- The UK-EU Clash Over Northern Ireland Will Have Grave Consequences
The UK-EU Clash Over Northern Ireland Will Have Grave Consequences
“Get your retaliation in first,” is a cynical old saying in Northern Irish politics that means you hit your opponent whenever you can without waiting for a provocation. It neatly captures the violent traditions of the province and explains why the political temperature there is always close to boiling over.
Imagine then the pleasure of those unionists who had always opposed the Northern Ireland Protocol, which places the new EU/UK commercial frontier between Northern Ireland and mainland Britain, to find that they had been genuinely provoked by the European Commission. In a classic cock-up, but one with grave and lasting consequences, Brussels had briefly called for a “hard border” between Northern Ireland and the Republic of Ireland, something it had repeatedly told Britain was an anathema because it would endanger the Good Friday Agreement and open the road to communal violence.
Yet here was a glaring example of the EU selfishly backtracking on its own warnings and fecklessly reopening one of the most explosive issues in European politics, the culpable purpose of this being to stop vaccines capable of saving the lives of British pensioners from being exported from the EU to the UK.
The Commission was instantly struck by a hail of abuse for its folly and it promptly withdrew the proposal with embarrassment, but for almost the first time in four years the EU was on the back foot in its relationship with Britain. No wonder Michael Gove was openly gloating as he told the House of Commons that the European Commission’s action had been condemned by everybody from the Archbishop of Canterbury to the former prime minister of Finland. And there was indeed some innocent pleasure to be had in watching somebody as poised and ostensibly competent as the Commission president, Ursula von der Leyen, get quite so much egg on her face.
She had presumably miscalculated or ignored, as have so many politicians before her, the extreme combustibility of Northern Irish politics, or failed to notice how far they had already been inflamed by the creation of an Irish Sea EU/UK commercial border at the start of this year. Such flames are not be easily put out, whatever calming noises may come from Brussels, London and Dublin.
Port officials in Belfast and Larne, who actually conduct the border checks, have stopped working on the grounds that they fear for their safety. A piece of graffiti has appeared on a wall in Larne reading: “All Border Post Staff are Targets.” For weeks, the media had been full of stories about frustrated Northern Irish businesses facing ruin because of the new border checks.
Ever since Boris Johnson openly betrayed the unionists and signed the Irish protocol, they have felt the ground shifting under their feet and, they found to their horror, apparently shifting inexorably towards a united Ireland. They complain that even the British Army was having to fill in EU forms to bring military equipment into the province (it turned out that they were doing so, though they did not have to under the terms of the Protocol). An element of “getting your retaliation in first” surfaces here since, under pressure from those even more hard line than themselves, the Democratic Unionist Party leadership which – along with Sinn Fein – heads the government in Northern Ireland, has switched its stance. Instead of reluctantly enforcing the Irish Protocol, it now opposes it.
One of DUP ministers, Edwin Poots, ordered the withdrawal of the port inspectors, though the police had told him that they did not believe the inspectors were under threat from loyalist paramilitaries. Poots claims the police did not have “a full understanding of the risks” – and in the long term he is probably right.
The bizarreness – and potential dangers – of the permanent crisis in Northern Ireland cannot be over-stated. By leaving the EU, Britain created a new UK/EU frontier the effect of which would be to the benefit of either the unionists/protestants or the nationalists/catholics. A repartitioning of Ireland by resurrecting a physical barrier along the 300-mile-long land border was never feasible, if only because it largely runs through nationalist/catholic majority areas where any new customs posts would be burned or wrecked as soon they were established. Now the unionist/protestant community is extending a similar veto over an “Irish Sea border”.
In other words, the frontier between Britain and the EU is a disputed no-man’s land where two communities struggle ceaselessly for dominance. This is something that will affect – and probably poison – future relations between London and Brussels for decades to come. Brexit automatically destabilised Northern Ireland and now Northern Ireland is going to destabilise Brexit Britain.
But the embattled province will not be the only friction point, only the one with greatest potential for violence. Boris Johnson won the general election of 2019 by claiming that he would “Get Brexit Done”, promising that relations between Britain and the EU would soon achieve a stable equilibrium. But that is precisely what is not happening. Instability is built into the Withdrawal Agreement, and the row over vaccines and the Irish Protocol is only a precursor to decades of friction.
Britain will be permanently in the position of negotiating and renegotiating access to the single market for its goods and services. It will, moreover, be negotiating from a position of weakness and will be continually forced to make concessions – as was so often the case during its negotiations to leave the EU. British fishermen, once the symbol of the benefits to come of enhanced British sovereignty, have become the first visible casualties of this new and unequal balance of power.
Remainers once fantasised about the day when Leavers would see the ruinous errors of their ways in exiting Britain’s largest market and lament their folly. But the exact opposite is likely to happen: the EU will in future fight for its 27 members’ interests with even less regard for the views of the British government and British public opinion than it did before.
A Brexiteer government and pro-Brexit media will inevitably respond by scapegoating Brussels for everything that goes wrong in Britain, accusing it of overbearing behaviour and unfair practices. They may even be right, but this will not do them any good, simply because the EU has the stronger hand of cards.
Just at the moment the government can say – though not too loudly – that the advantages of speedy national action, unobstructed by the restraints imposed by an unwieldy EU alliance, are exemplified by its swift development and rolling out of the coronavirus vaccine, but this type of success is unlikely to be often repeated.
On the contrary, the outlook is that Britain will remain obsessed by its relations with the EU – and that those relations will generate continuous friction. The economic relationship may begin to sort itself out in time, but at the cost of much bad political blood while Brexit turbo-charges Irish and Scottish separatism. The furore in Northern Ireland is not an atypical hangover from the past, but the first instalment of a permanent confrontation between Britain and the EU.
Tyler Durden
Mon, 02/08/2021 – 02:00 - Living Off Grid As The Collapse Of Society Approaches: "Why Aren't More People Doing This?"
Living Off Grid As The Collapse Of Society Approaches: “Why Aren’t More People Doing This?”
Authored by Michael Snyder via The Economic Collapse blog,
You don’t have to be a cog in the system. For most of us, the only option that was presented while we were growing up was to get on the hamster wheel and run as fast as we could. You know what I mean – go to school, get a job, pay a mortgage, prepare for retirement, etc. But it doesn’t have to be that way. If you truly want to unplug from the system and live your life off the grid, you can. Of course it isn’t easy, but nothing in life really worth doing ever is.
Sadly, the lives of most people are defined by the matrix that the vast majority of us are connected to on a daily basis. In most cases, your income and status in society are defined by whatever “job” has been given to you by whichever corporation you are currently working for. We like to call ourselves “employees”, but in essence we are basically corporate servants.
Of course most people feel like they can’t quit their corporate jobs because each month they have to make payments on mortgages, auto loans and credit card debts that they owe to giant corporate financial institutions.
And most people also feel the need to constantly “prepare for retirement” by pouring money into corporate securities in the rigged game that we call “the stock market”.
But what is going to happen to all of them when our economic and financial systems completely implode?
During this current economic downturn, millions upon millions of Americans have already lost their jobs, and it is being reported that millions of Americans could potentially be evicted from their homes in 2021.
When things go bad, it is the little guy that gets crushed first.
But you don’t have to wait around for that to happen.
An increasing number of Americans have decided that living off the grid is the way to go. For example, 65-year-old Bob Wells will never have to make a mortgage payment or pay rent ever again. He lives on public lands in his GMC Savana, and he uses solar power to run his 12-volt refrigerator. In recent years he has become internationally known for his YouTube channel named “Cheap RV Living”, but it wasn’t always this way.
In fact, his decision to adopt a nomad lifestyle was originally sparked by deep dissatisfaction with the corporate job that he was working…
Before becoming a nomad in 1995, Bob lived in Anchorage, Alaska, with his wife and two boys. He worked as a union clerk at the same Safeway where his father had worked until retirement, only to die two years later.
Bob didn’t want his father’s fate, but there he was. As days became decades, he went to a job he hated, worked with people he didn’t like, to buy things he didn’t want. By his own telling, he was the living embodiment of Thoreau’s “quiet desperation”. He knew he wasn’t happy, but it never occurred to him to live differently.
When he suddenly found himself divorced, Bob made a dramatic choice that changed his life forever…
Then, when he was 40 years old, the divorce happened. After paying alimony and child support, he was taking home $1,200 a month, $800 of which went towards rent.
One day, fretting about impossible finances, he saw a green box van for sale and thought: “Why don’t I buy that van and move into it?” The idea struck him as crazy, but with the prospect of homelessness closing in, he drained the last $1,500 in his savings account and bought the van that was just “too ratty-looking” for its previous owner. He gave his landlord notice that night, threw a sleeping pad in the back of his new home, and cried himself to sleep.
Today, he has hundreds of thousands of online followers, and he is even featured in a new film called “Nomadland”.
But despite all of that success, he will continue to live in his GMC Savana.
For others, living in a van is not a palatable option, but they have still chosen to live off the grid.
Over in the UK, a British couple named Matthew and Charis Watkinson have fully embraced a philosophy known as “collapsology”…
NO bills, no mortgage, an endless supply of homegrown grub and even a hot tub to relax in – welcome to the world of two Brits prepared for the end.
Essex vets Matthew and Charis Watkinson gave up the rat race for the good life in the Welsh countryside after reading about ‘collapsology’, a movement based around the theory that society as we know it could fall apart.
Wouldn’t it be great to have no bills every single month?
Matthew and Charis gave up their £30,000-a-year jobs, and now they produce their own food on three acres of land in Pembrokeshire…
Matthew and Charis, 35, bought three acres of land in Pembrokeshire for £35,000 and spent a further £25,000 on building a house, chicken coops, greenhouses, a horse poo-powered gas cooker and even a hot tub.
They are entirely self-sufficient, installing solar panels, growing their own fruit and veg, building beehives, rearing up to 140 chickens and converting lorries and flatbed hay trailers into zero-carbon living quarters.
If the collapse of our society greatly accelerates, they are ready.
Meanwhile, they don’t have to get up at the crack of dawn every morning and drag themselves to corporate jobs that they absolutely hate.
As I was preparing this article, I was reminded of a Reddit post that I saw earlier today…
I don’t understand how people would rather have a job than be dead. I genuinely don’t understand the motive. I picked a field I love, I became educated, I have had multiple jobs that are vastly different from each other and every one gives me the same overwhelming feeling of “I’d literally rather die than do this”. It’s been every job I’ve ever had, even before graduating college. I simply don’t feel rewarded when I put in effort to complete a task, I never get fulfillment out of a job well done. I don’t understand how people do this their whole lives
Have you ever felt that way?
I think that most of us have.
Matthew and Charis may have simple lives, but they are absolutely thrilled to be free of the system…
“We’ve built a farm for a lot less than £100,000 and it’s all ours.
“We don’t owe anybody any money and we don’t have any bills – why aren’t more people doing this?”
I think that is a perfect question.
Why aren’t more people doing this?
If you hate what your life has become, maybe it is time for a big change.
Countless others have gotten free from the system, and you can do it too.
* * *
Michael’s new book entitled “Lost Prophecies Of The Future Of America” is now available in paperback and for the Kindle on Amazon.
Tyler Durden
Sun, 02/07/2021 – 23:30 - China's New Type 15 Lightweight Tank Enters Service In Xinjiang To Protect Western Borders
China’s New Type 15 Lightweight Tank Enters Service In Xinjiang To Protect Western Borders
China and Russia are rushing to field new tanks while the US continues to operate M1 Abrams designed more than four decades ago.
According to intelligence firm Janes Information Group, the latest installment that the US is falling behind the modernization curve is China’s new lightweight battle tank has formally entered service.
On Jan. 30, China North Industries Group Corporation announced on state-owned television that Type 15 (also known as ZTQ-15) lightweight battle tank entered service with the Xinjiang Military Command of the People’s Liberation Army Ground Force (PLAGF).
China Central Television (CCTV) said an undisclosed number of Type 15s were delivered to a PLAGF regiment in Xinjiang. CCTV broadcaster said it was “the first lightweight tank to join the military command.”
The broadcaster said the Type 15s are outfitted with special oxygen equipment to allow the tanks to operate at high altitudes.
Janes said no confirmation on how many Type 15s were deployed, but it appears these new tanks will significantly increase PLAGF’s combat capabilities in the region.
“The Type 15 tank is easy and flexible to operate and has high mobility, as it is equipped with a new engine designed for plateau missions and an oxygen producer. It also uses new armor materials and stealth technologies, so it has reduced weight but better protection and stealth functions,” Zhang Hongjun, a master sergeant class one at the regiment, told CCTV.
The new tanks are much lighter than the People’s Liberation Army’s Type 96 and Type 99 tanks, allowing it to become a rapid response ground-based weapon, with a maximum top speed of 43 mph.
“It also has advanced fire control and weapons systems, and extra battlefield situational awareness capabilities, particularly the ability to identify friends or foes, providing significant convenience to the troops,” Hongjun said.
The new tanks appear to be safeguarding China’s western borders. More specifically, Beijing has a significant “core interest” in the northwest Xinjiang province where it houses massive re-education camps of Uighur Muslims.
Tyler Durden
Sun, 02/07/2021 – 23:00 - The GameStop Saga Unravels 'Stakeholder Theory'
The GameStop Saga Unravels ‘Stakeholder Theory’
Authored by Jeff Deist via The Mises Institute,
The GameStop saga shows some “equity” movements are more equal than others…
Stakeholder theory, the corporate version of social justice, attempts to install this hopelessly amorphous concept of “equity” in the business world. Equity, unlike equality, demands different treatment of individuals and different distribution of resources based on need, identity, and historical injustices. But now equity has evolved beyond a political buzzword, and finds growing support in calls for stakeholder capitalism. The animating impulse in big corporate boardrooms today requires cultivating an image of social responsibility. Under this theory business firms should entertain all kinds of noneconomic goals and outcomes. No longer may owners simply concern themselves with profit or loss, but instead must consider the broader societal implications of everything their business does. Whether corporate leaders concern themselves with social justice out of genuine desire or merely to avoid backlash is an open question, but the events of 2020 clearly changed the conversations in boardrooms.
