Update (1455ET): If Kevin McCarthy was a cat, he’d have one life left – after the eighth round of voting for House Speaker has once again left him with snake-eyes.

The results were virtually unchanged from the last round, with McCarthy garnering 201 votes, 20 Republicans voting for another candidate, and one voting “present.”

What’s next?

As of now, lots of uncertainty about what’s next.

Could be 9th ballot

House rs would like to adjourn but don’t think they have the votes.

The leadership operation is trying to turn some votes on adjournment now.

Remember: they have to keep voting if they can’t adjourn

— Jake Sherman (@JakeSherman) January 5, 2023

Rep. Nancy Pelosi (D-CA) told reporters on Wednesday that she wishes McCarthy had been voted in on the first ballot.

“I wish it had happened on the first vote, that Kevin would have been elected on the first vote and then we could have proceeded with putting committees together, an agenda and the rest,” she said. “People should be seeing what the difference public policy makes in their lives instead of their being subjected to, what do they call insanity, doing the same thing over and over again with no change.”

Come on Kevin, aren’t eight votes enough?

*  *  *

Update (1407ET): The House has begun voting for an eighth time, after McCarthy was soundly defeated once again.

After the Seventh vote for Speaker of the House, 21 Republicans are still Holding the Line and voting against Kevin McCarthy.

Since the first vote, those opposing McCarthy have only gained or maintained support.

— Benny Johnson (@bennyjohnson) January 5, 2023

In the last round of voting, 19 Republicans voted for Rep. Byron Donalds, one voted ‘present,’ and Matt Gaetz voted for former President Trump.

Rep. Chip Roy SMOKES McCarthy’s dream of being Speaker like Texas Brisket on live TV pic.twitter.com/EGPDSfgvVz

— Benny Johnson (@bennyjohnson) January 5, 2023

Update (1250ET): To the surprise of no one, Kevin McCarthy doesn’t have the votes to become Speaker of the House as the 7th round of voting comes to a close.

Hilariously, Rep. Matt Gaetz voted for Donald Trump for Speaker.

Representative-elect Gaetz votes for Donald John Trump for Speaker of the House. pic.twitter.com/zvAIH4tujZ

— The Republican Accountability Project (@AccountableGOP) January 5, 2023

Interestingly, Trump could become Speaker – as the Constitution does not specify that the Speaker must actually be a member of the House. In a 2021 report, the Congressional Research Service noted that “Although the Constitution does not so require, the Speaker has always been a Member of the House.

*  *  *

After two days of embarrassing defeat spanning six votes for Speaker of the House, Kevin McCarthy has offered his critics a mountain of new concessions before, during and after a round of Wednesday night negotiations, Politico reports.

The concessions include (via Politico): 

• A one-member “motion to vacate”: The GOP leader appears to have finally acquiesced to a demand to lower the threshold needed to force a vote ousting a speaker to just one member. While McCarthy originally indicated that restoring the one-member “motion to vacate” was a red line, his allies now argue that there’s not a huge practical difference between this and his previous offer of requiring five members to trigger the vote.

• Rules Committee seats for the Freedom Caucus: McCarthy is prepared to give the House Freedom Caucus two seats on the powerful House Rules Committee, which oversees the amendment process for the floor. (Some conservatives are still holding out for four seats on the panel.) There are also talks about giving a third seat to a conservative close to the Freedom Caucus but not in it — someone like Rep. Thomas Massie of Kentucky. Who would pick those members is still under discussion. Typically, it’s the speaker’s prerogative, but conservatives want to choose their own members for these jobs.
• A vote on term limits: This is a key demand of Rep. Ralph Norman (R-S.C.), who has proposed a constitutional amendment limiting lawmakers to three terms in the House.

• Major changes to the appropriations process: Fears of another trillion-plus-dollar omnibus spending bill have been a major driver of the conservative backlash to McCarthy. The brewing deal includes a promise for standalone votes on each of the 12 annual appropriations bills, which would be considered under what is known as an “open rule,” allowing floor amendments to be offered by any lawmaker.

That said, according to Punchbowl News‘ Jake Sherman (formerly of Politico), there are still 20 ‘no’ votes against McCarthy, who “may have to sit through a 7th speaker vote today that he’s sure to lose.”

According to Sherman, “negotiations between McCarthy and opponents have turned slightly positive,” while the Speaker hopeful is trying to drive a wedge between Reps. Lauren Bobert and Matt Gaetz. That said, some of McCarthy’s allies have suggested the drama could extend into next week before McCarthy either gets the job or backs down.

More from Sherman / Punchbowl regarding McCarthy’s progress:

TO BE SURE: MCCARTHY is a long way away. but he finally had a sliver of good news yesterday

— Jake Sherman (@JakeSherman) January 5, 2023

Meanwhile, ‘Never Kevin’ Rep. Dan Bishop (R-NC) has vowed to resign from Congress if McCarthy is elected Speaker, Fox News reports.

Years of anger, distrust

As Bloomberg notes, the 20 GOP holdouts that are blocking McCarthy’s bid to become Speaker comes from years of anger at party leadership and “deep suspicions of the veteran lawmaker.”

The group opposing McCarthy’s ascension to the top spot in the chamber have a list of grievances about House rules, anger over uniparty compromises with Democrats, and doubt over McCarthy’s claim to be a true conservative.

