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Dozens of White House staffers have been suspended, relocated, or asked to resign over past marijuana use, despite initial indications from transition officials that recreational use of cannabis would not be a disqualifying factor, according to the Daily Beast, citing three anonymous sources.

The policy has even affected staffers whose marijuana use was exclusive to one of the 14 states—and the District of Columbia—where cannabis is legal. Sources familiar with the matter also said a number of young staffers were either put on probation or canned because they revealed past marijuana use in an official document they filled out as part of the lengthy background check for a position in the Biden White House. –Daily Beast

Staffers were initially told by transition higher-ups that the administration would likely overlook past marijuana use, only to later be asked for their resignation.

“There were one-on-one calls with individual affected staffers—rather, ex-staffers,” one former White House staffer told the Beast. “I was asked to resign.”

“Nothing was ever explained” on the calls led by White House Director of Management and Administration, Anne Filipic. “The policies were never explained, the threshold for what was excusable and what was inexcusable was never explained.”

The news comes after a February report from NBC News that the White House would waive the requirement that all potential appointees in the Executive Office obtain “top secret” clearance.

The rules about past marijuana use and eligibility for the clearance vary, depending on the agency: For the FBI, an applicant can’t have used marijuana in the past three years; at the NSA, it’s only one. The White House, however, largely calls its own shots, and officials at the time told NBC News that as long as past use was “limited” and the candidate wasn’t pursuing a position that required a security clearance, past use may be excused. –Daily Beast

this is so fuckin funny pic.twitter.com/d0MAT4s8yc

— Trey Smith (@SlimiHendrix) March 19, 2021

Kamala Harris marching the young staffers who smoked weed out of the White House straight to Gitmo pic.twitter.com/H8lTQjPb3x

— Caleb Hull (@CalebJHull) March 19, 2021

What about Kamala?

In February, 2019, Kamala was trying to look cool on The Breakfast Club – where she was asked by host Charlamagne Tha God whether she ever smoked pot, to which the now-Vice President replied: “I have. And I inhaled – I did inhale. It was a long time ago. But, yes.”

Kamala did inhale.
Others went to jail. pic.twitter.com/D7GwQBandp

— Tom John – 🌎NoH8 (@tomjohn266) November 3, 2020

When reached for comment, a White House spokesperson disputed the number of affected staff, but said that the Biden administration is “committed to bringing the best people into government—especially the young people whose commitment to public service can deepen in these positions.”

“The White House’s policy will maintain the absolute highest standards for service in government that the president expects from his administration, while acknowledging the reality that state and local marijuana laws have changed significantly across the country in recent years,” the spokesperson added. “This decision was made following intensive consultation with career security officials and will effectively protect our national security while modernizing policies to ensure that talented and otherwise well-qualified applicants with limited marijuana use will not be barred from serving the American people.”

The president, meanwhile, is the final authority on who can receive a security clearance – meaning he has the power to keep promises made to his own staff whose dream jobs were just derailed.

One thing I find genuinely admirable about Joe Biden is that with his son Hunter he understands that a punitive approach to drug use is harmful and counterproductive. But it’s hard to square that with his hardline war on drugs position for everyone else. https://t.co/vDRFRbf0VM

— Jeet Heer (@HeerJeet) March 19, 2021

By Michael Every of Rabobank

The Odd Decouple

Yesterday saw Fed-dy bears return to the site of the picnic massacre with Sriracha sauce and take out those cocky sandwiches. Despite Fed Chair Powell making clear that US rates are going nowhere for years and years, 10-year US yields went up past 1.75% before consolidating to just below 1.71%: a month ago we were at 1.30%. Once again, this helped push equities lower, and tech stocks in particular. Moreover, it happened despite a spike in US jobless claims to 770,000 (though admittedly the Philly Fed ran very hot), an Ohio auto factory saying it would ship all its jobs to Mexico, and oil prices gapping sharply lower. Whatever happens today, if the Fed thought just jawboning would be enough, *it’s* a sandwich short of a picnic.

