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Earlier this week, we joked about a Bloomberg story claiming a 30-year-old Credit Suisse credit-trading wunderkind was being cut adrift by the bank amid a bout of “de-risking” inspired by the twin blowups caused by Greensill and Archegos, which might cost the bank up to $10 billion.

When the trader, Moroccan-born Hamza Lemssouguer, was poached by Citadel (to join the company’s hedge fund division as a portfolio manager for a new credit fund), Credit Suisse managed to keep him from leaving with the promise that the firm would seed a new fund for him under its asset management division. Unfortunately for him, the 30-year-old trading superstar, who was in high school when Lehman collapsed, decided to listen.

Hamza Lemssouguer

Six months later, Bloomberg reports that the door to Citadel is now closed, and that Lemssouguer is pressing ahead with his fund. However, he won’t be receiving any money or support from his former employer, which has essentially cut him adrift, according to Bloomberg, which published a lengthy story about Lemssouguer’s situation.

But at the chastened Credit Suisse, which has lurched from one crisis to the next this year, Lemssouguer apparently became a risk too great. The bank on Wednesday canceled plans for the young star’s fund, cutting him loose to pursue his ambition without its money or backing. The episode stands as a marker of the bank’s abrupt change in attitude after embarrassing debacles stemming from Archegos Capital Management and Greensill Capital spiraled into billions of dollars in losses for the firm.

In the story, Bloomberg recounts how this ‘star trader’ rose from a Goldman Sachs intern to a key player in Credit Suisse’s junk-bond trading operation who had a reputation for skirting the rules. According to Bloomberg, several complaints alleging insider trading were filed to various international security-market regulators, but Lemssouguer never faced any formal punishment.

For what it’s worth, the complaints don’t sound like much, having mostly been filed by counterparties who lost money to Lemssouguer. Perhaps this is why they were never taken seriously by Credit Suisse. Or perhaps it’s why the bank decided to cut the trader adrift. Bloomberg didn’t say.

In 2019, at least three rivals and trading customers made complaints against him to the U.K.’s financial watchdog, alleging insider trading and price manipulation, according to people familiar with the matter. One of those complaints came from a hedge fund that lost money on a bet which paid off handsomely for Credit Suisse, while another came from a firm that actually made money on the trade, the people said.

Although Credit Suisse didn’t receive any formal queries from the U.K.’s Financial Conduct Authority after the complaints, some clients informally raised concerns about Lemssouguer’s tactics with contacts working at the bank, one of the people said. Those complaints weren’t escalated by the clients, the person said.

It’s not clear if the U.K. regulator looked into the complaints against Lemssouguer. The FCA will typically acknowledge any complaint to parties who file them, but may not always provide any information on how it is handling the complaint. The FCA declined to comment.

According to BBG, Lemssouguer, praised in some of CS’s marketing materials as a “savant” when it comes to managing risk, generated most of his outsize profits with a relatively straightforward strategy: He placed big, concentrated bets on the debt of distressed companies, then collected a massive premium when prices improved as the companies improved. Some accused Lemssouguer of trading on inside information, particularly regarding one trade involving the bonds of Lowell Group.

While we’re unsure whether that makes him a risk-management “savant”, or just lucky.

It’s easy to understand why Credit Suisse wanted the trader back: he ranked as one of the firm’s top performers, helping the bank’s European high-yield desk generate about $220 million in 2020 by making outsize bets in risky junk bonds, distressed debt and illiquid securities, according to people familiar with the matter. That’s about 5.5% of the bank’s total fixed income trading revenues.

In recent marketing materials, Credit Suisse described the youthful trader as a savant of the junk-bond market who generated historic profits as he wagered on the fortunes of troubled European businesses.

“His ability to understand the psychology and risk tolerance across market participants and assess liquidity in that context led to some of the most profitable years in the trading desk’s history,” according to a presentation advertising his new credit fund seen by Bloomberg News. “He was instrumental in the visibility and risk-taking capacity of the group and introduced rigorous investment and risk-management processes.”

