Authored by Connor O’Keeffe via The Mises Institute,

It’s been a rough year for advocates of Modern Monetary Theory (MMT). After nearly two years with all the budget deficits and money printing MMTers could have wanted, the doctrine’s popularity seems to have faded now that we’re well passed the honeymoon phase. 2022 has clearly demonstrated that creating a lot of new money and running massive government deficits does, in fact, come at a cost.

We should let this theory die before it causes any more destruction.

MMT is a school of thought born and raised on the internet during a thirty-year period of low price inflation with constant debate over government budgets. Advocates argue that because the U.S. government is a currency issuer, we can drop all the talk about finding money for government programs. All that is needed is the political will to fund things with newly printed money. Suddenly in early 2020, that political will appeared overnight at a scale no one could have imagined even weeks before. 

The Federal Government embraced deficit spending to prop up the economy amidst imposed lockdowns and trade restrictions. Now, 31 months later, the National Debt has increased by almost $8 trillion. At the same time, the money supply, as measured by M2, grew by $6 trillion, an increase of nearly 40%. Most critics of the free market would probably classify this historic level of money printing and debt as an unfortunate but necessary response to unprecedented circumstances. But not advocates of MMT. This is what they’ve been wanting all along. 

According to MMT, having concerns about the national debt is antiquated and childish. In fact, they argue that the total national debt is nothing more than a record of how many dollars there are in the pockets of private citizens. A higher national debt is not a consequence of MMT; it’s the entire point. The pandemic was, in many ways, MMT’s moment. 

Predictably, the historic level of monetary inflation paired with the government-imposed production slowdown has resulted in levels of consumer price inflation not seen in 40 years. The rate appears to have peaked in June 2022, with prices on average 9.1% higher than the year prior. Producer price inflation also peaked in June at 11.3%. Although most MMT advocates had been dismissive of inflation, that’s not something they would have said was impossible. The problem for them is what they think needs to be done about it. 

Just as MMT sees the national debt as a measurement of all the dollars the government created and put into people’s pockets, taxes are the tools for the government to take money back out of the economy if inflation gets too high. Setting aside how economically flawed this characterization is, a government following the MMT playbook will run into a political problem at this point in the cycle. 

It is relatively easy to convince politicians and everyday people that the government programs they dream about can be funded by creating new money. And the true cost of this method—currency devaluation—is not felt or seen immediately. That adds to the illusion that something can be had for nothing. But taxes are the opposite. Everyone can see the line on their receipt, the amount withheld on payday, and the check they have to send to the IRS each April. The economic pain is felt without any clear, immediate benefit. 

During periods of high inflation, there is a general sense amongst everyday people that the same amount of money isn’t cutting it. Sure, the initial cause may be a higher money supply, but any given person will feel like possessing more money is the key to getting by. After all, prices keep going up. They’re not going to react as well to the argument that Uncle Sam should confiscate even more of their dollars. If MMTers thought it was difficult to cultivate the political will to inflate, they clearly haven’t been thinking further down the road. 

Interestingly, we’re not hearing much about raising taxes from MMT advocates these days. Or at least, their claims haven’t been amplified by Democrats and progressives as much as earlier arguments to print more money were. Just as they have done with Keynesianism for decades, politicians will grab any economic theory that justifies what they want and drop it when it prescribes something they don’t. And thank goodness for that. The last thing we need is more taxes. 

This year has demonstrated that printing vast quantities of money is costly. And that the political will to even stick with MMT breaks down when the going gets tough. That should be enough to completely discredit this ridiculous theory. 

Despite all the prognostications of a ‘red wave, the (early) results of the Midterms elections appear to be barely a red ripple with both chambers seeing a much closer than expected split.

House races are still being counted, but Republicans are poised to only have a majority of a handful of seats.

This means that a small group of House lawmakers can drive or reject the agenda for the chamber. This is essentially a rerun of Democrat Joe Manchin’s role in the Senate over the past two years, where one man could make or break Democrats’ ambitions.  The widely-followed NY Times “needle” forecast puts the odds of a Republican House majority at 84%; prediction markets are roughly the same.

The Senate outcome likely won’t be known for a while.

The contest between incumbent Democrat Raphael Warnock and Republican Herschel Walker in Georgia remained too close to call early Wednesday, making a Dec. 6 runoff increasingly likely. Democrats lead by 6pp in Arizona, with 1/3 of the estimated votes still outstanding. Prediction markets imply an 88% probability of a Democratic win there. Republicans lead in Nevada, by 2.7pp, with 1/5 of the estimated vote still outstanding. Prediction markets imply 67% probability of a Democratic win there, likely on an assumption that many of the remaining ballots reflect mail voting from Democratic-leaning areas. Democrats lead in Georgia with most votes counted, but the election looks likely to go to a run-off election on Dec. 6 as none of the candidates won more than 50% of the vote. If Democrats win Arizona and Nevada, they will have control of the Senate regardless of the Georgia result. If they lose either Arizona or Nevada, the Georgia result on Dec. 6 will determine the Senate majority.

While the GOP’s Kevin McCarthy is still the most likely candidate to become House Speaker, a tight majority likely means that conservatives will be able to extract additional concessions from him as they set the House rules for the coming Congress. It’s possible the speaker’s race could be thrown into chaos in the coming days. Republican leadership elections are next week. If trouble is brewing, those may get delayed.

All that being said, while Democrats outperformed expectations and Democratic Senate control would be a surprise, the end result nevertheless appears to be divided government and the policy implications are broadly similar to what would have been expected with Republican majorities in both chambers.

Goldman’s Alec Phillips lays out the key points:

• Senate control matters much less if Republicans have won the House majority. There are two general differences between a divided Congress and a Republican Congress. First, the Senate confirms presidential nominations with a simple majority, so continued Democratic control would limit Republican influence on President Biden’s nominations over the next two years. Second, passing legislation in a divided Congress would be harder than in a Republican Congress, though in either scenario bipartisan support would be needed (as President Biden could veto in either scenario, and Republicans would lack the 2/3 vote to override) so the amount of legislative activity could be similar.

• Reaching agreement on fiscal policy is likely to become more difficult. Congress will need to raise the debt limit by Q3 2023. Under a Republican House and Democratic Senate in 2011 and 2013, debt limit uncertainty disrupted financial markets and led to substantial spending cuts. A similar scenario could play out next year, though a Democratic Senate would make it less likely that a debt limit deal would involve spending cuts of the sort enacted in 2011. A legislative response to a potential recession would also be more difficult, we believe, as the House and Senate would likely pursue different approaches and the odds of gridlock would be somewhat higher than if Republicans controlled both chambers.

• Sector-focused policy changes would be even more limited under a divided Congress than under Republican control. Changes to energy or health policy—such as rolling back changes made in this year’s Inflation Reduction Act (IRA)—did not appear very likely under a Republican Congress and appear even less likely if control of Congress is split. For regulatory issues the difference between a Republican-majority and divided Congress is limited, as 60 votes are typically necessary in the Senate for regulatory (or any other non-fiscal) legislation and would have been elusive on most issues regardless of which party holds the Senate majority.

“Climate protesters are triggering widespread anger and signs of violence,” writes author and prominent critic of climate alarmism Michael Shellenberger. “And yet President Joe Biden, UN Secretary-General António Guterres, and other global elites are encouraging them, which is exceedingly dangerous and irresponsible.”

As a case in point, Shellenberger has highlighted a particularly disturbing recent video showing a young woman cry and scream into a camera while claiming she was essentially forced to climb onto an overhead gantry above a major freeway outside London over ‘climate change’ due to oil and gas extraction. It’s likely police or passersby may have initially thought she was suicidal. Police were soon forced to shut down the busy roadway over the safety issue, while emergency responders had to put on safety harnesses to clear the gantries. 

A 24 year-old woman shut down a major highway in UK just now. She says it’s for the climate but she’s obviously suffering from severe mental distress, narcissism, and grandiosity. “Why does it take young people like me?” she asks.

