Month: September 2023

The Georgia grand jury, whose ‘lunatic’ forewoman came under fire in February after she went on national TV, giddy with excitement, and foreshadowed the coming indictments against former President Donald Trump and 18 other defendants…

Emily khors is the forewoman of the Trump grand jury and she’s an absolute lunatic. She must think she’s the lead role in her head. pic.twitter.com/67DDzPmN83

— Stephan (@itoldyaso88) February 22, 2023

…went absolutely insane with indictment recommendations. As it turns out, the grand jury actually recommended charges against 39 people, including two former US senators for Georgia, David Perdue and Kelly Loeffler, as well as current US Senator Lindsey Graham (R-SC), who Georgia Secretary of State Brad Raffensperger said called him after the 2020 election to ask if it was possible to invalidate mail-in ballots that violated the state’s signature-matching law, and whether political bias may have played a role in counties where poll workers accepted higher rates of mismatched signatures.

The avalanche of indictment recommendations was revealed on Friday after a Georgia judge released a report which underpinned GA District Attorney Fani Willis’ decision to issue indictments on racketeering charges.

“The Fulton County Grand Jury went insane,” writes journalist and attorney, Techno Fog of The Reactionary.

The Fulton County Grand Jury went insane –

Voting to indict Lindsey Graham, Michael Flynn, David Perdue, and Kelly Loeffler “with respect to the national effort to overturn the 2020 presidential election”

Perdue and Loeffler (and many others) would have faced RICO charges. pic.twitter.com/Zs9Cegn2VH

— Techno Fog (@Techno_Fog) September 8, 2023

You know it’s bad when it’s too much for Fani.

By Michael Every of Rabobank

Irish job in a China shop

The iPhone ‘ban’ by China story took on a new dimension yesterday. Several news agencies confirmed an earlier report from the Wall Street Journal that Beijing looks to expand its ban of the use of iPhones in sensitive departments of government to include government-backed or controlled agencies and state companies. Considering that there are a whole lot of those (especially the latter), it is no surprise that this had a material impact on not just on Apple shares, which have lost more than 6% in the past two days, but also on the broader tech indices. The S&P technology index declined nearly 2%, where the S&P500 was down 0.3%.

Given that said company is not just a key vendor of phones in China but also a big employer, it would also strengthen the view that ‘national security trumps economics’ nowadays. If this is China’s – belated – answer to the blacklisting of Huawei by the Trump administration in 2019, it certainly doesn’t spell much good for the international relation between China and the US. Not that we had ever believed that recent initiatives to re-start a dialogue were likely to be successful, but these developments will arguably nullify any gains made in recent months. As we pointed out in yesterday’s Global Daily, the logical conclusions are that the US will likely increase trade sanctions further. And so, more decoupling and (potentially) less growth and more inflation.

In fact, things may be moving faster than most people realize. For, barely a week after the introduction of a new phone by China’s Huawei containing a chip with 7nm technology (significantly below the threshold of 14nm that the US government has said it is willing to allow on national security grounds), US lawmakers have now said that China’s top chipmaker, SMIC may have violated sanctions by supplying components to Huawei. This recent dynamic also raises questions on “what’s next”.

Does the car sector qualify for a closer scrutiny on national security grounds? You may think that sounds silly, but aren’t modern (EV) cars – some of which look more like coming straight out of Star Trek – nothing more than ‘mobile phones with an engine built around it’? And this thinking is not just theoretical. In June already Reuters reported that Tesla cars were prohibited from entering a Chinese coastal district because of a “secretive annual summer party leadership conclave”. And wouldn’t such thinking come in handy for European/German policy makers, who increasingly fear they are losing the race with China on EV’s? For Germany in particular, with cars accounting for 16% of goods exports, this would have grave consequences. Although the German government recently, and a bit surprisingly, ditched its earlier announced plan to provide significant energy subsidies for its ailing industry, when push comes to shove we would deem it quite unlikely that the German government is willing to “throw its car sector under the bus“!

Of course, things never move in straight lines and this also holds for geopolitics. For one, there is also a bright spot on the horizon as the United Kingdom has re-joined the European Union’s Horizon science research program. This represents a further thawing of UK-EU relations following Brexit, coming on the heels of the Windsor Framework that Prime Minister Sunak negotiated with Brussels in February. The EU had refused to discuss Horizon membership until tensions over trade rules governing Northern Ireland were settled. While this does not mean that similar deals with the bloc are imminent, it raises hopes that pragmatism continues to prevail between the two former partners. A key issue ahead is the looming post-Brexit deadline on electric vehicle trade.

