Authored by Adam Dick via The Ron Paul Institute,

A Monday article at Politico makes the case that Donald Trump will likely be running as the peace candidate among individuals vying to be the 2024 Republican presidential nominee.

The article’s authors – Meridith McGraw, Natalie Allison, and Gary Fineout – write:

Those close to Trump’s campaign operation say he plans to try and paint himself as an anti-war dove amongst the hawks. They believe doing so will resonate with GOP voters who are divided on, but growing wary of, continued support for Ukraine in its war with Russia.

Such a strategy would be in line with how Trump presented his campaign from the beginning — in his November 15 candidacy announcement speech. In that speech, Trump referenced his not having started a new war during his presidential term when declaring that, “unlike Biden possibly getting us into World War III, which can seriously happen, I will keep America out of foolish and unnecessary foreign wars just as I did for four straight years.”

Trump’s record on peace leaves some to be desired. But, his 2024 Republican presidential primary opponents can be expected to include major warmongers. The Politico article mentions Nikki Haley, Mike Pence, and Mike Pompeo as likely contenders, all of whom appear to be more pro-war than Trump. And while Florida Governor Ron DeSantis — another potential candidate for the nomination — is not widely known for his thoughts on foreign policy, the Politico article quotes a Trump advocate who provides a preview of the case for Trump as the peacemaker vis-à-vis DeSantis:

‘Trump is the peace president and he’s the first president in two generations to not start a war, whereas if you look at DeSantis’ congressional record, he’s voted for more engagement and more military engagement overseas,’ said a person close to the Trump campaign, who spoke on the condition of anonymity to describe internal discussions.

DeSantis was a Republican United States House of Representatives member from Florida from January of 2013 through September of 2018, when he left the House toward the end of his successful governor campaign. DeSantis was appointed to the House Committee on Foreign Affairs upon joining the House and went on to be chairman on the Subcommittee on National Security at the Oversight and Government Reform Committee. So DeSantis should have plenty of a track record related to war and peace.

We’ll see if Trump follows through with this campaign strategy.

One month ago, when looking at the latest Chinese credit data, we said that Beijing’s credit flood is coming, even if the December data was a disappointment.

China’s Credit Flood Is Coming, But December Was A Disappointment https://t.co/M9qmJRm0KX

— zerohedge (@zerohedge) January 11, 2023

Then two weeks later, we got confirmation that this was indeed coming, when a local news paper said that “China Bank Lending in Jan. May Hit Record at Over 4T Yuan”, to which our response was that China had just wasted 3 years in another pointless deleveraging experiment to get back where it started: with massive credit injections as the only means for growth.

China just wasted 3 years in another pointless deleveraging experiment to get back where it started: with massive credit injections as the only means for growth. https://t.co/nDrAaUHYJA

— zerohedge (@zerohedge) February 1, 2023

Fast forward to today when just as we previewed a month ago, the Chinese Credit Flood arrived with a bang, and a record 4.9 trillion in new loans, which smashed expectations as did the Total Social Financing which came at a near record 6 trillion yuan, or almost $1 trillion in total new credit (i.e., new money) in just one month!

The big picture: Total RMB loans surprised the market to the upside mainly on stronger corporate loans – corporate loan growth accelerated to 23.7% month-over-month annualized in January from 16.9% in December, although short-term corporate loans grew faster than medium to long term loans. Household loan growth slowed in contrast – medium to long term loans to households (mostly mortgages) contracted in January vs December last year amid weak property transactions and early repayment of mortgages. Total social financing and M2 beat expectations as well on the back of stronger loan growth.

The key numbers:

• New CNY loans: RMB 4900BN in January (RMB loans to the real economy: RMB 4930BN) vs. Bloomberg consensus: RMB 4200BN.
• Outstanding CNY loan growth: 11.3% yoy in January (+12.7% mom sa ann, estimated by GS); December: 11.1% yoy (+12.1% mom sa ann).
• Total social financing: RMB 5980 billion in January, vs. consensus: RMB 5400bn
• TSF stock growth: 9.4% yoy in January, vs. 9.6% in December. The implied month-on-month growth of TSF stock: 11.5% in January (seasonally adjusted annualized rate), more than double the 4.8% December rate.
• M2: 12.6% yoy in January (21% mom sa ann estimated by GS) vs. Bloomberg consensus: 11.7% yoy, December: 11.8% yoy (+2.5% mom sa ann).

Courtesy of Goldman’s Maggie Wei, here are the main points from the report:

• 1. January total social financing (TSF) came in above market expectations, mainly on stronger loan growth. The sequential growth of TSF stock accelerated to 11.5% mom sa annualized in January from 4.8% in December, and in year-on-year terms, TSF stock growth slowed to 9.4% from 9.6% in December. Among major TSF components, new CNY loans rose strongly after seasonal adjustment, and shadow banking credit turned less negative as well. Trust loans, entrusted loans and undiscounted bankers’ acceptance bills combined contracted by RMB 140bn in January, vs a contraction of RMB 453bn in December last year. Corporate bond showed net issuance of RMB 91bn, vs net redemption of RMB 505bn in December, and government bond net issuance rose to RMB 794bn, from RMB 425bn in December.

