Category: zerohedge

As Bill and Melinda Gates divorce shocks corporate America, even capturing the attention of main street given their status as a preeminent global power couple, many observers have been looking for parallels between the Gates split and the “de-coupling” of Jeff and MacKenzie Bezos. Ultimately, MacKenzie agreed to walk with $38 billion, the biggest divorce settlement ever. It’s widely expected that Melinda Gates could walk away with even more.

As the world scrutinizes the Gates situation for similarities and differences with the Bezos split as (however the couple’s assets are divided could have an impact on the share price of numerous companies) Bloomberg on Wednesday published an excerpt from a new book by Brad Stone, the tech writer and author known for his coverage of Amazon.

In his new book, Stone reminds the world just how dramatic the Bezos divorce saga was. Almost from the beginning, tabloid stories about Bezos’ relationship with Lauren Sanchez, triggered a PR battle that pitted Bezos against a suite of adversaries, including President Trump, National Enquirer publisher AMI, and the Saudi Royal Family (and Crown Prince Mohammad bin Salman) who were miffed about The Bezos-owned Washington Post’s coverage of the killing of Jamal Khashoggi, a former WaPo opinion contributor.

But as Stone reports, while Bezos came out on top in the affair, successfully portraying himself as the victim of a lurid plot to embarrass him by exposing his personal life, he largely has only himself to blame for how it all started.

The Bloomberg excerpt starts with Bezos addressing the tabloid reports about his divorce and relationship with Sanchez. As has been previously reported, Bezos and his wife grew apart when he started attending glitzy Hollywood events. Sanchez, the wife of a prominent venture capitalist, was more than willing to accompany Bezos on the red carpet. One source described her as “basically the opposite of MacKenzie”.

Now, facing Amazon’s leadership group, the S-team, Bezos addressed the elephant in the room. “The story is completely wrong and out of order,” he said. “MacKenzie and I have had good, healthy, adult conversations about it. She is fine. The kids are fine. The media is having a field day.” Then he tried to refocus the conversation on the matter at hand: personnel projections for the current year. “All of this is very distracting, so thank you for being focused on the business,” he said.

News of the affair came as “a shock” to many Amazon executives. But some couldn’t help but wonder about his motivations when he started pushing the board to consider a proposal to introduce a new class of shares that would help Bezos amplify his control of the company, something that would help him cement his dominance of the board even after giving up some of his stake.

By 2018, a year before the divorce, Bezos and Sanchez were seeing each other more or less openly. Bezos would occasionally be seen squirering Sanchez to the Washington Post’s printing press, or to visits at Amazon headquarters in Seattle, or elsewhere around his vast empire.

At some point, Bezos grew comfortable “sexting” with Sanchez, she was, unbeknownst to him, sharing his sexts and some of his texts with her brother, Michael Sanchez, who would later leak them to tabloids and emerge as one of Bezos’ chief antagonists in the drama, along with President Trump, the Saudi Royal Family (chiefly Crown Prince MbS) and the National Enquirer.

In the end, Sanchez sold out his sister and her boyfriend to AMI, the publisher of the National Enquirer and other tabloids, for a $200,000 payout, among the highest sums ever paid by the company for exclusive celebrity photos.

Even after paying, AMI sat on the story for weeks as it mulled whether publishing would be a smart move for the business. The company had just inked a non-prosecution agreement for killing negative stories about President Trump during the campaign, and the prospect of being sued by the world’s richest man made AMI publisher David Pecker extremely nervous, even as he praised a draft of the story as the “best piece of journalism” the magazine had ever published.

Sanchez helped the Enquirer shape the story for months.

For the rest of that fall, the Enquirer worked on the story with Michael Sanchez’s help. He emailed the paper more photographs and text messages and tipped off editors to the couple’s travel plans. When he had dinner with Bezos and his sister at the Felix Trattoria restaurant in Venice, Calif., on Nov. 30, two reporters were stationed at tables nearby as photographers clicked away surreptitiously. On the promised explicit selfie, though, Sanchez seemed to equivocate. He arranged to share it with Howard in L.A. in early November, then canceled the meeting. A few weeks later, on Nov. 21, after Enquirer editors kept hounding him, he finally agreed to show it to Simpson while Howard and Robertson watched via FaceTime from New York.

