Category: zerohedge

By Michael Every, Ryan Fitzmaurice, and Dennis Voznesenski of Rabobank (pdf link)

Attention: Russia-Ukraine Tension: The current stand off and its potential impact

Summary

• The long-standing conflict between Russia and Ukraine has flared up again, with huge Russian military deployments at the border. Russia has also closed the Kerch Strait into the Sea of Azov until October to foreign military and foreign-state vessels.

• The cost and logistics of massing this force means Russia must make an imminent choice between sabre-rattling to achieve a political target or a genuine military offensive

• Russian President Putin’s speech to the Russian general assembly, and hence the nation, on Wednesday 21 April could consequently be one of extreme gravity

• The sabre-rattling scenario would see Russia underline Ukrainian membership of NATO is a non-starter and that Ukrainian territories annexed to it will remain Russian

• The war scenario ranges from limited Russian strikes to Russia annexing eastern Ukraine up to the Dnieper river and the Black Sea coast to Transnistria

• Importantly, the US is unlikely to fight Russia, while the EU has no ability to. However, both may arm Ukraine to varying degrees

• The US has already imposed fresh sanctions on Russia and any military move would see these escalated. However, so far they have had no impact on Moscow, and the most painful sanctions mean pain for the West too, and even risk fragmenting the global financial system

• The impact on energy markets could be profound, depending on if there is fighting, the ultimate settlement, and in particular what happens to the Nord Stream 2 gas pipeline

• The impact on commodity markets would also be significant given Ukraine and Russia’s role in the global agri production. Ironically, this underlines the extent to which global food producers have the realpolitik upper hand at present

• Overall, this crisis has potentially huge implications for the ‘liberal world order’ and US-China tensions in particular, where even a benign scenario has long-run tail risks

2014 redux – or worse?

2021 has seen a rapid build-up of tensions between Ukraine and Russia, the latest episode in a conflict going back to 2014, and which has already seen Russia annex the Crimea region from Ukraine.

Both sides blame the other for this escalation, and the need for distraction by President Putin is obvious given anti-regime protests in 2021: but what is clear is that Russia has amassed a huge force on the Ukrainian border of over 100,000 men, a flotilla of amphibious ships, tanks, artillery, armoured personnel carriers, and hundreds of aircraft. This is now the largest mobilisation of the Russian military in the region since the Cold War, and perhaps since World War Two.

There are also reports that Russian allies Belorussia and Transnistria are seeing mobilization of forces, while Belorussian president Lukashenko –also subject to recent anti-regime protests– has claimed an assassination plot against him, heightening tensions further.
The US has already placed more sanctions on Russia (covered ahead), and both it and the EU have pledged support for Ukraine – albeit not military. President Biden has also called for de-escalation and requested a US-Russian summit in a third country, omitting Ukraine. This is already a Russian victory: but Moscow has not yet agreed.

In short, war is by no means certain, and there would be no element of surprise. Yet the logistics for an invasion appear in place. President Putin’s speech to the nation on April 21 could prove to be an historic one.

What next: “benign” scenario

Assuming President Putin is rational and looking at the risk-return of a potential conflict with Ukraine, the safe assumption may be that he would prefer not to go to war.

Wars are expensive: and while they can provide a political fillip, as they did to his popularity in 2014, this only happens if Russia wins easily. Russia clearly outmatches Ukraine militarily on all fronts, most especially in terms of critical air superiority, but Ukraine of today is still far better armed and prepared than it was back in 2014, and hence the potential risks of a protracted and/or painful conflict should be clear. On this basis we assume that President Putin is primarily interested in achieving a few political goals:

1. Testing the new US administration, which was always to be expected – and notably so far there has been no military response from either the US or the EU;

2. Making clear to the US and EU that Russia’s sphere of influence precludes Ukraine’s entry into NATO; and, potentially

3. An insistence that the Nord Stream 2 gas pipeline be completed, which Germany already wishes to, but which the US opposes – a pre-existing wedge Russia may try to drive between the two

On this basis, we could expect a de-escalation from President Putin’s address on Wednesday; agreement to a US-Russia summit, providing a global PR victory; a roll-back of Russian forces; and a de facto hiatus in Ukrainian and NATO entry. Even if existing US sanctions were not rolled back, this so far means little pain for Moscow.

In this case, however, there would still be important geopolitical and geostrategic implications. Above all, the US would have demonstrated that even despite: a planned troop drawdown from Afghanistan and Saudi Arabia; returning to the Iran nuclear deal regardless of Tehran’s current and previous breaches of its commitments; and retaining troops in Germany, the US appears to have no mind for a fight against Russia – while the EU has no mind and no arms to do so.

The signal sent to what the US dubs “revisionist powers” is the opposite of the wisdom of Vegetius: si vis bellum, para pacem. The long-term consequences could be terrible.

There is also the possibility that Wednesday could see President Putin absorb the disputed rebel portions of Ukraine in Donbas into Russia – and perhaps even a deeper political union with Belarus at the same time. The former would be seen as unacceptable by the West, and would arguably lead to a push for further sanctions – but presumably not military action.

