Authored by David Stockman via InternationalMan.com,

The Wall Street Journal recently brought word that a professor Efraim Benmelech of the finance department at Northwestern University thinks the Fed is hurting housing and the consumer too much.

Opined he,

….those higher interest rates are making mortgages more expensive and leading to fewer home sales. That leads to less spending on appliances, paint and other home goods, because people commonly buy those items ahead of a sale and after moving.

“The actions of the Fed are leading to lower consumption,” he said.

You don’t say!

Then again, has it occurred to the good professor that the years and years of ultra low mortgage rates engineered by the Fed were totally unnatural, uneconomic and not sustainable?

The evidence for that is in the chart below. It shows that for most of the last three decades, the Fed drove the after-inflation or “real” interest rate on 30-year mortgages steadily lower until it actually turned negative.

Inflation-Adjusted Interest Rate on 30-Year Fixed Rate Mortgages, 1990 to 2023

Stated differently, the unfolding recession is a long overdue and necessary purge of artificial economic activity stimulated and subsidized by the central bank’s own financial repression policies.

The Fed’s belated attempt to “normalize” interest rates, therefore, is not a mean-spirited policy to deliberately cause labor, manufacturing capacity and other economic resources to be idled. To the contrary, it’s a belated attempt to unshackle markets from the excesses, bubbles, malinvestments, inefficiencies and unsustainabilities that were the inherent results of decades of reckless money-printing.

One of the many bubbles created by the Fed’s relentless monetary expansion of recent years might be termed the “labor bubble”. By that we are referring to the madcap hiring undertaken by corporate HR departments in the aftermath of the Covid Lockdown disruption.

As it happened, they failed to meet staffing needs in the early days of the re-opening in 2021 owing to the fact that millions of workers had left the active labor force thanks to massive stimmies, early retirements and other welfare state inducements, along with mom and dad’s basements and checkbooks. So HR departments plunged into hiring “just in case” the re-opening boom of 2021 and early 2022 continued. In effect, they began to hoard labor.

Spotify CEO Daniel Ek admitted as much in a recent missive to employees announcing a 6% cut in the company’s workforce:

“In hindsight, I was too ambitious in investing ahead of our revenue growth. And for this reason, today, we are reducing our employee base by about 6% across the company. I take full accountability for the moves that got us here today,” the exec said.

Of course, the re-opening and stimmy boom didn’t last—notwithstanding the Fed’s massive money-pumping and monetization of the public debt issued to finance the $6 trillion of Covid bailouts.

Since the spring of 2021 when the stimmies peaked, the US economy has actually been slouching toward idle. In fact, once you strain out of the GDP numbers the one-time inventory rebuilding, which was necessitated by the drastic depletion of merchandise stocks triggered by the stimmy based consumer spend-a-thons, there is hardly any organic growth left.

As shown in the chart below, the combination of Dr. Fauci’s Virus Patrol and the Washington spenders did a real number on the business economy. First, the normal business inventory-to-sales ratio exploded to the upside during the initial lockdowns and spending collapse, and then plunged to unprecedented lows as the stimmy-fueled boom in Amazon orders drained the system of its working inventories.

Whipsaw of Business Inventory-to-Sales Ratio, 2018 to 2022

Since reaching bottom in October 2021 inventories have been rebuilt to nearly normal levels, but that’s just the problem. The GDP gain reflected in the inventory rebuild is just a case of “one and done”. In fact, with the interest cost of carrying inventories now rising rapidly it is likely that the business sector restocking is over.

As we indicated, once you peel back the effect of inventory restocking, the stagnation of the US economy is starkly apparent. For instance, in the case of the industrial production index, which covers all of manufacturing, energy, mining and utility output, the level in March 2022 stood at 103.5.

As it happened, the index posted at a nearly identical 103.4 in December. Call it nine months of “growth” to nowhere!

Industrial Production Index, March to December 2022

Needless to say, none of this madness would have happened without the enabling hand of the Federal Reserve.

*  *  *

The truth is, we’re on the cusp of an economic crisis that could eclipse anything we’ve seen before. And most people won’t be prepared for what’s coming. That’s exactly why bestselling author Doug Casey and his team just released a free report with all the details on how to survive an economic collapse. Click here to download the PDF now.

Former President Trump on Saturday suggested that the Manhattan DA was tricked by “Star” witness Michael Cohen, Trump’s former lawyer who was disbarred after pleading guilty in 2018 to multiple felony charges, including 5 counts of tax evasion, lying to a financial institution, lying to congress, and two campaign finance violations.

In addition to Cohen’s credibility issues, a 2018 letter emerged last week in which Cohen’s lawyer tells the Federal Election Commission that Cohen used his own funds to make a $130,000 ‘hush’ payment to Ms. Stephanie Clifford (Stormy Daniels aka “Horse Face”), and that Trump did not reimburse him for it.

Following a Saturday night rally in Waco, Texas, Trump told reporters on his plane: “I think they’ve already dropped the case … they have absolutely nothing.”

“It’s a fake case. Some fake cases, they have absolutely nothing,” Trump continued.

The former president made a similar statement earlier Saturday, writing:

“The Manhattan D.A. Witch Hunt against me is DEAD, no evidence at all, & it has been conclusively proven that I did nothing wrong!”

“The evidence against their “Star” witness, however, is overwhelming. An already disbarred lawyer & convicted Felon, the only question left is will the D.A.s Office sue him for lying & fraud. They should!”

Trump also told reporters on the plane that he wasn’t trying to incite violence with a recent Truth Social post warning of “potential death and destruction” if he’s indicted.

