Authored by Michael Lebowitz via RealInvestmentAdvice.com,

With Silicon Valley Bank and Credit Suisse defunct, the Fed must restore confidence in the financial sector. The historical treatment for financial instability has been lower interest rates and more liquidity. The problem, however, is that the Fed is simultaneously trying to reduce inflation. The Fed must preside over higher interest rates and less liquidity to tame inflation. Welcome to the paradox facing the Fed in phase two of the Fed follies.

During phase one of the Fed’s tightening campaign, it raised the Fed Funds rate at almost double any pace in the previous 40 years. Furthermore, they are reducing their balance sheet by nearly $100 billion a month via QT. To the Fed’s chagrin, high inflation is proving hard to conquer because economic activity remains brisk, and unemployment sits near 50-year lows. Fighting inflation requires tight monetary policy to weaken economic demand.

Phase two, unlike phase one, introduces financial instability. This inconvenient crisis drags the Fed in opposing directions. Lower interest rates and more liquidity are the keys to boosting confidence in the financial sector, but it impedes the Fed’s ability to fight inflation.

Fed Mandates

Per the San Francisco Fed:

“Congress has given the Fed two coequal goals for monetary policy: first, maximum employment; and, second, stable prices, meaning low, stable inflation.“

The Fed’s Congressional mandates argue the Fed should continue to focus on inflation as the unemployment rate is at historic lows and prices are far from low and stable. Economic activity, which significantly affects employment and prices, is robust.

If the Fed were to follow its mandates strictly, there would be no phase two of the Fed monetary policy. Fed Funds would remain “higher for longer” until inflation moderates.

Decades ago, the Fed expanded its boundaries by prescribing a third mandate. The Fed believes they must also maintain a stable financial system to keep the economy’s engine, banking, on sound footing.

Phase Zero Follies

Before phases one and two, there was phase zero. Phase zero, occurring in 2021 and the first quarter of 2022, laid the foundation for today’s difficulties. During 2021 and the first quarter of 2022, the Fed kept interest rates at zero and bought over $1.7 trillion of Treasury and mortgage assets.

As shown below, the Fed added $1.7 trillion of assets between January 2021 and March 2022. Such a five-quarter increase was more than any other five-quarter period during the financial crisis in 2008/2009. Despite rapid economic growth and wild market speculation, the Fed was turbocharging the economic engines to a degree never seen before.

The Fed had its foot on the gas pedal despite inflation rising from 1.4% in January 2021 to 5.28% in just six months. Inflation was running at 8.5% before they decided to do something about it. Further, inflation expectations implied by markets and forecasted by the Cleveland Fed were increasing rapidly.

Had the Fed realized supply lines were crippled, and demand for goods and services was fueled by one of the most extraordinary doses of fiscal stimulus, they would have easily recognized inflation was a problem. They didn’t, and their folly results in sticky levels of high inflation today.

Furthermore, had they started raising rates and curtailed QE in early 2021, not only would the inflationary pressures lessened, but stock and crypto speculation would not have formed the bubbles they did. Lastly, pertinent to the banking crisis, a more restrictive policy would have kept interest rates lower as the confidence in the Fed’s ability to manage inflation would have been greater.

The banks were improperly hedging against loan losses and keeping deposit rates too low, but the Fed made their bed.

Phase One

A little more than a year ago, the Fed started raising rates. Nine months ago, they gradually began reducing their balance sheet. Unfortunately, both actions were about a year too late. As such, they had to be more aggressive than they would have been.

Over the last year, we warned that the Fed would raise rates until something breaks. As labeled below, soaring interest rates are breaking the banks. 

Transitioning Monetary Policy

In Speak Loudly Because You Carry a Small Stick we gave Jerome Powell our two cents on monetary policy. Speak more hawkish and put fear into the markets. Let the markets and banks tighten financial conditions and lending standards and therefore avoid raising rates too much.

Little did we know that hours after publishing our article, Silicon Valley Bank would fail and drag the global banking sector down. Jerome Powell’s stick is now much smaller as the odds of a financial crisis are considerable.

As we share below, the Fed Funds futures market sniffed out the Fed was up against a new opponent. On March 1, the market implied a 37% chance Fed Funds would end the year between 5.25-5.50%. Some traders bet Fed Funds could be 6% or more. Only twenty days later, the market thinks Fed Funds may end up below 4% by year-end.

Phase Two

Phase two is the delicate balance of inflation and financial stability. The Fed must maintain credibility that its determination to fight inflation is still strong. But also convince the market it will provide ample liquidity to restore confidence in the banking system.

We are concerned that maintaining a balance between such opposing objectives is fraught with risk.

If the Fed leans too much toward financial stability, the reignition of inflation fears may scare markets. In such a case, bond yields and commodity prices will rise and further inflame the banking crisis. It will also require the Fed to take more action to stamp out inflation.

