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In the Blind Spot (Carry trades, Farmers, The ESF)

Screenshot 2023-03-18 at 02.16.58

This edition of the Blind Spot Wrap was compiled by Izabella Kaminska and Dario Garcia Giner. Apologies for typos and garbled text, but it’s been quite a week and we all need sleep!

Banking crisis:

  • A flashback from 2017, via Reuters:
  • Stakeholders in Japan’s banking sector were concerned about Japanese banks’ exposure to American bonds, following the collapse of Silicon Valley Bank.

    If you thought SVB’s exposure to held-to-maturity US Treasuries was bad, just consider that of the BoJ’s – IK.

  • First Republic announced it would receive uninsured deposits totalling $30 billion on March 16, 2023.

    I’m told FRC is a major originator of non-conforming jumbo loans that sit on JPM’s private label RMBSs. This means its failure, unlike SVB’s, would be a major contagion, which is why JPM & BofA (latter being the largest holder of MBSs on its books among big four) are bailing it out. – IK

  • Morgan Ricks and Lev Menand co-wrote an op-ed in the Washington Post, which argued that SVB’s collapse shows why the US needs to scrap the bank deposit insurance limit. They believe that Congress should scrap the cap above $250,000, among a raft of other regulatory measures.
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  • At least four banks supposedly put trading restrictions on dealings with Credit Suisse. For more analysis from me and Frances Coppola on the issue, see Friday’s Spot Markets Live transcript.

    TLDR: I’m not as bearish on Credit Suisse opco as everyone else. It’s mostly a toxic brand story rather than a liquidity story. And in that sense Credit Suisse is kind of the Tether of traditional finance. Holdco could be at risk.

  • Charles Schwab, whose share price has been battered in recent days, reassured everyone that it had attracted net new assets of $16.5bn this week.
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  • Even so, Bloomberg reported that Charles Schwab saw $8.8bn in net outflows from its prime money market funds into government funds this week.
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  • China stepped in to help with the global liquidity picture by cutting its reserve requirement ratio to boost the economy.
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  • .

  • Jim Bianco joined Bill Ackman in calling for unlimited deposit insurance because moral hazard was already here and that “we have already changed banking forever, and we now have a two-tiered banking system with a giant moral hazard problem.”
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  • Janet Yellen made some breath-taking moral hazard comments in an exchange with Senator James Lankford:

    He asks, “Will every community bank … get the same treatment as SVB?” Yellen: “Banks only get the treatment if … the failure to protected uninsured depositors would create systemic risk.”

  • KPMG’s US chief executive, Paul Knopp, attempted to defend the company’s audit of Silicon Valley Bank. The accounting firm had provided the Californian financier with a clean bill of health only two weeks prior to its collapse.

    Speaking at an event at New York University, Knopp claimed: “We stand behind the reports we issued and we think we followed all professional standards.” However, the Climateer site reminds us that KPMG auditors had issued SVB with an ‘unqualified’ opinion following its audit two weeks before its collapse and that the accounting firm also, worryingly, audits Citicorp and Wells Fargo.

  • An anonymous tech founder and former Silicon Valley Bank depositor wrote a piece for Sifted that opposed the British government’s potential bailout of SVB. They said it would cause “irreparable damage to the tech sector’s reputation”.
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  • To the surprise of absolutely nobody, Jim Cramer claimed in February that Silicon Valley Bank was a buy at $320.
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  • JPMorgan’s latest “Flows & Liquidity” note titled, A Repeat of 2018/19, stated the Federal Reserve’s Bank Term Funding Program (BTFP) will likely use a maximum of $2tn.
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  • The Grayzone spelled out the obvious: massive government overspending, as a result of lockdowns, was key in driving inflation and the financial crisis we are now experiencing.
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  • What exactly is the Exchange Stabilization Fund, which was used, with gusto, this week? Here’s an old explainer from Eric deCarbonnel.

