Month: March 2021

Authored by Melinda Mills, op-ed via The Financial Times,

I remember the evening a co-worker arrived at our door waving a phone, beaming “I’ve got it!” His Android mobile was the only way to use the UK government app that let EU citizens apply for UK settled status after Brexit. After some unsettling jokes about uploading my private biometric data on his device, we completed the deed and he disappeared into the night. As governments around the world ponder digital vaccine passports, that evening remains in my mind.

Vaccine passports are essentially certificates that link proof of vaccination to the identity of the holder, a potential silver bullet to return to our pre-Covid-19 lives. Before the pandemic, the EU was working on plans for cross-border electronic certificates to replace the paper booklets that many travellers carry. At this week’s EU summit some leaders pressed for further steps towards coronavirus passports.

A recent Royal Society report that I led came up with 12 different criteria that would need to be satisfied to make such passports feasible. This is a complex ecosystem that requires an understanding of everything from immunity and infection to technology, ethics and behavioural factors. But the underlying question must be: what would a vaccine passport be used for?

The head of Heathrow airport has called for digital health certificates to reboot international travel. Estonia and Iceland already link e-vaccination certificates to travel and exclusion from quarantine. Greece is pressing the EU to move quickly. There are precedents such as the airline industry group Iata’s travel pass initiative. But would these certificates only be required for international travel or could they be needed for getting a job, attending a football match, or buying some milk?

Israel recently introduced a green pass heralded as “the first step back to an almost normal life”. It opens entry to gyms, cinemas, hotels and meets some our technical criteria such as verifiable credentials, portability, (attempts at) security for personal data and interoperability. It is valid for six months after a second dose and for “those who have recovered from coronavirus”.

But this could be problematic. Current vaccines protect against severe disease, but we do not yet know whether they stop transmission, how quickly immunity wanes or if they are compromised by emerging variants. Whether someone who has “recovered” meets immunity criteria remains a question. In addition to an expiry date, we would need the ability to revoke a vaccine passport. Israel’s warning of severe punishment for forgery is another reminder of what could go wrong.

There is also the question of mission creep. Recall the UK’s early digital contact tracing app, which raised concerns about privacy, government surveillance and private sector data sharing. Or consider the technical problems with the Tawakkalna app, introduced in Saudi Arabia, which is used for entry into many places but recently froze.

All vaccine passports have the potential to block people from essential goods and services and exclude those who lack identification or do not own or cannot afford a smartphone.

The RS criteria for a workable vaccine passport included equity, ethics and non-discrimination. That means we must ask who would we exclude? There is higher vaccine hesitancy among ethnic minorities and the jabs are being rolled out by age. Plus some people are excluded entirely: children, pregnant women and those with allergies.

Others worry of a slippery slope towards digital health or ID cards. We are already partway there, as I discovered, with Apple’s link with healthcare institutions which allows me to download my immunisation and medical records on to my iPhone. This technology could mean greater efficiency in the health system and better outcomes. But there would be serious ethical concerns if a vaccine QR code that tracks movement is linked to other data — say housing and immigration status — without our knowledge, or if it increases surveillance of already disadvantaged groups.

Credit cards and social media data hold a wealth of behavioural and location data, that companies regularly mine. With vaccine passports, it will come down to trust in government and that can only be won through transparency. There is a risk that the government expends time and money to create a passport system only to have the public recoil in horror.

We also shouldn’t forget we are globally interconnected. When travel resumes, visitors and workers will cross borders and need global standards such the WHO’s Smart Vaccination Certificate. This could be a legal minefield of issues. Human rights and data protection need to be weighed against a duty of care and commercial freedom to act. Governments may make vaccine passports mandatory on economic grounds or to protect public health. Or they may decide to dodge that bullet, but allow businesses to require them instead.

There is also the question of whether a domestic vaccine passport is worth the investment. That depends, of course, on vaccine rollout, virus mutation and other factors. To work, a substantial proportion of the population needs to be vaccinated with universal access, which in most countries is months away. In the meantime, let’s put the pieces of this puzzle together and carefully judge if we like the picture that emerges. 

*  *  *

The writer directs the Leverhulme Centre for Demographic Science at Nuffield College, Oxford university

The White House has issued a belated response – or ultimately a weak attempt at damage control – amid growing bipartisan outrage that despite his prior “tough” talk on the campaign trail to “hold the Saudis to account”, crown prince Mohammed bin Salman is getting off scot-free.

