Month: January 2023

By Michael Every of Rabobank

Stop projecting; and start projecting

This week is obviously dominated by the upcoming Fed meeting. On which note, please – stop projecting, at least in one regard.

US personal income and expenditure data on Friday showed a now-established decline in spending on goods and the start of a slowdown in spending on services, which had been hotter, while savings starting to rise again. That’s exactly what the Fed wants to see, and adds to recent softness in other data. However, to project this means the Fed will be slashing rates soon is projection in a psychological sense, i.e., putting one’s own feelings onto the actions of others. It’s the desire for big Fed rate cuts, leading to lower bond yields, and a weaker US dollar, and higher asset prices, and the status quo ante of the past 40 years.

We are seeing deflation: in memory chips, used cars (US auto delinquencies are now looking worse that during the GFC, apparently), and housing. The US fiscal tap may remain turned off in the outside the defence sector too. Yet the unemployment rate remains low, and so do weekly initial claims: Covid has changed things through deaths, early retirement, and walking away. Moreover, Europe may avoid recession and China has reopened and says –again– that it will boost consumption: they are proposing higher welfare payments for rural immigrants to cities, for example. In short, while inflation will fall back near-term, it could potentially start to rise again later this year.  

Stubbornly high inflation is finally easing as supply chain disruptions fade and interest rates at 15-year highs put the brakes on demand

But Fed officials have voiced unease that any disinflation might be short-lived because labor markets are so tight https://t.co/Niaawe7pKj

— Nick Timiraos (@NickTimiraos) January 29, 2023

Consider what slashing rates would do against that backdrop. Indeed, alongside the easing in US financial conditions vs. a few months ago (the S&P +6% year-to-date; US 10-year yields 35bp lower) we see: Brent crude +1.8% y-t-d; copper +11.2%; gold +5.8%; and even Bitcoin +43.7%. Somebody is projecting more growth, more bubbles, and more supply-side inflation.   

Worse, markets are refusing to project headlines such as the Financial Times saying: ‘Top US air force general predicts China conflict in 2025’: if you cover the Fed or the ECB, or pensions or potatoes, or stocks or bonds, that headline warns current projections could be more dramatically wrong in 2025 than they were in 2022.

Of course, market analysts can never say what will happen in geopolitics, let alone markets. Yet the standard procedure in research is to note such a headline and say, “That’s wrong!” – with no professional experience in such matters; or to pretend one did not see it; or to say, “We don’t (know how to) look at such issues,” and, rightly, “We can’t price for them,”…and so to continue to project what one does know about and can price for; like Fed rate cuts and asset markets rallying. But is that really a good way to project things?

That headline is likely lobbying for even higher Pentagon budgets and more friend-shoring – yet that has inflationary implications and flusters businesses.  So does Japan and the Netherlands joining the US in restricting exports of chip and chip-manufacturing tech to China (though the Dutch allowed millions of chips to be sold to Russia despite a US ban); and the headline, ‘Key lawmaker: Biden mulling broad prohibitions on U.S. investments in Chinese tech’, noting, “The Biden administration “is talking about a theory where they would stop capital flows into sectors of the economy like AI, quantum, cyber, 5G, and, of course, advanced semiconductors… They actually want to say, right, you can’t invest in any [Chinese] company that does AI. You can’t invest in any company does cyber” or other similar sectors.

Nearer term, a few weeks from the first anniversary of the war, Russia is close to a new surge in Ukraine, which won’t get a small number of Western tanks for months. The fora discussing sending tanks a few months ago, as Germany said it would never allow that to happen, are now discussing sending fighter jets,… which Germany says it will never allow to happen. The escalatory spiral is obvious. The risks of an inflationary spiral should not be underestimated either, especially if Russia strikes at, or for, a Ukrainian port, and/or the Black Sea Grain Deal collapses.

Israeli drones just attacked Iranian factories manufacturing the drones they are exporting to Russia for use against Ukraine. While there are no immediate risks of outright Iran-Israel war on the back of that, despite the recent, huge US-Israeli military exercise for exactly that kind of thing, it is literally explosive in a volatile region again central to global energy-price —and so inflation— projections.

Against this backdrop, Germany’s Chancellor Scholz was just in Latin America, ‘racing with China for lithium’, as Bloomberg puts it. That’s for his auto sector facing a pincer squeeze from surging Chinese auto exports, notably of lithium-using EVs, and a higher cost of energy now Russian pipeline gas is gone, benefitting the US, who are selling the LNG replacing Russian pipeline gas. Meanwhile, arms-maker Rheinmetall is ready to greatly boost the output of tank and artillery munitions to satisfy strong demand in Ukraine and the West, and may start producing HIMARS multiple rocket launchers in Germany, says its CEO. So, a shift in German industry from cars to tanks? However, after the debacle over German-built tanks, demand for them is, excuse the pun, tanking. So, a shift from German-made cars to US-brand military goods? What does this project about EU “strategic autonomy”, or even the level of the Euro, longer term?

