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Stagflation: The Worse For Us, The Better For Gold

Stagflation is coming – and it could make the 1970s look like a walk in the park. As you’ve probably noticed, I expect a recession next year, and I’m not alone, as this has become the baseline scenario for many financial institutions and analysts. Even the DSGE model used by the New York Fed shows […] Stagflation is coming – and it could make the 1970s look like a walk in the park. As you’ve probably noticed, I expect a recession next year, and I’m not alone, as this has become the baseline scenario for many financial institutions and analysts. Even the DSGE model used by the New York Fed shows an 80% probability of a hard landing (defined as four-quarter GDP growth dipping below -1%) over the next ten quarters. Reasons? Inflation and the Fed’s tightening cycle. The history is clear: whenever inflation has been above 5%, the Fed’s hikes in interest rates have always resulted in an economic downturn. The key yield curve has recently inverted, which means that the most reliable recessionary indicator has started to flash red light. if (typeof jQuery == 'undefined') { document.write(''); } .first{clear:both;margin-left:0}.one-third{width:31.034482758621%;float:left;margin-left:3.448275862069%}.two-thirds{width:65.51724137931%;float:left}form.ebook-styles .af-element input{border:0;border-radius:0;padding:8px}form.ebook-styles .af-element{width:220px;float:left}form.ebook-styles .af-element.buttonContainer{width:115px;float:left;margin-left: 6px;}form.ebook-styles .af-element.buttonContainer input.submit{width:115px;padding:10px 6px 8px;text-transform:uppercase;border-radius:0;border:0;font-size:15px}form.ebook-styles .af-body.af-standards input.submit{width:115px}form.ebook-styles .af-element.privacyPolicy{width:100%;font-size:12px;margin:10px auto 0}form.ebook-styles .af-element.privacyPolicy p{font-size:11px;margin-bottom:0}form.ebook-styles .af-body input.text{height:40px;padding:2px 10px !important} form.ebook-styles .error, form.ebook-styles #error { color:#d00; } form.ebook-styles .formfields h1, form.ebook-styles .formfields #mg-logo, form.ebook-styles .formfields #mg-footer { display: none; } form.ebook-styles .formfields { font-size: 12px; } form.ebook-styles .formfields p { margin: 4px 0; } Get The Full Henry Singleton Series in PDF Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues (function($) {window.fnames = new Array(); window.ftypes = new Array();fnames[0]='EMAIL';ftypes[0]='email';}(jQuery));var $mcj = jQuery.noConflict(true); Q3 2022 hedge fund letters, conferences and more   Although the coming recession could decrease the rate of inflation more than I assume, given the slowdown in money supply growth, I believe that high inflation (although lower compared to the current level) will continue through 2023 and perhaps also in 2024 due to the excess increase in money supply during the pandemic. It means that recession is likely to be accompanied by high inflation, forming a powerful yet negative combo, namely, stagflation. If the calls for stagflation are correct, it suggests that the coming recession won’t be mild or short-lived, as it’s not easy to combat it. In the early 1980s, Paul Volcker had to raise the federal funds rate to above 17%, and later even 19% (see the chart below), to defeat inflation, which triggered a painful double-dip recession. During stagflation, there is a lot of uncertainty in the economy, and monetary policy becomes much more complicated, as the central bank doesn’t know whether to focus on fighting inflation, which could become entrenched, or rising unemployment. In a response to the Great Recession or the Great Lockdown, the Fed could ease its monetary policy aggressively to address declining aggregate demand and neutralize deflationary pressure. But if inflation remains high, Powell’s hands are tied. Some analysts argue that today’s financial imbalances are not as severe as those in the run-up to the 2007-2009 global financial crisis. Partially, they’re right. Commercial banks seem to be in much better shape. What’s more, inflation has reduced the real value of debts, and it remains much higher than many interest rates, implying that governments and companies can still issue very cheap debt. However, financial markets remain very fragile. A recent example might be the turmoil in the UK after the government proposed unfunded tax cuts that altered the price of Treasury bonds and negatively affected the financial situation of pension funds. The level of both private and public debt as a share of global GDP is much higher today than in the past, having risen from about 200% in 1999 to about 350% today. It means that the space for fiscal expansion will be more limited this time, and that the current tightening of monetary policy all over the world could have huge repercussions for the global economy. We’re already observing the first symptoms: the financial bubbles are bursting and asset prices are declining, reducing financial wealth and the value of many collaterals. This is why economist Nouriel Roubini believes that “the next crisis will not be like its predecessors.” You see, in the 1970s, we had stagflation but no debt crisis. The Great Recession was essentially the result of the debt crisis, followed by the credit crunch and deleveraging. But it caused a negative demand shock and low inflation as a result. Now, we could have the worst of both worlds – that is, a stagflationary debt crisis. Implications For The Gold Market What does it all mean for the gold market? Well, to be very accurate, nobody knows! We have never experienced stagflation combined with the debt crisis. However, gold shone both during the 1970s stagflation and the global financial crisis of 2007-2009, so my bet is that it will rally this time as well. It could, of course, decline during the period of asset sell-offs, as investors could sell it in a desperate attempt to raise cash, but it should later outperform other assets. To be clear, it’s possible that inflation will decline and we’ll avoid stagflation or that the Fed will blink and prevent the debt crisis instead of fighting with inflation at all costs, but one or another economic crisis is going to happen. When gold smells it, it should rebound! 2023 should, therefore, be much better for gold than this year, as the economy will be approaching recession and the Fed will be less hawkish. Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today! Arkadiusz Sieron, PhD Sunshine Profits: Effective Investment through Diligence & Care......»»

Category: blogSource: valuewalkNov 23rd, 2022

Luongo On 2023: Biden Impeached, Riyal De-Pegged, & Fed Terminal Rate Closer To 7%

Luongo On 2023: Biden Impeached, Riyal De-Pegged, & Fed Terminal Rate Closer To 7% Authored by Tom Luongo via Gold, Goats, 'n Guns blog, Consider this, Consider this the hint of the century Consider this, the slip, that dropped me to my knees, failed. What if all these fantasies come flailing around? And now, I’ve said…. too much - R.E.M. – Losing My Religion I probably should have codified these before the turn of the new year but I didn’t even think of doing one of these lists until someone mentioned it on Twitter a few days ago. So, here it goes.   My predictions for 2023 and all center around the big theme of 2023, the loss of confidence in the world we’ve always known. In other words 2023 will embody the phrase we use down here in the South, “Losing my Religion.” 1)  Inflation will return with a vengeance.  What we’ve experienced so far came from the big commodity pump-and-dump post-COVID.  Commodities went through a massive run as more money chased broken supply chains in 2020-21. Then in 2022 the inevitable bust happened, but left us with commodity prices across the board at levels which used to be resistance on the long-term price charts which has now become support. The next round of commodity-based cost-push inflation will mix dangerously with the growing realization that we can’t avoid things breaking.  There will be no ‘soft landing.’ The hard landing may not happen in 2023, but the set up for it will certainly take place.  Cost-push will mix with Loss of Institutional Confidence to light the fire of real inflation versus tangible assets in a way we haven’t seen since the late-1970’s.  We should see a return to increasing YoY CPI levels beginning in Q2 after the baseline effects are past and China’s reopening keeps a bid under commodities. January will not set the tone for commodities in 2023, but more likely be a ‘false move’ overcorrecting against the primary trend, which is clearly higher. 2) The Fed’s terminal rate is closer to 7% than the ~5% the markets are handicapping. The Fed hiked by 50 bps in Dec.  The markets are signaling 25 bps on Feb. 1st.  I think it will be another 50.  In fact, my base case now is four 50 bp hikes followed by four 25’s by December for a terminal rate of 7% by this time next year.   Even I was surprised by the violence of Powell’s hawkishness in 2022.  He did what I wanted him to do, be aggressive and attack the source of Davos’ power, the leveraged offshore dollar markets.  He forced out into the open the unsustainability of a weaker dollar based on the clown show on Capitol Hill being worse than the real collapsing governments across Europe. Powell’s plan has worked so far, forcing everyone to climb the wall of worry that The Fed Put is dead. That so many refuse to accept this is why markets this January, like last January, are completely mispriced. Until this is accepted, Powell will use every excuse to keep raising rates as fast as he can to ‘finish the job.’ Today’s job’s number and unemployment rate support this. Revised Q3 2022 GDP at +2.6% is another. The market keeps wanting to believe in a 5.25% to 5.50% terminal rate for this move. But if I’m right about #1 and structural inflation returns in Q2, the Fed will not slow down until we reach near parity with, of all people, the Bank of Russia. Rising inflation makes this prediction a slam dunk 3) The Euro will collapse to $0.80 or lower The ECB is trapped.  It can’t accept higher rates but it can’t afford for the euro to collapse either.  A falling euro means energy input costs skyrocket in real terms.  While a zombie banking system and Sovereigns in debt to someone else’s eyeballs (e.g. $1.1+ trillion in TARGET2 liabilities) see budgets blow out with higher debt servicing costs. ECB Chair Christine Lagarde bought herself some time in 2022 with the TPI — Transmission Protection Instrument — and some big moves to subvert the UK government, putting Brexit on the ropes.  She’s behind the inflation curve worse than Powell is.  But she can’t attract capital today without big rate moves, Powell’s beat her to that punch. Ultimately, Lagarde will protect credit spreads while letting the euro go. The EU still believes it can bolt on more problems like the UK and now Croatia (#20 in the euro-zone) to stave off the collapse of the euro by expanding its reach. We ended 2022 with the euro ‘painting the tape’ at $1.07. It’s already given us a preview of the volatility we should expect in this first week of trading. The Eurocrats in Brussels still believe in the EU’s inevitability, not because it is true, because they have to. The EU is a religion to the political class of Europe and its Davos paymasters.  They, like real communists, see this period as the end-state of capitalism and that the dialectic is true.  History was written, as it were. They are wrong.  And the beginning of the end of the European Union starts in 2023 with another 20% to 25% collapse of the euro. 4) The War in Ukraine Will Continue Dangerously The West is suffering under many illusions about what’s going on in Russia and, by extension, its war in Ukraine.  The UK/US neocons believe, like the EU, that history is already written about Russia’s future –balkanization and collapse. All pressure that the West places on Russia only exacerbates their demographic time bomb.  China’s as well.  And in that sense this is the race they are running.  Can they grind up enough Russians to ensure that even if Russia wins the war in Ukraine the West wins because the long-sought breakup of the USSR/Tsarist Empire will be achieved. For this reason neither the UK/US Neocons nor Davos believe having a reverse gear vis a vis Russia is the right play.  This is their strategic vision, regardless of the costs to the West itself. For Russia there is no other play for them but to continue increasing the costs on the West.  The longer the war goes on the deeper divisions within the EU get.  Those divisions then drive even more animosity within the Eurocracy towards the Brits and the Yanks, who some feel are taking advantage of the situation. When as ardent an Eurocrat as Guy Ver Hofstadt is now frothing at the mouth about the costs of sanctions, you know the Mafiosi in Brussels are getting nervous. They are beginning to crack under the strain of this war of financial and political attrition Russia is so good at playing against its European partners. Even though I’ve argued strenuously that the EU leadership walked into Ukraine with its eyes open, the 2nd tier of the Eurocracy did not.  And those are the ones having cold feet now and who the Russians are hoping will drive a pivot from Davos off Ukraine.   At the same time, expect Putin to keep opening up new fronts for the US/UK to deal with, see my next point. The UK/US Neocons’ only play, then, on the battlefield then is further escalation to the brink of a nuclear exchange, which these insane people think they can win. The other option is assassinating Putin in the hopes that Russia goes mad, nukes someone and that justifies the unthinkable. Either way we’re inching way too close to midnight for my tastes. 5) The US Will Leave Syria in 2023 The recent meeting between Russian, Syrian and Turkish Defense Ministers paves the way for a similar upcoming meeting between the three countries’ Foreign Ministers.   Once that happens, Syrian President Assad and Turkish President Erdogan will presumably sit down with Russian President Putin and end Turkiye’s involvement in Syria.  This will hang their pet jihadists in Idlib out to dry and leave the US forces there heavily exposed.  We’re already seeing them come under rocket fire though you’d never hear about this in the Western press.  I went over this in grave detail in a recent post. By making the deals with Erdogan over becoming the new “Gas Hub” into Europe, Putin has effectively done to the US and UK what they always try to do to Russia, open up another front to distract it from the main problem, i.e. Ukraine. Now Syria becomes the 2nd battleground for the US to decide if it will defend or will it suffer another ignominious retreat like Afghanistan?   6) De-Dollarization Will Accelerate / USDX Will Rise. Along with the collapse of the euro, the US dollar will lose more ground in the global payment system for international commodities and trade.   These two dynamics will create a very weird moment where the USDX — the US Dollar Index — will rise but the US dollar will be under sincere pressure vs. gold, commodities, and other rising emerging/developed market currencies. The USDX is heavily weighted towards the euro and the British pound but the Chinese yuan is not represented at all.  So, from one perspective the US dollar could be in a bull market but from another be in a bear market. The one thing holding gold back has been its lack of bull market versus the dollar. It’s not a ‘secular’ bull market in gold until it’s rising versus all currencies. Even if the USDX does nothing but hold its ground in 2023 versus the rest of its fiat competition, a rally in gold will still be fed by people the world over ‘losing their religion’ with respect to the dollar. That said, that fall in faith will likely not outpace the fall in faith of the “Fed Put.” I expect the ‘religion’ of the Fed Put is still stronger than the dollar itself which should put upward pressure on the US dollar overall. Because, let’s not forget that overseas US dollar synthetic short positions, known as US dollar-denominated debt, are still pretty biblical in size, keeping a strong bid under the dollar globally even as its position as a reserve and trade settlement currency erodes. Because of all of these competing forces — inflation, de-dollarization, war, etc. — the last US dollar bull market for the foreseeable future should be on tap in 2023.  For how long? It’s a good question, I can’t answer.   But I do know that it’s tied to #7 and to the Fed’s need to keep raising rates… 7) Saudi Arabia will de-peg the Riyal  In fact, I also expect the Hong Kong Dollar peg to fall, but maybe not in 2023.  It depends on the strength and rate of internationalization of the Chinese yuan this year. Oil prices are going higher once China’s economy is past the Omicron 2.0 wave crashing over it right now. The Saudis have been tendered the offer by China’s Xi to begin weaning itself off the US dollar.  Crown Prince Mohammed bin Salman seems agreeable to this.   When (not if) the Saudis put their first oil tender up for bid in Shanghai, that will signal the end of the currency peg that created the petrodollar.  It will be a subtle thing that will gain steam over time, just like Russia and China diversifying their holdings into each other’s debt and currencies has taken years to develop. So, the petrodollar will continue to die by a thousand cuts.  The Saudis will lead OPEC+ out of the US dollar arena, validating both China’s onshore futures markets while also moving a significant amount of the gold trade away from London to Hong Kong. By hedging their oil profits in gold on China’s international exchange they strengthen both the onshore (CNY) and offshore (CNH) yuan markets and laying the foundation for a much different financial future, including one where the Hong Kong dollar either floats or re-pegs itself to the yuan, likely the former. 8) Oil will Open 2023 Near the Yearly Low The fundamentals for oil are truly bullish.  China ending Zero-COVID just after the EU put its idiotic price cap on seaborne Russian oil was a strategic move to subvert “Biden’s” wish to refill the now nearly depleted US Strategic Petroleum Reserve at or below $70 per barrel.   He may get that from domestic producers for a while.  But Brent ended 2022 at $86 and a little downside momentum may be in place with early US dollar strength, but then fundamentals easily overcome this. “Biden” will not refill the SPR at $70 per barrel now that China just blew up the entire “deflation through higher rates” narrative.  The US economy has held up better to the Fed than expected.  Even Q3 GDP wasn’t uniquely terrible. The jobs report and low unemployment rate, while possibly artifacts of a changing labor market, still give us signals that the US economy isn’t as bad as many want it to be at 4.5% Fed Funds Rate to validate their place in the commentariat. Europe is getting a small reprieve with the extremely mild winter so far, pushing energy prices down, especially natural gas, for now. The global recession talk is vastly overblown until something fundamentally breaks. Anyone looking at the end of the year book squaring in things like the Reverse Repo balance (+$300b in one week) is overthinking the problem. The banks are allowed to tailor their reserves to present whatever quarterly numbers they want. It’s been going on since the Bernanke Era. As such, I see a kind of perfect storm for oil here.  Russia will pull production off the market and shift exports from St. Petersburg (Urals grade) to Kosmino, near Vladivostok (ESPO grade), nabbing higher prices in the long run. Arab OPEC can’t hit its production quotas as it is and China’s reopening its entire economy. The Davos demanded ESG investment protocols have the oil industry anywhere from $600b to $1trillion underinvested in exploration and production and that number is rising. Increased demand, tight supply, low replenishment investment and WAR.  Even a moron or Joe Biden can see that $70 per barrel Brent is out of the question for any significant period of time. 9) Dow Jones 40,000+ As we enter 2023 the Dow Jones Industrials sit right around 33,000.  It was a tumultuous 2022. After hitting a new all-time high a year ago at 36952.53 it was all downhill for most equity indices. The stronger USD fueled a lot of capital reorganization, interest rates were finally forced higher by the Fed and incessant talk of recession kept everyone selling first and asking questions later. But in this ‘pivot-obsessed,’ low pain environment, relief rally after relief rally was snuffed out until finally in Q4 the Dow made everyone stand up and take a little notice as to what was happening… flight to quality into tangible assets with deep liquidity pools. The Dow lost 8.7% in 2022.  The S&P 500?  15.8%.  The NASDAQ?  27.7% For all of the bitching gold bugs did in 2022, gold was up 1.6%  If we begin to move into the next stage of stagflation (#1) then the Dow will continue to outperform the broader US equity markets as well as major foreign equity markets. 2022 Foreign Performance: German DAX in 2022: -9.2% Euro Stoxxx 50: -7.2% FTSE 100: 1.2% Are those indexes sustainable given the economic outlook for Europe and the ECB following the Fed up the rate curve lest everyone ‘lose their religion’ in it? Or will the still weakly expanding US economy look more tasty to global investors and the hopeless Brits look insanely overvalued? If we have another year like we did in 2022 where high inflation outpacing nominal growth drives tangible asset investment we should see an outperformance from the US vs. Europe as the currencies collapse and the ECB’s tools prove inadequate. Emerging Markets, depending on their proximity to China and the US may have banner years, especially those that underperformed in 2022. 10) Biden is Impeached This looks like the long-shot of 2023, but I think we are very close to the moment where Sen. Joe Manchin (D-WV) goes one step further than Kyrsten Sinema (I-AZ) and not only leaves the Democrats but flips to the GOP, giving them the outright majority in the Senate (50-49-1) Even though Kevin McCarthy didn’t lose his bid for re-election as House Speaker, which has turned CSPAN into must-see TV these past few days, the fight itself is indicative of serious change coming to Capitol Hill. This is the essence of the ‘counter-revolution’ in the US I wrote about a few weeks ago. The soft underbelly for Biden at this point is FTX and divulsions of the US Gov’t’s censorship activities on Twitter.  All of these things, along with corruption in Ukraine, can easily be tied back to Biden.   The majority of people are so black-pilled at this point that they believe nothing will ever change on Capitol Hill.  But the first rule of good investing is remembering that the majority is almost always wrong. And it is the sudden realization of their real power by a critical mass of people that alter the landscape literally overnight. So, while it looks like Matt Gaetz (R-FL) and Lauren Boebert (R-CO) tilted at windmills against a terminally corrupt Uniparty, they are simply fanning the smoldering embers of long-thought-dead principles on Capitol Hill. This was the subject of my latest podcast with Bill Fawell, the state of the revolution in the US. {N.B. Bill and I discussed his Cycle of Revolutions in Episode #110 last summer} And when you read the rules deal that McCarthy signed to get elected, this is a recipe for the weakest Speaker from a Uniparty perspective we’ve had in decades. It’s a win. A small win but a win nonetheless. Since the mid-terms, this transition period has exposed yet even more malfeasance by GOP leadership and the natives are more than restless.  They are angry.  There is no appetite for what the GOPe is selling (out) anymore.   The façade of the two-party system is over.  The 2024 election cycle begins in a few months and the mood of the country will tell you which of those up for re-election that will happily cross party lines to save their skins. It still leaves open the idea of Donald Trump swooping in after McCarthy tries to betray this deal. Matt Gaetz told you the plan when he nominated Trump from the floor. Embedded in the deal crafted are sincere nods to exactly the kind of signals to fiscal conservatism – halting the budget at FY 2022 levels, balanced budget in 10 years, 3/5ths vote on tax increases, etc. — that I’ve argued is needed to back up Powell and the Fed’s monetary tightening. Congress has a bigger wall of worry to climb to regain its credibility than the Fed does, but this is a good first step. It’s the step the world wants as well. Whether it will hold together or not is absolutely up for grabs. But more weakening of the Uniparty in the coming weeks sets the stage for getting rid of Biden and the rest of the vandals on Capitol Hill. There are a ton of ‘manilla envelopes’ being passed out right now. There is a lot of arm-twisting and overt threats happening. The Davos Mafiosi on The Hill will call in every marker.  We will see a lot of surprising behavior from unlikely sources in 2023.  The energy is there for something big and the incentives are lining up. Sacrificing “Biden” on this altar may be a small price to pay. In closing I want you to remember that few of America’s “enemies” want the US to collapse in a disorderly manner, not even China.   Davos is the only one with that agenda in mind because it fuels their megalomania. The strident anti-US commentariat is a curious mix at this point of shills for foreign powers, egoists who can’t bare to be wrong, and anti-capitalist ideologues talking their book.  The thoughtful are few and far between and I fear they’ve been gaslit into making huge analytic errors about what’s really going on. But when you think through what’s happening right now, everyone wants a rational, less arrogant US to settle down, accept a smaller piece of the future pie, and get back to business.  Our criticisms leveled at both Europe and the US is their colonial behavior and their imperial attitude.   So many will ‘lose their religions’ in 2023 that the changes which come will blindside people, including me.  Honestly, looking at this list, I think many of these predictions err on the side of caution. That’s the core issue driving all of these trends and my predictions stem from it. *  *  * Join my Patreon if you are the change you want to believe in. Tyler Durden Sun, 01/08/2023 - 11:30.....»»

Category: blogSource: zerohedgeJan 8th, 2023

Ray Dalio: Principles For Navigating Big Debt Crises

A Two-Part Look at: 1. Principles for Navigating Big Debt Crises, and 2. How They Apply to What’s Happening Now Now that we are at the beginning of a new year, it seems appropriate to review the timeless and universal mechanics of money and debt cycles and the principles for dealing with them, and then […] A Two-Part Look at: 1. Principles for Navigating Big Debt Crises, and 2. How They Apply to What’s Happening Now Now that we are at the beginning of a new year, it seems appropriate to review the timeless and universal mechanics of money and debt cycles and the principles for dealing with them, and then to apply these to what’s happening now. I will do the first of these today and the second in a week or two.  .first{clear:both;margin-left:0}.one-third{width:31.034482758621%;float:left;margin-left:3.448275862069%}.two-thirds{width:65.51724137931%;float:left}form.ebook-styles .af-element input{border:0;border-radius:0;padding:8px}form.ebook-styles .af-element{width:220px;float:left}form.ebook-styles .af-element.buttonContainer{width:115px;float:left;margin-left: 6px;}form.ebook-styles .af-element.buttonContainer input.submit{width:115px;padding:10px 6px 8px;text-transform:uppercase;border-radius:0;border:0;font-size:15px}form.ebook-styles .af-body.af-standards input.submit{width:115px}form.ebook-styles .af-element.privacyPolicy{width:100%;font-size:12px;margin:10px auto 0}form.ebook-styles .af-element.privacyPolicy p{font-size:11px;margin-bottom:0}form.ebook-styles .af-body input.text{height:40px;padding:2px 10px !important} form.ebook-styles .error, form.ebook-styles #error { color:#d00; } form.ebook-styles .formfields h1, form.ebook-styles .formfields #mg-logo, form.ebook-styles .formfields #mg-footer { display: none; } form.ebook-styles .formfields { font-size: 12px; } form.ebook-styles .formfields p { margin: 4px 0; } Get The Full Ray Dalio Series in PDF Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues (function($) {window.fnames = new Array(); window.ftypes = new Array();fnames[0]='EMAIL';ftypes[0]='email';}(jQuery));var $mcj = jQuery.noConflict(true); Q4 2022 hedge fund letters, conferences and more   Principles For Navigating Big Debt Crises In this post, I am giving a highly condensed version of what I described in my book Principles for Navigating Big Debt Crises, which is an extension of the study I did of all big debt cycles in all major countries over the last 100 years. It lays out how I see the mechanics working to produce money-credit-debt-market-economic cycles, so it is helpful for understanding the one we are going through now. This template has also been very helpful in my and Bridgewater’s investment decision making, including during the 2008 financial crisis when it allowed me and Bridgewater to both navigate the crisis well and provide some helpful advice to policy makers.  I wrote the book in 2018 at the suggestion of former Treasury Secretaries Henry Paulson and Timothy Geithner and Fed Chair Ben Bernanke because we went through the 2008 financial crisis together in our different roles and they thought that on the 10th anniversary of the crisis it was important to share the lessons of that crisis in this book and other books. At the same time, I had reached a stage in life where I realized that one of the most important things I needed to do was pass along the learnings I acquired about the mechanics of how things work and the principles for dealing with them well, so I put out this book both as a free PDF and a regular hardcover. In its first 65 pages there is a complete summary of the mechanics and principles. I believe the most important pages to read now are Pages 16 to 38, which explain the seven stages of the typical cycle, most importantly how to identify them and how to handle them. That is because identifying them and knowing how to move when they move is very important. The rest of the book delves into all the different cases, which you can skip or wade into in depth as you like.    In this post, I am going to describe how I see the mechanics and principles of the money-credit-debt-market-economic cycles working in fresh words as it applies to what’s now happening. In a week or two, I will look at the specifics of what has been happening, putting it in the context of this template. While there is too much for me to cover in a detailed and comprehensive way in the limited space I have here, I will pass along the most important points about how the debt dynamic works in an imprecise way to get across the most important concepts. Also, for readers who want to get just the most important concepts in the quickest possible way, I will put the most important points in bold so you can read just that.  How The Machine Works And Principles For Dealing With It In a nutshell, the debt dynamic works like a cyclical perpetual-motion machine with the most important cause/effect relationships that drive it working in essentially the same way through time and across countries. While of course changes over time and differences between countries exist, they are comparatively unimportant in relation to the timeless and universal mechanics and principles that are far less understood than they should be. For that reason, I will focus on these most important timeless and universal mechanics and principles. To convey them in brief I will explain just the major ones in a big-picture, simplified way rather than a detailed and precise way. In this big-picture, simplified model of the money-credit-debt-markets-economic machine, the following describes the major parts and the major players and how they operate together to make the machine work. There are five major parts that make up my simplified model of this machine. They are: goods, services, and investment assets, money used to buy these things, credit issued to buy these things, and debt liabilities (e.g., loans) and debt assets (e.g., deposits and bonds) that are created when purchases are made with credit. There are four major types of players in this model. They are:  those that borrow and become debtors that I call borrower-debtors,  those that lend and become creditors that I call lender-creditors,  those that intermediate the money and credit transactions between the lender-creditors and the borrower-debtors that are most commonly called banks, and  government-controlled central banks that can create money and credit in the country’s currency and influence the cost of money and credit.  If you understand how these major parts work and the motivations of these players in dealing with them, you will understand how the machine works and what is likely to happen next, so let’s get into that. As mentioned, goods, services, and investment assets can be bought with either money or credit. Money, unlike credit, settles the transaction. For example, if you buy a car with money, after the transaction, you’re both done. What has constituted as money has changed throughout history and across currencies. Since 1971, it has been simply what central banks printed and provided in the form of credit. Money, unlike credit, at this time can only be created by central banks [1] and can be created in whatever amounts the central banks choose to create.  Credit, unlike money, leaves a lingering obligation to pay and can be created by mutual agreement of any willing parties. Credit produces buying power that didn’t exist before, without necessarily creating money. It allows borrowers to spend more than they earn, which pushes up the demand and prices for what is bought over the near term while creating debt that requires the borrowers, who are now debtors, to spend less than they earn when they have to pay back their debts. This reduces demand and prices in the future, which contributes to the cyclicality of the system. Because debt is the promise to deliver money and central banks determine the amount of money in existence, central banks have a lot of power. Though not proportionately, the more money that’s in existence, the more credit and spending there can be; the less money in existence, the less credit and spending there can be.  Credit-debt expansions can only take place when both borrower-debtors and lender-creditors are willing to borrow and lend, so the deal must be good for both. Said differently, because one person’s debts are another’s assets, it takes both borrower-debtors and lender-creditors to want to enter into these transactions for the system to work. However, what is good for one is quite often bad for the other. For example, for debtors to do well, interest rates can’t be too high, while for creditors to do well, interest rates can’t be too low. If interest rates are too high for borrower-debtors, they will have to slash spending or sell assets to service their debts, or they might not be able to pay them back, which will lead markets and the economy to fall. At the same time, if interest rates are too low to compensate lender-creditors, they won’t lend and will sell their debt assets, causing interest rates to rise or central banks to print a lot of money and buy debt in an attempt to hold interest rates down. This printing/buying of debt will create inflation, causing a contraction in wealth and economic activity.  Over time environments will shift between those that are good and bad for lender-creditors and borrower-debtors, and it is critical for everyone who is involved in markets and economies in any way to know how to tell the difference. While this balancing act and the swings between the two environments take place, sometimes conditions make it impossible to achieve a good balance. That causes big debt, market, and economic risks. I will soon describe what conditions produce these risks, but before I do I want to explain the other players’ motivations and how they try to act on them. Banks [2] are the intermediaries between lender-creditors and borrower-debtors, so their motivations and how they work are important too. In all countries for thousands of years up to now, banks did essentially the same thing, which is borrow money from some and lend it to others, making money on the spread to generate a profit. How they do this creates the money-credit-debt cycles, most importantly the unsustainable bubbles and big debt crises. Banks are motivated to make profits by lending out a lot more money than they have, which they do by borrowing at a cost that is lower than the return they take in from lending. That works well for the society and is profitable when those who are lent money use it productively enough to pay back their loans and make the bank a profit—and when those the banks borrowed from don’t want their money back in amounts that are greater than what the banks actually have. However, when the loans aren’t adequately paid back or when those that the banks borrowed from want to get more of the money they lent to the banks than the banks have to give them, debt crises happen. Over the long run, debts can’t rise faster than the incomes that are needed to service the debts, and interest rates can’t be too high for borrower-debtors or too low for lender-creditors for very long. If debts keep rising faster than incomes and/or interest rates are too high for borrower-debtors or too low for lender-creditors for too long, the imbalance will topple into a big market and economic crisis. Said differently, big debt crises come about when the amounts of debt assets and debt liabilities become too large relative to the amount of money in existence and/or the amounts of goods and services in existence. For that reason, it pays to watch these ratios.  Central banks came into existence to smooth these cycles, most importantly by handling big debt crises. Until relatively recently (e.g., 1913 in the United States) there weren’t central banks, and money that was in private banks was typically either physical gold or silver or paper certificates to get gold and silver. Throughout these times, there were boom-bust cycles because borrower-debtors, lender-creditors, and banks went through the credit-debt cycles I just described. These cycles turned into big debt and economic busts when too many debt assets and liabilities led to creditor “runs” to get money from debtors, most importantly the banks. These runs produced debt-market-economic collapses that eventually led governments to create central banks to lend money to banks and others when these big debt crises happened. Central banks can also smooth the cycles by varying interest rates and the amount of money and credit in the system to change the behaviors of borrower-debtors and lender-creditors. Where do central banks get their money from? They “print” it (literally and digitally), which, when done in large amounts, alleviates the debt problems because it provides money and credit to those who desperately need it and wouldn’t have had it otherwise. But doing so also reduces the buying power of money and debt assets and raises inflation from what it would have been.   Central banks want to keep debt and economic growth and inflation at acceptable levels. In other words, they don’t want debt and demand to grow much faster or slower than is sustainable and they don’t want inflation to be so high or so low that it is harmful. To influence these things, they raise interest rates and tighten the availability of money or they lower interest rates and ease the availability of money, which influences creditors and debtors who are striving to be profitable. The greater the size of the debt assets and debt liabilities relative to the real incomes being produced, the more difficult the balancing act is, so the greater the likelihood of a debt-caused downturn in the markets and economy. Because borrower-debtors, lender-creditors, banks, and central banks are the biggest players and drivers of these cycles, and because they each have obvious incentives affecting their behaviors, it is pretty easy to anticipate what they are likely to do and what is likely to happen next. When debt growth is slow, economies are weak, and inflation is low, central bankers will lower interest rates and create more money and credit which will incentivize more borrowing and spending on goods, services, and investment assets which will drive the markets for these things and the economy up. At such times, it is good to be a borrower-debtor and bad to be a lender-creditor. When debt growth and economic growth are unsustainably fast and inflation is unacceptably high, central bankers will raise interest rates and limit money and credit which will incentivize more saving and less spending on goods, services, and investment assets. This will drive the markets and economy down because it’s then better to be a lender-creditor-saver than a borrower-debtor-spender. This dynamic creates short-term debt cycles (also known as business cycles) that have typically taken about seven years, give or take three years. In almost all cases throughout history, over time these short-term debt cycles have added up to create long-term debt cycles that have lasted about 75 years, give or take about 25 years. The stimulation phases of these cycles create bull markets and economic expansions and the tightening phases create bear markets and economic contractions. For a more complete review of these cycles and key indicators read Pages 16 to 65 in the book Principles for Navigating Big Debt Crises.  Why don’t central bankers do a better job than they have been doing in smoothing out these debt cycles by better containing debt so it doesn’t reach dangerous levels? There are four reasons: Most everyone, including central bankers, wants the markets and economy to go up because that’s rewarding and they don’t worry much about the pain of paying back debts, so they push the limits, including becoming leveraged to long assets until that can’t continue because they have reached the point that debts are too burdensome so they have to be restructured to be reduced relative to incomes. It is not clear exactly what risky debt levels are because it’s not clear what will happen that will determine future incomes. There are opportunity costs and risks to not providing credit that creates debt. Debt crises, even big ones, can usually be managed to reduce the pain of them to acceptable levels.  Debt isn’t always bad, even when it’s not economic. Too little credit/debt growth can create economic problems as bad or worse than too much, with the costs coming in the form of forgone opportunities. That is because 1) credit can be used to create great improvements that aren’t profitable that would have been forgone without it, and 2) the losses from the debt problems can be spread out to be not intolerably painful if the government is in control of the debt restructuring process and the debt is in the currency that the central bank can print.  When debt assets and liabilities become too large relative to incomes and debt burdens have to be reduced, there are four types of levers that policy makers can pull to reduce the debt burdens: austerity (i.e., spending less), debt defaults/restructurings, the central bank “printing money” and making purchases (or providing guarantees), and transfers of money and credit from those who have more than they need to those who have less. Policy makers typically try austerity first because that’s the obvious thing to do and it’s natural to want to let those who got themselves and others into trouble bear the costs. This is a big mistake. Austerity doesn’t bring debt and income back into balance because one person’s debts are another person’s assets so cutting debts cuts investors’ assets and makes them “poorer” and one person’s spending is another person’s income so cutting spending cuts incomes. For that reason cuts in debts and spending cause a commensurate cut in net worths and incomes, which is very painful. Also, as the economy contracts, government revenues typically fall at the same time as demands on the government increase, which leads deficits to increase. Seeking to be fiscally responsible at this point, governments tend to raise taxes which is also a mistake because it further squeezes people and companies. More simply said, when there is spending that’s greater than revenues and liquid liabilities that are greater than liquid assets, that produces the need to borrow and sell debt assets, which, if there’s not enough demand for, will produce one kind of crisis (e.g., deflationary) or another (e.g., inflationary). The best way for policy makers to reduce debt burdens without causing a big economic crisis is to engineer what I call a “beautiful deleveraging,” which is when policy makers both 1) restructure the debts so debt service payments are spread out over more time or disposed of (which is deflationary and depressing) and 2) have central banks print money and buy debt (which is inflationary and stimulating). Doing these two things in balanced amounts spreads out and reduces debt burdens and produces nominal economic growth (inflation plus real growth) that is greater than nominal interest rates, so debt burdens fall relative to incomes. If done well, the deflationary and depressing reduction of debt payments and the inflationary and stimulating printing of money and buying of debt by the central banks balance each other. In the countries I studied, all big debt crises that occurred with the debts denominated in a country’s own currency were restructured quickly, typically in one to three years. These restructuring periods are periods of great risk and opportunity. If you want to learn more about these periods and processes, they are explained more completely in Principles for Navigating Big Debt Crises.  How These Mechanics Have Played Out From 1945 Until Now As World War II was ending, a new world monetary system began in 1944. It was a US dollar-based system because the US was the richest country (it had most of the world’s gold and gold was money at the time), it was the world’s dominant economic and trading power, and it was the world’s dominant military power. For those reasons, a US dollar credit system was created in a way that tied debt assets and liabilities to gold, and other countries tied their currencies to the dollar. From 1945 to 1971 there were six short-term money-credit-debt-economic cycles in which the United States central government and central bank created more debt asset claims on the gold than the US had gold in the bank. As had happened repeatedly over thousands of years, the much larger financial claims on the money than the actual money in the bank led to a run on the central bank to get the money (i.e., the gold), which led the US in 1971 to default on its promises to allow holders of debt assets to turn them in for the money (gold). In other words, during the whole 1945-71 period the Federal Reserve guided this credit cycle in a way that created many more debt asset claims on the gold-money than there was in the government’s bank so the government had to default on its promises to provide gold-money. That led to the debt restructuring that took the form of a US government debt default and the creation of a lot of money, credit, and debt which led to the devaluations of money and large inflation around the world. All that should not have been a surprise to students of economic history because history has shown that when governments are faced with this choice of how to deal with the excessive debts and the need to bring them down relative to incomes, this process is the least painful one, though it is still painful. That is why, in the end of all big debt cycles, all currencies have either been devalued or destroyed. Since 1971, we have been in what is called a fiat monetary system in which there are no constraints on governments’ abilities to create money and credit. For reasons explained more completely in Chapters 3 and 4 of my book Principles for Dealing with the Changing World Order, throughout history hard-money-linked monetary systems created too much debt, eventually leading to debt and economic crises and soft money—and quite often the creation of fiat monetary systems, which also created too much debt that led to money and debt devaluations which led to very tight money and often the return of hard-money systems, until these broke down, and so on repeatedly. The money and debt devaluations of 1971 and the newly gained free ability of central banks to create money, credit, and debt to fight economic stagnation led to the massive stagflation of the 1970s. Naturally the pendulum swung so that when late-1970s inflation was perceived as a bigger problem than weak or negative growth, the Fed produced a tightening of monetary policy in 1979-82. This flipped things so that it was much better to be a lender-creditor than a borrower-debtor and downturns in markets and economies followed. As explained, similar versions of this cycle have happened repeatedly for the same reasons throughout history. In the interests of time and space I won’t now take you through all that has happened since 1980, but I will give a quick summary to show that the pattern has continued until now: short-term debt cycles adding up to greater and greater levels of debt assets and debt liabilities that constitute the big long-term debt cycle. Normally when central banks want to be stimulative, they lower interest rates and/or create a lot more money and credit, which creates a lot more debt. This both extends the expansion phase of the cycle and makes the debt asset and debt liability balance more precarious. That is what happened between 1980 and 2008. During that time, debts continued to rise relative to incomes as every cyclical peak and every cyclical trough in interest rates was lower than the one before it until interest rates hit 0% in 2008.  History shows us that when central banks can’t lower interest rates anymore and want to be stimulative, they print money and buy debt, especially government debt. That gives debtors, most importantly governments, money and credit to prevent them from defaulting and allows them to continue to borrow to spend more than they are earning, so their debts can continue to increase. That is what has been happening since 2008. At such times, central banks are making up for the shortfall in the private sector’s demand for debt. They are happy to do so even if it doesn’t make economic sense because their objective is to stabilize markets and economies, not to make a profit. During this part of the big debt cycle, central banks become the big buyers of debt and they become the big owners of debt (the big creditors) rather than private investors. Because central banks don’t mind having losses from holding the debt that has reduced in value and because they don’t worry about getting squeezed, they can continue to prevent a debt crisis by printing money and buying debt. They let their balance sheets and income statements deteriorate in order to protect the private sector’s income statements and balance sheets. This process is called debt monetization. This dynamic has repeatedly taken place throughout time and across countries, and it has been true from 2009 until recently with each cyclical stimulation by central banks creating money and credit to buy debt larger than the one before it. One can see that occur via changes in the central banks’ balance sheets by looking at their holdings of debt assets that were acquired by providing those who sold the debt assets to central banks with cash and credit. In the United States, Europe, and Japan, they own roughly 20%, 30%, and 40% of the government debt, respectively, and roughly 10%, 10%, and 20% of the total debt, respectively. While in my next piece that I will put out in a week or two I will show what happened and what is now happening, my main goal of this piece has been to explain how the machine works. I especially want to show you that the big money-credit-debt cycle that we are in is taking place in the same basic way as past cycles have taken place for thousands of years with logical cause/effect relationships driving them. The only important difference between today’s money (which is now fiat money) and prior monies (which were not fiat monies, such as that in the 1945-71 period) is the link to hard currency isn’t there. That means that central banks can now more freely create money and credit than in the past. By the way, fiat monetary systems have existed throughout history, so studying them provides invaluable lessons of how they work that provide clues for how the one we are in will transpire. What hasn’t changed through these shifts in monetary systems over the millennia—and hasn’t been eliminated as a problem—is the creation of unsustainably big debt liabilities and assets relative to the amounts of money, goods, services, and investment assets in existence, which can lead to a run for the money and the goods and services that have intrinsic value. Because the only value of debt assets and other financial assets is to buy goods and services, if the holders of those financial assets actually tried to convert these assets back into money and goods and services, they would see that they couldn’t get the buying power they believe exists which could cause a run that’s like a bank run. For that reason there remains the risk that those who are holding financial assets will turn them in for money to buy goods and services which would cause either inflationary spirals or severe economic weakness, depending on how much the central bank tries to fight the economic contraction effects by printing money and making credit easily available. While central banks can more easily and flexibly print money and give it to debtors to alleviate the debt problems and give spenders the ability to spend in a fiat monetary system, it should be noted that their doing so doesn’t eliminate the rises in debt assets and debt liabilities that become excessive and produce debt crises. My examination of past cycles, including those in fiat currencies, shows the debt cycle dynamics I described, including very big debt crises, always existed in virtually all countries. I see no reason to believe they will stop. On the contrary, debt assets and debt liabilities are now very high and still rising, so it looks more likely that most economies’ central banks, most importantly the US’s Fed, Europe’s ECB, and Japan’s BoJ, are approaching the limits in their abilities to continue the money-credit-debt expansions that have been true throughout our lifetimes.    To repeat, when there are big debt crises, central banks have to choose between keeping money “hard,” which will lead debtors to default on their debts which will lead to deflationary depressions, or making money “soft” by printing a lot of it which will devalue both it and debt. Because paying off debt with hard money causes such severe market and economic downturns, when faced with this choice central banks always eventually choose to print and devalue money. For the case studies see Part 2 of Principles for Navigating Big Debt Crises. Of course, each country’s central bank can only print that country’s money, which brings me to my next big point. If debts are denominated in a country’s own currency, its central bank can and will “print” the money to alleviate the debt crisis. This allows them to manage it better than if they couldn’t print the money, but of course it also reduces the value of the money.  I have only a few remaining points and then we are done. Debt crises are inevitable. Throughout history only a very few well-disciplined countries have avoided debt crises. That’s because lending is never done perfectly and is often done badly due to how the cycle affects people’s psychology to produce bubbles and busts. Most debt crises, even big ones, can be managed well by economic policy makers and can provide investment opportunities for investors if they understand how they work and have good principles for navigating them well. In summary and to reiterate: Goods, services, and investment assets can be produced, bought, and sold with money and credit.  Central banks can produce money and can influence the amount of credit in whatever quantities they want.  Borrower-debtors ultimately require enough money and low enough interest rates for them to be able to borrow and service their debts.  Lender-creditors require high enough interest rates and low enough default rates from the debtors in order for them to get adequate returns to lend and be creditors.  This balancing act becomes progressively more difficult as the sizes of the debt assets and debt liabilities increase relative to the incomes. A “beautiful deleveraging” can be engineered by central governments and central banks to reduce debt burdens if the debt is in their own currencies.  Over the long term, being productive and having healthy income statements (i.e., earning more than one is spending) and healthy balance sheets (i.e., having more assets than liabilities) are the markers of financial health. If you know where in the credit-debt cycle each country is and how the players are likely to behave, you should be able to navigate these cycles pretty well.  The past is prologue.  As always, I’m not certain of anything, I am putting these thoughts out for your consideration to take or leave as you like, and I hope that you find them helpful. Footnotes [1] Bitcoin is an example of an attempt to create a private version of money using blockchain distributed ledger technology. 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Those responsible for preparing this report receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues. Article by Ray Dalio, via LinkedIn.....»»

