VC Banking Collapse Shows The Worst Isn’t Over For San Francisco
If there’s one thing San Francisco, which is in the midst of complete and total collapse as a functioning U.S. city due to looting, drugs, crime and homelessness (not to mention sky high taxes), didn’t need, it was another problem to deal with.
But alas, along comes Silicon Valley Bank, and a historic bank run on regional banks led especially by banks who deal with VC, such as Silicon Valley but also First Republic Bank.
And it looks as though these banking instabilities could be the straw that breaks the city’s back, according to Bloomberg. Despite the problems plaguing the city for years on end, only now is San Fran “struggling to figure out its future”, Bloomberg wrote this week.
While it’s laughable to think that San Francisco wasn’t doomed prior to these bank runs, the situation does look to be getting even more dire. For example, Bloomberg writes that last week “city officials forecast a $780 million deficit for the next two fiscal years, more than $50 million worse than projected in January.”
Meanwhile, in Q1, the city’s office-vacancy rate soared to a record 29.5%. This number stood at just 4% prior to the pandemic.
Michael Covarrubias, chief executive officer of local real estate developer TMG Partners and former head of the Bay Area Council, told Bloomberg: “We’ve never had this much vacancy in downtown San Francisco and a pandemic, followed by the work-from-home thing, followed by the banking thing started by Silicon Valley Bank and now sort of matriculating into the big banks, commercial loans and all that.”
Heidi Colin, a cashier at Dough and Little Griddle, a local luncheonette, said: “We used to have a morning rush, a lunch rush and a closing rush. Now it’s a mini rush, and we’re lucky if we even get it.”
Mayor London Breed, who famously encouraged defunding the city’s police just several years ago before drastically reversing course, is trying to enact legislation to help the city bounce back. However, it sounds as though she has given up on the San Francisco of old: “People are trying to equate success to the number of people who return to the office in downtown San Francisco, and we are not going to be what we were before the pandemic. We’re just going to be something different.”
Meanwhile, layoffs in tech numbering in the tens of thousands continue, with companies like Meta planning for another 10,000 layoffs globally. San Francisco Chief Economist Ted Egan added: “To lose this many jobs in three months is not something we’ve seen in the last few years. It’s definitely a warning sign.
Janice Jensen, CEO of Habitat for Humanity in the East Bay and Silicon Valley has banked with First Republic for more than 15 years and warns of what its loss could mean to the city: “To lose First Republic, that’d be terrible. It’s not just a bank. If it went away, it’d be a whole lot of tentacles into the community. That’s further stress on an already stressed area.”
And per commercial real estate experts, the worst in terms of vacancies could still be on their way. Colin Yasukochi, a researcher at CBRE Group Inc., said: “Usually in uncertain times, companies will delay decisions as long as possible,” he said. “Not moving is often cheaper than moving.”
The shooter who killed 60 people in a Las Vegas massacre in October 2017 may have been angry at casinos after he lost a significant amount of money in the days before the incident, according to newly released FBI files.
Stephen Paddock was accused by law enforcement of shooting into a crowd of country music fans from his Mandalay Bay hotel suite after transporting dozens of rifles and thousands of rounds of ammunition into his hotel room. Officials said that he died of a self-inflicted gunshot wound as responding officers attempted to access his room.
But few details have been provided about Paddock, and officials have never established a motive for why a 64-year-old high-stakes gambler would carry out the worst mass shooting in U.S. history.
Last week, the FBI released redacted documents following a Wall Street Journal Freedom of Information Act request showing that a fellow gambler, whose name is redacted from the hundreds of pages of documents, told the FBI that casinos had previously treated high rollers like Paddock to free cruises, airline flights, penthouse suites, rides in “nice cars,” and tours in wine country.
But in the years leading up to the mass shooting in Las Vegas, the red carpet treatment for high rollers had faded, the gambler claimed. Casinos even began banning some high rollers “for playing well and winning large quantities of money,” the documents said.
Paddock had been banned from three Reno casinos, the gambler told FBI investigators. That individual also believed “the stress could easily be what caused” Paddock “to snap.”
The FBI documents did not provide any information for why Paddock targeted a country music concert instead of shooting up a casino if he was angry about the way he and other gamblers were being treated.
The gambler also said that Mandalay Bay “was not treating Paddock well because a player of his status should have been in a higher floor in a penthouse suite.” It’s not clear how the gambler knew Paddock.
A woman who worked at the Tropicana Las Vegas casino told the FBI that Paddock would often play 6 to 8 hours per day at casinos and was “a prolific video poker player.” During a three-day-long period in September 2017—just days before the shooting—he lost about $38,000, she told the FBI.
Paddock, who appears to have had virtually no social media or online presence, did not leave a note or a manifesto, as is common among mass shooters, officials said. He also did not give any indication that he would carry out the shooting to family members or his girlfriend, a Filipino national named Marilou Danley.
The revelation comes years after the FBI in Las Vegas and the local police department concluded their investigations without a definitive motive, although both agencies said Paddock burned through more than $1.5 million, became obsessed with guns, and distanced himself from his girlfriend and family in the months leading up to the shooting.
In a statement on Thursday, Las Vegas police defended their inconclusive findings and dismissed the importance of the documents released this week in response to an open-records request from The Journal.
