“Capital markets stop panicking when officials start panicking” – Michael Hartnett

Here comes the panic.

Bloomberg just reported that Treasury Secretary Janet Yellen – who was singlehandedly responsible for stoking and restarting the bank crisis on Wednesday which until that day was easing back, with her comments that nobody in charge was even talking about a uniform deposit insurance, let alone working on one – will convene the heads of top US financial regulators Friday morning for a previously unscheduled meeting of the Financial Stability Oversight Council.

The meeting will be closed to the public, the Treasury Department said in a statement. The Treasury didn’t say what time the meeting would begin, and it wasn’t immediately clear whether the council would issue a statement following the meeting.

The step comes as regulators continue efforts to instill calm in financial markets and among bank depositors following the recent failure of two mid-sized lenders in the US and the near-collapse of banking giant Credit Suisse Group AG before its government-brokered takeover by rival UBS Group AG.

FSOC’s members include the heads of the Federal Reserve, the Federal Deposit Insurance Corp. and several other regulatory agencies. It has little legal authority but serves as a coordinating forum. Here is a list of the full members:

The Council’s voting members are:

• The Secretary of the Treasury who serves as the Chairperson of the Council;
• The Chairman of the Board of Governors of the Federal Reserve System;
• The Comptroller of the Currency (OCC);
• The Director of the Bureau of Consumer Financial Protection (CFPB);
• The Chairman of the Securities and Exchange Commission (SEC);
• The Chairperson of the Federal Deposit Insurance Corporation (FDIC);
• The Chairperson of the Commodity Futures Trading Commission (CFTC);
• The Director of the Federal Housing Finance Agency (FHFA);
• The Chairman of the National Credit Union Administration (NCUA); and
• An independent member with insurance expertise who is appointed by the President and confirmed by the Senate for a six-year term.

Yesterday we asked “What is the record for shortest interval between a final rate hike and the first rate cut.”

What is the record for shortest interval between a final rate hike and the first rate cut

— zerohedge (@zerohedge) March 23, 2023

Are we about to discover that the answer is “just two days.”

Finally, one can’t help but wonder if this is the final pre-financial crisis meeting in Yellen’s lifetime…

Developing

S&P Global’s PMI data surprised to the upside in preliminary February data with both Manufacturing and Services coming in hotter than expected.

• Flash US Services Business Activity Index at 53.8 (February: 50.6). 11-month high.

• Flash US Manufacturing Output Index at 51.0 (February: 47.4). 10-month high.

• Flash US Manufacturing PMI at 49.3 (February: 47.3). 5-month high.

Commenting on the US flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“March has so far witnessed an encouraging resurgence of economic growth, with the business surveys indicating an acceleration of output to the fastest since May of last year.

“The PMI is broadly consistent with annualized GDP growth approaching 2%, painting a far more positive picture of economic resilience than the declines seen throughout the second half of last year and at the start of 2023.

“The upturn is uneven, however, being driven largely by the service sector.

Although manufacturing eked out a small production gain, this was mainly a reflection of improved supply chains allowing firms to fulfil backlogs of orders that had accumulated during the post-pandemic demand surge. Tellingly, new orders have now fallen for six straight months in manufacturing. Unless demand improves, there seems little scope for production growth to be sustained at current levels.

“In services, there are more encouraging signs, with demand blossoming as we enter spring.

It will be important to assess the resilience of this demand in the face of the recent tightening of interest rates and the uncertainty caused by the banking sector stress, which so far only seems to have had a modest impact on business growth expectations.

“There is also some concern regarding inflation, with the survey’s gauge of selling prices increasing at a faster rate in March despite lower costs feeding through the manufacturing sector. The inflationary upturn is now being led by stronger service sector price increases, linked largely to faster wage growth.”

That ‘good’ news is definitely not what Powell and his pals were hoping to see.

Of course, all this ‘good’ news hit before the current ‘credit-tightening’ crisis occurred.

By Phillip Marey, Senior US strategist at Rabobank

Another week of banking turmoil did not halt the fight against inflation for the central banks that were scheduled to make monetary policy decisions this week. However, the Fed seems to have been impacted the most as concerns about credit tightening have averted the rise in the projected peak for the hiking cycle that Powell had announced only a few weeks ago. Nevertheless, we continue to doubt the rate cuts that have been priced in by the markets for this year, as inflation in the US remains persistent.

Banking turmoil

This week saw additional efforts to stabilize the banking system across the globe.

