Credit deflation and the reflation cycle to come (part 3)

[Noallegiance]

Polite reminder.

This is a macro thread.

There's a trading thread:

https://www.dosbods.co.uk/forum/21-shares-trading/

[Democorruptcy]

EVR:

Russian steelmaker Evraz said 10 members of its board had quit following the UK sanction of its largest shareholder Roman Abramovich and the suspension of its shares.

Only chief executive Alexey Ivanov remains in post. Evraz added that it was waiting for further clarifications from the Office of Financial Sanctions Implementation.

All 10 non-executive directors - Alexander Abramov, Alexander Frolov, Alexander Izosimov, Deborah Gudgeon, Eugene Shvidler, Eugene Tenenbaum, Karl Gruber, Maria Gordon, Sir Michael Peat and Stephen Odell - have resigned with immediate effect.

[moneyscam]

Interesting analysis from Zoltan Pozsar the Credit Suisse analyst often quoted in Zerohedge.

https://plus2.credit-suisse.com/shorturlpdf.html?v=4ZR9-WTBd-V

Worth the 5 minute read to understand how the paradigm is shifting. He mentions commodity CCP's which has got me thinking about the implications of weaponizing the $, euro and GBP in other derivative CCP's which use these assets as collateral. If there is indeed a move away from these currencies and their assets, the relative value of the collateral will fall and require more variation margin (daily MTM exercise) from clearing members. The price of these assets will fall as yields rise requiring more funds from market participants either in the form of more assets or cash.

If things cascade as I think they will with massive market dislocations and declining collateral quality, then these CCP's are going to be put to the test. As mentioned in previous posts on this subject CCP's concentrate and silo the counterparty risk all onto them. This risk is managed by the collateral posted and if this component starts to break down then they and the whole SIFI (systemically important financial institution) complex become a risk in and of themselves.

I haven't really thought this through and need to speak to some former colleagues but it is one of the things I would worry about and haven't really heard many out there discussing it apart from a few.

 

