Last year was a tough one for investors. In fact, it was the worst year for Wall Street since 2008. The Dow was down about 8.8%. The S&P 500 fell by 19.4%, dropping more than 20% from its high. The Nasdaq took the worst hit, tumbling by 33.1%. Meanwhile, the bond market tanked, bitcoin collapsed, and the air started coming out of the real estate bubble.
Peter Schiff recently did an interview with the Epoch Times. He predicted more pain in 2023, primarily driven by inflation and the Federal Reserve.
While price inflation has cooled a bit, it is still running far above the Fed’s 2% target. Nevertheless, there is talk about a Fed pivot to rate cuts in the year ahead. Peter pointed out that “the last couple of times the Fed was able to orchestrate a pivot, it did it when inflation was 2% or less.” If the central bank makes that move in the near future, it will “throw gasoline on the fire.”
High inflation gets even higher, and in that environment, I don’t see financial assets as a group doing well.”
Peter said bonds, in particular, will get killed.
That’s bad news for the US government as it continues to borrow and spend. A tanking bond market means higher interest rates – a big problem for a country trying to borrow more and more money.
Peter said that the year ahead could be particularly rocky for unprofitable tech companies that benefited from the Fed’s easy money policies in the past, and he sees a continued rotation into “value” stocks from companies with a proven track record of profitability.
If money is losing value much faster than 2% a year, you don’t want to wait 10–20 years to get your money. … It’s not companies that are promising earnings in the future. It’s companies that have earnings right now.”
More broadly speaking, Peter said inflation will continue to wear down consumers and make it more difficult for companies to maintain revenue streams.
If your customers are spending a lot more money on food, on energy, on insurance, on rent, on taxes, and they have nothing left over, then it doesn’t even matter if you cut your prices. You don’t have any customers.”
Peter said the Fed has turned the markets into “a casino” with artificially low interest rates and money printing. It has distorted markets and created all kinds of malinvestments.
It’s really helped undermine the productivity of the American economy, which is one of the reasons we have huge trade deficits.”
In fact, the central bank has become the dominant factor in investors’ decision-making.
The Fed should be irrelevant. Nobody should be making investment decisions based on the Fed. Right now, the Fed is the only thing anybody cares about. ‘Are they going to raise rates? By how much?’ Everything is riding on the decision of a few guys sitting in a room in Washington, DC That’s not how capitalism is supposed to work.”
Peter questioned why the Fed should have the power to decide the price of money.
That makes no more sense than putting together a bureau to decide the price of oil, or the price of milk, or the price of bread … That’s what the Soviet Union used to do, and it was a disaster.”
WTI Extends Gains Despite Massive Crude Build, Production Increase
Oil prices rallied overnight despite a huge crude inventory build reported by API, with traders shrugging it off as likely driven by the impact of the nationwide ‘deep freeze’ and refinery shut-ins distorting the data. Additional optimism over China’s demand outlook (after the government issued a bumper batch of import quotas, spurring hopes of improved crude consumption) offset the optics of the crude build.
“The perceived demand pull that’s expected from China is superseding the rise in crude inventories from the API,” said Dennis Kissler, senior vice president at Bok Financial Securities.
Will the official data confirm the huge builds?
API
Crude +14.865mm (-2.375mm exp) – biggest build since Feb 2021
Cushing +2.3mm
Gasoline +1.8mm (+1.3mm exp)
Distillates +1.1mm (+500k exp)
DOE
Crude +18.96mm (-2.375mm exp, BBG +6.2mm exp) – biggest build since Feb 2021
Cushing +2.511mm
Gasoline +4.11mm (+1.3mm exp)
Distillates -1.069mm (+500k exp)
Confirming and surpassing the API-reported data, official data showed a massive 18.96mm barrel crude build last week – the biggest build since Feb 2021 and stocks at Cushing soared by 2.511mm barrels (the most since Dec 2021)…
Source: Bloomberg
We note that there was a more than 15 million-barrel increase in the Gulf Coast. Much of the rise in inventories due to the disruptions in refinery operations from a deep freeze had not materialized in data yet, so we are seeing that come through now.
The SPR saw a drain of only 800k barrels last week – the smallest since Jan 2022.
Bear in mind that the EIA’s January outlook expects combined gasoline, diesel and jet inventories to rise 9% in 2023, led by a 2.8% jump in refining throughput
US crude production rose last week to 12.2mm b/d – equal to its post-COVID highs…
Source: Bloomberg
WTI was hovering just above $76 ahead of the official data and, after a brief dip, extending gains despite the massive build…
Expectations for higher demand out of China as the country scraps its COVID-19 restrictions continue to provide some support for prices.
“We are confident that oil prices will climb again once the current wave of COVID infections has peaked in China and economic activity picks up,” said Carsten Fritsch, commodity analyst at Commerzbank, in a note.
Still, Stephen Innes, managing partner at SPI Asset Management, warned that oil traders are “unlikely to see the explosive economic reopening that oil bulls had hoped for, with the market ignoring case counts in favor of local Chinese activity data.”
Oil prices “should rise tangentially to the increasing mainland mobility pulse,” he said in a market update.
However, near-term time spreads are holding in a bearish contango structure, signaling ample supply.
Inside Ukraine’s 120+ Mile Salt Mine Tunnels Just Captured By Russia’s Wagner Group
The head of the private Russian military firm Wagner Group has announced pro-Moscow forces have taken control of the town of Soledar in the eastern Ukrainian region of Donetsk. Wagner chief Yevgeny Prigozhin admitted in a series of Tuesday and Wednesday comments that fighting in the area is still ongoing, but said“Units of the Wagner private military company have taken the entire territory of Soledar under their control,” and that the Ukrainians are surrounded.
“The city center has been surrounded, and urban warfare is underway. The number of captives will be announced tomorrow,” Prigozhin added. “No units other than Wagner PMC fighters were involved in the storming of Soledar.” The Amsterdam-based Moscow Times and the AFP underscore that “If confirmed, the capture of Soledar would mark Russia’s biggest success in its war on Ukraine following months of retreats elsewhere.” Prigozhin’s emphasis that it was ‘only Wagner’ an no regular forces that stormed Soledar has reportedly unleashed anger and controversy inside the Russian chain of command.
Britain’s Ministry of Defence (MoD) acknowledged in a Tuesday daily briefing that the majority of Soledar is arlready under Russian control.
“Part of the fighting has focused on entrances to the 200km-long disused salt mine tunnels which run underneath the district. Both sides are likely concerned that they could be used for infiltration behind their lines,” the MoD briefing described.
Control of Soledar, a small town of 10,000 (pre-war) known for its immense salt mines, is seen as especially strategically key to Russian forces seeking to encircle the city of Bakhmut, which has witnessed months of intense but stalemated fighting. Bakhmut is 15km away from the outlying town of Soledar.
Wagner troops have been photographed inside the famous salt mines, following what state media described as “fierce fighting”. The firm also said it has taken many Ukrainian troops captive. There are also reports of large below-ground ammunition stores discovered there.
Reuters details the immensity of the mines, which is the largest in Eastern Europe, in the following:
Soledar is also home to cavernous salt mines that are owned by state-owned enterprise Artemsil, which completely dominated the Ukrainian market until it halted production a few months after Russia invaded. The enterprise has produced more than 280 million tonnes of salt since it was founded in the late 19th century. The mines go down to a depth of 200-300 metres and have tunnels with a combined length of 300 km (186 miles), according a local tourist website.
The enterprise was once considered one of the largest in Eastern Europe and exported salt to 20 countries. A hot air balloon was once flown inside one of the mines to demonstrate their depth.
The Kremlin confirmed that Russian army airborne troops have been assisting by blocking Soledar’s far northern and southern access parts, but officially the Kremlin has been slower to declare full victory as of yet.
“Let’s not rush. Let’s wait for official announcements,” Kremlin spokesman Dmitry Peskov said while hailing the “positive dynamic in advances” due to the “heroism of our fighters.” He stressed that “Tactical successes, of course, are very important.”
This Kremlin reaction, which crucially didn’t mention Wagner at all, is being taken by Western press as somewhat of a humiliating blow to the private military firm with direct links to Putin, and seems an attempt to walk back potentially premature ‘full victory’ claims amid the intense ebb and flow of ongoing urban warfare.
