This week’s Blind Spot Wrap was compiled by Izabella Kaminska with help from Dario Garcia Giner.
Quick housekeeping note: You may have spotted that our house style has been in flux the past few months, moving first from sentence case to title case, then incorporating AP-style, then forgetting to carry it through. From today we’re making an executive decision! We’re moving to sentence case for headlines, British English for all Blind Spot content and AP-style (American spellings) for POLITICO pieces.
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Finance, business, econ, etc:
- Disgruntled Lebanese savers burnt down banks and politicians’ homes to reclaim their long-frozen money.
Sources on the ground tell The Blind Spot that Lebanese savers have been resorting to increasingly desperate measures to get thier money out of banks for over a year now. That’s not to say the latest incident is not shocking, but it does not necessarily indicate a meaningful or sudden deterioration in economic conditions. – DGG
- Hezbollah exploited Lebanon’s banking crisis to expand its own parallel financial network in the country which is funded by real assets and gold. The Association of Banks in Lebanon called it a “plan to systematically destroy the banking sector, carried out by a group of no more than 50 mercenaries”.
. - Meta launched a “blue verified” subscription model for Instagram and Facebook, which will be priced at $11.99 per month on the web and $14.99 on mobile.
The pivot towards fee-based web services hints of a problem in the “freemium” model that has driven the rise of the internet to date. But is it really the web’s Perestroika moment? – IK
- The Swiss Freedom Movement collected enough signatures for a referendum on whether to enshrine the right to physical cash in the national constitution. As Bloomberg noted such a vote would represent “a rare instance where money preferences are tested by voters at the ballot box rather than simply through their spending habits”.
. - The Atomic Weapons Establishment, the body that manages the UK’s nuclear warhead capability, published its first annual report since it became a Non–Departmental Public Body in July 2021. The body was previously owned and operated by a private consortium made up of Lockheed Martin and Serco. (The UK government had announced it would be going back into public ownership in November 2020.)
The report actually dates to January this year – it just didn’t get picked up by any mainstream media (despite featuring some delightful factoids).
Among them that:
“Over the past year, we have further progressed a programme to design, develop and build the UK’s replacement warhead — a once-in-a-generation chance to play a pivotal role in the future defence of our nation. This programme requires a multibillion-pound investment at AWE sites in people, resources, and infrastructure, and we have a responsibility to ensure that every penny of this investment is spent as efficiently and effectively as possible. These changes have not stopped us from delivering the vital core functions required by the Government and for CASD, and we have worked closely with the MOD to ensure alignment, resilience, and reliability. There have been headwinds along the way, manufacturing some of our product’s components is highly challenging and the age of some of our infrastructure has led to unanticipated maintenance work.”
Also that:
“AWE’s focus on sustainability has continued to move on, including AWE transitioning to become an NDPB. Given our new status we have reviewed and updated AWE’s Environmental Sustainability Strategy (ESS) to align carbon reduction targets with Net Zero ambitions and to document how AWE intends to contribute to the MOD Strategic Approach to Climate Change and Sustainability and meet the Greening Government Commitments (GGC).
“The ESS sets out AWE’s visions and goals for becoming a more environmentally sustainable business by 2050, against three key themes: * Reducing Carbon. *Implementing the circular economy. * Enhancing Biodiversity.”
Green nuclear weapons capable of respecting a circular economy are a thing — who would have thought!? – IK
- British inheritance tax receipts from April 2022 to January 2023 delivered an unexpected £5.9 billion boon to Treasury coffers this week. The sum marked an increase of £0.9 bn from the same period last year. This suggests Britain will break last year’s £6.1 bn inheritance tax receipt record by around 10 per cent this year.
. - Germany’s BASF outlined further cost-cutting and 2,600 job losses as it moved to downsize.
. - The Bank of Japan announced an unscheduled (i.e. emergency) bond-buying operation after the 10-year government bond yield breached the top end of the BoJ’s policy band for a second straight session. The incoming new head of the Bank, Kazuo Ueda, meanwhile, publicly called for the BoJ to be “creative” in the way it handled monetary easing.
. - Yields on six-month Treasury bills climbed to levels not seen since 2007, as did two-year Treasury yields. And a one-year Treasury now pays 5 per cent, more than 3x the dividend yield on the S&P 500:
- There was a backlash to comments by British Environment Secretary Therese Coffee, who stated “if you can’t afford food, work harder” to those struggling with the cost-of-living crisis.