Quote

From the 1997, 2008, and 2020 crises, we also learned that… …every crisis is about the core vs. the periphery (large New York banks refusing to roll U.S. dollar funding in Southeast Asia in 1997; secured funding against subprime collateral to SIVs, Bear Stearns, and Lehman Brothers in 2008; and secured funding against good collateral to RV hedge funds during 2020). And from these crises we also learned that… …someone, somehow must always provide a backstop – or as Perry Mehrling would say, an “outside spread” (the IMF in Southeast Asia in 1997 in exchange for Washington consensus-type structural reforms; the Fed backstopping the shadow banking system with a range of facilities in 2008 in exchange for Basel III; and the Fed backstopping RV funds with QE and the SRF in March 2020, in exchange for “we don’t yet know what,” but history says there will be a price). Which brings us back to today – the present – and shipping freight rates. If we are right, and if this is a “crisis of commodities” – a 2008 of sorts thematically, if not in terms of size or severity – who will provide the backstop? We see but only one entity: the PBoC! Western central banks cannot close the gaping “commodities basis” because their respective sovereigns are the ones driving the sanctions. They will have to deal with the inflationary impacts of the “commodities basis” and try to cool them with rate hikes, but they will not be able to provide the outside spreads and won’t be able to provide balance sheet to close “Russia-non-Russia” spreads. Commodity traders won’t be able to either. Remember that Glencore rose from the ashes of Marc Rich + Co, and with Switzerland along with the sanctions, Swiss-based commodity traders will think twice about arbitraging the spreads. But the PBoC can… …as it banks for a sovereign who can dance to its own tune. To make things more complicated, China is probably thinking deep and hard about the value of the inside money claims in its FX reserves, now that the G7 seized Russia’s. The PBoC has two “geo-strategic” = “geo-financial” options… sell Treasuries to fund the leasing and filling of vessels to clean up subprime Russian commodities. That would hurt long-term Treasury yields and stabilize the commodities basis and would give the PBoC control over inflation in China, while the West would suffer commodity shortages, a recession, and higher yields. Yuck. That can’t be good for long-term Treasury yields. The PBoC’s second option is to do its own version of QE – printing renminbi to buy Russian commodities. If so, that’s the birth of the Eurorenminbi market and China’s first real step to break the hegemony of the Eurodollar market. That is also inflationary for the West and means less demand for long-term Treasuries. Yuck. That can’t be good for long-term Treasury yields either. The idea behind going long shipping freight rates is simple: the price the PBoC will be paying to lease ships to fill them up with Russian commodities can in theory rise as much as the collapse in the price of Russian commodities: a lot. Renting boats is like renting balance sheet at a dealer to fund inventory, and if China does not have enough storage capacity on the mainland, it will store Russian commodities on vessels floating on the seas, encumbering not balance sheet (the PBoC is funding all this by printing money) but shipping capacity, which, for the rest of the world, will also be inflationary. Once again: if you believe that the West can craft sanctions that maximize pain for Russia while minimizing financial stability risks and price stability risks in the West, you could also believe in unicorns. What G-SIBs are for financial stability… …Glencore is for price stability. In this instance, price instability (surging and collapsing commodity prices) feeds financial instability: margin calls may trigger the failure of some smaller commodity traders and maybe even some CCPs – the commodity exchanges. Again, commodity correlations are at 1, which is never a good thing… The Fed and other central banks will be able to provide liquidity backstops… …but those will be Band-Aid solutions. The true problem here is not liquidity per se. Liquidity is just a manifestation of a larger problem, which is the Russian-non-Russian commodities basis, which only China will be able to close. Do you see what I see? Do you see inflation in the West written all over this like I do? This crisis is not like anything we have seen since President Nixon took the U.S. dollar off gold in 1971 – the end of the era of commodity-based money. When this crisis (and war) is over, the U.S. dollar should be much weaker and, on the flipside, the renminbi much stronger, backed by a basket of commodities. From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities). After this war is over, “money” will never be the same again… …and Bitcoin (if it still exists then) will probably benefit from all this.

 

[Sugarlips]

3 minutes ago, moneyscam said:

Interesting analysis from Zoltan Pozsar the Credit Suisse analyst often quoted in Zerohedge.

https://plus2.credit-suisse.com/shorturlpdf.html?v=4ZR9-WTBd-V

Worth the 5 minute read to understand how the paradigm is shifting. He mentions commodity CCP's which has got me thinking about the implications of weaponizing the $, euro and GBP in other derivative CCP's which use these assets as collateral. If there is indeed a move away from these currencies and their assets, the relative value of the collateral will fall and require more variation margin (daily MTM exercise) from clearing members. The price of these assets will fall as yields rise requiring more funds from market participants either in the form of more assets or cash.

If things cascade as I think they will with massive market dislocations and declining collateral quality, then these CCP's are going to be put to the test. As mentioned in previous posts on this subject CCP's concentrate and silo the counterparty risk all onto them. This risk is managed by the collateral posted and if this component starts to break down then they and the whole SIFI (systemically important financial institution) complex become a risk in and of themselves.

I haven't really thought this through and need to speak to some former colleagues but it is one of the things I would worry about and haven't really heard many out there discussing it apart from a few.

 

 

Rafi is referencing Zoltan and concludes this LME debarcle is just another strong reason to be holding PMs and miners here.

 

[Majorpain]

1 hour ago, Cattle Prod said:

That's it exactly. But the point of financial services being based in London is the rule of law. Has a law been broken? If so, the LME should be prosecuted, and ideally the ownership forfeited. What idiot sold the London Metals Exchange to the Chinese anyway?

2012, the members sold it to China.  Now those same members find out they have been screwed by the Hong Kong owners in favor of a Chinese Billionaire (who wants to keep shorting nickel...).  Hoist by own Petard and all that.