On Sunday, six central banks – the Bank of Canada, the Bank of England, the Bank of Japan, the ECB, the Fed and the SNB – announced a coordinated action to enhance the provision of US dollar liquidity through an increase of the frequency of US dollar swap line operations to daily from weekly, at least through the end of April. The network of swap lines is a set of standing facilities that serve as a liquidity backstop for global funding markets.

First Republic Bank is the third casualty in the US banking turmoil. The similarity to Silicon Valley Bank, being a midsize bank with wealthy clients and largely uninsured deposits, makes it a prime suspect in the eyes of depositors and investors. A $30 billion deposit injection by 11 large US banks, led by JPMorgan Chase and facilitated by the Treasury Department, only provided temporary relief for First Republic. Note that these large banks received major inflows of deposits from midsize banks such as First Republic, so they are basically sending the hot money back. However, First Republic’s stock is still trading at low levels.

The first European casualty of the banking turmoil is Credit Suisse. After depositors fled the bank that has been suffering from scandals and trading losses for years, the Swiss central bank organized a takeover by UBS. The deal was announced on Sunday, with UBS buying Credit Suisse for $3.2 billion and getting a more than $200 billion liquidity line from the SNB and a Swiss government guarantee of $9 billion against potential losses. For more details, we refer to the Bank Bulletin by Paul van der Westhuizen.

During the week, US Treasury Secretary Yellen gave some mixed messages on bank deposit guarantees. On Tuesday, speaking to the American Bankers Association convention, she said the government stood ready to repeat the actions it took in case of Silicon Valley Bank and Signature Bank to rescue uninsured deposits if smaller institutions suffer deposit runs that pose the risk of contagion. Yellen’s remarks shored up confidence in midsize banks as many interpreted her words as a de facto guarantee of all $17.6 trillion in US bank deposits. However, on Wednesday, during a hearing before the Senate Financial Services and General Government Subcommittee, Yellen said that regulators are not looking to provide blanket deposit insurance to stabilize the US banking system without working with lawmakers. This led to an adverse market reaction, in regional bank shares, but also more broadly. Then came another change of tone on Thursday when she testified before the House and said that “we would be prepared to take additional actions if warranted.” On balance, it remains unclear how far the Treasury exactly is willing to go with raising deposit insurance, which contributes to market anxiety regarding the banking sector.

Decision time

This week was decision time for several monetary policy committees around the world. After the breakout of the banking turmoil, and efforts to stabilize the banking system, the Fed, the Banco Central do Brasil, the Bank of England, the Swiss National Bank, Norges Bank and the Bank of England had to decide how much impact the financial instability was going to have on their monetary policies. A week before, the ECB had already raised the policy rate by 50 bps with ECB President Lagarde stressing that there is no trade-off between price stability and financial stability, and that several facilities are available should they be needed. In fact, our ECB watchers already noted that the Fed’s new Bank Term Funding Program (BTFP) reminds them of the ECB’s series of (T)LTROs.

On Wednesday, the FOMC unanimously decided to raise the target range for the federal funds rate by 25 bps. However, wary of the banking turmoil and its impact on the economy and inflation, the FOMC does not want to go much higher and expects only one more 25 bps rate hike this year. Instead, the FOMC expects credit tightening by banks to do the rest of the inflation fighting for the central bank. Consequently, we have lowered our forecast for the target range of the fed funds rate to 5.00-5.25% from 5.25-5.50%. In other words, we now expect only one more hike of 25 bps instead of two. However, because of persistent inflation, we stick to our forecast that the FOMC will not cut rates this year. For more details, we refer to our FOMC Post-Meeting Comment.

Also on Wednesday, for the fifth time, the BCB‘s Copom unanimously decided to keep the Selic rate at 13.75%. The decision was in line with what we and the market had predicted. The Copom reinforced once again that they will remain “vigilant” and assess if holding the Selic rate for a sufficiently long period will drive inflation back to levels around the targets. And they hawkishly reiterated that they would not hesitate to resume tightening if need be, to reanchor inflation expectations. Going forward, we maintain our expectation that easing is not in sight until 2023Q4. We expect the Copom to keep the Selic rate at 13.75% until the November meeting when a cutting cycle begins, but we now add an upward bias to our 2024Q4 Selic rate forecast of 8.50%. For more details we refer to the BCB Post-Meeting Comment by Mauricio Une and Renan Alves.