Amusingly, he has developed a detailed rationalization for why none of this constitutes “selling out” his sister – and that by cooperating with the tabloids, he was actually helping Bezos,

None of this, Sanchez claims, was a betrayal of his sister. She and Bezos were conducting their relationship out in the open, and it was only a matter of time before their families and the larger world discovered it. “Everything I did protected Jeff, Lauren, and my family,” Sanchez later said in an email. “I would never sell out anyone.” He also believed, naively, that his source agreement with AMI precluded the media company from using the most embarrassing material he had provided them.

On one issue, at least, it appears that Sanchez didn’t betray his sister. He later told FBI investigators that he never actually had an explicit photograph of Bezos in his possession. In the FaceTime meeting on Nov. 21, Sanchez didn’t show a picture of Bezos at all. It was a random photograph of male genitalia that he’d captured from an escort website called Rent.Men.

According to Bloomberg, the rumored Bezos “dick pick” is actually a fraud. As for the involvement of Saudi Arabia and Trump, we already know that MbS was spying on Bezos after hacking his phone with a phishing text. But while the National Enquirer did try to pressure Bezos to make a statement saying their coverage wasn’t politically motivated, any links to Saudi Arabia were murky, at best. It all culminated with Bezos shocking Medium post, published in February 2019, where he shared copies of his correspondence with the Enquirer. This forced the tabloid to back down since it raised the possibility of political and legal blowback.

Bloomberg’s excerpt ends with a glimpse of the megayacht that many suspect is being built outside Rotterdam for Bezos.

Employees now had even more reasons to wonder. What did the future hold for their founder? At least part of the answer to that could be found in the shipyards of the Dutch custom yacht builder Oceanco. There, outside Rotterdam, a new creation was secretly taking shape: a 127-meter-long, three-mast schooner about which practically nothing was known, even in the whispering confines of luxury boat builders—except that upon completion, it will be one of the finest sailing yachts in existence. Oceanco was also building Bezos an accompanying support yacht, which had been expressly commissioned and designed to include—you guessed it—a helipad.

BlackRock made a big stink about Warren Buffett’s resistance to a pair of shareholder proposals to mandate ESG and diversity reporting standards across Berkshire Hathaway’s vast business holdings. Buffett ultimately prevailed, as he has in past years, but the backlash this year was more vocal, with a team of Reuters reporters writing that Buffett’s ESG “snub” “risks alienating Wall Street.”

While some insist that ESG is the way of the future, others contend that it’s more of a fad. Some purveyors of tradeable carbon credits have been accused of selling “worthless” offsets, revealing that the system is actually pretty complicated, and auditing whether these credits are actually behaving as advertised could be a resource-intense endeavor.

But while BlackRock makes a fuss about reporting standards that, more likely than not, would have little real-world impact, a report published Wednesday by the Financial Times laid bare the ETF giant’s hypocrisy when it comes to enforcing its new ESG “standards”.

The world’s biggest asset manager, with nearly $9 trillion in assets, has been accused of being inconsistent for supporting a shareholder protest against Procter & Gamble’s sourcing of palm oil from an Indonesian company called Astra Agro Lestari, a subsidiary of the Astra International conglomerate based in Indonesia. The company has been accused of stealing land from local farmers, and other ESG abuses. The company’s product enters the US supply chain via a relationship with Singapore-based Wilmar International, which P&G has since asked to investigate its suppliers.

But as it happens, BlackRock owns a stake both in Astra International, as well as a small direct stake in its subsidiary. And what has BlackRock done to push reform? Nothing substantial, activists conclude.

Rights groups and sustainable investment advocates have now turned their attention to BlackRock, which is a significant shareholder in Astra International. According to Bloomberg data, the US fund group is Astra International’s third-largest investor, with a holding worth almost $350m. It also has a small direct holding in Astra Agro Lestari.

Green finance groups said BlackRock had been inconsistent in its approach to ESG considerations by not openly pressing Astra over its environmental record. The $8.7tn fund house has come under increasing pressure to live up to its 2020 pledges regarding ESG and sustainable investing.

