The British premier had been preparing to unveil a new deal this week, but vocal opposition from unionists in Northern Ireland and Brexit hardliners in Sunak’s own Conservative Party scuppered the plan. Sunak had a positive talk with European Commission President Ursula von der Leyen late Friday and they will speak again soon, a person familiar said. He’s also gearing up to talk to his Cabinet before Monday, people directly involved in the plans said.

Sunak also wants to have further discussions with DUP Leader Jeffrey Donaldson, whose party has blocked the formation of Northern Ireland’s devolved power-sharing government for more than a year over the current post-Brexit trading arrangements, known as the Northern Ireland Protocol. His endorsement is likely to prove crucial and without it an announcement of the deal may be further delayed. 

There are three potential solutions to the question of how the Good Friday Agreement fits into the overall Brexit question. The first is the border with the EU is in the middle of the Irish Sea. This is the current situation which Boris Johnson implemented. 

A factor that’s gotten less attention, though, is something a bit more arcane, something more specific to the business models that have both enriched some of the world’s biggest tech companies and shaped the way many of us experience the internet. That factor is the iPhone.

In 2021, Apple rolled out what it called App Tracking Transparency. Henceforth, iPhone users had to opt in to certain forms of digital tracking, in particular targeting that involves the sharing of information between different apps.

Social media companies rely heavily on that technique to serve up the targeted ads that are their profit engines. The data they collect can form an ever-more-detailed mosaic of a user and, most importantly, a better sense of what kind of person responds to which types of ads.

Apple presented its anti-tracking policy as a way for people to take control of their information, at a time when lawmakers around the world are championing a similar cause. Ads are intrusive and annoying, and being closely tracked on the internet is creepy. If you are a political dissident or a woman researching abortion in a place where the procedure is illegal, it is terrifying.

At the time, however, Facebook’s parent company Meta saw the change as a serious threat. Social media executives feared that lots of iPhone users would opt out of this kind of app tracking when given the option. Almost two years on, they seem to have been right. Meta estimated that the change cost it $10 billion in 2022, or 9% of its total revenue.

Eric Michael Seufert, an analyst at Mobile Dev Memo, went so far as to call it “the App Tracking Transparency recession.” Seufert argued that the tech companies having the hardest time right now are those most directly affected by Apple’s policy. As he points out, revenue at YouTube, Google's video arm that relies heavily on third-party ad tracking, has lagged the company's search revenue, which is far less reliant on this type of tracking.

Perhaps a more accurate way of thinking about the repercussions of Apple’s walled garden approach, to information on its phones, is it is a bear market on click bait. The ads we are served are chosen based on assumptions the seller makes about our proclivities. That’s a valuable asset and now Apple holds that information for itself. 

The talk was split into two parts. The first was devoted to talking about the risks climate change represents and what a potential solution might look like. The second part criticised world leaders in turn. 

Norfolk Southern Corp. fell again as the railroad faced growing fallout from a train derailment that spilled chemicals in Ohio early this month.

The US Environmental Protection Agency notified the company of its “potential liability” and encouraged Norfolk Southern to reimburse the agency for its costs related to the crash. The EPA urged a quick response in its Feb. 10 letter.

The railroad said it received the EPA’s request and “will continue to perform or finance environmental monitoring and remediation,” according to an emailed statement. Norfolk Southern’s hazardous materials team was at the scene within an hour of the accident and continues to work with authorities, the company said in the statement.

The 150-car train derailed at 8:55 p.m. Eastern time on Feb. 3. It was hauling about 20 railcars with chemicals, including vinyl chloride, ethylhexyl acrylate and isobutylene, according to the EPA. 

Those chemicals were released into the air, surface soils and surface waters near East Palestine, Ohio. 

Norfolk Southern slid 1.2% Monday in New York, the fourth decline in six trading days since the spill. The shares are down 2.7% this year, while the S&P 500 Index is up 7.8%

The spill and burn off of butyl acrylate into the Ohio river, which provides drinking water for millions of people, has understandably put consumers on edge. There will certainly be class action lawsuits if there is a hint the spill has led to health issues, particularly following the evacuation from a wide area around the spill. 

Top European Union officials raised the possibility last year of making major streaming operators like Netflix Inc. and YouTube help pay for 5G and fiber infrastructure. Telcos had been pushing for such a move for over a decade.

The EU’s executive arm is expected to publish a request for feedback on the idea this month, the first step toward a formal proposal. When a draft of this consultation was circulated around Brussels recently, telcos read it with glee — and tech companies with horror. The consensus was that the EU is no longer asking whether it will do something but rather, how.

Last week brought another cause for celebration, at least for the bankers who work with the likes of Deutsche Telekom AG and Vodafone Group Plc. Commissioner Thierry Breton said the EU should more closely consider cross-border mergers, which could create “a true single market for telecoms” in Europe. Telcos, again, have been lobbying for consolidation for a long time.

Regulatory changes mean a lot to investment prospects in any sector, but when it comes to who pays for expensive network upgrades, it can have a material impact on the bottom line. Telecom stocks have been off the radar for 20 years because growth did not look likely to ever return. Repricing for the potential for slimmed down costs is a welcome development. 

Consumer spending ticked up at the start of the 2023 in the US, reversing declines late last year and suggesting that even lower-income families have some cash buffers to fall back on, according to a Bank of America Institute report.

Bank of America credit- and debit-card spending rose 1.7% in January from December, making it a 5.1% jump from a year earlier. 

The robust annual gain reflects in part the negative impact from the Omicron variant back in January 2022, according to the report. But it also suggests that consumption was bolstered by an increase in Social Security benefits and the minimum wage in some states, as well as the surprisingly robust labor market. Services such as airlines and restaurants in particular saw a boost.

The data add to evidence that a pullback in late 2022 — which had economists worried that a recession was looming — may have been short-lived. Once again, the American consumer proved more resilient than expected.

This news item supported the Dollar today as investors once more begin to bet on the possibility the peak of the interest rate hiking cycle is further in the future. The Dollar Index continues to extend its bounce from the region of the 1000-day MA. 

“At the right price there should be plenty of appetite for any Egyptian IPO,” said Hasnain Malik, a strategist at Tellimer in Dubai. However, he said that, in general, foreign institutional investors are more likely to go for IPOs out of the private sector, whereas sovereign wealth funds will be more interested in government-related enterprises.

“This is because, for sovereign wealth, the concern over whether their interests as a minority investor are subordinated to those of the government is outweighed by their geopolitical interest in the overall country,” he said.

The benchmark EGX 30 Index has been on a bullish run, rising over 100% in local currency terms from its July low, and is the third-best performing benchmark globally this year. It jumped 3.9% on Thursday, extending gains to a fifth day, and closing at the highest since May 2018.

The Gulf War was a transformative event for India. When Iraq invaded Kuwait remittances abruptly stopped and the Indian government was presented with a dilemma. They chose economic reform and capitalism and the rest is history. The Nifty Index is up 3077% since 1991 for an annualised 9.53% gain. That is almost identical to the S&P500’s 9.99% 32-year annualised performance on a constant currency basis.  

Brookfield Asset Management Ltd.’s earnings rose in the fourth quarter as it wrapped up a record year of fundraising that has given the firm more than $90 billion to invest. 

The Canadian alternative asset manager reported distributable earnings of $569 million, or 35 cents a share, up 6% from the prior year. It’s the first quarterly report for Brookfield Asset as a public company after it was spun out of parent Brookfield Corp. in December. 

The company raised a record $93 billion in capital last year. “Our fundraising outlook remains strong,” Chief Executive Officer Bruce Flatt and President Connor Teskey said in a letter to shareholders. “In 2023, we expect to have three flagship funds in the market, along with several complementary perpetual strategies and other long-term funds.”

Brookfield Corp. spun off a 25% stake in the division in an effort to gain a higher valuation by separating the money-management business from its own investment capital. Brookfield Asset managed $418 billion in fee-bearing capital at the end of December across asset classes including real estate, infrastructure, credit, private equity and renewable power.  

The Toronto-based company plans to more than double that to $1 trillion by 2027, driven by ambitious plans to grow in private credit and insurance. Some of the growth may come through acquisitions, Flatt suggested at a conference in December.  

$93 billion raised during a bear market for stocks and amid rising yields is an impressive feat. Blackstone is also chasing the moniker of the first alternative asset manager to reach $1 trillion under management. 

Borsa Istanbul has also canceled trades that were executed on the morning of Feb. 8 before transactions were suspended, citing low trading volumes. Before those cancellations, the benchmark Borsa Istanbul 100 Index had erased $35 billion in value and was headed for its worst weekly performance since the 2008 global financial crisis. 

Even with Wednesday’s trades being removed, the two days of selling following the deadly earthquakes in Turkey’s southern region wiped out $21 billion in value. Turkish stocks, which are this year’s worst performers globally, entered a technical bear market on Tuesday after falling more than 20% from their January high.

The earthquake in Turkey is a human disaster of epic proportions and will require significant investment in rebuilding. It is to be hoped building standards also improve to minimize the impact for inevitable future quakes. The big question in the short term is how much inflation will jump as the rebuilding process gets underway? 

Lula tried to walk back prior comments on Monday, saying his criticism was not about whether or not the central bank was independent, but rather over the fact that the institution continues to keep borrowing costs high. 

In Brazil, “the problem is that there is a culture of living with high interest rates and that doesn’t mix well with necessities and investment.” Lula said.

The president had publicly questioned the central bank in both January and earlier this month. Current Selic levels make it “impossible” to boost growth, Lula said previously, adding that he considered the bank’s autonomy law to be “nonsense” and suggesting a higher, 4.5% inflation goal. 

