Month: April 2021

Authored by Vassilis Karamanis, FX and rates strategist who writes for Bloomberg

Albert Einstein is widely credited as saying that insanity is doing the same thing over and over again and expecting a different result. The phrase keeps coming to my mind as I read story after story on the Archegos Capital Management saga and look at a series of charts on the euro. At first, the two might seem unrelated, but they both hold relevant lessons about market complacency.

The story reads as expected — or feared: The firm, little known outside finance circles, had amassed tens of billions of dollars in stocks bets, much of it using opaque derivatives and borrowed funds, including some giant bets on a small group of equities. And then it all went awry.

The acronym LTCM doesn’t mean much, it seems, to some market participants. Common sense either. Maybe Margin Call, J.C. Chandor’s 2011 movie, should be trending in streaming services, serving as a healthy reminder.

Those of us who still remember the spectacular collapse of the U.S. hedge fund Long-Term Capital Management in the late 1990s though are probably asking ourselves how this happened again.

Was it a regulatory issue, a market inherently at fault or just human nature? Will the story simply be forgotten again, especially given the few signs of lasting damage on markets? Or maybe we are all grown ups now and can move on quietly and in peace instead of obsessing over every set back. At least until the next tail risk comes knocking on our door, that is.

So what does the euro have to do with any of this?

It’s not that there is a secret correlation with stocks that unveiled itself amid the Archegos turmoil. But I’d argue that there’s a link. And it’s that some investors or managers are losing sight of reality and sustainable value-at-risk levels.

The common currency hit its lowest level in nearly five months today. Fair enough, right? The yield on 10-year U.S. notes reached its highest level since January 2020 Tuesday, and is now just a whisker away from halving its decline since 2018, so it makes sense for the dollar to keep applying pressure on euro bulls.

But positive data surprises are now coming out of the euro area, not the U.S.

And higher inflation expectations in the bloc area haven’t been reflected in rate  differentials. The mess with the vaccine rollout has already been priced in, to a large extent at least. When long lasting correlations break down, it isn’t for ever.

The euro’s volatility skew is also flattening once again. Whether that’s enough for the common currency to visit $1.20 remains to be seen. Suddenly though, U.S. payrolls data are beginning to hold more weight given how much is now hanging on the U.S. vaccine campaign and the prospect of a roaring economy.

And don’t think that mean reversion below $1.17 is such a game changer. The euro traded at the $1.07 handle in May. If we need to focus on one number in the euro, that could be $1.1640, its 55-weekly moving average.

Few believed Goldman CEO David Solomon when he told the media that he would try to enforce a firm-wide rule about not working on Saturdays after all that talk about Goldman analysts working “inhumane” hours as the SPAC deal boom stretches staff in the middle of a pandemic. Solomon also promised to send more staff to overstreched teams.

So far, at least, nothing much has changed. According to the Guardian, most teams in the UK still have between 3 and 6 employees on medical leave at any given time for burnout. And apparently, managers at the bank feel guilty enough that they’re sending employees fruit baskets and paying for them out of their own pockets.

The one-off hampers, full of fruit and snacks, are understood to have been paid for by managing directors out of their own pockets, since Goldman has not offered any company-wide gifts or additional bonuses after a leaked report revealed concerns about poor working conditions earlier this month.

While some junior bankers said they appreciated the small gift, it pales in comparison with perks announced by rival lenders in the weeks following the Goldman leak.

Earlier this month, a slide deck put together by a team of anonymous junior Goldman analysts and shared by finmeme account Litquidity quickly went viral, and sparked a conversation about junior banker hours, which the junior analysts alleged were “inhumane”. Of course, this isn’t the first time that junior banker hours have become a trending topic: Back in 2015, a 22-year-old Goldman analyst committed suicide, and a Bank of America analyst reportedly died from an epileptic seizure after working for 72 hours straight.

But considering all the money investment banks are making off the current SPAC deal boom, several of Goldman’s rivals decided to play it safe and lavish rewards on the junior employees tasked with creating most of the materials investment banks use to market and compete for deals. Credit Suisse doled out bonuses as large as $20K despite the massive hits to profitability the firm has endured as of late. Jeffries offered its 1,000+ junior analysts and associates their choice of several popular home-exercise products, including a Peloton.

While we’re sure the poor analysts appreciated the snacks, one analyst who spoke to the Guardian on the condition of anonymity said the firm should be doing more. “What we need is not a gesture from [managers], but from the firm,” the London-based banker said. Although US-based analysts were behind the viral slide deck, UK-based analysts told the Guardian that conditions aren’t any different on their side of the pond.

One Twitter user had a suggestion for managers concerned about the workload facing analysts.

Fucking fruit baskets? Try rolling up your sleeves & help. #leadershipfail

Goldman Sachs managers paid for hampers for staff https://t.co/QInoVYMvPm

— Chimie Mal (@ChimieMal) March 30, 2021

Authored by Pieter Cleppe via BrusselsReport.eu,

Last Friday, the German Constitutional Court ruled to suspend the German law ratifying the EU’s €750 billion “recovery fund”. This caused quite a stir. It’s a reminder of what economist Daniel Kral stressed on BrusselsReport.eu: that legal challenges will continue to pose a risk for any Eurozone transfers.

