Month: June 2022

Submitted by Gary Marshall, first published in Real Clear Markets. Gary Marshall is a Public Finance researcher living in Winnipeg, Manitoba, Canada. He can be reached by email at grimmer9 at gmail.com or through his website at www.economart.ca.

Many are resigned to the belief that salvation from the perpetual destruction of wealth, property and life by those directing ruinous government is a myth. But, an end of government tyranny is within our grasp, and a little exercise in thought and reason should reveal the solution to all our economic ills and slay this monster forever.

I have detailed two facts in Public Finance that most in the field ignore perpetually and inexplicably. The first: that government is in deficit to the whole of its expenditures, that it has no money or funds with which to pay its bills, that taxpayers, rather resident citizens, and specifically their property, assets, and incomes fund government and all of it. 

The second: that it makes no difference whether government taxes or borrows from the collective of the assets, property and incomes that comprise the source of government funds, that a superficial equivalence exists between Taxation and Borrowing in raising funds for public expenditures. 

I use the phrase ‘superficial equivalence’ because Taxation and Borrowing are not the same. Taxation bears immense costs in government waste and in deterrence that disappear with Borrowing. 

We are all familiar with government waste. Though government does supply a small number valued public goods, the majority of funds that pass into its control are squandered on politically useful, but dubious, harmful, and barren undertakings. The politicians and their employ eagerly institute regulations and laws for their own benefit, favored voting blocks, and the special interests that dominate them at great cost to us all.

But the greater and generally unaccounted cost inherent in Taxation is its weighty and poignant role as deterrent. The same instrument, essentially a fine or punishment, used to penalize speeders and criminals is used to raise funds for public expenditures. As it is with fines and the lawless, so it is with tax levies and the productive. The ubiquitous scourge of Taxation persecutes and chases away enterprising and hard-working spirits, and we are all poorer for it.

With the institution of full Public Borrowing, with the financial inducement of interest and eventual return of all principle these costs shall disappear. With deterrence erased the productive class shall thrive through full enjoyment of the rewards of their efforts, not penalized with the loss of large fractions of income. Worthy economic activities squelched, halted, curbed, delayed or concealed will of a sudden re-emerge and resume. Firms and people having sought tax refuge elsewhere will have every reason to return.

With a capital charge imposed, government must borrow funds instead of eagerly and obnoxiously confiscating them by daily entering the financial markets. The people, former taxpaying slaves transformed into Public Bankers, shall become the arbiters of which public expenditures are worthy and which are not. When private bankers fail to adhere to prudent lending practices and endanger the financial health of the institution, depositors withdraw and move funds elsewhere. Government, perpetual dependence imposed, must embrace sound financial measures, must embrace cost and benefit analysis in all undertakings. If it should falter, government shall find itself starved of funds until the perpetrators of waste or corruption are replaced. 

Suppose we have an economy producing 100 units per year with 40 units allotted to government and the remaining 60 units left to the rest of the people. With the institution of full Public Borrowing, one would expect government expenditure to decline sharply.  I estimate that about 75% of public expenditures go to waste. If correct, the size of the government’s allotment should reduce from 40 units to 10. 

I estimate the deterrent effect upon the economy at approximately 35% in an economy with a 40% tax rate. If correct, the economy should grow steeply in size, from 100 units to 135.

An economy of size 135 less 10 units for government would deliver 125 units to the people, beyond a doubling of the former allotment of 60. This explosion in wealth and prosperity would have no precedent in history. The same outcome repeats the following year and into perpetuity, the initial explosion in wealth building upon itself, compounding such that accruing assets always outpace accruing liabilities by at least 4 to 1.  

There may be some dispute about the size of government waste and the effect of deterrence and, thus, the size of the incomparable augmentation of wealth. But the direction and result is clear. 

Some have argued that none would lend to a government bereaved of the means of Taxation. By simple calculation, the increase in assets, 65 units, far surpasses the incurred liability of 10 units. How is a community so enriched, its Public Credit so enhanced by the abolition of all Taxation unable to provide security to or repay its lenders? It would be as if lenders turned away the wealthiest corporation in the world. 

A learned community would never persist with taxing resident citizens when enlightened as to its punishing costs. With the stagnant, medieval fields of economics once again rendered fertile, a declaration uttered by the authorities of a small town, city, province, state, region or nation would set the many peoples of our world, united in purpose, on a blessed and enriching path. Abolish all Taxation and institute full Public Borrowing, and I guarantee the meek, suffering poverty and tyranny, shall inherit the earth as prophesied by a great man long ago. 

