Authored by Julian Jackson via CoinTelegraph.com,

Snow Crash foretold many of the issues with the Metaverse back in the 1990s. Here are some of the problems that still need to be solved…

Neal Stephenson’s science fiction novel Snow Crash predicted the Metaverse in 1992. This cult book has the amusingly-named Hiro Protagonist running around in an artificial cyber world, trying to stop a virus that wipes minds, aided by his hacker friend Y.T. Reality is a place to escape from, a neoliberal future wrecked by hyperinflation and inequality and run by corporations and gangsters and insane bureaucracy.

In many ways, the book is horribly prescient. (It’s also horribly written in places, more like an info dump than a novel.) The Metaverse was a place where people had digital avatars, where they hung out with friends, went shopping and attended concerts. It was full of ads, the infrastructure was owned by a billionaire, and a virus was wreaking havoc on society. It all sounds familiar.

It wasn’t COVID-19 of course. The Snow Crash virus caused the infected to lose the ability to think for themselves, and they start speaking in tongues.

“Obviously, at the time, we didn’t have social media,” Stephenson told The Washington Post, but added, “I was writing about just a long-standing human trait, which is this tendency for the mind to get hijacked by ideas.”

The metaverse can’t enslave you, yet, but the addictive nature of social media suggests it’s possible you might get hooked on a better virtual world, where your hotter-looking avatar interacts with people from all over the planet and has adventures that are not possible in reality.

Macbeth Final Production

To give you one crazy example of the possibilities, there is an actual theater company in the zombie-infested online wasteland survival game Fallout 76 that puts on Shakespeare plays. So, you can be part of the audience, or even audition and act, if you desire. Almost normal, except you may have to blast a few zombies in the middle of Romeo and Juliet. The ushers patrol the perimeter with chainsaws and AK-47s to annihilate any undead critics seeking to make their analytical discourse upon the performance.

This is all very Snow Crash. There is a real tension between the use of virtual worlds for escape or leisure and the impetus for profiteering. Many corporations see the metaverse and metaverse platforms as new continents to be colonized and exploited. If the metaverse develops under a centralized model, then it will be Amazon, Facebook and Google all over again: whale time. A decentralized metaverse built around blockchain technology would be more egalitarian and put the power back in the hands of users.

Enter the metaverse, stage left

Dr. Christina Yan Zhang, nicknamed “Dr. Metaverse,” wrote her 2012 thesis about MMORPGs and the early metaverse platform Second Life, so she’s been thinking about this longer than most. She’s now the CEO of the Metaverse Institute.

“I think the beauty about the current development of the metaverse is basically the convergence of a whole range of different technologies coming together. Many of them are getting more advanced to really help to create the next generation of internet, which is more immersive, interactive and intuitive.” 

Dr. Christina Yan Zhang Z (Supplied)

She sees the metaverse as an enabling technology to improve interaction in both real and digital worlds.

Gaming writer Wagner James Au has just finished a book that will be published in June titled Making a Metaverse That Matters. Back in the early 2000s, he was the “virtual journalist named Hamlet” in Second Life. His white-suited avatar (a nod to Tom Wolfe) went around submitting dispatches from that virtual world. 

He envisions there being multiple metaverses: “It’s going to be based on the community; it’s going to be based on culture and aesthetics. For example, Roblox is huge, but it’s primarily with kids. And the aesthetics are very intentionally looking like Legos. You could jump from Roblox to Fortnite, then Fortnite to VR chat. So, it will not be a single, virtual world.”

Wagner James Au in Second Life (New World Notes)

He continues, “I define it very directly from what Snow Crash described: It was a vast virtual world with user creation tools and highly customizable avatars that is integrated with the real world economy.”

“In other words, you can make money from it and also integrate with external technology so you can actually hook it up to other technology beyond the immersive 3D experience.”

Snow Crash and capitalist realism

Science fiction and fantasy are known for creating new worlds to experience through literature, art and cinema. These genres have roots in the pervasive zeitgeist of their time, so they can often end up being unimaginative about new political or social opportunities. Tragic, influential British culture theorist Mark Fisher (who committed suicide in 2017) defined this as “capitalist realism,” the notion that capitalism is the only political structure and even visionary literature can rarely rise above imagining variations on this.

Mark Fisher Tribute Archive

Snow Crash posits a dystopian real world that makes escape into an alternative fantasy more attractive: Hiro is a pizza delivery boy in real life; in the Metaverse, he is the greatest swordsman alive.

The greatest tragedy would be if the specter of “capitalist realism” made the metaverse a mirror of the existing world. A virtual world where we peddle virtual crap to each other to keep our “likes” or crypto coming in. Roblox is a classic example: Its business model involves kids creating stuff with other kids that provides an income stream from their creativity. Web1 promised liberation but didn’t fulfill it. Web3 needs decentralization so that corporations do not overwhelm it as they have with previous iterations of the internet.