“We were unable to determine a motive for the shooter,” the police statement said. “Speculating on a motive causes more harm to the hundreds of people who were victims that night.”
It added: “The FBI documents that were released as part of a Freedom of Information Act request, are from the original investigation, we do not believe they will shed new light in the case.”
Nevada Gov. Joe Lombardo, who was the sheriff of the Las Vegas Metropolitan Police Department at the time of the shooting, declined to comment on the FBI documents last week.
But Kelly McMahill, a former Las Vegas Metropolitan Police Department official who headed the criminal investigation into the shooting, disputed the FBI’s claims that Paddock was motivated by an animus towards casinos. There were never any indicators that Paddock had an anti-casino motive, she said.
“There’s no way that LVMPD would have hidden any potential motive from our victims and survivors for five years,” McMahill told AP.
Keeping track of what appears to be almost weekly freight train derailments across the country is becoming a challenging task. A notable derailment occurred in Paradise, Montana, on Sunday, where a train carrying a load of beer went off the rails.
The fire department said there was “no current threat to public safety and no hazardous materials being released.”
Images from the scene reveal some of the boxcars were full of Coors Light and Blue Moon beer products.
AP shared a picture of fishermen taking beer from the incident area.
“The cause of the derailment is currently under investigation with MRL personnel and first responders,” Montana Rail Link said in a statement.
It comes after a series of train derailments in the US, including a Minnesota town that was evacuated last Thursday after a Burlington Northern Santa Fe train jumped the tracks and tankers carrying ethanol exploded. Meanwhile, cleanup from the Norfolk Southern Railway train derailment in Ohio in February is ongoing.
What recently caught our attention is the increasing number of news stories on train derailments. Bloomberg data reveals that reports on derailments have reached an all-time high.
Last year, mysterious fires plagued food processing plants. Now, it seems a series of train derailments is the current issue.
Sadly, gold is now on its way to heights which are unthinkable for most people.
To all the people who have asked me over the years why gold doesn’t go up, I have replied:
“Don’t wish for gold to go up substantially for when it does, your quality of life will deteriorate remarkably.”
And we are now at the point in the world when this is likely to happen.
Let me be clear, now is the time to protect whatever assets you have in order to avoid the total asset destruction that is coming next. More about this later in this article.
THE FINANCIAL SYSTEM WILL NOT SURVIVE
I came to the conclusion early in this century that a sick financial system was not going to survive the infestation of vermin in the form of debt that started just over 50 years ago.
Nixon’s closing of the gold window in 1971 was the signal that this currency system was going to end like all currency systems in history. And for the ones who haven’t studied the history of money, let me tell you that NO FIAT MONEY HAS EVER SURVIVED IN HISTORY IN ITS ORIGINAL FORM. So with all money going to ZERO, it has never been a question of if but only of when the dollar based currency system would die.
Dalai Lama said:
“If there is a solution to a problem, there is no need to worry.
And if there is no solution, there is no need to worry”
But in this case my view is THAT WE REALLY NEED TO WORRY.
So sadly, his wisdom doesn’t apply to the global problem that the world is now facing.
Although it is too early to be really optimistic, it now looks like my prediction that Russia will never lose this war is getting closer.
Ukraine is making the Battle of Bakhmut into their Stalingrad last stand (WWII 1943).
Ukraine has committed the majority of their remaining forces to winning this battle against Russia. If they lose in Bakhmut, even Zelensky believes that this could be the end for Ukraine.
Here is the Associated Press (AP) article in which Zelensky is hinting that Ukraine could lose this war –
“Ukraine’s Zelensky: Any Russian victory could be perilous.”
If Bakhmut fell to Russian forces, Putin would “sell this victory to the West, to his society, to China to Iran” Zelensky said in the AP interview.
“If he will feel some blood – smell that we are weak – he will push, push, push!”
Scott Ritter, the former intelligence officer and UN weapons’ inspector just gave this interview in which he believes that Ukraine is on the point of losing the war:
Scott Ritter – It is over!
THE END OF US HEGEMONY
At the beginning of the Ukraine conflict I and some others made the analogy with the Cuban Missile Crisis in 1962 (which I remember well) when Kennedy gave an ultimatum to Khrushchev to withdraw the nuclear missiles pointing towards the US or face war.
In the same way as with Cuba, Russia was never going to accept Ukraine becoming a Nato country. But sadly the US Neocons have seen this conflict as the last chance to save the US military, political and economic hegemony from total collapse. Defeating Russia was the last stand for the US. But it now looks like they will fail which seals the fate of the US empire.
The US neocons forced a much too willing Europe to not only agree to the sanctions against Russia but also make direct contributions to the war both with money and equipment.
This fatal mistake by Europe and especially Germany is totally crushing the European economy. But what the US neocons never understood is that the US sanctions would affect the whole world and in particular the debt infested US and the West.
At the end of an economic era, unexpected events take place which will seal the fate of a crumbling empire.
THE END OF THE CENTRAL BANKER
The script for the first 22+ years of the 2000s couldn’t be more perfect as the final glutinous feast of Gargantua The Central Banker. (Gargantua – book by Rabelais 1543)
Central bankers have been the principal creators of the current crisis which had its beginnings over 100 years ago.
