Authored by Dave DeCamp via AntiWar.com,

A group of House Republicans introduced a bill Thursday to audit the funds that Congress has approved to spend on the war in Ukraine. The effort is being led by Rep. Marjorie Taylor Greene (R-GA) and supported by a group of Republicans that have been critical of US aid to Ukraine. The resolution’s cosponsors include Reps. Thomas Massie (KY), Matt Gaetz (FL), Barry Moore (AL), Andrew Clyde (GA), and Cory Mills, a representative-elect from Florida.

According to The Hill, Greene introduced the bill as a privileged resolution, meaning it will be sent to the relevant committee, which will have 14 business days to either reject the legislation or approve it for a vote on the House floor.

If the bill is not discussed by the committee within 14 days, Greene has the option to force a House vote. Greene said she’s prepared to reintroduce the bill in the next Congress when Republicans have a majority in the House.

“I’ll introduce this resolution again, but I’ll also be calling for a full audit. We voted ‘no’ to send money over there, but we’re also going to audit what’s happening in Ukraine,” Greene said.

While most Republicans still support spending on the war in Ukraine, many have come out in favor of increasing oversight of the aid. House Minority Leader Kevin McCarthy (R-CA), who is set to be the speaker in the next Congress, has said a Republican-controlled House wouldn’t send a “blank check” to Ukraine.

McCarthy later downplayed his comments and said the lack of oversight was the issue, and other Republican leaders insisted they would keep arming Ukraine. But McCarthy’s comments were still enough to prompt a push to approve a massive new Ukraine aid package before the next Congress is sworn in, and the White House has asked for $37.7 billion.

If the new aid package is approved, it will bring total US spending on a proxy war on Russia’s border to about $105 billion. If it’s spent at the rate of other aid packages, the White House will likely be looking for more come spring.

Authored by Michael Maharrey via SchiffGold.com,

Walmart recently announced better-than-expected third-quarter sales growth. This may seem like great economic news until you realize the reason behind the retailer’s big jump in sales.

As it turns out, wealthier shoppers are flocking to Walmart to make ends meet as rising prices squeeze pocketbooks.

In its earnings report, Walmart said it is making “strong grocery share gains, including from high-income households.”

“Customers who came to us less frequently in the past are now shopping with us more often, including high-income customers,” Walmart CEO Doug McMillon said on a Tuesday call with investors and analysts.

Why are more affluent people shopping at Walmart? In a recent podcast, Peter Schiff said it was out of necessity.

It’s because they can’t afford to shop at the more expensive, fancier markets that they used to go to because prices are up so much, in order to put food on their tables, they’re having to trade down and buy cheaper stuff at Walmart.”

Walmart also reported strong growth in its private-brand sales, a sign shoppers are abandoning more expensive name brands and turning to lower-priced generic alternatives.

According to CNN, other discount supermarkets, along with Dollar General, reported gaining new, wealthier customers trying to manage budgets during these inflationary times.

While the CPI came in lower than expected in October, food prices continue to rise. The price of food at home increased by 0.6% month-on-month. Food at restaurants was up 0.9% on the month. Annualized, food prices were up nearly 11% in October.

Pundits and analysts like to look at core inflation, stripping out more volatile food and energy prices to gauge inflation, but consumers don’t have that luxury. They can’t just cut food out of their budgets, and Americans are struggling to cope.

Increased spending on food is forcing consumers to cut in other areas. Walmart’s third-quarter report hints at this. While grocery sales increased in the “mid-teens” last quarter, the company reported “softness in discretionary categories including electronics, home, and apparel.”

Wages are rising, but they aren’t keeping up with prices. On an annual basis, real average hourly earnings decreased by 3.0% from September 2021 to September 2022 (seasonally adjusted). It was the 18th consecutive month of declining real wages on an annual basis.

Tight budgets aren’t just altering shopping behavior. It is also forcing people to dig deeper and deeper into debt. Household debt increased at the fastest pace in 15 years during Q3, as American consumers ran up their Mastercards and Visas month after month. Credit card balances surged by 15% year-on-year in Q3, increasing by $38 billion between July and September. That was the biggest annual increase in credit card debt in more than two decades. Rising credit card debt coupled with increasing mortgage costs pushed overall household debt higher.

