, Part 3: The Corn And Soybean Spread
Grains Cheatsheet, Part 3: The Corn And Soybean Spread
The final, part 3 out of 3 in a weekly miniseries, by Macro Ops Substack, Part 1 can be found here; Part 2 can be found here.
The Corn and Soybean Spread
Corn and Soybeans compete for the same acreages area. Ultimately farmers must decide how much of their space they are going commit to plant Corn, and therefore how much Soybean they will put into the ground.
The ratio is Soybeans over Corn, and it tracks how much money a farmer receives for their Soybean crop relative to their Corn crop.
It’s usually around 2/1. Whenever it’s over 3/1, it means that it pays more to grow Soybeans over Corn. For every ton of Soybeans a producer sells he will have to sell at least 3 tons of Corn to get the same amount of income.
It’s important to realize that corn yields are bigger than soybean yields. That means that an acreage of Corn gives more bushels than an acreage of Soybeans. Since farmland is a limited resource that can’t be quickly scaled up or down, it’s important to pay attention to this indicator.
It gives you an insight on how the producers could decide to plant for the year.
Weather Is THE Real Risk Factor, it doesn’t have to materialize… the rumor is enough.
For Macro Ops narratives are important. And it’s no different for grain markets. The concept of Weather Premium is an important one to understand in order to trade grains. Whenever the crops are on the ground, they are really sensitive to bad weather conditions. Volatility tends to go up.
If you add a rumor about bad weather that COULD have a negative impact on yields, prices will go up. This higher price is known as Weather Risk Premium. The reason being is that now there are concerns that supply won’t be enough for everybody.
Some key players absolutely need corn for their operations. They are price acceptant which means that no matter the price they have to purchase the corn.
This type of player is willing to buy at a higher price just to secure its operative needs (think of Kellogg’s for example).
This type of behavior is what brings prices up.
Now, if we fast-forward to harvest time, and the Weather wasn’t as bad as previously thought. (The genetically modified seeds are pretty resilient by the way.) Then prices should go lower as the weather premium is no longer baked in anymore.
The point to take home here is bad weather didn’t become a reality, nevertheless the rumor was enough to make some key players take action, and this ended up influencing prices. So, pay attention to Weather Narratives and try to identify when you are in a Weather Risk Premium Market.
Weather has an asymmetric effect.
The real reason why markets are willing to pay a Premium for weather risk is because weather has an asymmetric effect on yields and therefore on the supply. Bad weather has the potential to literally destroy a year’s crop potential (that’s why insurance for farmers exists).
There are many ways horrible weather conditions could mess up crops. If it’s too dry or too wet while the grains are in the ground it has a negative effect on yields. Too much rain when it’s planting season means a slower planting pace. There’s a critical window of opportunity for planting corn and soybeans. If they are not planted in the right moment yields will suffer.
On the other hand, during harvest season if there is too much rain it also slows the pace and could lead to quality issues. Grains must have a standard dryness otherwise they are considered lower quality.
A storm could mess up piers and ships and create distribution worries. In South America where infrastructure isn’t so great, heavy rains imply bad muddy roads which makes some farms impossible to reach.
Good weather on the other hand, doesn’t have the same effect… it just helps yields to some degree, but only if everything else was done properly, and that’s pretty much it.
If you are trading Soybeans, China’s New Year Holidays matter.
Check your calendar around February. China’s holiday celebration lasts a week. That means that all physical operations for Soybeans stops during this time of the year, If there aren’t any other relevant news on the market like a weather story, prices tend to go down as a result of the lesser demand while the East is asleep.
By the same logic, when the festivities are over they tend to come back with a buying frenzy so it’s good to be aware of this behavior.
It’s easy to pinpoint this trend in China’s Soybean Imports report. February tends to be the smallest month of all.
Commitment of Trader Reports though a lagging indicator is an important one.
The COT is a really useful indicator to understand the structure of the market you’re in. It divides all market players into 3 key classifications, Commercials, Managed Money and Speculators. Commercials will be guys like ADM, Cargill, or Kellogg’s. They use the futures market not to speculate but to hedge out the risk that commodities prices have on their physical operations.
Managed Money will be hedge funds with big amounts of money. They are the so called “Smart Money.” Speculators are all the small players like you and me.
If you take each group’s long contracts minus their short contracts you will be able to pinpoint whether they are Net long or Net short.
Commercials tend to be net short almost all the time.
Managed Money can be both net short or net long. If they switch positions from a very net short position, like 150.000 contracts, to net long 50.000 contracts this should tell you that the “smart money” is now bullish on that commodity and betting on higher prices.
Referencing how long or how short the funds and the commercials are relative to their previous positions gives tremendous insight on the market.