“It’s incoherent that BlackRock is pushing P&G to clean up its value chain while simultaneously continuing to profit from this same value chain,” said Lara Cuvelier, sustainable investments campaigner at Reclaim Finance, an investor lobby group.

BlackRock should “make time-bound and detailed requests to the company…and commit to divesting if the requisite changes are not forthcoming,” Cuvelier added.

BlackRock has long argued that behind-the-scenes conversations with board directors will drive change, but critics argue that companies often only listen to the “ultimate sanction” of divestment.

Astra International is majority-owned by Hong Kong trading house Jardine Matheson through its Singapore-listed unit, Jardine Cycle and Carriage. BlackRock’s holdings, which have gradually increased over nine years, are mostly held through mutual funds and ETFs. And that’s the problem. While the company can vote against board proposals, BR’s index investing model makes it difficult to threaten divestiture, which activists say is typically the only threat that ESG abusers will take seriously.

BlackRock said it was “well aware” of the concerns and was “continuously engaged” with companies over sustainability concerns. “Where we believe companies are not moving with sufficient speed and urgency, our most frequent course of action will be to hold directors accountable by voting against their re-election,” it said. At Astra International’s 2020 annual meeting, BlackRock voted against a motion regarding board changes and director remuneration over disclosure issues.

Circling back to the Berkshire Hathaway, Buffett said over the weekend that he opposed the ESG measures (one of which would have required annual reports about what Berkshire companies were doing to confront climate change, as well as updates on “diversity and inclusion”) because he doesn’t like making “moral judgments” on businesses.

Buffett isn’t alone: ValueAct’s Jeff Ubben, who once praised BlackRock for its commitment to make ESG and fighting a climate change a priority, recently criticized the fund giant’s measures as misguided.

Arkansas has joined the growing opposition to Critical Race Theory – which posits that white supremacy and systemic racism is embedded in every facet of American life, must be actively corrected by re-engineering society, and anyone who denies this is guilty of ‘white complicity’ and racist themselves.

As Isabel van Brugen of the Epoch Times recently described it, “CRT has gradually proliferated in recent decades through academia, government structures, school systems, and the corporate world. It redefines human history as a struggle between the “oppressors” (white people) and the “oppressed” (everybody else), similarly to Marxism’s reduction of history to a struggle between the “bourgeois” and the “proletariat.” It labels institutions that emerged in majority-white societies as racist and “white supremacist.”

On Monday, Arkansas Gov. Asa Hutchinson (R) allowed legislation (SB 627) to become law – without endorsing or vetoing it – which effectively ends Critical Race Theory education within state agencies. The bill is described as “an act to prohibit the propagation of divisive concepts” and “to review state entity training materials.”

BREAKING: Arkansas passes legislation banning critical race theory indoctrination in public agencies. The bill will prohibit the state government from promoting race essentialism, collective guilt, and neo-segregation.

We are fearless; we are relentless; we are inevitable. pic.twitter.com/pj6Bu1Rvx7

— Christopher F. Rufo ⚔️ (@realchrisrufo) May 4, 2021

The law, which takes effect in 2022, does not apply to local governments, law enforcement training, or public education according to the Associated Press.

Arkansas joins Oaklahoma, Idaho, Florida and Texas in various forms of pushback against CRT – with Oklahoma’s House voting last Thursday to ban public schools and universities from teaching the concept, and Texas GOP legislators, who introduced a bill do the same. –

Critical Race Theory is being used to indoctrinate our children and divide America. State-sanctioned racism must not and will not be tolerated. #AmerciaFirst #CriticalRaceTheory https://t.co/xxd3kTPUlG

— Arizona Republican Party (@AZGOP) May 4, 2021

Critics of Critical Race Theory have pushed back – insisting that is teaches white children to hate themselves and causes racism.

Critical Race Theory is teaching our kids to be racist and it’s teaching many to hate how they were born. We’ll flip more school boards and local elections from Democrat to Republican by fighting this issue than we will by fighting almost any other issue. We must fight to ban it!

