Category: zerohedge

By Simon Watkins of OilPrice.com

China has proven with Iran that it has much practice and great skill in working around sanctions, and the U.S. has made it even easier to do so in the case of Russia in several ways, including leaving gaping loopholes in its sanctions that China and Russia can exploit. The current ambiguity surrounding these mechanisms suits China perfectly, as until it believes that it is militarily, technologically, and economically able to directly challenge the U.S. as the world’s number one superpower its strategy will remain to gradually build up its economic power through the multi-generational power-grab project, ‘One Belt One Road’ (OBOR), as analysed in depth in in my new book on the global oil markets.

This project contains within it a corollary colonialist element by dint of its land and sea routes secured through chequebook diplomacy. Given this, China cannot afford at this stage of its strategy to be seen to back Russia fully in President Vladimir Putin’s apparently ill-considered invasion of Ukraine and this was clearly evidenced in China’s abstentions – unwanted and unexpected by the Kremlin – in the United Nations Security Council’s votes last Friday firstly to condemn the war and secondly on whether to open the special emergency session of the General Assembly the next day. One basic factor that has worked in China’s favour in circumventing sanctions on continuing to do business, especially oil and gas business, with Iran – and will equally apply to its doing the same with Russia – is the lack of exposure of China’s firms to the U.S. financial infrastructure – particularly to the U.S. dollar – and the ease with which companies can set up new special purpose vehicles to handle ring-fenced areas of their businesses to allow for special situations, such as sanctions.

As a corollary of this operational independence, China made no secret at the time of the pre-2016 sanctions against Iran or the post-2018 sanctions against it that it was going to use its Bank of Kunlun as the main funding and clearing vehicle for its dealings with Iran. The Bank of Kunlun has considerable operational experience in this regard, as it was used to settle tens of billions of dollars’ worth of oil imports during the U.N. sanctions against Tehran between 2012 and 2015. Most of the bank’s settlements during that time were in Euros and Chinese renminbi and in 2012 it was sanctioned by the U.S. Treasury for conducting business with Iran. Rather like Iran – whose Foreign Minister, Mohammad Zarif, infamously stated back in December 2018 at the Doha Forum, that: ‘If there is an art that we have perfected in Iran, [that] we can teach to others for a price, it is the art of evading sanctions’ – China has always regarded any U.S. sanctions as a fun puzzle to solve. 

Washington learned early on – when it sanctioned Zhuhai Zhenrong Corp, the massive state-owned oil trading firm founded by the man who started oil trading between Beijing and Tehran in 1995 as a means by which Iran could pay for arms supplied by China to be used in the Iran-Iraq War – that Beijing would not be playing the sanctions game according to anyone’s rules but its own. Indeed, at a time when according to the U.S. ‘there is clear evidence that China did not import any crude oil from Iran in June [2020] for the first time since January 2007’, OilPrice.com showed that over a period of only 51 days just before the U.S. statement, China imported at least 8.1 million barrels of crude oil (158,823 barrels per day) from Iran.  

In the case of Russian oil and gas exports, though, there is no need for China to go through all the trouble it took to circumvent the sanctions on Iran, for three key reasons. Firstly, there are currently no direct sanctions in place from either the U.S. or the E.U. on Russian oil or gas energy exports. A statement was released over the weekend that both are discussing a ban on Russian oil imports but this has not been approved yet and can still be worked around by China in the same way it did for Iran. In fact, despite several announcements last week of various types of sanctions being placed on a slew of Russian banks, one bank that was notably absent from all of the U.S.’s lists was Russia’s third biggest lender, Gazprombank, which serves Russian state gas giant (with huge oil interests as well) Gazprom. Indeed, Gazprombank and Russian state-owned banking giant, Sberbank, are also not on the list of the seven institutions that the E.U. wants banned from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging and payments system. 

The second reason why Russia and China are untroubled that their oil and gas trade will be affected is that, in addition to the de facto exemptions so far granted to the aforementioned institutions, the U.S. issued on 24 February the ‘General License 8A’ waiver. Although this sounds as sexy to many as a cold haddock, to would-be sanctions evaders it is the waiver equivalent of Scarlett Johansson or Brad Pitt. Just in case any potential sanctions evaders may have missed the signal being given by the U.S., the U.S. Treasury Department went to great trouble to explain the nub of the point: “Treasury is reiterating … that energy payments can and should continue.” In its further detailed guidance, just in case any would-be sanctions evader thought that they would have to engage in any tricky manoeuvring to circumvent the wrath of the U.S., the Treasury explained how to use the waiver to continue to deal with a Russian oil or gas company: “For example, a company purchasing oil from a Russian company would be able to route the payment through a non-sanctioned third-country financial institution as an intermediary for credit to a sanctioned financial institution’s customer in settlement of the transaction.” The Treasury concluded: “Treasury remains committed to permitting energy-related payments – ranging from production to consumption for a wide array of energy sources – involving specified sanctioned Russian banks.” 

