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EU Seeks To Classify Some Natural Gas And Nuclear As Green

EU Seeks To Classify Some Natural Gas And Nuclear As Green

Authored by Mike Shedlock via MishTalk.com,

With energy costs soaring and citizens…

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This article was originally published by Zero Hedge

EU Seeks To Classify Some Natural Gas And Nuclear As Green

Authored by Mike Shedlock via MishTalk.com,

With energy costs soaring and citizens complaining, the EU shifts to a more pragmatic energy policy

EU’s New Green Definition 

The EU Drafts a New Definition of Green that includes nuclear and natural gas.

The European Union has drawn up plans to label some natural gas and nuclear energy projects as “green” investments after a year-long battle between governments over which investments are truly climate-friendly.

The European Commission is expected to propose rules in January deciding whether gas and nuclear projects will be included in the EU “sustainable finance taxonomy”.

Gas and nuclear power generation would be labelled green on the grounds that they are “transitional” activities – defined as those that are not fully sustainable, but which have emissions below industry average and do not lock in polluting assets.

Two Nuclear Green Requirements

  1. The project has a plan, funds and a site to safely dispose of radioactive waste.

  2.  New nuclear plants must receive construction permits before 2045.

Natural Gas Green Requirements

  1. Investments in natural gas power plants would also be deemed green if they emissions below 270g of CO2 equivalent per kilowatt hour (kWh)

  2. Replace a more polluting fossil fuel plant

  3. Receive a construction permit by Dec. 31 2030 

  4. Plan to switch to low-carbon gases by the end of 2035 

Point number 4 is interesting. To be classified as green, they only have to “plan” not “do” switch to low-carbon gasses. 

Low carbon gasses are defined as biogas, bio methane, or hydrogen produced via electrolysis by using renewable-generated electricity. 

Since methane is methane, a plan to switch to low-bio methane costs nothing (no plant retooling needed). Doing is another matter. But maybe it’s a lot easier in 2035. 

Do Something!

Previously, the EU proposed a 100g CO2e/kWh emissions limit, based on climate fearmongering and steps needed to avoid disastrous climate change.

That went out the window when citizens stated moaning about the cost of electricity and heating.

French president Macron did not want another “Yellow Vest Movement” energy protest on his hands ahead of French elections in April. 

France derives about 70% of its electricity from nuclear energy, due to a long-standing policy based on energy security. France aims reduce this to 50% by 2035.

Any bets on that?

Practical and Environmental Sense

The new policy makes for both practical and environmental sense in contrast to the ridiculous path Angela Merkel took Germany.

Merkel gave into the Greens and agreed to phase out nuclear. As a result, Germany became more dependent on coal. That makes no environmental sense whatsoever. 

Solar and wind are not exactly reliable as Spain found out, and its citizens are bitching the loudest. 

Mothballing plants that have decades more useful life also makes no practical sense. 

A cold winter and soaring prices knocked some sense into the EU. Inflation trumped green ideology.

In the US, Biden hasn’t learned his lesson yet. Elizabeth Warren and AOC still set green policy.

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Tyler Durden
Mon, 01/03/2022 – 05:00

Author: Tyler Durden

Economics

JPM Spots A Crack In The Market One Day Ahead Of $3 Trillion OpEx

JPM Spots A Crack In The Market One Day Ahead Of $3 Trillion OpEx

Earlier today we quoted a JPMorgan trader who was wondering if after yesterday’s…

JPM Spots A Crack In The Market One Day Ahead Of $3 Trillion OpEx

Earlier today we quoted a JPMorgan trader who was wondering if after yesterday’s mid-day swoon, the result of systematic, vol-targeting and CTA strategies unleashing a barrage of sell orders, if today’s action would be similar, to wit: “Let’s see if we can hold pre-market gains throughout the session as yesterday afternoon felt like systematic selling. If 1.90% was a buy-level in bonds, then we may have a relief rally being initiated led by Tech.” A few hours later we found out the answer, and it was a resounding no, because just around the time European market closed, the selling resumed, and boy was it glorious:

So what happened? Well, clearly there were more sellers than buyers (yes, contrary to the ridiculous response that sellers and buyers are always the same, sellers can certainly be more than buyers, and it is the price that reflects relative selling or buying pressure).