Though it addresses deglobalisation more loosely, and focuses more on demographics, the Financial Times also has a pre-Fed op-ed worrying about structurally higher inflation rates – ‘The world is not ready for the long grind to come’. At least markets aren’t if they continue to project a 25bp hike this week, then a short pause, and then rate-cutting business as usual. What if the Fed goes 25bp, but hawkishly stresses that not only might it do so again one more time, but that it won’t be cutting rates for a *long* time? Could Powell push back directly against the market’s constant easing of financial conditions? If so, how do people with psychological projection problems react when confronted? Denial, then anger, then denial; and then very expensive therapy, if they want to become better-adjusted.

Relatedly, last week I noted famed economist Schumpeter, seen as always favoring “creative destruction”, ended up arguing for a quasi-‘Christendom’ corporatism to deal with problems of economic imbalances, based on the Catholic principle of Quadragesimo anno put forward by Pope Pius XI in 1931 – to no effect at all, as we saw from 1939-45. On that note, Friday saw economist Mariana Mazzucato (‘For the Common Good’), argue we should follow the call of the current Vatican in a similar light: “Tackling our biggest challenges and reversing the undue concentration of wealth and power will require a fundamental change in political economy. Currently, the principle of the common good is seen as merely a corrective for the current system’s excesses, but it should be the system’s primary objective.”

Despite having argued for years that political economy and “-isms” were going to be the next big thing, I am in no way projecting that the change described above is going to happen anytime soon, or at all: would that it could. Yet project this: would a return to big Fed rate cuts make things relatively better or worse in that regard? Geopolitically, the answer is also clear: higher rates are a US weapon – yet, oddly, one the market expects to soon be holstered.

As BofA rates strategist Ralf Preusser writes in his weekly preview, “this week is one for the record book. We have not seen these three major central bank decisions (Fed, BoE, ECB); and key data releases (US ISM, payrolls, and the employment cost index, as well as Euro Area inflation, GDP, and confidence data) in the same week before. Not to mention in combination with month-end flow, which given the incidence of supply in Europe should be sizeable in both EUR and GBP.”

DB’s Jim Reid agrees writing that this week is set to be action packed for scheduled activity: “The main highlight is of course the FOMC conclusion (Wednesday), but the ECB and the BoE (both Thursday) will also likely hike. However, there’s plenty of other events on the macro calendar, including the US jobs report on Friday, the flash CPI release from France and Germany (tomorrow), the Euro Area aggregate (Wednesday), regional and Euro Area Q4 GDP (tomorrow), global manufacturing (Wednesday) and services (Friday) PMIs/ISMs, China’s equivalents (tomorrow and Wednesday), US JOLTS (Wednesday), and US ECI (tomorrow).”

If that’s not enough, 12% of the S&P 500 by market cap report within a few moments of each other on Thursday night after the bell with Apple, Alphabet and Amazon the highlights in a busy week for earnings. Overall, a whopping 35% of S&P earnings by sector are set to report this week.

Going back to central banks, at the time of writing, the Fed is priced to deliver 26 bp, the ECB 50 bp, and the BoE 46 bp. BofA expects both the Fed and the ECB to deliver what is priced in, and sees a 25 bp hike from the BoE – marginally more likely than before after new lows in the PMIs – but risks are clearly skewed towards 50 bp.

DB’s Reid adds that with a downshift to a 25bps Fed hike already priced in for Wednesday, the meeting will be all about what the Fed tone implies for further meetings. DB still think there’ll be two more 25bps hikes after this one partly as the Fed won’t want to see financial conditions ease too much as a result of being too dovish.

Assuming central banks deliver on forwards, the key focus for the market will be the accompanying messages. The Fed’s message will likely be strongly influenced by critical data prints between now and Wednesday: PCE, ECI, ISM, JOLTS. And that message in turn risks looking dated already by the end of the week with ISM Services and NFP prints to come, also. Our economists remain hawkish relative to market pricing, expecting a terminal FF target range of 5.00-5.25% and the first cut not until Mar-2024, for which forwards price 100 bp more cuts than our colleagues expect.

The last big and very important data point for the Fed before their meeting will be tomorrow’s Q4 ECI release (consensus 1.1% vs. +1.2% previously). Chair Powell is very focused on the relationship between core services ex-shelter inflation and wage pressures, with ECI near the top of their dashboard. JOLTS (Wednesday) is similarly important and may get a reference in the press conference.

Staying with labor markets, although Friday’s employment report will come after the FOMC, it will as ever be a lightening rod for the market. For the headline, consensus is at +185k vs. +223K last month, and 3.6% for unemployment (DB also at 3.6%, vs. 3.5% last month). All eyes also on average hourly earnings and importantly the work week length which was soft last month hinting at a small crack in the labor market.

