Category: zerohedge

Authored by Michael Maharrey via SchiffGold.com,

Treasury Secretary Janet Yellen sent markets into a tizzy on Tuesday when she said interest rates may have to rise to keep the economy from overheating with all the government stimulus. But later in the day, she walked those comments back, claiming inflation isn’t going to be a problem and insisting that she wasn’t suggesting or predicting rate hikes.

Yellen’s flipflop is telling. Even if inflation is an issue (and it is), there isn’t a darn thing the Federal Reserve can do about it.

Yellen made her first comments during an event hosted by The Atlantic magazine. She warned that all of the government spending coming down the pike could cause the economy to “overheat.” That’s code for “it could cause price inflation to surge.”

It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.”

Yellen’s comments spooked markets that are already worried that the Fed might tighten monetary policy sooner than later to deal with increasing price inflation. Tech stocks in particular were hammered after Yellen’s talk.

But the Treasury secretary walked back her comments later in the day. She told a Wall Street Journal CEO Council event that she doesn’t anticipate an inflation problem and she parroted Federal Reserve Chairman Jerome Powell’s mantra that any price increases will be “transitory.”

Yellen was asked directly about her earlier comments and she insisted she was neither recommending nor predicting a Fed rate hike, appealing to the central bank’s mythical independence.

“If anybody appreciates the independence of the Fed, I think that person is me,” she said.

“I don’t think there’s going to be an inflationary problem. But if there is the Fed will be counted on to address them.”

I think she’s wrong on both counts. There is an inflation problem and the Fed can’t do anything about it.

In a tweet, Peter Schiff said that’s exactly why Yellen walked back her comments.

The fact that Janet Yellen felt it necessary to walk back an obvious admission that interest rates may eventually have to rise somewhat in response to stimulus spending by later claiming that #inflation will not be an issue highlights the Fed’s lack of ability to fight inflation.

— Peter Schiff (@PeterSchiff) May 4, 2021

There has been an inflation problem for quite a while – from the moment the Fed starting printing trillions of dollars out of thin air to monetize trillions in government spending. And we’re now starting to see the impact of that inflation on prices.

Anybody who has been to the grocery store, the gas station, or Home Depot has experienced big price increases first hand. The question is: are these really “transitory” price hikes due to supply chain bottlenecks as the economy reopens and a return to normal oil demand, as Yellen insists?

She had better hope so.

Because despite her assurances, the Fed can’t be counted on to address them given the state of the economy.

The very fact that the markets threw a fit at even a hint of rate increases bears this out. Can you imagine the carnage on Wall Street if the Fed actually raised rates? This bubble economy is predicated on artificially low interest rates and running up debt. This economy can’t run on higher interest rates. That’s exactly why the central bank is keeping them artificially low, and why Powell and Company desperately want us to believe that they won’t have to take action to deal with inflationary pressures.

Yet despite their best efforts, we’re still seeing rising rates on the long end of the bond yield. They spiked again after Yellen’s pontification. In fact, Reuters quoted a TD Securities interest rate strategist who tried to give Yellen cover by pointing out rates were already rising.

She was actually asked about the growing share of government spending to GDP and she was asked a very economist question and she answered in a very economist way, where interest rates to yields might have to rise a little bit for the reallocation of resources and the market read that as rates will have to rise. But I think they’ve already risen. They’ve gone from 1% to where we are now, so it’s certainly quite a bit already. I don’t think it was meant to be an impactful statement that yields will have to rise now.”

And therein lies the rub.

The US government can’t afford rising rates. And it certainly can’t have the Fed tapering its bond purchases. In fact, I would argue Uncle Sam is going to need the Fed to step up its quantitative easing in order to monetize the additional borrowing that’s looming in the future. Biden and his fellow Democrats in Congress can pretend that all of this proposed spending will be paid for by tax hikes, but they are living in fantasy land. The government will pay for Biden’s infrastructure plan and the “American Families Plan” the same way it paid for all of the coronavirus stimulus spending.

It will sell bonds.

That means the Fed will have to keep buying bonds with money printed out of thin air in order to keep the bond market from completely imploding.

Earlier this week, the Treasury Department upped the amount of money it plans to borrow in the second quarter. And not just by a little bit. In February, the Treasury projected borrowing in Q2 would come in at a relatively modest $95 billion. The new estimate for second-quarter borrowing is $463 billion. Then, in Q3, Uncle Same will nearly double that, with estimated borrowing of $821 billion.

And I guarantee you there will be more borrowing after that. That’s the only way the government can feed these ballooning deficits.

The borrowing and spending tell you all you need to know about the trajectory of interest rates. They’re staying right where they are – inflation be damned. In fact, both Powell and Yellen have cited low interest rates as the reason the government can make all of these “investments” in the economy.

The Fed is boxed into a corner. Powell knows it. Yellen knows it. But give them props – they are putting on quite a show trying to assure us everything is fine to keep the markets calm. It reminds me a little bit of the orchestra playing as the Titanic sinks.

After a notable disappointment in the last two months, ADP’s National Employment report was expected to print a very positive 850k additions in April but again it disappointed with a ‘mere’ 742k jobs added (though March additions were revised higher from +517k to +565k).

Source: Bloomberg

That is the fourth straight month of gains (and most since September).

The largest businesses overall added the most jobs with only the Information sector losing jobs in April…

Once again, Services job gains massively outpace goods-producing jobs.

Source: Bloomberg

Leisure & Hospitality services rose the most…

“The labor market continues an upward trend of acceleration and growth, posting the strongest reading since September 2020,” said Nela Richardson, chief economist, ADP.

“Service providers have the most to gain as the economy reopens, recovers and resumes normal activities and are leading job growth in April. While payrolls are still more than 8 million jobs short of pre-COVID-19 levels, job gains have totaled 1.3 million in the last two months after adding only about 1 million jobs over the course of the previous five months.”

Source: Bloomberg

Finally, ahead of Friday, we note that ADP has serially under-predicted BLS payrolls data with a big miss last month…

Source: Bloomberg

So will Friday show a one-million-job-plus gain?

Yesterday, Pfizer released a strong earnings report (surpassing Wall Street’s elevated projections), and also revealed that it’s both on the cusp of securing regulatory approval in the US for minors between the ages of 12 and 15 to receive the vaccine (setting off another wave of demand as the Biden Administration heaps pressure on states to get their vaccination numbers up).

During a call with analysts and reporters, CEO Albert Bourla revealed that Pfizer is in talks with “basically all the governments of the world” about providing shots and booster shots through 2024.

The key number is that Pfizer expects sales of its coronavirus jab to hit $26 billion by the end of this year, a milestone that would make the vaccine the company’s biggest-selling pharmaceutical product, eclipsing Humira, the popular rheumatoid arhtritis drug made by Abbvie. Also, Pfizer said it intends to use its mRNA technology underpinning its COVID-19 jab for other therapies and vaccines. For example, the company is working on creating seasonal flu shots using the same RNA lipid nanoparticle technology.

Bourla has already primed the public to expect to receive at least one additional shot within a year of their second dose, while also teasing the likelihood that the world might require annual booster shots – something that would be a boon to Pfizer’s bottom line as it moves to grow its COVID-19 vaccine division into a major, and permanent, line of business.

To help make its product more durable (and thus increase demand in poorer countries) the company said it is studying whether doses ould be stored at standard refrigerator temperatures.

Regardless, Bourla expects “durable demand” for vaccnes, similar to the flu vaccine.

“It is our hope that the Pfizer-BioNTech vaccine will continue to have a global impact by helping to get the devastating pandemic under control and helping economies around the world not only open, but stay open,” Bourla said in prepared remarks.

That’s bad news for the rag-tag band of emerging-market economies pushing a proposal at the WTO to waive IP rights when it comes to vaccine technology. If Washington were to back such a move, it would supercharge the “open vaccine” movement, and represent a major threat to Pfizer’s latest profit stream. That effort is being led by India and South Africa, yet Bill Gates and Washington lobbyists have continued to insist that respecting IP and letting Big Pharma handle global distribution (as Covax dramatically lags expectations), which means the status quo is likely safe.