Speculators have a tendency to be on the wrong side of the trade consistently, OUCH! (Don’t be one of them).
Unlike other bigger markets. Fund money is big enough to move prices on the grains futures market. It’s important to track their actions. A good way to keep an eye on their activities is to take their net position and divide that by the open interest.
The Open Interest
Open Interest is an indicator that confuses a lot of stock traders since it’s exclusive to derivative markets.
Here’s a simple example:
If you go long 5 contracts of Corn, you have raised the volume indicator by 5 contracts. If by the end of the day you decided to take profits and close 2 contracts, you will have to sell two corn futures.
The volume will end up being 7 contracts for the day.
But since you closed out two contracts you are only left with 3 contracts overnight. The open interest indicator will show 3 contracts.
Open Interest tracks how many futures are still open at the end of the day. Every time you short or go long on a futures contract you will add one point to Open Interest. You will “create” one contract. When you offset the position by making a closing trade, you will eliminate the contract thus reducing the OI.
The higher the OI the more contracts are created. Therefore more people are trading that particular futures contract.
If OI starts to trend lower it usually means traders are starting to roll their exposure over to the next month’s contract. Liquidity will dry up in the expiring contract and flow into the new contract.
The Forward Curve: Contango and Backwardation
The forward curve is simply the chart representation of all the tradable futures contracts in any point in time. Futures contracts are available in most months. The forward curve will plot all the prices on Y axis, thus giving you a picture on how the market is pricing the contracts from today until many months into the future.
In this example prices went up from yesterday. The spread between different contracts remains the same, because otherwise there’ll be arbitrage opportunities.
When the front month is the cheapest one, and contracts further out in time are higher in price, you are in a Contango Market.
When the front month is the most expensive one, and contracts further out in time are lower in price, you are in a Backwardation market.
Calendar Spreads and the Grain Elevators Business
A calendar spread is a trading strategy which consists of profiting from a movement in price on the same underlying asset with two different expiry dates.
When we were discussing the Corn to Soybeans ratio, we were trying to get into a farmer’s head and play the game just like he would.
Whenever you are talking about calendar spreads we are entering in the domains of the Grain Elevators. Their business focuses on this.
They receive the grain from the farmers when it is abundant and cheap, store it, and then sell it when it’s scarce and expensive. They didn’t add value, they just keep it in the same conditions they received it. The idea is only to profit later on when prices are higher.
When you are trading calendar spreads you are working in a similar fashion. All you are saying is that the prices of Corn in May should go higher relative to the Corn in September or vice-versa.
Forward Curve and the Storage Theory
It always intrigued me how the market could figure out how to price Corn futures so many months in advance, especially when nobody knows how future events will unveil. To understand why the Corn market is usually in Contango we are going to need two additional concepts: Storage costs and Arbitrage.
Let’s say today’s Corn is priced at 350 cents per bushel and the futures with delivery 3 months from now are trading at 400 cents. If someone is able to buy the corn today at $3.50 and store it with a cost of 5 cents per month, he will end up with a price of 3.50+0.15= 3.65 per bushel three months into the future.
So what this opportunist needs to do is to buy the Corn at today’s prices, sell the 3 month futures contract for 4.00 and wait three months. At the end of it, he will end up with a profit 0.35 (4.00 – 3.65= 0.35) per bushel.
The point here is that there wasn’t any risk, no matter what happens to prices he’ll end up with a profit. That’s an Arbitrage trade.
If the contango curve is too steep it means that prices are too high between one contract and the next forward. Many people will be able to do a similar arbitrage trade like the one we just described. This brings down the prices on the further out futures until the arbitrage disappears.
I like to think about the forward curve in this way. If the Sep Contract is trading at 350 and the December Contract is trading at 355, then it probably costs 5 cents to store that corn from September to December. Otherwise there will be an Arbitrage Opportunity. It’s important to get a feeling of how steep the forward curve should be. If it gets too high maybe there’s an opportunity!
Backwardation Case
When prices are in Backwardation it’s not possible to do the same arbitrage trade we just described.
When prices are at backwardation it usually implies that there are supply concerns and people need their grain NOW.
But if the prices of the closest futures get too high, people just will stop buying altogether. They will postpone their purchase plan and try to take advantages of cheaper prices in the future.
This two cases should give you an idea on how the market is able to maintain a reasonable Forward Curve. Of course new information could mess up with these relationships, and that is where opportunities arrive!
Tyler Durden
Sun, 03/20/2022 – 17:30 - Wall Street's 'King Of Block Trades' Targeted In DoJ Investigation
Wall Street’s ‘King Of Block Trades’ Targeted In DoJ Investigation
A few weeks have passed since the investing public received an update on the SEC block trading probe that had captured Wall Street’s attention before the market ructions that briefly sent the Nasdaq into a bear market earlier this month emerged. As we learned earlier this year, the probe had ensnared Morgan Stanley and a handful of buy-side clients, most (if not all) of whom had some kind of connection to ex-Morgan Stanley executive Pawan Passi, who ran the bank’s equity syndication desk for years.
