Every market period has a distinct bogeyman for when a trade doesn’t go your way. As we recently noted, “8 years ago, every most hated rally was “explained” with HFTs; 4 years ago it was gamma. Now it’s 0DTE.”

8 years every most hated rally was “explained” with HFTs; 4 years ago it was gamma. Now it’s 0DTE

— zerohedge (@zerohedge) February 5, 2023

Having previously discussed the issue of zero-day-to-expire options (we profiled 0DTE first in late 2022 in “What’s Behind The Explosion In 0DTE Option Trading“, and more recently here “Why 0DTE Is So Important, And Why The VIX Is Now Meaningless“), the face of this new fear has recently been JPMorgan’s Marko Kolanovic who warned that these ultra-short-term options could lead to ‘Volmaggedon 2.0’.

As we noted here, however, Bank of America’s derivatives gurus were quick to dismiss this fearmongering, who explained that “a closer study of intraday trade-level data suggests reality is more nuanced” than that laid out by Kolanovic.

Specifically, the performance of intraday momentum strategies has stabilized in recent months, a development that the team attributed to an increase in options selling.

In other words, the market is not the one-sided monolith that will set the stage for an incident such as the rout in February 2018. 

“The 0DTE space has likely absorbed the initial demand impulse but has also drawn in more sellers,” BofA strategists wrote.

However, these contracts, with shelf lives shorter than 24 hours, have exploded since mid-2022 to as much as 50% of trading volume, at times causing derivatives to amplify moves in underlying assets.

As Bloomberg reports, that’s unquestionably made the task of figuring out the market’s collective thinking on the economy an especially futile exercise of late.

In a study by JPMorgan Chase & Co. in November, strategists including Peng Cheng found that the market impact from those trades can vary from a drag of as much as 0.6% to a boost of up to 1.1%.

“These big swings like yesterday were a great example,” Jim Bianco, founder of Bianco Research, said in an interview on Bloomberg TV.

“We have to be ready for this idea that, ‘hey, look, the market’s up 1%. What does it mean? Wait an hour, it’s now down on the day. Wait an hour, it’s back up on the day.’ That’s where I think that the 0DTE options are really starting to play. It’s the market that’s confusing a lot of people.”

Despite all this concern, history shows the merit of owning 0DTE “lottery tickets” despite paying inflated vols…

Incidentally, it’s the lottery ticket aspect of 0DTE why, as we first revealed last week, 87% of all same-day options traded one Tuesday of last week finished at zero point zero value.

• 83% of 1 day calls expired at a zero (585k was total volume)

• 91% of 1 day puts expired at a zero (620k was total volume)

BofA concludes by noting that while 0DTE options could – in theory – be “weaponized” in the future to exacerbate intraday fragility and/or mean reversion, “thus far the evidence presented above suggests that SPX 0DTE option positioning is more balanced/complex than a market that is simply one-way short tails.”

Translation: those waiting for 0DTE to spark the next market crash may want to not hold their breath.

But fear remains, as Bloomberg points out that getting a handle on what the craze may mean is complicated by the enormous volume of the options marketplace, the short lifespans of these trades and uncertainty about just who is using them.

“When you get big disruptions like that, you always get people that say, ‘you know, you got to watch out because you’re going to create a big problem,’” said Malcolm Polley, president and chief investment officer at Stewart Capital Advisors LLC.

“I don’t think they really fully understand because we’ve never really seen this phenomenon before.”

But, Brent Kochuba, founder of SpotGamma, does fully understand this ‘new phenomenon’.

His view is simple – the explosive rise of 0DTE options has actually acted as a positive market force.

He conducted a study on the impact of the activity via a measure known as delta, or the theoretical value of stock required for market makers to hedge the directional exposure resulting from options transactions.

From the start of 2022 to mid-February this year, positive 0DTE delta was tied to market rallies, a sign that short-dated calls were mainly being used to place wagers on stock rebounds.

“0DTE does not seem to be associated with betting on a large downside movement. Large downside market volatility appears to be driven by larger, longer dated S&P volume,” Kochuba said.

“Where 0DTE is currently most impactful is where it seems 0DTE calls are being used to ‘buy the dips’ after large declines. In a way this suppresses volatility.” 

In fact, 0DTE appears to have lowered differences between intraday volatility and close-to-close volatility…

George Patterson, chief investment officer at PGIM Quantitative Solutions, got a whiff of that retail urge recently when some friends’ teenage kids asked him questions about 0DTE options.

“0DTE options trades are yet another fad for retail investors, who view these as lottery tickets,” Patterson said.

There is one other aspect of the market that 0DTE options have impacted. The recent decoupling of VIX from the equity underlying has some market participants questioning the value of the ‘Fear Index’ given that so much of the options volume is now missing from the index calculation (which is based on only S&P 500 options expiring 23 to 37 days).

