Month: October 2021

Authored by Mike Shedlock via MishTalk.com,

Expect COP26 to be the biggest climate summit failure to date vs expectations and goals…

Conference of Parties 

COP26 is the 26th annual Conference of Parties on climate change. The goal of these meetings is to agree to methods of limiting global warming to 1.5ºC above pre-industrial levels by 2100. 

COP15 in Paris set lofty goals, but goals are one thing and actions are another. The rest of the 25 previous conferences failed totally.

Unless China, India, and developing nations are on board, don’t expect COP to do anything. And here’s a hint: China, India, and the developing nations are not on board,

Goals of COP26

• Secure global net zero by mid-century and keep 1.5C within reach

• Adapt to protect communities and natural habitats

• Mobilize finance

• Work together to deliver

Except for the first bullet point the goals are mush, but I can translate. 

Mobilize finance means payments to developing nations to meet their goals. Developing nations want more money than will be agreed on.

China is not committed net zero by mid-century. Countries are not working together.

COP26 Agenda

• October 30-31: G20 leaders gather in Rome. Key moment: look for climate pledges from China, India, and Saudi Arabia. More climate cash from France and Italy. A G20 communiqué reaffirming 1.5C goal.

• November 1-2 : World Leaders Summit opens COP26. Speeches will call for more climate action as talks begin. Key moment: an appearance from Xi Jinping will signal China means business.

• November 4: Energy Day – Alok Sharma will be fighting to “make coal history”. Key moment: look out for new signatories to the UN’s No New Coal pact.

• November 5: Youth and public empowerment day. Key moment: expect noisy protests from Greta Thunberg for more action.

• November 10: Transport day, with focus on cutting carbon from cars. Key moment: Boris Johnson will hope for new national bans on petrol and diesel car sales.

• November 12: Negotiations are due to end, so expect last minute scuffles to delay proceedings. Key moment: release of the negotiated text. No climate target, but nations are likely to reaffirm support for 1.5C goal. The text may agree to present more ambitious carbon-cutting targets by 2023. Nations should also have agreed common time frames for their climate targets, and the format for progress reports against those targets.

The above from COP26 meaning: What the name of Glasgow climate summit stands for and its aims explained

What to Expect

• October 30-31: Another useless communiqué reaffirming 1.5C goal.

• 1-2 November: Lots of speeches including another world will end in 15 years keynote address. Xi Jinping will not signal China means business or if he does, it will be a lie.

• 4 November: Energy Day – Alok Sharma will fight to “make coal history”. There will be new signatories to the UN’s No New Coal pact but China and the US won’t be among them.

• 5 November: Expect noisy protests from Greta Thunberg. This goal will certainly be met but it will not accomplish a damn thing.

• 10 November: Transport day, with focus on cutting carbon from cars. Key moment: Boris Johnson will hope for new national bans on petrol and diesel car sales. If there is anything to cheer it will come in this sector. But there will not be meaningful bans on petrol other than perhaps diesel cars. Most of the success will happen anyway from car makers. 

• 12 November: Negotiations are due to end, so expect last minute scuffles to delay proceedings. Key moment: release of the negotiated text. No climate target, but nations are likely to reaffirm support for 1.5C goal. The text is sure to disappoint climate change activists.

Climate Summit to Nowhere

The Wall Street Journal has the right idea in its outlook The Climate Summit to Nowhere.

It’s incongruous bordering on the bizarre to organize a summit like this while Europe is battening down for a winter fuel crisis, President Biden is begging OPEC to produce more oil, China is firing up its coal-fueled power plants amid an electricity shortage, and climate-change plans wilt as soon as they’re exposed to the sunlight of democratic politics.

No matter. This summit is called COP26 because there have already been 25. No less than the United Nations admitted this week that nations have made little progress on their previous climate pledges. But rather than adjust to this political reality, the delegates will make even more unrealistic promises.

The commitments of developing countries are even flimsier and depend on bribes from the rich. The Association of Southeast Asian Nations (Asean) this week called for more international aid to finance emissions reductions: A “floor” of $100 billion annually should do it, with $367 billion over the next five years going to Asean, thank you. Out of the 75% reduction in carbon emissions the Philippines plans to achieve by 2030, 72% is contingent on foreign aid, Nikkei reported this week.

Rich countries first made the $100 billion pledge in 2009, but the money still hasn’t appeared. Taxpayers in rich economies will be even less willing to sacrifice their own cash for the climate when they realize who isn’t coming to COP26: Vladimir Putin of Russia and China’s Xi Jinping.

Leaders of other big CO2 emitters, such as world number-three India, will be in Glasgow but might as well not be. Delhi’s environment minister suggested this week that his government won’t sign up for net zero. With several hundred million Indians still living in poverty, India needs more energy from fossil fuels, as does all of Africa.