Lula’s default mode is to spend. His first tenure as President of Brazil afforded him the luxury of spending during an historic commodity boom. This time around he has inflation to contend with and a central bank that appears ready to push back against profligate spending plans. The challenge is clear. If spending goes ahead without inflation coming down, the central bank will raise rates to levels that clearly depress economic activity. 

The inflation that we originally got was very much a collision between very strong demand and hard supply constraints, not something that you really have seen in prior, you know, in business cycles.

And

I think it's -- because this is not like the other business cycles in so many ways. It may well be that as -- that it will take more slowing than we expect, than I expect to get inflation down to 2 percent.

And

this is not a standard business cycle where you can look at the last 10 times there was a global pandemic and we shut the economy down, and Congress did what it did and we did what we did.

There is some logic to that statement. We have never shut down the entire global economy or printed so much money in such a short period of time. The clear conclusion Powell is taking in predicting a soft landing is that inflation really is transitory. 

The European Central Bank lifted interest rates by a half-point, with President Christine Lagarde saying another such move is almost certain next month, despite conceding that the inflation outlook is improving.

Policymakers, as expected, raised the deposit rate to 2.5%, the highest since 2008. Lagarde warned that the most aggressive bout of monetary tightening in ECB history isn’t done — even as energy prices plunge and the Federal Reserve moderates the pace of its own hikes.

In a statement, the Governing Council said it “intends” to raise rates by another 50 basis points at its March meeting, then “evaluate the subsequent path of its monetary policy.”

The ECB may hike again at the next meeting but clear implication is the peak of the hiking cycle will be lower than the USA’s. The same is true for the Bank of England. The vast sums spent to avoid an energy crisis mean governments will be under pressure to contain costs in future. That will siphon money from speculative activities and help to contain demand driven inflationary pressures. 

Hello Eoin, In today's Financial Times it is stated that the IMF is concerned about the risks of debt defaults by emerging market companies and states. How does this bring into question the flow of stock market investments in these countries in recent months?

Thank you for this question which is certainly topical. Countries like Ghana, Egypt, Pakistan, Lebanon, and Turkey experienced significant stress in their respective debt markets over the last 12 months. The unfolding drama with Adani group in India is an additional sign that global liquidity conditions are tightening. I think it reasonable to assume the flow of money into “emerging markets” is either bargain hunting or avoiding some of these destinations. 

As always thanks for your excellent service. I appreciate your comments on Volkswagon today, and am considering buying some, as I don't see how the German government would let VW go under. Can you also please comment on Credit Suisse. Do you think there is a serious risk that Credit Suisse will not survive. Thanks in advance. 

Thank you for this question which may be of interest to the Collective. Credit Suisse employs over 50,000 people so I imagine the Swiss government has an interest in ensuring it remains a going concern.

The biggest challenge for all Swiss banks is they lost all their US clients when they were forced to share account details in 2012. That sharing was greatly expanded in 2017 and today Switzerland shares details with almost 100 countries. Swiss banks have struggled to tap into new markets like China and India. 

In a recent article, Joseph Stiglitz argues that the current inflation is primarily due to the supply-side shock of the Covid crisis and to shifts in the demand patterns. His view is that the rate of inflation has already peaked - it is 1% higher now than in June 2022. He claims that the rise in interest rates has been largely passed on to consumers via higher prices and that any future interest rate rises would be inflationary.

Thank you for this email which may be of interest. I believe the article you referring to is Stiglitz’s one in Project Syndicate. Here is a section:

Worse, it is not even clear that there is any upside to this approach. In fact, raising interest rates could do more harm than good, by making it more expensive for firms to invest in solutions to the current supply constraints. The US Federal Reserve’s monetary-policy tightening has already curtailed housing construction, even though more supply is precisely what is needed to bring down one of the biggest sources of inflation: housing costs.

Moreover, many price-setters in the housing market may now pass the higher costs of doing business on to renters. And in retail and other markets more broadly, higher interest rates can actually induce price increases as the higher interest rates induce businesses to write down the future value of lost customers relative to the benefits today of higher prices.

To be sure, a deep recession would tame inflation. But why would we invite that? Fed Chair Jerome Powell and his colleagues seem to relish cheering against the economy. Meanwhile, their friends in commercial banking are making out like bandits now that the Fed is paying 4.4% interest on more than $3 trillion of bank reserve balances – yielding a tidy return of more than $130 billion per year.

The assumption the passthrough mechanism from costs to rents is seamless is a big leap. Without a healthy economy that delivers wage growth, rental yields increase through lower purchase prices. This article describing how robo-purchases by institutional investors in property have gone wrong, particularly Opendoor, may also be of interest. 

Putin’s confidence in his military’s ability to grind out a triumph - even at a cost of vast casualties and destruction - reflects a misreading of the West’s commitment to turn back his aggression, some insiders concede. The US and its allies have steadily stepped up weapons supplies to categories once considered off-limits.

Still, US and European military officials fear the conflict could soon settle into a World War I-style artillery fight with largely stagnant front lines, a scenario that could come to favor Russia, with its larger population and military industry.

Diplomatically, Russia has sought to win supporters among non-western countries with appeals for talks on a cease-fire. Even people close to the Kremlin admit those are hopeless at present, given Ukraine’s demand that Russia pull out its troops as a condition for any deal.

The minimum the Kremlin would accept would be a temporary truce that left Russia in control of the territory its forces currently hold in order to win time to rebuild its forces, the people said. Though short of the boundaries of the regions that Putin illegally annexed in September, that would still leave Russia with a large swath of land, linking the areas it occupied before the war. As a result, the idea is a nonstarter with Kyiv and its allies.

“Unless something changes, we’re looking at a war of attrition like World War I, which could go for a long time because both sides believe time is on their side,” said Andrey Kortunov, head of the Kremlin-founded Russia International Affairs Council. “Putin is sure either the West or Ukraine will grow tired.”

The route to a Russian victory lies in a war of attrition. They have more artillery, shells and tanks than NATO so they estimate a long drawn out conflict will eventually favour larger numbers. Absorbing high casualties is part of that strategy. It worked for Iran against Iraq in the 1980s and Russia appears to be following a similar strategy. 

Australia's surprisingly strong 4Q inflation isn't likely to phase the Reserve Bank of Australia. The headline outcome exceeded consensus estimates, but undershot the central bank's forecasts - and isn't a threat to our view that a February rate hike is likely to be the last of this cycle.

The economy’s inflationary pulse largely reflects temporary shocks, centered on utilities and airfares in 4Q. A number of other categories showed continued signs that pressures are set to subside in 2023. The central bank’s expectation for a lift in wage growth - necessary for inflation to be sustained in the target band - looks increasingly vulnerable given emerging signs of a softening labor market. Click on the Text tab for the full report.

The Australian Dollar has broken the two-year sequence of lower rally highs against the US Dollar. This is the 7th time since 1985 that the Australian Dollar has rebounded from the $0.60 area. The only time it has sustained move below that level was a brief period between 2001 and 2002. I’ll never forget that time because I felt well off from my success in door to door selling in Melbourne and only got £1 for every A$2.60 when I got to London in the spring of 2000. 

“In terms of just the macro and company performance, I think it will be much more muted as people capture the inflationary pressures,” he said. “Private equity M&A activity I think will be dampened.”

Concerns around portfolio company performance were not the only challenges up for discussion in the south of France, with private equity firms struggling to secure the debt financing they need to do big deals and juice returns and facing more competition when raising funds. 

The chief economist at German insurer Allianz SE, Ludovic Subran, said the industry had “nowhere to hide” when markets turned last year. “The private equity world has not been immune or has not defied gravity,” he said.

Banks pulling back from lending on buyouts was described as a “new reality” by Francois Jerphagnon, head of Ardian Expansion, in an interview with Bloomberg TV. This will open up an opportunity for private credit funds to step in, others said.

“There is much more interest in private credit and infrastructure where you do have that hedge against inflation and that hedge against rising rates,” said Richards at Pantheon.

Blackstone’s Eapen said private credit providers are in “the middle of a golden age” and that last year had been one of his business’s biggest ever for deploying capital. 

After the credit crisis, the vindictive wish of anyone who lost money in the crash was for banks to go broke. At the very least everyone concluded they needed to be heavily regulated. Today the burden of regulation is heavy within the banking sector and we are in our 15th year since the crash. 

“Every decade, there is a new leader in the market. In the 2010s, it was US stocks and mega-cap tech,” Kandhari said in a phone interview. “Leaders of this decade can clearly be emerging-market and international stocks.” Morgan Stanley IM has $1.3 trillion in assets under management.

The asset class has had a strong start to the year, with the MSCI emerging-markets index soaring 8.6% compared with a 4.7% advance for the US benchmark. The gains come as China’s pullback from its strict Covid Zero policy brightens the economic outlook, while investors position for the end of aggressive central bank interest-rate hikes. Many also still see US stocks as expensive, with those in emerging-markets trading at a nearly 30% discount.

There’s a growing disconnect between US’s shrinking share of the global economy and the size of its stock market capitalization, Kandhari said. Along with fund allocations to emerging-markets that are well below historical averages and inexpensive currencies, that gives them a lot of room to outperform, she said.

“What really drives this asset class is the growth differential, and that growth differential of the EM is improving relative to the US,” she said.

The risk of a US recession is increasingly being priced into equity markets. At the same time, China has just exited its three-year quarantine. US money supply is now negative on a year over year basis for the time. China is boosting monetary and fiscal support for its markets. Even with arguments about trade wars and competing systems, it will still be easier to make money in China this year. 

First, no country can avoid engaging with both the US and China. Dealing with both simultaneously is a necessary condition for dealing effectively with either. Without the US there can be no balance to China anywhere; without engagement with China, the US may well take us for granted. The latter possibility may be less in the case of a big country like India, but it is not non-existent.