“No, I don’t like violence and I’m not for violence. But a lot of people are upset.” he said.

Cohen’s credibility is shot

As the Epoch Times notes, former Trump attorney Robert Costello said he told the grand jury in the Manhattan case that Cohen was a tainted witness against Trump.

Cohen’s testimony against the 45th president in the investigation, which reportedly is connected to so-called hush money payments that were given to adult performer Stormy Daniels during the 2016 presidential campaign. A lawyer for Cohen, when reached for comment, declined to issue a statement, although Cohen told MSNBC last week that Costello never represented him and disputed his testimony.

Bragg’s has not returned a request for comment, and The Epoch Times cannot verify the authenticity of Trump’s claims. Previous Epoch Times requests for comment from the DA’s office have gone unanswered.

Over the past week, Bragg’s office has issued one public statement on the case, and that came in response to a House Republican letter seeking testimony and information about the DA’s case or whether his office would arrest Trump. A letter sent by his general counsel said that it was Trump who created a “false expectation” he would be indicted last week, although he provided no other details.

During Saturday night’s rally in Waco, Trump declared that his “enemies are desperate to stop us,” and that “our opponents have done everything they can to crush our spirit and to break our will.”

He also told the crowd that Bragg was investigating him “for something that is not a crime, not a misdemeanor, not an affair.“

“Not a crime. Not a misdemeanor. Not an affair. I never liked ’Horseface.’ That wouldn’t be the one” – Donald Trump, at Waco rally, on NYC investigation pic.twitter.com/zY4abOPTsu

— Politics1.com (@Politics1com) March 26, 2023

“But they failed. They’ve only made us stronger. And 2024 is the final battle, it’s going to be the big one. You put me back in the White House, their reign will be over and America will be a free nation once again.”

President Trump in Waco: “It’s no coincidence that the Deep State is coming after me even harder since I pledged to swiftly end the war in Ukraine.”

pic.twitter.com/jfr7fN1jIY

— Alex Bruesewitz 🇺🇸 (@alexbruesewitz) March 26, 2023

Authored by Peter Tchir via Academy Securities,

I Know What You Did Last Winter

While not quite a horror story yet, we’ve had at least a few deaths (or near-death experiences) depending on your perspective and what you own. Much of the current situation can be tied to events that occurred a year or so ago. Yes Virginia, there are long and variable lags to monetary policy. These recent events can be traced back to the start of the hiking cycle last winter, but also back to last summer (which would have been a catchier title) when the Fed doubled down on hiking to fight inflation at all costs.

In theory, there should be a lesson for central bankers in all of this. However, both the ECB and FOMC missed that possible lesson as they chose to hike rates at their recent meetings despite significant changes in financial conditions.

I’ve chosen the RSM Financials Conditions Index as it tries to track business sentiment and the demand for credit. In the past few weeks, we’ve seen an almost 2 standard deviation move, which RSM associates with a higher risk of financial dislocation that will impact the real economy! We all see how the stock and bond markets react instantaneously to news. One fear is that the events of recent weeks (which were triggered by the events of “last summer”) won’t show up in the economic data immediately. However, they have begun to cause inexorable damage to the real economy. Not just through tighter lending standards, but through an impetus for everyone (from savers to companies) to act more fiscally conservative.

I Still Know What You Did Last Summer

I didn’t choose this for a title, but I could easily have done so since we are living in a sequel (if not a trilogy). Before going further into today’s main topics, I want to highlight that the events of last winter were a direct result of the summer before that!

The events of last summer (hiking, Jackson Hole, QT, and high inflation) were a direct result of the previous summer when we left ZIRP (0% rates, large scale asset purchases, etc.) on for too long! We don’t have the time to harp on this subject. It was really important, but reliving those actions (or inactions) won’t change anything about where we are today. However, looking at last summer may help us figure out what is next. It isn’t too late to fix things, but I’m increasingly worried that we are heading in this direction.

Bonds – Texas Chain Massacre

A recurring theme in today’s T-report, unfortunately, will be the “steaming pile of unrealized bond losses”.

This long bond began its life in February 2021 when 1.875% was a “good” yield (even for a 30-year bond). It was so good that the bond even traded above par in December 2021. While the massacre started well before the summer of 2022, the theme applies. Any attempts to bounce at a price near 80 were thwarted. Currently, we still languish in the 60s.

No part of the curve was spared!

As inversion got worse, there was no place in the yield curve to hide.

Credit spreads weren’t helping anything for the corporate bond investor (or the issuer)

At least corporate spreads are below their widest levels (seen in June 2022). However, they’ve started to widen again recently as concerns about a possible recession get put back on the table. These concerns should never have been removed from the table as thoroughly as they were. In addition, more people are starting to worry about credit conditions.

One positive is that very little, if any, of the pressure on the banking sector can be linked to corporate credit quality concerns and I don’t see that changing!

The Ring – Deposit Rates

I remember being creeped out by “The Ring”. However, I still don’t understand it (which brings me to deposit rates). They are starting to creep me out as well and I don’t fully understand them either.

The only interest rates on the entire planet that have barely budged are the rates paid on deposits.

I can only find “reliable” data on FRED going back to April 2021. The data here is the FDIC rate on savings and it only moved above 0.1% in the summer of 2022 and was reported as 0.37% today (which is astonishing). We discussed this topic on Friday in Discretion is the Better Part of Valor and it is potentially the lynchpin for what happens next for banks.

• I’m 99.9999% confident that depositors in any bank will be fully protected. However, the policy makers could have been more explicit (rather than Powell’s “wink, wink, nudge, nudge” approach of hinting that they would step in when needed). This is hard to do except in the case of an “emergency”.

