By Michael Every of Rabobank

Stop projecting; and start projecting

This week is obviously dominated by the upcoming Fed meeting. On which note, please – stop projecting, at least in one regard.

US personal income and expenditure data on Friday showed a now-established decline in spending on goods and the start of a slowdown in spending on services, which had been hotter, while savings starting to rise again. That’s exactly what the Fed wants to see, and adds to recent softness in other data. However, to project this means the Fed will be slashing rates soon is projection in a psychological sense, i.e., putting one’s own feelings onto the actions of others. It’s the desire for big Fed rate cuts, leading to lower bond yields, and a weaker US dollar, and higher asset prices, and the status quo ante of the past 40 years.

We are seeing deflation: in memory chips, used cars (US auto delinquencies are now looking worse that during the GFC, apparently), and housing. The US fiscal tap may remain turned off in the outside the defence sector too. Yet the unemployment rate remains low, and so do weekly initial claims: Covid has changed things through deaths, early retirement, and walking away. Moreover, Europe may avoid recession and China has reopened and says –again– that it will boost consumption: they are proposing higher welfare payments for rural immigrants to cities, for example. In short, while inflation will fall back near-term, it could potentially start to rise again later this year.  

Stubbornly high inflation is finally easing as supply chain disruptions fade and interest rates at 15-year highs put the brakes on demand

But Fed officials have voiced unease that any disinflation might be short-lived because labor markets are so tight https://t.co/Niaawe7pKj

— Nick Timiraos (@NickTimiraos) January 29, 2023

Consider what slashing rates would do against that backdrop. Indeed, alongside the easing in US financial conditions vs. a few months ago (the S&P +6% year-to-date; US 10-year yields 35bp lower) we see: Brent crude +1.8% y-t-d; copper +11.2%; gold +5.8%; and even Bitcoin +43.7%. Somebody is projecting more growth, more bubbles, and more supply-side inflation.   

Worse, markets are refusing to project headlines such as the Financial Times saying: ‘Top US air force general predicts China conflict in 2025’: if you cover the Fed or the ECB, or pensions or potatoes, or stocks or bonds, that headline warns current projections could be more dramatically wrong in 2025 than they were in 2022.

Of course, market analysts can never say what will happen in geopolitics, let alone markets. Yet the standard procedure in research is to note such a headline and say, “That’s wrong!” – with no professional experience in such matters; or to pretend one did not see it; or to say, “We don’t (know how to) look at such issues,” and, rightly, “We can’t price for them,”…and so to continue to project what one does know about and can price for; like Fed rate cuts and asset markets rallying. But is that really a good way to project things?

That headline is likely lobbying for even higher Pentagon budgets and more friend-shoring – yet that has inflationary implications and flusters businesses.  So does Japan and the Netherlands joining the US in restricting exports of chip and chip-manufacturing tech to China (though the Dutch allowed millions of chips to be sold to Russia despite a US ban); and the headline, ‘Key lawmaker: Biden mulling broad prohibitions on U.S. investments in Chinese tech’, noting, “The Biden administration “is talking about a theory where they would stop capital flows into sectors of the economy like AI, quantum, cyber, 5G, and, of course, advanced semiconductors… They actually want to say, right, you can’t invest in any [Chinese] company that does AI. You can’t invest in any company does cyber” or other similar sectors.

Nearer term, a few weeks from the first anniversary of the war, Russia is close to a new surge in Ukraine, which won’t get a small number of Western tanks for months. The fora discussing sending tanks a few months ago, as Germany said it would never allow that to happen, are now discussing sending fighter jets,… which Germany says it will never allow to happen. The escalatory spiral is obvious. The risks of an inflationary spiral should not be underestimated either, especially if Russia strikes at, or for, a Ukrainian port, and/or the Black Sea Grain Deal collapses.

Israeli drones just attacked Iranian factories manufacturing the drones they are exporting to Russia for use against Ukraine. While there are no immediate risks of outright Iran-Israel war on the back of that, despite the recent, huge US-Israeli military exercise for exactly that kind of thing, it is literally explosive in a volatile region again central to global energy-price —and so inflation— projections.

Against this backdrop, Germany’s Chancellor Scholz was just in Latin America, ‘racing with China for lithium’, as Bloomberg puts it. That’s for his auto sector facing a pincer squeeze from surging Chinese auto exports, notably of lithium-using EVs, and a higher cost of energy now Russian pipeline gas is gone, benefitting the US, who are selling the LNG replacing Russian pipeline gas. Meanwhile, arms-maker Rheinmetall is ready to greatly boost the output of tank and artillery munitions to satisfy strong demand in Ukraine and the West, and may start producing HIMARS multiple rocket launchers in Germany, says its CEO. So, a shift in German industry from cars to tanks? However, after the debacle over German-built tanks, demand for them is, excuse the pun, tanking. So, a shift from German-made cars to US-brand military goods? What does this project about EU “strategic autonomy”, or even the level of the Euro, longer term?

Though it addresses deglobalisation more loosely, and focuses more on demographics, the Financial Times also has a pre-Fed op-ed worrying about structurally higher inflation rates – ‘The world is not ready for the long grind to come’. At least markets aren’t if they continue to project a 25bp hike this week, then a short pause, and then rate-cutting business as usual. What if the Fed goes 25bp, but hawkishly stresses that not only might it do so again one more time, but that it won’t be cutting rates for a *long* time? Could Powell push back directly against the market’s constant easing of financial conditions? If so, how do people with psychological projection problems react when confronted? Denial, then anger, then denial; and then very expensive therapy, if they want to become better-adjusted.

Relatedly, last week I noted famed economist Schumpeter, seen as always favoring “creative destruction”, ended up arguing for a quasi-‘Christendom’ corporatism to deal with problems of economic imbalances, based on the Catholic principle of Quadragesimo anno put forward by Pope Pius XI in 1931 – to no effect at all, as we saw from 1939-45. On that note, Friday saw economist Mariana Mazzucato (‘For the Common Good’), argue we should follow the call of the current Vatican in a similar light: “Tackling our biggest challenges and reversing the undue concentration of wealth and power will require a fundamental change in political economy. Currently, the principle of the common good is seen as merely a corrective for the current system’s excesses, but it should be the system’s primary objective.”

Despite having argued for years that political economy and “-isms” were going to be the next big thing, I am in no way projecting that the change described above is going to happen anytime soon, or at all: would that it could. Yet project this: would a return to big Fed rate cuts make things relatively better or worse in that regard? Geopolitically, the answer is also clear: higher rates are a US weapon – yet, oddly, one the market expects to soon be holstered.

As BofA rates strategist Ralf Preusser writes in his weekly preview, “this week is one for the record book. We have not seen these three major central bank decisions (Fed, BoE, ECB); and key data releases (US ISM, payrolls, and the employment cost index, as well as Euro Area inflation, GDP, and confidence data) in the same week before. Not to mention in combination with month-end flow, which given the incidence of supply in Europe should be sizeable in both EUR and GBP.”

DB’s Jim Reid agrees writing that this week is set to be action packed for scheduled activity: “The main highlight is of course the FOMC conclusion (Wednesday), but the ECB and the BoE (both Thursday) will also likely hike. However, there’s plenty of other events on the macro calendar, including the US jobs report on Friday, the flash CPI release from France and Germany (tomorrow), the Euro Area aggregate (Wednesday), regional and Euro Area Q4 GDP (tomorrow), global manufacturing (Wednesday) and services (Friday) PMIs/ISMs, China’s equivalents (tomorrow and Wednesday), US JOLTS (Wednesday), and US ECI (tomorrow).”