Category: blogSource: valuewalkJan 6th, 2023

Inflation, Recession, & Declining US Hegemony

Inflation, Recession, & Declining US Hegemony Authored by Alasdair Macleod via GoldMoney.com, In the distant future, we might look back on 2022 and 2023 as pivotal years. So far, we have seen the conflict between America and the two Asian hegemons emerge into the open, leading to a self-inflicted energy crisis on the western alliance. The forty-year trend of declining interest rates has ended, replaced by a new rising trend the full consequences and duration of which are as yet unknown. The western alliance enters the New Year with increasing fears of recession. Monetary policy makers face an acute dilemma: do they prioritise inflation of prices by raising interest rates, or do they lean towards yet more monetary stimulation to ensure that financial markets stabilise, their economies do not suffer recession, and government finances are not driven into crisis? This is the conundrum that will play out in 2023 for the US, UK, EU, Japan, and others in the alliance camp. But economic conditions are starkly different in continental Asia. China is showing the early stages of making an economic comeback. Russia’s economy has not been badly damaged by sanctions, as the western media would have us believe. All members of Asian trade organisations are enjoying the benefits of cheap oil and gas while the western alliance turns its back on fossil fuels. The message sent to Saudi Arabia, the Gulf Cooperation Council, and even to OPEC+ is that their future markets are with the Asian hegemons. Predictably, they are all gravitating into this camp. They are abandoning the American-led sphere of influence. 2023 will see the consequences of Saudi Arabia ending the petrodollar. Energy exporters are feeling their way towards new commercial arrangements in a bid to replace yesterday’s dollar. There’s talk of a new Asian trade settlement currency. But we can expect oil exports to be offset by inward investment, particularly between Saudi Arabia, the GCC, and China. The most obvious surplus emerging in 2023 is of internationally held dollars, whose use-value is set to drop away leaving it as an empty shell. It amounts to a perfect storm for the dollar, and all those who sail with it. Those of us who live long enough to look back on these years are likely to find them to have been pivotal for both currencies and global alliances. They will likely mark the end of western supremacy and the emergence of a new, Asian economic domination. The interest rate threat to the west’s currencies It is a mark of how bad the condition of Western economies has become, when interest rate rises of only a few cent are enough to threaten to precipitate an economic crisis. The blame can be laid entirely at the door of post-classical macroeconomics. And like a dog with a bone, their high priests refuse to let go. Despite all the evidence to the contrary, they would now have you believe that inflation is transient after all, though they have conceded the possibility of inflation targets being raised slightly. But the wider concern is that even though interest rates have yet to properly reflect the extent of currency debasement, they have risen enough to tip the world into recession.  In their way of thinking, it is either inflation or recession, not both. A recession is falling demand and falling demand leads to falling prices, according to macroeconomic opinions. When both inflation and a recession are present, they cannot explain it and it does not accord with their computer models. Therefore, government economists insist that consumer price rises will return to the 2% target or thereabouts, because rising interest rates will trigger a recession and demand will fall. It will just take a little longer than they originally thought. They now saying that the danger is no longer just inflation. Instead, a balance must be struck. Interest rate policy must take the growing evidence of recession into account, which means that bond yields should stop rising and after their earlier falls equity markets should stabilise. For them, this is the path to salvation. In pursuing this line, the authorities and a group thinking establishment have had success in tamping down inflation expectations, aided by weakening energy prices.  Since March, West Texas intermediate crude has retraced 50% of its rise from March 2020 to March 2022. Natural gas has fallen forty per cent from its August high. If the western media is to be believed, Russia is continually on the brink of failure, the suggestion being that price normality will return soon. And the inflationary pressures from rising energy and food prices will disappear. What is really happening is that bank credit is now beginning to contract. Bank credit represents over 90% of currency and credit in circulation and its contraction is a serious matter. It is a change in bankers’ mass psychology, where greed for profits from lending satisfied by balance sheet expansion is replaced by caution and fear of losses, leading to balance sheet contraction. This was the point behind Jamie Dimon’s speech at a banking conference in New York last June, when he modified his description of the economic outlook from stormy to hurricane force. Coming from the most influential commercial banker in the world, it was the clearest indication we can possibly have of where we were in the cycle of bank credit: the world is on the edge of a major credit downturn. Even though their analysis is flawed, macroeconomists are right to be very worried. Over nine-tenths of US currency and bank deposits now face a meaningful contraction. This is a particular problem earlier exacerbated by covid lockdowns and for businesses affected by supply chain issues. It gives commercial banks a huge problem: if they begin to whip the credit rug out from under non-financial businesses, they will simply create an economic collapse which would threaten their entire loan book. It is far easier for a banker to call in loans financing positions in financial assets. And it is also a simple matter to call in and liquidate financial asset collateral when any loan begins to sour. This is why the financial sector and relevant assets have been in the firing line so far. Central banks see these evolving conditions as their worst nightmare. They are what led to the collapse of thousands of American banks following the Wall Street crash of 1929-1932. In blaming the private sector for the 1930s slump which followed and was directly identified with the collapse in bank credit, central bankers and Keynesian economists have vowed that it must never happen again. But because this tin-can has been kicked down the road for far too long, we are not just staring at the end of a ten-year cycle of bank credit, but potentially at a multi-decade super-cyclical event, rivalling the 1930s. And given the greater elemental forces today, potentially even worse than that. We can easily appreciate that unless the Fed and other central banks lighten up on their restrictive monetary policies, a stock market crash is bound to ensue. And this is what we saw when the interest rate trend began a new rising trajectory last January. For the Fed, preventing a stock market crash is almost certainly a more immediate priority than protecting the currency. It is not that the Fed doesn’t care, it’s because they cannot do both. Their mandate incorporates unemployment, and their ingrained neo-Keynesian philosophies are also at stake. Consequently, while we can see the dangers from contracting bank credit, we can also see that the Fed and other major central banks have prioritised financial market stability over increasing interest rates to properly reflect their currencies’ loss of purchasing power. The pause in energy price rises together with media claims that Russia will be defeated have helped to give markets a welcome but temporary period of stability. The policy of threatening continually higher interest rates must be temporary as well. In effect, monetary policy makers have no practical alternative to prioritising the prevention of bank credit deflation over supporting their currencies. Realistically, they have no option but to fight recession with yet more inflation of central bank currency funding increased government budget deficits, and through further expansion of commercial bank reserves on its own balance sheet, the counterpart of quantitative easing.  Besides central bank initiatives to keep bond yields as low as practicably possible, runaway government budget deficits due to falling tax income and extra spending to counteract the decline in economic activity will need to be funded. And given that the world is on a dollar standard, in the early stages of a recession the Fed will probably assume that the consequences for foreign exchange rates of a new round of currency debasement can be ignored. While currency debasement can then be expected to accelerate for the dollar, all the other major central banks can be expected to cooperate. The point about global economic cooperation is that no central bank is permitted to follow an independent line. The private sector establishment errs in thinking that the choice is between inflation or recession. It is no longer a choice, but a question of systemic survival. A contraction in commercial bank credit and an offsetting expansion of central bank credit will almost certainly take place. The former leads to a slump in economic activity and the latter is a commitment too large for an inflating currency to bear. It is not stagflation, a condition which according to neo-Keynesian beliefs should not occur, but a doppelgänger rerun of what did for John Law and France’s economy in 1720. The inconvenient truth is that policies of monetary stimulation invariably end with the impoverishment of everyone. The role of credit and the final solution To clarify how events are likely to unfold in 2023, we must revisit the basics of monetary theory, and the difference between money and credit. It is the persistent debasement of the latter which has been the problem and is likely to condition the plans for any nation seeking to escape from the monetary consequences of a shift in hegemonic power from the western alliance to the Russian Chinese partnership. It is probably too late for any practical solution to the policy dilemma faced by monetary policy committees in western central banks today. When commercial bankers collectively awaken to the lending risks created in large part by their earlier optimism, survival instincts kick in and they will reduce their exposure to risk wherever possible. A credit cycle of boom and bust is the consequence. Inevitably in the bust phase, not only are malinvestments weeded out, but over-leveraged banks fail as well. While the intention is to smooth out the cyclical effects on the economy, the response of the state and its central bank invariably makes things worse, with monetary policy undermining the currency. It is important to appreciate that with a sound currency system, which is a currency that only changes in its quantity at the behest of its users, excessive credit expansion must be discouraged. The opposite is encouraged by central banks. Extreme leverage of asset to equity ratios for systemically important banks of well over twenty times in Japan and the Eurozone are entirely due to central bank policies of suppressing interest rates. It is only by extreme leverage that commercial banks, which are no more than dealers in credit, can make profits from the slimmest of credit margins when zero and negative deposit rates are forced upon them. Since bank credit is reflected in customer deposits, a cycle of excessive bank credit expansion and contraction becomes economically destructive. The solution advocated by many economists of the Austrian school is to ban bank credit entirely, replacing mutuum deposits, whereby the money or currency becomes the bank’s property and the depositor a creditor, with commodatum deposits where ownership remains with the depositor. Separately, under these arrangements banks act as arrangers of finance for savers wishing to make their savings available to borrowers for a return. The problem with this remedy is that of the chicken and the egg. Production requires an advance of capital to provide products at a profit in due course. The real world of free markets therefore requires credit to function. And savings for capital reinvestment are also initially funded out of credit. So, whether the neo-Austrians like it or not we are stuck with mutuum deposits and banks which function as dealers in credit.  That is as far as we can go with commercial banks and bank credit. The other form of credit in public circulation is the liability of the issuer of banknotes. To stabilise their value, the issuer must be prepared to exchange them for gold coin, which is and always has been legal money. And once the issuer has established sufficient gold reserves, the issue of any additional banknotes must be covered by additional gold coin backing. But much more must be done. Government budget deficits must not be permitted except strictly on a temporary basis, and total government spending (including state, regional, and local governments) reduced to the smallest possible segment of the economy. It means pursuing a deliberate policy of rescinding legal obligations for government agencies to provide services and welfare for the people, retaining only a bare minimum for government to function in providing laws, national defence and for the protection of the interests of everyone without favour. All else can only be the responsibility of individuals arranging and paying for services themselves. It means that most bureaucrats employed unproductively in government must be released and made available to be redeployed in the private sector productively. A work ethic perforce will return to replace an expectation that personal idleness will always be subsidised. Given political realities, this cannot happen except as a considered response following a major credit, currency, and economic meltdown. It is a case of crisis first, solution second. Therefore, there is no practical alternative to the continual debasement of currencies until their users reject them entirely as worthless. Money is only gold, and all the rest is credit For a lack of any alternative outcome, the eventual collapse of unbacked currencies is all but guaranteed. To appreciate the dynamics behind such an outcome, we must distinguish between money and credit. Currency in circulation is not legal money, being only a form of credit issued as banknotes by a central bank. It has the same standing as credit in the form of deposits held in favour of the commercial banks. The distinction between money and credit, with money wrongly being assumed to be banknotes is denied by the macroeconomic establishment today. Officially and legally, money is only gold coin. It is also silver coin, though silver’s official monetary role fell into disuse in nineteenth century Europe and America.  Gold and silver coin as money were codified under the Roman Emperor Justinian in the sixth century and is still the case legally in Europe today. In English law, the unification of the Court of Chancery and common law in 1875 formally recognised the Roman position, and gold sovereigns, which were the monetary standard from 1820, became unquestionably recognised as money in common law from then on. Attempts by governments to restrict or ban ownership of gold as money must not be confused with the legal position. FDR’s executive order in 1933 banning American citizens from owning gold did not change the status of money. Nor did similar government moves elsewhere. And the neo-Keynesian denigration of a gold standard doesn’t alter its status either. Nor do the claims from cryptocurrency enthusiasts that their schemes are a modern replacement for gold’s monetary role. As John Pierpont Morgan stated in his testimony before Congress in 1912, “Gold is money. Everything else is credit”. He was not expressing an opinion but stating a legal fact. That gold does not commonly circulate as a medium of exchange is explained by Gresham’s law, which states that bad money drives out the good. Originally describing the difference between clipped coins and their wholly intact counterparts, Gresham’s law also applies to gold’s relationship with currency. Worldwide, unrelated societies hoard gold coin, spending currency banknotes and bank deposits first, which are universally recognised as lower forms of media of exchange. Even central banks hoard gold. And as they have progressively distanced themselves from their roles as servants of the public, they refuse to allow the public access to their gold reserves in exchange for their banknotes. The importance of gold as a store of value, that is as sound money, appears to be difficult to understand for people not accustomed to regarding it as such. Instead, they regard it is a speculative investment, which can be held in securitised or derivative form while it is profitable to do so. When it comes to hedging a declining currency’s purchasing power, the preference today is for assets that outperform the cost of borrowing. As an example of this, Figure 1 shows London’s residential housing priced in fiat sterling and gold. Housing is the most common form of public investment in the UK, further benefiting from tax exemptions for owner-occupiers. According to government data, since 1968 when house price statistics began median house prices in London have risen on average by 115 times. But priced in gold, they have risen only 29% in 54 years. With prices having generally risen by less outside London and its commuter belt, some areas might have seen falls in prices measured in gold. It is virtually impossible to get people to understand the implications. They correctly point out the utility of having somewhere to live, which is not reflected in prices. They might also point out that property held by landlords produces a rental income. Furthermore, most buyers leverage their investment returns by having a mortgage. In investing terms, these arguments are entirely valid. But they only prove that the purpose of owning an asset is to obtain a return or utility from it, with which we can all agree. The purpose of money or currency is different: it is a medium for purchasing an asset which will give you a benefit. What is not understood is that far from giving property owners a capital return which exceeds the debasement of the currency, they have just about kept pace with it. And if you had bought property elsewhere in the UK, your capital values might even have fallen, measured in real legal money, which is gold. Since the end of the Bretton Woods agreement, the consequences of currency debasement for asset prices such as residential property have hardly mattered. The debasement of currencies has never been violent enough to undermine assumptions that residential property will always retain its value in the long run. Other assets, such as a portfolio of financial equities are seen to offer similar benefits of apparent protection against currency debasement. But we now appear to be on the cusp of a major currency upheaval. The global banking system is more highly leveraged on balance sheet to equity measures than ever before, and bank credit is beginning to contract. All the major central banks have undeclared loses which wipe out their nominal equity, affecting their own credibility as backstops to their commercial banking systems. Systemic risks are escalating, even though market participants have yet to realise it. And as economic activity turns down, government budget deficits are going to rapidly escalate. A practical remedy for the situation cannot be entertained, so the debasement of currencies is bound to accelerate. Mortgage borrowing costs are already rising, undermining affordability of residential property in fiat money terms. The relationship between currency and real money, which is gold coin, will almost certainly break down. Measured in gold, a banking and currency crisis will have the effect of driving residential property prices significantly lower, while they could be maintained or even move somewhat higher measured in more rapidly depreciating fiat currencies. The transition from financialised fiat currencies to… what? There is an overriding issue which we must consider now that the long-term decline of interest rates appears to have come to an end, and that is how the dollar will fare in future. While the dollar has lost 98% of its purchasing power since the ending of Bretton Woods, it has generally been gradual enough not to undermine its role as the world’s international medium of exchange and for the determination of commodity prices. It has retained sufficient value to act as the world’s reserve currency and is the principal weapon by which America has exercised her hegemony. It is in its role as the weapon for waging financial wars which may finally lead to the dollar’s undoing, as well as undermining the purchasing powers of the currencies aligned with it. By cutting Russia off from the SWIFT settlement system, thereby rendering her fiat currency reserves valueless, the western alliance hoped that together with sanctions Russia would be brought to her knees. The policy has failed, as sanctions usually do, while the message sent to all non-aligned nations was that America and its western alliance could render national currency reserves valueless without notice. Consequently, there has been a worldwide rethink over the dangers of relying on dollars, and for that matter the other major currencies issued by member nations of the western alliance. At this time of transition away from a weaponised dollar, there is a general uncertainty in nations aligned with the Russian Chinese axis over how to respond, other than to sell fiat currencies to buy more gold bullion. But the sheer quantities of fiat currency relative to the available bullion suggests that at current values the bullion is not available in sufficient quantities to credibly turn fiat currencies into gold substitutes. Nevertheless, it would be logical for the gold-rich Russian Chinese axis and nations in their sphere of influence to protect their own currencies from a rapidly developing fiat currency catastrophe. So far, none of them appear to be prepared to do so by introducing gold standards for the benefit of their citizens. Only Russia, under pressure from currency and trade sanctions has loosely tied its rouble to energy and commodity exports. In the vaguest of terms, it might be regarded as a synthetic equivalent of linking the rouble to gold. Why this is so is illustrated in Figure 2. Measured in fiat currencies, the oil price is exceedingly volatile, while in true money, gold, it is relatively stable. Measured in gold, the oil price today is about 20% lower than it was in 1950. Since then, the maximum oil price in gold has been a doubling and the minimum a fall of 85%. That compares with a rise in US dollars of 5,350% and no fall at all. Undoubtedly, if gold had traded free from statist intervention and speculation in currency and commodity markets and from the effects of fiat-induced economic booms and busts, the price of oil in gold would most likely have been even steadier. By insisting that those dubbed by Putin as the unfriendly nations must buy roubles to pay for Russian oil, demand for roubles on the foreign exchanges became linked to demand for Russian oil, which in turn is linked more closely to gold than the unfriendlies’ currencies. But it seems that in official minds, making this link between the rouble, oil, and gold is a step too far. When it comes to replacing the dollar with a new trade currency for the Asian powers, their initial discussions have suggested a more broadly based solution. The Eurasian Economic Union (EAEU), consisting mainly of a central Asian subset of the Shanghai Cooperation Organisation (SCO) earlier this year announced that plans for a trade settlement currency were being considered, backed by a mixture of commodities and the currencies of member states.  So far, members of the SCO have restricted their discussion to ways of replacing the dollar for the purpose of transactions between them, a long-term project driven not so much by change in Asia but by US trade aggression and American hegemonic dollar policies over time. Following Russian sanctions imposed by the West, it is likely that the dangers of an immediate dollar crisis are now being more urgently addressed by governments and central banks throughout Asia.  With the West plunging into a combined systemic and currency crisis, no national government outside the dollar-based system appears to know what to do. Only Russia has been forced into action. But even the Russians are feeling their way, with vague reports that they are looking at a gold standard solution, and others that they are considering Sergey Glazyev’s EAEU trade currency project. As well as heading a committee set up to advise on a new trade settlement currency, Glazyev is a senior economic advisor to Vladimir Putin. From the little information made available, it appears that Glazyev’s EAEU monetary committee is ruling out a gold standard for the new trade currency. Instead, it has been considering alternative structures without achieving any agreement so far. But for the project to go ahead, proposals reported to include national currencies in its valuation basket must be abandoned. Not only is this an area where Glazyev is unlikely to obtain a consensus easily from member states, but to include a range of fiat currencies is unsound and will not satisfy the ultimate objective, which is to find a credible replacement for the US dollar for cross-border trade settlements. For confidence in the new currency to be maintained, the structure must be both simple and transparent. Since the currency committee’s press release earlier this year, there have been further developments likely to influence it construction. Led by Saudi Arabia, the Gulf Cooperation Council is turning its back on the dollar as payment for oil and gas. Again, this development is attributable to climate change policies of the US-led western alliance. Not only has the alliance demonstrated that foreign reserves held in its fiat currencies can be rendered valueless overnight, but climate change policies send a clear message that for the GCC the future of their trade is not with the western alliance. For long-term stable trade relationships, they must turn to the Russian Chinese axis. It is happening before our eyes. China has signed a 27-year supply agreement with Qatar for its gas. President Biden attempted to secure a agreement with Saudi Arabia for additional oil output. He left with nothing. President Xi visited earlier this month and secured a long-term energy and investment agreement, whereby Saudi’s currency exposure to the yuan is minimised through Chinese capital investment programmes in the kingdom Already, an increase in China’s money supply is an early indication that propelled by cheap energy and infrastructure investment programmes, her economy is in the early stages of a new growth phase, while the western alliance faces a potentially deep recession. The currency effect is likely to be supportive of the yuan/dollar cross rate, which the Saudis are likely to have factored into their calculations. But they will almost certainly need more than that. They will want to influence settlement currencies for the balance of their trade. Their options are to minimise balances on the back of inward investment flows, as mentioned above. They can seek to influence the construction of the proposed EAEU trade settlement currency. Or they can build their gold reserves, to the extent they might wish to hedge currencies accumulating in their reserves. For the western alliance, the death knell for the petrodollar means that 2023 will see a substantial reduction of dollar holdings in the official reserves of all nations in the Russian Chinese axis and those friendly to it. The accumulation of dollars in foreign reserves since the end of the Bretton Woods regime is considerable, and its reversal is bound to create additional difficulties for the US authorities. Foreign owned US Treasuries are starting to be sold, and the $32 trillion mountain of financial assets and bank deposits are set to be substantially reduced. The potential for a run on the dollar, driving up commodity input prices in dollars, is likely to become a considerable problem for both the US and the entire western alliance in 2023. Conclusion We have noted the deteriorating systemic and monetary prospects for fiat currencies, predominantly those of the dollar-based Western currency system. Both sound economic and Marxist theory indicates that a final crisis leading to the end of these fiat currencies was going to happen anyway, and the financial war against Russia has become an additional factor accelerating their collapse.  After suppressing interest rates to zero and below, rising interest rates are finally being forced upon the monetary authorities by markets. With good reason, it has become fashionable to describe developments as an evolution from a currency environment driven by and dependent on financial assets into one driven by commodities — in the words of Credit Suisse’s Zoltan Pozsar, Bretton Woods II is ending, and Bretton Woods III is upon us. For this reason, there is growing interest in how a new world of currencies based somehow on commodities or commodity-based economies will evolve. This year, Russia successfully protected its rouble by linking it to energy and commodity exports and in the process undermined Western currencies. While it is always a mistake to predict timing, the fact that no one in the financial establishment is debating how to use gold reserves to protect their currencies clearly indicates that we are still early in the evolution of the developing fiat currency crisis. Officially at least, the forward thinkers planning a new pan-Asian trade settlement currency alternative to the dollar are looking at backing it with commodities and not a gold standard. Since Sergei Glazyev announced an enquiry into the matter, the Middle Eastern pivot away from the petrodollar to Asian currencies not only injects a new urgency into his committee’s deliberations but is bound to have a significant bearing on its outcome.  The implications for the western alliance play no part in current monetary policies. Their central banks act as if there’s no danger to their own currencies from these developments. But any doubt that fiat currencies will be replaced by currencies linked to tangible commodities, whether represented by gold or not, is fading in the light of developments. With neither the economic establishment nor the public having a basic understanding of what is money and why it is not currency, it is hardly surprising that current financial and economic developments are so poorly understood, and the correct remedies for our current monetary and economic conditions are so readily dismissed. These errors and omissions are set to be addressed in 2023. Tyler Durden Fri, 12/23/2022 - 21:25.....»»

