Crisis: are we there yet?

Geopolitics

Middle East

The US has started retaliatory strikes in Iraq and Syria last Friday, after deadly attack that killed 3 US troops and injured 40 others earlier last week.

The Pentagon admitted they have no evidence that Iran is behind the attacks that killed American troops earlier this week, but hold them responsible anyway because they provided the weapons.

For the record, the US and France, my 2 countries are the top 2 arm dealers selling to the whole world. Who said double standard?

Double standard, part 2: a question nobody asks: what is the US doing with military bases in Syria and Iraq, illegally occupying sovereign foreign nations (hint: mostly controlling oil fields). Are we a terrorist state then? #askingforafriend

Not really a surprise:

• Monday: announced by Biden
• Thursday: Biden admin says it will hit Iran forces in Iraq/Syria “in the next few days”
• Friday AM: Iraqi official confirms “Militants have evacuated HQ’s and moved weapons” ahead of U.S. strikes
• Friday night: US strikes Iran proxies

This has very little chance in my opinion to escalate significantly as this was a well choreographed dance between the US, Iran, Iraq and Syria. This was simply a communication operation toward the US domestic population.

The VIX barely reacted when Biden suggested retaliatory strikes at the beginning of last week.

It didn't react much today either on the first open session after the strikes with the focus still being on Powell and interest rates, not on the situation in the Middle East.

I maintain that a regional war (most often positive for the stock market) is not a significant market mover. Only a potential direct confrontation between the US and China and/or Russia would have an impact.

I believe that the risk in a conflict with Iran is actually the potential involvement of Russia (close military ties) and China. It is their backyard.

Last question: how many terrorists with an allegiance to Iran have crossed the southern border since 2021? The scary part is nobody knows and nobody cares, or …

POLITICS

Free speech is definitely an issue for this administration.

It keeps going after Musk, and Delaware court voided a compensation package tied to Tesla’s performance, when the company's went from $60B to $650B valuation in 3 years only which would have generated $55B for Musk

This is another sign of:

• The continued weaponization of justice
• The slow drift towards a socialist totalitarian state where the administration deemed that the payout is too much for a guy that is not compliant with the power in place

Consequence: Tesla is expected to change its incorporation state to Texas

ECONOMY

There was a truckload of economic indicators last week: Job Data and consumer confidence on Tuesday, ISM Manufacturing PMI data on Thursday, January Jobs Report on Friday, and ~20% of S&P 500 companies report earnings.

But only one thing matters: will the Fed cut interest rates or not?

Rates were kept unchanged as expected but Powell's tone significantly changed compared to his unexpected dovish stance in December.

Rate cuts in March are not a given any more, which sent cold water on the markets.

Passed the cold shower, interestingly the markets disagree and still price 4 to 5 rate cuts this year, and the market regained previous levels at the end of last week, 2 days later.

Jobs: despite reported massive jobs creation announced on Friday, unemployment rate at 3.7%, we’ve also seen massive layoffs across all industries.

In 2022 and early-2023, we saw over 300,000 layoffs but they were almost entirely in tech companies.

Now, over the last 3 months, we are seeing layoffs across all industries.

Layoffs are driven by a slowing economy, and a shift towards automation and AI adoption in a context of cost cutting.

So where do the jobs come from:

• Part time exploded in 2023 when full time jobs decreased

• Record high people working 2 jobs

This is not the sign of a strong economy but of the impoverishment of the American people.

US numbers are now as massaged as China's and 10 of the last 11 months have seen downward revisions in the jobs number. MSM comment on strong economy, but never on downward revisions.

Again we live in a world of narratives.

Inflation is rising again, before even cutting rates, fortunately or not ...

They’ll need to find an excuse for that, like the coming banking crisis.

NY Community Bancorp collapsed 40% in a day last week. NYCB is the bank that had absorbed Signature Bank after the Bank crisis with SVB collapse in March 2023.

This happens just a few weeks before the Fed's emergency loan program is set to expire. The end of BTFP in March will be critical for regional banks that suffered last week. Many regional banks are getting underwater, and actually drowning

Commercial Real Estate (CRE) is a big part of their troubles:

• 14% of all CRE loans and 44% of office building loans are now in "negative equity". In other words, the debt is now greater than the property value on all of these properties.
• Currently, US banks hold over $2.9 trillion of CRE debt, the majority of which is held by regional banks.
• Office building prices are down 40% from their highs and CRE as a whole is down over 20%.

All of this as rates rise and many of these loans are due to be refinanced.

CRE is beyond bear market territory.

Not only US regional banks are impacted by the losses on CRE, some foreign banks as well such as AOZORA Bank that dropped 20% in a single day this week due to its exposure to the US sector.

This has the potential to spill everywhere ...

MARKETS

Markets still behave like junkies for interest rates: back to bad news is good news, and good news is bad news, as both drive interest rates anticipations:

• Bad news is good news: bank crisis
• Good news is bad news: jobs market, illusion of strength of the economy

Interestingly the S&P500 established new highs with the VIX rising. The whole VIX curve is shifting, but no inversion and no panic at this time.

It has a feeling of end of January 2018 with something brewing.

S&P500 is a cap weighted index and the MAG7 is responsible for the biggest part of the rise: besides Tesla losing 21% over a month, NVidia and Meta jumped about 40%

Oil prices unfazed by tensions in the middle east this week and continued drifting lower. Economic concerns in China seem to play a higher role for oil at this point and Asian Indices were among the worst performers in January

And btw, as crazy as it may sound, there is one country printing more than the US and it is China. The next crisis will be global !

Contest in the least ugliness, the one that won’t be as bad as others, and considering that point of view, the US doesn’t look so bad.

Cryptos

The GBTC outflow from this expensive ETF to cheaper ETFs is almost over.

This will now become interesting: data like volumes won’t be polluted by transfers from GBTC to the other ETFs available.

The global picture for the Bitcoin ETF space will get much clearer.

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