Lemssouguer had started to meet prospective investors for his new fund, named Arini after a type of parrot he used to breed in Morocco, in 2021 and planned to raise as much as $500MM for the debut fund. However, now it’s unclear how much he has actually raised, since Credit Suisse has pulled the seed money it promised.

But the whole incident with the trader might be a learning opportunity for others: a bird in the hand is sometimes worth two in the bush.

Even though US CPI smashed expectations again, Deustche Bank’s chief credit strategist Jim Reid correctly points out that “the data isn’t going to change anyone’s mind of whether inflation is transitory or not.”

Still, as an aside for those who still care about fundamentals, he notes that the current gap between 10yr US yields (c.1.5%) and US CPI (5.0%) is a whopping 3.5%, the highest since 1980. In fact, the gap has only been more negative for 10 months in the last 70 years, all of which were in 1974, 1975 or 1980.

Another way of visualizing the unprecedented divergence between core inflation and 10Y yields is the following scattergram from Longview economics:

While such a deeply negative (albeit crude) proxy for real yields (as opposed to the manipulated ones where the Fed is implicitly setting real rates with its purchases of TIPS) is great for financial conditions today, the DB credit strategist asks, rhetorically, if “we are building up to a big accident with such a mismatch between inflation and bond yields?”

And just as rhetorically, Reid concludes that despite this stunning observation, “no-one is going to have a different opinion to what they had yesterday though” (although If anyone’s mind has changed, Reid would love to hear from you).

On June 1st, Mudrick Capital went from hero to zero in the eyes of Reddit’s Wall Street Bets rebels as the hedge fund scooped up $230 million in newly issued stock at an above market price ($27.12), prompting Redditors to herald the fund as the company’s savior and sparking a bullish move in the stock – now that the firm was (marginally) better capitalized.

In our view, this is not mindless dilution, but rather this is very smart raising of cash so that we can grow this company… to many of you on Twitter, to grow YOUR company. Watch out naysayers, $AMC is going to play on offense again. Here we come! {5 of 5}

— Adam Aron (@CEOAdam) June 1, 2021

Just a few short hours later, a Bloomberg headline knocked the firm off their ivory tower to the moon as Redditors described them as “losers,” “scum bags” and “a large waving pile of s—t with no future,” after the fund exited all of their equity position at $32 (a heroic trade making over $40 million in hours that upset the buy-and-hold frenzied WSB crowd). One Reddit post summed up their attitude to the fund’s quick profit… “Mudrick didn’t stab AMC in the back…They shot themselves in the foot.”

That is where the story ended for many…

But now, as The Wall Street Journal reports, things didn’t work out quite as well as Mudrick hoped and Redditors will get some schadenfreude payback…

It turns out that inside Mudrick, executives were growing apprehensive and the firm’s risk committee met on the evening of June 1 and decided to exit all debt and derivative positions the following day (only the cash equity position had been exited prior).

However, as WSJ notes, that was one day too late.

Jason Mudrick

As it happens that among that set of derivatives positions, Mr. Mudrick had sold call options on AMC stock, producing immediate income to offset some potential losses if the theater chain did face problems (or as some might say ‘picking up pennies in front a steamroller’). The derivatives gave buyers the option to buy AMC shares from Mudrick Capital for about $40 (viewed as a seeming improbability when the stock was trading below $10).

In overnight trading, AMC started to accelerate above $40… and within minutes of the open the next day had screamed up above $70 – sparking a massive surge in the price of those ‘sold’ call options, leaving Mudrick with a major loss…

The loss on the sold options, it turns out, was big enough to not only erase the gains, it left the previously heroic-looking trader looking like the biggest loser.

WSJ reports that Mudrick Capital made a 5% return on the debt it sold but after accounting for its options trade, the fund took a net loss of about 5.4% on AMC.

Mr. Mudrick’s fund is still up about 12% for the year, one of the people said. Meanwhile, investors who bought AMC stock at the start of the year and held on have gained about 2000%.

We can only imagine the reaction the WSB crowd once they find out about this.

Authored by Samuel Rines, Chief Economist at Avalon Advsiors,

“For a climber, saying that you are stopping by Everest is like saying that you are stopping by to see God.”