Although a look at short-dated VIX (9d – so still notably beyond the 0DTE expirations) suggests little systemic difference…

Nevertheless, as Nomura cross-asset strategist Charlie McElligott, the less controversial issue is that 0DTE options add yet another layer of noise to intraday markets, noting that “US equities are such an untradable mess right now,” as the battle between bulls eying a “no landing” and bears warning over “higher for longer” rates pushes more and more into short-dated, highly-levered trend-following ‘lottery tickets’ via 0DTE.

Authored by Bruce WIlds via Advancing Time blog,

Mortgage rates have doubled over the past year and this has hit housing affordability hard. How much housing prices will retrench is still up in the air. Consider the whole premise housing prices in America are about to fall like a stone may be overdone. Hard economic times could very well take a greater toll on the price of intangible assets and paper promises than on things like housing.  

Whether a person is better off renting or buying is often directly linked to rental rates that are related to cost. Feeding into what a landlord charges are things such as taxes, insurance, maintenance, utilities, and a slew of fees. If landlords cannot make money, they exit the business and the number of housing rental units is reduced. This puts a bottom under the market and/or drives rents higher. Yes, a lot of new rental units are coming online but how easy will it be to rapidly fill them with good tenants? Simply filling a unit at a huge discount or with tenants that want a new unit but fail to pay or tear the hell out of it does not work. 

What many renters fail to consider is that landlords have far more to risk than tenants. It is the kiss of death to lower your standards just to fill units up. Doing so simply destroys a property’s reputation while creating a slew of evictions, costly turnover, and an explosion in maintenance costs. Adding to this ugly path forward is the fact our costly legal system has lost its teeth when it comes to collecting on small claim judgments.

Much of the problems we see in housing stem from a lack of starter homes and new small houses at a reasonable cost. Several reasons exist for this situation. First and foremost is that builders and realtors like bigger more exotic homes because that is where the money is. Another factor is zoning, this includes tightening rules and restrictions in plotted additions. These are often intended to keep standards and values high. People are seldom excited to see less expensive homes being built in their area. 

Millennials Have Been Locked Out Of Buying Because Of Affordability 

The cost of shelter has skyrocketed and the face of housing ownership is changing.

Over the last several decades starter homes have become a thing of the past. This has created a shortage of low-cost housing that will put a floor under housing prices. The areas where housing will drop the most are areas where prices have increased the most with the bigger most expensive houses taking the brunt of the hit. This is partly because they cost more to maintain and are more heavily taxed.

Low-Interest Rates Have Pushed Prices Higher

The decision of the Fed to buy mortgage-backed securities years ago added to soaring prices and the mess we face today. Buyers are out there, many are speculators and inflation believers, these buyers are circling each new listing like hungry sharks. They are driven by the idea interest rates will soon fall and they will be able to refinance. If rates drop prices are likely to soar again. This could put a strong floor under most of the housing market. 

One problem causing an issue for those looking at the low end of this market is that lenders have little interest in making small dollar loans because they are less profitable. This means these properties are often picked up by cash buyers. Many of these now go to big players that at times may buy without looking at the property but simply have it inspected by a company that sends them a report. Others are sold on contracts that often give the buyer little protection. 

As stated many times in previous articles here at AdvancingTime, it could be argued the government holds huge responsible for many of America’s housing problems. Our government makes the rules by which builders and landlords must play. This includes some of the factors I have moaned about in the past, a big one is that roughly 80% of new apartment construction has been for the high-end luxury market. 

The government has its finger prints all over the housing sector and also causes problems for renters. This is because its policies avoid dealing with the growing number of tenants that are irresponsible. In short, Government housing cherry-picks the best of the low-income renters providing them with very low rents and nice apartments while dumping the worst of these renters on the private sector. This makes housing more expensive for the rest of the population.

The number of units being built during inflationary times with higher interest rates also plays into this market. Who buys homes greatly depends on who can afford them and how these buyers envision the future unfolding. In short, if buyers think prices will continue to rise this is very supportive of higher prices.  

And then, there is the decision of the Fed to buy mortgage-backed securities years ago, this has added to soaring prices and the mess we face today. Following 2008, big money from Wall Street got behind a move to have Fanny Mae and other big lenders bundle foreclosed properties. Selling them in packages eliminated and locked out small concerns and individuals from participating in buying. In recent years, a small but mighty group of corporations have purchased hundreds of thousands of homes. 

These Wall Street funded corporations are just one of the forces shutting people out of the home-buying market and locking them into being perpetual renters. When it comes to financing, short of some government giveaways to certain segments of the population, Wall Street has a huge advantage over individuals. This is why even though managing the renting of individual houses is challenging, Wall Street may not retreat from the task. It is important to remember this is about the real rate of inflation.