What next: “war” scenario

But what if it is war? Perhaps not much if this means a series of small skirmishes. However, it seems illogical to move a large army into place if the only intention is to seize a few kilometres of land – particularly given Russia will know that even this strategically negligible action would carry the risk of large economic and geopolitical consequences, such as accelerating Ukraine’s entry into NATO.

Indeed, military thinkers posit that were Russia to commit to the military option, effectively burning its bridges with the West, it would need to attain a significant prize for doing so. Geostrategically, Russian nationalists and some military strategists suggest this could include annexing eastern Ukraine up to the Dnieper River; and all of the Black Sea coast through to Transnistria – in short the Novorossiya (New Russia) plan below.

Figure 1: The Russian-nationalist maximalist position

Such an invasion would bifurcate Ukraine and boost Russia’s strategic depth. Russia would have a ‘natural border’ at the Dnieper while Ukraine’s capital, Kiev, would be vulnerable; Russia could take control of the Motor Sich plant in Zaporizhzhia, which produces military engines for Russia’s military helicopters, yet which will no longer sell to it. Russia would take command of the Black Sea, land-locking Ukraine. Indeed, a rump Ukraine in NATO would be an expensive proposition for the West to defend, being effectively a finger of land surrounded by Russia and allies on three sides. This would unilaterally redraw the map of Europe by force, involve mass population transfers – and would have enormous geopolitical and market implications.

The EU would have to make painful choices. It could walk away from Nord Stream 2 and acquire more military muscle, or plead with the US for support: in short, a new Iron Curtain. Or it could acquiesce to Russian influence on its borders – and within its economy if it refuses to abandon Nord Stream 2.

The US would have to decide what steps it could take next following on from the sanctions that are already in place and given its reluctance to fight.

Sanctions

On March 2, the US imposed sanctions on seven Russian officials over the poisoning of opposition leader Navalny. It also expanded existing sanctions imposed in 2018 to include a policy of denial for exports of defence goods.

The US imposed further sanctions on April 15 in response to the SolarWinds hacking, the (disproven) Russian bounty on US soldiers allegation, and “attempts to interfere in the 2020 election”. The White House also issued an executive order barring US financial institutions from purchasing RUB-denominated bonds from June 2021. This shows the Biden administration continuing the Trump tactic of using the US financial system as a weapon.

Yet these sanctions are more sabre-rattling than attack: US entities are still able to buy and hold RUB bonds in the secondary market; and none of President Putin’s inner circle, or their USD assets, were targeted.

A Russian invasion of Ukraine would mean significantly tougher sanctions from the US and EU, with the US acting much faster due to its unitary executive power in this respect. However, history shows that when this is done, there is also pain to the West and the global economy.

In April 2018, the US sanctioned Russian aluminium producer Rusal to retaliate for its role in what the US Treasury stated as “worldwide malign activity.” This action saw a severe supply squeeze in aluminium, and a near-50% price spike that was only reversed when the US rolled back the Rusal sanctions in response.

Given the current surge in input prices across most commodities, any action against Russian energy, mineral, or food exports, would have a similar impact. Moreover, any potential sanctions on Rusal could also complicate the move to decarbonise the Western economy, as Rusal is currently the largest supplier of “green” aluminium, which is produced with renewable energy sources compared to the mostly coal-fired Chinese production.

There have even been suggestions that as a nuclear option, the US might consider pushing Russia out of the global SWIFT network for inter-bank transfers. This step was last taken against Iran – which is ironically about to be rolled back, if rumours are to be believed, to allow the US to focus more on the Indo-Pacific (i.e., China).

The failure of the toughest US sanctions to break Iranian resistance should be a warning that constant usage of such measures can actually undermine their impact. Indeed, with Russia being such a large exporter of key commodities, it seems hard to imagine that the US could act against it via SWIFT without sanctioning all those who buy from it too, especially China.

Moreover, in the event this kind of policy were seen, Russia might shift to selling in cryptocurrency, or even the new digital CNY (despite PBOC protestations to the contrary).

Neither seem practical near-term. However, they underline the extent to which the limits of US military power, already exposed in its unwillingness to fight a war over Ukraine, are also potentially starting to extend into the financial sphere – perhaps akin to the British experience of Suez in 1956 at the extreme.

Unless, that is, the US and EU target President Putin and Russian oligarchs: in which case bridges (and villas) would be burned; the more targeted a sanction, the more targeted its response in kind; Russia would perhaps irrevocably break away from the Western orbit, marking an even larger geostrategic challenge for the US; and, awkwardly, the Western public may start to question why sanctions with real teeth are not being used against Myanmar, or China, or Saudi Arabia.

Hence, if Russia were to invade or formally annex parts of Ukraine, the US and EU would only have financial weapons to respond that:

1. Wouldn’t have an impact; or

2. Would hurt themselves too; or

3. Would require a massive escalation that could rapidly make this a systemic issue; or

4. Require a true Iron Curtain between East and West, even for elite oligarchs.

Where some might find this reassuring (“so nothing can happen then!”), the opposite is true: arguably only an escalation to a painful or systemic level could send a powerful enough message that the liberal world order is prepared to act to prevent the use of war redrawing borders in the modern world – and yet we may well fail to see this happen.

