Chinese Stocks Underperform S&P 500 Most Since 2016

Chinese Stocks Underperform S&P 500 Most Since 2016

By George Lei, Bloomberg Markets Live commentator and analyst

Three things we learned last week:

1. Optimism toward China’s growth recovery got a reality check last week, when the Politburo meeting made two things clear: the Covid Zero policy is here to stay and large stimulus is unlikely. On Sunday, a report showed China’s factory activity unexpectedly contracted in July. The benchmark CSI 300 index retreated for a fourth week and tumbled 7% in July, its biggest monthly loss since March. It trailed the S&P 500 by 16 percentage points, giving up all of its outperformance in June when reopening euphoria swept the markets. Foreign investors sold 21 billion yuan ($3 billion) worth of stocks via the stock connect programs during the month, the most since March.

In addition to the Covid policies, the real-estate market remains a source of tension. Reports of several rescue proposals — including to seize undeveloped land from distressed real estate-companies and to provide loans to support stalled property projects — have floated around. Details may differ, but the underlying theme for all these plans is the same: saving unfinished projects to protect homeowners, instead of developers. Struggling developers such as Evergrande are left hanging.

2. To be, or not to be (in Taiwan), that is the question. US House Speaker Nancy Pelosi left for her Asia trip on Friday. Whether she’ll land in Taipei remains a mystery, even as her itinerary skipped any mention of a possible stopover in Taiwan. The talk between President Xi and Biden centered on Taiwan, but neither side described the discussion as “constructive.” One thing is crystal clear: Taiwanese stocks rose on the week and month, handily beating peers in Hong Kong and China. Investors appear to have largely dismissed the simmering geopolitical tension.

3. While bad news is bad news for markets in China, it apparently is good news for US investors. The US economy contracted for a second quarter. Whether it’s truly a recession or not, growth clearly has lost momentum. The Fed signaled it could slow down the pace of tightening after it delivered another 75bp rate hike to put the benchmark rate at 2.5%. It’s hardly as pivotal as some market observers claimed, because the markets’ pricing of the Fed’s policy rates for the remaining of the year barely changed, and is in line with what’s prescribed on the Fed’s dot plot. With financial conditions easing, the risk now is that inflation doesn’t come down as quickly as markets expect.

Tyler Durden
Sun, 07/31/2022 – 18:00

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US Frack Growth Constrained In “Perfect Storm”

US Frack Growth Constrained In “Perfect Storm”

Last week, Halliburton Co.’s CEO Jeff Miller warned hydraulic fracturing equipment is in short supply and could hamper fracking growth. Another oil/gas executive echoed the same warning this week and said bottlenecks could persist through 2023. 

“Availability of frac fleets is one of main bottlenecks impeding oil and natural as production growth for the next 18 months,” Robert Drummond, chief executive officer of fracking firm NexTier Oilfield Solutions, told Reuters

Besides supply chain snarls, Drummond warned that capital constraints would make adding equipment to fields challenging. He said this imbalance could take several years to correct, adding that NexTier has no plans to expand fracking capacity this year. 

This development is another setback for the Biden administration’s efforts to increase US oil production to ease the worst inflation in forty years ahead of the midterm elections in November. 

US crude production is around 11.6 million barrels per day, below the pre-pandemic 12.3 million bpd in 2019, the latest data from the Energy Information Administration show. 

Matt Hagerty, a senior analyst at BTU Analytics, pointed out that “frac crew bottlenecks” are a “significant headwind for US producers headed into 2023.” He said frac sand and labor shortages, elevated inflation, and limited frac fleets are a “perfect storm.” 

Halliburton’s Miller said oil companies didn’t have enough fracking equipment for newly leased wells. He said diesel-powered and electric equipment are in short supply, “making it almost impossible to add incremental capacity this year.” 

similar message was conveyed by Exxon Mobil, whose CEO said that global oil markets might remain tight for three to five years primarily because of a lack of investment since the pandemic began.

Exxon CEO Darren Woods said it’ll take time for oil firms to “catch up” on the investments needed to ensure enough supply.