Mr. Xi promised in 2020 to reduce climate emissions—but only after 2030. In the here and now, China is building more coal-powered plants because growing the economy is a far higher priority. The Kremlin’s budget floats on oil and gas production, and Mr. Putin won’t mind if Western Europe goes to net zero. He’ll then have more energy leverage.

More Money Please 

Please consider the ASEAN Joint Statement on Climate Change COP 26.

Hooray! 

“The Kingdom of Cambodia, the Republic of Indonesia, the Lao People’s Democratic Republic, Malaysia, the Republic of the Union of Myanmar, the Republic of the Philippines, the Republic of Singapore, the Kingdom of Thailand and the Socialist Republic of Viet Nam, reaffirmed our commitments ….”

Based On ….”a new collective quantified goal from a floor of USD 100 billion per year, which takes into account the needs and priorities of developing countries.”

NIKKEI Asia reports ASEAN urges developed world to lift climate financing over $100bn. 

Developed countries should “continue and further scale up the mobilization of climate finance ahead of initiating deliberations on the setting up of a new collective quantified goal from a floor of $100 billion per year,” the bloc said in a joint statement issued Tuesday at its annual summit, ahead of the COP26 climate conference opening next week in Scotland.

Yet a study by the ISEAS-Yusof Ishak Institute, a Singaporean think tank, found that Southeast Asians have little awareness of their countries’ climate policies. Nearly 60% of respondents were unsure whether their country had submitted its Nationally Determined Contribution to the Paris climate agreement.

ASEAN would need at least $367 billion through the next five years for its energy plans, bloc Secretary-General Lim Jock Hoi said this week.

Synopsis 

• China will continue to build coal-fired plants through 2030

• China has a net neutral target of 2060 not 2050

• Russia will not do a thing

• India will not agree to goals 

• Developing countries will demand but not receive more money

• Gretta, will give a rousing speech on the end of the world as we know it within 15 years. 

How much carbon will be released by all those jetting around the world to attend this useless summit? 

COP26 will be the biggest failure yet. 

But hey, Gretta will get her picture on countless newspapers and magazines. That counts for something, doesn’t it?

*  *  *

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While the vast majority of employees across most industries and sectors have acquiesced to mandatory vaccine mandates, enough Americans are refusing to get the jab that states and municipalities are losing a dangerous game of chicken with employees who refuse.

On Saturday, the New York Post reported that 26 New York fire companies have been shuttered citywide due to staff shortages caused by the Covid-19 vaccine mandate.

…an “unconscionable” move some fear could have catastrophic consequences, elected officials told The Post Saturday.

The stunning lockdown came amid a pitched battle between City Hall, which will start enforcing a mandate Monday that all workers have at least one dose of the COVID-19 vaccine — and jab-resisting fire fighters, many reportedly saying they were already sick with the coronavirus and therefore have “natural immunity.” -NY Post

🚨As of 7:30am this morning, 26 @FDNY companies are closed including 5 in my district due to @NYCMayor locking out unvaccinated firefighters.

If someone dies due to a slower emergency response, it’s on Bill de Blasio and his overreaching mandates. I hope this fool fixes it ASAP!

— Nicole Malliotakis (@NMalliotakis) October 30, 2021

While FDNY Spokesman Jim Long insists that the closings are temporary, and the situation is “fluid,” it’s of no comfort to New Yorkers.

“We’re f–ked. We are going to toast like marshmallows,” retired electrician Vinny Agro, 63, told the Post. “It’s another sad day for New York City.”

Across the Rockies, Los Angeles Country Sheriff Alex Villanueva has warned of an “imminent threat to public safety” caused by a “mass exodus” of thousands of deputies and civilian personnel who refuse to take the jab.

“I could potentially lose 44% of my workforce in one day,” he wrote in a Thursday open letter to the Board of Supervisors, adding that he can’t enforce “reckless mandates that put public safety at risk,” according to LAist.

The county is currently sending notices to employees who have not yet complied with the vaccination policy that they have 45 days from the date of the notice to register as fully vaccinated, according to a statement from the office of County CEO Fesia Davenport.

After the 45 days have passed, employees who have not demonstrated proof of full vaccination or requested a medical or religious exemption will get a five-day suspension and have 30 days after they return from suspension to come into compliance, the statement said.

The Sheriff’s Department — the largest in the country — employs approximately 18,000 people. About half are sworn deputies.

Meanwhile in Arizona, a Tucson Water employee claims the department is ‘losing staff’ over the mandate.

“We are watching employees walk out as I speak in the water quality and operations division,” reports KOLD13.

“We’re pulling people from other areas and other departments to help specifically cover the operations division which is overseeing the water quality and drinking water parameters,” the whistleblower added.

According to the report, three people have left in the last week alone over the vaccine mandate.

““(We’re) feeling dispensable to our employer that we’ve dedicated our lives to,” the worker said. “In my opinion, it could come to a head where we can’t provide the level of service we were before the mandates.”

