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Copper and iron ore extended gains on a report that China may ease curbs on borrowings by developers, adding to a raft of measures to bolster real estate which is brightening the outlook for metals.

Beijing may allow some property firms to add leverage by easing borrowing caps, and pushing back the grace period for meeting debt targets, said people familiar with the matter. The moves would relax the stringent “three red lines” policy that had contributed to worsening the country’s real-estate meltdown and hit demand for steel and copper used in construction.

Copper rose as much as 1.5% and was 0.8% higher at $8,437 a ton on the London Metal Exchange as of 11:02 a.m. local time. Iron ore futures in Singapore rose 2.1% to $118.60, reversing a earlier decline.

China’s flurry of stimulus is aiding sentiment, and boosting confidence that the economy is stabilizing, Everbright Futures said in a note. But the optimism is being tempered by a severe wave of Covid-19 across China, which is crimping activity and worsening the seasonal weakness in manufacturing.

China’s three-year quarantine has helped to contain speculative interest in the commodity markets. Now that China is finally stepping in with aggressive measures to support growth and the property market, industrial resources are playing catch up with energy.

China’s trade restrictions on Australian wine, lobsters and other commodities could be the next to ease amid a warming of diplomatic ties and expectations that Beijing will soon resume imports of coal.

Curbs on commodity imports will probably be eased gradually and in an unofficial manner, said Hans Hendrischke, professor of Chinese Business and Management at the University of Sydney. While there’s some confidence that restrictions will be lifted, there’s currently no indication of timing, he said.

“Nobody could tell you whether it will start with barley, wine producers or lobsters for Chinese New Year,” Hendrischke said.

China’s boycott of Australian products has been a burden for the economy as inflationary pressures pushed up interest rates and pressured the property market. The prospect of increasing Chinese demand is now helping to support the currency which should ease some of the inflationary pressures.

“I suspect tumult” for markets in 2023, Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “This is going to be remembered as a ‘V’ year when we recognized that we were headed into a different kind of financial era, with different kinds of interest-rate patterns.” 

In every other instance where quantitative tightening has been attempted bonds yields go up first. That is fuelled by fears central bank selling of bonds will crowd out other investors which pushes down prices. That process lasts for several months, then yields come back down. The collapse in yields is driven by rising deflationary fears as liquidity is drained out of the economy.

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

Some of the topics discussed include: Nasdaq-100 extends decline led by cloud services, dollar steady, bonds yields fail to hold advance, gold eases and silver working on a downside weekly key reversal, China extends rebound and related markets benefit. Mexico testing the upper side of a seven-year base. 

2. The Federal Reserve remains in a tug-of-war with inflation, so it puts the word “pivot” on the shelf alongside the word “transitory.” The fed funds rate moves above the Personal Consumption Expenditures price index and real interest rates turn positive, a rare phenomenon relative to the last decade.

3. While the Fed is successful in dampening inflation, it over-stays its time in restrictive territory. Margins are squeezed in a mild recession.

4. Despite Fed tightening, the market reaches a bottom by mid-year and begins a recovery comparable to 2009.

5. Every significant correction in the market has in the past been accompanied by a financial “accident.” Cryptocurrencies had a major correction and that proved not to be a systemic event. This time, Modern Monetary Theory is fully discredited because deficits have proven to be inflationary.

I liked these surprises for the coming year better when they were more risqué. I think the above four are close to consensus. The Fed has no reason to cut rates and will not do so until they have one. That implies significantly higher unemployment.

Here are some alternative surprises:

At the risk of representing a bottom, my hat's off to you Eoin for your call on the cloud. A year ago I remember being in a Covid tent with an investor and you had just laid out the case for the cloud glut. Roll tape on all these guys with buys a year ago including Cramer.

Thank you for this kind email. Back when I put the list of Autonomies together in 2012, the one share people asked me about more than any other was Salesforce. It did not have the big global sales footprint of the other companies. I included it anyway because I thought it would, and wanted to have some forward-looking constituents. Cloud computing subsequently went on to prosper beyond most people’s expectations.

One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis 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: China recovery gathers pace, tourist sector basing, tech still under pressure, bond yield compressing and gold recovering, oil and copper weak.

The world’s second-biggest stock market is looking like an investor darling again, as optimism about the eventual benefits of Beijing’s abrupt end to Covid curbs outweighs concerns over the short-term pain it inflicts. Adding to that is a series of policy developments signaling the return of economic pragmatism, including plans of fresh property support, discussions of ending a ban on Australian coal imports and progress toward concluding a crackdown on Jack Ma’s financial tech behemoth.

The euphoria has spread beyond equities. The offshore yuan strengthened 0.5% against the dollar, while dollar bonds of some of China’s distressed developers saw sharp gains.

“These directly remove some of the pillars of risks for China — property, geopolitical, and regulatory headwinds,” said Marvin Chen, a Bloomberg Intelligence analyst, referring to the slew of “active” policies. 

Concerns over a further worsening of China’s property debt crisis receded further Wednesday after Bloomberg News reported that authorities are weighing new measures to ease the cash crunch plaguing some systemically important developers. The resumption of approvals for private equity funds to raise money for residential housing developments also lifted sentiment. 

It is looking increasingly likely Chinese policy has just had a major (positive) reversal. The effusive praise Qin Gang gave for the US negotiators as he stepped down as the top Chinese envoy to Washington suggests we can expect a friendlier atmosphere for the next year.

Crude’s dwindling levels of open interest have left it open to sharp swings in recent months, and a failed attempt to break above its 50-day moving average this week has done little to improve the technical picture. While sanctions against Moscow over Russia’s war in Ukraine dragged its oil flows to 2022 lows late last month, that’s been of little relief to bulls so far this year. 

The impact of a pre-Christmas freeze that hobbled refinery capacity in some parts of the US should also become clearer in inventory data this week, with the industry-funded American Petroleum Institute’s figures due later. In the short-term, that has lowered crude processing capacity in North America and is also weighing on prices. 

“We’ve seen these big freeze-offs in the US and that has meant that the crude balance has actually weakened,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., said in a Bloomberg TV interview, referring to US refinery closures due to cold weather. “There’s a few more weeks of softness I would think.”

The weakness in the oil sector has little to do with Chinese demand questions. Instead, the illiquidity of the futures market is an increasingly troubling issue because it increases volatility. Open interest in front-month Brent Crude contracts is back at 2015 levels and trending lower.

Kinross Gold and Pan American Silver are among the gold and silver miners getting the biggest boost Tuesday, as gold rose to the highest in six months.

Gold rose 1% to trade over $1,840 an ounce as the precious metal continues to gain momentum
The Bloomberg Americas Mining Index gains as much as 3.2% led by Kinross’s 7.5% rise and Pan American’s 7.4% climb, Newmont climbs 3.7% and is one of the top performer in the S&P 500 Index

Other miners rallying include: EQX CN +11%, ARIS CN +10%, SVM CN +4.3%, BTO CN +3.3%, ABX CN +3.8%, FR CN +2.8%, LUN CN +3.9%, YRI CN +3.1%

The gold price rallied in tandem with bonds yesterday, despite the relative strength of the Dollar. That suggests at least a temporary reorientation of investor focus towards the view gold is a perpetual zero-coupon bond. The implication is inflation has peaked and could easily surprise on the downside and the lagged effect of central bank tightening becomes clear in Q2/Q3.

Eoin, I hope you have had a good break. A very happy New Year to you and yours. I apologise, as I am sure I have asked the question previously. However, I cannot find your answer. Can you direct me to a good Spread Betting company in the UK? In anticipation, many thanks.

Thank you for this question which may be of interest to the Collective. I primarily use IG Index and CMC Markets.

IG Index has by far the largest breadth of instruments. However, they also widen spreads in thin overnight trading. That means when the price is trading close to your stop at the end of trading, there is a strong likelihood it will be triggered in the overnight session.

CMC Markets on the other hand does not have as wide a selection, but it does not tinker with spreads in the overnight session.

The choice of which you use will be influenced by the type of trader you are. I customarily do not use stops until I have a profit I want to protect.

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

Some of the topics discussed include: China bounce led by autos, Nasdaq declines led by autos, Europe and UK bounce one lower energy prices, Dollar strong, gold holds half advance, bonds firm, 

“We expect one-third of the world economy to be in recession,” Georgieva told CBS’s ‘Face the Nation’ in an interview aired Jan. 1. “Why? Because the three big economies — US, EU, China — are all slowing down simultaneously.”

The IMF already warned in October that more than a third of the global economy will contract and that there is a 25% chance of global GDP growing by less than 2% in 2023, which it defines as a global recession.

Examining the three biggest economies on CBS, Georgieva painted a mixed picture of their ability to withstand the downturn.

While “the US may avoid recession,” the European Union has been “very severely hit by the war in Ukraine — half of the EU will be in recession next year,” she said. At the same time, China faces a “tough year.”