Climate fanatics are weaponizing mental illness pic.twitter.com/e7JCwlrrz6

— Michael Shellenberger (@ShellenbergerMD) November 7, 2022

Human resilience to disasters is rising and there is no scientific scenario for greater deaths from disasters due to climate change in the future.

The activists ignore these facts.

Shellenberger further describes the clear narcissism behind such stunts in his tweet thread…

The young woman is describing herself as a victim. The template for this was set by Greta Thunberg. It’s pathological. They are privileged elites financed by their some of the richest people in the world. They are throwing temper tantrums.

Statements like “Why does it take young people like me?” and Thunberg’s “I shouldn’t be up here. I should be back in school …How dare you? You have stolen my dreams and my childhood with your empty words” are grandiose, narcissistic, and manipulative. 

“This is an exceedingly dangerous phenomenon because narcissism is about a lack of empathy. It’s about entitlement. And it’s exploitative. ‘I’m a victim, so I’m a saint. I’m morally superior to you. I have a right because I have a grievance. You have an obligation towards me.’” 

“They don’t have any meaningful agendas. They just want to be heard. They want to garner attention. They want to become celebrities and famous. They want to control, They want to have power. They’re power-oriented power. They are entitled and aggressive.”

European authorities are actively encouraging these dangerously pathological behaviors by refusing to properly enforce laws and deter such crimes. The reason is because they support the cause. As such, they are, to some extent, working together.

The new PM of UK @RishiSunak encouraged these protests by re-instating a ban on fracking. The activists feel they are winning. They are emboldened. That’s why they are engaging in ever-more extreme behaviors. They must be shut down.

Watch as the climate activists express narcissism in the form of victimhood, grandiosity, and lack of empathy for the people impacted by their behaviors.

Reporter: “Isn’t the risk that you lose support from Londoners?”

Activist: “We don’t actually need support.” pic.twitter.com/Ux9sFwszdN

— Michael Shellenberger (@ShellenbergerMD) November 7, 2022

Let’s be clear about what’s occurring. Rich fanatics & the news media are weaponizing mental illness to advance a radical, anti-capitalist agenda. That’s textbook psychopathic behavior: lack of empathy, lack of control (panic), and anti-social behavior.

It was clear from the beginning of Thunberg’s stardom that she suffered from an anxiety disorder, and yet she, her handlers, and her parents all suggested that it stemmed from her profound concern over climate change. That turned out to be a lie. 

Thunberg’s mother, a textbook narcissist, admitted as much in 2020 when she decided she needed to publish her own book. The media lapped it all up without ever asking: is this healthy psychologically for the Thunbergs and the rest of the society?

Of course, it wasn’t. But the media egged her on and insisted that anybody who dared question whether it was ethical or healthy for the world’s most influential teenager to urge panic was a “climate denier” who was somehow threatened by a child. The gaslighting was grotesque. 

And they’re not done. Thunberg Inc. and the media are now delivering her up as a savior from the mass psychopathology they created. You couldn’t make it up. This isn’t just cynical it’s also inhumane. 

Any doubts that this is about psychopathology stemming from fanaticism & nihilism, not climate change, can be put to rest when you consider that the main demand of the narcissists is a ban on natural gas, which is the main reason UK emissions have been declining for decades.

The fanatical elites who are weaponizing mental illness are also waging class war. They are against cheap energy & industrial capitalism because they lift up ordinary people and close the gap with the elites, who want distance & inequality.

Naturally the elites need to claim the opposite, that they want an end to inequality and poverty, because everybody knows the quickest way to increase inequality and poverty is by making energy and food more expensive. Watch what they do, and demand. 

“Part and parcel of our narcissistic culture is black-and-white dichotomous thinking” known as “splitting.”

Wrote Thunberg, “Everyone says that there is no black-and-white issue, but I think this is. Either we go on as a civilization or we don’t.”

Adds @GingerCoy , “If a person laments that they are a victim, in this narcissistic age, it should be a red flag that they are likely a perpetrator.”

Such is the case with climate activists. 

They are some of the richest and most privileged people in the world, thanks to cheap and abundant fossil fuels. Some of them, like the heirs and heiresses to the Getty Oil and Rockefeller Oil fortunes, are more directly beneficiaries than others. 

And yet they are actively seeking to deprive others, both their fellow citizens and Africans, of those very fuels, as well as non-fossil sources of productive energy, like hydroelectric dams and nuclear power. 

The heirs to the Getty and Rockefeller say they are financing anti-fracking advocacy because fracking is bad for the climate, but it was always obvious that fracking, by creating cheap and abundant natural gas to replace coal, would reduce emissions and be great for the climate. 

The real and often unconscious reason that the heirs to the Getty and Rockefeller fortunes finance anti-fracking is the same reason that Putin consciously did: fracking threatens their economic wealth, social status, and political power. 

More oil and gas from fracking reduced the price, and thus the value, of existing oil and gas assets. It meant the old rich had to make way for the new rich in social circles. Think of how the country club snobs looked down on the Rodney Dangerfield character in “Caddyshack.” 

Anti-capitalism thus became the ideology of the old rich, or what sociologist Thorstein Veblen called “the leisure class.”

Veblen noted the importance of “conspicuous consumption,” the tendency of leisure class to flaunt their wealth through fancy dresses and jewelry. 

Today, elites flaunt their wealth through “luxury beliefs, ideas and opinions that confer status in the upper class while inflicting costs on the lower class,” eg we must make energy more expensive & return to less efficient, feudal modes of production, to protect Nature. 

The capitalist class, the people who built their wealth from scratch, tend to feel proud, not guilty, for what they built. They defend free markets as part of their legacy. Their children and grandchildren who inherit their wealth struggle with their purpose. 

They tend toward neuroticism because they know, at some level, that they did nothing to deserve their good fortune. They compensate for their feelings of inferiority by devising various ways to put down the new rich and their workers, such as by financing activists to block roads 

Why, in the end, are educated elites anti-capitalist? Because capitalism reduces their power.

If climate change didn’t exist, elites like Thunberg would find some other reason to be anti-capitalist, to demand a “Great Reset,” and to demand higher costs for energy and food.

The victims are working people trying to pay their energy bills, get to work, and survive the worst energy crisis in modern history.

They are also the young people whose anxiety disorders and narcissism are worsened by the fanatics.

We need to have compassion toward the people who are plainly in mental distress. They are in the grip of a fanatical ideology.

But we also need to impose strict consequences for their dangerous and pathological behaviors in order to deter others from doing the same.

*  *  *

PS: It is good to see the police cracking down. More of that, please.

“Operations like these come at a cost.

“Since Oct used more than 10,000 officer shifts to police Just Stop Oil protests.

“These are officers who would otherwise be dealing with issues that matter to local communities, such as knife crime and responding to burglaries.”

— Metropolitan Police Events (@MetPoliceEvents) November 6, 2022

The police make a good point: the more time they must spend dealing with the temper tantrums of climate narcissists, the less time they have to deal with other crimes.

Sam Bankan-Fried, aka Scam Bankrun-Fraud, may have seen some 95% of his paper “net worth” vanish overnight as his check-kiting ponzi scheme finally blew up – with CZ set to hammer the final blow as he walks away from the non-binding deal – but the CEO of FTX may have less to worry if he will make the Forbes 30 under 30 and be more concerned about doing 30 at some Federal Penitentiary.

According to Bloomberg, US regulators are investigating whether FTX.com “properly handled customer funds”, as well as its relationship with other parts of Sam Bankman-Fried’s crypto empire, such as the in-house hedge fund Alameda Research, which contrary to its name, did zero research. Worse, as head of R&D at CoinMetrics noted overnight, the circular fund flows between FTX and Alameda were clear to anyone who bothered to look.

1/ I found evidence that FTX might have provided a massive bailout for Alameda in Q2 which now came back to haunt them.

40 days ago, 173 million FTT tokens worth over 4B USD became active on-chain.

