Month: March 2022

Podcaster Joe Rogan slammed Silicon Valley tech companies, saying that woke “activist” employees are “mentally ill” and are the “lunatics who are running the asylum to a certain extent.”

Rogan, who has come under fire by the left for allowing a free speech platform to non-heterodox thinkers, made the comments during a Wednesday interview with former Apple and Facebook engineer Antonio García Martínez – who upended his life to work in Silicon Valley, only to have a gaggle of woke Apple employees ‘cancel’ him for comments he made in a book more than five years ago (which Apple knew about before hiring him).

“For someone from the outside, we look at it and say: ‘How are those f–king places run?'” Rogan asked Martínez, adding that a “good friend” told him that life inside Silicon Valley is “utter madness.”

“The lunatics are running the asylum to a certain extent because there’s a lot of people working inside the company now that legitimately are mentally ill and they consider themselves activists,” he continued, adding that tech bosses at these companies “have to placate these workers ““because they’re a certain percentage of the population that works for the company, and they’re the loudest, and they oftentimes don’t get work done.”

When confronted over a lack of output, the ‘woke’ employees “talk about their activism,” said Rogan, adding that his friend – a former Google manager – had to reprimand workers, according to the New York Post.

“You are here for X amount of hours per day. This is your f—–g job. You’re not an activist.”

Martinez, meanwhile, told Rogan that the companies are partly to blame because HR departments encourage people to “bring the real self to work,” which has made big tech firms such as Facebook into “kind of a cult” where employees are brought into a “campus lifestyle” where “they do your laundry for you” and “feed you.”

“Facebook was a cult, and I joined it, and I was a happy member of it,” said Martínez. “It was very powerful. Everyone sacrificed themselves for the sake of the empire and its emperor.“

Watch:

Authored by Bruce Wilds via Advancing Time blog,

…Could the euro beat the Yen in the race to the graveyard?

Before saying anything else, it is important to note, when it comes to the major currencies, it is safe to assume they are manipulated by central banks. It is in the best interest of Central Bankers to keep them trading in a rather tight pattern as so not to rock the foundation of the global financial system. On top of the stress being placed upon economies due to the war in Ukraine, the one thing bankers don’t want to deal with is the growing fear the fiat monetary system is about to fail. 

The destruction of the myth that a major currency cannot fail could create a situation where we would see skittish investors dumping currencies in mass. As wealth rushed from currencies into tangible assets inflation would soar. When a currency implodes it fosters a transfer of wealth from those holding the now worthless paper to those holding other currencies or tangible assets. The group-think of all the major central banks until just recently has been concreted into a global monetary policy favoring inflation in order to support economic growth. This monetary policy is now being challenged by rising prices at the same time economies are slowing.

It is important to remember that fiat currency systems depend on the faith of its users and participants to survive. The emergence of a slew of new cryptocurrencies is an indication faith in the current fiat currencies is beginning to wane. These digital currencies that have flooded the market are disconnected from central banks. Also adding to the perception we are about to see a major shakeup in the global financial system are efforts by countries such as China and Russia to move more trade away from the dollar. This is happening at the same time we see the cost of living for the 16 nations that share the euro currency rose to 5.1% in January, a  new record high, few interest rate increases expected in 2022, and a time the German PPI is 18% and Spain’s 31%.

Recently, Zoltan Poz­sar, an In­vest­ment Strategist at Credit Suisse and is based in New York, has appeared all over the media touting a theory that would affect us all. He is touting the idea Russian sanctions combined with its relationship with China and a crisis in some commodities are threatening the dollar’s reserve status. He claims this will bring about a Bretton Woods III event where commodity collateral may repave the road to hard money. 

While Pozar may not be completely right, if we are moving in that direction, the effect has broad implications for all of us. It would substantially redefine the relationship between fiat currency and tangible assets. A strong argument can be made that even though the BOJ is the top dog when it comes to monetizing debt it may not be for long. The ECB is catching up in the percentage of central bank holdings of government bonds in percent of total issuance. Considering all of Europe’s problems the big issue is envisioning a scenario from which an economic renaissance might flow.

To say the Euro-zone banking system deception which has been going on for many years is continuing understates the size of the fraud occurring before our eyes. A program known as “Target 2” has been the salvation of the euro and is responsible for preventing countries from collapsing. Since 2015 when Draghi started QE, the Bundesbank has been buying bonds on the market. The Italian central bank is dependent on the ECB which buys Italian government bonds. Germany then sends euros to Italy transferring the debt via Target 2 to their German bank. The growing differences in the Target 2 balance sheet are the result of the Germans taking these bonds. Italians have also added to the capital flight by liquidating their bonds and sending their money abroad.

