The Great 2021 Squeeze Mania 

Doug Nolan

Yet another week for the history books. 

For posterity: GameStop gained 400%, AMC Entertainment 278%, Express 235%, Siebert Financial 122%, Cel-Sci 75%, Novavax 74%, Vaxart 68%, Fulgent Genetics 60%, Vir Biotechnology 59%, National Beverage 54%, and Fossil 47%. Ominously, the VIX Index spiked to almost 38.

Retail vs. the Hedge Funds. 

David vs. Goliath. Main Street Beating Wall Street. 

The democratization of finance for all. 

A Bloomberg headline from December: 

“Robinhood Is Not Gamifying Markets. It’s Democratizing Them.” 

Social media instigating a bloody short squeeze upon the hedge funds. 

The first month of the new year begins with chaos in our Nation’s Capital and ends with market mania chaos – both manifestations of Acute Monetary Disorder. 

Society Out of Kilter.

Shorting and even so-called “squeezes” have been part of markets for centuries. 

From a 2008 Reuters article, “Short Sellers Have Been the Villain for 400 years”: 

“In 1609, a merchant contracted to sell shares in the Dutch East India Company in the future, sending the company’s share price into a plunge. 

A year later, the authorities imposed the world’s first ban on short selling.”

My first experience with a short squeeze was in 1991. 

I was working for a bearish hedge fund that had just wrapped up a bountiful 1990. 

The economy was sinking into recession, the banking system was in trouble, and the U.S. was heading into war. 

Prospects for our fund could not have appeared brighter. 

Then, seemingly out of nowhere, disaster struck. 

Short Squeeze.

We had a handful of positions both heavily shorted and illiquid. 

These were also shorted by the leading short hedge fund at the time that, trapped by the squeeze, was “blowing up.” 

Hedge funds had even invested in short hedge funds specifically to garner a list of short squeeze candidates. 

It was dog-eat-dog, ruthless, manipulative and bloody within the nascent hedge fund industry. 

There was another brutal squeeze following the Fed’s Q4 1998 LTCM bailout – a squeeze that unleashed 1999 speculative blow-off “tech” Bubble dynamics. 

There was a decent squeeze that fueled record market highs after the Fed’s 2007 subprime blowup emergency measures. 

A big squeeze unfolded in 2009 after the Fed’s $1 TN QE-fueled market recovery. 

There were “mini” squeezes in 2011, 2013 and 2018.

Last March’s unprecedented Federal Reserve (and global central bank) crisis response unleashed a historic squeeze dynamic. 

Squeeze poster child Tesla surged about 700%, surely inflicting the largest ever losses from an individual company short position. 

The Goldman Sachs Most Short Index rallied over 200% off March lows, ending 2020 up more than 50%. 

The shorts came into 2021 significantly impaired and vulnerable. 

The retail “Robinhood” online trading community strolled merrily into 2021 in the money, emboldened, and understandably overconfident. 

After all, the Fed last year rigged the “investing” game to ensure maximum payouts. 

Some during 2020 caught on to the market peculiarity that there’s no quicker way to post hefty trading gains than to be on the right side of a short squeeze. 

This week the Manic Crowd discovered this phenomenon – and what a spectacular mob scene erupted. 

I appreciate that the retail trading community especially despises the “unsophisticated” label after a year of capturing such heady trading gains. 

But, as a group, they have no idea the fire they’re playing with. 

A well-known market pundit on Bloomberg Wednesday morning celebrated the retail traders’ defining success over the hedge funds. 

That the online trading community would profit from unwise and unwieldy short positions was nothing short of a marvel of Capitalism. 

What we’re witnessing poses a risk to Capitalism – an out of control mania. 

The Madness of Crowds. 

I’ve been increasingly disturbed by the manic nature of online equities and options trading. 

These concerns have only been elevated by throngs of online traders partaking in a chaotic squeeze episode. 

Many must be inexperienced in such cutthroat market warfare and surely do not comprehend the risk. 

Squeezes are pernicious market dislocations that ensure significant wealth transfers. 

There are big winners and losers – the ultimate game of chicken pitting greed versus fear. 

Some hedge funds will not survive this ordeal. 

Other funds will profit handsomely from the squeeze - and likely then turn their sights on exposed retail traders. 

There will be winners in the retail community – that will for years enjoy bragging rights for nailing the Great 2021 Squeeze. 

I hope I’m wrong on this, but most will be losers. 

Before this is over, many will blow up their trading accounts and exit the casino in dismay – or worse. 

Short squeezes always have a pyramid scheme component. 

It’s musical chairs, and the velocity with which squeeze stocks eventually collapse will be a shock to many. 

There was outrage Thursday after Robinhood and other online brokers restricted trading in a limited number of stocks. 

Just wait until this Bubble implodes and there’s blood in the (Main and Wall) Streets. 

Trading systems were stressed this week by millions of buy orders. 

How will the system function under the stress of tens of millions of panicked sell orders? 

I’ll presume worse than March.

Things get crazy at the end of cycles. 

To what scale of craziness during the waning days of an epic super-cycle? 

From this perspective, it’s only fitting that Crowds of retail traders discover the short squeeze game – the ultimate speculation. 

It’s also a conspicuously late-cycle phenomenon. 

Indeed, ears were ringing this week from sirens blaring warnings of trouble ahead.

January 27 – Bloomberg (Lu Wang and Melissa Karsh): 

“Hedge funds are slashing their stock exposure at the fastest rate in more than six years as a wave of volatility tied to some of their most-prominent bets forced a retreat from the market… 

The Goldman Sachs Hedge Industry VIP ETF, tracking their most-popular stocks, tumbled 4.3% for the worst day since September.”

