Six months ago, when looking at Michael Burry’s Q1 13F which in turn followed just a few months after the famous permabear admitted he had been wrong to urge his followed to sell…

… we found that the Big Short had continued the trend of rapidly rotating his entire portfolio and in the first quarter, Burry liquidated the rest of his legacy 2022 holdings, dumping his entire stake in companies like Black Knight, Wolverine World Wide, MGM Resorts and Qurate, and also trimmed his formerly largest holding, private prison operator GEO group, and had reallocated the proceeds in three ways:

• Adding to his Chinese exposure, making JD.com and Alibaba his top stocks (a move which appears to have been driven by the Q4 momentum and which has since fizzled, leading to substantial losses in Chinese names).

• Launching a handful of new positions in energy names such as Coterra, NOV and Devon

• Most notably, a third – or seven of the fund’s total 21 positions – were bank names, and with the exception of Wells, they were mostly distressed, regional, small banks and/or credit card companies, such as CapitalOne, Western Alliance, Pacwest, First Republic, and Huntington Bancshares, all of which had been hammered significantly during the March bank crisis.

In other words, as we put it then, “Burry appears to have enough of being called the “big short” and in this particular twist of the liquidity cycle is positioning himself to be the next “big long.”

Fast forward three months, when back in August we found that in Q2 Burry’s Scion Asset Management made even more dramatic changes to the investor’s personal portfolio.

First and foremost, we found that once again, Burry liquidated the bulk of his Q1 holdings, selling not only his previous top two positions, JD.com and Alibaba but also another 13 names of the 21 names that made up Burry’s Q1 holdings, among which were Zoom, Sibanye, Coherent, energy names such as Coterra, NOV and Devon, as well as all the banks he had acquired during the March crisis including Capital One, Wells Fargo, Western Alliance, Pacwest, and First Republic.

He also bought a bunch of things. Let’s start with Burry’s largest cash holdings which as of June 30, were Expedia ($10.9MM), Charter Communications ($9.2MM) and Generac ($8.2MM, which however is surely worth much less after the company’s catastrophic Q2 earnings which wiped out almost a third of its value). Other names Burry added were Cigna, CVS, MGM, Stellantis, Vital, all of which represented new mid-to-high single digit million positions (the full list is below).

But what was the most interesting new development, was not the single names Burry bought or sold, but his ETF and derivative trades.

Starting at the top, as of June, Burry owned two 2 million notional-equivalent blocks of SPY puts (for a notional-equivalent value of $887 million) and QQQ puts (a $739 million notional equivalent). In total, Burry owned puts on both the S&P and Nasdaq 100 for a notional-equivalent of $1.625 billion (which of course is not the capital at risk, and the actual premium Burry paid for those puts is orders of magnitude less), and which are both deeply underwater as of this moment since both the S&P and Nasdaq are trading high above where they were on June 30.

In other words, in the second quarter, Burry had made another giant (at least for his AUM) and very levered (using over $1.6 billion notional in put) “big short” bet on the broader market. Alas, unlike his infamous and original bearish bet against subprime, Burry’s latest attempt to time a market crash has crashed and burned, because according to the just released 13F from Burry’s Scion Capital, the $1.6 billion notional in puts on the SPY and QQQ have been liquidated. And since during the third quarter, when Burry unwound these positions (originally put on in Q2), the S&P did not drop below the June 30 highs, one can conclude that the puts either expired either worthless or were sold with very little value due to the brutal theta observed n Q3 when both calls and puts saw their value eviscerated.

Ok, so the “big short” liquidated his big market shorts; what else did he do in Q3?

Well, as has been the case recently, Burry once again rotated almost all of his holdings, liquidating a total of 25 existing positions, including what were formerly his three biggest cash holdings including Expedia, Charter and Generac. At the same time he added to a handful of smaller positions including Stellantis, Nexstar, and Star Bulk carriers, none of which have done all that well in Q3 or Q4. Burry also appears to have taken a hedged position in Booking Holdings, where he bought both the stock and puts against the stock. Oh, and after liquidating his JD.com and Alibaba positions in Q1, the former doctor is back in the two names and is once again hoping that this time Chinese stocks will finally surge.

But the one most notable trade Burry did in Q3 was to put on a large bearish trade against semiconducors, by buying $47 million notional worth of SOXX puts, a trade which was likely prompted by Burry’s bearishness against NVDA and its peers, yet which may have been an even bigger flop than Burry’s ill-timed bet against the SPY and QQQ, especially if he held on to it until now when the SOXX is once again well above where it was on Sept 30 and is fast approaching 2023 highs largely thanks to Nvidia.

Burry’s full 13F summary is below.

Authored by Jonathan Turley via jonathanturley.org,

There is a palpable level of panic that seems to have taken hold of Washington this week. Establishment figures are raising the alarm over the rise of dangerous figures as if they are the barbarians at the gate before the sacking of Rome in 410. The threat is coming from both parties in the form of the new Speaker Mike Johnson and Democratic presidential candidate Robert Kennedy Jr. They may be the worst type of barbarians because they came to this city with the best of intentions.

