Acting Comptroller of the Currency Michael Hsu appeared to want to make an early name for himself this afternoon as The Wall Street Journal reports the top federal banking regulator warned that big banks may need to be broken into smaller pieces if they become too big to manage and are unable to fix significant regulatory lapses.

Banks can become so big and complex “that control failures, risk management breakdowns, and negative surprises occur too frequently,” Mr. Hsu said, speaking at the Brookings Institution, a Washington think tank.

“Not because of weak management, but because of the sheer size and complexity of the organization.”

“In short, effective management is not infinitely scalable,” he said.

Tuesday’s remarks are consistent with those from others made by the Biden administration and its top regulators, who are seeking to address concerns that the steady growth of the nation’s largest banks has introduced new risks to the financial system.

On Tuesday, WSJ reports that Mr. Hsu said the most effective and efficient way to successfully fix issues at a bank deemed too big to manage is to simplify it by divesting businesses, curtailing operations, and reducing complexity.

Bank stocks were hit…

But the broad market took a spill on the headlines…

While rogue actors do exist, Hsu said significant problems are typically “multi-causal and reflect deeper, unseen weaknesses, which if unaddressed can manifest as further incidents in the future.”

A weekly round-up of geopolitical flashpoint and energy news we’re keeping our eyes on, and trends impacting global markets, which will later be accessible for Premium members and above…

Finally the Ukrainian and Russian governments agree on something… but it doesn’t bode well for the prospect of WWIII. Days ago Ukraine’s defense minister called his country a de facto NATO member in a television interview. Well over a week has passed since the interview was published and even offered in English translation (which was done by Russian state media). And yet scant attention was paid in Western media – at least not on the level the remarks deserved. Here’s what DM Oleksii Reznikov said…

“At the NATO Summit in Madrid [in June 2022]…it was clearly delineated that over the coming decade, the main threat to the alliance would be the Russian Federation. Today Ukraine is eliminating this threat. We are carrying out NATO’s mission today. They aren’t shedding their blood. We’re shedding ours. That’s why they’re required to supply us with weapons.”

In follow-up to the rare, ultra-blunt assessment from a top Kiev official, independent geopolitical analyst Aaron Mate teased out the implications, particularly at a moment both sides have committed to a fight to the finish over Bakhmut. Matte writes: 

Predictably, Ukrainian soldiers that “bear the consequences of war” are facing heavy losses. Speaking to Newsweek, retired U.S. Marine Corps Colonel Andrew Milburn, who has trained and led Ukrainian forces for the private mercenary firm Mozart Group, reports that in the battle for Bakhmut, Ukraine has been “taking extraordinarily high casualties. The numbers you are reading in the media about 70 percent and above casualties being routine are not exaggerated.”

Ukraine is now “taking high casualties on the Bakhmut-Soledar front, quickly depleting the strength of several brigades sent there as reinforcements in the past month,” the Wall Street Journal reports. “Western—and some Ukrainian—officials, soldiers and analysts increasingly worry that Kyiv has allowed itself to be sucked into the battle for Bakhmut on Russian terms, losing the forces it needs for a planned spring offensive as it stubbornly clings to a town of limited strategic relevance.” According to one battlefield Ukrainian commander, “the exchange rate of trading our lives for theirs favors the Russians. If this goes on like this, we could run out.”

Consider the above with another very stark assessment of where things are headed (or perhaps, something which is already fast unfolding before our eyes but which the world is slow to acknowledge): prominent French historian and anthropologist Emmanuel Todd told France’s popular daily Le Figaro that “The third world war has started.” Read more of his words in the following thread:

Emmanuel Todd, one of the greatest French intellectuals today, claims that the “Third World War has started.”

Small 🧵 translating the most important points in this fascinating interview.https://t.co/eYdKoBJx7B

— Arnaud Bertrand (@RnaudBertrand) January 13, 2023

Emmanuel Todd argues that “it’s obvious that the conflict, which started as a limited territorial war and is escalating to a global economic confrontation between the whole of the West on the one hand and Russia and China on the other hand, has become a world war.”