Second, I know of no country that is without concerns about some aspect or another of both American and Chinese behaviour. The concerns are not the same, nor are they held with equal intensity, and they are not always articulated – indeed, they are often publicly denied -- but they exist even in the closest of American allies and in states deeply dependent on China.

This perspective gels very well with the reality on the ground I observed in Saudi Arabia on my last two visits. The simple reality is China is the country’s biggest customer and the USA the country’s greatest geopolitical ally. There is no way to play favourites the greatest risk for any country is to be taken for granted because that greatly enhances the scope for one’s interests to be trampled. 

As Ukraine and its allies prepare for a potential escalation in fighting in the spring, the debate over sending battle tanks to back Kyiv’s military and potentially retake territory has become a flashpoint among NATO allies. US and European officials have bridled at Scholz’s slow decision-making, saying the German leader should be more assertive, following through his promised “Zeitenwende,” or historic turning point on security. 

Scholz has insisted that Germany should not act alone in sending new categories of heavy weapons that could provoke an escalation with Moscow. He’s placed a premium on moving in lockstep with the US and NATO. 

“We never go alone,” Scholz said in an interview last week with Bloomberg. 

There are estimates Rheinmetall could send as many as 139 Leopard Type 1 and 2 tanks to Ukraine via various swap agreements over the next several months. By that time, there is a risk available inventory will be fully exhausted. 

As part of its deal with the IMF, Egypt agreed to shrink the footprint of all state-run enterprises, including “military-owned companies,” and committed to allow for a more flexible exchange rate.

“We are also looking at our region, and we want to be a role model for the region,” Al-Jadaan said. “We are encouraging a lot of the countries around us to really do reforms,” he said.

 

The UAE’s reluctance to offer donations but attach support to investments is a model Saudi Arabia is now also following. The big oil exporters want regional stability. This change of policy suggests they now appear to believe that will best be achieved through economic reforms.

The Arab Spring shook up the Middle East more than a decade ago and resulted in significant turmoil. It now appears that the policy suite developed in response to those events has matured. Large young populations need to be offered a route to a productive life or rebellion is inevitable. 

I just wondered whether you had any thoughts on Lumber given the recent price action? Thanks and keep up the excellent work, I'll definitely be renewing my annual subscription (as I have been for more years than I care to count!)

Thanks for this topical question and your long-term patronage. Serving loyal long-term subscribers is why I happily regard this service as a vocation. ​

The Indonesian rupiah is leading a rally in Asia’s emerging-market currencies as bets grow that the US will slow rate hikes, bolstering risk sentiment. 

The rupiah gained as much as 1.3% against the dollar, the most in more than two months, while the baht climbed more than 1% to its highest level in about 10 months. Most Asian currencies are stronger. 

Easing inflationary pressures in the US have raised expectations of a smaller rate hike in the upcoming meeting of the Federal Reserve, while optimism over China’s reopening has also brightened the outlook for some of the regional currencies.

Last week’s lower CPI reading has led the wider investment community to conclude the peak of the interest hiking cycle is upon us. The Dollar took another leg lower on the news and supported everything from gold to crypto and non-US dollar denominated stock markets.

UK Prime Minister Rishi Sunak plans to strengthen anti-protest legislation, giving police additional powers to clamp down on demonstrations even before they’ve caused any disruption.

The government on Monday will propose an amendment to its own Public Order Bill — currently working its way through the House of Lords — to broaden the definition of what constitutes “serious disruption,” according to a statement from Sunak’s office. 

“We cannot have protests conducted by a small minority disrupting the lives of the ordinary public: it’s not acceptable and we’re going to bring it to an end,” Sunak said in the statement. “The police asked us for more clarity to crack down on these guerrilla tactics, and we have listened.”

The legislation is aimed at strengthening the police’s ability to deal with protests such as those in recent years from environmental campaigners at Just Stop Oil and Extinction Rebellion, who have brought traffic and public transport to a standstill by blocking bridges, motorways and London’s subway network. But it’s provoked the ire of civil liberty groups and of the opposition Labour Party. 

Labour’s policing spokeswoman, Sarah Jones, said in a statement that the police already have powers to deal with disruptive protests. She criticized Sunak for not focusing instead on tackling “the epidemic of violence against women and girls” or on prosecuting criminals. 

The amendment will include allowing police to consider the total impact of a series of protests rather than treating them as a single incident; giving officers the right to step in even before a protest has resulted in disruption, and letting them deal with long-running campaigns designed to cause chaos repeatedly, according to the statement.

Tightening the noose of civil liberties is almost always done in a reasonable manner. Who could argue with additional measures to ensure extremist activists don’t block major roads? Of course, we need additional measures to stop activists from defacing great works of art. However, once these kinds of measures are in place, they are often applied at the discretion of the authorities in new and surprising ways. With teachers ready to strike, the government appears to be putting measures in place to combat disruptions.

I posted the first part of this update on Wednesday and saved the second part of today. The number one theme in emerging markets is governance. That’s where Saudi Arabia is clearly attempting to make an impression.

In speaking with the junior minister for investment, the decision to give opportunities to young people is very intentional. They know the only way to achieve the progress they need is through harnessing the productive capacity and thirst for invention of the young.

It’s incredibly refreshing to meet so many tenacious young people with ambitious dreams for the future. The fact they have a route to achieve their goals is even better.

Egypt is grappling with its worst foreign-currency crunch in years and has recently seen the emergence of a black market for dollars. It secured a $3 billion loan from the International Monetary Fund and sought help from its wealthy Gulf Arab allies. 

Core inflation, the gauge used by the central bank that strips out volatile items, accelerated to 24.4% in December from 21.5% in November. 

This week the government said it would curb state spending, including through halting costly new infrastructure projects. The central bank announced in December it was targeting inflation at an average of 7%, plus or minus 2 percentage points by the fourth quarter of 2024.

Allen Sandeep, director of research at Naeem Holding in Cairo, has said the latest bout of depreciation sets the stage for a pickup in inflation to around 23%-25% and higher government borrowing costs. 

Egypt is one of the largest food importers in the world. With a population now in excess of 100 million that is a major point of stress. The war in Ukraine threw food security into a state of flux and has contributed to the inflation spike.

Saudi Arabia’s 11.95 billion riyals ($3.2 billion) of funding for a joint venture that will invest in mining assets internationally is “going to be a moving target,” Mining Minister Bandar Alkhorayef said in an interview with Bloomberg TV.

“We are establishing a governance between this JV with the ministry to make sure that this JV allows the country to get the right minerals needed for our industrial strategy and our needs in general,” he said

In 2022, Saudi Arabia saw as much as $32 billion of investments in the mineral sector, a 50% growth in revenues from 2021, the minister said in a separate interview

Saudi Arabia had previously estimated its mineral wealth at $1.3 trillion, but that’s now considered conservative because discoveries have been better than expected, he said

Maaden is now one of the largest industrial metal miners in the world and is only beginning to invest beyond Saudi Arabia’s borders. That represents a significant source of new competition for world-class mining opportunities and suggests bidding wars will be more common.

Any pullback in Brazilian asset prices should revert quickly as the protests should be short-lived and not have major direct implications, Citigroup strategists led by Dirk Willer wrote in a note Monday. 

The Brazilian real was the worst performer among 23 emerging market peers tracked by Bloomberg, weakening 1.2%

The protests have been publicly criticized by far-right leaders, including former President Jair Bolsonaro, and they lack support from leaders in the executive, legislative and judiciary branches

David long ago observed “governance is everything”. That is as true to today as in the past, but there is no getting around the fact that standards are deteriorating. Peaceful hand-off of power, following a free and fair election, is the basic starting point for liberal democracies.

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.

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.

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.

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.

“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.

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.

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.

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.

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.

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.

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.

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.

According to Central Election Commission, KMT won 13 out of 21 cities and counties, while DPP only managed to secure five cities in the southern part of Taiwan, the least since its founding in 1986. KMT candidates took 50% of votes in the contests, versus 41.6% for the DPP, 11.39 million votes counted as of 11:53 pm in Taipei, according to the official election website.

That prompted President Tsai Ing-wen to step down as party leader, saying in televised remarks: “In the face of these results, there are many areas where we need to engage in self-reflection.”

The elections represented the last major test of Tsai’s DPP before her second and final term draws to a close and Taiwan picks a successor in early 2024. The KMT, or Nationalist Party, hopes the gains in local races will help it mount a comeback after defeats in presidential elections in 2016 and 2020.

The results will be closely watched in Washington and Beijing, since the DPP’s rise to power has prompted China to cut off communications with Taiwan and ramp up diplomatic and military pressure on the island. The KMT, which favors eventual unification with China, had previously overseen a historic expansion of ties with Beijing, easing travel, trade and investment across the Taiwan Strait. 

The Tsai administration has actively escalated tensions with China and the electorate does not want to be in a war with China. That does not mean they want to be part of China but not do they wish to do anything to antagonise China. Taiwan’s citizens are very much aware of the fine balance that needs to be maintained when squeezed between two great powers.

Technicals over Fundamentals for now…our tactically bullish call was always more about the technicals than the fundamentals. Today, we provide an update to those factors, some of which no longer justify higher prices although they provide support at current levels. The deciding factor is market breadth, which has improved greatly over the past month and argues for us to remain bullish into year end before the fundamentals take us to lower lows next year. Feedback on our call for the S&P 500 to reach a price trough of 3,000-3,300 in Q1 '23…we've gotten a fair amount of pushback on that our forecast on this front is too aggressive both from a magnitude and timing standpoint. While directionally bearish, many investors struggle to see even a retest of 3,500. In our view, what was priced at the October lows was peak Fed hawkishness, not material earnings downside. If we were forecasting a modest 5% forward EPS decline and a reacceleration off of those levels, we'd concede that the earnings risk is probably priced, but we're modeling a much more significant 15-20% forward earnings downdraft, which should demand a more recessionary type 13.5-15x multiple on materially lower EPS.

