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Russia"s Ukraine invasion "makes no sense," according to a leading historian who once angered Putin by asking him about energy

Daniel Yergin said Russia had overestimated how reliant the West was on its energy exports, adding the Ukraine invasion 'made no sense.' Russian President Vladimir Putin chairs a meeting with members of the Security Council via teleconference call at the Novo-Ogaryovo state residence outside Moscow, Russia, on May 20, 2022.AP Daniel Yergin is a leading energy historian and vice-chairman of S&P Global.  He said Russia's days as an energy superpower were "waning," and called the invasion "irrational." Yergin said he'd once angered Putin by asking about shale energy at a conference in 2013. A leading energy historian, who claims to have enraged Vladimir Putin by asking him about shale energy, has said Russia overestimated the West's reliance on its oil and gas when it invaded Ukraine.In an interview with the New York Times, Daniel Yergin called the invasion "irrational," adding: "One of Putin's many miscalculations was his assumption that, because of Europe's dependence on Russian energy, it would protest but stand aside, as it did with Crimea."It has had just the opposite effect. Europe wants to get out of that dependence as fast as it can."Yergin, who is vice-chairman of S&P Global, told the Times Putin was "like a CEO when he talks about energy markets," and that he had timed the invasion to when those markets were at their tightest, as supply chains unwound after the COVID-19 pandemic.He said the invasion heralded "a new uncertain era," adding: "As we talk, the risks are going up."European countries are trying to reduce its dependence on Russian energy, which makes up 45% of its gas imports. The EU has drafted a plan to wean itself off Russian fossil fuels by 2027, while the US banned imports of Russian oil, gas and coal.In a separate interview on Friday, Yergin told Bloomberg's "What Goes Up" podcast that he asked the first question of Putin after the Russian president had spoken at the St. Petersburg International Economic Forum in 2013.The historian said he asked about shale gas and Putin "started shouting at me saying, 'shale is barbaric!'""He knew that US shale was a threat to him in two ways: one, because US natural gas would compete with natural gas in Europe, and secondly, because this would really augment the US's position in the world and give it a kind of flexibility it didn't have when it was importing 60% of its oil," Yergin told the podcast.He added that growing American shale oil and gas production had reduced the country's dependence on Russian energy, which "had a much bigger impact on geopolitics than people recognize."Yergin said on the podcast that "Russia's door to the West is closed," and that it would be forced to pivot toward China as Europe moves away from Russian energy.Read the original article on Business Insider.....»»

Category: topSource: businessinsiderMay 22nd, 2022

Gave: The End Of The Unipolar Era

Gave: The End Of The Unipolar Era Authored by Louis-Vincent Gave via Gavekal Research, Investors today must deal with the effects of not one, but two wars, as my Gavekal-IS colleague Didier Darcet pointed out in April (see Tick,Tock Tick,Tock). The first is the one we can see playing out each day on our television screens, with all the tanks, deaths and human suffering. The second is a financial war, with the unprecedented weaponization of the Western banking system and Western currencies aimed at bringing Russia to its financial knees (see CYA As A Guiding Principle (2022)). To the surprise of most people in the West, resistance against both of these war efforts has proved far stronger than expected. Almost 11 weeks into the war on the ground in Ukraine, Russian troops still seem to be taking heavy losses for relatively small territorial gains. And a little over six weeks after US president Joe Biden boasted that the ruble had been “reduced to rubble” by Western sanctions, the Russian currency is close to a two-year high against the US dollar and near a post-Covid high against the euro. At this point, both the euro and the yen appear to be bigger casualties of the Ukraine war than the ruble. The US boast that the ruble had been “reduced to rubble” is looking premature  In this paper, I shall review the implications of this stronger-than-expected resistance - both on the battlefield and in the financial markets - and attempt to draw some salient conclusions for investors. The evolution of warfare In October 1893, some 6,000 highly-disciplined warriors of King Lobengula’s Ndebele army launched a night-time attack on a camp occupied by 700 British South Africa Company police near the Shangani river in what is now Zimbabwe. It was a massacre. The BSAC “police” killed more than 1,500 Ndebele for the loss of just four of their own men. A week later, they did it again, killing some 3,000 Ndebele warriors for just one policeman dead. These one-sided victories were not won by courage or superior discipline, but because the British were armed with five machine guns and the Ndebele had none. As Hillaire Belloc wrote in The Modern Traveller: “Whatever happens, we have got / The Maxim gun, and they have not”. The technological superiority of the machine gun allowed Britain, and France, Germany and Belgium, to subjugate almost all of Africa, even though outnumbered by the Zulu, Dervish, Herero, Masai and even Boer forces they opposed. All were rendered helpless by the machine gun’s firepower. I revisit this ancient history to illustrate how military technology is a lynchpin of the geopolitical balance. Dominance of military technology is also a key factor underpinning the strength and resilience of a reserve currency. Today, one of the main reasons why Taiwan, South Korea, Japan, Saudi Arabia, the United Arab Emirates and others keep so much of their reserves in US dollars is that the US is widely regarded as being a generation (if not more) ahead of the competition in the design and production of smart bombs, anti-missile systems, fighter jets and naval frigates. In short, the superiority of US weaponry has been one of the principal factors underpinning the US dollar’s status as the world’s reserve currency. However, recent events raise important questions about whether the US can retain this superiority. In September 2019, drones allegedly deployed by Yemeni Houthi forces took out the Saudi Aramco oil processing facilities at Abqaiq. Between late September and early November 2020, Armenia and Azerbaijan fought a war over the Nagorno-Karabakh region. The conflict ended in near-total victory for the Azeris. This result stunned the military world. Observers had assumed that Armenia, with a bigger army, larger air force, more up-to-date anti-aircraft and anti-missile systems, and a history of Russian support, would easily triumph. But all Armenia’s expensively-acquired military “advantages” were quickly taken out in the early days of the fighting by Azerbaijan using Turkish-made drones costing no more than US$1mn each. On successive occasions between March 2021 and March 2022, Houthi drones attacked Saudi Arabian oil facilities, notably the giant terminal at Ras Tanura on the Persian Gulf. In December 2021, Turkish-made drones allowed the Ethiopian government to tip the balance in a civil war that until then had been going badly for government forces. In January 2022, Houthi drones hit oil facilities in the UAE.  Now, imagine being Saudi Arabia or the UAE. Over the years you have spent tens, if not hundreds, of billions of US dollars purchasing anti-missile and anti-aircraft systems from the US. Now, you see relatively cheap drones penetrating these defense systems like a hot knife through butter. This has to be frustrating. What is the point of spending up to US$340mn on an F-35c (and US$2mn on pilot training), or US$200mn on an anti-aircraft system, if these can be taken out by drones at a fraction of the cost? This evolution in warfare may help to explain the impressive resilience of the Ukrainian army in the face of Russia’s onslaught. When the Russian troops marched into Ukraine, consensus opinion was that the Ukrainian forces would crumble before the Russian military juggernaut. It is always hard to know what is happening on the ground amid the fog of war. But judging by the number of tanks destroyed, warships sunk and the apparent failure of the Russian air force to establish control over Ukraine’s skies, it seems the invasion of Ukraine is proving far more costly in terms of blood and treasure than Russian president Vladimir Putin had imagined. Could this be because Putin failed to factor the impact of drones into his military outlook? It may be premature to jump to that conclusion. But judging from afar, it appears inexpensive Turkish drones have helped level the battlefield in the Ukrainian-Russian David versus Goliath confrontation— the biggest and bloodiest on European soil since World War II. This helps to explain why the US military assistance package for Ukraine Biden announced this month included 700 Switchblade drones. These are surprisingly cheap—the Switchblade 300 reportedly carries a price tag as low as US$6,000—yet highly effective. In essence, they are single-use kamikaze drones. Apparently, they fly faster than the Turkish Bayraktar TB2 drones that the Ukrainians, like the Azeris before them, have used to such devastating effect. This suggests the Switchblades should be able to evade the air defenses that Russia has attempted to maintain over its troops. The US military deployed Switchblades sparingly in Afghanistan, so it is hard to know whether these will perform as billed in combat conditions. But before this shipment to Ukraine, only the UK was permitted to purchase Switchblades. This implies that the Pentagon considers the Switchblade a valuable and potent weapon. David Petraeus, the former Central Intelligence Agency director who, as a four star general, commanded the US campaigns in both Iraq and Afghanistan, singled out the weapon in a recent interview with historian Niall Ferguson: “I’ll mention one item in particular: the Switchblade drone. It’s a loitering munition that takes a one-way trip. The light version can loiter for 15 to 20 minutes. Heavy version, 30 to 40 minutes with a range of at least 40 km. The operator selects a target, it locks on and it follows. Then it strikes when the operator gives that order. This is extraordinarily effective because you can’t hear it on the ground. The first time the enemy knows it’s there is when it blows up. If we can get enough of those into Ukraine, they could be a true game-changer.” However, I digress. Returning to the discussion about why drones might matter for financial markets: 1) If ever-cheaper and more readily available drones are going to revolutionize war, much as the Maxim gun did 140 years ago, then it is questionable whether it still makes sense to invest in tanks, airplanes, anti-aircraft and anti-missile systems. If it does not, what does this mean for the value of the large, listed death-merchants? Cheap drones are bad news for the stocks of defense giants Historically, buying the merchants of death after a big rally in oil made sense, if only because so much of the world’s high-end weapon consumption occurs in the Middle East. But in the world of tomorrow, will Middle Eastern oil kingdoms still line up to buy multibillion US dollar systems from Raytheon, Boeing, Lockheed and the like, if those systems are vulnerable to attacks from relatively cheap drones? 2) Talking of Middle Eastern regimes, the deal prevailing in the Middle East for the past five decades has been that oil would be priced in US dollars, and that the oil-exporting regimes in Saudi Arabia, the UAE or Kuwait would use these US dollars to buy US-made weapons (and US treasuries). With this bargain, the US implicitly guaranteed the survival of the Gulf Arab regimes. Fast forward to 2022, and following the invasion of Ukraine, countries such as Saudi Arabia and the UAE have failed to condemn Russia. What’s more, Saudi Arabia let it be known that it might start to accept payment for its oil in renminbi. Perhaps this makes sense if Saudi Arabia feels it no longer needs US$340mn F-35s, but instead more US$1mn Turkish-made drones? 3) If, as the Azeri-Armenian and the Ukrainian-Russian wars suggest, drones have radically leveled the battlefield in war, this profound development has a multitude of implications. Does it undermine the long-held superiority of vastly expensive armament systems, tilting the balance in favor of much cheaper and much more widely-available weapons? If so, does this mean another pillar supporting the US dollar’s reserve currency status is crumbling in front of our eyes? In a world where military might is no longer the monopoly of a single superpower, or the duopoly of two, does the world become, de facto, multipolar? In such a world, would there still be a compelling reason for trade between Indonesia and Malaysia to be settled in US dollars, rather than in their own currencies? Wouldn’t trade between China and South Korea now be settled in renminbi and won? Drone tactics are a radically different form of warfare, and they are evolving fast. So, it would be premature to offer any definitive conclusions about the extent to which drones will dominate warfare in the future. However, their recent use in Ukraine (and Yemen, Azerbaijan and Ethiopia) means that investors have to be open to the idea that drones will change the battlefield of the future. Because if they are going to change the battlefield of the future, then they will also change the economic and financial realities of today. In this sense, drones might well be the modern-day equivalent of aircraft carriers. In World War II, aircraft carriers made big-gun battleships and other traditional naval warships obsolete, or at least highly vulnerable. Two early Pacific battles proved the point. The Battle of the Coral Sea in May 1942, generally considered by historians to have been a draw, was the first naval engagement ever fought in which the opposing fleets never made visual contact with each other. Carrier-based aircraft drove the action. A month later, the far more consequential Battle of Midway established the new reality beyond all doubt. The Imperial Japanese Navy was ambushed northwest of Hawaii and lost the bulk of its carrier force in a single action. It would be on the defensive for the rest of the war. With hindsight, Midway marked the start of US dominance over the world’s oceans. In short order, this translated into US dominance over global trade. But with the nature of warfare again changing, is this dominance of the oceans and of other battlefields guaranteed to last? Investors need to consider the uncomfortable possibility that it might not. The dramatic shift in the global financial landscape We are all the offspring of our own experiences. One important formative event in my own modest career was the Asian financial crisis of 1997-98. Witnessing how quickly things could unravel left a deep mark. I highlight this because I am not alone in having lived through the shock of 1997-98. Pretty much every emerging market policymaker aged 50-75 (which is most of them) went through a similar trauma. Seeing your country’s entire middle class wiped out in the space of a few weeks—which is what happened in Thailand, Indonesia, Russia, Argentina and others in the period from 1997 to 2000—is bound to leave a few scars. Among emerging market policymakers these scars took the form of a deepseated conviction of “never again” (see Our Brave New World). To ensure their countries’ middle classes were never again wiped out, they adopted a straightforward set of policy prescriptions that in the early 2000s Gavekal dubbed the The Circle Of Manipulation. It went something like this: 1) To avoid a future crisis, your central bank needs to maintain a healthy safety cushion of hard currency bonds, mostly US treasuries and bunds.   2) The more you become integrated with the global economy, the larger this cushion should be. 3) To build up this safety cushion, you need to run consistent and large current account surpluses. 4) To run consistent large current account surpluses, you need to maintain an undervalued currency. Among the results of these policy prescriptions were charts looking like this: By all previous standards, this was an odd state of affairs: an economic arrangement under which poorer countries with high savings rates and vast infrastructure investment needs ended up subsidizing consumption in rich countries with low savings rates and ever-accelerating twin deficits. To cut a long story short, for the last 25 years, we have lived in a world in which undervalued currencies in emerging markets allowed Western consumers to buy attractively priced goods and services imported from developing countries. Meanwhile, the individuals, companies and governments in the emerging markets which earned capital from these sales largely recycled their earned capital into Western assets—because Western assets were perceived to be “safe.” But this perception of safety may now be changing in front of our eyes. Consider the following changes: 1) Developed economy government bonds have proved anything but safe. As stresses of increasing severity have affected the world economy over the last 12 months, investors in local currency Indonesian and Brazilian government bonds and in gold have generated positive returns of between 3% and 4% in US dollar terms. Chinese government bonds are up by just over 1.5%. Meanwhile, Indian and South African government bonds have lost -4%. These performances contrast with US treasuries, which have lost -9%, and the train wrecks suffered by investors in eurozone bonds and Japanese government bonds, which are down anywhere between -17% and -23%. Of these, which can be considered the safest? 2) The confiscation of Russia’s reserves. I will not repeat here arguments I have made at length elsewhere (see What Freezing Russia’s Reserves Means). But in a nutshell, the decision to freeze Russia’s central bank reserves has been the most important financial development since US president Richard Nixon closed the gold window in 1971. From now on, any country that is not an outright US ally—China, Malaysia, South Africa and others—and even some historical friends—Saudi Arabia? The UAE? India?—will think twice before reflexively accumulating US treasuries from fear they may get canceled. Over the course of a weekend, with no discussion in the US Congress, and no discussion with the Federal Reserve, the US administration unilaterally turned the US treasury market on its head. From that moment on, the whole nature of a US treasury security would depend entirely on who owned it. 3) Running roughshod over property rights. It is hard to pin down what the West’s single most important comparative advantage might be. Having the world’s strongest military? Being the seat of almost all the world’s greatest universities? Issuance of the world’s reserve currencies? The list goes on. But surely somewhere near the top of the list should be the sanctity of property rights, guaranteed by rock-solid “rule of law.” The main reason Chinese tycoons for years purchased Vancouver real estate, the Emirati central bank bought US treasuries and Saudi princes parked their wealth in Zurich was the knowledge that, whatever happened, and wherever you came from, you were guaranteed property rights, and a fair trial to ascertain those rights, in any courtroom in New York, London, Zurich or Paris. Better still, since the implementation over the last 850 years in the West of habeas corpus and various bills of rights, you have been able to have confidence that you would be judged as an individual. One of the fundamental tenets of Western democracies’ legal systems is that there is no such thing as a collective crime—or collective punishment. You can only be held responsible and punished for what you have done as an individual. Unless - all of a sudden - you are a Russian oligarch. This is a dramatic development, if only because every Chinese tycoon, Saudi prince, or emerging market billionaire will now wonder whether he will be next to get canceled. If the wealth of Russian oligarchs can be confiscated so abruptly, then why not the assets of Saudi princes? Stretching this a little further, maybe it shouldn’t just be Saudi princes or Chinese billionaires who should be worried. If wealth can be seized without any trial, but simply because of guilt by association, maybe in the not-too distant future Western governments could confiscate the wealth of anyone who mined coal or pumped oil out of the ground. Don’t they have blood on their hands for causing tomorrow’s climate crisis? And while we are about it, perhaps we should also confiscate the wealth of social media barons for failing to prevent a mental health crisis among our youth? 4) Russia’s counter-attacks. Older readers may remember how in the days that preceded the Lehman bust, US Treasury secretary Hank Paulson walked around proclaiming that he had “a big bazooka,” and that if the market pushed too hard, he would fire this bazooka and blow shortsellers out of the water. Unfortunately, with Lehman it became obvious to all and sundry that Paulson’s bazooka was firing blanks. Today’s situation is similar. In the wake of the Russian invasion of Ukraine, the US decided to go for full weaponization of the US dollar, proclaiming the ruble had been turned to rubble. Last week, the ruble hit two-year highs against both the US dollar and euro. Biden’s financial bazooka seems to have been no more potent than Paulson’s. Why? Because Russia decided to fight back, requiring buyers from “unfriendly” countries to pay for their purchases of Russian commodities in rubles. And in effect, the only way unfriendly customers can acquire rubles is by offering gold to the Russian central bank (see The Clash Of Empires Intensifies). This has created a sudden and profound shift in the global trading and financial architecture. For decades, global trade was simple. If Russia produced commodities that China needed, then China first had to earn US dollars by selling goods and services to the US consumer. Only in this way could it acquire the US dollars it needed to purchase commodities from Russia. But what happens now that China or India can purchase their commodities from Russia or Iran for renminbi or Indian rupees? Obviously, their need to earn and save US dollars is no longer so acute. Conclusion Warfare is changing and the financial system has been weaponized like never before. However, the weaponization of the financial system has so far failed to deliver the intended results. At this point, investors can adopt one of two stances. The first might be described as “nothing to see here; move along.” The second is to accept that the world is changing rapidly, and that these changes will have deep and lasting impacts on financial markets. Different war, different world, different consequences For now, there are some clear takeaways. 1) The Ukraine war may be telling us that modern history’s unipolar age is now well and truly over. As big as the Russian army is, and as powerful as the US Treasury might be, the current crisis has demonstrated that neither is powerful enough to impose its will on its perceived enemies. This includes even relatively weak enemies; Ukraine’s army was hardly thought of as formidable, while Russia was supposed to be a financial pygmy. 2) This is a very important message. In an age of drones and parallel financial arrangements, there is no longer such a thing as absolute power—nor even the perception of absolute power. The pot has been called, each player has had to show his cards, and all are sitting with busted flushes! The fact that military and financial dominance may be harder to assert in the future opens the door to a much more multipolar world. 3) For 25 years, emerging market workers have subsidized consumption in developed markets, as emerging market policymakers kept their currencies undervalued and recycled their current account surpluses into “hard” currencies. If this arrangement now comes to an end, then the developed market consumer will struggle while the emerging market consumer will thrive. 4) Much consumption in emerging markets tends to occur at the “low end” of the product chain. This plays into a theme I have been harping on about for the last year: that investors should focus on companies that deliver products that consumers “need to have” rather than products that are “nice to have.” 5) Over the last two years, US treasuries and German bunds have failed in their job of providing the antifragile element in portfolios. There are few reasons to think that this failure is about to reverse any time soon. Today, investors need to look elsewhere for antifragile attributes. Precious metals, emerging market government bonds, high-yield energy assets and foodstuffs are all leading candidates. 6) High-end residential real estate in Western economies will lose the emerging market money-recycling bid and will struggle. 7) New safe destinations for emerging markets’ excess capital will emerge. Obvious candidates include Dubai, Singapore, Mauritius, and perhaps even Hong Kong (should China eventually decide to follow the rest of the world and to live with Covid). It is hard to be too bullish on these destinations. They are so small that even a marginal, influx of financial and human capital will have a disproportionate impact. The world’s unipolar era is over. Few portfolios reflect this reality - and definitely not the indexed portfolios that are today massively overweight an overvalued US and a desperately ill-omened Europe. Tyler Durden Sun, 05/22/2022 - 23:50.....»»

Category: blogSource: zerohedgeMay 23rd, 2022

Futures Rise For The First Time This Week As Oil Slumps

Futures Rise For The First Time This Week As Oil Slumps US futures advanced for the first time this week, as investors tentatively bought the dip and were cheered by a drop in oil prices. S&P 500 futures were 0.6% higher by 7:30 am in New York, while Nasdaq 100 futs gained 0.7%. Already light trading volumes are even lower, with UK markets shut for a long weekend holiday to mark Queen Elizabeth II’s Platinum Jubilee. Stocks slumped Wednesday after JPMorgan CEO Jamie Dimon’s warning to investors to prepare for an economic “hurricane”, reversing his cheerful comments from just one week earlier, and disagreeing with JPMorgan’s permabullish strategist, Marko Kolanovic, who expects stocks to rebound by the end of the year and the US to avoid recession. Treasuries held losses, with 10-year yields above 2.90%. The dollar slipped while the yen held near 130 per dollar after its recent decline on the prospect of widening interest rate differentials with the US. Oil dropped on a rehashed report - this time from the FT which echoed an almost verbatim report from the WSJ one day earlier - that Saudi Arabia could pump more crude should Russian output drop substantially due to increasing sanctions over its invasion of Ukraine. It could, of course, but it won't for various reasons we will discuss in a post shortly. In any case, OPEC+ meeting members are set to meet Thursday for their monthly gathering where no break up of OPEC+ is going to happen. It seems that #OPEC+ will continue its current policy of monthly increases until September, after which, depending on the market conditions, production limits will be lifted. In any case, we expect to see another lackluster meeting, as in previous months./3 #OOTT — Reza Zandi (@R_Zandi) June 2, 2022 Oil’s decline helped to steady sentiment after US manufacturing activity and job openings data Wednesday fueled concern the Federal Reserve will need to get more restrictive to slow runaway price gains. “There’s been a large correction in some stocks; those corrections led to valuations that are way more attractive that can benefit medium-to long-term investors, especially in Europe and the emerging-markets space,” Vanguard Asset Services Ltd. Investment Strategist Giulio Renzi Ricci said on Bloomberg TV, summarizing prevailing sentiment among the BTFD crowd. In premarket trading, bank stocks are higher as the US 10-year Treasury yield rises for a third straight day to about 2.91%. Elsewhere, Repare Therapeutics will be in focus as shares soared 20% in postmarket after it announced a worldwide license and collaboration agreement with Roche for Camonsertib, while GameStop reported mixed results in the first quarter as it shifts to cryptocurrencies and non-fungible tokens. In corporate news, tech-bloated hedge fund Tiger Global Management’s losses for the year reached 51.8% amid turbulent markets. Here are some other notable premarket movers: Hewlett Packard Enterprise (HPE US) drops as much as 8.1% in US premarket trading on Thursday after the computer hardware and storage company lowered its adjusted earnings per share forecast for the full year. Chewy (CHWY US) shares are up 16% in pre- market trading after the online pet products retailer reported quarterly adjusted Ebitda and net sales that topped analysts’ expectations. Jefferies called the results “impressive.” NetApp Inc. (NTAP US) shares gained in extended trading Wednesday. Analysts remain cautious about the outlook for the cloud business after the storage hardware and software company reported adjusted fourth-quarter earnings that were higher than analysts’ expectations. C3.ai Inc. (AI US) tumbled 22% postmarket after the AI software company forecast revenue for fiscal 2023 that fell short of estimates. Piper Sandler’s analyst Arvind Ramnani cut his recommendation to neutral from overweight. Veeva (VEEV US)shares advanced 4.2% in postmarket trading Wednesday as it lifted its revenue forecast for the full year. Investors have been on edge over when (not whether) the US central bank’s tighter policies will induce a recession. A chorus of Fed officials has fallen behind calls to keep hiking to counter price pressures. Mary Daly of the San Francisco Fed and her more hawkish colleague James Bullard of St. Louis both backed a plan to raise rates by 50 basis points this month, while Richmond’s Thomas Barkin said it made “perfect sense” to tighten policy. “We do see the rise in probability of a recession in the second half of this year, potentially persisting into 2023 as the Fed continues to battle inflation,” Tracie McMillion, Wells Fargo Investment Institute head of global asset allocation strategy, said on Bloomberg Television. In Europe, the Stoxx 600 Index advanced amid low session volumes with the London market closed in commemoration of the Queen’s Jubilee festivities. Here are some of the biggest European movers today: Remy Cointreau shares advance as much as 5.6% after the spirits company reported FY earnings that Morgan Stanley called “reassuring.” Peer Pernod Ricard also climb, as much as 3.1%. Calliditas Therapeutics rise as much as 16% after Pareto Securities initiated with a buy recommendation, calling the Swedish biotechnology firm “highly undervalued” and a potential acquisition target. European energy stocks underperformed as oil slipped following a report that Saudi Arabia is ready to pump more should Russian output decline substantially. Earlier in the session, Asian markets were dragged lower by the technology sector, as strong US economic data bolstered the case for aggressive interest-rate hikes by the Federal Reserve. The MSCI Asia Pacific Index dropped as much as 1.2% as most sectors fell, with tech shares including TSMC and Alibaba among the biggest drags. South Korea led declines in the region as traders returned from a holiday, while China stocks eked out gains after authorities urged banks to set up a 800 billion yuan ($120 billion) line of credit for infrastructure projects.  An unexpected advance in US manufacturing activity and still-high job openings added to investor concerns about monetary tightening in the country and its impact on global growth. James Bullard of the St. Louis Fed urged policy makers to raise interest rates to 3.5% this year to try and curb inflation. The US policy outlook adds to pressure on Asian firms, whose earnings prospects have dimmed on higher costs and China’s economic slowdown. The MSCI regional benchmark is down 13% this year, largely tracking the S&P 500’s 14% loss. “We do think near term it’s likely to be bumpy,” Sunil Koul, Apac equity strategist at Goldman Sachs, told Bloomberg Television. “This combination of quantitative tightening, raising rates, combined with some growth risks we are seeing and a stronger dollar is what is causing pain in the markets.” Japanese stocks fell as the persistent risk of global inflation and the prospects of tighter monetary policy in the US damped sentiment.  The Topix closed 0.6% lower at 1,926.39 at the 3pm close in Tokyo, while the Nikkei 225 declined 0.2% to 27,413.88. Sony Group contributed the most to the Topix’s decline, decreasing 3.2%. Out of 2,171 shares in the index, 675 rose and 1,402 fell, while 94 were unchanged. “There are still worries over inflation in the US and rate hikes, so it will be quite hard for stocks to enter an upward trend,” said Hitoshi Asaoka, a senior strategist at Asset Management One.  Stocks in India overcame concerns over hawkish central bank moves to snap two days of declines as a drop in oil prices and attractive valuations buoyed investors. The S&P BSE Sensex rose 0.8% to 55,818.11 in Mumbai, while the NSE Nifty 50 Index advanced 0.6%. Reliance Industries provided the biggest boost to the key gauges, surging 3.5%, followed by software majors Infosys and Tata Consultancy Services.  Of the 30 member stocks on the Sensex, 20 rose, while 10 declined. All but four of the 19 sectoral indexes compiled by BSE Ltd., rose, led by a measure of energy companies. Stocks in Asia were mostly lower after strong US economic data bolstered the case for aggressive interest-rate hikes by the Federal Reserve. However, the trend soon changed as investors assessed attractive valuations, while crude oil slid to $113 a barrel before the monthly OPEC+ meeting later today. “Nifty valuations are now at a sweet spot where they offer good potential returns,” DSP Mutual Fund said in note. About half of the NSE Nifty 500 Index’s members have corrected more than 30%, which creates selective opportunities, the asset manager said. In Australia, the S&P/ASX 200 index fell 0.8% to close at 7,175.90, following US shares lower after Fed officials reinforced a hawkish stance and JPMorgan’s Jamie Dimon cautioned on the economy. Megaport led a drop in technology shares. Woodside was the top performer after a block trade. In New Zealand, the S&P/NZX 50 index fell 0.2% to 11,349.54. In FX, the Bloomberg Dollar spot Index fell as the greenback traded weaker against all of its Group-of-10 peers. The euro snapped two days of losses and approached $1.07. One-week options in euro-dollar now capture the next ECB meeting, and implied volatility in the euro heads for its strongest close since mid-May. The pound retraced about half of Wednesday’s loss, with UK markets shut for a holiday. Australia’s bonds dropped amid speculation that the Reserve Bank of Australia will follow its Canadian counterpart and keep raising rates aggressively. The yen fell to a three-week low before reversing losses. US Treasuries were flat in early US trading as equity futures rose for the first time this week. The 10Y Yield is trading unch at 2.91%, outperforming most euro-zone counterparts, with 2- to 5-year yields cheaper by 1bp-2bp with 10- to 30-year yields little changed, flattening 5s30s by ~2bp. IG dollar issuance slate empty so far; nine borrowers priced $14.6b Wednesday, largest daily total since May 17. European bonds posted modest losses after a steady start. As noted above, crude oil slid on a report that Saudi Arabia is ready to pump more oil if Russian output declines. OPEC+ is scheduled to meet to discuss supply policy, where it is not expected to surprise anyone. At last check, Brent was trading just above $113, and although the benchmark lifted around $1/bbl off of its overnight troughs, this has marginally pulled back. Looking at the day ahead, the economic data slate includes May Challenger job cuts (7:30am), ADP employment change (8:15am), 1Q final nonfarm productivity and initial jobless claims (8:30am) and April factory orders (10am). Fed speakers slated include Logan (12pm) and Mester (1pm). Market Snapshot S&P 500 futures up 0.5% STOXX Europe 600 up 0.5% MXAP down 0.7% to 167.84 MXAPJ down 0.8% to 552.13 Nikkei down 0.2% to 27,413.88 Topix down 0.6% to 1,926.39 Hang Seng Index down 1.0% to 21,082.13 Shanghai Composite up 0.4% to 3,195.46 Sensex up 0.8% to 55,825.08 Australia S&P/ASX 200 down 0.8% to 7,175.94 Kospi down 1.0% to 2,658.99 German 10Y yield up 2bps to 1.21% Euro up 0.4% to $1.0689 Brent futures down 2.3% to $113.65/bbl Gold spot up 0.3% to $1,851.88 U.S. Dollar Index down 0.3% to 102.23 Top Overnight News President Joe Biden is likely to visit Saudi Arabia later this month as part of an international trip for NATO and Group of Seven meetings, according to people familiar with the matter, with record high US gas prices weighing on his party’s political prospects The ECB must pare back stimulus as inflation is too strong and too broad, Governing Council member Francois Villeroy de Galhau said EU efforts to approve a partial ban on Russian oil imports hit an obstacle after Hungary raised new or already rejected demands, further slowing a push to clinch a deal, according to people familiar with the negotiations The pound is coming off the first positive month of 2022, but the mood in the market is as bleak as ever. Scorching inflation, an economy teetering on the edge of recession and a scandal-prone government are feeding into a view that the UK currency is vulnerable After years of pushing exports to China and building up energy links to Russia, Germany’s economy faces a poisonous cocktail of risks. Its heavy reliance on manufacturing makes it more vulnerable than European peers to war-related disruptions in Russian energy supplies and bottlenecks in trade. The upshot is risk of contraction and even higher prices squeezing unsettled consumers Beijing is turning to state-owned policy banks once again to help rescue an economy under strain, ordering them to provide 800 billion yuan ($120 billion) in funding for infrastructure projects Chinese officials have vowed to carry out a slew of government policies to stimulate growth following Premier Li Keqiang’s recent call to avoid a Covid- fueled economic contraction this quarter A more detailed look at global markets courtesy of Newsquawk Asia-Pac stocks followed suit to the subdued performance seen in global peers after the recent upside in yields and hawkish central bank rhetoric. ASX 200 was dragged lower by underperformance in tech and weakness in financials, with sentiment also not helped by frictions with China. Nikkei 225 lacked firm direction with automakers indecisive following sharp declines in their US sales last month. Hang Seng and Shanghai Comp traded mixed ahead of the Dragon Boast Festival tomorrow and with Hong Kong suffering from notable losses in property names and tech, while losses in the mainland were pared amid COVID-related optimism and after the latest support efforts in which Beijing announced CNY 800bln of increased credit quotas for state-owned policy banks to fund the construction of infrastructure projects. Top Asian News China's Ambassador to Australia said that Beijing is prepared to talk with Australia without preconditions but added that trade sanctions on Australia will not be removed until there is an improvement in the political relationship, according to AFR. China's Global Times tweeted that Chinese Coast Guard vessels patrolled the territorial waters off the Diaoyu Islands (Senkaku Islands) on Thursday, which is a disputed territory with Japan. Japan's Chief Cabinet Secretary Matsuno confirmed that the government wants to increase the average minimum wage to JPY 1000, according to Reuters. China's Commerce Ministry, on the US considering adding additional firms to the blacklist, says they will adopt measures to protect Chinese firms. A group of nations are to make a request for an international labour organisation mission to China to probe alleged violation in Xinjiang at a meeting today, according to Reuters sources. Chinese Officials Vow to Carry Out Plans for Economic Stimulus Toshiba Reveals Buyout Bids as Privatization Chances Rise Hong Kong Quarantine Backtrack Stokes Fears of Covid Zero Return European bourses are posting modest gains, Euro Stoxx 50 +0.6%, though volumes are lighter given UK Spring Bank Holiday. Stateside, futures are firmer across the board, ES +0.5%, with action similarly contained ahead of a busy PM docket featuring ADP and Fed's Mester. Top European News Deutsche Bank CEO’s Fixer Hoops Takes Another Leap as DWS Chief Ukraine Latest: Russia Ready to Settle Eurobond Payment Claims Euro Options Into ECB Meeting Are Now Most Overpriced in a Month Swiss Exchange Investigates Swissquote for Disclosure Delay FX Pound pounces on Dollar downturn to reclaim 1.2500 handle as UK prepares for Platinum Jubilee celebrations. DXY sub-102.500 amidst broad bounce in index components led by Franc initially; USD/CHF reverses around 0.9600 axis in wake of Swiss inflation data showing bigger overshoot vs SNB targets. Euro eyes 1.0700, but capped by hefty option expiry interest from round number up to 1.0740. Kiwi and Aussie boosted by recovery in risk sentiment, but Loonie lags as WTI sags on reports of Saudi Arabia standing ready to cover any shortfall in Russian oil output; NZD/USD probes 0.6500, AUD/USD approaches 0.7200 and Usd/Cad 1.2650+ Yen retrieves some losses as Greenback retreats and US Treasury yields slip from peaks ahead of busy pm agenda, USD/JPY circa 129.70 compared to 130.24 overnight peak. Fixed Income Bunds and Eurozone peers extend recent losing streak to set deeper cycle lows in futures/high yields, without Liffe support and despite steady US Treasuries. 10 year German benchmark down to 150.29 and 1.21%+ in cash terms. Multi-tranche Spanish and French issuance draw mixed covers irrespective of concession. T-note holds around par within 118-30+/18+ range awaiting slew of US data and more Fed speakers. Commodities WTI and Brent remain pressured after overnight FT reports re. Saudi being prepared to pump more oil if Russian output declines. Though, the benchmarks have lifted around USD 1/bbl off of their respective overnight troughs at best; however, this has marginally pulled back. Reminder, the JMMC commences from 13:00BST/08:00ET with the OPEC+ event following ~30-minutes later. US Private Energy Inventory Data (bbls): Crude -1.2mln (exp. -1.4mln), Gasoline -0.3mln (exp. +0.5mln), Distillate +0.9mln (exp. +1.0mln), Cushing +0.2mln. Norway's Hammerfest liquefied natural gas plant has restarted LNG production following a fire 20 months ago, according to Equinor (EQNR NO). Spot gold is bid but has failed to gain much additional traction after breaching USD 1850/oz and the 10-DMA at USD 1851.3/oz; base metals are bid ahead of the long Chinese weekend for Dragon Boat Festival. US Event Calendar 8:15am: U.S. ADP Employment Change, May, est. 300k, prior 247k 8:30am: U.S. Initial Jobless Claims, May 28, est. 210k, prior 210k; Continuing Claims, May 21, est. 1340k, prior 1346k 8:30am: U.S. Nonfarm Productivity, 1Q F, est. -7.5%, prior -7.5% 10am: U.S. Durable Goods Orders, April F, est. 0.4%, prior 0.4% 10am: U.S. Factory Orders, April, est. 0.6%, prior 2.2%, revised prior 1.8%; -Less Transportation, April F, est. 0.3%, prior 0.3% 10am: U.S. Cap Goods Orders Nondef Ex Air, April F, est. 0.4%, prior 0.3% 10am: U.S. Cap Goods Ship Nondef Ex Air, April F, no est., prior 0.8% DB's Tim Wessel concludes the overnight wrap Filling in while the UK is on holiday, I hope my use of “Z’s” and neglect of “U’s” does not prove jarring to regular readers. The start of the month was jarring to many asset holders, as bond and equities both sold off with more evidence that labor markets are historically tight while inflation remains well above target. Meanwhile, the Fed’s beige book provided anecdotes of slowing growth in some districts, while a majority of districts had respondents expecting growth to slow in the near future. St. Louis Fed President and Hawk Emeritus James Bullard joined San Francisco Fed President to echo previous Fed communications that policy would expeditiously get to neutral, while the CEO of J.P. Morgan gave the gloomy growth narrative his imprimatur. The mix drove policy pricing higher and all but one sector in the S&P lower. North of the border, the Bank of Canada hiked rates another +50bps, layering hawkish guidance into the statement such as “the risk of elevated inflation becoming entrenched has risen.” While in Europe, ECB Governing Council member Holzmann sang the virtues of a +50bp hike (in line with our Europe team’s updated ECB call, found here). Stepping through the developments. The rate selloff began in earnest following the mid-morning data dump in the US, which included May ISM manufacturing and April JOLTS data. The ISM print surprised to the upside at 56.1 versus expectations of 54.5, while prices paid printed at 82.2 versus expectations of 81.0. Meanwhile, the JOLTS data across quits, hiring, and opening painted an historically tight labor market picture, with the vacancy yield (hires-per-job opening) hitting a record low. The March revisions also leaned tighter. The data re-emphasized that policy would need to get much tighter to do the work of actually bringing inflation down despite bubbling fears that the growth outlook was on shaky footing. The Treasury curve sold off and flattened, with 2yr yields gaining +8.5bps and the 10yr yield increasing +6.2bps, with real yields gaining +6.1bps in line with the tighter expected policy path. Two of the more germane policy path questions – how to size the September hike and what is terminal – moved tighter, in turn. The odds of a +50bp September move reached a month-high 65%, while terminal pricing moved back north of 3.1%. Presidents Bullard and Daly, typically taking opposing corners in the ideological ring, both re-emphasized the need to tighten policy expeditiously to neutral in light of runaway inflation. While policymakers debate where neutral is and what to do once there, support to get there fast is robust; it is best to heed their harmonious message the next time growth fears or falling risk assets drive policy pricing lower. Balance sheet policy will augment tightening as June marks the start of the Fed’s balance sheet normalization process, or QT. For more details on what that entails, I published a playbook on QT in conjunction with US rates and economics colleagues, found here. Steeper policy paths gripped north of the border and across the Atlantic as well. On the latter, Austrian central bank governor Holzmann said that “a 50 basis-point rise would send the necessary clear signal that the ECB is serious about fighting inflation”, leading OIS rates to price in +38bps by the July meeting. Longer-dated sovereign yields sold off in concert, with 10yr bunds (+6.4bps), OATs (+6.6bps) and BTPs (+8.5bps) hitting fresh multi-year highs. The spread of 10yr Italian yields over bunds also moved back above 200bps. The Bank of Canada hiked rates +50bps as expected, though weaved in restrictive guidance that gave the meeting a hawkish hue. Namely, the central bank warned they could be “more forceful” if needed, updating their statement to note that the economy was “clearly operating in excess demand”, which risked elevated inflation becoming yet more entrenched, as mentioned. The daily stew got a dose of anecdotal growth fears with the release of the beige book and comments from the CEO of J.P. Morgan warning that an economic “hurricane” was on the horizon. The beige book had a majority of Fed districts with contacts reporting growth or recession fears. The impact was to bring 10yr yields around 5bps below their intraday highs. Those yields are less than a basis point higher from those levels as we go to press this morning. The mixture drove equities lower on both sides of the Atlantic. The S&P 500 retreated -0.75% to start the month, with all but one sector in the red. The NASDAQ was in line, falling -0.72%, though mega cap growth FANG+ felt the impact of higher discount rates, falling -0.92%. In Europe, stocks underperformed as the continent countenances yet tighter monetary policy, with the STOXX 600 falling -1.04%. Energy was the sole gainer in the S&P, though that outperformance may be short lived as the FT reported overnight that Saudi Arabia was primed to pump more oil onto the market should Russian exports be crimped by sanctions. Brent crude futures are -1.67% lower ahead of the OPEC+ meeting today. Asian equity markets are trading lower following yesterday’s selloff. Across the region, the Hang Seng (-1.72%) is the largest underperformer after the local government decided to revive its toughest Covid-Zero measures as Covid variants flare. US stock futures are swinging between gains and losses with contracts on the S&P 500 (+0.04%), NASDAQ 100 (+0.07%) virtually unchanged. Elsewhere, early morning data showed that Australia’s April trade surplus swelled to A$10.5 bn (v/s A$9.0 bn) from the A$9.7 bn. In terms of yesterday’s other data, German retail sales fell by a larger-than-expected -5.4% (vs. -0.5% expected). Otherwise, the final manufacturing PMIs for May only diverged slightly from the flash readings. The Euro Area manufacturing PMI was revised up to 54.6 (vs. flash 54.4), but the US manufacturing PMI was revised down to 57.0 (vs. flash 57.5). To the day ahead now, and data releases include the Euro Area’s PPI for April, as well as the US weekly initial jobless claims, April’s factory orders, and the ADP’s report of private payrolls for May. Central bank speakers include the ECB’s Villeroy and Hernandez de Cos, along with the Fed’s Mester. Tyler Durden Thu, 06/02/2022 - 08:03.....»»