* * *

Below are global developments we are closely following this week…

Russia-Ukraine

• French historian and anthropologist Emmanuel Todd: “The third world war has began”: UnHerd

• Zelensky adviser resigns after blaming Ukraine for Dnipro apartment bombing: The Hill

• Dnipro death toll rising as Kremlin rejects charges that it’s forces are responsible: AP

• Bloody Bakhmut siege poses risks for Ukraine: WaPo

• EU calls grow for special tribunal for Russia’s ‘war crimes’ in Ukraine: Foreign Affairs

• Ukraine and Russia agree… Russia is fighting NATO: MoA

• CNN admits Ukraine has become a ‘Weapons Lab’ for Western arms: AW

• MSM Admits Russiagate Farce… years late: CN

• Walking Back the Russian Troll Scare: CN

• US begins expanded training of Ukrainian forces in Germany: AW

• Joint chiefs’ Gen. Milley visits to inspect troops: Stripes

• Russia confirms it will expand Army to 1.5 Million: BBG

• Kiev still warning that large-scale new offensive imminent: WSJ

• Russia posts record current account surplus of $227 billion in 2022: RTRS

• Russian, Chinese businessmen to skip 2023 World Economic Forum in Davos: TASS

• Worries in Davos that globalization is under siege: WaPo

• Ukraine tells WEF over 9,000 civilians killed: AJ

• Polish PM Decries WWIII, Says More Arms to Ukraine Will Prevent It: Ron Paul Inst.

• Britain Urges Germany to Permit Supply of Tanks to Ukraine: RTRS

China-Asia

• US, Taiwan talks raise hopes for free-trade pact: SCMP

• China’s Vice Premier at Davos: life has returned to normal, growth will return… open for investors: OP

• Yellen to meet Chinese official in bid to ease tensions: AFP

• China holds live-fire drills in South China Sea in wake of US warship entering: AW

• Pakistan PM seeks India talks on ‘burning issues such as Kashmir’: AJ

• Daughter of Thailand’s Exiled Former PM Thaksin to Seek Premiership: RTRS

• Firms in Europe, US helping Myanmar manufacture arms, report says: AJ

• China’s population falls for first time since 1961: BBC

• China reports 3% GDP growth for 2022: CNBC

Middle East/World

• Saudi Arabia Says Open to Settling Trade in Other Currencies: BBG

• Mexico seeks to tame tortilla prices by putting 50% tariff on white corn exports: BBG

• Here are the fastest growing weapons manufacturers in the world: 247 WallSt

• Chinese Foreign Minister calls on Israel to stop worsening Palestine issue with provocation: SCMP

• Hamas publishes unverified video of Israeli citizen held captive in Gaza: MEE

• Movement by Turkish far right to deport Syrian refugees: MEE

• Over 90 countries at UN slam Israel’s increasing crackdown on Palestinians: MEE

• Jailed Iranian-American starts hunger strike, appeals to Biden: AJ

Energy

• Europe’s gas emergency: A continent hostage to seller prices: The Cradle

• Poland, Lithuania want lower Russian oil cap, nuclear curbs in new EU sanctions: RTRS

• New York may be the first state to ban gas stoves: Ron Paul Inst.

• UK and others: hottest year on record as Putin tried to squeeze Europe: EN

• Oil Rises As OPEC Sees Chinese Demand Rebounding: OP

• India’s oil imports From Russia jump 33 times to record high: OP

• Germany will need to hold onto coal power for longer than planned: OP

Update (1430ET):

Here’s what people are saying about potential layoffs on an anonymous community app for the workplace called Blind:

“Microsoft does it in smaller phases and doesn’t cause a ripple in the news cycle,” someone said. 

Remember, Microsoft offered US employees unlimited time off last week. Here’s what another person on Blind said:

“Switching to unlimited PTO is not a good sign though, because MSFT won’t have to pay out any Unused PTO when they do layoffs.”

Someone else said:

“A massive number of managers in Bing got a critical confidential meeting scheduled for Tuesday morning. Other than that, everything else I know about the layoff came from unconfirmed sources on Blind. But the time of this mass meeting lines up with the speculated Jan 17 – 18 layoff date.” 

*  *  * 

Update (1404ET):

Bloomberg now reports Microsoft plans to reduce jobs in engineering divisions on Wednesday. 

The magnitude of the cuts couldn’t be learned, but the person, who asked not to be identified discussing confidential matters, said the reduction will be significantly larger than other rounds in the past year. Those cuts impacted less than 1% of the software giant’s workforce of more than 200,000.

*  *  * 

The US tech sector layoffs continue with news that Microsoft could reduce its headcount by thousands of jobs. 

