Authored by Mike Shedlock via MishTalk.com,

California is spending like the tech boom would last forever. But a tech crunch is underway with huge layoffs everywhere. Now what?

Please consider California’s Fiscal Outlook for 2023-2024.

Executive Summary

• Economic Conditions Weigh on Revenues. Facing rising inflation, the Federal Reserve— tasked with maintaining stable price growth—repeatedly has enacted large interest rate increases throughout 2022 with the aim of cooling the economy and, in turn, slowing inflation. 

• State Faces $25 Billion Budget Problem and Ongoing Deficits. Under our outlook, the Legislature would face a budget problem of $25 billion in 2023-24. (A budget problem—also called a deficit—occurs when resources for the upcoming fiscal year are insufficient to cover the costs of currently authorized services.) The budget problem is mainly attributable to lower revenue estimates, which are lower than budget act projections from 2021-22 through 2023-24 by $41 billion.

• Save Reserves for a Recession. The $25 billion budget problem in 2023-24 is roughly equivalent to the amount of general-purpose reserves that the Legislature could have available to allocate to General Fund programs ($23 billion). While our lower revenue estimates incorporate the risk of a recession, they do not reflect a recession scenario. 

The Budget Problem

Lower revenues are expected to lead to a deficit of $25 billion in the budget window. Over the subsequent years of the forecast, annual deficits decline from $17 billion to $8 billion.  

However, those estimates do not reflect a recession scenario. 

Politicians and the Fed have a 100% track record of never predicting recession until it’s obvious to everyone we are in one. 

LOA Revenue Outlook

Image from California’s Fiscal Outlook, annotations by Mish

The exact path is unpredictable but the direction isn’t. Budget forecasts heading into recession are always overly rosy. 

I suspect the plunge will be steeper and faster than the state expects. 

The state makes “assumptions about how the economy is likely to perform over the coming 20 months and then using those assumptions to project revenue collections.” 

In this case, the state even admits that its budget “does not reflect a recession scenario.” 

Minimum Budget Guarantees

Proposition 98 establishes a “Budget Within a Budget” adjusted for inflation.

A shortfall in the context of the Proposition 98 budget means that funding under the guarantee is insufficient to cover the costs of existing educational programs, as adjusted by changes in student attendance and inflation.

The minimum funding requirement grows by an average of $5.6 billion (4.9 percent) per year over the next four years.

California Heads for a Budget Crunch

The Wall Street Journal provides additional color commentary in California Heads for a Budget Crunch

California’s steeply progressive income tax makes it heavily dependent on the income, and especially the capital gains, of high earners. The top 0.5% of taxpayers pay 40% of state income tax. Tax revenue surged in the pandemic as the Federal Reserve’s loose monetary policies inflated asset values. Many tech workers cashed out stock options.

Surging capital gains and a gusher of federal pandemic relief contributed to a $97 billion budget surplus in this fiscal year and $76 billion a year earlier. As usual, Democrats spent like this would never end. But stock values, especially of high-flying tech companies, have crashed since the Fed began tightening more aggressively this year. Silicon Valley companies are laying off workers.

Don’t Call It a Bribe

Starting in October, about 23 million Californians making less than $250,000 per year will receive a stimulus check ranging from $200 to $1,050, depending on income and the number of dependents. 

The program is expected to cost $10 billion. Yeah, let’s give away free money to people making up to $250,000 a year. That will sure cure inflation.

The WSJ made a sarcastic comment, “don’t call it a bribe.”

Reflections on Fair Share

Progressives will not be happy with the fact that the top 0.5% of taxpayers only pay 40% of state income tax. For them, “fair share” will be somewhere between 70% and 90%. 

Higher taxes will lead to more human and business flight. Good luck with that Governor Gavin Newsom.

Governor Newsom is unofficially running for president in 2024. It will be official the day president Joe Biden announces he will not run for reelection.

Had Democrats retained the House, free money bailouts to California, Illinois, New York, and New Jersey would have been massive.

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US equity markets are chopping around wildly in the last few days as Nomura’s Charlie McElligott notes that risk is drifting on a mini “triple whammy” causing a modest reversal stronger in the USD (after the post-CPI puke)…

1) China’s again-devolving COVID outbreak (Beijing reported 3 COVID-related deaths, Guangzhou imposed a 5-day lockdown, Hong Kong’s CEO tested positive for COVID, and Shijiazhuang–the 11m population city profiled by the FT last week as a potential “test case” for re-opening–instituted lockdowns and mass PCR testing—h/t AK),

2) the ultimate arrival of cold European weather finally seeing first drawdowns of Gas reserves and

3) a raft of better US economic data late last week (Bloomberg US Eco Surprise Index at best levels since May) is flowing-through financial markets via suddenly-squeezing US Dollar.

Bloomberg Dollar Index has now bounced more than 2% off the three month low made last week, which sits at the root of the overnight risk-asset pullback to start the holiday-shortened US trading week.

Source: Bloomberg

And naturally, as the Nomura strategist details, this is occurring just as the latest CFTC / TFF data shows both 1) Specs / Non Comms finally “net short” US Dollars for the first time since mid ’21…

…and 2) Asset Managers at their most “net short” US Dollars since July ’21…

…resulting in what is now the largest three session cumulative “positive” move in DXY in over three weeks, and overnight, with all G10 and Bloomberg EMFX weaker vs USD.

Remember and as noted in the days which followed the lite CPI print which set off such a profilic VaR shock unwind in legacy “FCI tightening” trade expressions most clearly represented by “Long USD,” that up until then had worked all year (and, accordingly, were VERY crowded) – the Dollar’s recent blast weaker (largest 6d drawdown since 2008) was not simply about crowded “Long USD” expressions being taken-down / stopped-out…but the fundamental catalysts (as noted at the top of this article) also shifting.

This “strong USD” impact is particularly evident with US Equities, where “USD Liquidity” (proxied by USD xccy basis swaps, as a measure of USD demand) shows “weak USD” as currently the largest POSITIVE macro factor price-driver for US Equities…

…meaning “strong USD” then has the opposite effect on “lower stocks”. And even more explicitly, the largest Negative Driver for S&P 500 in the Quant Insight macro factor PCA model now screens as USDCNH… where after the shock move lower in recent weeks, we’ve now seen the largest cumulative 4 session move higher in USDCNH since September, and is a “top 10” largest 4d cumulative move since 2019…

So the fundamentals may be shifting in the most critical driver of equity strength, but, as McElligott notes, there is a perhaps even more important inflection point in risk attitudes appearing.

