By Peter Tchir of Academy Securities

With today’s big drop in the GDP Price Index (from 9% to 4.1% vs expectations of 5.3%), it seemed like a good day to do an inflation dumpster dive.

The Fed and so many others are apparently convinced that inflation remains a problem and the Fed is going to have to tighten at least into February. Some argue for even longer. Is that inflation risk real? Or is it as wrong as when so many people were screaming “transitory!” at the top of their lungs last year?

This report will work on two main premises:

• Let’s look for the most up to date and potentially leading indicators of where inflation is headed, rather than looking backward.
• The Fed, all else being equal, would still like to engineer a soft landing.
• Starting conditions are crucially important to the path that inflation will follow.

Maybe this analysis will resurrect the policies of Volcker, but I suspect not.

Ignoring Foreign Inflation Data

I am not going to spend more than about 30 seconds thinking about inflation in Europe, the UK, or Japan.

The Yen has depreciated over 25% versus the dollar this year and the British Pound and Euro have declined more than 10%. Given how much these countries need to import, especially on the commodity front, it would be shocking if they weren’t experiencing inflation.

Much of the inflation in other parts of the world is linked to their currency weakness. Either they can in theory hike more (to catch up to us) or we could ease the pressure.

As mentioned in this weekend’s VUCA piece, FX is becoming a geopolitical issue. It is an issue that some of our allies are likely asking for relief from (in return for supporting some of our policies across the globe). So far Treasury Secretary Yellen has refused to acknowledge any concerns from other countries, but that could change.

Yes, foreign inflation is bad, but it tells us very little about U.S. inflation.

Commodity Inflation

I don’t think that commodity inflation is the key here, but it is so easy to address that we might as well get this out of the way.

I chose oil and gasoline because they attract so many headlines. I chose copper because who doesn’t like Dr. Copper as both an inflation metric and a gauge of economic activity.

I did use the 3rd contract rather than the front contract because I like the relative stability and it is less crazy in and around settlement dates. It tells the same story, just more nuanced. In any case, commodity prices are headed in the right direction (at least these three big commodities).

FX moves have certainly helped our inflation picture on the commodity front.

The fact that industrial commodities seem to be leading the way lower could be a sign that the economy is grinding to a halt behind the scenes faster than we realize (or just a function of China’s Zero-COVID policy). On the industrial side, commodities are “only” up 9.4% since the start of 2021 and are down 14% YTD. Not great, but the trend seems clear and probably reflects more than just dollar strength.

Housing

The most recent CPI data had the highest monthly increase in shelter costs since 1990! We discussed it in OER Seems Crazy and again in The Wall of Worry Knows No Bounds. I cannot harp on this subject enough – not only was shelter inflation high, but it was RECORD HIGH! We all know why it set a record (bad calculations, lags, estimates, etc.) but that doesn’t mean we should use an obviously useless number to determine policy! I’m told that the definition of insanity is doing the same thing and expecting different results (like ignoring housing inflation in the summer of 2021), but a simpler definition of insanity is using data that you know is patently false to drive models and determine policy.

Mortgage rates have skyrocketed! They have risen over 400 bps on the 30-year fixed and even a 5/1 arm offers little respite (having risen 274 bps). The U.S. is the one country that really promotes longer-dated mortgages (much to the chagrin of UK borrowers right now), so while it would seem risky to only lock in 5 years, the cost difference is very large.

I would be remiss not to point out that mortgage rates started rising the minute QT was discussed. QE likely impacted the mortgage market more than any other market (the Fed was a disproportionately large and yield indiscriminate buyer). These much higher mortgage rates are the price we now have to pay for all those purchases that drove us to non-market levels.

For every $100,000 of borrowing, interest on a 30-year has gone from about $3,250 annually to $7,300 for a new loan. Existing owners with longer-dated mortgages are protected, but that doesn’t help a new homebuyer. I cannot think of a faster way to stop upward mobility than having mortgage rates skyrocket (and I suspect that lending standards have also tightened, which is a double whammy).

So, how do higher mortgage rates translate into the housing and rental markets?

• For most Americans, the “balance sheet” item that has done the best this year is their mortgage. The change in mortgage rates is literally impacting how people are thinking about their house and where to live. How do you move to a similarly priced house in another part of the country if you have to pay 400 bps more on any mortgage? Will this cause people to rent their homes out?

Since 1998, as far back as this time series goes, we have never seen anything like this in terms of not just the total size of the move, but how fast that move occurred. I’m assuming that there is an entire cottage industry of lawyers and accountants figuring out ways to “sell your house” while retaining the mortgage, but in any case, this move is unprecedented and we have to think about how buyers, sellers, renters, and landlords will adapt to this.

We see home prices starting to tick down, but how useful is this data? If sellers don’t want to sell, is this reflecting much of anything? My understanding is that the Case-Shiller data has embedded lag effects, so it may not be reflective if prices are moving rapidly.

We see home sales across the board dropping from the start of the year. In August (there is a lag), new home sales actually had an uptick. At first, that seems strange, but 1) builders are in the business of selling homes and clearing inventory, so they might have more price flexibility and 2) there is no existing mortgage, so that element is weird. Probably a touch early on this trade considering the increase in builder announced cancellations (remember our “wait list” economy thesis?), but then again, maybe this level of bad news is already priced in?

It almost seems weird to think about, but with the cost of construction presumably dropping (the aforementioned commodity prices, for example) and mortgages making existing homeowners reluctant to sell, it might be an interesting time to revisit homebuilders for a long-term perspective (XHB, the ETF, is down 34% YTD and 27% for the year).

Which series seems believable? Which one looks like something we lived through, and which one seems just plain wrong? It is highly unlikely that monthly rents actually jumped by the most in over 30 years in September (it is more likely that they declined in September relative to August).