A lot of energy

With Russia a critical global energy exporter, and Ukraine a conduit point en route to the EU, a war between the two would obviously push up energy prices – and so would the West sanctioning Russian energy supplies, were this to occur.

However, we do not expect to see a sharp reduction in global oil supplies but rather a re-routing of current import and export flows. Even so, any potential oil ban would come at a particularly troubling time given recent shipping attacks in the Middle East —ironically linked to regional perceptions of a likely US pull back from sanctions on Iran— as well as the global supply chains risks currently at play. As such, we see this scenario resulting in an elevated geopolitical risk-premium and higher transit costs for oil, and so higher energy prices overall.

Europe would likely feel the brunt of any action as they are much more dependent on Russian oil compared to the US. In fact, Russia is Europe’s biggest crude-oil supplier, with a nearly 30% market share of European imports. Russia has been able to maintain its dominant oil export position to Europe in large part due to the Druzhba pipeline, which stretches from the oil fields of Western Siberia all the way to Germany with various arteries along the way. This pipeline provides Russia with a lower cost of transport and, as such, a competitive advantage versus waterborne imports.

We see a similar outcome developing with natural-gas prices should the West sanction Russian energy supplies of these. As many are aware, natural gas exports are already a highly contested issue between Russia and the US, and specifically with respect to the Nord Stream 2 pipeline that is currently near completion. The massive 55bn cubic meter per year project is set to run from Western Russia to Germany via an underwater pipeline below the Baltic Sea. The US has aggressively pushed back on the development of this project, urging Europe to reduce its dependency on Russian natural gas rather than increase it.

As already alluded to, it would not surprise us to see further US pressure on Europe to cancel the completion efforts of the Nord Stream 2 pipeline, which would leave the Germany economy’s future energy needs unaddressed.

If the pipeline is ultimately halted, then Europe would be forced to import more waterborne LNG supplies, to the benefit of the US, which is a major supplier of the fuel, but at a much higher cost to the EU.

A lot of food

Russia and Ukraine are also crucial in global agri commodity supply chains. Although this is true in many areas, we want to focus on wheat and barley first.

Figure 2: “The bread basket”

Figure 3: “The beer basket”

As Figures 2 and 3 above show, assuming that a worst-case ‘Novorossiya’ scenario shown in Figure 1 were to occur, the areas of Ukraine that could see military disruption to activity or outright Russian seizure account for around half of Ukrainian wheat and barley production: and all of the key ports on both the Black Sea and the Sea of Azov from which they are shipped. That matters when Ukraine itself accounts for around 10% of global exports of wheat and 16% of barley – and when we are in a period of huge agri-commodity price inflation. (As flagged here, the risk was already of a major price spike if one of several conditions were met: war was not one we included.)

Any port in a price storm?

Even a far milder scenario where only the smaller Azov ports of Mariupol and Berdyansk are unusable –and recall the Kerch Strait leading to them are already closed to some vessels by Russia– we are talking about nearly 5% of Ukraine’s wheat production, or 1.9 million tonnes of production.

Of course, presuming other ports in Western Ukraine are available, the nearest is Ochakiv 480km away: then the back of an envelope maths suggests it would cost USD26.4 a tonne to move crops from Berdyansk to Ochakiv port by truck, and USD15.8/tonne to do so by train – all of which would have to be added to the sales price. A further list of ports and capacity lies below – all of which are on the pathway towards Odessa if the Russian military moves in that direction.

Over the past decade Ukraine has also emerged as the world’s fourth largest corn exporter, shipping 15% of the world’s exports. Additionally, for poultry meat Ukraine, while relatively minor in the global trade context, still ships 4% of world’s total out, albeit also partly via land routes rather than all by vessel – but these could again potentially be routes that are blocked.

In addition, fertilizers out of the broader region represent large global export shares, with 23% of world ammonia being shipped from Russia, 17% of potash, 14% of urea, and 10% of phosphates. However, most leave via Baltic, not Black, Sea ports.

In short, if real Russia-Ukraine war starts, wheat and barley prices are likely to shoot up, and the prices for other agri commodities like corn will follow; and at a time when many can least afford it.

What then of the potential for follow-on sanctions? Yet another hypothetical scenario to consider would be if ‘Novorossiya’ Ukrainian wheat, barley, corn or chicken de facto became Russian – and more so if Russia then deliberately mixed its own production in with them. Specifically, could the world afford to sanction Russian goods in this case?

Almost certainly not. We have already noted the risk of major price spikes in aluminum if the likes of Rusal are sanctioned. On agri commodities this also holds true. For example, stripping out Russia’s 45-50m tonnes of annual grains exports (some 20% of global wheat and 17% of barley) from the global market’s grains supply –at a time of pre-existing, rapid agri commodity inflation– would mean tremendous upward pressure on world market prices: and this would be incredibly disruptive to a large number of countries. Likewise, if Russia’s fish exports were sanctioned, this would also be felt by the imported livestock sector inputs like genetics or feed.

Liberal world disorder

On one hand this is good news: the world could not afford to boycott or sanction Russian agri goods, so trade can continue as normal. Isn’t that what markets like to hear?