On Thursday, it was decision time for several central banks in Europe. The SNB raised its policy rate by 50 bps to 1.5%. Swiss inflation is lower than in other European countries, but has been rising. The SNB said that “it cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term.” Regarding financial stability, the SNB said that the takeover of Credit Suisse by UBS, facilitated by the SNB, had “put a halt to the crisis.” Norges Bank raised its policy rate by 25 bps to 3.00%. Governor Ida Wolden Bache said that “there is considerable uncertainty about future economic developments, but if developments turn out as we expect, the policy rate will be raised further in May.”

Also on Thursday, the Bank of England raised its policy rate by 25bps to 4.25%. This was in line with our own expectations and with market pricing after the publication of the ‘hot’ February CPI report. The vote was split 7-2-0, with external members Tenreyro and Dhingra voting for a hold. The BoE will tighten policy further in May if price pressures persist and credit conditions permit. The shift to a meeting-by-meeting approach is not as dovish as some expected. The Monetary Policy Committee continues to focus on labor market tightness and what this means for wage and services inflation. We see risk that tightness persists. The Financial Policy Committee has judged that the UK banking system remains resilient, effectively giving the green light to this rate increase. For now, we hold on to our long-held view that Bank rate could rise as high as 4.75% with the next 25bps hike in May. This requires that global financial stability risks remain contained. For more details, we refer to the Bank of England Post-Meeting Comment by Stefan Koopman.

Overall, central banks decided to continue their fight against inflation this week, despite the banking turmoil. However, in particular the Fed has become more careful. Only a few weeks ago, prior to the collapse of SVB, Powell said that there would be an upward revision to the rate projections at the March meeting. However, this week the peak of the projected hiking cycle remained unchanged from the previous projections in December. Concerns about credit tightening are already playing a central role in the Fed’s mind, in contrast to other central banks

France is engulfed in turmoil following President Emmanuel Macron’s controversial decision to raise the retirement age. Over a million people participated in nationwide protests on Thursday, transforming urban areas into scenes of chaos. These demonstrations, the largest in years, have triggered fuel shortages, hundreds of arrests, and even claims of “civil war.” 

Interior Minister Gerald Darmanin told French media outlet CNews on Friday morning that more than 900 fires were reported in the streets of Paris on Thursday night — in one of the most violent days of protests in a while. 

“There were a lot of demonstrations and some of them turned violent, notably in Paris,” Darmanin said. He said more than a million people marched yesterday. 

Police warned anarchist groups were infiltrating marches across Paris and other demonstrations. Men wearing hoods and facemasks were seen smashing windows and setting fire to trash piles and, in some cases, burning buildings. 

Chaos on the streets of Paris

France 🇨🇵 on 🔥🔥🔥

🔊pic.twitter.com/CCxRmBmsxT

— Wall Street Silver (@WallStreetSilv) March 23, 2023

JUST IN: Protests in France are NOT LETTING UP, videos from Paris emerge showing what looks like a war zone..

WHY IS THE MEDIA HIDING CIVIL UNREST?

pic.twitter.com/OP64Km1UCT

— Chuck Callesto (@ChuckCallesto) March 23, 2023

JUST IN: Paris is being overrun by protestors..

Are we witnessing the beginning of a revolution?

pic.twitter.com/EQwBilJNdp

— Chuck Callesto (@ChuckCallesto) March 23, 2023

🚨🇫🇷URGENT – La mairie de #Bordeaux prend feu. pic.twitter.com/OUbsiZ4Iu7

— AlertesInfos (@AlertesInfos) March 23, 2023

Architectural beauty coupled with social unrest in one powerful picture!

Victory to the workers 🇫🇷#France #Protests #Paris pic.twitter.com/ncM9dCpztw

— The Auld Reekie Group Ltd (@ARSC_Edinburgh) March 23, 2023

Violent crackdown on protesters in France – imagine the media coverage if this happened in a country we are told to hate pic.twitter.com/RJ9Jg7FP85

— Glenn Diesen (@Glenn_Diesen) March 24, 2023

The level of police brutality in France is beyond shame. Why is western media silent on this?

French police violently beat up protesters.pic.twitter.com/oNcnT9Hb2g

— Hassan Mafi ‏ (@thatdayin1992) March 24, 2023

Darmanin said 457 people were arrested last night, and 441 security forces were injured. He praised the police for their brave actions. 

#UPDATE A total of 457 people were arrested and 441 security forces injured on Thursday during nationwide protests across France against President Emmanuel Macron’s pensions reform, Interior Minister Gerald Darmanin says ➡️ https://t.co/MvoQGpNlbc pic.twitter.com/ENWiNtde6N

— AFP News Agency (@AFP) March 24, 2023

Meanwhile, the demonstrations and violence have caused a significant fuel shortage, impacting gas stations nationwide. Other disruptions have been reported due to widespread strikes across many sectors of the economy, such as garbage piling up in the streets of Paris because trash collectors are protesting pension reforms. 

