Authored by Kevin Stocklin via The Epoch Times (emphasis ours),

The trial of Sam Bankman-Fried has thus far strongly supported the prosecution’s charges of securities fraud, analysts say; meanwhile, any questions regarding his massive political donations have been put off for another day.

Since its start on Oct. 3, the trial has featured compelling testimony from former colleagues FTX co-founder Gary Wang and Alameda CEO Caroline Ellison, both of whom pointed the finger at Mr. Bankman-Fried—also known by his initials, SBF—as the ringmaster of one of the largest financial frauds in U.S. history. The defense has struggled to make its case, although Mr. Bankman-Fried’s attorneys may still have cards to play.

“As of now, it’s not going well for the defense,” Braden Perry, a former federal enforcement attorney who’s currently a partner at Kennyhertz Perry, told The Epoch Times. “Both Ellison and Wang have testified that SBF directed them to commit the crimes.”

The prosecution has been methodically building its case, Mr. Perry said. Assistant U.S. Attorneys Nicolas Roos and Danielle Sassoon presented consistent testimony that Mr. Bankman-Fried knowingly and intentionally defrauded investors, and they also made efforts to humanize the losses suffered by FTX customers.

“The evidence that has come out over the first two weeks of trial is all to the point that SBF was involved, either directly or indirectly, in a conspiracy with people who themselves have pled guilty to committing fraud,” Daniel Silva, a former federal prosecutor who’s currently a shareholder at business law firm Buchalter, told The Epoch Times.

The prosecution’s case thus far “is very strong,” he said.

And while cryptocurrencies are arcane financial instruments, the case itself is straightforward.

The prosecution has largely avoided delving into the intricacies of cryptocurrencies, focusing instead on the simpler narrative of theft and deceit.

“What this trial boils down to is FTX’s use and Alameda’s use of customer funds,” Mr. Perry said. “The prosecution will need to prove SBF used those funds knowingly and fraudulently.”

According to the allegations, “SBF was the front of the entire enterprise, including Alameda,” he said. “Further, SBF used a massive [line of credit,] which was not disclosed to Alameda customers or investors.”

While approximately $9 billion of customers’ and investors’ money has gone missing in the 2022 collapse of crypto exchange FTX and its affiliated hedge fund Alameda Research, the trial on Oct. 4 featured testimony from an individual investor who had lost $100,000 on the FTX crypto exchange to show jurors how retail investors were personally harmed.

This was an “interesting start.” according to Mr. Perry.

“It shows how a typical investor was duped by the ‘safeness’ of FTX,” he said.

The prosecution then laid the foundation of its case with testimony from Mr. Wang, FTX’s former chief technology officer, who said he coded the accounts of Alameda Research to allow it to run negative balances on the FTX exchange. This gave Alameda the ability to borrow money from the exchange and ultimately to take clients’ funds—without their knowledge or consent—to pay off billions of dollars in loans and trading losses and to lend money to FTX executives for their personal use.

Mr. Wang said Alameda accounts were set up this way at the direction of Mr. Bankman-Fried but that this special arrangement between the two companies was kept secret from FTX customers. Mr. Wang pled guilty to charges of securities fraud and accepted a plea deal with prosecutors to testify against Mr. Bankman-Fried.

The prosecution’s case then shifted to how customers’ money was taken by Alameda Research.

Ms. Ellison took the stand next and accused Mr. Bankman-Fried of directing her to use Alameda’s credit line with FTX to repay approximately $10 billion in loans, which she could only do by taking money from FTX customers. She said he also instructed her to deceive Alameda creditors regarding the extent of its indebtedness.

With traders already exhausted by relentless, brutal daily whipsaws, today was not the day anyone expected the rollercoaster would end, and a good thing too because it was another brutal day for those tracking every twist and turn in the S&P, which in turn was pingponged about by headlines from both the New York Economic Club where Powell was speaking and also from the middle east, where the war between Israel and Hamas threatens to erupt into a much bigger regional conflict with every passing day.

With too much going on for a blow by blow, here is a chart summary of some of the key market reversals today, starting with the Powell rollercoaster and then progressing to the latest (adverse) developments out of the Middle East.

While stocks had a bad day, 0DTE traders were even more bearish, with the Delta flow outpacing the decline in equities by a sizable margin.

Virtually every sector was red…

… with the only outlier being communication services which was green thanks to just one company: Netflix, which soared as much as 17%, its biggest one-day surge since Jan 2021…

… but while NFLX longs rejoiced, the same could not be said for TSLA shareholders: Elon Musk’s EV company tumbled more than 10%, its worst drop since Jan 2023.