Yet the downside is exactly that same message. What kind of signal does it send about our ‘liberal world order’ if a country could –hypothetically– be bifurcated and its output commandeered, but the world could not and would not sanction the aggressor’s behavior via trade because it needs the food too badly?

It implies the very rawest of geopolitical realpolitik would be back again, and yet basic food needs would remain more of a priority than principles.

That won’t go unnoticed by strategic planners at global net food exporters or, more so, net food importers: especially not when the US and China are at loggerheads, and the former is a major net food exporter, and the latter a major huge net importer – at a time of rising prices.

As such, while economic and market purists would look at the presumed continued smooth operations of global trade as a positive after the hypothetical dust in Russia-Ukraine settles, the underlying reality would be anything but: might would make right, which is a problem for those with none; and world prices would come before world liberalism or world order, which is a problem for almost everyone.

For many reasons, one can only hope that President Putin offers a road-map to rapid de-escalation on Wednesday.

It was just yesterday we pointed out how a protestor at the Shanghai Auto Show “went viral” after standing on top of a Tesla vehicle and decrying the car’s brakes. 

Now, Chinese state media is looking for answers. 

Commentary by a CCTV broadcaster has called for an investigation into Tesla’s brake failures following the incident. 

The CCTV commentary “said the regulator could invite third-party testing agencies that both the customer and Tesla can trust to test the vehicles,” according to a Reuters report on Tuesday. At the same time, it has been reported that one of China’s largest insurers has temporarily stopped providing services for new Tesla owners after the incident. 

Ping An Insurance, one of China’s largest insurers, has temporarily stopped providing services for new @Tesla owners in some Chinese cities after the consumer complaint incident at #AutoShanghai2021, Sina News reported. Its renewals policy has also been tightened. @pingan_group pic.twitter.com/hq0SGIWSo3

— Yicai Global 第一财经 (@yicaichina) April 21, 2021

And the, of course, there was this incident, also echoed by Chinese state media on Wednesday morning:

An unknown @Tesla owner in southern China’s Nanning has parked their damaged car in front of a mall with banners claiming the vehicle accelerated automatically and had a brake failure. pic.twitter.com/1TRVnIWjwj

— Yicai Global 第一财经 (@yicaichina) April 21, 2021

In a note to clients Wednesday morning, analyst Gordon Johnson of GLJ Research also pointed out that:

• it was alleged by China state media that TSLA Vice President Tao Lin was absent from a scheduled seminar on Wednesday on industrial chain security at the Boao Forum after the company’s “cocky” response to a high profile consumer complaint sparked anger in China (link)
• another fiery car crash was reported in China, when the Tesla collided with a concrete barrier on the right side of the road and another small car, resulting in the death of the TSLA’s passenger on the spot, which is currently under investigation (see this link and this link)
• it was reported by state media that an unknown owner of a TSLA car in southern China’s Nanning parked their damaged car in front of a mall with banners claiming the vehicle accelerated automatically and had a brake failure (link)
• NIO’s President officially called out TSLA’s “FSD” low adoption rate, seemingly also calling into question its safety, saying: “Car companies need to refine FOTA (Firmware Over-The-Air) before pushing out advanced autonomous driving to ensure the business model works properly” (link)

“These are 6 negative headlines, just overnight, in TSLA’s highest-growth car market of China. When you add to this credible allegations that the deciding US authority (i.e., the NHTSA) has used flawed data when investigating the safety of TSLA’s cars (link), it seems the conclusions made by China’s regulators in their investigations could yield a different result,” Johnson wrote. 

Recall, a protestor at the Auto Shanghai expo this week climbed on top of a Tesla Model 3 sedan and screamed in protest while wearing a t-shirt that said “The Brakes Don’t Work” and “Invisible Killer”. Video of the incident has caught fire in China and ” hit a nerve in China, sending complaints about the company ricocheting across the Chinese internet,” according to the Wall Street Journal. 

The woman was eventually dragged away by security guards, but not after catching the attention of hundreds in the building – and millions more on the web. The hashtag of the incident was viewed by 150 million people on Weibo, WSJ reported. 

Her plight garnered sympathy online, with one user saying Tesla was “hoodwinking Chinese consumers” and others encouraging people to buy from competitors. Another user with 5 million followers shared their “litany of complaints” about other alleged glitches with their Tesla. 

In a statement, Tesla said the woman’s father was involved in a February accident where his Model 3 crashed into another vehicle. She had demanded a refund from the company, blaming the crash on a “technical problem”. Tesla said that her father had wrecked due to “excessive speed”. A woman who claimed to be the protestor wrote on a Weibo account that she would “seek justice through the legal system” and that the incident “exposed the true face behind Tesla’s vaunted brand”.

The woman was “detained for five days”, according to a local police statement provided by Bloomberg on Monday night. 

Even more interesting – as we continue to watch for signs of tumult between Elon Musk and the CCP – was the Global Times’ quick response to the incident, broadcasting it on its Twitter feed the day it happened:

Tesla expanded its investment in Chinese market during the stormy time of Trump administration-initiated trade war. Tesla and Chinese consumers reaching a win-win result is what most Chinese people want to see. https://t.co/iNTPANqugT

— Hu Xijin 胡锡进 (@HuXijin_GT) April 20, 2021

The US Postal Service (USPS) has been running a secret program to track and collect Americans’ social media posts – including those about planned protests, according to a document obtained by Yahoo News.