In response to shale’s dismal ramp-up in production, the Biden administration has panic sold millions and millions of barrels of oil from the Strategic Petroleum Reserve, which has been drained by 125 million barrels so far in 2022 — all in hopes of lowering gasoline prices at the pump ahead of the midterm elections in November.

The good news is the recession, and high inflation appears to have sparked the weakest gasoline demand since 2013. 

The Shale patch has a structural bottleneck that won’t be resolved this year. Blame years of divestment and decarbonization for the mess. 

Tyler Durden
Sun, 07/31/2022 – 17:30

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Rivian Laying Off Approximately 840 Employees

Rivian Laying Off Approximately 840 Employees

By John Gallagher of FreightWaves

Electric vehicle startup Rivian is laying off 6% of its 14,000-employee workforce, or roughly 840 positions, according to reports.

“This decision will help align our workforce to our key business priorities, including ramping up the consumer and commercial vehicle programs, accelerating the development of R2 and other future models, deploying our go-to-market programs and optimizing spend across the business,” according to news organizations citing a company statement.

“We’re deeply grateful for each departing team member’s contribution in helping build Rivian into what it is today. They will always be part of the Rivian story and community.”

Rivian did not immediately respond to a request for comment.

The cost-cutting move is aimed at ensuring the company can continue to grow its manufacturing operations without raising additional funds, according to Rivian CEO Robert Scaringe, in an email to the Wall Street Journal. It reported that the company’s sole manufacturing plant in Normal, Illinois, will not be affected by the layoffs.

“Over the last six months, the world has dramatically changed with inflation reaching record highs, interest rates rapidly rising and commodity prices continuing to climb — all of which have contributed to the global capital markets tightening,” Scaringe wrote.

Rivian’s stock has steadily lost ground since its first day of trading in November. On Friday, Rivian closed at $34.30 a share, down more than 80% from its high on Nov. 16 of $179.47.

Amazon, Rivian’s largest customer and backer, lost $11.5 billion on its Rivian stock investment over the first six months of 2022. That includes $3.9 billion lost on the investment in the second quarter, recorded as a non-operating expense.

The cuts at Rivian follow reports of Xos Trucks cutting 8% of its workforce and layoffs at Canoo, as competition intensifies in the EV market amid signs of a looming recession.

Amazon has started deliveries with Rivian electric delivery vehicles (EDVs), a rollout that “is the start of what Amazon plans to be thousands of EDVs in more than 100 cities by the end of 2022 — and 100,000 EDVs across the U.S. by 2030,” Amazon stated in its second-quarter results.

Tyler Durden
Sun, 07/31/2022 – 17:00

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Teen Who Assaulted Cop In Harlem Subway Station Released Without Bail And Remanded To Family Court

Teen Who Assaulted Cop In Harlem Subway Station Released Without Bail And Remanded To Family Court

It’ll probably come as zero surprise at this point, but New York City’s DA has decided to take it easy on a 16 year old that was caught on film last week attacking and assaulting a police officer.

The juvenile was stopped by the officer after he hopped a subway turnstile. The altercation then turned physical, with the youth engaging in a prolonged physical altercation with the officer before finally being controlled. 

And of course, New York City prosecutor Alvin Bragg is defending his office’s decision to release the youth – who has three felony arrests in less than four months – and try his case in family court instead of Manhattan Criminal Court, according to Fox News.

In family court, the youth will face rehabilitation instead of jailtime – and the DA’s office will no longer have any jurisdiction over the crime. 

As Fox notes, this is all despite the fact that the teen had just been arrested and released without bail for allegedly beating and robbing a stranger near Madison Avenue on June 21. 

“Our system must respond to children as children,” a  representative from Bragg’s office said. 

Photo: Fox News

They continued: “Violence against our police officers is unacceptable, and given his age at the time of arrest, we consented to send the second case to family court as soon as possible, where he would receive the age-appropriate interventions and supports he needs while being held accountable.”

And even better, the DA said they weren’t aware of another arrest on April 12 for possessing a .40 caliber handgun and crossbow in Brooklyn that the teen faced. 

