TheChek News Flow

Bank for International Settlements calls for more aggressive action from world’s central banks

Leading economies are close to “tipping” into a high-inflation world where rapid price rises are normal, dominate daily life and are difficult to quell, the Bank for International Settlements warned on Sunday.

In its annual report, the BIS, the influential body that operates banking services for the world’s central banks, said these transitions to high-inflation environments happened rarely, but were very hard to reverse.

Diagnosing that many economies had already embarked on the process, the BIS recommended that central banks should not be shy of inflicting short-term pain and even recessions to prevent any move to a persistently high-inflation world.

Agustín Carstens, BIS general manager, said: “The key for central banks is to act quickly and decisively before inflation becomes entrenched.”

Central banks around the world have started to raise rates quickly in response to soaring inflation, with the US Federal Reserve leading the pack, but the action taken so far does not satisfy the BIS.

In its report, the bank said that there was a deep, “inherently stagflationary” shock hitting the world from higher commodity prices, supply chain bottlenecks and shortages stemming from Russia’s invasion of Ukraine.

This had increased the prices of the goods and services that households noticed the most, reinforcing the salience of price rises.

“We may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched. This would mean a major paradigm shift,” the report stated.

Such a shift would mean leaving behind a world where prices have been generally stable, with some things getting cheaper and others more expensive. In this benign world, central banks have been able to ignore temporary surges in oil or natural gas prices because “economy-wide inflation [is] less noticeable [and] also less relevant”.

After a move to a high inflationary period, “price changes are much more synchronised and inflation is much more of a focal point for the behaviour of economic agents, exerting a major influence on it”.

Inflation is at multi-decade highs in several economies, including the US, eurozone and the UK. The BIS was worried the leading economies of North America, Europe and many emerging markets were near a tipping point. Consumers had noticed price rises, large increases had become broad across most goods and falling real wages would generate attempts to recoup the losses.

Ignoring price rises was no longer rational for consumers, the BIS said, which reinforced the danger of a shift to a high-inflation world.

“As inflation rises and becomes a focal point for agents’ behaviour, behavioural patterns tend to strengthen the transition,” it added, predicting companies would fight to prevent profit margins being squeezed and workers would defend their wages. The length of most contracts would tend to shrink, it added, because parties on both sides could not guarantee price levels in future.

To bring down inflation, the BIS said, “some pain will be inevitable”, but it said ultimately the difficulties of entrenched inflation “far outweigh the short-term ones of bringing it under control”.

“This puts a premium on a timely and decisive response,” it told its member central banks, even if none could be certain that they had moved into a high-inflation environment.

The BIS added: “The overriding priority is to avoid falling behind the curve, which would ultimately entail a more abrupt and vigorous adjustment. This would amplify the economic and social costs of bringing inflation under control.”

U.S. official says the ban aims to punish Russia for invasion of Ukraine

The U.S. will join other leading countries in banning Russian gold imports, broadening a sanctions regime against Moscow as an international summit is set to begin Sunday, according to a U.S. official.

The move, coming as part of the Group of Seven meeting in the Bavarian Alps, is the latest part of an effort to punish Russia for its invasion of Ukraine, the official said, noting that gold is a major Russian export commodity after energy.

“The U.S. has rallied the world in imposing swift and significant economic costs on Russia to deny (President Vladimir) Putin the revenue he needs to fund his war,” the official said. “President Biden and G-7 leaders will agree to announce an import ban on new gold from Russia.”

Moscow’s aggression in Ukraine will be a focus of the three-day summit. Russia has been hurt economically by various sanctions. But it still sells energy to China, India and other countries not participating in the sanctions effort, and higher commodity prices have helped offset some of the impact of sanctions.

On Tuesday, the U.S. Treasury Department will enforce the ban on new gold imports in an attempt to “further isolate Russia from the global economy,” the official said.