For the second time in the past decade, the Fed will try (and fail) to shrink its balance sheet to some “reasonable” size, a process known as Quantitative Tightening 2. What this means in theory is that, as shown below, the Fed’s balance sheet will shrink by $95BN or so every month for the foreseeable futures as existing TSYs ($60BN/month) and MBS ($35BN/month) matures.

What it means in practice, is that we will get a brief period of BS shrinkage for a few months before the “next big crisis” emerges and the Fed blows up the balance sheet again.

We know this will happen with 100% certainty and without a trace of doubt, if for no other reason than the green agenda of the anti-climate change crusaders, the one event that western politicians have been salivating over for decades, will cost $150 trillion over the next 50 years, of which roughly $2 trillion will come in the form of global QE every year (as we explained in “Here is The Hidden $150 Trillion Agenda Behind The “Crusade” Against Climate Change“.)

But while everyone knows what happens in the medium-to-long term, traders are more focused on how to trade the next few weeks.

For one answer we go to the latest note from JPMorgan flow trader Andrew Tyler who writes that “the question the market needs answered is whether growth is stabilizing after a move lower or if there is more decay to come…. I think it is premature to call the bottom in stocks, which appears to be a consensus view, given QT is about to launch and we are going to get another 100bps in rate hikes over the next 8 weeks.” We wonder if his permabullish “buy the dip, any dip” co-worker Marco Kolanovic has read this… we doubt it.

Tyler then pivots to JPM’s preview of QT2, as follows:

• QT2 kicks off tomorrow
• Today, on the Rates Sales podcast, they hosted JPM Economist Peter McCrory, who discuss the impact of QT on markets. Podcast is here.
• The TL; DR version is that QT2 could act as a 25bps rate hike in 2022.
• Mike Feroli had published a note, A Roadmap for QT2 (full note available to pro subscribers). The note contains information on the mechanics, impact on financial conditions, the long pathway to normalization, and some thoughts on bank deposits.
• As noted above, by the end of 2023, the Fed is set to shed over $1T in longer-duration assets (in theory), with JPM speculating that “the reduction in bank reserves should have little effect on lending or deposit growth” (it’s very wrong).

And here it gets really funny: JPM calculates that “to get back to a “normal” size balance sheet, QT2 may last until 2026 or 2027.” Uh, we have some bad news: by 2027, the US will have been in at least one depression, and we will be lucky if the Fed’s balance sheet is only twice as large as it is now (and the price of cryptos will be about 10-100x higher than it is now). In any case, readers can track the Fed’s activities in real-time in Treasuries (here) and MBS (here).

QT2 aside, there is still the question of the Fed’s rate hikes, at least until the Fed pulls a 180 some time around the August Jackson Hole symposium and the Fed “pauses” in September. According to JPM, here’s what to look for: the market continues to price according to Fed guidance (50bps hikes in June and July; 50% of maximum QT pace). Currently, the market has a ~50% probability of a 25bps hike in Sept and 50% probability of a 50bps hike. The market then prices in 25bps in both November and December. This week, keep an eye on whether Waller’s narrative is echoed by other speakers; or, if the Bostic mention of a September pause remains. If we see the Fed pivot and/or turn dovish, then this would benefit stocks.

* * *

Finally, going back to square one, the question is how does all of this impact the market in the coming days and weeks? According to Andrew Tyler, “the question is one of whether the US bounce is a bear market rally or the continuation of the longer-term bull trend. It is tough to say that we have seen the bottom in stocks given that we have seen a bottom when we still have potential for the Fed to increase its hawkish behavior due to the uncertainty surrounding the next few inflation prints. That said, if an investor wants to short this market, there are challenges given the relatively light positioning among hedge funds and the potential for vol-targeting funds to re-gross and for CTAs to reverse from short to long. Tactically, I think you ride the momentum higher which should be led by Tech and Energy; but, Energy is an idiosyncratic long play given the supply/demand dynamic and supercycle hypothesis.”

By Mark Solomon of FreightWaves

This isn’t a happy Memorial Day weekend for Florida truck driver Michael Calvo.

The Cape Coral driver admitted to having smoked meth before he crashed into the back of a Publix shopping center Thursday afternoon in Haines City near Lakeland, according to reports that cited the Haines City Police Department.

According to police, Calvo, 51, was making a delivery in the back of the shopping center when his truck tore an awning off the building and hit an unoccupied pickup truck, pushing it for about 200 feet. Both vehicles were totaled, reports said.

After the wreck, an officer reportedly approached Calvo and asked if he needed medical assistance. Calvo told him that he thought he was being “pranked” by a television show and resisted exiting the tractor, reports said, citing police information. 

After a few minutes, the officer was able to remove Calvo from the truck and asked him what caused his truck to crash, whether he had fallen asleep, been drinking or was experiencing a medical emergency, according to published reports.