After an almost 9-month-long period of pervasive bids for “Crash-Up” upside in US equities (versus any fear of a “Crash-Down”) – as investors were strictly concerned about missing rallies as opposed to further selloffs, because they were so egregriously under-positioned…

And the grab for “Crash-Up” hedges prompted November’s 2nd largest daily average S&P 500 gain (following October’s explosion)…

McElligott notes that something just changed…

After the short-squeeze, SPX Index Options “Call Skew” has come off the boil…

…as we got the impulse +12% rally in Nasdaq and +8% rally in SPX in mere days post CPI miss…

…while we have FINALLY seen SPX Skew & Put Skew pick-up off historic “flats” (steepened 5 out of 6 days), which McElligott suggests is because as clients finally began getting longer again for the first time in months, they actually had some need to hedge underlying exposures again!

That said, in the sense that I think now after Thanksgiving that the fiscal year is effectively “over” for most as far as being able to deploy new risk, and after this latest rally was sooooo much about de-grossing of “Shorts”…

McElligott suggests that we can see “Skew” staying broken until the turn into 2023…and accordingly, we’ve seen VVIX trade back down near 5 year lows by end of last week, as “Vol of Vol” remains just absolutely “dead in the water”.

Given all of this, SpotGamma continues to like holding some downside “lotto tickets” given the dynamics of:

• Put Wall staged significantly below current prices – indicates lack of hedges

• IV/SKEW continuing to be very flat – indicates lack of hedges

• “Medium term” IV should hold a bid due to 12/14 FOMC

• DEC OPEX positioning could act as a catalyst to drive downside volatility

This week we look for strong support at 3900 given that traders will likely not want to carry puts over Thanksgiving, and we have smaller near term options positions.

Beneath 3900 we look for volatility to tick substantially higher, as we believe traders will need to add downside put protection.

By Joanna Marsh of FreightWaves

Grain shippers have been scrambling to consider all their export options in the wake of low water levels on the Mississippi River and its tributaries. 

“Because of the low water conditions on the river, which is a major conduit for soybean and grain exports, there are a lot of farmers and a lot of agricultural shippers who are asking themselves, ‘What is my plan B? What is my plan C?’” Mike Steenhoek, executive director of the Soy Transportation Coalition, told FreightWaves. “And that answer is going to be different depending on your region of the country and what that market looks like.” 

The low water levels have reduced the capacity to ship grain exports via barge, sending those rates to their highest levels in years. According to the U.S. Department of Agriculture, barge rates for agricultural transport along key points of the U.S. waterway system have fallen for the week of Nov. 8 after experiencing pricing spikes in October.

“The barge rates right now are the highest they’ve ever been,” said Max Fisher, chief economist for the National Grain and Feed Association. 

When faced with low water levels, grain and soybean shippers are presented with several options. Two of those options include storing their soybeans or grain for longer than they normally would or trucking a portion of them to local livestock markets, according to Steenhoek.

Freight rail is also an option, particularly if the agricultural products need to be exported, Steenhoek said. 

Indeed, the Association of American Railroads recently noted that grain volumes have increased in October as grain producers seek alternatives to the Pacific Northwest and Gulf Coast. Mexico is also one of the U.S.’s key export markets, according to Steenhoek. 

But relying on rail offers its own issues. While rail service has improved over the course of this year, “it’s still not the effective lifeline that we really need it to be right now,” Steenhoek said. 

Fisher agreed with that assessment of the ongoing challenges.

“What we’re hearing is that grain shippers are not in the clear just yet,” Fisher said. “They’re still experiencing challenges on rail, but they are not as dire as they were earlier in 2022.”

Furthermore, a potential rail strike due to an inability to ratify labor contracts between the railroads and two to four unions could prove disastrous for grain shippers.

“[A strike] really does come at an unwelcome time because, within certain industries like agriculture, the decisions you’re making today relate in many cases to where you’re going to ship soybeans and grain next month, two months from now,” Steenhoek said. “It’s not like a cupcake shop where you’re asking, ‘How many chocolate cupcakes should I make tomorrow? How many do I think I’ll sell?’ For certain industries, you’ve got to have more of a greater predictability. You operate on more of a long-term demand-and-supply forecast. And so therefore you need to make sure you’ve got a predictable supply chain.”

Recent rainfall in the Midwest has helped increase water levels in the last several weeks, although the land is soaking up the precipitation and there is not enough runoff to fill streams and rivers to where water levels are needed to be. As winter approaches, any kind of moisture in the ground becomes frozen, so it doesn’t move to the waterways. 

If snow melts quickly enough and the ground is frozen, that runoff water could go to the streams and rivers. But if a region sees sustained cold temperatures, the snow just piles up and it won’t be until early spring to see what impact snow might have on the inland waterways. 

“Lack of water is the culprit and abundance of water will be the elixir,” Steenhoek said. “… It is going to require a pretty elongated and sustained amount of rainfall and precipitation [to raise water levels to be suitable enough for navigation].” 

Harvest yields for the U.S. are expected to be under historical levels because of hot and dry conditions experienced during the growing season. In a monthly report published Nov. 9, the Department of Agriculture anticipates U.S. exports for corn, soybeans and wheat will be lower in the 2022-23 crop year when compared with previous years. The U.S. crop year runs from Sept. 1 to Aug. 31.

Yet even though exports are expected to be down this year because last year’s harvest levels were much higher, the low levels of the inland waterways have not helped shippers, according to Fisher.

“There’s also probably more grain going out to the Pacific Northwest by rail than otherwise would be the case because grain companies have to get grain to the foreign markets no matter what,” Fisher said. “In some cases, the market sometimes just demands it, so they’re willing to go ahead and pay a little more freight costs to go ahead and get it there [but] still not offsetting what’s being lost on the river.” 

