Month: October 2024

By Benjamin Picton, Senior Macro Strategist at Rabobank

Meditations In An Emergency

It’s now less than a week to go until the USA decides who is going to be their next President. The state of the political discourse recalls the ‘dramatic crossroads’ meme, where the respective labels attached to the sunny uplands and the grim castle of doom is a Rorschach test to confirm our political priors.

I’ve chosen my words deliberately to say that the USA will be deciding on their next President – rather than the next ‘leader of the free world’ – because one of the options on the table is a more isolationist approach to trade and foreign policy where the USA may decline to perform the leadership role, instead prodding oftentimes recalcitrant allies into shouldering more of the global security burden.

That could draw the curtain on the ‘Team America World Police’ neocon phase, or even Woodrow Wilson’s “making the world safe for democracy” idyll, if you prefer to cast your view further back. What’s now clear is that the bond market and the DXY is becoming sensitized to the potential implications of another Trump win.

US 10-year yields were down almost 3bps overnight, but are up more than 55bps since the Fed cut rate in mid-September. Americans who had been holding out for rate cuts before they went house shopping are again contending with mortgage rates beginning with a 7-handle, because US mortgages tend to be priced off the long end of the yield curve.

The shape of the curve is telling. While the OIS futures strip has pared back prospects for further rate cuts from the Fed this year, the 2s10s Treasury spread has continued to steepen. The 2s10s was still inverted at the beginning of September, but now records a positive slope of 15.5bps even as the whole curve has shifted higher. Curiously, the 2s30s spread has not steepened at all since the Fed cut rates.

What does this tell us? In a nutshell, markets are banking on fewer rate cuts in the near term and a decade ahead where inflation may be higher than we have grown accustomed to in the recent past. Why might that be? As Donald Trump’s odds of winning the election improve, markets are re-pricing assets to reflect a state of the world in which the Trump policy suite is implemented. Trump himself is a big spender who favors sweeping tax cuts and universal tariffs that most economists will tell you are inflationary, but a Trump win isn’t the only bear case for bonds.

Harris herself is no fiscal hawk, and there is also a renewed uneasiness over the global debt burden and the likelihood of that debt burden growing further as nations confront higher spending on health, aged care, national defense and interest expenses. More on that later.

The recent price action looks like a win for Rational Expectations Theory, but some other elements of economic theory are also having their time in the sun. The concept of low but stable inflation targets being a good thing is borne of the idea of ‘nominal rigidities’. Essentially, this is the contention that certain prices in the economy are ‘sticky’, and that markets are therefore not self-equilibrating in the way that classical economists might ordinarily suggest.

An example of this might be the decline in the volume of US home sales as vendors refuse to adjust price expectations to reflect prevailing economic conditions. Another example might be the proposed 10% cut to the wages of Volkswagen autoworkers (sure to be opposed by labour unions) in Germany that comes courtesy of Europe losing the competition race to China.

In both instances, market offers (for houses and labor) have remained sticky and not adjusted to cold economic reality. The bid/offer spread has widened out, and transaction activity dries up. How do New Keynesian economists of the type that dominate central banking and national treasuries solve such a problem? They grease the wheels of the economic machine by creating enough inflation for bid prices to rise to meet those sticky offers.

We might get some hints of this kind of thinking later today when UK Chancellor Rachel Reeves delivers her first budget. In a document likely to be light on surprises, Chancellor Reeves is set to redefine how the UK measures debt so that it can borrow more to “invest”. The UK already exceeds the 90% debt-to-GDP threshold that Carmen Reinhart and Ken Rogoff famously (or infamously) estimated to be the point at which the Keynesian multiplier falls below one. In layman’s terms, this means that for every extra dollar that the government spends GDP increases by less than one dollar, thereby rendering borrow and spend stimulus measures self-defeating as debt grows faster than GDP.

How to escape this economic doom loop? The options are default or retrenchment (austerity). We can rule out austerity as something that no government is brave (or foolhardy) enough to seriously propose after previous attempts by George Osborne and Wolfgang Schauble severely frayed the social contract. On the default side of the menu, countries that have no power over the issuance of their own currency are constrained to hard default (think Greece), whereas sovereign currency-issuing governments have the luxury of defaulting sneakily by debasing the coinage of the realm.

This is the financial repression scenario where bondholders are the patsies, financing fiscal profligacy by holding securities that yield negative real returns. Under this scenario, the smart money gets out of bonds and holds real assets that provide an inflation hedge. With the S&P500 up more than 22% YTD and long yields rising, is this the future that markets are now envisaging in what is beginning to look like a debt emergency?

Authored by Paul Joseph Watson via Modernity.news,

A news station in Pennsylvania was forced to apologize for flashing up the US presidential election results in the state as part of a “test” that wasn’t supposed to be seen by viewers.

WNEP, an ABC affiliate, flashed up the results for Pennsylvania during its broadcast of the Formula 1 race in Mexico City and they were on screen for several minutes.

You’ll never guess who “won”.

Kamala Harris, of course, beating Trump by 52 per cent to 47 per cent of the vote.

