March 17, 2023: Fire

March 17, 2023: Fire
Doug Noland Posted on March 18, 2023

It is commonly believed that the “Great Financial Crisis” could have been avoided had the Federal Reserve bailed out Lehman Brothers. This is along the same lines as the Milton Friedman/Ben Bernanke thesis, that the Great Depression was the result of the Fed’s failure to print sufficient money to recapitalize the U.S. banking system. It’s a central tenet of CBB analysis that “money” – monetary inflation – is the problem, not the solution.

Bernanke concluded his November 8th 2002 speech, “On Milton Friedman’s Ninetieth Birthday”: “I would like to say to Milton and Anna [Schwartz]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

Federal Reserve total assets were $836 billion when Bernanke became Fed Chairman in February 2006. Fed assets had inflated five-fold to $4.0 TN by the end of his term (Feb. 2014) –on the way to a peak of $8.97 TN in April of last year (10-fold increase in 14 years!).

Federal Reserve Total Assets surged $297 billion last week to $8.639 TN, in one week reversing four months – and over half – of recent QT (quantitative tightening). A $10 TN balance sheet by year end would not be surprising.

March 13 – Reuters (Dan Burns): “The Federal Reserve on Sunday unveiled a new program to ensure banks can meet the needs of all their depositors amid escalating chances of bank runs following the abrupt collapse of two major banks in the space of 72 hours. The Bank Term Funding Program (BTFP) will offer loans with maturities of up to a year to banks, savings associations, credit unions and other eligible depository institutions. Here are some key elements of the Fed’s program: A key element of the program is acceptable loan collateral – including U.S. Treasuries and mortgage-backed securities among others – will be valued at ‘par’… Loans of up to a year in length will be available under the new facility… Interest rates will be the one-year overnight index swap (OIS) rate plus 10 bps and will be fixed for the term of the advance on the day the advance is made… The loan commitments made by the Fed’s 12 regional banks will be backstopped with $25 billion from the U.S. Treasury’s Exchange Stabilization Fund.”

March 13 – Financial Times (Colby Smith, James Politi, Ortenca Aliaj and James Fontanella-Khan): “Just hours after Wall Street opened for trading on Friday morning, US regulators had seized control of Silicon Valley Bank, which had imploded under the strain of depositors pulling out their money en masse. What at first seemed like the failure of a one-of-its-kind lender with deep ties to the technology industry quickly appeared as though it might spiral out of control. Within 48 hours, regulators were preparing a package of emergency measures to quell panic among depositors and prevent contagion in the rest of the banking system. For some working on the effort, it evoked memories of the response to the coronavirus pandemic in 2020 and the great financial crisis of 2008. By Sunday evening, the US government announced it would guarantee all deposits held at SVB and crypto lender Signature Bank, which was also shut down by regulators at the weekend. The Federal Reserve, meanwhile, launched a lending facility that would be available to lots of other banks in order to ensure depositors’ demands could be met.”

I appreciate that officials last weekend believed they needed to ensure all SVB and Signature depositors to stem a potential systemic bank run. Just as the Bernanke Fed had justification for opening the floodgate for unprecedented money printing; the Yellen Fed for holding the policy rate below 1% until June 2017; the Powell Fed restarting QE in non-crisis September 2019 (unemployment rate multi-decade low 3.6%); and the Fed to full-throttle the printing presses for $5 TN during the pandemic, while holding rates at zero well into 2022 in the face of surging inflation.

Where does it all end? For one thing, the Fed’s balance sheet will be getting much larger. I’ll assume global central bank balance sheets will also inflate. Gold surged $121 this week, second only to the $130 one-week surge in late-March 2020 (Covid panic).

March 16 – Reuters (David Lawder and Doina Chiacu): “The U.S. banking system remains sound and Americans can feel confident that their deposits are safe, Treasury Secretary Janet Yellen said on Thursday, but she denied that emergency actions after two large bank failures mean that a blanket government guarantee now existed for all deposits. In her first public remarks since the weekend’s emergency measures with other regulators to ensure no depositors at Silicon Valley Bank and Signature Bank suffered losses from those lenders’ collapse, Yellen was pressed during a hearing before the U.S. Senate Finance Committee if that meant all uninsured deposits were now guaranteed.”

How can it not be a “blanket government guarantee”? So, Washington will bail out wealthy depositors at SVB and Signature and deny the same treatment to depositors when more traditional banks begin to fail?

March 16 – Wall Street Journal (David Benoit, Dana Cimilluca, Ben Eisen, Rachel Louise Ensign and AnnaMaria Andriotis): “The biggest banks in the U.S. swooped in to rescue First Republic Bank with a flood of cash totaling $30 billion, in an effort to stop a spreading panic following a pair of recent bank failures. JPMorgan…, Citigroup Inc., Bank of America Corp. and Wells Fargo are each making a $5 billion uninsured deposit into First Republic, the banks said… Morgan Stanley and Goldman Sachs… are kicking in $2.5 billion apiece, while five other banks are contributing $1 billion each. The bank’s executives came together in recent days to formulate the plan, discussing it with Treasury Secretary Janet Yellen and other officials and regulators in Washington, D.C…”

Understandably, the Treasury, FDIC and Federal Reserve really hope to avoid a bailout at California’s First Republic Bank, an institution rife with wealthy uninsured depositors. A large liquidity injection from the big banks was clever. But with $176 billion of deposits (12/31), the $30 billion cash injection is little more than a liquidity stop-gap measure. The wealthy will escape unscathed – and I’ll assume the same for the big banks. But I doubt we’ve heard the last of the First Republic saga. Uninsured depositors have good reason to move now, rather than count on a rescue. After all, another wealthy depositor bailout risks unleashing a political firestorm. This week’s First Republic gambit could backfire.

Talk of taxpayers not being on the hook for bank collapses will sound silly in hindsight. The Biden administration faces a major political predicament. At the minimum, an onslaught of tougher bank regulation is a foregone conclusion. Bank executives across the country will swiftly reassess the risk versus reward calculus of high-risk growth strategies. To be sure, there are today extreme financial and economic risks associated with a shuttering of public debt markets (to new issuance) coupled with a precipitous drop in bank lending.

We’re officially one week into what will likely evolve into a major banking and financial crisis. Understandably, there are comparisons to the Lehman collapse. Such analysis doesn’t seem as lunatic fringe after this week’s upheaval in Europe.

March 16 – Financial Times (Joshua Frankli, Owen Walker and Laura Noonan): “Credit Suisse shares rebounded sharply on Thursday after the lender revealed plans to borrow up to SFr50bn ($54bn) from the Swiss central bank and buy back about SFr3bn of its debt in an attempt to boost liquidity and calm investors. The Swiss National Bank had said on Wednesday it was willing to provide a liquidity backstop following a plunge of as much as 30% in the troubled lender’s stock… In a statement on Thursday, Credit Suisse said it had taken the decision ‘to pre-emptively strengthen its liquidity’ by borrowing the funds from the Swiss central bank under a loan facility and short-term liquidity facility.”

The Swiss National Bank (SNB) liquidity injection failed to calm fears – at Credit Suisse or for European banks more generally. Things have quickly erupted into an international banking crisis. Those nagging old derivative and counter-party risks…

Credit Suisse CDS surged an unprecedented 596 this week to record 1,014 bps. In data back to 2007, the previous largest weekly increase was 66 bps in December. The largest weekly gain during the Covid crisis was 37 bps. Swiss mega-bank UBS’s CDS surged 56 to 128 bps, the largest weekly gain since global crash week, September 19th 2008 (107bps). Deutsche Bank CDS surged 64 bps this week, the largest weekly gain in data back to 2019 – even surpassing the two-week 60 bps Covid crisis jump in March 2020. France’s Societe Generale (SocGen) CDS jumped 33 to 95 bps, the largest weekly gain in a decade. Germany’s Commerze Bank CDS rose 28 this week to 94 bps, surpassing the Covid crisis for the largest weekly gain in data back to 2019. Italy’s UniCredit saw CDS jump 26 this week to 122 bps, the largest weekly gain since the Covid panic.

Despite rapidly widening cracks in financial stability, the ECB held firm Thursday with its 50 bps rate increase (the Fed today likely has its sights on 25 bps; by Wednesday they’ll have serious doubts). Europe faces a serious inflation problem. But I couldn’t help but think that perhaps Wednesday’s euro drop conjured memories of past European debt crises. The euro suffered an abrupt 2% dive, before cutting losses to 1.5% by the end of the session.

