Authored by Charles Hugh Smith via OfTwoMinds blog,

In a system maintained by ever-greater extremes, confidence erodes very quickly once the next extreme fails to move the needle.

Many observers expect interest rates to fall back to zero as inflation dissipates and central banks rush to stimulate flagging economies. This expectation is reasonable based on the events of the past 15 years (2008-2023), but if we zoom out to a 50-year timeline, we get a different perspective and draw a different conclusion.

2023 is not 2008, and the difference can be summed up in one phrase: global risk has been repriced. Interest rates reflect not just inflation expectations and central bank stimulus; interest rates and bond yields also reflect the risk premium on the cost of credit-money, and if the risk profile has changed in fundamental ways, the risk premium and cost of credit-money will reflect that, regardless of inflation and central bank stimulus.

The global economy is changing in fundamental ways, and this is repricing everything: the cost of money/credit, the price of assets, the value of hedges and insurance, and so on. The core driver in all this repricing is risk, for it’s the reappraisal of risk that forces the repricing of everything.

When risk is low and transparent, the risk premium is low and this is reflected in low, stable costs. When risk soars and is difficult to assess, the risk premium rises and this pushes costs higher.

In terms of asset valuations, higher risks reprice assets higher or lower based on the risk profile: what happens to the asset if liquidity dries up in a risk-driven crisis? If credit dries up, what happens to demand for the asset?

Risk tends to be self-reinforcing. If we look around and see everyone else is confident that risk is theoretical rather than real, we stop buying hedges against bad things happening, and we pay a premium for assets that do well in low-risk eras.

But if we see other people getting defensive–selling assets, paying down debt, reducing spending and risk-on investing–then we pull in our horns, too.

What changed? The global economy began a cycle in the early 1990s of declining risk throughout the system due to these risk-reducing changes:

1. The dissolution of the USSR and the end of the hyper-expensive, heightened-risk Cold War.

2. The flood of low-cost oil as all the super-giant fields discovered in the 1970s began peak production.

3. China emerged as the low-cost “workshop of the world,” enabling 30 years of soaring corporate profits as corporations reduced costs by offshoring production to China.

4. This offshoring boosted profits while deflating the costs of production due to much lower labor costs, lax / non-existent environmental standards and Chinese producers’ willingness to accept razor-thin profit margins.

5. The reduction in global risk and the deflationary impact of Globalization (offshoring and opening new markets) enabled central banks to lower interest rates for 30 years without sparking inflation and private-sector banking/lending to expand credit and leverage, effectively globalizing / commoditizing financial instruments that hedged risks (Financialization).

6. After a decade-long lag (the 1980s), the advances in personal computing, software and desktop publishing finally began generating productivity increases.

7. The economic theology of Neoliberalism was embraced globally. Neoliberalism claims “markets solve all problems” and so the universal solution is to turn everything into a market by reducing regulations and state oversight.

All of these forces tended to restrain prices of commodities, goods and services and reduce systemic risks while expanding markets, financial “innovations” and profits. This created a global “virtuous cycle” in which each dynamic reinforced the others.

This “virtuous cycle” ended in the 2008-09 Global Financial Meltdown, but was papered over for a decade by extreme policies:

1. China launched the largest credit expansion in history (Russell Napier’s phrase) to counter the meltdown

2. The Federal Reserve and other central banks began a policy of financial repression (i.e. centrally managing financial markets rather than let market forces dictate liquidity, price, risk, etc.), leading to Zero Interest Rate Policy (ZIRP) that was effectively negative-rates since inflation continued sputtering along at 1.5% to 2%.

Why did the “virtuous cycle” end? The basic answer is diminishing returns: the returns on any new policy or dynamic such as Neoliberalism, globalization or financialization follow an S-Curve (see chart below), where the initial returns are stupendous (the boost phase) and then as the dynamics become ubiquitous, the returns diminish until they stagnate. At that point, the system decays unless new more extreme measures are applied–for example, China’s debt to GDP ratio doubling from 140% to 280% and interest rates being suppressed to zero.

Another factor is the cannibalization of domestic markets once globalization had skimmed the easy returns. Financialization starts out looking “innovative” by claiming it can hedge all risks at low cost, effectively lowering the risk of playing financial games to zero. As Benoit Mandelbrot and other explained, this isn’t possible for structural/mathematical reasons (markets are fractals, etc.).

As the easy gains diminish, financialization takes assets that were once low-risk and commoditizes them into “instruments” that can be sold globally as “low-risk assets.” This is what happened to home mortgages, which went from being highly regulated and low-risk to being poorly regulated /fraudulent and packaged into highly deceptive mortgage-backed securities that masked the true risk–high–behind flim-flam claims of low risk.

As costs rose in China and other producing nations, labor costs began rising, along with higher taxes and mandates to reduce the choking air pollution and poisoned water/soil that inevitably result from uncontrolled industrialization.