A significant “risk off” deleveraging event is likely now unfolding. 

The dislocation in the short stock universe has inflicted serious losses across hedge fund strategies. 

These drawdowns dictate risk control measures, moves to reduce exposures including long holdings. 

Liquidation of the favorite longs (and resulting underperformance) has only exacerbated problems for long/short and some factor quant strategies. 

Losses along with general market uncertainty and instability have begun to force de-risking/deleveraging across strategies. 

Moreover, how much of the recent market advance was fueled by options-related buying (and associated leverage)? 

If it’s as significant as I suspect, the market is further vulnerable to self-reinforcing options-related deleveraging.

Treasuries were a notably weak hedge this week against instability in the risk markets. 

Ten-year Treasury yields dipped only two bps with the iShares Long-Term Treasury ETF gaining 0.1%. 

This highlights a potentially problematic dynamic for levered “risk parity” strategies, in particular. 

At this point, various strategies that incorporate a Treasury hedge would appear vulnerable to losses and deleveraging. 

Hedge fund managers – along with their investors – will now be watching anxiously for the next shoe to drop. 

Bubbles are self-reinforcing and appear to function splendidly so long as speculative leverage is increasing. 

As we witnessed as recently as last March, they don’t work in reverse. 

While on the subject of deleveraging, Friday from Bloomberg under the headline, “China Engineers Biggest Cash Squeeze Since 2015 to Avoid Bubbles:” 

“Beijing is so fearful of speculative manias that authorities are creating the biggest liquidity crunch in more than five years, roiling Chinese stocks and bonds and freezing a key funding market. 

The cost of overnight interbank borrowing surged 29 bps to 3.3433% on Friday, the highest since March 2015 and above the yield of China’s 10-year government debt. 

Earlier this month the overnight rate was just 0.6%. 

The real rate was even higher for some would-be borrowers, with brokers offering funds at 10% or higher... ‘The market is under huge liquidity stress,’ said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group.” 

The Shanghai Composite dropped 3.4% this week, with the growth-oriented ChiNext Index slammed for 6.8%. 

Major equities indices were down 5.5% in Taiwan, 5.2% in South Korea, 7.1% in Indonesia, 6.2% in Philippines, 9.4% in Vietnam and 6.7% in India. 

EM equities were under significant pressure as well in Eastern Europe and Latin America. 

For the most part, EM currencies and bonds suffered only modest losses, though the Mexican peso was hit for 2.9%.

Beijing has clearly made the decision to rein in some Bubble excess. 

Previous efforts were postponed, more recently due to the U.S. trade war and then by the pandemic. 

I’ll assume officials will proceed cautiously. 

Perhaps Beijing observes the U.S. struggling with myriad issues and believes it is opportune timing for China to take some needed medicine. 

I also assume that even timid tightening measures have potential to destabilize fragile Chinese and global finance. 

Hedge fund de-risking coupled with Chinese tightening measures hold potential to evolve into a powerful global deleveraging dynamic. 

And if global “risk off” does materialize, the myth of central bank control over liquidity will again be challenged. 

The global Bubble Thesis held that global leveraged speculation was at unprecedented extremes even prior to the pandemic. 

I fear leverage and speculative excess have expanded significantly since last year’s Fed and global central bank market bailouts. 

I do have some empathy for our Fed Chair. 

This historic Bubble has been decades in the making, though his Fed has certainly orchestrated some crucial finishing touches. 

Powell was noticeably uncomfortable Wednesday. 

He clearly has no answers for fundamental questions regarding how the Fed should respond to the most speculative market environment imaginable. 

They’ve been unrelenting with their huge liquidity injections right into a mushrooming market mania. 

Aggressive stimulus measures have promoted historic leveraged speculation. 

Now Powell is facing the possibility of acute financial instability and crisis after a year of creating $3.3 TN of additional liquidity. 

He knows this, and it must be deeply unnerving. 

New York Times’ Jeanna Smialek: 

“I was hoping that you would first react to the wild ride that GameStop stock has had this week. 

And then secondarily, you and your colleagues have repeatedly made it clear that you really plan to use macro-prudential tools as the first line of defense when it comes to financial stability risks, but your macro-prudential tools primarily apply to the banks. 

I’m wondering what your plan is, if you see some sort of large financial stability risks emanating from the non-bank financial sector in the coming months, especially as it relates to search for yield kind of activities, what do you see as the solution there?”

Chair Powell: 

“So, on your first question, I don’t want to comment on a particular company or day’s market activity or things like that… 

In terms of macro-prudential policy tools…, we rely sort of always on, through the cycle, macro-prudential policy tools, particularly the stress tests and also the elevated levels of liquidity and capital and also resolution planning that we impose on the largest financial institutions.

We don’t use time varying tests and tools as some other countries do. 

And we think it’s a good approach because for us to use ones that are always on because we don’t really think we’d be successful in every case in picking the exact right time to intervene in markets - so that’s for banks. 

You really asked about… the non-bank sector. And so, we monitor financial conditions very broadly. And while we don’t have jurisdiction over many areas in the non-bank sector, other agencies do.

And so, we do coordinate through the Financial Stability Oversight Council and with other agencies who have responsibility for non-bank supervision. 

And in fact…, in the last crisis the banking system held up fairly well so far. 

And the dislocations that we saw from the outsized economic and financial shock of the pandemic really appeared in the non-bank sector. 

So that’s, right now, we are engaged in carefully examining, understanding and thinking about what in the non-bank sector will need to be addressed in the next year or so.”

CNBC’s Steve Liesman: 

“…I wonder if I could follow up on Jeanna’s question here. 