– Roland Smith, Peak

• The pace of GDP growth is likely to peak in Q2. That makes sense given the amount fiscal stimulus in the first few months.

• But it is the pace of deceleration that matters more, and that remains an open question.

• This is interest because the pace will affect inflation, yields, and the Fed.

• At the moment, it looks “peakish” from GDP expectations to Fed hike timing to CPI forecasts.

Lots of Lines… But Useful

It is a messy chart. But it communicates the point of growth being peakish for the moment and the deceleration in the future. For the second quarter, the growth expectations may be a touch high given the lagging labor market recovery (more on that topic below). That should spill into the third quarter as individuals return to work.

But the story is really about the fourth quarter and the beginning of 2022. Those estimates remain well above the longer term “potential growth” of the U.S. That is somewhere around 2.25%. This summer will continue to see eye-popping GDP and growth statistics as the economy reopens. But the question is what happens after that.

Lots of Churn

There has been a tremendous amount of commentary and headlines surrounding the JOLTS report with much of the focus on the number of job openings soaring. But what might be more important for understanding the labor market dynamics at work here is how many people are quitting their jobs. There is an incredible amount of churn in the U.S. labor force. That 3.1% quit rate represents just under 4 million people.

One side-effect of rising wages is to incentivize job switching. It may turn out that the wage gains were largely captured by quitters and switchers – not necessarily those coming back to the workforce. The churn helps explain the lack of an uptick in labor force participation while hires have moved above pre-covid levels.
How does this tie into the narrative around GDP? With this type of dynamism and job openings, it increases the likelihood of exceedingly strong growth this summer.The question of the pace of deceleration becomes a fourth quarter and 2022 question.

CPI Should Normalize

Then there is inflation.

The above chart is similar to the GDP chart only the retreat toward normality is quicker. Again, all of this makes sense. Inflation pressures are expected to be transitory. But the question is – again – the rapidity of the retreat. After all, the “base effects” that are helping make inflation look horrid today will be completely the opposite in 2022. Simply, the deceleration of inflation could be one of the more surprising features of late 2021 and 2022.

All in 2023

Why is any of the above important? All of the above complicates the Fed’s decision-making. Not to mention, the dynamics of the deceleration will also affect yields – particularly longer duration. For the moment, markets believe 2023 is the year of the hike. Expectations for 2021 and 2022 have receded. Maybe it was all the “talking about talking about taper” talk that moved expectations for a hike higher. Oddly, taper talk (and eventual tapering) would have the effect of pushing down growth and inflation expectations. And therefore yields.

And that is the odd part of all of the above. GDP is going to decelerate with inflation (probably) following suit to even greater extent. All of this while the Fed is talking about talking about tapering their asset purchases. Maybe the decline in the 10-year yield is more signal than noise. With seemingly everything looking peakish, it is worth contemplating what the otherside might look like.

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Readers may remember earlier this year when an accident at the Emergent Biosolutions lab in Baltimore led to millions of J&J and AstraZeneca doses being ruined (after workers cross-contaminated them with ingredients from AstraZeneca jabs being produced in the same factory).

Since the incident, the FDA has been reviewing safety and production procedures at the facility. But despite the US government handing over control to J&J, attempts to re-start production have been in limbo, and according to the NYT, another 60MM doses produced at the facility didn’t meet the agency’s safety standards.

In a statement, the F.D.A. said that before making its decision, it “conducted a thorough review of facility records and the results of quality testing performed by the manufacturer.” It also considered the ongoing public health emergency. The agency said it was continuing to “work through issues” at the Baltimore plant with Johnson & Johnson and Emergent.

Dr. Peter Marks, the F.D.A.’s top vaccine regulator, said in the statement that the agency has been conducting an extensive review of batches of vaccine produced at the plant “while Emergent BioSolutions prepares to resume manufacturing operations with corrective actions to ensure compliance with the F.D.A.’s current good manufacturing practice requirements.”

Representatives from Johnson & Johnson and Emergent declined to comment on the agency’s decision.