Suppressing the cost of capital/credit to near-zero generated a tsunami wave of private-generated capital, both within the banking sector and the ballooning non-banking (shadow banking) sectors. This low-cost credit was then unleashed into global markets to chase any high-yield investment, which of course means gambling on risky assets while supposedly hedging the bets against losses.

All this financial engineering–ZIRP, cheap, abundant credit, the chase for yield–ultimately depends on liquidity, i.e. the presence of buyers in size to create a market for anyone who seeks to sell an asset. If liquidity dries up for whatever reason–a bank crisis, a market panic, etc.–then sellers run out of buyers abd the market reprices the asset at lower and lower levels until buyers emerge. In a bidless/zero-liquidity market, there are no buyers at all until the price approaches zero.

The potential wipeout of bubble-generated “wealth” would bring down the entire global financial system, for all those assets are collateral for the world’s immense mountain of credit/debt.

The evaporation of liquidity in 2008-09 is what former Fed Alan Greenspan identified as the risk he did not anticipate.

So what changed around 2007-09? Globalization and Financialization moved from “virtuous cycle” to stagnation/decline, policies became more extreme to mask rising systemic risks, and the addition of a billion new workers aspiring to all the commodity-consuming luxuries of the middle class lifestyle soaked up excess production of oil and other commodities. With surpluses gone, prices had to start rising.

Post-Covid lockdown and recovery, China’s policies changed from “open to the world” and “peaceful rise” to aggressive militarization and the restriction of Chinese society’s access to the outside world.

All of these factors exposed the risks that had been successfully masked: the risks that global supply chains can break down or be disrupted by geopolitics; the risk that financialization games can blow up; the risk that Neoliberalism failed to suppress risks of fraud and exploitation; the risks that soaring debt outpaces expansion of the real-world economy, generating debt crises, and the risks of extreme policies generating unintended consequences (moral hazard, extreme risk-taking, etc.) and blowback (re-industrialization, trade wars, etc.).

On top of these risks, there are now demographic, capital, labor and resource sources of risks. Geopolitical tensions are rising, which is historically typical in eras where essential commodities become scarce and/or unavailable /costly. This is incentivizing re-industrialization, reshoring, friendshoring, etc., all of which are national-security issues aimed at reducing dependency on rivals or risky supply chains.

In effect, the nation-state has to take the driver’s seat from deregulated markets, the Neoliberal ideal.

This re-industrialization is also driven by the transition to non-hydrocarbon energy sources, a goal that will require far more capital than most expect even as it underperforms unrealistic expectations. The demand for trillions in new investment will pressure credit for consumption (new homes, vehicles, vacations, etc.), pushing the cost of credit higher regardless of any other conditions.

In the past decade, birth rates in many developed and developing economies have cratered while the workforce ages and enters retirement. Both of these developments mean pension and social welfare programs launched when there where 5 workers for every retiree are no longer sustainable now that there are only 2 fulltime workers for every retiree/recipient of social welfare.

The decline of the work force also introduces two other dynamics: potential labor shortages and the stagnation of demand, as older people consume far less than new households having children. As marriage rates and birth rates plummet, so do the prospects for consumption-driven economic growth.

The policy extremes of ZIRP, moral hazard, credit expansion and the chasing of yields has inflated The Everything Bubble which has put the price of housing and vehicles out of reach of the bottom 60% (or in many regions, the bottom 80%) of households.

This rising inequality erodes social cohesion and fosters an alternative lifestyle in which young workers opt out of the rat race to acquire an upper-middle class income and wealth. This diminishes the pool of potential buyers of all the overpriced assets, further reducing liquidity on a demographic/structural basis.

Simply put, the rising tide of wealth and profits hasn’t raised all boats. The top 5% have garnered the vast majority of the gains in asset appreciation, capital gains and profits. This generates a background of rising risk of social disorder.

On top of all this, 30 years of moderate inflation have reversed into a era of sustained inflation, which despite the hopes of many commentators, will not be transitory. This era of inflation is driven by:

1. Excessive debt levels that can only be managed by inflating the debt down to manageable levels.

2. Scarcities of essentials which push prices above what consumers can afford while not being high enough to fund massive new investments needed to increase supply.

3. The cost of capital must rise to reflect the rising risk premium globally.

All the tricks deployed to restore confidence in 2008-09 have reached such extremes that now systemic risk–of default, conflicts, broken supply chains, geopolitical blackmail, scarcities of essential commodities and perhaps the least understood risk, the evaporation of liquidity as credit and buyers of risk-on assets become scarce–is rising dramatically.

These risks are difficult to assess or hedge completely, and the inter-dependence of the global economy and financial system–a tightly bound system–mean risk in one area quickly spreads to the rest of the system.

This structural rise in systemic risks raises costs and changes the risk-reward calculation on every asset.