Hopes that SVB instability would be isolated to U.S. banking were dispelled. Suddenly, the fragile European banks and euro currency were in the crosshairs. And with the dollar facing its own serious issues, yen prospects all at once looked relatively less dire. The yen gained 0.6% Wednesday, the top performing developed currency (ex-U.S. dollar) – on its way to a world-leading 2.4% weekly gain. This is a problem. The global leveraged speculating community is massively short the yen.

March 15 – Bloomberg (Edward Bolingbroke and Michael MacKenzie): “Government debt yields plunged globally Wednesday as mounting financial-stability concerns prompted bond traders to abandon bets on additional central-bank rate hikes and begin pricing in cuts by the Federal Reserve. Investors priced in a drop of more than 100 bps in the US policy rate by year-end and downgraded the odds of additional hikes by the Bank of England and the European Central Bank. A weeklong rout in bank shares globally has unleashed historic demand for government debt and other havens. In the US, two-year Treasury yields plummeted as much as 54 bps to 3.71%, the lowest level since mid-September, while German two-year rates fell 48 bps to 2.41%, a record drop.”

March 13 – Bloomberg (Denitsa Tsekova): “Fast-money quants rushed to extricate themselves from short positions on government bonds as debt markets from the US to Europe clock up their biggest rallies in decades. Commodity trading advisers sitting on $300 billion of wrong-way bets unloaded two-thirds of that in just three days, according to data from JPMorgan…, as widening cracks in the financial system put a Fed pivot to easy policy back on the table. The covering added fuel to a Treasury rally that saw yields plummet past 3.5% from a four-month high of above 4% in the space of 10 days, burning short-sellers. The unwind is a glimpse into a short squeeze that likely ensnared a much broader swath of fund managers since turmoil in the US banking system erupted last week.”

A major global de-risking/deleveraging episode erupted this week. After trading above 5% last Thursday, two-year Treasury yields collapsed to a low of 3.71% in chaotic Wednesday trading. Two-year yields were back up to 4.25% early-Friday, before closing a wild week down 75 bps to 3.84%. Trading interest-rate derivatives was one horrible nightmare. Meanwhile, the currencies turned chaotic, as Credit spreads blew out and CDS prices spiked higher.

For the levered speculators, markets turned against them everything, everywhere all at once. An incredibly intense squeeze engulfed the Treasury market. Yield curve bets were blowing up. Yen shorts and levered “carry trades” were suddenly at risk. JGB and European yields sank. Corporate spreads were blowing out, inflicting losses on levered corporate bond portfolios. Energy prices tanked. And stock market instability was turning increasingly problematic. The favored financial stocks were collapsing, while the heavily shorted technology stocks rallied. For the week, the KBW Bank Index sank 14.6%, while the Nasdaq100 (NDX) jumped 5.8%. Intense squeeze dynamics also spurred a huge rally in crypto, with bitcoin surging a crazy 34%.

Global markets did not “seize up” this week. However, the week had all the characteristics of the start of a serious period of de-risking/deleveraging. The SVB and U.S. banking crisis is, of course, an important dynamic. But the global nature of the unfolding crisis creates a much more complex market and financial backdrop. Derivatives markets in disarray. Hedge funds/family offices are running for cover. And in stark contrast to 2022, currency markets have turned disorderly and unpredictable. No place to hide. No environment for leverage. When markets start malfunctioning like this, my thoughts return to the $65 TN of “hidden leverage” identified by the Bank of International Settlements.

Friday under the MarketWatch (Vivien Lou Chen) headline, “Bond-Market Volatility at Highest Since 2008 Financial Crisis Amid Rolling Fallout From Banks”: “Analysts described the impact on the U.S. and German bond market as a rolling one in nature over the past five days, producing the biggest single-day drops in yields in well over a quarter of a century… On Monday, following a weekend government intervention to protect the depositors of… Silicon Valley Bank and Signature Bank…, the policy-sensitive 2-year U.S. note yield experienced its biggest one-day fall since Oct. 20, 1987… — though, outside of U.S. hours, the rate dropped by the most since 1982. That intraday drop of almost 60 bps exceeded the declines seen during the 2007-2009 financial crisis/recession; the Sept. 11, 2001, terrorist attacks; and 1987’s Black Monday stock-market crash. Two days later, as troubles emerged at Swiss banking giant Credit Suisse, the 2-year German yield saw its biggest daily decline based on available data going back to the country’s reunification period in 1990… The ICE BofAML Move Index, a gauge of bond-market volatility, soared on Wednesday and Thursday to its highest levels since the fourth quarter of 2008, or the height of the Great Financial Crisis…”

There is every reason to take the unfolding crisis most seriously. There will be comparisons to 2008, but we must recognize the potential for something worse.

Some data to ponder: Outstanding Treasury Debt ended 2007 at $6.051 TN, or 41.8% of GDP. Treasury Securities ended 2022 at $26.832 TN, or 105% of GDP. The Fed’s balance sheet was $951 billion (7% of GDP) to close out ‘07. This week it’s $8.639 TN, or 34% of GDP. Bank Loans ended 2007 $8.259 TN. They’re now $14.054 TN. Consumer Credit jumped from $1.132 TN to $2.661 TN. Total Bank Deposits have inflated from $8.487 TN (58% of GDP) to $20.698 TN (79% of GDP) – with Deposits expanding by a third ($5.165 TN) over the past three years.

China and emerging markets were in relatively robust up-cycles in 2008, with their stimulus and speedy recoveries providing a “global locomotive” that helped pull the world economy out of the morass. Chinese bank assets closed 2007 below $8.0 TN. Possibly surpassing $60 TN this year, Chinese bank Credit won’t be the global savior for this cycle.

I’ve argued for a while now that the “government finance Bubble” would prove the end of the line. There’s simply no category of financial claims outside sovereign debt and central bank Credit with the potential to expand sufficiently for Bubble reflation. A major expansion of bank Credit extended the cycle, but that fateful boom is now in jeopardy. Runaway growth in both central bank and sovereign Credit risks a devastating crisis of confidence.

A Lehman bailout wouldn’t have thwarted the crisis. There were Trillions of mispriced securities and too much speculative leverage, dysfunctional finance that fueled deep structural maladjustment. Today, there are tens of Trillions of securities – priced as if they’re actually backed by real economic wealth. The day of reckoning is long overdue.

There were many alarming developments this week. None could prove more consequential than uncharacteristically belligerent comments from one of the world’s leading central banks.

March 15 – Bloomberg: “China’s central bank echoed President Xi Jinping’s warning that the US is seeking to suppress the world’s second-largest economy, an unusual move that suggests the central bank could be looking for ways to safeguard against possible further sanctions. The People’s Bank of China will ‘appropriately respond to the containment and suppression of the US and other Western countries,’ it said in a statement… following a meeting to study Xi’s speeches during the National People’s Congress session…”

After central bank officials have mastered their Xi studies, we shouldn’t bank on the PBOC’s eager participation in concerted policy measures to thwart U.S., European and global financial crises. On many levels, risks today greatly outweigh 2008. And no amount of money-printing will resolve deep structural problems decades in the making. Moreover, we could be entering a major global crisis with every man (central bank) for himself. There will be an inclination to prioritize domestic over international. Some will remain focused on severe inflation problems, while others will pivot to financial instability. There are different agendas – “world orders” and geopolitical considerations to contemplate.

I don’t like being the guy yelling “fire” in the crowded theater. But there’s a fire burning. I hope it can be contained. It’s uncomfortable to hear so many shouting “stay calm, no fire!” And we’ve all grown tired of the false alarms. There’s just so much highly combustible material that has accumulated over the years. The stuff’s everywhere, in the aisles and even obstructing some exits.

How much confidence should we place in those decrepit fire extinguishers working this time around? With all the structural changes, it’s become such a towering theater – the grandeur, the dazzling new technologies and sophistication, filled with the unsuspecting, the rascals and newbies – with the same old small exits. Look at those guys eagerly making their way through the exit. Weren’t they the ones hollering “no fire”? It’s difficult to predict how the jittery crowd will respond to those first whiffs of smoke, but I’m not going to assume things stay orderly.

For the Week:

The S&P500 rallied 1.4% (up 2.0% y-t-d), while the Dow was little changed (down 3.9%). The Utilities surged 4.1% (down 6.2%). The Banks sank 14.6% (down 6.2%), and the Broker/Dealers fell 2.0% (down 1.3%). The Transports dropped 3.1% (up 2.8%). The S&P 400 Midcaps slumped 3.2% (down 2.3%), and the small cap Russell 2000 fell 2.6% (down 2.0%). The Nasdaq100 jumped 5.8% (up 14.4%). The Semiconductors rallied 5.5% (up 21.8%). The Biotechs recovered 1.0% (down 3.3%). With bullion jumping $121, the HUI gold equities index surged 13.2% (up 5.3%).