PMC Wagner inside the ancient Salt mines in Soledar, which is a treasure in and of itself – an abundance of natural mineral salt and a large cache of ammunition all left by the AFU. pic.twitter.com/jxRSPbqDBO
“Airborne Force units have blocked Soledar from the town’s northern and southern parts. The Russian Aerospace Forces are delivering strikes at enemy strongholds. Assault groups are engaged in a battle in the town,” Peskov continued.
Interestingly his bolstering of Russian regular forces’ contributions comes at a moment of reported tension between Wagner and the defense ministry. Wagner seems to have been given a carte blanche mandate in how it operates, naturally putting the elite group on a collision course with the army’s chain of command, creating distrust.
The Ukrainian government is meanwhile downplaying Russian gains in and around Soledar, rejecting the Wagner assertions of victory. “Soledar was, is and will be Ukrainian,” a Ukrainian military statement said.
The statement denied that its forces had surrendered the town as of yet, and went so far as to claim that the Wagner photographs from within the salt mines were faked.
However, RT is on Wednesday circulating video of the Wagner mercenaries clearly inside large, cavernous salt mines.
⚡️I can’t believe this war is real life.
Just as Wagner announced the capture of Soledar, Z forces struck a firework warehouse in Kharkiv. This has been confirmed by the governor. pic.twitter.com/2042udtwHC
The afforementioned founder of Wanger Group Prigozhin, also nicknamed “Putin’s chef”, previously described the strategic importance of the salt mines in particular, in relation to the larger city of Bakhmut:
“Bakhmut is the central point of the Eastern Front and a serious logistics center. And our task there is to die as little as possible, and to destroy the enemy as much as possible. Bakhmut’s feature is in its unique historical and geographical defense capabilities, which include, first, the division of the city into several parts by water barriers. Secondly, the neighborhood of Bakhmut is a complex of settlements that create a unified defense system.
Thirdly, this is a unique landscape, ravines and heights, which are natural tunnels. And the icing on the cake is the system of Soledar and Bakhmut mines, actually a network of underground cities. In which there is not only a cluster of people at a depth of 80-100 meters, but also tanks and infantry fighting vehicles move. And stockpiles of weapons have been stored since the First World War.”
At the start of this week, on Sunday, Ukrainian President Vladimir Zelensky admitted that the situation of his forces in Soledar was “very difficult”.
He described it as “one of the bloodiest spots along the front line,” while vowing Ukrainians would fight to hold the town “no matter what.” At this point reports from both sides have acknowledged heavy casualties as they fight for control over this key area of Donetsk.
* * *
Military situation in Bakhmut-Soledar region, Ukraine, on January 10, 2023 (SouthFront.org):
You read that right, the Fed wants lower stock prices.
Fed members will not say it as bluntly as we do in our title. But they have a long-held belief that stock prices directly impact the economy and, therefore, inflation. Thus, in the Fed’s efforts to quell inflation, it makes sense that they are likely using their stock market lever, specifically lower stock prices, to help improve the efficacy of monetary policy.
Before we delve into recent Fed comments about asset prices and describe the groundwork that Ben Bernanke laid for the Fed’s stock market theory, we share a quote of Fed Chair Janet Yellen from September 2016:
“It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions.”
December 2022 FOMC Minutes
Within the minutes of the December 15, 2022 FOMC meeting comes the following statement :
Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.
More straightforwardly, financial markets are an important way monetary policy is transmitted to the broader economy. As such, higher stock prices (“an unwarranted easing of financial conditions”) driven by a belief the Fed will pivot to lower rates make it more challenging for the Fed to tackle inflation.
In lay terms, lower stock prices can help the Fed get inflation back to its 2% objective.
Jerome Powell and other Fed members have made similar statements. For example, on Friday, August 26, 2022, Powell made an exceptionally hawkish speech about raising interest rates. The S&P 500 fell over 3% that day as investors expected a more market-friendly tone. On the following trading day, Minnesota Fed President Neel Kashkari responded:
I was actually happy to see how Chair Powell’s Jackson Hole speech was received.
Kashkari is cheering on lower stock prices!
Ben Bernanke Coins the Wealth Effect
In 2003 Ben Bernanke laid the groundwork for the Wealth Effect. His theory associates stock prices with the transmission of monetary policy to the economy.
The logic goes as follows: Easier monetary policy, for example, raises stock prices. Higher stock prices increase the wealth of households, prompting consumers to spend more–a result known as the wealth effect. Moreover, high stock prices effectively reduce the cost of capital for firms, stimulating increased capital investment. Increases in both types of spending–consumer spending and business spending–tend to stimulate the economy.
Bernanke argues that additional wealth resulting from stock market gains results in more household spending. While he doesn’t say it in this speech, the Wealth Effect also works in reverse!
Policy and Stocks are a Two-Way Street
Easy Fed policy, including lower rates and QE, tends to correlate with higher stock prices. Equally important and apropos for today, higher rates and QT are associated with lower stock prices.
The graph below quantifies monetary policy to show the correlation between stock prices and the degree of policy. The degree of Fed policy (red/green) is derived from the level of real Fed Funds and recent changes in the Fed’s balance sheet.
It’s not a perfect indicator, but you can generally see tightening policy (red) led to the significant drawdown in 2008, the 2020 decline, and the recent selloff. Conversely, stocks often trend upward when an easy Fed policy (green) is in place.
Inflation is a function of the supply and demand for goods and services. The Fed holds minimal sway over the supply side of the equation. However, they can, directly and indirectly, influence consumer and corporate demand. Not only do stock market gains or losses influence spending and investment, but interest rates significantly impact demand for specific items such as real estate and autos.
The Fed, aware it has little influence on supply, must target demand to reduce inflation. On November 30, 2022, Powell made it clear that the Fed’s objective is to weaken demand to reduce inflation.
We are tightening the stance of policy in order to slow growth in aggregate demand. Slowing demand growth should allow supply to catch up with demand and restore the balance that will yield stable prices over time. Restoring that balance is likely to require a sustained period of below-trend growth.
Controlled Burn of Stocks
Between higher interest rates and QT, the Fed is trying to cool demand and bring inflation to its target. Based on numerous comments like those shared, it also appears the Fed is targeting stock prices to help reduce inflation.
The Fed does not want to plunge stock prices as it could result in significant financial disruptions in which they could quickly lose control. We believe they want lower trending stock prices with controlled volatility until they meet their goals. Hawkish rhetoric, higher interest rates for longer, and QT can help them on their quest. The graph below shows volatility has been higher than average during the recent decline, but it did not spike as in the disorderly declines of 2008 and 2020.
The Fed likely wants a controlled, low-volatility burn on stock prices. If prices gravitate too far upward or downward from the trend channel, the Fed can adjust liquidity via the combination of QT and its Reverse Repurchase Agreement (RRP) program. Such policy management might explain the clean channel the S&P 500 followed throughout 2022.
Bernanke and Yellen acknowledge that influencing stock prices is crucial for the Fed to help them accomplish their goals. Powell is following in their footsteps and, in our opinion, trying to push stock prices lower to help ensure inflation is slayed.
Given inflation remains well above the Fed’s target, we suspect the Fed will try to guide stock prices lower in the foreseeable future. In doing so, the Fed may get inflation back to target and bring valuations back to historical norms as a side benefit.
The risk the Fed faces is that volatility spikes and stock declines get out of hand. Such would not only create financial instability but could significantly hamper economic activity. Likely, inflation would turn to deflation in the said scenario and allow the Fed to get back to its preferred playbook of pumping stocks higher to boost economic activity and get inflation up to its target.
The road ahead for stocks is likely lower until inflation is tamed. If the Fed is successful in a controlled burn of stock prices, we should see rallies from the lower range of the trend channel and declines from the upper end. Both extremes may very well present trading opportunities.
In market jargon, expect pumps and dumps as the stocks grind lower.