Even in the unlikely event that this extraordinary free-for-all waiver is stopped, the third reason why China and Russia will continue to go about their oil and gas trade – and all other trades – relatively unhindered is that over the past few years they have been securing their own bilateral infrastructural and financial structures for years, as also analysed in-depth in my new book on the global oil markets. China has long seen increased internationalisation of its renminbi currency as a fitting reflection of its growing status in the world and the chief executive officer of Russia’s Novatek, Leonid Mikhelson, said in September 2018 that Russia had been discussing switching way from US$-centric trading with its largest trading partners such as India and China, and that even Arab countries were thinking about it. “If they [the U.S.] do create difficulties for our Russian banks then all we have to do is replace dollars,” he added. At around the same time, China launched its now extremely successful Shanghai Futures Exchange with oil contracts denominated in yuan (the trading unit of the renminbi currency). Such a strategy was tested initially at scale in 2014 when Gazpromneft tried trading cargoes of crude oil in Chinese yuan and roubles with China and Europe.

Infrastructural development for oil and gas trading between China and Russia has also been extremely extensive in recent years, as examined several times in depth by OilPrice.com. The most recent examples of this was, in the oil sector, Rosneft signing an US$80 billion 10-year deal to supply the China National Petroleum Corporation (CNPC) with 100 million metric tonnes of oil over the period (slightly over 200,000 barrels per day). In the gas sector, at almost exactly the same time, Gazprom signed a 10 billion cubic metres per year (bcm/y)  deal to supply gas to CNPC, adding to another supply contract between the two companies signed in 2014 – a 30-year deal for 38 bcm/y to go from Russia to China. This, in turn, is part of, and augments, the ‘Power of Siberia’ pipeline project – managed on the Russian side by Gazprom and on the China side by CNPC – that was launched in December 2019. And just in case there were any doubts on where China stands – in practical terms – on Russia in light of its invasion of Ukraine, Beijing’s foreign ministry spokesperson, Wang Wenbin, said in a press conference on 28 February: “China and Russia will continue to conduct normal trade cooperation in the spirit of mutual respect, equality and mutual benefit.” For good measure, over the weekend China warned the U.S. against any moves that “adds fuel to the flames” in Ukraine and its Foreign Minister, Wang Yi, called on the West to take account of Moscow’s concerns about NATO expansion.

Submitted by QTR’s Fringe Finance

This is part 1 an exclusive Fringe Finance interview with shipping analyst (and friend of mine) J Mintzmyer, where we discuss the state of the Russian invasion of Ukraine and its effect on markets and shipping stocks.

J is a renowned maritime shipping analyst and investor who directs the Value Investor’s Edge (“VIE”) research platform on Seeking Alpha.  You can follow him on Twitter @mintzmyer. J is a frequent speaker at industry conferences, is regularly quoted in trade journals, and hosts a popular podcast featuring shipping industry executives.

J has earned a BS in Economics from the Air Force Academy, an MA in Public Policy from the University of Maryland, and is a PhD Candidate at Harvard University, where he researches global trade flows and security policy.

Part 2 of this interview will be up in days.

Q: How has the invasion of Ukraine changed the short-, mid- and long-term outlook for shipping?

It’s important to recall that most shipping markets, with the exception of oil tankers, were already very tight prior to the recent invasion of Ukraine. This invasion and the ripple effects of international sanctions are likely to have 3 key effects:

1) There will be significant delays and increase of congestion around regional ports, which could escalate further to major hubs like Rotterdam. This will synthetically reduce supply of ships similar to the disruptions we saw around COVID shutdowns.

2) Food and energy products must eventually move, so we will likely see re-routing into less efficient trade channels across the world. This will lead to higher total ton-miles (i.e. total cargo moved x distance between trading partners), which is the correct way to measure shipping demand.

3) Higher oil prices drive up the cost of the bunker fuel utilized by ships, which will incentivize “slow steaming” to consume less fuel, providing an additional synthetic supply reduction.

Ultimately, we have two clear pathways to reduce available ship supply in the short- and medium-term as well as one pathway to increase demand. There is a common misconception that ties shipping demand to global GDP growth or to total global commodity consumption, but that’s not the correct way to analyze the markets.

You have to look at trade routes on a product-by-product basis and see what happens when inefficiencies are introduced. There can be a scenario where total transport volumes go down, but ton milage still increases, and I think we likely see that outcome in both grain trades and crude oil trades. 