With regards to the ECB (Thursday), most economists expect another +50bps hike that would take the deposit rate to 2.50%. They also emphasize the importance of communicating expectations for the March meeting since core and underlying inflation remain sticky. The team sees further +50bps and +25bps hikes in March and May, respectively, and a terminal rate of 3.25%.

For the BoE decision that same day, DB economists differ with BofA and see another +50bps (vs 25bps) hike that will take the Bank Rate to 4%. That will potentially be the last ‘forceful’ hike in this tightening cycle. Although their view is that services and wages data warrant such a move, the risks are tilted to the downside. They continue to call for a 4.5% terminal rate as inflation pressures remain resilient.

European markets have lots of data to run through ahead of those decisions, with Eurozone Q4 GDP, inflation and labor market data all released early this week. Most of the key data will be out tomorrow, including Q4 GDP data for Germany, France, Italy and the Eurozone as well as CPI reports for Germany and France. Eurozone aggregates for the CPI and unemployment rate are released on Wednesday. DB economists expect Eurozone HICP to decline to 8.4% in January (vs 9.2% yoy in December) and continue falling to c.3.5% in Q4 this year. Core inflation is seen staying in a 5.0-5.5% range throughout first half of this year.

Finally, let’s not forget about earnings, although that’s impossible with a whopping 107 S&P companies reporting, including Apple, Amazon, Alphabet, Meta, Ford, AMD, Amgen, Qualcomm, Starbucks and dozens more.

Courtesy of DB, here is a day-by-day calendar of events

Monday January 30

• Data: US January Dallas Fed manufacturing activity, UK January Lloyds business barometer, Japan December jobless rate, retail sales, industrial production, Italy December PPI, Eurozone January economic, industrial and services confidence
• Central banks: ECB’s Villeroy speaks
• Earnings: Sumitomo Mitsui Financial, NXP Semiconductors, Ryanair
• Other: IMF’s world economic outlook update

Tuesday January 31

• Data: US Q4 employment cost index, January Conference Board consumer confidence, MNI Chicago PMI, Dallas Fed services activity, November FHFA house price index, China January PMIs, December industrial profits, UK December consumer credit, mortgage approvals, M4, Japan January consumer confidence index, December housing starts, Italy Q4 GDP, December unemployment rate, hourly wages, Germany Q4 GDP, January CPI, unemployment change, France Q4 GDP, January CPI, December PPI, consumer spending, Eurozone Q4 GDP, Canada November GDP
• Central banks: Euro Area bank lending survey
• Earnings: Samsung Electronics, Exxon Mobil, Pfizer, McDonald’s, UPS, Amgen, Caterpillar, AMD, Stryker, Mondelez, UBS, Moody’s, GM, MSCI, Electronic Arts, Spotify, Snap

Wednesday February 1

• Data: US January ISM manufacturing index, total vehicle sales, ADP report, December JOLTS report job openings, construction spending, China Caixin manufacturing PMI, Japan January monetary base, Italy January CPI, manufacturing PMI, new car registrations, budget balance, Eurozone January CPI, December unemployment rate, Canada January manufacturing PMI
• Central banks: Fed decision
• Earnings: SK Hynix, Novo Nordisk, Meta, Orsted, Thermo Fisher Scientific, Novartis, T-Mobile, Altria, Boston Scientific, GSK, BBVA, Peloton

Thursday February 2

• Data: US Q4 unit labor costs, nonfarm productivity, December factory orders, initial jobless claims, Germany December trade balance, France December budget balance, Canada December building permits
• Central banks: ECB, BoE decision
• Earnings: Apple, Alphabet, Amazon.com, Sony, Mitsubishi UFJ Financial, Mizuho Financial, Eli Lilly, Merck, Roche, Shell, Bristol-Myers Squibb, ConocoPhillips, QUALCOMM, Honeywell, Starbucks, Gilead Sciences, Estee Lauder, JD.com, ICE, Banco Santander, Ford, Ferrari, Infineon

Friday February 3

• Data: US January jobs report, change in nonfarm payrolls, unemployment rate, labor force participation rate, average hourly earnings, ISM services, China Caixin services PMI, UK January official reserves changes, Italy January services PMI, France December manufacturing and industrial production, Eurozone December PPI
• Central banks: ECB Survey of Professional Forecasters
• Earnings: Sanofi, Regeneron, Intesa Sanpaolo

* * *

Finally, looking at just the US, Goldman writes that the key economic data releases this week are the employment cost index on Tuesday, JOLTS job openings and ISM manufacturing on Wednesday, and the employment situation report on Friday. The February FOMC meeting is on Wednesday. The post-meeting statement will be released at 2:00 PM ET, followed by Chair Powell’s press conference at 2:30 PM.