Far-right leader Marine Le Pen accused Macron of sparking conditions for a “social explosion.” 

“Consciously, the government is creating all the conditions for a social explosion, as if they were looking for that,” she told AFP.

Le Pen’s sentiment was shared with the Wall Street Silver Twitter account, which asked, “is France is on the brink of civil war?”

Recall earlier this week. We penned a note asking if “European Spring” had arrived. 

France is so dangerous right now that even King Charles III of Britain postponed his visit. 

And let’s not forget that massive protests are scheduled for Germany early next week. 

This all comes as a banking crisis spreads across the Western world. 

Authored by Irina Slav via OilPrice.com,

• The choice between energy security and decarbonization is not one that tends to attract a lot of attention.

• Following the energy crisis in Europe last year, world leaders are more aware of energy security.

• The UN Intergovernmental Panel on Climate Change is calling for an acceleration of the decarbonization push.

This week, the Intergovernmental Panel on Climate Change released a new report. Unsurprisingly alarming, the report aimed to turn up the heat on governments, the business world, and every one of us to do more about the energy transition. Decarbonization, the report said, had to move faster and more dramatically. Yet that wasn’t the only document that made the headlines this week. Shell also released a report in which it detailed two different scenarios for the future to 2050. In those scenarios, the supermajor’s analysts pitted energy security against the energy transition – something the IPCC reports have never done. 

The choice between energy security and decarbonization is not one that tends to attract a lot of attention. It is a sensitive topic because it exposes the shortcomings of low-carbon energy.

Yet, as Europe found out last year, it may be wise to discuss this topic before we splash $110 trillion on the energy transition.

In one of its scenarios, dubbed Archipelagos, Shell paints a familiar picture of the world of the future, at least politically. With a focus on energy security rather than decarbonization, the Archipelagos scenario describes a world similar to 19th-century Europe, where spheres of interest shift and nations ally with a view to energy security and resilience.

In that scenario, emission reductions and the Paris Agreement take a back seat, but work continues on deploying low-carbon energy technology. It simply progresses at a much slower pace.

The IPCC would probably be quick to point out that this scenario is effectively a doomsday scenario because nothing should take priority over emission reduction and the race to net zero. However, it is much easier to make computer models of future global temperatures and sound the alarm about them than find the money and the raw materials necessary to effect the transition at the pace that the IPCC wants it.

The raw materials problem of the transition has been garnering more and more attention from the media and, with it, from various stakeholders. The United States came up with the idea of friend-shoring to source these raw materials because it has no mine capacity to meet all of its projected demand from local supply. The EU plans to set up a Critical Raw Material Club, which effectively amounts to a buyers’ cartel, but this time for metals and minerals.

The chances of success of either of these approaches are yet to become clear, but in the meantime, another thing is becoming clear: the transition bill will be even bigger than previously expected.

The sum total of transition investments has always been in the trillion-dollar territory, but the latest estimate from a climate think tank pegs the annual spend necessary to hit net zero by 2050 at $3.5 trillion. That’s a more than threefold increase on last year’s record investment in wind, solar, and other decarbonization efforts, which for the first time topped $1 trillion. Unfortunately, that record investment—some of its actual spent, the rest in commitments—brought us nowhere near either net zero or energy security.

In Shell’s second scenario, however, these investments will work their miracle, with the indispensable help of everyone deciding to work for the common goal of cutting emissions and achieving what the company referred to long-term energy security.

In this scenario, governments, citizens, and businesses team up to bring those emissions down and deploy as much low-carbon energy capacity as possible, notably driven by energy security concerns. Energy security has indeed been one of the strongest arguments in favor of wind and solar—the energy produced locally is better than imported energy. 

That leaves the reliability and affordability issue, which decision-makers appear determined to tackle with excess capacity—for reliability—and with massive investments and subsidies—to solve the affordability problem. Because much as climate think tanks and activists like to repeat that wind and solar are the cheapest form of energy available, the wind and solar industries themselves appear to disagree.

“We are walking when we should be sprinting,” the chairman of the Intergovernmental Panel on Climate Change, Hoesung Lee, said at the release of the body’s latest report.

There are “no big fundamental barriers to the energy transition,” said the deputy director of that climate think tank that produced the report estimating the cost of said transition.

