After a very strong start to the year for financial markets, February saw much of the early momentum go into reverse, with losses across equities, credit, sovereign bonds and commodities. That, as DB’s Henry Allen explains in his monthly performance review note, came “amidst growing concern about the persistence of inflation, which in turn led investors to ramp up their expectations for central bank rate hikes.” When all was said and done, it was an awful month for bonds, with Bloomberg’s global aggregate bond index experiencing its worst February performance since its inception in 1990 just one month after its best ever January. At the same time, February also marked a recovery for the US Dollar, while European equities proved resilient amidst the broader losses elsewhere. Furthermore, the YTD performance of financial assets is still generally positive, with most of those tracked by Deutsche Bank still higher over 2023 so far.

Below we excerpt from DB’s Month in Review, starting with the high-level macro overview

Having just experienced a strong rally in January, the initial mood in markets was pretty positive as February began. However, that all changed on the third day of the month, when the US jobs report for January was released. It showed that nonfarm payrolls had risen by credibility-busting 517k in January, marking the strongest job growth in six months. Furthermore, the unemployment rate fell to a 53-year low of 3.4%. The data raised fears that inflation would prove more persistent than previously thought. This led to a sharp re-appraisal on how fast the Fed would be hiking rates, with futures pricing for the December 2023 meeting up by +22.2bps on the day of the jobs report, and then a further +20.5bps on the following Monday. As of today, the terminal rate has shot up by 60bps in the past month, as more than two additional rate have been priced in.

This positive news on the employment side was then followed by upward revisions to inflation data from late-2022. These showed that CPI had fallen less rapidly than thought over Q4, with the 3-month annualized rate of core CPI in December being revised up from 3.14% to 4.25%. Then we had the January CPI data, where headline and core CPI remained hot, as did the PCE measure closely watched by the Fed.

With stronger data on the labor market and inflation, there was growing speculation that the economy could be in for a “no landing” scenario, rather than a hard or a soft landing. Unlike the hard or soft landing, which both see inflation coming down, the “no landing” would involve inflation remaining high, with growth remaining strong, and the Fed needing to hike rates even further in order to bear down on inflation. By the end of the  month, this meant that expectations of the Fed’s terminal rate had risen from 4.92% to 5.42%. And if you look at the rate priced by the December 2023 meeting, it went up from 4.48% to 5.28%, an increase of +80.5bps over the month. Investors’ expectations of inflation also saw a sharp move higher, with the 2yr breakeven up from 2.33% to 3.18% over the month.

This trend wasn’t confined in the United States: In the Euro Area, core inflation rose to a new record of +5.3% in January, and initial country releases for February from France, Spain and Germany are still showing high inflation. Similarly, the latest data shows Euro Area unemployment remaining at a joint record low of 6.6% in December, and there was further support on the growth side as natural gas prices declined a further -18.6%. Meanwhile in Japan, headline and core CPI for January reached their highest level since 1981.

The result of all this was a dramatic slide in global bonds. US Treasuries (-2.4%) suffered their worst monthly performance since September, and Bloomberg’s Global Aggregate Bond Index (-3.3%) saw its worst February performance since its inception back in 1990. Equities also struggled, with the S&P 500 peaking for the month on the day before the jobs report came out, before closing -2.4% lower. However, one of the few assets that benefited from this shift in Fed pricing was the US Dollar, with the dollar index (+2.7%) ending a run of 4 consecutive monthly declines.

Which assets saw the biggest gains in February?

• European Equities: The outperformance of European equities continued into February, with further gains for the STOXX 600 (+1.9%), the FTSE 100 (+1.8%) and the DAX (+1.6%). That leaves European equities as some of the best YTD performers in our sample, particularly in southern Europe. For instance on a YTD basis, there are now double-digit gains for Spain’s IBEX 35 (+14.7%), Italy’s FTSE MIB (+16.4%) and Greece’s ASE General Index (+21.5%).
• US Dollar: After a run of 4 consecutive monthly losses, the dollar index strengthened +2.7% in February. Indeed, it strengthened against every other G10 currency. The Swedish Krona was the next best performer among the G10, only weakening -0.04% against the US Dollar, which followed the Riksbank’s announcement that QT would be starting from April and they expected to raise the policy rate further in the spring.

Which assets saw the biggest losses in February?