“Mr. McCarthy has a history that is off-putting to some people,” said Rep. Andy Biggs (R-AZ), one of the leaders of the revolt.

According to Rep. Scott Perry, chair of the conservative House Freedom Caucus, “It’s not personal for us,” adding “It’s about the policies that come out of here.”

“I’m not for the restrictive nature of this place where eight people run it and the rest of us just vote yes or no,” Perry added, expressing frustration with a series of omnibus spending packages that Republicans have joined Democrats in jamming through the process, year after year.

Meanwhile, McCarthy foe Rep. Ralph Norman (R-SC) says there are ‘trust’ issues over McCarthy’s past votes on spending packages.

“Could Kevin McCarthy all of a sudden morph into a fiscal conservative?” he asked.

Matt Gaetz of Florida, one of McCarthy’s most vocal detractors, has made his opposition more personal, lambasting him as a creature of the Washington “swamp” who does the bidding of corporate lobbies.

“If you want to Drain the Swamp, you CANNOT put the biggest alligator in charge of the exercise!” he said in a fundraising email sent amid the speaker votes. “We’re talking about someone who the corrupt DC special interests can always count on to be their lapdog.”

McCarthy has made efforts to neutralize right-wing critics. He pulled himself close to former President Donald Trump after first criticizing him for his actions when a mob of his supporters stormed the Capitol on Jan. 6, 2021. -Bloomberg

Stay tuned for today’s episode of ‘nobody likes Kevin.’

Mexican authorities in the northwestern city of Culiacán arrested the son of the notorious drug lord El Chapo in a Thursday morning operation, according to the NY Times, citing three Mexican government officials.

Ovidio Guzmán López, son of Joaquín Guzmán Loera (El Chapo), was taken into custody and transferred to a military base in Mexico City according to the report.

Watch:

Meanwhile, the city has erupted in violence following the arrest – with news outlets reporting that an Aeromexico plane was hit by gunfire, while unconfirmed footage and reports are circulating that the cartel has responded by opening fire on planes and taking doctors hostage.

🇲🇽Estos grupos armados dispararon a un avión de la Fuerza Aérea Mexicana en el aeropuerto de Culiacán. pic.twitter.com/y3hi7B8J5i

— ENTRE GUERRAS (@entre_guerras_) January 5, 2023

Luego de que en la madrugada de este jueves 5 de enero se realizó un operativo en Culiacán, Sinaloa, para presuntamente detener a Ovidio Guzmán, el hijo de “El Chapo” Guzmán, se desataron bloqueos y enfrentamientos en distintas ciudades de ese estado. pic.twitter.com/cG4fuXw0Sr

— Cuestione (@cuestione) January 5, 2023

#ULTIMAHORA
Impactantes imágenes de hombres armados disparando hacia helicópteros de la Fuerza Aérea Mexicana en Culiacán #Sinaloa con un $Barret Calibre 50mm. Hechos registrados tras la captura de #OvidioGuzmán pic.twitter.com/EzRm9hVFf4

— Enrique BurgosV (@enriqueburgosv) January 5, 2023

🇲🇽 | Los sicarios toman ambulancias y retienen a personal en centros médicos de Culiacán, Sinaloa. pic.twitter.com/YKdcAiytw1

— Mundo en Conflicto 🌎 (@MundoEConflicto) January 5, 2023

In nearby Mazatlán, officials have ordered all tourists to stay in their rooms, while the military has ordered all vehicles in Culiacán to remain off the streets except for military and medical.

A prison riot was also reported in response to the arrest.

#Video | Tras darse a conocer la detención de Ovidio Guzmán, líder del Cártel de Sinaloa, se registraron disturbios y balaceras en el penal Aguaruto en Sinaloa. | Crédito: Especial pic.twitter.com/RejYUTkFS4

— Proceso (@proceso) January 5, 2023

Guzmán López, a prominent cartel leader himself, allows the government to claim its most recent victory in combating cartel violence amid one of the most deadly periods in recent history.

Armed groups responded to the raid on Thursday by lighting vehicles on fire and blocking major thoroughfares out of the city, according to one of the officials. Videos shared on social media showed buses and tractor-trailers aflame. The Culiacán airport confirmed, via Twitter, that it had closed down for security reasons.

…

The Guzmán family has a long history of escaping capture by the Mexican authorities. El Chapo broke out of prison twice. Federal prosecutors in the United States say his sons helped orchestrate his infamous escape from a maximum-security detention center in 2015 through a mile-long tunnel dug into the shower of his cell. -NYT

This is the second time Guzmán López has been taken into custody. In October of 2019, he was arrested but then immediately released after cartel gunmen opened fire with automatic weapons all over the city of Culiacán – which has long been the home base of the Sinaloa cartel.

“The situation turned very bad and lots of citizens were at risk, lots of people, and it was decided to protect the life of the people,” said President Andrés Manuel López Obrador, defending the release. “You cannot value the life of a delinquent more than the lives of the people.”

Authored by Ryan McMaken via The Mises Institute,

Southwest Airlines experienced an enormous meltdown over the Christmas holiday week last month, cancelling thousands of flights, and losing track of—or outright losing—countless pieces of luggage. The airline was full of excuses, of course. As has become fashionable for government and corporate screw-ups, airline management attempted to blame covid for staffing problems. Southwest also blamed the weather. It’s amazing they didn’t also try to somehow blame “Russia’s war in Ukraine“—as the stock phrase now goes—as well. 