— Robby Starbuck (@robbystarbuck) May 3, 2021

More:

Critical Race Theory is an indoctrination of kids that has no business in America’s classrooms. This isn’t teaching children how to combat racism & discrimination. It’s a gross attempt to devalue, divide & dumb down our children. https://t.co/V2sTY1xqkw

— Lee Zeldin (@RepLeeZeldin) May 1, 2021

Seattle Public Schools tells teachers that the education system is guilty of “spirit murder” against black children and that white teachers must “bankrupt [their] privilege in acknowledgement of [their] thieved inheritance.” https://t.co/nsgyrbEtYw

— Christopher F. Rufo ⚔️ (@realchrisrufo) April 27, 2021

A Cupertino, California, elementary school forces third-graders to deconstruct their racial and sexual identities, then rank themselves according to their “power and privilege.” They separate the eight-year-old children into oppressors and oppressed.https://t.co/me7APT6KiB

— Christopher F. Rufo ⚔️ (@realchrisrufo) April 27, 2021

A Philadelphia elementary school forces fifth-graders to celebrate “Black communism” and simulate a Black Power rally to “free Angela Davis” from prison. At this school, 87 percent of students will fail to achieve basic literacy by graduation.https://t.co/AWcnk8cGVL

— Christopher F. Rufo ⚔️ (@realchrisrufo) April 27, 2021

Buffalo Public Schools teaches students that “all white people” perpetuate systemic racism and forces kindergarteners to watch a video of dead black children warning them about “racist police and state-sanctioned violence” who might kill them at any time. https://t.co/lraff9C36B

— Christopher F. Rufo ⚔️ (@realchrisrufo) April 27, 2021

The California Department of Education passed an “ethnic studies” curriculum that calls for the “decolonization” of American society and has students chant to the Aztec god of human sacrifice. The solution, according to one author, is “countergenocide.”https://t.co/4OxSrBwWzb

— Christopher F. Rufo ⚔️ (@realchrisrufo) April 27, 2021

Santa Clara County Office of Education denounces the United States as a “parasitic system” based on the “invasion” of “white male settlers” and encourages teachers to “cash in on kids’ inherent empathy” in order to recruit them into political activism.https://t.co/N29tlJi9Zy

— Christopher F. Rufo ⚔️ (@realchrisrufo) April 27, 2021

 

As reporters look for clues about how Bill and Melinda Gates plan to divide up their fortune (as a reminder, here’s everything we have learned so far) focus is shifting to Cascade, the Gates family office set up with the proceeds from selling Gates’ Microsoft shares, as well as his investment dividends. The family office has long been seen as a piggy bank for the Bill and Melinda Gates foundation.

And according to an SEC filing, Cascade transferred $1.8 billion (14.1MM shares) in Canadian National Railway stock to Melinda French Gates on May 3. Cascade also transferred 2.94 million shares in AutoNation, worth $309M.

The move makes Ms. Gates the sixth-biggest shareholder in CN, Canada’s largest railway, however, Cascade (controlled by Bill Gates) remains thee largest shareholder, with more than 101M shares worth roughly $11 billion)

CN is the biggest investment held by Cascade, representing 24.4% of its holdings. Waste disposal company Republic Services is Cascade’s second-largest stake at 23.9%, while heavy equipment make Deere and  is third, at 18%.

Through Cascade, Gates has interests in real estate, energy and hospitality as well as stakes in dozens of public companies, including Deere & Co. and Republic Services. The couple are also among the largest landowners in America.

Other investments Gates owners via Cascade include:

• Berkshire Hathaway Class B $1.69 billion
• AutoNation $1.9 Billion
• Ecolab Inc. $6.9 Billion
• Liberty Global PLC $235.6 Million
• Waste Management $2.3 Billion

Gates lists himself as the sole member of Cascade Investment and makes clear that the stocks that he and Melinda own jointly through the Bill & Melinda Gates Foundation Trust are completely separate from his direct ownership of what’s in his family office hedge fund, Cascade Investment, which operates out of Kirkland, Washington.

We’re still waiting for more clues about the Gates’ “separation agreement”, as well as any settlement talks.

Authored by Charles Hugh Smith via OfTwoMinds blog,

What’s left are the ‘fatal synergies’ of soaring debt and leverage, diminishing returns on stimulus, the substitution of credit for savings and the coming deflationary tsunami that pops all the speculative bubbles.