If I’m not worried about credit risk as a depositor, why am I still worried about bank deposits?

• Having money in a bank deposit account serves many purposes (getting cash, paying bills, and easily moving money around). There are a lot of services that banks provide and part of the “payment” is accepting a lower interest rate than you could otherwise receive.

• That is how it has always been done and is likely how it will continue. However, it seems like it has become much easier to move money seamlessly back and forth (quite cheaply), which could cause many to question how much one should keep in a bank.

• What started as people re-thinking their credit risk may morph into people re-thinking the cost (in terms of yield give up).

A “preliminary chart”. As mentioned earlier, I have had some difficulty finding a good estimate of the average interest rate paid on bank deposits. I found this bankrate.com index that seems to include rates paid on jumbo savings accounts. This might be why (at 0.9%) it is higher than the FDIC rate I mentioned earlier. I need to do more work to find some better information on this, but it is at least indicative of the spreads between something as safe as bank accounts and 1-month T-bills.

On Friday, I had an interesting discussion with a banker that offers clients the ability diversify up to $50 million in deposits at the touch of a button. It would be distributed to enough different banks (and bank accounts) that the entire $50 million would be covered by the FDIC. This is impressive (both the technology and anyone who has $50 million lying around), but I am wondering if someone will ask the question – why?

Low rates paid on deposits and the ease of moving money around will be the next important point of discussion around banks. They can raise the rate they pay (should stem deposit flow), but this may hit earnings.

The timing of the “deposit boom” is also important!

It took about 7 years for deposits to grow from $10 trillion to just over $13 trillion. Then, between stimulus and ZIRP, deposits grew by $5 trillion in 2 years!

A system that basically was growing around $0.5 trillion per annum for an extended period of time grew by $2.5 trillion for 2 years in a row!

Remember (and this is crucial) that from early 2020 until somewhere in 2022, there was virtually no difference between what you could get in 1-month T-bills (and other super safe/low duration assets) and bank deposits. You had all the benefits/features of a bank account and were paying next to nothing (in terms of yield give-up).

That has all changed. It is not a coincidence that the level of bank deposits started to shrink early in 2022. This was all before bank deposits were part of the headlines on the nightly news.

Maybe I’m wrong and this is sustainable, but something has to give in the coming weeks and months.

What concerns me is how much money came into the banking system during ZIRP when there were few ways to earn net interest margin without taking more risk than was needed in the past. Yes, remember that the seeds of inflation (and other issues) were sown when we kept ZIRP going far longer than many thought was necessary.

Scream – Disruption

The wealth destruction in disruption has been nothing short of epic – hence the “scream”.

What has happened to cryptocurrencies (even as bitcoin is climbing), private equity (not immune to what has happened in public markets), and so many companies (investors and their employees) has been awful.

I use ARKK as a proxy for disruptive since everyone knows it. Its problems started earlier, but it is still down 70% from late 2021 (and even more compared to the early 2021 highs). There are some issues with using this as a proxy because the portfolio is traded actively (which may overstate the problems in disruption) and it is only a subset of “disruption”. However, it also tended to have TSLA as a large investment, which is still up more than 500% during this time period. In any case, I still cannot believe that I failed to tie the importance of the “disruptive economy” and the “disruptive portfolio” to Silicon Valley Bank. It literally personified my theory and I failed to see it.

If you get a chance, go back to Inflation Factors for why I think that disruption is so important.

I still believe in the importance of the wealth effect and think that disruption is at the epicenter of the problem that the market and economy are facing. The more your economy or business depends on the disruptive community, the more at risk you are.

Silence of the Lambs – Commercial Real Estate

The housing market, so far, has sustained much higher mortgage rates reasonably well.

I suspect that we will see declines continue, but so long as job losses remain minimal (so far, so good), many individuals who refinanced during ZIRP will not be in any rush to sell.

However, what isn’t so positive is what is happening in relative silence.

Limiting at least some withdrawals on at least one real estate focused fund is hardly an endorsement for that type of investment. That was reported late last year, but it is an ongoing issue (I haven’t seen stories that it has been re-opened to full withdrawals, but I could be wrong).

There are some publicly traded REITs that are at least 50% down since the start of 2022. Again, this is occurring in relative silence.

As I’m talking to people, CRE or commercial real estate is becoming the “topic de jour”. Small banks, which rely on local lending opportunities, could be exposed.

In any case, I encourage you to reach out to Stav Gaon at Academy who is our resident expert (and an II ranked analyst in the space). He has published many reports on structured products and real estate.

Bottom Line – Caution

If I had to pick one “crazy” idea right now, it would be an emergency rate cut of 100 bps or more sometime before the summer is over.

One thing that fixes the “cost of funds” issue for everyone (even if the curve steepens) is much lower short-term rates.

But the Fed and ECB both just hiked and are convinced that inflation is rebounding so I see more pain ahead. Inflation had improved steadily from last summer into January (disinflation was a risk at the second to last Fed meeting) and even wage inflation pressures eased in the most recent data, but let’s not let facts get in the way of hyping the return of inflation. They’ve also chosen to ignore a potential serious tightening of financial conditions. So long as deposits remain at risk of being taken elsewhere, banks will be more cautious on their lending than they were even a month or two ago.

I haven’t even touched on European banks today despite Friday morning’s spread widening. I think that the SNB could have handled CS much better from an overall market perspective. They did a lot to ensure that it got taken over by UBS, but did little to give confidence to the broader market. European banks face a different set of issues. These issues include the ability to retain deposits and to address questions about that “steaming pile” of unrealized (or unrecognized/unknown) losses in their portfolios.

