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As we detailed here first, during the months of April and May, as the Yuan-denominated oil futures were launched, trade war threats escalated, and sanctions were unleashed, Russia liquidated almost 90% of its US Treasury holdings.

The question most had was simple – why?

Speculation ran the gamut from this action being a dress-rehearsal – carefully coordinated with Beijing to field test what would happen if/when China also starts to liquidate its own Treasury holdings; to forced sales to cover liquidity needs on sanctioned Russian entities.

But now we have an “insider’s” view on why Putin was puking his T-Bonds.

Andrei Kostin, chairman of Russia’s second-largest bank VTB, told RIA Novosti that there are three reasons behind Russia’s decision to dump its bonds…

“Look, the latest sanctions, which have already been touched upon by our leading enterprises such as Rusal, Renova, undoubtedly shows us that we need to be more cautious. I think that the Central Bank reacts to this too, because the Central Bank the bank is often criticized for keeping money abroad, I think that it’s partly correct, everyone does it, but, of course, it’s necessary to somehow minimize risks, reduce these risks

… because today the US represents the largest threat… from the point of view of imposing sanctions of any kind is greater than all others.”

“I think that this, too, probably the Central Bank and the Ministry of Finance take into account in its policy,”

The head of VTB also recalled that the bank had prepared proposals aimed at de-dollarization and de-orphanization of the Russian economy.

“I recently met with the president, I told him the proposals of our bank to reduce the dollar in the calculations, in general, in the economy of our country.”

This is a measure that, in my opinion, has two sides: on the one hand, it is good for developing its own market: if we will create our derivatives and we will hedge the risks on the whole instrument within the Russian market, it will be very good, as well as calculations.

“On the other hand, life makes us,” Kostin said.

Additionally, Elvira Nabiullina, head of the Bank of Russia, said in June, responding to a question from Duma deputies about the sale of almost half of the US debt by the regulator in April, explained that the Central Bank is pursuing a policy of diversifying international reserves and taking into account all risks, including financial, economic and geopolitical decisions.

So to sum it all up, Russia liquidated its US Treasury holdings:

• The rise of the mulipolar world – to send a geopolitical message to the world over US sanctions bullying;

• Dedollarisation – to enable the redistribution of reserves in favor of gold; and

• Preparation for a global reset – due to “the feeling of impending trouble in the world economy.”

Do those sound like the kind of events that you should be acting on too? Is it any wonder that Putin is public enemy no.1 given the possibility that these risks may translate into actions by the worlds’ investors?

Remember, it was  just last week that Putin officially warned his “American partners” that:

“…the restrictions they impose involving the dollar… are a major strategic mistake because they’re undermining confidence in the dollar as a reserve currency.”

“We will continue to use the US dollar unless the United States prevents us from doing so.”

And given the volume of noise coming from Washington’s establishment, that could be sooner than many – aside from the Russians themselves – may be thinking.

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President Trump said on Monday that he is willing to meet with Iranian President Hassan Rouhani with “no preconditions,” exactly one week after he blasted out a fiery all-caps threat to the regime over Twitter. 

“I would certainly meet with Iran if they wanted to meet. I don’t know if they’re ready yet,” Trump said, responding to a reporter’s question during a White House press conference alongside Italy’s new Prime Minister Guiseppe Conte. 

.@POTUS on Iran: “I’m ready to meet anytime that they want to and I don’t do that from strength or from weakness. I think it’s an appropriate thing to do… No preconditions. If they want to meet, I’ll meet.” pic.twitter.com/KhRc38jrt3

— FOX Business (@FoxBusiness) July 30, 2018

Watch for the MSM to follow the North Korea playbook on this one – blasting Trump for failing to follow “protocol” as he carves a new path through international relations. 

Following a warning from Rouhani earlier in the month that hostile US policies could trigger the “mother of all wars,” after which Trump blasted back via Twitter: 

To Iranian President Rouhani: NEVER, EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE. WE ARE NO LONGER A COUNTRY THAT WILL STAND FOR YOUR DEMENTED WORDS OF VIOLENCE & DEATH. BE CAUTIOUS!

