Category: zerohedge

Authored by Michael Lebowitz and Jack Scott via RealInvestmentAdvice.com,

On April 29, 2020, Jerome Powell said: “both the depth and duration of the economic downturn are extraordinarily uncertain.”

We are often critical of Federal Reserve policy and contradictory economic jargon coming from Fed presidents and governors.  However, to our amazement, Fed Chairman Jerome Powell surprised us with a moment of clarity.

No truer words were ever spoken.

His statement is so obvious, it is profound. Yet, if you only follow the financial media or much of social media, you might think his statement hyperbolic. The future, according to so many “experts”, is certain.

In case you haven’t heard, the economy will gradually re-open, and, in time, everyone will go back to work and resume the same lives and consumption patterns they were leading in 2019.

This reassuring picture of economic resurgence and a return to normal is simply a matter of harnessing the virus.  We, also hope, the confidence exuding from the experts, being paraded around the clock on CNBC and Bloomberg, turns out to be correct.

Think Outside of the Box

Wealth is not built, accumulated, or retained on hope. Building wealth comes from analytical rigor and a strong knowledge of data, facts, and history. Building wealth comes from avoiding debilitating losses, and it is built by thinking for yourself.

There are no stories in the history of pandemics causing global economic shutdowns at times with extreme debt levels and eye-watering asset valuations. There is no relevant historical guidance for what may happen next.

However, we can evaluate various events throughout history, study their intricacies, and use them to arrive at a range of potential outcomes under current circumstances. What we learn by doing so, and what Chairman Powell reminds us, is that the future is far from certain.

Dare we say, extraordinarily uncertain?

Nth Order Effects

Economic devastation will not heal itself in months or quarters and disappear, even if the virus does. The implications of bankruptcy and joblessness and a host of other financial, psychological, and societal issues dictate the path going forward.

Monetary and fiscal stimulus will ease some of the pain today, but at a cost. The pandemic has scarred people in ways that Wall Street and the media do not understand.

It is hard enough to forecast the first-order effects of the virus and its economic impact. Now consider the impossibility of understanding the myriad of second and third-order effects.

Anticipating these effects is like solving a Rubik’s Cube. If you twist a row to the left, what does that do to the other five sides? But that analogy is too simple. Make the cube an octagon and add ten more rows and columns.  Now add a series of rules, so each square is a chess piece and is limited in how it can be twisted.

To see a few shifts of the cube and think we can foretell the future is misleading at best and more akin to delusion.

Unforeseen Effects

As we wrote this article, President Trump announced that the China Trade Deal is now secondary to what China did with the virus. Treasury Secretary Mnuchin followed that by warning, there would be “very significant consequences” if China does not make good on the trade agreement. The saber-rattling re-opens the following considerations:

• Trade War

• Tariffs

• De-globalization

We are witnessing a classic second-order effect, and but one example, that no one was planning for a few weeks ago.

The previous trade war happened when the U.S. and global economy were healthy. Despite the economy, trade barbs between Chairman Xi and President Trump took the S&P down 20%.

So now, the U.S. is engaged in a war on two fronts. One with another global power and one with a microscopic enemy. The list of possible second-order effects from these two issues is extremely complicated and unpredictable. Further, second-order effects often create third and fourth-order effects, and so on.  

Buy and Ignore

Stock prices and valuations are a function of the economy but are quite often trumped by confidence or lack thereof.

Despite depression-like GDP and unemployment data, which will undoubtedly be an anvil on corporate earnings, the S&P 500 has recently staged an eye-popping rally. April, in fact, witnessed the largest monthly percentage gain in over 30 years.

The S&P 500 is still down about 15% year to date, so some concern remains priced into asset prices.

However, consider that despite the selloff, valuations remain near record levels and, in some cases, are even higher today. In other words, for all the uncertainty, the market has not corrected at all.

Investors must be extremely confident that today’s problems will be fleeting and will not have significant lasting effects.

Summary

Extraordinary is defined as “very unusual or remarkable.”

Chairman Powell and the Fed, who tend to sugar-coat issues and take a cup-half-full approach, are warning us. What we are witnessing and experiencing is rare and, in many respects, without comparison.

No one knows how the future plays out geopolitically or economically, but we are experiencing a paradigm shift. Things have changed, and are changing, quickly. The “experts” are only experts at concocting compelling narratives. The ones who talk the most were cheerleaders during the dot-com bubble and never saw the onset of the great financial crisis. They are parrots repeating smart-sounding but empty phrases.