For some in Washington, there may be nothing more unnerving than the best of intentions. This is a one-industry town where fortunes are made the old-fashioned way with influence peddling, special dealing, and pork barreling. In that world, the rise of Johnson and Kennedy are about as welcomed as a priest among the Pirates of Penzance.

Johnson is the ultimate buzz kill.

Many were aghast that Johnson used his first speech as speaker to thank God and to say that he believes that God has a plan for him. That is a view shared by millions of religious Americans and it is not the first time that a politician has made such public expressions of devotion. Bill Clinton used to invoke God and salvation continually as he set physical records for debauchery. Even after his Monica Lewinsky scandal, Clinton would rally liberals to “politics and political involvement dictated by faith.” The problem is not that Johnson said it but he actually seems to mean it.

I likely do not share Johnson’s views on legislating morality or the separation of church and state. However, he has always been viewed as a honest man with deep convictions. Of course, this is a city that can more easily forgive actual convictions than religious convictions.

This is a city where professed socialists and populists unapologetically give their husbands or children huge amounts of campaign funds. Rep. Maxine Waters has reportedly given her daughter over a million dollars. Confronted with millions of dollars in alleged influence peddling by the Biden family, the media has continued to maintain a lack of interest, often excusing the practice as common in Washington.

Indeed, this month, NBC compared Hunter Biden tapping shady foreign figures for millions to the controversy over Nikki Haley’s daughter using TikTok.

The panic over the appearance of an honest man in Congress was evident in an article by the Daily Beast when senior political reporter Roger Sollenberger declared that the “newly elected Speaker of the House Mike Johnson (R-LA) does not have a bank account” and apparently “lives paycheck to paycheck.”

Of course, surveys show that over sixty percent of Americans live paycheck to paycheck and fewer than half of Americans can cover a $1000 emergency expense. However, those are average Americans, not one of us. In this city, hard-working members of Congress plan for the future with gold bars and cash stuffed in a closet or millions transferred from corrupt foreign figures through a labyrinth of shell companies and accounts.

In this city, the appearance of Johnson left people dumbfounded like seeing a Triceratops strolling down Pennsylvania Avenue. The Daily Beast’s Mike Fuller noted:

“Mike Johnson doesn’t have any retirement savings, own a single stock, or have any assets at all. He has less than $5,000 in his bank account. He’s got a 250-500K mortgage, a home equity loan, and a personal loan. So what’s his retirement plan? To lobby?”

God only knows.

The same panic was heard this week from the rise of popularity of Kennedy in polls. Once again, there was confusion in the media why the public (yet again) is not buying the universal portrayal of Kennedy as a wackadoodle. The D.C. establishment has been described as “panicking” over the rise of Kennedy in the polls — and the threat that he may present to Joe Biden.

Polls show a shocking 71 percent believe Biden is too old to run for reelection and he is losing ground with young people as well as minority voters. The solution in the establishment and the Democratic National Committee was not to give voters a choice in the primaries and leave them with what they hoped to present as a “better too old than too evil” choice in a rematch with Trump.

That cynical plan is being undone by the rise of Kennedy in polls despite a consistent messaging in the media demonizing the political outsider. He is now near a record in polling for an independent candidate.

The problem with Kennedy is that he is truly a barbarian in the Roman sense. The Romans used the term barbarus for a wide array of people deemed uncivilized or foreign.  Kennedy is a foreigner to the Beltway.  That problem was summed up by a story from my hometown of Chicago during the heyday of the Daley political machine. A younger law student (and later federal judge) named Abner Mikva went to the ward office of Chicago Alderman Timothy O’Sullivan to volunteer to work on a campaign. When O’Sullivan asked “who sent you?”, Mikva responded, “Nobody.” O’Sullivan responded with the classic: “We don’t want nobody that nobody sent.”

Kennedy is that nobody and nobody sent. He has no bona fides for the Beltway. Just some guy who doesn’t like vaccines and the establishment. In other words, a barbarian.

The problem is that a lot of people in the United States want to open the gates. That is what swept Trump into power in 2016 and it is driving the rise of Kennedy. It may have less to do with policies or personalities as much as a deep-seated resentment of the political and media establishment. The more that the establishment and the media try to convince the public that they should not consider Kennedy, the more they are drawn to him.

Likewise, the more that the media mocks Johnson for his abundance of faith and lack of cash the more the public is drawn to him.

The real concern for the establishment is that a nation of “nobodies” may be ready to send another message to the somebodies of Washington.

In surprisingly blunt words, a top aide to Ukrainian President Volodymyr Zelensky has warned that the coming year will essentially decide the fate of Ukraine and its war with Russia.

“A turning point in the war is approaching,” Andrii Yermak, who serves as chief of staff for the Office of the President of Ukraine, said Monday. “The next year will be decisive in this regard.” He issued the words while appealing for more urgent aid from Washington in an address to the hawkish DC-based Hudson Institute think tank.