Not only have institutional buyers with deep pockets hijacked some markets by buying whole neighborhoods but the market is changing in other ways. The U.S. housing market has become a speculative investment and now homebuyers are competing with I-Buyers that have lots of low-cost capital. An I Buyer is an “Instant Buyer” in the real estate industry who uses data-driven online home value assessment tools to determine what your house is worth and then makes you an offer.

Returning to the subject of inflation and the benefits of buying tangible assets as a way to protect ones buying power, as it becomes more obvious inflation is only going to get worse, those that can afford to buy houses will continue to do so even at higher prices. The point is, we should not be surprised if housing prices prove far more resilient in a slowing economy than many experts think. In an inflationary environment, these houses fall into the category of a tangible asset capable of earning a positive return. Few investments meet this criteria and those that do will be in strong demand. 

Note, housing prices are much higher in many parts of the world. One thing for certain, it will be interesting to see what happens next. Before you just assume housing prices are going far lower consider who will be buying those units that come available. All of what you have read above feeds into why those homeowners that have a low-interest rate mortgage may not be in a hurry to sell their home if they are not in distress. Expect how people handle their investments in the future to play a huge factor in future housing values.

Authored by ‘BTCCasey’ via BitcoinMagazine.com,

The Treasury’s statements explore the potential forms and implementations of an American CBDC…

The U.S. Department of the Treasury has released comments from Undersecretary for Domestic Finance Nellie Liang on the “Next Steps to the Future of Money and Payments,” addressing CBDCs and the approach the American government is taking to their potential implementation.

The original Treasury report released in September 2022 described the formation of a CBDC working group that would advance work on a CBDC. Liang’s remarks confirmed the formation of that group.

“One of the central tasks for the CBDC Working Group is to complement the Fed’s work by considering the implications of a U.S. CBDC for policy objectives for which a broader Administration perspective is helpful,” Liang said.

“To give you a sense of how we are pursuing this work, I will describe our approach to thinking about CBDC options, the policy questions we are attempting to answer, and the kinds of recommendations we hope to develop.”

Highlights from this description include a look at the potential forms that a CBDC could take, the potential for a separate retail and wholesale CBDC and the possible core features of the CBDC.

Also discussed is the idea that a “potential U.S. CBDC, if one were created, would best serve the United States by being ‘intermediated,’ meaning that the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments. In terms of technology, a retail CBDC might involve a different architecture compared to a CBDC that is intended solely for wholesale use.”

In his piece for Bitcoin Magazine, Mark Goodwin described how Bitcoiners may have “spent so much time looking for CBDCs, we missed the private-entity stablecoin monster right in front of our eyes.”

The Treasury’s released remarks suggest that a CBDC may well come on the backs of private entities, with major incentives to participate. The United States has gotten serious in regards to its consideration of a CBDC. And all this just as legislation has been introduced by Republican lawmakers that would “prohibit the Federal Reserve from issuing a CBDC directly to anyone.”

Although this bill may not have much of a chance of passing, notable is the specific angle of preventing a Federal CBDC, potentially leaving free those “intermediated” by private parties.

The remarks also described how a CBDC is one of many directions for the government to take, another being real time payment systems. The Federal Reserve, according to Liang, “has indicated that it expects to launch the FedNow Service this year, which will be designed to allow for near-instantaneous retail payments on a 24x7x365 basis, using an existing form of central bank money (i.e., central bank reserves) as an interbank settlement asset.”

This would differ from a CBDC in that it would utilize an existing form of central bank money versus the new form a CBDC would introduce, in addition to a potential new set of payment rails.

Regardless of the path that the Treasury takes, new payment systems are seemingly on the horizon for the United States. 

Wagner Group is heavily involved in fighting to capture the eastern city of Bakhmut, and its head, Yevgeny Prigozhin, has said at this point the strategic city on Donetsk Oblast is “practically surrounded”. 

Prigozhin issued a video message to Ukrainian President Volodymyr Zelensky on Friday. Donned in military fatigues, he urged for the order be given for Ukrainian forces to retreat in order to save soldiers’ lives. “Units of the private military company Wagner have practically surrounded Bakhmut. Only one route (out) is left,” he said. “The pincers are closing.”

⚡️Wagner forces walking around Bakhmut this morning showing an RIA reporter the destroyed bridges.

They say that almost all the bridges in Bakhmut have been destroyed by Ukrainian forces. pic.twitter.com/WMlOhjY4mo

— War Monitor (@WarMonitors) March 3, 2023

Wagner has further claimed that the Ukrainians have destroyed the majority of bridges leading in and out of the city center.

