Over the past year, we have repeatedly said that the endgame for this particular episode in central bank stupidity will be when the Fed is dragged, kicking and screaming, into hiking the US inflation target (read this, this and this).

At some point Fed will concede it has no control over supply. That’s when we will start getting leaks of raising the inflation target

— zerohedge (@zerohedge) June 21, 2022

And while it will take at least a few more years before the Fed admits defeat – should it pause and/or pivot it will take far shorter – one place where a central bank inflation target increase is imminent, is Brazil.

To be sure, Brazil is a bit of a basket case, having had its share of close encounters with terminal socialism, most recently in October when Luiz Inácio Lula da Silva (Lula) defeated Bolsonaro to became president for a second time (and a first-ever third term) while promising all the irresistible delights of socialism, if not communism. And like every self-respecting socialist, Lula quickly figured out that what he needs first and foremost, is control over the central bank.

The problem, as everyone knows, is that giving access of a country’s money printer to a true-blue socialist is sovereign suicide, and in Brazil It took decades of cajoling and lobbying by the financial community to finally shield the central bank from political meddling.

So when President Luiz Inacio Lula da Silva, just three weeks into office, questioned the need for an autonomous central bank during a national TV interview last week, it didn’t go over well in markets… even if nobody was really surprised. Swap rates surged and the currency tanked following his remarks. Cabinet members entered the field and managed to halt the plunge that day, but the episode left many investors increasingly alarmed about a Lula presidency they are finding to be vastly different than the one that oversaw an economic boom back in the first decade of the new the century.

As Bloomberg notes, as part of his socialist overhaul, Lula has packed his economic team with “left-wing loyalists, lambasted fiscal rules and now, with his thinly veiled attack on central bank autonomy, taken a posture that raises doubts about the government’s commitment to quelling consumer prices increases in a country with a long history of nasty inflation outbreaks.” Which is ironic since so much of the US establishment was openly rooting for a grand ole socialist time under Lula and was so very happy when Bolsonaro lost by the narrowest of margins.

And like every socialist (or despotic tyrant for that matter) who promises the sun, moon and stars… if only he had access to an infinite supply of (soon to be devalued cash), Lula quickly grasped that what he needs is to strip the central bank of its independence. As such, his saber-rattling is born in large part out of frustration, investors say, with the growing clash between their fiscal policy – aimed at boosting a sputtering economy – and the central bank’s high interest-rate policy –  designed to bring inflation back down to target.

But what if one goes for the classical Faustian bargain: let’s make life a little bit easier for everyone if we all agree on just a little more inflation? Well, that’s precisely what Lula is doing.

Last Wednesday, in a wide-ranging interview with Globo TV, Lula downplayed the importance of an independent central bank, and addressed the country’s soon-to-be-raised inflation target.

Taking a page right out of Erdogan’s playbook (as a reminder, in Turkey the central bank has lost all of its autonomy in recent years as Turkey’s dictator appointed close friends and allies to run it under fear of immediate termination if they refuse to follow orders), Lula said that “there was a lot of discussion in this country to have an independent central bank, believing that it would be better,” (during Lula’s initial two terms in office, the bank’s chief, Henrique Meirelles, said the president had given him de-facto autonomy to set monetary policy). Lula then said that “it’s silly to think that an independent central bank governor is going to do more than when the president appointed him.”

Which, of course, is precisely what he would say when considering his bigger goal, which is – drumroll – raising the Brazilian inflation target. As Bloomberg noted, during the interview, Lula defended moves to raise the country’s inflation target and said that he would be forced to tighten economic conditions to reach the target and questioned why not set higher than the current 3% goal established for 2024, mentioning 4.5% as a possibility.

And since every radical monetary overhaul needs a social crisis, the CIA Brazil conveniently had just that a few days prior. The president said in the interview that he views the storming of the presidential palace, the congress and the Supreme Court building on Jan. 8 to have been “the beginning of a coup” and that the rioters were acting “according to the order and guidance that Bolsonaro gave for a long time.”

“His decision to keep quiet after losing the election, weeks and weeks of not saying anything; his decision not to hand the sash to me, to leave for Miami as if he were running away in fear of something; and his silence even after what happened here, gave me the impression that he knew everything that was happening, that he had a lot to do with what was happening,” Lula said.

Ah yes, implementing revolutionary monetary policy overhaul at a time when a group of people (without military support) storms the local center of power, and the former president is constantly used by the media and the deep state as an endless propaganda distraction from what matters… it’s almost as if we’ve seen that particular play before.

So what happens next? Well, since there is nobody that can prevent Lula from achieving what he wants (see Turkey) it’s only a matter of time before Brazil becomes the first quasi-modern central bank to raise its inflation target during this particular monetary cycle.

The soon-to-be-toothless central bank chief Roberto Campos Neto himself addressed concerns about Lula’s intervention several times, saying such moves could “reduce the power” of monetary policy and reinforcing that policy makers “won’t hesitate” to raise interest rates if needed.

Meanwhile, as foreign investors watch the Brazilian socialist tragicomedy unwind in real time terrified of what the outcome for the country’s inflation will be, they have been avoiding local assets. Vista Capital had flagged an attack on the central bank’s autonomy as a “relevant risk” being underestimated by markets in a note at the end of last year, but the topic became ubiquitous following the interview, with money managers now expecting the administration to force a change in Brazil’s inflation goals. The government is expected to set 2026’s target in June, and will almost certainly revise the current goal of 3% for 2024 and 2025 to 4.5% as Lula hinted.