Yermak sought to assure the audience that Zelensky has “a clear plan” forward even as Western media has by and large soured on Kiev’s prospects for success. Much of this is about Zelensky sending envoys to do damage control in Washington at a moment the US administration’s focus is off Ukraine and on Gaza events instead.

He described advancing plans for “the development of our defense industry, and the deploying of our own arms production. But [that] will be later.”

But he quickly pivoted to an immediate need for more “weapons right now”–describing that “Russia still has air superiority. It is still capable of producing missiles, doing evasion of sanctions…And we especially need air defense systems.”

Without doubt, the Zelensky admin is in damage control after eyebrow-raising comments were issued to The Economist early this month by Ukraine’s top commander, who admitted there will be no breakthrough and the battlefield situation is in a stalemate. The New York Times had characterized his remarks as “the first time a top Ukrainian commander said the fighting had reached an impasse.”

So now Zelensky appears to be dispatching his envoys to calm Washington jitters over all the “bad news” of late out of Ukraine. 

Yermak also sought to assure the Hudson Institute conference that more billions given to Ukraine won’t be “charity” but is instead an “investment” in America’s “global leadership.”

He further emphasized Zelensky’s continued rejection of ceasefire talks with Russia, unless it’s purely on Kiev’s terms. “We seek peace, but not just any peace. In our case, ending the war through compromise is nothing more than pausing it. Ukraine will not repeat the mistake of Minsk,” Yermak said.

Watch the full Hudson Institute speech below:

By Tsvetana Paraskova of OilPrice.com

The European Union is considering toughening up the sanction enforcement on evaders of the price cap on Russian oil, almost none of which now trades below the ceiling of $60 per barrel, the Financial Times reported on Tuesday.

The price cap mechanism set by the G7 and the EU says that Russian crude shipments to third countries can use Western insurance and financing if cargoes are sold at or below the $60-a-barrel ceiling. The measure took effect at the end of 2022 when the EU imposed an embargo on imports of Russian crude oil.  

But Western officials are increasingly concerned that Russia is selling nearly all of its crude above the price cap.

“Almost none” of Russia’s crude shipments in October were executed below the cap, a senior EU government official told FT.

“The latest data makes the case that we’re going to have to toughen up,” the official said. 

“There’s absolutely no appetite for letting Russia just keep doing this.”    

In the past weeks, EU officials have discussed tougher sanction enforcement, according to FT.

Last month, the United States took a tougher stance on the sanctions against Russia and sanctioned two vessels for violating the price cap.

The U.S. is also reportedly working to further clamp down on price cap evasion.

The U.S. Department of the Treasury has requested information from ship management companies about 100 tankers it suspects of violating Western sanctions on Russian oil, Reuters reported this week, citing a source who has seen the notices the Treasury has sent. 

As a result of the stricter sanctions enforcement, shipping rates for transporting Russian crude have surged, traders have told Reuters.

Earlier this month, Russian government data showed that the average price of the flagship Russian crude grade, Urals, was $81.52 per barrel in October 2023. That’s higher than the average Urals crude price for the same month of last year, $70.62 per barrel.  

When the World Health Organization went to the Congo between 2018 and 2020, nearly two-dozen workers for the UN agency preyed on more than 100 Congolese women – with dozens of staffers raping, sexually abusing, and otherwise harassing local women.

One of the victims, identified in a UN report as “Jolianne,” was believed to be 13-years-old. Other women say their attackers used no birth control, from which several pregnancies ensued. Some of the women were forced by their rapists to get abortions.

In the case of “Jolianne,” a WHO driver stopped on a roadsidfe in the town of Mangina where she was selling phone cards in April of 2019 and offered to give her a ride home.

“Instead, he took her to a hotel where she says she was raped by this person,” according to a 2021 UN report.

WHO Director-General Tedros Adhanom Ghebreyesus traveled to Congo 14 times during the outbreak, repeatedly taking credit for the response to the outbreak, while publicly commending one of the alleged rapists for his heroic work.

“It is unconscionable that this should ever have happened, and the sheer scale of the sexual assaults is shocking,” said Lawrence Gostin, chair of global health law at Georgetown University.

All of this was known two years ago following an AP investigation which revealed that senior WHO management was informed of sexual exploitation during the agency’s efforts to curb Ebola, but did little to stop it. What wasn’t revealed was how the WHO put a bow on the whole thing.

$250 payoffs

According to a new report from AP, internal documents reveal that the agency paid 104 victims some $250 each, an amount which is less than a single day’s expenses for some UN officials working in the Congolese capital – but which can support more than four months of survival in a country where many live on less than $2.15 per day.

What’s more, the women had to complete a training course to help them start “income-generating activities” before they received the cash due to a UN policy that it doesn’t pay reparations.

Many Congolese women who were sexually abused have still received nothing. WHO said in a confidential document last month that about a third of the known victims were “impossible to locate.” The WHO said nearly a dozen women declined its offer.