“The Biden administration defended its decision not to sanction Saudi Arabia’s Crown Prince Mohammed bin Salman personally for his role in the death of Washington Post columnist Jamal Khashoggi, as the White House confirmed no more actions against the kingdom are imminent,” Stars & Stripes reports Sunday. This means that not so much as suspension of weapons sales are on the table, apparently.

This despite the newly declassified intelligence assessment identifying MbS as “approving” the operation to kill or capture the Washington Post journalist. 

Biden’s answer as to why the US is stopping short at sanctioning dozens of lower-level Saudi officials (and not MbS) that the newly declassified intelligence assessment identified as orchestrating Jamal Khashoggi’s Oct.2018 murder appears to simply be that the Saudis are “our allies”:

“The United States has not historically sanctioned the leaders of countries where we have diplomatic relations or even some where we don’t have diplomatic relations,” White House Press Secretary Jen Psaki said on “Fox News Sunday.” “Behind the scenes there are a range of diplomatic conversations.”

A White House statement indicated that no further actions will be taken against Riyadh (other than slapping up to 76 officials with ‘travel restrictions’):

“The recalibration of relations with Saudi Arabia began on January 20th and it’s ongoing,” the White House said in a statement. “The Administration took a wide range of new actions on Friday. The President is referring to the fact that on Monday, the State Department will provide more details and elaborate on those announcements, not new announcements.”

Also, this is quite the statement…

“The President should not meet with the Crown Prince, or talk with him, and the Administration should consider sanctions on assets in the Saudi Public Investment Fund he controls that have any link to the crime.”

— Andrew Desiderio (@AndrewDesiderio) February 26, 2021

Certainly the Saudis now have little to worry about given the White House is meekly talking “recalibration of relations” in the wake of US intelligence identifying MbS as having ordered the brutal killing and dismemberment. 

So it took no time at all for things to return to “business of usual” in terms of Washington relations with the Saudi regime. The Saudi prince literally got away with murder… and now has a perpetual “get out of jail free card” simply because he’s a White House “ally”. Ultimately this of course comes as no surprise at all.

Unlike the recent retail sales report which stunned sellside expectations with a 5-sigma blowout beat, Friday’s personal spending report came in generally as expected, even if it too came in scorching hot, with personal incomes soaring 10% M/M and a whopping 13% Y/Y thanks to the December $900BN stimulus hitting household checking accounts.

But for all those planning on extrapolating this surge in spending into February and further into Q1, you may want to hold the champagne.

According to the latest aggregated credit and debit card data from BofA, total card spending declined 2% yoy for the 7-days ending Feb 20th with Bank of America chief economist Michelle Meyer writing that “this weakening owes to the winter blizzard that created major disruptions to Texas and the surrounding region.” BofA remains optimistic, and believes this is a temporary setback and expect a recovery as is typical with natural disasters.

Some more details on the big driver behind February’s spending plunge:

The winter blizzard: The blizzard that rampaged the South and left millions without power created major disruptions to economic activity. We found particular weakness in card spending in TX, LA, OK, MS, AR and TN. Combined card spending in these six states ran at a -25% yoy pace for the 7-days ending Feb 20th. Subtracting these states from the total, card spending increased 1.3% yoy over the same period, which was likely still held down by poor weather conditions given the breadth of the blizzard.

As Meyer further notes, no sector was immune to the blizzard related retrenchment in consumer spending.

Predictably, restaurant spending plunged in the states where the blizzard hit, down 39% yoy, while the rest of the country actually saw an improvement in restaurant spending to -9.4% yoy, likely reflecting easing COVID-related restrictions with restaurant activity in California accelerating. Grocery store spending also declined in the affected states after increasing prior to the storm.

Even retail spending online (card not present) weakened meaningfully in affected states, likely reflecting the loss of power in the region.

Next, BofA takes a tangent In order to understand consumer spending patterns around natural disasters, we looked at the daily data around Hurricane Irma in 2017. Florida, the epicenter of the hurricane, saw a similar sized drop in spending of around -40% yoy when the hurricane hit. Spending then normalized around 10 days after the initial rainfall from Irma.

If history is a guide, BofA concludes that we are likely to see spending in TX and surrounding states return back to trend in the next week or so. We could even see spending run above trend as households restock.

