First, at a minimum, the FOMC must follow through on the forward guidance of federal funds rate increases and balance sheet reduction that we have already signaled in order to validate the repricing that has taken place in financial markets.

Second, we will need to see whether the supply issues that have contributed to high inflation begin to unwind and/or if the economy is in a higher-pressure equilibrium. I wrote about this possibility seven weeks ago. Unfortunately, the news from the war in Ukraine and the COVID lockdowns in China are likely delaying any normalizing of supply chains. If supply constraints unwind quickly, we might only need to take policy back to neutral or go modestly above it to bring inflation back down. If they don’t unwind quickly or if the economy really is in a higher-pressure equilibrium, then we will likely have to push long-term real rates to a contractionary stance to bring supply and demand into balance. The incoming data over the next several months should provide some clarity on these questions.

Finally, we will need to continue to assess where neutral is. If the economy is in fact in a higher-pressure equilibrium, that might indicate the neutral long-term real rate has increased, which would then require even higher rates to reach a contractionary stance that would bring the economy into balance.

Kashkari is not a voting member this year, so he has some leeway to speak his mind. The big takeaway is he has historically been viewed as a dove, so for him to talk about the need to create a recession to combat demand strength is notable. That is feeding into the current recession scare and financial conditions tighten.

According to its Impact report for 2021, Tesla can recover raw materials from batteries with ~92% efficiency: for every 1,000 kWh worth of end-of-life batteries, Tesla recovers 921 kWh worth of raw metals to produce new batteries. The importance of recycling already is clear when cells don’t meet quality assurance during the manufacturing process. Tesla believes that “the costs associated with large-scale battery material recovery and recycling will be far lower than purchasing additional raw materials for cell manufacturing,” contributing significantly to continued battery cost declines and amplifying the importance of recycling as more electric vehicles reach end-of-life.

Here is a link to Tesla’s 2021 Impact report. It clearly states Tesla does practically no recycling at present, because its batteries have not been in the field long enough to provide adequate supply.

“Stabilizing employment matters to people’s livelihoods, it is also a key support for the economy to operate within a reasonable range,” Li said, urging businesses to resume production with Covid-fighting measures in place, while reiterating the government’s policy to promote the healthy development of internet platform companies to support employment. 

The premier’s warning on employment came after the nation’s surveyed jobless rate climbed to 5.8% in March, the highest since May 2020, according to data released by the National Bureau of Statistics in mid-April.

China’s top leaders last week warned against attempts to question the country’s Covid Zero strategy as newly released data for April showed the lockdown-dependent approach taking a heavy toll on the economy. The rolling out of even more intense restrictions over the weekend in Shanghai and Beijing adds further to the challenges facing policymakers seeking to shore
up growth.

Li Keqiang is often regarded as a bookish technocrat who thinks more in terms of the health of the economy than politics. Talking about rising unemployment is already sensitive when the question of the merit of the COVID-zero policy is beyond discussion. He is due to retire in a few months, and his successor is likely to be even more loyal to Xi Jinping.

A link to this week's Big Picture Long-Term video is posted in the Subscriber's Area. 

A momentous week has ended with a thud rather than a bang (at least on the data front) as the U.S. employment numbers came out broadly in-line with expectations. To be sure, there were some notable features of the data -- a drop in both household employment and labor participation, though perhaps that was driven by the timing of Good Friday, which fell during the survey week. 

You can cherry-pick whatever you like from the figures to support your pre-existing view, so at this point it’s hard to say that they change much of anything. For now, the growth picture remains strong enough to support the policy trajectory that’s currently priced into rates markets. That, in turn, should continue to apply pressure to equities, regardless of how “cheap” they may seem.

From a macro perspective, the issue to focus on has clearly rotated from inflation to growth. Pretty much everyone understands that base effects will drive y/y CPI and PCE figures lower, but the run-rate of inflation will remain high enough for central banks to keep worrying ... and keep (or start) tightening. That policy trajectory will change when the growth outlook deteriorates significantly enough that demand looks more correctly aligned with supply. So that’s what we’ll be watching for.

While you can point to the 353k drop in household employment as a signal that the economy is weakening, that’s a pretty tenuous hook upon which to hang your hat at this point -- particularly given that household employment growth had comfortably outstripped the establishment survey over the prior six months. Moreover, the drop in the participation rate suggests the household figure may well have been a supply, rather than demand, issue -- which is problematic if the relatively elevated level of wages can still not attract fresh workers.

The pandemic economy is not the new normal. It was an anomaly fueled by money creation on a previously unimaginable scale. It is therefore reasonable to expect that unwinding much of the bonanza will be required to get inflation back under control.

The U.K. will introduce new laws for energy to enable a fast build out of renewables and nuclear power stations as set out in the government’s energy security strategy last month.

An energy bill will be included in the Queen’s Speech on May 10, according to a person familiar with the matter who asked not to be named because the information isn’t public.

The last significant set of energy legislation was in 2013 and the government has accelerated its push toward net zero significantly since then. Britain is targeting a tripling of installed nuclear power capacity by 2050 and plans to build 50 gigawatts of offshore wind farms this decade. The nation has also increased its ambition on hydrogen, solar power and measures to spur North Sea oil and gas projects.

“This country now has a raft of ambitious targets in place and the focus must now be on delivering these,” said Dhara Vyas, director of advocacy at EnergyUK. “A new Energy Bill should create a framework for a low carbon future. The energy industry is ready to deliver.”

North Sea oil allowed successive UK governments the leeway to avoid thinking seriously about energy policy. In the 15 years since the UK became a net energy importer, social cohesion has deteriorated, taxes have risen, debt has become problematic and social services have suffered. That’s not all because of energy imports but it is a factor at the margin.

The Reserve Bank of India stunned markets Wednesday with a 40-basis point rate increase and a move to suck out billions from the banking system. That was a remarkable U-turn from February, when it announced an ultra-dovish policy, highlighting a relaxed stance toward inflationary pressures at home and U.S. tightening abroad.

“We believe the rate hike is a belated acknowledgment of the inflation risks and that policy has been behind the curve,” Nomura analysts Sonal Varma, Aurodeep Nandi and Nathan Sribalasundaram wrote in a note.

Yields on the benchmark 10-year bond jumped as much as 30 basis points on Wednesday to 7.42%, the highest since 2019, while the shorter 4-year yield saw a nearly 50 basis point jump. Yields extended gains on Thursday. 

Emerging market central banks have much more direct experience of the damage high inflation can do. They are usually alert to inflationary pressures and tend to implement remedial action quickly. Brazil hiking from 2% to 12.75% in little more than a year is a good example of that. That also helps to highlight just how out of step the RBI has been. The Repo rate was stock at 4% for nearly two years before this week’s hike.

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Bank of England raises rates and is indecisive about what to do next. Pound declines, renminbi drops, gold and oil steady, stocks weak, bonds plunge bitcoin slumps 

Six MPC members voted for the rate rise to 1%, while three voted for a larger rise to 1.25%.

The central bank also said it has asked its staff to prepare a plan for selling some of the bonds it bought as part of its past stimulus programs. That plan is set to be outlined in August, but bond sales would start later.

However, the central bank indicated that it is likely to raise rates more slowly, if at all, in coming months, with the very high energy prices that have followed Russia's invasion of Ukraine set to squeeze household spending power and weaken economic growth.

In its statement, the BOE said further rises in its key rate "may still be appropriate" in coming months, but added that two of its policy makers didn't support that guidance and instead thought it likely the key rate would stay at 1%.

"There were risks on both sides of that judgement," the BOE said.

That greater caution is a contrast with the Fed, which Wednesday approved a rare half-percentage-point interest-rate increase to a target range between 0.75% and 1%. Fed Chairman Jerome Powell said at a news conference that officials broadly agreed that additional half-point increases could be warranted in June and July given current economic conditions.

The Pound rebounded yesterday and reversed that advance today following the reluctance of Andrew Bailey to talk about continued interest rate hikes. The decision was a long way from unanimous, which highlights the difficulty of containing inflation without causing a recession.

I seem to remember many years ago David saying that the time to be wary of share markets is after the third interest rate rise. Is this accurate and, if so, is it a relevant indicator for us now?

Thank you for this topical question which may be of interest to the Collective. The initial response to a new hiking cycle is generally seen as positive by investors because they prize efforts to control inflation and preserve growth. However, interest rate hikes have a lagged effect on the economy and are cumulative in nature. That means the initial enthusiasm at continued growth gives way to worry about the toll of withdrawing liquidity as the number of hikes builds. 

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: BoE and Fed tighten but guidance was not as hawkish as feared. Dollar eased, stocks rebounded, Treasuries steadied. oil surged, gold steadies. Upside follow through would confirm lows of at least near-term significance for most stock markets and increase scope for reversionary rallies.  
 

One of the questions subscribers as most often is how to find details of my open trades. To make it easier I will simply repost the latest summary daily until there is a change.
 

Your comments are often from a US perspective such as "telecom stocks are in downtrends such as Charter Communications". This is true for US telecom shares but many others, particularly in Europe have been going sideways for a number of years, potentially building bases such as KPN, Orange, Singapore Telecom, Telefonica, Vodafone and China Mobile. One or two have broken out to the upside. Would you be happy to comment on some of these charts?

Thank you for this email. I last did an extensive review of the high yielding global telecoms sector in November. Here is a link. 

The European Union plans to ban Russian crude oil over the next six months and refined fuels by the end

of the year as part of a sixth round of sanctions to increase pressure on Vladimir Putin over his invasion of Ukraine.

“This will be a complete import ban on all Russian oil, seaborne and pipeline, crude and refined,” European Commission President Ursula von der Leyen said in remarks to the European Parliament. “We will make sure that we phase out Russian oil in an orderly fashion, in a way that allows us and our partners to secure alternative supply routes and minimizes the impact on global markets.”

Hungary and Slovakia, which are heavily reliant on Russian energy and had opposed a sudden cut-off of oil, will be granted a longer timeframe -- until the end of 2023 -- to enforce the sanctions, according to people familiar with the matter.

A rumbling argument in the oil market is contributing to the evolving wedging characteristic in prices. For the bulls, the dislocation caused by Western Europe’s efforts to stop buying Russian oil, as well as leaning on other countries to do the same, is a clean support for prices. The bears believe the impending global slowdown will kill off demand, and the market will turn to surplus faster than many people expect. 