Many economists and investment strategists continue to use the lens of the past ten years in evaluating economies, markets, and investment ideas. They do not yet grasp that the next ten years may not be recognizable from the last ten years.

Do not assume that anyone, ourselves included, has the answers. Investment management is a dynamic process that should hinge first on sound risk management. As the Rubik Cube turns and the chess pieces move, we learn more, allowing us to adjust and change our minds.

Today’s complexities will reward those who manage risk well.

Belgian intelligence suspects Chinese spies of targeting biological warfare and vaccine experts, according to Belgium’s security service, which also believes Beijing is targeting the Belgium office of British pharmaceutical giant and vaccine manufacturer GlaxoSmithKline (GSK) as well as domestic high-tech firms, according to EU Observer.

The suspicions were detailed in confidential Belgian reports dated from 2010 to 2016, seen by EUobserver.

They were meant to alert Belgian authorities to the threat of Chinese military, scientific, and medical espionage.

But the Belgian suspicions have no direct link to the current coronavirus pandemic, which started in China in December 2019 due to natural causes, according to the scientific consensus.

And the reports, which were written by Belgium’s homeland security service, the Veiligheid van de Staat (VSSE), nowhere accused China of having a covert biological weapons programme. –EU Observer

China’s EU mission has denied any wrongdoing, and said that they’ve always acted “in accordance with local laws.”

That said, one of the 2016 reports reads: “This area [biological warfare and vaccines] is of great interest to Chinese [intelligence] services. Both defensively, because China, due to its overpopulation, is very exposed to epidemics, as well as offensively, since it has studied Ebola as an offensive vector.”

The Belgian intelligence reports used multiple human informants, while the security service also says that China wasn’t the only country showing interest in the subject. Top Belgian bioweapons expert Jean-Luc Gala reportedly had a “suspicious” Russian assistant.

Former Belgian bioweapons expert and inspector for the military, Martin Zizi, told EU Observer “I was as much a target from the US, Russian, Chinese, or even African sides.” The VSSE report says that Zizi was targeted by Chinese spies in 2010 when he was a science professor at the Vrije Universiteit Brussel (VUB).

He was very friendly with a Chinese scientist, whom he had “introduced into the scientific and medical milieu” in Belgium, the VSSE said.

But the Chinese scientist used to be a military doctor in the Chinese army, the VSSE noted, and “she might keep too-close ties with her country in general and her former employer in particular”, it added.

“She was obviously MSS,” the Belgian security source told EUobserver, referring to China’s Ministry of State Security (MSS). –EU Observer

Jean-Luc Gala – a retired colonel and current the head of the Centre de Technologies Moléculaires Appliquées (CTMA), a Belgian military-private joint venture that does bioweapons research – was also targeted by China when he was using mobile laboratories deployed in remote areas of Guinea testing Japanese anti-viral drug Avigan, which is now being researched as a potential coronavirus treatment.

The CTMA itself was described as being “ahead of its time on the subject of bioterrorism”, by the Belgian spy service.

It is located on the campus of the Université catholique de Louvain (UCL) in Louvain-la-Neuve in central Belgium.

But a few years ago, the VSSE noted that two suspicious Chinese entities had opened offices on a different floor of the same campus building that housed units of the Belgian bioweapons institute.

The first one, Beijing ZGC Science Park, folded in 2018, and had been a “non-specialised wholesale trade” company, according to its declarations in the National Bank Belgium.

The second one, Shenzhen European Office, is a branch of a Chinese regional development agency and is still operating at the same UCL address.

But one of its top people, a Chinese official, fell under suspicion because he had been “remarkably idle” in public terms for five years since arriving in Belgium, the VSSE said in a report in July 2016. –EU Observer

 Read the rest of the report here.

Authored by Jon Street via CampusReform.org,

A Northwestern University history professor called into question the accuracy of a New York Times Magazine essay that won a Pulitzer Prize. 

The Pulitzer Prize Board announced Monday that Nikole Hannah-Jones had won a Pulitzer Prize for her essay published as part of the New York Times Magazine‘s 1619 Project, in which she made the claim that American colonists sought independence from Great Britain because “they wanted to protect the institution of slavery in the colonies.”