As stocks tumbled, the VIX soared, and after 105 consecutive days of closing below 20, the longest streak since 2019…

… the VIX index finally closed above 20 – in fact above 21 – breaking the streak on day 106.

But believe it or not, the swings in the S&P, which weren’t even that wild with the S&P barely dipping more than 1%, were not the day’s main event: that would be the combination of soaring yields, which saw the 10Y rise as high as 4.992% and the 30Y touch 5.10%, levels which Morgan Stanley and Goldman both said earlier were buy triggers…

… as well as the surge in oil, which exploded $4 from session lows, and sent WTI above $89 and Brent above $93.

That said, oil wasn’t the only flight to safety. Capital flows into gold also extended, sending the precious metal to $1974, the highest price since July, and up $150 in just two weeks…

… while digital gold also saw continued buying which sent bitcoin to $28,775 the highest since August, and on pace to rise back above $30K in days if not hours.

Finally, while investor focus has been targeting the middle east as the new geopolitical hot spot, keep an eye on the US, where 5Yr CDS just hit the highest level since May when the US financial system was again on the edge of collapse and had to be bailed out with the Fed’s BTFP facility.

A longtime State Department official in the bureau that oversees arms transfers resigned this week in protest of the Biden administration’s decision to continue sending weapons and ammunition to Israel in support of its war with Hamas.

Josh Paul, who served as the director of congressional and public affairs for the State Department’s Bureau of Political-Military Affairs for 11 years, said the Biden administration’s “blind support for one side” had led to policy decisions that were “shortsighted, destructive, unjust and contradictory to the very values we publicly espouse.”

“Let me be clear: Hamas’ attack on Israel was not just a monstrosity; it was a monstrosity of monstrosities,” the letter reads. “But I believe to the core of my soul that the response Israel is taking, and with it the American support both for that response… will only lead to more and deeper suffering for both the Israeli and the Palestinian people – and is not in the long term American interest.”

“I fear we are repeating the same mistakes we have made these past decades, and I decline to be a part of it for longer,” the letter continues.

Paul told the NY Times that Israel cutting off water, food, medical care and electricity to the two million or so residents of Gaza should trigger a slew of federal laws that should normally prevent US weapons ending up in the hands of human rights violators.

“The problem with all of those provisions is that it rests on the executive branch making a determination that human rights violations have occurred,” Paul said. “The decision to make a determination doesn’t rest with some nonpartisan academic entity, and there’s no incentive for the president to actually determine anything.”

In a Wednesday visit to Tel Aviv while his administration prepares a $10 billion military aid package, Biden warned Israelis not to give in to an “all-consuming rage” that would be looked upon as an overreaction to the attack by Hamas earlier this month in which over 1,400 Israelis were killed and nearly 200 hostages were taken.

Paul, whose resignation was first reported by the Huffington Post, said he’s seen the US Government approve several sales or shipments of matériel to other Middle Eastern countries seemingly in violation of federal law.

“On all of them there’s a moment where you can say, OK, well, you know, it’s out of my hands, but I know Congress is going to push back,” he said, adding “But in this instance, there isn’t any significant pushback likely from Congress, there isn’t any other oversight mechanism, there isn’t any other forum for debate, and that’s part of what got into my decision making.”

By continuing to give Israel what Paul described as carte blanche to kill a generation of enemies, which will only create a new one, US interests are not served.

“What it leads to is this desire to sort of impose security at any cost, including in cost to the Palestinian civilian population,” he said. “And that doesn’t ultimately lead to security.”

“This administration, I think, knows better and understands some of the complexity but brought very little of that nuance to the policy decisions that are being made.”

Paul says he’s received an outpouring of support from State Department colleagues and congressional staff members.

“A lot of people are wrestling with this being the current policy and are finding it to be deeply problematic,” he said, adding “I’ve really been quite moved by some of the folks who have reached out to say that they understand where I’m coming from. They respect my decision. It’s been very supportive.”

The market’s initial reaction to Powell’s prepared remarks (see below) are very dovish with yields and the dollar sliding notably:

Highlights include:

Dovish

“Doing too much could also do unnecessary harm to the economy…”

“…indicators of wage growth show a gradual decline toward levels that would be consistent with 2 percent inflation over time.”

“Along with many other factors, actual and expected changes in the stance of monetary policy affect broader financial conditions, which in turn affect economic activity, employment and inflation.

Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening. We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy.”

Neutral

“Given the uncertainties and risks, and how far we have come, the Committee is proceeding carefully.

We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”

Hawkish

“We are attentive to recent data showing the resilience of economic growth and demand for labor,” he said.

“Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

“In any case, inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” he said.

*  *  *

As we detailed earlier, in the main event of the week, Fed Chair Jerome Powell will speak at the Economic Club of New York at 12ET.

The prepared remarks will be followed by a Q&A.

A multitude of Fed speakers have reinforced the messaging of ‘higher for longer’ and ‘we are not necessarily done hiking yet’ in recent days, echoing Powell’s comments from the last FOMC on September 20:

“the fact that [the Committee] decided to maintain the policy rate at [the September FOMC] meeting doesn’t mean that we’ve decided that we have or have not at this time reached that stance of monetary policy that we’re seeking.”

But some Fed speakers have been more dovish, providing hope for equity bulls (despite rate-cut expectations forf2024 having plunged in recent days).

The fear is that Powell may choose to reinforce the “we’re not done yet” narrative and be more hawkish:

“I don’t think Powell will take a definitive position as some on the FOMC have taken that interest rate hikes are behind us,” said Avery Shenfeld, chief economist of CIBC Capital Markets.

As a reminder, The Fed’s “dots” still indicate one more 25bps hike this year (at either the Nov or Dec meeting).

The recent surge in longer-term bond yields has some suggesting this represents investor doubts at The Fed’s inflation-fighting prowess (or determination). Robert Brusca, chief economist at FAO Economics warned:

“They all seem to have this kind of gravity model view of inflation that says ‘well they don’t have to do very much because inflation is going to fall by itself to 2% because that’s where it was’,” Brusca said.

“I don’t trust it and I think the markets are showing signs they don’t trust it,” he added.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, also warned Powell will have to strike a relatively more hawkish tone about December given the recent batch of data “that does seem to increase uncertainty about how much progress they are making” on growth, labor market and inflation.”

Will Powell feel empowered to be more hawkish by recent events in the Middle East, and their effects on oil markets (and thus inflation)?

“Markets are now conscious that US headline inflation remains uncomfortably high at 3.7% and that war in the Middle East brings further upside risk for inflation,” said Saxo Bank’s senior fixed income strategist Althea Spinozzi.

“With the labor market remaining tight, the bond market cannot call the end of the Fed’s interest rate cycle with certainty.”

Will Powell mention the fact that “markets are doing their job for them” as financial conditions have tightened so dramatically in recent weeks…

Jack Hammond, Nomura’s Head of US Rates Sales, believes that “Powell will confirm (that) term-premium is the new rate hike” …as Charlie McElligott notes that The Fed seems to be starting to get the joke that higher front-end rates may in-fact be inflationary- and growth- stimulative…

“Money funds alone now throw off more than $22 billion a month in interest income, up from a few hundred million in early 2022….

Government data show personal interest income climbed to an annualized $1.8 trillion in September, up $300 billion from a year ago.  This alone could be adding more than 1% to GDP if consumers spend the interest income.”

So take your pick…dovish or hawkish? …and guess which way the market will perceive his words.

Watch Live here (due to start at 1200ET):

Full (and brief) prepared remarks below:

Before our discussion, I will take a few minutes to discuss recent economic data and the outlook for monetary policy.

Recent Economic Data
Incoming data over recent months show ongoing progress toward both of our dual mandate goals—maximum employment and stable prices.

Inflation
By the time the Federal Open Market Committee (FOMC) raised rates in March 2022, it was clear that restoring price stability would require both the unwinding of pandemic-related distortions to supply and demand, and also restrictive monetary policy to cool strong demand and give supply time to catch up. These forces are now working together to bring inflation down.

After peaking at 7.1 percent in June 2022, 12-month headline PCE (personal consumption expenditure) inflation is estimated at 3.5 percent through September.1 Core PCE inflation, which omits the volatile food and energy components, provides a better indicator of where inflation is heading. Twelve-month core PCE inflation peaked at 5.6 percent in February 2022 and is estimated at 3.7 percent through September.

Inflation readings turned lower over the summer, a very favorable development. The September inflation data continued the downward trend but were somewhat less encouraging. Shorter-term measures of core inflation over the most recent three and six months are now running below 3 percent. But these shorter-term measures are often volatile. In any case, inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal. We cannot yet know how long these lower readings will persist, or where inflation will settle over coming quarters. While the path is likely to be bumpy and take some time, my colleagues and I are united in our commitment to bringing inflation down sustainably to 2 percent.

