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You will not see the next crisis coming

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This article is an on-site version of the unprotected newsletter. Participation over here To send the newsletter directly to your inbox every day of the week

good morning. The United Nations Conference on Trade and Development wants the world’s central banks to do just that Stop Raising interest rates, on the understanding that further tightening risks a global recession, with the world’s poorest suffering the most. We agree on which recessions will hit the hardest, but we believe global inflation will be tough on the weak. Regardless of who was right, it is worth remembering that the increases and decreases of stock portfolios in the rich world are one of the least significant consequences of the dire central bank dilemma.

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However, that’s what prompts us to write about it. Email us: robert.armsrong@ft.com And the ethan.wu@ft.com.

Financial crises, pseudo crises, and a vision for the future

Does the fact that everyone is looking forward to a financial crisis make a financial crisis more likely, or less so?

The question is the topic of the hour. Everyone in the markets is waiting for some market or institution to collapse. Just last week, we had one on the verge of losing and one pseudo-crisis.

The first was the vicious circle of liability driven investment/UK bonds cheap salewhich required the threat of large-scale BoE bond purchases a program to me extinguish. The latter appears to have been a self-reinforcing vortex of nonsense, as much of the excitement around a big move in the thin market for single-name bank credit default swaps has led to speculation that Credit Suisse It was at risk of a 2008-style solvency crisis. Credit Suisse is covered in deep wounds of its own making, but its capital and liquidity ratios suggest it is not on edge.

The view that fear of crises encourages them is rooted in the dynamics that the Bank manages. The company’s obligations are called weak or its counterparties are flying as speculation circulates, some or all of it unfounded.

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The view that excessive vigilance creates crises less It is likely rooted in the fact that for crises to be serious, they must be sudden. People have forgotten how traumatic the Great Financial Crisis was, as years of reading books and watching movies about the small minority of smart people who saw it coming quieted down. Most of us have been quite shocked by how much home prices can fall in the United States, how much housing exposure global banks can accumulate, and how reckless the men who run those banks are.

The long-standing consensus is that the next crisis will revolve around a non-bank financial institution. A fintech company, a leveraged ETF, a big risk parity hedge fund – all are good guesses. But given how familiar these and similar conjectures are, who’s the big opposite party going to be caught wearing his pants? This is the crucial point about LDI chaos. Even most of us who think about the markets for a living have never heard of responsible investing. Public ignorance is a crucial prerequisite for a truly gruesome blowout.

We know central banks are closing in on a sluggish economy, after the bull market has peaked. A recession is likely, and there will be accidents on the path to recession. But for most of us, trying to predict which cars will crash is pointless.

JGB short

Monday Message with Matt Klein About Japan was so much fun writing that we wrote a lot of it. Instead of dropping a 3,000-word thesis on our readers, here’s a passage we couldn’t squeeze out of yesterday:

unprotected: The most talked about Japanese trade is the short selling of Japanese government bonds. The idea is that the Bank of Japan’s “yield curve control” policy – buying an unlimited number of long-term bonds to keep interest rates low – will prove unsustainable as the yen continues to decline, leading to instability, lower living standards, and riskiness. inflation.

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One skeptic of the YCC is Caygan Capital’s Naruhisa Nakagawa, who says the Bank of Japan is on the cusp of winning the war against deflation, and will soon raise the YCC, opening the way for higher yields and lower prices on Japanese bonds. Although Japan’s 3 percent inflation is largely a product of the global commodity shock – that is, food and energy prices – Nakagawa sees the inflation trajectory eventually becoming entrenched. He points to consumers’ growing expectations of higher prices:

Perceived inflation is already accelerating at the moment, and there is a strong statistical relationship between perceived inflation by consumers and consumption growth. . .[The BoJ wants]to stimulate consumption and [output] The gap will accelerate wage growth and inflation.

Many other observers believe that Japan’s high inflation is just a passing picture, and for economic and cultural reasons, wages will not follow the more volatile food and energy prices. They also noted that tighter monetary policy did not prevent the Euro or the Pound from weakening. The Bank of Japan will not change its policy and has no reason to change it; “They don’t think inflation will stay above 2 per cent for the next year,” says Masa Adachi, chief Japanese economist at UBS.

