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Just incredible stuff

The Bank of Japan is just unstoppable.

We’ve written recently about how its bond-buying is now more than making up for the bond-selling being done by the likes of the Federal Reserve, the impact on Japan’s massive overseas savings and the new governor’s intellectual heritage.

The cherry on the cake was Deutsche Bank’s titbit that the BoJ “may” have bought more than 100 per cent of some Japanese government bonds, as it buys the JGBs, lends them out again to ensure the market still has some supply, short sellers borrow it and dump them in the market, only for the BoJ to buy it once more.

Here is a killer chart from Oxford Economics’ Norihiro Yamaguchi that puts more flesh on the bone. After buying a record ¥20tn of JBGs last month, the BoJ now owns more than 100 per cent of all on-the-run 10-year Japanese government bonds. In fact it owns almost 140 per cent of the most recent issue.

Here’s Yamaguchi on the BoJ’s Catch-22:

◼ The Bank of Japan enhanced its funds-supplying operations in January, after widening the tolerance band for 10-year JGB yields in December. The January actions are aimed at bringing down yields while avoiding further direct JGB purchases, but long-term JGB yields are staying stubbornly high, and market liquidity has not recovered. Maintaining the Yield Curve Control (YCC) policy is more costly now than ever.

◼ Since the December meeting, speculation of further yield hikes has increased. The 10-year JGB yield has been staying close to the new cap, and a kink in the yield curve remains. With the BoJ aggressively purchasing the JGBs, all on-the-run 10-year JGBs have effectively been absorbed from the market. Money market rates imply the shortage of JGBs is severe.

◼ To improve market liquidity, the BoJ is conducting securities lending daily, and raising its bid amount since late-December. Ironically, part of the bonds provided by this lending are used to construct short-sell positions in JGBs, resulting in further upward pressure on yields. To avoid such use, the BoJ has announced an increase in its fee. Given the new fee will be applied to all borrowers, this action is likely to limit liquidity provision.

◼ The BoJ’s January decision lowered both the JGB and swap rates considerably. The operation came with solid demands from financial institutions, at least for now. However, its impact on the market has been limited except for the initial reaction.

◼ The slight improvement in the JGB market functioning has raised the possibility that the bank will be forced to re-expand the target for the long-term yield in the not too-distant future. It will help the new governor to buy time to conduct a comprehensive review of the policy framework.

Just incredible stuff

The Bank of Japan is just unstoppable.

We’ve written recently about how its bond-buying is now more than making up for the bond-selling being done by the likes of the Federal Reserve, the impact on Japan’s massive overseas savings and the new governor’s intellectual heritage.

The cherry on the cake was Deutsche Bank’s titbit that the BoJ “may” have bought more than 100 per cent of some Japanese government bonds, as it buys the JGBs, lends them out again to ensure the market still has some supply, short sellers borrow it and dump them in the market, only for the BoJ to buy it once more.

Here is a killer chart from Oxford Economics’ Norihiro Yamaguchi that puts more flesh on the bone. After buying a record ¥20tn of JBGs last month, the BoJ now owns more than 100 per cent of all on-the-run 10-year Japanese government bonds. In fact it owns almost 140 per cent of the most recent issue.

Here’s Yamaguchi on the BoJ’s Catch-22:

◼ The Bank of Japan enhanced its funds-supplying operations in January, after widening the tolerance band for 10-year JGB yields in December. The January actions are aimed at bringing down yields while avoiding further direct JGB purchases, but long-term JGB yields are staying stubbornly high, and market liquidity has not recovered. Maintaining the Yield Curve Control (YCC) policy is more costly now than ever.

◼ Since the December meeting, speculation of further yield hikes has increased. The 10-year JGB yield has been staying close to the new cap, and a kink in the yield curve remains. With the BoJ aggressively purchasing the JGBs, all on-the-run 10-year JGBs have effectively been absorbed from the market. Money market rates imply the shortage of JGBs is severe.

◼ To improve market liquidity, the BoJ is conducting securities lending daily, and raising its bid amount since late-December. Ironically, part of the bonds provided by this lending are used to construct short-sell positions in JGBs, resulting in further upward pressure on yields. To avoid such use, the BoJ has announced an increase in its fee. Given the new fee will be applied to all borrowers, this action is likely to limit liquidity provision.

