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In the Blind Spot (HKD, Semafor, Elon)

Screenshot 2022-11-26 at 02.40.58

This edition of the Blind Spot Wrap was compiled by Izabella Kaminska (IK) and Dario Garcia Giner (DGG).

Business, Econ & Finance etc:

  • Nigel Farage has entered the investing world, but his calls have severely lagged the market.
  • After more than a decade and $100bn, the self-driving market appears to be yet another Silicon Valley money dump.
  • Is there another short squeeze happening to GME?
  • Credit Suisse forecasts $1.6bn loss as wealthy clients withdraw funds.
  • Bill Ackman reveals short position against Hong Kong dollar.

    As one of the largest managed currency board systems in the world, the Hong Kong dollar — whose value is linked to the dollar at a range of 7.75-7.85 — is arguably to traditional finance what the Tether stablecoin is to crypto.

    How so? Well, historically, much of the allure of holding the Hong Kong dollar has been its ability to operate as an on and off ramp for foreign capital seeking exposure to Hong Kong or related Chinese assets. Unlike the Chinese yuan, the HKD is not constrained by capital controls. Over time, this open but banded status has seen the HKMA absorb a large volume of US dollars into its reserves.

    In recent months, however, those inflows have started to reverse. This has been prompted by a number of factors including Hong Kong’s greater absorption into the Chinese system and Zero-Covid policy as wider global reshoring trends and rising interest rates in the US.

    With that so have HKMA reserves:

     

    Many say shorting the HKD is silly because clearly, despite the flow reversal, the HKMA still has a lot of dollar fighting power in its arsenal. It may take a long time to be proven wrong. But we think Ackman may be onto something.

    When currency systems buckle they rarely do so smoothly. For the short to come into the money, the HKMA need only be forced to increase its range just slightly. Its reason to do so would not only be to decelerate reserve sales but to shore up the domestic yuan so as to stem further private capital outflows.

    All of this is connected to the fact that China has been trying to encourage the offshore use of its currency for some time. One key part of that policy has involved the extension of Chinese Yuan Swap Lines from the PBOC to regional players.

    As the below chart shows, these grew rapidly up until 2015…:

    … even if their value matched that of the Fed and other central banks:

    But not all swap lines are made of the same stuff. While the Fed mainly keeps its swap lines with high grade G7 counterparts, China has extended its swaps to poorer credit quality developing nations in a way that poses risk.

    As Diana Choyleva of Enodo Economics noted earlier this year (our emphasis):

    “However, the rationale behind the PBoC’s bilateral yuan swap agreements has been different. Although the swaps have at times been tapped during crises to bolster countries’ foreign exchange reserves, their primary purpose is to provide foreigners with a source of yuan that can be used to pay for routine purchases from China.

    “Starting in 2018, the Central Bank of Nigeria has parceled out the yuan at auctions held every two weeks. Local banks bid for the yuan, which they then distribute to local firms that use it to pay for imports from China.

    “This type of swap agreements impose a cost on China. Swaps are usually perceived as being relatively riskless for central banks. Since the exchange rate at which the two currencies are initially swapped is the same as when they’re swapped back, there’s no exchange rate risk – the central banks get back exactly the same amount as they originally swapped.

    “The risk for China is that when the agreement matures, the PBoC’s counterparty can’t get hold of enough yuan to swap the currencies back. That leaves China holding a currency it doesn’t need that has likely declined in value.

    “The US has avoided this risk by signing swap agreements with countries it considers safe bets. China has sealed swaps with countries that have a record of balance-of-payments strains. Often the swaps are put in place during periods of stress. China is willing to risk losses in order to increase its economic presence and strengthen the role of its currency.”

    And here’s some extra useful context from Diana:

    “China put in place the basic financial infrastructure necessary to ease the use of the yuan outside of its borders. Chinese banks built global networks of branches. The PBoC established bilateral currency swaps to supply foreign counterparts with yuan. A global system of RMB clearing banks was created.

    “And the PBoC started developing the China Interbank Payment System (CIPS), which was partially launched in 2015. However, in 2015 things changed, and those initial gains proved to have been built on an unstable foundation.

    “On 11 August 2015, the PBoC let the yuan fall by 1.9% against the dollar, followed by a further 1% the next day. The adjustment was part of efforts to introduce greater flexibility into the exchange rate regime, but the PBoC bungled the messaging and markets interpreted the move as a devaluation. Faith in Beijing’s ability to manage the financial system was already wavering. Debt hadaccumulated quickly since the GFC, fed by an explosion of shadow banking activities thatthe authorities seemed unable to rein in. Moreover, China’s equity market crashed in thesummer of 2015, creating a sense of crisis that was fed further by the devaluation.