You bet that Europe is eagerly hoping for a completely different deal to be struck as well, although it can’t do much other than waiting.

Although it appeared just two weeks ago that an ‘in principle’ endorsement by Offshore Alliance members of an agreement with Woodside Energy had nipped the risk of disruptive strikes in Australia’s gas (distribution) sector in the bud, workers at Chevron have held out so far. They have now started their long-awaited partial strikes at the Gordon and Wheatstone facilities, together good for some 7% of global LNG supply according to Bloomberg.

Europe doesn’t buy a lot of Australian gas (which is largely aimed at the Asian market), but liquid gas is fungible, and global demand and supply conditions are such that these developments do have a material impact on European gas prices. The latter have been increasingly volatile off late – the ‘curse of interesting times’ as our Energy analyst Joe DeLaura would put it. Having hit a ‘low’ of around EUR25/MWh over the summer months, Dutch 1m TTF forward prices spiked to over EUR40/MWh in mid-August, to retreat again to around EUR30 in recent weeks. However, the recent developments in Australia have helped push prices up to EUR35 again.

We have been arguing for quite some time that although Europe has made progress in cutting back on its gas consumption (according to our calculations, there has been a structural weather-adjusted reduction of between 15 to 20% in the Eurozone, depending on the exact comparison date) and is well ahead of schedule in filling up storage capacity, the Australian strike(s) only underscores Europe’s vulnerabilities. More storage capacity -and harder to achieve- structural gas saving is required to tackle those remaining vulnerabilities in this area.

Speaking of… how can central banks make policies – which often are all about tens of basis points – when even the economic statistics move more than that simply because of revisions? Case in point are the latest Eurozone GDP growth data from Eurostat, which were released yesterday. The headline figure for Q2, which was accompanied by a first estimate of spending components data, was revised down from +0.3 to +0.1 %q/q. In basis points it was c. 15bp. That’s half a rate hike! A key explanation for the revision was a sharp cutback in the Irish GDP numbers. Initially these had shown a 3.3% q/q gain, but the latest data show a much more modest 0.5% increase.

As my colleague Stefan Koopman points out in this short and sweet publication, yesterday was no exception. The Irish data have been a key source of volatility in the Eurozone data, sometimes even obscuring the underlying trend. Ireland’s rise as a European hub for multinational companies in sectors like medical equipment, pharmaceuticals, ICT, and aircraft leasing has greatly impacted its GDP statistics. While part of this reflects real economic activity, the sharp increase in Irish GDP growth stems from assets being relocated to Ireland for tax purposes. The Irish data have been derided as “leprechaun economics” due to this distortion. However, we argue Ireland still warrants attention as it skews Eurozone economic data and narratives in non-trivial ways. The Eurozone’s GDP rebound after the pandemic, for example, is being inflated by global profits of multinationals, instead of reflecting real domestic growth. Similarly, looking at Eurozone industrial output, stripping Ireland out of the figures leads to an entirely different image: production volumes are down 4.4% on January 2019 instead of being up 0.8% as per the official statistics, a figure that, at least, better fits recent gloomy survey data.

Policy makers may not always be able to distinguish or correct for these disturbances. But in this case we believe it does support our view, as we explain here, that the ECB will hit the pause button in its next meeting as the growth outlook is deteriorating and overtightening is becoming a real possibility. But with inflation still high, the odds of another hike are more than just a tail risk

It was slow going for Tesla in China last month, with some questioning whether or not saturation in the market was slowing the company’s growth.

But in August, the EV company saw a return to growth as it slashed prices on vehicles even further and Beijing enticed citizens to go EV shopping with tax breaks. 

For the month of August, Tesla sold 64,694 vehicles and exported 14,465 vehicles, according to data from China’s Passenger Car Association. This marks month over month delivery gains of 30.9%, according to Bloomberg. 

Meanwhile, for the month of August, passenger vehicle sales were up 2.5% year over year to 1.92 million units, China’s Passenger Car Association said in a release out early Friday morning. Sales for the month were up 8.6%, Bloomberg calculated. 