While the worker said they’re fearful for the future, they want to reassure Tucsonans the drinking water is safe and they will do everything in their power to make sure it stays that way.

“I drink Tucson water and I care about the quality of it,” the employee said.

We reached out to the city of Tucson about the staff shortage impacting clean drinking water.

“Tucson Water is prepared to continue delivering safe secure clean drinking water,” the city said. “The utility has plans, procedures, practices, and redundancies in place to ensure continuity of operations in the face of reduced staffing and other emergency scenarios.” -KOLD

Now might be a good time to review EM Forster’s 1909 “The Machine Stops” – a cautionary tale of what can happen when a society takes their infrastructure for granted.

Authored by Matt Taibbi via TK News,

FBI Special Agent-turned-CNN Political Analyst Asha Rangappa — gosh that resume sounds unsurprising, doesn’t it? — tweeted this yesterday night:

As an experiment, I’d love for an @SouthwestAir pilot to say “Long live ISIS” before taking off. My guess is that 1) the plane would be immediately grounded; 2) the pilot fired; and 3) a statement issued by the airline within a matter of hours

— Asha Rangappa (@AshaRangappa_) October 31, 2021

Put on your irony helmet, this is going to be a long ride. Rangappa was referencing a story involving a Southwest Air pilot who became a headline news story by saying, “Let’s Go, Brandon!” during a flight from Houston to Albuquerque. Sitting on that flight, incredibly, was an AP reporter named Colleen Long who was writing a piece entitled, “How ‘Let’s Go Brandon’ became code for insulting Joe Biden.”

How did it happen? On October 2nd, at a NASCAR race at the Talladega Superspeedway in Alabama, a crowd broke into a chant of “Fuck Joe Biden!” after 28-year-old Brandon Brown won a race. NBC reporter Kelli Stavast was interviewing Brown during the chants, and quickly spoke over them, saying, “You can hear the chants from the crowd. Let’s go Brandon!”

The phrase has since become a war cry for people all over the country, being at once a burn on Biden, the anxious, airbrushing press, and the corporate conglomerates who are taking pre-emptive action to try to prevent such outbursts from ever again darkening America’s door (“NASCAR and NBC have since taken steps to limit ‘ambient crowd noise’ during interviews,” as the AP put it).

Now WFBI agent Rangappa has essentially declared “Let’s Go, Brandon!” the equivalent of an ISIS war cry. Supportive hand-wringing from press/natsec colleagues (is there a difference?) was instantaneous. “Donald Trump tried to overthrow American democracy and at least one Southwest Airlines pilot thinks that’s just fine,” cried HuffPo’s S.V. Date. “Come fly the extremist skies,” chimed in official #Resistance mascot Aaron Rupar. Then there was Rangappa’s fellow spook-to-CNN pipeliner, former Homeland Security official Juliette Kayyem:

If @SouthwestAir doesn’t do anything, every passenger on that flight has standing to file a complaint with the @FAANews and they should do so. Southwest will then be compelled to investigate or defend him. Have fun with that. No messing around in the air. Bright line rule. https://t.co/L7VlZWJ0SU

— Juliette Kayyem (@juliettekayyem) October 30, 2021

Is it really possible that these people don’t get they’re being trolled? Part of the joke of “Let’s Go Brandon,” of course, is that you couldn’t go five minutes during the last administration without hearing someone in pearls or a bowtie screaming “Fuck Trump!” I don’t remember Rangappa pumping out “Osama de Niro” tweets after this celebrated Tony Awards appearance:

The bigger part of the “Let’s Go Brandon!” gag is that such outbursts during the Trump years were not only not condemned, they were celebrated, as pundits and reporters for the first time told us directly profane insults of presidents were okay. “Robert de Niro’s Comments at the Tony Awards Go Viral,” was CNN’s bemused take, in a story quoting artist Ferrari Shepard saying, “Robert de Niro is my favorite rapper.”

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A little over two years ago, on the 11th anniversary of Lehman’s bankruptcy, a “repo crisis” shocked Wall Street when on Sept 16, 2019 it suddenly became apparent that despite $1.3 trillion in “excess” deposits and years of QE, there was not nearly enough liquidity in the system. A month later we were the first to piece together the puzzle, which confirmed that it was JPMorgan’s drain of over $100 billion in repo and money market liquidity that was the precipitating factor for the repo market collapse. In other words, not only did JPMorgan precipitate the repocalypse  (and was not just us who made this claim, but other websites websites and news sources), but with its actions it also triggered the launch of the repo liquidity flood and, a few weeks later, the Fed $60BN in T-Bill purchases, aka QE4.

But while it was JPMorgan’s direct actions that soaked up enough liquidity from the market to start a cascading crisis, the actual trades in question were highly levered positions involving a relative-value compression trade in the Treasury cash/swap basis, similar to what LTCM was doing ahead of its 1998 bailout (we described this dynamic in detail in in Dec 2019 in “The Fed Was Suddenly Facing Multiple LTCMs.”)