— Donald J. Trump (@realDonaldTrump) July 23, 2018

Trump’s decision to meet with Rouhani would be the first major step towards mending relations after he pulled out of the Obama-era Iran nuclear agreement in which Tehran committed to curtailing its nuclear program in exchange for reduced sanctions. 

Just yesterday we noted that Iran’s currency is in freefall – pegging 102,000 Rials to the US Dollar on the black market, according to currency website Bonbast, and confirmed to AFP by a currency trader. 

Trump suggested a meeting with Rouhani would be the “appropriate thing to do,” and that it would come neither from a position of strength nor weakness, reports Fox News. 

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An American-born Kansas family had their bank account frozen after Bank of America demanded to know their citizenship status, reports the Kansas City Star. 

Josh Collins of Roeland Park, Kansas ignored a letter from the bank asking a variety of personal questions, including whether he was an American citizen or holds dual citizenship with another country. 

Josh was born in Wichita, Kansas, while his wife Jessica Salazar Collins was born and raised in Kansas City, Missouri and is a second generation American citizen whose great-grandfather immigrated from Mexico.

Jessica said she tossed the letter out because she and Josh “thought it was a scam,” since Josh had been banking with BofA for the past 20 years. On July 24, however, Bank of America froze the Collins’ account – preventing them from accessing cash.

When Josh called the bank, they confirmed that his account had been frozen:

“The first question is, ‘Oh, we sent you something in the mail a few weeks ago,’” he recalled to KCTV5. “I said, ‘Yeah, I remember getting something that didn’t look real.’ And they’re like, ‘Oh yeah, we need to know if you’re a citizen.’ You know, I was born and raised in Kansas like Superman. I said, ‘How much more American can you get?’”

The family says they’re lucky they put off a family vacation to Minnesota, as they would have been left high and dry: 

“We would’ve found ourselves up there without money,” said Jessica, who says they’ll be changing banks. “No money for gas. No money to feed our kids. For a hotel. No money!”

BofA said that it’s standard practice to ask about citizenship status when opening a new account or updating customer information.

“Like all financial institutions, we’re required by law to maintain complete and accurate records for all of our customers and may periodically request information, such as country of citizenship and proof of U.S. residency. This type of outreach is nothing new,” Bank of America said in a statement Friday. “This information must be up to date and therefore we periodically reach out to customers, which is what we did in this case.” –Kansas City Star

Except citizenship questions are not federally required according to the California Banker’s Association – the largest state affiliate of the national group. “Not to our knowledge,” said spokeswoman Beth Mills, who added that federal law requires banks must collect and verify just four things about account holders; name, date of birth, address and Social Security number. 

Other federally chartered banks, including Wells Fargo, ask citizenship questions when some new deposit accounts are opened. The U.S. Department of the Treasury increasingly is urging financial institutions to collect as much information on customers as possible, including citizenship status, and to update often in part to ward against the laundering of money that may flow through foreign countries. –Kansas City Star

Bank of America spokeswoman Diane Wagner blamed the Collins family for failing to return the questionnaire. 

“If we don’t hear from a customer in response to our outreach,” she said, “as a last resort, we may restrict the account until we can confirm it is in compliance with regulatory requirements.” Collins wasn’t chosen for any specific reason, according to Wagner. 

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Authored by George Pickering via The Mises Institute,

Under cover of the tumult of Westminster politics in recent weeks, the far-left leadership of Britain’s Labour Party recently released anew plan to alter the fundamental role of the Bank of England in the British economy.

The plan — co-authored by Graham Turner, who is regarded as a likely pick for Governor of the Bank of England if Labour wins the next election — would have Britain’s central bank adopt a new set of objectives, similar to the ‘dual mandate’ pursued by the US Federal Reserve. If the plan were to be put into effect, not only would the Bank pursue a 2% inflation goal, as it already does, but it would also adopt the new goal of promoting ‘maximum employment’, as well as new productivity targets.