It marked the first year over year gain since May 2023, Reuters noted. China’s auto marker is also seeing a tailwind from lower rates on existing mortgages and lower rates for first time home buyers, CPCA Secretary General Cui Dongshu noted. 

Recall we just noted last month that Tesla had cut the price of its Model S Plaid in China by 19%. 

We also noted that Canadian VC and self-labeled “SPAC Jesus” Chamath Palihapitiya was out over Labor Day weekend praising the speed and aggressiveness of Tesla’s price cuts, which seem to be working. 

“Some companies cut prices, but most keep prices flat or increase them,” he added. “Some companies improve products quickly. But no one has actually given you more for less on such a big ticket purchase so frequently.”

Tesla’s recent price cuts have been a topic of discussion since January because, so far, they have been effective in spurring demand and putting pressure on legacy automakers. Tesla continues to make aggressive cuts, as we wrote about just days ago. 

Tesla cut prices on its Model S Plaid vehicle in China most recently, to 828,900 yuan from 1.03m yuan, a cut of about 19%. Bloomberg reported last week that Tesla was also cutting the price of its Model S to 698,900 yuan from 808,900 yuan, its Model X to 738,900 yuan from 898,900 yuan and its Model X Plaid to 838,900 yuan from 1.06m yuan.

These cuts followed additional price cuts in China that took place only about two weeks ago. Recall we reported on August 16 that Tesla’s Model S price was being cut 6.7% to 754,900 yuan ($103,477) from 808,900 yuan prior and the company’s Model X was priced 6.9% lower at 836,900 yuan, down from 898,900, according to Reuters. 

Earlier in August, news broke that Tesla was adding new, lower-range iterations of its Model S and Model X that would be priced $10,000 lower than previous base prices, Yahoo reported. The standard range Model S will start at $78,490 and will offer 320 miles of range and the standard range Model X will now be priced $88,490 and will have a range of 269 miles per charge, the report says. 

Authored by Kyle Anzalone via AntiWar.com,

In an interview with renowned reporter Seymour Hersh, a US intelligence official scolded the media for misleading the American public about Ukraine’s battlefield failures during the Spring counteroffensive. The unnamed official additionally told Hersh he believes that Russian President Vladimir Putin ordered the assassination of PMC Wagner chief Yevgeny Prigozhin to deescalate tensions with NATO.

Responding to reports in recent weeks that Ukrainian forces were gaining momentum and recapturing territory, the official remarked, “Where are the reporters getting this stuff?” he asked. “There are stories talking about drunk Russian commanders while the Ukrainians are penetrating the three lines of Russian defense and will be able to work back to Mariupol.”

He continued, “The goal of Russia’s first line of defense was not to stop the Ukrainian offense, but to slow it down so if there was a Ukrainian advance, Russian commanders could bring in reserves to fortify the line.” The official added, “There is no evidence that Ukrainian forces have gotten past the first line. The American press is doing anything but honest reporting on the failure thus far of the offense.”

Secretary of State Antony Blinken delivered a similarly optimistic message during his trip to Kyiv on Wednesday. “In the ongoing counteroffensive, progress has accelerated in the past few weeks. This new assistance will help sustain it and build further momentum,” he said at a press conference.

The official says that message is being delivered from military intelligence to the White House, while the CIA has drawn other conclusions. “This kind of reporting from the military intelligence community is going to the White House. There are other views,” he said, referring to the CIA. The official explained those views do not reach President Joe Biden.

For over three months, Kyiv has ordered its forces to advance on entrench Russian defensive lines in southern Ukraine. Russian minefields caused Ukraine to lose a significant portion of its Western-trained soldiers and equipment in the opening weeks of the offensive. The massive push by Ukraine resulted in nearly no territorial gains.

Still, Washington has pushed Kyiv to continue the counteroffensive. The White House acknowledges that for Ukraine to have a possibility of success, Kyiv will have to be willing to sustain high casualties.

The official told Hersh no matter how committed Kyiv is to the war effort, President Zelensky’s goals are unattainable.  “Zelensky will never get his land back,” he said.

