In a humiliating and expensive setback for a military service already suffering through an epic recruiting drought, the US Army has pulled ads of its new “Be All You Can Be” campaign after the arrest of movie actor Jonathan Majors, who serves as the ads’ on-screen narrator. Majors is the star of films including “Creed III” and “Ant-Man and The Wasp: Quantumania.”  

The now-shelved television ads, which debuted and have been in heavy rotation during the NCAA men’s basketball tournament, are huge-budget, cinematic productions shot on multiple locations and with special effects. The most prominent of the ads, titled “Overcoming Obstacles,” shows Majors walking casually throughout scenes depicting the Army in a variety of combat settings from the Revolutionary War until today.  

Majors was arrested on Saturday in New York City and charged with strangulation, assault and harassment of a 30-year-old woman, after police responded to a 911 call from a Chelsea apartment.  

According to an NYPD statement:

“The victim informed police she was assaulted. Officers placed the 33-year-old male into custody without incident. The victim sustained minor injuries to her head and neck and was removed to an area hospital in stable condition.”

Citing police sources, TMZ reports that the victim is Majors’ girlfriend and that the couple had an argument in a taxi en route home from a Brooklyn bar, after the girlfriend saw another woman texting Majors. The girlfriend was said to have called police the morning after the incident, and exhibited a laceration behind her ear, and marks and redness on her face.  

On Sunday, Priya Chaudhry, an attorney representing Majors, said he “is provably the victim of an altercation with a woman he knows” and attributed the incident to the woman having “an emotional crisis.” Chaudhry said she has evidence that includes “video footage from the vehicle where this episode took place, witness testimony from the driver and others who both saw and heard the episode, and most importantly, two written statements from the woman recanting these allegations.”

The Army’s Enterprise Marketing Office issued a statement saying the Army is “deeply concerned by the allegations…[while Majors] is innocent until proven guilty, prudence dictates that we pull our ads until the investigation into these allegations is complete.”

Posting its worst recruiting results in a generation, the Army missed its 2022 recruiting goal by a whopping 25%. Army-commissioned surveys found young Americans’ fear of death and mental illness are the biggest reasons they won’t sign up.  

Authored by Dave DeCamp via AntiWar.com,

French President Emmanuel Macron’s diplomatic adviser has told China’s top diplomat, Wang Yi, that Paris is willing to work with Beijing to find a “peaceful solution” to the war in Ukraine.

“France is ready to make joint efforts with China to facilitate the cessation of hostilities and seek a peaceful solution,” Emmanuel Bonne told Wang, according to a Chinese readout of a phone call that took place on Thursday.

The readout said Bonne “expressed appreciation for China’s positive role in promoting peace talks.” The French position is radically different than the Biden administration’s as the White House came out against the idea of a ceasefire in Ukraine ahead of Chinese President Xi Jinping’s trip to Moscow.

President Biden also immediately dismissed the idea of China mediating between Russia and Ukraine after Beijing released a 12-point peace plan for the conflict. He said the idea of China being involved in the negotiations is not “rational.”

Wang told Bonne in the call that China is hoping to come to a “strategic consensus” with the EU on the issue of Ukraine and wants European countries to promote the idea of peace talks.

“China expects France and other European countries to also play their due role in this regard. Ceasefire, resumption of peace talks and political settlement of the crisis should become the strategic consensus between China and the EU,” the Chinese readout said.

Other world leaders have expressed support for China’s initiatives, including Brazilian President Luiz Inacio Lula da Silva.

Brazil – the largest economy in Latin America – looks East, away from the Western Hemisphere’s self-appointed dictator, the USA.

🔹President Lula will visit China soon (his trip got postponed because of illness)

🔹The ex-President of Brazil – Dilma Roussef – just became the… pic.twitter.com/EkpbGXSb8i

— S.L. Kanthan (@Kanthan2030) March 26, 2023

Lula was due to visit China this week but had to cancel after catching pneumonia. Before the cancellation, the Brazilian leader said he would propose a “peace club” with China to help mediate an end to the war in Ukraine.

Almost two weeks following an interview with Bloomberg TV, in which Saudi National Bank Chairman Ammar Al Khudairy, who is also Credit Suisse Group AG’s largest shareholder, ruled out the possibility of raising his stake in the struggling Swiss lender, the bank’s stock immediately plummeted, leading to an abrupt takeover by rival UBS. Now the chairman of the Saudi National Bank has resigned, citing “personal reasons.”

After his comments on Credit Suisse helped spark a slump in the lender’s shares, Saudi National Bank Chairman Ammar Al Khudairy resigns https://t.co/9aaWunmcFT pic.twitter.com/RpqLCQwpMg

— Bloomberg (@business) March 27, 2023

According to a filing on Riyadh’s Tadawul stock exchange, Al Khudairy is being replaced by Saeed al-Ghamdi, the bank’s current CEO. No further explanation was provided for Al Khudairy’s departure, with the statement only mentioning it was “due to personal reasons.”

His departure comes 12 days after he told Bloomberg TV in an interview that Saudi National Bank would “absolutely not” be open to increasing its Credit Suisse position.