Significant events in the 2000s created by fallacious Central Bank policies:
2000-2 Market collapse: Tech stocks down 80%
2006-8 Subprime banking crisis: Dow down 54%, massive money printing
2009-21 Stocks & asset markets exploding: Dow up 6X, Nasdaq up 16X
2006-20 Manipulation of rates: US 10yr treasury down from 5.4% to 0.5%
2000-23 US Debt explosion: Up 3.5X from $27t in 2000 to $95t in 2023
2000-23 Global debt explosion: Up 3X from $100t in 2000 to $300t in 2023
2020-23 Real inflation US EU: Up from 0% in 2020 to 10%+ in 2023
The extreme moves and volatility exemplified in the table above has nothing to do with free markets.
They are the manifest consequences of shameless manipulation of markets and market conditions by Central Banks. Such extreme moves could never happen if markets followed nature’s laws and the laws of supply and demand.
For example, in an unmanipulated market it would be totally impossible for credit to expand exponentially and interest rates to remain at zero. The basic principle of supply and demand would force the cost of money up when demand for credit expands. And if there was no demand, the cost of money would obviously come down to the level where demand resumes.
If markets were allowed to follow the natural rhythm of nature, they would be self-correcting without extreme tops and bottoms.
This is so basic that a 7 year old would understand it. But the Central Bankers choose to ignore it.
The obvious consequence of markets flowing naturally without intervention would mean that we could get rid of Central Bankers. How wonderful! No Central Banks, No Manipulation and No Extremes in the economy or markets.
Sadly, such simple solutions are the exception in history with greed and power driving man rather than reason and logic.
The bankers clearly knew what they needed to do when they met on Jekyll Island in 1910 in order to control the US and global monetary system. At this meeting they schemed to create the Fed in 1913 and followed the axiom of Mayer Amschel Rothschild a German banker in the late 1700s: “Let me issue and control a nation’s money and I care not who writes the laws.”
From the Amschel Rothschild to Jekyll island to Nixon closing the gold window in 1971, the Central bankers and bankers have successfully taken control of issuing exponentially larger amounts of money and debt for their own benefit as well as for a very small elite who could take advantage.
Having created a structure that was above the law as Amschel said, they have so far been in total control of their own destiny with governments being dictated to by the central bankers and bankers. Thus in 2008, the Fed and a number of virtually bankrupt banks, including JP Morgan, Goldman, Morgan Stanley, Bank of America, Barclays etc dictated their own rescue terms to the US and other governments.
But we must remember that 2006-9 was just a rehearsal. The finale is starting now. The debt which has built up has now reached levels which means the financial system is now too big to survive.
Three US banks and one Swiss went under 2 weeks ago although two of the four were rescued temporarily at a high cost. The Swiss government could not afford to let Credit Suisse go under and is supporting the UBS takeover of the Credit Suisse at a potential extraordinary cost of CHF 209 billion.
Central banks are on standby to stop the next bank run. Many expected Deutsche Bank to be next. Governments will stop major banks from going under for as long as they can, to stop global contagion. But they will of course fail.
The FDIC (Federal Deposit Insurance Corporation) currently has a capital of $128 billion dollars to support a total of $18 trillion deposits. So with 0.7% cover, it is guaranteed that the US government will soon need to step in as the next lot of US of banks fail. Same in Europe where the most EU banks and the ECB are in a terrible shape.
Total central bank assets are $25trillion which is less than 10% of global debt before derivatives. Default rates in coming years are likely to exceed 50% which means much more money printing to come.
ALL ASSETS ARE PRICED AT THE MARGIN – PROTECT YOURSELVES
As the current asset bubbles are coming to an end, the exit doors will be totally blocked by panicking sellers.
All assets are priced at the margin and even more so since the current asset bubbles have been created by the most gigantic debt bonanza. To take an extreme example, if there is one seller and no buyer in the housing market, the price of all houses will go to zero. The same is true for the stock market.
But as investors run for the exit, most will not get through since there will at some point be no buyers at any price.
This is how the price of stocks, bonds or property can go down by 75% to 100% in real terms. Some market observers say that this has never happened in history so it won’t happen today either. Yes, of course I can be wrong, but what we must remember is that nor have we ever in history had a global debt and asset bubble of this magnitude. So we are in unchartered waters and conventional wisdom doesn’t apply and is just conventional without any wisdom.
In any case, investors shouldn’t worry how much their assets could decline. Instead they should worry about protecting themselves against the risk of this happening.
Firstly investors should go as liquid as possible. Secondly debts must be repaid. Nobody will want the bank to take their assets at a bargain price.
Short term government bonds could offer adequate protection. But medium and long term, governments will at best destroy the value of the currency and at worst also default.
Tangible assets are undervalued and a good investment to own.
Physical gold and silver held outside the banking system is the ultimate protection just as in any crisis.
It is absolutely critical to buy gold and silver now before investors panic into these metals. There is very little gold and silver available to buy. Currently all production is absorbed and any increase in demand cannot be met by increased supply but only by much higher prices.
But remember that gold and silver are also priced at the margin, so as demand increases, we could reach a situation when there is no silver or gold available at any price.
