Month: January 2023

Russian forces have just suffered what may be their single biggest loss of the war in an attack, after a Ukrainian strike killed multiple dozens, or possibly hundreds, of newly mobilized troops in the east of the country. Moscow is now pointing to a US role in the devastating attack.

“Russia’s Defense Ministry said Monday that Ukrainian forces used a U.S.-supplied Himars rocket system to destroy a facility used as a base for mobilized troops in the city of Makiivka,” The Wall Street Journal reports of the attack in Russian-occupied Donbas.

The defense ministry confirmed that 63 Russian troops died in the blast, saying that a wave of HIMARS rockets delivering “high-explosive warheads” struck the facility that housed the troops.

A statement by top Russian commanders carried in state-run TASS reads: “The Kiev regime delivered a strike firing six projectiles from the US-made HIMARS multiple rocket launcher on a Russian unit near Makeyevka in the Donetsk People’s Republic (DPR). The attack left 63 Russian service members killed.”

Though only reveled for the first time Monday, the strike reportedly took place soon after midnight on Sunday, New Year’s Day. Some Russian sources are suggesting an ammunition depot was next to the targeted facility, which likely resulted in a deadlier, expanded blast. 

The Ukrainian side is meanwhile claiming the true numbers among the Russian dead is much higher, with the Ukrainian military asserting that some 400 were killed and other 300 wounded – though Kiev didn’t directly take responsibility in the immediate aftermath.

Western media, including CNN and Reuters, have acknowledged being unable to independently verify the casualty numbers, however, some notable pro-Russian separatist officials have suggested it is more that the 63 dead officially cited by the Kremlin: 

Igor Girkin, a former Federal Security Service officer who helped Russia annex the Black Sea peninsula of Crimea in 2014 and then organize pro-Russian separatist forces in eastern Ukraine, said on Monday that “the number of dead and wounded runs into many hundreds.”

That same official is one among several Russian military commentators who lashed out at top commanders for the apparent lack of protection for the hundreds of personnel staying in a small area. Russian sources say at least two of the inbound missiles among the six fired by the Ukrainians were shot down by anti-air defenses.

Girkin said on Telegram: “This is not the only such [extremely dense] deployment of personnel and equipment in the destruction zone of HIMARS missiles,” also in reference to reports of ammunition stored dangerously close.

Other pundits are saying troops’ use of cellular phones or other possible open source communications could have tipped off the Ukrainians as to the presence and location of the base, given the potential for intercepted signals…

So the Ukrainian army appears to have hit a base of mobilised Russians in Makiivka in Donetsk. Reports suggest that at least 100 Russians were killed. They were using open source communications. So Rus army is starting 2023 like it ended 2022 then. Still using open source comms! pic.twitter.com/cHXMfQPnp6

— Dr Stephen Hall (@stephengfhall) January 1, 2023

Additionally, Reuters references the following source from the Russian side:

One Russian pro-war military blogger known as Rybar, who has more than one million subscribers on the Telegram messaging app, said more than 100 people had been wounded in the strike and that rubble was still being cleared.

Rybar said there had been about 600 people in the building, and that ammunition had been stored in the same facility.

And The Telegraph points out this could surpass the prior single most disastrous event from early on in the invasion:

Ukraine estimated the death toll at “about 400”, with some pro-Russian separatists in the region agreeing “hundreds” had died. The Kremlin, in a rare admission, said 63 men had been killed – far outweighing the official death toll from the sinking of the flagship Moskva.

Rare for battlefield casualties to be confirmed by Moscow. But Makiivka attack was so deadly that staying silent may not have been an option. Russian MOD says 63 Russian soldiers killed when “temporary deployment point” hit, it says, by Himars rockets fired by Ukrainian forces.

— Steve Rosenberg (@BBCSteveR) January 2, 2023

Beyond the issue of the disputed death toll, another question is whether the Ukrainians had targeting assistance from US intelligence.

Interestingly, Ukraine’s defense ministry on the same day as the attack posted footage of what appears to be Himars system launching a strike in the dark.

Surprise! pic.twitter.com/R0gSLvm2LN

— Defense of Ukraine (@DefenceU) January 1, 2023

In the past months, mainstream US press has increasingly acknowledged that the Ukrainians are receiving direct battlefield targeting help, based on the admissions of anonymous Pentagon and US intelligence officials. 

However, there’s currently no confirmation or clear evidence that US-supplied HIMARS were indeed used, as the Russians allege. But the fact that the facility struck was significantly behind the front lines may point to a longer range weapon being used, such as has been supplied by Western powers. Ukraine also seems to now be openly boasting of its US-supplied capabilities in the wake of the mass casualty attack on Makiivka.