Three-month Treasury bill rates ended the week at 4.235%. Two-year government yields sank 75 bps this week to 3.84% (down 59bps y-t-d). Five-year T-note yields fell 46 bps to 3.50% (down 50bps). Ten-year Treasury yields dropped 27 bps to 3.43% (down 45bps). Long bond yields declined eight bps to 3.63% (down 34bps). Benchmark Fannie Mae MBS yields sank 41 bps to 5.03% (down 36bps).

Greek 10-year yields declined 19 bps to 4.13% (down 44bps y-o-y). Italian yields dropped 27 bps to 4.05% (down 64bps). Spain’s 10-year yields sank 32 bps to 3.23% (down 29bps). German bund yields collapsed 40 bps to 2.11% (down 34bps). French yields dropped 33 bps to 2.68% (down 30bps). The French to German 10-year bond spread widened seven to 57 bps. U.K. 10-year gilt yields sank 36 bps to 3.28% (down 39 bps). U.K.’s FTSE equities index slumped 5.3% (down 1.6% y-t-d).

Japan’s Nikkei Equities Index dropped 2.9% (up 4.7% y-t-d). Japanese 10-year “JGB” yields dropped 12 bps to 0.29% (down 13bps y-t-d). France’s CAC40 sank 4.1% (up 7.0%). The German DAX equities index slumped 4.3% (up 6.1%). Spain’s IBEX 35 equities index sank 6.1% (up 6.0%). Italy’s FTSE MIB index slumped 6.6% (up 7.5%). EM equities were mostly lower. Brazil’s Bovespa index declined 1.6% (down 7.1%), and Mexico’s Bolsa index dipped 1.6% (up 7.1%). South Korea’s Kospi index was unchanged (up 7.1%). India’s Sensex equities index fell 1.9% (down 4.7%). China’s Shanghai Exchange Index increased 0.6% (up 5.2%). Turkey’s Borsa Istanbul National 100 index dropped 4.6% (down 6.8%). Russia’s MICEX equities index rose 2.0% (up 7.8%).

Investment-grade bond funds posted outflows of $3.891 billion, and junk bond funds reported negative flows of $1.427 billion (from Lipper).

Federal Reserve Credit surged $142bn last week to $8.447 TN. Fed Credit was down $453bn from the June 22nd peak. Over the past 183 weeks, Fed Credit expanded $4.720 TN, or 127%. Fed Credit inflated $5.636 Trillion, or 201%, over the past 540 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.2bn last week to $3.362 TN. “Custody holdings” were down $73bn, or 2.1%, y-o-y.

Total money market fund assets surged $121bn to a record $5.015 TN. Total money funds were up $456bn, or 10.0%, y-o-y.

Total Commercial Paper fell $15.2bn to an eight-month low $1.163 TN. CP was up $146bn, or 14.3%, over the past year.

Freddie Mac 30-year fixed mortgage rates dropped 20 bps to 6.51% (up 235bps y-o-y). Fifteen-year rates sank 24 bps to 5.85% (up 246bps). Five-year hybrid ARM rates jumped 15 bps to 6.15% (up 296bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down six bps to 6.96% (up 246bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 0.8% to 103.71 (up 0.2% y-t-d). For the week on the upside, the Japanese yen increased 2.4%, the New Zealand dollar 2.3%, the Swedish krona 2.1%, the Australian dollar 1.8%, the South Korean won 1.7%, the British pound 1.2%, the Canadian dollar 0.7%, the Singapore dollar 0.6%, and the euro 0.3%. On the downside, the Mexican peso declined 2.1%, the Brazilian real 1.2%, the South African rand 0.9%, the Swiss franc 0.6% and the Norwegian krone 0.5%. The Chinese (onshore) renminbi increased 0.44% versus the dollar (up 0.17%).

Commodities Watch:

The Bloomberg Commodities Index declined 1.9% (down 9.1% y-t-d). Spot Gold jumped 6.5% to $1,989 (up 9.1%). Silver surged 10.0% to $22.60 (down 5.6%). WTI crude sank $9.94 to $66.74 (down 17%). Gasoline dropped 5.5% (up 2%), and Natural Gas fell 3.8% to $2.34 (down 48%). Copper lost 3.4% (up 2%). Wheat rallied 4.6% (down 10%), and Corn recovered 2.8% (down 7%). Bitcoin surged $6,940, or 34%, this week to $27,354 (up 65%).

Bank Crisis Watch:

March 13 – Wall Street Journal (Berber Jin, Rolfe Winkler and Katherine Bindley): “Startup founders were relieved Monday to start getting access to their money at Silicon Valley Bank, as the entrepreneurs and venture investors said the lender’s collapse would drive changes in the industry’s financial practices. The federal government’s decision to backstop deposits at the bank… ended a multiday race to shore up cash and meet payroll needs. The government move surprised many in the industry, which was bracing for a delay of weeks and even months before depositors would get full access to their cash. Many startup chief executives and their venture backers were in the midst of completing agreements for emergency cash loans and other funding when they heard the news that their deposits would be made whole by Monday.”

March 16 – Associated Press (Christopher Rugaber): “Cash-short banks have borrowed about $300 billion in emergency funding from the Federal Reserve in the past week, the Fed announced cash-short banks have borrowed about $300 billion in emergency funding from the Federal Reserve in the past week… Nearly half the money — $143 billion — went to holding companies for two major banks that failed over the past week, Silicon Valley Bank and Signature Bank… An additional $148 billion in lending was provided through a longstanding program called the ‘discount window,’ and amounted to a record level for that program. The Fed has lent an additional $11.9 billion from a new lending facility it announced on Sunday.”

March 13 – Bloomberg (Michael Gambale, Alexandra Harris, Scott Carpenter and Carmen Arroyo): “The US system of Federal Home Loan Banks is ramping up the amount of cash it has available to deploy as the failure of several US lenders — including Silicon Valley Bank and Signature Bank — stokes expectations that more regional lenders will need to tap it for funds. The FHLB system, a key source of cash for regional lenders, raised $88.7 billion through the sale of short-term notes…, more than the $64 billion initially planned. ‘This isn’t the normal size for sure but likely reflects bank funding needs given the backdrop,’ said Ian Burdette, head of term rates trading at Academy Securities. ‘I don’t think they’d be doing what they’re doing if there wasn’t real bank demand.’”

March 15 – Associated Press (Ken Sweet and Stan Choe): “A bank run conjures images of ‘It’s a Wonderful Life,’ with anxious customers crammed shoulder to shoulder, desperately pleading with a harried George Bailey to hand over their money. The failure of Silicon Valley Bank last week had the panic but few other similarities, instead taking place on Twitter, message boards, mobile phones and bank websites… Regulators, policymakers and bankers are looking at the role that digital messaging and social media may have played in the collapse, and whether banks are entering an age when the psychological behavior behind a bank run — mass fear from depositors of losing their savings — may be amplified and go viral quicker than bank officers and regulators can successfully respond.”

March 13 – CNBC (Hugh Son): “On Friday, Signature Bank customers spooked by the sudden collapse of Silicon Valley Bank withdrew more than $10 billion in deposits… That run on deposits quickly led to the third-largest bank failure in U.S. history. Regulators announced late Sunday that Signature was being taken over to protect its depositors and the stability of the U.S. financial system. The sudden move shocked executives of Signature Bank, a New York-based institution with deep ties to the real estate and legal industries, said board member and former U.S. Rep. Barney Frank. Signature had 40 branches, assets of $110.36 billion and deposits of $88.59 billion at the end of 2022…”

March 17 – Reuters (Shankar Ramakrishnan, Stefania Spezzati and Sumeet Chatterjee): “At least four major banks, including Societe Generale SA and Deutsche Bank AG, are restricting new trades involving Credit Suisse Group AG or its securities, according to five sources with direct knowledge of the matter, as the Swiss bank struggles to restore confidence.”

March 17 – Bloomberg (Jan-Henrik Förster, Allyson Versprille and Dinesh Nair): “UBS Group AG is exploring an acquisition of all or parts of Credit Suisse Group AG at the urging of Swiss regulators after its smaller rival was pummeled by a crisis of confidence, according to people with knowledge of the matter. Swiss officials are pushing UBS to look at various ways it could be involved with a solution for Credit Suisse.”

March 15 – Reuters (Noele Illien, John Revill and Tom Sims): “Swiss regulators pledged a liquidity lifeline to Credit Suisse in an unprecedented move by a central bank after the flagship Swiss lender’s shares tumbled as much as 30% on Wednesday. In a joint statement, the Swiss financial regulator FINMA and the nation’s central bank sought to ease investor fears around Credit Suisse, saying it ‘meets the capital and liquidity requirements imposed on systemically important banks.’ They said the bank could access liquidity from the central bank if needed.”

