Tuesday Night Links

• Then came March 23. That day, the Fed announced it was there to stabilize the market for securitized loans based on things like credit card debt and auto loans. Moreover, if corporations needed funds, the Fed was standing ready to buy existing debt and even brand new debt. A Main Street loan program was created to do something unspecified to help out smaller firms across the country. And finally, the Fed promised to buy as much government debt as it would take to keep that market highly liquid. As one wag put it, “The Fed [is] throwing the kitchen sink and more, all the stuff under the stove and in the closet, at the markets.” The cumulative effect of those changes was an explicit promise that the Fed would do whatever it took to make sure there were no financial failures of any sort. “Racing Across Red Lines” is the title that Smialek gives to the chapter following the description of these changes. It turns out March 23 was just the beginning; there was stuff in other rooms too which could be thrown at the problem. Whatever limits used to constrain the Fed no longer existed. If municipal governments are running into financing problems, the Fed was there to help. When the junk bond market started getting problematic, the Fed showed up with checkbook in hand. [Law & Liberty]
  
• The financial sector is still roiling from the failure of Silicon Valley Bank. At the epicenter of factors triggering the collapse is the Federal Reserve’s strategy of hiking interest rates. This would be a good time to ask: How else might we tamp down inflation? Rapidly ratcheting up interest rates is intended to “cool down” the economy by inducing unemployment, or at least reducing job openings. Policies that lower labor demand make it easier for companies to compete for employees without triggering so-called “wage-price” inflation. And lower employment, in turn, also means there are fewer people with “excess wealth” demanding goods and services and thus driving inflation. The alternative is an economy that meets or over-supplies goods and services. Such an economy is disinflationary because it drives competition and thereby lowers prices. Economists like to point out that such supply-side solutions are “time-consuming to implement.” They are. So too are the effects of rate hikes. As Congressional Research Service economists wrote recently, it can take “from 18 months to several years for the effects of Fed policy changes to feed through to inflation.” [Mark P Mills]
• In the 1970s, the government debt was reasonably low relative to GDP. Accordingly, the government could tolerate high interest rates in order to stop inflation. At the end of World War II, government debt was roughly 100 percent of GDP. The government could not afford high interest rates, which in any case would have increased government expenditures. So the government kept interest rates low, at least until 1951. For American households, this meant that the return on their savings did not keep up with inflation. This is called a negative real interest rate by economists and financial practitioners. With financial markets much less fast-paced and globalized than they are today, households did not have much choice but to have their savings eroded by negative real interest rates. They experienced financial repression. Today, the ratio of government debt to GDP has returned to 100 percent. And Lyn Alden points out that repression—keeping interest rates below the inflation rate—is likely to be the case now, just as it was in the 1940s. [Arnold Kling] 
• The resource extraction industry went through significant debt-fueled consolidation during the peak of the so-called commodity supercycle (2011, now several years ago). A prime example of this is met coal producer Walter Energy. The mergers resulted in a funny kind of adverse selection where the most bullish managements with the worst historical sense and facility at market timing ended up controlling capital allocation for the whole industry. Just as so many of the leveraged solar panel and renewable energy companies went under in 2012 and 2013, I think we will see many, many resource extraction companies go bankrupt over the next two years: coal, iron ore, oil, and some of the big diversified mining companies. Look how much leverage this big companies in these industries have: Steel & Iron (AKS 3x debt/mcap, MT 1x, PKX 1x), Industrial Metals & Minerals (BHP, RIO, VALE not as much but gigantic market caps and no doubt operating leverage; BTU has big leverage), in copper FCX has a good amount of debt. Big leverage many years into a "boom" is a sign that the emperor has no clothes. This reminds me at looking at all of the banks, mortgage lenders, homebuilders, and mortgage insurers in 2006. [CBS]