If that’s not enough, 12% of the S&P 500 by market cap report within a few moments of each other on Thursday night after the bell with Apple, Alphabet and Amazon the highlights in a busy week for earnings. Overall, a whopping 35% of S&P earnings by sector are set to report this week.

Going back to central banks, at the time of writing, the Fed is priced to deliver 26 bp, the ECB 50 bp, and the BoE 46 bp. BofA expects both the Fed and the ECB to deliver what is priced in, and sees a 25 bp hike from the BoE – marginally more likely than before after new lows in the PMIs – but risks are clearly skewed towards 50 bp.

DB’s Reid adds that with a downshift to a 25bps Fed hike already priced in for Wednesday, the meeting will be all about what the Fed tone implies for further meetings. DB still think there’ll be two more 25bps hikes after this one partly as the Fed won’t want to see financial conditions ease too much as a result of being too dovish.

Assuming central banks deliver on forwards, the key focus for the market will be the accompanying messages. The Fed’s message will likely be strongly influenced by critical data prints between now and Wednesday: PCE, ECI, ISM, JOLTS. And that message in turn risks looking dated already by the end of the week with ISM Services and NFP prints to come, also. Our economists remain hawkish relative to market pricing, expecting a terminal FF target range of 5.00-5.25% and the first cut not until Mar-2024, for which forwards price 100 bp more cuts than our colleagues expect.

The last big and very important data point for the Fed before their meeting will be tomorrow’s Q4 ECI release (consensus 1.1% vs. +1.2% previously). Chair Powell is very focused on the relationship between core services ex-shelter inflation and wage pressures, with ECI near the top of their dashboard. JOLTS (Wednesday) is similarly important and may get a reference in the press conference.

Staying with labor markets, although Friday’s employment report will come after the FOMC, it will as ever be a lightening rod for the market. For the headline, consensus is at +185k vs. +223K last month, and 3.6% for unemployment (DB also at 3.6%, vs. 3.5% last month). All eyes also on average hourly earnings and importantly the work week length which was soft last month hinting at a small crack in the labor market.

With regards to the ECB (Thursday), most economists expect another +50bps hike that would take the deposit rate to 2.50%. They also emphasize the importance of communicating expectations for the March meeting since core and underlying inflation remain sticky. The team sees further +50bps and +25bps hikes in March and May, respectively, and a terminal rate of 3.25%.

For the BoE decision that same day, DB economists differ with BofA and see another +50bps (vs 25bps) hike that will take the Bank Rate to 4%. That will potentially be the last ‘forceful’ hike in this tightening cycle. Although their view is that services and wages data warrant such a move, the risks are tilted to the downside. They continue to call for a 4.5% terminal rate as inflation pressures remain resilient.

European markets have lots of data to run through ahead of those decisions, with Eurozone Q4 GDP, inflation and labor market data all released early this week. Most of the key data will be out tomorrow, including Q4 GDP data for Germany, France, Italy and the Eurozone as well as CPI reports for Germany and France. Eurozone aggregates for the CPI and unemployment rate are released on Wednesday. DB economists expect Eurozone HICP to decline to 8.4% in January (vs 9.2% yoy in December) and continue falling to c.3.5% in Q4 this year. Core inflation is seen staying in a 5.0-5.5% range throughout first half of this year.

Finally, let’s not forget about earnings, although that’s impossible with a whopping 107 S&P companies reporting, including Apple, Amazon, Alphabet, Meta, Ford, AMD, Amgen, Qualcomm, Starbucks and dozens more.

Courtesy of DB, here is a day-by-day calendar of events

Monday January 30

• Data: US January Dallas Fed manufacturing activity, UK January Lloyds business barometer, Japan December jobless rate, retail sales, industrial production, Italy December PPI, Eurozone January economic, industrial and services confidence
• Central banks: ECB’s Villeroy speaks
• Earnings: Sumitomo Mitsui Financial, NXP Semiconductors, Ryanair
• Other: IMF’s world economic outlook update

Tuesday January 31

• Data: US Q4 employment cost index, January Conference Board consumer confidence, MNI Chicago PMI, Dallas Fed services activity, November FHFA house price index, China January PMIs, December industrial profits, UK December consumer credit, mortgage approvals, M4, Japan January consumer confidence index, December housing starts, Italy Q4 GDP, December unemployment rate, hourly wages, Germany Q4 GDP, January CPI, unemployment change, France Q4 GDP, January CPI, December PPI, consumer spending, Eurozone Q4 GDP, Canada November GDP
• Central banks: Euro Area bank lending survey
• Earnings: Samsung Electronics, Exxon Mobil, Pfizer, McDonald’s, UPS, Amgen, Caterpillar, AMD, Stryker, Mondelez, UBS, Moody’s, GM, MSCI, Electronic Arts, Spotify, Snap

Wednesday February 1

• Data: US January ISM manufacturing index, total vehicle sales, ADP report, December JOLTS report job openings, construction spending, China Caixin manufacturing PMI, Japan January monetary base, Italy January CPI, manufacturing PMI, new car registrations, budget balance, Eurozone January CPI, December unemployment rate, Canada January manufacturing PMI
• Central banks: Fed decision
• Earnings: SK Hynix, Novo Nordisk, Meta, Orsted, Thermo Fisher Scientific, Novartis, T-Mobile, Altria, Boston Scientific, GSK, BBVA, Peloton

Thursday February 2

• Data: US Q4 unit labor costs, nonfarm productivity, December factory orders, initial jobless claims, Germany December trade balance, France December budget balance, Canada December building permits
• Central banks: ECB, BoE decision
• Earnings: Apple, Alphabet, Amazon.com, Sony, Mitsubishi UFJ Financial, Mizuho Financial, Eli Lilly, Merck, Roche, Shell, Bristol-Myers Squibb, ConocoPhillips, QUALCOMM, Honeywell, Starbucks, Gilead Sciences, Estee Lauder, JD.com, ICE, Banco Santander, Ford, Ferrari, Infineon

Friday February 3

• Data: US January jobs report, change in nonfarm payrolls, unemployment rate, labor force participation rate, average hourly earnings, ISM services, China Caixin services PMI, UK January official reserves changes, Italy January services PMI, France December manufacturing and industrial production, Eurozone December PPI
• Central banks: ECB Survey of Professional Forecasters
• Earnings: Sanofi, Regeneron, Intesa Sanpaolo

* * *

Finally, looking at just the US, Goldman writes that the key economic data releases this week are the employment cost index on Tuesday, JOLTS job openings and ISM manufacturing on Wednesday, and the employment situation report on Friday. The February FOMC meeting is on Wednesday. The post-meeting statement will be released at 2:00 PM ET, followed by Chair Powell’s press conference at 2:30 PM.