In the longer-term, we need to be cognizant of the potential ripple effects to the global economy. Russia makes up an extremely tiny slice of global GDP once we exclude oil, gas, and other commodities, but it is still worth considering. Additionally, if the war ravages all spring, summer, and next fall without agricultural exclusion zones or other mitigating events, we could have a global food shortage crisis on our hands by next fall/winter. It’s still too early to be making strong predictions here, but I am watching the situation as closely as possible.

If short-term is a few weeks, then shipping is likely mixed, slightly bullish. Medium-term, say 1 month through a year, I believe shipping companies and equities are extremely well positioned. In the longer-term, there are legitimate concerns about global food crisis, extreme energy prices, and the ultimate impacts to the global economy.

Shipping doesn’t do well in a global recession, but it can be an amazing place to be in a mature cycle. Lots of 10-bagger returns in shipping from 2005-2008 and valuations today are even lower than valuation in 2005. 

What parts of the shipping/logistics sector haven’t yet seen their stocks rise in proportion to what you think they will? Have any stocks gone “unnoticed” yet?

Great question! Folks are always looking for the ‘uncovered gems’ so to speak and of course I have to reserve a good portion of our ongoing research for members of Value Investor’s Edge, but I will foot-stomp a couple previous public picks which haven’t moved much even as fundamentals have significantly increased.

The added ‘bonus’ of these firms is that the core business is based on long-term contracts, so although they are benefiting at the margins from the current supply chain tensions, these aren’t ‘boom and bust’ operations.

These two stocks are Global Ship Lease (GSL) and Textainer Group (TGH). Although both stocks have increased on a y/y basis, both firms are significantly cheaper today in terms of current and forward earnings multiples, free cash flow multiples, net asset values, and virtually any other valuation metric than they were a year ago. Both companies were included in our latest Value Investor’s Edge top picks update (posted for members on March 2nd), which highlighted 14 firms across the industry. 

What is the best possible outcome, assuming a ceasefire tomorrow, and a worst possible outcome, assuming the conflict in Ukraine lasts many more months or years?

I’m glad we agree on what the best outcome would be, since my best wish would be for this crisis to be resolved tomorrow. It is important to remember that shipping stocks were performing incredibly well before any of the Ukraine tensions and eventual invasion, so any sort of return to normality would still be good for these firms!

In terms of a near-term ceasefire, sadly it does not appear likely at this stage, but if it does occur, we should see a significant drop in oil and gas prices and a slow return to pre-war situations in shipping.

However, sanctions tend to be stickier on the way out, so I still expect trade disruptions and re-routing to continue. I also expect both European and Asian nations to significantly bolster their stockpiles of all types of commodities, which of course would lead to a surge in dry bulk and tanker demand, likely for at least several years. A reminder that dry bulk supply/demand remains incredibly tight and the current orderbook (i.e. forward supply) is the lowest in modern history. And that’s before considering significant environmental regulations which begin kicking in January 2023!

The worst outcome, without getting into the extremes of thermonuclear war (in which case, stocks are irrelevant), would be a multi-year conflict which disrupts the global food and energy supplies, leading to millions facing starvation along with extremely high oil prices ($150-$200+), which could threaten the global economy. As I mentioned above, if you believe a global recession is likely, then shipping isn’t likely to perform well. However, almost nothing performs well here, so S&P 500 (SPY) and Nasdaq (QQQ) index puts probably make a lot more sense than trying to bet against shippers. 

If we’re in a similar state as 2006, for instance, there could indeed still be a recession down the road, yet many of these firms might still return 2,3, or even 5-10x, in the final stages of the global economic cycle.  

Part 2 of this interview can be read here. 

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Disclosure: J is long EGLE, GSL and TGH. J and I may have positions in other names mentioned in this interview. J is a podcast Patreon of mine and has been donating to my podcast monthly (as listeners already likely know from my constant shout-outs), though that is not why I seek his expertise. I have known J and have been reading his work for almost a decade now on Seeking Alpha and have met him numerous times in person. He’s a top class person – and analyst – in my opinion.

I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. I may hedge in any way. None of this is a solicitation to buy or sell securities. Please do not attempt these trades at home. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I get shit wrong a lot. 

By Joseph Hanneman of The Epoch Times

Richard ‘Bigo’ Barnett, the Arkansas man photographed with his feet up on a desk in House Speaker Nancy Pelosi’s office on Jan. 6, 2021, would spend 70 to 87 months in prison under a plea agreement offered by the U.S. Department of Justice.

Barnett, 61, of Gravette, Ark., faces three charges from his time in the U.S. Capitol, including knowingly entering or remaining in any restricted building or grounds while armed with a dangerous weapon, violent entry and disorderly conduct on Capitol grounds, and theft of public money, property, or records.

Barnett’s attorney, Joseph McBride, rejected the plea offer, calling it “ridiculous.” Barnett will proceed to trial this fall, he said.