Category: smallbizSource: nytJun 2nd, 2022

Futures Slide, Yields Jump And Oil Surges As Inflation Fears Return Ahead Of Biden-Powell Meeting

Futures Slide, Yields Jump And Oil Surges As Inflation Fears Return Ahead Of Biden-Powell Meeting After posting solid gains on Monday when cash markets were closed in the US for Memorial Day, boosted by optimism that China's  covid lockdowns are effectively over, and briefly topping 4,200 - after sliding into a bear market below 3,855 just over a week earlier - on Tuesday US equity futures fell as oil’s surge following a partial ban on crude imports from Russia added to concerns over the pace of monetary tightening, exacerbated by the latest data out of Europe which found that inflation had hit a record 8.1% in May.  As of 7:15am ET, S&P futures were down 0.4% while Nasdaq futures rose 0.1% erasing earlier losses. European bourses appeared likely to snap four days of gains, easing back from a one-month high while Treasury yields climbed sharply across the curve, joining Monday’s selloff in German bunds and European bonds. The dollar advanced and bitcoin continued its solid rebound, trading just south of $32,000. Traders will be on the lookout for any surprise announcement out of the White House after 1:15pm when Joe Biden holds an Oval Office meeting with Fed Chair Jerome Powell and Janet Yellen. As noted last night, Brent oil rose to above $124 a barrel after the European Union agreed to pursue a partial embargo on Russian oil in response to the invasion of Ukraine, exacerbating inflation concerns; crude also got a boost from China easing coronavirus restrictions, helping demand. With the price of oil soaring, energy stocks also jumped in premarket trading; Exxon gained as much as 1.5% while Chevron rose as much as 1.4%, Marathon Oil +2.9%, Coterra Energy +3.7%; smaller stocks like Camber Energy +8.8% and Imperial Petroleum rose 15%, leading advance. US-listed Chinese stocks jumped, on track to wipe out their monthly losses, as easing in lockdown measures in major cities and better-than-expected economic data gave investors reasons to cheer. Shares of e-commerce giant Alibaba Group Holding Ltd. were up 4.4% in premarket trading. Among other large-cap Chinese internet stocks, JD.com Inc. advanced 6.7% and Baidu Inc. gained 7%. Cryptocurrency stocks also rose in premarket trading as Bitcoin trades above $31,500, with investors and strategists saying the digital currency is showing signs of bottoming out. Bitcoin, the largest cryptocurrency, advanced 1.2% as of 4:30 a.m. in New York. Crypto stocks that were rising in premarket trading include: Riot Blockchain +9%, Marathon Digital +8.1%, Bit Digital +6.1%, MicroStrategy +9.4%, Ebang +3.4%, Coinbase +5.3%, Silvergate Capital +5.2%. “It’s very hard to have conviction at the moment,” Mike Bell, global market strategist at JPMorgan Asset Management, said in an interview with Bloomberg Television. “We think it makes sense to be neutral on stocks and pretty neutral on bonds actually.” The possibility that Russia could retaliate to the EU move on oil by disrupting gas flows “would make me be careful about being overweight risk assets at the moment,” he said. U.S. stocks are set for a slightly positive return in May despite a dramatic month in markets, which saw seven trading days in which the S&P 500 Index posted a move bigger than 2%. Global stocks are also on track to end the month with modest gains amid skepticism about whether the market is near a trough and as volatility stays elevated. Fears that central bank rate hikes will induce a recession, stubbornly high inflation and uncertainty around how China will boost its flailing economy are keeping investors watchful. On the other hand, attractive valuations, coupled with hopes that inflation may be peaking has made investors buy up stocks. In Europe, Stoxx 600 Index was set to snap four days of gains, retreating from a one-month high, with technology stocks among the heaviest decliners. The UK's FTSE 100 outperforms, adding 0.4%, CAC 40 lags, dropping 0.6%. Travel, real estate and construction are the worst-performing sectors. Among individual stock moves in Europe, Deutsche Bank AG slipped after the lender and its asset management unit had their Frankfurt offices raided by police. Credit Suisse Group AG dropped after a Reuters report that the bank is weighing options to strengthen its capital. Unilever Plc jumped as activist investor Nelson Peltz joined its board. Royal DSM NV soared after agreeing to form a fragrances giant by combining with Firmenich. Asian stocks rose Tuesday, helped by a rally in Chinese shares after Shanghai further eased virus curbs and the nation’s factory activity showed signs of improvement.  The MSCI Asia Pacific Index climbed as much as 0.5% Tuesday, on track for the first monthly advance this year, even as investors sold US Treasuries on renewed inflation concerns. Chinese stocks capped their longest winning streak since June. “Asia has seen the worst earnings revision of any region in the world,” David Wong, senior investment strategist for equities at AllianceBernstein, told Bloomberg Television. “When the news is really bleak, that is when one wants to establish a position in Chinese equities,” he said. “It is very clear that the policy support is on its way.” Tech and communication services shares were among the biggest sectoral gainers on Tuesday.  Asia stocks are on track to eke out a gain of less than a percentage point in May as the easing of China’s lockdowns improves the growth outlook for the region. Still, the impact of aggressive monetary-policy tightening on US growth and higher energy and food costs globally are weighing on sentiment in the equity market as traders struggle to assess the earnings fallout. Japanese stocks dropped after data showed the nation’s factory output dropped in April for the first time in three months as China’s Covid-related lockdowns further disrupted supply chains.  Benchmark gauges were also lower as 22 Japanese companies were set to be deleted from MSCI global standard indexes at Tuesday’s close. The Topix Index fell 0.5% to 1,912.67 on Tuesday, while the Nikkei declined 0.3% to 27,279.80. Nippon Telegraph & Telephone Corp. contributed the most to the Topix’s drop, as the telecom-services provider slumped 2%. Among the 2,171 companies in the index, shares in 1,369 fell, 720 rose and 82 were unchanged. “Until after the FOMC in June, stocks will continue to sway,” said Shingo Ide, chief equity strategist at NLI Research Institute, said referring to the US Federal Reserve.   India’s benchmark equities index clocked its biggest monthly decline since February, as a surge in crude oil prices raised prospects of tighter central bank action to keep a lid on inflation. The S&P BSE Sensex slipped 0.6% to 55,566.41 in Mumbai, taking its monthly decline to 2.6%. The NSE Nifty 50 Index dropped 0.5% on Tuesday. Mortgage lender Housing Development Finance Corp. fell 2.6% and was the biggest drag on the Sensex, which had 16 of the 30 member stocks trading lower.  Of the 19 sectoral indexes compiled by BSE Ltd., 10 declined, led by a measure of power companies.    The price of Brent crude, a major import for India, climbed for a ninth consecutive session to trade around $124 a barrel. “The primary focus in the coming weeks will be on central banks’ policy measures to stabilize inflation,” Mitul Shah, head of research at Reliance Securities Ltd. wrote in a note. “Changes in oil prices and amendments to import and export duties might play a role in assessing the market’s trajectory.” Similarly, in Australia the S&P/ASX 200 index fell 1% to close at 7,211.20, with all sectors ending the session lower. The benchmark dropped 3% in May, notching its largest monthly decline since January. Suncorp was among the worst performers Tuesday after it was downgraded at Morgan Stanley. De Grey Mining rose after an update on its Mallina Gold Project. In New Zealand, the S&P/NZX 50 index rose 1.5% to 11,308.34. With rate hikes in full swing in the US and the UK, the ECB is preparing to lift borrowing costs for the first time in more than a decade to combat the 19-member currency bloc’s unprecedented price spike. In the US, Federal Reserve Governor Christopher Waller said he wants to keep raising interest rates in half-percentage point steps until inflation is easing back toward the central bank’s goal. In rates, Treasuries are off worst levels of the day although yields remain cheaper by 5bp-7bp across the curve as opening gap higher holds. 10-year TSY yields around 2.815%, cheaper by 7.7bp on the day, while intermediate-led losses widen 2s7s30s fly by ~4.5bp; bund yields around 2bp cheaper vs Monday close, following hot euro- zone inflation prints. European bonds also pressure Treasuries lower after euro-zone inflation accelerated to a fresh all-time high and ECB hike premium was added across front-end. Italian bond yields rose by up to 6bps after data showed that euro-zone consumer prices jumped 8.1% from a year earlier in May, exceeding the 7.8% median estimate in a Bloomberg survey. Comments from Fed’s Waller on Monday -- backing half-point hike at several meetings --  saw Treasury yields reset higher from the reopen, following US Memorial Day holiday.Front-end weakness reflects Fed hike premium returning in US swaps, with around 188bp of hikes now priced in for December FOMC vs 182bp at Friday’s close. In FX, the Bloomberg Dollar Spot Index rose 0.2% as the greenback outperformed all Group-of-10 peers apart from the Norwegian krone, though the gauge is still set for its first monthly fall in three. The euro erased Monday’s gain after data showed that euro-zone consumer prices jumped 8.1% from a year earlier in May, exceeding the 7.8% median estimate in a Bloomberg survey. Norway’s krone rallied after the central bank said it will reduce its daily foreign currency purchases on behalf of the government to the equivalent of 1.5 billion kroner ($160 million) next month. Norway has been benefiting from stronger revenue from oil and gas production as the war in Ukraine contributed to higher petroleum prices. Sterling slipped against the broadly stronger dollar. UK business confidence rose for the first time in three months in May, with more companies planning to increase prices. Cable may see its first month of gains since December. The yen fell as Treasury yields surged. Japanese government bonds also took a hit from selling in US bonds while a two-year note auction went smoothly. Australian and New Zealand bonds extended an opening fall as cash Treasuries dropped on return from a long weekend. Dollar strength weighed on the Aussie and kiwi. In commodities, Brent rises 2% to trade around $124 after European Union leaders agreed to pursue a partial ban on Russian oil. Spot gold falls roughly $4 to trade at $1,852/oz. Base metals are mixed; LME nickel falls 1.7% while LME zinc gains 0.9%. Looking at the day ahead, the data highlights will include the flash CPI reading for May from the Euro Area, as well as the country readings from France and Italy. On top of that, we’ll get German unemployment for May, UK mortgage approvals for April, and Canada’s Q1 GDP. Over in the US, there’s then the FHFA house price index for March, the Conference Board’s consumer confidence indicator for May, the MNI Chicago PMI for May and the Dallas Fed’s manufacturing activity for May. Otherwise, central bank speakers include the ECB’s Villeroy, Visco and Makhlouf. Market Snapshot S&P 500 futures little changed at 4,159.50 STOXX Europe 600 little changed at 446.27 MXAP up 0.5% to 169.92 MXAPJ up 0.9% to 559.23 Nikkei down 0.3% to 27,279.80 Topix down 0.5% to 1,912.67 Hang Seng Index up 1.4% to 21,415.20 Shanghai Composite up 1.2% to 3,186.43 Sensex little changed at 55,914.64 Australia S&P/ASX 200 down 1.0% to 7,211.17 Kospi up 0.6% to 2,685.90 German 10Y yield little changed at 1.05% Euro down 0.3% to $1.0743 Brent Futures up 1.6% to $123.60/bbl Gold spot up 0.1% to $1,856.27 U.S. Dollar Index little changed at 101.63 Top Overnight News from Bloomberg ECB Governing Council member Francois Villeroy de Galhau said the latest acceleration in inflation warrants a “gradual but resolute” normalization of monetary policy The ECB’s interest- rate hiking must proceed in an “orderly” way to avoid threatening the integrity of the euro zone, Governing Council member Ignazio Visco said German joblessness dropped the least in more than a year, pointing to labor-market vulnerabilities as the war in Ukraine and surging inflation weigh on Europe’s largest economy China’s factories still struggled in May, but the slower pace of contraction suggests that the worst of the current economic fallout may be coming to an end as the country starts to ease up on its tough lockdowns A debt crisis in China’s property industry has sparked a record wave of defaults and dragged more developer bonds down to distressed levels A more detailed look at global markets courtesy of Newsquawk Asia-Pacific stocks were mixed as most indices lacked firm direction amid month-end and mixed data. ASX 200 was subdued by tech underperformance and after a deluge of data releases. Nikkei 225 traded rangebound with the index restricted after Industrial Production data missed forecasts. Hang Seng and Shanghai Comp were initially indecisive following the Chinese PMI data which printed above estimates but remained at a contraction, although risk appetite gradually picked amid further support measures and improved COVID situation in China. Top Asian News China's Cabinet issued a series of policies to stabilise the economy, according to a Cabinet document cited by Reuters. China is to accelerate the issuance of local government special bonds and add new types of infrastructure and energy projects to the project pool eligible for fundraising, while it is to step up VAT credit rebates, boost fiscal spending and will guide actual lending rates lower. China reported 97 new COVID-19 cases on May 30th which was the first time infections were below 100 since March 2nd, according to Bloomberg. Shanghai official said the city is moving into a normalised epidemic control phase and looks to resume normal life. The official added that malls and shops will be able to reopen with capacity capped at 75% although the reopening of high-density venues such as gyms will be slower, while all workers in low-risk areas should be able to return to work from June 1st, according to Reuters. Hong Kong Chief Executive Lam said they will likely begin the third stage of easing COVID-19 restrictions in late June, according to Bloomberg. RBNZ Deputy Governor Hawkesby said the central bank needs to keep decreasing stimulus and tighten conditions beyond the neutral of 2.0%. European bourses are mixed, Euro Stoxx 50 -0.8%, with sentiment cautious after a mixed APAC handover and in wake of hot EZ CPI before Powell's meeting with Biden. Note, the FTSE 100 and AEX are bucking the trend given their exposure to Unilever after Trian Fund Management confirmed a 1.5% stake. US futures are pressured, ES -0.6%, succumbing to the broader risk moves after relatively steady initial trade as sentiment remains cautious with multiple factors in play. IATA Chief says that demand is very strong and traffic will likely return to 2019 levels nearer to 2023 than 2024. Question does remain regarding the impact of inflation on disposable incomes and travel demand. Higher oil prices will result in higher ticket prices; rule of thumb is a 10% change in ticket prices can impact demand by 1%. Top European News Senior Tory MPs said UK PM Johnson is likely to face a no-confidence vote as leader of the Conservative Party if they lose two parliamentary by-elections next month, according to FT. Pressure is increasing for the ECB to hike rates after German CPI rose to its highest in half a century, according to The Times. ECB’s Visco Insists on ‘Orderly’ Rate-Hike Pace to Avoid Stress UK Mortgage Approvals Fall to 65,974 in April Vs. Est. 70,500 UK Could Reopen Top Gas Storage to Endure Energy Crisis BNP Paribas Aims to Hire 7,000 People in France in 2022 Russia’s Biggest Lender Sberbank Targeted in EU Sanctions Plan FX Buck bounces into month end as US Treasury yields rebound amidst rally in crude prices and hawkish Fed commentary, DXY towards top of firmer 101.800-410 range. Kiwi undermined by downbeat NBNZ business survey findings and recession warning from RBNZ; NZD/USD hovering just above 0.6500 and AUD/NZD back over 1.1000. Euro fades from Fib resistance irrespective of Eurozone inflation exceeding consensus, EUR/USD down through 1.0750 vs circa 1.0787 at best on Monday. Yen hampered by mixed Japanese data and UST retreat, but back above 128.00 and retracement level (128.27 Fib retracement). Aussie limits losses alongside recovering Yuan after better than feared Chinese PMIs and economic stability policies from the Cabinet, AUD/USD stays within sight of 0.7200, USD/CNH reverses from 6.6900+ and USD/CNY from just shy of 6.6750. Petro currencies cushioned by oil gains after EU embargo on some Russian exports; USD/CAD beneath 1.2700, EUR/NOK probes 10.1000 with added impetus as Norges Bank plans to trim daily FX purchases in June. Fixed Income Bonds succumb to more downside pressure as oil soars, inflation data exceeds consensus and Central Bank hawks get more aggressive. Bunds only just hold above 152.00, Gilts lose 117.00+ status and 10 year T-note retreats through 120-00 ahead of cash re-open from 3-day holiday weekend. Bobl supply snapped up at final sale of current 5 year batch and end of month Italian offerings relatively well received, albeit at much higher gross yields. BoJ maintains bond-buying operations for June at May levels. Commodities WTI and Brent are bid as China's COVID situation remains fluid, but with incremental improvements, alongside EU leaders reaching a watered-down Russian sanctions package. Currently, the benchmarks are holding comfortably above USD 119/bbl and in proximity to the top-end of the sessions range. Reminder, given the US market holiday there was no settlement on Monday. IEA's Birol says oil market could get tight in the summer and sees bottlenecks with diesel, gasoline, and kerosene, especially in Europe. Spot gold is modestly pressured but yet to stray much from the USD 1850/oz mark while base metals are mixed as sentiment slips. Central Banks ECB's Visco says rate hikes will need to be gradual given uncertainties, recent widening in the IT/GE spread shows the need to strengthen public finances and lower debt. Need to ensure tha t normalisation does not lead to unwarranted fragmentation in the Eurozone. ECB's Villeroy says the May inflation numbers confirm expectations for an increase and need for progressive monetary normalisation. Speaking in relation to the French inflation data. US Event Calendar 09:00: 1Q House Price Purchase Index QoQ, prior 3.3% 09:00: March S&P/Case-Shiller US HPI YoY, prior 19.80% 09:00: March S&P/CS 20 City MoM SA, est. 1.90%, prior 2.39% 09:00: March S&P CS Composite-20 YoY, est. 19.80%, prior 20.20% 09:00: March FHFA House Price Index MoM, est. 2.0%, prior 2.1% 09:45: May MNI Chicago PMI, est. 55.0, prior 56.4 10:00: May Conf. Board Expectations, prior 77.2 10:00: May Conf. Board Present Situation, prior 152.6 10:00: May Conf. Board Consumer Confidenc, est. 103.8, prior 107.3 10:30: May Dallas Fed Manf. Activity, est. 1.5, prior 1.1 DB's Jim Reid concludes the overnight wrap Yesterday we published our May market participant survey with 560 filling in across the globe. The highlights were that property was seen as the best inflation hedge with crypto only winning favour with 1%. 61% think a recession will be necessary to rein in inflation but less think the Fed will be brave enough to take us there. A majority think the ECB will have to throw in a 50bps hike at some point in this cycle but only around a quarter think the Fed will do a 75bps hike. Only a quarter think equities have now bottomed over a horizon of the next 3-6 months but responders have reduced their view of bubbles in the market from the last time we asked. Finally inflation expectations continue to edge up. See the link here for lots of interesting observations and thanks again for your continued support. It may have been a quieter session over the last 24 hours with the US on holiday, but inflation concerns were put firmly back on the agenda thanks to another upside surprise in German inflation, as well as a further rise in oil prices that sent Brent Crude back above $120/bbl (it was as low as $102 three weeks ago). That led to a fresh selloff in sovereign bonds, as well as growing speculation about more hawkish central banks, which marks a shift in the dominant narrative over the last couple of weeks, when growing fears of a recession had led to a rally in sovereign bonds, not least since there were growing doubts about the extent to which central banks would be able to take policy into restrictive territory, if at all. In reality though, that German inflation print for May provided significant ammunition to the hawkish side of the argument, with the EU-harmonised reading coming in above every estimate on Bloomberg at +8.7% (vs. +8.1% expected). For reference, that leaves German CPI at its highest level since the 1950s (using the numbers for West Germany before reunification), and that holds even if you use the national definition of CPI, which rose to a slightly lower +7.9% (vs. +7.6% expected). It was a similar story from Spain earlier in the day, which reported inflation on the EU-harmonised measure at +8.5% (vs. +8.3% expected). Speaking to our German economist Stefan Schneider he thinks temporary energy tax reductions should reduce the annual rate to below 7% in June but it’s likely that it’ll be back above 7% by September when this and other charges roll-off, and then only modestly fall into year-end. That’s a long period of high inflation where second round effect and wage pressures can build. With upside surprises from both Germany and Spain yesterday, that’ll heighten interest in this morning’s flash CPI print for the entire Euro Area, not least since the next ECB meeting is just 9 days away. Indeed, those bumper inflation readings have only added to expectations that the ECB will follow the Fed in moving by a larger-than-usual 50bps rather than 25bps once they start hiking. Overnight index swaps reacted accordingly, and are now pricing in a +33bps move higher in rates by the July meeting, which is the highest to date and leaves it just a few basis points away from being closer to 50bps than 25bps. On top of that, the amount of hikes priced in for the year as a whole rose to 114bps, which again is the highest to date. Ahead of that meeting, there were some further comments from policymakers, with the ECB’s Chief Economist Lane saying in an interview that “increases of 25 basis points in the July and September meetings are a benchmark pace.” Interestingly he didn’t rule out the possibility of a 50bp move, saying that “The discussion will be had”, but also said that their “current assessment … calls for a gradual approach to normalisation.” Against that backdrop, there was a significant selloff in European sovereign bonds, with yields on 10yr bunds (+9.4bps), OATs (+8.5bps) and BTPs (+9.9bps) all moving higher. The prospect of tighter policy meant those rises in yields were more pronounced at the front end of the curve, with 2yr German yields up +10.9bps to 0.43%, which is a level unseen in over a decade. The only major exception to that pattern were Swedish government bonds, where 10yr yields were down -6.2bps after the country’s economy contracted by a larger-than-expected -0.8% in Q1, which was above the -0.4% contraction in the flash estimate from April. Whilst Treasury markets were closed for the US Memorial Day holiday, Fed funds futures provided a sense that the direction of travel was similar in the US to Europe, since the implied fed funds rate by the December FOMC meeting ticked up +7bps. Furthermore, we also had a speech from Fed Governor Waller, who commented that he was in favour of “tightening policy by another 50 basis points for several meetings”, and said that he was “not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target”. Up to now, there’s been a pretty strong signal from Fed Chair Powell and others that 50bps were likely at the next two meetings (in June and July), but in September there’s been speculation they might begin to slow down to a 25bp pace, with futures currently pricing in something in between the two at present. In Asia, US sovereign yields are playing catch-up after reopening with 2yr through to 10yr yields 8-11bps higher across the curve. The main other story yesterday was a significant rise in oil prices, with Brent Crude up +1.97% on the day to close at $121.15/bbl, whilst WTI rose +1.82% to $117.17/bbl. That marks an 8th consecutive daily increase in Brent Crude prices, and leaves it at its highest closing level in over two months, and will not be welcome news for policymakers already grappling with higher energy prices. Part of that increase has come amidst the easing of Covid restrictions in China, but the prospect of an EU embargo on Russian oil has also played a role. Indeed, following an extraordinary European Council summit, EU leaders agreed late last night, a political deal to impose a partial ban on most Russian oil imports. Under a compromise plan, the 27-nation bloc has decided to cut 90% of oil imports from Russia by the end of 2022 with EU leaders agreeing to exempt Hungary from Russian oil embargo. The embargo will cover seaborne oil and partially exempt pipeline oil thus providing an important concession to the landlocked nation. Following this, oil prices are building on yesterday's gains with Brent and WTI up just under 1.5% as I type. Asian equity markets are mostly treading water this morning but with China higher. The Nikkei (+0.13%), Hang Seng (+0.24%) and Kospi (+0.11%) are slightly higher with the Shanghai Composite (+0.75%) and CSI (+0.98%) leading gains after China’s official factory activity contracted at a slower pace. The official manufacturing PMI advanced to 49.6 in May (vs 49.0 expected) from 47.4, as COVID-19 curbs in major manufacturing hubs were eased. This is still three months below 50 now. In line with the weakness in the factory sector, services sector activity remained soft, but did bounce. The non-manufacturing PMI came in at 47.8 in May, up from 41.9 in April. US equities were closed for the holiday yesterday, but in spite of the prospect of faster rate hikes being back on the table, futures still managed to put in a decent performance, with those on the S&P 500 up over +0.5% around the time of the European close. That's dipped to +0.2% as I type though. European indices made gains, with the STOXX 600 up +0.59% thanks to an outperformance among the more cyclical sectors, and the index built on its +2.98% advance last week. Those gains were seen across the continent, with the DAX (+0.79%), the CAC 40 (+0.72%) and the FTSE 100 (+0.19%) all moving higher on the day. Finally, there wasn’t much other data yesterday, although the European Commission’s economic sentiment indicator for the Euro Area stabilised in May having fallen in all but one month since October. The measure came in at 105.0 (vs. 104.9 expected), up from a revised 104.9 in April. To the day ahead now, and the data highlights will include the flash CPI reading for May from the Euro Area, as well as the country readings from France and Italy. On top of that, we’ll get German unemployment for May, UK mortgage approvals for April, and Canada’s Q1 GDP. Over in the US, there’s then the FHFA house price index for March, the Conference Board’s consumer confidence indicator for May, the MNI Chicago PMI for May and the Dallas Fed’s manufacturing activity for May. Otherwise, central bank speakers include the ECB’s Villeroy, Visco and Makhlouf. Tyler Durden Tue, 05/31/2022 - 07:51.....»»

Category: worldSource: nytMay 31st, 2022

What to Know About the New IPEF Trade Bloc Biden Is Touting In Asia

The IPEF is seen as a way for the U.S. to signal its commitment to remain a leading force in Asia TOKYO — President Joe Biden faced a dilemma on trade in Asia: He couldn’t just rejoin the Trans-Pacific Partnership that his predecessor had pulled the U.S. out of in 2017. Many related trade deals, regardless of their content, had become politically toxic for U.S. voters, who associated them with job losses. So Biden came up with a replacement. During Biden’s visit to Tokyo, the U.S. on Monday planned to announce the countries that are joining the new Indo-Pacific Economic Framework. In the tradition of trade deals, it’s best known by its initials: IPEF. What would the IPEF do? [time-brightcove not-tgx=”true”] That’s still to be figured out. Monday’s announcement signals the start of talks among participating countries to decide what will ultimately be in the framework, so the descriptions for now are largely aspirational. In a broad sense, it’s a way for the U.S. to lay down a marker signaling its commitment to remain a leading force in Asia. White House national security adviser Jake Sullivan said IPEF is “focused around the further integration of Indo-Pacific economies, setting of standards and rules, particularly in new areas like the digital economy, and also trying to ensure that there are secure and resilient supply chains.” The idea that new standards for world trade are needed isn’t just about discontent among U.S. voters. It’s a recognition of how the pandemic disrupted the entire scope of supply chains, shuttering factories, delaying cargo ships, clogging ports and causing higher inflation globally. Those vulnerabilities became even clearer in late February after Russian President Vladimir Putin ordered the invasion of Ukraine, causing dangerously high jumps in food and energy costs in parts of the world. U.S. President Joe Biden talks with South Korean President Yoon Suk-yeol during their meeting at the presidential office on May 21, 2022 in Seoul, South Korea. Who’s going to firm up the details? The negotiations with partner countries will revolve around four pillars, or topics, with the work split between the U.S. trade representative and the Commerce Department. The U.S. trade representative will handle talks on the “fair” trade pillar. This would likely include efforts to shield U.S. workers from job losses as China’s entrance into the World Trade Organization in 2001 led to severe manufacturing layoffs. Those job losses gutted parts of the U.S., angered voters and helped power the political rise of Donald Trump, who, as president, pulled the U.S. out of the Trans-Pacific Partnership almost as soon as he took the oath of office in 2017. The Commerce Department will oversee negotiations on the other three pillars: supply chain resiliency, infrastructure and climate change, and tax and anti-corruption. Commerce Secretary Gina Raimondo flew with Biden on Air Force One to Japan. She was also by the president’s side during his time in South Korea, where he highlighted investments in U.S. factories by automaker Hyundai and the electronics behemoth Samsung. Who can join the club? Not Taiwan The White House has said IPEF will be an open platform. But it has faced criticism from the Chinese government that any agreement could be an “exclusive” clique that would lead to greater turmoil in the region. And there are sensitivities to China, the world’s second-largest economy, in setting up IPEF. The self-ruled island of Taiwan, which China claims as its own, is being excluded from the pact. This exclusion is noteworthy since Taiwan is also a leading manufacturer of computer chips, a key element of the digital economy that will be part of IPEF negotiations. Sullivan said any trade talks with Taiwan would be done one to one. “We are looking to deepen our economic partnership with Taiwan including on high technology issues, including on semiconductor supply,” Sullivan said. “But we’re pursuing that in the first instance on a bilateral basis.” How long will it take? Once talks start, negotiations are expected to go 12 to 18 months, an aggressive timeline for a global trade deal, according to an administration official. The official insisted on anonymity to discuss plans and added that building consensus inside the U.S. will also be key......»»