March 14 – Financial Times (Sheila Bair): “Preventing ‘systemic risk’ was repeatedly used as a rationale for bailing out Wall Street during the 2008 financial crisis. The 2010 Dodd-Frank Act was supposed to have fixed all of that by strengthening regulation and banning government bailouts. Yet, banking regulators have now decided that the failure of two midsized banks, Silicon Valley Bank and Signature, pose systemic risk, requiring the Federal Deposit Insurance Corporation to pay off their uninsured depositors. At combined assets of $300bn, these two banks represent a minuscule part of the US’s $23tn banking system. Is that system really so fragile that it can’t absorb some small haircut on these banks’ uninsured deposits? If it is as safe and resilient as we’ve been constantly assured by the government, then the regulators’ move sets dangerous expectations for future bailouts.”

March 13 – Bloomberg (Priya Anand, Dawn Lim, Hannah Miller and Heather Perlberg): “The collapse of Silicon Valley Bank has prompted a global reckoning at venture capital and private equity firms, which found themselves suddenly exposed all together to the tech industry’s money machine. SVB billed itself as a one-stop shop for tech visionaries — more than just a bank, a financial partner across loans, currency management, even personal mortgages. Its tactics to bundle client services were deemed aggressive by some, but it was hard to argue with the results: business with 44% of venture-backed technology and health-care companies that went public last year, and overall explosive growth during boom times.”

March 16 – Reuters (Anirban Sen and David French): “PacWest Corp is in talks about a liquidity boost with Atlas SP Partners and other investment firms, people familiar… said…, in the latest case of a U.S. regional bank exploring such an option in the wake of Silicon Valley Bank’s failure. PacWest is considering a range of options to bolster its coffers and there is no certainty that any deal will materialize, the sources said.”

March 16 – Reuters (Susan Mathew): “Goldman Sachs said deposits have started to move out of U.S. banks and towards money markets funds, as investors seek the safety in Treasury securities amid worries about stresses in the banking sector. Retail money market funds have seen large and accelerating inflows over the last week, Goldman said…, likely suggesting some migration away from deposits.”

March 16 – Bloomberg (Nina Trentmann): “With Credit Suisse Group AG having wobbled this week and a handful of regional US banks collapsing, company executives are getting more concerned about where they can safely keep their cash. Some of them are yanking money from their banks and depositing it at other lenders, moving it to money market funds, or buying Treasury bills directly… The rapid moves are leaving certain banks with quick drops in deposits while helping to pull borrowing rates lower on short-term government debt, adding to turmoil in financial markets.”

March 15 – Reuters (Anirudh Saligrama): “The Bank of England was holding emergency talks with international counterparts last night amid rising concerns as the crisis deepens in Swiss bank Credit Suisse Group AG…, the Telegraph reported… The report comes after the turbulence at Credit Suisse renewed fears of a banking crisis that is reshaping international financial conditions on a daily – or even hourly – basis.”

March 13 – Financial Times (Stephen Gandel and Joshua Franklin): “The failure of Silicon Valley Bank and the sell-off in US banks that followed have highlighted the lasting dangers of a strategy many lenders used to boost profits when interest rates were low. Over the past three years, banks became accustomed to investing customer deposits in fixed-income securities when they could not profitably lend them out. SVB… was a particularly heavy user of the strategy: more than half of its assets were invested in securities. But as rates have jumped in the past year, the bonds that banks bought with their bounty of cheap deposits have sunk in value, creating as much as $600bn in paper losses. As a result, investors are getting a better picture of the risks some banks have been taking with their excess deposits.”

March 13 – Reuters (Nilutpal Timsina): “Moody’s… downgraded the debt ratings of collapsed… Signature Bank deep into junk territory and placed the ratings of six other U.S. banks under review for a downgrade. Moody’s, which rated Signature Bank’s subordinate debt ‘C’, said it was also withdrawing future ratings for the collapsed bank. The banks placed under review for downgrade are First Republic Bank, Zions Bancorporation, Western Alliance Bancorp, Comerica Inc, UMB Financial Corp and Intrust Financial Corporation…”

March 13 – Bloomberg (Soo-Hyang Choi): “Moody’s put all long-term ratings of First Republic Bank on review, as the collapse of Silicon Valley Bank reverberates across the sector. ‘The review for downgrade reflects the extremely volatile funding conditions for some US banks exposed to the risk of uninsured deposit outflows,’ Moody’s said…, citing a ‘material’ amount of deposits above the Federal Deposit Insurance Corporation threshold. ‘Ratings could be downgraded if the bank’s deposit base has eroded markedly, triggering asset sales, loss crystallization and a higher reliance on market funding,’ it said.”

March 13 – Bloomberg (Charles Williams and Carmen Arroyo): “Government-backed home loan company Fannie Mae has postponed the sale of more than $500 million of mortgage-linked bonds as the market absorbs the collapse of California’s Silicon Valley Bank… Fannie Mae alerted investors Monday morning that the deal, a $542 million credit risk transfer security, would be delayed and cited market conditions…”

March 13 – Bloomberg (Dana Hull and Sarah Holder): “Construction on The Kelsey Civic Center, a 112-unit affordable housing project across from San Francisco City Hall, was supposed to begin this week. But the lender for the project’s $52 million construction loan was Silicon Valley Bank. On Friday — the date the project’s financing was slated to close — regulators shut down the bank…”

March 16 – Bloomberg (Tom Maloney, Devon Pendleton, Biz Carson and Suzanne Woolley): “Just days ago, First Republic Bank boasted of another coup for its wealth-management business: poaching a six-person team from Morgan Stanley in Los Angeles. That followed hiring sprees targeting Bank of America Corp., JPMorgan Chase & Co., Bank of New York Mellon Corp. and Wells Fargo & Co. — raiding crews in Boston, New York and Palo Alto, California. It reflected how the… bank was rapidly expanding on the back of tech riches. Now First Republic is racing to reassure customers and clients that it can avoid the fate of Silicon Valley Bank, which collapsed last week after its depositors fled.”

March 16 – Wall Street Journal (Ben Foldy and Tom McGinty): “Top executives of First Republic Bank sold millions of dollars of company stock in the two months before the bank’s shares plummeted during the panic over the health of regional lenders. The bank’s chief risk officer sold on March 6… Two days later, Silicon Valley Bank shocked the market and sent other banks into freefall. First Republic was among the worst hit. Executives had been selling for months… Executive Chairman James Herbert II has sold $4.5 million worth of shares since the start of the year. In all, insiders have sold $11.8 million worth of stock so far this year…”

March 14 – Reuters (Echo Wang, Niket Nishant and Saeed Azhar): “SVB Financial Group said… that Goldman Sachs… was the acquirer of a bond portfolio on which it booked a $1.8 billion loss, a transaction that set in motion the failure of SVB… The portfolio SVB sold to Goldman Sachs on March 8 consisted mostly of U.S. Treasuries and had a book value of $23.97 billion, SVB said. The transaction was carried out ‘at negotiated prices’ and netted the bank $21.45 billion in proceeds, SVB added.”

Market Instability Watch:

March 13 – Bloomberg (Richard Annerquaye Abbey): “Gold jumped the most in a day’s trading since November as Silicon Valley Bank’s collapse led investors to seek haven in bullion and concerns surrounding the financial industry mount. Bullion advanced 2.4%, bringing its gains this month to 4.8%, the most since January, as the fallout from SVB’s collapse combined with a decline in the dollar index to drive up prices.”

March 14 – Financial Times (Laurence Fletcher, Katie Martin and Kate Duguid): “A violent move in government bond markets sparked by the collapse of Silicon Valley Bank has upended one of the most popular hedge fund trades of recent years. The bank’s failure on Friday sparked concerns that the US Federal Reserve may need to shy away from aggressive rises in interest rates to avoid putting the country’s broader financial sector under strain. It also pushed some investors to look for safe retreats. Both factors sent bond prices soaring. Analysts and investors say that swiftly collided with a huge consensus trade in markets that interest rates would keep climbing to combat inflation and bond prices would continue falling… Now, some of the same macro and computer-driven hedge funds that celebrated a hugely successful 2022 have been caught out, sending some of them to rush out of their positions and amplifying the bond market move… Market insiders say this is likely to be a factor behind the massive jump in bond prices on Monday, which sent the yield on the two-year US Treasury note down at the fastest pace since 1987. Volatility in the US government bond market exceeded even the fraught conditions at the start of the Covid-19 pandemic in March 2020 to reach its highest since the financial crisis in 2009, according to the ICE BofA Move index, a gauge of how the premiums investors are willing to pay to shield themselves against market swings.”