Even as WHO chief Tedros Adhanom Ghebreyesus decries a “shocking imbalance in the global distribution of vaccines” and calls for more efforts to fortify the WHO’s Covax programs and speed up delivery to poorer nations, Pfizer appears to be more focused on building out its latest profit stream.

President Biden said Tuesday that while he had yet to make a decision on whether to support a vaccine waiver, the US was already moving “as quickly as we can” to export doses.

Pfizer’s earnings were so strong, they helped lift shares of vaccine makers on the other side of the world. Shares of some Asian vaccine makers with deals to distribute Pfizer’s jabs on the Continent rallied in sympathy with Pfizer. India’s Pfizer Ltd., a unit of Pfizer, rallied 4.9%, on Wednesday while Dr Reddy’s and Cadila Healthcare rallied as much as 2.7% and 5.9%.

Looking ahead, CNN reported Wednesday that the FDA will approve the Pfizer-BioNTech COVID jab for use in 12 to 15 year olds as early as next week. Data released by Pfizer recently purported to show that the jab is 100% effective at preventing serious symptoms. According to recent media reports, Pfizer is also seeking approval for the vaccine to be used on children as young as 2 and as old as 11 in both the US and Europe, an authorization it expects to arrive in September.

US index futures rebounded from Tuesday’s tech-led rout, with Nasdaq futures leading gains alongside shares in Europe as focus shifted away from inflation fears and turned to strong earnings and the global economic recovery. Nasdaq futs gained the most, rising 70.25pts or 0.52% to 13,606, S&P futures were up 14.25 points or 0.34%, and Dow futures were back over 34,000, up 57pts or 0.17% to 34,077. Oil and the dollar also climbed.

Some notable premarket movers:

• FAAMGs (Apple, Microsoft, Amazon.com, Facebook and Alphabet) rose between 0.3% and 0.9%.
• Value stocks also gained, with oil major Chevron Corp adding 1.3%, lender Goldman Sachs Group Inc up 0.7% and heavy machinery maker Caterpillar Inc gaining 0.3%.
• Ride-hailing company Lyft Inc rose 5.9% after it surprised Wall Street with significantly lower losses than expected.
• Rival Uber Technologies Inc is set to report earnings after markets close on Wednesday.
• T-Mobile US Inc gained 2.4% as it raised its full-year postpaid subscriber net additions forecast

The Nasdaq fell 1.9% on Tuesday, the most since March, in a rout sparked by fears of quickening inflation, and accelerated after Treasury Secretary Janet Yellen rattled markets with comments that interest rates may have to rise moderately to keep the economy from overheating. Coupled with stock valuations near the highest in two decades, it was enough to deliver the worst day for the Nasdaq 100 since March, even as Powell previously assured markets that interest rates will remain at current lows throughout the recovery.

However, Yellen later reversed the remarks saying she sees no inflation problem brewing and wasn’t forecasting interest-rate increases to rein in any inflation spurred by President Joe Biden’s proposed spending but the fiasco reminded investors that rates would have to rise at some point in the future.

“Moderate inflation and a slow moving Fed would continue to be supportive, but inflation and a reactive Fed may prove to be a negative for valuations,” said Tapas Strickland, a director of economics at NAB. “Either way yields and equities are likely to be in a dance as much better than expected economic data continues to challenge central banks’ rates guidance.”

One such challenge looms on Friday when U.S. payrolls data are forecast to show a hefty rise of 978,000, while some estimates go as high as 2.1 million.

Meanwhile, soaring inflation sent commodities prices to their highest levels in almost a decade, with miners and energy stocks climbing the most among sectors in Europe. A gauge of commodities hit a decade high as copper rallied back above $10,000 a ton and oil topped $66 a barrel.

“The market’s focus will still be on growth restoration and how Covid develops over time,” said Cecilia Chan, HSBC Asset Management Asia-Pacific chief investment officer, on Bloomberg Television. She downplayed concerns about inflation and added that “the central bank will remain dovish.”

In Europe, the Stoxx 600 index gained 1.3% wiping out almost all of its 1.4% loss on Tuesday, with the German DAX jumping 1.3% and UK’s FTSE 100 gaining 1.1%. European markets bounced back on Wednesday after a sharp selloff in the previous session, helped by gains in commodity and banking stocks, while optimism about a strong earnings season and a speedy economic recovery dominated the markets. UK miners, including Rio Tinto, BHP Group and Anglo American, rose about 3% each as copper prices rose past a key psychological level of $10,000 a tonne, buoyed by optimism about a speedy recovery in the global economy.  European tech stocks rose 1.8% after a 3.7% plunge in the previous session. Euro zone business activity accelerated in April as the bloc’s dominant services industry shrugged off renewed lockdowns and returned to growth, a survey showed.

Here are some of the biggest European movers today:

• Rational shares gain as much as 8.7%, most since Oct. 27, after the German catering equipment maker delivered 1Q results which Warburg says were “better than feared.”
• Vestas shares extend gains to as much as 9%, with analysts saying it’s important that the wind-turbine maker maintained its guidance and that a weak start to the year was well-flagged.
• FLSmidth shares rise as much as 11%, the most intraday since since May 2020, after the machinery company reported earnings that beat analyst estimates on mining order intake and profitability.
• Virgin Money shares slide as much as 8.3%, most since Dec. 21; Investors are likely to focus on higher costs, which meant pre-provision profit in the fiscal first half was 5% below consensus, Citi (neutral) says in note.
• Alcon shares decline as much as 4.1% in Swiss trading after the eye care company reported 1Q results where strength in its surgical segment was offset by a slippage in contact lenses, according to Jefferies.
• Delivery Hero shares fall as much as 5.2% to EU121.20 after a group of the company’s shareholders sold 9.8 million shares in an accelerated offering on Tuesday.

“Yesterday’s sell-off in equities is a reminder that valuations in markets are tight,” Unicredit analysts said in a note. They, however, pointed out that earnings season continued to be supportive of risk appetite.

Earlier in the session, Asian shares swung between gains and losses with the Asia-Pacific Index ex-Japan flat as rallies in materials and finance shares were offset by a decline in the region’s technology sector. Markets in Japan, China and South Korea remain shut for holidays. India’s shares and bonds gained after the central bank approved 500 billion rupees ($6.8 billion) of liquidity to banks to support lending to vaccine makers, hospitals and providers of health services.

The materials sector was the best performing in Asia on Wednesday, with an MSCI industry gauge rising 0.6%. The rally in the region’s metal miners, cement producers and steel makers, set to outperform the benchmark for a fourth month, came as global commodity prices surged to their highest level in almost a decade. The ample liquidity provided by central banks, Wall Street’s bets on commodities to hedge the risks of inflation and China’s “voracious” commodity appetite are among factors behind the commodity price rally, according to a note from Rabobank. “One thing we can be sure of — prices seem to be moving significantly higher, and not just due to the expected base effects,” the bank said.

Financials were among the top-performing industries in Asia, with the Commonwealth Bank of Australia contributing the most of the day’s gains. Indian lenders rose after Reserve Bank of India governor announced new loan-relief measures. In contrast, semiconductor-related stocks in Taiwan and Hong Kong fell after U.S. Commerce Secretary Gina Raimondo called for a major increase in U.S. chip production capacity. Internet stocks also retreated after Treasury Secretary Janet Yellen’s remarks on the direction of interest rates caused a set of hiccups in U.S. financial markets. Country-wise, Thailand’s benchmark dropped 2%, the most in four months, after its central bank warned on growth amid a resurgence in virus cases, while keeping its benchmark interest rate unchanged.

In FX, the dollar traded mixed against its Group-of-10 peers, with commodity currencies rising against the greenback after Yellen said she wasn’t forecasting interest-rate increases to rein in any inflation spurred by President Joe Biden’s proposed spending, clarifying comments that had jolted markets earlier. The yen traded in a tight range with Japan’s markets still shut for holiday. The euro fell below the $1.20 handle only to find some buying interest at a two-week low of around 1.1990. The pound traded little changed, ahead of Thursday’s Bank of England policy decision and release of new forecasts, and with Scotland entering a key election. New Zealand’s dollar led an advance after an unexpected drop in the unemployment rate in the first quarter; the Aussie rose with other commodity currencies. Traders are pricing in a 75% chance that the Reserve Bank of Australia won’t roll its targeted yield-curve control bond at a July policy meeting, signaling the first rate hike could come mid-2024.