A local PA news station did a system “test” for election results this weekend. You’ll never guess what the “results” were. pic.twitter.com/CwGDy4tMau

— Andrew Torba (@BasedTorba) October 30, 2024

According to the test run, Kamala received 3,293,712 votes compared to Trump’s 2,997,793.

After viewers expressed confusion at what they were witnessing, the news station was forced to explain what happened.

“Those numbers should not have appeared on the screen, and it was an error by WNEP that they did,” said the station.

“The numbers seen on the screen were randomly generated test results sent out to help news organizations make sure their equipment is working properly in advance of election night.”

“WNEP regrets the error and apologizes for any confusion. We have taken steps to ensure that it does not happen again.”

No votes are actually counted in Pennsylvania until after 8pm on election day.

WNEP is owned by Tegna Inc., the chairman of which is Howard D. Elias, a longtime Democrat donor.

Its President and CEO is Mike Steib, who donated to Joe Biden’s presidential campaign in 2020 and has also donated to several Democrat PACs.

Don’t worry though, it was just a test!

*  *  *

Your support is crucial in helping us defeat mass censorship. Please consider donating via Locals or check out our unique merch. Follow us on X @ModernityNews.

Ahead of today’s UK budget announcement, much of its content had already been leaked including the biggest novelty item: redefining the concept of debt, to allow the UK – which already exceeds the 90% debt-to-GDP threshold that Reinhart and Rogoff estimated to be the point at which the Keynesian multiplier falls below one and which means that for every extra dollar that the government spends GDP increases by less than one dollar – to borrow an additional $90 billion in debt, a gimmick which only a politician could possibly have though was a good idea (and the US of course, but at least the US still has the reserve currency, something which the UK enjoyed a century ago until it lost it).

And while there were indeed no major surprises, the market clearly was not impressed with what it saw and has sent gilt yields soaring, sparking some concerns that another Sept 2022 “minibudget” crisis may be on the horizon.

But first, here is a snapshot of what we learned:

As Bloomberg reports, UK Chancellor Rachel Reeves unveiled £40 billion ($51.8 billion) of tax hikes, the most in decades, and massively ramped up borrowing (largely thanks to the new debt definition), both seismic moves designed to meet Labour’s pledge to “rebuild” the UK that still yielded only modest projected boosts to growth and public spending.

The budget was a make-or-break moment for both Reeves and Prime Minister Keir Starmer that will define their government. The scale was eye-watering, from the extra £142 billion of borrowing over the Parliament to tax rises that were the most in at least 30 years, when former Tory Chancellor Norman Lamont was also trying to restore economic stability. Labour’s inheritance from the Conservatives dominated Reeves’ narrative that offered a glimpse of the likely battle lines ahead of the next election still five years away.

Reeves put the tax burden on course for a postwar high with hikes impacting businesses and the wealthy in particular, insisting she had no choice but to fill a fiscal hole left by her Conservative predecessors if Labour was to deliver on its election pledge to begin a decade of national renewal. To bolster the impression that mostly wealthy people would bear the brunt, Reeves also decided to freeze fuel duty, increased the minimum wage and unexpectedly ended a freeze on income tax thresholds introduced by the Conservatives.

Despite the staggering tax hikes targeting the rich, which will inevitably lead to a scramble of rich expats fleeing the UK for low or no tax regimes such as the UAE, Reeves’ intervention still risked leaving voters unsatisfied. Estimates by the Office for Budget Responsibility appeared to fall short of Labour’s manifesto pledge to have the highest growth in the Group of Seven, and day-to-day public spending will rise just 1.5% per year, with several government departments facing real terms cuts. The question of whether the numbers justify a backlash especially from businesses will dominate the coming weeks.

In her statement, Reeves took aim at the Conservatives and especially former Chancellor of the Exchequer Jeremy Hunt sitting across from her: “The scale and seriousness of the situation that we have inherited cannot be underestimated,” said Reeves, the first female chancellor to deliver a budget in the 800-year history of the role. “Any chancellor standing here today would face this reality, and any responsible chancellor would take action.”

This was duly followed by a slashing of GDP growth estimates, which were cut for the nearby years, offset by the now traditionally increase in outer years, which of course will never happen.

More worrisome is the inflation forecastL while the BoE’s mandate is reconfirmed as 2.0%, the OBR doesn’t see that occurring until well beyond the end of the BoE’s forecast horizon; in fact, the OBR has CPI at 2.0% in 2029.

• 2024: CPI 2.5%
• 2025: CPI 2.6%
• 2026: CPI 2.3%
• 2027: CPI 2.1%
• 2028: CPI 2.1%
• 2029: CPI 2.0%

Of course, the risk is that this is very much incorrect and that UK inflation will not only not drop after 2025 but continue rising, crushing the budgeted model, and forcing the BOE to hike far sooner than expected.