Fortunately for President Biden, the US already has enough Pfizer and Moderna doses to satisfy domestic demand. But the latest production hiccup will make it more difficult for the US to export doses to countries around the world in desperate need of them.

Of the ruined doses, 10MM will be sold in the US, and abroad with a special warning label that regulators can use for drugs that are in short supply. The warning will read that “regulators cannot guarantee that Emergent BioSolutions, the company that operates the plant, followed good manufacturing practices.”

The F.D.A.’s action is disappointing news for Emergent and Johnson & Johnson, which hired the firm as a subcontractor. Inspectors are still reviewing the plant and are not expected to decide whether the company can reopen it until later this month, according to people familiar with the situation. Regulators are also continuing to cast doubt on whether the company, which has been paid hundreds of millions of dollars by the federal government to manufacture coronavirus vaccines, adhered to manufacturing standards.

The agency’s plan to allow 10 million doses to be used in the United States or abroad with a warning is somewhat unusual for a product under emergency authorization, experts said. Regulators have the discretion to take that action if the drugs are badly needed and in short supply, they said.

In a statement, the FDA said that before making its decision, it “conducted a thorough review of facility records and the results of quality testing performed by the manufacturer.” It also considered the ongoing public health emergency. The agency said it was continuing to “work through issues” at the Baltimore plant with Johnson & Johnson and Emergent.

But the real issue here is that after months of scrutiny and interrupted production, the Emergent factory, a key piece of America’s vaccine infrastructure, still isn’t producing anywhere near full capacity.

The FDA hasn’t decided yet whether the factory should be placed back under Emergent’s control. So far, doses produced at the factory have played little to no role in the US vaccination program.  Most of the J&J doses administered in the US so far were manufactured at the company’s plant in the Netherlands. For weeks now, the FDA has been trying to figure out what to do about at least 170MM doses of the vaccine that were left in limbo after the discovery of the production mishap mentioned above.

While the loss of 60MM J&J doses that could have been sold or donated is certainly “a blow” to the Biden Administration’s vaccine policy, the White House announced earlier this week that the US had agreed to purchase 500MM more doses from Pfizer and Moderna at cost provided the vaccines are donated to other countries with greater need.

Authored by Dave DeCamp via AntiWar.com,

The US continues to downplay expectations for the upcoming summit between President Biden and Russian President Vladimir Putin that is scheduled for June 16th in Geneva.

The meeting comes as US-Russia relations are at their lowest point since the Cold War. Despite the dangerous path the two largest nuclear powers are on, the Biden administration doesn’t seem interested in any diplomatic breakthroughs.

“We’re not expecting to have a huge outcome from this,” White House Press Secretary Jen Psaki said of the summit in an interview with ABC. Psaki made it clear that Biden will take a confrontational approach to the meeting. “He’s going to be straightforward, he’s going to be candid, he’s not going to hold back,” she said.

President Biden also made his hostile approach known in comments on Wednesday from the UK. “I’m heading to the G-7, then to the NATO ministerial, and then to meet with Mr. Putin to let him know what I want him to know,” he said.

Earlier this year, Biden agreed that he believed Putin was a “killer” who has “no soul.” Besides the rhetoric, the Biden administration has slapped sanctions on Russia, supported Ukraine during a tense stand-off over Crimea and Donbas, and has sent warships into the Black Sea.

In the meantime…

Former President Donald Trump on Thursday wished President Biden luck in his upcoming meeting with Russian President Vladimir Putin — and also encouraged him to stay awake.

“Good luck to Biden in dealing with President Putin—don’t fall asleep during the meeting, and please give him my warmest regards!” Trump said in an emailed statement.

Trump to Biden: ‘Good luck’ with Putin meeting, ‘don’t fall asleep!’ https://t.co/w5HTvax2wj pic.twitter.com/W2bM4xeMO5

— New York Post (@nypost) June 10, 2021

One area Biden has said he could work with Russia on is nuclear arms control. But besides agreeing to extend New START, the Biden administration hasn’t taken any steps to foster new treaties.

Last month, the US told Russia it would not rejoin Open Skies after Moscow’s attempts to salvage the mutual surveillance treaty that the Trump administration withdrew from in 2020.