But there was something more, because as as JPMorgan’s quant and derivative strategist Peng Cheng observed, after weeks of relentless buying the dip by retail traders, on Thursday retail investors net sold $53mm, with $400mm coming in the last 2 hours. This, as JPM puts it, “is notable as it is the first time retail investors have net sold since December 6th. Since December 6th, the retail investor had been net buying, on average, more than $800mm per day.”

And while according to JPM the above is “great color” it does not get to the why of the sell-off.

So while the answer includes some combination of technicals, deal gamma, and systematic activity, JPM’s Andrew Tyler writes that the “overarching story is how the Fed is changing investor behavior.” As he notes, the combination of ending QE, beginning QT, and rate hike liftoff has left Equity investors with significant uncertainty, one which is manifesting itself in a “sell all rallies” mentality with regards to the Tech sector.

What is curious, is that according to JPMorgan’s Positioning Intelligence team, the selling is led by non-Hedge Funds (one wonders just how much of the recent markets tumble is due to deleveraging by risk-parity whales such as Bridgewater). Here is an excerpt from their weekly wrap:

Tech – Still selling expensive stocks, but buying others: In the US, Expensive Software (JP1BXSFT) continues to underperform and HF flows have remained negative MTD. Additionally, expensive stocks in general (JP1QVLS) saw very strong selling over the past 5 days (>2z) with particularly strong selling on Thurs; it’s worth noting that periods of large selling in the past year have actually been followed by underperformance among these stocks. Despite the selling of expensive stocks and underperformance, Info Tech was actually the most net bought sector in N. Am. (just under +2z) and gross was added (>1z) for the week. Semis were the main driver, although most of TMT saw net buy skews for the week in aggregate.

As the bank concludes, among the reasons for the market scare is that with the Fed meeting next week, what should be a non-event now has investors questioning (i) will the Fed end QE next week; (ii) is next week a live meeting or does liftoff begin in March; and, (iii)is the first rate hike 25bps, 50bps, or more. Incidentally, JPM’s answer to all is no (and 25bps).

But before we get there, and get a powerful relief rally as Powell reaffirms that for all of Biden’s hollow rhetoric, the Fed will not – in fact – cause a market crash just tame inflation and save Biden’s approval rating…

… there is another issue to consider: tomorrow’s option expiration of $3.1 trillion in notional, including some $1.3 trillion in single-stocks.

As Goldman’s Rocky Fishman writes in his latest Vol Vitals note, “the January expiration is always a focus for single stock option markets, because January options are listed years in advance and can build up high open interest”, a topic we discussed extensively earlier this week in “All You Need To Know About Friday’s “Deep” Option Expiration.

Going back to tomorrow’s critical market event, in its post-mortem, SpotGamma writes that as expected, “a negative gamma position in all the indices made for volatile trade, today. The high gamma $4,600.00 SPX strike held as resistance; real-money sellers, alongside the hedging of negative delta options trades, bid volatility, and pressured indices.”

In other words, stock liquidation played into the large negative gamma position which accelerated selling into the close, SpotGamma writes, adding that so long as the SPX trades below its Volatility Trigger – around 4,630 –  SpotGamma sees heightened volatility, and adds that trades with respect to Friday’s monthly OPEX will only compound the instability.

In short, tomorrow could sheer chaos, but once trillions in notional expire, taking away with them a substantial chunk of the negative gamma that dealers are currently trapped under, it is quite likely that following an initial burst lower, the market will finally bottom out for the near-term.

Before we dig a little deeper into what to expect tomorrow, here is some context for today’s waterfall rout, courtesy of SpotGamma:

Stocks continued to sell, Thursday, pressured by increased jobless claims, the prospects of more aggressive tightening of monetary policy, and poor responses to earnings.

Growth and rate-sensitive names like Amazon and Peloton (which happened to halt production due to slowing demand), as well as Netflix (which fell after-hours on slower subscriber growth), are just some of the names leading to the downside. There were rumors of forced liquidations, which seemed to sync with with the afternoons indiscriminate selling.

Graphic: Nasdaq, which is officially in a correction, approaches key technical support.