◼ The BoJ’s January decision lowered both the JGB and swap rates considerably. The operation came with solid demands from financial institutions, at least for now. However, its impact on the market has been limited except for the initial reaction.

◼ The slight improvement in the JGB market functioning has raised the possibility that the bank will be forced to re-expand the target for the long-term yield in the not too-distant future. It will help the new governor to buy time to conduct a comprehensive review of the policy framework.

No company is immune from the generative AI wave, and everybody wants in. Meta is the latest entrant in testing AI-powered tools for its products. Mark Zuckerberg has announced that the company is building “a new top-level product group” to integrate generative AI into its services used by billions of users.

Zuckerberg said the team will focus on building creative tools at first, but its long-term goal is to create “AI personas that can help people in a variety of ways.” The company, however, has to do a lot of foundational work before it shares these “futuristic” experiences with users, he cautioned.

The company is starting by testing text-based AI tools on WhatsApp and Messenger — presumably ChatGPT-styled conversation bots. While these could be a fun use case for users, Meta could also eventually leverage these features by offering them to businesses in areas such as sales and customer support.

Meta is also experimenting with AI-aided filters and ad formats on Instagram along with “video and multi-modal experiences”.

According to Axios, the project will be led by former Apple executive Ahmad Al-Dahle, and the team will report to the Chief Product Officer Chris Cox.

While generative AI tools have been around for a while, the tech found mainstream stardom only with OpenAI’s ChatGPT bot. Microsoft has already integrated some of that AI goodness into Bing search and Edge browser. In response, earlier this month, Google also said that it is experimenting with a rival product called Bard. Other search engines like You.com and Neeva have also announced AI-powered chat product integrations. Facebook-rival Snapchat also launched a custom-trained chatbot for its paid subscribers this month.

It’s not surprising to see Meta go on an AI offensive. Zuckerberg’s big bet on the metaverse hasn’t paid off yet and the company will need to find new ways to earn revenue. Last week, it debuted the Meta Verified subscription program, but like we have seen with other social networks, paid plans are yet to show a semblance of a major revenue driver.

Snapchat is the latest company to get in on the AI frenzy. The company announced today that it’s launching “My AI,” a new chatbot running the latest version of OpenAI’s GPT technology that it has customized for its users. My AI is now available as an experimental feature for Snapchat+, the social network’s $3.99 a month subscription service.

The new chatbot will be pinned to the top of the Chat tab. My AI can do things like help answer a trivia question or write a haiku. My AI was trained to have a unique voice and personality that plays into its values about “friendship, learning and fun.” It has also been trained to adhere to the app’s trust and safety guidelines.

“My AI can recommend birthday gift ideas for your BFF, plan a hiking trip for a long weekend, suggest a recipe for dinner, or even write a haiku about cheese for your cheddar-obsessed pal,” the company wrote in a blog post. “Make My AI your own by giving it a name and customizing the wallpaper for your Chat.”

Snapchat notes that “as with all AI-powered chatbots,” My AI can be tricked into saying just about anything. The company seems to be alluding to the mess created by Microsoft’s Bing, which was recently updated with OpenAI’s GPT-4 model. A week into the launch, people started posting strange and unnerving responses that they received from the search engine, after which Microsoft admitted that Bing can be provoked to respond outside of its “designed tone.” Snapchat appears to be getting ahead of dealing with a similar situation with its own chatbot, noting that My AI has “many deficiencies.” Snapchat even went so far as saying “sorry in advance” to users of the new chatbot.

It’s worth noting that unlike Microsoft’s vision with Bing, Snapchat’s My AI isn’t meant to act as a search engine. It’s instead seen as a persona within Snapchat that you can chat with like you would with your friends.

All conversations with My AI will be stored and may be reviewed to improve the product’s experience. Snapchat also says that users shouldn’t share any secrets with My AI or rely on the chatbot for advice. The company says that although My AI is designed to avoid biased, incorrect, harmful or misleading information, mistakes may occur. The social network invites users to submit feedback by pressing and holding on any message from My AI.

Since its launch a few months ago, Open AI’s ChatGPT has dominated the internet and become increasingly popular. As a result, AI has become an increasingly trending topic over the past few months. Given these factors, it’s not surprising that Snapchat is adding an AI chatbot to its own messaging platform.

