Month: April 2022

Authored by Joseph Carson, former chief economist at AllianceBernstein,

Curve Inversion At Low Levels of Interest Rates Is Problematic For the Fed & Finance Not the Economy

The inversion of the two-year and ten-year yields creates more problems for the Fed and the financial markets than for the economy.

That’s because the yield curve inversion has occurred at a relatively low level of interest rates, far too low to slow final demand and squash inflation pressures.

History shows that yield curve inversions offer an accurate negative view of the economy’s future path only when accompanied by a level of interest rates that prove prohibitive. In the past, restrictive interest rates were when the federal funds rate and market rates equaled or exceeded the growth in nominal income.

Notably, that is not the case today. On the contrary, it’s the exact opposite. A record gap exists between Nominal GDP growth of 10% in the past year and the current fed funds of .5%. There is even a record spread between Nominal GDP and two and ten-year yields of around 2.5%.

Yield curve inversion at low-interest rate levels is a nightmare for the Fed.

Past experiences dealing with cyclical inflation pressures tell the Fed that it needs to increase the cost of credit to slow final demand before it can successfully dampen inflation pressures.

Take a look at the current trends in the housing market. Mortgage rates have moved above 4% for the first time since 2019. Yet, borrowing costs for a house purchase still are attractive given that house prices are rising close to 20% a year, people’s house prices expectations remain at double-digit levels for the foreseeable future, and wages for most workers are growing close to 7%. In other words, money is still too cheap to slow housing demand and house price inflation.

If the bond market is not responding to high reported inflation by marking up yield levels because it believes the inflation cycle will die or it trusts the Fed to bring it under control, that puts added pressure on the Fed to act more aggressively. And, as the Fed lifts official rates to dampen final demand growth and quell inflation, it will encounter market and political backlash of triggering more curve inversion.

A sustained inversion between fed funds, nominal GDP, and market rates may occur as policymakers attempt to bring inflation to their 2% target. After a decade (2010 to 2020) of a near-zero federal funds rate as policymakers tried to hit its 2% price target, investors will encounter of much different and higher cost of credit landscape.

One key takeaway is that high-multiple growth stocks which have outperformed value stocks for the past decade should see a ‘reversal of fortune” in the next decade.

The EU is expected to deliver another shock to its agricultural sector by capping Russian imports of potash, a crucial ingredient for growing food, according to Bloomberg, citing a Dow Jones report. 

The European Commission is expected to imminently unveil broad new sanctions on Russia. Much of the fertilizer is purchased from Belarus; the landlocked country in Eastern Europe could also be slapped with new sanctions for its involvement in Russia’s invasion of Ukraine.

Potash is a key ingredient for agricultural fertilizers. Europe produces only a negligible amount of the fertilizer, and to potentially cap imports from Russia and or Belarus (top producers) seems idiotic for Europe as the spring planting season is only beginning. 

Even if Europe were to rework its supply chains to import potash elsewhere, only a few other countries would export it. The impact of capping imports will send prices even higher and create fertilizer shortages for crops. This can dramatically affect crop harvests at the end of the growing season. 

A handful of North American fertilizer stocks jumped on the report, including CF Industries +3% and Intrepid Potash 2%. 

About 90% of potash is used as fertilizer in Europe; the rest is used to produce table salt, help slow the aging of wine, preserve canned food, and give chocolate its aroma. 

Global spot prices for potash show prices continue to accelerate to the upside. This may discourage farmers from purchasing or even spread less of it during the planting season. 

Even before the invasion of Ukraine, all fertilizer production in the West was declining (read: here) due to high natural gas prices. The shortage of fertilizers, not just potash, but also nitrogen and phosphates, on global markets, is inevitable. What Europe is doing to potentially cap potash imports from Russia and Belarus is idiotic and can spark a food crisis. 

European Union will place a cap on the import of potash.

Is Europe feeling ok? Does it really want a food crisis?

— zerohedge (@zerohedge) April 5, 2022

By Irina Slav of OilPrice.com

• Europe has been aggressively pursuing a clean energy future and the end of fossil fuels, but Russia’s invasion of Ukraine has highlighted the shortcomings of renewables.

• The soaring prices of key metals and the length of time it takes to implement renewable energy projects have meant Europe is turning to fossil fuels to solve its energy crisis.

• The EU is planning to replace Russian gas with LNG imports, coal, and even fuel oil, with a relatively small amount of the gas to be replaced by wind and solar. 