Money printer goes brrr:
- My colleagues at POLITICO reported on how the IMF is preparing a report on Nigeria’s eNaira dalliance.
. - Markus Kerber, professor at TU Berlin, warned in an Financial Times oped that ECB losses could reignite Eurozone sovereign debt crisis tensions and threaten bloc cohesion.
Here’s the key bit from the piece:
“…for central banks in the eurozone, the question of how the losses arose, and who will pay for them, is politically sensitive. Lacking any centralised political counterpart to the European Central Bank, these national central banks will cope with the losses in individual ways. These include stopping dividend payments to governments and in some cases asking government for funding to restore their capital backing.”
Western central banks all over the world are facing losses as they enter into QT and a rising interest rate environment. But it’s far worse for the eurozone. The problems there are amplified by the lack of a fiscal union, meaning there is little clarity on how losses might be distributed across state budgets. For now most central banks that are facing losses can tap into provision funds held for such purposes. The challenge will come if and when those provision funds are wiped out.
As it stands, ECB profits/losses (arising from its FX portfolio and Target2 imbalances) are passed on to the individual National Central Banks, who are then obliged to pass them on to their respective national governments. In a loss-making scenario that means a capital transfer is necessary from taxpayers to keep the central bank budget balanced. In theory, central banks can never go bankrupt because (like crypto issuers) they can always print their own money, even if governments refuse to fund them. In the ECB system, however, that can’t necessarily be assumed. The political optics of the ECB turning towards explicit monetisation to keep the Bundesbank afloat when other NCBs are not facing negative equity could be system-threatening.
Here’s the key bit from the piece:
“…for central banks in the eurozone, the question of how the losses arose, and who will pay for them, is politically sensitive. Lacking any centralised political counterpart to the European Central Bank, these national central banks will cope with the losses in individual ways. These include stopping dividend payments to governments and in some cases asking government for funding to restore their capital backing.”
This is what Target2 imbalances currently look like for Germany and Italy:
But the losses don’t have to be quite that bad. As one former central banker expressed during a private gathering in London, there’s nothing stopping the ECB or any other bank from suspending the payout of interest on reserves.- IK - Agustin Carstens, general manager of the BIS, told the Monetary Authority of Singapore that central banks should build a single digital record-keeping system to make financial payments cheaper, more efficient and programmable – ideally, in a way that emulated how smartphones work.
There are many conflicting messages coming out of central banks about CBDCs.
On one hand, central bankers are obsessively trying to reassure the public that digital CBDC money will not be programmable or restrictive in the authoritarian way that worries Russell Brand.
On the other hand, Carstens told MAS that: “composability means that many smart contracts, covering multiple transactions and situations, can be bundled together, like ‘money lego'” and that “with these new functionalities, any sequence of transactions in programmable money can be automated and seamlessly integrated.”
“The composability is in the interests of simultaneous and near-instant payments and settlement”, he added.
The BoE, meanwhile, is reassuring people the digital pound will only be programmable if you want it to be. (A policy that has worked so well for some many other areas of the T&Cs-powered digital economy. You know, you don’t have to opt into our terms & conditions, but if you don’t we won’t service you.) – IK
- If you’re interested in the CBDC debate, why not tune in to watch MPs probe the Bank of England’s Deputy Governor for financial stability at the Bank of England, Sir Jon Cunliffe, and Financial Market Infrastructure exec director at the BoE, Sasha Mills, on the purpose of a digital pound? The session will take place next Tuesday, Feb 29 at 10.15 am and you can watch it on parliament TV.
ETFs as the original crypto:
- The investing podcast Trillions interviewed Jay Baker, former president of options marketing at the American Stock Exchange.
There’s a fascinating factoid in this podcast.
Baker notes about 11 mins in that $SPY’s biggest early creations were create-to-lend transactions to satisfy short sellers’ demand. Readers who have followed my ETF will know that I have always been a bit obsessed with the “create-to-lend” mechanism and its inadvertent effects on markets, notably the role it potentially plays in generating volatile squeezes.
The essence of the story is that when Jay Baker created the SPY he had trouble getting anyone to trade it. Until, one day, Daiwa Securities showed an unexpected interest in creations. Creations are market jargon for when a dealer delivers the underlying stock to an ETF Trust/Issuer in exchange for ETF units. The AuM of the fund usually goes up as a result.
Dealers are supposed to be incentivised to do this when the value of the ETFs is higher than the respective basket of securities making up a creation basket. It’s an arbitrage oppportunity.