Commenting on the aforementioned video by Wagner’s leader, Reuters describes another scene as follows:

The camera panned to show three captured Ukrainians – a grey-bearded older man and two boys – asking to be allowed to go home. From visible buildings, Reuters determined the footage was filmed in Paraskoviivka, a village 7 km (4.3 miles) north of the centre of Bakhmut.

As we reported earlier this week, Zelensky and his top aides have lately issued statements appearing to pave the way for a ‘strategic withdrawal’ – or in reality a retreat – as better-armed and numerically superior Russian forces have the city almost completely encircled.

Russian firepower has also been relentless and reportedly greater in supply with Volodymyr Nazarenko, a deputy commander in the National Guard of Ukraine, telling a public radio station in a fresh statement that fighting has been occurring “round the clock”.

“They take no account of their losses in trying to take the city by assault. The task of our forces in Bakhmut is to inflict as many losses on the enemy as possible. Every meter of Ukrainian land costs hundreds of lives to the enemy,” he said.

Kiev has used the devastating scenes out of Bakhmut to press its Western backers for more artillery shells and heavier weaponry immediately. “We need as much ammunition as possible. There are many more Russians here than we have ammunition to destroy them,” Nazarenko said.

In a Pentagon briefing Thursday, Air Force Brig. Gen. Pat Ryder told reporters the US is still seeing “intense fighting near Bakhmut.” 

⚡️Wagner force’s confirmed to be crossing the bakhmutka river pic.twitter.com/ugTfNPK3Ix

— War Monitor (@WarMonitors) March 3, 2023

“Russian forces and Wagner [Group] mercenaries continue to press their attacks around Bakhmut, and Ukrainian forces continue to hold the line,” Ryder said. “It remains a very fluid situation.”

But again, all signs are pointing to a likely retreat already being in progress. The below unverified footage was first published on Thursday…

⚡️Unconfirmed video reportedly showing a Ukrainian unit withdrawing from Bakhmut this morning. pic.twitter.com/2Irgf3Rp8P

— War Monitor (@WarMonitors) March 3, 2023

On Tuesday for the first time the Ukrainian presidency’s office began significantly shifting its rhetoric. “So far they’ve held the city, but if need be, they will strategically pull back because we’re not going to sacrifice all of our people just for nothing,” Zelensky aide Alexander Rodnyansky conceded earlier.

Since then, Zelensky has admitted the extreme difficulty of the situation, as he’s likely moment by moment mulling giving the order for withdrawal. The Kremlin will see in Bakhmut one of the single and most strategic victories of the war so far, and it will likely open up momentum and will be a key logistics hub for pacifying all of the Donbas.

And yet for now, Ukraine’s military is still sending signals it’s trying to hold out its positions…

Ukrainian Commander of Eastern Forces Col. Gen. Oleksandr Syrskyi visited troops in Bakhmut today, proving there’s still a road into the city. He said Russians increasing forces, including units of Wagner & regular army. “Intense fighting in and around the city.” via Land Forces pic.twitter.com/vbG7MTd83k

— Christopher Miller (@ChristopherJM) March 3, 2023

But without doubt the overwhelming momentum is in Moscow forces’ favor at this late stage.

Authored by Lance Roberts via RealInvestmentAdvice.com,

Gen Zers, according to a recent Magnify Money survey, are overly optimistic about being wealthy. In fact, according to the survey, they are THE most financially optimistic generation. To wit:

“Nearly three-quarters (72%) of Gen Zers believe they’ll become wealthy one day, making them the most financially optimistic generation.”

But, interestingly, that optimism, as noted by the firm’s executive editor, is “more than just youthful optimism.”

“We are surrounded by extremes of wealth and poverty, and I think younger folks naturally gravitate to the more positive extremes. What’s more, the concept of investing is so much more accessible today, and I know many Gen Zers believe they can harness the power of the market to build wealth.” – Ismat Mangla

Interestingly, Gen Zers are optimistic they can use the stock market to build wealth. Unfortunately, that hasn’t worked out well for the generations before them.

Since 1980, there have been three major bull market cycles. The first started in the mid-80s and culminated in the Dot.com bust at the turn of the century. The early 2000s saw the inflation of the “real estate” bubble heading into the 2008 “financial crisis.“ We live in the third “everything bubble” fueled by a decade-long push of monetary and fiscal interventions.

However, 80% of Americans are still not “wealthy after these three major bull markets.”

That is according to some of the most recentsurveys and Government statistics:

• 49% of adults ages 55 to 66 had no personal retirement savings in 2017, according to the U.S. Census Bureau’s Survey of Income and Program Participation (SIPP).

• The latest Federal Reserve Survey of Consumer Finances found that the median savings in Americans’ retirement accounts were $65,000.