Sky News learned that the US tech giant is “finalizing plans” to reduce its workforce amid mounting macroeconomic headwinds. The announcement could come in the next few days. There was no mention of which jobs were at risk. 

The latest filings show Microsoft’s total workforce is around 220,000 people. Sky News said the company is mulling over a reduction of 5% of its workforce, or about 11,000 jobs. 

“That figure could not be verified on Tuesday evening, and one analyst suggested that Wall Street would be surprised if the figure was not higher than that,” noted the British paper. 

Microsoft has gone on a hiring spree in the last several years. 

Shares of Microsoft were widely unchanged as the news hit just a little bit ago.  

According to Layoffs.fyi, more than 154,000 workers in US-based tech companies were laid off last year. So far, in 2023, 25,500 tech workers have been fired. 

And it was only last week when Microsoft gave its US employees unlimited time off. 

Authored by Daniel Teng via The Epoch Times,

Organisers of the Australian Tennis Open have banned the display of Russian and Belarusian flags at the Australian Open Grand Slam following a courtside incident on Jan. 16.

Attendees could be seen displaying a Russian flag during a match between Ukraine’s Kateryna Baindl and Russia’s Kamilla Rakhimova in the first round on Court 14 prompting a response from Ukraine’s Ambassador to Australia Vasyl Myroshnychenko.

“I strongly condemn the public display of the Russian flag during the game of the Ukrainian tennis player Kateryna Baindl at the Australian Open today.

“I call on Tennis Australia to immediately enforce its ‘neutral flag’ policy,” the ambassador wrote on Twitter.

I strongly condemn the public display of the Russian flag during the game of the Ukrainian tennis player Kateryna Baindl at the Australian Open today. I call on Tennis Australia to immediately enforce its “neutral flag” policy. @TennisAustralia @AustralianOpen pic.twitter.com/zw8pLN4FIF

— Vasyl Myroshnychenko (@AmbVasyl) January 16, 2023

Ukraine’s Baindl went on to defeat Russia’s Rakhimova 7-5, 6-7 (8), 6-1.

Ban ‘Effective Immediately’

Tennis Australia responded a day after immediately banning the flag.

“Flags from Russia and Belarus are banned onsite at the Australian Open,” the Australian Open organiser said in a statement obtained by AAP.

“Our initial policy was that fans could bring them in but could not use them to cause disruption. Yesterday we had an incident where a flag was placed courtside.

“The ban is effective immediately. We will continue to work with the players and our fans to ensure the best possible environment to enjoy the tennis.”

The Australian Federation of Ukrainian Organisations said it would be writing to Tennis Australia about the incident.

“Around the world, international sporting events such as Formula One, FIFA, the Olympics and Wimbledon have condemned Russia’s brutal invasion of Ukraine, by introducing sanctions against athletes,” said Stefan Romaniw, co-chair of the organisation, in a statement.

“We were extremely disappointed that [Tennis Australia] chose to ignore these principled actions by sporting bodies. Besides sending a strong signal to Putin that his war is condemned, these types of sanctions prevent Russia from trying to use athletes to project Russian power and prestige.”

Russian and Belarusian players were banned from the Wimbledon tennis tournament last year, as well as the Billie Jean King Cup and Davis Cup competitions.

The country of Belarus is being used as a staging ground for Russian forces to invade Ukraine.

Until yesterday, Ryan Cohen was best known as the vice-chairman of meme stonk meltups and short squeeze, famous for generating eye-popping returns from investments in just a few months, including fueling repeat short squeeze in doomed stocks like GameStop (many of these staggering gains evaporated just as fast after Cohen pulled the rug on his followers and high tailed it out of GameStop and Bed Bath), and also for building Chewy.com into a $3 billion pet supply firm, a feat which to some has cemented his reputation as a lite version of Elon Musk.

So Monday’s news that Ryan Cohen has decided to invest “several hundred million” in China’s marquee stock, Alibaba (and according to some, megafraud), will be a key test for the meme-stock icon in a country where individual attempts to drive change at companies and generate stock returns remain a novelty.

As the WSJ reported, Cohen has taken a stake in Alibaba and is pushing the e-commerce leader to buy back more of its shares, in a rare case of activism targeting a prominent Chinese firm. While the stake is tiny in comparison to Alibaba’s market capitalization of nearly $300 billion, Cohen has a wide following among individual investors who often follow his lead.