Economists and pundits talk about inflation as an academic exercise. They rarely reflect on the fact that rising prices have real impacts on real people. After months of rising prices, even wealthier Americans are feeling the pain. And if you happen to be somebody living on a fixed income or savings, you’re really screwed as inflation is rapidly eating away your purchasing power and your income streams aren’t increasing at all. Inflation always causes the most pain for the poor and elderly.

A major development Thursday and Friday in Iran strongly suggests the protests crisis is escalating and will grow more violent, as hundreds of demonstrators set their sights on the historic and iconic “house of Ruhollah Khomeini” – the revolutionary hardline Islamic cleric credited with founding and leading the Islamic Republic. 

The “anti-hijab” protests which have raged for two months are now attempting to destroy the republic’s most sacred symbols, after a Tehran court began handing out the country’s first death sentences to protesters, or “rioters” as state authorities have called them. 

Astonishing scenes from #Iran. Protesters have burned down the house of Ruhollah Khomeini, the Islamic Republic’s founder.

The house has been a museum for the past 30 years. This is an attack in the essence of the republic itself. pic.twitter.com/Qtk5jr5AR6

— David Patrikarakos (@dpatrikarakos) November 18, 2022

Reports AFP, “Protesters in Iran have set on fire the ancestral home of the Islamic Republic’s founder Ayatollah Ruhollah Khomeini.”

The report further confirms that “The house in the city of Khomein in the western Markazi province was shown ablaze late Thursday with crowds of jubilant protesters marching past, according to images posted on social media, verified by AFP.”

The report also cites regional gulf sources to say the anti-government crowds are declaring that current Supreme Leader Ali Khamenei “will be toppled.”

The home (now museum) of Ayatollah Khomeini, founder of the Islamic Republic, set on fire by Iranian protesters. pic.twitter.com/YLE7Fe2kAh

— Frida Ghitis (@FridaGhitis) November 18, 2022

The protests have at times gotten violent, with buildings across various cities burned down, and also with live fire used by security services to quell the unrest. Last week hardliners in parliament demanded that authorities take a harsher stance in order to finally halt the so-called “anti-hijab” demonstrations.

Likely to further fuel the anger in the streets is the increasingly harsh stance the country’s judiciary is taking toward the protests. On Thursday three more Iranians were sentenced to execution, after the first such unprecedented sentence for “rioting” was handed down earlier in the week.

 According to Al Jazeera: 

The Iranian judiciary said late on Sunday that an unnamed individual has been sentenced to execution for “setting fire to a government center, disturbing public order and collusion for committing crimes against national security” in addition to “moharebeh” (waging war against God) and “corruption on Earth”.

Five more unnamed people, who authorities described as “rioters” – a word the government uses to describe the ongoing protests and those participating in them – were handed between five and 10 years in prison on national security-related charges.

More such extreme penalties are expected, given that Tehran officials have long accused the protest movement of being fueled by Iran’s enemies such as Israeli and US intelligence, hence the charge of “collusion for committing crimes against national security.” 

The Iranian Kurdistan region has continued to be a hotbed of unrest and anti-government demonstrations: 

People chant “Ghassmlou, Ghassmlou your path continues” at the funeral of Azad Hasaanpour who was killed by Iran’s terrorist #IRGC in the Kurdish city of #Mahabad
#JinaAmini #KurdistanProtests #IranRevolution #Kurdistan #IranProtests pic.twitter.com/d5MST1j1Ew

— PDKI (@PDKIenglish) November 18, 2022

At this point at least 326 people have died, including deaths among the police and security services. The White House has meanwhile said it stands in solidarity with the protesters, in what Tehran has taken as a declaration of regime change coming from the Biden administration. 

Authored by Ryan McMaken via The Mises Institute,

The tech sector in the US has benefited from more than a decade of ultra-low interest rates and easy money. But now it looks like the easy-money era may be ending—at least for now—and that means problems for the sector so long wedded to cheap loans.