Russell Matthews of BlueBay Asset Management, a Japanese short bond, rejects the suggestion that the decline in the pound and the euro shows that the decline in the Japanese currency is not a direct result of monetary policy in conflict with the rest of the world. He told Unhedged:

The Euro and the British Pound both face huge challenges outside of monetary policy. What is the opposite reality of where the pound is, or where the euro will be, if policy is not tightened? The Bank of England has more inflation, an open economy, a current account deficit, a leveraged economy, a terrible energy sector infrastructure, and the challenges of Brexit. . .

For Matthews and many other investors we spoke to, the allure of short government bond trading lies not in the high probability of a BoJ reversal, but in an uneven upside, as it benefits from a potentially large shock to global interest rate markets, should the BoE fall back . . Matthews calls it “discretionary trade,” noting that the Bank of Japan, if it ends the YCC, will do so suddenly to fend off speculators. Or, as Alex Lennard of Ruffer put it: “It is not certain whether the yield curve control is broken or not. It is the certainty of the damage it will do if it occurs.”

Your thoughts, Matt?

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Matt Klein: I may be sorry to say this, but I don’t really understand why the Bank of Japan would need to abandon the YCC. The policy does two big things for Japan: it keeps interest rates low across the curve, and it ensures that domestic lenders can make money on the spread between the short and long end. The argument for abandoning YCC is that it is bad for Yen. A lower yen is bad for Japan in that it makes imports more expensive and affects domestic consumption. But some perspective is in order. The yen has been mostly flat against the Korean won over the past year although the Bank of Korea was one of the first rich countries to raise interest rates and has kept pace with the Federal Reserve ever since. The yen was also relatively stable against the euro and the pound sterling. However, Japan continued to suffer much lower inflation than Korea, Europe, and the United States.

* Level * Japanese CPI Less than 2 percent since the eve of the pandemic. Rentals have not budged at all. Japanese consumer energy prices have risen only 18 percent since the end of 2019, compared to about 50 percent in the United States and Europe. Japanese grocery prices rose only 5 percent, compared to 20 percent in the United States and 15 percent in Europe. Fresh food and energy were excluded and the price level was consistent. Car prices rose only 2 percent, while prices of all durable goods rose only 5 percent. In Europe, durable goods prices rose by 9 percent while in the United States, durable goods prices rose 13 percent. Meanwhile, the Japanese government believes the economy is still operating well below its base potential, with The ‘production gap’ is around 3 percent as of the second quarter of 2022. For perspective, they also estimate that Japan was exceeding its potential by about 1 percent in 2017-2019. Recruit It may reach new highs, but this happens in the context Increasing workforce participation, fewer job opportunities than in 2019and taming wage growth relatively.

Given all this, it is not at all clear why the Bank of Japan would want to change course, especially when reopening Japan’s borders to tourists should help support the yen without any negative side effects for domestic savers.

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One of the outcomes of running a university like a business: The customer is always righteven about organic chemistry.

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Cryptofinance Scott Chipolina is filtering out the noise of the global cryptocurrency industry. Participation over here

swamp notes Experts’ view of the intersection of money and power in American politics. Participation over here

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Economic

Exclusive: Canada’s largest pension plan, CPPI, is ending the pursuit of cryptocurrency investing

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© Reuters. FILE PHOTO: A representation of bitcoin is seen in front of a stock chart in this illustration taken on May 19, 2021. REUTERS/Dado Ruvik/File Photo

Written by Divya Rajagopal

TORONTO (Reuters) – Canada’s largest pension fund, CBB Investments, has ended its efforts to study investment opportunities in the volatile cryptocurrency market, two people familiar with the matter told Reuters.

The reasons behind CPPI’s abandonment of cryptocurrency research were not immediately clear. CPPI declined to comment but said it has not made direct investments in cryptocurrency. He pointed to previous comments on cryptocurrency by its CEO, John Graham, in which he sounded cautionary.