So far, Morgan Stanley has appeared to be the nexus of the investigation, as DoJ and SEC investigators examine whether the bank illegally tipped off clients about impending block trades (a practice that was once described by Bloomberg as “a grey area”).
But on Friday, Bloomberg revealed that another firm has been inextricably wrapped up in the probe: CaaS Capital Management, a New York-based hedge fund with more than $4 billion AUM led by Frank Fu, a longtime Wall Street operator. To hear Bloomberg tell it, CaaS has made its money mainly off the types of block trades that the SEC/DoJ are trying to criminalize. Fu and his firm have become so closely associated with this trading strategy, that Bloomberg informally dubbed him Wall Street’s “king of block trading”.
What’s more, business has been good. According to Bloomberg, the firm achieved a return higher than 70% during its first year.
His CaaS Capital Management would focus on block trading, one of the last bastions of old Wall Street, where big slugs of stock are sold through person-to-person negotiation, even cajoling, rather than electronic venues. Many practitioners are bro-y – the type who played college football. For Friday happy hours, Fu’s colleagues unzip their CaaS puffer vests and break out chess boards in a conference room.
Yet Fu, 39, soon managed to establish close ties with investment banks including Morgan Stanley, the juggernaut of the equities world. His pitch: CaaS would “partner” with them, positioning itself for preferential treatment. Prospective investors say CaaS has boasted to them of quickly becoming one of the biggest U.S. funds dedicated to block trading, getting a first look at deals and gaining entry to virtually every IPO in the country. In the firm’s first full year Fu posted a jaw-dropping 76% return.
Fu has enjoyed a charmed career, starting off trading options at Susquehanna, before pivoting to an entirely different style of trading: block trades that required a high-contact approach involving the humans on either side of the trade. His personal relationship with Passi quickly established him as one of the first individuals to “get the call”.
In his early career, Fu focused on types of trading that depend more on math than networking. Born in Shanghai, he came to the U.S. to study at Cornell University in the early 2000s, earning a bachelor’s degree in operations research and industrial engineering and a master’s in financial engineering in 2006, after which he landed at Susquehanna International Group, where he spent two years trading options.
Fu parlayed his reputation and growing influence to launch his own firm, with the backing of Wall Street giants like BlackRock.
Fu set up his own shop with early backing from BlackRock Inc. and New Holland Capital. He told investors he planned to position himself as an aide to banks, which after the 2008 financial crisis weren’t able to pile on big blocks of stock like they used to. In more recent months, CaaS has told prospective investors it had ties to about 30 banks.
“Due to the breadth and strength of these relationships, CaaS has earned a reputation in the market as the firm that receives an early, if not first, call,” the firm wrote in a recent marketing presentation.
Fu wasn’t flashy with his growing wealth. One associate described him as one of the cheapest dinner meetings on Wall Street, typically ordering just an entree and a Diet Coke. He bought investment properties in Weehawken, New Jersey, and surrounding areas and started a foundation with his wife, which has donated to Cornell and Horace Mann, a private school in the Bronx.
He quickly became one of the best-known buyers of blocks of shares, which he used computer modeling to analyze to ensure his firm bought shares at a reasonable price. Regulatory filings show that CaaS was there to hoover up blocks of shares dumped by prime brokers on Archegos’s behalf. Typically, CaaS holds positions anywhere from a few days, to a few months.
But some of Fu’s counterparties have noticed what they described as ‘irregularities’ in his trading style.
Not every bank took up Fu’s offer. One banker, speaking on the condition that he and his employer not be named, said his firm twice sold Fu a block of shares from its own book, but each time noticed a drop in the public price before the transaction was finished, reducing the bank’s proceeds. Suspicious that the drops might not be coincidental, the banker made a personal decision a few years ago to stop trusting Fu with new business.
Now, Fu and Morgan Stanley’s Passi are reportedly two among a group of more than a dozen Wall Street executives who have found themselves in investigators’ crosshairs. As one lawyer who spoke with BBG acknowledged, the line between what’s legal and illegal is nebulous, at best.
“The definition of material nonpublic information is pretty broad,” and can be murky, said Dan Viola, a partner overseeing law firm Sadis & Goldberg’s regulatory and compliance practice. “Funds shorting after such calls are taking an aggressive stance. Regulators appear to be concerned about a banker giving confidential information to preferred customers at the expense of the person who is selling the big block.”
The big question now: can prosecutors actually convince a jury that Fu, Passi and others intentionally violated laws governing the dissemination of material non-public information?