In rates, Treasuries remained under pressure after drifting lower during the London session, when cash trading resumed having been closed in Asia for final day of Japan’s Golden Week holiday. Treasury yields are cheaper by ~1.5bp across long-end of the curve, steepening 2s10s, 5s30s by less than 1bp; 10-year around 1.601% is higher by ~1bp vs nearly 3bp increase for U.K. 10- year. Gilts underperformed ahead of Thursday’s BOE policy decision, with some expecting an increase in hawkish rhetoric. U.S. Treasury makes May-July refunding announcement at 8:30am ET, and most dealers expect unchanged auction sizes. The dollar issuance slate was empty so far; seven issuers sold $4.6b Tuesday, pushing weekly total over $14b. Next week expected to be active with potential for a $10b+ jumbo deal.

In commodities, palladium soared to a record high on worries over short supplies of the metal used in emissions controlling devices in automobiles. Gold was left lagging at $1,776 an ounce . Oil prices climbed to seven-week peaks as more countries opened their borders to travellers, improving the demand outlook for petrol and jet fuel. Brent added 57 cents to $69.49 a barrel, near its highest since mid-March, while WTI rose 52 cents to $66.23 per barrel.

Market participants are now awaiting monthly jobs data from payrolls processor ADP, which is expected to show additions of 800,000 last month, compared to 517,000 job additions in March. A more comprehensive reading in the form of the Labor Department’s non-farm payrolls data is due Friday. Also on the radar is the Institute for Supply Management’s non-manufacturing purchasing managers’ index, which is expected to show a slight rise in April from March.

A look at the day ahead highlights include the April services and composite PMIs from around the world. In the US we get the April ISM services index from the US and the ADP’s report of private payrolls for that month too, along with the March PPI reading from the Euro Area. Central bank speakers include the Fed’s Evans, Rosengren and Mester, along with the ECB’s Lane, and earnings releases out today include PayPal, General Motors, Booking Holdings and Uber.

Market Snapshot

• S&P 500 futures up 0.4% to 4,174.75
• STOXX Europe 600 up 1.3% to 439.47
• MXAP down 0.27% at 204.75
• MXAPJ up 0.2% to 688.61
• Hang Seng Index down 0.5% to 28,417.98
• Sensex up 0.7% to 48,588.44
• Australia S&P/ASX 200 up 0.4% to 7,095.82
• Kospi up 0.6% to 3,147.37
• Brent Futures up 1.19% to $69.70/bbl
• Gold spot down 0.11% to $1,777.10
• U.S. Dollar Index up 0.09% to 91.371
• German 10Y yield up 1 bp to -0.23%
• Euro down 0.2% to $1.1994

Top Overnight News from Bloomberg

• India’s central bank announced new loan-relief measures for small businesses and pledged to inject 500 billion rupees ($6.8 billion) of liquidity to support the economy against a second deadly coronavirus wave
• Signs of inflation are picking up, with a mounting number of consumer-facing companies warning in recent days that supply shortages and logistical logjams may force them to raise prices
• Oil extended a rally after U.S. stockpiles fell and investors applauded reopening drives in the U.S. and Europe that will aid demand. Brent neared $70 a barrel and West Texas Intermediate climbed for a third day as gasoline futures surged to the highest since July 2018
• Copper rallied back above $10,000 a ton, closing in on a record high as the reopening of major industrial economies sparks a blistering rally across commodities markets from iron ore to lumber
• A surge in steel consumption as the world emerges from its pandemic-induced slump is set to drive iron ore to an unprecedented high as the biggest miners struggle to keep up with the frenzied pace of demand. Expectations are building that benchmark prices can get to $200 a ton — topping the record $194 hit more than a decade ago
• The Group of Seven nations is considering a U.S. proposal to counter what the White House sees as China’s economic coercion. A paper was circulated before a two-day meeting of G-7 foreign ministers in London
• New coronavirus variants have proliferated across southern and eastern Africa, exacerbating the challenge of bringing the pandemic under control, analysis of the genomics data shows
• Citigroup Inc.’s global chief economist, Catherine Mann, is leaving the bank after three years in the job

A quick look at global markets courtesy of Newsquawk

Asian equity markets traded cautiously as the region battled to shrug off the tech-led declines in the US and amid holiday-thinned conditions due to market closures in China, Japan and South Korea. There was also plenty of attention on recent comments by US Treasury Secretary Yellen who stated that interest rates will have to rise somewhat to ensure the economy does not overheat, which added to the headwinds on Wall Street, although some of the jitters gradually eased given that the comments were taken somewhat out of context and was regarding the future not imminent policy, while Yellen later clarified that she is not predicting nor recommending a rate increase. ASX 200 (+0.4%) brushed aside the early indecision and climbed above the 7,100 level for the first time since early last year helped by much stronger than expected Building Approvals data and with gains in most the big four banks aside from ANZ Bank despite a surge in H1 cash profit which more than doubled to AUD 2.99bln as the CEO also flagged significant uncertainty. Hang Seng (-0.5%) was choppy after disappointing Retail Sales data for Hong Kong and continued absence of stock connect trade with the mainland, although downside was also limited after data from MOFCOM showed China’s online retail sales jumped 29.0% in Q1 and the China Iron and Steel Association noted a 15.6% output expansion for the nation’s steel sector. India’s NIFTY (+0.9%) was also mildly supported following RBI Governor Das unscheduled speech in which he eventually announced several measures including another INR 350bln of purchases of government securities and on-tap liquidity facility of INR 500bln for fresh lending to vaccine manufacturers and others.

Top Asian News

• ANZ CEO Not Ruling Out Purchase of Citi Australia Retail Assets
• Thailand Holds Rates, Warns on Growth Amid Its Worst Covid Wave
• RBI Steps Up Loan Relief, Liquidity for India’s Virus Fight
• Hong Kong Is a Renters’ Market as Prices Drop on Expat Moves

Major bourses in Europe trade higher across the board (Euro Stoxx 50 +1.3%) as the region stages a somewhat of a recovery or retracement from yesterday’s selloff, albeit putting the price action into context, indices remain some way off yesterday’s best levels. US equity futures also coat-tail on the sentiment seen across the pond, although gains across the futures are less pronounced with the RTY (+0.6%) modestly outperforming peers though the NQ (+0.5%) is catching up. The overall tone across the market however, is tentative with mixed final PMIs failing to spur much action, and as participants await a busy docket ahead in the run-up to tomorrow’s super-Thursday followed by Friday’s US jobs update. Back to Europe, varying gains are seen across the majors, whilst the periphery narrowly outperforms. Sectors in Europe are all in the green with cyclicals broadly performing better than defensives. Basic Resources top the charts as base metals are back on the grind higher. Oil & Gas is supported by the oil complex itself which is underpinned by the attempted revival of swift and safe international travel – namely between OECD countries. The Tech features among the gainers today, albeit after yesterday’s underperformance given Infineon, among other factors. Conversely, the Auto sector resides as one of the laggards as Daimler (-1.7%) is dealt a blow by Nissan offloading its stake at a discount, although losses are cushioned by Stellantis (+2.7%) strength post-earnings. Earnings-related movers this morning include the likes of Deutsche Post (+4%), Hannover Re (-1.2%), Siemens Energy (+0.4%), Hugo Boss (+5.5%), Axa (Unch), Veolia (Unch), Novo Nordisk (+2.5%) and Maersk (+4%). Finally, Delivery Hero (-4.0%) is among Europe’s laggards after reports stated that shareholders are looking to offload almost 10mln shares with a bookrunner guiding the price at a notable discount vs the last close.

Top European News

• UBS Chairman Axel Weber Apologizes for Archegos Loss
• Bahrain May Follow Gulf States by Selling Oil, Pipeline Assets
• Vestas Gains After Wind Turbine Maker Maintains Guidance
• London Emerges From Lockdown Harder Hit Than Much of the U.K.