By Peter Tchir of Academy Securities

2023 Outlook – PAIN

First, I need to apologize for last weekend’s Bah Humbug! T-Report. I meant to give a shout out to “Christmas Wrapping” by the Waitresses, which starts with the line “Bah Humbug, now that’s too strong”. If I had to listen to one holiday song on infinite replay all December, that song would be the one (apologies to Mariah Carey). But enough delaying, let’s get to the heart of the matter, which is why I think that 2023 (at least for the start of the year) will be a big bust! Maybe, much like the A-Team always won in the end, this year could finish well (for markets and the economy), but it will start with “PAIN” (okay, I’m mixing Mr. T lines, but let’s just roll with it).

• Not much help from the bond markets. I’m a bond bull and expect a “risk-off” trade early in the year, but bonds just aren’t going to help portfolios or the economy enough to stem the tide.

• The wealth effect (on individuals, companies, and governments) will weigh on the economy and markets. The amount of wealth destruction was large by historical standards and was more “circular” than in previous bouts of wealth destruction.

• Unlike Weebles (which wobble, but don’t fall down), economic data will fall down. Consumers and jobs, two areas that have given many people reasons to support an optimistic outlook, will succumb to the same problems that the rest of the economy is facing and it will finally show up in the data.

• There is a chance for some geopolitical respite, but globalization in 2023 and beyond will never go back to where it was in 2017.

• The valuation re-valuation is not done, and that will reduce whatever earnings (or free cash flow) we have to multiply these metrics by to calculate valuations. Credit contraction is a risk.

Those are the main points driving much of this very bleak outlook (but just because it is bleak, doesn’t mean that it is pessimistic because bad things can and do happen).

The Foundation – Key Building Blocks

There are some ongoing themes in last year’s work that set the stage for some of this analysis. We will refine the points listed in the first section, but it is important to lay the foundation.

We had several non-traditional factors that drove inflation, many of which are gone. Using responses that worked for “traditional” inflation when we have a unique fact set this time around is going to lead to large and difficult policy mistakes.

• See Rise and Fall of Inflation Risk Factors which examines the roles of the Fed, Stimulus, Supply Chains, War, and “Disruption” on inflation.

• 2 + 2 = 5 explores why the Fed seems to be looking at data very “weirdly” and the problems that these views are likely to cause.

• The last piece in this series, the Path to Q1 Deflation, lays out how this comes together to shock the system (deflation is not healthy when it is caused by an economy hitting a wall).

These are important pieces of the “PAIN” outlook, but they are not the only elements. Even if you disagree with the above, there is plenty of wiggle room to come to the “PAIN” conclusion and those arguments just help make the case stronger.

Relationships with China have changed and aren’t going to revert to what passed as “normal” any time soon. It isn’t just at the government level (where national security concerns are paramount), but at the company level where there is a threat to IP and supply chains. There is also unwillingness to truly provide open and equal access to the domestic economy. All these factors have left C-Suites working on alternatives to China.

It is almost sad (but true) that by the time markets and the mainstream media catch up to Academy’s view on China, our view will have become more negative. However, the gap is finally narrowing for most investors and corporations.

• The Beijing Olympics as Cultural Bookends is a “thought” piece but looks at the changes since China’s “coming out” party at the Beijing Summer Olympics and their “going away” party at the Winter Olympics last year. Topics include the reassertion of the Communist Party, Digital Yuan, Debt Diplomacy/Economic Colonization, Military Expansion, and the Real-Estate bubble. While that report is almost a year old, it sets the tone for much of how people should think about China.

• The Recentralization of China (August 2021) set the stage for the move from seeing China as a Strategic Competitor (December 2019) to more of an enemy across the globe.

• China’s zero-COVID policy. I dismissed the re-opening as being a “big deal” on national TV just a couple weeks ago (supply chain issues have been largely dealt with and the last thing this economy needs is more cheap goods). However, it is still interesting that it failed to help markets rally. Maybe that is because few people want to risk travelling to China at this stage (getting COVID there seems precarious at best in terms of treatment). Maybe it is because China’s importance to our economy has been greatly diminished. The full story hasn’t played out here, but I remain in the camp that China’s re-opening is only helpful at the margins given how companies and countries have adapted to the past few years of behavior.

Again, this “foundation” isn’t critical in coming to the “PAIN” conclusion, but it is an important building block.

Bond Market – Supply/Demand Imbalances?

I want to be bullish on bonds despite the fact that this is rapidly becoming a consensus view. I’m fully committed to the high probability of a “risk-off” trade that brings bond yields lower and takes stocks below their 2022 lows. Yet, things seem “off” in the bond world.

It is somewhat “difficult” (at least from this seat) to put a finger on exactly what is wrong, but let’s highlight a few potential risks to the bond world. These are primarily risks to the Treasury market, but many of those risks would cause problems for credit especially if the economy slows as rapidly as I expect it to (it is already slowing rapidly based on PMI data and other reports).

• Will foreign buyers of dollar denominated debt continue to buy? This question first got some serious attention as dollar strength and FX volatility made it more difficult for foreigners to buy dollar denominated debt and hedge out the FX risk (primarily a Treasury and investment grade bond issue). With Japan starting to increase the target levels on their bonds, will we see more buying of yen denominated bonds vs. buying dollar denominated bonds with the associated FX hedging? I am a strong believer that the “0% bound” is non-linear. Basically, a number of market participants will do a lot to avoid 0 or near-0 returns and will quickly revert to “simpler” strategies once they can achieve even a modicum of yield. Large/sophisticated institutions don’t think that way, but many smaller institutions seem to.