Under the old conception, businesses have four primary elements, namely owners, managers, employees (or vendors), and customers.
All four have skin in the game, which is to say their own money or income is involved.
The notion of stakeholders inverts this paradigm and grants a degree of power over ostensibly private businesses to those who take no risks and provide no benefit. By undermining the suddenly old-fashioned idea of profit and loss as the guiding principle for business, stakeholder theory calls into question the very existence of millions of businesses big and small—in fact their grubby and narrow focus is simply to make money.
To suggest that the general public or society at large ought to be a de facto partner in any business, based on the interconnected nature of any economy, is to suggest an unlimited and wholesale attack on the concept of private ownership. It is patently antiproperty and implies collectivism by its very conceptual foundation. It insists everyone in society ought to have an interest in and some say over what ostensibly private firms do—and not only with respect to their profits, but even their business practices and mission. Stakeholder theory even creates a starring role for the earth itself, as the ultimate nonrenewable resource which is dubiously always in peril from business.
Societal ownership of business firms traditionally takes three prominent forms, specifically socialism, communism, and fascism. But in 2021 these terms fail to shock or alarm us as they once did. The constant use of attenuated language makes us almost immune to powerful words that ought to be used judiciously. Socialism is increasingly popular, while fascism is the pejorative increasingly aimed at market capitalism. The newspeak of equity and stakeholders is yet another “third way” bridge blurring the distinction between private and state, between the economic means and the political means. And to be fair, equity and stakeholder movements per se do not represent outright socialism (or fascism) in either the Misesian or Rothbardian sense. We still have stock markets, we still have private owners, and we still have profits and losses. The equity revolution takes place within the form, as an evolution rather than a deviation.
Enter GameStop and its Reddit WallStreetBets bros, determined to prop up the fading retailer’s stock price in the face of intense short-selling pressure by powerful and rich hedge funds. This uprising, whether motivated by greed, gamer culture, or sheer spite against perceived Wall Street fat cats, is as much imbued with notions of fairness and societal benefit as any protest movement.
Yet suddenly the champions of stakeholder theory, like the predictably despicable Washington Post, find themselves singing a new tune about vulture capitalists, deciding that hedge fund short sellers are the good guys in the story.
After all, stakeholder theory means investment funds and major corporations have the right—or even the duty—to make uneconomic decisions. Broader societal interests, not just bottom-line profits and shareholder value, must be considered. So funds and companies frequently invest in supposedly green but inevitably less efficient technology, make donations to left-wing social causes like Black Lives Matter, and give money to a variety of charities. These actions may in fact provide long-term economic benefits from a positive public image, but they do not directly increase share prices or dividends.
Redditors have the same right. Correctly or not, they see social benefit in causing financial losses for hedge funds with short positions looking to profit off GameStop’s stock decline and anticipated eventual bankruptcy (due to downloadable games obviating any need for retail outlets). If Koch Industries can be characterized as a nasty fossil fuels polluter whose profits fund captured antidemocratic right-wing think tanks, why can’t Redditors similarly portray hedge funds as evil tools for the 1 percent to get even richer on the back of a struggling retail chain? The notion of rich Wall Street investment bankers using their inordinate financial power to rip the marrow out of a dying industry’s carcass used to excite the Left. Now that same narrative somehow becomes an alt-right populist slander, one used by Reddit bros in their evil plot to manipulate the GameStop price.
In truth there are no victims in this tale. Perversely, the celebrated former Fed chair and current Treasury secretary Janet Yellen was paid more than $800,000 by Citadel LLC—another player in the GameStop story. Should her “equity” be redistributed? Just yesterday GameStop stock dropped nearly 60 percent and has lost $400 per share from its recent all-time high. And while it all seems like a manipulated and even immoral series of events, we should remember that nobody put a gun to anyone’s head. The WallStreetBets group collectively chose to put their own money at play, knowing they were pumping the share price and could not all get out at once or even at a profit. Melvin Capital and other hedge funds heavily invested in shorting GameStop chose to take a significant risk, and their due diligence certainly could have included understanding and monitoring Reddit investment boards. As economist Peter Earle recently said, if you get in the ring, you might get punched.
The purpose of capital markets is price discovery. They help investors and businesses allocate capital to its best and highest uses, however imperfectly and haphazardly. Short traders, long traders, so-called insider traders, futures traders, derivative contracts, speculators, gamblers, colluders, and even naked short sellers all serve this imperfect process. All of these individuals and mechanisms constantly recalibrate and react to changing conditions, bringing a public company’s performance (and share price) into greater clarity. And any firm not wishing to subject itself to the vagaries of fickle equity markets or public campaigns can simply remain private and fund itself through operations or private placements.
The process is imperfect because humans are imperfect. It can manifest in fits and starts, and demonstrate deep irrationality or even mania. But the alternative is nothing less than creeping socialism by another name, whether stakeholder capitalism or otherwise. When your atavistic and deficient theory backfires on you, look for a mirror rather than a congressional bailout. Everything is not everyone’s.
Tyler Durden
Sun, 02/07/2021 – 22:30 - Pizza Hut To Begin Drone Deliveries In Israel
Pizza Hut To Begin Drone Deliveries In Israel
Drones will significantly revolutionize last-mile logistical networks over the coming years. Companies from Amazon to UPS to Walmart and others are quickly working to pilot test drones for last-mile deliveries, with the hope that one day these autonomous aerial vehicles will be embedded in their supply chains to create higher efficiencies.
The topic gains further significance in Israel, where Pizza Hut will pilot test drone deliveries in June. The company partnered with Dragontail Systems where the tests will be conducted at a single store in Bnei Dror.
Source: Dragontail Systems According to WSJ, Pizza Hut Israel won’t be flying pizzas directly to customers’ homes but instead will drop them off at government-approved hubs, such as ones that could be designated in parking lots. Delivery drivers will be able to retrieve the pies from the drone and complete the delivery’s final stretch.
“Drone delivery is a sexy thing to talk about, but it’s not realistic to think we’re going to see drones flying all over the sky dropping pizzas into everyone’s backyards anytime soon,” Ido Levanon, CEO and director for Dragontail Systems, which will be handling the drone trial, told WSJ.
During the test, the country’s Ministry of Transportation has allowed an “air bubble” measuring 50 square miles north of the country, where the Pizza Hut drones can safely operate.
WSJ noted that Pizza Hut’s Bnei Dror store will be armed with a fleet of drones that could serve up to 7,000 additional households.
Ahead of the big test, Dragontail will be operating its cargo drones six times a day to perfect commercial operations. Pizza Hut and Dragontail hope the flights this summer will be enough data for the government to analyze to approve a more widespread drone delivery service at other stores.
There’s one problem, the transportation agency has restricted the drones to a cargo payload of only 5.5 pounds. There is a plan to increase the cargo payload to 22 pounds, which would allow it to carry multiple pizzas and bottles of soda.
With more people shopping from home in the virus pandemic, the need for faster delivery times has become a priority and concern for many consumers. The proliferation of drones integrated into last-mile deliveries will become a reality not just in Israel but in many other countries in the coming years.
Tyler Durden
Sun, 02/07/2021 – 22:00 - "We Cannot Mince Words": San Francisco Education Official Denounces Meritocracy As Racist
“We Cannot Mince Words”: San Francisco Education Official Denounces Meritocracy As Racist
Alison Collins, the Vice President of the San Francisco Board of Education, has declared meritocracy to be racist even in the selection of students at advanced or gifted programs. As we have previously discussed, this has been a building campaign in academia as educators and others denounce selection based on academic performance through testing. At issue in San Francisco is Lowell High School where top students were selected through testing and grades. Most cities have such gifted programs or institutions, though we have discussed calls for the elimination of all gifted and talented programs in cities like New York. Lowell had a majority of white and Asian students and only two percent of its student body were African-Americans. Collins and other board members want to abolish the merit-based selection in favor of a blind lottery system.
Collins’ remarks from a San Francisco Board of Education public meeting in October 13, 2020 were only recently posted by Sophie Bearman of San Francisco’s online publication Here/Say Media. In the meeting, she declared:
“When we talk about merit, meritocracy and especially meritocracy based on standardized testing… those are racist systems… You can’t talk about social justice, and then say you want to have a selective school that keeps certain kids out from the neighborhoods that you think are dangerous.”
Collins made the statement in support of a resolution, entitled “In Response to Ongoing, Pervasive Systemic Racism at Lowell High School,” authored by Collins, Board President Gabriela Lopez, Commissioner Matt Alexander, and Student Delegates Shavonne Hines-Foster and Kathya Correa Almanza.
Newsweek quotes at least one Lowell teacher who objects to the elimination of the school as a place for top performing students and said that the system is blind on race and designed to reward “the hardest working kids in terms of academics.”
Gifted programs and elite academic schools are designed to allow students to reach their full academic potential with other students performing at the highest level of math and other disciplines. It is often difficult for such students to reach that potential in conventional settings. Teachers have to keep their classes as a whole moving forward in subject areas. That often means that academically gifted children are held back by conventional curricula or lesson plans. Those students can actually underperform due to boredom or the lack of challenging material. Many simply leave the public school system. Moreover, students tend to perform better with students progressing at their similar level. Teachers can then focus on a lesson plan and discussions that are tailored to students at a similar performance level.
Moving to a lottery system at Lowell would obviously convert the school into a conventional academic program. We can debate the value of having such schools to cater to the most advanced students. I believe such schools are important components to public education. We not only reward students for their considerable academic achievement but guarantee all students that they can progress as far as their interests and capabilities will take them. These schools are the source of pride in many cities in showing the full potential of high school students in science and other fields.
I do not agree that meritocracy is inherently racist. Students of all races benefit from such schools. While there is clearly less diversity at Lowell, the best solution is not to eliminate such programs but to work harder in the earlier grades to allow minority students to excel (and ultimately gain admission to such programs).
There is a need for meritocracy in academia and society at large. Indeed, such scores offer race-neutral systems for advancement. While subjects like math have been declared racist (and a University of Rhode Island professor recently declared all of science, statistics, and technology to be “inherently racist”), these are fields that allowed many intellectuals of color to advance.
We have to have systems of objective comparison in the ability and performance of students in academia. We use such tests and scores for the selection of students admissions to college and society uses such systems for business and professional advancement. The world is becoming a far more competitive place. Other countries are not abandoning meritocracy. They are pushing their most most talented students to achieve even more in specialized programs and advanced courses. We need to do the same if we are going to remain competitive as a nation. Eliminating elite programs like Lowell removes an opportunity not just for these students but our society as a whole. These are some of the best developing minds in our country and they should be allowed to reach their full potential through special schools and programs.
I have been a huge supporter of public schools my whole life. While my parents could afford private schools, they helped form a group to keep white families in the public school system in Chicago in the 1960s and 1970s. They wanted their kids to be part of a diverse school environment. I also sent my kids to public schools for the same reason. I view our public schools as important parts of our society as we shape future citizens.
This efforts in San Francisco and New York will only encourage more families to leave our public school systems and potentially increase rather than reduce problems of diversity in our student bodies. The need to achieve greater diversity in top public high schools is real and needs to be addressed. However, the solution is to create better educational opportunities for younger students to lift them up rather than lower (or eliminate) entry standards at these schools. That is certainly harder than just imposing a lottery system for all schools but it preserves the opportunity for high advancement for students of all races.
Tyler Durden
Sun, 02/07/2021 – 21:35 - The Semi Chip Shortage Is Turning Into A Crisis
The Semi Chip Shortage Is Turning Into A Crisis
For the better part of the last month we have been writing about how the shortage in semiconductors has wreaked havoc on the auto industry.
Now, it looks as though the shortage is going from being a nagging pain in the auto industry, to a full scale crisis that is also affecting consumer electronics like phones and gaming consoles.
It is now being referred to as the “most serious shortage in years”, with Qualcomm’s CEO saying last week that there were now shortages “across the board”, according to Bloomberg.
But it isn’t just Qualcomm executives speaking out: other industry leaders have warned in recent weeks that they are susceptible to the shortages. Apple said recently that its new high end iPhones were on hold due to a shortage of components. NXP Semiconductors has also warned that the problems are no longer just confined to the auto industry. Sony also said last week it may not be able to to fully meet demand for its new gaming console in 2021 due to the shortage. Companies like Lenovo have also been feeling the crunch.
Neil Mawston, an analyst with Strategy Analytics, said: “The virus pandemic, social distancing in factories, and soaring competition from tablets, laptops and electric cars are causing some of the toughest conditions for smartphone component supply in many years.”
Mawston says that prices for some smartphone components are up as much as 15% the last 6 months.
At the center of the shortage is Taiwan and its largest company Taiwan Semiconductor Manufacturing Co. The company now sits astride a larger political crisis between China and Taiwan while Biden officials in the U.S. work to find solutions, not only for the semiconductor issues, but for the larger conflict developing between the two nations.
To make matters worse, Huawei is being blamed for hoarding components in 2020 (almost as if they knew this was going to happen). This set off other manufacturers to do the same. According to the report:
Industry executives also blame excessive stockpiling, which began over the summer when Huawei Technologies Co. — a major smartphone and networking gear maker — began hoarding components to ensure its survival from crippling U.S. sanctions. Led by Huawei, Chinese imports of chips of all kinds climbed to almost $380 billion in 2020 –– making up almost a fifth of the country’s overall imports for the year.
Rivals including Apple, worried about their own caches, responded in kind. At the same time, the stay-at-home era spurred sales of home appliances from the costliest TVs to the lowliest air purifiers, all of which now come with smart, customized chips. TSMC executives said on its two most recent earnings calls that customers have been accumulating more inventory than normal to hedge against uncertainties, a maneuver they see persisting for some time.