I understand that you do address issues of valuations through macro-prudential policies in the first instance, but there’s a range of assets, and I know you do watch a range of assets, but from bitcoin to corporate bonds, to the stock market in general, to some of these more specific meteoric rises in stocks like GameStop, how do you address the concern that super easy monetary policy, asset purchases and zero interest rates, are potentially fueling a bubble that could cause economic fallout should it burst?”


“Let me provide a little bit of context. 

The shock… from the pandemic was unprecedented both in its nature and in its size, and in the amount of unemployment that it created, and in the shock to economic activity. 

There’s nothing close to it in our modern economic history. 

So, our response was really to that, and we’ve done what we could first to restore market function, and to provide a bit of relief, then to support the recovery, and hopefully we’ll be able to do the third thing - which is to avoid longer run damage to the economy.

Our role, assigned by Congress, is maximum employment and stable prices and also look after financial stability. 

So, in a world where almost a year later we’re still nine million jobs at least, that’s one way of counting it, it can actually be counted much higher than that, short of maximum employment. 

And… the real unemployment rate is close to 10% if you include people who have left the labor force. 

It’s very much appropriate that monetary policy be highly accommodative to support maximum employment and price stability, which is getting inflation back to 2% and averaging 2% over time.

So, on matters of financial stability, we have a framework. 

We don’t look at one thing or two things. 

We… made that framework public after the financial crisis so that it could be criticized and understood, and we could be held accountable.

And… we do look at asset prices. 

We also look at leverage in the banking system. 

We look at leverage in the non-banking system, which is to say corporates and households, and we look at also funding risk.

And if you look across that range of readings, they’re each different. 

But we monitor them carefully. 

And I would say that financial stability vulnerabilities overall are moderate. 

Our overall goal is to assure that the financial system itself is resilient to shocks of all kinds. 

That it’s strong and resilient, and that includes not just the banks, but money market funds and all different kinds of non-bank financial structures as well.

So, when we get to the non-financial sector, we don’t have jurisdiction over that, so I would just say there are many things that go in… to setting asset prices.

If you look at where it’s really been driving asset prices, really in the last couple of months, it isn’t monetary policy. 

It’s been expectations about vaccines, and it’s also… fiscal policy. 

Those are the news items that have been driving asset values in recent months.

So, I know that monetary policy does play a role there. 

But that’s how we look at it. And I think that the connection between low interest rates and asset values is probably something that’s not as tight as people think because a lot of different factors are driving asset prices at any given time.”


“Mr. Chairman, do you rule out or see as one of your tools in the toolkit the idea of adjusting monetary policy to address asset values?”


“So… that’s one of the very difficult questions in all of monetary policy. 

And we don’t rule it out as a theoretical matter. 

But we clearly look to macro-prudential tools, regulatory tools, supervisory tools, other kinds of tools rather than monetary policy in addressing financial stability issues. 

Monetary policy we know strengthens economic activity and job creation through fairly well understood channels. And a strong economy is actually a great supporter of financial stability. 

That will mean strong, well-capitalized institutions, and households will be working. And so we know that.

We don't actually understand the trade-off between - …if you raise interest rates and thereby tighten financial conditions and reduce economic activity, now in order to address asset bubbles and things like that. 

Will that even help? Will it actually cause more damage, or will it help? 

So, I think that’s unresolved. 

And I think it’s something we look at as not theoretically ruled out, but not something we’ve ever done and not something we would plan to do. 

We would rely on macro-prudential and other tools to deal with financial stability issues.”

Bloomberg Wednesday interviewed former Fed governor and current Colombia University professor Fredric Mishkin: 

“I actually think that people overdo their focus on the stock market as driving things. 

In fact, Bubbles in the stock market, per se, when they burst are not really the problem for the economy. 

They can be dealt with. 

It’s when it involves the Credit markets. 

The thing that caused the problem in terms of the last global financial crisis was not the stock market – not the fact that there were changes in asset prices, per se. 

It was the fact that when that happened, it really affected the Credit markets and caused them to seize up. 

That’s not where we are right now. 

So, I think that people focus on the market – people could lose money, they could do stupid things, you can have Bubbles, there’s the crazy things that are happening with GameStop and so forth – but that actually very rarely has a major effect on the economy unless it interacts with the Credit markets, which I don’t think is what we’re seeing right now.”

Dr. Mishkin should spend some time with the Fed’s Z.1 report, while giving serious thought to what transpired last March. 

Never has U.S. Credit expanded so rapidly. 

Moreover, this Credit is largely non-productive. 

There is also strong support for the thesis that the current scope of speculative Credit is unprecedented. 

At this point, we’re an unexpected market-induced tightening of financial conditions away from major financial and economic issues.

Bubbles are mechanisms of wealth redistribution and destruction. 

And it’s generally the “middle class” that becomes most vulnerable. 

They have wealth to lose while typically lacking the wherewithal of the wealthy to protect themselves. 

It’s worth recalling that Nasdaq lost 78% of its value in 30 months when that Bubble burst in 2000. 

Tens of millions suffered from the bursting of the mortgage finance Bubble. 

Yet never has the household sector been as exposed to a financial Bubble as it is today. 

I hate the thought of devastating losses – in online trading and investment accounts and retirement savings. 

There will be public outrage, followed by a regulatory crackdown. 

It will prove further destabilizing for an already troubled society. 

There will be further loss of trust in our institutions. 

I don’t share the sentiment that today’s short squeeze has anything to do with Capitalism. 

Instead, I expect to spend the rest of my life defending free markets and Capitalism more generally. 