• Japanese investors (for the first time in well over 5 years) can achieve a little over 20 bps by investing in 5-year JGBs. Certainly not an earth-shattering return, but it isn’t a particularly long maturity and it alleviates the need to run FX hedging strategies. This will be a small problem for bond markets, not material, but not entirely inconsequential. It is a risk that increases as Japanese yields rise (presumably while global bond yields are also rising) creating a negative feedback loop. This isn’t keeping me awake at night, but I am keeping an eye on it.

• Higher deficits? As yields rise, the cost of running existing debt burdens for countries goes up. Yes, it takes a long time for rising yields to have a significant impact on average coupons outstanding, but the U.S. has $3.8 trillion of bills and $2.6 trillion of bonds maturing in 2023, all of which will need to be refinanced at higher coupons than the bonds that are maturing. In 2021, the Federal Reserve helped reduce the government deficit by $107 billion. Since the Fed uses accrual accounting, the higher cost of borrowing impacted the remittance for 2022 (guessing around breakeven). This means that at the end of 2022, the Treasury Department did not receive the $100 billion it got in 2021. Unless the Fed does some form of “Operation Twist”, where they work with Treasury to retire longer-dated bonds (trading well below par) to book profits, this year’s number will end up being a significant loss. We could also see decreased remittances, especially if financial assets continue to struggle (which is my base case). Lots of moving parts, but we could see increased supply from governments which won’t be completely offset by lower supply from corporates.

• Quantitative Tightening. Quantitative tightening does not behave like rate hikes (see Rube Goldberg Translating QT to bps). I find quantitative easing much easier to explain. Every day, investors in every asset class get forced to take on more risk to get a similar expected return. If a T-bill is bought by the Fed, someone who used to be able to buy that T-bill now either needs a longer T-bill or something with slightly more risk (say Agency Discount Notes or CP) or something slightly less liquid (maybe ABS related or private credit). Their decision thrusts the same decision on the investors who used to buy what they are now buying. That goes on and on until it impacts the riskiest of assets (unprofitable tech and crypto certainly seemed to fit the bill). This is Newton’s Cradle in action (where you drop a ball at one end and the ball it hits doesn’t move, but the ball at the far end of the chain moves). Quantitative tightening acts in reverse (though with less impact since it is relying on bonds that are maturing, limiting the “duration” being taken out of the market). But every day investors seem to wake up with the ability to take less risk (less credit risk, shorter maturities, or more liquidity) for similar expected returns.

• This is not the “best” chart (and I’m sure that there are some Chart Crimes committed here). However my view is that QE is extremely prone to asset price inflation and the Fed knows it (even if they don’t harp on it) and they will keep QT even when they are done hiking rates because they want to “fix” this “problem”. This doesn’t get enough discussion in the inflation dialogue. This point also bothers me when thinking about the potential for bond or stock strength this year.
• The shape of the yield curve is not conducive to a great year for bonds. With 2s vs 10s still inverted by 55 bps, we need one heck of a bull market across the entire curve to generate big returns. While 20-year bonds seem to offer some respite, no one wants to touch them because the long bond only highlights these issues. As much as bond investors want long duration, the pickup in yield (relative to the risk/reward by moving to shorter-dated bonds) could be attractive and would be completely in line with how we see QT working.
• Corporate bond risk/reward. High end corporates should do “okay”, but if our theory plays out, there will be pressure on credit spreads. My “rough” thinking is that for every basis point Treasury yields rise, corporate spreads will tighten by less than a ½ of a bp. Overall yields on corporates will go up if Treasury yields rise. For every bp Treasury yields fall, beyond a threshold of say 10 to 20 bps from current levels, spreads will widen 1:1 or worse (it will be a risk-off trade, not as bad as in March 2020 or 2008, but still serious considering the IG level of risk). From an all-in yield basis, the risk/reward for corporates seems slightly worse than for Treasuries themselves. Less supply will help corporate credit, but liquidity is worse, which amplifies any hiccup. If I was an issuer I’d start the year trying to issue, but if I was an investor, I’d start the year reducing exposure.

I want to be a “pound the table” bond bull, but I struggle due to all these risks (5-year, highest quality paper is the best option here.)

The “Circular Error” in “Disruption”

Company XYZ raises money (public or private) at a new (and higher) valuation.

Company XYZ’s employees feel richer as the new valuation increases the value of their options.

Company XYZ’s other investors are also richer based on these new valuations.

Company XYZ’s employees spend money because they are (in some cases) “rich”. They buy fancy cars (mostly EV), big houses, and expensive vacations. They also take some of their newfound wealth to invest in companies similar to XYZ (and apparently in crypto).