The negative economic consequences of the war in Ukraine were rapidly priced into European stocks last year. However, a crisis needs to be seen to be getting worse, if it is to continue to exert an influence on prices.

Historically, dividend related ITM [Ed. In-the-money] call exercises have resulted in some of the highest call volume days of the year, including March 15, 2012, when a record 9M calls traded in SPY, but changes to the clearing process since then have dampened that activity. 

Mathematically, the decision to exercise a call or put early is related to the extrinsic value of the contract. For calls, if the dividend(s) amount exceeds the extrinsic value, a long holder is usually better off exercising. For puts, the decision is a bit more subtle, with extrinsic value compared to the carry cost on the strike. As U.S. interest rates have increased sharply to decade-highs this year, the cost of carry for deep positions has increased, while the selloff in many popular stocks has resulted in large blocks of deep put open interest. Unlike dividend-related call exercises, which tend to happen quarterly, put exercise dynamics may repeat daily if positions are open. In practice, put exercises are more common on Wednesdays based on the timing of settlement. Puts exercised on a Wednesday result in a stock sale on Thursday, which settles Monday.

Fortunately, early-exercise candidate call and put strikes for all listed products are calculated intraday and available in a subscription product on the Cboe DataShop.

A sample from the file for December 7 shows that all the active Amazon deep put strikes were considered optimal to exercise as of 2 p.m.

Large volumes of options traded in single stock names is a function of how much liquidity is still circulating the market. Massive volume in Tesla was a major factor in the stock’s ability to defy gravity in 2021. The opposite condition has been evident in Amazon, where outsized appetite for shorts has resulted in the share being among the worst performers in Q4. 

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

The topic of geopolitics and the world order is endlessly surprising because it does not submit readily to a formulaic approach. In fact, it is just when one thinks the future is most visible, that events transpire to muddy the outlook.

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Fitch Ratings expects lenders to broadly recover less on loans to small to mid-sized companies, compared with average recovery expectations in 2017. It forecasts that for about 64% of loans it rates, investors would recover between 30 cents and 70 cents on the dollar in a default, up from around 25% of the loans five years ago.   

The rising expectations for low recoveries stem from weakening contractual lender protections over the years, Fitch report said. Though those protections have grown a bit stronger this year, most outstanding loans were made before this year. On top of that, leverage is high in many transactions. 

“These capital structures were not constructed with 4% to 5% base rates in mind. Rising rates will hurt free cash flows and eat into companies’ liquidity,” said Lyle Margolis, head of private credit at Fitch Ratings.

It is a gross misrepresentation to think the pandemic was a true test for the private credit markets. Evictions were banned, defaults were forestalled and the volume of new money that hit the market broke records. The only way we can describe the impact of the COVID panic on private credit is as a hiccup.

China is likely experiencing 1 million Covid infections and 5,000 virus deaths every day as it grapples with what is expected to be the biggest outbreak the world has ever seen, according to a new analysis.

The situation could get even worse for the country of 1.4 billion people. This current wave may see the daily case rate rise to 3.7 million in January, according to Airfinity Ltd., a London-based research firm that focuses on predictive health analytics and has been tracking the pandemic since it first emerged. There’ll likely then be another surge of infections that will push the daily peak to 4.2 million in March, the group estimated.

Another story this morning quoted a Chinese health official as saying 37 million people are being infected every day. That’s a variation of exactly 10X in the above estimates. 

Still, central bankers are now focused on medium-term inflation expectations. “What matters now are estimates for 2024 and 2025, which are much more impacted by fiscal concerns than inflation,” said Laiz Carvalho, an economist at BNP Paribas. 

Spending Bill
Indeed, some of President-elect Luiz Inacio Lula da Silva’s cabinet picks have fanned investor concerns over a rise in public debt during his administration.

This week, congress approved a proposal that gives the 77-year-old leftist leader an additional 168 billion reais ($32 billion) to spend in 2023. The bill was watered down from a previous version that would have cleared the way for extra spending for two years, providing some relief to financial markets.

Brazil’s central bank has warned that possible changes to fiscal rules may fuel inflation by diluting the impact of its aggressive cycle of interest rate increases. Analysts surveyed by the monetary authority see consumer prices above target through 2025.

In an interview with Bloomberg News this week, former Brazilian central bank chief Arminio Fraga said injecting a large fiscal stimulus at a time of tight labor markets and high inflation “makes no sense.” 

Brazil has some of the highest real interest rates in the world with Selic overnight rate at 13.65% and inflation at 5.9%. The central bank is reluctant to declare victory because they are wary of what the new Lula-led government is going to do with spending.

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

Some of the topics discussed include: cross pollination between value, growth and quality factors, stocks retreat on stronger growth and personal consumption, toppy patterns in Lululemon and Costco point to peaks in consumer spending. oil eases, dollar firm, gold pauses. 

Debt markets are increasingly sorting US leveraged loans into two categories: money good, and distressed. 

A growing proportion of prices in the market are either very high, or very low. About 5% of the market is trading under 80 cents on the dollar, a share that has more than doubled since June, according to a JPMorgan Chase & Co. analysis. And more than half the market is trading above 96 cents on the dollar, an amount that has also more than doubled.  

With more loan prices reaching extremes, companies that run into any sort of difficulty can see their loans plunge quickly. That can translate to surging borrowing costs, boosting the chance of corporations defaulting. 

“This puts the worst companies at risk, as they’ll have a harder time refinancing,” said Roberta Goss, senior managing director and head of the bank loan and collateralized loan obligations platform at Pretium Partners LLC, in an interview.  

I used to live around the corner from “Nakatomi Plaza” and always got a kick out of driving past the setting for the Die Hard movie. This property is a prime example of the issues facing many commercial properties. Occupancy rates are spotty. Regions depending on the tech sector are most at risk of high vacancy rates. That is going to put pressure on owners are they refinance loans in a tight liquidity and high interest rate environment.

The underperformance of growth stocks has been the standout issue of 2022. Inflation surged and central bankers belatedly accepted it was not a transitory event. That has resulted in the swiftest pace of interest rate hikes in decades and it has also been a truly global phenomenon. This was accompanied by a swift run-up in the Dollar that tightened liquidity even more.

Tesla Inc. is offering US consumers $7,500 to take delivery of its two highest-volume models before year-end, adding to indications the carmaker is struggling with demand.

The discount on new Model 3 sedans and Model Y sport utility vehicles is double what the company was offering earlier this month. It mirrors an anticipated change in how much of a tax credit certain consumers will be eligible for early next year.

It’s highly unusual for Tesla to offer such perks, as Elon Musk has for years enforced a no-discounts policy. The company also departed from its chief executive officer’s insistence against spending on traditional advertising last month by promoting its wares on a local television shopping channel in China. Tesla also has cut prices and production in that market this quarter.

Elon Musk’s infallibility is quickly eroding, evidenced by his ham-fisted management of Twitter. There is even talk some buyers are cancelling orders because of this negative coverage. Not many people want to be associated with a personality vilified by all but those on the fringe of public opinion. As if that is not enough, the continued spread of COVID in China will take a toll on demand for Tesla’s vehicles.

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

Some of the topics discussed include: crude oil bounces from 1000-day MA, stocks unwind short-term oversold, VIX contracts, bonds yields hold gains, dollar stable, 

Junk-bond investors had almost no way to avoid losses this year, and shunning dirty energy only made the pain deeper. The best return -- one of very few gains -- was in coal, highlighting challenges for investors who need to perform but also want to be sustainable.

Junk’s 11% loss this year -- the worst since the global financial crisis -- was led by communications and consumer non-cyclical bonds, down 15% and 13%, respectively. Energy performed best in the US high-yield index, down about 5% overall.

Coal -- albeit a very small chunk of the corporate bond market -- is up 3.2%, while oil and gas services debt gained 1.7%. That compares with a global credit market that’s down double digits in most market segments this year, with particularly steep losses for longer-dated debt.

Credit markets are forecast to see a broad-based rebound next year and with many sectors trading cheap to history, junk energy probably won’t be the best again in 2023. But so long as oil prices stay supported by conflict and reopening, it should at least be a buttress for bond portfolios likely to take another beating from inflation next year.

The energy sector has been the best performer in S&P500 for two consecutive years. The fact it is also leading performance in the junk bond market is a testament to the strength of commodity prices in a geopolitically tense environment.

China will roll out supportive measures for the property market in order to correct past “mistaken” policies aimed at curbing the sector’s growth, according to the head of a top economic think tank in the country.

“It seems like the government is going to put forward more concrete measures,” said Yao Yang, the dean of the National School of Development at Peking University, in an interview. “The government has to at least stop the decline of the housing market. There are encouraging signs of it.”

Top officials including President Xi Jinping pledged in a policy meeting last week to support housing demand in 2023. “That is a code word for promoting the housing sector again,” Yao said.

CNY $1 trillion was allocated to support the property market in August. In November ICBC made the equivalent of $179 billion available to builders. This is concrete evidence the Chinese government is turning back to supporting the property sector.