Today’s fragile Bubble is a product of failed policymaking doctrine, inflationism and years of deepening Monetary Disorder. 

The Fed has made a catastrophic mistake in repeatedly backstopping markets, distorting risk perceptions, and perpetuating history’s greatest period of financial and speculative excess. 

January 29 – Bloomberg (Alan Mirabella): 

“The GameStop Corp. saga is another sign of the growing intolerance among those with opposing views that’s roiling the U.S., according to Bridgewater Associates’ founder Ray Dalio. 

‘What concerns me more is the general anger -- and almost hate -- and the view of bringing people down that now is pervasive in almost all aspects of the country,’ Dalio said… ‘That general desire to hurt one another’ is of concern, he said.” 

The corrosiveness of unsound money is as insidious as it is today conspicuous. 

Inflationism has already wrought irreparable damage upon the fabric of our society. 

The cost of the most recent $3 TN Fed “money printing” melee is just beginning to come into clearer focus. 

The next few TN risk a systemic crisis of confidence and social mayhem. 

Their inflation and unemployment mandates will be the least of the Fed’s worries.

China’s Economy Did Well in 2020. The U.S. Economy Did Not, but It’s Better Off. Here’s Why.

By Matthew C. Klein

This aerial photo taken on on May 8, 2019 shows a port in Lianyungang in China's eastern Jiangsu province./ STR/AFP/Getty Images

The numbers are in—China’s economy grew 2.3% in 2020 while the U.S.’s shrank about 3.5%—and they’re misleading.

Despite the extreme divergence, the U.S. economy performed better by many of the most important measures. That’s all the more impressive considering China’s superior handling of the coronavirus pandemic that originated in Wuhan.

The upshot: The U.S. should be in better shape as the world recovers in the years ahead.

The initial impact of the virus was almost identical everywhere, with economic output falling 20% to 30% before gradually recovering. But the recoveries in each society have differed depending on how each government responded to the economic hit from the virus.

In China, the government refrained from helping workers and ordinary households directly. 

Instead, the government supported politically connected businesses and local governments through cheap credit and helped exporters by intervening to prevent the currency from appreciating.

Total “aggregate financing to the real economy” rose by 35 trillion yuan (around $5.4 trillion) in 2020, compared with 26 trillion yuan in 2019 and just 19 trillion yuan in 2018. 

The uptick was driven by state-backed bank loans and by a surge in local government bond issuance.

At the same time, Chinese state-controlled banks and the People’s Bank of China have been aggressively purchasing foreign assets, almost certainly to manage the exchange rate. 

Since April, the big banks have bought $137 billion of foreign assets and repaid $20 billion in foreign debts, while the PBOC itself has added $234 billion in foreign exchange assets. 

In other words, Chinese government-connected entities have bought nearly $400 billion in foreign currency in the space of eight months, or almost $600 billion at an annual rate. 

That’s substantially higher than the rate of reserve accumulation the PBOC reported in the peak manipulation years from 2006 to 2011.

Thus, even though the yuan has gained about 10% against the dollar since the pandemic began, it’s been essentially flat against the trade-weighted basket that the government targets. 

Absent any intervention, China’s currency would have appreciated far more against the currencies of its trading partners to reflect the decline in the prices of commodities that China imports and the Chinese government’s relative success at containing the pandemic.

The result is that China’s recovery was led by residential construction (up 8%), infrastructure spending (up 5%), and exports (up 5%). 

But household consumption lagged far behind (down 4%) because the government preferred to let the tens of millions of migrant workers who lost their jobs return to the countryside and live as subsistence farmers rather than offer urban unemployment benefits.

The divergence between the Chinese government’s support of its producers and neglect of its consumers caused the country’s trade surplus to widen to its highest level ever by a wide margin.

Yes, the collapse in the number of Chinese traveling abroad due to the pandemic and the decline in commodity prices have hit imports, but that isn’t a sufficient explanation. 

After all, consumers who save money from deferred vacations should have more money to spend on other things, some of which may have to be imported. And Chinese exports are higher than ever. What’s the point of earning all that extra income from selling goods to foreigners if you won’t spend it on things you can’t make yourself?

It all makes for a striking contrast with the U.S. The American government provided enormous amounts of direct income support to households through one-off “economic impact payments,” enhanced unemployment insurance benefits, forgivable loans for businesses, and debt forbearance. 

While much of this support was saved and used to bid up the prices of housing and stocks, the government aid was also used to finance purchases of consumer goods.

These policy differences were at least as important for the economy as the two governments’ handling of the pandemic itself. China had effectively eliminated the virus from within its borders by April, but experienced an almost identical decline in consumer spending at restaurants as the U.S., which has had almost half a million people die from the virus in three separate waves. 

China’s success at controlling the virus was offset by its economic response, while America’s economic response helped cushion businesses from its catastrophic public health failures.

Thus, even though U.S. consumer spending on services was far lower in 2020 than in previous years, household spending on goods was significantly higher. 

However, the failure of governments in the rest of the world—most notably, but not only, China—to provide similar support to their own people meant that U.S. exports and American manufacturing have underperformed, especially because the U.S. didn’t try to devalue the dollar to compensate. 

As a result, America’s trade deficit has ballooned to its widest level ever.

Ultimately, China’s approach is less sustainable than the U.S. one. Relying on wasteful debt-financed investments and consumers in the rest of the world to keep your workers employed is dangerous, especially if those consumers—or at least their elected leaders—decide they would prefer to “decouple.” 

Americans, by contrast, always have the option of producing more to meet their needs. 

Chinese officials recognize this, which is why they have been so eager in recent months to promote their efforts to build a self-sufficient economy in part by encouraging consumption growth through “demand side reform.”