“The very general question is, ‘Does the punishment fit the crime?’ And the answer is a resounding, ‘Hell no.’” McBride told The Epoch Times. “There is no standard of reasonableness under which 70 or 87 months of incarceration for a 61-year-old man with no criminal record can ever amount to justice.

“In this situation, it is egregious. It is disgusting,” McBride said. “It is a criminalization of the First Amendment’s right to participate in political speech. While it was not a perfect day, he certainly should not spend years of his life—basically the entire decade of his 60s—behind bars. It’s ridiculous.”

According to federal prosecutors, Barnett entered into the conference area of the Speaker’s office about 2:50 p.m. and left at 2:56 p.m. He put his feet up on a desk and posed for photographs that went viral on the internet later that day.

Theft Charge Came from an Envelope

Barnett picked up an empty envelope addressed to Rep. Billy Long (R-Missouri), then carried it out with him because a cut on his finger dripped blood on the paper, McBride said. Barnett gave the envelope to FBI agents when he first met with them in January 2021.

Barnett cut his finger when a crowd pushed him through the Capitol’s Columbus Doors a short time before he entered Pelosi’s office, McBride said.  

We received the Government’s plea offer this week: 70-87 months for a glorified trespass.

No criminal history.
Non violent on J6.
Pushed in to the Capitol.

They can stick it where the 🌞 don’t shine.

On to trial we go.

Visit my website to fund @BigoBarnett’s freedom fight. 🇺🇸 pic.twitter.com/0G4L5ymWqe

— Joseph D. McBride 👑✝️👑 (@McBrideLawNYC) March 7, 2022

Law enforcement got a tip that Barnett was carrying a stun gun in the photos taken in the office of Pelosi (D-California). It was later determined to be a ZAP brand Hike ’n Strike aluminum walking stick with built-in flashlight and 950,000-volt stun gun.

McBride said the stun function was disabled the day prior, and there were no batteries in the device on Jan. 6. Barnett only used it as a walking stick that day.

“It’s clearly not working. So for them to use this as an excuse to give him an exorbitant amount of time, it’s ridiculous,” McBride said. “They’re just using it as a pretext to hit him over the head with a hammer because of the fame that came along with his picture.”

Barnett described the situation with a bit more color in the government’s charging documents.

“I did not steal it. I bled on it because they were macing me and I couldn’t [expletive] see. So I figured, I am in her office. I got blood on her office. I put a quarter on her desk, even though she ain’t [expletive] worth it.

“And I left her a note on her desk that says, ‘Nancy, Bigo was here, you [expletive],’” Barnett said.

Sentencing in the Spotlight

The sentencing of non-violent Jan. 6 offenders became a nationally discussed issue last week with the Feb. 25 suicide of Matthew L. Perna, 37, of Sharon, Pennsylvania. Perna hung himself in his garage after learning the U.S. Department of Justice would seek sentencing enhancers that could have put him in prison for 41 to 51 months.

Perna spent 20 minutes in the Capitol on Jan. 6. He was not accused of vandalism, violence, or engaging with police. His plea deal included a felony for obstructing an official government proceeding, the certification of Electoral Votes by Congress.

McBride said excessive sentencing recommendations are part of a strategy.

“They want to crush all things January 6-related, when it comes to you being on the opposite side of the political spectrum,” he said. “They are merciless, they are soulless, they have evil in their hearts.

“It’s very unfortunate. And that’s that’s why we’re in this fight,” McBride said. “They’re not going to pitch a shutout. They’re not going to win all these trials. They’re going to start to take losses at some point. They know that, so they are getting their pound of flesh now.”

Earlier today, when discussing the various supply-driven actions at the disposal of politicians and markets to reduce the price of oil including SPR releases, core-OPEC surge, and potential lift of sanctions on oil imports from Iran and Venezuela – Goldman said that while such measures could help offset a sizable decline in Russian seaborne exports, they would leave the global oil market with no buffer, still requiring demand destruction through higher prices. In fact, Goldman – as well as JPMorgan, BofA and MS – have also been saying that demand destruction – i.e., a sharp, induced economic slowdown – is the only solution to soaring oil prices.

Well, sure enough, demand destruction is now here, gradually at first and then all at once.

Stratospheric oil prices are flowing through into the plastics industry with producers reducing activity as profit margins collapse, a first sign of the demand destruction that may spread to other sectors.

As Bloomberg notes, several Asian operators of plants that make the petrochemicals used as the building blocks for everything from children’s toys to car interiors have cut processing rates to as low as 80%. The facilities, known as crackers, typically run at or near full capacity.

Speaking to Bloomberg, several traders said that the soaring price of crude and question marks over the supply of oil-derived naphtha – a popular feedstock in Asia – from Russia are challenging the economics of producing plastics in crackers in South Korea, Taiwan and Malaysia. They added that the problems are an early indication of the difficulties Russia’s invasion of Ukraine may create for industries that rely on raw materials.