Lehman was NOT a Moment. In no way am I comparing recent events to Lehman, but it is worth pointing out that the S&P 500 finished higher the week after Lehman filed. Yeah, stocks bounced off of the lows Friday, all is good! Hmmmmm…

I like lower yields.

I’m mildly nervous about credit spreads here, including structured products.

• I am NOT worried about credit risk increasing materially. Companies are doing well and will likely weather any economic slowdown (which is by no means a foregone conclusion even in a cautious state).

• I am worried about the cost of credit risk increasing. Investors will demand more premium for any given level of credit risk. The price of credit is always influenced by liquidity and if selling pressure mounts, pricing will deteriorate. I cannot remember how low AAA CLO paper got during the GFC, but it was absurdly cheap for an asset class that still hasn’t experienced losses due to credit. Even after this year’s bracket busting NCAA tournament, I still think that it is easier to pick a perfect bracket than to create credit losses in a AAA CLO tranche (but that doesn’t mean that the prices can’t get worse).

• One positive development next week (I think it is positive) is that we may see more institutions use the new Fed facility after March 31st. They wouldn’t have to report accessing the facility until the following quarter (small, but could help).

Equities, I see greater downside.

• Equities have been trying to re-ignite the ZIRP framework of 2020 (though conditions are so different compared to back then). This has created bullish positioning that is susceptible to a pullback.

• The system is “saved” mentality has helped markets too. Just watch how well stocks did after the FSOC meeting was announced (which so far has only produced a generic statement of “all is well”).

• You get any geopolitical risk for “free” being underweight equities. Maybe Putin is making peace overtures, but I’m still leaning towards China deciding to sell weapons to Russia before then.

• I saw people mocking “volmageddon” early last week. While I didn’t fully agree with the “volmageddon” idea, I do think that 0DTE options can push markets. While I’m convinced that there is “always a seller”, I’m not as convinced that there is “always a buyer”. The risk of a big move here is heavily skewed to the downside rather than a face-ripping rally!

• In addition, the debt ceiling debate is also looming and there are concerns that the situation could be even more contentious this time around, which would hurt risk assets.

The narrative is shifting and one thing that I learned from 2007-2009 (and again during the European Debt Crisis) is that by the time central bankers and policy makers solve the “current” issue, the market has started to move on to the “next” issue.

There won’t be as many “green dots” on Bloomberg this Sunday night as there were last Sunday so enjoy your weekend!

I’m going to remain cautious into next week until I see things evolving in a sustainable way (rather than just knee-jerk reactions and short covering).

The race to provide global high-speed internet through space-based networks is underway, heralding the potential beginning of a new era in communication.

London-based company OneWeb launched the final 36 satellites of its initial 616-satellite “constellation” via an Indian LVM3 rocket from the Sriharikota spaceport in Andhra Pradesh on Saturday. 

“It’s the fruition of an enormous amount of hard work, and obviously, we’ve been through some geopolitical issues over the last year or so, and the team has proven to be extremely resilient and caught up,” Chief Executive Officer Neil Masterson told Bloomberg ahead of the launch. 

LVM3-M3🚀/OneWeb 🛰 India-2 mission
is accomplished!

All 36 OneWeb Gen-1 satellites injected into the intended orbits

In its 6th consecutive successful flight, LVM3 carried 5805 kg of payload to Low Earth Orbit@OneWeb @NSIL_India

— ISRO (@isro) March 26, 2023

“This launch will be one of the most significant milestones in OneWeb’s history so far, with the launch adding an additional 36 satellites to the OneWeb fleet, the first ever completed global LEO constellation,” OneWeb wrote in a press release. 

Glimpses!
More in our other media. pic.twitter.com/saInoOQpt6

— ISRO (@isro) March 26, 2023

OneWeb’s space-based internet will provide high-speed, low-latency solutions to communities, enterprises, and governments worldwide through its constellation of satellites. 

Besides OneWeb, there is only one other company flying more satellites in space today and a competitor: Elon Musk’s Starlink system. 

However, OneWeb is different from Starlink because it’s not selling broadband connections to individuals but rather to telecom companies that will then provide this internet service. 

Bloomberg noted OneWeb had a rocky past, filing for bankruptcy in March 2020, only to be rescued by the UK government and Indian telecom tycoon Sunil Mittal’s Bharti Group. The company has attracted investments from Hughes Satelite Systems and SoftBank Group. 

More importantly, there’s a space race to provide satellite internet worldwide. Musk’s Starlink happens to be the leader. 

Authored by David Goldman via AsiaTimes.com,

Bank crisis not a credit quality problem but stems instead from now-impossible task of financing America’s ever-expanding foreign debt…

The US banking system is broken. That doesn’t portend more high-profile failures like Credit Suisse. The central banks will keep moribund institutions on life support.

But the era of dollar-based reserves and floating exchange rates that began on August 15, 1971, when the US severed the link between the dollar and gold, is coming to an end. The pain will be transferred from the banks to the real economy, which will starve for credit.

And the geopolitical consequences will be enormous.

The seize-up of dollar credit will accelerate the shift to a multipolar reserve system, with advantage to China’s RMB as a competitor to the dollar.

Gold, the “barbarous relic” abhorred by John Maynard Keynes, will play a bigger role because the dollar banking system is dysfunctional, and no other currency—surely not the tightly-controlled RMB—can replace it. Now near an all-time record price of US$2,000 an ounce, gold is likely to rise further.

