Month: September 2022

So much for the “coup in China” and “Xi is missing” rumor mill of the past week, which at one point saw Chinese President Xi Jinping’s name trending high on Twitter…

“Chinese President Xi Jinping visited an exhibition in Beijing on Tuesday, according to state television, in his first public appearance since returning to China from an official trip to Central Asia in mid-September – dispelling unverified rumours that he was under house arrest.”

He had arrived in Samarkand, Uzbekistan on September 15 – and attended the days-long Shanghai Cooperation Organization (SCO) summit – where he met with Russian President Vladimir Putin, among others.

Importantly, it had been his first foreign trip in two years. Xi had not traveled outside of the country since before the Covid-19 pandemic began.

But upon returning the Beijing, he hadn’t been seen in the public eye since that mid-September trip, fueling speculation and rumors in the West and on social media. Some pundits floated the idea that he had been under “house arrest” amid political instability and a possible coup attempt.

According to a Tuesday Bloomberg description of the Chinese leader’s “re-emergence” in the public eye, which has effectively ended the bizarre rumors: 

Xi, wearing a mask, visited an exhibition in Beijing on Tuesday about China’s achievements over the past decade, state-run news outlet Xinhua reported. The Chinese leader was accompanied by the other six members of the Politburo Standing Committee, a sign of unity after rumors circulated on Twitter about a challenge to his power.

He’ll likely cinch his third five-year term as leader at the major Chinese Communist party’s (CCP) meeting on October 16. The CCP meeting comes only once every half-decade.

Taking notes of all the big accounts spreading rumors of coup in China, put on a list pic.twitter.com/BHVFCPD7pU

— Carl Zha (@CarlZha) September 24, 2022

What had added to prior rumors was the fact that the 69-year old Xi recently undertook a purge of key senior security officials. This included arrests on corruption charges of the former police chiefs of Shanghai, Chongqing and Shanxi.

More importantly, former vice minister of public security Sun Lijun and former justice minister Fu Zhenghua were also sacked and faced severe charges.

Zhenghua was given a suspended death sentence following a bribery conviction. The sentence comes amidst a strict anti-corruption crusade by Chinese Premier Xi Jinping.https://t.co/nwLxknJNVn

— nasim raza (@razanasim3) September 22, 2022

Concerning Sun Lijun, state media made this shocking announcement a week ago: “Sun Lijun, former Chinese vice minister of public security, was sentenced to death with a two-year reprieve for taking more than 646 million yuan of bribes, manipulating the stock market, and illegally possessing firearms, according to the Intermediate People’s Court of Changchun in Northeast China’s Jilin Province on Friday.” The suspended death sentence means he’ll spend life in prison.

Authored by Mohamed El-Erian via Project Syndicate,

After previously eschewing interest-rate hikes, the US Federal Reserve has been tightening monetary policy at an unprecedented rate. But the current market turmoil and the central bank’s own revised projections show that a great deal of damage has already been done.

Financial markets’ reaction to the US Federal Reserve’s latest policy move was reminiscent more of developing countries than of the world’s most powerful economy. Given that the Fed is the world’s most systemically important central bank, this is more than just a curiosity. It has implications for America’s economic well-being – and that of the rest of the world.

On September 21, the Fed reinforced its two-month-old “HFL” approach of pushing interest rates higher, faster, and for a longer duration than previously anticipated. It implemented an unprecedented third successive 75-basis-point rate increase and sent a strong signal that hikes totaling another 125 basis points are on tap for the year’s last two policy meetings. It also signaled that the possibility of a “pivot” to lower rates is unlikely before 2023.

The Fed’s revision of its economic projections painted a darkening picture for the United States and most other economies. It is forecasting not only lower growth but also, and more surprisingly, higher inflation – something that it has done repeatedly in recent quarters.

The Fed’s latest moves are consistent with a central bank that is continuously scrambling to catch up with realities on the ground. It is the kind of thing that one typically finds in developing countries with weak institutions, not in the issuer of the world’s reserve currency and the custodian of the world’s most sophisticated financial markets – where many other countries and companies entrust their savings.