Monday, January 30

• 10:30 AM Dallas Fed manufacturing index, January (consensus -15.5, last -18.8)

Tuesday, January 31

• 08:30 AM Employment cost index, Q4 (GS +1.1%, consensus +1.1%, prior +1.2%): We estimate that the employment cost index (ECI) rose 1.1% in Q4 (qoq sa), which would boost the year-on-year rate by one tenth to 5.1%. Our forecast reflects sequential slowing in the private wages ex-incentives category following net softer readings of production and nonsupervisory average hourly earnings and the Atlanta Fed wage tracker. However, we expect another strong reading for the benefits category as firms expand health insurance and supplemental pay programs in order to attract and retain talent.
• 09:00 AM FHFA house price index, November (consensus -0.5%, last flat)
• 09:00 AM S&P/Case-Shiller 20-city home price index, November (GS -0.6%, consensus -0.7%, last -0.5%): We estimate that the S&P/Case-Shiller 20-city home price index declined 0.6% in November, following a 0.5% decline in October.
• 09:45 AM Chicago PMI, January (GS 45.1, consensus 45.3, last 45.1): We estimate that the Chicago PMI was unchanged at 45.1 in January, reflecting weaker industrial activity in the US and a continued drag from the covid wave in China.
• 10:00 AM Conference Board consumer confidence, January (GS 109.5, consensus 109.0, last 108.3): We estimate that the Conference Board consumer confidence index increased to 109.5 in January.

Wednesday, February 1

• 08:15 AM ADP employment report, January (GS +190k, consensus +170k, last +235k): We estimate a 190k rise in ADP payroll employment in January, reflecting strength in Big Data indicators.
• 09:45 AM S&P Global US manufacturing PMI, January final (consensus 46.8, last 46.8)
• 10:00 AM Construction spending, December (GS +0.2%, consensus flat, last +0.2%): We estimate construction spending increased 0.2% in December.
• 10:00 AM ISM manufacturing index, January (GS 48.0, consensus 48.0, last 48.4): We estimate that the ISM manufacturing index declined 0.4pt to 48.0 in January, reflecting weaker industrial activity in the US and a continued drag from the covid wave in China. Our GS manufacturing tracker declined 1.3pt to 47.0.
• 10:00 AM JOLTS job openings, December (GS 10,350k, consensus 10,300k, last 10,458k): We estimate that JOLTS job openings declined to 10,350k in December.
• 02:00 PM FOMC statement, January 31 – February 1 meeting: The key question for the February meeting is what the FOMC will signal about further hikes this year. As discussed on our FOMC preview, we expect two additional 25bp hikes in March and May, but fewer might be needed if weak business confidence depresses hiring and investment, or more might be needed if the economy reaccelerates as the impact of past policy tightening fades. Fed officials appear to also expect about two more hikes and will likely tone down the reference to “ongoing” hikes being appropriate in the FOMC statement.
• 05:00 PM Lightweight motor vehicle sales, January (GS 15.8mn, consensus 14.4mn, last 13.3mn)

Thursday, February 2

• 08:30 AM Nonfarm productivity, Q4 preliminary (GS +2.5%, consensus +2.4%, last +0.8%); Unit labor costs, Q4 preliminary (GS +1.5%, consensus +1.5%, last +2.4%): We estimate nonfarm productivity growth of +2.5% in Q4 (qoq saar) and unit labor cost—compensation per hour divided by output per hour—growth of +1.5%.
• 08:30 AM Initial jobless claims, week ended January 28 (GS 190k, consensus 200k, last 186k); Continuing jobless claims, week ended January 21 (consensus 1,684k, last 1,675k): We estimate initial jobless claims increased to 190k in the week ended January 28.
• 10:00 AM Factory orders, December (GS +2.5%, consensus +2.4%, last -1.8%); Durable goods orders, December final (last +5.6%); Durable goods orders ex-transportation, December final (last -0.8%); Core capital goods orders, December final (last -0.2%); Core capital goods shipments, December final (last -0.4%): We estimate that factory orders increased 2.5% in December following a 1.8% decrease in November. Durable goods orders increased 5.6% in the December advance report, reflecting a $15.5bn increase in nondefense aircraft orders, while core capital goods orders decreased 0.2%.

Friday, February 3

• 08:30 AM Nonfarm payroll employment, January (GS +300k, consensus +185k, last +223k); Private payroll employment, January (GS +250k, consensus +185k, last +220k); Average hourly earnings (mom), January (GS +0.4%, consensus +0.3%, last +0.3%); Average hourly earnings (yoy), January (GS +4.4%, consensus +4.3%, last +4.6%); Unemployment rate, January (GS 3.5%, consensus 3.6%, last 3.5%); Labor force participation rate, January (GS 62.3%, consensus 62.3%, last 62.3%): We estimate nonfarm payrolls rose by 300k in January (mom sa). Our well-above-consensus forecast reflects the elevated level of labor demand, the strong recent payroll trend, a 36k boost from the return of striking education workers, strength in Big Data employment indicators, and a boost from favorable seasonal factors that are spuriously fitting to last winter’s Omicron wave. Jobless claims remain extremely low, and while corporate layoff announcements have increased in recent months, only 15% of California layoff filings since December had been implemented by the January payroll period. We estimate the unemployment rate was unchanged at 3.5%, reflecting a rise in household employment offset by flat-to-up labor force participation rate (we estimate unchanged on a rounded basis at 62.3%). We estimate a 0.4% increase in average hourly earnings (mom sa), reflecting a 0.05pp boost from start-of-year wage hikes and neutral calendar effects.
• 09:45 AM S&P Global US services PMI, January final (consensus n.a., last 46.2)
• 10:00 AM ISM services index, January (GS 51.0, consensus 50.5, last 49.2): We estimate that the ISM services index rebounded by 1.8pt to 51.0 in January, reflecting the rise in our survey tracker (+1.0pt to 51.1).

Source: DB, Goldman, BofA

China stocks pulled back from bull market territory on Monday, the first trading session after a week-long Lunar New Year break.

The CSI 300 index initially surged but lost steam in afternoon trading to end up about half a percent higher, failing to maintain bull market territory. Today’s pop then selling pressure is a suspicious start to the Year of the Rabbit and might indicate profit-taking. 

Some analysts believe Chinese stocks might take a much-needed breather after nearly three months of gains. The CSI 300, which tracks the largest Chinese mainland-listed stocks, gained 19.88% from its October 2022 low. 

“It seems like a classic move for onshore — open high then go lower. I think the market is very excited about the Chinese New Year data, but in reality, if you look at the details, it is kind of mixed,” said Willer Chen, senior analyst at Forsyth Barr Asia Ltd.

Despite the bullish views on the reopening narrative that has helped propel Chinese stocks in recent months, there are a bunch of lingering negatives, including the Biden administration’s tech war against Beijing, Covid infections, broad slowdown, and a housing crunch. 

In the US, Chinese stocks retreated in premarket trading. KraneShares CSI China Internet ETF slid about 4% in premarket trading. 

And the Golden Dragon China Index has erased all of ist Lunar New Year gains now…

The latest BofA survey showed that long Chinese stocks made the list of the most overcrowded trades this month, which might indicate that investors are taking profits after months of gains. 

Authored by Alex Kimani via OilPrice.com,

Over the past two years, global energy companies have enjoyed record profits amid high commodity prices, with the International Energy Agency estimating that net income by oil and gas companies doubled from 2021 to 2022. Those high oil and gas prices have translated into high fuel prices for consumers, drawing the ire of the public and governments everywhere and sparking populist moves in response. 

The European Union, the UK and India have already introduced windfall taxes on oil and gas companies. 

On September 30, 2022, the Council of the European Union agreed to impose a “temporary solidarity contribution” on energy companies that realize “above a 20% increase of the average yearly taxable profits since 2018”. This tax will be levied on top of whatever taxes these companies already owe in their individual countries. 

A windfall tax is a one-time surtax levied on a company or industry when unusual economic conditions result in large and unexpected profits. 

Others, such as the Netherlands, Norway and the United States are currently considering them. 

