Do you remember the end of Dr. Strangelove? When the Russian ambassador reveals the existence of the Doomsday device Strangelove makes the point that such weapons only have deterrent power if everyone knows about them.
Secret weapons have no ability to deter cataclysmic violence.
The reply from the Russian ambassador is one for the ages, “It was to be announced at the Party Congress on Monday.”
Remember this when we consider the curious question of the demise of Archegos Capital.
Becuse sometimes I watch something unfold and I have zero opinion on it whatsoever. The Suez blockage was one of them. I had to will myself to care beyond the obvious, “this is bad” reaction. The more I think about it, however, the more significant it becomes (more on that in future posts).
On the other hand, the minute I read a single article about the vaporization of Archegos capital on Moday morning I smelled a rat, or least something vaguely rat-like. And what immediately popped into my head was this thing is important, but not for the reasons anyone will admit to on CNBC or in the financial press. vander Straeten, Pascal Best Price: $93.18 Buy New $74.49 (as of 10:12 EDT - Details)
In fact, they would go out of their way to demonize Bill Hwang, the head of Archegos, who ‘acted irresponsibly,’ ‘ran a scam,’ et cetera while everyone goes into cover thine own ass mode.
The first thing that stuck out at me was who got hit. Credit Suisse, Morgan Stanley, Nomura. Today we can add Goldman-Sachs, Morgan Stanley, Wells Fargo, UBS, Deutsche Bank in Europe, to Nomura and Mitsubishi Financial Group. There may even be others.
All Western Institutions. Clue #1
Zerohedge has done impeccable work helping us to understand this story. Today’s article puts the whole thing together (which I heartily recommend you read from top to bottom… twice). The background is in this graf:
As a reminder, and as we previously discussed, we already knew how Archegos was building up stakes in its various holdings: unlike most other investors, the fund never actually owned the underlying stock or even calls on the stock, but rather transacted by purchasing equity swaps known as Total Return Swaps (TRS) or Certificates For Difference (CFD). Similar to Credit Default Swaps, TRS exposed Archegos to the daily variation margin on the underlying stock, and as such while the fund would benefit economically from increases in the underlying stock price (and, inversely, would be hit by price drops forcing it to put up more cash as margin any day the stock price dropped) it would never be the actual owner of record of the underlying stock. Instead, the stock that Archegos was long would be “owned” by its prime broker, the same entity that allowed it to enter into TRS in the first place. As such Archegos also never had any disclosure requirements, allowing it to transact completely in the dark while being fully compliant with SEC disclosure requirements – since it didn’t own the underlying stock, Archegos did not have to disclose it. Simple and brilliant.
The next thing that came out of this article that didn’t shock me in the very least is that Hwang refused to purchase any downside protection for his $100 billion Ponzi Scheme of leveraged credit lines. Clue #2
As Bloomberg adds, at several points during those exchanges, bankers implored Hwang to buy himself breathing room by selling some stocks and raising cash to post collateral. But “he wouldn’t budge.” [emphasis mine]
Now let’s get into what actually happened here.
Archegos is a Chinese family office. The Biden administration is rapidly descending into anti-diplomatic relations with Russia, China and Iran. Every possible provocation of the Chinese nd the Russians you can think of is happening. On March 24th, Ukraine quietly declared war on Russia by making it Ukrainian security policy to retake Crimea (H/T to Mike Snyder at Economic Collapse Blog for finding this little goodie).
Earlier this week we have the Ambassador from the U.S. call Taiwan ‘a country’ in the worse kind of calculated offense and escalation you can think of.
So I have to ask the question, “If you were the Chinese and you were now in a hybrid war with the U.S. how would you send a message back across the Pacific?”
This state of hybrid war, in effect a proxy for a direct military World War III began with the coup in Ukraine in 2014, and has been escalating for years. The entire Trump administration was one big hybrid war exercise of asymmetric attacks on each others’ capital markets and internal domestic policies — sanctions, counter-sanctions, tariffs, currency manipulations, etc.
Would you send warships some place or would you attack our credit markets?
Or more importantly would you plant literal financial tac nukes across multiple sectors of the financial world to combat any big push from the U.S. and Europe to foment a financial crisis on the eve of a conflict going kinetic?
When we go back over the past few weeks of FOMC statements and assess the placidity of the Fed in the face of one of the biggest quarterly moves up in long-term interest rates in U.S. history we have to ask these questions.
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