And yes, as we previewed, Reeves also changed the debt measure targeted by the government for its other fiscal rule –  which requires debt to be falling as a share of the economy –  to give herself space to borrow for investment. The government will now target public sector net financial liabilities instead of public sector net debt excluding the Bank of England, she announced. Here is how UBS described the debt switcheroo:

[Reeves] confirmed the measure of debt will switch to net financial liability. In doing so she is able to pull in a number of assets to the calculation. She said the net financial debt rule will require the measure to be lower in the final year of the horizon relative to the year before. She will reduce the time horizon to three years from five years in 2026/27, and then roll onwards such that debt must be lower in each consecutive year from 28/29 onwards.

But while the public takes its time to assess the social impact of the Labour budget, the market’s reaction was swift and brutal as UK gilt yields soared as traders digested the long-term ramifications of taking on so much debt with a smaller than expected fiscal cushion. After earlier dropping as low as 4.20%, the 10Y Gilt surged over 20bps higher, and briefly touching 4.411%, the highest level since last November.

Curiously, markets were relatively muted while Reeves was speaking, and in fact there was an oddity in the market reaction: the yield low point during the budget speech was achieved at the moment Reeves reported tax hikes would total £40 bn. The market narrative at that moment was on the downside growth consequences. But right after that, bond yields soared as investors balked at the prospect of historically high debt issuance and fiscal stimulus that could mean interest rates stay higher for longer. The Debt Management Office said it will issue £297 billion of government bonds in the fiscal year 2024 to 2025, broadly matching the £293 billion estimated by 16 bond dealers in a Bloomberg survey. Of note, the DMO added £22.2 bn to its funding requirement for the current fiscal year, with the increase funded by additional Gilt sales of £19.2 bn, taking planned total Gilt sales in 2024-25 to £297 bn; and an increase in net (cash) sales of Treasury bills for debt management purposes of £3.0 bn, taking the planned net contribution to financing from such bills in 2024-2025 from zero to £3.0 bn.

The upward move in gilt yields, with shorter-end yields leading, led to a bull flattening indicative of a market reassessing the BOE’s reaction function in the face of greater inflation risks, i.e., not only are the days of rate cuts numbered, but inflation may return much sooner than expected, prompting the next hiking cycle by the BOE.

After the announcement, the UK’s OBR emphasized the fiscal loosening inherent in the budget, continuing the pattern of expansionary government policy in recent years, but the bond market may have had its “lettuce” moment and any incremental debt increases from here on out will only lead to a faster blow out in yields and lead to another debt crisis.

Commenting on the blowout in yields, UBS said that “UK markets opted to focus on the inflationary consequences of tax hikes. The thinking goes that since businesses are doing all the heavy lifting on taxes, that they’ll just pass that on to final selling prices. In that respect, the budget becomes inflationary. The market then talks itself into the idea that the BoE won’t be able to cut rates – they wouldn’t dare say “transitory”, which is what tax effects are on inflation.”

To this UBS counters that the alternative version is one taken from a traditional economic textbook, namely that higher end-prices represent a supply shock that causes spending to slow down; the Swiss bank suggests that the budget should be considered a Gilt twist steepener: “The upfront tax rises causing consumption to slow; the longer-term issuance driving term premium higher. If one wanted to make the link to the BoE, then it would be to buy into the improved long-term growth potential from higher investment in the future.”

Others were less sanguine than UBS, with Bloomberg’s Simon White focusing instead on the overall (catastrophic) fiscal picture that the massive new debt layring will result in; he said that while much focus is on the US’s soaring budget deficit, the UK’s is also egregious. When the current account deficit is added, the US and UK run almost the largest twin deficits in the world.

Indeed, debt has always been the UK’s Achilles’ heel. That’s because while the US has the world’s reserve currency, the UK doesn’t have that privilege, only an ability to print as much of a currency that fewer and fewer people want. That’s potentially very inflationary in the longer term, and that’s precisely why the market is reacting the way it is.

Bottom line, as White puts it, markets are once again waking up to the likelihood that rates in the UK aren’t likely to fall as much previously expected, or the BOE would want, and should the blow out in yields continue, we may be just days away from another emergency QE action by the BOE in the past two years as the world is reminded that the only reason why the US can and continues to borrow like a drunken sailor, is because it still has the world’s reserve currency, although judging by the explosion in gold and bitcoin in recent days, that won’t last long.

North Carolina may no longer be a swing state: With under a week to go until Election Day, the Kamala Harris campaign just slashed its planned advertising in the state. Some see the move as a surrender in the face of surging Republican turnout and plunging Democratic turnout in early voting there.  

According to AdImpact, a political intelligence firm, on Monday the Harris-Walz campaign reserved $2.7 million worth of ads in North Carolina for the last stretch of the campaign, only to turn around and kill more than $2 million of its reservations on Tuesday. Though Harris is following through on a scheduled Raleigh rally on Wednesday morning — while Trump is holding his own event in Rocky Mount, NC — her campaign managers’ hopes of winning North Carolina’s 16 electoral votes have likely plunged as daily updates of early voting numbers continue to paint a grim picture of her prospects in the Tar Heel State.

The 2020 vs 2024 contrast in early voting patterns is striking. Compared to the same time four years ago, North Carolina Democrats have cast 341,000 fewer votes, while Republicans have cast 9,000 more, noted Andy Jackson of the Raleigh-based John Locke Foundation. Aside from the party mix, North Carolina is also seeing lower turnout among two traditional Democratic voter blocs: young people and blacks. In 2020, 92% of the state’s black voters backed Biden. Across the country, however, black support of Trump is surging.   