“There’s a chip stockpiling arms race,” said Will Bright, co-founder and chief product officer at Drop. Analyst Mario Morales of IDC said: “A lot of it can be traced back to the second quarter of last year, when the whole world basically shut down. Many auto companies shut down manufacturing and their suppliers re-prioritized. Not until the second half will we see relief for some of these markets.
While the extent of the damage on consumer electronics remains to be seen, the shortages are expected to cost $61 billion worth of sales in the auto industry. Recall, we noted just days ago that GM and Ford had joined Nissan in cutting production due to the shortage.
Mid-day on Wednesday the U.S. automaker announced that the shortage would “impact production in 2021”, according to StreetInsider. The company said in a statement that “semiconductor supply for the global auto industry remains very fluid”.
It continued: “Our supply chain organization is working closely with our supply base to find solutions for our suppliers’ semiconductor requirements and to mitigate impacts on GM. Despite our mitigation efforts, the semiconductor shortage will impact GM production in 2021.”
The automaker said it is “currently assessing the overall impact, but our focus is to keep producing our most in-demand products – including full-size trucks and SUVs and Corvettes – for our customers.”
Nissan also announced Wednesday that it had fallen victim to the shortage. As a result, Nissan said it would suspend some truck production at its Mississippi plant due to the shortage of chips. Nissan is struggling to make “short term production adjustments”, according to Yahoo Finance, at its plants in North America.
The stoppage is starting with three non-production days at the Canton, Mississippi plant. Further delays could continue if the semi shortage continues to negatively affect business.
We also noted just hours ago that Ford had also announced it was making more production cuts and temporary layoffs at its Chicago Assembly Plant. The most recent round of layoffs is also being attributed to the supply chain disruptions in semiconductors, according to The Pantagraph.
Tyler Durden
Sun, 02/07/2021 – 21:10 - Protecting Your Capital During A War
Protecting Your Capital During A War
Authored by ‘Fritz’ via Asia Stock Report,
Wars are one of the greatest destroyers of capital.
In Barton Bigg’s book “Wealth, War & Wisdom”, he makes the case that to protect your capital during a war, investors need to own diversified portfolios of stocks and property in safe regions. The book chronicles the experience of investors during World War II: whose wealth was destroyed and why. And what you could have done to protect your wealth.
Biggs comes to the conclusion that the following asset classes were best at preserving wealth, ranked from best to worst:
1. Survival goods
Prices for daily necessities shot up during the war. And so, the people who got rich were often the black marketers. The black market was the most lucrative profession and the best source of wealth as the war raged on. Stocks, land, real estate and businesses on the other hand, worked only if you had a very long-term horizon.
What black marketers did was hoarding survival goods such as clothing and food and then selling them at high prices to desperate fellow citizens. Then using their black money to buy and hoard gold.
In Japan, people became increasingly desperate as the war progressed. Becoming cold and hungry, paying up for clothes, food and whatever other survival goods they could get their hands on. Even selling land at fire-sale prices in order to survive. Biggs tells stories of people involved in the sourcing of black market construction material for the rebuilding of bombed out cities, making fortunes in the process.
After liberation, known black marketers were often physically abused and their property seized, especially in Italy. But others managed to use their ill-gotten wealth to buy real businesses after the war. In the end, black marketers ended up ahead of almost everybody else.
Desperate Japanese citizens queuing up for food rations
2. Art, gold and jewelry
Gold and jewelry is portable, liquid and easily protected compared to building structures. Throughout the early 1940s it remained easy to transfer gold and jewelry to Switzerland from almost anywhere in Europe. So jewelry and gold played a crucial role in preserving wealth for any individual that stayed within an occupied country.
The difficulty was to hide jewelry from thieves and occupying forces.
You could hide jewelry in deposit boxes. But as happened in France in the early 1940s, French banks had to report to the Germans the contents of all safe deposit boxes. The contents of those safe deposit boxes were then transferred to Germany.
Another option was to stash jewelry at home. The downside of keeping jewelry inside your home is that bombing campaigns tend to lead to an increase in crime, as experienced in Britain throughout the 1940s. As Barton Biggs says “war unravels the bonds of civil society”. A rich old lady he knew “slept with [her] jewelry instead of her husband for four years” out of fear it would be stolen from her. Anything ostentatious was stolen.
In Italy, some families banded together, moved their prized possessions to defensible villas in the hills and stood ready to fight for their lives, all while desperate groups wandered the countryside searching for loot. You had to protect your property with your life. In countries occupied by Germany, informants told German officers where jewelry was stashed and large estates were often ransacked by them. Con artists flourished, often promising to hold jewelry safe on behalf of others, then running off to a far-away land never to be seen again.
A safety box outside the country would have kept jewelry safe. But you had to keep them secret. When your neighbours’ children are starving, they will do anything – including reporting you to occupying forces.
Jewelry is more liquid than property, so it could readily be swapped for necessities such as food and medicine. At a discount, of course. In an occupied country filled with informers and treachery, you had to watch your back when transacting in jewelry. Or accept a large discount from better-known black market dealers.
In Soviet-occupied countries, Soviet soldiers often fancied watches and jewelry and had no qualms murdering to get them. The Red Army was also used by high Soviet officials to help plunder for them. Clothes, cars, fine china, jewelry, art and grand pianos were shipped back to Russia. So jewelry did not preserve wealth effectively in countries occupied by Soviet forces.
Art performed poorly as a wealth preserver during WWII. It is vulnerable to destruction by fire, can easily be damaged, quickly plundered and is difficult to hide. But if you had capital to buy them during the war, you would have made a fortune. Keynes famously went on a mission to Paris in the spring of 1940 to buy, to the sound of howitzers, two Cézannes and two Delacroix that subsequently appreciated 40x in the next four decades.
The Cézanne painting purchase by Keynes in the spring of 1940
3. Overseas assets
Overseas assets also helped preserve wealth. Especially if kept in safe jurisdictions such as Switzerland. That was especially the case for individuals in occupied countries, whose domestic wealth was often confiscated by authorities. The key was to keep bank accounts in overseas countries secret – from tax authorities and even from friends & family.
That said, getting money out was not always easy as exchange controls and taxes often ate up a large portion of the capital. For example, by the end of the 1930s, Jewish business owners in Germany had to accept large discounts if they wanted to sell their businesses – often at 50% of fair value. Even homes had to be sold at discounts. And if they wanted to bring money out of the country, they had to pay exorbitant foreign exchange taxes of up to 90%.
Even overseas assets were expropriated in some cases. In the early 1940s, the UK the government became short of US Dollar for purchases of war materials. So the Chancellor of the Exchequer decreed that British citizens who owned US stocks had to report them to the Bank of England, and they were then sold to fund munitions purchases. The holders of those US stocks received a credit in pounds for the proceeds of the sales. Keeping your foreign assets secret remained key in avoiding confiscation.
A private bank in Zermatt, Switzerland with underground bunkers and storage facilities for gold
4. Domestic stocks
The experience of WWII is that stocks generally did preserve wealth. But stocks had substantially higher returns if their home country was on the winning side. Losing the war and becoming occupied destroyed a country’s long-term return in equities.
It wasn’t a smooth ride. The US stock market was sleepy during the war and stock prices fell to very low levels. A seat on the New York Stock Exchange cost only $17,000 in 1942, roughly 97% lower than the peak of $625,000 in 1929. And P/E ratios stayed low throughout the war. In 1942, the median P/E ratio for 600 representative stocks was only 5.3x. Only 10% of stocks traded at a P/E multiple over 10x trailing earnings.
Stocks reflected the success each country’s military advances or setbacks. The British stock market bottomed right before the Battle of Britain in 1940, when it successfully staved off a German invasion. The German market peaked when German troops reached Moscow in 1941, just prior to the setback in Stalingrad. The bottom for the US market in May 1942 coincided with the Battle of Midway, when US forces dealt a decisive blow to the Japanese Navy.
So if you own stock in a particular country, you better have conviction that it can win a war and avoid becoming occupied territory.
War spending via budget deficits was generally positive for the domestic stock market in nominal terms. From 1932 until the 1937-38 high – a period of record deficit spending – Germany was the best stock market in the world. After a brief respite, the market continued to rally all the way to the Battle of Stalingrad. This period was characterized by booming military production and eventually soaring profits from low-cost forced labour from France, Poland and Holland. Eventually however, budget deficits led to a drain of foreign currency reserves that made it difficult to keep up elevated spending levels. Stock prices stopped rising.
After Germany’s defeat at the Battle of Stalingrad, the Nazi government finally imposed controls on stock prices for the remainder of WWII to conceal the damage. No German could legally sell shares without first offering them to the Reichsbank, which had the option of buying them at 1941 prices in exchange for rapidly depreciating government bonds. After the war, the German stock market absolutely collapsed as you can see from the below chart.
Germany’s CDAX index
Holding stocks through the war required a nerve of steel. At market bottoms in the US, the UK and elsewhere, newspaper commentary was consistently negative and pessimistic. In every allied country, the market bottomed during major negative events, such as the Dunkirk evacuation and the fall of France to the Nazis.
UK Financial Times, 30 Industrials index
Likewise, the US stock market bottomed during the Battle of Midway, when newspaper commentary was largely negative. By the time of German surrender at Stalingrad, the US market had already risen well over 50%. So owners of US stocks had to stomach holding these stocks in the face of negative – or even catastrophic – news.
US Dow Jones Index
In Japan, newspapers and radio broadcast only good news about the course of the war. But in elite tea houses in Tokyo, information about the progress of the war was passed around to intelligent observers. Hence, the stock market correctly discounted Japan’s prospects of a victory in the war. The market fell gradually as the war progressed and collapsed completely in 1945 as Japan was defeated in a final blow. In real terms, Japan’s stock prices fell roughly 26% per year from 1940 to 1949. In nominal terms stocks did actually rise despite the spectacular defeat in 1945.
Japan stock market price index (real + nominal), as estimated by Citigroup
Stock markets in occupied territories performed poorly during WWII. Inflation was almost twice as high in the loser countries than in the countries that managed to avoid the war. The countries at risk of becoming occupied were primarily those in close proximity to Germany, Soviet Union, Italy and Japan: European countries and Southeast Asia.
During WWII, a number of stock markets had “permanent breaks” with the market closing and never restarting again. That happened in Hungary, Czechoslovakia, Romania, Poland and Finland when they were taken over by the Soviet Union. Communism is clearly the greatest enemy of wealth preservation.
Private wealth in Singapore and Hong Kong also suffered immensely in 1942-45 when they were taken over by Japan.
Stock markets in countries that were occupied by the Germans also suffered, though some emerged unscathed: including Austria, Denmark and Holland. Many families in Holland were able to keep their homes, land and small enterprises during the entire occupation. If you were Jewish or an enemy of the state, your property was seized just like in Germany.
France was treated poorly by their German occupiers. French were deemed not Aryan enough to be treated as equals. French patents, equipment and skilled workers were “temporarily” transferred to Germany, gutting French industry from intellectual property. Other French companies prospered mightily from military contracts. French inflation was 20% per year during the war and rose to 60% in the years following the war, completely destroying the economy. French stocks helped preserve wealth somewhat, but in real terms the stock market fell drastically throughout the 1940s.
France SBF-250 index, adjusted for inflation
5. Property
Physical property is a dangerous thing to posses in wartime. It often gets stolen, bombed, destroyed or expropriated.
In Nazi Germany, unless you were Jewish, property rights were generally respected. But in occupied countries of Eastern Europe, prime real estate were almost always expropriated. High-profile mansion and real estate were often used by the Wehrmacht or confiscated to become country estates for top German officers. In Hong Kong, the Chinese found that all their money and home on Victoria Peak were worth very little when the Japanese occupied the city in 1942.
Hyperinflation caused a particular problem, as interest rates rose to radical levels. Landowners who had paid off their mortgages on the other hand survived, and business owners who had repaid their loans became unencumbered owners of real property.
If you left property, getting it back after the war proved to be difficult in many cases. But if local property records remained intact, land often preserved wealth.
UK and US real estate lost value during the war, with prices falling to very low levels. Rents in Wall Street office buildings were as low as $1/sqft. A seller of a New York hotel had difficulties finding buyers, even at one time annual earnings.
A working farm often protected both wealth and your life, providing safety and food. There are number of anecdotes of affluent French families that shuttered their Paris houses in 1940 and retreated with their most precious possessions to family farms in the deep countryside, living in relative comfort through the war.
Remote farmland in the French alps during World War II
6. Fixed income securities
Budget deficits and war spending spells disaster for the ownership of government bonds. Even in the loser countries, stocks tends to beat bonds, and bonds tend to beat short-term bills and demand deposits.
Due to Japan’s deficit spending on war materials, prices rose 3,280% from 1930 to 1949. That caused a carnage in Japanese government bonds, which lost roughly 17% per year from 1940 to 1949.
German government bonds saw their purchasing power erode roughly 21% per year in the 1940s, or a loss of 90% during the 1940s.
In Italy, owners of fixed income securities were impoverished by the war. Government bonds lost 27% per year in real terms in the 1940s and government bills lost 30% per year.
Other European countries did not fare much better, as you can see from the below table:
Total real returns of a number of European countries
Conclusion
The best in-country stores of wealth are non-ostentatious property, such as remote farmland or vineyards. Just make sure the mortgages are paid off. Jewelry and gold are crucial since they can be readily exchanged for daily necessities.
The best out-of-country stores of wealth are equities, jewelry and land. They should be stored in safe jurisdictions, protected by geography, rule of law and a strong national defense. The United States, New Zealand, the United Kingdom and Switzerland come to mind. Don’t be tempted to sell just because news go from bad to worse. And maintain a well-diversified portfolio of stocks.
The biggest lesson of all might be to avoid fixed income instruments, including government bonds and demand deposits. Especially in countries at risk of becoming occupied by communist forces.
