Month: June 2022

The huge development out of the Madrid NATO summit yesterday was Turkish President Recep Tayyip Erdogan dropping his veto over Finland and Sweden’s application for membership, unveiled in a joint communique issued by the three countries. Still, this major development hasn’t been much of a high priority for mainstream media coverage.

On Wednesday, NATO has issued the formal invitation for Finland and Sweden to join the alliance. An official summit declaration began as follows: “Today, we have decided to invite Finland and Sweden to become members of NATO, and agreed to sign the Accession Protocols.”

LIVE: Turkish President Erdogan meets US counterpart Biden in Madrid https://t.co/PTCLJWnc0G

— PresserWatch (@PresserWatch) June 29, 2022

It continued: “In any accession to the Alliance, it is of vital importance that the legitimate security concerns of all Allies are properly addressed. We welcome the conclusion of the trilateral memorandum between Turkiye, Finland, and Sweden to that effect.”

At the same time, the declaration stressed that it said that it “warmly” welcomes Ukrainian President Volodymyr Zelensky’s participation in the summit “in full solidarity” with Ukraine.

While not mentioning Russia’s ‘red line’ issue of future potential Ukraine membership in the Western military alliance, the statement still spelled out that NATO “fully supports” Ukraine’s “inherent right to self-defense and to choose its own security arrangements.”

But within the document, there are “partner” countries named which is sure to be seen as immensely provocative in Moscow, particularly Georgia and Moldova:

“In light of the changed security environment in Europe, we have decided on new measures to step up tailored political and practical support to partners, including Bosnia and Herzegovina, Georgia, and the Republic of Moldova. We will work with them to build their integrity and resilience, develop capabilities, and uphold their political independence,” the NATO statement said.

Also on Wednesday NATO labeled Russia the most “direct threat” facing the alliance today, and vowed to take further steps at modernizing Ukraine’s military. The alliance statement said Russia is the “most significant and direct threat to the allies’ security and stability.”

President Biden at the summit also announced a beefed up and permanent US military presence in Eastern Europe, namely in Poland. Additionally, “New US warships will go to Spain, fighter jet squadrons to Britain, ground troops to Romania, air defense units to Germany and Italy and a wide range of assets to the Baltics,” according to Biden’s announcement featured in Reuters.

Türkiye’s President Erdogan met with US President Biden and the UK’s PM, Johnson, on the sidelines of a NATO family photo session in Madrid, Spain pic.twitter.com/JbLkhpITq5

— TRT World (@trtworld) June 29, 2022

“We mean it when we say an attack against one is an attack against all,” he told reporters upon meeting with NATO Secretary General Jens Stoltenberg. He said NATO will “defend every inch” of its territory.

Biden on Wednesday met with Turkish President Recep Erdogan, wherein he thanked the Turkish leader for backing Finland and Sweden’s NATO bids, after serious concessions were made regarding the Scandinavian countries willing to brand the Kurdish PKK a “terrorists organization”.

Look at me as Biden and Erdogan look at each other with love pic.twitter.com/Qrwp2egt9c

— Ragıp Soylu (@ragipsoylu) June 29, 2022

Authored by Steve Watson via Summit News,

Following repeated calls by Democrats for pop up abortion centres to be instituted on federal owned land, White House Press Secretary Karine Jean-Pierre admitted that any such move would likely put women and providers at risk of prosecution.

As we noted yesterday, the likes of Elizabeth Warren and Alexandria Ocasio-Cortez have called for the Biden administration to immediately implement federal abortion services, with Warren suggesting tents could be erected in national parks.

ALEXANDRIA OCASIO-CORTEZ: “Open abortion clinics on federal lands in red states right now!”

“Right now!” pic.twitter.com/sFvl101mSt

— RNC Research (@RNCResearch) June 28, 2022

I just spoke with @ewarren, who suggested the Biden administration establish Planned Parenthood outposts on the edges of national parks.

“They could put up tents, have trained personnel — and be there to help people who need it.”

“It’s time to declare a medical emergency.”

— Caroline Kitchener (@CAKitchener) June 27, 2022

At the weekend, Jean-Pierre said all options were on the table, however during a briefing Tuesday she appeared to dismiss the notion.

 “We understand the proposal is well intentioned, but here’s the thing: It could actually put women and providers at risk,” the press Secretary admitted.

“And importantly, in states where abortion is now illegal, women and providers who are not federal employees — as you look at the federal lands — could be — potentially be prosecuted,” she added, noting there may be “dangerous ramifications to doing this.”