The surveillance program – operated by the law enforcement arm of the USPS, is known as iCOP or “Internet Covert Operations Program” – has not been previously made public according to the report.

The work involves having analysts trawl through social media sites to look for what the document describes as “inflammatory” postings and then sharing that information across government agencies. –Yahoo News

“Analysts with the United States Postal Inspection Service (USPIS) Internet Covert Operations Program (iCOP) monitored significant activity regarding planned protests occurring internationally and domestically on March 20, 2021,” reads a government bulletin dated March 16, marked as “law enforcement sensitive” and distributed throughout the Department of Homeland Security’s fusion centers.

“Locations and times have been identified for these protests, which are being distributed online across multiple social media platforms, to include right-wing leaning Parler and Telegram accounts.“

The report cites intelligence that ‘a number of groups were expected to gather in cities around the globe on March 20 as part of a World Wide Rally for Freedom and Democracy’ against pandemic lockdown measures.

“Parler users have commented about their intent to use the rallies to engage in violence. Image 3 on the right is a screenshot from Parler indicating two users discussing the event as an opportunity to engage in a ‘fight’ and to ‘do serious damage,’” reads the bulletin,” though it hedges with “No intelligence is available to suggest the legitimacy of these threats.”

The bulletin includes screenshots of posts concerning the protests from Facebook, Parler, Telegram and other social media sites (only one of which – Parler – was ‘canceled’ by big tech).

“iCOP analysts are currently monitoring these social media channels for any potential threats stemming from the scheduled protests and will disseminate intelligence updates as needed,” reads the bulletin.

Post Office Redacted by Yahoo News

Read the rest of the report here.

Authored by Ben Wilson via SaraACarter.com,

A new poll from Pew Research reveals that 48% of those polled believe illegal immigration “a very big problem,” while only 47% consider the coronavirus outbreak to their most pressing concern, which was a lower percentage of Americans than those polled last year.

“The survey finds that, for the most part, the public’s views of major problems facing the U.S. are little changed from about a year ago,” Pew Research said.

“However, the share of Americans saying the coronavirus is a very big problem has declined 11 percentage points since last June (from 58% to 47%), while the share citing illegal immigration has increased 20 points (from 28% to 48%).”

Those polled appeared to give their findings based on what political party lines.

“While views of most national problems are divided along partisan lines, including illegal immigration, increasing shares of both Republicans and Democrats rate illegal immigration as a very big problem. Nearly three-quarters of Republicans (72%) say illegal immigration is a major problem, up 29 points since last June. The share of Democrats who say this is a major problem is now 29%, compared with 15% nearly a year ago,” the poll findings said.

Interestingly, the issue of the federal deficit has changed in which political party views it as a problem.

“Over this period, Republicans and Democrats have moved in opposite directions in concerns about the federal budget deficit. Currently, 71% of Republicans say the budget deficit is a very big problem; about half of Republicans (49%) said this in June 2020. By contrast, just 31% of Democrats rate the deficit as a major problem, down from 45% last year,” the report said.

Read the full poll findings from Pew Research here…

After eight consecutive auctions which saw the yield on the recently reintroduced 20Y Treasury rise, moments ago we got the latest 20Y bond auction (in the form of the 19-year 10-month reopening of CUSIP SW9), which saw the first sequential decline in the auction yield, and with a high yield of 2.144%, the April 20Y auction not only was below the March 2.29% high, but also stopped through the When Issued by 0.9bps.

The Bid to Cover was less exciting, dropping from 2.51 to 2.42, which still was above the six-auction average; the internals were mixed, with Indirects taking down 58.7%, down from 61.4% last month and below the recent average of 59.7. But while Indirects were muted, Directs jumped to 20.2%, the highest since the 20Y auction was reintroduced last May. That meant that Dealers were left with just 21.1% which in turn was the lowest since the reintroduction of the 20Y auction.

Overall, a solid showing and certainly far stronger compared to the March debacle when the entire bond market went haywire after “that” extremely ugly 7Y auction at the end of February unleashed rates turmoil.

 

To everyone who said that it was only a matter of time before Beijing blinked in its latest encounter with the harsh reality of market logic… congrats, you were right.

One day after the latest report – this time from Reorg Research – that China was considering options for bad-debt asset manager Huarong that included restructuring the debt of its offshore unit and which again sent Huarong dollar bonds tumbling, Beijing has had enough of the daily rollercoaster and leaked through Bloomberg – which quoted the usual “people familiar with the matter” – that the central bank is considering a plan to “assume more than 100 billion yuan ($15 billion) of assets from China Huarong Asset Management, helping the state-owned company clean up its balance sheet and refocus on its core business of managing distressed debt.”