Germany is preparing for gas rationing. France’s power grid operator is asking consumers to use less electricity. In the UK, protests are breaking out over the latest electricity price hike that plunged millions of households into what one local think tank called fuel stress.

Europe has a serious energy problem…

The problem dates back years and points to a persistent complacency on the part of European governments that whatever happens, there will always be gas from Russia. After all, even during the Cold War Russia pumped billions of cubic meters of gas to European countries. Now, things are different, and it’s not just because of the war in Ukraine.

Europe has been enthusiastically trying to reduce its dependence on all fossil fuels, not just Russian gas, for a few years now. The EU recently boasted that in 2022 renewable energy sources accounted for 37.5 percent of gross electricity consumption, with wind and hydro constituting two-thirds of the total renewable energy output. Why, then, one wonders, would Germany have to brace for gas rationing and France ask its citizens to consume less electricity? Now that has a bit to do with the war in Ukraine. The war seems to have whipped EU governments – and Downing Street – into a frenzy seeking to distance themselves from Russia in every possible way, up to and including cutting Russian gas imports.

Russian President Vladimir Putin’s demand for payment in rubles for the gas Russia supplies seems to have only increased the desire of European governments to ditch the gas, and the three Baltic states already announced they’d stopped buying Russian gas from April 1. For now, they are using gas from storage. For later, there’s either LNG arriving at the Klaipeda terminal in Lithuania or an interconnector with Poland. Lithuania is calling on the rest of the EU to follow its example. Interestingly, the Baltics do not appear to have replaced their gas dependence with wind and solar dependence.

The same is true for the rest of the European Union, too. Earlier this year, Bloomberg reported that renewables across the EU were “crowding out” natural gas. The report cited a study by environmentalist think tank Ember, whose lead author said

“These are moments and paradigm shifts when governments and businesses start taking this much more seriously. The alternatives are available, they are cheaper, and they are likely to get even cheaper and more competitive. Renewables are now an opportunity, not a cost,” Charles Moore explained.

So why the struggle for gas now? Why not really step up the construction of new wind parks and solar farms, and show Putin what Europeans are made of? This is one of the most awkward questions of current times, its answer necessarily includes references to the price of copper, steel, polysilicon, and pretty much every metal and mineral commodity. In addition to that, building these facilities takes time, more time than, for instance, switching to LNG (if you have import terminals) or coal.

Indeed, in a recently released plan to reduce the consumption of Russian gas – and oil and coal, too – the European Commission bet heavily not on wind and solar but on more gas and coal.

According to a breakdown of the plan, published by German Die Welt, the EU will seek to replace 50 billion cubic meters of annual Russian gas consumption with LNG from other sources and another 10 billion cubic meters with pipeline gas from other sources. That’s a total of 60 billion cubic meters out of the annual consumption of 155 billion cubic meters of Russian gas. Another 20 billion cubic meters, according to the plan, could be replaced by using more coal, per Industry and Internal Market Commissioner Thierry Breton.

This is the same Europe that has been calling for and working towards the end of coal. It is the same Europe that planned to shut down all of its coal power plants before 2030 in order to meet the Paris Agreement emission reduction targets. This same Europe is also betting on replacing natural gas with fuel oil to replace another 10 billion cubic meters of Russian gas.

In total, the European Commission seems to be planning to replace more than half of its Russian gas consumption with other fossil fuels. In comparison, wind and solar power are expected to contribute some 22.5 billion cubic meters in replaced Russian gas, with 10 billion cubic meters from wind and 12.5 billion cubic meters from solar. That’s not a whole lot for a region that is set on becoming the greenest on the planet in short order.

It seems, then, that the reality of energy supply and consumption is reasserting itself as the EU finds itself in a gas pickle. If its plan involves so much more consumption of fossil fuels, then fossil fuels must be easier – and quicker – to come by and, just maybe, cheaper, than wind and solar. Otherwise, why pick them over renewables?

On Tuesday it was confirmed that Ukraine has received over a dozen Soviet-designed T-72M tanks from the Czech Republic amid a big push among Western powers to bolster Ukrainian defenses amid the continued Russian war, and as the Russians are beginning to cut off much of the east and south.

The Czech initiative marks the first time any external power has provided tanks to Kiev since the start of the Feb.24 invasion. Further, the effort to transfer tanks apparently involved the assistance of the Biden administration, as previously reported by Politico and others.