Take housing as an example. When we’re confident housing will rise 30% every decade like clockwork, we’ll pay today’s prices with the expectation that the house will gain 30% in the coming decade. But as the financial risk premium rises, and we have to factor in the risk that the house might lose 30% of its value going forward, we become wary of paying today’s high price.

As others also become wary, the recognition of risk reinforces itself and as prices drop, our wariness increases and we decide to wait until the risks of further decline become clearer.

The problem with assessing risk is the full risks are never clear until it’s too late.

Everything is being repriced, including risk itself, the cost of capital and labor and the value of all assets. This repricing is currently modest, but as risks manifest, we can anticipate an acceleration of repricing. If liquidity dries up–buyers for houses suddenly withdraw from the market–the price declines can be dramatic and self-reinforcing.

In a system maintained by ever-greater extremes, confidence erodes very quickly once the next extreme fails to move the needle. At that point, all bets are off because confidence in the policymakers’ ability to “save the day” vanishes.

Once confidence vanishes, so does liquidity. Once markets are illiquid, the problem isn’t limited to the declining valuation–the real problem is finding a buyer who will enable you to convert the asset into cash.

It’s clear the global risk premium has increased dramatically and is increasing in an unpredictable arc. This structural trend of higher risks will reprice everything–including bond yields and interest rates.

*  *  *

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After ugly ISM employment data, dismal JOLTS, soaring WARN notices, and a weaker than expected ADP print, this morning’s Challenger, Gray & Christmas report announced a bigger than expected 89,703 job cuts in March (270,416 year-to-date), up 319.4% YoY. The West dominated the cuts (East 13,638; Midwest 21,764; West 48,123; South 6,178), with technology-sector companies have announced 102,391 cuts so far this year, “on pace to surpass the highest annual total for the sector announced in 2001,” the report notes.

Source: Bloomberg

“We know companies are approaching 2023 with caution, though the economy is still creating jobs,” Andrew Challenger, firm’s senior vice president, said in statement.

“With rate hikes continuing and companies’ reigning in costs, the large-scale layoffs we are seeing will likely continue.”

As we detailed overnight, this morning’s jobless claims data comes with a giant caveat as BLS is about to drop the ‘revised’ series of data.

With the BLS lies finally over, initial jobless claims soared to 228k – This is the 9th straight week with initial claims above 200k… post revision of course.

Continuing claims surged above 1.8mm, its highest since Dec 2021…

Source: Bloomberg

The so-called ‘adjustment’ is shown below – just as we have suggested, the last 3 months have seen dramatic upward revisions…

Below we zoom in on just 2023: note the staggering divergence between the previously reported “data” and the latest “post-revision” numbers:

Some context for the recent adjustments

• last week claims came in at 246K, revised massively from 198K
• the week before that was 247K revised from 191K
• the week before that was 230K revised from 192K

…all of which might well have had a significant impact on The Fed’s recent decisions.

None of this should come as a surprise as we have been mocking the claims data’s “seasonal adjustments” for months…

• Something Snaps In The US Labor Market: Full, Part-Time Workers Plunge As Multiple Jobholders Soar – July ’22
• Something Is Rigged: Unexplained, Record 2.7 Million Jobs Gap Emerges In Broken Payrolls Report – Dec ’22
• Here Comes The Job Shock: Philadelphia Fed Admits US Jobs “Overstated” By At Least 1.1 Million – Dec ’22
• US Layoffs Far Higher Than Suggested By Initial Jobless Claims, JOLTS – Jan ’23
• US Job Openings Far Lower Than Reported By Department Of Labor, UBS Finds – Jan ’23
• Even JPMorgan Is Lashing Out At Ridiculous Seasonal Adjustments In Key US Data – Feb ’23
• Goldman Expects Nearly 1 Million Drop In Tomorrow’s Job Openings – Mar ’23

The first bank crisis due to BLS seasonal adjustments

— zerohedge (@zerohedge) March 17, 2023

Under the hood, Michigan, Massachusetts and California saw the biggest jump in jobless claims while Indiana and Tennessee saw the biggest drop in claims…

Finally, we note that having decoupled from ‘reality’ for six months, the labor market is now rapidly catching down to ‘soft’ survey’s sad reflection of the state of the economy…

Source: Bloomberg

Will this be the trigger for Powell and his pals to ‘pause’?

Authored by Liam Cosgrove via The Epoch Times (emphasis ours),

Small businesses across the United States are experiencing a surge in bankruptcies, surpassing levels not seen since 2020. According to a UBS note reviewed by The Epoch Times, conditions could become worse as the knock-on effects from the recent banking crises begin to manifest.

The note from UBS Evidence Lab shows private bankruptcy filings in 2023 have exceeded the highest point recorded during the early stages of the COVID pandemic by a considerable amount. The four-week moving average for private filings in late February was 73 percent higher than in June 2020.