Other G-7 members haven’t publicized their stance on the ban, and U.S. officials didn’t elaborate on the specific timing of an official announcement. A spokesman for the German government, which currently holds the G-7 presidency and hosts the group’s summit, didn’t immediately respond to a request for comment.

Russia’s central bank holds more than 2,000 metric tons of the precious metal, worth roughly $140 billion and representing the world’s fifth-largest stash, according to the World Gold Council.

Analysts say the ban could push up the haven metal’s prices, which have been sliding so far this quarter because of higher interest rates and a stronger U.S. dollar. Those declines come despite the inflation rate reaching its highest level in four decades.

Investors prize gold for its stability in times of turmoil, expecting it to hold value even when other assets decline.

The ban on Russian gold is “only going to make the supply a little bit tighter, which should put a floor on what’s happening to gold,” said Mike Boutros, a strategist at DailyFX. Russia accounts for roughly a tenth of the global supply of gold.

A White House spokesman, John Kirby, declined to specify which actions against Russia would come. “There will be some announcements,” he told reporters aboard Air Force One as President Biden flew to Germany on Saturday. “There will be some muscle movements.”

Oaktree Capital’s co-founder is turning aggressive after sharp market sell-off

The time is right to snap up “bargains” in the financial markets following the widespread sell-off, according to Howard Marks, one of the world’s most formidable distressed debt investors.

“Today I am starting to behave aggressively,” the founder and co-chair of Oaktree Capital, said in an interview. “Everything we deal in is significantly cheaper than it was six or 12 months ago,” he added, highlighting drops in the prices of high-yield bonds, leveraged loans, mortgage-backed securities and collateralised loan obligations.

The main gauge used to measure junk US corporate debt has registered a loss of just under 13 per cent this year, its largest since the financial crisis in 2008, according to Ice Data Services.

Prices of loans offered to lowly rated corporate borrowers have fallen more than 5 per cent and are trading on average at 93.27 cents on the dollar, levels last seen in November 2020 just before Covid-19 vaccine breakthroughs were reported, data from S&P and the Loan Syndications and Trading Association showed.

Marks said Los Angeles-based Oaktree did not make investment decisions based on macro forecasts — such as how high inflation would rise or whether there would be a recession — nor try to time the market.

“I think the idea of waiting for the bottom is a terrible idea,” he said. Assets could get cheaper than current valuations “in which case we’ll buy more”.

Marks, 76, co-founded Oaktree in 1995 with a strategy of investing in “good companies with bad balance sheets” and has built the company into a $164bn powerhouse of debt investing. The company does not publicly disclose its financial performance.

His career has been founded on making big bets when and where others are unwilling to do so, and he sets out his investment views in a popular series of memos, whose regular readers include Warren Buffett.

“We’re more aggressive if we think . . . bargains are rife,” he said. “And we are more defensive if we think the market is elevated and investor behaviour is imprudent.”

Over the past year, Marks has advocated positioning on the more defensive side. “I thought asset prices were reasonable given where interest rates were, but I thought interest rates would go up, which meant prices would go down.”

Financial markets have sold off as the Federal Reserve has begun to sharply raise interest rates, piling pressure on treasurers across the globe. Borrowing costs have shot higher, with yields on highly rated corporate debt in the US averaging 4.72 per cent this week, double the level at the end of 2021.

For riskier groups rated junk by the major credit rating agencies, yields are now above 8.5 per cent, up from 4.32 per cent.

Oaktree, which sold itself to Canadian infrastructure group Brookfield at a near $8bn valuation in 2019, is one of the oldest specialists in chasing companies for unpaid debts. Marks said that while he expected the number of corporate bankruptcies to increase — following a period in developed markets where abundant cheap money from central banks has kept them low — he did not think this would reach double-digit levels like it did in previous crises.

“The hotter the environment, the more people look at something like crypto and they go from saying it’s possible it will work to it’s sure it will work. And that’s when you get in trouble.”