The total of $26,000 that WHO has provided to the victims equals about 1% of the $2 million, WHO-created “survivor assistance fund” for victims of sexual misconduct, primarily in Congo. -AP

The recipients told AP that the money, while not enough, wouldn’t give them the satisfaction of justice.

“It’s not unheard of for the U.N. to give people seed money so they can boost their livelihoods, but to mesh that with compensation for a sexual assault, or a crime that results in the birth of a baby, is unthinkable,” said Paula Donovan, who co-directs the Code Blue campaign to eliminate what it calls impunity for sexual misconduct in the U.N., and described the payoffs as “perverse,” and decried the training requirement before receiving the cash.

Two women who met with Dr. Gaya Gamhewage, the doctor who leads the WHO’s efforts to prevent sexual abuse, told her that what they wanted most was for the “perpetrators to be brought to account so they could not harm anyone else,” according to the WHO documents.

“There is nothing we can do to make up for (sexual abuse and exploitation),” Gamhewage told AP. 

The documents show that staff costs account for more than half of the $1.5 million the WHO set aside towards the prevention of sexual misconduct in Congo for 2022-2023, or $821,856. Another 12% was allocated for prevention activities, and 35%, or $535,000, was for “victim support,” which includes legal assistance, transportation and psychological support.

According to the WHO, the criteria to determine its “victim survivor package” included the cost of food in Congo, and “global guidance on not dispensing more cash than what would be reasonable for the community, in order to not expose recipients to further harm.”

“Obviously, we haven’t done enough,” said Gamhewage, adding that the WHO would ask survivors directly what additional support they needed.

At least one woman who said she was sexually exploited and impregnated by a WHO doctor negotiated compensation that agency officials signed off on, including a plot of land and health care. The doctor also agreed to pay $100 a month until the baby was born in a deal “to protect the integrity and reputation of WHO.”

But in interviews with the AP, other women who say they were sexually exploited by WHO staff asserted the agency hasn’t done enough.

Alphonsine, 34, said she was pressured into having sex with a WHO official in exchange for a job as an infection control worker with the Ebola response team in the eastern Congo city of Beni, an epicenter of the 2018-2020 outbreak. Like other women, she did not share her last name for fear of reprisals.

Alphonsine confirmed that she had received $250 from the WHO, but the agency told her she had to take a baking course to obtain it.

“The money helped at the time, but it wasn’t enough,” Alphonsine said. She said she later went bankrupt and would have preferred to receive a plot of land and enough money to start her own business. -AP

WHO staffers, meanwhile, had a standard daily allowance ranging between $144 and $480. Gamhewage received $231 per day during a three-day trip to the Congolese capital, according to an internal travel claim.

One victim, 24-year-old Audia, told AP that she was impregnated by a WHO official who forced her to have sex in exchange for a job during the outbreak. She now has a five-year-old daughter, and says the $250 WHO payoff is “really insufficient” after taking courses in tailoring and baking.

“I can’t put my trust in (WHO) anymore,” she said. “When they abandon you in such difficulties and leave you without doing anything, it’s irresponsible.”

Authored by Simon White, Bloomberg macro strategist,

Inflation is starting to re-emerge, at odds with Goldman Sachs’ view that it is set to continue slowing through next year.

The signs are here already that price growth will revive in 2024, leaving the Federal Reserve’s next rate move more likely to be a hike after an extended pause.

“We don’t think the last mile of disinflation will be particularly hard”, according to Goldman’s 2024 Macro Outlook.

But that stands in contrast to a growing corpus of data showing that far from a smooth path back to core CPI of 2-2.5% next year for the G10 ex-Japan, inflation should start to reheat, eventually pulling the Fed and other central banks back to the fore with further hikes.

Getting inflation right remains the most important macro call. Markets are priced for a benign outcome, with CPI fixing swaps in the US and Europe expecting a steady decline in headline price growth to 2-2.5% over the next 12 months.

But the coming months are likely to see increasing volatility. Inflation lags growth, and before it shows unequivocal signs it is rising we are likely to see further signs of weaker growth, deepening expectations of rate cuts next year.

The US economy should avoid an NBER recession, while Europe and the UK may also manage to skirt full-blown economic contractions. But as it becomes clearer inflation is returning, a rate hike – not a cut – is likely to be next move of the Fed, ECB and perhaps even the BOE. Stocks and bonds will face downside risk from a realization that rates may have to remain persistently elevated.

There are at least three areas where data is already showing inflation will soon re-accelerate:

1. Persistently large fiscal deficits are fueling corporate profits, which since the pandemic are now the dominant driver of corporate prices

2. A re-acceleration in goods inflation reinforcing still-elevated services inflation

3. Rising price growth in China that will increasingly add to global inflation pressures

The pandemic saw a sea change in the largest drivers of corporate prices, with profits now the dominant influence. In the US, in the 30 years prior to Covid the cost of labor accounted for over 50% of the change in real corporate prices (i.e. the price per unit of real gross value added), with profits under 20% of the change.

