Tag: finance

In a highly symbolic and ironic move to lash out at the United States for its ongoing illegal occupation of Hasakah and Deir Ezzor provinces, the Syrian government of Bashar al-Assad marks the first to say it “supports” Vladimir Putin’s decision to recognize the breakaway separatist republics in eastern Ukraine as independent (with the obvious exception of Belarus of course). 

Syrian Foreign Minister Faisal Mekdad vowed his country “will cooperate”  with the self-proclaimed Donetsk People’s Republic (DPR) and Luhansk People’s Republic (LNR), according to Al Jazeera, citing state media. 

Damascus was among the first foreign allied governments of Russia to reportedly be briefed on Moscow’s intentions in eastern Ukraine, according to Russian media. 

Speaking of Assad, a top Russian politician responsible for communications with its Syrian ally had this to say: “He said that Syria would be ready to recognize them the way it had recognized [breakaway Georgian regions of] South Ossetia and Abkhazia” after the 2008 Russian-Georgian war, Sablin told the RIA Novosti news agency.”

With the ‘recognition’ of the Russian change in status for Ukraine’s DPR and LNR, Syria is not only hitting back at the US over the years-long push for regime change via proxy war, but is also repaying its loyalty following Russia’s 2015 intervention in Syria at Damascus’ request. Russia’s military, especially its air power, decisively turned the tide of the war in favor of pro-Assad forces.

Earlier this month Russia launched military exercises off the Syrian coast in the Mediterranean, and just last week Russian Defense Minister Sergei Shoigu met with Assad for talks while he was in the country inspecting Russia’s major airbase near Latakia. 

Stopping Russia from interfering in Syria would have been awesome for Al Qaeda & ISIS. https://t.co/5f3XOwr3d5

— Max Abrahms (@MaxAbrahms) February 21, 2022

Overall, despite some 1,000 US troops currently occupying the oil-rich northeast Syria region, the ten-year long war there is widely perceived as yet another humiliation for America in the Middle East. Assad is still in power, the main US proxies having lost the war, and Russia has a bigger than ever presence in the levant region – with Iran also more deeply entrenched than before 2011. 

Authored by Simon White via Bloomberg,

Projected rate hikes and expectations of the speed of central-bank balance-sheet contraction are ambitious and unlikely to be realized, with or without the threat of conflict between Russia and Ukraine. Yields look stretched and yield curves should soon face re-steepening pressure.

Inflation fears have prompted aggressive repricing of rates curves across the world. Despite some easing prompted by the escalation in tensions between Russia and Ukraine, the market still expects almost six 25bps hikes by the end of 2022 in the U.S. Even in Europe, where dovishness has ruled for many years, just under 40bps of rate hikes are expected by the end of this year.

But this is a very unusual rate hiking cycle. Rates have rarely been so low and central-bank balance sheets have never been so bloated. This creates a conundrum for central banks. Markets are more familiar with rate rises as a policy-tightening tool than balance-sheet contraction. The Fed — still smarting from the memory of the Taper Tantrum in 2013 — will raise rates while contracting its balance sheet. Other central banks will do likewise
This lets rate increases do some of the heavy lifting, and allows central banks to build a cushion should they need to ease policy again. But growth and liquidity conditions suggest they may barely get started before they are forced to stop again.

Take the Fed. It has a dual mandate — inflation and employment — but most market participants know it has an unofficial third mandate too: the market. The Fed hasn’t done any actual tightening, and other central banks have barely, if at all, got started, but global liquidity has already collapsed. That’s not good news for the market.

Excess liquidity — the difference between real-money growth and economic growth — tends to have the greatest impact on markets as it is the liquidity “left over” from the needs of the real economy and therefore available to boost asset markets. The fall in excess liquidity points to continued turbulence for equity markets.

The outlook for economic growth, too, is worsening. The NFIB Small Business Survey provides leading insights on the U.S. economy. Optimism is falling, which signals a slowdown in U.S. growth over the next year.

The level of implied tightening is already having an impact before central banks have materially tightened policy, making it more likely they will have to end their tightening cycles much faster than they or the market currently expect
In the U.S., implied tightening has been so extreme and front-loaded that conditions in the forward-yield space are more consistent with the end than the beginning of a rate-hiking cycle.

The Eurodollar curve between the sixth and 10th contracts (currently 2023/24 maturities) has already inverted. Normally this curve would hit its lowest point — and remain un-inverted — about one year after the Fed begins tightening.

As with the extent of anticipated rate hikes, projections for the pace of balance-sheet contraction are unlikely to be realized.

The FOMC, in the minutes released last week, implied that balance-sheet contraction will be faster than in the previous cycle. The $2.2 trillion of USTs (ex-Bills) maturing between now and 2024 will aid the Fed here, while limiting the need for active selling of Treasuries.

Nevertheless, contractions of the magnitudes being discussed have never been attempted. There is no guarantee the Fed, the ECB or any other central bank will be able to materially contract their balance sheets to the extent expected, especially when liquidity is collapsing and the outlook for economic growth is worsening.

BofA ML estimates a 20 percentage-point decline in GDP terms of the ECB’s balance sheet by the end of 2023. Wall Street estimates for Fed balance-sheet contraction are less aggressive, but still around 8-10 percentage points over approximately three years.

A 20 percentage-point peak-to-trough contraction in any central bank’s balance sheet would be unprecedented. Drawdowns of 8 to 10 percentage points have been seen before, but usually over a longer period than what is anticipated today.

Over the past 10 years, the largest balance-sheet contraction was the ECB’s in 2012-2014, of 11.4 percentage points. The SNB and the BoJ have seen similar declines, while the largest drop in the Fed’s balance sheet was about 8 percentage points between 2014 and 2019.

Balance-sheet contractions are bad for markets. In the post-crisis period (2015 to the present), equity markets have typically underperformed their long-run averages when central-bank balance sheets were shrinking.

These are not trivial matters. If they were, then there would be more examples of balance sheets returning to more “normal” levels.

The BoJ was the first to embark on QE as a “temporary” measure in 2001, yet its balance sheet has been on a one-way expansion trip for almost 15 years. Today the BoJ’s balance sheet is a dumbfounding 135% of GDP and still climbing.

The anticipated tightening currently seen is extreme, and already having a significant impact on liquidity and economic growth. Central banks are unlikely to get close to the level of rates currently priced or the anticipated reduction in the size of their balance sheets, before being forced to pause or reverse course by a worsening economic and market outlook.

After 4 straight months of decelerating US home price gains in the largest 20 cities, prices re-accelerated in December (the latest data from S&P CoreLogic), and are up a shocking 18.56% YoY (surprisingly higher than the 18.35% YoY in Nov and much higher than the 18.00% expected)…

The National home price index rose 18.84% YoY, up from 18.69% YoY in November. Both still very close to record high levels of inflation.

Source: Bloomberg

“We have noted that for the past several months, home prices have been rising at a very high, but decelerating rate,” Craig J. Lazzara, managing director at S&P Dow Jones Indices, said in statement.

“The deceleration paused in December, as year-over-year changes in all three composite indices were slightly ahead of their November levels. December’s 18.8% gain for the National Composite is the fifth-highest reading in history.”

But, we note that this is before mortgage rates really started to take off in January (was this accelerated buying ahead of the rate moves?)…

…which suggests prices are set to slow their gains faster (which fits with the slumps in homebuyer and bomebuilder sentiment). And don’t expect The Fed to save this one…

Despite being better known to younger investors for his bearish bets on Tesla, Greenlight Capital’s David Einhorn remains a hero to value investors, an investing theme that’s coming back into vogue following the most recent tech wreck and the twilight of the ZIRP environment. Most famous for shorting Lehman brothers just before its collapse, Einhorn shared some insights into his current market outlook during a recent RealVision interview with Larry McDonald, author of the Bear Traps report. After a decade-long bull run fueled by rock-bottom interest rates, Einhorn believes the market is already one year removed from its peak, and that investors will need to reasses the landscape of opportunities among both financial assets and hard assets.