“The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory,” the chairman of Saudi National Bank said on March. 15. That was in response to a question on whether the bank was open to further injections if there was another call for additional liquidity.

Immediately following Al Khudairy’s remarks, Credit Suisse’s shares plummeted by 30%.

… and its CDS exploded to record highs…

Later that day, the Swiss National Bank agreed to lend Credit Suisse $54 billion to shore up its finances. 

The next day, Al Khudairy tried to calm fears, telling CNBC viewers:

“It’s panic, a little bit of panic. I believe completely unwarranted, whether it be for Credit Suisse or for the entire market.”

And by the end of the weekend, on Sunday, March 19, UBS said it would take over Credit Suisse. 

And just how much did the Saudis lose because of Al Khudairy’s comments?

Figure they had a 9.9% stake for 1.4 billion francs last year, or about a billion dollars in losses. Quite an unfortunate turn of events…

Submitted by QTR’s Fringe Finance

“It is a shit storm out here. You have no idea the kind of crap people are pulling, and everyone’s walking around like they’re in a goddamn Enya video.” – Mark Baum

Even if the stock market holds up, something is going to have to break in a big way.

This is about the simplest way I can try and explain how I feel about the state of the economy and markets, delivered to you honestly and devoid of detail, as someone who truly neither has the patience nor the attention span to dive into the intricacies of the Eurodollar system or the path printed money takes during QE or QT.

The fact is that I just don’t care about how the bowels of the system works. I don’t need to care. All I need to know is that money creation as a method of “solving” recessions can’t continue in perpetuity: the dollar amounts necessary for bailouts become astronomical, too quickly, and inflation becomes a pressing issue. Then, as we are now, Central Bankers get stuck between an “inflation vs. recession” rock and hard place. It’s a flawed system that once exploited a loophole (money printing) to slap band-aids on problems. We then thought we could do it in perpetuity to keep ourselves and voters consistently comfortable by presenting the illusion that everything had done “back to normal” – and now we’re finally going to have to deal with very uncomfortable consequences of our actions.

How’s that for a book report from someone who didn’t actually read the book? And I didn’t even need to mention “swaps” or “interest rate futures” to fake sounding smart.

Putting aside what bureaucrats are saying about deposit insurance and Fed policy in the midst of the banking crisis we are having, underneath it all people seem to be forgetting that the economy has just tapped into a large pool of chaos and unrest in the form of 4% interest rates we’re supposedly using to fight inflation.

CNBC.com

And just as was the case with Covid, the headlines today don’t seem to match the reality of what’s happening in markets. Are we to honestly believe that, in the face of a cascade of bank failures that has now encompassed Silicon Valley Bank and Credit Suisse, with names like Charles Schwab and Deutsche Bank also being tossed around, that a real “flight to safety” is people pouring their money into the Nasdaq QQQ ETF at 27x earnings? Because that’s what’s happening.

Of course this is simply the residual effect of too much liquidity in the system, behavioral incentives that have reversed free market poles over the last 30 years and a stock market that has been coddled, babied, micromanaged and manipulated to the point of no longer making any sense.

The further we stray off the path, the closer we get to something having to give.

Powell and Yellen

I think the key point I am trying to make today is that I strongly continue to believe we have not seen the last – or even the beginning, really – of the volatility we’re in store for as a result of rate hikes.

In addition to bank failures, headlines like this one about hedge funds taking on huge losses thanks to the plunge in bond prices are going to become more common place.

When there’s over $1 trillion still floating around in the crypto ecosystem and tech stocks are the “risk off” trade, you know we haven’t experienced even a modicum of fear or capitulation yet. It’s the same hubris and arrogance we had during QE infinity.

And we’ll keep this “plan” until, in the parlance of Mike Tyson, we are eventually “punched in the mouth” by something we didn’t see coming.

The question is: what is going to break, and when?

The answer I have for you today: who the hell knows?

We’re already starting to see a flight into gold and silver, probably as a hedge against the system and inflation at once, as well as a response to the idea that the Fed is likely to pause, then pivot, soon. In the last 6 months, gold is pushing a 20% rise:

This move in the metals has taken place before Jerome Powell has alluded to rate cuts.

In fact, last week he said that rate cuts were not a part of the Fed’s base case. As I have been saying for months, I still expect the market to tank at some point, which will then cause the Fed to hurriedly step in with rate cuts. Not only have we not seen a sell off yet, we haven’t even seen the suggestion of a sell off.

When I try to visualize the Fed’s priorities, based on their spineless action over the last couple decades, all I can think about is that they’re going to want to protect the price of stocks at any cost.

In other words, soaring inflation by more money printing is okay with them, as long as the nominal price of assets keeps going up. Rising nominal asset prices always seems to trump letting the economy crash for the Fed. Why? Because the former “solution” widens the inequality gap and protects those with assets (the rich), while the latter would actually contract the inequality gap and disproportionately harm those with assets (the rich).

In a scenario where the Fed lets the economy crash instead of surrendering to inflation, the rich would be most susceptible to taking real losses. And we can’t have that, can we?