Other Democrats, including Kamala Harris have suggested initiating slush funds to pay for women to travel out of state to get later term abortions where they remain legal.

Kamala Harris: “Looking at” using federal tax dollars to provide travel vouchers for abortions pic.twitter.com/IKY7CO6kbV

— RNC Research (@RNCResearch) June 27, 2022

While Biden’s HHS Secretary Xavier Becerra, who has a record of previously supporting ‘at birth’ abortions, also previously suggested the federal land idea and the voucher idea were possible, he also somewhat walked back the notions Tuesday.

Xavier Becerra said his department will “move as aggressively” as possible to ensure that women can still get abortions while “complying with the law.”

While noting that HHS is “aware of a number of ideas and proposals, many of which we have been considering internally,” Becerra added “You want to make sure that what you do is within the confines of the law,” adding that “We are not interested in going rogue and doing things just because. We want to make sure what we tell Americans is accurate.”

“There is no magic bullet,” he added. “But if there is something we can do, we will find it and we will do it at HHS. Indeed, that was the instruction I received from the President of the United States,” Becerra also told reporters.

The federal government owns almost a third of land in the U.S., but is restricted to use it only “primarily related to preservation, recreation, and development of natural resources”, according to a Congressional Research Service study from 2020.

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Fully-vaxx’d and double-boosted mask-admirer Anthony Fauci is suffering.

Two weeks ago, we reported that President Biden’s chief medical adviser had COVID.

The 81-year-old reportedly had ‘mild symptoms’ and of course he ‘said the words’…

Of course, Fauci followed the CDC guidelines and ingested the government-blessed treatment – Paxlovid – due to his age and possible risks from the virus.

So, that should have been it right?

But no. During an event at Foreign Policy’s Global Health Forum, Fauci admitted he had not had a good experience:

“After I finished the five days of Paxlovid, I reverted to negative on an antigen test for three days in a row,” Fauci said Tuesday .

“And then on the fourth day, just to be absolutely certain, I tested myself again. I reverted back to positive.”

Interestingly, Fauci admitted:

“…this is becoming more and more typical based on more clinical studies…”

As Bloomberg reports, large numbers of patients have reported the phenomenon, often called Covid rebound or Paxlovid rebound, of returning symptoms after taking a full course of Pfizer’s drug.

While Pfizer Chief Executive Officer Albert Bourlasaid in May that doctors could prescribe a second course of treatment to such patients, US drug regulators have said there’s no evidence that a repeat will help.

However, Fauci said he started taking a second course of Paxlovid after experiencing symptoms “much worse than in the first go around.”

Now near completion of the five-day oral treatment, he said he was still enduring symptoms but felt “reasonably good.”

Finally, as we reported less than two weeks ago, Pfizer stopped enrolling in a clinical trial for Paxlovid for standard-risk COVID-19 patients after the latest results suggested the drug did not reduce symptoms or hospitalizations and deaths to a statistically significant degree.

Watch the full interview below: (forward to around 5:26:00):

Not exactly encouraging news…

By Simon White, Bloomberg Markets Live analyst and reporter

Forward earnings remain elevated, but profit estimates are most wrong when recessions hit. As recession risk rises, more timely indicators are pointing to the likelihood of an earnings recession later this year.

Earnings, and what investors will pay for them, i.e. the P/E ratio, are over time the largest contribution to stocks’ total returns. The fall in the latter has been the main driver of lower returns this year. But multiples are now off 40% from their highs, while earnings have yet to contribute negatively.

Using forward earnings to gauge what is going to happen to profits might get you by in times of calm, yet it is a poor policy when recession risk is heightened. The chart below shows 12-month forward earnings pushed forward one year versus trailing 12-month ones. This allows us to see the “surprise” between expected and actual earnings.

Outside of recessions, the black line in the chart doesn’t stray too far from zero. But during recessions we see that actual earnings are considerably worse than expected ones.

This is a problem not only confined to equities. Economic data are typically most wrong at major turning points such as recessions. Ironically, though, this is when you need most clarity.

Forward earnings for the S&P have been falling this year, but if the past is a guide they are still likely to be too optimistic. As Morgan Stanley’s CIO of Wealth Management Lisa Shalett put it, “Analysts are still in fantasy land in terms of the earnings outlook.”

Step back from forward earnings, and the outlook is clouding. Better than relying on estimates is tracking the number of analyst upgrades in the aggregate. The fall in upgrades/rise in downgrades points to much weaker earnings growth over the next 6-9 months.