• 2. Overall CNY loans came in well above market expectations, and the sequential growth of RMB loans accelerated to 12.7% mom sa annualized from 12.1% in December. Year-on-year growth of RMB loans was 11.3% in January, edging up from 11.1% in December. Based on loan breakdown by different sectors after our seasonal adjustment, corporate loan growth accelerated while household loan growth slowed. In particular, household short-term loan growth slowed to 3.4% month-over-month annualized from 5.7% in December, and household medium to long term loans, which are mostly mortgages, contracted by 2.2% in January from 5.2% expansion in December last year, on the back of slow property transactions and early repayment of mortgages, despite on-going property policy easing.
• 3. M2 growth accelerated to 12.6% yoy in January from 11.8% in December, above market expectations and the highest since 2016. FX inflows have likely been quite strong in January, adding to the overall M2 growth in the month, besides the contribution from faster RMB loan growth.

• 4. January loan and credit data were stronger than expectations, mostly on higher RMB loans to the corporate sector. The acceleration in corporate loans reflected policy support and some improvement in credit demand – policymakers urged commercial banks to accelerate loan extensions and market color suggests faster loan growth in infrastructure and manufacturing sectors. However, corporate short-term loans grew faster than long-term loans – short-term loans expanded by 39.3% month-over-month annualized, vs 5.4% in December last year, and medium to long term loans expanded by 28.2% month-over-month annualized, vs 24.4% in December. Whether the fast speed of corporate loan growth could be sustainable thus remains to be seen. In contrast, the weak household loans and in particular household medium to long term loan growth highlighted the challenges in the property sector – despite the on-going policy easing in the sector, households chose to repay mortgages early amid falling mortgages rates and relatively conservative expectations on future property prices.
• 5. PBOC revised the statistical standards for money and credit data this month by including credit extensions from consumer credit companies, wealth management companies, and financial asset investment companies to the loan and TSF data, though this impact is relatively small. According to the PBOC, total loan extensions by these companies stood at RMB 841bn in January, around 0.4% of outstanding RMB loan stock.

Bottom line, the January loan and credit data came red hot as we expected and as China warned, clearly expecting this outcome and hinting that there is much more to come (no surprise that the PBOC released more than 1trillion yuan in new liquidity in just the past three days). The acceleration in bank loans reflected policy support – commercial banks extended more loans to property developers after the “property 16 measures”, and policy banks’ credit facility targeting at infrastructure investment in recent months likely also added to overall RMB loan growth. At the same time, the sharp upward reversal in TSF growth indicates that Beijing has fully capitulated when it comes to new containing the next credit bubble and is now pursuing it wholeheartedly as it hopes to reverse three years of subdued growth by China’s economy during its Zero Covid nightmare.

The question is how soon and how extensively China’s massive credit impulse reboot will flood the world. One thing is clear: the burst higher in credit will lead to an even more powerful bounce in Chinese stocks in the near term.

The chart below basically summarizes my take on the credit data Beijing just released. pic.twitter.com/Tpd0mtcD8T

— Shanghai Macro Strategist (@ShanghaiMacro) February 10, 2023

How widely that spreads across the globe remains to be seen and will be a function of how much inflation China manages to export to the world in the next year. This a topic we discussed in “Nikileaks Spooks Markets That Chinese Reopening May Be Inflationary, But Wall Street Disagrees.” But what is perhaps most important is that the wobbly foundation of the world’s biggest asset bubble – China’s property market..

… is about to be reinforced with monetary concrete, as discussed in “In Huge Policy Reversal, China Will Ease “Three Red Lines” Rule To Kickstart World’s Biggest Asset Bubble“, and not long after expect all global “high beta” asset classes to follow suit.

Authored by Jonathan Turley,

Even after the collapse of the Russian collusion investigation, Democrats seem to be doubling down on labeling opponents as Russian lovers and Putinites.

Yesterday, I testified at a hearing with members of Congress who want the House to investigate possible FBI abuses. One of the witnesses, former Rep. Tulsi Gabbard, testified how her anti-war positions led to her being labeled a Russian asset by Hillary Clinton. Not to be outdone, MSNBC contributor and former Senator Claire McCaskill appeared on MSNBC following the hearing to denounce Senator Chuck Grassley and Sen. Ron Johnson as “Putin apologists” and Putin lovers.

McCaskill went on MSNBC’s Deadline: White House to declare “I mean, look at this, I mean, all three of those politicians are Putin apologists. I mean, Tulsi Gabbard loves Putin.”

(For the record, she also attacked me as not being “a real lawyer.”)

McCaskill previously denounced the personal attacks used by Republicans as unacceptable in American politics.

It is an ironic follow up to a hearing where I warned Congress not to replicate the mistakes of the McCarthy period and label opponents as “fellow travelers” and Russian sympathizers. McCaskill immediately responded by denouncing these members as Putin apologists and lovers.