According to a recent Wood Mackenzie report, while 2022 was the year in which the idea of the windfall tax and the villainization of Big Oil reached a new peak, this year will likely see more momentum if oil prices remain high. If prices drop, windfall taxes could be eliminated; however, Wood Mackenzie views this as “unlikely”, noting at the same time that some windfall taxes have expiration dates and clauses for modification based on oil prices.

Overall, WoodMac warns that windfall taxes will distort the market and even risk prolonging–or delaying–the energy transition. How? If fossil fuel prices are lower, demand will increase and render renewables less attractive. 

In the meantime, governments have found another way to benefit from soaring oil and gas company profitability–taxing share buybacks, such as has been done in the U.S. and proposed in Canada. Dividends could also be taxes more heavily. Both methods, suggests Wood Mackenzie, would actually “incentivize reinvestment, thus promoting jobs and additional energy supply”.

“A tangle of long-term ambitions will drive upstream regulators and investors toward the big fiscal themes to look for in 2023, from windfall taxes to renewed interest in gas policy terms,” according to WoodMac’s 2023 outlook.

The Windfall Tax Report Card–So Far

United States

Back in October, President Biden threatened to slap a windfall profits tax on American oil and gas companies if they fail to use their “outrageous” bonanza to expand oil supplies in a bid to lower fuel prices. However, he is yet to follow through on his threat but instead American companies have to face a different beast: buyback tax.

As part of the new Inflation Reduction Act that President Biden signed in August is a new 1% tax on corporate share buybacks. Oil and gas companies will bear the brunt of the new tax because they have dramatically increased buybacks as a favored way to return excess cash to shareholders.

“My message to the American energy companies is this: You should not be using your profits to buy back stock or for dividends. Not now, not while a war is raging,” Biden said in October. Biden has scolded U.S. oil producers saying they fail to appreciate the free-market capitalism windfall made possible by American democracy nor sympathy for their retail customers.

In 2022, U.S. oil company share buybacks increased 1,043%, dwarfing the 64% increase for S&P 500 while dividends were up 33%, more than three times the rise for all the companies in the index. Total free cash flow of the 23 companies in the S&P 500 Energy Index increased 2.3 times to $201 billion, with free cash for Exxon Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) increasing 150% to $60 billion and $36 billion. Meanwhile, Valero Energy Corp.’s (NYSE: VAL) free cash flow grew five-fold to $9 billion from the previous four quarters.

United Kingdom

Back in November, the UK government announced plans to increase a windfall tax on oil and gas producers’ profits to 35% from the previous rate of 25%. The new rate, which will apply from 1 January 2023 until March 2028, is part of a raft of budgetary measures aimed at tackling the cost of living crisis and shoring up the UK’s finances.

Normally, UK oil and gas companies operating on its continental shelf are subject to a 40% tax rate, much higher than the 19% rate on corporate profits for companies in other sectors. The new levy now means that companies like BP Plc.(NYSE: BP) and Shell Plc.(NYSE: SHEL) will now fork over 75% in taxes, up from 65% in 2022.

Germany

Starting December 1 2022, the German government introduced a 33% windfall profit tax that will potentially generate a revenue of between one and three billion euros. Dubbed the “EU energy crisis contribution”, the tax is likely to affect dozens of energy companies and will target their 2022 and 2023 profits.  

The new levy will affect oil, gas and coal companies whose profits for 2022 and 2023 exceed by 20% or more than their 2018-2021 average. However, the tax has a major drawback: according to Katharina Beck, spokeswoman on financial matters for the Greens, the planned levy can be circumvented on a large scale by companies moving profits abroad.

“The draft of the finance ministry for windfall profit levy for oil and gas companies falls well short of what is necessary,” Beck said in a statement carried by Reuters. 

Finland

In December, the Finnish government proposed a temporary windfall tax on profits from the country’s electricity companies as part of a European Union response to soaring power costs. The proposed 30% tax would apply to any profits exceeding a 10% return on capital in 2023, with the government estimating it could bring in between 500 million and 1.3 billion euros ($533 million-$1.9 billion).

If the Finnish government goes ahead with its plans, it will join Germany and the UK as the other EU members that have introduced a windfall tax to energy and power companies. 

India

A few weeks ago, India raised its windfall tax on crude oil, petroleum and aviation turbine fuel. Windfall tax on crude oil was increased to 2,100 rupees ($25.38) per tonne from 1,700 rupees ($20.55). The federal government also raised export tax on diesel to 6.50 rupees per liter from 5 rupees, while raising the windfall tax on ATF to 4.5 rupees per liter from 1.5 rupees, the document showed.

India is a major consumer and importer of crude, and has been buying Russian crude barrels at well below a $60 price cap. The Indian government first introduced a windfall tax on crude oil producers and levies on exports of gasoline, diesel and aviation fuel in July after private refiners posted robust refining margins, instead of selling at lower-than-market rates

Optimism is increasing on Wall Street, with investors hoping for a “soft landing” in the economy.

“David Kelly, the chief global strategist at JPMorgan Asset Management, is betting that inflation will continue to ease in 2023, helping the U.S. economy to narrowly escape a recession. Ed Yardeni, the longtime stock strategist and founder of his namesake research firm, is putting the odds of a soft landing at 60 percent based on strong economic data, resilient consumers, and signs of tumbling price pressures,” reported Bloomberg.

As Lance Roberts recently explained, the hope is that despite the Federal Reserve hiking rates at the most aggressive pace since 1980, reducing its balance sheet via quantitative tightening, and inflation running at the highest levels since the 1970s, the economy will continue to power forward.

Is this a possibility, or is the “soft landing” scenario another Fed myth?

To answer that question, we need a definition of a “soft landing” scenario, economically speaking.

According to a definition by Investopedia, “A soft landing, in economics, is a cyclical slowdown in economic growth that avoids a recession. A soft landing is the goal of a central bank when it seeks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation without causing a severe downturn.”

The term “soft landing” came to the forefront of Wall Street jargon during the tenure (1987–2006) of former Fed chair Alan Greenspan. He was widely credited with engineering a soft landing in 1994–95. The media has also pointed to the Federal Reserve engineering soft landings economically in both 1984 and 2018.

The chart below shows the Fed rate-hiking cycle with soft landings notated by orange shading. I have also noted the events that preceded the “hard landings.”

(Source: Federal Reserve Bank of St. Louis / Refinitiv chart by RealInvestmentAdvice.com)

There is another crucial point regarding the possibility of a soft landing. A recession, or “hard landing,” followed the last instances when inflation peaked above 5 percent. Those periods were 1948, 1951, 1970, 1974, 1980, 1990, and 2008. Currently, inflation is well above 5 percent throughout 2022.

(Source: Federal Reserve Bank of St. Louis / Refinitiv chart by RealInvestmentAdvice.com)

Could this time be different? Absolutely, but there is a lot of history that suggests otherwise.

Furthermore, while the technical definition of a soft landing is “no recession,” if we include crisis events caused by the Federal Reserve’s actions, the track record becomes worse.

Bear in mind also that it is the labor market alone that is holding up the economic ‘signals’ as ‘soft’ survey and ‘hard’ industrial data is sliding significantly…

…and Leading Economic Indicators are screaming ‘hard landing’…

As noted above, there were three periods where the Federal Reserve hiked rates and achieved a soft landing, economically speaking. However, the reality was that those periods were not pain-free events for the financial markets.