• Real estate agents, lawyers, house sellers, auto dealers, etc., benefit from this surge in spending.

Company XYZ spends money on equipment (mostly tech), office spaces (to highlight their prowess in a physical manifestation), and on advertising so people hear about their product. Their mentality is “the faster I spend, the sooner I can do my next raise at an even higher valuation”.

• Real estate agents, lawyers, big tech, small tech, venues, ad sites, etc., all benefit from this spending.

The “second” order effect of this spending is smaller, but not only do the outside investors spend more, so do the real estate agents, lawyers, house sellers, tech companies, etc. The money multiplier increases the wealth “shock” that spreads throughout the economy.

Peloton, a company whose product I’m trying to use with more regularity this winter, went from $6 billion to $49 billion in market cap. This was one of hundreds of public companies that saw that sort of gain! That doesn’t include crypto/private equity investments and doesn’t even try to put a number on SPACs (though NKLA hit a market cap of $28 billion and is now at $1 billion). This is a good segue to the “circular” nature of all this.

If there was a “virtuous cycle” on the way up, it seems plausible that the cycle will be “unvirtuous” on the way down. That is the problem with “circularity”. Things circle back on themselves and you do not have the ability to get the correct answer.

This is probably the area on which I seem to differ most from many economists (I’m just a strategist). I see circularity and spirals where others see straight line extrapolations. Maybe I’m wrong, but this feels an awful lot like 2000/2001 (tech bubble), 2007/2008 (housing was the main culprit), and 2015/2016 (energy boom/bust), but with the focus being on “disruption” this time around in 2022/2023.

This keeps me awake at night.

Weebles

We will get a lot more information on jobs in the first week of January. I expect that the data will disappoint and we can do a retrospective on that in next weekend’s T-Report. At that point, it will hopefully be clear whether we were right or wrong (though given the quality of the data collected, the week will probably prove to be far less conclusive on the job front than it should be).

The health of the consumer is a big question mark.

• 2022 hurt low wage earners the most. Low income households were hit by inflation, but they had benefitted the most from stimulus (as a percentage of income) and an incredibly robust job market.
• 2023 may play out as the “high income” hit year. The wealth effect is taking a toll, but more importantly this part of the work force seems to be facing the brunt of recent layoffs. This year won’t be about the number of jobs lost, but it will be a function of the number of jobs lost multiplied by the average income (which could be surprisingly high). Employees at the “granular” level are still in high demand (though that could tail off too), but it will be a combination of job fears (even if unfounded) coupled with the wealth effect that will make the consumer seem much weaker in 2023 than in 2022.

I need to improve my charting capability on the “consumer” health side of things, but this chart caught my eye.

Similar to the alleged “inventory” build story (which we will revisit next week), this is just playing catch-up to the “excess savings”. But what if consumers are living beyond their means to an uncomfortable degree? Will Q4 and the holiday season be the last binge as the consumer embarks on a “dry January”?

I’m not optimistic on the consumer coming into 2023. Again, not keeping me up at night, but a definite concern and one that we need to do a lot more work on in the coming days and weeks.

“Positive” Geopolitical Surprises?

Last year we saw a shock to the system with a war in Europe! A year into this, it is still difficult to conceptualize that there is a war in Europe.

Academy’s current take is that Russia will make one more big push this winter, but if that fails, some sort of negotiations should begin, which would be a boost to global markets. But, like so many other things, nothing is returning to how it used to be! Russia has found new buyers for its energy products. These buyers care little about their behavior and are in no rush to shift away from traditional energy products. Probably, from the Russian perspective, this is a better client base.

I need to highlight that the U.S. changed the nature of global commerce permanently the minute “we” weaponized Russia’s dollar reserves. That was not lost on any country, but was most noticed by autocratic nations swimming in natural resources. This will impact policies and trade negotiations for decades to come and will put “us” at a distinct disadvantage to China and India. As we deal with the reality of what resources we will need in the future, this will be another hurdle.

So, the situation in Russia could result in some change globally, but more of a “Potemkin village” than a real change to the global commodity industry (and therefore to the global economy).

China may back down on some rhetoric (they are good at taking “5 steps forward, 1 step back” and highlighting their “1 step back” hoping that no one noticed they gained 4 steps.)

There is the opportunity to work with China, but they are now truly viewed as a competitor and a possible threat, so we cannot and will not go back to how it was (this applies to both nations and companies).

Geopolitics might provide some boosts, but they will be mild and temporary, and we will need to remain vigilant with China, Taiwan, Russia, Turkey and many other regions in the world as the geopolitical landscape continues to evolve, and not in a good direction!

Bottom Line

I’m not optimistic on risk (equities will do worse than IG credit spreads, but risk across the continuum is still not priced cheaply enough).

I’m not as optimistic on bonds as I’d like to be. That, sadly, is not comforting.

Hopefully I’m wrong! Maybe like Mr. T, we can go from being the adversary to a much-loved character, but for now my New Year’s message is anything but happy.