Einhorn started off by discussing his early days working in banking, and then in the nascent hedge fund industry of the early 1990s. One attitude he says he remembers clearly from those days is that portfolio managers were seemingly always rewarded for doubling down on losing bets. It’s an attitude he tries to avoid at Greenlight. “I really want to hear why we’re wrong,” he said.

“I really want to hear why we’re wrong about stuff all the time. Even when things are going well you’re wrong a lot. It just means you need to reasses objectively.”

Moving on to his outlook for inflation, Einhorn said he wouldn’t be surprised if inflationary pressures persisted for longer than the Street presently expects. Instead of being “transitory” like the Fed expects, inflation could become “embedded”.

“I think there’s a range of outcomes…but I think there’s much more uncertainty than that. There are some prices that might come down like used car prices…but there are others that seem like they might go higher.”

The problem with inflation is that inflationary expectations feed on themselves, creating a vicious cycle.

“It’s not clear to me that inflation comes down at this point. Inflation could become embedded….I don’t know how to handicap it. Everybody agrees that inflation has to come down, but nobody agrees how far it has to come down.”

There’s no question that the fundamental factors influencing markets are shifting before our feet. Which begs the question, how does one protect their portfolio in this new era?

Einhorn had a few ideas, claiming that Greenlight’s portfolio is already “pretty well set up” for higher inflation.

“Our portfolio is pretty well set up for higher and more sustained inflation. Not necessarily each and every month, we have commodities, we have energy we have a life insurance company that will benefit from higher long rates.”

With inflation causing a re-rating of equity valuations, Einhorn was asked about one of his fund’s classic value plays: their successful bet on Microsoft. Unfortunately, the stock trades at a much higher multiple today.

“It’s certainly not the opportunity that it was eight years ago or ten years ago when we owned it.”

As we mentioned above, Einhorn believes that the “enormous bubble” in financial assets created by rock bottom interest rates has already peaked, and will continue to deflate.

“With a very easy monetary fiscal policy we had I think an enormous bubble these last few years. And the bubble itself seems to have peaked last February in terms of the most speculative stuff. Since then we have been going through a reversion…the most speculative stuff has derated.”

While Einhorn recognizes that he was wrong about the bull run’s potential longevity, “I think the stuff that we identified as speculative will ultimately be shown to be speculative.”

That’s because the US economy will struggle to grow during the years ahead due to a combination of secular factors.

“I think there’s going to be somewhat of a slowdown regardless of what the Fed does. The GDP is some combination of hours worked and productivity. And hours worked is very high now, because there are very few unemployed people.”

“But if you’re at full employment, then there’s not much room for hours worked to go up. It’s hard to see what’s going to drive rapid GDP growth…so you’re going to get a deceleration no matter what.”

The bottom line is this: as interest rates rise and growth slows, the outlook for speculative assets will darken as investors turn to hard assets and value plays once again.

Authored by Lance Roberts via RealInvestmentAdvice.com,

The “Fed put?” Exactly, what is it, and where does this mythical support reside?

It isn’t surprising with the rough start to 2022, investors are hoping the Fed will look to stabilize financial markets. Of course, after more than a decade of monetary interventions, investors developed a “Pavlovian” response.

Classical conditioning (also known as Pavlovian or respondent conditioning) refers to a learning procedure in which a potent stimulus (e.g. food) is paired with a previously neutral stimulus (e.g. a bell). What Pavlov discovered is that when the neutral stimulus was introduced, the dogs would begin to salivate in anticipation of the potent stimulus, even though it was not currently present. This learning process results from the psychological “pairing” of the stimuli.

Importantly, for conditioning to work, the “neutral stimulus,” when introduced, must be followed by the “potent stimulus,” for the “pairing” to be completed. For investors, as each round of “Quantitative Easing” was introduced, the “neutral stimulus,” the stock market rose, the “potent stimulus.” 

As shown, each time a more substantial market correction occurred, Central Banks acted to provide the “neutral stimulus.”

The relationship is more evident when looking at the market response to the expansion or contraction of the Fed’s balance sheet.

Not surprisingly, with investors now more bearish than 2016, just before global central banks went “full QE,” it isn’t surprising investors are hoping the Fed “rings the bell.”

In other words, “exactly where is the Fed put.”

The Fed Put

The “Fed put” is the level where the Federal Reserve will take action to begin supporting asset markets by reversing rate hikes and restarting quantitative easing (QE) programs. Recently, a BofA fund managers survey pegged 3750 as the level they thought the “Fed put” resides.

While the BofA fund managers may be correct, my targets are slightly different as they are a function of Fibonacci retracement levels from the March 2020 closing lows. From the peak close of the market, the targets are:

• 38.2% rally retracement = 3829 = 20% market decline (Fed likely worried)

• 50% rally retracement = 3523 = 27% market decline (Margin calls triggered. Fed likely acts.)

• 61.8% rally retracement = 3217 = 33% market decline (Fed put triggered)

Chart courtesy of SimpleVisor.com

Interestingly, a 33% market decline, while likely causing the Fed to reverse monetary tightening rapidly, only erases the market gains from early 2020.

However, the risk for the Fed is that something triggers an unwinding of leverage. An absolute “reversion to the mean” event would reverse markets to the previous market peaks of 2000 and 2007. For obvious reasons, the Fed will avoid that at all costs. (This shows just how extensive the Fed-fueled bull run has become.)

But will the Fed sacrifice the markets for inflation?

Will Powell Sacrifice The Fed Put?

Liquidity is the lifeline of markets, and the Fed, directly and indirectly, manages its flow via QE and zero rates. With inflation raging, the pandemic subsiding, and economic activity normalizing, the Fed is keen to start reducing liquidity via higher interest rates and reductions in its balance sheet. The purpose of normalizing monetary policy is to bring inflation down.

“The Fed is making it clear they want to reduce inflation. They are also telling us they will ensure financial stability. Sounds like a good plan, but walking the narrow tightrope successfully by achieving lower inflation without destabilizing markets is an incredibly tough task.

We think the odds of success are poor. As such, we must carefully consider which goal they will prioritize when push comes to shove.” – – Michael Lebowitz

Michael is correct. The most significant risk to the Federal Reserve is “financial stability.” Such is particularly the case with the entirety of the financial ecosystem now more levered than ever. (Margin calls get cleared by either adding cash to the account or liquidating shares. Previous ratio peaks aligned with liquidations)

The “stability/instability paradox” assumes all players are rational, which implies avoidance of destruction. In other words, all players will act rationally, and no one will push “the big red button.”

The “instability of stability” is now the most significant risk to Fed while they try to raise interest rates to lower inflation. However, as shown above, history suggests that instability will likely weigh on the Fed’s willpower to adhere to their “inflation mandate.”

While the recent 10% drawdown is in line with other periods leading to the first-rate hike of a tightening cycle, we suspect the Fed has a little tolerance for a more profound decline.

Inflation Or Financial Stability

“So asset prices are somewhat elevated, and they reflect a high-risk appetite and that sort of thing. I don’t really think asset prices themselves represent a significant threat to financial stability, and that’s because households are in good shape financially than they have been. Businesses are in good shape financially. Defaults on business loans are low and that kind of thing. The banks are highly capitalized with high liquidity and quite resilient and strong.” – Jerome Powell

While financial underpinnings seem stable currently, they historically tend to become “unstable” quickly. Such is the case when the Fed hikes rates to the point it creates an issue concerning leverage.

While the Fed is likely to hike rates and reduce monetary accommodation in their quest to battle inflation, that fight will end quickly when “instability” arises.

As Former Dallas Fed President Richard Fisher noted:

“Let’s face it, Joe, I want to come back to the alcohol metaphor we started with, the market has worn beer goggles for the longest possible time. They just the Fed’s going to bail them out.