The metaverse is not without its challenges. Magazine’s Jillian Godsil looks at some issues here. Author and futurist Bernard Marr also highlights some serious drawbacks.

Seven big problems

Author and futurist Bernard Marr says, “I’m super-excited about this technology,” but that comes with a warning about the potential perils of the metaverse.

Bernard Marr. (BernardMarr.com)

He has identified seven major problems and disadvantages highlighting the downsides to the virtual worlds. Most are quite knotty challenges, which won’t be easy to solve in a malleable, constantly evolving world open to deviant behavior. 

1. Privacy issues

“We already have privacy concerns when we browse the web,” Marr says. “The technology that is already tracking our behavior online will also exist in the metaverse, and the tracking is likely to become even more invasive and intense.”

Wearable, haptic devices could measure all kinds of physical effects such as heart rate and sweating. “Enormous amounts of data could be collected and used by companies for marketing or other purposes,” Marr continues.

2. Safety of children

“As parents, it’s already difficult to track what our kids are doing online, and that challenge will continue with the metaverse. Understanding what our kids are doing in the metaverse will be even more challenging because we can’t see the world they’re looking at in their VR headset, and there is no process in place for monitoring their screens using tablets or phones,” Marr opines.

3. Health concerns

The result of spending your entire life in the metaverse could result in everyone looking like the Axios Humans in Wall-E. “VR hangovers” are also a thing: The sadness and angst that come from leaving a very intense, absorbing experience and returning to reality can create a comedown similar to drugs or drinking. Gaming or internet addiction is already impacting mental and physical health, so it could potentially be even worse in the metaverse.

Axios Humans in ‘Wall-E’ (Pixar)

4. Access inequality

Bernard Marr says, “In order to use augmented reality, we need the latest smartphone and handset technology, and VR experiences require high-tech, expensive headsets as well as strong and reliable connectivity,” he says.

“How can we make sure that everyone in the world has equal access to the metaverse, and not just the people who have the most money and live in developed countries?” This issue concerns Zhang, too. She sees Starlink as a way forward: “The reason I mentioned Starlink is because one-third of the global population are still suffering from the digital divide, so they do not have access to the internet. Those smaller Starlink satellites can cover the most remote areas in the world.”

5. Laws and regulations

A significant problem with all new technology is how slowly legislators and regulators are to formulate appropriate legal responses to the challenges presented. With something that’s immersive, global and anarchic, which includes cryptocurrencies as well as the metaverse, authorities have difficulties keeping up with these technological changes.

6. Desensitization

Marr also worries that even more realistic violence will desensitize people to real-life violence. Although the zombie-hunting amateur thespians of Fallout 76 seem pretty balanced when Magazine chats with them. The counterargument might be that therapeutically killing orcs and zombies or catapulting angry birds is a relief valve for real-world stresses. These are not exclusive issues for the metaverse of course and have been leveled at games for years.

7. Identity hacking

If your avatar is hacked, a malicious entity could spread damage or possibly steal from you. This is yet another use case for blockchain technology in the metaverse as NFTs or blockchain-based identity technology is a solution suggested by Marr. So, your avatar could be anyone, but to enter the world, you would have to produce a digital, verified identity. That is similar to KYC processes to sign up for most crypto exchanges.

Interoperability

Au believes that there will be many different metaverse platforms, catering to different audiences. Wang disagrees, believing that interoperability will be an important way to ensure that users can move between experiences in the metaverse, via agreed protocols of “interoperability, standardization of the metaverse and all additional assets by organizations worldwide.” Interoperability and one unified Metaverse were the vision in Snow Crash.

There’s also disagreement over the level of immersion. Wagner thinks that there is sufficient computing available for most people to have a reasonably immersive experience via their smartphones, without needing VR headsets. Zhang disagrees, feeling that a large increase in computing power and probably quantum computing will be needed to fully realize an immersive VR system with millions of users.

Where is the metaverse heading?

In this difficult time in the crypto universe, many metaverse projects seem to be reorientating themselves. People are exploring ventures with a longer timescale to reach fruition. Zhang thinks that it will take 10 years to reach mass adoption. She views the European Union’s provisional agreement on the Markets in Crypto-Assets (MiCA) proposal – which aims to safeguard investing while fostering innovation – as an important step forward for regulating the sector.

Wagner sees the drivers of the metaverse as users at both ends of the age spectrum: kids because they will find value in the play space, and seniors, driven by disability or social isolation, but able to interact via their avatars in ways that wouldn’t be so easy in the real world. Wagner quotes the example of an 86-year-old blues guitarist he met busking in the street in Second Life.

Interestingly, Snow Crash’s Stephenson has now launched a metaverse startup called Lamina1.

Wagner says, “Neal Stephenson launched it with a major player in the Bitcoin industry, Peter Vessenes. They’re making what they call a metaverse-as-a-service — so, a way for creators to monetize their content across various, multiple metaverse platforms.”