The poor earnings outlook is corroborated by a swathe of macro data, from a decline in corporate confidence, to the rise in the dollar, and to the very tight job markets fueling employment costs much higher.

President Vladimir Putin arrived in the ‘Russia-friendly’ central Asian country of Tajikistan on Tuesday, for a one-day visit with Tajik President Emomali Rahmon, in what marks Putin’s first trip abroad since launching the Feb.24 invasion of Ukraine.

The two leaders discussed “bilateral ties, the development of cultural and economic relations, and regional and global issues, especially the situation in Afghanistan.” He then went on to Turkmenistan on Wednesday to attend an important regional summit of allies.

According to Japan’s NHK World, this week includes a “tour of central Asia” by the Russian leader, as he’s visiting “Turkmenistan on Wednesday to attend a summit of five countries bordering the Caspian Sea, including Iran and Azerbaijan. The region is said to be rich in natural resources.”

During the visit to the country’s capital of Ashgabat, Putin is further meeting with Iranian President Ebrahim Raisi to discuss central Asian security, particularly Afghanistan in the wake of the US military withdrawal of last year, and as Western sanctions on the Taliban remain. It comes also at a moment the Iran nuclear deal with world powers continues hanging by a thread, and as the West scrambles to tap alternative oil and energy supplies.

Concerning the ongoing Afghan crisis, Putin indicated in statements while in Tajikistan that “Russia is trying to build relations with the Taliban and that Russia wants to see all the ethnic groups in Afghanistan take part in running the country,” according to the AP. Russia has a military base on Tajikistan, which shares a lengthy, hard to secure border with war-torn Afghanistan.

The short central Asian tour is happening as the Kremlin confirms this week that Putin will attend the G20 summit set to be held in Indonesia in November – which could prove deeply awkward as Ukraine’s Volodymyr Zelensky has been invited as well:

Vladimir Putin plans to attend the G20 summit in Indonesia in November, an aide to the Russian president said Monday. 

Despite launching a brutal full-scale invasion of Ukraine, Putin was invited to the meeting of the world’s major developed and emerging economies by Indonesian President Joko Widodo — a move that will spark soul-searching for Western allied leaders also invited to the summit.

Some European leaders have suggested they might boycott the G20 summit if it includes Putin’s personal participation. On Wednesday’s the UK’s Boris Johnson said he would do so.

British PM says don’t boycott G20 summit if ‘pariah figure’ Putin attends https://t.co/uhh7udGb7R

— South China Morning Post (@SCMPNews) June 29, 2022

However, it remains uncertain whether the Russian leader would actually travel there in person or if he’ll address participants via video link. A Kremlin statement indicated:

Putin’s participation — either in person or via video link — is “envisaged” at the meeting, said aide Yury Ushakov, according to Interfax. “They are still inviting in person. There is still a lot of time. I hope that the pandemic will allow this event to be held in person,” he added.

German Chancellor Olaf Scholz is among those who have said they are still deciding on attending the summit after Putin’s invitation and participation became clear. “In the end, we will have to make the decision shortly before the departure, because the course of the world can still change very considerably until then,” Scholz said.

By Michael Every of Rabobank

“and such small portions”

Another messy market day with bond yields down slightly, stocks by more, and oil up a lot. That was on the back of ugly US data, in particular consumer confidence expectations tumbling to 66.4, the lowest in years, and China reducing quarantine times from two to one week, which despite suggestions that Zero Covid will stay for five years(!), is a possible sign of opening up. The irony is that if China does, or stimulates, growth will pick up, commodity prices will go up, and the Fed will have to act more aggressively. The dollar had an up day, perhaps smelling that too.

The news-flow was of utopian plans that can’t be enacted. Like the Woody Allen joke about the Catskills hotel with terrible food “and such small portions”, is this a good or bad thing?

The ECB said it will roll out its anti-fragmentation toolkit from Friday, the same day it stops doing QE. How will it work? Don’t know. Will it work? Don’t know. What is the true price of assets against a backdrop of the ECB both removing and injecting bond market liquidity? Don’t know.

The G7 was all about Russia. The major policies announced were: a “pursuit” of discussions about ideas about a price cap on Russian oil imports (so no actual action); a short-term push for LNG from anyone but Russia; the formation of ‘climate clubs’; and a pledge of $4.5bn to help fight the global food crisis, taking the headline total for that to $14bn.