Monday, January 30

• 10:30 AM Dallas Fed manufacturing index, January (consensus -15.5, last -18.8)

Tuesday, January 31

• 08:30 AM Employment cost index, Q4 (GS +1.1%, consensus +1.1%, prior +1.2%): We estimate that the employment cost index (ECI) rose 1.1% in Q4 (qoq sa), which would boost the year-on-year rate by one tenth to 5.1%. Our forecast reflects sequential slowing in the private wages ex-incentives category following net softer readings of production and nonsupervisory average hourly earnings and the Atlanta Fed wage tracker. However, we expect another strong reading for the benefits category as firms expand health insurance and supplemental pay programs in order to attract and retain talent.
• 09:00 AM FHFA house price index, November (consensus -0.5%, last flat)
• 09:00 AM S&P/Case-Shiller 20-city home price index, November (GS -0.6%, consensus -0.7%, last -0.5%): We estimate that the S&P/Case-Shiller 20-city home price index declined 0.6% in November, following a 0.5% decline in October.
• 09:45 AM Chicago PMI, January (GS 45.1, consensus 45.3, last 45.1): We estimate that the Chicago PMI was unchanged at 45.1 in January, reflecting weaker industrial activity in the US and a continued drag from the covid wave in China.
• 10:00 AM Conference Board consumer confidence, January (GS 109.5, consensus 109.0, last 108.3): We estimate that the Conference Board consumer confidence index increased to 109.5 in January.

Wednesday, February 1

• 08:15 AM ADP employment report, January (GS +190k, consensus +170k, last +235k): We estimate a 190k rise in ADP payroll employment in January, reflecting strength in Big Data indicators.
• 09:45 AM S&P Global US manufacturing PMI, January final (consensus 46.8, last 46.8)
• 10:00 AM Construction spending, December (GS +0.2%, consensus flat, last +0.2%): We estimate construction spending increased 0.2% in December.
• 10:00 AM ISM manufacturing index, January (GS 48.0, consensus 48.0, last 48.4): We estimate that the ISM manufacturing index declined 0.4pt to 48.0 in January, reflecting weaker industrial activity in the US and a continued drag from the covid wave in China. Our GS manufacturing tracker declined 1.3pt to 47.0.
• 10:00 AM JOLTS job openings, December (GS 10,350k, consensus 10,300k, last 10,458k): We estimate that JOLTS job openings declined to 10,350k in December.
• 02:00 PM FOMC statement, January 31 – February 1 meeting: The key question for the February meeting is what the FOMC will signal about further hikes this year. As discussed on our FOMC preview, we expect two additional 25bp hikes in March and May, but fewer might be needed if weak business confidence depresses hiring and investment, or more might be needed if the economy reaccelerates as the impact of past policy tightening fades. Fed officials appear to also expect about two more hikes and will likely tone down the reference to “ongoing” hikes being appropriate in the FOMC statement.
• 05:00 PM Lightweight motor vehicle sales, January (GS 15.8mn, consensus 14.4mn, last 13.3mn)

Thursday, February 2

• 08:30 AM Nonfarm productivity, Q4 preliminary (GS +2.5%, consensus +2.4%, last +0.8%); Unit labor costs, Q4 preliminary (GS +1.5%, consensus +1.5%, last +2.4%): We estimate nonfarm productivity growth of +2.5% in Q4 (qoq saar) and unit labor cost—compensation per hour divided by output per hour—growth of +1.5%.
• 08:30 AM Initial jobless claims, week ended January 28 (GS 190k, consensus 200k, last 186k); Continuing jobless claims, week ended January 21 (consensus 1,684k, last 1,675k): We estimate initial jobless claims increased to 190k in the week ended January 28.
• 10:00 AM Factory orders, December (GS +2.5%, consensus +2.4%, last -1.8%); Durable goods orders, December final (last +5.6%); Durable goods orders ex-transportation, December final (last -0.8%); Core capital goods orders, December final (last -0.2%); Core capital goods shipments, December final (last -0.4%): We estimate that factory orders increased 2.5% in December following a 1.8% decrease in November. Durable goods orders increased 5.6% in the December advance report, reflecting a $15.5bn increase in nondefense aircraft orders, while core capital goods orders decreased 0.2%.

Friday, February 3

• 08:30 AM Nonfarm payroll employment, January (GS +300k, consensus +185k, last +223k); Private payroll employment, January (GS +250k, consensus +185k, last +220k); Average hourly earnings (mom), January (GS +0.4%, consensus +0.3%, last +0.3%); Average hourly earnings (yoy), January (GS +4.4%, consensus +4.3%, last +4.6%); Unemployment rate, January (GS 3.5%, consensus 3.6%, last 3.5%); Labor force participation rate, January (GS 62.3%, consensus 62.3%, last 62.3%): We estimate nonfarm payrolls rose by 300k in January (mom sa). Our well-above-consensus forecast reflects the elevated level of labor demand, the strong recent payroll trend, a 36k boost from the return of striking education workers, strength in Big Data employment indicators, and a boost from favorable seasonal factors that are spuriously fitting to last winter’s Omicron wave. Jobless claims remain extremely low, and while corporate layoff announcements have increased in recent months, only 15% of California layoff filings since December had been implemented by the January payroll period. We estimate the unemployment rate was unchanged at 3.5%, reflecting a rise in household employment offset by flat-to-up labor force participation rate (we estimate unchanged on a rounded basis at 62.3%). We estimate a 0.4% increase in average hourly earnings (mom sa), reflecting a 0.05pp boost from start-of-year wage hikes and neutral calendar effects.
• 09:45 AM S&P Global US services PMI, January final (consensus n.a., last 46.2)
• 10:00 AM ISM services index, January (GS 51.0, consensus 50.5, last 49.2): We estimate that the ISM services index rebounded by 1.8pt to 51.0 in January, reflecting the rise in our survey tracker (+1.0pt to 51.1).