Above and beyond the march higher in US longer yields, it’s crucial to underline the central-bank decoupling going on: the ECB just increased its bond buying; the RBA are refusing to hike for years; the Fed are sitting on their hands for years too; the BOE are as well; and the BOJ are today expected to formally make the policy shift of only buying equities when they go down, not whether they go up or down – this is tightening? The closest we see to real hawkishness in the developed world is Norway’s central bank, which has brought forward expectations for what will probably be the West’s first rate hike: it now expects to start in the “latter half” of this year.

Meanwhile the RBNZ has to find a way to permanently keep house prices under control while not raising rates, with Kiwi Q4 GDP -1.0% q/q and -0.9% y/y despite beating Covid. As argued here before, this underlines the issue with the Western monetary-policy/socio-economic structure. A colleague repeated to me the anecdote that ‘using interest rates to control the housing market is like using a shotgun on a mosquito’; I countered that NOT using rates –or anything at all– to control the housing market is like giving the mosquitoes shotguns.

By contrast with the West, emerging market central banks are hiking/tightening. China is, if not via rates; Brazil just hiked 75bp; Turkey a massive 200bp; and the Central Bank of Russia meets today. This policy decoupling isn’t related to the impact of the virus: China and the EU aside, western economies are doing better on vaccines and recoveries – look at the “no yachts left behind” gold rush in Australia (though retail sales were -1.1% vs. 0.6% expected in February). So are emerging markets doing this for fun?!

The optimistic (market) view is the West needs ultra-low rates for fiscal-monetary fusion so it can Build Back Better, and that Western central banks are fully in control and there is no inflation risk; and the pessimistic view is the West needs ultra-low rates to Build Back Bubbles —which the West is allowed to live by, but emerging markets (mostly!) are not— and Western central banks are *not* in control and there is a global inflation risk. Emerging markets can see this game.

On a related note, it’s no surprise the US-China meeting in Alaska went badly. Rather than the de-escalatory tone floated by Zhongnanhai-whisperers, the US started with a lecture on human rights, Hong Kong, Taiwan, and cyberattacks: Secretary of State Blinken even claimed Chinese actions “threaten the rules-based order,” and that “the alternative…is a world in which might makes right and winner takes all, and that would be a far more violent and unstable world.” Cameras were sent out of the room as things got heated, then brought back in so the Chinese side could be recorded saying: “Is this the way you hoped to conduct this dialogue? I think we thought too well of the United States. The United States isn’t qualified to speak to China from a position of strength.”

Perhaps the market only pays attention when that most political of crosses, USD/CNY moves. Yet consider that if the US seems very happy for USD to move lower, and China is tightening, the White House will not be thrilled to see CNY remaining as stable as it is at the moment: they will want it stronger – not the weaker level of around 6.70 many Chinese firms would like to see as a resting place.

It’s also not just the US in the firing line. The EU’s symbolic sanctions on China introduced this week –the first for three decades from a bloc that clearly does not want to pick a side– produced this official vitriol via Twitter: “If the EU makes erroneous decisions based solely on the lies of ill-intentioned anti-China forces, then it shows clearly that this is nothing but political manipulation. Should the EU insist on taking wrong actions detrimental to Chinese interests, we will react with a firm hand.” Even diplomatic European spines might be stiffened rather than softened by that tone.

In short, there still seems to be the odd decoupling left to be done. More so as Russia’s President Putin responded to US President Biden dubbing him a “killer” with a challenge to an online public debate: it would be great TV, but I am just not sure how to allocate the roles of Walter Matthau and Jack Lemon. At the same time, North Korea is no longer even interested in contact with the US; and Saudi Arabia is on the outs long before Iran is in on any new deal.

It’s a good job markets are too busy to focus on any of this because of a rise in US yields as we all Build Back Bubbles.

“In late February 2020, I attended an overseas meeting of the G-20 nations’ finance ministers and central bank governors. At the time, the U.S. was enjoying its longest economic expansion on record, and though my Fed colleagues and I had been monitoring Covid-19, we did not yet see it as likely to have a major impact at home. But that weekend, it became clear that the virus was spreading quickly—and widely. I left with the conviction that its effect would not be confined to faraway lands, as I had thought, but would reach every part of the globe.”