Think of it as supply-chain chokepoints, and in this case the weakest link is naphta: according to industry consultant FGE, as much as 15% of Asia’s naphtha imports come from Russia and the Black Sea and Baltic regions. But amid the sanctions fallout, many petrochemical plants have paused purchases from Russia, and are also hesitant to buy crude from anywhere at such high levels, given that their finished products won’t be ready for around six weeks or so. Expensive freight rates are adding to the problem and causing companies to cut activity now rather than risk massive losses.

“The situation is very foggy for crackers in Asia,” said Armaan Ashraf, a senior analyst at FGE. It’s a “big risk” to buy naphtha when crude is at $130 a barrel, he said, adding that profit margins are going to stay poor for at least a month.

The premium for prompt naphtha deliveries to Asia over contracts another month out is more than $30 a barrel, compared with less than $10 in early January. The so-called backwardation is another indicator of anxiety over the extremely tight supply situation.

This fiasco also is a harbinger of what will happen to profit margins once soaring commodities pass through the income statement (spoiler alert: they will crash). Indeed, as Bloomberg notes, profit margins from products including ethylene and propylene – which are used to make plastics – were already weak and have shrunk further since Russia’s invasion of Ukraine.

Which brings us to the demand destruction: Taiwan’s Formosa Petrochemical is running crackers at its Mailiao plant at 80% to 85%, while Lotte Chemical Titan Holding has cut run rates at its facility in Malaysia to below 90% and plans to reduce them further if market conditions deteriorate, while Hanwha Total Petrochemical, Lotte Chemical and LG Chem in South Korea have lowered processing by 10% to 20%, traders said.

The cost of producing ethylene from naphtha was $1,200 to $1,300 a ton in Asia last week, but it was fetching only around $1,200 in the market before shipping, according to IHS Markit, part of S&P Global. “The crackers aren’t making money,” said April Tan, an associate director at IHS.

* * *

We have also seen demand destruction in a completely separate place and industry: packaging group Pro-Gest has announced a temporary production stop at all of its six paper mills due to exorbitant energy prices.

Italy’s integrated tissue und packaging producer Pro-Gest has announced that production at the group’s’s six paper mills operating in Italy has been suspended. The company said that following the rapid escalation of natural gas prices, now at historic highs, it was resorting the force majeure and had decided to temporarily stop production.

Pro-Gest operates nine tissue and packaging paper machines at its six paper mills. Packaging production is not affected and the packaging plants will continue producing normally for the time being, the company reports.

“We are closely monitoring the war situation and are deeply saddened for the Ukrainian people hoping for an immediate solution to the armed conflict. Also because of the severe tensions we are witnessing, we have to record that the price of natural gas, now more than ten times higher than twelve months ago, has tripled in little more than a week. We will do our best to support our customers by assessing the delivery situation on a case by case basis. We sincerely hope to be able to resume production as soon as the situation allows,” the company said in a statement.

Russians who want to convert their rapidly devaluing rubles, as Joe Biden was quick to point out today…

“1 ruble is now worth less than 1 American penny,” Biden says.

Russia is facing a blitz of more than 2,000 economic sanctions over its invasion of Ukraine https://t.co/yndHY0idkv pic.twitter.com/SCejGjVet9

— Bloomberg Quicktake (@Quicktake) March 8, 2022

… into dollars or any foreign currency, are stuck for at least the next six months

In a statement on Tuesday, the Bank of Russia banned banks from selling cash currency to citizens who do not already have FX accounts for period of 6 months starting March 9, effectively ending ruble convertibility until September 9. It’s unclear if the ban means there effectively won’t be a RUB FX market until September, but it may also be a hint that the current crisis will be over by then, one way or another.

#BREAKING Russia suspends sale of foreign currencies until September 9, central bank says pic.twitter.com/As5KkoiWjF

— AFP News Agency (@AFP) March 8, 2022

The central bank also said that Russians who currently have accounts in FX can withdraw up to $10,000 in cash, and can withdraw additional amounts in rubles at market rate on day of issue. The bank was quick to point out that 90% of accounts in foreign currency do not hold over $10,000 and so will be unaffected, central bank says.

When FX withdrawals do happen, they will be paid in U.S. dollars, regardless of original foreign currency of account; and conversion to dollars will be at market rate, which is probably not a great option with the ruble seen trading anywhere between 120 and 170 to the dollar in the past day.

The bank also said that it may take “several days” for the banks to supply the necessary amount of foreign currency to the actual office, it added.

Meanwhile, for citizens who open new accounts in FX, withdrawals will be in rubles during this period. And of course, citizens will still be able to sell FX to banks, although we very much doubt it that there will be much demand to convert hard currency – whether FX or gold – into rubles during this crisis period.