Yet, no other major airline had nearly the troubles that Southwest had in terms of either weather delays or staffing problems. Rather, the operational problems apparently stem from the fact that Southwest couldn’t be bothered with spending money to improve its own operating capabilities over the past decade. This occurred in spite of the fact that Southwest—like other major US airlines—collected billions of dollars in bailout funds. The company then reported large profits thanks in part to the funds stolen from taxpayers. 

Already, we’re hearing about lawsuits from paying customers, and fines from federal regulators. The only real solution, however—in addition to civil suits to recover real damages—lies in forcing Southwest to submit to more market competition. In addition to periodic bailouts from taxpayers, Southwest—like all US airlines—is protected from foreign competition by protectionist US laws. Combining these protections with bailouts—airlines got free money in both 2001 and 2020—we have an airline industry that’s complacent, wasteful, and prone to mistreating its customers. 

Mask Mandates and Southwest’s Mistreatment of its own Customers 

As stranded customers sought to reschedule their flights at the Nashville airport last week, Southwest employees called in the police to threaten customers with arrest if they didn’t immediately leave the area. The airline later claimed they were merely trying to “help” customers contact reservation agents elsewhere in the airport.

Resorting to police coercion, of course, is a tactic we’ve seen employed by airline employees on many occasions. Perhaps, most famously, United Airlines employees in 2017 called in police to beat up a paid customer, David Dao, who refused to give up his seat on a flight after airline employees mismanaged booking. Some conservatives rushed to defend the airline, even claiming that United Airlines was the victim, or insisting that the passenger should have just meekly followed orders.

That case became an interesting prelude to the debate over “following orders” from airline employees in light of covid mask mandates. Three years later, airlines rushed to unilaterally adopt covid mask mandates for customers, forcibly removing customers who didn’t comply with every minute detail.

This was done without federal mandates, mind you. In April of 2020, private airlines began imposing their own mask mandates, and airlines were free to adopt—or not adopt— their own mask policies well into 2021. Southwest was happy to jump on the mask bandwagon early, however, and adopted a mask policy even more stringent than those policies imposed by many governments. In Colorado, for example, the government-imposed mask mandate applied only to children 11 years of age, or older. Southwest, on the other hand, saw fit to impose a mask mandate on children as young as two years old. There was absolutely no scientific basis for this, of course, but Southwest enthusiastically enforced the mandate, even tightening restrictions in the summer of 2020. The airline stated that even those with verifiable medical conditions preventing masking would not be allowed to fly at all.

Airline employees proceeded to throw an autistic 3-year old and his family off a plane in one case. On another occasion a Southwest flight attendant booted a 2-year old and his mother because the small child was taking too long to eat his gummy bears. Although the mask policy was only private corporate policy at that time, Southwest’s stated policy was that customers not be given much leeway to eat: “we expect these instances to be very brief, and customers should put their face covering back on as soon as possible.”

Southwest Gets Billions in Taxpayer Money 

At the same time Southwest was voluntarily throwing toddlers off planes for eating incorrectly, it was receiving billions in taxpayer money as part of the federal government’s bailout of US airlines. This was the second bailout for Southwest in twenty years, an earlier bailout having come in 2001. In the 2020 bailout, Southwest received $7 billion in subsidized loans, grants, and tax relief:

On April 14, Southwest announced that it had reached an agreement with the government in which it will receive $2.3 billion in grants, as well as a $1 billion low-interest loan backed by warrants that could dilute Southwest shareholders only minimally, even if fully exercised.

Months later, in April 2021, Southwest announced $116 million in profits. According to the Chicago Tribune, this was largely attributable to the infusion of taxpayer money handed over to Southwest: “Without the federal money, Southwest would have lost $1 billion in the quarter.”

This doesn’t distinguish Southwest from other major US airlines, of course. Those airlines received bailouts as well. Yet, in spite of its net revenues, Southwest did very little to address the problems of scheduling flights which it knew could lead to mass flight cancellations. Southwest’s passengers were victimized twice: once when their hard-earned money was stolen by the state to pay for Southwest’s bailout, and a second time when Southwest stranded thousands of taxpayers on Christmas. 

How Governments Limit Airline Competition

It is likely that last week many thousands of Southwest customers declared “I’ll never fly southwest again.” Such declarations have a way of being short-lived when passengers enjoy few alternatives.

Unfortunately, thanks to costs imposed by federal regulations, and by federal protectionism, American airline passengers don’t have as many alternatives as they should.  There were no new-entrant airlines from 2007 to 2021, and a small number of firms dominate the airline business in North America. Investopedia claims the three top carriers enjoy 70 percent of the business, and Salon and the NYT say the top four enjoy 80 percent. 

Governments limit competition in several ways, including: 

• Air traffic control is a monopoly run by the FAA and services are limited by political considerations. 

• Airports are owned by local governments, and thus allocate airport amenities and services according to political needs and not market needs. 

• The FAA rations “slots” which give “an airline the right to either takeoff or land at the airport in a specified time period, and airlines [can] only access the airport with a slot. These slots are generally distributed to the largest and most powerful incumbent firms. 