Conversely, the banking crisis can quickly spread if the Fed does not provide enough liquidity because it worries too much about inflation.

Tightening Lending Standards = Recession

As if balancing two opposing forces weren’t complicated enough, it now appears that recent bank events significantly increase the odds of a recession. Following the events of the last week, banks have no choice but to bolster their balance sheets. Consequently, they will tighten loan standards, making borrowing harder and more expensive.

The first graph below shows the strong correlation between tightening standards and corporate high-yield bond spreads. High-yield bond spreads are a good proxy for bank loans. Based on the scatterplot, a 2.5% increase in corporate bond spreads is likely. Further, the estimate may be understated as lending standards have yet to reflect recent events. The following graph highlights the robust relationship between tighter lending standards and recessions. The third graph shows Leading Economic Indicators have declined for 11 straight months. 11 consecutive months of monthly declines in the indicator have never been seen without the economy being in or heading into a recession.

Summary

In the longer run, stocks are fraught with risk.

If the Fed provides liquidity and restores confidence in banking, inflation fears will resurrect the “higher for longer” policy. As we saw last year, such policy accompanied higher bond yields and lower stock prices.

If the Fed is not supportive enough of the banking sector with lower rates and liquidity, the banking crisis can quickly get out of hand. A waterfall in stock prices and much lower bond yields can quickly occur if they lose control of the crisis narrative.

Of course, there is a probability the Fed threads the needle and tackles inflation while avoiding deepening the banking crisis. Even in that preferred case, the economy must still grapple with tighter financial standards resulting from the banking crisis. A recession, lower corporate earnings, and weaker stock prices are likely in that situation. Bond yields will likely decline in an economic downturn as inflationary pressures lessen.

Stocks may rally in the coming weeks or months as it appears the banking crisis is over, and the Fed is set to pause and pivot. We offer caution; this may be the calm before the recession.

Following your trading rules will prove very important as the year progresses.

Currently, the market is ‘expecting’ a 25bps hike (80%-plus odds) and a dovish-leaning message of hope (for the financial system) from Powell (as the Fed Funds curve has shifted back in line with where it was at the last FOMC meeting)…

If Powell delivers (or over-delivers), Goldman Sachs trader Michael Nocerino says the question of who is the incremental buyer keeps coming up in conversations.

His answer is shocking.

While many still believe that CTAs are potential sellers, it turns out they’ve derisked massively already.

Nocerino gives a nod to a good flag from his colleaugue Lee Coppersmith:

Our CTA positioning metrics estimate positioning in SPX is at the LOWEST LEVEL OF ALL TIME (-$31bn)…

The asymmetry is massively skewed towards repurchases (up to $60bn to buy over a month vs. a worst-case scenario of negligible flow).

Our client conversations have leaned massively bearish as of late, but this is something to make sure folks are aware of.

With the S&P 500 trading right around the 50DMA, the technical breakout from this covering flow could be more impressive than many suspect.

SpotGamma suggests 4065 as an upside resistance/pin level base don options positioning with 4100 having persistently seen a big drop-off in call-demand (acting as resistance).

Authored by Robert Rapier via OilPrice.com,

• In reality, there’s not a lot a president can do to impact gasoline prices in the short term.

• A president’s popularity is strongly influenced by what’s happening with gasoline prices.

• The fracking boom, COVID-19 and oil price wars have had a great impact on gasoline prices during the last 4 U.S. Presidencies.

In June 2022, driven by a combination of the Russian invasion of Ukraine, an economic recovery from Covid-19, and arguably certain policies of the Biden Administration, the average weekly retail gasoline price hit an all-time high of $5.07 per gallon. (Source). Since then, gasoline prices have fallen substantially, and were most recently $3.51/gallon. But I thought it might be interesting to look at the average gasoline price under each president over the past 20 years or so. (Prior to that, gasoline prices were generally under $2.00 a gallon).

Presidents get a lot of credit and blame over rising and falling gasoline prices. In reality, there’s not a lot a president can do to impact gasoline prices in the short term. Longer term, a president can pass policies that impact supply and demand in such a way that they do impact gasoline prices. But in the short term, a president has relatively few handles for influencing gasoline prices.

Nevertheless, a president’s popularity is strongly influenced by what’s happening with gasoline prices. So, let’s take a look at the average gasoline price overseen by each of the past four presidents.

The following graphic shows the average annual gasoline price during each year of the last four presidential terms. Republican presidents are shown in red, Democrats in blue. The numbers come from the EIA, and they represent the average retail price of all grades of gasoline. You can see the raw data here.

Average Annual Gasoline Price 2001 to 2023. ROBERT RAPIER

This graphic shows the data, but it needs context. There are many stories that could be spun from a superficial reading of the data, but many of them would be wrong. For example, President Bush saw a huge rise in gasoline prices when he was in office. It would certainly be easy to cast blame on him for this, but President Bush was very pro-oil and gas development.