The greatest danger to dollar hegemony and the strategic power that it imparts to Washington is not China’s ambition to expand the international role of the RMB. The danger comes from the exhaustion of the financial mechanism that made it possible for the US to run up a negative $18 trillion net foreign asset position during the past 30 years.

Germany’s flagship institution, Deutsche Bank, hit an all-time low of 8 euros on the morning of March 24, before recovering to 8.69 euros at the end of that day’s trading, and its credit default swap premium—the cost of insurance on its subordinated debt—spiked to about 380 basis points above LIBOR, or 3.8%.

That’s as much as during the 2008 banking crisis and the 2015 European financial crisis, although not quite as much as during the March 2020 Covid lockdown, when the premium exceeded 5%. Deutsche Bank won’t fail, but it may need official support. It may have received such support already.

This crisis is utterly unlike 2008, when banks levered up trillions of dollars of dodgy assets based on “liar’s loans” to homeowners. Fifteen years ago, the credit quality of the banking system was rotten and leverage was out of control. Bank credit quality today is the best in a generation. The crisis stems from the now-impossible task of financing America’s ever-expanding foreign debt.

It’s also the most anticipated financial crisis in history. In 2018, the Bank for International Settlements (a sort of central bank for central banks) warned that $14 trillion of short-term dollar borrowings of European and Japanese banks used to hedge foreign exchange risk were a time bomb waiting to explode (“Has the derivatives volcano already begun to erupt?”, October 9, 2018).

In March 2020, dollar credit seized up in a run for liquidity when the Covid lockdowns began, provoking a sudden dearth of bank financing. The Federal Reserve put out the fire by opening multi-billion-dollar swap lines to foreign central banks. It expanded those swap lines on March 19.

Source: US Bureau of Economic Analysis, Bank for International Settlements

Correspondingly, the dollar balance sheet of the world banking system exploded, as gauged by the volume of overseas claims in the global banking system. This opened up a new vulnerability, namely counterparty risk, or the exposure of banks to enormous amounts of short-term loans to other banks.

Source: Bank for International Settlements

America’s chronic current account deficits of the past 30 years amount to an exchange of goods for paper: America buys more goods than it sells, and sells assets (stocks, bonds, real estate, and so on) to foreigners to make up the difference.

America now owes a net $18 trillion to foreigners, roughly equal to the cumulative sum of these deficits over 30 years. The trouble is that the foreigners who own US assets receive cash flows in dollars, but need to spend money in their own currencies.

With floating exchange rates, the value of dollar cash flows in euro, Japanese yen or Chinese RMB is uncertain. Foreign investors need to hedge their dollar income, that is, sell US dollars short against their own currencies.

That’s why the size of the foreign exchange derivatives market ballooned along with America’s liabilities to foreigners. The mechanism is simple: If you are receiving dollars but pay in euros, you sell dollars against euros to hedge your foreign exchange risk.

But your bank has to borrow the dollars and lend them to you before you can sell them. Foreign banks borrowed perhaps $18 trillion from US banks to fund these hedges. That creates a gigantic vulnerability: If a bank looks dodgy, as did Credit Suisse earlier this month, banks will pull credit lines in a global run.

Before 1971, when central banks maintained exchange rates at a fixed level and the United States covered its relatively small current account deficit by transferring gold to foreign central banks at a fixed price of $35 an ounce, none of this was necessary.

The end of the gold link to the dollar and the new regime of floating exchange rates allowed the United States to run massive current account deficits by selling its assets to the world. The population of Europe and Japan was aging faster than the US, and had a correspondingly greater need for retirement assets. That arrangement is now coming to a messy end.

One failsafe gauge of global systemic risk is the price of gold, and especially the price of gold relative to alternative hedges against unexpected inflation.

Between 2007 and 2021, the price of gold tracked inflation-indexed US Treasury securities  (“TIPS”) with a correlation of about 90%.

Starting in 2022, however, gold rose while the price of TIPS fell. Something like this happened in the aftermath of the 2008 global financial crisis, but the past year’s move has been far more extreme. Shown below is the residual of the regression of the gold price against 5- and 10-year maturity TIPS.

Graphic: Asia Times

If we look at the same data in a scatter plot, it’s clear that the linear relationship between gold and TIPS remains in place, but it has shifted both its baseline and steepened its slope.

In effect, the market worries that buying inflation protection from the US government is like passengers on the Titanic buying shipwreck insurance from the captain. The gold market is too big and diverse to manipulate. No one has a lot of confidence in the US Consumer Price Index, the gauge against which the payout of TIPS is determined.

The dollar reserve system will go out not with a bang, but a whimper. The central banks will step in to prevent any dramatic failures. But bank balance sheets will shrink, credit to the real economy will diminish and international lending in particular will evaporate.

At the margin, local currency financing will replace dollar credit. We have already seen this happen in Turkey, whose currency imploded during 2019-2021 as the country lost access to dollar and euro financing.

To an important extent, Chinese trade financing replaced the dollar, and supported Turkey’s remarkable economic turnaround of the past year. Southeast Asia will rely more on its own currencies and the RMB. The dollar frog will boil by slow increments.

It’s fortuitous that Western sanctions on Russia during the past year prompted China, Russia, India and the Persian Gulf states to find alternative financing arrangements. These are not a monetary phenomenon, but an expensive, inefficient and cumbersome way to work around the US dollar banking system.

As dollar credit diminishes, though, these alternative arrangements will turn into permanent features of the monetary landscape, and other currencies will continue to gain ground against the dollar.

The math is truly daunting for would-be homebuyers: The difference between the mortgage payments and rents is the largest it’s been since the 2006 housing bubble that led to the Great Recession. 