“Lula’s decision to publicly state twice that the inflation target should be higher did not go unnoticed, and may further reinforce increasing inflation expectations over longer periods” in the central bank’s weekly survey, JPMorgan economist Cassiana Fernandez wrote in a note as Bloomberg reported. Sure enough, analysts in the survey have raised estimates for 2023 inflation six weeks in a row, and also see consumer prices rising above target through 2025.

Campos Neto seemed to mostly shrug off Lula’s remarks, acknowledging interest rates were currently high while also reiterating the bank will continue to act independently — something that’s helped curb volatility in markets, he said late last week, at least until Lula makes it very clear that he is in control of the central bank. As such, locals are watching for what they say is the first true test to the bank’s autonomy: the appointment of a replacement for Bruno Serra, who’s expected to step down as monetary policy director in February.

Campos Neto plans to suggest a name for the post, with Banco Santander’s Sandro Sobral gaining momentum among the possibilities, according to people with knowledge of the matter, who asked for anonymity discussing private information. But ultimately it’s up to the president to name Serra’s replacement, and it will most likely not be the most qualified candidate but instead some crony of Lula’s.

What happens next? Look to Argentina for clues. As for all those in the US deep state and assorted hanger-on billionaires who backed Lula over Bolsonaro, they are following events in Brazil most closely, knowing well that once the inevitable economic crash pans out – as it does every time a socialist is in charge – it will be only a matter of time before they can buy up Brazil’s vast riches at pennies on the real.

China is rapidly becoming the world’s most dominant force in liquefied natural gas, with Chinese buyers accounting for 40% of recent long-term LNG contracts among global players, according to Nikkei Asia.

Take Chinese energy giant Sinopec Group, which reached a 27-year agreement with state-owned QatarEnergy late last year to buy 4 million tonnes of LNG annually. The imports are due to begin around 2026. As a key client, China is also negotiating to invest in a massive Qatari project to expand LNG output.

At the same time, a private-sector Chinese energy company, ENN Group, signed a contract last year with Texas-based Energy Transfer to buy 2.7 million tonnes of LNG annually for 20 years. ENN increased its purchasing agreement with NextDecade, also headquartered in Texas, to 2 million tonnes a year for 20 years as well. In addition, NextDecade has agreed to supply 1 million tonnes of LNG yearly to China Gas Holdings, whose principal shareholder is an investment vehicle controlled by the city of Beijing. Imports are to start in the latter 2020s.

Over 2021 and 2022, China closed long-term LNG purchasing contracts worth nearly 50 million tonnes a year, European research firm Rystad Energy reports. In this not so covert attempt to corner the LNG market, China has tripled the scale of purchases through long-term contracts in just two years, up from the annual volume of roughly 16 million tonnes from 2015 through 2020.

In 2020 and 2021, spot transactions accounted for 40%-50% of China’s natural gas imports, well above the estimated 30% for Japan. But China appears to have changed strategy to fit long-term demand. Long-term contracts offer more stability in supplies compared with spot contracts.

In 2021, China surpassed Japan as the world’s top LNG importer. But last year, imports apparently dropped 18% to around 65 million tonnes on the economic fallout of the coronavirus pandemic. Yet China’s demand for natural gas in 2030 is projected to be over 50% higher than in 2021.

Amid global efforts to reduce carbon emissions, many countries have converged on natural gas as a relatively clean bridge fuel. The Institute of Energy Economics, Japan predicts annual worldwide LNG demand will reach 488 million tonnes in 2030, up about 40% from 2020. But global supply is on track to fall short of demand by 7.6 million tonnes a month in 2025.

The China contingent are addressing the risk of being cut off from the LNG supply chain at a time when U.S. and allies work to create China-free supply chains for semiconductors. Long-term contracts are seen as a hedge against such disruptions.

Ironically, the US is already China’s biggest LNG supplier based on long-term contracts. The same US that aggressively ramping up alternative semiconductor supply chains that bypass Beijing and which has cracked down on Chinese reverse engineering of US technology. And while Beijing imposed a 25% tariff on American-made LNG in 2019 during the trade war, it then started issuing waivers on the duties in 2020, and since 2021, Chinese and U.S. companies have signed a series of massive LNG deals.

China now imports about 90 million tonnes of LNG through long-term contracts, with the U.S. responsible for around 25 million. Australia ranks next at roughly 17 million tonnes, while the Middle East supplies 14 million and Russia contributes about 6 million.

Despite being extensively reliant on US long-term deal, Beijing intends to avoid dependence on American LNG, and China “is ready to expand cooperation with Qatar in natural gas and other traditional energy sectors,” President Xi Jinping said during a December meeting with Qatar’s Emir Tamim bin Hamad Al Thani in the Saudi Arabian capital of Riyadh.

Additionally, Beijing is carefully diversifying suppliers in the name of energy security. Beyond tanker-borne LNG, China also brings in natural gas via pipelines. China covers just over half of its natural gas demand through domestic output, and the rest comes from Russia and Turkmenistan. The natural gas supplies are supplemented by LNG from the U.S. and other sources.

“It’s best not to rely on any one country for 30%-40% of our needs,” said an executive at a large Chinese oil company, a lesson which Europe learned the very hard way.

As China emerges as a dominant LNG buyer, the role of Japanese purchasers has diminished.

In 2021 and 2022, Japanese companies agreed to less than 10 million tonnes of LNG per annum in long-term contracts. Utilities are wary of large LNG contracts due to uncertainties about future demand amid the decarbonization movement, Japan’s shrinking population and the restart of nuclear plants.