Futures Rise Ahead Of Inflation Data As China Reopening Lifts Sentiment Again
US equity futures were set to rise for a second day as upbeat sentiment ahead of tomorrow’s key CPI print – which JPM gives 85% odds of pushing stocks at least 1.5% higher – lifted global markets despite a freak outage of key FAA advisory system this morning led to a nationwide ground halt for all domestic flights (until at least 9am) pre. Contracts on the S&P 500 and Nasdaq 100 ticked up 0.1% as of 7:15am ET while Europe’s Stoxx 600 Index rose 0.8%. The FTSE 100 climbed within striking distance of a record high; Asian equities were supported by China lifting Covid restrictions. Among the top corporate news, Credit Suisse weighs cutting by half the bonus pool for 2022 after a turbulent year and Apple plans to start using its own custom displays in mobile devices as early as next year. Treasury yields dropped and the dollar gained for the second day in a row.
Among US premarket movers, airline stocks slipped in New York premarket as the failure of a key pilot notification system operated by the Federal Aviation Administration disrupted air travel. American Airlines Group Inc. fell 1.1% and United Airlines Holdings Inc. was down 0.6%. Delta Air Lines Inc. fell 0.8% as the FAA ordered a ground halt of all flights until at least 9am. Bed Bath & Beyond surged again and were on course for a third day of gains. World Wrestling Entertainment rose as much as 5.3%, extending a rally sparked by speculation that the company may sell itself. Chairwoman and co-CEO Stephanie McMahon announced she’s resigning from the company. Here are some other notable premarket movers:
US biotech Prokidney surges 34% after early data from a mid-stage trial of its cell therapy for chronic kidney disease. Jefferies said the treatment has multi-billion dollar potential.
CarMax falls 4.8% after JPMorgan cut its recommendation on the used-car retailer to underweight from neutral, citing unfavorable risk-reward following recent outperformance.
JinkoSolar Holding ADRs rise 1.9% after Roth Capital upgrades the solar panel maker to buy, saying US policy improvements point to a stronger outlook.
Levi Strauss drops 1.5% as Citi downgrades to neutral from buy to reflect what it describes as a challenging US backdrop in the near to medium term.
Keep an eye on PTC and Autodesk as Berenberg begins coverage of both US design software companies with buy ratings, and initiates AspenTech at hold, saying all three have the potential to continue outperforming the industry in terms of growth.
Data and analytics providers could be in focus as Redburn says they will have a significant opportunity to capitalize on growing and increasingly complex risk factors in financial markets. The broker has buy ratings on MSCI (MSCI US), S&P (SPGI US) and London Stock Exchange (LSEG LN), though initiates Verisk (VRSK US) at sell and cuts Morningstar (MORN US) to neutral.
The gains of US stocks since the start of 2023 has surprised many (very bearish) strategists who believe that much of the advance is conditional on inflation easing, which would allow the Federal Reserve to slow the pace of rate hikes. And while hawkish comments on Monday by San Francisco and Atlanta Fed presidents put a chill on the rally, a lack of subsequent reinforcement by Chair Powell led to a sharp rally on Tuesday. The next test for the market comes on Thursday with the US inflation report which will determine if the Fed hikes by 25bps or 50bps on Feb 1, and it’s widely believed that a lower-than-expected reading would trigger further gains. Investors are also closely watching technical levels as the S&P 500 Index nears its 200-day moving average.
“Tomorrow’s CPI event risk could be a decider where the S&P 500 can either break above its 200-day moving average, the 4,000 level and the downtrend line, or we head back to 3800,” says Gurmit Kapoor, a cross-asset sales trader at Aurel BGC.
While Powell didn’t directly comment on the Fed’s next steps at a forum in Stockholm, he did say that “restoring price stability when inflation is high can require measures that are not popular in the short term as we raise rates to slow the economy.”
Fed Governor Michelle Bowman said the central bank has more work to do to curb inflation, noting that further tightening is needed.
“We do expect an inflection in central bank policy later on this year,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “More risk-tolerant investors can look to anticipate this turn by phasing into markets, seeking early winners from a global improvement in sentiment, and identifying beneficiaries from China’s reopening. “However, we don’t believe we have yet reached the inflection point in policy or economic growth, and as we enter 2023 we continue to favor a defensive tilt when adding exposure in both equity and fixed-income markets,” he said.
“The prospect of a less cloudy economic outlook in both Europe and the US after recession risks in both regions eased back, combined with the reopening of the Chinese economy, is providing strong support toward risk appetite from investors,” said Pierre Veyret, a technical analyst at ActivTrades. “The lack of clear hints from Fed Chairman Jerome Powell yesterday also contributed to keeping the bullish trading stance alive, and most traders will now look toward tomorrow’s US inflation print for further clues.”
In Europe, real-estate and mining stocks led a 0.4% gain in the Stoxx Europe 600 Index amid subsiding inflation worries. Miners were boosted by optimism China’s economic reopening will spur demand for metals. Among the top corporate news, Credit Suisse weighs cutting by half the bonus pool for 2022 after a turbulent year. Here are some of the biggest European movers on Wednesday:
Vestas shares jump as much as 5.6%, the most in a month, after being raised to buy at Jefferies, which says an inflection point has been reached for wind-turbine manufacturers
JD Sports shares jump as much as 6.5%, reaching April highs, after the sports retailer said it sees headline pre-tax profit toward the top end of current market expectations
TeamViewer shares gain as much as 7.3% after the software company reported preliminary 4Q billings. RBC says the firm posted “a surprisingly stronger- than-expected finish to the year”
Corbion rises as much as 11%, reaching an almost 11-month high, after Barclays upgrades to overweight in note on “renewed conviction” following the Dutch ingredients maker’s CMD
Bang & Olufsen rises as much as 4.5% on better-than-expected 2Q results. Nordnet says “B&O does what it can and maybe even a little more” despite a challenging environment
Grafton shares rise as much as 4.7% after it predicted its profit will be at the top end of analysts’ forecasts. Investec expects 2022 underlying consensus profit to edge up
Direct Line shares slump 30%, pulling peers down with it, after saying it no longer expects to pay a final dividend; news that is likely to be a “major shock” to the market, Jefferies says
Adyen declines as much as 3.4% after BofA cuts the stock to neutral, saying risks of further slowdown in e-commerce sales and margin compressions are not properly accounted for
Maersk shares fall as much as 4.1%, the most since November, after Goldman Sachs cut its recommendation to sell, anticipating a “great unwind” in air and sea freight markets
Eurofins Scientific declines as much as 4.9% and is among the worst performers on France’s SBF 120 index after two brokers cut their recommendations for the French laboratory group
Earlier in the session, Asia’s equity benchmark resumed its advance, led by gains in key regional markets including Japan, South Korea and Hong Kong. The MSCI Asia Pacific Index climbed as much as 0.9% to the highest level in almost five months before paring about half of its gain. Tencent and Alibaba were the top contributors, with tech and communication services among the major sectoral boosters.
“A lot of traders and investors see the US being closer to peak inflation — if we have not already passed that point. Then that as a corollary also indicates an end to global central bank rate hike cycles,” said Justin Tang, head of Asian research at United First Partners. Though Chinese shares dropped on Wednesday, with liquor giant Kweichow Moutai among the decliners, investor sentiment remains bullish amid further signs of fading regulatory risks in the tech sector as well as more support coming for property developers. The dramatic recovery in Chinese equities, with a gauge of mainland companies listed in Hong Kong up more than 40% in about two months, helped the broad Asian benchmark enter a bull market this week. The key gauge is outperforming US peers so far in 2023 boosted by optimism over China’s reopening and a weakening dollar.
“In general the Chinese markets have been a pretty tough place to invest for almost five years now. So that recovery we’ve seen from below, there’s still a lot of value, support in the marketplace,” David Perrett, co-head of Asian equities at M&G Investment Management, said in an interview with Bloomberg TV
In FX, the Bloomberg dollar gauge rose, after hovering near a seven-month low and the greenback was mixed against its Group-of-10 peers, though most currencies traded in relatively narrow ranges. The euro traded in a narrow $1.0726-1.0757 range
The Australian dollar led G-10 gains after solid inflation and retail sales prints for November reinforced expectations for a quarter-percentage-point interest rate hike at the Reserve Bank’s first meeting of the year next month. CPI advanced 7.4% seasonally adjusted from a year earlier, up from 6.9% in October and exceeding economists’ median estimate. Core prices, or the trimmed-mean gauge, climbed to 5.6% in November compared with a forecast 5.5%. Retail sales beat most estimates.