While 16-and 17-year-olds charged with misdemeanors and many nonviolent felonies are automatically remanded to family court under the city’s “criminal justice reforms”, the DA still has the option of exercising discretion and keeping a case in criminal court for any type of extraordinary circumstances.

Apparently, assaulting a cop is no longer “extraordinary” in New York – a sad commentary on the state of the city’s criminal justice system, and its DA. 

“The DA clearly knew that they were prosecuting the same offender for a violent robbery,” he said. “If that is not an extraordinary circumstance, what is?  If violence against police officers is unacceptable, why ignore the violent robbery arrest. This isn’t accountability. This is lunacy,” criminal defense lawyer Mark Bederow concluded. 

Tyler Durden
Sun, 07/31/2022 – 16:30

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Trump Slams DC Mayor Requesting Deployment Of National Guard Over Influx Of Illegal Immigrants

Trump Slams DC Mayor Requesting Deployment Of National Guard Over Influx Of Illegal Immigrants

By Frank Fang of The Epoch Times

Former President Donald Trump chided Washington, D.C. Mayor Muriel Bowser after she requested that the National Guard be mobilized to deal with the influx of illegal immigrants being transported from southern states.

“The Mayor of Washington, D.C., wants the National Guard to help with the thousands of Illegal Immigrants, coming from the insane Open Border, that are flooding the City, but refused National Guard help when it came to providing Security at the Capitol Building for a far larger crowd on January 6th,” Trump wrote on his Truth Social account on July 29.

“Figure that one out?” Trump asked.

Bowser’s government has sent two separate letters to the White House and the Pentagon seeking federal help, describing the situation at the nation’s capital as a “humanitarian crisis.” In one of the letters, Bowser added that the arriving immigrants had brought her city to a “tipping point.”

Bowser, a Democrat, blamed Arizona and Texas in the other letter, saying the migrant crisis is “cruel political gamesmanship from the Governors of Texas and Arizona.”

The D.C. mayor has also claimed that immigrants are “being tricked” into opting to take buses to the nation’s capital.

Texas Gov. Greg Abbott and Arizona Gov. Doug Ducey, both Republicans, announced transportation programs to send illegal immigrants on free rides to Washington, D.C., following President Joe Biden’s decision to lift a pandemic-era immigration policy to expel illegal aliens. The first bus carrying immigrants from Texas arrived in D.C. in April, with Arizona sending its first bus in May.

Since then, Washington has received some 6,100 immigrants on 155 buses, Stars and Stripes reported on July 28, citing data from Abbott’s office.

Responding to Bowser’s request for the National Guard, Abbott wrote on Twitter that the problem that D.C. is experiencing is small compared to what Texas has been dealing with.

“D.C. is experiencing a fraction of the disastrous impact the border crisis has caused Texas,” Abbot stated. “Mayor Bowser should stop attacking Texas for securing the border & demand Joe Biden do his job.”

Two GOP lawmakers also suggested that Bowser should take up her troubles with Biden.

“Mayor Bowser now understands what it feels like to be a border state. How do you think folks in Texas feel?” Rep. Randy Weber (R-Texas) wrote in a post.

Weber added, “She should knock on Biden’s door and tell him that there is a crisis at our southern border and every state is a border state.”

“Mayor Bowser should call the White House instead and tell them to secure the southern border,” Rep. Fred Keller (R-Pa.) wrote on Twitter.

Washington Mayor Muriel Bowser attends March for Our Lives 2022 in Washington on June 11, 2022

On July 29, Abbott’s office released a press release detailing what it had accomplished with the state’s Operation Lone Star, a program launched in March 2021 to prevent criminal activity along the border, including drug smuggling and human trafficking.

continue reading at Epoch Times

Tyler Durden
Sun, 07/31/2022 – 16:00

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Rumors Of Serbia-Kosovo Clashes Send Border Tensions Soaring, President Addresses Nation

Rumors Of Serbia-Kosovo Clashes Send Border Tensions Soaring, President Addresses Nation

On Sunday evening (local time) there were unverified reports of armed clashes between Serbs and Kosovars along the border between the two countries. Kosovo, which is seen by Serbia as part of its own historic heartland – unilaterally declared itself independent in 2008 – and was quickly recognized as a “country” by the United States under the Bush administration. The border has been tense and seen periodic outbreaks of violence ever since.