I’ll be looking for reasons to become more optimistic and a “pound the table bull” (I’m okay being “long for a trade” here), but think that we are best served by being cautious and seeing if whether the “straight line extrapolation” people were correct or there is a spiral effect that has been put in motion and has its own energy.

Good luck and on behalf of Academy Securities; we look forward to working with you in 2023.

In a press release put out midday on Monday, Tesla announced it had delivered a record 405,278 vehicles for the Q4 2022 quarter. The number marks a record for the company, but comes in below most Wall Street estimates, even some that were revised lower. Consensus estimates for deliveries stood at 420,760 into the report, according to Bloomberg.

“In 2022, vehicle deliveries grew 40% YoY to 1.31 million,” the company’s press release says. This falls short of the 50% growth figure the company had once projected for the year. 

Tesla commented: “We continued to transition towards a more even regional mix of vehicle builds which again led to a further increase in cars in transit at the end of the quarter. Thank you to all of our customers, employees, suppliers, shareholders and supporters who helped us achieve a great 2022 in light of significant COVID and supply chain related challenges throughout the year.”

The breakdown of vehicles included 388,131 Model 3 and Model Y deliveries, which fell short of the 405,597 estimated:

And 17,147 Model S/X deliveries, which fell short of the 18,578 estimate:

Perhaps an interesting delta to keep an eye on is the company’s production versus delivery – production numbers all beat Wall Street estimates across the board, per Bloomberg:

*TESLA 4Q PRODUCTION 439,701 VEHICLES, EST. 438,840

*TESLA 4Q MODEL S/X PRODUCTION 20,613, EST. 18,611

*TESLA 4Q MODEL 3/Y PRODUCTION 419,088, EST. 411,828

$TSLA deliveries fall 8.5% vs production. Those backlog forecasts comped to pandemic demand will not be good for 1H inventories. 🚩

— Linsanity Capital (@JLinWins) January 2, 2023

Despite the delivery number missing most consensus estimates, we noted days ago that Morgan Stanley’s Adam Jonas had actually revised his Q4 delivery estimate to as low as 399,000 vehicles. 

Jonas seems to think headwinds out of China, which have been cited as part of the reason for Tesla’s recent share price plunge, may continue: “According to Morgan Stanley lead China auto analyst Tim Hsiao, Nio just announced a cut to its 4Q delivery target given Covid-related disruption to production and registrations. Despite sequential volume improvement MTD, the uptick of auto/NEV sales has come in weaker than expected given a surge in Covid cases following reopening.”

Jonas also continues to believe that Tesla is well suited to face macro headwinds heading into 2023. He wrote last week:

“On a relative basis, the reiteration of our OW rating must be seen vs. more challenged EV-related peers such as EW-rated Fisker (FSR), UW-rated Lucid (LCID),and UW-rated QuantumScape (QS). Between a worsening macro backdrop, record high unafforability,and increasing competition, there are hurdles to overcome. Yet we do believe that in the face of all these pressures, TSLA will widen its lead in the EV race, as it leverages its cost and scale advantages to further itself from the competition.”

Tesla has also started 2023 by continuing to offer 10,000 yuan incentives in China in a bid to help boost sales, we noted this weekend. The company may also see another subsidy shot-in-the-arm in the U.S. heading into the new year. 

Days ago we asked whether or not the Biden administration could work as a tailwind heading into 2023: “At the start of the new year, buyers will once again enjoy a tax credit when they purchase a Tesla vehicle. The original 2010 EV tax credit had a quota of 400K units. For Tesla, the tax credits fully disappeared in early 2020 when Tesla reached that unit sales quota. But thanks to the Inflation Reduction Act (IRA) that Congress passed earlier this year and Biden signed [last week], the tax credits are back in 2023.”

We continued:

“In the IRA there is a $7,500 tax credit for buyers of EVs, including TSLA and GM, who lost their previous tax credits. However, there are other strict limits on which brands would be eligible for the full credit, based on the selling price and where the cars and components are made. Unless the car is made in North America (NAFTA), the buyer is not eligible for the full tax credit. In addition, at least 50% of the battery parts will need to be made in North America. Lastly, a minimum of 40% of minerals used in the batteries must be sourced from the US or countries with free trade agreements with the US. So even buyers of GM and Tesla cars might only be eligible for half ($3,750) of the tax credit because their batteries and minerals come from a “foreign entity of concern” (China/Russia).”

To finish the year, Tesla has traded the furthest below its 200DMA (61% lower) in the company’s history – whether or not this is a sign of continued bearishness or a setup for a whipsaw higher remains to be seen…

Shares initially fell, before bouncing, in Europe where equity futures trading is open, versus the U.S. where markets are closed for the New Year’s holiday.

By Tony Pasquariello, Goldman head of hedge fund sales

For only the third time since 1926, both US stocks and bonds lost money in 2022 (the other two occurrences were 1931 and 1969).