Just a year ago, the ten-year treasury’s yield was 1.4 percent. This month, however, the 10-year’s yield is up to over 3.6 percent, and throughout the economy, debtors are finding that debt service isn’t nearly as cheap as it used to be.  Employers in the tech sector are responding as one might expect. Meta/Facebook has announced 11,000 layoffs. Amazon will soon lay off 10,000 employees. Twitter has laid off at least 3,700 employees. Stripe, Microsoft, and Snap have each laid off about a thousand workers. Salesforce and Zillow have laid off hundreds. Dozens of other firms have slowed or frozen hiring.

Thanks to rising debt costs, employers need to cut costs, but many employers will soon be facing declining revenues as well. Given that a multitude of indicators point toward an approaching recession—the yield curve is now the most inverted it’s been since 1982—this is likely just the beginning.

What we’re witnessing is the end of the latest tech bubble, and what seemed like rock-solid companies set to expand effortlessly forever will suddenly be characterized more by cost-cutting, falling revenues, and a hard slog in search of more capital. 

The end of easy money will also separate the real innovators and entrepreneurs – people who build real value – from the big-talking frauds who only look smart or productive when they can just borrow more cheap money to kick the can of their failing and stagnating ventures down the road. 

Unless the central bank and governments intervene to provide bailouts and backstops, the industry will face a much-needed reckoning. This will help clear out more than a decade of malinvestments and bubbles propping up top heavy and inefficient companies that could never survive without the artificially cheap credit provided by asset purchases and ultra-low-interest rate policy at the central bank. 

Rising Interest Rates, Falling Valuations

Until very recently, interest rates had been declining for decades in the United States, and that has meant companies, at any given time, have generally been able to bank on cheaper debt not too far down the road. This has increased companies’ valuations, and has made it easier for companies to find investors. 

Even for companies that never—or almost never—turn a profit, cheap money has meant that the day of reckoning can simply be pushed further into the future. In many cases, we call these zombie companies: they don’t have real value, but they can stay “alive” by paying off older, more expensive debt with new cheaper debt. 

But, things are very different when easy money starts to get scarce. As Ryan Browne at CNBC recently noted:

Higher rates spell challenges for much of the market, but they represent a notable setback for tech firms that are losing money. Investors value companies based on the present value of future cash flow, and higher rates reduce the amount of that expected cash flow.

As a result,

Venture deal activity has been declining … Not all companies will make it through the looming economic crisis — some will fail, according to Par-Jorgen Parson, partner at VC firm Northzone. “We will see spectacular failures” of some highly valued unicorn companies in the months ahead, he told CNBC. …

The years 2020 and 2021 saw eye-watering sums slosh around equities as investors took advantage of ample liquidity in the market. Tech was a key beneficiary thanks to societal shifts brought about by Covid-19, like working from home and increased digital adoption. … In a time when monetary stimulus is unwinding, those business models have been tested.

Part of the reason investors are now less interested in “unicorns” is that as interest rates rise, investors are less desperate to search out yield even in the most unproven and risky corners of the economy. For example, when government debt and other low-risk investments are paying next-to-zero yields, investors will be much more aggressive about finding riskier investments that pay at least something above zero. That includes high-risk trendy unicorn companies that promise big returns. But, as Treasurys and similar investments begin to promise higher yields—as they are doing now—there’s less pressure to dump money in whatever flavor of the month is being put forward as the next big thing for investors. Moreover, in times of easy money, investors have more cash to throw around. 

Once the cheap money regime ends, however, newly reticent investors become more interested in actually analyzing the fundamentals of firms seeking investors. That means firms will have to actually show they’re efficient and only hiring employees who actually create value. 

Easy Money Enables More Waste

For many top-heavy companies, that means layoffs. It’s why Meta’s Mark Zuckerberg recently complained that “realistically, there are probably a bunch of people at the company who shouldn’t be here.” Zuckerberg went on to say he would deliberately be “turning up the heat” for employees in the hopes that the less committed would simply quit. (Meta shares are down more than 50 percent this year, and Meta has lost revenues as Zuckerberg’s obsession with the metaverse has not been especially popular with consumers.)