• US Equities: Unlike their counterparts in Europe, US equities fell back amidst the prospect of further rate hikes. For instance, the S&P 500 fell -2.4%, the NASDAQ fell -1.0%, and the Dow Jones fell -3.9%. For the S&P 500, that brought its YTD gains back down to +3.7%.
• Sovereign Bonds: The prospect of higher inflation and more rate hikes was bad news for sovereign bonds. US Treasuries (-2.4%) and Euro Sovereigns (-2.3%) gave up most of their January gains, whilst gilts (-3.3%) are now in negative territory on a YTD basis.
• Credit: As with sovereign bonds, it was a rough month for credit. USD credit saw the worst performance on a relative basis, with US IG non-fin down -3.5%. However, EUR IG non-fin was still down -1.6%, and GBP IG non-fin was down -2.8%. HY also outperformed IG, with USD HY only down -1.6%, whilst EUR HY (-0.1%) was only just in negative territory. In terms of spreads, EUR IG (-22bps) and EUR HY (-4bps) tightened over February, as did US HY (-8bps). But US IG (+7bps) saw spreads widen for the first time since September.
• EM Assets: After a very strong performance in January, it was a bad month for EM assets. For equities, the MSCI EM index was down -6.5%. EM bonds fell back too, with a -2.7% decline. And for EM FX, there was a -1.7% decline.
• Commodities: All the major commodity groups lost ground in February. For energy, there were significant declines in European natural gas (-18.6%) along with smaller losses for Brent crude (-0.7%) and WTI (-2.3%) oil prices. Metals struggled too, with copper (-3.0%) and gold (-5.3%) both falling after three consecutive monthly gains. And agricultural goods lost ground as well, with corn (-7.4%) and wheat (-9.2%) posting noticeable declines.

Finally, here is a visual breakdown of the best and worst performing assets in February…

… and YTD.

Authored by Steve Watson via Summit News,

Following a 30 second bit on SNL where he branded big pharma as a ‘cartel’ forcing it’s drugs on people with government consent, actor Woody Harrelson has further spoken out against COVID mandates.

In an interview with the New York Times, Harrelson warned that America is no longer a free country, branding COVID protocols as “rather absurd.”

Woody doubles down. https://t.co/JoWUxI0zxJ

— Robert F. Kennedy Jr (@RobertKennedyJr) February 28, 2023

When asked what was “absurd about the COVID protocols,” Harrelson replied, “The fact that they’re still going on!”

“I don’t think that anybody should have the right to demand that you’re forced to do the testing, forced to wear the mask and forced to get vaccinated three years on,” the Zombieland star asserted.

Woody Harrelson: “The biggest drug cartels in the world get together and buy up all the media…”

Media: pic.twitter.com/y26cghklo9

— kanekoa.substack.com (@KanekoaTheGreat) February 28, 2023

“I’m just like, let’s be done with this nonsense,” Harrelson continued, adding “It’s not fair to the crews. I don’t have to wear the mask. Why should they? Why should they have to be vaccinated? How’s that not up to the individual? I shouldn’t be talking about this [expletive].”

“It makes me angry for the crew. The anarchist part of me, I don’t feel that we should have forced testing, forced masking and forced vaccination,” he continued.

“That’s not a free country,” he further warned, adding

“Really I’m talking about the crew. Because I can get out of wearing a mask. I can test less. I’m not in the same position they’re in, but it’s wrong. It’s three years. Stop.”

Cue the normie backlash…

Woody Harrelson: “The biggest drug cartels in the world get together and buy up all the media…”

Media: pic.twitter.com/6qGOLpr6AQ

— kanekoa.substack.com (@KanekoaTheGreat) February 26, 2023

Woody Harrelson accuses the media of being owned by the big pharma drug cartel and the media immediately proves his point. pic.twitter.com/RF4S1JU2FT

— Janebond (@Janebon34813396) February 28, 2023

Woody Harrelson accused the media of being in lock step with the Big Pharma Cartel.
The media then goes on to immediately prove him correct.#WoodyHarrelson #SNL pic.twitter.com/5H4JswFsY2

— Jake Dials (@TheJakeDials) February 26, 2023

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Authored by Gary Bai via The Epoch Times,

Elon Musk, CEO of Twitter and Tesla, stood in the crosshairs of the Chinese Communist Party (CCP) when he chipped in on the discussion on the origin of COVID-19 and brought attention to the theory that the virus leaked from a Chinese laboratory.

The world’s richest person joined in comments about a Wall Street Journal article on Sunday, Feb. 26, which reported that a classified intelligence report by the Energy Department said the virus likely leaked from the Wuhan Institute of Virology (WIV). The Chinese regime denies the lab leak theory and has accused its proponents of being conspiracy theorists.

Musk’s Comments

The billionaire hopped on discussions on Twitter following the news, with some users accusing Dr. Anthony Fauci, former head of the National Institutes of Health (NIH), of funding gain-of-function research at the WIV before the virus began spreading in early 2020.

“Dr. Anthony Fauci funded gain-of-function research at the Wuhan lab, lied to Congress about it, and now both the FBI & the Department of Energy have concluded that the coronavirus originated at the Wuhan lab,” wrote a Twitter user with the handle @KanekoaTheGreat. “Does that mean Dr. Anthony Fauci funded the development of COVID-19?”

“[Fauci] did it via a pass-through organization (EcoHealth),” Musk wrote in a reply, referring to Dr. Anthony Fauci, former head of the National Institute of Allergy and Infectious Diseases (NIAID) and former White House Chief Medical Advisor. Fauci’s NIAID sent $3.4 million in research grants via non-profit EcoHealth Alliance to the Wuhan laboratory.