Congratulations to @nhannahjones of @nytimes. #Pulitzer pic.twitter.com/ToOmaB8ZI8

— The Pulitzer Prizes (@PulitzerPrizes) May 4, 2020

But as Campus Reform previously reported, Hannah-Jones asked Northwestern University history professor Leslie Harris to fact check the essay before it was published and, according to Harris, she flagged the portion of the essay claiming that American colonists’ motivation in claiming independence was to maintain the institution of slavery. 

Harris noted that while that may have been one of the factors that led to the Revolutionary War, it was not the primary determinant.

Despite the historian’s concern, however, the New York Times and Hannah-Jones published the essay anyway. On Monday, it won a Pulitzer.

Media Research Center’s TechWatch Vice President Dan Gainor previously told Campus Reform, “The New York Times 1619 Project wasn’t about history, it was about rewriting history.” 

“Journalism doesn’t really deliver news now; it delivers narrative. To the Left elite like The Times, there’s no narrative they want to destroy more than American exceptionalism,” Gainor continued.

“If America had been more evil from the founding, then everything it created must be destroyed – the Founders, the Declaration of Independence, the Constitution, religious freedom, gun rights – everything Americans hold dear.” 

“The actual truth of American history isn’t the narrative that the Times cares to report,” Gainor added.

Harris told Campus Reform Tuesday, “I agree with the New York Times‘s clarification, as printed on March 11, 2020.” 

That “clarification,” however, was more of a doubling down. 

“Today we are making a clarification to a passage in an essay from The 1619 Project that has sparked a great deal of online debate. The passage in question states that one primary reason the colonists fought the American Revolution was to protect the institution of slavery. This assertion has elicited criticism from some historians and support from others,” the Times stated.

“We stand behind the basic point, which is that among the various motivations that drove the patriots toward independence was a concern that the British would seek or were already seeking to disrupt in various ways the entrenched system of American slavery,” the paper added. 

Hannah-Jones’ essay, at the time of publication, still stated, “Conveniently left out of our founding mythology is the fact that one of the primary reasons some of the colonists decided to declare their independence from Britain was because they wanted to protect the institution of slavery.”

That statement seems similar to the one Harris originally disputed.

“At one point, she sent me this assertion: ‘One critical reason that the colonists declared their independence from Britain was because they wanted to protect the institution of slavery in the colonies, which had produced tremendous wealth. At the time there were growing calls to abolish slavery throughout the British Empire, which would have badly damaged the economies of colonies in both North and South,'” Harris wrote in her March 6 op-ed.

“I vigorously disputed the claim,” Harris wrote at the time.

“Although slavery was certainly an issue in the American Revolution, the protection of slavery was not one of the main reasons the 13 Colonies went to war.”

The Pulitzer Prize Board did not respond in time for publication of this article.

One month ago, with the S&P500 staging an impressive V-shaped rebound from the March 23 lows after the Fed unleashed a nuclear bomb of monetary stimulus, we showed that forward stock multiples had surged right back 19.4x, which was just above the level the S&P500 held on Feb 19 when it was trading at an all-time high above 3,330. In other words, at in the first week of April, stocks were valued the same as they were at the February all time highs, which we showed in the following chart.

Fast forward one month when two things have happened: stocks have risen further, with the S&P rising just shy of 3,000 last week, while earnings expectations across the entire world have continued to slide and are yet to stabilize let alone find an inflection point, as the following Goldman chart shows:

This means that the chart we showed above which hit a 19.4x forward P/E is now even more idiotic, and below is an update of our chart courtesy of Deutsche Bank’s Torsten Slok.

This is what Torsten said:

It is difficult to think about the E in the P/E ratio when the economy is shut down and half of blue-chip companies don’t want to provide guidance on full-year earnings because of all the uncertainty. The Fed probably doesn’t worry much about if the forward multiple is 18, 20, or 25, their clear goal is to support markets at least as long as we are in lockdown and maybe until the unemployment rate has moved into the single digits again.

And just to show the idiotic disconnect between V-shaped markets and \-shaped reality, here is all you need to know about the Nasdaq:

And just to confirm that the “disconnect between markets and data is the largest on record”, here is the only chart you need from Matt King’s latest presentation.

And as King concludes, “when limitless liquidity meets spiraling insolvency there’s bound to be a long-term price.“

Authored by James Rickards via The Daily Reckoning,

The economy remains under lockdown, although some states are beginning to relax restrictions. As with so many other aspects of American life, there’s been a red state/blue state divide.