“[We] believe one of the more underappreciated signs of distress in U.S. corporate credit is already emanating from the small- and mid-size enterprises sector,” Matthew Mish, head of credit strategy at UBS, wrote in a recently published research note. “[The] smallest of firms [are] facing the most severe pressure from rising rates, persistent inflation and slowing growth.”

Industries hit hardest by the wave of bankruptcies include real estate, health care, chemicals, and retail outlets, according to the Swiss Bank’s report.

The Federal Reserve’s monetary tightening to combat inflationary pressures has been largely behind the uptick in bankruptcies. UBS indicated that the fear of a credit crunch has further worsened the rise in defaults.

Credit conditions are tightening across the spectrum. Large businesses and individual borrowers are feeling the heat as well.

As of February 2023, the monthly bankruptcy filings exceeded 31,000, an 18 percent rise from the 25,564 bankruptcy filings reported in February 2022, according to data provided by the American Bankruptcy Institute. The increase in Chapter 11 bankruptcies—typically used by larger businesses—rose by 83 percent over the same period, with 373 total filings in February of this year.

The White House has downplayed the current economic challenges and their impact on small businesses. Last week, for example, President Joe Biden cited higher rates of new business formation over the past three years—without acknowledging the issues entrepreneurs face. 

“When I came into office, this economy was reeling. Small businesses were hurting. Literally hundreds of thousands of small businesses had closed across the country. Millions of Americans, many of whom worked in small businesses, lost their jobs through no fault of their own,” he said. “To jumpstart American economic recovery, we needed to help the small businesses, and we needed to help them fast. So we got to work.”

The president claimed that the American Rescue Plan Act of 2021 helped the economy by providing emergency loans to millions of businesses. 

Still, the administration is set to raise the corporate income tax to 28 percent sometime in the coming months. The tax hike will affect small businesses at a time when credit conditions continue to tighten.

France faces another wave of widespread protests and strikes following an unproductive discussion between the prime minister and labor unions. The failure to reach a compromise on the unpopular pension reform, which extends the working years for individuals, has fueled two-and-a-half months of public discontent. 

Hundreds of thousands of people are expected to protest on Thursday against Emmanuel Macron’s pension reform to raise the minimum age from 62 to 64.

NOW – Protest at BlackRock head office in Paris.

The Globalists are starting to run into some bother as the world awakens from its slumber #paris #blackrock #biden #us #France #Dollar #protests pic.twitter.com/jBv93gtvbh

— jamiemcintyre (@jamiemcintyre21) April 6, 2023

Protests again grip France but Macron not backing down
https://t.co/ObUxxNENKm pic.twitter.com/GAiNzzTs8K

— Mohamed Vevo (@MoH_Vevo_Mv) April 6, 2023

Operation “Dead City”

Protesters block major highways, universities, high schools, industrial areas, etc., as protests against Macron’s pension reforms continue in France.

This is Lyon, France.pic.twitter.com/0V521MQD7O

— Hassan Mafi ‏ (@thatdayin1992) April 6, 2023

France 🇫🇷

Protests continue to take place across France against Macron’s pension reform (and many other issues). Just look at the scale of the protests in Toulouse.pic.twitter.com/4j368gEe0D

— James Melville (@JamesMelville) April 6, 2023

Trade union leaders met the Prime Minister, Elisabeth Borne, on Wednesday, but after just an hour of talks — they failed to find a comprise. The Guardian provides insight into some of those conversations: 

Cyril Chabanier, speaking on behalf of France’s eight main unions, said: “We again told the prime minister that the only democratic outcome would be the text’s withdrawal. The prime minister replied that she wished to maintain the text, a serious decision.”

Sophie Binet, the new leader of the CGT trade union, called for more protests and strikes after the failed talks with the prime minister:

“We have to continue mobilizing until the end, until the government understands there is no way out other than withdrawing this reform,” Binet said.

Labor unions plan to keep pressure on the government until the Constitutional Council decides on the pension reform. They believe there’s still a chance to block it from becoming law on April 14. If unions are unsuccessful, strikes will likely continue. 

“We’re in a social crisis, we have a democratic crisis, there is a problem, and the president has the solution in his hands,” Laurent Berger, leader of the CFDT union, said on RTL radio. 

Bloomberg cited a recent poll that shows most French people oppose pension reform. 

And most French people support pension reform protests. 

Meanwhile, Macron is meeting with Chinese President Xi Jinping in Beijing today while France enters another round of mass protests.

Authored by Ryan McMaken via The Mises Institute,

Last week, Fox News aired a segment discussing the possibility that the US dollar will cease to be the global reserve currency and what that would mean for Americans. The tone of the piece suggested that a “catastrophic” decline of the US dollar was not only possible, but perhaps even imminent. CNN last week also aired its own segment suggesting the US will face “a reckoning like none before” if the “dollar’s dominance” in the global economy falls significantly.

Much of the analysis was framed to stoke the public’s fears of Chinese geopolitical power, and the Fox segment was especially hyperbolic in its predictions of near-total economic devastation resulting from any movement away from the dollar in international trade and reserves.