In FX, the Greenback is not universally firmer against G10 counterparts, but has gained sufficient ground vs several index components to surpass Tuesday’s US Treasury Secretary inspired spike high and print a new best since April 19, albeit fractionally at 91.436 vs 91.430 on April 21 and 91.425 on the day after. The Franc is trailing in wake below 0.9150 having probed 0.9100 yesterday and Monday, with no reaction to in line Swiss CPI (naturally), but Euro weakness is arguably more eye-catching as the 1.2000 marker is finally breached irrespective of mostly softer than expected Eurozone services and composite PMIs. Eur/Usd is now banking on Fib support in the form of a 38.2% retracement from 1.1704 to 1.2150 at 1.1980 rather than decent option expiry interest between 1.2050-55 (1 bn) or any desire to retest the 100 DMA in that vicinity. Back to the DXY, 91.500 is the obvious nearest resistance level and next upside objective ahead of 91.748 and 91.813 (latter being the high on April 16) awaiting ADP, the services ISM and yet more Fed speak.

• NZD/AUD/CAD – All resisting the Buck’s latest advances, and in the case of the Kiwi recouping all and more of its Yellen rate rise knee-jerk losses with the aid of NZ jobs data that beat consensus on all counts. Indeed, Nzd/Usd has rebounded even more firmly from the low 0.7100 zone to 0.7175+ before fading, and probably also boosted by the RBNZ’s FSR flagging further tightening of LVR restrictions if required to keep a lid on property prices. On that note, NZ building consents are due later tonight and Aussie building approvals exceeded expectations by more than double to help Aud/Usd reclaim 0.7700+ status ahead of a speech from RBA’s Debelle on Thursday. Elsewhere, the Loonie has also regained composure after Tuesday’s disappointing Canadian trade balance, though largely on the back of a more pronounced recovery in crude prices as Usd/Cad retreats through 1.2300 compared to just over 1.2350 at one stage yesterday. However, 1.1 bn option expiries at the round number could well keep the Loonie in check, like 1 bn at 0.7750 for the Aussie.
• GBP/JPY – The Pound and Yen are relatively resilient in the face of broad Dollar strength as well, with Cable containing declines sub-1.3900 to circa 1.376 amidst favourable Eur/Gbp cross flows under 0.8650 and towards the 50 DMA that comes in at 0.8620 today. Meanwhile, Usd/Jpy has withdrawn into a narrower band inside 109.50-00 following Monday’s false breaks either side, but still lacking depth on the final day of Golden Week in Japan.
• SCANDI/EM – The aforementioned leg up in oil post-bullish API weekly inventory update that has lifted WTI over Usd 66.50/brl and Brent close to Usd 70 is propelling the Nok back beyond 10.0000 against the Eur, but the Sek is lagging near 10.2000 regardless of an acceleration in Sweden’s services PMI or marked pick up in new manufacturing orders. Similarly, the Rub and Mxn are weaker despite the ongoing crude rally, while the Try is also suffering from a rise in year end Turkish inflation expectations, but the Zar is deriving some underlying support via SA’s Whole Economy PMI extending above the key 50.0 threshold.

In commodities, WTI and Brent front-month futures are firmer on the session with the former around USD 66.50/bbl (vs low 66/bbl) and the latter just under USD 70/bbl (vs low 69.25/bbl). The complex has been underpinned by optimism surrounding swift and safe international travel, with reports yesterday suggesting that some Euro Zone holiday hotspots could be given the green light for travel from the UK. Meanwhile, yesterday’s Private Inventory (crude: -7.7mln bbl vs exp. -2.3mln bbl) report added further fuel to the bullish fire as the refined product inventories also proved to be constructive – with eyes on confirmation from the weekly DoEs with headline expectations pointing to a draw of 2.3mln bbl. Elsewhere, spot gold and silver are uneventful within recent ranges at USD 1,775/oz and above USD 26/oz as prices track the Buck in the run-up to today’s risk events including ADP and ISM Services. Finally, LME copper has regained a footing above USD 10,000/t with traders citing the higher demand prospect underpinning the red metal.

US Event Calendar

• 8:15am: ADP employment change in April; est. 850k
• 9:15am: Markit US services PMI; est. 63.1; Markit US composite PMI
• 9:30am: Fed’s Evans Speaks on Economy on Monetary Policy
• 10am: ISM services index; est. 64.1
• 11:00am: Fed’s Rosengren Speaks on the Economic Outlook
• 12:00am: Fed’s Mester Speaks to Boston Economic Club

DB’s Jim Reid concludes the overnight wrap

Financial markets saw a pretty major selloff yesterday, although the market collectively scratched its head as to what caused the scale of the falls. Candidates included Chinese/Taiwan tensions, fresh pandemic issues (e.g. fresh Singapore restrictions and India’s IPL cricket tournament being cancelled) and most likely US Treasury Secretary Yellen’s comments that rates may need to rise to prevent economic overheating. Yellen, who is also a former Fed Chair, said in an interview released yesterday that “it may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat,” and that this “could cause some very modest increases in interest rates.” Her remarks were likely speaking about market pricing of longer-term rates rather than breaking historic convention and commenting on monetary policy.

However, it was uncertain just how high she sees rates climbing as Secretary Yellen also commented that she expects the US to remain in a low interest rate environment for some time, but the government still needs to make sure deficits remain “manageable.” Later in the day White House Press Secretary Psaki said that “Secretary Yellen certainly understands” the importance of the Fed’s independence. She also noted that President Biden and Yellen are taking any “inflationary risk incredibly seriously.” Regardless, just after the market closed new headlines came out with Secretary Yellen indicating that she was not predicting or recommending that rates increase and that she is not expecting inflation to be a problem. She also mirrored her successor’s confidence that the Fed had the tools necessary to address inflation if it were to occur. So it seems like a small matter of fact statement has been magnified around financial markets, which just shows how sensitive we all are to rates and inflation.

Having said this, could the selloff be as simple as a sign that the pace of US growth is peaking? Regular readers will know that we’ve been flagging DB’s Binky Chadha’s work from last month (link here) where he looked at all ISM peaks since WWII and found 37 such occurrences. The S&P 500 fell -8.3% (median) after those growth tops. Given the stretched positioning in this cycle he was/is expecting something at the top end of a 6-10% correction over the next couple of months. So with the ISM falling on Monday from 64.7 to 60.7 (65.0 expected) it’s possible we’ve seen the peak in the rate of change in growth that has previously heralded a correction. As such was some of the sell-off a delayed reaction to Monday’s quite notable fall in the ISM?

Looking at the market moves in more depth, the S&P 500 closed -0.67% lower though it was a fairly binary sectoral move with growth giving way for value and cyclical stocks. The index was down as much as -1.53% intraday, before recovering in the US afternoon primarily on the back of banks (+1.36%), materials (+1.04%) and telecoms (+0.88%). Tech stocks saw the brunt of the losses with tech hardware (-2.97%), semiconductors (-1.87%) and software (-1.40%) causing the NASDAQ (-1.88%) and the FANG+ index (-2.35%) to fall back significantly. The VIX index of volatility surged +1.2pts to move back above 20pts for the first time in over a month in trading, before closing at 19.48pts. European indices similarly saw major declines yesterday, with the DAX (-2.49%) seeing its biggest daily loss so far this year as the Europe-wide STOXX 600 also fell -1.43%.

Amidst the decidedly risk-off tone among investors, haven assets outperformed in response, with both the dollar (+0.38%) and sovereign bonds advancing yesterday. Yields on 10yr Treasuries ended the session down -0.5bps at 1.592%, some way beneath their intraday high of 1.621%, in a decline that coincided with the Yellen headlines. The move was driven by lower real yields (-1.0bps) rather than inflation expectations (+0.4bps). However there was a noticeable rise in inflation breakevens at shorter maturities, with the 3yr breakeven up +4.9bps to 2.795%, a level not seen since 2006. For Europe, yields on 10yr bunds (-3.4bps), OATs (-2.7bps) and BTPs (-1.2bps) all moved lower.