I think the strike price on the Fed put has moved significantly [lower]. Unless we have a dramatic turn in the markets, it can infect the real economy.“

How would such a dramatic turn occur?

• At 20% margin calls will begin to rise put pressure on asset and high-yield credit markets.

• When the market declines 25%, yield curves will be fully inverted as economic growth crashes.

• At 30%, corporations will be laying off workers and moving to protect profitability.

I suspect, as noted above, that somewhere between a 20-30% decline, we will see the Fed return their focus to “market stability.”

Global stocks and US futures have staged a remarkable recovery and erased overnight losses of as much as 2.2% as investors bet that the surge in geopolitical tensions will mean a less hawkish Fed and as investors clung to hopes that Moscow’s deployment of troops to two breakaway regions in eastern Ukraine will be as far Russia goes. S&P 500 futures were fractionally in the green at 715am ET after earlier sinking 2.2% and eyeing correction territory; European stocks trimmed losses as investors weighed the risk of geopolitical tensions in Ukraine. Benchmark Treasury yields pared their decline to trade at 1.92% and gold slipped.

The spectre of war on Europe’s eastern flank had flared on Monday, sending oil prices to a seven-year high, less than a $1 away from $100, after Russian President Vladimir Putin ordered troops into the Donetsk and Luhansk regions of Ukraine.

On Monday, Russian President Vladimir Putin recognized two self-proclaimed separatist republics in eastern Ukraine and ordered the Defense Ministry to send what he called “peacekeeping forces” to the breakaway regions. In response, the United States and its European allies started to announce harsh new sanctions in response, with German Chancellor Olaf Scholz warning that the Nord Stream 2 gas pipeline would now be denied certification to begin operating.

The prospect of a major European war had prompted investors to dump shares and other riskier assets while Brent crude jumped more than $3 to top $99 at one point for its highest since September 2014, reflecting fears that Russia’s energy exports could be disrupted by any conflict.

“We can be pretty confident that this will put upward pressure on oil markets and will be watching gas prices pretty nervously as we wait to see what sanctions are introduced,” said Kit Juckes, macro strategist at Societe Generale

However, after US equity futures plunged on thin volumes during Monday’s holiday, sentiment has turned more positive as traders wager that the unfolding scenario has already been priced into stocks. If the situation de-escalates, a quick 5% rally in U.S. stock markets is possible, according to Morgan Stanley strategists, while Goldman calculated that a de-escalation would lead to a 5.6% jump in the S&P.

“We are not in the clear, but that gives a path to de-escalation,” said Trium Capital fund manager Peter Kisler, referring to the news on Ukraine border recognition.

As usual, Nasdaq futures are hit more than their S&P peers – due to the added threat of a hawkish Fed and higher rates – dropping 0.5% and also recovering a much bigger earlier loss. Major names were trading off their lows of the session: shares in iPhone maker Apple -0.8% premarket, Microsoft -1%, Amazon.com -1%, Meta Platforms -1.4%, Google-owner Alphabet -0.4%, and Nvidia -2.1%. Tesla fells  1.6% premarket, poised to worsen 19% drop YTD and on the verge of a bear market, however major names were trading off their lows of the session. Here are some of the biggest U.S. movers today:

• Oil and gas companies are among the few gainers in U.S. premarket trading, as oil price nears $100 amid worsening tension over Ukraine. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is trading above triple-top resistance relative to the SPY.
• U.S.-listed Chinese stocks declined in premarket trading as concerns resurfaced over Beijing’s regulation of the technology sector. Alibaba Group (BABA US) fell 4.3% following a report that Chinese authorities told banks and state-owned companies to report their financial exposure to Ant Group Co.
• Megacap U.S. tech stocks trimmed earlier drops as investors evaluated the impact from growing tensions between Russia and the West over Ukraine. Apple (AAPL US) -0.5%, Microsoft (MSFT US) -0.7%, Meta Platforms (FB US) -1%.
• Cryptocurrency-linked stocks slump as bitcoin stays near a more than two-week low. Marathon Digital (MARA US) -5.4, Bit Digital (BTBT US) -6%.
• Watch U.S. cybersecurity stocks amid escalating Ukraine tensions and worries over potential cyberattacks. Watch shares in Palo Alto Networks (PANW US), Crowdstrike (CRWD US), Zscaler (ZS US).
• Yandex, which operates an Internet search engine and web portal in Russia, plunge 18% in U.S. premarket trading amid intensifying tension between the West and Russia over Ukraine.
• Celanese gets its only negative analyst rating as Piper Sandler cuts to underweight after the chemicals company announced on Friday a deal to buy the mobility and materials arm of Dupont de Nemours.

In Europe, the Stoxx 600 Index also turned green after falling as much as 2% earlier.  European stocks with exposure to Ukraine and Russia slumped again on Tuesday as tensions intensified, after Russian President Vladimir Putin recognized two self-proclaimed separatist republics in eastern Ukraine and Western nations threatened new sanctions. Companies involved with the controversial Nord Stream 2 pipeline linking Russia to Germany dropped amid concerns that sanctions could target the suspension of the pipeline. BASF, Uniper and Engie declined, while Shell – which is also linked to the pipeline – rose on soaring oil prices. Here are some of the other stocks moving in the rest of Europe:

• Other energy companies exposed to the region, including Austrian oilfield services company Petro Welt Technologies, and miners with assets in Ukraine or Russia, including London-listed Ferrexpo and London-listed Russian gold-miner Petropavlovsk all dropped.
• Polish-listed Ukranian agriculture companies were mixed, with Astarta, Ovostar and Industrial Milk lower while Kernel rose.
• Banks including Austria-based Raiffeisen Bank, which had almost 14 billion euros in loans outstanding in the two countries at the end of last year — equivalent to 90% of its equity capital — fell.
• Hungary’s OTP Bank, France’s Societe Generale and Italy’s UniCredit also declined, reflecting the lenders’ loan exposure to the region.
• Consumer companies including bottling company Coca Cola HBC, beer stocks Carlsberg and Heineken, grocery company Metro AG and Polish fashion retailer LPP dropped.
• Event organizer Hyve Group, which gets about 30% of its revenue from Russia, slumped as much as 8.2%.

The threat of new Russian sanctions and disrupted supply kept energy prices elevated, with natural gas prices soaring more than 13%. The ruble climbed after dropping the most since March 2020 the previous day.

“Europe is in a very, very uncomfortable situation,” said Michael Hewson at CMC Markets. “What you’re getting is a classic risk-off play here.”

Earlier in the session, Asian stocks traded negative. The ASX 200 declined as the geopolitical concerns sunk most sectors although energy and gold miners bucked the trend after oil prices advanced on the geopolitical risk premium and with the precious metal underpinned by haven demand. Nikkei 225 was pressured as detrimental currency flows added to the headwinds for the index. KOSPI suffered after daily COVID-19 cases topped 100k for a third consecutive day Hang Seng and Shanghai Comp. conformed to the glum mood with notable weakness in the tech sector after China told banks and state firms to report their exposure to Alibaba affiliate Ant and with Tencent also subdued by recent concerns of a crackdown, while Rusal shares dropped nearly 20% on geopolitical tensions and looming Russian sanctions

Japanese equities fell for the sixth time in seven sessions as tensions between the West and Russia over Ukraine again intensified. Electronics and auto makers were the biggest drags on the Topix, which fell 1.6%, with all but three of its 33 industry groups in the red. Tokyo Electron and Fast Retailing were the largest contributors to a 1.7% loss in the Nikkei 225.  Russian President Vladimir Putin recognized self-proclaimed separatist republics in eastern Ukraine and ordered the Defense Ministry to send what he called “peacekeeping forces” to the regions. Western leaders condemned the moves, and the U.S. prepared to announce new sanctions against Russia. The U.S. has warned of a possible Russian invasion of Ukraine, a claim the Kremlin has repeatedly rejected. “Points to watch include what kind of economic sanctions the U.S. would be implementing and how much that would affect inflation or the economic situation,” said Shogo Maekawa, global market strategist at JP Morgan Asset Management. Comments from Federal Reserve officials also bear watching, “whether it be about rate increases this year or about Ukraine.”