Imagine a once modest but sturdy home built near a cliff to maximize the vistas. Over the decades, the foundation slowly degraded and the house moved imperceptibly closer to the unstable edge of the cliff. Those who observed the slippage and the potential for eventual disaster were either derided as alarmists or ignored.

Given the enviable location and views, the home rose in value and a series of increasingly gaudy additions were added, completely obscuring the once-modest exterior with cheap imitations of long-lasting, time-tested materials (plastic trim and brittle fake-marble veneers). The foundations of these ostentatious additions were slapdash, shallow and poorly made, as the goal was not durability but appearance.

The low-quality additions accelerated the slide to the unstable cliff edge, and in 2019 the viewing deck broke away and crashed into the canyon below. The repairs were hasty and the residents were assured all was well–in fact, better than ever.

In 2020, the weak foundation of the gaudiest, lowest-quality addition crumbled. The response of the owners was to fill the widening crack in the decaying structure and spray on a new coat of paint. There–good as new, the residents were told.

But this was not true. The house is now teetering on the precariously unstable cliff edge. Ironically, the vast majority of the residents have moved to the game room, which is now cantilevered over thin air. The slightest movement will tip the entire decayed structure over the cliff.

That decayed, precariously unstable structure is the U.S. economy, and Covid was the catalyst that nudged the economy right to the edge. Gordon Long and I discuss the causes and consequences in our new video program, Covid Has Triggered The Next Great Financial Crisis (34:46).

Chief among the many causes is a very basic one that’s easy to understand: America has consumed more than it has produced for decades, and filled the gap with imports purchased with borrowed money and currency created out of thin air.

As Gordon and I explain, this is a very well-worn path to instability and collapse: governments (which now include nominally independent central banks) have always responded to declines in productivity and affordable energy/materials, the expansion of a parasitic elite and excessive spending with the same bag of financial tricks:

1. They borrow more money, eventually borrowing more to pay interest on existing debts, greasing the slide to default and insolvency.

2. They defraud the users of their currency by devaluing the currency. In the old days, this was accomplished by substituting base metals for silver or gold in the minting of coinage. Eventually the coins contained only a trace of silver. Users soon caught on and the result was the coinage lost purchasing power, a.k.a. inflation destroyed the value of the officially issued money.

In today’s fiat currency regime, central banks create trillions of new units of “money” with a few keystrokes, effectively diluting the value of all existing currency.

3. Desperate for revenues, governments raise taxes, which despite all claims to the contrary by political leaders, fall most heavily on the productive middle class. Since the parasitic elite will never accept any consequential reduction of their wealth or power, the higher taxes and economic stagnation that result from these three policies crush the middle class, which was the engine of productivity and demand that enabled the parasitic elite to live large.

These are key dynamics in what Gordon calls the killing of the golden goose, the productive synergies that generate widespread prosperity and opportunity.

What’s left are the fatal synergies of soaring debt and leverage, diminishing returns on stimulus, the substitution of credit for savings and the coming deflationary tsunami (53 min) that pops all the speculative bubbles, setting up the destabilization and cliff-dive of the entire decayed, flimsy structure–The Next Great Financial Crisis that cannot be papered over with more central bank legerdemain.

There’s more in our 34-minute video program:

*  *  *

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

*  *  *

My recent books:

A Hacker’s Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World (Kindle $5, print $10, audiobook) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($5 (Kindle), $10 (print), ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).

While most people might guess that Israel or the UK hold the title, the tiny island nation of Seychelles is actually the most vaccinated country on earth, with more than 62% of its adult population already “fully vaccinated”, according to a BBC report.

However, despite the fact that the island nation is closing in on the herd immunity threshold, the country and its public health officials have been forced this week to reimpose restrictions due to a surge in COVID-19 cases.

All schools in the country have been closed and sporting activities cancelled for two weeks in the country, which is spread across an archipelago in the Indian Ocean.

Measures also include a ban on inter-household interaction, some types of in-person gatherings, and the early closure of shops, bars and casinos. Non-essential workers are also being encouraged to work from home, while a 2300 local time curfew has been revived.