And The Wall Street Journal notes the efforts could ramp up, writing, “In a potentially even more important development, both the Czech Republic and neighboring Slovakia, which shares a border with Ukraine, are considering opening their military industrial installations to repair and refit damaged Ukrainian military equipment.”

If the program reaches that point, it would mean NATO countries getting more deeply and logistically involved right on Ukraine’s border, potentially coming closer to a direct clash with Russian forces – given the Kremlin early in the invasion warning it would target any external weapons shipments or systems.

The WSJ emphasizes this possibility by pointing out that “Russia’s campaign of missile strikes across Ukraine has targeted in particular the country’s defense industry, destroying facilities where such repairs and refitting could take place—something that makes the Czech and Slovak cooperation particularly valuable.”

Most Western countries have maintained reluctance to transfer weaponry as heavy or significant as tanks, on fears it would lead to open Russia-NATO war. As for the Czech tanks, “These weapons supplies were funded by the Czech government, and private Czech donors who have chipped in to a government-backed crowdsourced fundraising campaign to arm Ukraine,” WSJ notes further.

The program likely has Washington’s “quiet” involvement. Days ago Politico reported that “The U.S. government is reportedly set to transfer Soviet-made tanks to support Ukrainian defense efforts against continued Russian attacks in the country’s east.” 

The Biden administration has in the past days repeatedly declined to comment on the widespread reporting of US involvement… 

Blinken said yesterday that he “can’t get into” whether this report is accurate, and that the US will now be sending tanks into Ukraine. According to the Biden Administration, the public has no right to know the details of these daily escalations in an intensifying US proxy war pic.twitter.com/JAUnSPJlSb

— Michael Tracey (@mtracey) April 4, 2022

Further, “A government official in Washington told the New York Times on Friday that the decision of U.S. President Joe Biden’s administration had come as a response to requests by Ukrainian President Volodymyr Zelenskyy to support his country’s war effort with military equipment, including tanks.”

The risk of hitting floating mines in the major Black Sea shipping route is adding to perils for the few merchant ships still sailing in the region, and governments must ensure safe passage to keep supply chains running, maritime officials said according to Reuters.

The Black Sea – whose waters are shared by Bulgaria, Romania, Georgia and Turkey, as well as the warring Ukraine and Russia – is key for shipping grain, oil and oil products. Ukraine and Russia have accused each other of laying mines in the Black Sea, and in recent days, Turkish and Romanian military diving teams have defused stray mines around their waters.

The International Transport Workers’ Federation (ITF) union and the Joint Negotiating Group of maritime employers said they were trying to find ways to ensure that seafarers and their vessels don’t become “collateral damage in the continuing conflict in Ukraine”.

“We strongly urge governments to do all in their power to mitigate the threat and secure the safe passage for vessels trading near these conflict areas,” said David Heindel, chair of the ITF Seafarers’ Section.

“It is essential that the world’s seafarers can continue to perform their duties safely and keep global supply chains moving.”

Two seafarers have been killed and five merchant vessels hit by projectiles – which sank one of them – off Ukraine’s coast since the start of the conflict, shipping officials say.

“The information available points to a clear threat to shipping and seafarers from floating and drifting mines in areas of the Black Sea,” said a spokesperson with UN shipping agency the International Maritime Organization.

NATO’s Shipping Centre said in an updated advisory on April 4 that there were ongoing searches by national authorities for “mine-like objects” and that “the threat of additional drifting mines cannot be ruled out.”

Last month, the insurance industry’s Joint War Committee widened the high-risk area of waters around the Black Sea and Sea of Azov to include areas close to Romania and Georgia, which has contributed to underwriters raising premiums. read more

“If it transpires that there are significant numbers of live mines that exceed littoral state abilities to contain them, then JWC will move to reassess the listed areas,” the Committee said in a separate note on March 31.

Authored by Ramzy Baroud via Common Dreams,

Much has been said and written about media bias and double standards in the West’s response to the Russia-Ukraine war, when compared with other wars and military conflicts across the world, especially in the Middle East and the Global South. Less obvious is how such hypocrisy is a reflection of a much larger phenomenon which governs the West’s relationship to war and conflict zones.