For those who missed it, a quick refresh: for much of 2017 and into 2019, as volatility collapsed, one increasingly popular and extremely levered hedge fund strategy involved buying US Treasuries while selling equivalent derivatives contracts, such as interest rate futures, and pocketing the arb, or difference in price between the two. While on its own this trade is not very profitable, given the close relationship in price between the two sides of the trade. But as LTCM knows too well, that’s what leverage is for. Lots and lots and lots of leverage.

We also said that “hedge funds such as Millennium, Citadel and Point 72 are not only active in the repo market, they are also the most heavily leveraged multi-strat funds in the world, taking something like $20-$30 billion in net AUM and levering it up to $200 billion. They achieve said leverage using repo.” The chart below shows the regulatory assets among the 3 biggest hedge funds: despite the 2019 repo crisis, asset growth has only accelerated…

… or rather precisely because the repo crisis showed that the Fed would always bail out the super large hedge funds (and with its Form ADV at 261 pages, it’s clear that Citadel would never be allowed to fail), that asset growth has continued with regualtory leverage still in the stratosphere.

And while individual firms borrowing is a closely guarded metric, and changed day to day depending on market conditions such as volatility and overall liquidity, in March 2020, Bloomberg reported that some fund were levered up as much as 50 times their own wagers. Leveraged funds exposure to the basis strategy could be as much as $650 billion, JPMorgan strategists said.

Why do we bring all of this up now?

Because as Bloomberg’s Edward Bolingbroke writes, picking up where we left off in “Treasury Market Becoming Increasingly Distorted By Record Bearish Sentiment“, a little over two years after the basis trade implosion that sparked the repo crisis and led to “NOT QE”, hedge funds are piling right back into precisely the same basis trade that nearly blew up the world in late 2019 and again in early 2020…

… as surging expectations for Federal Reserve rate increases create dislocations in the market, particularly for two-year notes.

As we have repeatedly explained over the years, the infamous Treasury basis trade involves pairing a position in highly liquid futures with an opposite position in the underlying (and usually less liquid, thus arbable) note or bond, and futures positioning data from the Commodity Futures Trading Commission suggest it’s having a moment. The trade makes sense because, as Bloingbroke notes, the increasing threat of Fed rate hikes last week caused a surge in two-year yields that disrupted the cash-futures relationship.

As interest-rate swaps repriced the Fed’s path to over two hikes next year, compared with less than one a month ago…

… interest in being short the two-year note inflated its value relative to futures, something we first discussed last Monday. And, as Bloomberg reports, this relative cheapening in futures apparently enticed hedge funds to enter into short basis trades, in which they’re long futures and short cash. Curiously, at the same time, the latest CFTC data shows that hedge funds last week extended their net long in two-year note futures to the most since October 2017, as asset managers cut their net long position. The positioning spread reached the widest since 2016.

Furthermore, as we also address last Monday, the rate at which short positions were established in two-year Treasuries last week was reflected in the high cost of borrowing the newest one, which was “trading deeply special in repo markets, and the specialness is expected to persist through the end of November,” Deutsche strategist Steven Zeng said in an Oct. 22 report. With the Fed’s rate near 0%, a security trading special has a negative financing rate that is beneficial to the owner and punitive for a borrower. It’s also why last week’s 2Y auction were so stellar: not because funds wanted exposure to rates on the short end, but because they were desperate to get their hands on more physical paper to put on even more basis trades.

Barclays strategists Anshul Pradhan and Andres Mok confirmed these observations when they said that the extraordinary demand for the newest two-year notes made them “a potential candidate for investors to be short against TU futures and likely why the issue has been funding special in repo as of late.”

Translation: the higher rates expectations rise, the more dislocated the cash-futures arb gets, the more hedge funds pile into the same trades which by definition soak up market liquidity and become ticking timebombs should there be a violent, sudden reversal in market sentiment…. Just like the one we saw last week when Australian and Canadian 2y yields did this:

And this is where things get interesting, because even Bloomberg admits that “past episodes involving hedge funds and the basis trade ended in tears, notably in 2020, but this one has been fairly orderly so far.” As Bolingbroke notes, the FRA/OIS spread, “a key gauge of banking-sector risk that moved 70 basis points during the first quarter of 2020, has remained within a three-basis-point range over the past month.”

While that’s certainly true, don’t expect this level of calm to persist, and in fact, if former Lehman trader and current author of the Bear Traps report is correct, all hell may be about to break loose. Writing in his latest report, McDonald says that “we are hearing 10 to 20 different asset managers across the industry are being liquidated or are under review for liquidation due to interest rate derivatives, it’s a bloodbath.The VIX (equity vol) looks wildly mis-priced relative to what is happening ) in fixed income markets.”