Democrats like McCaskill expressed disgust at the personal attacks of former President Donald Trump against opponents and witnesses. I joined in that criticism. However, they are now engaging in the same attacks to avoid addressing issues of agency bias, censorship, and investigatory abuse. On MSNBC, those seeking investigations into these allegations are now Russian lovers and traitors. Even with a supportive media, it will not work. The polls have shown that the public overwhelmingly support investigations into these matters. It will, however, succeed in adding to the hateful rhetoric that now permeates every aspect of our political discourse.

Ukrenergo, Ukraine’s energy operator, confirmed Friday that several high-voltage sites across the country had been hit in what Kiev authorities called the latest “massive” missile attack by Russia. Already tens of millions across the war-ravaged country are without power, and elsewhere emergency cuts persist.

Ukrainian forces claimed to have shot down the majority of inbound missiles, however. “The enemy launched a massive missile attack on the critical infrastructure of Ukraine,” Ukraine’s air force said. “Sixty-one out of 71 enemy missiles (have been) destroyed.”

The attack was focused on Kharkiv and Zaporizhzhia regions. In describing the fresh assault, Valery Zaluzhny, the commander-in-chief of Ukraine’s armed forces, said that Russia fired two Kalibr missiles from the Black Sea and which had allegedly crossed over the airspace of Romania and Moldova. The allegation is significant especially given Romania is a NATO member.

Romania has formally denied the claim, but Moldova acknowledged it without initially condemning Russia directly, likely in fear it will inflame tensions with Moscow further, as the AP reports:

Romania’s defense ministry said it detected an “aerial target launched from the Black Sea from a ship of the Russian Federation” but “at no point did it intersect with Romania’s airspace”.

The Moldovan defense ministry said it detected a missile, confirming it “crossed the airspace of Moldova.” Moldova, which has already seen debris of Russian missiles during the war, said it would summon Russia’s ambassador over the incident.

But one of the missiles is still believed to have narrowly missed crossing into NATO-member Romania’s airspace. Ukraine’s President Zelensky seized on this to argue it constitutes a fresh “challenge” to NATO and its collective security.

“The enemy launched at least 70 rockets in another massive attack [on Ukraine] this morning,” Zelenskyy said in a video statement on Telegram.

“Several Russian missiles passed through the airspace of Moldova and Romania. These missiles are a challenge to NATO and collective security. This is terror that can and must be stopped,” he added. Zelensky has long tried to push NATO more directly into the conflict to drive the Russians out of Ukraine.

News of the missile flyover was accompanied by further instability in Moldova, as CNBC reports, the Moldovan government has effectively collapsed amid the ongoing pressure due to the war just across the border. “Moldova’s Prime Minister Natalia Gavrilita said Friday that her government was resigning following a volatile 18 months in power and an ongoing war at its border.”

“Gavrilita did not say whether the decision was in direct response to the war between neighboring Ukraine and Russia,” CNBC continues. Western allies have long charged Russia with seeking to destabilize Moldova, and there have long been fears that Russian forces could cross into the country.

The follows on the heels of in the past months Western countries donating hundreds of millions of dollars to shore up tiny Moldova’s resources amid renewed fears of future Russian aggression and energy supply cuts against it. 

Moldova’s pro-Western government resigned as fallout from the war in neighboring Ukraine worsened. Ukrainian President Volodymyr Zelensky said Russia was trying to destabilize the country. https://t.co/rmomLx5EVl

— The Wall Street Journal (@WSJ) February 10, 2023

A new prime minister has been named, the pro-EU Dorin Recean, described as someone who will keep Moldova on a pro-European Union trajectory. Recean is currently the national security adviser, and will replace Natalia Gavrilița as the new head of government,” Politico reports.

“The Moldovan parliament, where Sandu’s party holds a comfortable majority with 63 out of 101 seats, will vote to confirm the nomination next week,” details Politico.

Video from Ukraine’s 72nd Mechanized Brigade reportedly showing Javelin ATGM strikes on three Russian BMP-3 (only 1 is in the video) and two T-80 tanks (they look like T-80BVM) from the Pacific Fleet’s 155th Naval Infantry Brigade in Vuhledar. https://t.co/vynMHox7K0 pic.twitter.com/HkO53vlJNS

— Rob Lee (@RALee85) January 26, 2023

On the ground, fighting in Bakhmut continues, with Western media reports increasingly acknowledging that time is running out for Ukrainian troops defending the city.

Russia already has it surrounded by three sides, but the Ukrainians have vowed to fight till the end, akin to what happened in Mariupol. Control of Bakhmut will strategically link large swathes of eastern and southern Ukraine currently in control of Russian forces. 

By Sagarika Jaisinghani and Michael Msika, Bloomberg Markets Live reporters and strategists

Meta, Big Oil Lead $160 Billion Buyback Revival

Investors may say they want companies to save cash rather than repurchase stock, but they’re more than happy to reward the increasing number doing otherwise.

