Month: May 2024

By Simon Watkins of OilPrice.com

The death of Iranian President Ebrahim Raisi in a helicopter crash on Sunday 19 May has reignited optimism among some that Iran’s stance towards the West may soften again into the pragmatic approach of his reforming predecessor, President Hassan Rouhani.

For the moment, presidential power has been transferred to Vice President Mohammad Mokhber, but a snap election is due to be held on 28 June to determine the president for the next four-year term. So, will it usher in a new dawn of better relations between Iran and the West of the sort that previously saw the forging of the Joint Comprehensive Plan of Action (JCPOA, or colloquially ‘the nuclear deal’) on 14 July 2015?

It is true that when he was elected president on 3 August 2013, former President Rouhani was instrumental in allowing more access for Western companies into Iran’s key businesses – including its huge but still relatively underdeveloped oil and gas sectors – in exchange for allowing greater oversight of its nuclear program. From Iran’s side, this would see a huge influx of investment from the West that would swell the coffers of an economy blighted by decades of international sanctions. This in turn would alleviate increasing social discontent from a large proportion of Iran’s young, well-educated, and non-Islamic fundamentalist population. It would also, as far as the country’s Islamic Revolutionary Guards Corps (IRGC) was concerned, provide funding for a stealthy advancement in key elements of its nuclear program and for the plugging of technology gaps elsewhere in its economy, as analyzed in full in my new book on the new global oil market order. After the signing of the JCPOA, commitments for massive investment rolled in from scores of Western firms, and Rouhani won a second term as president. It was at this point, though, that the P5+1 group of nations (the U.S., U.K., France, Russia, and China plus Germany)  that had signed the JCPOA deal revealed their own surprise, which was that they essentially wanted to dismantle the power of the IRGC across all key areas of Iran’s political and economic life, as also detailed in the book. It was at that point that the JCPOA began to fall apart, even before the U.S. unilaterally withdrew from the deal on 8 May 2018.

More than any other factor, the failure of the deal underlined that in reality there is no such thing as a ‘moderate’ Iranian politician in the truest sense of the word. Rouhani had been keen to re-engage with the West based solely on the beneficial economic considerations for Iran and not on some deeper ideological basis that might include embracing anything other than the notion of Iran as a fundamentalist Islamic state. Crucially, he had only been able to do so with the full blessing of Iran’s Supreme Leader, Ali Khamenei, and the ‘Guardians of the Islamic Revolution’, the IRGC in his first presidential term. When the powers of both were threatened by the JCPOA as it evolved past Rouhani’s first four years, the deal was effectively dead from the Iranian side. In this sense, then, there is no meaningful difference between those commonly portrayed in the West as Iranian political ‘moderates’ or ‘hardliners’, with the only variance in politicians being the degree of freedom they have been allowed by the Supreme Leader and the IRGC at any given moment. Moreover, as also analyzed in my new book, the portrayal of Iranian politicians as either moderate or hardliner has been encouraged by the IRGC as a ploy to leverage the West into certain negotiating positions and certain deals by playing up to its fears of ‘further empowering the hardliners’, or ‘undermining the moderates’.

“At the centre of the guiding principles for all top-level Iranian politics is the concept of Velayat-e-Faqih, which means that all serious political and religious authority is entrusted to the [Shia] clergy, which makes all key decisions for Iran, provided that they have been approved by the Supreme Leader, and this is then enforced by the Guardians of the [1979] Revolution, the IRGC,” a senior source close to Iran’s Petroleum Ministry exclusively told OilPrice.com. “These decisions cover everything of significance for Iran, from foreign policy, through defence policy, economic policy, and intelligence policy, to any domestic policy over and above how many aerials a specific apartment complex in Tehran can have on its roof,” he added. “It should be remembered that [former President, Hassan] Rouhani himself – often cited as a moderate – began his adult life as a cleric, becoming an ardent follower of the leader of the 1979 Revolution, Ayatollah Ruhollah Khomenei,” he said. “This structure is reinforced with the second element in Iran’s power structures that pre-determine the type of president it will have after the next election, which is the Majlis,” he underlined. The Majlis – Iran’s 290-member parliament – is an elected house, but its real powers are confined to determining non-essential matters, although even these decisions can be overturned by the Guardian Council of the Constitution, which approves all legislation. In turn, this 12-member body acts in the manner of a general constitutional overseer, with half of its membership always being Shia theologians directly chosen by the Supreme Leader himself. The other six members are lawyers selected by the head of the judiciary, who in turn is also directly appointed by the Supreme Leader. 

The final element of pre-determination in the upcoming Iranian presidential elections is the pre-selection process for ‘suitable candidates’ for the position by a body over which no one, except the Supreme Leader, has any authority at all – the Expediency Discernment Council of the System. The Expediency Council will vet all candidates and then pass the list to the Guardian Council, which will then publish the official shortlist of shortly before the election date. The Expediency Council was originally created by the Supreme Leader to resolve any differences that arose between the Guardian Council and the Majlis, but it also now functions as a key advisory body to the Supreme Leader. According to the Iran source, Iran’s Supreme National Security Council will also send a ‘foundation document on candidates’ to the Expediency Council that stresses the current security concerns of Iran’s key geopolitical backers – China and Russia. “This document will ensure that all the shortlisted candidates have ideas on politics, economics, and global security that are congruent with those of our Chinese and Russian partners,” the Iran source exclusively told OilPrice.com last week.

The late President Raisi was what the West terms a hardliner, but even he was given no say in Iran’s backing for Hamas’s 7 October 2023 attacks on Israel or on the 13 April drone and missile attacks directly on Israel, according to the senior Iran source. “He also had no say on Iran’s maneuvering of the Houthis to attack ships in the Red Sea area, or to threaten Saudi Arabian oil facilities or any such matters, and nor will the next president whoever it is,” he said. “All the key decisions will continue to be made by the Supreme Leader in conference with the IRGC,” he added. This said, a far more important appointment for Iran’s future may come from the replacement of Raisi on the Assembly of Experts, which is the group that chooses the new supreme leader when the ailing 85-year-old Khamenei dies. “For a long time, Khamenei has looked to his son, Mojtaba, to replace him as Supreme Leader, and he could well be appointed to the Assembly of Experts,” the Iran source underlined last week. “This would be the genuinely big event following Raisi’s death,” he concluded.