Hi Eoin, isn't the VIX approaching a level or is already at a level where it is very attractive to go long the VIX? how much downside could there still be?

Thank you for this question and I’ve been pondering this same topic myself. One of the primary issues I have been thinking about is the fact the VIX has contracted at the same time as the S&P500 has been falling. That’s quite unusual since the VIX is primarily calculated based on demand for put options.

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

The BOJ has been the last holdout on negative rates, so these tentative signs that it might be buckling will heighten expectations we may be in for more unsettling volatility in 2023. Markets really don't like uncertainty, and even a suggestion that Japan might be forced into letting bond yields soar higher is enough to get risk managers heading for the exit. Fixed income isn’t quite the haven some commentators had convinced themselves it might be in the new year.

BOJ Governor Haruhiko Kuroda was at pains to downplay any implications for official rates, but this sudden move after implacable denials speaks louder. The BOJ did increase its QE bond buying ammunition to 9 trillion yen ($68 billion) per month from 7.3 trillion yen — all to defend its new line in the sand, the 0.5% 10-year yield. But this is merely a symbolic delaying tactic. Kuroda steps down in April, so Tuesday’s decision increases the expectation that his replacement will usher in further monetary tightening. This is no longer an impenetrable negative interest rate fortress. It might make foreign speculators meditate on the perils of shorting both Japanese government bonds and the yen simultaneously.

Bull markets thrive on liquidity. The Bank of Japan’s efforts to depress the 10-year yield and devalue the Yen were a significant source of liquidity that is now dissipating. There has been scant evidence that the Yen carry trade has done anything to support markets over the last six months but the removal of support is certainly being felt.

Greenidge’s average monthly cash burn rate in the past two months was approximately $8 million. That is typically used to describe the rate at which a company spends capital to finance overhead before generating a profit or loss from operations. About $5.5 million of that cost was associated with principal and interest payments to NYDIG. The firm expects to have a similar cash burn rate and similar payments to NYDIG in December, according to the filing.

The Fairfield, Connecticut-based miner has a natural gas plant that powers its Bitcoin mining facility in Dresden, New York. It is one of the earliest and largest crypto-mining firms in the state. While Greenidge’s current operations remain intact, New York Governor Kathy Hochul signed one of the most restrictive laws in the US on crypto mining last month with a two-year moratorium on new permits from the miners that are powered by fossil fuel. 

Bitcoin is a liquidity barometer. When prices multiply, the fear of missing out creates demand for leveraged plays on the price of both bitcoin and altcoins. It encourages miners to leverage up to increase their chances of securing additional coins and it attracts new funding mechanisms to ensure maximum leverage is made available to the most risk-tolerant traders as the promise of massive gains proves siren-like. During crypto winters, this entire process goes into reverse and many operations go bust.

Yet private equity funds raised more than $1tn last year, up a record 20 per cent, according to the most recent data. Investor Cliff Asness wrote recently of the “mind blowing” possibility that investors now knowingly accept lower returns “for the privilege of not being told the prices”.

Hiding from reality creates an illusion that private investments are less risky than their debts clearly demonstrate, which draws in more money, raising risk further. The moment of reckoning likely comes when and if the downturn drags on, and private markets have to finally reveal losses in a down market. The shock could trigger a stampede toward the exits. While some private managers will continue to provide long-term capital to help build companies, many others will be exposed as financial engineers who built careers on a thin foundation of easy money.

In the end, there will be nowhere to hide in a tight money era. And private markets, which largely built returns on heavy and loose borrowing, are more vulnerable than public markets in this new age.

The credit crisis in 2007/08 was exacerbated by forced mark-to-market rules which automatically repriced assets based on a single trade at a lower level. Some of the reforms in place since then have curtailed that risk but do not protect values from a broad-side as commercial properties are handed back and business profits ebb in a recession.

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

Some of the topics discussed include: Dollar and yields steady, gold pauses, Wall Street remains weak and China rolling over as COVID cases rise. 

Good morning, Eoin I would welcome your perspective if I may. I have been long only forever, 40 years and counting. In view of the current global challenges, I am thinking of taking the remaining 60% (40% currently in cash or cash equivalents) off the table and holding all in cash for the time being. I would welcome any observations you may have. I look forward to hearing from you.

Thank you for this important question which may be of interest to the Collective. The biggest argument for remaining long forever is the market always comes back…eventually. Being an investor requires an optimistic mindset. That means there is always a risk of selling too late. There is also the risk that the sectors which lead a recovery are not those you currently own.

National Bank of Canada said Monday that it ascribed a neutral bias on i-80 Gold Corp. (IAU.TO)'s Hilltop corridor discovery at the Ruby Hill property that showed elevated zinc mineralization.

Drill highlights include 12.3% zinc over 39.6 meters, adding to the high-grade polymetallic discovery in the Hilltop zone announced in November.

The bank said the results were limited to a single hole although it reinforces Ruby Hill's optionality as well as potential host to oxide and sulfide gold as well as skarn base metal mineralization, all within proximity of the underground infrastructure planned in 2023.

"Results add a high-grade datapoint to the broader Hilltop area, while expanding the region of prospectivity, still open in all directions," the bank said.

National Bank gave i-80 an outperform rating with a $4.25 price target. Price: 3.58, Change: -0.18, Percent Change: -4.79

I-80, named for the highway the mine sits near, has been reporting impressive drill results for over two years. The promise of a major new resource with easy access to transportation links, and in close proximity to established mines, suggests the aim of the management team is to be acquired.

The yen whipsawed in Monday trade after reports on a potential change to a key agreement between the government and central bank fueled speculation policy makers are moving closer to a hawkish pivot. 

Japan’s currency jumped as much as 0.6% after Kyodo said on Saturday that Prime Minister Fumio Kishida may seek to revise a decade-old accord with the Bank of Japan and consider adding flexibility to the 2% inflation goal, potentially paving the way for an end to its ultra-dovish policy. The yen pared gains after a top government spokesman denied the report.

The existing agreement commits the government and the BOJ to achieving its 2% inflation goal as early as possible. 

The BOJ has long since missed Kuroda’s original timeline of around two years. Still, removal of the phrase would go a step further in recognizing that achieving stable inflation is a longer term goal while implying that factors other than time also need to be considered.

Japan has been trying to achieve its inflation target for a lot longer than two years. The challenge in the past was the global economy was going through a long-term disinflationary trend at the same time Japan was going through a deflating property bubble. Attempting to inflate while companies were moving jobs and manufacturing capacity offshore was a challenge. Today, the aging population and depressed consumer demand are headwinds to inflation.

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

Still, bearing in mind the woeful performance of economists’ predictions in 2022, it is worth considering the risks to the current consensus. One possibility is that we are underestimating the severity of any 2023 downturn. Because of the reflexivity that kicks in as economies contract, we have seen this pattern many times before. Perhaps something will break in financial markets or – more likely – the weakness in property markets will prove systemic. For their part, central banks are ignoring the “long and variable lags” in monetary policy. But perhaps the most under-priced risk is to the upside – that the global economy proves more resilient than everyone expects. In fact, given the large distortions in the economy, we would not rule out the unscheduled return of Goldilocks. She is not going to stick around for long, but perhaps long enough to provide some welcome respite for investors.

There are less than two weeks of trading left in the year. 2022 has been a year that delivered dual losses in both bonds and equities. If anyone has highly appreciated assets they were thinking of taking profits in, then selling major underperformers to harvest tax losses has been a major theme in the last few days.

“We see China as a strategic challenge to our country’s peace and safety and the peace and stability of the international community,” Kishida said. He added the two neighbors bear a joint responsibility for the peace and prosperity of the region and the world. 

Referring to a “remarkable” build-up of missile capability in the region, the government said in the document it is becoming difficult to deal with the situation simply by strengthening the country’s existing missile defense network. 

The strategy calls for acquiring “counterstrike capability” that would enable Japan to target an enemy’s military facilities, in a turning point for a country bound by a pacifist constitution since 1947. 

Raytheon Technologies Corp.’s Tomahawk missiles are being considered for that purpose, according to the document. The Tomahawk has a range of more than 1,250 kilometers (780 miles), meaning it could be used to hit naval bases on the east coasts of China and Russia.

Japan also intends to obtain sufficient supplies of missiles, including those made on its own, over the coming decade with ranges long enough to strike military assets in its three nuclear-armed neighbors that have been a focus of Tokyo’s concerns.

With its new strategy in place, the government is considering revising the defense guidelines governing its military cooperation with its only formal treaty ally, the US, according to Kyodo News. Kishida may raise the issue during a visit to the US the government is seeking to organize for next month, the agency said, citing government sources. 

Japan says it will retain its “exclusively defensive” posture as well as its ban on nuclear weapons. 

“Today, Prime Minister Kishida ushered in a new era in the defense of democracy. I want to congratulate him on his leadership,” US Ambassador to Tokyo Rahm Emanuel said in a statement welcoming the steps. 