March 15 – Wall Street Journal (Gunjan Banerji, Anna Hirtenstein and Eric Wallerstein): “The markets for the world’s safest and most liquid assets, the government bonds issued by the U.S. and other rich countries, came under immense stress on Wednesday following a week of worries about the health of global banks. Liquidity, the capacity to trade quickly at quoted prices, has fallen sharply in two of the keystone markets, those for U.S. Treasurys and German bunds, traders said. Difficulties including wider price spreads and slower executions are now spreading to many other markets, they said, including those for derivatives that firms and traders use to lock in prices and hedge risks weeks and months ahead of time, such as options, futures and swaps.”

March 14 – Bloomberg (Lu Wang): “As banking stress sparked turmoil on Wall Street last week, a familiar bogeyman is being blamed for making things worse: Thin liquidity. Goldman Sachs Group Inc.’s Scott Rubner, who has studied flow of funds for two decades, calculates the ease of trading S&P 500 futures has plunged 88% over the past two weeks. A similar gauge shows liquidity in Treasury futures dropped 83%. Both measures have reached the lowest since the March 2020 pandemic crisis… Based on the current wide spread between bid and ask prices, it takes more than $2 million of buying or selling in US stock futures before a trader risks moving the market, compared to a $17 million order book at least around the start of March.”

March 15 – Financial Times (Kate Duguid and Colby Smith): “Investors have rapidly increased bets that the Federal Reserve will cut US interest rates this year in a frenzied day of trading that strained the functioning of markets. The turbulence was such that the main US futures exchange temporarily halted trading in certain interest rate contracts. Traders backing away from risk widened the gap between prices offered and bid for US Treasury securities. Deals in the $22tn Treasury market — the deepest and most liquid in the world — took longer and were more expensive to execute. The market moves on Wednesday came a week before the Fed is scheduled to decide on interest rate levels at its next monetary policy meeting after months of increases in the past year.”

March 15 – Bloomberg (Lu Wang and Denitsa Tsekova): “The banking turmoil is breaking down inflation-fueled market trends, sending momentum-chasing quants into a tailspin. As Treasuries stage a dramatic rally and equities sink on stress in the financial sector, so-called commodity trading advisors have seen their 2023 profits wiped out all of a sudden. A Societe Generale CTA Index dropped almost 7% over three sessions through Monday, the biggest slump in data going back to end-1999. Down 3.8% since January, the rules-based cohort is now off to the worst start to a year in two decades. It’s a stark turn in fortunes for quant traders who surf the momentum of asset prices through long and short bets in the futures market. The group reaped big gains in 2022 by riding concerted trends in bonds, stocks and the US dollar… Now financial contagion threatens to upend the monetary-tightening cycle around the world, vexing once-reliable trading patterns while raising the specter of a regime shift across assets.”

March 14 – Reuters (Dan Burns): “The Federal Deposit Insurance Corp said its withdrawal of a record $40 billion in U.S. Treasury Funds on Friday as it seized control of Silicon Valley Bank will not affect when the Treasury runs out of operating room under the debt ceiling. The FDIC withdrawal from the Treasury General Account was many times larger than any previous largest draws… Combined with about $13 billion of other federal agency withdrawals on Friday, that left Treasury with just over $208 billion in operating funds at the TGA, which is held at the Federal Reserve. That was down by more than $100 billion from Wednesday’s TGA balance…”

March 15 – Bloomberg (Liz Capo McCormick): “China’s holdings of US Treasuries declined for the sixth straight month in January. China’s stockpile — the largest behind Japan’s — dropped to the lowest level since June 2010… The holdings declined by $7.7 billion in January to $859.4 billion. Japan, the largest foreign owner of US Treasuries, saw its holdings increase by $28.1 billion in January, to $1.104 trillion…”

Bursting Bubble and Mania Watch:

March 13 – Wall Street Journal (Gerard Baker): “In financial markets, the tide has been going out for a while and is still receding. To paraphrase Warren Buffett, we are starting to get a good look at who has been swimming naked. It isn’t pretty. Silicon Valley Bank was suddenly and brutally exposed last week halfway up the beach, clutching to its nether regions the shrinking hand towel of a capital raise that was quickly snatched away by panicking depositors. After futile CPR efforts, the bank eventually collapsed into the arms of the regulatory lifeguards. The crowd of cocky crypto kids ditched their designer swimsuits a while ago and now, with the surf rapidly retreating, are either going to be swept out to sea along with some of the financial institutions that supplied them or, like Sam Bankman-Fried, find themselves in the custody of the beach patrol, trying to explain how exactly they paid for that pricey house overlooking the ocean.”

March 13 – Bloomberg (John Gittelsohn and Karen Breslau): “The worst thing to hit California this week was supposed to be the weather, with drenching rainstorms, flooding and the evacuation of thousands of residents. Then came the sudden collapse of Silicon Valley Bank, a key lender for California’s almighty tech industry and the second finance company to fail in the state in days… In California, politicians and executives scrambled over the weekend to contain the broader fallout for the economy — the fifth-largest in the world — at a time nervousness had already been growing about its outlook. But the damage caused by the collapse of SVB has already spread beyond Silicon Valley, where it counted half of all US venture capital firms as clients, to other important California industries that it catered to, including cleantech companies and wineries.”

March 15 – Financial Times (Stefania Palma and Colby Smith): “The chair of the US Securities and Exchange Commission has called for a strengthening of ‘the guardrails of finance’ in the wake of the collapse of Silicon Valley Bank, as he pushes to implement a swath of new rules in the face of industry pushback. Gary Gensler… said SVB’s dramatic implosion last week was ‘a reminder of the importance of these resiliency projects for everyday Americans’. ‘Unfortunately, history tells us that events like those of this past week will occur from time to time,’ he added… ‘Thus, we should do our best to make them less frequent, strengthen the guardrails of finance for when they do occur, and protect the American public.’”

March 13 – Associated Press (Michael Liedtke): “Silicon Valley Bank’s collapse rattled the technology industry that had been the bank’s backbone, leaving shell-shocked entrepreneurs thankful for the government reprieve that saved their money while they mourned the loss of a place that served as a chummy club of innovation. ‘They were the gold standard, it almost seemed weird if you were in tech and didn’t have a Silicon Valley Bank account,’ Stefan Kalb, CEO of Seattle startup Shelf Engine, said… as he started the process of transferring millions of dollars to other banks.”

March 14 – Reuters (Katie Paul and Nivedita Balu): “Facebook-parent Meta Platforms said… it would cut 10,000 jobs this year, making it the first Big Tech company to announce a second round of mass layoffs as the industry braces for a deep economic downturn. Meta shares jumped 6% on the news. The widely-anticipated job cuts are part of a restructuring that will see the company scrap hiring plans for 5,000 openings, kill off lower-priority projects and ‘flatten’ layers of middle management.”

Crypto Bubble Collapse Watch:

March 16 – Financial Times (Scott Chipolina): “Traders have withdrawn a net $3bn from the crypto stablecoin USDC in the last three days as the fallout from the failure of Silicon Valley Bank spreads into the digital asset market… A total of $3.8bn of tokens were redeemed by investors since the weekend, and it had minted $0.8bn of new coins… The withdrawals, which represent almost 10% of the stablecoin’s total circulating supply, came after US-based Circle said it had $3.3bn trapped at SVB.”

Ukraine War Watch:

March 15 – Bloomberg: “Mark Milley, the chairman of the US Joint Chiefs of Staff, said… that ‘we do not seek armed conflict with Russia’ in the wake of the downing of an American spy drone. Milley told reporters… that he didn’t know if the Russian jet intentionally struck the drone, which crashed in the Black Sea earlier this week. He said the US had video evidence of the incident and there was no doubt Russia’s actions were aggressive. ‘As far as an act of war goes — I’m not going to go there,’ Milley said when asked by a reporter about the possibility.”

U.S./Russia/China/Europe Watch:

March 15 – Reuters (Phil Stewart, Idrees Ali and Olena Harmash): “While battles between Ukrainian troops and Russian forces raged on in eastern Ukraine, the drone incident on Tuesday was the first known direct U.S.-Russia encounter since Moscow’s invasion of Ukraine about a year ago. Russia said the episode showed the U.S. was directly participating in the Ukraine war, something the West has taken pains to avoid. ‘The Americans keep saying they’re not taking part in military operations. This is the latest confirmation that they are directly participating in these activities – in the war,’ Kremlin Security Council Secretary Nikolai Patrushev said.”