The Treasury Department said in a statement Wednesday that it will sell $103 billion of long-term securities at auctions next week -- down $7 billion from February. This marks the longest string of quarterly cuts since a 2014-2015 cycle. In a surprise for some dealers, it’s also trimming sales of two-year, three-year and five-year auctions in coming months.

“The issuance plans announced today leave Treasury well positioned” with regard to necessary borrowing, the department said in its statement. However, “additional reductions in future quarters may be necessary depending on future developments in projected borrowing needs.”

The Fed hiked by 50-basis points today as expected and suggested 75 basis point hikes are not being actively considered. The pace of quantitative tightening will initially be slower than initially expected.  It will start on June 1st at $47.5 billion and ramp up to $95 billion over the next quarter instead of starting at $95 billion now.

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: stocks markets quiet ahead of Bank of England and Fed rate decisions, China rebounding on easier monetary policy, Australia weakness on tighter policy, commodities at risk from slower growth. The biggest risk to a recovery is stagflation. gold at 200-day MA, Russell 2000 at 1000-day MA. 

Fed Chair Jerome Powell and his colleagues are expected to raise interest rates by 50 basis points on Wednesday and signal they’re on track to lift them to around 2.5% by the end of the year. But it’s not clear if that’ll be enough to tame inflation, which is running at more than three times the central bank’s 2% target. 

Rogoff spoke about the “risks of having a perfect storm” of recessions, where European economic growth contracts because of Russia’s war in Ukraine, China’s does the same due to “a failed Covid lockdown policy,” and the U.S. economy shrinks because the Fed “tightens too much, too fast.”  

“If China has a supply recession, which is really what we’re talking about, that’s going to feed inflation, it’s going to hurt demand in Europe,” Rogoff said. “I would say the risk has risen palpably, that this might happen,” he said of a U.S. economic contraction that would hit global financial markets. 

“Things could work out well, and so there’s a lot of uncertainty -- but it’s not hard to see all of these risks,” he said, adding that China “might already be bordering on recession.”

Over the last month Treasuries sold off aggressively, the Dollar surged, major stock market indices pulled back sharply, and gold contracted. Conventional energy sources like natural gas and coal surged while crude oil has been steady. 

These trends have been pricing in both the potential for successive 50-basis point interest rate hikes and the supply disruptions arising from Russia using commodities as an economic weapon. Tomorrow’s Fed meeting will deliver news on the interest rate front but will do nothing to change the Ukraine question.

“The meeting addressed most of the pressing issues in the economy and is intended to boost confidence and turn around negative sentiment,” said Xiong Yuan, chief economist at Guosheng Securities. “It’s a rare exception that the Politburo publishes the statement during the trading day. Clearly it’s meant to incentivize investors to hold on to positions ahead of the holiday.

China’s top leaders responded to calls from investors and analysts alike to revive an economy hurt by Covid lockdowns that this week spread to Beijing and Yiwu, disrupting business operations and roiling global supply chains. The Politburo’s readout -- which was released at the earliest time of day of any since at least January 2017 -- came ahead of a five-day break for onshore markets.

While headwinds for China’s economy and markets still remain, in particular the government’s adherence to Covid Zero, traders are now asking whether this can be the long-awaited market bottom. 

The CSI 300 Index jumped 2.4% Friday, trimming this year’s loss to 19%. That still makes it one of the world’s worst performing national benchmarks, far outpacing the 13% decline in MSCI Inc.’s Asia Pacific gauge.

Mainland Chinese stock markets are closed until Thursday for the May holiday, but Hong Kong reopened today. Faced with the political impossibility of altering the COVID-zero program, the central government have little choice but to cede some ground on its recalibration of the economy. That should represent further progress in supporting the trend of the credit impulse.

The Australian sharemarket hit a downdraft when the Reserve Bank of Australia raised interest rates by a surprisingly large 25 basis points yesterday, as the markets digested the implications of rising debt costs.

The ASX 200 dropped 0.4 per cent, or 30.8 points to close at 7316.2 with tech stocks, the health care and industrials the only sectors to close in the black. Miners like BHP, Fortescue and Rio sunk after iron ore prices slumped overnight. Fortescue led the declines with a 4.8 per cent share price drop and Rio Tinto closed 1.5 per cent lower.

Finance stocks also took a hit with ratings agency Standard & Poor's saying home loan arrears are likely to drift up from historically low levels following yesterday's increase in interest rates.

Russel Chesler, head of investments at VanEck, said higher credit costs are likely to dent big bank profits.

"Locally, we are likely to see the big banks come under pressure in the month ahead as higher rates dent the banks' earnings from mortgages and bad debts could jump on higher credit costs." He expects companies which act like an inflation hedge, like gold and infrastructure, are likely to outperform. And despite the drop yesterday, rising commodity prices are expected to support the big miners through 2022.

"In this environment, with inflation running hot and interest rates rising, companies, including cyclical stocks, that can increase their prices and keep their customers at the same time, are likely to outperform," he said.

In other news, the chief executives of Australia's two largest private employers, Woolworths and Wesfarmers have thrown their support behind an increase in workers' wages amid persistently rising inflation and a tightening labour market.

There was also good news about the pandemic recovery, Transurban chief executive Scott Charlton said toll-road traffic has fully rebounded in Australia and is almost at normal levels in the US as businesses and consumers emerge from the pandemic.

This is the first Australian interest rate hike since 2011. With CPI at 5% and testing the upper side of a 30-year base formation, the RBA can be expected to continue to hike but perhaps not as quickly as other developed markets.

A link to this week's Big Picture Long-Term video is posted in the Subscriber's Area. 

P&F charts don’t typically have time stamps, but the following charts incorporate at least 20 years of data where relevant. P&F charts only measure the movement in price up and down. We typically use 3 box reversals. That means the column will proceed to rise or fall until the price move three units of scale in the opposite direction on a closing basis. The benefit of P&F charts is they cut out the noise of inert ranges.

Exxon Mobil Corp. tripled its share-buyback program to as much as $30 billion after profits surged amid Russia’s invasion of Ukraine and a rally in worldwide energy prices.

The repurchases will be made through the end of next year, Exxon said in a statement on Friday. The oil giant more than doubled first-quarter adjusted net income to $8.8 billion, or $2.07 a share, lagging estimates by 17 cents.

Chief Executive Executive Darren Woods cited a dip in output from oil and natural gas wells stemming from adverse weather and other factors. Exxon rose 0.3% to $87.43 at 9:33 a.m. in New York.

The oil giant took a $3.4 billion writedown due to its planned exit from its Sakhalin-1 operation in Russia, compared with a previously announced estimate of as much as $4 billion. The company declared force majeure at the venture earlier this week and curtailed crude production. 

Exxon follows TotalEnergies SE and Chevron Corp. in posting first-quarter results. The French oil titan pledged to buyback as much as $3 billion in shares before the end of June while Chevron disclosed its biggest profit in almost a decade.   

In an environment where pandemic padding of balances in the tech sector rapidly waring thin, the energy sector hasn’t had a year this good in decades. In times of uncertainty, when interest rates are rising and geopolitical threats are mounting, the reliability of strong cashflows, rising dividends and a thinning supply of stock will be welcomed by investors.

Bank of Russia Governor Elvira Nabiullina dismissed the idea of pegging the ruble to gold after the Kremlin said it was a proposal under consideration.

“It is not being discussed in any way,” Nabiullina told reporters at a briefing Friday after the central bank cut the key interest rate by 300 basis points. The ruble must continue to have a floating exchange rate, she said, though volatility of the currency will be higher amid capital controls imposed after Russia began its invasion of Ukraine.

Her comment appeared to contradict President Vladimir Putin’s spokesman, Dmitry Peskov, who said earlier Friday that “this question is now being discussed.” Peskov pointed to comments by Security Council Secretary Nikolai Patrushev on linking the currency to gold and other commodities in an interview with a state-run newspaper this week, while offering no further details.

Unprecedented sanctions on Russia’s central bank over the invasion of Ukraine deprived it of access to about half of its holdings, leaving it in possession of only gold and yuan. Before the war, Putin repeatedly argued that Russia needs to cut dependence on the dollar as a global reserve currency.

Speculation has been rife that sanctions on Russia may herald a far-reaching shift that could bolster bullion. Analysts like Credit Suisse Group AG’s Zoltan Pozsar predict that the seizure of the central bank’s foreign exchange reserves will result in a new monetary paradigm where gold plays a greater role.

Speaking with Rossiyskaya Gazeta, Patrushev said experts are examining proposals to back the ruble’s value with gold and other goods as part of an alternative system of finance that guarantees a measure of sovereignty and reduces the link to the dollar.

Continuing a multi-year effort to reduce exposure to the U.S. currency, the Russian central bank cut the share of dollars in reserves to 10.9% as of Jan. 1 from from 21.2% a year earlier. Gold was down slightly at 21.5%.

Until the invasion of Ukraine forced Nabiullina to enact capital controls, the ruble was allowed to trade freely since 2014, its value determined by the market. 

Demanding payment for commodity exports in Rubles is a major escalation of the stress Russia is imposing on the EU and the rest of the world. China speaking of its relationship with Russia as a new model for world order is an additional signal that conditions are not about to go back to the pre pandemic equilibrium

One of the questions subscribers as most often is how to find details of my open trades. To make it easier I will simply repost the latest summary daily until there is a change.

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Japanese Yen continues to accelerate lower and weighs on all regional currencies, US growth negative but earnings boosted by Meta Platforms and Visa, gold and oil steady despite the strong Dollar. 

Against a backdrop of quicker inflation and solid spending, Fed monetary policy is still geared for a half-point rate hike next week. Nonetheless, officials need to balance tighter policy with risks to demand. 

The economy faces other potential headwinds that include knock-on effects from Russia’s war in Ukraine. Growth prospects in Europe are deteriorating, some raw materials are in short supply and the Chinese government’s severe pandemic-related lockdown measures are leaving supply chains in disarray.

The S&P 500 rose and the yield on the 10-year Treasury note remained higher along with the dollar.