Goldman Sachs notes in its latest ‘Top of Mind’ report, there are plenty of ‘experts’ on either side of the ‘soft’ vs ‘hard’ landing question:

Soft Landing

“I do continue to believe that there’s a path to a soft, or soft-ish, landing... And I think the path is pretty clear… We see inflation and, you know, the goods inflation get better, housing services inflation gets better, and the labor market softens but doesn’t go into recession.”
– Jay Powell, Federal Reserve Chair (Brookings Institution interview, December 2022)

“The probability of a soft landing has increased compared to where it was in the fall of 2022, where it was looking more questionable… And the reason I think that the prospects for a soft landing have increased is that the labor market has not weakened the way many had predicted… and growth levels rebounded from weakness.”
– James Bullard, President, Federal Reserve Bank of St. Louis (CFA Society speech, January 2023)

“My own prediction is indeed for a softish landing: inflation does seem to be coming down, and while we might not completely avoid a recession, if we have one it will probably be mild.”
– Paul Krugman, Nobel Prize winning economist (New York Times column, January 2023)

“We might see, actually, the job market loosen up dramatically… but that GDP grows much faster than most people think and we have a chance, if the Fed pivots, to really avoid a recession and have a good year for profits.”
– Jeremy Siegel, Professor, Wharton (CNBC interview, December 2022)

“All the signs are pointing to a higher, not a lower, probability of a soft landing… It may still not be more than 50-50. But 50-50 is looking better than it was a few months ago.”
– Alan Blinder, former Federal Reserve Vice Chair (Fortune interview, January 2023)

“The deeper I look into the bowels of last week’s job market data, the more I think we can skirt a recession…”
– Mark Zandi, Chief Economist, Moody’s (Twitter, January 2023)

Hard Landing

“One has to be careful of false dawns… I would stick with my view that a recession this year is more likely than not.”
– Larry Summers, former Secretary, US Treasury (Bloomberg interview, January 2023)

“A recession is pretty likely just because of what the Fed has to do.”
– Bill Dudley, former President, NY Fed (Bloomberg interview, January 2023)

“A recession does appear to be the most likely outcome at this time. While the last two monthly inflation reports did show a deceleration in the rate of price increases, it does not change the fact that prices are still increasing… Wage increases, and by extension employment, still need to soften further for a pullback in inflation to be anything more than transitory.”
– Alan Greenspan, former Federal Reserve Chair (Advisors Capital note, December 2022)

“I don’t want a recession. I hope we luck out with a soft landing but I just think a soft landing is a hard thing to achieve… It’s easy to avoid a recession, its hard to avoid a recession while bringing inflation down.“
– Jason Furman, former Director, National Economic Council of the US (CNBC interview, January 2023)

“I think either it’s going to be a borderline or very mild recession, or it could be a deeper one… There has been a little bit of good news recently, but the markets maybe are overplaying it, wages have a long ways to go. Wages have not kept up with inflation.”
– Kenneth Rogoff, Professor, Harvard University (CNBC interview, January 2023)

“[We] are predicting the recession to start mid-year and it’s because we think the Fed is continuing to push on the QT accelerator and continuing to drive down inflation as well as labor costs… The more quantitative tightening that we see, the more we see the risk of a more prolonged and deeper recession.“
– Anne Walsh, CIO, Guggenheim Partners (CNBC interview, January 2023)

The Case for a Hard Landing…

Historically, a substantial decline in job openings – a key requirement to tame the current bout of inflation – has never occurred without a sharp rise in unemployment…

…and since 1949, every time the three-month moving average of the unemployment rate has risen by 0.5pp+ relative to its low during the previous 12m, a recession has ensued (Sahm Rule)

Financial conditions tightened substantially over the course of 2022…

…and macro models suggest that monetary policy, which affects the economy through financial conditions, affects the level of GDP with a relatively long lag.

Inflation has declined, but remains well above target…

…and while wage growth has moderated, it remains high

The Case for a Soft Landing…

We expect solid growth in real disposable income this year…

We find that the lags from financial conditions on GDP growth are relatively short, suggesting that the US economy has already bore the brunt of the 2022 tightening in financial conditions…

We expect core goods inflation to turn negative this year…

The jobs-workers gap has so far shrunk mainly through a decline in job openings without a sharp rise in the unemployment rate, and we expect this pattern to continue…

The best alternative measures of new lease rent growth have slowed, and show signs of further slowing ahead…

Accordingly, we expect core PCE inflation to decline to 2.9% by YE23…

With those thoughts in mind, Goldman opines on how will the market react to a ‘soft’ (no recession) landing or a hard (recession) landing…

• The avoidance of a US recession and an improving global growth picture would push global equities higher. US 10y Treasury yields would be expected to rise by around 40bp, and bund yields potentially by more. Shorter-dated rates would also potentially climb higher as the market backs away from the deep rate cuts it has begun to price. Non-US equities would be expected to outperform, both in local and USD terms. Commodities would be expected to rise significantly, particularly under the more generous assumptions about China pricing. The USD would broadly weaken but would strengthen against JPY and weaken less versus EUR, with cyclical currencies performing strongly. A “Goldilocks” version of this outcome in which rapid inflation declines lead to more Fed relief despite improving growth would mitigate upward yield moves, provide a further tailwind to global equities, and reinforce USD weakness.

• In the case of a recession, US equities would be expected to fall significantly, with cyclical equities underperforming, and credit spreads widening sharply. Non-US equity markets would decline too, but to a lesser degree. US yields would decline along the curve, with the 10-year Treasury yield falling by nearly 60bp and smaller predicted declines in bund yields. Front-end rates would likely fall by more, implying yield curve steepening.  In FX, cyclical and EM currencies would mostly weaken against the USD, but EUR, CHF, and, most significantly, JPY would be expected to strengthen against the USD. Commodities would generally weaken. A “hawkish recession” – in which inflation proved stickier – would be expected to lead to larger declines in risky assets, more limited declines in yields, and broader USD strength.

So, with all that said, RealInvestmentAdvice.com’s Lance Roberts notes that Powell’s recent statement during a speech at the Brookings Institution was full of warnings about the lag effect of monetary policy changes. It was also clear that there is no pivot in policy coming anytime soon.

When that lag effect catches up with the Fed, a pivot in policy may not be as bullish as many investors currently hope.

We doubt a soft landing is coming.

Authored by Peter Reagan via Birch Gold Group,

Much like the Patriot Act had little to do with making life safer in the U.S., the Biden administration’s “Inflation Reduction Act” has very little to do with reducing inflation.

Thanks to this “Inflation Reduction Act,” our lives are about to get even more expensive for just about everyone. If you’re saving money for retirement, heating your home or driving a car, well, get ready to start paying higher prices.

That’s because of several new taxes that were tucked away in the 274 pages of the Inflation Reduction Act. Those new taxes have become law as of January 1st, 2023.

I’d argue this is a clear contradiction of Biden’s campaign promise that he wouldn’t tax Americans who have annual incomes under $400,000. This is open to debate, however – because the new taxes we’re discussing today don’t target the average American household directly. Rather, everyday hard-working families are collateral damage of the Biden administration’s battle against “greedy corporations, evil energy companies” and the like.

So let’s go through five new taxes aimed at the “greedy” and “evil” that will ultimately punish everyone.

What’s wrong with taxing the greedy and the evil?

If we view taxes as punishment (rather than as a method to finance public services), then we can understand why any administration would want to raise taxes on the “greedy” and the “evil.” Honestly, if a company or industry is actually evil, you’d think law enforcement rather than the IRS would get involved? Regardless, it’s easy to feel good about out-of-favor businesses and industries being punished.