Of course, given that Snapchat caters to a young user base, the idea of safety is pretty important. Snapchat notes that the chatbot has been designed to avoid harmful or misleading topics, and won’t provide responses in these circumstances.

“Our app reaches 750 million people per month, with 75% of 13- to 34-year-olds in over 20 countries,” the company notes in the blog post. “Incorporating this technology into Snapchat’s messaging platform has the potential to make these interactions with AI part of what draws our community to Snapchat.”

Snapchat says it believes that over time, AI can be incredibly additive to the app’s experience, while also helping to foster deeper connections. In the short term, My AI may boost the company’s paid subscriber numbers, which recently surpassed the two million mark.

The Space Age brand is back on the official calendar for the first time since 2010.

PARIS — Pierre Cardin is returning to the official Paris Fashion Week schedule for the first time in more than a decade, as the heritage brand prepares to unveil its renovated Paris flagship alongside a plaque commemorating its founder.

Cardin’s great-nephew Rodrigo Basilicati-Cardin, who took over the running of the house following the Space Age couturier’s death in 2020 at the age of 98, wants to raise the visibility of the brand as he tours the world to meet with its dozens of licensees and scout young design talents.

“Our licensees want new collections to be delivered regularly and this reassures them on a precise date. And fundamentally, most fashion journalists are here in Paris, so this gives us better access to them,” he told WWD. “It injects a little enthusiasm.”

Cardin stopped showing on a regular basis in the early 1990s, opting instead for sporadic displays in spectacular settings, such as the Gobi desert or his bubble-shaped Palais Bulles on the French Riviera.

The last time the designer was included in the official Paris schedule was 2010, when he celebrated the 60th anniversary of the label with one of his signature blockbuster shows, which often ran 45 minutes. A tribute show, held a year ago at the National Air and Space Museum on the outskirts of Paris, was a similarly extended affair with no fewer than 180 looks.

For this outing, to be held at the historic store on Rue du Faubourg Saint-Honoré, across from the Elysée presidential palace, Basilicati-Cardin promised a more concise lineup with 60 outfits, made mostly using upcycled and deadstock materials, in line with the brand’s pivot toward more eco-conscious design.

A case in point: the show décor will include a mannequin dressed in what it bills as the world’s first “space dress,” made from thermal blankets originally used to protect the Cygnus cargo spacecraft that delivers supplies to the International Space Station. The design was unveiled in Venice last July at a runway show held on the day that Cardin would have turned 100.

Basilicati-Cardin, a civil engineer by training, has designed new furniture for the store in the geometric style that the house is famous for. He confessed that Cardin had made only cosmetic tweaks to the famously drafty boutique since its opening in 1966.

The store will open to the public at the end of March, but he has set about overhauling the entire building, with plans to open a museum on the first floor in late 2023 or early 2024 showcasing Cardin’s designs through seven decades.

“Soon, the whole house will be restored and brought up to standard because it’s been a while. It really needs to be updated with systems that are friendly to the environment,” said Basilicati-Cardin, noting that he plans to install a heating system that takes advantage of the French capital’s teleheating network.

“I will furnish it with Cardin furniture only. I think anyone who comes to the Paris headquarters must feel and breathe Pierre Cardin,” he added.

Some 400 guests are expected at the show, including representatives of 120 licensees from across the globe.

The following day, Paris Mayor Anne Hidalgo will dedicate a plaque marking Cardin’s presence in the neighborhood since his arrival to Paris in 1945. In addition to his headquarters, he went on to acquire several buildings in the area.

“It gives you an idea of the history side of the house and how long we’ve been here, and I think it’s a nice tribute to him to restore it,” Basilicati-Cardin said.

Afterward, the executive will resume his country visits, with stops planned in South Korea, Turkey, China, Brazil, Israel and Cambodia this year, and South Africa in 2024.

“It’s been around 10 years since we took a close look at what our licensees are doing. I really prefer to work with the designers and go on location, and that way, we’re also able to run workshops with students and promote the competition that I launched in October in Mexico City,” he said.

The winner of each leg of the Pierre Cardin Young Designer Contest gains a three-month internship at the Paris headquarters of the brand. Basilicati-Cardin, who works with three other veteran designers, is so impressed with Jero Rosas, the Mexico City laureate, that he’s considering offering him a full-time position.