At least the Financial Times seems to have lost its cool. An editorial argued that “the best hope might be a changing of the guard on the court itself”, while describing proper legal scrutiny of mass EU borrowing as “doctrinal thinking”.

We can already guess what the governments of Poland and Hungary will respond the next time the FT highlights their rule of law deficiencies.

The idea that Eurozone transfers are badly needed is something of a “no brainer” among the “financial crowd” – investors, bankers and financial analysts. As they say, “it is difficult to get a man to understand something when his salary depends upon his not understanding it”, and certainly if that man is working in an industry desperate for ever more debt.

Many finances types genuinely do not see the problem, even in the face of the evidence that all the cheap money unleashed by the ECB in the last ten years, meant to provide some breathing room for Eurozone governments to finally implement structural reforms, has mainly done the opposite.

In a damning 2019 paper, German think tank CEP concluded that:

“Although Mario Draghi was able to reassure the capital market players with this promise, it did nothing to change the fundamental problems of the eurozone. In particular, the problem of the divergent competitiveness of the Eurozone countries remains unsolved.”

The EU’s “recovery fund” is simply yet another attempt to refuel the European economies with the help of transfers, even if now, also non-Eurozone countries will profit from it, which is very worrying, given how sensitive to corruption some of their national administrations are.

Certain conditions to receive the cash will be attached, but from experience, it should be questioned how much of a positive role this will play – never mind the accompanying loss of democratic control. Dutch Professor Adriaan Schout made a good point in NRC Handelsblad last week, when he urged the Netherlands “not to make use of the EU Corona fund”, arguing that “it is questionable that the European Commission attaches strings for the Netherlands”, adding that just like with the IMF, this kind of support should only go to countries in need and only them should have to accept conditionality.

In any case, according to the European Commission, not a single EU member state has already submitted the final version of the “national recovery plan” to unlock the recovery funds.

The first signs were not exactly inspiring confidence. In December, it appeared that the Italian government was planning to spend 74.3 billion euro from the 209 billion euro it gets from the EU’s “recovery fund” at “ecological transition” and 17.1 billion euro at “gender equality”. Let’s see how different the approach by the new government, led by Mr. Draghi, will be.

A key aspect of the “recovery fund” is that is funded by loans jointly issued by EU member states. This has been dubbed “Europe’s Hamiltonian moment”, seemingly ignoring Hamilton wasn’t all that great.

Supposedly, the scheme will be “temporary” and member states will pay back the loans with EU taxes, something enabled by the legislation which EU member states are currently ratifying. At least 11 EU member states would still need to ratify the EU’s “Own Resources Decision”, which increases the EU budgetary ceiling to borrow those funds. The Commission is confident that by July, this will be completed.

The EU has been engaged in joint borrowing schemes before – amongst others with the temporary Eurozone bailout fund EFSM – but an important reason why this time it may not be temporary is that it will be very tempting for EU governments to avoid paying back the loans and simply have another round of joint EU borrowing instead, in order to finance the old loans. After all, taking out a new loan in order to pay for an old one is standard national government procedure.

The problem here is that this ultimately erodes the creditworthiness of the economies actually guaranteeing to investors that the loans will be paid back, Germany in the first place.

Sure, theoretically, funds could be raised that could then be wisely invested by economically weaker EU member states, enabling them to outgrow their debt levels, but during the last 10 years, we’ve been able to witness how well this theory holds up in practice with Eurozone governments simply squandering the opportunity cheap ECB funding provided to implement structural reforms that can then generate growth – never mind the dismal track record of EU regional transfers.

A legal analysis by German Constitutional scholar Benedikt Riedl takes a closer look at the case against the German ratification law, thereby listing a whole range of issues that may cause the legislation to be deemed unconstitutional, amongst others the “lack of transparency when it comes to the procurement of the means…Which institutions will issue these loans? Has the European Commission got the free hand in all of this?”

These are incredibly important questions (primarily related to German law, irrespective of whether the new EU initiative violates EU law), certainly considering the risk that this scheme may become permanent.

The particular question of who would be actually lending the money to the EU also applies to another scheme involving joint EU borrowing, called “Support to mitigate Unemployment Risks in an Emergency” (SURE), amounting to €100 billion euro. For this, the EU Commission has already borrowed on the markets, and EU Commission President von der Leyen now goes around boasting how the EU has been lending some of this cash to Italy, Belgium, Cyprus, Greece, Malta and others.

In this regard, the European Commission also published a table, detailing how much member states have saved in interest rate payments. Italy emerges as a big winner, having saved almost 3 billion euro in interests, as compared with the situation whereby it would have to borrow the SURE funds on the markets itself.

EC report on Sure, 22 March 2021, page 27, table 7

Absent from this list: Germany, the Netherlands, Denmark, Sweden, Finland, Austria, France, Ireland and other states that are ultimately serving as the guarantors of these joint EU borrowing exercises.

Also here, there is no transparency on who those new creditors to the EU now are. China? The ECB – which already is the largest creditor to Eurozone democracies – ? Private investors?