The ‘oil cap’ is simple in theory: the G7 will refuse to provide insurance to any vessel that carries Russian oil unless the cargo is sold with an agreed price cap. Yet it won’t work and will just push oil prices higher. Russia will never agree. China and India will never agree either. Russia and China may offer their own underwriting services, which would force the West into physically blocking cargoes and confronting China – as a Russian-oil carrying ship is stopped in the US, says the Wall Street Journal. Plus, the G7 are already not taking Russian oil: they are taking Russian oil from India and China that is being on-sold.

In this economic war, the G7 continue to tell their opponents that they will invade in exactly six months, and where, and with which forces, and in the interim demand they are allowed to use that country’s beaches: Russia just counterattacks unannounced (but not unexpectedly). Russian gas flows to the EU will remain low enough for long enough to teach the West a lesson.

On LNG, the G7 says investment is “appropriate as a temporary response” but warns against locking in fossil-fuel use because that would make climate goals unachievable. In short, we need lots of investment and supply – which will then be abandoned. This stance upsets both the environmental lobby and potential LNG exporters and investors.

The G7 also says DM polluters and EM economies should join ‘climate clubs’ to create global markets for green products through carbon pricing or other climate-mitigation strategies. Just what we need during an economic war – market mechanisms! What this likely means is carbon border adjustment tariffs or quotas on imports from ‘non-green’ countries. These are actually protectionist measures that will separate EM like China from the DM like the US, EU, and Japan, something I have flagged for a long time.

Today sees FT’s Martin Wolf’s promised answer to our global structural dilemmas in his op-ed ‘In an era of disorder, open trade is at risk’. It is, as feared, ‘42’.

He admits we are in an epoch of world disorder, and we can only save the neoliberal trade order with “great difficulty”. Yet his proposed solutions, besides giving small countries a voice on trade –how? By them going on strike?– are:

1. Sustainability. Which means ‘climate clubs’, which means DM vs. China green tariffs. It also needs huge DM capital flows to EM to finance green transitions during a food and energy crisis, and when the global system breaking down involves EM capital flows to DM via trade surpluses.
2. Security. Which means diversifying Western supply chains, which China will fight tooth and nail. It also means allowing governments to set up negative national security lists. Isn’t this happening, and part of the problem, not the solution?
3. Blocs. Don’t allow them. Friend-shoring is not to be embraced. Neither is regionalisation, because it might mean North America and Europe are locked out of Asia. In short, ‘don’t do anything’. Global problem solved!
4. Standards. We need them. But not on labour, perhaps, just the environment and digital services. Who gets to set them, to what end? Isn’t this part of China’s and Russia’s gripe?
5. Domestic policy. We need to “[educate] the public on the cost of protection” and help “all those adversely affected by economic changes.” 40+ years into neoliberalism, and 14 years after the Global Financial Crisis, this is the best we can do?! We just saw ‘Build Back Better’ turn into high inflation, food and energy crises, higher rates, and a looming recession. Somehow bleating “Free trade gooood; tariffs baaaad!” and spending public money on those left behind *without producing any inflation* will solve our problems. If it doesn’t, Wolf warns “an ill-informed nationalism is bound to sever the bonds of commerce.”

Indeed, Wolf is honest at the end: “It is possible –perhaps even probable– that the world system will shatter.” Colour me unsurprised. If this wasn’t the pattern of history, many readers would be Romans. However, he still begs for someone, if not the US, to save global free trade. Which country wants to import from everyone else and deindustrialize in the process? This then takes us back to a more realpolitik great power world. (As has been argued here for many years.)

Yet even in that territory, utopian plans are the order of the day. It appears Türkiye will now let Sweden and Finland join NATO. However, NATO has announced its armies will be carbon neutral by 2050. Nice: but how about being capable of winning dirty wars first? As National Defence Magazine was saying a year ago, ‘Electric Vehicles for the Military Still a Pipedream’. You can’t wait 8 hours to recharge a tank in combat in the middle of a muddy field. You can’t power long-range electric fighter jets. And I don’t think bombs are carbon neutral.

UK PM Johnson has had to abandon his ‘CPI +0.5% until 2028’ defense spending pledge after CPI rose to 9.1%. Welcome to the real world of real economic power and realpolitik. (As Scotland announces an unofficial independence referendum for October 19, 2023, promising even greater economic uncertainty.) Meanwhile, China has 2.1% CPI and is growing its military spending very rapidly. “Freedom has to be better armed than tyranny,” said UK Foreign Secretary Truss recently. Well, freedom needs a new economic plan then, pronto.