The labor market
In the labor market, strong job creation has met a welcome increase in the supply of workers, due to both higher participation and a rebound of immigration to pre-pandemic levels.2 Many indicators suggest that, while conditions remain tight, the labor market is gradually cooling. Job openings have moved well down from their highs and are now only modestly above pre-pandemic levels. Quits are back to pre-pandemic levels, and the same is true of the wage premium earned by those who change jobs.3 Surveys of workers and employers show a return to pre-pandemic levels of tightness.4 And indicators of wage growth show a gradual decline toward levels that would be consistent with 2 percent inflation over time.5

Growth
To date, declining inflation has not come at the cost of meaningfully higher unemployment—a highly welcome development, but a historically unusual one. Healing of supply chains in conjunction with the rebalancing of demand and supply in the labor market has allowed disinflation without substantially weaker economic activity. Indeed, economic growth has consistently surprised to the upside this year, as most recently seen in the strong retail sales data released earlier this week. Forecasters generally expect gross domestic product to come in very strong for the third quarter before cooling off in the fourth quarter and next year. Still, the record suggests that a sustainable return to our 2 percent inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditions.6

Geopolitical tensions are highly elevated and pose important risks to global economic activity. Our institutional role at the Federal Reserve is to monitor these developments for their economic implications, which remain highly uncertain. Speaking for myself, I found the attack on Israel horrifying, as is the prospect for more loss of innocent lives.

Monetary Policy
Turning to monetary policy, the FOMC has tightened policy substantially over the past 18 months, increasing the federal funds rate by 525 basis points at a historically fast pace and decreasing our securities holdings by roughly $1 trillion. The stance of policy is restrictive, meaning that tight policy is putting downward pressure on economic activity and inflation. Given the fast pace of the tightening, there may still be meaningful tightening in the pipeline.

My colleagues and I are committed to achieving a stance of policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective. We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.

Along with many other factors, actual and expected changes in the stance of monetary policy affect broader financial conditions, which in turn affect economic activity, employment and inflation. Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening. We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy.

Conclusion
My colleagues and I remain resolute in our commitment to returning inflation to 2 percent over time. A range of uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little. Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment. Doing too much could also do unnecessary harm to the economy.

Given the uncertainties and risks, and how far we have come, the Committee is proceeding carefully. We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.

Thank you. I look forward to our conversation.

After suffering defeat twice, Rep. Jim Jordan (R-OH) will not hold a third vote for speaker, and will instead back Patrick McHenry (R-NC) as interim speaker until January.

This, after Jordan met with former Speaker Kevin McCarthy (R-CA), McHenry, Cole (R-OK), and Emmer (R-MN) to discuss options, Punchbowl News reports.

NEWS — JIM JORDAN will not hold a third ballot for speaker. He will back PATRICK MCHENRY as an interim speaker until JANUARY.

MCCARTHY, MCHENRY, JORDAN, COLE and EMMER met this morning

We reported this this AM in @PunchbowlNews AM.

CONFERENCE STARTING NOW.

— Jake Sherman (@JakeSherman) October 19, 2023

After the first two rounds, a group of Republicans made it clear that Jordan wouldn’t enjoy enough support to win the speaker’s gavel. With House functions at a standstill – including dealing with a looming shutdown after the 6-week band-aid expires mid-November, lawmakers can now move forward with a proposal to expand McHenry’s powers. Punchbowl also notes that there’s “essentially no difference between a speaker and a speaker pro tem.”

“There is a question whether a speaker pro tem would be in the presidential line of succession. There are also questions about whether he could take part in other speaker functions that have evolved over the years — Gang of Eight intelligence briefings, for instance.”

Jordan will remain the speaker designee, and will maintain the option to hold a speaker vote at any time.

According to Bloomberg, senior Democrats are supportive of the plan.

As Axios notes, McHenry, 47, will essentially have the same power as an elected speaker. More:

• McHenry got two ironic endorsements late yesterday: former GOP speakers Newt Gingrich and John Boehner. Both were run out of office — just like Rep. Kevin McCarthy was a few weeks ago.

Driving the news: Rep. Dave Joyce (R-Ohio) plans to introduce a measure on Wednesday that would temporarily empower McHenry to oversee the passage of legislation, Axios’ Andrew Solender reports.