Though that comment from Musk came as the latest of a series of jabs at Fauci, it stepped on a few nerves across the Pacific.

“Anti-China political forces in America have yet again hyped up the rumor that COVID-19 leaked from the Wuhan Institute of Virology,” reads a Feb. 28 article published in the Global Times, the CCP’s mouthpiece publication, titled “‘Elon Musk, are you smashing China’s pot?” which translates into the western euphemism “don’t bite the hand that feeds you.”

“Even the famous Tesla boss Elon Musk has joined in,” the article reads. 

“Some may think [Musk] made those remarks only to attack Fauci, but the posts he reposted almost all linked the origins of COVID-19 to China. And the argument is repeatedly used by the hostile-to-China U.S. right-wing and anti-China media to frame China.”

The Global Times piece then said the collaboration between the Wuhan laboratory worked and EcoHealth Alliance had “no relation” to researching the coronavirus or gain-of-function research (research that makes the virus more potent or more transmissible, or both), calling anyone who suggests otherwise “internet conspiracy theorists” and “anti-China forces.”

‘Smashing China’s Wok’

The comments from the state-owned media are a signal that the Chinese regime is discontent with the billionaire’s remarks.

The authoritarian regime keeps a close tab on Western businesses that operate in China and often has drastic reactions when it deems any entities to have stepped out of line. These reactions have included exerting pressure on companies to stick to the regime’s narrative or boycotting the companies altogether.

In 2019, in response to an undated statement from retail company H&M that said it is “deeply concerned by … accusations of forced labor” in Xinjiang, the Communist Youth League, following the calling of China’s state television, initiated a boycott campaign. It came amid reports of the detention of more than 1 million Muslim Uyghurs, along with forced sterilization, forced labor, and torture.

Notably, part of the comment by the Youth League is in almost identical wording to that posted by the Global Times on Tuesday, namely: “don’t expect to get fed by the Chinese and smash the Chinese wok at the same time.”

Following the boycott campaign, H&M was removed from online platforms such as Tmall and Alibaba and has seen significant drops in sales in the country.

In Musk’s case, the Chinese regime’s Tuesday signal had a significant shift in tone from the last time Musk waded into Chinese politics.

In an interview with the Financial Times in October 2022, Musk said that he recommends a “special administrative zone for Taiwan that is reasonably palatable” and that such an “arrangement” between Taiwan and the Chinese regime could probably be “more lenient than Hong Kong.” That comment won support from Chinese propagandists who saw Musk’s remarks as supportive of the regime’s clear intentions to claim Taiwan, a self-ruled democracy, as its own territory.

China is Tesla’s second-largest market, with a year-to-date average sales of 1,016 daily in 2023, according to Reuters. But the automaker currently faces strong headwinds from competitors in China such as BYD, who have been introducing new models and interior designs in its electric car products.

The Epoch Times contacted Tesla for comment.

In early January we noted that while the average investor continues to pour money into the equity markets like there’s no tomorrow (aka, a reckoning for the everything bubble), corporate insiders are notably doing just the opposite.

“The thing that stands out right now is the lack of buying even though prices have come down so much. That’s kind of a warning,” Nejat Seyhun told the Wall Street Journal at the time.

In the six weeks or more since, the apparent buyers’ strike by corporate insiders has continued.

Bloomberg’s Elena Popina reports that as US stocks slid last month, only about 450 corporate executives scooped up shares of their own firms and more than four times as many insiders sold, data compiled by the Washington Service show.

That’s the highest ratio of sellers versus buyers since April 2021.

“The selling is around where it has been, but buying has yet to pick up this year,” the Washington Service’s analysts said by email.

“It seems like they are sort of in a wait-and-see mode, or perhaps selling portions of their holdings for increased liquidity.”

As Popina noted, insider transactions may seem like an unlikely market-timing indicator, but they have a track record of providing an early read on market direction over the years.

The insider buy-sell ratio jumped in August 2015 and late 2018, with the former preceding a market bottom and the latter coinciding with one. In March 2020, corporate insiders’ purchases correctly signaled the bottom of a bear-market rout.

Furthermore, despite all the Fed Pivot chatter (that is now dead), there really was no sign of insider enthusiasm in aggregate whatsoever, and while investors are increasingly focused on ever-shrinking timeframes (0DTE options traders running the show), just like 2016 and 2020, insiders are sending a very clear message that this time is different.

Oddly, with the sellers dominating the buyers, C-suites are far from pessimistic. On a scale from 1 to 10, a gauge of CEO confidence in prospects for business over the coming year rose to 6.3 in February, the third monthly advance and the highest level since March 2022.

What’s more, announced buybacks stood at more than $163 billion in February, a decrease from the same time a year ago but still the third-highest reading for February ever, according to data compiled by Birinyi Associates.

Maybe, as always, it’s better to watch what execs ‘do’ rather than what they ‘say’.