    “Up until then, investors globally had anticipated that the yuan, which had appreciated fairly consistently since 2005, would continue to rise against the dollar. Suddenly, expectations reversed. Capital outflows surged and China’s foreign exchange reserves declined by nearly $1trn by 2017 as the PBoC intervened to prevent further yuan depreciation. It became clear that early progress toward RMB internationalization had been driven by foreigners’ willingness to hold an appreciating currency and to seize arbitrage opportunities arising from differences between onshore and offshore yuan exchange rates and interest rates. We discuss this more in Chapter. As the yuan weakened, the accumulation of RMB assets offshore started to unwind and the volume of trade settled in yuan declined.

    In short, the cost of sustaining an overly strong HKD in the face of capital outflows from Hong Kong, risks collapsing the house of cards China has built by extending yuan liabilities to low quality counterparts. The underlying dollars prop up an export financing loop (and related arbitrages) that may be hard to sustain in the face of Chinese capital outflows and a depreciating yuan.

    Not everyone will agree with the following assessment, but an argument can certainly be made that Chinese growth was always predicated on a tech-style unicorn model which only managed to grab market share by undercutting the competition below cost. The ensuing funding gap was bridged by dollar capital inflows as well as access to extremely cheap labour. All this was justified for as long as investment kept flowing in on an “if we build it they will come”  and when they do “they will be able to afford it.”

    If the export financing loop was to collapse before Chinese domestic consumption is properly stimulated, the whole balance that sustains China could be unravelled. Hence the need to weaken the HKD versus the USD. It can extend and pretend the fallacy that Chinese goods are affordable to the poorest countries for as long as the purchases are funded in borrowed yuan. The problem is the arrangement is akin to the US lending emerging markets the dollars they need to buy US exports. – IK

Amazon (Sub)prime:

  • Amazon to shut down food-delivery business in India.
  • Amazon’s Alexa division dubbed a ‘colossal failure’ as it’s set to lose over $10bn this year.

Geopolitical Pivots:

  • The Cuban President blames the United States for Putin’s invasion of Ukraine.
  • Poland to become Europe’s military super power.
  • A leaked photograph reveals a Taiwanese Army colonel who had promised to surrender himself and his troops if China attacked, in return for NT$40,000 a month.
  • Russia is carrying out joint military exercises with Algeria near the Morocco border.
  • Something’s going on in the greater Kurdistani region;

    A lot is happening in the Kurdish regions of Northern Syria, Northern Iraq, and Northern Iran.

    Erdogan has used the bombing by a Kurdish suicide bomber in Istanbul on November 13 has been used as a pretext to launch small-scale military operations along the borders of the Turkish occupation zone in Northern Syria. These may grow in size, but details will only emerge in the coming days and weeks.

    A heavy crackdown on anti-regime protests in the Kurdish-dominated provinces of Iran is also ongoing. At the same time, Iran is targeting Kurdish hideouts in the Kurdistani region of Northern Iraq with missile strikes. – DGG

  • The United States military is set to return to what was once their largest naval base in Asia, Subic Bay, in the Philippines after a 30-year absence.

    The Subic Bay naval base has a long and distinguished history thanks to its supremely advantageous geographic position in the South China Sea. Inaugurated by the Spanish Navy in 1885, it served as the United States’ largest naval facility and shipyard in the world until its closure in 1992 – citing both lease cost overruns and a lack of geopolitical necessity.

    However, China’s rising maritime assertivness has rendered the bases’ geographic position important again. Announced on November 24, the United States military apparently confirmed their desire to return after two Chinese firms had wanted to take control of the shipyards. This also comes amid a number of recent maritime flare-ups between the Chinese Coast Guard and Philippine navy ships.

    The opening of this geographically critical and large-scale port and shipyard confirms the United States’ continued pivot to Asia, originally initiated by Barack Obama, and underlines their continued security interests in countering Chinese expansion in the South China Sea. – DGG

Crypto Burnout:

  • The largest holders of Ethereum, so-called Ethereum whales, have accumulated over $1.03bn worth of ETH in a single day.
  • As the price of a Coinbase 2028 bond plummets, Redditors are asking whether the risk of a Coinbase bankruptcy is rising.
  • How is the Bahama’s central bank digital currency (CBDC), called the ‘sand dollar’, going?
  • Sam Bankman-Fried invested $11.5m in what looks like a shell bank called Farmington State Bank, later renamed Moonstone, which is linked to one of the few banking institutions, Deltec Bank, prepared to offer services to stablecoin Tether.

    Things to be suspicious of are as follows: 1) The San Francisco Federal Reserve President Mary Daly approved the bank’s entry into the Federal Reserve system giving it access to SWIFT. 2) One of the board members of the bank is the chief compliance officer for the Winklevoss crypto venture Gemini but is also an ex-DEA, AML expert and former Morgan Stanley. 3) Fintwit has linked Deltec to the Central Intelligence Agency, implying the whole operation may have been an intel op.