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

This coincides with my view. The US yield curve is heavily inverted and the pace of tightening has been surprisingly quick. That suggests it is not unusual for the corporate profits to have been immune because there is a significant lag between tightening and when it shows up in the economy.

On the income side, if you earn more than £100,000, you really should be looking at how to put as much of your salary as you can above that amount into a pension via salary sacrifice. Why’s that? Because contrary to what you might think, you’re not paying a 40% marginal tax rate. As the team at tax advisors Blick Rothenberg point out, your marginal tax rate is in fact closer to 60%, because £100,000 is the point at which your personal allowance starts to get whittled away. (This is also why the 45% rate was cut to £125,140 rather than £125,000 — so that it aligns with the point at which your personal allowance is all gone.)

As a result, any money you can shield from this rate is doing a great deal more work than any other pound you save. That said, given that your mortgage is probably going up, and your heating bill is through the roof, it’s quite possible that you are already doing as much as you can on that front without causing a major liquidity crisis in your household.

On the investment side, falling squarely into the “be thankful for small mercies” category, at least the chancellor didn’t mess around with the annual allowances for tax-efficient “wrappers” — you can still put up to £20,000 a year into an individual savings account, and up to £40,000 a year into a pension (assuming you earn that much each year). The latter of course is still subject to the (frozen) lifetime allowance, so do be careful if you’re in danger of breaching that £1.073 million lifetime cap.  

So if you have grown a bit sloppy with your admin, and you are holding any shares outside a tax wrapper (i.e. an Individual Savings Account or a pension), then now is the time to get a handle on that and move them. At least then you’ll be shielded from dividend or capital gains taxes. If you have already exhausted these allowances, you might want to start looking at venture capital trusts or enterprise investment schemes, though those are a topic for another day. 

Government rules tend to change investor behaviour. The perversion, that is the tax system, means the incentive to make a lot of money from working is actively under attack. Instead one is being encouraged to invest as much as possible to shield assets from the tax regime. That basically means outsourcing the job of making money to companies rather than individuals. That’s not great news for hard workers, but it certainly benefits the asset management sector.

Vietnam's State Securities Commission (SSC) has carried out measures to strengthen the local stock market following strong fluctuations triggered by investors' cautious sentiment and global stock market, local media reported on Wednesday.

The recent market corrections were caused by investors' cautious sentiment while facing uncertainties and less positive prospects in the world economy and politics, local newspaper Vietnam News reported.

As part of an effort to ensure a stable, sustainable and transparent development of the Vietnamese stock market, the SSC has strengthened inspection and supervision to address violations on the stock market, the newspaper said.

It has also proposed amending regulations regarding private offering and trading of corporate bonds in the domestic and international markets to improve the management mechanism for the private placement of corporate bonds.

In the short term, domestic investor sentiment is still strongly influenced by information, wrong handling of enterprises, and fluctuation in the corporate bonds market.

However, given Vietnam's long-term macroeconomic growth and the profit gains of listed companies, long-term investment opportunities will appear quite clearly, investment strategist Thai Huu Cong told local newspaper Saigon Investment.

The Dong tends to be the Vietnamese government’s first recourse in attempting to stimulate the economy. The currency has been falling all year and only began to steady over the last couple of weeks.

Lula said that he won’t give any details on his cabinet before returning from an international trip to attend COP27 in Egypt.

“The stakes are high in terms of fiscal uncertainty, in terms of cabinet composition, in terms of key appointments in the economic team,” said Joel Virgen Rojano, director for Latin America strategy at TD Securities. “All of that for now has a really big question mark and the markets are becoming impatient.” 

Emerging-market investors from Neuberger Berman LLC to Franklin Templeton had bet on the South American nation ahead of the election as they saw little distinction between Lula and President Jair Bolsonaro’s fiscal agenda. Neuberger wasn’t immediately available to comment on its current recommendations in Brazil.

“Markets tend to hate uncertainty,” Dina Ting, head of global index portfolio management for Franklin Templeton exchange-traded funds, wrote in an emailed response to questions. “From a long-term perspective, the fundamentals and macro factors have not changed. Brazil is still trading at a discount to historical averages and helped by both elevated commodity prices and favorable demographics, including its young workforce.”

Brazil faces many of the same issues as everywhere else. There is a clear need to enact some type of fiscal control but the population are already impatient with the pace of economic recovery. Those are two opposing perspectives and the new administration will need to tread very carefully if the currency is to remain stable.

Traders who have for long been seeking clear signals of a pivot away from the staunch Covid Zero policy cheered the slew of changes announced on Friday, which included a cut in the amount of time travelers and close contacts must spend in quarantine, and a pullback on testing. The decisions by the National Health Commission followed a meeting by the nation’s top leaders on Thursday, where a more targeted approach was encouraged to tackle outbreaks.

“This is a huge positive for the market,” said Wang Yugang, a fund manager at Beijing Axe Asset Management Co. “Of course how much efficacy these measures have for the economy we will need to observe.”

In a display of broad market optimism, every stock on the 50-member Hang Sang China gauge was up on Friday. On the mainland, the CSI 300 Index ended 2.8% higher.

The Chinese government is wrestling with the opposing challenges of rising cases and the slowdown in the economy. The reality is quarantines cannot stop the spread, only slow it down, when COVID is endemic everywhere else. At some stage China will have to grasp the nettle and tolerate higher numbers of infections for longer. How willing they will be to tolerate millions of cases a day remains an open question. Of course the answer, supplied by India’s experience, would be to simply stop counting.

In September, a sharp slide in the yen following the policy statement and dovish comments by Kuroda prompted Finance Minister Shunichi Suzuki to order Japan’s first entry into markets to prop up the currency in 24 years. While the governor moved the market again during Friday’s briefing, his tone was more cautious and his remarks weren’t preceded by falls in the currency like the previous month. 

Kuroda continues to hold firm as the last anchor of low global rates just a day after the European Central Bank went ahead with another jumbo rate hike. But the governor is walking on a tightrope as his stance risks putting further downward pressure on the yen despite billions of dollars spent by the government to support the currency.  

“The likelihood of the BOJ pivoting toward tightening is still small as Japan’s inflation is not broad based at all and is only rising about a third of the pace seen in Europe and US,” said Kyohei Morita, chief Japan economist at Nomura Securities.

The speed of the Yen’s decline since March has alarmed politicians and not least because the price of oil is in the region of the 2008 peak when redenominated into the currency. The Bank of Japan’s challenge is much of the inflation is imported. Domestic demand needs a cultural change and that will not be achieved by transient price pressures.

The US economy does not appear to be on the brink of recession at the moment. In thinking about the odds of a recession next year, we break the risks into three categories: (1) the risk that a recession will prove necessary to bring inflation down, (2) the risk that the Fed will cause a recession that is not necessary, and (3) the risk that something else will cause a recession.

The odds that a recession will prove necessary have fallen a little because the first two steps of the required adjustment—slowing GDP growth to a below-potential pace and rebalancing supply and demand in the labor market— have gone remarkably well so far. But it would be premature to say that this risk has fallen too much until we see consistent evidence that labor market rebalancing is slowing wage growth and breaking the wage-price feedback loop.

The odds that the Fed will cause a recession that is not necessary have likely risen somewhat. It is increasingly clear that shelter and health care inflation— and by extension commonly used measures of the underlying inflation trend such as trimmed-mean inflation—are likely to remain uncomfortably high throughout 2023 and would even if the labor market rebalanced tomorrow. While it is not our base case, we see some risk that too great a focus on lagging indicators, too little patience, or tightening too quickly to gauge the impact on the economy could result in a recession that is not necessary.

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

I used this slide in my IFTA conference slide deck a year ago. At the time, worry about inflation was not urgent even through the 5-year has broken highs and had first step above the base characteristics.

As I thought about what to talk about at the NAAIM conference today, I thought it would be time to update my chart. In the last year, yields have surged and instead of the illusory dragon, today Jay Powell is being tasked with slaying the inflation dragon.

The result was “solid” and leaves Mexico’s economic growth at a pace of 2.2% for the year, according to Alberto Ramos, Goldman Sachs Group Inc.’s chief Latin America economist. 

“The economy still has room to grow, and we expect it to expand in coming quarters supported by firm terms of trade and further normalization of activity among a number of still lagging sectors, particularly services,” he wrote in a research note Friday. 

Not only is China slowing down, but its relationship with the biggest buyers of its exports is deteriorating. Large global companies are not making decisions about how much manufacturing they want to do in China. Within the next decade, manufacturing in China by foreigner will focus on the domestic market while exports are likely to face greater competition from other economies.

Banks in Switzerland sought the most dollars since 2008 using an emergency dollar swap facility provided by the Federal Reserve in what is likely to be a bid for easy profits.

In Wednesday’s auction conducted by the Swiss National Bank, 17 institutions took up $11.09 billion. That’s the most since October 2008, when the Global Financial Crisis was raging in the wake of Lehman Brothers’ collapse. 

This is the fourth week in a row when banks have accessed the facility. Last Wednesday, 15 banks took up $6.27 billion in funds. 

According to economists at Credit Suisse, Swiss banks swap the dollars into francs in order to generate a profit. The lenders can even sell the cash back to the SNB using its reverse repo auctions, or deposit it at the institution to benefit from a positive interest rate.

“We do not believe that the increased demand for US dollar liquidity by domestic banks reflects any liquidity issues in the Swiss banking system”, Credit Suisse economist Maxime Botteron wrote in a report last week.

The dollar swap facility was created during the crisis that began in 2007 as a lifeline to provide safe access to Greenback liquidity, while the SNB’s cash-taking repo auctions are designed to drain excess liquidity from the market. 