Now say, instead, that the Fed tries to walk a thin line between inflation and recession. Something will still have to break, it may just not be as pronounced or as quick if the central bank commits to one of the other. And by “break” I don’t just mean the economy wrecking somewhere, I mean it showing up in the price of something…somewhere.

Take a look out there and you can find a case for pretty much any story you want to tell yourself. There’s analysts saying gold will go to $8,000, there’s analysts saying oil could go to $300, there’s analysts saying the Dow Jones will go to 50,000, there’s analysts saying copper is going to 20x and there’s analysts saying the bond market will crack up in the face of yield curve control.

All of a sudden my brutal honesty of admitting I don’t have a clue what’s going to happen next looks pretty good, right?

The point is that while everybody has a different take on what the specific malfunction is going to be, it all falls under the umbrella of agreeing there is going to be some major malfunction in prices somewhere. I’d love to tell you, Jim Simons-style, that I have some theoretical mathematic opinion on the situation, but the fact is, I’m just kind of sitting around, Eastwood-in-Gran-Torino-style, sipping a beer waiting for something to blow up.

The easy, broader point that I’m trying to make is that the complacency in the market we are witnessing currently is outrageous.

The market will do what it will – I can’t control that. But what I can control is how closely I am watching and paying attention. I truly believe we are in the calm before a very big storm in equity markets, so I’m focused acutely on day-to-day sentiment. There will come a time when “fear mongering” stops and I think the market will be on autopilot again. But that time isn’t now.

Every issue heralds the end of the dollar reserve system according to fear mongers https://t.co/cpq6MvCJ1J

— Sara Eisen (@SaraEisen) March 26, 2023

In fact, someone should inform Sara Eisen and CNBC that the “fear mongering” has now made its way to CNN.

If the US dollar’s global supremacy erodes, America will face a reckoning like none before.

My take: pic.twitter.com/yxTz16bi3N

— Fareed Zakaria (@FareedZakaria) March 26, 2023

Meanwhile the blow up of Silicon Valley Bank and the ensuing swings in the market haven’t pushed volatility levels to any type of alarming level, especially when compared to the onset of the pandemic.

And let us not forget that, underneath it all, we still have to deal with the very real consequences of not dealing with consequences for the last several decades. Once again, it is time to take the medicine from our terrible monetary policy and that, in turn, is going to require a much larger response than it ever has from central banks.

Most of the quantitative tightening that the Federal Reserve has already performed has been put back on the central bank’s balance sheet already. Now, the gate will swing wildly in the other direction as the Fed’s balance sheet inevitably starts to grow once again.

I know I repeat myself a lot talking about this stuff, but it is so important to realize: the fed is still raising rates.

Again, for the millionth time, these rate hike (or cut) moves affect the economy with a lag. Silicon Valley Bank blowing up was the result of rate hikes that took place probably six months to a year ago.

That means we have six months to a year of rate hikes that haven’t been “processed” through the economy yet.

I would guess that there are blowups happening as you read this. I guarantee you there are compliance officers in the back room of a major hedge fund somewhere right now, examining the size and scope of a massive blowup that is about to take place (or has already), that nobody knows about yet.

But in time, all of these blowups and failures will be revealed. And then, it isn’t as though they’ve just magically worked their way out of the system and we can all go about our business. You then have all of the counterparties that need to be looked at and scrutinized carefully. On top of that, every new blowup chips away a little bit more at psychology and sentiment in the market, encouraging a risk off attitude and increasing the likelihood of another blowup. Yikes.

Again, I do think the Fed will ride to the rescue here, but only once the market smashes into something hard and immovable. If the stock market was a bowling ball dropped off the roof of a 100 story building and the Fed only stepped in to react after it smashed into the sidewalk, it would still be at about the 98th floor right now.

I’d love to hear your thoughts in the comments in this free discussion here about what part of the market you think is going to blow up first, where it will reflect the most in prices, and what you think the Fed’s “plan” is going forward.

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QTR’s Disclaimer: I am not a guru or an expert. I am an idiot writing a blog and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning and generally trade like a degenerate psychopath. This is not a recommendation to buy or sell any stocks or securities or any asset class – just my opinions of me and my guests. I often lose money on positions I trade/invest in and I’m sure have lost more than I’ve made in my time in markets. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. Positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. Also, I just straight up get shit wrong a lot. I mention it three times because it’s that important.

By Benjamin Picton, Senior Strategist at Rabobank

“I’ve lived long enough to have learned,
The closer you get to the fire the more you get burned,
But that won’t happen to us,
‘Cause it’s always been a matter of trust” – Billy Joel

So we made it through a Friday evening without a bank collapse. This obviated the need for another weekend of regulatory scrambling, but if the price action is anything to go by we’re not out of the woods just yet. European bank shares took another dive on Friday after Deutsche Bank called a tier 2 bond and lit the fuse on more selling. The decision makers at Deutsche must have thought that early repayment would engender confidence. But this market is suspicious of promises, and promise-makers. Consequently, DB credit default swaps blew out and the stock sold off by more than 8%.