Authored by Nathan Worcester via The Epoch Times (emphasis ours),

The House of Representatives on Feb. 27 overwhelmingly voted to make manufacturers tell consumers if an Internet-connected device comes with a camera or microphone, with enforcement left to the Federal Trade Commission.

That requirement does not cover certain devices, such as “a telephone (including a mobile phone), a laptop, tablet, or any device that a consumer would reasonably expect to have a microphone or camera.”

A motion to suspend the rules and pass H.R. 538 flew through the chamber with 406 yeas and 12 nays: 201 Democrats and 205 Republicans voted for it, while 12 Republicans voted against it. 15 representatives didn’t vote.

The motion’s opponents include a number of well-known conservative and libertarian lawmakers.

Rep. Thomas Massie (R-Ky.), Rep. Dan Bishop (R-N.C.), Rep. Andy Biggs (R-Ariz.), and Rep. Chip Roy (R-Texas) all voted against it.

The Epoch Times has reached out to those lawmakers to learn why they opposed the motion.

“This is a relatively straightforward bill,” said Rep. Gus Bilirakis (R-Fla.), a supporter of H.R. 538.

“Internet-connected devices are becoming increasingly present in our lives, and it’s important for people to understand what they’re buying.”

Rep. Frank Pallone (D-N.J.), another supporter of the measure, told his colleagues about the rapid speed and massive scale of the Internet of Things (IoT) revolution in consumer products.

“Today, the average American home has 11 Internet of Things, or IoT, devices,” Pallone said.

Yet, Pallone’s numbers appear to be out of date.

A recent Deloitte survey suggests the number of Internet-connected items is even higher, at 22 smart devices per home as of 2022.

Read more here…

Authored by Paul Joseph Watson via Summit News,

A girls basketball team has withdrawn from the Vermont Division IV state tournament in protest against a transgender player who has routinely been dominating games.

After finding out that their opponents the Long Trail School Mountain Lions (LTS) had a biological male on their team, the Mid Vermont Christian School Eagles (MVCS) forfeited their playoff game.

“We believe playing against an opponent with a biological male jeopardizes the fairness of the game and the safety of our players,” said MVCS head of school Vicky Fogg.

“Allowing biological males to participate in women’s sports sets a bad precedent for the future of women’s sports in general.”

In a previous interview, Mountain Lions coach Courtney Stasny boasted about Rose Johnson, who at 6’1 is the tallest member of their team, and his ability to block shots.

“Rose brings such a great energy to the floor. We nicknamed her Rose ‘not in my house’ Johnson because she just does not let anything come through the lane,” Stasny said.

After being beaten 47-43 by LTS, Proctor High School player Aubrey Lanning lamented about how, “Rose guards the whole post.”

DORSET — Long Trail’s Rose Johnson controlled the opening tip of Tuesday night’s girls basketball game against Mill River and deflected it to a teammate who immediately found Molly Luikart for a layup on the left side of the basket. The opening sequ… https://t.co/ceAgm5OzVj

— Bennington Banner (@banner_news) February 1, 2023

Professional coach and fitness expert Aaron Warner told the Vermont Daily Chronicle that Johnson clearly had an unfair physical advantage on the other players.

“In one game [Johnson] had seven blocked shots. That means seven shots, typically closer to the basket so much more likely to go in, were blocked by the guy who is taller than every other girl on the floor, can jump higher and likely is significantly stronger. In what world is this even remotely fair to other Vermont Division IV girls?” he asked.

Warner also sounded the alarm bell on potential injuries that female players could sustain as a result of Johnson’s dominance.

“Bone mass, lean mass, cardiac output, strength capacity, work capacity and kinesiological potential all heavily advantage males. This is why men’s competition records (i.e. sprinting, jumping, weight lifting) dwarf women’s…Add to this fact that men are larger, faster and stronger than women and the potential for males injuring girls increases dramatically in competition.”

“In October, a North Carolina school district voted to forfeit all girls volleyball games against a rival school that featured a trans-identifying male player over safety concerns after he injured a girl on an opposing team with a forcefully-spiked ball to the face,” reports Reduxx. “Video that went viral showed the girl collapsing to the ground after being hit with the ball. She reportedly suffered head and neck injuries and long-term concussion symptoms.”

As we highlighted yesterday, a transgender athlete who now identifies as a woman has won four different female running competitions so far this year alone after smashing a women’s 5000 meter record last year.

Studies have consistently shown that biological male competitors retain significant advantages over female competitors even after undergoing ‘transition’ and starting hormone therapy.

A poll conducted last summer found that only 28 per cent of Americans support transgender athletes being allowed to compete in female sports tournaments.

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A cornerstone of the once-unassailable Covid-19 narrative took another mighty blow on Tuesday afternoon, as FBI Director Christopher Wray said the bureau concluded the pandemic was most likely the result of a leak from a Chinese lab. 

Wray’s remarks represent the FBI’s first public confirmation of its assessment. Exasperatingly for ZeroHedge and countless others who’ve been banned from social media and accused of racism for exploring that hypothesis, Wray casually framed it in a way that made it sound like old news.   