So my very strong advice is not to wait for the herd since you then are likely to be left with no silver or gold and no protection.
But in the end, as I have stressed, the $2 quadrillion debt and derivative liabilities, cannot be saved.
In the next few years the financial system will crash under its own weight in spite of and also due to the coming biggest money printing avalanche that the world has ever experienced.
Ugly Data & Oil Shock: Stagflation Threat Sparks Bond & Gold Gains; Banks & The Buck Dumped
OPEC+ pissed in Powell’s victory-lap-over-inflation punchbowl overnight, jolting stocks lower. Ugly Manufacturing ISM data early on sparked the ubiquitous ‘bbrrrrrr’ trade with gold and stocks bid, dollar and bond yields tumbling. The St.Louis Fed’s Jim Bullard raised the specter of OPEC+’s production cut making The Fed’s job harder (i.e. forcing them to be more hawkish than they would like to be) which then reversed some of the equity gains (especially in big-tech and small caps – finance-heavy). Finally, the Atlanta Fed GDPNow model estimate for Q1 2023 real GDP growth is 1.7% on April 3, down from 2.5% on March 31.
Oil prices shot 6-7% higher on the OPEC+ news, with WTI back above $80, its highest since Jan 27th (breaking above its 50- and 100-DMA). This was WTI’s best day since 4/12/22…
Source: Bloomberg
OPEC+’s timing could not have been better (as we warned last week)…
The Dow dramatically outperformed Nasdaq (by the most since Oct 27th at its peak before the late melt-up), with mega-cap tech red and Small Caps ramped into the green late on. S&P stumbled around unch for most of the day before the late-day buying panic…
Early in the day, 0DTE traders faded the opening ramp, took some profits then led the charge higher with huge positive delta flow…
Energy stocks massively outperformed on the day. Financials were flat-ish, while Discretionary was worst…
Source: Bloomberg
Regional Banks were hit again, back below the 3/24 close (before the ‘all clear’ ramp)…
After 3 straight days of relative weakness, value stocks outperformed growth stocks to start Q2 (but we note a similar pump and dump pattern)…
Source: Bloomberg
Weaker growth (ISM) and stronger inflation (OPEC) = stagflation… and that’s not at all what Powell and his pals want to see, as May rate-hike odds rose to 65%…
Source: Bloomberg
Interestingly, further out the curve you can see the impact of OPEC (hawkish) and ISM (dovish) on the market’s expectations for Fed actions…
Source: Bloomberg
Inflation expectations jumped to 5-week highs…
Source: Bloomberg
Treasury yields were all lower on the day – after quite a rollercoaster higher (OPEC+ inflation) then plunge lower (ISM weakness) – with the short-end outperforming…
Source: Bloomberg
The Dollar saw a similar velocity – ramping higher to open last night (OPEC+ hawkish) then plunging from the moment Europe opened, and accelerating after ISM weakness…
Source: Bloomberg
Cryptos were higher on the day, helped by Musk changing Twitter’s icon to DogeCoin…
Source: Bloomberg
Front-month gold futures surged back above $2,000…
Source: Bloomberg
Finally, Oil’s surge has lifted Bloomberg’s broad Commodity Index above is 6-month downtrend line, and above its 50DMA…
Source: Bloomberg
Commodities are up 6 of the last 7 days… not what Mr.Powell and Mr.Biden want to see.
Why OPEC’s “Best Offense Is Defense”, And The Biggest Surprise About The Output Cut Announcement
With markets still abuzz over Sunday’s OPEC+ decision to cut oil output by over 1.6 million bpd, which was strategic (the political implications of Saudi Arabia bitchslapping the Biden admin just days after it effectively joined the China-Russia-India axes are unmissable even by inbred Deep State types) as well as tactical (i.e., brutalize the oil shorts, a task made easier since energy is now the second most shorted sector after banks, while CTAs are max bearish and will be forced to cover and chase oil higher from here), below we excerpt from two different perspectives on the OPEC decision, the first one from TS Lombard (it is their view that the output cut “this will deter short sellers and help oil prices settle higher – much like what December’s surprise BoJ tweak to Yield Curve Control did for the yen” but in the long run “sticky oil prices are more likely to weigh on growth than arrest the broad disinflation process already under way”), as well as a second one from JPMorgan’s chief commodity strategist Natasha Kaneva who lays out what she thinks is the “most surprising part of the announcement.”
So without further ado, here is the first take courtesy of TS Lombard’s Konstantinos Venetis who explains why OPEC’s best offense is defense.
Oil prices have jumped following the decision by a Saudi-led group of OPEC members to cut output by around one million bpd starting next month. This will add to the two million bpd reduction agreed by OPEC+ back in October, taking the total to around 3% of global supply.
The cartel is trying to put a floor under crude prices against the backdrop of rising inventories and downside risks to demand as a US recession looms. This move is also meant to send a message to speculators: the bearish skew in futures positioning had become particularly pronounced recently, which goes some way to explaining today’s strong knee-jerk price response. There is also a political angle to the timing of this announcement, coming shortly after US officials effectively ruled out new crude purchases to replenish the Strategic Petroleum Reserve in 2023, underscoring the souring of US-Saudi relations.