Red states are generally more willing to reopen their economies, while harder-hit coastal blue states are generally more reluctant to open theirs.

Regardless, the economic consequences of the lockdown have been devastating, and we’ll be feeling their effects for a very long time. We’ll also be feeling the effects of the massive monetary and fiscal responses to the crisis for a long time.

There are so many government “stimulus” programs underway to deal with the New Depression it’s hard to keep track.

The Federal Reserve has at least 10 asset purchase programs going including purchases of corporate debt, Treasury debt, municipal bonds, commercial paper, mortgages and more.

Many of these are being done in a “special-purpose vehicle” using $425 billion given to the Fed by the Treasury as a kind of Fed bailout. (Of course, the Treasury money comes from the taxpayers, so you’re paying for all of this.)

Regardless of the legal structure, the Fed is on its way to printing $5 trillion of new money on top of the $5 trillion it has already printed to keep the lights turned on at the banks.

On the fiscal side, Congress has authorized $2.2 trillion of new spending on top of the baseline $1 trillion deficit for fiscal year 2020, and just authorized another $600 billion last week.

A new bill for $1.5 trillion of added spending is now being debated. Added together, that’s $5 trillion of deficit spending for this year, and possibly more next year.

Meanwhile, stimulus supporters hope that the checks Americans are getting from the government will give the economy a boost by way of increased consumer spending.

But a recent survey showed that 38% of recipients saved the money and 26% paid off debt. So the stimulus really isn’t stimulating. It’s main effect is to increase the deficit and the national debt.

But don’t worry, say the supporters of Modern Monetary Theory (MMT). We know how to stimulate the economy and who cares about the debt? It hasn’t been a problem yet and we can expand it a lot more.

Until a few months ago, MMT was a quirky idea known to very few and understood by even fewer.

It actually wasn’t modern (the idea has been around for over 100 years) and it wasn’t much of a theory because there was no way to test it in a controlled environment.

The basic idea is that the U.S. government could merge the balance sheets of the Treasury and the Federal Reserve and treat them as if they were a consolidated entity. (That’s not legally true, but never mind.)

The Treasury could spend as much money as it wanted on anything it wanted. MMT asks, if the Treasury doesn’t spend money, how are people supposed to earn any?

Ideas like hard work, innovation and entrepreneurship don’t enter the discussion. In MMT, all wealth comes from the government and the more they spend, the richer we get.

The Treasury finances this spending by issuing bonds. That’s where the Fed comes in.

If the private sector won’t buy the bonds or wants too high an interest rate, the Fed can just crank up the printing press, buy the bonds with money created from thin air, stick the bonds on its balance sheet and wait.

So the Fed can just give the Treasury an unlimited line of credit to spend as much as it wants.

When the bonds come due in 10 or 30 years, the Treasury can repeat the process and use new printed money to pay off the old printed money.

It all sounds nice in theory, but it’s an invitation to disaster.

If inflation breaks out, it will be too late to get it under control. You can’t just flip a switch. Inflation is like a tiger. Once it gets out of its cage, it’s very difficult to get it back in.

If confidence in the dollar is lost (something the Fed and Treasury can’t control), hyperinflation could wreck the economy. That could lead to social unrest, riots and looting, especially if the wealth disparities created by the Fed’s support of the stock market continue to grow.

Would there be any winners if MMT ran off the rails? There would be one big winner – gold.

A few weeks ago we reported that something “impossible” just happened in the world of structured credit: a CLO had just failed its AAA overcollateralization test, an event that was formerly considered impossible perhaps because it did not take place even during the depths of the global financial crisis in 2008/9.

And as increasingly more “impossible” events took place over the past two months, here is something else that should not have happened. As Bloomberg reports, “in one of the more desperate acts of the coronavirus-fueled credit crunch, a hedge fund last month sold about $100 million of European collateralized loan obligations for about a fifth of their face value.” 

The hedge fund offloaded stakes in the lowest-rated tranches of European CLOs to a small group of banks including Bank of America said the anonymous Bloomberg sources, adding that while secondary market trading in CLO equity has been sparse in recent weeks mostly because one can driver a Hummer through the bid and ask, with U.S. deals seen anywhere between 20 to 80 cents on the dollar, depending on the quality of the collateral pool, market participants said.