“The FBI has for quite some time now assessed that the origins of the pandemic are most likely a potential lab incident in Wuhan,” he told Fox News in a Tuesday interview. He said he couldn’t share details of the assessment since they’re still classified. 

Wray’s remarks come a few days after the Wall Street Journal reported that the Department of Energy had in May 2020 reached its own conclusion — albeit with “low confidence” at that early date — that a lab leak was the most likely origin. The Department of Energy is in a position to opine given its role in supervising US national laboratories. 

While the Journal reported that four intelligence agencies still embrace the natural-transmission theory, Wray touted the bureau’s credentials in reaching its conclusion:

“The FBI has folks agents, professionals, analysts, virologists, microbiologists, etc, who focus specifically on the dangers of biological threats, which include things like novel viruses like COVID and the concerns that in the wrong hands…some bad guys, a hostile nation state, a terrorist a criminal, the threats that those those could pose.

So here you’re talking about a potential leak from a Chinese government-controlled lab that killed millions of Americans, and that’s precisely what that capability was designed for.”

Watch for Attorney General Merrick Garland to be questioned about Wray’s comments on Wednesday when he appears before the Senate Judiciary Committee.

When asked about the Energy department conclusion, China pointed to a 2021 World Health Organization investigation that said a lab leak was “extremely unlikely.” Foreign ministry spokeswoman Mao Ning said “certain parties should stop rehashing the ‘lab leak’ narrative, stop smearing China and stop politicizing origins-tracing.” 

NOW – FBI Director Wray: “Origins of the pandemic are most likely a potential lab incident in Wuhan.”pic.twitter.com/ql5NmrXPZe

— Disclose.tv (@disclosetv) February 28, 2023

Wray, however, accused Beijing of thwarting efforts to determine the origin of the virus: 

“I will just make the observation that the Chinese government, it seems to me, has been doing its best to try to thwart and obfuscate the work here, the work that we’re doing, the work that our U.S. government and close foreign partners are doing. And that’s unfortunate for everybody,” 

The Chinese government may well have killed millions with gain-of-function research coupled with sloppy lab practices…or something worse. At the same time, we have to wonder: Is the U.S. government now choosing to weaponize that likelihood to turn up the heat in World War III’s easternmost tinderbox?  

#FBI Director Wray confirmed that the Bureau has assessed that the origins of the COVID-19 pandemic likely originated from a lab incident in Wuhan, China. pic.twitter.com/LcBVNU7vmO

— FBI (@FBI) March 1, 2023

Finally, two things worth considering: why now, and where’s Biden?

That’s my main red flag with this situation.

The FBI/DoE are pushing a media campaign to tell the public about the lab origin of covid, yet there is ZERO sense of urgency from the rest of the government.

We are allegedly under biological attack, and Biden is in the basement.

— Clandestine (@WarClandestine) March 1, 2023

There’s no coincidences in Washington and we need China as the ‘bad guy’ now.

Authored by Mike Shedlock via MishTalk.com,

Let’s discuss the warnings of PJM Interconnect, the operator of the nation’s largest competitive market for electricity.

Before reviewing the PJM Interconnect February 2023 report, let’s take a look at policies and regulations.

Policies and Regulations

• EPA Coal Combustion Residuals (CCR): The U.S. Environmental Protection Agency (EPA) promulgated national minimum criteria for existing and new coal combustion residuals (CCR) landfills and existing and new CCR surface impoundments. This led to a number of facilities, approximately 2,700 MW in capacity, indicating their intent to comply with the rule by ceasing coal-firing operations, which is reflected in this study.

• EPA Effluent Limitation Guidelines (ELG): The EPA updated these guidelines in 2020, which triggered the announcement by Keystone and Conemaugh facilities (about 3,400 MW) to retire their coal units by the end of 2028. 14 Importantly, but not included in this study, the EPA is planning to propose a rule to strengthen and possibly broaden the guidelines applicable to waste (in particular water) discharges from steam electric generating units. The EPA is expecting this to impact coal units by potentially requiring investments when plants renew their discharge permits, and extending the time that plants can operate if they agree to a retirement date.

• EPA Good Neighbor Rule (GNR): This proposal requires units in certain states to meet stringent limits on emissions of nitrogen oxides (NOx), which, for certain units, will require investment in selective catalytic reduction to reduce NOx. For purposes of this study, it is assumed that unit owners will not make that investment and will retire approximately 4,400 MW of units instead. Please note that the EPA plans on finalizing the GNR in March, which may necessitate reevaluation of this assumption.

• Illinois Climate & Equitable Jobs Act (CEJA): CEJA mandates the scheduled phase-out of coal and natural gas generation by specified target dates: January 2030, 2035, 2040 and 2045. To understand CEJA criteria impacts and establish the timing of affected generation units’ expected deactivation, PJM analyzed each generating unit’s publicly available emissions data, published heat rate, and proximity to Illinois environmental justice communities and Restore, Reinvest, Renew (R3) zones. For this study, PJM focuses on the approximately 5,800 MW expected to retire in 2030. 