Cohen, whose net worth is over $2.5 billion and whose stocks portfolio including Apple as well as Wells Fargo and Citigroup, first contacted Alibaba’s board in August to express his view that the company’s shares are deeply undervalued based on his belief that it can achieve double-digit sales and nearly 20% free-cash-flow growth over the next five years.

It’s unclear if Alibaba will bother responding, especially now that China’s government bought a “golden share” in tech giants Alibaba and Tencent to ensure influence over tech giants, and not to replace one pesky billionaire – Jack Ma – with another. We do know that subsequent to Cohen’s initial communication, Alibaba in November announced its board approved expanding the company’s share-repurchase program by $15 billion, to $40 billion, while also extending it through March of 2025. Alibaba said it had repurchased roughly $18 billion of its shares under its existing buyback plan, as of Nov. 16. Cohen has communicated to Alibaba’s board that the share-repurchase plan could be boosted by another $20 billion, to roughly $60 billion, the people said.

The good news for Cohen is that Alibaba’s shares have already climbed about 85% from a multiyear low in October, with its ADRs closing at $117.01 on Friday, but are still down from a high of over $300 reached in late 2020 as technology and other shares rallied in the early days of the pandemic.  Still, assuming that Cohen bought BABA shares in recent months, he is likely already sitting on a generous profit.

So will this particular activist campaign be successful or will the attempt to change policy in a systematically important Chinese company crash and burn? Before we address this, here is a snapshot of what Cohen has achieved in the stock market since 2020 courtesy of Bloomberg.

Meme-Stock Idol

GameStop soared 6,347% between August 2020 and its peak in January 2021, after an investment firm managed by the co-founder of Chewy disclosed that it had acquired a stake in the troubled video-game retailer. The stock has been trending lower since that astonishing rally.

Bankruptcy

Bed Bath & Beyond jumped 68% in a matter of about three weeks after Cohen’s investment firm RC Ventures disclosed last March a large stake in the retailer and asked that it consider a sale of the whole company. It has since dropped 87% from that peak, exacerbated by fears of an impending bankruptcy.

Pre-Meme Stock Days

Cohen plowed virtually all of his proceeds from the 2017 sale of the pet retailer Chewy into just two stocks: Apple and Wells Fargo. Cohen said at that time that his portfolio, when including dividends and a few other stock holdings, has returned more than 40% over the previous three years, beating the market.

* * *

With that in mind what does Wall Street think? According to several analysts, Ryan Cohen buying into Alibaba is another reason for optimism over China’s tech stocks, which have been getting a boost recently from signs that regulators are ending a years-long crackdown on the sector. Alibaba’s shares closed 1% higher in Hong Kong, paring an earlier advance of as much as 3%, after people familiar with the matter said Cohen has taken a stake in the e-commerce leader and is pushing the firm to buy back more of its shares.

The Cohen news follows a string of positive developments for the sector, the most notable of which was the approval of $1.5 billion in funding for billionaire Jack Ma’s Ant Group. Cohen’s move is in line with a recent wave of foreign investors, who were previously underweight on Chinese stocks, returning to the asset class amid growing optimism over the country’s reopening and pro-growth measures.

Here’s what market participants are saying: 

Union Bancaire Privee (Vey-Sern Ling)

• “It’s positive for the stock because it helps to raise confidence, especially among Western investors who have been skeptical of China”
• It also highlights “how undervalued the shares are, and if he encourages more buybacks then that helps shareholder returns too”
• Cohen’s forecasts are not very different from consensus so they’re not unrealistic

Saxo Capital (Redmond Wong)

• Cohen’s entry should work as an additional positive to get more overseas investors interested in Alibaba again
• “Buying from high- profile investors like Cohen will add to the positive sentiment toward A-shares among overseas investors”

Grow Investment (Hao Hong)

• Cohen is right in seeing value in Alibaba as the company is a “cash-flow machine”
• “While Ryan is influential and the news is positive for BABA, he’s unlikely to have much sway with the board, in which the Chinese authority has golden share”
• Allibaba’s momentum remains positive but the share price has not been going up because of Cohen

Mariana UFP (Jin Rui Oh)

• “Cohen’s entry can be broadly positive for Alibaba’s stock, and given his wide following it should lift sentiment for Chinese tech generally”

Bloomberg Intelligence (Catherine Lim)

• Cohen’s presence on Alibaba’s board might help raise public shareholders’ governance over strategic decisions at the company, particularly as Beijing takes a stake in the internet giant

Authored by Tsvetana Paraskova via OilPrice.com,

• OPEC Secretary General Haitham Al-Ghais has said that the group is cautiously optimistic about oil demand as China opens up again.