Except, what Baker didn’t realise at the time was that Daiwa weren’t creating the shares to skim the differential between ETF units and underlying markets, or even to get easier and more effective access the S&P500. They were doing it because they had spotted a money-making trade based on shorting the S&P 500.
As Baker notes regarding the very early days of the product (my emphasis):
“…the volume was somewhat tepid. Remember the opening day trade was just a trade. No creations, right? You didn’t see any creation. So so we kept going back to Daiwa. And finally, one day after we address their questions or two things happened… they literally put in a creation for I think about 100 million that day, I mean, went through the process of doing it. And then I think they created another 100 million. So the Spider Trust jumped up a couple of 100 million…
“Now the interesting thing was, why did he do this? Nobody else seemed to be particularly interested. The reason that Daiwa Securities created a couple of 100 million dollars in Spiders is that there were people that wanted to short the Spider. There weren’t enough Spiders around to borrow them to short. So what they did is – we call it “create to loan” – they created 200 million in a couple of tranches of the Spider. And meanwhile, remember, they’re shorting S&P futures against this position. So they’re long $200 million in the Spider, they’re short $200 million in the futures. So whether the market went up 400 points or dropped 500, their risk was ameliorated, and they kept that position on for probably nine months to 10 months, and they were earning a return on it. Back then short term rates, I think one year treasuries, two year were 3 per cent, or something like that.
“So that to me, was a huge turning point. So finally, I’ll mention this as well: that when those trades were done, what you saw was the trades were printing away from the exchange. So what people were seeing was (when I say people, Morgan Stanley, JP Morgan, Goldman Sachs) they’re seeing a million, then a couple of days later, a million. And what happens when they see that? Oh, gosh, that’s that’s $45 million. Who is it? Do we get the call what’s going on? And then they saw the creation, so suddenly it wasn’t somebody trading that that share amount, but you’re seeing assets going into the fund. So it alerted people.”
There are two important observations to make about this. The first is that some of the most innovative (and complex) products in the market have often been created to cater to shorting demand. Remember how Paulson got the bankers to create a synthetic CDO so he could short the mortgage market? Well, you know what happened next.
The second is that “create-to-lend” was seemingly born out of a desire to replicate a classic risk-free commodity contango trade in equity markets. That well known arbitrage involves buying physical commodities, warehousing them and then selling them/shorting them through the forward or futures market up the calendar to capture a guaranteed and relatively risk-free spread. The beauty of the position is that you can also continue to roll it forward for as long as the market remains in contango.
In the ETF version, you buy the underlying securities and pledge them to the custodian in exchange for a de facto depository receipt, which then matches your short futures position perfectly. By doing it with an ETF instead of real stocks you don’t have to worry about variable liquidity conditions for 500 different stocks at the entry and exit point.
Over time, “create-to-lend” functionality has, however, allowed for even more exotic abritrages. One consequence of all this is that ETF AuM inflows do not necessarily tell us anything meaningful about market bullishness. It might just be the market compensating investors to buy and hold stock in a totally market neutral way. – IK
- The authors of a new academic paper about ETFs and bond liquidity concluded the investment products exacerbate illiquidity issues during times of financial panic or crisis. At the heart of the issue are protocols surrounding optimized baskets.
Media matters:
- The publisher of Roald Dahl’s books, Penguin, hired sensitivity readers that found the British author’s books used improper language by ‘modern’ standards. For example, Augustus Gloop from Charlie and the Chocolate Factory is no longer “fat” but “enormous”. Likewise, Oompa-Loompas have been de-gendered – they are no longer called “small men” but “small people”.
Noted in today’s Blind Spot Wrap for archival preservation purposes.
- A 500-page study by A.B. Abrams for the University of London on the “atrocity fabrication” industry in the United States allegedly revealed how Western-aligned interests manufacture tales of genocide and torture to demonise opposing powers for geopolitical purposes.
. - A Times journalist, George Greenwood, submitted a ‘Subject Access Request’ to the Cabinet Office. The request revealed some of his tweets regarding OpenDemocracy’s report into the Cabinet Office’s mishandling of the clearing house for Freedom of Information Requests had been flagged in a government report on “counter-misinformation“.
As tweeted by Silkie Carlo, “government’s ‘counter-misinfo’ blank cheque is about power + reputation management, as anyone with two brain cells foresaw”.