Japanese LNG importer JERA, a joint venture between utilities Tokyo Electric Power Co. Holdings and Chubu Electric Power, decided at the end of 2021 not to renew a 25-year contract with Qatar to buy 5 million tonnes of LNG annually. China’s Sinopec was quick to step in and has emerged as Qatar’s replacement buyer.

Before LNG developers start production at new projects, they sign long-term contracts with importers to secure income and take in financing from lenders. Japanese power and gas companies once took leading roles for projects in Southeast Asia and Australia, but now Chinese players are looking to fill that function.

Rep. George Santos (R-NY) may have engaged in a ‘Bidenesque‘ series of lies about his bona fides to get elected, but he might actually find himself in hot water over more serious revelations over campaign finance violations – a much more serious class of misconduct which could result in expulsion from Congress, civil penalties and criminal prosecution.

The questions center around the hundreds of thousands of dollars Santos has loaned his campaigns from personal accounts; his sharp increase in reported wealth; an outside group that was raising funds on behalf of his campaign, without being registered with the Federal Election Commission (FEC); and a host of expenses submitted by his campaign for $199.99 — one cent less than the figure requiring receipts. -The Hill

“We certainly are talking about potential FEC investigations and DOJ investigations,” said Robert Maguire, head of research for Citizens for Responsibility and Ethics in Washington.

Santos, who now sits on a pair of committees, has already had calls to resign from his own party.

In addition to reported investigations into his finances, Santos also faces several ethics complaints.

Santos’s personal wealth spiked between his 2020 and 2022 campaigns – which coincided with the creation of the Devolder Organization, LLC – as well as at least $705,000 in what he originally said were personal loans to his 2022 campaign.

On Tuesday, however, Santos admitted that a $500,000 loan he gave to his campaign, did not in fact come from personal funds. Now, as the Daily Beast reports, the question is where did the money come from?

However, while the new amended filing told us where the funds did not come from, it also raised a new question—where did the money come from?

While both the old and new campaign filings claim that the loans came “from the candidate,” the campaign’s most recent amended filing had ticked the box for “personal funds of the candidate”; on the new amended filing today, that box is unchecked.

Another amended filing on Tuesday disclosed that a $125,000 “loan from the candidate” in late October also did not come from his “personal funds,” but like the $500,000 question, did not say where the money came from, when the loan was due, or what entity, if any, backed the money. -Daily Beast

In 2022, Santos reported a $750,000 salary from Devolder, and had between $1 and $5 million in his savings account, while holding between $100,001 and $250,000 in a checking account. He also owns an apartment in Rio de Janeiro with a value between $500,001 and $1 million.

Devolder, founded in May 2021 according to documents filed with the Florida secretary of state, previously claimed to have managed $80 million in assets – a claim which has been removed. According to a Dun & Bradstreet estimate from July, 2022, the company’s revenue was just $43,688. Santos told WABC and the Daily Beast that he pulled money from his company as his salary, and used it to fund his c ampaign.

Then in December, he told Semafor that the Devolder Organization was in the “capital introduction” business – similar to LinkBridge, his previous employer.

“What I will do is I will go look out there within my Rolodex and be like: ‘Hey, are you looking for a plane?’ ‘Are you looking for a boat?’ I just put that feeler out there,” he said, adding that he would then connect people to wealthy investors and institutions – landing “a couple of million-dollar contracts” in the first six months.

“If you’re looking at a $20 million yacht, my referral fee there can be anywhere between $200,000 and $400,000,” he told Semafor.

Santos has confirmed little else about the specifics of how his company made money, though some public reports have identified a few clients. 

Santos told the Daily Beast in December that the Devolder Organization contracted with Acrisure, the parent company of The Whitmore Group insurance brokerage. The Whitmore Group’s CEO, James Metzger, is a major GOP donor and also contributed to Santos’s campaign. 

The Devolder company was one of several organizations authorized to manage and control Red Strategies USA — separate from Redstone Strategies — according to documents reported in a Campaign Legal Center FEC complaint against Santos. FEC reports show just one political committee paying Red Strategies USA: Tina Forte for Congress, the Republican candidate who challenged Rep. Alexandria Ocasio-Cortez (D-N.Y.). It is unclear how much, if any, of the $110,320 paid from the Forte campaign ultimately went to Devolder. -The Hill

In a recent interview on the “War Room” podcast, Rep. Matt Gaetz (R-FL) asked Santos where his campaign funds originated from.

“I’ll tell you what. It didn’t come from China, Ukraine, or Burisma, how about that?” Santos replied.

Columbia law professor Richard Briffault said that Santos’ loans may be the most consequential factor in Santos’ future from a criminal justice standpoint, if they are found to constitute “an illegal means of disguising illegal contributions.”

“If it turns out that that was a device for donors to funnel money to the campaign, that itself is illegal — Santos would be a ‘straw donor’ falsely claiming he provided the money when it really came from someone else,” Briffault told The Hill on Friday.

If Santos ‘knowingly’ exceeded the legal limit of $2,900 per donor in any one election cycle – especially if the donors were found to be corporations or foreign entities, “we are talking about a felony,” Briffault added.

What if Santos resigns? A special election, which could cost the GOP a seat.

Six weeks ago the Department of Defense (DoD) awarded a $3 million grant to EcoHealth Alliance, the New York-based nonprofit which was used to funnel millions of US taxpayer dollars to the Wuhan Institute of Virology, where they collaborated to make bat coronaviruses more transmissible to humans via gain-of-function genetic manipulation.

The grant was awarded as part of a DoD program related to countering weapons of mass destruction, as noted by Just the News and Rutgers professor Richard H. Ebright.