Solar Projects On Hold

Next, consider the Inside Climate News report The Largest U.S. Grid Operator Puts 1,200 Mostly Solar Projects on Hold for Two Years

The nation’s largest electrical grid operator has approved a new process for adding power plants to the sprawling transmission system it manages, including a two-year pause on reviewing and potentially approving some 1,200 projects, mostly solar power, that are part of a controversial backlog.

Over the last four years, PJM officials have said they have experienced a fundamental shift in the number and type of energy projects seeking to be added to a grid, each needing careful study to ensure reliability. It used to be that PJM would see fewer, but larger, fossil fuel proposals. Now, they are seeing a larger number of smaller, largely renewable energy projects.

A new approval process will put projects that are the readiest for construction at the front of the line, and discourage those that might be more speculative or that have not secured all their financing.

Then, an interim period will put a two-year delay on about 1,250 projects in their queue—close to half of the total—and defer the review of new projects until the fourth quarter of 2025, with final decisions on those coming as late as the end of 2027. 

Energy Transition in PJM

Now let’s now take a look at Energy Transition in PJM: Resource Retirements, Replacements & Risks released February 24, 2023.

Our research highlights four trends below that we believe, in combination, present increasing reliability risks during the transition, due to a potential timing mismatch between resource retirements, load growth and the pace of new generation entry under a possible “low new entry” scenario:

The growth rate of electricity demand is likely to continue to increase from electrification coupled with the proliferation of high-demand data centers in the region. Retirements are at risk of outpacing the construction of new resources, due to a combination of industry forces, including siting and supply chain, whose long-term impacts are not fully known. PJM’s interconnection queue is composed primarily of intermittent and limited-duration resources. Given the operating characteristics of these resources, we need multiple megawatts of these resources to replace 1 MW of thermal generation. 

The analysis shows that 40 GW of existing generation are at risk of retirement by 2030. This figure is composed of: 6 GW of 2022 deactivations, 6 GW of announced retirements, 25 GW of potential policy-driven retirements and 3 GW of potential economic retirements. Combined, this represents 21% of PJM’s current installed capacity.

In addition to the retirements, PJM’s long-term load forecast shows demand growth of 1.4% per year for the PJM footprint over the next 10 years. Due to the expansion of highly concentrated clusters of data centers, combined with overall electrification, certain individual zones exhibit more significant demand growth – as high as 7% annually.

For the first time in recent history, PJM could face decreasing reserve margins should these trends continue. The amount of generation retirements appears to be more certain than the timely arrival of replacement generation resources and demand response, given that the quantity of retirements is codified in various policy objectives, while the impacts to the pace of new entry of the Inflation Reduction Act, post-pandemic supply chain issues, and other externalities are still not fully understood. 

Recent movement in the natural gas spot markets across the U.S. and Europe add another degree of uncertainty to future operations. In 2022, European natural gas supply faced many challenges resulting from the war in Ukraine and subsequent sanctions against Russia. Liquefied natural gas (LNG) imports into the EU and the U.K. in the first half of 2022 increased 66% over the 2021 annual average, primarily from U.S. exporters with operational flexibility. This international natural gas demand is a new competitor for domestic spot-market consumers, resulting in significantly higher fuel costs for PJM’s natural gas fleet. 

Along with the energy transition, PJM is witnessing a large growth in data center activity. Importantly, the PJM footprint is home to Data Center Alley in Loudoun County, Virginia, the largest concentration of data centers in the world. PJM uses the Load Analysis Subcommittee (LAS) to perform technical analysis to coordinate information related to the forecast of electrical peak demand. In 2022, the LAS began a review of data center load growth and identified growth rates over 300% in some instances. 

Additionally, PJM is expecting an increase in electrification resulting from state and federal policies and regulations. The study therefore incorporates an electrification scenario in the load forecast to provide insight on capacity need should accelerated electrification drive demand increases.

Impacts of Electrification and Data Center Loads

What Does This Mean for Resource Adequacy in PJM?

Combining the resource exit, entry and increases in demand, summarized in Figure 7, the study identified some areas of concern. Approximately 40 GW PJM’s fossil fuel fleet resources may be pressured to retire as load grows into the 2026/2027 Delivery Year. 

The projected total capacity from generating resources would not meet projected peak loads, thus requiring the deployment of demand response. By the 2028/2029 Delivery Year and beyond, at Low New Entry scenario levels, projected reserve margins would be 8%, as projected demand response may be insufficient to cover peak demand expectations, unless new entry progresses at a levels exhibited in the High New Entry scenario. This will require the ability to maintain needed existing resources, as well as quickly incentivize and integrate new entry 

The 2024/2025 BRA, which executed in December 2022, highlighted another area of uncertainty. Queue capacity with approved ISAs/WMPAs is currently very high, approximately 35 GW-nameplate, but resources are not progressing into construction.