Tyler Durden
Sun, 03/20/2022 – 17:00 - What Is The Strike Price Of The Powell Put?
What Is The Strike Price Of The Powell Put?
Authored by MN Gordon via EconomicPrism.com,
The Federal Reserve, through a multi-decade series of shady practices, finds itself in a very disagreeable place. Policies of extreme market intervention have positioned the economy and financial markets for an epic bust.
Price inflation. Unemployment. Interest rates. Stock market valuations.
These metrics are presently situated in such a way that the “Powell put” will be impossible to successfully execute for the foreseeable future.
Price inflation is at a 40 year high. The unemployment rate is 3.8 percent, which is near its low. The 10-Year Treasury note is yielding 2.15 percent. While this key interest rate is certainly trending higher, it’s still near a historical low.
And for all the wild price swings and gnashing of teeth over the last two months, the S&P 500 has hardly slipped. In fact, as of market close on Thursday March 17 of 4,411, the S&P 500 is down only 7.83 percent from its all-time record close of 4,786 reached on January 3. It still has another 12.17 percent to fall before reaching official bear market territory.
Moreover, the ratio of total market capitalization over GDP is currently 185 percent. This is considered significantly overvalued.
By our estimation the S&P 500 has much, much further to fall in 2022. And given current price inflation, unemployment, and interest rates, the Powell put won’t likely be executed with the clockwork certainty that investors have grown accustom to over the last 35 years.
We posit that a 50 percent decline in the S&P 500 and an unemployment rate over 10 percent would be needed before the Fed can bailout Wall Street again. That, and massively higher interest rates will first be required to contain raging consumer price inflation.
Quite frankly, 25 basis point rate hikes to the federal funds rate won’t cut it. We’ll explain why in just a moment. But first, some context is in order…
Extreme Intervention
When Alan Greenspan first executed the “Greenspan put” following the 1987 Black Monday crash, financial markets were well positioned for this centrally coordinated intervention. Interest rates, after peaking out in 1981, were still high. The yield on the 10-Year Treasury note was about 9 percent. There was plenty of room for borrowing costs to fall.
The unstated mechanics of the Greenspan put are extraordinarily simple. When the stock market drops by about 20 percent, the Fed intervenes by lowering the federal funds rate. This typically results in a real negative yield, and an abundance of cheap credit.
This tactic has a twofold effect of seen and observable market distortions. First, the burst of liquidity puts an elevated floor under how far the stock market falls. Thus, the put option effect. Second, the interest rate cuts inflate bond prices, as bond prices move inverse to interest rates.
As of the late 1980s, thanks to the Greenspan put, the Fed has been running an implicit program of countercyclical stock market monetary stimulus. Ben Bernanke then ratcheted up the Fed’s extreme market intervention via quantitative easing (QE) in the aftermath of the 2008-09 financial crisis. That’s when things really got nuts.
QE, remember, involves creating credit out of thin air and then loaning it to the Treasury. The Treasury then injects the fake money into the economy through government spending programs. QE can also involve bailing out the big banks by swapping the Fed’s fake money for toxic securities.
In short, U.S. financial markets have been rigged for at least three decades. The unintended consequences have infected every sector of the economy. And now, with the resulting effect of both massive asset price inflation and massive consumer price inflation, the next time the stock market cracks, it will be impossible to exercise the Powell put without also further inflating consumer prices.
The implications for buy and hold investors are bleak…
What is the Strike Price of the Powell Put?
The official CPI is currently 7.9 percent. When calculated using methodologies from the 1980s, the rate of inflation is double.
This week the Federal Open Market Committee (FOMC) hiked the federal funds rate by 25 basis points. The FOMC also promised to hike the federal funds rate six more times this year.
Some in the financial press reported this as “hawkish,” which is an absolute joke. But who knows? Maybe the Fed will get serious and hike by 50 basis points next time.
Regardless, it’s too little too late. Inflation is on the loose and the Powell put is seriously compromised.
According to the BofA Global Fund Manager Survey, the Fed put for the S&P 500 is now at 3,636. But what do they know?
As far as we can tell, participants in the FMS suffer from a serious lack of imagination. In fact, just a little abstract thinking tells another story.
For example, what if there’s a bear market yet consumer price inflation spikes to 10 percent (officially)? How could the Fed bailout Wall Street when consumer prices are inflating by double digits?
What if the economy contracts yet inflation rises…and the stagflation misery index – the unemployment rate plus the CPI – goes through the roof?
What then would be the strike price of the Powell put?
Scenarios like these have become increasingly likely.
Over the last two years, somewhere on the order of $6 trillion in fake money has been vomited into the U.S. economy. This is the primary reason for raging consumer price inflation. Despite what President Biden says, it’s not Vladimir Putin’s fault.