He admitted he “did not know enough about cryptocurrencies to know if it’s going to work or not” but said he was sceptical because it was impossible to value them: “I believe that assets that don’t have cash flow don’t have intrinsic value . . . a good part of the value has to be conceptual and future oriented.”

Oaktree’s most high-profile recent deals have been in China, where it seized two crown jewel real estate projects from property developer Evergrande after it defaulted on $1bn of loans from Oaktree. Marks said Oaktree had not yet sold the two sites — Project Castle in Hong Kong and “Venice” on the mainland — but that “the process is going as it should. We’re in control of the assets, and we’re very optimistic”.

Marks said that Beijing’s zero-Covid policy was hurting Shanghai’s ambitions as a global financial centre: “you can’t put an economy into a coma and expect vigorous activity.” 

Companies have taken advantage of low interest rates to lock in cheap financing during the pandemic, he said.

The bulk of Oaktree’s assets are managed in credit strategies but it also has much smaller divisions in real assets, listed equity and private equity. Marks questioned whether the average private equity fund could consistently outperform listed markets, and said leverage contributed a large part of the sector’s returns.

“Maybe the best private equity funds really do outperform, or maybe the rest do so in brief periods,” he said. “But you can’t talk about private equity outperformance over the long term based on the average private equity firm and the research that I’ve seen. Yes, private equity has produced very good returns in the last few bullish years. But given their leverage, shouldn’t that be expected in such a period?”

Until this year, and barring a sharp sell-off at the start of the pandemic, US equities were in a decade-long bull market, which Marks said had bred complacency. “When things are going well, people don’t worry about the downside. And they push into new areas that they have never been in before.”

He pointed to areas such as private assets, where mainstream investors in stocks and bonds have expanded, some with seemingly little concerns for matching fund liquidity with the underlying assets. “That’s bull market behaviour,” said Marks. “But when you get withdrawals in an illiquid market with declining values, those funds melt down.”

Marks argued the same psychological dynamics had driven investors into cryptocurrencies.

Le premier vol d'Ariane 6 est à nouveau reporté, à 2023. Une cadence d'escargot qui laisse le groupe d'Elon Musk sans véritable concurrence.

Il est des hasards de calendrier qui font mal. Le 13 juin, le patron de l'Agence spatiale européenne Josef Aschbacher officialisait dans une interview à la BBC le nouveau retard d'Ariane 6: le premier vol du lanceur européen, jusqu'alors espéré fin 2022, est désormais prévu en 2023. Le même jour, le grand rival californien SpaceX obtenait du régulateur américain de l'aérien, la FAA, un premier feu vert très attendu pour les premiers vols orbitaux de son lanceur géant Starship/Super Heavy, fusée de près de 120 mètres conçue pour les missions martiennes. Après une enquête de plusieurs mois, la FAA conditionnait quand même cette autorisation à la mise en place de 75 mesures de protection de l'environnement au sein du pas de tir de Boca Chica (Texas) de SpaceX. Des engagements que le groupe d'Elon Musk ne devrait pas avoir trop de mal à tenir.

SpaceX qui rit, l'Europe spatiale qui pleure? La différence de dynamique est effectivement frappante. Depuis le début de l'année, le champion californien a réalisé 26 tirs de son lanceur réutilisable Falcon 9, soit un par semaine. Arianespace, lui, n'avait effectué qu'un lancement, celui d'un Soyouz russe en février. Un second tir, le premier lancement d'Ariane 5 de l'année, était prévu le 22 juin. Cette cadence d'escargot s'explique aisément: l'Europe n'a quasiment plus de lanceurs à tirer. Ariane 6? Elle affiche trois ans de retard sur son calendrier initial. Ariane 5? En fin de vie, elle n'est plus produite et ses cinq derniers lancements affichent complet. Quant au lanceur russe Soyouz, longtemps tiré de Guyane, il n'est plus disponible depuis l'invasion russe en Ukraine.