Source: DB, Goldman, BofA

China stocks pulled back from bull market territory on Monday, the first trading session after a week-long Lunar New Year break.

The CSI 300 index initially surged but lost steam in afternoon trading to end up about half a percent higher, failing to maintain bull market territory. Today’s pop then selling pressure is a suspicious start to the Year of the Rabbit and might indicate profit-taking. 

Some analysts believe Chinese stocks might take a much-needed breather after nearly three months of gains. The CSI 300, which tracks the largest Chinese mainland-listed stocks, gained 19.88% from its October 2022 low. 

“It seems like a classic move for onshore — open high then go lower. I think the market is very excited about the Chinese New Year data, but in reality, if you look at the details, it is kind of mixed,” said Willer Chen, senior analyst at Forsyth Barr Asia Ltd.

Despite the bullish views on the reopening narrative that has helped propel Chinese stocks in recent months, there are a bunch of lingering negatives, including the Biden administration’s tech war against Beijing, Covid infections, broad slowdown, and a housing crunch. 

In the US, Chinese stocks retreated in premarket trading. KraneShares CSI China Internet ETF slid about 4% in premarket trading. 

And the Golden Dragon China Index has erased all of ist Lunar New Year gains now…

The latest BofA survey showed that long Chinese stocks made the list of the most overcrowded trades this month, which might indicate that investors are taking profits after months of gains. 

Authored by Alex Kimani via OilPrice.com,

Over the past two years, global energy companies have enjoyed record profits amid high commodity prices, with the International Energy Agency estimating that net income by oil and gas companies doubled from 2021 to 2022. Those high oil and gas prices have translated into high fuel prices for consumers, drawing the ire of the public and governments everywhere and sparking populist moves in response. 

The European Union, the UK and India have already introduced windfall taxes on oil and gas companies. 

On September 30, 2022, the Council of the European Union agreed to impose a “temporary solidarity contribution” on energy companies that realize “above a 20% increase of the average yearly taxable profits since 2018”. This tax will be levied on top of whatever taxes these companies already owe in their individual countries. 

A windfall tax is a one-time surtax levied on a company or industry when unusual economic conditions result in large and unexpected profits. 

Others, such as the Netherlands, Norway and the United States are currently considering them. 

According to a recent Wood Mackenzie report, while 2022 was the year in which the idea of the windfall tax and the villainization of Big Oil reached a new peak, this year will likely see more momentum if oil prices remain high. If prices drop, windfall taxes could be eliminated; however, Wood Mackenzie views this as “unlikely”, noting at the same time that some windfall taxes have expiration dates and clauses for modification based on oil prices.

Overall, WoodMac warns that windfall taxes will distort the market and even risk prolonging–or delaying–the energy transition. How? If fossil fuel prices are lower, demand will increase and render renewables less attractive. 

In the meantime, governments have found another way to benefit from soaring oil and gas company profitability–taxing share buybacks, such as has been done in the U.S. and proposed in Canada. Dividends could also be taxes more heavily. Both methods, suggests Wood Mackenzie, would actually “incentivize reinvestment, thus promoting jobs and additional energy supply”.

“A tangle of long-term ambitions will drive upstream regulators and investors toward the big fiscal themes to look for in 2023, from windfall taxes to renewed interest in gas policy terms,” according to WoodMac’s 2023 outlook.

The Windfall Tax Report Card–So Far

United States

Back in October, President Biden threatened to slap a windfall profits tax on American oil and gas companies if they fail to use their “outrageous” bonanza to expand oil supplies in a bid to lower fuel prices. However, he is yet to follow through on his threat but instead American companies have to face a different beast: buyback tax.

As part of the new Inflation Reduction Act that President Biden signed in August is a new 1% tax on corporate share buybacks. Oil and gas companies will bear the brunt of the new tax because they have dramatically increased buybacks as a favored way to return excess cash to shareholders.

“My message to the American energy companies is this: You should not be using your profits to buy back stock or for dividends. Not now, not while a war is raging,” Biden said in October. Biden has scolded U.S. oil producers saying they fail to appreciate the free-market capitalism windfall made possible by American democracy nor sympathy for their retail customers.