• The group believes that a stronger demand outlook for China could offset continued concerns about a global economic slowdown.

• OPEC has reiterated its willingness to do “whatever it takes” to keep the oil market balanced in 2023.

Signs of cautious optimism about a recovery in economies and oil demand have emerged, OPEC Secretary General Haitham Al-Ghais told Bloomberg Television in an interview on Tuesday.  

The cautious optimism stems from the easing of the Covid curbs in China and the reopening of the Chinese borders earlier this month, according to OPEC’s secretary general.

“We’re seeing signs of green,” Al-Ghais told Bloomberg.

“We are optimistic, but we are cautiously optimistic.”

The Chinese reopening has created some tailwinds for oil prices in recent weeks, although the impact of the easing of the curbs may not be felt immediately in rising oil demand due to the surge in the number of Covid cases after China abandoned its ‘zero Covid’ policy.

China’s oil consumption is expected to jump by 800,000 barrels per day (bpd) this year to a record 16 million bpd, a median estimate of 11 China-focused consultants polled by Bloomberg News showed last week.

Following the initial exit Covid wave after the strictest curbs were lifted, Chinese oil demand is set to rebound from the second quarter onwards, also raising global oil demand for this year, many analysts say.

The more optimistic demand outlook for China offsets to an extent continued concerns about developed economies, where rising interest rates could result in a significant slowdown and even recessions, according to OPEC’s Al-Ghais.

Still, the cartel is determined to do “whatever it takes” to keep the oil market balanced in 2023, OPEC’s secretary general told Bloomberg.

Analysts expect OPEC and the wider OPEC+ group to step up and defend an $80 per barrel floor under oil prices should recessions drag oil further down.

The first OPEC+ meeting for this year is in early February, but some analysts expect that the group will wait to see how much the EU embargo on imports of Russian oil products – effective February 5 – would disrupt the markets before taking any decision on changing the collective oil production targets.  

In a spectacular display of what happens when woke politics intersects utter financial illiteracy, a San Francisco government advisory committee on reparations has recommended the city pay eligible black residents age 18 years and older $5 million apiece. 

That’s just the headline recommendation of the San Francisco African American Reparations Advisory Committee (AARAC), which was created by the city’s board of supervisors amid 2020’s nationwide racial tumult. 

Next on the wish list: “a comprehensive debt forgiveness program that clears all educational, personal, credit card, payday loans, etc.” The group said this measure will get blacks out of “an inescapable cycle of debt” so they can “build wealth.” 

Rivaling the $5 million payment as an eyebrow-raiser, the committee also wants a welfare program that targets a $97,000 annual income for low-income blacks for the next 250 years. 

That’s right: a quarter-millennium of near-six-figure per capita handouts. “Centuries of harm and destruction of black lives, black bodies and black communities should be met with centuries of repair,” AARAC chair Eric McDonnell told the San Francisco Chronicle. 

As with every leftist agenda item, this one demonstrates a profound obliviousness to the influence of incentives on individual human action: There’s no surer way of guaranteeing an individual will stay “low-income” than promising to round them up to $97,000. 

But wait — there’s more: Those who qualify for reparations should also receive payroll tax, business tax and property tax credits, the panel says. 

The city should also “create structures and pathways to mitigate tax consequences for recipients of reparations funds.” Sounds like the board of supervisors will get to take a fact-finding trip to the Cayman Islands.  

Never mind that California wasn’t a slave state, says the committee: 

“While neither San Francisco, nor California, formally adopted the institution of chattel slavery, the values of segregation, white supremacy and systematic repression and exclusion of Black people were legally codified and enforced.”

The Chronicle approvingly called it a “bold” plan, and said “what happens next will show whether San Francisco politicians are serious about confronting the city’s checkered past.” 

To its credit, the committee seems wary of a new California gold rush comprised of opportunistic reparations prospectors. To guard against a wave of black migrants cashing in, AARAC took a stab at incorporating time-in-residency prerequisites.

Their fiscal border wall, however, has big gaps. Their list of criteria applies a “must meet at least two” approach, making it easier for new San Franciscans to sidestep the length-of-residency rules. For example, if you’re a descendant of a slave, and you were personally or a direct descendant of someone incarcerated for breaking drug laws, you’re in. 

