The price of lithium has experienced a significant decline over recent months, resulting from a deceleration in electric vehicle sales and an increasing supply of the key ingredient used in battery packs. 

Since November, the average price of battery-grade lithium carbonate in China has plunged from $84,500 per metric ton to $42,500, or about a 50% decline, according to Bloomberg data. 

Vivek Chidambaram, the senior managing director for strategy at Accenture, a consulting firm, told NYT the plunge in lithium prices could be attributed to the slowdown in electric vehicle sales. He said tight supply last year, which resulted in skyrocketing prices, has shifted into surplus this year as suppliers are producing more battery-grade lithium carbonate than ever before. 

“There was a time when people believed electric vehicles would grow very rapidly. Then the reality of how fast they were actually growing caught up.” He expects lithium prices to moderate over the next several years. 

In the second half of 2022, EV demand slowed due to China’s ending of subsidies to stimulate sales in the world’s largest EV market. Then in the US, the world’s second-largest EV market, Tesla began discounting vehicles in December. 

On Monday, Matty Zhao, an Asia Pacific basic materials analyst at Bank of America Securities, told CNBC that last year’s lithium shortfall, which sent prices soaring, could pivot into a surplus in 2023, with “a lot of supply coming out” from mines. 

“We are expecting 38% lithium supply growth this year. That’s why 2023 is likely to turn into a surplus year for lithium,” Zhao said. 

Cobalt, another crucial component in batteries, has seen prices plummet by over 50%. Meanwhile, copper, a key metal in electric motors and batteries, has experienced an 18% decline.

On a positive note, the decline in lithium prices could make EVs more affordable by lowering the cost of battery packs. 

Authored by Simon White, Bloomberg macro strategist,

The 25 basis points rate hike expected from the Fed this week could be the last for some time, as stresses in the financial sector cause bank credit to contract.

The crisis-lite in the banking sector, triggered by the Fed’s rapid run of rate hikes over the last year, looks set to cause the balance sheets of US lenders to shrink as the tighter conditions force regional banks to rein in lending.

The tightening will be more than enough to persuade the Fed to step back from its current policy stance, leading to an earlier-than-expected end to rate hikes and a premature curtailment of QT as tighter credit conditions coincide with a weakening job market.

The expected tightening will come in spite of the Fed’s new liquidity facility (the BTFP). To understand why, note that not all reserves are alike. In short, reserves are likely to migrate from smaller banks, where active lending ensured they were of higher velocity, to larger banks who do not want or need them.

The economy’s recent resilience has been driven by the fact that the aggregate balance sheets of US banks have barely contracted. But this trend has been masking the reality that, while smaller banks’ assets were continuing to grow, those of large banks have fallen over the last year.

Both small and large banks have continued to lend, but activity by the larger banks has on balance been neutralized as they have also been shedding duration risk by selling Treasury and agency bonds. Non-bank buyers have been acquiring the securities, meaning total deposits held in the banking system have fallen. Bank deposits are a higher-velocity “use” of reserves and therefore, when they fall, total velocity falls, posing a headwind for the economy.

Small banks are under stress, and are likely to continue to remain so, given their exposure to real estate lending, especially for commercial property. We can see this in the chart below, which shows the 99th and 75th percentile of rates traded in the fed funds market. It is almost certainly the more distressed smaller banks who are paying 15 bps above the top end of the fed funds target range to borrow reserves.

The BTFP facility will be of limited help as smaller banks have a higher proportion of assets that can’t be shifted onto the Fed’s balance sheet.

The FDIC may have eased the risk of bank runs for now, but small banks’ liquidity problems mean they will face further turbulence. The crisis may be in abeyance, but it has further to run.

Small banks are therefore likely to significantly rein in their lending. Larger banks too: the chart below shows that a greater number overall of banks are tightening lending standards, which will lead to fewer loans being made.

Even if larger banks pick up the slack in credit, they are likely to continue shedding duration risk – as they typically do when rates have risen – meaning the impact of any lending they do could have a lesser impact on economic momentum.

The overarching issue is that deposits will now migrate from the higher-velocity world of smaller, regional banks to the lower-velocity sphere of larger banks, which are already saturated with them.

The larger US banks, especially the big four, have been turning away deposits in recent years. After a temporary halt through the pandemic, central-bank reserves once again attract a capital charge of 3%.

Big banks are drowning in reserves, which is why they have kept their deposit rates so low. This is also why this crisis is different from 2008 — back then, nobody wanted to lend, while today, the biggest players don’t need to borrow. Cue LIBOR-OIS being sub 10-bps wide despite the biggest banking crisis since Lehman.

If big banks didn’t want deposits before SVB’s collapse, they’re unlikely to want them now. Indeed, if most of the new reserves created last week ended up at the big-four US banks, their reserves-to-asset ratio would be at an almost 20-year high.

Big banks will raise their deposit rates (perhaps under political pressure), but only slowly and reluctantly. And they may politely point new depositors in the direction of higher-yielding money-market funds. Yes, these are uninsured, but the yield pick-up is significant and, lest we forget, the US government underwrote MMFs in 2008.

So money-market funds are likely to be the ultimate beneficiary of Fed-intermediated small-bank deposit flight. And as bill yields are back below the Fed’s RRP rate, much of the deposit flow could wind up in the RRP facility.

The net effect of the banking crisis will be to turbo-charge QT. The BTFP does not address the distributional issue with reserves, and is only likely to help channel them from higher-velocity uses to the effectively zero-velocity RRP facility.

Bank credit is one side of the coin; corporate and private credit is the other. But credit is tightening across the economy.

This means considerably tighter financial conditions and much higher recession risk, while inflation pressures should ease (for now). So the Fed got what it wanted, but probably not in the way it would have wished

It’s only appropriate that the day after the weekly dose of doom and gloom from Marko Kolanovic and Mike Wilson, that stocks soar to the highest level in almost two weeks. S&P futures spiked above 4,000 on Tuesday as fears about turmoil in the global banking sector subsided, following a Bloomberg report that the Biden admin was considering insuring all deposits (unclear exactly how they will credibly insure all $18 trillion in deposits, some 75% of US GDP but whatever) followed by an FT article this morning previewing Janet Yellen’s speech at the American Bankers Association on Tuesday in which the Treasury Secretary will signal further US government backing for deposits at smaller American banks if needed, “a shift that seeks to protect parts of the country’s banking system struggling in the recent financial turmoil.”

Contracts on the S&P 500 were up 0.8% by 7:45 a.m. ET paced by European shares with Estoxx50 +1.8% on the day as  risk appetite has been stoked by report that US officials are studying ways to temporarily guarantee all bank deposits; Nasdaq 100 futures gained 0.7%. Both underlying indexes had risen on Monday. European and Asian markets were solidly in the green. As a result of the jump in risk sentiment, traders are also firming up bets on the Fed raising rates another 25bp on Wednesday with ~20bps currently priced in — versus less than 10bp at one stage on Monday.%. The Bloomberg Dollar Spot Index was down for the second day as treasury yields edged higher, mirroring moves in the UK and Europe. Gold fell and oil rose, while Bitcoin retreated for the first time in nearly a week.