But since 2020, that has been reversed: labor has only accounted for 30% of the change in corporate prices, while profits’ share has risen to 38%. Profits are now the single largest driver of corporate prices, and therefore are having a much greater impact on inflation.

Profits and margins have eased back recently, but that should not offer any solace to anyone with the view that their inflation potential has retreated.

The US’s vast fiscal deficit is the elephant in the room when it comes to the rapid rise in profits seen in 2020 and 2021. Using the Kalecki-Levy profit equation it can be shown that the government deficit is currently the biggest driver of corporate profits – after all, one sector’s spending is another’s saving.

It was the fall in the fiscal impulse after its huge rise at the start of pandemic which led to a lull in profit margins. But as the chart below shows, the impulse has picked back up, and thus margins should soon do likewise. Furthermore, deficits are likely to remain large due to the emergence of a Treasury put. The Congressional Budget Office expects the same, with the deficit forecast to rise to 5.8% in 2024 from 5.4% in 2023, and to 6.1% in 2025.

Declining wage growth is part of Goldman’s disinflation argument. But wages may not be the primary vector of second-round inflation effects in this cycle as in the 1970s, and more oligopolistic corporates mean that profits take on that role, germinating a profit-price-wage spiral.

Further, the underlying dynamics of inflation are turning. Goods inflation has started rising again from a low level, and is starting to reinforce still-elevated services inflation, pushing headline CPI higher. A continued decline in core goods inflation is another of Goldman’s disinflation arguments, but goods inflation’s nascent rise is likely to be further underpinned by China.

China has been the ghost at the feast as far as the global post-pandemic recovery goes. But leading data is giving an incrementally clearer sign fiscal and monetary stimulus is having an impact.

China’s PPI is one of the best gauges of global cyclical inflation. Its continued rise will mean burgeoning upward pressure on US and global CPI (left chart below). Moreover, leading data for PPI in China shows it should continue to increase (right-hand chart below).

China’s deflation has been an important component of the decline in inflation across the G10 ex-Japan, and thus its re-emergence would act as a boost to US and global price pressures.

It may look now as if we’re in the last mile of disinflation, but putting all of the above together suggests we’re getting close to this cycle’s inflation nadir, and the backdrop will soon look a lot less benign. As Stanley Druckenmiller advised, “Never invest in the present.”

Israel has been ramping up its global messaging campaign at a moment it faces increased isolation from Global South countries, and amid growing criticism from large powers like China, Russia, and major Latin American countries such as Brazil.  

But there have been signs of dissent even within the Biden administration as well, with pushback especially coming from the State Department of late, as US officials want to see the White House become more publicly critical of alleged Israeli war crimes, given also the immense death toll, at over 11,200 Gazans killed – with some half of these believed to be women and children.

Israeli Prime Minister Benjamin Netanyahu is now taking his message to the American public, in a Monday night appearance on Fox News’ Sean Hannity, warning that the US will be “next” if his military doesn’t decimate Hamas.

“We have to win not only for our sake, but for the sake of the Middle East, for the sake of our Arab neighbors. You know what, for the sake of Gazans who’ve been held by this dark tyranny that has brutalized and brought them nothing but bloodshed and poverty and misery,” Netanyahu introduced.

“We have to win to protect Israel. We have to win to safeguard the Middle East. We have to win for the sake of the civilized world. That’s the battle we’re fighting, and it’s being waged right now. There is no substitute for that victory.”

And that’s when he emphasized the potential dire repercussions for the West if Israel fails in its objectives. “If we don’t win now, then Europe is next and you’re next. And we have to win,” he added.

Netanyahu’s words carried a theme of a war between ‘barbarians’ and ‘civilization’, with an intent to make Americans believe what’s happening in the Middle East is “your fight” as well. According to Fox:

Netanyahu stressed that “our fight is your fight” and that there is “no substitute for victory.”

“We have to have the forces of civilization beat these barbarians because otherwise this barbarism will spread and will endanger the entire world,” Netanyahu said. “Every American, every civilized country will be under peril. We have to win. There is no substitute for victory. Total victory.”

Such messaging filled with a ‘good vs. evil’ motif was also heavily relied upon by the Bush administration and neocons in selling the Iraq War in 2003. Netanyahu has in past years also painted such simple contrasts when speaking about Iran and its supposed ‘nuclear threat’ as well.

Netanyahu may have been responding to rare words of restraint issued by President Biden on the same day. “I have not been reluctant in expressing my concerns about what’s going on and it’s my hope and expectation that it will be less intrusive action relative to the hospital,” Biden said Monday regarding the worsening humanitarian crisis at al-Shifa hospital in the center of Gaza City.

Zelensky’s playbook of “you’re next”?…

Netanyahu on Hannity last night:

– Israel is invading Gaza “for the sake of Gazans.” Sounds very generous and humanitarian

– War boils down to “good guys” versus “bad guys”

– If Israel doesn’t occupy the Gaza strip, “Europe is next, and you’re next.” I guess he means Ohio pic.twitter.com/4GXGDC5khk

— Michael Tracey (@mtracey) November 14, 2023

“So, I remain somewhat hopeful but the hospital must be protected,” he said. This was in response to growing international condemnation, including from the UN, of Israeli troops laying siege to the large Gaza hospital, amid reports that patients – including the very young – are dying, and as the hospital has run out of fuel to keep vital generators going.