Autos and Other Big-Ticket Items

The cost to borrow money has gone up across the board. Autos are particularly interesting to me and I will harp on the importance of “starting” conditions. We have had two public companies comment on the used car market: CarMax (KMX) a few weeks ago and AutoNation (AN) today. One message that is clear is that the shortage of supply across all used auto segments is a thing of the past (certain segments are holding their own, but it is not a universal free for all anymore).

That is supported by the Manheim Used Auto Index, which is down 10% YOY based on mid-October estimates and while it is up 21% from late 2020, it is trending down rapidly.

Starting conditions matter:

• Work from home meant more driving for many people. Certainly, in major city centers, public transportation use fell as people drove themselves. COVID and WFH created a spur in demand for cars!
• With fewer things to spend money on (COVID shortages), stimulus checks, day trading, crypto, stock options, etc. and with cheap financing readily available, more people could afford “more” car.
• Supply chain issues were very real in the new auto space, forcing people to pay up for used cars when the alternative was an uncertain delivery date for a new car.

None of those conditions exist today!

I will grant that the new auto space isn’t back to where it was, but lots are no longer empty. Advertising (at least in my streams) has picked up for auto sales. I’ve even seen some messages offering discounts!

Autos, were also one of the biggest examples of the “wait list” economy that I could think of – see Baby Needs New Shoes.

Whether it was existing EV companies, new EV companies, bringing back old brands, etc., there was a surge in wait list activity. People were signing up for wait lists and the more expensive the car, the better (maybe a bit of hyperbole there, but not much).

My contention is that since it cost nothing to be on most wait lists, and in some cases you could sell your spot in line, they massively overstated demand. Certainly, with crypto prices lower, stock options (for many) being far less valuable, and the general wealth effect issues, we could see people dropping off wait lists or not taking delivery when cars are available. If you look closely at some deliveries versus production reports, I think you can see this occurring.

Auto companies are ramping up production for new cars as the supply chains are healing. However, as demand is waning (and likely satisfied by used cars) and the ability to pay is dropping fast, they may face an uphill battle.

In any case, the auto market is not going to be a source of inflation for months to come.

More broadly, as housing prices decline (at least if you had to sell) and rates rise, it seems logical that many other capital expenditures would suffer (today’s Capital Goods report was negative for September and August was revised down).

According to ISM data, inventories continue to build and new orders are actually declining. It takes time to dial back production, but that seems to be the likely outcome as not only have we caught up (post the supply shortages), but we are also creating a large inventory overhang.

There seems to be a significant amount of above trend inventory. Yes, this includes both large and small products, but it seems logical that when we have below trend inventory we can see inflation, and that when we have above trend inventory, there is some deflationary pressures (hence all the sales).

Let’s not forget that the cost of holding inventory is no longer trivial as SOFR has risen from 0.04% to 3.02% and credit spreads have widened as well – further incentivizing companies to cut costs to reduce inventories if buyers don’t appear.

Goods inflation seems to be behind us as well.

Jobs

Jobs and wages are the weakest part of my argument – maybe.

I have to admit, I was shocked when I pulled up this chart. I forgot about the wage spikes when COVID first hit. I believe that it had more to do with lower income people getting let go in droves as opposed to actual wage increases. However, the five years before COVID doesn’t look very different from the recent data, at least not to the naked eye. I thought I’d have a lot more explaining to do on wages.

How I see the job market playing out:

It was so difficult to hire workers that companies won’t fire workers (at least not right away). Companies will try and cut the outside services they use first.

Could this be what we are seeing in some of the big tech earnings? Will we see it in accounting, consulting, and legal firms? Anecdotal evidence is yes, but not seeing a consistent story here, yet.

Cuts seem to be focused on underperformers who are viewed as expendable. Tolerable, but potentially it is only the first wave. The next wave, if it occurs, will start cutting into the actual meat of the organizations.

Data between the Establishment and Household surveys has been inconsistent, and ADP hasn’t been much of a guide as they were switching their methodologies. We could see some serious revisions to old data (that was originally very strong) in the coming months .

As belts tighten, raises will be focused on critical spots where companies can generate revenues with those extra costs. Far less overall wage pressure. • So far, nothing seems to move the labor force participation rate, but as savings decline, the wealth effect erodes, and moratoriums expire, will we see some increase in the supply of labor?

Labor, while not a strong part of the inflation story, isn’t as weak as I’ve been led to believe.

Starting Conditions Matter

I won’t belabor the point, as you can read Dredging Up Pendulums to get the details (I do think that it is a very worthwhile read). What this highlights is that a simple pendulum is easily modelled and starting conditions (that are similar) produce very similar results. In a more complex system, like a double pendulum, you can no longer predict the results with the naked eye.

Both the single pendulum system and double pendulum system can be modelled exactly, but:

• Much more precise measurements are required for the double system (think about how flawed many of our measurements are in the economics world).
• More complex algorithms and more computing power is needed for the double pendulum. It is possible to do but doesn’t lend itself to one-sentence soundbites.

There are so many conditions that are “unique” to the current environment that I think it is extremely dangerous to try and “solve” for inflation with rather basic tools without accounting for the differences in how inflation was created this time around.

Bottom Line

Rates should perform well here as the inflation reality sinks in.

The longer the Fed sticks to hiking based on old data and not allowing the effects of earlier hikes to kick in, the more risk we get of a hard landing.

I’m in the camp that the recession will be sooner and deeper than expected, but we can still get one more “everything rally” before that gets priced in. I’m increasingly worried that earnings calls are pushing the average economic outlook towards my rather bleak call.

With the bulk of the FAAMG stocks – which is now GAMMA following Facebook’s rebranding to Meta (at least until the company  quietly changes its name back now that the whole Metaverse farce has blown up in its Metaface) – having reported Q3 results (which have uniformly been a disaster, sending megatech stocks tumbling), investors were keenly looking to Amazon and Apple earnings after the close today, to round out the picture for the (former?) market generals and set the tone for the rest of 2022, or at least until after the midterms when the BLS reports that real payrolls were actually -1,000,000, and also to conclude whether the ongoing Nasdaq implosion has been justified.