Metaverse-First Blockchain Lamina1 Launches Rolling Fund for Web3 Builders https://t.co/vjZmahKK7o pic.twitter.com/kuykhtBLMQ

— Bunch Of Social (@BunchOfSocial) December 27, 2022

Vessenes, a Bitcoin pioneer, called it “the base layer for the open metaverse: a place to build something a bit closer to Neal’s vision — one that privileges creators, technical and artistic, one that provides support, spatial computing tech, and a community to support those who are building out the metaverse.”

Lamina1 is very much built around the interoperability vision: that there should be one internet-like platform where players big and small can mutually coexist and flourish. That said, Web1 and Web2 arguably didn’t reach that goal, so it isn’t certain that a future version won’t get dominated by big players as the web is now.

The metaverse is another new technology that has enormous potential for both financial and social rewards. It also has significant negatives that could stifle its growth. But Zhang opts for the glass-half-full viewpoint:

“Fundamentally, we want to use technology to really benefit more people to have a more diverse, equal and sustainable world. We don’t want the technology to be for a few people who have privilege or they are lucky to be financially free. So, I think there needs to be a really coordinated movement by governments, investors, NGOs and individuals coming together to ensure the rest of one-third of the population, in countries where the basic infrastructure is not in place, can be given more opportunity to flourish — so no one is left behind. That needs to be addressed on a much higher level internationally.”

“See, the world is full of things more powerful than us. But if you know how to catch a ride, you can go places.”

― Neal Stephenson, Snow Crash

Authored by Steve Watson via Summit News,

Arch globalist Klaus Schwab has called for elites to come together globally in order to “master” advanced technologies, warning them that if they don’t act swiftly the world could “escape our power”.

Yes really. The guy doesn’t hold back.

The World Economic Forum founder was speaking at a gathering in Dubai not so subtly titled the World Government Summit.

Schwab pointed to “fourth industrial revolution technologies,” and stated “Who masters those technologies – in some way – will be the master of the world.”

‘Our life in 10 years from now will be completely different, very much affected, & who masters [#4IR] technologies, in some way, will be the masters of the world’: Klaus Schwab, World Government Summit 2023 #WorldGovSummit #WGS @WorldGovSummit pic.twitter.com/NhLahuT56D

— Tim Hinchliffe (@TimHinchliffe) February 13, 2023

“Ten years from now we will be completely different,” Schwab said, adding “My deep concern is that [with] #4IR technologies, if we don’t work together on a global scale, if we do not formulate, shape together the necessary policies, they will escape our power to master those technologies.”

⭕️ Schwab’s tone has changed of recent. A deep panic is setting in that the world isn’t going to adhere to his WEF strategic map, that he won’t be able remake the world into a globalist utopia… pic.twitter.com/tD9caOWVjn

— Patrick Henningsen (@21WIRE) February 14, 2023

Schwab is obsessed with AI and other advanced technologies and has previously predicted that “What the Fourth Industrial Revolution will lead to is a fusion of our physical, our digital, and our biological identities.” 

Klaus Schwab: Great Reset Will “Lead to a Fusion of Our Physical, Digital and Biological Identity”

Schwab also openly endorses something the media still claims is solely a domain of discussion for conspiracy theorists, namely “active implantable microchips that break the skin barrier of our bodies.”

World Economic Forum Suggests There Are “Solid, Rational” Reasons For Children to Be Microchipped

*  *  *

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Update (1126ET):

Germany’s flagship airline carrier Lufthansa plans to return to normal operations by evening. All flights were grounded early Wednesday when construction crews in Frankfurt severed Deutsche Telekom AG broadband cables. This caused a major IT outage with the airline that affected systems, including check-in operations. 

According to Bloomberg, a spokesperson for the German airline said operations in Frankfurt are normalizing. They expect systems will be entirely restored by early evening. 

*   *   *  

Germany’s flagship airline carrier Lufthansa grounded all flights Wednesday because of a severed broadband cable, according to Bloomberg.

A Lufthansa spokesman said the airline’s ground systems, including the check-in operations, were affected. Initially, multiple news outlets said German authorities were investigating whether the IT failure was due to a cyberattack. 

📢 Currently, the airlines of the Lufthansa Group are affected by an IT outage. This is causing flight delays and cancellations. We regret the inconvenience this is causing our passengers.

— Lufthansa News (@lufthansaNews) February 15, 2023

But moments ago, Bloomberg, citing a person familiar with the matter, said construction workers in the Frankfurt region cut a Deutsche Telekom broadband cable and caused the widespread IT failure. 

⚠️Important information on flight disruption: As of this morning the airlines of the Lufthansa Group are affected by an IT outage, caused by construction work in the Frankfurt region. Unfortunately, this has led to flight delays and cancellations. We are working on –

— Lufthansa (@lufthansa) February 15, 2023

“Our technicians are working flat out to fix the issue,” Peter Kespohl, a spokesman for Deutsche Telekom, said. He outlined there is no timeline for how long the repairs would take. 