• The plan would be to introduce it if Jordan fails another House floor vote — and it would require McHenry to cooperate by recognizing Joyce on the House floor.

And so, Jordan is off the hook – for now.

During his Tel Aviv visit on Wednesday, President Biden had been pressed by reporters as to what convinced him to side with Israel’s denial that it didn’t strike Al-Ahli Baptist Hospital in Gaza, killing up to 200-300 people, according to local health officials. Biden had said that data from his Defense Department showed the explosion was unlikely to have been an Israeli airstrike. But it’s not just journalists that want more, US lawmakers are also demanding clearer answers.

A group of Progressive Democrats in Congress are now pushing the Biden White House to publicly declassify the intelligence that the US has on the hospital bombing. 

According to Haaretz, “Administration officials provided senators with a classified briefing on Wednesday, shortly after the ranking bipartisan members of both the House and Senate Intelligence Committees said they reviewed information and reached the same conclusion.”

Thirteen Democrats have brought the two-page resolution which additionally presses Biden to “immediately call for and facilitate de-escalation and a ceasefire to urgently end the current violence” as well as to “promptly send and facilitate the entry of humanitarian assistance into Gaza.” The US voted down a UN Security Council resolution this week which called for a humanitarian ceasefire.

The drive has been sparked in large part by angry Democratic progressives who have been vocal supporters of the Palestinian cause: 

The calls are only growing louder as tensions within the Democratic Party are brewing over Rep. Rashida Tlaib’s repeated allegation that Israel was responsible — even after U.S. President Joe Biden indicated an Islamic Jihad rocket launch caused the blast.

This immediately unleashed controversy within Democratic circles, with Sen John Fetterman going on the attack: “It’s truly disturbing that Members of Congress rushed to blame Israel for the hospital tragedy in Gaza,” he said in an interview.

“Who would take the word of a group that just massacred innocent Israeli civilians over our key ally?” Fetterman questioned.

Adding to the controversy, some within UK media have sought to debunk the audio and other information released by the Israeli Army which purports to reveal two Hamas members admitting an errant missile from Gaza fell on the hospital…

Who was behind the Gaza hospital blast – a visual investigation. pic.twitter.com/FGQ9kG0Wni

— Channel 4 News (@Channel4News) October 19, 2023

According to Channel 4’s Alex Thompson:

Several experts confirm Hamas’ view to Channel 4 News that the audio tape of “Hamas” operatives talking about the missile malfunction is a fake . They say the tone, syntax, accent and idiom are absurd.

Meanwhile, on Thursday British Prime Minister Rishi Sunak is engaged in his own solidarity visit with Israel. He met with Netanyahu and President Herzog in Jerusalem, telling them he’s “proud to stand with you in Israel’s darkest hour.” The UK says it’s cooperating with Israeli authorities on hostage recovery, and further that Hamas must be called terrorists.

By Bas van Geffen, Senior Macro Strategist at Rabobank

On The Wrong Track

For no other reason than historical, the entire European Parliament migrates from Brussels to Strasbourg for one week each month. To orchestrate the move, the parliament charters entire trains. This practice has drawn criticism and ridicule at the best of times. Earlier this week, due to a switching error, dozens of Members of European Parliament heading for Strasbourg found themselves at Disneyland instead. The symbolism of the error invites numerous jokes, such as POLITICO recalling that the EP is regularly seen as a Mickey Mouse Parliament – though I would say that Mr. Mouse probably runs a tighter ship than Europe.

The events in the Middle East again put the finger on the EU’s weakest spot: foreign policy. Take, for instance, the internal row over Von der Leyen’s trip to Israel – with many diplomats accusing her of policy overreach when she delivered a speech that not all countries could support. And last week the EU had to reverse its decision to halt aid to Palestine within hours of its announcement after furore from national governments. Indeed, European policymakers have been at pains to formulate a response that everyone could stand behind.

European officials aboard the train underwent their delay with a sense of humor too, with one jokingly suggesting that Disney’s slogan – When magic comes to life – could soon become the European Parliament’s as well. All jokes aside, European politicians could use a bit of magic to realize their dreams of strategic autonomy and a greener economy.