Based on these statements and the documents behind them, the transition seems like a no-brainer, however you look at it. Except if you look at it from an energy security perspective. Or a financial one. Because if there were no big fundamental barriers to decarbonization, such as reliability issues or affordability challenges, the transition would be happening everywhere, organically, without the need for such strong government support. This is what happens with successful, beneficial technology.

Which of the two scenarios that Shell has developed for the future remains to be seen. For now, the Archipelago scenario seems more realistic, not least because it does not rely on as many assumptions as the Sky 2050 scenario, such as a global ban on ICE cars by 2040.

So do all the scenarios of transition advocates. They are all based on a series of assumptions, some of them dangerously far-fetched, such as the assumption that there will be enough metals for EVs to take over roads. And assumptions are risky allies. Although sometimes grounded in reality, most of the transition assumptions appear to be grounded in wishes rather than facts. And wishes do not make reality or bring energy security into spontaneous existence.

Having enraged bondholders (who saw their entire AT1 debt tranche wiped out before the equity was fully impaired, violating every conventional liquidation waterfall):

Mark Dowding, chief investment officer at RBC BlueBay, which held Credit Suisse AT1 bonds, said Switzerland was “looking more like a banana republic”

“If this is left to stand, how can you trust any debt security issued in Switzerland, or for that matter wider Europe, if governments can just change laws after the fact,” David Tepper, the billionaire founder of Appaloosa Management, told the Financial Times.

“Contracts are made to be honored.”

Swiss authorities attempted to defend their actions, claiming that all the contractual and legal obligations had been met for it to act unilaterally given the urgency of the situation.

However, as Gavekal Research’s Louis-Vincent Gavekal writes, as books get written about Credit Suisse’s demise, fundamental questions will have to be asked:

• Was the bank condemned once Switzerland gave up its bank secrecy laws five years ago?

• Did the negative yield curve that prevailed in Switzerland for over a decade push the bank into taking excessive risk and accepting rotten deals (Greensill, Archegos, Wirecard)?

• Was its management just poor compared to other banks?

• Are private banks and investment banks condemned to be poor bedfellows?

Whatever the reasons, it is hard to see a storied institution disappear and not feel a degree of compassion.

But taking a step back, Credit Suisse may not be the only thing that died today. For amid the Swiss bank’s weekend “rescue”, the notion that the Swiss can be counted on to be both punctilious and the ultimate “rule followers” has also been blown out of the water.

Indeed, the episode creates two precedents:

1) A bank can merge with another bank without shareholder approval being granted.

The logic runs that if a bank is systemically important, minority shareholder rights have to be overrun in the name of the “greater good”.

This is an important precedent that minority shareholders in all systemically important banks will no doubt take notice of.

2) Even as the “take-under” of Credit Suisse leaves equityholders with cents on the dollar, contingent convertible bond holders (known as CoCos or AT1 bonds) are being wiped out.

This is an arresting development, given that even unsecured bondholders usually rank above equityholders in the capital structure. So for equityholders to get “something” and CoCo bond holders to get “nothing” raises serious questions about the real value of CoCo bonds. This is important since CoCo bonds were widely used by European banks to bolster their balance sheets after the 2008 mortgage crisis and 2011-13 eurozone crisis.

To cut a long story short, the terms of the Credit Suisse take-under is likely to kill the CoCo market.

Imagine being the Saudi National Bank, which in October invested US$1.5bn for a 9.9% stake in Credit Suisse, no doubt on the premise that Switzerland is one of the safest jurisdictions for foreign investors. Yet in less than six months, the Saudi bank’s investment has been merged into UBS, crystallizing a loss of some 80%, without a vote being offered on the matter. How likely are Saudi institutions to invest more in Switzerland, or perhaps even in the wider Western world?

This situation brings me to two of my longstanding themes:

Firstly, that Western economies keep on undermining their main comparative advantage, namely, the rule of law and sacrosanct property rights. After all, when China was accepted into the World Trade Organization in 2001, the hope was that as trade grew, China would become more rules-based, democratic and civic rights-minded. Instead, the reverse has occurred, with Western countries following China to permit less free speech and impose more government interventions that include directed bank lending policies. The West embraced stupid Covid restrictions, imposed vaccine mandates and repressed demonstrations of dissent (see Who Is Copying Who? Part II? & What Freezing Russia’s Reserves Means). In the battle between “individual rights” and the “common good”, the West could usually be relied on to strongly favor “individual rights”. But can one believe that today? The Credit Suisse take-under shows that, given a chance, policymakers will trample all over “individual rights” in the name of promoting the “common good”.