It’s not clear that Swiss officials are likely to act to stop banks from taking advantage of the facility. Conditions of the dollar auctions are controlled by the Fed, and the reverse repos are a core instrument in the SNB’s current tightening of monetary policy.

All Swiss and foreign banks which have a branch in Switzerland or are registered with Swiss authorities are entitled to participate in the dollar auctions. Credit Suisse expects predominantly smaller banks to take advantage of the profit play.

The world is dealing with falling supply of Dollars as rates rise and money supply shrinks. Tapping swap lines to source dollars which can then be sold for a profit is a handy money making exercise for banks. 

The central bank will defend the rupiah in line with fundamentals, Warjiyo said. It will monitor forex supply, and strengthen the currency stabilization policy, he added.

“The hike reflects less concern of inflation but more on the need to anchor FX stability,” said Wellian Wiranto, economist at Oversea-Chinese Banking Corp. in Singapore, who now sees a terminal rate of 5.25%. “Going forward, downside risks to growth will gain more prominence.”

A weakened rupiah threatens to fan imported inflation, adding to the risk posed by higher fuel costs that’s sent consumer price gains to a fresh seven-year high of 5.95%. Bank Indonesia expects inflation to climb further to 6.3% at the year-end before returning to its 2%-4% target next year.

The central bank retained its 2022 growth forecast for the economy, expecting it to be at the upper end of its 4.5%-5.3% target, while flagging risks from a slowing global recovery. For now, it expects to end the year with a current account surplus of 0.4%-1.2% of gross domestic product -- better than its previously estimated 0.5% of GDP.

The Indonesian Rupiah spent most of 2021 in a tight range relative to the Dollar but broke down in May and is now trending lower. The pass through of inflationary pressures from the developed world into ASEAN didn’t pick up until early this year. Many ASEAN countries did not engage in the same degree of monetary stimulus so effect was delayed. However, the surge in energy prices is increasing the cost of fuel subsidies and putting downward pressure on regional currencies.

Inside Lula’s campaign, the result in Brazil’s most populous state — the birthplace of his political career, and containing about 25% of the entire electorate — was compared to a plane crash, where a confluence of small factors leads to catastrophe. At his team’s first post-election meeting, the talk was of frustration and failure. 

Edinho Silva, the former president’s campaign coordinator, may have had an inkling of what was to come, saying in an interview on the eve of polling that Sao Paulo had become a center of hard-core support for Bolsonaro’s brand of right-wing identity politics. 

“We have a percentage of Brazilian society that, unfortunately, is racist, homophobic, sexist, xenophobic, and doesn’t accept the social ascent of the lower classes,” he said. “And a significant part of Brazil that thinks in this way lives in Sao Paulo.”

Here is a novel idea. Perhaps Brazilian voters are not prepared to install a man who squandered the bounty from the last commodity boom on vanity projects. As if that were not enough, he  led an administration that was the most corrupt in the country’s history, and that is saying something. Lula was jailed for corruption and was only allowed to run because he was offered a politically motivated dispensation.

Eighteen months later, newly unsealed court documents show that the FBI and U.S. attorney’s office in Los Angeles got their warrant for that raid by misleading the judge who approved it.

They omitted from their warrant request a central part of the FBI’s plan: Permanent confiscation of everything inside every box containing at least $5,000 in cash or goods, a senior FBI agent recently testified.

The FBI’s justification for the dragnet forfeiture was its presumption that hundreds of unknown box holders were all storing assets somehow tied to unknown crimes, court records show.

It took five days for scores of agents to fill their evidence bags with the bounty: More than $86 million in cash and a bonanza of gold, silver, rare coins, gem-studded jewelry and enough Rolex and Cartier watches to stock a boutique.

The U.S. attorney’s office has tried to block public disclosure of court papers that laid bare the government’s deception, but a judge rejected its request to keep them under seal.

The failure to disclose the confiscation plan in the warrant request came to light in FBI documents and depositions of agents in a class-action lawsuit by box holders who say the raid violated their rights.

The war on cash is an ongoing program by governments to control and tax every Dollar, Euro, Pound, Yen, Renminbi and Rupee in existence. The Reaganism “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” It is as true today as ever. In an effort to further that aim, governments want to know exactly where every unit of currency resides and to control how it moves. 

Australia benefitted both from the global low interest rate environment and booming Chinese demand for materials over much of the last 15 years. That seeded an impressive domestic technology/growth sector and significant growth in demand for iron-ore, coal and natural gas as well as other commodities.

The Biden administration is moving toward a release of at least another 10 million to 15 million barrels of oil from the nation’s emergency stockpile in a bid to balance markets and keep gasoline prices from climbing further, according to people familiar with the matter.  

The move would effectively represent the tail end of a program announced in the spring to release a total of 180 million barrels of crude from the Strategic Petroleum Reserve. About 165 million barrels has been delivered or put under contract since the program was put into effect.

The Biden administration also is set this week to provide details on plans to replenish the emergency stockpile. The Energy Department announced in May it was planning a new method of buybacks to allow for a “competitive, fixed-price bid process,” with prices potentially locked in well before crude is delivered.

The mid-term elections are in exactly three weeks. The incumbent party generally does not do well in the mid-terms but this year with inflation running rampant and a slim majority, the majority in both houses is at stake. Getting gasoline prices down was central to the effort to appease consumers’ inflation fears ahead of the election.

Our latest assessment, taking on board the change in borrowing costs since Hunt’s announcement and the policies in the statement, is that a further £13 billion will still need to be found to just get debt falling relative to GDP. It would take more like £36 billion of consolidation to put it on the same trajectory as we projected before the mini-budget was published in September.

Debt Still On Explosive Path
Finding a package of spending cuts that are politically viable and deliverable will be extremely challenging -- much of the low-hanging fruit has already been picked. Hunt faces an uphill struggle to win the faith of markets as he formulates a budget, to be delivered on Oct. 31.

Hunt also said that the universal household energy price cap will be replaced from April 2023 with more targeted measures. It’s not clear what those measures will be but removing the government cap altogether and reverting to Ofgem’s methodology from April would imply a 75% rise in energy bills for households. Inflation would jump to 11.6% in April, against 6.4% under the cap.

The combination of austerity and less support for households next year means the risks to our forecast for a 0.4% drop in GDP in 2023 have shifted to the downside. 

Jeremy Hunt introduced a reset over the weekend which puts the UK government’s finances back to where they were two weeks ago. As a result the Pound is back to where it was on September 20th. Deficits are wide but the assumption is the universal energy price cap is assumed to be temporary. The reality is price controls are difficult to remove once installed and are always expensive to maintain.

Current 4680 battery cells are not living up to their promises made by Elon Musk during Tesla's Battery Day in 2020 when they were first revealed. At the time, Musk mentioned features like a high-nickel cathode, silicon anode, and an ingenious packaging system at a fraction of the cost of the 2170 batteries. For now, however, it has hit only one of these purported features.

We already know that the 4680 battery packs that Tesla now places in its Model Y are only halfway to the stated goal of a 50% cost reduction compared to conventional batteries. The bulk of the savings come from the packaging efficiency of stuffing them into much larger tubes hence improving the volumetric density and requiring fewer welding points. The key dry-coating process for the electrodes, however, which doesn't require toxic mixes and oven baking, remains a pie-in-the-sky goal for now, despite that Tesla hopes to hit a pilot run this year.

Moreover, independent 4680 battery teardowns and chemistry analysis shows that Tesla is still using the regular 811 nickel-manganese-cobalt mixture for the cathodes and ordinary graphite anodes. Be it because of the price of raw materials that go into batteries for performance electric vehicles now, or simply for the lack of necessary manufacturing technology or equipment, the high-nickel and silicon electrodes that bring about true cost, range, and performance improvements, are still to come for Tesla vehicles with the 4680 battery.

Even NIO, which is farther ahead in the development and mass production of a 150 kWh high-nickel battery that is supposed to propel its top ET5 and ET7 performance sedan versions for more than 620 miles on a charge, had to postpone their launch. Its battery maker WeLion was supposed to deliver the first mass-produced batch of 150 kWh semi-solid packs with high-nickel technology this month, but the launch of the top ET5 and ET7 models has now been stretched into 2023 as the technology needs further validation.

As if the issues with the 4680 battery not living up to its hype were not bad enough, apparently Tesla is facing some significant issues with scaling up production. Quite apart from the fact lithium prices broke out to new highs this week, the cost of production is rising and a lack of manufacturing efficiency is going to make matters worse.

“Has the government finally heeded the calls from markets and the Bank of England? Price action in gilts and the pound suggests markets believe so,” said Simon Harvey, head of FX analysis at Monex Europe. 

The plan to freeze corporation tax next year has come in for particular attention from detractors within Truss’s own Tories. Under a strategy set out by the previous Conservative administration, the levy on companies was due to rise to 25% from 19% in April. But scrapping that move was one of the key measures in Kwarteng’s fiscal plan announced Sept. 23.

The initial market reaction on Thursday suggests that a U-turn on corporation tax -- along with the bank’s greater buying activity this week -- could help ease any turbulence next week after the Bank of England halts its bond purchases on Friday. Investors will be focused on the details of the plans the government is drawing up, and that may determine whether the broad market rally can be sustained.

“Given investors are short, the reaction of sterling is not a surprise,” said Gareth Gettinby, portfolio manager at Aegon Asset Management. “Ultimately, the UK has an extremely negative external balance that remains reliant on foreign funding which remains a negative. So a short term bounce on government noise and then expect the currency to weaken.”

Confidence in the standard of UK governance has taken a beating recently. The government has few options when the bond market is throwing a fit at the prospect of modern monetary theory gone wild. They will inevitably have to walk back the commitment to lower taxes and will hopefully double down on deregulation.