Because outside the gates of the Magic Kingdom, reality sadly still looks very grim. The deadly explosion at the Al-Ahli hospital turned US President Biden’s objective to de-escalate tensions in the Middle East into a herculean task. Accusations and (fake) evidence of involvement of both sides circulated. Despite this uncertainty, various countries were quick to condemn the attack, with many (initially) putting the blame on Israel. A day later, various intelligence sources suggest that the explosion was more likely caused by a misfired missile from Islamic Jihad militants. President Biden told Israel’s Netanyahu that “it appears as though it was done by the other team, not you,” according to his Department of Defence. While this may have shifted the perspective of some countries, it probably hasn’t changed the opinion of leaders of other Middle Eastern countries.

At the same time, President Biden’s attempts to de-escalate the situation may have partly fallen on deaf ears in Israel as well. “Justice must be done,” Biden said. “But while you feel that rage, don’t be consumed by it,” noting that many Palestinians are innocent and simply caught in the middle of this conflict. Yet, that advice may not be sufficient to see the Israeli leaders back down from a ground operation. And, especially after the cause of the hospital explosion is still being questioned in the Arab world, any such escalation from Israeli side comes with the risk that other countries may get (more) involved in the conflict.

But Israel, of course, has support from the US. Biden reiterated this yesterday: “[You] have to continue to ensure that you have what you need to defend yourselves. And we’re going to make sure that occurs, as you know.” Bloomberg reported that the US President is considering a supplemental request of $100 billion(!), which “would include defense assistance for Israel and Ukraine alongside border security funding and aid to nations in the Indo-Pacific, including Taiwan”.

Returning back to inside the gates of Europe’s land of wonders, the outside situation is unfortunately already seeping in. Not only politicians are divided; so too is the population. Security personnel have been on high alert for conflicts between supporters of both sides. Yesterday, the palace of Versailles was evacuated for a third time in just days, and several French airports were evacuated after threats were made against them.

Meanwhile, park maintenance is ongoing, as governments are unhappy that popular rides are unavailable to many Europeans. To allow more people past the ‘you must be this tall to ride’-signs on popular attractions like the housing market – with a steadily increasing lower bound owing to the ECB’s policies – several governments have launched, or extended, support programmes. France’s Le Maire announced an expansion of the zero-interest loan (‘PTZ’) programme. The policy supports households looking to buy a house in areas where the property market is tight, by making available –under certain conditions– interest-free loans of up to €100,000 (with the state covering the interest payments instead). The finance minister said, “The increase in rates prevents many French people from accessing a mortgage loan. […] We want as many households as possible to have access to housing loans.” Some middle class households will now also be entitled, and about 200 cities will be added to the list of eligible regions.

Le Maire estimates that this could cost the government around €850 million. A back of the envelope estimate suggests the government expects to help some 230,000 households. Yes, that is less than 1% of French households, but it could nonetheless pose a headache for the ECB. Other countries have taken similar measures to shield households from higher mortgage costs – take Spain and Italy. And the measures help those with lower incomes and first time buyers, which have relatively elastic demand curves. By contrast, those with existing mortgages – and a sufficiently long fixed rate period – are less sensitive to rising rates. And so, these measures, noble as their intentions are, could dull the impact of monetary policy at a time when the ECB is desperately trying to get people to behave more like Scrooge McDuck.

It also raises questions about the number of seats left on the (Fiscal) Space Mountain ride: Le Maire himself has said he would seek an additional €1 billion in spending cuts on top of the €16 billion in cost reductions unveiled in the draft 2024 budget last month, as governments are also starting to feel the impact of higher financing costs.

The Conference Board’s Leading Economic Indicators (LEI) continued its decline in September, dropping 0.7% MoM (worse than the 0.4% decline expected).

• The biggest positive contributor to the leading index was jobless claims at +0.13

• The biggest negative contributor was average consumer expectations at -0.19

This is the 18th straight monthly decline in the LEI (and 18th month of 19) –  the longest streak of declines since ‘Lehman’ (22 straight months of declines from June 2007 to April 2008)

“The LEI for the US fell again in September, marking a year and a half of consecutive monthly declines since April 2022,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.

“In September, negative or flat contributions from nine of the index’s ten components more than offset fewer initial claims for unemployment insurance.

Although the six-month growth rate in the LEI is somewhat less negative, and the recession signal did not sound, it still signals risk of economic weakness ahead. So far, the US economy has shown considerable resilience despite pressures from rising interest rates and high inflation.

Nonetheless, The Conference Board forecasts that this trend will not be sustained for much longer, and a shallow recession is likely in the first half of 2024.”

At this rate the Dept of Bidenomics will push GDP to 10% and unemp to 0% by Nov 2024. Unfortunately mortgages will be ~100% by then.