Both large and small companies have been impacted by low levels in the U.S. waterway system, which not only includes the Mississippi River but the Missouri, Illinois and Ohio rivers as well.

“It’s going to have a negative [volume] impact in ag services [in] North America,” Juan Luciano, CEO of grain producer ADM (NYSE: ADM), said during the company’s third-quarter 2022 earnings call on Oct. 25. ADM produces grain in both North America and South America.

A portion of North American soybean export volumes will likely be lost this season, while the window for the corn exports will probably be extended into the first quarter, Luciano said. 

ADM’s South American operations may also be able to export more grains, which should help offset any declines in North America. But Luciano said North American products could see a “pop” in their margins since the scarcity makes the products and destination more naturally valuable.

For their part, North American railroads say they are working with customers to ship more grain.

“[Kansas City Southern customers] continue to have the same great options they have always had, including direct access to the Gulf of Mexico at multiple locations,” KCS said in a statement to FreightWaves. “Historically, barge freight was the most cost effective option. However, this year, due to drought conditions, shippers have needed alternatives. As a result, KCS has converted some business to rail.

“While minimal volumes have been converted, we continue to have conversations with customers. In all cases, KCS is looking for win-win opportunities and solutions for new and existing customers, which in some cases means nontraditional KCS destinations.”

In its Q3 2022 earnings call, Canadian railway CN (NYSE: CNI) said it expects to handle some grain volumes that would have otherwise used barge transport in the inland waterway system. 

“It’s a great opportunity and we do parallel the [Mississippi] River,” CN Chief Marketing Officer Doug MacDonald said. 

CN is working with customers, although the railway also has to be mindful of terminal capacity, according to MacDonald. The railway operates both to western Canadian ports and to New Orleans via a north-south line that originates in Canada and cuts through the U.S. Midwest. 

Union Pacific (NYSE: UNP) is also shipping additional grain, but, like CN, the railroad has to be mindful about not overselling capacity, according to comments this week. 

“We are in a position to be able to help our customers because of our franchise,” UP President and CEO Lance Fritz said Tuesday at the Stephens Annual Investment Conference in Nashville, Tennessee. “They came to us because we have a wonderful shot from the Great Lakes, from the growing regions down to the Gulf. [But] we have to be careful because with our constrained crew base, there’s limited capacity. And if we wholesale shift to grain, somebody else — who we’ve committed to — is having a bad time. So there’s a lot of moving parts there.”

Norfolk Southern (NYSE: NSC) President and CEO Alan Shaw confirmed at the same investor conference that NS has been handling additional grain and that the company has been able to participate in grain export opportunities that weren’t previously available. 

With cryptos making headlines every day – and not in a positive way with the post-SBF fallout snowball gathering pace downhill – none other than billionaire hedge fund manager Bill Ackman offered a surprising rejoinder to the bears in a brief Twitter thread explaining why he is u-turning from skeptic to investor in the crypto ecosyste.

The last couple of days have seen Ethereum monkeyhammered lower relative to Bitcoin as the FTX Hacker dumps his horde of stolen tokens…

“The FTX issues are really an urgent reminder of the need for regulatory clarity and a real regulatory framework for crypto,” Christian Catalini, founder of the MIT Cryptoeconomics Lab, said on Bloomberg TV.

He added that hype and speculation over the minting and trading of tokens “has generated a massive distraction from building actual products and services that reach consumers, solve actual problems.”

And that reflects the attitude shift that the Pershing Square founder has had as he says “crypto is here to stay” comparing crypto’s potential social impact to the telephone and the internet…

The telephone, the internet, and crypto share one thing in common.

Each technology improves on the next in terms of its ability to facilitate fraud.

As such, I was initially a crypto skeptic, but after studying some of the more interesting crypto projects, I have come to believe that crypto can enable the formation of useful businesses and technologies that heretofore could not be created. The ability to issue a token to incentivize participants in a venture is a powerful lever in accessing a global workforce to advance a project.

The problem with crypto is that unethical promoters can create tokens simply to facilitate pump and dump schemes. It may in fact be that the vast majority of crypto coins are used for fraudulent purposes rather than for building legitimate businesses.

Despite crypto’s ability to facilitate fraud, with the benefit of sensible regulation and oversight, crypto technology’s potential for beneficent societal impact may eventually compare with the impact of the telephone and internet on the economy and society. 

Initially, I assumed that there is no intrinsic value to any of the tokens and therefore they simply represent a modern-day version of tulip mania without the aesthetic benefits.

But after examining a number of interesting crypto projects, I began to understand how a token could build intrinsic value over time.

Two examples may help to explicate my view: @helium created a global Wi-Fi network used by @limebike and others to track devices globally as well as for other uses which benefit by access to global Wi-Fi networks. 

Helium’s global network of 974k hotspots was crowd created by individuals who purchased and deployed Helium hotspots to mine HNT, its native token. Customers who wish to use the network must purchase HNT and burn it, ie, remove the ‘consumed’ HNT from its total supply of tokens. 

As a result, over time, a two-sided market for HNT develops in which miners buy hotspots and deploy them around the globe to earn tokens. Users, in turn, purchase HNT tokens in order to use the network. The more demand for the network, the more demand for HNT. 

Given HNT’s ultimately finite supply, the balance between supply and demand yields a market price which increases or decreases over time along with the success of the Helium Wi-Fi network. As such, HNT becomes a valued commodity whose price is determined by supply and demand. 

DIMO collects valuable auto data from data ports in cars. It does so by allowing car owners to mint tokens by capturing data from their own car. The data are valuable for the car owner as well as for auto manufacturers, suppliers, insurers, municipalities, etc. One can envision a two-sided market for DIMO tokens developing over time where data-users buy and burn tokens that are minted by car owners with DIMO data collection devices. (Disclosure: I am a small investor in DIMO and am uninvolved in Helium.) 

To understand the benefit of crypto-based business models, imagine how difficult it would be to create Helium’s million-node network of global hot spots where each node is placed in a location to optimize the coverage of the network. Helium miners earn more tokens for siting their nodes where they are most needed as miners earn more tokens the more their node’s signal is demanded by users. Consider the capital investment and time required for Verizon or ATT to create the same network. Consider the regulatory hurdles and international coordination that would have to be overcome compared with the Helium model. While @Tesla can build DIMO’s dataset for its own cars, how can any other automobile company create a similar dataset for their own vehicles that were manufactured before connectivity and data collection became feasible. Furthermore, how can any company create a dataset of all cars on the road today? While all cars made since 1996 have OBD (onboard data) ports, other than DIMO’s token-incentivized model, I can’t envision how a company in a non-crypto world can create real-time access to this data.