Focusing on Amazon, investors are expecting Amazon to outperform digital advertising peers Facebook and Google through an ad slump. The theory, as Bloomberg notes, is Amazon is closer to the customer at the time they are prepared to buy something, so that advertising is more valuable when consumers are penny-pinching when compared to broader marketing campaigns aimed at awareness on social-media sites like Instagram or Google’s search engine where users aren’t necessarily shopping.

Investors also expect a slight slowdown in Amazon Web Services sales growth (thank you Microsoft and Google), with third-quarter revenues expected to come in at $21 billion, up 30% from a year earlier. Cloud-industry peer Microsoft reported earlier this week that rising energy prices cut into cloud computing profits, so there will likely be some focus on Amazon’s cloud profit margins as well to see if they are under similar pressure. Investors expect operating income of $6.1 billion in the third quarter from Amazon’s cloud business.

Poonam Goyal, senior retail industry analyst for Bloomberg Intelligence, and Anurag Rana, BI’s senior software analyst, point to Microsoft’s projection of a slowdown as a harbinger for AWS. “Amazon Web Services’ sales growth in constant currency could dip in 4Q to about 26%-27% from consensus of 29%,” they wrote in a recent note. “The slump is probably going to stretch through 2023, with recovery possible in 2024.”

Amazon’s employee count will also be an interesting metric to watch. The company has been busy cutting some experimental projects, which would reduce its numbers, but it also announced plans to hire 150,000 people for the holidays, which is the same as last year. As of June 30, Amazon had 1.52 million employees globally. If that figure goes down, it will be the first time Amazon has reduced its number of employees for two consecutive quarters since 2001 and gives a clearer picture of how deep the cuts have been.

But while Q3 earnings will matter, all eyes will likely be on the forecast for the busy holiday quarter. Investors expect earnings of 39 cents per share on sales of $156 billion. Investors are counting on Amazon to boost profits and sales while trimming costs through hiring freezes and cutting experimental projects.

That said, like the rest of the tech sector, rising labor and energy costs coupled with slower spending growth have put a strain on Amazon’s business model. Amazon CEO Andy Jassy has taken several steps this year to boost revenues, including increasing the price of Prime membership and tacking new fees on merchants selling goods on the web store. Investors want to see if Amazon can maintain that strong connection with Prime subscribers and win their spending during the holidays, or if more expensive Prime membership compels them to shop elsewhere.

Heading into earning, Amazon shares suffered steep declines, falling as much as 5.1%. The e-commerce giant’s shares are down 8.5% over the past two days, the worst two-day slump since June.

So with all that in mind moments ago AMZN just reported Q3 results which were an absolute disaster and nailed the coffin of the FAAMGs shut, because not only did Amzn miss sales, and report disappointing AQS metrics but its forecast was a disaster.

• EPS 28c, beating estimates 22c
• With all that in mind, moments ago AMZN just reported Q3 results and they were an absolute disaster.
• Net sales $127.10 billion, +15% y/y, missing estimate $127.64 billion
  • Physical Stores net sales $4.69 billion, +10% y/y, beating estimate $4.68 billion
  • Online stores net sales $53.49 billion, +7.1% y/y, missing estimates $54 billion
  • Third-Party Seller Services net sales $28.67 billion, +18% y/y, beating estimates $28.49 billion
  • Subscription Services net sales $8.90 billion, +9.3% y/y, missing estimate $9.18 billion
  • AWS net sales $20.5 billion, +27% y/y, missing estimate $21.0 billion
  • North America net sales $78.84 billion, +20% y/y, beating estimate $76.95 billion
  • International net sales $27.72 billion, -4.9% y/y, missing estimate $29.28 billion
• Third-party seller services net sales excluding F/X +23% vs. +18% y/y, beating estimate +18.7%
• Subscription services net sales excluding F/X +14% vs. +23% y/y, estimate +20% (2 estimates)
• Amazon Web Services net sales excluding F/X +27% vs. +39% y/y, estimate +31.9%
• Operating income $2.53 billion, -48% y/y, missing estimate $3.11 billion
• Operating margin 2% vs. 4.4% y/y, missing estimate 2.48%
• Intl oper margin -8.9% vs. -3.1% y/y, missing estimate -7.71%
• Fulfillment expense $20.58 billion, +11% y/y, below the estimate $21.58 billion

But while revenue was disappointing and AWS was subpar at best, the reason why AMZN stock is imploding after hours is because the company’s guidance was absolutely catastrophic

• Sees net sales $140.0 billion to $148.0 billion, the midline coming far below the median estimate of $155.52 billion
• Sees operating income to be between $0 and $4 billion, also missing the median estimate of $4.66BN

In short: ugly earnings, catastrophic guidance!

Digging into the numbers we find that operating margins tumbled to 2.0%, down from 4.0% and missing the estimate of 2.5%. In fact as shown below, the only reason this number wasn’t positive is thanks to AWS.

And while the market was not happy with the overall profit margin, it was even less enthused with the profit margin breakdown where despite a modest improvement in AWS, the international operating margin collapsed to the lowest in the past decade, with US online sales still unable to turn green. In fact, if it wasn’t for AWS, AMZN would have negative operating income.

The chart above shows that Amazon’s online retail business in North America and international both lost money. This is after hiking the cost of Amazon Prime $20 a year and adding fees to online merchants that sell on the platform. If Amazon Web Services is subsidizing the e-commerce side, it makes it harder to justify keeping the businesses together.

And while AWS did post a modest improvement in profit margins, where it did disappoint was in revenue growth, which rose 27% Y/Y to $20.54 billion, missing the estimate of $21.01 billion.

But all these disappointing data points aside, what markets are mostly focused on is that forecast revenue growth in a range of $140-$148BN (midline at $144BN) suggests that very soon the company may see an unheard of event: shrinking revenues!

