Russia has issued a new warning Thursday aimed at the United States at a moment Moscow-appointed officials appear to be retreating from tge southern city of Kherson as it comes under increased Ukrainian shelling. 

The Associated Press reports of the new Kremlin warning as follows, “Amid the battles, Russia issued a warning that the United States could be drawn into the conflict, adding it could target Western commercial satellites used for military purposes in support of Ukraine.”

The statement came from the deputy chief of the Russian Foreign Ministry’s arms control and nonproliferation department, Konstantin Vorontsov, who said “Quasi-civilian infrastructure could be a legitimate target for retaliation.”

It also comes soon on the heels of the question of potential Pentagon funding for Elon Musk’s Starlink systems, after SpaceX said it can’t be expected to foot the bill indefinitely.

Ukraine’s forces have called Starlink essential to its ability to repel the Russian advance, as it’s often used in frontline communications where no other comms links exist. 

According to The Moscow Times: 

Commercial satellites used by the United States to assist Ukraine in its war against Russia are “legitimate” targets for attacks, a Russian diplomat said Wednesday.

Private assets like Elon Musk’s Starlink satellite internet constellation, as well as Maxar and Planet Labs earth observation satellites, have proven critical in keeping Ukrainians online and piercing the fog of war.

This is not the first time the Kremlin suggested such a threat. Vorontsov had warned just last month that non-military satellites used by Ukraine “constitute indirect involvement in military conflicts” – hinting that they could eventually be targeted. 

Vorontsov didn’t mention Starlink by name in his new statement to the United Nations…

Vorontsov did not mention any specific satellite companies though Elon Musk said earlier this month that his rocket company SpaceX would continue to fund its Starlink internet service in Ukraine, citing the need for ‘good deeds’ https://t.co/9z4a3EewHZ pic.twitter.com/8y4GbIvsOo

— Reuters (@Reuters) October 27, 2022

Also on Thursday, Foreign ministry spokeswoman Maria Zakharova charged that Washington is pursuing “thoughtless and mad” escalation.

“The more the US is drawn into supporting the Kyiv regime on the battlefield, the more they risk provoking a direct military confrontation between the biggest nuclear powers fraught with catastrophic consequences,” said Zakharova.

As the bell tolls for the end of the first chapter of Twitter’s life as a deep state narrative-enabling machine, the firings have begun with Musk becoming ‘Chief Twit’.

Just minutes after the world’s richest man has reportedly closed the $44 billion deal, The NYTimes reports that, according to sources that declined to be identified, the Twitter executives who were fired include:

• Parag Agrawal, Twitter’s chief executive,

• Ned Segal, the chief financial officer,

• Sean Edgett, the general counsel, and

• Vijaya Gadde, the top legal and policy executive, (or censorship czar).

We suspect she was first on the list given this tweet from Musk earlier in the year…

pic.twitter.com/1CE7rjBrNH

— Elon Musk (@elonmusk) April 27, 2022

As a reminder, having been with Twitter since 2011, Gadde was the key executive in charge of ‘trust and safety, legal and public policy functions‘ – described by Politico as the company’s “moral authority.” 

Gadde holds one of the most controversial positions at Twitter: Her teams decide how to moderate content. That’s made her a target of right-wing criticism, particularly when Twitter blocked the distribution of a New York Post article about President Joe Biden’s son, Hunter Biden, in 2020. She faced a renewed wave of criticism after multiple reports confirmed she was behind the decision to ban Trump from Twitter. -Politico

In other words, Gadde is likely the exec who signed off on ZeroHedge’s February 2020 ban for speculating that Covid-19 may have emerged from a Wuhan Lab, and President Trump’s January 2021 ban in connection with the capitol riot.

And we are not surprised at the others…

In all seriousness, imagine being such an arrogant, incompetent, entitled litttle wokester that your pissy texts provoked the richest man on earth to buy your employer just so he could fire you in his first act as owner. pic.twitter.com/NjpCOB9gbM

— Sean Davis (@seanmdav) October 28, 2022

At least one of the executives who was fired was escorted out of Twitter’s office, NYTimes reports.

Please do not feel too bad for these poor, dejected executives, as Insider reports, through “change in control” provisions in employment contracts for top leadership, they will receive a certain amount of severance and an automatic acceleration of their shares, so long as Musk fires them.

The provisions are disclosed in regulatory filings.

• Agrawal is set to receive the largest payout of $38.7 million, due largely to the entirety of his shares vesting upon his firing.

• Segal is set to receive a $25.4 million payout for getting fired.

• Gadde will leave with $12.5 million.

As we detailed earlier, over 1,100 employees have left Twitter since Musk announced his intention to buy the company back in January, with almost a third going to Google or Meta.

The figures come from a new analysis of LinkedIn data, with the report noting that other workers have moved to the likes of Pinterest, LinkedIn, Snap, and TikTok.

We suspect, as Elon warned, it’s sinking now for some…

Will we see this tomorrow?

Authored by Charles Lipson via RealClear Wire,

Two weeks before the 2022 midterms, fear of crime is second only to worries over inflation and recession. Both issues – personal security and economic security – affect voters directly. They arise every time voters ride the subway, walk down a dark street, pay the cashier at the grocery, or fill up their truck. That’s why survey after survey says they are the top issues motivating voters this November. That’s bad news for Democrats. Pollsters say Republicans hold huge advantages on the economy, inflation, and crime, the issues that matter most to voters.

Since crime is essentially a local issue, why does it hurt Democrats running for national or statewide office? Because the Democratic Party has associated itself with the notion that “social justice” and “racial equality” require fundamentally changing policing and incarceration. The problem, they say, is police, not criminals. In practice, that means Democrats, especially progressives, favor weaker law enforcement, easier conditions for bail (even for those charged with violent offenses), and less funding for police officers. That message was encapsulated in the slogans “defund the police” and “reimagine policing,” which took hold in 2020 after George Floyd was killed by a Minneapolis cop.

Not all Democrats embraced this self-defeating fad. Joe Biden, notably, spoke out against it. But progressives marched in lock-step, and their policies became the party’s dominant message on crime. Not just dominant, uncontested. Left-wing prosecutors ran on that message, won in city after city, and implemented it with disastrous effects. They had strong backing from state and local Democratic politicians. Pushback inside the party was tepid, for fear of alienating white progressives as well black leaders and activists.

Now Democrats are stuck with the consequences on the streets and, soon, at the ballot box. The party’s “soft on crime” image has become a political albatross, which candidates cannot readily discard. They are weighed down for two reasons. First, they hold power nationally and in almost every major city, so voters hold them responsible for bad outcomes. The party’s unwillingness to enforce basic laws and protect the public is exemplified by the porous Southern border, a deliberate policy choice by the Biden administration. The result has been an unprecedented influx of illegal immigrants (some 2.4 million in the last fiscal year alone), plus a surge of deadly drugs. Mexican cartels have reaped billions in profits, five or six times as much as they made before Biden threw open the border.

Second, when the movement to defund police was at its height, no prominent national Democrats were willing to push back forcefully. That means candidates today cannot appeal to the public on these issues. None chose to follow Bill Clinton’s path during the 1992 presidential campaign, when he denounced Sister Souljah’s openly racist statements. None, including Joe Biden, were willing to become the pro-law enforcement face of the party, to denounce widespread rioting during the summer of 2020, to urge a crackdown on arsonists, looters, muggers, carjackers, and killers. Far from it. When Democrats held their nominating convention in Milwaukee that summer, they remained silent about the violence. Biden chose as his running mate a California senator who personally urged her Twitter followers to send money to a Minnesota nonprofit that helped post bail for protestors accused of breaking the law.