These efforts may eventually bear fruit, but the track record isn’t encouraging. 

While Chinese leaders have been publicly discussing problems with China’s “unstable, unbalanced, uncoordinated and unsustainable” growth model since the mid-2000s, they haven’t managed to increase the relative importance of the domestic consumer market to the economy because that would require altering the distribution of political power within Chinese society—something the Communist Party’s elites are unwilling to do.

The U.S., for all its flaws, has greater flexibility to adjust without risking social upheaval.

America’s disarray is China’s opportunity

China’s economy is growing strongly while the US is mired in a political crisis

Gideon Rachman

    © James Ferguson

On January 20 1961, John F Kennedy, America’s youngest ever elected president, gave his inaugural address from the steps of the Capitol. 

Exactly 60 years later Joe Biden, America’s oldest ever president, will be sworn in at the same place — just days after it was stormed by a riotous mob.

Kennedy used the magisterial backdrop of Congress to proclaim that the “torch has passed to a new generation”. 

Mr Biden is the representative of an older generation — one that now fears the torch of liberty is in danger of being extinguished, even in the US itself.

Watching Kennedy’s address again, it is striking how much of it was addressed not to the American people, but to the leaders of the Soviet Union. 

JFK was speaking at the height of the cold war. 

Much of the American elite now believes that the US is on the brink of a second cold war — this time with China. 

But, unlike Kennedy, Mr Biden cannot promise to “pay any price, bear any burden” to ensure the “survival and success of liberty” around the world.

The president-elect and his advisers know that their most important task is to ensure the survival and success of liberty in the US itself. 

The country is reeling from the twin impact of a pandemic and the Trump presidency — as well as a generation’s worth of festering social and economic problems.

America’s disarray is China’s opportunity. As part of a planned pushback against China, Mr Biden had planned to call a summit of the world’s democracies. 

But, after an attempted coup d’état by a sitting president, America may lack the credibility to act as convener of the free world. Mr Biden’s democracy summit is likely to be quietly shelved in favour of a D10 meeting of 10 democracies, brought together by the UK.

A large part of America’s emerging struggle with China will be a battle for economic influence around the world. When 2019 ended, 128 of 190 countries in the world already traded more with China than with the US. 

China’s centrality to the global trading system will increase this year — with the World Bank projecting the Chinese economy to grow at around 8 per cent compared to 3.5 per cent for the US.

The Americans are also in a struggle with China to shape the technical standards and regulations that govern the world economy. The US needs new tools that go beyond the coercive power of sanctions.

But the Biden team, alarmed by the rise of populism and protectionism within the country, have made it clear that America is unlikely to sign any new trade deals for a while — which will make it harder to expand US influence.

China, by contrast, has recently signed two major new trade deals. The EU-China investment deal was agreed in December. The Regional Comprehensive Economic Partnership (RCEP) — a free-trade deal between 15 Asian nations, including Japan and South Korea — was agreed in November.

The battle for influence and prestige — or soft power — is also likely to be reshaped by the recent scenes in Washington. 

On the night of the storming of the Capitol, Richard Haass, the president of the Council on Foreign Relations, the epitome of the American establishment, tweeted despairingly that: “No one in the world is likely to see, respect, fear, or depend on us in the same way again. If the post-American era has a start date, it is almost certainly today.”

China’s own prestige and popularity have also suffered badly over the past year, as a result of the coronavirus pandemic, and its aggression towards countries such as India and Australia. Last week, the advocacy group Human Rights Watch reported that the past year has been “the darkest period for human rights in China since the 1989 massacre that ended the Tiananmen Square democracy movement”. 

The report highlighted the crackdown in Hong Kong, internment camps in Xinjiang and increased repression of dissidents, in the wake of the pandemic.

But while China may not be much loved overseas, it looks relatively confident and stable compared with the US — an image that will be carefully burnished by this year’s celebrations to mark the centenary of the foundation of the Chinese Communist party.

The contrast between the current states of China and America brings to mind Osama bin Laden’s sinister aphorism: “When people see a strong horse and a weak horse, by nature they will like the strong horse.”

Many political liberals, horrified by the rise of an authoritarian superpower, argue that the Chinese horse is actually much weaker than it appears. That may prove to be true. But there is also an element of wishful thinking in that view. 

A dispassionate assessment of world affairs, as it stands, cannot avoid the conclusion that the US is currently in deep trouble — and China is well placed to take advantage of that.

It is not just in China that the principles of political liberty, so stirringly championed by Kennedy, are under assault. This weekend’s arrest of Alexei Navalny, the Russian opposition leader, on his return to Moscow — illustrates the sense of impunity felt by President Vladimir Putin in Russia.

President Donald Trump has been notably reluctant to speak out against human-rights abuses by Mr Putin and others. 

Mr Biden will not be so reticent. 

But his voice is unlikely to carry the strength and conviction of John F Kennedy’s clarion call of 60 years ago.

Silver price hits eight-year high as retail traders take aim

ETF attracts almost $1bn of inflows after call to arms on Reddit discussion board

Henry Sanderson in London

   Silver prices rose as much as 11% in early trading on Monday in London © Stefan Wermuth/Bloomberg

Silver prices raced to the highest level since 2013 after retail traders targeted the silver market following their successful attack against short sellers of games retailer GameStop.

Prices for silver rose as much as 11 per cent to $30 per ounce in early trading on Monday in London. That followed a 6 per cent jump last week and a rally in the shares of some miners of the precious metal.