That would be the optimistic view. The less optimistic view comes from similar card spending data, but this time from JPMorgan, which found a similar plunge in Texas spending but also an acute dropoff in total spending across the US, not all of which could be explained by the Texas freeze.

In other words, after the record January spending boom sparked by the latest round of stimulus, it is quite possible the Americans retrenched again and whether it is due to the cold weather or concerns that quite some time may pass before the next government handout stimulus is sent out, we may well be in for a rough patch as US spending – which drives 70% of US GDP – hibernates at least until such time as the first (of many) Biden stimulus is passed and those $2,000 $1,400 stimmies are sent out. Which, incidentally, would be good news for a market suddenly terrified that the US economy is overheating and something must be done to halt the surge in output and/or spending…

Democratic Socialist Alexandria Ocasio–Cortez from New York ripped NYPD’s Boston Dynamics robot dog for ground surveillance of low-income neighborhoods. 

AOC quoted an NYPost article titled “Video shows NYPD’s new robotic dog in action in the Bronx,” where she was not fond of the “robotic surveillance ground drones that are being deployed for testing on low-income communities of color with under-resourced schools.” 

Shout out to everyone who fought against community advocates who demanded these resources go to investments like school counseling instead.

Now robotic surveillance ground drones are being deployed for testing on low-income communities of color with under-resourced schools 👍🏽 https://t.co/ZqKtnexctb

— Alexandria Ocasio-Cortez (@AOC) February 25, 2021

AOC, a Bronx Democrat, later tweeted that the money used for the robot’s purchase could have been allocated “for education, healthcare, housing” purposes. 

Please ask yourself: when was the last time you saw next-generation, world class technology for education, healthcare, housing, etc consistently prioritized for underserved communities like this?

— Alexandria Ocasio-Cortez (@AOC) February 25, 2021

For a couple of decades, police forces across the country have been militarized. Stepping into a new decade, police forces, like NYPD, are seeking to deploy automation and artificial intelligence systems to combat crime. 

NYPD first received the robot dog, called “Digidog,” a couple of months ago. At the time, NYPD Technical Assistance Response Unit Inspector (TARU) Frank Digiacomo told ABC7 that the four-legged robotic dog “will save lives, protect people, and protect officers and that’s our goal.” 

Digidog is like any Boston Dynamics Spot robot – though this one is equipped with lights, two-way communication, and video cameras.

The latest video shows the 70-pound robot being tested in the Bronx. The department also deployed the robotic dog back in October to a Brooklyn shooting. 

Social media was not enthused with NYPD’s actions to purchase a Boston Dynamics Spot. 

One person tweeted: “destroy it at all costs. destroy every boston dynamics robot you see in the wild.”

Another said, “I’m sorry, but @BostonDynamics needs to ban these types of uses. Their tech should be used to enrich people’s lives and to help society, not oppress it. I absolutely love their work, but I will not shed a tear if every single one of these gets destroyed by citizens.” 

We showed last week just how easy a weapon (though a paintball gun) could be mounted on one of these robots. 

It’s only a matter of time before these robotic surveillance dogs are deployed to low-income neighborhoods across the US. 

By Ye Xie, Bloomberg macro commentator and writer

Three things we learned last week:

1. China’s bond market proved to be a haven in the global rout.

In the global fixed-income selloff last week, yields on China’s 10-year bonds rose just 1 bp to 3.28%, compared with the 15 bps jump in U.S. Treasuries.

In part, that reflects China’s status as the leading indicator of the global economy as it was the first to emerge from the pandemic. Chinese bond yields started to climb in April and have been largely unchanged since November. In a sense, the global bond market is just experiencing what the Chinese market went through a few months ago.

The fact that the two economies are in a slightly different phase suggests that adding unhedged Chinese bonds provides the benefit of diversification. Indeed, Chinese bonds and their global counterparts have exhibited low correlation over the past two years.

2. Financial conditions haven’t tightened enough to alarm the Fed.

Investors have pushed forward their rate expectations, causing the 5s30s part of the yield curve to flatten. The euro-dollar futures now price in the first rate hike as soon as December 2022. That seems to be aggressive, as the Fed’s dot plot looks for no rate hike through 2023.

Yet, while the rising real yields wreaked havoc in some segments of the markets, financial conditions only tightened marginally. As St. Louis Fed President James Bullard put it bluntly, the 10-year yield has not returned to pre-pandemic levels.