In fact, the technologies that led to the fracking boom largely developed under President Bush. But fracking didn’t begin to show huge benefits until President Obama’s term.

What happened under President Bush was that Chinese demand grew sharply, and Saudi Arabia was slow to increase production. This led to a widespread belief that global oil production had peaked, and that helped create a bubble in oil prices. That bubble finally burst in 2008 when a recession caused a drop in global oil demand.

Like Bush, Obama initially experienced rising gasoline prices. Those prices reached a peak at the highest annual average to date of any president, before falling back down to the lowest level since Bush’s first term. The reason for the crash in gasoline prices was that Saudi Arabia decided to engage in a price war with the U.S. to win back market share that had been lost to the U.S. shale oil boom.

Thus, most of the rise and fall under Bush and Obama didn’t really have a lot to do with their policies. One could argue that the pro-oil policies under Bush did usher in the eventual glut of oil that happened under Obama, but these are once again long-term policy effects.

Gasoline prices rose during each of President Trump’s first two years in office, reversing the two-year trend that ended Obama’s second term. By Trump’s third year in office, prices fell slightly, but then prices were down sharply in Trump’s fourth year as a result of the Covid-19 pandemic and its impact on oil prices. Gasoline prices in 2020 were at their 2nd lowest level since 2004.

When President Biden came into office, gasoline prices had been rising for several months as the world began to recover from Covid-19. But, demand outstripped supply, and oil prices continued to soar. Then, in early 2022 Russia invaded Ukraine, and that helped propel the average annual gasoline price that year to $4.06/gallon, the highest annual average on record.

Obviously 2023 is incomplete, but so far this year the average annual price of gasoline is $3.47/gallon. That marks a 14.5% decline from 2022, but there’s still a lot of year left.

To date, the average gasoline price during President Biden’s term – with nearly two years still to go – is $3.60/gallon. That is on a pace to be the highest average under any president. Here is how prices stack up per gallon, from lowest to highest average for their terms:

1. Joe Biden (partial term) — $3.60

2. Barack Obama first term — $3.12

3. Barack Obama second term — $2.95

4. George W. Bush second term — $2.77

5. Donald Trump — $2.57

6. George W. Bush first term — $1.59

So, you can see how someone could argue that Republicans are better for gasoline prices. Presidents Bush and Trump were the only presidents that oversaw average gasoline price below $3.00/gallon for four consecutive years of a term.

But the truth is more nuanced than that. The technologies that led to the fracking boom were developed under a Republican president. That, in turn, is responsible for much of the ups and downs in the price over the years. But, Saudi Arabia/OPEC and the Covid-19 pandemic and subsequent recovery also had a huge impact. These factors were largely outside of a president’s control.

In the next article, I will discuss the evolution of oil production during each president’s term. President Obama presided over the largest expansion of oil (and gas) production in U.S. history. But, as with gasoline prices, context is important.

While we previously shared a detailed FOMC preview, below we excerpt from the Fed preview by Bloomberg Markets Live reporter and strategist Ven Ram, who breaks down his analysis in three parts: i) what traders are watching from the Fed today, ii) what the FOMC statement may look like, and iii) the Fed’s dot plot options.

Starting at the top, here is…

What Traders Are Watching From The Fed Today

Treasury two-year yields have bobbed almost 150 basis points in their range since the Federal Reserve met last month, enough to give any roller-coaster ride a run for its money. They are still looking for a definitive direction, and today’s Fed decision holds the key.

Decision & dissent:

• As of the close on Tuesday, overnight indexed swaps were factoring in slightly more than a 80% chance of a 25-basis point increase. While the tail risk of the Fed standing pat isn’t insignificant for the first time in the current cycle, given that we haven’t had any media leaks yet from the Fed’s trusted sources to steer the markets away from pricing a hike, we should perhaps expect the central bank to follow through

• And like the European Central Bank, Chair Jerome Powell may be inclined to think there is no trade-off between financial and price stability
• The Fed entered its traditional quiet period just as the crisis at Silicon Valley Bank was boiling over, so we don’t quite know if all policymakers will be on the same page when it comes to Wednesday’s decision. Still, there are clues from the Fed’s December dot plot, which showed that two of 19 members had penciled in a top rate of 5%. The question then is what those two think in light of the crisis
• Should the Fed, however, hold, long-dated Treasuries will rally big

Dot plot:

• The FOMC will likely envision 50 more basis points of tightening over and above Wednesday’s move to primarily drive home two points: a) that the Fed believes that the financial landscape isn’t as broken as the markets reckon; and b) the Fed isn’t shifting its focus away from inflation

Summary of Economic Projections:

• Given the adverse impact of the tumult in the banking sector, it’s likely that the Fed will revise its growth forecast for this year lower, possibly by a notch to 0.4% from 0.5%, while leaving the estimate for the jobless rate at 4.6%
• Bloomberg Economics expects that core PCE inflation will be revised higher to 3.7% from 3.5% and to 2.7% for next year from 2.5% now

Powell’s Pyrotechnics:

• Should the Fed go through with the hike, Chair Jerome Powell will doubtless face a barrage of questions on whether:
  • The FOMC is hiking rates into a hard landing. His likely response: The Fed sees the economy losing momentum, but given the tightness of the labor market, the FOMC hopes any blip will be transitory
  • What he makes of the market pricing on rate cuts down the line. Powell may say that inflation remains the Fed’s central focus and he doesn’t expect the current tumult in the banking landscape to spill over into the wider economy in light of the backstop that has already been put in place and other measures taken to shore up confidence.

Here’s What the Fed Statement May Look

The Fed faces the unenviable prospect of having to craft a policy statement at a time when it is still coming to grips with a banking crisis and its fallout on the wider economy. In light of the recent market tumult, revisions to the statement will be the most extensive in a long while.

The top:

• There are two ways the Fed could go about changing its preamble. It may start off with its time-tested boilerplate on recent macroeconomic inputs — that is, spending, production and the jobs market — before moving on to acknowledge the recent stress in the banking sector.
• The second way would be to acknowledge the latter right off the bat, at the very top. This choice may suggest that the Fed is placing greater weight on financial stability and what that implies for the broader economy.

Rate increase:

• Though it’s a close call, the Fed may opt to raise rates by 25 basis points to signal that it is still intent on battling inflation and also that it views the recent market stress as temporary:
• As reminder, JPMorgan disagrees with Ram here and as we noted last night, the bank’s economist Michael Feroli expects the Fed’s forward guidance to drop the phrase “ongoing increases…will be appropriate” and substitute language which will indicate that the bias is toward further tightening

Dissent:

• It is possible that the Fed may acknowledge that there two-way risks in the economy. However, the markets may interpret such a clause to mean that the Fed is willing to cut rates, so the FOMC may open a Pandora’s box in doing so
• FOMC members Lisa Cook and Austan Goolsbee are dovish in their leanings, and either or both of them may vote in favor of a pause

What About The Dot Plot

The Fed’s dot plot could broadly go one of three ways today:  

Option I: Cop-out

• The Fed could simply not do a dot plot, a reprisal of what happened in March 2020. However, that would end up alarming the markets, and seems unlikely.

Option II: The Dovish Choice

• This is one where Fed policymakers stick to the same dot plot as the one they unveiled in December — that is, one that shows the Fed funds rate topping at 5.125%. That would mean one more 25- basis point increase assuming the Fed raises rates by a similar margin today
• In the light of recent inflation and jobs market data, that would be dovish — but one that acknowledges the recent tightening in financial conditions

Option III: Dovish & Hawkish Simultaneously

• In this scenario, the median of policymakers will pencil in a top rate of 5.375%. In effect they would reckon that the Fed has more work to do on inflation in light of recent macroeconomic data
• While it may look hawkish given the market jitters, there is perhaps little question that the dot plot would have been even more ambitious were it not for the tumult in the banking industry

Carvana, one of the high-flying stocks during the post-covid lockdowns which came crashing down to earth almost as fast at is soared, is surging this morning, rising as much as 30% after the FT first reported, and the company then confirmed, that it was offering to exchange billions of bond principal at below-par prices as the struggling online car seller works to restructure its debt load.

The company is offering to swap five series of bonds, including its 5.625% unsecured notes due 2025 and 10.25% unsecured notes due 2030 for new secured notes due 2028 that pay 9% in cash or 12% in-kind, according to a statement Wednesday. The company would swap the existing bonds maturing between 2025 and 2030 for between 61.25 cents on the dollar and 80.875 cents on the dollar, depending on when they submit the notes. The early deadline for the swap, which offers the best terms for investors, is 5 p.m. on April 4 in New York. The bondholders would have a second priority claim, behind lender Ally Financial, on vehicle inventory and intellectual property including Carvana’s brand.

If successful, the company will restructure a substantial portion of its $9BN debt load as it attempts to stay afloat at a time of declining vehicle sales. If the offering is fully subscribed, the exchange offer to existing creditors would reduce the face value of its outstanding $5.7bn of unsecured bond debt by $1.3bn and its annual cash interest bill by roughly $100 million.

The exchange comes as Carvana deals with deeply distressed debt and plunging shares. The company’s stock soared during the pandemic as a chip shortage sent used car prices soaring, but Carvana’s outlook has since crashed, losing over 94% of its value since peaking in August 2021. It also posted a bigger-than-expected loss in February following its lowest retail unit sales in two years.