That’s how Powell begins his just published WSJ op-ed in which he recounts the events from the covid crisis, and specifically the days before the Fed announced the nationalization of the bond market by purchasing IG and HY corporate bonds and ETFs, a move which effectively tipped the US into USSR territory.

But that was the least of Powell’s concerns, who looks back and says that “we had to act forcefully” to “help people get through what was going to be a terribly difficult time” as “the danger to the U.S. economy was grave. The challenge was to limit the severity and duration of the fallout to avoid longer-run damage.”

Powell then emphasizes that the biggest hit from the pandemic was on low-income workers (which doesn’t explain why he then proceeded to make billionaires the richest they have ever been).

The pandemic inflicted a cruel and uneven toll on lives and livelihoods. It reversed the broadening gains of a decade of expansion. With unemployment at a 50-year low, wages had been moving up, especially for the lowest paid workers. Racial disparities in unemployment were narrowing, and many who had struggled for years were finding jobs. But the new job losses were heaviest among relatively low-paid workers, among whom minorities and women are overrepresented. Many smaller businesses faced the possibility of permanent closure.

So after that bleak flashback, Powell then fast forwards to today, saying that “the situation is much improved. A little more than half of the initial job losses have been regained. With the arrival of vaccines, the outlook is brightening. The American people have persevered through this difficult time with determination, resilience and ingenuity. We owe a debt of gratitude to our fellow citizens on the front lines of the response, from health care workers to vaccine researchers, from those who kept grocery stores open to those who taught children at kitchen tables.”

And then, in a preview of what will be Powell’s three media appearances next week, the Fed chair repeats his message from the FOMC presser and his applying his own take on Draghi’s “whatever it takes”, namely that “the recovery is far from complete, so at the Fed we will continue to provide the economy with the support that it needs for as long as it takes. I truly believe that we will emerge from this crisis stronger and better, as we have done so often before.”

The jury is clearly out on Powell’s optimism, which will require not only a market and economy-crushing taper but painful rate hikes before it can be consummated…

Although the mainstream press has seemingly stopped paying attention to the still-expanding sexual harassment controversy (stories are still hitting, but they’ve been relegated to the meat of the NYT metro section), more troubling details about Gov. Cuomo’s conduct have continued to dribble out, thanks to his 7 accusers, and a handful of former Albany reporters who have also shared some stories about Cuomo’s sleazy approach to hitting on women in the workplace.

Well, that might change, since on Friday, #MeToo scribe Ronan Farrow published a lengthy interview in the New Yorker with Lindsey Boylan, a former Cuomo staffer running for Manhattan Borough President. Boylan published her first sexual harassment allegations on Twitter late last year. But it wasn’t until she expanded on those claims in a medium post – around the same time that Cuomo admitted to lying about COVID nursing home death numbers – that other women started coming forward.

Weeks later, with the third-term governor still refusing to resign, Boylan is back with a high-profile exclusive interview with one of the most visible working journalists in America (Farrow’s reporting has been credited with helping to launch the #MeToo movement).

Boylan’s interview arrives a few days after the NYT reported on a letter purportedly penned (at least in part) by Cuomo, in which he sought to aggressively discredit the former staffer-turned-pollitician. The New Yorker added on Friday that Cuomo and his team also conspired to leak Boylan’s personnel file, which included details about alleged bullying by the former staffer (details appeared in stories published by the AP and others). But Farrow also spoke with other former Cuomo staffers who affirmed that Boylan could often be hostile and bullying, suggesting that she gave as good as she got.

Perhaps the most alarming segment of her latest interview was a story Boylan shared where Cuomo made a crude joke about his desire to sleep with her. After a German shepard excitedly mobbed Boylan, the governor reportedly remarked that he would “mount” her if he were a dog.