So the Fed will want to see how the bond moves play out before “changing its tune,” Fed watcher Tim Duy noted. In other words, fasten your seat belt.

3. Biden isn’t in a rush to reset U.S.-China relations.

Katherine Tai, Joe Biden’s pick for U.S. trade representative, told senators during her confirmation hearing that China “needs to deliver” on the promises it made in the phase-one agreement. It is the strongest signal yet that the new administration plans to build on the accord brokered by its predecessor rather than scrap it. William Burns, Joe Biden’s nominee to lead the CIA, called China’s “adversarial, predatory leadership” the biggest threat to the U.S.

For its part, the official China Daily said in an editorial that Biden’s early policy toward Beijing “smacks of Trumpism,” and the approach so far “affords little optimism.” Meanwhile, the government said Friday that it will extend punitive tariff exemptions for 65 items imported from the U.S.

It sounds like a stick and carrot , doesn’t it?

For those living under a rock in 2021, the big story in the past month is that 10-year Treasury yield have climbed by 50 bps in a month to 1.5% (technically as high as 1.61% for a few brief seconds on Thursday after the catastrophic 7Y auction triggered stop loss selling) as real rates jumped following a steady increase in inflation expectations (breakevens), which however are largely set by 10Y TIPS whose price is determined largely by the Fed due to its massive ongoing monetization of TIPS (thus crushing any actual signaling power TIPS may have). Whatever the cause, while rising breakeven inflation has driven most of the rise in yields during the past six months, the last two weeks have been characterized by a 40 bp jump in real yields.

It’s this sudden spike in real yields as opposed to breakevens, that has sparked much of the fear in markets in the past week, because as Goldman’s David Kostin explains in his Sunday Start note, “conceptually, and historically, equities digest rising inflation expectations more easily than rising real yields” and not just rising real yields, but a rapid spike the likes of which were last observed during the taper tantrum as we discussed two weeks ago in “Yields Soar, Sending 30Y Real Rates Positive Amid Overheating Panic: What Happens Next“). In any case, as a result of the violent moves in the rates complex, it is hardly a surprise that Kostin writes “the recent backup in rates has sparked a new wave of client concern.”

Here are the three things Goldman clients are most concerned about, as well as Goldman’s answer:

• First, investors ask whether the level of rates is becoming a threat to equity valuations.

Predictably, Goldman’s answer is an emphatic “no” with Kostin claiming (with a straight face) that “although the S&P 500 forward P/E multiple of 22x currently ranks in the 99th historical percentile since 1976, ranking only behind the peak of the Tech Bubble in 2000, our dividend discount model (DDM) implies an equity risk premium (ERP) that ranks in the 28th percentile, 70 bp above the historical average.” In other words, massively, record stretched PE multiples won’t collapse if rates rise. Yeah, right. May want to Timestamp that David. We’ll check back in a few weeks. So what would cause a market crash according to Goldman’s head market cheerleader? Well, according to Kostin, “keeping the current P/E constant, the 10-year yield would have to reach 2.1% to bring the yield gap to the historical median of 250 bp. If instead the yield gap remains unchanged, and rates rise to 2.0%, then the P/E multiple would fall by 10% to 20x.” But don’t worry, Kostin adds, because “in today’s economic environment, our macro model suggests the ERP should be narrower than average.” Translation: yes, a 10% drop is coming but our models say it may not come, so just keep buying.

• Second, Goldman’s bullish US equity view has already embedded expectations of rising interest rates.

Addressing the second most regular pushback against its bizarre optimism, Goldman says that an environment of accelerating economic growth (and recall that recently Goldman found that the US Economy is Growing At the Fastest Pace On Record), and higher bond yields is consistent with the bank’s forecast that S&P 500 EPS in 2021 will grow by 27% and be 10% higher than pre-pandemic 2019, driving a 14% rise this year to our year-end price target of 4300 despite a flat P/E multiple. In other words, multiples may indeed contract but the rise in earnings – a result of economic growth – will offset much if not all of the move. Furthermore, the forward market implies that 10-year nominal yields will climb 25 bp further to 1.7% – below Goldman’s 2.1% redline – and real yields will climb by a similar amount to from -0.7% to -0.4% by year-end.

• Third, even Kostin is forced to concede that the recent change in yields has reached a magnitude that is usually a headwind for stocks.