A rabbit hole appeared 🧵👇 pic.twitter.com/DtCyPspME0

— Lucas Nuzzi (@LucasNuzzi) November 8, 2022

The investigations by the SEC and the CFTC probes relate to the liquidity crisis at the trading platform that led to the sudden and unexpected collapse of the firm and the planned buyout of its non-US operations by Binance.  Regulators are also reportedly looking into the platform’s relationship with FTX.com’s American counterpart FTX US and Bankman-Fried’s trading house Alameda Research.

The good news here is that regulators won’t have to dig too deep: as we noted last night, Alameda’s own CEO (who is about 19-years-old) was kind enough to make a full admission of the fraud that was taking place at the firm just hours before the spectacular implosion.

curiously this tweet, let’s name it “Exhibit A” for obvious reasons, has not been deleted yet https://t.co/gfmnaGRBkv

— zerohedge (@zerohedge) November 9, 2022

The confusing news it that according to Bloomberg, the SEC’s inquiry began months ago as a probe into FTX US and its crypto-lending activities; how the SEC was unable to spot the glaring fraud here is troubling. Alternatively, it is possible that as the SEC dug deep and found out all sorts of rot, that it caused Alameda to panic and begin the slide into oblivion.

As for SBF and other FTX employees who just two days ago were busy showing off their brand new Miami office…

Do the windows open? https://t.co/0A7vDhOQxc

— zerohedge (@zerohedge) November 9, 2022

… they may find their new digs a tad less enjoyable as they transition from FTX to ADX.

Signaling a rare breakthrough at a moment that direct communications are almost non-existent, the US has confirmed this week that talks with Russia will move forward on maintenance and renewal of the single existing nuclear treaty between the two sides. In early August, Russia formally notified the Biden administration that it suspected inspections of its nuclear arsenal under the terms of the New START nuclear arms reduction treaty.

State Department spokesperson Ned Price announced that New START will be focus of bilateral talks in the near future. “We have agreed that the BCC [Bilateral Consultative Commission] will meet in the near future under the terms of the New START Treaty. The work of the BCC is confidential, but we do hope for a constructive session,” he said in a Tuesday press briefing.

The last meeting of the BCC was over a year ago, on October 2021, with central aspects of the treaty since stalled due to attempts of the US to resume nuclear arsenal inspections on Russian soil, which Moscow rebuffed.

Russia had complained that it was actually the US side which “deprive the Russian Federation of the right to conduct inspections on American territory.”

But the State Department cited the invasion of Ukraine and resulting sanctions, including travel restrictions, placed on Russian officials: “US sanctions and restrictive measures imposed as a result of Russia’s war against Ukraine are fully compatible” with the New START treaty, a prior statement had said.

Price claimed in his fresh Tuesday statements that “we believe deeply, around the world, in the transformative power and the importance of diplomacy and dialogue.” He added: “When it comes to Russia, of course, we are clear eyed, we’re realistic about what dialogue between the United States and Russia can – both what it can entail and what it can accomplish.”

“We – we have focused on risk reduction in these conversations, but we’ve been very intentional about seeing to it that the ability of our two countries to pass messages back and forth and to engage in dialogue has not, does not atrophy.”

Back in August, the Kremlin responded with anger after President Biden suggested that Russia is not a “willing partner” on nuclear arms control.

“But negotiation requires a willing partner operating in good faith. And Russia’s brutal and unprovoked aggression in Ukraine has shattered peace in Europe and constitutes an attack on fundamental tenets of international order. In this context, Russia should demonstrate that it is ready to resume work on nuclear arms control with the United States,” Biden had said on Aug.1st.

The resumption of talks is a hopeful sign after months of ratcheting nuclear rhetoric over Ukraine. Both sides have expressed willingness to avoid escalation on concerns that the nuclear armed superpowers could enter direct conflict. However, Moscow has condemned what it says is the US fueling a full-fledged proxy war utilizing Ukrainian forces.

By Michael Every of Rabobank

Lucy in the Markets with Diamonds

The market ‘action’ today is watching US midterm votes be counted, which even emerging markets do more smoothly; and US celebrities roll out on Twitter to back or decry conspiracies about why it is evidently incapable of doing the same.

Apart from that, markets will be echoing a Peanuts cartoon I recall vividly from my childhood (although I sadly failed to find it with a Google search this morning): changing the subject when proved wrong by facts. In said comic strip, Charlie Brown finally shows that some of opinionated Lucy’s statements are unequivocally wrong. Her reply, after a pause, is: “I know a girl who belongs to two book clubs.” A total non-sequitur as denial and shut down.

It’s deeply tragic that what made a 10-year-old laugh is, some four decades later, still the modus operandi for vast swathes of financial markets; but experience across the buy and sell side shows me it is absolutely the case.

Here are some not-too exaggerated Charlie Brown simple questions to markets and many Lucies’ diamond responses:

Charlie Brown: “Did you read that ‘China Downgrades Priority of Economy for Future Legislation’? Future legislation is no longer to revolve around economic development and adhere to “reform and opening up”, but instead now “to the leadership of the CCP,… to the guidance of Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, the Theory of Scientific Development, and Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, to develop a system of socialist rule of law with Chinese characteristics.”

Lucy in equities: “Did you try cronuts? They’re so good they make me feel bullish.”

Charlie Brown: “Did you hear the rumour China might introduce wealth and inheritance taxes –as the UK may now raise the top rate of income tax, not cut it– and the tax authorities may focus on high net worth individuals (net worth RMB 10m and up) for special audits, and they might even have to pay a de facto ‘exit tax’ if they look like they are decamping abroad?”

Lucy in wealth management: “Wild Wonder is the colour of the year 2023. That makes me bullish.”   

Charlie Brown: “Did you see that China is sliding back into deflation even as the rest of the world see high inflation? PPI was -1.3% y-o-y and CPI down to just 2.1%. Doesn’t that imply a much lower CNY to try to export its way out? Isn’t that negative for US dollar valuations of Chinese earnings? Won’t other EM exporter FX get dragged down too? Won’t that make paying for dollar-priced commodity imports harder? Doesn’t that also mean the West faces an imminent choice between deepening reliance on Chinese supply chains again, or putting up tariffs in response slash accelerating friend-shoring? Will they prioritise near-term lower inflation over geoeconomic resilience/security despite rising geopolitical tensions?”

Lucy in markets: “How do you feel about the World Cup being in Qatar? I see it as bullish EM.”

Charlie Brown: “On which note, did you see Xi Jinping state China’s security has been increasingly unstable and uncertain, and that it will comprehensively strengthen its military training and preparation for any war?”

Lucy in a Western corporation in China: “Car sales in October were up. I remain bullish.”

Charlie Brown: “Japan is now having to sell Treasuries to fund the FX intervention keeping its yields low. Doesn’t that mean more upward pressure on yields in other parts of other curves? Isn’t there a risk inflation goes down from here but stays around 3-4% for years due to structural supply-side issues?”

Lucy in fixed income: “Star Trek III is better than Star Trek II because it’s got Klingons. That, and this being transitory, makes me bullish.”

Charlie Brown: “Did you see that the French Minister of Economy has stated a “strong response” is required against American green policy to ensure Europe keeps industrial production? That must mean WTO-defying protectionism, and so going green will also mean going more mercantilist. It also therefore means an EU-US trade war when Europe is the net exporter, and as the EU relies on US gas and US guns. How does this add up?”

Lucy in Europe: “Strategic autonomy slash free markets slash Europe slash ESG. I remain bullish.”   

Charlie Brown: “FTX is blowing up, and Binance is buying them, and crypto is collapsing again. Didn’t they just run a Super Bowl ad? If they can go, who is next?”

Lucy in Crypto: “I eat one protein bar daily, but on Saturday I have two. That makes me bullish.”

Okay, not all of these are diamonds, but you get the idea on how much so many Lucies’ heads are up in the sky right now.

Now back to watching Americans struggle to count lots of small pieces of paper as a precursor to more ‘Lucy-ness’ to come .