Earlier this month, political analyst Mark Halperin told Tucker Carlson that, despite Harris’ bullishness on North Carolina, reliable Republicans told him North Carolina was firmly on the Trump side of the scoresheet: 

NORTH CAROLINA:

“A lot of [Harris’s] aides have been very bullish on North Carolina as the linchpin for replacing Pennsylvania if they lose Pennsylvania.”

Halperin says he has very trustworthy sources that know exactly how North Carolina will swing. Here’s what they are telling… pic.twitter.com/XL1oeSH3LX

— Tucker Carlson Network (@TCNetwork) October 17, 2024

Last week, an unnamed Harris campaign official conceded that things were starting to look bleak in North Carolina, telling NBC News, “Of all of the seven [swing states], that one seems to be a little bit slipping away.” The campaign had seen a North Carolina-Nevada combo as a potential game-saving offset in the event Trump were to win Pennsylvania. Now, North Carolina seems to fading out of reach, while early voting turnout patterns in Nevada also have Democrats sweating.  

In this scenario, if Trump wins North Carolina, Georgia and Arizona, he’d only need 8 more electoral votes from the four remaining swing states to reach the winning 270: 

While early voting numbers paint a grim Democratic picture, opinion polls continue to portray the North Carolina race as a tight one. The most recent poll, via AtlasIntel, has Harris leading 49% to 48%. Trafalgar’s latest survey shows Trump leading 49% to 46%. In 2020, Trump won North Carolina, beating Joe Biden 49.9% to 48.6%.  

Going into early voting, there was considerable concern among Republicans that turnout in GOP-dominated western North Carolina would be smothered by the devastation visited upon the region by Hurricane Helene — so much so that the chairman of the House Freedom Caucus, Maryland Rep. Andy Harris, mused that North Carolina’s legislature should consider awarding the state’s electoral votes to Trump no matter what the election’s outcome is. 

However, in another Democrat-jarring early-voting dynamic, “Turnout in the 13 counties hardest hit by Helene is slightly HIGHER than in the rest of the state,” said election expert Jackson. According to a new Elon University poll, only 24% of North Carolina Republicans say that state and federal agencies are doing a “very good” or “good” job handling recovery efforts, compared to 68% of Democrats — who are less likely to live in the affected zone.  

As an increasingly weakened Harris campaign staggers to the finish line, what will be the next shoe to drop?

Authored by Jay Solomon via The FP.com,

A senior Pentagon official faced scrutiny when her past ties to Iran came to light. Is that why she’s been transferred?

In the weeks leading up to Israel’s retaliatory strikes on Iran this Saturday, someone from inside the U.S. government leaked a cluster of highly sensitive documents outlining the Jewish state’s military deployments. 

We may never know the identity of the leaker—there are probably thousands of bureaucrats across the U.S. government who had access to the documents. But of those masses, a single name has been circulating online: Ariane Tabatabai, who’s served as a senior Defense Department official for the past two years.

There is no evidence we have found that Tabatabai is the leaker, despite the fact that various Arab and Israeli news sites reported as much.

In fact, Defense Secretary Lloyd Austin this week all but ruled out the culprit being Tabatabai or anyone else from the Pentagon.

But at the same time, the Defense Department, in recent days, quietly transferred the Iranian American academic out of her Pentagon post, which is among the most sensitive in the entire military: chief of staff in the Office of Special Operations and Low Intensity Conflict, or SO/LIC. The job has provided Tabatabai unique access to the highest levels of classified intelligence as well as knowledge of virtually all global U.S. special military operations. 

Instead, the Pentagon notified Congress on Friday, October 25 that Tabatabai was “transitioning to her new office” in troop education and training, without specifying the exact date when she left her last post. The new position, Deputy Assistant Secretary of Defense for Force Education and Training, has significantly less access to intelligence and covert military programs, according to former Defense Department officials interviewed by The Free Press. 

The Pentagon press office declined to answer questions provided by The Free Press about Tabatabai’s status or the reasons for her transfer. And her job change is likely to deepen questions from Capitol Hill Republicans who’ve been seeking answers for more than a year about Tabatabai’s past interactions with the Iranian government.

Tabatabai was brought into the Biden administration in 2021 to serve on the State Department negotiating team with Iran. Her initial boss, Special Envoy Robert Malley, however, was stripped of his security clearance in the spring of 2023 and is currently being investigated by the FBI for the mishandling of classified information.

Shortly before Malley’s departure, Tabatabai relocated to the Pentagon and eventually took up her position in SO/LIC.

Tabatabai began facing scrutiny last year after a large tranche of Iranian government emails were obtained by the U.S. media outlet Semafor (where I used to work), and Iran International, a Farsi-language television channel.

Included in the data were communications between Tabatabai and senior Iranian diplomats, beginning in 2014, that showed she had been a leading member of the Iran Experts Initiative, an Iranian Foreign Ministry–led program that sought to amplify Tehran’s positions on key national security issues in Western think tanks and the media. In some of the emails, Tabatabai can be seen seeking guidance from Iranian officials on her foreign travels and appearances before Congress. 