EcoHealth Alliance currently has federal contracts and grants from USAID, DoD-DTRA, DoD-USU, DHS, NIAID, and NSF.

— Richard H. Ebright (@R_H_Ebright) January 21, 2023

This latest grant from the DoD is officially meant for “reducing the threat of viral spillover from wildlife in the Philippines.”

In 2014, the Obama administration temporarily suspended federal funding for gain-of-function research into manipulating bat COVID to be more transmissible to humans. Four months prior to that decision, the NIH effectively shifted this research to the Wuhan Institute of Virology (WIV) to EcoHealth, headed by Peter Daszak.

Notably, the WIV “had openly participated in gain-of-function research in partnership with U.S. universities and institutions” for years under the leadership of Dr. Shi ‘Batwoman’ Zhengli, according to the Washington Post‘s Josh Rogin.

Yet, after Sars-CoV-2 broke out in the same town where Daszak was manipulating Bat Covid, The Lancet published a screed by Daszak (signed by over two-dozen scientists), which insisted the virus could have only come from a natural spillover event, likely from a wet market, and that the scientists “stand together to strongly condemn conspiracy theories suggesting that COVID-19 does not have a natural origin.” The Lancet only later noted Daszak’s conflicts of interest.

Meanwhile, as we noted late last year, a Senate Committee on Health Education, Labor and Pensions interim report from October 27, 2022 titled “An Analysis of the Origins of the COVID19 Pandemic” concluded that the origins of Covid were more likely based in a lab as part of a “research related incident” and not zoonotic.

The report was the result of a “bipartisan Health, Education, Labor and Pensions (HELP) Committee oversight effort into the origins of SARS-CoV-2”. It provides a lengthy analysis that reviews “publicly available, open-source information to examine the two prevailing theories of origin of the SARS-CoV-2 virus”.

Among other conclusions, the report notes: “Substantial evidence suggests that the COVID-19 pandemic was the result of a research-related incident associated with a laboratory in Wuhan, China,” the report states.

In a section titled “Problems with the Natural Zoonotic Hypothesis”, the report says:

“Based on precedent and genomics, the most likely scenario for a zoonotic origin of the COVID-19 pandemic is that SARS-CoV-2 crossed over the species barrier from an intermediate host to humans. However, the available evidence is also consistent, perhaps more so, with a direct bat-to-human spillover. Both scenarios remain plausible and, in the absence of additional information, should be considered equally valid hypotheses.”

“However, nearly three years after the COVID-19 pandemic began, critical evidence that would prove that the emergence of SARS-CoV-2 and resulting COVID-19 pandemic was caused by a natural zoonotic spillover is missing.”

“Such gaps include the failure to identify the original host reservoir, the failure to identify a candidate intermediate host species, and the lack of serological or epidemiological evidence showing transmission from animals to humans, among others outlined in this report,” the report states.

“As a result of these evidentiary gaps, it is hard to treat the natural zoonotic spillover theory as the presumptive origin of the COVID-19 pandemic.”

Then, in the report’s conclusion, it states:

“Based on the analysis of the publicly available information, it appears reasonable to conclude that the COVID-19 pandemic was, more likely than not, the result of a research-related incident. New information, made publicly available and independently verifiable, could change this assessment. However, the hypothesis of a natural zoonotic origin no longer deserves the benefit of the doubt, or the presumption of accuracy.”

The report was signed off on by Richard Burr, United States Senator and Ranking Member, U.S. Senate Committee on Health, Education, Labor, and Pensions.

Authored by Jonathan Turley,

California lawmakers appear intent on making the Eagles song Hotel California a reality … at least when it comes to taxes for those who try to flee the state. At the Hotel California, “you can check-out any time you like, but you can never leave!”

With soaring costs and a massive $24 billion deficit, the state is also facing an exodus of people leaving the state.

The solution?

Convert the state into a tax Venus flytrap: not only impose a wealth tax on those caught in the state but tax those who try to leave.

The new bill introduced by Democratic Assemblyman Alex Lee would impose an extra annual 1.5% tax on those with a “worldwide net worth” above $1 billion, starting as early as January 2024.

The law has a cynical bait-and-switch provision. The billionaire tax is just meant for the initial packaging and passage. It can therefore be sold as a “billionaire’s tax.” However, in two years, the threshold drops to a worldwide net worth exceeding $50 million. While billionaires would stay at 1.5%, those in the lower tax bracket would be hit by a 1% added rate on worldwide assets.

It also includes the taxation on those who left the state . . . many due to the high taxes. California already has the highest tax burden in the nation. It relies on its top 1% of taxpayers for roughly half of its individual income tax revenue, but continually treats those taxpayers like game in a canned hunt. The result, not surprisingly, is that they are leaving for states like Texas and Florida.

The new tax would arrange for payments to California’s Franchise Tax Board for years after a departure for those assets which are not easily converted into cash.

I have previously written how the wealth tax pushed by Democrats like Sen. Elizabeth Warren are unconstitutional under the federal Constitution.

States are not subject to the same limit. Not surprisingly, the highest taxing states are pursuing the most wealthy . . . who are leaving in droves. That includes Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York and Washington.

What is most striking under the proposed law is that it will not only spur more wealthy couples to leave the state but discourage any from moving into the state. Even if this ill-considered law does not pass, who wants to risk going to a state that is actively pursuing new ways to tax you even if you ever decide to leave? With many in the top one percent getting out of the state, the tax demand on the most wealthy is only likely to increase with the dwindling numbers in the top tax brackets. No one wants to be the last buffalo on the plains for the California tax collectors.