Near term, this will deter short sellers and help oil prices settle higher – much like what December’s surprise BoJ tweak to Yield Curve Control did for the yen. In our experience, however, as a rule the recipe for sustainable oil market turnarounds is positive demand surprises, not pre-emptive supply reductions. Just like the production cuts announced in autumn 2022, this essentially amounts to a defensive move in the hope that the world economy skirts a severe economic downturn in 2023.
Given our expectations for a US recession and limited global spillovers from China’s reopening, our sense is that at this juncture sticky oil prices are more likely to weigh on growth than arrest the broad disinflation process already under way. For bonds, this means that spikes in yields on the back of renewed inflation concerns are likely to be short-lived. For equities, firmer oil prices will (if anything) weigh on already falling earnings expectations.
For commodities overall, the glass still looks half empty: we continue to expect rangebound trading in 2023 Q2, albeit with metals’ outperformance over energy starting to erode as the Brent-to-copper ratio mean-reverts higher.
And here is an excerpt from JPM’s Natasha Kaneva laying out what is “the most surprising part of the announcement”:
A day before the OPEC+’s advisory (no policy-making) Joint Ministerial Monitoring Committee was set to meet on April 3, Saudi Arabia and other members of the OPEC+ alliance announced a 1.1 mbd oil production cut. Saudi Arabia pledged a “voluntary” 500 kbd supply reduction, in coordination with Iraq, the UAE, Kuwait, Kazakhstan, Algeria and Oman (Table 1). The cuts will begin in May and last until the end of 2023. Fellow member Russia said the 500 kbd production cut it was implementing from March to June would extend until the end of 2023. Similar to OPEC’s 2 mbd cut last October, we view the current reduction in supply as a preemptive measure, assuring that surpluses that started accumulating in the global oil market since mid-2022 don’t extend into the second half of 2023 as the global economy slows following almost 400 bps of cumulative hikes since 2022.
The most surprising part of the announcement is that it was not made sooner. Since last November our global oil supply-demand balance suggested a strong policy action was needed to keep global oil surpluses in check. For example, the first iteration of the supply-demand balances behind our oil view for 2023 last November resulted in an average 1Q23 Brent price of $78/bbl (WTI at $72/bbl). We believed that the low price level would trigger two policy responses.
First, the US administration would step into the market to purchase 60 million barrels of oil to partially replenish SPR inventories.
Second, we believed that to keep the market balanced in 2023, OPEC+ alliance would need to cut its October quota by another 0.8 – 1.0 mbd, effectively slashing production by 0.4 mbd. We estimated that absent policy shift, Brent oil price would be confined to the $70-80/bbl near-term band, with a risk of significantly lower prices were the recent events in the US financial markets to cascade through the regional banking sector.
The combined impact of Sunday’s announcement is ~100 kbd (on annualized basis) less crude flowing into the market than we previously expected. Consequently, we leave our long-standing price forecast unchanged. We missed our 1Q23 price forecast by $3/bbl but still see Brent oil prices averaging $89 in 2Q23, rising to $94 in 4Q23 and exiting the year at $96.
Cuts are taking place two months later than our initial assumption.The timing of the policy response is paramount, and we previously assumed both the US administration and OPEC would act in the first quarter. Acting later diminishes the impact on overall balances and hence it takes longer for the price impact to take hold.
With the Biden administration publicly ruling out new crude purchases any time soon, OPEC+ alliance needs to do the heavy lifting to balance the market. On annualized basis, our initial assumption of 164 kbd of SPR purchases this year now stands at zero.
OPEC’s 1.1 mbd cut to production quotas translates to about 0. 8 mbd decline in real production, by our estimates, assuming OPEC+ sticks with current reference levels for the cuts (see our balances in the back of the note). Annualized, this equates to about 533 kbd of supply reduction, which compares to the 333 kbd cut embedded into our price forecast from last November.
Russia cuts are real but from a higher base than original guidance, offset by longer duration. Russia is moving ahead with its announced 500 kbd cut but from a much elevated crude output level of 10.2 mbd in February (combined Russian crude and condensate production in February was 11 mbd). This means Russia is now aiming to produce 9.7 mbd in March through December, a much shallower reduction in output than Russia previously indicated, but largely in line with our assumption of 9.6 mbd average. If realized, Russia will overcompensate by extending the cuts by six months from the original June end-date through December. The impact on our balance is about 70 kbd less production from Russia this year, annualized.
More in the full reports from JPM and TS Lombard available to pro subs.
These Were The Best And Worst Performing Assets In March And Q1
Q1 was a turbulent period in markets, with a surge in volatility (especially in bonds, if not so much in stocks) during March after the collapse of Silicon Valley Bank. That led to fears about broader contagion across the banking system, while the sudden implosion of Credit Suisse led to its acquisition by UBS with guarantees from the Swiss government, and further bank crisis fears. As a result, as DB’s Henry Allen writes in his quarterly performance recap, “some of the daily moves were the largest seen for decades, and the MOVE index of Treasury volatility hit levels last seen at the height of the GFC in 2008.“
By the end of the quarter, the immediate volatility had subsided – in large part due to the market’s near certainty that the Fed’s rate hike cycle is effectively over – but the turmoil led to speculation about whether something was finally breaking after a rapid series of central bank rate hikes. Nevertheless, even with that market turbulence in March, Q1 as a whole saw some incredibly broad gains after the weakness of 2022, with advances for equities, credit, sovereign bonds, EM assets and crypto. The only major exception to that pattern were commodities, with oil prices losing ground in every month of Q1.