She said that, in October, 2017, as she sat with the Governor on a private plane, he told her, “Let’s play strip poker.” (In a statement released by the Governor’s office, four former staffers listed as being on such flights that month said that they had not witnessed the exchange.) In 2018, in an incident she has not previously disclosed, Boylan attended a meeting on the ground floor of the Governor’s mansion. At a press conference that February, Cuomo had proudly showed off his new puppy, a Siberian-Shepherd-Malamute mix named Captain. After the meeting, Boylan said that she made her way toward the entrance with the Governor, and Captain approached her. When the dog jumped up and down near her, Boylan said, she reached out to calm him, and then backed away. Cuomo, she said, joked that if he were a dog, he would try to “mount” her as well. Boylan said that she did not reply. “I remember being grossed out but also, like, what a dumb third-grade thing to say.” She added, “I just shrugged it off.” A spokesperson for Cuomo declined to comment specifically on the claim, but reiterated Cuomo’s denial that he behaved inappropriately with Boylan.

Another notable tidbit from the NYer story: Boylan alleged she once listened on as Cuomo verbally abused Susanne Craig, then the NYT’s Albany bureau chief, who would later go on to achieve mainstream fame as one of the NYT journalists who reported on leaks related to Trump’s tax returns.

Another factor informed Boylan’s decision to first disclose her allegations online, on her own terms. She had been fearful about reporters’ willingness to stand up to Cuomo’s tactics. Cuomo and his aides were legendary for their bullying of the press. According to a source familiar with the episode, in a February, 2014, off-the-record dinner with the Times, Cuomo, after several drinks, began shouting at Susanne Craig, the newspaper’s Albany bureau chief, finally telling her, “I’m going to ruin you. As long as I live, I will never speak to you again.” Cuomo then stormed out of the restaurant. (A Cuomo spokesperson acknowledged a “tense disagreement” with Craig over an article. He added, “It’s no secret that the office has had a number of difficult conversations with reporters over the years––we respect tough reporters and hope they respect us.”) Several months later, Craig was part of a team of Times reporters who published an investigation into Cuomo’s disbanding of an anti-corruption commission.

Boylan’s political instincts are clearly pretty-well developed at this stage. She’s proving adept at keeping the narrative alive. But as for whether this media savvy will translate to a win in NYC’s June Democratic primary, well, we’ll just have to wait and see.

Having leaked in advance everything that it plans to announce, overnight the BOJ held its Monetary Policy Meeting (MPM), and, as was widely expected, it maintained its monetary policy framework intact including yield curve control while slightly loosening its grip on long-term bond yields and laid the groundwork to taper its huge purchases of risky assets, as part of steps to make its ultra-easy policy sustainable enough to weather a prolonged battle to fire up inflation; the changes included a wider-than-previously-thought movement range for bond yields and the scrapping of a buying target for stock funds.

Here are the key highlights:

• The bank “clarified” (following some now typical confusion) that its tolerable band for fluctuations of 10-year JGB yields is around ±25 bp from the target level, widening from ±20 bp previously. At the same time, it introduced “fixed-rate purchase operations for consecutive days” to maintain the upper limit of its tolerable band.

• To give itself more room to wind down its massive stimulus, the central bank also removed an explicit guidance to buy ETF and J-REITs at an annual pace of roughly ¥6 tn and ¥90 tn, respectively. Instead, the BOJ now plans to continue purchasing ETFs and J-REITs with upper limits of ¥12 tn and ¥180 bn on an annual basis, respectively. These upper limits were originally set as a temporary COVID-19 countermeasure. The BOJ also said it will focus on buying ETFs tracking the Topix rather than the Nikkei 225 (which led to selling of Nikkei 225 stocks and a rebound in the Topix).

• The BOJ announced the introduction of a new scheme named “Interest Scheme to Promote Lending,” under which (positive) interest rates, linked to the short-term policy rate, will be applied to financial institutions’ current account balances. This scheme will be enacted when the BOJ decides to cut short-and long-term interest rates in the future, with a view to mitigating the potential adverse effect on the functioning of financial intermediation.

“We won’t tolerate yield fluctuations that would have an impact on our monetary easing,” Kuroda told a briefing. We absolutely need to make sure the effect of our monetary easing isn’t hurt. We clarified that stance with our new guidance.”