In 2022, U.S. oil company share buybacks increased 1,043%, dwarfing the 64% increase for S&P 500 while dividends were up 33%, more than three times the rise for all the companies in the index. Total free cash flow of the 23 companies in the S&P 500 Energy Index increased 2.3 times to $201 billion, with free cash for Exxon Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) increasing 150% to $60 billion and $36 billion. Meanwhile, Valero Energy Corp.’s (NYSE: VAL) free cash flow grew five-fold to $9 billion from the previous four quarters.

United Kingdom

Back in November, the UK government announced plans to increase a windfall tax on oil and gas producers’ profits to 35% from the previous rate of 25%. The new rate, which will apply from 1 January 2023 until March 2028, is part of a raft of budgetary measures aimed at tackling the cost of living crisis and shoring up the UK’s finances.

Normally, UK oil and gas companies operating on its continental shelf are subject to a 40% tax rate, much higher than the 19% rate on corporate profits for companies in other sectors. The new levy now means that companies like BP Plc.(NYSE: BP) and Shell Plc.(NYSE: SHEL) will now fork over 75% in taxes, up from 65% in 2022.

Germany

Starting December 1 2022, the German government introduced a 33% windfall profit tax that will potentially generate a revenue of between one and three billion euros. Dubbed the “EU energy crisis contribution”, the tax is likely to affect dozens of energy companies and will target their 2022 and 2023 profits.  

The new levy will affect oil, gas and coal companies whose profits for 2022 and 2023 exceed by 20% or more than their 2018-2021 average. However, the tax has a major drawback: according to Katharina Beck, spokeswoman on financial matters for the Greens, the planned levy can be circumvented on a large scale by companies moving profits abroad.

“The draft of the finance ministry for windfall profit levy for oil and gas companies falls well short of what is necessary,” Beck said in a statement carried by Reuters. 

Finland

In December, the Finnish government proposed a temporary windfall tax on profits from the country’s electricity companies as part of a European Union response to soaring power costs. The proposed 30% tax would apply to any profits exceeding a 10% return on capital in 2023, with the government estimating it could bring in between 500 million and 1.3 billion euros ($533 million-$1.9 billion).

If the Finnish government goes ahead with its plans, it will join Germany and the UK as the other EU members that have introduced a windfall tax to energy and power companies. 

India

A few weeks ago, India raised its windfall tax on crude oil, petroleum and aviation turbine fuel. Windfall tax on crude oil was increased to 2,100 rupees ($25.38) per tonne from 1,700 rupees ($20.55). The federal government also raised export tax on diesel to 6.50 rupees per liter from 5 rupees, while raising the windfall tax on ATF to 4.5 rupees per liter from 1.5 rupees, the document showed.

India is a major consumer and importer of crude, and has been buying Russian crude barrels at well below a $60 price cap. The Indian government first introduced a windfall tax on crude oil producers and levies on exports of gasoline, diesel and aviation fuel in July after private refiners posted robust refining margins, instead of selling at lower-than-market rates

Five days after we reported that Tesla was accused of ‘weaponizing’ price cuts in order to crush their competition in the electric vehicle space, Ford announced priced cuts for their electric Mustang Mach-E along with several other models ‘across the board.’

The company will also increase production, “underscoring the company’s commitment to lead the EV revolution by increasing the value of its EVs for customers,” according to a Monday press release.

“We are not going to cede ground to anyone. We are producing more EVs to reduce customer wait times, offering competitive pricing and working to create an ownership experience that is second to none,” said Marin Gjaja, Chief Customer Officer, Ford Model e. “Our customers are at the center of everything we do – as we continue to build thrilling and exciting electric vehicles, we will continue to push the boundaries to make EVs more accessible for everybody.”

Customers who are awaiting delivery of their Mach-E’s will automatically receive the adjusted price, while Ford will ‘reach out’ to anyone who bought one after Jan 1, 2023.

Shares of the Michigan-based automaker dropped as much as 3% in pre-market trading.

Tesla’s move to squeeze competitors by sacrificing some of its strong operating-profit margins could be seen in a recent price cuts on the Model Y – which is now priced at $53,000, down from around $66,000. If buyers qualify for the federal tax credit, the can knock off another $7,500.

Bank of America analyst John Murphy said, unlike Tesla, traditional automakers have very thin profit margins or lose money on their EV lineups. He said such a move to reduce prices could spark a price war.  

“These price cuts are likely to make the business even more difficult, just as they are attempting to ramp production of EV offerings,” Murphy said.

Who’s next?

If other automakers and dealers match Tesla price cuts, core CPI could drop by more than 1% M/M

— zerohedge (@zerohedge) January 13, 2023

Ford just did lol

— 0x.eth (@0xbirdapp) January 30, 2023

Authored by Liam Cosgrove via The Epoch Times (emphasis ours),

North Korea, fraud, and financial losses are some of the dangers emanating from the cryptocurrency industry, according to a White House blog published on Jan. 27. It argued for enhanced oversight of cryptocurrencies more broadly, requesting help from financial regulatory bodies and Congressional lawmakers.

