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Saturday, November 4, 2023

2023-11-04

*** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic and Market Fare:


Now that we have our first estimate of GDP for Q3, we also have our first estimate of M2 velocity for the third quarter. Because there is an amazing amount of uninformed hypothesis out there, I figured it was worth a quick review of where we are and where we’re going, and why it matters.

Why it matters: without the rebound in velocity, the slow-but-steady decline in M2 that we have experienced since mid-2022 would be outright deflationary. The money decline and the velocity re-acceleration are part and parcel of the same event, and that is the geyser of money that was squirted into the economy during COVID. Velocity collapsed for mostly mechanical reasons: it is a plug number in MVºPQ, and since prices do not instantly adjust to the new money supply float, velocity must decline to balance the equation. Another way of looking at it is that if you add money to people’s accounts faster than they can spend it then velocity will decline. ........

........... And here is the problem. If interest rates are back at 2007 levels, then naïvely we would expect velocity to be back in the vicinity of 2007 levels also. But that is massively higher than the current level. In 2007, money velocity was around 1.98 or so: about 49% higher than the current level!

....... All of which adds up to one reason why I continue to think that inflation will stay sticky and higher than we want it, for a while. Powell has surprised me before, though, and this would be a good time to do it again.



.......... The ECB, following the Neo-Keynesian approach that dominates many central banks, primarily focuses on finding the ideal interest rate level to fulfill its "price stability" mandate, with less emphasis on the money supply. Although Isabel Schnabel recently acknowledged that changes in the money supply can impact inflation, like most economists, she does not consider it the primary driving force.

This perspective is grounded in the fact that despite the expansion of the money supply in the 2010s due to Quantitative Easing programs, yearly consumer price inflation averaged about 1.3 %. It's evident that the early fears of QE critics, who anticipated rampant inflation, did not materialize.

However, it would be shortsighted to conclude that money supply hardly matters for inflation. First, there's a common misunderstanding about inflation, where it's often defined as the rate of change in consumer prices. As a result, monetary expansion that doesn't affect consumer goods and services isn't considered. When money drives up prices in financial markets, it isn't reflected in the CPI.

Second, the mechanism of QE involves central banks buying bonds, increasing the balance of their counterparties' bank accounts. In essence, QE primarily impacts narrow money (M1) but doesn't necessarily lead to significant growth in the broad money supply, which has a more substantial influence on inflation.

In summary, QE did not lead to high inflation during the 2010s because it remained contained in financial markets, driving up asset prices rather than significantly expanding the broad money supply. However, from 2020 onwards, the situation changed: initially, PEPP (akin to QE) expanded the broad money supply and fueled inflation. Now, as the broad money supply contracts due to the phasing out of bond purchases and a decline in bank credit growth, the indicators point toward price deflation in 2024. ........






In recent months, the consensus of economists has become less certain about the outlook for a recession in the U.S. economy. A recent survey asking economists about the probability of recession next quarter shows a retreat in expectations from a high of 47 percent at the end of 2022 to just 34 percent, according to the Philadelphia Federal Reserve.

It’s not hard to see why recession expectations have changed. The typical follow-through from leading indicators to coincident indicators has not happened. Coincident data is slowing generally, but not as quickly as leading data would have suggested. For example, when the 6-month annualized change in the Conference Board’s Leading Economic Index (LEI) has fallen below -5 percent for the first time, it has typically taken coincident data – like employment and income – between six and seven months to turn negative, on average. It’s been 13 months since the LEI has breached those levels, and the rate of change in coincident data is still mostly positive.

Because of this, it remains too early to confidently forecast a recession. But with stock market valuations still extended, recession remains one of the biggest risks stock investors face. So, as we all remain on recession watch, here are some ideas to consider on the topics of recessions, stock market performance around economic contractions, indicators to watch, and risks to consider.

1) A recession would bring three horsemen to the stock market’s front door
In his new book on longevity, Peter Attia outlines a framework for extending one’s lifespan. He suggests that the most effective approach is to establish early-life habits that can help prevent or delay the onset of the conditions he refers to as the “Four Horsemen.” His Four Horsemen are: heart disease, cancer, neurodegenerative disease, and type 2 diabetes. This line of thinking about longevity can be applied when considering which risks most frequently bring bull markets to their end.

Here are my suggestions of the stock market’s Four Horsemen: extended valuations, interest rate pressures, recessions, and sudden, destabilizing events (like a global pandemic). We already have two in place. A recession would join with extended valuations and the recent steep rise in interest rates. This collection of three of the four Horsemen would likely topple the extended rebound from last October’s low. .....