The biggest take home from Kuroda and Co is that the BOJ said the band around its 10-year bond yield target was around 0.25% either side of zero – which until now the range had been assumed to be around 0.2%, effectively a modest loosening of Japan’s YCC which helped send Japanese bank stocks higher. 

BOJ officials have been dropping hints that they will allow yields to fluctuate more around the 0% target to breathe life back into a market made dormant by the bank’s dominance. But the central bank faced a communication challenge of having to convince markets that any move would not lead to a withdrawal of stimulus. Kuroda stressed the near-term priority was to keep borrowing costs stably low to support an economy hit by the pandemic.

To avoid sending a message that the BOJ was tightening conditions, Kuroda said the band hadn’t been widened, only clarified. Adopting a wider tolerable band for 10-year yields was initially considered the most likely adjustment, but Kuroda clearly refuted the possibility in the Diet session on March 5. Goldman attributes the about-face to financial markets settling down since then, as well as the government’s decision to lift the state of emergency as of March 21.

Indeed, the BOJ said it will not apply the rule rigidly when yields move below the band temporarily, but step in forcefully with unlimited bond purchases to prevent sharp rise in yields. The conflicting goals made the BOJ’s tweaks so modest it will barely revitalize markets, some analysts say.

“It’s a very minor change. The difference between 0.25% and 0.2% is quite small,” said Masaaki Kanno, chief economist at Sony Financial Holdings in Tokyo. “There’s a long way to go before we even get close to 2% inflation,” he added.

As previewed earlier this week, the BOJ also ditched its 6 trillion yen ($55 billion) guide for annual purchases of exchange-traded funds, while sticking with an upper limit of 12 trillion yen so it can still step into the market if needed. By maintaining the larger annual guidelines as upper limits, the BOJ aims to sound dovish, but it is quite unlikely to actually purchase those amounts, judging from its purchase pace in recent months. In this manner, the BOJ wants to enhance flexibility in the ETF/J-REIT purchase program.

The central bank also unveiled bank lending incentives and a plan to revise its three-tier reserve system if it lowered its target rates. That is to counter the perception it cannot lower its negative rate further. This move in itself was widely anticipated in the market. That said, measures to counter potential side effects took the form of additional interest rates on the lending scheme, rather than the adjustment to the three-tiered system for the current account balance itself that had been reported by many media outlets beforehand.

Economists, leery of calling out naked BOJ emeperor, described the moves as “a balancing act that allows the BOJ greater scope to buy fewer assets but also shore up the effectiveness and sustainability of its measures.” Currency and bond markets largely took the moves in stride with the decision to focus only on ETFs on the Topix index briefly driving down shares on the Nikkei 225.

The best summary of the BOJ’s schizophrenic approach to micromanage the market came from Bloomberg’s Garfield Reyonds who wrote the following:

BOJ Governor Kuroda states Friday’s decision to set the 10-year yield range at -25bps to +25bps was a move to clarify the target, not to raise it. What is instead becoming clear is that the BOJ’s massive and persistent asset purchases are ineluctably drawing the central bank to expand its role in assets and the economy.

The BOJ’s increased focus on 20-year notes, and concern they not get too low, implies that YCC is advancing up the curve, and potentially becoming more vague.

The central bank’s stock-market ambitions have also become both more focused (dropping NKY for the Topix), and less focused (eliminating the 6t yen lower target). And Kuroda announced a plethora of measures to try and better engineer the right sort of mix of behaviors from banks. To sum up, the BOJ:

• Raised where it will in practice allow 10-year yields to go, but claimed that in theory it did nothing
• Appears to be favoring value stocks over growth
• Is certain it can somehow safeguard banks against the impact of negative rates, despite so far struggling to do so

Couldn’t have said it better ourselves.

Via SchiffGold.com,

COMEX is the primary futures and options market for trading metals such as gold and silver. There have been some interesting trends for silver in the COMEX in recent months. More investors are taking delivery of silver. In other words, the short squeeze may still be on track – albeit in slow motion – and this could impact the silver price moving forward.