As Bloomberg puts it, the results will ramp up pressure for CEO Andy Jassy – and all the other tech giants – to further cut costs. Amazon has a hiring freeze in its retail team and has been cutting experimental projects. But investors will be hungry for deeper cuts if sales are falling flat.

And speaking of Bloomberg, BBG Intel’s Poonam Goyal was rather adamant “It’s actually pretty bad across the board. It’s hard to find something good in this press release….It’s kind of humming the same tune of results we saw earlier. The consumer is slowing.”

In light of these catastrophic earnings and terrible guidance, it is not surprising that the kneejerk reaction may have been the worst in post-earnings plunge Amazon history: the stock was down as much as 21% after hours, plunging to the lowest level since the March 2020 covid crash when the entire economy was locked down!

Not surprisingly, Wayfair and EBay shares are falling postmarket after Amazon’s forecast miss. Wayfair is down as much as 6.2% while EBay declines as much as 3.6%. Alibaba is down 1.7%.

The ECB hiked rates by 75bps as expected but the somewhat dovish language sent Bund yields (-25bps) and EUR lower on the day. 10Y Bund yields tumbled back below 2.00%…

Source: Bloomberg

EUR back below parity against the dollar…

Source: Bloomberg

US stocks gained some ground on the ECB but tumbled on the US cash open, then ripped back after another Democrat demanded Powell stop hiking rates (but not for political reasons of course).

That rally last about 45 minutes, and then… (amid Putin’s address), the nuke threats started from Washington:

• *AUSTIN DESCRIBES RUSSIA AS ‘ACUTE’ THREAT TO US VALUES, WON’T RULE OUT NUCLEAR USE AGAINST NON-NUCLEAR THREATS,  DEFENSE STRATEGY SHUNS LIMITS ON USE ONCE EMBRACED BY BIDEN

And stocks sank. Nasdaq was monkeyhammered 2% lower and along with the S&P closed red. The Dow was the only major to manage gains, helped by CAT (which added over 100pts alone)…

Shorts were squeezed again at the open, but – again – that didn’t last…

Source: Bloomberg

But call demand continues to dominate put demand as there is no fear…

Source: Bloomberg

Notably, VIX was flat to down today despite the S&P being down… once again as we suspect puts were covered (pressuring vol lower)…

Source: Bloomberg

META was clubbed like a baby seal (-24% – its second worst day ever), tumbling to 6 year lows, down 75% from the highs (with Zuck down over $100bn in net worth since the highs!!)…

Source: Bloomberg

The market cap of the FANG stocks is back below pre-COVID highs…

Source: Bloomberg

Just for some context, the impact of GOOGL, MSFT, and META (among others) has prompted the biggest 2 day outperformance of the equal-weighted Nasdaq over the cap-weighted Nasdaq since Nov 2012…

Source: Bloomberg

As month-end spookily looms on Monday, the spread in US Majors is massive (Nasdaq +2% but The Dow +12% MTD)…

Source: Bloomberg

Most notably today we saw rate-trajectory expectations dovishly dive (GDP Price indices fell a little?) with terminal rate dropping and rate-cut hopes rising.Note that the Fed terminal rate (in May 2023) is down from 5.03% last Friday to 4.78% at its lows today…

Source: Bloomberg

That helped send UST yields dramatically lower with 5Y outperforming (-8bps) and 30Y the relative weakest. However, from the day’s highs, the swing in yields was huge 15-20bps across the curve. The main buying pressure in TSYs was from the GDP data to the European close…

Source: Bloomberg

10Y Yields dropped back below 4.00%…

Source: Bloomberg

The BoJ is set to announce tonight… will they comment on the fact that their YCC has broken?

Source: Bloomberg

The dollar rebounded modestly after 2 ugly days…

Source: Bloomberg

Bitcoin drifted lower today after 2 days higher…

Source: Bloomberg

Gold also drifted lower today

With the easing of rate expectations, and despite the ugly durable goods data (perhaps offset by US GDP), oil prices rallied today with WTI back abive $89.50…

US NatGas, on the other hand, was smashed lower (back below $6)…

Finally, is it over yet?

Source: Bloomberg

Maybe… but Nasdaq never made it back to those levels for years.

Authored by Steve Watson via Summit News,

Hundreds of woke Twitter employees have deserted the company and gone to work for Google and Meta over the past few months in anticipation of Elon Musk taking over the company, according to a Business Insider report.

The piece notes that in the past three months, a total of 530 Twitter employees have left, with many running directly to the tech giant’s direct competitors.

Over 1,100 employees have left Twitter since Musk announced his intention to buy the company back in January, with almost a third going to Google or Meta.

The figures come from a new analysis of LinkedIn data, with the report noting that other workers have moved to the likes of Pinterest, LinkedIn, Snap, and TikTok.

Musk, who has vowed to complete the Twitter acquisition by Friday, has said he intends to make huge staff cuts of up to 75% anyway, cutting worker numbers from around 7,500 to around 2,000 employees.

The Washington Post also notes that even if Musk doesn’t close the deal, Twitter officials have planned a $800 million cut in payroll by the end of 2023 regardless.

Musk previously mocked work-from-home enthusiasts at Apple with a lazy dog meme, and also stated that constantly working remotely is “phoning it in,” informing employees they can collect their belongings if they disagree.

pic.twitter.com/qup2NUiOM1

— Elon Musk (@elonmusk) May 18, 2022

In an email to Tesla employees earlier this year, Musk wrote “Remote work is no longer acceptable,” except in extreme cases.

“Anyone who wishes to do remote work must be in the office for a minimum (and I mean *minimum*) of 40 hours per week or depart Tesla,” he wrote in correspondence then leaked by Tesla shareholder Sam Nissim.