Lufthansa’s airlines include Austrian Airlines, Brussels Airlines, and Swiss. It also operates low-cost carrier Eurowings as well as other smaller regional airlines. 

Some passengers tweeted videos and photos of them being stranded at German airports. Instead of using computers, passengers had to check in using pen and paper. The airline also was unable to process their luggage digitally. 

IT systems still don’t work. „We will manually check all passengers” – airport London #Lufthansa pic.twitter.com/Q2pn1G4i8p

— Karina Moessbauer (@K_Moessbauer) February 15, 2023

#stuttgart #lufthansa #eurowings #standstill System world wide is down. No one is moving. Almost 2 hours now. pic.twitter.com/c2vLe0QToq

— mstutt_vet (@mstuttgart2) February 15, 2023

JUST IN – #Lufthansa is currently facing a global IT system failure.

UPDATE – Lufthansa has now grounded all its flights. German air traffic controllers are now diverting planes away from #FrankfurtAirport.

Feb 15,2023 🛫❌#Frankfurt pic.twitter.com/4qlScCqfiR

— 令和クニちゃん【BREAKING】@MJGA💎 (@ReiwaKuniChan) February 15, 2023

That construction worker is probably going to get fired. 

An emergency shelter-in-place was reinstated Wednesday for nearby residents in Tucson, Arizona, after a truck carrying nitric acid overturned on Feb. 14, killing the driver.

“Unified Command has reinstated the shelter-in-place order for a one-mile perimeter around the incident. While crews were attempting to remove the load from the commercial vehicle, gassing occurred. Interstate 10 remains closed in both directions between Kolb & Rita roads in Tucson,” the AZ Department of Public Safety wrote in a Wednesday update.

Residents were warned to avoid the area and seek alternate routs of travel, while anyone within a one-mile perimeter of the incident has been instructed to turn off air conditioning and heaters in order to avoid bringing in outside air.

UPDATE – Everyone in the area is advised to turn off heaters, air conditioning units and other equipment that may bring outside air in after truck flipped resulting in nitric acid spill pic.twitter.com/SqZsWfE1ww

— Insider Paper (@TheInsiderPaper) February 15, 2023

As Mimi Nguyen Ly of the The Epoch Times notes further,

Following a crash, a commercial truck tanker overturned on the Interstate 10 highway eastbound between Rita and Kolb roads, according to the Arizona Department of Public Safety.

“The tanker involved in this collision was hauling nitric acid in liquid form,” the Arizona DPS announced on Twitter of the HAZMAT spill.

Footage of the crash posted on Twitter showed reddish-orange mist emanating from an overturned truck tanker. The post was accompanied by a message: “be safe everyone, don’t [breathe] this in.”

Liquid nitric acid is a highly corrosive substance, described by the Centers for Disease Control and Prevention as a “colorless liquid with yellow or red fumes with an acrid odor.”

In vapor or mist form, it can cause burning sensations to the eyes, nose, skin, and lungs. Exposure to high concentrations of this can cause pneumonitis, bronchitis, and/or pulmonary edema, which can be fatal. These symptoms can be delayed from 4 to 30 hours after exposure. Furthermore, teeth can erode when exposed to the vapor or mist form of nitric acid.

Shelter in Place Alert Issued

The Arizona Department of Transport (DOT) announced the crash around 3 p.m. local time. By 5:09 p.m., the Arizona DPS said the tanker was leaking hazardous material.

“Interstate 10 remains closed in both directions between Rita and Kolb roads in Tucson,” per the Arizona DPS. “Motorists should continue to avoid the area and seek an alternate route.” The DPS added in a Twitter post: “We anticipate an extensive closure. Please avoid the area.”

Meanwhile, the Arizona DOT said that there is “no estimated time to reopen the road.”

Read more here…

Ukraine has been urging for the US to immediately transfer Army Tactical Missile Systems (ATACMs), which have a range of up to 190 miles, capable of being fired from the HIMARS rocket systems, which the Ukrainians already possess. 

But now the US is informing the Ukrainians that it doesn’t have enough of these long range missiles even if it were willing to provide them. Citing four US officials, Politico writes that “Transferring ATACMS to the battlefield in eastern Europe would dwindle America’s stockpiles and harm the U.S. military’s readiness for a future fight, the people said.”

An alternative that Ukrainian is considering seeking is to ask Washington to approve purchase of ATACMs from US allies which currently possess them, which includes Poland, Romania, Greece, Turkey, South Korea, Qatar and Bahrain.

Another main reason the US has cited in the past for not wanting to introduce ATACMs is the desire to avoid severe escalation with Russia in providing longer-range rockets. 

But it looks like low Pentagon stockpiles is fast becoming the number one reason for holding back, with one US official referencing “a desire to maintain a certain level of munitions in U.S. stockpiles.”