Voters get the point – and they don’t like it. They link the rise in crime to Democratic policies, to their unwillingness to make public safety a high priority, to their refusal to enforce the law. They don’t believe candidates who blame these problems mainly on bad policing or “systemic racism.” Voters do recognize the serious problems plaguing poor, minority communities and, for some six decades, have supported social-welfare programs to address them (with uneven results). But that doesn’t mean they accept crime, especially violent crime, whatever its social roots.

Voters are saying they want more public safety, which means more policing, not less. They don’t think their position is racist because they want fair, unbiased treatment of blacks, whites, Hispanics, and Asians. They don’t want to ignore persistent poverty and crime in inner cities. They want effective programs to deal with them. But they do not believe, as progressives do, that these problems are somehow due mainly to “white supremacy.” On the contrary, voters have witnessed a steep, long-term decline in those noxious attitudes.

On criminal justice issues, Americans see sharp differences between the two major political parties. They know Republicans have long favored more support for law enforcement, more funding, and more policies like “broken windows” policing, which seek to reduce crime by punishing minor offenses before the perpetrators succeed and move on to larger ones. They know Democrats have consistently opposed these policies and dismantled them in cities they govern. They can see the results for themselves.

The Democrats’ message on crime is failing for another reason: They control the cities where crime is rampant. Voters around the country see the connection, and it hurts Democrats everywhere. The pain is compounded because the party has no good answers about what to do next, aside from more spending on social services and mental health (which are badly needed) and controlling guns (which faces formidable constitutional obstacles, as well as practical obstacles since millions of people already own millions of guns).

Voters aren’t inventing their fear of crime. They see it daily on local news, followed by interviews with the victims’ anguished families. They see videos of local stores being ransacked by organized gangs – none ever arrested. They see it firsthand when they walk into Walgreens and have to ask a clerk to unlock the Plexiglas case to get a tube of toothpaste. They see it again when they walk on local streets, trying to avoid homeless camps, open-air drug markets, and discarded needles.

National data tells a similar story. Violent crime, in particular, has reached record levels. The problems are not limited to big cities like Chicago or Philadelphia or progressive bastions like Seattle, Portland, and San Francisco. Small and mid-sized cities face the same problems, without the media spotlight. In 2022, the FBI’s Uniform Crime Reporting Program lists the ten most dangerous cities as Little Rock, Memphis, Tacoma, Detroit, Pueblo, Cleveland, Springfield, Lansing, Kansas City, and Chattanooga. Democrats govern all of them except Chattanooga, whose mayor does not list a party affiliation. Once again, voters have no trouble making the connection.

The desire for better law enforcement became national news earlier this year when San Francisco voters recalled their uber-progressive prosecutor, Chesa Boudin. Savvy Democrats saw that as a warning. But by then, it was too late for many of them. They were locked into weak positions on crime. There wasn’t much they could do besides change the subject.

Voters don’t want to change the subject. They want to change policies. They want much better public safety, fairly administered. They are sick of virtue signaling, wishful thinking, and criminals released to repeat their offenses. That’s what they are saying to pollsters. Soon, that’s what they will say at the ballot box.

Authored by Philip Wegmann via RealClear Wire (emphasis ours),

President Biden walked on stage in the dark of the Howard Theatre and declared the coming midterms, then just three weeks away, “the most consequential election in our history.” Insisting that abortion was on the ballot this year, Biden promised that if Democrats kept their majorities, they would codify Roe v. Wade in federal law.

“I want to remind us all how we felt that day,” Biden told a congregation gathered by the Democratic National Committee of the Supreme Court decision to repeal Roe. “The anger, the worry, the disbelief.” He added, “If you care about the right to choose, you got to vote.”

It was a call to action from the man who is only the second Roman Catholic president in U.S. history – and America’s first and only pro-choice Catholic president. But in swing states Democrats must win if they are to preserve their Senate majority, and on the eve of the midterms, a majority of Catholic voters do not necessarily share the president’s priorities.

A new RealClear Opinion Research poll, done in concert with Catholic television network EWTN, shows that a majority of Catholic voters in six key battleground states would rather let states determine abortion policy; believe that the economy remains the most significant concern for the country; and generally favor Republican challengers and incumbents in the coming electoral contests.

Topline findings: Full polling breakdown

Those results are significant given that Catholic voters, who make up roughly one-fourth of the U.S. electorate, were an influential demographic in the last presidential election. With the Senate split 50-50, they may be positioned not just to determine who controls that body, but also to help define the next two years of Biden’s first term. Democrats currently hold the Senate only by virtue of the fact that Vice President Kamala Harris casts the deciding vote in case of a tie. If Republicans net one seat, they take control of that body and perhaps the destiny of the White House legislative agenda.

Georgia

Sen. Raphael Warnock was widely considered one of the most vulnerable Democrats up for reelection this year. Allegations that challenger Herschel Walker paid for a girlfriend’s abortion, however, seemed to put Republicans on the back foot. With Election Day only two weeks away, the race is a toss-up, with Warnock leading Walker by just one percentage point in the RealClearPolitics polling average.

But recent headlines have not swayed the Catholic electorate in Georgia. Among these voters, Walker leads Warnock 64.7% to 32.7%. In the governor’s race there, they also favor incumbent Republican Brian Kemp, 67.1%, over Democrat Stacey Abrams, 31.1%.

Biden is seriously underwater among Georgia Catholics, as more than two-thirds (68%) disapprove of his performance in office while only 30% approve. An overwhelming majority, 59.6%, believe abortion should be decided by the people through their elected representatives or ballot initiatives rather than the courts. Just 6.4% say that the issue is the most important facing the country right now, compared to 67.1% who identify economic issues as their top concern.

Pennsylvania

Pennsylvania may prove the best chance for the Democrats to pick up a Senate seat this year. Republican Dr. Mehmet Oz currently trails Lt. Gov. John Fetterman in the RCP average by 1.3 points. And even though a majority of Catholic voters, 56.5%, don’t approve of Biden’s job performance, they favor the Republican Senate candidate by a smaller margin: 50.7% support Oz while 45.2% are backing Fetterman.

At least in the Keystone state, Catholic voters seem prepared to split the ticket. A majority support the Democrat in the race for governor: Josh Shapiro leads Republican Doug Mastriano 50.8% to 44.5% on the eve of the election.

The economy is the driving factor among Catholic voters in Pennsylvania, although abortion remains a significant factor. A majority, 60.6%, identified jobs, inflation, and rising interest rates as the top concerns facing the nation, while nearly 10% say the abortion issue is the chief challenge.

A majority of Catholics there, 55.7%, still would like to see the abortion issue handled by elected representatives and through ballot initiatives, rather than through the courts.

Arizona

This state has been viewed as a pick-up opportunity for Republicans, and Sen. Mark Kelly remains at risk there, but his challenger Blake Masters has never wrested away the lead. The Democrat has, however, seen his advantage shrink steadily. Kelly leads Masters by just 2.5 points.

Among Arizona Catholics, the race is also tight. They favor Masters by a margin of about five percentage points over Kelly, 51.4% to 46.3%. The numbers are similar in the governor’s race, where 52.5% of that electorate backs broadcaster Kari Lake over Secretary of State Katie Hobbs with 46.9%.

The president is not popular among Arizona Catholics. A clear majority, 58.5%, disapprove of the way he does his job compared to 39.5% who approve, meaning that he may turn off more Catholics than he draws to the polls.