#Tesla no longer allowing remote work@TeslaPodcast @SawyerMerritt @WholeMarsBlog @garyblack00 @GerberKawasaki pic.twitter.com/DKAgh9ptSX

— Sam Nissim (@SamNissim) June 1, 2022

Musk confirmed that the email was authentic and doubled down, saying anyone unhappy with it should “pretend to work somewhere else”:

hey elon a lot of people are talking about this leaked email, any additional comment to people who think coming into work is an antiquated concept? https://t.co/E3qSBVrJIJ

— Whole Mars Catalog (@WholeMarsBlog) June 1, 2022

Musk has promised that “work ethic expectations” at Twitter will be “extreme” when he takes over:

Also, work ethic expectations would be extreme, but much less than I demand of myself

— Elon Musk (@elonmusk) May 7, 2022

Yesterday, Musk was filmed entering Twitter HQ literally carrying a sink. He tweeted the footage with the caption “let that sink in,” clearly an effort to trigger his detractors:

Entering Twitter HQ – let that sink in! pic.twitter.com/D68z4K2wq7

— Elon Musk (@elonmusk) October 26, 2022

The post prompted a barrage of memes imagining the reaction of remaining woke Twitter employees:

Meanwhile, as Twitter stock is rising, Meta is collapsing:

Update(1534ET): Putin in his nearly four-hour long annual Valdai Discussion Club speech (which included a the lengthy Q&A portion) “appeared relaxed”, Reuters observed while at times questioned by journalists and panelists about the prospect of nuclear war. 

Importantly, he rejected head-on the allegations from the West that he ever so much as hinted at plans to deploy nukes in Ukraine, describing a nuclear strike in the context of the “special operation” to be ultimately pointless. “We see no need for that,” Putin said. “There is no point in that, neither political, nor military.” He underscored, “it doesn’t make sense for us to do it.

He went on to emphasize that Russia had “never said anything proactively about the possible use of nuclear weapons by Russia.” At the same time he lashed out at Washington, for being the “only country in the world that has used nuclear weapons against a non-nuclear state” – in reference to WWII and the bombs over Hiroshima and Nagasaki.

He specifically referenced prior statements of Liz Truss and vague references to his saying he’s willing to defend Russia “by all means available” as having been intentionally misinterpreted and distorted: 

Putin said an earlier warning of his readiness to use “all means available to protect Russia” didn’t amount to nuclear saber-rattling but was merely a response to Western statements about their possible use of nuclear weapons.

He particularly mentioned Liz Truss saying in August that she would be ready to use nuclear weapons if she became Britain’s prime minister, a remark which he said worried the Kremlin.

“What were we supposed to think?” Putin said. “We saw that as a coordinated position, an attempt to blackmail us.”

Literally as Putin was speaking, the Pentagon decided it was a good time to unveil a stunning nuclear strategy reversal, saying it would no longer rule out use of nuclear weapons against a non-nuclear threat.

As we detailed earlier, the Defense Department said in the long-awaited document issued Thursday that “By the 2030s the United States will, for the first time in its history face two major nuclear powers as strategic competitors and potential adversaries”. In response, the US will “maintain a very high bar for nuclear employment” without ruling out using the weapons in retaliation to a non-nuclear strategic threat to the homeland, US forces abroad or allies.

In the document, which was framed well before the invasion, the Pentagon says Russia continues to “brandish its nuclear weapons in support of its revisionist security policy” while its modern arsenal is expected to grow further. 

Of course, Putin is now essentially pointing the finger at Washington and its allies for being the real nuclear threat in the world. The DoD briefing certainly didn’t hurt his case, at least from the point of view of Moscow and its allies. 

* * *

“Russia is not challenging the western elite. We are not trying to become the hegemon,” Russian President Vladimir Putin said early in an important speech before the Valdai Discussion Club meeting outside Moscow on Thursday. Each year the Valdai speech is a major one and closely watched by Western officials and media.

This year it was touted with the eye-catching title of “A Post-Hegemonic World: Justice and Security for Everyone.” And of course, this year’s Valdai meeting comes against the backdrop of the biggest war Europe has seen on its eastern doorstep since WWII. 

Putin said in his remarks that Russia merely wants to “defend its right to exist” and “won’t let itself be destroyed and wiped off the geopolitical map.” This as nuclear rhetoric and threats of defending red lines between Moscow and the West have reached heights not seen since the Cold War. 

He repeated a familiar refrain of a crisis unfolding because the Western allies are using Ukraine for their “dirty game” in an ultimate drive for world domination. “Power over the world is what the West has put at stake in the game it plays. This game is certainly dangerous, bloody and I would call it dirty,” he said according to a state media translation. 

“But in the modern world, sitting aside is hardly an option. He who sows the wind will reap the whirlwind, as the proverb says,” he added. Repeating a well-known theme of his, juxtapositioning collapsing unipolar order vs. multipolarity, he said “new centers of power in the multipolar world and the West will have to start talking as equals about our common future.”

“[This game] denies the sovereignty of nations and peoples, their identity and uniqueness, and has no regard whatsoever for other countries,” Putin added.

Commenting on one segment of the talk, The New York Times said the Valdai speech sought to appeal to conservatives in Europe and the US: 

Mr. Putin insisted that Russia did not fundamentally see itself as an “enemy of the West.” Rather, he said — as he has before — that it was “Western elites” that he was fighting, ones who were trying to impose their “pretty strange” values on everyone else.

“There are at least two Wests,” Mr. Putin said in his speech at the plenary session in Moscow of an annual foreign policy conference. One, he said, was the West of “traditional, mainly Christian values,” which Russia was close to.

But Putin drove home in contrast that “There’s another West — aggressive, cosmopolitan, neocolonial, acting as the weapon of the neoliberal elite.”

Ukrainian officials have been watching the speech closely, and commenting: 

“Confidence in one’s infallibility is a very dangerous state, one step away from destroying those they don’t like” – Putin knows what he is talking about at Valdai. pic.twitter.com/0VRSjKlWiu

— Maria Avdeeva (@maria_avdv) October 27, 2022

And more specifically on the Ukraine conflict, the Russian leader charged of the West’s actions, “They’re always trying to escalate…They’re fueling the war in Ukraine, organizing provocations around Taiwan, destabilizing the world food and energy markets.” 