[belfastchild]

4 hours ago, sancho panza said:

Important heads up from the George ref repo market fails due to counterparty risk rising,that predicted the last BK in 2008.Great little 14 min video explaining the basics as he does but the crucail heads up is 12 mins

1 repo fails,

 

I was catching up with videos/podcasts this week and someone mentioned something about the freezing of the russian state bank overseas reserves. I didnt pay much attention at the time but it stuck with me because they said it was primarily used in the repo or reverse repo market.
Should have paid more attention but does that ring a bell with anyone else?

[RWJ]

1 hour ago, Sugarlips said:

Rafi is referencing Zoltan and concludes this LME debarcle is just another strong reason to be holding PMs and miners here.

Good vid.  On the miners - provided they are unhedged against metal prices they're well placed to profit from a run up and avoid getting reamed in a short squeeze, as happened in nickel. 

Thinking about silver miners specifically, as that guy seems convinced the same thing will happen to silver :-

I hold some Jupiter Merian Gold & Silver fund to avoid paying vat on physical and I was interested to know which of the top held silver miners within the fund were unhedged, so I took a look through each of their accounts.

4, 5, 6, 8 & 10 are all unhedged.  The others aren't primarily silver focused so I didn't look at them.  I'd say this fund gives decent exposure to the silver price if, like me, you don't want to hold physical.

[Yadda yadda yadda]

24 minutes ago, Majorpain said:

2012, the members sold it to China.  Now those same members find out they have been screwed by the Hong Kong owners in favor of a Chinese Billionaire (who wants to keep shorting nickel...).  Hoist by own Petard and all that.

The members should create a new exchange as quickly as possible. Greedy morons selling in the first place. The whole thing is ruined.

China ought to send the billionaire away for 're-education'.

[Democorruptcy]

BATS exiting Russia

Quote

 

Russia Business Update and Revised Guidance

 t BAT we pride ourselves on our values and our ethos. We join together as one company to call on all leaders and governments to find a peaceful and sustainable resolution to this tragic conflict through the power of dialogue and diplomacy.

 Building on our announcement of 9th March 2022, we have now completed the review of our presence in Russia. The context is highly complex, exceptionally fast-moving and volatile.

 We have concluded that BAT's ownership of the business in Russia is no longer sustainable in the current environment.

 Today, we have initiated the process to rapidly transfer our Russian business in full compliance with international and local laws. Beyond continuing to pay our 2,500 employees, we will do our utmost to safeguard their future employment.

 Upon completion, BAT will no longer have a presence in Russia.

 Following our decision today, and in light of the continuing uncertainty related to Ukraine and Russia and the possible indirect impact on the rest of the Group, we consider it prudent to revise our guidance for full year 2022. We now expect constant currency Group revenue growth of 2% to 4% and Mid-Single Figure constant currency adjusted diluted EPS growth. In 2021, Ukraine and Russia accounted for 3% of Group revenue and a slightly lower proportion of adjusted profit from operations.

 

Edit to add for fag fanciers this was the IMB Russia figures I posted the other day:

 

Quote

 

IMB:

Tobacco giant Imperial Brands has suspended all operations in Russia following the country's invasion of neighbouring Ukraine.
Imperial Brands said on Wednesday that it was halting production at its factory in Volgograd, as well as ceasing all sales and marketing activity in the country, amid "a highly challenging environment" in Russia as a result of international sanctions and consequential severe disruption.

"We will be supporting our Russian employees, who continue to be paid while operations are paused," said Imperial. "We have already suspended our operations in Ukraine in order to prioritise the safety and wellbeing of our 600 employees in that country."

Imperial Brands added that both Russia and Ukraine were "relatively small markets" in the broader context of the group, representing around 2% of net revenues and 0.5% of adjusted operating profits in 2021.

 

 

[Harley]

4 hours ago, Democorruptcy said:

HFEL latest on HL has only a small India and no Japan in the top countries.