In a witty turn of the phrase, Bloomberg writes today that “the US stock market is finally as fast as it was about a hundred years ago” and it’s true: it’s been about one century since share trades in New York settled in a single day, as they will from Tuesday under new SEC rules.

The change, which cuts in half the time it takes to complete every transaction, us also occurring in Canadian and Mexican markets starting Monday; For some investors, one-day settlement cycles may mean greater convenience. For others, T+1 may require closer attention to how shorter settlement times could affect one’s investment, trading, or tax decisions. It also means that settlement will still take about 24 hours longer than any single crypto transaction, all of which settle instantly and securely courtesy of the blockchain.

That’s right: even in this age of instant communication and live financial data, investors still had to wait at least two days to take ownership of the stocks they purchase or to receive payment for the stocks they sell. That’s about to change. Starting today, May 28, US trades will “settle” (complete the exchange of dollars for stock) in one day rather than two.

US banks, brokers and investors have been forced to review all of their post-trade technologies and procedures to ensure they are ready for the new pace of stock trading. The change poses a special challenge to investors outside the US who need to buy dollars as part of their stock trades.

The switch to the system known as T+1, abandoned in the previous era as volumes became unwieldy, is intended to reduce risk in the financial system. Yet there are worries about potential teething issues, including that international investors may struggle to source dollars on time, global funds will move at different speeds to their assets, and everyone will have less time to fix errors.

While the hope is that everything will run smoothly, even the SEC warned last week the transition may lead to a “short-term uptick in settlement fails and challenges to a small segment of market participants.” The finance world’s main industry group, the Securities Industry and Financial Markets Association, has instigated what it calls the T+1 Command Center to identify problems and coordinate a response.

Courtesy of Bloomberg, here is a useful primer on where the change comes from, and what it will mean for markets.

1. Background

Stock trades before the computer age involved the physical exchange of stock certificates, which often took five days or more. That became a problem in the late 1960s as the stock market finally climbed its way back to its 1929 peak. As public participation in the stock market increased, trading volume skyrocketed to 12 million shares a day in 1970 from 3 million a day in 1960. With the industry’s growth prospects threatened by a “paperwork crisis,” the New York Stock Exchange created a central clearinghouse that would hold the millions of certificates owned by its member firms. That set the stage for transactions to become computer-automated.

2. How did the clearinghouse speed up stock settlements?

Transferring ownership among members of the clearinghouse required only a “book entry,” eliminating the need to physically transfer shares. The Securities and Exchange Commission has been gradually shortening the settlement cycle since the early 1990s, from five days to the current “T+2,” where the T stands for the “trade” or “transaction” date. The shift to T+1 means retail and institutional investors will get the proceeds of their transactions in a matter of hours.

3. What’s behind the change to T+1?

The “meme stock” trading frenzy in early 2021 highlighted the need to update the market infrastructure that transmits and settles stock trades. As amateur traders prompted by social media postings bought up shares of inexpensive stocks like GameStop Corp. and Bed Bath & Beyond Inc., operators of retail trading platforms like Robinhood Financial Inc. had to post collateral for those trades during the two days it took to settle them. As the prices rose along with the stocks’ volume and volatility, Robinhood started to restrict the purchasing of those stocks to ensure it had enough capital to cover the collateral. That drew loud rebukes from retail traders and scrutiny from regulators and members of Congress.

4. Why the need for collateral?

Brokers are required to post collateral, also known as margin, in a fund held by the Depository Trust & Clearing Corp. — the modern Wall Street clearinghouse for stock trades. This way, both sides of a trade are protected if one party defaults, or fails to hold up its commitment.

5. What are the benefits of T+1?

The SEC has said that a shorter settlement window means lower odds that the buyer or seller might default before the transaction is completed. That translates to lower margin requirements for the broker and a lower risk that high volumes or volatility will force a broker to restrict trades. (US Treasuries and mutual funds already settle at T+1.)

6. What are the challenges for T+1 in the US?

The SEC has also said that T+1 could increase some operational risks. As the new rule was being finalized, SEC Commissioner Mark Uyeda said that speeding up settlements would mean less time for participants to address errors in the transaction process and for regulators to block the potential proceeds from frauds, among other challenges.
“Transition to a shorter settlement cycle may lead to a short-term uptick in settlement fails and challenges to a small segment of market participants,” SEC Chair Gary Gensler said in a written statement a week before the changeover.

7. How about outside the US?

The halving of the time it takes to settle equity transactions will put US stocks out of step with the $7.5-trillion-dollar-a-day global market for currency exchanges, which typically take two days to complete. Many overseas institutions trying to buy US assets will need to secure dollars in advance to ensure they have them in time to complete a transaction. Failure to do so might cause some purchases to fall through entirely. The European Fund and Asset Management Association, which represents firms managing €28.5 trillion, has warned that as much as $70 billion of daily currency trading could be at risk from a faster US settlement cycle.

Brokers and investors in Asia face a particular time crunch to be able to execute their trades by the US market close so they meet the industry’s 9 p.m. New York time deadline for trade “affirmation,” the last step before settlement. FX liquidity dries up in the US afternoon, when other markets are shut.

Some funds, such as Baillie Gifford, have chosen to move traders to the US. Others like Jupiter Asset Management are purchasing dollars in advance, while yet more will look to outsource their FX trading. All options come with costs. More than half of European financial companies with fewer than 10,000 staff are planning to either move people to North America or hire overnight staff, a survey sponsored by the DTCC found last year.