Here’s the point, the Fed will have to contain inflation before it puts a floor under the stock market and acts to further stimulate the economy. It can’t do both at the same time.
Any path that involves juicing the stock market or stimulating the economy before inflation is snuffed out would ensure that inflation continues to rage higher.
So how far will the S&P 500 fall – and unemployment and interest rates have to rise – before Powell can fire off the monetary bazookas?
Would 2,500 cut it? What about 2,000…or lower?
In reality, Powell or his successor will fire them off long before then…and the misery index will eat us alive.
Tyler Durden
Sun, 03/20/2022 – 16:30 - Morgan Stanley: We Could Be In A Downturn 5-10 Months From Now
Morgan Stanley: We Could Be In A Downturn 5-10 Months From Now
by Michael Wilson, chief US equity strategist at Morgan Stanley
A year ago, we published a joint note with our economics and cross-asset strategy teams arguing that this cycle would run hotter but shorter than the prior three. Our view was based on the speed and strength of the economic and earnings rebound following the 2020 recession, the return of inflation after a multi-decade absence, and an earlier-than-expected pivot to more hawkish Fed policy. On Friday, we published an update that shows developments over the past year support this call – US GDP and earnings have surged past prior cycle peaks and are now decelerating sharply, inflation is running at a 40-year high, and the Fed has executed the sharpest pivot in policy we’ve ever witnessed.
Meanwhile, just 22 months after the end of the last recession, our cross-asset team’s US cycle model is already approaching prior peaks. This indicator aggregates key data to help signal where we are in the economic cycle and where headwinds/tailwinds exist for different asset classes, styles, etc. The latest rebound has been unusually fast. The model is currently in the ‘expansion’ phase (data above trend and rising – i.e., mid-to-late cycle). At this pace, the indicator could peak in 2-4 months and move to ‘downturn’ 5-10 months from today.
With regard to US equities, earnings, sales, and margins have all surged past prior cycle highs. In fact, earnings recovered to the prior cycle peak in just 16 months, the fastest rebound going back 40 years. The early-to-mid-cycle benefits of positive operating leverage have come and gone, and US corporates now face decelerating sales growth coupled with higher costs. As such, our leading earnings model is pointing to a deceleration in EPS growth toward zero over the coming months, and higher-frequency data on earnings revision breadth are trending lower – driven by cyclicals and economically sensitive sectors – a set-up that looks increasingly ‘late’ cycle.
Another key input to the shorter-cycle view was our analysis of the 1940s as a good historical parallel. Specifically, excess household savings unleashed on an economy constrained by supply set the stage for breakout inflation both then and now. Developments since we published our report in March last year continue to support this historical analogue – inflation has surged, forcing the Fed to move off the zero bound aggressively in a credible effort to restore price stability. Assuming the comparison holds, the next move would be a slowdown and ultimately a much shorter cycle. While the end – i.e., recession – does not appear to be imminent, the slowdown in earnings we’ve been expecting looks incrementally worse than it did when we first published our ‘fire and ice’ narrative last fall.
Further analysis of the post-World War II evolution of the cycle (1947-48) reveals another interesting similarity to the current post-Covid phase – unintended inventory build from over-ordering to meet an excessive but unsustainable pull-forward of demand. Regular readers of our research should be familiar with this as a dynamic we have written about. In short, we think the risk of an inventory glut is growing this year, particularly in areas of the economy that experienced well above-trend demand like Consumer Discretionary and Technology goods.
Now, with the Fed raising rates this past week and communicating a very hawkish tightening path over the next year, our rates strategists are looking for an inversion of the yield curve in 2Q. Curve inversion does not guarantee a recession, and our economists don’t expect one. However, it does support our view for sharply decelerating earnings growth and is one more piece of evidence that says it’s late cycle.
In terms of our US strategy recommendations, we continue to lean defensive and focus on companies with operational efficiency and high cash flow generation. This leads us to names with more durable earnings profiles that are also attractively priced. Pharma, Insurance, Real Estate, Utilities, Food/Beverage/Tobacco, and Telecom all screen relatively well – i.e., defensive cohorts. Growth stocks may benefit as the curve flattens, but such a move should be faded before 1Q earnings season begins and more companies come to the confessional. This same analysis also supports our underweight in Consumer Discretionary goods, with Retailing and Consumer Durables & Apparel screening poorly. Cyclical Technology stocks also look vulnerable to the payback in demand that has yet to fully play out.
Tyler Durden
Sun, 03/20/2022 – 16:00 - Will The New York Times Apologize To Sen. Cotton?
Will The New York Times Apologize To Sen. Cotton?
Every recovery program starts with the mantra that the first step in dealing with a problem is to admit that you have a problem.