The world’s largest silver-backed exchange traded fund, the iShares Silver Trust, recorded almost $1bn in inflows on Friday, according to data from BlackRock, the fund’s sponsor. The jolt of investments came after a user in Reddit’s r/WallStreetBets forum urged people to buy shares and options to put a squeeze on banks.

“It's a fool’s errand, it's financial anarchy; somebody is going to get hurt,” said Ross Norman, a veteran precious metals trader.

Last week, the user TheHappyHawaiian said buying shares in the ETF would “force physical delivery of silver” into the fund’s vaults, thereby causing a “short squeeze” on the market, pushing up the silver price.

The user wrote on the forum that it would be “incredible” to make large banks active in the futures market “pay dearly” for what he alleged were bets that the silver price will fall. The rallying call echoed that of other r/WallStreetBets users who last week cheered their success in triggering large losses at Melvin Capital and other hedge funds.

The 37.05m increase in the number of shares of the iShares Silver Trust on Friday was the biggest one-day rise since the ETF started trading in April 2006, data from BlackRock showed. The ETF is backed by physical silver held in vaults, meaning it needs to purchase the precious metal when it receives new investments.

The attempted “short squeeze” was reminiscent of a similar effort by oil barons William Herbert Hunt and Nelson Bunker Hunt, known as the Hunt brothers, who in 1979-80 bought billions of dollars worth of silver in an attempt to corner the market. They were later sanctioned for market manipulation and went bankrupt after the silver price collapsed in an event dubbed “Silver Thursday.”

In 1998, Warren Buffett’s Berkshire Hathaway drove silver prices up 90 per cent to a 10-year high after he quietly accumulated a huge position in the silver market.

Analysts said it would be more difficult for retail investors to influence the silver price as opposed to that of a single equity, given the large off-exchange market for the precious metal, where banks trade on behalf of clients.

“We are confident that the influence of retail investors on silver will not last all that long,” analysts at Commerzbank said.

Around $6bn worth of silver traded hands in the silver market in November, according to the latest statistics from the London Bullion Market Association. London’s vaults hold around 33,475 tonnes of silver, valued at $23.8bn, they said in January.

Mr Norman said the Reddit forum’s targeting of large banks was misplaced, since the lenders used futures contracts to hedge their physical holdings of silver, meaning they were not speculating on the price falling.

“There is a misnomer here that banks are constantly running short positions, but from a price perspective they are neutral, they have a long and a short that cancels each other out,” he said.

Additional reporting by Chris Flood in London

The Inevitability of German Stimulus

The transition to new German leadership after 16 years under Chancellor Angela Merkel will not change the country's core political priorities vis-à-vis Europe. Preserving the eurozone will remain paramount, even if it means suspending Germany's traditional opposition to fiscal stimulus and deficits.

Melvyn Krauss

STANFORD – Armin Laschet’s victory in the election to lead Germany’s Christian Democratic Union (CDU) puts him in pole position to succeed Chancellor Angela Merkel later this year. 

But the leadership contest was more about differences in tone and style than substance. 

From a policy standpoint, it makes no difference.

Currently the minister-president of North Rhine-Westphalia, Germany’s most populous state, Laschet will maintain Merkel’s policies to keep the eurozone together. 

His competitor for the post, Friedrich Merz, would have done the same, notwithstanding his more conservative temperament. Continuity will be the watchword of the post-Merkel period.

During Merkel’s 16-year tenure, holding the euro together has become a key political imperative for Germany. The response to the COVID-19 pandemic has shown that Germany’s leadership will do almost anything to prevent Italy from leaving the single currency. 

Not only has Germany agreed to a €750 billion ($910 billion) EU recovery fund and the issuance of joint debt (through a quasi-Eurobond); it also may agree to pursue additional fiscal stimulus, even if it has to again suspend its “black zero” rule against budget deficits.

After all, Italy and other southern eurozone economies simply will not be able to tolerate a steadily appreciating euro for an extended time. 

The Germans abandoned austerity during the Merkel era but it is a kind of “backdoor austerity” to forgo a fiscal stimulus with a declining economy and rising currency. 

Something will now have to give, and it won’t be the euro. It will be Germany’s traditional opposition to fiscal stimulus.

The euro has been under attack for years. As a committed “currency warrior” and brutal protectionist, President Donald Trump wanted a weaker dollar, and he has a US Federal Reserve chair, Jerome Powell, who is more than willing to accommodate his wishes in this respect.

President-elect Joe Biden’s administration will be pushing for more fiscal expansion. If this policy were to prompt an interest-rate hike from the Fed, it would strengthen the greenback against the euro. 

Powell, however, has already made clear that “now is not the time” for a rate increase. 

And Wall Street has been betting that the dollar will remain on a declining path throughout 2021, and perhaps longer.

Moreover, now that post-Brexit Britain’s dream of securing a special trade deal with the Trump administration has been exposed as nonsense, the British, too, will be pursuing a weak-currency policy. 

As if the increased costs from the emergence of a more contagious strain of COVID-19 were not severe enough, a recent study from the London School of Economics estimates that British exports to the EU will fall by more than one-third under the terms of Prime Minister Boris Johnson’s “hard Brexit” deal.

Finally, buying up euros has become an ideal bet for currency speculators. With its refusal to lower the discount rate, the European Central Bank has sent a clear signal that the euro’s foreign-exchange value is of secondary importance to the health of European banks, which oppose a rate cut. 

Likewise, by refusing to take steps to alleviate the upward pressure being applied by speculators, the ECB has made the euro into a “patsy currency” that is easily pushed around.

Owing to these factors, life is becoming increasingly difficult for European exporters. They are the ones bearing the economic burden of bank subsidization. 