Yet both segments are correct that events are piling up that point to at least a gradual decline in the dollar’s preeminence in the global economy and that this could lead to serious economic trouble for Washington. Events are not moving as quickly as the pundits are predicting, but they are moving, and if current trends continue, the United States will find itself facing a new and enduring era of stubborn price inflation and weakening US geopolitical power.

The Beginning of a Trend?

Much of the discussion around the decline of the dollar is framed as a matter of the Chinese renminbi (RMB, or yuan) becoming the global reserve currency. This purported imminent replacement of the dollar with the RMB, however, is not going to happen any time soon. There are many reasons for this. China still uses capital controls, its economy is not nearly as open as the US economy, and US government debt still looks less risky than Chinese debt. Yet we are witnessing a growing trend in the world’s regimes of moving away from the dollar as the overwhelming favorite among currencies used for international trade.

First, there is the recent agreement at the Russia-China summit to carry out trade transactions “between Russia and the countries of Asia, Africa, and Latin America,” as Vladimir Putin put it. This would be quite a change from the status quo in which nondollar transactions make up a tiny portion of international trade settlements. This trend is catching on elsewhere as well. Last month, China and Brazil reportedly “struck a deal to allow companies to settle their trade transactions in the two countries’ own currencies, ditching the United States dollar as an intermediary.” Meanwhile, a French company bought sixty-five thousand tons of liquified natural gas (LNG), meaning “Chinese national oil company CNOOC and France’s TotalEnergies have completed China’s first yuan-settled LNG trade.” Oil giant Saudi Arabia has also repeatedly stated that it’s amenable to opening up its oil trade to currencies other than the US dollar, with an eye toward accepting RMB.

None of this threatens to immediately send the dollar into a tailspin or “collapse.” The dollar’s role in the world economy is still huge, and the dollar remains the most used currency by far. This becomes all the more obvious when we look at how much the US dollar still dominates foreign exchange reserves—which are assets in foreign currencies held on reserve by central banks. These reserves are partly an indication of just how much central banks anticipate dollars will be needed to engage in international trade.

Dollars still make up 58 percent of foreign exchange reserves. That’s far above even the second-place currency, the euro, which is at a mere 20 percent. All other currencies are far behind that. The Japanese yen makes up about 5.5 percent of all reserves, and the pound sterling makes up under 5 percent. The RMB is in fifth place at about 2.7 percent.

Source: International Monetary Fund.

While the RMB is not about to replace the dollar, general movement away from the dollar—in favor of a mixture of other currencies—is indeed in place. In fact, as of the fourth quarter of last year, the dollar made up the lowest percentage of foreign reserves since 1995, falling from 66 percent of reserves in 2014.

Why Does Reserve Currency Status Matter?

Being the country whose currency enjoys global reserve status brings both domestic and international advantages to the US regime.

Domestically, reserve currency status brings a greater global demand for dollars. This means more of a global willingness to absorb dollars into foreign central banks and foreign bank accounts even as the dollar inflates and loses purchasing power. Ultimately, this means the US regime can get away with more monetary inflation, more financial repression, and more debt before domestic price inflation gets out of hand. After all, even if the US central bank (the Federal Reserve) creates $8 trillion in new dollars in order to prop up US asset prices, much of the world will take those dollars out of US domestic markets, and this will reduce price inflation in the US—at least in the short term. Moreover, the fact the dollar dominates in global trade transactions means more global demand for US debt. Or, as Reuters put it in 2019, the dollar is used “for at least half of international trade invoices—five times more than the United States’ share of world goods imports—fuelling demand for U.S. assets.”

Those assets include US government debt, and this pushes down the interest rate at which the US government must pay on its enormous $30 trillion debt. This also decreases the likelihood of a US sovereign debt crisis. Domestically in the US, reserve status for the dollar mutes inflation, lowers interest rates, and enables more government spending.

Internationally, the US government enjoys many benefits from reserve status. For example, the US regime is much more easily able to impose economic sanctions on rival states, thanks to the role of dollars in international trade and banking. Dollars are central to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, which is the main messaging network through which international trade transactions are initiated. In recent years, this control of SWIFT has enabled the US to largely exclude both Iran and Russia from much of the international banking system. The US has also frequently threatened sanctions on a number of countries that have not been quick to accept US primacy in all regions of the world. This power is further enhanced due to a longstanding agreement in which oil-producing Arab states—primarily Saudi Arabia—use dollars for oil transactions in exchange for certain US military commitments. These so-called petrodollars further secure US dominance in the geopolitical realm.

Weakening Reserve Status Means a Weakening US Regime

Often, discussion about the dollar’s reserve status creates a false dichotomy between total domination of the global monetary system on one hand and complete abandonment of the dollar on the other.

A more likely scenario is that the dollar will weaken considerably but will remain among the most often used currencies. After all, even after the pound sterling lost its status as reserve currency in the 1930s, it did not disappear.

