Thursday, March 23, 2023

Thursday Night Links

  • Destructive pessimism involves either wanting or expecting things to fail. At first glance, the aspect of not expecting success may appear similar to how I operate, but there's a subtle distinction. I generally anticipate that things will be challenging but still achievable, and when it matters, I want them to succeed. An extreme example of destructive pessimism on the other hand is expecting climate change to end the world and assuming society will do nothing to prevent it. Whatever I personally do, I want it to be successful. I don't search for reasons why something won't work; instead, I focus on how to make it work while addressing or avoiding the issues I see along the way. That does not make me an optimist, that just makes me someone who wants to get stuff done and someone who strives for positive outcomes. On the other hand optimism to me is expecting to succeed against all odds, something I do not do. I fully expect that there will be failure along the way. (I also love venting about stuff I don't like even if it's not at all productive). Many individuals in today's economy worry about their retirement and harbor a general negative sentiment about nearly everything, from the unfairness of the labor market and increasing poverty to climate change and more. Believe it or not, I share much of this negative sentiment, but I've learned never to let such thoughts govern my life. Dwelling on negativity regarding your employer, job prospects, government, economy, or environment — especially when it's difficult to influence these aspects — leads to nothing but unhappiness and depression. [Armin Ronacher]
  • For the past year, this column has repeatedly warned that Quantitative Tightening (QT) would result in failure and force the Federal Reserve into another round of emergency liquidity injections, just like the repo crisis of September 2019. And just nine months after the official start of QT, here we are. After draining a trillion dollars of cash out of commercial banks, QT bagged its first victim. Silicon Valley Bank went bust, setting off a chain reaction of contagion and panic in the process. To quell the panic, the Fed backstopped uninsured depositors of the elite institution and invented a new emergency lending facility for other banks in distress. The latest Federal Reserve balance sheet data released on Thursday afternoon reveals the scale of new liquidity provided to the banking sector. In the past week, the Fed’s balance sheet expanded by $297 billion, reversing about half of the cumulative effect of QT to date. How is it possible that a liquidity crisis could occur so early into QT, and after the enormous monetary expansion of the prior two years? The Fed expected that QT would run in the background for years, reducing the overall size of its balance sheet by trillions. Instead, the Fed found itself frantically subduing a bank run. [The Last Bear Standing]
  • By calling into question the value of a significant portion of the country's bank deposits, the recent failure of one or more regional banks is equivalent to a sudden tightening of monetary policy, in which the supply of money is perceived to have contracted while the demand for the remaining portion has increased. Background: The "ideal" money can be defined as a highly liquid, universally-accepted medium of exchange that holds its value over time and can—but not necessarily—also pay a floating rate of interest, e.g., currency, checking and demand deposits, and retail money market funds. M2 incorporates all of these and is thus an excellent way to track the supply of money. Therefore, we might say that the current banking crisis is being caused by the perception that some portion of M2 (e.g., bank deposits in regional banks) may lose—or may have already lost—value in the event of a bank failure or expected bank failures. That perception automatically triggers an increased demand for the rest of M2. Together, this has the same effect as a sudden tightening of monetary policy; the supply of money has decreased at the same time the demand for money has increased. If the Fed does not offset this effective tightening by reducing interest rates, things could get ugly. [Scott Grannis
  • We analyze U.S. banks’ asset exposure to a recent rise in the interest rates with implications for financial stability. The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent-- unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. A case study of the recently failed Silicon Valley Bank (SVB) is illustrative. 10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. We compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs. [SSRN]
  • Inflation-reducing, wealth-creating supply-side options are given short shrift for a simple reason. While the Fed controls interest rates, Congress controls the taxes and regulations that can limit supply-side expansion. Of course, Congress also controls inflationary spending. Acknowledgment of that reality was on display at a congressional hearing earlier this month when Senator Elizabeth Warren told Federal Reserve chairman Jerome Powell that “your tool, raising interest rates, is designed to slow the economy and throw people out of work. So far you haven’t tipped the economy into recession, but you haven’t brought inflation under control either. Maybe the reason for that is other things are keeping prices high, things you can’t fix with high interest rates.” [Mark P Mills]
  • Both father and son were innovative in finding ways to attract customers: "to supplement their business, the Humphreys had become manufacturers ... of patent medicines for both hogs and humans. A sign featuring a wooden pig was hung over the drugstore to tell the public about this unusual service. Farmers got the message, and it was Humphrey's that became known as the farmer's drugstore." One biographer noted, "while Hubert Jr. minded the store and stirred the concoctions in the basement, Hubert Sr. went on the road selling 'Humphrey's BTV' (Body Tone Veterinary), a mineral supplement and dewormer for hogs, and 'Humphrey's Chest Oil' and 'Humphrey's Sniffles' for two-legged sufferers." Humphrey later wrote, "we made 'Humphrey's Sniffles', a substitute for Vick's Nose Drops. I felt ours were better. Vick's used mineral oil, which is not absorbent, and we used a vegetable-oil base, which was. I added benzocaine, a local anesthetic, so that even if the sniffles didn't get better, you felt it less." [wiki]