Shouldn’t this be something EU citizens know when they are being burdened with billions of euros of extra debt through new, rather murky EU schemes?

NATO officials announced that the day prior its jets were scrambled 10 times in a mere six-hour time period in response to a “rare peak” in Russian aircraft activity across “several areas”.

“NATO aircraft intercepted six different groups of Russian military aircraft near alliance airspace in less than six hours,” the Brussels-based military alliance said in a statement of the intense period of Monday, which appears to have been confirmed in at least one photograph.

A NATO official told several major media outlets that that the Russian flights posed a potential “risk” to civilian aviation as they failed to transmit transponder codes as is normative in such crowded airspace. 

As the BCC details NATO identified six groups of Russian planes in the following locations where NATO intercepts took place:

• Norwegian F-16s scrambled as two Tu-95 Bears neared the Norwegian coast

• The Russian planes then flew south over the North Sea prompting action from UK and Belgian air force planes

• Two Tu-160 Blackjack bombers were later intercepted by the Norwegian air force

• Allied planes also tracked three Russian planes over the Black Sea

• A Russian maritime patrol plane was intercepted by Italian planes over the Baltic Sea near Kaliningrad.

The regions named constitute much of Russia’s Western flank, which becomes more interesting given this admission which is buried in the very last paragraph of the full official NATO statement posted to the military command’s website:

“The Russian aircraft intercepted on Monday never entered Alliance airspace…”

Moscow’s relations with NATO have lately hit a low-point from past years, with the two sides not communicating at all, prompting NATO Secretary General Jens Stoltenberg issuing a call last week for the reestablishment of the ‘NATO-Russia Council’ – which hasn’t met since 2019. It acts as a military-to-military point of dialogue and ‘deconfliction’ hotline of sorts.

Busy week for Russian bombers, other military aircraft, and NATO interceptors over Europe. h/t @cencio4

Wonder what Rules of Engagement was violated by decision to wedge Italian Typhoon in between Russian Su-27 fighters. https://t.co/oJChsyNlID

— Hans Kristensen (@nukestrat) March 31, 2021

As CNN reviews, intercept incidents between the two rivals have grown immensely since that time: “NATO aircraft scrambled more than 400 times in 2020 to intercept unknown aircraft according to the alliance.”

CNN reports of NATO’s accusations further that “About 90 percent were in response to flights by Russian aircraft. NATO says Russian flights often pose a risk to civilian air traffic over Europe because the Russians often fly without transmitting a transponder code indicating their position and altitude and do not file a flight plan or communicate with air traffic controllers.”

Authored by Paul Joseph Watson via Summit News,

A bronze statue of teenage climate activist Greta Thunberg has been unveiled at a university in the UK, with critics branding it a “vanity project.”

The University of Winchester proudly revealed the ‘inspirational’ statue’, claiming it was the first life-size sculpture of the Swedish campaigner.

However, critics blasted the statue as indicative of a cult of personality, while others questioned how much carbon emissions were emitted in the making of the structure.

The university’s student union also voiced opposition to the statue, which cost £24,000, saying the money could have been spent on better things.

Bronze statue of @GretaThunberg installed @_UoW as symbol of commitment to combat the climate emergency: https://t.co/K1K3FOTyeL pic.twitter.com/l6vg7wFmd7

— UoW Press Office (@_UoWNews) March 30, 2021

“We’re in a Covid year, lots of students haven’t really had access to campus, lots of them are trying to study online and are in dire need of support,” said President of Winchester Student Union Megan Ball.

“We are calling on the university to match the statue cost by committing £23,760 in additional funding to student support services across campus.”

“We urge them to publicly face the critical issues which students are highlighting and provide a transparent breakdown of additional and existing financial support.”

Winchester University and College Union (UCU) also passed a motion describing the statue as a “vanity project,” pointing out that the university had suffered through several years of austerity and job losses.

We have just passed the following motion regarding @_UoW’s decision to spend £24k on a statue of Greta Thunberg after years of austerity @winchestersu @dailyecho @hantschronicle: pic.twitter.com/CeDOCCqJe4

— Winchester UCU (@WinchesterUCU) March 24, 2021

Students were told in an email that the statue would become a symbol of its “commitment to combat the climate and ecological emergency.”

However, Twitter users pointed out that in creating it, CO2 emissions that could have gone to lighting lecture theaters were wasted.

Electricity to cast this bronze could have been used to light lecture theatres for learning. However, Greta doesn’t really do studying.
Fortunately some Swedish scientists have: pic.twitter.com/fy4leC0miJ

— Eyespeeled (@Eyespeeled3) March 30, 2021

As we previously highlighted, a mural of Greta in Edmonton, Alberta, was defaced, with the vandal telling Thunberg to stop lecturing him on how to live his life.

Last year, historian Niall Ferguson slammed Thunberg’s lecturing of solely western countries, asking why “I don’t see her in Beijing or Delhi.”

The fact that Greta is merely a mouthpiece for her activist parents was underscored during a press conference last November when she was unable to answer a simple question without reading off a script.

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