Those are the key investing lessons from World War II.
Tyler Durden
Sun, 02/07/2021 – 20:45 - Creator Of The Bond VIX: The Coming "Monetary Hurricane" Is A White Swan
Creator Of The Bond VIX: The Coming “Monetary Hurricane” Is A White Swan
By Harley Bassman, creator of the MOVE index, aka the “VIX for bonds”
Much is written about the Black Swan, famously described by Nassim Taleb in his 2001 book, Fooled by Randomness, and smartly summarized by Malcolm Gladwell in The New Yorker’s April 22, 2002 publication.
As a reminder, the Black Swan is a metaphor that describes an event that comes as a surprise, has a major impact on markets or society, and is often considered painfully obvious with the benefit of hindsight.
This begs the question of why we often ignore, to our detriment, the more commonplace White Swan. Daniel Kahneman won the 2002 Nobel Prize in economics for shining a bright light on how cognitive bias leads to poor decision making. Seemingly by nature, people overly worry about low probability events and diminish their concern for truly risky behaviors. For example, many people are terrified of being bitten by a shark or struck by lightning, but then hop into a taxi and fail to snap on their seat belt.
As the calendar rolled into 2020, the MOVE Index was under 50 while the more widely watched VIX Equity volatility index was kissing 12. There are no reasonable statistics to comprehend such levels, they are just too low. And of course, my in-box was bulging with investors wanting me to reveal the next “surprise” that would shock the market out of its doldrums. I could only reply that if I knew, it would (by definition) not be a surprise.
Notwithstanding that Bill Gates offered a TED Talk in 2014 on the risk of a Global pandemic, and that a dozen such science fiction movies were available on Netflix, indeed COVID-19 was a Black Swan surprise. What is no longer a surprise is the Government’s proposed Monetary and Fiscal solutions to the havoc that COVID has wreaked.
At this stage, discussing the merits of the Fed’s policies is pointless; it’s an activity best held in states where weed is legal. As pictured on the prior page, there seems to be no level of balance sheet expansion that is too high.
Not only is the FED employing QE (Quantitative Easing) to dampen an interest rate increase that would be extremely bothersome to our vastly over-leveraged economy, but they have signaled they will fund the expansion of Fiscal spending.
Again, a debate about whether this is good public policy is moot; a huge Fiscal impulse is coming, and it will be funded mostly by debt issued to the FED.
Economic purists will insist that this is not “money printing” since the US Treasury is independently selling bonds into the market via public auctions. Many of these bonds are purchased by Wall Street ‘primary dealers’ (sometimes referred to as Vampire Squids) who soon sell them to the FED for a small profit. Of course, this is “money printing” in the same way that one “borrows” beer at a Super Bowl party.
As a reminder, notwithstanding COVID, the financial road we are traveling has been paved with good intentions, especially by the FED; the pity is the expected result did not occur.
The GFC in 2008/09 revealed that the US had too much debt, both public as well as private. The FED recognized that there are only two ways out of a debt crisis – either default or inflate, with the caveat that inflation is simply a slow-motion default.
Since the market would not allow the FED to reduce its balance sheet via asset sales (or even the slow bleed of letting bonds mature), the alternate solution was to create inflation as a way to reduce the value of debt. This policy was reinforced by the FED’s most recent communications where they indicated they would not mind inflation rising above their 2.0% target (for a short time).
The original plan was for the FED’s largess to inflate middle class wages; instead, the inflation occurred in assets, most notably in Global Equities.
When one hears hoof beats, look for horses not zebras. There is no reason to ruminate over exotic possibilities when the problems we face are quite clear. Once again, ignore the merits of the public policy response – what is important is that there is wide support from both the Democrats and Republicans to offer significant Fiscal relief supported by massive Monetary expansion.
Will this be inflationary – Yes; but it is unclear how soon.
I made the case in my December 2, 2020 commentary, ”The Wages of Fear”, that demographics will set ablaze the dry kindling of printed money sometime between 2023 to 2025; and nothing has occurred to change that prediction. What is clear is that a financial bubble is being inflated, and there is risk on both sides of the distribution. Ordinarily the bloviating pundits advise one to sell assets, or perhaps execute some sort of hedge such as buying puts or selling covered calls. They are looking in the wrong direction.While I am not a stomping bull, the approaching monetary hurricane could well make the “surprise” a further rally in equities. Printed money should elevate stocks; either via a continued flow into assets, or into the pockets of consumers who will spend it and thus increase corporate profits. (Yes, higher taxes could be an offset, but let’s save that for another Commentary.)
As noted, inflation is an eventual certainty, so one should own real assets; and over the longest run stocks will hold their real value. Notwithstanding the Robinhood day traders, stock equity is an ownership right in a real company. Weimar Germany is the nightmare scenario for inflation; but contrary to expectations, stockholders were protected. While the German Papiermark vs. USD exchange rate exploded (4.2 Trillion per USD), the German Stock Index, currency adjusted into USD, held its value. As such, when faced with nominal inflation – Do not sell call options.
Below is the “skew” of Implied Volatility (IVol) for options that expire in one-year for SPY – S&P 500 ETF, and before Game Stop, one of the market’s most actively traded securities. The path of this line details the IVol used in the pricing models for various strikes. The 100% dot is the current market level of 375 (or 3750 on the S&P 500 Index); similarly, 80% would be a strike of 300 while 120% would be a strike of 450.
The IVol for an at-the-money option of 23.0% is not unreasonable since SPY realized such a volatility as late as last September when the market stabilized near 350. Similarly, an IVol of 31% is not crazy for a strike of 300 since SPY had such a volatility when it was near that level last June.
What is anomalous is that the 450 strike sports an IVol of only 16.9%, a level not too far from the level realized from 2018 to 2019 – before COVID.
The blue line profiles the skew for options that expire in two years with Ivols of 28.50%, 23.0%, and 18.75% respectively for similar strike levels.
Consider the results of the table above for two-year expiry options on SPY; is the risk of reaching the COVID lows (-36%) the same as a 20% rally by 2023 ? (Call px = Put px) I will not quibble with the put price as it offers “earthquake” insurance; but within the context of current events, the call price is too cheap.
By many measures the S&P 500 is expensive; in fact, the loudest pundits cite that we are in a “bubble”. I will submit those indicators are not false, but they ignore that the Fed’s lips are tightly wrapped around a larger financial balloon. The chart below maps the relative value of US equities to real interest rates; this is what supports my view that stocks are “fair”. However, if $1.9 Trillion of fiscal stimulus is funded by the Fed holding real interest rates below zero, the surprise will be north. As such, I want to be long the distant strike call options; not because I know I am right, but rather it is so inexpensive to be wrong.
Tyler Durden
Sun, 02/07/2021 – 20:33 - America's Top Union Boss Nervously Slams Biden Over Keystone XL Decision
America’s Top Union Boss Nervously Slams Biden Over Keystone XL Decision
America’s top union boss isn’t happy that President Biden canceled the Keystone XL pipeline his first day in office, and doesn’t think promises of ‘retraining’ programs are much consolation for union workers who will find themselves unemployed.
“If you destroy 100 jobs in Greene County, Pennsylvania, where I grew up, and you create 100 jobs in California, it doesn’t do those 100 families much good,” said AFL-CIO president Richard Trumka in comments which aired Sunday evening on “Axios on HBO.”
Axios notes that there are significant tensions between environmentalists, the Biden administration team addressing climate change, and segments of the labor movement. By canceling the Keystone XL project, approximately 1,000 existing union jobs and 10,000 protected construction jobs are estimated to have been lost.
Trumka, who fully supported Biden’s run for president, told Axios’ Jonathan Swan that he thought Biden’s decision to cancel the pipeline project his first day in office, without pairing it with an initiative that would create as many (or more) jobs as would be lost, was a bad move.
“If you’re looking at a pipeline and you’re saying we’re going to put it down, now what are you going to do to create the same good-paying jobs in that area?” asked Trumka, who “appeared to be uneasy – pausing for a few seconds and ducking the question — when asked whether he was comfortable with Biden’s plan to ban fracking on federal lands,” according to the report.
AFL-CIO president @RichardTrumka to @jonathanvswan on Biden canceling the Keystone XL pipeline: “I wish he hadn’t done that on the first day…It did and will cost us jobs…I wish he had paired that more carefully [with creating jobs].” #AxiosOnHBO pic.twitter.com/3Ba6F6g8GT
— Axios (@axios) February 7, 2021
https://platform.twitter.com/widgets.js
More via Axios:
The bottom line: Trumka, who started his career as a coal miner, signaled he will have no patience for promises of retraining programs as consolation for union workers forced from their jobs.
- “You know, when they laid off at the mines back in Pennsylvania, they told us they were going to train us to be computer programmers.”
- “And I said, ‘Where are the computer programmer jobs at?’ ‘Uh, they’re in, uh, Oklahoma and they’re in Vegas and they’re here.’ And I said, ‘So, in other words, what we’re going to be is unemployed miners and unemployed computer programmers as well.'”
People “love where they live and they love the people in that area,” Trumka said. “And to them, that’s home. And that’s their culture.”
- “I think what doesn’t get understood quite enough in the country, particularly in D.C. politics, is that that culture is very, very important to the people who live there.”
Meanwhile, Biden’s climate ‘guy’ – John Kerry, suggested that unemployed pipeline workers can just ‘make solar panels.’
John Kerry—who flies in private jets, owned a 76-foot yacht and several mansions—has the carbon footprint of a small nation.
Yet he tells energy workers to “make solar panels” when the Biden administration kills their jobs. pic.twitter.com/QhK2FVykxU
— Tom Cotton (@TomCottonAR) January 27, 2021
Tyler Durden
Sun, 02/07/2021 – 20:10 - "Mind-Boggling Liquidity": Nobody Is Paying Attention To The $1.1 Trillion Flood About To Hit Markets
“Mind-Boggling Liquidity”: Nobody Is Paying Attention To The $1.1 Trillion Flood About To Hit Markets
Amid the ongoing Reddit short squeeze drama which had traders glued to their trading terminals for much of the past two weeks, quite a few may have missed the biggest news of the past week which was the publication of the Treasury’s latest Borrowing forecast, according to which the US expects to borrow just $275BN in the current quarter, down a whopping 75%, or $853 billion, from its November 2020 projection of $1.127 trillion.
The reason for this plunge in funding needs is because the Treasury now expects that it simply won’t need to borrow as much debt as the end-of-March cash balance held in the Treasury General Account (TGA, which is simply the Treasury’s cash balance held at the Fed) would plunge to just $800 billion, down a record $929BN from $1.729 trillion at Dec 31, 2020 (as an aside, the reason why the cash was so high as year end is because the Treasury never got around to actually disbursing the latest stimulus package in December, and it’s also why as the Treasury said “the decrease in privately-held net marketable borrowing is primarily driven by a higher beginning-of-January cash balance as a result of lower-than-assumed expenditures.”)
In other words, had Trump used up roughly $1 trillion in cash the Treasury had previously budgeted for spending on fiscal stimulus, there would be no surprises today, and instead of the cash balance dropping to $800BN in this quarter, it would have done so last quarter (we discussed this last November in “The 2021 Liquidity Supernova: Step Aside Fed – US Treasury Will Unleash $1.3 Trillion In Liquidity“). Instead, the Treasury now expects the decline in the cash balance this quarter – which is being spent to fund last December’s fiscal stimulus – to be the main driver of funding needs.
It doesn’t end there, because one quarter later, the Treasury expects to borrow just $95BN – the lowest in two years quarters – and finish the June quarter with a cash balance of only $500BN, a reduction of $300BN for the quarter, the lowest in six quarters and less than 30% of the average cash balance at the end of the latest three quarters ($1.74BN).
Looking beyond that, we have to go back to an analysis we put together back in November, which cited calculations from Morgan Stanley, according to which unless the debt ceiling deadline – which this year falls on Aug 1, 2021 – is extended well in advance, starting on this date, the US Treasury will not be able to issue any additional debt above and beyond what it needs to cover existing debt obligations. However, what few may be aware of, is that there is a clause written into the law that prohibits the TGA from rising above levels prior to the debt ceiling deadline, which was in 2019.
This means that based on the 2019 debt ceiling, the Treasury cash will need to fall even more, down to just $200 billion by August 1, and as the chart from MS below shows, depending on the upcoming political fight over the debt ceiling, it could end up being quite a mess.
Said otherwise, the market is about to see a flood of $800BN in extra liquidity over the next 6 weeks, and a total of $1.1 trillion in the next 10 weeks, and then potentially another $300 billion in the subsequent two months. With the TGA cash currently at just under $1.6 trillion, it means that the US Treasury may unlock as much as $1.4 trillion in liquidity over the next 6 months, nearly double the liquidity coming from the Fed over the same time period which will be $720 billion ($120BN x 6 months)!
This, not too put it lightly, is a huge deal with major market implications (and is why three months ago we said to “buy everything ahead of an unprecedented dollar devaluation orgy” simply based on this analysis).
First, recall that one of the early (and completely false) reasons cited for the Sept 2019 repo crash, was the modest spike in Treasury cash balances around that time, which also resulted in substantial reserve drain among banks (mostly JPMorgan) which were desperate for more QE. As a result, we almost immediately got “NOT QE” (which, of course, was absolutely QE) and hundreds of billions of reserves were injected into the system by the Fed but not before markets had to tumble to spur the Federal Reserve into acting.
Well, what is happening now is just the opposite and many, many times bigger, as almost one trillion reserves are about to be injected into the system as cash is drained from the Treasury’s account at the Fed. As we said on Monday, “as Treasury cash balances plunge, banks will see their reserve levels soar by roughly $900 billion this quarter, a move that will lead to significant risk asset upside if previous instances of reserves growth are any indication.”