• Lyall’s liquidity and redemption flywheel theory would mean that instead of a bubble making it so that you have to sit on your hands because everything is expensive, a bubble causes the tide to go out from investments that are “cold” and you should be looking for those. Based on the redemption flywheel theory, they would be things that had done poorly recently for whatever (possibly idiosyncratic) reasons. The value ideas that we have been looking at lately - resources/minerals, pipelines, banks - have had a bad run and have downward price momentum even though they have stable or improving profits. [CBS]
• Canadian Natural Resources has approximately 1.1B shares outstanding. Barring a huge collapse in oil, it should be able to afford a $2-$3 per share special dividend in 2023, plus have ample cash to spend on share buybacks. I can easily envision it offering a shareholder yield of 9-10% in 2023, consisting of 6-7% dividends and 3-4% share buybacks. [Uproar Capital]
• US oil demand is recovering. The oil market figured out at what price demand started to rebound. That's great news for the oil bulls because we are about to enter into an asymmetric upside trade scenario. Something will have to give this summer. The market may remain apathetic on the heels of the macro issues, but product storage will get very tight, and the follow-on effects will push crude prices higher. The market will need to push prices back to the point of demand destruction again. Until then, the physical market will regain control and overwhelm the apathetic financial speculator community. [HFI Research]
• “Superchargers, a network that has become substantially better over the past few years” Not noticeable. On a multi-day drive across the country , North to South and South to North more or less along the coast, so no fly-over country driving, Teslas are seen only around large cities, going slow on the highway until they go extinct at around 50 – 70 away miles from a large city. Was passed by one fast – driving Tesla on the highway, in 30 miles I passed it parked on the shoulder. [Phil G]
• Today we might remember Fidel Castro as an old man, but he was one of the most impressive people in the world back then, especially to fellow Marxists like the Trudeaus. He forcefully deposed a brutal dictator with a band of rag-tag rebels. He turned Cuba into the Western world’s first Marxist country. He beat the Americans in an armed invasion by personally commanding the battle in a tank. He survived CIA coups and assassination attempts. He outlived two Kennedy brothers behind those attempts. He was smart, charming, and funny. He was 6'3, strong, and an athlete who sported the frame of an American football player. He looked like he could beat up any other word leader, much less any competitor for Margaret Trudeau’s attention. He was full of bravado, confidence, and masculinity and smoked cigars like a baller. Why would Pierre Trudeau chose anyone else to be the biological father of his children? [Karen Leibowitcz]
• We’re again going through such a mass hysteria, with featherheads thinking LLMs are sentient because they’re more interesting to talk to than their redditor friends. The contemporary LLMs being a sort of language model of the ultimate redditor. People think this despite the fact that since the 2010-2015 AI flip out which everyone has already forgotten about, there hasn’t been a single new profitable company whose business depends on “AI.” It’s been over 10 years now: if “AI” were so all fired useful, there would be more examples of it being used profitably. So far, the profits all go to data centers, NVIDIA, and nerds who know how to use PyTorch. A decade after they invented the airplane there was an entire industry of aircraft manufacturers, and they were being used productively in all kinds of places. You’d figure if “AI” were important, it would be used profitably by a single solitary AI oriented firm somewhere. As far as I can tell, it’s only used to goof off at work. [Scott Locklin]
  
• While the disappearance of the American Communists and fellow-travelers was regrettable, in some respects they brought this on themselves as a result of their initial naive devotion to the Soviet ideology. What was truly tragic was what ensued during the war. Both McMeekin and Tzouliadis report that hapless US airmen who made emergency landings at Soviet bases after bombing missions over Japan were then arrested by their Soviet “ally” and sent to the Magadan mines as slave labor. This, while the US delivered billions of dollars of war materiel to the USSR, even to the point of forcing margarine on the American civilian population since Stalin demanded butter since, as he told Roosevelt, the Red Army would be repelled by margarine on their rye bread. Not surprisingly, the Roosevelt administration was riddled with Communists and fellow travelers, including Harry Dexter White, Harry Hopkins and the repulsive State Department dupe, Sumner Welles. [Curated Carlos]