March 15 – Reuters (Caleb Davis and Kevin Liffey): “The Kremlin said… that its relations with the United States were in a ‘lamentable state’ and at their lowest level, after Washington accused Russia of downing one of its reconnaissance drones over the Black Sea… He said bilateral relations were ‘at their lowest point, in a very lamentable state’ but that ‘at the same time, Russia has never refused constructive dialogue, and is not refusing now’.”

March 12 – Bloomberg: “Xi Jinping started an unprecedented third term as China’s president with fresh vows to ensure stability and strengthen party leadership, as he faces a future of slower growth and greater confrontation with the US. ‘Security is the foundation for development, and stability is the precondition for prosperity,’ Xi said Monday to close out the annual National People’s Congress. He vowed to oppose foreign interference on Taiwan, a veiled reference to increasing American support for the democratically elected government in Taipei… Xi has used the annual parliamentary gathering to hit back at the US for trying to prevent the country’s rise.”

March 12 – Financial Times (Ryan McMorrow, Joe Leahy and Cheng Leng): “Xi Jinping has pledged to strengthen China’s security and build the military into a ‘great wall of steel’ to defend the country’s interests as relations with the west reach the lowest point in decades. The Chinese president’s speech… to the nearly 3,000 delegates of the National People’s Congress came at the close of the country’s annual rubber-stamp parliamentary session, during which Xi secured an unprecedented third term as president and appointed a close ally as his number two. After thanking delegates for his unanimous re-election last week, Xi said he would ‘build the military into a great wall of steel that effectively safeguards national sovereignty, security and our development interests’.”

March 13 – Bloomberg (Ditas Lopez): “China hit back at the US for expanding military access in the Philippines, saying Washington was trying to ‘encircle and contain’ Beijing, and is ‘driving a wedge’ between the two Asian nations. The Chinese embassy gave comments on Sunday, criticizing the US for moving to ‘secure its hegemony and selfish geopolitical interests.’ Involving the Philippines ‘will seriously harm’ the nation’s interest and endanger regional peace and stability…”

March 13 – Financial Times (John Paul Rathbone): “Britain described China as an ‘epoch-defining challenge’ to the international order in an update of its foreign and defence policy that identified the threat posed by Russia and the outcome of the Ukraine war as the biggest immediate priority. In a refresh of its so-called integrated review, the government warned of ‘the intensification of systemic competition’, illustrated by Moscow’s deepening ties with Beijing and Tehran, which had become the ‘main driver of the deteriorating’ international security environment. First released in 2021, the policy document was updated to reflect Russia’s full-scale invasion of Ukraine, accompanied by Moscow’s weaponisation of energy and food supplies, and ‘China’s more aggressive stance in the South China Sea and the Taiwan Strait’, UK prime minister Rishi Sunak wrote in a forward to the report…”

De-globalization and Iron Curtain Watch:

March 16 – Washington Post (Lily Kuo and Meaghan Tobin): “Fresh off a legislative congress where he cemented his vision for governing China, Xi Jinping turned to how he would create a better world order. It would be based on mutual respect, tolerance and equality — and China would be its natural leader, he told heads of political parties for an array of countries, including Russia and South Africa, Nicaragua and East Timor. ‘Chinese-style modernization does not follow the old path of colonial plunder or the hegemony of strong countries,’ Xi told them in a video call Wednesday, sitting at a desk surrounded by Chinese and Communist Party flags. ‘The world does not need another Cold War,’ he said, announcing his new concept — the ‘global civilization initiative,’ a set of lofty guiding principles for a ‘new type of international relations’ that China is building. Xi’s comments were a clear rebuke of the United States…”

March 12 – Bloomberg: “China’s efforts to ramp up lithium extraction could see it accounting for nearly a third of the world’s supply by the middle of the decade, according to UBS AG. The bank expects Chinese-controlled mines, including projects in Africa, to raise output to 705,000 tons by 2025, from 194,000 tons in 2022. That would lift China’s share of the mineral critical to electric-vehicle batteries to 32% of global supply, from 24% last year…”

Inflation Watch:

March 14 – Bloomberg (Reade Pickert, Vince Golle and Augusta Saraiva): “Wall Street may be grappling with financial fallout from a new banking crisis, but the beast of persistent and elevated US inflation is proving tough to tame. Underlying consumer-price growth accelerated in February, with Americans continuing to experience the sting of rising rents and sticky prices for services. Over the past year, a key housing category… climbed a record 8.2%. On a monthly basis, housing costs helped deliver a larger-than-forecast 0.5% gain in so-called core inflation, which excludes food and energy. That was the biggest advance in five months and forces a tough choice for Federal Reserve officials at next week’s policy meeting…”

March 14 – CNBC (Jeff Cox): “Inflation rose in February but was in line with expectations, likely keeping the Federal Reserve on track for another interest rate hike next week despite recent banking industry turmoil. The consumer price index increased 0.4% for the month, putting the annual inflation rate at 6%… Excluding volatile food and energy prices, core CPI rose 0.5% in February and 5.5% on a 12-month basis. The monthly reading was slightly ahead of the 0.4% estimate, but the annual level was in line.”

March 15 – Associated Press (Christopher Rugaber): “Wholesale price increases in the United States slowed sharply last month as food and energy costs declined… From January to February, the government’s producer price index fell 0.1%, after a 0.3% rise from December to January. Compared with a year ago, wholesale prices rose 4.6%, a big drop from the 5.7% annual increase in January… Excluding volatile food and energy costs, so-called core wholesale prices were unchanged from January to February… Compared with a year ago, core prices rose 4.4%, down from a 5% annual increase in January and a 5.8% rise in December.”

Biden Administration Watch:

March 16 – Reuters (David Lawder and Doina Chiacu): “The U.S. banking system remains sound and Americans can feel confident that their deposits will be there when needed thanks to ‘decisive and forceful’ actions taken after the inability of Silicon Valley Bank to fend off a run on deposits triggered its demise last week, Treasury Secretary Janet Yellen said… In remarks to the Senate Finance Committee, Yellen said emergency measures… to shore up public confidence in the banking system after the collapse of… Silicon Valley underscored its resolve to protect depositors. ‘I can reassure the members of the committee that our banking system is sound, and that Americans can feel confident that their deposits will be there when they need them,’ Yellen said… ‘This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe.’”

March 17 – Reuters (Akriti Sharma and Ananya Mariam Rajesh): “U.S. regulators are willing to consider the prospect of the government backstopping losses at Silicon Valley Bank and Signature Bank if it helps push through a sale, the Financial Times reported on Friday, citing people briefed on the matter. Sources told Reuters on Wednesday that regulators at the U.S. Federal Deposit Insurance Corp (FDIC) have asked banks interested in acquiring failed lenders SVB and Signature Bank to submit bids by March 17.”

March 13 – Associated Press (Ken Sweet, Christopher Rugaber, Chris Megerian and Cathy Bussewitz): “Depositors withdrew savings and investors broadly sold off bank shares Monday as the federal government raced to reassure Americans that the banking system was secure… President Joe Biden insisted that the system was safe after the second- and third-largest bank failures in the nation’s history happened in the span of 48 hours… ‘Your deposits will be there when you need them,’ Biden told the public, seeking to project calm. He also said the banking executives responsible for the failures would be held accountable.”

March 14 – Reuters (Mike Stone): “President Joe Biden’s biggest peacetime U.S. defense budget request of $886 billion includes a 5.2% pay raise for troops and the largest allocation on record for research and development, with Russia’s war on Ukraine spurring demand for more spending on munitions. Biden’s request earmarks $842 billion for the Pentagon and $44 billion for defense-related programs at the Federal Bureau of Investigation, Department of Energy and other agencies. The total amount of the 2024 budget proposal is $28 billion more than last year’s $858 billion.”

Federal Reserve Watch:

March 14 – Reuters (Pete Schroeder): “The Federal Reserve is considering tougher rules and oversight for midsize banks similar in size to Silicon Valley Bank, which collapsed suddenly last week, according to a source… The bank’s collapse set off fears across the financial system, drove an extraordinary government effort to reassure depositors and backstop the system, and set off debate about reversing previous rule easing for regional banks. Now, a review of the $209 billion bank’s failure being conducted by Fed Vice Chair for Supervision Michael Barr could lead to strengthened rules on banks in the $100 billion to $250 billion range, the source told Reuters.”