Category: topSource: timeMay 23rd, 2022

Financial War Takes A Nasty Turn

Financial War Takes A Nasty Turn Authored by Alasdair Macleod via GoldMoney.com, The chasm between Eurasia and the Western defence groupings (NATO, Five-eyes, AUKUS etc.) is widening rapidly. While media commentary focuses on the visible side of the conflict in Ukraine, the economic and financial aspects are what really matter. There is an increasing inevitability about it all. China has been riding the inflationist Western tiger for the last forty years and now that it sees the dollar’s debasement accelerating wonders how to get off. Russia perhaps is more advanced in its plans to do without dollars and other Western currencies, hastened by sanctions. Meanwhile, the West is increasingly vulnerable with no apparent alternative to the dollar’s hegemony. By imposing sanctions on Russia, the West has effectively lined up its geopolitical opponents into a common cause against an American dollar-dominated faction. Russia happens to be the world’s largest exporters of energy, commodities, and raw materials. And China is the supplier of semi-manufactured and consumer goods to the world. The consequences of the West’s sanctions ignore this vital point. In this article, we look at the current state of the world’s financial system and assess where it is headed. It summarises the condition of each of the major actors: the West, China, and Russia, and the increasing urgency for the latter two powers to distance themselves from the West’s impending currency, banking, and financial asset crisis. We can begin to see how the financial war will play out. The West and its dollar-based pump-and-dump system The Chinese have viewed the US’s tactics under which she has ensured her hegemony prevails. It has led to a deep-seated distrust in her relationship with America. And this is how she sees US foreign policy in action. Since the end of Bretton Woods in August 1971, for strategic reasons as much as anything else America has successfully continued to dominate the free world. A combination of visible military capability and less visible dollar hegemony defeated the communism of the Soviets and Mao Zedong. Aid to buy off communism in Africa and Latin America was readily available by printing dollars for export, and in the case of Latin America by deploying the US banking system to recycle petrodollars into syndicated loans. In the late seventies, banks in London would receive from Citibank yards-long telexes inviting participation in syndicated loans, typically for $100 million, the purpose of which according to the telex was invariably “to further the purposes of the state.” Latin American borrowing from US commercial banks and other creditors increased dramatically during the 1970s. At the commencement of the decade, total Latin American debt from all sources was $29 billion, but by the end of 1978, that number had skyrocketed to $159 billion. And in early-1982, the debt level reached $327 billion.[i] We all knew that some of it was disappearing into the Swiss bank accounts of military generals and politicians of countries like Argentina. Their loyalty to the capitalist world was being bought and it ended predictably with the Latin American debt crisis. With consumer price inflation raging, the Fed and other major central banks had to increase interest rates in the late seventies, and the bank credit cycle turned against the Latins. Banks sought to curtail their lending commitments and often (such as with floating-rate notes) they were paying higher coupon rates. In August 1982, Mexico was the first to inform the Fed, the US Treasury, and the IMF that it could no longer service its debt. In all, sixteen Latin American countries rescheduled their debts subsequently as well as eleven LDCs in other parts of the world. America assumed the lead in dealing with the problems, acting as “lender of last resort” working with central banks and the IMF. The rump of the problem was covered with Brady Bonds issued between 1990—1991. And as the provider of the currency, it was natural that the Americans gave a pass to their own corporations as part of the recovery process, reorganising investment in production and economic output. So, a Latin American nation would have found that America provided the dollars required to cover the 1970s oil shocks, then withdrew the finance, and ended up controlling swathes of national production. That was the pump and dump cycle which informed Chinese military strategists analysing US foreign policy some twenty years later. In 2014, the Chinese leadership was certain the riots in Hong Kong reflected the work of American intelligence agencies. The following is an extract translated from a speech by Major-General Qiao Liang, a leading strategist for the Peoples’ Liberation Army, addressing the Chinese Communist Party’s Central Committee in 2015: “Since the Diaoyu Islands conflict and the Huangyan Island conflict, incidents have kept popping up around China, including the confrontation over China’s 981 oil rigs with Vietnam and Hong Kong’s “Occupy Central” event. Can they still be viewed as simply accidental? I accompanied General Liu Yazhou, the Political Commissar of the National Defence University, to visit Hong Kong in May 2014. At that time, we heard that the “Occupy Central” movement was being planned and could take place by end of the month. However, it didn’t happen in May, June, July, or August. What happened? What were they waiting for? Let’s look at another timetable: the U.S. Federal Reserve’s exit from the Quantitative Easing (QE) policy. The U.S. said it would stop QE at the beginning of 2014. But it stayed with the QE policy in April, May, June, July, and August. As long as it was in QE, it kept overprinting dollars and the dollar’s price couldn’t go up. Thus, Hong Kong’s “Occupy Central” should not happen either. At the end of September, the Federal Reserve announced the U.S. would exit from QE. The dollar started going up. Then Hong Kong’s “Occupy Central” broke out in early October. Actually, the Diaoyu Islands, Huangyan Island, the 981 rigs, and Hong Kong’s “Occupy Central” movement were all bombs. The successful explosion of any one of them would lead to a regional crisis or a worsened investment environment around China. That would force the withdrawal of a large amount of investment from this region, which would then return to the U.S." For the Chinese, there was and still is no doubt that America was out to destroy China and stood ready to pick up the pieces, just as it had done to Latin America, and South-East Asia in the Asian crisis in 1997. Events since “Occupy Central” will have only confirmed that view and explains why the Chinese dealt with the Hong Kong problem the way they did, when President Trump mounted a second attempt to derail Hong Kong, with the apparent objective to prevent global capital flows entering China through Shanghai Connect. For the Americans the world is slipping out of control. They have had expensive wars in the Middle East, with nothing to show for it other than waves of displaced refugees. For them, Syria was a defeat, even though that was just a proxy war. And finally, they had to give up on Afghanistan. For her opponents, America has lost hegemonic control in Eurasia and if given sufficient push can be removed from the European mainland entirely. Undoubtedly, that is now Russia’s objective. But there are signs that it is now China’s as well, in which case they will have jointly obtained control of the Eurasian land mass. Financial crisis facing the dollar The geopolitics between America and the two great Asian states have been clear for all of us to see. Less obvious has been the crisis facing Western nations. Exacerbated by American-led sanctions against Russia, producer prices and consumer prices are not only rising, but are likely to continue to do so. In particular, the currency and credit inflation of not only the dollar, but also the yen, euro, pound, and other motley fiat currencies have provided the liquidity to drive prices of commodities, producer prices and consumer prices even higher. In the US, reverse repos which absorb excess liquidity currently total nearly $2 trillion. And the higher interest rates go, other things being equal the higher this balance of excess currency no one wants will rise. And rise they will. The strains are most obvious in the yen and the euro, two currencies whose central banks have their interest rates stuck below the zero bound. They refuse to raise them, and their currencies are collapsing instead. But when you see the ECB’s deposit rate at minus 0.5%, producer prices for Germany rising at an annualised rate of over 30%, and consumer prices already rising at 7.5% and sure to go higher, you know they will all go much, much higher. Like the Bank of Japan, the ECB and its national central banks through quantitative easing have assembled substantial portfolios of bonds, which with rising interest rates will generate losses which will drive them rapidly into insolvency. Furthermore, the two most highly leveraged commercial banking systems are the Eurozone’s and Japan’s with assets to equity ratios for the G-SIBs of over twenty times. What this means is that less than a 5% fall in the value of its assets will bankrupt the average G-SIB bank. It is no wonder that foreign depositors in these banking systems are taking fright. Not only are they being robbed through inflation, but they can see the day when the bank which has their deposits might be bailed in. And worse still, any investment in financial assets during a sharply rising interest environment will rapidly lose value. For now, the dollar is seen as a haven from currencies on negative yields. And in the Western world, the dollar as the reserve currency is seen as offering safety. But this safety is an accounting fallacy which supposes that all currency volatility is in the other fiat currencies, and not the dollar. Not only do foreigners already own dollar-denominated financial assets and bank deposits totalling over $33 trillion, but rising bond yields will prick the dollar’s financial asset bubble wiping out much of it. In other words, there are currently winners and losers in currency markets, but everyone will lose in bond and equity markets. Add into the mix counterparty and systemic risks from the Eurozone and Japan, and we can say with increasing certainty that the era of financialisation, which commenced in the 1980s, is ending. This is a very serious situation. Bank credit has become increasingly secured on non-productive assets, whose value is wholly dependent on low and falling interest rates. In turn, through the financial engineering of shadow banks, securities are secured on yet more securities. The $610 trillion of OTC derivatives will only provide protection against risk if the counterparties providing it do not fail. The extent to which real assets are secured on bank credit (i.e., mortgages) will also undermine their values. Clearly, central banks in conjunction with their governments will have no option but to rescue their entire financial systems, which involves yet more central bank credit being provided on even greater scales than seen over covid, supply chain chaos, and the provision of credit to pay for higher food and energy prices. It must be unlimited. We should be in no doubt that this accelerating danger is at the top of the agenda for anyone who understands what is happening — which particularly refers to Russia and China. Russia’s aggressive stance There can be little doubt that Putin’s aggression in Ukraine was triggered by Ukraine’s expressed desire to join NATO and America’s seeming acquiescence. A similar situation had arisen over Georgia, which in 2008 triggered a rapid response from Putin. His objective now is to get America out of Europe’s defence system, which would be the end of NATO. Consider the following: America’s military campaigns on the Eurasian continent have all failed, and Biden’s withdrawal from Afghanistan was the final defeat. The EU is planning its own army. Being an army run by committee it will lack focus and be less of a threat than NATO. This evolution into a NATO replacement should be encouraged. As the largest supplier of energy to the EU, Russia can apply maximum pressure to speed up the political process. The most important commodity for the EU is energy. And through EU policies, which have been to stop producing carbon-based energy and to import it instead, the EU has become dependent on Russian oil, natural gas, and coal. And by emasculating Ukraine’s production, Putin is putting further pressure on the EU with respect to food and fertiliser, which will become increasingly apparent over the course of the summer. For now, the EU is toeing the American line, with Brussels instructing member states to stop importing Russian oil from the end of this year. But already, it is reported that Hungary and Slovakia are prepared to buy Russian oil and pay in roubles. And it is likely that while other EU governments will avoid direct contractual relationships with Russia, ways round the problem indirectly are being pursued. A sticking point for EU governments is having to pay in roubles. Otherwise, the solution is simple: non-Russian, non-EU banks can create a Eurorouble market overnight, creating rouble bank credit as needed. All that such a bank requires is access to rouble liquidity to manage a balance sheet denominated in roubles. The obvious providers of rouble credit are China’s state-controlled megabanks. And we can be reasonably sure that at his meeting with President Xi on 4 February, not only would the intention to invade Ukraine have been discusseded, but the role of China’s banks in providing roubles for the “unfriendlies” (NATO and its supporters) in the event of Western sanctions against Russia will have been as well. The point is that Russia and China have mutual geopolitical objectives, and what might have come as a surprise to the West was most likely agreed between them in advance. The recovery in the rouble from the initial hit to an intraday low of 150 to the dollar has taken it to 64 at the time of writing. There are two factors behind this recovery. The most important is Putin’s announcement that the unfriendlies will have to pay for energy in roubles. But there was a subsidiary announcement that the Russian central bank would be buying gold. Notionally, this was to ensure that Russian banks providing finance to gold mines could gold and other related assets as collateral. But the central bank had stopped buying gold and accumulated the unfriendlies currencies in its reserves instead. This was taken by senior figures in Putin’s administration as evidence that the highly regarded Governor, Elvira Nabiullina, had been captured by the West’s BIS-led banking system. Russia has now realised that foreign exchange reserves which can be blocked by the issuers are valueless as reserves in a crisis, and that there is no point in having them. Only gold, which has no counterparty risk can discharge this role. And it is a lesson not lost on other central banks either, both in Asia and elsewhere. But this sets the rouble onto a different course from the unbacked fiat currencies in the West. This is deliberate, because while rising interest rates will lead to a combined currency, banking, and financial asset crisis in the West, it is a priority of the greatest importance for Russia to protect herself from these developments. A new backing for the rouble Russia is determined to protect herself from a dollar currency collapse. So far as Russia is concerned, this collapse will be reflected in rising dollar prices for her exports. And only last week, one of Putin’s senior advisors, Nikolai Patrushev, confirmed in an interview with Rossiyskaya Gazeta that plans to link the rouble to commodities are now being considered. If this plan goes ahead, the intention must be for the rouble to be considered a commodity substitute on the foreign exchanges, and its protection against a falling dollar will be secured. We are already seeing the rouble trending higher, with it at 64 to the dollar yesterday. Figure 1 below shows its progress, in the dollar-value of a rouble. Keynesians in the West have misread this situation. They think that the Russian economy is weak and will be destabilised by sanctions. That is not true. Furthermore, they would argue that a currency strengthened by insisting that oil and natural gas are paid for in roubles will push the Russian economy into a depression. But that is only a statistical effect and does not capture true economic progress or the lack of it, which cannot be measured. The fact is that the shops in Russia are well stocked, and fuel is freely available, which is not necessarily the case in the West. The advantages for Russia are that as the West’s currencies sink into crisis, the rouble will be protected. Russia will not suffer from the West’s currency crisis, she will still get inflation compensation in commodity prices, and her interest rates will decline while those in the West are soaring. Her balance of trade surplus is already hitting new records. There was a report, attributed to Dmitri Peskov, that the Kremlin is considering linking the rouble to gold and the idea is being discussed with Putin. But that’s probably a rehash of the interview that Nickolai Patrushev recorded with Rossiyskaya Gazeta referred to above, whereby Russia is considering fixing the rouble against a wider range of commodities. At this stage, a pure gold standard for the rouble of some sort would have to take the following into account: History has shown that the Americans and the West’s central banks manipulate gold prices through the paper markets. To fix the rouble against a gold standard would hold it a hostage to fortune in this sense. It would be virtually impossible for the West to manipulate the rouble by intervening in this way across a range of commodities. Over long periods of time the prices of commodities in gold grams are stable. For example, the price of oil since 1950 has fallen by about 30%. The volatility and price rises have been entirely in fiat currencies. The same is true for commodity prices generally, telling us that not only are commodities priced in gold grams generally stable, but a basket of commodities can be regarded as tracking the gold price over time and therefore could be a reasonable substitute for it. If Russia has significant gold bullion quantities in addition to declared reserves, these will have to be declared in conjunction with a gold standard. Imagine a situation where Russia declares and can prove that it has more gold that the US Treasury’s 8,133 tonnes. Those who appear to be in a position to do so assess the true Russian gold position is over 10,000 tonnes. Combined with China’s undeclared gold reserves, such an announcement would be a financial nuclear bomb, destabilising the West. For this reason, Russia’s partner, China, for which exporting semi-manufactured and consumer goods to the West is central to her economy activities, would prefer an approach that does not add to the dollar’s woes directly. The Americans are doing enough to undermine the dollar without a push from Asia’s hegemons. Furthermore, a mechanism for linking the rouble to commodity prices has yet to be devised. The advantage of a gold standard is it is a simple matter for the issuer of a currency to accept notes from the public and to pay out gold coin. And arbitrage between gold and roubles would ensure the link works on the foreign exchanges. This cannot be done with a range of commodities. It will not be enough to simply declare the market value of a commodity basket daily. Almost certainly forex traders will ignore the official value because they have no means of arbitrage. It is likely, therefore, that Russia will take a two-step approach. For now, by insisting on payments in roubles by the unfriendlies domestic Russian prices for commodities, raw materials and foods will be stabilised as the unfriendlies’ currencies fall relative to the rouble. Russia will find that attempts to tie the currency to a basket of currencies is impractical. After the West’s currency, banking, and financial asset crisis has passed then there will be the opportunity to establish a gold standard for the rouble. The Eurasian Economic Union While it is impossible to formally tie a currency which trades on the foreign exchanges to a basket of commodities, the establishment of a virtual currency specifically for trade settlement between jurisdictions is possible. This is the basis of a project being supervised by Sergei Glazyev, whereby such a currency is planned to be used by the member states of the Eurasian Economic Union (EAEU). Glazyev is Russia’s Minister in charge of integration and macroeconomics of the EAEU. While planning to do away with dollars for trade settlements has been in the works for some time, sanctions by the unfriendlies against Russia has brought about a new urgency. We know no detail, other than what was revealed in an interview Glazyev gave recently to a media outlet, The Cradle [ii]. But the desire to do away with dollars for the countries involved has been on the agenda for at least a decade. In October 2020, the original motivation was explained by Victor Dostov, president of the Russian Electronic Money Association: “If I want to transfer money from Russia to Kazakhstan, the payment is made using the dollar. First, the bank or payment system transfers my roubles to dollars, and then transfers them from dollars to tenge. There is a double conversion, with a high percentage taken as commission by American banks.” The new trade currency will be synthetic, presumably price-fixed daily, giving conversion rates into local currencies. Operating rather like the SDR, state banks can create the new currency to provide the liquidity balances for conversion. It is a practical concept, which being relatively advanced in the planning, is probably the reason the Kremlin is considering it as an option for a future rouble. That idea of a commodity basket for the rouble itself is bound to be abandoned, while a successful EAEU trade settlement currency can be extended to both the wider Shanghai Cooperation Organisation and the BRICS members not in the SCO. China’s position We can now say with confidence that at their meeting on 4 February Putin and Xi agreed to the Ukraine invasion. Chinese interests in Ukraine are affected, and the consequences would have had to be discussed. The fact that Russia went ahead with its war on Ukraine makes China complicit, and we must therefore analyse the position from China’s point of view. For some time, America has attacked China’s economy, trying to undermine it. I have already detailed the position over Hong Kong, to which can be added other irritations, such as the arrest of Huawei’s chief financial officer in Canada on American instructions, trade tariffs, and the sheer unpredictability of trade policy during the Trump administration. President Biden and his administration have now been assessed by both Putin and Xi. By 4 February their economic and banking advisors will have made their recommendations. Outsiders can only come to one conclusion, and that is Russia and China decided at that meeting to escalate the financial war on the West. Their position is immensely strong. While Russia is the largest exporter of energy and commodities in the world, China is the largest provider of intermediate and consumer goods. Other than the unfriendlies, nearly all other nations are neutral and will understand that it is not in their interests to side with NATO, the EU, Japan and South Korea. The only missing piece of the jigsaw is China’s commoditisation of the renminbi. Following the Fed’s reduction of its funds rate to the zero bound and its monthly QE increase to $120bn per month, China began to aggressively stockpile commodities and grains. In effect, it was a one-nation crack-up boom, whereby China took the decision to dump dollars. The renminbi rose against the dollar, but by considerably less than the dollar’s loss of purchasing power. This managed exchange rate for the renminbi appears to have been suppressed to relieve China’s exporters from currency pressures, at a time when the Chinese economy was adversely affected first by credit contraction, then by covid and finally by supply chain disruptions. With respect to supply chains, current lockdowns in Shanghai and the logjam of container vessels in the Roads look set to emasculate Western economies with supply chain issues for the rest of the year. All we know is that the authorities are making things worse, but we don’t know whether it is deliberate. It is increasingly difficult to believe that the financial and currency war is not being purposely escalated by the Chinese-Russian partnership. Having attacked Ukraine, the West’s response is undermining their own currencies, and the urgency for China and Russia to protect their currencies and financial systems from the consequences of a fiat currency crisis has become acute. It is the financial war which is going “nuclear”. Talk in the West of the military war escalating towards a physical nuclear war misses this point. China and Russia now realise they must protect themselves from the West’s looming currency and economic crisis as a matter of urgency. To fail to do so would simply ensure the crisis overwhelms them as well. Tyler Durden Fri, 05/06/2022 - 21:00.....»»

Category: dealsSource: nytMay 6th, 2022

Diesel For Dinner

Diesel For Dinner Via Doomberg Substack, “Governing a great nation is like cooking a small fish - too much handling will spoil it.” – Lao Tzu The words edible and eatable are often used interchangeably but embedded within their respective definitions is a distinction that makes an important difference. Edible means “safe to eat,” whereas eatable means “pleasant to eat.” A variant of the word eatable is delicious, commonly defined as “highly pleasant to eat.” Delicious certainly sounds more enticing than highly eatable, a phrase nobody would use to compliment an exquisite meal crafted by a professional chef. We find such linguistic nuances pleasing. Whether the balance of calories a person consumes is edible, eatable, or delicious depends on where they sit on Maslow’s hierarchy of needs, a concept we covered at length in a piece we wrote last July called Why Are Cows Sacred?  For those at the base of the pyramid, the struggle to consume enough edible food just to see another sunrise defines much of their existence. At the top of the pyramid sit those fortunate souls who can afford to cook delicious meals with fresh ingredients, eat at fine restaurants, or even hire a personal chef to tend to their every dietary indulgence. At the molecular level, the distinction between edible and inedible can be subtle. The rearrangement of a few atoms within an otherwise similar chemical structure can make the difference between satiation and a trip to the emergency room.  Prior to the advent of the modern chemical and energy industries, humanity leveraged animal and plant byproducts to create many of the functional materials used in daily life, making the tradeoff between food and other needs a more visceral one than it is today. The edible parts were eaten, and the inedible stuff – presumably identified through an unfortunate series of trial and error experiments – was converted into other useful things or burned to create energy. Armed with humanity’s mastery of chemistry, we can now rearrange atoms with astonishing specificity at an unimaginable scale, pushing billions of people further up Maslow’s hierarchy than they would otherwise be. In addition to using fossil fuels to create most of the materials that surround us, we leverage them to produce fertilizers, herbicides, fungicides, and other inputs into the farming process, boosting crop yields to levels once thought impossible. We also synthesize mountains of edible ingredients directly from oil and gas. Touring a modern food processing factory would seem almost indistinguishable from a specialty chemical plant, mostly because they aren’t all that different. While it makes perfect sense to leverage our bounty of fossil fuels and ability to manipulate them at the molecular level to increase global food abundance, going through the effort to grow food only to turn around and burn it for energy seems less than ideal. In a controversial piece we wrote in January titled “In Praise of Corn Ethanol,” we put forth a theory that the adoption of corn ethanol as a mandated additive to gasoline was a scheme to coverup one of the greatest environmental scandals of the past century: the use of tetraethyl lead as an anti-knock agent. While some readers interpreted our piece as supporting this policy – undoubtedly because of the title – our primary purpose was to highlight the ugly history that got us to the current situation, and how it was predominantly a dirty political compromise. In hindsight, “Why Corn Ethanol is a Thing” might have been a better title. No such compromise underpins the decision to use foodstuffs as replacements for diesel, a policy that will make the unfolding global food crisis substantially worse if it is not soon overturned. When a barrel of oil is refined, it is separated into various products using the different boiling points of its components. Gasoline boils at a lower temperature than diesel and represents about 43% of each barrel of oil. Diesel makes up approximately 27%, with the other 30% destined to become heating oil, jet fuel, asphalt, and other important materials. Because of its higher energy density per gallon and the efficiency of engines designed to use it, diesel is a desirable fuel, especially for long-haul trucking. Trucks at the pump | Getty Images Unfortunately for those near the bottom of Maslow’s pyramid, many cooking oils – liquid fat isolated from various crops used extensively in frying, baking, and other types of food preparation all over the world – have a molecular structure quite similar to that of diesel. It does not take much chemical magic to transform previously edible cooking oils into workable substitutes for the valuable fuel. Now that the environmental lobby has convinced government officials worldwide that “renewable carbon content” is prima facia a desirable thing – a fallacy that deserves its own Doomberg piece – various mandates exist to literally take food out of the mouths of the hungry and pump it into our trucks for burning. For the planet, and whatnot. The first commercially relevant incarnation of a diesel substitute derived from crops is a product known as biodiesel. Oils derived from palm, sunflower, soybean, rapeseed, and castor are used as inputs, to name a few, and they are reacted with methanol (derived from fossil fuels) in a chemical process known as transesterification. Transesterification generates a product with higher oxygen content than standard diesel. This presents some challenges, including poor low-temperature performance, increased microbial growth, corrosion of engine parts, and higher shipping costs (biodiesel cannot leverage existing pipelines that are used to transport regular diesel). Much like corn ethanol, biodiesel is blended with regular diesel at concentrations between 2-20% before being marketed. Despite these limitations, government mandates have motivated farmers the world over to redirect a sizable chunk of their crops from the grocery store to the gas station. Nearly all of the challenges with biodiesel have been overcome with the recent development of renewable diesel, a material synthesized by hydrotreating cooking oils. Here’s how the US Energy Information Agency (EIA) describes the differences (emphasis added throughout): “Renewable diesel is a biomass-based diesel fuel similar to biodiesel, but with important differences. Unlike biodiesel, renewable diesel is a hydrocarbon that is chemically equivalent to petroleum diesel and can be used as a drop-in biofuel that does not require blending with petroleum diesel for use… Because renewable diesel is a drop-in fuel, it meets ASTM D975 specification for petroleum diesel and can be seamlessly blended, transported, and even co-processed with petroleum diesel.” Image credit: iStockPhoto / Lori Hays To the truckers forced to meet renewable carbon content mandates, renewable diesel is a godsend. It requires no change on their part, is indistinguishable from regular diesel, and allows them to proudly proclaim their green bonafides. To the companies who produce it, renewable diesel is a government-mandated financial pot of gold. The US Environmental Protection Agency (EPA) issues valuable renewable identification numbers (RINs) to track compliance with various mandates and to stoke production. There’s also a national $1-per-gallon tax credit to further incentivize producers. While support at the federal level has been important, the real driver for renewable diesel adoption has been the State of California. Through its low-carbon fuel standards (LCFS) program, credits currently trading for $115 per carbon ton are being issued, and renewable diesel is now the largest source of incremental credits. This is before the real capacity to produce renewable diesel comes online. Where will all this renewable diesel come from? In the US, soybean oils are the main input, and it should come as no surprise that planting strategies are being quickly modified to produce more of it. This quote from an industry consultant frames the magnitude of the upcoming disruption well: “The dramatic development of the U.S. renewable diesel industry is similar to how ethanol changed the U.S. corn industry from 2007 to 2010, says Dan Basse, president of AgResource Company. But he believes renewable diesel could be more disruptive. ‘We are calling for 90.5 million soybean acres in 2022 versus this year’s 87 million, and that just gets us started in meeting renewable diesel demand,” he says. “Then we’d need to increase soybean acres by 5 million to 7 million each year. We have to top 120 million acres of soybeans to meet the growing demand for renewable diesel.’” With the force of the government’s thumb on the scale of demand compounding pre-existing inflationary pressures hitting farmers, the price of soybeans has soared to fresh all-time highs. At the time of this writing, soybeans trade for $17 per bushel, more than double the price seen just two years ago. Unless these policies are unwound, it is difficult to imagine a scenario where positive price momentum abates. In a piece we wrote last October called Starvation Diet, we warned that the unfolding energy crisis would trigger a global famine, a process that would be exacerbated by protectionism. Here’s a key passage: “We’ve written extensively about how the market for energy in Europe broke and how the ripple effects will snap through our delicate supply chains like a whip. When the supply of critical goods goes short, countries implement protectionist policies in a futile attempt to minimize the impact at home. A cascading series of retaliatory moves usually follows, leading to economic vapor lock. We are seeing that pattern play out now in agriculture.” Although we take no joy in being proven right in this regard, more evidence of our prescience emerged last week when Indonesia shocked the world by banning all exports of palm oil. Cooking oils can be substituted for each other and price pressures on one oil inevitably puts a bid under the others. Here’s how The Guardian describes the situation: “The price of edible oils such as soyoil, sunflower oil and rapeseed oil is expected to rise after Indonesia announced a surprise export palm oil ban, experts have warned. Major edible oils are already in short supply due to adverse weather and Russia’s invasion of Ukraine. The move by Indonesia to pause exports will place extra strain on cost-sensitive consumers in Asia and Africa hit by higher fuel and food prices.” The magnitude of this ban cannot be overstated. According to data from Statista, palm oil accounted for 35% of all cooking oil produced last year. Indonesia is responsible for a staggering 60% of global palm oil production. The blast waves emanating from this explosive move will be felt the world over, most acutely by those already on the brink that can least afford to react. Bluntly, people are going to starve. In the face of a global energy crisis, the war in Ukraine, food shortages, and rampant inflation, does it make sense to be redirecting so many acres of valuable cropland to make renewable diesel, a fuel we can easily and directly drill for domestically? Do our policymakers understand the interconnected nature of these markets, and how forcing a strong link between diesel and soybeans creates a tunnel through which the contagion of crisis in one market bleeds directly into the other? Imagine how grotesque this spectacle must seem to the most vulnerable among us. While they scramble to secure enough edible food to survive, our elite know-it-alls gorge themselves on the most delicious hors d'oeuvres the cocktail party circuit can provide. Through either shocking ignorance or callous indifference, they convince themselves they are saving the planet. Saving the planet for who, exactly? The poorest citizens on Earth? Nah. Let them eat diesel. *  *  * If you have enjoyed this or any of the 105 articles we’ve published in the last year, please hit the “Like” button and consider upgrading your subscription. New articles will be limited to paid subscribers after April 30th. Claim your spot in the Chicken Coop today! Tyler Durden Sun, 05/01/2022 - 14:00.....»»

Category: blogSource: zerohedgeMay 1st, 2022

As Putin Threatens Nuclear Disaster, Europe Learns to Embrace Nuclear Energy Again

In early March, the world looked on in horror as a fire broke out at Europe’s largest nuclear power plant in southeast Ukraine. The blaze at the Zaporizhzhia facility following shelling by invading Russian forces was eventually brought under control, and no leaked radiation was reported, though the potential for catastrophe prompted Ukraine President Volodymyr… In early March, the world looked on in horror as a fire broke out at Europe’s largest nuclear power plant in southeast Ukraine. The blaze at the Zaporizhzhia facility following shelling by invading Russian forces was eventually brought under control, and no leaked radiation was reported, though the potential for catastrophe prompted Ukraine President Volodymyr Zelenskyy to accuse his Russian counterpart Vladimir Putin of “nuclear terrorism.” “There are six nuclear reactors there,” Zelensky said of Zaporizhzhia. “In Chernobyl, it was one reactor that exploded, only one.” By referencing Chernobyl—the nuclear power plant in northern Ukraine that became the site of the world’s worst nuclear disaster in 1986—Zelensky was making the stakes very plain. But strange as it may sound, those scenes at Zaporizhzhia may inadvertently contribute to a new dawn for nuclear power. [time-brightcove not-tgx=”true”] The instability resulting from the Russian invasion—as well as mounting evidence of war crimes—has made finding alternatives to Russian oil and liquid natural gas (LNG) a policy priority for European nations who want to stop funding Putin’s war machine. With few options that offer true energy sovereignty, there is now renewed enthusiasm for nuclear energy among politicians in Europe. On April 8, British Prime Minister Boris Johnson announced the U.K. would build up to eight new nuclear plants by 2030 to ensure “we are never again subject to the vagaries of global oil and gas prices” and “can’t be blackmailed by people like Vladimir Putin.” Across Europe, there has been a growing acceptance that nuclear energy is a vital plinth of efforts to fight climate change, and Russia’s invasion of Ukraine has catalyzed that trend by injecting a national security argument. And as a leader in revolutionary new nuclear technology, the U.S. stands to be the chief geostrategic beneficiary of any revival. The question is whether engrained, ideological aversion to nuclear power in key stakeholder states, particularly Germany, will quell that momentum. Why Nuclear Power is Back on the Discussion Table Collectively, the E.U. imported more than 60% of its energy in 2019. Of that, 47% of the bloc’s imported coal came from Russia, along with 41% of its imported LNG, and 27% of its imported crude oil. The ideal solution is to replace coal and oil with renewables like wind, solar and tidal power. However, despite some great advances in battery technology amid heaps of investment, there is still not a viable storage solution to provide power when the sun isn’t shining, or wind stops blowing. This means each nation’s energy portfolio requires a “firm” element. The cheapest option is simply to swap out dirty coal for comparatively clean LNG, but Putin’s aggression has underscored the hidden costs of that approach. Not only is nuclear energy immune to the vicissitudes of oil and gas prices, it’s also a zero-carbon technology. Beyond the practically uncountable damage greenhouse gas emissions inflict on the lives and livelihoods of people globally, the air pollution that results from burning fossil fuels directly led to 8.7 million deaths in 2018 alone, according to research published last year. Meanwhile, despite the raft of high-profile disasters, historic fatalities from the civil nuclear industry are measured in the low thousands. In February, the E.U. classified nuclear energy as “green,” drawing a backlash from environmentalists who point to risks associated with accidents and nuclear waste. But many energy experts counter that it’s a necessary element of a viable net-zero economy. “Nuclear power is an important source of low-carbon electricity and heat that can contribute to attaining carbon neutrality and hence help to mitigate climate change,” wrote Olga Algayerova, Executive Secretary of the United Nations Economic Commission for Europe, in a report published in the lead up to November’s COP26 climate talks. And boosting the capacity of Europe’s existing nuclear reactors—which don’t normally run at full tilt, due to the growing inclusion of renewables—was one of the solutions the International Energy Agency (IEA) recently proposed to reduce European reliance on Russian LNG. “The majority of countries in Europe will be even more pro-nuclear now,” says Kai Vetter, a professor of nuclear engineering at the University of California, Berkeley. Even before the war in Ukraine, the IEA was saying that the nuclear industry must nearly double in size over the next two decades to meet global net-zero emissions targets. In 2018, the Intergovernmental Panel on Climate Change (IPCC) published a 400-page special report, “Global Warming of 1.5°C,” which offered four pathways to mitigate global temperature rises. All four pathways increased the use of nuclear power in relation to 2010, by an amount ranging from 59% to 106% by 2030, and from 98% to 501% by 2050. Since the invasion of Ukraine, E.U., policymakers grappling with how to wean their nations off Russian energy are seeing nuclear as an increasingly viable alternative. Why Some E.U. Countries Remain Skeptical of Nuclear On the other hand, nuclear power remains deeply political in Europe, not least after the 2011 Fukushima meltdown in Japan reenergized anti-nuclear advocates in the region. Perhaps the most important country opposing nuclear is Germany—which also happens to be the E.U.’s largest user of Russian energy. Germany’s ruling coalition partner Green Party has its roots as an advocacy group specifically in opposition to nuclear energy, and the country was about to take its nuclear power offline when the war began. As Russian tanks rolled into Ukraine in February, Robert Habeck, German Vice-Chancellor and a Green Party leader, said he wouldn’t rule out extending the life of Germany’s three remaining nuclear plants on “ideological” grounds. But he soon backtracked and insisted decommissioning would take place as planned. Instead, Germany has gone cap in hand to Qatar and the UAE to seek alternative sources of liquid natural gas despite climate and human-rights concerns. “It’s so incomprehensible,” says Vetter. “There’s amazing naiveté in Germany in my opinion.” Nuclear power is an issue that splits Europe. Although most E.U. nations are pro-nuclear, at COP26 a group of five—Austria, Denmark, Germany, Luxembourg and Portugal—banded together to urge the European Commission to keep nuclear out of the E.U.’s green finance taxonomy. “We have plenty of evidence of how dangerous nuclear power can be,” Austrian Energy Minister Leonore Gewessler told a COP26 side-event on Nov. 11. The reasons for each member’s opposition are varied and complex. In Germany and Austria, a sense of powerlessness amid fallout from the Chernobyl disaster melded anti-Soviet sentiment with anti-nuclear. In Portugal, opposition is rooted in historic tensions with neighboring Spain, which has four of its ten nuclear plants using the Tagus River for cooling, which runs into Portugal. Still, other Western European nations such as Finland, Sweden, France, Spain and Belgium have all historically supported the technology, even while adding renewables like wind and solar. In Eastern Europe, Romania, Czech Republic, Slovakia and Hungary are all beginning or expanding their nuclear capabilities. Indeed, appreciation of the myriad benefits is swelling alongside the price of oil and gas. “The question of how nuclear power may come back onto the scene was already being discussed because of climate goals,” says a senior Western diplomat in Central Europe, asking to remain anonymous due to official protocol. “Now we have the whole Russian gas question. And again, it’s an answer.” Jean-Marie Hosatte—Gamma-Rapho/Getty ImagesThe Cruas Nuclear Power Plant, in southern France, on Feb. 13, 2022. France is the E.U. country currently most reliant on nuclear energy. What Comes Next Many obstacles remain, of course: Aside from political hesitancy, nuclear plants are expensive, with steep regulatory hurdles. And there is no quick fix: traditional large-scale plants take 10 years to bring online; even the most cutting-edge, next-generation reactors require at least four. Nevertheless, those next-gen reactors, called Small Modular Reactors (SMRs), can make a difference, say industry watchers. They’re groundbreaking because, as they are modular, with different numbers of “off the shelf” reactors, they can be combined to tailor for specific needs. Rather than being built bespoke to fit on a specific site, SMR modules get shipped to the location by truck, rail, or barge. This makes them more affordable when economies of scale kick in. They are also theoretically much safer, requiring neither manpower nor electricity to go offline in case of a crisis, while also producing less hazardous waste since they are able to “burn” up more fuel. While traditional reactors are ideal for splitting uranium-235 atoms, the neutrons of “fast” SMRs can also split uranium-238, which makes up over 99% of the enriched uranium that’s fed to reactors. This means less frequent refuelings and less waste. “SMRs could potentially change the game and bring nuclear back,” says the Western diplomat. “There’s a lot of countries looking at this type of technology with different designs for small reactors.” Oregon-based NuScale is a leader in the SMR field, and co-founder and Chief Technological Officer Jose Reyes has seen an uptick in inquiries since the war in Ukraine, as nations grapple with an increasingly thorny energy conundrum. “We’ve gotten a lot of interest globally,” he tells TIME. On the sidelines of COP26 last fall, U.S. and Romanian officials inked an agreement for NuScale to build Europe’s first SMR in partnership with local nuclear firm Nuclearelectrica. The collaboration “will contribute to Romania’s energy independence in line with the European vision of protecting the environment and reducing carbon dioxide emissions,” Romanian Prime Minister Nicolae Ciucă told TIME in an interview in March. Indeed, if the E.U. wants a nuclear energy ascendency, the U.S. is a likely partner. In the U.S., nuclear power is largely uncontroversial—even Democrats and Republicans are united on the benefits—and America’s 93 operating nuclear reactors supply 20% of U.S. power, or about half of its carbon-free electricity. The U.S. has also been pushing the power source as a solution for developing countries, unveiling in November $25 million of funding to help build reactors in Brazil, Kenya, and Indonesia. In the E.U., the invasion of Ukraine has galvanized an appreciation of nuclear energy. The new mood has been helped by the fact that France—Europe’s most pro-nuclear country, generating over 70% of its electricity via the technology—is the current rotating president of the E.U. Council and controversially added promotion of nuclear power to its presidential program in what one German Green Party member described to TIME as a “f–k you into the face of Germans.” Many other European nations are making a similar calculation. Of the 10 foreign nations that have signed memoranda of understanding (MoUs)—which establishes the groundwork for exploring building an SMR—with NuScale, half are European. In addition, in December NuScale signed an agreement with Ukraine to offer analysis of necessary licensing revisions for SMR deployment funded by a U.S. Trade and Development Agency grant. Courtesy of NuScale Power, LLCNuScale co-founder and chief technology officer José Reyes on a platform at the firm’s Integral System Test facility at Oregon State University in Corvallis, Oregon Oregon. NuScale may be the first SMR firm to gain U.S. Nuclear Regulatory Commission design approval but it won’t have the field to itself for long. “There are four or five other [SMR] companies in the United States which I really believe will be on the grid within the next 10 years or so,” says Vetter. “And they will be strongly supported by the U.S. government.” The potential strategic benefits for the U.S. pushing this technology overseas are clear. Building a nuclear plant is not like coal or gas—the client is locked into dependency for training, fueling, and maintenance. Russia currently leads the world in exporting civilian nuclear technology, but Putin’s invasion of Ukraine has underscored it as an unreliable partner, and the E.U. is currently mulling whether to ban all collaboration with Russian nuclear providers, especially Rosatom and its subsidiaries. If so, Washington stands to boost its geostrategic clout at the expense of the Kremlin. China could be another potential partner for the E.U. Building more new nuclear reactors than any other country—it plans for as many as 150 by 2030, costing in the region of $500 billion—China will soon overtake the U.S. as the operator of the world’s largest nuclear-energy system. It is also experimenting with SMRs, and given its existing engineering prowess and record of slashing costs, is already offering cost-effective alternatives. But question marks hang over China’s strategic ambitions amid accusations of coercive practices and debt-trap diplomacy. In November 2015, Romania’s Nuclearelectrica signed a MoU with China General Nuclear Power Corporation (CGN) for the redevelopment of its sole existing nuclear power facility, Cernavoda. However, in August 2019, the U.S. blacklisted CGN over the alleged theft of U.S. nuclear technology for military purposes, and Romania canceled the deal less than a year later. Instead, it has agreed to a deal thought to be worth $8 billion to have the U.S. refurbish and expand Cernavoda. It helps that the U.S. is a trusted ally. “Our plants are designed for a 60 year life,” says Reyes. “So that’s a long-term relationship that involves supply chain and operations and training. So it’s a natural bond that’s created between nations when you do that.” German opposition remains the most problematic for the pro-nuclear lobby given the nation’s leadership role within the E.U. One leading Green Party figure, who asked to remain anonymous since energy policy was not his specific brief, tells TIME that any internal dissent regarding doubling down on LNG instead of reevaluating nuclear remains very much a fringe viewpoint. “There are political identity, cultural, and political risk components [to our continued opposition to nuclear],” he says. “And in a situation of crisis like now there are just so many compromises you can sell.” Certainly, the longer the Ukraine war goes on, extricating nations from Russian oil and gas will stay firmly at the top of Western policy agendas. And the nuclear-over-oil drum is one that Washington, Paris, and others, will keep on banging......»»

Category: topSource: timeApr 21st, 2022

Whither Bitcoin?