There’s just one small problem: the punishment doesn’t stop with the corporation paying higher taxes.

Simon Black summarized a very useful way to think about tax increases, regardless of who signs them into law and whatever their stated purpose. Taxes that seem to focus on “big businesses” and “unpopular industries” don’t stop there:

That’s because taxes, like sh*t, always roll downhill. Think about it – a ‘corporation’ can’t actually absorb the cost of taxes. A corporation is nothing but pieces of paper. It’s not real.

The burden of additional taxation falls onto the owners of the business… and onto the consumers who buy its products.

Remember when President Biden threatened to tax oil companies for making “excessive profits” a few months back? I concluded that the President either doesn’t understand basic economics, or is willing to pretend not to for political purposes.

Because Black is right! Corporations don’t just absorb higher costs – they pass them on to customers.

So anytime taxes go up on an industry or a company, who ultimately pays the bill?

You do. I do. The American taxpayer does.

Here are the new bills we’ll be paying this year…

These five new taxes will raise our cost of living

A report by Americans for Tax Reform explained how one of the five tax increases will raise your cost of living.

The first is a regressive tax on American oil and gas development. The tax will drive up the cost of household energy bills. The Congressional Budget Office estimates the natural gas tax will increase taxes by $6.5 billion.

A letter to Congress from the American Gas Association warned that the methane tax would amount to a 17% increase on an average family’s natural gas bill. Democrats have included a tax in the bill despite retail prices for energy surpassing multi-year highs in the United States.

(Note: calling a tax “regressive” means that it affects everyone, regardless of their ability to pay. The opposite of a “regressive” tax is a “progressive” tax, which is levied proportionally to income.)

Higher prices on natural gas are a big deal! About 40% of our consumption is used to produce electricity, and another 30% for residential heating and cooking.

So, by penalizing American energy development, this tax will (indirectly) raise electricity and heating bills for many families.

Second:

a 16.4 cents-per-barrel tax on crude oil and imported petroleum products that will be passed on to consumers in the form of higher gas prices.

Now, remember, this same bill has already penalized oil and gas development here in the U.S. At the same time, the “Inflation Reduction Act” is raising prices on energy imports, too!

There’s a pretty clear purpose here: by charging higher taxes on both domestic and imported energy sources, the end result is higher energy prices – guaranteed.

But we’re not done yet…

Third:

the tax rate on coal from subsurface mining would increase from $0.50 per ton to $1.10 per ton while the tax rate on coal from surface mining would increase from $0.25 per ton to $0.55 per ton. JCT estimates that this will raise $1.2 billion in taxes that will be passed on to consumers in the form of higher electricity bills.

Listen: I’m not particularly a fan of coal as an energy source. But more than doubling the tax on coal while raising taxes on oil and gas development and importing all at the same time? That’s a deliberate declaration of war on the entire energy industry.

What’s the purpose? It doesn’t matter, because regardless of whether or not these three taxes achieve their intended purpose, they will absolutely raise energy prices for everyone.

Well, now that we’ve devastated the U.S. energy industry, let’s turn to the more general war on investors concealed in the “Inflation Reduction Act.” These are a little more subtle, and might be a bit harder to understand, but bear with me – it’s worth it.

Fourth:

a new federal excise tax [on investing income] which will reduce the value of household nest eggs. Raising taxes and restricting stock buybacks harms the retirement savings of any individual with a 401(k), IRA or pension plan.

This tax specifically makes it more expensive for corporations to buy back their own stock. Corporate buy-backs have become a popular alternative to dividends. When a company issues a dividend, investors pay up to 20% tax on that dividend income. Companies figured out that they could buy their own shares from investors on the open market – which reduces the number of shares in circulation, and subsequently raises the share price.

Investors who own shares of the company benefit from the higher share price without paying taxes on the increase (at least, not until they sell the shares – possibly never if they own those shares in a Roth-type retirement account).

Are share buybacks a good idea? I don’t know. Are they more tax efficient for investors than dividends? Yes. Now, everyone who invests in stocks will pay this indirect tax.

Finally, a more direct tax on corporations:

a 15 percent corporate alternative minimum tax on the financial statement income of American businesses reporting $1 billion in profits for the past three years. The cost of this tax increase will be borne by working families in the form of higher prices, fewer jobs, and lower wages.

Once again: raising producer prices doesn’t just punish producers – it punishes everyone who buys their products.

To be clear: the “Inflation Reduction Act” won’t lower inflation. (After all, as Dr. Ron Paul reminded us, all inflation comes from just one place. The only way to lower inflation is to stop printing money to finance massive government deficit spending.)

The “Inflation Reduction Act” won’t lower prices, either – quite the contrary! As we’ve seen, prices are extremely likely to rise across the board – and virtually guaranteed to rise for gasoline, electricity and natural gas.

Our cost of living will go up this year. On top of prices continuing to surge thanks to actual inflation from the massive increases in money supply. In the face of a recession (either already underway or imminent, according to virtually every economist).

Rough economic times are ahead. I think it’s a good time to consider ways we can add stability to our financial futures.

Creating your own economic stability

For now, only two things are absolutely certain (as Ben Franklin famously said): “Death and taxes.”

As we’ve seen, it’s virtually guaranteed that we’ll be paying higher prices, thanks to inflation and these misguided tax hikes, for the rest of this year at least.

One of the major challenges we face when considering the future, especially our personal financial futures, is uncertainty. That’s really what the Ben Franklin quote is about. In the absence of certainty, we have to guess what we should be doing today that will turn out, in hindsight, to have been a smart move years or decades down the road.

To that end, let me share a story from Jefferey Tucker on inheriting his father’s gold and silver coin collection:

Gold keeps its value. But more than that, it symbolizes what it means to keep our values, as people, as societies, and as nations. They are physical objects but more than that, they embody a philosophy of living.

Think about this. One day your children or grandchildren will be rifling through your stuff and they might come across your collection of gold and silver… In a world of fleeting values and ceaseless and often pointless change, here we have something that we can both believe in and own. It’s real wealth, wealth for the ages, stuff we can carry in our pockets.

Here’s the thing: Presidents come and go. Tax laws are revised, refined and amended constantly. The IRS itself might change dramatically over the next decade or two.

But you could make a move today that could provide long-term benefits: learn more about physical precious metals and what it means to own “real wealth for the ages.” Would such an option help you and your family navigate the uncertain times ahead? For tens of thousands of people just like you, the answer is yes.

With global tensions spiking, thousands of Americans are moving their IRA or 401(k) into an IRA backed by physical gold. Now, thanks to a little-known IRS Tax Law, you can too. Learn how with a free info kit on gold from Birch Gold Group. It reveals how physical precious metals can protect your savings, and how to open a Gold IRA. Click here to get your free Info Kit on Gold.

By Eric Peters, CIO of One River Asset Management

“We delivered record earnings and cash flow in 2022, while increasing investments and growing U.S. production to a company record,” said Chevron CEO Mike Wirth. “We are well positioned to lead in both traditional and new energy businesses, delivering higher returns, lower carbon, and superior shareholder value.”

The market rejoiced in the $75bln share buyback program, ushering in a new era for oil producers. In the past, commodity leaders were rewarded for production. Strong profits were followed by even stronger investment. Low-cost producers gained market share by leveraged buyouts of smaller higher-cost ones.

Not today. CEOs are incentivized by profitability, and the era of climate policies reinforces the goal. Politicians don’t like it, naturally. Abdullah Hasan’s message on behalf of the White House was blunt: “For a company that claimed not too long ago that it was ‘working hard’ to increase oil production, handing out $75 billion to executives and wealthy shareholders sure is an odd way to show it.”