And now, international reports say “Kosovo Police announced on Sunday evening that they had closed the Bernjak and Jarinje border crossings to traffic due to roadblocks set up on these roads. The roadblocks were reportedly set up by local Serbs.” This was followed by rumors of gunfire exchanged between the two sides, with air raid sirens observed blaring in Mitrovica, Kosovo.

There has long been a minority persecuted community of ethnic Serbs still living in their homes within the West-backed boundaries of Kosovo since the 1990’s Yugoslav Wars. 

Tensions began spiraling this weekend what Serbia sees as fresh measures by Kosovo to persecute the Serb minority

The sirens come as Kosovo officials prepared to require Serbians visiting Kosovo to replace their Serbian passports with a temporary ID while in the country and to require Serbian license plates in the country to be replaced with Kosovar license plates.

Serbian President Aleksandar Vucic in a televised address on Sunday urged for peace, but also suggested the Kosovars could be preparing a purge of the Serb minority in the region…

President Vucic in his talk warned against “provocations” out of Pristina, according to a Russian media translation of his words

“The atmosphere has been heated up, and the Serbs will not suffer any more atrocities,” Vucic said in Belgrade on Sunday.

“My plea to everyone is to try to keep the peace at almost any cost. I am asking the Albanians to come to their senses, the Serbs not to fall for provocations, but I am also asking the representatives of powerful and large countries, which have recognized the so-called independence of Kosovo, to pay a little attention to international law and reality on the ground and not to allow their wards to cause conflict.”

The message to the nation followed the Saturday provocative remarks of Serbian Foreign Minister Nikola Selakovic who said to reporters that “the Albanian side in Kosovo and Metohija is literally preparing to raise hell for Serbs.” 

Serbian leadership is now warning that Kosovars will pay a “high price” if Serbians are attacked.

Serbia’s defense ministry later in the day tried to combat rumors of army involvement at this point, in another appeal for calm: 

Russia, which has long backed Serbia and condemned the 1999 US-NATO attack and intervention in the country, is reported to be keeping a close eye on the tensions.

Into the night hours, there continue to be unverified reports that Serbia is sending security forces en masse to the border…

At this point there have been no confirmed major disruptions in commercial air traffic patterns over the region, however, as rumors that the two sides are on a ‘war-footing’ continue to persist.

Tyler Durden
Sun, 07/31/2022 – 15:29

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Hawaii Electricity Prices To Skyrocket As Final Shipment Of Coal Arrives

Hawaii Electricity Prices To Skyrocket As Final Shipment Of Coal Arrives

Hawaii is receiving its final shipment of coal this week, which Gov. David Ige called a huge step forward in the state’s transition to clean energy. What he meant was that local are about to pay a lot more for basic essentials.

A law put in place a couple of years ago will finally shut down the island’s last coal burning power plant. And since coal is the dirtiest * but cheapest – source of power for Oahu, it means that all else equal, power prices are about to skyrocket.

“In its time, coal was an important resource for Hawai‘i and I’d like to thank the workers who have run our last remaining coal plant,” Ige said in a statement. “Renewable energy projects to replace coal are coming online with more on the way.”

“Even as we face challenges in making this transition, it’s the right move for our communities and planet. Most importantly, it will leave Hawaiʻi a better place for our children and grandchildren.”

So noble, Scandinavian teenagers would approve: there is just one problem: as KHON2’s Always Investigating reports, replacement power projects are behind schedule due to unexpected global events with supply chain issues, so Oahu residents should prepare to pay even more for electricity this fall. In other words, Europe’s catastrophic experience with the “Green transition” where an entire continent moved to “energy alternatives” some 30 years before it was ready to replace fossil fuels, is coming to at least one American state.

In the meantime, consumers can either cut back on power, try solar and batteries, or pay more for oil-generated power — which costs as much as five times more than coal.