Among notable movers in US premarket trading, First Republic Bank advanced more than 20%, rebounding from a slump to a record low as investors weighed a proposal from JPMorgan to help the struggling mid-size lender. Meta Platforms Inc. rose after Morgan Stanley raised its recommendation to overweight from equal-weight. Here are some of the other notable premarket movers:

• First Republic Bank jumps as much as 27% in premarket trading, set to rebound after closing at a record low Monday, as investors digest a proposal from JPMorgan to help the struggling midsize lender. Shares in fellow regional banks also gain on Tuesday, with Western Alliance (WAL US) +3.9%, PacWest Bancorp (PACW US) +4.9%
• Meta rises 2.5% after Morgan Stanley raised its recommendation to overweight from equal-weight, citing the social media giant’s pivot to increased efficiency.
• First Majestic Silver drops 16% in US premarket trading after saying it’s temporarily suspending all mining activities and reducing its workforce at Jerritt Canyon effective immediately.
• Keep an eye on Emerson Electric as it was upgraded to overweight from equal-weight at Morgan Stanley, which noted the drop in the US electrical-equipment maker’s stock after it announced its bid for National Instruments.

Investors are tiptoeing back into riskier assets, reversing the knee-jerk selloff early Monday that followed a government-brokered takeover of Credit Suisse Group AG at the weekend by Swiss rival UBS Group AG. Banks’ Additional Tier 1 bonds rebounded in Europe and Asia after euro-zone and UK regulators gave reassurances on the risky debt category, which seized up after Credit Suisse shareholders took precedence over the holders of over $16 billion of the AT1s. Appetite for risk is also being fueled by expectations that the Federal Reserve may adopt a more cautious policy approach when it decides on interest rates on Wednesday.

“The resolution to the Credit Suisse situation has managed to calm markets down, though in the US, all eyes remain on First Republic Bank and whether it needs another show of support from major banks,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. “If the Fed can calm markets down tomorrow, a longer-lasting rally in equity markets is on the cards.”

“About 10 days ago we had a series of risks emerge and now one by one, those tail risks are diminishing,” said Erick Muller, head of investment strategy at asset manager Muzinich & Co. Ltd. “It seems like everything has been put in place to resolve any liquidity issues — which is reassuring.”

The latest BofA fund manager survey showed investors now view a systemic credit event as the biggest tail risk to markets, followed by elevated inflation and hawkish central banks. Strategist Michael Hartnett recommended selling the S&P 500 above 4,100 to 4,200 points — between 3.8% and 6.3% higher than current levels.

Money markets are wagering on a hike of around a quarter-point as the cracks that emerged in the global banking industry discourage more aggressive tightening. Swap traders now see the Fed’s benchmark rate ending the year around 4%, while two weeks ago investors were betting on rates peaking close to 6%.

“It is possible that some central bankers will see recent events as policy finally getting some traction and tightening financial conditions via forcing markets to price in greater credit risk,” Mizuho International Plc strategists including Evelyne Gomez-Liechti wrote in a note. “This would allow central bankers to do a little less with policy rates.”

European markets rise for a second day as concerns around the health of the banking sector ease and investors look ahead to this week’s central-bank rate decisions while the demise of Credit Suisse appears to be in the rear-view mirror for investors who have piled back into European bank stocks. The Stoxx Banks Index is up 4.5% as most lenders saw their AT1 notes rebound from Monday’s sharp sell off. The Stoxx 600 is up 1.5%,  with banks and insurance stocks leading gains, while consumer staples trail. Here are some of the biggest European movers:

• Kingfisher shares rise as much as 3.4% after the UK home- improvement retailer reported FY pretax profit that beat estimates and said it plans to announce a new buyback program
• Santander gains as much as 4.8%, Deutsche Bank 4.6% and Commerzbank 7.2% as concerns around the banking system ease following UBS’s rescue deal for Credit Suisse
• RWE climbs as much as 3.2% after the German energy company reported new guidance and a higher dividend ahead of estimates
• Nordea shares rise as much as 3.6% after Barclays upgraded the bank to overweight, though is cautious given Nordic banks’ vulnerability to deposit outflows and funding costs
• Axfood gains as much as 5.7%, the most since June 2022, as both DNB and Carnegie upgrade the Swedish food retailer and wholesaler to buy from hold
• Thyssenkrupp climbs as much as 5.9% after a report that CVC is considering offering €1 for the German industrial firm’s steel unit
• Rockwool bounces as much as 5.5% as DNB upgrades the Danish insulation supplier to buy from hold, saying it thinks the firm’s margin guidance is “overly cautious”

Earlier in the session, Asian stocks gained as concerns of an escalation in the banking crisis eased, with lenders helping drive the day’s advance.  The MSCI Asia Pacific excluding Japan Index climbed as much as 1%, with Tencent, TSMC and AIA Group providing the biggest boosts among individual stocks. Japan was closed for a holiday. Financial stocks lent the most support among sub-indexes to the regional benchmark, which traded close to its 200-day moving average. Sentiment was helped by a rebound in riskier Additional Tier 1 bonds sold by banks in the region, along with news that US officials are studying ways to temporarily guarantee all bank deposits if the turmoil expands. 

“Whenever there is bad news on individual banks, governments and big global banks are responding immediately, helping markets find a bottom,” analysts at Shinhan Investment Corp. wrote in a note.  Benchmarks in Hong Kong and China advanced more than 1% to lead a regional rebound. The Hang Seng Tech Index gained 2.5% as Tencent climbed ahead of its earnings release. Korean stock gauges rose after China approved more foreign online game titles, fueling a rally among related stocks.  Investors are waiting for the Fed’s monetary policy decision, due early Thursday in Asian hours, with expectations that the US central bank will refrain from an aggressive interest rate increase. Pershing Square’s Bill Ackman said the Fed shouldn’t raise its benchmark rate.

In Australia, the S&P/ASX 200 index rose 0.8% to close at 6,955.40, buoyed by a rebound in banks and mining shares. The rise comes following gains on Wall Street as immediate concerns over the global financial system dissipated. Australia’s central bank will consider pausing its policy tightening cycle next month, given that interest-rate settings are already restrictive and the economic outlook is uncertain, minutes of its March meeting showed. In New Zealand, the S&P/NZX 50 index fell 0.3% to 11,531.30.

Stocks in India rose, helped by a recovery in lenders who posted their biggest gains in two weeks as investors chose to look beyond the ongoing banking crisis and chase pockets of value.  Tata Consultancy Services, the country’s biggest software exporter, slumped for a ninth straight session. This was the stock’s longest losing streak since November 2007, triggered by a surprise change in its top leadership. Meanwhile, the turmoil in US and European banks continued to dent the appeal for information technology service providers. The S&P BSE Sensex Index rose 0.8% to 58,074.68 in Mumbai, while the NSE Nifty 50 Index advanced 0.7%. The gauges have now risen for three of the last four sessions but slipped more than 4% over the last one month as global equities remained under pressure on concerns of slowing growth and higher rates. The 50-stock Nifty gauge is now trading at 17.3 times its members’ estimated earnings for the next 12 months – the lowest in one year –  and near its 10-year average, according to data compiled by Bloomberg.

In FX, the Dollar Index is flat after a three-day fall. The New Zealand dollar is the weakest among G-10 currencies, followed by the Japanese yen. The euro advanced to the strongest level in five weeks and short-end German bonds extended a drop as concerns about contagion in the European banking sector eased further following the rescue deal of Credit Suisse Group AG over the weekend.  EUR/USD rose as much as 0.5% to 1.0770, the highest since Feb. 14.