Deutsche could credibly claim that they are a bank more sinned against than sinning. As Paul van der Westhuizen, our Senior Financials Analyst, points out, DB has a strong profit outlook, whereas Credit Suisse didn’t. Capital and liquidity buffers are also very strong, and as a globally-systemic bank, there is little doubt that regulators and the German government would stand behind it. In short, there is no serious question over solvency or even liquidity. But banking is a trust game, and trust is hard to come by at the moment.

“It’s hard when you’re always afraid,
You just recover when another belief is betrayed,
So break my heart if you must,
It’s a matter of trust.”

Despite markets ending the week in a state of comparative calm, US authorities haven’t been idle. Data published over the weekend showed that an unknown central bank tapped the FIMA repo facility for $60bn worth of dollar liquidity last week. That is the maximum available, and there are only 23 countries with US Treasury exposures exceeding that figure, many of whom have Fed swap lines. Given that the FIMA liquidity is comparatively expensive (~20bps above market), the numbers were enough to raise some eyebrows and spark speculation about who done it. Could it be Germany? Might it have been China? And why?

Bloomberg reports that regulators are considering the expansion of emergency lending facilities to provide more support to embattled banks like First Republic. This follows confusion last week about whether or not the Biden administration would seek to extend deposit insurance to cover all deposits, rather than just up to the legislated $250,000 threshold. Treasury Secretary Yellen closed the week with an ambiguous promise to do more to support the banking system, if warranted.

Given the turbulence being experienced by otherwise healthy banks in Europe, it seems a safe bet that further steps will indeed be taken. We could learn more about what those steps might look like on Wednesday when the Fed’s Vice Chair of Supervision, Michael Barr, testifies to congress. Blanket deposit guarantees could be in the offing, but that would mean that the US government would be signing on to an $18 trillion contingent liability, backstopped by the FDIC’s $120 billion (with a ‘b’) balance sheet. Regulators have assured us that the taxpayer won’t wear the cost of depositor bailouts, but the math here is Herculean. I guess it’s just a matter of trust.

“Some love is just a lie of the soul,
A constant battle for the ultimate state of control,
After you’ve heard lie upon lie,
There can hardly be a question of why,”

Switching gears to geopolitics, Sweden, Norway, Denmark and Finland have issued a joint declaration of intent to integrate their national air forces into a single fighting unit. DefenceNews.com likens the move to the creation of a ‘mini NATO’. In effect, the move creates a reconstituted Kalmar Union (for defence purposes, at least), and highlights the realpolitik thinking of European states close to the Russian border. Clearly, there isn’t a great deal of trust there. In a similar vein, Polish PM Morawiecki criticised Germany Friday for not doing enough to support Ukraine. He also suggested NATO should ramp up defence spending to 3% of GDP and accelerate the repurposing of frozen Russian assets to assist the Ukrainian war effort.

“This time you’ve got nothing to lose,
You can take it, you can leave it, whatever you choose,
I won’t hold back anything,
And I’ll walk away a fool or a King”

Striking a more sanguine tone, EU foreign policy chief Borrell just declared Xi’s recent meeting with Putin has reduced the risk of a nuclear incident. This apparently justifies another Franco-German push for the EU to build bridges with China –‘to coax it away from Russia’– despite Hal Brands arguing via Bloomberg that what the US and the EU faces is a de facto Sino-Russian alliance. As Xi departed Moscow last week, he observed to Putin that “now there are changes that have not happened in 100 years. When we are together, we drive these changes.” Putin’s response: “I agree”. But Poland and the Baltics aside, the EU apparently isn’t getting the message. Indeed, Russia over the weekend announced that it would be deploying tactical nuclear weapons to Belarus, Poland’s immediate neighbor.

Obviously many things are in an epochal flux, from banks to geopolitics to supply chains. The Brazilian presidential state visit to Beijing this week (with 240 business people) has had to be cancelled due to pneumonia. However, Lula is calling on China, not the US, to help develop a Brazilian chip industry. As this Daily has previously argued, the world is bifurcating, and the pressure to pick a side is intense.

Meanwhile, Israel is in chaos following PM Netanyahu’s firing of his defense minister after he called for a halt to polarizing reforms to the judicial system: an estimated 600-700,000 protestors were on the street last night (up to 7% of the population), and a general strike may be called starting today. Detractors are accusing Bibi of setting himself up as a dictator. Bibi, naturally, denies it.

Again, it’s all a matter of trust.

For the 11th month in a row, The Dallas Fed Manufacturing Outlook survey printed negative (signaling contraction) in March, dropping to -15.7 (from -13.5), significantly below the -10.0 expected bounce.

Source: Bloomberg

The new orders index was negative for a 10th month in a row and came in at -14.3, little changed from February. The growth rate of orders index was also negative and largely unchanged, at -15.2.

The capacity utilization index returned to positive territory, moving up six points to 2.3, while the shipments index pushed down from -5.0 to -10.5.

However, perceptions of broader business conditions continued to worsen in March.

The general business activity index slipped two points to -15.7. The company outlook index remained negative but rose four points to -13.3. The outlook uncertainty index came in at 22.0, down slightly from February but still elevated.