Category: blogSource: zerohedgeDec 23rd, 2022

Rising Rates Lead To Financial Accidents

Rising Rates Lead To Financial Accidents Authored by Alasdair Macleod via GoldMoney.com, A recent Bank for International Settlements paper warning of unappreciated risks in foreign exchange markets echoes my earlier warning in an article for Goldmoney published over a month ago describing derivative risks in FX markets.[i] In this article I also show evidence that banks in both the US and Eurozone are reducing the deposit side of their balance sheets by turning away big deposits which are ending up in central bank reverse repos, parking unwanted liquidity out of public circulation. The great unwind is well under way. Credit contraction is not only driving a bear market in financial assets, but the exposure to malinvestments by rising interest rates is having negative consequences for the non-financial economy as well. Private equity, which has thrived on cheap finance used to leverage targeted businesses, is showing signs of unwinding with two major Blackrock funds suspending redemptions. As we approach the season for year-end window dressing, we must hope that the volatility in thin markets that often accompanies it does not destabilise global financial markets.  Inflation and stagnation Make no mistake: interest rates have bottomed at the zero bound and can go no lower. The forty-year trend of declining interest rates has ended, with an initial rally, which six weeks ago had halved the value of the 30-year US Treasury bond. The suddenness of this change probably needed a pause, and that is what we have today. Since October, there has been a spectacular recovery in bond prices with this UST bond yield dropping ¾% to 3.5%. Fears of price inflation have been replaced in large measure by fear of recession. Having dismissed monetarism, bizarrely for a Keynesian led establishment analysts and commentators are now frequently citing the slowing of monetary growth as evidence of a looming recession. Perhaps this means that the failure of their economic models has them grasping at straws, rather than being evidence of a conversion to monetarism. But what is definitely not in the Keynesians’ playbook is a combination of inflation and recession, commonly attributed to an unexplained phenomenon of stagflation. A moment’s thought explains the coincidence of the two. Inflation of total credit (both by central banks and commercial banks) transfers wealth from private sector actors to the State, its licenced banks, and their favoured borrowers. It acts as a suffocating hidden tax on economic progress, impoverishing ordinary people, and through their desire to protect themselves from credit debasement, driving otherwise productive capital resources into “safe havens”, such as physical property and financial speculation. There comes a point where the stimulative effects of credit expansion, which is a device to trick markets into thinking that things are better than they really are, becomes outright destructive.  If it was otherwise, currency debasement would work even history plainly shows it to be a destructive, failed policy. And in extremis, nations as diverse as 1920s Germany and today’s Zimbabwe would have been roaring successes from an economic point of view with their nominal GDP soaring off the scale. By way of contrast, post-WW2 Germany and Japan adopted monetary policies which led to strong currencies, yet they still outperformed the socks off the inflationary Anglo-Saxons. Both the empirical evidence and logic are ignored by policy makers and an investment establishment dedicated to believing otherwise for the sake of their macroeconomic dogmas. Like drowning men, they grasp evidence that the initial surge in prices, attributed conveniently to covid, supply chain disruption, and sanctions against Russia is slowing. And that increases in the CPI will subside. Undoubtedly, they will. But this is a statistical aberration because high numbers will drop out of the back end of a rolling statistic. It allows perennial bulls to call an end in sight to interest rate rises, and with a recession in prospect for that trend to be reversed. QT will be replaced again with QE — that is certainly believable. These expectations for the inflation outlook and therefore interest rates are too glib. As well as compensation for temporary loss of possession of credit and for counterparty risk, interest rates are bound to reflect a creditor’s view of changes in a currency’s purchasing power. Much of the time, a central bank can impose an interest rate policy on markets, as the evidence shows. But there comes a point where, recognising the debasement of a currency the market forces a central bank to concede higher rates. The market in question is usually the foreign exchanges. This is why with the path clearing towards a new softening of interest rate policy, the dollar has weakened dramatically against the other principal currencies along with the fall in US Treasury yields for longer maturities.  As to the course of future interest rates, we must make an assessment beyond the visible prospects for a recession. We must anticipate central bank policies and their consequences: will they abandon inflationism and seek to protect their currency, or will they prioritise protecting the economy from recession, from the illusion of financial wealth created by interest rate suppression, and to protect deteriorating government finances? When fiat currencies can be readily expanded to deal with all these escalating problems, whatever the stated intention of monetary policy inflationism proves irresistible.  And all the more so, when the alternative of credit restriction is bound to crash the economy, financial markets, and government finances.  Commercial bankers are not stupid, and with over-leveraged balance sheets are certain to try to protect themselves from mounting bad debts in a recessionary environment. The extent to which they do so throws an additional burden of credit creation onto central banks. But all the evidence shows that central bank monetary policy has a far greater impact on a currency’s valuation on the foreign exchanges than equivalent variations in commercial bank credit. Therefore, the effect of central bank credit replacing commercial bank credit is to rapidly undermine a currency’s value. All major governments are caught in debt traps, which are being sprung by higher interest rates. And when central banks band together to protection their failing economies, as they seem certain to do, exchange rates may appear to be stable. But the loss of purchasing power then begins to be reflected for all currencies in gold, commodity prices, and production costs, despite consumption declining. Therefore, there can only be one conclusion about the future course of interest rates. The trend has turned and after an initial rise have paused. This softening of the interest rate outlook will turn out to be temporary, to be followed by a continuing trend of yet higher rates, reflecting more aggressive currency debasement, awkwardly coinciding with a deepening slump in economic activity. This must be our basic assumption. Financial sector woes The most obvious consequence of a new trend of rising rates is falling values for financial assets. All financial markets take their cue from bond markets. From the commercial bankers’ point of view, they find that collateral values against customer loans start to decline, leading to pressure for additional collateral. Obviously, this leads to the decline in total loans supporting positions in stocks and bonds, as the next chart shows which is of outstanding margin credit in US financial markets. The evidence from FINRA is that banks are reducing their loan exposure to stock and bond markets. It is likely that diminishing collateral margins are causing investment positions to be liquidated, with lenders reluctant to blindly accept additional margin liquidity. We can assume this is so, because of the need for banks to reduce their balance sheet leverage. The recent rally in bond and equity prices might provide some relief (the chart above is up to October), but it is unlikely to be permenant if, as seems likely, central banks stop quantitative tightening and begin easing again. The reason an easing of monetary policy is unlikely to sustain a durable recovery in financial asset values is because by choosing to reflate the economy and markets, the currency is sacrificed. A decline in a currency’s purchasing power is initially foreseen by dealers on the foreign exchanges. Furthermore, any confusion over this relationship between monetary policies and their consequences for a fiat currency has been settled by the link between covid related credit expansion engineered by the central banks and subsequent price inflation. Markets are unlikely to be fooled so easily by the expansion of central bank credit in future.  While stock and bond commentary are relatively easy topics for commentators, the source of unpleasant surprises is hidden from their view. In a previous article,[ii] I described such a situation in derivative markets, pointing out that the notional values of foreign exchange crosses, forwards, and swaps totalled a notional $104 trillion — the BIS’s figure for mid-2021. Foreign exchange contracts are the second largest segment of the $600 trillion OTC total. According to the BIS’s triannual survey, only 84% of foreign exchange contracts are captured in the semi-annual statistics, so a truer figure is $124 trillion. By maturity, they split 80% up to a year, 15% one to five years, and the rest over five years. Because all foreign exchange contracts in the BIS’s statistics represent only one side of foreign exchange contracts, the whole amount of $124 trillion are definitely credit, the majority of which, only excluding options, is duplicated by matching credit obligations for the other counterparties. Therefore, total foreign exchange derivative credit in trillions is at least double notional amounts outstanding, less one side of notional options. This amounts to $236 trillion. According to the BIS, the gross market value of this credit is $2.548 trillion. The BIS defines gross market value as “the sum of the absolute values of all outstanding derivatives contracts with either positive or negative replacement values evaluated at market prices prevailing on the settlement date”. In other words, the extent to which the banking system, non-banks and non-financial counterparties are counterparties to these OTC derivatives, their balance sheets reflect this net mark-to-market figure, and not actual credit obligations, which are almost a hundred times greater. Since my article, Claudio Borio et al in a research paper for the Bank for International Settlements have made the same point adding some additional colour. The graphs below are taken from Borio’s paper, showing only one side of the notional values of FX positions updated to end-June this year.[iii] It should be noted that this OTC market is dominated by US dollar positions, totalling over $80 trillion (Chart A), that there is a preponderance of short-term, liquidity vulnerable maturities (Chart B), and that non-bank financial entities are the largest category by far (shadow banks — Chart C). And the paper also points out that the Fed is responsible for ensuring that there is sufficient dollar liquidity to support these enormous off-balance sheet obligations. The two instances of failure — the financial crisis of 2008/09 and of March 2020 (the repo crisis in September 2019 was unrelated) had the Fed flying blind, not knowing the extent of these obligations and where they were located. In effect, along with all its other obligations the Fed must ensure the integrity of the entire global FX market, which the BIS paper estimates include more than $35 trillion in the hands of foreign non-banks. What could go wrong? Clearly this is a situation made more dangerous in a long-term trend for rising interest rates. Just as this and other OTC markets have grown on the back of forty years of declining interest rates, they will contract in size as the new trend progresses. In a secular financial sector slump, institutions which have come to rely on derivatives for risk protection or for trading profits are bound to be exposed to settlement failures, triggered when one or more counterparties fail to deliver on their obligations. The preponderance of non-bank, foreign, and short-term liquidity-vulnerable FX positions is a combination which is at high risk of leading to an unexpected event. It is tempting to think that a problem is more likely to occur when the dollar is strengthening against other currencies, which until October was the position. This assumes that foreign bank and non-banks were net short of the dollar. But the rising trend for the currency is more likely to be evidence of net long positions. It is possible that this market will be threatened by short-term liquidity dislocations. But surely, there is over $2 trillion of reverse repo liquidity on tap… The dollar liquidity position There is excess liquidity in the US financial system. But the question is, why is it there and will it become available to resolve liquidity issues in the event of an FX crisis? The Fed’s chart above of reverse repurchase agreements (reverse repos, or RRPs) shows that RRPs stand at $2.16 trillion. In an RRP, the Fed temporarily borrows cash using securities on its balance sheet as collateral, agreeing to reverse the transaction for an overnight return currently set at 3.35%, about 0.4% below its current fund rate (Note: these rates were before the FOMC raised the funds rate by 0.5% yesterday). A wide range of counterparties—primary dealers, banks, money market mutual funds, and government sponsored enterprises—are eligible to participate in the Fed’s RRP facility. The Fed sets the overnight RRP rate to provide a floor under money market rates consistent with its Fed funds rate target, which has now been raised to 4.25%—4.5%. A counterparty’s decision whether to lend credit to the Fed at its overnight rate has little to do directly with overall market liquidity, but it is true to say that so long as there is substantial liquidity in the Fed’s RRPs, a repo blow-up, such as that witnessed on 17 September 2019 when on a credit shortage the repo rate soared to 10% is unlikely to happen. It might appear to be a simple matter for the Fed to refuse to roll over RRPs to push liquidity back into the commercial banking system. But that is not how it works. To achieve that objective, the Fed would have to reduce its RRP rate to discourage rollovers, thereby ensuring extra liquidity is returned to the commercial banks. Not only are commercial banks reluctant to take large deposits on board because of Basel 3 net stable funding penalties, but to reduce the RRP rate goes against maintaining current interest rate policies. [Note that Basel 3 regards large deposits as providing a significant risk to bank balance sheets liquidity, while small deposits are seen to be a stable source of funding. Undoubtedly, this is why G-SIBs like JPMorgan Chase are now promoting retail banking services.] Therefore, that over $2 trillion in large deposits has effectively migrated out of bank credit onto the Fed’s balance sheet is evidence of bank credit contraction. As well as complying with Basel 3, being aware of escalating financial and lending risks commercial banks are trying to reduce their overall credit exposure. Liquidating financial assets and refusing to extend loans to desperate borrowers deals with risks the asset side of a bank’s balance sheet. The entire commercial banking network cannot so easily reduce its obligations to depositors, necessary if banks are to reduce leverage on their collective balance sheets. Therefore, the reason liquidity is parked at the Fed in the form of RRPs simply reflects commercial banking reluctance to retain large deposits and is a counterpart to their reduction of balance sheet assets.  So much for the domestic dollar market. But as Borio’s BIS paper points out, the Fed has almost little or no intelligence concerning foreign dollar FX obligations and where the weak points might be. But it is not only a matter of dollar liquidity that might upset the money-market applecart. Each dollar transaction is matched by a foreign currency transaction, likely to be part of a chain. Very few FX transactions do not involve the dollar, because of the way the market works. An importer in India of Chinese goods has to sell rupees to buy dollars, and then sells the dollars for yuan to pay for the goods. In this simple chain, the counterparties are the importer, the importer’s bank, the exporter’s bank, and the exporter. In a deepening global recession, there’s much that can go wrong. The BIS’s FX statistics only capture one side of a transaction, which is off-balance sheet, when double entries should reveal at least a doubling of the BIS’s estimates across all market participants. And a contraction in this outsized derivative market, driven by rising interest rate trends, is likely to expose liquidity problems in a maze of foreign shadow banks as well. Europe’s liquidity position In a marked difference from the US RRPs’ parking of over $2 trillion in short-term liquidity, according to the International Capital Markets Association Europe is also heavily dependent on repos for managing market liquidity. In a repo, an originating bank uses securities (usually government or high-quality corporate bonds) as collateral against cash. It is the other side of a reverse repo, which is how the other party would view it. Repos and reverse repos have been a growing feature of interbank markets. In the past, daily excesses and deficiencies on deposits were negotiated in money markets through interbank rates, involving smaller amounts for agreements that were not collateralised. There were always individual credit limits for these transactions which limited their scope. For this and other reasons which need not detain us, repos became an increasing feature of money markets. What is more to the point is repos are conducted between commercial banks and the euro system because they set the overall level of market liquidity.  According to the last annual survey by the International Capital Market Association conducted in December 2021, at that time the size of the European repo market (including sterling, dollar, and other currencies conducted in European financial centres) stood at a record of €9,198 billion equivalent.[iv] This was based on responses from a sample of only 57 institutions, including banks, so the true size of the market is somewhat larger. Measured by cash currency analysis, the euro share was 56.9% (€5,234bn). It allows European pension and insurance funds to finance geared bond positions through liability driven investment schemes — that’s what nearly crashed UK pension funds recently when it went wrong. This is fine, until the values of the bonds held as collateral fall, and cash calls are then made. This is unlikely to be a problem restricted to the UK and sterling markets. The common explanation is that quantitative easing has led to substantial quantities of high-quality collateral being absorbed by the euro system of the ECB and national central banks, leaving the commercial banking network as a whole short of good collateral and long of liquidity. Consequently, repo rates have been driven lower than the ECB’s marginal lending facility of 2.25% (i.e. its repo rate) as the table below from MTS Markets shows, as collateral is said to be more valuable to commercial banks than cash. The analysis that suggests a lack of collateral is driving reverse repos between the euro system and commercial banks is only valid to a point. Liquidity is required by some banks to resolve temporary liquidity issues on an interbank basis by using repos for which they require collateral. But otherwise, the desire to park cash at the ECB and the national central banks appears to be similar to issues facing American commercial banks in their attempt to reduce the deposit side of their balance sheets. It is the banking cohort’s demand to dispose of cash that suppresses the repo rate. Unwinding commodity derivatives A far smaller OTC subset is commodity contracts, which by last June were recorded at $2.962 trillion. Classified by commodity, $820bn was in gold, $106bn in other precious metals, and $2,036bn in other commodities. While the June total is up 20% from the total at the 2021-year end, liquidity in underlying physical commodities is falling. This is particularly acute in metals such as silver and energy. For bank trading departments, dealing in commodity derivatives has been very profitable, and despite the penalties with respect to Basel 3’s net stable funding ratio for balance sheet liquidity, banks have maintained exposure to this business. They usually take the short side, while speculators take out long positions. The price effect is that banks and their market makers create artificial supply to absorb investment demand, thereby suppressing prices below where they would otherwise be. Suppressed commodity prices feed into fiat currency stability, which is why western governments led by America have condoned the expansion of this inherently speculative business. But the lack of underlying commodity liquidity combined with a trend of rising interest rates now threatens to increase derivative risk as banks turn from chasing profits to become more cautious. These commodity positions are not trivial either. The BIS figure for gold alone amounts to the equivalent of 14,170 tonnes at today’s prices, nearly four times annual mining output.  Additional to the OTC market is regulated futures and options totalling over $38 trillion (September 2022) which are backstopped by bank credit expansion. While positions in OTC derivatives are assumed to provide an offset to regulated futures exposure, in practice they can add to total short positions in marketable commodities such as gold.  Malinvestments in the non-financial economy The example of unidentified risks in FX markets identified by the BIS is just one of several potential accidents in the banking and financial sectors of the global economy, which is unaccustomed to a rising interest rate environment. We must now turn our attention to non-financial entities, which have taken advantage of suppressed interest rates and easy credit to finance projects which would otherwise have been deemed to be unprofitable. Additionally, there will be many businesses which have struggled to survive even with artificially low borrowing costs, the zombie corporations. The dangers to the global economy from these malinvestments were mounting even before the covid lockdowns, during which their costs then continued without any income from customers. Persistent supply chain disruptions added considerably to these businesses’ debts. And now, over-leveraged banks are trying to rein in debt obligations as rising interest rates threaten to bankrupt these entities. It is tempting to think that governments can lean on commercial banks not to make a deteriorating situation even worse. And there is no doubt, that with government guarantees banks will want to cooperate rather than face debt write-offs and public reproach for their role in not extending credit. But it is not just a banking problem. Collateralised loan obligations have been acquired by many banks in lieu of direct loan exposure to corporate debt. And an additional horror is likely to be the unwinding of the private equity industry. According to McKinsey’s 2022 Annual Review of Private Markets, by mid-2021 global private markets had grown to $9.6 trillion. There are a number of categories across a range of activities, but the basic theme is the same. A private equity partnership is able to raise funds at a lower cost than independent cash-generating businesses. It applies that ability to acquire control of the business and to leverage its balance sheet with debt, so that its return on equity is enhanced. Obviously, this strategy is driven by both suppressed interest rates and a continuing trend for them to remain low. Those conditions have gone. Already, there are signs that this industry is running into difficulties. On 7 December, the Financial Times reported that Blackstone’s $69bn Real Estate Income Trust was limiting withdrawals from wealthy investors. The fund is twice leveraged, with $125bn of assets. The following day, Bloomberg reported withdrawals from Blackstone’s $50bn private credit fund. Both these funds are leaders in the US leveraged private market. The mood music around lending to non-financials has certainly changed. And as far as can be seen, the consequences are hardly appreciated by the financial media – yet.  Conclusions Even at this early stage of a new trend of rising interest rates, strains in the global banking system are becoming apparent. Bank balance sheets are as overleveraged as they have ever been particularly in Europe and Japan. And with rising interest rates ensuring a bear market in financial assets and widespread exposure to malinvestments leading to non-performing loans, banker sentiment is swinging firmly towards risk containment. Money supply figures, which are showing a slowing down in the rate of credit expansion, only tell some of the story. Commercial banks in the US and the EU are using reverse repos to jettison liquidity on the deposit side of their balance sheets, to keep pace with the drive to reduce the asset side of their balance sheets. Acting like the canary in a coal mine, we can already see derivative liquidity drying up in regulated gold and silver futures. This is probably being replicated in other commodity markets as well. But a far larger issue is FX crosses, swaps and forwards, whose notional values are not properly reflected on bank balance sheets, just one side of counterparty exposure being more than double the combined global systemically important banks total capitalisation of roughly $40 trillion. As with all credit contractions, when and where the system will break is virtually impossible to predict. But when it happens, the crisis will be sudden. We must hope that the year-end financial window-dressing season passes without incident.  Tyler Durden Tue, 12/20/2022 - 14:32.....»»

Category: blogSource: zerohedgeDec 20th, 2022

The Mainstream Is Increasingly Accepting The Possibility That The Fed Will Blow Up The Economy

The Mainstream Is Increasingly Accepting The Possibility That The Fed Will Blow Up The Economy Not more than a year ago it was generally thought impossible among mainstream economists and retail investors that the Federal Reserve would commit to raising interest rates and ending stimulus.  After 14 years of predictable QE and near zero rates, it's not surprising that they would refuse to acknowledge the possibility that the Fed would abandon them.  Well, as with the seasons, all things must change. At first they refused to admit that inflation was a problem, now mainstream outlets are openly discussing the idea that the Fed will have to “blow up the economy” in order to stop rising prices, with another 75 bps rate hike expected this week.  As CNN noted recently in an article titled The Fed May Have To Blow Up The Economy To Get Inflation under Control: “It’s unclear what all this tightening will do to the economy. The housing market is already starting to show some signs of strain. Bond yields have spiked due to the Fed. And mortgage rates, which tend to move in tandem with the benchmark 10-year Treasury, have skyrocketed this year as a result. There is also a growing chorus of lawmakers on Capitol Hill who are warning Fed Chair Jerome Powell and other Fed members to slow down the rate hikes because they fear even tighter monetary policy will lead to a recession.” In the past, the immediate reaction by media pundits would be to suggest that a Fed “pivot” to stimulus was coming soon.  This is no longer suggested and the economists are now accepting the reality that pivot hopes are fading. As as new Slate article admits: “...Some economists think it’s almost impossible for the Fed to be too hawkish right now. If people believe that the Fed will do whatever it takes to get inflation down—including making unemployment rise—that will shift public expectations in a way that actually helps keep inflation down. Paradoxically, that could reduce the amount of tightening the Fed ultimately needs to do and spare us additional economic pain.” The narrative shift is dramatic, and it's almost as if the media is now preparing markets as well as the public for tightening to continue for far longer than they initially expected.  But why the sudden change in tone?   From 1972 to 1980 the US witnessed a stagflationary avalanche that resulted in the Fed eventually raising interests rates to 20%.  This led to the recession of 1981-1982 and an unemployment rate of around 11%.  The effects of the recession persisted through the rest of that decade.   At that time, the stagflation crisis was triggered primarily by the complete removal of the US dollar from the gold standard by Richard Nixon and the Fed.  The Fed claimed that the move was designed to “stop inflation”, which makes little sense given that removing all commodity backing to the dollar resulted in a historic stagflationary crisis only a few years later.   It's important to note that in the 1980s the country had not just witnessed tens of trillions of dollars in fiat stimulus created by the central bank on top of a doubling of the national debt in the span of eight years.  In other words, the economic conditions today are much worse than they were back then. Another event in which the Fed raised interest rates aggressively into economic weakness was in the early years of the Great Depression, which Milton Friedman argued was the actual cause of the long term crisis.  In 2002, Ben Bernanke agreed with him. The point is, the Fed has done all of this before and it has no reluctance about engineering a recession or even a depression in the face of inflation.  The greater threat, though, is that none of these measures will actually create stability.  Rather, they may only lead to greater instability given the unprecedented factors involved.  Furthermore, the media either doesn't understand or doesn't want to talk about the Fed's culpability for the existing crisis.   For now, they are presenting inflation as a consumer “demand issue”, which is only a side note to the bigger issue of central bank fiat money creation.  It should not be forgotten that the Fed dumped over $8 trillion on the economy in the span of two years through covid stimulus measures, and this is when prices truly skyrocketed.  That was the straw that broke the camel's back. How many more rate hikes will it take to deal with that level of monetary inflation?  We have no idea because such a thing has never happened in the US before.  With the latest GDP print coming in at 2.6%  and CPI prints remaining high, there is no indication that tightening will stop anytime soon.  The implication is that a far reaching deflationary effort would be required, and the Catch-22 is that this effort could cause the same kind of chaos as inflation would.   In another year, we might find the media finally admitting that it was a damned if you do, damned if you don't scenario all along.      Tyler Durden Wed, 11/02/2022 - 06:55.....»»

Category: dealsSource: nytNov 2nd, 2022

We’re Heading for a Stagflationary Crisis Unlike Anything We’ve Ever Seen

The rise in inflation may not be a short-term phenomenon: we may be entering a new era of Great Stagflationary Instability. Inflation is back, and it is rising sharply, especially over the past year, owing to a mix of both demand and supply factors. This rise in inflation may not be a short-term phenomenon: the Great Moderation of the past three decades may be over, and we may be entering a new era of Great Stagflationary Instability. Unless you are middle-aged and gray-haired, you probably hadn’t heard about the term stagflation until very recently. You may have barely heard about inflation. For a long time, until 2021, inflation—the increase in prices year to year—was below the advanced economies’ central banks’ target of 2%. Usually inflation is associated with high economic growth. When aggregate demand for goods, services, and labor is strong, coupled with positive animal spirits, optimism about the future, and possibly loose monetary and fiscal policies, you get stronger than potential economic growth and higher than target inflation. Firms are able to set higher prices because demand outstrips supply, and workers receive higher wages given a low unemployment rate. In recessions, on the other hand, you have low aggregate demand below the potential supply of goods, which leads to a slack in labor and goods markets, with ensuing low inflation or even deflation: prices go down as consumers’ spending declines. Stagflation is a term that refers to high inflation that happens at the same time as stagnation of growth or outright recession. Will the coming recession be mild and short-lived, or will it be more severe and characterized by deep financial distress?[time-brightcove not-tgx=”true”] But sometimes the shocks hitting the economy, rather than coming from changing demand, can come from the supply side: an oil-price shock, say, or a rise in food or other commodity prices. When that happens, energy and production costs rise, contributing to lower growth in countries that import that fuel or food. As a result, you can get a slowdown of growth, or even a recession, while inflation remains high. If the response to this negative supply shock is loose monetary and fiscal policy—banks setting low interest rates to encourage borrowing—to prevent the slowdown in growth, you feed the inflation flames by stimulating rather than cooling demand for goods and labor. Then you end up with persistent stag-flation: a recession with high inflation. In the 1970s we had a decade of stagflation as two negative oil shocks and the wrong policy response led to inflation and recession. The first shock was triggered by the oil embargo against the U.S. and the West following the 1973 October War between Israel and the Arab states. The second shock was triggered by the 1979 Islamic revolution in Iran. In both cases a spike in oil prices caused a spike in inflation and a recession in the oil-importing economies of the West. The inflation was fed by the policy response to the shock because central banks did not rapidly tighten and impose strong monetary and fiscal policy to contain the inflation. So we ended up with double-digit inflation and a severe recession that doomed the presidencies of Gerald Ford and Jimmy Carter. It took a painful double-dip recession in 1980 and again in 1981–1982 to break the back of inflation when Fed Chairman Paul Volcker raised the interest rates to double-digit levels. Coming after the stagflation of the 1970s and early 1980s, the Great Moderation was characterized by low inflation in advanced economies; relatively stable and robust economic growth, with short and shallow recessions; low and falling bond yields (and thus positive returns on bonds), owing to the secular fall in inflation; and sharply rising values of risky assets such as U.S. and global equities. This extended period of low inflation is usually explained by central banks’ move to credible inflation-targeting policies after the loose monetary policies of the 1970s, and governments’ adherence to relatively conservative fiscal policies (with meaningful stimulus coming only during recessions). But more important than demand-side policies were the many positive supply shocks, which increased potential growth and reduced production costs, thus keeping inflation in check. During the post–Cold War era of hyper-globalization, China, Russia, India, and other emerging-market economies became more integrated in the world economy, supplying it with low-cost goods, services, energy, and commodities. Large-scale migration from the poor Global South to the rich North kept a lid on wages in advanced economies; technological innovations reduced the costs of producing many goods and services; and relative geopolitical stability after the fall of the Iron Curtain allowed for an efficient allocation of production to the least costly locations without worries about investment security. The Great Moderation started to crack during the 2008 global financial crisis and then finally broke during the 2020 COVID-19 recession. In both cases there were severe recessions and financial stresses, but inflation initially remained low given demand shocks; thus, loose monetary, fiscal, and credit policies prevented deflation from setting in more persistently. But this time it’s different, as inflation has been rising since 2021, and many serious and important questions are now emerging and being debated by economists, policymakers, and investors. What is the nature of the current inflation? How persistent will it be? Is it driven by bad policies—loose monetary and fiscal policies—or bad negative aggregate supply shocks? Will the attempt of central banks to fight inflation lead to a soft landing or a hard landing? And if the latter, will this be a short and shallow recession or a more severe and protracted one? Will central banks remain committed to fight inflation, or will they blink and wimp out and cause persistent long-term inflation? Is the era of Great Moderation over? And what will be the market consequence of a return to inflation and stagflation? Anna Moneymaker-Getty ImagesU.S. Federal Reserve Board Chairman Jerome Powell and U.S. Treasury Secretary Janet Yellen listen during a meeting with the Treasury Department’s Financial Stability Oversight Council at the U.S. Treasury Department on October 03, 2022 in Washington, DC. First question: Will the rise in inflation in most advanced economies be temporary or more persistent? This debate has raged for the past year, but now it is largely settled: “Team Persistent” won, and “Team Transitory”—which included most central banks and fiscal authorities—has now admitted to having been mistaken. The second question is whether the increase in inflation was driven more by bad policies (i.e., excessive aggregate demand because of excessively loose monetary, credit, and fiscal policies), or by bad luck (stagflationary negative aggregate supply shocks including the initial COVID-19 lockdowns, supply-chain bottlenecks, a reduced U.S. labor supply, the impact of Russia’s war in Ukraine on commodity prices, and China’s zero-COVID policy). While both demand and supply factors were in the mix, it is now widely recognized that supply factors have played an increasingly decisive role. This matters because supply-driven inflation is stagflationary and thus increases the risk of a hard landing (increased unemployment and potentially a recession) when monetary policy is tightened. That leads directly to the third question: Will monetary-policy tightening by the U.S. Federal Reserve and other major central banks bring a hard landing (recession) or a soft landing (growth slowdown without a recession)? Until recently, most central banks and most of Wall Street were in “Team Soft Landing.” But the consensus has rapidly shifted, with even Fed Chair Jerome Powell recognizing that a recession is possible and that a soft landing will be “very challenging.” A model used by the Federal Reserve Bank of New York shows a high probability of a hard landing, and the Bank of England has expressed similar views. Several prominent Wall Street institutions have now decided that a recession is their baseline scenario (the most likely outcome if all other variables are held constant). Indeed, in the past 60 years of U.S. history, whenever inflation has been above 5%—it is now above 8%—and the unemployment rate below 5%—it is now 3.7%—any attempt by the Fed to bring inflation down to target has caused a hard landing. So, unfortunately, a hard landing is much more likely than a soft landing in the U.S. and most other advanced economies. The Fourth question: Are we in a recession already? In both the U.S. and Europe, forward-looking indicators of economic activity and business and consumer confidence are heading sharply south. The U.S. has already had two consecutive quarters of negative economic growth in the first half of this year, but job creation was robust, so we weren’t yet in a formal recession. But now the labor market is softening, and thus a recession is likely by year’s end in the U.S. and other advanced economies. Now that a hard landing is becoming a baseline for more analysts, a new fourth question is emerging: Will the coming recession be mild and short-lived, or will it be more severe and characterized by deep financial distress? Most of those who have come late and grudgingly to the hard-landing baseline still contend that any recession will be shallow and brief. They argue that today’s financial imbalances are not as severe as those in the run-up to the 2008 global financial crisis, and that the risk of a recession with a severe debt and financial crisis is therefore low. But this view is dangerously naive. There is ample reason to believe the next recession will be marked by a severe stagflationary debt crisis. As a share of global GDP, private and public debt levels are much higher today than in the past, having risen from 200% in 1999 to 350% today. Under these conditions, rapid normalization of monetary policy and rising interest rates will drive highly leveraged households, companies, financial institutions, and governments into bankruptcy and default. When confronting stagflationary shocks, a central bank must tighten its policy stance even as the economy heads toward a recession. The situation today is thus fundamentally different from the global financial crisis or the early months of the pandemic, when central banks could ease monetary policy aggressively in response to falling aggregate demand and deflationary pressure. The space for fiscal expansion will also be more limited this time, and public debts are becoming unsustainable. Moreover, because today’s higher inflation is a global phenomenon, most central banks are tightening at the same time, thereby increasing the probability of a synchronized global recession. This tightening is already having an effect: bubbles are deflating everywhere—including in public and private equity, real estate, housing, meme stocks, crypto, SPACs, bonds, and credit instruments. Real and financial wealth is falling, and debt and debt-servicing ratios are rising. Thus, the next crisis will not be like its predecessors. In the 1970s, we had stagflation but no massive debt crises, because debt levels were low. After 2008, we had a debt crisis followed by low inflation or deflation, because the credit crunch had generated a negative demand shock. Today, we face supply shocks in a context of much higher debt levels, implying that we are heading for a combination of 1970s-style stagflation and 2008-style debt crises—that is, a stagflationary debt crisis. The fifth question is whether a hard landing would weaken central banks’ hawkish resolve on inflation. If they stop their policy tightening once a hard landing becomes likely, we can expect a persistent rise in inflation and either economic overheating (above-target inflation and above-potential growth) or stagflation (above-target inflation and a recession), depending on whether demand shocks or supply shocks are dominant. Indeed, while currently the debate is on soft vs. hard landing and how severe the hard landing will be, that assumes that central banks that are now talking hawkishly will stick to their commitment to return to 2% regardless of whether that policy response leads to a soft or hard landing. Most market analysts seem to think that central banks will remain hawkish, but I am not so sure. There is a chance that central banks will wimp out and blink, and not be willing to fight inflation. In this case the Great Moderation of the past 30 years may be over, and we may enter a new era of Great Inflationary/Stagflationary Instability fed by negative supply shocks and policymakers—as in the 1970s—being unwilling to fight the rising inflation. On the demand side, loose and unconventional monetary, fiscal, and credit policies have become not a bug but rather a feature. Between today’s surging stocks of private and public debts (as a share of GDP) and the huge unfunded liabilities of pay-as-you-go social-security and health systems, both the private and public sectors face growing financial risks. Central banks are thus locked in a “debt trap”: any attempt to normalize monetary policy will cause debt-servicing burdens to spike, leading to massive insolvencies and cascading financial crises. With governments unable to reduce high debts and deficits by spending less or raising revenues, those that can borrow in their own currency will increasingly resort to the “inflation tax”: relying on unexpected price growth to wipe out long-term nominal liabilities at fixed rates. Early signs of wimping out are already discernible in the U.K. Faced with the market reaction to the new government’s reckless fiscal stimulus, the Bank of England has launched an emergency quantitative-easing (QE) program to buy up government bonds (the yields on which have spiked). Monetary policy is increasingly subject to fiscal capture. Central banks will talk tough, but there is good reason to doubt their willingness to do whatever it takes to return inflation to its target rate in a world of excessive debt with risks of an economic and financial crash. Gary Coronado-Los Angeles Times/ Getty ImagesShell gas station 6101 W Olympic Blvd, Los Angeles, CA 90048, on Thursday, Sept. 29, 2022 in Los Angeles, CA. The Los Angeles County average price rose 15.3 cents to $6.261, its highest amount since July 6, according to figures from the AAA and Oil Price Information Service. It has risen for 27 consecutive days, increasing $1.015, including 14.9 cents Wednesday. It is 67.4 cents more than one week ago, 98.2 cents higher than one month ago, and $1.852 greater than one year ago. On the supply side, the backlash against hyper-globalization has been gaining momentum, creating opportunities for populist, nativist, and protectionist politicians. Public anger over stark income and wealth inequalities also has been building, leading to more policies to support workers and the “left behind.” However well intentioned, these policies are now contributing to a dangerous spiral of wage-price inflation. Making matters worse, renewed protectionism (from both the left and the right) has restricted trade and the movement of capital. Political tensions, both within and between countries, are driving a process of reshoring. Political resistance to immigration has curtailed the global movement of people, putting additional upward pressure on wages. National-security and strategic considerations have further restricted flows of technology, data, and information. This balkanization of the global economy is deeply stagflationary, and it is coinciding with demographic aging, not just in developed countries but also in large emerging economies such as China. Because young people tend to produce and save, whereas older people spend down their savings, this trend also is stagflationary. The same is true of today’s geo-political turmoil. Russia’s war in Ukraine, and the West’s response to it, has disrupted the trade of energy, food, fertilizers, industrial metals, and other commodities. The Western decoupling from China is accelerating across all dimensions of trade (goods, services, capital, labor, technology, data, and information). Other strategic rivals to the West may soon add to the havoc. Iran’s crossing the nuclear-weapons threshold would likely provoke military strikes by Israel or even the U.S., triggering a massive oil shock. Now that the U.S. dollar has been fully weaponized for strategic and national-security purposes, its position as the main global reserve currency may begin to decline, and a weaker dollar would of course add to the inflationary pressures. A frictionless world trading system requires a frictionless financial system. But sweeping primary and secondary sanctions against Russia have thrown sand into this well-oiled machine, massively increasing the transaction costs of trade. On top of it all, climate change, too, is stagflationary. Droughts, heat waves, hurricanes, and other disasters are increasingly disrupting economic activity and threatening harvests (thus driving up food prices). At the same time, demands for decarbonization have led to underinvestment in fossil-fuel capacity before investment in renewables has reached the point where they can make up the difference. Today’s large energy-price spikes were inevitable. Pandemics will also be a persistent threat, lending further momentum to protectionist policies as countries rush to hoard critical supplies of food, medicines, and other essential goods. After 2½ years of COVID-19, we now have monkeypox. Finally, cyberwarfare remains an underappreciated threat to economic activity and even public safety. Firms and governments will either face more stagflationary disruptions to production, or they will have to spend a fortune on cyber-security. Either way, costs will rise. Thus, as in the 1970s, persistent and repeated negative supply shocks will combine with loose monetary, fiscal, and credit policies to produce stagflation. Moreover, high debt ratios will create the conditions for stag-flationary debt crises; i.e., the worst of the 1970s and the worst of the post-global-financial-crisis period. That leads to a final question: How will financial markets and asset prices—equities and bonds—perform in an era of rising inflation and return to stagflation? It is likely that both components of any traditional asset portfolio—long-term bonds and U.S. and global equities—will suffer, potentially incurring massive losses. Losses will occur on bond portfolios, as rising inflation increases bond yields and reduces their prices. And inflation is also bad for equities, as rising interest rates hurt the valuation of firms’ stock. By 1982, at the peak of the stagflation decade, the price-to-earning ratio of S&P 500 firms was down to 8; today it is closer to 20. The risk today is a protracted and more severe bear market. Indeed, for the first time in decades, a 60/40 portfolio of equities and bonds has suffered massive losses in 2022, as bond yields have surged while equities have gone into a bear market. Investors need to find assets that will hedge them against inflation, political and geopolitical risks, and environmental damage: these include short-term government bonds and inflation-indexed bonds, gold and other precious metals, and real estate that is resilient to environmental damage. The decade ahead may well be a Stagflationary Debt Crisis the likes of which we’ve never seen before. Adapted from MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them, published by Little Brown on October 18th.....»»

