Month: March 2023

For the third day in a row (ahead of tomorrow’s month- and quarter-end and the big PCE print), bonds ‘rested’ while stocks went wild (this time up… and then back down). Gold rallied as the dollar and bitcoin sold off.

Regional bank stocks slipped back towards the post-SVB lows again, back into the red for the week (not helped by Biden pushing for tighter regs for this cohort) ahead of tonight’s Fed bailout data…

FRC was weak today and SCHW fell on an analyst downgrade joining PACW in the red for the week…

Source: Bloomberg

Minnesota Fed’s Kashkari opened his mouth around 1330ET and hawkish tones gushed forth, pushing stocks lower.

Richmond Fed’s Barkin was more dovish at around 1400ET, hinting at credit tightening (which may reduce needs for hikes) and that policy has lags (hinting at a pause).

Nasdaq outperformed… again… with Small Caps lagging (actually closing in the red on the day). The Dow and S&P rebounded (after Barkin) back into the green on the day…

And as the quarter-end nears, it’s clear what’s driving the exuberance in long-duration stocks…

Nasdaq heads for one of its best quarters in a decade, up 17% in Q1. Second only to 2022’s Q2 30% rally on the monumental monetary easing during Covid. Both times, the Fed’s balance sheet expanded. Latest 10% leg up on the Nasdaq coincided with Fed’s balance sheet adding $400bn pic.twitter.com/na34YcyIwr

— Valerie Tytel (@ValerieTytel) March 30, 2023

‘Most Shorted’ Stocks squeezed higher at the open once again (to key resistance) but were sold back to unch from there…

Source: Bloomberg

Options traders have priced in a lot of (relative) uncertainty for tomorrow (PCE), but then a jolt lower before rising again into next week’s payrolls…

Source: Bloomberg

Treasury yields were modestly lower on the day with the belly outperforming (5Y -3bps) but all yields are still up notably on the week…

Source: Bloomberg

The 10Y yield continued to sleep after its explosion higher Friday thru Monday on the back of a suddenly heavy calendar of issuance…

Source: Bloomberg

The yield curve (2s10s) flattened for the 4th straight day…

Source: Bloomberg

Rate-hike odds picked up hawkishly again today, with May now at 55% odds of 25bps hike…

Source: Bloomberg

The dollar dumped again to its lowest close since Feb 3rd…

Source: Bloomberg

Bitcoin slipped back below $28,000 today (after spiking above $29 k overnight)..

Source: Bloomberg

Gold (June futures) topped $2000 once again, as spot jumped back above $1980…

Source: Bloomberg

Oil prices extended their gains with WTI (May is front-month) back above $74 at two-week highs…

And finally, we note that US equities still screen as expensive vs. the alternatives despite the recent decline in Treasury yields…

Source: Bloomberg

And the S&P 500 NTM P/E of 18x ranks in the 82nd percentile since 1980…

Source: Bloomberg

Do you feel lucky punk?

Given that, maybe you should!

Authored by Jonathan Turley,

I recently wrote a column on how Democrats in California are being challenged to put their money where their mouth has been on reparations.

For years, Democrats have insisted that reparations are a moral imperative.

Now, however, the bill has come due and advocates in a Wednesday hearing confronted members of the California Reparations Task Force in asking “where’s the money?” Some are now demanding more than $5 million per resident as Reparations Board member Lisa Holder of the Equal Justice Society promised that the committee’s “recommendations will be breathtaking.”

California Gov. Gavin Newsom (D) created the Reparations Task Force, which just reached its own recommendations for $223,000 per person. Others have insisted the figure should be $350,000 for individuals and another $250,000 for Black-owned businesses. One California politician insisted the figure needs to be $800,000 per person, reflecting the average cost of a home in the state. In the meantime, a similar board has recommended $5 million payments to eligible residents of San Fransisco.

Notably, California’s law expressly states that this money should not be treated as compensation for federal reparations.

That raises the question of whether a resident could receive $5 million from San Francisco, $223,000 from the state, and additional payments from the federal government.

[ZH: As Eric Lundrum writes at AMGreatness, after economists estimated that California’s reparations plan could spend as much as $800 billion, the leader of the state’s “reparations task force” has refused to commit to such a staggering amount.

According to ABC News, the $800 billion figure would be paid to all black residents in the state in return for past historical circumstances such as slavery and segregation, as well as alleged “racism” in policing, incarceration rates, and housing.

“All forms of discrimination should be considered in reparations,” said Thomas Craemer, a public policy professor at the University of Connecticut, in testimony before the panel.