• Less than half of those surveyed saved $100,000. Not enough to support a median retirement income of around $40,000 a year. 

• One in six say they have saved nothing. A third currently makes NO contributions. 

•  80% of people expected to see their living standards fall in retirement. 10% feared they wouldn’t be able to retire at all.

Will it be different for Gen Zers in the future? Unfortunately, it likely won’t be for the same reasons that using the stock market to build wealth didn’t work for the generations before them.

80% Of Americans Aren’t Wealthy

According to the Magnify survey, Gen Zers defined “being wealthy” by several measures:

Most surveyed define “wealthy” as living comfortably without concern about their finances. As shown below, that goal has eluded all but the top 20% of income earners.

While 72% of Gen Zers believe they will be wealthy, the net worth of the bottom 50% of Americans has remained relatively unchanged since 1990. While the middle 50-90% of Americans have seen an increase in net worth, it has not been enough to keep up with the “standard of living,” which, as discussed previously, continues to push Americans further into debt.

“The current gap between savings, income, and the cost of living is running at the highest annual deficit on record. It currently requires roughly $6,300 a year in additional debt to maintain the current standard of living. Either that or spending gets reduced which is the likely outcome as a recession becomes more visible.” – The One Chart To Ignore

Another Magnify Money survey supports this bit of analysis by showing that roughly 50% of working Americans live “paycheck-to-paycheck,” meaning they have no money left after expenses. While that was common among those making less than $35,000 annually (76%), 31% of those making more than $100,000 experienced the same.

The critical point is that it is hard to count on the stock market to build wealth when you don’t have excess savings with which to invest.

The Stock Market Won’t Make You Wealthy

Generation Z, born between 1992 and 2002, was between 5 and 16 years old during the financial crisis. Such is important because they have never truly experienced a “bear market.” Any advice they might have received from financial advisors suggesting caution, asset allocation, or risk management was repeatedly proven to underperform the market.

“Ha….Boomers just don’t get it.”

However, since they became old enough to open an investment account, they have only seen a “liquidity-driven” bull market that fostered a generation of “Buy The F***ing Dip “ers.

However, while the lack of savings was one of the key points in “The One Chart To Ignore,” the other key point, and why 80% of Americans didn’t build wealth, is that “markets don’t compound returns.“

“There is a significant difference between the AVERAGE and ACTUAL  returns received. As I showed previously, the impact of losses destroys the annualized ‘compounding’ effect of money. (The purple shaded area shows the “average” return of 7% annually. However, the differential between the promised and “actual return” is the return gap.)“

While 26% of Gen Zers think that investing in the stock market and 19% in Cryptocurrencies will be their ticket to financial wealth, a lot of financial history suggests this will not be the case.

While Gen Zers are very optimistic they will be wealthy in the future, a mountain of statistical and financial evidence argues to the contrary. Will some Gen Zers attain a high level of wealth? Absolutely. Roughly 10% of them. The remainder will likely follow the exact statistical breakdown of the generations before them.

The reasons for that disappointing outcome remain the same. If investing money worked as the mainstream media suggests, as noted above, then why, after three of the most significant bull markets in history, are 80% of Americans so woefully unprepared for retirement?

The crucial point to understand when investing money is this: the financial market will do one of two things to your financial future.

1. If you treat the financial markets as a tool to adjust your current savings for inflation over time, the markets will KEEP you wealthy. 

2. However, if you try and use the markets to MAKE you wealthy, the market will shift your capital to those in the first category.

Experience tends to be a brutal teacher, but it is only through experience that we learn how to build wealth successfully over the long term.

How Money Really Works

It isn’t just about investing money. There are also vital points about the money itself.

1. Your career provides your wealth.

You most likely will make far more money from your business or profession than from your investments. Only very rarely does someone make a large fortune from investments, and it is generally those that have a business investing wealth for others for a fee or participation. (This even includes Warren Buffett.)

Focus on your career, or business, as the generator of your wealth.

2. Save money. A lot of it.

“Live on less than you make and save the rest.” Such sounds simple enough but is exceedingly difficult in reality. Given that 80% of Americans have less than $500 in savings tells the real story. However, without savings, we can’t invest to grow our savings into future wealth.

3. The true goal of investing money is to adjust savings for inflation.

As investors we get swept up into the “casino” called the stock market. However, the true goal of investing is to ensure that our “savings” adjust for future purchasing power parity in the future. While $1 million sounds like a lot today, in 30-years it will be worth far less due to the impact of inflation. Our true goal of investing is NOT to beat some random benchmark index by taking on excess risk. Rather, our true benchmark is the rate of inflation.

4. Don’t assume you can replace your wealth.

The fact that you earned what you have doesn’t mean that you could earn it again if you lost it. Treat what you have as though you could never earn it again. Never, take chances with your wealth on the assumption that you could get it back.