Abortion is not a top concern for these voters. Only 7.6% identify the issue as the most important facing the nation, and 60% want abortion policy determined at the state level through elected representatives and ballot referenda.

Catholic voters in Arizona are much more concerned about the state of the economy, with 58.5% identifying jobs, inflation, and interest rates as the chief national problems. In this border state, immigration and border security rank second, with 14.2% of Catholics identifying it as their top concern.

Nevada

Nevada may prove the most pivotal Senate race this cycle. Former Republican Attorney General Adam Laxalt and Democrat Sen. Catherine Cortez Masto are running neck and neck in a race in which the RCP average has Laxalt’s margin as less than a single percentage point. This is the incumbent’s first reelection bid, and Nevada Catholics haven’t yet warmed up to the Democrat. A clear majority, 56.7%, favor Laxalt over Cortez Masto with 36.4%. The numbers are nearly identical in the governor’s race: 55.6% of Catholic voters favor Republican challenger Joe Lombardo over Democratic Gov. Steve Sisolak with 34.2%.

Just 33% of Catholics in Nevada approve of Biden compared to 63.3% who disapprove. And even in this famously libertarian state, abortion is not a top concern. When asked to identify the most important issue facing the nation, 64.3% said economic issues, 12.4% replied with immigration and the border, and 10.3% pointed to climate change.

Only 5.4% said the top challenge facing the country today was abortion. As far as that issue is concerned, 59.8% said it should be dealt with at the local level through elected representatives.

Florida

For a while, Florida was seen as an opportunity for Democrats to go on the offense. But Sen. Marco Rubio has pulled away in the final stretch against Democratic challenger Rep. Val Demings and now leads in the RCP average by 6.4 points. Here, Catholics clearly favor the incumbent, supporting Rubio, 59.1%, over Demings, 36.9%. That preference for Republicans expands in the race for governor where 61.4% prefer Gov. Ron DeSantis over former Gov. Charlie Crist, 34.5%.

Catholic voters here are much more likely to identify economic concerns as a top priority over social issues. A whopping 67.6% say that economic issues are the top challenge compared to just 7% who identified abortion policy as the country’s chief concern. Overall, 59% want abortion policy to be set at the local level. The Catholic electorate has soured on Biden: Just 35.9% of these voters approve of the president, while 61.4% disapprove.

Ohio

The open Ohio Senate race leans Republican, and here the GOP is on the defensive to preserve the seat vacated by retiring Sen. Rob Portman. J.D. Vance leads Democratic Rep. Tim Ryan by a slim 2.4-point margin.

If the race was up to Catholic voters, the seat would stay red. A majority, 55.5%, favor Vance over Ryan, 41%. Catholic voters are even more enthusiastic about backing a Republican in the governor’s race there. They much prefer Gov. Mike DeWine, 61.3%, over Democratic challenger Nan Whaley, 34.4%.

Just like their brethren in other swing states, Ohio Catholics have soured on the president. A sizable majority, 62.4%, do not believe Biden has done a good job in the White House. If they agree with him that the coming elections are the most important in recent memory, it isn’t for the same reason. Just 7.3% of Catholic voters believe that abortion is a top national concern, compared with 59.8% who identified the economy in that category.

Our view from December 2020 was that sooner or later, nuclear would be included in the ESG basket (see “Is This The Beginning Of The Next ESG Craze“). There have been multiple signals from the US Energy Department to develop a domestic uranium strategy. 

We first pointed this out in March in a note titled “Uranium Stocks Soar After US Signals Aid For Nuclear Power.” Then in June, in a note titled “Uranium Stocks Soar On Report US Seeking Billions To End Reliance On Russian Enriched Uranium.”

On Wednesday, Jennifer Granholm, the US energy secretary, gave even more clues about a domestic uranium strategy that would eventually eliminate the US reliance on Russia and its allies Kazakhstan and Uzbekistan for about 50% of its uranium needs, according to Reuters. 

“The United States wants to be able to source its own fuel from ourselves and that’s why we are developing a uranium strategy,” Granholm told reporters at the International Atomic Energy Agency conference in Washington. 

“We’ll be working on … enhancing that and making sure that we can fuel our own reactors as well as the partners to those who also have those ambitions,” she added.

In August, President Biden signed the Inflation Reduction Act, which helps pave the way for nuclear energy to reduce US emissions before the decade’s end. 

Momentum is certainly building for expanding zero-emission nuclear power production and sourcing uranium domestically, outlined in the IRA via increased investments and tax incentives. 

IRA contained $700 million to produce a high assay low enriched uranium (HALEU) supply for advanced nuclear power plants. Then in September, the White House requested Congress to allocate $1.5 billion in a temporary government funding bill to boost domestic HALEU supply. 

Granholm said the White House will “seek an additional large amount by the year-end for a more fulsome strategy.”

The move by the Energy Department is to remove Russia’s critical leverage to throttle US nuclear power. There’s a big push to increase US mining and processing of uranium to ensure US energy security. 

The broader Uranium space has been on an upswing for the last two years. 

Like the US, other countries around the world, including Germany and Japan, are developing plans or implementing strategies to revamp their nuclear power plants after years of neglect. It seems like climate alarmist Greta Thunberg’s war against nuclear is finally being ignored.  

Authored by John Haughey via The Epoch Times (emphasis ours),

Nationwide early voting and vote-by-mail turnout trends for the 2022 midterm election reflect a pattern similar to that of the pandemic-skewered 2020 election.

As a result, it may take several days after polls close on Nov. 8 for results to be confirmed in several key battleground states, including Pennsylvania, Wisconsin, and Michigan.

In-person early voting periods and vote-by-mail have grown increasingly popular over the last two decades. They became mainstream during the 2020 election when more than 101 million Americans cast early in-person votes or vote-by-mail ballots.

The 2022 early vote and vote-by-mail turnout is expected to easily eclipse the record for midterm elections set in 2018, when more than 5 million voters cast early in-person ballots and 30.4 million voted by mail. The totals this year may come close to matching the number of ballots cast before Election Day in 2020.

According to the University of Florida’s United States Elections Project, as of Oct. 23, more than 7.46 million Americans have already cast their midterm ballots.

Turnout

Of those 7.46 million ballots, nearly 1.65 million were cast in-person in the 27 states where early voting is under way. Early voting periods range from four to 45 days before Election Day.

By week’s end, another 18 states will open polls for in-person early voting, beginning with seven states on Oct. 24—including Florida, Texas, Colorado—and ending with New York and New Jersey on Oct. 29.

More than 5.8 million mail ballots of 41.52 million requested nationwide have been returned to local election offices as of Oct. 23, according to U.S. Elections Project. All 50 states offer voting by mail, or absentee ballot options. Nine states, including California, Colorado, Nevada, and New Jersey, send mail ballots to all registered voters.

Not all states break down early votes and mailed votes by political affiliation when posting turnout figures. In Kansas, North Carolina, and New Mexico,  138,406 Democrats (40.5 percent) and 112,047 (32.8 percent) Republicans voted early in-person.

Georgia, which opened its early voting period on Oct. 17, reported more than 740,600 early ballots cast as of Oct. 23. Early voting ends Nov. 5 in the state.

The Georgia tally includes a record midterm first-day early voting turnout of 131,000, twice as high as the 71,000 first-day early voters in 2018, and nearly matching the 136,739 who showed up on the first day early-voting polls opened in 2020.