For example, let’s say the US dollar sinks to 40 percent of all foreign reserves and is only used in one-third of all international trade invoices—instead of one-half, as is now the case. This would not necessarily destroy the dollar or the US economy, but it would certainly weaken the US regime’s geopolitical position. As global infrastructure around other currencies grows, it will become easier for regimes and private firms to circumvent US sanctions. Perhaps more importantly, a world less awash in dollars will mean a world with less demand for US assets such as US government debt. That means higher interest rates for the US government and less of an ability to finance elective wars by inflating the currency.

In other words, even a weakening of the dollar’s global demand will limit the US regime’s ability to throw its weight around internationally. This is why in a recent interview with Fox News, US senator Marco Rubio worried that if other countries are using their own currencies in trade, “we won’t be talking about sanctions in 5 years . . . because we won’t have the ability to sanction them.”

This doesn’t require the full collapse of the dollar. It just requires a framework for other currencies. It will take a while, and some attempts will fail. But those frameworks are being built now, and not all of them will fail.

How to Stop the Slide Away from the Reserve Currency

For obvious reasons, then, the US regime wants to maintain the US dollar’s status. If the US regime were motivated to ensure economic prosperity and security for Americans, it could easily do so. All that is required is to end the US central bank’s easy-money policies, reduce monetary inflation, and rein in deficit spending. This would immediately buttress both the real and perceived value of the dollar and make the dollar far more attractive as a currency that holds its value. Moreover, the US regime could ensure continued widespread use of the dollar if it stops using the dollar to bully other regimes and wage economic war on every regime that annoys the foreign-policy establishment. Without the dollar’s weaponization—especially with reduced monetary inflation—there is very little motivation to abandon the dollar in favor of other currencies. After all, most other regimes inflate their own currencies at least as much as the dollar and engage in widespread deficit spending. Economically, the dollar remains less turbulent than both the euro and yen. So long as Washington does continue to weaponize the dollar, however, other regimes will have good reason to escape the dollar system. 

It’s difficult to see how the US regime will abandon this status quo any time soon, however. Washington is addicted to deficit spending, monetary inflation, and international meddling in the name of US primacy and war. It won’t stop until domestic inflation becomes politically unbearable and foreign states finish building off-ramps from the dollar system.

Amazon partnered with Element Six, a division of De Beers, to cultivate lab-grown diamonds that have the potential to revolutionize quantum computer networks, reported Bloomberg.

Element Six will work with Amazon Web Services’ Center for Quantum Networking to develop next-generation data transmitting technology over long distances.

The transmission of data in quantum networking will be on the subatomic level and goes beyond today’s fiber-optic network. The lab-grown diamonds will be integrated into network components that allow data to travel longer distances without degradation. 

“We want to make these networks [quantum networks] for AWS, said Antia Lamas-Linares, who heads the Center for Quantum Networking. She believes the technology could be in use in a matter of years rather than decades. 

AWS is likely to adopt quantum networks in the second half of this decade as it offers faster and more secure data transmission technology. This will enable AWS to handle a greater share of the world’s computing and information storage, thereby increasing Amazon’s profits.

… and who knows, Amazon may also venture into selling jewelry with synthetic diamonds to compete with Pandora’s lab-grown diamond jewelry line. 

Via SchiffGold.com,

There’s no sign of a slowdown in central bank gold buying.

In February, central bank gold reserves rose by another 52 tons, according to the latest data compiled by the World Gold Council.

It was the 11th straight month of central bank net gold purchases.

Through the first two months of 2023, net central bank gold purchases came in at 125 tons. This is the strongest start to a year since 2010.

China was the biggest buyer in February. The Peoples Bank of China increased gold holdings by a reported 24.9 tons. It was the fourth consecutive month of reported Chinese gold purchases. In that time, China’s official gold reserves have grown by 102 tons.

The Chinese central bank accumulated 1,448 tons of gold between 2002 and 2019, and then suddenly went silent until it resumed reporting in November 2022. Many speculate that the Chinese continued to add gold to its holdings off the books during those silent years.

There has always been speculation that China holds far more gold than it officially reveals. As Jim Rickards pointed out on Mises Daily back in 2015, many people speculate that China keeps several thousand tons of gold “off the books” in a separate entity called the State Administration for Foreign Exchange (SAFE).

Last year, there were large unreported increases in central bank gold holdings.  Central banks that often fail to report purchases include China and Russia. Many analysts believe China is the mystery buyer stockpiling gold to minimize exposure to the dollar.

Turkey continued to pile up gold, adding another 22.5 tons of gold to its hoard in February. The Central Bank of Türkiye was the biggest gold buyer in 2022 and has increased its gold holding for 15 straight months.

Turkey has been battling rampant inflation. Price inflation accelerated to as high as 85% last year and was at 64% in December. The Turkish lira depreciated by almost 30% last year.  Meanwhile, the price of gold in lira terms increased by 40% on an annual basis, according to Bloomberg.

