Tag: finance

Authored by Michael Snyder via TheMostImportantNews.com,

Do you remember how much optimism there was in January? 

Many Americans were entirely convinced that really bright days were just around the corner, but instead things have taken a dramatic turn into the dumpster over the last 9 months. 

The Afghanistan debacle was the worst foreign policy embarrassment in modern American history, the Biden administration is trying to deal with an unprecedented crisis on our southern border, and the way that our politicians are handling the pandemic is causing extremely deep divisions throughout our society.  In addition, our economy is starting to break down on a very basic level.  On a widespread basis, goods are not getting to the places they need to be when they need to be there, and services are often not available when people need them.  As time has passed, the “malfunctioning” of our economy has spread, and now the coming mandates threaten to make things a whole lot worse.

Just look at the chaos that was caused in Florida on Sunday…

Southwest has canceled 1,018 Sunday flights as of 2 p.m. ET, according to flight tracker FlightAware. That’s 28% of the the airline’s scheduled flights and the highest of any U.S. airline by a wide margin.

American Airlines has canceled 63 flights, or 2% of its operation, while Spirit Airlines canceled 32 flights, or 4% of its flights, according to FlightAware.

Overall, more than 1,800 flights were canceled during the weekend, and Southwest is publicly blaming the problems on “weather challenges”…

“We experienced weather challenges in our Florida airports at the beginning of the weekend, challenges that were compounded by unexpected air traffic control issues in the same region, triggering delays and prompting significant cancellations for us beginning Friday evening,” the spokesperson told FOX Business.

“We’ve continued diligent work throughout the weekend to reset our operation with a focus on getting aircraft and crews repositioned to take care of our customers,” the spokesperson added. “With fewer frequencies between cities in our current schedule, recovering during operational challenges is more difficult and prolonged. We’re working diligently to accommodate our customers as quickly as possible, and we are grateful for their patience.”

Of course that is complete and utter nonsense.

A large number of Southwest pilots in Florida engaged in a “sickout” over the weekend to protest Southwest’s vaccine mandate, and apparently at least some air traffic controllers joined them…

On the record, they’re denying any sort of protest — but there are reports, citing airline sources, that a massive “sickout” went down, and that ripple effects are still being felt.

Regardless of what the truth here is … it’s screwing a lot of people, and causing a lot of problems. And, IF there is merit to the sickout speculation — it could also be a bad sign of what’s to come in other industries that might try to enforce vaccines on employees.

As I write this article, there are rumblings that pilots at American Airlines are organizing similar efforts.

Good for them.

In fact, we need bold people in every industry in America to start doing this sort of thing.

Perhaps if enough people start standing up, those that are trying to impose these mandates will start backing down.

Right now, we are already facing the most epic labor shortage in U.S. history, and economic activity is badly gummed up as a result.  If millions more qualified people are thrown out of work in the months ahead due to these absurd mandates, that is going to cause unprecedented chaos all across America.  A weekend of canceled flights might be bad, but it is nothing compared to the complete and utter nightmare our society will be facing if all of these mandates go through.

Even the military will be deeply affected.  On Sunday, it was being reported that “hundreds of thousands” of our service members have chosen to resist the mandates…

Hundreds of thousands of U.S. service members remain unvaccinated or only partially vaccinated against the coronavirus as the Pentagon’s first compliance deadlines near, with lopsided rates across the individual services and a spike in deaths among military reservists illustrating how political division over the shots has seeped into a nonpartisan force with unambiguous orders.

So what would it do to the state of our military if hundreds of thousands of service members are kicked out in the months ahead?

That is a question that we need to be asking, because it appears that this is actually what is going to happen.

On top of everything else, now we are facing a severe global energy crisis…

Energy is so hard to come by right now that some provinces in China are rationing electricity, Europeans are paying sky-high prices for liquefied natural gas, power plants in India are on the verge of running out of coal, and the average price of a gallon of regular gasoline in the United States stood at $3.25 on Friday — up from $1.72 in April.

Most Americans may not realize it yet, but this is a really big deal.

There are more than 1.3 billion people living in India, and coal is in such short supply there that officials are warning that there could soon be widespread blackouts…

Just like Chinese authorities ordering energy firms to conserve supplies at all costs, numerous power plants across India could be forced to adopt rolling blackouts as coal supplies run low. A minister in Indian capital New Delhi warned Sunday that blackouts could rock the massive city over the next two days. But the nation’s capital city isn’t alone in suffering energy shortages: it joins two Indian states – Tamil Nadu and Odisha – which have issued warnings about the growing possibility of blackouts due to dwindling coal supplies.

Other nations are facing similar issues.  In fact, Lebanon just emerged from a blackout that lasted about 24 hours…

LEBANON has finally got the lights back on some 24 hours after the country was plunged into total darkness by fuel shortages.

The Mediterranean country is battling one of the planet’s worst economic crunches since the 1850s in the wake of last year’s devastating blast that levelled a huge part of the capital Beirut.

If things are this bad already, how crazy will things get in the middle of winter when demand for energy is at the highest?