“With any package, we always consider our readiness and our own stocks while providing Ukraine what it needs on the battlefield,” a senior DoD official said. “There are other ways of providing Ukraine with the capabilities it needs to strike the targets.”

In prior months, as reports of a potential ATACMS transfer emerged, Russian Foreign Ministry spokeswoman Maria Zakharova warned that if longer range munitions are supplied, the US would become “a party to the conflict”.

She stressed at the time that Russia “reserves the right to defend its territory” – given especially that longer range rockets could potentially be used to strike deep inside Russia, something that appears to have already happened on a handful of occasions with drones.

Meanwhile, a small handful of Congressional Republicans have been increasingly highlighting the issue of the US needing to prioritize its own defense readiness first, instead of handing essential advanced arms over to foreign countries while risking needless escalation with a nuclear-armed superpower.

By Michael Every of Rabobank

When most of the market was saying “transitory!” this Daily was among the first to float the idea that inflation and rates risked being “higher for longer”. This was considered a ‘colorful’, counter-consensus view: like Russia invading Ukraine; or a US-China Cold War in 2017; or Trump winning the 2016 election. Yet Valentine’s Day saw a slew of Fed speakers say higher for longer in so many words; and the market –finally– shifted its rate projections up to the most dovish end of the Fed’s dot plot, at least until 2024, while starting to price in the odds of rates rising in June rather than being close to the start of a series of falls.

US January CPI was slightly stronger than expected at 0.5% m-o-m, 6.4% y-o-y headline and 0.4% m-o-m, 5.6% y-o-y core, but not the upside surprise some had feared. However, core services excluding shelter, which the Fed is focusing on, only edged down from 7.5% to 7.2% y-o-y. That was the lowest print since July 2022, but it’s still over three times higher than the Fed wants it to be. Clearly rates are *not* going to go down against that backdrop.

Moreover, this was after a new statistical polish had been applied. Used car prices fell rather than rising sharply, as the industry actually recorded, and new seasonal-adjustments saw big changes, mostly downwards: unadjusted CPI was up 0.8%, not 0.5% m-o-m; food at home 0.8%, not 0.4%; fruits and veggies 0.5% not -0.5%; energy 3.1% not 2.0%; electricity 2.3% not 0.5%; and apparel 2.6% not 0.8%, etc. Did the seasons really shift that much this year?

This morning sees Bloomberg quoting Rogoff and El-Erian on inflation, with the former saying, “Back in the day, they should’ve said 3%, not 2%,” as a US CPI target, but it’s too late to change it now: he thinks the Fed will keep saying 2% while not getting there. El-Erian also says the CPI target can’t be changed without a massive loss of credibility, but that if a new target were to be drawn up today, it would be 3-4% – which is where he also sees US inflation getting stuck.

Where do financial assets trade if global inflation is stuck well above target? Note I said “global”, as this is not a US but a Western problem; and not just Western, with India and the Philippines both recently seeing large upside inflation surprises. Those talking US CPI need to look more widely and deeply – that they didn’t is why they were wrong on “transitory” calls.

Let me first live up to my promise to quote the US NFIB small business survey: “Owners are managing several economic uncertainties and persistent inflation and they continue to make business and operational changes to compensate.” Persistent inflation. Now, let’s look globally.

The Financial Times warns ‘Western intelligence shows Russians amassing aircraft on Ukraine border’. That’s the spring offensive the market hasn’t been pricing for, as the new German defence minister bitterly points out none of the EU countries who promised to deliver tanks to Ukraine while Berlin was floundering have actually done so. It’s not like timing matters in war as in markets; or that war is inflationary.

To repeat a point the market keeps missing, Dean of International and Security Studies Andrew Michta notes:

“For 20 years of the Global War on Terror, the assumption was that a major war of this kind was unlikely. The mantra was “just-in-time” when it came to munitions and supplies in the name of efficiency.  That “efficiency” is today our vulnerability. The big five US defence contractors are scrambling to surge production. The situation of Europe’s defence industry is borderline dire.

The extent to which the proponents of globalization have de-industrialized the country leaves us with little capacity to switch to wartime production in an emergency. In WWII, Chrysler could retool from making cars to making tanks. How do you retool Facebook to make missiles? Consider the long wait times after orders have been placed for Abrams tanks, F-35s, etc. Bottom line: We need to invest now in expanding our defence industrial capacity and build stocks of weapons and munitions. The mantra of “just-in-time” must be replaced by “just-in-case.”

The implication is the need for more industrial capacity that can be retooled in a crisis. (By the way, as India opts to buy 220 Boeing passenger airliners in a $34bn order.) Indeed, other defense analysts point out in the fat-tail scenario of a major war in Asia, even a US victory would mean appalling military losses, and it is no position to replace its ships and planes with the current flow of production. Other countries are.

In the background, the White House has admitted three of the last four objects it shot down look to be private civilian balloons, not foreign military ones; and Iran’s President Raisi, in Beijing while nuclear tensions rise in the Middle East, heard Xi Jinping underline his “solidarity” with Tehran and that, “No matter how the international and regional situation changes, China will unswervingly develop friendly cooperation with Iran.” If people who look at dot plots could better join those dots, they would see risks of inflationary global fragmentation.