Moreover, the generally-high level of bureaucratization in the airline business means that airlines spend a sizable amount of effort satisfying government bureaucracies rather than concentrating on their own customers. As Per Bylund has explained, regulated markets destroy consumer sovereignty. 

So, yes, there are multiple government-imposed constraints that indirectly limit competition in the airline industry—to the benefit of incumbent firms like Southwest.

The Ban on Domestic Routes for Foreign Carriers

But there is also one big government regulation that directly protects all domestic airlines from competition: the US ban on foreign carriers. USAToday reports: 

International airlines do operate in this country, of course, but they’re forbidden from flying point-to-point destinations domestically. These laws, which are meant to protect American consumers and jobs, are having the exact opposite effect. Eliminating — or at least partially lifting — outdated restrictions could significantly increase competition and improve customer service.

The author of the above is wrong about at least one thing. The protectionist laws eliminating foreign competition are not “outdated.” They were never a good idea to begin with. Protectionist laws such as the ban on foreign carriers have always favored the owners of domestic firms at the expense of their customers. 

Were free trade allowed in the airline business, customers could potentially elect to fly the Irish carrier Aer Lingus — for example — between Dallas and Chicago rather than Southwest. This would, of course, drive down prices and give more choices to consumers. 

Southwest’s debacle has shown just how much more competition is needed. 

Ukraine says it’s bracing for a major new Russian offensive, which will involve a large influx of new ground forces at a time Russian forces are under pressure and reportedly lacking enough manpower to maintain front lines, but did not give a timeline for the expected push.

In fresh statements widely circulated Wednesday, Ukrainian President Volodymyr Zelensky said Russia is planning a major “new offensive” which will involve a planned “new mobilization processes.”

He suggested the new mobilization is imminent given recent Russian battlefield losses in the east, which includes the devastating strike on a barracks in the city of Makiivka, resulting an a huge Russian troop death toll.

“We have no doubt that the current masters of Russia will throw everything they have left and everyone they can muster to try to turn the tide of the war and at least postpone their defeat,” Zelensky said. “We have to disrupt this Russian scenario. We are preparing for this. The terrorists must lose.”

Kiev had begun issuing these warnings of a major escalation by Moscow shortly after last month Putin referred to the Ukraine special operation as a “war” for the first time. As the The Hill also details: 

Some Ukrainian officials also warned last month about a potential new Russian offensive in January or February, including Gen. Valeriy Zaluzhnyi, a top commander in the Ukrainian army who told The Economist that Russia is preparing some 200,000 troops and could have another go at Kyiv.

Previously, Ukraine’s defense minister Oleksii Reznikov also issued a New Year message, and in it appealed to the Russian people, warning that Putin his about to declare martial law and close borders to men, in preparation for a new wave of mobilization.

Reznikov called for Russians to resist these efforts and stand for peace in the video address…

Within Russia, public opinion appears increasingly divided on how military and Kremlin leadership is executing the war, particularly in the wake of the Makiivka barracks attack, which left up to hundreds of Russian conscripts killed. 

Hawks within Russia in the meantime have continued pushing for a more muscular escalation in order to achieve the military objectives laid out since the start of the invasion. Others are calling for both sides to implement a Christmas truce this weekend in observation of Orthodox Christmas (Jan.7 according to the Julian calendar). 

* * *

Is an offensive from the north coming? Is this what Putin was recently in Belarus to negotiate?

Looks like Putin really is going to launch another offensive from the north. https://t.co/FB23b9M8MB

— Gissur Simonarson (@GissiSim) January 5, 2023

Authored by Jeffrey Snider via RealClearMarkets.com,

It was a riotous summer, the heat scorching the world from one end to the other. Many remember it for all the wrong symptoms, beginning with the so-called taper tantrum. The year 2013 was many things, and there were several consequential tantrums in the middle of it, it’s just that they had nearly nothing to do with the Fed’s taper.  

For one thing, the sell-off in USTs and other global fixed income which began in May reversed course suspiciously quickly. According to some markets, eurodollar futures, in particular, it was over by early September. The yield curve would top out (steepest point) by November. Nominal rates peaked at year’s end.

From the very first day in 2014, the dollar began ringing China’s yuan bell. CNY carried with it a nearly mythical place in Western ideology, sparked by an unhealthy affection for those presumed behind the currency’s unrelenting “strength.” The grass always greener to our own wannabes, the skies sunnier to them under the despotic technocracy the Chinese Communists claim to have perfected.

But 2013 wasn’t all that great or even good in Central Planning Paradise. On the contrary, from the earlier stages, the People’s Bank of China found itself alone fighting severe bouts of illiquidity the vaunted technocracy could not seem to eliminate no matter how many times it scolded market participants (moral suasion is equally ineffective there as here).

Where we had our taper tantrum, this was also the Summer of SHIBOR.

To try and address these persistent cash shortfalls, China’s central bank hastily arranged something called the Standing Lending Facility, or SLF. This was no overly complicated structure, as can be typical of Chinese official practice, rather the SLF akin to the Federal Reserve’s Discount Window (Primary Credit); the same the Fed had operated (if hardly used) from its very origin.

How could a major central bank from the world’s second largest economy and financial system not have something like the Discount Window until relatively recently?

Easy. Up until around 2012, it just wasn’t necessary. Cash flowed into China from the outside by the billions, then tens of billions, reaching hundreds of billions. None of it real cash, of course, there rarely is any, rather virtual ledger balances kept track of by the world’s real monetary system, the ubiquitous eurodollar banks.