“Bailey’s words did sound harsh but from the BOE’s perspective they need to sound stern,” said Pooja Kumra, rates strategist at Toronto-Dominion Bank. “The BOE has been very receptive to markets. If chaos continues we doubt that they will run away.”

The Bank of England is in a very difficult position. They desperately need to act against inflationary pressures but are constrained from using the tools at their disposal because of the risk posed by leverage in the financial system, not least in the pension sector.

We’re living through an extraordinary time in American history, and really in all human history. Once you take that big-picture historical perspective, once you look at the whole forest rather than the individual trees, the real story of our times starts to make more sense. We happen to have arrived at a juncture between two very different historical eras and that makes everything on the ground very confusing, and very traumatic.

One way to understand this is that for the last 40 years America and the world have been operating within a series of interconnected systems that add up to one mega-system. Our energy system was rooted in carbon, and our transportation system was based on the internal combustion engine. Our culture was dominated by the huge Baby Boom generation and our politics tended to be more conservative. Our economics was all about unleashing the private sector and maximizing shareholder capitalism. Work was done in physical places and production was primarily industrial. Our uber-challenge was terrorism, and our geopolitical focus was the Middle East, which made sense because we needed to keep the carbon energy flowing to keep the whole flywheel of this mega-system spinning.

That whole mega-system, and all the subsystems, arguably are now breaking down and often causing more problems than they are solving. This world that older people spent their entire careers and lives mastering is coming to an end. This world that younger people were taught is “just the way things are” increasingly does not make sense. This world that politicians proudly had policies for, and that the media confidently analyzed and explained, is soon going to be over.

Every one of those systems arguably is being superseded by new systems much better suited for the 21st century. Our uber-challenge is now climate change and so our energy system must shift to clean power and our transportation system to electric. Our culture now is dominated by the huge Millennial generation and our politics are becoming more progressive. Our economics is raising the role of the public sector and capitalism being pushed to include all stakeholders. Work is now taking place much more virtually, and production is on the cusp of becoming biological. And our geopolitics is recentering on Asia, and in particular on the new superpower, China.

There are two important cycles investors need to be aware of. First you have the technology cycle. Time marches to a different beat inside universities and labs all over the world. The market may go up and down but smart people, beavering away on their pet idea, will eventually lead to technological innovations that take everyone by surprise.

Overwatch 2’s launch suffered from a double whammy of troubles when the servers opened for business Tuesday: Massive player interest led to equally massive login queues and a cyberattack.

Blizzard Entertainment President Mike Ybarra tweeted that the company was dealing with a Denial of Service (DDoS) attack that was disrupting servers (these stopped after Tuesday’s launch). "Server issues” and “launch day” predictably go together in gaming, so plenty of players knew to expect disruptions and wait times.

Another issue plaguing Overwatch 2’s launch was the use of Blizzard’s SMS Protect feature, which requires a mobile phone number to prevent cheaters and stop hackers from taking over player accounts. But since Tuesday’s launch, those using prepaid cellular accounts can’t use those mobile numbers to play (it's part of the SMS Protect protocol). A Blizzard spokesperson said that the company is "actively engaging with some service providers to explore if we can expand the program to cover more users while still protecting our players and game security."

Late Wednesday, Blizzard said an update it plans to roll out Friday will change SMS Protect so that any player who has logged into Overwatch since June 2021 can play without a phone number requirement (anyone who hasn't played Overwatch since that time will need to use a phone number. It’s also rolling out updates to improve online stability and long login queues. Players have also been reporting missing items and other data, and Blizzard said half of these issues are because players didn’t merge their accounts. For the rest, Blizzard said no data has been wiped or lost and it is working to restore missing items.

Activision Blizzard was in the process of collapsing before Microsoft made a bid for the company. The share is falling once more which suggests investors are wary of thinking the merger will get approval from the EU.

Investors counting on a Federal Reserve pivot any time soon are bound to get burned again, according to PGIM Fixed Income.

“We’ve seen this movie time and time again,” said Greg Peters, co-chief investment officer at the Newark-based firm, in an interview. “The market gets hyped up on different narratives between inflation releases. I’ve been surprised by it, and we’ve been using it as an opportunity to sell into.”

The firm, which manages assets of $790 billion, sold US Treasuries after a rally earlier this week sparked by speculation the Fed was about to turn more dovish. The market move proved short lived, backing its view that there’s still not enough evidence to suggest policy makers will rein in aggressive interest-rate hikes.

The speculation -- fueled by a smaller-than-expected rate hike in Australia -- drove action across global markets in the first two days of this week, driving down two-year Treasury yields by nearly 30 basis points at one point to below 4%.

Neel Kashkari, who has historically been viewed as a dove, was quoted today as saying "more work to do" on bringing down inflation, and is "quite a ways away" from being able to pause its aggressive interest-rate hikes.

Upgrade from Cautious to Attractive: No one knows exactly when this downturn will end and we find it difficult to get ahead of macro events, but we see signals that suggest we should no longer be overly pessimistic: (1) the cyclical sell-off has already been punitive in an historical context; (2) the magnitude of the valuation correction (YoY) is approaching extremes relative to the last two decades; (3) earnings risks are now well understood and it is surprises that will drive stocks from here; (4) green shoots are emerging while some consumer parts of tech are close to bottoming; (5) we are upgrading our top down EM strategy view on IT, Korea, and Taiwan; these are set-up for a reversal in returns in the coming weeks. What is not understood is cycle turns and the market's willingness to increasingly look through this late stage of the downturn and, hence, our focus on the other side of the cycle.

An inflection is near and we see reasons to be constructive on a 2H23 recovery. (1) Macro headwinds are fading with the bulk of the Fed’s heavy lifting likely to be done by year-end and benefits from China’s reopening; (2) demand elasticity and replacement cycles will be driven by the sharp fall in pricing, especially consumer products; and (3) supply adjustment is accelerating via significant production and capex cuts that are underway. We have clearly worked through the slowdown in the consumer and are most positive on 'first-in, first out' exposure in LCD panels bottoming now, followed by memory in 4Q22, while the trough for foundry, auto and semicap should come with a lag in 1H23.

As the fourth quarter begins and investors position for how they hope to salvage returns for 2022, questions are already arising about the prospects for 2023. There is no doubt, steep declines in asset prices, particularly within the tech sector, have improved valuations. In normal circumstances that would be sufficient to create attractive entry points. Therefore, the question is whether this is a normal correction following the excesses of the pandemic or the end of the cycle. 

Dear Eoin, In the 1960s and 1970s subscribers to the David Fuller Chart Service received a booklet containing hundreds of charts each week or each month. I used to come into the office at 6a.m. and complete the point and figure charts each day. Thanks to this work, I gained a reputation among my colleagues for being the first one to spot changes in the long-term trends of both overall markets, sectors and individual shares. As of this morning, I am getting up one hour earlier and I will start by looking at all the daily charts of the Autonomies in the Chart Library. Let's hope that this will produce the same result. This morning's work show very small blue upward marks in almost every chart. These are tiny upward movements in the year-long major decline in all these share prices. This "summer's swallow" has not yet started chirping. Regards,

Thank you for this account. David was still having chartbooks printed in 2003, when we began working together. By that stage they were a very niche product that had become obsolete with the development of charting software. Nevertheless, the practice of looking at lots of charts is as useful today as it has ever been.

In following your program of activity, I would suggest taking one day to look at point and figure charts. They will give you clear confirmation of a change of trend.

Speaking on the sidelines of the Tories’ annual conference in Birmingham, the ministers predicted she will survive to fight the next election, due in about two years, because there isn’t enough time to replace her. The result, they said, is likely to be more rebellions from Tory MPs pushing around a lame duck premier, just like the one that forced her into a humiliating U-turn on Monday morning. 

The stark view suggests the “new economic deal for Britain” launched by Truss and her Chancellor of the Exchequer Kwasi Kwarteng may be dead in the water before it has even got going. The policy calls for a major program of deregulation in areas such as housebuilding and childcare alongside tax cuts.

One former Cabinet minister predicted Truss will be gone within a year to allow the party time to regenerate before the general election, which must be held by January 2025 at the latest. They said local votes in May, 2023, would provide a clear indication of how badly Truss is doing and predicted that her successor would have to come from outside the current Cabinet.

Reversing the 5% cut to the top rate of tax was essential to avoid significant public protest. The biggest challenge for the Truss administration is their inability to fathom that the era of profligate spending with no concern for funding ended when inflation surged and forced rates higher. The reality is high rates force a reappraisal of value and in turn a questioning of values is inevitable.

Even if new buyers step into purchase these bonds, they’re likely to demand a higher yield for doing so — potentially adding to government deficits and mortgage rates at a time when they’re already soaring.

“All this points to a somewhat higher resting level for the mortgage/Treasury basis—and potentially for other related assets like IG corporates, which finally caught up with some of the mortgage widening over the past few days,” the analysts conclude.

2-year yields at over 4% are sufficient incentive to drag cash into the sovereign markets. When the alternative is to lose double digits in the stock market and see cash eroded by inflation, the allure of a guaranteed 4% is reason enough to invest.

I've spent some long days and nights this week on this very subject (work as an investment actuary in DB [Ed. Defined Benefit] pension fund space)...

Fiscal policy context: mini-budget, with expected energy price cap but surprise revenue cuts (tax, NI, duty, etc.); cost of the latter might be in the vicinity of c£40bn pa (without OBR numbers its hard to say though).

Monetary policy context: TBC regarding rate hikes from November MPC meeting; QT expected to be of the order of c£80bn over next 12months, in an effort to combat inflation. So we have fiscal loosening amid a longer term aim from the BoE to tighten.