The intra-year path was extraordinary — be it the high print on inflation (I wonder when we’ll see a 9.1% headline on CPI again), the Fed’s response (425 bps of hikes across just seven meetings) or the geopolitical backdrop (one variable that very much carries through to 2023).

Then consider this fundamental oddity: US real GDP growth should only amount to +0.7% this year (Q4/Q4) … yet, there’s been over 4.5mm new jobs created (payrolls survey) [ZH: with even the Philly Fed confirming our speculation that the BLS is fabricating job numbers it’s no longer much of an oddity].

In that context, I’ll borrow a line from Barton Biggs, which I think captures the raw material of what served folks well in 2022:

Although those quantitatively inclined would disagree, to me, investing is much more an art than a science … experience, diligence, a knowledge of history, an open mind, and an obsessive nature are all important ingredients for the successful [investor] … as are intuition, imagination, flexibility and maybe just a touch of the seeing eye.

What of 2023?

For the macro crowd, my instinct is these tensions won’t go quietly into the night and the opportunity set will remain decently target rich (e.g. China and Japan could be very actionable theaters).

At the same time, I concede that the broad setup across asset prices today is far less asymmetric than it was at the start of this year.

Therefore, I suspect we’re shifting from a macro environment that favored aggressive trading (see chart below) and brute force (i.e. US 2-year notes surged from 70 bps to 470 bps, that’s about as good as it gets for trend following strategies) to one that is more nuanced, featuring less volatility and more dispersion across markets (which should play to the strengths of RV and equity long/short).

With thanks to Ben Snider in Goldman Research, what follows from here is a check-down of the score board … I also included the recap on last year at the very bottom of this note, if only for a compare-and-contrast that speaks (quite loudly) for itself.

* * *

The tale of the tape in 2022:

1. The S&P 500 fell by 19%. Including dividends, the total return was -18%. This ranks in the 5th percentile of all annual returns since 1962.

2. Realized volatility was 24%. This ranks in the 92nd historical percentile.

3. Putting those together, the ratio of S&P return-to-vol was -0.7, ranking in the 12th historical percentile.

4. The largest S&P peak-to-trough drawdown during the year was 25%, almost 2x the median historical annual drawdown.

5. The market traded higher on just 43% of days in 2022, the second worst year since WWII (after 1974). This is interesting: the median gain on those days was 115 bps, the highest in postwar history.

6. 31% of S&P stocks posted positive returns, including 66 names up 20% or more and 18 names up 50% or more. On the other side, 188 stocks closed down more than 20% and 26 names were down 50% or more.

7. NDX returned -32%, lagging S&P by 14 percentage points and registering the worst year of underperformance since 2002.

8. US Treasury 10-year notes returned -16%, the worst return on record.

9. Only two of the GICS level one sectors generated positive returns: energy +65%, utilities +2%.

10. The worst sectors: communication services -40%, consumer discretionary -37%, information technology -28%.

11. The best global markets (in local FX): Venezuela +254%, Turkey +207%, Argentina +142%.

12. The worst: Russia -37%, South Korea -24%, China A-shares -20%.

13. Finally, I’ll conclude with a chart, from Ryan Hammond in GIR: as mentioned before, you have probably seen work suggesting that one should not try to time the markets, as missing the best days is a serious drag on returns. While that rang true again (see the gray line), for the world’s best traders, note how dodging the worst days this year generated an immense amount of alpha (see the light blue line):

More in the full Pasquariello note available to pro subs.

2023 now effectively marks the end of the whole “Interim President Juan Guaidó” fiction of the previous years, after Venezuela’s opposition on Friday voted to remove him from this role.

Starting in 2019, Guaidó declared himself as interim president of Venezuela while seeking to invalidate President Nicolas Maduro’s controversial 2018 re-election. He had received the full backing of the United States, followed by other countries who can be counted on to mimic Washington policy.

For the latter part of the Trump administration it was official US policy to recognize Guaidó with the “interim president” title, even with Maduro’s diplomatic officials at the embassy in Washington being considered persona non grata. 

During the Trump years there were even widespread reports of a US-sponsored coup attempt against Maduro, as Guaidó waited in the wings to take over, but which failed and with subsequent efforts to stoke anti-Maduro unrest gaining no traction and ultimately waning. 

This was despite Guaidó and his opposition officials not having any real level of power inside Caracas or the country, despite a period of what might be called super star status outside the country and some decree of international or Western recognition.

But since November of 2022, the opposition has been in deepening talks with the Maduro government, coinciding with Maduro officials seeking rapprochement with Washington.

Those unprecedented talks led to the White House unveiling a monumental shift in its Venezuela policy,  namely the easing of oil sanctions which allowed Chevron to pump Venezuelan crude and export it to the United States.

The US-led attempt to simply pretend that Juan Guaidó was the actual President of Venezuela – even though not a single person had ever voted for him for that position – was one of the more laughable and pathetic failures of the bipartisan US National Security State. https://t.co/sldO1Pfpwi

— Glenn Greenwald (@ggreenwald) January 1, 2023

Chevron was forced to halt all drilling there just under three years ago due to Trump administration sanctions, also amid the aforementioned US policy that recognized only the opposition leader Guaidó.  “Chevron received a six-month license that authorizes the company to produce petroleum or petroleum products in Venezuela,” a White House statement indicated.