You will recall that last month, the Reddit investors turned the spotlight onto silver. The hope was to create a short squeeze in the market by buying up physical silver. The price popped temporarily, but it appeared at the time the silver market was just too big for the Reddit Raiders to squeeze. The price dropped back and the spotlight dimmed. But looking at some trends in the COMEX indicates the squeeze might still be on.

A futures contract is a promise to deliver a certain amount of gold or silver at a certain price at a certain time. Speculators play this market, hoping to profit from a price swing. Say you buy a $26 per ounce silver contract and the price of silver rises to $28. The investor can sell the contract and make a few dollars per ounce. Generally, the trades are made on paper. They are made on the promise of that metal and on the knowledge that it exists, but traders rarely take delivery of the metal itself. About 1% of COMEX trades go to delivery.

The following analysis was submitted to SchiffGold and is published for your consideration. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

The COMEX has shown a major divergence in the silver market in recent months. For context, consider this graph. (Open interest is the total number of outstanding options or futures that have not been settled for an asset.)

The big gold and silver delivery months on the COMEX alternate. For gold, it’s February, April, June, August, October, and December. For silver, it’s March, May, July, September, and December. Historically, open interest starts out very high in these months and then drops significantly in the days leading up to the notice period (notice for delivery where you can no longer roll contracts). Below shows the last 4 March months. As can be seen, contracts start high and drop as contracts are rolled forward.

Over the last year, more and more people have been standing for delivery, meaning slightly fewer contracts get rolled forward. The current March contract has doubled any recent March. See chart below.

This delivery trend has been in place for about a year. The charts below show the outsize deliveries in Gold and Silver in 2020 and how 2021 is well on its way to beating 2018 and 2019.

This next chart shows the silver monthly deliveries over the last two years. The previous 12 months show a clear jump in the number of deliveries, especially the big months.

One thing that may have gone unnoticed is the delivery rate in the off-months. The last off-month in February had a major divergence from anything in past years. More contracts are being bought to specifically stand for delivery. In most off-months, less than 1,000 contracts stand for delivery. That started changing in February when the Reddit event occurred.  The chart below shows how the open interest moved higher leading up to first notice (it drops after first notice as contracts are set for delivery).

As can be seen in the chart, instead of a low number of contracts slowly moving toward zero, in February the opposite happened, it spiked into the final days.

To highlight the first chart again, it is clear this trend is continuing for April. Open Interest is moving up as the contract nears first notice.

It is probable that all of these will stand for delivery and there are still about seven trading days left for more contracts to be added. Again, this is not a large number of contracts relative to the big months but the change in trend is impossible to ignore. Investors are demanding more physical silver and the futures market directly reflects this. At the time of the month when open interest should be falling, it is rising instead!

As the Sprott blog commented last month, this is not going to change anything quickly. The Comex still has the supply to handle the large volumes of delivery. But at the current rate they only have roughly a year supply on hand:

Can they get more? Absolutely! But at what price? Bottom line, if this continues, it is hard to imagine the price won’t reflect the demand.

The global supply chain remains “stretched thin,” with Ford Motor Company announcing Thursday evening that it will continue to build its top-selling F-150 trucks and Edge SUVs without certain parts, according to CNBC, quoting a Ford spokeswoman. 

The spokeswoman said the automaker would continue building the F-150 and Edge models for “several weeks” without specific semiconductor components. When those chips are made available, the vehicles, expected to be “in the thousands,” will have workers install the chips. 

Production woes don’t stop there. Ford canceled three production shifts through Friday at a Kentucky plant that produces Ford Escape and Lincoln Corsair crossovers. Next week, Ford expects to limit production of the Ford Fiesta car made in Germany. 

By now, the world knows the massive chip shortage is worsening and could jeopardize the economic recovery. 

Ford expects the chip shortage could lower its earnings by at least $1 billion $2.5 billion this year. 