The recent collapse in cash flows has triggered a record wave of rating agency downgrades with Moody’s recently warning it may cut the ratings on $22 billion of U.S. CLOs – a fifth of all such bonds it grades. The ratings agency took action on 859 bonds from 358 CLOs that package leveraged loans into securities of varying degrees of risk and return. The step – which according to Bloomberg affects about 19% of Moody’s-rated CLOs that purchase broadly syndicated loans – comes as the underlying debt gets downgraded at a record pace.

As Bloomberg then pointed out, CLOs “are being downgraded at a pace so frenetic that it threatens to overwhelm safeguards that were put in place to ensure the securities’ financial strength.”

As a result of the growing risk that increasingly more lower-rated tranches stop paying interest, hedge funds – which bought the structured debt using borrowed money – have found themselves in a liquidation panic since the Fed has so far refused to bail out CLOs, willing to take massive losses on holdings just to recover some principal. Ironically, CLOs, which package and sell leveraged loans into chunks of varying risk and return, became a darling of asset managers from pensions to hedge funds in recent years as record low interest rates and depressed bond yields encouraged investors to take greater risk. One such “investor” was Scaramucci’s SkyBridge Capital whose fund of funds plunged 22% as a result of its billions in CLO investements.

As Bloomberg adds, some analysts expect as many as one in three U.S. CLOs may soon have to limit interest and principal payments to holders of the riskiest and highest-yielding part of the CLO structure – the equity portion. And, as we first reported on April 20, payouts are already at risk of being cut off for investment-grade tranches in about a dozen different transactions totaling a few billion dollars, including the formerly untouchable AAA tranche.

One thing that is certain is that the CLO firesales are only just starting as the asset class is battling not only a collapse in cash flows but a wave of downgrades to underlying corporate loans that threatens to overwhelm safeguards put in place to ensure the securities’ financial strength. One example: CLO debt rated BB fell to as low as 60 cents in late March, with the gauge rebounding in recent days to about 68 cents according to Palmer Square data.

But while it’s only a matter of time before the lower tranches are now toast, keep an eye on the top of the stack: that’s where the real pain for retirees and pensioners will soon be found.

Authored by James Bianco, op-ed via Bloomberg.com,

The S&P 500 Index has rallied 28% from its low this year on March 23, with Wall Street praising the Federal Reserve for basically creating money to purchase a broad range of securities, effectively supporting asset prices.

So now, many believe the bear market that saw the S&P 500 plunge 34% over the course of five weeks starting in late February is over and that major stock indexes will not revisit their recent lows.

Don’t count on it.

The basis for the optimistic outlook  is based on three ideas, starting with “you can’t go wrong co-investing with the Fed.”

The central bank on March 22 announced what is probably the most aggressive set of moves in its 106-year history. They included a reduction in the target federal funds interest rate by 1 percentage point to zero as well as numerous liquidity facilities to support various parts of the financial market. If the Fed, with its nearly unlimited ability to print money, is buying, how could prices ever go down? That notion alone was reason enough for investors to buy.

Optimism was further fueled by some states starting to lift shelter-in-place orders.

Georgia and Texas were among the first to announce plans to begin opening their economies. About 30 other states will begin easing restrictions in the days and weeks ahead.

And there is finally some hope in the battle against the spreading pandemic, with Gilead Science Inc.’s remdesivir drug being found effective in shortening hospital stays for those with the coronavirus.

The Food and Drug Administration approved its use for Covid-19 patients on May 1.

Now, though, investors will increasingly need proof that these reasons for optimism are bearing fruit. In Wall Street parlance, investors “bought on the rumor,” and any setbacks may cause them to “sell on the news.”

When considering the potential magnitude of the economic rebound, recall that the deepest post-World War II recession was the last one, which lasted from 2007 to 2009. At its worst, real gross domestic product fell 4% from its peak. Put another way, the economy held onto 96% of its pre-recession output.

That was still enough to push the unemployment up to 10%, cause the S&P 500 to fall as much as 56% and spark social unrest.

This time around, a re-opening of the economy would have to lead to an almost complete rebound in output for Fed support of asset prices to hold at current levels. This seems unlikely if the state re-openings are accompanied by de-risking, de-globalization, extended periods of social distancing and a more cautious attitude in general.

Even with output returning to 90% of its previous levels, it’s likely that the recession the economy is now in would be twice as bad as the one during the financial crisis, suggesting the recent rebound in equities has gone too far. On Friday, the government will probably say that the U.S. unemployment rate reached 16% in April, much higher than the peak of 10% in October 2009, according to a Bloomberg survey of economists. 