Quarter in Review – The high-level macro overview
Q1 started on a fairly positive note, with lots of good news stories in January helping markets to rebound after an awful 2022. For instance, European natural gas prices fell by -24.8% over January, which helped to allay fears about a potential recession. That was echoed among various sentiment indicators, with consumer confidence rising to its highest level in months. Meanwhile in China, the economy’s reopening continued and restrictions were eased, boosting hopes that global growth would be lifted more broadly. This brighter macro outlook meant that plenty of assets began the year very strongly. For instance, the S&P 500 (+6.3%) had its best start to a year since 2019, and Europe’s STOXX 600 (+6.8%) had its best start since 2015.
However, as we moved into February, the tone in markets became decidedly more negative. The main culprit was a series of strong US data releases and higher-than expected inflation, which led investors to ramp up the likelihood of future rate hikes. Indeed, the unemployment rate fell to a 53-year low of 3.4%. This even sparked discussion about the US economy experiencing a “no landing” scenario, where inflation stayed high and growth remained strong, requiring the Fed to take rates even higher.
This trend wasn’t just confined to the United States however. In the Euro Area, data released in February showed core inflation hitting a record high of +5.3% in January. And in Japan, headline and core CPI for January reached their highest level since 1981. This sparked a major sell-off among global bonds, with Bloomberg’s Global Aggregate Bond Index (-3.3%) seeing its worst February performance since its inception back in 1990.
By March, the persistence of inflation saw investors keep ratcheting up their expectations for central bank terminal rates. That was then validated by Fed Chair Powell, who said in his semi-annual congressional testimony that “we would be prepared to increase the pace of rate hikes”, which explicitly opened the door to50bp moves again. Shortly afterwards on March 8, 2yr yields closed at a post-2007 high of 5.07%, and expectations of the Fed’s terminal rate stood at a new high for the cycle of 5.69%. In the meantime, the 2s10s curve closed at an inverted -109bps that day, which hadn’t been seen since 1981.
But all this changed shortly afterwards, as concern grew about the financial system after Silicon Valley Bank collapsed, raising fears about broader contagion. Credit Suisse then came under investor scrutiny and saw large deposit outflows, which culminated in a purchase by UBS that included guarantees from the Swiss government. This led to significant market turmoil, and investors speculated whether central banks might call it a day on their current hiking cycles, with yields on 2yr Treasuries seeing their largest daily decline since 1982 on March 13. Bankstocks were also hit, with the KBW Bank Index down -17.9% over Q1, despite thebroader equity rally.
However, by the end of the month, there were signs that calm was returning to financial markets again. Measures of volatility like the MOVE index and the VIX index had come down substantially, and financial conditions had also eased since the height of the turmoil. And with investors far less concerned about aggressiverate hikes, sovereign bonds put in a very strong performance. In fact, for USTreasuries it was their best monthly performance in 3 years since March 2020, back when investors poured into save havens and the Fed slashed rates and restarted QE.
The big question now, the DB strategist concludes, is whether the turmoil from March proves to be an isolated incident, or whether it proves the harbinger of further shocks ahead.
Which assets saw the biggest gains in Q1?
Equities: Despite the market turmoil, equities overall saw solid gains over Q1. For instance, the S&P 500 (+7.5%), the STOXX 600 (+8.6%) and the Nikkei (+8.5%) all advanced on a total return basis. Tech stocks were one of the best performers on a sectoral basis, and the NASDAQ (+17.0%) had its best quarter since the Q2 2020. However, given the financial turmoil, banks were one of the weaker performers, and the KBW Bank Index fell -17.9% over Q1.
Credit: There was a decent start to the year in credit, with gains across all indices in USD, EUR and GBP credit. The strongest gains were seen among GBP IG non-fin (+4.3%) and US HY (+4.2%), whereas the weakest was among EUR Fin Sub (+1.1%).
Sovereign Bonds: US Treasuries (+3.3%) just experienced their best quarter since the pandemic turmoil of Q1 2020, back when investors poured into save havens and the Fed slashed rates to zero and restarted QE. For Euro sovereign bonds (+2.4%) it was also their best quarter since Q3 2019, and brings an end to a run of 5 consecutive quarterly declines.
EM Assets: Having struggled in 2022, emerging markets saw a much better start to 2023 across the major asset classes. For instance, the MSCI EM Equity Index was up +4.0%, EM Bonds were up +4.9%, whilst EM FX was up +2.0%.
Precious Metals: Gold (+8.0%) and silver (+0.6%) prices both advanced over Q1. Prices have been supported by growing demand for safe havens, along with the prospect that central banks might be ending their hiking cycles shortly. That came after some very strong performances in March specifically, with gold up +7.8% over the month and silver up +15.2%.