Pression maximale

Plusieurs opérateurs satellites, clients d'Arianespace, se retrouvent ainsi dans le flou. Même situation pour l'armée française, dont le satellite espion CSO-3, qui devait être lancé à la fin de l'année 2022, est pour l'instant cloué au sol, en attente d'une fusée disponible. "Nous avons 11 lancements à recaser", précisait le patron d'Arianespace, Stéphane Israël, lors du Paris Air Forum le 7 juin.

L'entrée en service d'Ariane 6 apparaît d'autant plus urgente que le lanceur européen a décroché, le 5 avril dernier, une commande géante de 18 lancements pour la constellation de satellites Kuiper d'Amazon. "Il n'y a plus de marge, ni de plan B: tout échec du premier tir serait catastrophique", résume Arthur Sauzay, auteur de plusieurs rapports sur l'Europe spatiale pour l'Institut Montaigne.

La pression est donc maximale sur Ariane-Group, maître d'œuvre d'Ariane 6. L'industriel franco-allemand doit mener de front deux campagnes de tests d'une importance capitale: les essais dits "combinés" d'une Ariane 6 sur son pas de tir à Kourou, prévus ces prochaines semaines; et les tests à feu de l'étage supérieur de la fusée, sur le site du DLR (l'agence spatiale allemande) à Lampoldshausen, au nord de Stuttgart. Ces derniers, prévus début 2021, n'ont toujours pas commencé.

Total compensation, with stock, rose 48.1 percent for the fashion company’s top executives, including Howard Smith who left under a cloud.

Ralph Lauren Corp. pushed through the pandemic, continuing to elevate its brand and court younger consumers — and senior executives saw top-dollar pay days last year in the process.

“This year, our teams around the world delivered strong results that exceeded our expectations with growth across every brand, channel, category and region – demonstrating their agility and strength amid an environment that remained challenging,” said executive chairman and chief creative officer Ralph Lauren and chief executive officer Patrice Louvet in a joint letter to shareholders filed with regulatory authorities.

Sales bounced back from the worst of the pandemic, increasing 41 percent to $6.2 billion for the year ended April 2.

For his efforts, Lauren saw his compensation rise 45.6 percent to $24.9 million. That included $12 million in incentive pay and a salary of $1.8 million. His package also included stock awards that were valued at $11 million, although the full value of share-based compensation will ultimately rely on the company’s Wall Street performance.

Louvet’s package increased 53.8 percent to $18.6 million, including $7.9 million in incentive pay.

The five executives named in the fashion company’s proxy statement logged total compensation of $68.9 million — an increase of 48.1 percent from a year ago.

That top tier included Howard Smith, who was chief commercial officer, but resigned at the end of the year after an investigation found he had “violated the company’s code of business conduct and ethics and other policies.”

The nature of the exact violations was never revealed, beyond the vague reassurance from the firm that they were “unrelated to the company’s financial reporting and business performance.”

A source told WWD when the departure was revealed that the violations were not related to either sex or money, but instead reflected multiple incidents of “misjudgment.”

Still, Smith, a 19-year veteran of the company, was allowed to walk away with a significant pay package.

His compensation rose 28.2 percent last year to $12.3 million, including incentive pay of $3.2 million.

The restaurant is permanent, but will operate seasonally.

RIVIERA BOUND: On a global expansion kick this year, Caviar Kaspia is to open in Saint-Tropez, France, on July 1. The permanent, but seasonal, restaurant will be operated by the Annie Famose Group and located on the first floor of the Tour du Portalet in the port area.

Previously the home of Kinugawa for the past three years, the space has been renovated in “Art Deco Tropézienne” style, according to Kaspia, describing it as a “glamorous boudoir overlooking the Mediterranean.” It is to open from 7 p.m., offering cocktails on the terrace including the new Oyster Independent, composed of vodka, oyster leaf, sea foam and a garnish of caviar. A deejay is to accompany diners late into the night.