And more via state media translation:

Putin warned that the West’s confidence in its “infallibility” is a “very dangerous” condition, with there only being “one step” between this self-confidence to the idea that “they can simply destroy those they do not like, or as they say, to ‘cancel’ them.”

Emphasizing that Russia is not a natural “enemy” of the West, Putin urged Western political elites to stop seeing “the hand of the Kremlin” behind all their internal problems.

On multipolarity, Putin’s message to Europe is essentially “take it or leave it”…

Putin is at it again. New Munich III speech at Valdai conference. He is laying the foundations of new multipolar world order. The message to Europe is “take it or leave it”. pic.twitter.com/oUixDO7Jmm

— србин (@forzaserbia) October 27, 2022

Western officials are also keeping a close watch on Putin’s words regarding nuclear doctrine and usage. Putin at Valdai underscored he sees “no political or military reason” to conduct a nuke strike in Ukraine. He also stressed Moscow’s nuclear doctrine is defensive in nature. “Russia has never talked about nuclear use, only replied,” he said. 

He went on to warn that it remains Russia will never “put up with what the West tells it to do” – and that while Russia should not be seen as a direct challenge to the West, it reserves the right to develop. With this theme established, Putin asserted that Washington has discredited international finance “by using the dollar as a weapon” – thus he posited that in the future continued moves toward “settlements in national currencies will dominate.”

Authored by Simon White, Bloomberg macro strategist,

The real decline in stocks has yet to come, as inflation and recession threaten the historic overweight in equities versus bonds.

It has been a torrid year for financial assets. The paradigm shift in inflation has led to decades of market experience being turned on its head, with stocks and bonds commonly falling together. This year has seen a peak-to-trough drawdown of over 25% in the S&P, and an historic 15% drop in Treasuries.

The stock-bond ratio has declined precipitously, but we are likely just getting started.

The ratio tends to revert to its mean, but with big overshoots.

Those to the upside typically lead to overshoots to the downside of a similar magnitude. The enormous fiscal and monetary injections during the pandemic led to a dizzying bubble in financial assets, sending the stock-bond ratio skyward.

But the fall in stocks and bonds this year has only taken the ratio to just below its mean.

We are in the process of an overshoot that could take it much lower still, driven by the twin specters of inflation and recession.

It’s a common misconception that equities are an inflation hedge. Some stocks and sectors, particularly those related to real assets, do make good inflation hedges, but equities overall are terrible at protecting against persistent price rises.

In fact, equities were the worst-performing main asset class in both real and nominal terms during the Great Inflation of the 1970s. This is because they became a shunned asset.

Why?

Stocks have an infinite duration with a fixed coupon, the return on equity. Bonds, on the other hand, have a maturity date where there is an opportunity to renegotiate the coupon.

When inflation is high, equities have to compete with bonds and they begin to look less and less attractive. Today, the real dividend yield of the S&P is -5.6% and the real earnings yield is -7.2%, while the real 10-year yield on a Treasury bond is -3.5%. Why bother with equities when you can get a comparatively juicy, less risky return from bonds?

The big overweight in stocks versus bonds is therefore at great risk. The prospect of higher returns has meant a strong preference for stocks over bonds is the norm in the US. That overweight currently sits at its highest level since the tech bubble of 2000, after hitting even greater extremes during the pandemic.

As it becomes apparent inflation is entrenched and not returning to a low-and-stable regime any time soon, the penny will drop that equities are more of a leaky ship than a water-tight revenue generator, prompting an exodus to comparatively inflation-resilient bonds.

This exodus could be sizable, taking the stock-bond ratio considerably lower and decimating the long-term real return of equities. The 1970s saw a similar rebalancing, with the equity overweight in the late 1960s morphing into a record underweight that persisted until the late 1980s. Inflation, like a skin disease, gave equities a rash that made them unattractive for many years. They face the same risk today.

A recession only makes the risk of further stock underperformance more immediate. Leading indicators point to a US recession in the next 3-6 months as being all but inevitable. Stocks face more downside in a downturn, while bonds are likely to catch their usual haven bid. History shows that the stock-bond ratio falls at a median of over 12% in the six months after a recession begins. Leaving aside that in real terms both assets are still likely to lose you money, the stock-bond ratio is poised to fall further in any economic slump.

Ultimately, though, stocks are more at risk than bonds as governments do not borrow in equity markets.

High inflation means yields could rise much higher, and at this point equities would be sacrificed to limit how much governments have to pay to borrow by way of financial repression. This, later on, may mark the final capitulation in the stock-bond ratio.

The long-term outlook for bonds is less than rosy in the current inflation paradigm, but the prospect for stocks is dimmer still.

A former Trump administration official and two Republican lawmakers are demanding an immediate investigation from the Department of Health and Human Services (HHS) over an advocacy group’s use of $8.5 million taxpayer dollars.

As Rita Li reports via The Epoch Times, Alianza Americas, a pro-mass immigration group funded by liberal billionaire George Soros, may have unlawfully used funds granted by agencies under HHS, according to Friday letters by Brian Harrison, the former chief of staff of the department, Reps. Chip Roy (R-Texas) and Beth Van Duyne (R-Texas). Federal grants are banned under U.S. law from being leveraged to weigh on government positions on legislation or policies, including lobbying.

“Despite statutory and regulatory restrictions on lobbying for recipients of federal funding from all federal agencies, forms submitted to the Internal Revenue Service by Alianza Americas appear to show activity in direct violation of the law and federal regulations,” Roy and Van Duyne wrote in an Oct. 21 joint letter sent to HHS Deputy Inspector General Christi Grimm, calling for “a review of all grants received by Alianza Americas as well as the publicly disclosed actions” taken by the group.

Besides calling to defund U.S. Customs and Border Protection, Alianza Americas launched in September a lawsuit against Florida Gov. Ron DeSantis after the state flew illegal immigrants to Martha’s Vineyard, Massachusetts under the governor’s order.