In rates, the improving market sentiment dented government bonds and treasuries extend declines led by the short-end as US stock futures gain and money markets add to Fed tightening wagers ahead of Wednesday’s policy decision. Losses across the curve are led by an aggressive bear-flattening move in bunds, with 2-year German yields nearly 21bp higher on the day to 2.57% as traders also bet the ECB will raise rates again in May. The US 2-year yield rises 11bps to 4.09% while its 10-year peer climbs 5bps to 3.54%, flattening the 2s10s curve 6bps to -56bps. Traders bet on 20bps of Fed hikes this week and add as much as 17bps to tightening expectations this year. The US session includes 20-year bond auction reopening at 1pm, while a $15b 10-year TIPS sale is slated for Thursday. WI 20-year yield near 3.875% is around 10bp richer than last month’s, which tailed by 0.2bp. Cash trading was closed in Tokyo for a Japanese holiday.

In commodities, crude futures rose for a second day with WTI rising 1.3% to trade near $68.50 after swinging in a $3-plus range on Monday. Traders are starting to return to risk markets after authorities stepped in to shore up the financial system. US officials are also studying ways they might temporarily expand protection for all deposits. Spot gold falls 0.6% to around $1,697. Bitcoin gains 0.4%. 

To the day ahead now, we get the US existing home sales for February and the latest Philly Fed non-mfg survey. From central banks, we’ll hear from the ECB’s Lagarde and Villeroy, whilst the two-day FOMC meeting will be getting underway ahead of tomorrow’s decision. Lastly, earnings releases include Nike.

Market Snapshot

• Australia’s central bank will consider pausing its policy tightening cycle next month, given interest-rate settings are already restrictive and the economic outlook is uncertain, minutes of its March meeting showed. BBG
• Vanguard will shut its remaining business in China after a partial retreat two years ago, people familiar said. It will shut the Shanghai unit and exit a robo-advisory joint venture with Ant Group. The reversal comes as rivals including BlackRock and Fidelity strive to build up local operations as China’s recovery and a pension reform brighten prospects. BBG
• UBS relies more on AT1 bonds for its capital than any other major lender in Europe. AT1s are the equivalent of about 28% of its highest quality regulatory capital, Bloomberg calculations show, just slightly more than for Barclays. The average exposure among the 16 biggest banks in Europe is about 16%. BBG
• Financial market turmoil may do some of the ECB’s work for it if it dampens demand and inflation, ECB President Christine Lagarde said on Monday. “Clearly financial stability tensions might have an impact on demand and might actually do part of the work that would otherwise be done by monetary policy and interest rate hikes,” Lagarde told European lawmakers. RTRS
• The Federal Home Loan Bank System issued $304 billion in debt last week, according to a person familiar with the matter, who asked not to be identified discussing non-public data. That’s almost double the $165 billion that liquidity-hungry lenders tapped from the Federal Reserve. BBG
• US officials are studying ways they might temporarily expand FDIC coverage to all deposits, a move sought by a coalition of banks arguing that it’s needed to head off a potential financial crisis. BBG
• The jobs market may not be as robust as it seems as many job postings are “fake”, with the prospective employer having no intention of immediately filling the position in question. WSJ
• US accounting rulemakers are being urged to rethink how banks should value their assets in financial statements, in the wake of the run on Silicon Valley Bank and pressure across the regional banking sector. Advocates of “fair value” accounting are urging the Financial Accounting Standards Board to force banks to recognize unrealized losses on securities such as those held by SVB, even when management insists they will never have to be sold. FT
• Wall Street bank chief executives are trying to come up with a new plan for First Republic after a $30bn lifeline failed to arrest a sharp sell-off in the lender’s shares. The executives will discuss if anything more can be done for the California-based lender on the sidelines of a pre-planned gathering in Washington on Tuesday, which is being organized by the Financial Services Forum, one of the main industry lobby groups. FT
• Pacific Investment Management Co. and Invesco Ltd. are among the largest holders of Credit Suisse’s so-called Additional Tier 1 bonds that have been wiped out after the bank’s takeover by UBS Group AG: BBG
• First Republic Bank shares rallied in US premarket trading after falling to a record low Monday, as investors ponder what’s next for the struggling midsize lender following an offer of help from JPMorgan Chase & Co: BBG

Top Overnight News

• S&P 500 futures up 0.9% to 4,018
• MXAP up 0.5% to 156.40
• MXAPJ up 1.0% to 504.24
• Nikkei down 1.4% to 26,945.67
• Topix down 1.5% to 1,929.30
• Hang Seng Index up 1.4% to 19,258.76
• Shanghai Composite up 0.6% to 3,255.65
• Sensex up 0.7% to 58,035.99
• Australia S&P/ASX 200 up 0.8% to 6,955.40
• Kospi up 0.4% to 2,388.35
• STOXX Europe 600 up 1.2% to 446.06
• German 10Y yield little changed at 2.18%
• Euro up 0.1% to $1.0734
• Brent Futures up 0.7% to $74.28/bbl
• Gold spot down 0.6% to $1,967.56
• U.S. Dollar Index little changed at 103.35

A more detailed look at global markets

Asia-Pac stocks mostly tracked the gains on Wall St where some of the banking sector jitters dissipated following the Credit Suisse rescue and amid hopes FDIC’s deposit insurance amount could be increased. ASX 200 was led by outperformance in energy, financials and the mining-related sectors, while the RBA Minutes from the March meeting noted that the Board agreed to reconsider the case for pausing at the April meeting. Nikkei 225 was closed as Japanese participants observed the Vernal Equinox holiday. Hang Seng and Shanghai Comp. gained as Hong Kong benefitted from strength in consumer stocks and the mainland was buoyed by the PBoC’s liquidity injection albeit with upside capped on higher money market rates.

Top Asian News

• China is giving chipmakers new powers to guide a recovery in the industry with a handful of China’s most successful chip companies to get easier access to subsidies and more control over state-backed research, according to FT.
• RBA March Minutes said the Board agreed to reconsider the case for pausing at the April meeting and that a pause would allow time to reassess the outlook for the economy, while it added that further tightening of monetary policy is likely required to lower inflation. RBA noted monetary policy was in restrictive territory and the economic outlook was uncertain, while these considerations meant that it would be appropriate at some point to hold the cash rate steady to assess more fully the effect of the interest rate increases to date. Furthermore, it said inflation is too high, the labour market is tight, business surveys are solid and sluggish productivity could lead to more persistent inflation.

European bourses are firmer on the session, Euro Stoxx 50 +1.7%, as the region continues the positive APAC handover with specific banking-sector updates slim. Sectors are all in the green with Banking names the outperformer, SX7P +3.5%, and back at Friday’s best levels; albeit, the index has someway to go to recoup the pressure of recent days/weeks. Stateside, futures are similarly in the green though magnitudes are much more contained as participants await updates to First Republic (FRC) and the FDIC ahead of Wednesday’s FOMC, ES +0.6%.

Top European News

• The Times shadow monetary policy committee urges the BoE to continue raising interest rates this week. Two members said the Bank should stick to 50bps, five said 25bps and one said unchanged.
• ECB’s Kazaks said uncertainty in financial markets is high and it is not possible to say that we have stopped hiking, while he added that European banks are well capitalised and financial resources are available, according to Bloomberg.
• ECB’s de Cos says he cannot validate the markets expectation of a 3.25% peak rate, via Expansion.
• Swiss KOF: Inflation forecast at 2.6% (prev. 2.3%) and 1.5% (prev. 1.1%) in 2023 and 2024. Click here for more detail.

Bank headlines

• US officials are examining ways to permit the FDIC to temporarily insure deposits beyond the current USD 250k cap on most accounts without the need for congressional approval, according to Bloomberg. There were also earlier reports that the House Freedom Caucus is against raising bank deposit guarantees.
• US banking executives are to discuss at a Financial Services Forum event on Tuesday the next steps for First Republic (FRC), via FT citing sources.
• Swiss Banking Association says Swiss banking credibility has not been destroyed by the Credit Suisse (CSGN SW) crisis, but the situation is not good.
• ESMA Chair says reforms to make money market funds more resilient to economic shocks are needed sooner rather than later.
• Australia’s prudential regulator has begun asking banks to declare their exposures to start-ups and crypto-focused ventures following the collapse of Silicon Valley Bank and volatility at global lenders, according to AFR.