As above, the surprise cuts cost, and the DMO has therefore had increase it's expected gilt issuance significantly. This huge increase in supply led to an increase in gilt yields, which move inversely vs price and hence inversely vs relative demand. But, that was only the start...

DB pension schemes facing substantial deficits post-GFC typically have portfolio divided into two parts:

one part seeks excess return in order to make good the deficit
the other part "hedges" the liabilities, which behave like typically long duration bonds (insomuch as they have interest and inflation sensitivities) - their long duration makes them susceptible to quite large changes in value (e.g. 20y duration with a 1% increase in rates at that duration would lead to a 20% fall) - it's therefore a good idea to minimise risk, but you need to minimise risk relative to your specific liabilities (i.e. jurisdiction, duration, realness, etc.)

But, if you're trying to hedge 100% of your liabilities (or even something less) with <100% of your assets (in practice this number is often in the 25-50% range), then you need to use leverage. Two (not exhaustive) ways of gaining exposure to interest rates and inflation using leverage are: 

To enter into swaps whereby I agree with you that I'll pay you x% each period and you'll pay me whatever a floating interest rate or inflation is. I haven't actually bought anything in doing so and therefore haven't actually used any money = leveraged exposure

Another option is that we use a "repo". I sell you my gilt on the understanding that I'll buy it back on a known future date at a specified future (higher) price. In other words, I am paying to borrow over the period whilst still exposed to the price move of the asset repo'd. With that borrowing I can go and buy another gilt. I've therefore effectively doubled my exposure to gilt price moves = leveraged exposure.

In practice, to ensure that these synthetic hedges don't pose excessive credit risk either way, you are usually required to maintain a pool of collateral (the gilt in the repo, or a pool of assets backing a swap portfolio).

With both these techniques, if rates rise/fall, then the value of my liabilities falls/rises. So too do my assets. If I had used these synthetic techniques to ensure my asset sensitivity = liability sensitivity then the move will be similar on both sides, so my deficit won't have changed.

So, what's the problem? As yields rise, the value of my gilts fall. So, when I close out the positions on a repo for example: I make a loss on the second gilt; I then can't repay the lender in the repo arrangement. You can see how this ends if I hadn't repo'd once, but more...

That means then that when yields rise people are forced to close out positions and you end up with a load of gilts sold. Those additional sales push the price down further (DB funds are massive players in the gilt markets - less so in other risk asset markets - so move prices materially). This forces those next up the chain to close out, pushing the price down further. Repeat. You end up in a spiral that collapses pretty spectacularly and pretty quickly.

The only way to avoid having to close out in such situations is to keep posting more collateral. But, that means selling those assets you're using to seek excess returns. Can you do that quickly enough, allowing for settlement times and the necessary transfer of cash over to your leveraged gilt portfolio? Normally yes when markets are moving gradually, but not in the last week and certainly not in a fully fledged spiral sell-off.

So far, it's not a pension fund solvency issue - just a liquidity one - they have the cash/liquid assets but can't put them to work in time. But, you really don't want to be the last one out in these spirals as you come out at the worst price without much ability to get back in for the ride back down (in yields/up in prices). You either want to be out from the start or in all the way and still in at the top. If you do end up closed out in the spiral, then you most likely will struggle to buy back in before yields fall. And that is where the long term damage is done: when yields fall back down, the value of your liabilities is going back up, but you no longer have the hedging assets to match that rise, so your scheme funding worsens.

In this week's episode, we eventually saw the BoE step in. Probably a day late and after much pressure, but understandable given to calm things they are committing to buying gilts to whatever extent is necessary - effectively QE, and the opposite of what they are trying to do medium term to curb inflation. But, their purchase has calmed things substantially, so that's good. It's just unfortunate that there will have been some casualties on the way - we'll find out over the coming days. There will be large variation: those that were "underhedged" a month ago will have won big time; those that were forced sellers immediately before the BoE statement will be big losers; others will be somewhere between.

Here's the 20y nominal gilt yield. You can very clearly see when the budget was and when the BoE stepped in around 11am this morning. Worth also flicking to "all" to see quite how sharp this is in historical context. 

When people talk about how central banks have distorted the fixed income markets this is a perfect example. Pensions need reliable returns to meet their obligations. That’s especially true of defined benefit programs which occupied 45% of the UK market in 2019. The alternative to goosing returns with leverage or moving further out the risk curve into private assets.

The price of refusing to take these risks would be to demand much higher contributions to cover the shortfall and nobody wants to do that. Faced with the possibility of angry retirees, at the prospect of not receiving their dues, or relying on the central bank to bail them out, the answer is always going to be the latter.  Quantitative easing introduced significant moral hazard and yesterday Bank of England action, while necessary, compounded it

Let's do a little rule of three.
Debt service is now at about three percent of GDP per year and the ECB can no longer manipulate Italy's rates downward, to keep Italy's head above water, since the US is raising its rates.
On today's growth figures (which will fall), and with interest rates rising over the next five years, debt servicing will rise to six percent of GDP, which means that the standard of living of every individual will fall by at least three percent, which is impossible.
And there is no solution as long as Italy remains in the Euro, and everyone in Italy knows this.              
And Italy can easily get out because it has a primary budget surplus and a trade surplus. It does not need the financial markets to make ends meet, unlike France.
In any case, make no mistake: the Italian elections are about one thing and one thing only: the euro. "Always think about it, never talk about it" seems to be the watchword in Italy.
And so, the more "right-wingers" are elected, the higher the probability that Italy will abandon the euro.

Yield curve control is the topic of the moment. The UK has just introduced it, so the logical question is which jurisdiction will deploy it next. In this regard, Japan’s refusal to abandon its program looks particularly inspired. Another way to frame this question is what will Germany do to ensure everyone continues to use the Euro? So far, the answer has been whatever is necessary.

Deals for house purchases are collapsing after lenders pulled mortgage offers in response to soaring interest rates.

Smaller lenders such as Kensington, Accord Mortgages and Hodge were among those to say they were withdrawing products Tuesday. That follows the decision by Lloyds Banking Group Plc -- the UK’s biggest mortgage provider -- on Monday to halt some offers, while Virgin Money UK Plc temporarily stopped offering home loans to new customers.

Major firms weighed in later Tuesday. HSBC Holdings Plc told brokers it was removing new mortgage products for the rest of the day while Nationwide Building Society announced that it was increasing rates across product ranges starting Wednesday. Banco Santander SA said it was removing some products and increasing rates on many others.

Jessica Anderson, a 33-year-old who works in publishing, was set to buy a house in Walthamstow, east London, with her husband until the seller pulled out last week.

“We’re in an uncertain position where we’re not sure whether it still stands,” she said, regarding the couple’s mortgage offer. “Since the approval there have been two interest rate increases.”

The UK housing market is at a significant point of peril because of interest rate uncertainty. Fixed rate loans typically trade at a 100-basis point premium over the 5-year government yield. At present that implies a mortgage rate of 5.7%.

Congrats on your opinion on a larger correction and acting on it with put purchases.

Last week Double Line presentation  had a chart that showed the performance of equity and the different credit subclasses, Ags., EM, HY, ClOs and so forth. Showed  the large move by equities compare to credit over the same time period. It made me wonder how much further the equity correction can go.

You often follow interesting companies, you mention EQNR from Norway. have you ever looked a Freyr. It is also Norwegian and is involved in batteries. During  the last days because of a report on its possible growth it had a huge move , but during this correction it may be a good opportunity, let me have your thoughts. Based on your comments  how much the market has already priced in the EVs maybe it is not a good idea.

The move on copper is not a good signal  

Trust all is well for you  and your family

Thank you for these well wishes and questions which may be of interest to the Collective. Of my nine different long-dated put positions, the only one not in profit is Tesla and yet that is the one I have the greatest hopes for. They all have maturities in 2024, but I expect the point of maximum pessimism will arrive while they still have some time value.

Liz Truss’s new British government delivered the most sweeping tax cuts since 1972, slashing levies on rich households and companies in a bid to boost economic growth in a move that triggered a massive market selloff in UK assets.

Chancellor of the Exchequer Kwasi Kwarteng announced a series of tax cuts and regulatory reforms that will cost £161 billion over the next five years. That fanned concerns about inflation, already near a 40-year high, and about a spiraling government debt burden. 

The pound crashed below $1.11 for the first time since 1985, sliding 2% in addition to declines earlier in the week. Borrowing costs on five-year government bonds jumped the most for a single day on record as traders dumped UK assets.

“It is extremely unusual for a developed market currency to weaken at the same time as yields are rising sharply,” said George Saravelos, global head of foreign exchange research at Deutsche Bank AG. He warned the UK currency is “in danger” and suggested markets were treating it like a developing economy. 

The package was more ambitious than expected, with a big giveaway for the UK’s wealthiest households and plans to tear up planning rules and reform financial regulations. 

Kwarteng scrapped the 45% additional rate of income tax, paid by only the richest earners, leaving the top rate at 40%, and cut the basic rate from 20% to 19%. He paid only lip service to concerns about rising public debt, reiterating a pledge to “reduce debt as a percentage of GDP over the medium term.”

The Conservative administration hopes its program of lower taxes and deregulation will turbo-charge the economy, staving off a recession that the Bank of England says has already begun and shaking the UK out of a decade of weak growth.

 

In case it needs to be said, these are not Conservative policies. Cutting taxes and embarking on an historic fiscal stimulus while inflation is raging is not sound policy. It is only going to make the job of the Bank of England even more difficult and taxes will inevitably have to rise in future to fund these measures.

Brookfield is looking to multiply its current 4 GW renewable portfolio by 3 to four times in India within the next decade in generation as well as help corporates make the transition to decarbonise and invest in building large scale supply chain in the country, said a top executive.