Disclosure: I am a small direct investor in crypto projects.

The other two are @ORIGYNTech and Goldfinch Finance. I am also an investor in seven crypto VC funds and a small investor in companies that help with tax compliance and/or reduce fraud in crypto i.e., @TaxBit and @trmlabs.

In total these investments represent less than 2% of my assets. I invest more as a hobbyist trying to learn than as a careful investor as I minimize the time I spend on non-Pershing Square investments so please don’t rely on my due diligence or take any of the above as an investment recommendation.

All of the above said, I think crypto is here to stay and with proper oversight and regulation, it has the potential to greatly benefit society and grow the global economy.

All legitimate participants in the crypto ecosystem should therefore be highly incentivized to expose and eliminate fraudulent actors as they greatly increase the risk of regulatory intervention that will set back the positive potential impact of crypto for generations.

As always I welcome your feedback. 

With Pershing Square ‘buying the dip’ as it were, perhaps this is the point where retail exuberance will morph into institutional investment?

“We’ve got to get past this early stage of amateurs in crypto,” Bobby Lee, founder of crypto storage solution provider Ballet Global Inc., said on Bloomberg Television.

By Michael Every of Rabobank

The World COP

Today’s Daily is truly Global. For those who only want to hear about US inflation, especially all those beating down commodities and the US dollar on the view that things are transitory again, I offer ‘History Lessons: How “Transitory” Is Inflation?’ based on the 1970-2022 inflation experiences of 14 OECD economies. Its key conclusions are:

• “The US Federal Reserve Bank’s expectations for the speed of reverting to 2% inflation levels remains dangerously optimistic.”;

• An inflation jump to 4% is often temporary, but when it crosses 8%, it proceeds to higher levels over 70% of the time;

• If inflation is cresting, levels of up to 6% revert by half in about a year;

• If inflation is accelerating, 6% inflation reverts to 3% in a median of about seven years;

• Reverting to 3% inflation is easy from 4%, hard from 6%, and very hard from 8% or more; and above 8%, reverting to 3% usually takes 6 to 20 years, with a median of over 10 years; and

• Nobody is even mentioning 2%.

Those interested in the global outlook feeding this sticky inflation, please look around you.

COP27 just concluded in Sham el-Chic. Few seem happy with the outcome, and the EU27 nearly walked out. The final communique, in the words of Bloomberg’s energy voice Javier Blas, “is full of diplomatic language gymnastics… the reference to “low-emission” energy to mean gas and nuclear (and probably carbon-captured oil)…. no advance from COP26 on coal… coal remains a phase down, not a phase-out (and, in reality, coal demand is going up, on track for a record high both in 2022-23, surpassing the 2013 peak)… doesn’t move the needle on fossil fuels either, simply copy-and-pasting COP26 language on the need to phase-out “inefficient fossil fuel subsidies” (but, in reality, subsidies are up!!). Early attempts to call for a phase down of fossil fuel *consumption* were killed… While everyone is talking about “loss and damage” (but where’s the money?), to me COP27 key is the lack of progress on what really matters: fossil fuel consumption and emissions. And there, an alliance of big fossil fuel producers and consumers has delayed-or-muted action.”

Is that at least deflationary near term if it means more fossil fuels for several years? Perhaps – just look at oil prices today.

Then again, Daniela Gabor argues the Wall Street consensus won at COP27, noting “central banks’ journey from restrainers of carbon finance to derisking ‘influencers’” as they will use Blended Finance Initiatives for “marginally bankable transition projects to attract private capital.” So, central banks will back loss-making transition projects, guaranteeing the tax-payer wears all losses while all profits flow to Wall Street. Yet such neoliberal profiteering dressed up as altruism is perhaps not a million miles away from my argument of inevitable rate hikes and MMT: we would still get higher rates alongside de facto public subsidies for infrastructure – just hiding the role of the public sector as the loss maker while lauding the ‘bravery’ of the private sector getting guaranteed profits. It depends on what we do with the inevitable losses – will they be monetised?

Is that deflationary? Over the medium term on the supply side, yes: but there is a big J-curve as investment ramps up, while investment and monetisation depress the exchange rate and raise inflation until new supply, and so healthier trade balances, kick in; and this neoliberal version offers more financialisation and high-end consumption to boot.

Not far from Sham el-Chic, and full of fossil fuels and high-end consumption, Qatar kicked off the 2022 World Cup – with no booze for fans staying in $200 a night tents, and ‘polite’ requests for no loud noise, music, or public displays of affection of any kind (but some more than others): the Daily Mail is doing its usual pot-stirring in calling it a ‘Qatarstrophe’. The dazzling opening ceremony involved Morgan Freeman and the reception Trump got in Saudi minus the Palantir, and talked about mutual respect and being “one tribe”. The football was less dazzling, with the hosts losing 2-0 to Ecuador and the Guardian noting: “This was the global game in its final form, a private power-show for the benefit of a very small group of very rich people… They were 2-0 down by half-time… whereas people and presidents and slogans can lie, elite sport rarely does.”

Notably, the World Cup is not a distraction from our problems, but in many ways emblematic of them: how do we make things work globally when we can’t agree on what that even means?

On a level fans can understand, how did we end up with the World Cup being held in Qatar in November? Why do FIFA run ‘The people’s game’? Can we get rid of them? Forgetting about their legitimacy, their corruption is a matter of public record (and prosecution).

More politically, the BBC refused to carry the opening ceremony, instead covering the trail leading to Qatar’s selection as host, alleged human rights abuses there, and recorded deaths among the migrant workers who built the new football stadia nobody will use when the competition is over. (Qatar’s official mascot is ironically a friendly ghost.) Beforehand, FIFA General Secretary Infantino launched a bizarre rant claiming, “Today I feel Qatari. Today I feel Arab. Today I feel African. Today I feel gay. Today I feel disabled. Today I feel a migrant worker,” adding he had been bullied for being a redhead long before he was a slaphead, and that any Western accusations against Qatar are hypocrisy because of the West’s actions over the last 1,000 years.