FX

• The DXY is underpressure as the risk tone takes a more constructive tilt, with the index at the low-end of 103.24-103.51 parameters.
• Amidst this, the EUR is the marginal outperformer as the single currency extends above 1.07 though has seemingly paused for breath at 1.0750 with specific catalysts thin.
• Next best is the CHF, though this is more a recuperation of recent depreciation than any concerted upward move vs the USD while EUR/CHF is essentially flat, given the EUR’s relative strength.
• Antipodeans are at the bottom of the G10 pile following data and RBA minutes which suggested that a pause could occur in April, currently AUD/USD and NZD/USD are below 0.67 and 0.62.
• Additionally, given the above, the JPY has pared back much of Monday’s haven allure with USD/JPY around 25pips shy of Monday’s 132.64 high at best.
• PBoC set USD/CNY mid-point at 6.8763 vs exp. 6.8753 (prev. 6.8694)

Fixed Income

• Bonds extend retreat from Monday’s lofty safe haven peaks as risk appetite continues to pick up amidst less financial sector stress.
• Bunds down to 136.62 vs yesterday’s 140.30 Eurex best, Gilts to 104.65 from 107.33 and T-note 114-18+ compared to 116-24.
• Solid 2053 DMO issuance provides UK debt with little support and 20 year US supply still to come.

Commodities

• WTI and Brent are firmer in-fitting with the risk sentiment seen in European trade and with the complex attentive to commentary from Goldman Sachs, among others.
• Specifically, the benchmarks are towards the top-end of USD 66.77-68.500/bbl and USD 72.82-7466/bbl parameters respectively.
• Spot gold is softer given the relatively constructive tone with the yellow metal retreating further from Monday’s USD 2009/oz peak to USD 1963/oz at worst while base metals are benefitting from broader action and reports relating to China’s steel output.
• Goldman Sachs’ Commodities Head Currie sees upside of USD 5-10/bbl for crude, saying a Fed pause would be bullish for oil.
• Trafigura says they do not see major impact on industry from Credit Suisse (CSGN SW); current oil prices are not encouraging production. Still moving limited Russian refined products and considering whether to resume more Russian oil trade, CEO does not see much downside for oil at this point. Adds, that the existing LME Nickel contract is not fit for purpose.
• Gunvor Co-head of trading says with all these new refineries coming on stream, we are not very bullish on refined products down the road; does not think oil price can go over USD 100/bbl by December.
• Pierre Andurand of Andurand Capital sees oil price at USD 140/bbl at year end.
• TotalEnergies (TTE GP) Normandy refinery (250k BPD) is to be shutdown amid strike action, according to a statement.
• Norwegian oil production (Feb) 1.776mln BPD (vs. prev. M/M 1.754mln BPD), gas production 9.9bcm (vs. prev. M/M 11.1mln BPD).
• China is reportedly considering cutting 2023 crude steel output by circa. 2.5%, via Reuters citing sources.

Geopolitics

• Chinese President Xi said China will continue to play a constructive role in promoting a political settlement of the Ukraine crisis, while President Xi told Russian President Putin that ties with Russia are China’s strategic choice.
• Chinese President Xi has invited Russia President Putin to visit China, via Ria. Subsequently, Russia’s Kremlin says Putin and Xi had a throughout exchange on Monday including on Chinese peace proposal for Ukraine, declined to give more details.
• Iran is interested in developing peaceful nuclear and renewable energy cooperation with Russia, according to RIA.
• Japanese PM Kishida said he will visit Kyiv and meet with Ukrainian President Zelensky, according to NHK. It was later reported that Japan’s Ministry of Foreign Affairs said Japan and Ukraine leaders will hold a summit today.
• South Korea imposed sanctions on four individuals and six entities linked to North Korea’s weapons programmes, while it announced a watch list to ban the export of items related to North Korea’s satellite development, according to Reuters.

US Event Calendar

• 08:30: March Philadelphia Fed Non-Manufactu, prior 3.2
• 10:00: Feb. Existing Home Sales MoM, est. 5.0%, prior -0.7%
• 10:00: Feb. Home Resales with Condos, est. 4.2m, prior 4m

DB’s Jim Reid concludes the overnight wrap

Morning from what promises to be a very sunny warm day in Lisbon which makes a nice change from the rain in London as I left yesterday as we hit the first official day of spring. Like the seasons, it did feel like a new beginning for markets as they finally saw some positivity in the UBS-Credit Suisse deal after an open that felt like we might be in an ice age rather than starting to see green seasonal shoots.

It’s worth looking at how bad the open was yesterday and why it turned around. The STOXX 600 fell by almost -2% within 20 minutes of the opening bell, whilst UBS was down almost -16% with European bank AT1s down around 10-15%. It was a similar story on the rates side too, since the 10yr Treasury yield hit its lowest intraday level in over 6 months, at just 3.286% (-14.3bps at that point).

It all turned when we got a statement from the European Banking Authority that explicitly set out that the EU’s practice was that “common equity instruments are the first ones to absorb losses”, and that “only after their full use would Additional Tier One be required to be written down”. A similar statement was then issued by the Bank of England, which said that the UK’s bank resolution framework “has a clear statutory order” as used in the case of SVB UK, which prioritised AT1 ahead of CET1. With that reassurance, AT1s recovered somewhat over the session and we saw a broader boost in bank stocks across the board.

In more detail, Euro Sub-Financial CDS was as much as +46bps wider on the open yesterday before closing -13bps tighter overall, while the senior index was +18bps wider just after the open before finishing -12bps tighter by the end of trading. The STOXX Banks index advanced +1.97% (from -6.61% at the early lows), as all 19 of the 23 members moved higher on the day.

This was an extremely important announcement as most financial investors felt very uncomfortable with the details of the Swiss merger and what it did for AT1 bondholders rights in the resolution pecking order. The EU/UK clarity was a very good move and net net probably helps the European economy longer-term as to permanently increase the cost of bank capital would be counterproductive. As we’ve shown for the last few days, CS was massively decoupled from the rest of the European banking sector in CDS terms over the last several months, so whilst harder times are to come economically, this announcement and the prior fairly stable European banking system outside of CS, should cut off contagion risks.

US banks have a few more issues to deal with still though and although the KBW Banks index was up +0.79% on the day, they were as much as +2.4% higher before selling off steadily after Europe went home.

This came as concerns continue to percolate regarding US bank First Republic, even after last week’s move by other US banks to deposit $30bn. S&P cut their credit rating to B+ from BB+ over the weekend and yesterday saw their shares end the day down -47.08%, which builds on a decline of more than -80% already over the previous two weeks. There was a short intraday rally after the Wall Street Journal reported that JPMorgan CEO Jamie Dimon was leading discussions with other CEOs to stabilise First Republic, which could involve some or all of the $30bn in deposits being converted into a capital infusion. Despite these headlines, the stock reverted lower to finish near the lows of the day.

Overnight, it was reported that US officials at the Treasury Department and FDIC were studying ways to temporarily expand their deposit coverages in case the current situation expands into a full-blown crisis of confidence. The White House was looking into whether federal regulators would be able to increase the $250k cap without an act of Congress as headlines suggest Republicans would oppose the move.