“We’re extremely pleased that so many Georgians are able to cast their votes, in record numbers and without any reports of substantial delays,” Georgia Secretary of State Brad Raffensperger said in a statement. “This is a testament to the hard work of Georgia’s election workers, the professionals who keep our elections convenient and secure.”

Georgia, which does not provide party affiliations with early voting and vote-by-mail turnout tallies, reported Oct,. 23 that more than 31 percent of requested mail-in ballots had been returned.

Vote-by-Mail Turnout

Of 17 states that provide party affiliations for more than 3.74 million vote-by-mail tallies to the U.S. Elections Project, 51.3 percent came from registered Democrats, and 30 percent were mailed in by registered Republicans.

Florida, where early in-person voting begins Oct. 24 and ends Nov. 5, has registered the largest vote-by-mail turnout thus far with more than 1.16 million of 4.23 million requested mail ballots already filed with local elections offices as of Oct. 23. Registered Democrats cast 42.2 percent of the mail-ballot votes, and Republicans cast 38.2 percent. Nearly 20 percent of the mail ballots were cast by non-affiliated voters.

Florida Gov. Ron DeSantis, a Republican, in early October signed an executive order that allows four Southwest Florida counties that remain devastated in Hurricane Ian’s wake more flexibility in expanding in-person voting and voting by mail. Among those emergency measures is allowing three more days of early in-person voting.

During an Oct. 15 press conference, the Republican governor encouraged residents in Southwest Florida to vote by mail.

“What I would say is whatever you like is fine. We’ve got good returns on absentee, and I have confidence in early voting, in person (voting) and, of course, Election Day” voting, DeSantis said.

The only state that comes close to the 1.16 million who’ve returned vote-by-mail ballots in Florida is California, where all 21.87 million registered voters get ballots in the mail. As of Oct. 23, nearly 1.08 million Californians had returned mail ballots, according to the U.S. Elections Project.

Of those returned California VBM ballots, nearly half were mailed in by Democrats while 28 percent came from registered Republican voters.

Read more here…

The US rental market is beginning to cool down, but not in all areas. Boston surpassed San Francisco as the second most expensive rental market, with New York in the number one spot, according to Bloomberg. 

Rental listing company Zumper published new data that showed median one-bedroom rent in Boston increased by 5.9% in October from the prior month to $3,060. San Francisco dropped to the third spot with a 2.6% decline to $3,020. New York City is still the most expensive city for median one-bedroom rent, even though prices fell 2.3% to $3,860. 

“These eye-popping prices shine a light on Boston’s ongoing housing crisis,” Zumper said in the report, adding, “New inventory coming online is skewed towards the luxury market, pushing median asking prices even higher.”

Even though Boston rents are increasing, residential real estate brokerage Redfin’s latest report showed median rents across the country recorded their first notable decline in almost two years last month. 

“The rental market is coming back down to earth because high rents and economic uncertainty have put an end to the pandemic moving frenzy of 2020 and 2021, when remote work fueled an enormous surge in housing demand that would’ve otherwise been spread out over the coming years,” said Redfin Deputy Chief Economist Taylor Marr.

Marr continued: “Rising supply is also causing rent growth to slow. Scores of apartments that have been under construction are now coming on the market, and more homeowners are choosing to become landlords instead of selling in order to hold on to their record-low mortgage rates.”

And he expects “rent growth to slow further into 2023 as Americans continue to hunker down and more new rentals hit the market.”

So the takeaway is that some rental markets are cooling while others continue to boil. Avoid the ones that continue to see rising prices, and if you can, wait until next year to lock in a rental contract when prices are expected to be much lower. It doesn’t make sense to sign a two-year contract at the peak. 

Authored by Satyajit Das via NakedCapitalism.com,

Ordinary lives are lived out amidst global economic, social and political forces that they have no control over. Today, multiple far-reaching pressures are reshaping that setting.

This three-part piece examines the re-arrangement. This part examines current great geopolitical divisions. The second and third part, will look at key vulnerabilities and possible trajectories respectively.

There are decades where nothing happens; and there are weeks where decades happen“. The pithy phrase (the attribution to Lenin is contested) encapsulates periods when established orders are challenged and sometimes overturned, often violently. The question is whether this is one of those times.

Today, there is a sharp division between the ‘West’ – the US and its Anglosphere acolytes (Canada, Australia, New Zealand) supported unenthusiastically by Europe and Japan-  and the rest of the world. While a simplification, the categorisation is helpful in understanding key contemporary events and potential changes to the current global order.

Points of Difference

Positions on the Ukraine conflict highlight the schism. Support for Ukraine is primarily Western, representing around half of global GDP but less than 20 percent of world population.

Couched in platitudes about shared values and unity, Europe and Japan’s tepid support of the Anglosphere reflects competing priorities. Like the Anglosphere, they benefit from American military protection which lowers defence spending  allowing resources to be used more productively. Despite a 2006 commitment to defence spending of 2 percent of GDP, NATO members average only 1.6 percent, with Germany, Italy, the Netherlands and Spain spending 1.3-1.5 percent. At the same time, geographic proximity to Russia and China as well as greater economic connections complicate allegiances.

Relationships between Germany, Japan and the West bear deep scars. The former has fought two world wars against its Western allies. The US and Britain reduced much of these countries to rubble. America deployed nuclear weapons against Japan with the ancillary objective of intimidating potential rivals. The rehabilitation of Germany and Japan served US post-World War 2 interests, creating bulwarks against the threat of communism. It reversed the original plan of reducing both to agrarian pasts unable to compete with America globally.

While urging a rapid end to hostilities, the majority of nations have been reluctant to condemn Russia’s actions, often professing neutrality. With an eye to its own regional territorial claims, China acknowledges Russian grievances. China and India along with most nations are sensitive about foreign intervention in their internal affairs. The West has highlighted recent public expressions of disquiet by Chinese and Indian leaders. However, there was no direct reference to or support of Ukraine. The comments mainly focused on the conflict’s impact on food, fuel and fertiliser supplies. Most nations prefer the benefits of maintaining relationships with all.

The conflict has unified the West against Russia and given NATO renewed focus. But Ukraine has also created a common cause for those with long standing grievances against the West. Countries such as Iran, a US branded member of the “axis of evil”, have sought to exploit the widening gulf between global factions. They have become suppliers of military equipment to Russia. This opportunistic co-operation exacerbates the global split.

The non-Western position reflects history. Associations are complicated by racially charged, exploitative colonial pasts, and experience of Western hypocrisy. There are legitimate questions about the support for Ukraine, especially the provision of generous financial and humanitarian aid, compared to that offered to forgotten victims of conflicts and disasters in the Middle East, Asia and Africa. The favoured treatment of white, Christian refugees has not gone unnoticed.

A Sea of Troubles

The avoidable Ukraine conflict, with its unnecessary destruction and human suffering, is best seen as a catalyst.

Unwillingness to recognise core interests of parties, increasingly entrenched positions, and lack of interest in negotiations means a spiral into a wider confrontation is not impossible.  With escalation difficult to calibrate, the evolution from a proxy into a real war between the US and Russia, which might draw in China, all nuclear-armed, remains possible.

The West’s expressed desire for engineering regime change within Russia is dangerous. Any new regime may not be more amenable to Western pressure. History, most recently the Arab Spring and Colour Revolutions, shows that a dangerous political void is more likely than liberalisation.

Whatever the length, dimensions and outcome, Ukraine has exposed already present major differences in the world. In particular, the West’s response -trade restrictions, sanctions and asset seizures- will outlive the military actions and prove more damaging.