    One former US central banker I spoke to this week described the ESF as a Treasury slush fund. And now the ESF is underwriting a key chunk of the this week’s bailout. The video explains how the ESF has always been used by the Treasury department in conjunction with the NY Fed (which operates as its agent) to finance most of the government’s international financial black-ops. It is also the main approach taken by the US Government to impart influence over the Federal Reserve – and its actions are not accountable to Congress. – IK

Business, econ, finance etc:

  • American home goods retailer Tuesday Morning announced it was filing for bankruptcy and will close 263 locations across 38 states.
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  • CTA funds suffered their biggest loss since Jan 2000..
  • China’s central bank, the PBOC, echoed Xi Jinping’s concerns and stressed the need to respond appropriately to the United States’ financial “containment and suppression” measures against China.
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  • It’s the liquidity stupid! Holger Zschaepitz argued on Twitter that stocks were rising because central banks were pumping billions into the market again.
    And here’s how much the Fed added alone:
  • It was revealed that FTX transferred $3.2bn to Sam Bankman Fried and its executives before the crypto exchange collapsed.
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  • Klarna’s CEO Sebastian Siemiatkowski argued that the media were “unfair” in asking Klarna how they could burn $100m a month.
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  • The FT’s Gillian Tett argued carry trades were at the root of the collapse of Silicon Valley Bank and were a major consequence of the Fed’s loose monetary policy.

    That duration risk would emerge in the market in a possible QE unwind was self-evident from 2009 onwards, when central bankers first began talking about QE exits. Allowing banks to borrow cheap and invest with risk (i.e. lower credit quality and/or long) was the whole point of the QE exercise after all.

    But carry trades in and of themselves are no bad thing. You borrow cheap, and then invest somewhere that pays you more. Which is the whole point of banking. So when does basic banking become a “carry trade”?

    Gillian notes: “SVB did it in such an extreme way that it was very similar to a carry trade. Most notably, the bank had $180bn in deposits, which provided cheap but potentially short-term (and flighty) funding. And since loan demand was weak, it bought long-term bonds that, stupidly, were unhedged.”

    But actually hedging such a position isn’t all that easy. Doing so turns the carry trade into a basis trade and it is fairly common practice not to hedge held-to-maturity portfolios across the banking system as a result. Not least because there is no requirement to mark-to-market if the bonds are not held in a bank’s trading book. – IK.

  • Insiders of Charles Schwab, including CEO Walt Bettinger and others, bought the dip in bank stocks this week following the SVB collapse.
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  • US bank failures triggered a surge in demand for interest rate hedges.
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  • Jeffrey Snider noted that March 14’s drastic Eurodollar futures moves were historic and that panic hedging clearly shows how little faith the global marketplace currently has in the financial system and the Federal Reserve.

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And well, have a look at this:

r/wallstreetbets - For people who think the banks are fine…

  • As the Go Woke Go Broke hashtag struck Twitter following the collapse of Silicon Valley Bank, some wondered if Californian executives had been too distracted by diversity targets. Meanwhile Sifted offered the following info graphic:

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  • The FT’s Henry Mance argued that while SVB did apparently care about microaggressions, if such things were fatal to profitability, the tech industry would not be based in California. (He didn’t reference, however, that a whole slew of tech executives had escaped California for precisely this reason.)

Digital currencies:

  • FedNow, the Federal Reserve’s digital payments system, announced it was set to launch by July. The system aims to increase efficiency in dispatching bill payments, money transfers, and other consumer activities, and is a precursor to a potential CBDC.
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  • Caitlin Long, the founder and CEO of Custodia, was not happy about how authorities had handled the banking crisis. As one informed party explained to me, she has beef because:

“Custodia is a proposed 100% reserve bank that utilises bitcoin for payments infrastructure, run by hardcore bitcoiner Caitlin Long (but who is a 20+ Morgan Stanley veteran), which was rejected a Fed application due to “systemic risk””

  • Bitcoin hit a nine-month high after a recent CPI report and breached the $26k figure.

The unsustainability of ESG:

  • Orsted, the developer of the planned £8bn Hornsea 3 offshore wind farm off the British coast, claimed it needed more financial support from the government, such as tax breaks, to proceed with the project. This is because material and construction costs have drastically increased the price of what would be the world’s largest offshore wind farm.

Foreign influence:

  • The EU’s new ‘foreign agents’ law will force NGOs, consultancies, and academic groups to disclose non-EU funding. The crackdown on unregistered foreign influence in the bloc comes after a series of foreign influence scandals in Europe, most recently the Qatargate scandal in the European Parliament.
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  • Meanwhile, mass street protests by pro-EU Georgians convinced the country’s parliament to drop its proposed “foreign agents” bill, which was framed as allowing Vladimir Putin too much influence over Georgian affairs.
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  • The New York Post reported that an unnamed Biden family member reaped proceeds from a $3m wire transfer to John “Rob” Walker, an associate of Hunter Biden, weeks after Joe Biden left the vice presidency in 2017. The House Oversight Committee Chairman James Comer is expected to reveal the individual’s name at some point in the future.