More worryingly though, the new plan would aim at “integrating” the Bank of England’s monetary and macroprudential policy with the government’s “industrial strategy.” In practice, this would mean the Bank would be required to use its regulatory powers, as well as its control over credit expansion, to arbitrarily steer cash toward whichever industries and businesses happened to be favoured by the government of the day. This policy — which has been given the deceptively inoffensive name of ‘credit guidance’ — would likely involve the Bank of England adjusting the capital requirements for commercial banks in such a way as to manipulate them into extending more loans to the manufacturing sector and other “critical areas of technology,” and fewer loans to the supposedly unproductive residential and commercial real estate sector.

This desire to diminish the role of real estate in the British economy also led to one of the more bizarre proposals put forward by the plan. Contrary to banks’ widespread use of real estate as collateral for loans in the present, Labour’s new plan would force banks to “show they are raising the share of loans backed by intellectual property instead.” Even leaving aside the questionable validity of the very concept of intellectual property, this article would not be the first to point out that banks might be less willing to extend loans at all if they were forced to secure those loans on shaky estimates of the value of the copyright to a self-published volume of the borrower’s poetry, for example, or perhaps the patent on a contraption the borrower invented in their garage, rather than the more certain value of brick and mortar.

All of this is not to deny that Britain’s economy is currently struggling under the weight of a dangerously overblown housing bubble, and any sincere attempt to deflate that bubble would certainly be welcome. However, if Labour wish to use the Bank of England to prick the housing bubble, they must first understand that the Bank itself played a large part in inflating that bubble to begin with. While it’s true that a patchwork of price-controls, planning restrictions, and other assorted regulations have restricted the supply of British housing, the Bank of England’s low interest rate policy and resultant cheap mortgages have stimulated an artificial surge of demand in the housing sector, pushing prices up to prohibitive heights. Regardless of who’s in control of the Bank after the next election, they should aim to remove this root cause of the problem, rather than merely patching it with new policy.

Although the British press is not typically known for its devotion to free markets, the media reaction to Labour’s new plan for the Bank of England has been quite negative, likely due to the perception that it is a threat to the sanctified tenet of ‘central bank independence’.

London’s Evening Standard, for example, described the plan as government “meddling” in the affairs of the Bank, while another mainstream article decried the “weaponisation” of the Bank by a plan which “reeks of central planning … [and] statism.” It is certainly true that Labour’s new plan puts forward many dangerous ideas which deserve to be criticised. However, the media’s criticisms of the new plan would ring significantly less hollow if those same criticisms were not equally applicable to the very institution of central banking itself, which that same media is so quick to defend.

For example, the news media are correct to point out that permitting the government to use ‘credit guidance’ to arbitrarily pick winners and losers in the economy is indeed “straight out of the central planning handbook.” But the same is also true of the central banking status quo, which likewise distributes arbitrary benefits and penalties without arousing any complaint from the mainstream press. When writing in the 1720s, Richard Cantillon — the forgotten founder of modern economics — pointed out the redistributive effects of money creation: the first receivers of the new money get the benefit of being able to spend it at its previous value before the market has a chance to register the increased supply, whereas the rest of us are stuck with the downside of having the value of our savings inflated away. These same ‘Cantillon effects’ abound in our modern economy because of the way central banks, by their very nature, enable and drive credit expansion and money creation, benefitting the first receivers of the new money (mainly financial institutions and government agencies) at the expense of smaller businesses and individual savers.

The mainstream press are likewise right to attack the interventionist “meddling” of Labour’s plan to make the Bank of England pursue explicit, government-set targets for employment and growth. If only those same outlets had not, for so many years, overlooked the Bank of England’s equally interventionist commitment to “support the economic policy of the Government, including its objectives for growth and employment.”

It is undoubtedly true to say that Labour’s new plan for the Bank of England would harm the British economy — compared with both the laissez-faire ideal and the present situation — and we should be pleasantly surprised that the mainstream press has criticised it so readily, perhaps reflecting the slowly-growing place of free market and ‘Austrian’ ideas in the zeitgeist. In reality however, the real emphasis should be on the fact that Labour’s “central planning” proposal is separated from the ‘respectable’ central banking status quo only by a difference of degree, not of kind.