People need to wake up, because the times that we are moving into are going to be completely different from what we have grown accustomed to.

It isn’t just the U.S. economy that is crumbling.  Literally, the economic infrastructure of the entire globe is falling to pieces, and experts are warning that things will continue to break down in the months ahead.

So many of the things that you have been warned about are starting to transpire right in front of our eyes, and this winter looks like it will be very dark indeed.

*  *  *

It is finally here! Michael’s new book entitled “7 Year Apocalypse” is now available in paperback and for the Kindle on Amazon.

To celebrate Indigenous People’s Day, the bond market took the day off so there was less human ‘discipline’ in general in the market.

Treasury futures (prices) ended the day marginally lower, implying perhaps a 1bps rise in 30Y Yields…

Source: Bloomberg

And so the machines were in charge and they tried their best early on to ignite momentum, but that all fell apart as Europe closed.. The Dow was the laggard on the day with Small Caps the last to give up its gains but still outperforming the others…

In fact, as we detailed earlier, 4400 was the line in the sand for the S&P…

The dollar rallied on the day but remained in a relatively tight range…

Source: Bloomberg

And bitcoin had a strong day, pushing up towards $58,000…

Source: Bloomberg

Ethereum had a different day but ended higher in the end…

Source: Bloomberg

Oil prices ended higher on the day despite a small pullback after The White House urged OPEC to ramp up production again…

Finally, we note that the correlation among S&P 500 components has been rising notably recently…

Source: Bloomberg

The fact that individual stocks have started moving around in unison has portended trouble in the past. Rising correlations are “a sign of market fragility — you could see a market pullback if there’s a change in outlook,” Steve Kolano, chief investment officer at BNY Mellon Investor Solutions told Bloomberg.

For everybody who speculated that Beijing’s fine against Meituan was a sign its crackdown on the private sector might be slowing, the reality is that President Xi Jinping and China’s top policy makers are merely moving on to their next priority now that Chinese tech giants have been reminded who’s in charge.

With China’s bond market in chaos thanks to the excesses of developers like Evergrande, Fantasia and others, the WSJ just reported that President Xi Jinping is launching an anti-corruption review of 25 Chinese financial institutions, including state controlled banks and private companies. Just like the “anti-monopoly” crackdown on Chinese tech behemoths like Alibaba, the crackdown on Chinese banks is intended to ensure complete CCP control over the “lifeblood” of the economy.

The investigation was announced in September with few details, but WSJ’s sources say it’s finally ramping up, as investigators try to determine whether state-controlled financial firms have become “too chummy” with the private sector.

Part of the crackdown will focus on compensation in the financial industry. Apparently, officials within China’s Ministry of Finance are concerned that compensation in China’s financial sector is “too high”.

Aside from the banks and firms themselves, China’s top anti-corruption agency, the Central Commission for Discipline Inspection, will also focus on whether regulators at the PBOC and other banking, insurance and securities watchdogs have been negligent in supervising companies. The suspicion is that they may have fallen under the spell of what is called “regulatory capture” in the US.

Over the coming weeks and months, employees from the commission will be fanning out to offices across the sector to review files, investigate lending activity and demand answers for how certain deals came to be. Zhao Leji, the head of the CCDI, said his investigators will “thoroughly search for any political deviations,” according to Xinhua.

WSJ added that it’s “notable” the crackdown is starting in the middle of the Evergrande crisis, which, as we have reported, is spreading to other developers. Chinese banks have already apparently gotten the memo, and banks have already started curtailing lending to private developers.

President Xi and others are concerned that aggressively lending to well-connected firms like Evergrande might be due to their close ties with state banks. Already, Chinese financial conglomerates that lent to Evergrande, including Citic Group, founded in the 1970s by Rong Yiren, an infamous “red capitalist”. State banks’ lending to Evergrande will also be examined.

One academic and China expert said Xi’s crackdown will hurt economic growth as banks sever business ties with private companies. “When uncertainty goes up, the only way to react is to stop doing what you’re doing,” said Michael Pettis, a finance professor at Peking University, to WSJ. “But a slowdown of economic activity in the private sector—from tech giants unsure of the regulatory climate to private developers whose lending spigot is cut off—presents a dilemma for Beijing. “Without ‘bad’ lending, you’re not going to achieve the growth target.”

And Evergrande isn’t the first Chinese firm to overextend itself. A few years ago, Beijing forced major private conglomerates like HNA Group to sell off pieces of their offshore portfolio following a global buying frenzy by a handful of major Chinese firms. HNA’s former chief executive is now in jail, and the company – once one of China’s high-flyers – has declared bankruptcy.

Despite Beijng’s warnings about real-estate lending, Citic has pumped more than $10 billion into Evergrande, per WSJ’s sources.

One of the managers responsible for lending to Evergrande, Xie Hongru, who ran Citic’s office in Guangzhou, close to EG’s home base in Shenzen, has been under investigation by the Party’s disciplinary investigators since last month, WSJ says.