Some see it, but don’t like it. The Financial Times’ Martin Wolf warns ‘security concerns are driving the fashion for active industrial policy, but there are potential downsides’. He points to the sweeping trend CEOS see towards onshoring, reshoring, and nearshoring, and notes historically this has not played out that well. He’s right in the examples he shares. Except many countries did develop rapidly via industrial policy: the Hamiltonian US, 19th century Germany, 20th century Japan and South Korea, and 20th/21st century China. Moreover, free trade has only existed in brief historical pockets between major wars, which says something about its structural stability. Wolf just argued for land taxes, which are an even more radical policy. The missing link between his two editorials is free movement of capital: domestically, which a land tax addresses, and internationally, because if you stop the latter, trade may revert to comparative advantage as we mis-sell it today. That might be sustainable, but will first see a wrenching adjustment process – which is inflationary. By the way, expect the US to impose outbound capital controls on China.

Meanwhile, China will offer free fertility treatment to try to boost its record low birth rate; Asia-Nikkei says ‘Japan readies ‘last hope’ measures to stop falling births’; and Singapore’s budget just offered a baby bonus. Fewer workers for the same number of jobs is inflationary. To combat that, we now won’t see more outsourcing, at least not to China, while more immigration is politically unpopular. So what then? A rates response of higher for longer.

On that front, RBA Governor Lowe today told the Aussie senate that he won’t resign and that “There is a risk that the tightening of policy that’s taken place does dampen spending more than we think. But there is a risk on the other side. There is a risk that we have not yet done enough with interest rates.” I had already dismissed Lowe’s happy median talk months ago. He added, “I think the probability of a price-wage spiral is low, but if we’re wrong on that then the cost is very high. If we’re wrong on that then we are going to see higher interest rates and higher unemployment… If people think that inflation is going to be 7-8% the year after next, we’re going to have all sorts of trouble.”

Yet it would be remiss not to point out that there are deflationary signals out there – from China: just due to domestic weakness and not cheap-goods export strength, as we are accustomed to. Bloomberg carries two recent stories on that front:

• Analysis stating China’s housing slump exceeds that of the US in 2007, which took 16 years to recover from in terms of new-home sales, and China might struggle to do that well: indeed, if the population is much smaller in 2039, then how can sales recover?

• ‘Xi’s Consumer Boom Thwarted by Secret Stock Trades, Debt Misuse’ claims borrowers are using low-cost consumer loans to prepay mortgages or buy stocks. The article notes a 37-year old borrowed CNY798,000 via two consumer loans at 3.2% and 3.65% to pay off her mortgage at 5.65%, and will apply for low-cost business loans to do more of the same, presumably on another property. In short, the desired consumer boom in China is not going to happen. Once again the market consensus is dead wrong, this time in having expected inflation, not missing it. The market is also wrong in saying China will contribute x% to global growth in 2023. If it is not importing more, then any GDP growth it sees benefits it alone, while any stimulus that pushes up producer price inflation for everyone else reduces growth elsewhere.

Higher inflation. Higher rates. Higher protectionism. Higher global tensions. For longer.

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

U.S. Treasury Secretary Janet Yellen recently stated: “You don’t have a recession when you have the lowest unemployment rate in 53 years.” Let’s HOPE she is correct.

As logical as her statement seems today, it may look equally foolish in short order. As we will explain, HOPE leads us to believe Yellen does not appreciate the time it takes for tighter monetary policy conditions and reduced liquidity to cause economic deterioration.

The Fed is tightening monetary policy at the fastest pace in over 40 years. Furthermore, the economy is more leveraged now than at any time in history and, therefore, more sensitive to interest rate increases. It seems naïve to assume a recession is not probable because a lagging economic indicator, like employment, is robust.

This article explores the HOPE framework, developed by Michael Kantro, Chief Investment Strategist of Piper Sandler. HOPE is an acronym describing the lags and the sequence in which economic activity typically weakens before a recession.

HOPE

Michael’s HOPE model consists of Housing, New Orders (ISM), Corporate Profits, and Employment.

His framework acknowledges that the most interest rate-sensitive sectors are first to feel the brunt of tightening monetary policy. These sectors often serve as leading economic indicators. As interest rates dampen economic activity in interest rate-sensitive sectors, other sectors and facets of the economy begin to feel the impact of higher rates. HOPE illustrates the various lags or the time it takes for rate hikes to affect economic activity fully.

Janet Yellen may not acknowledge monetary policy lags, but Jerome Powell and many Fed members are fretting about their inability to judge how 2022’s interest rate hikes will impact 2023’s economic activity. Did they hike too much? Or might they stop too soon, keeping inflation pressures too high?

At his most recent post-FOMC press conference, Jerome Powell describes the lag effect the economy faces.