Australia	22.53%
Taiwan	17.87%
South Korea	12.81%
China	11.90%
Hong Kong	10.06%
Singapore	9.27%
Indonesia	3.13%
India	3.02%
New Zealand	2.82%

https://www.hl.co.uk/shares/shares-search-results/h/henderson-far-east-income-ltd-ord-npv

 

We had ensured geo coverage so Japan would be VJPN.  India needs a revist but some EM trusts and ETFs are held.  I just looked at Indian trusts and I see some good yielders but need to check the charts (one recent newsletter thought the market might be overvalued).

[stoobs]

Regarding access to Russian shareholdings, does anyone know how things were handled in the Second World War?

Did all the main exchanges stop for five years, or could you only deal on the exchanges of your own country (and maybe allies)?

[moneyscam]

3 hours ago, Cattle Prod said:

That's it exactly. But the point of financial services being based in London is the rule of law. Has a law been broken? If so, the LME should be prosecuted, and ideally the ownership forfeited. What idiot sold the London Metals Exchange to the Chinese anyway?

You're right of course with regards to rule of law. But in this case I might be able to make an exception...

 

[Bobthebuilder]

On 10/03/2022 at 17:22, Cattle Prod said:

Nobody was listening, nobody invested, price was on the floor (when governments should be supporting investment) and renewables were the answer. So sod em, I did my little bit by warning you lot and the lurkers 4 years ago.

So don't ever let them tell you "how were we supposed to know, who could have seen this coming". Don't accept it. This is on them, and it's going to be messy.

I got really angry today, and these words were running around my head.

Went to a boiler service in a rented house, first thing I noticed was the boiler switched off at the mains. Lady with 2 small kids, she was cooking them spaghetti with tinned hot dogs.

She could not afford to put the heating on, so turned the boiler off as she kept running out of gas on the pre pay meter.

I set the boiler up for her as hot water only, turned the gas rate down and turned the comfort mode off to make it as cheap as possible for her.

I hate politicians, they will never see face to face what I saw today.

I am still really angry.

[feed]

Something clearly needs to done about this. 

BlackRock loses $17B due to Ukraine crisis 

https://www.teletrader.com/blackrock-loses-17b-due-to-ukraine-crisis-report/news/details/57473068?internal=1

BlackRock has lost about $17 billion on its holdings in Russian securities due to the Ukraine crisis, as reported by the Financial Times.

Before the crisis began, BlackRock's clients owned more than $18.2 billion in Russian assets. But the closure of the markets and the sanctions imposed have made the vast majority unsaleable, leading the world's largest asset manager to lower prices.

According to the report, the enormous destruction of value mirrors the harm that the Russian operation in Ukraine has caused to the financial system in general.

 

 

[Errol]

 

[Plan-b]

5 minutes ago, Errol said:

 

[M S E Refugee]

Washington bans dollar supply to Russia https://www.rt.com/business/551725-washington-bans-dollar-supply-russia/

[Chewing Grass]

24 minutes ago, Errol said:

 

Isn't price fixing a communist thing, the free market players will not like that.

I officially regard the USA as Corporate Communists more akin to early 1930s Germany than Stalin's Russia.

[Castlevania]

38 minutes ago, Errol said:

 

Is it a coincidence that the CEO of the LME is a World Economic Forum Young Global Leader for 2022?

https://www.younggloballeaders.org/new-class?utf8=✓&region=a0Tb00000000DCLEA2#results

4th person if you scroll down from the above link

[sancho panza]

6 hours ago, moneyscam said:

Interesting analysis from Zoltan Pozsar the Credit Suisse analyst often quoted in Zerohedge.

https://plus2.credit-suisse.com/shorturlpdf.html?v=4ZR9-WTBd-V

Worth the 5 minute read to understand how the paradigm is shifting. He mentions commodity CCP's which has got me thinking about the implications of weaponizing the $, euro and GBP in other derivative CCP's which use these assets as collateral. If there is indeed a move away from these currencies and their assets, the relative value of the collateral will fall and require more variation margin (daily MTM exercise) from clearing members. The price of these assets will fall as yields rise requiring more funds from market participants either in the form of more assets or cash.