Bumper buyback announcements worth more than $160 billion from the likes of Meta Platforms Inc., BNP Paribas SA and Equinor ASA have brought enthusiastic responses this earnings season. Those that suspended programs — such as Carlsberg A/S and British American Tobacco Plc — or shied away from setting out new plans have been punished. Both in the US and Europe, buyback announcers have outperformed benchmark indexes by 6 percentage points in the past year.

After slowing down last year as firms braced for a bleaker economic outlook, stock repurchase plans have roared back in 2023, led by energy firms such as Chevron Corp. and Exxon Corp. as soaring oil prices brought cash flooding in. That’s despite 53% of the participants in Bank of America Corp.’s latest fund manager survey saying they’d rather see corporates shoring up balance sheets, and less than a fifth opting for higher shareholder returns.

Not even a new US tax on buybacks or calls for further levies by President Joe Biden have acted as a deterrent, and at $132 billion in January in the US, repurchase plans notched the best ever start to a year.

Companies with still large post-pandemic cash balances are returning increasing amounts to investors as they face “relatively limited investment opportunities in light of a worsening economic backdrop and rising uncertainty,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets.

In Europe, this year is shaping up to be one of the best ever for buybacks, with announcements totaling about $30 billion so far. Along with energy firms, banks have been leading the way as higher interest rates have provided a boost to their income. Goldman Sachs Group Inc. strategist Sharon Bell said she expects repurchases to be one of the main drivers of stock demand in the UK in 2023.

With the economic climate still so uncertain, companies have cause to prefer returning cash via buybacks, given they’re much easier to suspend or reduce than dividends. Moreover, buybacks produced capital gains but no immediate tax bills until this year, when a 1% excise tax went into effect in the US. In his State of the Union address this week, Biden called for quadrupling the levy.

One argument against buybacks is that companies would be better off investing the cash into research & development, ensuring they maintain a competitive advantage over the longer term. But as interest rates remain high, “shorter-duration equities” are more attractive, “perhaps at the expense of those hoping to tie up capital for longer-time horizons,” said Ross Mayfield, investment strategy analyst at Robert W. Baird & Co.

That’s not to say companies announcing buyback plans this season have ignored R&D investments. BP Plc on Tuesday hiked its dividend and extended buybacks, but also pledged to accelerate investments in both low-carbon energy and fossil fuels. Its stock jumped 8% to the highest since November 2019.

“It’s not an either/or situation for buybacks versus capital expenditure and a majority of companies are continuing to invest as appropriate in R&D,” said Brian Ferguson, a portfolio manager at Newton Investment Management.

To be sure, not everyone is sold on the benefits of stock repurchases.

“Buybacks create incremental demand for shares, pushing them higher and enriching executives with stock options or underlying shares,” said Michael Green, portfolio manager and chief strategist at Simplify Asset Management. “Whether they are a good deal for long-term shareholders is debatable.”

BAT shares tumbled by the most in nearly two years after the firm’s decision to end a share buyback program disappointed some investors.

Late last month, mysterious green laser beams were spotted from Hawaii’s tallest peak. Experts initially said the burst of laser beams was emitted by a NASA spacecraft though that was proven incorrect this week — with evidence pointing to a Chinese satellite. 

Space experts at the National Astronomical Observatory of Japan (NAOJ) initially tweeted on Jan. 30 that the Subaru-Asahi Star Camera “captured green laser lights in the cloudy sky over Maunakea, Hawai’i. The lights are thought to be from a remote-sensing altimeter satellite ICESAT-2/43613.” 

But on Feb. 6, one week later, NAOJ issued a correction on YouTube that specified the laser beams weren’t from a US spacecraft but the “most likely candidate” was a “Chinese Daqi-1/AEMS satellite.” 

“According to Dr. Martino, Anthony J., a NASA scientist working on ICESat-2 ATLAS, it is not by their instrument but by others,” a correction note on the YouTube video explains. 

“His colleagues, Dr. Alvaro Ivanoff et al., did a simulation of the trajectory of satellites that have a similar instrument and found a most likely candidate as the ACDL instrument by the Chinese Daqi-1/AEMS satellite.

“We really appreciate their efforts in the identification of the light. We are sorry about our confusion related to this event and its potential impact on the ICESat-2 team.”

Here’s the video of the Chinese satellite firing bursts of lasers toward Earth. 

Even though the Daqi-1 satellite is supposedly an atmospheric environment monitoring spacecraft, there are many concerns after the spy balloon incident last week of space-base and even high-altitude surveillance equipment monitoring the US and allies. 

By Michael Every of Rabobank

Duh, Kapital

Balloons blow, and capital won’t flow. ‘US Makes Case That Chinese Balloon was Part of a Spying Program’, says Bloomberg, and “The Chinese spy balloon shot down Saturday included western components with English-language writing on them.” ‘US Aims to Curtail Financial Ties With China’, says the New York Times, with the White House preparing rules to restrict US dollars from flowing there. An inverse CFIUS would stop US investment in areas related to technologies like AI; or with dual civilian-military uses, which is a longer list; or balloons.