That cathartic moment seems to have escaped the editors of the New York Times in denouncing a cancel culture that they helped spread in the media. Many of us were both bemused and bothered by the editorial in the New York Times opposing cancel culture. The Times has not been some dedicated antagonist of this culture but rather one of its most unabashed ambassadors.
Indeed, one of the most outrageous acts of cancellation by the media was the treatment of Sen. Tom Cotton over his 2020 Times editorial.
Given its history, the most striking aspect of the Times editorial was the utter lack of self-awareness. The editors wrote:
“In the course of their fight for tolerance, many progressives have become intolerant of those who disagree with them or express other opinions, and take on a kind of self-righteousness and censoriousness that the right long displayed and the left long abhorred.”
As with the recent admission of the Times that the Hunter Biden laptop and emails are authentic, there was no effort to address its own leading role in spreading viewpoint intolerance and censorship.
The treatment of the Cotton column shocked many of us.
It was one of the lowest points in the history of modern American journalism. During the week of June 6, 2020, the Times forced out an opinion editor and apologized for publishing Cotton’s column calling for the use of the troops to restore order in Washington after days of rioting around the White House.
While Congress would “call in the troops” six months later to quell the rioting at the Capitol on January 6th, New York Times reporters and columnists denounced the column as historically inaccurate and politically inciteful. The column was in fact historically accurate, even if you disagreed with the underlying proposal (as I did).
Reporters insisted that Cotton was endangering them by suggesting the use of troops and insisted that the newspaper should not feature people who advocate political violence. Writers Taylor Lorenz, Caity Weaver, Sheera Frankel, Jacey Fortin, and others also said that such columns put black reporters in danger and condemned publishing Cotton’s viewpoint.
Critics never explained what was historically false (or outside the range of permissible interpretation) in the column.
In a breathtaking surrender, the newspaper apologized and not only promised an investigation into how such an opposing view could find itself on its pages but promised to reduce the number of editorials in the future:
“We’ve examined the piece and the process leading up to its publication. This review made clear that a rushed editorial process led to the publication of an Op-Ed that did not meet our standards. As a result, we’re planning to examine both short term and long term changes, to include expanding our fact-checking operation and reduction the number of op-eds we publish.”
One of the writers who condemned the decision to publish Cotton was New York Times Magazine reporter Nikole Hannah-Jones. Hannah-Jones applauded the decision of the Times to apologize for publishing such an opposing viewpoint and denounced those who engage in what she called “even-handedness, both sideism” journalism. (Notably, Hannah-Jones herself later tweeted out a bizarre anti-police conspiracy theory that injuries and destruction caused by fireworks was not the fault of protesters but actually part of a weird police conspiracy. There was no hue and cry over accuracy).
Opinion editor James Bennet reportedly made an apology to the staff. That however was not enough. He was later compelled to resign for publishing a column that advocates an option used previously in history with rioting.
What was particularly galling was the open hypocrisy of the editors as they continued to publish authors with violent viewpoints and anti-free speech agendas.
For example, the newspaper had no problem in publishing “Beijing’s enforcer” in Hong Kong as Regina Ip mocked freedom protesters who were being beaten and arrested by the government.
Likewise, the New York Times published a column by University of Rhode Island professor Erik Loomis, who defended the murder of a conservative protester and said that he saw “nothing wrong” with such acts of violence. (Loomis has also been ridiculed for denouncing statistics, science, and technology as inherently racist).
In truth, there is a reason to publish all of these authors as part of a diverse set of viewpoints in a newspaper. The problem is that the Times only moved against one: Sen. Cotton.
When confronted by the very mob described in the recent editorial, the Times let them in and rushed to join them in cleansing its pages and editorial staff.
Everyone loves a redemptive sinner and I would be the first to applaud the New York Times in rescinding its earlier position on the Cotton editorial. However, absent that recognition, the Times is just another member of the mob haunted by its own lack of courage.
If the Times has decided to truly oppose the anti-free speech movement, it can start with an apology to Senator Tom Cotton.
Tyler Durden
Sun, 03/20/2022 – 15:30 - Oil Tycoons Have Seen Their Net Worth Explode Higher Since Russia Invaded Ukraine
Oil Tycoons Have Seen Their Net Worth Explode Higher Since Russia Invaded Ukraine
Sometimes, the irony is just wonderful.
The very same ultra-rich oil tycoons that the left absolutely loves to hate (because not only are they rich, but rich from oil) are benefitting the most from the left insane economic policies that have helped to drive up the price of the commodity.
According to the Bloomberg Billionaires Index, oil and gas industrialists now share a collective net worth of $239 billion, which is up 10% higher since Russia invaded Ukraine on February 24. The rise in wealth is directly tied to the spike in energy prices over the last few months.