As McDonald continues “when you have a book that is wounded, they need to sell liquid assets. When you don’t allow business cycles to function and you don’t allow price discovery in global capitalism for long periods of time and then academics who don’t understand anything about risk all of a sudden unleash price discovery too fast, they destroy things – and that is what is happening.“

Citing a London CIO, McDonald asks “did the yield curve kill rumors that this move has taken out another fund, ala Alphadyne.” As a reminder, overnight Bloomberg reported that steepening bets gone terribly wrong is why macro hedge fund giants Rokos and Alphadyne suffered huge losses in recent weeks). The question of course is who else got steamrolled and whether they will have to liquidate performing assets to plug the VaR shock crisis hole. Indeed, as McDonald notes, “the rally in nominal yields pushed real yields further negative, which should have led to a surge in gold and silver, but didn’t – this speaks to an Alphadyne-like situation.”

So besides real vs breakeven rates – which over the past two days have violently zigzagged…

… as more funds were stopped out with massive losses, leading to a collapse in Eurodollar open interest as the net change in white-pack (Dec21-Sep22) eurodollar futures was -113,546 contracts, while open interest plunged -84,014 in red-pack futures (Dec22-Sep23), with the plunge in OI suggesting the trades were done to exit steepeners, another place to watch for early signs of trouble is junk spreads. 

And indeed, as McDonald observes, the weakest links in the credit market have seen spreads consistently widen (weaken) over the past 2 months, and it is only a matter of time before BBs start trending weaker along with CCCs.

As McDonalds warns, “the weakest links in the credit market have seen spreads consistently widen (weaken) over the past 2 months. We expect BBs to soon start trending weaker along with CCCs.”

“The entire leveraged finance complex is based on low borrowing costs – the high yield market is at 4% and even CCC bonds (50%-60% historical default rates) are at an average yield of about 7%.”

Corporate credit moves notwithstanding, the bigger concern is that while equity implied vol remains subdued and almost ominously low, rate vol is not only surging domestically, disconnecting from the complacency in stocks…

… but has exploded globally especially in places like Australia, Canada and the UK (see 2Y Yield charts above). This is how the Bear Traps summarizes this dynamic:

For much of the last two years, price discovery across global government bond yield curves has been suppressed. As we stressed in recent months, “Adam Smith’s hands are being tied behind his back.”

Free markets have not existed in a covid world.  Now central banks are pulling away and the moves across the front and long-end of yield curves are colossal. It’s ALL ABOUT the rate of change. In macro rates, the body bags are piling up this week. The losses are enormous across this section of the hedge fund community. As one large whale gets stopped out, he takes the smaller players with him / her. There is a lot more risk out there than meets the eye.

In US rates, the 20 and 30-year bonds both yield 1.77%, we touched inversion today. We are NOT seeing real economic growth, bonds are telling us real demand destruction is here. Inflation has already hiked rates 200bps for the Fed.

And here is the problem: in his latest weekly note, JPM’s rates strategist Alex Roever echoed what DB’s Zeng said last week and writes that the recent volatility in rates markets has ushered in with it an increase in dislocations along the Treasury curve:

Exhibit 5 shows that the root mean square error (RMSE), of our par fitted curve, a measure of aggregate dispersion, has nearly doubled this month, rising to levels last seen in March 2020. The rise in RMSE at that time was a clear early indication of dysfunction within the Treasury market and driven by record-sized deleveraging in various forms of carry trades within the Treasury market. This time around, we do not think this rise portends the same historic disruptions that we saw in early 2020, especially with policy rates at the ELB, the Fed still buying $80bn in Treasuries per month, and financial conditions are broadly easy.

Yet while JPM is – as always – complacent about bond market risks, the bank concedes that “this does indicate that relative value trades which traded like short volatility positions have been unwound in recent days” and nowhere is this more evident in the 20-year sector of the Treasury curve, as 20s/30s flattened 4bp this week amid the broader long end flattening, moving into inverted territory

This violent shift in the 20s30s yield curve is merely the latest confirmation that liquidity across the curve is collapsing; here is Srini Ramaswamy from JPM’s rates derivatives team explaining why:

It was a wild ride in markets this week, with front end yields decoupling from longer maturity sectors of the curve. At the very front end of the curve, the drumbeat of rising inflation concerns continued to pressure front end yields higher and money-market sector yield curves steeper. Long end yields on the other hand, fell sharply this week. As the week came to a close, yields were higher by 4bp in the 2-year sector, but lower by 10bp and 15bp, respectively, in the 10- and 30-year sectors of the curve.

These sharp idiosyncratic moves are a clear sign of thin liquidity in markets, even as major thematic shifts are underway. Exhibit 2 shows, for instance, daily changes in the 10s/20s/30s swap spread butterfly over the past 5 years, with the bands representing a 2.2bp move (the size of Thursday’s move) in either direction.