The weaponization of trade and finance, modern gunboat diplomacy, has a long lineage. Sanctions and blockades were used in World War 1 and influenced Japan’s entry into World War 2. Western embargoes against communist bloc countries were common during the Cold War. Since 1979, the US has sought to isolate the Islamic Republic of Iran established by a popular revolution which overthrew the Shah, who had been installed by an American coup d’état. Measures against Russia commenced in 2014. The US has imposed progressively more stringent restrictions on China covering exports and sales of critical technologies since 2018.

In the short term, the measures have affected Covid19 disrupted supply chains, aggravating shortages and price inflation, especially in food, energy and raw materials. In the longer-term, the interaction with other stresses may prove significant.

The effects of climate change driven extreme weather – droughts, floods, storms, wildfires-  on food production and transportation links is accelerating. A triple dip La Niña alone threatens large scale disturbance with a potential global cost of $1 trillion (around 1 percent of global GDP). Resource scarcity – water, food, energy, raw materials- is simultaneously rising due to natural limits.

The decisions by major producers to increasingly stockpile or limit foreign sales to ensure domestic supply and control local costs are adding to disruptions to food production,. As of mid-2022, 34 countries had imposed restrictive export measures on food and fertilizers contributing to surging prices of key staples.

Energy shortages are not purely the result of sanctions on Russian oil and gas exports. Underinvestment, due to ESG compliant investors limiting funding for traditional energy sources, has affected supply. The necessary but over-hyped transition to renewables is a contributor. Proponents have overestimated its speed and underestimated the challenges of substituting existing generation capacity, reconfiguring electricity systems and converting industry and heavy transportation to non-fossil fuels. Shortages of critical metals and minerals, many non-recyclable, will retard conversion to new energy sources.

Given the world’s high energy needs, availability and cost will remain a major issue. Progress on controlling climate change, already inadequate, will reverse, perhaps fatally. Concern about emissions has been replaced by focus on energy security. A reversion to fossil fuels to lower prices and the cost of living is already apparent.

Slowing globalisation, which previously drove global growth, is another factor. Despite its benefits, greater economic integration has drawbacks. It reduces national sovereignty. Sharing of benefits and costs are frequently unequal. The 2011 Thai floods, the Tohoku earthquake, tsunami and resultant Fukashima nuclear plant disaster, and multiple episodes of extreme weather have illustrated the fragility of just-in-time production and tightly coupled global supply chains. The Ukraine conflict is the latest chapter in this history.

The 2008 Global Financial Crisis and Great Recession played its part. It exposed a key globalisation funding mechanic – large financial imbalances (China-US and intra-Europe). Germany and China needed the US, the world’s consumer of last resort, the Southern Eurozone and the Anglosphere to absorb their surplus production. The resulting large current account surpluses financed deficits in the consuming countries. 2008 underscored the risk of this strategy for savers – primarily Chinese, East Asian, German, Japanese and oil exporters. China’s Premier Wen Jiabao spoke for all when expressing concern about the safety and security of their capital.

The Western response to the financial crisis added to the disquiet and fed global division. The beggar-thy-neighbour monetary, fiscal and currency policies of advanced economies were destabilising for many countries.

China, Russia and India, to different degrees, saw the events of 2008 as signalling Western weakness and validation of their state controlled political and economic systems. It encouraged a distrust of the West and strengthened the belief that evolution into more open economies and societies was risky. Resistance to greater globalisation was the result.

While these pressures are likely to persist, complete deglobalisation and a retreat to autarky is unlikely in the short run. It is simply too difficult to replace intricate connections created over several decades overnight. More importantly, the effect on availability and cost of products would be great, reducing living standards. Instead, a dollop of decoupling is the most likely course. Increased re-, near- or friend-shoring of goods and services production is possible. Digital or e-globalisation may continue. But the retreat into distinct groupings or trading blocs – a us-and-them world- will be difficult to arrest.

Changes in the electoral dynamic are reinforcing the shift. Financial crises, economic stagnation, inflation, shortages, war and pestilence (the Covid19 pandemic) generate anxiety and fear. Politicians in all countries have exploited the instability.

Without tractable solutions, mainstream parties have largely lost their dominance. The appeal of strong, populist leaders has increased. Increasingly, the strategy is to put a reasonable face and emollient gloss over often unpalatable views in order to get elected.

Like traditional parties, the populists, both of the left and right, do not have answers to the major problems of the day. Instead they parade nationalist credentials and strong leadership. They target globalisation, elites (Davos Man), foreigners, immigration and overseas interference in domestic matters.

For democracies, the crisis is deepening. For existing authoritarian nations, it has strengthened latent instincts for centralised control, one party systems and repression.

The combination of these stresses have set up feedback loops which are now reshaping existing economic and power relationships.

Winners and Losers

All nations are affected by these changes, but not equally.

Functioning as an isolated entity or bloc requires a sizeable population, large internal market, self-sufficiency in key resources (food; water; energy; raw materials), necessary technologies and skills, and ability to ensure your security. The alternative is assured access to these elements from within your trading bloc or allies.

The sanctions imposed following the Ukraine conflict illustrate the dynamics. The limited effect, to date, of restrictions reflects the fact that Russia possesses many of the identified characteristics to operate as a near autarky. The absence of universal compliance also reduces the effectiveness of measures like sanctions.

Non-West countries, such as China and India, have an incentive to defy sanctions. They benefit financially from the ability to purchase oil and gas at significant discounts, sometime re-selling it raw or as refined products. Attempts at more complete enforcement, such as oil and gas price caps, may not be successful. It would require exclusion of all violators from global payments and insurance or imposition of secondary sanctions. But preventing access to insurance for shippers carrying Russian oil will disadvantage poorer countries but not large nations, like China and India, able to self-insure.

Jenga games of balancing cutting off Russian energy sales and ensuring adequate supplies to control prices was always going to be beyond the capabilities of economically-challenged bureaucrats and politicians.

China illustrates a different approach. It lacks self-sufficiency in food and raw materials, such as iron ore and energy.  Strategic overseas investments, the Brick and Roads Initiative and leasing farmland target these deficiencies. Interestingly, Russia can supply a significant part of the Middle Kingdom’s food, energy and mineral needs although this would require reconfiguration of infrastructure. This process is already observable in global energy markets with Russian output being redirected East while Gulf and Australian supplies going to the West.

Having been relatively isolated until the 1990s, countries like Russia, China and India are not fully integrated into the global market system. Legacy structures are capable of reverting to a more closed economy.

In recent years, these countries have increasingly redirected policies and investment towards their home markets, abandoning reflexive globalism. The objective is the greatest possible independence and control over strategic sectors and essential products. For example, China has developed and sought to force businesses and population to adopt its Beidou satellite navigation system instead of the US GPS satellite system and Europe’s Galileo. In parallel, it seeks to export technology to build networks of client economies and governments frequently incorporating them into aid packages, soft loans and commercial transactions.

The West is more reliant on global commerce, although individual positions differ.

The US is substantially self-sufficient in food and energy. However, it has outsourced large components of its manufacturing and would have to re-skill its workforce to re-shore activities. It also requires export markets for its products – around 40 percent of S&P 500 companies’ revenue originates outside the US.

Canada, the UK, Australia and New Zealand enjoy varying degrees of food and resource self-sufficiency. Canada, Australia and New Zealand are exporters of food or raw materials. The UK is a significant exporter of services. All depend on imports of manufactured goods, a significant proportion of which is from China.