Factoring in an assumed 10% down payment on newly purchased home, the National Multifamily Housing Council says a 30-year fixed-rate mortgage payment costs a whopping $1,176 more than renting an apartment, as of the end of 2022.   

“Rapid home price appreciation in recent years coupled with rising interest rates has caused the monthly cost of homeownership to rise far more than both the cost of rent and other consumer goods,” said the National Multifamily Housing Council, a trade group for the apartment industry.

The cost of owning a home has soared 71% in three years — an average of about 20% per year, compared to an average annual rent increase of 6.3%.

This week — in the wake of banking collapses that have pushed benchmark Treasury rates lower — mortgage rates fell for the second consecutive week, with the average 30-year fixed mortgage falling 18 basis points to 6.42%. 

Higher rates have thrown cold water on home sales, to the extent they fell 12 consecutive months before February’s stunning 14.5% month-over-month surge  in existing home sales.

“If mortgage rates continue to slide over the next few weeks, look for a continued rebound during the first weeks of the spring homebuying season,” said Freddie Mac chief economist Sam Khater. 

February new-home sales rose 1.1%, to the best pace since August. Meanwhile, February’s median sales price of a new home was $438,200, according to a report from the Census Bureau and the Department of Housing and Urban Development. That’s up 2.5% from the previous February.  

“Home shoppers are looking to find the optimal combination of prices and mortgage rates before entering the market,” Hannah Jones, economic analyst at Realtor.com, told Bloomberg. “However, elevated rates and high prices mean that point doesn’t yet exist in the market for many would-be buyers.”

While the cost of homeownership remains stubbornly high, rent inflation has been on a steady nine-month cooling trend, with the yearly growth rate easing to the lowest point since 2021. 

Authored by Tsvetana Paraskova via OilPrice.com,

• The EU’s ban on imports of Russian oil products resulted in Russia diverting its petroleum products to North Africa and Asia.

• Asian refineries now have to compete with Russia for diesel sales, with weekly gasoil inventories at the Singapore hub hitting the highest level in more than a year last week.

• The diesel glut in Asia is not expected to last for more than a few months, although recessionary concerns may weigh on demand.

Gasoil stocks held in Asia have jumped since the EU’s ban on imports of Russian diesel came into effect on February 5 as Asian refiners now have to compete with Russia for diesel sales in Africa, traders and analysts have told Reuters.

Ahead of the EU ban on Russian petroleum products, Russia began to divert its oil product cargoes to North Africa and Asia. At the same time, Europe has started to buy more diesel and other fuels from the Middle East, Asia, and North America to replace the lost Russian barrels.

Weekly gasoil inventories at the Singapore hub last week hit the highest level in more than a year, according to Reuters estimates, as Russia is now selling more diesel to Africa, replacing supply from the east of Suez.

The diesel glut in Asia is not expected to last for more than a few months, as demand in the second half of the year is set for a surge, analysts say.

Russia is said to be accelerating its exports of diesel to Saudi Arabia by both direct shipments and ship-to-ship transfers, Reuters reported earlier this month, quoting trade sources and shipping data from Refinitiv.

Using STS loadings, Russia is shortening the routes for tankers headed to Africa and Asia after Moscow is now banned from exporting fuels to the EU.

At the same time, Europe is ramping up imports of diesel from the Middle East and Asia to offset the loss of Russian barrels, of which it imported around 600,000 barrels per day (bpd) before the February 5 embargo took effect.

So far in March, Russian diesel loadings are up by 400,000 bpd compared to February, to “an extraordinarily high” of 1.5 million bpd so far this month, Jay Maroo, Lead Crude Analyst at Vortexa, said in an analysis this week. 

“At least for the near term supplies look ample and demand could be threatened, especially in the case of diesel, by wider recessionary concerns,” Maroo noted.

Only two weeks after Saudi Arabia announced an effort to establish diplomatic ties to Iran in a deal mediated by China, more news surfaced that Saudi Arabia was also planning to reopen its embassy in Syria for the first time in over a decade.  Rumors are swirling that Iran, Saudi Arabia and Syria are on the verge of geopolitical and economic agreements that sidestep the US.  It is perhaps not surprising that just as these deals are being announced, there has been a sudden resurgence of fighting between US forces in Syria and Iran supported insurgent groups in the eastern region of the country.

Joe Biden addressed the issue in a short statement, asserting that his administration is ‘not seeking conflict with Iran’, but that the US government would act to protect its personnel deployed in Syria.  The comments were a response to an apparent drone strike on a US military instillation in Syria which killed at least one American contractor and injured several others.  Biden has authorized airstrikes against Iran backed forces in Syria as retaliation, though, it should be noted that no evidence has yet been presented of Iranian involvement.

The eruption of direct conflict has the potential to escalate tensions with the Syrian government and Iran, and the timing of the event is highly suspicious.  

In January of this year at the annual Davos conference run by the WEF, Saudi Arabia announced it was now open to trading oil for Chinese Yuan instead of US dollars (long valued as the global petro-currency).  The economic shift, if Saudi Arabia follows through, could change the very fabric of the global economic landscape as the dollar loses petro-status and even world reserve status.  

China has been aggressively pursuing stronger economic ties to oil producing nations and the CCP announced its intention to turn the Yuan into a global petro-currency in December of 2022.  Another important factor is Russia’s alliance with Syria’s government under Bashar al-Assad and their naval base in Tartus, which they have been expanding since 2021. 