Aside from the First Republic issues, the more positive shift in sentiment saw investors put growing weight on the probability of the Fed hiking rates tomorrow. For instance, shortly after the European open when everything had slumped, just 9bps worth of hikes were being priced in by futures. But that bounced back over the rest of the session, and by the close a 17.8bps hike was priced in, which is equivalent to a 71.2% probability. So for the time being at least (and clearly things are subject to change in these conditions), it would still be a surprise relative to expectations if the Fed didn’t go ahead.

Last night, our own US economists published their preview of tomorrow’s Fed meeting (link here), and they agree with the view that the Fed will opt for 25bps. Our economists expect the Fed to follow the ECB’s lead and raise rates in line with expectations, do away with forward guidance, but signal a continued tightening bias. They do not expect much change to the dot plot or the SEP from December, and Powell will also likely emphasise the heightened uncertainty surrounding those forecasts in his press conference.

Those expectations of a Fed hike meant that yields posted a small increase yesterday, with the 10yr Treasury yield ending the day up +5.6bps at 3.485%. As with bank stocks though, that only came after a big turnaround earlier in the session, having recovered by nearly +20bps from their intraday low of 3.286%. It was much the same story in Europe too, with the 10yr bund yield up from a low of 1.91% after the open before closing at 2.125%, leaving it up by a net +1.7bps over the day.

For equities it was also a positive session, at least once we got past the European morning. By the close, the STOXX 600 had advanced +0.98%, capping off a turnaround of almost +3% on an intraday basis from the initial lows. And over in the US, the S&P 500 was up +0.89%, which now leaves it down by just -1.01% since its close on March 8 before the concerns about SVB really took hold. Tech stocks were the main underperformer yesterday, with Software (-0.8%) the worst-performing industry, but even so the NASDAQ still gained +0.39%.

This morning in Asia a cautious rally continues. As I check my screens, the Hang Seng (+0.33%), the KOSPI (+0.30%), the CSI (+0.42%) and the Shanghai Composite (+0.15%) are trading in positive territory. Elsewhere, markets in Japan are closed for a holiday with Treasuries not trading overnight.

In central bank news, the minutes from the Reserve Bank of Australia’s recent meeting were less hawkish as the central bank indicated a near-term pause in interest rate increases at its upcoming policy meeting scheduled on April 4th, as uncertainty surrounding the economic outlook persists. In response to the RBA meeting minutes, the Australian dollar rose to a high of 0.6726 versus the US dollar before settling at $0.6687 as we go to press. Meanwhile, 10yr government bonds rallied with yields dropping -4bps to 3.20% as I type.

Amidst all the financial news, one more positive story in the background for consumers (albeit for negative return reasons) has been the continued decline in commodity prices. For instance, European natural gas futures (-8.24%) closed at a 19-month low of €39.325 per megawatt-hour yesterday, which brings their decline over March so far to -15.73%. Oil prices were under pressure for most of the day before a late rally in the US left Brent crude up +1.12% to $73.79/bbl and WTI contracts were up +1.35% to $67.64/bbl. Both contracts reached their lowest level since December 2021 intraday. Overall the recent drop in energy prices will benefit consumers, as well as central banks since it’ll offer them a helpful tailwind on the inflation side. On the other hand, it’s worth noting that much of the decline is thanks to growing concerns about a recession, with oil traditionally being a more cyclical commodity in those circumstances.

To the day ahead now, and data releases include the German ZEW survey for March, Canada’s CPI for February, and US existing home sales for February. From central banks, we’ll hear from the ECB’s Lagarde and Villeroy, whilst the two-day FOMC meeting will be getting underway ahead of tomorrow’s decision. Lastly, earnings releases include Nike.

Via SchiffGold.com,

Peter Schiff appeared on the Capitol Report on NTD News to talk about the bank bailouts and the possible ramifications. He said that no matter what President Joe Biden and others tell you, Americans are going to pay for this.

The interview started with a clip of Treasury Secretary Janet Yellen assuring Congrees that the banking system is safe. So, should we feel confident in our banking system?

Peter said, “not at all!”

In fact, that comment is as accurate as her earlier comments that inflation was transitory or the comments in the days leading up to the ‘08 financial crisis when she and everybody else at the Fed was saying not to worry about subprime because it was contained.”

Peter noted that Yellen kept interest rates at zero for virtually her entire term as Federal Reserve chair.

That’s the reason that we had such a big bubble. Those low interest rates and quantitative easing, and she was part of that, that’s why all these banks are loaded up with now underwater long-term Treasuries and mortgage-backed securities so the banking system is a house of cards. It couldn’t be less sound, and partially, Janet Yellen is to blame for the current state of affairs.”

The host noted the falling CPI and asked what that said about the state of the US economy.

The economy is literally a house of cards. It’s imploding. But inflation is going to get much worse because the Fed has already returned to quantitative easing, whether they admit it or not. The way they are bailing out all the banks is by printing new money and adding it into the economy and taking on mortgages and government debt onto their already bloated balance sheet. So, the Fed’s balance sheet is going to go up. The money supply is going to go up. And that means consumer prices are going to go way up.”

Meanwhile, President Joe Biden keeps insisting that Americans aren’t going to have to pay the cost of these bailouts.

He’s lying. They’re going to pay the cost through higher prices. And when he says that everybody’s bank account is now safe, it’s not. It’s in more danger than ever before because your bank account is going to be eroded in value because of inflation. So, even if your bank doesn’t fail, and you don’t lose your money, your money is going to lose its value.”

Why exactly did SVB fail? Peter said it was due to the low interest rate and QE environment it operated in for a decade.

It was the Federal Reserve that created all these distortions by its artificial suppression of interest rates, and it caused financial institutions to take incredible risks in order to get a return.”

US government regulations also encouraged these banks to load up on Treasuries and mortgages through favorable accounting

So, this whole thing was a byproduct of bad monetary and fiscal policy.”

The Federal Reserve has managed to aggressively raise interest rates and tighten financial conditions so much that it sparked a regional banking crisis and unleashed contagion in European banks. Even before the banking meltdown, financial conditions were tight, pressuring subprime consumers the most. 

A new Federal Reserve Bank of New York survey shows the auto loan denial rate rose to 9.1%, a six-year high in February — and up from 5.8% in October. 

“The findings show how higher interest rates are squeezing consumer credit in some key areas, in line with the Fed’s goal of cooling inflation. But in recent days, the collapse of three US banks has spurred fears of a sharper credit crunch that risks tipping the economy into a recession,” Bloomberg said. 

We suspect denial rates will continue increasing as banks lose faith in subprime consumers. Earlier this year, when discussing the “perfect storm” hitting the US auto market, we showed that according to Fitch, “More Americans Can’t Afford Their Car Payments Than During The Peak Of Financial Crisis“…

Since 1H21, the average rate on a new-car loan has nearly doubled, making vehicles much less affordable. 

And the number of folks with $1,000 monthly car payments has soared in recent years, with the average loan amount financed hitting a record high of $40,000 — a disaster in the making… 

The good news for the auto market is that tighter financial conditions have reduced the number of people buying new cars. However, that could only shift more consumers to the used car market in search of deals. As we noted in recent weeks, used car prices are reaccelerating. 

Authored by Chris Hedges via Consortium News/ScheerPost.com,

Two decades ago, I sabotaged my career at The New York Times. It was a conscious choice. I had spent seven years in the Middle East, four of them as the Middle East Bureau Chief. I was an Arabic speaker. I believed, like nearly all Arabists, including most of those in the State Department and the C.I.A., that a “preemptive” war against Iraq would be the most costly strategic blunder in American history.