Second, there are major implications for the rates market where the recent flood of bill issuance is set to hit a brick wall: as we said on MOnday, the plunge in short-term debt (Bill) issuance – since there will no longer be an urgent need to keep cash balances in the $1+ trillion range – will compress short-term spreads (effective FF through 3M) to zero – or even negative – as there is suddenly a flood of liquidity which could prompt the Fed to engage the fixed-rate borrowing facility or even nudging the IOER higher. Indeed, on Friday we saw just this move as the 2Y TSY dropped to the lowest yield on record.
Those looking for more details can read our November preview of this event (“The 2021 Liquidity Supernova: Step Aside Fed – US Treasury Will Unleash $1.3 Trillion In Liquidity“), or read the below explanation from Larry McDonald, author of The Bear Traps Report, who last week put together an exhaustive summary of the implications of the TGA plunge.
Again What is the TGA? The US Treasury’s General Account
The TGA is the mechanism through which Treasury makes payments. It’s the checking account through which the government makes all its payments. This checking account is located at the Federal Reserve Bank of New York. It’s where tax payments are deposited and where funds from Treasury debt auctions are collected. So when the TGA changes, that affects deposits at the Federal Reserve. Ultimately, monetary policy, and Quantitative Easing, is conducted through the TGA. It’s important. Of course, last year the TGA grew. It moved up from its usual range of $300 million/$500 million to, since May, well over $1 trillion. The thought had been that $1 trillion would be released into the economy to stimulate it prior to the November election. Didn’t happen. Congress stalled.
Go Big or Go Home?
Enter “Go Big or Go Home” Yellen. What’s she gonna do now? There will be another Covid relief bill of some kind. She’ll be the one cutting the checks through the TGA. This will release money out of the TGA and that means there will be a lot more money in the system. Yellen has $1 trillion burning a hole through her pocket. Additionally, QE is pumping money in at $120 billion clips a month. The combo of a near $1 trillion check and $120 billion monthly QE is the monetary equivalent of eating a banana split after downing an Italian hero sandwich. The market will be stuffed with reserves.
The money will in part be put into the short end of the curve (already anticipated as we can see in super low LIBOR recently, and low T-Bill yields etc.). Some of the tidal wave of money will find its way into stocks and commodities. Some will find its way to higher prices for goods and services. This is the mirror opposite of 2018/2019 when traders fretted that treasury issuance would overwhelm their desks. This led to higher rates and a higher dollar… The 2019 events drama reached its September 2019 climax when the Fed was forced to introduce QE light. What an embarrassment, after pounding the table for 2 years on the wonders of committed balance sheet REDUCTION, up to $50B a month in Q1 2019, they reversed 2x. First in January 2019 by stopping the expansion, THEN again in September 2019 by restarting QE. Reflation assets (EM, global cyclicals ripped higher from Sept to the start of Covid risk in Feb 2020). Both times the beast inside the market reversed the academics at the Fed. Traders > educators in this case.
So now there will be mind-boggling liquidity, no vig in the front end, and a weaker dollar to boot. Nothing is guaranteed when it comes to fiat currencies, but fiat currencies are in a race to the bottom. Given the upcoming drawdown of the $1 trillion in the TGA , it’s a race the US is likely to win.
Recap with more Complexity, Digging Deeper
One of the questions hanging over asset markets going into 2021 was what would happen to the TGA account. The TGA is the Treasury’s General Account which is how the Treasury makes payments. As we saw last year, the TGA was built up to levels much higher than they traditionally get to. In the past, the level of the TGA has traditionally been between $300-500 billion. Currently, and pretty much since May of last year, the TGA has been over $1 trillion, which is well above its historical norm.
Going back to Q3 of 2020 there was a lot of speculation that the previous administration would use the massive levels of TGA to get more stimulus into the economy before the elections in November. However, that never really transpired and more covid relief was not passed by congress until after the election.
This setup the question for Secretary Yellen in terms of how she would manage the TGA, especially into the likelihood of another covid relief bill. The market has gotten its answer as Yellen and the Treasury plan to draw down the TGA balance back to more historical levels. The consequences of this are simple, a lot more reserves in the system. The combination of Fed QE running at $120 billion a month and around a trillion-dollar drawdown in the TGA level means that the levels of reserves in the system will be massive.
The combination of less short term issuance and massive QE will continue to put pressure on front end yields. This has been seen in very low LIBOR settings, low T-bill yields, and a lower setting in the effective fed funds rate. This pressure on the front end will continue to come especially in light of less front end issuance as the Treasury draws down their TGA balance.
The market in the first quarter of this year is basically setting up for the inverse of 2018/2019, where funding markets have begun to get stretched. The story in 2018/19 was that Treasury issuance would overwhelm the market and lead to this crowding out of assets as dealers had to move funding to take down treasuries. Now, the problem is flipped. There are so many reserves in the system already from the Fed’s QE, and now it is going to get another increase via the TGA. So if 2018/19 was the story of issuance crowding out the market and putting pressure on funding markets which led to a higher dollar, this rendition could lead to the opposite.
With that said, we think the correlation between net issuance and asset prices is a bit overstated. Yes, there will be a ton of liquidity on the back of these moves from Treasury, but in terms of marginal drivers, it will matter most in funding markets and the front end of the treasury curve. The other part of this is, this UST funding announcement doesn’t include the impact of whatever $1.9tln will come from the White House and congress.
Overall: the story is that reserves are everywhere and more are coming. In theory, over the near term, we are setting up for an inverse of 2018/19, which means front-end yields, funding markets etc. will be flushed and liquidity in the system will be at very high levels.
So while the bullish case is clearly there – after all a $1.1 trillion reserve injection all but assures higher risk prices, the only question is by how much, some – such as JPM’s Nick Panigirtzoglou – have taken on a more hedged position, even though even the JPM admits that a $800BN spike in reserves in just two months would be a major market event…
- The US Treasury signaled this week a strong intention to reduce its Treasury General Account (TGA) balance at the Fed, from its current level of close to $1.6tr to $500bn by mid-2021.
- Such a sharp decline would mechanically bolster the liquidity in the US banking system, i.e. the amount of reserves, by $1.1tr by mid year
… noting that “a halving in the TGA in just under two months would be a significant decline, in particular given the slow conversion of PPP loans to grants thus far with just over $100bn converted between October and mid-January.”
Yet within this broader tidal wave in reserves, Panigirtzoglou believes that the immediate impact will be relatively modest, and explains why below, first focusing on his view of narrow vs broad liquidity “plumbing” dynamics in the market (which differ substantially from those of repo god Zoltan Pozsar so take them with a giant grain of salt)…
What are the implications for liquidity from a prospective large reduction in the TGA balance over the coming months? We argued before that liquidity should be split into two different components: 1) narrow or banking sector liquidity, which is created by the injection of excess reserves into the banking system; and 2) broader liquidity or money supply, which is the amount of cash or deposits held by the non-bank sectors of the economy such as households, non-financial corporations and financial intermediaries such as asset managers, pension funds and insurance companies. This broad liquidity is in turn primarily a function of QE related purchases by central banks and bank lending to the real economy by commercial banks. In general, these two components of liquidity are interrelated but are not necessarily mechanically linked and are thus distinct. For example, QE bond purchases, by injecting reserves into the banking system, increase narrow liquidity, but they do not necessarily increase broad money supply. Bond purchases can result in an increase in money supply either directly, e.g. if the central bank buys bonds from a non-bank entity such as a pension fund, this automatically expands the assets (reserves) and liabilities (deposits) of the banking system; or indirectly, when central banks’ quantitative measures induce higher bank lending in the economy.
… and then expands this analytics framework to how $1.1 trillion in reserves will impact assets:
A sharp decline in the TGA balance and the resulted $1.1tr increase in the stock of reserves in the US banking system would bolster banking sector liquidity i.e. narrow liquidity but will have no direct implications for broad liquidity, i.e. the cash balances of non-bank investors as captured by money supply. This is because a decline in the TGA balance would have no overall impact on the size of commercial bank’s balance sheet as it would effectively replace government debt with reserves in commercial bank’s asset side and TGA balances with reserves in the Fed’s liability side. These reserves or narrow liquidity reflect the amount of reserves commercial banks have with central banks in excess of what they would need to meet usual liquidity needs. Given that the banking system cannot get rid of reserves in aggregate, these zero yielding reserves become the “hot potato” that banks try to pass to other each until the relative pricing across money market instruments is adjusted enough to remove the incentive for banks to get rid of these reserves. In other words, narrow liquidity tends to reverberate within the money market space and suppress yields at the front end of the yield curve with little implication for the longer end of the yield curve or other asset classes such as equities.
Needless to say, we completely disagree here and merely bring up the historical record: the Sept 2019 repo crash first spiked a violent market correction and only then did the Fed conceded to inject more liquidity. It stands to reason that the equity response now will be the opposite as we are now facing a mirror image of the liquidity picture in 2019. In any case, going back to the JPM quant:
But even with the money market space, given the US banking system is already flooded with $3.2tr of reserves, well above a neutral level which we envisage at below $2tr, an additional $1.1tr of reserves would not make much difference in the current conjuncture. Indeed, after the sharp increase in reserves during 1H20, volatility in Fed funds – IOER spreads and SOFR – IOER spreads have already significantly reduced (Figure 2). The additional injection is likely to put some downward pressure on these rates to grind toward the zero lower bound of the Feds funds target range, supporting somewhat demand for shorter-dated Treasuries as banks seek some yield and duration. However, our projections for the global bond supply-demand balance in 2021 already incorporated only a relatively modest deterioration in G4 commercial bank demand from last year’s record levels.
Summarizing JPM’s view, we find it surprisingly restrained in its optimistic assessment…
In all, we see little impact from a prospective TGA balance reduction on broad liquidity and thus on other asset classes outside money markets or the front end of the UST yield curve. And the actual path of the TGA decline may differ from the Treasury’s forecasts not least as they do not potential additional fiscal stimulus into the projection.
… then again it comes from the same JPM analyst who has been desperately trying to talk down bitcoin for the past 4 months, most recently just two weeks ago. Well, with bitcoin hitting $41,000 this morning and all other cryptos at all time highs, not only have those who listened to Panigirtzoglou worse off, but maybe Nick has become the “big JPM fade”. In any case, we are confident that it is only a matter of time before his Croatian colleague, the permabullish Marko Kolanovic takes the other side of the euphoria trade from Panigirtzoglou… as would we by the way.
In any case, with $1.1 trillion about to hit the market, perhaps now is not the time for nuance and instead a more shotgun approach is appropriate, which is why we like Larry McDonald’s take as it cuts to the chase, and more importantly, is correct:
The combo of a near $1 trillion check and $120 billion monthly QE is the monetary equivalent of eating a banana split after downing an Italian hero sandwich. The market will be stuffed with reserves.
Of this we are certain. What does remain an open question is at what S&P level – 4,000? 4,500? moar? – will the Fed finally realize what it and the Treasury have done, and intervene by warning markets that it is about to pull its pedal off the gas, especially with a chorus of dovish, establishment progressive economists such as Larry Summers and Olivier Blanchard now warning that a $1.9 trillion stimulus could overheat the economy (yes, democrats warning of such a thing as too much stimulus – now we’ve seen it all). In fact, the next big risk is increasingly shaping up as a hawkish reversal by the Fed some time around July/August, when the Treasury cash balance tumbles to $200BN or so and when the S&P is in the the low to mid-4000s…
Tyler Durden
Sun, 02/07/2021 – 19:55 - Washington Post Says COVID Lab Accident "Plausible" And "Must Be Investigated"
Washington Post Says COVID Lab Accident “Plausible” And “Must Be Investigated”
Exactly one year ago today, Zero Hedge was ‘enjoying’ our suspension by Twitter after we pointed out that scientists from the Wuhan Institute of Virology had been experimenting on bat coronaviruses, and that investigators trying to determine the origins of the COVID-19 outbreak might want to have a word with them.
We later reported that the same scientists had been using ‘gain-of-function‘ research to make bat coronaviruses more transmissible to human beings – for which they were roundly criticized in 2015.
Thus, it seemed only logical that the possibility of a lab escape at ‘ground zero’ was at least non-zero, and should be investigated alongside the ‘natural origin’ theory which posits that the virus jumped from bats to an intermediary species, which then infected a cluster of people at a Wuhan wet market. According to a study published in The Lancet, 66% of patients admitted to Wuhan hospitals (27 out of 41) as of January 2nd, 2020 had been exposed to the Huanan seafood market.
Since then, the lab leak hypothesis has gained traction – and has been elevated to let’s at least investigate status by legitimate bodies.
Three weeks ago, the US State Department announced that while they haven’t determined whether the COVID-19 pandemic “began through contact with infected animals or was the result of an accident at a laboratory in Wuhan, China,” the US government “has reason to believe that several researchers inside the WIV became sick in autumn 2019, before the first identified case of the outbreak, with symptoms consistent with both COVID-19 and common seasonal illnesses.“
And in late January, A World Health Organization (WHO) adviser who previously worked under President Clinton and then-Senator Joe Biden said that COVID-19 was most likely an accidental lab leak.
Which brings us to the Washington Post, whose editorial board on Sunday suggested that the lab leak hypothesis was “plausible” and “must be investigated.”
Many scientists have speculated that the virus leaped from animals, such as bats, to humans, perhaps with an intermediate stop in another animal. This kind of zoonotic spillover has occurred before, such as in the West Africa Ebola outbreak in 2014.
But there is another pathway, also plausible, that must be investigated. That is the possibility of a laboratory accident or leak. It could have involved a virus that was improperly disposed of or perhaps infected a laboratory worker who then passed it to others.
* * *
Update (0810ET): After publication, we learn that Chinese Ambassador, Cui Tianki, has called for the WHO to investigate the United States to see whether the pandemic may have originated here.