It wasn’t immediately clear how the Bank of Russia would treat conversions in or out of gold or crypto, although if the recent shift in political sentiment is any indication…

• RUSSIA’S DEPUTY GORELKIN CALLED ON THE AUTHORITIES TO SUPPORT THE CREATION OF RUSSIAN  CRYPTOCURRENCY EXCHANGE

… Russia may soon join El Salvador as one of the most active adopters of digital currencies. For now, however, it appears locals are mostly buying gold.

The ruble hit an all-time low against Western currencies on Monday after Russia was hit by unprecedented Western sanctions targeting the central bank and major financial institutions. On Tuesday, the Russian economy was dealt another blow when US President Joe Biden imposed an embargo on US imports of Russian oil and gas.

Dozens of Western companies have fled Russia in recent days, abandoning inventory, property and investments worth billions and now sitting idle. Russia has a solution for how to deal with that: a senior member of Russia’s ruling party has proposed nationalizing foreign-owned factories that shut down operations in the country over what the Ukraine invasion.

Toyota, Nike and IKEA are among the companies that have announced shutdowns of stores and factories in Russia in order to put pressure on the Kremlin to stop its invasion of neighboring Ukraine. In a statement published on Monday evening on the United Russia website, the secretary of the ruling party’s general council Andrei Turchak said that shutting operations was a “war” against the citizens of Russia.

The statement mentioned Finnish privately-owned food companies Fazer, Valio and Paulig as the latest to announce closures in Russia.

“United Russia proposes nationalizing production plants of the companies that announce their exit and the closure of production in Russia during the special operation in Ukraine,” Turchak said.

“This is an extreme measure, but we will not tolerate being stabbed in the back, and we will protect our people. This is a real war, not against Russia as a whole, but against our citizens,” he said. “We will take tough retaliatory measures, acting in accordance with the laws of war.”

Paulig Chief Executive told Reuters in an email that this would not change its plans to withdraw from Russia.

Fazer, which makes chocolate, bread and pastries, has three bakeries in St Petersburg and one in Moscow, employing around 2,300 people. Valio has one cheese factory and employs 400 people in Russia, and Paulig has a coffee roastery and employs 200 people in the country.

A leveraged nickel exchange-traded commodity (ETC) product is dead. WisdomTree Investments announced on Wednesday the Nickel 3x Daily Short exchange-traded commodity (ticker 3NIS) has been wiped out due to the metal’s historic short squeeze in the last 48 hours. 

“The Redemption Amount of the WisdomTree Nickel 3x Daily Short securities has been calculated as zero so investors should not expect to get paid for the securities they hold,” a notice on WisdomTree’s website read. 

3NIS had a little more than $7 million in assets last week ago. The 250% surge in nickel prices on the London Metal Exchange to over $100k per ton has blown up the ETC’s commodity investments which were likely in future contracts.

On Monday, WisdomTree declared a “restrike event” for 3NIS to limit declines in the leveraged product by effectively resetting it before moves in the underlying security could destroy all value.

Here’s the full statement from WisdomTree about 3NIS’s demise: 

WisdomTree Commodity Securities Limited today announced that WisdomTree Nickel 3x Daily Short (3NIS) will be compulsorily redeemed.  

Further to the restrike announcement on 7 March 2022 where the 25% restrike threshold was triggered, the extreme and continual movements in nickel prices on the 7 March 2022, led to the product moving more than 33% from the previous close price before the restrike process was able to be concluded. As a result of this price move the Calculation Agent determined the value of the product had dropped by 100% and was less than zero (3 x 33.3334%), causing the commodity contracts to be terminated in accordance with the conditions set out in prospectus.

Application has been made to the London Stock Exchange and Borsa Italiana where the WisdomTree Nickel 3x Daily Short securities are listed to request that they are to be suspended with immediate effect and delisted. The Redemption Amount of the WisdomTree Nickel 3x Daily Short securities has been calculated as zero so investors should not expect to get paid for the securities they hold.

Leveraged products are prone to blowing up. In 2018, readers may recall that VelocityShares Daily Inverse VIX Short Term ETN (XIV) was terminated after the most popular way of shorting volatility for retail investors blew up. 

Submitted by QTR’s Fringe Finance 

I wasn’t even going to write a note this morning, but then I had an interesting set of realizations while walking to get my coffee:

1. Many young people on Wall Street nowadays have never experienced real volatility in markets

2. Russia’s invasion of Ukraine and inflation at 7.5% in the U.S. are two extremely different, complex and unmapped pieces of terrain that we are going to be forced to navigate

In other words, we have a ton of inexperienced market participants that should be bracing for the economic shock of their lifetimes, but they’re not – they’re still at the stage where walking around Manhattan in Patagonia vests, drinking Starbucks and making dinner reservations at whatever douche-motel is trendy this week are among their top concerns.