“The task force should feel free to go beyond our loss estimates, and determine what the right amount would be.”

But on Wednesday, the task force’s chair, Kamilah Moore, said the final decision on the exact amount will be left up to the California state legislature and Governor Gavin Newsom (D-Calif.).

“The task force is pretty much done regarding the compensation component,” Moore said in an email.

“Our task was to create a methodology for calculation for various forms of compensation that correspond with our findings.”]

Some congressional Democrats have pushed for similar federal reparations and passed a bill out of the House Judiciary Committee in 2021 that failed to receive a floor vote. BET founder Robert Johnson has called for $14 trillion in federal reparations.

In the hearing on Wednesday, the growing expectation and impatience was evident among witnesses. Yet, some reparations advocates in cities with even smaller reparation programs admit that they do not know how cities will fund the payouts.

One witness described the payments of $5 million per person as “nothing” and “too little.” The correct figure was suggested as more like $7.6 million.

Reverend Tony Pierce asked “Where’s the money? Where’s the cash? Where’s the check?” “$5 million, San Francisco’s already made a move. $5 million is nothing.” Pierce mocked the notion of $5 million if it is “spread over 50 years would only amount to $100,000 year, and then with taxes, you’ll be lucky if you end up with $40,000 a year.”  He also rejected the notion of $223,000 for housing as woefully inadequate.

For her part, Holder is pledging breathtaking” reparation payments, including “monetary compensation to Black people who are descendants of enslaved and persecuted Black Americans.”

Those continued assurances are fueling demands for the money without further delay. After years of being told that the payments are moral imperatives, many are losing patience. In a prior hearing, one well-known California activist declared in a prior hearing that “It’s a debt that’s owed, we worked for free. We’re not asking; we’re telling you.”

Despite Gov. Newsom’s underestimating the state debt figures by billions, this bill has now come due and many critics are challenging the left to show that the prior pledges were not mere political opportunism or virtue signaling.

California is set to face the true costs of these pledges and many are in no mood to haggle over price.

In other words, California Democrats may have finally reached the “show me the money” moment.

The political fallout continues after President Biden’s controversial and rare criticisms of Israel, which included on Tuesday his urging Prime Minister Benjamin Netanyahu to abandon his governing coalition’s judicial overhaul policy which critics say will destroy any semblance of checks and balances and thus is a threat to Israeli democracy itself. The plan is now on “pause” as deep divisions in Israel simmer.

Biden had said he hoped Netanyahu “walks away from” the plan which has brought hundreds of thousands of Israeli protesters into the streets over the last couple weeks. But he really riled Israel-supporters by emphasizing that he has no intention of welcoming Netanyahu to the White House “in the near term.” Typically newly elected Israeli prime ministers can expect to meet with the US president fairly quickly after entering office.

“Like many strong supporters of Israel, I’m very concerned, and I’m concerned that they get this straight. They cannot continue down this road,” Biden had told reporters after a speech in North Carolina. “Hopefully the prime minister will act in a way that he can try to work out some genuine compromise. But that remains to be seen.”

Again such a rebuke from an American president directed at close ally Israel, which receives over $3 billion a year in foreign and defense aid from Washington, is so rare as to be almost unheard of. But some argue that the funding and steady weapons pipeline to Tel Aviv is precisely why Washington must reign in Israel from time to time.

But pro-Israel hawks have historically treated the Jewish state like it cannot possibly do any wrong. Congressional Republicans were especially angry by Biden’s criticisms, with House Speaker Kevin McCarthy on Thursday speaking up, issuing words of support for Netanyahu: 

“Prime Minister Netanyahu is an Israeli patriot, statesman, and most importantly, a great friend of the United States of America,” McCarthy said in a statement.

“Free societies have vigorous and open debate. Israel is no exception. I support Prime Minister Netanyahu, and America’s support for Israel’s strong, vibrant democracy is unwavering. Now is an important time for Americans to stand together in support of our long, mutually respectful, and important friendship with Israel.”

Interestingly, some Republicans agree that the judicial overhaul plan shouldn’t be pursued, but have expressed that Biden shouldn’t criticize Israel so out in the open.

For example, Rep. Chris Smith of New Jersey said Biden’s words should have been conveyed through quiet back-channels: “The administration if they’re going to convey a message, it ought to be doing it through secure channels and not being so public about it,” he said to The Hill on Wednesday.