In response to the shortage that has severely hit some global automakers to the point of limiting production and furlough workers until supply bottlenecks are resolved, President Biden recently signed an executive order which seeks to address the global semiconductor chip shortage after a session with a bipartisan group of lawmakers to discuss the growing crisis. “Make no mistake, we’re not simply planning to order up reports. We are planning to take actions to close gaps as we identify them,” a White House official said.

To gauge just how serious the supply chain disruption is, one needs only to read what the respondents to the most recent mfg ISM said to get a sense of how bad it truly is:

• “Things are now out of control. Everything is a mess, and we are seeing wide-scale shortages.” (Electrical Equipment, Appliances & Components)

While the massive semiconductor shortage affects automakers worldwide, other companies in different industries are starting to feel the pressure. Samsung is the latest to confirm that the current chip shortage is “very serious” and “poses a slight problem” for the electronics company heading into the second quarter. 

Goldman Sachs’ Jan Hatzius provided an outline to clients this week of recent media reports documenting the disruptions.

Hatzius believes supply-chain and logistical challenges will persist through 2021 and only be alleviated next year. 

In the meantime, the chip shortage is getting more serious, affecting the production output of certain companies. 

As was perhaps hinted at, and discussed in detail here, The Fed has decided – likely under political pressure – to let the temporary supplementary leverage ratio changes to expire as scheduled.

The federal bank regulatory agencies today announced that the temporary change to the supplementary leverage ratio, or SLR, for depository institutions issued on May 15, 2020, will expire as scheduled on March 31, 2021.

The temporary change was made to provide flexibility for depository institutions to provide credit to households and businesses in light of the COVID-19 event.

Stocks tumbled…

And bond yields spiked…

In case you’ve been living under a rock, here’s why you should care about the SLR decision.

First, for those who missed our primer on the issue, some background from JPM.

The massive expansion of the Fed’s balance that has occurred implied an equally massive growth in bank reserves held at Federal Reserve banks. The expiration of the regulatory relief would add ~$2.1tn of leverage exposure across the 8 GSIBs. As well, TGA reduction and continued QE could add another ~$2.35tn of deposits to the system during 2021.

While the expiry of the carve-out on March 31 would not have an immediate impact on GSIBs, the continued increase in leverage assets throughout the course of the year would increase long-term debt (LTD) and preferred requirements. Here, JPM bifurcates from Goldman’s assessment: JPMorgan writes that “even the “worst” case issuance scenario as very manageable, with LTD needs of $35bn for TLAC requirements and preferred needs of $15-$20bn to maintain the industry-wide SLR at 5.6%. The constraint is greater at the bank entity, where the capacity to grow leverage exposure to be ~$765bn at 6.2% SLR.” Goldman’s take was more troubling: the bank estimated that under the continued QE regime, there would be a shortfall of some $2 trillion in reserve capacity, mainly in the form of deposits which the banks would be unable to accept as part of ongoing QE (much more in Goldman’s full take of the SLR quandary).

In any case, the regulatory relief granted to large US banks with regards to calculation of Leverage Exposure is scheduled to expire on March 31, and as JPM correctly notes, “the potential impacts on bank balance sheets as well as rates remain front of mind for investors.” Ultimately, JPM reaches the same conclusion as Goldman: the reinclusion of deposits at Federal Reserve banks and Treasuries would increase Leverage Exposure for the 8 GSIBs by ~$2.1tn as of 4Q’20, and keep in mind that balance sheets and deposits held at Federal Reserve banks are expected to grow further in 2021 reflecting TGA reduction and continued QE, to the tune of another $2+ trillion .

Having explained that, what happens next? While many have feared significant instability from forced deleveraging, repo guru, Zoltan Pozsar (formerly of the NY Fed and currently at Credit Suisse) most recently talked down the effects, suggesting that The Fed has been “foaming the runway” for the end of SLR exemption.

However, ending the exemption of reserves and Treasuries from the calculation of the SLR may mean that U.S. banks will turn away deposits and reserves on the margin (not Treasuries) to leave more room for market-making activities, and these flows will swell further money funds’ inflows coming from TGA drawdowns.

This – as we have explained repeatedly – is a problem.