As with all Kaspia locations, expect turquoise tablecloths and napkins, minaret-shaped ashtrays – and that famous caviar-topped potato on the menu.

The fashion crowd’s favorite Parisian restaurant, located on Place de la Madeleine since 1952, is marking its 95th anniversary this year.

Caviar Kaspia Group, headed by chief executive officer Ramon Mac-Crohon, recently opened locations in São Paulo and Dubai — and coming soon are Los Angeles, New York City and London.

Annie Famose, formerly an alpine ski champion, operates more than 30 restaurants with her two children, David and Sarah Bremond, in a range of jet-set locations including Saint-Tropez, Megève, Courchevel , Saint-Barthélemy, Biarritz and Avoriaz.

Caviar Kaspia was founded by Arcady Fixon, a Russian refugee fleeing the Bolshevik Revolution, who ultimately became a French citizen. Out of nostalgia for the Motherland of his youth, he decorated his eatery in pre-Revolutionary style, decorated with artifacts he collected over the years, including a crystal seal once belonging to Tsar Nicolas II.

This week was another good illustration of the fundraising market. Only five U.S.-based startups raised six-figure rounds and none even broke the $200 million mark. A year ago, it wasn’t uncommon for at least a trio of startups to raise a quarter-billion dollars every week. These are definitely much different times.

1. Electric Hydrogen, $198M, cleantech: With most companies looking to cut emissions, many investors are looking to put money into cleantech startups that can help them accomplish that feat. This week, they invested in Boston-based Electric Hydrogen, which closed a $198 million Series B—a mix of equity and venture debt—led by Fifth Wall Climate Tech. The round also consisted of an impressive list of strategic investors such as Amazon’s Climate Pledge Fund, Honeywell and Mitsubishi Heavy Industries. Electric Hydrogen has created its own patented approach to electrolysis—the process of producing hydrogen from electricity and water—designed for industrial applications. Those applications account for more than a third of global greenhouse gas emissions. The cleantech and clean energy sectors saw a record $10.1 billion invested in VC-backed startups last year, and $5.3 billion already has come into the market this year, according to Crunchbase data.

2. FalconX, $150M, crypto: No matter what happens in crypto, it seems like every week some startup locks up a huge round. This week, San Francisco-based FalconX was that startup, raising a $150 million Series D that more than doubled its valuation from just 10 months ago. The new round was led by GIC and B Capital, and values the company at $8 billion. In August, the company closed a $210 million Series C at a $3.75 billion valuation. The round also included investment from other big names like Thoma Bravo, Wellington Management, Adams Street and Tiger Global Management. FalconX’s platform allows institutions to access and manage their crypto assets. The crypto market has had a rocky go of it this year for investors. The two largest cryptocurrencies—Bitcoin and Ether—have lost more than half their value from their November highs, and some lending platforms, such as Celsius Network, suspended withdrawals and transfers due to market uncertainty and liquidity issues. Nevertheless, investors still seem intrigued. FalconX has now raised more than $430 million, according to the company.

3. Magic Eden, $130M, NFTs: Similar to its parent industry crypto, NFTs also are reportedly having some issues. Nevertheless, NFT marketplace Mountain View, California-based Magic Eden closed a $130 million round to reach a valuation of $1.6 billion this week. The round was co-led by Electric Capital and Greylock. Magic Eden’s marketplace allows users to create, buy and collect NFTs. Its primary marketplace has rolled out more than 250 projects since launching last year and its secondary market has more than 7,000 listed collections.

4. Alladapt Immunotherapeutics, $119M, biotech: If you have food allergies, Menlo Park, California-based Alladapt Immunotherapeutics may be a company to watch. The clinical-stage biopharmaceutical company closed a $119 million financing round led by Enavate Sciences this week. Those proceeds will be used to help the firm develop its ADP101 product, which the company says “has the potential to be the first FDA-approved therapy to treat the majority of U.S. food allergy patients.” Founded in 2018, the company has now raised $179 million, according to Crunchbase.