New: President Biden urged Prime Minister Benjamin Netanyahu in a strong private message to halt his government’s judicial overhaul just hours before Netanyahu announced the suspension of the controversial plan. My story on @axios https://t.co/EUtzlFkYAj

— Barak Ravid (@BarakRavid) March 29, 2023

“An ally like Israel that absolutely needs a friend like the United States as part of its deterrence, we want to, in no way convey, any, no matter who’s prime minister, diminution of support. Talk it out on a secure phone or in a meeting, don’t do it through the press,” Smith added.

More Israeli airstrikes rocked Damascus early Thursday morning, wounding two Syrian soldiers, according to national SANA news agency and international reports.

State sources say Syrian air defenses were “confronting hostile targets” over the capital at around 1:20am, during the aerial attack which came from the direction of the Golan Heights. This marks the fourth major Israeli attack on Syria this month, which included two prior air assaults which temporarily shut down Aleppo International Airport.

“At around 01:20 am (10:20 GMT), the Israeli enemy carried out an aerial aggression from the direction of the occupied Golan Heights targeting several positions in the vicinity of Damascus,” Syria’s defense ministry said later, also noting material damage.

After a short lull following a pattern of several years that included hundreds of Israeli attacks on Syria, there’s been an uptick and return to more frequent attacks so far this year.

“A group monitoring the Syrian civil war said the Israeli missile strikes last week destroyed a suspected arms depot used by Iran-backed fighters at Aleppo airport,” Al Jazeera observes. “On March 7, three people were killed in the Israeli air strike on the airport that also halted flights for three days.”

Israeli officials have long claimed to be targeting Iranian military assets such as weapons shipments, but civilians and city infrastructure have long been targeted. “Along with airports, Israeli warplanes have also aimed at other critical infrastructure, including Syrian seaports,” AJ notes further.

One likely explanation for Israel’s ramped up aggression in Syria is the Saudi-Iran deal to reestablish and normalize diplomatic ties announced this month. Israel has long relied on robust US-Gulf (and GCC) efforts to counter Iran. Couple with this is that Syria’s Bashar al-Assad is being welcomed in Gulf capitals such as the UAE and Oman.

#UPDATE: Israeli strikes have reportedly hit a target in the Al-Midan neighbourhood in the Syrian capital, Damascus pic.twitter.com/cRXqzof1HZ

— ELINT News (@ELINTNews) March 29, 2023

US state-backed VOA has observed the post-earthquake diplomacy is part of “renewed efforts to bring Damascus back into the Arab fold.” This scares Israel, which wants to see Syria perpetually isolated amid fears in Tel Aviv of deepened Iranian entrenchment in the region.

Via Political Calculations blog,

In late 2020, the policy makers of the Biden administration and its partisan supporters started crafting a new COVID stimulus package. What they wrought set off a chain of events that ultimately led to the cost of living and banking system crisis we face today.

It didn’t have to be that way. When they started their discussions, the participants had modest goals for what an additional stimulus would look like. Considering the federal government had just enacted its fourth Covid relief package on 27 December 2020, totaling $900 billion, no one at the time was advising the Biden administration to pursue for another stimulus of similar size, much less one that was $1 trillion larger.

That changed quickly after 5 January 2021, when President Biden’s political party gained control of the U.S. Senate after runoff elections in Georgia came out in their favor.

With control of the U.S. Congress in hand, the most rabidly partisan among President Biden’s supporters quickly switched gears to exercise their new political power. Instead of linking the magnitude of any new stimulus package to the actual scale of the problem the U.S. economy was facing at the time, they decided they would “go big”, putting their fringe political agenda ahead of sound fiscal policy.

But in ditching sound fiscal policy, they opened a rift among those who had been crafting the new stimulus measure. That rift took the form of an academic controversy that erupted while they were developing what would ultimately become the American Rescue Plan Act, which the Biden administration rammed through Congress and signed into law on 11 March 2021.

The controversy involved an economic concept known as potential output, or potential GDP. Here’s a quick primer:

Potential output is an estimate of what an economy could feasibly produce when it fully employs its available economic resources. The Congressional Budget Office (CBO) estimates potential output by estimating potential GDP, which it describes as “the economy’s maximum sustainable output.” The word “sustainable” is important — it doesn’t mean that the entire working-­age population is working 18 hours per day or that factories are operating 24/7. Rather, it means that economic resources are fully employed — at normal levels. Potential output (estimated as real potential GDP) serves as an important benchmark level against which actual output (measured as real GDP) can be compared with at any given time.

