Scott Bessent (64), the USA’s 79th Secretary of the Treasury since 2025 may wish he retired and took up sports of leisure after the week he just had!

Pic: Official US Treasury picture. 2025 Scott Bessent.

The unruly (yields rocketing higher) US Treasury market, especially the “land of the big 01’ (present value of 1 bp), long bond (30 year), > 5.20%, has been cause not just for consternation, but action by the Treasury.

In addition to declaring “Operation Economic Fury” on Iran via all means know to man (likening the impact to D-Day no less, in a slightly embarrassing presser) Bessent intervened in the US Treasury market last week in an effort to drive bonds yields down in the long end of the curve, at what has been deemed a very peculiar time and in a highly peculiar fashion. The “Bessent put” is having an influence in keeping long term treasury yields in check/subdued, a play of the “Fed put” adage that implies there is limited downside for public equities as the Fed is ever present with cupped hands in the form of rate cuts, QE and whatever other extraordinary measures (e.g. $700bln Troubled Asset Relief Program, aka TARP) to recoup (eventually) ATH price levels.

Stanley Druckmiller, Bessent’s former governor (boss) 1991-2000 and 2011-2015, when he was CIO (Chief Investment Officer) at George Soros’s Quantum Fund blasted Scott’s ham-fisted effort via the Wall St. Journal this week noting that “defense against fundamentals always lose”. He added, “You can not buy your way out of a solvency conversation with liquidity tools.” Surely a fireside chat would have sufficed here? Someone is off the Christmas card list for certain. Druck, as he is affectionately known, is famous for taking on the UK government in 1992 via shorting the bejesus out of the UK Pound Sterling is an outsized wager that the UK government did not have enough in their coffers (foreign exchange reserves) to adequately defend their currency. The trade made was a monster in terms of sizing $10bln (in 1992 $) and netted US$1bln in profit for Quantum and solidified Soros and Druckmiller (Bessent was 29 year old at the time) as trading gods, if one believes in such things.

In my early financial derivative days I dealt with Bessent’s global macro trade execution team on a lumpy (1/2 yard, C$500 million notional) fx options trade where at the last minute Quantum’s purchased option (read no cpty credit risk) was cheapened by “selling the tails” on the payout, resulting in credit exposure, at a given fx cross. I was able to keep the trade by confirming it as a corridor trade versus two outright options, avoiding breaking the trade (and keeping my head!).

In the Treasury Secretary role Bessent has shown sharper elbows than Trump’s pencil, going so far as to threaten bodily harm to detractors (e.g. Bill Pulte, then housing finance director for one, and less believably Elon Musk of DOGE fame). Termed “the political pugilist” by the New York Times, I doubt Scott has ever had a hockey jersey pulled over his head, or enjoyed a “Shawinigan Handshake” (happy belated 92nd birthday to PM Chretien).

cartoon credit: Bruce MacKinnon

Photo credit: The New Yorker

Bond market typical management tools:

QE (Quantitative Easing). Typically done by the Federal Reserve. QE expands the Fed balance sheet and has monetary easing as its’ goal (esp when Fed Funds are at their lower bound). Long term yields lower.

Kevin Warsh is the newly minted Fed Chair, having replaced Powell as Trump’s hand picked candidate (note: The Fed Chair is meant to be apolitical/neutral). As an aside, Druck used to be Warsh’s boss as well (2011-2026). Warsh is likely mirror talking in prep for his first J-Hole (aka Jackson Hole Economic Policy Symposium) which kicks off tomorrow in Wyoming and all eyes are on the seemingly mute new Fed Governor. It will not be all Smores and single malts, to be certain.

Japan is the undisputed king of QE as they “kitchen-sinked” it a decade + ago. All assets classes are fair game and the BoJ currently owns approximately 40% of the Japanese equity market (via EFT’s). Japan’s pension plan, GFIP, is one of the world’s largest in terms of aggregate size at well over US$1 trillion, but the horrendous aging demographics of Japan would see the plan zeroed after only 5 years if younger workers were to stop contributing. As an aside, the US Social Security Trust, largely a “pay-as-you-go” system (e.g. funded largely via payroll deductions which roughly equate to interest of the $40 trillion in accumulated debt). A budget surplus has not been seen in the United States since the year of ourLord 2000, under Democrat nor Republican!

Liz Truss vs. lettuce was quite a recent spectacle also in the United Kingdom. A mini-budget that both capped utility prices for the masses and cut income taxes at the top end has bond vigilantes throwing their toys out of the pram! The skyrocketing Gilt market yields were threatening the blow up (bankrupt, literally) the private pension market in the UK (LDI, liability driven investment Kool-aid drinkers all). The Bank of England (BoE) briskly launches a targeted QE program of up to GBP1tln to buy the long end. Day saved, yields down, pensions all good, Truss out, lettuce for the win!

Treasury buybacks: U.S Treasury action whereby Treasury repurchases outstanding UST’s using cash (rare) or other financing (typically T-bills which make up almost 30% of debt issuance presently). No direct expansion of the Fed balance sheet. Done in the name of liquidity / debt management. Expansionary/inflationary to the extend terms rates are brought down (on a persistent basis). Lower long term rates targeted (note: achieved another matter).

US Midterm election are less than 3 months away with Republicans (Trumpians) under immense pressure to lower the cost of living for the average American. Under the guise of increasing long-dated treasury liquidity (Druck argues the liquidity was fine, but the price/yield was deemed wrong) Treasury executed treasury purchases in the open market that brought the observable yield on those secondary US treasury securities down. Like a fart in an elevator, the effect soon dissipated and yields returned to the levels seen 24-hours prior. The “long bond” 30 year (on-the-run) yields 5.19% at the time of print). Druck would advise Bessent to focus on reducing the deficits (legacy $40tln and $1.8tln ytd 2026 running). The Federal Reserve (Warsh et al) set monetary policy in the short end of the curve via the “Fed Funds” rate, currently 3.50-3.75%, with a September FOMC (Federal Open Market Committee) meeting soon upon us. Longer term rates are much more difficult to “coral” or control (see YCC, yield curve control below). Thus far at least, Trump is a Bessent fanboy, noting ,” He has a good touch, a very good natural touch for the bonds and interest” (whatever that means) adding more confusingly in the same interview, “We have many types of interventions, that’s one, the ultimate intervention is our military. If we have to use that we will.” (bond execution, execution style …).

30 year UST yield

Operation Twist: Traditionally the purvey of the Federal Reserve; Treasury Department can approximate via debt management. Buy long-duration + sell/issue short-duration. Balance sheet largely unchanged in classic twist. Flattens curve, lower term rates, typically lower long end and slightly higher short end. In 2011 Twist was monetary policy conducted by the Fed with this 2026 version debt management policy effected by Treasury.

YCC (Yield Curve Control): Federal Reserve. Buy UST in whatever amount necessary to defend a stated yield. In stubborn, potentially unlimited balance sheet expansion. Explicit cap targeting specific yield. Rates down / capped.

Japan has the best exhibit of YCC in the modern age whereby they targeted a 10bp (0.10%) yield on 10 year government bonds for multiple years, before abandoning it. Since, the 10 year JGB yield has risen and currently stands at 2.90% (29X the former “capped” yield of 10bp).

Who owns your debt is a factor in all of these programs. Japan’s massive debt of well over 2X GDP is 93% held in Japan. The US is beholding to foreign buyers (e.g the indirect bid in ongoing auctions) as over 30% of their debt is held by foreigners. IF the Fed’s balance sheet were ever brought down through quantitative tightening (QT) the foreign % would rise (it has historically been >50% for periods of time).

When deemed credible YCC can require less purchases as wary investors are not keen to short bonds against an effectively unlimited central bank bid (JGB shorting in particular called the “widow maker” trade.

On a continuum, normal market operations, Treasury Buybacks, Twist, QE and YCC is one way to look at the government’s policy influence over long end rates (beyond fiscal policy, prudence). .

Who is zooming who, in this instance?

Bessent’s most recent actions have been characterized as both a Treasury Buyback and a Twist Operation. Buying long dated bonds and shifting issuance toward bills is De facto Treasury Twist operation. The strict definition/moniker made even more difficult to nail down given Bessent’s follow on comments that future purchases in the UST long end (liquidity passes can be for up to $4bln per versus $2bln prior) may be funded by the Treasury General Account (TGA) which currently stands at approx. $1 trillion (elevated in terms of size, sub $500bln would be “typical”).

Throughout their storied history there have been conflicts between the Federal Reserve and Treasury. In 1951 the matter was laid to rest with the Treasury Federal Reserve Accord which was signed Mar 4, 1951. Post this accord, the Fed was no longer required to maintain Treasury bond prices/yields for the purpose of financing the government. The accord set out the mandate for both with the Federal Reserve in charge of money + reserves + monetary policy + open market operations and Treasury charged with debt issuance + maturity structure + fiscal financing. This accord signaled the foundation of modern Fed independence.

We will all be fire-hosing the news flow from Jackson Hole over the next 2 days for clues, beyond what we now know in this murky but important land of bonds!

Cheers, JCG

Last minute negotiations to curtail the most recent economic tariff assail by the United Stated on Canada have failed. Prime Minister Carney “walks away” from a bad deal. 50% tariffs on US$20bln of varied goods are now in “engaged”. Tariffs have woven their way into the economic construct of the United States and it appears Canada must adapt to the new paradigm.

Much will be written on this in the coming days and weeks.

The ties to US Treasury Secretary’s Scott Bessent’s latest “assistance” to the Bank of Japan (BoJ) will be covered in this article, as will the global bond market writ large. The global bond market stands at US$350 trillion, dwarfing the global equity market of $158 trillion by 2.2X!

The global bond markets are decidedly “grumpy”. Yields are at 20 years highs in most G10 markets. In the C-19 “funk” a full 25% of the sovereign global debt markets were trading at a negative nominal yield!;

In Japan 4 is a very unlucky number. Phonetically “shi” sounds the same as death, even though it has its’ own kanji. Superstitious buildings do not skip the 13th floor, they skip 4!

USA’s national debt has eclipsed US$40 trillion for the 1st time ever. With USA GDP at US$32 trillion that is 1.25X USA GDP. The “4 handle” curse does not end there! This deficit is being financed with 4%+ interest (4*4=16) that is $1.6tln in annual interest payments!! That is 28.6% of current US government revenue (US$5.7tln annual “spot” receipts).

US Debt Clock

To put this in context USA’s debt service in the prior year was roughly equivalent to defence spending at $900bln per annum.

What can Carney feasibly do, to taser tRump’s aggression as he finishes his 2nd and final term as USA’s president (POTUS)?

Who is your daddy?

Japan’s debt/GDP is over 2X GDP but they “own” / finance the bulk of it. Less than 7% of JGB’s are owned by foreigners versus 30% + for the USA (peak was > 50%). .

Canada is a special case. Low federal debt as a % of GDP (implied fiscal “capacity),but inclusive of provincial debt a 1.05X debt to GDP metric versus 1.25X as noted for the USA. Not as much “capacity” as implied by the the pure federal #!.

1.) Recommendation - Reduce Canada’s holding in US Treasuries in favour of UK “Gilts”.

A “shot across the bow” of the USS Minnow, showing that the USA’s undue reliance on foreign buyers for their wares (e.g. US Treasuries) can not be assured when the “deals” struck by their skallywag (Merriam-Webster definition; scamp, reprobate) leader can be struck down in a New York minute.

Why? The current policy floor for US securities is 50% and the current aloocation is 67.4%.

How? Sell US$9.7bln in US Treasuries (various maturities), taking the USA allocation to 57.4% from 67.4%.

In favour of; UK “Gilts” taking the UK allocation to 18.9% from 8.9%. Note: Canada is a commonwealth nation. King Charles is also Canada’s king. There is a yield “pick-up” to move (increase allocation) to the UK government bond market.

EU allocation of 16.8% to remain unchanged and Japan at 6.9% also unchanged (for now).

This would NOT be a negotiation tactic with tRump. It would be advised, after the fact, as an asset allocation matter. While $10bln seems trivial in the context of a $40tln deficit, the message to tRump and his minions (Vance, Lutnick, Navarro, and Bessent) would be crystal clear. When you can not rely on your biggest trading partner to be the marginal buyer of your debt (e.g. a net seller in fact!), you have a BIG problem. Only through modified behaviour can global trust be re-established.

Fed Governor Kevin Warsh (newly minted) has a tough job! Hand picked by tRump to cut the Fed Funds rate from the current 3.50-3.75 (3.625% “mid”), he is likely more inclined (as implied by Fed Fund futues) to hike rates going forward, as the 2% inflation target of the Federal Reserve has been > the 2% inflation target for over 5 years!

US Treasury Secretary Scott Bessent has been a busy boy! The USA recently contributed US$110bln to assist the BoJ in “bolstering” the Japanese Yen (JPY) via a coordinated foreign exchange intervention. I lived in Japan for an extended period (1997-2000 and 2017-2021) and can attest to the difficult of understanding the “widow maker” trade of shorting Japanese government bonds (JGB’s) works. The JPY “carry trade” is a mysterious phenomenon in its’ own right, a US$20 trillion multi decade “arbitrage” whereby speculators of all guise borrow in Japanese Yen, invest in risk assets (off all ilk, mostly EUR and USD denominated) and “enjoy” the low (relative) interest rates in their funding currency (yen) and a relatively stable currency (although the worst G-10 performance over the last 5 years). The BoJ “invests” in > US$1 trillion of US Treasuries, hence Japan = USA’s “best friend”. IF the Japanese Yen were to fall precipitously, they would have little choice but to tweak the make up of the BoJ balance sheet which could include selling foreign assets (e.g. US Treasuries). This joint action was the 1st time in several decades that the US has engaged in joint fx intervention. Back in the day, Japan’s Sakakibara (aka Mr. Yen) was made famous by his sizeable forays in fx intervention (e.g. buying yen in the open market to singe the fingers of fx speculators).

Bessent-san also intervened in the US Treasury market last week via a “twist” operation. Almost 30% of funds raised by the US Treasury are t-bills (e.g. short dated). Bessent issued new bills to buy longer dated US Treasuries which successfully brought the yield down in the long end and flattened the curve. 2-10’s as you can see below now 105 basis points (5.28-4.23=1.05). From recent statements, Trump appears to think there is a military solution to the bond market turmoil? Lower yields may well prove elusive going forward.

2.) Re-instate a Canadian central bank gold reserve. Canada currently has zero ($0) in gold reserves, despite having some of the world’s largest gold miners. Many decades ago Canada chose to sell their gold reserve for reasons that made abundant sense (at the time for sub $500/oz.). Currently, with the EU “experiment” under renewed scrutiny the time is now to establish a substantive reserve, domiciled in Nova Scotia (Sydney, Cape Breton to be specific) as a hedge to London, New York and Fort Knox, USA. All Canada produced gold would be earmarked for said reserve with storage offered, as an option, to other “alt $” nations (namely Australia, New Zealand and South Africa).

In addition to the outsized central bank additions by China and others (notably Russia pre the Ukraine war), this Canada action would likely result in renewed “levity”, namely an upward trajectory for the price of gold. As a producer of size, Canada, over a decade + runway could amass a substantial war chest of gold to underpin our eventual involvement in a global currency unit, should the EU “experiment” fall flat as implied by Kalshi et al betting odds.

Note: Trump is approaching +3 to the USA average life expectancy, while Carney is still 22 years under Canada’s admirable 82 year average life expectancy. Carney’s approval rating is in the mid 60’s versus the mid 30’s for agent orange. For context the Liberal party approval rating is in the low 40’s.

There is much more to discuss, but this is a manageable bite!

Cheers! JCG

Pictured : Elon Musk, Earthing’s 1st humanoid worth 1 trillion dollars (fiat USD), awaiting his performance bonus for colonizing the first million on planet Mars.

Buckle up buttercup, this has been a wild ride over the last decade for SpaceX, a historic IPO in term of its size, complexity and the challenges of parsing a company valuation with a claimed US$28 trillion TAM (total addressable market), approaching 1/3 of global GDP, to put that in perspective.

Just in case we were wondering if LLMs (large language models) like Chat GPT (paid version!) were still subject to “hallucinations”, I bring you the following excerpt from a chat prompt from this morning as unambiguous as “What is the ticker symbol for SpaceX?”;

Prompt; SpaceX ticker

Reply; SpaceX does not have a stock ticker.

SpaceX is a private company, so its shares do not trade on public stock exchanges and there is no NASDAQ or NYSE ticker symbol.

If you’re looking for ways to gain exposure to SpaceX, common avenues include:

• Baillie Gifford funds that hold private SpaceX shares.

• ARK Invest venture-oriented funds (availability varies).

• Alphabet invested in SpaceX in 2015 and retains a stake.

• Secondary-market platforms that facilitate trading of private-company shares for accredited investors.

If SpaceX eventually goes public, it would receive a ticker at that time, but as of today there is no announced IPO date and no ticker symbol.

My rebuttal; this is not factual, the successful IPO launched last Friday in the USA

Reply from Chat GPT; You’re correct. My previous answer is no longer accurate.

Based on multiple reports published over the last few days, SpaceX completed its IPO on June 12, 2026 and is now trading on Nasdaq under the ticker symbol SPCX. The IPO was priced at $135/share and the stock reportedly closed its first day around $160.95, making it the largest IPO in history.

Ticker: SPCX

Key reported figures:

• IPO price: $135/share.

• Capital raised: approximately $75 billion.

• Initial valuation: roughly $1.8 trillion, exceeding $2 trillion after the first-day surge.

• Exchange: Nasdaq.

Thank you for the correction. The information I originally provided reflected SpaceX’s long-standing private status and was overtaken by this very recent IPO.

IPO details: S-1 filed with the Securities and Exchange Commission

https://www.sec.gov/Archives/edgar/data/1181412/000162828026036936/spaceexplorationtechnologi.htm

In perhaps the most anticipated initial public offerings in history, SpaceX raised US86.2bln (post greenshoe upsize by 15%) with 5% of the company floated to the public via their public offering on the NASDAQ exchange under the ticker symbol $SPCX. The IPO price was set at $135 per share, valuing the entire enterprise at US$1.8trillion. The stock rallied on the first day of trading to $166.85/sh taking the valuation north of US$2 trillion. Impressive indeed!

This successful trading day was despite the S&P Index committee’s decision to not include in the S&P Index from the inception of trading. The decision was made to wait at least 12 month to open up this potential fire-hose of additional liquidity. It is estimated that upwards of 40 cents of every $1 invested in the stock market today are via passive index fund investors (401K plans, Traditional IRA’s, Roth IRAs and the like) in ETFs and various target date funds sold by the likes of Vanguard.

SpaceX is a “roll-up” of three distinct businesses, the launch business, Starlink and xAI. As a private company SpaceX was trading at (based on most recent funding rounds) US$1.2 trillion. The list of “winners” waggering investing early in “privatized NASA”, a satellite-based internet service (10.3 million current subscribers) and xAI are extensive. Alphabet (Google for most home-gamers) invested $900 million in SpaceX in 2015 which is now worth $100bln, rarified air of “100 baggers” at 111x their initial investment. Ontario Teacher Pension plan in Canada invested C$300 million in 2019 that is now worth C$15.6bln, a staggering 75% cagr (e.g. compounded return). The fund has assets of C$280bln, hence an investment of approximately 10 basis points (0.10% of fund assets) will return 52x their initial investment, bolstering their 2026 returns by over 5%! The fund underperformed their benchmark return in 2025 by a comparable amount (e.g. 6% net return vs just over 11% for their benchmark).

A number of institutional and accredited investors in SpaceX’s numerous private funding rounds are subject to trading restrictions that force them to wait before hitting the cash register on their epic paper gains. This will be the true test. Who will sell, who will choose to hold? When the relatively tiny float (5%, < 640 million shares) of the 12.9 billion shares in existence expands will demand be strong enough to keep the stock price up? Nobody has a crystal ball, but have no doubt, this is a yo bet on xAI’s role in artificial intelligence and Elon Musk, full stop. The 67% margins in the launch business, driven by reusable rockets are nice, as are the US$15bln in US taxpayer (and of course buyers and holders of US$40 tln in US Treasuries) funded contracts. There is little clarity on matters such as contract performance, cost over-runs, milestone’s/KPIs or use of government funds. The launch business was valued at US$750 bln (of the $1.8tln total). There is no independent board, a feature, not a bug. A governance concern that permeates the entire organization across the three silos.

Starlink margins are a more pedestrian 48%. They have launched over 5k Starlink satellites, more than 1/2 of all active satellites in orbit with a end state target of 42k. It has been pointed out that SpaceX is altering the orbital environment for all humanity with no independent oversight nor international consulation.

xAI is in the tbd category with capex and R&D representing US$14bln, over 60% of the US$23bln spent in 2025 alone ($14bln capex and $9bln in R&D for a total of $23bln spent). Last I checked there appeared to be many competitors in this space! An AI TAM of $26 trillion is estimated to be the equivalent of the operating expenses of all businesses operating, globally.

SpaceX is a dual-share listing, a common structure that allows founders to hold shares with 10x the voting powers of the “A” class, public shareholders. In this case, there are 6.9 bln “A” class shares with 1 vote each and 5.6 bln “B” class shares that have 10 votes per share. As the holder of the “B” Elon Musk retains 85% of the voting rights for SpaceX.

The writer in not involved as a trader nor investor in SpaceX, but we will all likely be “passive” investors in SpaceX via our mutual fund and ETF holdings. Counter to the S&P Committee, Nasdaq chose to include SpaceX in the Nasdaq-100 from 6/15/2026 under new “fast-track” IPO inclusion rules, hence your tech ETFs like $QQQ need to buy the stock today to reduce tracking error. With a US$2tln market cap, SpaceX will rank among the largest constituents of the Nasdaq-100. Coupled with ceasefire peace in the gulf, we could see a follow on rally in the stock this week.

The King of valuation” Aswath Damodaran has done extensive work on the valuation of SpaceX and sees $100/sh or US$1.2-$1.4 as defendable. The $135 IPO price implied 92 x earnings (4.5x 2026 optimistic revenue projections of US$400bln, a premium to the spot 3-4-3.6x revenue and 31x p/e Amazon trades at). Apples and pomegranate’s ,but you get my drift. The median p/e (price to earnings, not revenue) for the Defence/Aerospace sector is 34x, a premium valuation to the market at 21x.

After a decade in the shadows (private) , a public listing for SpaceX brings a requirement for transparency, GAAP (the USA accounting standard, Canada and 145 other countries report under IFRS, International Financial Reporting Standards) prepared audited financial statements and reports on insider trading. While a public listing provides liquidity, it also opens the specter of short selling, a bloodied lot as this frenzied AI market pierces new highs at Icarus thin atmosphere. We celebrate visionaries and shorting Musk to date via vehicles such as Tesla as been a fool’s errand.

Be careful out there. Be prudent and perform your own due diligence in these heady matters of timing, trust and valuation.

Good governance is perhaps the largest shortfall here. All governance power is concentrated in Elon Musk, solely. There is no publicly disclosed board of independent directors with the power to overrule or constrain CEO and majority owner Elon Musk’s decisions. As a result, SpaceX operates without independent oversight. This violates every principle of modern corporate governance.

Cheers,

JCG

For the 1st time since 2022 Premier Tim Houston addressed a crowd of 800+ at the Halifax Convention Centre on May 25, 2026 for a “State of the Province” address.

The message was stern for those insistent on decay and decline. Managing decline is no fun and he does not plan to oversee it. Entitled groups, demanding righteousness to the point of everyone else staying poor, do not have the Premier’s ear. His direct quote was “They want to be righteous, even if it risks everyone else being poor.” Stopping development, turning a blind eye to the glaring and outsized opportunity in natural resource development in Nova Scotia in “not on”.

“Have-nots”. Tim outlined hard facts, NS’s GDP per capita is 77% of the Canadian provincial average and ranks 59/60 in North America. He noted even if one does not know what GDP is know that this ranking is effectively rump last. The child poverty rate in NS is 22.7% in 2025 (40,210 children living below the poverty line), down 4.6% from 2022. In Cape Breton, the child poverty rate is 31.5%, 9% above the provincial average. Rural First Nations on island are > 40%. At 22.7%, NS’s child poverty rate is the highest in Atlantic Canada and the 3rd highest in the country.

Houston’s latest budget was taken like a double shot Buckley’s mixture austerity with modest budget cuts ($305 million on a budget of > $18bln, < 2%), required to indicate some modicum of prudence, but there was in fact $1.24 bln in net deficit spending (1.7% of GDP), equivalent to $1,200 for every Nova Scotian, hunger pangs or not. Nova Scotia’s $22bln in debt (40% of GDP) is expected to grow to $36bln in 2029/2030 (60% of pond still GDP) before cresting.

Federal equalization for this year is $3.538bln for Nova Scotia, equivalent to $3,500 per capita. The questions needs to be asked, have-nots or will-nots? Chants and protest signs outside the Halifax Convention Centre read “reverse the cuts” and “Keep it in the ground”. A non-binding referendum is being held in Alberta on Oct 19, 2026. Their GDP is 70% higher than Nova Scotia’s (and no provincial sales tax, it should be noted).

Growing the NS economy from the current $60bln is a necessity if we are to pine for “nice things, hospitals, schools, parks and a child poverty rate in keeping with a G-10 nation (approximating zero).

JCG

• written by a human

The ink is not yet dry on the formal announcement of Carney staking Canada’s 1st Sovereign Wealth Fund, the “Canada Strong Fund” (CSF) with C$25bln in federal government (deficit) funding over three years to seed it. The fund will increase in size over time, both from investment returns and other assets the government may allocate to it. Mandated, staffed and executed properly, with a capable and accountable Board of Directors, CSF could be a + game-changer for Canada.

Despite Pierre Poilievre’s ongoing protestation, Canadians have given their stamp of approval of Carney’s commercially-minded, no nonsense stance on Canadian governance at the federal level. Where glaring gaps exists, he has reached out the the private sector for much needed expertise. Not one to build a ship of the slab timber the electorate have provided, Carney clearly prefers carbon fibre and does not suffer fools gladly in his machete paced march of excellence. Shortcoming in the current cabinet will likely be resolved, post haste. My feeling is that this man, this leader, will not rest until the best foot can be laid forward at this critical time in Canada’s sovereign and commercial history.

Let’s review the possible with this quasi sovereign wealth fund, assume the glass is 1/2 full and compare this effort to other global “middle power” peers. This is good news, full stop, but the devil, as always, is in the details. Unlike the United States municipal bond market, Canada’s market is fully taxable. Details are yet to be provided on the features of the Canada Strong Fund, but interesting possible features could include;

-Federal tax exempt for Canadian citizens. Separate from existing TSFA limits.

-Contribution ”Top-up” for minors (e.g. $1,000 contribution nets a $2,000 investment in the fund, if held for > decade).

-Mandatory $5,000 contribution for those seeking Canadian Permanent Residency and/or Canadian Citizenship.

-Contributions to CSF accepted either directly to the Crown Corporation or via Canadian Credit Unions (credit union factor into the Bank of Canada’s stated goal of improving competition, boasting 11 million members and C$680bln in assets).

The wording of the announcement of the Canada Strong Fund at the Spring Economic Update in Parliament implies principal protection for Canadian investors, “As the Canada Strong Fund succeeds, investors will be able to share in the upside, while their initial invested capital will be protected.” As a full-fledged Crown Corporation, CSF shares the AAA/Aaa rating and carry the full faith and credit of the Government of Canada (His Majesty in Right of Canada).

Program features will of course embrace and promote foreign direct investment as well, alongside CSF. The top 10 money managers/asset management firms (globally) manage US$60 trillion. The top 100 Sovereign Wealth Funds manage $17 trillion with the top 10 AUM = $11.7 trillion. Family offices manage > $10 tln globally. Global GDP currently stands at US$100 trillion with the global pool of capital estimated at US$150-200 trillion.

Canada represents 2.2% of global GDP (C$3tln of C$135tln). This % of global GDP has been static since 1990. Canada’s population over the 1990 to 2026 time frame has grown from 28 million to 41 million. Per capita GDP currently stands at $54,000. Canada has been described as a small country attached to a hegemon.

Carney says, “We’re building big things again.” As a general statement, taxes (municipal, provincial, federal) are typically the means by which infrastructure is built in developed nations, a category Canada is certainly “in” as a G-10 nation.

Legislation has been crafted and enacted to aid in this heady effort. The Building Canada Act was introduced as part of Bill C-5, the One Canadian Economy Act. Meant to fast track projects of national interest, this act enables the government to streamline federal approval (5 year/never to as quickly as 2 years). The Major Projects Office (MPO) has the broad aspiration to advance major projects in Canada and act as a single touch point for project proponents into the federal regulatory process, to both simplify and accelerate project approvals.

CSF will play in the equity space, alongside private capital in conventional and renewable energy (conventional oil & gas and clean energy), mining (critical minerals and traditional), agriculture, advanced manufacturing and Canadian infrastructure. A 100% Canada asset allocation. The newly established sovereign wealth fund will deliver market rate returns with a dual mandate to promote Canadian economic development.

A C$1.8-$2 trillion investment over the next decade could make Canada a G7 growth leader. After a $1tln outflow over the 2014-2025 period, the recapture of all the outflows + $1tln in new investment would be positive for all Canadians. A higher “Canada” domiciled allocation for the “Maple 8” alone (+10% from blended 17% currently) could net +$235 billion of incremental Canadian investment.

President Trump recently proposed a SWF for the United States, funded by the negotiated “deals/ trade settlements” of the USA’s fractured global trade partners, of which Canada is #1, sharing the largest common border and largest % cross-border trading relationship globally. “Elbows up” is likely the correct strategy near term, as early concessions would likely lead to finger, hand, arm, 1st born trades with still uncertain long term outcomes. The US deficit is set to pierce US$40 trillion to the upside, often hitting the “debt ceiling” which is invariably raised (can-kicked) to keep the punch bowl full to the brim. The USA has not run a budget surplus since 2000 (Republican nor Democrat). US social security, unlike Canada’s CPP is not a funded program. Social security is a “pay-as-you-go” system. While those living under the poverty line is similar in both the USA and Canada, the USA has 1/3 of the population scraping by just above it. For many Americans, social security is the only retirement income they have at the end of their working lives.

Funded pensions are another matter, California’s Calpers, the largest pension systems in California is funded at 79 cents (assets) per $1.00 in liabilities. CalPERS (California Public Employees' Retirement System) is the largest public pension fund in the U.S., managing over $550 billion in assets as of April 2026. It serves nearly 2.4 million members, providing retirement and health benefits to California state employees, school employees, and local public agency workers. With a 79% funded status, CalPERS unfunded liability is currently US$115.5 billion.

State of Illinois; As of early 2026, Illinois has the worst-funded public pension system in the nation, with a funded ratio of approximately 49%. Moody’s rating service recently upgraded Illinois to A2 (they were at risk of losing investment grade status in recent decades).

By definition a SWF is born of surplus (oil, mineral or otherwise) not funded by deficit, regardless of one’s “fiscal capacity”. One can forgive, perhaps, the “jazz hands” at play IF Carney can pull it off (e.g. +C$2 trillion of FDI over the next decade), his 60’s zenith, his legacy, the cherry on the top of an illustrious global career in high finance.

Canada’s “Maple 8”:

Fund / AUM / % Invested in Canada

CPP Investments C$780B ~13%

Caisse de dépôt et placement du Québec~C$500B+~20–30% (higher Québec tilt)

Ontario Teachers’ Pension PlanC$270B ~10–20%

*Ontario Municipal Employees Retirement System (OMERS) C$150B~15–20%

*OMERS CEO Blake Hutcheson attended #FNMPC26 Apr 29 - May 1, 2026 the first Canadian pension fund executive to attend. With a Canadian global GDP weighting of 2%, OMERS’ current 16% allocation is 8X “overweight”. Bruce Power (nuclear power station in Ontario) is their largest single investment. Plans are to add C$10bln to their Canadian investments over the next decade. OMERS track record with respect to returns is 7-8% per annum. Real return target (after inflation) 4-5%.

Public Sector Pension Investment Board C$300B ~10–15%

British Columbia Investment Management Corporation C$230B ~15–25%

Alberta Investment Management Corporation C$180B ~15–25%

Healthcare of Ontario Pension Plan C$110–120B~40–50% (notably domestic-heavy)

• Combined Maple 8 AUM (assets under management): C$2.35 trillion

• Among the most influential institutional investors globally

• Many funds invest only ~13–20% in Canada

• Example:

  • CPP: ~13% Canada / ~47% U.S.

  • OMERS 16% Canada / 55% U.S.

    Drivers:

• Removal of foreign investment limits (2005)

• Pursuit of global returns

The Maple 8:

• Invest globally

• Run internal investment teams

• Focus heavily on:

  • Infrastructure

  • Private equity

  • Real assets

Result: world-class returns, low relative MER (management expense ratios) but less domestic concentration than many assume.

• The Maple 8 are massive global investors headquartered in Canada

• But:

  • Most capital is invested outside Canada

  • Domestic allocation typically 10–25% (with exceptions)

“Canada Strong Fund”. De-risk large-scale nation-building projects

• Accelerate:

  • Energy transition (incl. LNG, nuclear, grids)

  • Critical minerals

  • Transportation/logistics infrastructure

  • Indigenous partnership projects

• Deal Packaging, Hedging (Foreign Exchange and Interest Rates) & Scale:

Pensions typically require:

• $500M–$5B+ ticket sizes

• Stable, long-duration cash flows

A federal investment vehicle like CSF could:

• Bundle projects into institutional-grade portfolios

• Standardize structures

• Allow for long-dated hedging for foreign direct investment looking to hedge/quanto their going forward Canadian dollar returns to their respective home currencies (e.g. USD, EUR, JPY, AUD, NZD, CHF, SGD, HKD, RMB).

This could solve a major friction point.

Canadian pensions typically avoid:

• Politically controversial sectors

• Projects lacking long-term policy alignment

A “Canada Strong Fund” signals:

“These are nationally prioritized, durable investments”. This alone can materially increase domestic allocation.

• Canada allocation: 20–25% of Maple 8 AUM

With effective fund structure:

• Could rise to: 25–35% over time. An increase of 10% would net $235bln in Canadian domiciled investment from the “Maple 8”.

• The bulk of the outlined Maple 8 manage defined benefits pension plans for their members. They have both a contractual and fiduciary obligation to pay benefits to their plan members. This would naturally put an upper threshold on their respective Canada asset allocation, but on the face of it +10% seems a plausible incremental Canada asset allocation target.

CSF Investment Focus:

Energy & Electrification

• Grid expansion

• Oil & Gas. New oil pipelines and LNG terminals, securing Canada’s energy superpower status.

• Nuclear (SMRs)

• LNG / transition fuels

Critical Minerals

• Lithium, nickel, rare earths

• Uranium

• Processing infrastructure (rare earth metals are abundant globally, but the appetite for the sometimes caustic processing, less so)

Transportation

• Ports (West Coast, Arctic, Churchill, Atlantic)

• Rail/logistics

• Trade corridors

Digital Infrastructure

• Data centres (data sovereignty)

• AI compute infrastructure

• Fibre networks

Defence

Canada plans to triple defense spending from a low base to 5% of GDP by 2035 (currently at our NATO committed 2% of GDP recently achieved), which could generate $100 billion for Canadian companies and make Canada a net contributor to allied military capabilities (think Arctic surveillance and space-based defence systems). CAF (Canadian Armed Forces) current force (ex 27k Reserve Force)) of 68,000 is roughly = CRA (Canada Revenue Agency) staff compliment of 59,000. We have some wood to chop to build a credible defense force in the coming years. With comp rates up and a recruitment effort 6,900 joined the CAF ranks in 2025 but with 5,000 retiring the net gain was 1,900.

There is a great deal of overlap with Canadian aspirations in the high-tech and advanced manufacturing spheres. Staffing will be a persistent bottleneck and may likely lead to mandatory military service in Canada with co-op placements in the aforementioned areas (knowledge industries). Defense supply chain will be an area of heavy investment, especially in Arctic and Atlantic regions.

Canada currently spends 75 cents of each dollar spent on military procurement from the USA suppliers. This can not be flipped overnight, but that is the eventual intent (3/4 domestic).

CSF (Canada Strong Fund) role beyond pure funding:

The Canada Strong Fund must act as a risk mitigator and deal structurer, not just a funding pool. Hedging on ultra-long duration assets is particularly important for offshore investors, real-money, pension, family office and sister sovereign wealth funds (SWF).

Japan’s GPIF (Government Pension Investment Fund) is managing well over US$1.5 trillion in assets. They report quarterly but have a duration target of 99 years. Despite its enormous size, demographics do not favour “The Big Noodle” and without current workers paying into the fund, it would be “pockets inside out” inside of 6 year.

Australia’s Superannuation fund (aka “Super”) from a standing start in 1992 now boasts A$4.3 trillion in AUM, 150% of Australia’s GDP. 12% contribution rate (employer) does wonders! AUD/USD 1.38 vs CAD/USD 1.35 hence comparable from an fx cross perspective.

Indigenous Economic Reconciliation

Land Acknowledgement (Nova Scotia);

“We respectfully acknowledge that we operate on the traditional and ancestral territories of the Mi’kmaq and Wolastoqiyik People, who have lived in and care for these lands for thousands of years.

We recognize the enduring presence and deep cultural heritage of Indigenous communities across Atlantic Canada, and we honour their contributions, past, present, and future.

We are committed to fostering respectful relationships with Indigenous Peoples and advancing reconciliation through learning, unlearning, collaboration, and meaningful action. We encourage reflection on the history of this land and our shared responsibility to support Indigenous voices and leadership.”

Indigenous voices are being heard, like never before in Canada’s history.

Note: The 9th annual #FNMPC26 First Nations Major Projects Coalition conference was just held in Toronto, Ontario, Canada Apr 29 - May 1, 2026. The theme for this year’s conference was “The Next Seven Generations - Our Shared Future”. From the kernel of an ideal 9 year ago with 50 attendees in Timmons, BC to 2,000+ attendees (500 indigenous from across the country) in 2026 it was a truly spectacular event.

On April 27, 2025, Air Canada operated a historic all-Indigenous crew flight (AC34) from Vancouver (YVR) to Toronto (YYZ) to celebrate Indigenous excellence in aviation. The flight featured 9 Indigenous flight attendants and pilots, along with a traditional cedar brushing and Musqueam Paddle Song ceremony to honor local Indigenous culture.

I was honoured to attend this year’s event on behalf of Sydney Credit Union, Cape Breton, Nova Scotia, Canada. Note: Pre-loyalist family history; England, Virginia, Nova Scotia.

Note: Mark Podlasly, CEO First Nations Major Projects Coalition and John McKenzie, CEO TMX Group ring the opening bell of the TSX on May 1, 2026 at #FNMPC26. #IndigenousEconomicReconciliation. Author next to 5 gallon hat gentleman!

Mark Podlasly is the CEO First Nations Major Projects Coalition, a national 190+ member First Nations organization dedicated to ensuring Indigenous environmental and economic values are incorporated into major projects in traditional territories. Mark Podlasly, a member of the Nlaka'pamux Nation in British Columbia. He hold a Masters of Public Administration from Harvard University, holds the ICD.D designation and currently sits on the board of both CIBC and Ontario’s Hydro One.

Canadian Indigenous equity participation is becoming a default condition of project legitimacy in Canada, including for the recently formed Major Projects Office (MPO) which already has 17 projects with a budget of $126 billion slated for this vast nation. 70% of these project are on or adjacent to indigenous lands. This is a watershed change from prior mis-steps where indigenous involvement was seen as an afterthought, a hindrance, even a “risk factor”. Present day, indigenous involvement is seen as an enabler. Swift and thoughtful environmental approvals. Equity ownership options. World leading project time lines on LNG terminals, port development, grid modernization, and mining, to name a few.

MPO, Indigenous Advisory Council; The 11-member council brings together diverse expertise from across Canada, featuring prominent leaders and representatives from First Nations, Métis, and Inuit communities across Canada. Key members include Chief Terry Paul (Unama’ki, Cape Breton, Nova Scotia) of Membertou First Nation.

The capital recession in Canada indeed appears to be over. 2025 saw C$100bln in foreign direct investment (FDI). Each year, going forward, should eclipse this sum.

In recent times, the US equity market has garnered the majority of global capital flows vs the USA global GDP weighting of 26%. The MSCI World index has a USA weighting of 70-72%, the highest ever USA concentration level (note this is a developed markets (23) index). The MSCI ACWI (which includes emerging markets) has a USA weighting of 60-65%!

Turtle island does not have a black line on its’ back “approximating” the Canada/USA border. Canada’s investment opportunities are superior, on the face of it, hence we should make all efforts to mosquito the United States of America’s vast pool of investment capital, a full 20X Canada’s scale (US$3tln vs $60tln in “market cap”) to drive an outsized pace of investment in Canada, from coast to coast to coast (East, Arctic, West). A USA and/or dual listings requires the listing entity’s financials be prepared under US GAAP (as well as IFRS which is the accounting standard for 140+ countries globally). Perhaps a small price to pay for a potential firehose of U.S. dollar liquidity on a go forward basis.

Beyond the potential + force a Canadian SWF could have, convincing the $60 trillion + of global institutional money manager universe (top 10 only) and the $11 trillion SWF universe (top 100 over $17tln) to allocate more $$ to Canada should be job #1.

Emerging markets returns, without the emerging market risks. Canada is rated AAA/Aaa (S&P and Moody’s rating respectively). The First Nations Finance Authority (FNFA) is rated AA-/Aa3. The United States is rated AA+/Aaa, (for reference).

Prime Minister Carney has a Sept 2026 Toronto domiciled Investment Summit planned to entice global investment flow to Canada. The top 100 money managers have a “golden ticket” invite. Few will likely decline, given the immense potential opportunity cost.

JCG

Note: Picture from the interweb, coffee pot, not teapot but the wave, “The Great Wave off Kanagawa” by Katsushika Hokusai (1831) was a great visual tempest for this post

AI Governance and Model Risk in Nova Scotia

No Nova Scotia statute or regulator (CUDIC, utility board, securities commission, insurance council) has issued AI/model risk guidelines analogous to OSFI’s E‑23. The province’s only related policy is its Digital Code of Practice (internal government policy) covering responsible use of AI in public services. Privacy protections in Nova Scotia (FOIPOP and PIIDPA) apply only to government-held data; provincially regulated financial firms must follow federal privacy law (PIPEDA/CPPA). Without a provincial AI framework, Nova Scotia institutions should voluntarily align with OSFI’s E‑23 principles.

Next Steps: Provincially regulated FIs in Nova Scotia should proactively adopt E‑23-style model risk governance. This includes creating a model inventory, defining risk categories, implementing lifecycle controls (design, validation, monitoring), and assigning clear board/senior management accountability, even absent a legal mandate. They should also follow federal privacy rules (CPPA/PIPEDA) for data used in AI. Engaging with industry groups and regulators to develop sectoral guidance is advisable. Until Nova Scotia or federal legislation specifically addresses AI risk (CPPA’s algorithmic fairness rules are forthcoming), the prudent approach is to treat OSFI E‑23 as best practice for model governance.

There are a few federally regulated (OSFI) credit unions in Canada, Coast Capital the largest with almost C$40bln in assets, but as a percentage <7% of Canada’s credit unions operate under a federal charter (50 of 750 million by assets). Provincially regulated credit unions in Nova Scotia offer deposit protection of $250,000 versus the $100,000 offered to OSFI regulated financial institutions covered under the Canadian Deposit Insurance Corporation (CDIC). Especially in Atlantic, the federal (OSFI) route (converting from provincial to federal regulation) has been deemed to be of limited strategic benefit versus the cost ($/years) and complexity. UNI Financial Cooperation is the largest and only federally regulated credit union in Atlantic Canada, based in New Brunswick. With $5.3bln in assets UNI is the largest Acadian francophone financial institution in Canada.

Why this matters. Tempest in a teapot is an idiom that describes a small issue being blown out of proportion and made to seem more significant than it is.

OSFI Guideline E‑23 (effective May 1, 2027) sets a principles-based, risk‑focused framework for all federally regulated financial institutions (FRFIs) to manage all models, including traditional actuarial models and AI/ML systems. It requires boards and senior management to oversee model risk, maintain a centralized inventory with risk ratings, and enforce robust lifecycle controls from design through decommissioning. Key requirements include formal governance and accountability (with clear roles and board reporting), rigorous data governance and lineage documentation, measures for explainability and bias/fairness in AI models, and ongoing monitoring for model drift and retraining needs. Third‑party (vendor) models must be validated and monitored to the same standard. Institutions must document every model and have escalation procedures for incidents and failures. An 18‑month transition period ends May 2027.

Compliance will require many FRFIs to upgrade resources and tools: for example, investing in model inventory platforms and hiring or outsourcing dedicated validation teams. Smaller institutions will need to scale their practices and may adopt technology solutions or third‑party validators for complex AI models. Internationally, E‑23’s principles echo global standards (e.g. U.S. Fed/OCC model‑risk guidance, UK AI‑governance consultations, and the EU AI Act’s high‑risk AI controls), but OSFI’s guideline explicitly names AI/ML and ties model risk to board responsibility.

Officer’s and Director’s insurance rates are not likely going down soon.

Scope and Definitions

• Applies to all FRFIs: Banks, insurers, trust companies, foreign branches, etc. (pension plans are excluded). All models – defined as any tool applying quantitative or AI/ML methods to process input data into outputs – fall in scope.

• AI/ML included: “Emerging technologies such as AI and machine learning” are explicitly covered. Even simple AI applications (e.g. generative AI) must be assessed for model risk in context.

• Risk‑based, principles approach: The guideline is not prescriptive. It encourages innovation but requires that higher‑risk models get stricter governance. Institutions determine model risk ratings based on complexity, materiality, autonomy, and data quality.

Governance and Accountability

• Board & Senior Management: Overall accountability stays with the institution. Senior management must establish policies, assign roles (owner, developer, reviewer, approver), and allocate skilled personnel, especially for novel AI techniques. Model risk (including from AI) must be reported clearly to the board. The board oversees model risk within the institution’s risk appetite.

• MRM Framework: Institutions must build a formal Model Risk Management (MRM) framework aligned with enterprise risk policies. This includes: a model inventory, risk-rating methodology, lifecycle processes (development, validation, deployment, monitoring, decommissioning), reporting channels, and periodic reviews. The framework must be periodically reviewed and updated (e.g. as new AI tech emerges).

• Resources & Team: MRM needs a multidisciplinary team (data scientists, risk experts, legal/ethics, etc.). Resources must be “commensurate with risks” – for example, firms using many advanced AI models need more sophisticated controls (OSFI notes “extensive use of advanced AI/ML techniques should have correspondingly mature governance”).

• Accountability Clauses: Institutions cannot outsource responsibility. Even if models or components come from vendors, the institution is fully accountable for outcomes. (OSFI Guideline B‑10 on third‑party risk also applies.)

Model Inventory and Risk Classification

• Comprehensive inventory: All models with non-negligible inherent risk must be logged in a central inventory. (Trivially low-risk tools need not be managed under MRM.) The inventory is an enterprise-level record.

• Inventory content: At minimum, record each model’s ID, name, description/use case, owner/developer, origin (in-house or vendor), risk rating, and key dates (deployment, last review). For high‑risk models, also track version, dependencies, data sources, approved uses, limitations, monitoring status, and next review date. The inventory must be accurate, up-to-date, and controlled.

• Risk Rating Methodology: Institutions must define a model risk-rating scheme. Ratings consider quantitative factors (e.g. portfolio size, potential financial impact) and qualitative factors (e.g. complexity, autonomy, customer or regulatory impact). Models are tiered (e.g. high/medium/low risk) so that the most critical or complex models get enhanced scrutiny. Ratings are reviewed regularly and updated after significant changes or performance issues. Firms may carve out a “negligible risk” category for trivial models, but this exemption must be carefully controlled and approved.

Model Lifecycle Controls

OSFI requires governance throughout the model lifecycle. Key lifecycle stages and controls include:

• Model Design & Development: Models (including AI/ML) must have a clear business purpose and justification. Development standards include: comprehensive documentation (model logic, assumptions, limitations); defined performance criteria; traceable data sourcing; and version control. For AI models especially, data must be representative and pre-processed carefully to avoid embedding bias. Explainability requirements (e.g. transparency of inputs-output mapping) should be set based on the model’s use and impact. Any use of expert judgment must be documented. (Guideline encourages “expert judgment” checks during development.)

• Independent Validation/Review: All higher-risk models require independent validation by parties separate from the developers. Validators assess conceptual soundness, data quality, methodology, and performance. The scope and frequency of validation are driven by risk rating. Events triggering a new review include: initial model build, major modifications (including self-learning changes), material performance deterioration, or new data sources. The validation must explicitly check explainability and fairness (e.g. “review novel algorithms for AI/ML” and confirm outputs are explainable). Findings are documented, and any weaknesses require remedial action or additional controls.

• Model Approval: Before use, each model (and significant change) must be formally approved by a governance committee or senior function. Approval confirms the model is fit for purpose and that risks are acceptable or mitigated. A model can be approved even with known limitations, provided compensating controls are in place. OSFI expects approvals at key stages, e.g. post-validation and pre-deployment, and after periodic reviews.

• Deployment and Change Control: Deploy models in a controlled environment. This includes thorough testing in a production-like setting, ensuring consistency between development and production data. Formal change-control procedures must be in place: clear roles, change-approval paths, and rollback plans. Related risks (cyber, tech infra) must be assessed before launch. For AI models, particular care is needed if models have many dependencies or use third-party components. Deployment plans should include communicating model outputs to stakeholders and updating documentation.

• Ongoing Monitoring: Defined monitoring standards (frequency, metrics, thresholds) are required for all models. Monitoring checks both performance metrics (accuracy, etc.) and qualitative factors (ensuring the model remains used as intended). AI models need additional drift detection – tracking changes in input data or environment that degrade model accuracy. Institutions must set thresholds for revalidation or retirement and have contingency plans if a model fails (e.g. fallback models, ceasing use). Any significant issues (breaches, drift, unavailability) must trigger prompt escalation via pre-defined procedures.

• Model Decommissioning: When a model is retired, a formal decommission plan is required. Stakeholders are notified, and the model (with documentation) is archived for a defined period as a fallback. Downstream impacts must be checked to prevent residual risks. If decommissioning a third-party model, review any additional contractual or technical steps needed.

Independent Validation Requirements

• Validation by Risk Tier: Models rated as higher risk demand more intensive, independent validation. Validators must be separate from developers; they can be internal specialists or external experts. The validation scope should test model logic, data, code and outcomes. E‑23 stresses “effective challenge”: reviews should uncover hidden flaws and ensure models meet objectives.

• AI/ML Considerations: For “self‑learning” or continuously retrained models, OSFI requires criteria to determine when changes are material enough to trigger revalidation. Incremental updates may require periodic evaluation of performance drift and fairness. Institutions should predefine what constitutes a significant model change (e.g. architecture updates, new training data batches) to avoid unmonitored evolution.

• Regulatory Alignment: OSFI’s use of “validation” is interchangeable with “review” in the guideline. The frequency of validation is risk-based (OSFI explicitly disavows mandatory annual validations). In fact, US regulators (OCC/Fed) similarly emphasize tailoring validation frequency to complexity and risk.

Data Governance and Lineage

• Data Quality Standards: OSFI mandates robust data governance for model inputs. Data must be accurate (free of material errors or biases) and representative of the model’s target population. Source data must comply with all legal/regulatory privacy and ethics rules. Data used for model training/validation should be traceable (lineage documented) so that transformations and sources are auditable.

• Bias and Fairness: Institutions must explicitly consider and mitigate data bias. E‑23 highlights that biased training data can lead to “unfair model outputs” and reputational damage. Controls should include regular quality checks (outliers, missing values) and documented data cleaning procedures. The impact of synthetic or proxy data should be documented and monitored.

• Explainability Support: Well-governed data also aids explainability. E‑23 notes that clear data lineage and documentation help end-users understand model outputs. Institutions should integrate model data governance with the enterprise’s broader data strategy (e.g. data dictionaries, master data management).

Explainability and Bias/Fairness Controls

• Proportional Explainability: E‑23 requires that each model’s level of explainability be assessed based on its use, autonomy, and impact. Models used in customer-facing or high-impact contexts need higher transparency (e.g. clear rationales for outputs). Firms must define what “explainable” means for each model and verify it during validation. During independent review, validators must check that outputs are sufficiently understandable to stakeholders.

• Bias Testing: Beyond data bias controls (above), institutions should test models for biased or unfair outcomes. This might include checking that protected groups are not adversely affected by predictive models. Any bias concerns must be addressed by adjusting data, algorithms, or adding safeguards. OSFI’s guideline urges firms to “give consideration to the potential for unwanted bias” translating into unfair outputs.

• Documentation: All explainability and bias analyses should be documented. If an AI model is essentially a “black box,” firms may need alternative controls (e.g. human overrides, limited scope) and must justify their adequacy. Notably, Basel (BCBS) has long warned that black-box models reduce confidence in results. OSFI’s text aligns with this view.

Model Drift and Retraining Controls

• Drift Monitoring: For models that learn over time, banks must actively monitor for “model drift” (performance degradation due to changing data distributions). Monitoring should include statistical tests and triggers for retraining or validation whenever inputs or performance metrics change significantly.

• Autonomous Changes: Self-learning AI models (e.g. with online learning) need guardrails. OSFI expects institutions to set internal thresholds indicating when model evolution constitutes a “material change” requiring re-approval. Real-time or frequent retraining frameworks should include audit trails and canary testing before full deployment.

• Contingency Planning: Institutions must prepare for the possibility of rapid drift. The guideline explicitly requires contingency plans for a model’s unavailability or deterioration. This could mean parallel run strategies, fall-back models, or halting usage until a new model is validated. Documentation of drift events and responses (including revalidation results) is essential for auditability.

Vendor and Third‑Party Model Oversight

• Third‑Party Risk (Guideline B-10): E‑23 mandates compliance with OSFI’s B‑10 guideline for all outsourced models. Vendor‑supplied models, even neutral network enabled Generative AI, must be subject to full model-risk management.

• Due Diligence: Institutions should assess vendor models’ risks before use, including technology, data privacy, and concentration risk. Contracts should ensure access to model details (algorithms, training data) so the institution can validate and control them. OSFI emphasizes that banks are responsible for ensuring third‑party model use stays within risk appetite.

• Validation & Monitoring: Third-party models must be validated and monitored just like in-house ones. OSFI specifically added that third-party models should receive validation and monitoring commensurate to their risk. For complex vendor models with proprietary tech, institutions need alternative controls (e.g. thorough end-to-end testing, output sensitivity analysis) since internal access to the model may be limited.

• No “Grace Period”: There is no OSFI‑granted grace period for validating updates to vendor models after deployment. Firms may create limited-use exceptions but should aim to complete independent validation promptly.

• Governance Structure: A governance framework must cover all third-party AI usage. OSFI expects each institution to decide how to govern its “black box” vendor models in line with its risk appetite. For layered cases (vendor uses another AI model), institutions should include feeder models in their review scope.

Reporting, Escalation and Incident Management

• Risk Reporting: Regular reporting of model risk is required at all levels (team, management, board). This includes reports on inventory status, high-risk models, validation results, and monitoring outcomes. Board reporting must cover the organization’s overall model risk profile.

• Escalation Protocols: OSFI requires clear escalation procedures for model issues. Any breach of performance thresholds or validation failures should be promptly escalated to appropriate management (and ultimately the board if systemic). Incident management should track issues, corrective actions, and communicate lessons learned.

• Audit and Supervisory Oversight: Institutions should treat model governance audits like any risk audit. OSFI (and supervisors) will expect evidence of compliance: e.g., documentation of reviews, approvals, testing logs, incident logs. Firms should prepare to demonstrate their model governance processes during examinations.

Documentation and Auditability

• Comprehensive Record keeping: Institutions must document every aspect of each model. Beyond the inventory, firms should retain: model development documentation, validation reports, code repositories, change logs, and user manuals.

• Audit Trail: All model-related decisions (design choices, parameter settings, approval decisions) must be traceable. The guideline implies that model risk management activities, from development to retirement, should be audit-ready. For example, maintaining historical versions of models and data ensures reproducibility of past results.

• Regulatory Audit: OSFI may conduct reviews of model governance during examinations. Having organized and accessible documentation will be critical to pass audits. E‑23 expects institutions to “provide evidence” of compliance, so clear records of policies, committees, and validation work are essential.

Timeline and Implementation Schedule

• Publication and Effective Dates: OSFI published the final E-23 guideline on September 11, 2025. It takes effect on May 1, 2027, giving an 18‑month transition.

• OSFI Guideline B-10 is currently in force and deals with risk from 3rd party technology providers (e.g. Microsoft 365) and AI model providers (Co-Pilot in the case of MSFT). OSFI clearly saw the import of AI specific guidance as we collectively increase our reliance on digital platforms and advanced analytics.

International Comparisons

• Basel Committee (BCBS): Basel’s model standards have long emphasized understanding and validating models. Notably, BCBS warned that a model “black box that is not well understood by bank personnel does not provide confidence”. OSFI’s focus on explainability and “effective challenge” aligns with this.

  Models should be “As simple as possible, but no more so.” Responsible AI must focus on the concepts of explainability and interpretability.

• US Regulators (OCC/FRB): The US Fed/OCC guidance (SR 11-7) similarly defines models broadly and requires governance, validation, and risk-based policies. The recent OCC bulletin (2025) underlines that model-risk practices (including frequency of validation) should be scaled to the institution’s size, complexity and risk exposure, echoing E‑23’s proportionality principle.

• UK (PRA/FCA): UK regulators advocate a technology-neutral, outcomes-based approach. Recent Bank of England/PRA discussion papers stress that oversight should focus on actual consumer/outcome risks (not on AI label) and be proportionate to each AI application’s impact. This resonates with E‑23’s risk-based, principle-driven stance, though OSFI sets specific lifecycle milestones.

• EU AI Act: The upcoming EU AI Act classifies many financial AI systems as “high-risk,” imposing strict obligations (risk management, documentation, data governance, human oversight, etc.) on providers. E‑23’s requirements on documentation, bias mitigation, and oversight are broadly consistent with such high-risk controls. (Unlike the AI Act, OSFI applies to all models but implies higher scrutiny for critical ones.)

  The AI Act is a proposed European law on artificial intelligence (AI), the first law on AI by a major regulator anywhere. The law assigns applications of AI to three risk categories. First, applications and systems that create an unacceptable risk, such as government-run social scoring of the type used in China, are banned. Second, high-risk applications, such as a CV-scanning tool that ranks job applicants, are subject to specific legal requirements. Lastly, applications not explicitly banned or listed as high-risk are largely left unregulated.

• Others (IAIS, BCBS 239): International bodies (IAIS, Basel Committee on data aggregation) similarly emphasize model/data integrity. For example, BCBS 239 on risk data calls for reliable model outputs, complementing E‑23’s data and explainability rules. The common theme worldwide is clear: institutions must treat AI models as key risk drivers and govern them rigorously.

• China has been rapidly developing and implementing regulations related to AI, covering technology, cybersecurity, privacy, and intellectual property. One significant regulation is the Provisional Administrative Measures of Generative Artificial Intelligence Services (Generative AI Measures), which were published by the Cyberspace Administration of China (CAC) and took effect Aug. 15, 2023. These measures apply to the use of generative AI technology to provide services for generating text, pictures, sounds, videos, and other content within the territory of China. They impose various obligations on generative AI service providers, including the prohibition of generating illegal content, taking measures to prevent the generation of discriminatory content, and not infringing on others’ rights, including privacy rights and personal information rights.

  China has enacted several comprehensive laws aimed at protecting personal information, like the Personal Information Protection Law (PIPL) and the Internet Information Service Algorithmic Recommendation Management Provisions. These regulations mandate data minimization, user consent, and transparency in algorithm decision-making.

  Practical Implementation Considerations

• Resourcing: Achieving E‑23 compliance will likely require hiring or training model-risk staff (quantitative validators, data scientists, AI ethics experts). Many firms are already augmenting teams for new analytics. Smaller institutions may need to outsource certain functions (e.g. complex model validation) to keep up.

• Tooling: Maintaining an up-to-date model inventory at scale will require tools (e.g. MRM software). Some firms are implementing workflow and inventory platforms to track models across lines of business. Automated monitoring dashboards and data lineage tools can ease ongoing governance.

• Policies and Governance: Firms must update MRM policies to map roles explicitly to E‑23 roles (owner/reviewer/approver) and ensure independence where needed. Separate committees may be needed for high‑risk AI models. Policies should codify what constitutes a model change and how to document it, per E‑23.

• Validation Teams: Given the volume of models (including spreadsheets and apps that now count as models), dedicated validation resources will be strained. Institutions should prioritize the highest‑risk models and consider sampling or statistical validation methods for lower‑risk ones. Scenario analysis and stress testing (like those under Basel) may complement validation for certain model classes.

• Training: Business users and IT staff must be trained on new model governance processes. Model developers should document everything clearly. Executives and board members may need briefing on AI/model risk so they can oversee reporting.

Requirements vs. Action Checklist

Requirement (OSFI E-23)

Recommended Institutional Actions Governance & Accountability: Board oversight; clear roles; risk-aligned policies. Establish a Model Risk Committee or integrate into existing risk committees; define owner/reviewer roles; update governance charter; schedule regular reports to senior management/board.

Model Inventory: Enterprise inventory of all non-negligible models. Create or enhance a centralized inventory system; catalog every model (ID, use, owner, risk rating); update inventory processes (use automated discovery tools if needed).

Risk Classification: Risk-rating framework (quantitative & qualitative). Develop and document risk-rating criteria (e.g. impact, complexity, data issues); apply ratings to all models; review ratings periodically and on model changes.

Documentation: Full documentation for model design, data, assumptions. Standardize development documentation templates; include model purpose, logic, data sources, assumptions, limitations; ensure documentation is stored securely and linked in inventory.

Independent Validation: Risk-based validation of models. Build or strengthen a validation unit independent from development; schedule validations based on model risk (e.g. quarterly for high-risk models); maintain review checklists.

Model Deployment: Change control and pre-launch testing. Define deployment procedures (test plans, sign-off); implement IT change-control and versioning; require deployment approvals; test models end-to-end in production environment.

Monitoring (Drift): Ongoing performance checks & drift thresholds. Set up automated monitoring (performance metrics vs. benchmarks); define alert thresholds; create workflow to investigate anomalies; plan triggers for retraining or remediation.

Data Governance: Fit-for-purpose data, lineage, quality checks. Enforce data quality controls (profiling, cleansing); map data lineage for key models; integrate model data governance with enterprise data strategy; document synthetic data use.

Explainability & Fairness: Ensure outputs are understandable; test for bias. For each model, define required transparency (e.g. feature importance output, decision rules); perform bias/fairness testing (e.g. subgroup analysis); document rationale of outputs.

Third-Party Models: Due diligence and oversight per B-10. Vendor contracts: require model info access; include audit/validation clauses; apply model review even if vendor-supplied; track third-party models in inventory; align with B-10 processes.

Reporting & Escalation: Incident logs; board reporting. Establish incident management for model failures; ensure risk reports on models to risk committees; maintain audit logs of all governance actions; escalate major events to executives.

Retention & Auditability: Archival of models/docs; audit trails. Retain historical model versions, data snapshots, documentation per records policy; perform periodic audits of the MRM process; prepare for regulator reviews.

Each action item should be incorporated into the institution’s model risk policies and procedures in advance of May 2027. OSFI expects clear evidence (e.g. right down to meeting minutes, reports) that these practices are in place.

ISO/IEC 42001 is the first international standard specifically for managing artificial intelligence systems.

It was published in December 2023 by International Organization for Standardization.

What is ISO 42001 ?

ISO 42001 establishes a management system for Artificial Intelligence (AI) similar to how:

• ISO 27001 governs information security

• ISO 9001 governs quality management

The official name:

ISO 42001: Artificial Intelligence Management System (AIMS)

Purpose

The standard helps organizations:

• govern AI responsibly

• manage risks from AI systems

• ensure transparency and accountability

• implement ethical AI practices

It applies to organizations that:

• develop AI

• deploy AI

• use AI in operations

Areas Covered by ISO standard 42001:

AI Governance

Organizations must create:

• AI oversight policies

• accountability structures

• internal controls

Risk Management

Requires identifying risks such as:

• algorithmic bias

• data privacy violations

• unsafe automation

• unintended outcomes

Transparency

Organizations must document:

• how AI systems work

• data sources

• decision logic

• limitations

Human Oversight

AI systems must allow:

• human review

• intervention

• auditability

Closing comments;

AI is an international technology, from its sources of data and talent to its implementation and use. It is therefore not unreasonable to expect some movement toward international regulation or at least agreed best practices. Organizations that adopt ISO 42001 demonstrate responsible AI Governance.

This topic can seem overwhelming for certain, but it is important we “get it right”. A key guardrail for the entire exercise is “humans in the loop”. The current state of play is fraught with risk. Generative AI (GAI) LLMs (large language models) currently often present erroneous or false context in response to prompts.

“Confabulation” refers to a phenomenon in which GAI systems generate and confidently present erroneous or false content in response to prompts. These phenomena are colloquially also referred to as “hallucinations” or “fabrications.” MIT researchers have mathematically proven that ChatGPT’s built-in sycophancy creates a phenomenon called “delusional spiraling” (you ask it something it agrees. You ask again and it more vehemently agrees until one believes things that are false).

Note. This is study preparation for my April 2026 examination for the Risk and AI (RAI) certification. Wish me luck! GARP's RAI cert

This AI craze has certainly made it interesting to choose a career path for younger generations! It would appear that “number” people are on the front line, right behind software engineers that now spend their time scrubbing data and prompting chatbots to ring further efficiency (model training), to the point where adding more data provides a less optimal result (over-fitting). The “word” people seem safe for a bit, given the slop many models currently produce.

JCG

There is so much codswallop (Oxford dictionary = nonsense) on X these days that one is tempted to open a Truth Social account, or perhaps watch the Melania “documentary/horror” flick. It is rare to see a single digit rotten tomatoes score (6 in this case). Hopefully its production was funded in Melania Meme Coins (all time high $18.86, currently $0.17). Actual funding Mr. Bezos, concurrent with cutting Washington Post staff by 1/3!

Back to silver!

The total return graph below shows that $SLV, the largest silver ETF on the planet, run by the venerable Blackrock (US$14tln in total AUM), has been the place to be when it comes to speculation. Panic seeks liquidity, as I will explain in this post.

X bots have been ranting about the basis (premium in this case) between where silver has been trading in China vis-a-vis world markets (USA serving as the proxy for same).

UBS sponsored SDIC Silver Futures Fund is listed on the Shenzhen Stock Exchange (SZSE) under the ticker 161226 (A shares). Premiums for silver traded via this instrument hit up to 60% ($160 for $100/oz silver!) before the exchange took action. The fund stopped accepting new subscriptions from Jan 28, 2026 “to protect existing investors and avoid unsustainable leverage”. Trading halts for short time periods (1 hour) before full-day trading halts were announced. With little visibility provided as to when “normal” trading would resume, traders were left with little choice but to effect a “dirty hedge” stuck long SDIC (161226) with no foreseeable window to sell, some instead sold the most liquid silver ETF, SLV in USD to delta hedge their silver exposure. Cross market risk, yes. Foreign exchange risk, ditto. Time zone exposure, you bet. Still better than a naked long when the sky is falling and the forecast is “cloudy with a chance of meatballs”. SLV, the gorilla silver ETF with $30bln + in AUM closed the day mullered (Oxford dictionary = wrecked or destroyed), not just down lock-step with silver but -19% to the funds NAV (net asset value). Let that sink in, SLV closed Friday at almost a 20% discount to the silver they own! ETF’s, especially large ETF’s rarely deviate by more than 1% from their NAV. In the peak funk of C-19 EFT discounts got to -4% before rebounding at pace on trillions in government support programs (just under 20% of GDP in the case of Canada, never fully utilized, but “on offer” nonetheless).

The near 30% one-day correction in silver is epic in terms of scale. In Jan 1980 a similar instance was observed/endured when the levers and pulleys at the markets avail thwarted the attempt of the Hunt brothers to “corner” the silver market. Rare indeed, 46 years ago! Their substantive “thumb” on the scale of the silver market took the price from $6/oz in 1979 to almost $50/oz when the rug was pulled.

The CME Group’s COMEX metal exchange is the dominant futures exchange now, with open interest, at time of print, of 156,637 contracts. Each contract is for 5,000 troy ounces of silver. This translates to 783 million troy ounces of silver which is 24.35 metric tonnes (30% of annual world silver production). Notably, this is several times the listed inventory of silver in the vaults at COMEX. This is why open interest is watched closely!

Shanghai Futures Exchange (SHFE) has a silver futures contract, denominated in RMB (Chinese Yuan) with a contract size of 15kg (482.26 troy ounces) of silver. Open interest for the front contract 02/2026 is 98,515 contracts. Local demand, VAT and delivery dynamics cause the SHFE silver to trade at an exaggerated premium to COMEX.

LBMA (London Bullion Market Association), created in 1997, is an international trade association representing the global market for gold and silver bullion. LBMA’s client base is extensive; ETF-backed stocks like $SLV, central banks, institutional holder and other custodial accounts. The silver in the LBMA vaults underpin the global OTC (over-the -counter) bullion market. In most instances the OTC market dwarfs the futures market. LBMA’s silver inventories were last reported at 27.2 metric tonnes.

Risk is “controlled” in the futures market via margining (e.g. requiring all customers, regardless of credit standing, to post margin).

CME (COMEX) margin requirements for silver:

January 13, 2026: CME Group shifted from fixed dollar compensation margins to a percentage‑of‑contract‑value system for precious metals, including silver.
Under the new method, margins automatically scale with price levels, helping ensure appropriate collateral as volatility rises, rather than lagging behind when prices jump sharply.

E.G. Instead of a fixed $20–$22 k per SI contract, margin is now a percentage of the notional value (~9–11%). This change means that margin requirements grow as silver prices rise.

Late January 2026: Following a significant rally in silver prices to near record highs:

• Standard margin for COMEX silver futures was increased to around 11% of notional value (up from ~9%).

• Heightened‑risk profiles (for speculative/retail accounts) saw margins rise to about 12.1% (up from ~9.9%).
  These hikes were implemented after the close of trading, reflecting heightened risk from extreme price moves and volatility.

The “standard” silver futures contract is for 5,000 ounces of silver. Even after a “dead cat bounce” off Friday’s lows, silver sits at US$85.15, making 1 standard futures contract worth US$425,750 in “notional” terms. Settlement is physical (silver), but in practice most contracts are settled well ahead of contract expiry (settled for fiat US dollars) or rolled into the next contract.

As is common with other futures contracts there is a “mini” silver futures contract worth 1/5th of SI or 1,000 ounces. There is a “micro” contract for 100 ounces soon to be listed as well shortly.

Fund Size approx. (USD)

United States

SLV (iShares Silver Trust)~$33 billionLargest physically backed silver ETF globally

SIVR (Aberdeen Physical Silver Shares ETF)~$3 billion Mid-size physically backed silver ETF

China

UBS SDIC Silver Futures Fund (LOF)~$0.8–1.0 billionChinese silver futures-linked fund.

SLV silver ETF, total return Jan 2024 - Jan 2026

Stay safe out there! Cross asset vol is spiking! SLV vol (annualized) is 32.4% which implies an expected daily price swing of 2.05% (32.4/sq rt 250). For SPY in comp vol is 19.5% (@), implying a 1.23% daily range.

Bitcoin, a proxy for rabid (Oxford dictionary = extreme or fanatical support or belief in something) risk appetite, is also getting poleaxed (Oxford dictionary = hit, killed, or knocked down with or as if will a poleaxe). Perhaps some of the same market actors involved, selling what they can, not what they would like to sell? Spot US$76,711.35, very close to MicroStrategy’s break even purchase price.

May we live in interesting times …. indeed.

Cheers,

JCG

PS: Feb 2, 2026, the sell-off in precious metals continues unabated with double digit percentage losses for both gold and silver. Sometimes a bubble just needs to lose their marginal buyer to crest and head back to earth. Some point to Trump’s choice for Fed Governor, Mr. Claude Warsh. By reputation a monetary hawk (boosted US dollar on announcement as measured by the DXY, I would argue an eventual dove under Republican rule (or else). I suspect more a result of the unwind of crowded trades and leveraged derivatives than Fed Governor change! In term of the big bullion banks it was rumoured that JP Morgan recently (with the last 3-4 weeks) switched from a 250 million ounce short to a 750 million ounce long.

PSS: Feb 3, 2026 Macro strategist Cameron Cise of Bloomberg cites that in addition to nervous retail punters, another factor in last Friday’s silver price downdraft was a sizeable open interest in puts on silver with strikes to as low as $70/oz. Speculators short (naked) said puts saw their value go from cents to dollars, enough to see many a trader hand in their trade blotter and plod for the exits! A highly complex cast of players in silver, clearly.

“Retail was almost certainly culpable for a significant chunk of
the recent metals collapse during US trading hours, but you
don’t get that sort of price action without excessive negative
leverage. The easiest way to get that, of course, is to sell a
bunch of naked options. As of last Thursday’s close, there was
open interest of nearly 100k in Friday-expiry SLV options struck
from 70 to 81. It’s hard to know how many of these were naked
shorts, how many were customer longs, and how many were parts of
spreads.

* Still, all of them had settled at a penny or a little more on
Thursday, and the chart above shows a snapshot of where they
were valued at just after 4 pm on Friday. As you can see, many
of them went from a penny to several dollars, which would be a
disaster for anyone who had been running them as a naked short.
Needless to say, there were plenty of higher strikes that surged
in value from a few pennies to even more extreme values; that’s
the sort of thing that can get a professional a seat next to me
or blow up a retail trader like a Fourth of July firework.” - Cameron Cise

Addendum - Bullion Banks - who matters. A much smaller sub-set of banks than seen in the financial derivative markets, that is for certain!

The following banks are the core players in the silver markets (LBMA, COMEX, OTC forwards, ETFs):

JPMorgan Chase

Widely considered the most powerful bullion bank today

• Largest clearer of precious metals globally

• Major custodian for SLV and GLD

• Controls massive physical gold & silver inventories

• Dominant on COMEX delivery

• Key LBMA market maker

Too big to fail …. indeed. US$4tln + of the $23tln value of all US banks ($JPM 17%! 1 bank).

HSBC

• Primary LBMA clearer

• Major ETF custodian

• Large London vault footprint

• Deep involvement in OTC forwards and swaps

UBS

• Inherited Credit Suisse’s metals book

• Strong in OTC precious metals derivatives

• Active in China-linked metals flows. Sponsor of aforementioned UBS SDIC Silver Futures Fund, an LOF (Listed Open-ended Fund).

• LBMA market maker

UBS became more important after the Credit Suisse collapse and UBS “take-under”.

Goldman Sachs

• Major derivatives dealer (options, forwards, swaps)

• Less focused on vaulting, more on structuring & hedging

• Key player in institutional metals exposure

Goldman moves paper risk more than physical bars (E.G. Vampire Squid - Rolling Stone article re-read).

ICBC Standard Bank

The biggest Chinese-linked bullion bank

• London-based but Chinese-owned

• Large LBMA vault

• Major conduit between China and London

• Important in gold, growing in silver

ICBC is critical for understanding China–West metals flows.

Note: Actual Canadian WWI advertisement for “Victory Bonds”, the sale of which were used to finance budget deficits on the rare occasions that expenditures exceeded receipts (E.G. wartime). Thanks to all veterans globally. Canadians have made outsized contributions through the broad history of human conflict via armed warfare.

Pictured: L-R, top to bottom (sourced from Canadian Armed Forces X post of today);

Capt Nichola Kathleen Sarah Goddard
Cpl Joseph Dany Olivier Fortin
Pte Mark Anthony Graham
Company Sergeant-Major Frederick William Hall
Lt Robert Hampton Gray
Sgt Joseph Arthur Guy Desjardins

In Flanders Fields

By John McCrae

In Flanders fields the poppies blow

Between the crosses, row on row,

That mark our place; and in the sky

The larks, still bravely singing, fly

Scarce heard amid the guns below.

We are the Dead. Short days ago

We lived, felt dawn, saw sunset glow,

Loved and were loved, and now we lie,

In Flanders fields.

Take up our quarrel with the foe:

To you from failing hands we throw

The torch; be yours to hold it high.

If ye break faith with us who die

We shall not sleep, though poppies grow

In Flanders fields.

BUDGET:

Carney delivered the first budget of his brief term as Canada’s Prime Minister, having taken office on Mar 14, 2025 at the helm of a minority Liberal government. Mark Carney is the current and 24th Prime Minister is Canada. Aisle-crossers in the past week from the Conservative Party bring PM Carney ever closer to an elusive majority. The appetite for another election, at this critical juncture, is deemed to be low.

The budget was not an austerity budget. Public sector “right-sizing” -40k civil servant jobs by 2029/30 vs. the -70k “feared” (cheered by some seeking smaller government). Deficit for the coming year -C$78.3 bln, equivalent to -2.6% of GDP (C$3.07tln).

Numbers heavy post, but I am a finance guy with my flag planted in Nova Scotia so buckle up!

Deficits must be placed in context. In this regard, Canada might be thought of as the “cleanest dirty shirt”, if one were at the end of their laundry cycle. With federal debt at C$954bln (31% of GDP and C$22,270 per woman, man and child) fiscal capacity vs G10 peers appears strong. Canada remains a AAA/Aaa rated sovereign (highest rating on offer, shared only with Germany at this juncture).

The USA has a deficit of US$38.18tln, a whopping 125% of GDP. The debt ceiling related government shut-down appears be resolved, hence we will see a $40tln “print” by Q1 2026. Persistent annual deficits of 5.0-7.0% of GDP are now the “norm” in the USA. No budget has been balanced since the Year of our Lord 2000, under Republican nor Democrat. The last US budget to approach Canada “prudence” is 1993 which was -2.8% of GDP. Per capita in the USA the deficit is US$111k per citizen and a whopping US$328k per taxpayer. Little wonder “stablecoins” are all the rage.

Canada apparent federal restraint is in some ways masked by burgeoning provincial debt (healthcare a provincial responsibility). As one might expect, given the vast expanse and paltry (relative) population, in comparison to Ont. and Que., the provincial numbers look worst per capita in Atlantic Canada. Atlantic Canadian provincial debt totals C$55.49bln across a population of 2.6 million for a per capita Atlantic Canada provincial total of C$21,340. Combined with federal previously noted of C$22,270 that is C$43,610 per Canadian in accrued federal + provincial debt. Nova Scotia provincial debt stands at C$21.15bln hence with a population only recently cresting 1 million (1,060,000), per capita NS provincial debt is C$20,000 (rounded up from C$19,953).

Regardless of the optics or the practicality of the argument, Canada’s cleanest dirty shirt get cleaner and the USA’s more grimy with each passing budget cycle.

The dent in the goodwill of America is beyond measure and democratic humanity can only hope that a yet unseen saviour can replace tRump 2.0 as a force for good and recapture the excellence premium previously afforded the United States of America on the global stage.

TARIFFS:

Trump’s tariffs currently face a formidable legal challenge. The US Supreme Court is likely to uphold the decision of lower courts that the tariffs imposed are unconstitutional (reversed and returned via a complicated calculus). Delta 0.85. If tariffs = taxes, that is the purvey of Congress. tRump’s jazz hands seemingly know no limit, hence, in the midst of this legal donnybrook he has unilaterally offered an initial US$2,000 tariff dividend to the masses (American woman, man & child).

With CUSMA compliant goods exempt, Canada has done well to avoid the bulk of tRump’s “whack-a-mole” negotiation tactics. Carney’s decorum, intellect and steadfast repudiation of the “three ring circus” has served Canada well thus far. Ill timed recognition of Palestine as an independent state and Premier Ford’s teevee ads have proved to be sharpish speed bumps.

International diplomatic efforts have readied fields, but are yet to bear measurable fruit. China relations, in particular, appear to be in thaw mode with test messaging on the abolition of 100% China EV tariffs (instituted to match the USA’s 4-fold increase) getting a net + response. With Stellantis and others car companies turning tail for the USA as a pivot, Canada may well be best served by taking China EV tariffs to 0%, effectively rolling out the red carpet to China’s BYD (Build Your Dreams) to establish a manufacturing base in Canada to serve North America.

China would most likely lift their retaliatory tariffs on Canada (seafood, canola oil, etc.) as a quid pro quo measure. The mouse and the elephant can perhaps once again “play nice”? BYD recently surpassed Toyota as the largest global car manufacturer by # units and Canada was Toyota’s 1st overseas base of manufacturing outside of Nagoya, Japan. They say if you live long enough, you get to see everything twice.

DEFENCE:

After skipping along for decades with defence budgets well below the 2% of GDP NATO commitment level and hiding behind the apron/shield of the USA, adults have entered the room.

Carney’s aforementioned budget goes big on defence. C$62.7bln for the coming year, approx. 2% of GDP (up from 1.4% prior) ,with aspirations for 5% of GDP by 2035.

The Canadian Armed Forces (CAF) have been running well shy of their recruitment targets for many revolutions of the Sun. -60,000 recruits shy order of magnitude.

A volunteer supplementary reserve made up from a pool of 300k+ Canadian civil servants has been touted as a possible way to “bridge the gap”. Appetite to serve aside, the demand for remote drone pilots (aka “fight from home”) will likely be limited in the early innings of this program.

Borrowing some insightful comments from former consultancy mate with serious defence chops here! Richard Farrington CBE is a highly respected leader with a distinguished career in the United Kingdom’s Royal Navy:

-Defence spending is an insurance policy. We all pay our premiums, but we hope we never have to claim, not least because the “no claims bonus” goes up.

-Defence spending and foreign policy are closely linked.

-Governments in democracies do change and so do their priorities. If you want predictability in policy, seek a dictatorship.

The level of potential waste in defence procurement is jaw-dropping, given the bespoke nature of the kit required. A bidder may deliver something faster/cheaper, but it may prove not “fit for task”.

Much work lies ahead. Canada is up for the challenge. Chin up.

JCG

Trump’s 2nd POTUS term has officially been a dud thus far. As signaled by Moody’s recent USA ratings downgrade, finally joining S&P and Fitch in the “AA” category, enough is enough. This should serve as a stern warning about America’s fiscal health. With the US sovereign rating no longer AAA, a number of credits, including the large US banks were dealt a concurrent downgrade (too big to fail backstop less credible).

CDS (credit default swaps) on USA debt popped +14bp to 55 basis points from 41 prior to the downgrade. To put this is some context, if a counterparty wanted to insure against a default by the US Treasury they could buy CDS cover for 55bp. The yield on the 10 year UST is currently 4.43%. If credit protection was purchased for 0.55% (per annum) the “investors” effective yield drops to 3.88%. At AA1, the actual risk of a USA default is low, but the volume of CDS can spike as hedge funds and family offices play the arbitrage of buying off-the-run (secondary market) low coupon US treasuries (e.g. UST 1.375% 8/15/2050 for $47.00 price) pay 0.55% CDS premium on $100 million notional, on the small chance (e.g. technical default on debt ceiling impasse) that there is a default where they can deliver the $40 bond (acceptable under a Borrowed Money definition) and get paid $100 by their CDS counterparty (e.g. pay $47,550,000 for the cash UST and CDS premium to receive $100 million in the event of a default, delivering the UST to their counterparty for a par payout).

The best moniker for the Wall Street Monopoly game so far in 2025 is TACO “Trump Always Chickens Out”. Trump hates it, hence it will likely stick.

No administration, Democrat nor Republican has run a surplus since the “mini” surplus in 2000, 25 years ago! The US budget deficit over the last 5 years averaged 9% of GDP. Over the last 12 months it hit 7% of GDP. Q1 2025 has swung to -0.2 from +3%.

The Golden Age of Grift appears to be catching up to the current administration. The “One Big Beautiful Bill” scraped through the house with a yes this month, but will likely be rejected by the senate. Golden Visa’s for $5 million a piece. The Golden Dome protection racket (Canada) and of course the gold-adorned oval office. Matching TRUMP and MELANIA meme coins. Trump Media & Technology Group Corp. , ticker market cap $4.7bln (well off highs north of $10bln). Digital corruption in DC on a scale that would likely make prohibition rum-runners blush. The currently tabled “Genius Act” (Guiding and Establishing National Innovation in U.S. Stablecoins) appears to be counter genius if anything.

The market reaction to Trump’s BBB (not to be confused with their credit rating, Mexico is rated BBB), cutting taxes for the wealthy and cutting benefits (e.g. Medicaid work requirement), hence increasing income disparity further, was swift. $3.5tln cost over 10 year ($40tln here we come with +1tln per 100-day deficit pace). Some market pundits called it Trump’s Liz Truss moment. Then UK PM Truss announced the intent to cap utility bills for all Britons concurrent with a mini-budget cutting income taxes for even the wealthiest (e.g. 45%) on September 22, 2022. The UK bond market was battered for days, long dated gilts +50bp per day (higher yields) had the UK pension industry on death watch as the LDI (liability driven investment) mantra sold to them had them gagging on the heavy allocation in the long end of the gilt curve inflicted immense paper losses (British Telecom’s pension fund alone > GBP12bln). Truss reversed course, cancelled the tax cuts and ramped a quantitative easing program of $1tln buying long end gilts exclusively. It worked, yields fell in the path of the QE steamroller. Politically Liz was no more and the lettuce did in fact outlast here tenure as PM (49 days at 10 Downing Street).

Bond vigilantes are not required to upset such a loaded apple cart. The indirect bid, from foreign buyers at set treasury auctions, can dictate the success of an auction. They do not need to sell any of their existing UST holdings to cause a spike in bond yield, they just need to buy less of an increasing supply. The global bond market dictates all, at almost 3x the size of the global equity markets, $300tln bond market vs. $110tln equity market.

Note: In the inflationary early 1980s, economist Ed Yardeni coined the term “bond vigilantes.” He described investors who sold bonds to protest against irresponsible fiscal and monetary policy, putting pressure on governments to act.

USA, UK, & Japan bonds market have been mullered. Real yields (nominal yields less inflation) are spiking while global growth expectations are tanking. This is not a healthy. The bond market is known as the adult in the room vs the frenzied equity market. Bonds are typically rational and price in the cocktail of inflation expectations, fiscal policy, geopolitics and global growth expectations.

USA

The spike in bond yields in the USA has banks facing almost $500bln in unrealized losses, up by 33% from the prior quarter. We all know the Silicon Valley Bank story, held to maturity (banking book) can not act as a shield in all circumstances. The big banks (JP Morgan $4tln of $22tln) effectively have no depositor protection limit. SIFI’s all (systemically important financial institutions), but the small banks and regionals are on a banana peel from a capital underpinning perspective.

Japan

Officials in Japan seem to open their mouths to change feet. The Prime Minister Shigeru Ishiba recently stated that their financial situation was “worse than Greece’s”, highlighting the severity of their fiscal challenges. The Agriculture Minister Taku Eto resigned following public outrage over his comments that he “never had to buy rice” because he received it as gifts from supporters. Inflation, driven by rice prices (+98.4% year over year in April) posted their biggest jump since 1971. Energy prices rose +9.3% after the March 2025 phase out of Japanese government subsidies. GPIF (Japan’s government pension plan) is one of the largest in the world at US$1.3tln. Demographics (population dropped 45th year in a row in 2024) dictate that if current worked stopped contributing GPIF would be out of funds in 5 years. 40 year government bonds(JGB’s) have spiked in yield to historic highs (highest since inception) at 3.675%. The most recent 40 year JGB auction was poor, sold at a yield of 3.135% with a bid-to-cover ratio of 2.21, the lowest since July 2024, signaling tepid demand (fiscal concerns, shifting global interest rate dynamics). Fiscal concern is warranted as Japan’s debt is 263% of GDP, the highest among developed nations. Japan Ministry of Finance is reportedly seeking to reduce the amount of 40 year debt issuance to address the weak demand and rising yields. To add insult to injury India officially surpassed Japan to become the 4th largest economy in the world, hitting the $4.2 trillion GDP milestone (IMF).

The spike in bond yields have the insurers on watch. Four Japanese insurers; Nippon Life, Dai-Ichi Life, Sumitomo Life and Meiji dominate the insurance landscape. Their losses (unrealized) on the spike in JGB yields is over 8 trillion JPY (US$563bln with USD/JPY at 144.20 at the time of print.

Canada

Tariff paralysis would be a good summary. Trump’s “whack-a-mole” tariff labyrinth is certainly hard to navigate. This week a Federal court struck down most of Trump’s tariffs, demanding they cease within 10 days and that monies collected to date be returned. Trump’s legal team is appealing of course. This news does not help the auto sector where $350bln in vehicles and parts stay in limbo, as they were implemented under Section 232 of the Trade Expansion Act of 1962, not the International Emergency Economic Powers Act (IEEPA) authority that the court rules against. If Trump’s appeal fails expect more “cowbell”, higher tariffs under Section 232. The venerable WSJ this morning reports that the White House (Gold?) is considering a stopgap effort to impose tariffs under Section 122 of the Trade Act of 1974 (it has never been used before hence no case law exists). TACO appears to have his back up.

Silver bullets nor crosses have kept Trump from dialing up his 51st state rhetoric. The latest jest related to “free” Golden Dome cover OR $61bln if Canada choses to remain independent. Newly minted Canadian PM Mark Carney sent a pigeon to London to request that the King of Canada, King Charles III deliver Canada’s speech from the throne in person for only the 4th time ever (last delivered my mumsy, Queen Elizabeth II in 1977!). The King’s presence and delivery of the throne speech served as a powerful symbol of Canada’s autonomy and its enduring constitutional monarchy.

Canada would be well served to send a pigeon to China as well. China’s retaliatory tariffs affects over $2.6bln of Canadian goods including a 100% tariff of canola oil, 25% on seafood and pork (68% of China’s protein). Canada matched the USA’s 100% EV tariff (4x prior tariff level) on China and put a 25% tariff on Chinese steel and aluminum. If DJT (Donald J. Trump) is the ticker symbol for the USA then BYD (Build Your Dreams) China’s biggest EV producer is China’s. With over 300,000 Ontario jobs dependent on the automotive sector these are tough calls to make clearly, but blindly falling in line with USA tariffs on China is equally as dangerous (e.g. mouse/elephant).

Moody’s still rates Canada Aaa (His Majesty in right of Canada). The USA is now Aa1 with the latest downgrade. Canadian government bonds trade well below US Treasuries at all points in the curve (lower bond yields). The differential in 10 years is -1.2% (10 yr UST 4.42% vs. 10 yr Canada 3.22). The differential is wider in 30 years at -1.42% (USA 4.93% vs CAN 3.51%). Canada’s debt (federal and provincial combined) is 76% of GDP. Federal alone at C$1.24tln is 42%. The provinces carry heavy debt loads largely due to their responsibility for healthcare. Canada’s spends C$81.8bln in interest on its debt, a full 2x their military spend (C$40.4bln or 1.3% of GDP). Canada admits it has been a freeloader with respect to military spending and with 22/32 NATO member at or above their 2% GDP commitment we clearly need to ramp this effort quickly. Canada has now committed to hitting their spending target of 2% by 2027, six years ahead of schedule (end 2032 prior commitment).

With this envious trading environment Canada might want to capitalize on the market conditions to file a bond shelf for C$60bln in 50 year “Victory Bonds”, last used to finance military operations in WWI and WWII. These bonds would carry an interest rate of 5% and would be dual tax-exempt (federal and provincial). At the end of the retail order period, there would be sales to corporates (up to a 2% of assets de minimis cap) with the program capped once demand was satiated. A successful 2025 Victory Bond program could well get Canada to our 2% of GDP target by late 2025. Taxation bruised Canadians would “do their part” at 9% TEB (Taxable equivalent basis), assuming a 45% marginal tax rate for most individuals (5%/.55)=9.1%.

#JCG

poppycock

noun

pop·​py·​cock ˈpä-pē-ˌkäk

Synonyms of poppycock

: empty talk or writing : nonsense

Sovereign Wealth Funds - There are almost 100 SWFs operating globally, managing in excess of US$8 trillion.

Norway’s Government Pension Fund Global (GPFG) with US$1.4tln in AUM (assets under management) is the largest in the world, funded in large part by Norway’s oil & gas revenues. The fund invests in global equities (approx. 1.5% of each listed equity), bonds, real estate and other assets. Norway’s GDP is approximately $500 million, hence GPFG is 3.6X Norway’s GDP.

SWFs are typically funded through natural resource revenues (as with GPFG), budget surpluses, foreign exchange reserves, privatization proceeds and via ongoing investment returns.

China Investment Corp (CIC) has AUM of $1 trillion and manages a significant portion of China’s foreign exchange reserves. CIC invests in varied global assets, including public and private equity, real estate and infrastructure.

Pension Plans

Japan’s Government Pension Investment Fund (GPIF) is the world’s largest in terms of AUM at US$1.7 trillion. Given the horrid demographics in Japan, this funded pension would be out of money inside of 5 years, without the contribution from gainfully employed Japanese.

Canada’s CPPIB (Canada Pension Plan Investment Board) is the largest in Canada at $600 million in AUM, with the top 10 pension funds in Canada managing $2 trillion.

USA

USA’s Social Security program is a largely unfunded program, funded on a pay-as-you-go basis through FICA (Federal Insurance Contributions Act) which taxes earnings (6.2% for Social Security and 1.45% for Medicare, with an employer match for the same %). Payroll taxes for the USA total $1.6 trillion per year.

The USA has not run a budget surplus since the year 2000 (a 1/4 century ago), hence this is not a funding source for the new USOC. The current US national debt stands at $36.4 trillion, 121% of the US’s $30 trillion GDP. At the current pace, $1 tln is being added every 100 days. Debt service (interest cost) is now > $1 trillion per annum, above the spend on defense at $878 bln.

USOC sizing

Scott Bessent, US Secretary of the Treasury (net worth 1/2 billion USD) has hinted as some features of the USA’s inaugural SWF. Trump, perhaps in jest, has hinted at at housing TikTok within the fund. Even at a discounted valuation TikTok is worth $100 billion (fire sale). Even at $5 trillion USA SWF inception sizing (16.7% of USA GDP), a 2% concentration in a recent Chinese “trojan horse” might be deemed excessive, especially in the early innings of a newly formed SWF.

The DOGE clock, which has been recently added to the US Debt Clock, stands at $86bln. >30k civil servants have thus far accepted the severance offer from the new administration.

There is a great gap between $2 trillion and $86bln! Privatization of assets has been mentioned. Potential equity stakes in significant service providers in the government’s supply chain has also been floated. A “shadow” municipal bond market where high net worth individuals could pre-fund taxes (presumably as a discount) via investing in the SWF.

The Official Trump meme coin trades at $17.18 today ($3.4bln mkt cap, primarily owned by President Trump). Early adopters are well off-side on their positions, clearly. Trump’s meme coin hit a high of $75.35 on 01/19/0225 and is down 77% from that high print. It is estimated that $100 million in fees (bid-offer spread primarily) have been extracted from smaller investors in this instrument. Binance has controlled 23% of the turnover in the last 24 hours. Donald Trump Media & Technology Group Corp is 61% off recent highs at $30.86/share, still sporting a market cap of $6.7bln.

The World may not be quite ready for the “Buy Now, Pay Later” SWF.

JCG

If you make four quarters for a dollar long enough, those selling general & administrative expenses catch up to you, or your stakeholders (bond holders, lease holders, employees, private equity, shareholders, and other unsecured creditors).

In its last year of operation, WeWork lost US$1.6bln on US$1.8bln in revenues. WeWork founder Adam Neumann was but a mirage at this juncture of course, forced out of the company in the fall of 2019 with the most golden exit parachute one can envision, US$1.7bln, inclusive of a $185 million consulting fee!. Neumann had already cashed out for US$700 million pre-IPO (the S-1 for which was pulled). WeWork’s brief life as a public company came into being via the much inferior SPAC route. Of the 306 SPAC’s brought to market in the last 2 years, 3 (three, not a typo) are above their issue price!

The We Company’s guiding mission was “Elevating the World’s Consciousness”. A full 65% of the tech company’s expenses were rent. It looked, in retrospect, a lot like a plain old share-space (coworking), real estate company. WeWork was carrying rocks straight up hill as the lead real estate lessee in New York, London, San Francisco, Chicago and other major centres right into the teeth of the C-19 pandemic and resultant battle to get worker bees back to the office when the pandemic became endemic. Most long term corporate tenants are looking to shed between 1/4 and 1/3 of their commercial space presently, as their long term leases come up for renewal. WeWork’s short term tenants were typically on rolling 30 day terms.

In a way, WeWork is the modern day office space-share Lehman Brothers. Lehman was heavily reliant, coming into the fall of 2008, on wholesale funding via the short term, and sometimes fickle, commercial paper (CP) market, funding both operations and a levered asset portfolio of considerably longer tenor. Lehman’s head, Dick Fuld passed the hat around his Wall Street “peers”, but found dust, and a bit of spittle. No rescue was forthcoming from the public purse either, and Lehman famously filed for Ch. 11 bankruptcy in September 2008 with assets of $700bln. The bankruptcy work-out took a full 14 years.

WeWork poses no systemic risk. With $2.9bln of direct debt and $13bln in long-term leases, this tap-out will haunt Masayoshi Son (Softbank’s founder) lead “investor” with $16lbn committed (mostly equity, which is a zero), more than any other creditor by wide measure.

WeWork is a stark lesson in worshipping at the feet of charismatic founders and allowing corporate governance to run amuck.

”Jesus take the wheel”. Messianic Adam Neumann. Credit: Visual Capitalist.

We should all aspire to have the charisma of Adam Neumann. At 44, even after the WeWork toxic dust has settled, his net worth has been reported at US$2.2bln.

Governance red flags:

Executive compensation; As noted, Adam sold $700mm of his We stock pre-IPO, an IPO that was eventually cancelled/postponed to “focus on our core business the fundamentals of which remain strong”. Alarm bells should have been raised, at least at Masayoshi’s SoftBank HQ.

When Mr. Newmann was ousted, soon after, from the WeWork board, he negotiated an enormous “parting gift” compensation package for himself, worth $1,700,000,000. The 10% equity stake he retained when he left backed a $410,000,000 non-recourse (to Adam Neumann) loan from SoftBank. The Wall St Journal reported the stock backing the loan was worth $500 million at the time of Adam’s departure in 2019, now worth $4 million. A liability of this size, hedged with a high beta asset needs to be managed dynamically over time (demerit SoftBank).

Hat tip to the real Prof G, Professor Scott Galloway; Adam Neumann licensed the use of “We” to wework for US$5.8 million. You really can not make this stuff up.

“How you doin?” 1.93m Adam Neumann casts a long shadow on the USA tech commercial real estate ecosystem.

Board composition/ HR “gaps”; All male for a the first decade of its existence, until a woman was added. Adam’s wife Rebekah, co-founder, is profiled well in the Apple+ docuseries WeCrashed as the self-appointed Chief Branding Officer of WeWork (later amended to Chief Brand and Impact Officer). Rebekah’s brother-in-law was Head of Wellness. He must have been lacklustre at his job, WeWork was sued for many HR transgressions by former employees, the State of New York and other authorities.

Dual share structure; From inception Adam’s shares were “super” voting shares, a full 20x class A “normal” shares. This was eventually stepped down to 10x and finally 3x on his departure from WeWork. This structure is common (I see you Zuck), but it can be a bad shareholder structure, in concert with mis-management, and a flawed business model. Despite having bailed out WeWork with a $5bln infusion (for 80% of the company) Masayoshi Son’s SoftBank would likely have been challenged to oust Newmann sporting 20x shares.

SoftBank’s big score was Alibaba, on which they netted $72 billion in profit over 25 years. Masa-san saw WeWork as SoftBank and the Vision Fund’s next Alibaba. Masa could not have been more wrong.

Note: The $100bln Vision Fund is funded 60% by SoftBank and 40% by Saudi Arabia (aka ATM for the world). Saudi “opts out” of select investments.

Masa-son will get full control of WeWork 2.0 for certain, but should he? $16bln invested grants him this right to decide (his debt exposure will most likely be converted to new equity). SoftBank’s exposure was further increased during the final death throws when landlords drew down on a portion of $1.7bln in Letters of Credit that SoftBank co-signed with WeWork in 2019. High finance is hard. The WEWORK 7.875% May 1, 2025 bonds are wrapped around $0.10, indicating a paltry recovery rate for unsecured shareholders (seems high to me at 9cents/$). Coincidentally, Lehman’s CDS auction post Ch. 11 in 2008 was $0.09.

Adam, Rebekah and their six children are settling into their new (post-2019) $44 million Miami Florida estate and reportedly doing OK. Venture Capital Firm Andreesen Horowitz has thrown $350 million behind Adam Neumann’s latest real estate venture which focusses on retail. Something tells me this will rhyme with, but not be called “time-share”. The beat goes on.

Adam’s other venture, Flowcarbon. plans to transform the trading of carbon credits (carbon credit crypto). Too bad that AI did not flow in the tag-line.

Perhaps too much focus on ESG ratings life-to-date have been on the E-Environmental with most ESG ratings companies equally weighting the E, S & G components.

Do your own due diligence. The truth is out there, but you need to know where to look.

Caleb Gibbons, CFA

News is largely fire-hosed these days online, via “free” outlets. Ray Dalio, retired founder of the biggest hedge fund in the world, Bridgewater pegged the probability of a World War at 50%, as the Irsael-Hamas War escalates. To be clear, I am in the camp that saner heads prevail.

My lens was re-focussed this week via a pay-walled article (note; academic subscription cost modest) in The Atlantic called “The Patriot” about Mark Milley’s defence of the US constitution under President Donald Trump. To a man with a hammer, everything looks like a nail. Having a “non-stable” head of state greatly diminishes the effectiveness of the checks and balances in the current system. The comments in the article are highly critical of Trump, but clearly Biden is approaching or arguably past his “best before” date in terms of intellectual vitality. We are not likely to see him on the pickle ball courts in the run up to the 2024 election. Biden, Trump or Kennedy ….really?

The President of the Unites States is also Commander in Chief, the role has never been more important. The Department of Defence (DoD) is the world’s largest employer at 3 million. There are US military personnel deployed in 150 countries at present (75% of World Nations). It has been reported that no military in the history of mankind has been deployed more widely, including Byzantine, Ottoman, Roman & British empires. China’s PLA employs 2.7 million in comparison, supporting >4x the population (2.2mm active duty and 500,000 reserve). Other notables in terms of active duty are North Korea 1.2mm, Russia 1mm and Iran 600,000.

The 91st Missile Wing of the Air Force Strike Command control the 400 Minute Man III intercontinental ballistic missiles largely domiciled in North Dakota, Montana and Wyoming. Each officer controls 10 of said missiles, each weighs 80,000 lbs. and stand 60 ft. tall, with a load capacity of 20X the nuclear bomb, code named “Little Boy” dropped on Hiroshima, Japan on August 6, 1945 (“Fat Man” was dropped on Nagasaki 3 days hence on Aug 9, 1945, speeding the resolution of WWII).

From current USA missile locations a nuclear warhead can be “landed” in Moscow, Russia (5,300 miles) in 25 minutes flat. Tehran, Iran is 6,824 miles, achievable in a scant 33 minutes. Beijing is 6,100 miles from Wyoming, half an hour from complete obliteration.

The USA Department of Defence (DoD) is the largest employer in the USA; 1.3 million active duty, a 750k civilian workforce and 811k national guard/reserve.

Well regarded authors such as Satyajit Das, have noted that the Hamas-Israel war could prove a tipping point for a compromised global financial system.

Summary points:

The trajectory of the world’s two most serious geopolitical conflicts, Ukraine and the Middle East is unpredictable. In the Hamas-Israel war the potential for escalation is high.

Inflation. Government deficits are running at 5% of global GDP ($4.5tln of liquidity when it is not required). Spending will continue to be boosted by factors such as the energy transition, subsidies for strategic manufacturing (onshoring, and “friend-shoring”), semiconductors and war-footing defense spending. Input costs are rising. Volatile energy prices appear floored (Saudi and Russia production cuts influencing) and military activities will juice near term demand. Food prices are effected by war. Commodities like copper have a thumb on the scale due to the energy transition and armaments. Shortages loom due to underinvestment in part due to ESG targets. The service component of advanced economies will reflect higher labour cost (UAW a stand out in that regard!). An aging population and skills shortages will drive higher salaries , in nominal but not real terms, enforcing a negative wage-price feedback loop.

War is hell. War is inflationary.

War is by definition dirty & expensive, both in terms of loss of life and its monetary impact. Three species on planet earth show a proclivity for war, crows, ants and humans. Approximately 10% of the world is at war at any given point, but it is the world wars that get the bulk of our attention.

Biden visited Hiroshima, Japan for the G-7 summit, where he and other world leaders focussed on a range of issues, including Russia's ongoing invasion of Ukraine, climate change, and the global economy. Japan’s Prime Minister Fumio Kishida, said he hoped the setting of the summit will bring a focus to the danger of nuclear weapons. The Japanese public noted that a female member of the US forces carried the briefcase with the nuclear codes to the Hiroshima event.

Diplomacy, it has been said is saying “nice doggie” until you can reach a bigger rock.

Kim Jong Un (39) nick-named “little rocket man” by Trump (30 vs. 5,244 nuclear warheads) and Putin displayed their comparable launch code cases at a recent bilateral meeting.

The bulk of Russia’s replenished munitions stockpile has come from North Korea, which reportedly ramped up military cooperation with Russia after a September 2023 summit between North Korean leader Kim Jong Un and Russian President Vladimir Putin.

When countries were run by conviction instead of polls debt was largely assumed to finance wars. WW II cost the USA $300bln in today’s equivalent dollars. Over $100bln equivalent of this cost was financed with various forms of Victory Bonds. US national debt stands at $33.7 trillion presently and inflation math dictates a near exponential rise going forward. USA tax receipts stand at $4.4 trillion, but spending is $6.15 trillion. Expressed another way tax receipts as a % of GDP are 29% and spending is 37% for an 8% of GDP deficit! 5% will likely not be the top in interest rates demanded by the so-called bond vigilantes (5 year UST yield 4.86% presently, 10’s are 4.88% and the long bond is at 5.01% for reference). Debt service will exceed $1tln for the first time ever in 2023 (> military spending of $877bln for the 1st time in history.

Total debt stands at $304 trillion globally, $90 trillion of which is sovereign debt (USA 37% of that #).

Present day, the USA seeks approval for $100bln to help fund the wars in Ukraine and Israel.

The United Nations Security Council — whose one job is to respond during times of international conflict — failed to pass a nearly unanimous resolution on the Israel-Hamas war because of a US veto.

The resolution condemned Hamas’ attack and called for humanitarian access, protection of civilians in Gaza, and the release of Israeli hostages. On Wednesday, the US was the lone "no" vote, but because it is one of five nations on the council with veto power, the resolution failed.

The US vetoed it because it did not mention Israel’s right to self defense. The stance drew accusations of hypocrisy and comparisons to Russia, which has used its veto power to paralyze the council on the war in Ukraine.

Iranian backed militias mount a new wave of attacks as the USA supports Israel, ending Tehran’s undeclared 6 month truce.

France and the UK are calling for a ceasefire. The USA fully supports Israel’s stated plans for Gaza. The world waits, impatiently.

“I would have lived in peace. But my enemies brought me war.” - Pierce Brown

The other Prof G.

New York City has been inconvenienced. Air quality < New Delhi, India! Stop the presses. Broadway shows cancelled, basketball matches postponed, Laguardia Airport flights cancelled. Something has to be done. There are renewed calls for President Biden to declare a climate emergency, unlocking sweeping executive powers to deal with having 100 million people living under air quality alerts.

Climate change advocates are taking a victory lap, as hotter temperatures (a measurable certainty) and drier conditions (ditto) have seen a sharp increase in wildfires in the 21st century.

Over 85% of Canada’s 40 million population lives within 100km (61 miles) of the USA border. Canada’s forests are immense, covering 3,470,000 square km. Multiplied by 100 (10,000 square meters in a hectare) we have 347,000,000 hectares of forests. 1 hectare = 2.47 acres, hence 857 million acres of combustible, natural land-based carbon capture. The storage part is difficult, as fire releases all of the captured carbon back into the shared atmosphere (the air New Yorker’s are chewing this week, the New York Times describing the tiny airborne particles as “akin to car or coal plant fumes”. For the purposes of clarity, the combusted material was wood, in the form of trees). 4 million hectares have burnt year to date in 2023 (1% of the total forest), the bulk since June 1, 2023 (28,000 hectares was the count to the end of May 2023). The nascent market for nature-based carbon credits, which have been utlilized to create “net-zero” offerings for crude oil and other “green” products, created via offsets, is on alert. Most nature-based credits are generated through avoiding deforestation. Forestry credits are generally deemed effective if they can sequester carbon for 100 years. The credits from jurisdictions at high risk of potential carbon reversal have little commercial value (sub $3/mtCO2e). If Canada’s latitude is not deemed safe from wildfires in this regard, where on the planet is?

Canada’s Wildland Fire Information System reports well over 400 active wildfires at the time of print:

CWFIS

In a troubling development, it has been reported that arson has been the culprit in a number of cases in Canada. In Nova Scotia a fire ban has been instituted and several $25,000/incident fines levied. All forest management efforts can be negated with a match, it would appear. The fires in southern Quebec are some of the most suspicious in this regard. In Nova Scotia, over 200,000 acres burned in the Shelbourne area (near Yarmouth) and in Tantallon, a Halifax suburb, hundreds of houses have been destroyed or damaged from ravaging wildfires in the last 10 days.

The average house in Canada is currently worth over C$700,000(US$522k), up C$100,000 since January 2023. Houses are as combustible as forests and insurance companies are taking note. “All perils” coverage could be tweaked to exclude wildfires (effectively an “Act of God” exclusion, akin to that afforded to war) in the future. Both State Farm and Allstate have halted the issuance of new homeowners’ policies in California, citing unsustainable claims experience related to wildfires and mudslides.

Canada has not met one (1) climate goal life-to-date. Water and land based carbon sinks absorb an estimated 40% of global CO2 emissions. Wildfires are one of the biggest reasons Canada has not met any of its lofty climate goals. Boreal forests, primarily in Canada and Russia cover 17% of the earth’s land surface but contain more than 30% of all the carbon in land-based sinks (aka the terrestrial biome).

Canada has instituted a world-leading carbon tax, stepping to C$170/tonne at its terminus. The program started at $50/tonne and steps +$15/tonne per year until reaching $170/tonne in 2030. “Rebates” cushion the blow for retail customers, but the buck stops somewhere, hence higher prices abound.

Caleb Gibbons, CFA, FRM, SCR*

*(Sustainability and Climate Risk certificate, Global Association of Risk Professionals).

Photo credit: Ian Bremmer, Eurasia Group

The market for credit default swaps on the United States of America is relatively small at $12 billion (notional), versus $23 trillion of US Treasuries outstanding. The probability of a US default is non-zero. The US default probability is the highest ever at 2.8%, as per Bloomberg. Moody’s cumulative, 5 year default probability for a Aaa credit is 0.10%. This is not an event easily modelled with traditional VaR based models.

The standard contract term for the CDS market is 5 years, but other maturities also trade. As of Friday May 12, 2023 USA 5 year CDS was offered at 69 basis points (0.69% in per annum premium), a record high. As a frame of reference, 5 year CDS for the US entered 2023 at 24 bps (0.24%). China, which is rated A+ CDS is at 74 (0.74%) in 5 years.

The current 10 year UST (on the run) has a coupon of 3.375% and a maturity date of May 15, 2033. A portfolio manager looking to hedge against default by the USA would pay 69bp per annum (i.e. $69,000 per 10 million notional, a typical transaction size), 20% of their running yield to protect against the default of a Aaa/AA- credit that administers the world’s reserve currency. Another reason the US sovereign CDS market is small, it that players are uncertain of the mechanics of settlement. In a typical CDS contract, an auction is held to determine the recovery rate. Post default, upon settlement, the hedger (long US CDS cover) delivers a qualifying US Treasury security (cheapest-to-deliver under a “borrowed money” definition would be the lowest coupon long bond which has a maturity of 30 years) and receives par. Upon default all US Treasury securities would trade at the same price (the recovery rate). Some hedge funds are building inventory in the cheapest-to-deliver long bonds in the $60’s (in price terms). Depending on the aggregate size of this arbitrage attempt (assume billions), there could be turmoil as the crisis hits peak in the coming weeks. CDS only “pays out” upon a default, but clearly some speculators are trying to play the spread migration to wider levels.

Due to the impending debt limit crisis, the US CDS curve is inverted. Risk is elevated in the short end. 1 year US CDS is wrapped around 176 (1.76%). That is 107bp (1.07%) of inversion 1-5’s! Brazil 5 year CDS is at 57, Greece 49 and BBB-rated Mexico 37! Crazy pills.

Before the 2007 GFC the CDS market for the AAA-rated contiguous US states (GO - general obligation bonds) was 10bp (0.10% per annum). At the worst of it, California CDS trades at 470bp (4.70%). According to the Depository Trust & Clearing Corporation (DTCC), as of September 2021, the total notional outstanding amount of Municipal Credit Default Swaps (CDS) was approximately $86 billion, 7x the USA sovereign CDS notional outstanding.

In terms of mechanics, a hedger or speculator (more likely) counterparty enters into CDS contract with a Bank counterparty. The arrangement is documented under an ISDA (International Swap Dealers Association) in concert with a CSA (Credit Support Annex) to manage counterparty risk. With hedge fund counterparties the threshold is typically set at $0 (2-way) meaning that collateral will be posted by the cpty with a negative mark-to-market (mtm). In a typical CSA schedule cash is given 100% value and other instrument have a haircut (i.e. 2 year UST 98%) with a bigger haircut for longer dated instruments (given the high interest rate risk).

The US has not run a surplus since the year 2000, as per the chart above. Democrat or Republican, it matter not. The forecasted deficit for 2023 is -1.94tln versus record tax receipts of $6tln +. The US fiscal situation is worsening. S&P cut the AAA rating of the USA in August 2011 to AA+ (negative watch). Moody’s remains at Aaa, as does Fitch who rate the US AAA. The United States is “split-rated” as a result. Likely resolved by Fitch next taking the US into the AA’s, in my view.

The current US debt ceiling is US$31.4 trillion. Current US debt stands at $31.7 trillion

US Debt Clock (real time)

The US Treasury had $143 billion in cash/near-cash to end the week, down 11.5bln on the day (debt service is $2bln/week now). The Treasury has enough cash to continue servicing their debt, for a short period of time (est. 1 quarter), but the question raised is what payments cease? For reference. Warren Buffett’s Berkshire Hathaway has $130bln in cash and with investable short end fixed income yielding >5%. Warren likes cash more than stock presently.

The equity market in the US will eventually react forcefully as this plays out. Risk assets will be sold and many will revisit circuit breaker levels in a market that has traded inside of a 1% range for 6 weeks. -10% over a few trading days will get the spotlight on the debt ceiling issue. Such a move would have the S&P at -3% for 2023, hardly an extreme call. There have been other instances where the US has faced the threat of default, such as during the debt ceiling crisis of 2011. During that time, the stock market experienced significant volatility, with the S&P 500 index falling by 17% from its high in April to its low in October of 2011.Many want to be more like Warren Buffett, and if many attempt a tactical asset allocation shift from risk assets to money market the market could fall precipitously. Equity market breadth has been horrendous, as has volume. 10 names in the S&P account for all the 8% upside year-to-date in 2023, the top 5 names are up 58% from their 2022 lows. Apple’s $2.7 trillion dollar market cap now exceeds the market cap of the Russell 2000.

US Debt ceiling negotiations:

Talks between Biden and Kevin McCarthy have not yet started. They are planned for this week before Biden heads to Japan. Key entitlement programs are off the table for cuts, as agreed by both sides, namely medicare and social security. Military spending is not going down with the Ukraine war in year 2. Interest expense is up markedly from 2022. Find me billions in cuts. The Republican want $5 trillion in spending cuts over the next 10 years (-14% in spending, by a government). There is no precedent for this ask. Higher CDS levels ahead, can 5 year break 100? McCarthy took 15 tries to become Speaker of the House. IF we get a debt ceiling deal we will likely need a new speaker.

A debt ceiling resolution is likely, as the debt ceiling issue has always been resolved in the past. The United States has a long history of meeting its debt obligations, and defaulting on its debt would have severe consequences for the country's financial standing and global economic stability. The U.S. government has never defaulted on its debt. A short term “patch” extending the debt limit for a shorter time frame, with a $1.5tln bump in size, is a likely outcome (6 months of oxygen). That takes into the crash prone late fall months. The markets would clearly like to see the debt ceiling issue resolved, full stop. Resolution may prove elusive, as the required cuts in spending (entitlement programs) are just too hard ahead of a 2024 election. The Democrats are offering a thimble full of blood (i.e. Funds from the 2021 stimulus not get distributed, est. $30-50bln) whereas Republicans want an arm (trillions).

A technical default would lead to global mayhem.

Disclosure: I’m short the S&P via ES futures (aka, talking my own book).

Caleb Gibbons, CFA

Opportunity Zones are a United States government construct. OZs date from 2017, the brainchild of early FaceBook billionaire Sean Parker who began his OZ effort from 2013 at the World Economic Forum in Davos, eventually bringing the “Investing in Opportunity” bill to the floor via senators Tim Scott and Cory Booker in 2016 . OZs are designed to spur economic development and job creation in economically distressed areas by providing tax incentives to investors. The program is specific to the United States, but clearly could be modified for use in Canada. In the USA the OZs allow for the deferment of capital gain by investing in designated jurisdictions across the US. Investors who leave their investment in place for a 10 year period can get complete capital gains tax forgiveness.

Cape Breton could potentially benefit from similar initiatives that focus on spurring economic development and job creation in the area.

Cape Breton Island, located in Nova Scotia, Canada, has a diverse economy with several key sectors contributing to its growth. Nova Scotia’s population recently surpassed 1,000,000, 47% of whom live in HRM (Halifax Regional Municipality). Cape Breton’s CBRM (Cape Breton Regional Municipality) is approximately 100,000. Name change contest please. My vote would be Sydney! Sydney (founded 1785 by the British) has the largest population in CBRM. Outmigration trends have finally abated after decades and the population of Cape Breton stands at > 135,000.

Tourism: Cape Breton Island is known for its natural beauty, vibrant culture, and historical significance, making tourism a significant contributor to the local economy. The island attracts thousands of visitors every year who come to enjoy the Cabot Trail, visit the historic Fortress of Louisbourg, or attend cultural festivals. Western Cape Breton Island is in the midst of a transformation. The incomparable Cabot Trail and celebrated destinations like Cabot Links and Cabot Cliffs have captured the world’s attention and the potential to develop the region as a premiere tourism destination is within reach.

Energy: Cape Breton has a modest presence in the energy sector, with coal mining being a historically significant industry. Nova Scotia has committed to have zero coal in their energy mix by 2030, just 7 years away! Coal makes up 55% presently, the highest percentage in the country. In recent years, there has been a push towards renewable energy, and there are several wind farms and hydroelectric projects on the island. Solar adoption has been muted with just over 4,000 residential installation.

Fishery. The fishing industry has historically been an important sector in Cape Breton's economy, particularly for small coastal communities. The size of the industry has fluctuated over the years due to changes in regulations, market demand, and environmental factors.

According to Statistics Canada, in 2019, the landed value of fish and seafood caught by Cape Breton-based fishing vessels was CAD 69.9 million. For all of NS, the landed value of fish and seafood was C$614.7 million in 2020, for reference.

The most significant fishery in Cape Breton is the snow crab fishery, followed by lobster, scallops, and groundfish such as cod and haddock. The industry employs a significant number of people in the region, including fishermen, processing plant workers, and support staff.

It's worth noting that the fishing industry in Cape Breton, like many other fishing communities, faces various challenges such as climate change, overfishing, and changes in regulations, which can impact its sustainability and profitability. Russian dumping of snow crab (sanctions get “teeth” from June after a brief respite) drove the start of the 2023 season to $2.20/lb in Newfoundland and only slightly higher in Cape Breton. In addition to snow crab inventory overhang from 2022, a potential hard candy Christmas for Atlantic Canada snow carb fishers in 2023. Indications for lobster are somewhat better, lower than 2022, but in relative term “stable”, $7+/lb..

Clearwater Seafoods is a seafood company based in Nova Scotia, Canada, that specializes in fishing, processing, and distributing a variety of seafood products. Clearwater Seafoods was recently acquired by a coalition of Mi'kmaq First Nations (50%) and Premium Brands Holdings Corporation (50%).

According to Clearwater Seafoods' 2020 annual report, the company reported consolidated sales of CAD 437.9 million for the year ended December 31, 2020. Most recent numbers for Clearwater under new management (and private, post buy-out) reflected year-over-year sales up $70 million.

Manufacturing: Cape Breton Island has a small buy resilient manufacturing sector, with several companies producing everything from kitchen cabinets, to electronics and textiles. The island is home to the Cape Breton Screaming Eagles.

Healthcare: The healthcare industry is an essential part of Cape Breton's economy, with several hospitals, clinics, and long-term care facilities providing jobs for healthcare professionals. Of Nova Scotia’s $11bln budget, $4.6bln is spent on healthcare (42%!).

Education: Cape Breton Island has several post-secondary institutions, including Cape Breton University (CBU), Nova Scotia Community College, and Island Career Academy. These institutions provide training and education to students, and also contribute to the local economy through research and innovation. CBU has seen tremendous growth, doubling enrolment over 7,000 over a short period of time, driven by growth in international student enrolment. Growth bring problems, but better problems than persistent outmigration.

The Cape Breton economy is diverse, with tourism, fishing, manufacturing, healthcare, and education being the key sectors that contribute to its economy.

These programs in the US have been taken to task for being regressive, on the basis that only the wealthy can typically utilize the tax break and swing the “bite-size” of $100,000 for a typical qualifying investment.

The truth is, governments have no money, they levy taxes. Most governments are over-extended and were running deficits well before the now “endemic” Covid-19 hit our shores. Think of OZs like the government selling (factoring) their accounts receivable. A rational means for selecting the qualifying opportunity zones is key, based on the experience of other nations.

This economic development construct has a relatively long history and, on the face of it, make good sense. As always, it is all about execution. The British (Long live King Charles III) has tried it with their UK Enterprise Zones (1980) which offered a pass on capital gains taxes. Canary Wharf was perhaps the biggest “win” of the UK program. The UK program was subject to criticism as well, largely around the designation of the zones, which was controlled at the national level.

In the US program, state Governors were given the power to determine which of their regions should be designated as OZs. Like with public officials trading stock on inside information (without consequences thus far), many OZ designations were a farce! Of the almost 9,000 designated OZs, fewer than 1,400 received “investments” (15.5%). There are success stories, but they are few. On the metric of increasing income, some stats are promising in that 55% of OZs (as of Q4 2021) saw a 20% increase in single-family income.

There is an ESG angle here as well. Impact Investing has an even longer history, but most investors have a greater interest in the bottom line than in altruistic ends.

Higher income levels, lower child poverty rates and more private sector capital would all be good things for Cape Breton. It would also likely be a “thumb on the scale” for the real estate market (as in higher!), running counter to recent efforts to create more housing (especially to accommodate the large influx of foreign students attending Cape Breton University). CBU enrolment has swelled to 7,000 students with approx. 70% or 5,000 of the student body made up of international students.

OZs have been utilized for student housing in the USA. Typically student housing funds are raised via the municipal bond market ($3tln+, largely tax exempt market).

Any economic development initiative must be tailored to the specific needs and characteristics of the region, and should involve input from community members and local stakeholders to ensure that it addresses their priorities and concerns.

Atlantic Canada Opportunities Agency (ACOA)

Innovation Superclusters

Cape Breton Partnership

Nova Scotians for Equalization Fairness

Caleb Gibbons, CFA, FRM

Japanese eel (Anguilla japonica) 1.9kg (4.2lbs.). Silver eel (full grown) pictured.

Japan has a love for Unagi (eel), consuming over 100 metric tons in 2020.

With all the fervour over the recent Fisheries and Oceans Canada (DFO) decision to effectively halt the glass eel harvest for 2023 in the Maritimes (45-day ban, likely to be extended), I decided to investigate this shrouded global fishery for baby eels, glass eels, aka elvers. The halt was a result of attacks on harvesters and evidence of widespread poaching of the endangered fish, a problem we see globally.

Glass eels are sold primarily to eel farmers in Taiwan and China who grow them to between 150g and several kg. for export to Japan, South Korea and Hong Kong.

The glass eel fishery in the Maritimes is worth C$50 (US$37mm) million per annum with prices in 2022 reaching C$5,000 per kg., making glass eels the highest valued catch, by weight ($1 each, 0.002kg), in Canada.

American eel (Anguilla rostrata), 7.3kg (16.1lbs.)

European eel (Anguilla anguilla), 6.6kg (14.5lbs.)

日本鰻 nihon'unagi

Pimizi (Anishinaabemowin word for ‘eel’)

Japan is one of the largest consumers of eel in the world, it is a popular dish in Japanese cuisine. The traditional Japanese dish of grilled eel, called unaju, served in a lacquered box over Japanese rice. A thick sauce made from sake, soy and sugar is lathed on the eel fillets as they are being cooked. One can expect to pay JPY4,000 (C$40) for a 200 gram (7oz.) unaju meal. Prime cuts of the increasingly scarce Japanese eel can be as high as US$90/200g. No sushi here as raw eel is poisonous. Eel blood has toxins that are broken down from cooking it. Advertised in the 18th century Japan as building stamina for the hot summer months, eel has been in high demand for a long time.

A significant portion of the eel consumed in Japan is imported from other countries, particularly China and Taiwan, due to the decline in the wild eel populations in Japan. Eels can not be bred in captivity. Japanese glass eels can trade for in excess of US$10,000/kg. (C$13,600/kg.)

Roughly 1bln glass eels (Euopean eels) hit the shores of Europe in their migration each year and fetch upwards of €1 per eel.

The global glass eel trade is largely unregulated and often conducted illegally, making it difficult to obtain accurate information on global glass eel quotas. The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) regulates the trade of the European eel, which includes glass eels. Under this regulation, a quota system is in place for the export of European eels, including glass eels, from the European Union to other countries. The total annual quota for the EU is currently set at 3,200 kilograms (3.2 tons!), which is divided among individual member states based on historical catch records.

It is worth noting that the illegal trade of glass eels is thought to be many, many times larger than the legal trade, and there are concerns about the sustainability of the wild eel population due to overfishing and loss of habitat. As a result, many countries and regions have imposed their own regulations and bans on the trade of glass eels to protect the species from further decline.

Japan places eels on the “red list” of endangered species in 2013 after seeing the eel population shrink by 90% (over 3 decades). Japan’s largest harvest year was in 1965 when 140 metric tons were harvested.

For other types of seafood, farm-raised stocks remain relatively stable when wild catches fall off. But unagi, which hatch at sea but mature in freshwater, cannot be effectively bred in captivity, hence farm-raised stocks rely on baby eels, also known as glass eels, which are harvested in the wild, then raised to maturity at eel farms in China, Korea, and Japan. The penalties for fishing eel without a license were made more severe from 2015, up to 3 years in prison and a fine of JPY3mm (C$30,000 at current fx rates).

Japan consistently consumes >100,000 tons of eel, representing an estimated 75% of the global catch.

China’s role:

China is also a major consumer of eel and is one of the largest producers and exporters of eel in the world. Eel is a popular and traditional dish in many regions of China, and it is often served in various styles, including grilled, steamed, and braised.

According to the Food and Agriculture Organization (FAO) of the United Nations, China is the largest producer of farmed eel in the world, accounting for more than 80% of the global eel production. However, it is difficult to estimate the exact amount of eel consumed in China as data on domestic consumption is not widely available.

In terms of exports, China exported a total of 121,000 metric tons of live, fresh, or chilled eel worth $1.1 billion in 2020, according to the United Nations COMTRADE database. Most of these exports were destined for other Asian countries, such as Japan, South Korea, and Hong Kong.

China calls on all localities to further strengthen the export management of glass eel, strengthen law enforcement and supervision, strengthen industry self-discipline, and severely crack down on the smuggling of glass eel. The Yangtze River Estuary and the Yangtze River Basin are the most important producing areas of glass eel in China. The output of glass eel in the Yangtze River Estuary accounts for about 2 / 3 of the total output in China.

Indigenous fishers - International Law

The current international legal framework provides no specific rules or principles regarding the rights of indigenous peoples to salt sea fishing. As a result, Indigenous coastal fishing rights are derived from more general instruments. Since the establishment of the Universal Declaration of Human Rights, the cultures of indigenous peoples, including their use of the ocean, has been increasingly protected by the introduction of various international law instruments.

United Nations Declaration on the Rights of Indigenous Peoples

The above declaration contains several articles which provide protections for the rights of indigenous peoples to natural resources. For example, article 3 provides for a right of self-determination which includes the free pursuit of economic, social and cultural development. More specifically, article 26 provides for the protection of the rights of indigenous peoples to own, use and control resources, lands and territories they possess by traditional ownership, occupation or use.

It is important to note that this declaration is not a treaty, and thus does not have the binding effect of a treaty. Its adoption by the United Nations does, however, have considerable legal effect internationally.

Article 27 of the International Covenant on Civil and Political Rights

Article 27 provides for the right of ethnic minorities to enjoy their own culture by precluding any action of others which interferes with this enjoyment. The Human Rights Committee, in General comment 23 (1994), stated that the right includes traditional activities of indigenous peoples such as hunting and fishing.

A strict application of this article to indigenous fishing rights would suggest the existence of a preferred position for indigenous peoples compared to other citizens. Therefore, It may be argued that in order to preserve indigenous culture in particular regions, fishing quotas and other restrictions imposed by law must be relaxed or eliminated in their application. Further, in order to uphold the intention of the legislation, it may be required that fishing quotas and other restrictions must be tightened for non-indigenous fishers. This idea is further supported by the Committee’s explanation that article 27 imposes specific obligations on State parties to ensure the protection of these rights.

International Labour Organization (ILO) Convention concerning Indigenous and Tribal Peoples in Independent Countries (No. 169)

The ILO Convention includes numerous provisions which provide protections for indigenous rights to fishing. First, article 6 imposes a duty on governments to consult with its peoples to establish means by which they can freely participate in, and fully develop, their own institutions and initiatives. More specific to fishing rights is article 15, which supports the protection of material bases of indigenous peoples’ culture by safeguarding their right to the natural resources of their lands. Article 13 provides that the term “lands” is to be given a wide meaning to include all “areas which the peoples concerned occupy or otherwise use”.

Indigenous fishers - Canadian law

The Origin of the Right: Peace and Friendship

From 1725 to 1780, the British Crown entered into and renewed “Peace and Friendship Treaties” with Indigenous Peoples, including with Mi’kmaw, Wolastoqey and Peskotomuhkati Indigenous communities in Atlantic Canada. These treaties set out mutual obligations between the Crown and those Indigenous peoples. Treaty Rights, including those confirmed in the Peace and Friendship Treaties, are constitutionally protected by section 35 of the Canadian Constitution Act, 1982, which recognizes and affirms the Aboriginal and Treaty Rights of Indigenous peoples. Like Aboriginal Rights, Treaty Rights are collective rights and communal in nature. While individuals may enjoy the benefits of these Rights, such as hunting and fishing, the Rights themselves belong to the community.

The Right Defined: R v. Marshall

The Supreme Court of Canada considered whether the Peace and Friendship Treaties granted a Treaty Right to hunt and fish in the 1999 landmark case of R. v. Marshall.

Issue. Donald Marshall Jr., a Mi’kmaw person from Membertou First Nation, was charged under the Fisheries Act for catching, possessing and selling eels without a licence and doing so outside of the prescribed fishing season. In his defence, Mr. Marshall argued that the Peace and Friendship Treaties enshrined his inherent right to sell the catch of his hunting and fishing, irrespective of modern regulations that may restrict or limit such hunting and fishing.

Amazing that such a pivotal case was decided on this exact harvest, glass eels and with Donald Marshall Jr., a judicial trailblazer versus the Crown! Wrongly convicted of murder in Sydney, NS decades prior, Donald Marshall Jr. served 11 years in prison before his eventual release. Perhaps the CBC put it best, “The name Donald Marshall is almost synonymous with ‘wrongful conviction’ and the fight for native justice in Canada.”

Moderate Livelihood. The Court decided the Peace and Friendship Treaties of 1760-1761 confirmed the right of the Mi’kmaw people to provide for their own sustenance by taking the products of their hunting, fishing and other gathering activities, and trading for what in 1760 was termed “necessaries”. The Court found that the concept of “necessaries” is equivalent in current times to the concept of a “moderate livelihood”, and a moderate livelihood includes such basics as “food, clothing and housing, supplemented by a few amenities”. It does not, however, extend to the open-ended accumulation of wealth.

With only 9 commercial licenses and individual indigenous elver harvesters of between 100 and 150 (estimated 2023), it would appear that all involved in glass eel have outsized gains! If 70% of the market was retained by commercial license holders and they all harvested an equal share that would leave C$3,900,000 per holder. If 30% was eventually split between 150 First Nations harvesters that would be C$100,000 each. Whether this sum constitutes a “moderate livelihood” is open to question. What is the appropriate threshold? The current average household income in Canada is C$75,452, for reference.

Constitutional Right. Accordingly, the Court affirmed the Mi’kmaq of Nova Scotia’s Treaty Right to fish for a moderate livelihood is validated and protected by the Canadian Constitution. The regulatory prohibitions against fishing and selling eels without a licence infringed Marshall’s constitutional rights and were inoperative, unless the Crown could justify them – which it could not in this case.

The Scope & Limit of the Right: Marshall II

The R. v. Marshall decision caused considerable uncertainty, an escalation in tensions and, in some locales, even violence. On the one hand, the Court unequivocally recognized a Treaty Right to pursue a moderate livelihood. On the other, a lack of clarity remained as to how the exercise of this Treaty Right would impact stocks and interact with existing regulatory regimes. In the days following the R. v. Marshall decision, some Indigenous groups put traps in the water regardless of existing regulations on the basis they didn’t constrain the newly confirmed Treaty Right. This led to conflict between Indigenous and non-Indigenous fishers similar to those in 2020. Two months after its decision in R. v. Marshall, and in response to the growing tensions, the Supreme Court of Canada issued a subsequent decision in R. v. Marshall, known as Marshall II, to clarify the scope and implementation of the Treaty Rights in question.

Local Rights. Marshall II clarified that the treaties, and the benefits granted under them, were local in nature and limited to the area traditionally used by the local community with which the treaty was made.

Regulation. The Court determined that although treaty rights could be infringed, the government must produce sufficient evidence demonstrating that the regulation in question is necessary for conservation or other grounds of public importance. Although the Court in Marshall II found that the regulations purporting to limit the Treaty Right by imposing a discretionary licensing system and closed season (on eel fishing specifically) were not justified in that context, it left open the possibility that the government could regulate such Rights in the future.

Justification. The Supreme Court of Canada in the R. v. Marshall and Marshall II decisions was clear that although the federal government has the right to regulate Aboriginal and treaty rights, such regulation must be justified. The burden for proving a justified infringement rests solely with the government. Accordingly, the federal government cannot impose whatever regulation it sees fit.

The Clarification of the Right: The Missing Piece

There have been some steps taken since the R. v. Marshall and Marshall II decisions, but significant progress is still needed to ensure a peaceful and mutually acceptable resolution.

Post-Marshall. In 1999, the Department of Fisheries and Oceans (DFO) launched the Marshall Response Initiative, which aimed to increase participation of Indigenous communities in commercial fisheries by providing assets and training. In 2007, DFO implemented the Atlantic Integrated Commercial Fisheries Initiative, which provides funding to Indigenous communities to build the capacity of their communal commercial fishing enterprises. And in 2019, DFO reached 10-year interim agreements with a few Indigenous communities throughout the region to guide implementation of their Treaty Rights. Criticism, however, has persisted among Indigenous communities that there has been insufficient effort by DFO to ensure the Treaty Rights the Court affirmed in the Marshall decisions can be integrated and respected within current regulatory regimes. As a result, Indigenous communities, like the Sipekne’katik First Nation in Nova Scotia, have moved forward with their own self-regulated fisheries. In response, there has again been tension and even violence.

Post-Sipekne’katik. Almost one year after the events involving Sipekne’katik, there have been both signs of progress toward certainty and resolution, and some setbacks.

• On November 29, 2020, the office of the federal Fisheries Minister proposed a draft memorandum of understanding (MOU) to the Sipekne’katik First Nation Chief. Yet in December 2020, talks again appeared to stall without a resolution.

• In spring 2021, the federal government signed a 10-year Rights Reconciliation Agreement with Listuguj, a Mi’gmaw community in Quebec’s Gaspé Region (in addition to agreements signed in 2019 with three communities).

• The House of Commons Standing Committee on Fisheries and Oceans held hearings through late 2020 and early 2021 with respect to the events at Sipekne’katik. In May 2021, the Committee tabled its report on the Implementation of The Mi’kmaw And Maliseet Treaty Right To Fish In Pursuit Of A Moderate Livelihood, making 40 recommendations.

• During the spring 2021 lobster season, like at Sipekne’katik, another Nova Scotia Mi’gmaw community – Potlotek First Nation – proceeded with its own “moderate livelihood” fishery. But unlike at Sipekne’katik, DFO and Potlotek reached an interim agreement respecting this community’s fishery.

One thing remains clear: there’s further work to do for all parties to agree on just what an Indigenous moderate livelihood looks like and how an Indigenous moderate livelihood fishery can be implemented in Atlantic Canada.

Maine, given its proximity, has a glass eel industry as well. 4 additional licenses were recently granted via lottery (5,000 applied!). The Maine harvest is comparable to the Maritimes with 18,000 lbs (8 metric tons) sold for US$33 million in 2022 (C$45mm). US$2,162/lb. was the clearing level for the 2022 season.

Next steps:

There have been calls for Canada to place a SARA (Species at Risk Act) classification on glass eels. Canada’s endangered wildlife committee listed Anguilla rostrata as “threatened” over a decade ago. The quota for the fishery has remained unchanged for 18 years at just below 10 metric tons. The Maritime quota is 9,960kg (14% of which was recently recently granted to First Nations fishers/harvesters). This was the 2nd year that 14% of the quota was granted to Míkmaw First Nations. Commercial license holders (9) have launched a federal challenge to the uncompensated transfer.

The Canadian federal government needs to define, at long last, “moderate livelihood”, most likely on some sort of indexed income metric (i.e. per capita GDP, average household income)

The elver fishery in the Maritimes has been around since the 1980’s, but catches were below 1 metric tone until the 1990’s (1995 the catch was 3.4 metric tons).

DFO Elver Fishery background and history

With prices seemingly floored at $1/glass eel, this “live gold rush” will continue. Japan’s domestic eel harvest continues to print new lows (under 4 tons most recently) and trying to introduce proxies like catfish Kabayayi is not displacing demand for unagi in the domestic market in a meaningful way.

The maritime elver fishery is a short season (March to early May) with a compact footprint, in terms of where the glass eel migrate. The current commercial licensing system acknowledges the potential for conflict by allocating by specific rivers and estuaries. Míkmaw harvesters exercising their treaty rights to join in the elver harvest has resulted in a halt to the season in 2020 and now 2023. It appears that some sort of timed partition might be the only way to avoid conflicts between commercial and indigenous elver harvesters. 14% of an 8 week season would be 8 days for First Nations and 48/56 for commercial license holders. 14% of nothing is nothing, hence a solution must be reached for the benefit of all.

Caleb Gibbons - The “Other Prof G”

The ogre of global inflation is real. Critical inputs to your business, including labour costs, are likely to remain elevated for the foreseeable future (as in years). 40% of inflation is composed of goods, 60% services (including housing).

The de-globalization trend, spurred by the now deemed endemic Covid-19, will likely play out over the coming decades. Autarky (self-reliance), near-shoring, on-shoring and US Treasury Secretary Janet Yellen’s latest gem “friend-shoring” are all decidedly inflationary. Friend-shoring is a cuddly term for a policy that would buttress free-market democracies against the authoritarian regimes of China and Russia. Supply chains re-engineered on this basis would arguably be more robust, but would cost more 10 times out of 10.

Taiwan Semi’s Morris Chang recently noted that the expense at their Oregon, USA semiconductor plant (WaferTech, based in Camas, OR) are 50% higher than in Taiwan. Apple, with assistance from the CHIPS and Science Act (2022) will undertake domestic chip production, but at a cost of +20-30% versus current facilities (Foxconn has 1.3 million employees). The US Inflation Reduction Act, “a historic down payment on deficit reduction to fight inflation” was clearly mis-named as all arrows point skyward. Are folks really this gullible? Debt is debt, not a down payment. All will rue the day that “buy-now-pay-later” devolves to our $1,200+ smart phone and eventually to dental floss.

ESG pressures have forced a significant redirection of capital investment from extractive industries to renewable projects. At least a decade of shortages in key base metals awaits. Rare earth metals will serve as a critical bottleneck soon. These “rare earth” metals exist all over the world, it is just that, until now, only China has the stomach for the caustic processing required. Inflationary, and fraught with NIMBY and ESG “conflicts”. Lithium remains a “hot” commodity as we transition from an ICE dominated automotive industry to an EV one. Mexico (Baa2 rated) nationalized their lithium industry last month and Chile has announced plans to do the same. Myanmar’s recent production halt for tin sent tin futures up > 10% in April 2023.

Geopolitical influences:

The shift in the global power structure from USA, often termed unipolar to multipolar is undeniable. USA vs. China is likely more accurate, bipolar, if you will. India just surpassed China as the country with the largest population at 1.42 billion (35x Canada’s 40 million for reference). China has issues. The real risk is that they get old before they get rich. Some see Russia’s invasion of Ukraine (lets call it the Ukrainian War) as a smoke screen for China’s invasion of Taiwan. Handicapping the timing is difficult, but likely before an IMF bail out (of China, to be clear) which some forecast by 2030. As an aside China’s net-zero commitment is 2060, a decade back of global peers who have committed to 2050.

USA (AAA/Aaa) Credit default swaps (CDS) are at record highs with 1 year CDS > 140bp (1.4%) and 5 years wrapped around 50bp (0.5%). The debt ceiling farce is in full swing once again. Can-kicking is the solution at hand with a $1.5tln patch in the works. US federal debt stands at US$31.7 trillion (36% of the $88tln total sovereign debt tally).

A deep and prolonged global recession would be one route to deflation (via outright demand destruction), or at least dis-inflation, but the global tea leaves tell a different near-term tale. China is slowly emerging from their Covid-19 induced hibernation. The IMF forecasts China growth in 2023 at 5.2% and some private forecasts are for >6%. India is pegged at 5.9%. There are scant signs of inflation in China’s domestic economy, so far. Folks are just glad to have their front doors un-welded, perhaps.

China and India will account for over 1/2 of global economic growth in 2023. The USA and Japan are treading water, with the IMF forecasting +1.6% for the US and +1.3% for Japan in 2023. The EU is at +0.8 and the UK at -0.3%. The UK is the only developed nation to acknowledge a recession is a near certainly. Current odds of recession are 80% for the UK and 65% for the USA (China and India zero % chance). The tug-of-war favours China and India, a thumb on the scale for the goods component of global inflation. When China is fully open the services component will be on full boil too.

Can central banks coordinate bringing inflation down without governments doing the same? Likely not. The US has not run a budget surplus since the year 2000. Direct federal debt stands at $31.7 trillion, as noted. Republican or Democrat, the red ink flows. The US deficit for 2023 will exceed $1.2 trillion (record receipts of $4.8tln vs. spending of > $6tln). Global central banks are using their significant balance sheets, built up over years of quantitative easing to throttle steer around potholes. The UK did it in September 2022 with a 1 trillion GBP QE targeting the long end of the gilt market to save the private pension market (Truss vs. lettuce). Japan has not even started. The USA was reducing their formidable $8.65 tln balance sheet by 95bln per month until the regional banking crisis hit and 6 months of QT was negated by the BTFP (Bank Term Funding Program).

The Bank of England has slowed their pace of rate hikes to 25bp (0.25%), as have the Fed in the USA, but headline inflation last printed > 10% in the UK! The UK’s Chief economist Pill (jagged little) says Britons need to accept they are poorer and that seeking pay increases will only push prices higher. Inflation globally is both broad and sticky. In the EU 80% of the components in the broad CPI basket are > 3%. Wages are running > 4%.

All eyes on Japan’s BoJ next week. Incoming Ueda is making noises and Japan is under increasing pressure to act. All are preparing for higher rates, which current stand at -10bp (-0.10). When QT (quantitative tightening) comes it will send global shock waves given the broad mandate the BoJ had on the ramp of their balance sheet to US$5tln + (JGB’s, corporate debt, equities, etc.). Japan’s CPI basket increased to 2.9% YoY in March 2023, up from 2.7% in February. These levels have not been seen for 40 years.

Emerging markets. As you might expect, messy. Argentina hikes rates by 3% to 81% after inflation hit 104% (not typos). Venezuela inflation hit 495% post $60bln debt default. Serial defaulters are lining up like dominoes. With the IMF have any porridge left if China succumbs?

Military spending. Worldwide military spending rose 3.7% in 2022 to $2.24 trillion (2.65% of global GDP of $88tln). The USA is the “big dog” with $877bln spent (39% of the total). China is #2 at $291bln (up 4.2% from 2021), followed by India at $66bln, Russia at $61bln (seems low), UK $55bln, Japan $48bln (defence only!), Germany $46bln, Italy $33bln, Canada $27bln, Brazil $20bln and Iran at $6bln. There is nothing green, productive or arguably sane in times of war. With an ongoing war in Ukraine, spending in Europe swelled 13% to $345bln, the fastest military spending clip since the end of the Cold War.

Risk assets (equities) have been whistling through the graveyard ytd 2023. Regional bank indigestion in the US may in fact be an ulcer. First Republic Corp dropped 50% after disclosing they lost $100bln in deposits thus far in 2023 (JP Morgan and others deposited $30bln in a sign of faith a mere month ago). Earnings from tech stalwarts impress thus far for Q1 2023, but chinks in the armour abound. UPS, a bell-weather, saw domestic volumes off by 5.4% with next day air and deferred -11% and -25% respectively (I see dead people), suggesting a precipitous fall in retail sales (ex. buy-now-pay-later). Global banking turmoil will lead to tighter credit conditions for businesses and households.

Shifting inflation dynamics could see the most aggressive tightening cycle in decades begin to unwind by the end of 2023.

Higher nominal rates have clear implication on valuation, as we have seen in spades with respect to banks HTM (held to maturity) and AFS (available for sale) securities portfolios with unrealized losses. Ditto to commercial real estate, perhaps the next shoe to drop? Investment grade debt has been selling like hot cakes, but the new issue equity and high yield markets are setting up for some rough comps as the deltas on recession tick higher.

From an exposure assessment perspective, many risk are 2-tailed by nature, greatly expanding ones hedging alternatives. Doteki’s team are well versed in the intricacies of these perilous markets (across rates, credit, commodities and foreign exchange markets) of setting a plan of action and executing.

The hills are alive, to the sound of a merger in Switzerland as a hasty shotgun marriage is arranged by regulators to have Union Bank of Switzerland (UBS) acquire Credit Suisse (CS) for CHF 0.76 (CHF 3bln, US$3.24bln) in UBS shares (no capital raise). Gobs of liquidity are on offer, CHF 200bln inclusive of the 50bln provided to Credit Suisse Wednesday past. UBS take “first-loss” of 5bln with a government guarantee for up to 9bln CHF (not likely required, barring further fall-out).

CS equity opened down 60% on Monday Mar 20,2023 as the terms of the “take-under” were announced. The market noise that echoes through the mountains is not for common equity holders, but for CoCo security holders. CS CoCo’s have been zeroed out. With over $3bln paid to CS common shareholders some may think they are living in the “upside down” from a priority of payment perspective, but the contract terms of AT1 bonds, also known as Enhanced Capital Notes (ECN’s) ranks holders behind common equity on a breach of contractual triggers (typically 2/3 capital write-downs, order of magnitude). Over US$17bln of such securities were issued by CS. Current valuation $0.00, a goose egg for all CS AT1 holders.

Contingent convertible securities have been issued in size since the 2007/2008 GFC with in excess of US$250bln now outstanding. Germany hears the echoes of said CoCo losses. Deutsche Bank (DB) 6% US$1.25bln AT1’s which were trading just shy of $90.00 in early March fell 10% to $79.00 and sit at $70.56 this morning at the time of writing. There is scant liquidity in sovereign bonds presently. Last week featured futures trading halts on SOFR and Fed Fund contracts on the CME. The exits for AT1 bonds are narrow, if not sealed. After a ferocious February for IG credit where U$140bln was issued, last week saw zero investment grade bonds brought to market.

DB 6.0% 2049 AT1

Batton to the Fed’s Powell stateside. If we see a 0.25% Fed Funds hike on Wednesday Mar 22nd we will know they are out of touch with the fragility of the market at present. The Fed has raised rates >400bp in a very short period of time, the pace in fact without precedent. The Fed/Treasury is complicit in the regional banking meltdown which remains front burner. The Swiss were not the only busy bees this weekend as numerous jets were seen in Nebraska, assumed to be regional bank CEOs. Buffett is not long CoCo securities, but he loves double digit preferred shares! Forced marriages and an unlimited FDIC limit appear to be next up.

Stay diligent. Keep your wits about you.

Caleb Gibbons, CFA, FRM (the Other Prof G)