Category: topSource: timeOct 14th, 2022

Futures Bounce, Gilts Tumble In BOE-Driven Rollercoaster Session

Futures Bounce, Gilts Tumble In BOE-Driven Rollercoaster Session US stocks were set to bounce, ending a brutal five-day losing streak, amid confusion over what the BOE will do in two days, amid hope that tomorrow's CPI print will come in lower than expected, and as Treasury yields eased off multi-year highs - at least initially - and investors put aside concerns that overheating inflation could offer more fodder to hawkish Federal Reserve policy makers amid speculation that things are breaking in far too many markets after it emerged that the Fed had sent a substantial amount of dollars to Switzerland this week in the first material use of the dollar swap facility in 2022. Nasdaq futures gained 0.9% by 7:30 a.m. in New York while S&P 500 futures rose 0.7% a day after the benchmark index nearly erased its October gains, while UK bonds tumbled and the pound rose amid UK policy confusion. While global risk sentiment earlier received a boost from a report suggesting the Bank of England could extend its emergency bond repurchases, a bank spokesperson quashed that speculation and said the program would still end on Friday, leaving traders in the dark as to what will happen. Meanwhile, Treasury yields and the dollar were little changed as traders await a key US inflation measure due Thursday that’s set to return to a four-decade high, underscoring broad and elevated price pressures that are pushing the Federal Reserve toward yet another large interest-rate hike next month. US investors are also looking to corporate earnings for clues about Fed policy. Among notable moves in premarket trading, Uber Technologies edged back up after the previous session’s 10% slump that was driven by the Biden administration’s proposal on classifying gig workers’ employment status. Analysts said there was limited near-term risk, given implementation was “far from imminent.” Chip stocks were set to recoup some of this week’s losses stemming from fresh curbs on China’s access to US semiconductor technology. Norwegian Cruise Line Holdings also gained in premarket trading, after UBS raised its recommendation on the stock to buy, amid strong improvement in bookings. PepsiCo gained 1.9% in premarket trading after the company raised its forecast for the full year and said consumers continue to purchase more of its snack foods and soft drinks despite rising inflation. In the US, investors have been laser-focused on how the Fed might respond to inflation figures due Thursday. While economists expect the consumer price index reading for September to have declined slightly versus a year earlier, a surprise increase could send stocks tumbling, JPMorgan's trading desk warned. Given the Fed has so far shown little sign of toning down its hawkishness, even in the face of a potential economic recession and weaker company earnings, many analysts expect equity bounces to be short-lived. “In the back of everyone’s mind is tomorrow’s CPI print, with many investors worried that it may be as strong as the jobs report on Friday,” said Neil Campling, head of TMT research at Mirabaud Securities. “Bears are firmly in control and any rallies could be incapable of sustaining a bid for more than a few days.” “While futures positioning is now slightly less extreme, it is still a very bearish set up into what is seen as a binary market event tomorrow,” said Carl Dooley, head of EMEA trading at Cowen in London. That makes it “natural to see some bear covering, with the remaining bulls having another roll of the dice.” The big story overnight was the flip-flopping rollercoaster from the BOE: the yield on 30-year gilts rose above 5% for the first time since late September after the Bank of England confirmed its plan to end emergency bond purchases on Friday and a report showed the UK economy shrank unexpectedly in August. Sterling rallied more than 1% after a report from Politico that the government may make further fiscal U-turns. “The Bank of England is a test case for how hawkish central banks can be without doing damage to financial stability,” said Michael Metcalfe, global head of macro strategy at State Street Global Markets. So far the "test" is failing miserably. In other news, Q3 earniungs season kicks off on Friday when several top Wall Street banks are set to report including JPMorgan, although analysts have already downgraded estimates for corporate America in recent weeks, a glum outlook by management teams could further pressure stocks. Lori Calvasina, head of US equity strategy at RBC Capital Markets, cut her year-end target for the S&P 500 Index to 3,800 from 4,200 citing a weak economic backdrop through the end of 2023. However, her new target implies a nearly 6% gain from Tuesday’s close. In European equities, consumer products, chemicals and food & beverages are the strongest-performing sectors. Euro Stoxx 50 rose 0.4% as Spain's IBEX lagged, dropping 0.5%  Credit Suisse drops as much as 5.0%, adding to a tumultuous month for the Swiss lender, after Bloomberg reported that the Justice Department is investigating whether it continued to help US clients hide assets from authorities. Here are other notable European movers: LVMH rises as much as 3.2% on stronger-than-expected organic revenue growth, signaling that the wealthy are still spending, and allaying fears of a China slowdown from Covid-19 curbs. Chr. Hansen climbs as much as 15%, the most since 2012, after the Danish enzymes and food cultures manufacturer reported better- than-expected 4Q results, including a wide topline beat, Jefferies says. Leonteq rallies as much as 7.8% after the company responded to a Financial Times report that had driven the stock lower in recent days. Bossard rises as much as 4.2% after nine- month sales beat estimates. UK domestic stocks underperform amid gilt market volatility following earlier speculation over the timing of an end to the Bank of England’s bond-buying program. Homebuilders, real estate, retail and domestic banks are among biggest decliners with Barclays falling as much as 5.3%. Philips slumps as much as 12%, hitting the lowest in more than a decade, after the Dutch medical technology company cut its outlook due to worse-than-expected supply-chain difficulties, prompting analysts to doubt its ability to meet 2022 targets. Kloeckner falls as much as 14%, the most intraday since May 2020, after the steel company revised its full-year guidance, which Jefferies said implies a 20%-25% reduction to consensus estimates. Earlier in the session, Asian equities were mixed after a three-day rout, as Chinese shares rebounded in a volatile trading session, while overall sentiment remained jittery ahead of the release of the US inflation report. The MSCI Asia Pacific Index erased an early-session loss of as much as 0.8% and traded down just 0.1% as of 5:02 p.m. in Hong Kong Wednesday, with financial shares lifting the broader market. Still, the benchmark hovered near a two-year low. Chinese stocks bounced back strongly in afternoon trading as bargain hunters piled into the nation’s battered shares, with the CSI 300 Index closing 1.5% higher, the most in two months. Investors were worried about the Covid-Zero policy and an economic slowdown despite an upbeat set of aggregate financing and loans data released on Tuesday. “With supportive valuations and better earnings outlook, downside may be limited from current levels,” said Vey-Sern Ling, an analyst at Union Bancaire Privee. Still, “China has too many outstanding issues currently that drag investor sentiment. Investors may not be willing to buy equities given the macro uncertainties.” Sentiment also remained fragile after Bank of England Governor Andrew Bailey said the bank would end emergency gilt purchases as planned this week, in the face of market pressure to expend the program.  US consumer price data due Thursday will be crucial in defining the size of the Federal Reserve’s interest-rate hike at the November meeting. Economists expect inflation to top 8% again.  “The tightening of US financial conditions, global and China growth slowdowns have sharply weighed on Asian equities this year,” said Rajat Agarwal, Asia equity strategist at Societe Generale SA. “Korea and Taiwan, the two semiconductor-driven markets have been the worst affected. A fading semiconductor cycle, geopolitical issues and more recently the semiconductor exports curbs have pushed the valuations to a more than five-year low on the two markets.” South Korean stocks erased losses to close higher after the central bank pivoted back to half-point interest-rate increases Japanese stocks closed a directionless day slightly lower, pushing losses to a third day, weighed down by electronics makers. The Topix fell 0.1% to close at 1,869.00, while the Nikkei was virtually unchanged at 26,396.83. Tokyo Electron Ltd. contributed the most to the Topix Index decline, decreasing 4.4%. Out of 2,168 stocks in the index, 908 rose and 1,151 fell, while 109 were unchanged. Australian stocks snapped a three day rout, led by financial stocks. The S&P/ASX 200 index edged higher to close at 6,647.50 after a three-day drubbing, with traders awaiting US inflation data due Thursday for further clues on Federal Reserve interest rate hikes. Financial stocks gained, led by Bank of Queensland, offsetting losses in mining and energy stocks. Coronado Global Resources was among the top gainers after the coal miner confirmed it’s in talks with Peabody Energy on a merger. In New Zealand, the S&P/NZX 50 index fell 0.8% to 10,873.23. Stocks in India gained for the first time in four sessions, helped by real estate and consumer goods companies that had seen sharp declines earlier this week. Investors will be monitoring India’s consumer inflation data for September to be released later Wednesday to gauge the outlook for local shares. Software exporter Wipro reported quarterly earnings below consensus estimates.  The S&P BSE Sensex rose 0.8% to 57,625.91 in Mumbai, while the NSE Nifty 50 Index was higher by an equal measure. All of BSE Ltd.’s 19 sector sub-indexes advanced. In FX, the Bloomberg Dollar Spot Index was little changed as the greenback traded mixed versus its Group-of-10 peers. the yen led G-10 losses and slipped to a fresh 24- year low of 146.43 per dollar as traders tested the resolve of Japanese authorities to intervene as key US inflation data may drive further weakness. The British pound led G-10 gains after volatile session. It earlier erased gains against the dollar while gilts extended a decline after the BOE confirmed that the bond-buying scheme will still end on Friday. Sterling had risen after the Financial Times reported that the BOE told lenders it was prepared to extend the program past Oct. 14 end date if market conditions demanded it. Bearish sentiment in the pound is the strongest in two weeks when it comes to short-term bets as hedging costs keep rallying. The euro was steady around $0.97 as Bunds and Italian bonds fell led by the long end of the curve. The Aussie inched lower. In rates, Treasuries are mixed with the curve steeper as US trading gets under way, led by dramatic steepening in UK bond market after Bank of England Governor Andrew Bailey late Tuesday said the central bank’s bond buying would end this week. Focal points of US session include September PPI and 10-year auction, following cool reception for Tuesday’s 3-year. US yields little changed at front end, the 10Y yield rises by 1bp to  3.95%, steepening 2s10s by ~1.5bp, 5s30s by ~2bp. US auction cycle continues with $32b 10- year note reopening at 1pm New York time, concludes Thursday with 30-year reopening. WI 10-year yield at around 3.96% is above auction stops since 2009 and ~63bp cheaper than last month’s result. UK gilts remain near worst levels of the session with 30-year yields cheaper by ~18bp on the day and UK 2s10s, 5s30s spreads steeper by 30bp and 15bp. Australia’s bonds gained for the first day in five after RBA Assistant Governor Luci Ellis said the central bank’s neutral interest rate is likely to be at least 2.5%, compared with the current cash-rate target of 2.6%. In commodities, WTI trades within Tuesday’s range, marginally falling to near $89.33. Polish pipeline operator said on Tuesday evening it detected a leak in the Druzhba pipeline; cause is unknown; leak detected in one of two lines, second line is working as normal. Russia's Transfneft said it has received notice from Polish operator PERN about the leak at Druzbha; oil pumping towards Poland continues, according to IFX. Polish top official for energy infrastructure said there are no grounds to believe leak in Druzhba pipeline was sabotage, adds leak was probably caused by accidental damage. Spot gold is modestly firmer as the upside for the Buck remains capped for now, but the yellow metal remains under its 21DMA (USD 1,673.34/oz). LME metals are mixed with copper relatively flat but aluminium is underperforming following a large build in LME warehouse stocks. To the day ahead now, and data releases include the US PPI reading for September, along with UK GDP and Euro Area industrial production for August. From central banks, we’ll get the FOMC minutes from the September meeting, and hear from the Fed’s Barr, Kashkari and Bowman, ECB President Lagarde, the ECB’s Knot and De Cos, as well as the BoE’s Pill, Haskel and Mann. Finally, earnings releases include PepsiCo. Market Snapshot S&P 500 futures up 0.5% to 3,617.00 MXAP little changed at 137.63 MXAPJ little changed at 444.71 Nikkei little changed at 26,396.83 Topix down 0.1% to 1,869.00 Hang Seng Index down 0.8% to 16,701.03 Shanghai Composite up 1.5% to 3,025.51 Sensex up 0.6% to 57,503.85 Australia S&P/ASX 200 little changed at 6,647.54 Kospi up 0.5% to 2,202.47 STOXX Europe 600 down 0.2% to 387.21 German 10Y yield little changed at 2.34% Euro up 0.1% to $0.9719 Brent Futures up 0.3% to $94.55/bbl Gold spot up 0.3% to $1,671.92 U.S. Dollar Index little changed at 113.12 Top Overnight News from Bloomberg Giorgia Meloni’s euphoria at winning the Italian election is running into reality as the far-right leader struggles to put together a coalition government and the gas-dependent country’s financial outlook darkens Bank of England Governor Andrew Bailey’s blunt warning that fund managers have to cut vulnerable positions before the central bank ends debt purchases is sending a shiver around already fragile global bond markets The UK economy shrank unexpectedly in August for the second time in three months, raising the possibility that the country is now in a recession. The 0.3% drop in output was driven by a sharp decline in manufacturing and a small contraction in services The Bank of England has warned that some UK households may face a strain over debt repayments that is as great as before the 2008 financial crisis, if economic conditions continue to be difficult Bank of England policy maker Jonathan Haskel said one of the key issues ailing the UK economy is lackluster levels of business innovation and productivity The European Union is moving closer to proposing a temporary overhaul of the electricity market by limiting prices of gas used for power generation even as pressure mounts for the bloc to impose a broader cap Germany’s biggest service-sector union is demanding 10.5% pay increases amounting to at least 500 euros ($486) a month for public-sector employees to avoid real losses amid record inflation A more detailed look at global markets courtesy of Newsquawk Asian stocks were subdued with price action indecisive as the region took its cue from the choppy performance and late selling stateside after BoE Governor Bailey rejected industry calls for an extension to Gilt purchases, although a report from FT overnight suggested the contrary. ASX 200 was rangebound with strength in the real estate and the top-weighted financials sector offsetting the losses in tech, utilities and mining-related stocks, while there were also comments from RBA’s  Assistant Governor Ellis who suggested nominal rates have already passed neutral and that policy was no longer expansionary. Nikkei 225 lacked conviction following the disappointing Machinery Orders data although the downside was contained with Japan reportedly to draw up economic measures before month-end. Hang Seng and Shanghai Comp. were the worst hit despite the jump in loans and financing data in China with markets constrained by lockdown concerns after China's Xi'an announced to suspend onsite classes for some students and shut other venues, while the Shenzhen Metro suspended three stations due to coronavirus. Top Asian News US permitted at least two non-Chinese chipmakers in China to receive goods and support that are restricted under new US export rules, according to industry sources. It was later reported that SK Hynix (000660 KS) received authorisation from the US Commerce Department to receive equipment for a chip production facility in China for a year without seeking a separate permit from the US, according to Reuters. China will be declared an official threat in a new strategic review of Britain's enemies, according to The Sun. RBA Assistant Governor Ellis said the neutral rate is a guide rail for policy not a destination and that the real neutral rate is uncertain but should be positive even if low which implies a nominal neutral rate of at least 2.5% for Australia, while Ellis added that policy is no longer in an expansionary place, according to Reuters. BoK hiked the base rate by 50bps to 3.00%, as expected and said inflation will remain high in the 5%-6% range for a considerable time. BoK Governor Rhee said board members Joo Sang-Yong and Shin Sung-Hwan dissented at Wednesday's rate decision, while he added that the board's views on the rate hike pace in November differ but added that a majority of board members see the BoK's terminal rate at 3.5%. European bourses saw a choppy start to the session, but have since titled to the upside as US traders prepare to enter the fray. Sectors are mixed with Consumer Products bolstered by luxury names after LVMH earnings, with Tech following whilst Banks and Real Estate lag. Stateside, US equity futures trade on a firmer footing with the ES back above 3600 as the index futures attempt to claw back some of the lost ground yesterday. Top European News It was reported that the BoE signalled to lenders that it is prepared to prolong bond purchases with officials privately indicating a flexible approach if market volatility flares up, according to FT. It was later reported that BoE affirmed that its bond-buying scheme will end on Friday 14th October, via Bloomberg. BoE said the bank has made it clear from the outset its temporary and targeted purchases of gilts will end on October 14th, and beyond Oct 14th, a number of facilities are in place to ease liquidity pressures on LDIs. Pensions and Lifetime Savings Association said the announcement by the BoE to purchase index-linked Gilts is a positive additional intervention, while it noted that the concern of pension funds has been that the period of purchasing should not be ended too soon, according to Reuters. UK's trade deal with India is reportedly on the verge of collapse after Indian ministers reacted "furiously" to comments by Home Secretary Braverman, according to The Times. There is growing speculation that UK PM Truss "could ditch yet more aspects of the mini-budget", according to Politico's Courea, adds "Think we’re looking at “deferring” tax cuts and maybe a further windfall tax”". However, Downing St source said that despite claims, there's no delay to April income tax cut, former Chancellor Sunak's corporation tax hike still is cancelled, according to a Sun reporter. ECB's Villeroy said fears of a recession must not derail ECB normalisation and that the current level of inflation requires ECB determination, while he also noted that a short recession is less detrimental than stagflation and said discussion about a 50bps or 75bps hike in October is premature amid volatile markets. Furthermore, Villeroy said the ECB may move more slowly after reaching a neutral rate and the APP unwind could begin earlier than 2024 with partial reinvestments. FX DXY is softer but off worst levels after testing levels close to 113.00 to the downside. GBP was volatile but currently stands as the outperformer following speculation over the Government ‘ditching’ or ‘deferring’ more of the tax cut proposals. The USD extended its bull run against the JPY to a fresh 2022 and multi-year best beyond prior Japanese intervention levels and 146.00, with little resistance from officials other than the usual verbal interjections Fixed Income Bunds slipped to a fresh intraday low on Eurex at 135.64 for an 81 tick loss on the day having been 9 ticks above par at one stage. Gilts remain 100+ ticks adrift within extremes spanning 90.90-92.81 vs yesterday’s 92.83 Liffe close. US Treasuries are holding steady before PPI data, 10 year note supply, FOMC minutes and further Fed rhetoric. Commodities WTI and Brent front-month futures are flat intraday but off the worst levels seen overnight. NHC said Tropical Storm Karl is expected to strengthen today as it moves slowly over the southwestern Gulf of Mexico. Polish pipeline operator said on Tuesday evening it detected a leak in the Druzhba pipeline; cause is unknown; leak detected in one of two lines, second line is working as normal. Russia's Transfneft said it has received notice from Polish operator PERN about the leak at Druzbha; oil pumping towards Poland continues, according to IFX. Polish top official for energy infrastructure said there are no grounds to believe leak in Druzhba pipeline was sabotage, adds leak was probably caused by accidental damage. Germany State of Brandenburg Economy Minister said there was a pressure drop in Druzhba's main pipeline No.2, according to dpa. Polish pipeline operator PERN said supply to German clients is continuing taking into account technical possibilities; Polish refineries are receiving oil in line with nominations. SGH Macro said the understanding in Beijing is that Saudi Crown Prince Mohammad bin Salman assured Russia’s President Vladimir Putin that OPEC+ will cooperate to ensure that global crude oil prices do not fall below USD 80/bbl at least until the end of the military conflict between Russia and Ukraine, even if there is a global economic crisis.". Spot gold is modestly firmer as the upside for the Buck remains capped for now, but the yellow metal remains under its 21DMA (USD 1,673.34/oz). LME metals are mixed with copper relatively flat but aluminium is underperforming following a large build in LME warehouse stocks. Geopolitics US President Biden told CNN that he doesn't think Russian President Putin will use a tactical nuclear weapon. US President Biden said the Saudis face consequences after the OPEC+ production cut, according to Bloomberg. Two delegations of US congressmen led by Republican Brad Wenstrup and Democrat Seth Moulton have arrived in Taiwan and will stay until Thursday, according to Sputnik. US Event Calendar 07:00: Oct. MBA Mortgage Applications -2.0%, prior -14.2% 08:30: Sept. PPI Final Demand MoM, est. 0.2%, prior -0.1% Sept. PPI Final Demand YoY, est. 8.4%, prior 8.7% Sept. PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.2% Sept. PPI Ex Food, Energy, Trade YoY, est. 5.6%, prior 5.6% Sept. PPI Ex Food and Energy YoY, est. 7.3%, prior 7.3% Sept. PPI Ex Food and Energy MoM, est. 0.3%, prior 0.4% 14:00: Sept. FOMC Meeting Minutes DB's Jim Reid concludes the overnight wrap Have we got 3 days to avert some kind of financial crisis here in the UK? That seemed to be the implicit message from the BoE governor Bailey last night in Washington in what were extraordinary comments that shook global markets after what was slowly turning into a pretty positive session up until the remarks less than 90 minutes before the US close. His exact words were “My message to the funds involved and all the firms is you’ve got three days left now…. You’ve got to get this done.” He was referring to the fact that the APF purchases are slated to end on Friday and that there won’t be any extension. Whether that’s the case or not the extra actions from BoE this week and the stern words from Bailey hint at some big issues still for UK pension funds which will scare the market. Bailey’s language was also a little scary elsewhere saying that he’d been up all night addressing UK market issues and that recent market volatility went beyond their bank stress tests. I suppose the problem with all of this is that if you want pension funds to sort all their issues out in the next three days, he may have made their job a lot harder with the explicit public comments as the market will be really concerned there's a bigger problem now than they thought beforehand. This is unlikely to help pension funds delever. So we could be in for some major volatility in UK assets for the next few days. The only caveat is that the FT reported at 5am this morning that the BoE have privately communicated to bankers that it would extend the emergency bond buying program if market conditions required it. The first reaction to Bailey's comments was felt in Sterling which fell -1.35% from the comments to the close (-0.79% on the day overall) landing at $1.097. Overnight it has rebounded (+0.54%) a bit as I type purely on the FT article I mentioned above. 10yr treasury yields spiked +6.6bps into the close after Bailey having been roughly unchanged immediately before the remarks (after volatile intraday moves) and global equities retreated after their own volatile session. Initially the S&P 500 fell -1.23% after the open, hitting intraday lows that were last matched in November 2020, immediately following Pfizer’s positive Covid trial results, before steadily rallying throughout the day to +0.76%, only to reverse course and nose dive into the close, finishing -0.65% lower following Bailey’s comments. The continued bout of volatility and warnings around broader financial stability saw the Vix index of volatility increase +1.2pts to 33.63pts, its highest levels since immediately before June’s financial conditions easing. Big tech stocks led the way down, with the NASDAQ falling -1.10% to hit its lowest level since July 2020. European stocks may have missed the intraday gyrations and the late US sell-off, but ended up much in the same place, with the STOXX 600 (-0.56%) down for a 5th consecutive session Back to the UK, earlier, the Bank of England announced they were widening the scope of their daily gilt purchases to include index-linked gilts as well. The move followed some astonishing increases in real yields on Monday, which were so big that they surpassed what we saw during the market turmoil following the mini-budget, with the 10yr index-linked gilt yield rising by an incredible +64.1bps. This widening in the BoE’s intervention is now occurring alongside their existing conventional gilt purchases. 10yr Gilts closed +1.0bps, while real 10yr yields fell back -5.6bps. Nevertheless, nominal 30yr yields increased +10.9bps to 4.78%, and that was before Bailey’s comments after the close. Elsewhere, today we start the shift back towards inflation with today’s PPI release from the US setting the stage for the all-important CPI reading tomorrow, with those prints having led to some of the biggest selloffs we’ve seen this year. There’s little doubt in markets that the Fed are going to go for another 75bps hike in 3 weeks’ time, particularly after last week’s jobs report, but there’s more uncertainty about the subsequent meetings, and any upside inflation surprises today and tomorrow could put any slowdown in rate hikes even further into the distance. Alternatively softer numbers could help encourage a big rally given bearish risk positioning. We won’t get the producer price reading until 13:30 London time, but ahead of that we did get the New York Fed’s latest Survey of Consumer Expectations for September, which showed a divergent picture on inflation expectations. At the one-year horizon, expectations fell back to 5.4%, which is their lowest in a year, and some further good news for the Fed. But the longer-term data was somewhat less positive, with three-year expectations ticking back up to 2.9% following three consecutive monthly declines, and five-year expectations advanced to 2.2% following four consecutive monthly declines. Clearly that could just be a blip, but well-anchored inflation expectations have regularly been cited as a reason for the Fed not moving even more aggressively, so any signs that expectations are going in the wrong direction again would raise the prospect of yet more tightening ahead. In the meantime, Fed officials continued to strike a hawkish note in their remarks yesterday, with Cleveland Fed President Mester saying that “the larger risks come from tightening too little and allowing very high inflation to persist and become embedded in the economy”. Recall, there’s been a brewing philosophical divergence on the Committee about the risks of over-tightening given the long and variable lags of monetary policy, which should gather more steam once we get through the last two FOMC meetings in 2022, so it was instructive to hear an official come down so starkly on the other side of the balance of risks debate. That backdrop saw futures price in a 75bps hike for November as more likely than at any point to date so far, with +73.8bps priced in by the close. Elsewhere among central bankers, we heard from ECB Chief Economist Lane as well yesterday, although he didn’t reveal much in the way of policy conclusions to draw from. One line was that he said “the ECB’s Governing Council is fully aware that further ground needs to be covered in the next several meetings to exit from the prevailing highly accommodative level of policy rates”. So a clear signal that more rate hikes are coming over the meetings ahead. Against that backdrop, sovereign bonds in Europe had oscillated between gains and losses throughout the day, in line with the volatility seen across global markets. But by the close yields had mostly fallen across the continent, with those on 10yr bunds (-4.1bps) and OATs (-3.0bps) both falling back. 10yr BTPs rose +4.2bps as some of the previous day's excitement over possible joint EU issuance to help with the energy crisis faded. Asian equity markets are sliding again this morning with the Hang Seng (-1.92%) leading losses followed by the Shanghai Composite (-1.22%) and the CSI (-1.19%) as the rising number of Covid-19 cases has prompted Beijing to impose fresh lockdowns and travel restrictions ahead of the 20th Party Congress. Elsewhere, the Nikkei (-0.14%) is slightly weaker with the Kospi (-0.16%) also moving lower as the Bank of Korea (BOK) raised interest rates by a half percentage point to 3%. The statement indicated that it sees upside risks to its August inflation projection for this year of 5.2%, which warrants additional rate hikes. Additionally, it warned of slower growth with the Korean economy expected to grow next year at a slower pace than the August forecast of 2.1%. Moving ahead, US stock futures are ticking higher with contracts on the S&P 500 (+0.43%) and the NASDAQ 100 (+0.52%) edging higher with US 10yrs -2bps overnight. In FX, the Japanese yen touched a new 24-yr low of 146.23 against the dollar. Elsewhere yesterday, the IMF released their latest round of economic projections as the IMF/World Bank annual meetings get underway. In terms of the headlines, they left their 2022 global growth forecast unchanged at +3.2%, but their 2023 forecast was downgraded to +2.7% (vs. +2.9% in July). Those reductions were particularly concentrated in the advanced economies, with Germany seeing one of the biggest downgrades as they’re now forecasting a -0.3% contraction for 2023 (vs. +0.8% in July). They also upgraded their global inflation forecasts, and are now projecting that world consumer prices will have risen by +8.8% in 2022 (vs. +8.3% in July) and +6.5% in 2023 (vs. +5.7% in July). Finally on the data front, the UK unemployment rate fell to 3.5% (vs. 3.6% expected) in the three months to August, which is its lowest level since 1974. In addition, the number of payrolled employees in September was up +69k (vs. +35k expected). To the day ahead now, and data releases include the US PPI reading for September, along with UK GDP and Euro Area industrial production for August. From central banks, we’ll get the FOMC minutes from the September meeting, and hear from the Fed’s Barr, Kashkari and Bowman, ECB President Lagarde, the ECB’s Knot and De Cos, as well as the BoE’s Pill, Haskel and Mann. Finally, earnings releases include PepsiCo. Tyler Durden Wed, 10/12/2022 - 08:03.....»»

Category: blogSource: zerohedgeOct 12th, 2022

Markets Are Expecting The Fed To Save Them – It"s Not Going To Happen

Markets Are Expecting The Fed To Save Them – It's Not Going To Happen Authored by Brandon Smith via Alt-Market.us, I have said it many times in the past but I’ll say it here again: Stock markets are a trailing indicator of economic health, not a leading indicator. Rising stock prices are not a signal of future economic stability and when stocks fall it’s usually after years of declines in other sectors of the financial system. Collapsing stocks are not the “cause” of an economic crisis, they are just a delayed symptom of a crisis that was always there. Anyone who started investing after the crash of 2008 probably has zero concept of how markets are supposed to behave and what they represent to the rest of the economy. They have never seen stocks move freely without central bank interference and they have only witnessed brief glimpses of true price discovery. With each new leg down in markets one can now predict every couple of months or so with relative certainty that investor sentiment will turn to assumptions that the Federal Reserve is going to leap in with new stimulus measures. This is not supposed to be normal, but they can’t really help it, they were trained over the past 14 years to expect QE like clockwork whenever markets took a dip of 10% or more. The problem is that conditions have changed dramatically in terms of credit conditions and price environment and it was all those trillions of QE dollars that ultimately created this mess. Many alternative economists, myself included, saw this threat coming miles away and years ahead of time. In my article ‘The Economic End Game Continues’, published in 2017, I outlined the inevitable outcome of the global QE bonanza: “The changing of the Fed chair is absolutely meaningless as far as policy is concerned. Jerome Powell will continue the same exact initiatives as Yellen; stimulus will be removed, rates will be hiked and the balance sheet will be reduced, leaving the massive market bubble the Fed originally created vulnerable to implosion. An observant person…might have noticed that central banks around the world seem to be acting in a coordinated fashion to remove stimulus support from markets and raise interest rates, cutting off supply lines of easy money that have long been a crutch for our crippled economy.” The Fed supports markets through easy money that feeds stock buybacks, and it’s primarily buybacks that kept stocks alive for all these years. It should be noted that as indexes like the S&P 500 plunged 20% or more in in the first six months of 2022, buybacks also decreased by 21.8% in the same time period. That is to say, there seems to be a direct relationship between the level of stock buybacks and the number of companies participating vs the decline of stocks overall. And why did buybacks decline? Because the Fed is raising interest rates and the easy money is disappearing. If buybacks are the primary determinant of stock market prices, then the participation of individual investors is mostly meaningless. Stocks cannot sustain on the backs of regular investors because regular investors don’t have enough capital to keep markets afloat. Companies must continue to buy their own shares in order to artificially prop up prices, and they need cheap Fed money to do that. Stocks are therefore an illusion built only on the whims of the Fed. And the reason for the Fed’s dramatic shift away from stimulus and into tightening? One could argue that it’s merely the natural end result of inflationary manipulation; that central banks like the Fed were ignorant or arrogant and they weren’t thinking ahead about the consequences. Except, this is false. The Fed knew EXACTLY what it was doing the whole time, and here’s the proof… Way back in 2012 before Jerome Powell became Fed Chairman, he warned of a market crisis if the central bank was to hike rates into economic weakness after so many years of acclimating the system to easy money and QE. During the October 2012 Fed meeting Powell stated: “…I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.” In other words, Powell and all other Fed officials knew ten years ago what was going to happen. They knew that they were creating a massive financial bubble and that when they raised rates that bubble would collapse causing serious economic damage. Yet, they kept expanding the bubble, and now with Powell as chairman, they are popping the bubble. No one honest can claim that the central bankers were “blind” or ignorant. This is an engineered crash, not an accidental crash. If the crash is deliberate then it is a means to an end, and there is no reason for the Fed to intervene to save markets at this time. Some people will argue that this puts a target on the Fed as a saboteur of the economy, and they wonder why the central bankers would put themselves at risk? Because they have a rationale, a way out, and it’s called “stagflation.” Price inflation coupled with negative GDP is the basis for a stagflationary environment. The only other factor that is missing in the US today is rising unemployment, but this problem will arrive soon as numerous companies are slated to start layoffs in the winter. Stagflation is the Fed’s perfect excuse for continuing to raise interest rates despite plunging stocks. If they don’t hike rates then price inflation runs rampant and GDP declines anyway. If they return to QE then an inflationary calamity ensues. In order to “save us,” they have to hurt us. That’s the excuse they will use. It’s a Catch-22 event that they created, and I believe they created it with a purpose. But let’s imagine for a moment that the Fed has the best interests of the economy at heart; would a pivot back to QE change anything? Not in the long run. Rising inflation is going to crush what’s left of the system anyway. Supply chain problems will only get worse as costs rise. To return to stimulus would indeed put a target on the central bankers. It’s better for them to pretend as if they are trying to fix the problem rather than continue with policies that everyone knows are draining pocket books. Stocks saw a brief rebound this past week for one reason and one reason only – Rumors of a Fed pivot were spread and investors were hoping for a stop to rate hikes or a glorious return to stimulus measures. We will see many short rebounds in stocks like this over the next year, each one initiated by rumors of a reversal in policy. It’s not going to happen. Will the Fed stop rate hikes? Sure, probably when the Fed funds rate is between 4% to 5%. Will that mean a reversal is on the horizon? No, it won’t. And it won’t mean that the Fed is done with rate hikes. They could start hiking again a few months down the road as price inflation persists. Will the Fed return to QE? I see no reason why they would. Again, they are fully aware of the damage they have done with the QE bubble and the popping of that bubble. They would not have hiked rates in the first place unless they wanted a crash. Consider this: What if the goal of the Fed is the destruction of the middle class? What if they are using the false hopes of small time investors in a return to QE? What if they are luring investors into markets with rumors of a pivot, tricking those investors into pumping money back into markets and then triggering losses yet again with more rate hikes and hawkish language? What if this is a wealth destruction steam valve? What if it’s a trap? I present this idea because we have seen this before in the US, from 1929 through the 1930s during the Great Depression. The Fed used very similar tactics to systematically destroy middle class wealth and consolidate power for the international banking elites. I leave you with this admission by former Fed Chairman Ben Bernanke on the Fed’s involvement in causing the Great depression through rate hikes into weakness… “In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn. Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” – Ben Bernanke, 2002 Is the Fed really sorry? Or are they just repeating the same strategy they used 90 years ago while acting as if they are unaware of the eventual outcome? *  *  * After 14 long years of ultra-loose monetary policy from the Federal Reserve, it’s no secret that inflation is primed to soar. If your IRA or 401(k) is exposed to this threat, it’s critical to act now! That’s why thousands of Americans are moving their retirement into a Gold IRA. Learn how you can too with a free info kit on gold from Birch Gold Group. It reveals the little-known IRS Tax Law to move your IRA or 401(k) into gold. Click here to get your free Info Kit on Gold. Tyler Durden Sat, 10/08/2022 - 21:25.....»»

Category: personnelSource: nytOct 8th, 2022

Peter Schiff: FedEx Exposes The Myth Of The "Soft Landing"

Peter Schiff: FedEx Exposes The Myth Of The "Soft Landing" Via SchiffGold.com, Inflation continues to surprise to the upside. Meanwhile, the economy continues to surprise to the downside. But the markets continue to believe that the Federal Reserve can slay the inflation monster while still guiding the economy to a so-called “soft landing.” FedEx announced some news last week that undercuts this narrative. In his podcast, Peter Schiff talked about why the landing is going to be hard. And when the economy crashes, the Fed inflation fight will be over. Peter said in the short run, investors are not reacting properly to what’s going on. I knew we were getting higher inflation. I knew we were getting weaker growth. Most people didn’t know that. But what’s still happening is every time investors are surprised with a hotter-than-expected inflation number, that makes them feel that the Fed is now going to have to fight harder to bring inflation back down to 2%. Nobody doubts the Fed’s resolve, or its ability to bring inflation back down to 2%. So, the higher inflation goes, the harder everybody expects the Fed to fight to win. And that keeps propping up the dollar, and that keeps suppressing gold.” Peter said he has no idea when the markets are going to figure out that higher inflation just means the Fed is losing the fight, and no matter how hard it fights, it’s going to keep losing. It’s not fighting hard enough because it can’t.” Even if the Fed comes out with a 100-basis point hike this week, real rates will remain at -5%. In what universe can you fight inflation with negative five percent real rates? You can’t, It is impossible.” As Peter said in a previous podcast, the Fed falls further behind the inflation curve every time it hikes. The Fed won’t succeed in killing inflation. But it will kill the economy. And that’s because it’s a bubble. The entire economy is based on artificially low interest rates.” The economy can’t just levitate in midair. It has to fall down when the monetary supports are pulled out from under it. There is no way to normalize interest rates after more than a decade of abnormally low interest rates and not let everything come toppling down.” There are already signs that the economy is shaky. We’ve already had two quarters of negative GDP growth and the Atlanta Fed lowered its Q3 estimate to 0.5% last week. The housing market is falling apart. And last week, FedEx dropped a bombshell, announcing office closures and layoffs due to falling demand for shipping. As Peter pointed out, it’s no wonder that package volume is dropping. Consumers are spending more, but they’re not buying more stuff. They’re just paying more for everything. FedEx exposes the underlying rot in the economy, and it’s going to get worse. Peter said when that happens, the Fed will abandon the inflation fight. Layoffs are coming as real spending is going down, and that’s when the Fed ultimately is going to pivot. Once the economy really starts to buckle, the Fed is going to turn.” Peter said he thinks the only reason Federal Reserve Chairman Jerome Powell continues to talk tough about fighting inflation is because he’s still delusional enough to think he can do it without destroying the economy. Powell still thinks he can manage a “soft landing.” He’s willing to put the economy in a mild recession and allow unemployment to tick up a little bit. That would be getting out of Dodge with barely a scratch. So yes, he’s willing to do that. But is he willing to create a worse financial crisis than 2008? Is he willing to put the economy in the equivalent of a depression — great recession worse than we had in 2008? Of course not! He has zero tolerance for that.” But Powell still doesn’t expect that, nor does anybody else in the mainstream. Most people concede that the US economy will move into a recession. But everybody thinks it will be “short and shallow.” But how do they know that? Why should it be short and shallow? As Peter pointed out, the bust needs to be proportional to the boom. We’ve never had a boom this big. We’ve never had interest rates this low for this long. We’ve never had an economy more screwed up than the one we have right now. We’ve never had bigger asset bubbles, bigger debt bubbles, more misallocations of capital and resources. So, we have more mistakes that we need to fix now than ever before. So, how are we going to do that with a short shallow recession? We’re not. It’s going to be a massive recession. And again, the Fed has no stomach for that, and that’s why the Fed is going to pivot.” And of course, this pivot is going to happen when inflation is still well above 2%. If the Fed goes back to zero percent interest rates and quantitative easing, it’s going to drive inflation even higher. In other words — stagflation. In this podcast, Peter also talks about silver as the silver lining in gold’s cloud, the declining stock market, the likelihood of a Black Monday in the near future, why bonds may crash harder than stocks, and the implications of that crash. Tyler Durden Mon, 09/19/2022 - 12:05.....»»

Category: worldSource: nytSep 19th, 2022

Jay Powell: A Breathing Weapon Of Mass Destruction?