The yen was sandwiched between large options expiring on Wednesday. Japan’s 30-year bonds gained after an auction of this tenor met resilient demand and the central bank announced unscheduled debt purchases.
The Egyptian pound plunged 5% against the US dollar on Wednesday, after the International Monetary Fund said authorities were showing commitment to a flexible exchange rate.
In rates, treasury yields trimmed their advance from the previous session as yields shed up to 6bps as the curve bull-flattened and with the rate on 10-year debt slipping to below 3.58% as investors remained focused on the price outlook for the US. UK spreads flatter, leading core European rates higher with 2s10s, 5s30s tighter by 5.5bp and 2.5bp on the day; Bunds also bull-flattened and outperformed Treasuries as money markets eased ECB tightening bets before a German 10-year bond sale. Focus is also on scheduled ECB speeches. Japan’s 30-year bonds gained after an auction of this tenor met resilient demand and the central bank announced unscheduled debt purchases.
In commodities, oil reversed an earlier decline as traders weighed the outlook for stronger Chinese demand against a reported build in US crude stockpiles. Optimism over demand from China was evident in the iron ore market, with the steel-making ingredient rallying above $120 a ton in Singapore. Copper rose above $9,000 a ton for the first time since June, fueled by hopes of increased consumption by the world’s top user of the metal.
Looking to the day ahead now, it’s a quiet day and data releases include US Mortgage applications. Otherwise, central bank speakers include the ECB’s Holzmann, Villeroy and De Cos.
Market Snapshot
S&P 500 futures up 0.2% to 3,948.50
MXAP up 0.5% to 162.36
MXAPJ up 0.3% to 535.96
Nikkei up 1.0% to 26,446.00
Topix up 1.1% to 1,901.25
Hang Seng Index up 0.5% to 21,436.05
Shanghai Composite down 0.2% to 3,161.84
Sensex little changed at 60,124.03
Australia S&P/ASX 200 up 0.9% to 7,195.34
Kospi up 0.3% to 2,359.53
STOXX Europe 600 up 0.5% to 448.06
German 10Y yield little changed at 2.25%
Euro up 0.1% to $1.0746
Brent Futures up 0.8% to $80.75/bbl
Brent Futures up 0.8% to $80.76/bbl
Gold spot up 0.5% to $1,885.60
U.S. Dollar Index little changed at 103.25
Top Overnight News from Bloomberg
The collective hive mind of Wall Street is backing a view that the euro rally is just getting started. With energy prices tumbling and calls for a region-wide recession falling to the wayside, a clear narrative is emerging that the worst of the economic damage is over and European assets are cheap
In Germany, Italy and Spain — three of the currency bloc’s top four economies — anxiety at inflation over the next year is close to or below the average since the euro was introduced in 1999, European Commission data show
Only a slowdown in core inflation can alter the ECB’s resolve to raise interest rates, according to Governing Council member Robert Holzmann
The ECB needs to be pragmatic as it raises interest rates in the coming months to get to a level by the summer that is sufficiently high to bring inflation back toward 2%, Governing Council member Francois Villeroy de Galhau said
The French economy continued to grow at the end of 2022 and should avoid a contraction in the first weeks of the year despite headwinds from surging energy prices, a Bank of France survey showed
China shouldn’t bail out the debt that local governments take off their balance sheets so as to discourage them from allowing hidden liabilities to snowball out of control, according to former Finance Minister Lou Jiwei
Japan’s Finance Ministry will likely issue sovereign bonds to fund decarbonization efforts from the latter half of fiscal year 2023 after assessing investor needs, Michio Saito, a senior official at the ministry, says in a TV Tokyo interview
A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks initially tracked the advances on Wall Street after Fed Chair Powell refrained from any major policy rhetoric and as participants looked ahead to upcoming US CPI data with hopes of softening price growth. ASX 200 tested the 7,200 level to the upside with the index led by outperformance in the mining and materials sectors, while participants also digested better-than-expected Retail Sales and a pickup in monthly inflation metrics. Nikkei 225 gained as earnings trickled in with outperformance in Yaskawa Electric after growth in its top and bottom lines, while there was encouragement from news that Fast Retailing will boost wages by as much as 40%. Hang Seng and Shanghai Comp were firmer for a bulk of the session after the PBoC pledged support measures including for the property sector and boosted its short-term liquidity efforts ahead of next week’s Lunar New Year celebrations, although gains were capped in the mainland after the recent mixed loans and aggregate financing data.
Top Asian News
PBoC injected CNY 65bln via 7-day reverse repos with the rate kept at 2.00% and it injected CNY 22bln via 14-day reverse repos with the rate kept at 2.15% for a CNY 71bln net daily injection.
Analysts noted there is room for China to cut RRR and interest rates this year, while analysts also see room for a rate cut in the property sector, according to China Securities Journal.
BoJ offered to buy JPY 100bln in 1-3yr JGBs, JPY 100bln in 3-5yr JGBs, JPY 300bln in 5yr-10yr JGBs, JPY 200bln in 10yr-25yr JGBs and JPY 50bln in 25yr+ JGBs, while it also offered to buy an unlimited amount of JGBs at a fixed rate with maturities of 1yr-3yr and 3yr-5yr in an unscheduled announcement.
Stocks Climb Amid Optimism Over Inflation, China: Markets Wrap
Egypt Pound Plunges 5% in Test of Shift to Currency Flexibility
Russia to Restart FX Operations in Yuan Under Fiscal Rule
Philippine Finance Chief Sees Rate Hike Cycle Nearing End
European bourses are firmer across the board, Euro Stoxx 50 +0.8%, with an easing in yields seemingly spurring a modest extension of opening gains. Sectors are primarily in the green, though Insurance names are pressured in sympathy with Direct Line while Retail-related stocks are supported after updates from the likes of JD Sports. US futures posting marginal gains, ES +0.2%, with the US docket particularly thin ex-supply ahead of Thursday’s CPI. US FAA has reported a system equipment outage, all flights nationwide have been grounded, according to a source familiar with the situation, cited by NBC Washington reporter.
Top European News
ECB’s Villeroy says they will need to be pragmatic on speed of hikes, will have to raise rates more in the coming months. Should aim to reach the terminal rate by the summer. Domestic inflation is likely to peak in H1, will avoid hard landing scenario.
ECB’s Holzmann says rates will need to rise significantly further to reach levels that are sufficiently restrictive to ensure a timely return of inflation to target. Inflation is expected to subside but risks remain to the upside. There are no signs of de-anchored market expectations.
Activist Coast Capital Sells Vodafone Stake Within a Year
Russia to Sell Yuan From Wealth Fund as Oil Price Hits Budget
Ukraine Latest: Zelenskiy Says Russian War Won’t Turn to WWIII
Direct Line Shares Tumble as Insurer Cuts Dividend on Claims
FX
DXY forms a foothold on 103.000 handle within a tight band post-Powell and pre-US CPI.
Aussie outperforms on perky inflation metrics, strong retail sales data and gains in iron ore prices, AUD/USD holds near 0.6900 and AUD/NZD rebounds from around 1.0800 to top 1.0850.
Euro retains grasp of 1.0700 handle, but Sterling sags around 1.2150 axis and Yen weakens after closing below a Fib to circa 132.75 and away from decent option expiries at 132.50.
PBoC set USD/CNY mid-point at 6.7756 vs exp. 6.7776 (prev. 6.7611)
Fixed Income
Core benchmarks continued to gain momentum throughout the morning with little clear sign of concession pre-supply and perhaps deriving some support from ECB remarks.
However, the rally has run out of steam with a sub-par German outing aiding the pullback, with Bunds and Gilts now sub 137.00 and 103.00 respectively.
Stateside, USTs have been following suit and it remains to be seen if the looming 10yr supply will influence broader action, an auction which follows Tuesday’s strong 3yr.
UK DMO is to launch a new conventional Gilt maturing October 2053 in the week commencing January 23rd.