The people added that CPPI’s Alpha Generation Lab, which studies emerging investment trends, put together a three-member team in early 2021 to research cryptocurrency and blockchain-related businesses, with a view to potential exposure.

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But sources said CPPI gave up the chase this year and redeployed the team to other regions.

CPPI’s move also comes as two of Canada’s largest pension funds have divested their investments following the collapse of cryptocurrency exchange FTX and cryptocurrency lender Celsius, which collapsed this year.

Earlier this year, CPPI CEO Graham said the pension plan, which manages C$529 billion ($388 billion) for nearly 20 million Canadians, did not want to invest in digital currencies simply for fear of missing out.

“You really want to think about the intrinsic value of some of these assets and build your portfolio accordingly,” Graham said in a June speech. “So I’d say crypto is something that we keep looking at and trying to understand, but we haven’t really invested in.”

It was not clear when CPPI dropped its plan. One source said the team was actively evaluating investment opportunities in late July this year, but the second source said the team finished its work earlier than that.

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Details of CPPI’s quest to invest in cryptocurrency and its decision to end it were not previously reported.

The sources declined to be identified because the information was not made public.

Canadian pension funds’ exposure to the cryptocurrency sector has come under scrutiny in the aftermath of the FTX debacle. While Canadian pension funds are not prohibited from buying cryptocurrencies, they are known for risk-averse investment strategies to generate steady returns for retirees.

While CPPI has avoided investments in cryptocurrencies, some of its peers have been caught up in the chaos of the sector this year. The Ontario Teachers’ Pension Fund (OTPP), which oversees approximately C$242 billion in assets, has written off its C$95 million investment in FTX. OTPP said it was “disappointed” with its investment in FTX.

Earlier this year, Canada’s second largest pension fund, Caisse de dépôt et placement du Québec (CDPQ), said it had canceled its C$150 million investment in bankrupt crypto lending firm Celsius. CDPQ has initiated legal action against Celsius in Bankruptcy Court.

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The Ontario Municipal Employees Retirement System (OMERS), which manages C$121 billion, made three allocations to crypto-related companies through the business of OMERS Ventures between 2012 and 2018, but exited all investments in 2020.

Another Canadian pension fund, OP Trust, told Reuters it has investments in the offshore digital asset fund space. She said the investment in core encryption technology.

($1 = 1.3650 Canadian dollars)

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Argentina urges the European Union to renegotiate a South American trade agreement

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Argentina’s President Alberto Fernandez has called on the European Union to renegotiate a landmark trade deal with South America, saying the agreement is unbalanced and a threat to the auto industries of Brazil and Argentina.

Fernandez told Financial Times’s Global Boardroom Conference.

Asked how long this process might take, he said, “As long as the parties want to. It’s like tango. The tango is danced by a couple, you need both of them to want to tango, otherwise it’s very difficult.”

The trade deal between the EU and the Mercosur bloc – Argentina, Brazil, Paraguay and Uruguay – was agreed in principle in 2019 after nearly two decades of haggling. But its conclusion has been shelved amid European objections to Brazil’s poor record of preserving the Amazon rainforest under far-right President Jair Bolsonaro.

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The election in October of Luiz Inacio Lula da Silva, who has pledged to preserve the Amazon, to succeed Bolsonaro, raising hopes that a long-awaited deal between the EU and Mercosur might gain final approval. Spain’s trade minister, Xiana Mendez, told the Financial Times last month that she believed he would support the agreement. “It’s very balanced,” she said. We do not support reopening negotiations.

But Fernandez told the Financial Times conference that the environment “isn’t why we don’t get the agreement, it’s an excuse”.

The real reason is that for Brazil and Argentina [as] Car producers, the only car producers in South America, this agreement is problematic because it makes things difficult for us if European competition reaches South America,” he said.

At the same time, he added, South American countries faced a “burden of hurdles” in selling their agricultural exports to Europe, with countries such as France, Ireland and Poland opposing ending agricultural subsidies and allowing competition from Argentina.