This is probably doubly true if the individuals in question are both foreign and from non-democratic countries. Since most current account surpluses accumulate in countries like China, Saudi Arabia and Qatar and most of the world’s twin deficits occur in democracies like the US, France and Britain, a difficult question arises: if Western economies no longer treat property rights as sacrosanct, why should capital keep flowing from the “greater South” into the “unified West”, as it has since the late 1990s Asian Crisis?

Secondly, Western policymakers seem ready to sacrifice “individual rights” on the altar of the “common good” due to a bad brew stemming from the 2008 crisis, social media’s development and our current cultural predilection for virtue signaling (see The Guiding Principle Of Our Time & CYA As A Guiding Principle (2022)). All of this has shortened policy time horizons to the “here and now”. Hence, the more involved a population is with social media, the more the policy time frame shortens, with the “common good” tending to prevail over “individual rights”. So more individual freedoms expressed on social media seems to lead to weaker individual rights!

Putting it all together, the unfolding Credit Suisse debacle and the Swiss government’s policy responses lead to the following conclusions:

1) The effect of government interference is to raise regulatory uncertainty and so again make the broader financial industry uninvestible.

2) Breaking the CoCo bond market means that in the next crisis banks will have to fund themselves in new ways, or shareholders will simply face massive dilution.

3) Emerging market savings will increasingly stay at home. I exaggerate for effect, but if I was a Saudi banker today, I might feel that, like the Russians last year, my assets had just been seized.

4) Policymaking in the Western world remains a shambles. This means that emerging market bonds will continue to outperform developed market bonds, and gold is likely to continue outperforming both.

By Simon White, Bloomberg Markets Live reporter and analyst

The Fed’s actions to stem the banking crisis are beginning to accelerate the effects of QT, causing money velocity to drop and intensifying the tightening of financial conditions.

In an implicit acknowledgement that policy may have been overtightened, the Fed at its meeting Wednesday hiked rates by 25 bps, but gave the impression it is on the verge of stepping back from further raises.

The rescue of SVB et al has shifted the landscape and compromised moral hazard, and prompted a reorganization of how bank deposits and Fed reserves are spread through the system. Money has migrated to large banks from small ones as the credit risk of the latter is reappraised in the wake of recent lender failures.

The system overall is saturated with reserves. But there is a distributional problem, with three-quarters of domestically-held reserves with the big four banks, while only 10% are with the next 300 largest, according to JPMorgan (and Zero Hedge which first pointed this out weeks ago).

This disconnect showed up in the LIBOR-OIS spread barely going above 20 bps in the midst of the crisis (versus 350 bps in 2008), even though Discount Window use was ballooning.

This is why there’s a good chance that reserves could end up with money market funds. The big banks don’t want the deposits and may, as they have done before, point larger depositors in MMFs’ direction. They offer a higher yield, and even though they’re uninsured, they invest mostly in ultra-safe assets, so they are very low risk.

We only have the data to last week, but MMFs had already been seeing a rise in their assets.

And some of this may already be finding its way to the RRP facility, which yesterday rose to its high for the year.

With the overnight RRP facility offering ~15 bps more than a 3-month Treasury bill after Wednesday’s rate hike, there’s a strong likelihood that MMFs will continue deposit cash there.

We’ll find out how bank deposits have moved around when the data comes out this evening in the Fed’s H.4.1 release, but in the coming weeks and months we are likely to see reserves leaving the high-velocity world of smaller banks, where they were being lent out more, to the effectively zero-velocity black-hole of the RRP.

Moreover, the Treasury may soon start to build back up its account at the Fed, a further suck on reserves and velocity.

It’s hard not to think conditions are going to get much tighter from here on out, making the Fed’s more cautious stance look prudent.

There’s been a number of new developments including tit-for-tat warnings and threats following the International Criminal Court’s (ICC) last Friday issuance of an arrest warrant for Russian President Vladimir Putin.

The most blistering and alarming attack on the Hague-based court this week has been from former Russian president and current deputy chairman of the security council Dmitry Medvedev, who said any attempt to actually arrest Putin would be an act of war.

First, on Monday he said, “It’s quite possible to imagine a hypersonic missile being fired from the North Sea from a Russian ship at The Hague courthouse.” He added as part of the warning: “Everyone walks under God and rockets… Look carefully to the sky…”

In follow-up on Wednesday he said in a video statement posted to Telegram that any “arrest” would surely spark world war 3…

“Let’s imagine — obviously this situation which will never be realized — but nevertheless lets imagine that it was realized: The current head of the nuclear state went to a territory, say Germany, and was arrested,” Medvedev said.