The Kapolei plant has been Oahu’s largest single generator for three decades, meeting about 16% of the island’s peak electricity demand. Its closure on Sept. 1 means eliminating 180 megawatts of power, or about one-tenth of what Oahu needs. There is no ready replacement for this source of energy which is about to go offline.

But wait, it gets funnier: one year ago, Hawaii was stunned to learn that the “green facility” which is replacing the Kapolei coal plant,  the  185-MW Kapolei Energy Storage Facility, will be charging its “enormous battery” … with oil! In other words, Hawaiians will be trading one fossil fuel (coal) for another, albeit one far more expensive. Or as the chair of PUC, Jay Griffin, complained, Hawaiians are “going from cigarettes to crack.”

If there is not enough solar, wind, or battery storage energy to replace the AES plant, HECO would have to use oil instead to charge things like the upcoming 185-megawatt Kapolei Energy Storage Facility,” Pacific Business News reported.

It’s not a matter of “if,” however. The reality is there’s not enough wind, solar, or battery storage to replace the AES plant. Hawaiian Electric has made this quite clear in recent documents, noting that it would not be able to meet its year-two renewable target (75 percent) for “more than a decade.” – Source FEE Stories

Confused? Here is the simplified schematic:

  1. Oahu is permanently shutting down its final coal plant which provides 10-20% of the island’s energy
  2. Its replacement is an energy storage facility which however will need oil to charge its battery
  3. Hawaii is effectively replacing dirty coal power with just as dirty oil power, which however is far more expensive.

Translation:another brilliantly executed “green” revolution, or as FEE put it:

The project is a wonderful demonstration of why we should be wary of giving central planners more power over energy security. It’s an example of a phenomenon explained by Ludwig von Mises: that government policies often have exactly the opposite effect of what was intended.

In an address delivered before the University Club in New York in 1950, the economist explained how government policies often backfire in ways that are predictable. Here is an example he offered:

“The government believes that the price of a definite commodity, e.g., milk, is too high. It wants to make it possible for the poor to give their children more milk. Thus it resorts to a price ceiling and fixes the price of milk at a lower rate than that prevailing on the free market. The result is that the marginal producers of milk, those producing at the highest cost, now incur losses. As no individual farmer or businessman can go on producing at a loss, these marginal producers stop producing and selling milk on the market. They will use their cows and their skill for other more profitable purposes. They will, for example, produce butter, cheese or meat. There will be less milk available for the consumers, not more.”

These outcomes are of course contrary to the intentions of lawmakers, Mises pointed out. They wanted to make it easier for people to purchase milk, not reduce the supply of milk. But the result is the same, he observed, and that is the lesson.

So what can we do about it at home besides getting ready to write bigger checks to Hawaiian Electric Company (HECO)?

HECO vice president Jim Kelly suggests to “really be embracing the idea of conservation,” especially during peak hours. Between 5 p.m. and 9 p.m., don’t be cranking on the air conditioner, taking long showers, running the oven, or whatever else that requires electricity and water. And while blaming Putin might provide a few minutes of gratification, it won’t do anything for the accelerated depletion of your bank account.

Tyler Durden
Sun, 07/31/2022 – 15:00

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Election Observers Won’t Be Allowed To View Vote-Counting In LA District Attorney Recall: Official

Election Observers Won’t Be Allowed To View Vote-Counting In LA District Attorney Recall: Official

Authored by Jack Phillips via The Epoch Times (emphasis ours),

Election monitors won’t be allowed to view vote-counting in the recall of controversial Los Angeles District Attorney George Gascon, officials said Thursday.

“[A] reference to monitors/observers in the presidential election is not an accurate comparison as an election does allow for public observation, and Los Angeles County does have an Election Observer Program where members of the public get to watch election-related activities,” Los Angeles Registrar spokesman Michael Sanchez told the Washington Examiner. “However, a recall attempt and its verification/certification activities are not the same.”

Los Angeles County District Attorney George Gascon speaks at a press conference in Los Angeles on Dec. 8, 2021. (Robyn Beck/Getty Images)

Sanchez said that observers can participate in normal elections, but recalls have different requirements. He cited California Government Code 6253.5, which says that petitions for ballot measures aren’t public records and aren’t able to be inspected.