Update (1050ET): Following earlier comments from Binance boss CZ, CoinDesk is reporting the crypto exchange is highly unlikley to go through with its proposed rescue of FTX…

SCOOP: @binance is highly unlikely to go through with its proposed rescue of @FTX_Official after glancing at crypto exchange’s books, according to a person familiar with the matter.@IanAllison123 reports.https://t.co/ORh1K9RufB

— CoinDesk (@CoinDesk) November 9, 2022

That headline sparked a new leg down in Bitcoin to a $16k handle..

FTX Token (FTT) is trading back to the lows…

Roughly half a day into the process of reviewing FTX’s internal data and loan commitments has led Binance to strongly lean against completing the transaction, according to a person familiar with the matter.

*  *  *

With all eyes on what the most powerful man in crypto, Binance CEO Changpeng “CZ” Zhao, will do next now that Sam Bankman-Fried (or rather Bankrun-Fraud) has been exposed as just another Ponzi-running fraudster (read this thread for details on how FTX did everything it could to delay the inevitable implosion of his trading group Alameda), and how long until his “non-binding” agreement to acquire FTX collapses, Bloomberg reports that in a memo to employees, CZ said that there wasn’t a “master plan” to take over FTX.com and the collapse of the rival crypto exchange “is not good for anyone in the industry” (of course he would say that).

“We did not master plan this or anything related to it… It was less than 24 hrs ago that SBF called me. And before that, I had very little knowledge of the internal state of things at FTX,” Zhao wrote in the memo sent Wednesday, which of course is false since Binance – as an existing major investors – had every insight into what was going on and knew precisely what to do to spark a bank run… which it did. Which is also why CZ hedged: “I could do some mental calculations with our revenues to guess theirs, but it would never be very accurate.” In retrospect, they were accurate enough.

Still, knowing that regulators will scrutinize his every decision and comment, CZ continued to plead ignorance: “I was surprised when he wanted to talk. My first reaction was, he wants to do an OTC deal… But here we are.”

Zhao noted that “due diligence for the deal is on-going,” and reminded employees not to trade the FTT token. He also told employees not to comment on the transaction.

“Never use a token you created as collateral . . . Don’t borrow if you run a crypto business. Don’t use capital ‘efficiently’. Have a large reserve,” Zhao tweeted.

Two big lessons:

1: Never use a token you created as collateral.

2: Don’t borrow if you run a crypto business. Don’t use capital “efficiently”. Have a large reserve.

Binance has never used BNB for collateral, and we have never taken on debt.

Stay #SAFU.🙏

— CZ 🔶 Binance (@cz_binance) November 8, 2022

Zhao also said that the proposed – if hardly completed – bailout, which consolidated Binance’s position as the world’s biggest crypto trading venue, was not “a win for us” adding that “user confidence is severely shaken. Regulators will scrutinize exchanges even more. Licenses around the globe will be harder to get.”

The message also laid out the speed of the deal he agreed with his counterpart Sam Bankman-Fried to prevent the total collapse of FTX, which had been valued at $32bn earlier this year. 

The two men shocked the crypto industry when they announced on Tuesday that Binance had agreed to rescue FTX after a surge in customer withdrawals sparked a liquidity crisis after Zhao announced that he was selling a $530 million holding of FTX’s native token. The letter of intent signed is a non-binding agreement. Terms haven’t been disclosed.

In the aftermath of FTX’s near collapse, Binance and other larger exchanges have pledged to publish more proof that they hold their customers’ funds in secure reserves that are readily available to meet withdrawals.

“We must significantly increase our transparency, proof-of-reserves, insurance funds, etc. A lot more to come in this area. We have a lot of tough work ahead of us. Not to mention prices swinging wildly,” he wrote to staff.

The Binance chief also acknowledged that a takeover of FTX, creating by far the largest crypto exchange in the world, would paint a target on the company’s back.

“People now think we are the biggest and will attack us more,” he said.

After it was leaked by the press, CZ posted his full letter on twitter:

In the spirit of transparency, might as well share the actual note, sent to all Binance team globally a few hours ago.https://t.co/IUNkPcLC8T pic.twitter.com/XGlIJB7EV5

— CZ 🔶 Binance (@cz_binance) November 9, 2022

Via SchiffGold.com,

Gold rallied by over $50 an ounce last Friday and the rally has extended into this week with the yellow metal moving back above $1,700 an ounce. In his podcast, Peter Schiff explained why he thinks that gold has bottomed and this is a significant reversal.

Commodity prices in general have been rallying over the last several days. News that China might be close to ending its zero-COVID policies sparked the rally. Industrial metals and oil both saw big gains.

This is bad news for the Federal Reserve.

It’s going to see inflation being pushed higher even as the economy continues to soften.”

Increased Chinese demand as the country’s economy reopens could also be a problem for the Fed. The central bank focuses on fighting inflation by lowering demand. But as Peter pointed out, demand is global, not just domestic.

I always talk about how we can have higher inflation during a recession because I realize that prices are not just determined by the ability of Americans to pay, but it’s the ability of everybody all around the world to pay. Americans are competing with foreigners for the same goods. And, it’s also not simply a function of demand, but it’s a function of supply. Even if demand in America goes down, supply in America could go down even more because demand outside America goes up, and supply is diverted from the United States abroad. So, even if American consumers are buying less, there are even fewer goods available for them to buy. And so, what ends up happening is fewer goods get bought, but the ones that do get bought are bought at ever-increasing prices.”

Dollar weakness could further exacerbate the situation. Despite Jerome Powell’s hawkish comments after the November Fed meeting, the dollar failed to make a new high.

I think as it becomes more obvious that the dollar has seen its highs and is headed lower, I think you are going to get a rush to liquidate long dollar positions. So many people have been piling into the dollar as the only safe haven, as the least-dirty shirt in the hamper, the dollar milkshake theory — whatever it is, a lot of people have been buying dollars, and they are long dollars. The assumption was that the dollar would keep on rising. But the minute that momentum is lost, there is tremendous downside as everybody looks to unwind those positions.”

Peter said another signal that the dollar has reached its high is gold has reached its low.

Of all the big moves in the market during the week, I think the most significant move was the one made by gold.”

Gold made a new 52-week low interday last Thursday (Nov. 3). But on Friday, gold rallied with the price rising by $52.

If you look at the trading pattern for gold, it was an outside reversal week, where during the week, gold took out the low from the prior week, it took out the high from the prior week, and then it closed above the prior week’s high.”

Peter called it “a very significant reversal.”

And it continued this week with gold rallying back above $1,700 an ounce on Tuesday (Nov. 8).

Silver charted a similar rally. The difference was that silver did not make a new 52-week low last week.

When you see gold making a new low, but that new low not being confirmed by silver, that is an indication of a bottom because silver is normally weaker than gold until you get to the end of the bear market, and then silver starts to have some relative strength in relation to gold.”

Peter said gold mining stocks also confirmed the bottom. As a group, miners also failed to make a 52-week low even as gold did.

What makes me more confident in this call is the fact that even though gold itself made a new 52-week low on Thursday, the gold stocks did not. And then we had the explosive move up on Friday where both the GDX and the GDXJ rose better than 10% on the day. It is very rare that you see gold stocks up 10% in a single day.”

While both $50 up-moves in the price of gold and 10% rallies in mining stocks are rare, Peter said he thinks it will become less so in the coming months.

I figure, before too long, we’re going to finally see the price of gold rally by $100 in one day.”

Peter also pointed out that we’ve already seen healthy demand for physical gold.

You can already see the demand in physical gold and silver, where demand is skyrocketing. Central bank demand is skyrocketing.”

In fact, central bank demand set a Q3 record with a huge increase in unreported buying. Many speculate that the mystery buyer was China.

That makes a lot of sense to me. I think China is really trying to stockpile its gold, especially if China is thinking of doing something, maybe making a move against Taiwan. They’re not going to do that until they’ve really shored up their gold holdings. They want to divest themselves of US dollars and US Treasuries and be loaded up with gold before they do anything that may invoke sanctions.”

Peter said it’s only a matter of time before investors realize that the price of gold is not only going to rise commensurate with the cost of producing it, but it’s going to rise more.