Japan adopting a more forthright approach to national defense, by acquiring offensive capabilities, has been a long time coming. Rearming is going to be a significant theme for many countries over the balance of the decade.

The announcement Friday was “very exciting news for Games Workshop,” said Andrew Wade, an analyst at Jefferies in a research note, noting that licensing income has built strongly in recent years. “A mainstream TV/film product could be game-changing in terms of Warhammer’s brand reach and awareness.”

Shares in Games Workshop rose 11% in early trading on Friday, the most in almost nine months. The stock — a pandemic market darling as lockdowns boosted demand for home-based hobbies — had previously fell about a quarter year-to-date.  

Amazon is gearing up to spend more than $1 billion a year to produce movies that it will release in theaters, following the $8.5 billion acquisition of MGM, a 98-year-old Hollywood studio that released Ben-Hur and Legally Blonde. I

The ex-superman actor Henry Cavill is likely to star and executive produce a series adaption of Warhammer 40k, a franchise he’s made no secret of his love for, according to a report the Hollywood Reporter Thursday.

This is a significant coup for Games Workshop and will greatly enhance the visibility of its Warhammer franchise. I never got into Warhammer since I have never had the free time to play the game. However, two of my younger brothers are avid fans, and have spent many long hours painting and arranging their battle groups.

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

Some of the topics discussed include: downside weekly key reversals for Nasdaq and Euro  STOXX, dollar and bonds firm, gold weak, oil and copper ease, China COVID headwinds likely to peak in Q1 but will be a problem until then. 

As I’ve written many times about the economy and markets, we never know where we’re going, but we ought to know where we are. The bottom line for me is that, in many ways, conditions at this moment are overwhelmingly different from – and mostly less favorable than – those of the post-GFC climate as described above. These changes may be long-lasting, or they may wear off over time. But in my view, we’re unlikely to quickly see the same optimism and ease that marked the post-GFC period.

We’ve gone from the low-return of 2009-21 to a full-return world, and it may become more so in the near term. Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets. Lenders and bargain hunters face much better prospects in this changed environment than they did in 2009-21. And importantly, if you grant that the environment is and may continue to be very different from what it was over the last 13 years – and most of the last 40 years – it should follow that the investment strategies that worked best over those periods may not be the ones that outperform in the years ahead.

That’s the sea change I’m talking about.

There is really only one big question. Will the Fed relent and revert to the GFC playbook when unemployment rises and economic hardship stokes deflationary fears? 2023 will probably deliver an answer.

The Bank of England said Britain’s inflation rate may already have peaked and that two of its policy makers believe interest rates are already high enough to drain pricing pressure. 

The UK central bank lifted its benchmark lending rate a half point to 3.5%, the ninth increase in a year aimed at taming soaring prices and the highest level since the start of the global financial crisis in 2008.

“The majority of the committee judged that, should the economy evolve broadly in line with the November Monetary Policy Report Projections, further increases in bank rate may be required,” Governor Andrew Bailey wrote in a letter to Chancellor of the Exchequer Jeremy Hunt. 

This verbiage differs significantly from the warnings delivered by the ECB and the Fed over the last few days. Both continue to suggest there is significant need for additional interest rate hikes. At her news conference today Christine Lagarde appeared to be channeling Margaret Thatcher in her statement that today’s decision should in no way be construed as a pivot.  

“The November data were way below consensus, pointing to a worsening slowdown” which will continue this month, Lu Ting, chief China economist at Nomura Holdings Inc. wrote in a note. “Surging Covid infections will offset some of the positive impact of the easing in the near term,” he wrote, adding that “the road to a full reopening may still be painful and bumpy.” 

The scrapping of many of the Covid rules will allow residents to move about freely and for shops, factories and restaurants to remain open without fear of snap lockdowns. However, with the virus likely to sweep through a country largely unprepared for the mass illness and deaths that could occur, fear of infection will probably keep people confined to their homes and weigh on economic activity.

China successfully delayed the spread of COVID for more than two years. By abandoning the testing and quarantine policy they have not chosen to frontload the infection rate. The worst of the economic and healthcare fallout will be in the first quarter of 2023. That’s going to have a knock on effect for demand for all manner of goods globally.

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

Some of the topics discussed include: Fed raises rates and issues hawkish statement, dollar weak, bond yields contract, oil firm, gold unchanged, recession inevitable stocks stable. 

“I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way,” he said. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” he said.

The Fed’s preferred yield curve spread the 18m3m swap over 3-month Treasury yields is as inverted as it was in 2019, 2006/07 and 1999. That virtually ensures a recession is on the way. This is now the time to take big risks, there will be very attractive buying opportunities in 2023 because it takes time for the lagged effect of interest hikes to appear and rates have gone up very quickly in 2022.

A personalized Moderna Inc. cancer vaccine combined with collaborator Merck & Co.’s biggest-selling drug reduced melanoma deaths in a mid-stage trial, helping for now to ease concerns about the biotechnology company’s second act following the success of its Covid-19 vaccine.

The combination of the vaccine with Merck’s Keytruda cut the risk of death or recurrence of the lethal skin cancer by 44%, the companies said Tuesday in a statement. The drugmakers plan to move the combined treatment into final-stage studies next year. Moderna shares rose as much as 26% as of 1 p.m. in New York, while Merck’s gained as much as 2.1%. 

During the pandemic, the Nasdaq Biotech Index was dominated by vaccine providers. COVID-19 was all anyone was interested in. For a couple of years, everyone was willing to suspend concern that there are causes other than coronaviruses. We are now returning to more normal considerations in that the biggest causes of death are heart disease and cancer and obesity is a massive chronic issue.

China’s pivot away from Covid Zero is poised to boost natural gas demand in the world’s biggest importer, potentially curbing supply to Europe and other Asian nations.

China National Offshore Oil Corp. is now looking to secure more shipments of the super-chilled fuel for next year. The return to the market of one of the nation’s largest liquefied natural gas buyers follows a period of subdued demand, due to virus curbs suppressing economic activity, and may herald a rebound in imports. 

Beijing’s move to reopen its economy and live with Covid-19 has seen most internal restrictions being dismantled over the last few weeks. Provided that’s not rolled back as cases surge, that will increase the challenge for Europe next year as it prepares for the winter of 2023/24 with little or no natural gas from Russia. 

Chinese gas imports are likely to be 7% higher in 2023 than this year, according to Wang Zhen, president of Cnooc’s Energy Economics Institute.

The forecast belies still-weak industrial demand. Many factories will send workers home earlier-than-usual for the Lunar New Year holidays, while local production and Russian pipeline flows are rising.

There are already signs China will need to increase LNG purchases to prepare for next year, however. Inventories at northern ports are depleting faster than normal amid cold weather and have dropped to the mid-to-low level, according to ENN Energy’s research group, while domestic LNG prices are trending higher.

The Chinese economy is going to experience significant issues as COVID cases ramp higher. The sheer volume of ill people will mean lower productivity over the first quarter. However, peak infections will likely be reached within 10 weeks. After that, there is clear scope for the fiscal measures already introduced to support the property market will become evident.

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

Some of the topics discussed include: CPI falls, stocks initially rebound but fade on economic weakness fears, dollar weak, gold and oil firm, non-US asset continue to outperform but with a global recession brewing expect volatility. 

“While the war against inflation is turning, we are a long way off declaring victory and the Fed will keep its hawkish stance for a while longer, even if it does potentially force a recession,” said Richard Carter, head of fixed interest research at Quilter Cheviot.

The CPI-fueled stock rally fails to recognize that corporate earnings are just starting to see the impact of tight monetary policy, James Athey, investment director at Abrdn.

“As the full effects of the Fed’s aggressive actions this year play out next year, it seems inevitable that we will see a significant repricing lower in EPS forecasts and thus the broad market,” Athey said.

The stock market has been pricing in the likelihood Inflation has peaked since October. Now is the time to start thinking about the knock-on effects of inflation peaking. Economic activity will slow as the race to overtake inflation with purchase subsides and as savings are eroded. Corporate profits will inevitably slow in response and unemployment will likely rise from Q2 onwards.

The product is known as a “collateralised fund obligation” and its aim is to diversify risk by parceling up the companies’ providing returns. CFOs are, in some ways, a private equity variant of “collateralised debt obligations”, the bundles of mortgage-backed securities that only reached the public consciousness when they wreaked havoc during the 2008 financial crisis.

So far, CFOs have flown largely under the radar. Although some of private equity’s largest names such as Blackstone, KKR, Ares and the specialist firm Coller Capital have set up versions, this is often done privately with little or no public disclosure of the vehicle’s contents — or even, in some cases, of its existence, making it all but impossible to build a full picture of who is exposed and on what scale. CFOs introduce a new layer of leverage into a private capital industry already built on debt. Their rise is one illustration of how post-crisis regulation, rather than ending the use of esoteric structures and risky leverage, has shifted it into a quieter, more lightly regulated corner of the financial world.