As the Goldman strategist concedes, equities have generated an average return of nearly +1% per month, but the return has averaged -1% during months when nominal rates rose by more than two standard deviations and -5% when real yields rose by that amount. Today, a two standard deviation monthly rise in 10-year rates equates to 40 bp for nominal yields and 30 bp for real yields, both thresholds exceeded this week.

Of course, it’s not just absolute levels across risk that are impacted by rates: Kostin also notes that “shifting interest rates have major implications for rotations within the equity market, a dynamic made clear in recent weeks.” In mid-2020, Kostin’s equity valuation model showed that equity duration –the expectations of earnings growth far in the future –had become a more important contributor to multiples than ever before. One key reason for the importance that investors ascribed to expected future growth was the extremely low level of interest rates. As rates have risen, the contribution of equity duration to stock valuations has declined while near-term growth profiles have become more important. Practically, this means that both the improving growth outlook and rising rates have supported the outperformance of cyclicals and value stocks relative to stocks with the highest long-term growth. Hardly surprising, in recent weeks Goldman’s S&P 500 Growth factor has declined by 9%, similar to the 12% decline around the announcement of Pfizer-BioNTech vaccine efficacy in November

Which brings us to the one sector most at risk from the continued risk in yields.

As Kostin writes, “this rotation has also weighed on one of the most spectacular outperformers of the last 12 months: Stocks with negative earnings but strong expected growth.” One of the most remarkable moves of the past year is that a basket of non-profitable tech stocks soared by 204% last year and 27% in the first six weeks of 2021… before falling by 15% in last two weeks. The decline of these high-growth firms has been particularly painful given the current record degree of leverage carried by hedge funds and the elevated activity of retail traders, both of whom have recently favored some of these long-duration stocks.

To be sure, while earnings for S&P 500 firms declined by 13% in 2020, the fall in aggregate profits does not capture the wide dispersion in operating results that occurred inside the market. While 2020 EPS growth was negative for the overall index and the median stock, the actual level of profits was positive… But not for every company.  In fact, 1082 firms or 37% of the constituents in the Russell 3000 posted negative net income in 2020 (i.e., a loss or negative EPS), and 21% posted negative EBITDA.

Getting even more granular (and apologizing to George Orwell), Kostin then notes that all companies with losses are equal, but some are more equal than others. Some firms reported negative earnings in 2020 because the pandemic and economic shutdown disrupted their business and crushed their revenues. But in other instances, the Goldman strategist points out that “companies grew sales so rapidly that top-line was the focus of investors and bottom-line losses were ignored.” Indeed, consider that across all non-Financial US stocks with at least $50 million in revenues, “those with negative earnings and declining revenues in 2020 returned a median of -18% last year. In contrast, stocks with negative earnings and growing revenues returned +51%.”

Recently, however, improving economic growth prospects from vaccination rollout and pending fiscal stimulus coupled with rising rates have moved firms that struggled most in 2020 into pole position so far in 2021. The cyclical and virus-affected firms with negative earnings and falling sales in 2020 have generated a median YTD return of +22%, outperforming the +10% return of the median stock that posted a loss but grew sales last year. Unsurprisingly, these cyclical stocks have been positively correlated with both nominal and real interest rates. In contrast, the ultra long-duration stocks have been negatively correlated with interest rates given they generate no earnings today and their valuations depend entirely on future growth prospects. Cyclicals also carry far lower valuations, with a median EV/2022 sales ratio of 2x vs. 6x for the median negative earner with positive sales growth.

Putting it all together, Kostin concludes that “looking forward, investors must balance the appeal of promising businesses with the risk that rates rise further and the recent rotation continues.” The list of non-profitable companies that makes up GOldman’s Non-Profitable Tech basket is shown below:

And although secular growth stocks may remain the most appealing investments on a long-term horizon, Goldman believes that those stocks will underperform more cyclical firms in the short-term if economic acceleration and inflation continue to lift interest rates. 

Which brings us to the other side of the table: the chart below shows the Russell 1000 firms from each sector with the shortest implied equity durations that have outperformed sector peers during the past two weeks as rates rose and are expected to grow revenues in 2021. The median stock trades at a P/E ratio of 19x and has returned 7% YTD compared with 22x and 2% for the Russell 1000 median.