Commodities
WTI and Brent have experienced a firmer start to the mid-week session, with the benchmarks posting upside of around USD 0.30/bbl within relatively narrow ranges that keeps the complex within WTD and recent parameters
US and allies are reportedly preparing the next round of sanctions on Russian oil, via WSJ; intending to cap the sales price of Russian exports of refined petroleum products.
Russian Kremlin, on possible losses from oil price caps, says there have been hardly any cases of the caps yet.
Chinese Commerce Ministry will continue to impose anti-subsidy tariffs on dried distillers grains with solubles (DDGS) imported from the US.
Standout mover has been LME Copper which eclipsed the USD 9k mark in an extension of yesterday’s price action after fairly contained/rangebound APAC trade for base metals.
Spot gold is modestly firmer and resides towards the top-end of a USD 1872-1886/oz range, which is a fresh multi-month high leaving the figure itself as resistance before the May 2022 USD 1909/oz peak.
Geopolitics
Russia’s ambassador to the US commented that the US training of Ukrainian troops on Patriot systems confirms Washington’s de facto participation in the conflict and that the US administration’s goal is to inflict the most damage on Russia on the battlefield by the hands of Ukrainians, according to Reuters.
Russian Kremlin says there is a positive dynamic in the military situation around Ukrainian town of Soledar Putin is open to discussions on Ukraine.
Russian Rights Commissioner says important ceasefire proposals have been made during her meeting with Turkish and Ukrainian colleagues in Turkey, via Reuters.
Russia and Iran are working on a new shipping corridor to bypass sanctions and are looking to work with India, according to Nikkei. ]
US Event Calendar
07:00: Jan. MBA Mortgage Applications 1.2%, prior -10.3%
DB’s Jim Reid concludes the overnight wrap
Morning from Helsinki where snow is on the ground. This is the start of a whistle stop 4 countries in 2 days 2023 outlook tour. I’ve been coming here around this week every year for about the last 25, apart from the last 2 due to Covid. So it’s nice to have the old routine back. In the past I’ve landed in wild snow storms, seen the temperature hit -20c, seen piles and piles of snow, and yet everything always runs. Impressive! This year it’s all fairly calm with the temperature just above zero.
Markets have also been relatively quiet over the last 24 hours as we await tomorrow’s all important US CPI print. There was some speculation that remarks from Fed Chair Powell could inject some volatility into proceedings but overall markets turned steadily higher after his lack of commentary on the policy outlook at his panel in Stockholm.
Looking through the various moves yesterday, some of the biggest came from longer-dated core sovereign bond yields. For instance, yields on 10yr Treasuries were up +8.7bps to 3.619%, marking their biggest daily increase so far this year, and taking yields up to their highest level since the weak ISM services release last Friday. We have given back -3bps of that climb in Asia as I type. The rise yesterday though came as investors took out some of the dovish expectations for the Fed they’d been pricing over recent days, with the futures-implied rate for end-2023 up by +2.0bps on the day to 4.459%. Separately, we also heard from the Treasury Department that they were increasing the size of their T-bill auctions. It comes with many expecting that they’ll soon announce extraordinary measures in order to avoid exceeding the statutory cap imposed by the debt ceiling.
Sticking with the US Treasury Department, it was reported yesterday that Treasury Secretary Yellen has agreed to remain in her post after having been asked to by President Biden last month. This is a confirmation of Secretary Yellen’s own professed wished from back in November when she said she intended to stay through the entirety of Biden’s first term. This means at least one part of the upcoming debt ceiling negotiations will have some stability. Bloomberg reported that the Biden administration was preparing to turnover some cabinet-level positions now that the midterms are over.
Over in Europe it was a similar story, with yields on 10yr bunds (+8.0bps) seeing the largest increase on the day, along with smaller increases for OATs (+7.0bps) and BTPs (+3.6bps). And as in the US, the moves occurred with investors taking out some of the dovishness priced for the ECB, which got further support after the ECB’s Schnabel said that “interest rates will still have to rise significantly” and that “inflation will not subside by itself”.
When it comes to the Fed, we did hear from Chair Powell yesterday, but despite the anticipation he didn’t comment on the policy outlook. He was speaking on a panel on central bank independence, and stuck to that topic by defending the merits of an independent monetary policy. Interestingly, he acknowledged that “restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.” Otherwise, he explicitly said that the Fed should “stick to our statutory goals and authorities”, and said that they would not be a “climate policymaker”. With little to go off from Powell, the focus will now turn to tomorrow’s US CPI release for December.
With Powell not taking a hawkish tone, equities drifted higher after Europe logged off. The S&P 500 ticked +0.70% higher, with both the NASDAQ (+1.01%) and the Dow Jones (+0.56%) also rising. The rally had a distinct risk-on tone with communications (+1.29%) and consumer discretionary (+1.26%) names outperforming while defensives like staples (-0.16%) and utilities (+0.04%) lagged. Having closed beforehand and catching up to the US reversal late Monday, European equities pulled back with the STOXX 600 down -0.59% on the day.
Asian markets are stronger this morning. As I type, the Nikkei (+1.02%) is leading gains followed by the Hang Seng (+1.01%), the KOSPI (+0.40%), the CSI (+0.22%) and the Shanghai Composite (+0.20%). Outside of Asia, stock futures in the US are fluctuating with contracts on the S&P 500 (+0.04%) just above flat while those on the NASDAQ 100 (-0.05%) are trading fractionally lower. Meanwhile, European futures tied to the DAX (+0.55%) are catching back up.
Early morning data showed that inflationary pressures are yet to ease in Australia as CPI advanced +7.3% y/y in November (v/s +7.2% expected), up from a surprise pullback to +6.9% in October. The latest inflation reading is at its highest level in 30 years with housing costs being the main contributor to the annual increase. Separately, retail sales rebounded +1.4% m/m in November, buoyed by consumer appetite for Black Friday sales despite rising interest rates and high inflation. Market expectations were for a +0.6% gain as against October’s upwardly revised +0.4% rise. The Australian dollar (+0.39%) nudged higher against the dollar, trading at $0.69 on the prospect of more interest rate hikes by the Reserve Bank of Australia (RBA).
In commodity news, copper prices are trading at the highest level since June inching towards $9,000 a ton as China’s exit from the Zero Covid policy enhanced the demand outlook of the commodity.
Elsewhere yesterday, the French government outlined a plan that would see the country’s retirement age rise to 64 by 2030, up from 62 at present. Moves to reform the pension system have long been an ambition of President Macron’s, but a previous attempt in his first term was postponed during the Covid-19 pandemic, and there remains opposition from trade unions and some other political parties. Macron’s party no longer has an absolute majority in parliament either, but they have made some concessions to the conservative Les Républicains to try and secure their votes.
In other news, the World Bank released their latest round of economic projections yesterday, with their global growth projection for 2023 now at +1.7%, marking a downgrade from their +3.0% forecast back in June. Those downgrades were mainly driven by the advanced economies, where growth is now seen at just +0.5% (vs. +2.2% in June), but the forecasts for emerging market and developing economies were also lowered, with this year’s growth now seen at +3.4% (vs. +4.2% in June).
Finally, there wasn’t a great deal of other data yesterday. One release in the US was the NFIB’s small business optimism index, which fell more than expected to 89.8 in December (vs. 91.5 expected). That’s the second-lowest reading in over a decade. Elsewhere, French industrial production grew by a faster-than-expected +2.0% in November (vs. +0.8% expected).
To the day ahead now, and data releases include Italian retail sales for November. Otherwise, central bank speakers include the ECB’s Holzmann, Villeroy and De Cos.
FAA ordered all airlines to halt domestic departures until 0900 ET.
Update 3: The FAA is still working to fully restore the Notice to Air Missions system following an outage.⁰⁰The FAA has ordered airlines to pause all domestic departures until 9 a.m. Eastern Time to allow the agency to validate the integrity of flight and safety information.
So far, 1,366 flights have been delayed within, into, or out of the US, flight tracking website FlightAware showed. Another 108 were canceled.
* * *
Update (0719ET):
“The FAA is still working to fully restore the Notice to Air Missions system following an outage … some functions are beginning to come back online, National Airspace System operations remain limited,” FAA tweeted.
Cleared Update No. 2 for all stakeholders: ⁰⁰The FAA is still working to fully restore the Notice to Air Missions system following an outage. ⁰⁰While some functions are beginning to come back on line, National Airspace System operations remain limited.