There are currently 1.07K active Covid cases in the Seychelles, of which a third have been detected in people given two doses of either AstraZeneca’s or China’s Sinopharm’s vaccine.

It unclear what has triggered the surge in cases but testing has detected the South African variant spreading on the islands. Scientists believe the mutant strain can evade immunity and make jabs up to 30 per cent weaker at preventing infections — but they think Western vaccines should still stop people falling severely ill if they get infected. But because Seychelles is not actively analyzing a large amount of positive tests (something the UK and other countries are doing to monitor the spread of variants) it is difficult to tell exactly which strain has taken hold in the country.

But the country’s close links to South Africa means it is likely the B.1.351 variant could be behind the rise. Seychelles was added to Britain’s travel “red list” in January along with nine southern African countries and Mauritius in a bid to prevent the UK from importing the strain.

During a recent press conference, officials didn’t offer much in the way of detail about what they suspect might be causing the revival.

The country acted quickly to begin its vaccination program in January, using doses from China’s Sinopharm vaccine that were donated from the UAE. It also received doses of AstraZeneca from India. When Seychelles president Wavel Ramkalawan first announced the country’s vaccination drive, the Seychelles had recorded a total of only 531 coronavirus cases and a single death, according to data from its health ministry. But in the span of four months, that number has risen more than 10x to 6,373 with 146 total deaths. Seychelles isn’t alone: Chile, another country that has been heavily reliant on vaccines developed in China, has also seen rising cases despite its successful inoculation campaign.

Update (1832ET): SN15 has just landed safely after a high-altitude flight.  

* * * 

SpaceX is preparing to launch Starship SN15 on Wednesday afternoon. 

About to launch https://t.co/t4nki8vU4E

— Elon Musk (@elonmusk) May 5, 2021

Watch Live 

For the past two years, JPMorgan’s head quant and resident in house permabull, Marko Kolanovic, has been periodically predicting an imminent rotation out of growth and into value stocks (a rotation which had failed to take hold until earlier this year when we finally saw some glimmers of value outperformance). Most recently, Kolanovic predicted in February that March would see a major move higher in commodity names as quants and CTAs started buying up commodity and reflation-linked stocks, only to see the energy sector tumble in March and in April.

Fast forward to today when in his latest attempt to time the biggest market rotation of all, the Croat published a note titled “Positioning for Inflation”, in which he predicts – you guessed it – a “rotation towards reflation, inflation, rising yields and reopening themes” and not only that but apparently the coming inflation surge will be such a surprise to most of today’s portfolio managers that they will scramble to reposition their portfolios for “the risk of more persistent inflation” (“persistent“ as in the opposite of “transitory“).

He might just be right this time.

Kolanovic first starts off by explaining why the broader “reflation” theme and its narrower cousin, “inflation hedging”, has been mocked to death by analysts on both the sellside and the buyside.

Inflation hedging was a big theme in 2010. At the time, the Fed’s Quantitative Easing increased its balance sheet above $2T. Many investors thought it will inevitably lead to inflation. There was a rush to buy commodities, gold and other inflation hedges. However, the post-GFC recovery was weak, and new crises kept on emerging – the European sovereign debt crisis, EM and China crisis, global trade war, global manufacturing recession and global pandemic. As no inflation materialized over the past decade, inflation hedgers threw in the towel, and inflation-sensitive exposures were shorted as investors piled on deflationary themes (e.g., secular growth, low volatility, ESG, etc.). Driven by deflationary trends, bonds nearly doubled and the S&P 500 quadrupled since 2010, while Commodity indices significantly declined. Since 2010, the Fed’s balance sheet nearly quadrupled to $7.8T, and outside of the US, central banks instituted negative interest rates. Fiscal measures ranging from infrastructure to direct payments injected trillions. For instance, just this year, the new US administration proposed $6T of new stimulus measures.