By Matthew Smith of Oilprice.com

Colombia has a severe problem, cocaine. The South American country is the world’s largest producer of the narcotic, and it continues setting record highs for the cultivation of coca, the drug’s key raw ingredient, and cocaine production. The United Nations Office on Drugs and Crime (UNODC) reported for 2022 (Spanish) that the amount of land cultivated with coca soared 13% year over year to 230,000 hectares. This, the agency believes, possessed the potential to produce a record 1,738 metric tons of cocaine, yet another all-time high. The tremendous amounts of gasoline required to treat coca leaves, coupled with soaring cocaine production and higher oil prices, is causing petroleum theft in Colombia to spiral higher. This is sharply impacting Colombia’s economically crucial oil industry, which is already facing considerable uncertainty and battling heightened geopolitical risk.

Significant elements of Colombia’s hydrocarbon sector, including major producing sedimentary basins, are located in those regions where the cocaine trade dominates local economies. According to the UNODC, Colombia’s departments of Nariño, Norte de Santander and Putumayo dominate the country’s cocaine trade, with 65% of all coca crops concentrated in those provinces. Indeed, Putumayo, which saw coca cropping and the associated conflict explode in 2022, contains the prolific Putumayo sedimentary basin. That department, according to Colombia’s petroleum industry regulator (Spanish) the National Hydrocarbon Authority (ANH – Spanish initials), contains 39 million barrels of proved, or 1P, reserves as well as considerable industry infrastructure. Spiraling cocaine production, especially in Southern Colombia, is impacting petroleum industry operations. 

Surging coca cropping and cocaine manufacturing are driving an insatiable demand for gasoline and the other chemicals required to produce the narcotic. It is estimated that around 75 gallons, or 284 liters, of gasoline, is required to treat the approximately 440 pounds of coca leaves required to produce one kilogram of cocaine hydrochloride. Based on the UNODC’s 2022 estimate, which means 130 million gallons, or 492 million liters, of gasoline was consumed during 2022 to produce 1,738 metric tons of cocaine. This tremendous amount of gasoline combined with soaring oil prices, with Brent up by 3% since the start of 2023, makes it extremely costly for Colombia’s illegal armed groups, which control the Andean country’s cocaine trade, to acquire the required volume of gasoline.

For those reasons, there are considerable incentives for criminal bands to steal oil from Colombia’s extensive network of petroleum pipelines, which are amplified by strict government controls on the sale of large volumes of gasoline. The system of pipelines crisscrossing Colombia not only connects the Andean country’s oilfields to crucial port infrastructure on the Pacific and Caribbean coasts but also passes through remote regions. That network is the only cost-effective and efficient means of transporting crude oil across Colombia’s rugged terrain, where a lack of reliable transportation infrastructure has impeded economic development for decades. Quite a few of those remote areas, where there is little, if any, state presence, are where coca cultivation and cocaine production dominate local economies.

Colombia’s Caño Limon and Transandino, known by their Spanish initials OTA, pipelines are the main targets for petroleum theft. Various criminal bands and illegal armed groups tap the pipelines with primitive valves to extract the oil flowing through them, often leaving pools of environmentally damaging petroleum behind. The 251,000 barrel per day 481-mile long Caño Limon pipeline, which connects Arauca’s oilfields to the Caribbean port of Coveñas, has long been targeted for sabotage by leftist guerillas. The key piece of energy infrastructure passes through remote regions close to Colombia’s porous and conflict-strewn border with Venezuela, including the department of Norte de Santander, where the strife-torn Catatumbo region, Colombia’s third largest coca-growing area, is located. 

For decades, the Caño Limon pipeline was targeted attacks by leftist guerillas from the now defunct Revolutionary Armed Forces of Colombia (FARC – Spanish initials) and National Liberation Army (ELN – Spanish initials). Official records indicate the Caño Limon pipeline has suffered 1,600 attacks (Spanish) since commencing operation in 1986, most of which were bombings, but also includes the application of illicit valves to steal petroleum. While the volume of attacks fell significantly after the government’s 2016 peace agreement with the FARC and further after an August 2023 ceasefire with the ELN, the Caño Limon pipeline remains one of the top targets for oil theft. 

Indeed, the Caño Limon pipeline was at the center of a massive scandal regarding petroleum theft (Spanish) which was revealed in July 2023. A cabal of Colombian businesspeople operating in collusion with criminal bands, including the ELN, were stealing copious quantities of oil from the pipeline. Legitimate provenance for the stolen petroleum was created by falsifying documents allowing the syndicate to sell the oil onto international energy markets. The criminal coalition also mixed U.S.-sanctioned petroleum smuggled from Venezuela with legitimate Colombian oil for sale abroad. The criminal conspiracy existed for many years, with at least $80 million of oil stolen from state-controlled Ecopetrol.