During a meeting with Ukrainian President Volodymyr Zelensky, Secretary of State Antony Blinken said he and U.S. officials thought Ukraine’s progress in its counteroffensive against Russian forces to be “very, very encouraging.” https://t.co/xKcZu9aiDT pic.twitter.com/NrkgTNY99o

— CSPAN (@cspan) September 6, 2023

The official also spoke about the assassination of Prigozhin last month. He believes that Putin ordered the killing because the mercenary boss had begun to provoke NATO members. “By early August, there were reports of border tensions as the remnant of the Wagner Group made a series of intrusions into the airspace of Poland, and troublesome threats at the borders of Lithuania, Latvia, Estonia, and Finland,” Hersh writes, “For Putin, triggering complaints from NATO countries was an unforgivable breach. ‘That was it,’ a knowledgeable US intelligence official told me.”

Lee was only a Category 1 storm Thursday morning. In the last 24 hours, the hurricane traversing the warm Atlantic Ocean waters has doubled in wind speeds — now a dangerous Category 5. 

Hurricane #Lee Advisory 11: Lee Becomes a Category 5 Hurricane. Dangerous Beach Conditions Expected to Develop Around the Western Atlantic Through Early Next Week. https://t.co/tW4KeGe9uJ

— National Hurricane Center (@NHC_Atlantic) September 8, 2023

As of 0500 ET, Lee was about 630 miles east of the northern Leeward Islands, which are located in the northeastern Caribbean, and the storm was churning west-northwest at 14 mph with maximum sustained winds north of 165 mph. This is the first Cat. 5 storm of the 2023 Atlantic hurricane season. 

“Additional strengthening is forecast today. Fluctuations in intensity are likely over the next few days, but Lee is expected to remain a major hurricane through early next week,” NHC wrote in an update. 

NHC’s current forecast shows Lee could strengthen Friday and reach maximum sustained winds around 180 mph by the evening. This would be the strongest system in the Atlantic since Hurricane Dorian in 2019. 

#Hurricane #Lee is forecast to reach a max intensity of 180 mph. Only seven Atlantic hurricanes in satellite era (since 1966) have had max winds >= 180 mph:

Allen (1980), Gilbert (1988), Mitch (1998), Rita (2005), Wilma (2005), Irma (2017), Dorian (2019) pic.twitter.com/P5HOUDFMb3

— Philip Klotzbach (@philklotzbach) September 8, 2023

Computer models show Lee is expected to turn north early next week. But when that exactly happens is unknown. 

“It is way too soon to know what level of impacts, if any, Lee might have along the US East Coast, Atlantic Canada, or Bermuda late next week, particularly since the hurricane is expected to slow down considerably over the southwestern Atlantic,” NHC said Thursday evening. 

Authored by Lance Roberts via RealInvestmentAdvice.com,

Since the beginning of the year, economic data has continued to defy the recession calls of 2022. Therefore, it is unsurprising that economic data surprised analysts’ more dire predictions last year. Of course, given the underestimation of the economy previously, the risk of overestimation is now a real possibility.

The upgrading of estimates also contributed to the discussion of the Federal Reserve’s need to raise the “neutral rate.”

The neutral interest rate is:

“The real rate (net of inflation) that supports the economy at full employment and maximum output while keeping inflation constant.“

(Note: There is no accurate measure of the neutral rate, and it cannot be observed directly. In other words, it is a guess.)

The issue, as always, is that economists are looking at lagging economic data to make assumptions about the future. However, after over 40 years of rising debt levels, economic growth remains slowing. As shown, as debt issuance increased after each economic crisis since the turn of the century, economic growth rates declined. (I have projected the increase in debt based on the average quarterly debt growth since 2018.)

Naturally, if the economy grows at a slower natural rate, inflation and interest rates will ultimately match that growth rate. Furthermore, and most importantly, in the context of this discussion, avoiding a recession becomes increasingly challenging at lower growth rates.

While analysts become more optimistic about economic growth, the divergence of the economic data suggests increased risk to that outlook.

Production Comes First

As is always the case, predicting a recession is incredibly difficult. The influence of monetary and fiscal policy, corporate actions, and other events can increase or delay the recessionary onset. Nonetheless, restrictive policies, such as higher interest rates and tighter lending standards, will curtail the consumption that drives economic growth. The chart below is a composite index of bank lending standards and interest rates versus GDP. The financial conditions composite is inverted to compare declines in economic activity better. Unsurprisingly, tight financial conditions always precede weaker economic growth rates and recessions.