What internal monetary mechanics the PBOC had practiced targeted the currency and prospective inflation, essentially trying to manage way, way too much money. In the grand scheme of everything, a far better problem to have, one which is especially necessary with China’s economy transforming into what everyone thought would be an unstoppable powerhouse for decades more to come.

Even 2008’s Global Monetary (not financial) Crisis didn’t appear to derail the country’s economic and financial prospects owing largely to the eurodollar system’s continued preference for it over everyone else; while the developed world would struggle in its “new normal” post-crisis, everyone bought into – literally – King Beijing.

The dollars kept coming.

Then they stopped coming.

This was right around 2011 when what was called a European Sovereign Debt Crisis (another misapplied name) squashed that little certainty surrounding Asia dependent upon King Beijing. The firehose of eurodollars once blasting over the border quickly became a trickle.

Without so much foreign “capital”, most of which got turned over to the PBOC in its inflation/CNY/management paradigm in exchange for RMB reserves, China’s big financials found themselves in 2012 and especially 2013 for want of RMB liquidity. Suddenly, a Discount Window equivalent which had been a complete afterthought before got hastily arranged.

And still the Summer of SHIBOR happened anyway. As the main money market rate inside China, the chaos calculated from within its panel (entirely-too-reminiscent of LIBOR’s 2007-08 experience) was a total shock as everything once assumed permanent was upended in a matter of months.

The taper tantrum’s early end was as much about this Chinese reversal as anything else, markets becoming ultra-worried seeing potential red from the land of the Reds. Treasuries selling off in 2013 had been a good sign, a signal that the market was agreeing with Ben Bernanke’s take on the economy, that it might have been recovering in a way which would lead policymakers, anyway, to rethink their policy positions.

Once the monetary disaster which only began that summer started to truly drive the point home, suddenly more and more began to realize how actually no one was going to escape what started in August 2007. Not even China.

Even the Dallas branch of the Federal Reserve, reviewing these events in 2021, correctly surmised some of the basics:

“Most emerging-market countries can’t borrow abroad in their own currency. When a country runs a trade deficit, it needs to borrow in U.S. dollars to cover that deficit. Over time, this leads to a stock of foreign currency-denominated debt. The country needs a steady stream of dollar financing to finance current deficits and to service and roll over any dollar-denominated debt.”

True, and this was a major issue for many countries (like Brazil) who found themselves caught up in everything. Dollar providers out in the eurodollar shadows who become risk averse tend not to provide enough dollars where risks were once incorrectly believed small.

However, setting aside risks, China didn’t run a trade deficit then – and doesn’t now.

On the contrary, the Chinese have benefited from decades of a massive, seemingly ever-growing trade surplus. For the calendar year 2013, that excess reached $259 billion (according to China’s General Administration of Customs). Figure another $30 billion or so for net investment flows, more income receipts from the rest of the world than interest payments and such out to it, China really should have been awash in dollar cash feeding into RMB reserves at the PBOC such that no SLF would have been necessary. A monetary inflow of organic economics regardless of eurodollar risk perceptions.

So, where did all that money go?

To those at the Dallas Fed, or anywhere in the Fed, it was “capital outflows” of the standard textbook sort.

“Federal Reserve tightening, or even the expectation of tightening, complicates this dollar financing, as investors reallocate their holdings to now higher-yielding U.S. assets. This leads to currency depreciation in the debtor countries and rising instability due to an increase in the real (inflation-adjusted) value of foreign currency-denominated debt.”

While the (euro)dollars do disappear from these places, it sure as hell isn’t because investors can earn a few extra bps, maybe even a few percentage points on US Treasury debt. This is the problem with central bankers as Economists, they think of everything in terms of an academic worldview populated by spreadsheets.

Money hadn’t been seeking out opportunity in China because investors believed they get a small spread over USTs, eurodollars went there because of the Chinese trade surplus (and BoP) along with risk-takers believing they were going to get insanely rich off China’s massive, forever-juicy and dependably-friendly economic structure.

They’d suddenly pull up stakes in 2013 because the Fed in 2015 might get off a few 25 bps rate hikes? Please.

All these imbalances would only get worse – so much worse – in 2014. The PBOC’s SLF proved as ineffective as the Fed’s, well, everything. CNY completely reversed course and plummeted. Trying to stabilize the currency, at least, China’s central bank found itself selling off reserves and by doing so supplying the dangerously dry funding market with “dollars” that market wouldn’t otherwise supply itself.

The dates don’t line up, either. QEs 3 and 4 were ongoing all throughout this period. Bernanke first hinted at tapering in May 2013. It wasn’t actually carried out until December, and then those weren’t terminated until October 2014. By then, China – along with basically every other emerging market country – was already toast.  

The previous paradigm had completely reversed; dollars flowed out, depriving both the PBOC (and SAFE) and commercial banks of foreign exchange, leaving each with fewer organic additions in RMB. And the irresistible rise of CNY screeched to a halt, then abruptly (right from the beginning of 2014) reversed course.

Damage ended up being astronomical, in money as well as economic terms. As to the former, Chinese authorities ended up burning through nearly $1 trillion in reserves by the middle of 2016.

Where did all that “cash” go?