The plan is to hire three or four additional designers by the end of next year. “Heading to these countries searching for talents, like a pilgrim, is beneficial for them,” he said. “But it’s very nourishing for me too.”

European banking’s MVP is up for a pay review

They don’t call Andrea Orcel the “Ronaldo of Bankers” for nothing.

Much like the Portuguese football star, the banker is known for pulling off big wins and collecting generous payouts in the process.

So two years into his role as chief executive of UniCredit, the bank’s board is considering raising his €7.5mn salary by 20 to 30 per cent. But DD readers know that it wouldn’t be a conversation about Orcel’s pay without a little controversy.

After helping boost UniCredit’s share price from €11 to €19 in less than two years and helping generate record profits in 2022, Orcel’s gains have been overshadowed by a series of controversies that have raised questions over his leadership style and corporate governance at the Milan-based lender, the FT reports.

The proposed pay rise, which would make Orcel one of the highest-paid European banking chiefs, will be submitted to investors on Wednesday just weeks after an inconclusive investigation into allegations of leaking from the board.

Dame Jayne-Anne Gadhia — the former chief executive of UK lender Virgin Money who joined UniCredit in 2021 — chose to step down as a non-executive director following the probe, four people with knowledge of the process said. Two people said the allegations had ultimately been withdrawn. Gadhia declined to comment.

Gadhia, the head of UniCredit’s remuneration committee tasked with overseeing pay for senior executives, was interviewed by the lender’s chair Pier Carlo Padoan and group legal officer Gianpaolo Alessandro, the people said, as part of the probe into the source of a series of media stories, including in the FT. 

The leak inquiry is the latest controversy at the Milan-based lender since Orcel’s arrival.

His refusal to swiftly cut ties with Russia led to a clash with the European Central Bank earlier in his tenure, while a collapsed takeover of state-owned lender Monte dei Paschi di Siena earned him enemies in Rome.

This is, of course, not the first time there has been drama around Orcel’s pay. He famously took Santander to court for withdrawing a 2018 offer they made him to take over as CEO. He was ultimately awarded €43.5mn.

There’s also the fact that he narrowly avoided a shareholder rebellion over his pay when starting at UniCredit. Still, Orcel does have his fair share of fans.

Some of his supporters argue that he should be paid more, pointing to UniCredit’s performance since he took over.

UniCredit shareholders, poised to receive a payout of as much as €5.25bn thanks to its banner performance, are presumably happy with the way things are going. The bank is also planning to boost its bonus pool by 20 per cent, according to Bloomberg.

That’s all to say that Orcel’s performance means fewer people are likely to challenge him.

“Corporate governance, reputation and how Russia makes you look become secondary items on the agenda when you’re making all this money,” said one investor.

Oxy and Anadarko: how the ‘dumbest deal in history’ paid off for Vicki Hollub

Feared to be facing bankruptcy three years ago, oil producer Occidental is set to report its biggest-ever earnings

When Vicki Hollub flew Occidental Petroleum’s Gulfstream V jet to Omaha for a meeting with billionaire investor Warren Buffett in April 2019, she needed cash to place a bet.

The $10bn cheque with which she emerged allowed her to outbid rival Chevron in an epic corporate battle to acquire Anadarko Petroleum, doubling Occidental, better known as Oxy, in size. But the takeover saddled the company with debts totalling almost $50bn. For the gamble to pay off, oil prices needed to remain elevated.

Things quickly started to go wrong. A little over six months later, as the Covid-19 pandemic upended the global economy, oil prices began a collapse in which the US benchmark would trade below zero — down as much as 177 per cent from the price on the day the Anadarko deal closed.

Oxy’s stock was demolished by a market that had already soured on an industry that had burnt through investor cash in a series of debt-funded drilling sprees with little to show in the way of returns. Critics panned Hollub for recklessness in ploughing ahead without regard for cost.

“It was the dumbest deal in history,” said one senior oil executive.

Almost four years later, Oxy is not only back from the dead, it is thriving. The company was the best performer on the S&P 500 in 2022, with its stock rising 119 per cent, as it reaped the rewards of elevated oil and gas prices in the wake of Russia’s invasion of Ukraine.

On Monday, Hollub unveiled the company’s most profitable year ever, with an annual net income of over $12.5bn — almost double its previous record. Meanwhile, it cut debt levels by $10.5bn, or 37 per cent, during the year.