Critically, what drives the economic cycle must be understood. We often speak of the consumption side of the economic equation; however, consumers can not consume without producing something first. Production must come first to generate the income needed for that consumption. As analysts increase earnings estimates, the earnings derived from corporate revenues are a function of consumer spending. Such is a crucial part of the cycle.

The Invisible Hand

Of course, if you bypass the production phase of the cycle by sending checks directly to households, you will get a strong surge in economic growth. As shown in the chart below, the massive spike in economic growth in the second quarter of 2021 directly resulted from those fiscal policies.

However, once individuals spent that stimulus, the economic activity subsided as the production side of the equation was still lagging. Here is the crucial point. For a household to consume at an economically sustainable rate, such requires full-time employment. While the media touts the “strong employment reports,” such is mostly the recovery of jobs lost during the economic shutdown. As shown, full-time employment as a percentage of the working-age population has only recovered to pre-pandemic levels.

In other words, we have NOT created millions of new jobs, as touted by the current administration, but rather only recovered the jobs lost and the increase in the working-age population since the economic shutdown. However, higher inflation and interest rates require more income to maintain the same growth rates.

The production side of the equation is now ringing a loud alarm.

The GDP & GDI Relationship

Let’s review the economic cycle equation once again.

Production => Incomes => Consumption => Demand => Increased Employment => Increased Wages

It is a relatively simple economic concept that seems to elude the vast majority of mainstream analysts and, seemingly, the Federal Reserve itself. However, there are two measures of economic activity. The most common measure is GDP, which is simply the sum of Personal Consumption Expenditures (PCE), Business Investment, Government Spending, and Net Exports (Exports Less Imports)

The other less observed measure is Gross Domestic Income (GDI). The calculation of GDI is as follows:

GDI = Wages + Profits + Interest Income + Rental Income + Taxes – Production/Import Subsidies + Statistical Adjustments. 

Therefore, given that GDI measures the income side of the equation (derived from production), it is logical that GDI should track pretty closely to GDP over time. Furthermore, it should be logical that deviations between production and consumption should indicate a shift in the economic underpinnings.

As shown below, in 2021 and 2022, real (inflation-adjusted) GDI supported economic growth. With $5 Trillion in stimulus supporting incomes, the consumption side of the equation rose. However, beginning in the 4th quarter of 2022 and persisting through the 2nd quarter of 2023, GDI has turned negative as all of the stimulative monetary measures have become exhausted. Yet, economic growth has increased sharply over that time frame.

The following chart is a bit clearer. I rebased both GDP and GDI to 100 in 2016. Again, logically, GDI and GDP should track closely to each other given the economic relationship. However, the deviation is apparent starting last year.

The question is whether this Is an anomaly or has it occurred previously.

GDI Sends A Recession Warning

The short answer is YES.

The chart below looks at real GDP and GDI back to 1947 and measures the deviation between the 3-quarter growth rates of each. With only the expectation being in the late 70’s, a recession followed each time GDP deviated from GDI. In other words, the economic activity eventually catches down to the primary driver of consumption: production. Currently, the deviation of GDP from GDI is the largest on record.

In past articles, we reviewed many indicators that typically preceded recessionary onsets. Falling tax receipts, inverted yield curves, student loan payments, leading economic indicators, and even our economic composite confirm that recessionary risks remain elevated. As shown, based solely on the inverted yield curve alone, the probability of a recession is at one of the highest levels since the 1980s.

Given the wide range of other confirming indicators previously discussed, betting on the “avoidance” of a recession, particularly given such tight financial conditions, seems risky. Such was a point made in “Financial Conditions Are Tighter Than You Think.” To wit:

“As shown below, financial conditions, measured by the difference between the 10-year Treasury yield and the “neutral rate,” clearly reside in restrictive territory. Such has previously always preceded an economic downturn since 1980.”

However, even if you want to dismiss all of the other indicators discussed previously under the guise of “it’s different this time,” the recessionary warning sign sent by the spread between GDP and GDI should likely not be.

Sure, this “time could be different.” The problem is that, historically, such has not been the case. While we must weigh the possibility that analysts are correct in their more optimistic predictions, the probabilities still lie with the indicators.

GDI is increasing those probabilities.