Early Wednesday morning, the US Federal Aviation Administration’s (FAA) system that notifies pilots about hazards or any changes to airport facility services suffered an outage that might result in a nationwide grounding.
The FAA wrote in an advisory update that its NOTAM (Notice to Air Missions) system had “failed.” The aviation agency provided no immediate estimate for when it would return online.
“THE FAA is experiencing an outage that is impacting the update of NOTAMS. All flights are unable to be released at this time,” the FAA said in a statement.
In a statement to NBC News, the FAA said, “Operations across the National Airspace System are affected.”
So far, 1,162 flights have been delayed within, into, or out of the US, flight tracking website FlightAware showed. Another 94 were canceled.
Flights are being grounded nationwide.
Just an FYI if you are planning to fly today (as I sit on a plane I boarded at 5am), FAA’s NOTAM system is down and basically all planes within and coming in and out of the U.S. are grounded. Our pilot says they have no idea when it will be functioning again. So. pic.twitter.com/4iW11Ns2vr
BREAKING NEWS: 🚨🚨
Dozens of flights have been delayed at Charleston International airport due to a FAA computer malfunction.
We haven’t seen any flights leave Charleston in the past 40-45 minutes.
Tune into @ABCNews4 for the latest updates #Working4Youpic.twitter.com/kcZugsJaqo
It’s probably not a good time to fly this morning.
BREAKING: Widespread U.S. flight delays expected after critical FAA system goes down; agency currently working on getting it back online pic.twitter.com/DVQAw4nsTE
Passengers are beginning to complain on social media about delayed flights.
FAA computer outage has grounded flights nationwide this morning. Boarded at 5:30AM as the first flight of the day. Currently delayed indefinitely. Idk if I’ll be making this cruise out of Florida… 😢🌴🚢 pic.twitter.com/SBy8q2sD2N
@AmericanAir I’ve been sitting on a full plane at the gate at LAX for 2+ hours for a system issue with the FAA. When will this be resolved? #flightdelay
The world is today confronted with two nuclear threats of a proportion never previously seen in history.
These threats are facing us at a time when the world economy is about to turn and decline precipitously not just for years but probably decades.
The obvious nuclear threat is the war between the US and Russia which currently is playing out in Ukraine.
The other nuclear threat is the financial weapons of mass destruction in the form of debt and derivatives amounting to probably US$ 2.5 quadrillion.
If we are lucky, the geopolitical event can be avoided but I doubt that the explosion/implosion of the Western financial timebomb can be stopped.
More about these risks later in the article.
There is also a summary of my market views for 2023 and onwards at the end of the article.
CURIOSITY AND RISK
With a business life of over 52 years in banking, commerce and investments, I am fortunate to still learn every day and learning is really the joy of life. But the more you learn, the more you realise how little you really know.
Being a constant and curious learner means that life is never dull.
As Einstein said:
“The important thing is not to stop questioning.
Curiosity has its own reason for existing.”
There has been another important constancy in my life which is understanding and protecting RISK.
I learnt early on in my commercial life that it is critical to identify risk and endeavour to protect the downside. If you can achieve that, the upside normally takes care of itself.
Sometimes the risk is so clear that you want to stand on the barricades and shout. But sadly most investors are driven by greed and seldom see when markets become high risk.
The end of the 1980s was such an obvious period, especially in the property market. Stocks crashed in 1987 but if you are not leveraged, stock crashes normally don’t wipe you out. But in commercial property the leverage can kill a lot of investors and sadly did in the early 1990s.
The end of the 1990s was another period of very high risk in the tech sector. I was involved with a tech business in the UK and told the founder in late 1999 that we must sell the business for cash. This was the time when tech businesses were valued at 10x sales. Virtually none of them made a profit. So we managed to sell the business in 2000. We actually got shares as payment but were allowed to sell them immediately which we did. Thereafter the Nasdaq crashed by 80% and many businesses went bankrupt.
At those particular moments of extreme overvaluation, you do not have to be clever in order to get out and take profit. Super profits should always be realised when the valuation of businesses doesn’t make sense and the prospects don’t look good.
RISK OF MAJOR ESCALATION OF WAR
So let’s get back to the massive risks that are hanging over the world currently.
In my estimation this is not a war between Russia and Ukraine but between the US and Russia. Russia found it unacceptable that the Minsk agreement of 2014 was not kept to. Instead, the bombing of the Donbas area continued, allegedly encouraged by the US. As Ukraine intensified the bombing, Russia invaded in Feb 2022.
I won’t go into the details here of who is at fault etc. But what is clear is that the US Neocons have a major interest for this war to escalate. For them Ukraine is just a pawn and the real enemy is Russia. Why would the US otherwise lead the initiative to sanction Russia and send weapons and money to Ukraine but send no peace keepers to Russia?
Let us just remind ourselves that ordinary people never want war. The American people doesn’t want war, nor do the Russians or Ukrainians. It is without fail always the leaders who want war. And in most countries, even in the so called democratic USA, the leaders have total power when it comes to starting a war.
Most of Europe is heavily dependent on Russian oil and gas. Still Europe is shooting itself in the foot by agreeing to the sanctions initiated by the US. The consequences are disastrous for Europe and especially Germany which was the economic engine of Europe. Germany is now finished as an economic power. Time will prove this.
The global economic downturn started before the Ukrainian war butthe situation has now severely deteriorated with the European economy weakening rapidly. Still, Europe is digging its own grave by sending more weapons and more money to Ukraine much of which being reported to end up in the wrong hands.
The Ukrainian leader Zelensky is skilfully inciting the West to escalate the war in order to achieve total NATO involvement.
The risk of a major escalation of the war is considerable. Russia’s main aim is for the Minsk agreement to be honoured whilst the US Neocons want to weaken Russia in a direct conflict. Major wars are often triggered by a minor event or a false flag.
The Neocons know that a defeat for the US in this conflict would be the end of the US dollar, hegemony and economy. At the same time, Russia is determined not to lose the war, whatever it takes. This is the kind of background that has a high risk of ending badly.
THE CONSEQUENCES ARE UNTHINKABLE
Since there is not a single Statesman in the West, dark forces behind the scenes are pulling the strings. This makes the situation particularly dangerous.
The risk of a nuclear war in such a situation is incalculable but still very real.
There are 13,000 nuclear warheads in the world and less than a handful of these would wipe out most of the West and a dozen, a major part of the world.
Let’s hope that the West comes to its senses. If not, the consequences are unthinkable.
FINANCIAL WEAPONS OF MASS DESTRUCTION
The other nuclear cloud which is financial will fortunately not end the world if it detonates but inflict a major global setback that could last many years, maybe decades.
This can be illustrated in a number of pictures so let us look at two self explanatory graphs.
The first one shows how global debt has grown 75X from $4 trillion to $300T since Nixon closed the gold window in 1971.
The graph also shows that the world could reach debt levels of maybe $3 quadrillion by 2030. That sounds like a sensational figure but the explanation is simple. Derivatives were around $1.4 quadrillion over 10 years ago as reported by the Bank of International Settlement (BIS) in Basel. But with some hocus-pocus they reduced the figure to $600 trillion to make it look better cosmetically. The BIS decided just to take just one side of a contract as the outstanding risk. But we all know, it is the gross risk that counts. When a counterparty fails, gross risk remains gross. So as far as I am concerned, the old base figure was still $1.4Q.
Since then derivatives have grown exponentially. Major amounts of debt are now created in the derivatives market rather then in the cash market. Also, the shadow banking system of hedge funds, insurance companies and other financial business are also major issuers of derivatives. Many of these transactions are not in the BIS figures. Thus I believe it is realistic to assume that the derivatives market has grown at least in line with debt but probably a lot faster in the last 10+ years. So the gross figure is easily in excess of $2 quadrillion today.
When the debt crisis starts in earnest which could be today or in the next 2-3 years, major defaults in derivatives will become debt as central banks print money on an unprecedented scale in a futile attempt to save the financial system. This is how debt can grow to $3Q by 2030 as the graph illustrates.
US GDP GROWTH IS ILLUSORY
The second graph shows that the US, the world’s biggest economy, is living on both borrowed time and money.