In a blow to the woke pillar of creative and flexible identity, AARAC shamefully stipulates that all applicants should have “identified” as “black/African American” for at least 10 years. Let’s just hope there’s no need for photo ID. 

Financial acumen appears to be in short supply among the AARAC members. San Francisco’s budget is around $14 billion and there were about 47,000 African Americans in the 2020 census. If just 10,000 residents qualify, the $5 million payment alone would cost $50 billion. 

Diversity isn’t a strength of the reparations committee either: All 14 members are black. However, there’s a vacant seat right now — available only to “an individual who has lived or is currently living in public housing.”

US stocks spiked, with spoos rising above both the closely watched 200DMA and the descending channel resistance level, after Bloomberg reported that echoing the Fed, the ECB is also “starting to consider a slower pace of interest-rate hikes than President Christine Lagarde indicated in December” citing officials with knowledge of their discussions. As the report notes,

While the report notes that the 50 bps hike in February remains likely, “the prospect of a smaller 25-point increase at the following meeting in March is gaining support, the officials said.”

And although the sources were quick to add that “any slowdown in monetary tightening shouldn’t be viewed as the ECB going soft on its mandate” and that “no decisions have been taken, and that policymakers may still deliver the half-point move for the March meeting that Lagarde penciled in on Dec. 15”, the market immediately read between the lines and – realizing that the global tightening wave is almost over – immediately sent expectations for an ECB March rate hike tumbling…

… and sent futures to session highs…

… pushing spoos above both the 200DMA and the descending channel resistance level which had proven insurmountable for the S&P since last April.

Naturally, yields promptly tumbled.

Weaker-than-expected inflation in the euro area, a drop in natural gas prices and the prospect of gentler tightening by the US Federal Reserve have brought some comfort to policymakers as they ponder how to continue the most aggressive rate hikes in ECB history.

While officials opted to slow the pace of increases in December with a 50-basis-point move, they coupled that decision with a sense of heightened vigilance on price stability. Lagarde said then that available data “predicate” a 50-basis-point hike at the Feb. 2 meeting “and possibly at the one after that” — cautioning that decisions will continue to be data-dependent.

As Bloomberg notes, economists currently anticipate moves of that magnitude at the next two meetings, with money markets betting on a half-point hike next month and placing more than 80% odds on a similar increase in March, with the deposit rate expected to peak below 3.5% by July.

Whether and how inflation prospects have shifted will only become apparent with the new forecasts in March, which might help justify a less aggressive pace. That may be one reason for policymakers to be cautious about departing from their outlined hike in February.

Authored by Alex Kimani via OilPrice.com,

• British buyers are indirectly buying Russian crude refined by Indian refineries.

• High diesel prices in Europe and cheap Russian crude offer a window of opportunity for Indian refiners.

• Kpler: the Jamnagar refinery on India’s west coast imported 215 shipments of crude oil and fuel oil from Russia in 2022.

Russia’s 2022 invasion of Ukraine has forced a dramatic restructuring of energy markets in the west, with many European nations vowing to wean themselves off Russian energy products. The UK has been one of the more successful countries in achieving this target after committing to end imports of oil and coal from Russia by the end of 2022 and even recently legislated for a ban on Russian gas. By October, UK imports of Russian energy were down to a trickle, with the country buying just £2 million of oil, but zero coal or gas from Russia. But reports have now emerged that India has been offering a back-door for imports of Russian oil into Britain, blunting the country’s efforts to restrict funding for the Kremlin. Some British buyers have effectively replaced imports directly from Russia with imports from Russian-fed refineries, thereby indirectly supporting the Russian oil industry. 

Although such a supply chain is actually legal under UK rules, still it cannot be overlooked because this is another covert way to fund Putin’s war. Before the war began nearly a year ago, it was pretty rare for Indian refiners to process Russian crude. The refiners have always exported to Europe, but they are now exporting even more because it’s more attractive as Europe’s diesel prices are higher and also buying more Russian crude because Russia is offering heavy discounts.

Indeed, Oleg Ustenko, adviser to Ukraine’s president Volodymyr Zelensky, says these companies are “exploiting weaknesses in the sanctions regime”.

“The UK must close the loopholes that undermine support for Ukraine by allowing bloody fossil fuels to continue flowing across our borders. About one in five barrels of the crude oil that they process is Russian. A big chunk of that diesel they produce now will be based on Russian crude oil,’’ he has said.