Why is the US military still in Syria?  It’s hard to say.  No US president since Barack Obama has offered a rational explanation.  Syria continues to act as a remnant of establishment war-hawk policies from the Bush era, with Obama, Biden and Hillary Clinton using the conflicts in Iraq and Afghanistan as a jumping-off point for their covert Arab Spring operations, including the Pentagon funding and training of groups that would later become ISIS terrorist factions.  

In theory, Syria stands as a possible powder keg for wider regional wars that certainly serves the interests of establishment globalists if their goal is geopolitical chaos.  The confluence of eastern interests is bound to clash with the US military occupation eventually.  Furthermore, the growing threat of international economic warfare and even a currency war over smaller conflagrations like Ukraine is not being addressed. 

Did Iran-backed militants really attack US forces in Syria?  Or, is the flare up in tensions with Iran merely designed to throw a monkey wrench into diplomatic negotiations between Saudi Arabia, Iran, Syria and China?  Or, is Biden leading America towards an economic conflict that will eventually destroy the dollar? 

If the third scenario is the case, who ultimately benefits?

Authored by Conor Gallagher via NakedCapitalism.com,

The Riyadh – Tehran detente deal could be a major win for not only the Middle East but also larger projects seeking more integration of greater Eurasia.  If the deal is implemented, China’s Belt and Road Initiative could become a key component of the economic futures of both Saudi Arabia and Iran. The rapprochement could also pay dividends for the International North-South Transport Corridor (INSTC) project, which  runs from St. Petersburg to Mumbai in India via Azerbaijan (or the Caspian Sea) and Iran and across the Arabian Sea. The “sanction-proof” corridor connects the Indian subcontinent with Russia without needing to go through Europe while simultaneously being 30 percent cheaper and 40 percent shorter than the existing routes.

Following the announcement of the Saudi Arabia – Iran rapprochement deal brokered by China, the chairman of the Russian State Duma Committee on International Affairs Leonid Slutsky praised the deal and explained how it corresponds with Russia’s collective security concept for the Persian Gulf region. He paid particular attention to the INSTC, saying:

In this regard, I view the International North-South Transport Corridor project, which will become the key factor for positive feedback for security, stability and development in this most important region, as a strategic one. The launch of the Corridor will become a milestone event not only in logistics, but also in politics and in security architecture of the Greater Eurasia, it will become the most important economic superstructure atop the strategic basis, achieved in Beijing.

The INSTC was announced back in the early 2000s, but progress was slow until recently when the West’s actions put it into overdrive. The sanctioning of Moscow and Tehran and the severing of Europe from Russian energy created the incentive to accelerate investments by key stakeholders. The authorities in Tehran realize their centrality on the India-Russia trade route, and considering that India’s imports from Russia quadrupled last year, one can deduct the potential upside for Iran. With an investment boost from Russia, Tehran has been trying to speed up the completion of improved railway networks that will connect to the existing railways of Russia and Azerbaijan and Chabahar Port in southeastern Iran.

Yet the major impediment to the INSTC reaching its full potential remains Iranian infrastructure. Much of the transit of goods on the INSTC still takes place on roads in Iran. Much of Iran’s railway is single track, and regular container train services from Moscow to Iran have to rely on transloading.

The government in Tehran is trying to prioritize the improvement of port capacity, rail and road infrastructure, transportation terminals and the modernization of its transportation fleet. The Iran Chamber of Commerce, Industries, Mines and Agriculture is also starting a new Transports Internationaux Routiers or International Road Transport center in the southern port city of Bandar Abbas to expedite the processing of transit cargoes. However, there is a clear need for further investment in transportation infrastructure, which has been difficult due to US sanctions on Iran.

Saudi Arabia’s Finance Minister Mohammed Al-Jadaan said March 15 that Saudi investments into Iran could happen “very quickly” following the agreement to restore diplomatic ties. He added that he does not see any impediment as long as the terms of agreements are respected by Tehran.

Any Saudi economic dealing with Iran would undercut US sanctions imposed to pressure Tehran, if not violating them outright. With tens of billion of dollars in Iranian assets blocked worldwide, the prospect of Saudi investments could jumpstart the INSTC and help maintain the peace between Riyadh and Tehran.

China’s desire to keep the peace could also bring investments. Scott Ritter writes at Energy Intelligence:

With China providing infrastructure-generating investment capital through its Belt and Road Initiative, the new Iran-Saudi détente could evolve into a regional economic relationship that supplants the US-led defense relationships that have defined Middle East politics for decades.

China would have to work around US sanctions in order to increase investments in Iran, but the two countries have already found a workaround to continue the oil trade, with most being rebranded as from a third country. If a China were to up its investments in Iran, it would mark a shift. From Silk Road Briefing:

Russia has now overtaken China as the biggest investor in Iran. This follows Moscow’s conflict with Ukraine from late February last year, as a result of which Iran and Russia have strengthened their economic and investment ties. The UAE, Afghanistan, Turkey and China are the next biggest investors. Although China that was expected in Iran to be the major investor, Beijing reduced its exposure in 2022, and concentrated more on investing into the Belt and Road Initiative infrastructure such as logistics centers, border facilities etc. that would facilitate its own export capabilities to Iran and the region.

Foreign investment flows to Iran have been decreasing from 2012-13 when the volume stood at US$4.5 billion. The lowest level was recorded in 2015-16 with only US$945 million of FDI inflows. UNCTAD estimated that the volume of FDI inflows to Iran stood at US$3.372 billion, US$5.019 billion, US$2.373 billion and US$1.508 billion from 2016 to 2019.

According to the United Nations Conference on Trade and Development, Iran attracted an estimated US$1.425 billion in Foreign Direct Investment in 2021 to register about a 6% rise compared to US$1.342 billion in 2020. In 2022, however, and despite the sanctions, the total volume of investments attracted to Iran hit US$5.95 billion. Out of this figure Chinese companies invested only about US$185 million.