Jay Powell: A Breathing Weapon Of Mass Destruction? Authored by Matthew Piepenburg via GoldSwitzerland.com, Below we track how the Powell Fed serves as a contemporary weapon of mass destruction. Powell’s so-called “war against inflation” will fail, but not before crushing everything from risk asset, precious metal and currency pricing to the USD. As importantly, Powell is accelerating global market shifts while sending a death knell to the ignored middle class. Let’s dig in. The Fed: Creators of Their Own Rock & Hard Place In countless interviews and articles, we have openly declared that after years of drunken monetary driving, the Fed has no good options left and is literally caught between an inflationary rock and a depressionary hard-place. That is, hawkishly tightening the Fed’s monthly balance sheet (starting in September at $95B) while raising the Fed Funds Rate (FFR) into a recession was, is and will continue to be an open head-shot to the markets and the economy; yet dovishly mouse-clicking more money (i.e., QE) would be fatally inflationary. Again, rock and a hard place. What’s remarkable and unknown to most, however, is that the Chicago Fed recently released a white paper during the Jackson Hole meeting which says the very same thing we’ve been warning: Namely, that Powell’s WMD “Volcker 2.0” stance (arrogance/delusion) is only going to make inflation (and stagflation) worse, not better. To quote the Chicago Fed: “In this pathological situation, monetary tightening would actually spur higher inflation and would spark a pernicious fiscal stagflation, with the inflation rate drifting away from the monetary authority’s target and with GDP growth slowing down considerably. While in the short run, monetary tightening might succeed in partially reducing the business cycle component of inflation, the trend component of inflation would move in the opposite direction as a result of the higher fiscal burden.” In short, Powell can’t be Volcker. Why? Simple. America Can’t Afford Powell (or His Rate Hikes) This hard reality is economic and mathematical, not political or psychological, though Powell suffers from both political delusion and a psychological lack of self/historical awareness… I’d like to ask Powell, for example, how the US plans to pay for its now rate-enhanced (i.e., even more expensive) debts and obligations regarding defense spending, Treasury obligations, social security and health care when just the interest payments alone on Uncle Sam’s current bar tab are unsustainable? Powell, part of the so-called “independent Fed,”will now have to make a political choice (and trust me, the Fed IS political): Will he A) intentionally seek to crash the economy into the mother of all recessions to “fight” the inflation his own private bank’s balance sheet singularly created, or B) will he help turn America into the Banana Republic that it is already becoming by printing (debasing) trillions more US “dollars”? The “inflation-fighting” Powell, embarrassed to go down in history as the next Arthur Burns, may just A) continue to hike rates and strengthen the USD (currently bad for gold), which is sending America to its knees, or B) sometime this autumn he’ll cave, pivot and let inflation rip (while the BLS, of course, under-reports inflation (i.e., lies) by at least ½). In the meantime, we can only watch markets and economic conditions continue to tank as interest rates and the USD climbs toward a peak before the USD makes a record-breaking fall. And why do I see a fall? Easy. The Credit Markets Are Screaming “Oh-Oh!” To borrow/twist from Shakespeare: “The bond market is the thing.” Everything, and I mean everything, hinges on credit markets. Even the cancerously expanding US money supply(M0-M4) is at root just 95% bank credit. Understanding credit markets is fairly simple. When the cost of debt is cheap, things (from real estate to growth stocks) feel good; when the cost of debt is high (as measured by the FFR, but more importantly by the fatally rising yields on the US10Y), things collapse. We saw the first (and media-ignored) warnings of this collapse in September of 2019 when the oh-so critical (yet media ignored) repo markets imploded, none of which can be blamed on COVID (2020), Putin (2022) or climate change. As dollar liquidity dries up, so will markets, economies and lifestyles. Remember: All market crises are, at root, just liquidity crises. A Summer of Credit Drought As previously warned, signs of this drying liquidity are literally everywhere. The Fed’s own Quarterly Loan Officer Survey confirms that banks are lending less. And given that 70% of the US bond market is composed of junk, high-yield and levered loans (i.e., the worst students in the class hitherto priced as PhD candidates), the rigged game of debt roll-overs and stock buy-backs is about to end in a stock and bond market near you as rates rise to unpayable levels. Furthermore, it’s worth noting that US banks (levered 10X) and European banks (levered 20X due to years of negative nominal rates), will now use rising rates as the long-awaited excuse to de-lever their bloated balance sheets, which is fatal to risk asset markets. Even more alarming, however, is what this de-leverage will mean to that massive, USD-based and expanding (1985 to now) Weapon of Mass Destruction otherwise known as the OTC and COMEX derivative markets. Rather that expand, this fatal market will contract—all of which will have massive implications for the USD as debt markets slowly turn from a past euphoria to a current nightmare. The Dangerous USD Powell Ignores Measured by the DXY, the Dollar is ripping. But you’ll note that Powell and his “data points” never address the Dollar. Powell, like most DC-based Faustian deal-makers, lives in a US-centric glass house, which ignores the rest of the world (namely Emerging Markets, oil producers and mislead “allies”) who are de-dollarizing (i.e., repricing the USD) as I type this. In case Powell never took an econ history class or read a newspaper that was not written in English, it might be worth reminding him that EM nations like Venezuela, Lebanon, Argentina, Turkey, and Sri Lanka, as well as, of course, the BRICS themselves, are tired of importing US inflation and paying trillions and trillions of Dollar-denominated debt or forced dollar-settled oil purchases. As the Fed artificially strengthens the USD via rate hikes, debt-soaked nations are forced to either: A) debase their currencies to pay their debts (which might explain Argentina’s 69.5% official interest rate) or B) raise rates and look elsewhere for new trading partners or money. Even “developed” economies are seeing their currencies at record lows vis-à-vis the rising USD (Japanese Yen at 50-year lows, UK’s currency at 37-year lows and the euro now at 20-year lows). And as for those cornered EM nations, $650B of the IMF’s 2021 usurious (and dollar-based) loans to them have already dried up. EM Markets Looking East Not West So, where will EM countries go trade, survival, better energy pricing, and even fairer gold pricing? The answer and trends are now open and obvious: East not West, and away from (rather than toward) the USD. Russia and China are making trade and currency deals not only with the BRICS at a rapid pace, but with just about every nation not otherwise “friendly” (i.e., forced to be) with the USA (and which “friends” now face a cold winter on this side of the Atlantic.) Even the notoriously corrupt LBMA gold market, which spends its every waking hour using forward contracts to artificially crush the paper gold price, is about to see a Moscow-based new gold exchange (the Moscow Gold Standard). Of course, such a Moscow exchange makes sense given that 57% of the world’s gold comes from Eurasian zip codes where a post-sanction Putin sees yet another golden opportunity to fix what the West has broken. Furthermore, and as stated above, as the derivatives markets de-lever, demand for the USD (and hence dollar-strength) will equally tank, as OTC settlements are done in USD, not Pesos, Yen, euros or Yuan. As we warned within weeks of the failed sanctions against Putin, the world is de-dollarizing slowly yet steadily, and once the DXY inevitably slides from 108, to 107 and then below 106, the Greenback’s fall will mirror Hemingway’s description of poverty: “Slowly then all at once.” For the last 14 months, the Dollar Index has been trading above its quarterly moving average, which as the always-brilliant Michael Oliver reminds, is like a runner who never exhales. At some point the USD’s lungs will collapse. Gold: Waiting for the USD to Snap The foregoing and seismic shifts in the derivative and EM markets portend the sick finale of the USD, and hence for the currently repressed gold price. In short: As the former tanks, the latter surges. Many are nevertheless angry that gold hasn’t ripped in a world of geopolitical risk and rising/persistent inflation, but that’s because the artificially rigged USD has been their only (and short-lived) measure. As risk assets in the US and around the world experience double-digit declines, gold in every major currency but the USD has been rising, not falling: And even gold’s relative decline in US markets remains minimal compared to double-digit losses in traditional US risk-parity (i.e., stock/bond) portfolios for 2022. A COMEX in Transition You also may have overlooked that those fat foxes over at the BIS recently unwound 90% of their gold swaps (from 500 to 50 tons) at precisely the same pace that JP Morgan and Citibank (which hold/control 90% of the US commercial banking gold derivatives) just expanded the notional value of their gold derivatives by 520% (!). Anyone and everyone in the precious metals markets knows that the notional value of those contracts over-shoots the actual supply of the physical metal by 99%. The COMEX is a nothing more than a legalized fairytale (fraud) whose non-fictional pains (and gold surges) are inevitable. In the meantime, however, many players in the COMEX markets (the precious metal exchange in NY) are now (and increasingly) looking to take delivery of real rather than paper gold. Why? Because they see the writing on the wall. Gold is a monetary metal not a paper card trick. The COMEX players want to get as much physical metal as they can before false idols like Powel and the global EM currents flowing East take down the USD’s post-Bretton Woods hegemony. When/as that happens, gold does what it always does when nations and their debased currencies tank: It rises. And you can be sure that JP Morgan and Citi will keep the paper gold price low until they have enough of the physical gold in hand when gold rips and the USD sinks. For Now, More Lies, Empty Phrases and Distractions In the meantime, Powell will act like the nervous captain of a sinking ship and play with rates and the USD as the DC information bureaus (i.e., BLS) spread more open fictions and false distractions on everything from the inflation and unemployment rate to suddenly forgotten viral threats (?), the freedom of Ukraine or the political theme of climate change. And of this you can also be certain: Powell will continue the Fed’s historical role of crushing the US working class. Translating Powell’s “Softening Demand” As Powell wandered Jackson Hole, he warned Americans to prepare for “softening demand,” which is a euphemism for crushing the middle class via rising rates and long-term (rather than “transitory”) inflation ahead. This rich. After being the sole tailwind for pushing equity markets up by hundreds of percentage points with mouse-click money since 2009, the Fed has made the top 10% (which owns 85% of the Fed-inflated stock market wealth) extremely rich. Now, by deliberately cranking rates higher, Powell’s Fed is making the middle class (bottom 90%) even poorer. Wealth inequality in the US has NEVER been higher, and this never bodes well for the future of an openly fracturing nation. Indeed, inflation pains and rising rates certainly hurt all Americans. For the wealthy, such inflationary pains sting; however, for the working class, they cripple. And as far as this crippling effect of “softening demand” goes, we can blame that squarely on the narrow shoulders of such false idols like Greenspan, Bernanke, Yellen and Powell. For years, they’ve been saying their mandate was to control inflation and manage employment. But that employment (as confirmed by PWC, household surveys and our own two eyes) is about to see hiring freezes, downsizing and lay-offs as debt-soaked enterprises with tanking earnings and confidence levels cut costs and jobs. Again: That’s not “softening,” that’s crippling. But as I’ve shown in Rigged to Fail and Gold Matters, the Fed’s real mandate is providing (now increasingly scarce) liquidity to credit markets (and hence tailwinds for the equity markets), which benefit a minority, not a majority, of the population. This easily explains Andrew Jackson’s prescient warning that a central bank simply boils down to the “prostitution of our government for the benefit of the few at the expense of the many.” Truer words were never spoken, and we are now seeing these warnings playing out in real time, and will see even more pain ahead in this surreal new normal of “softening demand” and a current America of central-bank created serfs and lords. Powell’s words, of course, do not match his or the Fed’s deeds, a profile flaw that has been hiding in plain site since the Fed’s not-so-immaculate conception in 1913. The more that investors understand where the decisions are made and why, and the more they track the market signals (bond yields, credit markets and currency debasements), the more they can prepare for what is already here and what lies ahead. Tyler Durden Sat, 09/17/2022 - 10:30.....»»

Category: blogSource: zerohedgeSep 17th, 2022

Futures Slump In Ugly Start To Ugliest Month Of The Year

Futures Slump In Ugly Start To Ugliest Month Of The Year With September already historically the ugliest month for markets of the entire year... ... an underperformance which this year will likely be on steroids thanks to the Fed's doubling of QT to $95BN starting today... ... especially with stocks having gone from overbought to oversold in two weeks as bullish sentiment imploded... ... it's not like stocks needed an additional impetus to dump, yet they got just that overnight when first China announced that it would put 21 million citizens living in its megacity of Chengdu on lockdown (as part of Beijing's "Zero Covid" policy of blaming China's slowdown on 1 or 2 cases of covid per city and promptly locking down whole swaths of the economy, you know, for the kids), and second in a major escalation, Taiwan shot down an unidentified drone off the Chinese coast; the news sent S&P 500 futures sharply lower on the first of the month, dropping as much as 0.9%, with Nasdaq futures down as much as 1.3% after another sales warning from Nvidia sent chipmakers in retreat on new China export rules. The US 10-year Treasury yield rose to 3.20% and threatening to break above the previous level, a move which would be seen as especially bearish. The dollar gained and oil tumbled for a 3rd day amid fears about Chinese demand, even as OPEC+ is preparing to announce some sort of price stabilization intervention. Industrial metals fell after China locked down Chengdu’s 21 million residents, while oil and natural gas retreated as Europe considers various measures to intervene in the energy market. Commodity-linked and Group-of-10 currencies weakened, while the yen dropped to a 24-year low. The market jitters come after August’s losses, reflecting fears of an economic downturn alongside restrictive monetary policy to choke inflation. A global bond rout saw the two-year Treasury yield touch 3.50% for the first time since 2007. In premarket trading, US chipmakers fell in premarket trading after Nvidia warned that new rules governing the export of artificial-intelligence chips to China may affect hundreds of millions of dollars in revenue. Nvidia fell 6%, AMD -3.5%, Intel -1.2%, Micron -2.3%. Bank stocks were lower as investors await the release of jobs data. Here are other notable premarket movers: Okta shares slumped as much as 15% in premarket trading after results, which analysts said were “muted” and spurred worries over billings growth and demand. MongoDB shares fell 17% in premarket trading, after the database software company gave a “conservative” full-year forecast. C3.ai shares were down 14% in premarket trading after the application software company cut its full-year revenue forecast amid an uncertain macro environment. Bed Bath & Beyond shares slid as much as 6.3% in premarket trading, with other meme stocks also down, as investors continue to assess the home-goods retailer’s turnaround plan. Five Below reported second-quarter results that failed to meet estimates. While disappointed, analysts said they weren’t surprised. The stock rose 3.2% in thin premarket trading. “The Fed effect is now melding with other global factors such as China’s growth slowdown and Europe’s stagflation to create a more fraught global macro environment with higher rates and lower growth,” said Alvin Tan, strategist at RBC Capital Markets in Singapore. “It is this combination of hawkish central banks led by the Fed, China’s slowdown and Europe’s stagflation that is now driving volatility across global markets.” European stocks also declined, Euro Stoxx 50 slumps 1.6%. IBEX outperforms, dropping 0.9%, CAC 40 lags, dropping 1.7%. Miners, real estate and consumer products are the worst-performing sectors.  Miners led declines in Europe as commodities dropped amid concerns that aggressive tightening and China’s slowdown will lower demand.  Among individual moves, Reckitt Benckiser Group Plc’s shares fell on news that Chief Executive Officer Laxman Narasimhan will step down at the end of the month to pursue a new opportunity in the US. Here are the other notable European movers today: Jet2 shares rise as much as 4.2% with HSBC saying the tour operator’s AGM statement was reassuring for the short- term EuroAPI gains as much as 6.1%, the most since June, after the company presented its 1H earnings. Oddo BHF says the strong report shows EuroAPI’s strategy is “beginning to bear fruit.” Chrysalis Investments climbs as much as 5.7% as the Telegraph newspaper’s Questor column says now is “the best time to buy” shares in the investment firm Basic Resource stocks fall the most in seven weeks, the sector’s longest losing streak since mid-June, as a slide in metal prices accelerated amid demand concerns over fresh Covid lockdowns in China The European real estate sector is among the day’s worst performers on the regional equity benchmark, weighed down by concerns around hawkish central banks Luxury-goods stocks slide in Europe after a new Covid lockdown in the key market of China and as HSBC downgraded a bunch of the sector’s biggest firms Reckitt Benckiser drops as much as 5.7%, the most since July 2021, after the unexpected news that CEO Laxman Narasimhan will step down Zur Rose slumps as much as 11% after an offering of shares priced at CHF39 apiece, representing a 15% discount to the last close Warsaw’s WIG20 index continues its retreat, widening this year’s drop to 34% as appetite for commodity stocks wanes amid growth fears and a decline in energy prices in Europe Some of Wall Street’s biggest banks now expect the European Central Bank to hike rates by 75 basis points at next week’s meeting, while the latest economic data underlined a parlous outlook for China. Meanwhile, Russia said it is considering a plan to buy as much as $70 billion in yuan and other “friendly” currencies this year to slow the ruble’s surge, before shifting to a longer-term strategy of selling its holdings of the Chinese currency to fund investment. Earlier in the session Asian stocks traded mostly lower following the weak handover from global counterparts amid the higher yield environment and following a surprise contraction in Chinese Caixin Manufacturing PMI data. Hang Seng and Shanghai Comp were subdued after weak factory activity data from China and with Meituan among the worst performers in Hong Kong after reports its shareholder Tencent is planning about USD 14.5bln of divestments from its equity portfolio including a partial divestment of its stake in Meituan, while the mainland was cushioned after further policy support pledges by China’s cabinet.  Japanese stocks closed lower ahead of a raft of US data that may back the case for the Federal Reserve to continue raising interest rates. The Topix index fell 1.4% to 1,935.49 at the 3 p.m. market close in Tokyo, while the Nikkei 225 declined 1.5% to 27,661.47,  closing beneath the 28k alongside the broader risk aversion with further currency weakness and an upgrade to Japanese PMI data doing little to inspire a turnaround. Toyota contributed the most to the Topix’s decline, decreasing 2.3%. Out of 2,169 stocks in the index, 226 rose and 1,879 fell, while 64 were unchanged. Shares also slid as parts of China went back into lockdown. In Australia, the S&P/ASX 200 index fell 2%, the most since June 14, to close at 6,845.60, dragged by losses in banks and mining shares.  The materials sub-gauge was the worst performer, slumping to the lowest since July 27, as commodity prices tumbled and as BHP, the benchmark’s heaviest-weighted stock, trades ex-dividend. In New Zealand, the S&P/NZX 50 index was little changed at 11,609.83. In FX, the Bloomberg Dollar Spot Index advanced as the greenback strengthened against all of its Group-of-10 peers apart from the Swiss Franc. The euro slumped but managed to hold above parity against the dollar after Germany July retail sales rose 1.9% m/m vs estimated 0.1% decline. Italian bonds and bunds slid for a fifth day, lifting Italy’s 10-year yield above 4% for the first time since June 15 as money markets continued to raise ECB tightening bets ahead of next week’s policy outcome. The Swiss Franc snapped a four-day loss against the dollar. A report showed that Swiss prices increased by 3.5% in August, above July’s reading of 3.4% -- already the highest in three decades. The pound extended declines, dropping to a 2 1/2-year low against a broadly stronger US dollar. Sterling was set for its fifth- straight day of declines, after August saw its worst month versus the greenback since 2016. The yen dropped to 139.68 per dollar, its lowest since 1998 as surge in Treasury yields heaped more pressure on the currency, prompting a warning from a Japanese government official that did little to stem the tide. Australian and New Zealand dollars fell as a stronger greenback boosted by rising Treasury yields and a drop in iron ore prices weighed. The offshore yuan fleetingly extended gains against the dollar on reports that Russia is considering buying as much as $70 billion in yuan and other “friendly” currencies. The yen pares some declines to trade at 139.24/USD after falling to weakest level since 1998 as US-Japan yield spread keeps widening. Bloomberg dollar spot index rises 0.2%, while CHF outperforms G-10 peers. In rates, Treasuries were narrowly mixed as US trading gets under way Thursday with the yield curve steeper after the 2-year failed to sustain its first breach of 3.5% since 2007. 2-year yields are lower by 1.4bp at 3.479% after rising as much as 1.8bp to 3.511%; 30-year higher by 2.2bp near day’s high; inverted 2s10s spread steeper by 1.6bp at -29bp, 5s30s by nearly 4bp at -2.2bp. Wednesday’s month-end close entailed bear-flattening that continued until 5pm New York time, an hour after the Bloomberg Treasury index rebalancing, and was especially pronounced in TIPS. The US 10-year trails steeper yield increases for UK and most euro-zone counterparts. Treasuries’ 2.5% August loss was the market’s biggest since April; paced by UK and euro-zone yields, it was driven by more hawkish expectations for Fed policy that lifted 2- and 5-year yields by more than 60bp. Gilts push lower, with the yield on 10-years up 7 bps to 2.87%, while European bonds extend declines. Italian 10-year yield went briefly above 4% for the first time since June 15. Bunds also slipped, leaving the two-year rate within a whisker of its June peak. In commodities, WTI crude fell to around $88; gold loses ~$5 to near $1,705. European natural gas declines for a fourth day. Spot gold is meandering just north of USD 1,700/oz after testing the figure to the downside. Base metals are lower across the board following the downbeat Chinese manufacturing PMI overnight alongside news of stricter Chinese lockdowns in some regions. US Treasury Secretary Yellen and UK Chancellor Zahawi discussed efforts regarding a price cap on Russian oil to lower global energy prices and restrict Russia's revenue, according to the US Treasury Department. It was separately reported that US and allies are to set out a plan on Friday to limit the price of Russian oil with a strategy that aims to cut Russian energy revenues without increasing global oil prices, according to WSJ. OPEC+ JTC acknowledges the relevance of the Saudi Energy Minister's comments on volatility and thin liquidity of crude markets, via Reuters citing a document. Bitcoin remains under pressure and below the USD 20k mark, fairly in-fitting with its Ethereum peer in residing at the bottom-end of very narrow ranges. To the day ahead now, data releases include the global manufacturing PMIs for August and the ISM manufacturing reading from the US. Otherwise, there’s also the US weekly initial jobless claims, the Euro Area unemployment rate for July, and German retail sales for July. Central bank speakers include the ECB’s Centeno and the Fed’s Bostic. Finally, earnings releases include Broadcom and Lululemon. Market Snapshot S&P 500 futures down 0.8% to 3,924.25 STOXX Europe 600 down 1.6% to 408.48 MXAP down 1.9% to 155.53 MXAPJ down 1.9% to 510.07 Nikkei down 1.5% to 27,661.47 Topix down 1.4% to 1,935.49 Hang Seng Index down 1.8% to 19,597.31 Shanghai Composite down 0.5% to 3,184.98 Sensex down 1.6% to 58,581.55 Australia S&P/ASX 200 down 2.0% to 6,845.60 Kospi down 2.3% to 2,415.61 German 10Y yield little changed at 1.63% Euro down 0.2% to $1.0032 Brent Futures down 1.8% to $93.88/bbl Brent Futures down 1.9% to $93.87/bbl Gold spot down 0.6% to $1,701.34 U.S. Dollar Index up 0.19% to 108.91 Top Overnight News from Bloomberg The hotly anticipated US jobs report has the potential to tip the scales toward a third jumbo-sized hike in interest rates later this month after a wave of data that point to a resilient consumer and high labor demand The Chinese metropolis of Chengdu will lock down its 21 million residents to contain a Covid-19 outbreak, a seismic move in the country’s vast Western region that has largely been untouched by the virus Europe is considering various measures to intervene in the energy market, including price caps, reducing power demand and windfall taxes on energy companies as surging prices threaten the economy and push households toward poverty PMIs for the 19-nation euro zone slipped to 49.6 in August from 49.8 in July, according to S&P Global -- a reflection of dwindling demand as consumers face surging costs for energy and a broadening range of goods and services. Germany and Italy both saw the worst readings in 26 months Russia is considering a plan to buy as much as $70 billion in yuan and other “friendly” currencies this year to slow the ruble’s surge, before shifting to a longer-term strategy of selling its holdings of the Chinese currency to fund investment Japanese workers’ share of company earnings fell for the first time in four years, suggesting Prime Minister Fumio Kishida’s call for companies to pay more to employees is running into resistance A more detailed summary of global markets courtesy of Newsquawk Asia-Pac stocks traded mostly lower following the weak handover from global counterparts amid the higher yield environment and following a surprise contraction in Chinese Caixin Manufacturing PMI data. ASX 200 was dragged lower by the mining-related sectors after recent declines in underlying commodity prices. Nikkei 225 retreated beneath the 28k alongside the broader risk aversion with further currency weakness and an upgrade to Japanese PMI data doing little to inspire a turnaround. Hang Seng and Shanghai Comp were subdued after weak factory activity data from China and with Meituan among the worst performers in Hong Kong after reports its shareholder Tencent is planning about USD 14.5bln of divestments from its equity portfolio including a partial divestment of its stake in Meituan, while the mainland was cushioned after further policy support pledges by China’s cabinet. Top Asian News China's city of Chengdu will conduct mass COVID testing from September 1st-4th and the city government said all residents will stay at home from this evening, according to Reuters. Hong Kong will push ahead with a proposal that will allow more residents to travel to mainland China after completing a quarantine period locally, according to SCMP citing sources. UN Human Rights Office issued its assessment of human rights concerns in Xinjiang in which it stated that China's government has committed serious human rights violations in Xinjiang and recommended China take prompt steps to release all those detained in training centres, prisons or detention facilities, according to Reuters and AFP. Chinese mission in Geneva said it expresses strong dissatisfaction regarding the UN report on Xinjiang and firmly opposes the report, while it added that the so-called assessment was a farce planned by the US, western nations and anti-China forces, according to Reuters. Hong Kong officials are targeting a conclusion to hotel COVID quarantines in November. Macau gov't intends to gradually reopen the city to foreign travellers, via Reuters. European bourses are underpressure amid continued hawkish pricing, but off lows as yields ease from highs, Euro Stoxx 50 -1.4%. Stateside, a similar picture to fixed with action in-fitting directionally but steadier in terms of magnitudes ahead of data, ES -07%; NQ -1.1% lags given elevated yields. Top European News Russia is said to be mulling as much as USD 70bln in "friendly" currencies, according to Bloomberg sources; this is in order to slow the RUB surge "before shifting to a longer-term strategy of selling its holdings of the Chinese currency". Lufthansa Pilot Union Calls for One-Day Strike on Friday Zur Rose Slumps Amid Offering at Discount, Convertibles Sale Russia Mulls Buying $70 Billion in Yuan, ‘Friendly’ Currencies Factory Slowdown in Europe and Asia Is Warning for Global Trade Central Banks Fed's Logan (2023 voter) said the number one priority is to restore price stability, according to Reuters. Japan's Chief Secretary Matsuno provides no comment on every day-to-day FX moves, watching moves with a high sense of urgency; desirable for currencies to move stably, reflecting economic fundamentals. FX DXY sits around USD 109.00 after seeing fresh lows amid Yuan appreciation. EUR, GBP AUD, NZD, JPY are all softer vs the USD to similar magnitudes. CAD and CHF are the G10 outliers, with the latter supported after Swiss CPI and the former hit by softer oil prices. Fixed Income Core benchmarks are under pronounced pressure once more with yields across the board at fresh near-term peaks Pressure occurring despite geopolitical tensions as hawkish ECB pricing continues to increase, ~85% chance of a 75bp hike. Though, following the passing of hefty European/UK issuance, the magnitude of this downside has eased. USTs are directionally in-fitting but more contained overall awaiting ISM Manufacturing today and then NFP on Friday. Commodities WTI and Brent futures have resumed downward action following an APAC session of consolidation. Spot gold is meandering just north of USD 1,700/oz after testing the figure to the downside. Base metals are lower across the board following the downbeat Chinese manufacturing PMI overnight alongside news of stricter Chinese lockdowns in some regions US Treasury Secretary Yellen and UK Chancellor Zahawi discussed efforts regarding a price cap on Russian oil to lower global energy prices and restrict Russia's revenue, according to the US Treasury Department. It was separately reported that US and allies are to set out a plan on Friday to limit the price of Russian oil with a strategy that aims to cut Russian energy revenues without increasing global oil prices, according to WSJ. OPEC+ JTC acknowledges the relevance of the Saudi Energy Minister's comments on volatility and thin liquidity of crude markets, via Reuters citing a document. EU Commission President von der Leyen will outline ideas on an energy price cap in more detail in a speech on September 14th. Four people killed in overnight clashes in Iraq's Basra, according to security officials cited by Reuters. US Event Calendar Aug. Wards Total Vehicle Sales, est. 13.3m, prior 13.4m 07:30: Aug. Challenger Job Cuts YoY, prior 36.3% 08:30: 2Q Unit Labor Costs, est. 10.5%, prior 10.8% 2Q Nonfarm Productivity, est. -4.3%, prior -4.6% 08:30: Aug. Initial Jobless Claims, est. 248,000, prior 243,000 Continuing Claims, est. 1.44m, prior 1.42m 10:00: July Construction Spending MoM, est. -0.2%, prior -1.1% 10:00: Aug. ISM Manufacturing, est. 51.9, prior 52.8 ISM Employment, est. 49.5, prior 49.9 ISM New Orders, est. 48.0, prior 48.0 ISM Prices Paid, est. 55.2, prior 60.0 DB's Henry Allen concludes the overnight wrap Welcome to September. Given it’s the start of the month, we’ll shortly be publishing our regular monthly review of financial assets across for the month just gone. August was very much a month of two halves when it came to risk assets, with most ending the month in negative territory. There were still plenty of headlines though, and in Europe we saw some of the largest rises in short-term yields in decades. For instance, yields on 2yr German debt haven’t risen this much in a month since 1981, and for their UK counterparts you also have to go back to 1986. The full report will be in your inboxes shortly. When it comes to the last 24 hours, markets have been playing a familiar theme, with risk assets losing further ground as investors price in more rate hikes over the coming months. The big driver behind that yesterday was another stronger-than-expected inflation print from the Euro Area, where the flash CPI reading rose to a record +9.1%. We haven’t seen inflation that strong since the formation of the single currency, and it was also above the +9.0% reading expected by the consensus. The details didn’t look much better either, with core inflation rising to a record +4.3% too (vs. +4.1% expected). So a disappointment for those hoping we might have seen the worst of inflation by now, and another demonstration of how the energy shock is sending European inflation increasingly above that in the US. Unsurprisingly, the high inflation bolstered the arguments of the hawks on the ECB’s Governing Council, and Bundesbank President Nagel said yesterday that “We need a strong rise in interest rates in September.” In addition, Austria’s Holzmann further said that he saw “no reason to show any kind of leniency in our positioning and our wish to reduce inflation”. That’s more voices bolstering the speakers we’ve heard from in recent days who’ve put a 75bps hike on the table, and investors themselves moved to price in a more aggressive ECB response too. Indeed, overnight index swaps are now pricing in a 69.0bps hike for the next meeting, which is noticeably closer to 75 than 50 now. And for the September and October meetings as a whole, 130.7bps worth of hikes are priced in, which is equivalent to at least one of them being a 75bps move and the other at 50bps. In light of these developments, our own European economists at DB have changed their call and now expect that the ECB will hike by 75bps at the next meeting (link here for the full details). Their view is that the upside inflation surprise and the more vocal support from Governing Council members to have 75bps on the table has tipped the balance in favour of a larger hike. Remember that we’re just a week away from the next policy decision now, so not long until we find out, and it was only at the last meeting in July when the ECB went against their own forward guidance in June and hiked by 50bps rather than the 25bps they’d indicated. For markets, the prospect of additional rate hikes knocked European sovereign bonds once again, meaning that for many country’s government bonds (including Germany and the UK) it’s been their worst monthly performance on a total returns basis for the 21st century so far. Yields rose across the continent, with those on 10yr bunds (+2.8bps), OATs (+1.9bps) and BTPs (+6.7bps) all moving higher. Gilts underperformed in particular with a +9.6bps move, whilst US Treasuries also lost ground as the 10yr yield rose +9.0bps to 3.19%. The move in Treasuries came as Cleveland President Mester said that her view was the “move the fed funds rate up to somewhat above 4% by early next year and hold it there”, saying in addition that she did “not anticipate the Fed cutting the fed funds rate target next year.” For equities it wasn’t a great day either, with the S&P 500 (-0.78%) in negative territory for a 4th consecutive session, and leaving the index down by -4.08% over the month in total return terms. That came in spite of a decent performance at the open yesterday, when it had been up +0.73% at one point, but it couldn’t sustain those gains by the close. In Europe there was an even worse performance as the inflation data hurt risk appetite, and the STOXX 600 (-1.12%) fell to a six-week low. That said, in a contrast with recent days, megacap tech stocks were an outperformer, and the FANG+ index advanced +0.32%. One brighter piece of news for the ECB yesterday was the latest decline in energy prices, which have continued to fall back from their recent highs. European natural gas futures shed -5.15%, bringing their declines since the start of the week to more than -29%, and German power prices for next year fell -5.61%, bringing their own declines since the start of the week to more than -40%. Oil lost ground too, with Brent Crude down -2.84% as it capped off its worst monthly performance since last November, with a -12.29% decline over August as a whole. Those negative moves in the US and European equities are continuing in Asia this morning with many of the major indices seeing sharp losses. The Kospi (-1.89%) is the biggest underperformer followed by the Nikkei (-1.77%) and the Hang Seng (-1.52%) whilst the CSI (+0.09%) and the Shanghai Comp (+0.24%) have made modest gains. An important factor affecting sentiment this morning has been a new lockdown in the Chinese city of Chengdu, making it the largest city to be locked down since Shanghai earlier in the year. 157 cases were reported in the city yesterday. We also got the latest manufacturing PMIs for August overnight, which painted a mixed picture across the region’s main economies. In China, the Caixin PMI showed the sector falling into contraction for the first time in three months with a 49.5 reading (vs. 50.0 expected), and in South Korea the reading fell to 47.6 (vs. 49.8 previously), which is its lowest level since July 2020. Meanwhile in Japan, the 51.5 reading was the lowest since September 2021, and the Yen has hit a 24-year low of 139.52 against the US Dollar overnight. Elsewhere on the data side, we had the ADP’s report of private payrolls from the US ahead of tomorrow’s jobs report. That came in at +132k (vs. +300k expected) and marked the first release that uses an updated methodology. They also updated their previous data, and on the same basis the job growth in August was the slowest since January 2021. Otherwise in the UK, there was a significant piece of news from the Office for National Statistics, as they said that the government’s £400 discount for energy customers this winter would not affect the Consumer Price Index. As our UK economist has written, that decision was an important one because if it had been counted as part of inflation, then the October RPI projections would have been affected by around 2.7 percentage points. To the day ahead now, and data releases include the global manufacturing PMIs for August and the ISM manufacturing reading from the US. Otherwise, there’s also the US weekly initial jobless claims, the Euro Area unemployment rate for July, and German retail sales for July. Central bank speakers include the ECB’s Centeno and the Fed’s Bostic. Finally, earnings releases include Broadcom and Lululemon. Tyler Durden Thu, 09/01/2022 - 08:13.....»»