— zerohedge (@zerohedge) October 19, 2023

Despite ‘soft landing’ hype, the LEI is showing no signs at all of ‘recovering’, tumbling back in line with the peak in March 2006…

And on a year-over-year basis, the LEI is down 7.8% – close to its biggest YoY drop since 2008 (Lehman) outside of the COVID lockdown-enforced collapse…

Not a good sign for Real GDP. (The annual growth rate of the LEI remained negative, confirming weaker economic activity ahead)…

The trajectory of the US LEI continues to signal a recession over the next 12 months

Is this the cleanest view of The Fed’s tightening impact on the US economy? Certainly doesn’t look like a ‘soft’ landing…

Authored by James Rickards via DailyReckoning.com,

Is the world coming apart at the seams? It would seem so…

Of course, there are always wars going on somewhere and hot spots waiting to erupt. That’s the steady state of the world. But some periods are far more dangerous either because the conflicts are more intense, or there are more of them or both.

The best analytic approach in such situations is not just to compile a list of conflicts but to consider their interconnectedness and weigh the risks of escalation. Is it just another bad patch like the 1960s with Vietnam, or are we on the brink of something truly catastrophic like World War II?

In considering a catastrophic outcome such as World War II, it’s important to recall it was preceded by a long series of individual events, each bad in their own way, which culminated in the war.

These included the Japanese invasion of Manchuria, the Italian invasion of Ethiopia, the German takeover of Austria and annexation of part of Czechoslovakia and the Spanish Civil War. Most took these events to be unconnected.

Only a few statesmen, most famously Winston Churchill, saw these were all steps leading to a new world war.

The Linkage of War

Investors are not mere bystanders in these periods. Fortunes are made or lost by those who correctly see the linkages between disparate crises, and who have the predictive analytic tools to see where it is all leading.

Below is an overview of critical confrontations today with the suggestion that the linkages are strong, and the risks of escalation are high. Some recommendations for portfolio risk management follow:

Ukraine: I’ve written extensively about the war in Ukraine and readers are generally familiar with the outline. This is not the place to review the entire history of U.S. provocations since 2008 and Russian responses.

The situation today is that the Ukrainian offensive that was launched on June 4 has failed utterly. Russian defensive lines are intact, Ukraine has gained no appreciable territory except for a few deserted villages in the gray zone where their troops are being annihilated and equipment losses of armored vehicles have been enormous.

The U.S. response has not been to start peace talks. Instead, the U.S. continues to escalate with more weapons shipments and money. Biden’s goal is to keep the war going past the November 2024 election, so he does not have to admit another defeat.

The danger is that the U.S. resorts to escalation (F-16 fighter jets, Abrams tanks, sea drones, advisers on the ground), which leads to Russian responses (hypersonic missiles, a new offensive in the north) and that both sides are driven closer to the use of nuclear weapons by the escalatory dynamic.

Kosovo–Serbia. This is another in the long list of Balkan conflicts that go back to the origins of World War I in 1912–1913. The latest flashpoint is the confrontation between Kosovo and Serbia.

Kosovo declared independence from Serbia in 2008, a move that Serbia has never recognized. Relations between the two areas had been stable due to mediation by the EU and U.S. Recently tensions have escalated due to claims of a Serbian terrorist attack in Kosovo and the massing of Serbian troops on the border.

Serbia is a longstanding ally of Russia. Serbia is surrounded by NATO members (Slovenia, Croatia, Hungary, Romania,, among others).

On the other hand, if Serbia could regain control of Kosovo, it would drive a wedge through much of this NATO encirclement. The risk is not only of a war between Kosovo and Serbia, but that it becomes another proxy war between the U.S. and Russia, and a sideshow to the war in Ukraine.

Again, the risks of escalation are high.

Israel – Hamas. The Hamas surprise attack on Israel from Gaza on October 7 was of unprecedented size and scope since the Yom Kippur War of 1973; in fact the new attack was on the exact 50th anniversary of the Yom Kippur War. For the first time since 1973, Israel has officially declared war. This is not an incursion, an incident or a terrorist attack. This was an invasion by Hamas and will be met with the destruction of Gaza by Israel.

Initial details including many I have received from Israeli Defense Forces (IDF) on the ground and former intelligence officers are horrific. Hamas fighters went from house to house and executed civilians, including women and children.

Some were killed, stripped and dragged through the streets. Perhaps 1,000 Israelis were killed on the first day and an unknown number taken hostage. They are not prisoners of war because they were not in military uniforms. They’re hostages.