Kpler data has revealed that the Jamnagar refinery on India’s west coast imported 215 shipments of crude oil and fuel oil from Russia in 2022, 4 times as much as it bought in the previous year. Meanwhile, the UK has imported a total of 10m barrels of diesel and other refined products from Jamnagar since the war began, 2.5 times what it bought during 2021 with Trafigura, Shell Plc , BP Plc , PetroChina Co. and Indian multinational conglomerate Essar Group the key buyers.

According to Bloomberg’s oil strategist Julian Lee, Russia’s flagship Urals have been trading at a massive discount of as much as 40% to the international Brent crude oil. In contrast, in 2021, Urals traded at a much smaller discount of $2.85 to Brent. Urals is the main blend exported by Russia. Indeed, Moscow could be losing ~$4 billion a month in energy revenues as per Bloomberg’s calculations.

Europe Importing Russian LNG

But the UK is hardly the only culprit in Europe as far as helping fund Putin’s war machine goes. Whereas supplies of Russian pipeline gas–the bulk of Europe’s gas imports before the Ukraine war–are down to a trickle, reports have emerged that Europe has been hungrily scooping up Russian LNG.

Europe has been working hard to wean itself off Russian energy commodities ever since the latter invaded Ukraine. The European Union has banned Russian coal and plans to block most Russian oil imports by the end of 2022 in a bid to deprive Moscow of an important source of revenue to wage its war in Ukraine.

But ditching Russian gas is proving to be more onerous than Europe would have hoped for, with the Wall Street Journal estimating that the bloc’s imports of Russian liquefied natural gas jumped by 41% Y/Y in the year through August.

“Russian LNG has been the dark horse of the sanctions regime,” Maria Shagina, research fellow at the London-based International Institute for Strategic Studies, has told WSJ. Importers of Russian LNG to Europe have argued that the shipments are not covered by current EU sanctions and that buying LNG from Russia and other suppliers has helped keep European energy prices in check. 

Although Russian LNG has accounted for just 8% of the European Union and UK’s gas imports since the start of March, the trade runs counter to the EU’s efforts to deprive Russia of fossil-fuel revenue.

Authored by Lance Roberts via RealInvestmentAdvice.com,

The “pain trade” is likely higher over the next few weeks. I touched on this topic in this past weekend’s “Bull Bear Report:” Not surprisingly, the “bullish” short-term outlook garnered a substantial amount of pushback. However, there is more to this outlook than just “rosie optimism.”

Let’s review what I wrote, and then we will expand on why we believe the “pain trade” is higher over the next few weeks.

“From the bullish side of the ledger, the outlook for 2023 has statistical support for a positive outcome. After having a negative year in 2022, the markets were visited by “Santa Claus,” although very late, and the first 5-days of January turned out to be a positive return. As the table below shows, there are only a few periods in history where this has occurred, and each yielded positive returns in the following year.”

Critically, just because something has always occurred in the past does not mean it MUST happen this time. However, as investors, we must focus on statistical tendencies and invest according to the probabilities rather than the possibilities. At the moment, there are many “possibilities” bullish investors are betting on in the short-term, which have a larger potential “probability” of being wrong.

• The Fed will pivot and start cutting rates and reversing QT.

• The economy will avoid a recession.

• The yield curve inversions (shown below) are wrong this time.

• The housing market will remain robust.

• Employment will continue to remain strong.

• Households will continue to spend despite inflationary pressures.

• Most importantly, corporate earnings and profits will NOT mean revert.

Notably, 90% of the 10-most economically significant yield curves are inverted. Such has never previously occurred without a recession occurring. Of course, in a recession, economic demand slows as the consumer contracts leading to a contraction in earnings. Such is problematic for the bullish view.

Yes, it is entirely possible this time could be different. However, the probabilities are it likely won’t be. Notably, with valuations still elevated from a historical perspective, prices still need to correct to accommodate higher rates.

However, in the short term (over the next 1-3 months), the technicals are becoming more bullish, suggesting the “pain trade” remains higher.

Bullish Technicals

It is called the “pain trade” because it is the opposite of how investors are currently positioned. Investor sentiment, as shown in the chart of net bullish sentiment (an index of both professional and retail investors), remains historically bearish despite improvement since the October lows.