In the world of investment banking everything can be made better with leverage. Private equity offered rich rewards in the decades before zero interest rates. Then the volume of cash available to the sector ballooned and valuations for the assets they acquired rose in tandem. Leverage is the easy answer for how to sustain returns despite high valuations, which would normally compress yields.

“My biggest concern is the slowdown they’re seeing in China,” Matt Maley, chief market strategist at Miller Tabak + Co. said, adding that “as long as Elon Musk is spending a lot of time with Twitter, it’s going to keep a lid on the stock.”

Bloomberg News reported Friday that Tesla plans to suspend output in stages at its Shanghai electric car factory from the end of the month until as long as early January, amid production line upgrades and slowing consumer demand. 

Meanwhile, Twitter is more than a distraction. Musk’s bankers are considering replacing some of the high-interest debt he layered on Twitter with new margin loans backed by Tesla, people with knowledge of the matter told Bloomberg.   

I saw in another article that SpaceX is valued at approximately $140 billion. The purchase of Twitter has stretched both Elon Musk’s time and finances. If his creditors impose a margin loan there is clear scope he will be denuded of his Tesla holdings if Twitter does not turn around quickly. That may result in a rush to IPO SpaceX to raise cash.

"I spend all my time reading about how automation and AI is going to take all our jobs, and here I am," one fired MSN staffer told The Guardian at the time. "AI has taken my job."

That anonymous staffer imparted a prescient warning: that though the human team had employed close editorial guidelines to vet the material that appeared on MSN's site, the new automated system would likely struggle to bring the same level of nuance and skepticism.

MSN makes lofty promises that there's still "human oversight" over the stories it syndicates, but given the desultory deluge of fake nonsense it appears to run constantly, it seems very unlikely that the site's remaining skeleton crew is accomplishing much at all.

And with its dwindling human staff, fewer still are left to hear readers' concerns, effectively erecting a brick wall that imposes a worrying opacity. Requests for comments go unanswered, and MSN publishes more bogus stories all the time.

The media coverage of ChatGP has been nothing short of euphoric. I’ve even heard it compared to a sputnik moment for artificial intelligence. That might even be true but it does not mean AI is ready to take over editorial roles.

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

Some of the topics discussed include: China COVID cases rising but likely to peak by the end of the Q1 2023. Copper pauses near the MA, stocks steady, gold eases, oil unwinding oversold condition, bitcoin stable. bond yields unwinding short-term overextension. 

Saudi Arabia will be part of it. Russia will be part of it. Iran may be part of it. India may be part of it. And that currency will be—unlike all other currencies—not be a fiat currency, but a currency backed by commodities these member nations produce. And what I hear is, I think, it will come to the market in the mid-’20s or something like that. So, in a few years’ time. It’s another two to three years away.

Once that comes and becomes reality, then I think this is an important source and currency unit to settle trade and to store certain reserves for countries that are not very close friends with the US. And once that currency unit gets established, that could be a big problem for the US dollar.

I don’t think it will happen overnight. I think it will happen step by step, but it’s a first step. So, I’m concerned that the US dollar is in a topping process. They could stretch into next year and then begin a decline. I do not believe that the decline will be dramatic in the first next few years, but I think from the second half of the ‘20s onwards, I think we could see the dollar in an accelerating decline, yes.

I agree the world is in a state of flux. There are significant competing themes evolving and not every cherished theory is going to be successful. The biggest consensus in the market today is there is going to be a soft landing. I have my doubts.

A deal on the carbon measure would be a major victory for one of the EU’s more controversial proposals, when it was announced last year as part of the bloc’s package to cut emissions by 55% by the end of the decade. The proposal tabled by the European Commission in 2021 envisaged that the importer would be entitled to account for the pollutions costs paid in country of origin if it has carbon pricing.

The EU plans have already caused diplomatic unease in China and India and there’s concern that Russia may not comply with it. The EU mechanism also comes amid growing tensions over the US government’s Inflation Reduction Act, the country’s $369 billion green package, which provides subsidies only to American manufacturers to develop some clean technologies, including electric vehicles. The EU sees that as a possible contravention of WTO rules.

For its part, the EU argues that the CBAM is in line with international trade rules as an environmental measure, designed to stop industry from moving carbon emissions outside of the bloc as it imposes stricter climate measures on industry. A potential preliminary deal among negotiators on Monday would need the endorsement of ministers from national governments and the full EU Parliament to enter into force. That may be done only after policy makers iron out the details of a link with a broader carbon market reform.

For European bureaucrats climate change is a religion and adherence to its tenets borders on zealotry. From their perspective, there is an acute need to reduce all forms of carbon emissions as quickly as possible to avoid the worst effects of climate change.

The federal Lawrence Livermore National Laboratory in California, which uses a process called inertial confinement fusion that involves bombarding a tiny pellet of hydrogen plasma with the world’s biggest laser, had achieved net energy gain in a fusion experiment in the past two weeks, the people said.

Although many scientists believe fusion power stations are still decades away, the technology’s potential is hard to ignore. Fusion reactions emit no carbon, produce no long-lived radioactive waste and a small cup of the hydrogen fuel could theoretically power a house for hundreds of years.

The US breakthrough comes as the world wrestles with high energy prices and the need to rapidly move away from burning fossil fuels to stop average global temperatures reaching dangerous levels. Through the Inflation Reduction Act, the Biden administration is ploughing almost $370bn into new subsidies for low-carbon energy in an effort to slash emissions and win a global race for next-generation clean tech.

The fusion reaction at the US government facility produced about 2.5 megajoules of energy, which was about 120 per cent of the 2.1 megajoules of energy in the lasers, the people with knowledge of the results said, adding that the data was still being analysed.

To the extent people are familiar with fusion experiments, most think of the tokamak experiments that look like big globes. They basically use magnetic confinement to control and heat plasma with the aim of achieving fusion.

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

Farmers are “ordinary people but they feel treated like criminals. Everything farmers do is bad; poison sprayers, environmental polluters, mistreatment of animals,” says Caroline van der Plas, leader of the populist Farmer-Citizen Movement, which stormed onto the Dutch political scene in 2019. “They feel undervalued and have no space to expand or develop their business and are very worried about their future.

The Netherlands is one of the most densely populated and space-constrained countries in the world. That means the farming sector has significant pressure to be efficient and not least to provide food at an affordable cost. Talking about the Netherlands and deforestation in the Amazon in the same breadth is a clear logical inconsistency.

Turquoise Hill Resources Ltd. shareholders endorsed a C$4.24 billion ($3.1 billion) takeover offer by Rio Tinto Group, paving the way for the London-based miner to gain control of one of the world’s largest copper mines.

About 60.5% of Turquoise Hill’s minority investors voted in favor of Rio’s C$43-a-share cash offer, the Canadian company said following a shareholders’ meeting in Montreal on Friday. The result clears the way for Rio Tinto to take over Turquoise Hill and gain majority ownership in its massive Oyu Tolgoi project in Mongolia, which is expected to become the world’s fourth-largest copper mine.

Shares of Turquoise Hill rose 0.9% to C$42.93 at 2:43 p.m. in Toronto. Rio shares closed almost 1% higher in London before the vote results were announced.

“This transaction will deliver significant benefits for all shareholders, and allow us to progress the Oyu Tolgoi project in partnership with the government of Mongolia with a simpler and more efficient governance and ownership structure,” Rio’s copper head Bold Baatar said in a statement.

This acquisition is a testament to how rare new truly world-class copper mines are. The fact Mongolia is sandwiched between Russia and China is a handy geographical accident that means supply will be a buyer regardless of what else happens.

Amgen is years behind rivals Novo Nordisk and Eli Lilly in developing an obesity treatment, but the company says its experimental drug could prove superior. And investors seem to agree, as news of the drug helped Amgen stock go on a tear recently.

Shares of Amgen now are taking a breather after a run-up in late October and early November. Last week, the biotech giant unveiled another  batch of official data, showing that its drug requires less-frequent injections and leads to faster weight loss.

Over three months, patients who received three high-dose shots of Amgen's drug lost 14.5% of their body weight. That beat out the 8% weight loss for Lilly's weekly injection over the same time period, according to one analyst.

Now, the question is how durable the weight loss will be for recipients of Amgen's AMG 133.

The big money-making drugs in the healthcare sector treat, but don’t cure, chronic diseases. Obesity is one of the biggest evolving issues, and is also a major contributing factor to the evolution of diabetes. Treating obesity with a pill, instead of the lifestyle change needed to address weight gain has obvious attractions for potential patients.

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

Some of the topics discussed include: China's advantage in EVs, oil continues lower despite sensational stories, stocks steadier on bond weakness, Dollar eases, gold steady. 