Tabatabai has never publicly disclosed her role in the IEI. 

And a number of Republican members of Congress have been pressing the Pentagon over the past year to strip Tabatabai of her security clearances because of her reported ties to Tehran. The Pentagon declined on Friday to say if her transfer was related to her work with the IEI. 

This month, a conservative government watchdog also sued the Pentagon for what it claims has been the department’s failure to answer questions and provide documents related to the activities of Tabatabai and Malley. 

Tabatabai’s status is particularly sensitive for the Biden-Harris administration. The academic has worked closely in the past with Vice President Harris’s national security adviser, Philip Gordon, as outlined in an August piece in The Free Press. This included co-authoring a string of opinion pieces in the summer of 2020 that called for the U.S. to return to its nuclear diplomacy with Iran, and to soften some of Washington’s economic sanctions on Tehran.

Tabatabai’s switch at the Pentagon, on paper, is a promotion: The UK-educated PhD is now ranked as a deputy assistant secretary of defense rather than a chief of staff. But in reality, a number of former U.S. defense officials told The Free Press, it’s a clear step down. 

“Everyone that is in the know understands that this is not a promotion, right? She wants to be active in the policy space, and going over to education and force training is not,” said Garrett Exner, who served in SO/LIC during the Obama and Trump administrations, and is currently a fellow at the Hudson Institute. 

Exner added: The Biden administration transferred Tabatabai to a department “where she can’t really touch any classified material.”

A second SO/LIC veteran said the Iranian American academic has exited a post that’s among the most secretive in the entire U.S. government. “I cannot underscore: The things SO/LIC. . . are doing are more sensitive than what the CIA is doing.” 

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

Ballots that arrive by mail can be counted up to three days after Election Day, the Nevada Supreme Court ruled on Oct. 28.

The state’s top court turned away a challenge to a state law that says ballots that arrive without clear postmarks, provided they’re received no later than 5 p.m. on the third day after the election, shall be counted as having been postmarked on or before Election Day.

Nevada officials have interpreted the law as enabling the counting of ballots without any postmarks.

“A mail ballot that has no visible postmark should be interpreted to have an indeterminate postmark, and therefore should be accepted if it has been received by the clerk by mail not later than 5 p.m. on the third day following the election,” the Nevada Secretary of State’s Office said in guidance to county clerks earlier this year.

Republicans said the fact that the law states ballots must be “postmarked” to be counted and the exception is for ballots for which “the date of the postmark cannot be determined” means postmarks are still required.

“That caveat expressly requires the existence of ’the postmark’ in order to apply,” they told the Nevada Supreme Court in an appeal.

In an order in August, Nevada District Court Judge James Russell had ruled that the provision lets mail ballots without postmarks be counted and that Republicans had failed to show it was “in the public’s interest to disenfranchise voters.”

The justices said on Oct. 28 that they assumed Republicans had standing, or a sufficient connection to the guidance, on the basis of competitive injury but that they were upholding the lower court decision because Republicans are not likely to prevail in their case.

The justices said both of the interpretations of the law are reasonable but pointed to how lawmakers, when discussing the bill, had talked about how they thought it would let ballots without postmarks be counted. They also noted that the purpose of the bill was, according to lawmakers, to expand the ways in which people vote and make it easier to vote.

“If a voter properly and timely casts their vote by mailing their ballot before or on the day of the election, and through a post office omission the ballot is not postmarked, it would go against public policy to discount that properly cast vote,” the state’s high court wrote. “Indeed, there is no principled distinction between mail ballots where the postmark is ‘illegible’ or ’smudged’ and those with no postmark.”

In response to the ruling, a spokesperson for the Republican National Committee told The Epoch Times that the ruling goes against the state law.

“Requiring ballots to be postmarked on or before election day is a critical election integrity safeguard that ensures ballots mailed after election day are not counted. It is also a requirement of Nevada law,” Claire Zunk wrote in an email.

“By allowing Nevada officials to ignore the law’s postmark requirement, the state’s highest court has undermined the integrity of Nevada’s elections.”

The campaign of former President Donald Trump did not respond to a request for comment by publication time.

“This is great news for Nevada,” Athar Haseebullah, executive director of the American Civil Liberties Union of Nevada, wrote on social media platform X. “Changing rules a week before the election would have been unconscionable.”

Justice Douglas Herndon said he concurred with his colleagues on Republicans not showing they will suffer irreparable harm absent an injunction but sees the law as unambiguously not allowing the counting of ballots without postmarks.

Justice Kristina Pickering said that Republicans were not arguing that every ballot needed a postmark but only ballots that arrive in the days after the election. She said she shared Herndon’s concern with the majority’s decision but that she was not convinced of the Republican interpretation either. Pickering also said that it would not be in the public interest to reverse the lower court order so close to the election.

Huge Israeli airstrikes rocked Lebanon’s eastern city of Baalbek on Wednesday, nearly 70km northeast of Beirut, after Israel warned some 80,000 residents to evacuate.