The comparison is even more troubling when one considers what the recent market turmoil implies.

For starters, markets see a central bank that, as hard as it tries, is still struggling to catch up with both market expectations and what is needed to contain cost-of-living pressures. Having been consistently pushed by markets to do more – and for good reason, given that core inflation is running at 6.3% and still rising – the Fed’s latest policy actions duly caused another sharp reduction in prices for both stocks and bonds.

Second, markets see a central bank that expects to cause more collateral damage as it tries to meet its inflation target. Fed Chair Jerome Powell said as much this month when he continued to distance himself from the possibility of a soft or “softish” landing, as he once put it. Powell has now repeatedly signaled more “pain” ahead, implying an uncomfortably high probability of recession. The market appears to agree with this outlook: the yield curve is inverted, with the yield on ten-year Treasury bonds having fallen to around 40 bps below that on two-year bonds.

Ominously, these market signals indicate that the US economy (and therefore the global economy) lacks both a monetary-policy anchor and a sufficiently credible central bank. As a result, the US needs more monetary-policy tightening than it would have if the Fed had reacted in a timely and credible fashion. That will indeed produce “pain,” in the form of foregone growth (actual and potential) and higher unemployment, which will hit the most vulnerable segments of society the hardest.

For the global economy, this will translate into even greater growth fragility at a time when Europe is heading into recession, China’s performance is increasingly lagging its economic potential, and little fires are burning across the developing world. Despite this increased fragility, many other central banks will have no choice but to follow the Fed in raising interest rates beyond what would have otherwise been needed, in order to avoid “importing” more damaging inflation and unsettling financial instability.

Now that the Fed finds itself in such an uncomfortable situation – one mostly of its own making – it may be inclined to eschew further rate hikes, particularly given the growing criticism that it is tipping the economy into recession, destroying wealth, and fueling instability. Yet such a course of action would risk repeating the monetary-policy mistake of the 1970s, saddling America and the world with an even longer period of stagflationary trends.

Instead, the Fed should be doing much more to contain the adverse spillovers of its policy mistake, including through innovative thinking about its monetary-policy framework and more proactive collaboration with other policymaking entities (domestic and abroad).

Sadly, it is too late to avoid all the detrimental economic and social consequences of the damage the Fed has caused to its own credibility. The central bank was notably late with its response to inflation. But it is not too late to contain the harm. Doing so is crucial.

White House Press Secretary Karine Jean-Pierre said on Tuesday that the United States is ready to welcome Russians currently fleeing Putin’s “unpopular” war and can grant them asylum.

“We believe that regardless of their nationality, they may apply for asylum in the United States and have their claim educated on a case by case basis,” she said. This as there are continued reports of “total chaos” at some key border crossings leaving Russia, particularly at the Georgian border. 

“In the four days since the announcement of Russia’s first mobilization since World War II, about 260,000 men of military age have left the country, independent media outlet Novaya Gazeta Europe reported Sunday, citing a Kremlin source,” writes The Moscow Times.

While Putin’s ‘partial mobilization’ order of last week impacts reservists with prior military experience, who will be sent to Ukraine (the defense ministry cited 300,000 reservists would be called up), there have been widespread reports of young Russian men receiving draft notices.

The Moscow Times continues of border traffic jams, “With tightened entry requirements for European Union countries bordering Russia, most of those leaving the country have been heading for the South Caucasus nations of Georgia and Armenia as well as Belarus, Turkey and Central Asian countries.”

Reports from the region late in the day Tuesday suggest lines of cars over 10 miles long at the Russia-Georgia border.

NEW: Russians fleeing Vladimir Putin’s mobilization have created a traffic jam more than 10 miles long to the Georgian border, per satellite photos taken today.

The Russian news agency TASS said more than 5,000 cars were waiting at the border on Tuesday.

📸:@Maxar pic.twitter.com/gOLhF6iZxM

— Jack Detsch (@JackDetsch) September 27, 2022

Some neighboring countries, most especially Baltic states, but also recently Finland, have moved to shutter their borders to all Russian visa holders as a measure to prevent an influx of Russian military age men departing the country.