In 1970 total US debt was 1.5X GDP. Today is is 3.6X. This means that in order to achieve a nominal growth in GDP, debt had to grow 2.5X as fast as GDP.
The conclusion is simple. Without credit and printed money there would be no real GDP growth. So the growth of the US economy is an illusion manufactured by bankers and led by the private Federal Reserve Bank. As the graph above shows, GDP can only grow if debt grows at an exponential rate.
The gap between debt and GDP growth is clearly unsustainable. Still with hysterical money printing in the next few years, in an attempt to save the US financial system, the gap is likely to widen even further before it is eroded.
There is only one way for the gap to narrow which is an implosion of the debt through default, both sovereign and private. Such an implosion will also lead to all assets inflated by the debt – including bonds, stocks and property – also imploding.
Temporarily the US has achieved this illusory wealth but sadly the time is now coming when the Piper must be paid.
THE END OF THE DOLLAR
The days of the dollar as reserve currency are counted. A currency that has lost 98% in the last 50 years hardly deserves the status of a reserve currency. A combination of military might, petrodollar payments and history has kept the dollar far too strong for much too long. Since there is no immediate alternative, it is possible that the dollar temporarily will remain strong for a while as the Ukrainian conflict continues. The economies of other currencies (Euro, Pound, Yen) are clearly too weak currently to be realistic reserve currency contenders.
The days of the Petrodollar are also counted.
Major moves are now taking place between the world’s biggest energy producers (excluding the US) which will gradually end the Petrodollar system.
A GLOBAL RECEPE FOR DISASTER
But firstly let’s understand that in spite of the climate zealots, there will be no serious alternative to fossil fuels for many decades. Fossil fuels account for 83% of global energy.
Global growth can only be achieved with energy. Since renewables today only account for 6% and are growing very slowly, there will be no serious alternative to fossil fuels for many decades.
In spite of that, Western governments in Europe and the US have not only stopped investing in fossil fuels, but also closed down pipe lines, coal mines and nuclear power plants. This is of course sheer political and economic lunacy and a very rapid method to achieve a collapse of the world economy. Add to that the Russian sanctions and we have a global recipe for disaster.
Without fossil fuels, the world economy will collapse. In spite of that, political pressure has slowed down fossil fuel production substantially. As the graph shows, fossil fuel production is likely to decline by 26% by 2048. Increases in nuclear and, hydro and renewables will not compensate for that fall. The effect will be a fall in global GDP and trade. But more about the energy side in another article.
Few people understand the importance of global trade. Rome conquered many countries from Europe to Asia and Africa. But during the Roman Empire, the various economies prospered due to free trade. The Romans were clearly superior thinkers compared to current Western leaders.
MAJOR SHIFT FROM WEST TO EAST
The GCC countries (Gulf Corporation Council) consist of Saudi Arabia, UAE plus a number of Gulf countries have 40% of the oil reserves in the world.
Another 40% of oil reserves belong to Russia, Iran and Venezuela all selling oil to China at a discount currently.
In addition there are the BRICS countries (Brazil, Russia, India, China and South Africa. Saudi Arabia also want to join the BRICS which represents 41% of the global population and 26% of global GDP.
Finally there is the SCO, the Shanghai Cooperation Organisation. This is a Eurasian political, economic and security organisation headquartered in China. It covers 60% of the area of Eurasia and over 30% of global GDP.
All of these organisations and countries (BRICS, GCC, SCO) are gradually going to gain global importance as the US, and Europe decline. They will cooperate both politically, commercially and financially. As energy and oil is a common denominator for these countries, they will most likely operate with the Petroyuan as their common currency for trading.
With such a powerful constellation, minor hobbyist groups like Schwab’s WEF will dwarf in significance and finally disappear as the WEF members including the political leaders lose their power and the billionaires their wealth.
MAJOR MOVES IN MARKETS
This article is already very long but I will still cover what I see in markets in 2023 and coming years. I have covered this in many articles so I will be brief.
Stocks have just had a major down year globally. This is the mere beginning of the implosion of the extreme overvaluation based on printed money. I would be surprised if stocks on average decline by less than 90% in real terms. The measure for real terms is of course gold.
It will not be a straight line fall and many investors will buy the dips until they have exhausted most of their wealth.
Bonds will probably perform even worse than stocks. Many borrowers, both sovereign and commercial, will default.
The 40 year decline in interest rates has finished. Central banks will lose control of the interest markets as investors panic out of bonds.
The combination of high inflation, collapsing currencies and defaults on a massive scale will turn the bond market into a historic horror story.
The bond equation is simple:
Hyperinflation + Currencies going to Zero + Defaults = BOND VALUES ZERO
Good luck to bond holders. They will need it.
Investment properties will also fare badly. Low interest rates and unlimited credit have created a bubble of historic proportions.
In many countries it has been possible to borrow up to 15 year money at 1% or less. Anyone who didn’t take advantage of free money will regret it badly. The risk reward calculation was obvious. At 1%, rates could only go to zero which is a 1% fall. On the other hand, rates could go to 20%+ like they did in the 1970s.
Falls of 75-90% in real terms will be commonplace in the property market.
If you have no mortgage or a low one at a fixed rate, don’t worry. But just look at it as an abode and not an investment.
Lastly and most importantly let’s look at GOLD.
We invested heavily into gold in early 2002 at $300 for ourselves and the investors we advised. This was based on our risk assessment of the financial system and a gold price which had declined for over 20 years. We were certain that gold was undervalued at the time and also that it was the ultimate wealth preservation investment.
Since that time we and our clients have not ever worried one day about our gold holdings. As a matter of fact, gold today in relation to money supply is cheaper than in 2002 and therefore represents superb value.
2023 will be the start of another gold era. The circumstances are perfect for this.
Back in mid September I tweeted that gold was bottoming when the price was $1665 and that we would see $2,000 at least in 2022. Well as I often say, forecasting is a mug’s game and we are “only” at $1,875 today. See graph below which was Tweeted in Sep 21.
Considering the two nuclear risks discussed above, the gold price becomes irrelevant. Physical gold is the ultimate wealth preservation investment. The value should be measured in ounces or kilos and not in ephemeral currencies.
Gold is likely to reach levels that no one can imagine today. But to forecast a price in paper money serves no purpose without defining the purchasing power of the fiat money at some future point.
Gold is the metal of kings and should be the primary wealth preservation holding. Silver has a massive potential but is much more volatile and much bulkier.
It is extremely important how gold is stored. The principal part of your gold holding should be outside your country of residency. You should be able to flee to your gold.
Do not store gold at home. With crime rates surging globally and likely to go up much further, it is extremely unwise to store gold at home. Add to that likely social unrest in most countries, whatever valuables you store at home are at risk however well hidden you think they are.
There is no perfect country to store gold today. The world has become a generally unsafe place. Our company has carried out a major review of the best countries to store gold globally. This will be published at some future point.
Switzerland is still one of our favourites. The combination of the political system, history and 70% of gold bars being refined in Switzerland plus most private gold being stored here, makes it an obvious choice.
Our company also has a major advantage in being able to offer the only private vault which is nuclear bomb proof and can operate fully under any such circumstances. We also offer full data backup even against EMP risks (Electro Magnetic Pulse). I am not aware of anyone in our industry that offers this protection. The location of this vault is confidential. Here is a brief video which shows the uniqueness of the vault:
To summarise, the risks today are greater than anytime in history. A full nuclear war between the US, Russia and China is the end of mankind and no one can protect against this kind of event.
But there are more limited situations, whether nuclear or with conventional weapons which necessitate the best protection possible of your wealth preservation asset.
Let’s hope that a major nuclear war will not take place. In any case, there is very little we can do about it.
The financial nuclear risk is very real and also very likely to be triggered in my view. Anyone who can has a responsibility to organise protection against this risk as discussed in this article.
Finally remember that in periods of crisis family and friends is your most important protection. Helping others will be essential in a coming crisis.
China Jet Fuel Demand Set To Soar Ahead Of Lunar New Year
China’s oil demand could surge as it reopens after scraping zero Covid restrictions. Beijing’s Covid curbs weighed on crude and refined products demand for three years. Soaring air travel demand ahead of the Lunar New Year is yet more evidence fuel demand is gathering steam.