Elon Musk has been in the midst of something similar at Twitter, firing thousands of employees, and demanding that those who remains be prepared to work long hours.  While Twitter employees and ex-Twitter employees have been whining continually online about how everything was wonderful at Twitter until Musk showed up, the reality is that Twitter has only ever had two profitable years (2018 and 2019) and is neither efficient nor innovative. 

Moreover, it’s certainly not difficult to see why Zuckerberg and Musk would want to trim the fat if recent videos about “a day in the life” at Meta and Twitter are true. The two now-notorious videos show young female employees walking around Meta and Twitter offices showcasing how little work they do and how opulent the office perks are. Perks apparently include complementary gourmet food, red wine on tap, and free cappuccinos. Last May, Project Veritas reporters captured a Twitter senior engineer bragging about how little he works: 

“[B]asically went to work, like, four hours a week last quarter. And that’s just how it works in our company. … [E]ssentially, like, everyone gets to do whatever they want, no one really cares about, like, [operating expenses].” 

The engineer contrasts this approach at Twitter with “capitalists” who “care about numbers or care about how to make the business more efficient.”

If true, it’s all a perfect illustration of how the age of cheap credit has made it possible for companies to be highly valued even in the midst of senior employees who are essentially dead weight.  As debt costs rise, labor costs must fall in many cases. That makes employees who work a few hours a day ripe for trimming. 

These companies are probably looking at more hits from the revenue side as well. David Zaslav, CEO of Warner Bros. Discovery this week warned that the advertising market is worse now than at any time during the pandemic slowdown of 2020. 

Yet again, we find that as borrowing costs rise, companies have less money to spend elsewhere. Advertisers have reduced spending, and this has meant hits to the valuation of media companies like Warner Bros. Discovery. This extends to social media companies as well. 

Years of Malinvestment

The story of the last decade has in many cases been rising valuations for companies that often lose money, hire employees who barely work, and simply rake in the cash that yield-starved investors throw at them. 

In other words, much of the tech sector has all the markings of a classic bubble and the effects of years of malinvestment. The lucky business owners and employees on the receiving end of malinvestment get to live high on the hog of cheap money with rising wages, luxurious offices, and never ending “growth.” Workers and owners alike can then pat themselves on the back about how brilliant they all are. But much of it is an illusion and its existence depends largely on many years of central bank interventions designed to force down interest rates, prop up asset prices, and essentially print money to keep liquidity flowing unceasingly to firms via investors.  Yet, when price inflation finally forces the central bank to allow interest rates to rise again—as is now happening—the music stops, and it seems all the brilliant geniuses running tech companies weren’t quite so efficient, profitable, or clever after all.

Update (1430ET): Garland named John L. Smith, known as Jack Smith, a war crimes prosecutor at The Hague and a former federal prosecutor, to begin serving as special counsel immediately.

Smith was previously the chief of the Justice Department’s Public Integrity Section, where he oversaw public corruption and elections-related investigations.

“Based on recent developments, including the former president’s announcement that he’s a candidate for president in the next election … I have concluded that it’s in the public interest to appoint a special counsel.”

Garland noted that the special counsel’s investigation will be two-fold: the Jan. 6 investigation and the Mar-a-Lago matter.

Presumably this probe will take just under two years, leaking regular updates of “now we’ve got him” soundbites, until the findings are released just before the election showing that there’s no there, there.

*  *  *

Just a few short days after Trump said during his 2024 campaign launch:

“Nothing is greater than the weaponization from the system, the FBI or the DOJ. We must conduct a top to bottom overhaul to clean out the festering rods and corruption of Washington, D.C.”

The follow breaking news from the Wall Street Journal just hit:

“Attorney General Merrick Garland will appoint a special counsel to determine whether former President Donald Trump should face charges stemming from Justice Department probes, according to a person familiar with the matter.”

It seems Trump’s warning from earlier in the week is about to come true:

“The journey ahead of us will not be easy,” he continued.

“Anyone who truly seeks to take on this rigged and corrupt system will be faced with a storm of fire that only a few could understand.”

As Techno Fog details via The Reactionary Substack, WSJ reports that the announcement is to come sometime Friday afternoon. The identity of the special counsel is yet to be announced.