Australian stocks dropped to the lowest in two years, with the S&P/ASX 200 index falling 1% to 7,161.30, its lowest close Feb. 7, as banks weighed. The benchmark tumbled alongside regional peers amid intensifying tension between the West and Russia over Ukraine. Nanosonics was the worst performer in Australia following the company’s 1H results. Cochlear was the biggest gainer after reaffirming its full-year profit forecast. In New Zealand, the S&P/NZX 50 index fell 0.3% to 12,114.63

In rates, treasury futures erased Asia session gains as U.S. stock futures rebound and risk-off move on Ukraine developments takes a breather. U.S. yields were cheaper by 6.5bp to 1bp across the curve with front- end led losses flattening 2s10s, 5s30s spreads by 5bp and 3bp; 10-year yields around 1.945%, cheaper by 1.5bp vs. Friday close — bunds and gilts both 1bp cheaper in the sector vs. Treasuries. Yields were cheaper across the curve, led by front-end, flattening spreads. U.S. session’s focus is also on auctions, which start with $52b 2-year note sale at 1pm eastern time. German government bond yields hit their lowest level since Feb. 4 while U.S. Treasuries rallied.

In FX, the Bloomberg Dollar Spot Index eased as the greenback weakened against most of its Group-of-10 peers; the Treasury curve flattened as front-end yields rose by up to 4bps and the 10-year yield remained lower. Scandinavian currencies were the best performers as risk sensitive currencies advanced. The euro snapped three days of losses to rise over $1.1350 and bunds erased early gains. The pound fell, reversing Monday’s gains. The Japanese yen erased early gains that took it close to a three-week high of 114.48 per dollar while the Swiss franc held steady near the previous day’s one-month high.

The rouble, which has been hammered by the rising tensions in recent weeks, swept higher in FX markets while German equities – seen as more vulnerable because of the country’s heavy reliance on Russian gas – also erased losses of more than 2% to trade flat.  The rouble has lost 12% on prospects of a Ukraine invasion, with Russian equities down by a third.

In commodities, WTI and Brent were underpinned on geopolitics, with Brent soaring to a high of $99.50/bbl although the benchmarks are off best levels at present. Saudi Arabia, Kuwait and Iraq would struggle to cover the shortfall in crude supply created by a blanket ban on Russian energy exports as they have already allocated their annual term supplies, according to Argus sources. Qatar’s Emir has received a letter from Russian President Putin regarding supporting and strengthening bilateral relations. Spot gold lies below USD 1900/oz, as havens given up recent gains as officials are yet to label the Russia situation as a full-scale invasion.

Fears of supply disruption from Russia sent London-traded aluminium to a more than 13-year high of $3,350 a tonne while benchmark nickel hit its highest since August 2011. Shanghai-traded nickel hit a record high .

Looking at the day ahead now, data releases include the German Ifo business climate indicator for February, whilst from the US there’s the FHFA house price index for December, the flash PMIs for February and the Conference Board’s consumer confidence measure for February. Central bank speakers include Atlanta Fed President Bostic and BoE Deputy Governor Ramsden. Finally, earnings releases include Home Depot and Medtronic.

Market Snapshot

• S&P 500 futures down 0.1% to 4,340.50
• STOXX Europe 600 down 0.7% to 451.82
• MXAP down 1.4% to 185.33
• MXAPJ down 1.4% to 610.18
• Nikkei down 1.7% to 26,449.61
• Topix down 1.5% to 1,881.08
• Hang Seng Index down 2.7% to 23,520.00
• Shanghai Composite down 1.0% to 3,457.15
• Sensex down 0.8% to 57,230.48
• Australia S&P/ASX 200 down 1.0% to 7,161.28
• Kospi down 1.3% to 2,706.79
• German 10Y yield little changed at 0.20%
• Euro up 0.2% to $1.1333
• Brent Futures up 3.9% to $99.14/bbl
• Gold spot down 0.2% to $1,901.67
• U.S. Dollar Index little changed at 95.99

Top Overnight News from Bloomberg

• U.S. and European governments threatened new sanctions after Russian President Vladimir Putin recognized two self-proclaimed separatist republics in eastern Ukraine and ordered troops sent to them in the latest escalation of Moscow’s standoff with the West
• Stocks erased losses as investors bet that markets can recover from the latest imbroglio between the West and Russia over Ukraine, and a flight to havens eased
• The U.K. recorded its first fiscal surplus since the start of the pandemic, setting Chancellor of the Exchequer Rishi Sunak on course for an almost 18 billion-pound ($24 billion) budget windfall.
• German companies grew more confident in February as the country moved past the worst of its latest Covid-19 outbreak. A business-expectations gauge compiled by the Munich-based Ifo Institute rose to 99.2, significantly above economist estimates and the highest reading since July

A more detailed look at global markets courtesy of Newsqsuawk

Asia-Pac stocks traded negative as focus remained on geopolitics after Russian President Putin announced Russia is to recognise LPR and DPR as independent states and ordered a ‘peacekeeping’ operation in the two breakaway regions ASX 200 declined as the geopolitical concerns sunk most sectors although energy and gold miners bucked the trend after oil prices advanced on the geopolitical risk premium and with the precious metal underpinned by haven demand. Nikkei 225 was pressured as detrimental currency flows added to the headwinds for the index. KOSPI suffered after daily COVID-19 cases topped 100k for a third consecutive day Hang Seng and Shanghai Comp. conformed to the glum mood with notable weakness in the tech sector after China told banks and state firms to report their exposure to Alibaba affiliate Ant and with Tencent also subdued by recent concerns of a crackdown, while Rusal shares dropped nearly 20% on geopolitical tensions and looming Russian sanctions.

Top Asian News

• ThaiBev Is Said to Revive Unit’s $2 Billion Singapore IPO
• China Broadens Real Estate Lending Support to Bigger Cities
• Zhenro Seeks More Time to Pay $1 Billion in Bonds Coming Due
• Hong Kong Virus Outbreak Builds as City Braces for More Curbs

European bourses have experienced a marked recovery throughout the session, Euro Stoxx 50 Unch., with the FTSE 100 (+0.4%) the marginal outperformer given its crude exposure. A recovery that comes amid numerous geopolitical developments and was seemingly led by oil upside and as we await clarity/insight into any Russian sanctions and as Ukraine’s President remains confident that there will not be a war. Stateside, futures remain negative but have also experienced a marked pick-up; bringing the ES, for instance, to within 10-points of unchanged.

Top European News

• Traders Delay Bets on First ECB Rate Hike in 2022 to December
• Energy Prices Surge on Ukraine With Oil Closing In on $100
• HSBC Says It’s Under Investigation in U.S. Over WhatsApp Use
• HSBC Boosts Bonuses 31% in ‘Extraordinarily Competitive’ Market

In fixed income,  Core debt avidly in demand in early EU trade before falling from grace as Russia/Ukraine risk aversion wanes. US Treasuries retain flatter curve profile in the run-up to Usd 52 bln 2 year supply. Bunds also dragged back down in wake of an upbeat German Ifo survey.

In commodities, WTI and Brent are underpinned on geopolitics, Brent Apr soared to a high of USD 99.50/bbl (vs low USD 96.50
/bbl). Albeit, the benchmarks are off best levels at present; note, there was no settlement yesterday amid the US holiday. Saudi Arabia, Kuwait and Iraq would struggle to cover the shortfall in crude supply created by a blanket ban on Russian energy exports as they have already allocated their annual term supplies, according to Argus sources. Qatar’s Emir has received a letter from Russian President Putin regarding supporting and strengthening bilateral relations. Spot gold lies below USD 1900/oz, as havens given up recent gains as officials are yet to label the Russia situation as a full-scale invasion.