5. Prime Trust, $100M, fintech: Helping financial institutions compete in the digital world can be hard. Las Vegas-based Prime Trust tries to make it a little easier. The company closed a $100 million-plus Series B—with FIS, Fin Capital, Mercato Partners and Kraken Ventures among the leading investors, the company said. Prime Trust offers the actual infrastructure needed by crypto exchanges, on-ramps, wallet apps, broker dealers and banks to offer financial services in the digital world. The company will use the new proceeds to further push its own crypto IRA. Prime Trust has raised more than $170 million in funding, according to the company.

6. Ledger Investing, $75M, financial services: New York-based Ledger Investing, a marketplace for insurance risk, raised $75 million in Series B funding led by WestCap. Founded in 2016, the company has raised nearly $91 million, Crunchbase data shows.

7. Openly, $75M, insurance: Boston-based Openly, the technology-enabled provider of homeowners insurance, closed a $75 million Series C from Advance Venture Partners, Clocktower Technologu Ventures, Obvious Ventures and others. Founded in 2017, the company has raised more than $137 million, according to Crunchbase.

8. DEM BioPharma, $70M, biotech: Cambridge, Massachusetts-based immuno-oncology company DEM BioPharma raised an initial $70 million of financing led by founding investor Longwood Fund and Alta Partners.

9. MicroTransponder, $53M, medical devices: Austin, Texas-based neuroscience medical device developer MicroTransponder closed a $53 million Series E led by US Venture Partners. Founded in 2007, the company has raised $95 million, according to Crunchbase.

10.Autobooks, $50M, fintech: Detroit-based payment and accounting platform Autobooks raised a $50 million Series C round led by Macquarie Capital. Founded in 2015, the company has raised nearly $98 million, according to Crunchbase.

With the U.S. rounds rather small this week, the top three global rounds came from Europe.

June has been a hot one across the country; see where the temperatures have been most oppressive

Sweltering heat gripped much of the U.S. this week, from the Midwest to the South, sending temperatures to record-breaking levels and putting millions of people under heat advisories. A reprieve for the Midwest is forecast to come this weekend, but high temperatures are expected to persist in Texas and across the South into next week, according to the National Oceanic and Atmospheric Administration.

The recent heat spell comes on the heels of stifling temperatures last week, creating what has been an unseasonably hot June for many cities in the U.S.

Hot, dry conditions in the Southwest and parts of California have exacerbated tinderbox conditions for forest fires. Much of the region has been experiencing an extended and severe drought, although the start of monsoon season brought much-needed rain to parts of Arizona and New Mexico this week.

A dome of high pressure, sometimes called a heat dome, generated above-normal to record-breaking temperatures this month, the National Weather Service said. A heat dome occurs when the atmosphere traps hot air “like a lid or cap,” according to the weather service, creating large areas of sweltering heat.

The persistent heat this month led more of the Southern and Eastern U.S. to experience temperatures exceeding 95 degrees Fahrenheit at this point in the year than in the previous two years.

The recent hot weather follows a trend of increasingly warm starts to summer. Four of the five hottest Junes since 1895 have occurred in the past 10 years.

New records were set for maximum daily high temperatures this month in several cities, according to NOAA. St. Louis reached a new high of 99 degrees on June 13. Chicago’s O’Hare Airport hit 96 on June 15. Houston’s George Bush Intercontinental Airport notched 102 on June 20. Minneapolis reached 101 Monday, breaking the previous record for that day by three degrees.

Many cities experienced daily highs well above historical averages.

Current forecasts show extreme heat weakening across the South through the weekend, though high temperatures will linger along the Gulf Coast through next week, NOAA forecasts.