Top ECB officials argue that the subsidy must be maintained, because banks account for 85% of Europe’s financial intermediation (compared to 50% in the United States according to my ECB sources). 

But the tradeoff that pushes the euro higher is not sustainable. Clearly, Europe must find a way to subsidize its banking sector without undermining its exports.

German fiscal stimulus, by removing “backdoor austerity,” would act as a tonic for southern eurozone exports to northern member states. 

It would also help to restructure trade relations within the eurozone overall, which would serve to make EU exports less dependent on the relative strength of the euro. 

This would both promote economic growth and support the bloc’s political cohesion, because internalizing European trade would make the euro’s exchange rate far less contentious between north and south than it is now. 

Italy and other southern countries could sidestep the effects of a stronger euro by selling more goods to Germany and other northern countries. 

In this way, fiscal stimulus would offer an effective answer to the “currency warriors” now and in the future.

Laschet’s election as CDU leader neither increases nor decreases the chances for German fiscal stimulus. 

Much will depend on whether another crisis poses a sufficient threat to Italy and the other southern member states. Given these countries’ already-weak economies, a steadily rising euro is the factor most likely to send them scurrying for the exit. 

And the ECB’s cavalier treatment of the euro implies that such a scenario could materialize sooner than many think. To prevent it, German policymakers should have plans for fiscal stimulus ready and waiting.

Melvyn Krauss is Professor Emeritus of Economics at New York University.

The Dilemma of Iran's Islamic Revolution

Tehran must cope with a hostile environment and a dwindling ability to retaliate.

By: Hilal Khashan

Ayatollah Ruhollah Khomeini's 1979 Islamic Revolution ended Iran's nearly five centuries of uninterrupted imperial rule. But it continued the Persian tradition of territorial expansionism and regional dominance dating back to Cyrus the Great, whose empire in the sixth century B.C. stretched from North Africa to Central Asia. 

Iran's Islamic revolutionaries pursued their imperial objective under the guise of religious redemption, not brute military conquest, but they expanded the country’s influence nonetheless.

Iran's war with Iraq in the 1980s slowed its penetration of the Arab region. Still, Iraq's defeat in Desert Storm in 1991 and its occupation by U.S. and allied forces in 2003 opened the way for Tehran to assert its influence in the Middle East Last year, a former Iranian minister of intelligence bragged that Iran now controls four Arab capitals (Baghdad, Damascus, Beirut and Sanaa). 

Yet the U.S. withdrawal in 2018 from the Iran nuclear deal has gradually weakened Iran economically. It also isolated Tehran internationally. Iran is trying to cope with crippling sanctions, the new Sunni-Israeli alliance, frequent Israeli attacks and growing inability to sow discord in the region.

Imperial Nostalgia

Since the rise of the Safavid Empire in 1501, Iranian territorial ambitions stopped at India's gates in the east. They were also blocked in the north by czarist Russia, leaving the Arab lands in the west as the only outlet for fulfilling Iran's grandiose plans of becoming a world power. The leaders of the Iranian revolution similarly believe they are entitled to extend their influence throughout the Arab region. 

Khomeini and his propaganda machinery implored Arabs to topple their reactionary regimes and install Islamic revolutionary governments. Khomeini especially focused his calls on the Iraqi people, who he hoped would supplant their leaders and help him install a satellite government. 

He did everything within his capacity to destabilize Iraq, including assassination attempts, planting explosive devices and ordering daily artillery barrages, leading to the 1980-88 Iran-Iraq war.

Many Iranians, be they Persians or Azeris, feel they are historically entitled to rule the region, and signing a treaty with them would not change their minds. 

In 1971, Mohammad Reza Shah ordered an ostentatious celebration in the ancient city of Persepolis commemorating the 2,500th anniversary of the founding of the Persian Empire. 

Even though it was dubbed the world's most expensive party and resented by most Iranians, the festivities rekindled Iran's legendary nationalism. It’s a tradition that current Supreme Leader Ayatollah Ali Khamenei continues. 

In keeping with the Iranian elites' imperial thinking, Khamenei recently reminded the world that Iran's regional presence is nonnegotiable.

Iran's Arab Complex

Islam appeared in Mecca in 610 and spread spectacularly fast, overwhelming the worn-out Byzantine and Sasanian empires. In 636, an Arab Muslim army defeated the Persians in the Battle of Qadisiya in south-central Iraq, and 16 years later, the Sasanian Empire collapsed. This event stunned Persians who viewed their culture and civilization as superior to the conquering Arabs. 

Thanks to their religion, which permanently Islamized Iran, the Arabs – more than Persia's glorious past or any other people – have played a decisive role in shaping modern Iranian identity. Even though the Persians embraced Islam, they rejected the Arabic language and never overcame their historic defeat. 

The foundations of Islam's history took shape in the Umayyad and Abbasid dynasties between 661 and 1258 in lands that accepted Arabization, which kept Persia outside the centers of power and deepened the dilemma of injured Persian national consciousness.

Many Arabs developed over the centuries the impression that Iranians are arrogant and condescending. During their 19th-century awakening, Arabs turned their back on Iranian culture. They chose to emulate Europe, namely France, because it presented itself as a liberal country even after colonialism. 

Most Iranians, both secular and religious, dislike Arabs; it does not matter if they are Sunnis or Shiites. In the initial stages of the Iran-Iraq War, some 40,000 Iraqi Shiite soldiers defected to Iran, which imprisoned them because they were Arabs.

Assuming they could normalize their relations with Tehran, the countries of the Gulf Cooperation Council tried to establish friendly relations with Iran. In December 2007, Qatar invited Iranian President Mahmoud Ahmadinejad to attend the council’s summit in Doha. 