According to Cenit, Ecopetrol’s subsidiary responsible for managing pipelines and related oil transportation infrastructure, there were 715 illicit valves applied to various pipelines (Spanish) across the network during 2022. A portion of those valves were affixed to the Caño Limon pipeline, a long-time target for petroleum theft, although a growing number were found on the 85,000 barrel per day 190-mile-long OTA pipeline. That crucial piece of oil industry transportation infrastructure connects oilfields in Colombia’s Putumayo Basin to the Pacific Coast port of Tumaco. Data from Cenit shows that during the first quarter of 2023, 146 valves were found applied to Colombia’s network of oil pipelines, of which 141 were affixed to the OTA pipeline.

The OTA pipeline passes through remote areas in the departments of Putumayo and Nariño, which rank among the top coca-cultivating regions in Colombia, where cocaine production dominates local economies. For those reasons, coupled with the tremendous amount of gasoline needed to extract the psychoactive alkaloid from coca leaves which is turned into cocaine, the volume of oil being stolen from the OTA pipeline is soaring. The stolen petroleum is processed into a primitive form of gasoline, known as pategrillo or cricket foot because of its off-green hue, in crude jungle refineries with scored of those facilities hidden in the rugged terrain around the Pacific port of Tumaco. This is responsible for growing environmental damage in the region, with oil staining the earth and leaching into water bodies in the areas where those clandestine refineries operate.

Soaring oil theft in Colombia is weighing on the country’s economically crucial oil industry, which is struggling to recover from the COVID pandemic. The latest data from the hydrocarbon regulator, the ANH, shows Colombia is pumping around 788,723 barrels per day compared to around 880,000 barrels per day prior to the pandemic. Rising insecurity, particularly in rural and remote parts of Colombia, is also weighing on oil industry operations. President Gustavo Petro’s decision to cease awarding new hydrocarbon exploration contracts and ban hydraulic fracturing is deterring investment. Soaring petroleum theft, with it estimated that an average of around 3,500 barrels of oil per day are stolen in Colombia or triple the volume reported for 2018, is sharply impacting an economically important oil industry already under considerable pressure.

After several months of upside surprises, markets were expecting more of the same. Instead, they got the biggest across the board CPI miss in a year, and indeed if one looks at the market reaction to the print it is shaping up as the biggest “positive surprise” response this year.

As shown in the chart below, the spike in stock futures in the first 30 minutes after the release was the largest reaction to a CPI print in 2023 based on data compiled using the Bloomberg’s Market Impact Monitor. For the dollar, this is the largest drop and absolute move since January while gold saw its biggest gain post CPI since July.

Considering options were pricing in just a 0.75% move today, there will be a lot of very unhedged, and hurt, traders.

And while even the WSJ’s Nikileaks hinted that the Fed is now done with hikes, and the market pricing in some rate cuts as soon as March and around 2 cuts by July…

… Bloomberg’s Chris Antsey made a good point: “if the Fed does stay on hold in December, then by the January meeting, it will have been on hold for half a year. At that point, you would have to assume any move to raise rates again would be effectively a new cycle. Hard to see how they would think one 25 basis point increase would do the trick. We’d be in another cycle of tightening.”

And we will be, just as soon as China panics and injects trillions into the economy to avoid a full-blown revolt, some time in late 2024 just in time to send commodities soaring to record levels ahead of the US election. Until then, however, it’s time to enjoy the end of the current hiking cycle as the bulk of Wall Street reactions to today’s CPI print suggest.

Below we excerpt the reactions to today’s CPI from several traders, analysts and strategists.

Win Thin, global head of currency strategy at BBH:

“I’m not hanging up the ‘Mission Accomplished’ banner just yet. Transportation was a big downside factor (-0.9% m/m). However, food and beverages (0.3%), housing (0.3%), and services (0.3%) are still showing solid gains. 4 cuts by end-2024? Again, ain’t happening. The market sees what it wants to see. It’s been wrong on the Fed this entire cycle.”

Ian Lyngen of BMO Capital Markets:

“This print was good news for the Fed and offers evidence that monetary policy is still effective and impacts the real economy with a lag — the fundamental things apparently still apply. This takes a rate hike off the table in December and reinforces our call that July was the last hike of the cycle and the process will now shift to the Fed attempting to delay cuts as long as possible.”

Anna Wong of Bloomberg Economics:

“October’s surprisingly soft core CPI reading will increase Fed officials’ confidence that rates are sufficiently restrictive. Still, core CPI readings will need to continue on this path for several more months for the FOMC to declare a definitive end to the rate-hike cycle. Looking at the 12-month change in core inflation, it’s still running at twice the pace of the Fed’s 2% target. Overall, inflation is still a long way from the target — and the road there is sure to be bumpy.”