It was the first such call to evacuate on such a large scale from Israel’s military (IDF) in this location (and so far north, significantly away from frontlines in southern Lebanon) since the war began, and main roads out of the city have been jammed and chaotic throughout the day.

“The city is almost empty,” an AFP correspondent described soon after the evacuation warning. Prior bombings in the same area (Bekaa Valley) left at least 60 people dead on Monday.

The IDF published a map alongside the warning to evacuate which included the entire extended city situated in the eastern Bekaa Valley – long known as a Hezbollah stronghold.

“The (Israeli army) will act forcefully against Hezbollah interests within your city and villages,” an Israeli military spokesman said on X.

The fresh Wednesday air raids on Baalbek, an ancient city and UNESCO site with many Roman ruins, began within just minutes after newly named Hezbollah chief, Sheikh Naim Qassem, started speaking in his first address as the Iran-backed paramilitary group’s Secretary-General.

Qassem’s theme for the speech focused on readiness of the group to keeping the fight going so long as Israel is on Lebanese territory. “Final victory will be ours,” he proclaimed as part of the nearly hour-long pre-recorded video speech from an undisclosed location.

He spoke in front of a large image of his assassinated predecessor Hassan Nasrallah who had for decades been the much more recognizable face of Hezbollah behind him.

Importantly, after the many serious losses and setbacks for the group going back to the mass pager attack of September, and Israel soon after taking out Nasrallah and his number two leader Hashem Safieddine along with top officers, new Secretary-General Qassem is now vowing “we can keep fighting for days, weeks and months.”

Huge fireball from Israeli strike seen over Baalbek:

⚡️From the enemy’s strikes on Baalbek pic.twitter.com/qHIU8K8TRi

— War Monitor (@WarMonitors) October 30, 2024

According to more from the speech:

Qassem said Nasrallah was like a brother to him, and assassinated leader Hashem Safieddine was a man upon whom Nasrallah could heavily rely on. He described killed Hamas chief Yahya Sinwar as “an icon of heroism and Palestinian resistance and the free people of the world”.

Qassem vowed that under his leadership, Hezbollah will continue the work of Nasrallah and keep fighting a war with Israel while following the same political path. “Helping Gaza is our duty and we will defend it to counter the Israeli threat for the entire region.”

As for the ongoing strikes on a large area of Baalbek, one regional reporter has called it a “kill zone”.

“This is a significant chunk of Baalbek that has been put under these evacuation orders and let’s call evacuation orders what they are. They’re effectively a kill zone – if you remain behind, Israel says that you are a fair target,” an AJ journalist base in Beirut writes.

⚡️Powerful enemy strikes on Baalbak pic.twitter.com/wKyOOtvuOs

— War Monitor (@WarMonitors) October 30, 2024

“Now, that despite the fact that Israel does have under international humanitarian law a responsibility to any civilians left behind after they give those orders, but people are taking them seriously,” he continues.

Southern Lebanon has also remained scene of heavy ground finding amid the IDF ground offensive, with 15 Lebanese reported killed on attacks in Sarafand and Haret Saida near Sidon city.

Lebanese authorities does not distinguish between identifying combatants and civilians when it publishes casualties. Since the war’s start, Israel says that 33 of its soldiers have been killed in Lebanon.

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Can famed investors Paul Tudor Jones and Stan Druckenmiller, who recently proclaimed they are short bonds, thus betting on higher yields, be wrong? Instead of mindlessly assuming such legendary investors are correct, let’s do some homework.

First, though, let’s remind ourselves that Paul Tudor Jones and Stanley Druckenmiller are known for their aggressive trading styles. Therefore, we don’t know whether their bets are short term trades for a quick profit, or longer-term bets on significantly higher yields. Moreover, maybe their negative bond commentary is just “talking their books” to get traders and investors to follow them and boost their profits. Such a proven strategy by famous traders can be a recipe for losses by those who try to mimic their trades.

The recent 50-basis point increase in longer-term yields started the day after the Fed cut rates by 50 basis points. Some bond bears claim the Fed will rekindle inflation by cutting rates while the economy remains strong. Others fear that fiscal deficits are out of control, leading to inflation. An emerging group of bond bears, led by Paul Tudor Jones and Stanley Druckenmiller, worry that a Donald Trump Presidency and Republican control of Congress will ramp up deficits, resulting in high inflation.

Let’s address the market narratives and assess their credibility. Doing so will help us decide if following Paul Tudor Jones and Stanley Druckenmiller is a good idea.

Is Another Round Of Higher Inflation Likely?

Below is a review of some possible causes of inflation bandied about by the inflationist crowd.

Will High Inflation Reemerge

At its core, inflation is a function of supply and demand. The 2022-2023 bout of high inflation occurred because demand was grossly elevated by pandemic-related stimulus and unusual consumer behaviors. At the same time, the supply of many goods was significantly curtailed by global lockdowns and crippled supply lines.

Both demand and supply have since normalized. If inflation rises, it will not be for the same causes as the last round of inflation.  