The difference is that ChatGPT is not actually running python and determining the first 10 prime numbers deterministically: every answer is a probabilistic result gleaned from the corpus of Internet data that makes up GPT-3; in other words, ChatGPT comes up with its best guess as to the result in 10 seconds, and that guess is so likely to be right that it feels like it is an actual computer executing the code in question.

This raises fascinating philosophical questions about the nature of knowledge; you can also simply ask ChatGPT for the first 10 prime numbers:

Those weren’t calculated, they were simply known; they were known, though, because they were written down somewhere on the Internet. In contrast, notice how ChatGPT messes up the far simpler equation I mentioned above:

For what it’s worth, I had to work a little harder to make ChatGPT fail at math: the base GPT-3 model gets basic three digit addition wrong most of the time, while ChatGPT does much better. Still, this obviously isn’t a calculator: it’s a pattern matcher — and sometimes the pattern gets screwy. The skill here is in catching it when it gets it wrong, whether that be with basic math or with basic political theory.

The probabilistic versus deterministic issue boils down to the problem all models face; quality of data. The best way for a chatbot to function is to only use a confined sample of reliable answers. In other words for an answer that is sure to be correct, the dataset has to be filled with deterministic infallible answers.

Late last month, Turkey announced that passing tankers would have to provide letters from their insurers proving they were covered to navigate the straits, through which almost 700 million barrels of crude flowed in the past year. Turkey’s move was a response to European Union sanctions against Russia that bar insurance of vessels if the oil they’re carrying costs above $60 a barrel.

‘Unacceptable’

US and UK officials have been pushing for Turkey to reconsider the proof-of-insurance requirement, especially given that cargoes from Kazakhstan are not subject to sanctions. 

“We’ve been in touch with Turkey about how the price cap only applies to Russian oil, and explained that the cap doesn’t necessitate additional checks on ships passing through Turkish waters,” US Treasury spokesman Michael Gwin said. “Our understanding is that virtually all of the delayed tankers are not carrying oil from Russia and are not affected by the cap.”

Still, Turkey said it was “unacceptable” for protection and indemnity clubs that insure risks including collisions and spills not to provide confirmation letters to their commercial customers. 

“This letter demanded by us is only about confirming that the ship’s insurance is valid during its passage through Straits,” the ministry said.

Turkey is working on a separate solution for ships without letters that were bound for Turkish refineries, the ministry said, citing “public good and national interest.”

Turkey appears to be taking a leaf out of Singapore’s playbook. As pipeline supply to Europe slows down, Turkey has a clear incentive to position itself as a major centre of refining and as an oil and gas pipeline terminus. That also suggests Turkey will soon break ground on LNG export facilities. This is not a new idea. There has been talk of Turkey being a major energy hub for at least a decade. 

China’s Contemporary Amperex Technology, the world’s biggest maker of electric-car batteries, signs a global partnership agreement with Honda Motor, according to an exchange filing to Shenzhen Stock Exchange.

China has worked hard to capture the market for EV batteries and that is now paying dividends. Traditional car companies all now want to be EV companies but are years behind in building their own factories and supply chains. That is most especially true for batteries. China has a dominant position in mining and processing the respective raw materials. The implication is clear, there is no way for car companies to achieve their EV goals without outsourcing at least part of the process to Chinese companies.

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

Some of the topics discussed include: China pandemic surge inevitable as quarantines and testing ease, oil lower, gold stronger, Dollar weak, Chinese shares rolling over, Treasury yields lower as deflation priced in, Nasdaq-100 easing back from 200-day MA. overbought instruments susceptible to weakness. 

The Politburo on Wednesday signaled more stimulus could be on the cards next year, saying fiscal policy will be kept active with a focus on improving its efficiency, while monetary steps will be “targeted and forceful.” China will “push for overall improvement of the economy,” the official Xinhua News Agency said in a readout of the meeting. 

Larry Hu, head of China economics at Macquarie Group Ltd., said the message from the Politburo meeting was “loud and clear: Zero-Covid is behind us, and growth would be the top priority for next year.” The signals suggest policymakers want to bring next year’s growth rate back to its potential of above 5%, he said.

The growth outlook for next year remains highly uncertain, given a likely surge in coronavirus infections and further disruption expected to the economy. The global economy is also at risk of falling into recession, and a recovery in China’s property market remains elusive.

China has built permanent plague hospitals in several of the largest cities. That is in preparation for a significant rise in the number of COVID infections. Now that the restrictions on movement and the draconian testing regime are being relaxed, the number of cases is likely to surge. 

Morgan Stanley projects that a multi-asset income fund can now find some of the best investing opportunities in nearly two decades in dollar-denominated securities, including inflation-linked debt and high-grade corporate obligations. The interest payments on regular 10-year Treasuries, for example, has hit 4.125%, the highest since the global financial crisis.

Meanwhile Pacific Investment Management Co. reckons long-dated securities, the biggest losers in this era of Federal Reserve hawkishness, will bounce back as a recession ignites the bond-safety trade, with government debt acting as a reliable hedge in the 60/40 portfolio complex once more.

“People are excited, believe it or not,” said Maribel Larios, founder and CEO of Fiduciary Experts, a Murrieta, California-based registered investment advisor. “It’s all relative, as they’ve seen these fixed-income accounts pay little to nothing in the past. So, 4% — or even about 2% to 3% in some cash accounts — is relatively good now.”

Banks like Deutsche and Morgan Stanley are taking an axe to their earnings estimates for the S&P500 next year. Corporate earnings have been resilient, even as the Fed has hiked rates faster than at any time in the last 40 years. That is unlikely to persist as the lagged effects of tightening catch up.

Inward remittances, accounting for around 3% of India’s GDP, surged 12% from 2021.

Besides a large working population of Indians living abroad, there were other reasons, too, for this increase. For instance, students are the other big constituents of the Indian diaspora. They eventually form high-income groups, with direct implications for remittances.

The depreciation of the Indian rupee has also helped. Since January, the currency has fallen 10% against the dollar. This has made sending money from South Africa to India cheaper by 26%, from Thailand by about 17%, and from Japan by 14% in the past year or so, the World Bank has said.

The dilemma for countries with high rates of emigration is they end up sending the most ambitious, adventurous, and well-educated abroad. The so-called “brain drain” is mourned by society and people lament that if these productive people could stay at home, they would better society. However, the reality is those people probably have better personal opportunities overseas and would not reach their full potential at home. The benefit is they send cash home which is a significant source of inward foreign currency.

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

Some of the topics discussed include: Amazon trouble, oil breaking down but shares only beginning to feel pain, stock susceptible to additional weakness. bonds yield compressing in response to slowing economic activity. 

Professional investors are loading up on bets that an economic recession can be avoided despite all the warnings to the contrary. It’s a dangerous bet -- for a variety of reasons.

Money managers have been favoring economically sensitive equities, such as industrial companies and commodity producers, according to a study from Goldman Sachs Group Inc. on positioning by mutual funds and hedge funds with assets totaling almost $5 trillion. Shares that tend to do well during economic downturns, like utilities and consumer staples, are currently out of favor, the analysis shows.

The positions amount to wagers that the Federal Reserve can tame inflation without creating a recession, a difficult-to-achieve scenario often referred to as an economic soft landing. The precariousness of such bets was on display Friday and Monday, when strong readings on the labor market and American services sectors drove speculation the Fed will have to maintain its aggressive policies, increasing the risks of a policy error.

“Current sector tilts are consistent with positioning for a soft landing,” Goldman strategists including David Kostin wrote in a note Friday, adding that the fund industry’s thematic and factor exposures point to a similar stance. 

I am reminded of 2007 and 2008 when commodities were surging and banks beginning to roll over. At the time commodity inflation was running rampant but there was relatively little upward pressure on wages. The growing weakness in the housing sector effectively kept wage demand growth under control. Nevertheless, the spike in energy prices and overleverage in the financial system caused a significant problem.

U.S. crude oil production in 2023 is forecast at 12.34m b/d, an all-time high and revised up slightly from 12.31m b/d projected in November, EIA says in monthly Short-Term Energy Outlook

2022 output estimated at 11.87m b/d vs 11.83m b/d

Output to grow annually in 2023 at an average rate of 470k b/d vs prior forecast of 480k b/d

See here the forecast for US fuel demand in 2023:

Gasoline demand revised up to 8.77m b/d from 8.75m previous forecast
Distillate consumption seen at 3.94m b/d from 3.93m
Jet fuel use estimated at 1.64m b/d from 1.57m

EIA sees contraction in US economic activity in Q4 2022 and Q1 2023, though will be shorter and milder than previously forecast

The go-go days of limitless spending on securing leases and active drilling are receding into the distant past. The peak in the horizontal rig count was in 2014 at almost 1400. Since then the focus of investors and companies has turned towards sustainable profitability. Concurrently many institutional investors now also have to worry much more about environmental sustainability.

CEO Andy Jassy had earlier hinted about the layoff, however, he had not clearly specified the number of employees to be laid off. The New York Times had, in November, reported that the company was considering laying off employees.