So “this time is different”? While he won’t use those words, Kolanovic paraphrases the apocryphal phrase by saying that “If one stretches rubber too long, it eventually snaps.” To Kolanovic, the pandemic is what ultimate snapped the deflationary rubber:

With the end of pandemic this year – global growth, bond yields, and inflation are making a sharp turn. At the same time, easy monetary and fiscal policies will likely persist for a while. In addition, there are various temporary frictions related to supply chains, reopening, as well as political and business decisions that may compound inflation. On financial asset allocation, we expect the market to be late in recognizing the inflection, which we believe already happened in November last year.

While one can debate that claim, where Kolanovic is spot on is that after over a decade of only deflationary (long duration) trades working, many of today’s “investment managers” which is a polite name for 30-year-old money managers who were still in college when Lehman blew up “have never experienced a rise in yields, commodities, value stocks, or inflation in any meaningful way.“

So as a significant allocation shift took place in the past decade towards growth, ESG and low volatility styles, all of which have negative correlation to inflation…

… Kolanovic warns “that most portfolios are now vulnerable to a potential inflation shock.”

Of course, the big question is whether this will be a brief, one-time “shock”, or a generational cataclysm, and as we discussed yesterday, as inflation soars, the big debate today is how long this trend will persist.

As a result, the question that matters the most to Kolanovic is if asset managers will make a significant change in allocations to express an increased probability of a more persistent inflation. The JPM quant is confident – as he has been for much of the past two years- that “this shift in allocation will happen (regardless of how temporary inflation is), and new data points related to inflation will on margin cause investors to shorten duration, move from low volatility to value, and increase allocations to direct inflation hedges such as commodities.”

We expect this trend to persist during the reopening of global economies in the second half of this year. Given the still high  unemployment, and a decade of inflation undershoot, central banks will likely tolerate higher inflation and see it as temporary. Portfolio managers likely will not take chances and will reposition portfolios. However, where things will get messy is in “the interplay of low market liquidity, systematic and macro/ fundamental flows, the sheer size of financial assets that need to be rotated or hedges for inflation put on” which according to Kolanovic “may cause outsized impact on inflationary and reflationary themes over the next year.”

To underscore this point, in the next chart below he shows US CPI, S&P GSCI commodity index, and S&P 500 Energy index since 2007, which as he notes, all closely track each other. But the question is whether after a decade of declines, whether inflation will rise above its spike in 2008.

Indeed, as we have repeatedly noted, the US Manufacturing PMI input and output price indices that have already matched their 2008 spike. In fact, the last time these indexes were here, oil was double where it is now, in the mid-$100s.

So what should portfolio managers do if Kolanovic is right? And how can investors reposition their portfolio for the risk of more  persistent inflation? Here is the Croat’s answer:

1. First, one should shorten duration and reallocate from bonds to commodities and equities. Commodity indices (such as S&P GSCI) are perhaps the most direct inflation hedge. Commodities are also cheap in a historical context – they are the only major asset classes that declined in absolute terms over the past decade (underperformance is significant and largely due to the drop in energy prices). Since 2010, the S&P 500 quadrupled and S&P GSCI index declined almost 40%.
2. Within equities, investors should buy value and short low volatility style. Growth and quality also have negative correlation to inflation. Investors should also be cognizant that by embracing ESG they introduced additional short inflation exposure into portfolios (e.g., via long tech and short energy exposure).

But while Kolanovic’ broader thesis may be spot on, where it completely breaks down is in how he segues it to bolster his broader, permabullish posture: “While our highest conviction is for rotation towards reflation, inflation, rising yields and reopening themes (see here), we remain overall positive on equities (S&P 500 YE price target of 4400).” Because, of course. Let’s just ignore the fact that if there is indeed a scramble away from growth stocks, where just the 5 FAAMG names account for 25% of the S&P’s market cap, both the Nasdaq and the S&P500 would implode, even if the commodity sector – whose market cap weighted representation in the S&P500 is now dead last – were to surge.

Not to one to give up easily, the JPMorganite then tries to justify how a reflationary surge would push all stocks higher, not just value/commodity-linked ones:

“Exposure of Systematic investors has been gradually increasing, but is still in the ~35th percentile. Hedge funds reduced effective equity beta (net equity exposure) over the past few weeks from ~75th to ~45th percentile. Markets with higher exposure to value, cyclicals, commodities and inflation such as EM, Europe, and Japan should outperform the S&P 500 due to their sector and style composition.”