Whalen: Rate Peak Emerges, Deflation Looms

..... Meanwhile, the outlook for interest rates is rapidly turning. Michael Green makes the case for no more rate hikes in his latest comment, but also reminds one and all that “deflation” remains the more fundamental concern of the Fed: “Measures of inflation expectation have normalized, and the term structure suggests the Fed might soon be dealing with deflationary conditions rather than inflation.”  And nothing is more deflationary than debt defaults. 

Deflation comes when the accumulation of debt makes it impossible for the obligor to refinance or “roll” obligations, forcing a markdown in principal via a debt restructuring.  Most of the industrial nations have already reached the tertiary stage of indebtedness, where the bulk of debt is merely rolled and refinanced. Eventually the cost of rolling the debt forces a reduction in principal.

..... If the FOMC merely pauses and leaves benchmark rates unchanged for an extended period, which seems to be the consensus narrative at present, then the banking system will need to internalize the losses on asset prices while navigating relatively weak lending volumes. This is a prospective economic scenario unlike that faced by banks since the 1990s. Office loans are facing the highest levels of deliquency in a decade, reports Jeffrey Fuller of Bloomberg, but the real concern is loss severity, because there are so few ready buyers for these assets.  

As we noted in our latest edition of The IRA Bank Book for Q3 2023, the US banking industry was deeply insolvent, a fact that will negatively impact earnings for years to come.  The 10-year Tresury was still below 4% at the end of June 2023, thus the situation facing the US banking industry was even more extreme at the end of Q3 2023 with the 10-year Treasury note near 5%. .....



Investors in US Treasury bonds have experienced extraordinary losses in the post-Covid stimulus era as evidenced by the iShares 20+ Year Treasury Bond ETF (Ticker: TLT) which is down 47% on a total return basis from its August 2020 high. Such a large drawdown in a supposedly safe asset class led to several bank failures in early 2023, but the full ripple effects have yet to spill over to other large, richly valued segments of equity and corporate bond markets and to the broader economy. In our analysis, further shock waves lie directly ahead.

The equities most at risk in our view fall into three main thematic buckets: (1) mega-cap tech, (2) leveraged financial services businesses holding potentially overvalued and mismarked assets, and (3) companies facing new earnings headwinds from debt refinancings and an emerging profit margin squeeze. Meanwhile, the fixed-income securities most likely to get caught up in downside contagion in our analysis are sub-investment-grade corporate bonds.

By far, the biggest risk of getting caught up in an implosive chain reaction in our analysis is a tightly packed nucleus of stocks dubbed “The Magnificent 7”. These stocks are a bubble that is ripe to burst based on all our various modeling approaches which reveal lofty valuations that are simply not justified by underlying future growth potential. Note the bearish technical head-and-shoulders pattern in the fundamental valuation chart below which is based on the aggregate Enterprise Value to GDP. .....

As one can see in the chart below, we believe the risk is that we are headed down from the top of an even bigger large-cap tech stock speculative mania than the one that ended the economic cycle of the 1990s. One can also see that there is much further downside ahead as today’s analogous companies to those of the 2000 tech bubble stand to lose an even bigger share of GDP than their counterparts ...

The biggest lesson from both the 1929 and 2000 stock market bubbles is that long periods of speculation combined with high valuations lead to major stock market crashes. We don’t believe this time will be any different.  .........

US Treasury securities are the foundation for all lending in the US and global economy, and their yields impact the valuation of all financial assets. In today’s historically leveraged world, especially in the government and corporate segments of the economy, we want to make it as clear as we possibly can that we believe the recent systemwide upward pressure on the cost of refinancing and issuing new debt instruments, led by the run-up in 10-year Treasury yields, runs the risk of leading to a near-term decline in the S&P 500 Index of up to 20% or more and ultimately a decline of up to 50% or more within 12 to 18 months coinciding with a recession. ....

It is important to note that the two other key components of financial conditions, S&P 500 stock price valuations and credit spreads, have yet to tighten in a meaningful way. As we showed in our analysis above, we think those are two of the next major dominos to fall in the chain reaction. ....

It is important to understand that empirically, a significant tightening of financial conditions has historically led to financial crises and often sharp contractions in real GDP, but rarely if ever, has it led to a soft landing in financial markets. ........

We are confident that the next expansion cycle will be both fiscally powered and monetarily accommodated. As such, it should be highly favorable for commodity assets. The next expansion should be one with higher-than-ZIRP-era interest rates but one that is also combined with highly inflationary fiscal and monetary policies in an attempt to rapidly grow nominal GDP .......

Forgotten Essential Parts of the Economy

From a different perspective, for all the money flowing into S&P 500 Index funds and ETFs, only 0.2% of that today is going into the metals and mining industry which we believe is an unsustainably depressed level.