Category: blogSource: zerohedgeSep 1st, 2022

Futures Jump As China Adds Fresh 1 Trillion Yuan Stimulus; J-Hole Forum Begins

Futures Jump As China Adds Fresh 1 Trillion Yuan Stimulus; J-Hole Forum Begins Futures jumped overnight after China revealed its latest massive stimulus (which however is still woefully insufficient to prop up the country's crashing housing sector) steadied nerves in the anxious wait for Jerome Powell's key speech at 8am tomorrow, where the only question is will it be even more hawkish than the market expects, or will it meet expectations, and send dollar and yields tumbling and stocks soaring. Shortly after 2am ET, China stepped up its economic stimulus with a further 1 trillion yuan ($146 billion) of funding largely focused on infrastructure spending, support that analysts quickly agreed won’t go far enough to counter the damage from repeated Covid lockdowns and a property market slump.  The State Council, China’s Cabinet, outlined a 19-point policy package on Wednesday, including another 300 billion yuan that state policy banks can invest in infrastructure projects, on top of 300 billion yuan already announced at the end of June. Local governments will be allocated 500 billion yuan of special bonds from previously unused quotas. However, as has been the case for the past 2 years with Beijing's drip-drip stimulus, economists were downbeat on the measures, while financial markets were muted. The yield on 10-year government bonds rose 2 basis points to 2.65%. China’s CSI 300 Index of stocks rose as much as 0.6% before paring gains to trade up 0.3% as of 2:28 p.m. local time. A similar reaction was observed in US futures which initially spiked by nearly 30 points, reaching a high of 4187.5 before fading most of the gains; emini futures traded +0.6%, or 25 points higher, at 7:30am  ET, while Nasdaq futures were up 0.85%.  Emerging-market stocks also rallied the most in two weeks on the Chinese stimulus news, only to see gains fade. Treasury yields and a dollar gauge dipped, while the crypto space rose on China's stimulus. The Chinese-inspired gains failed to stick as traders expect markets to remain volatile as they look to Powell’s comments due Friday at the Jackson Hole meeting for clues on the pace of US monetary tightening. Fed officials in the run-up to Jackson Hole have been clear they see more monetary tightening ahead, a message that’s eroded a bounce in stocks and bonds from mid-June troughs. The tension in markets is whether those assets will continue to head back toward the lows of the year. “Powell is likely to push back on premature expectations of a dovish pivot, reiterating the focus on the fight against high inflation,” said Silvia Dall’Angelo, a senior economist at Federated Hermes Ltd. “Whether markets take him seriously amid an increasingly gloomy outlook for the global economy is yet to be seen.” In premarket trading, Chinese stocks in the US rallied amid recent positivity over Beijing boosting stimulus with a further 1 trillion yuan of funding, and as the country takes measures to shore up its currency. Tesla shares rose 2% as the electric-vehicle maker’s 3-for-1 stock split takes effect, confirming US markets remain dominated by idiots. Snowflake shares soared ~17% in premarket trading after the infrastructure software company reported second-quarter revenue that beat expectations and raised its full-year forecast for product revenue. On the other end, Nvidia shares slide ~4% in premarket trading after the chipmaker, which preannounced a month ago and gave a dire forecast, did it again and gave a third- quarter revenue forecast that was below expectations as demand for chips used in gaming computers slipped. Other notable premarket movers: Salesforce (CRM US) shares are down 6.6% in premarket trading after the application- software company reported second-quarter results that beat expectations but lowered its full-year forecast. Analysts note that the company’s forecast is being hit by FX headwinds and delays in closing large deals. Teladoc Health (TDOC US) shares climb 5% in premarket trading after Amazon says it will close its primary care and telehealth service by the end of the year. Bed Bath & Beyond (BBBY US) shares rose as much as 6% in US premarket trading before turning lower. The fluctuation follows a report that the home furnishings retailer is nearing a $375 million loan deal with Sixth Street Partners. Kinetik (KNTK US) initiated with an equal-weight recommendation and Street-high price target at Morgan Stanley, which says the midstream services company offers an “attractively positioned set of Permian midstream assets run by a growth-oriented management team.” NetApp (NTAP US) shares were up ~4% in extended trading after the computer hardware company reported first-quarter results that beat expectations and affirmed its forecast. Analysts note the company continues to see broad-based demand strength, despite supply challenges and FX headwinds. In Europe, the Stoxx 50 rose 0.3%, paring an earlier advance amid mixed economic data from the region’s biggest economy. Energy and basic resources stocks were the biggest gainers, with retailers underperforming. Sovereign bonds across Europe gained led by short-end bonds. IBEX outperforms, adding 0.6%, FTSE MIB lags, adding 0.1%. In fixed income, short-end bonds lead the move. Here are some of the biggest European movers today: Harbour Energy shares jump as much as 13%, the most since November 2020, as analysts applaud an increased buyback and strong cash flows. Jefferies says 1H results “beat on all metrics” Ambu rises as much as 11% on its latest earnings, which were in-line with figures released on Aug. 3. Handelsbanken sees a “no drama” report and DNB highlights a positive free cash flow Rentokil gains as much as 2.7% after JPMorgan put the pest control company on a positive catalyst watch as the closing date for the Terminix acquisition nears Hunting rises as much as 19% after the company posted better-than-expected profitability, while the outlook for the rest of 2022 and 2023 is positive Yara gains as much as 2.8% as Citi flags rising demand for fertilizers. Yara earlier said it would cut production, citing record gas prices Tessenderlo climbs as much as 8.1% to a level last seen in April after the Belgian chemicals company raised annual guidance again and said it sees adjusted Ebitda for the year rising 15% to 20% Komax rises as much as 5% after Credit Suisse raises the wire processing machines maker to outperform, seeing its recent merger with Schleuniger as highly- accretive Elekta falls as much as 11%  after the firm presented its latest earnings. Jefferies noted a “disappointing” drop in order intake, while Handelsbanken flags a soft outlook Baloise drops as much as 7.6%, hitting the lowest since March, after the Swiss financial services firm reported solid, “yet unspectacular” results, according to Vontobel Daetwyler falls as much as 6.3%, the most since May, as Credit Suisse cut its price target on the rubber components and seals maker following its results in the prior session Grafton declines as much as 5.4% after reporting 1H profit that missed expectations. The company said the weakness was due to hot weather in the UK and less construction activity Earlier in the session, Asian stocks rebounded strongly after a five-day loss to head for their biggest advance since the end of May, boosted by a late surge in Hong Kong shares. The MSCI Asia Pacific Index climbed as much as 1.6% late in the Asian day, with Hong Kong-listed Chinese tech stocks like Alibaba and Tencent being the biggest contributors to its gain. The gauge’s increase earlier in the session was driven by export-heavy markets like Korea and Taiwan as the dollar weakened. The Hang Seng Index surged 3.6%, the most since April 29, leading the late regional rebound that some traders attributed to short-covering ahead of a key speech by Federal Reserve Chair Jerome Powell at the Jackson Hole conference. The morning trading session in Hong Kong was suspended due to a tropical storm warning. The amount of bearish bets against Hong Kong stocks rose to levels that could trigger a surge in share prices as traders rush to close out their positions, according to quantitative analysts at Morgan Stanley. A gauge of Chinese tech names listed in the financial hub soared 6%. It is still down about 25% this year. Markets have been edgy ahead of Powell’s speech, with the MSCI Asia gauge losing 3.1% in the last five sessions. Thursday’s move looks like “pre-positioning,” said Justin Tang, the head of Asian research at United First Partners. “Investors are taking positions on expectations” of a less hawkish commentary from Powell, he said. Chinese stocks on the mainland also rose as the nation stepped up measures to bolster growth with a further 1 trillion yuan ($146 billion) of stimulus. South Korean shares gained on foreign buying even after the nation’s central bank raised its key interest rate by 25 basis points, while Taiwanese stocks also climbed. “It may be a combination of risk-on sentiment across the region heading into Jackson Hole and the China support measures,” said Marvin Chen, a strategist with Bloomberg Intelligence. “Growth, tech and offshore-listed China stocks are leading gains suggesting that Fed meeting may be playing a bigger role in the late-day move.” Japanese equities advanced, with the Nikkei 225 posting its first gain in six sessions, as the market looked ahead to remarks Friday from Fed Chair Jerome Powell at the Jackson Hole meeting. The Nikkei rose 0.6% to close at 28,479.01, while the Topix added 0.5% to 1,976.60. Daiichi Sankyo Co. contributed the most to the Topix gain, increasing 4.6%. Out of 2,170 shares in the index, 1,445 rose and 597 fell, while 128 were unchanged. “Investors will continue to take a wait-and-see stance until after the speech by Chairman Powell scheduled for the 26th,” said Takashi Ito, a senior strategist at Nomura Securities. “After a round of buying, there is a possibility that there will be a small drop.”  Australia,'s S&P/ASX 200 index rose 0.7% to close at 7,048.10, driven by gains in banks and mining shares. The materials sub-gauge rallied to its highest level since June 16, amid advances in iron ore prices.  Uranium company Paladin was the top performer, surging after Japan said it is planning a dramatic shift back to nuclear power more than a decade on from the Fukushima disaster. City Chic was the biggest decliner after it flagged an uncertain outlook.  In New Zealand, the S&P/NZX 50 index fell 0.2% to 11,627.14 In FX, the Bloomberg Dollar Spot Index fell as the greenback weakened against all of its Group-of-10 peers. The Aussie led G-10 gains, jumping as much as 1.1% against the greenback as traders turned more optimistic after China announced fresh economic stimulus with a further $146 billion of funding largely focused on infrastructure spending. Australia’s dollar outperformed the kiwi after New Zealand reported disappointing retail sales data. The euro rose to briefly trade above parity against the dollar. Germany’s economy proved more resilient than initially thought in the second quarter, growing 0.1% despite surging inflation and the war in Ukraine; the initial reading was 0%. Separately, German Aug. Ifo business confidence came in at 88.5 vs est. 86.8. The gauge of business expectations for the next six months inched down to 80.3 from 80.4, but better than forecast 79.0. Yen rose on flows-driven trade amid a decline in US yields and general dollar weakness during Asian hours In rates, Treasury futures were off session highs into the early US session, although yields remained richer by 1bp-2bp across the curve, following wider gains across UK gilts where 10s rally as much as 7bp on the day. US 10-year yields around 3.09%, richer by ~1bp on the day with bunds and gilts outperforming by 2bp and 5bp in the sector; curves steady with gains seen across maturities. US auctions conclude with 7-year note sale at 1pm New York time. European bonds advanced in a rally that was led by Italian bonds. Gilts outperform USTs and bunds; gilts 2-year yields drop ~10bps to 2.81%. USTs push higher, led by the belly.  Bunds 2-year yield down about 5.5bps to 0.85%. Peripheral spreads tighten to Germany with 10y BTP/Bund narrowing 5.1bps to 225.7bps.  Benchmark 10-year JGB yield climbed to its highest in more than a month. The yield on China’s 10-year government bonds rises the most since June 27 after the State Council outlined a 19-point policy package to stimulate the economy. The 10-year yield advanced 3bps to 2.66% while the 30-year note yield gained 3bps to 3.14%. Bitcoin is essentially unchanged but closer to the top-end of circa. USD 500 parameters that reside well within the USD 21k area. WTI jerked drifts 0.4% higher to around $95 after the WSJ reported that the OPEC president is open to cutting oil production. Most base metals trade in the green; LME copper rises 1.4%, outperforming peers. Spot gold rises roughly $13 to trade near $1,764/oz.  Natural gas has surged to fresh highs, intensifying an energy crisis that threatens the euro-area economy and hence the global outlook. Looking at the day ahead, data releases from the US include the weekly initial jobless claims, the second estimate of Q2 GDP and the Kansas City Fed’s manufacturing activity in index. In Germany there’s also the Ifo Institute’s business climate indicator for August. Otherwise from central banks, we’ll get the account of the ECB’s July meeting. Market Snapshot S&P 500 futures up 0.9% to 4,179.50 STOXX Europe 600 up 0.7% to 435.05 MXAP up 1.6% to 160.34 MXAPJ up 2.0% to 523.18 Nikkei up 0.6% to 28,479.01 Topix up 0.5% to 1,976.60 Hang Seng Index up 3.6% to 19,968.38 Shanghai Composite up 1.0% to 3,246.25 Sensex up 0.5% to 59,385.35 Australia S&P/ASX 200 up 0.7% to 7,048.13 Kospi up 1.2% to 2,477.26 German 10Y yield little changed at 1.35% Euro up 0.4% to $1.0004 Gold spot up 0.8% to $1,765.17 U.S. Dollar Index down 0.45% to 108.18 Top overnight news from Bloomberg China stepped up its economic stimulus with a further 1 trillion yuan ($146 billion) of funding largely focused on infrastructure spending, support that likely won’t go far enough to counter the damage from repeated Covid lockdowns and a property market slump As the countdown to the Jackson Hole symposium begins, an abrupt shift has taken place in the options market. When trading got underway in Asia on Thursday, investors had to pay more for options which benefit when dollar-yen rises. Just a few hours later, the premium had shifted in favor of options that benefit when the currency pair falls European natural gas extended its blistering rally as the worst supply crunch in decades boosts pressure on politicians to do more to rescue industries and households. Benchmark futures jumped as much as 8.1%, after closing at a record on Wednesday The good news is that Ukraine’s crucial grain is leaving its ports again. The bad news is that farmland lost to the war and weak local prices are threatening its next wheat harvest Climate change is having a “clear impact” on inflation in the euro area, ECB President Christine Lagarde said in an interview The current state of the economy and prices doesn’t allow the Bank of Japan’s easing bias to be shifted to neutral, board member Toyoaki Nakamura tells reporters A more detailed look at global markets courtesy of Newsquawk Asia-Pacific stocks took impetus from the positive handover from Wall St but with gains capped as attention remained on the looming Jackson Hole Symposium. ASX 200 was led higher by commodity stocks after the recent upside in energy and precious metals. Nikkei 225 was underpinned as the government mulled a further loosening of COVID rules and is expected to extend local travel incentives through next month. Shanghai Comp was initially choppy amid the absence of Stock Connect flows after morning trade in Hong Kong was cancelled, although the mood gradually improved with Hong Kong opening for the afternoon session after the storm signal 8 was dropped and following the recent support pledges by China. Top Asian News Chinese Industry Ministry says will accelerate research and development of new types of batteries including sodium-ion batters and hydrogen energy storage batteries; will improve supply capabilities of key resources including lithium, nickel, cobalt and platinum. Some of China's sate-backed financial firms are said to be pushing back on calls to support the Chinese property sector amid the exposure risk on their balance sheets, according to sources cited by Reuters. BoK hiked its base rate by 25bps to 2.50%, as expected, with the decision unanimous. BoK said inflation will remain high for the time being and export growth is to slow, while Governor Rhee said strong inflation could last longer than previously seen. Furthermore, Rhee noted that policies will continue to be inflation-focused for a while and said there will be no change in the 25bps rate increase stance for the foreseeable future. China Human Resources Ministry official said they will focus on expanding jobs and will promote fiscal, monetary and industrial policies to support job market stabilisation, according to Reuters. European bourses are essentially unchanged, Euro Stoxx 50 -0.1%, as an initial pronounced foray higher around the cash open that occurred without driver has dissipated since. Fresh drivers have been slim with the German Ifo release sparking a brief extension on initial gains of circa. 50 points in Euro Stoxx 50, for instance. Stateside, futures remain modestly firmer but are similarly off best levels, ES +0.5%, ahead of Jackson Hole beginning today (Powell on Friday). Top European News ECB's Lagarde says "we can no longer rely exclusively on the projections provided by our models – they have repeatedly had to be revised upwards over these past two years.". Private Jet Shortage Hits English Football’s Pre-Match Prep Veolia Must Sell 3 Businesses to Complete Suez Deal, UK Says Germany Aug. IFO Business Confidence Index 88.5; Est. 86.8 London’s Stock Market Misery Grows as Delistings Add to IPO Woes Commodities WTI and Brent October contracts consolidated in the early hours following a session of gains yesterday. Spot gold is edging higher in tandem with the decline in the Dollar, with the yellow metal approaching its 50 and 21 DMAs. Base metal futures are mostly firmer amid the softer Dollar, with 3M LME copper making its way further above USD 8,000/t. Caspian Pipeline Consortium says the SPM-3 inspection has completed, mooring point is fine to work, via Reuters. Italian government to update emergency plan for gas next week; will not announce gas rationing plan for now, according to Reuters citing government sources; to include tougher measures in case of further cut or stop of Russian gas flows. German Network Regulator VP says is on right track with gas storage but more must be done; will reach 85% storage by October 1st Fixed Income Core benchmarks have derived a pronounced upward bias, despite pronounced pressure alongside initial equity strength and post-Ifo. Pressure which has dissipated and given way to modest across the board strength with Bunds eyeing 151.00, Gilts above 111.00 and USTs firmer by 4 ticks. Yield dynamics are mixed and are modestly off earlier WTD peaks given the above action, US 7yr due, Central Banks ECB's Lagarde says "we can no longer rely exclusively on the projections provided by our models – they have repeatedly had to be revised upwards over these past two years.". BoJ Board Member Nakamura says JPY has weakened significantly so far this year, high volatility has had big impact on Japan's economy; premature to tweak the BoJ's dovish guidance now, there are pros and cons to soft JPY, therefore will watch carefully but there is not much the BoJ can do as moves are driven by changes in US economy. South Korean Presidential Office says closely monitoring forex markets, will take timely measures to stabilise the market. Fed's Bostic (2024 Voter) says he has not decided whether a 50bp or 75bp increase is appropriate in September, at this point it is a coin toss, via WSJ. Key employment and inflation reports are due prior to the meeting, if data remains strong and inflation clearly doesn't soften then it may make the case for another 75bp move. Too soon to say the inflation surge has peaked, some hopeful signs. Cautioned that expectations the Fed could reverse course in short-order and reduce rates fairly soon is misguided. Upbeat on the economic outlook. US Event Calendar 08:30: 2Q GDP Annualized QoQ, est. -0.7%, prior -0.9% Personal Consumption, est. 1.5%, prior 1.0% GDP Price Index, est. 8.7%, prior 8.7% PCE Core QoQ, est. 4.4%, prior 4.4% 08:30: Aug. Initial Jobless Claims, est. 252,000, prior 250,000 Continuing Claims, est. 1.44m, prior 1.44m 11:00: Aug. Kansas City Fed Manf. Activity, est. 10, prior 13 DB's Jim Reid concludes the overnight wrap It’s been an eventful 24 hours for markets, with sovereign bonds selling off again as investors keep ratcheting up their expectations for central bank rate hikes over the months ahead. Fed Chair Powell’s speech at Jackson Hole tomorrow could throw some more light on how far they’ll go, but the rise in yields has shown no sign of relenting ahead of that, not least since the energy situation in Europe keeps getting worse. In turn, that’s adding to fears that “peak inflation” might not actually have arrived yet for some countries, whilst policymakers are about to face some unenviable choices as they grapple with the worst stagflation we’ve seen in decades. In terms of the specific moves yesterday, European natural gas futures (+8.59%) settled at another record high of €292 per megawatt-hour amidst growing supply concerns as we head towards the winter months. That wasn’t helped by the news after the European close the previous day, as Freeport LNG said that their natural gas terminal in Texas wouldn’t restart until early to mid-November, having previously been aiming for October. In addition, there’s also the usual Russian supply issues of late to contend with, and there are serious worries that flows through the Nord Stream pipeline might not resume at all following maintenance for three days from August 31. There wasn’t much respite to be found elsewhere either, as German power prices for next year hit a fresh record of their own at €643 per megawatt-hour. With these supply shocks continuing to fester, investors moved to price in an increasingly aggressive response from central banks. In fact for the ECB, the hikes now priced in for 2022 are the most rapid we’ve seen to date, with an additional +133bps priced by year-end on top of the +50bps we already had in July. And looking further out, overnight index swaps are pricing in +194bps of hikes by June 2023 relative to today, which is up by +9.1bps on the day before. So it was little surprise that sovereign bonds lost ground across the continent, with yields on 10yr bunds (+5.2bps), OATs (+6.8bps) and BTPs (+3.5bps) all moving higher. Here in the UK those moves were even more pronounced, with gilts underperforming European sovereigns for a 7th consecutive session. That continues a pattern we’ve seen since the release of the stronger-than-expected UK CPI print last week, as investors have also moved to price in faster rate hikes from the Bank of England. Unlike their continental counterparts however, gilt yields are now at multi-year highs once again, with the 10yr gilt yield (+12.2bps) closing at its highest level since 2014, at 2.69%. Furthermore, the 2s10s curve in the UK flattened a further -9.7bps, leaving it deeper in inversion territory than at any time since 2008. Over in the US, all attention is on what Fed Chair Powell might say tomorrow at the Jackson Hole symposium in Wyoming. Nevertheless, the performance for Treasuries echoed what happened in Europe, with 10yr yields up +5.8bps on the day to 3.10%, which is their highest level since late June. They’ve remained fairly stable around those levels overnight too, coming down just -0.9bps. Given the US faces a more favourable situation on the energy side, the moves in central bank pricing weren’t as pronounced as in Europe yesterday. But the peak rate priced in by Fed funds futures for March 2023 still rose +3.5bps on the day as investors continued to adjust their policy expectations closer towards the more hawkish rhetoric from FOMC officials. Equities weren’t too affected by those developments on the rates side yesterday, with the S&P 500 (+0.29%) paring back its initial losses to end a run of 3 consecutive declines. Tech stocks were a big outperformer, with the FANG+ index (+0.96%) of megacap tech stocks seeing sizeable gains, while the NASDAQ (+0.41%) also put in a decent performance. A number of European indices did lose ground on the day however, including the UK’s FTSE 100 (-0.22%) and Spain’s IBEX 35 (-0.35%), although the broader STOXX 600 did manage to advance +0.16%. That trend from the US has continued in Asian markets overnight, where equities are broadly trading higher. One supportive factor has been a further package of measures from China’s State Council that includes 1 trillion yuan focused largely on infrastructure spending. That’s bolstered the Shanghai Composite (+0.41%) and the CSI (+0.13%), although both are lagging the Nikkei (+0.56%) and the Kospi (+0.89%). The latter has seen strong gains after the Bank of Korea only hiked rates by 25bps overnight, marking a step down from the 50bps hike at the July meeting, yet the South Korean Won has still strengthened +0.43% against the US Dollar this morning. The Bank of Korea also moved their forecasts in a stagflationary direction, raising their inflation projection for this year to 5.2%, and cutting their growth forecast to 2.6%. Looking forward, US and European equity futures are pointing towards additional gains today, with those on the S&P 500 up +0.35%. Back on the energy scene, another notable trend over the last week has been a decent recovery in oil prices, with Brent Crude (+1.0%) closing at its highest level so far this month, at $101.22/bbl. And this morning it’s seen further gains as well, up +0.56% to $101.79/bbl. Bear in mind that early last week it had closed at $92.34/bbl, so that’s a recovery of just over +10% since that point. That echoes the recovery we’ve seen in commodities more broadly over recent weeks as well, with Bloomberg’s Commodity Spot Index (+0.67%) closing at a 2-month high yesterday. Separately, we heard from President Biden yesterday, who announced student debt relief of up to $10,000 for those with an individual income of less than $125,000. For Pell Grant recipients, the relief would be up to $20,000. Furthermore, the current pause on federal student loan repayments is being extended again through the rest of 2022, taking that beyond the mid-term elections in November. Speaking of the midterms, there are signs that the Democrats’ political fortunes are continuing to rise after they won the special election for New York’s 19th congressional district, which had been a closely watched swing race. In addition, FiveThirtyEight’s forecast for the Senate now gives the Democrats a 64% chance of retaining control, their highest number to date. For the House, their model puts them at a 22% chance of retaining control. On the data side yesterday we had a mixed set of releases from the US. On the positive side, the preliminary reading for core capital goods orders in July showed a +0.4% gain (vs. +0.3% expected), and the previous month also saw an upward revision of two-tenths to +0.9%. Durable goods orders were unchanged (vs. +0.8% expected), although excluding transportation they were up +0.3% (vs. +0.2% expected). Finally, pending home sales fell -1.0% to their lowest level since April 2020. That was better than the -2.6% decline expected, but if you exclude April 2020 during the lockdowns then you’ve got to go back to September 2011 to find a lower reading for that index, which echoes the decline in various housing indicators we’ve seen recently. To the day ahead now, and data releases from the US include the weekly initial jobless claims, the second estimate of Q2 GDP and the Kansas City Fed’s manufacturing activity in index. In Germany there’s also the Ifo Institute’s business climate indicator for August. Otherwise from central banks, we’ll get the account of the ECB’s July meeting. Tyler Durden Thu, 08/25/2022 - 08:04.....»»

Category: blogSource: zerohedgeAug 25th, 2022

Supply Chain Problems Will Persist Because The System Is Being Sabotaged

Supply Chain Problems Will Persist Because The System Is Being Sabotaged Authored by Brandon Smith via Alt-Market.us, In a recent interview with Bloomberg, the executive vice president of UPS asserted that “regionalization” of the supply chain is critical to economic stability as geopolitcal conflicts expand. The word “regionalization” is basically a code word to describe decentralization, a concept which the UPS representative obviously did not want to dive into directly. Almost every trade expert and industry insider is admitting that supply chain problems are going to persist into the foreseeable future, and some are starting to also admit (in a roundabout way) that localized production and trade models are the key to survival. This is something that I and many other alternative economists have been talking about for a decade or more. The globalist dynamic of interdependency is a disaster waiting to happen, and now it’s happening. Without decentralized mining of raw materials, local manufacturing, locally sourced goods, local food production and locally integrated trade networks there can be no true stability. All it takes for the system to implode is one or two crisis events and the economy’s ability to meet public demand stagnates. The system doesn’t completely stop, but it does slowly shrivel and degrade. The war in Ukraine has been the go-to scapegoat the past few months for supply chain disruptions, but these issues started long before that. Years of central bank stimulus and fiat money creation have triggered the inevitable landslide of inflation/stagflation that alternative economists have been warning about. Price inflation is a direct contributor to production declines and supply chain disruptions because costs continually rise for manufacturers. Also, wages of workers cannot keep up with rising prices, inspiring many employees to quit and look for work elsewhere, or attempt to live off of government welfare. All of this leads to less supply, or slower production and thus, even higher prices. We were right, the mainstream media was wrong (or they lied). New York Times contributor Paul Krugman claimed that “no one saw this coming” when he was recently forced to admit that he was wrong on inflation. This is the same thing MSM economists said after the credit crash of 2008. It was a lie back then and it’s a lie now. Plenty of people saw it coming; we’ve been repeating our warnings for years, but they didn’t want to listen or they did not want us to be heard. Krugman is perhaps the worst and most arrogant economist/propagandist in the US, and though he belatedly acknowledged the inflation and supply chain threat after arguing for the past two years that it was “transitory,” he now claims that the traditionally accepted indicators of recession “don’t matter” anymore and that there is no downturn. How many times can this guy be proven ignorant and still keep his job? It’s this kind of disinformation that keeps the public in the dark on what is about to happen. Maybe it’s because of stupidity and ego, or maybe it’s a deliberate attempt to keep the population docile (I say it is deliberate), but in either case the American people are being put in great danger when it comes to the false narrative on inflation and the supply chain. The longer they are led to believe the disaster will simply go away on its own, the less time they have to prepare. The bottom line is this: Things are only going to get worse from here on. Maybe slowly, or maybe quickly depending on a handful of factors. Most of the world right now is focused on Taiwan and China’s persistent threats to invade. Nancy Pelosi’s widely publicized plan to visit the island nation (yes, CCP, it is a nation) is a bizarre act of non-discretion that is clearly meant to instigate wider tensions between the US and China. Why would Pelosi do this now? Well, she’s not doing it on her own and it’s certainly not the dementia addled Joe Biden’s idea. There are clearly other hands and other interests involved. The US sources around 20% of its retail goods from China as well as a large portion of it’s medical supplies. More concerning though is China’s near monopoly on Rare Earth metals which are integral to numerous electronic components. Furthermore, there is a pinnacle threat, which is China dumping trillions in US treasuries and dollar holding and virtually ending the dollar’s world reserve status. This is not to say China is in a great position financially – They are on the verge of debt crisis as well, which indicates to me that they will indeed invade Taiwan (and possibly other regions) as a means to expand their borders and consolidate resources. With billions of people to feed and control, the temptation for the CCP to seek military conquest is high. If they do, it will be soon – within the next couple of months when the weather in the Taiwan Strait is optimal for naval operations. The supply chain crisis is going to accelerate into winter as stagflation persists. Price inflation will remain high. The US is indeed officially in a recession today. Two consecutive negative GDP prints IS a recession, this is a fact that no one can change, including Joe Biden, Paul Krugman or Wikipedia. Reality does not answer to these people. The system is breaking, and certain people greatly benefit. A regional conflict with China on top of the Ukraine war could be the perfect smokescreen for a financial and supply chain collapse that was going to happen anyway. But when the mainstream media talks about the triggers and culprits, they’ll never mention central banks and political corruption, they will only talk about Russia and China. As I have noted in the past, the “Great Reset” agenda of the WEF, IMF, the BIS and other globalist organizations requires an extensive destabilization of the existing order. In other words, they need a controlled demolition of certain pillars of the economy. To frighten the public into accepting new collectivist and authoritarian models like the “Shared Economy” (where you will own nothing and like it), they will need a large and semi-chaotic disaster. People would have to be threatened with the loss of supply certainty and they would have to be unsure every day of where they will be able to get the necessities they need when they need them. This level of uncertainty drives calls for solutions, and the globalists will be there to offer their pre-planned objectives and “save the day.” Generally, inflation and shortages lead to price controls, government rationing, government “aid” with strings attached (Universal Basic Income), and eventually nationalization of all production as well as the attempted confiscation of supplies from people that prepared ahead of time. Redistribution will be the name of the game. Maybe not this year, maybe not next year, but soon enough. The limited corporate calls for “regionalization” are too little too late, just as the Federal Reserve’s interest rate hikes are too little too late. They all know it, and they don’t care. These actions are only designed to make it appear as if they tried to save the system so they have deniability of their involvement in the crisis. Stagflation and supply chain shortages are going to become the all encompassing issues of our era. They will be terms that are spoken about daily at every dinner table in America and probably through most of the world. These are dangers that were predicted extensively by the liberty media well ahead of time. They are NOT a surprise. And, there are plenty of institutions, corporate and government, that could have done something about them, but they chose not to. It’s important for people to accept the fact that this crisis is not a product of stupidity; it is a product of malicious motives and intent. *  *  * With global tensions spiking, thousands of Americans are moving their IRA or 401(k) into an IRA backed by physical gold. Now, thanks to a little-known IRS Tax Law, you can too. Learn how with a free info kit on gold from Birch Gold Group. It reveals how physical precious metals can protect your savings, and how to open a Gold IRA. Click here to get your free Info Kit on Gold. Tyler Durden Fri, 08/05/2022 - 16:20.....»»

Category: worldSource: nytAug 5th, 2022

"Worst Start Since 1788": A Closer Look At The Catastrophic First Half Performance

"Worst Start Since 1788": A Closer Look At The Catastrophic First Half Performance As discussed yesterday... Worst first half for stocks in 52 years. pic.twitter.com/mOYvbJ6pvo — zerohedge (@zerohedge) June 30, 2022 ... and again this morning, when Rabobank's Michael Every said that "if you bought stocks in H1, you lost; if bonds, you lost; if commodities, you were doing great until recently; if crypto you lost; if the US dollar, you were fine" but lost purchasing power to inflation, the first six months of the year were terrible. Just how terrible? To quantify the destruction, we go to the latest chart of the day from DB's Jim Reid who writes that "the good news is that H1 is now over. The bad news is that the outlook for H2 is not looking good." To demonstrate just how bad H1 was, Reid shares three charts.  They show that: 1) Deutsche Bank's US 10yr Treasury proxy index did indeed see the worst H1 since 1788 in spite of a sizeable late June rally, and... 2) the S&P 500 saw the worst H1 total return since 1962 after a rally last week just pulled it back from being the worst since 1932. Here, BofA has outdone DB, and notes that in real timers, the S&P500's performance was the worst since 1872! As Reid further notes, "I’ve found through my career that these type of charts are always the most demanded as investors want to put their performance in context." Which is why he also added a the third chart which is an abridged version of one published by DB's Henry Allen in a report fully reviewing H1, June and Q2 (more below, and also available to professional subs in the usual place). As Reid concludes, "if you like horror stories its an alternative to Stranger Things which returns to our global screens today. Obviously if you run a commodity fund you may think differently!" Stepping back from this narrow take, we look at the full performance review for June and Q2 conducted by Reid's colleague, Henry Allen, which finds that "it's hard to overstate just how bad markets have performed over recent months, with the returns in Q2 very much following in Q1’s footsteps... a range of asset classes saw significant losses, including equities, credit and sovereign bonds, whilst the US dollar and some commodities like oil were among the few exceptions. In fact, in total return terms we’ve just seen the biggest H1 decline for the S&P 500 in 60 years, and in June alone just 2 of the 38 non-currency assets in our sample were in positive territory, which is the same as what we saw during the initial market chaos from the pandemic in March 2020." On a YTD basis as well, just 4 of 38 tracked assets are in positive territory, which as it stands is even lower than the 7 assets that managed to score a positive return in 2008. The main reason for these broad-based declines is the fact that recession and stagflation risks have ramped up significantly over Q2. This has been for several reasons, but first among them is the fact that inflation has proven far more persistent than the consensus expected once again, requiring a more aggressive pace of rate hikes from central banks than investors were expecting at the start of the quarter. For instance, the rate priced in by Fed funds futures for the December 2022 meeting has risen from 2.40% at the end of Q1 to 3.38% at the end of Q2. A similar pattern has been seen from other central banks, and the effects are beginning to show up in the real economy too, with US mortgage rates reaching a post-2008 high. The good news is that as of today, the market is now pricing in not just rate hikes to peak in Q4, but about 14bps of rate cuts in Q1. in any case, the big worry from investors’ point of view is that the cumulative effect of these rate hikes will be enough to knock the economy into recession, and on that front we’ve seen multiple signs pointing to slower growth recently in both the US and Europe. For instance, the flash Euro Area composite PMI for June came in at a 16-month low of 51.9, whilst its US counterpart fell to a 5-month low of 51.2. Other recessionary indicators like the yield curve are also showing concerning signs, with the 2s10s Treasury curve still hovering just outside inversion territory at the end of the quarter, at just +5.1bps. The energy shock is adding to these growth concerns, and that’s persisted over Q2 as the war in Ukraine has continued. Brent crude oil prices built on their sizeable gains from Q1, with a further +6.4% rise in Q2 that left them at $115/bbl. Meanwhile, European natural gas is up by +14.8% to €145 per megawatt-hour. However, fears of a global recession have knocked industrial metals prices significantly, and the London Metal Exchange Index has just seen its first quarterly fall since the initial wave of the pandemic in Q1 2020, and its -25.0% decline is the largest since the turmoil of the GFC in Q4 2008. That decline in risk appetite has knocked a range of other assets too: The S&P 500 slumped -16.1% over Q2, meaning its quarterly performance was the second worst since the GFC turmoil of Q4 2008. Sovereign bonds built on their losses from Q1, Euro sovereigns (-7.4%) saw their worst quarterly performance of the 21st century so far as the ECB announced their plan to start hiking rates from July to deal with high inflation. Cryptocurrencies shared in the losses too, with Bitcoin’s (59.0%) decline over Q2 marking its worst quarterly performance in over a decade Which assets saw the biggest gains in Q2? Energy Commodities: The continued war in Ukraine put further upward pressure on energy prices, with Brent crude (+6.4%) and WTI (+5.5%) oil both advancing over the quarter. The rise was particularly noticeable for European natural gas, with futures up by +14.8% as the continent faces up to the risk of a potential gas cut-off from Russia. US Dollar: The dollar was the best-performing of the G10 currencies in Q2 as it dawned on investors that the Fed would hike more aggressively than they expected, and the YTD gains for the dollar index now stand at +9.4%. Which assets saw the biggest losses in Q2? Equities: Growing fears about a recession led to significant equity losses in Q2, with the S&P 500 (-16.1%) seeing its second-worst quarterly performance since the GFC turmoil of Q4 2008. That pattern was seen across the world, with Europe’s STOXX 600 down -9.1%, Japan’s Nikkei down -5.0%, and the MSCI EM index down -11.4%. Credit: For a second consecutive quarter, every credit index we follow across USD, EUR and GBP moved lower. EUR and USD HY saw some of the worst losses, with declines of -10.7% and -9.9% respectively. Sovereign Bonds: As with credit, sovereign bonds lost ground on both sides of the Atlantic, and the decline in European sovereigns (-7.4%) was the worst so far in the 21st century. Treasuries also lost further ground, and their -4.1% decline over Q2 brings their YTD losses to -9.4%. Non-energy commodities: Whilst energy saw further gains over Q2, other commodities saw some major declines. Industrial metals were a significant underperformer, with the London Metal Exchange Index (-25.0%) seeing its largest quarterly decline since the GFC turmoil of 2008. Precious metals lost ground too, with declines for both gold (-6.7%) and silver (-18.2%). And a number of agricultural commodities also fell back, including wheat (-13.6%). Japanese Yen: The Japanese Yen weakened against the US Dollar by -10.3% over Q2, which also marked its 6th consecutive quarterly decline against the dollar. By the close at the end of the quarter, that left the Yen trading at 136 per dollar, which is around its weakest level since 1998. That came as the Bank of Japan has become the outlier among the major advanced economy central banks in not hiking rates with even the Swiss National Bank hiking in June for the first time in 15 years. Cryptocurrencies: The broader risk-off tone has been bad news for cryptocurrencies, and Bitcoin’s -59.0% decline over Q2 is its worst quarterly performance in over a decade. Other cryptocurrencies have lost significant ground as well, including Litecoin (-59.2%) and XRP (-61.2%). June Review Looking specifically at June rather than Q2 as a whole, the picture looks even worse in some ways since just 2 of the 38 non-currency assets are in positive territory for the month, which is the same number as in March 2020 when global markets reacted to the initial wave of the pandemic. The two positive assets are the Shanghai Comp (+7.5%) and the Hang Seng (+3.0%), which have been supported by improving economic data as Covid restrictions have been eased. Otherwise however, it’s been negative across the board, and even commodities have struggled after their strong start to the year, with Brent crude (-6.5%) and WTI (7.8%) posting their first monthly declines so far this year as concerns about a recession have mounted. The main catalyst for this was the much stronger-than-expected US CPI print for June, which triggered another selloff as it dawned on investors that the Fed would be forced to hike rates even more aggressively to rein in inflation, which they followed through on at their meeting when they hiked by 75bps for the first time since 1994. Finally, without further ado, here are the charts showing total returns for the month of June... ... for Q2... ... and for YTD. Tyler Durden Fri, 07/01/2022 - 15:00.....»»

Category: worldSource: nytJul 1st, 2022

First-Half FUBAR: Stocks Worst In 60 Years, Bonds & Bitcoin Worst Ever

First-Half FUBAR: Stocks Worst In 60 Years, Bonds & Bitcoin Worst Ever It appears the world's investors were 'over-stuffed' full of liquidity just as 2021 ended... ...which meant the first half of 2022 was a bloodbath for most. Stocks were clubbed like a baby seal, bonds were battered, there was carnage in crypto as the dollar soared and gold was steady... S&P was down 21.01% in 1970 H1, we are currently down 21.22% H1... so, according to Bloomberg data, this would be worst since 1962... 60 years ago Nasdaq Composite is down 30% to start the year - that is the worst start to a year ever, worse than the H1 2002 collapse. Year-to-date, US stocks have been hammered lower with 3 small BTFD efforts... Only the energy sector is green year-to-date with Consumer Discretionary the worst horse in the glue factory... Source: Bloomberg Of course, the ugly quarter has prompted many calls for a rebound based on history... the question is - how many of those times saw stagflationary pressures as large as the current quagmire... This series goes back to 1946. (via @bespokeinvest) $SPX pic.twitter.com/0BQVK3BxSM — Carl Quintanilla (@carlquintanilla) June 30, 2022 The US economy saw false hopes of recovery in Q1 of 2022, only to have that slapped in the face of optimists in Q2 as May and June saw macro data collapse... Source: Bloomberg US Treasuries suffered their worst first half of a year ever... The Short-end of the curve was the hardest hit, with 2Y rising 220bps in H1 and 30Y up 123bps... Source: Bloomberg For a different perspective on this shift, here is the before and after of the US yield curve... Source: Bloomberg The credit side of the bond market was also a bloodbath with HYG suffering its worst H1 losses ever... Commodities, broadly speaking, were up 18% in the first half of 2022 (but we note they were up 22% in the first half of 2021 - which is weird because we are pretty sure that Putin didn't invade Ukraine in 2021). Oil prices soared 40% in the first half of 2022, but that is less than the surge to start 2021... Crypto was carnage as Bitcoin fell 59% in the first half of the year - that is the worst start to a year ever for the crypto currency (worse than the 57.99% drop in 2017). Ethereum was worse, falling 72% YTD... Source: Bloomberg The Dollar soared in the first half of the year, up almost 10% - its biggest start to a year since 2010... So having got all that off our chest, let's focus back in on this week... Stocks rollercoastered today, weakness overnight and then dumping early on in the cash session led to a bid into and across the European close which managed to get the majors back to unchanged on the day... only to see selling return in the afternoon Interestingly, today's dead-cat-bounce managed to get stocks up to last Friday's cash open level before stocks went panic-bid into OpEx... Credit markets are breaking bad and signaling significantly more pain ahead for stocks... Source: Bloomberg Treasuries were bid today with the short-end outperforming (5Y -14bps, 30Y -9bps) and the belly continues to outperform strongly into the quarter-end... Source: Bloomberg This pushed the 10Y Yield back below 3.00%, back below the CPI-spike lows on June 10th... Source: Bloomberg Global inflation expectations are starting to really tumble with US 10Y Breakevens at their lowest since Sept 2021. Japanese inflation expectations have fallen the least... Source: Bloomberg Rate-hike expectations fell further today and subsequent rate-cut expectations rose as recession fears rise... Source: Bloomberg And stagflation is here... Source: Bloomberg The Dollar had a big month, quarter, and half; surging back to near COVID safe-haven spike highs... Source: Bloomberg On the day, the dollar was lower but still up on the week (and notably higher since CPI on June 10th) Source: Bloomberg Bitcoin fell back below $19,000 and then hovered around there today... Source: Bloomberg Commodities crashed today, falling down towards pre-Putin levels... Source: Bloomberg US Nat Gas tumbled further today on another bigger than expected storage build, plunging to 3-month lows... Notably this smashed US NatGas below WTI (on an oil barrel equivalent basis) and the widened the spread to EU NatGas dramatically... Source: Bloomberg Oil suffered its first monthly decline since November... Gold extended the week's losses back down towards $1800 with every bounce getting monkeyhammered to a new low... Finally, we note that global equity and debt capital markets lost a stunning $31 trillion in the first half of the year... Source: Bloomberg ...a record by a massive margin... Source: Bloomberg And that was triggered by just $1 trillion drop in global central bank balance sheets... Source: Bloomberg The Biden Bloodbath! And it could get worse... ⚠️ What's the opposite of "animal spirits"? Confidence indicators across major economies are pointing to a synchronised global downturn... and one that's potentially as a big as the GFC $SPX $USD pic.twitter.com/oheqtm9zlH — Viraj Patel (@VPatelFX) June 30, 2022   Tyler Durden Thu, 06/30/2022 - 16:00.....»»