Carvana’s 10.25% bond due 2030 last changed hands at 53 cents on the dollar, according to Trace.

The Financial Times has previously reported that at least six prominent credit investment firms have joined forces to negotiate with Carvana. According to a person familiar with the situation, there has not been much interaction between the company and its bondholders. One prominent member of the group, Apollo Global Management, which had bought $800mn in bonds issued by Carvana in 2022 at par, would take a significant loss should it decide to participate in the restructuring.

Participation is voluntary and Carvana says that for the deal to close, at least $500mn of new debt will have to be issued. The kind of restructuring the company is proposing can often serve as a prelude to the renegotiation terms or an entirely different agreement.

Carvana released preliminary first-quarter results alongside the terms of the exchange, which showed that a cost-cutting plan — including a reduction in headcount from 21,000 to 17,000 over the past year — is starting to bear fruit as the company’s massive cash burn is starting to shrink, with EBITDA expected to come between ($50MM) and ($100MM), an improvement to the ($348MM) EBITDA one year ago. Some more details:

• For the three months ending March 31, 2023, we expect retail units sold to be between 76,000 and 79,000 units, compared to 105,185 retail units sold for the three months ended March 31, 2022. This reduction in retail units sold is primarily driven by higher interest rates, lower inventory size, lower advertising expense, and our focus on profitability initiatives.
• For the three months ending March 31, 2023, we expect total net sales and operating revenues to be between $2.4 billion and $2.6 billion, compared to total net sales and operating revenues of $3.5 billion for the three months ended March 31, 2022. The decrease in total net sales and operating revenues is primarily driven by the reduction in retail units sold.
• For the three months ending March 31, 2023, we expect gross profit, non-GAAP to be between $310 million and $350 million, compared to gross profit, non-GAAP of $314 million for the three months ended March 31, 2022. The change in gross profit, non-GAAP is primarily driven by higher total gross profit per retail unit sold offset by lower retail units sold.
• For the three months ending March 31, 2023, we expect total gross profit per unit, non-GAAP to be between $4,100 and $4,400, compared to total gross profit per unit, non-GAAP of $2,985 for the three months ended March 31, 2022. The increase in total gross profit per unit is due to higher retail gross profit per unit, primarily driven by the benefit of a lower inventory allowance adjustment, higher wholesale gross profit, primarily driven by strong wholesale market demand and price appreciation, and higher other gross profit, primarily driven by higher finance receivable, principal sold.
• For the three months ending March 31, 2023, we expect SG&A, non-GAAP to be between $400 million and $440 million, which excludes approximately $55 million of depreciation and amortization expense and $15 million of share-based compensation expense, compared to SG&A, non-GAAP of $662 million, which excludes $37 million of depreciation and amortization expense and $28 million of share-based compensation expense, for the three months ended March 31, 2022. The reduction in SG&A, non-GAAP is primarily driven by our continued focus on operating efficiency and reduced advertising spend.

For the three months ending March 31, 2023, we expect Adjusted EBITDA to be between $(50) million and $(100) million, compared to Adjusted EBITDA of $(348) million for the three months ended March 31, 2022. The improvement in Adjusted EBITDA is primarily driven by reduced selling, general, and administrative expenses and higher total gross profit per unit, partially offset by lower retail units sold.

Carvana’s market capitalization soared to nearly $50bn in 2021 after customers flush with stimulus cash flocked to its website and vending machines when a global chip shortage and supply chain problems had resulted in a dearth of new vehicles. It sold 425,000 cars that year, up from 245,000 in 2020.

The stock jumped as much as 30% this morning following news of the proposed exchange offer.

By Michael Every of Rabobank

It was another wild day yesterday in markets. Very strong US housing data allayed fears of immediate recession, but then raised them that the Fed might keep hiking even as credit conditions turn. So, as our current global financial crisis, which is still not a Global Financial Crisis, rumbles on, all focus is now on the FOMC, in its biggest meeting for many years.

Imagine they don’t hike. On one hand – phew! On the other, markets could be spooked that a Fed set to do 50bps weeks ago is suddenly not willing to focus on its inflation mandate.

Imagine they hike 50bps. Panic. Chaos. Tears before bedtime.

Imagine they hike 25bps and are hawkish, with a shift higher in the dot plot in some form. A slightly milder version of the above would ensure.

Imagine they hike 25bps and are dovish, or say they are done. Commodities and risk assets will likely soar. But inflation will still be there unless there really is a credit crunch looming after this liquidity pinch.

In short, there doesn’t appear to be a good option (ZH; or as we said two days ago, ‘”Whatever The Fed Does On Wednesday Will Be A Mistake“) Moreover, as often repeated here, the Fed trade-off is not just about inflation vs. financial stability. Whether the players involved today see it or not, it’s also about the global role of the US dollar, which Treasury Secretary Yellen yesterday pledged was something that needed to be zealously guarded. (Although she meant it more in terms of a financialized US economy seeing constant capital inflows from countries running structural excess savings, to little benefit to the US ex. Wall Street.)