Because as investors lose confidence in the ability of the Fed and other central banks to rein in inflation, now they’re more motivated to hedge against inflation because they can no longer count on the central banks to protect them. They have to look for their own protection, and they can find it in gold.”

In this podcast, Peter also talks about the continued decline in tech stocks, and the decline labor force participation rate.

Submitted by QTR’s Fringe Finance

Over the summer, I was stunned when a friend of mine sent me an interview with FTX CEO and crypto billionaire Sam Bankman-Fried that I had never seen before. In the interview, Sam, who I recently noted knows more about the inner bowels of the defi/crypto space than anybody, basically came out and admitted that crypto lending was one giant Ponzi scheme.

Of course, many of us knew that the space was a ponzi scheme already – as I have been adamantly outspoken about – but it was the sheer, unadulterated, matter-of-fact-style, bald-faced admissions by Bankman-Fried that caused my jaw to drop when I read it and listened to it this week.

Now, looking back on it after FTX’s collapse this week, it’s even more stunning that nobody saw it coming. 

3 months before the collapse of crypto lending firms, it was literally just…out there…in the public, from the man who knows the space best, that such companies were, in essence, total Ponzi schemes. First, here’s a video of SBF explaining how DeFi works like a ponzi scheme. 

Then, there were Bankman-Fried’s comments on the Odd Lots podcast with Matt Levine.

Matt asked the same daring question that Peter Schiff asked of Celsius CEO Alex Mashinsky back in November 2021: where does the extra cash for yield farming actually come from?

While Mashinsky ducked the answer, at least Bankman-Fried tried to describe it, though he did so as a “black box” where new investor money pays back old investor money. Also known as a Ponzi scheme.

“Can you give me an intuitive understanding of farming? I mean, like to me, farming is like you sell some structured puts and collect premium, but perhaps there’s a more sophisticated understanding than that,” Levine asks Bankman-Fried, per a Bloomberg transcript of the interview.

Bankman-Fried responds: 

“You start with a company that builds a box and in practice this box, they probably dress it up to look like a life-changing, you know, world-altering protocol that’s gonna replace all the big banks in 38 days or whatever. Maybe for now actually ignore what it does or pretend it does literally nothing. It’s just a box. So what this protocol is, it’s called ‘Protocol X,’ it’s a box, and you take a token. You can take ethereum, you can put it in the box and you take it out of the box. Alright so, you put it into the box and you get like, you know, an IOU for having put it in the box and then you can redeem that IOU back out for the token.”

Later in the interview, when pressed on where the actual generated value comes from to pay the yields by Levine, Bankman-Fried expounds on his statements:

“Describe it this way, you might think, for instance, that in like five minutes with an internet connection, you could create such a box and such a token, and that it should reflect like, you know, it should be worth like $180 or something market cap for like that, you know, that effort that you put into it.”

He continues:

“In the world that we’re in, if you do this, everyone’s gonna be like, ‘Ooh, box token. Maybe it’s cool. If you buy in box token,’ you know, that’s gonna appear on Twitter and it’ll have a $20 million market cap. And of course, one thing that you could do is you could like make the float very low and whatever, you know, maybe there haven’t been $20 million dollars that have flowed into it yet.

“Maybe that’s sort of like, is it, you know, mark to market fully diluted valuation or something, but I acknowledge that it’s not totally clear that this thing should have market cap, but empirically I claim it would have market cap.”

One host responds cynically:

“It shouldn’t have any market cap in theory, but it practice, they always do. Okay.”

Bankman-Fried confirms this and continues, calling the box “magic” and explaining further:

“That’s right. So, and obviously already we’re sort of hiding some of the magic impact, right? Like some of the magic is in like, how do you get that market cap to start with, but, you know, whatever we’re gonna move on from that for a second.

So, you know, X tokens [are] being given out each day, all these like sophisticated firms are like, huh, that’s interesting. Like if the total amount of money in the box is a hundred million dollars, then it’s going to yield $16 million this year in X tokens being given out for it. That’s a 16% return. That’s pretty good. We’ll put a little bit more in, right?

And maybe that happens until there are $200 million dollars in the box. So, you know, sophisticated traders and/or people on Crypto Twitter, or other sort of similar parties, go and put $200 million in the box collectively and they start getting these X tokens for it.

And now all of a sudden everyone’s like, wow, people just decide to put $200 million in the box. This is a pretty cool box, right? Like this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box. And who are we to say that they’re wrong about that? Like, you know, this is, I mean boxes can be great. Look, I love boxes as much as the next guy. And so what happens now?

All of a sudden people are kind of recalibrating like, well, $20 million, that’s it? Like that market cap for this box? And it’s been like 48 hours and it already is $200 million, including from like sophisticated players in it. They’re like, come on, that’s too low. And they look at these ratios, TVL, total value locked in the box, you know, as a ratio to market cap of the box’s token.

And they’re like ‘10X’ that’s insane. 1X is the norm.’ And so then, you know, X token price goes way up. And now it’s $130 million market cap token because of, you know, the bullishness of people’s usage of the box. And now all of a sudden of course, the smart money’s like, oh, wow, this thing’s now yielding like 60% a year in X tokens.

Of course I’ll take my 60% yield, right? So they go and pour another $300 million in the box and you get a psych and then it goes to infinity. And then everyone makes money.”

Bloomberg’s Matt Levine then sums it up at the end of Bankman-Fried’s comments:

“I think of myself as like a fairly cynical person. And that was so much more cynical than how I would’ve described farming. You’re just like, well, I’m in the Ponzi business and it’s pretty good.”

Over the summer, I wrote about how these statements reaffirmed my belief that there are more blowups taking place behind the scenes than we knew about in crypto, as I pointed out in a piece. Today, in November, it still remains a harbinger of bad news for the space, in my opinion. 

(READ THIS FULL ARTICLE HERE).

Get 50% off: If you enjoy this article, I would love to have you as a subscriber and can offer you 50% off for life: Get 50% off forever

Futures and yields are flat, both recovering from a dip earlier in the session, as investors kept an eye on midterm election results ahead of key inflation data later in the week. To the disappointment of bulls, a Red Wave failed to emerge in Congress as voters delivered a mixed verdict in elections shaped by inflation and split around social issues, with Republicans headed toward control of the US House, but by smaller margins than forecast, while the Senate majority remains a toss-up.

In the House, official results have Republicans on 196 and Democrats on 168. Projections from the New York Times (seats either already won by a party or projected to win) put the Republicans on 219 and Democrats on 207 with 9 seats viewed as “tossups”. In the Senate, official results have Republicans on 47 and Democrats on 48. Democrats won in PA (where a brain-damaged Fetterman managed to flip a critical seat which even liberal pollsters said was set to go to republican Challenger Dr. Oz ) and NH; GOP is leading in NV and WI; Democrats leading in AZ and GA. Three key battleground states which are yet to be called are Arizona, Nevada and Georgia. The Georgia seat could end up having to be decided via an election run-off which would be held on December 6th. As such, the outcome of the election might not be known for weeks.

“It is clear that any Republican majority is likely to be extremely narrow. From a market perspective, that would certainly be attractive,” said DWS Global Chief Investment Officer Bjoern Jesch. “On the one hand, this would remove corporate tax increases or other spending packages that would have threatened both houses if the Democrats marched through. On the other hand, the Republicans would probably be too divided to set their own strong accents in legislation.”

Back to markets, where Nasdaq 100 futures were down -0.5%, while S&P 500 futs slipped 0.4% at 7:30 am ET after fluctuating between gains and losses one day after stocks capped a three-day rally.