5. Don’t use leverage.

When someone goes completely broke, it’s almost always because they used borrowed money. Using margin accounts, or mortgages (for other than your home), puts you at risk of being wiped out during a forced liquidation. If you handle all your investments on a cash basis, it’s virtually impossible to lose everything—no matter what might happen in the world—especially if you follow the other rules given here.

6. Whenever you’re in doubt, it is always better to err on the side of safety.

If you pass up an opportunity to increase your fortune, another one will be along soon enough. But if you lose your life savings just once, you might never get a chance to replace it. Always err on the side of caution. Always ask the question of what CAN go “wrong” rather than focusing on what you “HOPE” will go right.

Investing money in our future is not as simple as much of the media makes it seem. We all want to be able to under-save today for tomorrow’s needs by hoping the markets will make up the difference. Unfortunately, there is no magic trick to building wealth.

The process of saving diligently, investing conservatively, and managing expectations will build wealth over time.

It’s boring. But it works.

No matter your age, it’s not too late to start making better choices.

Six months ago, a series of explosions caused damage to Russia’s undersea Nord Stream gas pipeline. The pipeline’s future has been uncertain due to rising tensions between Moscow and Washington, particularly with an anticipated spring offensive in Ukraine. Earlier this year, there were discussions about the possibility of repairs within a year by the German energy company Uniper. However, sources now tell Reuters that Russia plans to “seal up” the pipelines. 

Russia’s Gazprom, a state-controlled oil company, constructed Nord Stream 1 and Nord Stream 2, which consist of two pipes each. These pipelines were designed to transport 110 billion cubic meters of natural gas annually from Russia to Germany via the Baltic Sea. 

In September, three of the pipelines were severely damaged by explosions, resulting in ruptures. One of the Nord Stream 2 pipes remained intact. 

Although Gazprom has stated that repairing the damaged pipelines is possible, two sources told Reuters that Moscow does not expect relations with the West to improve sufficiently in the near future to warrant the pipelines being repaired. 

In January, outgoing Uniper CEO Klaus-Dieter Maubach, which was Russia’s top gas customer before pipeline flows were reduced, said Nord Stream could be repaired within a year. But that’s not politically popular in the EU as countries race to find supplies elsewhere. 

However, the Russians aren’t abandoning Nord Stream. Sources said even though repairs might not be imminent, there is a plan for conserving the pipelines “for possible reactivation in the future.” This means that Gazprom would seal the ruptured ends of the damaged lines and coat the insides with an anti-corrosion lubricant. 

The possibility of reopening Nord Stream might come if Europe’s ability to offset Russian gas supplies fails. A source said this might push Europe back to buying cheap gas from Russia. 

Meanwhile, the investigation into the Nord Stream explosions at the end of September continues amid accusations from Moscow that Western intelligence services are “hiding something.”

Famed journalist and Pulitzer prize winner Seymour Hersh, who for decades was a star reporter writing for The New York Times and New Yorker, published a bombshell report on his Substack last month about the US sabotaging Nord Stream under the guise of a military exercise in 2022. 

In recent Senate testimony, US Under Secretary of State for Political Affairs Victoria Nuland praised the Nord Stream sabotage act. 

At a Senate hearing, top US diplomat Victoria Nuland celebrated the Nord Stream 2 pipeline bombing:

“Senator Cruz, like you, I am, and I think the administration is, very gratified to know that Nord Stream 2 is now, as you like to say, a hunk of metal at the bottom of the sea.” pic.twitter.com/KS5OM4N165

— Aaron Maté (@aaronjmate) January 27, 2023

… and then there’s this. 

⚡️#BREAKING Russia will not allow the West to “blow up gas pipelines” again — Lavrov

— War Monitor (@WarMonitors) March 3, 2023

By Michael Every of Rabobank

The court of public opinion

Years ago, the start of quantitative easing caused a backlash over concerns that the central banks were prioritizing the asset-rich over the average Joe. It raised questions about mandates and the independence of the monetary authority, particularly in Europe where the ECB was the only actor to prevent a fragmentation of the Eurozone. And it even raised questions of ethics, after some of the FOMC members’ trading activities came to light.

Plus, for years their policy was unable to revive inflationary pressures. But then, due to circumstances outside the control of central banks, inflation did return – with a vengeance. And while some of these supply-driven inflation shocks do not fall within the realm of control of central banks, it is the monetary policymakers who are now being looked at for last year’s erosion of households’ purchasing power.

The number of news articles in mainstream media related to monetary policy has increased with the rise in inflation, and central banks are under the microscope. Their credibility is tarnished, and they are behind in the court of public opinion.