Whither Bitcoin? Authored by Eric Yakes via BitcoinMagazine.com, The world stands on the precipice of a monetary restructuring, with bitcoin seemingly the most likely to be adopted... albeit slowly. INTRODUCTION The world is reorganizing. People are attempting to comprehend the implications of recent events across a variety of dimensions: politically, geopolitically, economically, financially and socially. A feeling of uncertainty has eclipsed global affairs and individuals are developing an increased reliance on the thoughts of those bold enough to attempt comprehension. Experts are everywhere, but the expert is nowhere. I am not claiming to be an expert on anything, either. I read, write and do my best to piece together an understanding of vague and complex concepts. I’ve spent some time reading and thinking through various concepts and believe we are witnessing an inflection point of global trust. My goal is to explain the framework that led me to this conclusion. I’ll generally avoid discussing geopolitics and focus on the monetary and financial implications of this shift we are witnessing. The best place to start is understanding trust. THE WORLD RUNS ON TRUST We are witnessing a shift in global trust, setting the table for a new global monetary order. Consider Antal Fekete’s introduction from his seminal work Whither Gold?: “The year 1971 was a milestone in the history of money and credit. Previously, in the world's most developed countries, money (and hence credit) was tied to a positive value: the value of a well-defined quantity of a good of well-defined quality. In 1971 this tie was cut. Ever since, money has been tied not to positive but to negative values -- the value of debt instruments.” Debt instruments (credit) are built on trust — the most fundamental construct of organization. Organization allowed humanity to genetically eclipse its ancestors. Relationships, whether between individuals or groups, hinge on trust. Societies developed technologies and social structures to reduce the need for trust through reputations, security and money. Reputations reduce the need to trust because they represent an individual’s pattern of behavior: You trust some people more than others because of how they’ve acted in the past. Security reduces the need to trust that others will not hurt you in some form. You build a fence because you don’t trust your neighbors. You lock your car because you don’t trust your community. Your government has a military because it doesn’t trust other governments. Security is the price you pay to avoid the costs of vulnerability. Money reduces the need to trust that an individual will return a favor to you in the future. When you provide an individual a good or service, rather than trusting that they will return it to you in the future, they can immediately trade money to you, eliminating the need to trust. Stated differently, money reduces the need to trust that positive outcomes will happen while reputations and security reduces the need to trust that negative outcomes won’t happen. When money became entirely unanchored from gold in 1971, the value of money became a function of reputations and security, requiring trust. Before then, money was tied to the commodity gold, which maintained value through its well-defined quality and well-defined quantity and therefore didn’t require trust. Trust at a global level appears to be shifting across reputations and security, and thus credit money: Reputations — countries are trusting each other’s reputations less. The U.S. government’s reputation throughout recent history has been a global pillar of political stability and standard of financial and economic prudency. This is changing. The rise of U.S. populism has hindered its reputation as a politically stable country that allies depend on and rivals fear. Unprecedented economic and financial policy measures (e.g., bailouts, deficit spending, monetary inflation, debt issuance, etc.) are causing international powers to question the stability of the U.S. financial system. A hindrance to the reputation of the U.S. is a hindrance on the value of its money, to be discussed below. Security — countries are witnessing a contraction in global military order. The U.S. has been reducing its military presence and the world is shifting from a unipolar to a multipolar structure of order. The U.S.’ withdrawal of its military presence abroad has reduced its role as the monitor of international order and given rise to the military presence of rival nations. Reducing the assurance of its military presence internationally reduces the value of the dollar. Money — countries are losing trust in the international monetary order. Money has existed as either a commodity or credit (debt). Commodity money is not subject to trust through the reputations and security of governments while credit money is. Our modern system is entirely credit-based and the credit of the U.S. is the pillar upon which it exists. If the global reserve currency is based on credit, then the reputation and security of the U.S. is paramount to maintaining international monetary order. Trust in political and financial stability impacts the value of the dollar as does its holders’ demand for liquidity and stability. However, it’s not just U.S. credit money that is losing trust; it’s all credit money. As political and financial stability decline, we are witnessing a shift away from credit money entirely, incentivizing the adoption of commodity money. U.S. DEBT IS NOT RISK FREE Most recently, the reputation of U.S. credit has declined in an unprecedented way. Foreign governments historically trusted that the U.S. government’s debt is risk free. When financial sanctions froze Russia’s foreign exchange reserves, the U.S. undermined this risk-free reputation, as even reserves are now subject to confiscation. The ability to freeze the reserve assets of another country removed a foreign government’s right to either repay its debts or spend those assets. Now, international observers are realizing that these debts are not risk free. As the debt of the U.S. government is what backs its currency, this is a significant cause for concern. When the U.S. government issues debt, and demand from domestic and foreign buyers of it isn’t strong enough, the Federal Reserve prints money to purchase it in the open market and generate demand. Thus, the more U.S. debt countries are willing to buy, the stronger the U.S. dollar becomes — requiring less money printing by the Fed to indirectly enable government spending. Trust in the U.S. government’s credit has now been damaged, and thus so has the credit of the dollar. Further, trust in credit is declining in general, leaving commodity money as the more trustless option. First, I will examine this shift in the U.S. which applies specifically to its reputation and security, and then discuss the shifts in global credit (money). U.S. Dollar Dominance Will foreign governments attempt to de-dollarize? This question is complex as it not only requires an understanding of the global banking and payment systems but also maintains a geopolitical background. Countries around the world, both allies and rivals, have strong incentives to end global dollar hegemony. By utilizing the dollar a country is subject to the purview of the U.S. government and its financial institutions and infrastructure. To better understand this, let’s start by defining money: The above figure from my book shows the three functions of money as a store of value, medium of exchange and unit of account, as well as the supporting monetary properties of each below them. Each function plays a role in international financial markets: Store of Value — fulfilling this function drives reserve currency status. U.S. currency and debt is ~60% of global foreign reserves. A country will denominate its foreign exchange reserve assets in the most creditworthy assets — defined by their stability and liquidity. Medium of Exchange — this function is closely tied to being a unit of account. The dollar is the dominant invoicing currency in international trade and the euro is a close second, both of which fluctuate around ~40% of total. The dollar is also 64% of foreign currency debt issuance, meaning countries mostly denominate their debt in dollars. This creates demand for the dollar and is important. Since the U.S. issues more debt than domestic and foreign buyers are naturally willing to buy, they must print dollars to buy it in the market, which is inflationary (all else equal). The more foreign demand they can create for these newly printed dollars, the lower the inflationary impact from printing new dollars. This foreign demand becomes entrenched as countries denominate their contracts in the dollar, allowing the U.S. to monetize their debt. Unit of Account — Oil and other commodity contracts are often denominated in U.S. dollars (e.g., the petrodollar system). This creates artificial demand for the dollar, supporting its value while the U.S. government continually issues debt beyond amounts domestic and foreign buyers would be willing to purchase without the Fed creating demand for it. The petrodollar system was created by Nixon in response to a multi-year depreciation of the dollar after its fixed convertibility into gold was removed in 1971. In 1973, Nixon struck a deal with Saudi Arabia in which every barrel of oil purchased from the Saudis would be denominated in the U.S. dollar and in exchange, the U.S. would offer them military protection. By 1975, all OPEC nations agreed to price their own oil supplies in dollars in exchange for military protection. This system spurred artificial demand for the dollar and its value was now tied to demand for energy (oil). This effectively entrenched the U.S. dollar as a global unit of account, allowing it more leeway in its practices of money printing to generate demand for its debt. For example, you may not like that the U.S. is continually increasing its deficit spending (hindering its store of value function), but your trade contracts require you to use the dollar (supporting its medium of exchange and unit of account function), so you have to use dollars anyway. Put simply, if foreign governments won’t buy U.S. debt, then the U.S. government will print money to buy it from itself and contracts require foreign governments to use that newly printed money. In this sense, when the U.S. government’s creditworthiness (reputation) falls short, its military capabilities (security) pick up the slack. The U.S. trades military protection for increased foreign dollar demand, enabling it to continuously run a deficit. Let’s summarize. Since its establishment, the dollar has served the functions of money best at an international level because it can be easily traded in global markets (i.e., it’s liquid), and contracts are denominated in it (e.g., trade and debt contracts). As U.S. capital markets are the broadest, most liquid and maintain a track record of secure property rights (i.e., strong reputation), it makes sense that countries would utilize it because there is a relatively lower risk of significant upheaval in U.S. capital markets. Contrast this idea with the Chinese renminbi which has struggled to gain dominance as a global store of value, medium of exchange and unit of account due to the political uncertainty of its government (i.e., poor reputation) which maintains capital controls on foreign exchange markets and frequently intervenes to manipulate its price. U.S. foreign intervention is rare. Further, having a strong military presence enforces dollar demand for commodity trade per agreements with foreign countries. Countries that denominate contracts in dollars would need to be comfortable trading away military security from the U.S. to buck this trend. With belligerent Eastern leaders increasing their expanse, this security need is considerable. Let’s look at how the functions of money are enabled by a country’s reputation and security: Reputation: primarily enables the store of value function of its currency. Specifically, countries that maintain political and economic stability, and relatively free capital markets, develop a reputation for safety that backs their currency. This safety can also be thought of as creditworthiness. Security: primarily enables the medium of exchange and unit of account functions of its currency. Widespread contract denomination and deep liquidity of a currency entrench its demand in global markets. Military power is what entrenches this demand in the first place. If the reputation of the U.S. declines and its military power withdraws, demand for its currency decreases as well. With the shifts in these two variables in front of mind, let’s consider how demand for the dollar could be affected. OVERVIEW OF THE GLOBAL MONETARY SYSTEM Global liquidity and contract denomination can be measured by analyzing foreign reserves, foreign debt issuance, and foreign transactions/volume. Dollar foreign exchange reserves gradually declined from 71% to 60% since the year 2000. Three percent of the decline is accounted for in the euro, 2% from the pound, 2% from the renminbi and the remaining 4% from other currencies. More than half of the 11 percentage point decline has come from China and other economies (e.g., Australian dollars, Canadian dollars, Swiss francs, et al.). While the U.S. dollar decline in dominance is material, it obviously remains dominant. The primary takeaway is that most of the decline in dollar dominance is being captured by smaller currencies, indicating that global reserves are gradually becoming more dispersed. Note that this data should be interpreted with caution as the fall in dollar dominance since 2016 occurred when previous non-reporting countries (e.g., China) began gradually revealing their FX reserves to the IMF. Further, governments don’t have to be honest about the numbers they report — the politically sensitive nature of this information makes it ripe for manipulation. Source: IMF Foreign debt issuance in USD (other countries borrowing in contracts denominated in dollars) has also gradually declined by ~9% since 2000, while the euro has gained ~10%. Debt issuance of the remaining economies was relatively flat over this period so most of the change in dollar debt issued can be attributed to the euro. Source: Federal Reserve The currency composition of foreign transactions is interesting. Historically, globalization has increased the demand for cross-border payments primarily due to: Manufacturers expanding supply chains across borders. Cross-border asset management. International trade. International remittances (e.g., migrants sending money home). This poses a problem for smaller economies: the more intermediaries that are involved in cross-border transactions, the slower and more expensive these payments become. High-volume currencies, such as the dollar, have a shorter chain of intermediaries while lower-volume currencies (e.g., emerging markets) have a longer chain of intermediaries. This is important because it is these emerging markets that stand to lose the most from international payments and for this reason alternative systems are attractive to them. Source: Bank of England If we look at the trend in composition of foreign payments it’s evident that the dollar's share of invoicing is materially greater than its share of exports, illuminating its outsized role of invoicing in proportion to trade. The euro has been competing with the dollar in terms of invoicing share, but this is driven by its usage for export trade among EU countries. For the rest of the world, export share has been, on average, greater than 50% while invoicing share has remained less than 20% on average. Source: Journal of International Economics Lastly, let’s discuss the volume of trade. A currency with high volume of trade means that it is relatively more liquid and thus, more attractive as a trade vehicle. The chart below shows the proportions of volume traded by currency. The dollar has remained dominant and constant since 2000, expressing its desirability as a liquid global currency. What’s important is that the volume of all major global reserve currencies have declined slightly while the volume of “other” smaller world currencies has increased from 15% to 22% in proportion. Source: BIS Triennial Survey; (Note: typically these numbers are shown on a 200% scale — e.g., for 2019 USD would be 88.4% out of 200% — because there are two legs to every foreign exchange trade. I’ve condensed this to a 100% scale for ease of interpretation of the proportions). The dollar is dominant across every metric, although it has been gradually declining. Most notably, economies that are not major world reserves are: Gaining dominance as reserves and thus world FX reserves are becoming more dispersed. Utilizing the dollar for foreign transactions in significantly greater proportions than their exports and limited by a long chain of intermediaries when attempting to use their domestic currencies. Hurt the most by long chains of global intermediaries for their transactions and thus stand to gain the most from alternative systems. Increasing their share of foreign exchange volume (liquidity) while all the major reserve currencies are declining. There exists a trend whereby the smaller and less dominant currencies of the world are expanding but are still limited by dollar dominance. Pair this trend with the global political fragmentation occurring and their continued expansion becomes more plausible. As the U.S. withdraws its military power globally, which backs the dollar’s functions as a medium of exchange and unit of account, it decreases demand for its currency to serve these functions. Further, the dollar’s creditworthiness has declined since implementing the Russian sanctions. The trends of declining U.S. military presence and creditworthiness, as well as increased global fragmentation, indicate that the global monetary regime could experience drastic change in the near term. THE GLOBAL MONETARY SYSTEM IS SHIFTING Russia invaded Ukraine on Feb. 24, 2022, and the U.S. subsequently implemented a swath of economic and financial sanctions. I believe history will look back on this event as the initial catalyst of change towards a new era of global monetary order. Three global realizations subsequently occurred: Realization #1: Economic sanctions placed on Russia signaled to the world that US sovereign assets are not risk free. U.S. control over the global monetary system subjects all participating nations to the authority of the U.S. Effectively, ~$300 billion of Russia’s ~$640 billion in foreign exchange reserves were “frozen” (no longer spendable) and it was partially banned (energy still allowed) from the SWIFT international payments system. However, Russia had been de-dollarizing and building up alternative reserves as protection from sanctions throughout previous years. Now Russia is looking for alternatives, China being the obvious partner, but India, Brazil and Argentina are also discussing cooperation. Economic sanctions of this magnitude by the West are unprecedented. This has signaled to countries around the world the risk they run through dependence on the dollar. This doesn’t mean that these countries will begin cooperating as they are all subject to constraints under an international spiderweb of trade and financial relationships. For example, Marko Papic explains in “Geopolitical Alpha” how China is heavily constrained by the satisfaction of its growing middle class (the majority of its population) and fearful that they could fall into the middle-income trap (GDP per capita stalling within the $1,000-12,000 range). Their debt cycle has peaked and economically they are in a vulnerable position. Chinese leaders understand that the middle-income trap has historically brought the death of communist regimes. This is where the U.S. has leverage over China. Economic and financial sanctions targeting this demographic can prevent growth in productivity and that is what China is most afraid of. Just because China wants to partner with Russia and achieve “world domination” does not mean that they will do so since they are subject to constraints. The most important aspect of this realization is that U.S. dollar assets are not risk free: they maintain a risk of appropriation by the U.S. government. Countries with plans to act out of accordance with U.S. interests will likely start de-dollarizing before doing so. However, as much as countries would prefer to opt out of this dollar dependency, they are constrained in doing so as well. Realization #2: It’s not just the U.S. that has economic power over reserves, it’s fiat reserve nations in general. Owning fiat currencies and assets in reserves creates uncertain political risks, increasing the desirability of commodities as reserve assets. Let’s talk about commodity money vs. debt (fiat) money. In his recent paper, Zoltan Pozsar describes how the death of the dollar system has arrived. Russia is a major global commodity exporter and the sanctions have bifurcated the value of their commodities. Similar to subprime mortgages in the 2008 financial crisis, Russian commodities have become “subprime” commodities. They’ve subsequently declined materially in value as much of the world is no longer buying them. Non-Russian commodities are increasing in value as anti-Russia countries are now all purchasing them while the global supply has shrunk materially. This has created volatility in commodity markets, markets that have been (apparently) neglected by financial system risk monitors. Commodity traders often borrow money from exchanges to place their trades, with the underlying commodities as collateral. If the price of the underlying commodity moves too much in the wrong direction, the exchanges tell them that they need to pay more collateral to back their borrowed money (trader get margin-called). Now, traders take both sides in these markets (they bet the price will go up or that it will go down) and therefore, regardless of which direction the price moves, somebody is getting margin-called. This means that as price volatility is introduced to the system, traders need to pay more money to the exchange as collateral. What if the traders don’t have more money to give as collateral? Then the exchange has to cover it. What if the exchanges can’t cover it? Then we have a major credit contraction in the commodity markets on our hands as people start pulling money out of the system. This could lead to large bankruptcies within a core segment of the global financial system. In the fiat world, credit contractions are always backstopped — such as the Fed printing money to bail out the financial system in 2008. What is unique to this situation is that the “subprime” collateral of Russian commodities is what Western central banks would need to step in and buy — but they can’t because their governments are the ones who prevented buying it in the first place. So, who is going to buy it? China. China could print money and effectively bail out the Russian commodity market. If so, China would strengthen its balance sheet with commodities which would strengthen its monetary position as a store of value, all else equal. The Chinese renminbi (also called the “yuan”) would also begin spreading more widely as a global medium of exchange as countries that want to participate in this discounted commodity trade utilize the yuan in doing so. People are referring to this as the growth of the “petroyuan” or “euroyuan” (like the petrodollar and eurodollar, just the yuan). China is also in discussions with Saudi Arabia to denominate oil sales in the yuan. As China is the largest importer of Saudi oil, it makes sense that the Saudis would consider denominating trade in its currency. Further, the lack of U.S. military support for the Saudis in Yemen is all the more reason to switch to dollar alternatives. However, the more the Saudis denominate oil in contracts other than the dollar, the more they risk losing U.S. military protection and would likely become subject to the military influence of China. If the yuan spreads wide enough, it could grow as a unit of account, as trade contracts become denominated in it. This structure of incentives implies two expectations: Alternatives to the U.S. global monetary system will strengthen. Demand for commodity money will strengthen relative to debt-based fiat money. However, the renminbi is only 2.4% of global reserves and has a long way to go towards international monetary dominance. Countries are much less comfortable utilizing the yuan over the dollar for trade due to its political uncertainty risks, control over the capital account and the risk of dependence on Chinese military security. A common expectation is that either the West or the East is going to be dominant once the dust settles. What’s more likely is that the system will continue splitting and we’ll have multiple monetary systems emerge around the globe as countries attempt to de-dollarize — referred to as a multipolar system. Multipolarity will be driven by political and economic self-interest among countries and the removal of trust from the system. The point about trust is key. As countries trust fiat money less, they will choose commodity-based money that requires less trust in an institution to measure its risk. Whether or not China becomes the buyer of last resort for Russian commodities, global leaders are realizing the value of commodities as reserve assets. Commodities are real and credit is trust. Bitcoin is commodity-like money, the scarcest in the world that resides on trustless and disintermediated payment infrastructure. Prior to the invasion of Ukraine, Russia had restricted crypto assets within its economy. Since then, Russia’s position has changed drastically. In 2020, Russia gave crypto assets legal status but banned their use for payments. As recently as January 2022, Russia’s central bank proposed banning the use and mining of crypto assets, citing threats to financial stability and monetary sovereignty. This was in contrast to Russia’s ministry of finance, which had proposed regulating it rather than outright banning it. By February, Russia chose to regulate crypto assets, due to the fear that it would emerge as a black market regardless. By March, a Russian government official announced it would consider accepting bitcoin for energy exports. Russia’s change of heart can be attributed to the desire for commodity money as well as the disintermediated payment infrastructure that Bitcoin can be transferred upon — leading to the third realization. Realization #3: Crypto asset infrastructure is more efficient than traditional financial infrastructure. Because it is disintermediated, it offers a method of possession and transfer of assets that is simply not possible with intermediated traditional financial infrastructure. Donations in support of Ukraine via crypto assets (amounting to nearly $100 million as of this writing) demonstrated to the world the rapidness and efficiency of transferring value via just an internet connection, without relying on financial institutions. It further demonstrated the ability to maintain possession of assets without reliance on financial institutions. These are critical features to have as a war refugee. Emerging economies are paying attention as this is particularly valuable to them. Bitcoin has been used to donate roughly $30 million to Ukraine since the start of the war. Subsequently, a Russian official stated that it will consider accepting bitcoin, which I believe is because they are aware that bitcoin is the only digital asset that can be used in a purely trustless manner. Bitcoin’s role on both sides of the conflict demonstrated that it is apolitical while the freezing of fiat reserves demonstrated that their value is highly political. Let’s tie this all together. Right now, countries are rethinking the type of money they are using and the payment systems they are transferring it on. They will become more avoidant of fiat money (credit), as it is easily frozen, and they are realizing the disintermediated nature of digital payment infrastructure. Consider these motivations alongside the trend of an increasingly fragmented system of global currencies. We’re witnessing a shift towards commodity money among a more fragmented system of currencies moving across disintermediated payment infrastructure. Emerging economies, particularly those removed from global politics, are postured as the first movers towards this shift. While I don’t expect that the dollar will lose primacy anytime soon, its creditworthiness and military backing is being called into question. Consequently, the growth and fragmentation of non-dollar reserves and denominations opens the market of foreign exchange to consider alternatives. For their reserves, countries will trust fiat less and commodities more. There is a shift emerging towards trustless money and desire for trustless payment systems. ALTERNATIVES TO THE GLOBAL MONETARY SYSTEM We are witnessing a decline in global trust with the realization that the age of digital money is upon us. Understand that I am referring to incremental adoption of digital money and not full-scale dominance — incremental adoption will likely be the path of least resistance. I expect countries to increasingly adopt trustless commodity assets on disintermediated payment infrastructure, which is what Bitcoin provides. The primary limiting factor to this adoption of bitcoin will be its stability and liquidity. As bitcoin matures into adolescence, I expect this growth to increase rapidly. Countries that want a digital store of value will prefer bitcoin for its sound monetary properties. The countries most interested and least restrained in adopting digital assets will be among the fragmented developing world as they stand to gain the most for the least amount of political cost. While these incremental shifts will be occurring in tandem, I expect the first major shift will be towards commodity reserves. Official reserve managers prioritize safety, liquidity and yield when choosing their reserve assets. Gold is valuable in these respects and will play a dominant role. However, bitcoin’s trustless nature will not be overlooked, and countries will consider it as a reserve despite its tradeoffs with gold, to be discussed below. Let’s walk through what bitcoin adoption could look like: Source: World Gold Council; Advanced reserve economies includes the BIS, BOE, BOJ, ECB (and its national member banks), Federal Reserve, IMF and SNB. Since 2000, gold as a percentage of total reserves has been declining for advanced economies and growing for China, Russia and the other smaller economies. So, the trend towards commodity reserves is already in place. Over this same period gold reserves have fluctuated between nine and 14% of total reserves. Today, total reserves (both gold and FX reserves) amount to $16 trillion, 13% of which ($2.2 trillion) is gold reserves. We can see in the below chart that gold as a percentage of reserves has been rising since 2015, the same year the U.S. froze Iran’s reserves (this was ~$2 billion, a much smaller amount than the Russia sanctions). Source: World Gold Council. Reserves have been growing rapidly in China, Russia and smaller economies as a whole. The chart below shows that non-advanced economies have increased their total reserves by 9.4x and gold reserves by 10x, while advanced economies have increased total reserves by only 4x. China, Russia and the smaller economies command $12.5 trillion in total reserves and $700 billion of those are in gold. Source: World Gold Council. The growth and size of smaller economy reserves is important when considering bitcoin adoption among them as a reserve asset. Smaller countries will ideally want an asset that is liquid, stable, grows in value, disintermediated and trustless. The below illustrative comparison stack ranks broad reserve asset categories by these qualities on a scale of 1-5 (obviously, this is not a science but an illustrative visualization to facilitate discussion): Countries adopt different reserve assets for different reasons, which is why they diversify their holdings. This assessment focuses on the interests of emerging economies for bitcoin adoption considerations. Bitcoin is liquid, although not nearly as liquid as fiat assets and gold. Bitcoin isn’t stable. Standard reserve assets, including gold, are much more stable. Bitcoin will likely offer a much higher capital appreciation than fiat assets and gold over the long run. Bitcoin is the most disintermediated as it has a truly trustless network — this is its primary value proposition. Storing bitcoin doesn’t require trusted intermediaries and thus can be stored without the risk of appropriation — a risk for fiat assets. This point is important because gold does not maintain this quality as it is expensive to move, store and verify. Thus, bitcoin’s primary advantage over gold is its disintermediated infrastructure which allows for trustless movement and storage. With these considerations in mind, I believe the smaller emerging economies that are largely removed from political influence will spearhead the adoption of bitcoin as a reserve asset gradually. The world is growing increasingly multipolar. As the U.S. withdraws its international security and fiat continues to lose creditworthiness, emerging economies will be considering bitcoin adoption. While the reputation of the U.S. is in decline, China’s reputation is far worse. This line of reasoning will make bitcoin attractive. Its primary value-add will be its disintermediated infrastructure which enables trustless payments and storage. As bitcoin continues to mature, its attractiveness will continue to increase. If you think the sovereign fear of limiting its domestic monetary control is a strong incentive to prevent bitcoin adoption, consider what happened in Russia. If you think countries won’t adopt bitcoin for fear of losing monetary control, consider what happened in Russia. While Russia’s central bank wanted to ban bitcoin, the finance ministry opted to regulate it. After Russia was sanctioned, it has been considering accepting bitcoin for energy exports. I think Russia’s behavior shows that even totalitarian regimes will allow bitcoin adoption for the sake of international sovereignty. Countries that demand less control over their economies will be even more willing to accept this tradeoff. There are many reasons that countries would want to prevent bitcoin adoption, but on net the positive incentives of its adoption are strong enough to outweigh the negative. Let’s apply this to the shifts in global reputations and security: Reputations: political and economic stability is becoming increasingly riskier for fiat, credit-based assets. Bitcoin is a safe haven from these risks, as it is fundamentally apolitical. Bitcoin’s reputation is one of high stability, due to its immutability, which is insulated from global politics. No matter what happens, Bitcoin will keep producing blocks and its supply schedule remains the same. Bitcoin is a commodity that requires no trust in the credit of an institution. Security: because Bitcoin cannot trade military support for its usage, it will likely be hindered as a global medium of exchange for some time. Its lack of price stability further limits this form of adoption. Networks such as the Lightning Network enable transactions in fiat assets, like the dollar, over Bitcoin’s network. Although the Lightning Network is still in its infancy, I anticipate this will draw increased demand to Bitcoin as a settlement network — increasing the store of value function of its native currency. It’s important to understand that fiat assets will be used as a medium of exchange for some time due to their stability and liquidity, but the payment infrastructure of bitcoin can bridge the gap in this adoption. Hopefully, as more countries adopt the Bitcoin standard the need for military security will decline. Until then, a multipolar world of fiat assets will be utilized in exchange for military security, with a preference for disintermediated payment infrastructure. CONCLUSION Trust is diminishing among global reputations as countries implement economic and geopolitical warfare, causing a reduction in globalization and shift towards a multipolar monetary system. U.S. military withdrawal and economic sanctions have illuminated the lack of security within credit-based fiat money, which incentivizes a shift towards commodity money. Moreover, economic sanctions are forcing some countries, and signaling to others, that alternative financial infrastructure to the U.S. dollar system is necessary. These shifts in the global zeitgeist are demonstrating to the world the value of commodity money on a disintermediated settlement network. Bitcoin is postured as the primary reserve asset for adoption in this category. I expect bitcoin to benefit in a material way from this global contraction in trust. However, there are strong limitations to full-scale adoption of such a system. The dollar isn’t going away anytime soon, and significant growth and infrastructure is required for emerging economies to utilize bitcoin at scale. Adoption will be gradual, and that is a good thing. Growth in fiat assets over Bitcoin settlement infrastructure will benefit bitcoin. Enabling a permissionless money with the strongest monetary properties will spawn an era of personal freedom and wealth creation for individuals, instead of the incumbent institutions. Despite the state of the world, I’m excited for the future. Whither Bitcoin? Tyler Durden Fri, 04/15/2022 - 13:00.....»»

Category: dealsSource: nytApr 15th, 2022

These 3 Refining & Marketing MLP Stocks Are Worth a Closer Look

Notwithstanding high gasoline prices and supply chain challenges, the Zacks Oil and Gas - Refining & Marketing MLP operators like Targa Resources (TRGP), Western Midstream Partners, LP (GLP) and Sunoco LP (SU) should enjoy some upside momentum. Elevated pump prices are raising worries of a demand destruction for the Zacks Oil and Gas - Refining & Marketing MLP industry as certain low-income consumers mull over tightening their belts to deal with the higher cost of daily commutes. Operators have also not been immune to supply-chain disruptions and cost inflation. But the defensive nature of the stocks and their fee-based business models, together with built-in inflation protection, have held up rather well. In this context, investors might want to focus on Targa Resources TRGP, Western Midstream Partners, LP WES and Sunoco LP SUN for attractive returns and cash flow growth.Industry OverviewMaster limited partnerships (or MLPs) differ from regular stocks since interests in them are referred to as units, and unitholders (not shareholders) are partners in the business. Importantly, these low-risk hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities that earn a stable income. The assets that these partnerships own are typically oil and natural gas pipelines and storage/infrastructure facilities. The Zacks Oil and Gas - Refining & Marketing MLP industry is a sub-sector of this business model. These firms operate refined products' terminals, storage facilities and transportation services. They are involved in selling refined petroleum products (including heating oil, gasoline, residual oil, jet fuel, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay and gypsum).3 Trends Defining the Oil and Gas - Refining & Marketing MLP Industry???s FutureHigh Motor Fuel Price Impacting Consumer Demand: Operating results of the energy refining and marketing MLPs, which own oil and natural gas pipelines and storage facilities, are highly sensitive to prices for motor fuel. With prices at the pump skyrocketing after Russia’s invasion of Ukraine, consumption of gasoline seems to have weakened. Apart from fuel demand, any increase in petroleum costs also impacts convenience merchandise. Coupled with elevated inflation in the United States, the surge in gasoline prices is starting to influence consumer decisions that might lead to some kind of demand destruction. On top of that, higher petrol prices would spur even higher inflation, acting as a significant threat to usage.Supply Chain and Labor Constraints: Despite the bullish energy landscape and improved demand environment, the industry has not been immune to supply chain disruptions and cost inflation. Macro issues like higher transportation expenses, driver scarcity and labor shortages have limited MLPs’ (or the energy infrastructure providers, also called the midstream group) ability to ship packaged volumes to their customers. Most operators have also felt the impact of inflation, which is rolling through the cost structure. What’s worse is that these headwinds across the system and the subsequent hit to profitability (due to difficulty in passing through the increased costs to clients) are expected to continue in the near future.Distribution Growth Beneficial in Inflationary Environment: Investors are typically attracted to MLPs, thanks to reliable distributions and defensive characteristics. The major refining and marketing midstream players — being largely insulated to fluctuations in commodity prices — maintained their distribution levels through the crisis-stricken 2020. Now, with the energy space displaying secular demand growth, their relatively steady coverage should represent a more predictable midstream payout scenario in the near future, improving commodity price visibility. Meanwhile, as a response to the energy downturn, a number of these entities have been highly effective in managing cash outflows. Adjusting costs with the prevailing business activity, the partnerships have focused on the generation of free cash flow (post distribution payment) to lower debt and strengthen their financial position. The growing free cash flows could be used to boost investor returns through buybacks and distribution hikes. Finally, the distribution growth can also help investors to offset some of the impacts of high inflation. Zacks Industry Rank Indicates Gloomy OutlookThe Zacks Oil and Gas – Refining & Marketing MLP is a 7-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #242, which places it in the bottom 4% of more than 250 Zacks industries.The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates challenging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and its current valuation first. Industry Outperforms Sector & S&P 500The Zacks Oil and Gas – Refining & Marketing MLP industry has fared better than the broader Zacks Oil – Energy sector as well as the Zacks S&P 500 composite over the past year.The industry has gained 73% over this period compared to the S&P 500’s rise of 13.5% and the broader sector’s increase of 45.6%.One-Year Price Performance Industry's Current ValuationSince midstream-focused oil and gas partnerships use fixed-rate debt for most of their borrowings, it makes sense to value them based on the EV/EBITDA (enterprise value/ earnings before interest tax depreciation and amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 10.33X, lower than the S&P 500’s 14.98X. It is, however, well above the sector’s trailing-12-month EV/EBITDA of 5.46X.Over the past five years, the industry has traded as high as 17.75X, as low as 5.79X, with a median of 11.11X, as the chart below shows.Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)  3 Oil and Gas - Refining & Marketing MLP Stocks to Focus OnSunoco LP: This downstream operator focuses on motor fuel distribution to convenience stores, independent dealers and commercial customers. A participant in the transportation and supply phase of the U.S. petroleum market across 30 states, Sunoco enjoys stable demand for its services.SUN pays out 82.55 cents quarterly distribution ($3.302 per unit annually), which gives it an 8% yield at the current unit price. Sunoco beat the Zacks Consensus Estimate for earnings twice in the trailing four quarters, the average being 44.4%. Valued at around $4.1 billion, the Zacks Rank #2 (Buy) SUN has gained some 37.7% in a year. You can see the complete list of today’s Zacks #1 Rank stocks here. Price and Consensus: SUN Targa Resources: A leading provider of integrated midstream services in North America, Targa Resources’ fractionation ownership position in Mont Belvieu is among the company’s best midstream assets. The facility has connectivity to supply, storage, terminalling infrastructure, as well as to end markets through petrochemical complex and exports. The company also has state-of-the-art LPG export facilities on the Gulf Coast at its Galena Park Marine Terminal, which is interconnected to Mont Belvieu.The 2022 Zacks Consensus Estimate for this Houston, TX-based firm indicates 73% year-over-year earnings per share growth. Targa Resources beat the Zacks Consensus Estimate for earnings in two of the last four quarters. The Zacks Rank #3 (Hold) stock has a trailing four-quarter earnings surprise of roughly 61.1%, on average. TRGP shares have surged around 150.3% in a year.Price and Consensus: TRGP Western Midstream Partners: WES is engaged in gathering, processing, compressing, treating, and transporting natural gas, condensate, natural gas liquids, and crude oil. Western Midstream Partners’ top-class asset portfolio, financial strength and ability to generate stable cash flows should boost unitholder returns.  The 2022 Zacks Consensus Estimate for The Woodlands, TX-based firm indicates 19.3% year-over-year earnings per share growth. Western Midstream partners pays out 32.70 cents quarterly distribution ($1.308 per unit annually), which gives it a 5.2% yield at the current unit price. Valued at around $10.1 billion, the Zacks Rank #3 WES has gained some 39% in a year.Price and Consensus: WES   Just Released: The Biggest Tech IPOs of 2022 For a limited time, Zacks is revealing the most anticipated tech IPOs expected to launch this year. Concerns about Federal interest rates and inflation caused many private companies to stay on the bench- leading to companies with better brand recognition and higher growth rates getting into the game. With the strength of our economy and record amounts of cash flooding into IPOs, you don’t want to miss this opportunity. See the complete list today.>>See Zacks Hottest IPOs NowWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Targa Resources, Inc. (TRGP): Free Stock Analysis Report Sunoco LP (SUN): Free Stock Analysis Report Western Midstream Partners, LP (WES): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research.....»»