“Neither I nor Lula are against the agreement with the European Union,” Fernandez said. You have to keep in mind what this agreement is, because this agreement has problems. . . related to market imbalances.

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While the debate over the long-stalled trade agreement with Europe continues, Argentina is striking deals with China, its second largest trading partner after Brazil. Beijing last month agreed to expand a swap facility with Argentina’s central bank to $25 billion, which helps boost the South American country’s meager foreign reserves.

China has also built a space monitoring station in the Patagonian province of Neuquen, which the Center for Strategic and International Studies in Washington says is Works with little Argentinian supervision It can be used to gather military intelligence.

Fernandez rejected the argument Argentina Need to choose between the United States and China, saying that he does not wish to recreate the Cold War era. “Argentina has to do what works best for Argentina,” he said. “The US is very concerned about what China might do in Latin America but China could do . . . just like the US could do in Latin America, they could come and invest.”

Argentina is building a naval base at Ushuaia in southern Patagonia to support ships patrolling the South Atlantic and Antarctica, but Fernandez called “fictional” news reports that China was involved. He said, “There is no such thing.” “In Argentina you cannot have Chinese, American or French military bases . . . because we are a sovereign country.”

The South American country faces dire economic challenges, with inflation approaching 100 percent annually, access to international financial markets largely cut off after a default in 2020, and exchange controls that have pushed dollars on the black market to nearly double the level. the official.

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Fernandez said the Argentine economy was “strange” because, despite high inflation and “unpayable” levels of debt, the country also had record levels of foreign investment and exports in the first half of the year, unemployment was low and consumption was increasing.

“If you cling to the image of an inflated Argentina . . . of an indebted Argentina, you will say Argentina is a mess,” Fernandez said. “But there is also all this data that points to sustainable growth and huge potential.”

He said the solution to the longstanding economic problems of this South American country is to add value to its goods. “Argentina must stop being an exporter of raw materials and become an industrialized country.”

Argentina holds presidential and congressional elections next October, and opinion polls show Fernandez’s Peronist party trailing the conservative opposition. The president has said in the past that he would like to run again but that his approval ratings are low, and he told the Financial Times conference that he was “totally immersed” in governance.

His powerful vice president, Cristina Fernandez de Kirchner, said on Tuesday she would not run again Convicted of corruptiona ruling against which she plans to appeal.

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“I’m not thinking of re-election, believe me,” said President Fernandez. I think how to solve all these problems[of the country]. . . I want to finish my tenure having seeded Argentina with opportunities for the person who will succeed me.”

Additional reporting by Andy Pounds in Brussels

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Renault says executive vice president Delpos has resigned, according to Reuters

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© Reuters. FILE PHOTO: A Renault logo is pictured in a shop in Vertou, near Nantes, France, January 17, 2022. REUTERS/Stephane Mahe/File Photo

PARIS (Reuters) – President of the French automaker Renault The company said on Wednesday that its new mobility unit Mobilize (EPA:) and group executive vice president Clotilde Delbos have both resigned.

Renault said Delpos would leave at the end of December, without giving a reason for her departure. The company said in a statement that Phaedra Ribeiro will be named CEO of Mobiliz while Patrick Claude, Group Chief Financial Services Officer, will take on the role of Delbus on a temporary basis at Renault Financial subsidiary RCI Banque.

Delbos joined Renault in 2012 as group controller and was a seasoned executive who helped transition between former boss Carlos Ghosn, who was arrested in Tokyo in 2018 on financial misconduct charges, and current CEO Luca de Meo, who took over in the summer of 2018. Past. 2020.

Delbos, who also served as Renault’s chief financial officer between 2016 and early 2022, pitched herself in to take over as CEO before the board decided to call the outsider de Meo.

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Renault is in the middle of a major and complex overhaul that will see it spin off its businesses into five companies, deepen ties with China’s Geely and spin off the electric car unit with a stock market listing next year.

Shares of the automaker briefly fell after Delbos’ departure was first reported by a Le Monde reporter on Twitter but then recovered to close a touch higher.

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