It would also constitute what the International Military Tribunal at Nuremberg called the “supreme international crime.” While Arabists in official circles were muzzled, I was not. I was invited by them to speak at The State Department, The United States Military Academy at West Point and to senior Marine Corps officers scheduled to be deployed to Kuwait to prepare for the invasion.

Mine was not a popular view nor one a reporter, rather than an opinion columnist, was permitted to express publicly according to the rules laid down by the newspaper. But I had experience that gave me credibility and a platform. I had reported extensively from Iraq. I had covered numerous armed conflicts, including the first Gulf War and the Shi’ite uprising in southern Iraq where I was taken prisoner by The Iraqi Republican Guard.

I easily dismantled the lunacy and lies used to promote the war, especially as I had reported on the destruction of Iraq’s chemical weapons stockpiles and facilities by the United Nations Special Commission (UNSCOM) inspection teams. I had detailed knowledge of how degraded the Iraqi military had become under U.S. sanctions. Besides, even if Iraq did possess “weapons of mass destruction” that would not have been a legal justification for war.

The death threats towards me exploded when my stance became public in numerous interviews and talks I gave across the country. They were either mailed in by anonymous writers or expressed by irate callers who would daily fill up the message bank on my phone with rage-filled tirades. Right-wing talk shows, including Fox News, pilloried me, especially after I was heckled and booed off a commencement stage at Rockford College for denouncing the war.

The Wall Street Journal wrote an editorial attacking me. Bomb threats were called into venues where I was scheduled to speak. I became a pariah in the newsroom. Reporters and editors I had known for years would lower their heads as I passed, fearful of any career-killing contagion. I was issued a written reprimand by The New York Times to cease speaking publicly against the war. I refused. My tenure was over.

No Accountability

What is disturbing is not the cost to me personally. I was aware of the potential consequences. What is disturbing is that the architects of these debacles have never been held accountable and remain ensconced in power. They continue to promote permanent war, including the ongoing proxy war in Ukraine against Russia, as well as a future war against China.

The politicians who lied to us — George W. Bush, Dick Cheney, Condoleezza Rice, Hillary Clinton and Joe Biden to name but a few — extinguished millions of lives, including thousands of American lives, and left Iraq along with Afghanistan, Syria, Somalia, Libya and Yemen in chaos. They exaggerated or fabricated conclusions from intelligence reports to mislead the public. The big lie is taken from the playbook of totalitarian regimes. 

The cheerleaders in the media for war — Thomas Friedman, David Remnick, Richard Cohen, George Packer, William Kristol, Peter Beinart, Bill Keller, Robert Kaplan, Anne Applebaum, Nicholas Kristof, Jonathan Chait, Fareed Zakaria, David Frum, Jeffrey Goldberg, David Brooks and Michael Ignatieff — were used to amplify the lies and discredit the handful of us, including Michael Moore, Robert Scheer and Phil Donahue, who opposed the war.

The US has engaged in over eight major conflicts since it declared its War on Terror 19 years ago.

Since then, more than 37 million people have been displaced in US-related wars.

We take a look at the impact of the global war against terrorism ⤵️https://t.co/W4j4iyRPfy

— Middle East Eye (@MiddleEastEye) March 20, 2023

These courtiers were often motivated more by careerism than idealism. They did not lose their megaphones or lucrative speaking fees and book contracts once the lies were exposed, as if their crazed diatribes did not matter. They served the centers of power and were rewarded for it.

Many of these same pundits are pushing further escalation of the war in Ukraine, although most know as little about Ukraine or NATO’s provocative and unnecessary expansion to the borders of Russia as they did about Iraq. 

“I told myself and others that Ukraine is the most important story of our time, that everything we should care about is on the line there,” George Packer writes in The Atlantic magazine. “I believed it then, and I believe it now, but all of this talk put a nice gloss on the simple, unjustifiable desire to be there and see.”

Packer views war as a purgative, a force that will jolt a country, including the U.S., back to the core moral values he supposedly found amongst American volunteers in Ukraine. “I didn’t know what these men thought of American politics, and I didn’t want to know,” he writes of two U.S. volunteers. 

“Back home we might have argued; we might have detested each other. Here, we were joined by a common belief in what the Ukrainians were trying to do and admiration for how they were doing it. Here, all the complex infighting and chronic disappointments and sheer lethargy of any democratic society, but especially ours, dissolved, and the essential things — to be free and live with dignity — became clear. It almost seemed as if the U.S. would have to be attacked or undergo some other catastrophe for Americans to remember what Ukrainians have known from the start.”

The Iraq war cost at least $3 trillion and the 20 years of warfare in the Middle East cost a total of some $8 trillion. The occupation created Shi’ite and Sunni death squads, fueled horrific sectarian violence, gangs of kidnappers, mass killings and torture.

It gave rise to al-Qaeda cells and spawned ISIS which at one point controlled a third of Iraq and Syria. ISIS carried out rape, enslavement and mass executions of Iraqi ethnic and religious minorities such as the Yazidis. It persecuted Chaldean Catholics and other Christians. This mayhem was accompanied by an orgy of killing by U.S. occupation forces, such as as the gang rape and murder of Abeer al-Janabi, a 14-year-old girl and her family by members of the U.S. Army’s 101st Airborne. The U.S. routinely engaged in the torture and execution of detained civilians, including at Abu Ghraib and Camp Bucca. 

There is no accurate count of lives lost, estimates in Iraq alone range from hundreds of thousands to over a million. Some 7,000 U.S. service members died in our post 9/11 wars, with over 30,000 later committing suicide, according to Brown University’s Costs of War project. 

Yes, Saddam Hussein was brutal and murderous, but in terms of a body count, we far outstripped his killings, including his genocidal campaigns against the Kurds. We destroyed Iraq as a unified country, devastated its modern infrastructure, wiped out its thriving and educated middle class, gave birth to rogue militias and installed a kleptocracy that uses the country’s oil revenues to enrich itself.

Ordinary Iraqis are impoverished. Hundreds of Iraqis protesting in the streets against the kleptocracy have been gunned down by police. There are frequent power outages. The Shi’ite majority, closely allied with Iran, dominates the country. 

The occupation of Iraq, beginning 20 years ago today, turned the Muslim world and the Global South against us. The enduring images we left behind from two decades of war include President Bush standing under a “Mission Accomplished” banner onboard the USS Abraham Lincoln aircraft carrier barely one month after he invaded Iraq, the bodies of Iraqis in Fallujah that were burned with white phosphorus and the photos of torture by U.S. soldiers. 

To The Hague

The U.S. is desperately attempting to use Ukraine to repair its image. But the rank hypocrisy of calling for “a rules-based international order” to justify the $113 billion in arms and other aid that the U.S. has committed to send to Ukraine, won’t work. It ignores what we did. We might forget, but the victims do not.

The only redemptive path is charging Bush, Cheney and the other architects of the wars in the Middle East, including Joe Biden, as war criminals in the International Criminal Court. Haul Russian President Vladimir Putin off to The Hague, but only if Bush is in the cell next to him. 

Many of the apologists for the war in Iraq seek to justify their support by arguing that “mistakes” were made, that if, for example, the Iraqi civil service and army were not disbanded after the U.S. invaded, the occupation would have worked. They insist that our intentions were honorable. They ignore the hubris and lies that led to the war, the misguided belief that the U.S. could be the sole major power in a unipolar world. They ignore the massive military expenditures spent annually to achieve this fantasy.

They ignore that the war in Iraq was only an episode in this demented quest. 