But Tim Lineberger, a spokesman for the recall campaign, told the paper that voters have the right to monitor the recall.

Clearly the examination of a recall petition is part of the recall process,” Lineberger said. “Other county elections officials allow for observations. This would be a very narrow interpretation on their part.”

He cited California state Election Code 2300, which stipulates that Californians “have the right to ask questions about election procedures and observe the election process” and also have the “right to ask questions of the precinct board and elections officials regarding election procedures and to receive an answer or be directed to the appropriate official for an answer.”

Earlier this month, the recall effort hit a key milestone and delivered 715,833 signatures of Angelenos to the Los Angeles County Registrar’s office, exceeding the some 566,000 signatures needed to put Gascon on the ballot for a recall election.

Now the county clerk’s office said it will carry out a count of all signatures by Aug. 17.

“We remain confident the requisite 566,857 verified signatures to qualify the recall were submitted, and that once the recall qualifies, Gascon will be removed from office in a landslide,” Lineberger told The Epoch Times in mid-July. “As we assumed, this was always going to be close, but we are right in line with where we need to be to qualify. Ultimately, we will exhaust every legal and statutory option available to demonstrate as much if necessary.”

The recall was triggered amid a wave of criticism against Gascon, who was elected in late 2020 and promised to bring progressive change to the district attorney’s office. However, top law enforcement officials and other critics say that he’s pursued a left-wing agenda while allowing repeat offenders as well as violent criminals back on the streets.

The Epoch Times has contacted the registrar’s office for comment.

Tyler Durden
Sun, 07/31/2022 – 14:30

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Jon Stewart Goes Full ‘Useful Idiot’ After Dems Sneak $400B Of ‘Mandatory’ Spending Into Veterans’ Health Care Bill

Jon Stewart Goes Full ‘Useful Idiot’ After Dems Sneak $400B Of ‘Mandatory’ Spending Into Veterans’ Health Care Bill

You may have noticed last week that pundit Jon Stewart went on a self-righteous rant about how evil Republicans are because they voted against the PACT Act this week, would have helped veterans affected by burn pits.

Stewart, however, failed to explain why Republicans shot down the bill – which was passed in June with bipartisan support, but was then put up for a re-vote after the House made a change to the tune of $400 billion shifting it from the ‘discretionary’ spending category to ‘mandatory’ – which Sen. Pat Toomey (R-PA) said last week was “completely unnecessary to achieve the PACT Act’s stated goal of expanding health care and other benefits for veterans.”

The change would also exempt the $400 billion from annual congressional appropriations – essentially making it a blank check.

Enter (veteran) Jack Posobiec…

Stewart doesn’t care – calling Toomey’s objections “utter nonsense.”

“The difference between mandatory and discretionary…that’s just a word salad that he’s spewing into his coffee cup on his way to god-knows-where,” the comedian then told NBC’s “Meet the Press” on Sunday, adding “At some point we all have to live in reality. And what he’s saying is just factually incorrect.”

VA secretary Denis McDonough, meanwhile, claimed without evidence that the $400 billion is included to ensure that “all the spending for this program is for the veterans exposed to these toxins.”

As Axios notes:

  • McDonough added that Toomey’s amendment there would be a year-on-year cap on spending and that after 10 years the fund would “go away.”
  • “If his estimations are wrong about what we’ll spend in any given year, that means that we may have to ration care for veterans,” McDonough said.

Toomey hit back…

More via the Post Millennial

Posobiec cited Pennsylvania Senator Pat Toomey, who said that his “concern about the bill has nothing to do with the purpose of the bill. It’s not about about the $280 billion, approximately $280 billion of new spending that is meant to be required under this bill for the VA [Veteran’s Administration] to cover healthcare, and other benefits for veterans who are exposed to toxic burn pits.

What I want to change,” Toomey continued, “has absolutely nothing to do with any of that.” Toomey said that he expects that there would be 85 votes for the bill if the issue was remedied.

The PACT Act as written includes a budget gimmick that would allow $400 billion of current law spending to be moved from the discretionary to the mandatory spending category. This provision is completely unnecessary to achieve the PACT Act’s stated goal of expanding health care and other benefits for veterans,” Toomey said in a statement.