8. Why not T+0?

Gensler has said that modern technology could shorten the transaction process “to same-day settlement (T+0 or T+evening)”, especially if blockchain is used to enable instant settlement. That would further reduce the risk that one part or the other would default before settlement. But the Securities Industry and Financial Markets Association, the trade group known as Sifma, says that such a change would require expensive modifications to market operations. The group said T+0 could result in many more “failed trades” and fraud because there would be less time to fix incorrect settlement instructions or spot compliance problems.

9. What are banks doing to prepare for T+1?

Financial trade groups like the Investment Company Institute have said their industry is on track in preparing for the transition. Banks have drawn up transition plans to keep on top of any potential hiccups. They’re paying particular attention to a so-called double-settlement day on May 29 — when US trades from the old T+2 cycle will come due at the same time as the first batch of T+1 trades — and preparing for some of the world’s major indexes to rebalance their lineups at the end of the month, just days after the shift.

T+1 is also changing banks’ longer-term decisions: The securities services arm of Societe Generale SA, for example, is among non-US institutions extending the hours for some staff, while Citigroup Inc. is moving part of its team in Kuala Lumpur to a Tuesday-through-Saturday schedule instead of a typical Monday to Friday one to better align with the US trading week.

10. Are other countries making the change?

Yes. India is already on T+1, and regulators have approved a soft launch of same-day settlement in 25 stocks, as it attempts to lure back retail investors who’ve been shunning direct bets on shares in favor of more complex derivative products. China’s markets operate with a mix of same-day to T+2 settlement speeds. Canada and Mexico are poised to make the shift to T+1 in May. The UK plans to move to T+1 no later than the end of 2027. The US is also pressing the European Union to align with T+1, and the bloc’s financial regulation chief, Mairead McGuinness, has said the “question is no longer if, but how and when” the bloc will make the move. Australia is also weighing a move to T+1.

Authored by Mike Maharrey via Money Metals,

Could the world be creeping closer to a monetary gold standard? 

Steve Forbes sees signs that it is.

In a recent article published by Forbes Magazine, Steve Forbes wrote that it may seem hard to believe, but the world is “beginning to lurch toward a gold-based monetary system.”

“This, despite the fact that the historical gold standard is held in almost universal contempt by economists and financial officials.”

Forbes argued that this disdain for a gold standard is misplaced, pointing out that during the 180 years that the dollar was tied to gold, the U.S. enjoyed the greatest long-term growth in human history without the ravages of price inflation.

“Since the greenback’s link to gold was severed, our aver­age historic growth rates have fallen by about a third. Me­dian household income today would be at least $40,000 higher if our traditional pattern of growth for those 180 years had been maintained. Nonetheless, the contumely and scorn for a gold­based monetary system is universal.”

That’s because government people and their support system in academia and media hate gold.

Why Is There Such Disdain for a Gold Standard?

Because it limits the growth of government.

In fact, you could argue that by rejecting the gold standard, the U.S. traded economic growth that benefits the average person for government growth that benefits the political class.

Franklin D. Roosevelt took the first steps to abandon the gold standard in the 1930s.

With the dollar tied to gold, the Federal Reserve was unable to significantly increase the money supply during the Great Depression. It couldn’t simply fire up the printing press as it can today. The Federal Reserve Act required the central bank to hold enough gold to back at least 40 percent of the currency notes in circulation.

But the central bank was low on gold and up against the limit.

To solve this “problem,” FDR nationalized gold, removing it from public hands with a confiscation order. He then arbitrarily increased the fixed price of gold to $35 an ounce. This effectively boosted the value of gold on the Federal Reserve’s balance sheet by 69 percent. 

By increasing its gold stores through the transfer of private gold to the Fed, and declaring a higher exchange rate, the Fed could circulate more paper money. In effect, the hoarding of gold by the government allowed it to inflate the money supply.

President Richard Nixon severed the last link to the gold standard in 1972 when he closed the “gold window.”

While Americans were legally prohibited from redeeming dollars for gold by FDR’s moves in the 1930s, foreign governments retained that privilege. In the 1960s, the Federal Reserve initiated an inflationary monetary policy to support government spending for the Vietnam War and President LBJ’s “Great Society.” These inflationary policies rapidly devalued the dollar. Foreign governments responded by redeeming dollars for gold. As gold flowed out of the U.S. Treasury, officials worried it could completely deplete the country’s gold reserves.

This is exactly how a gold standard is supposed to work. It limits the amount the money supply can grow and constrains government spending.

Instead of insisting on fiscal and monetary discipline, Nixon simply cut the dollar’s last ties to gold. Since then, the Fed has been able to print money with virtually no restraints.

Is a Gold Standard Coming Back?

This monetary malfeasance has consequences. It incentivizes debt. It devalues the currency. It drives malinvestments in the economy and boom-bust cycles. The negative impacts of a fiat currency system could push the world back into the arms of gold.

As Forbes put it, “Events … have a peculiar way of forcing things once unthinkable into the forefront of consideration, and then into reality.”

Forbes points out four signs that point to a return to some kind of monetary gold standard.

1. Central Bank Gold Buying

Central banks have been gobbling up gold at a record pace. Last year, central bank gold buying fell just 45 tons short of 2022’s multi-decade record.

According to the World Gold Council, central banks’ net gold purchases totaled 1,037 tons in 2023. It was the second straight year central banks added more than 1,000 tons to their total reserves.

Central bank gold buying in 2023 built on the prior record year. Total central bank gold buying in 2022 came in at 1,136 tons. It was the highest level of net purchases on record dating back to 1950, including since the suspension of dollar convertibility into gold in 1971.

China, India, Russia, Turkey, and other emerging market banks have driven this buying spree.

“These countries are reacting to growing doubts about the long-­term value of the dollar, which in turn is a symptom of the perceived decline of the United States,” Forbes wrote.

2. The Rise of Cryptocurrencies

Forbes argues that the growing interest in crypto is a “high-tech cry for help in the face of increasingly unreliable fiat currencies.”

3. The Binge of Debt Creation

As already noted, fiat money systems incentivize debt. We see this playing out today with government, corporate, and personal debt at record levels. Much of the United States’s economic growth over the last 18 months has been put on credit cards.