Europe and Japan are oriented to manufacturing exports, with significant reliance like the Anglosphere on Chinese demand. Both are reliant on imported raw materials, especially energy. Japan has a growing reliance on imported foodstuffs, with its food self-sufficiency rate having fallen to around 38 percent of calories consumed from 73 percent in 1965 because of rising demand for foodstuffs it cannot supply, like meat.

The West’s major disadvantage is its high cost structures, which have been offset in recent decades by imported cheap labour and raw materials. Europe, especially Germany, has tied its economic fortunes to the availability of low-cost Russian gas. If forward prices prove correct, then Europe’s gas and electricity cost would reach nearly €2 trillion ($2 trillion or around 15 percent of GDP). The high operating leverage in the case of Germany equates to around $2 trillion of value added production from $20 billion of imported Russian gas.

Attitudinal differences are important. Asiatic patience and memory breed resilience. A fatalistic acceptance of life’s constraints and caution about progress makes the non-West more resistant to setbacks and reversals.

In his 1933 work In Praise of Shadows, Japanese writer Junichiro Tanazaki captured this divergence:  “We… tend to seek our satisfactions in whatever surroundings we happen to find ourselves, to content ourselves with things as they are; and so darkness causes us no discontent, we resign ourselves to it as inevitable. If light is scarce then light is scarce; we will immerse ourselves in the darkness and there discover its own particular beauty. But the progressive Westerner is determined always to better his lot. From candle to oil lamp, oil lamp to gaslight, gaslight to electric light – his quest for a brighter light never ceases, he spares no pains to eradicate even the minutest shadow.”

Changes in the existing global economic structure threaten Western living standards. The disruption of global trade and mobility during the Covid19 Pandemic and resulting shortages provided a window into these susceptibilities.

Mutual Misunderstandings

The fracture reflects fundamental differences in belief and values. Western thinkers, as varied as Montesquieu, Adam Smith, Voltaire, Spinoza and John Stuart Mill, were wedded to the idea that trading between nations could overcome tribalism, national identity and ideology reducing the risk of conflict. There was also an implicit confidence about the dominance of the West.

Late twentieth century globalisation, with its espousal of free trade and capital movement, was indivisible from this political end and propagation of certain values. Integrating previous antagonists like China, Russia, India and others into global trading arrangements would bring about political change helping strengthen the West’s position. The end of history would produce the suzerainty of a carefully crafted internationalist economic system which favoured the West.  Under chancellors from Willy Brandt to Angela Merkel, Germany exemplified this policy of “change through trade” which created the now troublesome energy dependence on Russia.

But Chinese, Russian and Indian engagement with this Western agenda was always superficial. China was effectively bankrupt when Deng Xiaoping assumed power in the late 1970s. India and Russia faced penury in the early 1990s. Embrace of globalisation was driven by necessity not conversion to Western values or economic tenets.

Liberalisation, allowing greater private ownership and a modicum of free enterprise, was designed to boost living standards to placate a restive population. There was never any great desire for fully opening up and wholesale reform of the economic or political system. At best, it was marginal changes to the basic planned economy model. The central idea of an insulated system capable of existing in isolation from the West was never abandoned.

President Xi has repeatedly emphasised the Chinese Communist Party’s traditional leadership in government, military, economic, civilian and academic matters. He has preached self-reliance and rejected competitive democracy, the rule of law and the separation of powers as foreign ideas. Far from being reformers, President Xi, President Putin and Prime Minister Modi see themselves as restorers of their country’s proper place in the world.

As their economies grew stronger, the necessity for real change became even less paramount. The political threat, especially for China and Russia, was exemplified by Western orchestration of and support for regime change, such as the Arab spring and colour revolutions. It encouraged disengagement and reversion to centralised control.

In 1910, in The Great Illusion, Normal Angell famously argued that war was impossible because of economic interconnections. World War 1 undid those illusions. Today, the Ukraine conflict and related stressors are, in a similar way, challenging established geo-political and economic arrangements.

*  *  *

Satyajit Das is a former banker and author of numerous works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives  (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011), A Banquet of Consequences RELOADED (2021) and Fortune’s Fool: Australia’s Choices (2022). 

By Peter Tchir of Academy Securities

With today’s big drop in the GDP Price Index (from 9% to 4.1% vs expectations of 5.3%), it seemed like a good day to do an inflation dumpster dive.

The Fed and so many others are apparently convinced that inflation remains a problem and the Fed is going to have to tighten at least into February. Some argue for even longer. Is that inflation risk real? Or is it as wrong as when so many people were screaming “transitory!” at the top of their lungs last year?

This report will work on two main premises:

• Let’s look for the most up to date and potentially leading indicators of where inflation is headed, rather than looking backward.
• The Fed, all else being equal, would still like to engineer a soft landing.
• Starting conditions are crucially important to the path that inflation will follow.

Maybe this analysis will resurrect the policies of Volcker, but I suspect not.

Ignoring Foreign Inflation Data

I am not going to spend more than about 30 seconds thinking about inflation in Europe, the UK, or Japan.

The Yen has depreciated over 25% versus the dollar this year and the British Pound and Euro have declined more than 10%. Given how much these countries need to import, especially on the commodity front, it would be shocking if they weren’t experiencing inflation.

Much of the inflation in other parts of the world is linked to their currency weakness. Either they can in theory hike more (to catch up to us) or we could ease the pressure.

As mentioned in this weekend’s VUCA piece, FX is becoming a geopolitical issue. It is an issue that some of our allies are likely asking for relief from (in return for supporting some of our policies across the globe). So far Treasury Secretary Yellen has refused to acknowledge any concerns from other countries, but that could change.

Yes, foreign inflation is bad, but it tells us very little about U.S. inflation.

Commodity Inflation

I don’t think that commodity inflation is the key here, but it is so easy to address that we might as well get this out of the way.

I chose oil and gasoline because they attract so many headlines. I chose copper because who doesn’t like Dr. Copper as both an inflation metric and a gauge of economic activity.

I did use the 3rd contract rather than the front contract because I like the relative stability and it is less crazy in and around settlement dates. It tells the same story, just more nuanced. In any case, commodity prices are headed in the right direction (at least these three big commodities).

FX moves have certainly helped our inflation picture on the commodity front.

The fact that industrial commodities seem to be leading the way lower could be a sign that the economy is grinding to a halt behind the scenes faster than we realize (or just a function of China’s Zero-COVID policy). On the industrial side, commodities are “only” up 9.4% since the start of 2021 and are down 14% YTD. Not great, but the trend seems clear and probably reflects more than just dollar strength.

Housing

The most recent CPI data had the highest monthly increase in shelter costs since 1990! We discussed it in OER Seems Crazy and again in The Wall of Worry Knows No Bounds. I cannot harp on this subject enough – not only was shelter inflation high, but it was RECORD HIGH! We all know why it set a record (bad calculations, lags, estimates, etc.) but that doesn’t mean we should use an obviously useless number to determine policy! I’m told that the definition of insanity is doing the same thing and expecting different results (like ignoring housing inflation in the summer of 2021), but a simpler definition of insanity is using data that you know is patently false to drive models and determine policy.

Mortgage rates have skyrocketed! They have risen over 400 bps on the 30-year fixed and even a 5/1 arm offers little respite (having risen 274 bps). The U.S. is the one country that really promotes longer-dated mortgages (much to the chagrin of UK borrowers right now), so while it would seem risky to only lock in 5 years, the cost difference is very large.

I would be remiss not to point out that mortgage rates started rising the minute QT was discussed. QE likely impacted the mortgage market more than any other market (the Fed was a disproportionately large and yield indiscriminate buyer). These much higher mortgage rates are the price we now have to pay for all those purchases that drove us to non-market levels.