In premarket trading, News Corp. and Disney both tumbled at least 8% after posting disappointing results. A selloff in cryptocurrencies deepened, sending Bitcoin toward the biggest four-day slump since June. Oil slid on the now daily sluggish demand outlook from China. The dollar rose while yields were flat.  Affirm Holdings shares tumbled 16% as analysts said the buy-now-pay-later firm’s guidance cut and ongoing credit deterioration overshadowed a solid quarter. Meta Platforms Inc. gained after confirming job cuts of about 13% and let more than 11,000 of employees go. Here are some of the biggest US movers today:

• Amyris shares slump 22% in US premarket trading after the chemical products distributor reported third-quarter revenue that missed the average analyst estimate. Piper Sandler said more clarity was given on the outlook, but thought there was still some uncertainty.
• Axon Enterprise reported strong quarterly results and the outlook for the taser and body cameras maker remains strong, analysts say. Axon shares rose 7.7% in extended trading following the results.
• CarGurus shares drop 22% in premarket trading after the car retailer reported weak 3Q results and gave disappointing guidance, with analysts unsure how long it will take the firm to fix the challenges it faces.
• Keep an eye on News Corp (NWSA US) after the company reported first-quarter revenue that came ahead of Guggenheim’s estimates, though the broker notes management’s comments on headwinds stemming from factors such as exchange rates persisting into the next quarter.
• Kroger stock gains 1.3% in premarket trading as Evercore ISI upgraded it to outperform, saying that risk/reward appears favorable with food inflation likely to stay higher for longer.
• Shares in cryptocurrency- exposed companies dropped in US premarket trading as digital currencies extended their losses, with Binance’s potential takeover of troubled rival exchange FTX stoking worries over the fragility of the industry.Riot Blockchain (RIOT US) -3.8%, Marathon Digital (MARA US) -5%, MicroStrategy (MSTR US) -7%, Coinbase (COIN US) -5%
• Tesla shares rise as much as 1.9% in US premarket trading following three days of losses and lowest level since June 2021; CEO Elon Musk sold $3.95 billion of shares in the electric-vehicle maker.
• Upstart slumps about 26% in US premarket trading and is set to hit the lowest level since its IPO in 2020. The AI lending platform’s 3Q results are well below expectations as it deals with significant pressure on its core business from a weakening macro backdrop, analysts say.

Investors had hoped for a Republican “Red Wave” in Congress, with the best outcome seen as GOP control of both the House of Representatives and Senate. Optimism for shares has been helped by a history of robust performance following midterm results. Stocks have tended to flourish during times when government is constrained and polls suggest Republicans could make gains, placing a check on Democratic policies. But voters – and the USPS – delivered a mixed verdict, with Republicans heading for control of the House by smaller margins than forecast and the race for Senate still wide open. The final outcome may not be known for days or even weeks if the results are as close as polls have suggested and if losers challenge results.

“The Republican aim of controlling both houses hangs by a thread,” Chris Beauchamp, the chief markets analyst at IG Group in London, wrote in a note. “A divided House might mean the partisan battles over spending and the debt ceiling are not quite as dramatic or vitriolic, but this is unlikely to brighten the policy outlook markedly. Instead, the focus will likely return to the Federal Reserve and the US economy.”

That left Thursday’s inflation report the next catalyst for markets. Economists are expecting the figures to show consumer prices cooled slightly compared with the previous month. The data could provide crucial clues on how the Federal Reserve is likely to proceed with tightening monetary policy.

“Tension is high and investors won’t want to be burnt by jumping the wrong way ahead of that inflation data, because in the past expectation has proved a little off the mark,” said Danni Hewson, a financial analyst at AJ Bell.

In Europe, the equity benchmark fell for the first time in four days, dragged by tech, real estate, travel- and automotive-industry shares. Euro Stoxx 50 falls 0.7%. IBEX is flat but outperforms peers, DAX lags, dropping 0.8%.  Here are some of the biggest European movers today:

• Vantage Towers shares jump as much as 11% after Vodafone said in a statement that it will deconsolidate its 81.7% interest in the tower business by creating a joint venture with KKR and Global Infrastructure Partners to hold the stake.
• Smiths Group rises as much as 5.4%, hitting the highest since Feb. 2020, with analysts saying the industrial group delivered a strong start to its fiscal year.
• Recordati shares rise as much as 4.8%, hitting the highest since Sept. 19 and extending gains after its results in the prior session, as Banca Akros upgrades its rating on the drugmaker.
• Scor shares reversed earlier declines on the back of its third quarterly loss in a row and climbed as much as 4.5%, as analysts focused on their deep value and noted that a cost- cutting plan marked a pivotal moment for the French reinsurer.
• Commerzbank shares decline despite the German lender delivering a beat on its quarterly earnings, with Deutsche Bank flagging what looks like conservative guidance for 2024. Shares fall as much as 7.6%.
• Evotec falls as much as 12%, the most in three months, after analysts said the German biotech missed quarterly estimates, with investments in the Just-Evotec Biologics arm hurting profits.
• ITV shares drop as much as 6.6% after the broadcaster said rising costs will be an issue in 2023. Barclays notes this is the first time ITV has mentioned that inflation may hit its costs and earnings. While 3Q results largely met expectations, analysts say the 4Q advertising outlook fell short amid growing economic uncertainty.
• Marks & Spencer falls as much as 7%, the most since Sep. 29, after the UK retailer’s trading update is seen as offering little reassurance in the face of demand headwinds and cost inflation.

Earlier in the session, Asian shares were little changed after three straight gains of more than 1%, as a rally in tech stocks offset losses in Chinese shares and investor worries about US midterm election results. The MSCI Asia Pacific Index was up 0.01% as of 6:04 p.m. in Singapore, with chipmakers TSMC and Samsung Electronics among the biggest boosters, while Chinese internet names fell amid concerns over Singles Day sales.   With Republicans headed toward control over the US House of Representatives — albeit by a smaller margin than forecast –some investors say it portends difficulty in passing legislation during a trying economic period, while others see political gridlock as preserving status quo. “This could be a dysfunctional political situation at a time of economic crisis,” said Gary Dugan, chief executive officer at the Global CIO Office. However, there may be some positive impact on Asia stocks if the dollar tops out, he added.

Meanwhile, tech shares extended a rebound on cheaper valuations, boosting benchmarks in Taiwan and South Korea. Key gauges in China and Hong Kong, however, dropped for a second straight day after a recent rebound. The decliners were influenced as Chinese producer prices fell into deflation for the first time in nearly two years amid lockdowns and new Covid cases in Beijing jumped. While Asia’s benchmark index has rebounded more than 7% from a recent trough, all eyes are on US consumer price inflation data due Thursday for a sense of the Federal Reserve’s next policy step. Growing lockdowns in China are also weighing on sentiment. “We don’t think the worst is over for Asian equities even though the markets have bounced back about 7% from the late October bottom and flows have picked up,” said Manishi Raychaudhuri, a strategist at BNP Paribas. “The Fed’s hawkish stance on inflation shall sustain till there are clear signs of core inflation peaking out.”

Japanese stocks fells: the Topix dropped 0.4% to 1,949.49 at the 3 p.m. close in Tokyo, while the Nikkei 225 declined 0.6% to 27,716.43. Nintendo contributed the most to the Topix’s loss, decreasing 7.1%. Out of 2,165 stocks in the index, 1,020 rose and 1,022 fell, while 123 were unchanged.

In India, stocks fell from their near-record levels as investors booked profits in recent outperformers such as ICICI Bank and Hindustan Unilever. Stocks across Asia were mixed as investors await midterm poll results in the US.  The S&P BSE Sensex fell 0.3% to 61,033.55 in Mumbai, while the NSE Nifty 50 Index eased by an equal margin. Both indexes still trade about 1% short of their record levels seen in October last year.  Fifteen of BSE Ltd.’s 19 sector sub-gauges dropped, led by consumer durable companies as trading resumed after a holiday on Tuesday. Tata Motors, the owner of Jaguar Land Rover, reported smaller-than-expected loss for September quarter, adding to Indian companies’ stronger show for the earnings season. Of the 44 Nifty firms that have announced results so far, 31 have met or beaten analysts’ estimates, while 10 missed. ICICI Bank contributed the most to the Sensex’s decline, decreasing 0.6%. Out of 30 shares in the index, 8 rose and 22 fell.