As Bloomberg’s PBOC source details, under the proposal that’s still being finalized and could change, a PBOC unit would assume assets from some of Huarong’s unprofitable operations. At the same time, China Huarong International Holdings Ltd., the offshore unit that issues or guarantees most of Huarong’s dollar bonds, is in the process of transferring distressed assets worth tens of billions of yuan into a separate offshore entity called China Huarong Overseas Investment Holding Co., a move which is also aimed at improving the financial health of China Huarong International, the group’s main link to overseas funding.

Naturally, if the PBOC proposal is effectuated, it would not only end the turmoil surrounding Huarong’s future – and its dollar bonds – but mark a significant show of government support for a company that has faced intense investor scrutiny after missing a deadline to report earnings at the end of March.

It would also ease much of the pressure that China’s dollar bond sector has found itself in in recent days as speculation about a looming debt restructuring sent Huarong’s dollar bonds to record lows last week, stoking market contagion and prompting some investors, as Bloomberg put it, “to reconsider assumptions about implicit government guarantees that have underpinned China’s credit market for decades.”

Understandably, Huarong’s bonds have swung wildly in recent days amid conflicting signals about the company’s fate. The company’s 4.5% perpetual bond gained 6.4 cents on the dollar to 79.8 cents on Wednesday, while its 3.75% dollar bond due in 2022 climbed 5 cents to 87.7 cents.

“The news suggests that the central government is examining options to provide bail-out solutions to Huarong,” said Dan Wang, an analyst at Bloomberg Intelligence in Hong Kong. “The potential involvement of the PBOC, which is experienced in handling distressed financial institutions, also gives the market more hope that the Huarong saga will be dealt with in an orderly way that is less likely to incur losses for offshore bondholders.”

In retrospect, the bailout was inevitable: with nearly 1.6 trillion yuan of liabilities including $22 billion in dollar bonds, and a vast web of connections with other financial institutions, Huarong has long been among China’s most systemically important companies outside the nation’s state-owned banks. It’s also majority-owned by China’s finance ministry, making it a closely watched barometer of the government’s willingness to backstop debt of troubled state-owned enterprises. Which is why the mere speculation that Beijing would let it default was enough to send shockwaves across China’s market.

Huarong and China’s three other main bad-debt managers have nearly $50 billion in outstanding dollar bonds, or about 8% of China’s overseas investment-grade credit market, data compiled by Bloomberg show. Huarong is the third largest Chinese financial issuer in international markets, according to S&P.

As Bloomberg further details, worries about the company’s fate have been most acute among offshore bondholders, in part because most of Huarong’s dollar debt contains a form of credit protection called a keepwell agreement that has yet to be fully tested in court. It’s unclear whether Huarong would be compelled to make good on more than $20 billion in dollar bonds if its offshore units — especially China Huarong International — were unable to repay.

The imminent PBOC bailout seeks to put an end to a saga that has enthralled China watchers since 2018, when Huarong’s then-chairman Lai Xiaomin was charged and then sentenced to death for bribery in one of the country’s biggest-ever financial scandals. Under Lai, who was executed earlier this year, Huarong moved far beyond its original mandate of helping banks dispose of bad debt. The company raised billions of dollars from offshore bondholders and expanded into everything from trust companies to securities trading and illiquid investments.

Despite Huarong’s history of mismanagement, some market observers have said the costs of allowing the company to suffer a major default probably outweigh the benefits.

“We see little for the government to gain in letting such a major crisis happen in an effort to eliminate moral hazard in SOEs,” Citigroup Inc. analysts including Eric Ollom wrote in a recent research report. “A financial crisis would likely result in a return to substantial monetary stimulus to counter any financial instability. The more likely policy outcome seems to be to remind investors of these risks but keep the fallout well contained.”

And just like that China blinked… again… confirming that for all its bluster and rhetoric about deleveraging and containing the world’s fastest growing debt bubble, Beijing will never have the balls to actually go through with such a plan.

Taiwan electronics manufacturer Foxconn has all but bailed on a $10 billion factory in Wisconsin which was supposed to employ 13,000 workers – only to have been plagued with setbacks and confusion from the start.

Under a deal announced on Tuesday with the state of Wisconsin, Foxconn will slash its planned investment to $672 million, and cut the number of new jobs to just 1,454 according to Reuters.

The Foxconn-Wisconsin deal was first announced to great fanfare at the White House in July 2017, with Trump boasting of it as an example of how his “America first” agenda could revive U.S. tech manufacturing.

For Foxconn, the investment promise was an opportunity for its charismatic founder and then-chairman, Terry Gou, to build goodwill at a moment when Trump’s trade policies threatened the company’s cash cow: building Apple Inc’s iPhones in China for export to America. -Reuters

The Wisconsin manufacturing campus was originally slated to be 20 million square feet in what would have been the largest investment in US history for a foreign-based company. The location would have built flat-panel displays for TVs and other devices, however the plan had more than a few hitches.

As we noted in October, execution of Foxconn’s plan was plagued with issues from the start. There was talk about Foxconn needing to bring in its own Chinese engineers due to skilled labor shortages. But we can’t say for certain whether this, or another issue – say the souring mood between Washington and Beijing – might be to blame.