Category: blogSource: zerohedgeJun 30th, 2022

The 2022 Market Disaster... More Pain To Come

The 2022 Market Disaster... More Pain To Come Authored by Matthew Piepenburg via GoldSwitzerland.com, If you think the current market disaster hurts; it’s gonna get worse despite recent dead cat bounces in U.S. equities. The Big 4: Dead Bonds, Rising Yields, Tanking Stocks & Stagflation For well over a year before fantasy-pushers and politicized, central-bank mouth pieces like Powell and Yellen were preaching “transitory inflation,” or hinting that “we may never see another financial crisis in our lifetime,” we’ve been patiently and bluntly (rather than “gloomily”) warning investors of the “Big Four.” That is, we saw an: 1) inevitable liquidity crisis which would take our 2) zombie bond markets to the floor, yields (and hence interest rates) to new highs and 3) debt-soaked nations and markets tanking dangerously south into 4) the dark days of stagflation. In short, by calmly tracking empirical data and cyclical debt patterns, one does not have to be a market timer, tarot-reader or broken watch of “doom and gloom” to warn of an unavoidable credit, equity, inflation and currency crisis, all of which lead to levels of increasing political and social crisis and ultimately extreme control from the top down. Such are the currents of history and the tides/fates of broke(n) regimes. And that is precisely where we are today—no longer warning of a pending convergence of crises, but already well into a market disaster within the worst macro-economic setting (compliments of cornered “central planners”) that I have ever experienced in my post-dot.com career. But sadly, and I do mean sadly, the worst is yet to come. As always, facts rather than sensationalism confirm such hard conclusions, and hence we turn now to some equally hard facts behind this market disaster. The Ignored Hangover For well over a decade, the post-2008 central bankers of the world have been selling the intoxicating elixir (i.e., lie) that a debt crisis can be solved with more debt, which is then paid for with mouse-click money. Investors drank this elixir with abandon as markets ripped to unprecedented highs on an inflationary wave of money printed out of thin air by a central bank near you. In case you still don’t know what such “correlation” looks like, see below: But as we’ve warned in interview after interview and report after report, the only thing mouse-click money does is make markets drunker rather than immune from a fatal hangover and market disaster. For years, such free money from the global central banks ($35T and counting) has merely postponed rather than outlawed the hangover, but as we are seeing below, the hangover, and puking, has already begun in a stock, credit or currency market disaster near you. Why? Every Market Crisis is a Liquidity Crisis Because the money (i.e., “liquidity”) that makes this drunken fantasy go round is drying up (or “tightening”) as the debt levels are piling up. That is, years and years of issuing IOU’s (i.e., sovereign bonds) has made those IOU’s less attractive, and the solution-myth of creating money out of thin air to pay for those IOUs is becoming less believable as inflation rises like a killer shark from beneath the feet of our money printers. The Most Important Bond in the World Has Lost Its Shine As we’ve warned, the UST is experiencing a liquidity problem. Demand for Uncle Sam’s bar tab (IOU’s) is tanking month, after month, after month. As a result, the price of those bonds is falling and hence their yields (and our interest rates) are rising, creating massive levels of pain in an already debt-saturated world where rising rates kill drunken credit parties (i.e., markets). Toward this end, Wall Street is seeing a dangerous rise in what the fancy lads call “omit days,” which basically means days wherein inter-dealer liquidity for UST’s is simply not available. Such omit days are screaming signs of “uh-oh” which go un-noticed by 99.99% of the consensus-think financial advisors selling traditional stocks and bonds for a fee. As the repo warnings (as well as our written warnings) have made clear since September of 2019, when liquidity in the credit markets tightens, the entire risk asset bubble (stocks, bonds and property) starts to cough, wheeze and then choke to death. Unfortunately, the extraordinary levels of global debt in general, and US public debt in particular, means there’s simply no way to avoid more choking to come The Fed—Tightening into a Debt Crisis? As all debt-soaked nations or regimes since the days of ancient Rome remind us , once debt levels exceed income levels by 100% or more, the only option left is to “inflate away” that debt by debasing (i.e., expanding/diluting) the currency—which is the very definition of inflation. And that inflation is only just beginning… Despite pretending to “control,” “allow” and then “combat” inflation, truth-challenged central bankers like Powell, Kuroda and Lagarde have therefore been actively seeking to create inflation and hence reduce their debt to GDP ratios below the fatal triple digit level. Unfortunately for the central bankers in general and Powell in particular, this ploy has not worked, as the US public debt to GDP ratio continues to stare down the 120% barrel and the Fed now blindly follows a doomed policy of tightening into a debt crisis. This can only mean higher costs of debt, which can only mean our already debt-soaked bond and stock markets have much further to go/tank. Open & Obvious (i.e., Deadly) Bond Dysfunction In sum, what we are seeing from DC to Brussels, Tokyo and beyond is now an open and obvious (rather than pending, theoretical or warned) bond dysfunction thanks to years of artificial bond “accommodation” (i.e., central-bank bond buying with mouse-click currencies). As we recently warned, signals from that toxic waste dump (i.e., market sector) known as MBS (“Mortgage-Backed Securities”) provide more objective signs of this bond dysfunction (market disaster) playing out in real-time. Earlier this month, as the CPI inflation scale went further (and predictably) up rather down, the MBS market went “no bid,” which just means no one wanted to buy those baskets of unloved bonds. This lack of demand merely sends the yields (and hence rates) for all mortgages higher. On June 10, the rates for 30-year fixed mortgages in the U.S. went from 5.5% to 6% overnight, signaling one of the many symptoms of a dying property bull as U.S. housing starts reached 13-month lows and building permits across the nation fell like dominoes. Meanwhile, other warnings in the commercial bond market, from Investment Grade to Junk Bonds, serve as just more symptoms of a dysfunctional “no-income” (as opposed to “fixed income”) U.S. bond market. And in case you haven’t noticed, the CDS (i.e., “insurance”) market for junk bonds is rising and rising. Of course, central bankers like Powell will blame the inevitable death of this U.S. credit bubble on inflation caused by Putin alone rather than decades of central bank drunk driving and inflationary broad money supply expansion. Pointing Fingers Rather than Looking in the Mirror Powell is already confessing that a soft landing from the current inflation crisis is now “out of his hands” as energy prices skyrocket thanks to Putin. There’s no denying the “Putin effect” on energy prices, but what’s astounding is that Powell, and other central bankers have forgotten to mention how fragile (i.e., bloated) Western financial systems became under his/their watch. Decades of cramming rates to the floor and printing trillions from thin air has made the U.S. in particular, and the West in general, hyper-fragile; that is: Too weak to withstand pushback from less indebted bullies like Putin. But as we warned almost from day 1 of the February sanctions against Russia, they were bound to back-fire big time and accelerate an unraveling inflationary disaster in the West. The West & Japan: Overplaying the Sanction Hand As we warned in February, Russia is squeezing the sanction-makers with greater pain than history-and-math-ignorant “statesmen” like Kamala Harris could ever grasp. From here in Europe, Western politicians are beginning to wonder if following the U.S. lead (coercion?) in chest-puffing was a wise idea, as gas prices on the continent skyrocket. In this backdrop of rising energy costs, Germany, whose PPI is already at 30%, has to be asking itself if it can afford tough-talk in the Ukraine as Putin threatens to cut further energy supplies. In this cold reality, the geniuses at the ECB are realizing that the very “state of their European Union” is at increasing risk of dis-union as citizens from Italy to Austria bend under the weight of higher prices and falling income. As of this writing, the openly nervous ECB is thus inventing clever plans/titles to “fight fragmentation” within the EU by, you guessed it: Printing more money out of thin air to control bond yields and cap borrowing costs. Of course, such pre-warned and inevitable (as well as politicized) versions of yield curve controls (YCC) are themselves, just well…Inflationary. Even outside the EU, the UK’s Prime Minister is discussing the idea of handing out free money to the bottom 30% of its population as a means to combat inflating prices, equally forgetting to recognize that such handouts are by their very nature just, well…Inflationary. (By the way, such monetary policies are an open signal to short the Euro and GBP against the USD…) Looking further east to that equally embarrassing state of the union in Japan, we see, as warned countless times, a tanking Yen out of a Japan that knows all too well the inflationary sickness that a non-stop money printer can create. Like the UST, the Japanese JGB is as unloved as a pig in lipstick. Prices are falling and yields are rising. As demand for Japanese IOU’s falls, yields and rates are rising, compelling more YCC (i.e., money printing) from the Bank of Japan as the now vicious (and well…inflationary) circle of printing more currencies to pay for more debt/IOUs spins/spirals fatally round and round. By the way, and as part of our continued warning and theme of the slow process of de-dollarizationwhich the sanctions have only accelerated, it would not surprise us to see Japan making a similar “China-like” move to buy its Russian oil in its own currency rather than the USD. Just saying… Don’t Be (or buy) a Dip As indicated above, trying to combat inflation with rate hikes is not only a joke, it creates a market disaster when a nation’s debt to GDP is at 120%. To fight inflation, rates need be at a “neutral level,” (i.e., above inflation), and folks, that would mean 9% rates at the current 8%+ CPI level. That aint gonna happen… At $30T+ of government debt and rising, the Fed can NEVER use rising rates to fight inflation. End of story. The days of Volcker rate hikes (when public debt was $900B not $30T) are gone. But the fickle Fed can raise rates high enough to kill a securities bubble and create “asset-bubble deflation,” which is precisely what we are seeing in real time, and this market disaster is only going to get worse. In short, if you are buying this “dip,” you may want to think again. As June trade tapes remind, the Dow dipped below 30000, and the S&P 500 reported an ominous 3666, already losing more than 20% despite remaining grossly over-valued as it slides officially into bear territory. As for the NASDAQ’s -30% YTD loss, well, it’s embarrassing… Many, of course, will buy this dip, as many forget the data, facts and traps of dead-cat bounces. Toward this end, it’s worth reminding that 12 of the top 20 one-day rallies in the NASDAQ occurred after that market began a nearly 80% plunge between 2000 and 2003. Similarly, the S&P saw 9 of its top 20 one-day rallies following the 1929 crash in which that market lost 86% from its highs. In short: These bear markets are not even close to their bottom, and today’s dip-buy may just be a trap, unless you think you can time a one-day rally amidst years of falling assets. Markets won’t and don’t recover from the bear’s claws until spikes are well above two standard deviations. We are not there yet, which means we have much further to fall. Capitulation in U.S. stocks won’t even be a discussion until the DOW is below 28,400 and the S&P blow 3500. Over the course of this bear, I see both falling much further. As we’ve warned, mean-reversion is a powerful force and we see deeper lows/reversions ahead: Toward that end, we see an SPX which could easily fall at least 15% lower (i.e., to at least 1850) than the “Covid crash” of March 2020. Based upon historic ranges, stocks won’t be anywhere near “fair value” until we see a Shiller PE at 16 or a nominal PE of 9-10. Index bubbles have been driven by ETF inflation which followed the Fed liquidity binge—and those ETF’s will fall far faster in a market disaster than they grew in a Fed tailwind. And if you still think meme stocks, alt coins or the Fed itself can save you from further market disaster, we’d (again) suggest you think otherwise. Looking at historical data on prior crashes from 1968 to the present, the average bear crash is at around -33%. Unfortunately, there’s nothing “average” about this bear or the further falls to come. The Shiller PE, for example, has another 40% to go (down) before stocks approach anything close to “fair value.” In the 1970’s, for example, when we saw the S&P lose 48%, or even in 2008, when it lost 56%, U.S. debt to GDP levels were ¼ of what they are today. Furthermore, in the 1970’s the average consumer savings rate was 12%; today that rate is 4%. Stated simply, the U.S., like the EU and Japan, is too debt-crippled and too GDP-broke to make this bear short and sweet. Instead, it will be long and mean, accompanied by stagflation and rising unemployment. The Fed knows this, and is, in part, raising rates today so that will have something—anything—to cut in the market disaster tomorrow. But that will be far too little, and far too late. And, Gold… Of course, the Fed, the IMF, the Davos crowd, the MSM and the chest-puffing sanction (back-firing) West will blame the current and future global market disaster on a virus with a 99% survival rate and an avoidable war in a corner of Europe that neither Biden nor Harris could find on a map. Instead, and as most already know, the real cause of the greatest market bubble and bust in the history of modern capital markets lies in the reflection of central bankers and politicians who bought time, votes, market bubbles, wealth disparity and cancerous inflation with a mouse-click. History reminds us of this, current facts confirm it. For now, the Fed will tighten, and thereby unleash an even angrier bear. Then, as we’ve warned, the Fed will likely pivot to more rate cuts and even more printed (inflationary) currencies as the US, the EU and Japan engage in more inflationary YCC and an inevitable as well as disorderly “re-set” already well telegraphed by the IMF. In either/any scenario, gold gets the last laugh. Gold, of course, has held its own even as rates and the USD have risen—typically classic gold headwinds. When markets tank and the Fed pivots, yields on the 10Y could fall as global growth weakens—thus providing a gold tailwind. Furthermore, the USD’s days of relative strength are equally numbered, as is the current high demand for US T-Bill-backed collateral for that USD. As the slow trend toward de-dollarization increases, so will the tailwind and hence price of gold increase as the USD’s credibility decreases. In the interim, the fact that gold has stayed strong despite the temporary spike in the USD speaks volumes. In the interim, Gold outperforms tanking stocks by a median range of 45%, and when the inflationary pivot to more QE returns, gold protects longer-term investors from grotesquely (and increasingly) debased currencies. And when (not if) the re-set toward CBDC (central bank digital currencies) finally arrives, that blockchain eYen and eDollar will need a linkage to a neutral commodity not to an empty “faith & trust” in just another new fiat/fantasy with an electronic profile. As we’ve been saying for decades: Gold Matters. Tyler Durden Thu, 06/30/2022 - 07:20.....»»

Category: blogSource: zerohedgeJun 30th, 2022

Red vs Blue, ‘Black’ vs Green, All vs All, Green vs Red

Red vs Blue, ‘Black’ vs Green, All vs All, Green vs Red By Michael Every of Rabobank We've just seen huge market volatility. This week promises more given it’s month and quarter end with key positioning, portfolio reallocation, and short squeezes all in play. On top of that, the news continues to underline the central thesis: that the ‘one size fits all/one world for all’ neoliberal/liberal/’new normal’ system is collapsing. Red v Blue Friday’s US Supreme Court overruling of Roe v Wade was a shock despite having been flagged in an unprecedented leak. It was leading news on Bloomberg and the Financial Times because it exposes US fault-lines. Overturning a near-50 year constitutional precedent means we have US inflation and monetary policy which echoes the 1980s, a pre-Roe status of 1973, and polarization that echoes the 1960s, 1930s, 1880s, 1860s, and 1830s. The optimistic view is that the US can work this out politically, as the rest of the West has. USA Today stresses: ‘The Supreme Court has now given millions of citizens rather than nine justices the power to decide.’ Tellingly, last week the Court reaffirmed the Second Amendment right to bear (concealed) arms and saw the first gun control legislation in decades too. The pessimistic take is things get worse. Justice Thomas -- not the other five anti-Roe justices -- floated roll-backs of other constitutional rights, as did the dissenting Court minority. Twitter has (unbanned) calls for violence, burning down the Court, or killing justices, following the recent arrest for attempted murder of a man targeting Justice Kavanaugh. Some politicians say they will defy the Court, that it has no legitimacy, or they will now pack it. Some media echo this, and claim civil war looms. It’s likely hyperbole, but this is what one expects in an ‘winner takes all’ emerging market, not a constitutional liberal democracy claiming to lead a global struggle vs. autocracy. It is unlikely markets are going to treat Treasuries or the US dollar as EM assets on the basis of what happened on Friday. Yet the long-run market impact could be significant. Justice Thomas, in an interview with The Federalist, stressed the importance of the Supreme Court pressing ahead to roll back “the administrative state” and Federal agencies, who: “…have the executive power, the enforcement power, they have administrative judges to adjudicate, so they have all three. And the question for us is, where do they fit in the constitutional structure?... If we simply defer to the agencies,… aren’t we doing precisely what happened when it came to the royal courts of the pre-Revolutionary era?... You’ve got this creation that sits over here outside the Constitution, or beyond the Constitution. How does it fit within our constitutional structure?”   One wonders where the imperial Fed sits in this view. We also risk a more polarized/balkanised US. Will population shifts from California and New York to Texas and Florida on economic grounds become two-way on culture? The DNC’s @DavidOAtkins points to fragmentation risks as, “…California is not going to follow Idaho's rules. We're just not. We don't have to and our people deserve better. And if we have to Constitutionally protect basic social rights and set up our independent EPA because the GOP destroyed the federal govt, we will.”  Such splits can even hit firms. Kirkland & Ellis, which helped over-rule the challenge to the Second Amendment, told the two lawyers who did so for it to either end such defences or leave the firm. So, red and blue states, firms, products, and consumers? Blue v Red If Red v Blue is clear in US politics, so Blue v Red is in geopolitics. The US, Australia, Japan, New Zealand, and the UK just launched a Partners in the Blue Pacific scheme to counter China, and the G-7 a rival to China’s Belt and Road Initiative in its ‘Partnership for Global Infrastructure and Investment’. The US is promising $200bn in funding: *if* that is new money and *if* the rest match it we are talking about a serious global policy shift. Meanwhile, China warned a US spy-plane flying above international waters in the Taiwan Strait, which is seen as a dangerous escalation by both sides. Belarus is being used as a base for more widespread Russian air attacks on Ukraine, including against Kyiv again, and Moscow says it will base nuclear weapons there aimed at Europe. Tensions also continue to mount near the critical Suwalki gap leading to Kaliningrad. Ignoring that Iran plays for Team Red (as it just attempted to assassinate Israelis in Turkey) EU foreign policy chief Borrell is trying to resuscitate the Iran nuclear deal - just before US President Biden heads to the region to sign military agreements with states who don’t want it to happen. (Indeed, such anti-Iran regional co-ordination is already crystalizing.) ‘Black’ v Green Meanwhile, Germany (and the EU) are forced to blink on green pledges: coal output is soaring; plans made for the risks of Nord Stream 1 closing, which could reportedly mean consumer gas prices doubling or tripling; it may appropriate parts of Nord Stream 2 to speed up new LNG pipelines; it and others, reportedly want to delay EU bans on the sale of new petrol and diesel cars from 2035 to 2040; it is pushing the G-7 to drop a pledge to stop financing fossil fuel projects; and French power firms are calling for immediate energy rationing. Yet Europe won't help Africa --which has fossil fuels and minerals for EVs-- to develop its fertiliser capacity because of concerns over *EU* green targets; and the US is to proceed with production of biofuels despite the global food crisis. The G-7 is also considering imposing a price cap on Russian oil by withholding its monopoly on shipping insurance on any global importer which refuses to adhere to it. That’s a very high risk game of geopolitical brinksmanship which will either see Russian energy income slashed, or will alienate the rest of the world and humiliate the West – and see even higher energy prices. All v All *Finally*, the West grasps it's in an economic war: but it doesn't see where all the fronts are. For example, G-7 gold trade with Russia is to be cut off by sanctions too. However, everyone else can still buy it and sell it on, like Russian oil. The G-7 needs to win global hearts and minds to win. That means noticing the FT warning the food crisis is biting in Africa; that up to 345m people --4.4% of humanity-- are at risk; that the Economist says ‘A Wave of Unrest is Coming’; and that Bloomberg predicts ‘Hunger and Blackouts are Just the Start of an Emerging Economy Crisis’. Indeed, Spain just saw an incursion into its enclave in Morocco in which 23 people died, Peru has joined Sri Lanka and Ecuador in economic chaos, and China has had to bail out Pakistan with a $2.3bn loan. Yet the response so far is for the better off to subsidise their own food and energy, which forces the ultimate cost onto the world’s very poorest and makes things worse: California is talking about giving households $1,050; Spain is to spend another EUR9.5bn on tax breaks and commodity subsidies; and even middle-income Malaysia will spend $18bn this year on subsidies, almost 5% of its GDP(!) The risks of a global all v all are rising, as are internal red v blue pressures in many places. Indeed, as the ECB struggles for its own "anti-fragmentation" strategy, the Dutch Prime Minister states it is up to Italy to deal with the problem itself via reforms, which will surely only make the ECB’s immediate task harder(?); the UK deeply-unpopular PM Johnson say he wants to stay in office until the mid-2030s(!), as Scotland would like to leave by 20:30, and Northern Ireland could potentially follow; and even in China, an ultra-hardliner Xi loyalist was also just appointed the new Minister of Public Security ahead of the expected schedule – surely not for no reason at all. The answer must be for supply to increase: yes, it must be sustainable, but so must the current global population, or else politics, geopolitics, and markets can’t be. However, that new supply is itself going to break up the global system, as part of ‘sustainable’ means not relying on others in a pinch so we don’t end up here again. Relatedly, in her latest note ‘Time to Get Real’, geostrategist Dr Pippa Malmgren underlines, “Food is now a national security issue that warrants spending from the defence budget… It’s time to get real. That means a world where capital and talent get on their bikes and start making hard stuff.” Which is hard, and inflationary before it is deflationary. Green v Red Despite this mess, markets think the Fed is going to tighten less than feared just days ago. That was helped by Friday’s revisions to the final Michigan consumer sentiment survey: the headline fell to a 50-year low, but more ‘important’ was that longer-term inflation expectations dropped 0.2ppts to 3.1% y-o-y. Despite massive uncertainty from respondents, this was because a sub-set felt long-term inflation would be very low. Do they all work for the fixed income market or pension funds? Nobody on Main Street is thinking “deflation”! As evidence, look at rents. According to CoreLogic, they just surged 41% y-o-y in Miami, 26% in Orlando, 18% in Phoenix, 17% in San Diego and LA, and 8% in New York, D.C., St Louis, Philadelphia, and Honolulu: that’s quite the ‘forecast err-OER’ in a series the BLS says is rising much more slowly. Nonetheless, the Wall Street end-month/end-quarter/short-squeeze/’new normal’/Fed put crowd got their win last week, and they may get another this week too. They just didn’t notice that oil leaped on Friday day too, despite many speculative longs having been reversed, which rains on the deflation premise and yells ‘stagflation’ or ‘incession’. And ‘soaring global unrest’. If the Fed can’t step up now, it never can. Indeed, the BIS just warned that leading economies risk tipping into a high inflation where rapid price increases are normal, dominate daily life, and are difficult to quell. It is openly calling for key rates to be raised "quickly and decisively" in H2 2022, even if “some pain will be inevitable,” because falling behind the curve risks far worse than that. Are the Fed going to ignore that call? Bloomberg says that ‘Fed Chair Jerome Powell's path to 2% inflation needs luck, or failing that, pain’. That overlooks the unlucky geopolitical backdrop it faces. If the *supply* side is not fixed, even if the Fed pivots, it will have to flip back, with no credibility, if inflation gets worse. They had better be hoping the G-7 plan works: or *help* the G-7 plan work, which might mean telling other people to help others globally. After all, the Director of the Institute for Financial Transparency correctly tweets, “Few realize Volcker's high rate plan appears successful only because of luck. Had OPEC continued to raise prices, his plan would have been an abysmal failure.” Zooming in, such a view suggests ‘red’ will win against ‘green’ even if this week sees the opposite. Indeed, 3% on the US 10-year Treasury once seemed a ‘new normal’ ceiling: if said new normal is falling apart, it now looks to be a floor. Tyler Durden Mon, 06/27/2022 - 10:45.....»»

Category: blogSource: zerohedgeJun 27th, 2022

The Gas Inflation Crisis Is Far From Over – Where Will Prices Finally Stop?

The Gas Inflation Crisis Is Far From Over – Where Will Prices Finally Stop? Authored by Brandon Smith via Alt-Market.us After a single Federal Reserve rate hike of 75bps I am noticing a trend among mainstream economists whipping out their crystal balls and predicting an almost immediate reversion to deflationary conditions. In their view, a recession will “balance everything out.” For most of these people I would suggest that they keep their crystal balls in their pants; they have been consistently wrong and it’s time for them to shut up. If you were predicting that inflation would be “transitory” last year, then you have no right to act like you are an economist today. It’s going to take a lot more than one semi-aggressive rate hike from the central bank to stop the inflation problem, and when I say “inflation” I am talking about PRICE INFLATION, not the mere increase of the money supply or a bubble in stock markets. There are far too many financial analysts out there that don’t even grasp what true inflation really entails. There are certain sectors of the economy that will indeed see deflationary pressures. Real GDP, for example, is witnessing declines. Retail sales are in decline. US wages are stagnant in comparison to prices. Housing sales are now falling rapidly. Manufacturing is dropping. Yet, prices continue to remain high. Clearly there is a mix of inflationary and deflationary elements within the same economic crisis. In other words, it’s a stagflation event. An area in which prices continue to climb without much relent is energy. The mainstream blames this almost entirely on Russia’s conflict with Ukraine and the evolving sanctions against Russian oil and natural gas. However, gas prices were spiking well before Russia ever invaded Ukraine. Inflation in the overall economy hit 40 year highs long before Ukraine became an issue, as Federal Reserve Chairman Jerome Powell finally admitted this past week. Let’s not pretend like we don’t know the cause of all of this. It is caused by fiat money printing by the Federal Reserve since 2008, and central banks in general are the culprits. The bankers can fund or refuse to fund whatever they wish. Government politicians play their role in creating inflation by ASKING for the money, but it is the Fed that decides if they create the money. The government has zero power to dictate policy to the Fed; as Alan Greenspan once admitted, the Fed answers to no one. The central bank could print us into oblivion if they wished, and this is essentially what they have done. That said, there are other elements to our current crisis beyond too many dollars. There is also the issue of supply chain disruptions. I am specifically reminded of the stagflation threat that occurred in 1970s. The oil and stagflation crisis of the late 1970s ran its course right before I was born, so obviously I can’t give a first hand accounting of what it was like, but when I study the events that led up to it I find a lot of similarities to the situation we are facing today. Though, the crisis that is developing right now has the potential to become far worse. In the early 1970s Richard Nixon, at the request of central bankers, removed the dollar from the last vestiges of the gold standard. Central banks shifted away from gold as the primary trade mechanism between governments and started switching over to Special Drawing Rights; the IMF’s basket currency system. Not surprisingly, the dollar began an immediate spiral and its buying power began to crash. Stagflation became a household concern throughout the 70s. This problem was mitigated eventually as the dollar’s world reserve status grew. Basically, we exported many of our dollars overseas for use in global trade, and by extension we also exported a lot of our inflation/stagflation. As long as the dollar remained the premier reserve currency, most of the consequences of central bank fiat printing would not be felt by the general populace. In terms of gasoline, the dollar has been the petro-currency for decades which allowed us to keep prices in the US lower than in many countries. But things are changing. The dollar’s portion of global trade has been in decline for the past several years, and the Fed just keeps creating more greenbacks from nothing. In 2020 alone, the Fed conjured $6 trillion to fuel the covid stimulus response, pumping all that money directly into the system through covid checks and PPP loans. In order for this process to continue, the dollar’s global percentage of trade would have to keep growing in order to export US inflation overseas. This is not happening. The dollar’s percentage of global trade is in reversion. We are dealing with the end of a cycle that started in the 1970s. We are going back to the beginning. Furthermore, the gas crisis in the late 70s and early 80s was also driven by the Iranian revolution and the removal of Iranian oil supplies from the global market. This created a loss of around 7% of total oil from markets, but it resulted in gas prices exploding from 65 cents in 1978 to $1.35 in 1981. Prices more than doubled in the span of three years and never went back to where they were before the crisis. As in the late 1970s, we also have a supply chain issue with an OPEC nation. The Russian portion of the global oil production was around 10% in 2020, but the nation is the 2nd largest oil exporter in the world. Only 3% of oil imported into the US comes from Russia, but Europe relies on Russia for around 25% of its total oil consumption. The EU now supposedly cutting off that supply of oil, though there are questions surrounding loopholes and how much Russian oil is actually still being supplied to European nations. As sanctions continue, the EU will have to go to other exporters to get what they need and this is reducing the amount of supply available to western countries. The Russians have simply adapted, and are now selling more oil as a discount to major eastern markets like China and India. But for the rest of us, Europe’s thirst for oil is going to continue to cause price expansion as supplies falter. So where does this leave us? Our situation is similar to the gas crisis of the late 1970s because we have ongoing stagflation, a weakening currency as well as a major economic conflict with an OPEC producer. That said, things are measurably worse than the 1970s for a few reasons, notably the fact that our country is in far more debt, foreign treasury and dollar holdings are in decline, and the conflict with Russia is far more egregious than our troubles with Iran in the 70s. I suspect we will see at least a 300% markup in gas prices from pre-pandemic lows, which were around $2.60 per gallon for regular. Meaning, prices will continue to climb over the course of this year and level out around $7.50 per gallon by the second quarter of 2023. I am basing the pace of the price increases according to the pace that occurred from 1979-1981. Obviously, there will be market dips and pauses, but it is unlikely we will see prices at the pump fall dramatically anytime soon. There will be endless predictions in the mainstream media about when inflation will stop and many pundits will claim that the Fed will capitulate soon on rate hikes. All this clamor will affect oil markets to a point, but prices will continue to rise regardless. Some people will argue that declining demand will stop rising prices, however, the stagflation problem does not only revolve around demand, there are many other factors at play. Unless we see a drop in demand similar to what we saw at the beginning of the pandemic lockdowns, there is little chance there will be a meaningful reversal. Also, for anyone hoping that US shale or OPEC will pick up the slack from Russia, this is not going to happen. Oil industry experts have already noted that because of inflation and lack of manpower there will not be a major uptick in oil pumping and so shortages will continue for some time. What does this mean for the wider economy? Inflation in necessities like gasmuch means an implosion in retail. People will divert funds away from other purchases to cover gas and energy costs. Expensive gas also means expensive freight rates, which means higher prices for everything else on the store shelves. Expensive gas will also cause smaller freight companies to go bankrupt or close up shop, along with much higher interest rates being instituted by the Fed. My own grandfather lost his trucking and freight company in the 1970’s for this exact reason. In turn, less freight means less supply, which in turn means higher prices on everything. It’s a terrible cycle. The point is, you should expect gas prices to remain very high (into the $7 per gallon range) over the course of the next year, and this will affect EVERYTHING else in terms of your pocket book and your life. Don’t put too much stock in the people claiming deflation is on the way; not in prices of necessities it’s not. Eventually, lack of demand will slow price increases but not until we are much higher than the current national average of $5 a gallon. And, if you live in a state with high gas taxes like California, then be prepared for double digit costs at the pump. Tyler Durden Sat, 06/25/2022 - 13:30.....»»