We expect the scope of the special counsel’s investigation to cover the Biden DOJ’s current prosecutorial efforts relating to the raid at Mar-a-Lago, which includes an investigation into mishandling of classified documents/national security documents, obstruction of justice, and the destruction of government records.

For the Biden DOJ, this step is no surprise. They would have planned for it to take place once Trump announced his candidacy. And sure enough, here we are. While the special counsel is quasi-independent, allegedly, it will still be subject to the control of Attorney General Garland.

Of course, this news came after federal officials decided to wait until after the midterms to leak information beneficial to Trump regarding the Mar-a-Lago raid.

The Washington Post reports on the review of the documents – purported by the Biden DOJ to be classified – by federal authorities:

That review has not found any apparent business advantage to the types of classified information in Trump’s possession, these people said. FBI interviews with witnesses so far, they said, also do not point to any nefarious effort by Trump to leverage, sell or use the government secrets. Instead, the former president seemed motivated by a more basic desire not to give up what he believed was his property, these people said.

Motive matters in this context, and it is especially important that Trump had no type of nefarious intent with respect to the records. But will it matter enough to prevent the Biden DOJ – now the upcoming special counsel – from charging relating to the potential crimes it is investigating: “mishandling of national security secrets, obstruction, and destruction of government records”?

Subscribers can read more here…

First it was Deutsche Bank, then Bank of America; and while Goldman is still shoving its head in the sand and pretending that somehow a recession can be averted and the Fed can magically spawn a soft landing and that the Fed won’t cut in 2023 (with the bank predicting back in October 2021 that the Fed wouldn’t hike until Q3 2023) …

… overnight even the largest and most bullish US bank has – after months of denial and deflection – capitulated and made a 2023 recession its base case.

In a note from JPM’s top economist Michael Feroli and Daniel Silver, the duo write that with JPMorgan still expecting the FOMC to tighten another 100bp: (50bp in December and 25 by in both February and March), the almost 500bps of expected cumulative hikes is already delivering a commensurate tightening of financial conditions which JPMorgan believes “will tip the economy into mild  recession later next year.” It wasn’t clear what JPM thought would happen if the Fed hikes to the 7% which 2023 Fed non-voter Bullard hinted yesterday, but it certainly would not be “mild” and it almost certainly would be a “depression” (of course, Democrats would never let that happen and will intervene long before we get anywhere close).

We won’t bore you with the note’s details (pro subs can get it in the usual place), so we’ll just excerpt from the punchline:

“No postwar expansion died of old age. They were all murdered by the Fed.” Since the late Rudiger Dornbusch reportedly said that, we have had the ‘post-modern’ recessions of ’01 and ’08 that were more associated with asset price froth than aggressive Fed actions, and we also had the brief (but severe) COVID-19 downturn, for which it’s hard to blame the Fed.

But those subsequent caveats notwithstanding, most postwar expansions were indeed done in by Fed tightening. And the Fed is currently tightening as rapidly as it has ever done, and we now believe it will deliver another 100bp of hikes before going on hold next spring. So it makes sense that forecasters are more convinced than they have ever been of a recession over the next year

Why not a soft landing? Feroli explains (Goldman, are you listening?):

It would be nice to think the Fed could gently nudge the unemployment rate up 0.5-1.0%-pt to restore labor market balance, but the cyclical behavior of the unemployment rate exhibits both asymmetries and non-linearities. As former Fed Vice Chair Kohn used to say, “the unemployment rate goes down by the escalator and up by the elevator.” Consistent with this, we also expect slowing aggregate demand eventually leading to labor market weakness that builds on itself, and we anticipate that we could lose over a million jobs by the middle of ’24. We also believe that this labor market weakness will convince the Fed that it has generated enough disinflationary impetus that it can start to ease policy toward a more neutral posture.

Of course, the question is when and according to someone who just put a few million where his mouth is, the Fed will make that conclusion some time in early/mid 2023.