And despite a reduction in gamma levels ahead of today’s regular trade (9:30 AM – 4:00 PM ET),  SpotGamma observes that the move lower in markets, overall, comes with an increased concentration of put-heavy gamma tied to Friday’s monthly options expiration.

To preface, delta denotes an options exposure to the underlying direction. Gamma, on the other hand, is the potential delta-hedging of options positions. 

  • When a position’s delta rises (falls) with stock or index price rises (falls), the underlying is in a positive-gamma environment.
  • When a position’s delta falls (rises) with stock or index price rises (falls), the underlying is in a negative-gamma environment.

In the latter case, as the risk of out-of-the-money customer protection developing intrinsic value increases (given an increase in implied volatility or move lower in price), dealers are long more delta, and therefore the addition of hedges (short stock/futures) introduces negative flows (i.e., the addition of short delta hedges to long delta positions) that pressures markets.

This negative gamma regime, which we experienced today, is affecting both single-stocks and the index products. Below, the selling of calls and buying of puts in Tesla, for instance, is a negative delta trade dealers hedge by selling stock, thus exacerbating weakness.

To note, the reduction in the positive delta in names like Tesla, which, heading into this week, had nearly 107% of its deltas set to expire (as a percentage of average daily volume), is one dynamic further pressuring markets.

This activity is feeding into products like the Nasdaq which is seeing a lot of put buying. A shift higher in the VIX term structure (below) denotes demand for index protection, especially in shorter-dated options that are more sensitive to changes in direction and implied volatility.

If volatility continues to rise, positive exposure to delta rises. This solicits even more selling.

Why does this matter and why is all of the above potentially bullish? Because many stocks are to have their largest “put-heavy” gamma positions soon expire. We are taking trillions in put notional.

These positions are, at present, compounding weakness as dealers sell aggressively against very short-dated, increasingly sensitive negative gamma positions.

The removal of this exposure post-OPEX and the approaching FOMC event will leave dealers with less positive delta exposure to sell against. That’s why, SpotGamma sees the market soon entering into a window of strength, to which we will only add that once $3+ trillion in options expire Friday and much of the dealer negative gamma overhang disappears, the selling which we predicted would dominate this week ahead of Friday’s Op-Ex, will have exhausted itself and the bandwagon of shorts that piggybacked on the rout in stocks is about to be painfully squeezed higher.

Still, while the next move is higher, as long as bears successfully maintain S&P prices below the $4,630.00 SPX Volatility Trigger, there is increased potential for instability as dealer hedging flows continue to take from market liquidity (sell weakness and buy strength), further exacerbating underlying movement.

Tyler Durden
Thu, 01/20/2022 – 21:30






Author: Tyler Durden

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Economics

Good Time To Go Fish(er)ing Around The Yield Curve

It should be as simple as it sounds. Lower LT UST yields, less growth and inflation. Thus, higher LT UST yields, more growth and inflation. Right? If nominal…

It should be as simple as it sounds. Lower LT UST yields, less growth and inflation. Thus, higher LT UST yields, more growth and inflation. Right? If nominal levels are all there is to it, then simplicity rules the interpretation.

Visiting with George Gammon last week, he confessed to committing this sin of omission. Rates have gone up, he reasoned reasonably, therefore it would seem to follow how the market must be shifting expectations toward the more optimistic and favorable economic case.

To some, perhaps many, they’ve taken their interpretation of same a step (or twelve) further by claiming the bond market is in the process of a radical change in outlook, finally surrendering to the Great Inflation 2.0 after having been stupidly bearish on prices and macro for almost the entire span of last year.

But the yield curve is not now, nor has it ever been, so simple. There are, in actuality, three variables to always keep in mind whenever interpreting.

The first, which we won’t delve much into today, is the relative nominal level. Even if everything is going right and the other two factors moving favorably, should the entire curve stay historically low that’s already a red flag.

What follows is the second element, that which was proposed at the outset: the relative direction of any changes in yields.

Third, to me the more if not most important is the curve’s shape. Steep or flat, how LT rates are behaving in the context of ST yields and rates.

So, it’s not as simple as: down = bad, good = up; though you can easily understand why that impression lingers in the public consciousness. If, on the contrary: 1. Rates overall stay low; 2. Even as LT yields may rise; 3. Should those LT rates be rising because of those in the ST; then that’s not the same at all.