The Israeli response will be massive and extremely violent. Israel hasn’t yet launched a large-scale ground campaign in Gaza yet, but one is expected. Again, the geopolitical risk is escalation. Hamas is backed by Iran and Qatar. Many Hamas leaders live in Doha, the capital of Qatar. Israel won’t hesitate to assassinate them there. A much wider Middle East war cannot be ruled out.

The implications for global energy markets are obvious. Recriminations are already being aimed at Biden because he recently released $6 billion in cash to Iran and has been making funding available to Hamas.

Syria – Turkey – U.S. I’ll touch on this theater briefly. U.S.-backed efforts to topple the Assad regime in Syria go back to the Obama administration. U.S. troops are in Northern Syria to promote this effort and to control Syrian oil output for the benefit of indigenous Kurds. Turkey views the Kurds as mortal enemies because they are trying to liberate Kurdish portions of Turkey to join in a broader Kurdistan.

Russia has been heavily involved in supporting Assad with clear success so far. Turkey has recently increased attacks on Kurdish positions in Syria. The U.S. recently shot down a Turkish drone. Russia is on full alert. Russia and Turkey are on friendly terms but the U.S. and Turkey are NATO allies.

It’s complicated but the risks of U.S. dogfights with Turkish or Russian aircraft and the risks of a Russian missile attack on U.S. aircraft are high.

China – Taiwan. A Communist invasion of Taiwan would result in a war larger than any of those described above, yet matters have been relatively calm in this region. That is likely due to upcoming Taiwan elections where a pro-China party has a good chance of winning.

China does not want to rock the boat ahead of the elections. Yet, this situation remains dangerous and potentially volatile.

I’ve just described five wars or near-wars that are currently underway. It would be easy to add to this list including hot spots in Azerbaijan, North Korea, Niger, India and elsewhere.

Without assigning numeric probabilities to each crisis getting worse, it’s a simple matter of statistics that when five or more conflicts are escalating, the odds of one spinning out of control are high.

It may be the case that we look back on this mosaic of proxy wars and hot wars as presaging a world war.

Investors Should Follow A Few Simple Rules

Follow events closely. Don’t take any of this for granted and never assume things will “just work out.” Sometimes they don’t. Again, the statistical odds that one of these conflicts will spiral are high. It’s not inevitable, but the odds are high.

Diversify your portfolio. That sounds obvious, but many investors don’t understand diversification. It doesn’t mean owning 50 stocks in ten sectors. It means owning allocations in five or more uncorrelated asset classes.

These can include stocks but should also include cash, private equity, alternative funds, gold, real estate, and high-quality notes such as U.S. Treasuries.

Remain nimble. Situations can change quickly. On the path to war, you should increase allocations to cash and hard assets and own some defense and energy stocks. If events are resolved without escalation, then a pivot back into stocks may be timely.

But this is not a time to “set it and forget it” in terms of portfolio allocations.

With housing affordability at its lowest since at least the early 1980s, (as supply suffers with housing starts slumping, and mortgage rates continuing to surge), it’s no surprise that analysts expected existing home sales in September to tumble 3.7% MoM. Sales actually fell 2.0% MoM (so better than expected,  but still the 19th monthly decline in the last 22 months). That decline left existing home sales down over 15% YoY…

Source: Bloomberg

The total existing home sales SAAR dropped back below 4mm for the first time since October 2010 (during the foreclosure crisis)…

Source: Bloomberg

Sales fell in all regions except the Northeast in September… and in every price range…

Single-family home sales fell to an annualized 3.53 million pace, the lowest since 2010. Condominium and co-op sales also declined.

“As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales,” said Lawrence Yun, NAR’s chief economist.

“The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains.”

First-time buyers made up a historically low 27% of purchases, down from the prior month.

Cash sales represented 29% of total sales, matching the highest level in over a decade. Investors, who often purchase with cash and are therefore less sensitive to mortgage rates, made up 18% of the market.

“It would be very unusual to have higher cash compared to first time buyers,” Yun said on a call with reporters.

And, if mortgage rates (and thus affordability) are anything to go by, things are about to get real…

Source: Bloomberg

The median selling price rose 2.8% from a year earlier to $394,300, the highest September reading on record, pushing affordability even lower. But existing home prices are falling relative to new home prices (with the ratio near record lows)…

Finally, amid all this un-affordability for shelter, some Americans are turning elsewhere…and with mortgage rates back above 8%, it can only get worse.