Branko Milanovic made a typically poignant observation back in 2015 when noting the expansion of the World Cup to new venues represents a shifting of global power from an old European and Latin American aristocracy to a more inclusive kleptocracy. There is more money; more people are involved – if ‘people’ means a larger elite; but the football gets worse for the working class base in the former aristocracies. Nobody wanted to see the 32-team tournament this time round but Infantino and teams not good enough to qualify for 24 slots. But wait until the 2026 World Cup in Canada, the US, and Mexico –two of which have no interest in the sport. There, instead of nobody being able to travel anywhere as in tiny Qatar, nobody will be able to do so because of the huge distances involved – and 48 countries’ fans will be involved. By 2034, perhaps every country qualifies automatically, and we all form a global league that plays non-stop?

This is the issue with globalisation: there are winners and losers, and new power structures emerge – with obvious limits involved to those who are not being paid not to see them.

Some argue alongside Qatar 2022 –and Saudi Arabia’s MBS and its Emir shaking hands when the former was recently considering building a moat around the latter– COP27 showed geopolitical gains for smaller economies demanding payments from the West for damages from climate change; the G20’s ‘middle powers’ took the lead in making the US and China back off slightly; the International Institute for Strategic Studies confab just saw smaller economies argue together they can constrain larger ones; and even France’s Macron told the Indo-Pacific not to allow the larger beasts of the jungle to set the rules. In short, perhaps middle powers present a middle path to us all via a ‘new non-alignment plan’.

However, what if the old football aristocracies with all the money and talent say enough is enough? What happens if UEFA, flirting with its own deeply unpopular stupid European Super League, says it won’t release players to even bigger, sillier World Cups? (Or national leagues to UEFA?) When push comes to shove, true footballing power lies with the old elite not the new. What could other footballing countries do? Refuse to let their talent play in Europe and develop their own leagues over decades? If it were that easy, why don’t they just do it now?

Brexit was an attempt to just that, botched by tautisms, contortions, and deliberate distortions. The British government is now pushing back against suggestions it is now interested in a ‘Swiss’ route back to Europe again. After all, the government is about to embrace EU style fiscal rules and taxation just as Europe realizes how stupid they are. Yet opinion polls make abundantly clear the Conservatives won’t be in power for long, and perhaps ever again(?) Looking forward, one can say that with a structural energy crisis, high taxes and crumbling public services, a rump nationalist demographic, geopolitical delusions of grandeur, and an economy driven by mainly one sector with a cloudy global future, the UK would fit back into other EU economies snugly.

Donald Trump, now back on Twitter and running for President again despite the mainstream press and billionaires trying to ignore him, also claimed to want to do the same for the US. Trump is less relevant now because we are all Trump to varying degrees. Yet imagine what a Trump unencumbered by wanting to please either the Republican establishment or billionaires might want to do in power. Time for some serious ignoring from mainstream thinkers!

Indeed, for now we are all pretending to be “one tribe” cheering a game where 22 men kick a ball for 90 minutes, even if Gary Lineker’s “…and the Germans win” seems less likely on and off the pitch. Everyone is friends with everyone else again, despite PM Trudeau’s on-camera dressing down in Bali; middle powers are pretending they can swing outcomes in their favor; France and Germany are pretending they have strategic autonomy, as is the Netherlands in saying it won’t follow the US lead on tech controls vs. China when its semiconductor firm ASML is reliant on US inputs; Australia’s PM is pretending he can block Taiwan joining the CPPTP then suddenly remembering he can’t.

But let’s see how long it is until things we are sorted into World Cup groups, or things kick off. China just told Russia it is happy to work together with “like-minded countries”, and Thailand that they are “one family”. The US is sending F-22s to Japan and other bombers to Australia, and is extending and deepening its mutual defense treaty with the Philippines; the White House is also to help Thailand and the Philippines develop nuclear power. (If middle powers play against both sides smartly, they prosper; if they play against both sides badly, they get sent off.) The Wall Street Journal carries a detailed report showing EU-US trade and FDI is surging, dwarfing that of both into China in some respects – and European firms are looking at the US as an industrial base.

Is this deflationary? The sharp economic downturn we have coming ahead certainly is. The grim outlook for net exporters facing up to no more net exports certainly is. Yet a surge in new infrastructure and industrial investment, even if private-sector led and loss-stop bank-rolled by central banks, and into new up-to-downstream supply chains into new defence spending, is going to be very inflationary almost immediately afterwards. It is, as they say, a game of two halves.

As is my Bloomberg morning screen today, where headline one says ‘Locked Down: Covid Curbs Return to City Rumoured to Be Reopening’; and the one underneath says ‘China stocks to Jump on Reopening, Property: Hao Hong’. And you thought footballers who were not very bright but made too much money – at least they can kick a ball.

As DB’s Jim Reid (a fervent Liverpool supporter) writes in his weekly preview, the start of the World Cup coincides with the holiday-shortened Thanksgiving week so it will be the usual compressed few days of activity. The FOMC minutes (Wednesday) and the ECB’s account of their last meeting (Thursday) will be the key macro events. Focus will be on their thinking about the terminal rate (both) and QT plans (ECB), with both now more likely to hike 50bps than 75bps in December. We will also see global flash PMIs on Wednesday.

Other data will include an array of business activity indicators, including durable goods orders in the US. Indeed, Wednesday is a US data dump ahead of Thanksgiving and we will also see the final UoM consumer confidence data which includes the inflation expectations revision which is important. Claims also comes a day early.

The Fed speakers last week helped prompt a big flattening of the US curve as they generally hinted towards a terminal rate of above 5%. As such before we see the FOMC minutes, tomorrow sees three Fed speakers who might add to the debate. They are all hawks (Mester, George and Bullard) though and have all spoken since the FOMC so the market should know their biases. Over the weekend, the Atlanta Fed President Raphael Bostic (non-voter) opined that he believes that the Fed can slow the pace of rate hikes and feels that the Fed’s target policy rate need not rise more than 1 percentage point to tackle inflation and help ensure a soft landing. Boston Fed Collins also spoke but kept all options open.