Crypto: After significant losses in 2022, crypto-assets rebounded in Q1. Bitcoin had its best quarterly performance in two years, with a +71.7% advance that left it at $28,395. And this was echoed among other cryptocurrencies too, with Ethereum (+51.6%) also seeing a sharp rebound, whilst Bloomberg’s Galaxy Crypto Index was up +59.7%.
Which assets saw the biggest losses in Q1?
Commodities (except precious metals): Commodities were the only major asset class to lose ground over Q1. For instance, Brent crude oil prices were down -7.1%, marking a third consecutive quarterly decline for the first time since 2014-15. In Europe, natural gas futures were down -37.3% over Q1, building on their -59.6% decline in Q4 last year. And plenty of agricultural commodities also fell back, including wheat (-12.6%), corn (-2.7%) and soybeans (-0.9%).
Finally, here is the visual summary of best and worst performers in March…
A researcher claims to have found a tool allowing for government intervention in Twitter’s algorithm, upon Elon Musk’s decision to allow the algorithm to become open sourced to the public.
Breitbart reports that Musk honored his promise on Friday by releasing a portion of Twitter’s recommendation algorithm on the website GitHub, where computer programmers often go to share and collaborate on work dealing with open-source code.
Web developer Steven Tey then claimed to have discovered a particular mechanism within the code that allows the U.S. government to make changes to the website’s algorithm.
“When needed, the government can intervene with the Twitter algorithm. In fact, @TwitterEng (Twitter Engineering) even has a class for it – ‘GovernmentRequested,” Tey tweeted, including a link to the code on GitHub.
7. When needed, the government can intervene with the Twitter algorithm.
In fact, @TwitterEng even has a class for it – “GovernmentRequested”
Upon purchasing Twitter for $44 billion in October, Musk vowed to increase transparency and loosen restrictions on certain speech and accounts that had been imposed by previous leadership. One of his goals was to make the algorithm open source for public viewing; he later said that “our ‘algorithm’ is overly complex & not fully understood internally,” and that “people will discover many silly things, but we’ll patch issues as soon as they’re found!”
In addition, Tey discovered that the algorithm takes such factors into account as following-to-follower ratio when determining which users to promote; users with a low number of followers but a high amount of followed accounts would be negatively affected.
1. Your following-to-follower ratio matters.
Twitter’s “Tweepcred” PageRank algorithm reduces the page rank of users who have a low number of followers but a high number of followings.
The algorithm also promotes those who are subscribed to the “Twitter Blue” program, where users must pay $8 a month for a blue checkmark signaling that their account is “verified.” These users are subsequently put into different categories, including “power users,” “Democrats,” and “Republicans.”
The discovery of the government intervention tool is just the latest example of controversy surrounding Twitter’s relationship with the federal government prior to Musk’s takeover. In his signature transparency effort, Musk has been periodically releasing information about Twitter’s past leadership, in the form of screenshots of emails and other forms of correspondence, revealing the levels of collusion between Twitter executives and government officials, often for the purpose of targeting conservative users. The information would be given to independent journalists and shared in extensive Twitter threads, becoming known as “The Twitter Files.”
Gag Order? Trump Legal Team Expects Manhattan Judge To Silence Former President
Update (1208ET): Donald Trump’s legal team thins a New York judge may slap a gag order on the former president, the Daily Mail reports.
“The Trump legal team now thinks that the Manhattan judge will take the unprecedented step of silencing the presidential frontrunner with an unconstitutional gag order tomorrow,” one source told the Mail. “The Trump legal team is considering adding a First Amendment lawyer to the effort to combat this and will fight it all the way.'”
If Trump breaks an imposed gag order, he risks a $1,000 fine and as much as 30 days in prison under New York law.
If a gag order is imposed, a previously announced Tuesday evening speech from Trump’s Mar-a-Lago home may now be in doubt.
* * *
As The Epoch Times’ Naveen Anthrapully detailed earlier, former president Donald Trump has confirmed that he intends to appear before a New York court for his arraignment on charges brought against him by Manhattan District Attorney Alvin Bragg.
“ELECTION INTERFERENCE!!!” Trump said in an all-caps April 3 Truth Social post.
“I will be leaving Mar-a-Lago on Monday at 12 noon, heading to Trump Tower in New York. On Tuesday morning I will be going to, believe it or not, the Courthouse. America was not supposed to be this way!” Trump said in another post.
The court hearing for the arraignment will take place at 2:15 p.m. ET when Trump will appear before acting Supreme Court Justice Juan Merchan. This will be the first time in history that a former U.S. president faces criminal charges.
In an interview with CNN on Sunday, Trump’s lawyer Joe Tacopina said that he is yet to see the indictment as it is still sealed.
“We will take the indictment. We will dissect it. The team will look at every, every potential issue that we will be able to challenge and we will challenge, and of course, I very much anticipate a motion to dismiss coming because there’s no law that fits this,” Tacopina said.
A spokesperson for the Manhattan District Attorney’s Office said in a statement on March 31: “This evening we contacted Mr. Trump’s attorney to coordinate his surrender to the Manhattan D.A.’s Office for arraignment on a Supreme Court indictment, which remains under seal. Guidance will be provided when the arraignment date is selected.”