We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors of the economy, particularly housing. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation. – Jerome Powell 2/1/2023

The Fed first hiked rates on March 17, 2022, by .25%. Assuming it takes a year or longer for the full impacts of a rate hike to be experienced, the first, relatively small rate hike is not fully being felt. There were seven more after March 2022, accounting for an additional 4.25% of interest rate increases.

H Housing

30-year mortgage rates were just under 3% at the end of 2021. They currently stand north of 6%. Like most debt, mortgage rates move in lockstep with other interest rates. Therefore, when the Fed increases rates, the cost of buying a new home often follows.

As Lance Roberts often correctly reminds us, “people buy mortgage payments, not house prices.” The graph below shows how the surge in mortgage rates grossly deflated housing affordability.

The following graph shows the NAHB homebuilders’ sentiment survey plummeted over the last year. Such is not surprising given that cancellations of new home sales are literally off the chart, as shown in the second graphic. The third graph, the University of Michigan Survey Buying Conditions for Houses, shows how interest rates have negatively impacted homebuying sentiment.

O New Orders

New orders tend to follow interest-rate-sensitive sectors. Often companies seeing accumulating inventories start to reduce new inventory orders. Recent inventory warnings and desperate inventory liquidation actions from Target, Walmart, and other retailers result in reduced demand to restock inventory.

The Investing.com graph below shows the ISM New Orders survey is down to 42.5, a level often associated with recessions.

P Profits

As companies order less, corporate revenue and usually profits fall.

The KKR Global Macro scatter plot graph below shows the six-month moving average of ISM New Orders tends to lead corporate profits by about three months. The plot implies profits could drop 30-40%.

The yield curve, also a leading economic indicator, is another prescient indicator of corporate profits. It also shows a profit slump of 20-50% would be commensurate with such an inverted yield curve.  

Thus far, with more than two-thirds of companies reporting fourth-quarter 2022 earnings, earnings growth is slightly negative. Estimates for 2023 are falling.

The Fidelity graph below shows the progression of 2023 earnings estimates. 2023 estimates just went negative after starting the year in positive territory. Except for 2021 and 2018, earnings estimates over the last ten years trended lower throughout the year. We suspect 2023 will as well.

The following quote comes from Morgan Stanley’s Mike Wilson:

Forward EPS growth has just gone negative. This has only previously happened 4 times over the past 23 yrs. In each prior instance (2001, ’08, ’15, ’20), equities have faced significant price downside associated w/the shift from positive to negative earnings growth.

Lastly, the graph below from Deutsche Bank shows that last quarter’s aggregate earnings were below estimates for the first time in nearly 15 years.

E Employment

Employment is often the last economic indicator to falter. Companies will often take other cost-cutting actions before laying employees off. Not only is firing employees expensive, but it can be very disruptive and worrying for the remaining employees. Before companies’ fire employees, we often see them reduce the average work week and wages. Thus far, there are few signs this is occurring.

Quite often, unemployment doesn’t increase until a recession has already begun.

The graph below contrasts the unemployment rate with recession periods. Recessions begin within months of the cyclical low in the unemployment rate. Unemployment tends to shoot higher once a downturn begins.

Janet Yellen’s False Comfort

As we began, Janet Yellen told us not to worry about a recession because the unemployment rate is at a 53-year low. 53 years ago, in December 1969, the unemployment rate was 3.5%, marking the low for the nine-year economic expansion starting in 1960. By May 1970, it was 4.8% and rose to 6.1% within a year.

The following graph shows how employment and unemployment trended before and during the last 11 recessions since 1950. The left side shows that on the eve of recessions, the unemployment rate has always been within half a percent of its cycle low. In all cases, unemployment rose by at least 1% and up to more than 3% in a recession’s first twelve months.

The right side shows that while employment increases right until the recession starts, and then it drops suddenly. 1973 is the only exception.

Summary

Janet Yellen and most investors are failing to factor in the powerful lag effect of monetary policy. Even more concerning, they seem to be making a critical mistake as the Fed is raising rates and doing QT at a pace most of us haven’t seen in our careers. We HOPE we are wrong and such actions result in a soft landing. Unfortunately, history tells us it’s a matter of when and not if tighter monetary will send the economy into a recession.

Focus on the leading, not the lagging indicators!

A special thank you to Michael Kantro for his simple HOPE acronym that makes the lag effect of tighter monetary policy so easy to understand.

After two straight monthly declines, consensus was for a big rebound (+2.0% MoM) in retail sales in January – with the almost omnipotent forecasters at BofA seeing an even bigger (+3.0%) surge.

And once again BofA nailed it as headline retail sales soared 3.0% MoM in January. That is the biggest jump since March 2021, lifting the YoY rise in retail sales up to +6.4%…

Source: Bloomberg

Core retail sales growth also beat on a MoM basis but the YoY slipped to just +4.4% – lowest since March 2022…

Source: Bloomberg

The control group – which filters directly into GDP – saw a 1.7% surge (far better than the +1.0% exp).