However, a recent report now claims that the number of employees likely to be fired has now increased to 20,000 and that people at all levels are likely to be fired by the company. Recently, Amazon’s CEO announced that they would continue the process of a layoff and that the employees who will be impacted will be informed after everything is assessed by the company.

Amazon is a low margin business. The company just about breaks even on the high volume online marketplace it is synonymous with. Profits are raised first from the Web Services division and more recently from advertising. In boosting advertising and pay-to-play models, the company has taken the bet that convenience trumps quality assurance. It’s not clear that was the right move.

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Same from Dominican Rep...

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Just like British trains over Xmas

Thank you for letting me know. This is a maddening issue because the videos play fine for me. I have been in contact with Vimeo's customer support this morning to try and get this issue resolved.

The original reason for using Vimeo was uploading videos was much faster than YouTube. That is no longer true. They are both now equally slow. 

My dilemma is I have over 3200 videos sitting on the platform and do not wish to pay for two services just so I don’t lose my archive. Nevertheless, in the interest of ensuring subscribers have access to the full content of the Service I will switch to YouTube for the time being.

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

Some of the topics discussed include: PMI surprises on the upside, Dollar steadies, yields rise, gold pulled back sharply, oil weak, Hong Kong firm but US Chinese stocks point to weakness tomorrow. oil weak. container demand collapsing. 

“There will be geographic expansion as these markets continue to evolve along a similar trajectory with a lot of the same trends we saw in the US,” Michael Arougheti, chief executive officer of Ares Management, said of private credit in an interview on Bloomberg Television. “If we continue to demonstrate durable performance through cycles then the appetite for the asset class will continue to grow significantly.”

Yet it is not without risk. With the US economy slowing, more companies that private credit funds lend to may begin defaulting on their repayments next year as earnings decline and interest on their floating-rate loans rises.

“Private credit is a place people can go to benefit from rising rates,” Arougheti said. “The flipside of that is that as rates are going up, debt service becomes more challenging.”

An additional problem is the less stringent valuation process for private credit portfolios compared with assets in public markets, which can leave poor investments hidden for longer.

Private credit ballooned in size following the credit crisis as big banks retreated from riskier parts of the lending market and quantitative easing flooded the market with liquidity. Non-bank lenders now dominate the US mortgage markets. Companies like Citadel dominate market making in stocks. Private equity groups are now some of the largest property owners in the world. Private credit groups are now also dominating commercial credit markets. The fact they are migrating to international markets suggests the domestic US market is at capacity.

The first working models of the Semi were delivered last week to PepsiCo Inc., part of an order of 100 vehicles. That’s three years behind schedule, but it still happened. More sober carmakers are getting in on the act, too. Alongside Volvo, Daimler Truck Holding AG has had orders for 1,280 zero-emission trucks and buses in the first half of this year, and unveiled a prototype long-haul model in September.

What’s changed? If Tesla had made dramatic breakthroughs in battery density, Musk would be boasting about it, so that's not the answer. There’s one huge difference in 2022 compared to 2017, however: the cost of diesel.

The decline of domestic oil refining and 2022’s squeeze in energy prices have conspired to drive US truck fuel costs up to almost double what they were five years ago. Plug the current prices of Californian diesel and commercial electricity into the trucking expenditure calculator made by logistics-data company ACT Research Co., and even an electric rig that’s twice as pricey to buy as a conventional vehicle is getting 12% cost savings every mile, equivalent to nearly $17,000 a year at typical usage levels.1

That might not last as diesel prices fall back to earth, but it’s close enough to put electric trucking firmly in the game.

The other factor supporting the Semi right now is that it’s not trying to offer full-spectrum competition to long-haul trucks. Its range is only half what a Class 8 can do between refueling stops. It’s telling, too, that one of its first customers will be a Frito-Lays plant. If you’re worried about the challenges of hauling heavy loads as well as your massive batteries, few types of cargo will be more forgiving than feather-light pallets of potato chips.

The first thing that comes to mind is virtue signalling. Putting a few hundred or thousand large electric haulage vehicles on the road will help reduce emissions inside cities. They will be visible to large numbers of people and everyone will feel good about “helping” the environment. Meanwhile the heavy lifting of haulage will continue to depend on diesel.

Amazon is aware of the macro challenges, and hence AWS employees are reaching out to clients to see how it can help optimize spending, said David Brown, AWS' vice president.

"If you're looking to tighten your belt, the cloud is the place to do it," AWS CEO Adam Selipsky said during his keynote presentation.

However, an investment firm Andreessen Horowitz analysis last year, painted a different picture. It showed that a company could trim its computing costs by half or more by bringing workloads from the cloud back to on-premises data centers.

Amazon is also offering a cheaper alternative, Graviton computing instances based on energy-efficient Arm-based chips alternative to standard Advanced Micro Devices, Inc (NASDAQ:AMD) and Intel Corp (NASDAQ: INTC) processors.

"We do see some customers who are doing some belt-tightening now," Selipsky told CNBC. Expedia Group, Inc (NASDAQ: EXPE) CEO Peter Kern sees the cloud as an area where his company can reduce its fixed costs.

The point I have been making for at least the last year is large companies offering cloud services saved startups time in scaling up. Instead of buying servers and hiring teams or engineers to create a data base, they outsourced that to companies like Amazon, Microsoft and Google/Alphabet. As the fountain of money supporting the startup scene ebbs, that will inevitably hit spending on outsourced data infrastructure. The subscription business model only works when you have subscribers.

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During the decade of zero interest rates, savers were sacrificed in the interests of reviving animal spirits among speculators. Rates were held at both low absolute and negative real levels for years.

That forced conservative investors, like pensions, endowments and regular consumers into much riskier assets. Performance in the fixed income markets was driven by price momentum rather than yield which left the sector exposed to the current round of interest rate hikes.

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

In Australia, where the pace of housing declines has eased, the outlook for mortgagees is similarly tough: borrowing capacity has fallen and monthly repayments have surged. In addition, a large chunk of loans that were fixed at record-low rates during the pandemic are due to roll over in 2023 at a much higher rate. 

With the full impact of past hikes yet to be felt, rates still rising and the economy set to weaken, there’s likely still some way to go before prices bottom, said Shane Oliver, chief economist at AMP Capital Markets in Sydney. 

Given expectations that rates will rise higher in both countries, some economists see home values dropping more than 20% from their peaks. 

Rolling fixes is likely to be a major topic of conversation in Australia, Canada, and the UK in 2023. The impending step higher in mortgage payments for millions of consumers is the central dilemma for their respective central banks. They need to raise rates to try and tackle inflationary pressures but every hike makes the problem of consumer debt sustainability worse.

Lame-duck session might result in OKs for 'SAFE Banking Plus' and 'Secure Act 2.0'

It has been a long road for Washington's cannabis banking bill and an unrelated measure targeting the U.S retirement system.

Now both legislative packages have decent or even strong chances of becoming reality by year's end, according to analysts.

The bill that aims to protect financial institutions that work with the marijuana industry (MSOS)(MJ) is known as "SAFE Banking Plus," with the "Plus" referring to its expected inclusion of some criminal-justice reform provisions.

The cannabis banking bill has a roughly 70% chance of passing by the end of December, reckons Ben Koltun, director of research at Beacon Policy Advisors.

"There's a lot of positive momentum. It's just can they come to agreement over some of the details that are outstanding?" Kolton told MarketWatch.

Cowen Washington Research Group is also bullish on the measure, putting its chances at 75% -- up from 60% in October.

"We are increasingly optimistic that Congress will enact the SAFE Act on cannabis banking by the year-end. We now set a 75% probability for passage based on the election outcome, the passage of a cannabis research bill, and the broader progress the Senate made over the last 2 weeks on other bills," said Cowen analyst Jaret Seiberg in a note on Monday.

I feel very conflicted by the cannabis sector. On the one hand my libertarian leanings support the view that individuals have a right to do whatever they want with their own bodies and everyone’s lived experience is their own to do with as they will. On the other, I hate the smell of cannabis smoke in public areas and the trend of licentiousness is not a positive development for the cohesion and security of society at large.

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Some of the topics discussed include: liquidity conditions continue to tighten, dollar breaks lower, gold, silver, miners firm, China rebound pauses, India breaking high, oil fails to hold intraday high. 

The Personal Consumption Expenditure Deflator, a measure of inflation based on changes in personal consumption, rose 0.3% in October from the month before, below economists’ median forecast. It follows two other inflation gauges that indicated price pressures were easing, boosting bets on a slowdown in monetary tightening. 

Rate hikes to curb inflation have weighed on non-interest bearing gold throughout the year by pushing up bond yields and the dollar. Bets on a slowdown and China’s Covid loosening saw bullion rise 8% in November as the greenback retreated the most since 2009.

Other data showed the jobs market gradually cooling, a welcome sign for the Fed as it tries to tame inflation. Wage gains driven by labor tightness have been a major driver of price increases.