The blog—co-written by national security adviser Jake Sullivan, National Economic Council Director Brian Deese, Office of Science and Technology Policy Director Arati Prabhakar, and Council of Economic Advisors Chair Cecilia Rouse—outlined the administration’s strategy for mitigating the risks associated with cryptocurrencies.

The White House officials described digital assets as a nascent industry with promise but one that must be reined in for the sake of consumers. Sullivan has long been sounding the alarm with respect to cryptocurrencies, which he placed on the administration’s radar back in June of 2021, following the highly publicized ransomware attack on the Colonial Pipeline.

The White House pointed to North Korea to justify the need for further legislation, highlighting that a lack of security protocols allowed North Korea to “steal over a billion dollars to fund its aggressive missile program.” This refers to allegations by South Korea’s main spy agency that their northern neighbor employed state-sponsored hackers to extract $1.2 billion from various digital asset projects.

“Privacy coins”—cryptocurrencies that algorithmically “wash” transactions to obfuscate their ownership history—appear to be in the sights of the Biden administration as well. The briefing linked to a 2022 report (pdf) that listed privacy coins under the “Malicious Acts” section of the report, mentioning that such tokens are the preferred medium of exchange for criminals and bad actors.

Proponents of the popular privacy coin Monero view the ability to transact with anonymity as one of the core tenets underpinning the crypto movement.

The White House urged Congress to pass new laws to help curb criminal activity in the digital asset space. Suggestions included steeper penalties for illicit financial affiliations and additional transparency requirements for crypto-related companies.

A push to partner with international lawmakers was a key focus of the blog as well. Many have blamed foreign nations with lax legal frameworks for facilitating much of the fraud in the space.

“These foreign exchanges have virtually no regulation,” said macroeconomic strategist Jim Bianco in an interview with Wealthion. Bianco, however, recognized the risk that regulators may become co-opted by the companies they are intended to regulate, using FTX founder Sam Bankman-Fried as an example.

“A lot of people in the industry were very uncomfortable with him because they didn’t think he represented the best interests of the industry,” Bianco said. “He was going to use his vision of regulation to build a moat around FTX.”

Urging caution in regulation was a theme in the blog as well. White House officials warned that laws incentivizing further investment into crypto should be avoided.

Read more here…

Adani Group published a 413-page rebuttal on Sunday, condemning Hindenburg Research’s 100-page short report last week. Hindenburg responded overnight, indicating the rebuttal only answered 62 of 88 questions and sidestepped key questions. Adani’s rebuttal wasn’t enough to calm investors as most stocks and bonds tied to the Indian group plummeted for the third session. However, bucking the bear trend, Abu Dhabi’s royal family is bullish on Adani. 

Since Hindenburg accused Adani Group of “pulling the largest con in corporate history,” having “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades,” a three-day selloff has wiped out more than $68 billion of market capitalization from Adani Group companies. 

Billionaire Gautam Adani has lost $20 billion in personal wealth. His ranking on the Bloomberg Billionaire Index had shifted down to number seven from number four before Hindenburg published the short report last Wednesday. 

“Not sure if Adani’s rebuttal is enough to assuage investor concerns. Just because things are disclosed and known does not make them right,” said Brian Freitas, an analyst at Smartkarma.

Freitas added: “How does a group that big explain no analyst coverage and no mutual fund holdings?”

Late Sunday, Hindenburg wrote in a statement that Adani’s rebuttal failed to answer key questions:

Our report asked 88 specific questions of the Adani Group. In its response, Adani failed to specifically answer 62 of them. Instead, it mainly grouped questions together in categories and provided generalized deflections.

In other instances, Adani simply pointed to its own filings and declared the questions or relevant matters settled, again failing to substantively address the issues raised.

Of the few questions it did answer, its responses largely confirmed our findings, as we detail.

Hindenburg released its report last week ahead of a $2.5 billion follow-on public offering in Adani Enterprises for institutional investors. The shares are trading at a discount to the offer price. 

“They might need to give more discount.

 “It looks difficult for investors to justify buying the FPO, so they might not join the offering. Besides, onshore mutual funds have avoided active exposure to the group so they might not participate much,” said Nitin Chanduka, an analyst at Bloomberg Intelligence.

Meanwhile, in an interview, Adani Group CFO Jugeshinder Singh told CNBC TV 18 that there would be no change to the offer price.

Despite all the turmoil, Abu Dhabi-based International Holding Co. said it would invest 1.4 billion dirhams ($400 million) in the follow-on share sale, representing about 16% of the total offering. 

“Our interest in Adani Group is driven by our confidence and belief in the fundamentals of Adani Enterprises.

“We see a strong potential for growth from a long-term perspective and added value to our shareholders,” IHC Chief Executive Officer Syed Basar Shueb said. 