But even more surprising than Citic (a private firm) is the fact that China’s sovereign-wealth fund, China Investment Corp, and several of China’s “Big Four” banks will face investigations over whether their ties to Didi helped the ride-share company’s application to IPO in New York sail through China’s regulatory framework. As officials at CIC brace for the Party investigators, a source inside the company told WSJ: “People are nervous.”

When it comes to the state-controlled entities, the big question will be: “Do those investments represent the state’s interests or those of a few individuals?”

To try and goose economic activity, the government could ramp up infrastructure investment and other elements of its old stimulus playbook.

Ultimately, Xi appears to have two goals: rein in the excessive lending that has created crises like the Evergrande debacle. And – most importantly – to make sure every financial firm private or otherwise remains completely loyal to the CCP.

Of course, when it comes to rooting out official corruption and inappropriate relationships between the state and financial firms, it looks like there’s plenty Chinese regulators can teach their American counterparts.

we should let him clean up congressional and fed insider trading and special interests here too https://t.co/Tq8G4hKlWS

— North Hero Trading (@northherofx) October 11, 2021

Submitted by Adventures in Capitalism

For four decades, the US stock market has traded up and to the right. During those brief moments of setback, treasuries rallied strongly. The fact that these two asset classes seemed to offset each other, creating a smoothed-out return profile, was not lost on certain fund managers who created portfolios comprised of the two. Then, to better market this portfolio to the sorts of institutional investors who cannot bear drawdowns, the overriding strategy was given the pseudo-intellectual sounding Risk Parity moniker. Over time, the reliability of Risk Parity funds has astonished most observers, especially after being tested by fire during the GFC. As a result, portfolio managers took the logical next step and added copious leverage—because in finance, when you do a back-test, every return stream works better with leverage. Naturally, as Risk Parity continued to produce returns, inflows bloated these funds. Risk Parity strategies, in one form or another, now dominate many institutional asset allocations. While everyone makes their sausage a bit differently, trillions in notional value are now managed using this strategy—long equities, long treasuries. Are they highly-leveraged time-bombs??

Taking a step back, it’s important to ask, what created this smooth stream of Risk Parity returns? Was it investor brilliance or was it a four-decade period of declining interest rates that systematically increased equity market multiples while reducing bond yields? What if all the sausage-making was just noise? This then brings out the next logical question; what happens if the rate cycle has now turned and we have an extended period of both increasing interest rates and declining equity market multiples?

During the darkest Covid days of March 2020, I distinctly remember a few days where the equity market crashed along with treasuries. It was so highly unusual, that it was memorable. I kept saying to myself, “well, this is odd…” Later on, we learned that during the global margin call caused by Covid, multiple Risk Parity funds were forced to de-lever and sell both legs of their trade (dumping both equities and bonds). For the first time that I can remember, bonds did not act as the anticipated hedge to an equity market crack-up. They actually accelerated the crack-up as collateral values crashed.

When a strategy gets too crowded, particularly with excess leverage to augment returns, we often see that strategy act “funny” around stress-points. This is because when any large player gets into trouble, they de-gross, which starts a feedback loop, forcing someone else to get into trouble and also de-gross—it simply cascades. Fortunately for everyone, the Fed stepped in with unlimited liquidity. It turned out to be an excellent time to buy pretty much anything with a CUSIP. However, that week in March should have been a wakeup call for everyone in the Risk Parity world. Instead, I suspect they’ve made a few small tweaks and continued with their prior strategy.

For some time, I have been very clear that the disinflation cycle has been turning. Sure, I was a bit early, and the cycle overshot my wildest expectations. However, that’s how tops get made. Now, with each passing day, complete with new and bizarre forms of price inflation, it is increasingly obvious that the multi-decade disinflationary cycle has turned. We’re barely into the first innings and supply chains are breaking, while prices are soaring. Just wait until the Global Central Planners really get going with their “fixes” which will naturally accentuate the inflationary pressures. This will get nasty for many risk assets and their valuations will come in—at a time when treasuries also sell off due to inflationary pressures. I don’t think most Risk Parity portfolios are ready for what’s coming.

The Risk Parity sell-off of March 2020 was the warning that everyone should have paid attention to. Now, once again, bonds are getting wobbly while equities are also acting heavy. Some of the nastiest days over the past month were on days when both equities and treasuries sold off at the same time. Inflation expectations are starting to get priced into the markets—gradually, then suddenly.

What if the Fed is not there to backstop the Risk Parity funds? What if the Fed is forced to tackle a failed energy policy that was mangled by ESG? A 60/40 portfolio can suffer through bad periods if it isn’t levered. Put some leverage on that and watch out. Ever since March 2020, I’ve been convinced that these Risk Parity funds will blow up spectacularly with any rise in inflation expectations, as both legs of the trade get shredded. It’s getting closer to game-time on that theory. I’m not saying that this is a tomorrow sort of thing, maybe it takes a few quarters, but I think we’re well into the death-rattle stage for Risk Parity strategies. When something that is this widely adopted blows up, it tends to blow up spectacularly. I suspect this will get wild.