Debt isn’t just a problem in the U.S. Global debt has grown to $300 trillion, three times global GDP.

This is unsustainable. Forbes argues that debt “will inevitably kindle crises that cannot be easily extinguished.”

4. The Rise of BRICS

BRICS is an economic cooperation bloc originally made up of Brazil, Russia, India, China, and South Africa. As of Jan. 1, 2024, the bloc expanded to include Saudi Arabia, Egypt, the UAE, Iran, and Ethiopia. More than 40 other nations have expressed interest in BRICS membership.

BRICS countries have floated the idea of an alternative currency to compete with the dollar, along with new payment systems that would dent U.S. economic hegemony.

Meanwhile, India is experimenting with gold-based government bonds.

Forbes said that these “monetary mechanizations” haven’t amounted to much – yet. But it does reflect a general shift away from the dollar and toward something else. The most logical something else is gold.

Even Zimbabwe, the poster child for monetary hyperinflation, has turned to the yellow metal.

“Deep skepticism is warranted that this government has the discipline to make such an arrangement work,” Forbes wrote, “But the move is a sign of things to come.”

The Impact of a Gold Standard 

A gold standard would drive the price of gold significantly higher.

 Financial analyst and investment banker Jim Rickards also sees the world tilting toward a gold standard.

Like Forbes, Rickards understands that there will always be a lot of resistance to a gold standard because it limits government. But he also sees a scenario where events force governments’ hands.

“What if confidence in command currencies collapses due to some combination of excessive money creation, competition from Bitcoin, extreme levels of dollar debt, a new financial crisis, war or natural disaster? In that case, central bankers may return to gold not because they want to, but because they must in order to restore order to the global monetary system.”

If the world were to turn to gold, Rickards calculates that gold would need to settle somewhere in the neighborhood of $27,000 an ounce.

There are plenty of roadblocks in any path back to sound money, but as the saying goes, necessity is the mother of invention. If the global fiat system collapses, it has to be replaced with something. Gold has been money for 5,000 years, so it is a logical choice.  And as I like to say –  eventually, economics always wins.

Two words – F**king NVDA – sum up today as the AI giant accelerated on the back of a gamma-squeeze…

Source: SpotGamma

…which created these gains…

And now we are up 4500% in one day.

Hey @garygensler, maybe once you emerge from under Senator Karen’s skirt, you can pretend to do your job. https://t.co/fuYk6xWcZx pic.twitter.com/XdNHKutx8l

— zerohedge (@zerohedge) May 28, 2024

…to within $100 Billion of AAPL’s market cap…

Source: Bloomberg

…that is an addition of almost $500 billion since earnings last week.

And as NVDA soared…

Source: Bloomberg

…the major indices tumbled from Friday’s cash market close. The Dow is the biggest loser, followed by Small Caps. Nasdaq tried desperately to hold on to a green close while the S&P faded. The ubiquitous last minute ramp made things look a little better on the day…

NOTE – yesterday – while cash markets were closed, the algos seemed to forget and panic-bid futs into the early close.

“What I think this sets up for in the medium- to long-term is a price-action that looks more like either a grinding move higher but also one too where we have actual conditions to crash-down,” says Nomura’s Charlie McElligott. He notes that investors’ long exposure has been rebuild to such a degree that it’s creating actual downside hedge demand.

With US elections also entering their hot phase soon, it’s worth noting that VIX futures are already reacting with some sensitivity and rather early to this topic.

NVDA was not the only thing rising today though – oil prices surged back above $80 (WTI), Gold jumped back above $2360, Bitcoin spiked back above $70,500 overnight (before fading on Mt.Gox moves), the dollar ripped higher, and US Treasury yields soared after two auctions and some stronger than expected macro data (home prices at record highs and conference board confidence, and inflation expectations, rising).

We do note two things – Dallas Fed Manufacturing tumbled today more than expected and while the headline confidence data picked up at The Conference Board, the lowest income cohort saw confidence plunged to pandemic lows…

Source: Bloomberg

Treasury yields were up across the board with the long-end underperforming. Selling was pretty constant from the US cash equity open…

Source: Bloomberg

That steepened the yield curve significantly…

Source: Bloomberg

Interestingly (given the steepening and short-end outperformance), rate-cut expectations (hawkishly) fell significantly on the day…

Source: Bloomberg

The dollar followed yields higher…

Source: Bloomberg

Gold managed to hold gains despite the dollar strength…

Source: Bloomberg

After 10 straight days of net ETF inflows, Bitcoin extended gains overnight, back above $70,000. However, moves in Mt.Gox-related wallets prompted selling in anticipation of selling pressure to come…

Source: Bloomberg

Oil prices soared back above $80 (WTI)…

Source: Bloomberg

Finally, this is probably nothing…

Source: Bloomberg

…because it’s different this time.

Authored by Lance Roberts via RealInvestmentAdvice.com,

Corporate greed is not causing inflation, despite the claims of many on the political left who failed to understand the very basics of economic supply and demand.

“If you take a look at what people have, they have the money to spend. It angers them and angers me that you have to spend more. It’s like 20% less for the same price. That’s corporate greed. That’s corporate greed. And we have got to deal with it. And that’s what I’m working on.” – President Biden via CNN

Yes, prices have certainly gone up due to inflation. However, that wasn’t the fault of corporations. The surge in inflation directly resulted from the supply-to-demand imbalance caused by shutting down the economy (supply) and increasing household purchasing power by sending them checks (demand).

For the majority of Americans who now get their “news” from social media, the uneducated masses now have a new target of hatred for their financial woes – corporate greed.

A Claim Of Absurdity

The problem, as with many of the narratives ramping up the ire of Americans on social media, is it is patently false.

As Michael Maharrey previously penned:

“One simply has to reason through the claim to uncover the absurdity. If corporations can willy-nilly raise prices and enjoy “excessive” profits, why don’t they do it all the time? Did corporations suddenly get greedy in 2021? And why did the Federal Reserve spend a decade fretting about inflation being ‘too low’ as it struggled to hit its 2% target? Was there not enough corporate greed before coronavirus?”