March 13 – Bloomberg (Saleha Mohsin and Kate Davidson): “The Federal Reserve is launching an internal probe of its supervision of Silicon Valley Bank after its collapse sparked sharp criticism of the central bank’s oversight. Vice Chair for Supervision Michael Barr will lead the review, due for public release by May 1… The collapse of the lender, which was overseen by the Federal Reserve Bank of San Francisco, was the biggest bank failure in more than a decade. ‘The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve,’ Fed Chair Jerome Powell said…”

March 16 – Bloomberg (Masaki Kondo and Alexandra Harris): “Market observers are on alert to find out just how much extra funding the Federal Reserve’s new bank backstop program will ultimately add into the system, with analysts at JPMorgan… positing that it could inject anywhere up to $2 trillion in liquidity. That’s their maximum estimate. The analysts’ prediction based on the amount of uninsured deposits at six US banks that have the highest ratio of uninsured deposits over total deposits is closer to $460 billion. That’s a smaller amount, but still enormous compared to historic usage of the so-called discount window…”

March 13 – Bloomberg (Alex Harris): “The Federal Reserve may need to end its quantitative-tightening program early to preserve the amount of bank reserves in the financial system while also maintaining its hawkish signaling on interest rates, according to Citigroup Inc. As Citigroup sees it, the Fed’s new Bank Term Funding Program, introduced over the weekend after the collapse of Silicon Valley Bank, will create additional reserves in the financial system to avert funding stress. Essentially, that risks being seen as a form of quantitative easing at a time when the Fed is engaged in a major effort to do just the opposite…”

U.S. Bubble Watch:

March 16 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits fell more than expected last week, pointing to continued labor market strength… Initial claims for state unemployment benefits dropped 20,000 to a seasonally adjusted 192,000 for the week ended March 11… Economists polled by Reuters had forecast 205,000…”

March 14 – Reuters (Lucia Mutikani): “U.S. small-business confidence improved further in February, but many owners continued to experience difficulties finding workers, according to a survey… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index increased 0.6 point to 90.9 last month… Forty-seven percent of owners reported job openings that were hard to fill, up 2 points from January, with workers scarce for both skilled and unskilled positions.”

March 16 – Reuters (Lucia Mutikani): “U.S. single-family homebuilding and permits for future construction rebounded in February… Single-family housing starts, which account for the bulk of homebuilding, increased 1.1% to a seasonally adjusted annual rate of 830,000 units last month… Data for January was revised down to show single-family homebuilding falling to a rate of 821,000 units instead of the previously reported 841,000 unit-pace. Single-family homebuilding increased in the Northeast and West, but tumbled in the densely populated South as well as the Midwest. Single-family housing starts dropped 31.6% on a year-on-year basis in February.”

Fixed Income Watch:

March 17 – Bloomberg (Jacqueline Poh and Carmen Arroyo): “Companies are delaying their bond and loan sales at the fastest pace in a year after a week of financial system turbulence left investors reluctant to buy debt. On a quarterly basis, the number of US deals in limbo — spanning bonds, loans and asset-backed securities — has climbed to eight, according to data compiled by Bloomberg.”

China Watch:

March 12 – Wall Street Journal (Lingling Wei): “A decade into Xi Jinping’s rule, the puzzle pieces of his designs for China are in place, marking a definitive end to Deng Xiaoping’s reform-and-opening era. Four decades ago, Deng, a short, stocky survivor of the Cultural Revolution, kicked off an effort to unshackle China from the ideological turmoil of Mao Zedong’s rule, embrace capitalist forces and open China to the West. The past week has put in stark relief how, bit by bit, Mr. Xi has torn down the fundaments of the Chinese governance model that Deng built. Where Deng introduced a collective-leadership system to protect against one-man rule, gave private enterprise wider room to flourish and marked a separation between the party and the government, Mr. Xi has done away with term limits, narrowed the scope for the private sector and placed the party—and himself—at the center of Chinese society.”

March 16 – Financial Times (Joe Leahy and Chan Ho-him): “China has unveiled reforms that will allow President Xi Jinping to exert closer direct control over the government in areas ranging from the financial sector to the integration of technologies with civilian and military uses. State media… announced new Communist party commissions that will supervise government ministries and regulators under the State Council, China’s cabinet, as Xi further consolidates political oversight of the organs of the state. The reforms include a new central commission for science and technology that will oversee a revamped ministry of science and technology. The commission’s purpose will be to ‘strengthen the party’s leadership’ on scientific and technological reform and to ‘co-ordinate the integration of civil-military technological development’.”

March 16 – Bloomberg: “China’s ruling Communist Party unveiled its biggest revamp in years, placing the nation’s finance and technology sectors at the heart of its control as part of President Xi Jinping’s drive to tighten his grip over the organization that dominates politics in the world’s No. 2 economy. The country is setting up a central financial committee to enhance the party’s centralized oversight over the $60 trillion sector… The new body, which will absorb the financial stability and development committee under the State Council, will be responsible for top-level design of the sector’s stability and development as well as major policies.”

March 13 – Washington Post (Meaghan Tobin, Christian Shepherd and Lily Kuo): “China needs ‘self-reliance and strength in science and technology’ to better compete with the West in military preparedness, economic growth and many other areas, leader Xi Jinping said…, closing an annual Chinese Communist Party meeting during which he cemented his hold on power and escalated his rhetorical confrontation with the United States. The urgent need for technological progress was a dominant theme of the eight-day National People’s Congress meeting…”

March 11 – Bloomberg: “China reappointed several top economic officials in a leadership reshuffle Sunday, giving investors greater continuity as Beijing overhauls financial regulation and grapples with escalating tensions with the US. People’s Bank of China Governor Yi Gang, 65, will remain in his post, as will the finance and commerce ministers. He Lifeng, a close ally of President Xi Jinping, was appointed a vice premier, signaling he could replace Liu He as the nation’s top economic official. The retention of Yi and others… surprised analysts who were expecting a larger reshuffle.”

March 17 – Reuters (Ellen Zhang and Kevin Yao): “China’s central bank said on Friday it would cut the amount of cash that banks must hold as reserves for the first time this year to help keep liquidity ample and support a nascent economic recovery. Chinese leaders have pledged to step up support for the world’s second-largest economy, which is gradually rebounding from a pandemic-induced slump after coronavirus-related curbs were abruptly lifted in December.”

March 14 – Reuters (Winni Zhou and Brenda Goh): “China’s central bank ramped up liquidity injections when rolling over maturing medium-term policy loans for a fourth month in a row on Wednesday, while keeping the interest rate unchanged, matching market expectations. The higher fund injection suggested that the authorities are keen to keep the market supplied with sufficient long-term funds…”

March 15 – Bloomberg: “China reported a rebound in consumer spending, industrial output and investment this year after coronavirus restrictions were dropped, while warning of risks to the economy’s recovery as unemployment rose and real estate investment continued to slump. Retail sales rose 3.5% in January and February compared to the same period last year… Industrial output rose 2.4% and fixed-asset investment grew strongly, as local governments increased infrastructure spending to spur the recovery. However, the unemployment rate increased, pointing to weakness in domestic demand.”

March 15 – Bloomberg: “China’s home prices rose in February for the first time in 18 months… New home prices in 70 cities… gained 0.3% after being unchanged in January, the National Bureau of Statistics reported… Prices snapped an 18-month decline in the secondary market, rising 0.12%. Authorities have ramped up financial support for cash-strapped developers and lowered mortgage rates in about two dozen cities after a crackdown sparked dozens of bond defaults and curbed demand for housing.”

Central Banker Watch:

March 16 – Bloomberg (Alexander Weber and Jana Randow): “The European Central Bank went ahead with a planned half-point increase in interest rates but offered few clues on what may follow amid market turmoil that roiled Credit Suisse Group AG. The deposit rate was lifted to 3% on Thursday — as officials have been flagging since their last meeting six weeks ago and as the majority of economists anticipated, but dropped language from its statement indicating where borrowing costs are headed. It’s ‘not possible to determine at this point in time’ the future path for rates, President Christine Lagarde told reporters… ‘If the baseline as we have it was confirmed and was to persist, we would have more ground to cover.’”

Japan Watch:

March 15 – Bloomberg (Emi Urabe and Erica Yokoyama): “Japanese Prime Minister Fumio Kishida emphasized… the central importance of wage gains for his agenda of tweaking the way businesses and the economy operate to ensure a fairer distribution of income and stronger growth. ‘Wage increases are the most important issue for ‘new capitalism,’ Kishida said…”

March 15 – Reuters (Tetsushi Kajimoto and Kiyoshi Takenaka): “Top Japanese companies agreed to their largest pay increases in a quarter century at annual labour talks that wrapped up on Wednesday, heeding, at least for now, Prime Minister Fumio Kishida’s call for higher wages to offset rising living costs… The average wage increase at ‘shunto’ spring wage talks this year was the biggest in about 30 years, according to the Keidanren business lobby… That put the increase broadly in line with analysts’ expectations for a boost of almost 3%, which would be the biggest since 2.9% in 1997.”