Since Russia invaded Ukraine, Brent prices have risen as much as 32% and finished last week at about $106, Bloomberg wrote. While the price spikes have sent other industries into chaos, it has translated to pure profit for those in the business of producing or transporting fossil fuels.
Continental Resources Inc. co-founder Harold Hamm, for example, moved up 28 places on the BBI to 93rd and now has a fortune of over $18 billion dollars. Richard Kinder, of Kinder Morgan, has seen his net worth move to $8.5 billion.
Even before the invasion of Ukraine, oil prices in the U.S. were being pushed higher by post-Covid demand. And it was mostly private companies, not public, who seized the opportunity of higher prices the most, the report says.
Andrew Dittmar, a director at energy-analytics and software firm Enverus, told Bloomberg: “On the private side, those pressures from shareholders aren’t nearly as acute. It makes good economic sense for private firms to invest in growing production.”
The founder and sole owner of Lafayette, Louisiana-based Hilcorp Energy, Jeffery Hildebrand, now sports a net worth of more than $12 billion as a result. Autry Stephens, founder of Endeavor Energy Resources, has seen his net worth move higher to $5.2 billion.
Michael Smith, who owns about 63% of Freeport LNG, saw his wealth rise to $6.2 billion after the company sold 25% of itself to a Japanese company that valued Freeport at $9.7 billion.
Talon Custer, a Bloomberg Intelligence analyst, concluded: “Michael Smith’s bet on the U.S. gas industry has paid off. And they have options to grow.”
Tyler Durden
Sun, 03/20/2022 – 15:00 - "Disinformation": China Says They're Not Providing Weapons To Russia, Instead Hopes To 'De-Escalate Crisis'
“Disinformation”: China Says They’re Not Providing Weapons To Russia, Instead Hopes To ‘De-Escalate Crisis’
China’s top Ambassador has vowed Beijing “will do everything” to de-escalate the war in Ukraine, and insisted that his country’s relationship with Russia is “not part of the problem,” according to Bloomberg.
In a Sunday appearance on CBS‘s “Face the Nation,” Ambassador Qin Gang said “There’s disinformation about China providing military assistance to Russia,” adding that China isn’t currently sending “weapons and ammunitions to any party.”
MARGARET BRENNAN: So President Biden asked Beijing not to provide any kind of support to Russia. Is it your intent to go ahead and give a lifeline to Vladimir Putin?
AMB. GANG: On Friday, President Xi Jinping and the president, Biden, had a video call. It was candid, deep and constructive. President Xi Jinping gave China’s position very clear, that is China stands for peace, opposes war. China is a peace-loving country. We hate to see the situation over Ukraine come to today’s, you know, like this and we call for immediate ceasefire and we are promoting peace talks and we are sending humanitarian assistance to–
MARGARET BRENNAN: –Will you send money and weapons to Russia, though?
AMB. GANG: Well, There’s a disinformation about China providing military assistance to Russia. We reject that–
MARGARET BRENNAN: –You won’t do so, Beijing will not?
AMB. GANG: What China is doing is send foods, medicine, sleeping bags and the baby formula–
MARGARET BRENNAN: –That’s–
AMB. GANG: –not weapons and ammunition to any party and we are against a war, as I said, you know, we will do everything to dis-escalate the crisis.
Watch:
The interview comes as China attempts to balance its relationships with the US and Russia – with Qin claiming that its “common interests” with Russia are “not a liability.”
“China is part of the solution, it’s not part of the problem,” he added, citing Chinese President Xi Jinping’s phone call with Putin shortly after the Russian invasion in which the Chinese leader urged Putin to negotiate with Ukraine.
When asked if China would condemn Russia, Qin said: “Don’t be naive, condemnation doesn’t solve the problem. I would be surprised if Russia will back down by condemnation.”
Why can’t you condemn this as an invasion?” @margbrennan asks China’s Ambassador to the U.S., Qin Gang of Russia’s Ukraine invasion.
“Don’t be naive. Condemnation doesn’t solve the problem,” he says. pic.twitter.com/Oe47GsJSTC
— Face The Nation (@FaceTheNation) March 20, 2022
https://platform.twitter.com/widgets.js
Nothing like a hostile interview in the US press to promote healthy US-China relations, right?
Tyler Durden
Sun, 03/20/2022 – 14:30 - Life In The 1970s
Life In The 1970s
Submitted by Nicholas Colas, founder of DataTrek Research
The economic history of the 1970s and early 1980s is getting a lot of attention these days as an analog to today’s period of soaring inflation (see our post from October “Is Stagflation Here: Comparing The 2020s With The 1970s“). For his latest Story Time note, DataTrek’s Nick Colas offers up 3 personal anecdotes to fill in some of the gaps on that fateful decade: food inflation was a huge issue, especially in the early 1970s. Second, unemployment was actually higher in the early 1980s than during the Financial Crisis. Third, Fed policy ran very differently from today, targeting money supply growth with dramatic swings in Fed Funds rates.