That issue, he said, is “completely unrelated to the $280 in new spending, there is a mechanism created in this bill, a budgetary gimmick, that has the intent of making it possible to have a huge explosion in unrelated spending, $400 billion.”

“This budgetary gimmick,” he went on, “is so unrelated to the actual veterans issue that has to do with burn pits that it’s not even in the House version of this bill. The fact is that we can fix this tonight.”

Toomey urged his Democrat colleagues to remove the unrelated spending and get the bill passed to help veterans.

Texas Senator Ted Cruz echoed Toomey’s points, saying “Jon, you’re a funny guy and I appreciate your engaging on issues of public policy, that’s a good thing. But if you’re gonna do so, the facts matter.

“Listen, when it concerns the PACT Act, I support the PACT Act. I voted for the PACT Act, and I’ve advocated for it for a long time. We have an obligation to take care of our veterans, particularly those who were wounded or injured from burn puts or in other ways from combat.”

“The issue here,” Cruz continued, “is the Democrats included in this bill an accounting gimmick where they took $400 billion of spending, discretionary spending, they shifted it to mandatory spending didn’t change the amount at all.

“But the reason they did that is it created a hole for $400 billion in new discretionary spending. Their objective? They want to cram $400 billion in unrelated spending into this bill that has nothing to do with veterans. Now given inflation that is skyrocketing this country, I think another 400 billion in spending is irresponsible.”

“Let me be clear,” Cruz said, “I support every single penny of the $679 billion dollars of funding for veteran’s health care.”

This reality was not something Stewart was aware of when he blasted those who didn’t vote for the bill with the extra $400 billion in it.

Stewart freaked out for almost 10 minutes, saying that the GOP senators didn’t care about vets. “So ain’t this a b*tch?” Stewart said after the vote. “America’s heroes, who fought in our wars, outside sweating their asses off, with oxygen, battling all kinds of ailments, while these motherf*ckers sit in the air conditioning, walled off from any of it. They don’t have to hear it, they don’t have to see it. They don’t have to understand that these are human beings.”

Posobiec ripped into another fabrication propagated by Stewart. “Earlier this year,” Posobiec wrote, “he claimed he never called Harry Potter anti-Semitic and I caught him changing his YouTube video titles after the controversy went viral.”

Read the rest here…

Tyler Durden
Sun, 07/31/2022 – 14:00

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Morgan Stanley: Market Participants Do Not Appreciate The Implications Of New Capital Requirements

Morgan Stanley: Market Participants Do Not Appreciate The Implications Of New Capital Requirements

By Vishwanath Tirupattur, global head of Quantitative Research at Morgan Stanley

The Coming Capital Crunch

As macro strategists, digging deep into company earnings is outside our jurisdiction. We rely on our sector analysts for nuggets of information that could matter for fixed income markets. Insights from Betsy Graseck, our banks and consumer finance equity analyst, on the back of 2Q bank earnings highlight the impact of changes to regulatory capital requirements this year. These changes not only affect banks’ ability to buy back stock or pay dividends but are also likely to have a bearing on credit formation, credit spreads, and demand for high-quality assets on bank balance sheets, issues that are relevant for risk markets in general and fixed income markets in particular. In our view, market participants do not fully appreciate the implications of the new capital requirements.

A quick detour to frame why this is a big deal. As every investor knows, interest rates have risen sharply since the start of the year, which has meant that, like other investors, banks have had to write down the fixed-rate securities in their portfolios. This happens in every sell-off in rates, but this one was larger and faster than most. The move in five-year notes was the second-largest six-month sell-off in the last 30 years. The magnitude of the write-downs (especially combined with the spread widening in both mortgage and credit instruments) was large to say the least. Consequently, banks have less GAAP capital than normal, and the biggest banks have less regulatory capital too. That would be regrettable, but manageable.