Chevron as the last major US oil company to operate in Venezuela had before the oil embargo invested in Venezuela’s oil fields and machinery over the last century to the tune of an estimated $2.6 billion. But it’s expected to take much more than just six months, possibly even years, for Chevron to get its necessary oil field infrastructure, machinery, and logistics chain up and running again to get back to its earlier Venezuela production levels.

Authored by John Cody via Remix News,

German youth in migrant-heavy neighborhoods once again turned Berlin and other German cities into war zones on New Year’s Day, but this year, news reports indicate that attacks were especially brutal and targeted rescue services, including ambulance workers.

In Berlin, police and firefighters responded to 3,943 incidents, with 15 firefighters and 18 police officers injured. According to Bild newspaper, there were “particularly bad attacks in the hotspot neighborhoods of Kreuzberg and Neukölln with a high proportion of migrants.”

“There were dozens of attacks,” says Interior Senator Iris Spranger, of the Social Democrats (SPD).

In Kreuzberg, for example, after young men set fire to barricades, firefighters who arrived to extinguish the fire were attacked by 200 hooded men. In Neukölln, which is one of the most multicultural neighborhoods in Germany, 50 perpetrators fired rockets at emergency force services.

In one disturbing scene, a group of men were filmed attacking an ambulance, hurling objects inside the vehicle’s open rear doors.

Berlin-Neukölln New Year’s Eve. If you import Kalkutta you don’t help Kalkutta, you will become Kalkutta. @NancyFaeser you are responsible pic.twitter.com/roLNVwdyaO

— Hans Gutermann (@HausPirna) January 2, 2023

Other videos show youths hurling rockets at ambulances as they attempt to drive down Berlin streets.

(1/4) Wenn man Bilder aus Städten wie Berlin oder auch Frankfurt sieht, weiß man: Es ist immer eine bestimmte Klientel, die hier zu Silvester völlig ausrastet. Es geht also nicht pauschal um Böller. Es geht darum, wer wie damit umgeht. pic.twitter.com/mdnT7qWRpw

— Anabel Schunke (@ainyrockstar) January 1, 2023

Zu #Silvester und dem #Jahreswechsel geht #Berlin im #Feuerwerk #Chaos unter.#Fachkräfte aus der #Partyszene und #Chaoten aus der #Sonnenallee, #Kreuzberg und #Neukoelln überfallen #Polizei und #Feuerwehr.

Berlin: das institutionialisierte #Staatsversagen, dank #Giffey. pic.twitter.com/4pHZcVYNKf

— Dr. David Lütke (@DrLuetke) January 2, 2023

Berlin Neukölln war dieses Jahr Silvester richtig schlimm pic.twitter.com/Obzc3tRyur

— 🌙فاطمة (@fatumaa_ab) January 1, 2023

Many of the incidents were caught on film, with the clips featuring burning vehicles, fires in tall apartment blocks, and one police officer being struck by a rocket directly on his helmet, which then burst into flames. One officer and one firefighter suffered from severe injuries and remain hospitalized.

“Our vehicles were fired at with birdshot ammunition,” says Thomas Kirstein of the Berlin Fire Department. Police report that an “illegal bullet bomb” was thrown at a fully occupied police car. In another video, a man shoots out a police car window.

freue mich auf das #boellerverbot in berlin. dann gehören solche bilder nächstes silvester der vergangenheit an.

Ihr team freiheit

🗽✊🏼

pic.twitter.com/bcEGoRqyP0

— Ulf Poschardt (@ulfposh) January 2, 2023

In the ensuing chaos, 103 people (98 men and five women) were arrested. The Berlin police wrote on Twitter, “The violence that our colleagues had to experience on New Year’s Eve is unbearable. It is a task for society as a whole to clearly counteract this. We thank you all for your commitment and wish the injured a speedy recovery.”

Die Gewalt, die unsere Kolleginnen & Kollegen in der Silvesternacht erleben mussten, ist unerträglich. Es ist eine gesamtgesellschaftliche Aufgabe dem deutlich entgegen zu wirken. Wir danken Ihnen allen für Ihren Einsatz & wünschen den Verletzten schnellste Genesung.
^VPr ^PPr’in

— Polizei Berlin (@polizeiberlin) January 1, 2023

Another video showed migrant youth mocking a firefighter as he attempted to give an interview to news outlets.

Berlin halt. pic.twitter.com/04NiRZGICB

— Anabel Schunke (@ainyrockstar) January 1, 2023

The next morning, burned-out buses and automobiles could be seen across Berlin.