Additionally, expectations regarding future manufacturing activity were mixed in March. The future production index remained positive but fell eight points to 13.5, signaling well-below-average output growth is expected over the next six months. The future general business activity index pushed further negative, from -2.9 to -11.2.

A sliver of a silver lining shows prices paid and received falling in March.

But, it is the respondents that dropped the hammer on any nascent recovery or stability:

• [The collapse of] Silicon Valley Bank could be the beginning of more challenges ahead.

• Illiquidity of consumer customers is increasing. Stagflation is upon us. The politically charged funny money, the denial of economic realities by the current administration and the illusion of prosperity have come home.

• Our outlook is horrible. The level of certainty is zero. Production is hand to mouth. We cannot find workers.

• We are laying off workers for the first time since 2010.

• Foreign competition is at an all-time record percentage for our segment of the industry. Several countries, including Mexico, are subsidizing manufacturers in our industry.

• There are too many negatives in the economy: International conflict, inflation, poor national leadership, deficit spending, the Federal Reserve keeping rates artificially low and now raising them quickly and steeply, thus stressing the financial markets.

Is this what Powell wants to hear?

Authored by Bryan Jung via The Epoch Times,

The European Union is threatening more sanctions on Russia if it stations tactical nuclear weapons in Belarus.

It comes after Russian President Vladimir Putin announced on March 25 that his government would move tactical nuclear weapons to Belarus, in a clear warning to Ukraine and allied Western nations as they continue to provide military and financial support to Kyiv.

The bloc’s foreign policy chief, Josep Borrell, warned Belarus about allowing Russian tactical nuclear weapons to be placed in its territory.

“Belarus hosting Russian nuclear weapons would mean an irresponsible escalation & threat to European security. Belarus can still stop it, it is their choice. The EU stands ready to respond with further sanctions,” Borrell said in a Twitter post on March 26.

NATO spokeswoman Oana Lungescu condemned the Kremlin’s move, calling it “dangerous and irresponsible.”

Moving the weapons to a storage facility in Belarus raises the stakes in the Ukrainian conflict, by placing them closer to the combat zone and the borders of NATO.

Ukrainian service members next to an infantry fighting vehicle near the frontline town of Bakhmut, amid Russia’s attack on Ukraine, in Donetsk region, Ukraine, on Feb. 25, 2023. (Yan Dobronosov/Reuters)

Putin Protests UK-Supplied Depleted Uranium

Putin said that the move was triggered by the UK’s decision to provide Ukraine with depleted uranium armor piercing shells, which are widely considered to be toxic.

He said “the trigger was the statement by the British deputy minister of defenсe that they are going to supply depleted uranium munitions to Ukraine, this is somehow related to nuclear technology.”

“Those weapons are harmful not just for combatants, but also for the people living in those territories and for the environment,” he said in a previous statement.

Putin argued that the deployment of tactical nuclear weapons in Belarus is no different than the United States storing nukes in Belgium, Germany, Italy, the Netherlands, Greece, and Turkey.

“There is nothing unusual here either: firstly, the United States have been doing this for decades. They have long ago deployed their tactical nuclear weapons on the territory of their allied countries, NATO countries, in Europe, in six states.”

“We are going to do the same thing.”

Tactical nuclear weapons are short range and primarily intended for use on the battlefield. They a low yield compared with the more powerful nuclear warheads, which are carried by long range missiles.

The Russian president claimed that the decision does not violate existing nuclear non-proliferation agreements.

“I emphasize, without violating our international obligations on the nonproliferation of nuclear weapons, we have already helped our Belarusian colleagues and equip their aircraft, aircraft of the Belarusian Air Force. Ten aircraft are ready for use of this type weapon,” said Putin.

It would be the first time since 1996 that the Russians have based nuclear weapons outside of their borders.

Before the collapse of the Soviet Union in 1991, there were once nuclear weapons within the borders of Ukraine, Belarus, and Kazakhstan, but they have since been returned to Russia.

Russia plans to maintain complete control over the nuclear weapons it sends to Belarus and will complete the storage facilities built to house them by July 1, Putin said.

Defense Secretary Lloyd Austin (R) and Chairman of the Joint Chiefs of Staff Gen. Mark Milley, attend a virtual meeting of the Ukraine Defense Contact Group at the Pentagon in Washington on March 15, 2023. (Andrew Caballero-Reynolds/Pool via AP)

Biden Administration Monitoring Situation

Putin did not reveal how many nuclear weapons would be left in Belarus, which borders Ukraine, Poland, Lithuania, and Latvia, which are members of NATO.

The Pentagon believes that Russia has about 2,000 tactical nuclear weapons, including bombs that can be carried by tactical aircraft, along with warheads for short range missiles and artillery rounds.

“We have not seen any indication that he’s made good on this pledge, or moved any nuclear weapons around,” National Security Council spokesman John Kirby told CBS’ “Face the Nation.”

The Biden administration said it would “monitor the implications” of Putin’s decision, but so far there has been no indication that the Russians have started to move nuclear weapons across their borders.