A national reckoning with the military fiascos in the Middle East would expose the self-delusion of the ruling class. But this reckoning is not taking place. We are trying to wish the nightmares we perpetuated in the Middle East away, burying them in a collective amnesia. “World War III Begins With Forgetting,” warns Stephen Wertheim.

The celebration of our national “virtue” by pumping weapons into Ukraine, by sustaining at least 750 military bases in more than 70 countries and by expanding our naval presence in the South China Sea, is meant to fuel this dream of global dominance.

What the mandarins in Washington fail to grasp is that most of the globe does not believe the lie of American benevolence or support its justifications for U.S. interventions. China and Russia, rather than passively accepting U.S. hegemony, are building up their militaries and strategic alliances.

China Brokers Deal

China, last week, brokered an agreement between Iran and Saudi Arabia to re-establish relations after seven years of hostility, something once expected of U.S. diplomats. The rising influence of China creates a self-fulfilling prophecy for those who call for war with Russia and China, one that will have consequences far more catastrophic than those in the Middle East.

There is a national weariness with permanent war, especially with inflation ravaging family incomes and 57 percent of Americans unable to afford a $1,000 emergency expense. The Democratic Party and the establishment wing of the Republican Party, who peddled the lies about Iraq, are war parties.

Donald Trump’s call to end the war in Ukraine, like his lambasting of the war in Iraq as the “worst decision” in American history, are attractive political stances to Americans struggling to stay afloat. The working poor, even those whose options for education and employment are limited, are no longer as inclined to fill the ranks. They have far more pressing concerns than a unipolar world or war with Russia or China. The isolationism of the far right is a potent political weapon.

The pimps of war, leaping from fiasco to fiasco, cling to the chimera of U.S. global supremacy. The dance macabre will not stop until we publicly hold them accountable for their crimes, ask those we have wronged for forgiveness and give up our lust for uncontested global power.

The day of reckoning, vital if we are to protect what is left of our anemic democracy and curb the appetites of the war machine, will only come when we build mass anti-war organizations that demand an end to the imperial folly threatening to extinguish life on the planet.

North Korean state media has been touting new claims of mass enlistments amid “an atmosphere of war” and urgent defense preparedness in response to ongoing joint US-South Korea drills, which are the largest in five years.

The state-run Korean Central News Agency (KCNA) initially over the weekend cited a figure of 800,000 citizens having newly signed up for military service, most of them young people, while other state-linked sources are saying it’s well over one million enlistees. By Monday the number jumped significantly to claims of around 1.4 million people enlisting. 

“Amidst soaring anger and hostility toward the US imperialists and the South Korean puppet traitors going mad over the reckless nuclear war provocation targeting the Democratic People’s Republic of Korea, the ranks of hot-blooded youths bravely and vigorously set out to defend the homeland are growing day by day is growing,” a Pyongyang statement said.

The reports follow the North Korean government holding a major new recruiting drive, hosting events across the country while conducting near daily test launches of projectiles – including the latest on Sunday which included a ‘mock nuclear warhead’ as a warning to Seoul and Washington.

State media described that “youth college students from universities in various places as well as high-end middle school students from all over the country” expressed their determination “to join forces in the fight…”

The KCNA report additionally cited citizens’ willingness “mercilessly wipe out the war maniacs” – in what’s also clearly a propaganda blitz and bit of signaling aimed at the south and at the west. Kim Jung Un had promised a fierce response to the major US-South Korean drills which have lately included American B1 bombers and stealth jets joining the drills, dubbed Freedom Shield joint exercise.

North Korea’s state-run television aired a video of citizens signing up to enlist or reenlist in the military to counter the ‘imperialist Americans’ and that about 1.4 million people have expressed a desire to join the army as of March 19th https://t.co/VfGfWHBlBF pic.twitter.com/Y3nArTKI7N

— Reuters (@Reuters) March 20, 2023

But it seems Kim hasn’t gotten the reaction or attention from Washington that he hoped for, and thus could be daily ramping up the threatening missile launches and rhetoric.

The South Korean military, for its part, promised to continue undeterred with the US drills: “The South Korea-US alliance maintains the best-combined defense posture in the face of North Korea’s continued regional instability,” a press release said. “Going forward, we will realize ‘Peace through Strength’ and enhance the credibility of the US extended deterrence based on the solid capabilities and posture of the alliance,” it added.

Authored by Thomas McArdle via The Epoch Times,

As the old saw goes, a banker is someone who lends you his umbrella when the sun is shining and then wants it back as soon as the first drops of rain fall.

Hostility toward money lenders goes way back. In the Middle Ages in Europe, to deposit your money with one was unlawful, “even as it would be unlawful to deposit one’s sword with a madman, a maiden with a libertine, or food with a glutton.”

Loans may no longer be against the law, but bankers have been, and still are, convenient villains in popular culture.

In the movie “It’s a Wonderful Life,” for example, old man Henry Potter mocked George Bailey’s just-deceased father by remarking that “ideals without common sense can ruin this town.” And he said of George issuing a loan to his friend Ernie, Bedford Falls’s cabby, “You see, if you shoot pool with some employee here, you can come and borrow money.”

Were the now-failed Silicon Valley Bank and Signature Bank acting sensibly or madly? And did they shoot pool with powerful Washington figures in hopes that they could avoid ruin despite their lack of sense?

How much common sense is there in the “ideals” associated with SVB not having a chief risk officer for most of last year as it hurtled toward collapse, but at the same time employing a chief diversity, equity, and inclusion officer and making a point of focusing on climate change, and social and corporate governance policies? “Issues of inequity in the innovation sector” apparently mattered more to SVB president and CEO Greg Becker than the soundness of his bank’s loans in an environment of rising interest rates amid high inflation.

It’s no shock to find that Joe Biden’s presidential campaign and political action committees were bestowed with at least $11,900 from SVB executives, with SVB managing director Gerald Brady giving $5,600 to Biden’s 2020 campaign, according to the Federal Election Commission. The Democratic National Committee and various party politicians are announcing the return or the money or donating funds received to charities.

Congress early this month moved against a Biden administration rule forcing pension funds holding $12 trillion of 150 million Americans’ savings to include environmental, social, and corporate governance (ESG) in their investment decisions—in other words, make your retirement finances dependent on the same kind of thinking that led SVB to collapse. ESG equities distinctly underperform the market.

Who can forget Jimmy Stewart as George Bailey scrambling to hand out cash meant for his honeymoon to beleaguered depositors during the run on the Bailey Savings & Loan? But the tone-deaf sixteenth largest bank in the country was handing out company-wide bonuses to its employees for their 2022 work just hours before the government had to take it over.

In the case of Signature Bank, it wasn’t George Bailey shooting pool, it was superstar bankers poached from competitors in at least one case spending “most of his week golfing with prospective clients.” Big Signature Bank customers ultimately included rap superstars. And speaking of Ernie the Bedford Falls cabby, among Signature’s peculiar banking practices was to encourage taking out loans to buy New York City’s infamously expensive taxi medallions—in itself a regulatory shell game—in expectation of Uber and Lyft upending the passenger transport landscape.

Of far more import, however, was Signature’s over-exposure in cryptocurrency, where it placed over a quarter of its $109 billion in deposits before the FTX debacle last year that sent crypto spiraling to earth.

The bailing out of these two boutique, politically fashionable institutions by the “wokest” of woke presidents is for the benefit of the well-to-do; most of the tens of billions of dollars in deposits exceed the Federal Deposit Insurance Corporation’s (FDIC) $250,000 ceiling. Would a bank in deep trouble in, say, Roberts County in the Texas panhandle, where the median average family income is $50,400, have received such exceptional treatment from Uncle Sam?