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While Goldman’s clients are growing increasingly concerned about the narrow breadth in the market and the S&P500 leadership where a handful of stocks are responsible for all the gains, Goldman itself is not too worried, and as we reported over the weekend, the bank responded to concerns about about excessive concentration and “bad breadth” that while “in the past, sharp declines in breadth have signaled below-average 1-, 3-, and 6-month returns for the S&P 500 as well as larger-than-average prospective drawdowns” however, “relative to history, the recent narrowing of market breadth has not been sharp enough to trigger alarm.”

Not everyone agrees.

In a note released this morning by Citigroup, the bank warns that investors are once again becoming complacent even as fundamentals do not “support an enduring move” to the upside. In the latest warning to watch out for growing idiosyncretic risks, Citi’s Mark Schofield said that the risks that led to several rounds of selloffs earlier in the year, have not abated and that the growing risk of tighter monetary policy may be what knocks markets off course, according to the FT.

But what, according to Citi, explains the lack of any selling, and in fact quite the opposite: continued market levitation?

In one word: Herding, or the same market phenomenon dismissed by Goldman, which is far more sanguine about the “herding” by most investors in just a handful of stocks, such as FaceBook.

“It may be that easing trade tensions and China’s policy response are comforting investors, but the move has the hallmarks of herd instincts at work” warns Schofield.

What Citi believes the herd is missing, is that while “the global economy looks to be riding the tailwinds of easy policy and
fiscal stimulus” these drivers are fading.

“Meanwhile storm clouds are gathering and risks look biased to the downside.”

Of course, no risk is greater than the potential collapse of trade, following growing trade tension between the US and China, coupled with fears of a possible economic slowdown in China. But while the market casts a concerned eye into the future, last Friday we showed that global trade has already posted a sharp slowdown and is now negative on a 3M annualized basis, which historically has preceded a drop in global EPS.

In addition to trade worries, the rise in bond yields also sparked a drop in equities prices earlier in 2018, however that move – which we now know was at least partially a function of Russia’s record Treasury liquidation – is now over, with the 10Y Treasury trading in a range between the mid 2.80s and 3.00%.

Meanwhile, even as trade tensions continue to escalate, with the US now widely expected to launch another $200BN in Chinese tariffs in the coming months, the S&P 500 has jumped nearly 10 per cent and is close to its January all-time high, while Europe’s Stoxx 600 index has risen nearly 8 per cent over the same period.

But the “news has not really justified the latest moves” and “fundamentals are vulnerable to longer-term headwinds” amid “rising risk of higher rates in three of the larger central banks, that have hitherto been the anchor as the Fed has started to raise rates”, he said cited by the FT.

Recent news-flow has been heavily skewed towards the intertwined risks of escalating trade wars, potential retaliation in currency markets and the possibility of an economic slowdown in China. These have combined to create a narrative of a global economy riding the last tailwinds of accommodative policy and financial conditions, against a backdrop of threatening storm clouds and market risks that are increasingly skewed to the downside

Which brings up back to the risk of herding behavior, and the Citi strategist writes that while he adheres “to the view that the business cycle is increasingly mature and that the risks are becoming far more skewed to the downside” yet the “timing of an inflexion point in the cycle and indeed the central bank policy responses to a shift in the data, remain unclear.” Until then, investors find confidence in numbers, and conflate positioning with fundamentals:

Absent a catalyst, herding behavior can be very  persistent and can feed on itself.

So what could shake the herd’s confidence and serve as a trigger for a risk-reversal? Schofield writes that it is idiosyncratic events that deliver the necessary impetus for investors to reappraise broader risks, and while “it is not always clear where unexpected come from” he believes that this week’s trio of central bank announcements from the BOJ, Fed and BOE could be just such a catalyst, of which that from Japan would be most troubling.

We expect the Bank of Japan to leave monetary policy unchanged at this week’s meeting; however we expect it to make its JGB purchase operations more flexible in order to accommodate modestly higher long-term interest rates. We do not expect any move higher in JGB yields to be large, but we would point out that the JGB market has a considerable track record in triggering broader reactions in global bond markets.

Putting all of this together, Citi warns that it still sees “plenty of reason not to get too complacent over the recent rally in risk assets.” Of course, the bank is also taking on a “herd” which for the past 10 years has been conditions not only to buy every dip, but – more recently – never to sell. Citi may find that changing a decade of behavior ingrained by the Fed will be very difficult to achieve.

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