Official records show Soros’s Open Society Foundations website awarded nearly $1.4 million to Alianza Americas between 2016 and 2020.

Yet lawmakers said official grants from the Centers for Disease Control and Prevention (CDC) and the Health Resources and Services Administration (HRSA) totals $8.5 million over the past two years.

CDC granted Alianza in February 2021 $7.5 million in funding, which will terminate in September 2025, “to reduce the spread of COVID-19 and mitigate impacts among Latinx and Latin American immigrants.”

Since last July, the group had also received a total of $1 million from HRSA to “increase COVID-19 vaccine access” among local communities.

Van Duyne asserted that unchecked spending under President Joe Biden is “out of control.”

“I have continued to monitor actions taken by the Department,” Harrison wrote in his letter to HHS, saying he is “deeply concerned” that taxpayer dollars may have encouraged illegal immigration to the United States, both at home and in foreign jurisdictions, the Washington Examiner reported.

Read the rest here…

Authored by Jesse Felder via TheFelderReport.com,

“This month (so far) has been the worst for the Nasdaq since the stock market was in the throes of the Great Financial Crisis back in 2008. And it shouldn’t be hard to understand what is plaguing the Big Tech stocks that make up the bulk of this index. In addition to capital flows, macro economic trends, risk appetites and insider activity, all of which warned of the current weakness in stock prices well ahead of time, there are two major bearish forces at work.”

I wrote that six months ago and, if you change “month” in the first sentence to “year,” it is just as true today as it was back then.

Put the market caps together of Microsoft, Apple, Nvidia, Tesla and Amazon and compare that figure with their aggregate free cash flow and you get a multiple of over 50 times, down from nearly 70 at the start of the year.

This historic level of overvaluation was only made possible by massive money printing on the part of the Fed that supported both cash flows and the multiple applied to them.

Now that inflation is raging, however, the money printer has been shifted into reverse and that’s already having a visible impact (both “bearish forces,” the reversion in valuations and falling liquidity, have been consolidated into one chart this time below).

Furthermore, if the Fed follows through on its commitment to normalize the balance sheet over the next few years then this reversion in valuations has only just begun.

In fact, price-to-free cash flow ratios could still halve from their current levels. Of course, if free cash flow (the denominator in the valuation ratio) continues to grow as it has over the past decade, this process will be much less painful than if free cash flow also goes into reverse.

Worryingly, that reversal in cash flows is actually what has happened over the past year in which growth went from double digits positive to double digits negative.

As I wrote in the prior piece, “Considering the nature of the pandemic and the stimulus enacted as a result, it’s not unreasonable to think there was a significant pulling forward of demand for Big Tech products and services that will now leave a vacuum of demand for a prolonged period of time.”

We’re just now beginning to find out how much of a vacuum of demand now lies in front of us. And a Fed-induced recession resulting from the rapid rise in interest rates and draining of liquidity isn’t likely to improve things in that regard.

Well, we’re finally there: stocks are officially trading off nuclear war headlines.

Moments ago, as part of his closely-watched speech, Vladimir Putin appeared to talk down the likelihood of a nuclear attack in Ukraine:

• *PUTIN: NO POLITICAL, MILITARY REASON IN NUKE STRIKE IN UKRAINE

Which, however, is more than can be said about the US.

As Bloomberg just reported, the Pentagon’s new National Defense Strategy rejects limits on using nuclear weapons long championed by arms control advocates (and, in the not too distant past, by Joe Bide) citing burgeoning threats from Russia and China.

“By the 2030s the United States will, for the first time in its history face two major nuclear powers as strategic competitors and potential adversaries,” the Defense Department said in the long-awaited document issued Thursday. In response, the US will “maintain a very high bar for nuclear employment” without ruling out using the weapons in retaliation to a non-nuclear strategic threat to the homeland, US forces abroad or allies.

In yet another stark reversal for the senile occupant of the White House basement, in his 2020 presidential campaign Biden had pledged to declare that the US nuclear arsenal should be used only to deter or retaliate against a nuclear attack, a position blessed by progressive Democrats and reviled by defense hawks. But, like with every other position held by the pathological liar who even trumps Trump in the untruth department, this one has just been reversed as well as “the threat environment has changed dramatically since then” and the Pentagon strategy was forged in cooperation with the flip-flopping White House.

In a stunning move that should – or rather “should” – spark outrage among the so-called progressives but will at best prompt some very sternly retracted letters, the nuclear report that’s part of the broader strategy said the Biden administration reviewed its nuclear policy and concluded that “No First Use” and “Sole Purpose” policies “would result in an unacceptable level of risk in light of the range of non-nuclear capabilities being developed and fielded by competitors that could inflict strategic-level damage” to the US and allies.

meanwhile…

Putin: The only country in the world that has used nuclear weapons against a non-nuclear state is the United States of America

— Paul Sonne (@PaulSonne) October 27, 2022

The nuclear strategy document doesn’t spell out what non-nuclear threats could produce a US nuclear response, but current threats include hypersonic weapons possessed by Russia and China for which the US doesn’t yet have a proven defense.

It does spell out, however, in the strongest terms, what would happen to another nuclear power, North Korea, if it launched a nuclear attack on the US, South Korea or Japan. That action “will result in the end of that regime,” it says. US nuclear weapons continue to play a role in deterring North Korean attacks.

So, the brilliant neocon minds behind the report concluded, it is better to instill the fear of a disproportionate nuclear retaliation, thus making an outright nuclear attack far more likely (if the US will nuke you anyway, may as well go all out).