And at that level of output, highly indebted governments and companies will struggle. A 10% decline in revenue is enough to blow a big hole in government budgets, requiring massive tax hikes or bailouts. Companies would be unable to stay profitable or meet debt payments, let alone dividends.

We saw this in October 2008 when the Fed also went to unprecedented levels to support plunging markets. Along with a bailout of the banks via the Troubled Asset Relief Program, or TARP, the Fed was also trying to support asset prices at too high a level. As a result, the S&P 500 fell 25% over the following six months.

This leaves the hope of a vaccine as the sole reason to believe that economic output will soon return to 100% of 2019’s level, which is the only way current asset valuations make sense.

But hope is not a strategy. As cities and states begin to re-open their economies and hard data becomes available, the fear of missing out in the stock rally,  or FOMO , may be replaced by the realization that a return to a pre-virus world will be much more difficult than imagined.

In a bombshell exclusive, Reuters reports the Trump administration is readying plans to initiate a pact among US allies for mining the moon: 

The Trump administration is drafting a legal blueprint for mining on the moon under a new U.S.-sponsored international agreement called the Artemis Accords, people familiar with the proposed pact told Reuters.

The agreement would be the latest effort to cultivate allies around NASA’s plan to put humans and space stations on the moon within the next decade, and comes as the civilian space agency plays a growing role in implementing American foreign policy. The draft pact has not been formally shared with U.S. allies yet.

Notably, and now grabbing international headlines, Russia is to be excluded from the pact, which is already sounding like a ‘NATO in space’ alliance of sorts, due to its “hostile” actions which includes “threatening” satellite maneuvers toward US spy satellites in Earth orbit. 

Reuters continues: 

The Artemis Accords, named after the National Aeronautics and Space Administration’s new Artemis moon program, propose “safety zones” that would surround future moon bases to prevent damage or interference from rival countries or companies operating in close proximity.

The pact also aims to provide a framework under international law for companies to own the resources they mine, the sources said.

The report notes further the moon is expected to be a future jumping off point for similar exploration and mining possibilities on Mars. 

The White House has already named specific partner countries it expects to kickstart the moon mining pact with: 

In the coming weeks, U.S. officials plan to formally negotiate the accords with space partners such as Canada, Japan, and European countries, as well as the United Arab Emirates, opening talks with countries the Trump administration sees as having “like-minded” interests in lunar mining.

Russia, a major partner with NASA on the International Space Station, won’t be an early partner in these accords, the sources said, as the Pentagon increasingly views Moscow as hostile…

However, anonymous top US officials interviewed by Reuters sought to underscore: “This isn’t some territorial claim.”

The Artemis Accords … propose “safety zones” that would surround future moon bases to prevent damage or interference from rival countries or companies operating in close proximity. Via @joroulette @Reuters https://t.co/X9cf2kObCw

— Sarah Cammarata (@sarahjcamm) May 6, 2020

“The idea is if you are going to be coming near someone’s operations, and they’ve declared safety zones around it, then you need to reach out to them in advance, consult and figure out how you can do that safely for everyone,” the source added.

But we highly doubt Moscow will see it like this, given it looks like Washington is trying to claim moon resources exclusively for itself and its allies, even before the futuristic sounding industry of ‘moon mining’ gets its start, not to mention the question of whether the technology exists to mine the moon on a large scale. 

Since the launch of Trump’s ‘Space Force’ – now officially the newest branch of the American military, critics warned of a coming and dangerous ‘weaponization of space’. Russian officials and media especially underscored just such a likelihood.

The newly revealed ‘Artemis Accords’ sound precisely like a first monumental step toward this future scenario.

Authored by Stephen O’Neal via CoinTelegraph.com,

Ukraine’s Ministry of Energy believes that using power plants for crypto mining could be one of the best ways to take advantage of a current energy glut.

image courtesy of CoinTelegraph

Cryptocurrency mining is a contemporary and efficient way to use excess energy, Ukraine’s Ministry of Energy argued in a May 6 statement published on Facebook. According to the post, local nuclear plants have generated the surplus due to the COVID-19 lockdown. 