“We have not seen any reason to adjust our own strategic nuclear posture nor any indications Russia is preparing to use a nuclear weapon,” said National Security Council spokeswoman Adrienne Watson.

“We remain committed to the collective defense of the NATO alliance.”

Meanwhile, Kyiv called for an urgent meeting of the U.N. Security Council on March 26 to address the move, as Ukraine’s Security Council Secretary, Oleksiy Danilov, accused the Kremlin of taking Belarus as a “nuclear hostage” and said it was taking a “step towards the internal destabilization of the country.”

The Russian president also accused the West of building a new “axis” similar to that of the Axis Powers of Germany, Italy, and Japan during World War Two, and denied that his country was building a military alliance with China.

US equity markets are extending Friday’s rip higher this morning, having bounced off the 200DMA, broken through the 100DMA, and now testing 4,000 level and the 50DMA around 4,012…

Friday’s action was helped (juiced) by one of the heaviest volume 0DTE options days on record.

SpotGamma recorded >50% of total volume, and 1.5mm contracts (which are “top 5” marks). Note here how in the previous few weeks 0DTE reduced which correlates to the bank crisis, FOMC, etc.

This 0DTE flow remains to be long buyers in the morning, as 0DTE call buyers seem particularly heavy into weak market openings. This can bee seen here in the composite S&P500 HIRO signal, as 0DTE bought the dip, and unwound those positions as the S&P pulled up into 4000 territory.

SpotGamma suggests that much of this 0DTE call buying on lows is traders delta hedging core long put positions.

And we are seeing a similar trend this morning…

The reason we bring this up is that, as Bloomberg’s Ven Ram notes this morning, expressions of volatility in equities remain subdued despite raging concern about the broader macroeconomic backdrop and elevated pricing in rates and currency-option gauges.

The VIX Index is hovering nonchalantly around 20. A Rip Van Winkle coming out of hibernation and missing the latest context would perhaps have concluded that all is hunky-dory in the markets. Juxtapose that with the sharp moves in the Move Index and comparable currency-market gauges, and the contrast couldn’t be more stark.

Ram goes on to note that a considerable part of that insouciance in stock volatility stems from the growing presence of zero-day-to-expiry options. Unlike the newer cousin, VIX is based on options that have an average expiry of about 30 days, and that’s obviously a lot of theta decay to pay for. That is especially so in the context of positioning for a calendar-led event risk that may suggest a very short burst of volatility rather than a prolonged one.

[ZH: while not a direct apples to apples comparison, the following chart shows the leak lower in implied vol (amid all the chaos) while a realized volatility measure that accounts for intraday movements (i.e. the potential impact of 0DTE trading on amplifying intraday swings) has been rising significantly.]

This is a market that seems to be undergoing a complete regime change, so if the current risk-averse macroeconomic backdrop doesn’t send volatility spiraling in equities, it’s hard to think what else might.

However, tactically-speaking, our strongest view remains that of resistance around 4000 for today into tomorrow, and 4065 into Friday. Dealers are likely long gamma in this area, which suggests that volatility should contract sharply if the 4000 level is breached.

Authored by Daniel Lacalle,

Negative interest rates and quantitative easing have wrecked the economic system. Negative interest rates destroy the profitable portion of a bank’s asset base, and no amount of cost-cutting or efficiency initiatives can compensate for this loss. Furthermore, persistent quantitative easing has transformed the investment side of the balance sheet into a ticking bomb.

Deutsche Bank is the latest headline after Credit Suisse. Nonetheless, everyone was aware that Credit Suisse faced enormous obstacles and a lack of profitability. On the other hand, Deutsche Bank was recovering from years of losses. Since 2019, Deutsche Bank has launched a solid rebalancing plan, with a goal of increasing return on tangible assets to 8%, a massive cost-cutting initiative, and a shift from investment banking to its core lending activities. After years of losses, the core capital ratio grew and profits began to emerge, indicating the apparent success of the plan.

Deutsche Bank followed the recommendations of authorities and the central bank to the letter. No strategy can counteract the erosion of the balance sheet caused by monetary policy and regulation.

Credit Suisse, Deutsche Bank, and Silicon Valley Bank are not the root of the banking issue. These are the symptoms.

The banking industry was not damaged by rate hikes, but by years of negative interest rates and monetary excess.

During a time when negative interest rates were destroying their primary business, European banks did all they could to become modestly profitable and bolster their balance sheets. According to the ECB, at the end of 2022, the aggregate Common Equity Tier 1 (CET1) ratio was 14.74 percent, the aggregate Tier 1 ratio was 16.03 percent, and the aggregate total capital ratio was 18.68 percent.

The economic aberration of negative interest rates has destroyed the bank’s profitable assets. Hence, most assets do not create a profit above the cost of capital for banks. Furthermore, investment risk surged during the period of monetary excess, obscuring any risk analysis.

Central banks constructed the time bomb that is exploding today through the insanity of negative interest rates and perpetual quantitative easing. Even during moments of boom, they made the assets with the lowest risk and volatility, sovereign debt, enormously expensive and volatile by acquiring bonds without control. As described numerous times in this column, this concealed danger but did not eliminate it.