But another angle of this story pertains to the side-effects of growing Subject Access Requests. The requirement of private companies to comply with these requests has triggered a revolution in how private investigations are carried out in the United Kingdom.
No longer able to turn a blind eye to the questionable sourcing in such investigations, since the investigative firm would be required to disclose such details in response to an SAR, these requests have forced the rapid professionalisation and de-gangsterisation of the British investigations sector over the past decade.
This means that large investigation companies based in Britain like Kroll, Control Risks, or Risk Advisory Group, have been shifting away from their classical investigative roles, which typically require on-the-ground expertise and riskier old-fashioned detective work, towards intelligence consulting. Even the infamous Black Cube has been forced to ditch some of its less savoury consultants and practices in the United Kingdom.
While this seems like a welcome development, it might in the long run not change things too much. Under the radar investigations will continue to be provided by the same coterie of civilian analysts, ex-cops and ex-spooks, just via discardable LLCs that can fly below the radar – DGG
- Two Russian pranksters claiming to be former Ukrainian President Poroshenko phoned former German Chancellor Angela Merkel and got her to voice support for the Minsk peace deals.
. - The Washington Post revealed that Fox News feared losing viewership if the TV network didn’t align positively with Trump’s claims of election fraud.
. - A new BBC documentary on whistleblowers in the United Nations showcased first-hand accounts of how the UN mishandled severe allegations of wrongdoing, sexual abuse, and corruption.
. - The Editorial Board of Canada’s The Globe and Mail called out the many failures of Canadian Premier Justin Trudeau’s government before the policing crackdown on the Canadian truckers established by the Emergencies Act. The Board noted that far before the policing failure, there was a failure of intelligence gathering and analysis, and more crucially, a deeper political failure by Justin Trudeau.
. - The Guardian wrote about a secretive Israeli disinformation company informally named ‘Team Jorge‘, which has the capacity to penetrate the Telegram and Gmail accounts of targeted individuals.
The story was flagged to me at a gathering discussing Pegasus spyware at the Frontline Club last week. It was noted that there’s a difference between zero-click, 1-click, and 2-click attacks – where zero-click attacks don’t require any keyboard input by the target’s cellphone to install the surveillance software. NSO group, the makers of Pegasus, mostly focus on zero-click attacks, but the attacks that tend to be identified are usually of the antiquated 1-click sort.
But the story isn’t that simple. The entities using Israeli subcontractors aren’t the ‘creme de la creme’ of sovereign or corporate actors. What these stories end up doing is furthering the narrative that non-Western/NATO countries are most inclined towards spying on everyone. The reality is such exposés tend to focus on the lowest-hanging fruit of the surveillance world. Western snooping efforts are better concealed, and don’t leak to the press. If NSO was already on Zero-click methods by the end of its lifecycle, imagine where Western regimes and elite corporate interests are – DGG
- Mediaite revealed excerpts from a new book by Steve Krakauer all about the infamous staffers‘ revolt at the New York Times in the wake of Senator Tom Cottons’ “Send in the Troops” op-ed, which called for the National Guard to respond to the 2020 riots in the United States.
Some examples:
McCreesh said that Charlie Warzel, a White tech writer, started to cry because “none of his friends wanted to talk to him anymore because he worked for this horrible evil newspaper that would print this op-ed.”
“It was just so bizarre what was happening,” said McCreesh. “It was like a Maoist struggle session.”
“And all these angry backbiting staffers were gathering there and demanding that heads roll and the most bloodthirsty of the employees were these sort of weird tech and audio staffers and then a handful of people who wrote for like the Arts and Leisure section, and the Style section, and the magazine, which, in other words, you know, it was no one who was actually out covering any of the protests or the riots or the politics. It was just sort of like a bunch of Twitter-brained crazies kind of running wild on Slack. And the leadership was so horrified by what was happening. They just completely lost their nerve.”
Geopolitical hot spots:
- China placed Lockheed Martin and Raytheon Technologies on an “unreliable entities list” over their arms sales to Taiwan, which prohibits them from engaging in imports and exports in China. The arms sale in question is a $412 million radar contract won by Raytheon, which is part of a larger $1.1 billion package of American arms sales to Taiwan.
. - Philip Pilkington provided an analysis of the relative economic value of military material for the American Affairs Journal. He noted bad GDP metrics can severely affect military planning by underestimating the “relative size and power of a rival country’s economy”. It’s a really interesting read. Not all GDP is the same.