“What would that be? It would be a declaration of war on the Russian Federation,” he continued. “And in that case, all our assets — all our missiles et cetera — would fly to the Bundestag, to the Chancellor’s office.”

Medvedev was responding to Germany saying it plans to cooperate with the ICC and arrest Putin if he were to ever fly to German soil.

Given the ICC doesn’t have a police force, any actual attempt to detain Putin would be the decision of a government, so needless to say it could not possibly be enforced. However, it does complicate Putin’s ability to travel to European or other capitals which cooperate with the ICC. This also means it could hinder peace efforts in the scenario Putin might choose to personally engage in negotiations or diplomacy in a European city. 

It should be recalled amid the media outrage over Medvedev’s bombastic words that the Bush administration long ago said something similar… that the US would invade the Hague if a top US official were ever arrested to sent to the ICC:

USA has a law called the ‘Hague Invasion Act’, which allows it to INVADE the Netherlands if any American citizen is ever held accountable for war crimes at the International Criminal Court at Hague.

The next time you hear Americans talk about ‘war-crimes’, keep this in mind. https://t.co/7D5OA5ioV8

— Advaid അദ്വൈത് (@Advaidism) March 16, 2022

As for hindering the possibility of peace negotiations further, Kiev has seized on the ICC move, saying it has made negotiations with the Russian leader pretty much impossible.

Mykhailo Podolyak, an advisor to Ukrainian President Volodymyr Zelensky, said in the wake of the warrant: now that Putin is “an obvious international criminal” this “directly means there will be no negotiations with the current Russian elite.”

Authored by Rupert Darwall via The Epoch Times (emphasis ours),

Politicians and climate activists portray net zero climate policies as a win–win: good for the planet, good for the economy. A recent example is “Mission Zero,” a supposedly independent review of Britain’s net zero target led by the former minister who signed net zero into law. “Net zero is the economic opportunity of the 21st century,” it breathlessly proclaims. “We must act decisively to seize the opportunities in a global race.” Economics isn’t about races or moon shots but about comparative advantage and allocative efficiency. Nonetheless, the message we’re given is that the faster an economy decarbonizes, the wealthier it becomes. Through green alchemy, costs are transmuted into benefits.

In Britain, this is known as cakeism, defined by the Cambridge dictionary as “the wish to have or do two good things at the same time when this is impossible.” Normally, economists would deride such thinking. The concept of opportunity cost says that the cost of choosing one thing is represented by the highest-value option of what is not chosen. But when it comes to climate, to adapt Richard Nixon, “We’re all cakeists now” – and that includes economists, at least when it comes to their public pronouncements. 

That may finally be changing. Writing in the Financial Times last week, former chief economist at the IMF and Harvard professor Kenneth Rogoff says that a factor pushing up long-term real interest rates is “the massive costs of the green transition.” In any field other than climate, this wouldn’t be news. The trade-off involved in climate policy is higher costs in the near term for a better climate some decades in the future. Thus climate policy makes us poorer (the cost) than we would otherwise be for the sake of a better future (the benefit). Politicians pushing action on climate aren’t going to admit this, but one might expect better of economists. Instead, much of the economics profession has been complicit in the spinning of this fairy tale and has forsaken the tools of its science to disabuse politicians and the public of the net zero goldilocks story.

Following the first oil price shock of the 1970s, the International Energy Agency (the IEA) was created to protect the interests of Western energy consumers. When it sketches out various policy scenarios – including net zero by 2050 – the IEA uses the same global growth rate as an input assumption. This practice misleads the credulous by implying that net zero has no negative impacts on economic growth. The IEA’s net zero roadmap foresees rapidly falling demand for oil, causing oil prices to drop to $35 a barrel by the end of the decade. This is fantasyland economics.

Less than two years ago, the IMF was telling governments to embark on a huge green stimulus program, amounting to one percent of GDP, to stave off “catastrophic” climate change. It was terrible advice that would have meant even higher inflation than the inflation we’re now experiencing. IMF economists have also produced misleading estimates of the scale of fossil fuel subsidies, which a 2019 paper estimated at an implausible $4.7 trillion in 2015. Dig deeper, and the definition used by the IMF for fossil fuel subsidies would include delays to EVs caused by traffic congestion and EV tire wear resulting in PM2.5 particulate pollution. Based on the IMF’s misleading definition of fossil fuel subsidies, if the world went 100 percent EV, there would still be fossil fuel “subsidies” caused by EVs stuck in traffic jams, involved in fatal accidents, and from PM2.5 pollution.