A Repeat Of the 1970s Is In the Cards

Some investors argue that consecutive rounds of the 1970s-like inflation are inevitable.

That era and this era are very different, as we recently wrote in a four-part series. Instead of requoting from those articles, we share the links (ONE, TWO, THREE, and FOUR).

 “The 2020s aren’t the 1970s by any stretch of the imagination!” – Part Four

Government Spending Will Boost Inflation

Paul Tudor Jones and many others warn that uncontrollable federal deficits will boost inflation. We will also address this topic in the Debunking Deficits section, but before doing so, it’s worth a quick lesson on an economic term called the negative multiplier. To do so, we share a section from our article Stimulus Today Costs Dearly Tomorrow:

As we note, debt increasing faster than economic growth proves that borrowing and spending are unproductive. Unproductive government debt or private sector debt also results in a negative economic multiplier. Essentially, the ultimate expense of the debt outstrips its benefits over the long run.

Economists define the multiplier effect as the change in income divided by the change in spending. Over an extended period, if the change in spending is more significant than the change in income, the effect of said spending is negative. Replace GDP for income and government debt for spending to compute the government’s spending multiplier.

Multiplier = Change Income / Change Spending

Government Multiplier = Change GDP / Change Debt Outstanding

Bottom line: government debt stimulates the economy. However, the debt detracts from growth over time, more than offsetting the initial benefits. If you think the government is suddenly spending productively, then inflation may have an upward bias. However, assuming the government continues to spend unproductively, higher deficits are deflationary and weigh on economic growth.

The U.S. Will Import Inflation

Some say we will import inflation. The first graph below shows that inflation in the Eurozone, China, and the U.K., three of our largest trading partners, is falling alongside that of the United States. China’s inflation is near zero. Japan, not shown, has seen meager inflation with bouts of deflation for the last 25 years.

We also ran a multiple regression to forecast U.S. inflation based on the inflation of China, the U.K., and the Eurozone. The second graph shows a significant correlation, with an r-squared of .86. Moreover, the model states that U.S. CPI needs to fall by 0.3% to align with the historical relationship.

Both charts lead to the question of who we will import inflation from.

Debunking Deficits

Before we put context to the recent deficit spending, it’s important to caveat that we believe, and have written on many occasions, that the nation’s consistent deficit spending and accumulating debt are a considerable headwind to economic growth. We, in no way, condone the recent deficit spending or the excessive spending for most of the last forty years. We are also well aware that countries with debt-to-GDP ratios above 1.0 have not fared well. 

That said, considering bond returns for the next year or two, we must assess the situation for what it is today and not let the narratives and hyperbole surrounding the market sway our decision-making.

We now review a few popular arguments claiming that the trajectory of deficits has changed considerably, and the change is inflationary.   

Recent Spending Is Obscene

A common argument from the emerging bond bears is that recent deficits are obscene compared to past ones. Accordingly, bond bears think these increased deficits will be inflationary and require higher yields to satisfy Treasury investors.

While that may be true, the argument lacks context. They fail to mention that the economy has grown significantly over the last few years.

The economy is about $8 trillion, or 33%, larger than it was on the eve of the Pandemic. Therefore, it’s not surprising the amount of debt has grown commensurate with that amount.

The graph below shows the debt-to-GDP ratio and its trend line since 1980. After the ratio jumped higher on massive COVID-related spending, it settled down slightly above where it was before the Pandemic. Furthermore, it has been flat for the last two years.   

Now, let’s take the analysis one step further and theoretically calculate what the current debt growth would look like had the Pandemic never occurred. We admit that this is not a traditional way to assess debt, but it does provide unique context on the debt outstanding compared to GDP.

To do this, we reduce the debt by the estimated $5.6 trillion spent on COVID relief. Furthermore, we assume the interest expense of the Treasury debt would have stayed on the pre-inflation trend. For perspective, this cuts approximately $500 billion of added interest expense in the past year.

The graph below shows the revised debt to GDP in orange. Might it be fair to say that without the Pandemic, current debt issuance would be on par with pre-pandemic debt to GDP levels given the economy’s size? Furthermore, despite the pandemic, spending, debt, and GDP growth have primarily been aligned for the last two years.

Deficit Spending Increases The Money Supply

Money is lent into existence. Such is a fact; therefore, larger deficits (borrowing) increase the money supply. However, as the graph below shows, the money supply (M2) is on the pre-COVID trend. More importantly, M2 as a ratio of GDP, a better measure of money supply, is decently below the pre-COVID trend.

Also, for consideration, the supply of money is only part of the inflation equation. The other significant half is the velocity of money, or how often it is spent. Currently, the velocity of M2 is at the same level as at the start of 2020.

The supply and velocity of money have erased the pandemic-related anomalies and are similar to where they stood in late 2019. At that time, inflation was consistently running at 2%. The current supply and velocity of money should not lead one to believe that inflation is set to increase. If anything, the figures argue that inflation will return to the Fed’s 2% target.

We Are Following Japan’s Path

Paul Tudor Jones mentions a similarity between our fiscal situation and Japan’s. He refers to Japan’s excessive government debt and its central bank, which keeps interest rates extraordinarily low to help service the debt.