This wasn’t a big deal when I first pointed out in November that I thought the NASDAQ could crash. We weren’t dealing with Russia or inflation just 5 months ago.

In that same short span of time, risks to markets have gone from non-existent, to potentially grave. 5 months is nothing; it’s a split second when gauged relative to the reaction times of 27 year old guys named Kyle who help draw up models to justify 45x P/Es on sell side reports.

And I think there’s a chance shit gets real for the Kyles, the Tylers and the Jordans working on Wall Street, in addition to a lot of other “investors” who got their financial education from 2AM Tik Tok videos, YouTube livestreams and Twitter spaces calls with AMC “apes”, very soon.

While market pullbacks over the last two decades have been akin to light breeze on a summer day, a coming supercycle of discomfort, where the U.S. dollar is challenged and our debt may actual come due, could be a Category 5 hurricane.

And nobody has even considered “evacuating” markets yet.

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The housing crisis was almost 15 years ago at this point. We’ve had the better part of 2 decades of nothing but synthetic, Fed produced heroin, mainlined into our brokerage accounts since then.

I have a long railed against what I have called this “arrogant” monetary policy: the idea that we can micromanage the economy in a way that is going to make everybody comfortable, all the time.

I have argued that the feeling of entitlement that comes with expecting to be comfortable all the time goes beyond being “arrogant”: it’s just plain unreasonable. The laws of nature – no matter what industry we’re talking about – all but guarantee some discomfort somewhere along the way.

This is a lesson that I think we’re going to be learning the hard way this year, and potentially for years to come. Over the last 20 years, we have watched people make fortunes in the market simply by guessing a stock and pouring money into it while the Fed backstops markets from ever moving lower.

We have overdrawn ourselves at the bank, so to speak, as much as humanly possible. Not only have companies with terrible financials been bid up, they have been bid up to fever pitch valuations that – even in the best of financial circumstances – no company should really ever be afforded.

And in addition to discomfort, one of nature’s guarantees is often reversion to the mean. Reversion to the mean becomes far more painful the further off the path of normalcy you have drifted. Heading into 2022, after two years of unprecedented and basically unlimited quantitative easing, which was lopped on top of two decades of additional quantitative easing, we’ve gotten about as far off that path as possible.

In addition to veering off course, the shock of running headfirst into two immoveable monoliths of volatility – the Fed attempting to curb unrelenting and blistering inflation and an unprovoked invasion of a sovereign nation in Europe – may have only just begun to be absorbed by markets. There’s a reason that the cycle of markets diagram, when swinging lower, starts with “anxiety” and “denial”.

We haven’t even begun to approach “fear” yet, because markets have sold off in orderly fashion. This was the cornerstone of my prediction that we are still due for a limit down morning and real capitulation one of these days.

The truth is that while many investors see this as simply another “BTFD” moment like we’ve had in years’ past, we haven’t even started to ponder the long-lasting effects of what could be coming down the pike for U.S. markets, the U.S. dollar and geopolitical tensions.

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The Fed doesn’t have any other option but to hike, in my opinion – regardless of what happens in Ukraine.

Either the Fed will allow the American public to suffer through continued unprecedented inflation, which will have psychological and monetary effects on the American consumer the likes of which we’ve never seen, or they will be consistently hiking rates, which will start the countdown on a ticking time bomb of debt and malinvestment that has been gestating and growing since 1999. Given that the geopolitical conflict is making inflation worse than it was when CPI was 7.5%, the Fed is going to have to react – even if it’s just for show.

And Russia’s invasion of Ukraine is an all out wild card. Nobody knows what path it is going to go down or how it will end. Analysts have drawn up scenarios ranging from a cease-fire tomorrow to a full-on nuclear holocaust. And while there are hopes for a temporary cease-fire, which would at least stop the humanitarian crisis of killing of innocent civilians, the shockwaves on the global economic system and the geopolitical implications of Russia’s actions are likely to stick around for years to come.

In fact, I wrote a week ago that I believe this invasion marks the beginning of Russia and China’s official war on the U.S. dollar as the global reserve currency.

Both rate hikes and the geopolitical conflict will have effects, even in a best case scenario, that linger for years to come. The number of potential outcomes that can occur as a result of these effects that also end with the market moving to all time highs over the next few years, has dwindled. The outcomes that do result in new all-time highs – hyperinflation and QE – would have devastating consequences that would make the market’s move higher, in nominal terms, moot.

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Perhaps over long periods of time, the market may move higher in real terms once again, but appear to clearly be entering a stagflationary period of discomfort that many “analysts” couldn’t have ever fathomed just months ago.