The cash haul has allowed Oxy to pay down almost half of the debt it took on to win Anadarko. Having soared to $39bn after the takeover, long-term debt levels had been halved to $19bn as of September 2022. The company’s market capitalisation, which collapsed to less than $10bn after the Covid-19 pandemic, has recovered to $54bn — higher than pre-deal levels.

It is a stark turnround for a company that many feared was facing bankruptcy just three years ago as it led the US shale patch in slashing its dividend and cutting spending.

The criticism of both Oxy and Hollub had been intense. Chevron had emerged from the clash with a $1bn kill-fee, with chief executive Mike Wirth insisting his company was not “desperate” to do a deal to acquire Anadarko. Billionaire investor Carl Icahn, meanwhile, branded the transaction “one of the worst disasters in financial history” as he launched an activist campaign seeking to unseat Hollub. Icahn did not respond to a request for comment.

But as the oil price has rebounded so too have Oxy’s fortunes.

“Sometimes it’s better to be lucky than good,” said Andrew Gillick, a director at consultancy Enverus. “Crude is 80 bucks and everything’s OK now — so it worked out. Should we have expected it to work out? I don’t know, but one can argue that Oxy benefited more than any other energy company from the rebound in oil-price expectations since 2020.”

Today Occidental is the second biggest oil and gas producer in the US’s prolific onshore oilfields. Its so-called inventory of promising areas to drill is among the biggest in the shale patch — an advantage in a sector where rising costs mean scale is becoming increasingly important, say analysts.

“Oxy put itself in a good position by getting bigger at the right time,” said Raoul LeBlanc, vice-president for upstream oil and gas at S&P Global Commodity Insights. “While it took on an enormous amount of debt and required some deft dealmaking, given where prices have gone, it looks like a great deal.”

Elevated prices, said LeBlanc, mean Anadarko has “just turned into a giant ATM to repay the debt”.

For some, the turnround is vindication of Hollub’s strategy. Hollub declined to be interviewed for this article. Criticism of the deal was also often laced with misogyny in a male-dominated shale patch.

“I felt like the media unfairly characterised Vicki personally,” said Katie Mehnert, chief executive of Ally Energy. “If she had been Victor . . . had she been a man, would this have been the dramatic situation it was?”

Today, analysts are more interested in the group’s pivot into carbon capture. Oxy reckons its expertise in enhanced oil recovery — in which carbon dioxide is injected into the earth to release more oil — will give it a leg-up as the world scrambles to find ways to store carbon back underground.

The move has made the company a major beneficiary of the Inflation Reduction Act, Joe Biden’s sweeping $369bn climate law, which pumps huge funds into carbon capture and storage. But the shift, which includes a $1bn investment on as-yet unproven direct air capture, is also another gamble for Hollub, analysts say.

With Buffett on board, Hollub has access to one of the best capitalised balance sheets in the world. His involvement at the time of the deal was critical: the use of preferred shares helped safeguard Oxy’s credit ratings while also avoiding the need for a shareholder vote on the takeover, something the Anadarko board refused to entertain.

Berkshire has since scooped up far more of Oxy, buying more than 20 per cent of its common stock in the open market. The purchases have fuelled speculation that Berkshire could one day make a full-throated play for the US oil company, in part because Buffett’s company has won approval to buy up to half of Oxy.

“He really likes her and feels like she is a super high-quality chief executive,” Jim Shanahan, an analyst at Edward Jones, said of Buffett’s view of Hollub. “Perhaps there is a link he sees to combine interests” between Oxy and Berkshire’s own energy and utility businesses.

But there are clouds on the horizon. Shale producers, including Oxy, have successfully ridden a wave of rising oil prices since Russian troops spilled into Ukraine. But those prices have been steadily drifting lower in recent months. And banking on supplying more oil in a world otherwise needing to curb its consumption of fossil fuels remains the biggest gamble of all.

Hollub was unlucky that a global pandemic arrived just at the wrong time. But she has been fortunate that an invasion has helped rescue her company’s stock price too.

“Oxy weathered the storm,” said LeBlanc. “And it is in a pretty strong position both in its core business and with the risks that they’re taking. I don’t know if those risks are going to pan out — but they’re in a pretty good position in terms of their approach and strategy — and on the execution — so far.”