In FX, roller coaster ride for the Rouble after Russia recognises independent regions in Eastern Ukraine but only enters to keep the peace and reportedly rejects wider separatist claims. USD/RUB reaches circa 80.9275 before recoiling to sub-79.000 lows. Dollar unwinds safe haven gains around 96.000 in DXY terms as risk sentiment improves from an initial state of pronounced aversion.
Kiwi holds firm on the 0.6700 handle awaiting RBNZ rate verdict amidst expectations for a 25bp hike, but outside bets of half point.
Crude currencies underpinned by Brent hitting USD 99.50/bbl and WTI nearing USD 95.00/bbl.

Geopolitical update

• Russian President Putin said Russia will recognize the independence of Donbas LPR and DPR separatists, while he ordered a peacekeeping operation involving Russian troops being sent to eastern Ukraine’s two breakaway regions.
• In response, Ukraine said their border remains unchanged.
• The DPR and LPR parliaments subsequently ratified the cooperation/friendship agreements with Russia; since then, Russia’s Lower Parliamentary House has voted in favour of the treaty.
• US President Biden signed an executive order prohibiting new investment, trade and financing to the DNR and LNR regions of Ukraine, while the US will announce fresh sanctions against Russia on Tuesday in which it will coordinate with allies on the announcement.
• US Secretary of State Blinken said recognition of Donetsk and Luhansk People’s Republics as independent requires a swift and firm response, while he added that they will take appropriate steps in coordination with partners.
• US Ambassador to the UN said Russian recognition of eastern Ukraine is clearly the basis for an attempt to create a pretext for a further invasion.
• EU’s Von Der Leyen said the recognition of the two separatist territories in Ukraine is a blatant violation of international law, the territorial integrity of Ukraine and the Minsk agreements.
• Russian Foreign Minister Lavrov says Ukraine does not have a right to sovereignty, according to Interfax. Appears to be speaking in relation to the DPR/LPR updates
• Russian Foreign Ministry says that establishing Russian bases in Eastern Ukraine is not being discussed at the moment, according to Tass; however, steps could be taken if required

US Event Calendar

• 9am: Dec. S&P Case Shiller Composite-20 YoY, est. 18.00%, prior 18.29%
  • Dec. S&P/Case-Shiller US HPI YoY, prior 18.81%
  • Dec. S&P/CS 20 City MoM SA, est. 1.10%, prior 1.18%
• 9am: Dec. FHFA House Price Index MoM, est. 1.0%, prior 1.1%
• 9:45am: Feb. Markit US Services PMI, est. 53.0, prior 51.2
• 9:45am: Feb. Markit US Composite PMI, prior 51.1
• 9:45am: Feb. Markit US Manufacturing PMI, est. 56.0, prior 55.5
• 10am: Feb. Conf. Board Present Situation, prior 148.2
  • Feb. Conf. Board Expectations, prior 90.8
  • Feb. Conf. Board Consumer Confidenc, est. 110.0, prior 113.8
• 10am: Feb. Richmond Fed Index, est. 10, prior 8

DB’s Jim Reid concludes the overnight wrap

The growing geopolitical tensions over Ukraine ratcheted up further yesterday, leading to a slump in global equities and a complete rout amongst Russian assets as investors became increasingly fearful about the prospect of conflict in some form or another. With the US off on holiday the truncated trading session was bad enough, but things got worse in a bit of a market vacuum after Europe closed as Putin made a televised address and signed a decree recognising two separatist regions in the east of Ukraine, whose leaders had called on Putin to recognise their independence and provide them with support against their descriptions of Ukrainian aggression.

On the news, the risk assets that were trading fell fairly sharply and oil spiked a dollar or so to eventually close up +3.16% (flattish overnight). The Russian Ruble fell a further percent or so to close -3.2% – the worst day in two years. S&P futures, that were already down -1.24% at the European close, have fallen an additional -0.34% overnight with Nasdaq futures down -2.17% as I type (covering 2 days). Spot gold, in contrast, has touched a new six-month high of $1910.56. 10yr US treasuries have rallied -6.2bps to 1.866% after being closed yesterday and 2s10s is 4.5bps flatter.

The Nikkei and Hang Seng have fallen over -2.0% while the Shanghai Composite, CSI and Kospi are down more than -1.0%. Meanwhile, Chinese technology stocks have declined for a third consecutive session on mounting concerns of a new wave of tech crackdowns by the authorities.

I can’t pretend to be a geopolitical expert but it seems that the next point of interest will be what sanctions the West puts on Russia after this news and whether the US/UK response is coordinated with the EU one. Europe has more to lose economically so this will be very interesting. Most countries have come out overnight and have said they will be placing sanctions on Russian imminently. Also we will be watching carefully to see what Russian military involvement is in the newly recognised regions.

Even before Putin’s address moves were big yesterday, especially for Russian markets. The MOEX Russia equity index (-10.50%) suffered its worst day since March 2014 during the Crimean annexation, and that comes on top of declines of more than -3% on each of Thursday and Friday. Furthermore, Russia’s 10yr bonds were up a massive +79bps in their biggest daily move higher since December 2014. This volatility also saw Russia’s finance ministry cancel today’s government bond auction that had been planned.

The negative headlines incrementally grew yesterday and meant that any optimism yesterday morning about a potential Putin-Biden summit was swiftly knocked back, not least as a Kremlin spokesman said that there were “no concrete plans” for a leaders’ summit. And matters escalated further just after midday in London as Russia claimed they’d destroyed two Ukrainian military vehicles on Russian territory, with five Ukrainian soldiers killed, whereas Ukraine’s military said these border violation claims were fake.

The main action took place in Europe as the STOXX 600 fell -1.30% to its lowest level since early October. It was a broad-based decline and every single sector in the index moved lower on the day, albeit with cyclical sectors underperforming in particular. Other indices in Europe including the DAX (-2.07%), the CAC 40 (-2.04%) and the FTSE 100 (-0.39%) all lost ground as well, with those indices in Eastern Europe seeing outsized declines in particular.

Sovereign bonds struggled to gain much flight to quality benefit, with yields on 10yr bunds (+1.5bps), OATs (+3.2bps) and gilts (+3.0bps) all moving higher, albeit closing before the worst news of the day. Notably, there was yet another widening in peripheral spreads, with the gap between both Italian and Spanish 10yr yields over German bunds reaching their widest closing levels since June 2020, at 170bps and 104bps respectively. And similar moves were seen in credit too, with Itraxx Crossover widening +6.7bps to 352bps, its widest since November 2020, and Itraxx Main was +1.1bps wider at 72bps, the widest since June 2020.

This backdrop of rising geopolitical risk and tightening financial conditions led to a further reappraisal of the likelihood of ECB rate hikes in 2022 yesterday. By the close, overnight index swaps were pricing in just 36bps worth of ECB hikes by the December meeting, which is the lowest amount since their much more hawkish than anticipated meeting at the start of the month. Bear in mind that after the last meeting and the US CPI report, over 50bps worth of hikes had been priced by year-end, which implied a potential end to negative rates given their -0.5% deposit rate. So these darkening clouds over the outlook have made investors quite a bit more cautious as to whether central banks will follow through on some of their more hawkish rhetoric over recent days.

For commodities, growing tensions led to a fresh rise in oil as discussed at the top. That said, even as markets more broadly are pricing in an increasing risk of a conflict, oil hasn’t broken out above levels seen 10 days ago when Biden made his negative statement before the previous weekend. In addition, natural gas futures in Europe actually fell -2.45% as well to €71.96 per megawatt-hour, although there was a noticeable spike higher intraday after Russia’s claims that five Ukrainian soldiers had been killed, before it pared back those gains later in the session.