Policy signals are clear – climate change demands an energy transition. But the world needs an offramp, and none has been offered. So, it is being imposed by the market in the most brutal of manners. It is the unintended consequence, generating geopolitical strife.

“Transmission lines tripped, which resulted in isolation of north and south system,” wrote Sajjad Akthar, general manager at Pakistan’s state-run National Transmission and Distribution Company. Complete grid failures are rare. Operators of modern grids observed shocks from integration of renewable energy as their primary challenge. Pakistan’s blackout last week was its second near-complete grid failure and the third in south Asia in three months. 220 million people were impacted.

“Due to unavailability of generators, services are affected in health centers in suburbs,” Dr. Imran Zarkoon declared, the director of a local health department.

It is also not a shock. Prime Minister Sharif already ordered all federal departments to reduce their energy consumption by 30% earlier in the month. Italian energy major Eni also notified it would not deliver an LNG cargo to Pakistan due to circumstances outside its control. Eni has a long-term contract to deliver one LNG cargo per month to Pakistan through 2032.

“All the previous disruptions in LNG delivery suffered by ENI have been caused by the LNG supplier who didn’t fulfill the agreed obligations,” the company said. “At the request of the authorities, an in-person Fund mission is scheduled to visit Islamabad,” the IMF’s Resident Chief stated. Negotiations for unlocking the $1.1bln IMF tranche come after FX companies removed a floor for the currency, opening the door for a 10% decline.

And it is all in an election year with Beijing Islamabad’s chief supporter. The China-Pakistan Economic Corridor is an elaborate, 3000-kilometer infrastructure project covering sea and land, securing passage for China’s energy imports. So, it’s complicated. It always is. Just as the weakest links are always the first to reveal distress.

Anecdote

“If humanity does not fail nature, nature will not fail us,” October 28, 2022. Who said it? No, not Al Gore. Greta gave it a thumbs up, but it wasn’t her. It was President Xi in his unveiling of China’s White Paper on Climate Change.

Climate is poised to dominate investment in the next decade. A wide-ranging survey showed 53% of investors regard climate change as the most important factor affecting their investment decisions; 78% of private and business clients surveyed are concerned about climate change; these echo in the chambers of the WEF, focused on “staving off disaster and catastrophe.” Herds are famous for stampeding principled contrarians in financial markets. Investors are asked to be wise enough to see the follies of the collective and disciplined enough to not get run over by the herd. Irony is the answer.

Global CO2 emissions have increased 44% in the past two decades – China accounts for 68% of the world’s rise. Climate goals without capital discipline won’t matter. This is also where it pays to avoid the herd, who are dedicated to hopelessly inefficient solutions.

China accounts for more than one-third of global commodity production – cutting raw material output is the only way of achieving Beijing’s ambitious climate goals.

Raw materials will be in high demand through the world’s energy transition. Those will also be shorter in supply. China is preparing, the world is talking, and markets are the arbiter with high prices accelerating the energy transition. And in that transition shines the most ironic climate theme. Long oil.

The White House refused to say if it will provide Ukraine with Bradley Fighting Vehicles equipped with radioactive depleted uranium rounds, ammunition that is linked to cancer and birth defects.

Depleted uranium is typically created as a byproduct of producing enriched uranium and is extremely dense, making it an effective material to pierce the armor of tanks. Bradleys can be equipped with depleted uranium ammunition, which is why they are known as “tank killers.”

When asked on Wednesday if the Bradleys the US is sending to Ukraine will be equipped with depleted uranium, a senior Biden administration official said, “I’m not going to get into the technical specifics.”

The official also declined to answer if the M1 Abrams tanks the US is providing Kyiv will be equipped with a depleted uranium cage.

Konstantin Gavrilov, the head of Russia’s delegation in Vienna on arms control, has warned Moscow would view the use of depleted uranium weapons in Ukraine as the use of a “dirty bomb.” Gavrilov claimed that Germany’s Leopard 2 tanks could also be equipped with depleted uranium rounds.

“In case such munitions for NATO-made heavy weapons are supplied to Kiev, we will consider that as the use of dirty nuclear bombs against Russia with all the consequences that come with it,” he said, according to the Russian news agency TASS.

Cancer and birth defects spiked in Iraq after the Gulf War, during which the US fired an estimated one million depleted uranium rounds.

The US also used toxic ammunition in its 2003 invasion, and studies have found that birth defects are more common in areas where depleted uranium was used. Birth defects are still common today in the city of Fallujah.

Authored by Tsvetana Paraskova via OilPrice.com,

• Oil majors’ earnings for 2023 are set to drop from the 2022 record to around $150 billion.

• Although oil prices traded below $90 per barrel in the last weeks of 2022 and prices increased on an annual basis by only around 10% last year compared to 2021.

• The industry, the top performer in the S&P 500 index over the past year, has boosted dividends and share buybacks in recent quarters thanks to the massive cash flows.

The five biggest oil majors in the world are expected to report record profits for 2022 in the coming days, for around $200 billion in combined yearly earnings thanks to the jump in oil and gas prices last year. 

This year, earnings at ExxonMobil, Chevron, BP, Shell, and TotalEnergies are set to be around a quarter lower than the combined profits for 2022, but they will still be a whopping $150 billion for 2023, analysts say.  

The record quarterly earnings which the majors reported for the second and third quarters of 2022 have already drawn intense criticism from the White House, which has scrambled to have gasoline prices down from the record levels seen in June. The Biden Administration has accused Big Oil of “war profiteering” and has called on companies to invest in more supply or “face higher taxes.” In Europe, the record earnings are already subject to windfall taxes, which ExxonMobil has challenged in court. 

The five oil and gas supermajors are expected to report at the end of January and early February combined 2022 earnings of $200 billion, according to early estimates compiled by S&P Capital IQ and cited by the Financial Times. Fourth-quarter earnings will still be well above year-ago levels, although lower than the record quarterly profits for Q2 and Q3. 

The majors’ earnings for 2023 are set to drop from the 2022 record to around $150 billion, which – despite the decline – would be the second-highest profit haul for Big Oil, per projections by S&P Capital IQ.

For 2022, the U.S. supermajors alone are set to post combined yearly profits of nearly $100 billion, analysts say.

Exxon is set to report a record of as much as $56 billion in profit for 2022, while Chevron’s earnings are projected to exceed $37 billion, also a record-high, per estimates compiled by S&P Capital IQ cited by the Financial Times. 

Although oil prices traded below $90 per barrel in the last weeks of 2022 and prices increased on an annual basis by only around 10% last year compared to 2021, extreme volatility and the frequent surges above $100 per barrel helped all oil firms, including the biggest American integrated companies, generate record or near-record quarterly profits and cash flows. 

The industry, the top performer in the S&P 500 index over the past year, has boosted dividends and share buybacks in recent quarters thanks to the massive cash flows. And its earnings are set to lead the 2022 earnings growth of all 11 sectors in the S&P 500.   

The energy sector is expected to report the highest annual earnings growth of all eleven sectors at 151.7%, John Butters, Vice President and Senior Earnings Analyst at FactSet, said in a report last month. 

“The Energy sector is also expected to be the largest contributor to earnings growth for the S&P 500 for CY 2022. If this sector were excluded, the index would be expected to report a decline in earnings of -1.8% rather than growth in earnings of 5.1%,” Butters noted.  