The Chinese Ambassador @AmbCuiTiankai just called for an investigation in the United States by the WHO into whether the coronavirus outbreak originated here. Horrendous. @cnn
— Josh Rogin (@joshrogin) February 7, 2021
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The Post then notes that “Published papers show that some of these institutions have been very active in coronavirus research. The most active is the Wuhan Institute of Virology, where Shi Zhengli leads a research team that has extensively studied and experimented on bat coronaviruses that are very similar to the one that ignited the global pandemic.”
Also noted is Shi’s response to the virus – which was to ‘check her laboratory records to see whether there had been any mishandling of experimental materials,’ and that the genetic sequence of COVID-19 did not match a similar coronavirus her team had sampled in caves in China, which “really took a load off my mind,” she told Scientific American. “I had not slept a wink for days,” Shi claimed.
In reality, the cave-culled virus, RaTG13, was reportedly 96.2% identical to SARS-CoV-2, however in September, researchers in India concluded that “the RaTG13 genome had serious issues and all data related to it required a full review.”
The Post remains skeptical of Shi’s claims.
But that must not be the end of the story. China actively covered up the early stages of the pandemic, concealed the transmissibility of the virus from its own people and the world, and punished Wuhan doctors who expressed worry about it in late December 2019. President Xi Jinping did not warn the public in China or abroad until mid-January.
Since then, Chinese officials and scientists have advanced a host of dubious theories to suggest the origin of the virus was beyond China’s borders: perhaps brought to China by contaminated packaging of frozen food from abroad or from the U.S. military biodefense laboratory at Fort Detrick, Md., or from mink farms. The disinformation only heightens suspicions that China is trying to distract from or conceal something. –Washington Post
And while we recommend (we know…) reading the rest of the Post‘s Editorial Board here – where they discuss ‘gain of function’ research, a mysterious database, and RaTG13, among other things – prepare yourselves for some serious damage control by the World Health Organization (WHO), who was finally allowed into Wuhan in search of evidence supporting the natural origins theory.
The field trip prominently included Peter Daszak – president of EcoHealth Alliance, a non-profit group that has received millions of dollars of U.S. taxpayer funding to genetically manipulate coronaviruses with scientists at the Wuhan Institute of Virology. Of note, Daszak drafted a February, 2020 statement in The Lancet on behalf of 27 prominent public health scientists which condemned “conspiracy theories suggesting that COVID-19 does not have a natural origin.”
So, the not exactly unbiased Daszak and his team are preparing to release ‘important clues’ found during their investigation, according to Bloomberg. Daszak reports that the main findings will likely be released before Feb. 10, and that the Hunan fresh produce market in central Wuhan was “especially useful” – which was sanitized after its closure last January. That didn’t mean there were no clues, apparently.
Investigators looked further and found “important clues” about the market’s role, Daszak said, declining to elaborate.
“Right now, we’re trying to tease everything together,” he said. “We’ve looked at these three strands separately. Now we’re going to bring it together and see what everything tells us.”
While the food market was shuttered and cleaned almost immediately after cases were recognized, “it’s still pretty intact,” Daszak said. “People left in a hurry and they left equipment, they left utensils, they left evidence of what was going on, and that’s what we looked at.” –Bloomberg
Whatever the WHO team comes up with should, at minimum, make for some great reading.
Tyler Durden
Sun, 02/07/2021 – 19:55 - Fossil Fuels Aren't Going Anywhere
Fossil Fuels Aren’t Going Anywhere
Authored by Irina Slav via OilPrice.com,
“There is no scenario where hydrocarbons disappear,” the chief executive of Baker Hughes, Lorenzo Simonelli, said during his keynote speech at this year’s annual meeting in the company. Like other executives from the industry, Simonelli acknowledged and welcomed the energy transition, but he noted that a 100-percent renewable energy scenario was simply not possible.
There is plenty of evidence this is indeed the case, despite the hopes and ambitions of many environmental advocates.
These hopes and ambitions imagine a world where human activity is powered from electricity only, and this electricity in turn is being generated using only renewable energy sources such as solar, wind, and hydropower.
Such a world, however, is unrealistic.
Take Germany, for example. The country, which is among the EU members with the most renewable energy capacity, has not produced a single Watt of solar energy since the start of this year. The reason: it’s winter. It is producing solid amounts of wind power, that’s for sure, but it is also generating power from the most despised fossil fuel of all: coal.
At the time of writing its carbon intensity was 264 grams of CO2 equivalent per kWh. That was comparable to the carbon intensity of another poster girl for renewables in Europe, Denmark, which is currently getting most of its energy from wind power.
So, it seems building renewable capacity in itself is not a silver bullet solution to the emissions problem. In fact, if you build it too quickly without adding substantial storage capacity, it could backfire. This was most recently evidenced by a narrow miss of a major blackout in Europe prompted by a minor problem at a Croatian substation that rippled through the continent, highlighting the importance of maintaining the grid at a constant frequency—something renewables cannot do because of their intermittent generation.
Even Denmark has thermal power plants to secure the baseload any grid needs to function properly and eliminate or at least reduce the risk of blackouts.
But back to Simonelli’s prediction about the guaranteed future of oil and gas. This future won’t be like the past. The world is firmly on course to change the way it generates and uses energy. Both Simonelli and the other keynote speaker at Baker Hughes’ AM2021, IHS Markit’s Daniel Yergin, recognized that. It is simply that this change will not be limited to a build-up of solar- and wind-generating capacity.
Energy efficiency, for one, will be a big part of the transition.
Efficiency has been pushed out of the spotlight recently, replaced by things like green hydrogen and the constant emission-reduction narrative, but it has not gone away. According to Baker Huges’ Simonelli, efficiency alone could help meet as much as 27 percent of the Paris Agreement climate change targets. On a global scale, this is a massive amount of emissions cut, at a rate of half a gigaton annually.
In addition to efficiency, there are all the commitments Big Oil is making under pressure from investors, regulators, and activists. Every supermajor now has a renewable energy transition plan, some more ambitious than others. All the plans, however, involve pouring billions of dollars into what is essentially a move away from these companies’ core business of extracting oil and gas from the ground, at a carbon and methane emission cost, of course.
This shift to renewables might raise some doubts about whether oil and gas will really remain indispensable. However, the facts suggest that they probably will. There are still millions of people around the world without access to any electricity, and going renewable straight out of the gate for many of these people is simply not an option, for a number of reasons including cost—yes, even though solar panel costs are dropping like WTI in April 2020—and logistics problems. Going green only appears cheaper than sticking with fossil fuels. But it isn’t.
As IHS Markit’s Yergin pointed out in his speech, emerging economies will continue to rely heavily on fossil fuels, despite other regions’ efforts to reduce their own reliance on them. Even if solar panels become free at some point, it is not just panels that go into the making of a solar farm: it also needs components such as inverters and a link to the grid, plus storage, for best results. This alone is enough to guarantee the long-term future of oil and especially gas as an indispensable part of the world’s energy mix.
So, if oil and gas are not going anywhere, can we at least make them a bit cleaner? We certainly can, according to both Simonelli and Yergin, as well as to many other industry experts. Carbon capture is the second element of oil and gas’ long game, besides efficiency. True, carbon capture technology is still quite costly but, as in solar and wind, costs are on their way down. From a lot of talk and little action, carbon capture is on its way to becoming a feature of the energy transition. Why? Because “the numbers don’t work without it,” as Daniel Yergen said.
Tyler Durden
Sun, 02/07/2021 – 19:30 - National Guard And Razor Wire Everywhere: DC Gets Dystopian As Impeachment Trial Kicks Off
National Guard And Razor Wire Everywhere: DC Gets Dystopian As Impeachment Trial Kicks Off
Next week, the country will gather round to watch Democrats argue why former President Trump should be convicted for inciting the Jan. 6 ‘Capitol Riot,’ after the House impeached him on one count of “incitement of insurrection.”
To prepare for the trial, DC Homeland Security and Emergency Management chief, Christopher Rodriguez, is maintaining a dystopian backdrop of armed National Guard troops and razor wire-topped security fences.
“We must demonstrate an overt security presence in D.C., at least for now,” Rodriguez said at a House Homeland Security Committee hearing last week. “We believe that this posture is essential to ensuring that the Metro Police Department can deploy resources to all parts of the city during an emergency.”
Photo via @Revolov America’s rallying cry? pic.twitter.com/aeSm2g2kSf
— Armstrong Williams (@Arightside) February 6, 2021
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Members of the U.S. National Guard gather outside of the U.S. Capitol on Feb. 5. Photographer: Al Drago/Bloomberg Walkways and green spaces around the Capitol and adjacent congressional office buildings that are normally plied by tourists and joggers have been off limits since the Jan. 6 riot.
Instead, there are rifle-toting National Guard troops — part of a contingent of several thousand assigned to assist with security — stationed with Capitol police at a checkpoints for entry to the grounds. In addition there are 500 members of the District of Columbia National Guard on standby as a quick reaction force.
“It’s surreal,” said Representative Andy Kim, a New Jersey Democrat. “I’ve worked in a lot of tough areas before, it is very intense to see this level of structure with such a massive perimeter put forward. –Bloomberg
Approximately 7,000 National Guard personnel will remain in DC – left behind after more than 20,000 Guradsmen were deployed to Joe Biden’s inauguration to protect against a ‘right-wing extremist threat’ that never materialized. By mid-march, the number of Guard will be reduced to 5,000.
Live from our Nation’s Capital. Why is this show of force increasing? pic.twitter.com/RevCmjUC7q
— Armstrong Williams (@Arightside) January 29, 2021
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Democratic impeachment managers are expected to argue that Trump’s election fraud claims inspired a cadre of supporters to ‘storm the capitol’ (they walked through an open door), and that the ‘insurrectionists’ led by ‘QAnon Shaman’ were attempting to gain control of the United States (only to take selfies with Capitol Police and walk out un-arrested). In total, five people died during the incident – including a protester who was shot dead by Capitol Police for trying to breach an interior barricade.
Capitol police open doors for the protestors. They stand aside and invite them inside. pic.twitter.com/OnSd3KGzz5
— Christina Bobb (@christina_bobb) January 8, 2021
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More footage from the Jan. 6 ‘insurrection’:“Any chance I could get you guys to leave?”“This is like, the sacredest place.““Insurrection” pic.twitter.com/NbJRAVbcBp
— Jack Posobiec 🇺🇸 (@JackPosobiec) January 17, 2021
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Trump’s impeachment defense team, meanwhile, is expected to show a montage of prominent Democratic lawmakers calling for insurrection against the Trump administration, and what we assume will include footage of 2020 anti-police riots.
The most important video of 2020
pic.twitter.com/3nMNlxl5Q8— ELIJAH SCHAFFER ON GAB (@ElijahSchaffer) August 31, 2020
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Defense attorneys will undoubtedly mention that Trump told his supporters to ‘stay peaceful‘ and then ‘go home now,’ because ‘we have to have peace.‘
All Democrats plus 17 Republican Senators would be required to cross the two-thirds threshold to convict Trump. As Bloomberg notes, however, “A test vote in the Senate last month indicated that a few GOP members are willing to break with the former president, but far fewer than the level needed to bar him from serving in public office again.”
Perhaps an encore performance by Rep. Alexandria Ocasio-Cortez recounting her near death experience will convince at least 17 Republicans to break ranks?
AOC Claims She Was Killed In The Capitol Riots And Is Now A Ghosthttps://t.co/mTmKkRsrYP
— The Babylon Bee (@TheBabylonBee) February 5, 2021
Tyler Durden
Sun, 02/07/2021 – 19:05 - State Legislatures Eye Sound Money Reforms
State Legislatures Eye Sound Money Reforms
Submitted by Jp Cortez,
More state lawmakers than ever are introducing sound money legislation in the opening days of the 2021 legislative session.
Several states will consider measures to remove sales or general excise taxes from the purchases of gold, silver, and other precious metals.
Many other states will weigh bills to eliminate income taxes on gold and silver.
Still others will decide whether state funds can be held in physical gold and silver — and may even consider establishing a state-chartered bullion depository.
With debt-funded spending and money-printing in our nation’s capital at breakneck speed, will states see the wisdom of enacting measures to counteract these policies of currency debasement?
Here’s a rundown on newly introduced state legislation:
In Mississippi, House Bill 375, sponsored by Representative Henry Zuber and Representative Brady Williamson, and House Bill 978, sponsored by Representative Joel Bomgar, include language to exempt precious metals from sales taxes.
Two of Mississippi’s neighbors, Alabama and Louisiana, have already exempted precious metals from sales taxes – so the Magnolia State will continue to be at a competitive disadvantage if it maintains its current policy of taxing real money.
South Carolina’s Representative Stewart Jones just introduced three sound money measures. House Bill 3378 excludes from gross income any net capital gain derived from the exchange of precious metals bullion.
And Jones’s House Joint Resolution 3379 would create a committee to explore the feasibility of a state-chartered metals depository. Finally, the representative from Laurens, South Carolina, has put forward House Bill 3377, which reaffirms that gold and silver are money.
Building on prior efforts to make precious metals purchases tax-free, Tennessee Senator Rusty Crowe introduced Senate Bill 251.
Meanwhile, Tennessee Representative Bud Hulsey and Senator Paul Rose introduced House Bill 353 and Senate Bill 279, respectively. These bills would create a study commission regarding a gold depository for the Volunteer State and a report of findings to the state Senate and House of Representatives.
In Arkansas, a measure that would eliminate the sales tax on precious metals purchases has been submitted for introduction by Representative Delia Haak, Representative Robin Lundstrum, and Senator Mark Johnson. Senator Johnson introduced a similar measure in 2019.
In Alabama, Representative Andrew Sorrell will re-introduce a measure to remove income taxes from gold and silver. While Alabama enacted a precious metals sales tax exemption into law in 2018, the original bill sponsor, Senator Tim Melson, plans to introduce a bill this year to clear up some ambiguity in the 2018 language and to push out a sunset provision for another 5 years.