As can be seen, moves this large are very unusual – outside of the March 2020 immediate aftermath of COVID-19, such a large move has only happened three other times in the past 5 years – Oct 2nd 2017, Aug 19th 2020 and Feb 25th 2021. When individual issues in the Treasury market become dislocated from the Treasury curve, it generally represents periods of thin liquidity.

Even assuming JPM’s optimistic take is accurate what happens next? As the bank’s rate derivatives analysts concludes, “liquidity driven dislocations should ultimately fade, but could linger for a few weeks. One way to see this is to look at the performance of short gamma positions after periods of poor liquidity. Exhibit 3 shows the performance of delta-hedged short 6Mx10Y straddles in the weeks following periods of poor illiquidity (identified as periods when the 10s/20s/30s swap spread butterfly changed in magnitude by 2.2bp or more in a day). As can be seen, history suggests that the first few weeks following such episodes could stay volatile.”

Putting it all together:

1. The liquidity in what is supposed to be the deepest, most liquid market in the world, is collapsing.
2. In a time when the Fed is still injecting $120BN in liquidity every month, we just observed an event that has only happened on prior previous occasions – Oct 2nd 2017, Aug 19th 2020 and Feb 25th 2021. One can only imagine what happens to liquidity when the Fed begins to taper.
3. As liquidity evaporates, rate vol is accelerating and dislocations across the yield curve accelerate, with bond vol surging while equity vol is completely ignoring the turmoil in the bond market. Eventually equity vol catches up to rates.
4. Some extremely levered multistrat hedge funds are reprising LTCM and piling into treasury/futures basis trades – the same trades that blew up spectacularly in Sept 2019 and March 2020.
5. As hedge funds pile into new flattener basis trades, others are liquidating basis steepeners, in some cases at huge margin call inducing losses, which force them to liquidate other performing assets.
6. A positive feedback loop emerges as liquidity shrinks further while volatility rises as the basis trade funnel gets wider, and more enter while those hoping to exit hold off until the last moment.
7. We hit a tipping point where all basis trades are no longer viable as there is simply not enough liquidity to put new trades on. That’s the moment everyone starts rushing for the exits, and as Sept 2019 and March 2020 showed us, that’s precisely the catalyst for a cross-asset crash, as basis trading funds scramble to boost liquidity while repo markets lock up. The result is a surge in volatility in underlying assets (TSYs), but also a freeze in the funding pathways (i.e. repo) that are used by the funds to fund said trades.
8. Eventually, Fed steps in to bail out some of the world’s richest hedge fund managers, usually under the guise of some social calamity, like – for example – a viral pandemic.

We are currently toward the end of step 6 of this checklist.

As usual, all the supporting docs are available for professional subs.

There’s new allegations of a Russian troop build-up along the Ukrainian border, and Western leaders are sounding the alarm over what’s perhaps becoming another brewing showdown near Donbass and the Crimea region.

The Washington Post reported Saturday that “A renewed buildup of Russian troops near the Ukrainian border has raised concern among some officials in the United States and Europe who are tracking what they consider irregular movements of equipment and personnel on Russia’s western flank.”

The fresh allegations of Russian muscle-flexing aimed at Kiev come after last April’s West-Russia showdown and tensions due to large-scale Russian drills along the border wherein tens of thousands of additional troops were deployed from their home bases to border areas near Ukraine. However, the Kremlin pointed out at the time that it’s free to move troops anywhere within its sovereign borders that it wants. 

The new weekend Washington Post report admits that the purpose of this current troop build-up remains “unclear” – while detailing the following: 

Videos have surfaced on social media in recent days showing Russian military trains and convoys moving large quantities of military hardware, including tanks and missiles, in southern and western Russia.

“The point is: It is not a drill. It doesn’t appear to be a training exercise. Something is happening. What is it?” said Michael Kofman, director of the Russia studies program at the Virginia-based nonprofit analysis group CNA.

The concern comes just after the conclusion of the major ‘Zapad 2021’ military drills primarily held between Russian and Belarusian forces in September, including a handful of other allies. Analysts say large units never returned to their ‘home’ bases after the drills, but instead went to outposts near the Ukrainian border.

🇷🇺 Video of the transfer of Russian troops in the Bryansk region#Russia #Ukraine pic.twitter.com/86GpIuNwQe

— Dailyaz (@dailyaz1) October 28, 2021

Ukraine’s government is now suggesting as much as well, according to WaPo:

Oleksiy Danilov, secretary of Ukraine’s national security and defense council, said in a statement that after the conclusion of the Zapad 2021 exercises, Russia left military equipment, as well as control and communications centers, at training sites along the Ukrainian border.

Danilov estimated that the number of Russian troops deployed around the Ukrainian border at 80,000 to 90,000, not including the tens of thousands stationed in Crimea.