Australian stocks rallied for a 4th day: the S&P/ASX 200 index rose 0.6% to close at 6,999.30, boosted by gains in mining and real estate shares. A gauge of mining shares hit the highest since Aug. 26 after metal prices increased. Shares of gold miners, including St Barbara, were the benchmark’s best performers after the metal advanced on a slide in the US dollar.  In New Zealand, the S&P/NZX 50 index was little changed at 11,143.48.

In FX, the Bloomberg Dollar Index rebounded and the greenback rose versus all of its Group-of-10 peers as risk assets turned lower. One-day hedging costs rallied across the major currencies, modestly higher than what the roll suggested, as focus shifts to Thursday’s US inflation report. Risk sensitive currencies, such as the kiwi and pound fell by around 1% against the greenback. The euro fell, but remained above parity.

• The pound plunged by as much as 1.1% after three days of gains, while gilts twist flattened. Bank of England monetary policy committee members Jon Cunliffe and Jonathan Haskel are due to speak later, a day after Chief Economist Huw Pill suggested that the stimulus program through the pandemic was a mistake and contributed to inflation
• Australian sovereign bonds extended opening gains after data showed that China’s producer prices fell into deflation for the first time in nearly two years. The producer price index declined 1.3% in October from a year earlier after gaining 0.9% the previous month
• Japanese government bonds rose after a solid sale of 30-year bonds alleviated concerns about demand for super-long debt. The yen was steady

In rates, Treasuries were mixed with the curve flatter, pivoting around a little-changed 10-year sector. Bunds outperform, bull-flattening sharply, while stocks hover near top of Tuesday’s range. US yields richer by nearly 2bp across long-end of the curve and cheaper by ~1bp across front-end, leaving 2s10s, 5s30s spreads flatter by 1bp and 2bp on the day, while 10-year at around 4.125% is little changed from Tuesday’s close. Bunds outperform by 4.5bp in the 10-year sector, gilts by 1.2bp. Focal points of US session focus include 10-year note auction and a couple of Fed speakers ahead of Thursday’s inflation data: the US auction cycle resumes with $35b 10-year at 1pm, followed by $21b 30-year Thursday; Tuesday’s 3-year note sale was strong, drawing a yield 1.2bp below the WI at the bidding deadline.  Two-year German and Italian government bond yields inched up while falling further out. One trader has placed a large bet using options on German 10-year futures, targeting the yield to fall to 1.55% for maximum profit, down from about 2.25% currently

In commodities, WTI drifts lower to trade near $88. WTI and Brent futures are softer intraday as the Dollar claws back some recently lost ground and sentiment remain tilted to the downside, while China’s COVID situation remains an overhang for the complex. Spot gold fell roughly $7 to trade near $1,705/oz, swayed from gains to losses after testing resistance at its 100 DMA (1,715/oz) in early European hours, before a turn in risk sentiment spurred the Dollar and hit the yellow metal. Base metals are pressured by the downbeat risk tone and the firmer Dollar, but 3M LME copper holds onto a USD 8,000/t handle after testing USD 8,100/t to the upside overnight.

Cryptocurrencies slipped further as Binance’s potential takeover of embattled rival exchange FTX.com highlighted how strains in the digital-asset industry are buffeting some of its top players. Bitcoin traded as much as 7.7% lower.

To the day ahead now, and although investors will be digesting the midterm results, there are a few central bank speakers to look out for as well, including the Fed’s Williams and Barkin, the ECB’s Elderson, and the BoE’s Haskel and Cunliffe.

Market Snapshot

• S&P 500 futures down 0.4% to 3,820.50
• STOXX Europe 600 down 0.8% to 418.34
• MXAP up 0.2% to 144.17
• MXAPJ up 0.5% to 464.43
• Nikkei down 0.6% to 27,716.43
• Topix down 0.4% to 1,949.49
• Hang Seng Index down 1.2% to 16,358.52
• Shanghai Composite down 0.5% to 3,048.17
• Sensex down 0.2% to 61,067.52
• Australia S&P/ASX 200 up 0.6% to 6,999.30
• Kospi up 1.1% to 2,424.41
• German 10Y yield down 0.9% to 2.26%
• Euro down 0.2% tp $1.0051
• Brent Futures down 0.7% to $94.71/bbl
• Gold spot down 0.3% to $1,707.98
• U.S. Dollar Index up 0.1% to 109.79

Top Overnight News from Bloomberg

• US voters delivered a mixed verdict in elections shaped by inflation and splits around social issues, with Republicans headed toward control of the US House, but by smaller margins than forecast
• Consumers’ expectations for inflation over the next 12 months rose to 5.1% in September from 5% in August, European Central Bank says in statement summarizing the results of its monthly survey
• Euro-area wage growth has jumped, with most occupations seeing raises of at least 3%, according to an analysis of job ads that also suggests the pace of increases may be flattening
• Two key indicators of Chinese interbank borrowing costs have hit a three-month high, as the nation’s central bank faces a crucial decision on what to do with a massive amount of policy loans due next week
• Hungary’s annual price growth increased by a full percentage point in October to 21.1%, data published Wednesday showed. The nation is closing in on the three Baltic states that have the fastest inflation in the EU

A more detailed summary of global markets courtesy of Newsquawk

Asia-Pac stocks traded cautiously and US equity futures were indecisive as attention focused on the trickling results from the US Midterm Elections where a red wave has so far not yet materialised although Republicans are in a strong position to take control of the House, while the Senate race is still widely viewed as a toss-up. ASX 200 was led higher by strength in the mining-related sectors although upside was capped as financials are subdued following results from National Australia Bank which posted an increase in FY profit but warned of a significant slowdown in lending growth for the current fiscal year. Nikkei 225 faded its initial gains with price action lacklustre amid a slew of earnings and despite Japan’s Cabinet approving a JPY 29.1tln extra budget to fund the stimulus package. Hang Seng and Shanghai Comp swung between gains and losses with early strength in property names after China’s state planner asked large banks to step up lending for manufacturing infrastructure and developers, with China to provide initial support of around CNY 250bln in bond financing to private firms, although COVID-related headwinds persisted following a further increase in China’s daily infections and participants also reflected on the mixed-to-soft inflation data. Chinese developers jumped the most in eight months as a regulator expanded financing support for the sector.

Top Asian News

• China’s Guangzhou reportedly locked down a second district due to coronavirus. However, it was separately reported that China lifted the lockdown in the area around Foxconn’s Apple (AAPL) iPhone plant as planned, according to Bloomberg.
• China’s Guangzhou locks down another district amid COVID, according to Bloomberg.
• China reported 1,346 (prev. 890) new coronavirus cases in the mainland for November 8th, 1,294 (prev. 843) new local cases and 6,989 (prev. 6,801) new asymptomatic cases, according to Reuters.
• US President Biden will highlight a commitment to rules-based international order in the South China Sea during the ASEAN summit and will talk about the need for peace and stability throughout the Indo-Pacific region and across the Taiwan Strait, according to a senior administration official cited by Reuters.
• RBA’s Bullock reiterated that further rate hikes will be needed. Wage growth is a bit stronger than thought three months ago. Good reason to think approaching peak of the inflation cycle, via Reuters.

In Europe, major bourses hold a downside bias after seeing some choppiness at the cash open and following a somewhat mixed APAC handover. Sectors are all in the red with a clear defensive bias as Telecoms, Utilities, Healthcare, Food & Beverages post the shallowest losses, whilst Tech, Travel & Leisure, Real Estate and Retail reside at the other end of the spectrum. US equity futures traded sideways on either side of breakeven overnight and in early European hours but have since drifted under the overnight lows.