The swift pace of Fed tightening was a major tailwind for the US Dollar. Now that the Fed is slowing the pace of hiking it reduces that tailwind and the Dollar is now trending lower. That’s a significant tailwind for gold.

The threshold of 2.52 francs is “the ‘hard underwriting’ price for the consortium of 19 banks,” JPMorgan & Co. analysts said in a research note. If Credit Suisse’s shares keep trading above that level until “the last day of rights trading on Dec. 6, 2022, we can assume at that point the capital raise was most likely a success.”

Having a large number of underwriters makes it easier to find buyers and reduces the risk for the investment banks to get stuck holding a large amount of the shares. As part of the lender’s capital raise plans, Saudi National Bank to invest up to 1.5 billion francs in the lender, becoming a top shareholder. 

Credit Suisse Chairman Axel Lehmann, speaking at a conference in London on Thursday, said that the stock would stabilize after the rights issue is completed and that investors should expect volatility until then. The new shares are due to start trading on Dec. 9. 

“I cannot predict where the share price is going,” Lehmann said. Until the end of the capital raise process, “we will have a little bit of volatility, but then I think it will start to somewhat stabilize and bottom out, and then we go from there.”

Credit Suisse’s share price continues to accelerate lower. A catalogue of management errors has seen the share lose close to 90% of its value since 2013. Tightening global liquidity is a proximate cause of stress, but the bank also needs to address many of the internal controls that led to this condition too.

The Biden administration is seeking to stop sales from the Strategic Petroleum Reserve mandated by Congress so it can refill the emergency reserve, a move that could impact the release of 147 million barrels of crude oil.

The Energy Department is seeking to cancel or delay sales mandated by Congress in fiscal years 2024 through 2027 so that it can move forward with a White House plan to refill the oil reserve when crude prices reach around $70 a barrel, an agency official told a Senate committee Thursday. Congress has mandated the sale of 147 million barrels of oil to pay for unrelated legislative initiatives during that time frame, including 35 million barrels in fiscal 2024, according to data compiled by research firm ClearView Energy Partners. 

“It doesn’t make sense for us to be releasing oil while we’re trying to refill the SPR,” Doug MacIntyre, the department’s Deputy Director for the Office of Petroleum Reserves, said in testimony before the Energy and Natural Resources Committee. “We can’t fill and release from the same site at the same time.”

It would be easy to conclude the US government had never heard the maxim “buy low, sell high” when they decided to put the floor for purchases at $70. Of course, if we instead think of the USA as a major energy producer, with an administration that is attempting to force a migration away from dependence on oil, higher prices for longer make sense.

One of the questions subscribers ask 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.

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Some of the topics discussed include: Powell pleases markets, Wall Street rebounds led by Nasdaq, dollar weak, gold firm, emerging markets and Europe rebound, bonds yields contract. yield curve still inverted and deeply so. Recession is still likely in 2023. 

Since returning from the Chart seminar in London I have spoken to several people who work in the Israeli high-tech industry, They all tell me that about 10% of their colleagues have lost their jobs recently. Today you referred to your MIIN index. How can we invest in these countries?

Thank you for this additional insight. The market for big ideas ballooned with the delivery of free money. Suddenly, no idea was too grand, or time to delivery/commercialization too long. That trend was looking tired in 2019, as the Federal Reserve’s quantitative tightening was siphoning liquidity from the global economy.

“Russian LNG has to continue to flow,” said Anne-Sophie Corbeau, a researcher at Columbia University’s Center on Global Energy Policy. “We need that on the global LNG balance: it is already tight enough as it is. I think most European countries are indeed happy to turn a blind eye on this.”

Among European nations, only the UK and Baltic states have stopped buying Russian LNG. By contrast, Russian oil has been widely shunned by buyers across the region, and an EU ban is set to come into force on Dec. 5.
 
A complete embargo on Russian gas has never been seriously considered, given the scarcity of global supply and the potential for an even tighter market next year. Yet the EU has made efforts to find alternative supplies. In March, the bloc pledged to replace almost two-thirds of its gas imports from Russia this year, with most of the new volumes coming in the form of global LNG.

Russian gas now makes up less than 10% of the region’s supply of the fuel, down from more than a third last year, but the share of LNG in Russia’s deliveries is close to half.

 

There is a great deal of discussion about the prospect of a price cap on Russian oil and gas exports. This is the alternative to a full embargo on Russia imports which are slated to go into effect next week. Since Europe still relies on Russia for 10% of its gas, the “price cap” is a virtual necessity to keep economic activity moving even if it is impossible to enforce effectively. That suggests a deal will be reached in coming days.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in the text of his speech. “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”

Policy-sensitive 2-year Treasury yields fell on Powell’s remarks, erasing increases on the day, and the S&P 500 index reversed losses to trade higher. The dollar slipped in value against major rivals on foreign-exchange markets.

The Fed’s actions -- the most aggressive since the 1980s -- have lifted the target range of their benchmark rate to 3.75% to 4% from nearly zero in March. Powell said rates are likely to reach a “somewhat higher” level than officials estimated in September, when the median projection was for 4.6% next year. Those projections will be updated at the December meeting.

Jerome Powell confirmed today that the pace of Fed hikes will moderate; not reverse or pause. Nevertheless, cashed-up traders are more than willing to take anything less than outright hawkishness as good news.

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Some of the topics discussed include: FANGMAN underperforming, MIIN on the cusp of breaking out, China rebounds, India new all-time high, nickel surges, precious metals steady, dollar steadies, 

The softer tone followed unrest over the weekend that was triggered by a deadly fire in the city of Urumqi last week. The protests sputtered Monday night, after Beijing deployed a heavy police presence to clamp down on gatherings. Cities including Shanghai, Hangzhou, Nanjing and elsewhere also saw fewer demonstrations, while censorship of protest-related discussions ramped up across the social media platforms that had been used to vent public anger.

Some concessions have quietly emerged. People who stay home don’t need frequent Covid tests, the state news agency said on Tuesday, a retrenchment from the previous reliance on mass testing to track the virus. The elderly and students taking online classes were exempted from daily tests in Guangzhou.

Government restrictions imposed in Beijing to trace the source of Covid or identify those infected generally must not exceed 24 hours, officials said.
 

China’s government is adopting a carrot-and-stick approach to containing the recent outpouring of emotion on the streets. Vaccinating large numbers of elderly people and quietly circulating information that the Omicron variant is less deadly have been two policies deployed over the last 48 hours. At the same time, the streets have been flooded with police and protestors are being made aware, both publicly and privately that there are costs to challenging the status quo.

I see a third question more related to the protests, not COVID, and I apologize in advance for the potential false equivalency. When comparing Europe's energy situation and the global supply chain / China sourcing situation how will each unfold in future years? Certainly both are heading directions (reversing) that will not turn. Are Europe's hooks deeper into the Russian supply habit or is the global supply chain China habit even deeper?

I am most interested in the impact similarities these two withdrawal themes may have on the West, and the length of time change will take. I have long thought North America "has it all" when you look at materials, labor, and markets.

Thank you for this question which raises some important points. The conclusion that Europe is in a more difficult position than North America is clear but nothing is ever so simple.

Europe relied on Russia to supply much of its energy and much of the money spent on imports was recycled through European countries. That is over. Europe now needs to mirror the USA’s success in becoming energy-independent.

Another product has migrated to the financial center: a popular derivative based on a benchmark gauge of Indian stocks that was traded on the Singapore Stock Exchange. In 2022 the National Stock Exchange of India opened a cross-­border trading link with Singapore—similar to the Hong Kong-Shanghai connect—to allow global investors to trade stock derivatives listed on the Indian market without needing to set up shop in India.

Trading volumes have increased since a single regulator, the IFSC Authority, was created by the Indian government in 2020 to streamline approvals and oversight in the special economic zone. In October, average daily turnover on the two stock exchanges in the financial center climbed to $14.6 billion, from $3.4 billion two years before, cumulative derivative transactions by banks jumped to $466 billion, from $22 billion, and cumulative banking transactions rose to $303 billion, from $45 billion.

“Beyond the shores of India, in some of those centers where India-centric business developed, they are able to notice that something is happening, and things may not be the same in the future,” says Injeti Srinivas, the IFSC Authority’s chairman. “Business is gravitating toward IFSC.”

A new international bullion exchange will let qualified jewelers directly import gold to India through GIFT City, a change from current rules permitting only some banks and nominated agencies approved by the central bank to do so. That loosening of restrictions is set to widen the importer base in India, the world’s second-biggest consumer. An aircraft leasing and financing business is operating in GIFT City to tap into the demand of one of the world’s hottest aviation markets for new-plane orders. Ship leasing will start soon.

Bull markets thrive on liquidity and so do economies. India has a burgeoning young population. The biggest challenge the government has is growing the economy quickly enough to absorb the productive capacity of that many people. Setting up special economic and financial zones is a vital step in attracting sufficient inward investment to make a difference.