The FOMC meeting coincides with the wrap-up of Xi and Putin doing the same and agreeing:

• A peace plan Russia accepted, because it cements current gains, and the West rejected;

• An invite for ICC-indicted Putin to visit Beijing;

• A declaration that both sides will “provide strong mutual support in defending each other’s fundamental interests, above all sovereignty, territorial integrity, security, and development”, which sounds like an alliance; and

• Putin floating Russian trade with EM and China now be cleared in CNY.

This is not a workable ‘Bretton Woods 3’, a concept that will now drift on longer than the bank that sold the idea to markets. I already rebutted that Russia can clear its oil and food —which Putin suggested he might give away free to Africa(!)– in CNY if it wants. Pricing of commodities will remain in US dollars, and the trade cleared will just be netted out in CNY, which nobody opts to hold for structural reasons of China’s choosing. All the big trade deficits in the West are the ultimate balance that has to clear, and can’t be in CNY – though Russia’s economy will. Sorry, Lebanon, Egypt, Kenya, etc., with your US dollar shortages, with no Fed swaplines so far. No easy dollar alternatives for you as well as no easy dollars. Yet, if the Fed were to pivot, it would throw fuel on the ‘BW3’ fire, boosting calls for a shift from fiat dollars to commodity currencies that ‘hold their value’.

Then again, it isn’t all about which money you can digitally print in a crisis. Russia is helping Egypt build nuclear power stations, swinging another strategic economy (Suez Canal, anyone?) potentially back into its orbit. Lots of that kind of thing is happening all over.  

For a strident view on the Putin-Xi meeting and its broader implications, @samagreene, professor at the Russia Institute at King’s College London, notes:

“…China’s domination of Russia is complete. Xi praised Putin, touted strong relations with Russia, unity in the UNSC, and promised coordination on IT and natural resources trade. And that’s it. Putin, by contrast, was almost obscenely generous – and not just with his praise…. He pledged completion of the Strength of Siberia 2 pipeline… [which] replaces structural dependence on Europe with structural dependence on China, at a time when Russia is a price taker for hydrocarbons. That’s a strategic win for China.

Further, Putin announced a reorientation of agricultural trade towards China and a strategic role for China in  developing Russia’s far east and high north – a move Putin’s own security apparatus has long resisted (for obvious reasons). Again, strategic wins for China… And Russia offered Chinese companies first dibs on the assets of departing Western companies – again strengthening China’s presence in Russia, with no reciprocal strengthening of Russia’s presence in China…

While there were undoubtedly agreements we are not meant to know about, there is no indication here of a significant increase in military support for Russia – nor even of a willingness on Xi’s part to ramp up diplomatic support. A swing and a miss for Putin…

Putin greeted Xi with a rhetorical bear hug. Xi gave Putin a pat on the head and told him to run along now and play… Putin tells his people he’s fighting for Russia’s sovereignty. In truth, he’s mortgaged the Kremlin to Beijing. The question now is one for Xi: What will he do with his newest acquisition?”

That leaves the EU facing a two-for-one in Russia and China, and as Politico notes, ‘Europe’s China policy will shape transatlantic relations’. The implication is large German firms lean on the large German government, “putting Europe’s priorities on a likely collision course with US strategic goals, which will focus on confronting China in economic, military and, increasingly, ideological domains.”

On which, US historian Kotkin says,

“So I’m in love with the Cold War. I’m in favour of the Cold War. The Cold War is not only a good thing – it’s a necessary thing, because we have to uphold…the terms of the way we share the planet…. You know, I hear a lot of people saying, “Oh my God, no Cold War with China. God forbid we should have a Cold War with China.” And I think to myself, “What world do these people live in?” First, we’re already in a Cold War with China, because China started that long before we understood that that’s what they were doing. And secondly, would you prefer a hot war? The alternative to Cold War is capitulation– which you can imagine I’m not in favour of– or hot war.”

Yet maybe the EU is feeling Cold too. As @Schuldensuehner points out, China is losing importance as a German export destination: February exports to it were -12.4% while those to the US were +19%, making it by far the most important market, as well as supplying key LNG imports (and Fed swaplines); France is number two, far ahead of China. Moreover, Germany is considering China export restrictions similar to those of the US, according to its economy minister, who adds, “We have to prevent losing our technology leadership because we don’t look closely.”  Notably, China just threated the Netherlands over its tech export controls (“This will not be without consequences. I’m not going to speculate on countermeasures, but China won’t just swallow this.“): how long until the same message is heard in Berlin?

A bifurcating world like this only complicates real economy investment decisions, supply chain issues, and monetary policy decisions.