Under the existing exit tax, businesses and individuals must pay a one-time tax to leave based on the value of the business or individual’s assets, including property, stocks, and other investments. For those who have earned more than $30 million, you can continue to pay for years after fleeing the state. The current exit tax is 0.4% of an individuals’ net worth over $30,000,000 in a tax year, including assets located outside of California other than real estate.

Taxing wealth is no easy matter so the proposal seeks $660 million per year for administrative costs.

California is also considering constitutional amendments and referendums to increase taxes for the most wealthy.

Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
“Relax, ” said the night man
“We are programmed to receive
You can check out any time you like
But you can never leave”

Oil prices traded down today after punching up to seven-week highs with WTI back to a $79 handle after weak ‘soft’ survey data poured more cold water on the idea of a ‘soft landing’., along with disappointing results from a handful of economic-activity bellwethers, such as Union Pacific and 3M. These results have tempered optimism for the economy in the near-term.

Oil prices declined on “uncertainty about how much of a demand boost we’ll see, and concerns over a weakening U.S. economy constrains the upside,” said Michael Hewson, chief market analyst at CMC Markets U.K.

“With the latest PMI numbers in US, Europe and the U.K. showing signs of weakness despite lower energy prices, some doubt is creeping in around any sort of rebound in economic activity,” he said in market commentary.

After two crazy weeks of inventory builds (in crude and at Cushing), all eyes are on this week’s data as the impact of storms and deep-freezes begins to wear off.

It’s the second week in a row with no release of oil from the Strategic Petroleum Reserve, “but at the same time refinery maintenance could lead to an increase in crude oil supply,” Phil Flynn, senior market analyst at The Price Futures Group, told MarketWatch.

There’s an “expectation that we could see an increase in supply in the Cushing, Okla. delivery point,” he said. However, oil products are “still very tight and the focus will be on both gasoline and diesel supplies.”

API

• Crude +3.378mm

• Cushing +3.928mm – biggest build since April 2020

• Gasoline +620k

• Distillates -1.929mm

Crude inventories rose for the 5th straight week, but the size of the build was much more ‘normal’ than the last two.

Source: Bloomberg

Cushing stocks rose for the 4th straight week, by 3.928mm barrels – the most since April 2020…

Source: Bloomberg

WTI was hovering just above $80 ahead of the print and was unmoved after the data hit…

Oil advanced over the past two weeks on China’s swift pivot away from Covid restrictions, which may spur daily consumption to hit a record in 2023. Still, OPEC and its allies are staying conservative with production, as the group is expected to leave levels unchanged when they meet next week.

Finally, President Biden has a problem as gas prices at the pump are about to start accelerating fast…

On Feb. 5, the European Union will impose a ban on imports of Russia-refined petroleum products, and a price cap on Russian oil products will also take effect. That follows an EU embargo and G7 price cap on Russian seaborne oil last month.

“A key question is whether these measures are already lowering or will further lower Russian oil production,” said Stephen Innes, managing partner at SPI Asset Management, in a market update.

Authored by Charles Hugh Smith via OfTwoMinds blog,

One of the great fictions about money is that it is neutral. It isn’t. It’s either designed for the elites or for the citizenry.

Many proclaim a desire for “sound money,” but “backed by X” currencies are not “sound money” unless they can be converted directly into X. Those proposing gold-backed currencies are trying to secure the promise of “sound money” without actually doing the hard part, which is convertibility to the underlying asset.

The only way a currency can be “as good as gold” is if it can be converted to gold. Without a conversion mechanism, the currency isn’t backed by anything but an illusory connection between reserves and the currency being issued.

The only way an oil-backed currency is actually backed by oil is if the currency can be converted into an oil futures contract, i.e. a claim on actual oil. This is what made America’s “gold standard” an actual gold-backed currency: other nations could (and did) demand gold in exchange for their surplus dollars.

As I’ve discussed elsewhere, America’s geopolitical goals required running sustained trade deficits to support our allies’ economies, which left these exporting nations with surplus dollars they could trade for gold. America’s gold reserves were being drained and if the convertibility had been left in place, the reserves would have fallen to zero: with the gold gone, that would have been the end of the gold standard.

Rather than waste our time with illusory “backed by X” schemes, why don’t we cut out the intermediary paper-digital currency and just use gold and silver as money directly in coinage? In other words, if we want truly sound money, then use intrinsically valuable metals as money.

So let’s run a thought experiment on this very ancient and common-sense sound money. Please withhold your screams that “this can’t possibly work!” until the end. On second thought, let’s just dispense with all the quibbles right now: gold and silver coinage was “sound money” for millennia, so we know it works. If we can’t make it work now, that’s our fault, not the fault of precious-metal coinage as money.

Three problems immediately arise:

1. The gold reserves are not large enough at the current price.

The US currently holds 261,500,000 ounces of gold in reserve (8,133 tons). At the current price of gold around $1,900 per ounce, this stash is worth $500 billion–nowhere near enough to equal the current monetary base or money supply. Per the Federal Reserve:

• Currency in circulation: $2.292 trillion.

• Monetary base (currency in circulation plus reserves): $5.418 trillion.

• M1 Money Supply: $9.913 trillion

• M2 Money Supply: $21.327 trillion

2. The amount of “money” and “assets” that can be converted to cash floating around the world far exceed the reserves.

World individually held wealth (2022): $480 trillion

According to a report from the Boston Consulting Group, there was $27.5 trillion US dollars worth of electronic money in circulation around the world.