The rise in the dollar came even as commodity prices rose to their highest price levels since late 2011. Dovetailing inflation worries into the piece highlighted above by our colleague Luke on supply bottlenecks, the Bloomberg Commodity Index – comprised of 23 raw materials including oil, metals and agriculture products – rose +1.05% yesterday to its highest levels in nearly a decade, and +77.3% since the March 2020 lows. The rise has been driven by a confluence of factors. Energy and metal prices have increased as demand for travel and consumer products have rebounded with the pandemic abating somewhat, while crop prices have gained on particularly dry seasons in Brazil, the US and Europe. Supply shocks, exacerbated by the pandemic, have pushed raw material prices higher. Lastly, commodities are an oft-used inflation hedge and investor positioning could be playing a role as well.

Overnight in Asia, a number of markets are still closed for holidays including in China, Japan and South Korea, though the Hang Seng (+0.06%) and Australia’s ASX 200 (+0.64%) have both moved higher this morning. Futures markets in the US and Europe are similarly pointing to a recovery from yesterday’s selloff, with those on both the S&P 500 (+0.30%) and the STOXX 50 (+0.85%) advancing. And speaking of commodities, oil prices have climbed further overnight, with Brent crude (+0.78%) at $69.43/bbl, which is its highest level in over 7 weeks and just shy of its post-pandemic closing high at $69.63/bbl in March. WTI oil prices (+0.79%) have also risen this morning to now trade at $66.20/bbl, which would be their highest closing level in two years.

On the pandemic, the surge in cases in India saw the Indian Premier League cricket tournament suspended, following a number of players testing positive. Meanwhile Singapore has moved to toughen up restrictions on gatherings and at their borders following a cluster of cases that has been linked to new variants. In Tokyo, Prime Minister Suga is reportedly considering keeping the greater Osaka and Tokyo areas in a state of emergency after the orders were originally supposed to end on May 11. Meanwhile in the UK, Prime Minister Johnson said there are “no plans to deviate from the earliest dates set out in the roadmap” for reopening the economy.

In terms of vaccine news, the EMA announced they are starting their rolling review of the Sinovac Life Sciences’ vaccine in order to allow its use in the EU. The Chinese-based company’s vaccine joins the Russian Sputnik V vaccine on the review list. Moderna’s chairman announced in an interview yesterday that the company has started trials of the efficacy of its vaccine in lower doses in order to boost supply as the pandemic continues. In the US demand has started to slow in certain areas and the Biden Administration has told the state Governors that it would start reallocating vaccines that are not claimed in order to better meet demand in all areas. President Biden also set the new target of 70% of all Americans getting at least one dose of vaccine by July 4th with 160mn adults fully inoculated. Currently the CDC reports that 56% of all US adults have gotten one jab and 105mn adults are fully vaccinated.

In terms of yesterday’s data, the US trade deficit came in at a record $74.4bn in March, in line with expectations. Meanwhile US factory orders were up +1.1% that month (vs. +1.3% expected). Over in Europe, the UK’s final manufacturing PMI for April came in at 60.9 (vs. flash 60.7), and mortgage approvals in March fell to 82.7k (vs. 86.5k expected).

To the day ahead now, and the data highlights include the April services and composite PMIs from around the world. Otherwise, there’s also the April ISM services index from the US and the ADP’s report of private payrolls for that month too, along with the March PPI reading from the Euro Area. Central bank speakers include the Fed’s Evans, Rosengren and Mester, along with the ECB’s Lane, and earnings releases out today include PayPal, General Motors, Booking Holdings and Uber.

A little over a week ago, we reported on one of the biggest deflationary threats looming over the global economy: that is, China’s shrinking population, as deaths outpace births for the first time, a trend that demographers believe will only worsen as the impact of China’s one-child policy is felt on its population numbers.

And as Wall Street banks and America’s largest corporations complain about growing inflationary pressures in their sell-side research and earnings calls, the latest population update from the CDC has just confirmed that the deflationary trend of a falling birth rate continued last year in the US. In fact, one could argue this trend has been supercharged by the pandemic, thwarting theories about a lockdown “baby boom” as the number of births in the US fell by 4% in 2020, dropping to the lowest level since 1979.

Put another way: thanks to the pandemic, US birth rates have fallen to their lowest level in a generation.

Source: Bloomberg

Birth rates dropped across every race, ethnicity and age group – even teenagers (though teenage birth rates have been falling in the US for decades), according to the data, which was published by the CDC’s National Center for Health.

As we noted at the time, a shrinking population is bound to create serious challenges for China’s debt-fueled economy. It’s one reason to doubt President Xi’s propaganda about China being “on the rise” globally.

Still, declining birth rates are a problem across the developed world, and the US is no exception. The provisional data for 2020, at 3.6MM births, marks the 6th annual drop in a row. The decline will likely continue in 2021, when the brunt of the impact from the pandemic will be recorded, but with a nine-month delay.

Bloomberg suggested that fears of contracting the virus while pregnant, or while in hospital to give birth, combined with job insecurity and government measures limiting social contact and business activity, dissuaded Americans from having babies, according to surveys by Ovia Health, a women’s health technology company.

“There are several factors that go into family planning, and an entire ecosystem of support that enables and empowers parents and parents-to-be,” said Paris Wallace, chief executive of Ovia Health. “In 2020, nearly all of those factors were turned on their head, and many of those support systems came crashing down.”

While birth rates fell for women in all age groups between 15 and 40, the declines were steeper in states that were hit the hardest by COVID-19, such as California and New York. And the exodus from crowded urban centers exacerbated the drop in birth rates in places like NYC, where the constant shriek of ambulance sirens over the summer likely made it difficult for couples to get in the mood.

Source: Bloomberg

Interestingly, many pregnant couples in the city fled to give birth elsewhere (well, at least those who could afford to do so).

The percentage of births to NYC residents that occurred outside of the city increased for all months between March and November. Non-Hispanic White residents were 2.5x more likely to give birth outside of the city in April and May 2020 than during the same period a year earlier.

Here are some other key findings courtesy of Bloomberg.

• Births in Florida surpassed those in New York last year — by just 440. It’s still significant given that the differential in favor of New York was about 1,500 and 5,000 in 2019 and 2018, respectively.
• Fewer than 10,000 babies were born in Alaska, Vermont, Washington D.C., and Wyoming in 2020.
• The number of births fell 3% for Hispanic women, 4% for both non-Hispanic White and non-Hispanic Black women, and 8% for non-Hispanic Asian women.

To sum up, a declining birth rate leaves the US with two options: either increase the inflow of immigrants, or risk a blowout in the per-capita level of America’s exploding debt.

By Thomas Kirchner of Camelot Portfolios

• Confiscatory tax rates of 87% result from elimination of the step-up basis.

• France’s “supertax” President was ousted after one term.

• Nonsense academic studies appear to justify tax hikes.

• Offshore tax evasion is largely a myth..

Tax hikes are coming. Key proposals by the White House involve an increase in long-term capital gains rates to income tax levels, an increase in the corporate tax rate, and an elimination of the step-up basis on estates ^[i]. Taken together, they have the effect of creating a confiscatory tax environment. We look at how such confiscatory tax regimes have failed in other countries in the last decade and discuss some of the academic studies that claim to show massive tax evasion by the wealthy. Finally, we debunk the widely-held belief in offshore tax evasion by the wealthy on a massive scale.

Confiscatory rates justify abolition of the estate tax

A key element of the Administration’s tax hike proposal is the elimination of the so-called step-up basis. Under current tax laws, a deceased person pays an estate tax of up to 35% on assets upon death. The heirs then receive what is left, and their tax basis reflects the value of the assets upon receipt. The U.S. differs with this approach from the rest of the world where not the deceased person is taxed, but the heirs on their respective share of the inheritance. Hence, the term “inheritance tax” rather than “estate tax” is used everywhere else.

The problem with the elimination of the step-up basis lies in its combination with the estate tax and the proposed higher tax rates on long-term capital gains, which will lead to overall tax burdens of nearly 90%.

A simplified example illustrates the toxic interaction of these three taxes. Consider an estate worth $100 million that consists of founders’ shares in a business, so we can assume a tax basis of zero. Upon the death of the founder, an estate tax of 35% is due. For simplicity, we ignore the current $10 million exemption, which is going to sunset in a couple of years anyway.