“I was smoking my meth pipe,” Calvo said, according to police information cited in the reports.

Calvo was arrested and faces charges of possession of methamphetamine, disorderly conduct, resisting arrest without violence and possession of narcotics paraphernalia, according to reports.

It’s been a brutal year for some on Wall Street. There’s been no corner of the market to hide in the first five months of the year, and stocks, bonds, and cryptocurrency markets have been clubbed like a baby seal. Poor performance in markets comes as the rental market in the Hamptons, also known as a playground for Wall Streeters during the summer months, faces an abrupt chill ahead of summer. 

Jonathan Miller, CEO of real estate firm Miller Samuel, reports the median rental price in the first quarter slumped 26%. Brokers are reducing prices by as much as 39% to attract renters before the summer begins. 

“There is a tremendous amount of inventory and people are not renting it. And it’s across all segments, from the very low to the very top of the market,” Enzo Morabito of Douglas Elliman told CNBC. 

After two years of booming markets (2020-21) and asset prices soaring to the moon as the Federal Reserve expanded its balance sheet and lifted all tides for Wall Streeters, those days are long gone as the monetary wonks in Eccles reversed policy to remove liquidity from markets, sending asset prices spiraling lower this year. This means that Wall Streeters are feeling the pain, and perhaps some have pulled back from splurging their bonuses on luxurious beachfront rental properties on eastern Long Island. 

Morabito said one beachfront mansion was asking $70,000 a month. Just weeks before summer, there are still no takers. He said one potential renter offered just $45,000. 

“We were hoping the renter would split the difference, but it’s a different market right now,” he said.

“There are a lot of questions in the air, about the economy, both locally and nationally,” said Harald Grant with Sotheby’s International Realty. “It all affects the market.”

Median rents for May are 46% higher than the same month in 2019. Given the plunge in stocks and crypto prices, the dwindling demand of Wall Streeters, balking at the high rental prices, is an ominous sign of the cloudy economic outlook. 

Samuel and Douglas Elliman said many renters who spent their summers in the Hamptons bought homes during the pandemic and have become permanent residents or second homes.

“The buyers removed themselves from the rental market,” Morabito said. “Now, all of the sudden the people who bought want to rent it and the renters aren’t there. So you have this huge surplus.”

The days of renting a beachfront mansion for $1.65 million per month appear to be over. Check out the massive reduction in rent for 155 Surfside Drive.

The cooling of the Hamptons rental market is a sign of the slowdown in the economy as recession risks flourish. 

Authored by Jessica Corbett via Common Dreams,

Following reports that US President Joe Biden may visit Saudi Arabia during his trip to the Middle East next month, a human rights group on Monday highlighted global calls to release Abdullah al-Howaiti, a young man twice sentenced to death by the country’s courts.

Reprieve pointed out in a statement that United Nations experts have urged the Saudi government to annul his sentence “because he did not receive a fair trial, as credible reports that he was tortured into making a false confession when he was 14 years old were not investigated.” Sharing the statement on Twitter, the group noted that the U.S. leader is considering a trip to Saudi Arabia and encouraged Biden to review what a trio of U.N. experts has recently said in response to the case.

Arrested and tortured at 14
Sentenced to death at 17
At risk of “arbitrary execution”@JoeBiden @POTUS, before you visit #SaudiArabia 🇸🇦 read what UN legal experts say about Abdullah al Howaiti 👇🏼 https://t.co/Rx71pdYfnE

— Reprieve US (@ReprieveUS) May 30, 2022

“From the moment police raided the Howaiti family home and dragged out 14-year-old Abdullah, the Saudi justice system has been on autopilot, punishing him for a crime he cannot have committed,” said Jeed Basyouni, who leads Reprieve’s work on the death penalty across the Middle East and North Africa.

“Every court knew how young he was,” she continued. “Every court heard he had an alibi. Every court was told he was tortured. But they sent him to death row and kept him in a cell, when he should have been playing football with his friends.”

“Abdullah will never get back the teenage years he spent fearing for his life, but it’s not too late for the Saudi courts to do the right thing,” Basyouni added. “The world is watching.”

Human Rights Watch (HRW) explained last year that “while Saudi authorities announced an end to the death penalty for children for certain crimes in 2018 and applied this retroactively to previous cases in 2020, the death penalty remains a possible punishment for the type of crime Abdullah al-Howaiti is accused of committing.” He is accused of murdering a police officer during a robbery of a jewelry store in Duba.

“Al-Howaiti’s court proceedings flouted almost every internationally recognizable fair trial guarantee, and yet a Saudi court still sentenced him to die for a crime allegedly committed when he was 14,” said Michael Page, HRW’s deputy Middle East director, at the time. “In sentencing a child to die while ignoring torture allegations, the Saudi court made a mockery of the country’s alleged ‘reforms.'”