Indeed, we all do. We rightly focus on the Fed and the ifs and buts and maybes of its pivots and divots, as another 75bps for the next meeting is waved as a prospect. But if it’s “perhaps even probable” that “the world system shatters”, perhaps markets should start thinking about what it implies for rates and FX? That thinking is currently served up in such small portions.

After “systems issues” ‘delayed’ last week’s inventory, supply, and demand data from the EIA, the admin will report this week’s data as well as last week’s combined following API reported a notable build the prior week and a surprise draw last week.

API (last week)

• Crude +5.607mm

• Cushing -390k

• Gasoline +1.216mm – first build since March

• Distillates -1.656mm

API (this week)

• Crude -3.799mm

• Cushing -650k

• Gasoline +2.852mm

• Distillates +2.613mm

So over the last two weeks, API reports (net) a small crude build, notable Cushing draw, large gasoline build and small distillates build.

Oil prices are notably higher again today following reports that Iran-deal-talks have failed and news that Libya has halted oil exports. Additionally, OPEC’s pre-meeting reportedly concluded with no discussion of oil policy, focusing instead on administrative affairs, including an update to the group’s manifesto of guiding principles known as its Long-Term Strategy.

Meanwhile, a deluge of ugly macro data provides some fodder for the oil bears (though it is being dominated by supply fears for now)…

“Recession fears are just that — fears,” said Stephen Brennock, an analyst at brokerage PVM Oil Associates Ltd. 

“In the meantime, oil fundamentals remain solid.”

So all eyes are back on the official inventory and demand data…

DOE (net of the two weeks)

• Crude -2.762mm

• Cushing -782k

• Gasoline +2.645mm

• Distillates +2.559mm

The official data shows a small crude draw (API showed a small crude build), Cushing a 6th weekly draw of the last 7 (confirming API’s net draw). On the product side both gasoline and distillates showed unexpectedly large inventory builds (also confirming API’s data)…

Source: Bloomberg

US Crude Production rose to its highest since April 2020…

Source: Bloomberg

WTI was hovering around $113.50 ahead of the EIA data and extended gains modestly after the data…

Finally, we note that the tight supply situation in oil (especially European) is revealing itself in the WTI-Brent spread, grew to $6.19, the widest in almost three months.

Source: Bloomberg

“European demand will remain robust, especially as natural gas supplies run out, while the North American demand for crude is weakening,” said Ed Moya, senior market analyst at Oanda.

This is not good news for President Biden as prices are rising…

Source: Bloomberg

And his ratings are hitting record lows.

One of the world’s most well-known short-sellers, Jim Chanos, is betting against “legacy” data centers facing increasing competition from technology giants that have been their biggest customers. 

Chanos and his firm Kynikos Associates are raising several hundred million dollars for a fund that will place bearish bets on data center REITs. 

“This is our big short right now,” Chanos said in a Financial Times interview. “The story is that although the cloud is growing, the cloud is their enemy, not their business. Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centers.” 

Chanos’s thesis is that the largest cloud providers, Amazon Web Services, Google Cloud, and Microsoft Azure, are building their own data centers instead of leasing from REIT-owned data centers. He believes many of these REITs are overvalued and are on the cusp of experiencing a slump in revenue and faltering earnings growth.  

“The real problem for data center REITs is technical obsolescence … Their three biggest customers are becoming their biggest competitors. And when your biggest competitors are three of the most vicious competitors in the world, then you have a problem,” Chanos continued. 

Watch Digital Realty and Equinix, as well as data center operators Cyxtera Technologies and Iron Mountain, are ones to watch after Chanos announced his new short thesis. American Tower Corporation is another after it recently acquired CoreSite Realty Corp. 

Chanos also spoke about equity valuations. He said, “One thing that amazes me is how sanguine inventors are … People just shrug their shoulders and don’t seem to notice where equity valuations are today versus historically and that there are so many flawed business models. It’s a little bit baffling that no one seems to think they need financial insurance because it’s pretty cheap. It’s another reason to be more cautious — no one is beating down the door of short-sellers these days.” 

He said today’s turmoil in stocks could be described as “the dot-com era on steroids” amid the implosion of profitless companies. 

Chanos expects more downside in stocks as the market cycle trends lower, noting it will be a rewarding environment for short-sellers: “We’ll be feasting on the returns of these stock ideas for years — very similar to the post-dotcom era.”