We simply cannot bring about the transition to green energy, achieve the re-shoring of developed economies, enhance manufacturing capabilities, modernize electrical grids, boost housing supply and inventory, substantially improve public infrastructure, and expand military efforts, all without making metals and mining a significantly more relevant part of the economy. .....








As China’s economy shows few signs of climbing back out of its sluggish state, public sentiment in the country grows more gloomy. Falling real estate values are dampening corporate and household consumption and investment, threatening economic growth. Many note the similarities to the bursting of Japan’s economic bubble; will China face a similar situation?





Investing Fare:


... As I think back over the years, I have been guided by four principles for decision making.  First, the only certainty is that there is no certainty.  Second, every decision, as a consequence, is a matter of weighing probabilities.  Third, despite uncertainty we must decide and we must act.  And lastly, we need to judge decisions not only on the results, but on how they were made. 









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(not just) for the ESG crowd:

Asset managers have a fiduciary duty to act in your best interests. Does that include considering ESG factors when investing your money?

....... As one major asset manager puts it, there’s no point creating value for a person’s pension if they do not have a “livable world” in which to claim it.


Abstract
Improved knowledge of glacial-to-interglacial global temperature change yields Charney (fast-feedback) equilibrium climate sensitivity 1.2 ± 0.3°C (2σ) per W/m2, which is 4.8°C ± 1.2°C for doubled CO2. Consistent analysis of temperature over the full Cenozoic era—including ‘slow’ feedbacks by ice sheets and trace gases—supports this sensitivity and implies that CO2 was 300–350 ppm in the Pliocene and about 450 ppm at transition to a nearly ice-free planet, exposing unrealistic lethargy of ice sheet models. Equilibrium global warming for today’s GHG amount is 10°C, which is reduced to 8°C by today’s human-made aerosols. ......


How an elite clique of math-addled economists hijacked climate policy.

................  In other words, the economist who has been embraced as a guiding light by the global institution tasked with shepherding humanity through the climate crisis, who has been awarded a Nobel for climate costing, who is widely feted as the doyen of his field, doesn’t know what he’s talking about. ......

......... TO UNDERSTAND THE gap between climate scientists and climate economists, one must first understand that most economists — the folks we call mainstream or neoclassical economists — have little knowledge of or interest in how things really work on planet Earth.  ......


A discussion of how fossil fuel companies' imperatives and our legal regime preclude getting them to leave oil and gas in the ground.


(State of the World 2023 #2)



................................... So, here is some context for the predicament. Humans are: a biological species; one of millions; relatively new to the planet; needed by few but needing many; part of nature; belonging to Earth and no other place. Moreover, many humans on the planet are: only very recently experimenting with modernity; operating without explicit regard for ecological consequences; rapidly spending a material inheritance; boasting a population temporarily swollen on the fruits of that inheritance; carrying out enormous ecological damage as a thoughtless by-product of energy and material expenditures; running a system predicated on something as obviously and inherently unsustainable as growth; purposefully decontextualizing our lives by separating further from nature; powerful enough to have initiated a sixth mass extinction; collectively arrogant enough to think we’re getting away with it; short-lived enough to not appreciate the magnitude of the insanity; unaccustomed to thinking about context, as lives are increasingly structured around narrow concerns.




Sci Fare:



Since the Al-Aqsa Flood on 7 October and the ensuing assault on Gaza, the Biden administration has performed what is euphemistically described as a ‘balancing act’. On the one hand it praises the collective punishment of Palestinians; on the other it warns Israel against overreach. Its support for aerial bombardment and targeted raids is steadfast, but it has posed ‘tough questions’ about the ground invasion that started earlier this week: Is there an achievable military objective? A roadmap to release the hostages? A way to avoid untenable Israeli governance if Hamas is extirpated? Washington is pressing the Israelis on such issues – and sending its own advisers to help solve them – while also giving the green light for the ongoing massacre. Its response to the crisis has been driven by a confluence of factors, including the desire to outflank Republicans and the reactive instinct to ‘stand with Israel’. Yet it can also be placed in the context of its broader vision for the Middle East, which crystallized under Trump and was consolidated by Biden.

Aware of the chaos wrought by its regime change efforts, and eager to complete the ‘pivot to Asia’ initiated in the early 2010s, the US has sought to partially disentangle itself from the region. Its goal is to establish a model that would replace direct intervention with oversight from a distance. .......



..... The whole vaunted ‘arsenal of democracy’ is just a Roman circus without the bread. All of these wars, all of this death, all of this open genocide and murder and torture and theft; it’s all a show to them. If a bomb ever hits their countries, they freak out and destroy an entire nations (or two, or three, or four). Then make movies about how bad it made them feel. As I said, these are the arseholes of democracy. Bloody minded children being relentlessly marketed war. And business is good.