The course toward digitalization

The bureau is now looking to apply progressive solutions to avoid wasting energy as part of the government’s course toward digitalization championed by president Volodymyr Zelensky. Leaving the situation unchanged might create “conditions for corruption offenses, which will ultimately be paid at Ukrainian citizens’ expense”, the ministry warns.

Crypto mining, in turn, could prove to be one of the efficient solutions, the post continues:

“There is a way to transfer this ‘liability’ into an ‘asset’. One of the modern approaches for using excess electricity is to devote it to cryptocurrency mining. That would not only allow to maintain the guaranteed load on the nuclear power plants, but also ensure that companies can attract extra funds. Therefore, it would open the way to a fundamentally new economy, new approaches, a new market model.”

As previously reported by a Russian-language crypto news outlet Forklog on May 5, the acting head of Ukraine’s Ministry of Energy requested the state-owned enterprise Energoatom to study potential ways to implement cryptocurrency mining at the country’s nuclear energy generating facilities by May 8. 

A potentially profitable operation?

Power plants have been used for cryptocurrency mining before, although not on a government scale. As reported by Cointelegraph in March, a privately-owned power plant in New York’s Finger Lakes region turned to Bitcoin (BTC) mining, adding about $50,000 worth of BTC each day to daily revenues.

Every quarter, banks proudly announce their VaR limits to demonstrate to the world just how overcapitalized they are for a worst case scenario. The only problem is that VaR calculations look at the past, not future, and when we get a forced global economic shutdown as a result of a viral pandemic which sends the VIX above 80, VaR models tend to… fail.

That’s what happened with the two largest European banks HSBC and BNP, whose risk limits were brutally and repeatedly violated in March as unprecedented market volatility made a mockery out of the banks’ estimates on how much they could lose or gain on their trading desks.

According to Bloomberg calcualtions, Europe’s two biggest banks exceeded their value-at-risk, or VaR limits, a measure of risk used to calculate how much capital they need to hold against potential losses, more times in March than over several years during calmer times.

In March alone, London-based HSBC’s trading models breached the daily expected profit-and-loss threshold 12 times, while French megabank BNP Paribas, which suffered hundreds of millions in losses on its various equity derivative products as discussed previously, reported nine such violations during the same quarter, close to a third of all such instances reported since 2007.

HSBC had 15 “back-testing exceptions” in January and March, when the firm was caught out by moves in the prices of precious metals. Europe’s biggest bank said it made two outsized profits and one loss in January that were driven largely by palladium volatility; subsequent problems were caused in part by “delivery disruptions in the gold market” which means that we now know which bank was on the other side of the gold spot-future trade.

While HSBC said it would normally only expect to record two to three breaches in an entire year, the pandemic “caused price disruptions that have not been observed in the past two years,” according to a filing, and in a statement to Bloomberg, the bank added that VAR “modelling forms just one part of our market risk management toolkit.” Hopefully the other “models” are more credible and don’t boil down to “beg central bank for bailout.”

At the same time, Germany’s Deutsche Bank reported several such “backtesting outliers” as well, while the largest Swiss bank, UBS, reported three “negative backtesting exceptions” in the quarter because of “unprecedented price moves in various asset classes,” filings show.

As Bloomberg notes, regulators have closely scrutinized banks that have problems gauging the risks their traders are taking ever since the huge losses racked up during the last financial crisis. While significant breaches usually lead to automatic penalties, regulators have naturally eased off when the breaches do occur, given how quickly trading models can become obsolete during such a virus pandemic, which begs the question: just what use are capital markets models, or stress tests for that matter? (Don’t answer, Nassim Taleb has written several books on the subject).

In March, the Bank of England said that it would temporarily allow banks to offset increases in value-at-risk calculations “through a commensurate reduction” in other risks they take. Which, considering the surge in loan standards, apparently means no longer offering loans or credit cards to ordinary peasants.

At BNP Paribas, the average daily value at risk soared to €35 million because of “the shock of volatility on equity markets,” mostly from mid-March onwards, according to a presentation Tuesday. That was the highest level in four years, and 49% above its quarterly average last year.

The surge in the VaR which caught the French bank unprepared, was reflected in BNP Paribas’ results. Its stock-trading business swung to a loss in the quarter, even as FICC climbed 35% as investors lifted their trading in interest rates, foreign exchange and corporate debt. Deutsche Bank has said the impact of the modeling breaches was mitigated because the European Central Bank relaxed its rules, and there was no overall impact on its capital requirements as a result.