Italy Is Far Worse Post Covid-19

Target 2 translates into enormously huge debt claims on the Germans that are not covered by any securities. In short, if Italy (or even Spain) would withdraw from the Euro-zone, the Germans would be left holding worthless paper. The bottom-line is Brussels and Germany must continue buying what could be considered, “bad debt” to keep the system afloat. All this raises the question of when the value of the euro will begin to reflect the stress which has been masked over and greatly ignored. In short, the choice of Europe has been whether to put a lot of bad debt on the balance sheet of the European Central Bank or deal with defaults and the contagion that flows from them. To be clear, many German economists criticize Target 2 and see it as a check that cannot be cashed.

As for the yen, for a long time, many investors have viewed it as a safe-haven currency, so much in fact that it has been called a “widowmaker” trade for those betting on its decline. For years Japan has been the poster child and living proof that low-interest rates do not guarantee economic growth and prosperity. Going unnoticed by many investors is that the BOJ  has been pumping up Japan’s stock market by buying into the ETF market. This has morphed into a program that seems akin to Mario Draghi’s fraud of doing “whatever it takes” to give the appearance their economy is moving forward. Following along the line of thought that while there is no way of avoiding the final collapse of a boom brought about by credit expansion years ago, Ludwig Von Mises wrote; “The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” In short, the BOJ now has little choice but to go all-in which strips away any illusion all is well.

Japan Led The Way In This Experiment

Before the “Bernanke has all the answers” era, many of us criticized Japan for failing to own its problems. At the time the idea was that only by letting its zombie banks and industries fail could Japan clean out the system and move forward. Instead, the Government of Japan ran huge deficits and ran up massive debt. For decades Japan languished and avoided disaster only by the fact that it enjoyed a large trade surplus year after year and was able to pigtail onto the rapid growth occurring in China. Today much of that trade surplus has vanished but Japan’s massive debt remains.

After 2008 Japan decided to put itself on the leading edge of an experiment to propel its economy forward. This includes the BOJ not only expanding its balance sheet but pumping up the market by jumping into the ETF market, what the country is not doing is taking big steps toward economic reform. All this has morphed into a program that seems to share a key focus on doing “whatever it takes” to keep the economy moving forward. The problem in pursuing the flawed policy of never allowing the market to slip but putting it on a path ever upward until everyone doubting the strength of the market finally capitulates is that it thwarts true price discovery.

Recently articles have surfaced exploring how the central banks and governments have distorted true price discovery in stock markets across the world. By buying stocks they are taking or transferring branches of industry or commerce from the private sector to state ownership or control. The keyword here is “ownership.” This is because the state may choose to abdicate control over decisions leaving them in the hands of management. It has been estimated the BOJ holds around 35 trillion yen, accounting for roughly 80% of Japan’s ETF market. In some ways, the actions of Japan’s central bank could be considered nothing more than a new model of “stealth nationalization.” 

This is a course filled with moral hazard since it destroys true price discovery the bedrock of free markets. We cannot underestimate the importance between assets prices and the feedback signals they send. These are critical in determining value, especially when it comes to assets such as stocks, bonds, currencies, or paper promises which carry no utility value and can perform no useful task. When true price discovery is lost or impaired management teams no longer get market feedback as to whether an executive decision is good or bad, this dilutes the market’s ability to reward and punish companies no matter how disastrous their decisions.

To keep the illusion of a viable economy alive central banks must continue expanding credit and debt so the wheels do not come off the economy. It is hard to create the illusion all is well if unemployment soars and defaults skyrocket. This means the central banks remain trapped in a box Ben Bernanke built, Janet Yellen reinforced, and Jerome Powell has not tried to escape from. It is easy to see how central bank policy, right or wrong, falsely accomplishes two things, it bolsters and supports current holdings while reinforcing the image markets are climbing higher because our economic future is getting brighter which is a narrative mainstream media is glad to provide.

This may have started as a “short-term solution” but Ben Bernanke upped the ante by setting the money printing machines on high and flooding America and the world with QE. When other central bankers embraced this solution the world embarked on a grand experiment. The big problem is momentum seems to ebb shortly after each new wave of stimulus and another fix seems to constantly be needed. Current policies are not creating true growth in productivity or real wealth but simply driving up the value of certain markets and assets. This benefits those who own or have assets but does little or even hurts the poor or those who have nothing. It also increases economic inequality and social unrest. The harsh reality central bankers, politicians, and the world must face is the medicine for curing high inflation is high-interest rates. This will not go down well and to some an unacceptable solution.

For years, Japan and Italy, both mired in debt, have been on artificial support. Not only the size of the debt, but the quality of the debt, suggest a huge drop in the values of their currencies must occur. Weakness in the euro or even the yen almost certainly will result in a stronger dollar which could be the catalyst for a crisis in currencies issued by emerging market economies. In short, there is the potential to see such an incident over to the rest of the developed world and evolve into a global deleveraging event. This will most likely be seen as part of the great reset many of us have come to expect will occur at some point. Meaning, promises will be broken and rules will be rewritten as we go through the wash. If I’m correct this reset will involve a massive transfer of wealth with many people having their assets rinsed away as society gets put through the wringer.