Media Matters:

  • Meta aped Elon’s much-maligned move to launch a paid-for verification service which, just like Twitter Blue, will operate as a subscription-based service with added account features, such as proactive account protection and access to direct account support. It’s even called Meta Blue.

    And the funny thing is that none of the “Versailles set” on Twitter noticed, let alone cared, that it had happened — even as Meta continued to push ahead with equally poorly managed layoffs.

  • The FT’s Tony Barber ran through the interesting history of the politicisation of meteorological bulletins.
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  • Axios fired one of their journalists after he accused the DeSantis team of spreading propaganda.
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  • Bellingcat’s Elliot Higgins revealed how easy it is these days to create deep fakes that pass for realistic news footage and pictures.
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  • Matt Taibbi revealed another instalment of the Twitter files, this time pertaining to the “Great Covid-19 Lie Machine”.

    The files reveal that an outfit called The Virality Project worked with the government in 2021 to launch a pan-industry monitoring plan for Covid-related content that flagged even true and accurate information if it didn’t fit the narrative. Taibbi shows that at least six major internet platforms were “onboarded” to the same JIRA ticketing system — daily, sending millions of items for review. As he noted: “It [the project] accelerated the evolution of digital censorship, moving it from judging truth/untruth to a new, scarier model, openly focused on political narrative at the expense of fact.”

  • The Guardian outlined how the British Broadcasting Corporation had instructed its journalists to avoid using the word “lockdown” after the first series of restrictions in March 2020 and to be more critical of Labour after receiving pressure from Number 10.
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  • Isabel Oakeshott continued to share her views on what the Lockdown Files had revealed about journalism and the media today: “These people didn’t do their jobs during the lockdowns,” she said.

Farmers United:

  • The Farmer-Citizen Movement in the Netherlands, which was formed four years ago in response to the government’s plan to aggressively cut nitrogen emissions, surprised even itself by becoming the largest party in the Dutch Senate in recent provincial elections. Photo of the week:.
  • Dutch Farming activist Eva Vlaardingerbroek pointed out that, despite the win, the party had not won enough seats to be able to form a majority in the Senate to stop it from passing the nitrogen policies, including expropriation.
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  • How the Dutch vote broke down in charts.

Governance a la Francaise:

  • Emmanuel Macron’s government said it would wield special constitutional powers to skirt parliament in executing his highly unpopular retirement reform bill. These special powers have upset a wide range of French lawmakers, many of whom are already incensed by the controversial bill that is set to raise the retirement age from 62 to 64.

These measures are taking place against an estimated 8 tonnes of piled up rubbish in the streets of Paris. A strike among waste collectors has led to a spate of images depicting even the well-heeled districts of the 16th and 5th arrondissements drowning in seas of uncollected trash. Unsurprisingly, there are also ongoing riots.

We understand that a hike in retirement age can never be a popular measure. But the dramatic increase in life expectancy since the implementation of these laws, and the collapse of birth rates, must force us to seriously reconsider them. How else can we guarantee pensions for my generation and beyond? – DGG

Geopolitical hot spots:

  • As part of its deal with Saudi Arabia, Iran agreed to stop arming its Houthi allies in Yemen.

I can’t have been the only one with raised eyebrows when news of this China-brokered deal broke.

The seemingly intractable Iran-Saudi conflict only saw the promise of respite in Obama’s failed nuclear deal in 2015, which quickly encountered strong headwinds in the region.

China’s succesful foray into the conflict, which we assume follows in part from Xi Jinping’s historic visit to Saudi Arabia a few months ago, is a critical geopolitical show of force.

Considering that Ukrainians have to be pressured by the West from succumbing to Russian peace feelers, who knows how China may end up exerting its influence in this hotter conflict.- DGG

  • Beijing asked the United Nations to launch a probe into the Nord Stream incidents, following media reports that blame a secretive ‘pro-Ukraine group’.
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  • The Chinese Foreign Ministry released a blunt white paper titled ‘US Hegemony and Its Perils’, which tackles a series of overreaches by the American government overseas.

This wrap was not written by GPT5:

  • Raising questions about Microsoft’s long-term responsible AI practices, the company laid off the entirety of its “ethics and society” team, which was responsible for governing the company’s development of AI products for customers along ethical and sustainable lines.
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  • In a bid to win the Skynet arms race to the end of the world, the UK Treasury announced plans to invest £900m in a supercomputer – Britain’s very own ‘BritGPT’. The initiative also plans to ensure that Britain won’t lose out to rising geopolitical competitors’ AI developments, such as those of China.
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  • The University of Bristol discovered a way of using quantum computing to create ‘counterportation’, a practical blueprint for forming a wormhole in a laboratory.