Lower oil and gas prices in the fourth quarter will impact Q4 earnings at the majors, but refining has held up, and LNG trading at the European majors is also expected to have helped Big Oil in the October-December quarter. 

Early this month, Exxon said in an SEC filing that lower oil prices could have an up to $1.7 billion negative effect on Q4 earnings, while the drop in natural gas prices could have a negative effect of up to $2.4 billion. Those negative effects will be partly offset by a positive contribution of mark-to-market derivative gains of up to $1.5 billion. 

In Europe, Shell said that trading and optimization at its integrated gas and LNG division is expected to have been significantly higher in the fourth quarter of 2022 compared to the third quarter, despite a decline in production volumes. 

Although Q4 and 2023 earnings at the majors are expected to come off the record highs seen in the previous quarters and full-year 2022, profits this year would still be huge compared to the years before 2022. Analysts expect that Big Oil will continue to seek to reward shareholders with the surplus cash, much to the resentment of the Biden Administration. 

U.S. supermajor Chevron announced this week a $75 billion share buyback program without a fixed expiration date, which immediately drew criticism from the White House.  

White House Assistant Press Secretary Abdullah Hasan said, commenting on the news, “For a company that claimed not too long ago that it was ‘working hard’ to increase oil production, handing out $75 billion to executives and wealthy shareholders sure is an odd way to show it.”  

Authored by Pepe Escobar via PressTV,

The Doomsday Clock, set by the US-based magazine Bulletin of the Atomic Scientists, has been moved to 90 seconds to midnight…

That’s the closest ever to total nuclear doom, the global catastrophe.

The Clock had been set at 100 seconds since 2020. The Bulletin’s Science and Security Board and a group of sponsors – which includes 10 Nobel laureates – have focused on “Russia’s war on Ukraine” (their terminology) as the main reason.

Yet they did not bother to explain non-stop American rhetoric (the US is the only nation that adopts “first strike” in a nuclear confrontation) and the fact that this is a US proxy war against Russia with Ukraine used as cannon fodder.

The Bulletin also attributes malignant designs to China, Iran and North Korea, while mentioning, only in passing, that “the last remaining nuclear weapons treaty between Russia and the United States, New START, stands in jeopardy”.

“Unless the two parties resume negotiations and find a basis for further reductions, the treaty will expire in February 2026.”

As it stands, the prospects of a US-Russia negotiation on New START are less than zero.

Now cue to Russian Foreign Minister Sergei Lavrov making it very clear that war against Russia is not hybrid anymore, it’s “almost” real.

“Almost” in fact means “90 seconds.”

So why is this all happening?

The Mother of All Intel Failures

Former British diplomat Alastair Crooke has concisely explained how Russian resilience – much in the spirit of Iranian resilience past four decades – completely smashed the assumptions of Anglo-American intelligence.

Talk about the Mother of All Intel Failures – in fact even more astonishing than the non-existent Iraqi WMDs (in the run-up to Shock and Awe in 2003, anyone with a brain knew Baghdad had discontinued its weapons program already in the 1990s.)

Now the collective West “committed the entire weight of its financial resources to crushing Russia (…) in every conceivable way – via financial, cultural and psychological war, and with real military war as the follow-through.”

And yet Russia held its ground. And now reality-based developments prevail over fiction. The Global South “is peeling away into a separate economic model, no longer dependent on the dollar for its trading needs.”

And the accelerated collapse of the US dollar increasingly plunges the Empire into a real existential crisis.

All that hangs over a South Vietnam scenario evolving in Ukraine after a rash government-led political and military purge. The coke comedian – whose only role is to beg non-stop for bags of cash and loads of weapons – is being progressively sidelined by the Americans (beware of traveling CIA directors).

The game in Kiev, according to Russian sources, seems to be that the Americans are taking over the Brits as handlers of the whole operation.

The coke comedian remains – for now – as a sock puppet while military control over what is left of Ukraine is entirely NATO’s.

Well, it already was – but now, formally, Ukraine is the world’s first de facto NATO member without being an actual member, enjoying less than zero national sovereignty, and complete with NATO-Nazi Storm troopers weaponized with American and German tanks in the name of “democracy”.

The meeting last week of the Ukraine Defense Contact Group – totally controlled by the US – at the US Air Force base in Ramstein solidified a sort of tawdry remix of Operation Barbarossa.

Here we go again, with German Panzers sent to Ukraine to fight Russia.

Yet the tank coalition seems to have tanked even before it starts.  Germany will send 14, Portugal 2, Belgium 0 (sorry, don’t have them). Then there’s Lithuania, whose Defense Minister observed, “Yes, we don’t have tanks, but we have an opinion about tanks.”

No one ever accused German Foreign Minister Annalena Baerbock of being brighter than a light bulb. She finally gave the game away,  at the Council of Europe in Strasbourg:

“The crucial part is that we do it together and that we do not do the blame game in Europe because we are fighting a war against Russia.”

So Baerbock agrees with Lavrov. Just don’t ask her what Doomsday Clock means. Or what happened after Operation Barbarossa failed.

The NATO-EU “garden”

The EU-NATO combo takes matters to a whole new level. The EU essentially has been reduced to the status of P.R. arm of NATO.

It’s all spelled out in their January 10 joint declaration.

The NATO-EU joint mission consists in using all economic, political and military means to make sure the “jungle” always behaves according to the “rules-based international order” and accepts to be plundered ad infinitum by the “blooming garden”.

Looking at The Big Picture, absolutely nothing changed in the US military/intel apparatus since 9/11: it’s a bipartisan thing, and it means Full Spectrum Dominance of both the US and NATO. No dissent whatsoever is allowed. And no thinking outside the box.

Plan A is subdivided into two sections.

1. Military intervention in a hollowed-out proxy state shell (see Afghanistan and Ukraine).

2. Inevitable, humiliating military defeat (see Afghanistan and soon Ukraine). Variations include building a wasteland and calling it “peace” (Libya) and extended proxy war leading to future humiliating expulsion (Syria).

There’s no Plan B.

Or is there? 90 seconds to midnight?

Obsessed by Mackinder, the Empire fought for control of the Eurasian landmass in World War I and World War II because that represented control of the world.

Later, Zbigniew “Grand Chessboard” Brzezinski had warned: “Potentially the most dangerous scenario would be a grand coalition between Russia, China and Iran.”

Jump cut to the Raging Twenties when the US forced the end of Russian natural gas exports to Germany (and the EU) via Nord Stream 1 and 2.

Once again, Mackinderian opposition to a grand alliance on the Eurasian landmass consisting of Germany, Russia and China.

The Straussian neo-con and neoliberal-con psychos in charge of US foreign policy could even absorb a strategic alliance between Russia and China – as painful as it may be. But never Russia, China and Germany.

With the collapse of the JCPOA, Iran is now being re-targeted with maximum hostility. Yet were Tehran to play hardball, the US Navy or military could never keep the Strait of Hormuz open – by the admission of the US Joint Chiefs of Staff.

Oil price in this case would rise to possibly thousands of dollars a barrel according to Goldman Sachs oil derivative experts – and that would crash the entire world economy.

This is arguably the foremost NATO Achilles Heel. Almost without firing a shot a Russia-Iran alliance could smash NATO to bits and bring down assorted EU governments as socio-economic chaos runs rampant across the collective West.

Meanwhile, to quote Dylan, darkness keeps dawning at the break of noon. Straussian neo-con and neoliberal-con psychos will keep pushing the Doomsday Clock closer and closer to midnight.