Category: topSource: zacksApr 5th, 2022

Edging Towards A Gold Standard

Edging Towards A Gold Standard Authored by Alasdair Macleod via GoldMoney.com, Commentators are trying to make sense of Russian moves... However, there is a back story which differs from much of the speculation, which this article addresses. The Russians have not put the rouble on some sort of gold standard. Instead, they have repeated the Nixon/Kissinger strategy which created the petrodollar in 1973 by getting the Saudis to agree to accept only dollars for oil. This time, nations deemed by Russia to be unfriendly will be forced to buy roubles – roughly 2 trillion by the EU alone based on last year’s natural gas and oil imports from Russia — driving up the exchange rate. The rouble has now doubled against the dollar from its low point of RUB 150 to RUB 75 yesterday in just over three weeks. The Russian Central Bank will soon be able to normalise the domestic economy by reducing interest rates and removing exchange controls. The Russians and Chinese will be acutely aware that Western currencies, particularly the yen and euro, are likely to be undermined by recent developments. The financial war, which has always been in the background, is emerging into plain sight and becoming a battlefield between fiat currencies, and it is full on. The winner by default is almost certainly gold, now the only reliable reserve asset for those not aligned with Russia’s “unfriendlies”. But it is still a long way from backing any currency. Putin is losing the battle for Ukraine President Putin is embattled. His army as let him down — it turns out that his generals lack the necessary leadership qualities, the squaddies are suffering from lack of food, fuel, and are suffering from frostbite. It is reported that one brigade commander, Colonel Yuri Medvedev, was deliberately run down by one of his own men in a tank, a measure of the chaos at the front line. And Putin is not the first national leader to have misplaced his confidence in military forces. Conventional wisdom (from Carl von Clausewitz, no less) suggested Putin might win the battle for Ukraine but would be unable to hold the territory. That requires the willingness of the population to accept defeat, and a lesson the Soviets had learned in Afghanistan, with the same experience repeated by America and the UK. But Putin has not even won the battle and word from the Kremlin is of accepting a face-saving fall-back position, perhaps taking Donetsk and the coast of the Sea of Azov to join it up with Crimea. There was little doubt that if Putin came under pressure militarily, he would probably step up the commodity and financial war. This he has now done by insisting on payments in roubles. The mistake made in the West was to believe that Russia must sell commodities, and even though sanctions harm the West greatly, the strategy is to put maximum pressure on the Russian economy for a quick resolution. It is obviously flawed because Russia can still trade with China, India, and other significant economies. And thanks to rising commodity prices the Russian economy is not in the bad place the West believed either. Besides nations representing 84% of the world’s population standing aside from the Western alliance’s sanctions and with some like India sorely tempted to buy discounted Russian oil, we would profit from paying attention to some very basic factors. Russia can certainly afford to sell oil at significant discounts to market prices, and there are buyers willing to break the American-led embargoes. The non-Western world is no longer automatically on-side with American hegemony; that is a rotting hulk which the Americans are desperately trying to keep afloat. Observing this, the Kremlin seems relaxed and has said that it is willing to accept currencies from its friends, but Western enemies (the “unfriendlies”) would have to pay for oil in roubles or, it has also been suggested, in gold. On 23 March the Kremlin drew up a list of these unfriendly countries, which includes the 27 EU members, Switzerland, Norway, the United States, the United Kingdom, Canada, Australia, New Zealand, Japan, and South Korea. Payment in roubles is easy to understand. We can assume that all oil and natural gas long-term supply contracts with the unfriendlies have force majeure clauses, because that is normal practice. In the light of sanctions, the Russians are entitled to claim different payment terms. And it is this that the Russians are relying upon for insisting on payment in roubles. Germany, for example, would have to buy roubles on the foreign exchanges to pay for her gas. Buying roubles supports the currency, and this was the tactic that created the petrodollar in 1973 when Nixon and Kissinger persuaded the Saudis to take nothing else but dollars for oil. It was that single move which more than anything confirmed the dollar as the world’s international and reserve currency in the aftermath of the temporary suspension of the Bretton Woods Agreement. That’s not quite the objective here; it is to not only underwrite the rouble, but to drive it higher relative to other currencies. The immediate effect has been clear, as the chart from Bloomberg below shows. Having halved in value against the dollar on 7 March, all the rouble’s fall has been recovered. And that’s even before Germany et al buy roubles on the foreign exchanges to pay for Russian energy. The gold issue is more complex. The West has banned not only Russian transactions settling in their currencies but also from settling in gold. The assumption is that gold is the only liquid asset Russia has left to trade with. But just as ahead of the end of the cold war Western intelligence completely misread the Soviet economy, it could be making a mistake again. This time, intel seems to be misled by full-on Keynesian macro analysis, suggesting the Russian economy is vulnerable when it is inherently stronger in a currency shoot-out than even the dollar. There is no need for Russia to sell any gold at all. The Russian economy has a broadly non-interventionist government, a flat rate of income tax of 13%, and a government debt of 20% of GDP. There are flaws in the Russian economy, particularly in the lack of respect for property rights and the pervasive problem of the Russian Mafia. But in many respects, Russia’s economy is like that of the US before 1916, when the highest income tax rate was 15%. An important difference is that the Russian government gets substantial revenues from energy and commodity exports, taking its income up to over 40% of GDP. While export volumes of energy and other commodities are being hit by sanctions, their prices have risen substantially. But it remains to be seen what form of money or currency for future payments will be used for over $550bn equivalent of exports, while $297bn of imports will be substantially reduced by sanctions, widening Russia’s trade surplus considerably. Euros, yen, dollars, and sterling are ruled out, worthless in the hands of the Central Bank. That leaves Chinese renminbi, Indian rupees, weakening Turkish lira and that’s about it. It’s hardly surprising that Russia is prepared to accept gold. Putin’s view on the subject is shown in Figure 1 of stills taken from a Tik Tok video released last weekend. Furthermore, Russia’s official reserves are only a small part of the story. Simon Hunt of Simon Hunt Strategic Services, who I have found to be consistently well informed in these matters, is convinced based on his information that Russia’s gold reserves are significantly higher than reported — he thinks 12,000 tonnes is closer to the mark. The payment choice for those on Russia’s unfriendly list, if we rule out gold, is effectively of only one — buy roubles to pay for Russian energy. By sanctioning the world’s largest energy exporter, the effect on energy prices in dollars is likely to drive them far higher yet. Additionally, market liquidity for roubles is likely to be restricted, and the likelihood of a bear squeeze on any shorts is therefore high. The question is how high? Last year, the EU imported 155 billion cubic meters of natural gas from Russia, valued at about $180bn at current volatile prices. Oil exports from Russia to the EU were about 2.3 million barrels per day, worth an additional $105bn for a combined total of $285bn, which at the current exchange rate of RUB 75.5 is RUB 2.15 trillion. EU Gas consumption is likely to fall as spring approaches, but payments in roubles will still drive the exchange rate significantly higher. And attempts to obtain alternative sources of LNG will take time, be insufficient, and serve to drive natural gas prices from other suppliers even higher. For now, we should dismiss ideas over payments to the Russians in gold. The Russian gold story, initially at least, is a domestic issue. Though it might spill over into international markets. On 25 March, Russia’s central bank announced it will buy gold from credit institutions at a fixed rate of 5,000 roubles per gramme starting this week and through to 30 June. The press release stated that it will enable “a stable supply of gold and smooth functioning of the gold mining industry.” In other words, it allows banks to continue to lend money to gold mining and related activities, particularly for financing new gold mining developments. Meanwhile, the state will continue to accumulate bullion which, as discussed above, it has no need to spend on imports. When the RCB’s announcement was made the rouble was considerably weaker and the price offered by the central bank was about 20% below the market price. But that has now changed. Based on last night’s exchange rate of 75.5 roubles to the dollar (30 March) and with gold at $1935, the price offered by the central bank is at a premium of 7.2% to the market. Whether this opens the situation up to arbitrage from overseas bullion markets is an intriguing question. And we can assume that Russian banks will find ways of acquiring and deploying the dollars to do so through their offshore facilities, until, under the cover of a strong rouble, the RCB removes exchange controls. There is nothing in the RCB’s statement to prevent a Russian bank sourcing gold from, say, Dubai, to sell to the central bank. Guidance notes to which we cannot be privy may address this issue but let us assume this arbitrage will be permitted, because it might be difficult to stop. And if Russia does have undeclared bullion reserves more than those allegedly held by the US Treasury, then given that the real war is essentially financial, it is in Russia’s interest to see the gold price rise in dollars. Not only would Eurozone banks be scrambling to obtain roubles, but the entire Western banking system, which takes the short side of derivative transactions in gold will find itself in increasing difficulties. Normally, bullion banks rely on central banks and the Bank for International Settlements to backstop the market with physical liquidity through leases and swaps. But the unfortunate message from the West to every central bank not on Russia’s unfriendly list is that London’s or New York’s respect for ownership rights to their nation’s gold cannot be relied upon. Not only will lease and swap liquidity dry up, but it is likely that requests will be made for earmarked gold in these centres to be repatriated. In short, Russia appears to be initiating a squeeze on gold derivatives in Western capital markets by exploiting diminishing faith in Western institutions and their cavalier treatment of foreign property rights. By forcing the unfriendlies into buying roubles, the RCB will shortly be able to reduce interest rates back to previous policy levels and remove exchange controls. At the same time, the inflation problems faced by the West will be ameliorated by a strong rouble. It ties in with the politics for Putin’s survival. Together with the economic benefits of an improving exchange rate for the rouble and the relatively minor inconvenience of not being able to buy imports from the West (alternatives from China and India will still be available) Putin can retreat from his disastrous Ukrainian campaign. Senior figures in the Russian army will be disciplined, imprisoned, or disappear accused of incompetence and misleading Putin into thinking his “special operation” would be quickly achieved. Putin will absolve himself of any blame and dissenters can expect even greater clampdowns on protests. Russia’s moves are likely to have been thought out in advance. The move to support the rouble is evidence it is so, giving the central bank the opportunity to reverse the interest rate hike to 20% to protect the rouble. Foreign exchange controls on Russians can shortly be lifted. Almost certainly the consequences for Western currencies were discussed. The conclusion would surely have been that higher energy and other Russian commodity prices would persist, driving Western price inflation higher and for longer than discounted in financial markets. Western economies face soaring interest rates and a slump. And depending on their central bank’s actions, Japan and the Eurozone with negative interest rates are almost certainly most vulnerable to a financial, currency, and economic crisis. The impact of Russia’s new policy of only accepting roubles was, perhaps, the inevitable consequence of the West’s policies of self-immolation. From Russia’s failure in Ukraine, Putin appears to have had little option but to go on the offensive and escalate the financial, or commodity-currency war to cover his retreat. We can only speculate about the effect of a strong rouble on the international gold price, but if Russian banks can indeed buy bullion from non-Russian sources to sell to the RCB, it would mark a very aggressive move in the ongoing financial war. China’s position China will be learning unpalatable lessens about its ambition to invade Taiwan, and Taiwan will be encouraged mightily by Ukraine’s success at repelling an unwelcome invader. A 100-mile channel is an enormous obstacle for a Chinese invasion that Russia didn’t have to navigate before Ukrainian locals exploited defensive tactics to repel the invader. There can now be little doubt of the outcome if China tried the same tactics against Taiwan. President Xi would be sensible not to make the same mistake as Putin and tone down the anti-Taiwan rhetoric and try the softer approach of friendly relations and economic integration to reunite Chinese interests. That has been a costless lesson for China, but another consideration is the continuing relationship with Russia. The earlier Chinese description of it made sense: “We are not allies, but we are partners”. What this means is that China would abstain rather than support Russia in the various supranational forums where the world’s leaders gather. But she would continue to trade with Russia as normal, even engaging in currency swaps to facilitate it. More recently, a small crack has appeared in this relationship, with China concerned that US and EU sanctions might be extended to Chinese entities in joint ventures with Russian businesses linked to sanctioned oligarchs and Putin supporters. The highest profile example has been the suspension of a joint project to build a petrochemical plant in Russia involving Sinopec, because of the involvement of Gennady Timchenko, a close ally of Putin. But according to a report from Nikkei Asia, Sinopec has confirmed it will continue to buy Russian crude oil and gas. As always with its geopolitics, we can expect China to play its hand with great care. China was prepared for the consequences of US monetary policy in March 2020 when the Fed reduced its funds rate to zero and instituted quantitative easing of $120bn every month. By its actions it judged these moves to be very inflationary, and began stockpiling commodities ahead of dollar price rises, including energy and grains to project its own people. The yuan has risen against the dollar by about 11%, which with moderate credit policies has kept annualised domestic price inflation subdued to about 1% currently, while consumer price inflation in the West is soaring out of control. China is not therefore in the weak financial position of Russia’s “unfriendlies”; the highly indebted governments whose finances and economies are likely to be destabilised by rising energy prices and interest rates. But it does have a potential economic crisis on its hands in the form of a collapsing property market. In February, its response was to ease the credit restrictions imposed following the initial pandemic recovery in 2021, which had included attempts to deleverage the property sector. Property aside, we can assume that China will not want to destabilise the West by her own actions. The West is doing that very effectively without China’s assistance. But having demonstrated an understanding of why the West is sliding into an inflation crisis of its own making China will be keen not to make the same mistakes. Her partnership with Russia, as joint leaders in the Shanghai Cooperation Organisation, is central to detaching herself from what its Maoist economists forecast as the inevitable collapse of imperial capitalism. Having set itself up in the image of that imperialism, it must now become independent from it to avoid the same fate. Gold’s wider role in China, Russia, and the SCO Gold has always been central to China’s fallback position. I estimated that before permitting its own people to buy gold in 2002, the state had acquired as much as 20,000 tonnes. Subsequently, through the Shanghai Gold Exchange the Chinese public has taken delivery of a further 20,000 tonnes, mainly through imports from outside China. No gold escapes China, and the Chinese government is likely to have added to its hoard over the last twenty years. The government maintains a monopoly on refining and has stimulated the mining industry to become the largest national producer. Together with its understanding of the West’s inflationary policies the evidence is clear: China is prepared for a world of sound money with gold replacing the dollar’s hegemony, and it now dominates the world’s physical market with that in mind. These plans are shared with Russia, and the members, dialog partners and associates of the Shanghai Cooperation Organisation — almost all of which have been accumulating gold reserves. Mine output from these countries is estimated by the US Geological Survey at 830 tonnes, 27% of the global total. The move away from pure fiat was confirmed recently by some half-baked plans for the Eurasian Economic Union and China to escape from Western fiat by setting up a new currency for cross-border trade backed partly by commodities, including gold. The extent of “off balance sheet” bullion is a critical issue, because at some stage they are likely to be declared. In this context, the Russian position is important, because if Simon Hunt, quoted above, is correct Russia could have more gold than the US’s 8,130 tonnes, which it is widely thought to overstate the latter’s true position. Furthermore, Western central banks routinely lease and swap their gold reserves, leading to double counting, which almost certainly reduces their actual position in aggregate. And if fiat currencies continue to decline we could find that the two ringmasters for the SCO have more monetary gold than all the other central banks put together — something like 30,000-40,000 tonnes for Chinese and Russian governments, compared with perhaps less than 20,000 tonnes for Russia’s adversaries (officially ,the unfriendlies own about 24,000 tonnes, but we can assume that at least 5,000 of that is double counted or does not exist due to leasing and swaps). The endgame for the yen and the euro Without doubt, the terrible twins in the major fiat currencies are the yen and the euro. They share much in common: negative interest rates, major commercial banks highly leveraged with asset to equity ratios averaging over twenty times, and central bank balance sheets overloaded with bonds which are collapsing in value. They now face rising interest rates spiralling beyond their control, the consequences of the ECB and Bank of Japan being trapped under the zero bound and being in denial over falling purchasing power for their currencies. Consequently, we are seeing capital flight, which has accelerated dramatically this month for the yen, but in truth follows on from relative weakness for both currencies since the middle of 2021 when global bond yields began rising. Statistically, we can therefore link the collapse of both currencies on the foreign exchanges with rising bond yields. And given that rising interest rates and bond yields are in their early stages, there is considerable currency weakness yet to come. Japan and its yen The Bank of Japan has publicly stated it would buy an unlimited amount of 10-year Japanese Government Bonds at a 0.25% yield to contain the bond sell-off. A higher yield would be more than embarrassing for the BOJ, already requiring a recapitalisation, presumably with its heavily indebted government stumping up the money. Figure 2 shows that the 10-year JGB yield is already testing the 0.25% yield level (charts from Bloomberg). Fig 2. JGB yields hits BoJ Limit and Yen collapsing As avid Keynesians, the BOJ is following similar policies to that of John Law in 1720’s France. Law issued fresh livres which he used to prop up the Mississippi venture by buying shares in the market. The bubble popped, the venture survived, but the livre was destroyed. Today, the BOJ is issuing yen to prop up the Japanese government bond market. As the issuer of the currency, the BOJ is by any yardstick bankrupt and in desperate need of new capital. Since it commenced QE in 2000, it has accumulated so much government and corporate debt, and even equities bundled into ETFs, that the falling value of the BOJ’s holdings makes its liabilities significantly greater than its assets, currently to the tune of about ¥4 trillion ($3.3bn). Ignoring the cynic’s definition of madness, the BOJ is doubling down on its commitment, announcing on Monday further unlimited purchases of 10-year JGBs at a fixed yield of 0.25%. In other words, it is supporting bond prices from falling further, echoing Mario Draghi’s “whatever it takes” and confirming its John Law policy. Last Tuesday’s Summary of Opinions at the Monetary Policy Meeting on March 17 and 18 had this gem: “Heightened geopolitical risks due to the situation surrounding Ukraine have caused price rises of energy and other items, and this will push down domestic demand while raising the CPI. Under the circumstances, it is necessary to improve labour market conditions and provide stronger support for wage increases, and therefore it is increasingly important that the bank persistently continue with the current monetary easing.” No, this is not satire. In other words, the BOJ’s deposit rate will remain negative. And the following was added from Government Representatives at the same meeting: “The budget for fiscal 2022 aims to realise a new form of capitalism through a virtual circle of growth and distribution and the government has been making efforts to swiftly obtain the Diet’s approval.” A virtuous circle of growth? It seems like intensified intervention. Meanwhile, Japan’s major banks with asset to equity ratios of over twenty times are too highly geared to survive rising interest rates without a bank credit crisis threatening to take them down. It is hardly surprising that international capital is fleeing the yen, realising that it will be sacrificed by the BOJ in the vain hope that it can continue to maintain bond prices far above where they should be. The euro system and its euro The euro system and the euro share similar characteristics to the BOJ and the yen: interest rates trapped under the zero bound, Eurozone G-SIBs with asset to equity ratios of over 20 times and market realities forcing interest rates and bond yields higher, as Figure 3 shows. Furthermore, Eurozone banks are heavily exposed to Russian and Ukrainian debt due to their geographic proximity. Fig 3: Euro declining as bond yields soar There are two additional problems for the Eurosystem not faced by the BOJ and the yen. The ECB’s shareholders are the national central banks in the euro system, which in turn have balance sheet liabilities more than their assets. The structure of the euro system means that in recapitalising itself the ECB does not have a government to which it can issue credit and receive equity capital in return, the normal way in which a central bank would refinance its balance sheet by turning credit into equity. Instead, it will have to refinance itself through the national central banks which being insolvent themselves in turn would have to refinance themselves through their governments. The second problem is a further complication. The euro system’s TARGET2 settlement system reflects enormous imbalances which complicates resolving a funding crisis. For example, on the last figures (end-February), Germany’s Bundesbank was owed €1,150 billion through TARGET2, while Italy owed €568 billion. It would be in the interests of a recapitalisation for the Italian government to want its central bank to write off this amount, while the Bundesbank is already in negative equity without writing off TARGET2 balances. Germany’s politicians might demand the balances owed to the Bundesbank be secured. This problem is not insoluble perhaps, but one can see that political and public wrangling over these imbalances will only serve to draw attention to the fragility of the whole system and undermine public trust in the currency. With Germany’s CPI now rising at 7.6% and Spain’s at 9.8%, negative deposit rates are wildly inappropriate. When the system breaks it can be expected to be sudden, violent and a shock to those in thrall to the euro system. Conclusion For decades, a showdown between an Asian partnership and hegemonic America has been building. We can date this back to 1983, when China began to accumulate physical gold having appointed the Peoples’ Bank for the purpose. That act was the first indication that China felt the need to protect itself from others as it ventured into capitalism. China has navigated itself through increasing American assertion of its hegemony and attempts to destabilise Hong Kong. It has faced obstacles to its lucrative export trade through tariffs. It has been cut off from Western markets for its advanced technology. China has resented having to use the dollar. After Russia’s ill-advised invasion of Ukraine, it now appears that the invisible war over global financial resources and control is intensifying. The fuse has been lit and events are taking over. The destabilisation of the yen and the euro are now as certain as can be. While the yen is the victim of John Law-like market-rigging policies and likely to go the same way as France’s livre, perhaps the greater danger is for the euro. The contradictions in its set-up, and the destruction of Germany’s sound money principals in favour of the inflationism of the PIGS was always going to be finite. The ECB has got itself into a ridiculous position, and no amount of conjuring and cajoling of financial institutions can resolve the ECB’s own insolvency and that of all its shareholders. History shows that there are two groups involved in a currency collapse. International holders take fright and sell for other currencies and assets they believe to be more secure. They drive the exchange rate lower. The second group is the public in a nation, those who use the currency for transactions. If they lose confidence in it, the currency can rapidly descend into worthlessness as ordinary people accelerate its disposal for anything tangible in a final crack-up boom. In the past, an alternative currency was always the sounder one, one backed by and exchangeable for gold coin. That is so long ago that we in the West have mostly forgotten the difference between money, that is gold and silver, and unbacked fiat currencies. The great unknown has been how much abuse of money and credit it would take for the public to relearn the difference. Cryptocurrencies have alerted us, but they are not a widely accepted medium of exchange and don’t have the legal standing of gold and gold substitutes. War is to be our wake-up call — financial rather than physical in character. Western central banks and their governments have been fiddling the books, telling us that currency debasement is good for us. That debasement has accelerated in recent years. But by upping the anti against Russia with sanctions that end up undermining the purchasing power of all the West’s major currencies, our leaders have called an end to the reign of fiat. Tyler Durden Sat, 04/02/2022 - 14:30.....»»

Category: blogSource: zerohedgeApr 2nd, 2022

Will Russia Backstop The Ruble With Gold?

Will Russia Backstop The Ruble With Gold? Submitted by QTR's Fringe Finance Now that Russia has come right out and said it will only transact in Rubles when selling oil to “unfriendly” nations, I’m expecting gold to be the next safe haven for the nation to fall back on, as it desperately tries to backstop both its currency and its economy. The backstopping of the Ruble with gold can come in many forms and doesn’t have to be a direct peg from the Ruble to gold - it can also include the far more likely scenario of accepting payment for oil, the country’s most ubiquitous and valuable resource, in gold. A new directive from President Vladimir Putin saw the Russian leader say in a televised government meeting yesterday: "I have decided to implement ... a series of measures to switch payments — we'll start with that — for our natural gas supplies to so-called unfriendly countries into Russian rubles.” I have been arguing for nearly a month now that Russia would use its biggest commodity, oil, to help backstop its currency. I said last month that Putin would push back on economic sanctions by “allying himself further with China, and even discussing with China the prospects of a monetary system outside of the current global monetary system.” Tying the Ruble directly to oil makes it “sound money” of sorts, because it is tied to a commodity with demand which ostensibly will help buoy demand for the currency. In fact, OPEC’s agreeance to price oil in dollars for the last 4 decades has been a contributor in helping support the U.S. dollar as the world’s reserve currency in the exact same way that Russia plans on using oil to support the Ruble. And as Russia is working to tie the Ruble to oil, the decades-old petrodollar agreement with Saudi Arabia appears to also be at risk. The report about Russia accepting Rubles for oil, published by NPR, ends by saying: Russian leaders have also hinted at more severe consequences as members of the EU bloc have sought — thus far unsuccessfully — to impose an outright embargo on Russian imports. I can’t help but think that if economic constraints on Russia continue to tighten, or if the country’s plan to salvage the Ruble doesn’t work as intended, the next step lower in the global monetary safe-haven fortress then becomes gold. This post has been published without a paywall because I believe its content to be far too important. If you have the means, enjoy the work, and want to support the blog, I’d be humbled and honored to have you as a paid subscriber. Paid subscribers get detailed analysis on my portfolio positions, analysis of macro from my “Fringe” perspective, and my thoughts on politics and current events, near-daily: Subscribe now I’ve noted that in the past decade, Russia and China have steadily built up their gold reserves (in my opinion, in preparation for an event like this, where they will be forced to de-dollarize). Russia’s Gold ReservesDemand for gold in Russia could continue to be voracious, especially now that the West is considering sanctions on Russia’s gold, including preventing the country from selling gold on international markets. Hilariously, the New York Times reported that U.S. Senators consider Russia’s gold to be a “loophole” in sanctions against the country: The senators suggested that Russia’s $130 billion worth of gold reserves were a loophole in the sanctions that were imposed on Russia’s central bank. They said that Russia was laundering money through gold by buying and selling it for high-value currency. But it isn’t a loophole: this is the reason gold is a safe haven. There’s almost always going to be a bid for it somewhere - that’s part of what makes it sound money. And so preventing Russia from selling their gold actually does them a favor, of sorts, and encourages them to continue to build their stockpile. In fact, removing supply from the market may only serve to help gold’s price in dollar’s rise, potentially If the country’s plan to backstop the Ruble with oil doesn’t work, Russia can also choose to set a price per barrel for oil, in gold, and accept gold for its oil. This would help stockpile more gold, which in turn would backstop the Ruble further, and would help the country build a firmer foundation to try and rebuild its economy off of, when the time comes for Russia to re-open and re-boot its economy without the help of the Western world. This isn’t some complex monetary policy analysis, it just seems to be the next step for Russia, based on common sense. I stand by what I wrote in a March 10 article about why I like gold miners: Not only are people flocking to gold as a safe haven, but people are likely taking note of the fact that Russia seems to think it can defend the ruble – which has tanked against other fiat currencies - with its commodities and its hundreds of billions of dollars in gold reserves. Talk about leading a fucking horse to water for gold investors. The bull case for gold, as I see it, remains strong on three different fronts. Russia could potentially want to start transacting in gold and could peg it to the price of a barrel of oil. There is always going to be a bid for gold somewhere in the world. Caught off guard, when Western nations realize that gold isn’t a “loophole” but is the main tool Russia (and likely China) will use to challenge the dollar, demand for the safe haven will continue to increase. Inflation globally, especially in energy, will likely increase for as long as global pressure on Russia’s economy continues. “…additional sanctions on Russian energy could fuel inflation expectations, which would be favorable for gold,” Stephen Innes, managing partner at SPI Asset Management Pte., told Bloomberg yesterday. Inflation in the U.S. continues to be a “problem underneath the problem” of the geopolitical conflict, and I’m still not convinced we have a solution that isn’t going to result in the Fed eventually, once again, implementing more QE and the price of gold responding by moving significantly higher. It was just a couple of weeks ago that I wrote an article arguing that the economic sanctions we have cast upon in Russia, due to its invasion of Ukraine, likely mark the beginning of a period where China and Russia would bifurcate the global monetary system, leading them to eventually challenge the U.S. dollar’s reserve status. No matter how this bifurcation happens, I expect that gold will serve as the foundation for what will ultimately become the soundest monetary system going forward. Now read: The Dominance Of The U.S. Dollar Is Fading Right Before Our Eyes Now read: Do Look Down Now read: Russia Has Caused A "Monetary Earthquake", Fiat Currencies Are Going To "Fail Spectacularly" Thank you for reading QTR’s Fringe Finance . This post is public so feel free to share it: Share   Tyler Durden Thu, 03/24/2022 - 12:46.....»»

Category: personnelSource: nytMar 24th, 2022

Why Did Vladimir Putin Invade Ukraine?

Why Did Vladimir Putin Invade Ukraine? Authored by Soeren Kern via The Gatestone Institute, Nearly three weeks have passed since Russian President Vladimir Putin began his invasion of Ukraine, but it still is not clear why he did so and what he hopes to achieve. Western analysts, commentators and government officials have put forward more than a dozen theories to explain Putin's actions, motives, and objectives. Some analysts posit that Putin is motivated by a desire to rebuild the Russian Empire. Others say he is obsessed with bringing Ukraine back into Russia's sphere of influence. Some believe that Putin wants to control Ukraine's vast offshore energy resources. Still others speculate that Putin, an aging autocrat, is seeking to maintain his grip on power. While some argue that Putin has a long-term proactive strategy aimed at establishing Russian primacy in Europe, others believe he is a short-term reactionary seeking to preserve what remains of Russia's diminishing position on the world stage. Following is a compilation of eight differing but complementary theories that try to explain why Putin invaded Ukraine. 1. Empire Building The most common explanation for Russia's invasion of Ukraine is that Putin, burning with resentment over the demise of the Soviet Empire, is determined to reestablish Russia (generally considered a regional power) as a great power that can exert influence on a global scale. According to this theory, Putin aims to regain control over the 14 post-Soviet states — often referred to as Russia's "near abroad" — that became independent after the collapse of the Soviet Union in 1991. This is part of greater plan to rebuild the Russian Empire, which territorially was even more expansive than the Soviet Empire. The Russian Empire theory holds that Putin's invasion of Georgia in 2008 and Crimea in 2014, as well as his 2015 decision to intervene militarily in Syria, were all parts of a strategy to restore Russia's geopolitical position — and erode the U.S.-led rules-based international order. Those who believe Putin is trying to reestablish Russia as a great power say that once he gains control over Ukraine, he will turn his focus to other former Soviet republics, including the Baltic countries of Estonia, Latvia, and Lithuania, and eventually Bulgaria, Romania and even Poland. Putin's ultimate objective, they say, is to drive the United States out of Europe, establish an exclusive great-power sphere of influence for Russia on the continent and dominate the European security order. Russian literature supports this view. In 1997, for instance, Russian strategist Aleksandr Dugin, a friend of Putin, published a highly influential book — "Foundation of Geopolitics: The Geopolitical Future of Russia" — which argued that Russia's long-term goal should be the creation, not of a Russian Empire, but of a Eurasian Empire. Dugin's book, which is required reading in Russian military academies, states that to make Russia great again, Georgia should be dismembered, Finland should be annexed and Ukraine should cease to exist: "Ukraine, as an independent state with certain territorial ambitions, represents an enormous danger for all of Eurasia." Dugin, who has been described as "Putin's Rasputin," added: "The Eurasian Empire will be constructed on the fundamental principle of the common enemy: the rejection of Atlanticism, the strategic control of the USA, and the refusal to allow liberal values to dominate us." In April 2005, Putin echoed this sentiment when, in his annual state of the nation address, he described the collapse of the Soviet empire as "the greatest geopolitical catastrophe of the 20th century." Since then, Putin has repeatedly criticized the U.S.-led world order, in which Russia has a subordinate position. In February 2007, during a speech to the Munich Conference on Security Policy, Putin attacked the idea of a "unipolar" world order in which the United States, as the sole superpower, was able to spread its liberal democratic values to other parts of the world, including Russia. In October 2014, in a speech to the Valdai Discussion Club, a high-profile Russian think tank close to the Kremlin, Putin criticized the post-World War II liberal international order, whose principles and norms — including adherence to the rule of law, respect for human rights and the promotion of liberal democracy, as well as preserving the sanctity of territorial sovereignty and existing boundaries — have regulated the conduct of international relations for nearly 80 years. Putin called for the creation of a new multipolar world order that is more friendly to the interests of an autocratic Russia. The late Zbigniew Brzezinski (former National Security Advisor to U.S. President Jimmy Carter), in his 1997 book "The Grand Chessboard," wrote that Ukraine is essential to Russian imperial ambitions: "Without Ukraine, Russia ceases to be a Eurasian empire.... However, if Moscow regains control over Ukraine, with its 52 million people and major resources as well as its access to the Black Sea, Russia automatically again regains the wherewithal to become a powerful imperial state, spanning Europe and Asia." The German historian Jan Behrends tweeted: "Make no mistake: For #Putin it's not about EU or NATO, it is about his mission to restore Russian empire. No more, no less. #Ukraine is just a stage, NATO is just one irritant. But the ultimate goal is Russian hegemony in Europe." Ukraine expert Peter Dickinson, writing for the Atlantic Council, noted: "Putin's extreme animosity towards Ukraine is shaped by his imperialistic instincts. It is often suggested that Putin wishes to recreate the Soviet Union, but this is actually far from the case. In fact, he is a Russian imperialist who dreams of a revived Czarist Empire and blames the early Soviet authorities for handing over ancestral Russian lands to Ukraine and other Soviet republics." Bulgarian scholar Ivan Krastev agreed: "America and Europe aren't divided on what Mr. Putin wants. For all the speculation about motives, that much is clear: The Kremlin wants a symbolic break from the 1990s, burying the post-Cold War order. That would take the form of a new European security architecture that recognizes Russia's sphere of influence in the post-Soviet space and rejects the universality of Western values. Rather than the restoration of the Soviet Union, the goal is the recovery of what Mr. Putin regards as historic Russia." Transatlantic security analyst Andrew Michta added that Putin's invasion of Ukraine was: "The culmination of almost two decades of policy aimed at reconstructing the Russian empire and bringing Russia back into European politics as one of the principal players empowered to shape the Continent's future." Writing for the national security blog 1945, Michta elaborated: "From Moscow's perspective the Ukrainian war is in effect the final battle of the Cold War — for Russia a time to reclaim its place on the European chessboard as a great empire, empowered to shape the Continent's destiny going forward. The West needs to understand and accept that only once Russia is unequivocally defeated in Ukraine will a genuine post-Cold War settlement finally be possible." 2. Buffer Zone Many analysts attribute the Russian invasion of Ukraine to geopolitics, which attempts to explain the behavior of states through the lens of geography. Most of the western part of Russia sits on the Russian Plain, a vast mountain-free area that extends over 4,000,000 square kilometers (1.5 million square miles). Also called the East European Plain, the vast flatland presents Russia with an acute security problem: an enemy army invading from central or eastern Europe would encounter few geographical obstacles to reach the Russian heartland. In other words, Russia, due to its geography, is especially difficult to defend. The veteran geopolitical analyst Robert Kaplan wrote that geography is the starting point for understanding everything else about Russia: "Russia remains illiberal and autocratic because, unlike Britain and America, it is not an island nation, but a vast continent with few geographical features to protect it from invasion. Putin's aggression stems ultimately from this fundamental geographical insecurity." Russia's leaders historically have sought to obtain strategic depth by pushing outward to create buffer zones — territorial barriers that increase the distance and time invaders would encounter to reach Moscow. The Russian Empire included the Baltics, Finland and Poland, all of which served as buffers. The Soviet Union created the Warsaw Pact — which included Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland and Romania — as a vast buffer to protect against potential invaders. Most of the former Warsaw Pact countries are now members of NATO. That leaves Belarus, Moldova and Ukraine, strategically located between Russia and the West, as the only eastern European countries left to serve as Russian buffer states. Some analysts argue that Russia's perceived need for a buffer is the primary factor in Putin's decision to invade Ukraine. Mark Galeotti, a leading British scholar of Russian power politics, noted that the possession of a buffer zone is intrinsic to Russia's understanding of great-power status: "From Putin's point of view, he has built so much of his political identity around the notion of making Russia a great power and making it recognized as a great power. When he thinks of great power, he is essentially a 19th century geopolitician. It's not the power of economic connectivity, or technological innovation, let alone soft power. No. Great power, in good old-fashioned terms, has a sphere of influence, countries whose sovereignty is subordinate to your own." Others believe that the concept of buffer states is obsolete. International security expert Benjamin Denison, for instance, argued that Russia cannot legitimately justify the need for a buffer zone: "Once nuclear weapons were invented ... buffer states were no longer seen as necessary regardless of geography, as nuclear deterrence worked to ensure the territorial integrity of great powers with nuclear capabilities.... The utility of buffer states and the concerns of geography invariably changed following the nuclear revolution. Without the concern of quick invasions into the homeland of a rival great power, buffer states lose their utility regardless of the geography of the territory.... "Narrowly defining national interests to geography, and mandating that geography pushes states to replicate past actions throughout history, only fosters inaccurate thinking and forgives Russian land-grabs as natural." 3. Ukrainian Independence Closely intertwined with theories about empire-building and geopolitics is Putin's obsession with extinguishing Ukrainian sovereignty. Putin contends that Ukraine has been part of Russia for centuries, and that its independence in August 1991 was a historical mistake. Ukraine, he claims, does not have a right to exist. Putin has repeatedly downplayed or negated Ukraine's right to statehood and sovereignty: In 2008, Putin told William Burns, then the U.S. ambassador to Russia (now director of the CIA): "Don't you know that Ukraine is not even a real country? Part of it is really East European and part is really Russian." In July 2021, Putin penned a 7,000-word essay — "On the Historical Unity of Russians and Ukrainians" — in which he expressed contempt for Ukrainian statehood, questioned the legitimacy of Ukraine's borders and argued that modern-day Ukraine occupies "the lands of historical Russia." He concluded: "I am confident that true sovereignty of Ukraine is possible only in partnership with Russia." In February 2022, just three days before he launched his invasion, Putin asserted that Ukraine was a fake state created by Vladimir Lenin, the founder of the Soviet Union: "Modern Ukraine was entirely created by Russia or, to be more precise, by Bolshevik, Communist Russia. This process started practically right after the 1917 revolution, and Lenin and his associates did it in a way that was extremely harsh on Russia — by separating, severing what is historically Russian land.... Soviet Ukraine is the result of the Bolsheviks' policy and can be rightfully called 'Vladimir Lenin's Ukraine.' He was its creator and architect." Russia scholar Mark Katz, in an essay — "Blame It on Lenin: What Putin Gets Wrong About Ukraine" — argued that Putin should draw lessons from Lenin's realization that a more accommodating approach toward Ukrainian nationalism would better serve Russia's long-term interests: "Putin cannot escape the problem that Lenin himself had to deal with of how to reconcile non-Russians to being ruled by Russia. The forceful imposition of Russian rule in part — much less all — of Ukraine will not bring about such a reconciliation. For even if Ukrainians cannot resist the forceful imposition of Russian rule over part or all of Ukraine now, Putin's success in imposing it is only likely to intensify feelings of Ukrainian nationalism and lead it to burst forth again whenever the opportunity arises." Ukraine's political independence has been accompanied by a long-running feud with Russia over religious allegiance. In January 2019, in what was described as "the biggest rift in Christianity in centuries," the Orthodox church in Ukraine gained independence (autocephaly) from the Russian church. The Ukrainian church had been under the jurisdiction of the Moscow patriarchate since 1686. Its autonomy dealt a blow to the Russian church, which lost around one-fifth of the 150 million Orthodox Christians under its authority. The Ukrainian government claimed that Moscow-backed churches in Ukraine were being used by the Kremlin to spread propaganda and to support Russian separatists in the eastern Donbas region. Putin wants the Ukrainian church to return to Moscow's orbit, and has warned of "a heavy dispute, if not bloodshed" over any attempts to transfer ownership of church property. The head of the Russian Orthodox Church, Patriarch Kirill of Moscow, has declared that Kyiv, where the Orthodox religion began, is comparable in terms of its historic importance to Jerusalem: "Ukraine is not on the periphery of our church. We call Kiev 'the mother of all Russian cities'. For us Kiev is what Jerusalem is for many. Russian Orthodoxy began there, so under no circumstances can we abandon this historical and spiritual relationship. The whole unity of our Local Church is based on these spiritual ties." On March 6, Kirill — a former KGB agent who is known as "Putin's altar boy" due to his subservience to the Russian leader — publicly endorsed the invasion of Ukraine. In a sermon he repeated Putin's claims that the Ukrainian government was carrying out a "genocide" of Russians in Ukraine: "For eight years, the suppression, extermination of people has been underway in Donbass. Eight years of suffering and the entire world is silent." German geopolitical analyst Ulrich Speck wrote: "For Putin, destroying Ukraine's independence has become an obsession.... Putin has often said, and even written, that Ukraine is not a separate nation, and should not exist as a sovereign state. It is this fundamental denial that has led Putin to wage this totally senseless war that he cannot win. And that leads us to the problem of making peace: either Ukraine has the right to exist as a nation and a sovereign state, or it hasn't. Sovereignty is indivisible. Putin denies it, Ukraine defends it. How can you make a compromise about the existence of Ukraine as a sovereign state? Impossible. That's why both sides can only fight on until they win. "Normally wars that take place between states are about conflicts they have between them. Yet this is a war about the existence of one state, which is denied by the aggressor. That's why the usual concepts of peacemaking — finding a compromise — do not apply. If Ukraine continues to exist as a sovereign state, Putin will have lost. He is not interested in territorial gain as such — it's rather a burden for him. He is only interested in controlling the entire country. Everything else for him is defeat." Ukraine expert Taras Kuzio added: "The real cause of today's crisis is Putin's quest to return Ukraine to the Russian orbit. For the past eight years, he has used a combination of direct military intervention, cyber-attacks, disinformation campaigns, economic pressure, and coercive diplomacy to try and force Ukraine into abandoning its Euro-Atlantic ambitions.... "Putin's ultimate objective is Ukraine's capitulation and the country's absorption into the Russian sphere of influence. His obsessive pursuit of this goal has already plunged the world into a new Cold War.... "Nothing less than Ukraine's return to the Kremlin orbit will satisfy Putin or assuage his fears over the further breakup of Russia's imperial inheritance. He will not stop until he is stopped. In order to achieve this, the West must become far more robust in responding to Russian imperial aggression, while also expediting Ukraine's own Euro-Atlantic integration." 4. NATO This theory holds that Putin invaded Ukraine to prevent it from joining NATO. The Russian president has repeatedly demanded that the West "immediately" guarantee that Ukraine will not be allowed to join NATO or the European Union. A vocal proponent of this viewpoint is the American international relations theorist John Mearsheimer, who, in a controversial essay, "Why the Ukraine Crisis Is the West's Fault," argued that the eastward expansion of NATO provoked Putin to act militarily against Ukraine: "The United States and its European allies share most of the responsibility for the crisis. The taproot of the trouble is NATO enlargement, the central element of a larger strategy to move Ukraine out of Russia's orbit and integrate it into the West.... "Since the mid-1990s, Russian leaders have adamantly opposed NATO enlargement, and in recent years, they have made it clear that they would not stand by while their strategically important neighbor turned into a Western bastion." In a recent interview with The New Yorker, Mearsheimer blamed the United States and its European allies for the current conflict: "I think all the trouble in this case really started in April 2008, at the NATO Summit in Bucharest, where afterward NATO issued a statement that said Ukraine and Georgia would become part of NATO." In fact, Putin has not always opposed NATO expansion. Several times he went so far as to say that the eastward expansion of NATO was none of Russia's concern. In March 2000, for instance, Putin, in an interview with the late BBC television presenter David Frost, was asked whether he viewed NATO as a potential partner, rival or enemy. Putin responded: "Russia is part of the European culture. And I cannot imagine my own country in isolation from Europe and what we often call the civilized world. So, it is hard for me to visualize NATO as an enemy." In November 2001, in an interview with National Public Radio, Putin was asked if he opposed the admission of the three Baltic states — Lithuania, Latvia and Estonia — into NATO. He replied: "We of course are not in a position to tell people what to do. We cannot forbid people to make certain choices if they want to increase the security of their nations in a particular way." In May 2002, Putin, when asked about the future of relations between NATO and Ukraine, said matter-of-factly that he did not care one way or the other: "I am absolutely convinced that Ukraine will not shy away from the processes of expanding interaction with NATO and the Western allies as a whole. Ukraine has its own relations with NATO; there is the Ukraine-NATO Council. At the end of the day the decision is to be taken by NATO and Ukraine. It is a matter for those two partners." Putin's position on NATO expansion radically changed after the 2004 Orange Revolution, which was triggered by Moscow's attempt to steal Ukraine's presidential election. A massive pro-democracy uprising ultimately led to the defeat of Putin's preferred candidate, Viktor Yanukovych, who eventually did become president of Ukraine in 2010 but was ousted in the 2014 Euromaidan Revolution. Former NATO Secretary-General Anders Fogh Rasmussen, in a recent interview with Radio Free Europe, discussed how Putin's views about NATO have changed: "Mr. Putin has changed over the years. My first meeting took place in 2002...and he was very positive regarding cooperation between Russia and the West. Then, gradually, he changed his mind. And from around 2005 to 2006, he got increasingly negative toward the West. And in 2008, he attacked Georgia.... In 2014, he took Crimea, and now we have seen a full-scale invasion of Ukraine. So, he has really changed over the years. "I think the revolutions in Georgia and Ukraine in 2004 and 2005 contributed to his change of mind. We shouldn't forget that Vladimir Putin grew up in the KGB. So, his thinking is very much impacted by that past. I think he suffers from paranoia. And he thought that after color revolutions in Georgia and Ukraine, that the aim [of the West] was to initiate a regime change in the Kremlin — in Moscow — as well. And that's why he turned against the West. "I put the blame entirely on Putin and Russia. Russia is not a victim. We have reached out to Russia several times during history.... First, we approved the NATO Russia Founding Act in 1997.... Next time, it was in 2002, we reached out once again, established something very special, namely the NATO-Russia Council. And in 2010, we decided at a NATO-Russia summit that we would develop a strategic partnership between Russia and NATO. So, time and again, we reached out to Russia. "I think we should have done more to deter Putin. Back in 2008, he attacked Georgia, took de facto Abkhazia and South Ossetia. We could have reacted much more determinedly already in that time." In recent years, Putin repeatedly has claimed that the post-Cold War enlargement of NATO poses a threat to Russia, which has been left with no other choice than to defend itself. He also has accused the West of trying to encircle Russia. In fact, of the 14 countries that have borders with Russia, only five are NATO members. The borders of those five countries — Estonia, Latvia, Lithuania, Norway and Poland — are contiguous with only 5% of Russia's total borders. Putin has claimed that NATO broke solemn promises it made in the 1990s that the alliance would not expand to the east. "You promised us in the 1990s that NATO would not move an inch to the east. You brazenly cheated us," he said in during a press conference in December 2021. Mikhail Gorbachev, then president of the Soviet Union, countered that such promises were never made. Putin recently issued three wildly unrealistic demands: NATO must withdraw its forces to its 1997 borders; NATO must not offer membership to other countries, including Finland, Sweden, Moldova or Georgia; NATO must provide written guarantees that Ukraine will never join the alliance. Writing for Foreign Affairs, Russian historian Dmitri Trenin, in an essay — "What Putin Really Wants in Ukraine" — argued that Putin wants stop NATO expansion, not to annex more territory: "Putin's actions suggest that his true goal is not to conquer Ukraine and absorb it into Russia but to change the post-Cold War setup in Europe's east. That setup left Russia as a rule-taker without much say in European security, which was centered on NATO. If he manages to keep NATO out of Ukraine, Georgia, and Moldova, and U.S. intermediate-range missiles out of Europe, he thinks he could repair part of the damage Russia's security sustained after the Cold War ended. Not coincidentally, that could serve as a useful record to run on in 2024, when Putin would be up for re-election." 5. Democracy This theory holds that Ukraine, a flourishing democracy, poses an existential threat to Putin's autocratic model of governance. The continued existence of a Western-aligned, sovereign, free and democratic Ukraine could inspire the Russian people to demand the same. Former U.S. Ambassador to Russia Michael McFaul and Robert Person, a professor at the United States Military Academy, wrote that Putin is terrified of democracy in Ukraine: "Over the last thirty years, the salience of the issue [NATO expansion] has risen and fallen not primarily because of the waves of NATO expansion, but due instead to waves of democratic expansion in Eurasia. In a very clear pattern, Moscow's complaints about NATO spike after democratic breakthroughs.... "Because the primary threat to Putin and his autocratic regime is democracy, not NATO, that perceived threat would not magically disappear with a moratorium on NATO expansion. Putin would not stop seeking to undermine democracy and sovereignty in Ukraine, Georgia, or the region as a whole if NATO stopped expanding. As long as citizens in free countries exercise their democratic rights to elect their own leaders and set their own course in domestic and foreign politics, Putin will keep them in his crosshairs.... "The more serious cause of tensions has been a series of democratic breakthroughs and popular protests for freedom throughout the 2000s, what many refer to as the "Color Revolutions." Putin believes that Russian national interests have been threatened by what he portrays as U.S.-supported coups. After each of them — Serbia in 2000, Georgia in 2003, Ukraine in 2004, the Arab Spring in 2011, Russia in 2011-12, and Ukraine in 2013-14 — Putin has pivoted to more hostile policies toward the United States, and then invoked the NATO threat as justification for doing so.... "Ukrainians who rose up in defense of their freedom were, in Putin's own assessment, Slavic brethren with close historical, religious, and cultural ties to Russia. If it could happen in Kyiv, why not in Moscow?" Ukraine expert Taras Kuzio agrees: "Putin remains haunted by the wave of pro-democracy uprisings that swept Eastern Europe in the late 1980s, setting the stage for the subsequent Soviet collapse. He sees Ukraine's fledgling democracy as a direct challenge to his own authoritarian regime and recognizes that Ukraine's historical closeness to Russia makes this threat particularly acute." 6. Energy Ukraine holds the second-biggest known reserves — more than one trillion cubic meters — of natural gas in Europe after Russia. These reserves, under the Black Sea, are concentrated around the Crimean Peninsula. In addition, large deposits of shale gas have been discovered in eastern Ukraine, around Kharkiv and Donetsk. In January 2013, Ukraine signed a 50-year, $10 billion deal with Royal Dutch Shell to explore and drill for natural gas in eastern Ukraine. Later that year, Kyiv signed a 50-year, $10 billion shale gas production-sharing agreement with the American energy company Chevron. Shell and Chevron pulled out of those deals after Russia annexed the Crimean Peninsula. Some analysts believe Putin annexed Crimea to prevent Ukraine from becoming a major oil and gas provider to Europe and thereby challenge Russia's energy supremacy. Russia, they argue, was also worried that as Europe's second-largest petrostate, Ukraine would have been granted fast-track membership to the EU and NATO. According to this theory, Russia's invasion of Ukraine is aimed at forcing Kyiv to officially acknowledge Crimea as Russian, and recognize the separatist republics of Donetsk and Lugansk as independent states, so that Moscow can legally secure control over the natural resources in these areas. 7. Water On February 24, the first day of the Russian invasion of Ukraine, Russian troops restored water flow to a strategically important canal linking the Dnieper River to Russian-controlled Crimea. Ukraine blocked the Soviet-era North Crimean Canal, which supplies 85% of Crimea's water needs, after Russia annexed the peninsula in 2014. The water shortages resulted in a massive reduction in agricultural production on the peninsula and forced Russia to spend billions of rubles each year to supply water from the mainland to sustain the Crimean population. The water crisis was a major source of tension between Ukraine and Russia. Ukrainian President Volodymyr Zelensky insisted that the water supply would not be restored until Russia returns the Crimean Peninsula. Security analyst Polina Vynogradova noted that any resumption of water supply would have amounted to a de facto recognition of Russian authority in Crimea and would have undermined Ukraine's claim to the peninsula. It would also have weakened Ukrainian leverage over negotiations on Donbas. Even if Russian troops eventually withdraw from Ukraine, Russia likely will maintain permanent control over the entire 400-kilometer North Crimean Canal to ensure there are no more disruptions to Crimea's water supply. 8. Regime Survival This theory holds that the 69-year-old Putin, who has been in power since 2000, seeks perpetual military conflict as a way of remaining popular with the Russian public. Some analysts believe that after public uprisings in Belarus and Kazakhstan, Putin decided to invade Ukraine due to a fear of losing his grip on power. In an interview with Politico, Bill Browder, the American businessman who heads up the Global Magnitsky Justice Campaign, said that Putin feels the need to look strong at all times: "I don't think that this war is about NATO; I don't think this war is about Ukrainian people or the EU or even about Ukraine; this war is about starting a war in order to stay in power. Putin is a dictator, and he's a dictator whose intention is to stay in power until the end of his natural life. He said to himself that the writing's on the wall for him unless he does something dramatic. Putin is just thinking short-term ... 'how do I stay in power from this week to the next? And then next week to the next?'" Anders Åslund, a leading specialist on economic policy in Russia and Ukraine, agreed: "How to understand Putin's war in Ukraine. It is not about NATO, EU, USSR or even Ukraine. Putin needs a war to justify his rule & his swiftly increasing domestic repression.... It is really all about Putin, not about neo-imperialism, Russian nationalism or even the KGB." Russia expert Anna Borshchevskaya wrote that the invasion of Ukraine could be the beginning of the end for Putin: "Though he is not democratically elected, he worries about public opinion and protests at home, seeing them as threats to retaining his grip on power.... While Putin may have hoped that invading Ukraine would quickly expand Russian territory and help restore the grandeur of the former Russian empire, it could do the opposite." Tyler Durden Tue, 03/15/2022 - 02:00.....»»