And while one can mock JPM for predicting merely a “mild” recession, the bank at least puts in the effort to counter the possibility of being wrong:

So why don’t we have a deeper downturn penciled into our outlook? If we do have a downturn next year, it will be the most well-telegraphed recession in modern memory. That fact alone should change the nature of the slowdown. When businesses and households expect good times to last they take on leverage and spend freely, particularly for durables. But as attested to by the Fed’s recent Financial Stability Report, you have to squint to see signs of financial excess right now. And after its post-pandemic normalization, the net spending share on durables and structures has flattened off below its historical mean. Like Nineveh’s response to Jonah’s prophecy, the people have taken heed of what forecasters are saying and are beginning to change their behavior in ways that affect the forecasted outcome.

This thinking is similar to both the Austrian and Pigouvian theories of the business cycle: expansions end when optimistic expectations meet a less optimistic reality. The more conventional thinking, and the one both we and Dornbusch ascribe to, is that expansions end when the Fed takes away the punch bowl. Even so, these other schools of thought can provide useful insight into the nature of any prospective downturn..

More in the full note available to pro subs.

US natural gas prices surged on the news that one of the largest US LNG export terminals is targeting a complete operational restart by March 2023.  

*FREEPORT LNG EXPECTS FULL PRODUCTION IN MARCH
*FREEPORT LNG:UPDATE ON INITIAL RESTART OF LIQUEFACTION FACILITY

— zerohedge (@zerohedge) November 18, 2022

Freeport LNG, a major liquefied natural gas exporter in Texas, wrote in a press release that “it is targeting initial production at the facility in mid-December,” with “full production utilizing both docks remains anticipated to commence in March 2023.” 

Remember, Freeport has been shuttered since June due to an explosion, with an initial reopening timeframe around fall. The delay has a silver lining: more NatGas will be injected back into the US grid as the heating season begins, though the bad news is that Europe will receive fewer shipments of US LNG shipments. 

“Each of Freeport LNG’s three liquefaction trains will be restarted and ramped up safely, in a slow and deliberate manner, with each train starting separately before restarting a subsequent train. It is expected that approximately 2 BCF per day of production will be achieved in January 2023. Full production utilizing both docks remains anticipated to commence in March 2023,” Freeport said. 

US NatGas price jumped as much as 6% on the news but is still lower in the session. 

Houston-based energy firm Criterion Research responded to the news of Freeport’s updated reopening timeline: 

At long last, Freeport has given clarification of its timeline for a restart of LNG operations at the long-offline terminal. The company reported that the reconstruction work needed to start initial ops at all three LNG trans, two storage tanks, and one berth was 90% completed, with all work on target for completion by the end of November 2022. 

With that in mind, they are now targeting the initial startup in Mid-December 2022. They will then work gradually to a 2 Bcf/d operational rate in January 2023. Full operations at both docks will be reached in March 2023. Freeport will phase on each of its three trains in a “in a slow and deliberate manner, with each train starting separately before restarting a subsequent train.” 

Earlier this week, Criterion Research released an analysis of the Freeports November 14 update and surmised according to the timeline we laid out, they would be on pace for a restart within 30-days of November 14, 2022. We got a bit lucky on that one, but we will keep an eye on updates between now and then to see if this timeline shifts at all.

Via Global Macro Monitor,

If you are not watching this space, you won’t know what hits you when it hits you. 

Central banks, both the Fed and foreign, have morphed from the largest buyers of Treasury notes and bonds over the past two decades into the largest net sellers.

Japan and China Biggest Monthly Treasury Dump On Record

Japan and China, both private investors and central banks, sold $118 billion of Treasury notes and bonds in September, their largest combined monthly dump on record, which confirms our suspicions from a September post,

As of the end of September, the Japanese have sold $114 billion in coupon Treasuries since July, 9.2 percent of their holdings, and $208 billion from Japan’s peak holdings of $1.33 trillion in November 2021, down 15.7 percent.  

The above goes a long way to explaining the below. 

“In recent months, however, liquidity in the Treasury market has deteriorated further. This recent development is more concerning, as it seems as if market functioning has become a bigger source of risk, rather than just reflecting the uncertain fundamental environment.”

For most analysts, the liquidity problems in the Treasury market are not just about rapidly changing prices, they are also a reflection of a dearth of buyers, or an inability or unwillingness of the buyers in the market to mop up all the supply. The fact the Treasury department has begun discussing the prospect of buying back some of the most illiquid Treasury bonds, says HSBC’s Major, is an implicit acknowledgment that faltering demand has begun to cause problems. – FT

Our The Great Reset: The Bond Yield-Dollar Feedback Loop post provides a fairly reasonable framework to explain the dollar bond yield dynamic based on global capital flows.  It’s an easy read and worth your time. 