EM Crisis Watch:

March 14 – Reuters (Miguel Lo Bianco and Claudia Martini): “Argentina’s annual inflation rate tore past 100% in February…, the first time it has hit triple figures since a period of hyperinflation in 1991, over three decades ago. Inflation over 12 months clocked in at 102.5% in the second month of the year…, with a higher-than-expected 6.6% monthly rise in the Consumer Price Index (CPI), and a 13.1% year-to-date increase.”

Leveraged Speculation Watch:

March 17 – Wall Street Journal (Eric Wallerstein): “Quantitative investment strategies that soared during the 2022 turmoil are getting hit hard by bond-market gyrations. After enjoying a record-breaking year betting against bonds–hoping to profit from rising yields and interest rates–some quants are nearly back to square one. Computer-driven funds such as commodity trading advisers, or CTAs, are suffering from the latest bond rally in which yields have plunged, wrong-footing traders that ride market trends. The iMGP DBi Managed Futures Strategy ETF, which seeks to mirror the performance of the largest trend-following hedge funds, is down 9.3% this year after gaining nearly 13% in 2022.”

March 17 – Reuters (Summer Zhen, Nell Mackenzie and Yoruk Bahceli): “Trend-following and macro hedge funds have been badly wrong-footed in a week of wild market gyrations and are selling stocks to make up for souring bets on higher interest rates, banks and traders say. Commodity trading advisers (CTAs) – funds that try to profit by buying or selling when there is a clear direction in markets – slumped 4.3% in the three days to Monday…”

March 13 – Financial Times (Harriet Agnew, Laurence Fletcher and Patrick Jenkins): “Ken Griffin, founder of hedge fund Citadel, said the rescue package for Silicon Valley Bank unveiled by US regulators shows American capitalism is ‘breaking down before our eyes’. Griffin told the Financial Times that the US government should not have intervened to protect all SVB depositors following the collapse of the… bank on Friday. ‘The US is supposed to be a capitalist economy, and that’s breaking down before our eyes,’ he said…, a day after US regulators pledged to protect all depositors in SVB — even those with balances above the $250,000 federal insurance limit.”

March 16 – Bloomberg (Francesca Maglione and John Gittelsohn): “The University of California’s investment fund will stop betting on hedge funds and allocate more of its assets to the growing private credit market. ‘Within two or three years, whenever we can get liquidity from our hedge funds, we will be primarily all out,’ Chief Investment Officer Jagdeep Bachher said…”

Social, Political, Environmental, Cybersecurity Instability Watch:

March 16 – Wall Street Journal (Robert McMillan and Dustin Volz): “State-sponsored hackers from China have developed techniques that evade common cybersecurity tools and enable them to burrow into government and business networks and spy on victims for years without detection, researchers with Alphabet Inc.’s Google found. Over the past year, analysts at Google’s Mandiant division have discovered hacks of systems that aren’t typically the targets of cyber espionage. Instead of infiltrating systems behind the corporate firewall, they are compromising devices on the edge of the network—sometimes firewalls themselves—and targeting software built by companies such as VMware Inc. or Citrix Systems Inc.”

March 15 – Reuters (Francois Murphy): “U.N. nuclear watchdog inspectors have found that roughly 2.5 tons of natural uranium have gone missing from a Libyan site that is not under government control, the watchdog told member states… The finding is the result of an inspection originally planned for last year that ‘had to be postponed because of the security situation in the region’ and was finally carried out on Tuesday, according to… International Atomic Energy Agency chief Rafael Grossi.”

Geopolitical Watch:

March 13 – Associated Press (Hyung-Jin Kim): “The South Korean and U.S. militaries launched their biggest joint exercises in years Monday while North Korea said it tested submarine-fired cruise missiles in an apparent protest of the drills it views as an invasion rehearsal. North Korea’s launches Sunday signal the country likely will conduct provocative weapons testing during the U.S.-South Korean drills that are expected to run for 11 days. Last week, North Korean leader Kim Jong Un ordered his troops to be ready to repel rivals’ ‘frantic war preparation moves.’ North Korea’s increasing nuclear threats, along with concerns about China’s ambitions, is pushing the United States to beef up its Asian alliances.”

March 14 – Reuters (Soo-Hyang Choi): “North Korea fired two short-range ballistic missiles into the sea off its east coast on Tuesday, South Korea’s military said, the latest of several weapons tests as the South and the United States conduct their largest joint military drills in years. The missiles were fired… from South Hwanghae province, near the country’s west coast, and flew about 620 kilometres, South Korea’s Joint Chiefs of Staff (JCS) said.”

March 13 – Reuters (Yimou Lee and Ben Blanchard): “Taiwan’s defence spending this year will focus on preparing weapons and equipment for a ‘total blockade’ by China, including parts for F-16 fighters and replenishing weapons, the military said in a report. China… staged war games around the island in August, firing missiles over Taipei and declaring no-fly and no-sail zones in a simulation of how it would seek to cut Taiwan off in a war… In ‘anticipation of a total blockade of the Taiwan Strait’, spending this year would include replenishment of artillery and rocket stocks, and parts for F-16 fighters ‘to strengthen combat continuity’, the ministry said.”

March 14 – Reuters (Steve Holland, Elizabeth Piper, David Brunnstrom and Lewis Jackson): “The United States, Australia and Britain unveiled details of a plan to provide Australia with nuclear-powered attack submarines from the early 2030s to counter China’s ambitions in the Indo-Pacific. Addressing a ceremony at the U.S. naval base… in San Diego, accompanied by Australian Prime Minister Anthony Albanese and British Prime Minister Rishi Sunak, U.S. President Joe Biden called the agreement under the 2021 AUKUS partnership part of a shared commitment to a free-and-open Indo-Pacific region with two of America’s ‘most stalwart and capable allies.’”

March 16 – Associated Press (Mari Yamaguchi): “Japan and South Korea agreed to resume regular visits between their leaders and take steps to resolve a trade dispute during a highly anticipated summit…, in what Japan’s prime minister called a ‘big step’ to rebuilding the two nations’ security and economic ties as they try to overcome a century of difficult history. The summit could revise the strategic map of northeast Asia. The two United States allies, who have long often been at odds over their history, are seeking to form a united front, driven by shared concerns about a restive North Korea and a more powerful China.”

March 16 – Associated Press (Aamer Madhani, Matthew Lee, Ellen Knickmeyer): “In a matter of days, Saudi Arabia carried out blockbuster agreements with the world’s two leading powers — China and the United States. Riyadh signed a Chinese-facilitated deal aimed at restoring diplomatic ties with its arch-nemesis Iran and then announced a massive contract to buy commercial planes from U.S. manufacturer Boeing. The two announcements spurred speculation that the Saudis were laying their marker as a dominant economic and geopolitical force with the flexibility to play Beijing and Washington off each other. They also cast China in an unfamiliar leading role in Middle Eastern politics. And they raised questions about whether the U.S.-Saudi relationship… has reached a détente.”

March 11 – Reuters (Greg Torode): “General Li Shangfu, named on Sunday as China’s new defence minister, is a veteran of the People’s Liberation Army’s (PLA) modernisation effort – a drive that led the United States to sanction him over the acquisition of weapons from Russia. Although his new post within the Chinese system is viewed as largely diplomatic and ceremonial, Li’s appointment is being closely watched given his background, regional diplomats say.”

March 12 – Wall Street Journal (Mike Cherney): “When the top general for the U.S. Air Force in the Pacific traveled overseas recently to meet with U.S. allies, responsibility for 46,000 personnel across the region fell to an unusual second-in-command: an air vice-marshal from the Australian air force. The Australian officer was appointed recently to be one of two deputy commanders for the U.S. Air Force in the region at its base in Hawaii. Although it isn’t unusual for people from friendly nations to embed in the U.S. military, it is the first time an allied officer has held such a top operational role in the U.S. Air Force’s Pacific command. ‘That’s the kind of trust that we have in our two air forces, that we could work that closely together,’ Gen. Kenneth Wilsbach, the U.S. Air Force commander for the Pacific, said…”

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June 14, 2024: Potential Catalyst and Q1 2024 Z.1
June 7, 2024: Summer of Discontent and Instability
May 31, 2024: Thesis Corroboration
May 24, 2024: Speculative Bubble Hype
May 17, 2024: Zhang Zhan
May 10, 2024: Citadel Securities vs. Jane Street
May 3, 2024: Instability
April 26, 2026: Opposite Day
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