Markets are not going to like that because it’s anti-Marx. I don’t mean the CCP, though that is also true, but rather Karl’s quote that: “The bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country. To the great chagrin of Reactionists, it has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed…. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations.”

Talking of capital flows, yesterday US yields rose again and the 2s -10s yield curve spread widened to most since the early 1980s, at one point reaching 86bps – and that is with the 2-year yield still 100bps lower than the 5.50% terminal rate that our Fed watcher Philip Marey now has penciled in for this year. However, things can get worse. Philip sees the risk of a US wage-price spiral becoming embedded, as does Fed Chair Powell in talking about a “structural” shift in the labor market. That leads Philip to flag that Fed Funds might have to go to 6% – and today Bloomberg quotes one analyst saying 8% rates are needed to bring US inflation down to 2% again. (If 5.50% was science-fiction a year ago, 8% was *bad* science-fiction, like ‘Plan 9 From Outer Space’.)

The deepening US curve inversion shows the market refuses to see the same risks of a wage-price spiral: the long end would hypothetically by 450bps inverted if it didn’t move and the Fed did to 8%.

In doing so the market is adopting a Marxist view that capital has so much power vis-à-vis labour that wages can’t get out of control. For a long time that has been a really accurate call. However, there is building evidence of a Covid effect on OECD labour markets, and others: Thailand recently floated using prisoners in the under-staffed tourist sector, giving a whole new meaning to ‘Let me take your bag, Sir.’ Moreover, we might be seeing labor hoarding because firms realize having no labor makes their capital worthless. If sustained, that would undermine Marx’s claim that capitalists maintain a “reserve army of labor”, i.e., high unemployment to ensure wage demands never rise.

Of course, one can push back against this, as a Marxist dialectician must, to say that central banks don’t understand the political-economy or Marx, which is ironically an argument for an inverted yield curve, because they risk over-tightening.

However, the long-end view that the bourgeoise elderly are retiring, so asset prices must be high, so yields must be low, clashed with an inverted US demographic pyramid even pre-Covid. A retirement wave now means fewer workers; so wage pressures; so inflation pressures; so higher rates for longer; and so lower asset prices; unless one is focused on the bourgeoise elderly – “OK, Marxist Boomer.”

Moreover, it seems an odd dichotomy to conceive that capitalists are ruthless, short-term, amoral exploiters (so low wages), yet capital markets are thoughtful, rational, and forward-looking (so low yields). Enron, Madoff, and Bankman-Fried are obvious retorts, as is the fact that Wall Street thinks about end-quarter returns and remuneration, not Marx. On that basis, the capital market is as willing to be ruthless, short-term, amoral, and exploitative: and what it wants is lower rates, to allow a broader re-risking, end-quarter returns, and remuneration.

Just as a reserve army of labor is created by capitalists to ensure wages cannot rise much, a reserve army of liquidity flows from capital markets to the long end of the yield curve to ensure yields cannot rise much either. That forces the Fed to keep doing more on rates to compensate for the easing of financial conditions the market is creating. If that then leads to a Fed policy error, recession, and the mass mobilization of a reserve army of labour, then it’s just collateral damage to end-quarter returns; and the market will have created it, rather than having predicted it. Perhaps they are Leninists, not Marxists, willing to give history a violent push in the right direction. Yes, this again supports an inverted curve – just not for the kind of intellectual reasons one thinks.

Of course, capital markets can be forced back – the Fed’s Williams recently underlined that rates are not just moving vastly higher than capital thought a year ago, but will stay higher for longer. But such talk is cheap, as is the long-end cost of borrowing in real terms. Far more effective is the kind of blunt instrument we see the Biden administration about to use vis-à-vis China.

Importantly, all this theorizing will reach a point of praxis soon. What will tip the market scales one way or the other will be wage growth. If there really is no more reserve army of labor, we are going to see wage growth stay high. If there is a reserve army of labor, we won’t. It’s not just a case of ‘duh, Kapital’, but ‘duh, Labor’.

We will find out what the BOJ has to say about both shortly too, as next week (11am local time on February 14) will see the nomination of the next Governor. Do we get a hawk or a dove? Does that imply a market-wrenching shift in BOJ policy? Again, praxis looms.

The RBA quarterly Statement on Monetary Policy today also saw the Bank raise its forecasts for core inflation, now 6.25% y-o-y in the year to end-June, up from 5.5%, but then falling back to 4.25% by December (because reasons). Wages are expected to rise 4% y-o-y by June and peak at 4.25% too, despite a white-hot labour market, despite 1/3 of firms surveyed by the RBA hiking wages by over 5% in Q4 (because reasons). Those forecasts are based on the RBA overnight cash rate peaking at 3.75% this year then declining to 3% by mid-2025, both of which are open to question at this stage. Aussie GDP growth is now seen at 1.6% in 2023 and 1.4% in 2024, against population growth of 1.5%, which implies a lot of net immigration, and a slight decline in GDP per capita. Overall, the SoMP was taken as hawkish – but trying to decipher its inherent contradictions, as the RBA tries not to spook housing while talking tough, is a challenge even for a Marxist.