It looks like the analytical geniuses over at the San Francisco Fed have finally figured out something that Larry Summers anticipated nearly a year ago: When you pump trillions of dollars of stimulus spending into the economy, it causes inflation to overheat to the highest level in a generation.

Of course, Summers was aggressively poo-poo’d by policy nabobs at Treasury (not to mention the Eccles Building) when he first projected that inflation would likely exceed 5% by the end of 2021 thanks to the federal government’s decision to hand out trillions of dollars in stimmies, benefits and PPP loans (combined with the Fed’s ’emergency’ policy posture that involved backstopping corporate debt and slamming interest rates back down to the zero-bound). While he has since been vindicated, at the time, Summers was nearly excommunicated by his fellow Democrats for having the audacity to suggest that the federal government shouldn’t have ridden to the rescue of ordinary people during a once-in-a-century pandemic (or, at the very least, it maybe should have considered a more measured approach).

Now, months after Summers inflationary fears were vindicated, the Fed has finally summoned the courage to acknowledge that maybe the government’s balls-to-the-wall COVID stimulus was responsible for stoking the voracious inflationary spiral that – contrary to Jerome Powell’s assurances – has been anything but “transitory”.

To wit, on Monday, a team of researchers with the SF Fed published a research report illustrating how the US fiscal-policy response is, more than likely, responsible for driving up price pressures.

According to the note, the team set out to answer a question that has plagued economists in recent months: why has inflation been so much more intense in the US than in many of its developed-nation peers?

After crunching the numbers, the team arrived at the following conclusion:

“Though many of the pandemic distortions are common to other countries, we show that U.S. inflation has risen more quickly and increasingly diverged from inflation in other OECD (Organisation for Economic Co-operation and Development) countries. In seeking an explanation, we turn to the combination of direct fiscal support introduced to counteract the economic devastation caused by the pandemic.”

The team compared US inflation to a smattering of OECD countries, before determining that the difference between the US inflation rate and that of its OECD rivals – which had moved largely in lock-step during the years before the pandemic – was the boost to disposable incomes in the US, which were buttressed by the federal government’s generous fiscal largess.

First, the team ruled out that the difference in the inflation readings wasn’t due to a “measuring error”, but to “direct fiscal transfers”, which are higher in the US than abroad.

As the chart below shows, the data are pretty stark: “they show that throughout 2020 and 2021, US households experienced significantly higher increases in their disposable income relative to their OECD peers.” Note how the peaks in US disposable income correspond to the passage of the CARES Act and the other COVID stimulus bills

That’s not to say that the Fed believes the US should have held back (like Summers initially suggested). On the contrary, the team concluded (for reasons that weren’t entirely fleshed out in their note) that “without these spending measures, the economy might have tipped into outright deflation and slower economic growth, the consequences of which would have been harder to manage.”

Of course, relying on a counterfactual to prove one’s argument is never ideal.

But maybe policymakers can take this admission to heart, and try to keep it in mind when the next once-in-a-generation crisis finally arrives.

Russia’s Transneft, operator of the world’s largest oil pipeline network, has taken the unprecedented step of imposing caps on oil received by it as storage filled up amid weak Western demand for Russian oil, Reuters reports citing five sources familiar with the matter.

While Russian oil exports are still flowing – especially in the direction of India and China – despite self-imposed sanctions by western energy buyers, difficulties with payments, insurance and shipping as well as curbs on dealing with several Russian oil suppliers forced many regular buyers to shun the market, leaving barrels unsold.

And as the oil plumbing has literally clogged up, Transneft has told several Russian oil firms it would limit intake to its system amid high volumes of stored oil, which affect flexibility and threaten normal operations.

Transneft’s curbs cover oil that has yet to find buyers, while companies that have no difficulty selling cargoes would be allowed to supply all their oil to the system, two Reuters sources said.

As reported previously, more than a dozen cargoes of Urals oil from the March loading plan were cancelled, postponed or replaced amid weak demand, traders said, while Russian firms had to divert extra volumes for export, as domestic refinery runs declined. Furthermore, Russian oil giants Surgutneftegaz and Zarubezhneft did not award spot tenders this month.

That said, Russia’s pipeline capping may reverse soon: while the Urals oil loading plan for April has been increased significantly, May is looking stellar with Bloomberg reporting that according to the loading program, a total of 33 cargoes of Russian ESPO crude totaling 3.3m tons (all cargoes in May program are 100k tons) are scheduled to be shipped from the port of Kozmino in May. This equates to 780k b/d, a record, compared with 3.1m tons or 757k b/d in April.