You would therefore expect monetary policymakers to be a bit more cautious, for example when selecting new executives. The recent appointment of Austan Goolsbee to the position of President of the Federal Reserve Bank of Chicago has stirred up quite some dust, though.

First of all, his appointment adds to the concerns that central banks are increasingly becoming politicized, putting the independence of the monetary authorities at risk.

The new head of the Chicago Fed is a prominent Democrat and outspoken critic of the GOP. Now, that of itself shouldn’t be an issue – we all have our political beliefs. And considering that the government picks the national monetary policymakers, that usually results in nominees who are at least to some extent aligned with the political incumbent. This is not just true in the US; the appointment of ECB board members has seen similar horse trading in the highest circles of the EU. And after that pick has been made, it is quite uncommon to see politics in the voting process.

Yet, that is exactly what appears to have happened over the Chicago Fed presidency. Bloomberg News unveiled that the FOMC’s Bowman and Waller, both appointed to the Federal Reserve board by former President Trump, abstained from the confirmation vote. Moreover, the news agency discovered that several of the Chicago Fed directors who nominated Goolsbee to head the institution have been donors to Democratic candidates.

Secondly, and to make matters worse, Bloomberg News followed up on that story yesterday with the news that the executive search consultancy that helped select Goolsbee for the job employs his wife. Responding to the Bloomberg reporters, a spokesperson for the Chicago Fed stated that “members of the search committee, […] were made aware Robin Goolsbee was an employee of the search firm”, and that she didn’t play a role in the selection process. However, none of this information was disclosed during the search or after the choice was made – despite the fact that the regional central bank has been relatively open and transparent about the search process.

Yes, Goolsbee has great papers to lead the institution. And of course, neither of the above may have actually influenced the outcome of the selection process, as the Chicago Fed has stressed too. But the optics sure aren’t great.

The commotion surrounding the appointment of the regional Fed’s executive only adds to President Biden’s headache trying to fill the vacancy left by the departure of Lael Brainard, which is already a contentious pick between inflation (a hawk) and employment (a dove) for the US president. Within his own party, Senator Warren has called for the appointment of a person who will balance some of Powell’s ‘extreme’ rate hikes, to avoid that the Fed’s obsessive inflation fight “puts millions of people out of work”. Keeping politics out of the doors of central banks has become increasingly difficult in the current economic environment.

This more general notion not only holds for the world’s biggest central bank. The ECB, for example, is taking some flak for their insistence that wages are a key risk for the future inflationary process. European central bankers have acknowledged that there should be some wage increases to compensate households for the lost purchasing power, but they have also cautioned labour unions against asking for too much. Last year, the ECB even found itself in a pay dispute with its employees.

While wages, through their impact on inflation, are tied to the bank’s objectives, their recent comments also put the ECB more in the political arena. At a recent retreat, the Governing Council was presented a slide pack detailing how company profit margins have been increasing rather than shrinking, despite the sharp rise in input costs. As the Reuters article summarizes, “the idea that companies have been raising prices in excess of their costs at the expense of consumers and wage earners is likely to anger the general public.” It also implies that the ECB is at risk of overtightening, since profit margins do not have the same self-reinforcing effect on inflation as wages might.

That is particularly true if the ECB continues to point to wages as the main risk for the inflation outlook – which have increasingly become the subject of Lagarde’s press conferences. This assessment not entirely fair, though. The accounts of the October meeting already mentioned an “unusual resilience of profits and profit margins in the light of deteriorating cyclical conditions”   and the accounts of the February ECB meeting released yesterday do note that “developments in profits and mark-up warranted constant monitoring and further analysis on an equal footing with developments in wages.”

For now, though, the ECB’s focus remains very much on wages: “until a few months ago wage growth had remained moderate, but now there was a clear acceleration, which had to be taken into account in the outlook for core inflation.” The Council added that the labour market remains tight despite the slowdown in activity. “Therefore, while there was wide agreement that there were no signs of a wage-price spiral, it was argued that current wage growth was clearly not consistent with a 2% inflation target.”

This is the ECB suggesting that they may need to do more to lean against wage developments and a tight labor market – which comes down to depressing demand: “a better than expected growth outlook would contribute to continued inflationary pressures, which were unlikely to abate by themselves without further significant policy tightening.”

Indeed, yesterday’s inflation data for February, which saw core HICP accelerating to 5.6% unexpectedly, may dash some of the doves’ hopes that “the recent dynamics of core inflation showed that there had been a levelling-off of momentum.” That increases the upside risks for the ECB’s policy rate.

Following recent snubs, The Wall Street Journal reports a growing rift between two of OPEC’s largest producers – Saudi Arabia and the United Arab Emirates.