Additionally, Secretary of the Iranian Supreme National Security Council, Ali Shamkhani, announced on Monday that Tehran concluded an agreement with the United Arab Emirates to facilitate trade movement between the two countries using the Emirati currency, the dirham.

The UAE has not confirmed any such agreements as it would run afoul of US sanctions, which have created a financial crunch in Iran. Tehran is hoping that better ties with Persian Gulf Arab countries can help reduce that pressure. It remains to be seen how far these countries will go in order to provide Iran an economic lifeline.

But should diplomatic and economic relations between GCC members and Iran continue to improve, it could spell the end to US efforts to apply “maximum pressure” on Tehran and another nail in the coffin of US influence in the region. It would also cement Iran’s position as key nexus in new global trade routes like China’s BRI and the INSTC.

The US, by trying to put maximum economic pressure on Iran and Russia, hinting that China is next, and the ill-fated oil price cap, has only helped drive the integration of Russia, China, Iran, Saudi Arabia, and more.

Despite all the sanctions and western pressure on countries to isolate Moscow, Russian trade is on the upswing. Iran is eager to cash in on its position between India and Russia, who are rapidly increasing their trade volume. From India Shipping News:

Ruscon, a leading multimodal transport logistics provider in Russia, has significantly expanded its containerized service network from the Black Sea Port of Novorossiysk to Nhava Sheva and Mundra in west India as volumes rapidly rise.

The company, a Deli Group subsidiary, has now increased its tonnage deployments from one vessel to four vessels to provide a weekly sailing frequency on the route.

Additionally, an extra stop has been introduced at Saudi Arabia’s Jeddah Port. The service rotation already includes a call at Istanbul Port in Turkey.

According to Reuters, Russia began exporting diesel to Saudi Arabia in February after the EU enacted its embargo on seaborne imports of Russian oil. The Saudis are now expected to export the Russian diesel to other countries after some refining.

Russia’s largest ocean container carrier, Far Eastern Shipping Co., also recently added a direct Novorossiysk to Nhava Sheva route. And many other countries are jumping in and providing vessels after western sanctions forced regular mainline operators to halt operations into and out of Russia. Even the New York Times begrudgingly admits:

Ami Daniel, the chief executive of Windward, a maritime data company, said he had seen hundreds of instances in which people from countries like the United Arab Emirates, India, China, Pakistan, Indonesia and Malaysia bought vessels to try to set up what appeared to be a non-Western trading framework for Russia.

India’s imports of crude oil from Russia reached a record of 1.6 million barrels per day in February, which was more than one-third of India’s imports and more than the combined imports from traditional suppliers Iraq and Saudi Arabia.

India has been making a profit turning around and selling the refined oil to the US and EU, which are unable to purchase directly from Russia due to sanctions. The same story is occurring in North Africa, which buys up Russian crude and increases supplies to Europe as a sanctions workaround.

Russian wheat and fertilizer exports also rose in 2022 despite sanctions, much of the former going to the Middle East and North Africa (MENA) region, which is the top destination for Russian food exports. Much of the fertilizer went to INdia.

Iran and Russia are cooperating to build ships and vessels in the Caspian Sea. In October, Iran announced Moscow’s readiness to allow Iranian ships to pass through the Volga River. Russia had previously not allowed foreign ships to use the Volga River or the Volga-Don canal, but if the agreement is implemented, Iran will have access to the longest river in Europe, and have access to the Volga-Don Canal, which provides the shortest connection between the Caspian Sea and the Mediterranean.

For another look at how Western sanctions are backfiring and only drawing countries closer to countries the US is trying to isolate, take the Eurasian Economic Union (EAEU) members of  Belarus, Kazakhstan, Armenia and Kyrgyzstan, which are also all being boosted by anti-Russian sanctions. From Silk Road Briefing: 

It has had the unexpected effects of boosting regional GDP growth rates: in their “Regional Economic Prospects” report, the European Bank for Reconstruction and Development (EBRD), analysts noted that Kazakhstan’s 2022 GDP growth reached 3.4% instead of the previously anticipated 2%.

Part of that has been due to sanctions, with an increase in income due to the re-export to Russia of computers, household appliances and electronics, auto parts, electrical and electronic components. Exports of non-energy goods from Kazakhstan to Russia in 2022 increased by 24.8% and amounted to US$18.9 billion. …

An EAEU Intergovernmental Council meeting held in early February this year showed that the economic situation in all EAEU members states is stable, and mutual trade is growing. Anti-Russian sanctions actually significantly contribute to this growth, meaning that for EAEU members especially, as well as countries such as China and India, the attractiveness of Russia as an economic partner has grown.

India, Turkey, and Egypt are among the countries discussing free trade agreements with the EAEU. And Iran signed one in January.  The primary driver for the Iran-EAEU integration is to upgrade Iran’s transport and logistics infrastructure, i.e., the INSTC.

The importance of the INSTC and its link to the Middle Corridor, which enables Russian traffic to head east via Kazakhstan to China, and vice-versa, is growing to include the entire region. At a joint press briefing with US Secretary of State Anthony Blinken in February Kazakhstan’s Foreign Minister Mukhtar Tleuberdi made it clear that EAEU economic participation is critical for Astana, and Kazakhstan would not be opting out of such a beneficial arrangement in order to please the US.

It was just another reminder of how the INSTC and Middle Corridor represent the growing integration of the EAEU, MENA, China, and India, and the US’ fading influence.