Japan has a debt-to-GDP ratio of 263%, more than twice that of the U.S. Its central bank has set interest rates at or below zero and relied on massive amounts of Q.E. for the last 20 years. The result is longer-term bond yields, as shown below, of 2% or less and sub-1 % inflation with prolonged periods of deflation. 

Following Japan’s path seems awfully bullish strictly from a bond holder’s perspective.

More From Jones

Paul Tudor Jones also believes that inflating away the debt is the only way to resolve the issue without taking strict fiscal steps. Maybe he knows something we don’t, but Japan proves that is not necessarily the case, at least not yet.

Jones also comments that we need to “get to the point where we stabilize debt to GDP to where it is right now.” As we showed earlier, the debt to GDP is stable and not rising.

Donald Trump and a Republican Sweep

Paul Tudor Jones and Stanley Druckenmiller voice concern over inflation and bond yields if Donald Trump becomes the President and the Republicans sweep Congress.

Let’s take their assumption a bold step further and assume Donald Trump immediately attempts to cut taxes, spend like crazy, and rack up massive deficits. Even so, he must contend with Democrats, who will still have nearly 50% of the votes in Congress, and the Republican Freedom Caucus, which wants to curtail government spending and balance budgets. The Caucus and Democrats could be strange bedfellows in that circumstance.

Summary

The bearish arguments we discuss in this article have merit. However, when taken in proper context, we believe some of them are not as worrying as the headlines may seem. Further, as we see in Japan, there is quite likely more monetary policy runway before problems escalate.

We believe the slowing economic growth and lower inflation trends that persisted before the Pandemic are reasserting themselves. It may sound ridiculous today, but we wouldn’t be shocked if investors and the Fed were again worried about deflation in the coming years.

Many Americans are tired of the fruits of their labor being stolen to finance mass slaughter. Neither Trump nor Kamala have indicated their intent to diverge from the status quo when it comes to Israel. So the question at the center of today’s ZeroHedge debate: Who will be worse?

Independent journalist Michael Tracey, arguing Trump will be the “most fanatically pro-Israel” President ever, faced off with Harrison Smith of InfoWars who argued the former POTUS is playing politics and cannot be materially worse than the Biden-Harris coterie. Moderated by Liam McCollum of the “Human ReAction Podcast” and Mises Institute.

Full discussion below:

“Trump is the peace President.”

Keeping faith in Trump’s anti-war instincts, Smith pointed to the former President’s tendency to rebuff entrenched foreign policy officials, which — while imperfect — is preferable to the Deep State on autopilot.

Smith: “Trump is the peace president. That much is obvious. Kamala Harris is purely a puppet of the establishment, which is in totality Israeli-controlled at that level when it comes to the State Department and foreign policy.”

“You’re either voting for the puppet of the Israeli lobby or somebody — who participates in their scheme sometimes — but has also shown and proven that he has the ability to defy their greatest and largest goals.”

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— ZeroHedge Debates (@zerohedgeDebate) October 29, 2024

Democrats Aren’t Pro-Israel Enough!

Tracey dismissed this as wishful thinking that is misaligned with Trump’s record in office and current rhetoric, which at times is markedly more radical than Kamala’s:

Tracey: “Trump is running on the most fanatically pro-Israel platform of any major candidate ever.”

“[Biden and Harris] have supplied more armaments to Israel than any administration ever. Trump denounces them as not doing enough and actually catering to Hamas. What else are we to draw from that? Trump goes around explicitly stating that he gave his pro-Israel donors all the policy initiatives that they had ever sought.”

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— ZeroHedge Debates (@zerohedgeDebate) October 29, 2024

But moving the U.S. embassy and “recognizing” the Golan Heights — the major first-term moves Trump touts — are a far cry from genocide, argued Smith, categorizing them as “symbolic” yet largley insignificant.

Smith: “It’s what Trump does. They’re the low hanging fruit. They’re just things that he could do that would make these people happy that wouldn’t change anything on the ground. That wouldn’t exacerbate any conflict. That wouldn’t cause any war.”

No War With Iran

In a recent interview with comedian Tim Dillion, Vice Presidential Nominee JD Vance said that Israel and the United States sometimes have “distinct interests” and that it is “very much” in U.S. interests to avoid war with Iran. Vance bolstered the former POTUS’s comments from the previous week to podcast host Patrick Bet David, when Trump eschewed PBD’s insistence on regime change in Iran.

Smith highlighted these — very recent — exchanges as more evidence of the restraint exhibited by MAGA as compared to the establishments wings of both parties:

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— ZeroHedge Debates (@zerohedgeDebate) October 29, 2024

Dovish sentiment aside, Trump is still heavily backed by hawkish GOP members like Tom Cotton and Marco Rubio as well as die-hard zionist religious fanatics.

Tracey: “Trump, however, has aligned himself more with those genuinely messianic religious elements… One of the Rabbis that stood beside Trump said that he wants to build a Third Temple, and he views Trump as the vessel for accomplishing that.”

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— ZeroHedge Debates (@zerohedgeDebate) October 29, 2024

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