At this point, what I call the White Empire, now capital’d in America, cannot build anything. That’s all been outsourced. All they have left is destruction. Of allies and enemies alike. While China builds infrastructure with its Belt and Road initiative, America just destroys it with its ‘rules-based order’. What rules? We rule. Fuck you. It’s not just enemies like Libya or Syria or Afghanistan that are destroyed and stolen from, they blow up Germany’s oil pipelines and gleefully bleed Ukraine to mildly wound their own enemy. America has no allies, only interests, and their ailing President is only interested in violence. 

America’s visibly aging ruler ran against the previous ‘loose cannon’ but has run absolutely wild since he took power. Instead of white supremacism at home with Trump, America got untrammeled imperialism abroad with Biden, which has actually killed more people. America does not even deploy a fig leaf of diplomacy anymore, it’s just war and weapons, immediately and without conscience. The only job the US President takes seriously is his job as the world’s largest arms dealer. In Ukraine the US (through its vassal UK) blocked negotiations to sell more bombs and in Israel, they openly veto ceasefires. Where’s the money in that? The privatized propaganda they call a ‘free press’ gobbles up the advertising rights, becoming a much more powerful Radio Rwanda, lying and inciting open genocide. War is farce that gives them meaning, and the only thing that matters to these ghouls is money. And, as I said, business is good. Across the whole media-military-industrial complex.

The great trick of American Empire has been figuring out that there’s more money in losing wars than in winning them. You sell more weapons in a losing, intractable conflict, and it’s somebody else’s country anyways. So they ‘lost’ trillions in Afghanistan, Iraq, Syria, Libya, and are now ‘losing’ in Ukraine, while their warlords ‘make’ those same trillions. ‘Lose’ is of course a misnomer for what’s happening. Like money ‘lost’ during any corruption, someone is making it.It’s the arms dealers, who dutifully give politicians, journalists, and think-tanks their cut of the blood money. The world bleeds, but if it bleeds it leads, and blood money is just money when it hits your bank account. The Empire loses every war it starts or inflames, but who cares? It’s about the journey, not the destination, and they're whistling past graveyard after graveyard, driving to their third home with their fourth wife in a convoy of SUVs. .......



................. Joe Biden is the picture of a corrupt and collapsing American Empire, old Grandpa Genocide, out embarrassing himself and not knowing when to retire. The picture of American youth, vitality, and diversity in Obama has faded into withered, wrinkled, and loathsome Biden. They are both genocidal maniacs, of course. Now it’s just obvious. The cursed painting of American Progress still looks beautiful, but the reality of American Empire looks hideous. .................




First time in recent history a nation waged a war of extermination in urban environment

........... Global leaders and Israel apologists prattle like birds on a telephone wire the same Israeli talking points: “right to defend itself–squawk!” “Hamas terrorists–squawk!” “human shields–squawk!” “hiding terrorists–squawk!” “protect civilians–squawk! “terror tunnels–squawk!” It’s banal. It’s obscene, because it is propaganda rather than truth. It is easily digestible slogans instead of nuanced analysis. ..........


The subjugation and annihilation of innocent civilians, bombed into the dust of "collateral damage," does not support America, Israel or the West's claim for moral high ground and a path to peace.


It is journalistic malpractice for the media to still be repeating so credulously the Israeli military’s account of that day


It is the height of perversity to claim self-defense in our invasion of Syria.





Everything is interrelated: war, terrorism, the police state, the global economy, economic austerity, financial fraud, corrupt governments, poverty and social inequality, police violence, Al Qaeda, ISIS, media disinformation, racism, war propaganda  weapons of mass destruction, the derogation of international law, the criminalization of politics, the CIA, the FBI, climate change,  nuclear war, Fukushima, nuclear radiation, crimes against humanity, The China-Russia alliance, Syria  Ukraine, NATO, false flags, 9/11 Truth, ….  

An overall understanding of  this worldwide crisis is required: the last section deals briefly with reversing the tide of war, peace-making, instating social justice and real democracy.



..... Back in March 2022 Ukraine could have negotiated peace terms. My guess is that the next negotiations will be surrender terms.

It was always clear, and I have said so consistently from the start, that Russia was going to win. Ukraine cannot win a war of attrition with Russia, especially when Russia has air superiority and far more artillery and artillery shells.

......... In a larger sense the loss of Russia to Chinese alliance is the loss of any chance of defeating China. The biggest geopolitical blunder of the early 21st century, and the end of the oil and gas deals with Russia is the end of German/European energy intensive industry, which is a LOT of it.

Oh well.



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