The Path to High (per) Inflation? 

If the Fed is forced to step in and finance the U.S. Treasury as they did en masse with the COVID rescue packages or help in the rollover of Treasury refinancings, the economy will be set on a path of high inflation for many years to come. 

On Thursday, St. Louis Fed President James Bullard sparked a slide in risk assets after he said policy makers should raise interest rates to at least 5% to 5.25% to curb the highest inflation in nearly 40 years. Meanwhile, as Bloomberg’s Vincent Cignarella writes this morning, crude futures point to a recession, lower inflation expectations and a Fed soon to be on hold.

With winter approaching one would expect energy prices to be rising but that is not the case. Across the complex they are falling, even gasoline futures, and that is with the holiday driving season approaching.

As Cignarella observes, the reasons seem all too clear: dropping demand for energy leads consumer inflation expectations. Despite the Fed’s warnings, consumers believe inflation is slowing. For risk markets that should mean a healthy environment for bond bulls and dollar bears. For equities, it’s a bit muddy. Lower rates generally mean higher stocks but slower spending will mean lower earnings so choose your sectors wisely; not all will gain as rates fall.

And in keeping with the coming recession, the market is starting to notice, and as Bloomberg’s Edward Bollingbroke points out, a standout trade over the US morning session has been a stream of buying in SOFR September 2023 options, an upside play targeting a drastic Fed pivot to a 2% rate by September next year vs. the approximately 4.9% currently priced into the swaps market.

Citing a US trader, Bollingbroke notes that during the session, there has been constant buying in 40,000 SOFR Sep23 97.00/98.00 call spread between 4.25 and 4.5 by combination of block and pit flow. Open interest in the strikes sits at 35,680 (98.00) and 31,831 (97.00), consistent with a new position which expires Sept. 15 2023, week before the Sept. 20 policy decision.

The premium paid was approximately $4.5 million, and targets a policy rate around 2% by options expiry; for context, the Fed-dated OIS currently prices in a policy rate of around 4.9% for the September meeting next year, almost 300bp above options target.

In other words, someone is not only betting on a pivot, but a huge pivot.

Considering that the overwhelmingly consensus trade now is that the Fed won’t be cutting any time in 2023 – just like it was anathema to even suggest a rate hike in 2022 one year ago – we have a feeling that this will be an extremely profitable trade less than a year from today.

By Michael Every of Rabobank

Same Ship, Different Day

Last year, we published a report called ‘In Deep Ship’, which argued: supply chains were breaking down for a number of reasons, not just excess demand; this process would continue until a downturn; but politics and geopolitics meant even that would just provide a pause, not a structural reversal. The deeper I dug, the more I was personally convinced inflation wasn’t transitory, and that rates would have to go up and stay up.

Today it’s a case of same ship, different day. Ocean freight rates on many, but not all, routes are tumbling due to a looming downturn. Yet politics and geopolitics are still showing inflation is not transitory, even if it may have peaked, and central bankers are saying rates will have to go up further and stay up.

The Fed’s Bullard could not have been more hawkish yesterday. Not only did he shrug off weak data and say rates should go to 5.00% – 5.25%, but he made clear this was the lowest level they should sit at. Indeed, he suggested they might need to go as high as 7% using the Taylor Rule.  True, there are doves like Brainard lobbying for pivots too. However, the real world outside of short-term economic data backs the Bullard view more than Brainard:  

• Russia, Ukraine, Turkey and the UN have agreed an extension of the Black Sea Grain Deal – wheat prices are lower as a result. However, an Israeli tanker was just attacked by an Iranian drone. More such events will raise the cost of global ocean freight, or make it less viable, as the Black Sea route was before the Grain Deal.

• Turkey is demanding all oil shippers passing through the Bosporus show insurance from December 1, which could restrict flows of Russian oil ahead of new EU sanctions.