When you think about it this way, something else apparently happened.

Let’s begin with Powell’s assessment of the cause of inflation.

“The ongoing episode of high inflation initially emerged from a collision between very strong demand and pandemic-constrained supply. By the time the Federal Open Market Committee raised the policy rate in March 2022, it was clear that bringing down inflation would depend on both the unwinding of the unprecedented pandemic-related demand and supply distortions and on our tightening of monetary policy, which would slow the growth of aggregate demand, allowing supply time to catch up.”

It’s crucial to note the complete dismissal of the causes behind the “collision between robust demand and pandemic-constrained supply.” I suspect this was intentional in avoiding placing blame at the feet of the current or previous administrations or themselves. However, it muddies the impact of their actions that created the problem.

The following economic illustration is taught in every “Econ 101” class. Unsurprisingly, inflation is the consequence if supply is restricted and demand increases via monetary interventions.

• Who had the power to shut down the entire economy and force everyone into their homes using a fear-driven campaign? Was it the war, corporations, or the Government?

• Who then supplied trillions in stimulus checks directly to households to spend when no supply could be produced? Was that corporations? Russia? Or was it the Government?

• Who supported the issuance of trillions in debt issuance to fund those stimulus checks and keep interest rates suppressed? Was that the Federal Reserve, Russia, or corporations?

• Was it corporations that put a moratorium on student loans, rent, and mortgage payments, giving individuals a source of additional funds to spend? Or was it the Government?

Milton Friedman also had much to say on this issue.

Corporate Greed Does Not Cause Inflation

Regarding inflation, many armchair economists are quick to quote Milton Friedman.

“Inflation is always and everywhere a monetary phenomenon.”

The problem is there is much more to Friedman’s statement on the cause of inflation.

As Milton Friedman once stated, corporations don’t cause inflation; governments create inflation by printing money. 

“It is always and everywhere a result of too much money, of a more rapid increase of money, than of output. Moreover, in the modern era, the important next step is to recognize that today the governments control the quantity of money so that, as a result, inflation in the United States is made in Washington and nowhere else. Of course, no government any more than any of us, likes to responsibility for bad things.

All of us are humans. If something bad happens, it wasn’t our fault. And the government is the same way, so it doesn’t accept responsibility for inflation. If you listen to people in Washington talk, they will tell you that inflation is produced by greedy businessmen, or it’s produced by grasping unions, or it’s produced by spendthrift consumers, or maybe its those terrible Arab sheiks who are producing it.”

As he concludes:

“But none of them produce inflation, for the very simple reason that neither the businessmen, not the trade union, nor the housewife have a printing press in their basement on which they can turn out those green pieces of paper we call money. Only Washington has the printing press, and therefore, only Washington can produce inflation.”

The inflation surge has nothing to do with corporate greed taking advantage of consumers but rather the actions of the Federal Reserve and the Government. The cause of inflation was the economic consequence of “too much money chasing too few goods.”

Milton Friedman’s statement is supported by the chart below showing the M2 money supply compared to inflation (with a 16-month lag).

You can watch Milton’s entire speech on “Money and Inflation.”

Corporations Respond To Inflation

So, if it isn’t corporate greed, why are corporations raising prices so much on everything?

Corporations have a responsibility to their shareholders to remain in business. If the costs to their business increase (i.e., wages, benefits, commodities, utilities, etc.), such must be factored into the selling price to maintain profitability. Crucially, corporations can only pass on higher input costs to consumers if demand remains higher than the available supply of those goods or services.

In 2020 and 2021, corporations could pass on most of the inflationary increase to consumers as they were willing to spend the Government’s money. However, as excess savings run out, inflation declines as consumers decrease spending. Corporate profits weaken as the ability to pass on higher input costs to customers fades. As shown, as inflation declines, the rate of change in corporate profits also weakens.

We see the same if you use a two-year average of corporate profits minus inflation. Again, when inflation surged in 2020, corporations could pass on the bulk of the cost increases to consumers. Today, as inflation slows due to declining demand, corporations must absorb the inflation to sell products or services.

Another way to view this issue is by comparing the spread between the consumer price index (what consumers pay for goods and services) and the producer price index (what corporations pay). When inflation rises, and consumer demand exceeds supply, corporations can pass on higher input costs to consumers. Corporations absorb higher input costs when inflation declines to sell products or services.

Here is the crucial point:

“Corporations don’t create inflation. They merely react to changes in demand and adjust pricing and supply to maintain profitability. When the consumer slows down, corporations cut prices to reduce supply.”

Who Is Responsible For Inflation?

If there is a “greed factor” in inflation, it is more of a function of political policy and Wall Street. Let’s start with political policies.

Most government policies are passed to appease the masses in one form or another, but mostly to appease those who fund campaigns to keep them in office. We have already addressed the side effects of shuttering the economy and sending checks to households while halting debt payments. That had nothing to do with corporate greed, but the voting base was happy getting “free money.”

There are also policies pushed at the state level that result in higher inflation but keep politicians in office. For example, California’s minimum wage hike to $22/hour is an inflationary policy. Corporations’ obvious response is to raise prices to offset the higher wage costs.

As discussed in “$15/Hour Cost & Consequences,” wage increases are not a “free lunch.” To wit:

“Labor costs are the highest expense to any business. It’s not just the actual wages, but also payroll taxes, benefits, paid vacation, healthcare, etc. Employees are not cheap, and that cost must be covered by the goods or services sold. Therefore, if the consumer refuses to pay more, the costs have to be offset elsewhere.

For example, after Walmart and Target announced higher minimum wages, layoffs occurred and cashiers were replaced with self-checkout counters. Restaurants added surcharges to help cover the costs of higher wages, a “tax” on consumers, and chains like McDonald’s, and Panera Bread, replaced cashiers with apps and ordering kiosks.”

Furthermore, Wall Street itself is a factor. Prices of commodities are controlled by traders on the New York Mercantile Exchange. Those traders look for opportunities to place bets on commodities based on many events that could impact supply, such as weather, transportation disruptions, or geopolitical conflicts. Take a look at the commodity index below.