Category: personnelSource: nytJun 25th, 2022

Futures Drop As Yields Push Higher, Hawkish ECB Looms

Futures Drop As Yields Push Higher, Hawkish ECB Looms After yesterday's bizarro rally, US futures and European bourses dipped ending two days of gains, as yields reversed Tuesday's slide and climbed ahead of highly anticipated CPI data on Friday and a hawkish ECB meeting tomorrow, as traders try to predict the Federal Reserve’s policy path. Nasdaq 100 futures were flat at 7:30 a.m. in New York, with contracts on the S&P 500 and Dow Jones also modestly lower. European markets also dipped, with Credit Suisse shares tumbling after the Swiss bank announced that it expects a loss in the 2Q and is weighing a fresh round of job cuts. Meanwhile, Asian stocks rose as Beijing’s move to approve a slew of new video games bolstered bets that the outlook is improving for the Chinese technology sector. The yield on the 10-year US Treasury resumed its advance, climbing to 3%, while the dollar rose as the yen cratered to fresh 20 year lows, flat and bitcoin traded around $30K again. Among notable premarket movers, energy companies’ extended their Tuesday gains with Imperial Petroleum rising 8.3% and Energy Focus adding 20%. Western Digital shares climbed 4.1% in US premarket trading after the chipmaker said that it’ll consider splitting its main units as part of a review of “strategic alternatives” following talks with activist investor Elliott. US-listed Chinese stocks jump in premarket trading, on track for a third day of gains, after China approved a second batch of video games this year, providing a signal of policy support to the the country’s internet sector; Alibaba (BABA US) gained 5.8%, JD.com (JD US) +4.4%, Pinduoduo (PDD US) +5.9%, Baidu (BIDU US) +2.7%. Other notable premarket movers: Intel (INTC US) shares fell 1.9% in premarket trading as Citi lowered its estimates on the chipmaker after the company’s management mentioned at a conference that circumstances are worse than expected during the quarter. Altria Group (MO US) stock slid 2.4% in premarket trading as Morgan Stanley downgraded it to underweight, citing increasing macro pressures and competitive risks. Western Digital (WDC US) shares rise 4.1% in premarket trading, after the chipmaker said that it will consider splitting its main units as part of a review of “strategic alternatives”. Smartsheet (SMAR US) stock fell about 7% in premarket trading as analysts said the software company delivered a mixed set of results with billings growth decelerating to top estimates by a slimmer margin than in previous quarters. Novavax (NVAX US) shares jump as much as 22% in US premarket trading after the company’s coronavirus vaccine won support from an FDA advisory panel. DBV Technologies ADRs (DBVT US) gain as much as 22% in US premarket trading after a trial for the biotech firm’s peanut allergy treatment met its primary endpoint. Sentiment remains fragile on concerns rising rates will spark a recession as corporate earnings are set to slide. Thursday the ECB is set to wind down trillions of euros of asset purchases in a prelude to a rate hike expected in July that will mark the end of eight years of negative interest rates. "Higher yields will inevitably resume the pressure on valuations,” said Roger Lee, head of UK equity strategy at Investec Bank. Inflation now exceeds 8% in the euro area, and is expected to stay above that level in the US when May data comes out on Friday, increasing pressure on central banks to stick to aggressive rate hikes. “Recent bouts of optimism can only be short-lived for now, as they were based on the wrong assumptions, that lower growth would push central bankers to ease their aggressive path,” Olivier Marciot, a portfolio manager at Unigestion SA, wrote in a report. Yet some argue that central banks will be forced back into dovish mode, among them hedge fund founder Ray Dalio. The billionaire said central banks across the globe will be required to cut interest rates in 2024 after a period of stagflation. On Friday, focus will turn to the US CPI reading for hints on the Fed's tightening path following the central bank’s outsized hike on May 4. The data is expected to show inflation picked up from a month ago, but slightly slowed from a year earlier. Complicating the task of policy makers trying to arrest runaway inflation without choking off growth, the war in Ukraine shows no signs of ending. That’s ignited higher food and energy prices across the world, despite the best efforts of central banks to use higher rates to cool economies. In Europe, the Stoxx 600 Index was down 0.4%, with shares of basic resources companies and financial sector stocks leading the drop,  while the region’s bonds fell as traders braced for a crucial European Central Bank meeting. Credit Suisse shares tumbled as much as 7.6% after the Swiss bank announced that it expects a loss in the 2Q. In addition, people familiar with the matter said that the lender is weighing a fresh round of job cuts. European mining stocks also underperformed the Stoxx 600 benchmark as copper declines, while iron ore fluctuates with investors weighing signs of demand recovery against caution that China may seek to stabilize commodity prices. The Stoxx Europe 600 Basic Resources sub-index slid 1.1% as of 9:45 a.m. in London after rising to the highest since April on Tuesday. Here are the most notable European movers: Prosus’s shares jump as much as 8.6% in Amsterdam trading after China approved its second batch of video games this year, with a total of 60 titles. Naspers, which holds a 29% stake in Tencent through Prosus, up as much as 9.8%. Inditex shares gain as much as 5.3% after the Zara owner reported 1Q results. Analysts were impressed by the sales beat, with Bryan Garnier calling the company a “safe-haven choice” in the retail sector. UK and European retail stocks rise after Inditex’s results helped boost sentiment, with the retail segment the biggest gainer in the Stoxx 600 Index. Asos gained as much as +3.9%, Boohoo +3.1%, JD Sports +2.5%. Voestalpine shares rise as much as 4.5% after the company reported strong results for the business year, even as its guidance for FY23 points at a lack of visibility for fiscal 2H, according to analysts. Haldex shares rise as much as 45% after SAF-Holland offers SEK66 in cash per share for the Swedish brake and air suspension products maker, representing a 46.5% premium to its closing price on Tuesday. Wizz Air shares fall as much as 8.6% after the company reported results that were in line with expectations but flagged an operating loss for the 1Q of fiscal year 2023. European mining stocks underperform the Stoxx 600 benchmark as copper declines, while iron ore fluctuates. Anglo American shares fell as much as 1.7%, Rio Tinto -1.8%, Glencore -1.7%, Antofagasta -3.3%. Orpea shares declined as much as 5.9% as the company said that French police investigators began an evidence-gathering raid on Wednesday at its headquarters. Asian stocks rose as Beijing’s move to approve a slew of new video games bolstered bets that the outlook is improving for the Chinese technology sector.  The MSCI Asia Pacific Index advanced as much as 1.1%, with Alibaba and Tencent providing the biggest boosts. Benchmarks in Hong Kong outperformed on the approvals news, while Japanese equities climbed as the yen continued to weaken. Stocks in India fell after the country’s central bank raised interest rates as expected while Thai shares inched up after the Bank of Thailand kept its benchmark rate unchanged.  China approved more games in a step toward normalization after a months-long freeze amid the government’s crackdowns on the tech sector. The news follows a report earlier this week that regulators are preparing to conclude an investigation of ride-hailing giant Didi. “We think the significant dangers have passed” in Chinese equities markets, said Eric Schiffer, chief executive officer at California-based private equity firm Patriarch Organization, which holds positions in Alibaba and JD. “The approval on the game titles signals that policymakers are following through on their intention to back off tech regulation and reverse the pain that caused investors to leave the sector."  Optimism toward a less-harsh regulatory environment and China’s post-Covid economic reopening has helped Hong Kong’s tech stocks outperform US peers recently. The Hang Seng Tech Index is up more than 17% the past month compared with little change in the Nasdaq 100. The rebound in Chinese equities also helped the MSCI Asia Pacific Index stage a bigger recovery than the S&P 500 in the same period. Japanese equities advanced for a fourth straight day, as the yen’s weakness provided support for the nation’s exporters.   The Topix rose 1.2% to 1,969.98 as of market close, while the Nikkei advanced 1% to 28,234.29. Toyota Motor Corp. contributed the most to the Topix gain, increasing 1.8%. Out of 2,170 shares in the index, 1,646 rose and 435 fell, while 89 were unchanged. Stocks in India declined as the Reserve Bank of India said it would withdraw pandemic-era accommodation to quell inflation after raising borrowing costs for a second straight month.  The S&P BSE Sensex dropped 0.4% to 54,893.84, as of 2:46 p.m. in Mumbai, while the NSE Nifty 50 Index fell 0.6%. Both gauges erased gains of as much as 0.8% reached during the central bank’s briefing and are heading for a fourth day of declines. Of 30 shares in the Sensex, 13 rose and 17 fell. Sustained high prices could unhinge inflationary expectations and trigger second-round effects, central bank Governor Shaktikanta Das said in an online briefing, emphasizing that preserving price stability is key to ensuring lasting economic growth. Reliance Industries was the biggest drag on the Sensex, while State Bank of India gave the biggest boost. All except two of BSE’s 19 sector sub-gauges declined, with telecom and energy groups the worst performers as realty and metals gained In FX, Yen weakness extends in European trade, with JPY hitting the weakest level since 2002 at 133.77/USD after BOJ’s Kuroda reiterated easing stance. The dollar strengthened against all its group-of-10 peers with the yen and Australian and New Zealand dollars as the worst performers. The euro fluctuated around the $1.07 handle while bunds and Italian bonds fell alongside Treasuries, paring some of Tuesday’s gains. Australian and New Zealand dollars both weakened amid greenback strength and falling US stock futures. Aussie further was weighed by local yields giving up Tuesday’s RBA-driven gains. In rates, Treasuries drifted lower, giving back a portion of Tuesday’s gains and following bigger losses for bunds, which underperformed ahead of Thursday’s ECB policy meeting.  Yields are cheaper by 2bp-3bp across the curve with front-end marginally outperforming, steepening 2s10s spread by ~1.5bp and building curve concession for the auction; bunds underperform by 1.5bp in 10-year sector.  Focal points of US session include 10-year auction, following soft results for Tuesday’s 3-year. $33b 10-year reopening at 1pm ET is second of this week’s three auctions; $19b 30-year reopening is ahead Thursday. WI 10-year yield ~3.015% is above auction stops since 2011 and ~7bp cheaper than May’s, which tailed by 1.4bp. JGBs little changed, with benchmark 10-year bonds trading again after no transactions on Tuesday. Peripheral spreads widen to Germany; Italy lags, widening ~3bps to core at the 10y points ahead of the ECB on Thursday. In commodities, WTI drifts 0.6% higher to trade at around $120. Most base metals are in the green; LME tin rises 2.8%, outperforming peers. Spot gold falls roughly $5 to trade at $1,848/oz. Looking at To the day ahead now, and it’s a fairly quiet one on the calendar, but data releases include German industrial production and Italian retail sales for April, as well as the UK construction PMI for May and the final reading of US wholesale inventories for April. Market Snapshot S&P 500 futures down 0.4% to 4,144.00 STOXX Europe 600 down 0.3% to 441.39 MXAP up 0.8% to 169.14 MXAPJ up 1.1% to 559.98 Nikkei up 1.0% to 28,234.29 Topix up 1.2% to 1,969.98 Hang Seng Index up 2.2% to 22,014.59 Shanghai Composite up 0.7% to 3,263.79 Sensex down 0.4% to 54,907.55 Australia S&P/ASX 200 up 0.4% to 7,121.10 Kospi little changed at 2,626.15 Brent Futures up 0.3% to $120.92/bbl Gold spot down 0.3% to $1,847.71 U.S. Dollar Index up 0.34% to 102.67 German 10Y yield little changed at 1.33% Euro down 0.2% to $1.0686 Top Overnight News from Bloomberg Boris Johnson plans to press ahead with legislation giving him the power to override parts of the Brexit deal, three people familiar with the matter said, a move likely to anger some of his MPs and the EU The yen’s historic weakness is spreading from the dollar into other currency crosses as the Bank of Japan’s policy isolation grows. Bloomberg’s Correlation-Weighted Currency Index for the yen -- a gauge of its relative strength against a broad basket of Group-of-10 peers -- slumped to a seven-year low Wednesday Japanese investors sold US Treasuries for the sixth consecutive month in April, underscoring waning appetite for the securities as the Federal Reserve sticks to its aggressive monetary tightening path Inflation in Hungary exceeded 10% for the first time in more than 20 years, putting pressure on the central bank to tighten monetary policy further and prop up the forint Australian inflation is likely to breach 6% and potentially could go “well above” that level and remain there for the rest of the year, Secretary to the Treasury Steven Kennedy said Wednesday Economists and investors criticized Australia’s central bank for confusing communications after it raised interest rates by twice as much as expected, having previously signaled a preference for quarter-point moves The RBI delivered a 50 basis-point rate hike as predicted by 17 of 41 economists in a Bloomberg survey A slew of China video game approvals is giving stock bulls renewed hope that a nascent rebound in tech shares could become a sustainable rally. The Hang Seng Tech Index jumped more than 4% Wednesday after the government approved 60 licenses A more detailed look at global markets courtesy of Newsquawk Asia-Pac stocks were mostly higher following the gains on Wall St and optimism of China easing its tech crackdown. ASX 200 recovered from the prior day’s RBA-induced selling with nearly all sectors in the green, although financials underperformed. Nikkei 225 extended further above the 28k level on currency weakness and with Q1 GDP data revised upwards to a narrower contraction. Hang Seng and Shanghai Comp. traded mixed with tech fuelling the gains in Hong Kong after China’s NPPA approved the publishing licences for 60 games this month, while sentiment in the mainland gradually soured despite support efforts as an official also warned that China's foreign trade stabilisation faces uncertainties and large pressure. Top Asian News China Vice Commerce Minister Wang said China's foreign trade stabilisation faces uncertainties and a large pressure from domestic and external factors. Furthermore, he sees global demand growth as low, while he added that China will accelerate export tax rebates and MOFCOM will assist foreign trade companies in securing orders, according to Reuters. Chinese Retail Passenger Car Sales (May) +30% M/M, according to PCA's Prelim data cited by Bloomberg. Japan's CDP has, as expected, submitted a no-confidence motion against the governing administration within the Lower House, motion will be put to a vote on June 9th, via Asahi; Asahi adds that the move is not expected to go anywhere European bourses have trimmed initial upside, Euro Stoxx 50 -0.2%, with macro newsflow limited and the initial strength primarily a continuation of APAC/Wall St. leads. In specifics, Credit Suisse (-5%) issued a Q2 profit warning for the group and its Investment Bank division while noted Retail name Inditex (+4%) provided a positive update. Stateside, futures are modestly pressured overall but well within overnight ranges ahead of a slim docket; ES -0.4%. DiDi (DIDI) is in advanced discussions to own a one-third stake of Sinomach Zhijun, a China state-backed EV maker, according to Reuters sources. Top European News Euro-Zone Economy Grew More Than Estimated at Start of Year Even the ECB’s Most Dire Forecast May Have Been Too Optimistic Euro Options Point to Most-Pivotal ECB Meeting Since 2019 Ireland Accuses Johnson of Acting in ‘Bad Faith’ on Brexit Deal Saudi Wealth Fund Makes Second $1 Billion Bet on Swedish Gaming Central banks RBI hiked the Repurchase Rate by 50bps to 4.90% (exp. 40bps hike) via unanimous decision and dropped mention of "staying accommodative", while RBI Governor Das noted that inflation has increased above upper tolerance levels and they remain focused on bringing down inflation. Das added they will control inflation without losing sight of growth and that further monetary policy measures are necessary to anchor inflation, as well as noted that upside risk to inflation had intensified and materialised sooner than expected. RBI Governor says they dropped the word "accommodative" from their stance, but they remain accommodative; liquidity withdrawal going forward will be calibrated and gradual. BoJ's Kuroda says rapid weakening of JPY as seen recently is undesirable; various macroeconomic models show that a weak JPY is positive. I It is important for FX to move stably, reflecting fundamentals. BoJ is expected to maintain its view that the domestic economy is picking up as a trend and will likely continue improving, according to Reuters sources. PBoC international department official Zhou said the PBoC will keep guiding financing costs lower, while the PBoC also announced that China will extend the trading hours of the interbank FX market, according to Reuters. FX Buck bounces as Yen rout continues after soft verbal intervention from BoJ Governor and Japanese Economy Minister; DXY back around 102.500 axis, USD.JPY climbs to circa 133.86 at one stage. More Lira depreciation on multiple negative factors including unconventional easing policy stance aimed at returning inflation to target, USD/TRY touches 17.1500. Aussie and Kiwi undermined by Greenback rebound and fade in general risk sentiment; AUD/USD loses 0.7200+ status again, NZD/USD sub-0.6450. Franc and Pound down, but Euro and Loonie resilient as former awaits ECB and latter leans on strong crude prices; USD/CHF just shy of 0.9790, Cable under 1.2550, EUR/USD probing 1.0700 and USD/CAD pivoting 1.2550. Forint and Zloty underpinned post-strong Hungarian CPI metrics and pre-NBP that is expected to hike 75bp; EUR/HUF & EUR/PLN around 389.60 and 4.5700 respectively. Fixed Income Bunds and Gilts pare some losses after testing round and half round number levels at 149.00 and 114.50 respectively, with added incentive after solid demand for 10 year German and UK supply. US Treasuries await 2032 issuance with caution given a lukewarm reception at 3 year auction. 10 year note just off base of 118-03/13 overnight range. Commodities WTI and Brent have been moving in-line with broader risk; however, following the UAE Minister the benchmarks have extended to the upside and post gains in excess of USD 1.50/bbl. US Energy Inventory Data (bbls): Crude +1.8mln (exp. -1.9mln), Cushing -1.8mln, Gasoline +1.8mln (exp. +1.1mln), Distillates +3.4mln (exp. +1.1mln) Brazilian government is considering measures to monitor fuel prices at distributors, according to Reuters sources. UAE Energy Minister says situation is not encouraging when it comes to the amounts of crude OPEC+ can bring to the market, via Reuters; Notes conformity with the OPEC+ deal is more than 200%, are risks when China is back, in talks with Germany and other nations to see if they are interested in UAE natgas. Spot gold is essentially unchanged, and continues to pivot its 10-DMA, while base metals are primarily tracking broader risk sentiment. US Event Calendar 07:00: June MBA Mortgage Applications -6.5%, prior -2.3% 10:00: April Wholesale Trade Sales MoM, prior 1.7% 10:00: April Wholesale Inventories MoM, est. 2.1%, prior 2.1% DB's Henry Allen concludes the overnight wrap A reminder that Jim’s annual default study was released yesterday. His view is that while nothing much will change for the remainder of 2022, we might be coming to the end of the ultra-low default world discussed in previous editions. First, there’ll likely be a cyclical US recession to address in 2023, and after that, a risk that various trends reverse that have made the last 20 years so subdued for defaults. See the report here for more details. It’s been another topsy-turvy session for markets over the last 24 hours as investors look forward to the big macro events later in the week, namely the ECB tomorrow and then the US CPI print the day after. Initially it had looked like we were set for another day of higher rates, not least after the hawkish surprise from the RBA we mentioned in yesterday’s edition as they hiked by a larger-than-expected 50bps. But more negative developments subsequently dampened the mood, including an unexpected contraction in German factory orders, and then an announcement by Target (-2.31%) that they were cutting their profit outlook for the second time in three weeks. But then sentiment turned once again later in the US session, with equities seeing a late rally that put the major indices back in positive territory for the day. Against that backdrop, equities swung between gains and losses, but the S&P 500 rallied to a broad-based gain after the European close, finishing the day +0.95% higher after being as much as -1% lower following the open, with only the consumer discretionary (-0.37%) sector finishing in the red after Target updated their guidance again to now expect Q2’s operating margin to be around 2% amid price reductions to reduce inventory. For the index as a whole, it was also the first back-to-back positive start the week since in a month, that’s also seen it recover all of last week’s declines. Energy (+3.14%) was the biggest outperformer in the S&P amidst a further rise in oil prices, with Brent Crude (+0.89%) moving back above the $120/bbl mark. However, Europe’s STOXX 600 (-0.28%) missed the late rally and eventually settled in negative territory. Whilst equities had a mixed session, sovereign bonds put in a more consistent performance ahead of tomorrow’s ECB decision, with decent gains posted on both sides of the Atlantic. Yields on 10yr Treasuries were down -6.6bps to 2.97%, moving back beneath 3% again, although this morning’s +2.8bps rise has taken them just back above that point to 3.001% at time of writing. Yesterday’s moves lower in yields were more pronounced at the long end of the curve, with the 2yr yield essentially flat as investors’ expectations of the near-term path of Fed rate hikes remained fairly steady. Indeed, the futures-implied rate by the December meeting was also down just -1.5bps to 2.84%. It was much the same story in Europe too of lower yields and flatter curves, as the amount of ECB tightening priced in for the rest of the year fell a modest -1.4bps from its high of 125bps the previous day. Yields on 10yr bunds (-2.9bps), OATs (-3.6bps) and gilts (-3.3bps) all fell back, and there was a noticeable decline in peripheral spreads thanks to even larger reductions in the Italian (-12.1bps) and Spanish (-7.4bps) 10yr yields. Interestingly, another trend over recent days that continued was the fall in European natural gas prices (-3.57%), which fell for a 5th consecutive session to hit its lowest level since Russia’s invasion of Ukraine, at €79.61/MWh. Those late gains for US equities have carried over into Asia overnight, with the Hang Seng (+1.70%) the Nikkei (+0.85%) both advancing strongly. The main exception to that has been in mainland China however, where the CSI 300 (-0.41%) and the Shanghai Composite (-0.70%) have just taken a tumble this morning. We’ve also seen that in US equity futures too, with those on the S&P 500 down -0.335 this morning. On the data side, the final estimate of Japan’s GDP for Q1 showed a smaller contraction than initially thought, with GDP only falling by an annualised -0.5%, which is half the -1% decline initially thought. However, the Japanese Yen has continued to weaken overnight, and is currently trading at a fresh 20-year low against the US Dollar of 133.13 per dollar. It’s also at a 7-year low against the Euro of 142.19 per euro. Here in the UK, Brexit could be back in the headlines shortly as it’s been reported by multiple outlets including Bloomberg that legislation will be introduced that would enable the UK government to override the Northern Ireland Protocol. That’s the part of the Brexit deal that avoids the need for a hard border between Northern Ireland and the Republic of Ireland, but has been a persistent source of tension between the two sides since the deal was signed, since it creates an economic border between Northern Ireland and Great Britain that Northern Irish unionists are opposed to. Irish PM Martin said yesterday that Europe would respond in a “calm and firm” way, and Bloomberg’s report suggested the draft bill could be presented to the House of Commons tomorrow. Looking at yesterday’s data releases, German factory orders for April unexpectedly saw a -2.7% contraction (vs. +0.4% expansion expected). That was the third consecutive monthly decline, and was driven by a -4.0% decline in foreign orders. On the other hand, the final PMIs from the UK for May were revised up relative to the flash readings, with the composite PMI at 53.1 (vs. flash 51.8), helping sterling to strengthen +0.48% against the US Dollar. Finally, the World Bank yesterday became the latest body to downgrade their global growth forecast, now projecting a +2.9% rise in GDP for 2022 compared to their 4.1% estimate put out in January, and openly warned about the risk of stagflation. To the day ahead now, and it’s a fairly quiet one on the calendar, but data releases include German industrial production and Italian retail sales for April, as well as the UK construction PMI for May and the final reading of US wholesale inventories for April. Tyler Durden Wed, 06/08/2022 - 08:09.....»»

Category: dealsSource: nytJun 8th, 2022

Recession, Prices, & The Final Crack-Up Boom

Recession, Prices, & The Final Crack-Up Boom Authored by Alasdair Macleod via GoldMoney.com, Initiated by monetarists, the debate between an outlook for inflation versus recession intensifies. We appear to be moving on from the stagflation story into outright fears of the consequences of monetary tightening and of interest rate overkill. In common with statisticians in other jurisdictions, Britain’s Office for Budget Responsibility is still effectively saying that inflation of prices is transient, though the prospect of a return towards the 2% target has been deferred until 2024. Chancellor Sunak blithely accepts these figures to justify a one-off hit on oil producers, when, surely, with his financial expertise he must know the situation is likely to be very different from the OBR’s forecasts. This article clarifies why an entirely different outcome is virtually certain. To explain why, the reasonings of monetarists and neo-Keynesians are discussed and the errors in their understanding of the causes of inflation is exposed. Finally, we can see in plainer sight the evolving risk leading towards a systemic fiat currency crisis encompassing banks, central banks, and fiat currencies themselves. It involves understanding that inflation is not rising prices but a diminishing purchasing power for currency and bank deposits, and that the changes in the quantity of currency and credit discussed by monetarists are not the most important issue. In a world awash with currency and bank deposits the real concern is the increasing desire of economic actors to reduce these balances in favour of an increase in their ownership of physical assets and goods. As the crisis unfolds, we can expect increasing numbers of the public to attempt to reduce their cash and bank deposits with catastrophic consequences for their currencies’ purchasing power. That being so, we appear to be on a fast track towards a final crack-up boom whereby the public attempts to reduce their holdings of currency and bank deposits, evidenced by selected non-financial asset and basic consumer items prices beginning to rise rapidly. Introduction In the mainstream investment media, the narrative for the economic outlook is evolving. From inflation, by which is commonly meant rising prices, the MSIM say we now face the prospect of recession. While dramatic, current inflation rates are seen to be a temporary phenomenon driven by factors such as Russian sanctions, Chinese covid lockdowns, component shortages and staffing problems. Therefore, it is said, inflation remains transient — it’s just that it will take a little longer than originally thought by Jay Powell to return to the 2% target. We were reminded of this in Britain last week when Chancellor Sunak delivered his “temporary targeted energy profits levy”, which by any other name was an emergency budget. Note the word “temporary”. This was justified by the figures from the supposedly independent Office for Budget Responsibility. The OBR still forecasts a return to 2% price inflation but deferred until early 2024 after a temporary peak of 9%. Therefore, the OBR deems it is still transient. Incidentally, the OBR’s forecasting record has been deemed by independent observers as “really terrible”. Absolved himself of any responsibility for the OBR’s inflation estimates, Sunak is spending £15bn on subsidies for households’ fuel costs, claiming to recover it from oil producers on the argument that they are enjoying an unexpected windfall, courtesy of Vladimir Putin, to be used to finance a one-off temporary situation. That being the case, don’t hold your breath waiting for Shell and BP to submit a bill to Sunak for having to write off their extensive Russian investments and distribution businesses because of UK government sanctions against Russia. But we digress from our topic, which is about the future course of prices, more specifically the unmeasurable general price level in the context of economic prospects. And what if the OBR’s figures, which are like those of all other statist statisticians in other jurisdictions, turn out to be hideously wrong? There is no doubt that they and the MSIM are clutching at a straw labelled “hope”. Hope that a recession will lead to lower consumer demand taking the heat out of higher prices. Hope that Putin’s war will end rapidly in his defeat. Hope that Western sanctions will collapse the Russian economy. Hope that supply chains will be rapidly restored to normal. But even if all these expectations turn out to be true, old-school economic analysis unbiased by statist interests suggests that interest rates will still have to go significantly higher, bankrupting businesses, governments, and even central banks overloaded with their QE-derived portfolios. The establishment, the mainstream media and government agencies are deluding themselves over prospects for prices. Modern macroeconomics in the form of both monetarism and Keynesianism is not equipped to understand the economic relationships that determine the future purchasing power of fiat currencies. Taking our cue from the stagflationary seventies, when Keynesianism was discredited, and Milton Friedman of the Chicago monetary school came to prominence, we must critically examine both creeds. In this article we look at what the monetarists are saying, then the neo-Keynesian mainstream approach, and finally the true position and the outcome it is likely to lead to. Since monetarists are now warning that a slowdown in credit creation is tilting dangers away from inflation towards recession, we shall consider the errors in the monetarist approach first. Monetary theory has not yet adapted itself for pure fiat Monetarist economists are now telling us that the growth of money supply is slowing, pointing to a recession. But that is only true if all the hoped-for changes in prices comes from the side of goods and services and not that of the currency. No modern monetarist appears to take that into account in his or her analysis of price prospects, bundling up this crucial issue in velocity of circulation. This is why they often preface their analysis by assuming there is no change in velocity of circulation. While they have turned their backs on sound money, which can only be metallic gold or silver and their credible substitutes, their analysis of the relationship between currency and prices has not been adequately revised to account for changes in the purchasing power of pure fiat currencies. It is vitally important to understand why it matters. A proper gold coin exchange standard turns a currency into a gold substitute, which the public is almost always content to hold through cycles of bank credit. While there are always factors that alter the purchasing power of gold and its relationship with its credible substitutes, the purchasing power of a properly backed currency and associated media in the form of notes and bank deposits varies relatively little compared with our experience today, particularly if free markets permit arbitrage between different currencies acting as alternative gold substitutes. This is demonstrated in Figure 1 below of the oil price measured firstly in gold-grammes and currencies under the Bretton Woods agreement until 1971, and then gold-grammes and pure fiat currencies subsequently. The price stability, while economic actors accepted that the dollar was tied to gold and therefore a credible substitute along with the currencies fixed against it, was evident before the Bretton Woods agreement was suspended. Yet the quantity of currency and deposits in dollars and sterling expanded significantly during this period, more so for sterling which suffered a devaluation against the dollar in 1967. The figures for the euro before its creation in 2000 are for the Deutsche mark, which by following sounder money policies while it existed explains why the oil price in euros is recorded as not having risen as much as in sterling and the dollar. The message from oil’s price history is that volatility is in fiat currencies and not oil. In gold-grammes there has been remarkably little price variation. Therefore, the pricing relationship between a sound currency backed by gold differs substantially from the fiat world we live with today, and there has been very little change in monetarist theory to reflect this fact beyond mere technicalities. The lesson learned is that under a gold standard, an expansion of the currency and bank deposits is tolerated to a greater extent than under a pure fiat regime. But an expansion of the media of exchange can only be tolerated within limits, which is why first the London gold pool failed in the late 1960s and then the Bretton Woods system was abandoned in 1971. Under a gold standard, an expansion of the quantity of bank credit will be reflected in a currency’s purchasing power as the new media is absorbed into general circulation. But if note-issuing banks stand by their promise to offer coin conversion to allcomers that will be the extent of it and economic actors know it. This is the basis behind classical monetarism, which relates with Cantillon’s insight about how new money enters circulation, driving up prices in its wake. From John Stuart Mill to Irving Fisher, it has been mathematically expressed and refined into the equation of exchange. In his earlier writings, even Keynes understood monetarist theory, giving an adequate description of it in his Tract on Monetary Reform, written in 1923 when Germany’s papiermark was collapsing. But even under the gold standard, the monetarist school failed to incorporate the reality of the human factor in their equation of exchange, which has since become a glaring omission with respect to fiat currency regimes. Buyers and sellers of goods and services do not concern themselves with the general price level and velocity of circulation; they are only concerned with their immediate and foreseeable needs. And they are certainly unaware of changes in the quantity of currency and credit and the total value of past transactions in the economy. Consumers and businesses pay no attention to these elements of the fundamental monetarist equation. In essence, this is the disconnection between monetarism and catallactic reality. Instead, the equation of exchange is made to always balance by the spurious concept of velocity of circulation, a mental image of money engendering its own utility rather than being simply a medium of exchange between buyers and sellers of goods and services. And mathematicians who otherwise insist on the discipline of balance in their equations are seemingly prepared in the field of monetary analysis to introduce a variable whose function is only to ensure the equation always balances when without it, it does not. Besides monetarism failing to account for the human actions of consumers and businesses, over time there have been substantial shifts in how money is used for purposes not included in consumer transactions — the bedrock of consumer price indices and of gross domestic product. The financialisation of the US and other major economies together with the manufacture of consumer and intermediate goods being delegated to emerging economies have radically changed the profiles of the US and the other G7 economies. To assume, as the monetarists do, that the growth of money supply can be applied pro rata to consumer activity is a further error because much of the money supply does not relate to prices of goods and services. Furthermore, when cash and bank deposits are retained by consumers and businesses, for them they represent the true function of money, which is to act as liquidity for future purchases. They are not concerned with past transactions. Therefore, the ratio of cash and instant liquidity to anticipated consumption is what really matters in determining purchasing power and cannot be captured in the equation of exchange. Monetarists have stuck with an equation of exchange whose faults did not matter materially under proper gold standards. Besides ignoring the human element in the marketplace, their error is now to persist with the equation of exchange in a radically different fiat environment. The role of cash and credit reserves In their ignorance of the importance of the ratio between cash and credit relative to prospective purchases of goods and services, all macroeconomists commit a major blunder. It allows them to argue inaccurately that an economic slowdown triggered by a reduction in the growth of currency and credit will automatically lead to a fall in the rate of increase in the general price level. Having warned central banks earlier of the inflation problem with a degree of success, this is what now lies behind monetarists’ forecasts of a sharp slowdown in the rate of price increases. A more realistic approach is to try to understand the factors likely to affect the preferences of individuals within a market society. For individuals to be entirely static in their preferences is obviously untrue and they will respond as a cohort to the changing economic environment. It is individuals who set the purchasing power of money in the context of their need for a medium of exchange — no one else does. As Ludwig von Mises put it in his Critique of Interventionism: “Because everybody wishes to have a certain amount of cash, sometimes more sometimes less, there is a demand for money. Money is never simply in the economic system, in the national economy, it is never simply circulating. All the money available is always in the cash holdings of somebody. Every piece of money may one day — sometimes oftener, sometimes more seldom — pass from one man’s cash holding to another man’s ownership. At every moment it is owned by somebody and is a part of his cash holdings. The decisions of individuals regarding the magnitude of their cash holdings constitute the ultimate factor in the formation of purchasing power.” For clarification, we should add to this quotation from Mises that cash and deposits include those held by businesses and investors, an important factor in this age of financialisation. Aside from fluctuations in bank credit, units of currency are never destroyed. It is the marginal demand for cash that sets it value, its purchasing power. It therefore follows that a relatively minor shift in the average desire to hold cash and bank deposits will have a disproportionate effect on the currency’s purchasing power. Central bankers’ instincts work to maintain levels of bank credit, replacing it with central bank currency when necessary. Any sign of a contraction of bank credit, which would tend to support the currency’s purchasing power, is met with an interest rate reduction and/or increases in the note issue and in addition today increases of bank deposits on the central bank’s balance sheet through QE. The expansion of global central bank balance sheets in this way has been mostly continuous following the Lehman crisis in 2008 until March, since when they began to contract slightly in aggregate — hence the monetarists’ warnings of an impending slowdown in the rate of price inflation. But the slowdown in money supply growth is small beer compared with the total problem. The quantity of dollar notes and bank deposits has tripled since the Lehman crisis and GDP has risen by only two-thirds. GDP does not account for all economic transactions — trading in financial assets is excluded from GDP along with that of most used goods. Even allowing for these factors, the quantity of currency liquidity for economic actors must have increased to unaccustomed levels. This is further confirmed by the Fed’s reverse repo balances, which absorb excess liquidity of currency and credit currently standing at about $2 trillion, which is 9% of M2 broad money supply. In all Western jurisdictions, consuming populations are collectively seeing their cash and bank deposits buy less today than in the past. Furthermore, with prices rising at the fastest rate seen in decades, they see little or no interest compensation for retaining balances of currencies losing purchasing power. In these circumstances and given the immediate outlook for prices they are more likely to seek to decrease their cash and credit balances in favour of acquiring goods and services, even when they are not for immediate use. The conventional solution to this problem is the one deployed by Paul Volcker in 1980, which is to raise interest rates sufficiently to counter the desire of economic actors to reduce their spending liquidity. The snag is that an increase in the Fed funds rate today sufficient to restore faith in holding bank deposits would have to be to a level which would generate widespread bankruptcies, undermine government finances, and even threaten the solvency of central banks, thereby bringing forward an economic and banking crisis as a deliberate act of policy. The egregious errors of the neo-Keynesian cohort Unlike the monetarists, most neo-Keynesians have discarded entirely the link between the quantity of currency and credit and their purchasing power. Even today, it is neo-Keynesians who dominate monetary and economic policy-making, though perhaps monetarism will experience a policy revival. But for now, with respect to inflation money is rarely mentioned in central bank monetary committee reports. The errors in what has evolved from macroeconomic pseudo-science into beliefs based on a quicksand of assumptions are now so numerous that any hope that those in control know what they are doing must be rejected. The initial error was Keynes’s dismissal of Say’s law in his General Theory by literary legerdemain to invent macroeconomics, which somehow hovers over economic reality without being governed by the same factors. From it springs the belief that the state knows best with respect to economic affairs and that all the faults lie with markets. Every time belief in the state’s supremacy is threatened, the Keynesians have sought to supress the evidence offered by markets. Failure at a national level has been dealt with by extending policies internationally so that all the major central banks now work together in group-thinking unison to control markets. We have global monetary coordination at the Bank for International Settlements. And at the World Economic Forum which is trying to muscle in on the act we now see neo-Marxism emerge with the desire for all property and personal behaviour to be ceded to the state. As they say, “own nothing and you will be happy”. The consequence is that when neo-Keynesianism finally fails it will be a global crisis and there will be no escape from the consequences in one’s own jurisdiction. The current ideological position is that prices are formed by the interaction of supply and demand and little else. They make the same error as the monetarists in assuming that in any transaction the currency is constant and all the change in prices comes from the goods side: money is wholly objective, and all the price subjectivity is entirely in the goods. This was indeed true when money was sound and is still assumed to be the case for fiat currencies by all individuals at the point of transaction. But it ignores the question over a currency’s future purchasing power, which is what the science of economics should be about. The error leads to a black-and-white assumption that an economy is either growing or it is in recession — the definitions of which, like almost all things Keynesian, are somewhat fluid and indistinct. Adherents are guided religiously by imperfect statistics which cannot capture human action and whose construction is evolved to support the monetary and economic policies of the day. It is a case of Humpty Dumpty saying, “It means what I chose it to mean —neither more nor less” Lewis Caroll fans will know that Alice responded, “The question is whether you can make words mean so many different things”. To which Humpty replied,” The question is which is to be master —that’s all.” So long as the neo-Keynesians are Masters of Policy their imprecisions of definition will guarantee and magnify an eventual economic failure. The final policy crisis is approaching Whether a macroeconomist is a monetarist or neo-Keynesian, the reliance on statistics, mathematics, and belief in the supremacy of the state in economic and monetary affairs ill-equips them for dealing with an impending systemic and currency crisis. The monetarists argue that the slowdown in monetary growth means that the danger is now of a recession, not inflation. The neo-Keynesians believe that any threat to economic growth from the failures of free markets requires further stimulation. The measure everyone uses is growth in gross domestic product, which only reflects the quantity of currency and credit applied to transactions included in the statistic. It tells us nothing about why currency and credit is used. Monetary growth is not economic progress, which is what increases a nation’s wealth. Instead, self-serving statistics cover up the transfer of wealth from the producers in an economy to the unproductive state and its interests through excessive taxation and currency debasement, leaving the entire nation, including the state itself eventually, worse off. For this reason, attempts to increase economic growth merely worsen the situation, beyond the immediate apparent benefits. There will come a point when the public wakes up to the illusion of monetary debasement. Until recently, there has been little evidence of this awareness, which is why the monetarists have been broadly correct about the price effects of the rapid expansion of currency and credit in recent years. But as discussed above, the expansion of currency and bank deposits has been substantially greater than the increase in GDP, which despite its direction into financial speculation and other activities outside GDP has led to an accumulation of over $2 trillion of excess liquidity no one wants in US dollar reverse repos at the Fed. The growth in the level of personal liquidity and credit available explains why the increase in the general price level for goods and services has lagged the growth of currency and deposits, because at the margin since the Lehman crisis the public, including businesses and financial entities, has been accumulating additional liquidity instead of buying goods. This accelerated during covid lockdowns to be subsequently released in a wave of excess demand, fuelling a sharp rise in the general level of prices, not anticipated by the monetary authorities who immediately dismissed the rise as transient. The build-up of liquidity and its subsequent release into purchases of goods is reflected in the savings rate for the US shown in Figure 2 below. The personal saving rate does not isolate from the total the accumulating level of spending liquidity as opposed to that allocated for investment. The underlying level of personal liquidity will have accumulated over time as a part of total personal savings in line with the growth of currency and bank deposits since the Lehman crisis. The restrictions on spending behaviour during lockdowns in 2020 and 2021 exacerbated the situation, forcing a degree of liquidity reduction which drove the general level of prices significantly higher. Profits and losses resulting from dealing in financial assets and cryptocurrencies are not included in the personal savings rate statistics either. This matters to the extent that bank credit is used to leverage investment. Nor is the accumulation of cash in corporations and financial entities, which are a significant factor. But whatever the level of it, there can be little doubt that the levels of liquidity held by economic actors are unaccustomedly high. The accumulation of reverse repos representing unwanted liquidity informs us that the public, including businesses, are so sated with excess liquidity that they may already be trying to reduce it, particularly if they expect further increases in prices. In that event they will almost certainly bring forward future purchases to alter the relationship between personal liquidity and goods. It is a situation in America which is edging towards a crack-up boom. A crack-up boom occurs when the public as a cohort attempts to reduce the overall level of its currency and deposits in favour of goods towards a final point of rejecting the currency entirely. So far, economic history has recorded only one version, which is when after a period of accelerating debasement of a fiat currency the public finally wakes up to the certainty that a currency is becoming worthless and all hope that it might somehow survive as a medium of exchange must be abandoned. To this, perhaps we can add another: the consequences of a collapse of the world’s major monetary institutions in unison. How excess liquidity is likely to play out We have established beyond reasonable doubt that the US economy is awash with personal liquidity. And if one man disposes of his liquidity to another in a transaction the currency and bank deposit still exists. But aggregate personal liquidity can be reduced by the contraction of bank credit. As interest rates rise, thereby exposing malinvestments, the banks will be quick to protect themselves by withdrawing credit. As originally described by Irving Fisher, a contraction of bank credit risks triggering a self-feeding liquidation of loan collateral. Initially, we can expect central banks to counter this contraction by redoubling efforts to suppress bond yields, reinstitute more aggressive QE, and standing ready to bail out banks. These are all measures which are in the central banker’s instruction manual. But the conditions leading to a crack-up boom appear to be already developing despite the increasing likelihood of contracting bank credit. The deteriorating outlook for bank credit and the impact on highly leveraged banks, particularly in Japan and the Eurozone, is likely to accelerate the flight out of bank deposits to — where? Regulators have deliberately reduced access to currency cash so a bank depositor can only dispose of larger sums by transferring them to someone else. Before an initial rise in interest rates began to undermine financial asset values, a transfer of a bank deposit to a seller of a financial asset was a viable alternative. That is now an increasingly unattractive option due to the changed interest rate environment. Consequently, the principal alternative to holding bank deposits is to acquire physical assets and consumer items for future use. But even that assumes an overall stability in the public’s collective willingness to hold bank deposits, which without a significant rise in interest rates is unlikely to be the case. The reluctance of a potential seller to increase his bank deposits is already being reflected in prices for big ticket items, such as motor cars, residential property, fine and not-so-fine art, and an increasing selection of second-hand goods. This is not an environment that will respond positively to yet more currency debasement and interest rate suppression as the monetary authorities struggle to maintain control over markets. The global financial bubble is already beginning to implode, and the central banks which have accumulated large portfolios through quantitative easing are descending into negative equity. Only this week, the US Fed announced that it has unrealised portfolio losses of $330bn against equity of only $50bn. The Fed can cover this discrepancy if it is permitted by the US Treasury to revalue its gold note to current market prices – but further rises in bond yields will rapidly wipe even that out. Other central banks do not have this leeway, and in the cases of the ECB and the Bank of Japan, they are invested in considerably longer average bond maturities, which means that as interest rates rise their unrealised losses will be magnified. So, the major central banks are insolvent or close to it and will themselves have to be recapitalised. At the same time, they will be required to backstop a rapidly deteriorating economic situation. And being run by executives whose economic advisers do not understand both economics nor money itself, it all amounts to a recipe for a final cock-up crack-up boom as economic actors seek to protect themselves. As the situation unfolds and economic actors become aware of the true inadequacies of bureaucratic group-thinking central bankers, the descent into the ultimate collapse of fiat currencies could be swift. It is now the only way in which all that excess faux liquidity can be expunged. Tyler Durden Sat, 06/04/2022 - 13:30.....»»

Category: worldSource: nytJun 4th, 2022