It vanished up in the smoke of a world-shattering depressionary deflation.

This wasn’t the work of US authorities instituting an ultra-cautious end to QEs 3 and 4 (yes, there had been four up to 2014) and then maybe, possibly some rate hikes down the line in 2015 enticing the safest investors to bring some cash home from China. The incongruity really should have launched an aggressive search for real answers, not copy and paste from the outdated textbooks as Dallas would offer even so many years afterward.

Facing the end of 2022, China’s numbers are now “somehow” even bigger – and not in a good way, rather 2013-style. Whereas the country started on the plus side with a quarter trillion in merchandise surplus dollars back then, this year authorities put it at over $800 billion, and that’s with another month left to go to add more to it!

Yet, despite that plus another $70 to maybe $100 billion net investment inflows, China’s SAFE shows $132.7 billion fewer total forex reserves. The PBOC displays none of it; in either direction.

Where most of that $800 billion really should have made its way onto the central bank’s balance sheet, instead Chinese authorities have to be trolling us all. Forex balances for the insanely complicated monetary, financial, and economic system there have moved in such a narrow range (for several years, now) it has to be a joke, doesn’t it?

 No. This is deadly serious stuff which remains without answer, or even any serious appreciation let alone useful discussion.

Another trillion “dollar” hole left in China’s money isn’t because the safety of USTs yields a few percent more this year than in 2013 (look it up; yields aren’t actually all that higher than they were in the second half of that year).

The issue only begins with this fatal conceit:

“…I continue to believe that monetary policy at its current level is accommodative and that, if this current stance is sustained, the economy will experience faster inflation in the medium term.”

Those words were muttered by Charles Plosser, the Philadelphia Fed’s President on September 16, 2008 – the day after Lehman Brothers.

Nothing has changed since that day, except how acute these intermittent global dollar shortages have gotten to be along the way.

Sometimes more manageable than others. SHIBOR Summer turned out to be simply the opening round of one that would prove unmanageable.

All the while those at the Fed tell us – and the Chinese – monetary policy is or has been highly accommodative.

As the dawn of 2023 approaches, it does so beginning with what by any rational account appears to be another trillion dollar hole in global finances.

I write “another” because China is hardly the only one to experience such a deficit in 2022, cumulatively those adding up to their own trillion. Give or take a few hundred billion.  

What does the Fed do here? No. What does the Fed have to do with any of it.

Do have a Happy New Year, as best as you might. 

A critical conduit supplying fuel to the US Northeast was halted on Wednesday, when the Colonial Pipeline temporarily shut operations after a spill, the latest disruption to energy flows following an outage to the Keystone oil pipeline last month.

As Bloomberg first reported, some product was released at Colonial’s Witt delivery station near Danville, Virginia, prompting the shutdown of its Line 3, spokeswoman Meredith Stone said in an email. The company is planning a restart at around 12 p.m. Eastern time on Saturday, according to a notice shared with users of the pipeline.

Colonial’s Line 3 transports refined products such as distillates and gasoline to the New York Harbor market from Greensboro, North Carolina, and is part of a broader system that supplies fuels to the eastern US. The system’s key gasoline conduit was shut for nearly a week in 2021 after a cyberattack.

Colonial’s vast product system which includes Lines 1, 2, 3 and 4 are a vital source of fuels for the eastern US. Lines 1 and 2 extend from the Houston area and meet in Charlotte, North Carolina, to form Line 3 into New York Harbor.

The incident follows the outage to TC Energy Corp’s Keystone pipeline after the biggest onshore oil spill since 2010. The conduit, which can deliver as much as 600,000 barrels a day of Canadian crude into the US Midwest, only fully returned to service last week.

Colonial didn’t provide the cause of the leak or the volume that was discharged from Line 3, although it did say the impact had been contained within its property.

President Joe Biden on Thursday will read remarks regarding border security, as his administration has now flip-flopped, and is working to expand Title 42, the Trump-era policy which allows the US Government to expel immigrants while they wait for asylum hearings, as opposed to allowing them to walk free in the United States.

Watch Live:

As the Wall Street Journal notes, “The Biden administration is expanding its use of a pandemic-era border measure known as Title 42 to begin rapidly expelling migrants from Cuba, Haiti, Nicaragua and Venezuela, while opening a new legal path for up to 30,000 migrants from those countries to enter the U.S. a month.”

The new policy represents the broadest effort yet that the Biden administration has undertaken to deter migrants seeking asylum from crossing the border illegally. It also relies on an expanded use of Title 42 as a border-control measure, even while the administration is arguing in court that the measure is no longer justified on public-health grounds and must end. The Supreme Court is set to hear oral arguments on Title 42 in February.

The new program will require migrants hoping to seek asylum in the U.S. to be paired with financial sponsors and would give applicants two years of humanitarian protections, under which they can work legally and apply for asylum. -WSJ

Meanwhile, Biden indicated on Wednesday that he will visit the US-Mexico border for the first time since he took office nearly two years ago.

As the Epoch Times‘ Jack Phillips notes;

President Joe Biden indicated Wednesday that he will visit the U.S.–Mexico border for the first time since he took office nearly two years ago.

While in Kentucky, the president was asked if he will be going to the border in connection to a meeting next week in Mexico City with other world leaders. “That’s my intention, we’re working out the details now,” Biden said.