Politico’s Finest:

  • The European Union struggled to keep up with a great business subsidy shakedown. Firms are threatening to quit the bloc in favour of the United States. Fearing state-sponsored competition from China and the United States, and amid fears of a European industrial decline, Brussels’ fightback involves injecting vast amounts of state aid into their economies to achieve greater self-sufficiency.
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  • Nouriel Roubini warned banks that their underwater bond portfolios could spell trouble, following dramatic interest rate rises. (an Izzy story.)
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  • The British government announced plans to ban Chinese social media app TikTok from their governmental phones. Though Government officials can still use the app on their personal phones, they have been warned to exercise caution.
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  • Perhaps relatedly, the UK Treasury released a promotional video that openly mocked Matt Hancock’s leaked WhatsApp messages.
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  • The Polish Defence Minister Mariusz Blazczak announced the smashing of a Russian spy ring, which Blazczak called a ‘real’ threat to Poland’s national security.
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  • With Polish elections looming, Jamie Dettner wondered just how far the Law and Justice party will go this campaign season in its attempts to maintain power for a third term.
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  • Thanks to lobbying efforts by the European Peoples Party, the European Parliament will only phase out fossil fuel-fired boilers from households by 2040 with a significant amendment; boilers will be allowed in new buildings as long as they can run on renewable fuels.
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  • The oversupply of vaccines in the European continent has prompted European health ministers, notably Poland’s Health Minister, to confront the European Commission regarding the transparency of the vaccine contracts they negotiated.
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  • A Chinese Foreign Ministry’s spokesperson claimed that the United States, the United Kingdom, and Australia, also known as AUKUS, had “gone further down a wrong and dangerous road” as a result of Biden’s announcement to sell five nuclear-powered submarines to Australia.

Government overreach:.

  • The Climateer website highlighted the betrayal of scientific principles by science journals by showcasingTablet piece, which explored how Fauci had used his contacts in the scientific journal community and the media to manufacture a consensus on the origins of Covid-19. The anonymous blogger also reminded readers that the Lancet’s history in politicising its scientific reporting, and claimed the journal “just can’t be trusted”.
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  • The Telegraph’s Allison Pearson called for UK Health Minister Matt Hancock’s arrest.

Unintended consequences:

  • Norwich City youth football coach who beat a man’s head with a metal pole for not wearing a Covid mask at a Norwich McDonalds was jailed for nearly three years.
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  • The American maternal mortality rate soared to a record 40 per cent in 2021, as more than 1,200 women died in the United States as a result of pregnancy or childbirth-related complications that year.
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  • United Nations nuclear inspectors found that around 2.5 tons of uranium have disappeared from a Libyan site. The investigation, which was postponed for a year over security concerns, was finally carried out Tuesday. About 10 drums of uranium, which correspond to around 2.5 tons, were unaccounted for.

WW3 Update:

  • The United States released footage from its Predator drone that was recently rammed by a Russian fighter jet over the Black Sea. The video shows Russian jets dumping fuel on the drone while engaging in dangerous maneuvers.
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  • A Russian TV channel claimed the Russian military are using a novel psychological operation method to suppress the Ukrainian Army; female moans.

Not to be outdone, the Ukrainian army’s legions of 3D-printed drone-dropped shell manufacturers are fighting fire with fire:

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  • The Turkish Air Force’s advanced fighter aircraft, the TF-X project, successfully completed its first taxiing tests. Turkey’s original military aircraft should see its first flight this year.

Unidentified phenomena:

  • Sean Kirkpatrick, the Pentagon’s chief ufologist, stated: “There is a possibility that extraterrestrial motherships and smaller probes may be visiting the planets of the solar system.”
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  • On the “Full Send” podcast, Fox News host Tucker Carlson recalled a discussion with a Stanford professor who allegedly worked with the Department of Defense investigating troops’ brain injuries following UFO encounters.
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One Response

  1. Re SVB: I have yet to see in any publication reference to – still less condemnation of – the role of the Board in all this. The failure was not due to subtle fraud or concealed transactions, so where was the Chairman? Where the Chair of the Audit Sub-Committee? The independent Board NED charged with overseeing risk? Why was the bank allowed to run so long without that most crucial of roles, a Finance Director or Head of Risk?

    When the executive team are making mistakes that come in Banking 101 – mistakes that would have been mistakes 100 years ago: mismatch risk, interest rate risk, concentration risk, liquidity risk – it is for the Board to challenge and act on behalf of the shareholders. Why did it noit do so; and why is nobody asking?

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