“With strong growth of consumer spending, business investment and employment in the first quarter, the U.S. economy was not in a recession at the beginning of the year,” said Bill Adams, chief economist at Comerica Bank. “Growth should resume in the second quarter as the trade deficit and inventories become smaller headwinds.”

Biden blamed the contraction on “technical factors,” saying in a statement that employment, consumer spending and investment all remain strong.

When you feel pressured by inventory shortages and rising prices, the natural response is to accelerate purchases. Orders also tend to be front loaded to forestall the trouble of having to worry about inventory in future.

Weijian Shan, whose group PAG manages more than $50bn, said his fund had diversified away from China and was being “extremely careful” about its portfolio in the country.

“We think the Chinese economy at this moment is in the worst shape in the past 30 years,” he said in a video of a meeting viewed by the Financial Times.

“The market sentiment towards Chinese stocks is also at the lowest point in the past 30 years. I also think popular discontent in China is at the highest point in the past 30 years.”

In the video, Shan said that large parts of the Chinese economy, including its financial centre Shanghai, had been “semi-paralysed” by “draconian” zero-Covid policies and that the impact on the economy would be “profound”.

“China feels to us like the US and Europe in 2008,” Shan added. “While we remain long-term confident in China’s growth and market potentials, we are very cautious towards China markets.”

It seems like every central bank is chasing a soft landing. China used the pandemic induced boom in demand for exports to initiate a cleansing of the Augean stables. By clamping down on property development and private equity investment in technology, they hoped to reorient the economy to sectors that would further the dream of becoming a self-reliant global superpower.

Eoin, your SPAC Index. Is that a composite that you have drawn up from active SPACs? I have looked a few indices for this, but they show nowhere the decline yours does, I suspect that is because they will have a lot of weighting towards dormant SPACs that are trading in and around the $10 level.

Thank you for this question which others may also be interested in. The SPAC Index was created by IPOX. Here is how they describe it on their website:

The IPOX® SPAC Index is designed to track the aftermarket performance of Special Purpose Acquisition Companies (SPACs) which pursued initial public offerings (IPO) in the U.S. The index is an applied market-cap weighted index measuring the performance of the top publicly traded SPACs. The index is actively reconstituted and adjusted.

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: advance decline continues to trend lower, oil steady, gold weak, stocks contiue to correct, bonds stable, China bounces on renewed hope of stimulus. 

Shares of Chinese infrastructure firms rallied on Wednesday following Xi’s pledge. The smaller, growth-heavy ChiNext Index soared 5.5%, the most since March 2016.
The barrage of verbal promises has drawn comparisons to the events in October 2018, when stocks were plummeting amid the U.S.-China trade war and domestic deleveraging worries.
Despite the initial boost, profit-taking soon kicked in and stocks tanked to fresh lows less than two months later. Historically cheap valuations pulled the market out of the doldrums in 2019.
“A revelation has hit traders that Chinese policy makers are facing an impossible trinity of goals here: they’re not going to hit the 5.5% growth target and limit the amount of leverage in their system and also have a zero-Covid tolerance policy,” Eli Lee, head of investment strategy at Bank of Singapore, told Bloomberg Television. “And this means, at the margin, the thesis for the Chinese renminbi and equities is weaker.”

There is no way the Chinese administration can walk back its COVID-zero policy. That’s as much about practicality as political priorities. Therefore, to even come close to placating an increasingly restive population, the Renminbi is being sacrificed at the expense of supporting the economy.

A signing ceremony was held at GS Energy Headquarters in Gangnam-gu, Seoul, on April 26 with the presence of representatives from the four companies. They included GS Energy president Huh Yong-soo, Doosan Enerbility vice president Na Gi-yong, Samsung C&T vice president Lee Byung-soo, GS Energy vice president Kim Seong-won, and NuScale Power president John Hopkins.

NuScale’s SMR is the only one of its kind to receive design certification from the U.S. Nuclear Regulatory Commission (NRC). It is regarded as the most advanced SMR in the world. It can be used for hydrogen production, seawater desalination, and heat supply to industrial complexes in addition to electricity generation.

The MOU is expected to generate huge synergies by combining NuScale’s SMR technology, GS Group’s power plant operation capabilities, Doosan Enerbility’s expertise in nuclear power plant equipment production, and Samsung C&T’s power plant construction capabilities.

A power plant using NuScale SMRs will be built and put into commercial operation in Idaho of the United States in 2029.

Last month Samsung also signed a memorandum of understanding aimed at building Seaborg’s modular self-contained molten salt reactors for nearshore power production. In addition to taking a minority stake in NuScale last year, this represents a significant bet on small scale nuclear construction. It’s not an exaggeration to think South Korea is aiming to dominate the construction of small modular reactors.

Digital wealth meant little to banks when it came to a mortgage. And Burniske, 63, wanted to keep his coins rather than trade them for dollars. 

“If you cash out, you have to pay sizable tax and you’re leaving a lot of upside on the table because you’re getting out early,” he said.

Then came an option that wasn’t available when Burniske found the properties late last year: a 30-year fixed-rate mortgage secured by part of his Bitcoin and Ethereum holdings. He nailed down the loan from Milo Credit, a Miami-based startup that’s seeking to tap into the burgeoning pool of crypto loyalists who want to diversify their wealth while hanging on to their tokens.

Crypto mortgages are the latest example of the deepening role of digital coins in the U.S. real estate market, with property buyers and lenders alike embracing the volatile currencies to underpin deals for hard assets. Last year, Fannie Mae started allowing borrowers to use crypto for their down payments. New buildings going up in tech hot spots like Miami are accepting digital tokens for deposits on condos. A house in Tampa, Florida, even sold as an NFT earlier this year. 

The conventional metrics we have available come nowhere close to measuring the extent of leverage in the system. Companies buyback shares instead of paying dividends for a variety of reasons. From an investor’s perspective buybacks are preferrable to dividends because they are a tax-free benefit.

 A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: contagion spreading into the commodities and megacaps as correction intensifies, gold, oil and natural gas firm, shipping comapnies steady, China promises assistance but is shy on delivering as COVID spreads, Treasuries begin to steady as growth slows. 

“All the big mining companies coming down 20-25 pct in 4 to 5 days. pretty scary to me. what am I missing? Beside talk about the Fed raising interest rates in May with 0,5 pct and a growth scare or the lockdowns in China? Any other reasons? Should we now buy the miners again with the positive future ahead? Gold and copper also look attractive now. your opinion please”

Thank you for this question which may be of interest to the Collective. Ultimately, the question can be distilled down to whether we believe the rest of the world is going to invest in enough infrastructure to outpace a significant economic slowdown in China. The answer is not necessarily binary. We probably get one first, then the other.  

Moscow appears to be making good on a threat to halt gas supplies to countries that refuse President Vladimir Putin’s new demand to pay for the crucial fuel in rubles. Europe has said that doing so would breach sanctions and strengthen Russia’s hand. Poland has been particularly vociferous in its criticism of Russia and has refused to comply with the new terms.

The energy volatility from the Russian invasion will continue to be a source of worry for the global economy for as long as sanctions are in place. That’s likely to be at least a few years and will weigh more heavily on countries lying close to Ukraine.  

Our role was to make sure that low-level content moderators could find "harmful and dangerous content" as soon as possible, just like fishing out needles from an ocean. And we were tasked with improving censorship efficiency. That is, use as few people as possible to detect as much content as possible that violated ByteDance's community guidelines. I do not recall any major political blowback from the Chinese government during my time at ByteDance, meaning we did our jobs.

It was certainly not a job I'd tell my friends and family about with pride. When they asked what I did at ByteDance, I usually told them I deleted posts (删帖). Some of my friends would say, "Now I know who gutted my account." The tools I helped create can also help fight dangers like fake news. But in China, one primary function of these technologies is to censor speech and erase collective memories of major events, however infrequently this function gets used.

Dr. Li warned his colleagues and friends about an unknown virus that was encroaching on hospitals in Wuhan. He was punished for that. And for weeks, we had no idea what was really happening because of authorities' cover-up of the severity of the crisis. Around this time last year, many Chinese tech companies were actively deleting posts, videos, diaries and pictures that were not part of the "correct collective memory" that China's governments would later approve. Just imagine: Had any social media platform been able to reject the government's censorship directives and retain Dr. Li and other whistleblowers' warnings, perhaps millions of lives would have been saved today.

The thing I find most interesting is how these kinds of stories are proliferating. It’s not like Chinese censorship of ideas is new. It is a measure of how much the West’s relationship with China has soured that the appetite for this kind of critical content is sustaining large numbers of articles.

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: China lockdowns spreading to Beijing, CSI300 down 4%. commodities pullback, Dollar surges, stocks wobble but begin to steady on China threat reducing potential for outsized interest rate hikes.  

China’s worst equity selloff since early 2020 reflects a growing concern about President Xi Jinping: He
can’t afford the political costs of shifting from a Covid Zero strategy that is pummeling the economy. 
In Shanghai, a weekslong Covid-19 lockdown got even worse, with workers in hazmat suits fanning out over the weekend to install steel fences around buildings with positive cases. In Beijing, the process is just getting started, as authorities on Monday began shutting down a bustling district in the capital to
quash fresh outbreaks. 

The threat of paralyzing China’s two largest and wealthiest cities with a strategy abandoned by most countries helped push the CSI 300 down 4.9%, the gauge’s steepest one-day drop since the first such lockdown in Wuhan two years ago. The spreading lockdowns have investors worried that Xi is sacrificing the Communist Party’s reputation for pragmatic economic management to defend a political narrative that portrays him as the world’s most successful virus-fighter.

“This Covid situation is really putting China into a very dark moment, perhaps the darkest moment in economic terms for the last couple of decades,” Junheng Li, JL Warren Capital founder and chief executive officer, said of the Shanghai lockdown during an interview on Bloomberg TV. “It’s a confidence
crisis in a sense that you’ve got the most affluent city in China with this consensus disappointment and resentfulness towards a very non-sensible policy.”

“People really don’t know, what’s a clear path to get China out of this Covid situation,” Li said.

Democratic capitalist systems focus on the health of the corporate/financial system to achieve social cohesion and rising living standards. Communist systems focus on sustaining political stability to achieve the same ends. That difference doesn’t become obvious until a crisis challenges it.