In the document, which was framed well before the invasion, the Pentagon says Russia continues to “brandish its nuclear weapons in support of its revisionist security policy” while its modern arsenal is expected to grow further. In other words, the Pentagon knew what Putin would do even before he did it and that defined the dramatic revision in US nuclear posture. Almost as if the Pentagon directed the entire sequence of events…

Meanwhile, China remains the US’s “most consequential strategic competitor for coming decades,” Defense Secretary Lloyd Austin said in a letter presenting the new defense strategy. He cited China’s “increasingly coercive actions to reshape the Indo-Pacific region and the international system to fit its authoritarian preferences,” even as it rapidly modernizes and expands its military. China wants to have at least 1,000 deliverable nuclear warheads by the end of the decade, the nuclear strategy document says, saying it could use them for “coercive purposes, including military provocations against US allies and partners in the region.”

The nuclear strategy affirmed modernization programs including the ongoing replacement of the aging US air-sea-land nuclear triad. Among them are the Navy’s Columbia-class nuclear ICBM submarine, the ground-based Minuteman III ICBM replacement, the new air-launched Long-Range Standoff Weapon and F-35 fighter jets for Europe carrying nuclear weapons.

The review confirmed previous reports that the Pentagon will retire the B83-1 gravity bomb and cancel the Sea-Launched Cruise Missile program. But the review endorses a controversial Trump-era naval weapon, the low-yield W76-2 submarine-launched nuclear warhead, which is described as providing “an important means to deter limited nuclear use.”

The broader strategy report also offered gently worded criticism of major US weapons programs, which often runs years behind plans and billions of dollars over initial budgets.

“Our current system is too slow and too focused on acquiring systems not designed to address the most critical challenges we now face,” the Pentagon said. It called for more “open systems that can rapidly incorporate cutting-edge technology” while reducing problems of “obsolescence” and high costs.

The Pentagon strategy documents were sent to Congress in classified form in March so they were considered during congressional approval of the fiscal 2023 defense budget.

* * *

So how to trade all of this? Well, the initial instinct now that nuclear war headlines are being lobbed around is that it may be time to sell… but as Art Cashin so insightfully put it some time ago, “Never bet on the end of the world, because it only happens once.”

Now thanks to the Biden admin, that “once in a lifetime” event is that much closer to taking place.

“Russia is not challenging the western elite. We are not trying to become the hegemon,” Russian President Vladimir Putin said early in an important speech before the Valdai Discussion Club meeting outside Moscow on Thursday. Each year the Valdai speech is a major one and closely watched by Western officials and media.

This year it was touted with the eye-catching title of “A Post-Hegemonic World: Justice and Security for Everyone.” And of course, this year’s Valdai meeting comes against the backdrop of the biggest war Europe has seen on its eastern doorstep since WWII. 

Putin said in his remarks that Russia merely wants to “defend its right to exist” and “won’t let itself be destroyed and wiped off the geopolitical map.” This as nuclear rhetoric and threats of defending red lines between Moscow and the West have reached heights not seen since the Cold War. 

He repeated a familiar refrain of a crisis unfolding because the Western allies are using Ukraine for their “dirty game” in an ultimate drive for world domination. “Power over the world is what the West has put at stake in the game it plays. This game is certainly dangerous, bloody and I would call it dirty,” he said according to a state media translation. 

“But in the modern world, sitting aside is hardly an option. He who sows the wind will reap the whirlwind, as the proverb says,” he added. Repeating a well-known theme of his, juxtapositioning collapsing unipolar order vs. multipolarity, he said “new centers of power in the multipolar world and the West will have to start talking as equals about our common future.”

“[This game] denies the sovereignty of nations and peoples, their identity and uniqueness, and has no regard whatsoever for other countries,” Putin added.

Commenting on one segment of the talk, The New York Times said the Valdai speech sought to appeal to conservatives in Europe and the US: 

Mr. Putin insisted that Russia did not fundamentally see itself as an “enemy of the West.” Rather, he said — as he has before — that it was “Western elites” that he was fighting, ones who were trying to impose their “pretty strange” values on everyone else.

“There are at least two Wests,” Mr. Putin said in his speech at the plenary session in Moscow of an annual foreign policy conference. One, he said, was the West of “traditional, mainly Christian values,” which Russia was close to.

But Putin drove home in contrast that “There’s another West — aggressive, cosmopolitan, neocolonial, acting as the weapon of the neoliberal elite.”

Ukrainian officials have been watching the speech closely, and commenting: 

“Confidence in one’s infallibility is a very dangerous state, one step away from destroying those they don’t like” – Putin knows what he is talking about at Valdai. pic.twitter.com/0VRSjKlWiu

— Maria Avdeeva (@maria_avdv) October 27, 2022

And more specifically on the Ukraine conflict, the Russian leader charged of the West’s actions, “They’re always trying to escalate…They’re fueling the war in Ukraine, organizing provocations around Taiwan, destabilizing the world food and energy markets.” 

And more via state media translation:

Putin warned that the West’s confidence in its “infallibility” is a “very dangerous” condition, with there only being “one step” between this self-confidence to the idea that “they can simply destroy those they do not like, or as they say, to ‘cancel’ them.”

Emphasizing that Russia is not a natural “enemy” of the West, Putin urged Western political elites to stop seeing “the hand of the Kremlin” behind all their internal problems.

On multipolarity, Putin’s message to Europe is essentially “take it or leave it”…

Putin is at it again. New Munich III speech at Valdai conference. He is laying the foundations of new multipolar world order. The message to Europe is “take it or leave it”. pic.twitter.com/oUixDO7Jmm

— србин (@forzaserbia) October 27, 2022

Western officials are also keeping a close watch on Putin’s words regarding nuclear doctrine and usage. Putin at Valdai underscored he sees “no political or military reason” to conduct a nuke strike in Ukraine. He also stressed Moscow’s nuclear doctrine is defensive in nature. “Russia has never talked about nuclear use, only replied,” he said. 

He went on to warn that it remains Russia will never “put up with what the West tells it to do” – and that while Russia should not be seen as a direct challenge to the West, it reserves the right to develop. With this theme established, Putin asserted that Washington has discredited international finance “by using the dollar as a weapon” – thus he posited that in the future continued moves toward “settlements in national currencies will dominate.”