Hat #Berlin noch irgendwas von einer normalen deutschen Großstadt?
Wahldebakel, Antifa Krawalle und jetzt noch so ein Silvester. Vielleicht wählt ihr euch mal ne vernünftige Regierung ins Amt wie wir anderen. pic.twitter.com/Xneaf4OIgy

— Henrijs_DE🔅 (@HenrijsDE) January 1, 2023

Georg Pazdersk, former AfD parliamentary group leader in the Berlin House of Representatives, wrote: “When are we finally going to admit that we have a huge problem with young male migrants from archaic societies who don’t want to integrate. Silencing the problem means continuing to promote it.”

Wann gestehen wir uns endlich ein, dass wir ein riesiges Problem mit jungen männlichen Migranten aus archaischen Gesellschaften haben, die sich nicht integrieren wollen. Das Problem totzuschweigen heißt es weiter zu fördern.https://t.co/Z6NODxl9Cmpic.twitter.com/7BqWOkxXKx

— Georg Pazderski (@Georg_Pazderski) January 1, 2023

Other cities, such as Duisburg, were hit with violence as well, including attacks on rescue services.

#duisburg #silvester pic.twitter.com/kDiY1JmDSQ

— Anabel Schunke (@ainyrockstar) January 1, 2023

“One can only shake one’s head. The political leadership in Berlin takes no responsibility for this disaster. It has sympathy for people who break rules,” Neukölln’s former mayor, Social-Demcrat (SPD) Heinz Buschkowsky, told Bild.

In der Silvesternacht regieren in unseren Innenstädten #DIEGESETZLOSEN. Junge Männer, die machen, was sie wollen, vor niemandem Respekt haben, sich über Gesetz & Ordnung hinwegsetzen – unsere Doku morgen 18 Uhr bei #AchtungReichelt – Hier Kanal abonnieren: https://t.co/bhjqXCo8wP pic.twitter.com/BVdkbinASW

— Julius Böhm (@julius__boehm) January 1, 2023

“The lunatics are becoming are appearing more and more. Every festive event is a welcome occasion to attack the authorities…That’s the enemy, and they must be fought.”

“Even experienced emergency personnel are shocked by the extent of the brutality. This must finally come to an end. The state must no longer stand by while chaotic people repeatedly attack police officers and firefighters. These are not trivial offenses, they are crimes,” CDU Berlin chapter leader Kai Wegner told Bild.

Previous years also featured extreme violence, especially in Neukölln.

In a statement released by the AfD, the party wrote, “Anarchy reigned in Berlin on New Year’s Eve. It was a first foretaste of future everyday life in German cities because although the authorities and the press are adamantly silent when it comes to the specific naming of the perpetrators, the countless videos of that night speak volumes: They are young, violent men with a southern appearance who hardly speak German. And not only can they immigrate unhindered, they also get paid for a nice life by the traffic-light government with tax money.

The conclusion that is now being drawn from the riots is as typical as it is naïve: a ban on firecrackers and cameras on the rescue vehicles should fix it. As if the corresponding clientele would be impressed by these measures. There is only one effective remedy against such scenes: finally protect the borders and deport criminal migrants immediately,.”

Weitere Eindrücke der #Partyszene, die ich euch nicht vorenthalten möchte! Da wäre ich doch gern dabei gewesen – in dieser “sicheren und lebenswerten” #Silvester2022-Nacht!
Meine Kinder hätten das #Feuerwerk wahrlich genossen🙃🤡@polizeiberlin: Material für euch! Tut was damit😉 pic.twitter.com/jhned7Yjiu

— XzumTreme (@XzumTreme) January 2, 2023

In 2016, approximately 2,500 German women were raped and sexually assaulted by North African and Middle Eastern men in Cologne and other cities in an event that fueled the rise of the Alternative for Germany party and anti-immigration sentiment in Germany.

An earthquake rattled parts of Northern California on Sunday for the second time in two weeks. The 5.4-magnitude quake was centered about 30 miles south of Eureka. On Dec. 20, a 6.4-magnitude earthquake also struck near Eureka.

Now one quake prediction research firm warned that the next big one could be imminent. 

On Monday morning, Quake Predictions published a warning that read for the next two days — there is a “dangerous situation” of the likelihood of a 7.0-magnitude “in the San Francisco Bay to NW of Los Angeles area.” 

48 hour warning – (Dangerous situation) – WARNING: 7.0 earthquake is likely in the San Francisco Bay to NW of Los Angeles area 01/02 to 01/03- (huge quake signal just hit California) https://t.co/VMyuA1uw32 pic.twitter.com/goGyalmLFc

— EarthquakePrediction (@Quakeprediction) January 2, 2023

The warning comes after two sizeable quakes hit Northern California in less than two weeks. 

Sunday morning’s earthquake was described as “more violent this time,” Rio Dell Mayor Debra Garnes told CNN in an interview. 

“It was shorter but more violent. My refrigerator moved two feet. Things came out of the refrigerator. There’s a crack in my wall from the violence of it,” Garnes said. 

California has an average of five earthquakes per year with magnitudes between 5 and 6, according to LATimes. And the latest shakings might suggest a long overdue big quake could be nearing.