What took place in 2022? Central banks have reported astronomical losses on their portfolios of national bonds. In 2022, the ECB reported losses of 1.6 billion euros that had to be covered by reversing provisions. The Federal Reserve and the Bank of England also suffered tremendous losses.

The financial void caused by the central bank’s accumulation of “safe assets” became the limit for many firms.

These identical unrealized losses in a commercial bank, when combined with negative returns on loans and deposit losses, indicate disaster. Quickly, the bank’s equity evaporates.

How is it possible? Is the issue the absence of regulation?

Regulation is the cause of this void. According to the regulation, taking risks in the public sector does not require capital because there is no risk involved. Negative interest rates are mandated by regulation through the supervisor. The regulation penalizes the increase of the cash ratio. And it is the supervisor who creates the risk in sovereign bonds by purchasing them uncontrollably while printing money.

Currently, the major issue is centered on the star financial instrument of these years. Regulation and oversight prompted banks to issue contingent convertible bonds in excess of $250 billion (AT1, or CoCos). These bonds have a particularly important equity component because if the entity’s highest quality capital falls below 6% – a lower figure than the norm for banks in 2008 – they are promptly converted into shares and the bank is automatically recapitalized. It looks like a terrific idea… Until it causes a big stock market meltdown, as everybody who has purchased a convertible bond is aware.

At the time of writing, the average coupon yield on contingent convertible bonds issued by European banks is 10.46%, while the average capital ratio (tier 1) of the largest European banks is 14.5%, according to Bloomberg. When the capital ratio falls below 6%, convertible bonds would immediately convert into common stock. Consequently, a substantial cushion of money exists before the necessity to convert arises. Right?

We cannot assume that these bonds are without danger. Low-risk bonds do not yield 10.4%. There are CoCos with a 19% yield from German banks and 15.7% yields from French banks. This does not imply that they are inexpensive, but rather that they carry a higher risk.

There is no return without risk, and if a convertible bond offers a 15% return, it is not due to the issuer’s generosity but to the bond’s extremely high risk.

In certain instances, in Europe, the amount of AT1 bonds issued by the firm is comparable to its present market capitalization. The number of AT1 bonds issued represents around half of the banking sector’s overall capitalization.

A convertible bond is only a good financial instrument if investors have perfect faith in the issuer’s balance sheet. When confidence wanes, the bond depresses the stock price, and the stock price, in turn, depresses the bond price, creating a vicious cycle that may have a negative outcome. The majority of credit investors cannot hold the shares if these bonds are converted; therefore, they must sell them or short the equity to mitigate the risk. It is not an issue with the instrument itself, but rather with the complacency of those who believe that having this financial buffer eliminates the need to normalize policy.

Many investors who purchase convertible bonds cannot hold the stock when it converts, so they must either short the security or sell the shares when it converts, which can have a significant impact on the share price. If the amount of convertible bonds issued is comparable to the bank’s market capitalization, it is possible that the conversion will not strengthen the bank’s capital but instead cause it to collapse due to selling pressure, since the value of both the new and old shares is less than the bank’s previous market capitalization. In other words, a convertible bond is a good idea if its conversion into shares does not cause a subsequent decline in the stock market’s value. However, this danger is difficult to assess.

In the case of European banks, it is important to recall that during the era of negative interest rates, they increased their high-quality capital. Today’s banks are better prepared for a shock of this scale, but it would be irresponsible and dishonest to claim that these are unique incidents that do not influence other entities. The balance sheets of the banks have been destroyed by monetary policy and regulation. Thus, the significance of addressing the anomaly of negative interest rates.

To prevent financial crises, regulators must also abolish the penalty for saving and the incentive to amass risk in the public sector.

No entity acquires large risk in its assets. Crises are always caused by the building of positions in assets that are regarded as posing almost no risk.

You wanted negative types and uncontrolled printing, correct? Lending without economic criteria? Welcome to the repercussions.

No one can claim we did not issue a warning about this. I stated in 2019 (The Eurozone Banks’ Trillion Timebomb, 18 Nov 2019) that Cocos can be a double-edged sword. On the one hand, they have been one of the most popular mechanisms for rapidly increasing core capital. In recent years, it was an extremely popular vehicle for bolstering capital and diversifying funding sources. In contrast, it is a highly hazardous asset that can have a domino effect on the entity’s equity and other bonds. The notion that a CoCo can convert or default without posing a risk of contagion to the rest of the capital structure or other banks is absurd.

Currently, the issue may appear to be controllable, but if financial repression persists, it will generate a systemic risk in the entire financial system by extending a slowly building but rapidly exploding risk.

Authored by Lance Roberts via RealInvestmentAdvice.com,

As the Fed tightens monetary policy, a banking crisis is historically the first evidence that something is breaking. As noted recently in “Not QE,”

Last week, amid a rash of bank insolvencies, government agencies took action to stem a potential banking crisis. The FDIC, the Treasury, and the Fed issued a Bank Term Lending Program with a $25 billion loan backstop to protect uninsured depositors from the Silicon Valley Bank failure. An orchestrated $30 billion uninsured deposit by eleven major banks into First Republic Bank followed. I suggest those deposits would not occur without Federal Reserve and Treasury assurances.