Last week, Russia indicated that it aims to ship the largest amount of its flagship Urals crude in almost three years in April.

 

While several asset-gatherers and commission-rakers will try to gaslight investors into monitoring the steepening in the 3M2Y spread – “see no recession to fear there”; for anyone who has actually lived through a Fed hiking cycle, or has read any market history, the 2s10s curve is the most-monitored, the most-studied, and the most accurate predictor of recession the market has to offer.

And today, after a long wait…

waiting for the 2s10s to invert pic.twitter.com/58y3sPTb7X

— Newsquawk (@Newsquawk) March 29, 2022

…2s10s has finally inverted…(according to Bloomberg data 2s10s spread was -0.23bps)

…chasing the rest of the curve (3s10s, 5s10s, 5s30s, 20s30s) all into inversion…

As Deutsche Bank’s Jim Reid notes this morning, there has never been such a directional divergence possibly because the Fed have never been as behind the curve as they are today.

For a sense of just how far behind, The Taylor Rule suggests given the current inflation rate and unemployment rate, The Fed needs to hike by an absurd-sounding 1155bps to get back to ‘normal’…

But back to the divergences in the curve, Reid notes that the remarkable thing is that the two have always gone hand in hand directionally until around December 2021 when 3m10s started to steepen as 2s10s collapsed.

If market pricing is correct, they will rapidly catch up over the next year so it’s possible that in 12 months’ time this measure will be flat.

As a reminder, every hiking cycle that has inverted the curve has led to a recession within 1-3 years.

The table from DB below shows the details of every Fed hiking cycle over the last 70 years alongside the time to recession, yield curve shape, and inflation at the first hike. DB has ordered this by length of time from first hike to recession to demonstrate that the quickest recessions following hikes were associated with an inverted curve by the time the Fed stopped hiking.

On average it takes around three years from the first Fed hike to recession. However all but one of the recessions inside 37 months (essentially three years) occurred when the 2s10s curve inverted before the hiking cycle ended. With all the recessions that started later than that, none of them had an inverted curve when the hiking cycle ended. In fact, hiking cycles that ended with the curve in positive territory saw the next recession hit 53 months on average after the first rate hike, whereas the next recession for hiking cycles that ended with an inverted curve started on average in 23 months, just under two years. All these cycles eventually saw an inverted curve but this happened after the Fed stopped hiking. As a reminder, none of the US recessions in the last 70 years have occurred until the 2s10s has inverted. On average it takes 12-18 months from inversion to recession. Then again, the Fed has never before started a rate hiking cycle when inflation was already 7.9%.

Many would prefer to ignore this indicator, or make general excuses for why it’s different this time “because of QE”, “because of COVID”, “because of Putin”, but as Jim Reid explains so eloquently:

…for me I think about it very differently. I don’t care why the curve inverts as I think the transmission mechanism is through animal spirits. When a curve is steep it should encourage entrepreneurial behaviour as borrowing costs at the front end are low relative to potential returns. In an inverted curve environment, the rational investor/entrepreneur/business should be more risk averse and either place more money in safe assets at the front end or do less animal spirits enhancing longer-term investments/economic activity.

As Reid notes, this all operates with a lag but if I exaggerate to illustrate, if 2yr yields are 5% and 10yr yields are 1% then rational economic agents will be highly likely to park money at the front end and wait for better opportunities irrespective of how negative the term premium is.

But, as a new Piper Sandler study finds, stocks and bonds tend to do quite well in the window between yield-curves inverting and the onset of the actual recessions.

“The broad stock-market appreciates between inversions and the onset of the subsequent recession,” Roberto Perli, the head of global policy at Piper Sandler, wrote in a note with his colleagues Tuesday.

“With the exception of the Volcker years, fixed-income assets always appreciated, with mortgages, investment-grade corporates, and munis as top performers.”

“Overall, the message seems clear for equity and fixed-income investors alike: Don’t get too gloomy as soon as the yield curve (or a portion of it) inverts — doing so is very likely to leave performance on the table,” Perli wrote.

We do note that this study ‘excludes the Volcker years’ and the ‘burst of the equity bubble’ – consider that before piling in.

However, bear in mind that this could well be what The Fed wants – politics and plunge protectors aside – as the only solution to soaring inflation…

Fed wants recession. It will get it in a few months.

— zerohedge (@zerohedge) March 16, 2022

In fact, for those who still believe ‘the consumer is strong’ and ‘just look at the stock market’, we suggest just look at sentiment surveys – all crashing to multi-decade lows as inflation expectations hit multi-decade highs.

As none other than the former head of the Hew York Fed, Bill Dudley, wrote this morning, The Fed’s application of its framework has left it behind the curve in controlling inflation. This, in turn, has made a hard landing virtually inevitable.