That surge in commodity prices, which resulted from the economic shutdown, raises the cost of input prices to corporations. That additional cost must be accounted for in the production process and is ultimately passed on to the consumer.

This isn’t corporate greed. The increased cost to consumers is a byproduct of Wall Street raising the price of commodities to gain profit from supply disruptions.

While it is easy to blame corporate greed for higher prices, it is not the fault of corporations. As noted, corporations are responding to higher input costs to maintain profitability for both shareholders and to remain in business.

No, corporate greed is not responsible for inflation.

Yes, it is a nice fantasy that corporations should eat higher costs and be benefactors to consumers.

However, corporations are not charities.

Calls are growing for escalation in Ukraine, with EU foreign policy chief Josep Borrell on Tuesday joining in the chorus of Western leaders urging allowing Kiev to attack Russian territory with West-supplied weaponry.

Borrell said that Ukraine has a right to strike back: “According with the law of war, it is perfectly possible and there is no contradiction,” he said in a meeting with European Union defense ministers. Sweden agrees with him.

“I could retaliate or I could fight against the one who fights against me from his territory,” Borrell said, adding: “You have to balance the risk of escalation and the need for Ukrainians to defend.”

So far Washington, which has recently supplied the US Army’s ATACMS with a max range of 190 miles, has not officially overturned its prohibition on using American missiles for strikes inside Ukraine. Germany has also been reluctant to change policies.

Borrell’s fresh remarks come soon on the heels of NATO Secretary-General Jens Stoltenberg saying in a weekend interview with The Economist that “The time has come for allies to consider whether they should lift some of the restrictions they have imposed on weapons donated to Ukraine.”

“To deny Ukraine the possibility of using these weapons against legitimate military targets on Russian territory makes it very hard for them to defend themselves,” Stoltenberg had explained.

Meanwhile, NATO’s newest member is also joining the crowd, jumping on the bandwagon in favor of strikes on Russian territory:

Sweden has permitted Ukraine to use its donated military weapons to strike deep into Russia — a bold move seen as an attempt to influence other nations to do the same.

Kyiv has long called for greater freedom to hit targets in Russia by lifting the restrictions imposed by Western nations on their donated weapons.

The country’s Defense Minister Pal Jonson said Ukraine is up against an “unprovoked and illegal war of aggression” by Russia and thus it has a  right to defend itself by any necessary means.

‘Balance the risk of escalation and the need for Ukrainians to defend’ – Borrell ahead of EU talks with Western allies divided on allowing Ukraine to strike Russia #Ukraine #Russia #Borrell #NATO #OTAN #Ukrainian #Western #weapons pic.twitter.com/M4O1gFkuMU

— Viory Video (@vioryvideo) May 28, 2024

“As long as the military actions comply with the laws of war, Sweden stands behind international law and Ukraine’s right to defend itself,” Jonson said while discussing the question of Swedish weapons in Ukraine. Despite being relatively small in size, the Scandinavian country is the world’s ninth biggest donor of defense aid to Ukraine. The US of course tops the list.

Authored by Garfield Reynolds via Bloomberg,

Even in an environment where implied volatility readings are grinding lower, there’s some noticeable angst appearing around the November US elections. 

Bond traders look much more uncertain about the outlook for six months ahead than they do for the coming month, which underscores the potential for turmoil with both presidential candidates leaning toward increased spending.

There’s also speculation that Donald Trump would follow through after his comments earlier this year that he wouldn’t reappoint Jerome Powell as Fed Chair if he wins the US election.

The so-called fear gauges for Treasuries are showing the widest gap since 2014 between expectations for yields swings six months from now and the expectations for a month ahead. That’s similar to the picture for a range of currencies – the yuan’s 6 month-1 month volatility gap is the widest since 2016.

Equities look far less concerned, with the similar spread for the VIX only around the highest this year.

Bonds, and currencies for that matter, also have more than just the election on their plate when they look ahead toward the concluding weeks of 2024. Traders are seeing the November-December period as crucial for the Fed’s easing cycle, if it does indeed turn up this year.

OIS contracts show one reduction this year as the most likely outcome – with November or December the focus of bets for when the rate cut comes.

As of the end of last week swaps priced in an 80% chance for a cut by the end of the November FOMC meeting, and signaled they were certain there would be at least one reduction for 2024 once the December meeting concludes.

They even seem to envisage a scenario where the Fed carries out back-to-back easings in the final two meetings of the year.

The end of this year is seen as being at least as exciting on the economic front as it could be on the political side of things.

Bond traders will be hoping they face a Happy New Year indeed after what they expect to be a relatively tumultuous run into Christmas.

Israeli tanks have reached the heart of Rafah overnight amid continual heavy bombardment and shelling. Local eyewitnesses say they’ve reached a roundabout in the center of the city which forms a key landmark.

Images and footages to emerge Tuesday have confirmed the advance of tank columns and IDF infantry deep into Rafah, which has sent thousands more displaced Palestinians fleeing from the Western half of the city, where the most intense fighting is happening. 

Additionally BBC has observed of IDF tanks that overnight “they also seized control of the highest hilltop along the Gaza-Egypt border after reported gun battles with Hamas-led fighters.”

Airstrikes have continued to increase in intensity on the Western outskirts, especially on the al-Faluja area which lies west of Jabalia camp.

Following the Sunday bombing of a refugee tent camp in a designated safe zone which reportedly killed 45 people, there are emerging reports of another catastrophic air raid:

The air raid targeted al-Mawasi in western Rafah, an area where tents have been set up to house displaced Palestinians. It is also a designated humanitarian area to which Israeli authorities told Palestinians to flee.

“Among them are 13 females were killed. Israeli forces targeted another makeshift tent [area] where most of the people were women and children,” Al Jazeera’s Hind Khoudary said, reporting from Deir el-Balah.

Pressure out of Europe in particular is growing, amid ongoing EU discussions over possible sanctions against Israel and after last week’s ICJ (World Court) call for immediate ceasefire, but so far the Netanyahu government is defiantly pushing forward its anti-Hamas operation.