Trump blasted Bragg for subjecting him to criminal charges. “The Corrupt D.A. has no case. What he does have is a venue where it is IMPOSSIBLE for me to get a Fair Trial (it must be changed!), and a Trump-Hating Judge, hand selected by the Soros-backed D.A. (he must be changed!). Also has the DOJ working in the D.A.’s Office – Unprecedented!” he said in an April 3 Truth Social post.
Trump was indicted by a grand jury for his involvement in paying $130,000 to adult film actress Stormy Daniels. The case is believed to rely mostly on testimony from Trump’s former lawyer Michael Cohen.
During an arraignment, formal charges against the accused are read by a judge for the first time. Trump will be asked how he wishes to plead and the judge will decide whether bail is necessary for him to be released.
GOP members have also insisted that the Manhattan District Attorney’s case against Trump is politically motivated. In a letter (pdf) to Republican lawmakers on Friday, Leslie Dubeck, Bragg’s general counsel, called such allegations of political persecution “baseless and inflammatory.”
“Like any other defendant, Mr. Trump is entitled to challenge these charges in court and avail himself of all processes and protections that New York State’s robust criminal procedure affords. What neither Mr. Trump nor Congress may do is interfere with the ordinary course of proceedings in New York State.”
Political Play
Richmond-based veteran political analyst Bob Holsworth believes the Manhattan district attorney’s case against Trump will boost the former president’s appeal for the Republican primaries in the race for 2024 president.
“But this [indictment] is not likely to be the only one. And the question is, as these pile up later this spring and summer, will it open up a lane for someone other than these two?” he said in an interview with The Epoch Times, referring to Trump and Florida Gov. Ron DeSantis.
“We’re in uncharted territory, and I think we’ll see likely twists and turns beyond the immediate impact.”
On April 1, Trump posted the results of a poll on Truth Social which saw 83 percent of respondents willing to vote for Trump in the Republican primary. Second-placed candidate DeSantis only received 13 percent support.
“I have never had so much support and love as I do now against the Radical Left Insurrectionists, Extortionists, Crooked Politicians, and Thugs that are destroying our Country. Thank you, we will MAKE AMERICA GREAT AGAIN!!!” Trump said in an April 3 post.
Over the weekend, and ahead of the OPEC+ output cut shocker, we first reported that short WTI bets had already collapsed by the most in 7 years following last week’s sharp spike in oil prices.
Now, it’s energy guru John Kemp’s turn to report that investors started to pair back short positions in petroleum even before Saudi Arabia and its OPEC+ allies surprised the market by announcing production cuts totalling more than 1 million barrels per day.
As Kemp notes, “the scale of the cuts and the element of surprise is likely to have been intended to intensify the rush of short-covering as well as boost confidence and draw more bullish investors back into the market.“
Hedge funds and other money managers purchased the equivalent of 61 million barrels in the six most important petroleum futures and options contracts over the seven days ending March 28.
Most of the buying came from the closure of previous bearish short positions (-48 million barrels) rather than initiation of new bullish longs (+13 million).
Buying was concentrated in NYMEX and ICE WTI (+49 million barrels), U.S. gasoline (+14 million), U.S. diesel (+5 million) and European gas oil (+1 million) with sales of Brent (-9 million).
As we also noted over the weekend, while short positions in NYMEX and ICE WTI were slashed (-51 million barrels), no new bullish positions were established and in fact long positions were trimmed marginally (-2 million).
Fund managers seem to have concluded WTI prices had found a floor after touching a 15-month low of less than $67 per barrel on March 17 and were unlikely to fall further in the short term.
Positions were all reported at the close of business on March 28, ahead of the decision by Saudi Arabia and its allies in the OPEC⁺ producer group to cut their output targets by more than 1 million barrels per day on April 2.
WTI Rally Primed
Prior to the most recent week, positioning in WTI had become especially bearish, leaving the market primed for a sharp short-covering rally. Hedge funds had reduced their net position in WTI to just 56 million barrels by March 21, the lowest since February 2016 and in only the 1st percentile for all weeks since 2013.
Funds’ bullish long positions outnumbered bearish short ones by a ratio of just 1.39:1 on March 21…
… the lowest since August 2016 and in only the 2nd percentile.
Positions had become so stretched towards the downside creating conditions for a sharp rebound if and when the news flow become more bullish or at least less bearish.
Even before the OPEC+ announcement, the concentration of bearish shorts and absence of bullish longs seems to have encouraged at least some fund managers to realise profits ahead of the expected recoil.
The announcement will likely fuel even more short covering in the near future, which was probably one of the motivations for the decision, announced on a Sunday to maximise its impact when trading resumed on Monday.
US Gas Positions
Fund managers are becoming less bearish about the outlook for U.S. gas prices following the full re-opening of Freeport LNG’s export terminal.
Hedge funds and other money managers increased their net position in Henry Hub futures and options for the seventh time in eight weeks.
Funds purchased the equivalent of 237 billion cubic feet of gas over the seven days ending March 28 taking total purchases to 1,011 billion cubic feet since January 31.
Portfolio managers still have a small overall short position of 50 billion cubic feet (30th percentile since 2010) but it has been sharply pared back from 1,061 billion cubic feet (7th percentile) at the end of January.