Thanks for this commentary Eoin, which I found very good. I think we can have an intermediate correction in commodities and equities. The equity correction might be longer lasting and deeper in my opinion given valuations, interest rates, and massive positioning but I agree totally that the Fed will loosen policy when the going gets tough. That's what the Fed did during the 1970s several times if my memory is correct. I think the Germans did the same during the 1920s with much worse results, but their position was much worse.

One thing regarding the yield curve. If the Fed raises rates 250 or 300 bps, the curve will invert mathematically if bond yields are unchanged or fall. However, once the market sees the Fed raising rates, long rates could increase depending on inflation and the economy

Thank you for this insightful email. I don’t want to put limits on how long or how deep a correction can be. We can only deal with the reality provided by markets. The one thing we do know is the correction is in response to tightening liquidity conditions, so it is unlikely to end until liquidity conditions ease.

The move by Indonesia, which accounts for a third of global edible oil exports, will add to turmoil facing emerging markets from Sri Lanka to Egypt and Tunisia. Even developed countries could see sharp rises in supermarket prices.

Palm oil is one of the most versatile staples, used in thousands of products from food to personal care items to biofuels. Prices of cooking oils have been on a tear due to drought and labor shortages. Then the war in Ukraine roiled trade of about 80% of global sunflower oil exports, boosting demand for alternatives like palm and soybean oil and sending prices to record highs. 

Indonesia’s ban applies to exports of RBD palm olein, a higher value product that has been processed. Exports of crude palm oil and RBD palm oil will still be allowed, according to people familiar with the matter. RBD olein accounts for 30% to 40% of Indonesia’s total palm oil exports. 

The move could increase costs for packaged food producers such as Nestle, Mondelez International and Unilever. Nestle declined to comment, while the other companies didn’t respond to a request for comment. It may also force governments to choose between using vegetable oils for food or biofuels. 

Palm oil prices initially popped higher on the news of Indonesia’s export ban but were not spared the decline in the wider commodity complex today. Nevertheless, the longer Indonesia’s ban persists the bigger the knock-on effect for regional consumers. Inflationary pressures may ease in industrial commodities, but agricultural prices are less susceptible to slowing Chinese growth.

Hurt by plunging tech valuations, SoftBank is walking away from some of its loss-making portfolio firms to comply with stricter investment criteria, said the people, who asked not to be identified because the matter was not public. Many of the two Vision Funds’ portfolio of 300-plus companies are loss-making.

The Japanese investment firm offered to contribute money if Light could find another investor to lead the next fundraising round, one of the people said. But with its biggest backer offering only a token amount, other investors were wary about stepping in, the person said. The Redwood City, California-based startup has hired a consulting firm to explore options, including winding down operations.

“Their purse strings are tight as they have ever been,” the person said.

A Vision Fund spokesman and Light Chief Executive Officer Dave Grannan declined to comment. 

The adoption of prudence at SoftBank’s Vision Fund -- which rewrote the rules of venture capital by deploying billions of dollars from the sovereign wealth funds of Saudi Arabia and Abu Dhabi into startups -- is an about-face from its past freewheeling largess. 

For years, SoftBank’s founder and Chief Executive Officer Masayoshi Son persuaded startup founders to accept Vision Fund money by encouraging them to think bigger and promising continued support to help them expand. He would often invest more money than founders were looking for if they would try to accelerate growth.

Before approving the investment in Light, the billionaire made clear to Grannan that his interest was predicated on the startup’s ability to adapt its depth-sensing imaging technology for self-driving cars -- something Light’s founders never considered before.

Ambitious startups with big ideas and no path to profits are finding the Vision Fund is a fair-weather friend. That only increases the pain they experience as yields rise. The startup sector is most acutely sensitive to tighter liquidity. Some will not survive this correction.

One of the questions subscribers as most often is how to find details of my open trades. To make it easier I will simply repost the latest summary daily until there is a change.

A link to this week's Big Picture Long-Term video is posted in the Subscriber's Area. 

The readings will feed into debate about how quickly policy makers should move to calm inflation, which at 7% is more than triple the target. Investors anticipate another increase in interest rates next month, bringing the key lending rate to 1% for the first time since the global financial crisis more than a decade ago.

BOE policy maker Catherine Mann on Thursday raised the prospect of a bigger jump in interest rates to control inflation. She also said she’s focused on how well demand holds in determining how to vote in May. 

She noted that data suggested “consumers were forward-looking, which would translate into a period of softer demand growth, perhaps even retrenchment.”

“Mann put the cat amongst the pigeons yesterday by suggesting the BOE could accelerate its pace of tightening if the economy withstood the cost of living crisis,” ING analysts wrote in a note. “Today’s soft U.K. March retail sales release is a notch against such an outcome.”

The big question is whether the growth slowdown in the UK is a prelude to what we can expect from the rest of the world? My hunch is yes. The UK aggressively boosted money supply and debt issuance during the pandemic, was among the first to remove mask mandates, experienced a jump in activity immediately afterwards, and is now beginning to experience a hangover as the rising cost of all consumables bites into spending power.

if we are at peak inflation now, as some suggest, do you believe it's time up for the commodity trade? Freeport, Anglo, Alcoa has vicious pull backs this week from highs, with some of those having key week reversals. If you've made money, take shelter and come back another day, or stick it out because the longer-term structural story is intact?

Thank you for a topical question. The big question at present is whether we are in a cyclical or secular bull market for commodities and industrial resources in particular.  

The cyclical argument runs that the current conditions are similar to the post credit crisis rebound. From early 2009 commodities rallied from depressed levels to new highs inside of three of years. Then monetary conditions tightened as balanced budget measures were imposed in both the USA and Europe. As monetary conditions tightened, and the Dollar strengthened, commodities peaked went through a crushing bear market for the next five years.

The move is the latest manifestation of Stripe’s renewed interest in crypto after rivals such as Block Inc., PayPal Holdings Inc. and Checkout.com made inroads in the industry. Stripe suspended support for Bitcoin payments in 2018, but began recruiting crypto talent last year and in March said it was helping digital-asset exchanges FTX and Blockchain.com with online payments and customer verification. 

Creators on Twitter will be able to receive payments initially in the stablecoin USD Coin. The payouts across the Stripe Connect platform will be made using Polygon, a blockchain network designed to make Ethereum faster and easier to use. Stripe said it chose Polygon because of its speed and low transaction fees.

Distributed ledgers and trustless networks continue to gain traction in the financial services sector. The desire to track ownership and the origin of funds has probably increased with the sanctions levied on Russia which should be positive for blockchain-based payments systems. However, that doesn’t tend to have much influence on the trajectory of crypto assets.

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Some of the topics discussed include: Jay Powell suggsts 0.5% hike in May, stock markets pull back across the board, Dollar firm, China devaluing renminbi stock market tests March lows, FANGMANT looks susceptible to additional weakness. Vietnam weak, India firm. 

U.S. stocks fell as the selloff in Treasuries resumed, with the rates market hedging the possibility that the Federal Reserve will tighten policy more aggressively. The dollar gained.

The S&P 500 dropped, reversing gains of as much as 1.2%. The tech-heavy Nasdaq 100 extended losses, underperforming major benchmarks, as the jump in yields weighed on growth-related stocks.

Treasury yields rose across the curve, with the policy-sensitive two-year rate climbing 14 basis points 2.72% as traders priced in 50 basis-point rate hikes at each of the next three meetings. The dollar gained against all of its major peers following the surge in yields.

Fed Chair Jerome Powell said he saw merit in the argument for front-loading interest-rate increases and that a half-point hike “will be on the table for the May meeting.”

Tesla’s earning buoyed sentiment this morning but the momentum was short lived. The Federal Reserve wants to kill off demand. They know as well as the rest of us raising rates will do nothing to increase oil supply, clear port congestion or boost crop yields. The tools they have at their disposal all target demand.   

In a sign that authorities are keen for the slide to end, the China Securities Regulatory Commission said that on Thursday it met with institutional investors such as the National Social Security Fund, banks and insurers to ask them to boost their equity investments.

Lockdowns in major cities across the country, coupled with capital outflow risks as the Federal Reserve hikes rates, have dampened sentiment toward local Chinese shares. Investors who had expected authorities to ramp up stimulus have since been underwhelmed, with Wednesday’s decision by banks to keep lending rates unchanged serving as another setback.

“The market is flooded with pessimism,” said Wu Wei, fund manager at Beijing Win Integrity Investment Management Co. “While there have been some policies since Liu He, the greater weight on people’s minds now is the virus. No one can accurately guess the bottom. Judging from the virus situation, we could still see a further slide.”

 

As predicted early this year, China’s covid problem was the wildcard no one was properly prepared for. Politics is the primary concern of every Communist administration. The leadership question will be settled at the Party Congress in November. There is no chance of the Covid-zero policy being abandoned before then.

The company lowered its sales guidance for this year to 4.25 billion pounds of copper from a previous call of 4.3 billion, and raised its annual cash cost forecast to $1.44 a pound from $1.35 and ahead of the average analyst estimate.

Freeport sees the kind of dramatic cost inflation that is affecting miners now as temporary, although “time will tell,” Chief Executive Officer Richard Adkerson said on a call with analysts.  

For now, cost increases are being offset by higher output and surging prices, translating into bumper profits. Adjusted earnings more than doubled to a better-than-expected $1.07 a share. 

Freeport produced 1 billion pounds of copper in the first quarter, exceeding the 996 million-pound average estimate of six analysts tracked by Bloomberg. The result was well ahead of the same period last year, although slightly below a three-year high clocked in the fourth quarter. Freeport also produced more gold than expected in the quarter.

Reporting bumper production but rising costs is symptomatic of the challenge facing miners. They will be reluctant to spend the money necessary to radically increase supply when they do not have visibility on inflation and interest rates. That’s particularly true when rising production threatens to put a lid of the appreciation in metal prices.

 A link to today's video commentary is posted in the Subscriber's Area.

Which firms have monopoly - pricing power?

Thank you for this question which may be of interest to the Collective. David and I pondered this same issue a decade ago. Globalisation was flourishing, the shale revolution promised US energy independence and companies were expanding enthusiastically to capture market share among the new vibrant emerging market middle classes. We also worried about inflation because central bank money printing money was so prolific.