3. This generates the third problem: like every other asset, gold-silver coins will be bought up and hoarded by the wealthy few, leaving none for the the many to use as money.

There is no way to have a currency that circulates if every coin is immediately socked away, mostly by the wealthy both domestically and overseas.

The solution is three-fold:

1. Arbitrarily set the value of gold in the coins at $20,000 an ounce. Thus a coin containing 1/100th of an ounce is stamped with a value of 200 dollars. The value of a coin containing 1/1000th of an ounce is set at $20. The difference between the current price of gold and the $20,000 per ounce valuation in US dollars is the value of the coins being legal tender in the US.

The same mechanism could be used for silver coinage: the value of silver in the coins could be set at $250 per ounce.

This limits hoarding, at least until the global price of gold approaches $20,000 an ounce and the price of silver approaches $250/ounce.

This would set the total value of the dollar amount stamped on the coins of the US gold holdings of 261 million ounces at $10 trillion. This is roughly double the current monetary base.

2. Reverse-split the dollar 100-to-1, so $100,000 is reduced to $1,000. This will reduce the dollar-denominated “wealth” to a number more in line with the currency in circulation. A house that is currently worth $300,000 would be worth $3,000, and so on. A $1 coin would have the same purchasing power as a $100 bill today.

This would reduce total household wealth in the US from $140 trillion to $14 trillion–more in line with the monetary base of $10 trillion.

3. Make holding coins abroad illegal and subject to immediate confiscation. Furthermore, make it a federal crime to hold more than $5,000 in coinage. This limit is necessary to keep the wealthy from buying up and hoarding the nation’s coinage. To enforce this, each coin must have its own unique ID stamp so it can be tracked.

This changes the coin currency from an anonymous commodity that can be acquired without limit by criminals or the wealthy to money that is intended to circulate rather than become yet another asset hoarded by the wealthy.

There are other forms of precious metals the wealthy can accumulate in vast quantities, but money for the citizenry is intended for circulation, not hoarding by the wealthy.

One could argue that the difference between the arbitrary value of the coin–a $10 coin would only have 10% of that value in precious metals–is too high for these coins to be “sound money.” But this misses the point: “sound money” doesn’t require the value of the precious metal set by global markets to equal the dollar value stamped on the coin.

Sound money simply means the money has an intrinsic value that isn’t reliant on some intermediary mechanism such as paper or digital money supposedly “backed” by one kind of tangible asset or another–a form of money that has no intrinsic value if it can’t be converted to the tangible asset itself.

Any US resident could convert their electronic dollars into coinage with intrinsic value at any bank, with a maximum of $5,000 to disable hoarding by the wealthy. Note that once the dollar is reverse-split, then that $5,000 would be enough to buy a house currently valued at $500,000.

When the electricity goes out, coins are still money.

These coins would have value for 1) containing a defined quantity of precious metals and 2) being legal tender in the US.

As noted, the value stamped on the coins has to far exceed the price of the metal to discourage hoarding. Without this vast premium for being legal tender, precious metal coinage would immediately disappear into the vaults of the wealthy.

One of the great fictions about money is that it is neutral. It isn’t. It’s either designed for the elites or for the citizenry. Since we’ve never really had a currency that wasn’t designed for the wealthy to accumulate and hoard, no one even knows what a currency designed for the citizenry even looks like.

A monetary base of metal money would place strict limits on the central bank, Treasury and government spending. It would no longer be possible to conjure currency out of thin air to fill every interest group’s trough or bail out the banks again. Free money for financiers would not longer be possible. Neither would giving every taxpayer “free money” to spend to support consumption. The Treasury could still sell interest-bearing bonds, but the monetary base could not be expanded by a few keystrokes.

In other words, a stable monetary base would be inconvenient for financial and political elites. There would be limits on their power and predation. But there would also be limits on the citizenry’s demands. Promises made to win elections (“I’ll give you more free money than my opponent”) could no longer be honored with “free money” conjured out of thin air.

Living with constraints is the cost of having sound money.

This is a stone coin on the island of Yap. It’s an extreme example of money. Metal coins are certainly more transportable and easier to use.

*  *  *

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Authored by Julianne Geiger via OilPrice.com,

• AAA: gasoline prices continue to climb throughout the U.S.

• Gasoline prices are up 11.8 cents over a week ago.

• Gasoline prices are rising along with the rise in WTI crude oil prices, which are up $3 per barrel from a week ago.

Gasoline prices continue to climb for the fourth straight week, rising 32.7 cents over the last month as crude oil prices rise, data from AAA showed on Monday.

Gasoline prices are up 11.8 cents over a week ago, and are 9.4 cents higher than they were a year ago, before Russia’s “special military operation” in Ukraine.

Gasoline prices are rising along with the rise in WTI crude oil prices, which are up $3 per barrel from a week ago, and up $2 per barrel from a month ago… and given the lags of the supply chain, pump prices are set to go considerably higher…

In addition to rising crude oil prices, gasoline prices are rising as “continued refinery challenges kept supply of gasoline from rising more substantially,” Patrick DeHaan, head of petroleum analysis at GasBuddy said in a Monday note.

“Macroeconomic factors have continued to weigh on oil and refined products, as strong demand in China hasn’t been slowed much by a surge in new Covid cases.

In addition, releases of crude oil from the Strategic Petroleum Reserve have wrapped up.

Concerns are increasing that without additional oil, supply will tighten in the weeks ahead, especially as the nation starts to move away from softer demand in the height of winter. Moving forward, it doesn’t look good for motorists, with prices likely to continue accelerating,” DeHaan added.