On Thursday we reported that just three weeks after Australia’s central bank announced on Feb 1 an extension to its QE program by a further A$100 billion (when it also said it doesn’t expect to increase interest rates until 2024) in the pursuit of the central bank’s yield curve control (as a reminder Governor Philip Lowe had previously set the three-year yield target at 0.10%) that same day the RBA purchased a whopping (for Australia) A$3BN in three-year government bonds in the secondary market on Thursday – triple the amount it bought on Monday and the most since the bond market turbulence during the COVID-19 panic last March.

Unfortunately, the RBA’s scramble to preserve both the Yield Curve Control target of 0.10% on the 3Y, and its credibility, fell short as “only” A$3BN proved insufficient and 3Y Australian bond rose to 0.13%, 3bps above the maximum YCC barrier (and the highest since December) which is why we said “Australia’s Yield Curve Control Is On The Verge Of Collapse.“

So fast forward to Monday morning when after the latest round of fireworks, the Aussie 10Y had blown out to 1.92% and threatened to unravel the local bond market.That’s when the RBA officially panicked, and took emergency steps to show markets who’s boss, by announcing an even bigger increase in bond purchases, aimed at the longer-term debt and in hopes of keeping the YCC dream alive.

Specifically, the RBA said it is buying A$4BN of longer-dated bonds, twice the usual amount. This was the first time since officials introduced the debt purchase program Nov. 3 that they bought more than the planned amount outlined by Governor Lowe, and follows the bank’s unscheduled A$3 billion bond purchase operation Friday to defend its three-year yield target, which however also failed to stabilize the rout.

In kneejerk response, 10Y Aussie yields – which we already down for the day – tumbled much as 32bps.

At the same time, amid expectations of even more coordinated central bank intervention, treasury futures were rising, with the 10Y yield down to 1.38% after hitting 1.61% on Thursday…

… and the closely watched 5Y yield tumbling…

… along with sliding yields in New Zealand and Japan. 

And with the rout in bonds now seemingly under control, risk assets were heavily bid with Nasdaq futures up 1% in early trading…

… and with stocks seemingly set for a sharp reversal to Friday’s rout and preparing to blast off in Monday’s session.

Or, as BofA CIO Michael Hartnett is so fond of saying, “markets stop panicking when policy makers panic.”  As a reminder, Fed Chair Powell and several other U.S. central bankers are scheduled to speak this week, while the RBA has its monthly meeting tomorrow. And with BofA expecting the Fed to address markets “as soon as this week“, there is no telling how high stocks can soar in the coming days as central bank panic goes to 11…

Back in 2015, when Goldman stunned Wall Street with the taxpayer-backed hedge fund’s decision to roll out a consumer-facing commercial bank – Marcus – which offered “high yield” deposit accounts (of 1.25%) and consumer loans, at least Goldman had rising rates to fall back on: after all that was a period when Janet Yellen had decided that it was time to shrink the Fed’s balance sheet and proceed with hiking rates, waking the infamous “ghost of 1937” (and culminating with the minicrash of 2018, and eventually the biggest liquidity injection of all time in March 2020).

In any case, rising rates made it easier to sell a consumer-facing commercial bank to Goldman investors. Yes, the revenue stream would be limited (after all Goldman would have to steal market share from such established banks as JPM, BofA, Citi and Wells), but if rates rose enough the Net Interest Margin would provide for a generally risk-free source of income.

All that ended last March when the Fed made it clear that ZIRP would be with us for years, and instead of an asset, any net interest margin exposure became a liability (especially when accounting for a potential surge in bad loans once the forebearance moratorium ends), and suddenly Goldman’s Marcus doesn’t look like such a hot idea.

It also explains why Bloomberg reports this morning that Omer Ismail, the head of Goldman’s consumer bank, has made a “surprise exit” and is headed for WalMart as the retail giant muscles into the banking business.

The world’s largest retailer made a splash last month after disclosing plans to offer financial services with an independent venture in a tie-up with investment firm Ribbit Capital without offering much detail. And now, it has sent shockwaves with the decision to poach Goldman’s top consumer bankers: in addition to Ismail, Bloomberg reports that Walmart is also hiring David Stark, one of his top lieutenants at Goldman, who will join him in the new venture.

Walmart’s move, which deprives a top Wall Street firm of the talent atop its own foray into online banking, “underscores the seriousness of the retailer’s intent to intertwine itself in the financial lives of its customers.”