There has only been about 10 GW-nameplate moving to in service in the past three years. There may still be risks to new entry, such as semiconductor supply chain disruptions or pipeline supply restrictions, which are preventing construction despite resources successfully navigating the queue process. 

About that Queue

After applying the logistical regression model for 10 years of historical project completion (Y-queue to present) without project stage, approximately 15.3 GW-nameplate/8.7 GW-capacity were deemed commercially probable out of 178 GW of projects examined. 

The model results for thermal resources were reasonably in line with expectations. However, the model produced extremely low entry from onshore wind, offshore wind, solar, solar-hybrid and storage resources.  

Mish Synopsis 

• Expect to pay much higher prices for electricity 

• Expect brownouts

• Expect missed targets 

• Expect most of the thousands of project requests on hold to be economically unviable.

• Expect many economically unviable projects to continue anyway paid for by taxpayer subsidies.

• Expect much higher inflation. 

• Don’t expect any of this to do a damn thing for the environment.

Question of the Day – How Fast Will the Shift to EVs happen?

In case you missed it, please consider Question of the Day – How Fast Will the Shift to EVs happen?

The faster the shift, the higher and faster the inflation.

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Tesla is slated to hold its most recent investor day today, with shareholders eagerly awaiting CEO Elon Musk’s long-term vision for the electric vehicle manufacturer. 

Shareholders are hoping for a number of updates, including on the company’s Cybertruck, its new subcompact vehicle, a refreshing to the existing product line, a long term vision and new manufacturing ventures the company is putting in place. And, of course, Wall Street will be looking for any information or guidance as to how the year is progressing – and how it may continue to progress – from the auto manufacturer. 

The concept of a new subcompact vehicle is front and center, with investors hoping that a lower priced vehicle could move Tesla even further into the mass market for automobiles, according to the Wall Street Journal.

Investors will also look for how the company plans on meeting its 20 million vehicles sold per year goal by 2030. The increase marks a substantial scale higher from the 1.3 million vehicles the company sold in 2022. 

Musk is expected to deliver his “Master Plan 3”, which he called a “path to a fully sustainable energy future for Earth” earlier this month. He has confirmed that it will be released during today’s presentation. Musk’s previous “Master Plans” have included the goals of making battery powered vehicles affordable and competitive, followed by the idea to buy Solar City – a decision that has come under scrutiny due to the precarious financial position of the acquired company at the time. 

Investors will also be on watch for new information about Tesla’s humanoid robot, as well as an update on the recent Full Self Driving recall and the grappling match that the company is in the midst of with regulators related to its autonomous driving software. The company’s use of AI in the future – both with Tesla and potentially as part of new projects – is also said to be a focus of the event.

Finally, as we wrote about hours ago, the company will also offer up new information on its forthcoming production facility in Mexico. The company is slated to build a new plant in Monterrey, Mexico, it was reported by Bloomberg this week. The announcement comes after weeks of guessing over where the U.S. based EV company would expand its reach next. 

President Andres Manuel Lopez Obrador announced on Wednesday that the facility would help Mexico “build on the millions of combustion-engine vehicles the country already supplies to the US every year,” according to Bloomberg. Companies like BMW and GM have also recently announced new investments in Mexico, also. 

Lopez Obrador reportedly spoke to Tesla Chief Executive Officer Elon Musk about environmental commitments for the plant, which included recycled water throughout the manufacturing process. 

AMLO said of the deal: “He was very responsive, understanding our concerns and accepting our proposals. I want to thank Mr. Elon Musk for being very respectful, attentive and understanding of the importance of addressing the problem of water scarcity.” 

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

As if the 2020s haven’t been strange enough, the United States military recently shot down several UFOs. Equally bizarre as the possibility of aliens, some investment analysts are projecting an economic no landing scenario. They believe economic activity will easily absorb significant headwinds and chug along.

The last few years have been humbling for economists, the Fed, and investment professionals. In late 2021 no one expected the Fed would raise rates by over 4% within a year and inflation would approach levels last seen 40 years ago. In hindsight, had we or any economist foreseen the future, a recession prediction would have been appropriate. Such has yet to happen, but that doesn’t mean a recession won’t happen. Unfortunately, current monetary policy all but ensures the economic cycle will play out as it always does.

While the economy may seem unpredictable, the economic future is predictable. The no landing scenario assumes economic cycles have ceased to exist. The economic cycle is alive and well. But timing its ups and downs with unprecedented amounts of fiscal and monetary stimulus still flowing through the economy and markets is proving incredibly challenging. 

What is a No Landing Scenario

Unlike a soft landing that envisions the Fed action’s dampening economic growth, the no landing scenario believes the economy will continue to grow at or above the trend growth rate. Such optimism assumes that the Fed’s restrictive monetary policy will not cause the economy to stumble.