Mongolia has also witnessed an uptick of border traffic. “The Russians are fleeing to Georgia, Mongolia, Kazakhstan and other countries because they don’t require visas,” reports NBC. “But getting to the border has been an ordeal for many.”

After a series of catastrophic coupon auctions, moments ago the US Treasury sold $32BN in 7 paper in what was one of the strongest sales in weeks. And all it took was a pivot by the Bank of England, one which most traders now expect will sooner or later come to the US.

Stopping at a high yield of 3.898%, the auction was the first one in weeks to stop through the When Issued 3.903% by 0.5bps; it was the 3rd consecutive stop through for the 7 Year tenor since a modest tail in June; the auction was also one giant step higher than the 3.130% yield on the August 7Y auction, and the highest yield since the GFC.

The bid to cover dipped modestly from last month’s 2.655 to 2.569, if just above the six-auction average of 2.547.

The internals were on the weaker side, with Indirects taking down 62.5%, down from 75.7% last mointh and below the 68.7% recent average. And with Directs taking down a solid 24.7% – one of the highest on record – Dealers were left holding 12.85% of the auction.

Overall, this was a very solid auction and understandably it has sent yields plunging both in the US – where the 10Y just dropped to a session low of 3.733% after rising above 4.00% just hours earlier…

… and globally, with 30Y gilts up (in price) a remarkable 25% today!

Via SchiffGold.com,

Last week the Fed raised interest rates another 75 basis points and continued to insist it was fully committed to doing whatever it takes to bring inflation back down to 2%. In his podcast, Peter argued that Powell still thinks he can pull off the impossible.

He can’t.

Most people expected a 75 basis point hike and that’s exactly what the Fed delivered. Peter said the Fed has gotten into the habit of giving the markets what they expect because he doesn’t want to upset them.

Even though Powell claims he doesn’t care about the markets, he absolutely does care. So, he only wants to raise by the amount that he thinks the markets are OK with.”

If the expectation is already priced in, you don’t risk much damage by meeting expectations. But Peter said the problem for the markets is that rates are going up.

It doesn’t even matter at this point. What matters more is that they’re not zero anymore, they’re going much higher, and you have a market that is priced basically for free money — for zero percent interest rates.”

Not to mention quantitative easing.

So, the markets have lost the two primary crutches that they were relying on for support. … Not only are those supports gone, but now we have the opposite. We have quantitative tightening, and we have money that’s getting a lot more expensive.”

During the post-meeting Q&A, Powell said he was committed to bringing about positive real interest rates. The projection is for nominal rates to be at 4.4% next year. That would mean another 125 basis points of tightening between now and the end of the year. Powell said he expected 4.6% to be the peak rate for the cycle and that would yield a positive real rate. But currently, CPI is running at 8.3%. That means even with the most recent hike, real rates remain deeply negative at -5%.

That raises a question.

If Powell is finally accepting the fact that to really push down inflation we need to have positive real interest rates, why not immediately move there right now? Why drag your feet? Why wait? In fact, why does the Fed even have to wait for a meeting to raise interest rates? If the Fed recognizes that interest rates are too low, why can’t it just raise them the moment it recognizes it?”

During the press conference, Powell said we need to act quickly to get inflation under control now because it will be even more painful later. He admitted that even now, this is going to cause some pain. But it will be worse later.

Yes! That’s true. So, where was Powell a few years ago when he said we were going to err on the side of allowing the inflation genie to get out of the bottle? If Powell knows how painful it is to deal with an inflation problem, why did he let it get out of control in the first place? Why didn’t he preemptively act when he had the opportunity?”

It’s pretty clear that back then, Powell was just delaying.

He didn’t care about the delay or how much more pain we’d ultimately have to endure. Because at that point, inflation wasn’t a big problem. The reason he wants to do something about it now is that the problem is so big, it can no longer be ignored.”

Even though Powell has conceded the inflation fight will cause some pain. He’s still holding out hope that the Fed can orchestrate a “soft landing.” Peter said, “That ship has sailed,” noting that the Atlanta Fed has now dropped the Q3 GDP projection to 0.3%.