Referencing al-Howaiti’s plea of not guilty and his written account from January 22, 2019, HRW outlined:

Al-Howaiti said in the letter and to the court that interrogators subjected him to torture and ill treatment to force him to confess. He said they made him stand for hours at a time, beat him and slapped him on the face, flogged him with an electric cable on the soles of his feet and various parts of his body until he lost consciousness, forced him to hold his brother’s legs while he was being beaten, and lied that his mother and sisters were also in detention and would only be released once he confessed.

Al-Howaiti eventually signed the confession prepared for him, after which authorities transferred him to a social observation home in Tabuk. He told another investigator there that his confession had been forcibly extracted. He said he was then transferred to a prison cell, where the criminal investigations interrogators from Tabuk arrived after midnight, blindfolded him, and transferred him back to the criminal investigation department.

There, he said, an interrogator threatened to pull out his nails, suspend him from one hand, and torture him in ways he “could not begin to imagine,” prompting al-Howaiti to promise him he would not tell anyone else about his ill treatment.

In March, the U.N. experts—Nils Melzer, special rapporteur on torture and other cruel, inhuman, or degrading treatment or punishment; Miriam Estrada-Castillo, vice-chair of the Working Group on Arbitrary Detention; and Morris Tidball-Binz, special rapporteur on extrajudicial, summary, or arbitrary executions—sent their letter to Saudi leadership that Reprieve elevated.

After outlining the allegation about al-Howaiti’s treatment since his arrest in 2017, the experts’ letter states that “while we do not wish to prejudge the accuracy of the information received, we are deeply concerned by the continuing imposition and execution of the death penalty against persons who were below 18 years of age at the time of committing the crime, which amounts to a serious violation of international human rights law.”

The top 5 executioners of 2021 are…

🇨🇳 China – 1000+
🇮🇷 Iran – 314+
🇪🇬 Egypt – 83+
🇸🇦 Saudi Arabia – 65
🇸🇾 Syria – 24+

— Amnesty International (@amnesty) May 28, 2022

Along with reminding the kingdom of its obligations under international law, the letter calls on the government not only “to annul the death sentence imposed on Mr. al-Howaiti,” but also “to promptly and thoroughly investigate the allegations of torture, and to ensure that he is re-tried in conformity with international norms and standards.”

The letter further calls on the Saudi government “to adopt without delay the necessary legislative measures to abolish the imposition of the death penalty for children for all crimes” as well as “to consider establishing an official moratorium on all executions as a first step towards fully abolishing the death penalty in the country.”

Meanwhile, in the United States, though Biden’s administration suspended federal executions following what critics called a “killing spree” under his predecessor, death row inmates are still being executed at the state level—conditions that fall short of the president’s campaign promise to “work to pass legislation to eliminate the death penalty at the federal level, and incentivize states to follow the federal government’s example.”

Of all the commodities in the midst of a raging bull market, Goldman Sachs thinks the run in the battery metals is over and done with. The firm said this week that cobalt, lithium and nickel prices will drop over the next two years, according to a recap by Bloomberg. 

Goldman analysts Nicholas Snowdon and Aditi Rai wrote in a note over the weekend: “Investors are fully aware that battery metals will play a crucial role in the 21st century global economy. Yet despite this exponential demand profile, we see the battery metals bull market as over for now.”

While future demand looks strong, “investor exuberance has led to an oversupply”, the report says. 

The analysts said there has been “a surge in investor capital into supply investment tied to the long term EV demand story, essentially trading a spot driven commodity as a forward-looking equity. That fundamental mispricing has in turn generated an outsized supply response well ahead of the demand trend.”

Goldman is predicting a “sharp correction” in the prices of lithium, the report also says. The firm predicts lithium will average under $54,000 a ton this year and that Cobalt will drop to $59,500 a ton. 

The bank concluded: “This phase of oversupply will ultimately sow the seeds of the battery materials super cycle over the second half of this decade. Then the demand surge will more sustainably overcome current supply growth.”

In April we noted that Chinese EV manufacturers were grappling with the continued rising cost of all input materials. Remember, we just wrote days prior to that piece that Japanese automakers were also grappling with the skyrocketing cost of raw materials and a shortage of semiconductors. 

Even as some parts have become unavailable, raw materials for other parts have skyrocketed in price. For example, palladium, nickel and aluminum have all surged to record highs this month. The metals are used in automobile catalytic converters, batteries and other car parts.

The price hikes are likely due to the fact that 40% of palladium production comes from Russia, Nikkei noted last week. This has forced auto manufacturers to abandon buying from Russia and seek out alternative sources. 

Back in February we broke down the cost of an EV battery here.