After paying the estate tax, the heirs will be left with $65 million. The problem is that most heirs won’t have an extra $35 million lying around that they can hand over to the IRS. So, they will be forced to liquidate the estate. With the tax basis of the shares at zero, they will need to pay $52 million in long term capital gains taxes if they are located in high-tax states such as New York or California. Add to that the $35 million in estate tax, and the total tax burden is $87 million, or nearly 90% ^[ii].

These are confiscatory tax levels. We believe that eliminating the step-up basis is a good reason for the abolition of the estate tax altogether. After all, it leads to a triple taxation of income: corporate taxes are paid on the profits of the business. Capital gains are merely the discounted cash flows of the after-tax corporate earnings, so that capital gains taxes are already a form of double taxation. Taxing such gains again with an estate tax then amounts to triple taxation.

Parallels to the French tax debacle

Former French President Hollande gained infamy for not only stating that he hates rich people, but also for acting this way. In 2012, he introduced a 75% “supertax” on earners over 1 million Euros, who were faced with a total tax burden, including social security, of well over 90% [iii]. He found out the hard way that such confiscatory taxes don’t work: many high earners moved to London or Geneva and conducted their business from there; those who stayed behind avoided realizing gains in anticipation of a future repeal.

Actor Gerard Depardieu took the most drastic step of taking on Russian citizenship. While we won’t speculate which Hollywood stars might vote with their feet, we note that Senator Warren is trying to prevent this from happening by calling for an increase of the exit tax on the wealthy.

The end result of Hollande’s tax hike, derided as “Cuba without the sunshine” by then little-known economic adviser Emmanuel Macron, the current President, was that an estimated 10,000 high income earners left France permanently. Despite this small number of people, income tax receipts fell €16 billion short of projections. Moreover, a mere €200 million per year was raised by the tax, nowhere near enough to offset the drop in tax revenues. Hollande had to rescind the tax two years later ^[iii][iv].

The confiscatory tax hikes proved to be transitory, as was Hollande, who ended up as a one-term President with approval ratings in the low teens. Permanent, however, was the damage to the French tax base, as few of the tax refugees returned.

Revenue-optimizing tax rates

The proposed tax increase on the highest income earners to 39%, when combined with state and local income taxes, will lead to total tax rates in California and New York of roughly 52%. We believe that this number is no accident. In 2014, Fed researchers published a study [v] that claimed that the peak of the Laffer curve, at which maximum government revenues are achieved, is 52%.

But just because there is a study that shows that 52% is optimal does not mean it really is optimal. After all, the French “supertax” of 75% is close to the theoretical optimum of 73% that none other than economist Emmanuel Saez calculated as optimal. That is the same Emmanuel Saez who rose to fame with his monstrous tome “Capitalism in the 20th Century” a few years earlier, which claimed that rich people were getting so rich that they were becoming a threat to democracy and advocated income tax rates in the range of 54% to 80%. Of course, we know now that while that 73% tax rate may have been optimal in ivory tower theory, in real life it was terribly suboptimal and had to be nixed.

It might be a good bet that the 52% “optimal” rate calculated by the St. Louis Fed researchers will have the same fate as the French “supertax” and turn out to be dramatically suboptimal and revenue-minimizing.

Do the top 1% really evade 20% of their income taxes?

All this talk about tax hikes comes against a background of an academic study ^[v] purporting to show that the top 1% of earners evade 20% of their income taxes. That claim made headlines a few weeks ago, but its dubious assumptions remained unchallenged.

Uncontested are the raw data: IRS audit data show that as you climb the income ladder the percentage of tax evasion relative to total income declines sharply. In this data, the largest percentage of tax evasion occurs just below the median income group in the 40th percentile, where taxpayers evade 6% of their income (interesting side note: half of that evasion occurs through Schedule C /sole proprietor income).

For the top 0.1% earners, tax evasion is half that rate, or 3%, while for the top 0.01%, tax evasion is less than 1% of income. To us, the raw data suggest that the system works: penalties for tax evasion become more severe as the amounts evaded increase, with jail time being a realistic prospect for 7-figure evasion. Not to mention that legal ways to minimize the tax burden through deferral and shelters increase with incomes. Therefore, we would expect that the top of the income pyramid has very little evasion.

Of course, the data runs counter to the narrative that the rich don’t pay their fair share. To make the data fit the narrative, the authors of the study took the percentage of tax evasion found by those IRS auditors who come across the most tax evasion and applied that rate to everyone. The assumption behind that approach is that the rate of tax evasion is the same for every income group. The outcome is the headline-grabbing result that the top 1% evade 20% of their taxes.

However, as we pointed out, penalties increase as the amounts evaded become larger, so the assumption of a uniform rate of tax evasion for all income groups is highly questionable. Moreover, it runs counter to the actual IRS data. In fact, the methodology is a simple trick that will always yield sensational headlines. For example, if we take those police officers who encounter the highest incidence of violent crime and then apply that percentage to all demographic groups, we find that the “adjusted” violent crime rate shows massive “undetected” crime. With this dubious approach, the top 1% of earners will commit massive amounts of “undetected” violent crimes, as do the university professors who create these types of nonsense studies. The differential between actual and theoretical will be largest in the group that has the smallest actual incidence. The policy response will be to increase policing of those groups who have the lowest actual incidence, because that’s where the most supposedly “undetected” violent crimes happen. Most likely, this will reduce policing and exacerbate problems in those areas where the actual incidence is the highest.

The methodology is arguably useless and purely of academic interest because it applies the worst case scenario to everyone. Basing policy, in particular tax policy, on a worst-case scenario based on unrealistic assumptions is a bad idea.

The myth of offshore tax evasion

Finally, we would like to clarify a myth about offshore tax evasion that underlies many other studies. The fact is that most industrialized countries impose withholding taxes on dividends and interest on foreign-held accounts. For example, the U.S. generally imposes withholding taxes of 30% on foreigners, while Switzerland, supposedly a tax haven, imposes 35%. That means that anyone stashing away their investments in Switzerland faces a tax rate of 35%. Of course, you can get these foreign taxes back under most tax treaties. But that requires you to declare the income to your own tax authority, who will then issue a certificate that can be used with the foreign tax authority for a refund. So any American hiding money in Switzerland faces a 35% tax rate on dividends. If the person invests their hidden Swiss money in U.S. stocks, they face a 30% U.S. withholding tax on dividends, more than the 20% federal tax rate they would pay on qualified dividends on investments fully disclosed to the IRS. Of course, that’s the point of withholding taxes: they are supposed to make hiding assets uneconomic. And because the assets are undeclared, their owners cannot claim a refund for the withholding taxes. In light of these heavy disincentives, we doubt the claims about the exorbitant amounts of taxes supposedly evaded by the rich through offshore accounts.

In fact, for smaller investors, the cheapest option is to simply pay the withholding tax and forego the refund. This is not because they are hiding assets, but because the cost and complexity of the refund process exceeds what they expect to recover. Therefore, if someone doesn’t request a refund of their withholding, that alone cannot be taken as evidence of tax evasion, but is simply a cost-benefit tradeoff.

Moreover, in our experience, few financial advisers are familiar with the intricacies of holding foreign stocks and withholding taxes and refunds, so that many end clients probably forego significant refunds due to such ignorance.

To the extent that undeclared offshore wealth actually exists, overall tax receipts would not necessarily increase if all of it were to be declared. As discussed above, the U.S. government already withholds taxes on dividend and interest payments paid to foreign accounts. If these assets were declared, these withholding taxes would no longer be collected. Moreover, to the extent that these accounts are invested in stocks listed in other countries, taxpayers would be able to claim a tax credit for withholding taxes paid in such other countries. Depending on how the net effect of all of this would play out, U.S. tax receipts may actually decline if all currently undeclared offshore wealth were to be declared. The absence of considerations of withholding taxes in academic studies on offshore tax evasion is a red flag that these academics lack a good understanding of the complexities underlying offshore investments.

How it will end

Taxes are a hot button topic. A significant proportion of the population is convinced that the rich do not pay their fair share. Much of that is based on myths, which are reinforced by questionable studies and statistics.