The Taliban for the first time announced Sunday that it will receive humanitarian aid for the people of Afghanistan directly from the United States. It comes after the latest round of talks with Washington officials in Doha which Taliban negotiators said “went well” – the first such talks since the US evacuation and pullout in August. 

It appears the two sides came to agreement over the humanitarian assistance based on reception of the funds not being linked to formal political recognition. The US side gained confirmation that the Taliban would allow US citizens and permanent residents, and other foreign nationals still stuck in Afghanistan the freedom to leave the country:

The statement said the US agreed to provide humanitarian aid to Afghanistan, while the Taliban said they would “facilitate principled movement of foreign nationals.”

There was also agreement that the Taliban would commit to fighting terrorism, which further comes after ISIS-K attacks on mosques and the mass killing of civilians, resulting in Taliban assaults on what are said to be ISIS hideouts.

The American side’s statement on the foreign aid directed to Kabul was more vague, saying only that “The two sides also discussed the United States’ provision of robust humanitarian assistance, directly to the Afghan people.”

“The US delegation focused on security and terrorism concerns and safe passage for U.S. citizens, other foreign nationals and our Afghan partners, as well as on human rights, including the meaningful participation of women and girls in all aspects of Afghan society,” the US State Department readout of the proceedings in Doha indicated. 

U.S. in talks with Taliban to deliver aid to Afghanistan https://t.co/HoHfDKWJn2

— Peoples Gazette (@GazetteNGR) October 11, 2021

Last month the Biden administration appeared to leave open for future consideration the questions of counter-terror cooperation with the Taliban, foreign aid to the country, and formal recognition of Taliban rule. All of these remain hugely controversial, given any of these would be taken as a glaring Washington admission of defeat after two decades of war. It would also effectively bring the US government into ‘partnership’ with a de facto terrorist organization which the US and NATO allies spent many years fighting. 

Over the weekend Taliban leaders reaffirmed their unwillingness to accept any level of US cooperation to fight ISIS-K or other terrorists in the country. 

Authored by Kenneth Kalczuk via The American Institute for Economic Research,

Wouldn’t it be strange if the government director of an industry wanted to end that industry? Like if the Secretary of Education wanted to close schools, or if the Secretary of Agriculture hated farming?

The implications of President Biden’s recent nomination for the head of the Office of the Comptroller of the Currency (OCC), Saule Omarova, reach far beyond “stricter financial rules.” In a forthcoming article for the Vanderbilt Law Review, Omarova expresses her desire to “end banking as we know it” by replacing all private bank deposits with central bank accounts. 

Omarova’s proposal, dubbed “FedAccounts,” would replace private deposits with central bank accounts as part of her larger plan to “democratize finance.” However, such a restructuring would result in greater authority in the hands of unelected officials and an overall loss of financial privacy with no guarantees of greater policy effectiveness. 

Endless Restructuring and Reallocation

On September 23rd, 2021, President Biden announced his intent to nominate Cornell Law Professor Saule Omarova as the next Comptroller of the Currency. As Comptroller, Omarova would head the Office of the OCC, which regulates and supervises all national banks. Omarova is an ardent critic of both the current banking system and cryptocurrencies. Her forthcoming article “The People’s Ledger: How to Democratize Money and Finance the Economy” pushes for “more equitable and inclusive modes of finance” through the issuance of a Central Bank Digital Currency and the creation of a National Investment Authority (a modern-day equivalent of the Reconstruction Finance Corporation.)

Yet, perhaps most jarring is Omarova’s advocacy for an “ultimate end-state,” where FedAccounts fully replace private bank accounts. The proposal comes as a part of Omarova’s plan to restructure the Fed’s entire balance sheet into “the People’s Ledger.” Combined with an expansion of the Fed’s liabilities with FedAccounts, the People’s Ledger involves a corresponding expansion of its assets to include new types of securities and loans. Simply put, the People’s Ledger is presented as Omarova’s plan to expand and restructure the Fed’s balance sheet to restore the public-private balance in the financial system.

Under the People’s Ledger, Omarova stresses that access to financial services and resources would be democratized and the financial system would be in a better position to support productive economic activity. Attractive as this may seem, however, implementing the People’s Ledger would cause more harm than good. 

Effective FedAccounts?

Omarova embraces an expanded balance sheet and a more interventionist regime as crucial to Fed efficiency. Such enhancements, however, are not necessary to achieve more effective monetary policy.

The Fed’s pre-2008 corridor system serves as an example of greater monetary effectiveness without such tradeoffs. Prior to 2008, the Fed managed interest rates and the money supply according to a corridor operating system. Whereas in the corridor operating system, the Fed primarily relied on open-market operations to achieve its interest rate target, under the current floor operating system, the Fed now relies on adjusting the interest rate it pays on reserves. As open market operations are rendered ineffective by the current floor system, the Fed can significantly expand its balance sheet without worrying about typical inflationary pressures.

The corridor system thus represents the possibility for effective monetary policy to be conducted without a dramatic expansion of the Fed’s balance sheet (the likes of which Omarova would find favorable), by ensuring that open-market operations will have a substantial impact on the federal funds rate. It is the substantive track record of the corridor system that ultimately demonstrates an alternative to the People’s Ledger.