Such long cables would have leaked too much power to be viable in the past. Modern HVDC technology at 515 kilovolts has shaved the total loss to 15pc, including the conversion of electricity at both ends.

The coming generation of 800 or 1,000 kilovolts will shave the loss rate further. New methods of laying cables will open up the most direct deep-sea routes instead of having to hug the coasts, cutting transmission lines from Morocco by a quarter.

“We are going to see an explosion of long-distance interconnectors criss-crossing the seas. You could even link up the US and UK, since it is a similar cable distance,” said Mr Morrish.

Covering the Sahara in solar arrays has been discussed for years and very little progress has been made. It’s not exactly the most politically stable place in the world, even if Morocco is less volatile than some of its neighbours. European countries have also probably had enough of being beholden to the Middle East and oil. Transferring dependence to solar and North Africa was viewed as less than appealing. However, Russia’s invasion of Ukraine may change that calculus and introduce urgency into the discussion.  

Netflix Inc. is throwing out all of its old rules after losing customers for the first time in a decade, saying it will introduce an advertising-supported option and crack down on people sharing passwords.

The plans are intended to help staunch the loss of subscribers that pummeled the streaming service Wednesday, pushing the stock down as much as 29% in premarket trading in New York and potentially wiping about $43 billion from its market value. It the decline holds, it would put Netflix on course to be the worst performing stock of the year on both the benchmark S&P 500 and Nasdaq 100 indices.

Co-founder Reed Hastings has said for years that he doesn’t want to offer advertising and had no problems with password sharing. But the company is changing course after losing 200,000 customers in the first quarter, the first time it has shed subscribers since 2011. Netflix also projected it will shrink by another 2 million customers in the current second quarter, a huge setback for a company that regularly grew by 25 million subscribers or more a year. Netflix also will curb its spending on films and TV shows in response to the customer losses.

S&P offers an investment grade rating, while Moody’s rates Netflix as the highest level of junk. That represents the widespread indecision about the company’s prospects. To some Netflix’s debt is a sound investment, to others it is no better than speculative grade. The yield on the 2028 bonds has doubled since the beginning of the year but stills trades at a price of 106. That premium is hardly justifiable as subscriber numbers contract.

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Some of the topics discussed include: bonds continue to sell off, oil, natural gas, gold, orange juice, sugar, coffee pullback, stocks begin to steady on a weaker Yuan and Yen. slowing global growth is negaitve for commodity demand but reduces the potential for interest rate hikes which supports stocks. 

Over the weekend I participated in a sales presentation for solar panel installation. The cost to the consumer has not come down all that much over the last few years, which suggests manufacturing efficiencies are not being passed on to consumers. However, financing for the panels is unusually attractive.

I was offered a 25-year fixed rate loan for $65980 at 1.49%. 20-year yields are at 3.17% and 30-year yields are at 2.99% so it begs the question where are they getting the cash to lend at 1.49%?

The yuan slipped to its weakest level in six months, pressured by concern surrounding China’s growth outlook and a surge in U.S. Treasury yields.

China’s offshore currency weakened by as much as 0.7% to 6.4198 per dollar in New York trading, its weakest since October 2021. The decline comes as traders eye the risk that the world’s second-largest economy is becoming snarled in lockdowns, quarantine and testing rules. The yuan was also pressured by a rise in U.S. yields and the greenback on odds of even more aggressive Federal Reserve tightening. 

On Monday, China’s central bank unveiled nearly two dozen measures and promises intended to boost lending and support industries that have been beaten down by recent Covid lockdowns, including a pledge to guide banks to expand loan extensions.

“This is the strongest signal yet from Chinese authorities that they are concerned over growth conditions,” said Simon Harvey, head of currency analysis at Monex Europe. “Coupled with regulatory tightening in the tech sector, the increased level of concern over domestic growth suggests a poor year for Chinese equity returns. Today’s currency reaction is reflective of this.”

Although first-quarter GDP data showed a pick-up in growth, a deceleration in production and retail data in March as economists further worried about China’s growth outlook amid damage from lockdowns. 

In the U.S., meantime, investors are ramping up bets for the size of the Fed’s next interest rate hike. While markets are generally pricing in a 50-basis-point hike, St. Louis Fed President James Bullard said Monday that hikes of as much as 75 basis points shouldn’t be ruled out. Treasury yields surged across the curve on Tuesday, with the benchmark 30-year bond rising above 3% for the first time in three years.

That likely deepened losses for the yuan, which on Tuesday breached the key support level of its 200-day moving average. Japan’s yen also plunged, set to extend its longest losing streak in more than half a century.

Slowing consumer spending is beginning to weigh on the Chinese economy and not least as house prices post negative performance. The Chinese government has been very slow to act because they are aware of how overt stimulative action inflates asset bubbles, and prices are already high. Nevertheless, they probably fear social unrest from high unemployment and negative growth more.  

Oil extended losses after the International Monetary Fund downgraded its global growth forecast, intensifying market concerns of an economic slowdown in the wake of hawkish comments from U.S. Federal Reserve officials.
 
West Texas Intermediate fell more than $5 on Tuesday to trade below $103 a barrel, the sharpest drop in more than a week. The IMF slashed its world growth forecast by the most since the early months of the Covid-19 pandemic and projected even faster inflation. The market opened on a downbeat after Fed Reserve Bank President James Bullard said late Monday the central bank needs to move quickly to raise interest rates to quell inflation.

Global growth is slowing amid tighter monetary and fiscal policy, the war in Ukraine and China’s determination to persist in its zero-Covid policy. At the same time major oil companies are flush with cash. Development and exploration budgets have been slashed over the last few years because politicians have been so eager to appease the green movement. That means the windfall from higher prices will result in large companies booking record profits.

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The announcement of diamonds as a regulator-approved investment product has resonated across the industry. The anticipated 1% to 2% growth in rough diamond production over the next five years will not keep up with accelerated demand, especially now that a much broader pool of investors are indirectly competing with the consumer jewelry market for diamonds.

Precious metals saw similar evolutions as their use expanded beyond the functional and decorative and into storing value. Investors now hold at least 15% of each above-ground precious metal. Early evidence of the impact of diamond investment assets indicates a shift toward the hands of investors similar to that of precious metals. Presently fewer than 1% of above-ground diamonds are allocated to investors.

There is more institutional investment in bitcoin than diamonds. The primary obstacle to investing in diamonds has always been fungibility. No two stones are the same and the relative merits of colour, shape, size, cut, clarity and fluorescence mean pricing has always been inefficient and subject to interpretation. The inefficiency of the market has kept the market for stones opaque and deterred institutions from attempting to take positions.

As prices continue to rise amid inflation, so too does financial stress, according to new research from Affirm, the payment network that empowers consumers. The research found that 73% of Millennials / Gen Z consumers - and 66% of U.S. consumers overall - are concerned that rising costs will prevent them from being able to pay for the things and experiences they want to achieve this year.

The study asked 1,740 consumers about how inflation is affecting their spending habits and revealed three key trends around how Americans are responding to the pressure on their wallets.

A night out is off the table - instead, consumers are prioritizing the home as their happy place

Purchases for the home are the top category Americans plan to prioritize as costs rise (38%).
Going out to restaurants (53%), entertainment (47%), and beauty (34%) are the top categories consumers plan to deprioritize.

Buy-now-pay-later is the opposite of delayed gratification. The sector has surged in popularity over the last two years as homebound consumers splurged on anything to relieve the tedium of the pandemic. Lifestyle creep is a hard habit to break and is usually forced on people by a sharp reversal of fortunes.

Nomura Holdings Inc. expects an “Ecuador-style debt restructuring” where the existing stock of bonds are exchanged into three longer-dated bonds with a reduction in coupon rates and some principal haircut, said Nicholas Yap, head of Asia credit desk analysts in Hong Kong.

Sri Lanka’s foreign-exchange reserves slumped 16% to $1.94 billion last month. The government was due to make a $36 million interest payment on a 2023 dollar bond April 18, as well as $42.2 million on a 2028 note, Bloomberg-compiled data show. A $1 billion sovereign bond was maturing July 25. 

The economic crisis has evolved into a political stalemate, potentially complicating efforts to negotiate aid. Mahinda Rajapaksa in a speech Monday night called on citizens to be patient as price surges and shortages worsen, while touting his family’s role in ending a decades-long civil war back in 2009. His brother, the president, has said he won’t resign under any circumstances. 

The government hasn’t yet named negotiators for the restructuring process or set a value for the debt recast, Finance Minister Ali Sabry said by phone. Sabry -- who has been in the job for about a week after cabinet resigned en masse -- will be part of Sri Lanka’s team attending the IMF’s spring meetings next week that would discuss a potential aid package.

“We have no choice,” he said, referring to the decision to stop payments. “This should have happened a long time ago.”

Sri Lanka has been heading towards a dire debt situation for much of the last decade. The massive debts taken on to accommodate China’s building of large port facilities at rates, which are multiples of what were available from the IMF, are no doubt part of the problem. The surging cost of imported commodities tipped the country over the edge. 

One of the questions subscribers as most often is how to find details of my open trades. To make it easier I will simply repost the latest summary daily until there is a change.

A link to today's video commentary is posted in the Subscriber' s Area. 

Some of the topics discussed include: Canada raises rates by 50 basis points, Dollar eases, gold, oil and gas firm, Wall Street steadies, Europe at risk from further war escalation commodity currencies firm

Paraphrasing Herodotus…

…”circumstances rule central banks; central banks do not rule circumstances”.

Inflation is a complex phenomenon, and it has nothing to do with DSGE models. Free-flowing commodities and commodity traders guarantee price stability, not central banks, and deflationary impulses coming from globalization shouldn’t be mistaken for central banks’ communication skills as anchors of price stability.

Luck is luck. Luck isn’t structural…

Luck is running out; central banks were lucky to have price stability as a tailwind when they had to fight crises of FX pegs, par, repo, and the cash-futures basis. Those were the easy crises. The ones you can print your way out of with QE.

But not this time around…

Inflation borne of shortages (commodities [due to Russian sanctions], goods [due to zero-Covid policies], and labor [due to excessive positive wealth effects]) is a whole different ballgame. You can’t QT or hike your way out of it easily…

…and if you can’t, credibility gets damaged, a decline of the U.S. dollar is inevitable, and shorting U.S. rates, the U.S. dollar, and some FX pegs make logical sense.
 