Lastly, with only around 20 S&P 500 firms left to report earnings this season, this week’s results line-up will be tech-heavy and feature a number of large Chinese firms. These include Baidu (Tuesday), Xiaomi (Wednesday) and Meituan (Friday). In the US, we will hear from Zoom today and Analog Devices, Autodesk and HP tomorrow.

Courtesy of DB, here is a day by day summary of key events

Monday November 21

• Data: US October Chicago Fed national activity index, Germany October PPI

• Central banks: ECB’s Holzmann, Simkus, Nagel, Centeno and Vasle speak

• Earnings: Zoom

Tuesday November 22

• Data: US November Richmond Fed manufacturing index, UK October public finances, Italy September current account balance, ECB September current account, Eurozone November consumer confidence, Canada September retail sales

• Central banks: Fed’s Mester, George and Bullard speak, ECB’s Holzmann and Rehn speak

• Earnings: Baidu, Analog Devices, Autodesk, Dollar Tree, HP

• Other: OECD’s Economic Outlook is released

Wednesday November 23

• Data: US November PMIs, October durable and capital goods orders, new home sales, initial jobless claims, Germany, France, UK and Eurozone PMIs

• Central banks: FOMC meeting minutes, ECB’s Guindos speaks

• Earnings: Deere, Prosus, Xiaomi

Thursday November 24

• Data: Japan November PMIs, Tokyo CPI, October nationwide and Tokyo department store sales, PPI services, Germany November Ifo survey, France November business and manufacturing confidence

• Central banks: ECB’s account of October meeting, ECB’s Schnabel and Nagel speak

• Other: US markets are closed

Friday November 25

• Data: Germany December GfK consumer confidence, Q3 private consumption, government spending, capital investment, France November consumer confidence, Italy November consumer and manufacturing confidence, economic sentiment

• Central banks: ECB’s Muller and Guindos speak

• Earnings: Meituan

* * *

Finally, here is a focus on just the US, with Goldman noting that the key economic data release this week is the durable goods report on Wednesday. The minutes from the November FOMC meeting will be released on Wednesday and there are several speaking engagements from Fed officials, including presidents Daly, Mester, George, and Bullard.

Monday, November 21

• 01:00 PM San Francisco Fed President Daly (FOMC non-voter) speaks: San Francisco Fed President Mary Daly will speak at a livestreamed event hosted by the Orange County Business Council. Text and Q&A with audience and media are expected. On November 16, Daly said, “Somewhere between 4.75% and 5.25% [fed funds rate] seems a reasonable place to think about as we go into the next meeting. And so that does put it in the line of sight that we would get to a point where we would raise and hold…Pausing is off the table right now, it’s not even part of the discussion…Right now the discussion is, rightly, in slowing the pace.”

Tuesday, November 22

• 10:00 AM Richmond Fed manufacturing index, November (consensus -8, last -10)

• 11:00 AM Cleveland Fed President Mester (FOMC voter) speaks: Cleveland Fed President Loretta Mester will deliver opening remarks at a discussion on wages and inflation at an event hosted by the Cleveland Fed. Q&A is not expected. On November 10, Mester said, “I currently view the larger risks as coming from tightening too little…This morning’s October CPI report also suggests some easing in overall and core inflation…Monetary policy will need to become more restrictive and remain restrictive for a while in order to put inflation on a sustainable downward path to 2%…It is likely that there will continue to be higher-than-normal levels of financial-market volatility, which can be difficult to navigate. With growth likely to be well below trend, it could easily turn negative for a time.”

• 02:15 PM Kansas City Fed President George (FOMC voter) speaks: Kansas City Fed President Esther George will participate in a virtual policy panel hosted by the Central Bank of Chile. On November 16, George said, “I’m looking at a labor market that is so tight, I don’t know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have contraction in the economy to get there…Seeing that we’re not going to get help in the supply side, we have a lot of work to do…When I think about inflation today, we’ve kind of turned the tide of supply-chain, production-side shortages. Now, we’re really looking at labor as the driver here…For me, the more important question for this committee, looking out over next year, is being careful not to stop too soon. This was the lesson of the 1970s and ’80s, is thinking, ‘Oh, we’ve got it now, we can stop,’ and then you find that inflation really reemerges in some way.”

• 02:45 PM St. Louis Fed President Bullard (FOMC voter) speaks: St. Louis Fed President James Bullard will discuss the implications of heterogeneity in macroeconomics for monetary policy at an event hosted by the Central Bank of Chile. Media Q&A is not expected. Bullard’s presentation on November 17 said, “Even under these generous assumptions, the policy rate is not yet in a zone that may be considered sufficiently restrictive. To attain a sufficiently restrictive level, the policy rate will need to be increased further…Caution is warranted…as both markets and the FOMC’s SEP forecasts have been predicting declining inflation just around the corner for the past 18 months.”

Wednesday, November 23

• 08:30 AM Durable goods orders, October preliminary (GS +1.5%, consensus +0.4%, last +0.4%); Durable goods orders ex-transportation, October preliminary (GS flat, consensus flat, last -0.5%); Core capital goods orders, October preliminary (GS flat, consensus +0.1%, last -0.4%); Core capital goods shipments, October preliminary (GS +0.4%, consensus +0.2%, last -0.5%): We estimate that durable goods orders rose 1.5% in the preliminary October report, reflecting strength in commercial aircraft orders. We forecast moderate growth in shipments of core capital goods (+0.4%) but unchanged core capital goods orders, reflecting weaker foreign demand and some softening in domestic industrial data.

• 08:30 AM Initial jobless claims, week ended November 19 (GS 215k, consensus 225k, last 222k); Continuing jobless claims, week ended November 12 (consensus 1,520k, last 1,507k): We estimate initial jobless claims decreased to 215k in the week ended November 19.

• 09:45 AM S&P Global US manufacturing PMI, November preliminary (consensus 50.0, last 50.4): S&P Global US services PMI, November preliminary (consensus 48.0, last 47.8)

• 10:00 AM University of Michigan consumer sentiment, November final (GS 55.5, consensus 55.0, last 54.7); University of Michigan 5–10-year inflation expectations, November final (GS 3.0%, consensus 3.0%, last 3.0%): We expect the University of Michigan consumer sentiment index increased by 0.8pt to 55.5 in the final November reading.