The geopolitical turmoil outweighed some very strong numbers in the flash PMIs for February, which came in stronger than expected across Europe. The Euro Area composite PMI rose to 55.8 (vs. 52.9 expected), coming off an 11-month low back in January to reach a 5-month high in February. On a country-by-country basis as well, France’s composite measure rose to 57.4 (vs. 53.0 expected), Germany’s rose to 56.2 (vs. 54.5 expected), and the UK’s hit 60.2 (vs. 55.3 expected) in its fastest pace of expansion since last June. The US numbers aren’t out until later today given yesterday’s holiday.

Finally on the pandemic, UK Prime Minister Johnson confirmed the much-previewed announcement that all legal Covid-19 restrictions would be ending in England, as part of a transition to “living with Covid”. In terms of the changes, from Thursday those who test positive won’t be legally required to self-isolate following a positive test, but will instead be advised to stay at home and avoid contact with others. And from April 1, the government will also no longer be providing free universal testing for the general public in England. It comes as case rates in the UK have been continuing to fall since the Omicron wave over Christmas, and the weekly average of cases is now roughly back in line with its pre-Omicron levels, with hospitalisations and deaths also declining.

To the day ahead now, and data releases include the German Ifo business climate indicator for February, whilst from the US there’s the FHFA house price index for December, the flash PMIs for February and the Conference Board’s consumer confidence measure for February. Central bank speakers include Atlanta Fed President Bostic and BoE Deputy Governor Ramsden. Finally, earnings releases include Home Depot and Medtronic.

At a moment the United States and Europe are busy mulling over what sanctions to impose on Moscow for Putin’s independence recognition for Ukraine’s separatist republics – one the one hand wanting Russia to feel the pain as a warning against moving further into Ukraine (beyond what the Kremlin is dubbing “peacekeeping” troops in Donetsk and Luhansk, which moved into the republics overnight), and on the other wanting to avoid serious enough economic measures that would almost assure immediate escalation – Germany on Tuesday has announced it has halted the certification process for the Nord Stream 2 pipeline.

As European Union leaders prepare to sanction Moscow, Bloomberg quoted German Chancellor Olaf Scholz as saying the Nord Stream 2 pipeline certification can’t happen right now. He explained to reporters that he contacted the Economic Ministry to withdraw a report on the security of supply required for the certification process of pipeline to move forward. Without it, NS2 “cannot go into operation” – he told reporters.

In essence as Bloomberg put it, the controversial Russia-to-Germany natural gas pipeline appears to be the first major Russian project to fall victim to Putin’s independence declaration for the breakaway Ukraine republics. 

“That sounds technical, but it’s the necessary administrative step so that no certification of the pipeline can happen right now,” Scholz said of the move, adding that “without the certification, Nord Stream 2 cannot go into operation.” 

Concerning the first wave of sanctions reportedly now being prepared targeting Russia, Scholz said, “I expect a very strong and focused package.”

European natural gas jumped 13% today – hours after Russian troops began entering Donetsk and Luhansk. Brent prices nearing $100 a barrel, and German power and coal prices advanced. This all comes as Europe is dealing with one of the worst energy crisis in years. 

Wow! Germany is killing the new $10bn Nord Stream 2 gas pipeline from Russia.

That’s a huge step after refusing to be drawn on it in public for months. It’ll have major consequences for European energy security and suggests the western sanctions against Moscow will be tough. https://t.co/hQknCtBEpG

— max seddon (@maxseddon) February 22, 2022

The Russia-to-Germany gas pipeline was completed on Sept. 11 and has been ready to supply Europe for months. Even before this week’s geopolitical turmoil in Ukraine, Germany’s federal network agency, Bundesnetzagentur, halted the pipeline’s certification process in mid-November.

By December, Bundesnetzagentur President Jochen Homann said, “a decision won’t be made in the first half of 2022.” The latest developments to halt the certification process suggest Nord Stream 2 pipeline won’t supply energy crisis-stricken Europe with natural gas anytime soon. 

China has weighed in for the first time Tuesday after Vladimir Putin’s Monday night speech wherein he issued Russia’s formal recognition of independence for Ukrainian separatist regions Donetsk and Luhansk, followed by a quick signing ceremony and with what have been billed “peacekeeping forces” entering the war-torn eastern Ukraine republics overnight. 

In his official comments, Foreign Minister Wang Yi urged calm and a lowering of tensions in the region, calling for “dialogue and negotiations”. His words carried in state media underscored that China’s stance on the Ukraine issue is consistent, noting that “The legitimate security concerns of any country should be respected,” according to a readout in state-run Global Times. 

Though vague and ambiguous, the choice of emphasizing “security concerns” echoes Moscow’s stance vis-a-vis NATO. Notably there was no use of the words ‘respecting sovereignty’ which would have been a nod more in Ukraine’s and the West’s direction.

The senior Chinese diplomat said, “China once again calls on all parties to exercise restraint, recognize the importance of implementing the indivisible security principle, ease the situation and resolve differences through dialogue and negotiation.”

 GT further noted that China’s representative at the UN also made Beijing’s concerns known in Monday night’s emergency Security Council meeting: 

Chinese Ambassador to UN Zhang Jun also called on all parties relevant on the Ukraine situation to continue dialogue and consultation and seek reasonable solutions to address each other’s concerns on the basis of equality and mutual respect at an emergency Security Council meeting on the Ukraine situation.

But interestingly, in a scheduled phone call with US Secretary of State Antony Blinken, the Ukraine crisis and Russia’s entry into the Donbas was not raised by the Chinese side. Instead the Chinese official’s words were focused on regional tensions, particularly defusing the North Korea situation. However, Blinken did press the issue, with the US call readout framing that part of the conversation and Blinken raising “Russia’s aggression against Ukraine”. Wang reportedly sidestepped efforts by the US Secretary of State to side with the US position. According to his full words as reported in the South China Morning Post:

“China is concerned about the evolving situation in Ukraine,” Wang said, reiterating that China’s stance on the matter had not changed and that “every country’s security concern should be respected”.

“The fact that the Ukraine crisis has evolved to this stage is related to the delayed implementation of the Minsk agreement,” Wang said, referring to the protocol signed in 2014 and 2015 whose clause would rule out foreign armed formations, including Nato, equipment and mercenaries.


“China will continue to stick to the facts and be in touch with all parties. The situation in Ukraine is worsening. China would call upon all parties to be restrained and to recognise the universal importance of security for all, and to de-escalate tensions through dialogues,” Wang said.

Additionally, “Wang and Blinken discussed Ukraine and North Korea issues during the Tuesday phone call,” Bloomberg cited a Chinese foreign ministry statement to say. “Wang said the U.S. should attach importance to the reasonable concerns of North Korea; China hopes U.S. and North Korea start direct dialogue.”

In this piece Robert Kagan, who I’ve always thought of as the ultimate believer in US power, writes that “it is time to start imagining a world where Russia effectively controls much of Eastern Europe and China controls much of East Asia and the Western Pacific.” https://t.co/V7t7SpcSIk

— Gideon Rachman (@gideonrachman) February 22, 2022

The two top diplomats also discussed US-China relations, with Wang saying, “China once again urges the US to take concrete actions to reflect on the series of commitments made by President Biden,” in reference to the virtual summit to two held. Blinken as is typical reiterated the US official stance that it is not seeking conflict with China and further that it opposes Taiwan independence and wishes to maintain the status quo. 

On the Ukraine issue, Russia’s independence recognition of the two breakaway republics could introduce further tension into the US-China relationship, given it’s widely perceived that Putin may have gotten a nod from Beijing that China would ultimately back Moscow if the latter took a more muscular approach to the crisis. 

Authored by Victor Davis Hanson via AmGreatness.com,

Few are listening any more to the clueless Justin Trudeaus and bumbling Joe Bidens and all the toxic hypocrisies they embody…

Canada is now governed by absurdism, and it is symptomatic of an ailing Western elite.