There are a lot of moving parts in the markets today. Everyone is eager to come up with a narrative that cuts through the verbiage and illuminates a path to security and stability of mind and purpose. It’s not easy because there are so many conflicting ambitions. Most people can’t shake the feeling momentous events result in momentous, not necessarily fortuitous, outcomes.

Already, natural gas spot prices are so high that the world’s top buyers in North Asia are choosing not to refill inventories with additional overseas purchases. They’re instead gambling that this summer will be mild, or a peace deal between Russia and Ukraine will result in a price drop, said traders, who requested anonymity to discuss private details.

LNG importers in China and India have drastically cut back spot purchases, and are instead maximizing domestic supply and consuming gas in storage, traders said. This strategy will help to save money, but comes with an enormous risk that allows little room for surprises -- a bet that hasn’t paid off recently. 

If there is a sudden spike in demand for gas, or if a contracted shipment isn’t able to be delivered due to a production issue, some of Asia’s top consumers may be short of gas this summer or next winter. They will be forced to go back into the spot market and buy very expensive shipments of the fuel, or curtail gas deliveries to customers at home.

Telling your rival what you are going to do before you do it is not good strategy. Europe has been telling the world it wants to be greener for years. They closed coal fired power stations and nuclear plants while intensifying reliance on imported gas. Russia could decide to curtail shipments to Europe at any time.

Policymakers led by Governor Tiff Macklem increased the central bank’s overnight benchmark to 1% on Wednesday. Macklem said he expects rates will return to what they consider the “neutral range” of 2% and 3%, with policy makers prepared to move “forcefully” if needed. 

The bank also said it will stop purchasing government bonds later this month to start shrinking its balance sheet, another form of stimulus withdrawal.

“The economy can handle higher interest rates, and they are needed,” Macklem said at a news conference in Ottawa. 

Short-term bonds fell after the report, pushing Canada’s benchmark two-year yield to as high as 2.346%, before reversing those losses. The loonie strengthened, however, gaining 0.4% to C$1.2593 per U.S. dollar at 12:29 p.m. in Toronto trading. 

About a quarter of Canadian mortgages are floating rate. Rising government bond yields and the promise of aggressive rate hikes already bit into housing demand. Getting inflation back under control should be less worrisome for a major commodity exporter like Canada but it isn’t something that can be ignored either.

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Some of the topics discussed include: gold and oil rebound, Dollar Index breaks above 100, stock markets reverse early advances, Bond yields pause, 

While the U.S. consumer-price index climbed by the most since late 1981, excluding volatile food and energy components, the gauge increased 0.3% from a month earlier and 6.5% from a year ago -- due in part to the biggest drop in used vehicle prices since 1969. The March CPI reading represents what many economists expect to be the peak of the current inflationary period, capturing the impact of Russia’s invasion of Ukraine.

Comments:
“There were some green shoots in the data that suggest March could potentially be the peak for inflation,” said Lindsey Bell, chief markets and money strategist for Ally. “When you couple this with the recent retreat in oil prices, improving shipping costs, a potential reduction in demand from higher prices, and the cycling of higher inflation comparisons, it’s possible that inflation could be topping out.”

“While today’s inflation print hit a four-decade high, there was a sigh of relief as some components of core inflation weakened,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. “Regarding peak inflation, we have been at this juncture before where subtle shifts within the data make it appear that the level of inflation has reached its peak for the cycle only to keep marching higher.”

“It’s a red-hot number, but the market’s reaction for now suggests it’s priced in, especially with the month-over-month core read coming in below expectations,” said Mike Loewengart, managing director of investment strategy at E*Trade from Morgan Stanley.

The above headline was a bit premature as early rises were later reversed.

Used car prices have an outsized effect on the USA’s official inflation measure because they don’t look at either food or energy. The Index rallied 57.3% between June 2020 and January 2022. It is now declining. Used cars cost about the same as new vehicles with the only difference being you can get a used car today but wait for a new one. The wait is increasingly preferrable to consumers as monetary conditions tighten.

A Chinese fast-fashion company without a global network of physical stores of its own is seeking a valuation that could be more than the combined worth of high-street staples Hennes & Mauritz AB and Inditex SA’s Zara.

Shein, an online-only retailer of inexpensive clothes, beauty and lifestyle products that pumps out over 6,000 new items daily, is in talks with potential investors including General Atlantic for a funding round that could value the company at about $100 billion, Bloomberg News reported Sunday.

Should Shein succeed with the round, it would make the decade-old brand about twice as valuable as Tokyo-based Fast Retailing Co. -- the owner of Uniqlo -- which last year had more than 2,300 outlets in 25 countries and regions. It would also make Shein the world’s most-valuable startup after ByteDance Ltd. and SpaceX, according to data provider CB Insights.

I wrote about the success of direct-to-consumer Chinese fashion brands in my 2015 China trip report. Back then I was impressed by the speed with which new SKUs were churned out. The injection of capital and internet marketing savvy has grown that business model to the point where every other fast fashion brand is struggling to compete.

The evolution of natural language programming is a significant trend. It holds out the promise of broadening the spectrum of people who can use innovative tools to create useful products and services. At present this is still in relative infancy, but the pace of development is sufficiently fast to suggest real world applications within the next couple of years. It might be while (decades?) before we get to Star Trek levels of voice commands but it’s not impossible.

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Bonds yields continue to accelerate, stocks pullback, oil closes below $100, bitcoin below $40,000, defensives continue to outperform. 

The unmooring of long-term Treasury yields just keeps gaining momentum. Yet there’s a wall of corporate cash lurking on the sidelines, which could curb further bond losses.

Demand from pension funds “should help cap the path of long-end rates ultimately,” Shahid Ladha, head of Group-of-10 rates strategy for the Americas at BNP Paribas SA, told Bloomberg Television Monday. “In terms of their appetite and possible support to U.S. fixed income, we have seen an average of $10 billion a quarter or $40 billion a year.” However, demand this month has been below average -- so it has room to pickup, he added. 

Ten-year U.S. rates climbed through 2.75% Monday for the first time since March 2019, following a wave of rising yields in Europe as traders intensified global bets on aggressive rate hikes from major central banks. While benchmark rates may climb even higher, likely breaking above the 3%, demand for Treasuries will probably resurface, Ladha said.

When there was $17 trillion in negative yielding debt very few investors were worried about the surety of long-term losses. They were too interested in short-term momentum driven gains to give much thought to the long-term.

Frontline Ltd. and Euronav NV are considering an all-stock merger that would produce the world’s biggest tanker fleet, just as Russia’s invasion of Ukraine drives a recovery in the market.

The creation of a tanker behemoth -- capable of carrying the equivalent of about 100 days of German daily oil demand -- would come at an opportune moment. With shippers shunning Russian vessels, demand for other carriers is increasing, boosting a market that’s languished for more than a year.

Shares of both Frontline and Euronav have rallied this year, valuing a combined tanker company at more than $4.2 billion.

“A combination of Frontline and Euronav would establish a market leader in the tanker market and position the combined group for continued shareholder value creation in addition to significant synergies,” John Fredriksen, who owns a 39% stake in Frontline, said in a joint statement on Thursday.

The Baltic Dirty Tanker Index remains on a recovery trajectory since Russia’s fleet is having difficulty moving around. The Index hit a new 14-year high on Friday. Meanwhile Brent crude oil prices are back below $100 and likely to fall further as China’s demand outlook worsens. That begs the question how long the surge in tanker prices will last.  

Cryptocurrency losses accelerated, with popular Defi tokens such as Cardano and Avalanche falling more than sector bellwether Bitcoin, as risk aversion sweeps through financial markets. 

Bitcoin dropped as much as 6.1% to $40,510, the first time the largest cryptocurrency by market value has been below $41,000 since March 22. Ether, the second largest, was down as much as 9.5%, dipping below $3,000. Altcoin, or alternative coin, Luna was down around 8.4%, while Avalanche was off 10% and Cardano slumped 11%. 

Since peaking at just above $48,000 in late March, Bitcoin -- and other tokens -- have been dragged lower by concerns about tighter monetary policy. Even the buzz around last week’s Bitcoin 2022 conference in Miami wasn’t enough to reverse the trend. 

“Historically, altcoins have a tendency to over perform Bitcoin to the downside in strong bearish trading environments,” said Josh Olszewicz, head of research at crypto investment firm Valkyrie.  “Altcoin trading participants often have less longer-term conviction.” 

The Miami crypto conference concluded over the weekend with some very bullish forecasts for both the price and role of cryptocurrencies in the economy of the future. It’s not uncommon for big bullish gatherings like this to create demand for the sector. The challenge in the near-term is the market is very liquidity dependent. Bitcoin tends to do well when liquidity is both cheap and abundant. That’s not currently the case.

A link to this week's Big Picture Long-Term video is posted in the Subscriber's Area. 

The ECB’s behind-the-scenes preparations hint at how officials are bracing for the moment when bond markets will need to cope without large-scale interventions for the first time after more than seven years of nearly uninterrupted asset purchases. 

Policy makers stopped emergency bond-buying last month and aim to halt regular quantitative easing in the third quarter.

The creation of a new crisis tool against a relatively benign market backdrop might mark a rare moment of the ECB getting ahead of the game rather than catching up under duress. By contrast, former President Mario Draghi’s OMT measure in 2012 and the Pandemic Emergency Purchase Program in 2020 were unveiled after financial turmoil had engulfed the region. 

Already last year, policy makers discussed a precautionary instrument to prepare for so-called fragmentation risks, with officials from the region’s periphery lobbying for an unconditional purchase backstop, while peers from core countries insisted on some strings attached.

The debate was resolved when the Governing Council deemed in December that extra flexibility in reinvesting bonds maturing from its emergency portfolio would be sufficient. But the imminent end of QE and heightened uncertainty about the implications of Russia’s war in Ukraine has reignited concerns among some policy makers.

Financial repression comes in many shapes and forms. At its simplest it means holding down interest rates, so inflation runs hot and reduces the burden of paying back fixed interest debt. When that is accompanied by lower government spending, it can erode debt relative to GDP quite quickly.