And don’t swallow Treasury Secretary and former Federal Reserve chairwoman Janet Yellen’s claims that the “bank fees”-funded rescues will leave no taxpayers on the hook. Like any other business, banks ultimately pass the taxes and fees imposed upon them by the government down to their customers, whether it happens individually or collectively, conspicuously or in hidden manner. As Fordham University law school professor and bank bailout expert Richard Squire points out, while management at SVB and Signature may be being allowed to save face, “the venture capital firms and the startups are being bailed out. There is no doubt about that.”

The Biden administration’s nearly $5 trillion in spending is the engine behind the inflation that forced the Federal Reserve to embark on an extended policy of raising the interest rates under its direct control—which in turn has put the squeeze on banks, especially those conducting fast and loose financial practices. But as scary as that chain reaction may be, the FDIC’s guarantee to reimburse all the rich uninsured depositors at the two failed institutions, making an exception to its $250,000 cap, and no matter how big the depositors’ accounts, is more alarming.

Such measures take the United States down a road toward total nationalization of the banking system and removes the indispensable elements of accountability and discipline all businesses need: certainty that misjudgment and irresponsibility must come with a cost.

When Washington bails that out, America turns into Potterville.

Move over Tesla: both Ford and GM are also trying to take a page out of the ‘price cut’ playbook that the EV manufacturer has been (successfully) running in China over the last couple months. 

The move is coming after lifting pandemic controls failed to spur significant demand in China, the Wall Street Journal reported this week. Ford and GM will be joined by BMW and Volkswagen in offering the discounts and promotions on EVs, the report says. 

Retail auto sales plunged the first two months of the year and automakers are facing additional challenges in trying to transition their business models to prioritize EVs over conventional internal combustion engine vehicles. 

Ford is offering $6,000 off its Mustang Mach-E, putting the standard version of its EV at just $31,000. Last month, only 84 of the vehicles were sold, compared to 1,500 sales in December. There was some pulling forward of demand due to the phasing out of subsidies heading into the new year, and Ford had also cut prices by about 9% in December. 

A spokesperson for Ford called it a “stock clearance”. 

Discounts at Volkswagen are ranging from around $2,200 to $7,300 a car. The cuts will affect 20 gas powered and electric models. Its electric ID series is seeing price cuts of almost $6,000. The company called the cuts “temporary promotions due to general reluctance among car buyers, the new emissions rule and discounts offered by competitors.”

Even more shocking is Citroën-maker Dongfeng Motor Group, who is offering a 40% discount on its C6 gas-powered sedan, now priced at $18,000. 

Kelvin Lau, an analyst at Daiwa Capital Markets, told the Journal that automakers are also trying to get rid of 500,000 vehicles collectively stored in their inventory, most of which are older vehicles that won’t meet new emissions standards.

David Zhang, a Shanghai-based independent automobile analyst, added: “Some car makers have been seeing very few sales. At this rate, the manufacturers’ production and dealership networks will collapse.”

Hopefully Tesla is paying close attention to the cuts – but perhaps even moreso to their mainland China competition. Domestic-based market leader BYD has only cut prices “a single percentage point”. 

Authored by Petr Svab via The Epoch Times (emphasis ours),

Ordinary Americans can expect their wealth to get repeatedly chipped away as the monetary system degrades and requires progressively more intervention by authorities to perpetuate itself, according to an influential author and economist. It may take “a very long time,” however, for the system to actually break, he told The Epoch Times.

The recent downfall of two sizable American banks, Silicon Valley Bank (SVB) and First Republic Bank, rattled the financial markets. Investors are now looking to the Federal Reserve to provide relief and within months reverse its policy of raising interest rates. That’s after the central bank, together with the Treasury and the Federal Deposit Insurance Corporation (FDIC), already shored up the banking sector, offering special loans and guaranteeing uninsured deposits for the failed banks.

The failures, however, represent a symptom of a broader problem—one the central bank can’t fix, according to Daniel Lacalle, fund manager, economist, and prolific author.

“The problem here is the concept of ‘what can be done?’” he said, arguing central bank market interventions intended to smooth over market perturbations tend to simply redistribute the risk and losses—and at the added cost of making the system more fragile in the long run.

“Every time they try to solve a bubble with more liquidity injections, they create another bubble,” he said. “What you have to do first is not implement crazy monetary policies.”

He was referring to the policy of extremely low interest rates that the Fed maintained for most of the past decade.

Free Money

Lacalle alluded to the Austrian economic theory, which posits that central banks can’t set interest rates correctly. When the economy is not doing well, central banks set the rates artificially low in order to “stimulate” the economy. That allows companies to loosen fiscal discipline and makes credit available to projects that would be otherwise too risky to attract capital. When the economy “overheats”—the availability of credit outstrips the production capacity of the economy, resulting in inflation—the central bank raises rates, tightens credit, and the poorly performing risky projects go under. Because rate hikes take more than a year to fully manifest in the economy, central bankers tend to continue hiking for too long. Excessively high rates then cause the destruction of even viable businesses. Recession ensues. The central bank then tries to cushion the recession blow by dramatically cutting rates, thereby repeating the cycle.

“After a decade of excess, of course, there are going to be episodes like SVB and these other regional banks,” Lacalle said.

SVB was the banker of choice for many Silicon Valley tech startups and their venture capital funders that have benefited from the protracted period of loose credit. In just a few years, it grew into one of the 20 largest banks in the country, with some $200 billion in assets. When its investments started to underperform and its stock dropped, clients got cold feet and many moved their money elsewhere, triggering a bank run.

Regulation

Some economists have argued that the SVB crash was the fault of regulators. The Federal Reserve of San Francisco should have stepped in when it saw warning signs of SVB’s instability, argued the Brookings Institution’s Aaron Klein in a recent commentary.

Lacalle wasn’t convinced. He pointed out that on paper, SVB was following the regulatory mantras.

“You’re hedging your volatile positions in technology and risky ventures, which obviously is your core business—that’s nothing we can do about—and you’re hedging it with long-term treasuries and mortgage-backed securities,” he said.

But it was exactly the large treasuries portfolio, which dropped in value due to the Fed’s rate hikes last year, that pushed SVB over the edge.

Klein also pointed to SVB’s unhedged $100 billion position in mortgage-backed securities. But Lacalle noted that the Fed itself has designated those as low-risk, sitting on $2.6 trillion of them. If the Fed, as a regulator, was to declare mortgage-backed securities as risky, how could the Fed, as a monetary policy setter, declare them low-risk?

Intervention

The Fed’s response to the SVB crisis is a typical example, Klein suggested, of the system’s underlying flaw—a short-term solution with long-term negative implications.

Shortly after regulators took over SVB, the Fed, the Treasury, and the FDIC announced that no depositors in the failed banks will lose money, despite most of the deposits being above the FDIC insurance limit of $250,000 per account. Furthermore, to ensure no other banks hit a liquidity crunch because of the value drop in their treasury holdings, the Fed will allow them one year to borrow against those holdings at “par value”—the Fed will de facto pretend the treasuries are worth more than they currently are.

The Fed’s apparent motivation was to forestall runs on other smaller banks. Yet its actions created “an incentive to take even more risk by the next bank,” Lacalle said.

“The example of SVB is telling everyone that what they should do is exactly what SVB did because nothing’s going to happen. If things go well, you will make a lot of money and if things go badly, bad luck, but nothing’s going to happen. So what is the incentive to be prudent and to have a prudent level of risk management? Zero.”

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