The People’s Political Problems

Omarova recognizes how her plan for the People’s Ledger could raise questions regarding the Fed’s political independence. She argues that the Fed’s supposed neutrality is merely a veil that hides the fact that “central bankers’ investment choices have immense distributional consequences. However, instead of attempting to limit or reduce the Fed’s reach, Omarova doubles down by insisting that public policy priorities (e.g., job creation, combating climate change, and reducing racial inequities) be incorporated into the Fed’s operations.

Combined with the fundamental loss of privacy involved with the issuing of FedAccounts, Omarova’s plan for the People’s Ledger echoes the underlying distrust of the public (and religious reverence for experts), present in many proposals which claim to be based in “democracy” and “the public benefit.” Paradoxically, Omarova’s plan to “democratize” finance results in an overall loss of individual choice and financial autonomy for all of those who would prefer to remain unbanked or simply prefer the privacy offered to them under the current financial system.

Should Omarova be confirmed, her position as the head of the OCC would not allow her to adjust the operations of the Fed and establish the People’s Ledger. Nevertheless, it is important to recognize just how drastic the implications of her nomination are. Neutering private banking and reforming the entire financial system to align with public policy priorities are not normally floated by would-be financial regulators. Such ideas, instead, would seem to be an unfortunate side effect of politicians and regulators embracing politically driven policy making, and the never-ending search for interventionist panaceas.  

Omarova is right to point out the deficiencies in central banking. Nonetheless, ending traditional banking to fix central banking would be like closing schools to improve student retention.

There are easier ways forward.

Back on Sept 30, China stunned markets when reeling from soaring energy prices, widespread blackouts, mass factory closures and a shortage of coal – it’s most popular source of power – Beijing ordered energy firms to “secure supplies at all costs.” Local producers did not need a second invitation to do just that, and in less than two weeks, the Chinese thermal coal futures have soared by over 16% to an all time high, spiking above 1,500 yuan per ton overnight, where the jump triggered even more stops ensuring that the move higher would continue.

The move in Chinese coal prices, seen in its long-term context, has been nothing short of staggering.

But while we can certainly admire the view from up there, that doubling in coal prices in just the past month is terrible news for Beijing which is under increasing pressure to cut rates or ortherwise ease financial conditions to contain – or “ringfence” in the parlance of our times – the “disaster” taking place in the Chinese bond market, the commodity price inflation means Xi’s hands may be tied for one simple reason.

Historically, Chinese coal prices – due to their core role as the anchor of China’s energy-intensive economy – have been the asset the most closely has correlated with Chinese wholesale, or factory gate inflation, also known as Producer Prices. And while we wait to get the latest Chinese CPI and PPI print this week, we can already predict what it will be either next month or the month after.

While coal prices were relatively contained one month ago, they have since then exploded. And if the historical correlation between Coal prices and PPI holds, were may be soon looking at a tripling of China’s PPI, which from 9.5% Y/Y in August, is about to soar to 30% or more.

Needless to say, if Chinese PPI does hit 30%+, even if CPI somehow stay in the single digits, the results would be catastrophic: profit margins would collapse, the plunge in already thin cash flows would lead to even more defaults and supply chain bottlenecks, even as the scramble to obtain commodities “at any price” keeps pushing costs – and PPI – even higher. Meanwhile, if producers do try to pass on some of the costs and CPI spikes (the gap between CPI and PPI was already record wide before the recent surge in coal prices).

… then Beijing will have social unrest on its hands. And all this is happening as China’s property sector desperately needs a massive liquidity infusion which is – you guessed it – inflationary.

And while China may be facing its first “galloping inflation” PPI print, it’s only downhill from there, because as Citigroup wrote earlier, China’s power outages – which will only get even worse as coal prices hit new all time highs – have strengthened the case of stagflation in China as over 20 provinces, making up >2/3 of China’s GDP, have rolled out electricity-rationing measures since August.

The three NE provinces were hardest hit, with power cuts from factories to homes. Costal manufacturing and export hubs like Guangdong, Jiangsu and Zhejiang were also seriously impacted. The outages are attributable to:

1. Electricity supply shortage. Thermal power (73% of total power production in 21H1) was limited by the low supply and surging prices of coal. China’s coal industry just emerged out of a prolonged de-capacity and is subject to tighter safety regulations. The geopolitical tensions (e.g., between China-Australia) and the COVID disruptions (e.g., in Mongolia) affected coal imports. Coal inventories in key coal-handling ports like Qinhuangdao are now around the new lows since the supply-side reform.

2. Export-led industrial boom. China’s uneven recovery, with electricity-consuming industrials (67% of total power consumption in 2020) outpacing services (16%), pushed up the power demand.