On March 19, Iraq commemorated the 19th anniversary of the US invasion which killed, according to modest estimates, over a million Iraqis. The consequences of that war were equally devastating as it destabilized the entire Middle East region, leading to various civil and proxy wars. The Arab world is reeling under that horrific experience to this day.

Also, on March 19, the eleventh anniversary of the NATO war on Libya was commemorated and followed, five days later, by the 23rd anniversary of the NATO war on Yugoslavia. Like every NATO-led war since the inception of the alliance in 1949, these wars resulted in widespread devastation and tragic death tolls.

None of these wars, starting with the NATO intervention in the Korean Peninsula in 1950, have stabilized any of the warring regions. Iraq is still as vulnerable to terrorism and outside military interventions and, in many ways, remains an occupied country. Libya is divided among various warring camps, and a return to civil war remains a real possibility.

Yet, enthusiasm for war remains high, as if over seventy years of failed military interventions have not taught us any meaningful lessons. Daily, news headlines tell us that the US, the UK, Canada, Germany, Spain or some other western power have decided to ship a new kind of ‘lethal weapons‘ to Ukraine. Billions of dollars have already been allocated by Western countries to contribute to the war in Ukraine.

In contrast, very little has been done to offer platforms for diplomatic, non-violent solutions. A handful of countries in the Middle East, Africa and Asia have offered mediation or insisted on a diplomatic solution to the war, arguing, as China’s foreign ministry reiterated on March 18, that “all sides need to jointly support Russia and Ukraine in having dialogue and negotiation that will produce results and lead to peace.”

Though the violation of the sovereignty of any country is illegal under international law, and is a stark violation of the United Nations Charter, this does not mean that the only solution to violence is counter-violence. This cannot be truer in the case of Russia and Ukraine, as a state of civil war has existed in Eastern Ukraine for eight years, harvesting thousands of lives and depriving whole communities from any sense of peace or security. NATO’s weapons cannot possibly address the root causes of this communal struggle. On the contrary, they can only fuel it further.

If more weapons were the answer, the conflict would have been resolved years ago. According to the BBC, the US has already allocated $2.7bn to Ukraine over the last eight years, long before the current war. This massive arsenal included “anti-tank and anti-armor weapons … US-made sniper (rifles), ammunition and accessories.”

The speed with which additional military aid has poured into Ukraine following the Russian military operations on February 24 is unprecedented in modern history. This raises not only political or legal questions, but moral questions as well – the eagerness to fund war and the lack of enthusiasm to help countries rebuild. 

After 21 years of US war and invasion of Afghanistan, resulting in a humanitarian and refugee crisis, Kabul is now largely left on its own. Last September, the UN refugee agency warned that “a major humanitarian crisis is looming in Afghanistan”, yet nothing has been done to address this ‘looming’ crisis, which has greatly worsened since then. Afghani refugees are rarely welcomed in Europe. The same is true for refugees coming from Iraq, Syria, Libya, Mali and other conflicts that directly or indirectly involved NATO. This hypocrisy is accentuated when we consider international initiatives that aim to support war refugees, or rebuild the economies of war-torn nations.

Compare the lack of enthusiasm in supporting war-torn nations with the West’s unparalleled euphoria in providing weapons to Ukraine. Sadly, it will not be long before the millions of Ukrainian refugees who have left their country in recent weeks become a burden on Europe, thus subjected to the same kind of mainstream criticism and far-right attacks.

What are the #US and the west’s final objectives to try to corner #Russia so it becomes an existential threat, a superpower with 1000s of nuclear weapons?

Do people realise that their thirst for blood and the successful propaganda manipulation campaign is a call for all-out war?

— Elijah J. Magnier 🇪🇺 (@ejmalrai) April 5, 2022

While it is true that the West’s attitude towards Ukraine is different from its attitude towards victims of western interventions, one has to be careful before supposing that the ‘privileged’ Ukrainains will ultimately be better off than the victims of war throughout the Middle East. As the war drags on, Ukraine will continue to suffer, either the direct impact of the war or the collective trauma that will surely follow. The amassing of NATO weapons in Ukraine, as was the case of Libya, will likely backfire. In Libya, NATO’s weapons fueled the country’s decade long civil war.

Ukraine needs peace and security, not perpetual war that is designed to serve the strategic interests of certain countries or military alliances. Though military invasions must be wholly rejected, whether in Iraq or Ukraine, turning Ukraine into another convenient zone of perpetual geopolitical struggle between NATO and Russia is not the answer.