The difference between the economy’s potential output and its actual output is called the output gap, which economic policy makers must consider when shaping major fiscal policies. If they adopt policies that undershoot the gap, they will fail to obtain the full positive results they seek at the cost of greatly adding to the nation’s debt. If they overshoot the gap, they risk creating adverse economic conditions, like inflation, that can fully undermine whatever positive results they hoped to achieve.

These scenarios were known risks at the time the Biden administration was pushing the American Rescue Plan Act forward. In fact, because the stimulus package they were considering had swelled to $1.9 trillion, the risk of creating inflation became a primary concern among the more fiscally responsible members of Biden’s policy making team. But they lost the internal argument when President Biden sided with the most extreme elements among his supporters.

That victory didn’t make the likelihood the enormous new stimulus package would almost certainly overshoot the output gap and create persistent inflation go away. By Inauguration Day, the progressive activists who hijacked the stimulus development still needed to dispell that risk to ensure they could get the massive stimulus through a still closely-divided Congress. Their chosen path to achieve their political agenda would hinge on an assumption cooked up by the Biden administration’s most rabidly partisan supporters: that the nation’s potential GDP and output gap were much larger than the CBO estimated and thus, would not create inflation. That assumption would become the focal point of the controversy for how the stimulus bill could negatively impact the economy.

On 3 February 2021, the Committee for a Responsible Federal Budget discussed how the assumptions of the size of potential GDP and the output gap being put forward affected the forecasts of how much the stimulus could overshoot the output gap:

The output gap could differ from CBO’s projections. Many forecasts and experts suggest the economy will grow faster this year than CBO estimates. A one percentage point increase in Gross Domestic Product (GDP) growth would reduce the output gap to less than $200 billion, in which case the American Rescue Plan would be large enough to close eight to ten times the output gap based on the Edelberg and Sheiner numbers. On the other hand, many have argued that CBO is underestimating full employment and potential GDP. If potential GDP were 1 percent larger than CBO’s estimate, the output gap would total $1.3 trillion through 2023 and the America Rescue Plan would close 115 to 145 percent of the output gap.

The “Edelberg and Sheiner numbers” refer to a 28 January 2021 analysis of the Biden administration’s proposed stimulus produced by the nonpartisan Brookings Institute’s Wendy Edelberg and Louise Sheiner. Just a few weeks later, Sheiner would join with Brookings’ Tyler Powell and David Wessel to report on the controversy related to potential GDP that had erupted among those who were giving input to the Biden Administration’s first major economic policy initiative:

As President Biden and Congress negotiate the next fiscal stimulus package to aid the COVID-19 economic recovery, they will implicitly be making assumptions about the output gap. Analysis by one of us (Louise Sheiner) and our Brookings colleague Wendy Edelberg suggests that Biden’s $1.9 trillion package would result in GDP reaching its pre-pandemic path by the end of 2021 and exceeding it in 2022. In other words, some of the economic activity lost during the pandemic would be made up after the virus subsides.

Based on the CBO’s recent estimate of potential GDP, though, this would leave a large positive output gap—peaking at 2.6 percent in the first quarter of 2022. Some critics — including former Treasury Secretary Lawrence Summers — argue that pushing output this far above potential could drive up inflation.

Others, including Nobel Laureate Paul Krugman, warn against putting too much emphasis on a projected output gap in determining the riskiness of a large fiscal stimulus. They note the significant uncertainty that surrounds any estimate of potential GDP. Indeed, by CBO’s estimates, the U.S. economy was operating above potential in 2019, yet inflation remained subdued and below the Fed’s 2 percent target. Moreover, there is little historical precedent to predict how the pandemic will affect potential output or consumer and business demand once the virus recedes.

With hindsight being 20/20, we know that Larry Summers’ view was correct. President Biden’s COVID stimulus overshot the output gap and created significant inflation, which quickly became evident after its enactment. Mainstream economists using different methodologies indicate the American Recovery Plan Act played a “sizable role” in causing inflation, adding anywhere from 2.6% to 3.5% on top of the inflation rate that would have been recorded without President Biden’s $1.9 trillion stimulus.

That inflation was allowed to fester for a full year because of a commitment the Federal Reserve made to hold rates near zero percent for as long as possible. It took Americans seeing prices inflate faster than their incomes to finally force the Fed to address the inflation they allowed to gain traction with a series of interest rate hikes beginning in March 2022. Flashing forward one year later, the actions to fix the inflation unleashed by the stimulus measure has had negative impacts on large sectors of the U.S. economy, such as the housing market, and directly contributed to the bank failures that became front page news during the last few weeks.