Top European News

• UK PM Sunak could raise the top rate of income tax, according to The Telegraph. Options being discussed include raising the 45% top rate, or lowering the GBP 150k annual income threshold at which it kicks in.
• UK Chancellor Hunt is set to scrap former PM Truss’ plan for investment zones, according to FT.
• EU is mulling Eurobonds for Ukraine fund, Politico reported – will propose a new EU instrument to finance EUR 18bln.
• ECB Says 12-Month Consumer Inflation Expectations Rose Slightly
• Adidas Cuts Margin Forecast After Ending Yeezy Partnership
• M&S Falls Amid Concerns Over Demand, Cost Inflation For Retail
• Top Sunak Ally Williamson Resigns Amid Bullying Allegations
• Commerzbank’s New Targets Disappoint Investors as Charges Mount

FX

• DXY attempted to stop the rot and nurse some losses awaiting the remaining and potentially game-changing Midterm Election results, with the index now on either side of 110.00.
• The NZD and GBP underperform and more ground than other majors as the Buck bounced, with nothing obvious in terms of negative NZ or UK factors.
• Traditional havens JPY and CHF are off best levels, but retained a safety premium as the rout in crypto currencies raged on and the ripples reverberated across to stocks.

Fixed Income

• US Treasuries are braced for the long bond sale that wraps up this week’s rather mixed Quarterly Refunding.
• Gilts remain in the green having digested an average Green offering.
• Bunds saw a lack of positive reaction despite a very well received 2032 German auction.

Commodities

• WTI and Brent futures are softer intraday as the Dollar claws back some recently lost ground and sentiment remain tilted to the downside, whilst China’s COVID situation remains an overhang for the complex.
• US Energy Inventory Data (bbls): Crude +5.6mln (exp. +1.4mln), Cushing -1.8mln, Gasoline +2.6mln (exp. -1.1mln), and Distillate -1.8mln (exp. -0.9mln).
• IEA’s Birol said OPEC+ might need to rethink its output cut decision, according to Bloomberg
• Spot gold swayed from gains to losses after testing resistance at its 100 DMA (1,715/oz) in early European hours, before a turn in risk sentiment spurred the Dollar and hit the yellow metal
• Base metals are pressured by the downbeat risk tone and the firmer Dollar, but 3M LME copper holds onto a USD 8,000/t handle after testing USD 8,100/t to the upside overnight.

Geopolitics

• North Korea fired a missile, according to South Korean military; could be a ballistic missile, according to Japanese Coast Guard; projectile has fallen outside of Japan’s EEZ.
• German cabinet has agreed to block the prospective Chinese takeover of Elmos chip factory and ERS electronics, according to government sources cited by Reuters.

US Event Calendar

• 07:00: Nov. MBA Mortgage Applications, prior -0.5%
• 10:00: Sept. Wholesale Trade Sales MoM, est. 0.5%, prior 0.1%
• 10:00: Sept. Wholesale Inventories MoM, est. 0.8%, prior 0.8%

Central Banks

• 03:00: Fed’s Williams Discuss Risk and Uncertainty at Event in Zurich
• 11:00: Fed’s Barkin Discusses the Economic Outlook
• 20:00: Fed’s Kashkari Discusses Inflation and the Economy

DB’s Jim Reid concludes the overnight wrap

As has been anticipated, it will take a few days to unpack the full results of the US midterms. What is clear at this hour though is that neither major party is running away with the election in a ‘wave’ and it appears that Republicans are still on track to achieve a majority in the House of Representatives, a combo that should put a pin in any new fiscal stimulus for the next few years. The New York Times model is currently showing that the Senate will likely finish with 50 seats each. So overall maybe Democrats slightly outperforming but it’s not too far away from expectations. The mix also seems to not be surprising markets too much, as S&P 500 futures (-0.07%) are oscillating between gains and losses as we go to press. Our US team will be hosting a webinar later today to unpack the implications with the link to register here.

As we awaited the results of the midterm elections, risk assets continued to put in a decent performance yesterday, with the S&P 500 (+0.56%) advancing for a 3rd consecutive session. A reminder that if history’s any guide that could prove to be just the start however, since in all 19 post-war midterm elections, the S&P 500 has closed above its levels on the day of the election after a year. We highlighted this a couple of months ago and in yesterday’s CoTD we showed how the 3 quarters from midterms have been the top 3 quarters for the S&P 500 since 1949 across the 4 year presidential cycle. However as I’ve eluded for a while, although I’ve thought midterms would be a short-term positive catalyst I suspect we won’t see this record spell stretch into a 20th successive positive outcome 12 months on. I’m going to take a stab at why we should ignore history today in my CoTD.

Back to yesterday and gains were pretty broad-based for a relatively modest index-level increase, with over 70% of the index moving higher on the day, and only the consumer discretionary sector in the red (-0.30%) on the day thanks to Tesla’s (-2.93%) decline. The Nasdaq flitted around zero, trading as much as +1.70% higher and -0.87% lower before splitting the difference to finish up +0.49%. After the close, Mark Zuckerberg confirmed that layoffs would start at Meta tomorrow, which won’t help tech sentiment. The sentiment wasn’t any better following Disney’s after-hours earnings, which came in below consensus and had the company ready to find “meaningful efficiencies” in light of rising costs. Disney’s shares were -6.83% lower after the close.

The S&P 500 had a bit of a wild swing after Europe went home moving from +1.35% to -0.55% in the space of an hour before closing higher (+0.56%) as Bitcoin (long time no mention) plunged to $17,187 having been as high as $20,655 as European equity markets closed. It bounced back into the close and is at similar levels as we type this morning at $18,430. Crypto exchange FTX.com had been suffering from a liquidity crunch before rival Binance agreed to buy it yesterday and the associated story created a fair amount of noise, some of it creeping into equities. This morning in Asia there are a few concerns the deal isn’t binding so one to keep an eye on. Before the late US vol, the STOXX 600 (+0.78%) hit its highest level in nearly two months, whilst the DAX (+1.15%) hit its highest level in nearly three months.

For sovereign bonds, the main focus is still on tomorrow’s US CPI report, but there was a decent rally ahead of that as investors modestly dialled back their expectations of future central bank rate hikes. For instance, the futures-implied rate for the Fed in December 2023 came down -6.1bps to 4.80%, having traded as high as 4.88% earlier in the European morning. In turn, that prompted a rally in Treasuries across the curve, with the 10yr yield down -9.0bps on the day to 4.12%, with roughly half of the decline in real yields, which fell -5.2bps. In the meantime, the 2s10s yield curve flattened -1.7bps to -53.1bps, remaining just above its post-1982 closing low of -57.3bps from last week. Meanwhile, in Asia, 2 and 10yr yields are back up a basis point.

Over in Europe, there was a similar sovereign bond rally, with yields on 10yr bunds (-6.3bps), OATs (-6.6bps) and gilts (-9.0bps) all lower on the day. At the front end however, UK gilts underperformed, with the 2yr yield up +5.3bps after BoE chief economist Pill said that “there is more to come” on rates following their 75bp hike last week. Overnight index swaps are currently pricing a nearly even split between a 50bps or 75bps hike at the next meeting in December.

This morning in Asia, equities are mostly trading lower led by the Hang Seng (-1.52%) with the CSI (-0.75%), the Shanghai Composite (-0.35%) and the Nikkei (-0.54%) all trading in negative territory. Elsewhere, the KOSPI (+1.00%) is bucking the trend.

We’ve had softer price data coming out of China as the nation’s producer price index (-1.3% y/y) in October fell for the first time in two years, down from +0.9% growth in September as strict Covid restrictions coupled with a sluggish property sector amid global recession risks dented the economy. Meanwhile, consumer inflation in October (+2.1% y/y) moderated from September’s 29-month high of +2.8% (v/s +2.4% expected) pointing towards underlying domestic price pressures remaining modest.

Staying on China, the Chinese yuan extended its decline for a third day, weakening past the 7.25 level against the dollar after the data. The subdued inflation figures suggests that the PBOC policy divergence against its global peers will continue.

There wasn’t much in the way of data releases yesterday, with Euro Area retail sales growing by +0.4% in September, in line with expectations. That said, there was a positive revision to August which showed that retail sales were unchanged, as opposed to the -0.3% contraction previously released. Otherwise in the US, the NFIB’s small business optimism index for October fell for the first time since June, coming in at 91.3 (vs. 91.4 expected).

To the day ahead now, and although investors will be digesting the midterm results, there are a few central bank speakers to look out for as well, including the Fed’s Williams and Barkin, the ECB’s Elderson, and the BoE’s Haskel and Cunliffe.