The initial deal called for Wisconsin supplying $3.3 billion in state subsidies in exchange for Foxxconn investing $10 billion into a new LCD manufacturing plant, which was projected to create 13,000 “family sustaining” manufacturing jobs; that’s a rate of roughly $230,000 per job. However, the state has already sunk money into the project. Though none of what has been spent so far can be clawed back from Foxconn.

From the beginning, the vision for Foxconn’s first factory in the US seemed almost too grandiose to be true. And as early as 2018, it appeared that the company had dramatically scaled back its plans. Since then, the company has been – as the Verge put it – “confusing the hell out of Wisconsin”, one minute saying plans for the factory had been abandoned, before turning right around and saying they were back on.

At one point, the company promised to instead fill the space with a much smaller number of “knowledge workers” working on a “mysterious” platform called “AI 8k+5G”, which sounds like some kind of inside joke.

After walking away from the record-breaking incentive deal struck by Foxconn Chairman Terry Guo and Gov Walker, the new administration in Madison has been pushing Foxconn to return to the table (since the state already spent money on preparing the site where the groundbreaking was held), and on Monday, officials utilized the last bit of leverage available to them: they denied Foxconn’s request for some of the tax subsidy “credits” (which take the form of direct payments from the state Treasury to Foxconn) to which the company claimed it was entitled.

And now, Foxconn has thrown in the towel – leaving Wisconsin with a vastly downscaled project that will employ just a fraction of the workers originally promised.

Having refused to provide a ‘science-based’ answer to Jim Jordan’s recent question of “when will we get our liberties back?,” Dr. Anthony Fauci (in between commenting on gun violence as “a national health crisis”), blamed Republicans, well, for pretty much everything.

He-who-must-be-obeyed declared authoritatively:

“The fact that one may not want to get vaccinated, in this case a disturbingly large proportion of Republicans, only actually works against where they want to be.”

“They want to be able to say these restrictions that are put on by public health recommendations are things that they’re very concerned about. We’re all concerned about that. We share that concern. But the way you get rid of those restrictions is to get as many people vaccinated as quickly and as expeditiously as possible,” he added.

“On the one hand, they want to be relieved of the restrictions. But on the other hand, they don’t want to get vaccinated. It just almost doesn’t make any sense,” Fauci further proclaimed.

Of course, Fauci has been exposed numerous times over the past year of his tyrannical rule, e.g. his flip-flopping over mask-wearing (no masks needed, wear your mask indoors, wear two masks?), and the ineffectiveness of lockdowns (please explain the difference in deaths/cases between locked-down California and ‘free’ Florida).

And so it’s likely not a surprise that Fauci blaming Republicans for the lack of herd immunity (which by the way some real scientists believe we have almost achieved) is not true, as instead of middle-aged white-supremacist anti-vaxxers, it is the younger cohorts of the population that are refusing to take the ‘Fauci ouchie’.

As Bloomberg reports, Millennials and Gen Z are more likely to be hesitant about getting vaccinated than their elders.

While the majority of Brits will take the vaccine, young people are the most hesitant.

It’s a similar picture in the U.S., young Americans display the most hesitation when asked whether they would get the Covid-19 vaccine

Simply put, younger people just aren’t as scared of the virus, and rightly so given the ‘risk’ of the virus to younger, healthier people is almost negligible.

As the chart shows, adults in their twenties and thirties are more concerned about vaccine side-effects than the virus itself.

Perhaps instead of warning of “impending doom” (as the new CDC Director did), or rejecting science (as Fauci has been unable to explain), or politicizing the vaccination process (as Fauci has done), some “truth” on the real risks would serve “we, the people” better:

“Dr. Fauci needs to put up or shut up,” Senator Rand Paul recently told Cavuto.

“He needs to show us the scientific evidence that it’s a problem after you’ve been vaccinated or after you’ve already got the disease naturally.”

For now, the US is 4th globally in terms of percentage of the population that is 100% vaccinated (scientists initially estimated that 60 to 70 percent of a population would have to acquire resistance to Covid-19 in order for herd immunity to take effect, a threshold that has been revised upwards since the start of the year with 80 to 85 percent quoted in some cases).

You will find more infographics at Statista

For now, Senator Paul sums up our reality rather darkly: “We do what we’re forced to do to live in Dr. Fauci’s world.”

As about half of America celebrates the guilty verdict handed down yesterday by a jury to former Minneapolis Police Officer Derek Chauvin, Democrats are moving to exploit the moment for maximum political impact. Even as the department struggles to recruit enough officers to fill the places left by a wave of quitters and retirees, AG Merrick Garland announced Wednesday that he is launching a federal investigation into the Minneapolis Police Department.

The investigation will focus on identifying whether the Minneapolis Police Department “engages in a pattern or practice of using excessive force including during protests,” Garland told a group of reporters on Wednesday during brief remarks at the DoJ.

As the NYT explains, so-called pattern-or-practice investigations are often the precursors to consent decrees, court-approved deals between the DoJ and local governments that create and enforce a road map for training and operational changes. The paper also noted that this new DoJ inquiry into the Minneapolis police department is different from the existing DoJ investigation into whether Officer Chauvin violated Floyd’s civil rights.

On Friday, Garland reversed a Trump era policy curbing the use of “consent decrees”, which the Obama administration had repeatedly used as a tool to address police misconduct.