In recent months the Kremlin has accused Kiev of renewed aggression against pro-Russia separatist forces in eastern Ukraine, resulting in new casualties, while Ukrainian officials have charged that it’s the Russian state that’s fueling renewed fighting on stalemated front lines, especially by secretly transferring arms.

This as Vladimir Putin and other Russian leaders continue to warn Ukraine and NATO over Russian “red lines” of NATO military and base expansion into Ukraine. Russia has said it will be forced to act if in observes NATO military expansion in Ukrainian territory. 

2/ Here is alleged video of Russian materiel being sent to Ukrainepic.twitter.com/aeKACKWX6u

— Josh Wolfe (@wolfejosh) October 31, 2021

Putin last summer charged that the West, especially the United States, exercises de fact control over Ukraine’s top leadership. 

“We will never allow our historical territories and people close to us living there to be used against Russia,” Putin stated previously. “And to those who will undertake such an attempt, I would like to say that this way they will destroy their own country.”

Authored by Ryan McMaken via The Mises Institute,

It seems supporters of the Biden administration finally settled on a narrative they like for explaining away supply chain shortages.

Here’s the administration’s talking point:

the US economy is rolling along so well that Americans are demanding huge amounts of goods.

That’s overwhelming the supply chain and causing the backups roiling America’s ports and logistic infrastructure.

For example, transportation secretary Buttigieg this month declared “Demand is up … because income is up, because the president has successfully guided this economy out of the teeth of a terrifying recession.”

Similarly, White House spokeswoman Jen Psaki told reporters supply chain problems are occurring because “people have more money … their wages are up … we’ve seen an economic recovery that is underway.”

This position has been mocked by a number of conservative politicians—including Senator Ted Cruz—and commentators, who find this to be an absurd assumption. Indeed, Cruz and other critics could point to a variety of factors ranging from the weight of government regulations to the problem of covid lockdowns limiting the productivity of supply-chain workers. 

Yet the administrator’s defenders are right about consumer demand and spending—even if for the wrong reasons. As Mihai Macovei showed earlier this month, the global volume of trade and shipping volume in 2021 have actually exceeded prepandemic numbers. For example, in the port of Los Angeles, “loaded imports” and “total imports” for the 2020–21 fiscal year (ending June 30, 2021) were both up when compared to the same period of the 2018–19 fiscal year.

In other words, it’s not as if little is moving through these ports. In fact, more is moving through them than ever before. That suggests demand is indeed higher. 

But why is it higher? It some ways, it’s true that, as Psaki says, “people have more money.” That, however, is where the veracity and usefulness of Biden’s defenders end in explaining the problem. 

Much of the answer can be really found in monetary inflation. Obviously, Joe Biden hasn’t “successfully guided the economy” through anything, but it is accurate to say that people have more money in a nominal sense. Wages are up nominally. After all, if we look at the immense amount of new money created over the past eighteen months, we should absolutely expect people to have more money sloshing around. But this also means a lot more pressure on the logistical infrastructure as people buy up more consumer goods.

The idea that supply chain problems are “driving inflation” gets the causation backward. It’s money supply inflation that’s causing much of the supply chain’s problems. Not the other way around. 

After all, as of September 2021, M2 has increased from $15.2 trillion to $20.9 trillion since February 2020. That’s an increase of 35 percent. Yes, some of that has been kept within the banking system through the Fed’s payment of interest on reserves, but a lot of it clearly has entered the “real economy” through stimulus payments, unemployment insurance, and federal deficit spending in general.

Originally, the public was saving a lot of that stimulus and bailout money, with the personal savings rate hitting historic highs of over 25 percent. But this past summer the savings rate collapsed again, and as of September is back under 8 percent. The public is now flooding the economy with its former savings.

The American appetite for spending on consumer goods hasn’t gone away. Yet there are many reasons to suspect this spending spree is unsupported by actual economic activity and is a phenomenon of monetary inflation.

For example, today’s tsunami of spending raises questions when we consider there are still about 5 million fewer people working in the American economy than was the case in early 2020. That means fewer people being paid wages. Without monetary inflation, an economy with millions of fewer workers suggests there should be less spending.

Additionally, spending increases when the public suspects that inflation is going to increase. That is, if there is a perception the value of money will decline, the demand for money will decline also. As Ludwig von Mises noted: “[O]nce public opinion is convinced … the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size.”

That means more spending. This phenomenon is already clear in home prices and grocery prices. The public may suspect rising prices are here to stay. Meanwhile, the Consumer Price Index—a very limited measure of goods price inflation—is nonetheless near a thirty-five-year high. That means now’s a good time to spend.

With 2020’s panic-induced saving subsiding, people are now wondering if their savings produce any returns. But ordinary savers are surely now remembering that the interest returns from savings right now are next to nothing. Thanks to the central bank’s ultralow interest rate policy, we live in a yield-starved world. That’s okay for hedge funders who can participate in carry trades and other high-yield forms of investment. But regular people are stuck with interest rates that don’t keep up with price inflation. So it makes more sense to spend dollars rather than save them. 