Under the hood, all 13 retail categories rose last month (for the first time since COVID), led by motor vehicles, furniture and restaurants. The report showed vehicle sales climbed 5.9% in January.

Department stores sales soared 17.5%?!

Retail inventories continued to improve marginally but have a long way to go (i.e. lots of overhang still) to normalize back to pre-COVID levels…

What’s really behind the red hot retail sales?

• aggressive seasonal adjustments, same as payrolls: one-time

• COLA adjustment (+8.7): one-time

• post-holiday spending spree to take advantage of liquidation sales: one-time

Those are all one-time factors… so do not extrapolate

Finally, as a reminder, all of this retail sales data is nominal – i.e. not adjusted for inflation. While not comparing apples to apples, adjusting nominal retail sales for CPI shows that Americans’ real spending has gone practically nowhere for  10 straight months…

So before you charge off writing about how ‘strong’ the spending data is, consider how ‘strong’ the credit card debt load is and how ‘weak’ the savings rate is for Americans struggling after the 32nd straight month of real income declines.

So hotter than expected payrolls… hotter than expected inflation.. and now hotter than expected retail sales… Get back to work Mr.Powell!

The Biden administration announced Wednesday new plans to expand the nation’s charging network “so that the great American road trip can be electrified.” 

According to a fact sheet published on the White House’s website, the administration plans to build a network of 500,000 electric vehicle chargers from coast to coast. To achieve this goal, the administration announced Tesla would open 7,500 chargers to all electric vehicles, including 3,500 new and existing 250 kW Superchargers on highways. 

Tesla, for the first time, will open a portion of its US Supercharger and Destination Charger network to non-Tesla EVs, making at least 7,500 chargers available for all EVs by the end of 2024. The open chargers will be distributed across the United States. They will include at least 3,500 new and existing 250 kW Superchargers along highway corridors to expand freedom of travel for all EVs, and Level 2 Destination Charging at locations like hotels and restaurants in urban and rural locations. All EV drivers will be able to access these stations using the Tesla app or website. -WH

The Biden administration also said Tesla would “double” its nationwide network of Superchargers produced in Buffalo, New York.

Late last month, Reuters reported that Elon Musk met two top White House officials to discuss expanding EV production and charging networks. 

On Tuesday, White House infrastructure chief Mitch Landrieu told reporters that Musk was involved in discussions with the administration about charging infrastructure. 

“He was very open, he was very constructive,” Landrieu said. “And at that time, he said his intent was to work with us to make his network interoperable. Everybody else on the call agreed.”

Landrieu added, “It was critically important to us that everybody be included in the conversation.”

The rapid buildout of the nation’s EV charging stations is to handle the future demand for all the new EVs to hit roadways. The administration has set a goal for EVs to account for at least 50% of new car sales by 2030. And it’s only a matter of time before the US power grid will have to be upgraded to handle all these new EVs.  

Today’s development shows the White House and Musk might have repaired strained relations since the billionaire accused Biden of being “unable to say the word ‘Tesla'” last year. 

After a week-long suspension, Turkish stocks soared Wednesday after the country’s sovereign wealth fund supported financial markets to prevent further declines following last week’s twin earthquakes. The death toll in Turkey and neighboring Syria has surpassed 40,000. 

Here are the top headlines via Bloomberg of the intervention to save financial markets: 

• Turkey Stocks Surge as State Support Underwrites Reopening Boost
• Turkey Injects Billions of Liras to Prop Up Stocks Before Open
• Turkey Wealth Fund to Support Equities With New Mechanism
• Turkey Set to Temporarily Suspend Some Gold Imports 
• Turkey Plans Tax Waiver for Share Buybacks on Stock Exchange

The Borsa Istanbul 100 Index jumped 9.82% today, as the main equity benchmark recovered much of its losses since the twin earthquakes rocked the country’s southeast region on Feb. 6. 

Bloomberg, citing officials with direct knowledge of the matter, stated that Turkey’s sovereign wealth fund supported equities in a new internal mechanism to suppress market volatility. 

“All the measures taken seem to have been successful in boosting the equity market.”

“The market reaction for now says most of the demands of the market players are met,” said Burak Isyar, the head of equity research at ICBC Turkey Investment in Istanbul. 

Another mechanism to support stocks was Turkish firms’ announcement of large share buyback plans. Turkish Airlines, Erdemir, and Isbank debuted new buyback programs. State-owned lenders Vakifbank and Halkbank boosted their existing programs. 

In New York, iShares MSCI Turkey Exchange Traded Fund, the largest ETF concentrated on Turkish stocks, jumped 8% yesterday and is up 6% in premarket trading. 

Meanwhile, the number of dead in Turkey and Syria crossed a grim mark today, surpassing 40,000. Tens of thousands of people are still missing as quakes leveled large swaths of ten cities.