And yet Powell called the economy “strong and robust.” That means the economy can withstand these rate hikes. The markets seem to believe this. But Peter said the markets are wrong twice.

They’re wrong about the economy and they’re wrong about the inflation. The economy is going to be much weaker than investors think. But at the same time, inflation is going to be much stronger than investors think.”

Meanwhile, these rate hikes are going to cause big problems for both state governments and the federal government as they try to finance their perpetual borrowing and spending. This will add trillions to the national debt.

This is a massive fiscal timebomb.”

The Federal Reserve kept rates at zero and ran QE in order to put off the pain. It has deliberately created inflation since 2008 to postpone the pain. The Fed didn’t want to allow a bad recession to get worse. It did it in ’08 and then doubled down with the COVID lockdowns.

The Fed wanted to prop up stock prices. The Fed wanted to prop up real estate prices. So, in order to do that, we created inflation. We put interest rates at zero. We did quantitative easing. Well, now we’ve got a huge inflation problem. And now the Fed has to fight a monster that it created. But the Fed can’t fight and create inflation at the same time. So, if the only reason the economy was propped up, the only reason the markets were propped up, was because of inflation, and now we’re going to remove the inflation prop, everything built on top of that foundation has to collapse. And that’s exactly what we’re seeing.”

So far, we’re seeing it in slow motion. But Peter said it won’t stay in slow motion for long.

The bottom line is the Fed can’t do what it claims it’s going to do. The Fed has kicked the inflation can down the road for 12 years. Now all of a sudden, it has found religion.

I don’t think Powell has found religion. I think when push comes to shove, he’s going to go back to the same old sin of inflation. … Powell still believes he can pull off the impossible. He still thinks we can bring inflation back down to 2%, where at most we have a bumpy landing, that unemployment tweaks up a bit and that we have a period of below-trend growth. … I think when Powell is really confronted with how ugly this is going to be, then we’re finally going to get that pivot. But this is a giant game of chicken, and I think Powell is going to keep up this pretense as long as he possibly can.”

Due to large underwater “explosions” that damaged the Nord Stream pipeline system, European energy infrastructure faces increased security risks. 

US Secretary of Energy Jennifer Granholm was quoted by Bloomberg as saying following the “apparent sabotage” of NS1 and NS2 pipelines, EU nations must increase security around energy assets, that includes LNG carriers en route to Europe. 

Granholm said European allies need to launch an “expedited investigation” into identifying the culprits behind the pipeline attacks. She added President Vladimir Putin’s recent move to weaponize natural gas highlights the urgency all EU members have to “evaluate the risks of relying on another entity for their energy.” 

The Baltic Sea region remains “tense” between Russia and NATO, Danish Defense Minister Morten Bodskov said. He expects Russian military forces in the Baltic region to continue their “saber-rattling.” 

Germany deployed warships to assist in the pipeline investigation, said the defense ministry, adding NS1 and NS2 leaks are an “alleged act of sabotage,” which emphasizes the vulnerability of critical energy infrastructure: 

“The circumstances of this disturbing event must now be quickly clarified and those responsible identified,” Defense Minister Christine Lambrecht said.

“I have already exchanged views on this with my Danish counterpart,” she added. “We have agreed to share information and our navy will contribute its expertise to the investigation.”

Meanwhile, Norwegian energy giant Equinor raised the level of preparedness for all its energy-related assets, including supply locations, installations, helicopter bases, land facilities, and vessels, across Norway, local broadcaster NRK reported. 

Security risks around LNG carriers are something we outlined before the pipeline attacks — since EU states have had to source LNG via tankers due to dwindling Russian supplies via pipelines this summer, leaving many of these tankers sitting ducks in the open water. 

And then watch these floating hindenburgs encounter unexpected if catastrophic “events” as they sail to Europe https://t.co/aoMOWxWDry

— zerohedge (@zerohedge) September 26, 2022

There are a lot of LNG vessels floating around Europe. 

And you never know what could be next… 

Did the CIA also warn Germany about future tanker attacks? 

CIA Warned Germany Of Possible Nord Stream Pipeline Attack https://t.co/jwV0uWSmrV

— zerohedge (@zerohedge) September 27, 2022