Banks quickly tapped the program, as shown by the $152 billion surge in borrowings from the Federal Reserve. It is the most significant borrowing in one week since the depths of the Financial Crisis.”

Since last week, that number has surged to almost $300 billion.

RealInvestmentAdvice.com (St. Louis Federal Reserve/Refinitiv)

Since then, UBS entered into a “shotgun marriage” with Credit Suisse, and the Federal Reserve reopened its dollar swap lines to provide liquidity to foreign banks.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced on March 19 “a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.”

To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations began on March 20 and will continue at least through the end of April.

Historically, once the Fed opens dollar swap lines, further monetary accommodations follow from rate cuts to “quantitative easing” and other liquidity operations. Of course, such is always in response to a banking crisis, credit-related event, recession, or a combination.

RealInvestmentAdvice.com (St. Louis Federal Reserve/Refinitiv)

While the “pavlovian response” to a reversal of monetary tightening is to buy risk assets, investors may want to take some caution as recessions tend to follow a banking crisis.

Banking Crisis Cause Recessions

An obvious consequence of a banking crisis is a tightening of lending standards. Given the “lifeblood” of the economy is credit, both consumer and business, the tightening of lending standards reduces that economic flow.

Not surprisingly, when banks tighten lending standards on loans to small, medium, and large firms, liquidity constriction ultimately results in a recessionary drag. Many businesses rely on lines of credit or other facilities to bridge the gap between manufacturing a product or service and collecting revenue.

RealInvestmentAdvice.com  (St. Louis Federal Reserve/Refinitiv)

For example, my investment advisory business provides services to clients for a fee of which we collect one-fourth of the annual fee during each quarterly billing cycle. However, we must meet payroll, rent, and all other expenses daily or weekly. When unexpected expenses arise, we may need to tap a line of credit until the next billing cycle. Such is the case for many firms where there is a delay between the sale of a product or service and the billing cycle and collection.

If lines of credit are withdrawn, businesses must lay off workers, cut expenses, and take other necessary actions. The economic drag intensifies as consumers cut spending, further impacting businesses due to reduced demand. This cycle repeats until the economy slips into a recession.

Currently, liquidity is getting extracted across all forms of credit, from mortgages to auto loans to consumer credit. The current banking crisis is likely the first warning sign of a worsening economic situation.

RealInvestmentAdvice.com (St. Louis Federal Reserve/Refinitiv)

The last time we saw lending standards contract this much was during the pandemic-driven economic shutdown.

Many investors hope a Fed “pivot” to loosen monetary policy to combat recession risks will be bullish for equities.

Those hopes may be disappointed as recessions initially cause “repricing risk.”

Recessions Cause Repricing Risk

As noted, the bullish expectation is that when the Fed makes a “policy pivot,” such will end the bear market. While that expectation is not wrong, it may not occur as quickly as the bulls expect. When the Fed historically cuts interest rates, such is not the end of equity “bear markets,” but rather the beginning.

RealInvestmentAdvice.com (St. Louis Federal Reserve/Refinitiv)

Notably, most “bear markets” occur AFTER the Fed’s “policy pivot.”

The reason is that the policy pivot comes with the recognition that something has broken either economically (aka “recession”) or financially (aka “credit event”). When that event occurs, and the Fed initially takes action, the market reprices for lower economic and earnings growth rates.

Forward estimates for earnings remain elevated well above the long-term growth trend. During recessions or other financial or economic events, earnings regularly revert below the long-term growth trend.

RealInvestmentAdvice.com (St. Louis Federal Reserve/Refinitiv)

A better way to understand this is by looking at the long-term exponential growth trend of earnings. Historically, earnings grow roughly 6 percent from one peak earnings cycle to the next. Deviations above the long-term exponential growth trend are corrected during the economic downturn. That 6 percent peak-to-peak growth rate is derived from the roughly 6 percent annual economic growth. As we showed just recently, and of no surprise, the yearly earnings change is highly correlated to economic growth.

RealInvestmentAdvice.com (St. Louis Federal Reserve/Refinitiv)

Given that earnings are a function of economic activity, current estimates into year-end are unsustainable if the economy contracts. That deviation above the long-term growth trend is unsustainable in a recessionary environment.

RealInvestmentAdvice.com (St. Louis Federal Reserve/Refinitiv)

Therefore, given that earnings are a function of economic activity, valuations are an assumption of future earnings. Therefore, asset prices must reprice lower for earnings risk, particularly during a banking crisis.

RealInvestmentAdvice.com (St. Louis Federal Reserve/Refinitiv)

There are two certainties facing investors.

1. The Fed’s rate hikes started a banking crisis that will end in a recession as lending contracts.

2. Such will force the Fed to eventually cut rates and restart the next “Quantitative Easing” program.

As noted, the first cut in rates will be the recognition of the recession.

The last rate cut will be the one to buy.