Category: blogSource: zerohedgeMar 15th, 2022

Malthusianism, Prometheanism, & The Hyper-Bitcoinized World To Come

Malthusianism, Prometheanism, & The Hyper-Bitcoinized World To Come Via Cathedra.com, 2021 Letter to Shareholders Dear Fellow Shareholders of Cathedra Bitcoin Inc: In 1798, a British economist was concerned that the incessant increase in population would cause humanity to run out of food. As a solution, he supported a variety of measures aimed at curbing the rate of population growth (e.g., taxes on food) to improve the living standards for those humans who did survive. The economist in question, Thomas Malthus, was raised in a country house in Surrey, was educated at Jesus College Cambridge, became a Fellow of the Royal Society in 1818, and–in simple terms–championed policies designed to limit (or end) human life to prevent this population bomb. “Instead of recommending cleanliness to the poor, we should encourage contrary habits. In our towns we should make the streets narrower, crowd more people into the houses, and court the return of the plague.” – Thomas Malthus, “An Essay on the Principle of Population” (1798) Looking back, we can see that such predictions have (fortunately) not come to fruition. The human population has grown ninefold since Malthus penned his infamous piece, “An Essay on the Principle of Population.” Meanwhile, technology has given humanity the ability to channel energy in ways unimaginable to Malthus, allowing us to enjoy levels of prosperity that make the elitist Malthus look like a serf in comparison. Yet we are not without our troubles. In response to COVID-19, the last two years have seen an unprecedented degree of government intervention around the world, through mandates as well as record-breaking fiscal and monetary stimulus. Meanwhile, food shortages have visited the developed and developing worlds alike. Housing, asset, and commodity prices are soaring, with even the dubious Consumer Price Index reaching its highest level in four decades in the U.S. And around the world, civil unrest is on the rise. We believe the root causes of these issues are quite simple: unsound money and unsound energy infrastructure. In this first annual letter to Cathedra Bitcoin shareholders, we examine the current state of both and discuss how they inform our vision for the future of the company. Macro Update: Energy The European Energy Crisis For the last six months, headlines have been filled with a “European Energy Crisis.” As the global economy surged back to life after 18 months of lockdowns, a perfect storm of events unfolded: over the summer, China increased natural gas imports following a coal shortage, causing power prices to rise in Europe; in September, a wind shortage beset northern Europe, resulting in enormous sums being paid to dispatch other (“dirtier”) forms of generation; reduced natural gas imports from Russia left Europe with historically low natural gas reserves; in December, unusually cold temperatures hit the continent, sending shockwaves through energy markets (even serving as a catalyst for the civil unrest in Kazakhstan); and Russia’s invasion of Ukraine in recent weeks has sent oil and gas prices surging, bringing calls for increased domestic energy production. These events have conspired to cause a sharp increase in energy prices around the continent. One is tempted to point to any one of the above as a “black swan event” driven by unforeseeable forces beyond our control (in hindsight, it will be even more tempting to blame this crisis on Putin’s invasion of Ukraine). But in reality, Europe has been systematically dismantling its stable energy infrastructure for over a decade. And unfortunately, they are not alone. Take California, for example: over the last decade, the state has seen energy prices rise 7x more than those in the rest of the U.S., and blackouts have become “almost daily events.” If one looks deeper, a far subtler cause reveals itself: misguided policies that subsidize intermittent renewables and shutter stable forms of generation, the net effects of which are energy insecurity and higher energy costs. The Real “Energy Transition” Beginning in the early 2000s, governments around the world began reorienting energy policy around climate change. These “net-zero” policies push for an “energy transition” away from CO2-emitting energy sources toward 100% “renewable” energy, primarily via subsidies to intermittent wind and solar generation. On the surface, these policies seem to have worked. EU power generation from renewables has increased 157% in the last ten years. As a result, in 2020, renewable generation in Europe surpassed that of fossil fuels for the first time, providing 38% of the region’s electricity (vs. fossil fuels’ 37%). And these policies are only accelerating: in July 2021, the EU announced its even more ambitious goal to reduce greenhouse gas emissions by 55% by 2030, requiring an estimated tripling of wind and solar generation from 547 TWh in 2020 to ~1,500 TWh in 2030. These pro-renewables policies have been paired with the abandonment of more stable forms of generation. Coal continues to be pushed out of the generation stack due to its heavy carbon footprint and the rising cost of carbon credits. Additionally, despite the seemingly obvious importance of nuclear energy in a “net-zero” carbon future, regulators have been shutting down nuclear reactors around the world in response to environmentalist movements[1] (a trend that accelerated in the wake of the Fukushima disaster). Germany alone shut down 16 GW of nuclear power since 2011, and plans to retire its last three nuclear power plants this year. With hydro being geography-dependent and long-term energy storage unsolved, natural gas is left as the main  viable form of dispatchable generation. Given self-imposed fracking bans, Europe has no choice but to import natural gas via LNG or pipelines (largely from Russia). Returning to California, we see the same dangerous combination of policies. Despite the aforementioned rising electricity costs and grid fragility, the state is decommissioning its last nuclear power plant at Diablo Canyon–responsible for ~10% of the state’s electricity–while reasserting goals to achieve “net-zero” by 2045. Unfortunately, even if stable forms of generation are not discarded by mandates, renewables subsidies distort market signals. This auxiliary revenue stream of carbon or renewable energy credits allows wind and solar farms to sell power to the grid at negative prices, often driving unsubsidized, baseload generation out of business. The net result? The hollowing out of sound energy infrastructure, which increases both the costs and fragility of the energy system. In her book Shorting the Grid, Meredith Angwin warns of a “fatal trifecta” affecting grids around the world: (1) overreliance on renewables, (2) overreliance on natural gas, often used to load-follow renewables, and (3) overreliance on energy imports. When demand outpaces supply, either due to diminished output from renewables or heightened demand (e.g., during a cold snap), grid operators seek to dispatch additional generation. But natural gas and energy imports are both vulnerable to disruptions, as natural gas is typically delivered just-in-time via pipelines and neighboring regions are likely to experience correlated supply or demand shocks (read: weather). This results in more expensive energy (increased demand chasing limited supply) or enforced blackouts (e.g., Texas in February 2021). “Grid fragility” may sound like a highly abstract concept, but its real-world consequences are severe. It means industry halting, hospitals losing power, and even access to clean water being threatened. Such effects are so severe that energy-insecure countries tend to rely on more rudimentary forms of energy, including expensive backup diesel generators, to keep the lights on. Robert Bryce has termed this phenomenon the “Iron Law of Electricity”: people, businesses, and governments will do whatever they must to get the electricity they need[2]. We fear these confused policies are causing an energy transition of the wrong kind–one toward energy insecurity. Its effects are clear in the U.S., where “major electric disturbances and unusual occurrences” on the grid have increased 13x over the last 20 years. Meanwhile, Generac, a leading gas-powered backup generator company, saw 50% growth in sales in 2021 (it's worth highlighting the contradiction between the stated aims of these “net-zero” policies and their downstream effects). A Malthusian Approach to Energy Energy insecurity is also expensive. Dependence on intermittent renewables often results in paying top-dollar for energy when it’s needed most. During its September wind shortage, the UK paid GBP 4,000 per MWh to turn on a coal power plant–a clear demonstration that not all megawatt hours are created equal. The quality of energy matters. With renewables, humanity is once again at the mercy of the weather. This is the underlying logic of these “net-zero” policies: make energy more expensive so that we use less of it. In fact, economists advising the European Central Bank view rising energy costs (“greenflation”) as a feature, not a bug–a necessary consequence of the energy transition. Rising energy prices are a regressive tax on the least well-off in society. We all require energy to survive (heating/cooling, food, water, etc.), regardless of our wealth. These requirements are effectively a fixed cost; the lower one’s income, the greater the percentage of it one spends on energy. There is a point beyond which rising energy costs become unsustainable, sending people to the streets to fight for their survival–as we saw in Kazakhstan after the spike in LPG prices. Researchers estimate that each 1% increase in heating prices causes a 0.06% increase in winter-related deaths, with disproportionate effects in low-income areas. “If energy is life, then the lack of energy is death.” – Doomberg, “Shooting Oil in a Barrel” (2021) Energy is the key input for every other good and service in the economy, and over time accounts for all wealth in an economy. To the extent energy gets more expensive, so does everything else (including and especially food), making society poorer. This is the Malthusian approach to energy. Expensive “green” energy that the elites can afford, while the unwashed masses bear the brunt of those rising costs. Energy for me, but not for thee. We question the political and social sustainability of such an approach. Enter Entropy Energy’s role is even more fundamental to the economy and human well-being than most understand. As we’ve discussed elsewhere, what is commonly understood as “energy generation” is really just the conversion of energy into a more highly ordered form; it is the reduction of entropy locally by shedding even greater amounts of entropy elsewhere. Despite the universality of this entropy reduction, some energy resources are inherently lower-entropy than others (highly dense nuclear fission vs. low-density wind power). We depend on this entropy reduction to sustain us through the food and energy we need to maintain the order of civilization. This entropy reduction is cumulative; without sufficient entropy-reducing energy infrastructure, we cannot maintain our existing order. We cannot create entropy-reducing energy infrastructure without adequate pre-existing infrastructure. And we cannot advance further as a civilization (i.e., create more order) unless we develop even more entropy-reducing infrastructure. “We never escape from the need for energy. Whatever the short-term variations might look like, the trend over time is for greater energy use, to deliver and crucially to maintain and replace a human sphere that is progressively further away from thermodynamic equilibrium. There is no point at which you sit down and have a rest.” – John Constable, “Energy, Entropy and the Theory of Wealth” (2016) There is no free lunch when it comes to energy. If a country’s economy grows while reducing energy consumption, it is only through de-industrialization, exporting its energy footprint to other countries (the same often holds true for carbon emissions). The second law of thermodynamics is indeed a law, the best attested regularity in natural science, not a tentative suggestion: the entropy must go somewhere. Unfortunately, distortions caused by our current monetary system have convinced many otherwise, a deception that has had dire consequences. Macro Update: Money For the last 50 years the world has participated in an unprecedented experiment: a global fiat monetary standard. In 1974, a few years after “Tricky Dick” Nixon rug-pulled the other governments of the world by severing convertibility of the U.S. dollar into gold, the U.S. struck a deal with Saudi Arabia to cement the dollar’s status as the global reserve currency: the OPEC nations would agree to sell oil exclusively for U.S. dollars, and the Saudis would receive the protection of the U.S. military in return. This arrangement, which survives to this day, became known as the “Petrodollar system,” and it has had enduring economic, social, and political consequences: securing the dollar’s status as the reserve currency of the world; bidding up U.S. asset prices via petrodollar “recycling;” displacing U.S. manufacturing capabilities and increasing economic inequality between American wage-earners and asset-owners; and contributing to the secular decline in interest rates, causing an accumulation of public- and private-sector debts and distortions in the pricing mechanism for all other assets (typically viewed in relation to the “risk-free rate” of interest on Treasuries). In recent years, cracks in the foundation of this system have begun to show. A half-century of irresponsible fiscal and monetary policy has pushed sovereign and private sector debt to the brink of unsustainability and fragilized financial markets. The once steady foreign demand for Treasuries is evaporating, forcing the Fed to begin monetizing U.S. deficits at an increasing rate. The U.S.’s share of global GDP is waning, and the role of the dollar in key trading relationships is diminishing. Even the once-mighty U.S. military—on whose supremacy the entire Petrodollar system was predicated—shows signs of degeneration. The U.S. response to the COVID-19 pandemic has accelerated many of these trends. Through a series of legislative and executive actions in 2020 and 2021, Congress and the Trump and Biden administrations approved nearly $7 trillion of spending on COVID relief, a large majority of which increased the federal deficit. Not to be outdone, the Fed authorized its own emergency measures to the tune of $7 trillion. In the nearly two years since these extraordinary actions, the U.S. and the global economy has been defined by record-low interest rates (which is part of the explanation for the interest in subsidized renewables); acute supply chain disruptions (read: shortages) across critical markets; a continuation of the asset price inflation of prior decades; and the highest levels of consumer price inflation in 40 years. This last development—“not-so-transitory” CPI inflation—is perhaps most significant given it represents a departure from economic conditions since the Great Financial Crisis. The Fed now faces a predicament. With mounting cries from the public and political officials over the runaway CPI, the pressure is on Jay Powell & Co. to arrest inflation by raising interest rates. But the current state of public and private sector balance sheets complicates matters. As the Fed increases rates, so too does it increase the federal government’s borrowing cost, not to mention that of a private sector which is also saddled with dollar-denominated debt. If corporates are unable to service or refinance their debt, they will be forced to reduce costs, resulting in higher unemployment. Rest assured; rates aren’t going higher for long. Global balance sheets will not allow it. This suggests to us that we may be entering a period of financial repression, whereby inflation is allowed to run hot while interest rates remain pinned near zero, producing negative real returns and deleveraging balance sheets over several years. We also find it likely that the Fed will be forced to implement some version of a yield curve control program. Under such a policy, the central bank commits to purchasing as many bonds as necessary to cap the yields of various maturities of Treasuries at certain predetermined levels. There is precedent for a maneuver of this sort: the Fed implemented a version of the policy throughout the 1940s to inflate away the national debt during and after WWII. At the end of the long-term debt cycle, the only option is to inflate away the debt and debase the currency. But unlike in the 1940s, citizens, businesses, and governments now have several monetary alternatives available to them. We therefore believe the coming period of structural inflation will hasten a transition to a new monetary standard. The Currency Wars Cometh The writing is on the wall; the post-Bretton Woods monetary system is in its death throes. The question is not if we will see a paradigm shift away from the present dollar-based monetary order, but when. And the far more interesting question, in our view, is: what will replace it? We believe the next global monetary system will be built atop Bitcoin—with bitcoin the asset and Bitcoin the network working together to offer final settlement in a digitally native, fixed-supply reserve currency on politically neutral rails. Bitcoin uniquely enables this value proposition, and game theory and economic incentives will compel nation-states to take notice amid the collapsing monetary order. But it is not without competition. Central Bank Digital Currencies Bitcoin is the ideological and economic foil to another candidate for heir to the petrodollar: the central bank digital currency (“CBDC”). The retail CBDC—which is the variety most often discussed in policy circles—is a natively digital form of fiat money that is issued, managed, and controlled by the central bank. Their proponents claim CBDCs would enable many of the same benefits as cryptocurrencies—near-instant final settlement, programmability, high availability, etc.—without many of the attendant “disadvantages”—decentralization, untraceability, etc. CBDCs open up a whole new design space for monetary authorities, empowering them to implement creative and fine-grained policies which heretofore have been confined to masturbatory thought-experiments in BIS papers (e.g., negative interest rates). They would also allow for all manner of fiscal policies which today are operationally or technically infeasible; one can imagine government-imposed parameters around how and when a given sum of CBDC money is spent, digitally programmed into one’s Fed wallet. A universal basic income program could be effected with a single keystroke. In many ways, the CBDC is the perfect Malthusian implement. Their inherent programmability allows for granular, top-down rationing of resources for whatever “greater good” suits the politically powerful. “I’m sorry, sir. Your card has been declined, as you have already exceeded your weekly beef quota. Might we suggest a more environmentally friendly alternative, such as a Bill Gates pea protein patty?” Such a system amounts to highly efficient regulatory capture; citizens are only permitted to spend money on those goods and services favored by The Powers That Be (or the corporate interests that fund them). Expect CBDCs to further distort the pricing mechanism, leading to a variety of market failures (such as the current energy crises). Skeptics of such claims need only be reminded of the U.S. government’s recent history of abusing its power to restrict politically undesirable financial activities. It should come as no surprise that the CBDC model is being pioneered by the Chinese Communist Party in the form of a “digital renminbi.” Make no mistake—wherever a CBDC is implemented, it will be weaponized by the State for political ends. In the West, such a system would be readily abused to create a Chinese-style social credit system—but one cloaked in the neo-liberal parlance of “financial inclusion,” “climate justice,” and “anti-money laundering.” CBDCs: Coming to A Country Near You? We remain cautiously optimistic that the U.S. will forgo implementing this dystopian technology. The U.S. remains among the freest nations in the world, both politically and culturally. A CBDC is wholly incompatible with American values, and we expect millions of Americans would resist the complete usurpation of their financial lives by the State. Additionally, a retail CBDC implemented by the Fed would transfer power from the commercial banks whose interests the Fed was conceived to protect to the federal bureaucracy[3]. And is there any doubt that the U.S. now lacks the state capacity to implement a CBDC, a feat which would require a high degree of technical and operational competence? Figure 1: Which Way, Western Man? BTC vs. CBDC Bitcoin for America So, how can the U.S. extend its financial leadership of the 20th century amid the decaying Petrodollar system? The U.S. is already the frontrunner in nearly all things Bitcoin—trading volumes, mining activity, number of hodlers, entrepreneurial and business activity, capital markets activity, etc. We submit that the path of least resistance would be for America to lean into its leadership in the Bitcoin industry and embrace the technology as a privacy-respecting, open-source, free-market, and fundamentally American alternative to the totalitarian CBDC. What does “adopting Bitcoin” look like for a country like the U.S.? It is likely some combination of: (i) authorizing bitcoin as legal tender, (ii) removing onerous capital gains tax treatment, (iii) subsidizing or sponsoring mining operations (which could support domestic energy infrastructure, in turn), (iv) purchasing bitcoin as a reserve asset by the Fed and/or Treasury, or (v) making the dollar convertible into bitcoin at a fixed exchange rate. We see early signs that such a move by the U.S. may not be so far-fetched. Notably, major American policymakers have already signaled support for bitcoin as an important monetary asset and nascent industry. The “crypto” sector has grown into an important lobby in D.C. and represents a highly engaged, motivated constituency—politicians are taking notice. In our estimation, Bitcoin’s economic incentives and congruence with American values make it the leading candidate for U.S. adoption as a successor to the present monetary order. As the current dollar-based system continues to deteriorate, we are excited by the potential for a U.S.-led coalition of freedom loving nations moving to a Bitcoin Standard. Money, Energy, and Entropy Energy is the fundamental means to reduce entropy in the human sphere, and money is our tool for the direction of energy towards this end. We use money to communicate information about economic production, resolving uncertainty about how scarce resources ought to be employed. And we seek out highly ordered sources of energy to resist the influence of entropy on our bodies and societies. In his lecture, “Energy, Entropy and the Theory of Wealth,” John Constable of the Renewable Energy Foundation observes that all goods and services—and indeed, civilizations—are alike in that they are thermodynamically improbable. All require energy as an input and necessarily create order (i.e., reduce entropy) in the human domain, shifting the local state further away from thermodynamic equilibrium. So then, wealth can be understood as a thermodynamically improbable state made possible through human entropy reduction. If material wealth is measured by the goods and services one has at one’s disposal, then wealth creation on a sound monetary standard is the reduction of entropy for others, and one’s wealth is a record of one’s ability to reduce entropy for fellow man. Unsound money (of the sort the Malthusians celebrate) increases uncertainty—and therefore, entropy—in economic systems. Active management of the money supply confuses the price signal, reducing the information contained therein and erecting an economic Tower of Babel. Fiat money therefore contributes to malinvestment—entrepreneurial miscalculations which produce the wrong goods and services and increase societal entropy. Nowhere is this more apparent than in our energy infrastructure: unsound money has caused malinvestment in unsound sources of generation. As noted above, a half-century of government subsidies and declining interest rates made possible by the Petrodollar system has steered capital towards unreliable renewables that invite greater entropy into the fragile human sphere, dragging us ever closer toward thermodynamic equilibrium (read: civilizational collapse). Cathedra Bitcoin Update Our macro views on energy and money inform everything we’re doing at Cathedra. Chief among them is the belief that sound money and cheap, abundant, highly ordered energy are the fundamental ingredients to human flourishing. Our company mission is to bring both to humanity, and so lead mankind into a new Renaissance—one led by Bitcoin and the energy revolution we believe it will galvanize. Accordingly, with Cathedra we’ve set out to build a category-defining company at the intersection of bitcoin mining and energy. One which is designed to thrive in the turbulent years of the present energy and monetary transition and in the hyperbitcoinized world we believe is to come. In December we announced a change of the company’s name from Fortress Technologies to Cathedra Bitcoin. Our new name reflects our aspirations for the company and for Bitcoin more broadly. The gothic cathedral is a symbol of bold, ambitious, long-term projects; indeed, any single contributor to the monument would likely die before its completion, but contributed nonetheless—because it was a project worth undertaking. So it is with Cathedra, and so it is with Bitcoin. The religious connotations of the name “Cathedra” are not lost on us. Rather, they’re an indication of the seriousness with which we regard this mission. Ours is a quest of civilizational importance. Our new name also hints at another distinguishing feature of our business: we focus our efforts on Bitcoin, and Bitcoin only. The difference between Bitcoin and other “crypto” networks is one of kind, not degree. Bitcoin is the only meaningfully decentralized network in the “crypto” space, which is why bitcoin the asset will continue to win adoption as the preferred form of digitally native money by the world’s eight billion inhabitants. Bitcoin seeks to destroy the institution of seigniorage once and for all. Your favorite shitcoin creator just wants to capture the seigniorage himself. We feel strongly that our long-term mission of delivering sound money and cheap, abundant energy to humanity can be best achieved through a vertically integrated model. In the long-term, Cathedra will develop and/or acquire a portfolio of energy generation assets that leverages the synergies between energy production and bitcoin mining to the advantage of both businesses. In a decade, Cathedra may be as much an energy company as a bitcoin miner. Vertical integration will allow us to control our supply chain and rate of expansion to a greater degree, in addition to giving us a cost advantage over our competitors. As a low-cost producer of bitcoin, we will also be positioned to deliver a suite of ancillary products and services to customers in the Bitcoin and energy sectors. And we’ve begun making strides toward this goal. Earlier this year, the Cathedra team expanded by three with the hires of Isaac Fithian (Chief Field Operations and Manufacturing Officer), Rete Browning (Chief Technology Officer), and Tom Masiero (Head of Business Development). Each of these gentlemen brings years of experience in developing and deploying mobile bitcoin mining infrastructure in off-grid environments. With this expanded team, we recently began production of proprietary modular datacenters to house the 5,100 bitcoin mining machines we have scheduled for delivery throughout 2022. We’re calling these datacenters “rovers,” a nod to their mobility, embedded automation, and capacity to operate under harsh environmental conditions in remote geographies. The modularity and modest footprint of our rovers will allow us to produce them at a rapid pace and deploy them wherever the cheapest power is found, in both on- and off-grid environments. We are proud to be manufacturing our fleet of rovers entirely in New Hampshire, working with the local business community to bring heavy industry back to the U.S. As bitcoin miners, we view ourselves as managers of a portfolio of hash rate. As in the traditional asset management business, diversification can be a powerful asset. Whereas most of the large, publicly traded bitcoin miners are pursuing a similar strategy to one another—developing and/or renting space at hyperscale, on-grid datacenters in which to operate their mining machines—we have optimized our approach to minimize regulatory, market, environmental, or other idiosyncratic risk within our portfolio of hash rate. If one has 90% of one’s hash rate portfolio concentrated in a single on-grid site, 90% of one’s revenue can be shut off by a grid failure or other catastrophic event—an occurrence which is sadly becoming more common, as highlighted in our Energy Update. To our knowledge, Cathedra is the only publicly traded bitcoin miner with both on- and off-grid operations today. We increasingly believe that the future of bitcoin mining is off-grid. On-grid deployments are already vulnerable to myriad unique risks today, and we believe their economic proposition will become less attractive over time. As power producers continue to integrate bitcoin mining at the site of generation themselves, large on-grid miners positioned “downstream” in the energy value chain will see their electricity rates rise. Today, “off-grid” describes any arrangement in which a bitcoin miner procures power directly from an energy producer. Popular implementations include stranded and flared natural gas and behind-the-meter hydro and nuclear. In the long-term, we believe the only way to remain competitive will be to vertically integrate down to the energy generation asset. Mining bitcoin is a capital-intensive business. To ensure we have access to the capital we’ll require to execute on our vision, we’ve embarked on several capital markets initiatives. In February, Cathedra commenced trading on the OTCQX Best Market under the symbol “CBTTF.” This milestone represents a significant upgrade from our prior listing on the OTC Pink Market and should enhance our stock’s accessibility and liquidity for U.S. investors. We intend to list on a U.S. stock exchange in 2022 to further increase the visibility, liquidity, and trading volume in our stock. We recently announced that Cathedra secured US$17m in debt financing from NYDIG, a loan secured by bitcoin mining equipment. When it comes to borrowing in fiat to finance assets that produce bitcoin—an asset which appreciates 150%+ per year on average—almost any cost of debt makes sense. We intend to continue using non-dilutive financing in a responsible manner where possible, with a sober appreciation for the risks debt service presents as an additional fixed cost. Accumulating a formidable war chest of bitcoin on our corporate balance sheet is a priority for us. If one believes, as we do, that the next global monetary order will be built with Bitcoin at its center, then those companies with the largest bitcoin treasuries will thrive. We will continue to hold as much of our mined bitcoin as possible and may even supplement our mining activities with opportunistic bitcoin purchases on occasion. At time of writing, Cathedra has 187 PH/s of hash rate active, and another 534 PH/s of hash rate contracted via purchases of mining machines we expect to be delivered from April through December of this year. Since we replaced the prior management team in September, we have grown Cathedra’s contracted hash rate by more than 300%. And we’re just getting started. Conclusion We stand today at a crossroads between two divergent movements defined by conflicting visions for the future: Malthusianism and Prometheanism. The Malthusians believe progress is zero (or even negative) sum; resources are finite and “degrowth” is the only viable path forward; we ought to judge human action first and foremost by whether it disturbs the natural world. This movement is characterized by totalitarian CBDCs and a desire to make energy more scarce and expensive, so that earth’s resources can be appropriately rationed. On the other hand, the Prometheans carry with them a more optimistic vision: progress is positive-sum; human creativity allows us to liberate and employ resources in novel ways, in turn preserving the natural world for our own benefit; and that human flourishing is the moral standard by which we should evaluate human action. These are social, cultural, and spiritual choices we are all called to confront. “The century will be fought between Malthusians (“resources are finite”; obsessed with overpopulation; scarcity mindset; zero-sum, finite games) and Prometheans (“human imagination is the most valuable natural resource”; abundance mindset; positive sum, infinite games).” – Alpha Barry (2020) The Malthusian camp wants top-down, centralized management of resources via CBDCs and energy rationing policies. They believe our energy resources are fixed; the only path forward is backward, farming for energy using huge swaths of land controlled by the privileged few. “Industrialization for me but not for thee.” “You’ll own nothing and be happy.” These are the slogans of the Malthusian movement. This is not the path that took us to space and lifted billions out of poverty. We, Cathedra, choose the other path. That of Prometheus, who stole fire from the gods to benefit humankind. We believe in a future of sound money that brings property rights to eight billion humans around the world. A world of beautiful, free cities powered by dense and highly ordered forms of energy generation. Small modular nuclear reactors with load-balancing bitcoin miners (and no seed oils). A future in which technology is employed to improve the human condition–not only for those who walk the earth today, but for generations to come. Bitcoin mining is a powerful ally to the Promethean cause. As the energy buyer of last resort, Bitcoin promotes sound money and sound energy infrastructure. No two forces are more fundamental to keeping disorder at bay and advancing human civilization. We at Cathedra are not alone; there are other Prometheans working tirelessly to further this vision of a freer, more prosperous tomorrow. Human flourishing is earned, not given. Together, we win. Drew Armstrong President & Chief Operating Officer AJ Scalia Chief Executive Officer Tyler Durden Mon, 03/14/2022 - 19:40.....»»