Greg McBride, Chief Financial Analyst at Bankrate

“The slower pace of inflation is little comfort to households still dealing with the cumulative effect of rising prices. The strain on household budgets is real with the Consumer Price Index up more than 18% in the past 3 years.”

Jay Bryson, Wells Fargo chief economist:

“You would need to see a few more months of 0.2 before saying mission accomplished. I think the Fed is going to delay easing at this point.”

Bryce Doty, of Sit Investment Associates:

“The Fed looks smart for effectively ending their tightening cycle as inflation continues to slow. Yields are down significantly as the last of investors not convinced the Fed is done are likely throwing in the towel.”

Kathy Jones of Charles Schwab:

“Things are going their way and they probably don’t want to change policy until there is more confidence in the inflation outlook. I think the Fed sticks with it’s on-hold policy until they get a series of low month to month readings over a period of 3 to 6 months and/or the labor market shows a lot more weakness.”

Oscar Munoz, macro strategist at TD Securities

“Core goods still in deflation, that was a surprise for us. We were looking for strength there. New vehicles prices and apparel were surprises to the downside for us. The OER decline was expected, though rents continue to move sideways (some concern there). Lodging away from home was a driver of inflation in Sep, it mean-reverted today. All told, good report for the Fed. They will continue to maintain the odds of another hike on the table, but the market won’t buy it. Higher for longer will be the message Fed officials will try to convey.”

Stuart Paul, of Bloomberg Economics

“Lodging away from home again served as a critical swing factor. Whereas a surge in lodging prices boosted shelter costs in the September report, the 2.5% month-on-month decline in October created approximately 3 bps of drag and explains much of the downside surprise in inflation. Measures of homeowners’ equivalent of rent moderated to 0.4% in October from 0.6% in September, creating additional disinflation in reported shelter costs.”

Spencer Hakimian, CEO of Tolou Capital Management:

“The cumulative effect of 525 basis points of tightening, along with QT, are evidently working. The FOMC must exercise patience and allow last year’s tightening fully flow through the economy. Two-year Treasuries are poised for significantly attractive risk-adjusted returns, due to market pricing for rate cuts as well as a nearly 5.00% yield.”

Victor Masotti, Director at Clear Street:

“Softer than expected CPI data has traders repricing probabilities for the FOMC’s next move as today’s inflation reading supports the view that rates have peaked and the FOMC will need to begin easing sooner rather than later. At close of business yesterday, December FOMC rate hike probabilities were at 15%, while we are now at 0% chance of a hike after CPI YoY came in at 3.2% versus expectations of 3.3% and last month’s print at 3.7%. The narrative has now shifted towards 2024 as to when the first rate cut will come with the market pricing in a 75% chance of a cut in May 2024 and pricing in more than one 25bp rate cut in June 2024. In repo pricing, we have seen 2 and 3mo term repo tighten 2-3bps from last week’s prints. As for year-end funding, general collateral year-end turn (12/29/23 – 01/02/24) has been printing in the 5.60 range.”

Source: BBG, primary sources

Chinese President Xi Jinping departed Beijing on Tuesday to attend the Asia-Pacific Economic Cooperation summit in San Francisco. During the summit, he intends to have discussions with President Biden about addressing the fentanyl trade between China and the US, as per a new report.

Bloomberg, citing those familiar with the talks, said the deal could involve China regulating the production and export of fentanyl. This would be a major win for the Biden administration. They noted the agreement, which is in its final stages, would involve China targeting domestic chemical companies to curb the distribution of fentanyl and source materials. 

The deal is on a quid pro quo basis. This means the Biden administration would lift restrictions on China’s forensic police institute, an agency Washington says is responsible for human rights violations, the people said. 

A deal should be announced on Wednesday when Biden and Xi meet on APEC’s sidelines. Separate reports indicate China could also announce a new commitment to purchase Boeing 737 Max jets. And another report last week suggests the two leaders will discuss restoring military communications. 

The timing of the possible crackdown comes as Soros-backed DAs nationwide and radical progressive mayors have failed to enforce law and order, transforming many metro areas into lawless hellholes of open-air drug markets, homelessness, and soaring violent crime. 

Also, the White House has embraced open southern borders, allowing an invasion of unvetted illegals from around the world to flood the nation by the millions. Illegals entered the country on the same routes used by Mexican drug cartels to sneak fentanyl and other drugs into the US. 

Meanwhile, Democrats have prioritized a ‘woke’ agenda over the health and safety of the majority.

Don’t forget San Fran Mayor London Breed demonstrated in the last week she was entirely capable of restoring law and order, bowing down to Xi rather than her constituents by placing more cops in the city, pressure washing shit-covered streets, dissolving open-air drug markets, and kicking the homeless out of the downtown area near APEC. 

If the Biden administration manages not to screw up before a deal with Xi, then they will parade the agreement around for the 2024 presidential election cycle. 

For those who have lost loved ones because of the drug crisis and lack of law and order by Democrats nationwide, Biden’s agreement won’t bring back those who have tragically perished. It’s time for Americans to hold Democrats accountable at the polls for their disastrous policies.