Well, guess what Marko – if and when AAPL, AMZN and GOOGL tumble 10-20% and the VIX explodes higher, do you think systematic investors will be loading up on risk exposure? This is not a trick question, and yes you know the answer. 

Kolanovic then tries to give a second reason why he remains macro bullish:

Our views on reflation also reflect our positive outlook on the pandemic – COVID-19 cases have been rapidly declining in the US. Cases are now declining in most of Europe and EMs (Brazil, Turkey). Growth of cases in India appears to be leveling off and we are hopeful for an improvement there in the near future.

… well, of course you have a positive outlook on the pandemic: you can’t be bullish on the commodity sector without expecting a continued return to normalcy.

That said we understand that someone in Kolanovic’s institutional stature has to goalseek a bullish posture even when his core thesis is one that is inherently bearish on the overall market (he does that all the time). However when one reads between the lines of his latest report, if he is indeed finally right in timing the great reflation rotation, our advice would be to indeed go long commodities and hard assets but get the hell out of Dodge. After all, it is May…

Jared Dillian of The Daily Dirtnap returns to Real Vision to share his analysis on the latest financial news. In a live interview with Real Vision editor Jack Farley, Dillian makes sense of the the soaring prices of lumber, copper, and live hogs; commodity backwardation; and the latest economic data. Dillian provides a strategic update on his bearish bond thesis and interprets yesterday’s serious nosedive in U.S. tech stocks. Dillian incorporates the ongoing fiscal and monetary stimulus into his inflationary framework and makes several key points about the minimum wage.

Update (1645ET): John Solomon reports that, according to Chief Disciplinary Counsel Alan Pratzel’s memo obtained Wednesday by Just the News, Gardner engaged in 62 acts of misconduct that resulted in 79 false representations during Greitens’ now-dismissed criminal prosecution.

“Probable cause exists to believe that the respondent is guilty of professional misconduct,” Pratzel declared in a 73-page memo that repeatedly accused Gardner of withholding evidence of innocence and providing a false portrait to the courts, the defense and even her own prosecution team.

Pratzel also accused Gardner of lying during the disciplinary proceedings, long after the case was dismissed against Greitens, a former Navy SEAL and rising Republican star who was forced to resign as governor in 2018 less than two years after he was sworn in.

*  *  *

As The Epoch Times’ Ivan Pentchoukov detailed earlier,

St. Louis Circuit Attorney Kim Gardner faced disciplinary proceedings stemming from an ethics complaint filed against her, according to a case list (pdf) posted on a state website.

Gardner, who was elected to her post with the help of billionaire liberal activist George Soros, will likely face a panel that will review the allegations against her. The Missouri Supreme Court would render the final verdict on what punishment, if any, Gardner will receive.

It is unclear which allegations the disciplinary proceedings will address, but a statement by Gardner’s office provided to KMOV referenced the allegations against her lodged by former Missouri Gov. Eric Greitens.

“As the Circuit Attorney has repeatedly proven time after time, she has acted in full accordance with the law during the investigation into former Governor Greitens,” the statement says.

“Despite several investigations attempting to uncover illegal wrongdoing by her office in this case, none has ever been found. We are confident that a full review of the facts will show that the Circuit Attorney has not violated the ethical standards of the State of Missouri.”

Greitens’ team had accused Gardner of failing to correct the record during a deposition from private investigator William Tisaby, whom Gardner had hired to investigate Greitens.

Tisaby had conducted interviews with the woman who accused Greitens of misconduct.

Tisaby had since been charged with six counts of perjury and one count of tampering with evidence as part of his work on the Greitens case. Gardner was with Tisaby when some of the violations occurred and had an ethical duty to flag his alleged lies, Greitens’ team claims.

Greitens resigned from the governorship amid Gardner’s probe, but all of the charges against him were subsequently dropped.

In 2019, the Missouri Supreme Court’s Office of the Chief Disciplinary Counsel received 1,733 complaints (pdf) of attorney misconduct and opened 763 investigations. The office’s work that year resulted in the disbarment of 22 attorneys and the suspension of 30 others.

Greitens is now running for the U.S. Senate in Missouri.