3. “Dual energy control”. To peak carbon emissions by 2030, the NDRC added more effective incentive measures for the “dual control of energy consumption and intensity” – for example, missing the targets may lead to delays or suspensions in the NDRC’s approvals of new energy-intensive projects for localities. Such measurable KPIs appear even more important amid the ongoing reshuffle of local officials ahead of the 20th Party Congress (in 22H2). China aimed to cut energy intensity by 13.5% during 2021-25 and by 3% in 2021. Total energy consumption growth is capped at 2.9% for 2021, which would require a more aggressive intensity reduction by 5.3%. The barometer released by the NDRC on August 17, showing 19 provinces lagging behind, further served as a wake-up call for local governments in achieving their “dual control” targets.

This led to a series of factory shutdowns and production cuts in energy-intensive and high-emissions sectors. Other than executive orders and window guidance, the cut of electricity supply has been used by some as a policy tool. It’s exerting material impacts on sectors like steel, non-ferrous metals, cement, glass, coking, chemicals, industrial silicon, paper making and electroplating, among others.

What are the implications?

As noted above, Citi believes that “China seems to be entering into at least a short period of “stagflation”:

• 1. PPI inflation to remain elevated. The supply disruptions in the peak season should outweigh the demand weakness induced by the property down-cycle in the near term, keeping energy and industrial prices up. Citi expects PPI inflation to stay above 9% toward the year-end; we expect it to more than double from 9% in coming months, leading to catastrophic results for profit margins.
• 2. Inflation divergence to deepen. Power rationing and production cuts may drive up consumer prices more directly than the market-based pass-through from PPI shocks. However, lingering public health risks still hold back the recovery of services. Recent regulatory actions may also reduce household expenses on education, healthcare and other services. The room for pork price declines has narrowed, but the down-cycle hasn’t bottomed yet. These would help keep CPI muted. The enduring PPI-CPI divergence would squeeze the profit margin of mid/downstream sectors, especially SMEs.
• 3. China as an exporter of inflation. China’s environmental initiatives can be inflationary for the world over the medium term. The tight supply of industrial products would prompt the government to prioritize domestic demand over exports by, for example, cutting export tax rebates (already done for steel). The impact of disruptions with manufacturers/suppliers/assemblers would ripple through global supply chains (think electroplating for electronics as an example).

As a result of the above, Citi warns that China’s growth risks tilted toward downside; the bank recently downgraded its growth forecasts to 4.9% (vs 6% previously) for 21 Q3 and 4.5% (vs 5.1%) for 21 Q4 earlier, but it did not anticipate the abrupt widespread power-related production cuts. Some high-frequency activity indicators (e.g., daily crude steel outputs) have weakened quickly since.

And the pièce de résistance, Beijing is now trapped: if it eases, inflation – already at nosebleed levels – will soar further crushing margins and sparking a deep stagflationary recession; if it does not ease, the property market – already imploding – will crater.

Authored by Lance Roberts via RealInvestmentAdvice.com,

The fact we have the lowest interest rates in 5000-years is indicative of the economic challenges we face. Such was a note brought to my attention by my colleague Jeffrey Marcus of TPA Analytics:

“BofA wants you to know that ‘Interest rates haven’t been this low in 5,000-years.‘ That’s right, 5000 years. ‘In the next 5,000 years, rates will rise, but no fear on Wall Street this happens anytime soon,’ said David Jones, director of global investment strategy at Bank of America. This should not come as a shock to anyone who has been watching, given that the FED’s balance sheet is now an astonishing $8.5 trillion and that fiscal spending has caused the U.S. debt to balloon to over $28 trillion (For reference, the U.S. GDP is $22 trillion).

All of this really means that the FED and the U.S are in a tough spot. They need a lot of growth to dig out from mountains of debt, but they cannot afford for rates to move too high or debt service will become an issue.“

Yes, rates will probably rise at some point in the next 5000-years. However, currently, the primary argument is that rates must increase because they are so low.

That argument fails in understanding that low rates are emblematic of weak economic growth rates, deflationary pressures, and demographic trends.

Short-Term Rate Rise Can’t Last

In recent weeks, interest rates rose sharply over concerns of a debt-ceiling default and inflationary fears. But, asMish Shedlock noted, five factors are spooking the bond market.

1. Debt Ceiling Battle: Short Term, Low Impact

2. Supply Chain Disruptions: Medium Term, Medium Impact

3. Trade Deficit: Long Term, Low-to-Medium Impact

4. Biden’s Build Back Better Spending Plans: Long Term, High Impact

5. Wage Spiral: Long Term, High Impact

“I said early on that if Progressives get their way on spending plans, especially their demands to have 80% clean energy by 2030 it would set off a bout of stagflation. The rise in bond yields and a slowing economy are now linked.” – Mish Shedlock

He is correct. The problem, however, between today, and the 1970s, is the massive debt and leverage levels in the U.S. economy. Thus, any significant rise in rates almost immediately leads to recessionary spats in the economy.

A Long History Of Rates & Economic Growth

The chart below shows a VERY long view of interest rates in the U.S. (equivalent rates to the Federal Funds Rate and 10-year Treasury) since 1854.