Overall, there may be plenty of legal ways to defer and reduce taxes, from special IRA accounts, MLPs and REITs, 1099 exchanges or insurance wrappers to a myriad of other structures. American investors have no need to go into illegality to reduce their tax burden.

Moreover, the increase in individual tax rates may lead to a revival of the C Corp for small businesses. Rather than passing through all income to the owners, who pay a high tax rate on that income, it will make sense for many highly profitable closely-held businesses to become C Corporations and pay salaries to their owners, while the majority of profits are kept in the corporation, where they are taxed at a much lower tax rate and can grow, with these gains also taxed only at the (lower) corporate tax rate. The result of the reduction in pass-through entities would be lower income inequality, because the income is no longer reported by the taxpayer but by the corporation. This effect may be one of the reasons why the White House is adopting such tax policies.

For the tax hikes themselves, we foresee three scenarios: in a worst-case scenario, a confiscatory tax regime will be implemented. In this case, the economic boom will end. Depending on the length of such a tax regime, America may no longer be seen as the land of opportunity and IPOs by the world’s most talented technologists, but as the land of confiscatory taxes. This will do long-term damage to the tech industry and, by extension, the economy as a whole. In a best-case scenario, taxes will be raised only moderately. In the third, most likely scenario, taxes will be hiked substantially but this will be undone by future elections, as the economic consequences become apparent.

* * *

[i] Greg Iacurci: “Biden wants to raise $1.5 trillion by taxing the rich. Here’s how.” CNBC.com, April 29, 2021.
[ii] Camelot calculations.
[iii] Jon Hartley; “Hollande’s 75% ‘Supertax’ Failure A Blow To Piketty’s Economics.” Forbes, Feb 2, 2015.
[iv] John Lichfield: “President Hollande bids adieu to French ‘supertax’ detested by the country’s millionaires” The Independent, January 6, 2015.
[v] Alejandro Badel and Mark Huggett: “Taxing Top Earners: A Human Capital Perspective.” Federal Reserve Bank of St. Louis, Working Paper 2014-017B.
[vi] John Guyton, Patrick Langetieg, Daniel Reck, Max Risch, Gabriel Zucman: “Tax Evasion at the Top of the Income Distribution:Theory and Evidence.” NBER Working Paper 28542, March 2021.

Dominic Frisby with Money, Markets & Other Matters talks about the war on cash and central bank digital currency, known as CBDC. He questions if CBDCs are “the final step into the brave new world – Orwellian great reset dystopia – we seem to be heading towards” or are they “the onramp to the Bitcoin motorway.” He said the answer is “both.” 

Frisby points out the biggest issue with CBDCs is that digital money is “programmable,” which means the issuer, such as the Federal Reserve or the Bank of England, can build specific rules into it. He said cash grants users freedom and power.

Programmable money, such as CBDCs, means the user has even less control over their money. Frisby said almost any kind of rule could be coded into CBDCs. He provides an example of China mulling over the idea of expiry dates for its digital money. This means those holding the programmable money have to spend the money by a specific time or it disappears from their account. 

For those who aren’t familiar with Chuck Palahniuk’s 2018 “Adjustment Day” book, a similar concept of expiring money was detailed. Palahniuk is also the writer behind “Flight Club.” 

Back to Frisby, who said issuers could manipulate money velocity by changing expiry dates. He said the money could be programmed to work only in certain areas or jurisdictions. He then warned:

“Every transaction ever made will be visible to the all-seeing government.” 

 

Governments will know your whereabouts and habits at all times simply by tracking your use of funds through the CBDC payment system. This can already be done, to some extent, by tracking credit card transactions, but the CBDC system will make state surveillance more pervasive.

CBDCs also allow the government to have direct access to a person’s wallet to remove taxes and other fines. 

He then said digital money could be programmed to be issued to different types of people. Wealthy people receive a better rate of interest than the unreliable poor. Or, “what’s even worse, monetary policy can be linked to a user’s social rating.” This means users who do and say the right things by appeasing the government might qualify for a more generous interest rate or might receive higher levels of universal basic income payments. 

Frisby then said CBDCs allow issuers to weaponize the money against certain users who are enemies of the state. Sort of like what the US government does with the weaponization of the dollar against Iran or Venezuela. 

Digital money is the key for governments to control and shape the behavior of their citizens. 

Unlike cryptos, CBCDs aren’t new currencies. They’ll still be dollars, euros, yen, or yuan, just as they are today. But these currencies will only be digital. Maybe the push into cryptos is to escape the new dystopic system of CBCDs that may enslave humanity. 

Authored by Claudio Grass via The Mises Institute,

Over the last few weeks, we’ve been constantly bombarded by news reports and “expert” analyses celebrating an incredible global economic recovery. They’re not even presented as projections or expectations anymore, but as a fact, as though the return to vibrant growth were already underway. Stock markets certainly seem to agree, going from record high to record high while all the political and institutional leaders congratulate themselves on a job well done. 

Although this is largely the consensus in most Western economies, this jubilant, victorious mood feels most bizarre in Europe. Celebrating a recovery during a third round of total lockdowns, closed shops, travel bans, and millions out of work seems like cognitive dissonance at best, or barefaced political hypocrisy at worst. France, Italy, Germany, Austria, they’ve all launched yet another round of business shutdowns and heavily restricted social activities and freedom of movement. And they did that to combat what they labeled a terrible, deadly third wave of infections and hospital overcrowding. In fact, to convince the public of the dire need to go back into lockdown, they painted postapocalyptic visions of a virus-overrun nation and sounded the alarm on the imminent collapse of their public health systems. Under these extreme conditions, these existential threats, closely resembling a state of national emergency, it is really quite challenging to see how the economy might be flourishing.

One could argue that the trillions that were printed by the ECB and helicopter dropped on member states actually achieved their aim and successfully rescued and restarted the economy. However, it is still hard to fathom how injecting any amount of cash into a forcibly frozen economy can restart economic activity and jump-start productivity, given that it’s still largely illegal to be economically active and productive. In other words, you can pump as much fuel as you like into your car, but if the engine is dead, you probably won’t go very far. 

Another common argument that we hear a lot these days to explain the roaring stock markets is about all the hopes riding on the vaccine. The idea is that since markets are forward looking, they’re pricing in the great news of a successful vaccination rollout that will allow Europe to reach the much-coveted herd immunity and finally reopen the economy. Again, we’re facing a reality check problem here: the EU has completely botched the rollout and delivered the poorest and slowest results among Western economies. Logistical chaos, insufficient doses, infighting, indecisive leadership, and scientific guidance that frequently flip-flops on crucial issues, like vaccine safety, have vastly damaged the credibility of the bloc, but also heavily clouded its economic outlook. That much-anticipated “reopening” and the return to normalcy is a hope that seems increasingly distant and elusive. 

So how does that all fit together with the unprecedented monetary and fiscal stimulus wave? Where do all the trillions of euros go when so much of normal economic activity is suspended for a year? Of course, the most obvious answer is inflation. It is already obvious in asset prices, and it has been for years, but now there’s a very real risk that inflationary pressures will start affecting ordinary consumers too. The record-breaking spending spree, combined with an extremely supportive and accommodating monetary policy, has already generated piles of idle cash, not just in the banks and the corporate world like we saw in 2008, but also in the average household. 

On a micro level, looking at those households and their finances, it is clear that, for the moment, a lot of citizens are simply frozen by fear and uncertainty. They have largely adopted a conservative approach and chosen to save more, as they are justifiably wary of what lies ahead and when their next paycheck might come, if it comes at all. In fact, this entirely reasonable response has been identified as a problem by mainstream analysts and institutional figures. For example, in Germany, the amount of cash held in private bank accounts increased by €182 billion to reach €1.73 trillion, according to data from the nation’s central bank. The Ifo Institute issued a report on this “savings surplus,” arguing that it undermines hopes for a consumer boom. Put simply, in this brave new world, being responsible and planning ahead for one’s future is bad for the economy. 

At this point, the economic crisis still rages on and the restrictions on commerce are so harsh and so numerous that even if they wanted to spend more, most consumers wouldn’t be able to. Sooner or later, however, economic activity will return, in some form or another. Even with strict limits or new rules and regulations, shops will reopen and even if that happens under the conditions of a “new normal,” citizens will eventually either get used to it or at least go along with it. It is still hard to tell when the average consumer will feel confident enough in their own financial and professional outlook to start spending all this saved-up cash, but once they do, the inflationary risks will be substantially increased. 