And if analysts couldn’t have predicted it, markets – commodity markets, equity markets, debt markets, FX markets and otherwise – may only be pricing in the very, very beginning of this new era for the United States.

The “new era” of discomfort may not last weeks, months or years, but rather decades, especially if the U.S. dollar is finally called into question as the world’s reserve currency.

This coming week, I’ll be publishing an article that asks about the opposite idea: is it possible for us to get through this and put it behind us relatively quickly? In fact, I’ll even urge my readers to think about whether or not the worst could be over. But this morning,  I couldn’t help but feel that – even in a situation where the volatility dies down – the market’s discomfort could be long lasting.

If we are, in fact, approaching a new epoch of discomfort for investing in the U.S. (which, by the way I hate to say that we probably deserve), investors’ reactions in the public markets have still not reflected the size of the potential volatility going forward.

There’s a part of me that still believes markets need to move 30% or 40% lower just based on Fed rate hikes alone, as I predicted weeks ago. Throwing into the mix a new, uncharted geopolitical relationship with Russia and Putin as the “wild card”, I can’t help but feel that the odds of long lasting discomfort have spiked profoundly.

And remember: the next crisis, we may not be able to print our way out of anymore…

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Now read:

• Obscure & Unexpected “Wartime” Stocks That Might Slip Under The Radar

• Is Sanctioning Russians Elsewhere In The World Just A Continuation Of “Cancel Culture”?

• Nuclear Power, Gold as Money, And The Forced Pragmatism Of Wartime

• Russia And China Might Collectively Challenge The Dollar’s Reserve Status

• This Company Could Have 40% More Upside

• Is There A Case For Investing In Russian Assets?

As it turns out, American megabanks like JPMorgan and Goldman Sachs aren’t the only ones buying up distressed Russian assets. Chinese banks are also getting in on the fun.

China is considering buying or increasing stakes in Russian energy and commodities companies, such as gas giant Gazprom and aluminum giant Rusal International, according to people familiar with the matter, Bloomberg reports.

Beijing is in talks with its state-owned firms, including China National Petroleum, China Petrochemical, Aluminum Corp. of China and China Minmetals Corp., about potential opportunities for potential investments in Russian companies or assets, the people said. Any deal would be to bolster China’s imports as it intensifies its focus on energy and food security, not as a show of support for Russia’s invasion in Ukraine, the people said.

The talks are still in an early stage, and it’s unclear whether a deal will result, as the discussions aren’t public. Some talks between Chinese and Russian energy companies have started to take place. The Chinese companies involved refused to comment to Bloomberg.

As European and American firms cut ties with Russian firms, China has vowed to continue normal trade relations with Russia. The decision comes as American and European energy giant Exxon Mobil, Shell and BP have walked away from Russian assets worth billions of dollars. 

China Foreign Minister Wang Yi said during a press briefing earlier this week that China-Russia ties remain “rock solid”, even as Beijing called on Russia to engage in peace talks to try and end the war.

Among China’s current energy investments in Russia, CNPC has a 20% stake in the Yamal LNG project and a 10% stake in Arctic LNG 2, while Cnooc owns 10% of Arctic.

China and Russia have been strengthening ties for years. Just last month, President Xi and President Putin signed a series of deals to boost the Russian supply.

Gazprom and Rosneft have sealed major supply deals with China, which have helped soften the impact of western sanctions (which, remember, have largely left Russia’s vital gas and oil industry untouched). The partnership has inspired Russia’s own “pivot to Asia”, a policy that Barack Obama had also tried to impose on the US.

An investment by China could help solidify Moscow’s effort to accelerate its own “Pivot to Asia” as it looks for new markets for its energy products. China has doubled purchases of Russian energy products to nearly $60 billion over the past five years, and most analysts expect this figure to continue to rise.

U.S. equity indexes rallied early Tuesday, even as spiraling commodity prices promise even more upward pressure on inflation. Highlighting the day’s events was nickel soaring past the $100,000-per-metric-ton mark, which led the London Metal Exchange to suspend trading in the key input for stainless steel. Soon after President Joe Biden announced that the U.S. would ban imports of Russian oil, natural gas, and coal effective immediately, the U.K. government said it would phase out Russian oil and oil products by the end of 2022. Shell declared it would stop all purchases of Russian crude and shutter its service stations in Russia, while Germany’s Uniper, a major buyer of Russian gas, said it won’t sign any new contracts for long-term supply. West Texas Intermediate crude traded as high as $128 per barrel, Brent hit $132, and European natural gas prices remained near record highs. Tony Greer, founder of TG Macro and editor of The Morning Navigator joins Warren Pies, founder of 3Fourteen Research, to discuss the impact of the Russia-Ukraine war on commodity and financial markets. Want to submit questions? Drop them right here on the Exchange: https://rvtv.io/3MwxnH7