With investors bearishly positioned, including a large amount of short positioning in the market, it becomes increasingly painful to fight the tape as the market rises. As the market continues to improve, the “pain trade” forces a reversal of positioning, pushing prices higher. As prices increase, the pain rises, causing additional positioning reversals and further increasing prices. The cycle repeats until it is exhausted.

The “pain trade” is usually swift and occurs over one to three months. Once that cycle is complete, the underlying fundamental and economic trends will retake control of the markets.

Such is where we are currently.

From a purely technical perspective, a bullish pattern is developing in the S&P 500. The market has recently established a higher low and potentially formed a “right shoulder” of an “inverse head-and-shoulders” technical pattern.

With the market approaching the downtrend line from last year’s peak, and as shown below, a higher low and tightening consolidation suggests a higher move is possible. While the market is short-term overbought, the MACD buy signal continues to suggest the “pain trade” is higher for now.

Importantly, this is just an improving technical picture for the market short-term.

The breakouts have not happened yet, and may not.

However, given the technical improvement, a break above the downtrend and the 200-DMA will set targets between 4200 (50% retracement) and 4360 (61.8% retracement) of last year’s decline.

There are also improving internals that suggests the “pain trade” may continue for a bit longer.

Additional Support For A “Painful Trade” Higher

Another indicator that suggests a continued move higher is the number of stocks on “bullish” buy signals. As more stocks begin to participate in the move higher, such tends to feed upon itself. As shown, 63% of the stocks in the S&P 500 have registered bullish buy signals. This indicator has shown marked improvement since the lows of 2022.

Furthermore, earnings estimates have been cut sharply over the last couple of quarters, and S&P is now expecting a -6.4% decline in earnings from Q3. As shown, as investors begin to bet on a “soft landing” scenario for the economy, expectations are this quarter will be the worst part of the earnings reversion cycle. (Those expectations will likely prove wrong.)

We also discussed previously one of the essential supports of the financial markets: share buybacks.To wit:

“Since 2011, 40.5% of the markets advance is attributable to corporate share buybacks. In other words, in the absence of share repurchases, the stock market would not be pushing record highs of 4600 but instead levels closer to 2700.”

In a slow-growth economic environment, there is little incentive to increase capital expenditures, make risky acquisitions, or drastically increase wages and compensation. Therefore, share repurchase announcements, which benefit corporate insiders, have surged. Such translates into roughly $4.8 billion per day of repurchases in 2023. ($1.2 Trillion divided by 250 trading days)

Adding all these things together provides the support necessary for a “pain trade” higher.

The question is, what happens next?

The Contrarian Trade

We have said before that one of our biggest concerns going into the end of 2022 was that EVERYONE was extraordinarily bearish and confident of a recession. As Bob Farrell once quipped:

“When all experts agree, something else tends to happen.”

With everyone extremely bearish and confident of a recession, such puts the markets into a position where there are few buyers and an overwhelming number of sellers. From a contrarian investment view, that is an ideal setup for a “pain trade” higher, which we have discussed as a rising possibility.

Fortunately, we are now seeing a reversal of that extremely bearish view and, as recently noted by Zerohedge:

“Everyone and their pet rabbit was waiting for a ‘dip’ to buy but there was no ‘dip’ and so everyone is now under-exposed to a FOMO-led rally as talk of a ‘soft landing’ becomes the new narrative.”

Such is precisely the point we discussed previously:

“Interestingly, seemingly terrified investors are still unwilling to sell for the ‘fear of missing out.’ It is worth noting that during previous bear markets, equity allocations fell as investors fled to cash. Such has not been the case in 2022.

Investors seem more afraid of missing the bottom should the Federal Reserve suddenly reverse course on monetary policy. Much like Pavlov’s dogs, after years of being trained to ‘buy the dip,’ investors are awaiting the Fed to ‘ring the bell.’“

While there is support for the current “pain trade,” the rally still has many risks.

• The Fed is still tightening its policy and reducing its balance sheet.

• The rate hikes of last year have yet to impact the economy fully.

• Economic growth is slowing.

• Earnings and profit margins are still historically deviated from long-term growth trends.

• The massive supports of fiscal stimulus are no longer available.

Such is especially the case as we head into earnings season and the next Fed meeting. Therefore, it is important to remain cautious until the markets declare themselves.

We remain overweight in cash, and our bond duration remains short of our benchmark index. However, we will adjust our holdings accordingly if these technical patterns mature.

While the “pain trade” is higher for now, the challenge we have with the market “Fighting the Fed” is that historically such has not worked out well.