    Crypto’s linkage to the intel world makes sense on many fronts. First, the market serves as a useful mechanism to raise “off the books” financing for plausibly deniable jobs. 2) Its hyper neutrality can be used by all sorts of competing agencies and cells. 3) It would help the Intel community to bypass conventional KYC and AML checks when paying off assets.Remember, during the Cold War, Swiss bank accounts were considered the optimal mechanism for paying off all sorts of assets. And all sorts of bearer securities. – IK

  • SBF’s Semafor vs Elon Musk.

    Elon Musk is far from faultless. But sometimes he may have a point. Take the showdown between him and the Sam-Bankman-Fried-backed new media venture Semafor as an example.

    The context is as follows. A few days after SBF’s fraud was revealed, Semafor sheepishly flagged that the crypto billionaire had been a major investor in its business. Not that this stopped it from covering the story. The publication – along with a lot of other media – continued to do so but in an embarrassingly soft way.

    Things came to ahead when the neo publication, instead of digging deeper into the SBF drama, launched an aggresisve attack on Elon Musk instead. The attack came in response to the internet having quickly identified that Musk may have sniffed out SBF’s dodgy nature early on by going through a series of private text messages that had been made public earlier in the year as part of Elon’s M&A legal dispute with Twitter. One specific communication showed Elon questioning whether the crypto “altruist” really had the means to raise the $1-2bn liquidity he was promising for a Twitter investment. Soon after, Elon took to Twitter to confirm speculation he had sensed something was off – telling a Twitter spaces session on Nov 13 that his bullshit metre was going off.

    The possibility that Elon is not a fool, however, clashes with the current prescribed narrative that Elon is a moron who will soon burn Twitter to the ground. It didn’t take long for Semafor to return to the scene with a supposed scoop about the discovery of another  “secret text” it was Elon, not SBF, who had been the true bullshitter all along. Semafor claimed the secret text they had seen and verified actually revealed Elon was desperately hustling for SBF’s money by May, and that in the end SBF did become an investor.

    Elon rightly responded that the Semafor story was false and that the outfit should not be trusted given its own conflicted position.

    This, however, failed to resonate with the Elon haters. Once a liar always a liar – hence better to side with a baseless assertion from a totally conflicted Semafor than accept Elon’s word for it. [The logic here is even more questionable when you consider any official SBF Twitter holdings will definitely be confirmed via the Chapter II process.]

    Under pressure to prove his version of events, Ben Smith, Semafor’s co-founder, eventually released the supposedly incriminating secret text (no doubt leaked to him by SBF himself).

    Unfortunately for Smith it did little to prove his point to anyone with basic verbal reasoning skills. The text ended up being an SBF counterpart to one of Elon’s texts on May 5 asking who he was speaking to?

    That Smith saw this text as confirming any of the Semafor claims is truly bizarre. It clearly does not.

    What it does on the contrary indicate is that SBF may have been running short of liquidity as early as May 5. That’s two days before the formal collapse of the Terra Luna stablecoin peg:

    Credible journalists would be investigating that – IK.

  • Named after one of the largest scams in Europe, the JuicyFields scandal only appears to be growing.

    This cannabis crypto-based crowdfunding investment platform promised outsized returns for wannabe online investors in the cannabis industry.But it’s now accused by Lars Oloffson, the Swedish lawyer spearheading a class action lawsuit against the company on behalf of aggrieved investors, of large-scale money laundering.And that’s not all.Oloffson promises to make public documents that outline JuicyFields’ connections to Russian and Columbian drug cartels that used JuicyFields to launder their illicit proceeds. As if that’s not enough, Oloffson claims the CEO and Managing Director of a JuicyFields subsidiary, JuicyGrow, has extensive links to both the Russian and American intelligence communities and operated as a high-level ‘fixer’ for the group. – DGG

Is Our World a Metaverse?

  • A scientist proposes a method to determine whether we’re living inside a computer program.
  • The Polish President Andrzej Duda was duped by the same Russian prankster duo who has now targeted a number of high-profile state figures, this time by pretending to be French President Emmanuel Macron.

From the “Fake News” Zone (Limits To Growth Edition):

  • Matthew Ehret writes for Unlimited Hangout regarding the rise of the ‘predictive modeling’ mafia and how they may be skewing outcomes to suit their secret Malthusian agendas.
  • Theil Capital’s Eric Weinstein decides there’s something creepy about ‘Build Back Better’ campaigns.
  • The Russians are building a forging a domestic propaganda narrative that Nazism actually originated in Great Britain.
  • The BBC debunks a widely shared “independent” documentary alleging vaccines are more harmful than people realise, and may be linked to an elite Malthusian agenda to depopulate the planet.

Covid Isn’t Over:

  • How a deliberate pandemic could crush societies and what to do about it.
  • It turns out the FDA’s campaign against the use of Ivermectin to treat COVID-19 was ‘just a recommendation’.

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