The audacious poaching punctuates years of warnings by bank leaders that their industry faces tough new challengers, after regulators smoothed the way for corporate giants and Silicon Valley to expand into payments and other services

Ismail is credited as one of the key architects behind Goldman’s push into Main Street, seeing through the growth of Marcus into a billion-dollar business in five years. But, as noted above, in a time of ZIRP (and perhaps NIRP), the allure of a fintech commercial bank rollout has faded.

The departures are a setback for Goldman, which had just entrusted Ismail and Stark with bigger roles. Ismail formally assumed control of the consumer bank at the start of the year. But he’s been tied to it ever since Goldman’s merchant bank set up the side project several years ago.

As part of Goldman’s attempt to expand beyond its traditional investment bank strengths, Ismail helped formulate the plan for Marcus – the biggest strategy refresh the firm has seen in three decades. The company ultimately resolved to make itself a serious force in digital banking.

Meanwhile, stark played a key role in Goldman’s partnership with Apple on a credit card, for which the bank provides the financial backbone. Weeks ago, Goldman named Stark as the head of large partnerships, which was supposed to serve as a key peg for Marcus’s growth, which had recently struck deals with Amazon, JetBlue and – yes – even Walmart. However, Walmart appears to have decided to go it alone and rollout its own fintech division, offering customers low-cost products by avoiding physical branches, and instead using online portals or phones to provide loans, savings accounts or investment options.

Walmart said in January it aims to combine its “retail knowledge and scale with Ribbit’s fintech expertise” to serve shoppers and associates. Walmart will own a majority of the new venture, but in Ribbit, it has a partner that’s made big bets in the fintech space including backing Robinhood, the scandalous brokerage which sells its retail orderflow to the likes of Citadel.

As for Goldman, in a world where its “high-yield” savings account is now just a paltry 0.50%, the bank may find significant challenges as it hopes to poach clients away from existing commercial bank relationships.

Making matters worse for Goldman, it is about to see even greater competition: in December, the FDIC approved a final rule governing so-called industrial loan companies that would make it easier for major businesses to seek banking charters while escaping capital and liquidity demands faced by dedicated financial firms. That’s a worrying prospect for banks facing the risk of going up against against corporate behemoths that could lean on their huge customer base to eat into the banking wallet.

Ismail’s predecessor Harit Talwar is still a chairman at Marcus and will probably continue to play a key role with the division after Ismail’s exit. The unit also hired a former Stripe executive Swati Bhatia as the head of its direct-to-consumer business earlier this month. After the departure of Ismail and Stark, his tenure at Goldman may prove to be extremely short-lived.

By Eric Peters, CIO of One River Asset Management

“My beloved dogs Koji and Gustav were taken in Hollywood two nights ago,” tweeted Lady Gaga, the nation reverting to normal, images of the capitol insurrection, the horned Shaman, receding into the depths of our collective humiliation.

“I will pay $500,000 for their safe return,” offered Gaga, no questions asked, returning America to a more innocent time of price inflation and armed dog snatchings. Apparently, these things are on the rise after a year of lonely lockdowns.

You see, handing out cash is rather easy, but you can’t print puppies. So their price quite naturally jumped. And for all the focus on the rising price of long-duration assets in a world of perpetually low interest rates, the market for adorably-ugly French bulldogs has been in a low growl. The imbalance rising, a Minsky moment approaching.

So no sooner had Gaga’s heroic dogwalker taken a bullet to the chest in defense of her pugnacious short-duration assets, then US real rates began a dramatic rise. “The economic recovery remains uneven and far from complete, and the path ahead is highly uncertain,” said Fed Chairman Powell in a policy panic. “There is a long way to go,” he added, attempting to calm fears that rates will rise even slightly.

After all, risks to the economy of an abrupt rise in rates has never been higher with a government budget deficit of 15% for the 2nd year running, debt and leverage at historic highs, and global asset prices having largely adjusted to the lowest interest rates in human history.

Back in 1994, Greenspan hiked rates without preparing the market. Bonds crashed.

Then in 2013, Bernanke suggested he would taper QE purchases. Bonds had a tantrum.

But after decades of monetary manipulations, it is no longer Fed chairmen who markets should fear – they will never again knowingly cause a collapse. The next great catalyst, when it comes, will be against the backdrop of an accommodative Fed. It’ll be seemingly trivial, stupid. Obscure. Franz Ferdinand. French bulldogs.