Breaking down yields is a pretty simple process, too. We start with easy Fisherian decomposition which you can put in some kind of fancy econometric format if you desire. For our purposes here, there’s no need since we can effortlessly just eyeball the thing.

Unlike standard orthodox theory, we’ve no need for term premiums because, well:

Term premiums are not science nor really math. They are made up and more than that they are rationalizations, truly Orwellian, intended to deny the obvious and straightforward signals coming from the very fundamental building blocks of all finance and economy. The entire notion is purposefully shrouded in unnecessarily complex concepts whose only true use is to attempt to answer for the otherwise inexcusable.

As I often write, Economists don’t understand bonds. But they know just enough of them to understand that they had better change the subject.

You can read the explanation why at the link above.

This leaves us with just two basic pieces: the expected path of ST rates and then what Irving Fisher realized more than a century ago, forward longer run expectations about growth/inflation. The LT yield is some mixed up combination of those two.

The long-sought transition to global normalcy – from money to finance to real economy – should have looked like, in the bond market, what you see above. The expected path of ST rates contributes more to LT yields as does the commiserate improvement about perceived growth and inflation prospects; the two actually reinforcing one another (assuming, of course, the Fed is right about why it’s influencing ST rates).

From ultra-low LT yields post-2008, these were supposed to move closer to what they used to be. They never once did for equally obvious reasons; the economic prospects for growth and inflation never materially improved despite anything the Fed did to the contrary (especially 2017-18).

But what about 2020 and now after?

What you easily find is how the initial reflationary period (defined loosely here as dating from the August 2020 lows through the first BOND ROUT!!!! topped out in mid-March 2021) was absolutely consistent with the good pattern – if only in two out of the three dimensions.

The expected path of ST rates was up if ever so slightly (represented by the 2-year UST yield which only ticked higher while the 5-year moved much farther) while growth and inflation expectations obviously then improved. The curve steepened and nominal rates across it were going higher.

But the curve never traveled that far upward, meaning it didn’t actually break out in terms of our first criteria. Red flag. Topping out with the 10s at jut 1.74% wasn’t as much of a shift as it had been made out to be.

Even so, the fact that in early 2021 the curve was meeting the other two conditions was at least a modestly good sign; that the market was judging the future to be materially better than 2020 – low standard – if still a long ways from normal.

The argument, such that there may be any, is how the market has performed since that point. I think you can literally see why it isn’t or shouldn’t be much of one:

At each respective top along the way, expectations for ST rates (confirmed by eurodollar futures) have moved up, though especially so going back to October.

Because of this, it leaves expected growth and inflation to have shrunken materially since that mid-March inflection entirely consistent with the third criteria. Flat curves mean flat curves and unless they are flattening in accordance with at least Criteria #1 (because curves aren’t supposed to be steep, but they are supposed to go flat at a normal, healthy interest rate level far, far above what you see here) then essentially that’s the ballgame.

The market is both rejecting taper and rate hikes and simultaneously, because of it, forming what’s very clearly shaping up as Conundrum No5.

There are any number of pretty obvious and damning pieces of evidence why this would be, and have been for nearly a year already, most of which we’ve documented over the traverse of these specific months in question – starting right from the beginning with Fedwire.

So, 2022 begins with modestly rising, suspiciously modest rising yields but flattening curve (not good) at still obscenely low nominal levels (more not good).

The meaningful difference between rising yields late 2021/early 2022 is night and day from rising yields late 2020/early 2021:

The curve, as always, could change but why would it now? What has changed lately in any material fashion? According to the vastly more important shape, even as rates are pushed up from below there is no steepening in it anywhere. On the contrary, flatness is over the past week or so pushing new levels of flat.

And this is hardly the first time (see: 2018).

I’m obliged the usual disclaimer: this does not mean imminent recession or even necessarily recession at any point. That’s not what we’re really talking about here, not yet. All we can definitively conclude, for now, is that there is and has been no change in bond market perceptions about the balance of future probabilities that, with low nominal levels and an increasingly flat shape, are tilted decidedly toward the not-inflation and unfavorable for whatever the latter might end up.

Instead, the only thing which has changed between the early to middle part of last year and this year is the Fed. Again.