Interest rates are a function of the general trend of economic growth and inflation. More robust rates of growth and inflation allow for higher borrowing costs to be charged within the economy. Such is why bonds can’t be overvalued. To wit:

“Unlike stocks, bonds have a finite value. At maturity, the principal gets returned to the lender along with the final interest payment. Therefore, bond buyers are very aware of the price they pay today for the return they will get tomorrow. As opposed to an equity buyer taking on investment risk, a bond buyer is loaning money to another entity for a specific period. Therefore, the interest rate takes into account several substantial risks:”

• Default risk

• Rate risk

• Inflation risk

• Opportunity risk

• Economic growth risk

“Since the future return of any bond, on the date of purchase, is calculable to the 1/100th of a cent, a bond buyer will not pay a price that yields a negative return in the future. (This assumes a holding period until maturity. One might purchase a negative yield on a trading basis if expectations are benchmark rates will decline further.) “

What Caused Rates To Rise Previously

Interest rates rose during three previous periods in history. During the economic/inflationary spike in the early 1860s and again during the “Golden Age” from 1900-1929. The most recent period was during the prolonged manufacturing cycle in the 1950s and 60s. That cycle followed the end of WWII where the U.S. was the global manufacturing epicenter.

However, notice that while interest rates fell during the depression era, economic growth and inflationary pressures remained robust. Such was due to the very lopsided nature of the economy at that time. Much like the current economic cycle, the wealthy prospered while the middle class suffered. Therefore, money did not flow through the system leading to a decline in monetary velocity.

Currently, the economy once again is bifurcated. The upper 10% of the economy is doing well, while the lower 90% remain affected by high joblessness, stagnant wage growth, and low demand for credit. Moreover, for only the second time in history, short-term rates are at zero, and monetary velocity is non-existent.

The difference is that during the “Great Depression,” economic growth and inflationary pressures were at some of the highest levels in history. Today, the economy struggles at a 2% growth rate with inflationary pressures detracting from consumptive spending.

Low Rates Can Last A Long Time

Interest rates are ultimately a reflection of economic growth, inflation, and monetary velocity. Therefore, given the globe is awash in deflation, caused by weak economic output and exceedingly low levels of monetary velocity, there is no pressure to push rates sustainably higher. The dashed black line is the median interest rate during the entire period.

(Note: Notice that a period of sustained low interest rates below the long-term median averaged roughly 40 years during both previous periods. We are only currently 10-years into the current secular period of sub-median interest rates.)

The following chart overlays the 10-year average economic growth rate. As you will notice, and as discussed above, rates rise in conjunction with more substantial levels of economic growth. Such is because more substantial growth leads to higher wages and inflation causing rates to rise accordingly.

Today, the U.S. is no longer the manufacturing epicenter of the world.  Labor and capital flow to the lowest cost providers to effectively export inflation from the U.S., and deflation gets imported. Technology and productivity gains ultimately suppress labor and wage growth rates over time. The chart below shows this dynamic change which began in 1980. A surge in debt was the offset between lower economic growth rates and incomes to maintain the “American lifestyle.”

A Demographic Challenge

The chart below shows both the long-view of real, inflation-adjusted, annual GDP growth and on a per-capita basis. I have also included the annual growth rates of the U.S. population. [Data Source: MeasuringWorth.com]

There are some interesting differences between the “Great Depression” and the “Great Recession.” During the depression, the economy grew at 13% and 18% on an annualized basis. Today, the current economic cycle of 2.5% and 2.7%. What plagued the economic system during the depression was the actual loss of wealth following the “Crash of 1929” as a rash of banks went bankrupt, leaving depositors penniless, unemployment soaring, and consumption drained. While the government tried to assist, it was too little, too late. The real depression, however, was not a statistical economic event but rather an absolute disaster for “Main Street.”

During the current period, real economic growth remains lackluster. In addition, real unemployment remains high, with millions of individuals simply no longer counted or resorting to part-time work to make ends meet. Finally, with more than 100-million Americans on some form of government assistance, the pressure on “Main Street” remains.

One crucial difference is the rate of population growth which, as opposed to the depression era, has been on a steady and consistent decline since the 1950s. This decline in population growth and fertility rates will potentially lead to further economic complications as the “baby boomer” generation migrates into retirement and becomes a net drag on financial infrastructure.

Today, despite trillions of dollars of interventions, zero interest rates, and numerous bailouts, the economy has yet to gain any real traction, particularly on “Main Street.”

The End Of The Bond Bubble

The problem with most forecasts for the end of the bond bubble is the assumption that we are only talking about the isolated case of a shifting of asset classes between stocks and bonds.

However, the issue of rising borrowing costs spreads through the entire financial ecosystem like a virus. The rise and fall of stock prices have very little to do with the average American’s participation in the domestic economy. Interest rates, however, are an entirely different matter.

While there is not much downside left for interest rates to fall in the current environment, there is not a tremendous amount of room for increases. Moreover, since interest rates affect “payments,” increases in rates quickly negatively impact consumption, housing, and investment.