While all eyes have been distracted by First Republic Bank’s efforts to re-capitalize, it appears Pacific West Bank (PacWest) has also been trying to raise capital.

The bank issued an update this morning confirming that it is abandoning its plans for a capital raise:

In addition to these liquidity-enhancing measures, and as part of its proactive approach to capital and liquidity management, the Company has explored a capital raise with potential investors.

In light of the current volatility in the market and depressed market prices for regional bank stocks, as well as the availability of other options to enhance capital, the Company determined it would not be prudent to move forward with a transaction at this time.

This decision reflects the Company’s confidence in its financial strength and commitment to ensuring the long-term stability and profitability of the institution.

The bank announced that is has drawn on available federal facilities, including:

• $3.7 billion of borrowings from the FHLB,

• $10.5 billion of borrowings from the Federal Reserve Discount Window, and

• $2.1 billion in Bank Term Funding Program borrowings, in each case as of March 20, 2023.

Additionally, the bank securitized some assets to raise some cash…

The Bank has seen validation from the private sector as well, having secured $1.4 billion in fully funded cash proceeds from ATLAS SP Partners through a new senior asset-backed financing facility, which unlocked liquidity from unencumbered, high-quality assets in an expeditious manner.

As a reminder, the bailout BTFP has very limited collateral, and so PacWest’s decision to securitize ‘other’ assets suggests they did not have enough high-quality, eligible securities to grab more of that easy money from The Fed.

PACW is down over 10% in the pre-market…

The bank stated that it has over $11.4 billion in available cash as of March 20, 2023, which exceeds total uninsured deposits of $9.5 billion as of March 20, 2023.

“I am proud of the efforts the entire PacWest team has taken in these challenging times to enhance our liquidity and preserve franchise value,” said Paul W. Taylor, Pacific Western Bank President and CEO.

“We have remained steadfast in our commitment to our customers and our communities, and we are grateful for their support and loyalty. As we look ahead, we have continued confidence in the strength of PacWest and are encouraged by the stability we have seen in our deposits and liquidity over the past week. Additionally, we continue to be encouraged by the clear message from government officials, regulatory agencies, and industry leaders, including Secretary Yellen’s recent remarks regarding the protection of smaller bank depositors. We look forward to continuing to sharpen our strategic focus, bolster our balance sheet, and be a proven partner to our customers.”

The bank also admitted that it has seen 20% of deposit outflows since the start of the year…

That expensive capital raise may be more prudent soon.

The merger between Trump Media & Technology Group and Digital World Acquisition Corp., which seeks to make Trump’s social media platform “Truth Social” public through a blank check company, faces even more challenges as deal hopes fade. 

According to a DWAC press release, CEO Patrick Orlando was terminated and will be replaced by Eric Swider, a member of DWAC’s Board of Directors. 

“As the Board executes its succession plan, it looks forward to a fully realigned management team to best meet the challenges the Company faces. Mr. Orlando will remain as a Director on the Board,” the press release said. 

DWAC outlined the reason for a management shakeup:

“Due to the unprecedented headwinds faced by the Company, the Board agreed it was in the best interest of its shareholders to select a new management team to execute an orderly succession plan and set strategic operating procedures for the Company in this new phase. Mr. Orlando’s departure enables the Board to appoint new leadership, which it believes will restore confidence to the shareholders.”

And the news this morning comes one week after Bloomberg reported, “Truth Social has trimmed staff while awaiting regulatory approval for a merger.” 

People knowledgeable about layoffs told Bloomberg that half a dozen employees, including top management team members, such as Chief Technology Officer William “BJ” Lawson, were laid off. The move appears to be in response to capital running out at the social media company. 

“Some close to Trump Media estimate it can fund operations through September at present spending levels,” the people said. 

Weeks ago, Trump Media’s general counsel sent the Securities and Exchange Commission a letter about the reviewal process. They said, “endless investigation of the DWAC-TMTG merger clearly constitutes an unprecedented attempt to kill the deal without any finding of wrongdoing.” Also, the lawyers asked Congress to investigate the matter. 

Authored by Felix Ng via CoinTelegraph.com,

The report included 35 pages seemingly aimed at debunking the merits of crypto assets…

Crypto executives have expressed irritation over the latest White House economic report — which notably features an entire chapter dedicated to casting doubts on the merit of digital assets.

The Economic Report of the President, released on March 20, marks the first time the White House has included a section on digital assets since it first began issuing the annual economic policy report in 1950.

The co-founder of digital asset investment firm Paradigm, Fred Ehrsam, remarked that 15% of the Economic Report was dedicated to “crypto FUD.”

15% of the annual White House Economic Report is devoted to crypto FUDhttps://t.co/lQlAyXgfyJ pic.twitter.com/RTZacgXSUg

— Fred Ehrsam (@FEhrsam) March 21, 2023

The report includes 35 pages dedicated to debunking the “Perceived Appeal of Crypto Assets,” along with a short section on the FedNow payment system and central bank digital currencies.