Way to the west, Representative Val Okimoto and Representative Dale Kobayashi in Hawaii have introduced House Bill 1184, a measure to exempt precious metals from Hawaii’s general excise tax.
And Idaho Representative Ron Nate and Senator Steven Vick have put forward House Bill 7 to permit the State Treasurer to hold a portion of state funds in physical gold and silver. Idaho hope to join Ohio and Texas as one of the few states make such a move to secure state assets against the risks of inflation and financial turmoil and/or to achieve capital gains as measured in Federal Reserve Notes.
Washington State removed sales taxes against sound money decades ago, but a lawmaker hopes to take it a step further. House Bill 1417, introduced by Representative Rob Chase and co-sponsored by Representative Bob McCaslin, seeks to eliminate all Evergreen State taxes on the only form of money mentioned in the U.S. Constitution.
Sound money forces could face some defensive battles in 2021 as well.
Fortunately, there are now 39 states that have removed some or all sales taxes from precious metals. But during the shortened 2020 session, revenue-hungry politicians in Maryland, Pennsylvania, and Washington State tried to buck the trend and repeal those sales tax exemptions.
All three of these recent attempts to reinstate taxes on the monetary metals have been defeated, but taxpayers should be wary of their return.
By communicating with lawmakers, providing testimony, and igniting a vocal grassroots response, the Sound Money Defense League and its allies continue to make the case for sound money and to defend the existence of current sound money policies.
Massive debt-financed government spending in response to COVID-19 has reemphasized the importance of sound money.
As state legislatures and Congress consider actions in the face of a global pandemic and an unprecedented economic meltdown, they would be wise to remove the disincentives that stand in the way of protecting citizens and their states with sound, constitutional money.
* * *
Jp Cortez is the Policy Director for the Sound Money Defense League, a non-partisan, national public policy group working to restore sound money at the state and federal level and publisher of the Sound Money Index.
Tyler Durden
Sun, 02/07/2021 – 18:40 - "This Is The Wildest Market I've Ever Seen": Druckenmiller's Must-See Goldman Interview
“This Is The Wildest Market I’ve Ever Seen”: Druckenmiller’s Must-See Goldman Interview
On January 29, Tony Pasquariello, global head of Goldman Hedge Fund Coverage (whose observations we have frequently profiled on these pages) spoke to investing legend Stanley Druckenmiller, head of the Duquesne Family Office, about his current outlook on the market, his approach to risk management throughout his career, and his perspective on the conversation surrounding the role of capitalism in American society. The result was a fascinating conversation that was anything but the canned talking points one would expect from such a high level interview (h/t to @JohnStCapital for bring it to our attention).
Without missing a beat, Druck admitted that this “is the wildest cocktail I’ve ever seen in trying to figure out a roadmap.” Below we summarize some of his key observations.
“The recession we had was 5x the average since WWII but it occurred in 25% of the time,” Druckenmiller said adding that “more bizarrely in a year when 11 million more people were unemployed, we had the largest increase in personal income in 20yrs during an economic downturn, due to massive policy support. The CARES Act added trillions in fiscal stimulus. How big was it? In three months in 2020 we increased the deficit more than the past 5 recessions combined (1973, 1975, 1982, the early 90s’, the dot com bust and the GFC). The Fed in 6 weeks bought more treasuries than in 10yrs under Bernanke/Yellen. Corporate borrowing, which almost always goes down in a recession, which had already increased from $6trln to $10trln going into the crisis due to the Fed’s free-money policies, went up $400bln. Putting that in perspective, it went down by $500bn during the GFC.”
“So we had this massive increase in liquidity and stimulus which is the background and all of this stimulus has flown into financial markets, into commodities, into financial interests so it’s a bizarre background.”
“The juxtaposition of the various policy responses is somewhat breathtaking. Since 2018, M2 in the US has grown 25% more than nominal GDP; a 25% increase in liquidity. In China M2 to nominal GDP is where it was 3 years ago. So China hasn’t borrowed anything from their future and we’ve had a massive liquidity input and frankly very little investment. It’s primarily been transfer payments and Fed Stimulus. We’ve done a horrific job with the virus. The Chinese and Asia in general they’ve pretty much defeat the virus.”
“So the background could not be more different, but could not be more exciting if you are a macro investor, because on top of all this there is the other big force in the equation which is vaccines. And it’s possible in fact probable that all this stimulus will be in place just when we unleash the biggest increase in pent up demand globally since the 1920s which could make the world extremely different than it looks today.”
In response to a question from Pasquariello what is Druck’s favorite asset with the best opportunity, Druckenmiller refuses to answer, saying “that’s not how I play the game” and instead he says that the “overriding theme is inflation relative to what policymakers think. But because of the policymaker response which could be very varied based on the vaccine, I’ve found it’s better to have a matrix. So basically to play reflation I have a short treasury position primarily at the long end.”
Take home #1: Druckenmiller is short long-end Treasuries.
He also has a large position in commodities: “the longer the Fed tries to keep rates suppressed the more I win on commodities; the quicker they respond the quicker I might have a bigger problem with commodities.”
Take home #2: He is very long commodities.
And then there was currencies: “because of the juxtaposition of the US policy response versus Asia, I have a very, very short dollar position.”
Take home #3: He is also “very very” short the dollar.
Pasquariello then asks Druckenmiller about his view on stocks, and specifically the tech space (both mega cap, cloud and smaller cap names). Here, Druckenmiller is more reserved and says that “if we get 4-5% inflation in the US a few years out and bond yields rise precipitously that’s very negative historically for growth stocks relative to other stocks. On the other hand the comparisons with 2000 are ridiculous. The reason they are ridiculous is we had a double whammy back then of not only the raging mania of overvaluation but also earnings were about to end, because those companies that were growing rapidly then were all about building the Internet itself”, and that was done so there was no way to generate earnings.
Looking to today, Druckenmiller says that “the combination of valuation and challenged bond markets could certainly make growth stocks in a very, very challenged environment the next 5 years relative to what they’ve been.”
“Having said that, on the cloud we are in the 3rd-4th inning. COVID-19 had us jump from the 1st to 3rd-4th inning but we’re not in the 9th inning and if anything every company that I talk to is speeding up their transition because they are going to competitively die if they stay behind within digital transformation.”
“Within tech itself AMZN and MSFT have been big underperformers in the last 2-3 months. It’s like that market has rotated into 40x sales tech companies or into radioactive reopening stocks. And if you look at Amazons, Microsofts and Googles of the world, they are not overvalued, they are GARP names that are currently out of favor. And if the Fed continues to push the envelope in terms of friendliness I’m not worried about those stocks in fact they could keep going.”
The interview then shifts to geographical preference and the Asian region in particular, to which Druckenmiller says that he owns China, Japan and Korea, “They’ve had a very good start to the year” and considering how much the US borrowed from the future, he thinks “Asia is the big, big winner coming out of COVID-19.”
The same is true within tech itself, where Intel has thrown in the towel “so Asia owns foundry, memory, they are ahead in robotics.I think the next 5 years Asia looks a lot better than the US because at some point we have to pay back in terms of productivity, in terms of higher wages, in terms of lower dollar for all these transfer payments we’ve made the last nine months and we will continue to make.”
“So I’m quite constructive on a number of names in Taiwan, in Korea, in China, in Singapore. Long-term Asia is going to be an outperformer vs the US, and especially the currency market. Net investment into China just passed the US ever this year, and it’s the beginning rather than the end of a trend.”
* * *
The conversation then turns to the topic of money and risk management to which Druck, who has never recorded a down year since 1981, said it was “a lot of it is luck. I’ve been deep in the hole 3-4 years and in every case something came along and it was just a coincidence of the calendar that at Dec 31 I was up. If you looked at May 31-May 31 there would have been some down years.”
Druck then says that “the fact that he can trade 5-6 asset classes does a few things.
- Number one, it can point you in the right direction and if you believe something you can make big, big gains.
- Number two, as a macro investor currencies and bonds trade 24 hours a day and are very liquid and you can change your mind, which I’ve had to do a lot in my career cause I’ve been wrong a lot.
- Number three, it also gives you discipline not to playing around in an area that is dangerous. Equity only investors need to be in equities. But if you’re a macro investor you don’t need to be in equities at any given point in time.
As an example of the last point, Druck said he has never lost money big in credit because the only time he bets in credit is every 8 years after there’s a big debacle in credit and that’s when he buys a bunch of credit. But if he was a purely credit investor he would’ve had 3 or 4 down 30% years.
Druckenmiller also said the he is “very much of philosophy to put all your eggs in one basket and watch it very carefully.” He has found that every investor has 3-4 big winners per year and usually you know what they are. But when you get in trouble is with something you’re not focused on. But if you put 50-70% of your assets in one asset class, “trust me you’re focused and you’re more risk averse” then with something you might have 5% or 6%.
The investor also admitted that he has never used VaR: “I’m very unsophisticated I watch my PnL everyday and if it starts acting in a strange manner relative to what I’d expect in a matrix, my antenna would go up.”
The reason why Drucknemiller simply uses his PnL for risk management is that “I’ve found all risk models are great until complete chaos happens and then all the correlations break down and they can suck you in into a false security. If you watch your PnL, it’s a much better warning system than some of these mathematical models out there. They’re useful, just not useful when you actually need them.“
* * *
Naturally, no conversation could take place without a discussion of bitcoin, and when asked if bitcoin may be the “mother of all asset bubbles or something genuine” Druckenmiller said “maybe both.” And while he admits he does not know the future, he knows how we got here, and his take is one we completely agree with (and one which Neel Kashkari should read very closely): Bitcoin “wouldn’t do what it’s doing without Central Bank behavior.”
While Druck was skeptical of XBT 3-4 years ago when the crypto first broke out out – “why would anybody buy this thing” – he now admits that bulls have done an unbelievable marketing job. Bitcoin has been around 13 years and younger millennials look at bitcoin the way he looks at Gold. That said, Druck has doubts whether Bitcoin will ever be anything other than a store of value, as Bitcoin has problems as a currency because it uses a lot of energy, it’s volatile and it’s got other problems. But that doesn’t matter because right now it’s an asset class, “my view of it has been way overblown in the press; I do own some of it, it’s gone up a lot since I bought it.” In the end he doesn’t believe in it. He doesn’t not believe in it. He simply admits honestly that he “doesn’t know.”
The conversation then shifts to more philosophical topics, and in response to a question how he would characterize “the state of American capitalism”, Druck says that he’s worried because “we have not engaged in capitalism for some time.”
“The Central Bank has bastardized the most important price in the world which is the cost of money. We have crony capitalism as you know.”
“But even in the best days of capitalism there’s always been a stain in the US, which is I grew up believing that we are a meritocracy by and large but there is a subsector of out society where we are in a caste system. We have a lot of neighborhoods in our country where millions of kids just don’t have opportunity to pull up their bootstraps and work hard.”
“That’s always been there and is something we need to address. Which is why I am not sure events of last summer were a bad thing. It’s my own view that they were a good thing because people need to be woken up to fact that American Dream is a great thing but there are a significant amount of kids without access to the American dream the way I had.”
Watch the full interview below.
Tyler Durden
Sun, 02/07/2021 – 18:29 - That Mystical Monetary Theory
That Mystical Monetary Theory
Authored by Joakim Book via The American Institute for Economic Research,
MMT, or Modern Monetary Theory, is on everyone’s lips – and it seems that everyone is keen on this long-obscure idea of how our public finances really work.
In an article in the latest issue of Economic Affairs, I try to condense the argument into four propositions that form the core of MMTers’ understanding of the world. I do this by reviewing Stephanie Kelton’s book from June of last year, Kelton being the most vocal and well-known persona in the field. I show that there is great tension between these propositions and that most MMT arguments include accurate statements in the service of inaccurate conclusions. What is right about MMT is mostly old – and fairly trivial – and what is new about MMT is not quite right.
1. A currency issuer (a “monetary sovereign”) cannot run out of money
With this proposition, MMTers stumble upon an old and long-accepted idea in monetary economics. The more others wish to hold your liabilities, the more you benefit. Everyone from private banks on a gold standard to Amazon and Starbucks’ gift cards, and more recently Elon Musk’s Tesla have realized that free lunches abound if consumers want to hold financial claims on you.
Just like central banks issuing money, these companies can never run out of the paper promises they issue. Had they wished to, private banks could have issued as many notes as they wanted, just as Bezos’ Amazon can flood gift cards everywhere or Musk’s Tesla can print up as many Tesla-shares as its shareholders want. Nobody would want to, of course: Amazon would quickly make losses if the goods on their platform were mainly purchased by gift cards freely issued by a Bezos-spree; and not even Musk would know what to do with that much cash on Tesla’s balance sheet – not to mention the effect on the share price from flooding the market with new supply.
Isn’t the money issued by central banks entirely different? Not really. True, the dollar or euro notes in my pocket cannot be redeemed for some outside commodity or Starbucks coffee but I can dispose of them by buying goods and services – just like I can with Starbucks and Amazon gift cards. If the hypothetical me instead is a whole population of people who no longer want to hold these paper slips, everyone tries to get rid of them at the same time – which we do in a monetary economy by buying things. Since money can’t escape its closed system, excess money holdings bounce around, hot potato-style, until prices have adjusted enough that the real value of your money holders are no longer excessive – in other words: large and rapid inflation.
Yes, the Fed or the Bank of England can never “run out of” the paper money they issue (trivially true), but they can run into the consequences of issuing too many. Kevin Dowd writes that Kelton’s main mistake is “to presume that what is correct at the margin (i.e., that the government can avoid default by issuing a few extra dollar bills) is also correct under any circumstances, that is, at any scale.”
2. Taxes don’t pay for government expenditures but generate demand for money
While the first proposition is trivially true but doesn’t mean quite what you think it means, this one is closer to “demonstrably false.” The first part is an accounting claim or at best a hypothetical proposition that central banks would honor payments by governments even if there were no funds in their Treasury accounts.