Today saw Chinese CPI and PPI too: the former was 2.1% y-o-y, up from 1.8%, but as expected, and the latter was -0.8% y-o-y, weaker than then -0.5% expected. Lots of challenges for Marxists there too, even if different ones from the West.

Meanwhile, global commodity traders Trafigura are facing losses of $577m after nickel shipments were found to be fraudulent. That’s painful for them, and for markets expecting cheap nickel as a key input for ongoing green transitions, especially as it comes after the LME’s scandal over nickel trading. That means higher inflation as part of that transition. Of course, higher US rates for longer would help push commodity prices lower for everyone, as well as asset markets in general;  and ‘nickel and dimes’ also points out the problems inherent in trying to move away from dollars to commodities as currency as a point of geopolitical praxis. You think fiat is doddy? Try non-existent nickel and copper!

Possibly emboldened by the strong demand it spurred from price cuts just a month ago, Tesla is now raising the price of its Model Y in China back to 261,900 Yuan. 

The price of the vehicle had been cut to 259,900 Yuan on January 6th from its original price of 288,900. The move not only shows that price cuts for the automaker could be over in China, but also that demand has likely firmed. 

Tesla will also be raising the price of the Model Y an unspecified amount in the United States, according to the same Bloomberg write up.

As we noted yesterday, price cuts seemed to be a plan that paid off for the automaker, which was mired in questions about slumping demand heading into the end of 2022. The worries sent the company’s stock spiraling lower to end last year, but shares have now doubled off the low they made on January 6, 2023, the day after the price cuts were announced. 

It marks a stunning move higher in a short amount of time when both Elon Musk’s financial solvency and Tesla demand were popular talking points among skeptics. 

The pop in shares has come as a result of Tesla finding success in driving more demand by cutting its prices. Heading into the company’s Q4 2022 earnings report, there were looming questions not only about whether or not the price cuts would work, but also whether or not they would drive down margins too much.

But just last weekend we noted that the company’s price cuts were helping spur demand in China that was so robust, it was bucking the national trend for EVs for the month of January. The company’s China segment shipped 66,051 vehicles in January, according to Bloomberg, citing preliminary data released by China’s Passenger Car Association. In December, that number stood at 55,800.

The figure is up 18% from December, while China’s new energy passenger vehicles, in total, are seen down 45% month over month from December to January. 

The company is now reportedly planning to increase output at its Shanghai plant – bringing its run rate back toward where it was in September 2022 – in order to continue meeting the demand from price cuts on its best selling models. 

Tesla had suspended operations at its Shanghai plant for a portion of December. The EV maker was expected to halt production – as we noted in a previous article – but continued swirling questions about demand had surfaced after the company shut down operations at the key location earlier than expected. Back on December 9th we wrote that the company was shutting down operations due to upgrades at the plant and waning consumer demand.

Meanwhile, looking at the broader scope of EV sales in China, domestic names like Nio, Xpeng and Li Auto all recorded monthly and YOY sales declines in January, per Jalopnik. 

Authored by Lance Roberts via RealInvestmentAdvice,com,

Bullish investors continue to “Fight the Fed,” hoping that a change to monetary policy will reignite the 12-year-long bull market. But, for over a decade, the “Don’t Fight The Fed” mantra was the “call to arms” for bullish investors.

“With zero interest rate policies and the most aggressive monetary campaign in history, investors elevated the financial markets to heights rarely seen in human history. Yet, despite record valuations, pandemics, warnings, and inflationary pressures, the “animal spirits” fostered by an undeniable “faith in the Federal Reserve.” 

Of course, the rise in “animal spirits” is simply the reflection of the rising delusion of investors who frantically cling to data points that somehow support the notion ‘this time is different.’” 

Not surprisingly, as a massive flood of monetary interventions detached market dynamics from economic and fundamental realities, bullish investors scrambled to find rationalizations for ever-higher asset prices. David Einhorn previously explained such:

“The bulls explain that traditional valuation metrics no longer apply to certain stocks. The longs are confident that everyone else who holds these stocks understands the dynamic and won’t sell either. With holders reluctant to sell, the stocks can only go up – seemingly to infinity and beyond. We have seen this before.

Of course, with more than $43 Trillion in bailouts and Federal Reserve interventions, it is of no surprise that bullish investors cast caution to the wind.

It is also not surprising that stocks have come under pressure as the Fed started hiking interest rates aggressively and the process of reducing its previous influx of monetary support.

Yet, instead of bullish investors sticking with their mantra of “Don’t Fight The Fed,” it is now a standoff between bullish investors and the Fed. After a tough year in the markets, the hope for 2023 is that the Fed will “pivot” in its monetary policy campaign and begin to ease by mid-year. As Tom Lee of FundStrat noted;

“Historical data shows there is a high chance that the U.S. stock market may record a return of 20% or more this year after the three major indexes closed 2022 with their worst annual losses since 2008,”

While bullish investors cling to historical statistics about market returns, the problem is the Fed remains clear that it will not back off its current inflation fight.