The report’s main argument is that crypto assets fail to deliver on their “touted” benefits, such as improving payment systems, financial inclusion and creating mechanisms to transfer value and intellectual property, stating:

“Instead, their innovation has been mostly about creating artificial scarcity in order to support crypto assets’ prices — and many of them have no fundamental value.”

It also argues that cryptocurrencies fail to perform the functions of sovereign money — such as the U.S. dollar — as crypto prices fluctuate too wildly to be a stable store of value, nor can they function as a unit of account or medium of exchange.

Excerpt from Chapter 8: Digital Assets: Relearning Economic Principles Source: Economic Report of the President

The report also takes aim at stablecoins, arguing they are subject to run risks and thus too risky to satisfy their role as a “fast payment” instrument.

Blockchain Association CEO Kristin Smith called the latest presidential report “disappointing,” saying it shows that some in the government appear “increasingly allergic” to the burgeoning crypto industry, adding:

“We urge the Biden administration to consider how it will be remembered: as a leader of profound innovation or a roadblock to a global tech revolution.”

Decentralization is also highlighted in the report, which argues that “despite claims of being decentralized and trustless, blockchain-based applications are in practice neither.”

Users access crypto assets by going to a limited set of crypto asset platforms, while a small group of miners performs the majority of mining in most crypto assets, it argues.

The latest annual economic policy report was published some two weeks after the collapses of Silvergate, Silicon Valley and Signature banks — all three of which had served aspects of the crypto industry. 

Dan Reecer, chief growth officer at decentralized finance platform Acala Network, claims that the report comes “just days” after Operation Chokepoint 2.0 was executed on crypto-friendly banks.

Source: Twitter

He also noted an “obvious early warning” of an upcoming United States CBDC, or digital dollar, referencing a section of the report that seemingly touts the benefits of a U.S. central bank-controlled currency. 

Authored by Katabella Roberts via The Epoch Times (emphasis ours),

The Centers for Disease Control and Prevention (CDC) is warning of an increasingly drug-resistant emerging fungus that the health agency says presents a “serious global health threat.”

Candida auris is a rare fungal disease that is easily spread through contact with contaminated surfaces or from person-to-person and can cause severe illness in hospitalized patients and those with weakened immune systems, according to health officials.

In some rare cases, the yeast can enter the bloodstream of patients and spread throughout the body, causing serious invasive candidiasis infections, which can affect the blood, heart, brain, eyes, bones, and other parts of the body and can prove fatal.

Data from a limited number of patents shows that 30 to 60 percent of people diagnosed with the fungal disease have died. However, healthy people typically do not get sick from the fungal disease.

The CDC said it is concerned about Candida auris for three main reasons: it is often multidrug-resistant, it is hard to identify using standard laboratory methods, and it has rapidly caused outbreaks in health care settings.

so… maskshttps://t.co/TuixrVjJn6 pic.twitter.com/peKW78pS6J

— zerohedge (@zerohedge) March 21, 2023

Additionally, individuals who have been hospitalized in health care facilities for long periods of time—especially those who have breathing tubes, feeding tubes, and central venous catheters going into their bodies—appear to be at the highest risk of contracting Candida auris.

Other risk factors are generally similar to risk factors for other types of Candida infections and include recent surgery, diabetes, and recent use of antibiotics or antifungal medications, initial data shows.

CDC Data Shows Rise in Cases

Infections of Candida auris, also referred to as C. auris, have been found in patients of all ages, from preterm infants to the elderly, health officials say.

According to CDC data, the drug-resistant fungus, which was first detected in the United States in 2016, has been spreading “at an alarming rate” among hospitalized patients in recent years, with clinical cases of the fungus nearly doubling in 2021 and continuing to rise in 2022.

There were at least 2,377 confirmed clinical cases of Candida auris in the United States in 2022, according to CDC statistics, up from 1,474 cases in 2021 and 757 cases in 2020.

Data shows the fungal disease is now present in more than half of U.S. states.

Separate data from the CDC published in the Annals of Internal Medicine on March 20 also found that screening cases—in which the fungus is detected but is not causing infection—tripled from 2020 to 2021, from 1,310 to 4,041 cases.

The CDC has said it is concerned with the tripling in 2021 of the number of cases that were resistant to echinocandins, antifungal drugs that are typically the first line of treatment for Candida auris.

CDC officials said in a press release that the number of Candida auris cases may have risen for multiple reasons, including poor general infection prevention and control practices in health care facilities, although enhanced efforts to detect cases may have also contributed to the rise.

“The timing of this increase and findings from public health investigations suggest C. auris spread may have worsened due to strain on healthcare and public health systems during the COVID-19 pandemic,” CDC officials added.

Read more here…