Liberal Canadian Prime Minister Justin Trudeau last week invoked martial law to arrest and financially destroy truckers on the charge that their largely peaceful protests are “dismantling the Canadian economy” that had already been dismantled for two years under some of the most draconian lockdowns in the world. The trucker “sect,” Trudeau added, is guilty of felonious “unacceptable views.” But his rhetoric still cannot square the circle of demonizing vital workers while conceding he cannot run his country without them. 

He has invoked the Emergencies Act for the first time in the law’s 34-year history, even as the highly infectious Omicron variant wanes after spreading natural immunity and yet proving relatively mild in its effects. Trudeau has neither science nor good governance on his side, especially given how civil the protests have been. The truckers, who more or less work in solitary cabs, are better informed about the “science” and are themselves mostly vaccinated.  

Whether by accident or intent, the truckers have now become iconic of far larger issues. Their resistance to government vaccination mandates transcends them. And so, they are playing the role of the proverbial straw that may break the back of a once compliant Canadian citizenry, burdened by over two years of masks, lockdowns, and vaccination mandates. 

They are Howard Beales yelling, “I’m mad as hell and I’m not going to take it anymore!” or the iconic Tunisian peddler Tarek el-Tayeb Mohamed Bouazizi whose self-immolation prompted the Arab Spring, or Tank Man who stood erect in Tiananmen as an oncoming tank finally swerved around him. The truckers are saying to the Canadian people, “Watch and we will kindly show you why you always privately suspected that this prime minister and his ilk were frauds.” As in the case of earlier exasperated rebels, we do not know the exact consequences that will follow, only that the leaders who targeted the dissidents will likely end up worse than their targets. 

The North American public has endured almost daily nonsensical changes in “follow the science” state edicts, as well as vast asymmetries between those who profited and those who were hurt by the government reactions to the pandemic. On the one hand, Trudeau threatens to use his state powers to ruin financially the protestors and their supporters. On the other hand, the prime minister brags that he participated in the Canadian versions of the BLM protests in summer 2020. Here in the United States, the combined BLM/antifa riots of summer 2020 caused the greatest property damage claims of any riot in U.S. history, around $2 billion. The violence eventually led to over 35 deaths, the torching of a federal courthouse, police precinct, and historic Washington D.C. church, over 1,500 police injuries–and, mysteriously, very few indictments of the some 14,000 people arrested. Is Trudeau’s point to stress that destroying things make protestors more authentically left-wing and thus exempt, while mostly peaceful protests lose deterrence and therefore can be crushed? 

The North American Left justifies such asymmetry both in crude terms and in ideological gobbledly-gook. A Trudeau official called the truckers “Trump supporters,” as if that label has any relevance other than to justify the government’s violation of civil liberties. Does Trudeau think a “Trump supporter” necessarily polls worse than a “Trudeau supporter”? The foppish man who in his youth thought it cool to be photographed sporting blackface is quick to demonize a multiethnic and multiracial protest as “racist”? 

Left-wing administrations in Toronto and Washington feel that the supposed higher social goals of the antifa and BLM violent protests (that purportedly advance their own political agendas) warrant exemptions of every sort. More than 1,000 U.S. healthcare workers went on record in 2020 justifying street protestors’ flagrant violations of strict COVID-19 lockdowns, at the height of the pre-vaccination pandemic.  

We were lectured that curbing any BLM protest might cause mental health problems. Should noncomplying truckers and their boosters try that ruse?  

The asymmetric application of punishment depends solely on the degree to which any given violation aids or detracts from left-wing agendas. A postelection Time magazine piece by Molly Ball gave the game away. She bragged how CEOs and plutocrats conspired to modulate the pulse of the Antifa/BLM violence to ensure calm for Joe Biden’s election—and more or less summed up the larger progressive elite impulse (“There was a conspiracy unfolding behind the scenes, one that both curtailed the protests and coordinated the resistance from CEOs. Both surprises were the result of an informal alliance between left-wing activists and business titans.”)  

COVID accentuated a larger and growing cultural, political, social, and economic split in the West. Partly, the fissures were brought on by the displacements of globalization. Partly they appeared with the final dominance of a huge class of credentialed government apparatchiks. And partly the split derives from the paradox of governments inviting millions of non-Western immigrants into Europe and North America from impoverished, and dystopian societies. Their inequality upon arrival, supposedly predicated on race rather than class, then becomes political nourishment for progressive redistributive agendas that otherwise had little political support among their citizen populations.  

Again, the truckers symbolize this gap, in an age when elites do not care much for class divides, only racial distinctions as a way of demonizing the less well-off. 

After all, those who smear the truckers are mostly of the zoom and laptop class. Their chief agendas during the last two years of crisis were sheltering in place to avoid contact with anyone, while zooming and skyping to maintain and boost their already generous incomes. Few like Trudeau ever wondered how the elite remained fully employed, but rarely present at work—much less why millions of others were expected to scoff at the virus and come physically to work, while their incomes often dived or ended due to government lockdown policies.  

The muscular classes enjoyed no such exemptions. Their kids went to public schools that were shut down or required masks. Parents lost incomes as they stayed home to watch children that tenured teachers would not teach. Truckers had no such margin of safety or security, but were out among the public delivering food, fuel, clothing, and the appurtenances of the Western comfortable lifestyle. In our current inflationary spiral, they earned a bit more, while inflation made them poorer, while those they served earned far more.  

The truckers remind Western audiences that modern progressivism equates muscular labor and hourly wage compensation with a sort of Neanderthalism. That is, the unfortunate clingers supposedly never quite understood globalization, much less how an 8-billion-person market rewards those who type on keyboards and, in relative terms, punishes the supposedly less aware who physically deliver, fix, make, and repair things.  

DAVE CHAN via Getty Images

We can almost reduce the divide to the embarrassing optics of a pouty-face pajama-boy prime minister, with a pompadour coiffure, issuing threats to calm, but beefy and calloused workers. Each time Trudeau speaks to his nation, the visual message is that any of the truckers could do a better job than he in both setting and explaining policy, while he would become a helpless weeping child if placed behind the wheel of a big rig. 

Somehow the elite class extrapolates moral worth from its rigged superiority in financial compensation. And given its economic and cultural leverage—social media, entertainment, academia, professional sports, the corporate boardroom, Wall Street—it has institutionalized the idea that, in circular fashion, the more the credentialed and better compensated, the more the elite deserve even more influence on how societies should run in a manner that mostly benefits themselves.  

Paradoxes arise constantly. Government grandees are caught without masks at tony restaurants. Climate change demagogues fly private jets. Pro-teacher union, anti-charter and anti-home school zealots ensure their children stay in private schools. The gated estate crowd ridicule the fossilized idea of a border wall. Professional bureaucrats routinely lie under oath to Congress and to federal investigators without any consequences whatsoever—as John Brennan, James Clapper, Anthony Fauci, and Andrew McCabe can attest. 

To explain California Governor Gavin Newsom sporting about without a mask at elite gatherings, we are supposed to assume that his class deserves exemption from the ramifications of its ideology—in order to travel faster, sleep better, have a larger support network, and relax in deservedly larger homes and gardens—all so that they could better save us chumps and clueless dregs from ourselves. 

Our elites like Trudeau and Newsom seem angry they are unfairly underappreciated by their clueless beneficiaries. The latter supposedly never appreciate the needed remedies for climate change, the thought cleansing required to eliminate systemic racism, and the mind reprogramming demanded for true diversity, equity, and inclusion thinking.  

Instead, the losers cling to unwoke and incorrect notions that class, not race, remains the real postmodern divide, that printing money does not make us richer, that a nation without a border is an amorphous nothing, that affordable gasoline and diesel fuel (not wind and solar) for now keep the West alive, that a fetus is alive at conception, that biology largely determines gender, that assimilation and integration are the only cures for tribalism, and that the law reflects a natural innate morality, and should not be applied on the basis of perceived victims manipulated by it, or the supposed victimizers manipulating it.  

That wound of an imperious but counterfeit elite has suppurated too long beneath a smooth scab. And abruptly, the truckers at least tore some of it off.  