According to MMTers, taxes don’t fund expenditures, as monetary sovereigns just create money to settle any transaction whenever it is spent. Taxes, in contrast, merely destroy money and keep a lid on aggregate expenditures. Compared to the public finance most students learn, this is completely upside-down – but more importantly, unprovable. Despite Kelton’s desire to describe the world as it really is, this is emphatically not how governments of the world operate. Yes yes, Kelton handwaves, and says that this is because they’re in thrall to mistaken economics and that if they wanted to, they could. OK, great.
The second part is less ethereal, but more demonstrably wrong. When you tax something, you do not create demand for that good. When government taxes your income and requires that you pay that tax in some specific unit, that unit doesn’t become money for others; if the government would happen to pick a useful enough item – determined as such and valued by the consumers who use them – public receivability can benefit one monetary commodity over another such that this becomes a society’s general money.
If mandating taxes is what generates demand for money and exorbitant privilege for their issuing country, it makes no sense that countries would ever give up that right. When Ecuador in January 2000 stopped resisting its people’s monetary choices by dollarizing and no longer issued its Sucre, this must have been a mistake. In the MMT story, it is unclear why they, or Venezuela and Zimbabwe or Lebanon in the 2010s, couldn’t just have taxed away the inflation that happened when money demand plunged. But with this argument we can go one step further: if money issuers get this grand benefit that the U.S. government has – that Kelton doesn’t think it’s (ab)using enough and that’s unfair towards countries of the world that can’t enjoy this power – why don’t we extend the logic?
If it’s so bad that countries that don’t have monetary sovereignty can’t issue their own money, we can have the fifty states print their own dollars (why constrain states from spending on what they “desperately need?”). We can have a New York dollar, an Oklahoma dollar, a Georgia dollar and even an Austin dollar, and all of these jurisdictions can spend to their heart’s desire as they are now money issuers. I can issue Joa-coins right away (Dogecoin, anyone?) and command much more purchasing power for all the things I need!
The missing piece for the argument to work is that I benefit only if all of you kindly accept the Joa-coins in exchange for goods and services, even when I’m issuing more and more of them. When you don’t, the purchasing power of any outstanding Joa-coins quickly goes to zero (i.e. infinite inflation) as you all try to get rid of them at any price. We’re back at money demand: the policy proposals of modern monetary theorists only work if there is a desire to hold more of the issuer’s money. Joa-coins can only save the (my?) world if you desperately want to hold them.
3. Inflation is the only constraint that a monetary sovereign faces.
4. Capitalist economies have lots of idle resources (unemployment, spare capacity, fiscal space).
The fine-print of the MMT system arrives in the two final propositions, which MMTers freely advance Motte-and-Bailey style, against any criticism to their theory. What isn’t immediately obvious in an average conversation about MMT is that these fine prints severely restrict how far (1) and (2) can go in achieving the political ends that MMTers seek.
Even if (2) would be factually correct, and taxes levied don’t pay for government expenditures, once (3) starts binding – which Kelton and others explicitly accept they would at some point – taxes and borrowing must be levied to control it. In a roundabout way, real government spending would then be financed by taxes and borrowing.
When, in the MMT framework, do we get inflation? When there are no longer “idle resources” in the economy. This is an old idea in the Post-Keynesian tradition that when assets are not used (i.e. factories not operating, capital equipment not producing, houses not occupied) and labor is unemployed or out of the labor force, government spending becomes a free lunch. Spending, which in the MMT world means issuing more money, can bring these resources online without increasing prices because they are assumed not to have alternate uses.
Of course, in real life they have; asset owners may have different plans than the central MMT planner, and labor markets can be unsynchronized for other reasons – geography, welfare payments, structural and frictional unemployment – than insufficient demand (if there even is such a thing). Adjusting Ludwig von Mises’ fable of the master builder only a little: if you find yourself in a minefield, the solution is not – as Kelton and others who worry about slack and spare capacity would have you do – to run as fast as you possibly could. It’s to stand still, survey the terrain, and carefully retrace your steps until you’re once again on safe ground. Only from there can you try to go around the minefield.
Even so, if and when idle resources and unemployed labor do not abound, government spending crowds out private spending and the alleged macroeconomic benefits come to a close (or public wants must trade off private wants).
Aren’t Governments and Central Banks doing MMT Right Now?
Against James K. Galbraith’s argument that the MMT was vindicated by central bank actions of 2020, my AIER colleague Nicolás Cachanosky notes that
“The government spent a lot of money in a short period of time and inflation expectations remained below two percent. But that doesn’t tell us much about how such a policy would work in normal times. And the supposed evidence offered in support of MMT is also consistent with the standard view. To the extent that the fear of pandemic and government lockdown orders slowed spending, good old-fashioned monetary theory explains the observed low inflation rate in 2020.”
The real test for MMT is not the fervor with which policymakers around the world have taken MMT-like actions in the midst of a stop-all pandemic economy, but in a “normal” economy. If we make lots of resources idle (4), which governments did when they engineered a recession last year, MMT collapses into standard counter-cyclical Keynesianism with at best some cosmetic differences in form.
It’s not under today’s conditions that MMT’s policies must deliver, but in pre-pandemic years where unemployment had virtually disappeared, wages were rising across the income distribution, median incomes were rising, and labor force participation reversed its decades-long decline. Spending government funds like it’s World War II and doubling the monetary base during those conditions (without hitting capacity constraints!) is what would vindicate MMT.
The MMT mistake lies in believing that any alleged shortfall in money or supply of U.S. Treasuries is big enough to finance their entire policy wish list for the foreseeable future. It also assumes that any potential labor or capital goods not currently used can be effortlessly moved to whatever production line politicians desire, without causing prices or wages to increase.
While MMT seems to offer grand justifications for spendthrift governments, the more (3) and (4) hold, the less revolutionary (1) and (2) seem. The monetary theory that calls itself modern remains mystically inadequate.
Tyler Durden
Sun, 02/07/2021 – 17:50 - Renaissance Hit With $5 Billion In Redemptions After "Terrible" Returns
Renaissance Hit With $5 Billion In Redemptions After “Terrible” Returns
At the end of January, when the Reddit revolt was wrecking havoc among hedge funds and forcing even market neutral quants to degross and delever, we pointed out something unexpected: according to the latest HSBC Hedge Fund performance tracker, Renaissance’s public funds – RIEF and RIDA – had a dismal 2020, losing 20% and 32% respectively, while the Renaissance Institutional Diversified Global Equities Fund (RIDGE) lost 31% as Rentec’s famous quant algos were thrown out of whack by swings the computers had never seen or experienced before (which is not to say that RenTec’s private, internal “friends and family-only” Medallion fund suffered a similar fate, quite the opposite).
What the hell is going on in Setauket. If some teens can topple Jimbo it’s all over pic.twitter.com/n8LjrjeQYA
— zerohedge (@zerohedge) January 29, 2021
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This prompted us to ask “what the hell is going on in Setauket” (where RenTec’s HQ is located), a question which gained even more urgency once we found out that the dismal streak of the world’s largest quant fund (RenTec manages around $60BN) had continued into 2021, when its funds were the top and 5th worst performers overall in January (while Senvest was by far the best on the back of its $700 million gain from going long GME stock).
It turns out we were not the only ones closely watching the dismal recent returns at the world’s most profitable hedge fund, because as Bloomberg writes this morning, the “investing giant that just posted its worst-ever returns across its public funds, has been hit with at least $5 billion in redemptions”, a staggering reversal in fortune for a fund which always had a line of people around the corner just waiting to get be admitted.
According to the report, after clients pulled $1.85 billion across the three hedge funds in December (RIEF, RIDA, RIDGE), they also hit the Jim Simons’ money machine with another $1.9 billion in January, and are poised to yank another $1.65 billion this month. While those figures could be offset if there are any inflows in February or if investors decided to walk back any of their redemption requests, that does not seem very likely after the staggering underperformance of the quant hedge fund.
Of course, for RenTec founder and former codebreaker Jim Simons none of this matters, because while the public facing funds are a convenient hedge, in the grand scheme of things they are tiny; the real money at Rentec is made at Medallion – the iconic fund reserved for employees and insiders – and in 2020 it soared 76% last year, according to Institutional Investor.
This kind of discrepancy between internally managed funds and capital run for outside investors is truly unprecedented, and should prompt at least one regulator to ask what is going on. The last time they did, they found that another iconic fund – Michael Platt ‘s BlueCrest – had secretly transferred its best traders from managing outside capital to just running the firm’s own money, while assigning crappy algos to “manage” outside money by piggybacking on internal trades after they were already put on (Platt received a $170MM slap on the wrist and all was forgotten).
In other words, as we explained in December, “when managing its own money, the macro fund would dedicate its best traders to come up with the top trades, and not only that but it would effectively frontrun its clients! Then, when the time came to manage client money, BlueCrest basically used a simply copycat algo to piggyback on its top trades but only after the management team was already in the positions, thus giving it substantial firepower to generate alpha simply by having billions in fund flows rush into the same trades it had already put on, creating a feedback loop. We wonder if BlueCrest also unloaded its own positions by selling them to its own clients.”
Surely RenTec would never abuse its fiduciary duty so blatantly as to allow Medallion to frontrun the public fund trades… Surely.
Back in September, Renaissance told clients that its losses were due to being under-hedged during March’s collapse and then over-hedged in the rebound from April through June. That happened because its trading models “overcompensated” for the original trouble (translation: RenTec’s models had no idea what they were doing).
Renaissance then again addressed its dismal returns in a December letter, which Bloomberg got access to:
“Although recent performance has been terrible and worse than prior performance would have suggested was likely for 2020,” the firm said, its model “anticipates that in track records as long as ours, some risk-return ratios every bit as bad as the ones we are now seeing are not shocking.”
The broader lesson is that “one should expect even good investments to perform horribly from time to time.”
Well, the returns may have been “terrible” for anyone who foolishly assumed that Simons & Co. would put the same care in managing outside money as they allocate to their own funds. Because while most outside investors have lost over a third of their investment in the past year, RenTec’s internal Medallion fund is up nearly 80% in the same period. How much longer will this divergence continue, we wonder, before someone asks the obvious question: why?
Tyler Durden
Sun, 02/07/2021 – 17:45 - "The Post-U.S. Era Has Started": Iran's Ayatollah Blasts Biden For Refusing To Lift Sanctions
“The Post-U.S. Era Has Started”: Iran’s Ayatollah Blasts Biden For Refusing To Lift Sanctions
Despite Joe Biden’s prior promises on the campaign trail to immediately restore US participation in the 2015 Iran nuclear deal (JCPOA) brokered under Obama, it’s now looking to be effectively in tatters merely less than a month into his administration.
Iran’s Supreme Leader Ayatollah Ali Khamenei issued a ‘final ultimatum’ on Sunday, demanding the US remove all sanctions that were enacted by Trump prior to the Islamic Republic returning to compliance.
“Iran has fulfilled all its obligations under the deal, not the United States and the three European countries,” Khamenei said, according as cited in Reuters. “If they want Iran to return to its commitments, the United States must in practice… lift all sanctions.”
Via Reuters Iranian state media is widely describing it as the country’s “final word” on the deal. Given that previously Biden’s top foreign policy advisers as well as press secretary definitively stated that Iran must return to compliance first, most especially when it comes to uranium enrichment caps, the developing stalemate looks to increasingly point toward Washington staying on the sidelines, while keeping sanctions to the max – a continuation of Trump’s ‘maximum pressure’.
Khamenei affirmed the prior position of top Iranian leaders, including President Rouhani and Foreign Minister Zarif, that it is for the US to move first since it was the one which backed out. He said further in his statement speaking of the US administration, “The side with the right to set conditions to JCPOA is Iran since it abided by all its commitments, not US or 3 European countries who breached theirs.”
It comes on the heels of Biden saying in a CBS interview that the US won’t budge until Iran returns to compliance first:
And so it continues. Hours after #Iran‘s Supreme Leader says Iran will only return to its JCPOA commitments AFTER the US lifts sanctions, @CBS releases this: a video of US president Joe Biden saying the US will not lift the sanctions before Iran is back in full compliance. #oott pic.twitter.com/sknoLiPsSk
— Nader Itayim | نادر ایتیّم (@ncitayim) February 7, 2021
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As WSJ recaps of the latest interview which will air in full just ahead of the Super Bowl on Sunday evening:
Asked by CBS News whether the U.S. will lift sanctions to convince Iran to participate in negotiations, Mr. Biden said, “No.” When CBS asked whether Iran must stop enriching uranium first, Mr. Biden nodded.
Also on Sunday the Supreme Leader took to twitter to opine about the ‘decline’ of the American empire…
One should know the US properly. Their recent events were a fiasco. #Trump’s fall wasn’t just the fall of an unfit president. It was the decline of US power & social order. Speaking of US’s decline from within & the start of a post-US era are the words of US experts, not ours.
— Khamenei.ir 🇮🇷 (@khamenei_ir) February 7, 2021
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“If they want Iran to go back to its JCPOA commitments, the U.S. must practically end all sanctions. We will verify if it has been done properly. If yes, we will go back to our JCPOA commitments,” Iran’s Supreme Leader said further.
Khamenei then issued the following ominous prediction:
The post-U.S. era has started.
— Khamenei.ir 🇮🇷 (@khamenei_ir) February 7, 2021
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While during his last weeks in office Trump had ramped up the pressure campaign on the Islamic Republic, Iranian authorities defiantly announced they had taken uranium enrichment to 20%, installed more advanced centrifuges, and advanced its capability to produce uranium metal crucial for nuclear warhead development (though Tehran has long maintained all of this is toward peaceful domestic energy purposes).
Meanwhile with Washington and Tehran are now telling each other, “you first” in terms of who acts to reverse measures, the nuclear looks to effectively remain dead with the sanctions status quo remaining in effect for the foreseeable future.
Tyler Durden
Sun, 02/07/2021 – 17:25
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