Category: dealsSource: nytMar 14th, 2022

4 Energy Stocks From the Promising Integrated Oil Industry

With economies reopening and people socializing & going to work, the outlook for the Zacks Oil & Gas Integrated International industry is brightening up. ExxonMobil (XOM), Chevron (CVX), BP (BP) and Eni (E) are well positioned to make the most of the highly favorable business environment. Oil price has returned to its glorious days and global fuel demand has recovered significantly from the coronavirus-hit low level. Thus, with economies reopening and people socializing and going to work, the outlook for the Zacks Oil and Gas Integrated International industry is brightening up.It is now a clear picture that the business prospects for upstream, midstream and downstream operations of international integrated energy players are improving at a significant pace. Among the players, Exxon Mobil Corporation XOM,Chevron Corporation CVX, BP plc BP and Eni SpA E are well positioned to make the most of the highly favorable business environment.About the IndustryThe Zacks Oil and Gas Integrated International industry covers companies primarily involved in upstream, midstream and downstream operations. These companies have upstream businesses in the United States (including prolific shale plays and the deepwater Gulf of Mexico), Asia, South America, Africa, Australia and Europe. Midstream operations of energy companies entail transporting oil, natural gas liquids and refined petroleum products. Under downstream businesses, the firms buy raw crude to produce refined petroleum products. The companies’ downstream activities involve chemical businesses that manufacture raw materials used for making plastics. The integrated players are now gradually focusing on renewables, leading to energy transition. In fact, the firms aim to lower emissions from operations and cut the carbon intensity of the products sold.4 Trends Shaping the Future of the Oil & Gas Integrated International IndustryOil Price Skyrockets: The price of West Texas Intermediate crude, trading at more than $100 per barrel, has improved drastically over the past year. The significant rise in oil price is owing to Russia’s violent and unprovoked invasion of Ukraine. The crude price rally is also being backed by a strong recovery of global energy demand with the reopening of economies, as coronavirus cases are quite low across the world and vaccines are being given at a massive scale. Overall, a favorable business scenario will continue to aid the upstream business of international integrated energy players.Sturdy Midstream Demand: With the possibility of upstream energy companies adding more rigs, oil and gas production is expected to increase further. This will likely boost the demand for pipeline and storage assets since more commodities will be needed to be transported and stored. Importantly, the midstream business has lower exposure to commodity price volatility since shippers generally book pipeline assets for the long term, thereby generating stable fee-based revenues.Recovered Downstream Business: Since the countries have been ramping up the rollout of coronavirus vaccines, this will encourage more people to go to offices and travel. With social-distancing measures becoming flexible, the demand for gasoline, diesel fuel and jet fuel will increase.Business Diversification: International integrated energy companies are gradually investing money in the renewable business. Thus, by diversifying operations, companies will be able to capitalize on the mounting demand for cleaner energy.Zacks Industry Rank Indicates Encouraging OutlookThe Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil - Energy sector. It carries a Zacks Industry Rank #18, which places it at the top 7% of more than 250 Zacks industries.The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates impressive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Before we present a few international integrated energy stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.Industry Outperforms Sector and S&P 500The Zacks Oil and Gas Integrated International industry has outperformed the broader Zacks Oil - Energy sector as well as the Zacks S&P 500 composite over the past year.The industry has gained 31.9% over this period compared with the S&P 500 and the broader sector’s growth of 8.7% and 25%, respectively.One-Year Price PerformanceIndustry's Current ValuationSince oil and gas companies are debt-laden, it makes sense to value them based on the Enterprise Value/Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) ratio. This is because the valuation metric takes not just equity into account but also the level of debt.On the basis of the trailing 12-month EV/EBITDA, the industry is currently trading at 4.78X, lower than the S&P 500’s 14.10X. It is also below the sector’s trailing-12-month EV/EBITDA of 4.90X.Over the past five years, the industry has traded as high as 8.84X, as low as 2.92X, with a median of 5.16X.Trailing 12-Month EV/EBITDA Ratio4 Integrated International Stocks Moving Ahead of the PackBP plc: The British energy giant has been generating handsome returns from refining and marketing operations, thanks to the reopening of the economies. On the dividend front, BP expects that if the oil price trades around $60 per barrel, it will be able to hike dividend per ordinary share by around 4% annually through 2025. Investors applaud BP since it also expects to reward shareholders with stock buybacks. BP, currently carrying a Zacks Rank #3 (Hold), believes that it will be able to buy back shares worth $4 billion annually through 2025, if oil price hovers around $60 per barrel.Price and Consensus: BPChevron Corporation: Chevron is also a leading integrated energy player, with operations across the world. Apart from a strong balance sheet, Chevron has a solid capital discipline that will help it tide over volatile commodity prices. The energy major’s conservative capital spending will probably help the company generate considerable cash flow, even if the business scenario is unstable. The primary growth driver for Chevron, at least in the near term, is its low-cost Permian projects. Chevron, presently sporting a Zacks Rank #1 (Strong Buy), has seen upward earnings estimate revisions for 2022 in the past seven days. You can see the complete list of today’s Zacks #1 Rank stocks here. Price and Consensus: CVXEni SpA: Eni’s energy business is spread worldwide, with a strong upstream presence. In the Ivory Coast, Eni made major oil and gas discoveries. The #3 Ranked company’s refining and marketing business is recovering, with the reopening of economies across the world. Eni has set an ambitious goal to fully decarbonize its products and processes. Over the past seven days, Eni has witnessed upward estimate revisions for 2022 earnings per share.Price and Consensus: EExxon Mobil Corporation: ExxonMobil is among the largest integrated energy companies in the world. The energy major can rely on its strong balance sheet to withstand any business turmoil. ExxonMobil is banking on low-cost project pipelines centered around Permian — the most prolific basin in the United States — and offshore Guyana resources. ExxonMobil, having a Zacks Rank of 1 at present, has seen upward estimate revisions for 2022 earnings in the past seven days.Price and Consensus: XOM Just Released: Zacks Top 10 Stocks for 2022 In addition to the investment ideas discussed above, would you like to know about our 10 top picks for the entirety of 2022? From inception in 2012 through 2021, the Zacks Top 10 Stocks portfolios gained an impressive +1,001.2% versus the S&P 500’s +348.7%. Now our Director of Research has combed through 4,000 companies covered by the Zacks Rank and has handpicked the best 10 tickers to buy and hold. Don’t miss your chance to get in…because the sooner you do, the more upside you stand to grab.See Stocks Now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Exxon Mobil Corporation (XOM): Free Stock Analysis Report BP p.l.c. (BP): Free Stock Analysis Report Chevron Corporation (CVX): Free Stock Analysis Report Eni SpA (E): Free Stock Analysis Report To read this article on Zacks.com click here......»»

Category: topSource: zacksMar 11th, 2022

Hundreds of CEOs Came Out Against Russia. Their Involvement Could Change War Forever

Traditionally, corporations that do business with countries that are considered international pariahs have drawn a bright line between matters of trade and matters of state. Many CEOs see it more or less as Mark Weil of global business service provider TMF group does: “If I start saying, I don’t much like that government—and there are… Traditionally, corporations that do business with countries that are considered international pariahs have drawn a bright line between matters of trade and matters of state. Many CEOs see it more or less as Mark Weil of global business service provider TMF group does: “If I start saying, I don’t much like that government—and there are plenty of governments whose actions one might choose not to like very much—we wouldn’t do business anywhere,” he says. [time-brightcove not-tgx=”true”] Besides, trade between nations is supposed to be good for peace and prosperity, so those who help it along consider themselves the good guys. “We’re part of the cog of capitalism that spreads investment employment wealth,” says Weil of his company’s work providing compliance and administrative services around the world, including in Russia and Ukraine. “And generally there is some correlation between inward investment and prosperity and various freedoms.” But these calculations have changed since Russia invaded Ukraine on Feb. 24. The NATO countries and their western cousins quickly slammed an unprecedented suite of financial and economic penalties on Russia. While cutting off an aggressor from outside resources is almost as old a battle tool as battering rams, these economic restrictions were of a breadth and depth that had never been leveled against a country with such a large GDP before. And they were enhanced by the number of corporations and private enterprises that unilaterally announced they would suspend or completely terminate business dealings there. Having jumped in with both feet, the business world has become enmeshed in an international geopolitical conflict with a whole new force, which could have a significant impact on how wars are fought—and peace is negotiated—in the future. Read More: How Big Business Got Woke and Dumped Trump In the space of a few days the statements rolled in from energy companies, credit card companies, media companies, management firms, tech giants, and on Thursday, even banks. It wasn’t just that they announced their departures in their usual neutral corporate-speak; many of them shook the dust off their feet before leaving. “We are compelled to act following Russia’s unprovoked invasion of Ukraine, and the unacceptable events that we have witnessed,” said Al Kelly, chairman and CEO of Visa Inc. Accenture, calling for an end to “unlawful and horrific attack on the people of Ukraine and their freedom,” said it was discontinuing its business in Russia. In an email to franchisees and employees about temporarily closing all its restaurants in Russia, McDonalds CEO Chris Kempczinski said the company “cannot ignore the needless human suffering unfolding in Ukraine.” On Mar. 4, TMF Group joined the boycott, sort of. Weil announced that TMF group be wrapping up any work with Russian clients, but would continue to serve clients who were doing business in Russia. “I found it a very difficult decision. Not because I was scared of the immediate consequences or thought it was a difficult moral judgment but it’s that sense of crossing a line,” he says. If he changes his company’s blanket “no politics” stance in this situation, then other situations are negotiable too. But the arguments on the counter side were too strong. He has an office in Ukraine, and was shocked at what was happening there. He wanted to communicate to his employees that he meant it when he said integrity was one of the company’s core values, and he wanted to get ahead of any trouble. “It was partly me thinking, why are we wasting our time waiting for sanctions?” How corporations became corporals What has surprised sanctions experts is how many of these corporations are, like TMF, imposing these restrictions on themselves, and how quickly they moved. In many cases they decided to exit Russia before being ordered to by any government. “I’m surprised at the scope and scale of what the private sector has done,” says Juan Zarate, a senior adviser at the Center for Strategic and International Studies, who was a deputy national security adviser in the George W. Bush administration. “Even before sanctions really took full hold or before the full suite of sanctions were unrolled, you had the private sector making decisions to divest, to withdraw investments, to minimize exposure to Russia.” While businesses have increasingly become accustomed to what is known as de-risking or over-complying with international sanctions, the conflict in Ukraine has generated a different level of corporate behavior. “I’ve spent pretty much my entire career working around sanctions,” says Daniel Tannebaum, the Global Head of Sanctions at Oliver Wyman, “and we’ve not seen something quite like this in terms of the self-sanctioning.” Perhaps the most remarkable exits were those by the energy companies, who had sunk a lot of money into partnerships with Russia and were among the first to announce their exits. Many companies’ bottom lines would not be much affected by closing their Moscow offices. But Shell’s liquified natural gas joint venture with Gazprom, Sakhalin 2, was considered a jewel in its crown. “IKEA pulling out is not surprising to me. IKEA’s had problems with corruption and other issues in its dealings in Russia for a long time. It was the straw that broke the camel’s back,” says Zarate. “But BP and Shell and Exxon? Russia is a major partner, a major player in the energy market, that’s a big deal.” Read More: With the State of the World in the Hands of Big Business, Some Executives Think It Can Pay to Do Good The business sector’s swift buy-in to the economic isolation of Russia has made the sanctions more effective, says Bryan Early, an associate dean for research at Rockefeller College of Public Affairs and Policy at SUNY Albany, because “economic sanctions tend to work better when they are imposed in packages that are large and highly disruptive and impose an immediate strong impact, as opposed to economic sanctions that are imposed through gradual escalation.” That way, the offending countries do not have time to figure out a workaround and find new trading partners or financiers before they start to feel the impact. The more businesses pull out, the less economic sense it makes for others to remain. The cost of doing business in Russia rises. It’s harder to find the goods and services needed to keep the business running. The number of people who can afford a given company’s products or require its services grows ever smaller. “Companies likely would not be able to earn any money in the Russian market going forward and even if they did earn that money they’d have no ability to actually bring that money back into the U.S. financial system,” says Leo Feler, senior economist at UCLA Anderson school of management. The net effect of so many companies exiting or pausing operations in Russia means the government sanctions might almost become a moot point. “It’s a chicken and egg story. If enough businesses abandon the Russian market on their own, the Russian market is also going to shrink,” says Feler. “You don’t need sanctions to do it if everyone’s self-sanctions.” The future of global warfare The longer term consequences of private enterprises essentially opting to add their power to the engines of war are unknown. “I think we’re an uncharted waters now, as to the effects of this,” says Zarate. Compliance experts are not sure how best to advise clients. “We’ve just not seen a situation where sanctions were literally brought to a gunfight in a very long time,” says Tannebaum. “So that is a bit of the challenge.” As an advisor to major financial services firms, which are mostly still doing business in Russia, Tannebaum says he’s in a lot of discussions about what move to make next and what the result would be without any clear answers. “This playbook is being written as we’re speaking,” he says. One sure outcome is that Russia will be more cut off to influence from the West than ever. “We’ve accelerated the isolation of a major global economy in a way that we haven’t in modern history,” says Zarate. This isolation may make the war and subsequent occupation in Ukraine logistically, financially, and politically punishing for Putin to complete. But it also may force Russian enterprises to seek trading partners elsewhere, notably China. The two main Russian banks, Sberbank and Tinkoff Bank are already said to be considering using cards powered by China’s UnionPay system after Mastercard and Visa removed access to their services. Read More: Henry Kissinger’s Last Crusade: Stopping Dangerous AI A warmer Chinese-Russian alliance could represent a significant shift in the global balance of power and trade. But analysts are dubious. “Thus far, China has neither condemned nor endorsed the actions in Ukraine. If you look at some of the underlying Chinese financial institutions, I don’t see the appetite of really welcoming with open arms kind of a mass volume of activity,” says Tannebaum. “This was more than the Chinese government had anticipated. I think that’s become extremely clear. So I’m not sure how much support China will provide.” The West’s other trading partners may be scrutinizing the dramatic, co-ordinated moves that America and European governments and private enterprises are prepared to make in concert and the devastation such acts can cause and consider their own vulnerability. Putin knew sanctions were coming, and tried to create some sanction-proof networks and firewalls, but they proved insufficient. “One of the lessons that you can glean from this is that it’s very, very difficult to disconnect yourself from the global economy or protect yourself in the case of an overwhelming desire to impose economic punishment for bad behavior,” says Early. “If there are countries that are considering doing something that would lead to global stigmatization and a global punishment, they might have learned some lessons from this that it’s a lot harder to protect yourself from from the exposure.” A shift in diplomatic leverage As the business world begins to flex its diplomatic muscles, actual diplomats and statesmen may find that they have less impact and control than they’re used to. Some of the levers of power have been transferred to a different operator, with different priorities. “The private sector has a voice in this now and is a prime agent in the isolation of the Russian economy. It will have a say in how Russia is reintegrated if ever,” says Zarate. “But it also makes diplomacy a bit more unwieldy.” Several experts pointed to the Iran nuclear deal, for which then Secretary of State John Kerry went on a global tour trying to persuade banks that the sanctions on Iran had been lifted and they should start doing business there. They all declined, which made it almost impossible for other businesses to set up shop, leading Iran to accuse the West of not holding up its end of the deal. Even if some negotiated settlement could be reached in Ukraine, in return for the lifting of sanctions, many companies may not choose to reinvest in Russia. “Diplomats don’t control the decision-making of McDonalds’ board or of BP’s CEO,” says Zarate, who wrote about the growing role of private enterprise in his book, Treasury’s War. Typically, removal of sanctions is accompanied by promises of foreign investment as inducements to persuade warring nations to lay down their arms. “The private sector has its own risk calculus and its own reputational calculus that may not coincide with the diplomatic off-ramps that are often discussed, in terms of turning off the pressure from sanctions or converting the pressure of sanctions into carrots.” It’s not just a matter of whether corporations will re-invest in Russia. The unusual and undiplomatic manner in which the corporations announced their exits—with terms of disgust and dismay rather than the usual oblique references to operational difficulties and the uncertainty of the situation—may make Russian authorities less than eager to welcome them back. If the negotiated settlement is imperfect, which all deals usually are, investors and employees may protest that the conditions that led to the exit have not improved significantly. It’s possible a desire among businesses to emphasize their ESG bona fides has scorched their bridges back to Moscow, and Moscow’s bridge out of the conflict. For CEOs and boards, the downstream question is whether corporate leaders have opened a door that will make future moral considerations about where to do business more complicated. If companies are prepared to make a stand on behalf of the Ukrainians, why are they not prepared to make a stand on behalf of the Uighurs, the Rohingya, or other oppressed peoples? Weil expects some blowback from his employees. “It feels like we made a tough, but correct choice,” he says. “But I know I’m going to get emails saying, ‘I can’t believe you haven’t done anything to look after [this oppressed group] and I’m going to stress to them, ‘Look, don’t expect me to be your ethical instrument. We can’t have what’s now nearly 10,000 employees having their individual preferences satisfied by the policies we adopt. You have to accept that this was exceptional.'”.....»»

Category: topSource: timeMar 11th, 2022

How Ukraine Fits Into The Global Jigsaw

How Ukraine Fits Into The Global Jigsaw Authored by Alasdair Macleod via GoldMoney.com, Ukraine is part of a far bigger geopolitical picture. Russia and China want US hegemonic influence in the Eurasian continent marginalised. Following defeats for US foreign policy in Syria and Afghanistan and following Brexit, Putin is driving a wedge between America and the non-Anglo-Saxon EU. Due to global monetary expansion, rising energy prices are benefiting Russia, which can afford to squeeze Germany and other EU states dependent on Russian natural gas. The squeeze will only stop when America backs off. Being keenly aware that its dominant role in NATO is under threat, America has been trying to escalate the Ukraine crisis to suck Russia into an untenable occupation. Putin won’t fall for it. The danger for us all is not a boots-on-the-ground war — that’s likely to only involve the pre-emptive attacks on military installations Putin initiated last night — but a financial war for which Russia is fully prepared. Both sides probably do not know how fragile the Eurozone banking system is, with both the ECB and its national central bank shareholders already having liabilities greater than their assets. In other words, rising interest rates have broken the euro system and an economic and financial catastrophe on its eastern flank will probably trigger its collapse. The bigger picture is Mackinder’s World Island The developing tension over Ukraine is part of a bigger picture — a struggle between America and the two Eurasian hegemons, Russia and China. The prize is ultimate control over Mackinder’s World Island. Halford Mackinder is acknowledged as the founder of geopolitics: the study of factors such as geography, geology, economics, demography, politics, and foreign policy and their interaction. His original paper was entitled “The Geographical Pivot of History”, presented at the Royal Geographical Society in 1905 in which he first formulated his Heartland Theory, which extended geopolitical analysis to encompass the entire globe. In this and a subsequent paper (Democratic Ideals and Reality: A study in the Politics of Reconstruction, 1919) he built on his Heartland Theory, and from which his famous quote has been passed down to us: “Who rules East Europe commands the World Island [Eurasia]; Who rules the World Island rules the World”. Stalin was said to have been interested in this theory, and while it is not generally admitted, the leaders and administrations of Russia, China and America are almost certainly aware of Mackinder’s theory and its implications. We cannot know if the Russian and Chinese leaders and administrations are avid Mackinder fans, but their partnership in the Shanghai Cooperation Organisation is consistent with his World Island Theory. Since commencing as a post-Soviet, post-Mao security agreement between Russia and China founded in 2001 to suppress Islamic fundamentalism, the SCO has evolved into a political and economic intergovernmental organisation, which with its members, observer states, and dialog partners accounts for over 3.5 billion people, half the world’s population. The symbiotic relationship between resource rich Russia and the industrial Chinese ties the whole SCO together. China’s development of the Asian land mass holds the promise of dramatic improvements in everyone’s living conditions. And consistent with the World Island Theory, Chinese money now dominates the whole of sub-Saharan Africa, the Middle East and South-East Asian nations, particularly those controlled and influenced by the Chinese diaspora. China’s influence also spreads to South America through organisations such as BRICS (B is for Brazil) and Chile for copper and other metals. While the Sino-Russian partnership dominates the World Island economically, America has only gradually been expelled from Asian affairs. Its post 9/11 campaigns in the Middle East destabilised that region, creating fuel for America’s enemies and appalling refugee calamities for her European allies to this day. Her withdrawal from resource-rich Afghanistan was merely the last domino to fall. She retains political influence in Western Europe and South-East Asia only, though her military and intelligence presence is still widespread. Today, America’s actions are those of a hegemon whose time is passing. By the UK opting for Brexit, American influence over the European Union through its security and political partnership with the UK has been diminished. Its grip on European affairs through NATO is being undermined by both Turkey’s determination to shift its interests into the Turkic regions of Central Asia, and the EU’s determination to establish its own defence arrangements. The irrelevance of NATO for the future defence of Western Europe is now becoming apparent to the Russians, and it must be hard for them to resist speeding its decline. The cold war in the Pacific is all about containing China. While Taiwan’s future and China’s attempts to establish naval bases in the South China Seas hog the headlines, China’s trade influence in the region continues to increase. After President Trump withdrew America from the planned Trans-Pacific Partnership, the TTP was replaced by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership which came into force in December 2018, whose eleven signatories have combined economies representing 13.4% of world GDP. This makes it one of the largest free trade areas by GDP and includes Australia and New Zealand. Even the UK has formally applied to join (it qualifies as a Pacific nation through its dependencies in the region), so that three of the US security “five eyes” members will be part of the CPTPP. China also applied to join the CPTPP last September. For now, China’s membership of the CPTPP is in doubt. US allies in the partnership, including Japan, are insisting on various obstructive provisions. But in that well-worn hackneyed metaphor, China is the elephant in the room, and it is hard to see the CPTPP holding out against her membership for ever. For now, China can chip away at it by separate free trade agreements with selected CPTPP members, with whom it is already in bilateral trade. Whatever America’s desire to retain political and military control over the Pacific may be, the economics of trade will eventually diminish that influence. And while sabres are being rattled over Taiwan and Pacific atolls, Russia is putting pressure on Europe to put an end to American dominated defence arrangements at the other end of the World Island. Observers of the greatest of the great games would be right to look at current developments over Ukraine in the context of Mackinder’s heartland theory. Understand that, and you have a grasp of Putin’s reasoning. Driving American influence out of the Eurasian continent has been his objective ever since America reneged on her agreement not to advance NATO any closer to Russia following the ending of the old USSR. Ukraine is caught in the middle Both Russia and the Anglo-Saxons are ramping up the rhetoric over Ukraine. Until recently, Ukraine itself had seen little evidence of any truth in Western propaganda, asking for it to be toned down because all this war talk is increasing its likelihood and ruining the economy. Meanwhile the EU mainstream just wants peace and natural gas. Concern is being expressed in some quarters that all this talk of war might become self-fulfilling — like the first World War. In this case, it is generally agreed by military strategists that Putin would be mad to take over Ukraine. He certainly has the fire power, and Ukraine is cast like a Belgium on the Steppes, with two ethnic groups and whose main purpose seems to be to allow foreign occupation and passage for foreign troops. But holding on to Ukraine against the peoples’ will, when there is an immensely long border over which dissidents can be provided with arms and anti-Russian propaganda is another matter. Russian occupation is likely to be limited to defending Donbas and Luhansk now that Russia has formally recognised their right to self-determination. Without firing a shot, the Russian military has moved the border a hundred miles into formally Ukrainian territory. But that is where an occupying invasion is likely to stop and is not to be confused with the pre-emptive strikes against military bases and airfields today. These moves are there to apply increasing pressure for a diplomatic settlement. So, what is it that Putin wants? Basically, he wants America to get out of Eastern Europe. And following Brexit, as America’s poodle he sees no reason why Britain should be there either. And having his thumb over various gas pipes into Europe, he is squeezing Germany and the other EU NATO members into his way of thinking. Ukraine comes in the wake of America’s disastrous evacuation of Afghanistan, which followed the failure of her attempt to remove Syria’s Assad. It is rumoured that US intelligence services organised the failed coup in Kazakhstan, which was quickly subdued by Russian troops. So, from Putin’s point of view, American policy with respect to the Eurasian land mass has failed, he has America on the run, and he will want to capitalise on its retreat. Meanwhile America, which has ruled western Europe through NATO following WW2, finds it hard to come to terms with its setbacks and needs to get back on the front foot. Presumably, by ramping up fears of a Russian invasion, the Biden administration hoped that either Putin would back down or be tricked into attacking Ukraine. If he had backed down, that would be a diplomatic victory and allow America to rebuild its presence in Kiev. If Putin invades and occupies Ukraine, America can help make life extremely difficult for an occupying force. Either way, it would mark the end of American policy failures on the Eurasian continent. Britain, as always, merely toes the American line. But Putin is no fool. He is destroying Ukraine’s economy. He has his thumb on Nord Stream 1 and 2. And Germany has too many commercial and financial interests in both Russia and Eastern Europe for this not to hurt. Germany also hosts the main railhead for China’s silk road. If Germany kowtows to America, will America then put pressure on her to cut ties with China? This is the geopolitical reality Germany and all mainland Europeans must now face. The new German Chancellor must decide: does he back America, sacrifice Germany’s economic potential and see energy costs soar, or does he recognise the economic realities of the Russia—China partnership and the enormous opportunities it provides for the long run? Russia, America, and Germany are the principal actors whose decisions will decide the outcome of the Ukrainian situation. An escalation into a non-nuclear conflict and Russian occupation of Ukraine will only suit the Americans, confirming that their presence is the guarantee of national security. Ukraine has become a virtual battleground. Ukraine’s geographical position, between the liberated central European states and Russia ensured that it would become central to the continuing rivalry between Russia and America. Since the fall of the Soviet Union, Ukraine has been determined to forge its path independent of Russia as a sovereign nation. But its starting point was difficult, with its eastern provinces predominantly Russian, while the western regions were more central European. The Orange and Maidan Revolutions in 2004 and 2014 respectively were proxy struggles between America and Russia. While America allegedly chucked billions into its Ukrainian interests, in 2014 Russia responded by taking over Crimea and fomented rebellions in Luhansk and Donetsk. By capturing Crimea and fostering two breakaway provinces, Putin had won this territorial battle in an ongoing war. Other than these eastern provinces, most Ukrainians have desperately tried to avoid their country becoming a Russian colony. They wanted to apply for EU membership, which was rejected by Russian-backed President Yanukovych in 2013, leading to the Maidan Revolution and Yanukovych fleeing the country to Russia. Ukraine has also sought the protection of NATO, which has provoked Putin to put a stop to American influences marching eastwards. While Ukraine never left the headlines, the US moved its focus to Syria later in 2014.The eventual failure to oust Assad, who drew on Russian help, was followed by Afghanistan. Ukraine is now back in the headlines, this time at the behest of Russia. Putin is now proactively leading this conflict instead of quietly letting America make all the mistakes and rolling with the punches, representing a major change in Russian strategy. It implies that Putin perceives America to be off balance, and he sees it as the time for a winning move. Putin has prepared his defences carefully. US politicians called for Russia to be cut out of SWIFT after the Crimean invasion. Since then, Russia has developed Mir, a payment system for electronic fund transfers, and a SWIFT equivalent known as SPFS — System for transfer of Financial Messages, with agreements linking SPFS to other payment systems in China, India, Iran, and member nations of the Eurasian Economic Union. The Central Bank of Russia has strengthened the commercial banking network. And it has also reduced its dollar exposure as much as possible by investing in gold and euros instead, which means less reserves are held as deposits in the US banking system and invested in US bonds. From these actions, Putin has signalled that he is aware that the danger to Russia is more likely to be a financial war, rather than a physical one. As President Biden said, to have American troops on the ground fighting the Russians is a world war and will not happen. In that sense the Ukraine, over which Russia retains an energy stranglehold, is a virtual battleground for a proxy war. Financial considerations In examining the strengths and weakness of the principal parties, we must first confirm who they are: Russia, America, and the EU. And in the EU, principally it is Germany, but all member states will be affected. As argued above, Russia’s real objective is to get America out of Europe, and Putin’s strategy is to drive a wedge between America and the EU, and in particular its industrial powerhouse, Germany. Plans to split America from Europe go back to Putin’s earlier days, with the construction of Nord Stream to bypass Ukraine with which Russia’s Gazprom was in dispute. Delivering 55bn billion cubic meters of natural gas annually, the first Nord Stream was completed in 2012. A second pipeline. Nord Stream 2, which is ready to go online, doubles this capacity. American pressure on Germany to delay the operation of Nord Stream 2 follows the dollar’s debasement from March 2020 in particular, when the Fed reduced interest rates to zero and instituted QE of $120bn every month. The effect has been to undermine the dollar’s purchasing power for nearly all commodities, including energy. Consequently, a combination of dollar debasement, winter demand and the absence of extra supply from Russia has created an energy crisis not just for Germany, but all EU members. Germany is particularly hard hit, with its producer prices index up 25% year-on-year at the end of January. Germany cannot go along with an escalation of financial sanctions against Russia at a time when its industry is struggling with other rising production costs. Not only is her trade with Russia substantial, but she has banking and financial interests in Central Europe, Eastern Europe, and Russia, which could be destabilised by American-led attempts to restrict payments. Despite Chancellor Scholz’s initial support for EU sanctions Germany is likely to be indecisive, torn between competing demands from a collapsing economy and pressure from NATO. By withholding regulatory permission for Nord Stream 2 he has demonstrated that instead of regarding his electors’ interests as paramount, he has given in to NATO pressure. This weakness on Olaf Scholz’s part is consistent with the indecisive socialism of his Social Democratic Party and Germany’s continuing guilt trip following two world wars. Recognising the importance of Germany and its likely indecision, President Macron of France seized the political opportunity to mediate between Russia and the EU, which suits the Russian cause. Macron simply provided another channel for Putin’s message about NATO: get the US out of Europe and the EU should be responsible for its own defence. And given Macron’s ambitions for France in Europe he is likely to see it as an opportunity to enable France to take the lead in the EU’s future defence arrangements after the Ukraine situation has blown over. That will be down the road, but for now the EU is standing firm behind US and UK sanction proposals. Sanctions rarely work. They merely encourage the sanctioned to dig deeper into their own intellectual and entrepreneurial resources and work hard to find ways round them. Russia will merely sell its gas elsewhere: at these high prices harm is minimal, and they can afford to restrict supplies through Ukraine, the Yamal-Europe and Turk-stream pipeline supplies. It might be sensible for Russia to allow flows through Nord Stream 1 to continue for now, holding its restriction as a backup threat. European gas prices will likely rise even further, providing a price windfall for Russia. The tweet below, from Russian President Medvedev implies European gas prices will double from here. The apparent lack of understanding of economic and financial consequences for the EU by the EU leadership is a wild card danger. The economic and financial exposure of Germany to its eastern neighbours has already been mentioned, but other EU members are similarly exposed. Furthermore, the reckless inflationary policies of the ECB have undermined the financial health of the entire euro system to the point where even on the current rise in bond yields, the ECB and all the national central banks (with only three minor exceptions) have liabilities greater than their assets. The whole eurozone is a mountain of financial disasters balanced on an apex over which it is set to topple. We cannot say for sure that Ukraine will be the last straw for the euro system, but we can point to political ignorance of this instability. Any dissenting central banker (and there could be some, particularly at the Bundesbank) has no influence at the political level. We must assume that none of the major political players in this tragedy are aware of the financial and economic crisis in Europe waiting to be triggered. And if the Russians have made a mistake, it will be in their accumulation of euro reserves, which will turn out to be worthless when the euro system collapses. Financial sanctions against individual oligarchs have probably already been anticipated and avoiding action been taken by them: oligarchs are not dumb. Sanctions against Russian banks will have also been anticipated and will probably inflict less damage on them than on their counterparties in the EU banking system, particularly if SWIFT comes under pressure to suspend Russian banking access. Not only Ukraine, but the whole of the EU, for which Russia supplies over 40% of its natural gas, is being squeezed. We can be reasonably sure that the Russian government has war-gamed this situation in advance. Inflation, gold, and unintended consequences The situation today is very different from that of 2014 at the time of the Maidan revolution, with the world massively increasing government debt and currency in circulation since then. At the time of the Crimean take-over, commodity prices were declining from their peak in 2011, and following Crimea, they fell sharply with negative consequences for the Russian economy. The expansion of world currencies is now driving commodity and energy prices higher due to their purchasing power is declining. Figure 2 shows how a basket of commodities has increased in price since the Fed reduced its funds rate to the zero bound and instituted QE at $120bn per month. In those 22 months commodity prices have risen by 127% by this measure. When all commodity prices rise at the same time it is due to currency debasement, which is what has happened here. Within the broader commodity context, energy price increases have been particularly acute, with Russia being a major beneficiary, leading to a substantial surplus on its balance of trade. It has been a long-term ambition of the Sino-Russian partnership not just to expel America from the World Island but to reduce dependency on dollars as well. While trade between Russia and China is increasingly settled in their own currencies, so long as the dollar has credibility for settling international transactions it will still dominate trade for the other nations in the Eurasian landmass. The fiat alternative for Russia has been the euro, which partly explains why Russia has accumulated them in her foreign currency reserves. But since 2014, the stability of the euro system has deteriorated to the point where the currency is no longer a credible alternative to the US dollar. We cannot be sure if this is understood in the Kremlin. But there has always been a Plan B, which is the accumulation of physical gold. There is evidence that official reserves in China and Russia understate the true position. Following the enactment of regulations in 1983 whereby the Peoples Bank was appointed sole responsibility for the acquisition of China’s gold and silver reserves, I have estimated that the State accumulated as much as 20,000 tonnes of gold before permitting the public to own gold, for which purpose the Shanghai Gold Exchange was established in 2002. Since then, the SGE has delivered a further 20,000 tonnes from its vaults into public hands, though some of this will have been returned as scrap. The Chinese state has retained the exclusive right to mine and refine gold, even importing doré from abroad. China is now the largest gold mine producer in the world by far, continuing to add over tonnes annually to total above ground stocks (last year’s dip to 350 tonnes was due to covid), which are all ringfenced in China. These policies, as well as anecdotal evidence suggests that my earlier estimate of state-owned gold of 20,000 tonnes was realistic. Russia has been relatively late in adding to her gold reserves, having officially accumulated 2,298 tonnes. But being only second to China as a gold mine producer at 330 tonnes, it is likely that following earlier financial sanctions that Russia has accumulated undeclared gold reserves as well. Additionally, we can see that all the SCO members and their associates have increased their declared gold reserves by 75% since 2014. Plan B therefore appears to be to back fiat roubles and renminbi with gold in the event of a Western fiat currency meltdown. The West has no such plan. America’s fifty-one-year denial of and attempted demotion of gold as the ultimate money appears to have left it short: otherwise it could have returned Germany’s gold on demand instead of trying to spin it out over a number of years. Furthermore, Western central banks routinely lease and swap their gold, leading to double counting of reserves and lack of clarity over ownership. We can be sure that neither Russia nor China indulge in these practices. The consequence of these disparities is to weaponize gold’s monetary status, turning it into a nuclear weapon in a financial war. If, say, during NATO-led attempts to destabilise the rouble Russia was to declare another 6,000 tonnes to match America’s unaudited figure and for China to revise its reserves to stabilise the renminbi, it would probably result in a run against the dollar. It would be a sure-fire way for the Asian hegemons to destroy US economic and military power. Therefore, ultimately, the US and its five-eyes allies cannot win a financial war. When China and Russia planned their financial defences, this golden umbrella made sense, and the security services in America would have been aware of it, if not the full implications. But things have changed, particularly the debasement of all major currencies, including the renminbi. China has an old-fashioned cyclical property crisis on her hands and can only think to print her way out of trouble. Together with the Fed, the ECB, and the Bank of Japan, the Peoples Bank has expanded its balance sheet recklessly, and all together they have increased from $5 trillion equivalent in 2007 to over $31 trillion today, with their rate of expansion being particularly high from March 2020. The consequences for their currencies’ purchasing power are becoming obvious now, turbocharging Russia’s strategy with respect to European energy supply. What few politicians appear to be aware of, and we should include Putin in this, is the fragile state of the major central banks. Having loaded their balance sheets up with fixed-interest government debt, falling market values for these bonds are eliminating central banks’ margin of assets over liabilities. While the Fed, the Bank of Japan and the Bank of England can turn to their governments for recapitalisation, embarrassing though that may be, the ECB has no such recourse. The ECB’s shareholders are the national central banks in the euro system. And they in turn, except for Ireland’s, Malta’s, and Slovenia’s central banks, all have liabilities easily exceeding their assets. The euro system is already insolvent, and Russian action on energy supplies could tip the whole currency system over the edge. Given the Russian Central Bank’s reserve holding of euros, we can call that an unintended consequence. Tyler Durden Fri, 02/25/2022 - 02:00.....»»