So, Biden’s people are correct in a certain sense that people have “more money” and that “demand is up.” This is just what we would expect in an inflationary environment.

We should expect demand for everything (but money) to be up. 

The question, however, is how much of this windfall will continue in real, inflation-adjusted terms. It’s too early to tell, although we can also see that inflation-adjusted median earnings collapsed 6.3 percent, year over year, during the second quarter of 2021. We can see that real GDP growth has dramatically slowed.

But at least as far as the third quarter is concerned, it’s fairly clear the US was—and likely still is—in the midst of an inflationary boom. But how long will it last?

At this point, one can’t say the G-20 meeting in Rome was entirely unproductive, although the unofficial run-up to the upcoming COP climate conference in Glasgow next week didn’t seem to accomplish much.

After the US and EU trade negotiators struck a deal late yesterday to resolve a trade spat dating back years, the G-20 nations – an agglomeration of the most economically powerful nations on the planet – have agreed early Sunday on a new climate framework that they will bring to the climate accords in Glasgow next week (although Russia and China, two prominent G-20 members, skipped the international circle-jerk, and with good reason). Both leaders participated in the Rome meetings via video conference, and aren’t expected to join in person in Glasgow.

Anyway, on Sunday, negotiators from all sides reached agreement on the climate section of the G-20 summit’s final conclusions, giving the world’s biggest and most developed countries something to take with them to the COP26 summit in Glasgow this week. Of course, as we have explained, developing nations will need some seriously convincving, since projections show them having the most to lose over the coming decades as they catch up to their developed peers.

According to Bloomberg, the G-20 deal – as expected – calls for a reduction in offshore coal plants, while recommitting the global community to the aims first adopted 6 years during the Paris Accords (which haven’t hardly come close to being realized).

Negotiators reached agreement on the climate section of the Group of 20 summit’s final conclusions, giving leaders something to take onto the COP26 summit in Glasgow this week.

The language largely mirrors prior pledges made in the 2015 Paris climate accord, however. Leaders said they “remain committed to the Paris Agreement goal to hold the global average temperature increase well below 2 degrees Celsius and to pursue efforts to limit it to 1.5 degrees Celsius above pre-industrial levels.

As expected, the communique agrees to phasing out investment in new offshore coal power plants, something China already said it would do. “We will put an end to the provision of international public finance for new unabated coal power generation abroad by the end of 2021.”

While members committed to cut their reliance on coal, the deal didn’t offer too many details about how exactly that would happen (China, the world’s second largest economy is still heavily reliant on the stuff).

In terms of domestic coal, the statement only contains a general pledge to supporting those countries that commit to “phasing out investment in new unabated coal power generation capacity to do so as soon as possible.” The communique offered little in the way of concrete action. The G-20 committed to “significantly reduce” greenhouse gas emissions “taking into account national circumstances.”

Speaking at the start of the meeting, Italian Prime Minister Mario Draghi proclaimed that going it alone simply isn’t an option for the world’s most developed nations.

Instead, Draghi insisted that “multilateralism” is the key, per the FT.

Multilateralism is the best answer to the problems we face today. In many ways it is the only possible answer,” Draghi, Italy’s prime minister and host of the G20 this year, said in his opening comments on Saturday. “From the pandemic, to climate change, to fair and equitable taxation, going it all alone is simply not an option. We must do all we can to overcome our differences”.

Ahead of Saturday’s talks French President Emmanuel Macron told the FT that he hoped the G-20 would agree to “accelerate the exit from coal power” and for rich countries to commit more financially to help developing countries meet their climate goals. Of course, the last time the West was confronted with a bill for these so-called “commitments”, John Kerry nearly had a heart attack.

For the sake of global cooperation allowing the emerging world to continue on its path toward development without taking too much away from the West, the world leaders attending better be ready to make more sacrifices than they did this weekend in Rome.

One final takeaway from the G-20 gabfest, as Andrea Widburg notes, is that if the ritual photograph of world leaders is anything to go by, Joe Biden has lost some of the respect that used to be accorded America. Some? Who am I kidding? He’s lost all of the respect. Think of this as a Where’s Waldo game and try to find Biden in the staged photo-op of massed world leaders above.

If you can’t find him, let us help. Don’t look to the center. In the center, you can see India’s Modi in the white leggings, with Germany’s Merkel on his left and, two over from Merkel’s left, there’s Canada’s Trudeau. Cast your eyes in the other direction, to Modi’s right, and you’ll see the blonde shock of hair that is England’s England’s Boris Johnson, a couple of people away from Modi. Turkey’s Erdogan standing in front of Johnson.

But where is Biden? Oh, right! There he is, on the far left of the photo, practically falling off the stage.

Is that really where the American president belongs?