What is now following is amplification and clarification of the Western divide. We the public are at the global theater. And we are watching a tragicomedy. On stage, a petulant cast of clueless Justin Trudeaus and bumbling Joe Bidens simply cannot fathom why few anymore are listening to them. More and more North Americans are perplexed why anyone would wish to follow such unimpressive mental and physical figures along with all the toxic hypocrisies they embody and weaponize.

With Americans temporarily distracted by the drama in Ukraine, traders are losing sight of the real driving force behind markets: the Fed, and it’s sluggish approach to normalizing monetary policy. Just a few days ago, we shared research from Fed repo oracle Zoltan Poszar, who proclaimed that the central bank will need to crash markets to save the economy. Now, another Fed expert, Jim Bianco of Bianco Research, joins Erik Townsend to discuss the nature of Jerome Powell’s current predicament, along with a handful of other topics like the impact of the COVID lockdown on America’s working habits.

One factor recently contributing to inflation is the fact that Wall Street banks are doling out massive raises to coax their most valuable workers back to the office.

When pressed about Wall Street’s obsession with returning to the office, Bianco explains that banks like JP Morgan and Goldman Sachs are demanding employees return to the office because “executives” and “MD types” really like the office. After all, they’re the ones with the best office real estate. And since they’re the decision-makers, back to the office it is.

I think the simple answer is who is the office designed for and who likes the office the most? The office is designed for executives in you know, it is their office managing director types, senior vice president types, they prefer the office more than anybody else. Who are 75% of the employees roughly speaking in the service sector office, they can work from home, their administrative, they’re operational, they’re maybe clerical as well to. The office is not designed for them. They’re the ones that have to take the New Jersey Transit through the port authority, that is not a fun thing to do, even through this day. They would prefer to work from home. So that’s kind of the push-pull. Yes, Dave Solomon of Goldman Sachs wants everybody at Goldman Sachs back in the office 10-11 hours a day, five or six days a week, because the office is a wonderful place according to Dave Solomon. And he’s right for Dave Solomon It is.

During his opening question, interviewer Erik Townsend asks Bianco for his thoughts on an old Wall Street yarn: which is smarter, the credit market or the stock market? Because right now, it doesn’t seem like the credit market anticipates the possibility of long-lasting, secular inflation. As Bianco delves into his reasoning for why selling in credit has been more contained, he outlines why there might be more carnage to come.

But there’s another dynamic that’s going on in the credit markets, which I think a lot of people don’t realize is occurring. No one sells anymore in the credit markets. It’s either you buy or you hedge or you buy your hedge. What has happened since January is two things. If you look at puts on the HYG and the LQD indexes, these are the high yield ETF and the investment grade ETF, the iShares ETFs puts have exploded in volume and open interest since the market started getting a little messy around January 1. Credit default swap volume has exploded higher. ETF volume has exploded higher. ETF volumes right now, if you look at dollar volumes of the HYG and all the junk indexes that trade, it’s 80% the sell volume of the underlying cash market, no other ETF sector, whether gold, healthcare, international, whatever you want, nothing is approaching what is happening in the high yield and investment grade ETFs that they trade almost as much as the underlying market.

By the way, speaking of the underlying market, cash market volumes of high yield bonds and investment grade bonds that trade eight year low. They’re not trading bonds. You buy bonds when you’re bullish. You buy puts and you short ETFs. And you buy credit default swaps when you think things are going messy. So there’s an old adage in the stock market. It’s a market of stocks, not a stock market. I think that really applies for the bond market. It’s a market of bonds. It’s not a high yield market. But we trade this like it’s a high yield market. We just you know, buy the ETF, buy puts, buy credit default swaps, or not. Wait a minute, just so you know, bonds are not the same as an energy bonds, which are not the same as healthcare bonds, even more than casino stocks, energy stocks and healthcare stocks. But that’s the way that we seem to trade it right now. And that’s one of the things that might be masking the selloff that you see or the lack of urgency in the credit markets is it trades as one instrument, and when that one instrument decides that now’s the time to sell, which it hasn’t for many many years because it either buys hedge, you could have real problems moving forward with the market.

Moving on, Bianco shifted to discussing what, exactly, is going on with the Fed. Far from being an “apolitical” institution, Bianco explains that right now, the Fed is “more political” than at any time in at least a generation. One reason is that, since the Senate hasn’t voted to confirm Powell for his second term, the Democrats are effectively holding a veto over anything he might do, meaning he has limited scope to tighten interest rates to such a degree that it totally collapses the market.

Now, again, I don’t think that was the plan all along. And I don’t even think they think that right now. But effectively, that’s what’s happened is that he is the Federal Reserve Chairman. He is being asked to bring inflation for the first time in 40 years, and the Senate is holding the sword of Damocles over him. At any point he displeasures the Senate. They just want a 50 votes for him and he’s out. So the Fed is in a position of enormous pressure of loss of independence that we’ve frankly, I don’t think we’ve ever seen right now with the Federal Reserve. And we’ll have to see how it plays out. And what I’m suggesting is, it’s all about inflation. And it’s all about politics.

And that’s what cerebral Alaskans about. And that’s what this whole thing is about. It’s about politics, the Fed is one of the most political or, you know, the Fed likes to say that they’re non-political, that is not true at any point in at least a generation. The Fed is intensely political and it revolves around inflation.

How is this impacting the Fed’s ability to bring inflation under control? As one might guess, it’s not good. Well, Bianco fears that – as we have repeatedly pointed out – the central bank’s policy error has already been made: the problem is, inflation moved up “too fast” and the Fed has been “way, way too late” – maybe if they had started the taper earlier. They’re going to have to raise rates

So that’s where the debate comes in, as well. But I also think that the Fed has already made a policy error. They have another thing that the Fed likes to do, which is called forward guidance. In English what that means is, the Fed wants to tell you 16 times what they’re going to do before they do it.

This inflation thing that remember one year ago, inflation was one and a half percent. Today, it’s seven and a half percent. It moved up on them too fast. They initially put in their framework for their new framework to emphasize unemployment, dismiss inflation fears, call them transitory, say it was going to go away because remember, the original forecast of the Fed was inflation was going to peak in the spring of last year and come down.

And that was when it was at an unacceptably high rate, by the spring of last year was two and a half percent. And it was gonna come back down under 2%, by the end of December of 2021. Instead it shot up to seven and a half percent, as well. So they’re now, they’ve waited too long. Look, we’re recording this in February, the Fed is still buying bonds in February, they’re still easing. So they’ve been way way too late in this. Maybe if they had started to taper earlier, ended the taper earlier, maybe have one or two rate hikes in place now, they would have actually changed the outlook for the bond market, but they are operating so late in this and they are under so much political pressure.

If the Fed fails to react fast enough to bring inflationary pressures under control, Bianco fears there will be talk of “price controls” – just look at the “left wing” publications like “Mother Jones” and “Axios ” – before the end of the year as politicians grasp at straws in the struggled to try and curb inflation.

Look if the Fed can’t get inflation under control. Let’s just bring back price controls. Let’s just bring back wage and price controls. Yeah, they didn’t work in the 70s but they’re desperate right now. The day we’re speaking, the Washington Post has a story. The Democrats are the ones that love taxes, want to see fossil fuels usage reduced to save the planet, they’re getting ready to cut the gasoline tax for the rest of this year because they’re so panicked about what’s going to happen in December as well too. So if the Fed doesn’t get this under control, there will be I think, talk about price controls before the end of the year. I think the Fed also knows this. And this is another reason why the J saying don’t go there with those price controls. Let me handle this. I’ll move 50 in March. And I’ll just keep hiking every meeting until we slow the economy enough to bring down inflation.

In one respect, it has already started. And the end result is that financial markets will eventually be forced to reckon with the fact that they aren’t “the priority” any more.

During the rest of the interview, Bianco discusses what Americans can expect from monetary and fiscal policy over the next year or two. Readers can listen to the full interview below: