Average card rates hit all-time high at 19%

Credit loss provisions across the Big Four banks spiked the most in a decade (exclding CoVid lockdowns)

Discover smacked-down on charge-offs

BigSerge: https://bigserge.substack.com/p/russo-ukrainian-war-the-world-blood

For those unfamiliar with military operation, Big Serge offers a nice primer most commissioned officers learn early in their careers. This one is set in the current Russo-Ukrainian War and the Russian “attrition strategy”.

This is pretty basic stuff and obvious to just about every former military officer I’ve spoken with. Yet, it is lost on millions.

The Minsk Agreement gave Ukraine 8 years to build up defenses from which they launched attacks on Russian nationals and would serve as a bastion for threatening Russia with tactical weapons. That’s the reality – stripped of any moral comments

As Russians With Attitude observes: “And those defensive lines are ~20km deep… Turns out it wasn’t a great idea to give them eight years to build all of this.”

Indeed.

For those of you who’ve been there, you know what I’m saying. For everyone else, enjoy your red pill.

Emphasis added in bold

**********

Since Russia’s surprise decision to voluntarily withdraw from west bank Kherson in the first week of November, there has been little in the way of dramatic changes to the frontlines in Ukraine. In part, this reflects the predictable late autumn weather in Eastern Europe, which leaves battlefields waterlogged and clogged with mud and greatly inhibits mobility. For hundreds of years, November has been a bad month for attempting to move armies any sort of significant distance, and like clockwork we started to see videos of vehicles stuck in the mud in Ukraine.

The return of static positional warfare, however, also reflects the synergistic effect of increasing Ukrainian exhaustion along with a Russian commitment to patiently attriting and denuding Ukraine’s remaining combat capability. They have found an ideal place to achieve this in the Donbas.

It has gradually become apparent that Russia is committed to a positional attritional war, as this maximizes the asymmetry of their advantage in ranged fires. There is an ongoing degradation of Ukraine’s warmaking ability which is allowing Russia to patiently maintain the current tempo, while it organizes its newly mobilized forces for offensive action in the coming year, setting the stage for cascading and unsustainable Ukrainian losses.

In Ernest Hemingway’s novel, The Sun Also Rises, a formerly wealthy, now down on his luck character is asked how he went bankrupt. “Two ways”, he replies, “gradually and then suddenly.” Someday we may ask how Ukraine lost the war and receive much the same answer.

Verdun Redux

It is safe to say that western regime media has set a very low standard for reporting on the war in Ukraine, given the extent to which the mainstream narrative is disconnected from reality. Even given these low standards, the way the ongoing battle in Bakhmut is being presented to the population is truly ludicrous. The Bakhmut axis is being spun to western audiences as a perfect synthesis of all the tropes of Russian failure: in a nutshell, Russia is suffering horrible casualties as it struggles to capture a small town with negligible operational importance. British officials, in particular, have been highly vocal in recent weeks insisting that Bakhmut has little to no operational value.

The truth is the literal opposite of this story: Bakhmut is an operationally critical keystone position in the Ukrainian defense, and Russia has transformed it into a death pit which compels the Ukrainians to sacrifice exorbitant numbers of men in order to hold the position as long as possible. In fact, the insistence that Bakhmut is not operationally significant is mildly insulting to the audience, both because a quick glance at a map clearly shows it at the heart of the regional road network, and because Ukraine has thrown a huge number of units into the front there.

Let’s take a step back and consider Bakhmut in the context of Ukraine’s overall position in the east. Ukraine began the war with four operable defensive lines in the Donbas, built up over the last 8 years both as part and parcel of the simmering war with the LNR and DNR, but also in preparation for potential war with Russia. These lines are structured around urban agglomerations with road and rail links between each other, and can be roughly enumerated as follows:

The Donbas is a particularly accommodating place to construct formidable defenses. It is highly urbanized and industrial (Donetsk was the most urban oblast in Ukraine prior to 2014, with over 90% of the population living in urban areas), with cities and towns dominated by the typically robust Soviet buildings, along with prolific industrial complexes. Ukraine has spent much of the last decade improving these positions, and the frontline settlements are riddled with trenches and firing positions that are clearly visible on satellite imagery. A recent video from the Avdiivka axis demonstrates the extent of Ukrainian fortifications.

So, let’s review the state of these defensive belts. The first belt, which ran roughly from Severodonetsk and Lysychansk to Popasna, was broken in the summer by Russian forces. Russia achieved a major breakthrough at Popasna and was able to begin the full rollup of this line, with Lysychansk falling at the beginning of July.

At this point, the frontline sits directly on what I have labeled as the 2nd and 3rd Ukrainian defensive belts, and both of these belts are now heavily bleeding.

The capture of Soledar by Wagner forces has severed the connection between Bakhmut and Siversk, while around Donetsk, the heavily fortified suburb of Marinka has been almost completely cleared of Ukrainian troops, and the infamous keystone Ukrainian position in Avdiivka (the place from which they shell Donetsk city’s civilian population) is being flanked from both directions.

These positions are absolutely critical for Ukraine to hold. The loss of Bakhmut will mean the collapse of the last defensive line standing in the way of Slavyansk and Kramatorsk, which means Ukraine’s eastern position will rapidly contract to its fourth (and weakest) defensive belt.

The Slavyansk agglomeration is a far worse position for Ukraine to defend than the other belts, for several reasons. First and foremost, as the belt farthest to the west (and thus the farthest from the February 2022 start lines), it is the least improved and least fortified of the belts. Secondly, lots of the, shall we just say “good stuff” around Slavyansk is to the east of the city, including both the dominating high ground and the major highways.

All this to say, Ukraine has been very anxious to hold the Bakhmut line, as this is a vastly preferable position to hold, and accordingly they have been pouring units into the sector. The absurd levels of Ukrainian force commitment in this area have been well noted, but just as a quick refresher, publicly available Ukrainian sources locate at least 34 brigade or equivalent units that have been deployed in the Bakhmut area. Many of these were deployed months ago and are already shattered, but over the full span of the ongoing battle this represents an astonishing commitment.

Russian forces, primarily Wagner PMC and LNR units, have been slowly but surely collapsing this Ukrainian stronghold by making liberal use of artillery. In November, now former Zelensky advisor Oleksiy Arestovych admitted that Russian artillery on the Bakhmut axis enjoyed roughly a 9 to 1 tube advantage, which is turning Bakhmut into a death pit.

The battle is being presented in the west as one where Russians – usually stereotyped as convict soldiers employed by Wagner – launch frontal assaults on Ukrainian defenses and take horrible casualties attempting to overwhelm the defense with pure numbers. The opposite is much closer to the truth. Russia is moving slowly because it irons out Ukrainian defenses with artillery, then pushes forward cautiously into these pulverized defenses.

Ukraine, meanwhile, continues to funnel units in to more or less refill the trenches with fresh defenders. A Wall Street Journal piece about the battle, while trying to present a story of Russian incompetence, accidentally included an admission from a Ukrainian commander on the ground who said: “So far, the exchange rate of trading our lives for theirs favors the Russians. If this goes on like this, we could run out.”

The comparisons have been liberally made (and I cannot take credit for them) to one of the most infamous battles of World War One – the bloody catastrophe at Verdun. While it does not do to exaggerate the predictive value of military history (in the sense that a thorough knowledge of the first world war does not allow one to predict events in Ukraine), I am, however, a great fan of history as analogy, and the German scheme at Verdun is a useful analogy for what’s happening in Bakhmut.

The Battle of Verdun was conceived by the German high command as a way to cripple the French army by drawing them into a preconfigured meatgrinder. The notion was to attack and seize crucial defensive high ground – ground so important that France would be forced to counterattack and attempt to recapture it. The Germans hoped that France would commit their strategic reserves to this counterattack so that they could be destroyed. While Verdun failed to completely sap French combat power, it did become one of the most bloody battles in world history. A German coin commemorating the battle depicted a skeleton pumping blood out of the earth – a chilling but apt visual metaphor.

Something similar has indeed occurred in Bakhmut, in the sense that Russia is pressing on one of the most sensitive points on the front line, drawing Ukrainian units in to be killed. A few months ago, on the heels of Russia’s withdrawal from west bank Kherson, the Ukrainians talked ecstatically of continuing their offensive efforts with a strike southward in Zaparozhia to cut the land bridge to Crimea, along with continued efforts to break through into northern Lugansk. Instead, forces from both of these axes have been redirected to Bakhmut, to the point where this axis is actively draining Ukrainian combat strength in other areas. Ukrainian sources, previously full of optimism, now unequivocally agree that there will be no Ukrainian offensives in the near future. As we speak, Ukraine continues to funnel forces into the Bakhmut axis.

At the present moment, Ukraine’s position around Bakhmut has badly deteriorated, with Russian forces (largely Wagner infantry supported by Russian army artillery) making substantial progress on both of the city’s flanks. On the northern flank, the capture of Soledar pushed Russian lines to within spitting distance of the north-south highways, while the near simultaneous capture of Klishchiivka on the southern flank has propelled the frontlines to the dootstep of Chasiv Yar (firmly in Bakhmut’s operational rear).

The Ukrainians are not presently encircled, but the continued creep of Russian positions ever closer to the remaining highways is easily discernable. Currently, Russian forces have positions within two miles of all the remaining highways. Even more importantly, Russia now controls the high ground to both the north and south of Bakhmut (the city itself sits in a depression surrounded by hills) giving Russia fire control over much of the battle space.

I am currently anticipating that Russia will clear the Bakhmut-Siversk defensive line by late March. Meanwhile, the denuding of Ukrainian forces on other axes raises the prospect of decisive Russian offensives elsewhere.

At the moment, the front roughly consists of four main axes (the plural of axis, not the bladed implement), with substantial agglomerations of Ukrainian troops. These consist, from south to north, of the Zaporozhia, Donetsk, Bakhmut, and Svatove Axes (see map below). The effort to reinforce the Bakhmut sector has noticeably diluted Ukranian strength on these other sectors. On the Zaporozhia front, for example, there are potentially as few as five Ukrainian brigades on the line at the moment.

At the moment, the majority of Russian combat power is uncommitted, and both western and Ukrainian sources are (belatedly) becoming increasingly alarmed about the prospect for a Russian offensive in the coming weeks. Currently, the entire Ukrainian position in the east is vulnerable because it is, in effect, an enormous salient, vulnerable to attack from three directions.

Two operational depth objectives in particular have the potential to shatter Ukrainian logistics and sustainment. These are, respectively, Izyum in the north and Pavlograd in the South. A Russian thrust down the west bank of the Oskil river towards Izyum would simultaneously threaten to cut off and destroy the Ukrainian grouping on the Svatove axis (S on the map) and sever the vital M03 highway from Kharkov. Reaching Pavlograd, on the other hand, would completely isolate the Ukrainian forces around Donetsk and sever much of Ukraine’s transit across the Dneiper.

Both Izyum and Pavlograd are roughly 70 miles from the start lines of a prospective Russian offensive, and thus offer a very tempting combination – being both operationally significant and in relatively manageable reach. Beginning yesterday, we started to see Russian advances on the Zaporozhia axis. While these consist, at the moment, mainly of reconnaissance in force pushing into the “grey zone” (that ambiguous interstitial frontage), RUMoD did claim several settlements taken, which could presage a genuine offensive push in this direction. The key tell would be a Russian assault on Orikhiv, which is a large town with a genuine Ukrainian garrison in it. A Russian attack here would indicate that something more than a probing attack is underway.

It is difficult sometimes to parse out the difference between what we predict will happen and what we want to happen. This, certainly, is what I would choose if I was in charge of Russian planning – a drive south along the west bank of the Oskil river on the Kupyansk-Izyum axis, and a simultanious attack northward past Zaporozhia towards Pavlograd. In this case, I believe simply screening Zaporozhia in the short term is preferable to getting bogged down in an urban battle there.

Whether Russia will actually attempt this, we do not know. Russian operational security is much better than either Ukraine’s or their proxy forces (Wagner and the LNR/DNR Milita), so we know significantly less about Russia’s deployments than we do about Ukraine’s. Regardless, we know that Russia enjoys a strong preponderance of combat power right know, and there are juicy operational targets within range.

Please Sir, I Want Some More

The bird’s eye view of this conflict reveals a fascinating meta-structure to the war. In the above section, I argue for a view of the front structured around Russia progressively breaking through sequential Ukrainian defensive belts. I think that a similar sort of progressive narrative structure applies to the force generation aspect of this war, with Russia destroying a sequence of Ukrainian armies.

Let me be a bit more concrete. While the Ukrainian military exists at least partially as a continuous institution, its combat power has been destroyed and rebuilt multiple times at this point through western assistance. Multiple phases – life cycles, if you will – can be identified:

• In the opening months of the war, the extant Ukrainian army was mostly wiped out. The Russians destroyed much of Ukraine’s indigenous supplies of heavy weaponry and shattered many cadres at the core of Ukraine’s professional army.
• In the wake of this initial shattering, Ukrainian combat strength was shored up by transferring virtually all of the Soviet vintage weaponry in the stockpiles of former Warsaw Pact countries. This transferred Soviet vehicles and ammunition, compatible with existing Ukrainian capabilities, from countries like Poland and the Czech Republic, and was mostly complete by the end of spring, 2022. In early June, for example, western sources were admitting that Soviet stockpiles were drained.
• With Warsaw Pact stockpiles exhausted, NATO began replacing destroyed Ukrainian capabilities with western equivalents in a process that began during the summer. Of particular note were howitzers like the American M777 and the French Caesar.

Russia has essentially fought multiple iterations of the Ukrainian Army – destroying the pre-war force in the opening months, then fighting units that were refilled from Warsaw Pact stockpiles, and is now degrading a force which is largely reliant on western systems.

This led to General Zaluzhny’s now-famous interview with the economist in which he asked for many hundreds of Main Battle Tanks, Infantry Fighting Vehicles, and artillery pieces. In effect, he asked for yet another army, as the Russians seem to keep destroying the ones he has.

I want to note a few particular areas where Ukraine’s capabilities are clearly degraded beyond acceptable levels, and observe how this relates to NATO’s effort to sustain the Ukrainian war-making effort.

First, artillery.

Russia has been prioritizing counterbattery action for many weeks now, and seems to be having great success hunting and destroying Ukrainian artillery.

It seems that this partially coincides with the deployment of new “Penicillin” counterbattery detection systems. This is a rather neat new tool in the Russian arsenal. Counterbattery warfare generally consists of a dangerous tango of guns and radar systems. Counterbattery radar is tasked with detecting and locating the enemy’s guns, so they can be destroyed by one’s own tubes – the game is roughly analogous to enemy teams of snipers (the artillery) and spotters (the radar) attempting to hunt each other – and of course, it makes good sense to shoot the other side’s radar systems as well, to blind them, as it were.

The Penicillin system offers potent new capabilities to Russia’s counterbattery campaign because it detects enemy artillery batteries not with radar, but with acoustic locating. It sends up a listening boom which, in coordination with a few ground componants, is able to locate enemy guns through seismic and acoustic detection. The advantage of this system is that, unlike a counterbattery radar, which emits radio waves that give away its position, the Penicillin system is passive – it simply sits still and listens, which means it does not offer an easy way for the enemy to locate it. As a result, in the counterbattery war, Ukraine currently lacks a good way to blind (or rather, deafen) the Russians. Furthermore, Russian counterbattery abilities have been augmented by increased use of the Lancet drone against heavy weapons.

All that to say, Russia has been destroying quite a bit of Ukrainian artillery lately. the Russian Ministry of Defense has made a point of highlighting counterbattery success. Now, I know at this point you’re thinking, “why would you trust the Russian Ministry of Defense?” Fair enough – let’s trust but verify.

On January 20, NATO convened a meeting at Ramstein Airbase in Germany, against a backdrop of a massive new aid package being put together for Ukraine. This aid package contains, lo and behold, a huge amount of artillery pieces. By my count, the aid announced this week includes nearly 200 artillery tubes. Multiple countries, including Denmark and Estonia, are sending Ukraine literally all of their howitzers. Call me crazy, but I seriously doubt that several countries would just spontaneously decide, at the exact same time, to send Ukraine their entire inventory of artillery pieces were Ukraine not facing crisis levels of artillery losses.

Furthermore, the United States has taken new, unprecedented steps to supply Ukraine with shells. Just in the past week, they have dipped into its stockpiles in Israel and South Korea, amid reports that American stocks are so depleted that they will take more than a decade to replenish.

Let’s review the evidence here, and see if we can make a reasonable conclusion:

1. Ukrainian officials admit that their artillery is outgunned by 9 to 1 in critical sectors of the front.
2. Russia deploys a cutting edge counterbattery system and increased numbers of Lancet drones.
3. The Russian MoD claims that they have been hunting and destroying Ukrainian artillery systems in large numbers.
4. NATO has hurried to put together a massive package of artillery systems for Ukraine.
5. The United States is raiding critical forward-deployed stockpiles to supply Ukraine with shells.

I personally think it is reasonable, given all of this, to assume that Ukraine’s artillery arm has been largely shattered, and NATO is attempting to rebuild it yet again.

My kingdom for a tank

The main point of contention in recent weeks has been whether or not NATO will give Ukraine Main Battle Tanks. Zaluzhny hinted at a badly depleted Ukrainian tank park in his interview with the Economist, in which he pleaded for hundreds of MBTs. NATO has attempted to provide a stopgap solution by giving Ukraine various armored vehicles like the Bradley IFV and the Stryker, which do restore some mobility, but we must unequivocally say that these are in no way substitutes for MBTs, and they fall far short in both protection and firepower. Attempting to use Bradleys, for example, in the MBT role is not going to work.

Thus far, it appears that Ukraine is going to receive a small handful of Challenger tanks from Britain, but there is also talk of donating Leopards (German make), Abrams (American), and Leclercs (French). As usual, the battlefield impact of Ukraine receiving tanks is being both greatly overstated (by both Ukrainian shills and pessimistic Russians) and understated (by Russian triumphalists). I suggest a middle ground.

The number of tanks that can be reasonably given to Ukraine is relatively low, simply because of the training and sustainment burden. All of these tanks use different ammunition, special parts, and require specialized training. They are not the sort of systems that can simply be driven off the lot and directly into combat by untrained crew. The ideal solution for Ukraine would be to receive only Leopard A24s, as these might be available in decent numbers (perhaps a couple hundred), and at least they would be standardized.

We should also note, of course, that these western tanks are not likely to be game changers on the battlefield. The Leopard already showed its limitations in Syria under Turkish operation. Note the following quote from this 2018 article:

“Given that the tanks are widely operated by NATO members – including Canada, the Netherlands, Denmark, Greece and Norway – it is particularly embarrassing to see them so easily destroyed by Syrian terrorists when they are expected to match the Russian Army.”

Ultimately, the Leopard is a fairly mundane MBT designed in the 1970’s outclassed by the Russian T-90. It’s not a terrible piece of equipment, but it’s hardly a battlefield terror. They will take losses and be attrited just like Ukraine’s prewar tank park was. However, that doesn’t change the fact that a Ukrainian army with a few companies of leopards will be more potent than one without them.

I think it’s fair to say that the following three statements are all true:

1. Receiving a mixed bag of western tanks will create a difficult training, maintenance, and sustainment burden for Ukraine.
2. Western tanks like the Leopard have limited combat value and will be destroyed like any other tank.
3. Western tanks will raise the combat power of the Ukrainian army as long as they are in the field.

Now, with that being said, at this point it does not appear that NATO wants to give Ukraine main battle tanks. At first it was suggested that tanks from storage could be dusted off and given to Kiev, but the manufacturer has stated that these vehicles are not in working order and would not be ready for combat until 2024. That leaves only the possibility of dipping directly into NATO’s own tank parks, which thus far they are reticent to do.

Why? My suggestion would simply be that NATO does not believe in Ukrainian victory. Ukraine cannot even dream of dislodging Russia from its position without an adequate tank force, and so the reticence to hand over tanks suggests that NATO thinks that this is only a dream anyway. Instead, they continue to prioritize weaponry that sustains Ukraine’s ability to fight a static defense (hence, the hundreds of artillery pieces) without indulging in flights of fancy about a great Ukrainian armored thrust into Crimea.

However, given the intense war fever that has built up in the west, it’s possible that political momentum imposes the choice upon us. It is possible that we have reached the point where the tail wags the dog, that NATO is trapped in its own rhetoric of unequivocal support until Ukraine wins a total victory, and we may yet see Leopard 2A4s burning on the steppe.

Summary: The Death of a State

Ukraine’s military is extremely degraded, having taking exorbitant losses in both men and heavy weaponry. I believe Ukrainian KIA are approaching 150,000 at this point, and it is clear that their inventories of both artillery tubes, shells, and armored vehicles are largely exhausted.

I expect the Bakhmut-Siversk defensive line to be cleared before April, after which Russia will push towards the final (and weakest) defensive belt around Slavyansk. Meanwhile, Russia has significant combat power in reserve, which can be used to reopen the northern front on the west bank of the Oskil and restart offensive operations in Zaporozhia, placing Ukrainian logistics in critical danger.

This war will be fought to its conclusion on the battlefield and end in a favorable decision for Russia.

Coda: A Note about Coups

Feel free to ignore this segment, as it’s a little more nebulous and not concretely related to events in Ukraine or Russia.

We’ve seen lots of fun rumors about coups in both countries – Putin has foot cancer and his government will collapse, Zelensky is going to be replaced with Zaluzhny, on and on it goes. Patriots in control and all that good stuff.

In any case, I thought I would just generally write about why coups and revolutions never seem to lead to nice and cuddly democratic regimes, but instead almost always lead to political control passing to the military and security services.

The answer, you might think, is simply that these men have the guns and the power to access the important rooms where decisions are made, but it is not only that. It also relates to a concept in game theory called Schelling points.

A Schelling point (named after the gentleman that introduced the concept, an economist named Thomas Schelling) refers to the solution that parties choose given a state of uncertainty and no ability to communicate. One of the classic examples to illustrate the concept is a coordination game. Suppose that you and another person are each shown four squares – three are blue and one is red. You are each asked to choose a square. If you both select the same square, you receive a monetary prize – but you are unable to talk to one another about your choices. How do you choose? Well, most people rationally choose the red square, simply because it is conspicuous – it stands out, and you therefore presume that your partner will also choose this square. The red square isn’t better, per se, it’s just obvious.

In a state of political turmoil, or even anarchy, the system works itself towards Schelling points – obvious figures and institutions that radiate authority, and are therefore the conspicuous choice to assume power and issue commands.

The Bolsheviks, for example, understood this very well. Immediately after declaring their new government in 1917, they dispatched commissars to the various office buildings in Saint Petersburg where the Tsarist bureaucracies were headquartered. Trotsky famously turned up at the foreign affairs ministry building one morning and simply announced that he was the new Foreign Minister. The employees laughed at him – who was he? how did he presume to be in charge? – but for Trotsky the point was to insinuate himself on a Schelling point. In the state of anarchy that began to spread in Russia, people naturally look for some obvious focal point of authority, and the Bolsheviks had cleverly positioned themselves as such by claiming control over the bureaucratic offices and titles. On the other side of the civil conflict, political opposition to the Bolsheviks clustered around Tsarist army officers, because they too were Schelling points, in that they already had titles and position within an existing hierarchy.

All of this is to say that in the event of a coup or state collapse, new governments are virtually never formed sui generis – they always arise from preexisting institutions and hierarchies. Why, when the Soviet Union fell, did political authority devolve to the Republics? Because these Republics were Schelling points – branches that one can grab for safety in a chaotic river.

I simply say this because I am tired of phantasmagorical stories about liquidation of the regime in Russia and even territorial dissolution. The fall of Putin’s government will not and cannot lead to an acquiescent, western-adjacent regime, because there are no institutions of real power in Russia that are thus disposed. Power would fall to the security services, because they are Schelling points, and that’s where power goes.

Two settlements taken – Lobkovoe and Maly Shcherbaki.

Battles for the village of Shcherbaki.

Russian army is directly approaching the town of Orekhov.

Winter intensifying in Europe as polar vortex temperatures are already -20C below average.

More broadly, rapid warming in the stratosphere. Sudden stratospheric warming usually leads to 30-60 days of cold across the Northern Hemisphere.

Zonal winds appear primed to unwind from the stratosphere, top-down.

With that in mind, check out the dropping prices.

“Target-rich environment”?

February 2023 NG Contract

Having grown up in Joey Gallo’s neighborhood (https://en.wikipedia.org/wiki/Joe_Gallo), within mortar range of Carlo Gambino’s “casa”, you get a sense of a sanctioned hit.

Larry Johnson seems to have the same “gestalt” about these things: https://sonar21.com/are-the-ukrainian-political-elite-starting-to-eat-each-other/

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ARE THE UKRAINIAN POLITICAL ELITE STARTING TO EAT EACH OTHER?

18 January 2023 by Larry Johnson

You know that happy feeling when things are going your way? Everything is turning up roses? You got a nice buzz going? Well, if you feel that way then you certainly are not a member of Ukraine’s ruling elite. Some genuine chaos unfolding in Kiev in the wake of Russia’s victory in Soledar.

Let us commence with the news that someone (or a group of someones) assassinated Ukraine’s top three intelligence officials — the Minister of Internal Affairs of Ukraine Denis Monastyrsky, his first deputy Yevgeny Enin and the State Secretary of the Ministry of Internal Affairs Yuriy Lubkovich. Wait a minute (some will say) we do not know if this was a mechanical failure or pilot error. True, no final conclusions, yet. But an eyewitness interviewed by one of the Kiev media claimed:

that the helicopter with the leadership of the Ministry of Internal Affairs of Ukraine on board was spinning and burning in the air before the collision.https://t.me/c/1840140143/126

If that witness is giving an accurate account then it is highly unlikely that the mid-air fireball was caused by pilot error or a mechanical malfunction. This sure sounds like a surface-to-air missile, like a U.S. supplied Stinger that popped up on the black market. Here is one of the rumors floating around Ukraine. It emerged shortly after the chopper crashed into a kindergarten courtesy of someone with the nom de plume, Hacker DPR Joker:

I will tell you all, my loyal followers, what happened today in Brovary. The Minister of Internal Affairs of Ukraine had long been aware that the leadership of the Ministry of Defense was trading Western arms, which came to Ukraine in the form of aid, for the benefit of third countries, and that this process was overseen directly by the head of the GUR, Budanov. By the way, this information has already surfaced somewhere.

The leadership of the Interior Ministry wanted their share and began collecting data through their structural units, which are associated with intelligence and surveillance. As a result, they managed to obtain evidence and began blackmailing. The military bosses promised a share to the police leadership, and the first tranche was paid. But it was pointless and unprofitable to pay any further.

In addition, the insolence of the minister of the Ministry of Internal Affairs, who had his head in the wrong place, was putting the military leadership under strain. And now the day had come when the kids from the GUR were able to demonstrate their skills. But that is not all. The sanction for this was given personally by Yermak, who is also in on the secret from the supreme narcissistic clown, Zelensky.

[Comment: Hacker DPR Joker is not just on Telegram. “Hacker DPR Joker” confirmed to RIA Novosti the hacking of the DELTA command and control system of the Ukrainian troops: “It was not easy, but there are no absolutely secure systems.”

https://twitter.com/1qCQDs3JLZ4oxs7/status/1587428751612289024?s=20

" According to him, "absolutely all" plans of the Ukrainian command were disclosed – information about them was transferred "to the right place." The program itself, Joker noted, was created by Ukrainian and American specialists according to NATO standards. pic.twitter.com/lo8qw7x30P

— Кинжал Z (@1qCQDs3JLZ4oxs7) November 1, 2022

Back to Larry]

The key point for Hacker DPR Joker is that the head of Internal Affairs, Monastyrsky, was independent of the President, the military and the intelligence service (i.e., SBU). Because Monastyrsky is in charge of Ukraine’s national police, he and his subordinates were in a position to collect dirt on the illegal activities of Zelensky or the military and could use that as “leverage” (aka blackmail) to extract money or concessions.

That is at least one possibility that should be considered. What strikes me is that you had the equivalent of the FBI Director, the FBI Deputy Director and the Attorney General all on board the same aircraft. Why? What was their destination and why were all three on the same helo? Normal security procedures would keep the three men apart to avoid this very scenario. I cannot rule out the possibility that a Russian Spetznaz team carried out a hit. Regardless of who did it, this has created enormous turmoil within Zelensky’s government.

At a minimum, this is going to sharpen suspicions among the police, the military and the intelligence service. Warm, fuzzy feelings do not abound.

Preceding all of this was the forcible removal of Oleksii Arestovych, a former Ukrainian intelligence officer who, until this past weekend, was directing strategic communications for Zelensky. Mr. Arestovych made the mistake of telling the truth about a missile strike on an apartment building in Dnepropetrovsk. According to Arestovych, it is an errant Ukrainian missile. He said it was not Russian. Whoops!! That is verbotten. Not only was he fired (he reportedly tried to resign), but his name popped up today on the Ukrainian hit list reserved for enemies of Ukraine. That’s right. After a year of faithfully telling lies for Zelensky, he says something truthful and next thing you know he has a target for execution on his back.

Not a lot of good news in Ukraine other than the United States and Europe are promising to send more weapons to a beleaguered Ukrainian army. I actually think the Russians are more delighted by this than Ukraine. Reminds me of a scene from Game of Thrones when Tyrion Lannister thanks mutineers for an unexpected gift:

Oh, and about the weather in Europe, by Jan 28 Europe plunges into a deep freeze, -20C and snow chaos.

Perfect winter assault weather?

Violation of the Espionage Act?

Here’s the Espionage Act: https://www.law.cornell.edu/uscode/text/18/793

Some operative language:

(e) Whoever having unauthorized possession of, access to, or control over any document, writing, code book, signal book, sketch, photograph, photographic negative, blueprint, plan, map, model, instrument, appliance, or note relating to the national defense, or information relating to the national defense which information the possessor has reason to believe could be used to the injury of the United States or to the advantage of any foreign nation, willfully communicates, delivers, transmits or causes to be communicated, delivered, or transmitted, or attempts to communicate, deliver, transmit or cause to be communicated, delivered, or transmitted the same to any person not entitled to receive it, or willfully retains the same and fails to deliver it to the officer or employee of the United States entitled to receive it; or

(f) Whoever, being entrusted with or having lawful possession or control of any document, writing, code book, signal book, sketch, photograph, photographic negative, blueprint, plan, map, model, instrument, appliance, note, or information, relating to the national defense, (1) through gross negligence permits the same to be removed from its proper place of custody or delivered to anyone in violation of his trust, or to be lost, stolen, abstracted, or destroyed, or (2) having knowledge that the same has been illegally removed from its proper place of custody or delivered to anyone in violation of its trust, or lost, or stolen, abstracted, or destroyed, and fails to make prompt report of such loss, theft, abstraction, or destruction to his superior officer-

Shall be fined under this title or imprisoned not more than ten years, or both.

I was a commissioned officer in the US Navy and held a security clearance associated with my training and assignments as an engineering officer in naval nuclear propulsion.

We all knew the law. I knew another commissioned officer who mishandled classified information and was convicted by a court marial for his mistake.

After he left office, Joe Biden obviously violated paragraph (f) of the Espionage Act.

Hunter Biden obviously violated paragraph (e) of the Espionage Act. 

The governing law for the safeguarding of classified materials can be found at 32 CFR Part 117, the National Industrial Security Program, aka the NISPOM.  The NISPOM is the security bible for the security officers of defense contractors who deal with classified documents and customers.

What I see of media reporting and the White House narrative is cowardly and criminal.

They are purposely skewing the facts.  They are using propaganda to create the illusion that a simple accident or the mishandling of documents occurred.

The mere fact is classified materials are not mere documents.

The documents were not properly secured, as required by the NISPOM – prima facie evidence of a major crime.

In this case, the documents were essentially in the possession of Hunter Biden, the person who was reportedly living in the house, and who is not authorized to receive, possess, or transmit classified information. 

Any investigator would call that for what it obviously is: a probable safe house used to traffic classified materials, and for a long time.

Maybe there is an ulterior reason for Joe Biden to constantly return to Delaware or wherever his homes are located. 

There is only one purpose for removing classified information from a safe or a SCIF (Sensitive Compartmented Information Facility) without the proper authority — to conduct espionage.

Removal is stealing and stolen documents are necessary to engage in that crime.  Bradley Manning and Reality Winter are cases in point, that if you remove classified documents from a SCIF without authorization, you will be charged with violating the Espionage Act.

This basic lesson seems to have eluded the national security section of the FBI.

If you or I had a single page of TS/SCI classified material, out of its container, out of a SCIF, we’d be locked up for espionage in a microsecond.

That the FBI has chosen not to do anything speaks volumes.  They are compromised and by taking no action they are actually facilitating espionage.  It must be great having the FBI run cover for a criminal enterprise. 

We should not be surprised.  Hillary Clinton was caught violating the Espionage Act and everyone knew it, but FBI Director James Comey exonerated her. 

Bradley Manning and Reality Winter thought they would receive the same ‘punishment’ Hillary received, but were mistaken. 

As POTUS, Donald Trump had the absolute authority to declassify documents and keep copies of declassified documents for future use, such as for presidential libraries (see https://supreme.justia.com/cases/federal/us/484/518/)

Joe Biden has no excuse having any TS/SCI classified material, out of its container, out of a SCIF, unsecured in a garage, in the possession of someone not authorized to receive classified documents. 

There are many ways to conduct espionage, and President Biden has been caught in flagrante delicto trafficking classified documents.

Tax Scam?

Here’s the Market Ticker: https://market-ticker.org/akcs-www?singlepost=3940956

Well now the classified document scandal has really blown up in Biden’s face.

But even more-intriguing is that there is an apparent set of evidence of both hinky dealing and intentional cover-up to be found in Biden’s tax returns and the revelation that Hunter was paying Joe $50,000 a month to rent a house that was worth a couple of million.

Hunter also claimed that said house was owned by him, but the tax and deed records say otherwise.  That, however, is Hunter’s problem —  not Joe’s.  Joe’s tax return not only shows the property tax paid on the house it also deducts mortgage interest.  It’s his house both by deed and by who’s covering the mandatory bills.

Joe’s tax returns from the subject year shows business income from pass-throughs (two S corps) which is perfectly legal.  The tax returns do not show income in that classification from other sources; ergo, said “rental” has to be inside one of those two corporations or there is a serious felony involved, because that would be $600,000 of undeclared (and untaxed) income.  Line 17 of Schedule 1 shows this and ties back from Schedule E, as it must.  The other “business income or loss” from Schedule C is inconsequential in amount.

But this leads to a very serious question: There’s nothing wrong with an S corp owning property but does it not have to be titled into the corporation?  It wasn’t; at all times material the house was owned by Jill and Joe Biden in their personal capacity.  It was not in a trust of some sort nor was it retitled into an S-corp as there’s no record of either.  That seems rather hinky but perhaps not.  In any event rental property is very different than a personal residence in that with rental property there’s depreciation and all other manner of things you can deduct that isn’t true for a personal residence — but if you convert it back to a personal residence that gets recaptured which is something I’ve warned other people to be careful of.

So let’s see the records on those two S-Corps that the Bidens declared and paid taxes on during that year.  Is the rental income from Hunter in there, and if so, how does the S-Corp, which I remind as a corporation must keep formal books of account and not lie in any material respect account for income from an asset it does not own?

If the rental income isn’t in those two S-Corps then either it never existed or Joe and Jill ripped off the government and committed tax fraud on the $600,000 paid by Hunter to Joe that is not declared anywhere in their state or federal tax returns.

In any event someone is hiding something in there.  Whether this is more confabulation of a drug-addled Hunter or was disclosure of “10% for the big guy” kicked back to his father under the table and either improperly buried in an S-Corp “profit” that never owned the asset in question and thus can’t do that or Joe and Jill got $600,000 worth of undeclared income and didn’t pay taxes on it is now the question that demands an answer.  After all tax cheating in that sort of size is serious business, felony-level serious, and is one of the few plausible explanations for what those documents disclose.

I’m not a CPA or Enrolled Agent; I paid both when I ran corporations, but I have run an S-Corp, an LLC and a C-Corp and signed tax returns listing income from all three over the years.  I know what the law is in this regard because I respected and properly followed same.

If I pulled something like this and attempted to claim 10x the reasonable and expected rate of rental income on a single house by running it through an S-corp I’d have federal and state tax people along with law enforcement crawling so far up my rectum I’d be able to taste it.

Well?

Alex Krainer: https://alexkrainer.substack.com/p/japans-economy-the-worlds-ticking?publication_id=1063805&post_id=97572798&isFreemail=true

In Ernest Hemingway’s 1926 novel The Sun Also Rises, Bill asks Mike, “How did you go bankrupt?” “Two ways,” Mike said. “Gradually and then suddenly.” Hemingway succinctly conveyed the way things tend to fail. The gestation may be long: a slow, gradual compounding of headwinds, errors and missed opportunities, with failure becoming probable long before it actually happens. When it does happen however, it may seem sudden and even unexpected.

The gradual decline of Japan

I’ve been following the gradual decline of Japan’s economy for over ten years; Way back in March of 2010 I published an article titled, “Japan: the Harbinger of (bad) things to come,” opening with the sentence, “Large and gathering imbalances brewing in the Japanese economy threaten to generate a tsunami-like fallout that could soak most of the global economy.” The Bank of Japan (BOJ) cut interest rates to zero in 1999 and started quantitative easing in 2001, using its monetary printing presses to buy up corporate bonds, REITs, stocks and Japanese Government Bonds (JGBs).

Over the ensuing 12 years and several rounds of ever greater QE, the imbalances have only worsened and in February last year, the BOJ was forced to go full Mario Draghi, all-that-it-takes, committing to buy unlimited amounts of JGB’s. At the same time however, the BOJ capped the interest rates on 10-year JGBs at 0.25% to avoid inflating the domestic borrowing costs.

Yen will burn to a crisp!

Well, if you conjure unlimited amounts of currency to monetize runaway government debt, and you keep the interest rates suppressed below market levels, you are certain to blow up the currency. On 8 March this year, when the yen was trading around 115 to the US dollar I wrote in my daily TrendCompass report that the “yen will burn to a crisp over the coming years,” as discussed also in a podcast with Tom Luongo. By the way, that podcast has aged remarkably well considering everything that’s been happening through the super-eventful year 2022.

The sudden collapse

By the end of 2022 we may also have reached the inflection point between Hemingway’s gradually and suddenly. In December alone, the BOJ escalated its JGB purchases to keep the yield on JGB’s capped at 0.25%: it spent 17 trillion yen (equivalent to about 3% of Japan’s GDP). In spite of that, on December 20 we saw the BOJ’s first battlefield retreat when it unexpectedly raised the maximum rate of 10-year JGBs from 0.25% to 0.50%. In spite of that, the BOJ had to continue spending huge sums to defend the new rate: on 12 and 13 January, it spent another 10 trillion yen (2% of GDP) wetting a new daily record. By now, the Bank of Japan owns about 55% of all Japanese Government Bonds.

The risk is this…

Yesterday morning (Wednesday, 19 January 2023), as it concluded its 2-day meeting, the BOJ Policy Board announced that it would hold the 10-year JGB yields firm at 0.50%. But the unravelling is far from over. As Jim Grant said in his recent interview, “Japan is perhaps the most important risk in the world, not least because it is among the least discussed risks… The risk is this: Every business day, the Bank of Japan is spending tens of billions of dollars worth of yen to enforce governor Kuroda’s yield curve interest rates suppression program. To put this into perspective: in the UK, when the little crisis over liability driven pension investing in late September happened, the Bank of England spent around $5 billion. The BOJ does that before breakfast.“

Grant is also right about the fact that Japan is among the least discussed risks today. By the way, if you wish to keep abreast of the developments in Japan, I recommend Richard Katz’s excellent Substack, “Japan Economy Watch.”

What happens next?

There’s no predicting how this situation will unfold. Corroborating Ernest Hemingway, Jim Grant also points out that bond market cycles tend to be very long and that trends reverse only very gradually. However, when governments and central banks resort to the printing presses to monetize debt, and we have seen many such cases through history, the typical outcomes include the collapse of the currency, rise in interest rates, and very probably a sharp rise in equity values. One such example, and a possible indication of what we might see in Japan, was Germany at the beginning of the last century:

Here again, we can see the gradual phase of the decline from about 1896 turn into the suddenly phase in the beginning of 1918. By the end of 1922, German government bonds had become nearly worthless.

Stocks go vertical…

What typically happens as bonds and the currency collapse, equities tend to go vertical as we saw in many cases, including Venezuela, Zimbabwe, Argentina, Israel and also the Weimar Republic:

This is perhaps because investors see holding any asset preferable to holding cash, so they plough ever penny they can spare into stocks.

Even if the timing and magnitude of these events can’t be predicted, such large-scale price events invariably unfold as trends. The most reliable way to navigate trends is with trend following strategies. For example, last year we’ve already seen the beginnings of the collapse of the yen. Here’s how the 12 trend following strategies included in our Major Markets TrendCompass report performed:

The top of the chart shows the price of US dollar in yen, which suddenly vaulted through most of 2022. And in spite of the yen’s strong recovery in the last quarter of 2022, I expect that this story has only started its suddenly phase of collapse. Over the coming months and years, we’ll likely see further pressure on the yen and JGBs. The Nikkei will likely break into a significant uptrend fairly soon.

It’s not just Japan…

With time, the same developments will almost certainly engulf Great Britain and the Eurozone. Ultimately, even the United States will not be able to avoid the collapse; that outcome is baked into the economic equation from the get go under the monetary system based on fractional reserve lending with a fiat currency.

The Cradle: https://thecradle.co/article-view/20403/europes-gas-emergency-a-continent-hostage-to-seller-prices

**********

Europe’s gas emergency: A continent hostage to seller prices

The 2022 outbreak of war between Russia and Ukraine revealed the importance of energy security in bolstering Moscow’s geopolitical power in Europe. The continent, which imported about 46 percent of its gas needs from Russia in 2021, found itself in a vulnerable position as it sought alternative sources.

This presented an opportunity for the US to replace Russia and become the primary supplier of natural gas to Europe at significantly higher prices, resulting in large profits at the expense of its European allies. According France-based data and analytics firm, Kpler, in 2022 the EU imported 140 billion cubic meters (BCM) of liquefied natural gas (LNG), an increase of 55 BCM from the previous year.

Around 57.4 BCM of this amount (41 percent) now comes from the US, an increase of 31.8 BCM, 29 BCM from Africa (20.7 percent) – mainly from Egypt, Nigeria, Algeria and Angola – 22.3 BCM from Russia (16 percent), 19.8 BCM from Qatar (14 percent), 4.1 BCM from Latin America (2.92 percent) – mainly from Trinidad and Tobago – and 3.37 BCM from Norway (2.4 percent).

In 2022, France was the leading importer of LNG in Europe, accounting for 26.23 percent of total imports. Other significant importers included Spain (22.3 percent), the Netherlands (12.65 percent), Italy (11 percent), and Belgium (10.42 percent).

These countries, along with Poland (4.7 percent), Greece (2.9 percent), and Lithuania (2.31 percent), imported over 90 percent of LNG exported to Europe at prices higher than Russian pipeline gas. It is worth noting that upon arrival, LNG is converted back to its gaseous state at receiving stations in Europe before being distributed to countries without such infrastructure, such as Germany.

Switching dependencies

Europe was able to reduce its reliance on Russian pipeline gas from 46 percent to 10 percent last year. This decrease, however, came at a high cost to the economy, as the price of gas rose to $70 per million British thermal units (Btu), up from $27 before the Ukraine war. By the end of the year, the price had fallen to $36, compared to $7.03 in the US.

This price disparity has been hard to stomach. French President Emmanuel Macron went public with his annoyance: “American gas is 3-4 times cheaper on the domestic market than the price at which they offer it to Europeans,” criticizing what he called “American double standards.”

High gas prices have made Europe an appealing destination for gas exporters from around the world, with increased interest from countries such as Egypt, Qatar, Turkey, UAE, Iran, Libya, Algeria, and those bordering the Mediterranean basin, as they either export gas, or possess gas but lack infrastructure.

To replace the cheaper Russian pipeline gas, European countries are being forced to seek out the more expensive LNG. The EU and Britain are working to increase LNG import capacity by 5.3 billion cubic feet (BCF) per day by the end of 2023, and by 34 percent, or 6.8 BCF per day, by 2024.

Can West Asia, North Africa meet Europe’s gas needs?

The West Asia and North Africa region has the potential to partially meet Europe’s gas needs due to its geographic proximity and the presence of countries with large gas reserves and export infrastructure, such as Palestine/Israel, Algeria, and Egypt. However, there are several obstacles that must be considered.

For example, Egypt’s high production costs and increasing domestic consumption limit its export capacity. Additionally, Europe would need to be willing to pay a higher price than the Asian market for Egyptian gas.

Israel, on the other hand, has seen an increase in gas exports to Europe in the first half of 2022 after the pipeline to Egypt via Jordan was restored in March, but it is unlikely to significantly increase exports in 2023 due to factors such as limited export capacity and high domestic consumption. Experts predict that Israel may export around 10 BCM of gas to Europe this year, similar to the amount exported in 2022.

Qatar is the only Persian Gulf emirate that has increased its gas exports to Europe for 2022. This is largely because Persian Gulf countries prefer to sell their gas to Asian markets, where they can garner higher profits due to lower shipping costs and longer-term contracts.

Last year, Qatar took advantage of the significant increase in gas prices to sell part of its shipments on the European spot market. According to the Qatari Minister of Energy, between 10 percent and 15 percent of Qatar’s production can be diverted to this market.

However, it may be difficult for Europe to attract Qatari gas away from the Asian market, especially as China is expected to recover its demand for gas in 2023. In a policy home-goal, western sanctions on Iran, which has the second-largest natural gas reserves in the world, impede the investment needed to increase Iranian production.

No real alternatives

Iran’s lack of infrastructure connecting it to Europe and high domestic consumption also affect its export capacity. According to a report by BP, Iran produced 257 BCM of gas in 2021, of which 241.1 BCM were consumed domestically.

With regards to Algeria, the main obstacle in increasing its gas exports to Europe is political tension with Morocco and Spain that led to the suspension of the Moroccan-European gas pipeline project, which can export 10.3 billion cubic meters of Algerian gas.

In the case of the UAE, despite having the seventh-largest proven natural gas reserves in the world, its production is not sufficient to meet the demands of the local market and it imports a third of its gas consumption from Qatar through an undersea pipeline. European countries are currently in talks with Abu Dhabi to accelerate work on gas projects and increase production.

As for Saudi Arabia, it consumes all of its gas production domestically and does not export any, with a total production of 117.3 BCM in 2021. There are also expectations for a significant increase in the demand for oil and coal in 2023. The World Bank reports that this is due to an increase in European countries’ reliance on these fossil fuels instead of natural gas. This increase in demand will keep oil prices high, allowing Saudi Arabia and other OPEC+ members to make large profits.

The dilemma of growing demand

The Paris-based International Energy Agency (IEA) predicts that global demand for natural gas will increase to 394 BCM this year, driven in part by Europe’s need to diversify its sources of gas away from Russia. And West Asia, with its significant reserves, remains a key region for Europe to tap into for this purpose.

The challenge remains in finding cost-effective ways to transport the gas from the region to Europe, which will necessitate building a pipeline connecting the Mediterranean Basin to the Old Continent.

Failure to do so will result in Europe continuing to pay a high premium for its energy security without achieving true independence. The alternative for Europe is to rely on LNG from the US. This gives Europe almost complete independence from Russian gas, but keeps it weak, obedient, and dependent on American energy supplies.

ZH: https://www.zerohedge.com/markets/beginning-end-credit-cycle

The Beginning Of The End Of The Credit Cycle

BY TYLER DURDEN

TUESDAY, JAN 17, 2023 – 03:21 PM

Authored by Simon White, Bloomberg macro strategist,

The credit cycle is turning, which points to wider credit spreads, increasing loan-losses at banks, and rising equity volatility.

Credit has exploded higher since the pandemic. But all good things must come to an end, with credit busts typically following close on the heels of credit booms. Cracks are now emerging in lending markets as the sharpest monetary policy tightening in decades begins to bite.

The recent expansion in credit was across the board, from leveraged and private loans to corporate debt and bank loans. There was a brief retracement as some of the fiscal support extended to private lending was withdrawn after lockdowns were eased. But with monetary policy still extremely loose, credit took off again, soon making new highs.

Rapid expansions in credit are rarely a good thing as the quality of lending tends to deteriorate, ultimately leading to a bust as many loans go bad at once. This cycle has been no different, with more loans made at lower spreads, with fewer protections for lenders, and to lower-rated borrowers.

But after the feast comes the famine. The credit cycle operates in a well-defined sequence: first lending conditions tighten, then demand for loans falls, followed by a fall in loan supply. Loan delinquencies then increase as it is harder to get new credit, followed by a rise in charge-off rates as losses are realized. Finally, bankruptcies and defaults rise as loan losses lead to insolvencies.

Lending conditions have been tightening since October, based on the Fed’s Senior Loan Officer Survey for banks. This is leading to demand for loans falling, which in turn points to weaker loan growth.

This tightening in conditions is not confined to bank lending – we are also seeing it in corporate debt, which dwarfs banks loans in size by about eight times. Credit spreads have widened markedly since the Fed has been raising rates.

I expect this trend to continue given the extraordinarily rapid rise in leverage since the depths of the pandemic. As the chart below shows, leverage leads credit spreads by about 18 months. This is because the bad lending that inevitably occurs during credit booms leads to stress on firms’ capital structures as old loans cannot be rolled due to tighter and pricier new lending.

Thus, despite the tightening in credit spreads seen in recent months, they are likely to begin widening again.

The most lagging parts of the credit cycle are delinquencies, charge-off rates and bankruptcies.

These peak during or after the recession, but begin rising before it. Delinquencies are slowly rising across loan categories, including credit cards, auto loans and mortgages.

Charge-off rates are beginning to climb as well. Wider credit spreads are a leading indicator for the further rise in loan charge-offs banks will soon see.

Lenders, including Bank of America and JPMorgan, have been increasing loan-loss provisions in preparation for a downturn or a recession. Still, loan-loss provisions for US banks remain more reflective of a zero-interest rate world, and are below where they were in the 1990s, a period with significantly above-zero rates similar to today. Banks are at risk from being underprepared for a potentially deep recession.

Cracks are also beginning to emerge in some of the most speculative parts of credit markets, such as leveraged loans. While a tiny sector compared to corporate credit, it is a harbinger for overall sentiment. Leveraged loans to junk-rated firms have been getting downgraded at the fastest pace since the pandemic, according to Citi, while leveraged-loan holders have a high sensitivity to rising rates due to floating-rate repayments and less hedging.

Weaker credit markets and wider credit spreads will also lead to higher equity volatility. The VIX has been missing in action this past year. After hitting 39 last January, it has remained below this level all through 2022 to now, despite one of the worst bear markets in over a decade.

A reduction in equity positioning leading to a reduced need for deep out-of-the-money downside protection is likely part of the reason, but that will change in a credit downturn and recession. Equity is just the thin sliver of capital between a company’s assets and liabilities, and when the capital structure comes under strain due to bad loans, the equity gets stressed leading to rise in equity volatility.

Loan and corporate-debt issuance has slowed this year compared to last, but the penny has not yet dropped that the credit cycle is on the cusp of turning, and could deteriorate significantly in the coming quarters – turbocharged by an impending recession. As always in markets, pay attention to what is going to happen, not what is happening, and prepare accordingly.