Were the IMF’s fossil fuel subsidy estimates the product of a good-faith exercise, progressively eliminating fossil fuels would throw up large and growing fiscal surpluses. That’s not what the British Treasury found in its October 2021 review of the impact of net zero on the public finances. Net zero, it reckons, results in “a large and relatively rapid structural shrinking of the tax base as motorists move away from using petrol and diesel vehicles. This leads to a significant and permanent fiscal pressure.” How come the elimination of fossil fuels doesn’t lead to the disappearance of government subsidies for fossil fuels? Far from being an objective analysis – though it’s widely quoted and cited, it’s wholly misleading – the IMF’s fossil fuel subsidy estimates are little more than IMF-branded climate propaganda. 

The Treasury review concedes that Britain is unlikely to be directly affected by the physical effects of climate change. Rather, the effect is likely to be indirect via global supply chains, with reduced production pushing up the cost of imported goods. Ironically, the threat to the global trading system turns out not to be from climate change, but climate policy, such as the European Union’s carbon border adjustment mechanism (i.e., tariffs) and the United States’ Inflation Reduction Act – $370 billion of subsidies and trade privileges designed to decarbonize electricity generation. Inflation reduction? Residential electricity prices in Britain more than doubled in a decade, increasing from 8.08p (9.91¢) per kWh in 2009 to 17.98p (22.04¢) in 2019, thanks largely to climate policies. 

In its assessment of the fiscal risks of climate change, Britain’s Office of Budget Responsibility (OBR), which plays a role similar to that of the Congressional Budget Office, uses the Intergovernmental Panel on Climate Change’s RCP8.5 scenario and its off-the-wall assumption of a six-fold growth in global per capita coal consumption to 2100, which the OBR reckons would cause public debt to explode to 289 percent by the end of the century. If climate change were all that it’s hyped up to be, there would be no need to use extreme and implausible scenarios that have lost touch with economic reality – not that you’d learn that from mainstream economists. 

Stanford economist John Cochrane is a rare exception who has called out the notion that climate change represents a risk to the financial system. Economists’ colleagues in business and finance schools have shown much greater commitment to scientific objectivity. True, some business schools are seeking to close down debate, notoriously the University of Pennsylvania’s Wharton School, whose dean told RealClear Investigations that he did not see “substantive academically grounded debate” on climate financial risk. Despite the political and commercial momentum behind Environmental, Social and Governance (ESG) investing, there is debate.

In 2020, the University of California Los Angeles’s Bradford Cornell and NYU Stern School of Business’s Aswath Damodaran wrote a paper unpacking the central ESG claim of doing well by doing good. Harvard Law School’s Lucian Bebchuk and Roberto Tallarita have written articles showing that the Business Roundtable’s statement on stakeholderism is little more than a PR exercise. In 2022, London Business School’s Alex Edmans called time on ESG in a paper titled “The End of ESG,” followed by a second earlier this year applying insights from mainstream economics to test fashionable claims made for ESG investing.

By contrast, the silence of economists on the downsides of net zero climate policies for economic growth is a manifestation of intellectual cowardice. A fundamental tenet of environmentalism is hostility to economic growth. Dating back to the limits-to-growth debates of the early 1970s, environmentalism views economic growth as unsustainable and a threat to planetary boundaries (an ill-defined concept without empirical validation).

This green anti-growth sentiment is leaching into mainstream economics. A 2020 “Green Swan” paper on central banking and climate change published by the Bank for International Settlements (BIS) and the Banque de France argues that the notion of “endless economic growth” needs to be questioned, going on to suggest that biogeochemical cycles apart from the carbon cycle “may present even higher risks than climate change.” 

So, on one side, we have environmentalists, including some at the Banque de France and the BIS, who believe economic growth is bad for the planet and who support net zero because it suppresses growth; on the other, we have economists touting net zero as a growth elixir or preferring silence to pointing out the awkward trade-offs inherent in it. Perhaps with Roggoff’s example before them, they will  find the courage to speak up so that the public is better informed about the likely costs and consequences of net zero. As can be seen on this twentieth anniversary of the Iraq war and its nonexistent weapons of mass destruction, a policy misrepresented and deceptively sold to the public poisons democracy.

Rupert Darwall is a senior fellow of the RealClear Foundation and author of Climate-Risk Disclosure: A Flimsy Pretext for a Green Power Grab.