Hamas has issued a statement meanwhile, as tanks plunge deeper into Rafah, calling on the UN Security Council to take “practical and immediate measures” to halt the invasion of Rafah city.

The statement said that the southernmost major city in Gaza “is being subjected to indiscriminate barbaric Zionist bombing, affecting homes and tents of displaced people in various parts of the city.”

“The UN Security Council is required to fulfill its legal and moral responsibilities in the face of the criminal Zionist entity’s disregard for the decision of the International Court of Justice, which ordered an immediate halt to the aggression against the city,” the Hamas statement added.

Exclusive footage from Al Jazeera shows Israeli occupation tanks advancing further into the west of Rafah city.

The Israeli occupation intends to fully occupy the Philadelphi Axis with Egypt, effectively encircling the Strip and implementing disastrous restrictions. pic.twitter.com/6rgaIOJ8XK

— Quds News Network (@QudsNen) May 28, 2024

This comes a day after the White House appeared to justify Sunday’s Israeli attack on the refugee encampment. A Biden national security spokesperson told CNN on Monday, “The devastating images following the IDF strike in Rafah last night that killed dozens of innocent Palestinians are heartbreaking.”

“Israel has a right to go after Hamas, and we understand this strike killed two senior Hamas terrorists who are responsible for attacks against Israeli civilians,” the statement said. Axios has since reported:

The Biden administration is still assessing whether an Israeli strike that killed at least 45 displaced Palestinians at a tent camp in Rafah on Sunday is a violation of President Biden’s “red line,” two U.S. officials told Axios.

So far the administration has stalled some ammo shipments, even while approving more massive defense aid packages and funding for Israel, in a largely symbolic move meant more for deflecting criticisms from Progressive Democrats.

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The U.S. Supreme Court on May 28 said it was rejecting a bid by lawyer Michael Avenatti, known for representing adult film actress Stormy Daniels, to overturn his conviction in a Nike-related case.

The justices did not explain their decision. The court said Justice Brett Kavanaugh, an appointee of former President Donald Trump, did not participate in the decision to turn down Mr. Avenatti’s writ for certiorari, or review of a lower court ruling.

Mr. Avenatti has represented a woman who accused Justice Kavanaugh of sexual assault.

Mr. Avenatti was convicted in 2020 of extorting Nike and defrauding a client.

At the center of the Nike-related case was a threat, caught on an audio recording, made by Mr. Avenatti in 2019. He threatened to tarnish the athletic wear company’s reputation and hurt its stock price by exposing its alleged corrupt payments to the families of college basketball prospects.

Mr. Avenatti was heard threatening to “blow the lid” on Nike at a press conference unless it paid up to $25 million for him to conduct a probe, plus $1.5 million to his client, youth basketball coach Gary Franklin.

Mr. Franklin testified that he did not want an investigation and merely wanted Nike to resume sponsoring his team.

Nike has denied wrongdoing.

Prosecutors said Mr. Avenatti was looking to enrich himself and pay down heavy debts tied to his law firm and a recent divorce. He was convicted of extorting Nike and of committing “honest services fraud” against Mr. Franklin, in which someone in a position of authority deprives a client or constituent of his right to honest services.

Mr. Avenatti’s lawyers in a Supreme Court filing argued that the 1988 statute criminalizing honest services fraud is so vague that it violates the right of defendants to due process under the U.S. Constitution’s Fifth Amendment. They also urged the justices to take up the case to declare that settlement negotiations like Mr. Avenatti’s communications with Nike cannot give rise to criminal extortion charges.

The U.S. Department of Justice said the nation’s top court should decline to take up the case, noting that Mr. Avenatti did not raise the vagueness argument in briefs to a federal appeals court.

“Consistent with this court’s ’traditional rule,‘ the court should thus decline to grant a writ of certiorari to address a question that was ‘not pressed or passed upon below,’” government lawyers said, quoting from an earlier ruling in a separate case.

They also said the exertion conviction was correct because Mr. Avenatti violated it by demanding the payment of up to $25 million from Nike.

After jurors convicted Mr. Avenatti, U.S. District Judge Paul Gardephe, an appointee of former President George W. Bush, ruled against Mr. Avenatti’s request for acquittal.

The appeals court in 2023 upheld that ruling.

“The trial evidence was sufficient to support Avenatti’s conviction for the two charged extortion counts because a reasonable jury could find therefrom that Avenatti’s threat to injure Nike’s reputation and financial position was wrongful in that the multi-million-dollar demand supported by the threat bore no nexus to any claim of right,” U.S. Circuit Judge Reena Raggi wrote for the unanimous circuit court panel.

The appointee of former President Bush was joined by Circuit Judges Michael Park, an appointee of former President Trump, and John Walker Jr., an appointee of former President George H.W. Bush.

“The trial evidence was sufficient to support Avenatti’s conviction for honest-services fraud because a reasonable jury could find therefrom that Avenatti solicited a bribe from Nike in the form of a quid pro quo whereby Nike would pay Avenatti many millions of dollars in return for which Avenatti—in addition to forbearing on his extortion threat—would violate his fiduciary duty as an attorney by influencing his client to accept a settlement of potential claims without realizing that he was receiving only a small fraction of the many millions of dollars that Nike would be paying Avenatti,” the panel found.

Daniel Habib, a lawyer representing Mr. Avenatti, declined to comment on the Supreme Court’s action. The Department of Justice did not immediately respond to a request for comment.

Mr. Avenatti, 53, gained fame in 2018 while representing Ms. Daniels, an adult film performer whose real name is Stephanie Clifford, in litigation against President Trump. He was a regular on cable television and promoted by a number of opponents of the president.

Mr. Avenatti’s 2020 conviction on fraud and extortion drew a sentence of 30 months in prison.

Mr. Avenatti was convicted of defrauding Ms. Daniels out of a book contract and was sentenced in June 2022 to an additional two and a half years behind bars. The U.S. Court of Appeals for the 2nd Circuit upheld that conviction earlier this year.