After a pause in January, India went back to buying gold in February, adding 2.8 tons to its reserves. India ranks as the ninth largest gold-holding country in the world. Since resuming buying in late 2017, the Reserve Bank of India has purchased over 200 tons of gold. In August 2020, there were reports that the RBI was considering significantly raising its gold reserves. India now holds 790 tons of gold.

After a massive 44.6-ton increase in its gold reserves in January, Singapore continued its buying spree in February with another 6.8-ton purchase.

The Central Bank of Uzbekistan added 8 tons of gold to its reserves, following three consecutive months of sales.

Mexico bought 0.3 tons of gold in February.

The National Bank of Kazakhstan was the only notable seller in February, decreasing its reserves by 13.1 tons.

It is not uncommon for banks that buy from domestic production – such as Uzbekistan and Kazakhstan – to switch between buying and selling.

The Central Bank of Russia disclosed its gold reserves for the first time in over a year, reporting gold holdings of 2,330 tons at the end of February 2023. That was a 31-ton increase since its last report. The timing of the gold purchases remains unclear.

The World Gold Council said it expects net central bank gold buying to continue through 2023. According to the WGC, emerging market banks remain relatively under-allocated to gold.

Overall, we expect further buying, with EM banks at the forefront of this trend as they continue to redress the imbalance in gold allocations with their developed market peers.”

Total central bank gold buying in 2022 came in at 1,136 tons. It was the highest level of net purchases on record dating back to 1950, including since the suspension of dollar convertibility into gold in 1971. It was the 13th straight year of net central bank gold purchases.

According to the World Gold Council, there are two main drivers behind central bank gold buying — its performance during times of crisis and its role as a long-term store of value.

It’s hardly surprising then that in a year scarred by geopolitical uncertainty and rampant inflation, central banks opted to continue adding gold to their coffers and at an accelerated pace.”

World Gold Council global head of research Juan Carlos Artigas recently told Kitco News that the big purchases underscore the fact that gold remains an important asset in the global monetary system.

Even though gold is not backing currencies anymore, it is still being utilized. Why? Because it is a real asset.”

By Henry Ren and Michael Msika, Bloomberg Markets live reporters and analysts

With credit conditions steadily tightening, equity traders are switching back to the “bad news is bad news” narrative as they brace for a recession. So how to position for it? Europe’s tech and luxury sectors — less sensitive to economic downturns given their secular trends — seem like a good place to start.

Tech has flipped from being last year’s laggard to be one of Europe’s market leaders in 2023. The Stoxx 600 Tech Index is up 19% year-to-date, with chip shares such as ASM International and STMicroelectronics up more than 40%. Meanwhile, an MSCI index of luxury shares has rallied 24% this year, with China’s post-Covid reopening helping companies such LVMH and Hermes scale record highs.

Luxury and tech are both classed as growth sectors, benefiting when bond yields slide and central banks ease off the policy-tightening pedal. Tech is particularly sensitive to peak-rate expectations, given companies’ future earnings hinge on low borrowing costs. And both sectors received an extra boost from recent financial turmoil, which pushed investors to seek shares in companies perceived to have robust balance sheets and promising business models. The below chart shows the lockstep moves between bond yields and tech shares.

Citigroup strategists upgraded European tech stocks to overweight on March 23, citing their preference for quality growth. The firm’s analysts agreed. “Our base case view at the start of the year was for the sector outperformance to resume and we reiterate the same,” Citi’s Amit Harchandani told clients last week. Goldman Sachs strategists concur, also  upgrading the sector to overweight and predicting a further 25% share price upside.

A look at Europe’s top tech stocks shows each has a fundamental story to tell. ASML for instance expects a 25% revenue increase this year, SAP’s sale of its Qualtrics cloud business is seen boosting profit, while Prosus is benefiting from its stake in China’s Tencent. Infineon is enjoying robust chip demand from the car industry.

All that has already boosted the sector’s earnings forecasts by 3.9% this year, beating the Stoxx 600’s 1.1% rise and the Nasdaq 100’s 0.7% upgrade. Infineon, which just raised revenue forecasts, enjoyed a larger lift to estimates, as did its peer STMicro. As a result of this, the Stoxx Tech Index trades around 23.8 times forward earnings — at about its five-year average. The Nasdaq 100 on the other hand, carries a 5% premium to five-year multiples.

Still, not all tech is favored. Companies reliant on discretionary consumer spending, such as keyboard maker Logitech and video-game producer Ubisoft, are underperforming. Tech names with high debt or low profitability — Sinch, Ams-OSRAM and Just Eat Takeaway feature here — also remain in the cold.