Newly refined Russian platinum and palladium was suspended from trading in London from Friday, denying access to the metals’ biggest trade hub in the latest in a growing list of measures against Russian interests because of the conflict in Ukraine.

Prices of palladium surged as much as 11%, with traders fearing the move could worsen a shortage of the metal automakers use in exhaust pipes to reduce emissions.

Russia’s Norilsk Nickel (Nornickel) produces 25-30% of the world’s palladium supply and about 10% its platinum, which is also used to curb vehicle emissions as well as in other industries and to make jewelry.

Palladium went on an epic bull run between 2016 and 2020 which took the price from $500 to $2500. The logic for the move was consumers were suddenly insensitive to price. Car companies would normally have spent the money to substitute in platinum long before the price hit $2500. On this occasion they instead spent money on retooling to build electric vehicles so there was no effort made to substitute demand for palladium.

$143.9B Total funding for Q1’22. Global funding to startups reached $143.9B in Q1’22, a 19% drop compared to the record-breaking Q4’21 — the largest percentage fall since Q3'12. However, Q1’22 was still the fourth-largest quarter for funding on record and its total was 7% higher than the same quarter in 2021.

113 New unicorns. Q1'22 saw the birth of 113 new unicorns globally — a 5-quarter low and a slight drop from the 115 unicorns born a year ago in Q1'21. US and Europe accounted for most of the new unicorns, with 67 and 20 unicorn births, respectively. The highest-valued new unicorn was the US-based visual collaboration company Miro, with a valuation of $17.5B.

49% Of all funding goes to the US. US-based startups received 49% of global funding in Q1’22, with a quarterly total of $71.2B. Despite accounting for almost half of all dollars invested, Q1’22 US funding marked a 5-quarter low for the country. US-based startups also drove a significant proportion of the deal activity, accounting for 37% of all deals in Q1’22.

160% Climb in valuations. So far in 2022, companies raising new financing have gained a median valuation increase of 2.6x compared to their prior financing rounds. Median valuations of early and mid-stage deals also trended up, reaching $34M and $343M, respectively. For late-stage deals, however, the median valuation dropped to $1,054M in 2022 YTD — barely above the $1B mark crossed for the first time in 2021.

-45% Drop in public exits. The number of exits via SPACs and IPOs decreased by 45% QoQ in Q1’22, while M&A activity remained elevated with 2,983 deals in total. US-based startups accounted for 40% of all exit activity in the quarter, followed by Europe at 34%.

120 Tiger funded cos. Top investor. Tiger Global Management continued to be the most active investor in Q1’22. The firm invested in 120 companies, up from 107 in Q4’21. The largest investment Tiger participated in was a $1B Series D round to Checkout.com with 12 co-investors.

91 IPOs in Asia, more than any region. Asia led globally in terms of IPOs, which were down for every region this quarter. Asia based companies accounted for 9/10 of the top IPOs in Q1'22, including 8 China-based companies. The largest IPO came from South Korean LG Energy Solutions, which exited at a valuation of $98B.

-30% Decrease in megaround funding. Mega-rounds accounted for less total funding and fewer deals this quarter, consistent with broader VC trends. At $73.6B, total megaround funding represented just over half of all venture dollars invested in Q1'22, down from 59% in Q4'21.

71% Jump in Philadelphia funding. Quarterly funding is down across all major cities and tech hubs in the US, except for Philadelphia, Atlanta, and Dallas. Among them, Philadelphia and Atlanta based startups saw the largest jumps in funding at 71% and 30%, respectively.

20% Of funding goes to fintech. 1 out of every 5 dollars in funding went to fintech in Q1’22, despite investment in the sector shrinking quarter-over-quarter. The retail sector came second, accounting for 17% of all venture funding in Q1'22.

A link to the full report is posted in the Subscriber's Area.

Discount rates don’t matter until they do. SPAC, IPO and every other “innovation” focused asset has experienced a deep pullback over the last six months. That’s entirely due to jumps in yields which reintroduced a discount rate to valuations.

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: banks rolling over, dollar strong, ongoing medium-term correction, bond yields accelerating but oil at support, inflation may now be peaking. 

Brookfield Business Partners agreed to buy CDK Global Inc., a provider of software for auto dealerships, in an all-cash deal with an equity value of $6.4 billion.

The investment company said it will pay $54.87 a share for Hoffman Estates, Illinois-based CDK, according to a statement Thursday. The price was 12% higher than CDK’s closing price Wednesday, and 30% above where CDK traded on Feb. 18, just before speculation surfaced regarding a potential sale of the company. CDK shares rose 11% to $54.50 at 9:45 a.m. in New York.

“CDK’s board of directors carefully evaluated a range of strategic and financial alternatives over several months and determined that this transaction is superior to all other available alternatives,” Chief Executive Officer Brian Krzanich said in the statement. 

Brookfield, which has about $690 billion of assets under management, said the CDK transaction is expected to be completed in the third quarter. The deal’s enterprise value is $8.3 billion, according to the statement. 

There are two parts to every private equity company. The first is what they already own and how the valuation for those holdings has been arrived at. The second is availability of fresh capital to make new purchases and the valuation of what they are in the market for acquiring.

With Russia regrouping for a fresh offensive in eastern Ukraine, China is preparing to receive the first commodity shipments from Moscow paid for in yuan since several Russian banks were cut off from the international financial system. 

Russian crude that would normally end up in refineries in Europe or the U.S. is heading for Asia, where buyers, particularly in India, are taking advantage of steep discounts. Shipments from the Black Sea and Russia’s Baltic Sea ports of Primorsk and Ust-Luga started heading to India in March, following earlier cargoes from the same terminals to China.

EU foreign ministers are likely to discuss imposing an oil embargo on Russia when they meet next week, said Josep Borrell, the bloc’s foreign policy chief. Speaking in Brussels on Thursday, Borrell said that a ban on oil is not in the latest sanctions package, though he expects ministers will tackle it on Monday, “and sooner or later -- I hope sooner -- it will happen.”

Russia’s natural gas supplies, which like oil have yet to be sanctioned by the EU, continue to flow freely as Europe faces an energy cost crunch that’s prompting governments to think twice before taking any action that might see prices rise further. 

Italy, one of the biggest buyers of Russian gas, said Wednesday that it would support a ban if the bloc was united behind the idea, a move that Germany among others has so far opposed.

The Russian regime calculated correctly that it would be impossible for Europe to avoid importing its oil and gas for the next few years. They may also have bet that the jump in prices for its exports would come close to compensating for the decline in exports to the OECD. Revelations of war crimes are hard to watch but that doesn’t change the fact Europe is not yet in a position to cut itself off from Russian imports.

If the economy is going to avoid recession this year, consumers will need to dip into savings accumulated during the pandemic. So far, the evidence suggests this hasn’t happened. That’s worrying given the deep cost-of-living crisis facing the country.

It’s well documented that the combination of enforced saving during lockdowns and massive government income protection programs has seen household balance sheets to balloon over the past two years.

The cash, once seen as rocket fuel for the recovery, is now being viewed as a way for households to maintain the volume of goods and services they consume while inflation spirals.

That’s what made the latest credit data from the Bank of England all the more concerning. As yet, consumers have shown no willingness to dip into the 200 billion pound slush fund they have amassed even though inflation continues to run well ahead of income growth.

With inflation set to accelerate further those cash reserves will need to be drawn on if the economy is going to avoid falling off a cliff. In our forecast, we have assumed 10% of the stock of deposits is used over the next year, when the hit to spending power will be at its most intense. Consumption still contracts on a quarterly basis in 2Q and 4Q, but the economy avoids recession. About 25% of the pandemic savings are used over our whole forecast period to 2025.

Of course, it may be that as the squeeze on household budgets intensifies, it forces people to use the cash. It’s also possible that rather than run down assets, households borrow. For low income workers, who weren’t able to bolster their savings during the pandemic, that may be the only option if they want to maintain their spending. With that in mind, it was notable that the same credit data showed a big increase in unsecured net borrowing.

Still, with consumer confidence at levels that are normally associated with recessions, the worry is that caution prevails and the economy takes a far bigger hit than we expect this year.

Economic statistics are good at giving some visibility on aggregate numbers but terrible at displaying divergences in opportunity. £200 billion in excess saving ignores the fact most people do not savings. The reality is higher prices mean many people have to make hard decisions about consumption.

A link to today's video commentary is posted in the Subscriber's Area.

Some of the topics covered include: $95 billion a month in QT spooks markets, oil backwardation contracts, gold steady, stock markets weak, bitcoin eases back, Australia and Canada susceptible to additional weakness too. 

So far, the Fed’s removal of stimulus hasn’t had much effect on financial conditions. The S&P 500 index is down only about 4% from its peak in early January, and still up a lot from its pre-pandemic level. Similarly, the yield on the 10-year Treasury note stands at 2.5%, up just 0.75 percentage point from a year ago and still way below the inflation rate. This is happening because market participants expect higher short-term rates to undermine economic growth and force the Fed to reverse course in 2024 and 2025 — but these very expectations are preventing the tightening of financial conditions that would make such an outcome more likely.

Investors should pay closer attention to what Powell has said: Financial conditions need to tighten. If this doesn’t happen on its own (which seems unlikely), the Fed will have to shock markets to achieve the desired response. This would mean hiking the federal funds rate considerably higher than currently anticipated. One way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower.

Fed and ex-Fed officials appear to have all been given the same talking points. They are willing to break something if that is what is required to bring inflation down. Reactions of 20% have historically been enough to create deflationary growth fears and for the Fed to relent.

A link to the full report is posted in the Subscriber's Area. 

Ranging prices contribute to analysts hedging their bets of which direction prices are likely to breakout and how much they are likely to move. Nevertheless, by suggesting a strike on put options of $9750, which coincides with the trend mean, they are effectively saying give the benefit of the doubt to the upside provided it continues to hold that level.