For every $100,000 of borrowing, interest on a 30-year has gone from about $3,250 annually to $7,300 for a new loan. Existing owners with longer-dated mortgages are protected, but that doesn’t help a new homebuyer. I cannot think of a faster way to stop upward mobility than having mortgage rates skyrocket (and I suspect that lending standards have also tightened, which is a double whammy).

So, how do higher mortgage rates translate into the housing and rental markets?

• For most Americans, the “balance sheet” item that has done the best this year is their mortgage. The change in mortgage rates is literally impacting how people are thinking about their house and where to live. How do you move to a similarly priced house in another part of the country if you have to pay 400 bps more on any mortgage? Will this cause people to rent their homes out?

Since 1998, as far back as this time series goes, we have never seen anything like this in terms of not just the total size of the move, but how fast that move occurred. I’m assuming that there is an entire cottage industry of lawyers and accountants figuring out ways to “sell your house” while retaining the mortgage, but in any case, this move is unprecedented and we have to think about how buyers, sellers, renters, and landlords will adapt to this.

We see home prices starting to tick down, but how useful is this data? If sellers don’t want to sell, is this reflecting much of anything? My understanding is that the Case-Shiller data has embedded lag effects, so it may not be reflective if prices are moving rapidly.

We see home sales across the board dropping from the start of the year. In August (there is a lag), new home sales actually had an uptick. At first, that seems strange, but 1) builders are in the business of selling homes and clearing inventory, so they might have more price flexibility and 2) there is no existing mortgage, so that element is weird. Probably a touch early on this trade considering the increase in builder announced cancellations (remember our “wait list” economy thesis?), but then again, maybe this level of bad news is already priced in?

It almost seems weird to think about, but with the cost of construction presumably dropping (the aforementioned commodity prices, for example) and mortgages making existing homeowners reluctant to sell, it might be an interesting time to revisit homebuilders for a long-term perspective (XHB, the ETF, is down 34% YTD and 27% for the year).

Which series seems believable? Which one looks like something we lived through, and which one seems just plain wrong? It is highly unlikely that monthly rents actually jumped by the most in over 30 years in September (it is more likely that they declined in September relative to August).

Autos and Other Big-Ticket Items

The cost to borrow money has gone up across the board. Autos are particularly interesting to me and I will harp on the importance of “starting” conditions. We have had two public companies comment on the used car market: CarMax (KMX) a few weeks ago and AutoNation (AN) today. One message that is clear is that the shortage of supply across all used auto segments is a thing of the past (certain segments are holding their own, but it is not a universal free for all anymore).

That is supported by the Manheim Used Auto Index, which is down 10% YOY based on mid-October estimates and while it is up 21% from late 2020, it is trending down rapidly.

Starting conditions matter:

• Work from home meant more driving for many people. Certainly, in major city centers, public transportation use fell as people drove themselves. COVID and WFH created a spur in demand for cars!
• With fewer things to spend money on (COVID shortages), stimulus checks, day trading, crypto, stock options, etc. and with cheap financing readily available, more people could afford “more” car.
• Supply chain issues were very real in the new auto space, forcing people to pay up for used cars when the alternative was an uncertain delivery date for a new car.

None of those conditions exist today!

I will grant that the new auto space isn’t back to where it was, but lots are no longer empty. Advertising (at least in my streams) has picked up for auto sales. I’ve even seen some messages offering discounts!

Autos, were also one of the biggest examples of the “wait list” economy that I could think of – see Baby Needs New Shoes.

Whether it was existing EV companies, new EV companies, bringing back old brands, etc., there was a surge in wait list activity. People were signing up for wait lists and the more expensive the car, the better (maybe a bit of hyperbole there, but not much).

My contention is that since it cost nothing to be on most wait lists, and in some cases you could sell your spot in line, they massively overstated demand. Certainly, with crypto prices lower, stock options (for many) being far less valuable, and the general wealth effect issues, we could see people dropping off wait lists or not taking delivery when cars are available. If you look closely at some deliveries versus production reports, I think you can see this occurring.

Auto companies are ramping up production for new cars as the supply chains are healing. However, as demand is waning (and likely satisfied by used cars) and the ability to pay is dropping fast, they may face an uphill battle.

In any case, the auto market is not going to be a source of inflation for months to come.

More broadly, as housing prices decline (at least if you had to sell) and rates rise, it seems logical that many other capital expenditures would suffer (today’s Capital Goods report was negative for September and August was revised down).

According to ISM data, inventories continue to build and new orders are actually declining. It takes time to dial back production, but that seems to be the likely outcome as not only have we caught up (post the supply shortages), but we are also creating a large inventory overhang.

There seems to be a significant amount of above trend inventory. Yes, this includes both large and small products, but it seems logical that when we have below trend inventory we can see inflation, and that when we have above trend inventory, there is some deflationary pressures (hence all the sales).

Let’s not forget that the cost of holding inventory is no longer trivial as SOFR has risen from 0.04% to 3.02% and credit spreads have widened as well – further incentivizing companies to cut costs to reduce inventories if buyers don’t appear.

Goods inflation seems to be behind us as well.

Jobs

Jobs and wages are the weakest part of my argument – maybe.

I have to admit, I was shocked when I pulled up this chart. I forgot about the wage spikes when COVID first hit. I believe that it had more to do with lower income people getting let go in droves as opposed to actual wage increases. However, the five years before COVID doesn’t look very different from the recent data, at least not to the naked eye. I thought I’d have a lot more explaining to do on wages.

How I see the job market playing out:

It was so difficult to hire workers that companies won’t fire workers (at least not right away). Companies will try and cut the outside services they use first.

Could this be what we are seeing in some of the big tech earnings? Will we see it in accounting, consulting, and legal firms? Anecdotal evidence is yes, but not seeing a consistent story here, yet.

Cuts seem to be focused on underperformers who are viewed as expendable. Tolerable, but potentially it is only the first wave. The next wave, if it occurs, will start cutting into the actual meat of the organizations.

Data between the Establishment and Household surveys has been inconsistent, and ADP hasn’t been much of a guide as they were switching their methodologies. We could see some serious revisions to old data (that was originally very strong) in the coming months .

As belts tighten, raises will be focused on critical spots where companies can generate revenues with those extra costs. Far less overall wage pressure. • So far, nothing seems to move the labor force participation rate, but as savings decline, the wealth effect erodes, and moratoriums expire, will we see some increase in the supply of labor?

Labor, while not a strong part of the inflation story, isn’t as weak as I’ve been led to believe.

Starting Conditions Matter

I won’t belabor the point, as you can read Dredging Up Pendulums to get the details (I do think that it is a very worthwhile read). What this highlights is that a simple pendulum is easily modelled and starting conditions (that are similar) produce very similar results. In a more complex system, like a double pendulum, you can no longer predict the results with the naked eye.

Both the single pendulum system and double pendulum system can be modelled exactly, but:

• Much more precise measurements are required for the double system (think about how flawed many of our measurements are in the economics world).
• More complex algorithms and more computing power is needed for the double pendulum. It is possible to do but doesn’t lend itself to one-sentence soundbites.

There are so many conditions that are “unique” to the current environment that I think it is extremely dangerous to try and “solve” for inflation with rather basic tools without accounting for the differences in how inflation was created this time around.

Bottom Line

Rates should perform well here as the inflation reality sinks in.

The longer the Fed sticks to hiking based on old data and not allowing the effects of earlier hikes to kick in, the more risk we get of a hard landing.