Meanwhile, gold prices appear to have weakened over the last few months, causing many analysts and commentators to declare that the precious metal is no longer a safe haven or indeed relevant at all in a modern portfolio. This view is so obviously and dangerously misguided that it’s frankly surprising it is getting any traction at all. Of course gold demand is suppressed when borrowing costs nothing; spending, buying, and gambling are actively encouraged; and all political and central banking figureheads ceaselessly reassure anyone who will listen that the support is not going away any time soon. 

This is the classic setup to an inflationary environment, the same prelude that we’ve seen again and again in monetary history.

A high-ranking diplomatic official with the Swiss embassy has died under mysterious circumstances in Tehran on Tuesday. The 51-year old woman reportedly fell from a high-rise building in the north of the city and was found deceased on the street level below.

Reuters cites Iranian state media to report “The first secretary at the Swiss embassy in Tehran was found dead on Tuesday after falling from a high-rise building where she lived in the north of the city, a spokesman for emergency services was quoted as saying by Iranian news agencies.”

Switzerland’s foreign ministry expressed that it was “shocked” by the death, and further described it as an “accident” – though without revealing further details. 

Reuters continues of the few known details: “Iranian emergency services spokesman Mojtaba Khaledi said the diplomat’s body was found by a gardener after an employee who arrived at her apartment early on Tuesday noticed she was missing,” citing Fars news agency. Conflicting reports described the woman as having lived on the 17th or 18th floor of the building from which she fell.

The Iranian officials said, “This person was the first secretary of the Swiss embassy,” and that “The cause of her fall has yet to be determined.”

It doesn’t appear at this point that the Swiss embassy suspects any foul play, and hasn’t commented on if this was a possible suicide. 

A Swiss diplomat has been found dead after falling from a high-rise building where she lived in Tehran, #Iran. https://t.co/6tn4XoAaYj

— Steve Herman (@W7VOA) May 4, 2021

Interestingly the Swiss embassy and its diplomatic officials have often represented Washington’s interests in backchannel negotiations with Tehran, following the US and Islamic Republic cutting ties after the 1979 Islamic Revolution and embassy hostage crisis. Switzerland represents one of the oldest continuing foreign diplomatic representations in Iran, having had an official presence in Persia for 100 years.

Authored by Martin Jay via The Strategic Culture Foundation,

How did the mercurial Recep Erdogan get himself into the military geopolitical wrangle that he’s in both with the Pentagon and Russia?

April was quite a month for Ankara-based foreign correspondents who were kept busy with what seemed to be a never-ending stream of news stories about Turkey’s role in the world. After the dust has settled, many analysts might conclude that Turkey is now more isolated than ever. The new rogue state in the Middle East. The question is whether the region is better off and more stable and – critically – if the thawing of relations, as a consequence, with both Egypt and Saudi Arabia is sustainable.

From an analyst’s point of view, Turkey’s geopolitics was always a moving target which no one could entirely understand. The opaque nature of Mr Erdogan’s strategy even baffled Turkey’s own best hacks and at times made him look almost Trump like with his serendipity.

The geomilitary strategy of buying Russia’s S-400 missile system and imagining that the U.S. would allow Turkey to also have U.S.-made F-35s was always going to be a brain teaser.

Initially, Turkey pledged to purchase 100 F-35 fighter jets. In 2018, six were meant for Turkey with some conditions about pilot training, but the actual delivery of the jets was postponed after the start of the S-400 crisis between the U.S. and Turkey kicked off.

But by July 2020, things were looking increasingly shaky as eight jets initially intended for Turkey were instead purchased by the U.S. Air Force which was followed by the cancellation of the supply of parts for the jets, from Turkey.

U.S. empties both barrels at Turkey

The final communication which came from the Pentagon removing Turkey from the F-35 program came in late April and banged a final nail in the coffin of a military hardware sharing deal with the U.S. – forcing Turkey, a NATO member, out in the cold. Perhaps a final blow even to Ankara-Washington relations came days later when Joe Biden formally announced his acknowledgement of Turkey’s role in the Armenian genocide.

The reason the U.S. took this position was that there was a growing skittishness from military figures in the Pentagon over whether Turkey can be trusted not to share sensitive information about the jets with Russia. The timing of this decision is both curious and poignant though.

Relations with Russia in recent years have been at best lukewarm and barely cordial at best, but quite delicate at worse. President Putin on occasion has felt the need to issue veiled threats to Erdogan during tense talks over such incendiary subjects like Syria – where both countries are fighting on opposing sides in Idlib – and Erdogan has appeared to respect the lucid but polite warnings from the Russian leader.

Russia out in the cold

But Erdogan recently went over a line with regards to Ukraine making it very clear that his government would always be more sympathetic to siding with Kiev in any dispute with Russia in the Donbas region. On April 21st, President Zelensky met with President Erdogan in Ankara where they underlined the importance of another defense contract which has also proved to be costly to the firebrand Turkish leader: Turkey’s sales of its own drone to Ukraine.

And this is where it gets complicated. If it were not for this deal and the coziness of Ankara and Kiev, Erdogan could have turned to the Russians when the F-35 deal dell flat on its face and struck a new deal over the Russian fighter jets currently making the headlines on the Ukrainian border itself.

The irony here is that Turkey was always the delinquent member of the NATO pack with generals of western countries always questioning whether it could be useful if the west ever had a conflict with Russia – as Turkey, they say, could be relied upon to ‘choke’ the Bosporus straits blocking Russia’s naval fleet to return to its Black Sea base for refueling. Or at least that’s the theory. With the Ukraine crisis in mid-April, and Turkey’s divided loyalties now after being snubbed by the NATO giants as well as Russia, this role is being more and more questioned.

Turkey has literally dug itself into a deeper and deeper hole entrenching itself increasingly with complicated geopolitical and geomilitary relations – and rows – that it is now stuck out in the cold with no partner for stealth fighters.

And yet, with recent shifting plates in the Middle East of old foes becoming friends, some might be forgiven for arguing that Turkey doesn’t need this grade of stealth fighter anyway, which would have been a huge drain on an economy already in the doldrums.

In recent months, we have seen relations with archenemy Saudi Arabia thaw, after King Salman held out an olive branch in November of last year and this theme was followed by the Saudi Crown Prince ‘MBS’ who recently took the decision to re-open the border between KSA and Qatar – its uber-adversary and partner with Turkey. This coincides with a new chapter of relations between Turkey and Egypt, where there was genuinely some bad blood geopolitically which needed tackling head on.

That’s a considerable shift, coming after a seven-year freeze in relations that started after Turkey’s backing of former Egyptian President Mohammed Morsi, who was elected in 2012 and affiliated with the Muslim Brotherhood.

Morsi was of course deposed in 2013, following uprisings and finally a military coup that led to Abdel Fattah al-Sisi becoming president in 2014, leading to what analysts called a “deep freeze” thereinafter.

But with these new chapters being turned, largely due to Joe Biden becoming U.S. president in December of 2020, a casual observer of Middle East politics might surmise that peace is breaking out in the region – especially with Iraq brokering talks between Iran and KSA presently.

Turkey still has though an ace to play with its largely victorious role in Libya, where in recent weeks we have seen a new attitude from the UAE (also previously an enemy) which is warming to a new political leadership in Tripoli raising many questions as to whether now the “warlord” General Haftar can be trusted to adhere himself to the new mood which his nemesis Ankara can take credit for.

But Ankara still has this enfant terrible role with the European Union. Erdogan creating headlines over a chair incident, which denied EU commission president Ursula von der Leyen the seat next to his when she and the European Council president both visited Ankara, has only soured relations with Brussels to a new low point. With relations also with both the U.S. and NATO at an all-time low, matched only by a new stand-off with Russia, one might be forgiven for thinking that the Turkish president is more comfortable out in the cold and, like a fairground conjurer, he prefers to keep everyone guessing as to what his next move might be. Surely, we won’t have to wait long before the next debacle grabs the media spotlight.