  • Parked out front was Paul Casey’s pimped-out black Porsche GT3 RS with gold wheels and a customized Arizona State license plate; the Scottsdale resident had driven from home, presumably at 180 mph. In the hotel lobby, Jason Kokrak made the scene in a plaid flannel like a roadie for Soundgarden, circa 1993. In his jeans, puffer vest and Oxford shirt, a graying Charles Howell III looked like a visiting lecturer at a community college. Numerous players milled around, showing off a variety of Air Jordans and flip-flops, backward baseball caps and receding hairlines. The lobby was also alive with khaki-clad agents, with their telltale leather-encased notebooks, and a phalanx of hot blondes, including Paulina Gretzky spilling out of a micro mini-dress. Cam Smith and Jediah Morgan were tossing around a rugby league ball. Harold Varner approached a random kid and tickled him without ever breaking stride. Pat Perez strolled by a couple of dour cops and said, “At ease, gentlemen. At ease.” [Alan Shipnuck]
  • I think one of the things that Jay Powell and the Fed are missing in the inflation fight is the supply side. The pandemic, government shutdowns, and stimulus payments (paid to people to not work) were and are critical components to the inflation. The labor markets and supply chains have gotten much better, but they are still normalizing. We need more people working, not fewer people. Let our remarkable economy do its thing. But Jay Powell apparently thinks increasing unemployment won't hurt the supply chain side of things. He is dead wrong. One example: the sharp spike in interest rates has already caused housing starts and construction to plunge. How does that help to increase housing/shelter supply? Increasing rates tomorrow in light of all this and the heightened anxiety and bank failures will go down as one of the dumbest moves in the history of central banking. The Fed should have cut rates by 50bp last Monday to stop cold the bank failure contagion in its tracks. [Scott Grannis]
  • Survey and experimental evidence documents discrimination against tattooed individuals in the labor market and in commercial transactions. Thus, individuals’ decision to get tattooed may reflect short-sighted time preferences. We show that, according to numerous measures, those with tattoos, especially visible ones, are more short-sighted and impulsive than the non-tattooed. Almost nothing mitigates these results, neither the motive for the tattoo, the time contemplated before getting tattooed nor the time elapsed since the last tattoo. Even the expressed intention to get a(nother) tattoo predicts increased short-sightedness and helps establish the direction of causality between tattoos and short-sightedness. [link]
  • In 2022, the adjustment to the monthly U.S. crude oil supply data published in our Petroleum Supply Monthly (PSM) averaged 786,000 barrels per day. This average annual adjustment was the biggest in our data history dating back to 1973. Based on our study of causes of the rising adjustment, we found two causes. First, our estimates of crude oil disposition have been overstated because we have been counting light hydrocarbons and unfinished oils that are blended into crude oil in our proxy for domestic petroleum consumption, which we refer to as product supplied in the petroleum balance. There is no product supplied of crude oil because there is no direct end use of crude oil. We believe this approach has overstated crude oil disposition above actual disposition because these light hydrocarbons and unfinished oils are blended into crude oil as exports or input to refineries. Second, we have been understating crude oil supply because of unreported field condensate blended into crude oil at natural gas plant processing facilities, producing region tank farms, or directly into pipelines that carry crude oil. [EIA]
  • Ford Motor said Thursday its electric vehicle business lost $2.1 billion last year on an operating basis, a loss that was more than offset by $10 billion in operating profit between its internal combustion and fleet businesses. The Detroit automaker expects 2023 to unfold along similar lines, forecasting an adjusted loss of $3 billion for its EV unit, adjusted earnings of about $7 billion for its internal combustion unit, and adjusted earnings of roughly $6 billion for its fleet business. [CNBC
  • CO2 rates have risen from use of fossil fuels, but use of fossil fuels is becoming increasingly expensive. The energy return on energy invested for fossil fuels is probably lower than at any moment since the industrial revolution began. It has declined by 23% in the last 16 years, according to the linked source. Some experts in EROEI believe we may already be below the point at which fossil fuels can sustain an industrial civilization. And I don’t mean to imply that Green Power will save the day — I mean to imply we might be doomed because it won’t. We can’t sustain our population without energy. But maybe we’ll electromagnetically poison ourselves before then. The radio frequency power density on Earth was 1,000 times higher than natural levels by the 1950s, 1,000,000,000 natural levels by the 1980s, and 100,000,000,000,000,000 times natural levels by the 2010s. I sure don’t know whether a hundred-quadrillion increase in RF power is safe for humanity in the long term. No one does — the power density and the rate of increase are entirely unprecedented. [Contemplations on the Tree of Woe]
  • Whig historiography is wrong because it falsely presupposes the inevitability of progress. If Whig historiography sees progress as a hockey stick, its arch-rival, cyclical historiography, sees progress as a sine wave. Cyclical historiography is nowadays in vogue among the dissident right, and there are a number of different cyclic theories of history. [Contemplations on the Tree of Woe]

1 comment:

Anonymous said...

You can now put stories about vaccine damage on Twitter and not be censored-WIN

Russia is knocking the snot out of Deep State backed, money laundering Ukraine-WIN

Silicon Valley Bank, besides being woke may have been a "bad bank" is gone-WIN

Maybe there is something else going on.

BTW, Ford has wayyyyyy to many techies walking the corridors of Dearborn, the CEO has to go.