Category: personnelSource: nytFeb 25th, 2022

Stocks, Cryptos Tumble To Close Out Catastrophic First-Half

Stocks, Cryptos Tumble To Close Out Catastrophic First-Half It was supposed to be a 7% ramp into month-end on billions in pension fund residual buying. Instead, it ended up being more or less the opposite, with crypto-led liquidations dragging futures and global markets lower, and extending Wednesday losses after central bankers issued warnings on inflation and fueled concern that aggressive policy will end with a hard-landing recession, which increasingly more now see as being 2022 business, an outcome that now appears assured especially after yesterday's disastrous guidance cut from RH, the second in three weeks! Recession fears and inflation woes may be prolonged by today's PCE deflator report. The consumer price gauge favored by the Fed may have picked up to 6.4% last month from 6.3%. Personal income growth probably edged up but Bloomberg Economics highlights an anticipated decline in real personal spending as a major worry. Meanwhile, China’s economy showed further signs of improvement in June with a strong pickup in services and construction, even if the latest Chinese PMI print came slightly below expectations. Also overnight, Russia said it withdrew troops from Ukraine’s Snake Island in the Black Sea after Ukraine said its forces drove Russian troops from the area. In any case, with zero demand from pensions so far (even though the continued selling in stocks and buying in bonds will only make the imabalnce bigger), overnight Nasdaq 100 contracts dropped 1.8% while S&P 500 futures declined 1.3%, and cryptos crumbled, with bitcoin dragged back below $19000 and Ether on the verge of sliding below $1000. The tech-heavy gauge managed to end Wednesday’s trading slightly higher, while the S&P 500 fell for a third straight day. In Europe, the Stoxx Europe 600 Index slid 1.9%. Treasuries gained, the dollar was steady and gold declined and crude oil futures edged lower again. Which brings us to the last trading day of a quarter for the history books: the S&P 500 is set for its biggest 1H decline since 1970 and the Nasdaq 100 since 2002, the height of the dot.com bust. The Stoxx 600 is set for the worst 1H since 2008, the height of the GFC.  Traders have ramped up bets that the global economy will buckle under central bank tightening campaigns -- and that policy makers will eventually backpedal. The bond market shifted to price in a half-point rate cut in the Federal Reserve’s benchmark rate at some point in 2023. On Wednesday, during the annual ECB annual forum, Fed Chair Jerome Powell and his counterparts in Europe and the UK warned inflation is going to be longer lasting. A view that central banks need to act fast on rates because they misjudged inflation has roiled markets this year, with global stocks about to close out their worst quarter since the three months ended March 2020. “Markets are worried about growth as central bankers continue to emphasize that bringing down inflation is their overriding objective, and that it may take time to bring inflation down,” said Esty Dwek, chief investment officer at Flowbank SA. “We still haven’t seen total capitulation in markets, so further downside is possible.” Meanwhile, the cost of insuring European junk bonds against default crossed 600 basis points for the first time in two years on Thursday. And speaking of Europe, stocks are also down over 2% in early trading, with all sectors in the red. DAX and CAC underperform at the margin with autos, consumer discretionary and banking sectors the weakest within the Stoxx 600.  Here are some of the biggest European movers today: Uniper shares slump as much as 23% after the German utility withdrew its outlook and said it was discussing a possible bailout from the German government following Russia’s move to curb natural gas deliveries. SAP sinks as much as 6.5% after Exane BNP Paribas downgraded stock to neutral from outperform, saying it sees risks on demand side in the near term as software spending decisions come under increased scrutiny. Sanofi shares decline as much as 4.5% after the French drugmaker said the FDA placed late-stage clinical trials of tolebrutinib on partial hold in US because of concerns about liver injuries. European semiconductor stocks fell, following peers in the US and Asia lower amid growing concerns that the industry might face a downturn soon as chip stockpiles build. ASML drops as much as 3.4%, Infineon -4.1%, STMicro -3.1% Norsk Hydro shares slide as much as 6% amid metals decline and as DNB cuts the stock to sell from hold, citing concerns about rising aluminum supply. Stainless steel stocks in Europe fall, with Morgan Stanley saying the settlement on the latest ferrochrome benchmark missed its expectations. Outokumpu shares down as much as 6.6%, Aperam -7.2%, Acerinox -4% Saab shares jump as much as 8.4%, after getting an order worth SEK7.3b from the Swedish Defence Materiel Administration for GlobalEye Airborne Early Warning and Control aircraft. Orsted shares rise as much as 2.5%, before paring some of the gains. HSBC raises to buy from hold, saying any further downside for the wind farm operator looks limited. Bunzl shares rise as much as 2.6% after the specialist distribution company said it now expects very good revenue growth in 2022. Grifols shares rise as much as 7.8% after slumping on Wednesday, as the company says that the board isn’t analyzing any capital increase “for the time being.” Earlier in the session, Asian stocks fell for a second day as tech-heavy indexes in Taiwan and South Korea continued to get pummeled amid concerns over the potential for aggressive monetary tightening in the US to rein in inflation.  The MSCI Asia Pacific Index declined as much as 1.2%, dragged down by technology shares including TSMC, Alibaba and Tencent. Taiwan slid more than 2%, while gauges in Japan, South Korea, Australia dropped more than 1%.  Stocks in mainland China rose more than 1% after the economy showed further signs of improvement in June with a strong pickup in services and construction as Covid outbreaks and restrictions were gradually eased. Traders are also watching Chinese President Xi Jinping’s trip to Hong Kong, his first time outside of the mainland since 2020.  Asian stocks are struggling to recover from a May low as the threat of higher US rates outweighs China’s emergence from strict Covid lockdowns and its pledge of stimulus measures. While mainland Chinese stocks led gains globally this month, the rest of the markets in the region -- especially those heavy with technology stocks and exporters -- saw hefty outflows of foreign funds.  “Investors continue to assess recession and also inflation risks,” Marcella Chow, JPMorgan Asset Management’s global market strategist, said in an interview with Bloomberg TV. “This tightening path has actually increased the chance of a slower economic growth going forward and probably has brought forward the recession risks.” Asian stocks are set to post a more than 12% loss this quarter, the worst since the one ended March 2020 during the pandemic-induced global market rout. Japanese stocks declined after the release of China’s data on manufacturing and non-manufacturing PMIs that showed slower than expected improvements.  The Topix Index fell 1.2% to 1,870.82 as of market close Tokyo time, while the Nikkei declined 1.5% to 26,393.04. Sony Group contributed the most to the Topix Index decline, falling 3.4%. Out of 2,170 shares in the index, 531 rose and 1,574 fell, while 65 were unchanged. “Although China is recovering from a lockdown, business sentiment in the manufacturing industry is deteriorating around the world,” said Tomo Kinoshita, global market strategist at Invesco Asset Management China’s Economy Shows Signs of Improvement as Covid Eases. Indian stock indexes posted their biggest quarterly loss since March 2020 as the global equity market stays rattled by high inflation and a weakening outlook for economic growth.  The S&P BSE Sensex ended little changed at 53,018.94 in Mumbai on Thursday, while the NSE Nifty 50 Index dropped 0.1%. The gauges shed more than 9% each in the June quarter, their biggest drop since the outbreak of pandemic shook the global markets in March 2020. The main indexes have fallen for all but one month this year as surging cost pressures forced India’s central bank to raise rates twice and tighten liquidity conditions. The selloff is also partly driven by record foreign outflows of more than $28b this year.  Despite the turmoil in global markets, Indian stocks have underperformed most Asian peers, partly helped by inflows from local institutions, which made net purchases of more than $30b of local stocks. “Investors worry that the latest show of central bank determination to tame inflation will slow economies rapidly,” HDFC Securities analyst Deepak Jasani wrote in a note.  Fourteen of the 19 sector sub-gauges compiled by BSE Ltd. fell Thursday, with metal stocks leading the plunge. The expiry of monthly derivative contracts also weighed on markets. For the June quarter, metal stocks were the worst performers, dropping 31% while information technology gauge fell 22%. Automakers led the three advancing sectors with 11.3% gain. Australian stocks also tumbled, with the S&P/ASX 200 index falling 2% to close at 6,568.10, weighed down by losses in mining, utilities and energy stocks.  In New Zealand, the S&P/NZX 50 index fell 0.8% to 10,868.70 In rates, treasuries advanced, led by the belly of the curve. German bonds surged, led by the short-end and outperforming Treasuries. US yields richer by as much as 5.4bp across front-end and belly of the curve which outperforms, steepening 2s10s, 5s30s by 2bp and 2.8bp; wider bull-steepening move in progress for German curve with yields richer by up to 13.5bp across front-end with 2s10s wider by 3.5bp on the day. US 10-year yields around 3.055%, richer by 3.5bp. Money markets aggressively trimmed ECB tightening bets on relief that French June inflation didn’t come in above the median estimate. Bonds also benefitted from haven buying as stocks slide. Month-end extension flows may continue to support long-end of the Treasuries curve. bunds outperform by 7bp in the sector. IG issuance slate empty so far; Celanese Corp. pushed back plans to issue in euros and dollars, most likely to next week, after deals struggled earlier this week. Focal points of US session include PCE deflator and MNI Chicago PMI.  In FX, the Bloomberg Dollar Spot Index was steady as the greenback traded mixed against its Group-of-10 peers. The yen advanced and Antipodean currencies were steady against the greenback. French inflation quickened to the fastest since the euro was introduced. Steeper increases in energy and food costs drove consumer-price growth to 6.5% in June from 5.8% in May . Sweden’s krona swung to a loss. It briefly advanced earlier after the Riksbank raised its policy rate by 50bps, as expected, signaled faster rate hikes and a quicker trimming of the balance sheet. The pound rose, snapping three days of losses against the dollar. UK household incomes are on their longest downward trend on record, as the nation’s cost of living crisis saps the spending power of British households. Separate figures showed that the current-account deficit widened sharply to £51.7 billion ($63 billion) in the first quarter. The yen rose and the Japan’s bonds inched up. The BOJ kept the amount and frequencies of planned bond purchases unchanged in the July-September period. The Australian dollar reversed a loss after data showed China’s official manufacturing purchasing managers index rose above 50 for the first time since February in a sign of improvement in the world’s second largest economy. Bitcoin is on track for its worst quarter in more than a decade, as more hawkish central banks and a string of high-profile crypto blowups hammer sentiment. The 58% drawdown in the biggest cryptocurrency is the largest since the third quarter of 2011, when Bitcoin was still in its infancy, data compiled by Bloomberg show. In commodities, WTI trades a narrow range, holding below $110. Brent trades either side of $116. Most base metals trade in the red; LME zinc falls 3.1%, underperforming peers. Spot gold falls roughly $3 to trade near $1,814/oz. Bitcoin slumps over 6% before finding support near $19,000. Looking to the day ahead now, data releases include German retail sales for May and unemployment for June, French CPI for June, the Euro Area unemployment rate for May, Canadian GDP for April, whilst the US has personal income and personal spending for May, the weekly initial jobless claims, and the MNI Chicago PMI for June. Market Snapshot S&P 500 futures down 1.2% to 3,775.75 STOXX Europe 600 down 1.8% to 406.18 MXAP down 1.0% to 158.01 MXAPJ down 1.1% to 524.78 Nikkei down 1.5% to 26,393.04 Topix down 1.2% to 1,870.82 Hang Seng Index down 0.6% to 21,859.79 Shanghai Composite up 1.1% to 3,398.62 Sensex up 0.2% to 53,136.59 Australia S&P/ASX 200 down 2.0% to 6,568.06 Kospi down 1.9% to 2,332.64 Gold spot down 0.2% to $1,814.91 US Dollar Index little changed at 105.04 German 10Y yield little changed at 1.42% Euro little changed at $1.0443 Brent Futures down 0.4% to $115.85/bbl Top Overnight News from Bloomberg The surge in the dollar has set Asian currencies on course for their worst quarter since the 1997 financial crisis and created a dilemma for central bankers French Finance Minister Bruno Le Maire said the EU can deliver the global minimum corporate tax with or without the support of Hungary, circumventing Budapest’s veto earlier this month just as the bloc was on the brink of a agreement German unemployment unexpectedly rose, snapping 15 straight months of decline as refugees from the war in Ukraine were included in those searching for work The SNB bought foreign exchange worth 5.7 billion francs ($5.96 billion) in the first quarter of 2022 as the franc sharply appreciated against the euro and briefly touched parity in March The ECB plans to ask the region’s lenders to factor in the economic hit of a potential cut off of Russian gas when considering payouts to shareholders European stocks were poised for their biggest drop in any half-year period since 2008, as investors focused on the prospects for economic slowdown and stubbornly high inflation in the region New Zealand will enter a recession next year that could be deeper than expected, Bank of New Zealand economists said after a survey showed business sentiment continues to slump A more detailed look at global markets courtesy of Newsquawk Asia-Pac stocks were varied at month-end amid a slew of data releases including mixed Chinese PMIs. ASX 200 was dragged lower by weakness in energy, miners and the top-weighted financials sector. Nikkei 225 declined after disappointing Industrial Production data and with Tokyo raising its virus infection level. Hang Seng and Shanghai Comp. were somewhat mixed with Hong Kong indecisive and the mainland underpinned after the latest Chinese PMI data in which Manufacturing PMI printed below estimates but Non-Manufacturing PMI firmly surpassed forecasts and along with Composite PMI, all returned to expansion territory. Top Asian News NATO Secretary General Stoltenberg said China's growing assertiveness has consequences for the security of allies, while he added China is not our adversary, but we must be clear-eyed about the serious challenges it presents. US blacklisted 5 Chinese firms for allegedly helping Russia in which Connec Electronic, King Pai Technology, Sinno Electronics, Winnine Electronic and World Jetta Logistics were added to the entity list which restricts access to US technology, according to WSJ. Japan's government cut its assessment of industrial production and noted that production is weakening, while it stated that Japan's motor vehicle production declined 8% M/M and that industrial production likely saw the largest impact of Shanghai's COVID-19 lockdown in May, according to Reuters. Tokyo metropolitan government will reportedly increase COVID infections level to the second-highest, according to FNN. It’s been a downbeat session for global equities thus far as sentiment deteriorates further. European bourses are lower across the board, with losses extending during early European hours. European sectors are all in the red but portray a clear defensive bias. Stateside, US equity futures have succumbed to the glum mood, with the NQ narrowly underperforming. Top European News Riksbank hiked its Rate by 50bps to 0.75% as expected, and said the rate will be raised further and it will be close to 2% at the start of 2023. Bank said the balance sheet its to shrink faster than previously flagged, and suggested that policy rate will increase faster if needed. Click here for details. Riksbank's Ingves said inflation over forecast probably not enough for Riksbank to hold extra policy meeting in summer. Ingves added that if the situation requires a 75bps hike, then Riksbank will carry out a 75bps hike. Orsted Gains as HSBC Upgrades With Shares Seen ‘Good Value’ Aston Martin Extends Losses as Carmaker Reportedly Seeking Funds Climate Litigants Look Beyond Big Oil for Their Day in Court Ukraine Latest: Putin Warns NATO on Moving Military to Nordics FX DXY extends on gains above 105.00, but could see more upside on safe haven demand and residual rebalancing flows over fixes - EUR/USD inches towards 1.0400 to the downside. Yen regroups as yields drop and risk sentiment deteriorates to compound corrective price action. Franc unwinds some of its recent outperformance and Loonie lose traction from oil ahead of Canadian GDP. Swedish Crown unable to take advantage of hawkish Riksbank hike in face of risk aversion - Eur/Sek stuck in a rut close to 10.7000. Pound finds some underlying bids into 1.2100 and Kiwi at 0.6200, while Aussie holds above 0.6850 with encouragement from China’s services PMI that also propped the Yuan. Fixed Income Bonds on bull run into month, quarter and half year end - Bunds top 148.00 at best, Gilts approach 113.50 and 10 year T-note just a tick away from 118-00. Debt in demand on safe haven grounds rather than duration as curves steepen on less hawkish/more dovish market pricing. Italian supply comfortably covered to keep BTP futures propped ahead of US PCE data and yet another speech from ECB President Lagarde. Commodities WTI and Brent front-month futures are resilient to the broader risk downturn, and firmer Dollar as OPEC+ member members gear up for what is expected to be a smooth meeting. Spot gold is uneventful but dipped under yesterday's low, with potential support at the 15th June low at USD 1,806.59/oz. Base metals are softer across the board amid the broader risk profile. Dalian and Singapore iron ore futures were on track for quarterly losses. Ship with 7,000 tonnes of grain leaves Ukraine port, according to pro-Russia officials cited by AFP. US Event Calendar 08:30: June Initial Jobless Claims, est. 229,000, prior 229,000 08:30: June Continuing Claims, est. 1.32m, prior 1.32m 08:30: May Personal Income, est. 0.5%, prior 0.4% 08:30: May Personal Spending, est. 0.4%, prior 0.9% 08:30: May Real Personal Spending, est. -0.3%, prior 0.7% 08:30: May PCE Deflator MoM, est. 0.7%, prior 0.2% 08:30: May PCE Deflator YoY, est. 6.4%, prior 6.3% 08:30: May PCE Core Deflator YoY, est. 4.8%, prior 4.9% 08:30: May PCE Core Deflator MoM, est. 0.4%, prior 0.3% 09:45: June MNI Chicago PMI, est. 58.0, prior 60.3 DB's Jim Reid concludes the overnight wrap We’ve just released the results of our monthly EMR survey that we conducted at the start of the week. It makes for some interesting reading, and we’re now at the point where 90% of respondents are expecting a US recession by end-2023, which is up from just 35% in our December survey. That echoes our own economists’ view that we’re going to get a recession in H2 2023, and just shows how sentiment has shifted since the start of the year as central banks have begun hiking rates. When it comes to people’s views on where markets are headed next, most are expecting many of the themes from H1 to continue, with a 72% majority thinking that the S&P 500 is more likely to fall to 3,300 rather than rally to 4,500 from current levels, whilst 60% think that Treasury yields will hit 5% first rather than 1%. Click here to see the full results. When it comes to negative sentiment we’ll have to see what today brings us as we round out the first half of the year, but if everything remains unchanged today we’re currently set to end H1 with the S&P 500 off to its worst H1 since 1970 in total return terms. And there’s been little respite from bonds either, with US Treasuries now down by -9.79% since the start of the year, so it’s been bad news for traditional 60/40 type portfolios. Ultimately, a large reason for that has been investors’ fears that ongoing rate hikes to deal with inflation will end up leading to a recession, and yesterday saw a continuation of that theme, with Fed Chair Powell, ECB President Lagarde and BoE Governor Bailey all reiterating their intentions in a panel at the ECB’s Forum to return inflation back to target. In terms of that panel, there weren’t any major headlines on policy we weren’t already aware of, although there was a collective acknowledgement of the risk that inflation could become entrenched over time and the need to deal with that. Fed Chair Powell described the US economy as in “strong shape”, but one that ultimately requires much tighter financial conditions to bring inflation back to target. Year-end fed funds expectations remained steady in response, down just -0.7bps to 3.45%. However, further out the curve the simmering slower growth narrative continued to grip markets and sent 10yr Treasury yields -8.2bps lower to 3.09%, and the 2s10s another -1.1bps flatter to 4.7bps. In line with a tighter Fed policy path and slower growth, 10yr breakevens drove the move in nominal yields, falling -8.2bps to 2.39%, their lowest levels since January, having entirely erased the gains seen after Russia’s invasion of Ukraine, when it peaked above 3% at one point in April. Along with 2s10s flattening, the Fed’s preferred measure of the near-term risk of recession, the forward spread (the 18m3m – 3m), similarly flattened by -5.7bps, hitting its lowest level in nearly four months at 154bps. And thismorning there’s only been a partial reversal of these trends, with 10yr Treasury yields (+1.3bps) edging back up to 3.10% as we go to press. Over in equities, the S&P 500 bounced around but finished off of its intraday lows with just a -0.07% decline, again with the macro view likely skewed by quarter-end rebalancing of portfolios. The NASDAQ was similarly little changed on the day, falling a mere -0.03%. In terms of the ECB, President Lagarde said on that same panel that she didn’t think “we are going back to that environment of low inflation” that was present before the pandemic. But when it came to the actual data yesterday there was a pretty divergent picture. On the one hand, Spain’s CPI for June surprised significantly on the upside, with the annual inflation rising to +10.0% (vs. +8.7% expected) on the EU’s harmonised measure. But on the other, the report from Germany then surprised some way beneath expectations, coming in at +8.2% on the EU-harmonised measure (vs. +8.8% expected). So mixed messages ahead of the flash CPI print for the entire Euro Area tomorrow. As in the US, there was a significant rally in European sovereign bonds, with yields on 10yr bunds (-10.7bps), OATs (-10.7bps) and BTPs (-16.0bps) all moving lower on the day. Equities also lost significant ground amidst the risk-off tone, and the STOXX 600 shed -0.67% as it caught up with the US losses from the previous session. That risk-off tone was witnessed in credit as well, where iTraxx Crossover widened +21.5bps to a post-pandemic high. At the same time, there were further concerns in Europe on the energy side, with natural gas futures up by +8.06% to a three-month high of €139 per megawatt-hour, which follows a reduction in capacity yesterday at Norway’s Martin Linge field because of a compressor failure. Whilst monetary policy has been the main focus for markets lately, we did get some headlines on the fiscal side yesterday too, with a report from Bloomberg that Senate Democrats were working on an economic package that had smaller tax increases in order to reach a deal with moderate Democratic senator Joe Manchin. For reference, the Democrats only have a majority in the split 50-50 senate thanks to Vice President Harris’ tie-breaking vote, so they need every Democrat Senator on board in order to pass legislation. According to the report, the plan would be worth around $1 trillion, with half allocated to new spending, and the other half cutting the deficit by $500bn over the next decade. Overnight in Asia we’ve seen a mixed market performance overnight. Most indices are trading lower, including the Nikkei (-1.45%) and the Kospi (-0.81%), but Chinese equities have put in a stronger performance after an improvement in China’s PMIs in June, and the CSI 300 (+1.62%) and the Shanghai Comp (+1.31%) have both risen. That came as manufacturing activity expanded for the first time in four months, with the PMI up to 50.2 in June (vs. 50.5 expected) from 49.6 in May. At the same time, the non-manufacturing climbed to 54.7 points in June, up from 47.8 in May, which also marked the first time it’d been above the 50 mark since February. Nevertheless, that positivity among Chinese equities are proving the exception, with equity futures in the US and Europe pointing lower, with those on the S&P 500 (-0.28%) looking forward to a 4th consecutive daily decline as concerns about a recession persist. When it came to other data yesterday, the third estimate of US GDP for Q1 saw growth revised down to an annualised contraction of -1.6% (vs. -1.5% second estimate). Separately, the Euro Area’s M3 money supply grew by +5.6% year-on-year in May (vs. +5.8% expected), which is the slowest pace since February 2020. To the day ahead now, data releases include German retail sales for May and unemployment for June, French CPI for June, the Euro Area unemployment rate for May, Canadian GDP for April, whilst the US has personal income and personal spending for May, the weekly initial jobless claims, and the MNI Chicago PMI for June. Tyler Durden Thu, 06/30/2022 - 07:58.....»»

Category: blogSource: zerohedge1 hr. 12 min. ago

Thoughts From JPMorgan Futures Trader: "Any Rally Feels Fairly Unsustainable"

Thoughts From JPMorgan Futures Trader: "Any Rally Feels Fairly Unsustainable" Some macro thoughts from JPMorgan futures and options trader Marissa Gitler. After a handful recent conversations, the most salient theme from clients has been a lack of conviction as for how to handle the next few months of trading. What’s interesting is that the general thought process amongst many remains the same – EPS and company guidance are likely to fall short of articulated expectation in Q3 as inflation has failed to moderate globally while growth has definitively started to wane in lockstep. The FED will continue hiking to keep inflation under control in the short term, though much is out of their devices as energy, input prices, and supply chain bottlenecks outpace demand-led triggers in the market. Inflation will eventually start to moderate into the back half of the year (though still remain higher than ‘target normal’). Recession in the US isn’t a guarantee, but the likelihood is increasing – whereas Europe’s outlook is much more bleak and headed towards stagflation given inflation pressures are more heavily tilted towards the supply-side. Though emerging market economies have, in past, been better equipped to weather an inflationary storm – they are currently fairly anchored to the path of DM rates, and overall performance of DM countries (from a demand perspective), and (though to a bit lesser extent now) China. Energy upside makes sense fundamentally (inventories remain critically low), but desire to add to existing positioning is lacking at current elevated levels amidst lower liquidity, higher realized vol, and recession fears ticking higher. Similar can be said for Ags, which are broadly back to pre-invasion levels as positioning while wiped out in the broader macro sell-off. As per this thought process, risky assets continue to look fairly unattractive, while the popular front-end fixed income shorts that had ‘worked’ for the majority of the year now appear at more risk. Though the US outlook is better than most from a global perspective - a U.S. flight-to-quality trade fails as the FED path remains uncertain (highly inflation-print dependent) while equity valuations still appear stretched in the current macro environment. Consequently, investors have continued a pattern of degrossing in the equity space – from both the long and short sides. As has been well advertised at this point, CTAs were the first to de-gross when indexes crossed through technical downside levels, while long only’s have been working through books to take down exposures throughout the entirety of 2022. Though selling of growth plays by long-only’s has been taking place since the end of last year when yields began to move decidedly higher, the newest iteration of selling has been of well-owned winners (like Energy) as there remains overall less of the growthier/weak balance-sheet stocks to sell. Moreover, HFs – who had most recently been playing the market from the short side on the back of global central banks’ sharp hawkish pivot, have also taken down grosses ahead of the summer; covering short positions at the index lows, and unwinding index hedges given there is a higher bar for a further rollover (recession) vs a move higher (squeeze/chase). The question really becomes – how to go forward amongst what has now become fairly homogeneous (under-positioned) playbook and recession-led thought process amongst investors; especially as we enter the historically more ‘relaxed’ summer months. As the market awaits more information (eco data, inflation prints, CB rhetoric) there has been a fairly well advertised upside equity rebalancing view into month end – which has caused many macro investors to step back from selling at the index level in recent days. Moreover, there are worries arising that a drift higher will trigger CTAs to re-enter the market, which would then spiral into price moves higher given the reduced overall positioning. In the same vein, discussions of market bottoms preceding actual recessions have also begun to enter conversations. Any pullback in bond yields would also add to this conversation. The tactical upside play appears to me a bit of a shaky leg to stand on longer term, especially as the macro environment is far from decisive in its path forward, and index hedges have come down over recent weeks (which could lead to more violent down-trades). For those looking into upside in the next few months - would be best to play tactically from a positioning perspective – long in what is under-owned (growth/tech/short momentum), and balancing these trades scaling into some long-duration plays. Overall though, I still favor using equity upside as opportunity to re-engage in sales. What I continue to watch for (in equities), is growth in open interest (and net position growth by asset managers in CFTC data) that would imply CTA re-engagement and real money equity re-grossing – which would provide footing for a more sustained move higher - but this is yet to be seen... Bottom Line: light positioning could lead to an equity rally, but in absence of CTA re-engagement this feels fairly unsustainable, play any upside tactically – vol has cheapened, puts are attractive for short-term downside delta plays. Tyler Durden Wed, 06/29/2022 - 13:25.....»»

Category: blogSource: zerohedge19 hr. 56 min. ago

Why a Recession Isn’t Inevitable

The chances a recession will take hold are lower in the U.S. and Asia than in Europe. An ugly word has been shooting around the media like it’s going out of fashion: Recession, usually defined as two back-to-back quarters of a shrinking economy. Judging by recent headlines and rhetoric from experts, you’d think we are already there. But as with many things, the truth is more nuanced. To be sure, no one in their right mind wants to see a recession, as these periods of malaise usually coincide with higher unemployment and lower corporate profits. While there are growing risks of a recession as the world economy slows, the chances a recession will take hold are lower in the U.S. and Asia than in Europe. [time-brightcove not-tgx=”true”] For now, what we have is a global economy in deceleration mode. “In a slowing economy, investors get anxious because that R-word may be right around the corner,” says Amanda Agati, chief investment officer at PNC Asset Management Group. Where the fear comes from The current worries aren’t just investor paranoia, however. First-quarter economic growth in the U.S.—the world’s largest economy—slowed to 3.5%, down from 5.5% during the last three months of 2021. Meanwhile, the Federal Reserve instituted its most aggressive interest rate hike in nearly thirty years this month, as part of its war on rising prices. Inflation recently soared to an annual rate of 8.6%, up from 5.3% in August. A primary issue for investors is the Fed’s historic lack of skill in reducing inflation while avoiding a recession. “The Fed has never orchestrated a soft landing once after completing a tightening cycle,” Agati says. Indeed, the Fed’s inability to effectively get its timing right may be the biggest risk. Still, there are many reasons for optimism. “We don’t see the probability of a recession in 2022,” Agati says. “We think the economy holds up,” She sees a mere one-in-three chance of a U.S. recession next year. Overblown worries That makes sense to a handful of other economy-watchers, who see many signs of strength among perceived risks that are probably overblown. Sure, investors are alarmed by a weak stock market. So far this year, the S&P 500 index lost more than 20%, ushering in a bear market. Such a dramatic downdraft in the stock market could augur a recession. But it doesn’t always. In October 1987, stocks fell more than 20% in one day. There was no imminent recession. In late 2018, the same index retreated nearly 20%. Again, no recession followed. Similar, although smaller, declines occurred in late 2015, and the middle of both 2011 and 2012, again with no subsequent recessions. Another likely phantom worry is the recent softness in the U.S. housing market. Sales of new homes in the U.S. dropped to an annualized rate of 591,000 in April, from 831,000 in January. While that doesn’t sound good, the slowdown likely won’t be prolonged or severe, experts note. Over the last decade, home builders have constructed fewer houses than necessary to keep pace with population growth and the essential replacement of dilapidated structures. That means there will almost certainly be a bounce-back in demand for real estate. “It is universally agreed that we have a housing shortage,” says Jay Hatfield, CEO of Infrastructure Capital Management. “We don’t think housing goes into a death spiral.” The homebuilding downturn likely means the U.S. economy will not grow as fast as it has recently. But that is different from a six-month-long contraction of the whole economy, which defines a recession. “We see a slowdown,” says Thomas A. Martin, Senior Portfolio Manager at Globalt Investments in Atlanta. Hidden Bright Spots Meanwhile, the job market looks vibrant. “Employment remains strong,” Martin says. The recent monthly employment report shows that the U.S. added 390,000 jobs during May, which exceeds the growth in the pool of active workers. And the unemployment rate remained steady at a historically low 3.6%. That’s the opposite of typical recession news. In April 2020, the peak of the pandemic-led recession, unemployment jumped to 14.7% up from 4.4% the previous month. Recessions tend to hit corporate profits hard. And yet Wall Street is forecasting the opposite. New York-based investment bank Goldman Sachs is currently predicting an increase in earnings for the companies in the S&P 500 index of 8% this year and 6% in 2023. The U.S. energy sector is also booming. Consumers are contending with higher gas prices, but at the same time, the U.S. is exporting liquified natural gas to Europe to supplement now-reduced energy supplies following Russia’s invasion of Ukraine. A Chinese recovery Beyond the U.S., things look good too. China, the world’s second-largest economy and the driving economic force in Asia, looks likely to see a growth burst following temporary COVID-19-related lockdowns. The result of the restrictions was annual growth recently fell to 4.8% in the first quarter, down from 18.3% a year before. “I expect growth to recover, and they have all the means to cut rates and use fiscal measures,” says Adrien Pichoud, chief economist at Syz Bank. He expects Chinese growth to be strong, meaning it won’t be in recession. He says after the post-lockdown rebound, the Chinese economy will likely stabilize with annual growth of 5% to 5.5%. “If China stabilizes it will be good for the rest of Asia.” Real Concerns for Europe Europe is a different story. The single-currency area known as the eurozone is currently benefiting from government assistance to help deal with soaring energy and food costs. That amounts to around 1% of GDP. “We’re not talking small numbers here,” Pichoud says. However, the benefit of the subsidies will likely end by 2023, raising the risk of a European recession as the continent suffers from energy shortages. “We may face an environment where momentum is softer, and the headwinds of tighter financing raise the risk of recession,” Pichoud says......»»

Category: topSource: timeJun 28th, 2022

Russia Defaults on Foreign Debt for First Time Since 1918

It’s a grim marker in the country’s rapid transformation into an economic, financial and political outcast Russia defaulted on its foreign-currency sovereign debt for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors. For months, the country found paths around the penalties imposed after the Kremlin’s invasion of Ukraine. But at the end of the day on Sunday, the grace period on about $100 million of snared interest payments due May 27 expired, a deadline considered an event of default if missed. It’s a grim marker in the country’s rapid transformation into an economic, financial and political outcast. The nation’s eurobonds have traded at distressed levels since the start of March, the central bank’s foreign reserves remain frozen, and the biggest banks are severed from the global financial system. [time-brightcove not-tgx=”true”] But given the damage already done to the economy and markets, the default is also mostly symbolic for now, and matters little to Russians dealing with double-digit inflation and the worst economic contraction in years. Read more: How Sanctions on Russia Will Hurt—and Help—the World’s Economies Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment. As it tried to twist its way out, it announced last week that it would switch to servicing its $40 billion of outstanding sovereign debt in rubles, criticizing a “force-majeure” situation it said was artificially manufactured by the West. “It’s a very, very rare thing, where a government that otherwise has the means is forced by an external government into default,” said Hassan Malik, senior sovereign analyst at Loomis Sayles & Company LP. “It’s going to be one of the big watershed defaults in history.” A formal declaration would usually come from ratings firms, but European sanctions led to them withdrawing ratings on Russian entities. According to the documents for the notes whose grace period expired Sunday, holders can call one themselves if owners of 25% of the outstanding bonds agree that an “Event of Default” has occurred. With the final deadline passed, focus shifts to what investors do next. They don’t need to act immediately, and may choose to monitor the progress of the war in the hope that sanctions are eventually softened. Time may be on their side: the claims only become void three years on from the payment date, according to the bond documents. “Most bondholders will keep the wait-and-see approach,” Takahide Kiuchi, an economist at Nomura Research Institute in Tokyo. During Russia’s financial crisis and ruble collapse of 1998, President Boris Yeltsin’s government defaulted on $40 billion of its local debt, while declaring a moratorium on foreign debt. The last time Russia fell into default vis-a-vis its foreign creditors was more than a century ago, when the Bolsheviks under Vladimir Lenin repudiated the nation’s staggering Czarist-era debt load in 1918. By some measures it approached a trillion dollars in today’s money, according to Loomis Sayles’ Malik, who is also author of ‘Bankers and Bolsheviks: International Finance and the Russian Revolution.’ By comparison, foreigners held the equivalent of almost $20 billion of Russia’s eurobonds as of the start of April. Russia Debt Held Abroad Below 50%, First Time Since 2018: Chart “Is it a justifiable excuse to say: ‘Oh well, the sanctions prevented me from making the payments, so it’s not my fault’?” Malik said. “The broader issue is that the sanctions were themselves a response to an action on the part of the sovereign entity,” he said, referring to the invasion of Ukraine. “And I think history will judge this in the latter light.” Finance Minister Anton Siluanov dismissed the situation on Thursday as a “farce.” With billions of dollars a week still pouring into state coffers from energy exports, despite the grinding conflict in east Ukraine, he reiterated that the country has the means, and the will, to pay. “Anyone can declare whatever they like,” Siluanov said. “But anyone who understands what’s going on knows that this is in no way a default.” His comments were prompted by the grace period that ended on Sunday. The 30-day window was triggered when investors failed to receive coupon payments due on dollar- and euro-denominated bonds on May 27. The cash got trapped after the US Treasury let a sanctions loophole expire, removing an exemption that had allowed US bondholders to receive payments from the Russian sovereign. A week later, Russia’s paying agent, the National Settlement Depository, was also sanctioned by the European Union. In response, Vladimir Putin introduced new regulations that say Russia’s obligations on foreign-currency bonds are fulfilled once the appropriate amount in rubles has been transferred to the local paying agent. The Finance Ministry made its latest interest payments, equivalent to about $400 million, under those rules on Thursday and Friday. However, none of the underlying bonds have terms that allow for settlement in the local currency. So far, it’s unclear if investors will use the new tool and whether existing sanctions would even allow them to repatriate the money. According to Siluanov, it makes little sense for creditors to seek a declaration of default through the courts because Russia hasn’t waived its sovereign immunity, and no foreign court would have jurisdiction. “If we ultimately get to the point where diplomatic assets are claimed, then this is tantamount to severing diplomatic ties and entering into direct conflict,” he said. “And this would put us in a different world with completely different rules. We would have to react differently in this case — and not through legal channels.”.....»»

Category: topSource: timeJun 28th, 2022