The Fed And Bullish Investors Are At Odds

In early January, the market got the release of the minutes from the December FOMC meeting. The minutes were unsurprising, at least to us, as they reiterated the same message the FOMC delivered in all of 2022. To wit:

“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience  cautioned against prematurely loosening monetary policy.”

There are a couple of important points made in that statement.

1. The FOMC isn’t looking to have inflation at 2% before changing its policy stance. They want to see a clear and sustained pathway to 2%.
2. The FOMC fears inflation will come down and then reaccelerate, as seen in the 70s. (See chart)

It is worth noting that the floor for inflation in the 70s was 4% versus 2% today. Such is because debt levels were dramatically lower, economic growth was more robust, and there was no Federal deficit. Today, the economy can’t sustain higher interest rates or inflation for very long without more severe economic consequences.

Nonetheless, despite the FOMC reiterating there is “no pivot” coming on monetary policy anytime soon, bullish investors expect rate cuts as soon as July of this year.

Notably, bullish investors are trying to apply some fundamental logic for a stronger market in 2023.

• The economy will avoid a recession.

• Employment will remain strong, and wages will see the consumer through.

• Corporate profit margins will remain elevated, thereby supporting higher market valuations.

• The Fed will back off its tightening campaign as inflation falls.

There is a particular problem with those arguments.

If the economy and employment remain strong, and a recession gets avoided, there is no reason for the Fed to begin cutting rates. Yes, the Fed may stop hiking rates, but if the economy is functioning normally and inflation is falling, there is no reason for rate cuts.

More importantly, bullish investors continue to work against their own interests.

The Beatings Will Continue Until Morale Improves

As we discussed, the Fed wants “tighter,” not “looser,” financial conditions.

“Higher asset prices represent looser, not tighter, monetary policy. Rising asset prices boost consumer confidence and act to ease the very financial conditions the Fed is trying to tighten. While financial conditions have tightened recently between higher interest rates and surging inflation, they remain low. Such is hardly the environment desired by the Fed to quell inflation.”

The FOMC needs substantially tighter financial conditions to slow economic demand and increase unemployment, lowering inflation toward target levels. Tighter financial conditions are a function of several items:

• A stronger US dollar relative to other currencies (Check)
• Wider spreads across bond markets (There is no credit stress currently)
• Reduction in liquidity (Quantitative Tightening or QT)
• Lower stock prices.

The more bullish market participants should be aware the Fed is ultimately pushing for lower stock prices. The Fed is removing liquidity by reducing its balance sheet twice as fast as in 2018. For those who don’t remember, the last QT ended in a 20% market plunge over three months. Today, even with weaker inflation, QT is not ending anytime soon.

We noted in November that:

It will not be surprising to see Federal Reserve speakers try and swat down asset prices with continued hawkish rhetoric. As far as a ‘pivot’ goes, that still seems quite a long way off.”

That point was repeated in the latest FOMC minutes.

“Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability. Several participants commented that the medians of participants’ assessments for the appropriate path of the federal funds rate in the Summary of Economic Projections, which tracked notably above market-based measures of policy rate expectations, underscored the Committee’s strong commitment to returning inflation to its 2 percent goal.”

As noted, the FOMC wants a “controlled burn” of asset prices lower, not higher. I would suspect that at some point, market participants will realize that the FOMC is serious about its mission.

However, for now, hope remains.

Risks Of A Recession Are Elevated

As noted, heading into 2023, market participants are starting to coalesce around the idea the economy will avoid a recession. To wit:

“We believe the Fed will stop QT sometime in the Fall before they begin lowering rates. It is hard for us to see a recession of any significance occurring in 2023.” – Brett Ewing, Chief Market Strategist, First Franklin.

Maybe that happens. Anything is certainly a possibility.

However, that is essentially swimming against the stream of what the FOMC is trying to achieve. Again, if the goal is to quell inflation, then economic demand must fall. Even the FOMC is now admitting a recession is plausible.

“Moreover, the sluggish growth in real private domestic spending expected over the next year, a subdued global economic outlook, and persistently tight financial conditions were seen as tilting the risks to the downside around the baseline projection for real economic activity, and the staff still viewed the possibility of a recession sometime over the next year as a plausible alternative to the baseline”

The financial markets have yet to adjust to accommodate for a substantially weaker, if not recessionary, economy.

As discussed previously, earnings estimates remain highly optimistic and deviated from their long-term growth trend despite the recent cuts.

As my friend and colleague Albert Edwards of Societe Generale recently noted:

“I keep being told this is the most widely anticipated recession ever, and it must already be priced in. But the decline in 12-month forward EPS of only 4% (from the peak) doesn’t suggest so.”

Furthermore, the rash of weak economic data also suggests that the risk of a recession has risen markedly, as noted by our broad economic activity composite index. If that data weakens further, which is the Fed’s goal, such also suggests lower earnings.

Given current valuations, as discussed in more detail here, the forecast for asset prices later in the year is not extremely bullish.