• 10:00 AM New home sales, October (GS -7.0%, consensus -5.5%, last -10.9%); We estimate that new home sales declined 7.0% in October, following a 10.9% decrease in September.

• 02:00 PM FOMC meeting minutes, November 1-2 meeting: The FOMC increased the federal funds rate target range by 75bp to 3.75%-4.0% at its November meeting. Chair Powell hinted that the FOMC will likely raise the funds rate to a higher peak than it previously projected and said that slowing the pace is not contingent on seeing softer inflation data, but rather is likely to be appropriate because the level of the funds rate is now much higher, the cumulative tightening to date is substantial, and the magnitude and timing of its impact on the economy are uncertain. Our baseline forecast calls for the Fed to deliver a 50bp rate hike in December, and a 25bp hike in February, March, and May for a peak rate of 5-5.25%.

Thursday, November 24

• No major data releases scheduled.

Friday, November 25

• No major data releases scheduled.

Source: DB, Goldman

The first question that comes to mind (as oil already tests multi-month lows) is – why would they do this?

The Wall Street Journal reports that Saudi Arabia and other OPEC oil producers are discussing an output increase, the group’s delegates said…

An increase of up to 500,000 barrels a day is now under discussion for OPEC+’s Dec. 4 meeting, delegates said.

The move would come a day before the European Union has said it would impose an embargo on Russian oil and the Group of Seven wealthy nations’ plans to launch a price cap on Russian crude sales, potentially taking petroleum supplies off the market.

Any output increase would mark a partial reversal of a controversial decision last month to cut production by 2 million barrels a day at the most recent meeting.

The reaction was swift and obvious as WTI tumbled $2 back to a %77 handle…

We are sure it just a coincidence that this report hits days after the Biden administration grants immunity to MbS over the brutal assassination of reporter Jamal Khashoggi.

Even WSJ admits it is an unusual time for OPEC+ to consider a production increase, with global oil prices falling more than 10% since the first week of November.

…quid pro quo, indeed.

A powerful earthquake struck Indonesia’s main island on Monday, killing dozens of people and wounding hundreds, reported Reuters. 

Videos on social media show building structures toppled and debris strung out across streets and damaged infrastructure in Indonesia’s West Java province. 

The U.S. Geological Survey said the magnitude 5.6 quake was centered in the Cianjur region in West Java province at a depth of 10 kilometers (6.2 miles).

Weather Updates PK / Karachi Doppler pic.twitter.com/GouZ6Vuyn1

— Weather Updates PK (@WeatherWupk) November 21, 2022

#GempaCianjur #GempaCianjur 5.6 magnitude Earthquake left 46 dead and over 700 injured. Heartbreaking and Devestating visuals from *אזהרת צפייה*..🔞#Indonesia #Earthquake #إندونيسيا #جاوا #Java #Cianjur #WestJava #gempabumi #GempaCianjur #Gempa #Pray pic.twitter.com/M8xO4QPWVv

— Voice Bengali 🇧🇩❤️🇵🇸 (@VoiceBengali71) November 21, 2022

इंडोनेशिया के जावा द्वीप में 5.6 तीव्रता का भूकंप, कम से कम 44 लोगों के मरने और 300 से अधिक के घायल होने का समाचार#Indonesia #Earthquake #WestJava #ViralVideo pic.twitter.com/GwTHAYr37K

— सुधांशु कुमार 🇮🇳🚩 (@sudhanshu_nasa) November 21, 2022

תנועת הכבישים נחסמה בעקבות קריסת עצים..
מרעידת אדמה באינדונזיה.#Indonesia #Earthquake #إندونيسيا #جاوا #Java #Cianjur #WestJava #gempabumi #GempaCianjur #Gempa pic.twitter.com/eH8v1m4Vyx

— 🌏News (@kisis007) November 21, 2022

Earthquake of 5.6 magnitude rocks Indonesia’s Java island; 20 dead, over 300 injured#Earthquake #Cianjur #JawaBarat #WestJava #Java #Indonesia #Indonesia #earthquake pic.twitter.com/Bx5wvfooNM

— Sumit Kumar (@Sumit_Sankrit) November 21, 2022

According to US Geological Survey data, the quake struck at a shallow depth of six miles, measuring at 5.6 magnitude, with an epicenter in Cianjur.

NYT quoted Cianjur police, who said 61 people had been killed, warning the number could rise as many people were trapped under buildings reduced to rubble or in landslides. 

The country’s National Disaster Mitigation Agency said preliminary reports show the earthquake destroyed 343 buildings, including homes, businesses, government offices, schools, temples, and churches. 

“Local news outlets reported some interregional roads have been cut off due to damages and landslides caused by the earthquake, hindering search and rescue efforts in some areas,” Bloomberg said. 

Indonesia’s disaster mitigation agency warned about aftershocks. Tremors were felt as far as the capital Jakarta, about 63 miles away from the epicenter, where people working in tall buildings were evacuated. 

Indonesia’s 18,000 islands are located along the “Ring of Fire,” a very active seismic zone in the Pacific Ocean. 

In 2004, a powerful earthquake off Sumatra, an island in northern Indonesia, triggered a tsunami that killed 230,000 people. In 2009, a 7.1-magnitude quake hit Cianjur, killing 57 people. 

Authored by Bill Pan via The Epoch Times,

House Minority Leader Kevin McCarthy (R-Calif.) said on Saturday that when he becomes speaker of the House next year he will remove Rep. Ilhan Omar (D-Minn.) from the House Foreign Affairs Committee because of her remarks that many deemed anti-Semitic.

“We watch anti-Semitism grow, not just on our campuses, but we watched it grow in the halls of Congress,” McCarthy said at the Republican Jewish Coalition’s annual leadership meeting in Las Vegas on Saturday.

“I promised you last year that as speaker, she [Omar] will no longer be on Foreign Affairs, and I’m keeping that promise,” he told a cheering audience.