Still formally allies, Saudi Arabia and the U.A.E. have diverged on several fronts, competing for foreign investment and influence in global oil markets and clashing on the direction of the Yemen war.

The disagreements once unfolded behind closed doors but are increasingly spilling out into the open, threatening to reorder alliances in the energy-rich Persian Gulf at a time when Iran is trying to exert more sway across the region and Russia’s war in Ukraine has raised crude prices and roiled OPEC decision-making.

Crude prices tumbled on the news as fears of a crack in OPEC’s production promises may lead to more supply…

Crucially, within OPEC, the U.A.E. is obligated to pump much less than it is capable of, hurting its oil revenue.

It has long pushed to pump more oil, but the Saudis have said no, OPEC delegates have said.

Now, some Emirati officials say, the U.A.E. is having an internal debate about leaving OPEC, a decision that would shake the cartel and undermine its power in global oil markets.

And most recently, the Emiratis clashed with the Saudis last October when OPEC+ decided to dramatically reduce oil production to prop up crude prices.

“Up until a few years ago, this sort of division and openly pursuing objectives that are counter to what their brothers are pursuing was unheard of,” said Dina Esfandiary, senior adviser for the Middle East and North Africa at the International Crisis Group.

“Now it’s becoming increasingly normal.”

The Emiratis are “worried about a Saudi that works against their interests,” said Ms. Esfandiary. She said the Saudis are concerned the U.A.E. poses a threat to Saudi dominance in the Gulf.

As a reminder, this is not all that unusual, as UAE seems to want to rattle their oil sabre every few years…

O/U on the UAE denial is 90/120 mins.

Consumers face increasing financial difficulties due to high inflation, rising interest rates, maxed-out credit cards, lack of personal savings, and nearly two years of negative real wage growth, resulting in an emerging distress cycle for subprime auto loans.

According to S&P Global, more than 6% of subprime auto loans were at least 60 days overdue in December, a more significant percentage than during the 2008-09 GFC. 

Bloomberg reported that auto dealers had noticed an alarming rise in customers who trade in their vehicles with negative equity of $10,000. 

“As trade-in values begin to cool, each month more and more consumers will find themselves falling from positive to negative equity.

“Unless American car shoppers break their habit of buying again too soon, we’ll see the negative equity tide continue to rise,” Ivan Drury, director of insights at auto-market researcher Edmunds, said. 

About one month ago, when discussing the “perfect storm” hitting the US auto market, we showed that according to Fitch, “More Americans Can’t Afford Their Car Payments Than During The Peak Of Financial Crisis“…

… which was to be expected: after all, the latest consumer credit report from the Fed revealed an exponential spike in the number of new car loans, which increased by more than $2,000 in one quarter, from just over $38,000 (a record) to $40,155 (a new record).

And purchasing a new car has become less feasible for the average person. Approximately two out of every 13 individuals are making monthly car payments of $1,000 or more. The average loan rate for new car loans just hit a 13-year high and will soon rise even higher. 

Yet a giant wave of auto loan defaults among subprime Americans has yet to hit. Perhaps the negative-equity surge is the tipping point. Edmunds data shows average negative equity on trade-ins is approaching pandemic highs of $5,500. 

“Because these car loans are generally unaffordable at the outset, that means that every month, borrowers are getting closer to the financial edge,” said Kathleen Engel, a law professor at Suffolk University.

Pete Kesterson, the general manager of a car dealership in Falls Church, Virginia, warned:

“It’s going to come, and it’s going to bite us,” referring to negative equity, which he believes will worsen.

“Now, we’re selling the cars for so much more, and financing for longer, at a much higher interest rate. There are some challenges coming down the pike.”

The rising delinquency rates for subprime auto loans are unexpectedly happening at the current record-low unemployment rates. Too many borrowers with low credit scores took on too much auto debt during Covid. Now the payback period has arrived. 

Authored by Simon White, Bloomberg macro strategist,

At least one key segment of the Treasuries yield curve suggests the US economy will enter a recession as early as June.

The spread between 3-month and 30-year yields — typically the first part of the curve to steepen before a recession — continues to widen.

This is a warning sign because inverted yield curves precede recessions, but it’s the re-steepening that signals the downturn is going to hit sooner rather than later.

Historically it is the 3m30y yield curve that has started steepening first before a recession, beginning to rise about five months before its onset. It began in mid-January, which would put a downturn starting as early as June. The spread between 3-month and 30-year yields is about minus 84 basis points, versus the January low of minus 115 basis points.

This time around, the rise in long-term yields is particularly troublesome because it suggests the bond market is beginning to price in structurally high inflation.

The closely watched 2s10s curve is still inverting, recently hitting a new low. But as the chart shows, 2s10s along with most other yield-curve segments, only begin to steepen just before the recession begins.