If things cascade as I think they will with massive market dislocations and declining collateral quality, then these CCP's are going to be put to the test. As mentioned in previous posts on this subject CCP's concentrate and silo the counterparty risk all onto them. This risk is managed by the collateral posted and if this component starts to break down then they and the whole SIFI (systemically important financial institution) complex become a risk in and of themselves.

I haven't really thought this through and need to speak to some former colleagues but it is one of the things I would worry about and haven't really heard many out there discussing it apart from a few.

 

 

I think another consideration is the one George Gammon remindd us of in the vid psoted earlier and thats the rehypotecation of financial collateral which could exacerbate any volatility.

It's a pertinent point that there's nothing stopping collaterel devaluing whilst it's being held in a repo trade or as margin

3 hours ago, Democorruptcy said:

BATS exiting Russia

Edit to add for fag fanciers this was the IMB Russia figures I posted the other day:

 

 

Funnily enough,we've moved from 4% baccy to 10% portfolio value over last two days.Japan Tobacco down at $8.53,lower than during covid.

Have people been stoping smoking?

Coma scores.We had a 3% BATs position,have added Jap and Imps to the mix.Yank ones are pricey imho.

Note:the balance sheet scores in red means goodwill is >75% of equity,amber means goodwill>50%

Company	Share price	Date	Chart	Inc	BS	CF	Sector	SCS
IMB	GBP 15.35	11/03/22	4	5	1	4	4	18
BATS	GBP 30.68	11/03/22	3	4	3	4	4	18
JAPAY	USD 8.53	11/03/22	4	4	3	5	4	20
ALTRIA	USD 50.85	11/03/22	2	3	1	4	4	14
PM	USD 89.25	11/03/22	1	2	1	3	4	11

[JREWING]

3 hours ago, stoobs said:

Regarding access to Russian shareholdings, does anyone know how things were handled in the Second World War?

 

No too young. But.

If the governments around the globe go after companies that have Russian shareholders then watch for the capital flight. You think anyone would want to own shares via a US/EU\UK exchange when they can freeze your assets purely because of nationality? Watch the Arabs and Chinese start to liquidate anything the west can freeze. The west is very close to the point of undermining its own capital markets and verging on Banana Republic territory. The days of foreign companies listing on western exchanges is probably getting very close to being over.

[Castlevania]

2 minutes ago, sancho panza said:

I think another consideration is the one George Gammon remindd us of in the vid psoted earlier and thats the rehypotecation of financial collateral which could exacerbate any volatility.

It's a pertinent point that there's nothing stopping collaterel devaluing whilst it's being held in a repo trade or as margin

Funnily enough,we've moved from 4% baccy to 10% portfolio value over last two days.Japan Tobacco down at $8.53,lower than during covid.

Have people been stoping smoking?

Coma scores.We had a 3% BATs position,have added Jap and Imps to the mix.Yank ones are pricey imho.

Company	Share price	Date	Chart	Inc	BS	CF	Sector	SCS
IMB	GBP 15.35	11/03/22	4	5	1	4	4	18
BATS	GBP 30.68	11/03/22	3	4	3	4	4	18
JAPAY	USD 8.53	11/03/22	4	4	3	5	4	20
ALTRIA	USD 50.85	11/03/22	2	3	1	4	4	14
PM	USD 89.25	11/03/22	1	2	1	3	4	11

Do you consider withholding tax when doing your comma scores?

[DurhamBorn]

Might be time to end the thread,or book myself in at the Doctors,iv bought a Cathie Wood ARKfund biotech stock 

Im not going to mention is because its likely to go to zero and its a small holding,but just wanted to be honest that iv gone off piste,i hope its a one off and doesnt become a habit.

Wheres Dogecoin...............

[sancho panza]

28 minutes ago, M S E Refugee said:

Washington bans dollar supply to Russia https://www.rt.com/business/551725-washington-bans-dollar-supply-russia/

Anotehr 'careful what you wish for' moment in a long line of them.

[ThoughtCriminal]

Penny's dropping for a lot of people.