Omar, a Muslim immigrant of Somali descent, has been condemned for her remarks on the U.S.–Israel relationship several times in recent years, including by the leadership of her own party.

In 2019, the first-term congresswoman wrote on Twitter that the U.S. support of Israel is “all about the Benjamins.” This prompted House Speaker Nancy Pelosi (D-Calif.) and other Democrats to issue a joint statement, saying that the comment invoked a long-standing anti-Semitic trope and was “deeply offensive.”

President Donald Trump also weighed in at that time to call for Omar’s expulsion.

“Anti-Semitism has no place in the United States Congress,” Trump told reporters during a Cabinet meeting at the White House.

“And I think she should either resign from Congress or she should certainly resign from the House Foreign Affairs Committee.”

McCarthy’s Plan To Expel Democrats From Panels

This isn’t the first time McCarthy has said he wants to expel Omar from her committee assignment. In an interview with Breitbart in January, he said he was planning to oust Reps. Omar, Adam Schiff (D-Calif.), and Eric Swalwell (D-Calif.) from their respective committees if Republicans secure a majority in the House after the midterms.

“Ilhan Omar should not be serving on Foreign Affairs,” McCarthy said at that time. “You had Ilhan Omar, who earlier referred to my support for Israel in an earlier Congress was ‘all about the Benjamins’ and never apologized.”

McCarthy argued that the two Californian Democrats shouldn’t stay on the House Intelligence Committee, either. He pointed to Swalwell’s affair with an alleged Chinese Communist Party spy, and the role Schiff played in promoting the false assertion that the Trump campaign had colluded with Russia during the 2016 election.

“You look at Adam Schiff—he should not be serving on Intel when he has openly, knowingly now used a fake dossier, lied to the American public in the process and doesn’t have any ill will [and] says he wants to continue to do it,” he said.

Authored by Daniel Lacalle,

While many market participants are concerned about rate increases, they appear to be ignoring the largest risk: the potential for a massive liquidity drain in 2023.

Even though December is almost here, central banks’ balance sheets have hardly, if at all, decreased. Rather than real sales, a weaker currency and the price of the accumulated bonds account for the majority of the fall in the balance sheets of the major central banks.

In the context of governments deficits that are hardly declining and, in some cases, increasing, investors must take into account the danger of a significant reduction in the balance sheets of central banks. Both the quantitative tightening of central banks and the refinancing of government deficits, albeit at higher costs, will drain liquidity from the markets. This inevitably causes the global liquidity spectrum to contract far more than the headline amount.

Liquidity drains have a dividing effect in the same way that liquidity injections have an obvious multiplier effect in the transmission mechanism of monetary policy. A central bank’s balance sheet increased by one unit of currency in assets multiplies at least five times in the transmission mechanism. Do the calculations now on the way out, but keep in mind that government expenditure will be financed.

Our tendency is to take liquidity for granted. Due to the FOMO (fear of missing out) mentality, investors have increased their risk and added illiquid assets over the years of monetary expansion. In periods of monetary excess, multiple expansion and rising valuations are the norm.

Since we could always count on rising liquidity, when asset prices corrected over the past two decades, the best course of action was to “buy the dip” and double down. This was because central banks would keep growing their balance sheets and adding liquidity, saving us from almost any bad investment decision, and inflation would stay low.

Twenty years of a dangerous bet: monetary expansion without inflation. How do we handle a situation where central banks must cut at least $5 trillion off their balance sheets? Do not believe I am exaggerating; the $20 trillion bubble generated since 2008 cannot be solved with $5 trillion. A tightening of $5 trillion in US dollars is mild, even dovish. To return to pre-2020 levels, the Fed would need to decrease its balance sheet by that much on its own.

Keep in mind that the central banks of developed economies need to tighten monetary policy by $5 trillion, which is added to over $2.50 trillion in public deficit financing in the same countries.

The effects of contraction are difficult to forecast because traders for at least two generations have only experienced expansionary policies, but they are undoubtedly unpleasant. Liquidity is dwindling already in the riskiest sectors of the economy, from high yield to crypto assets. By 2023, when the tightening truly begins, it will probably have reached the supposedly safer assets.

In a recent interview, Bundesbank President Joachim Nagel said that the ECB will begin to reduce its balance sheet in 2023 and added that “a recession may be insufficient to get inflation back on target.” This suggests that the “anti-fragmentation tool” currently in use to mask risk in periphery bonds may begin to lose its placebo impact on sovereign assets. Additionally, the cost of equity and weighted average cost of capital increases as soon as sovereign bond spreads begin to rise.

Capital can only be made or destroyed; it never remains constant. And if central banks are to effectively fight inflation, capital destruction is unavoidable.

The prevalent bullish claim is that because central banks have learned from 2008, they will not dare to allow the market to crash. Although a correct analysis, it is not enough to justify market multiples. The fact that governments continue to finance themselves, which they will, is ultimately what counts to central banks. The crowding out effect of government spending over private sector credit access has never been a major concern for a central bank. Keep in mind that I am only estimating a $5 trillion unwind, which is quite generous given the excess produced between 2008 and 2021 and the magnitude of the balance sheet increase in 2020–21.

Central banks are also aware of the worst-case scenario, which is elevated inflation and a recession that could have a prolonged impact on citizens, with rising discontent and generalized impoverishment. They know they cannot keep inflation high just to satisfy market expectations of rising valuations. The same central banks that assert that the wealth effect multiplies positively are aware of the disastrous consequences of ignoring inflation. Back to the 1970s.

The “energy excuse” in inflation estimates will likely evaporate, and that will be the key test for central banks. The “supply chain excuse” has disappeared, the “temporary excuse” has gotten stale, and the “energy excuse” has lost some of its credibility since June. The unattractive reality of rising core and super-core inflation has been exposed by the recent commodity slump.

Central banks cannot accept sustained inflation because it means they would have failed in their mandate. Few can accurately foresee how quantitative tightening will affect asset prices and credit availability, even though it is necessary. What we know is that quantitative tightening, with a minimal decrease in central bank balance sheets, is expected to compress multiples and valuations of risky assets more than it has thus far. Given that capital destruction appears to be only getting started, the dividing effect is probably more than anticipated. And the real economy is always impacted by capital destruction.