Biden is slated to attend the North American Leaders’ Summit in Mexico City on Jan. 9 and Jan. 10, where he is expected to meet with Mexican President Andrés Manuel López Obrador and Canadian Prime Minister Justin Trudeau.

Republicans and some Democrats who represent districts along the U.S.–Mexico border have repeatedly called on Biden to visit the border amid surging numbers of illegal immigrants crossing the border. They’ve also accused the administration of pursuing an “open borders” agenda by rescinding numerous Trump-era immigration rules.

In December, Biden was chided as he flew to Arizona to deliver a speech at a computer chip factory and highlighted jobs but did not visit the border. At the time, the president said that he could not visit “because there are more important things going on … they are going to invest billions of dollars in a new enterprise in the state.”

Other Details

Data released by U.S. Customs and Border Protection (CBP) show that nearly 2.4 million people were arrested for illegally crossing the border in the 2022 fiscal year, which ended Sept. 30. That’s up from 1.7 million during the previous fiscal year.

White House press secretary Karine Jean-Pierre addressed Title 42, a border rule established under the Trump administration that allowed the federal government to quickly expel people at the border, after the Supreme Court last week ruled that the policy should remain while it considers arguments. A lower court had ruled to end the policy, which would have ended in December.

“To truly fix our broken immigration system though, we need Congress to act,” Jean-Pierre told reporters Tuesday. “We saw the president on his first day in office put forth a comprehensive immigration policy, and he did that to show how important this was, how much of a priority this was for him.”

And when she was asked about a possible Biden visit to the border, Jean-Pierre said in late December that “the president’s focus right now is to come up with solutions” and “his focus on making sure that we have the resources to manage the challenges that we’re seeing at the border.”

After the midterms, top House Republicans have indicated that investigating the administration’s border policies will be a priority. Last month, House Republican Leader Kevin McCarthy (R.-Calif.) told reporters that he had invited Biden to visit the border with him when Biden met with McCarthy and other GOP leaders following the Nov. 8 midterms.

“The control of our border is lost right now. That is why I asked [the] homeland security secretary to resign. And come January, we’ll have an investigation of why the border has become the situation it is and not allow them to continue along the same path,” said McCarthy, who is currently vying to become the next House speaker amid opposition among members of his own party.

Some GOP lawmakers have said that Homeland Security Secretary Alejandro Mayorkas, who oversees the CBP and U.S. Immigration and Customs Enforcement, could face impeachment.

Mayorkas on Wednesday again acknowledged that the number of illegal immigrant encounters at the border is causing strain on the system.

“We’re operating within a system that is fundamentally broken. No one disagrees with that. We just can’t seem to agree upon the solution and a solution is long overdue. Within the broken immigration system that we are operating, we are managing the number of encounters and we are prepared to address the end of Title 42,” he told the Washington Post.

Rep. Henry Cuellar (D-Texas), whose district sits along the border, said in late December that Biden should visit to see what he described as an escalating crisis.

“I don’t know why they keep avoiding the border and saying there’s other things, more important things, than visiting the border. If there is a crisis, show up. Just show up,” he told CNN in December, coming days before the Supreme Court allowed Title 42 to remain for the time being.

Biden “showing up at the border would send a strong signal to the communities that he’s there, he cares about the border communities,” Cuellar said. “Just show up! It doesn’t take much to just show up at the border.”

After two days of embarrassing defeat spanning six votes for Speaker of the House, Kevin McCarthy has offered his critics a mountain of new concessions before, during and after a round of Wednesday night negotiations, Politico reports.

The concessions include (via Politico): 

• A one-member “motion to vacate”: The GOP leader appears to have finally acquiesced to a demand to lower the threshold needed to force a vote ousting a speaker to just one member. While McCarthy originally indicated that restoring the one-member “motion to vacate” was a red line, his allies now argue that there’s not a huge practical difference between this and his previous offer of requiring five members to trigger the vote.

• Rules Committee seats for the Freedom Caucus: McCarthy is prepared to give the House Freedom Caucus two seats on the powerful House Rules Committee, which oversees the amendment process for the floor. (Some conservatives are still holding out for four seats on the panel.) There are also talks about giving a third seat to a conservative close to the Freedom Caucus but not in it — someone like Rep. Thomas Massie of Kentucky. Who would pick those members is still under discussion. Typically, it’s the speaker’s prerogative, but conservatives want to choose their own members for these jobs.
• A vote on term limits: This is a key demand of Rep. Ralph Norman (R-S.C.), who has proposed a constitutional amendment limiting lawmakers to three terms in the House.

• Major changes to the appropriations process: Fears of another trillion-plus-dollar omnibus spending bill have been a major driver of the conservative backlash to McCarthy. The brewing deal includes a promise for standalone votes on each of the 12 annual appropriations bills, which would be considered under what is known as an “open rule,” allowing floor amendments to be offered by any lawmaker.

That said, according to Punchbowl News‘ Jake Sherman (formerly of Politico), there are still 20 ‘no’ votes against McCarthy, who “may have to sit through a 7th speaker vote today that he’s sure to lose.”

According to Sherman, “negotiations between McCarthy and opponents have turned slightly positive,” while the Speaker hopeful is trying to drive a wedge between Reps. Lauren Bobert and Matt Gaetz. That said, some of McCarthy’s allies have suggested the drama could extend into next week before McCarthy either gets the job or backs down.