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Economics

Lacy Hunt: Negative Real Rates Are A Strong Recession Warning

Lacy Hunt: Negative Real Rates Are A Strong Recession Warning

Authored by Mike Shedlock via MishTalk.com,

In his 4th Quarter Review and Outlook,…

Lacy Hunt: Negative Real Rates Are A Strong Recession Warning

Authored by Mike Shedlock via MishTalk.com,

In his 4th Quarter Review and Outlook, Lacy provides some interesting charts on negative real rates and recessions.

Please consider the Hoisington Management Quarterly Review and Outlook Fourth Quarter 2021Emphasis Mine

Real Treasury Bond Yields

Real Treasury bond yields fell into deeply negative territory in 2021. In elementary economic models, this event, taken in isolation, would qualify as a plus for economic growth in 2022 and would be consistent with the strength indicated by fourth quarter 2021 tracking models.

Lacy a different view however. His analysis shows that negative real yields are associated with recessions. 

Debt overhang and demographics make the matter worse.

History

Since 1870, the starting point of reliable data, only 24 full yearly averages were negative, or just 16% of the 152 readings over this time span.

Detailed parsing of the series reveals that 12 of those occurrences fell in the spans from 1914 to 1920 and 1939 to 1953, both of which were dominated by major military engagements and their subsequent demobilization – World Wars I and II and the Korean War.

Excluding the 1914-20 and the 1939-53 periods from the post 1870 sample still leaves a robust sample of 130 readings. During this lengthy span, cyclical and secular economic conditions resulted in a negative yearly average for real Treasury bond yields twelve times, or just 8% of the time. In the eleven cases prior to 2021, nine of the negative real yield periods coincided with recessions – 1902-03, 1907, 1910, 1912, 1937, 1974-75, and 1980.

Real long maturity yields were negative in 1934, which while not a recession year, happened during the horrific conditions of the Great Depression (1929-1939). In only one case, 1979, does the negative real yield happen during an economic expansion when the economy is not in a highly depressed state.

Debt Overhangs and Real Interest Rates

The level of indebtedness of the economy is another of the critical moving parts in assessing future economic growth. Based on empirical evidence, theory and peer reviewed scholarly research, the massive secular increase in debt levels relative to economic activity has undermined economic growth, which has in turn, served to force real long-term Treasury yields lower. This pattern has been evident in both the United States and the more heavily indebted Japanese and European economies.

Real 10-Year Government Bond Yields 

Economic research provides additional insight and evidence as to why interest rates fall to low levels and then remain in an extended state of depression in times of extreme over-indebtedness of the government sector. While differing in purpose and scope, research has documented that extremely high levels of governmental indebtedness suppress real per capita GDP. In the distant past, debt financed government spending may have been preceded by stronger sustained economic performance, but that is no longer the case.

When governments accelerate debt over a certain level to improve faltering economic conditions, it actually slows economic activity. While governmental action may be required for political reasons, governments would be better off to admit that traditional tools would only serve to compound existing problems. For a restless constituency calling for quick answers to economic distress and where inaction would be likened to an uncaring and insensitive attitude, this is a virtually impossible task.

Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff (which will be referred to as RR&R), in the Summer 2012 issue of the Journal of Economic Perspectives linked extreme sustained over indebtedness with the level of interest rates. In this publication of the American Economic Association, they identify 26 historical major public debt overhang episodes in 22 advanced economies, characterized by gross public debt/GDP ratios exceeding 90% for at least five years, a requirement that eliminates purely cyclical increases in debt as well as debt caused by wars. They found that the economic growth rate is reduced by slightly more than a third, compared when the debt metric is not met.

Persistent Global Weakness

Advanced Economies (AD)

In 2021, the Japanese, Euro Area and Chinese economies, in comparative terms, underperformed the U.S. economy. This pattern should continue this year. Due to more massive debt overhangs and poorer demographics, real GDP in Japan and the Euro Area in the third quarter of 2021 was still below the pre-pandemic level of 2019. The U.S. in this time period managed to eke out a small gain. The dispersion between the U.S., on the one hand, and China and Japan, on the other hand, may be even greater. Scholarly forensic evaluations have found substantial over-reporting of GDP growth in China and now, similar problems have been revealed in Japan.