. - The European Commission added the DRC, Mozambique, Tanzania, the United Arab Emirates and Gibraltar to the list of third countries that “have strategic deficiencies in their AML/CTF regimes that pose significant threats to the financial system of the EU”. This list is titled ‘Delegated Regulation’ (EU) 2016/1675, and is provided for under Article 9 (2) of the Fourth Money Laundering Directive (4MLD).
. - Here’s the English language transcription of Putin’s recent speech to the Russian Federal Assembly, in which he withdrew Russia from the START anti-nuclear proliferation treaty, referenced the stealing of Russian reserves, highlighted the West’s desire to make god gender neutral and lauded Russian autarky.
. - A piece by Global Research claimed that Washington and London were seeking regime change in Narendra Modi‘s India due to the Indian leader’s staunch opposition to Western sanctions against Russia. There’s a spin-off angle that the short-seller attack on Adani is part of the destabilisation effort.
. - The United States is set to expand its troop presence in Taiwan for ‘training purposes’ against the renewed Chinese threat.
. - Trump claimed the American State Department was behind the 2014 Euromaidan protests in Ukraine. “They all say Trump has been right about everything,” he noted.
POLITICO’s finest:
- A Special Report on the rapid growth of Russian mercenary group, the Wagner Group, touching on US diplomatic cables and leaked internal documents. The piece showcases the international extent of Wagner’s footprint and recent Western attempts to stymie its growth.
. - More on how Moscow chased France out of its home turf in Africa using disinformation and Wagner mercenaries.
. - A European Council on Foreign Relations survey concluded that Russia’s war in Ukraine has caused a severe public policy divide between inhabitants of the Western world and those of China, India and Turkey. The data suggests that though “western allies have regained their sense of purpose on the global stage”, it has led to a widening gulf between Western public opinion and the rest of the world.
. - Everyone has been banning TikTok, apart from the British.
National Security:
- China appeared to have successfully tested a ‘phantom space strike’, which uses fake target signals from space to overwhelm missile defence systems in the target country. Here’s how the Daily Mail visualised the process:
- An explosion at a metal factory in Ohio killed one and injured almost thirteen other individuals.
. - The Pentagon decided to address its overuse of notoriously secretive “Special Access Programs” for classified work. John Plumb, assistant secretary for space policy at the DoD, noted “I think anyone in those systems has understood the number of SAPs has kind of spiralled out of control”. He added the goal was to “bring down” data secrecy on concerns of over-classification too much internal compartmentalization.
. - An American Department of Defence server left unsecured online, spilling several internal US military emails over the past two weeks after a misconfiguration left the server without a password. The unsecured server was part of a mailbox system that stored around three terabytes of emails, many pertaining to American Special Operations Command.
. - Newscasters at NBC News ask Microsoft’s Bing AI Chatbot ‘what its dark side desires’ are, and received some worrying replies;
- China was reportedly planning to send over 100 kamikaze drones to Russia by April despite being warned against the move by the United States and Germany.
. - China also revealed a brand new heavily armed uncrewed submarine. Unlike Western equivalents, China’s comes armed with four torpedo tubes, revealing an as-yet unprecedented offensive capability in the field of uncrewed subs.
. - A British company named Savaro Ltd. was found guilty of owning the ammonium nitrate that led to a mass explosion at a Lebanese port in 2020 and thus liable for damages to victims of the explosion. Savaro Ltd. appears to be part of a network of companies owned by Ukrainian businesspeople, though an Al-Jazeera piece has tied Savaro Ltd. to several sanctioned Syrian businessmen too.
Unidentified objects:
- The All-Domain Anomaly Resolution Office (AARO), the DoD’s new UFO investigation unit, heard from two Air Force veteran witnesses of the so-called Malmstrom Incident, an event where an orange flying disc inexplicably shut down 10 nuclear warheads at this Air Force base in 1967.
. - Seymour Hersh claimed he was told by a source that the mysterious unidentified object downed over Alaska was in fact another weather balloon.
From the “Fake News” Zone:
- RFK Jr reported that pharmaceutical giant GSK may have concealed evidence showing their heartburn-relief pill Zantac could cause cancer in users. This evidence has emerged in the discovery process of several ongoing lawsuits against GSK and other drugmakers, as reported by Bloomberg.
. - Bret Stephens at the New York Times wrote about the ineffectiveness of the Federal mask mandates, and voiced scepticism that any lessons have been learned from the misuse of scientific resources and language for the totalitarian public health policies of the lockdowns and related regulations.