Temples

“Daily bond returns were 32% correlated with equities in Feb,” said Indiana, our industry’s leading archaeologist, explorer. “This is an asset class with a 2% aggregate return expectation,” he said. “Nobody is holding bonds hoping for something special. They want surety of capital with the aim of buying cheap stuff when asset prices decline,” he said. “That bond aggregate was down more than 2% at its worst point in the month. Bonds no longer work. Not the end of the world. But it illustrates the problem – portfolios are commonly geared.”
 
“Credit performance is terrible,” continued Indiana. “LQD is down more than 4% YTD with spreads barely moving.” Credit is funded through capital markets, not banks. “The weakest LatAm links saw a surge in local rates. Brazilian markets imply rate hikes to 9% through the end of 2023, when the Fed is supposedly on hold. That’s a long way from the current 2% rate,” he said. “It is all one trade. Art. Watches. Antique cars. Houses. Bonds. Equities.” Valuations surged in everything. “An orderly unwind means policy must be prepared to let assets become cheap at some point. The rise in bond yields cannot happen in a vacuum.”
 
“The Fed is being tested,” said Indiana. “Dec 2023 OIS futures now price almost two hikes versus zero for the Fed dots.” This happened with 5yr5yr inflation breakeven spreads down 15bps in Feb and 5yr5yr real yields surging 51bps. “Fed economic types will say the yield rise is good news, reflecting a stronger economy.” The new framework types (Brainard biggest champion) argue that hidden unemployment is rife. “14mm Americans are collecting Federal relief programs that didn’t exist pre-pandemic, a massive number.”
 
“When terms like ‘full range of tools’ are used by the Fed in various settings, I pay attention,’ said Indiana. “Went back to Clarida Feb 2019. Brainard Feb 2020. There are three tools – forward guidance (exhausted), negative policy rates (unanimous distaste at FOMC), and yield curve control (studied for more than a year now).” So the ‘full range of tools’ is really just yield curve targeting now. “Foreign ownership of treasuries is the blind spot for YCC. Rough numbers – foreigners own $7trln (official institutions are $4trln), Fed owns $7trln (including agency mortgages). YCC can accelerate foreign rebalancing away from US treasuries, weakening the dollar, boosting real asset purchases, or both.”
 
“Guess what didn’t move in Feb? China,” he emphasized. “China’s bond market was up a bit on the month and the exchange rate was down a bit,” he said, pausing for the obvious conclusion. “The world is hunting for a new safe-haven and the number-crunching is pointing them to Chinese bonds.” The exchange rate may not be the main act of this play. “China is relaxing outflows, moving up the value curve. Their buying of foreign companies paused in the pandemic, and it is heating up again. That’s the story.”

Clash of the egotistical titans…

Global soccer star Zlatan Ibrahimovic has a great deal of respect for the basketball skills of LeBron James, but wishes the Los Angeles Lakers star would refrain from remarking on political concerns.

The historically outspoken Ibrahimovic, who’s a striker at A.C. Milan, spoke to UEFA and Discovery+ Sweden to express his opinion that athletes in general should shy away from delving into issues involving politics and cited James as an example.

“He’s phenomenal, but I don’t like when people with a ‘status’ speak about politics. Do what you’re good doing,” Ibrahimovic said.

“I play football because I’m the best playing football, I’m no politician. If I’d been a politician, I would be doing politics. This is the first mistake famous people do when they become famous: for me it is better to avoid certain topics and do what you’re good doing, otherwise you risk doing something wrongly.”

Following Zlatan’s comments, LeBron wasn’t too pleased that someone dared to call him out and fired back Friday night, according to ESPN:

“I would never shut up about things that are wrong. I preach about my people, and I preach about equality.

Social injustice. Racism. Systematic voter suppression. Things that go on in our community…

So, there’s no way I would ever just stick to sports, because I understand how this platform and how powerful my voice is…

I speak from a very educated mind, so I’m kind of the wrong guy to actually go at because I do my homework.”

Watch LeBron’s response here…

LeBron responded after Zlatan Ibrahimovic criticized him for his activism.

“I’m kind of the wrong guy to actually go at because I do my homework.” pic.twitter.com/VyKgBrYuiz

— SportsCenter (@SportsCenter) February 27, 2021

Daily Caller’s David Hookstead summed things up perfectly: “This is America. Everyone is entitled to their opinions, but being able to score 30 points in an NBA game doesn’t make you an authority on politics.”