U.S. crude oil inventories have risen over the last two weeks by leaps and bounds, while gasoline inventories also grew, but by a lesser amount. Still, gasoline inventories are below the five-year average for this time of year.

GasBuddy on Monday said that its demand data shows that U.S. retail gasoline demand fell 1.4% in the last week ending on Saturday, with demand falling sharply in the Rockies.

The national average for a gallon of gasoline is $3.423 per gallon as of Monday, according to AAA data.

Whose fault will it be this time? Putin’s again… or “greedy” Big Oil… or ‘mom and pop gas station owners’?

Update(1412ET): The Biden administration has said it will send 30 M1 Abrams tanks to Ukraine, in a significant breakthrough and escalation after weeks of debate, as well as division over the issue within the NATO alliance.

Politico’s national security correspondents Alex Ward and Hans von der Burchard are further reporting that with the US ready to pull the trigger, Scholz’s Germany has followed by approving Leopard 2 main battle tanks. Germany is planning to send 14 of its Leopard 2 A6 tanks to Ukrainian forces.

Scholz’s decision was made possible after Biden agreed to send U.S. Abrams tanks as well. In the end, seems like the Chancellor prevailed with his insistence that both Germany and the U.S. must send modern Western tanks:https://t.co/JFpCYmfOvW

— Hans von der Burchard (@vonderburchard) January 24, 2023

Ominously, this comes on the very same day that the war in Ukraine has pushed the Doomsday Clock to its closest point to midnight in history, as The Hill details: 

Russia’s war in Ukraine has significantly raised the risk of global self-annihilation, the Bulletin of the Atomic Scientists warned Tuesday, moving forward the Doomsday Clock to its closest point to midnight ever.

The Doomsday Clock is meant to measure the gravest risks to human existence to pressure world leaders to recommit to addressing extinction-level challenges, such as the threat of nuclear weapon use, but has grown to include the dangers of climate change and biological risks such as the COVID-19 pandemic. 

The clock has moved to 90 seconds before midnight, 10 seconds closer than when it was last set in January 2022, shortly before Russia launched its invasion against Ukraine on Feb. 24.

The Bulletin of Atomic Scientists has moved the Doomsday Clock to 90 seconds to midnight, the closest it has ever been, primarily because of the NATO-Russia proxy war being fought in Ukraine. pic.twitter.com/L8ImrfpZty

— MintPress News (@MintPressNews) January 24, 2023

“It is now 90 second to midnight”…

The Doomsday Clock was moved to 90 seconds to midnight today, Jan. 24, the closest it’s ever been.

The Doomsday Clock is a decades-long project of the Bulletin of the Atomic Scientists featuring a clock face where midnight represents Armageddon. https://t.co/uG9vmchRXK pic.twitter.com/IFM1gmIjjT

— USA TODAY Graphics (@usatgraphics) January 24, 2023

* * *

Now the US is “leaning” toward sending Ukraine its advanced Abrams M1 tanks, reports The Wall Street Journal on Tuesday. “The Biden administration is leaning toward sending a significant number of Abrams M1 tanks to Ukraine and an announcement of the deliveries could come this week, U.S. officials said,” the report indicates.

At the moment, a reluctant German government is coming under immense pressure to allow its Leopard 2 main battle tanks to be transferred to Ukrainian forces. Poland is leading the way in this pressure campaign. 

“The announcement would be part of a broader diplomatic understanding with Germany in which Berlin would agree to send a smaller number of its own Leopard 2 tanks and would also approve the delivery of more of the German-made tanks by Poland and other nations,” WSJ continues. “It would settle a trans-Atlantic disagreement over the tanks that had threatened to open fissures as the war drags into the end of its first year.”

Earlier this month Berlin signaled that would authorize the Leopards if Washington made the first move and took the initiative on sending the Abrams.

As of Tuesday the Polish government says it has formally submitted its request to Berlin to send the tanks. Germany by law must first authorize these transfers of its German-manufactured military items by other nations.

“The Germans have already received our request for consent to transfer Leopard 2 tanks to Ukraine,” Polish Defense Minister Mariusz Błaszczak confirmed on Tuesday. “I also appeal to the German side to join the coalition of countries supporting Ukraine with Leopard 2 tanks.”

Despite prior signals that Berlin would not be approving the transfer anytime soon for stated reasons of wishing to avoid escalation with Russia, as predicted it looks as if Germany is weakening under pressure.

Bloomberg reports Tuesday that “Germany is expected to give Poland approval as soon as Wednesday to re-export its German-made Leopard tanks to Ukraine, according to people familiar with the matter, who asked not to be identified because the decision is private.”

This despite repeat warnings from Russian officials this week that ‘global catastrophe’ could be unleashed if the West keeps pumping heavier weapons in the conflict, also amid nuclear escalation warnings.

It was several years ago when Jeremy Grantham quietly turned from stock bull to vocal permabear, and while his market notes turned breathlessly alarmist (if only to those who were long his multi-billion fund GMO), such as this from June 2020 “Stock-market legend who called 3 financial bubbles says this one is the ‘Real McCoy,’ this is ‘crazy stuff’”, it wasn’t until early 2021 that Grantham’s warnings of an imminent crash became especially shrill… and wrong. Recall, back in January 2021, Grantham wrote that “Bursting Of This “Great, Epic Bubble” Will Be “Most Important Investing Event Of Your Lives“, while was followed by warnings of a “Spectacular” Crash In “The Next Few Months.”