Prime Minister Fumio Kishida said on December 15, 2021, that overstated construction orders had the effect of inflating the country’s economic growth figures for years. Consequently, the marginal revenue product of debt is even lower than reported therefore so is the velocity of money for both Japan and China. Interestingly, Bloomberg syndicated columnist and veteran Wall Street research director Richard Cookson makes a strong case that “China looks a lot like Japan did in the 1980s.”

Emerging Market Economies (EM)

The sharp surge in inflation in 2021 has resulted in far greater damage to the EM economies than the U.S. for three reasons. First, a much higher proportion of household budgets are allocated to necessities than in the United States since real per capita income levels are much lower than in the U.S. Second, numerous EM central banks increased interest rates in 2021.

Another problem emerges as most of the EM debt is denominated in dollars. When EM currencies slump as in 2021, the external costs of servicing and amortizing debt add an additional burden on their borrowers.

Growth Obstacles

In 2022, several headwinds will weigh on the U.S. economy. These include negative real interest rates combined with a massive debt overhang, poor domestic and global demographics, and a foreign sector that will drain growth from the domestic economy. The EM and AD economies will both serve to be a restraint on U.S. growth this year and perhaps significantly longer. The negative real interest rates signal that capital is being destroyed and with it the incentive to plough funds into physical investment.

Demographics continue to stagnate in the United States and throughout the world. U.S. population growth increased a mere 0.1% in the 12 months ended July 1, 2021. This was the slimmest rise since our nation was founded in the 18th century, along with two other firsts: (1) the natural increase in population was less than the net immigration, and (2) the increase in population was less than one million, the first time since 1937. The birth rate also dropped again.

Inflation

Inflation has been one of the most widely reported and discussed economic factors in the past year. Surging energy, rents, building materials, automotive, food and supply disruptions have boosted the year-over-year rise in the inflation rate to the fastest pace in decades. While some see this increase as a good economic sign, its increase actually had the effect of reducing real earnings by 2%. Even though unemployment fell in 2021, consumers became more alarmed by the drop in real wages according to surveys.

With money growth likely to slow even more sharply in response to tapering by the FOMC, the velocity of money in a major downward trend, coupled with increased global over-indebtedness, poor demographics and other headwinds at work, the faster observed inflation of last year should unwind noticeably in 2022.

Due to poor economic conditions in major overseas economies, 10- and 30-year government bond yields in Japan, Germany, France, and many other European countries are much lower than in the United States. Foreign investors will continue to be attracted to long-term U.S. Treasury bond yields. Investment in Treasury bonds should also have further appeal to domestic investors, as economic growth disappoints and inflation recedes in 2022.

Thanks to Lacy Hunt 

Thanks again to Lacy Hunt for another excellent Hoisington quarterly review. The above snips are just a small portion of the full article. 

As of this writing, the article is not yet posted for public viewing but should be available at the top link soon.

When Does the Sizzling Economy Hit a Recession Brick Wall?

I addressed many of the same points on January 17 in When Does the Sizzling Economy Hit a Recession Brick Wall?

I discuss productivity, demographics, and unproductive debt.

Something Happened

Something has happened in the last 30 years, which is different from the past,” says Minneapolis Fed president Neel Kashkari.

Yes it has and the Fed is clueless as to what it is.

The answer is unproductive debt is a huge drag on the economy. And the Fed needs to keep interest rates low to support that debt. 

When Does Recession Hit?

If the Fed does get in three rate hikes in 2022, then 2023 or 2024. And it may not even take three hikes.

Also, please see China’ Central Bank Cuts Interest Rates As Consumer Spending Dives

Few believe China GDP statistics.

China posts a GDP target and generally hits it despite questionable economic reports, electrical use, etc., and with a property sector implosion.

Slowing Global Economy

China did not decoupled from the global economy in 2007 and the US won’t in 2022.

For discussion, please see US GDP Forecasts Stumble Then Take a Dive After Retail Sales Data.

Finally, please see The Fed Expects 6 Rate Hikes By End of 2023 – I Don’t and You Shouldn’t Either

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Tyler Durden
Thu, 01/20/2022 – 19:10



Author: Tyler Durden

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