As shown, the working age population in the U.S. is expected to be relatively flat whereas both Europe and China will likely experience a significant decline. The key point is that economic growth is equal to the sum of growth in the working age population and productivity growth. Therefore, unless China can stimulate significant productivity growth, it can expect a significant slowdown in economic growth. While not top of mind for most Americans, this likely slowdown has important implications for the U.S. First, slower economic growth may cause socio-political issues for the Chinese government which may further complicate already tense international relations. Second, a shrinking workforce in China will likely result in higher wages which may import inflation to the U.S. given our dependency on China for the manufacturing and assembly of so many types of goods. Third, recent supply constraints in the U.S. will likely continue on a sporadic basis. Finally, a maturing population in China will consume internally more of what it produces. This example is so fascinating because the unintended consequences of a forty year old policy decision are currently impacting the entire globe.

A link to the full report is posted in the Subscriber's Area. 

This chart included with this report highlighting the reversal of working age population growth in China, Europe and the USA is particularly relevant. It suggests a migration of manufacturing and labour-intensive activity to lower median age countries is inevitable over the coming decade.

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Quantitative tightening creates deflation, stocks weak, bond yields soaring for now, jet fuel accelerating, gold and oil stable. 

Federal Reserve Governor Lael Brainard called the task of reducing inflation pressures “paramount” and said the central bank will raise interest rates steadily while starting balance sheet reduction as soon as next month.

The Federal Open Market Committee “will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting,” Brainard said on Tuesday in remarks prepared for a speech to the Minneapolis Fed. 

“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19,” she added. Officials next meet May 3-4.

Quantitative tightening causes deflation. Everywhere it has been tried, that has been the result. If you have an inflationary problem, sucking liquidity out of the system is a good way to get it under control. Arguably, it is much more effective than raising rates. In the process, demand will fall, and growth will deteriorate. It will also reduce the number of interest hikes that need to be enacted.

Wholesale jet fuel prices in New York continue to soar unabated, touching a fresh record for the second consecutive trading day.  

Jet fuel on the spot market added another 93 cents, surging to $7.61 a gallon on Monday, a new high since Bloomberg started publishing these prices in 1988. Regional stockpiles are at their lowest for this time of year since 2015.

For much of the pandemic, U.S. refiners prioritized making other fuels such as gasoline and diesel with air-travel demand lagging the pace of recovery in other oil markets. Fuel makers began raising jet fuel production in late March as prices suddenly soared above diesel for the first time since Jan. 2020. Fuel accounts for up to a third of operating costs for airlines. Some airlines were already cutting flights as a result of expensive fuel back in early March.

Potentially bringing some relief to East Coast inventories, a jet fuel cargo was diverted mid-voyage to New York from Spain with an estimated arrival next week. Wholesale jet fuel prices have more than doubled within the past month.

Traders must be wondering whether it is advisable to simply buy every commodity contract that has not yet accelerated. Afterall, the number of commodities that have gone from quiescence to fame in the last year continues to grow. 

Today, there is an unusual discrepancy between GDX (-1.43%) and GDXJ (-0.27%), usually it is the other way around. Gold futures are up 0.64%.

Is there something the "big money" (presumably in GDX) knows about upcoming developments in Gold or miners?

You have not talked about your position in RR? Just keeping indefinitely?

Thank you for this email which may be of interest to subscribers. Gold continues to pause around the psychological $1900 level. In any range the bullish and bearish arguments return to equilibrium.

At present the competing arguments are that gold should do well because central banks have been backed into a corner by rampant money printing and will be unable to raise rates enough to fix the inflation issue. The competing negative view is gold faces an increasing headwind for rising yields.

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: tech stocks rebound on China compliance, oil, gold, copper steady, Dollar firms, bonds remain weak.

In 2020 I began a series of reviews of longer-term themes which will be updated going forward on the first Friday or Monday of every month. These reviews can be found via the search bar using the term “Secular Themes Review”.

“Play along to get along” has been the default strategy for global peace over the past thirty years. The default proposition was that if we concentrate on commerce, and all grow wealthy together, there was no real need to focus on our political differences. Under that system globalization flourished.

A just in time global supply chain allowed components to be made in a host of different countries, assembled in China and exported to the world. The demise of subsidy regimes allowed commodities, particularly agriculture products, to be produced in the lowest cost regions and exported to the globe. The internet has allowed the dissemination of know-how and services like never before.

In attacking Ukraine, Russia expressed a willingness to risk being cut off from much of the global economy. Regardless, of any other motive, Russia’s invasion of Ukraine is a gamechanger for the global order. With evidence of war crimes emerging, the chances of Russia being welcomed back into the global trading community are growing progressively more distant. We are back in an “Us versus them” global environment.

A link to this week's Big Picture Long-Term video is posted in the Subscriber's Area. 

This year, California farmers have been given a financial incentive to not plant crops.

Much of the state is already experiencing extreme drought conditions. As part of a $2.9-billion plan to try to keep water flowing in California rivers, the state will pay farms to keep thousands of acres vacant this growing season. 

Both state and federal officials, as well as some major water companies in the region, signed the plan on Tuesday. Their hope is to keep upwards of 824,000 acre-feet of water every year in the Sacramento-San Joaquin River Delta. The Capital Press explains that one acre-foot of water adds up to around 325,000 gallons of water—or typically enough to supply water to two households for a year.

The most impacted sector will be the rice industry, as the plan would leave 35,000 acres of rice fields in the northern Central Valley—adding up to about six percent of the yearly crop—unused.

The conversion of acre feet quoted above doesn’t appear to be accurate but reducing the acreage of rice planted by 6% is a significant event.

Barclays Plc’s $600 million structured products blunder has little precedent on Wall Street. But the bank’s past misconduct may have set the stage for the paperwork fail it revealed this week.

A key issue at the heart of the regulatory breach appears to be its loss of the so-called well-known seasoned issuer status in 2017, a right granted by the U.S. Securities and Exchange Commission that allows banks to sell notes in the U.S. with fewer filing requirements. 

Since 2007, Barclays had faced the risk of losing this right at least five times in the aftermath of issues from dark pool disclosures to foreign exchange manipulation, an analysis by Bloomberg News shows. The bank had to repeatedly engage with the SEC over it and apply for waivers, so it didn’t lose this classification.

Barclays isn’t the only bank to have engaged in such back-and-forth with regulators, and the loss of the WKSI approval explains how a limit breach could happen. But the years-long battle to keep that status raises ever more questions over how it could have overlooked one of the most expensive clerical errors ever. 

The oversight is landing the bank with about 450 million pounds ($600 million) in expected expenses from buying back unregistered securities the bank sold, a halt to a booming U.S. business, possible regulatory fines that will deepen the pain, and a delay to a highly anticipated stock buyback.

The raft of additional regulatory hurdles imposed on banks following the credit crisis necessitates having an army of personnel on hand to make sure every “i” is dotted and every “t” crossed. It surprising how few banks have come in for active censure for failing to comply fully with regulations. Barclay’s is certainly being punished for its transgression by investors.

Commodities can be their own worst enemies when they get too far out over their skis, and we see 2022 risks akin to 2008's pump and dump. Energy prices may inch higher or collapse, the latter typical amid similar supply-shock spikes. What's different now is the U.S. paradigm shift to largest energy producer and net exporter from the top importer. Embracing technology is a primary reason, and the war and high prices should accelerate existing trends away from a world reliant on fossil fuels, notably from mercurial sources. Copper and base metals are subject to demand destruction and reversion risks along with crude oil, in addition to central banks fighting inflation. A record Corn Belt crop this year is likely, but it may not be enough to cover production lost to the war. Gold may be a primary beneficiary.

A link to the full report is posted in the Subscriber's Area.

The oldest adage in the commodity markets is “the cure for high prices is high prices”. Under normal circumstances demand surges during prolonged periods of economic and supply struggles to keep up. The inflationary pressures high prices incur forces central banks to take action. Commodity bull markets often end with new supply reaching market at the same time as demand evaporates due to high interest rates.

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Crude oil eases, gold stable, bitcoin weak, stock markets susceptible to weakness as they pause at their 200-day MAs, Brazilian real breaks, India a beneficiary of lower oil prices, 

In a provocative but persuasive column for the New York Times, Bret Stephens suggests that Russia’s war aim is not preventing NATO enlargement, or rebuilding the Soviet empire, but cementing its status as an energy superpower:

Suppose for a moment that Putin never intended to conquer all of Ukraine: that, from the beginning, his real targets were the energy riches of Ukraine’s east, which contain Europe’s second-largest known reserves of natural gas (after Norway’s). Combine that with Russia’s previous territorial seizures in Crimea (which has huge offshore energy fields) and the eastern provinces of Luhansk and Donetsk (which contain part of an enormous shale-gas field), as well as Putin’s bid to control most or all of Ukraine’s coastline, and the shape of Putin’s ambitions become clear. He’s less interested in reuniting the Russian-speaking world than he is in securing Russia’s energy dominance.

Even if this is not the aim, the possibility of entrenching Russia’s energy power is now at the center of the broader conflict between Putin’s Russia and the West. 

I’ve been arguing from the outset that the idea Russia acted irrationally does not make sense. Securing energy assets now so they can never be used to decrease European natural gas reliance on Russia offers an elegant explanation for the aggression. From their perspective it is better to act now, to forestall the certainty Ukraine energy resources would be developed, and risk destroying a supply relationship than to endure a loss of influence of time.

The drop in Brazil’s swap rates goes against the move seen elsewhere in emerging markets, with yields rising across the board following the U.S. bond rout. Treasury yields surged recently with traders pricing in more tightening in the world’s biggest economy amid concern about rising prices. 

“BCB has raised rates almost 1,000 basis points in two years, so they are certainly willing to fight inflation,” said Brendan Mckenna, a currency strategist at Wells Fargo in New York. “There is little they can do to defend against external shocks, but at some point policy makers have to wait for the effects of tighter policy to materialize.”

Brazil’s policy makers defied analyst expectations when it said that a final 100 basis-point rate hike in May would be enough to bring inflation back toward the 3.25% target next year. The last central bank weekly Focus survey shows economists see consumer prices running at 3.8% next year.

“The central bank was being held hostage of the Focus survey forecasts and now it decided to follow its own views,” said Tony Volpon, chief strategist at Wealth High Governance and a former central bank director.

In the developed world there is no prospect of raising rates to a level above inflation. Everyone understands growth would reverse well before that point is ever reached. Economies are so overburdened with debt that even modest interest rates will kill off demand.