GDP, as graphed below, in dollar terms (orange line), paints the picture of an economy constantly growing and essentially free of cycles. However, viewing annual growth rates (blue line) and the trend (dotted blue line), we find that GDP cycles regularly, and the growth trend is steadily declining. To forecast a no landing means you believe the blue GDP growth rate line will flatten and stay linear.

That did occur, to a degree, following the financial crisis (2010-2018), but the Fed pegged interest rates to zero and resorted to multiple rounds of QE at the first sign of trouble. The monetary conditions during that no landing period versus the current period are polar opposites. 

What Drives the Economy?

The economy’s trend growth rate is around 2.0%, well below the rates of prior decades. The Fed predicts the long-run growth rate (beyond 2025) to be 1.8%.

Growth is and has been declining for decades. The two leading factors supporting economic activity, productivity, and demographics, contribute less and less each year to economic activity.

In Capital Neglect is Killing Capitalism, we elaborated on the importance of productivity growth and how the Fed’s aggressive monetary policy in years past has stifled productivity growth.

Not surprisingly, GDP growth followed the declining path of productivity growth. As we share below, it’s possible GDP could run much higher if the pre-1970 productivity trends continued. 

The following graph, also from the article, shows how the trend in productivity growth changed about 50 years ago.

In addition to declining productivity growth, demographic trends in the U.S. and other developed countries are problematic. Population growth among the world’s leading economies is growing at a trickle and, in some cases, starting to decline. Consider the following population growth rates for the top five economies:

• United States +0.1%

• China +0.1%

• Japan -0.5%

• India +0.8%

• Germany 0.0%

Equally alarming is the increase in the elderly population as a percentage of the entire population. For example, the chart below from the United Nations shows the dramatic shift in China’s population between 2015 and forecasts for 2040.

Similar, albeit less severe shifts are expected in the U.S. Declining population growth, and a growing financial dependency by the baby boomers will reduce GDP.

Barring any trend changes in productivity or demographics, we should expect GDP growth to continue to drift lower.

Fed Juice Counteracts Productivity and Demographics

The Fed uses monetary policy to boost the economy and counter the aforementioned deteriorating economic building blocks. Lower interest rates and the accompanying debt-driven consumption grew the economy above its natural growth rate. However, in the wake of this strategy lies a highly leveraged economy that is exceptionally vulnerable to higher interest rates.

The table below shows that debt as a percentage of GDP has risen from 210% to 275% this century. Over the last 22 years, GDP grew by $16 trillion while debt increased by $52 trillion. Is that sustainable?

The more leveraged an economy, the more sensitive it is to interest rate changes. Reducing interest rates makes servicing the debt and repaying the principal easier. However, higher interest rates make servicing and repayment more costly.

We can think of higher interest rates as a tax on the economy. The Fed’s juice of years past, low-interest rates, is being replaced with the highest interest rates in fifteen years. High-interest rates are stifling new debt creation. More importantly, borrowing to repay old debt introduces a financial shock to the borrower and a tax on the economy.

Current Scenario

If the expected growth rate is sub 2% and higher interest rates are and will be extracting a heavy tax on the economy, why is the economy running hot? The answer likely lies in the pandemic-related stimulus and the psychology of consumers. Both stimulus and irregular consumer behaviors support extra growth.

While the no landing crowd likes to think the relatively high economic growth is sustainable, we got news for them. The means supporting such strong economic growth is not likely to continue.

The blue line below shows that personal savings have fallen to a 12-year low. The growth of credit card debt has swelled to a 25+ year high. Unless wages spike higher, many consumers will cut back as savings deplete and credit card limits are reached. Further, higher interest rates on credit cards will reduce their spending ability.

We remind you personal consumption accounts for nearly 70% of economic activity.

Is this Time Different?

The no landing scenario crowd assumes this time is different. Therefore, by default, they argue the graphs and bullet points below are irrelevant.  

• A recession occurred every time the 10-year/ 3-month yield curve inverted and then un-inverted.

• Fed rate hikes have preceded each of the last ten recessions.

• Except once, in 1965, every time the ISM manufacturing index fell below 45, a recession occurred.

• A recession occurred each time the Philadelphia Fed Index was at its current level.

• A reading of over 50% of Deutsche Bank’s recession probability gauge preceded each recession.

• The current level on the 85-factor Chicago Fed National Activity Index (CFNAI) and the OECD leading indicators are commensurate with prior recessions.

Summary

Maybe UFOs have wealthy aliens onboard wanting to buy a lot of stuff and boost our economy. Most likely, those forecasting a no landing have a false sense of optimism as the economy has thus far proven resilient.

Time is not on the no landing scenario’s side. With every passing day, the effect of yesterday’s interest rate hikes will weigh more on the economy. As we wrote in Janet Yellen Should Focus on Hope, understanding the progression of economic activity deterioration and the time lag between monetary policy changes and full consequences helps us appreciate that a no landing scenario is a pipe dream.

We hope for a soft landing but fear the more typical hard landing is the likely course. We caution those who believe the economy is unaffected by interest rates. It is dangerous to believe this time is different!