Will the “bond bull” market eventually come to an end?  Yes, eventually. However, the catalysts needed to create the economic growth required to drive interest rates substantially higher, as we saw previous to 1980, are not available today. Such will be the case for decades to come. The Fed has yet to conclude we are caught in a “liquidity trap” along with the bulk of developed countries.

Over the following 5000-years, rates will eventually rise. But for now, I am long bonds and continue to buy more whenever someone claims the “Great Bond Bull Market Is Dead.”

Global food prices are at fresh decade highs leading to even higher grocery bills for the working poor, and the supply chain chaos plus the emerging energy crisis are making things worse. 

Food producers, such as Kraft Heinz Company, have struggled with shortages, supply chain woes, labor issues, higher energy costs, and rising ag commodity prices, all of which support higher food inflation. 

BBC News spoke with the European boss of Kraft Heinz, Miguel Patricio, who warned that consumers must get used to higher food prices. He said, “we’re raising prices, where necessary, around the world.” 

The company, famous for tomato ketchup and baked beans, is dealing with a rapid surge in ag costs, such as cereals and oils, which has also pushed the global food price index to a decade high, according to UN data. 

Patricio outlined a broad range of factors contributing to rising food costs: 

“Specifically in the UK, with the lack of truck drivers. In [the] US logistic costs also increased substantially, and there’s a shortage of labor in certain areas of the economy.”

He said inflation is up “across the board,” and consumers will need to get used to paying higher prices.

Patricio did say that not all costs should be passed along to consumers:

“I think it’s up to us, and to the industry, and to the other companies to try to minimize these price increases.” 

But according to Kona Haque, head of research at the agricultural commodities firm ED&F Man, food producers like Kraft Heinz, Nestle, and PepsiCo “will most likely have to pass that cost on to consumers.”  

“Whether it’s corn, sugar, coffee, soybeans, palm oil, you name it, all of these basic food commodities have been rising.

“Poor harvests in Brazil, which is one of the world’s biggest agricultural exporters, drought in Russia, reduced planting in the US and stockpiling in China have combined with more expensive fertiliser, energy and shipping costs to push prices up,” Haque said.

The warning comes as an increasing amount of Brits are unable to find essential items as an energy crisis in the country has disrupted food supply chain networks. 

The Office for National Statistics said about 17% of people couldn’t find certain supermarket items, and as many as a quarter are having issues finding essential food items. 

A survey commissioned by The Grocer, a British magazine devoted to grocery sales, found 66% of people are concerned about shortages over the upcoming holidays.

The confluence of rising food prices and skyrocketing energy bills in the country comes as some fear the “winter of discontent” nears. 

Major corporations, such as Kraft Heinz, have no qualms about raising prices on the working poor. They just want their damn money, just like the mobsters in the classic movie “Goodfellas:” 

Authored by Jack Phillips via The Epoch Times,

A federal judge on Oct. 8 denied a request to block Michigan State University’s COVID-19 vaccine mandate on the basis of natural immunity.

An employee at the school, Jeanna Norris, filed a lawsuit against the mandate and asked a judge to intervene on the basis that she had already contracted COVID-19 and recovered. She presented two antibody tests showing her previous infection, and her doctors told her that she didn’t need to get the vaccine at this time.

Despite her natural immunity, Norris faces termination from the university for not complying with the school’s mandate that all students and staff get the shot unless they have a medical or religious exemption.

U.S. District Judge Paul Maloney, an appointee of former President George W. Bush, declined her lawsuit. The mandate, Maloney said, didn’t violate her fundamental rights and pointed to a 1905 Supreme Court ruling.

“This Court must apply the law from the Supreme Court: Jacobson essentially applied rational basis review and found that the vaccine mandate was rational in ‘protect[ing] the public health and public safety,’” Maloney said in his order.

“The Court cannot ignore this binding precedent.”

Some studies have shown that natural immunity afforded by a previous COVID-19 infection provides longer-lasting and stronger protection against the CCP (Chinese Communist Party) virus than the vaccines. An Israeli study published in August compared individuals who had a previous infection with those who received the Pfizer–BioNTech vaccine and said their “analysis demonstrated that natural immunity affords longer-lasting and stronger protection against infection, symptomatic disease, and hospitalization due to the Delta variant.”

“This is the largest real-world observational study comparing natural immunity, gained through previous SARS-CoV-2 infection, to vaccine-induced immunity, afforded by the BNT162b2 mRNA vaccine,” the study said.

Lawyers for Norris told The Washington Times that she’s considering legal alternatives.

“Ms. Norris courageously brought this lawsuit to vindicate the constitutional rights of individuals with naturally acquired immunity to COVID-19 who are subject to irrational vaccine mandates,” Jenin Younes, a lawyer who works for the New Civil Liberties Alliance, who represents Norris, told the paper.

“While we are disappointed by today’s order, we are committed to fighting for the rights of COVID-recovered Americans to decline a medically unnecessary vaccine without having to sacrifice their livelihoods.”

It comes just days after a federal judge in California ruled against a professor who argued that his previous infection should make him exempt from the University of California’s vaccine requirement.

Michigan State officials didn’t immediately respond to a request by The Epoch Times for comment.