Some more details from Colas on Life in the 1970s:
#1: Going to the supermarket.
Once I turned 10 (which was in 1974), one of my household chores was to run errands to the local grocery store. My family lived in New York City, and the market was a short walk from our apartment. My mom gave me a list of things to buy, some cash, and sent me on my way.
On one such trip – I think it would have been 1975 – I got to the cash register with my items and a $10 bill. The cashier rang them up. The total was $11 and something.
“What do you want to put back?” the cashier asked. I had no idea. I had never come up short before. In the end she chose the lowest ticket items that would bring the bill down to below $10.
I walked home in shock. My family was not wealthy, but we had always had enough money to buy food and get change back from the transaction. What had just happened? Was it my fault?
That was my introduction to inflation. When I got home my parents thought I had been mugged, because I was so upset. They explained prices were going up a lot lately, and that’s just the way things were.
The chart below shows US CPI food inflation from 1970 to the present, and it shows just how different the world has been since then. The cost of food has risen most years since the early 1980s, but only in a band of 0 to 5 percent. Now, however, food inflation is 7.9%. That may not be back to the 1970s/early 1980s, but it is outside of the historical band since then.
Takeaway: when people say, “if you didn’t experience 1970s inflation, you don’t know how bad it can be”, food inflation is a big part of what they mean. Wages went up in the 1970s (+6-9 percent annually), just as they are now (+6-7 percent). But wages did not keep up with food prices then, and they are not doing so now. It is frightening, as a child or adult, to wonder if food prices will rise so quickly that you will only be able to afford the basics or even less. “What do you want to put back?” is an awful question to hear.
* * *
#2: “Your father is going to be a consultant, working for himself. He got fired.”
While the 1970s/early 1980s are now best known for inflation, they were also a period of very high unemployment and job insecurity. My own family went through that in the late 70s, when my father lost his job. He picked up work as he could, and we were OK eventually.
This chart shows just how bad US unemployment was in the 70s – early 80s. It never fell below 5.7% and was 8 – 11 percent during the 3 recessions of the period. At its worst in late 1982, unemployment got to 10.8 percent, higher even than the Great Recession.
Takeaway: with US unemployment now at just 3.8 percent, we are a long way from the 70s-early 80s experience. I do wonder how this will affect the Federal Reserve’s efforts to reduce inflation without causing a recession. At yesterday’s press conference, Chair Powell made it clear that his goal is to reduce the current labor market imbalance between openings (companies’ desire to hire) and unemployed workers (available labor supply). Cooling the economy through rate hikes should do that, but he and the Fed will have to strike a fine balance. The central lesson of then-Fed Chair Paul Volcker’s early 1980s rate hikes is that recession is the fastest way to reduce high inflation.
* * *
#3: “Watch the money supply”.
I first became interested in capital markets listening to the news in the morning before going to school. The local NYC station featured a fellow named Larry Wachtel at 7:55am every weekday morning. He was a market strategist before that was a popular job title, and he made the markets intelligible and even interesting to my teen aged ears.
Larry would focus on the US money supply data to get an edge on market action. This was because in October 1979 Paul Volcker had made it a central focus of his fight against inflation. Back then, Fed policy was much more opaque. No post-meeting communiques, no press conferences, and no Fed-head interviews. Volcker needed to give investors a simple roadmap to explain the Fed’s goals. He chose the supply of money. Slow its growth, and lower inflation should follow.
This translated into both very high, but also very volatile, Fed Funds rates as the chart below shows. Volcker’s Fed, free of the communication requirements of today’s institution, moved Fed Funds aggressively and frequently to manage the supply of money by changing its cost as needed. It was shock therapy for the US economy, and it eventually worked.
Takeaway: where Paul Volcker’s Fed managed to a number (money supply) that it could directly influence by changing interest rates, Jay Powell’s Fed has chosen to strictly adhere to the “dual mandate” of measured inflation and unemployment. In 2020 – 2021, Chair Powell was fond of saying that the Fed has a great playbook for reducing inflation. Paul Volcker wrote that playbook, and it is expressed in the above chart. How much today’s Fed will follow it remains an open question. For clients interested in this topic, I recommend the link below. It summarizes Volcker’s inflation-fighting strategies and their costs on the US economy.
Sources: Paul Volcker and the US Money Supply: https://www.federalreservehistory.org/essays/anti-inflation-measures
Tyler Durden
Sun, 03/20/2022 – 13:30
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