I’m in the camp that the recession will be sooner and deeper than expected, but we can still get one more “everything rally” before that gets priced in. I’m increasingly worried that earnings calls are pushing the average economic outlook towards my rather bleak call.

With the bulk of the FAAMG stocks – which is now GAMMA following Facebook’s rebranding to Meta (at least until the company  quietly changes its name back now that the whole Metaverse farce has blown up in its Metaface) – having reported Q3 results (which have uniformly been a disaster, sending megatech stocks tumbling), investors were keenly looking to Amazon and Apple earnings after the close today, to round out the picture for the (former?) market generals and set the tone for the rest of 2022, or at least until after the midterms when the BLS reports that real payrolls were actually -1,000,000, and also to conclude whether the ongoing Nasdaq implosion has been justified.

Focusing on Amazon, investors are expecting Amazon to outperform digital advertising peers Facebook and Google through an ad slump. The theory, as Bloomberg notes, is Amazon is closer to the customer at the time they are prepared to buy something, so that advertising is more valuable when consumers are penny-pinching when compared to broader marketing campaigns aimed at awareness on social-media sites like Instagram or Google’s search engine where users aren’t necessarily shopping.

Investors also expect a slight slowdown in Amazon Web Services sales growth (thank you Microsoft and Google), with third-quarter revenues expected to come in at $21 billion, up 30% from a year earlier. Cloud-industry peer Microsoft reported earlier this week that rising energy prices cut into cloud computing profits, so there will likely be some focus on Amazon’s cloud profit margins as well to see if they are under similar pressure. Investors expect operating income of $6.1 billion in the third quarter from Amazon’s cloud business.

Poonam Goyal, senior retail industry analyst for Bloomberg Intelligence, and Anurag Rana, BI’s senior software analyst, point to Microsoft’s projection of a slowdown as a harbinger for AWS. “Amazon Web Services’ sales growth in constant currency could dip in 4Q to about 26%-27% from consensus of 29%,” they wrote in a recent note. “The slump is probably going to stretch through 2023, with recovery possible in 2024.”

Amazon’s employee count will also be an interesting metric to watch. The company has been busy cutting some experimental projects, which would reduce its numbers, but it also announced plans to hire 150,000 people for the holidays, which is the same as last year. As of June 30, Amazon had 1.52 million employees globally. If that figure goes down, it will be the first time Amazon has reduced its number of employees for two consecutive quarters since 2001 and gives a clearer picture of how deep the cuts have been.

But while Q3 earnings will matter, all eyes will likely be on the forecast for the busy holiday quarter. Investors expect earnings of 39 cents per share on sales of $156 billion. Investors are counting on Amazon to boost profits and sales while trimming costs through hiring freezes and cutting experimental projects.

That said, like the rest of the tech sector, rising labor and energy costs coupled with slower spending growth have put a strain on Amazon’s business model. Amazon CEO Andy Jassy has taken several steps this year to boost revenues, including increasing the price of Prime membership and tacking new fees on merchants selling goods on the web store. Investors want to see if Amazon can maintain that strong connection with Prime subscribers and win their spending during the holidays, or if more expensive Prime membership compels them to shop elsewhere.

Heading into earning, Amazon shares suffered steep declines, falling as much as 5.1%. The e-commerce giant’s shares are down 8.5% over the past two days, the worst two-day slump since June.

So with all that in mind moments ago AMZN just reported Q3 results which were an absolute disaster and nailed the coffin of the FAAMGs shut, because not only did Amzn miss sales, and report disappointing AQS metrics but its forecast was a disaster.

• EPS 28c, beating estimates 22c
• With all that in mind, moments ago AMZN just reported Q3 results and they were an absolute disaster.
• Net sales $127.10 billion, +15% y/y, missing estimate $127.64 billion
  • Physical Stores net sales $4.69 billion, +10% y/y, beating estimate $4.68 billion
  • Online stores net sales $53.49 billion, +7.1% y/y, missing estimates $54 billion
  • Third-Party Seller Services net sales $28.67 billion, +18% y/y, beating estimates $28.49 billion
  • Subscription Services net sales $8.90 billion, +9.3% y/y, missing estimate $9.18 billion
  • AWS net sales $20.5 billion, +27% y/y, missing estimate $21.0 billion
  • North America net sales $78.84 billion, +20% y/y, beating estimate $76.95 billion
  • International net sales $27.72 billion, -4.9% y/y, missing estimate $29.28 billion
• Third-party seller services net sales excluding F/X +23% vs. +18% y/y, beating estimate +18.7%
• Subscription services net sales excluding F/X +14% vs. +23% y/y, estimate +20% (2 estimates)
• Amazon Web Services net sales excluding F/X +27% vs. +39% y/y, estimate +31.9%
• Operating income $2.53 billion, -48% y/y, missing estimate $3.11 billion
• Operating margin 2% vs. 4.4% y/y, missing estimate 2.48%
• Intl oper margin -8.9% vs. -3.1% y/y, missing estimate -7.71%
• Fulfillment expense $20.58 billion, +11% y/y, below the estimate $21.58 billion

But while revenue was disappointing and AWS was subpar at best, the reason why AMZN stock is imploding after hours is because the company’s guidance was absolutely catastrophic

• Sees net sales $140.0 billion to $148.0 billion, the midline coming far below the median estimate of $155.52 billion
• Sees operating income to be between $0 and $4 billion, also missing the median estimate of $4.66BN

In short: ugly earnings, catastrophic guidance!

Digging into the numbers we find that operating margins tumbled to 2.0%, down from 4.0% and missing the estimate of 2.5%. In fact as shown below, the only reason this number wasn’t positive is thanks to AWS.

And while the market was not happy with the overall profit margin, it was even less enthused with the profit margin breakdown where despite a modest improvement in AWS, the international operating margin collapsed to the lowest in the past decade, with US online sales still unable to turn green. In fact, if it wasn’t for AWS, AMZN would have negative operating income.

The chart above shows that Amazon’s online retail business in North America and international both lost money. This is after hiking the cost of Amazon Prime $20 a year and adding fees to online merchants that sell on the platform. If Amazon Web Services is subsidizing the e-commerce side, it makes it harder to justify keeping the businesses together.

And while AWS did post a modest improvement in profit margins, where it did disappoint was in revenue growth, which rose 27% Y/Y to $20.54 billion, missing the estimate of $21.01 billion.

But all these disappointing data points aside, what markets are mostly focused on is that forecast revenue growth in a range of $140-$148BN (midline at $144BN) suggests that very soon the company may see an unheard of event: shrinking revenues!

As Bloomberg puts it, the results will ramp up pressure for CEO Andy Jassy – and all the other tech giants – to further cut costs. Amazon has a hiring freeze in its retail team and has been cutting experimental projects. But investors will be hungry for deeper cuts if sales are falling flat.

And speaking of Bloomberg, BBG Intel’s Poonam Goyal was rather adamant “It’s actually pretty bad across the board. It’s hard to find something good in this press release….It’s kind of humming the same tune of results we saw earlier. The consumer is slowing.”

In light of these catastrophic earnings and terrible guidance, it is not surprising that the kneejerk reaction may have been the worst in post-earnings plunge Amazon history: the stock was down as much as 21% after hours, plunging to the lowest level since the March 2020 covid crash when the entire economy was locked down!

Not surprisingly, Wayfair and EBay shares are falling postmarket after Amazon’s forecast miss. Wayfair is down as much as 6.2% while EBay declines as much as 3.6%. Alibaba is down 1.7%.