The Biden administration cannot say they were not warned. Here’s the prescient commentary from Larry Summers’ 4 February 2021 op-ed in the Washington Post:

… while there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability. This will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem. But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply. Stimulus measures of the magnitude contemplated are steps into the unknown.

In another op-ed just two months later, Summers provided the epitaph for the inflationary failure of the Biden administration’s first major economic initiative with just a simple, understated clause:

Excessive stimulus driven by political considerations was a consequential policy error…

The Biden administration and its extremist political supporters chose to purposefully overshoot the output gap and pretend it would not create the adverse economic conditions that are undermining whatever positive results they hoped to achieve with their $1.9 trillion stimulus. Today, they’re expending much effort trying to avoid accountability for their roles in causing the catastrophic consequences of what is becoming the biggest policy error in generations.

Then again, if they weren’t honest about it from the beginning, why would they start being honest and take responsibility for their failings now?

References

Martin Wolf. Interview with Larry Summers: ‘I’m concerned that what is being done is substantially excessive’. Financial Times. [Online Article]. 11 April 2021. Here’s a video of the full interview:

François de Soyres, Ana Maria Santacreu, and Henry Young. Demand-Supply Imbalance during the COVID-19 Pandemic: The Role of Fiscal Policy. Federal Reserve Bank of St. Louis Review. First Quarter 2023, 105(1), pp. 21-50. [PDF Document]. DOI: 10.20955/r.105.21-50. 20 January 2023.

Francesco Bianchi and Leonardo Melosi. Inflation as a Fiscal Limit. Federal Reserve Bank of Chicago Working Paper No. 2022-37. [Online Article]. DOI: 10.2139/ssrn.4205158. 21 September 2022.

Doreen Fagan. Understanding Potential GDP and the Output Gap. Federal Reserve Bank of St. Louis Open Vault Blog. [Online Article]. 4 August 2021.

Committee for a Responsible Federal Budget. How Much Would the American Rescue Plan Act Overshoot the Output Gap. [Online Article]. 3 February 2021.

Wendy Edelberg and Louise Sheiner. The macroeconomic implications of Biden’s $1.9 trillion fiscal package. Brookings Institute Up Front. [Online Article]. 28 January 2021.

Tyler Powell, Louise Sheiner, and David Wessel. What is potential GDP, and why is it so controversial right now? Brookings Institute Up Front. [Online Article]. 22 February 2021.

Shares of payment company Square are edging back toward territory it traded in prior to Hindenburg Research’s March 23 report on the company. Today, shares are higher by about 3% after the company issued a more detailed response to the report. 

The company said in a response publicized on Thursday that its “compliance and risk teams placed just 2.4% of Cash App accounts on a watch list last year”, according to Bloomberg on Thursday. 

As part of the response, the company also admitted that it had 39 million unique users by social security number, differing from the 51 million user number they have highlighted. 

So $SQ just admitted that actual confirmed (unique SS #) Cash App users was 39M at 12/31, vs the 51M they keep highlighting? That seems like a material difference. pic.twitter.com/BZDhCH1wg2

— Diogenes (@WallStCynic) March 30, 2023

The company also said “that transacting actives have conducted at least one financial transaction through the app during the specified period, unlike other companies that count any account that opens their mobile app or loads a webpage as an active account,” Seeking Alpha reported. 

Addressing allegations of fraud, Block wrote:

“While it’s challenging to arrive at definitive estimates of the amount of fraud and illicit activity, we measure the number of accounts that we “denylist” (a control that prevents, among other things, sending and receiving funds, using a Cash App Card, buying stocks or bitcoin, or taking a loan).”

 “We have additional controls to help prevent known bad actors from returning to the platform,” it added. 

Recall on March 23, Hindenburg Research published a report called “Block: How Inflated User Metrics and “Frictionless” Fraud Facilitation Enabled Insiders To Cash Out Over $1 Billion”. 

“Most analysts are excited about the post-pandemic surge of Block’s Cash App platform, with expectations that its 51 million monthly transacting active users and low customer acquisition costs will drive high margin growth and serve as a future platform to offer new products,” the short seller wrote.

The report alleged: “Our research indicates, however, that Block has wildly overstated its genuine user counts and has understated its customer acquisition costs. Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.”

“Even when users were caught engaging in fraud or other prohibited activity, Block blacklisted the account without banning the user,” Hindenburg writes. “Block obfuscates how many individuals are on the Cash App platform by reporting misleading “transacting active” metrics filled with fake and duplicate accounts. Block can and should clarify to investors an estimate on how many unique people actually use Cash App.”