China’s easing of border restrictions imposed almost three years ago has been a recent boon for air travel, domestically and internationally. There are no more mandatory quarantines for travelers arriving in China.
BloombergNEF said jet fuel demand is rising in China ahead of the holidays. They noted that scheduled passenger flights for Jan 10 to 16 indicate jet fuel demand has reached about 0.61 million barrels per day (mbpd), rising 0.10 mbpd compared with a week earlier. Then by next week, jet fuel demand could increase to 0.72 mbpd. This would mark the highest demand for Chinese jet fuel in more than 1.5 years.
Another sign China’s oil demand is rebounding is a massive quota for crude imports by refiners. Traders with direct knowledge of the matter told Bloomberg that quotas for this year are already 132 million tons, compared to 109 million tons of crude oil import as of this time last year.
China’s reopening is driving fuel demand growth and could steadily rise after the Covid infection wave wanes in the next few months.
Early on Tuesday, Brent Crude prices hovered around $80 per barrel.
“I think oil will go upwards of $140 a barrel once Asia fully reopens, assuming there will be no more lockdowns,” he said, adding that the “market is underestimating the scale of the demand boost that it will bring.”
Andurand tweeted a startling analog of what could be next for crude prices.
Also, Carsten Fritsch, commodity analyst at Commerzbank, told clients this week that her team is “confident that oil prices will climb again once the current wave of COVID infections has peaked in China and economic activity picks up.”
And all of this begs the question of whether a China reopening could mark a bottom for the energy complex. There’s still a risk a central bank-induced global recession is possible. The World Bank warned Tuesday recession threats were mounting.
Guinness Hikes Beer Prices In Ireland, Risking “Financial Hardship For Many”
Irish Prime Minister Leo Varadkar says a move by Guinness to raise prices of a pint in Ireland would cause “financial hardship for many,” after the company announced an increase of 12 euro-cents per pint.
The move has prompted calls for London-based parent company, Diageo Plc, to reverse the decision. According to Diageo, they can no longer afford to absorb rising costs – following fellow beverage company Heineken NV, which slapped a 17 euro-cent increase on its products in December.
Diageo reported a profit of £3.34 billion ($4.1 billion) during its latest fiscal year, according to Bloomberg.
Vintners Federation of Ireland Chief Executive Paul Clancy said publicans were “getting hammered from every angle” and described Diageo’s move as a further difficulty for his members.
“We’re heading into the quietest few months of the year for the trade, so the increase in the price of a pint couldn’t come at a worse time. Due to the unprecedented cost of doing business publicans will have to pass on this price increase to their customers, which is something they are very unhappy about,” he said. -Bloomberg
According to PM Varadkar, he doesn’t think the increase will put any pubs out of business, but that given the overall cost of living, it would cause hardship. He added that he’s surprised more pubs aren’t taking Ireland up on an energy subsidy scheme.
By Stefan Koopman, Rabobank Senior Macro Strategist
The week in Asia and Europe started off with a continuation of 2023’s decidedly positive risk appetite, but this nonetheless faded during US hours. This morning’s handover from Asia trading to Europe is rather weak too, with the Stoxx 600 slipping around 0.6% after reaching a 9-month high on yesterday. The weaker sentiment is ascribed to some hawkish comments from the Fed’s Daly and Bostic; the latter said that US rates need to be raised above 5% and to be held there for “a long time”. Even though Fed policy makers continuously seek to keep expectations of a pivot in check, they haven’t been very convincing at that: swaps markets are currently pricing nearly 50 bps of cuts in the second half of this year. Consequentially, EUR/USD holds well-above 1.07 – the highest in seven months.
The “will they/won’t they”-pivot chatter is likely going to continue for months on end, and will surely be covered in numerous Global Dailies to come, so it’s perhaps a good moment to have a look at something else and to have a look of what Brexit has in store for us in 2023.
Investors are forgiven to have missed some of its more recent developments, as it has been a long time since Brexit made headlines that actually affected markets on a day-to-day basis. However, both Brexit and the intense period of politics following it are closely connected to the UK’s current multiple crises. One example is the mini-Budget, which was initially touted as the ultimate fulfilment of Brexit by many of its supporters, but turned out to be a disaster when fantasies met realities. Some of the other crises that are at least indirectly Brexit-related include the potentially persistently high level of inflation, the wave of strike action, potential food supply issues, and the risk of a UK-specific energy crisis. These issues are essential for a functional democracy, and even though Brexit may not have a daily impact on markets anymore, the country’s desire for radical changes to the status quo was a tell-tale sign of its structural decline.
The United Kingdom has become, quite literally, the sick man of Europe. Not only has its productivity growth lagged behind that of other G7 countries for more than a decade, its self-inflicted wounds are now also impacting its healthcare system and, in a very unhealthy feedback loop, the supply of labour at a macro-economically highly relevant scale. At the same time, the Conservative party continues to be dominated by incompetent right-wing populists, which limits the ability of some of the better-intentioned but, frankly, clueless technocrats to address these problems: you would think that nearly 50,000 unfilled nursing positions should even convince the most ardent libertarians that their pay is too low. More strike action is coming in the upcoming days, weeks, and months, only further impairing the country’s economic supply.
So, what is the latest on Brexit? How is the current ‘mood music’ in these perennial talks between the United Kingdom and the European Union? The current negotiations centre on the implementation and possible renegotiation of the Northern Ireland Protocol. This Protocol has caused tension in Northern Ireland – where the unionists of the DUP have refused to nominate a Deputy First Minister until it is “scrapped or changed” – as well as between the UK and the EU. The good news on this front is that parties are currently finally working seriously and pragmatically to reach an agreement on the protocol’s implementation, with hopes that some deliverables will be achieved in time for the 25th anniversary of the Good Friday Agreement in April. The quarter-centenary would indeed be rather embarrassing if the institutions that were set up under the treaty are non-operational and the cross-community political consensus it aimed to create is visibly broken.
Yesterday, the UK and EU reached an accord to use the UK’s data-sharing system to track goods moving from Great Britain to Northern Ireland. This new database provides real-time customs and commercial data on goods, such as agri-food or industrial machinery, being transported across the Irish Sea. It is the first concrete sign of progress in the dispute over post-Brexit trading rules. A continued ‘de-dramatisation’ and serious progress on trade flows and customs checks between Great Britain and Northern Ireland may eventually unlock further progress on a whole host of other issues, such as the deal’s governance and food safety regulations.
It is to be seen whether the current progress will eventually be sufficient for the Northern Ireland unionists to agree to return to the Northern Ireland Assembly, which they currently boycott. The DUP have stated that they will not return until their concerns about the Protocol are fully addressed (although, as we’ve seen in the recent past, tax handouts do miracles). Yes, increased political pressure from US Democrats, who want to see this being resolved before even thinking about a UK-US trade deal, may eventually result in a partial agreement on trade flows between the UK and the EU, but it remains unlikely that such a deal will be comprehensive enough to fully resolve all issues related to the Protocol and to placate the DUP and the Conservative Party’s own hardliners.
Given that it took more than six months to agree something ‘technical’ as data sharing, the most likely outcome at this point seems to be that another deadline will pass with no comprehensive resolution. Even worse, the risk is that if hardly any progress on the issue of Northern Ireland is made in the next few months and if the UK government decides to still pursue its unilateral Northern Ireland Protocol Bill, a whole host of other issues may again resurface. More specifically, the EU will be keeping a close eye on the UK’s efforts to eliminate inherited EU laws through the new Retained EU Law Bill, suspecting that the UK may be attempting to gain an unfair competitive advantage with a bonfire of regulations.
In a speech, the Bank of England’s chief economist Huw Pill linked all of the problems described above to the possible “persistence” of inflationary pressures in the UK relative to other economies.
It has indeed often been said that the UK’s unique inflation problem combined the worst of both the US (soft labour supply) and Europe (skyrocketing energy prices) with some UK-specific goods and services market bottlenecks added to it. This should keep inflation elevated throughout 2023
and well into 2024, making a Bank of England pivot a remote prospect. We look for Bank rate to rise to 4.75% by this summer.