We wonder if IHC’s investment is enough to restore confidence in the Adani Group.

Authored by Charles Hugh SMith via OfTwoMinds blog,

So here we are: the global credit-asset bubbles are popping, and the illusory “prosperity” generated by the bubbles is about to tumble off a cliff.

There are two kinds of prosperity, one fake, one real. Bogus “prosperity” depends on credit-asset bubbles inflating, magically creating “wealth” not from labor, production or improving productivity, but from the value of assets soaring as bubbles inflate.

This bubble-generated “wealth” then fuels a vast expansion of credit and consumption as assets soaring in value increases the collateral available to borrow against, and the occasional sale of soaring assets generate capital gains, stock options, etc. which then fund sharply higher consumption.

When the value of a modest home skyrockets from $200,000 to $1,000,000 in a few years, that $800,000 in gain was not the result of any improvement in utility. The house provides the same shelter it did when it was worth 20% of its current value. The $800,000 is gain is the result of the abundance of low-cost credit and the global search for a yield above zero.

Eventually, this vast expansion of “money” chasing yields and seeking places to park all the excess cash trickles into the real economy and the result is inflationary. Consider how soaring home prices affect rents.

When an investor bought the modest home for $200,000, the costs of ownership were low due to the costs being linked to the value: the property tax, insurance and mortgage were all based on the valuation. (The costs of maintenance were unrelated to valuation, of course, being based on the age and quality of construction.) Let’s say the modest house rents for $1,500 per month.

The investor who buys the modest home for $1 million has much higher costs, even if they bought the property with cash and din’t need to borrow money (i.e. obtain a mortgage). The property taxes and insurance are much higher, and the comparable market rent of similar houses reflects the expected yield on investing $1 million: if investors expect a 3% yield after all expenses, then the rents have to rise so the investor/owner nets $30,000 annually.

Due to the valuation increasing in a bubble, the rent is now $4,500 per month, even though the house hasn’t materially gained any utility at all. The rent has to be high to justify the purchase price of $1 million.

This is why all credit-asset bubbles are self-liquidating: once the cost of credit drops to near-zero, there’s no discipline left: any loan for any investment can be justified by the “guaranteed” increase in value / collateral. Since everything will rise in value, then it makes sense to leverage up as much debt as possible to gain control of as many assets as possible, as the means to maximize gain.

This leads to marginal borrowers over-extending, borrowing more than is prudent.

All this nearly free money sloshing around seeps into the real economy, jacking up prices (such as rents) without increasing the production of goods and services or improving productivity. Costs rise solely as a result of the bubble, pressuring wage earners and enterprises.

Central banks are eventually forced to raise interest rates and reduce credit expansion to put the brakes on the bubble’s inevitable offspring, an inflationary spiral. Once credit is no longer expanding rapidly, the air starts leaking out of the asset bubbles. Marginal borrowers can no longer roll over their debt based on ever-higher collateral (as valuations rise, so does the collateral to support new loans) and default become inevitable once markets tighten.

For example, those willing and able to pay outrageous rents thin out, and commercial / residential properties are vacant, generating zero income.

But inflation generated by bubbles is “sticky.” Landlords are reluctant to drop rents, as they’ve been trained by central bank bailouts and decades of easy money/credit to expect a prompt resumption of the bubble’s expansion. This mentality permeates the entire economy.

Once valuations stop rising like clockwork, the bubble “prosperity’ is revealed as illusory. All the “wealth” was illusory; it wasn’t generated by improvements in productivity or the production of more goods and services; it was all based on soaring valuations driven by cheap, abundant credit and the bubble-mentality faith that bubbles never pop and so the “wealth” created by soaring stocks, bonds, collectibles and real estate would only continue expanding forever.

The inflation generated by bubbles remains as collateral crashes and credit expansion reverses into contraction. Suddenly, there’s fewer greater fools willing to pay bubble prices for assets. The smart money sold long ago, but the not-so-dumb money finally awakens to the potential downside of bubbles popping: rather than reaping huge gains, assets might become illiquid (i.e. there are no buyers at any price) or valuations might fall faster than anyone believed possible in the heady bubblicious decades.

Bubbles liquidate the illusory “wealth” they generated when they pop, and then the bogus “prosperity” dissipates into the air from whence it came. The only source of real prosperity in improvements in productivity which generate more goods and services with fewer inputs of capital, labor, materials and energy.

So here we are: the global credit-asset bubbles are popping, and the illusory “prosperity” generated by the bubbles is about to tumble off a cliff. The $20,000 week at the posh resort was fun, as was the $80 lunch for two (two avocado toast and two beverages), but it was all fake, phony, a fraud: jacking the valuation of a bungalow five-fold doesn’t actually improve productivity or create any new goods and services. It jacked up prices and property taxes, but it didn’t actually create any real wealth.

It’s a long way to the bottom, but it won’t take as long as many seem to think.

*  *  *

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