The sector may also struggle to sustain its rally if things worsen. Morgan Stanley’s Michael Wilson, for instance, considers tech to be a cyclical-oriented sector, and says health-care and utilities will offer better protection during downturns. Another risk is that peak interest rates are further than expected and central banks double down on rate hikes. A subsequent bond selloff could well crush tech, as was the case in 2022.

“Tech will certainly be vulnerable to moves in the bond market in the short term,” Marcus Morris-Eyton, a portfolio manager at Allianz Global Investors, said. However, he expects companies with clear technology leadership to outperform, especially as they have “none of the balance sheet questions that investors are currently debating in other sectors.”

“A significant proportion of our lethal aid [for Ukraine] is procured overseas and for both operational and commercial reasons, the detail of these contracts will not be published,” the Ministry of Defence (MoD) has told parliament.

The announcement raises suspicion that Britain is sending more controversial weaponry to Ukraine that it does not want made public. Declassified first reported last week that the UK was sending ammunition containing depleted uranium to Ukraine. Vladimir Putin, Russian president, responded by announcing he would station tactical nuclear weapons in neighboring Belarus. 

The MoD said the only contracts it will publish will be those with British companies for equipment replenishing existing stockpiles. 

It is unclear which foreign companies the government does not want to reveal its contracts with—or what weapons systems they are for.

The UK provided £2.4bn in military equipment to Ukraine in 2022 – more than any country other than the United States. It has committed to providing the same amount in 2023.

The UK has supplied 10,000 anti-tank weapons, including 5,500 NLAWs, which are designed by Saab in Sweden and made by French arms manufacturer Thales in Belfast. The UK has also provided Javelin and Brimstone missiles. 

UK lethal aid to Ukraine has also included thousands of surface to air missiles including Starstreak, again produced by Thales. 

“The UK arms export regime is defined by a chronic lack of transparency,” Katie Fallon, advocacy manager at Campaign Against the Arms Trade (CAAT), told Declassified. 

“That the public might never know how a large part of the weaponry budgeted for Ukraine is being spent, not only raises the risk of corruption, profiteering and procurement of inappropriate equipment, but it also reduces the ability of the UK public to provide badly needed scrutiny of government actions taken in their name.”

Read the rest of the report at Declassified UK…

Authored by Michael Maharrey via SchiffGold.com,

China and Brazil recently finalized a trade deal in their own currencies completely bypassing the dollar, but that’s not the only bad news for the world’s reserve currency.

Last week, a Russian official announced that the BRICS nations are working to develop a “new currency,” yet another sign that dollar dominance is waning.

State Duma (the Russian legislative assembly) deputy chairman Alexander Babakov said the transition to settlements in national currencies is the first step. We’ve already seen this occur with recent oil deals between India and Russia being settled in currencies other than dollars.

The next one is to provide the circulation of digital or any other form of a fundamentally new currency in the nearest future. I think that at the BRICS [leaders’ summit], the readiness to realize this project will be announced, such works are underway.”

That summit is scheduled for August.

Babakov said the BRICS nations are developing a strategy that “does not defend the dollar or euro” and that “a single currency” would likely emerge within BRICS, pegged to gold or “other groups of products, rare-earth elements, or soil.”

Brazil, Russia, India, China, and South Africa make up the BRICS block. It accounts for about 40% of the global population and a quarter of the global GDP.

Last year, Iran officially applied to join BRICS, and according to a report by The Cradle, several nations have expressed interest in joining the bloc, including Saudi Arabia, Algeria, UAE, Egypt, Argentina, Mexico, and Nigeria.

Former Goldman Sachs chief economist Jim O’Neill coined the BRIC acronym. In a recent paper published by Global Policy Journal, he urged the expansion of BRICS.

“The US dollar plays a far too dominant role in global finance,” he wrote.

“Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the value of the dollar and the knock-on effects have been dramatic.”

It’s clear that many countries are trying to minimize their exposure to the dollar.

Confidence in the greenback continues to erode thanks to the profligate borrowing, spending and money creation by the US government. America’s use of the dollar as a foreign policy weapon also makes many countries wary of relying solely on dollars.

According to the International Monetary Fund (IMF), the dollar’s share of global foreign-exchange reserves fell below 59% at the end of 2021, extending a two-decade decline.

Strikingly, the decline in the dollar’s share has not been accompanied by an increase in the shares of the pound sterling, yen and euro, other long-standing reserve currencies…

Rather, the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role as reserve currencies.”

This is a big problem for the US government.

Uncle Sam depends on the demand for dollars to underpin its profligate borrowing and spending. The only reason the US can get away with massive budget deficits and an ever-growing national debt to the extent that it does is due to the dollar’s role as the world reserve currency. It creates a built-in global demand for dollars and US Treasuries that absorb the money creation and maintain dollar strength. But what happens if that demand drops? What happens if BRICS develops its own currency and no longer needs dollars to trade?

If the demand for dollars tanks, the greenback’s value will quickly erode away. That means even worse price inflation for Americans. And in the worst-case scenario, it could collapse the dollar completely.