“Adding the bullish scenario to our projection chart gives us a full range of options for 2023, which run the gamut from 4500 to 2400, depending on the various outcomes.”

Here is our concern with the bullish scenario. It entirely depends on a “no recession” outcome, and the Fed must reverse its monetary tightening. The issue with that view is that IF the economy does indeed have a soft landing, there is no reason for the Federal Reserve to reverse reducing its balance sheet or lower interest rates.

More importantly, the problem with the bullish forecast is the rise in asset prices eases financial conditions, which reduces the Fed’s ability to bring down inflation. Such would also presumably mean employment remains strong along with wage growth, elevating inflationary pressures.

While the bullish scenario is possible, that outcome faces many challenges in 2023, given the market already trades at fairly lofty valuations. Even in a “soft landing” environment, earnings should weaken, which makes current valuations at 22x earnings more challenging to sustain.

While bullish investors continue trying to “Fight the Fed,” such may prove to be a more formidable challenge than many expect.

Adidas AG shares trading in Germany crashed after it published its financial guidance for 2023 and warned it’s sitting on a 1.2 billion euros ($1.3 billion) pile of unsold Yeezy product. 

The German sportswear company said it’s ‘reviewing’ all options for utilizing its Yeezy inventory. It said, “this guidance already accounts for the significant adverse impact from not selling the existing stock.” 

Operating profit will decline by 500 million euros if the company fails to sell the products and expects sales to decline at a high-single-digit rate this year. The company might write off its remaining products if the inventory isn’t repurposed. 

In December, we first pointed out Adidas was sitting on a half billion dollars of Yeezy products. Today’s report doubles that number to a staggering $1.3 billion. 

“The numbers speak for themselves. We are currently not performing the way we should,” CEO Bjørn Gulden wrote in a statement. 

Gulden said this “will be a year of transition to set the base to again be a growing and profitable company.” 

In October, Adidas terminated its partnership with Kanye West, who now goes by Ye, after antisemitic comments. 

Gulden added: 

“We need to put the pieces back together again, but I am convinced that over time we will make adidas shine again. But we need some time.”  

Adidas shares crashed 12% on today’s horrible 2023 outlook. 

Here’s what Wall Street analysts are saying about Adidas (courtesy of Bloomberg): 

Jefferies (cut to hold from buy, PT to €150 from €140) 

• The confirmation of an even-deeper earnings trough for 2023, though needed for a quicker rebuild in profit, “will spook many,” analyst James Grzinic says 
• The disconnect between the operational delivery at Adidas and the exceptional cash returns will likely see the company end 2022 with a slight net-debt position 
• As such, assume no dividend proposal for 2022 or 2023 and cut rating given the rebound for the stock set agains a difficult medium-term profit outlook

Oddo (cuts to underperform from neutral, PT to €120 from €124) 

• “Massive” warning on both Yeezy and other problems within the business, with market seemingly too-optimistic on inventory clearing and promotional volumes, analyst Andreas Riemann says
• Not selling more Yeezy is not a surprise, but the magnitude is and given this cannot explain the shortfall entirely, believe there are additional problems which may take years to resolve

Morgan Stanley (underweight, PT to €110 from 115)

• “Material reset” for Adidas in 2023, driven by the combination of losing any profit contribution from the highly-profitable Yeezy line and from weaker underlying performance, analyst Edouard Aubin says 
• Bulls will say this is a classic “kitchen-sinking” by the new CEO, who is know to guide conservatively 
• Yet this report confirms what the broker has been hearing in the trade, that Adidas has an unattractive profit line, it is losing market share in a number of categories and has a bigger inventory issue than peers

UBS (neutral, PT €150) 

• Based on the tone of the press release, see a high likelihood that the Yeezy business will be “scrapped entirely” going forward, analyst Zuzanna Pusz says
• The update may provide a “reality check” for the market given the re-rating in Adidas shares recently

Credit Suisse (underperform, PT €103) 

• The warning underlines the weakness of the Adidas brand and damage to the margin structure of the company, analyst Simon Irwin says 
• Assume the cut to guidance driven by weaker gross margins and operating de-leverage, which means much of the margin rebound will have to come from the cost lines

RBC (sector perform, PT to €110 from €130) 

• Had been anticipating Adidas would book one-offs in FY23 but the lower underlying guidance has resulted in a “materially worse” outlook than expected, analyst Piral Dadhania says 
• See much work to do for Adidas across its corporate culture, on products, on lower sell-through rates, inventory and digesting the Yeezy exit, which can all be achieved but which will take time
• Materially cutting FY23 estimates and continue to prefer Puma and Nike

Baader (reduce, PT €133) 

• Outlook is “horrible” and and the cut to the sales and earnings guidance is “much deeper than anybody projected,” analyst Volker Bosse says

Senior leaders at the German sportswear company have learned a valuable lesson not to concentrate large segments of the business on one relationship. 

Let’s not forget Beyoncé’s clothing line with Adidas is another flop. The Germans sure know how to pick influencers…