• Prices for LNG ships have soared, with only the recent warm autumn weather, now being reversed in the US, providing any temporary respite.

• As re-/friend-shoring from China, despite kumbayanik dreams, will see a surge in demand on second-tier carrier routes that can only use smaller vessels, and declining demand on existing routes between mega-ports using the largest ships (which we dubbed ‘too big to sail’ last year). That will mean inflation and deflation in carrier rates simultaneously.

• Ocean carriers are responding to a collapse in freight demand with blank sailings and scrapping older vessels – supply destruction to match demand destruction; which is why the White House has the industry in its crosshairs as a cartel.

• Plans for national ocean carriers as fall-backs are still proceeding in several economies, arguably the only viable solution given breaking carrier alliances up would not make things cheaper in isolation. There are urgent calls for the US to ‘go back to the sea’ too to ensure its military sealift capacity, without which it can no longer be considered a Superpower.

• In Australia, regulators ruled tugboat workers could not be locked out by their employer from today as it would cause too much damage to the economy: the ripple effect of how close we came to such a development is seeing their supply chains disrupted today anyway.

• In the US, a rail strike is still possible: the American Chemistry Council warns a one-month strike could result in 700,000 lost jobs, a 4ppt spike in US PPI, and a 1ppt drag on GDP, while a two-month strike would mean PPI up 12ppts and GDP down 2ppts. And how does one resolve strike action from key workers on tugboats or railways? Large pay rises ahoy!

• The low Mississippi and Rhine underline key rivers can no longer be relied on.

It may not float your boat, but the supply side is still inflationary medium to longer term, not just short term as yield curves suggest. That is before Europe is deindustrialised by higher energy prices. Moreover, the Pentagon says it now understands the real lesson from Ukraine is the need for “production”, as legislation calling for massive increases in US weapon stocks sits before Congress. Once the real power-players wake up to the fact that supply/production is all that matters, then we end up with really inflationary shifts in supply/production. That’s true even if an infinite supply of economists and Wall Street analysts say this can’t happen “because markets”.

Higher rates are hence needed for several reasons.

• First, to clamp down on excess demand and asset bubbles – job underway.

• Second, to anchor the US dollar during this transition. Recall oil maven Anas Alhajji stresses the oft-overlooked fact that a key part of the post-1973 ‘petrodollar’ deal with Arab oil producers was the US promise to provide them with a decent, safe return for their oil revenues – which is part of the reason why US rates went up. This may no longer apply to OPEC+ today, but the same dynamic holds true vs. muttering of potential dollar rivals backed by commodities. Try pivoting and see what happens alongside structural supply-side inflation pressures! The inverse is to note the power the dollar wields as rates rise – Fed swap lines become geopolitical life-lines.

Indeed, what’s the alternative pivoters are actually offering now from a bigger picture perspective? Bankman-Fried polyamorous Harry Potter Bahamian frauds exceeding that of Enron? More bubble gibberish for the likes of Masayoshi Son to waste billions on investing in?

Most foreign investors want a decent, safe return from Fed Funds; and the Pentagon wants a decent, safe return from US industry that keeps the US decent and safe.

On the surface things may look the same, but actually it’s a case of same ship, different day; or very different ship from what Wall Street has been sailing us for years.  

But there are always slow learners – the UK, for example. Fresh after trying Thatcherite tax cuts on steroids, Blighty is about to try austerity on steroids. Chancellor Hunt’s budget will slash spending for years, take taxes to the highest level in decades, and allow energy bills to soar, smashing consumers. Hunt promises “Scandinavian quality with Singaporean efficiency” as taxes hit Scandinavian levels without any sign of Singaporean outcomes, let alone support for public housing, transport, and cheap, delicious hawker centres. So, “British delusion” or “British irony”? Apparently, this is ‘what the market wants’ – just not voters: I struggle to think of a UK constituency, and I mean that figuratively and literally, who will back this budget.

The greatest irony is that if the Fed does go to 7% because ‘same ship, different day’, then the Bank of England and Britannia will almost certainly be forced to keep pace with it anyway – so what’s the point?

But I find myself asking that question with depressing frequency given so many in markets ignore all the above and busily rearrange deckchairs on the Titanic every day.