Saudi King Abdullah walked hand in hand with him as a gesture of friendship. But Arab reconciliation efforts foundered because Iran's religious leaders behaved as if they were on a divine mission.

U.S. Stranglehold and Israeli Vigilance

U.S. and British cooperation in executing Operation Ajax in 1953 to depose Iranian Prime Minister Mohammad Mosaddegh and reinstate Mohammad Reza Shah's rule humiliated the Iranian people and shocked them profoundly. 

They did not forgive the shah for colluding with foreigners – who always blunted their national aspirations – to return to power. 

The CIA-orchestrated coup played a role in making Khomeini's inspired revolution a success. 

The Islamic Revolution's plans for regional hegemony did not sit well with the U.S. and Israel, let alone Arabs, and immediately poisoned their relations. They only worsened with time.

The past few years of U.S. and Israeli strikes against Iran have revealed its military weakness and incapacity to retaliate, especially since its ability to use its regional proxies and get away with it is diminishing. 

On the first anniversary of the assassination of Qassem Soleimani, the commander of Iran's Quds Brigade, Hezbollah chief Hassan Nasrallah announced that avenging his death is the responsibility of all free people. 

He assured Shiites that the axis of resistance (Iran, Iraq, Syria, Houthi Yemen and Lebanon) emerged stronger from Soleimani’s death.

Nasrallah falsely claimed that the assassination established a military situation that jeopardized the American presence in Iraq, which forced Donald Trump's administration to withdraw U.S. troops from the country. 

Despite overwhelming evidence to the contrary, he said that Iran does not ask its allies to carry out military operations on its behalf. 

He said Iran knows when, how and where to answer Soleimani's killing. Nasrallah even praised Iran's self-restraint in not falling into the trap of retaliation, saying that the alliance it leads has an authentic and responsible leadership that made victories possible. 

He eventually laid the matter to rest, saying: "Killing our leaders makes us more determined to persevere to achieve our goals."

The Iranians have come to understand that U.S. President-elect Joe Biden will not lift the sanctions on Iran gratuitously, and instead will largely uphold the far-reaching expectations laid out for Tehran by his predecessor. 

Frustrated Iranian Foreign Minister Javad Zarif rejected Biden's preconditions for lifting the sanctions and demanded that the U.S. abide by its commitments to the 2015 Joint Comprehensive Plan of Action. 

Zarif said the U.S. is not in a position to stipulate conditions to renegotiate the deal from which Trump unilaterally withdrew in 2018.

Iran also accused Israel of killing Mohsen Fakhrizadeh, its top nuclear scientist, last November, but did not answer it, revealing Tehran's military weakness and lack of options. Israel, whose air force continues to target Iranian assets in Syria, is carefully scrutinizing Iranian activity throughout the region and progress in its nuclear program.

Iran's Dwindling Options

There is little doubt that Iran's Arab policy is expansionist, combining religion with Persian imperial ambitions. Since 1979, the Islamic Revolution and Iran’s governments have continued the territorial policy of Persia's ancient and medieval empires and the Pahlavis between 1925 and 1979. 

The 41st Gulf Cooperation Council summit, recently held in Saudi Arabia, issued the al-Ula Declaration, which ended Qatar's blockade and reached a unified foreign policy. This turnaround is not welcome news in Tehran. 

Iran's frequent military exercises are intended to signal to the U.S. that its freedom of action is beyond subjugation and that it will retaliate massively against any attack. 

Iran disclosed an underground missile base on the Persian Gulf coast during an unscheduled tour by the Iranian Revolutionary Guard Corps commander, Hussein Salami. But Tehran's ostentatious military parades are nothing more than a charade because the balance of military power tilts grossly toward its adversaries.

When the new commander of the Quds Brigade, Ismail Qaani, visited Baghdad last year, the pro-Iranian Iraqi militias thought he would distribute cash handouts as his predecessor had. Much to their disappointment, he gave them nothing. 

The Iraqi authorities required him to apply for an entry visa before his second visit, where he gave out silver rings. Qaani told the militias’ commanders not to expect money from Iran and, instead, rely on the Iraqi government's $2 billion handout. 

Divisions plagued the Iran-backed Iraqi militias after the death of their deputy chief, who died in the same attack that killed Soleimani. 

The umbrella movement failed twice to reach a prime minister's consensus to succeed Haidar al-Abadi before agreeing on Mustafa al-Kadhimi in May 2020. Unlike bureaucratically rigid Qaani, the two are charismatic and influential enough to keep the militias together.

Iran avoids confrontation with its adversaries and usually uses its regional proxies in Lebanon, Iraq and Yemen to set the region on fire. Iran is much less likely to use its regional proxies to launch an attack similar to the one carried out against Saudi Aramco oil installations in September 2019. 

The U.S. and Israel warned Iran that any attack against them by Tehran's proxies would invite an overwhelming reaction against Iran itself. Iran's conservatives have condemned reformist President Hassan Rouhani's policy of strategic patience in the face of grueling U.S. sanctions. 

Still, Ahmadinejad warned Iranian leaders against escalation and urged them to avoid any measures that could lead to war.

Iran does not bend under foreign pressure; fulfilling its national objectives outweighs any consideration, and its pride is more important than economic interests. 

However, Iranian leadership will eschew escalation, even as it proceeds with its nuclear program, which could only be stopped by an all-out U.S. attack that is not forthcoming. 

Iran boasts lively and diverse schools of thought that attest to its immense cultural richness, even though their ideological differences complicate its ability to project a consensual domestic and foreign policy. 

Only the Iranian people can extricate the country from its perennial dilemma.