Meanwhile, critics have already emerged to point out that Chauvin likely has a path to getting the convictions tossed out on appeal. Constitutional Lawyer Jonathan Turley published a column in the Hill explaining exactly how that might happen. Turley’s opinion largely focuses on remarks made by Congresswoman Maxine Waters, who traveled to Minneapolis to join the protesters ahead of the verdict.

Damage Below the Waters Line

Rep. Waters ignited a firestorm of controversy by flying to Minnesota to tell protesters to remain in the streets and fight for “justice,” to be “more confrontational,” despite days of rioting, looting and other violence. She said no verdict in the Chauvin trial would be accepted except a conviction for first-degree murder — a demand that might be a tad difficult to satisfy since Chauvin is not charged with first-degree murder. All of this as the jury literally headed off to deliberate.

Some of us immediately noted that Waters single-handedly succeeded in undermining not just the Chauvin case but her own case against former President Trump. Waters, one of several House members suing Trump for inciting violence on Jan. 6, is now his best witnesses against her lawsuit. Where she charged that Trump sought to incite violence and intimidate Congress, Waters is being denounced for inciting violence and intimidating the trial court.

One of those denouncing Waters was Judge Cahill, who declared in open court that “I wish elected officials would stop talking about this case, especially in a manner that is disrespectful to the rule of law and to the judicial branch and our function. If they want to give their opinions, they should do so … in a manner that is consistent with their oath to the Constitution.” Calling such comments “abhorrent,” Cahill added this haymaker: “I’ll give you that Congresswoman Waters may have given you something on appeal that may result in this whole trial being overturned.”

His statement was not just a criticism but a concession that Waters’ comments could not have come at a worse time or put the court in a worse position. Some of us have criticized Cahill — who has done an otherwise outstanding job — for not changing the trial’s venue or sequestering the jury. Those rulings came back to haunt him as protests grew before the trial and then exploded with the killing of Daunte Wright in nearby Brooklyn Center, Minn. One of the Chauvin jurors lives in Brooklyn Center, where rioting and looting occurred even before Waters flew in to throw gasoline on the fire.

Cahill denied a defense motion for a new trial but acknowledged that Waters’ comments magnified the appellate challenges in sustaining any conviction. Such statements alone are unlikely to overturn a conviction — indeed, such motions are notoriously hard to win — but Waters has made it far more difficult for prosecutors in the case. The tragic irony is that Waters could be used to overturn the very conviction she demanded. If that happens, it is unlikely that rioters will go to her home or burn businesses in her district. Those crimes will be focused in Minnesota but could spend across the country, too.

The danger for unrest may be greater due to the array of charges. It is not clear that a manslaughter conviction will satisfy protesters if it is accompanied by acquittals on murder. This was always a stronger manslaughter than a murder case. More importantly, adding the murder charges created a potential flashpoint for protests with any acquittal or later reversal on appeal. Moreover, while total acquittal seems unlikely, there is a possibility of a mix of acquittals and a hung jury that could ignite further rioting.

And with the trial of Chauvin’s fellow former Minneapolis officers now seemingly a forgone conclusion, we imagine there will be plenty more room for federal grandstanding by Democrats eager to burnish their ‘social justice’ credentials.

From the grassrootiest of supporters to some of the game’s greatest players, there was much rejoicing overnight as all six English teams abandoned the newly-formed European (Soccer) Super League, implicitly killing the project before it got off the ground.

While owners’ greed, ego, and efforts to ‘Americanize’ the world’s most popular sport were blamed, there is another that has faced serious condemnation… Jamie Dimon and his firm JPMorgan.

Bloomberg summed things up perfectly by writing:

“Funding a revolution is always a risky business, and one of the world’s largest banks is now exposed to a very public defeat in the emotional arena of soccer.”

As a reminder, JPMorgan agreed to back Europe’s breakaway league to the tune of 4 billion euros ($4.8 billion), which have filled Dimon and his investment-banker pals’ pockets with millions in fees… but now that the coup is over, they will get nothing.

Rejoice at the defeat of globalist JP Morgan’s attempt to destroy English football. #BrexitBritain

— Nigel Farage (@Nigel_Farage) April 20, 2021

Farage’s tweet offers key insight that while the bank may not suffer economically, it’s a reputational hit that exposes a huge underestimation of the potential backlash from upending a sport with deep traditions and local roots.

“It didn’t seem co-ordinated and almost didn’t seem thought through,” said Steve Greenfield, a professor of sports law at the University of Westminster.

“It was business-based and lost sight of the sporting connotations.”

“The Beautiful Game” remains in the hands of the many (for now).

Hey Jamie, after destroying football which sport is JPMorgan “fixing” next?

— zerohedge (@zerohedge) April 21, 2021

As Rabo’s Michael Every noted earlier, victory for the people’s game! Victory for localism over globalism! Well, yes,…except it’s far from certain the British government will now act as promised to deliver real power back into fans’ hands via partial ownership of the clubs they worship to stop this happening again. Moreover, the pre-existing football structure we revert to includes an expanded gilt-edged Champions League format, and a game that is still more about money than it is about anything else.