In December 2022, Mr. Avenatti was sentenced to 14 more years in prison after he pleaded guilty to cheating four other clients, including a paraplegic man, out of millions of dollars.

Reuters contributed to this report.

By Michael Every of Rabobank

Planes, Grains, & Automobiles – and ‘Coinz’

ECB Chief Economist Lane yesterday backed the view a June rate cut is in the bag and even implied July might be too. He pointed out that the majority of EU inflation was due to an energy supply shock now fading: which would be why European services inflation is still so high now? Lane also had to make clear that the path ahead was bumpy, and that rates would still need to stay higher for longer. As such, some may see this as ‘Mission Accomplished’. Others will recall the George W Bush’s declaration of such, which after an early cakewalk marked the beginning of a disaster still going on today.

On which, drones were just fired at the Israel’s Eilat by Iran-backed Iraqi militia; there is world anger at a “tragic mishap” in Gaza; and an Egyptian soldier was shot dead in a border clash between the Israeli and Egyptian armies at the Rafah border crossing. The risks of further escalation on the first and second fronts are clear, but on the third don’t really justify the 1%+ tick higher in oil seen in thin holiday trading yesterday. That said, there may be a lot set to be revealed about that border, with geopolitical ramifications: who allowed and profited from the weapons-smuggling operations in the vast Hamas tunnel network there?

But back to inflation. The ECB –and all central banks– need to think about inflation differently from how they used to. Simplifying, it’s now about ‘planes, grains, and automobiles – and crypto’.  

• Planes: The Economist points out ‘There is an explosive flaw in the plan to rearm Ukraine’: the 15 March allocation of €500m for higher EU ammunition production has run into immediate bottlenecks of skilled labor and “something that was an afterthought until recently: a shortage of explosives.” That’s a structural supply vs. demand shock, if not on the same scale as 2022. Yet what happens when the EU has to spend 3.5% of GDP on defense, not 1.5%? What if after the US election Europe has to suddenly start producing its own shells, navy ships, tanks, helicopters, and planes, because the US pivots to Asia – ‘Mission Accomplished’ on inflation? The US, UK, and Australia, of course all have their own related defense industrial supply chain issues.

• Grains: Inflation is evident in commodities again. The CBOT wheat cash market crossed $7 a bushel this morning, when in early March it was just $5.2, marking a 34% increase in 12 weeks. Black Sea, EU, and North Africa producers are all losing tonnes due to bad weather: dryness, late frost, or too wet conditions. Yet in parallel, four Russian state-owned firms are taking control of its vast wheat market, pushing out the private players domestic and foreign. It seems unlikely this is being done in a push for neoliberal market efficiency; and what if Russia were to add Ukraine’s grain output to its tally via conquest? Wheat alone is not going to move Eurozone CPI much, but it’s part of a larger macro picture of rates down > commodities up, and a geopolitical picture of supply down (or with strings attached) > commodities up that can destabilise a swathe of the world’s weaker economies, many of which are very close to Europe.

• Automobiles: Europe is close to its decision on how high to set tariffs for Chinese EVs, as the Financial Times says Chinese brands will respond to steep US tariffs by targeting EU consumers with luxury models: the highest end of the value chain with the juiciest profits. Europe does not want to reverse from their automatic gear towards free trade because they are afraid to look in their historical rear-view mirror. However, if it can’t make cars, it won’t be in a position to make shells or other military goods either. Then what? “A giant museum with a nice gift shop”?

Planes, (foreign) grains, and automobiles are also about what Marx described as “the annihilation of space through time.” That used to be deflationary, but now means we can’t just look at domestic issues when thinking about price pressures anymore.

The Philippines is asking the US, and the West, to boost bilateral trade and investment ties to compensate for a drop in Chinese inflows since Manila took a stand over the South China Sea. As the government puts it, if they were economically secure, they could afford to strengthen their defence capabilities further. The unspoken alternative is if that without economic help, allies can’t bring much to the table on the military –like Europe– or may prefer to back away from geopolitical tensions – like parts of Europe. That backdrop encourages the trend towards inflationary global decoupling into ideological blocs.

Or even the US, as the ‘Biden Administration Presses Allies Not to Confront Iran on Nuclear Program’ to keep geopolitical tensions low before the November election, a tactic that has failed consistently. (And what will it do about Iran’s plans to boost oil output to China?) That Si Vis Pack-your-bags, Para Bellum backdrop encourages more geopolitical violence, necessitating higher defense spending and supply-chain disruption.

‘Coinz’: Presidential poll frontrunner Trump has forsworn a central bank digital currency, which will be a relief to many, and sworn to protect Americans’ right to hold crypto, differentiating himself from a Democrat administration that wants to regulate it. I had always expected the latter outcome from both US political parties; but now a second Trump term would not just be inflationary in terms of higher tariffs and larger tax cuts, but also in terms of Americans being able to create their own crypto money at home. I’m not sure central banks’ inflation models include the wildly price-boosting effects of the kinds of crypto craziness we saw a few years ago. But they now should. It’s going to take a serious interest rate to distract some from punting on stonks and coinz (or grains!) in the hopes of keeping their heads above water in the current dog-eat-dog US economic system.  

On which note, I repeat the savage commentary about the RBA and modern financialised central banking in general which I shared yesterday: if you haven’t read it yet, do. Because it’s worth understanding to see how what we take for granted as normal in markets today is deeply dysfunctional for what it needs to do compared to how it used to do it.

China is certainly way ahead of the curve in counter-alternatives – just not ones markets like. As Bloomberg puts it, ‘Xi Tells Politburo Needs Financial Regulations With Teeth’, noting “the country’s financial regulators and local governments must take greater responsibility for defusing risks” and “hidden dangers” in the property sector, local government debt, and small and medium-sized financial institutions via “new rules [which] will strengthen the Communist Party’s leadership in the financial sector” – although what the rules are were not made clear. I await Wall Street analysts’ deep dive on this with bated breath.