More from Sherman / Punchbowl regarding McCarthy’s progress:

TO BE SURE: MCCARTHY is a long way away. but he finally had a sliver of good news yesterday

— Jake Sherman (@JakeSherman) January 5, 2023

Years of anger, distrust

As Bloomberg notes, the 20 GOP holdouts that are blocking McCarthy’s bid to become Speaker comes from years of anger at party leadership and “deep suspicions of the veteran lawmaker.”

The group opposing McCarthy’s ascension to the top spot in the chamber have a list of grievances about House rules, anger over uniparty compromises with Democrats, and doubt over McCarthy’s claim to be a true conservative.

“Mr. McCarthy has a history that is off-putting to some people,” said Rep. Andy Biggs (R-AZ), one of the leaders of the revolt.

According to Rep. Scott Perry, chair of the conservative House Freedom Caucus, “It’s not personal for us,” adding “It’s about the policies that come out of here.”

“I’m not for the restrictive nature of this place where eight people run it and the rest of us just vote yes or no,” Perry added, expressing frustration with a series of omnibus spending packages that Republicans have joined Democrats in jamming through the process, year after year.

Meanwhile, McCarthy foe Rep. Ralph Norman (R-SC) says there are ‘trust’ issues over McCarthy’s past votes on spending packages.

“Could Kevin McCarthy all of a sudden morph into a fiscal conservative?” he asked.

Matt Gaetz of Florida, one of McCarthy’s most vocal detractors, has made his opposition more personal, lambasting him as a creature of the Washington “swamp” who does the bidding of corporate lobbies.

“If you want to Drain the Swamp, you CANNOT put the biggest alligator in charge of the exercise!” he said in a fundraising email sent amid the speaker votes. “We’re talking about someone who the corrupt DC special interests can always count on to be their lapdog.”

McCarthy has made efforts to neutralize right-wing critics. He pulled himself close to former President Donald Trump after first criticizing him for his actions when a mob of his supporters stormed the Capitol on Jan. 6, 2021. -Bloomberg

Stay tuned for today’s episode of ‘nobody likes Kevin.’

In a day when strong jobs data (Challenger, ADP, Initial Claims all coming in strong or stronger than expected) has been viewed by markets as bad for risk assets as it signals continued economic strength and continued rate hikes by the Fed, we got yet another conflicting economic signal, this time from the latest US trade deficit, which narrowed in November by much more than expected. According to the BEA, the November trade deficit narrowed to $61.5b from $77.8b in prior month, coming in below the median estimate of $63.0BN (and just barely missing the top end of the range of $61.3BN to $80.5BN from 42 economists).

Remarkably, the 20% one-month decline in the deficit was the single biggest drop in the US trade deficit on a percentage basis going back to the global financial crisis!

And while it would have been welcome economic news if the drop in the deficit was the result of a surge in exports, the plunge was driven not by rising exports but rather by shrinking imports – a telltale sign of economic slowdown – with consumer goods, industrial supplies, capital goods and autos all contributing to the decline, the US Bureau of Economic Analysis said. To wit, while exports fell 2% in Nov. to $251.9BN from $257.0BN in Oct, imports fell a striking 6.4% in Nov. to $313.4BN from $334.8BN in Oct. Here are the detials:

Exports of goods and services decreased $5.1 billion, or 2.0 percent, in November to $251.9 billion. Exports of goods decreased $5.3 billion and exports of services increased $0.2 billion.

• The decrease in exports of goods reflected decreases in industrial supplies and materials ($3.6billion) and in capital goods ($1.3 billion). An increase in consumer goods ($0.9 billion) partly offset the decreases.
• The increase in exports of services reflected increases in other business services ($0.1 billion), in telecommunications, computer, and information services ($0.1 billion), and in charges for the use of intellectual property ($0.1 billion). A decrease in travel ($0.2 billion) partly offset the increases.

Imports of goods and services decreased $21.5 billion, or 6.4 percent, in November to $313.4 billion. Imports of goods decreased $20.7 billion and imports of services decreased $0.8 billion.

• The decrease in imports of goods reflected decreases in consumer goods ($8.8 billion), in industrial supplies and materials ($3.7 billion), in automotive vehicles, parts, and engines ($3.3 billion), and in capital goods ($3.0 billion).
• The decrease in imports of services reflected decreases in transport ($0.7 billion) and in travel ($0.4billion). An increase in charges for the use of intellectual property ($0.2 billion) partly offset the decreases.

Whether the plunge in imports is due to a the reverse bullwhip effect, or general economic malaise is unclear; adding to the confusion, the slowdown in US consumer demand for foreign goods and services will serve to boost GDP due to the way net trade is imputed for GDP purposes. In other words, expect a jump in Q4 GDP estimates due to a plunge in US imports.

A double whammy of better than expected jobs data this morning (just ignore the massive layoffs at Amazon etc) has sparked a hawkish reaction in the market’s expectations of Fed actions with the terminal rate now back above 5% – at pre-December-CPI levels…

The dollar is rallying on the hawkish shift…

But… Stocks are dumping…

Bonds are dumping…

Gold is dumping…

And while the jobs market is screaming ‘no recession’ the oil market is is rumbling on demand fears…

Powell will be happy as financial conditions are tightening…