Needless to say, no crash followed as the Fed and other central banks went all in on stabilizing the market, resulting in an epic year for risk assets which closed 2021 at all time highs, while GMO suffered not only steep losses but also substantial redemptions, a humiliating outcome for Grantham who had previously called the bursting of both the dot com and housing bubbles, but failed to account for just how determined the Fed is to avoid another bubble bursting.

Grantham then tried his market-timing luck once more, this time with somewhat better results, when in January 2022 he doubled down on the fire and brimstone. The GMO founder revisited a familiar theme, namely that we are currently living in a superbubble – only the fourth of the past century – and like the crash of 1929, the dot-com bust of 2000 and the financial crisis of 2008, Grantham was  “nearly certain” the bursting of this bubble has begun, sending indexes back to statistical norms and possibly further.

How much lower? The value manager saw the S&P tumbling by nearly 50% to 2,500 from its then recent all time highs of 4,800 weeks ago (he appears to enjoy forecasting 50% drops as will apparent in a second). He also predicted that the Nasdaq Composite will sustain an even bigger correction.

“I wasn’t quite as certain about this bubble a year ago as I had been about the tech bubble of 2000, or as I had been in Japan, or as I had been in the housing bubble of 2007,” Grantham told Bloomberg in a “Front Row” interview last January. “I felt highly likely, but perhaps not nearly certain. Today, I feel it is just about nearly certain.”

Well, maybe not that certain, because one year later stocks did drop, but nowhere nearly as much as Grantham predicted, with the S&P sliding 20% in 2022 and the Nasdaq losing a third. Hardly the catastrophic bursting of a superbubble which has inflated stock prices by order of magnitude.

But with Grantham, now 84 and eager to make at least one more historic call before his career is over, is not giving up and in a new paper published today titled “After a Timeout, Back to the Meat Grinder!”, the value investor is doubling down on his call from last January (and January 2021… and June 2020), and warns – again – that the popping of the bubble in US stocks is far from over and investors shouldn’t get too excited about the strong start to the year for the market.

According to Grantham, the value of the S&P 500 at the end of the year should be about 3,200, which in retrospect is well above his previous bubble-bursting forecast of 2,500.  That equals a 17% full-year drop and a 20% decline for the year from current levels. Not satisfied with his bearish forecast, Grantham hopes to outbear the likes of Mike Wilson, and believes the index is likely to spend some time below that level during 2023, including around 3,000.

“The range of problems is greater than it usually is — maybe as great as I’ve ever seen,” Grantham told Bloomberg in an interview from Boston.

“There are more things that can go wrong than there are that can go right,” he added. “There’s a definite chance that things could go wrong and that we could have basically the system start to go completely wrong on a global basis.”

Grantham, who is desperate to eventually “nail the crash” as the biggest bear, is also quietly doubling down on his apocalyptic call from a year ago and said he doesn’t discount the idea that the benchmark index could fall to around 2,000, a 50% drop from the current price, which he says would be a “brutal decline.” He is, of course, right… if the Fed were to ever allow that to happen. The problem is that Powell would step in long before the S&P dropped anywhere near there and would instruct Blackrock to buy any and all ETFs. Meanwhile, the only brutality has been the collapse in GMO’s assets which had been cut by half since 2015 through the end of 2020, as the fund kept doubling down incorrectly on ever more bearish scenarios.

The irony, of course, is that if Grantham is – finally – correct, it will only force Powell to exit from his “Fed put” hibernation and start bidding up risk assets, thus leading to even more pain for bears.

Beside Grantham’s bearishness, GMO – which is a value fund – has struggled with lackluster returns in the decade following the global financial crisis as growth stocks led the longest bull market in US stocks on record. But now, as the Federal Reserve tries to tame elevated inflation with aggressive interest-rate increases, value strategies are enjoying a revival. The GMO Equity Dislocation Strategy, which is long value equities and short those the company sees as being valued at “implausible growth expectations,” had gained nearly 15% last year through November; alas it has to more than double to regain its lost AUM.

Value has worked “quite a lot better” over the past year and has outperformed growth during that stretch. Before that, growth had a solid 10-year run, though value had been outperforming in the decades prior to that, Grantham said. “In the range of value versus growth, value is still much more attractively positioned than growth,” he explained. “It’s gone half the way back, but it’s still cheaper.” Value stocks could outperform growth ones by 20 percentage points over the next year or two, he added.

As to what might be currently attractive, Grantham says an investor could divide value stocks into four quartiles. The third group — made up of “the pretty cheap” — did well last year and is no longer super attractive. But the cheapest quartile, which didn’t have the best year, could be poised to hold up best. “It will have a very good time,” he said.

Grantham views the process of further stock market pain playing out now as similar to the popping of bubbles following other rare “explosions of investor confidence” such as in 1929, 1972 and 2000. While many are attributing last year’s slide in stocks to the war in Ukraine and the surge in inflation, or reduced growth from Covid-19 and ensuing supply chain problems, Grantham believes the market was due for a comeuppance regardless.

While the first and “easiest” leg of the bubble’s bursting is over, Grantham says that the next phase will be more complicated. Seasonal strength in the market in January and during the current period of the presidential cycle could keep the market buoyant in the early part of the year.

“Almost any pin can prick such supreme confidence and cause the first quick and severe decline,” he wrote echoing what he has said again, and again, and again. “They are just accidents waiting to happen, the very opposite of unexpected. But after a few spectacular bear-market rallies we are now approaching the far less reliable and more complicated final phase.”

For Grantham’s sake, we hope he is right because at 84, he is rapidly running out of time for the apocalypse to finally hit.

Grantham’s full note is below (pdf link).