But starting in January 2022, banks had to adopt a new approach (the Standard Approach to Counterparty Credit Risk or SACCR) to measure the counterparty risk of “off-balance sheet” derivatives. Under the Basel III rules, banks apply weights to assets based on riskiness, resulting in risk-weighted assets (RWA) against which they are assessed a capital charge. Government-guaranteed assets like cash, Treasuries, and mortgage-backed securities (MBS) guaranteed by Ginnie Mae have a 0% risk weight, hence there is no capital charge against them for this purpose. MBS issued by government-sponsored entities (GSEs) such as Fannie Mae and Freddie Mac and general obligation municipal bonds carry a 20% risk weight, and most residential mortgage loans have a 50% weight. For most banks, SACCR increased the RWAs associated with derivatives contracts.

Beyond the capital impairment they faced from the sell-off in rates, credit spread widening, and the adoption of SAACR, banks must contend with the annual stress capital buffer (SCB) tests. The most recent results from these tests, released at the end of June, point to higher required regulatory capital than consensus expectations for some of the largest banks in the country, especially the money center banks. Add in the fact that several Globally Systemically Important Banks (GSIBs) will have an increase in their GSIB surcharge in 1Q23 and are actively working to reduce it by the end of 2022, and the largest banks in the US banking system are confronted with a serious challenge. Betsy notes that they will need to keep dividends flat, eliminate buybacks, and reduce their RWAs to generate a capital ratio above their new required minimums. She further estimates that the three largest banks (JPMorgan, Bank of America and Citigroup) alone will need to lower their RWAs by more than US$150 billion in aggregate by the end of the year if they maintain a 100bp management buffer on top of their regulatory capital minimums. While managements may choose to flex to a lower 50bp buffer, the market doesn’t stand still; higher volatility, higher equity market valuations, and growing loan books add to RWA balances.

In post-2Q earnings conference calls, different banks talked about “optimizing RWAs” and “RWA management”. What could that entail and what are the potential consequences? For starters, banks could move out of 20% risk assets such as Fannie/Freddie MBS and into 0% assets like Ginnie MBS. Bank of America and Wells Fargo announced that they are doing precisely that. We think that they don’t have enough of such assets in their portfolios currently to sufficiently reduce their RWAs. Banks have been substantial buyers of senior tranches of securitized products, thus playing a crucial role in enabling credit formation across a wide range of assets by providing senior leverage. While such senior tranches are risk-remote by construction, they carry higher risk weights and thus are capital intensive. If banks step back from such assets, the cost of financing would increase, affecting the cost and availability of credit across the system. Spreads of Fannie/Freddie MBS and CLO AAA tranches, trading near post-GFC wides, suggest that the pressures from RWA optimization are already at play. Furthermore, banks would need to reduce their footprint in trading and in their portfolio assets with higher RWAs, which could well impact market liquidity for those assets.

But, in the banks’ RWA, the biggest line item by far is their loan portfolio. Regulatory capital pressures mean that banks will increasingly have to make tough choices in their lending books. Citizens Financial highlighted that it is leaning into credit card, commercial and industrial, and home equity loans and away from mortgage, auto and education refinancing. The CFO of Citigroup noted on an investor conference call that the bank is requiring some of its least profitable trading clients to post more collateral and is even dropping some of them to help boost returns in its markets business. Betsy estimates that JPMorgan needs to reduce RWA by another ~US$90 billion by 1Q23 to get to its required capital ratios with a 100bp buffer, or US$28 billion with a 50bp buffer. JPMorgan indicated that it would distinguish between franchise and non-franchise lending and reduce the latter. Clearly, different banks will react differently to RWA pressures, but in aggregate we will likely see lower overall liquidity, lower credit formation, and continued pressure on spreads on capital-intensive assets.

In our view, market participants have yet to fully appreciate the challenges from the regulatory capital pressures on banks, particularly large-cap banks. These challenges are unlikely to dissipate within the next 2-3 quarters and add to the many other uncertainties markets are facing. If there is a silver lining, it is that, longer term, there may be better holders of the RWAs – entities that do not have the same capital pressures (e.g., sovereign wealth funds, pension funds and certain non-US banks) and may find these assets attractive additions to their portfolios.

Tyler Durden
Sun, 07/31/2022 – 13:30

via ZeroHedge News Tyler Durden