The renewables current assets under management is approximately $1 billion.

Earlier this year, Brookfield Asset Management announced that it raised a record $15 billion for its inaugural Global Transition Fund. This marks the world's largest private fund dedicated to the net zero transition, signaling that investors are still committed to establishing cleaner portfolios. Brookfield is the single largest sponsor of the fund having deployed $2 billion itself.

Brookfield deals with state utilities but sees incremental green power demand coming from corporates who are increasingly becoming bulk consumers. For example, as part of its road map to achieve 100 per cent dependence on renewable energy by 2025. Amazon on Wednesday announced its first utility-scale projects in India — three solar farms located in Rajasthan. These include a 210-megawatt (Mw) project to be developed by India-based developer ReNew Power, a 100 Mw project to be developed by local  developer Amp Energy India, and a 110 Mw project to be developed by Brookfield Renewable Partners.

Brookfield is the name that comes up in almost every conversation I have with investors. The name is treated reverentially because the team so artfully plotted a route through the Global Financial Crisis and the subsequent boom.

on today's video you highlighted the virtues of the NOBL Dividend Aristocrat index, but on closer inspection the yield on this is just 2%. A year ago, that was 4x the yield on short term treasuries in the US, but with 1 and 2- year treasuries yielding 4% now, double that of NOBL, there seems to be far less support from those seeking out yield.
The TINA approach is fast coming to an end. With that in mind, and with the Sterling continuing to take strain, what investment vehicles are available to us in the UK to invest in 3M, 1Y an 2Y US Treasury paper?

Thank you for this question which may be of interest to the Collective. There is of course a big difference between capturing a high yield now and buying with the expectation of dividend increases in future. It is essentially the difference between current yield and yield to cost.

I have been thinking a lot about the aspects of the market we all tend to take for granted. The types of conclusions we have been conditioned to draw, because that is always how markets work. It strikes me as a big question because we should be asking if these market norms are the result of the decades-long process of disinflation or are they rules that transfer between big secular themes.

The basic working hypothesis of the markets is the Fed will rescue its stock market. The EU will rescue its bond market and China will rescue its property market. The rationale for all three is the same. That’s what they have always done because those are the biggest asset classes owned by consumers in all three jurisdictions.

His arrest is the latest blow to the plant-based protein company, which last month slashed its revenue outlook for the year and said it would cut 4% of its workforce.

The irony of a vegetarian food company executive taking bites out of unwary civilians put me in mind of Soylent Green. Afterall, the movie might have been released in 1973 but it is set in 2022. Here is a section from the Wikipedia description:  

By 2022,[3] the cumulative effects of overpopulation, pollution and an apparent climate catastrophe have caused severe worldwide shortages of food, water and housing. In New York City alone, there are 40 million people, and only the city's elite can afford spacious apartments, clean water, and natural food. The homes of the elite are fortified, with private security and bodyguards for their tenants. Usually, they include concubines (who are referred to as "furniture" and serve the tenants as slaves). The poor live in squalor, haul water from communal spigots, and eat highly processed wafers: Soylent Red, Soylent Yellow, and the latest product, far more flavorful and nutritious, Soylent Green.

In the Big Picture Roundup, you shared this wonderful chart.

The problem is that the way that you shared it, means that we could not see the date axis.

It would be great if you could share a better version of this chart e.g., on Comment of the Day

Thank you in advance

Thank you for pointing this out. The aspect ratio between my monitor and the recording software is not always one to one. Here is the chart you were asking about.

What I like about this chart is it starts in 2000. It graphically illustrates that some property markets completely sidestepped the housing crash associated with the global financial crisis in 2008. These same markets, notably Australia, Canada, New Zealand and Sweden are expensive on a price/income and price/rent basis.

After the discussion around earnings trajectory for the S&P 500, the focus then typically turned to how to trade it. Here, we have some sympathy for the view that markets may potentially hold up very tactically until the EPS cuts actually happen. As already noted, conference season is upon us and investors are ready for some bad news at least with regard to how 3Q is progressing. However, the degree of that deterioration is more debated now given the recently announced $500 billion student debt forgiveness and extended moratorium on loan payments until December, combined with the energy subsidy announced this past week in the UK to help consumers through the winter. Both of these are rather large fiscal stimulus packages that could keep the "tone" of company commentary less bearish than feared, and potentially delay the eventual cuts. Nonetheless, we have high conviction that EPS cuts will play out in earnest over the next 2-3 months, and as a reminder from our note last week, mid-September through October is a particularly challenging seasonal period for EPS revisions.

The yield curve (10-year – 2-year) inverted for a week in April and has been persistently inverted since June. The classic version of the yield curve (10-year – 3-month) is not yet inverted but it is still trending lower. This spread collapsed from an artificially elevated level in May. It tends to be much more volatile than the longer-dated version because short-term interest rates can whip around a lot.  

Thanks for another very informative comment of the day. do you expect the SP500 to test the lows of 2020? I would very much like to hear your views on this. Thanks in advance. Best rgds.

Thank you for this topical question. As a repeat delegate at the Chart Seminar, you will remember that targets are more a reflection of personal bias than an accurate predictor of where prices are likely to trade. Since I am short the Nasdaq-100 I am keenly aware of the influence that has on my personal psychology and that is likely to affect how I view downside potential. Let’s look at the chart facts.

"New guest acquisition remains strong, with transactions by first-time guests increasing over 20% in (the) quarter," McDonald told analysts on the company's earnings call, according to a FactSet transcript.

"Transactions by existing guests increased in the high teens. Traffic across channels remains robust, with store traffic up over 30%, and e-commerce traffic increasing over 40%. And importantly, we are not creating this traffic through markdowns or price promotions. Lululemon remains predominantly a full-price business, and we have not changed our promotional cadence or markdown strategy and we have no plans to do so."

Still, inventories rose 85% to $1.5 billion at quarter-end, up from $800 million in the year-earlier period. "The company believes its inventories are well positioned to support its expected revenue growth in the third quarter," it said in its earnings release.

An inability to clear inventories to make way for fresher products and steep declines in traffic to stores has plagued most other clothing retailers this earnings season.

Mrs. Treacy was complaining last week that her pickleball team’s Lululemon uniform was out of stock. In her search she found plenty of inventory on third party sites at more than 100% markups. That’s suggests robust consumer demand for the company’s products.

Thanks for joining us as we took you through the results of the Conservative leadership race. Liz Truss will take office Tuesday and give a speech outside her new home -- No. 10 Downing Street. In the meantime, these are the key takeaways so far:

Liz Truss won the race to be the UK’s next prime minister, but achieved a smaller-than-expected margin of victory over Rishi Sunak, with 57.3% of Tory members’ votes.
She vowed to cut taxes, grow the economy, and address the crises in energy and the National Health Service.
Truss will visit Queen Elizabeth II in her Scottish castle to be formally appointed on Tuesday, after which she will make a speech to the nation and appoint members of her cabinet.
She inherits a forbidding in-tray: surging inflation, predictions of a recession and a record squeeze on living standards spurred by soaring energy prices.
Truss has promised to announce how she would help Britons through the cost-of-living crisis in her first week -- reports suggest she could freeze energy bills and offer targeted financial help to low-income households and pensioners.

The Pound and Gilts have sold off aggressively over the last month as traders priced in the rising potential Liz Truss would succeed Boris Johnson. The most urgent issue is the massive impending jump in electricity costs. No prime minister can survive through that kind of living standard decline, so price caps are inevitable.

“With the yuan set to weaken further, other emerging markets will face downward pressure on their currencies,” said Per Hammarlund, the chief emerging markets strategist at Skandinaviska Enskilda Banken AB. “The impact will be felt the most by nations which compete directly with China on exports.”

The yuan declined for a sixth consecutive month in August, capping the longest losing streak since the height of the US-led trade war in October 2018. It will fall even more and cross the psychological mark of 7 per dollar this year, banks including Societe Generale SA, Nomura Holdings Inc. and Bank of America Corp. say.

It’s a stunning reversal for a currency that stood out for its resilience at the outbreak of Russia’s war in Ukraine. In the days following the Feb. 24 invasion, the yuan was the only emerging-market exchange rate to avoid a decline, trading at an almost four-year high against MSCI Inc.’s benchmark index. Global demand for it deepened -- from countries like Russia and Saudi Arabia looking to reduce their reliance on the dollar to US bond investors seeking new havens.

China is the destination for most industrial commodity exports, so a weaker currency boosts domestic inflation. At the same time many countries in China’s hinterland compete with it for exports. A cheaper Renminbi forces them to also depress their currencies.

My theory is that the breaking of these superbubbles takes multiple stages. First, the bubble forms; second, a setback occurs, as it just did in the first half of this year, when some wrinkle in the economic or political environment causes investors to realize that perfection will, after all, not last forever, and valuations take a half-step back. Then there is what we have just seen – the bear market rally. Fourth and finally, fundamentals deteriorate and the market declines to a low.

Let’s return to where we are in this process today. Bear market rallies in superbubbles are easier and faster than any other rallies. Investors surmise, this stock sold for $100 6 months ago, so now at $50, or $60, or $70, it must be cheap. Outside of the late stage of a superbubble, new highs are slow and nervous as investors realize that no one has ever bought this stock at this price before: so it is four steps forward, three steps back, gingerly exploring terra incognita. Bear market rallies are the opposite: it sold at $100 before, maybe it could sell at $100 again.

The proof of the pudding is the speed and scale of these bear market rallies.
1. From the November low in 1929 to the April 1930 high, the market rallied 46% – a 55% recovery of the loss from the peak.
2. In 1973, the summer rally after the initial decline recovered 59% of the S&P 500's total loss from the high.
3. In 2000, the NASDAQ (which had been the main event of the tech bubble) recovered 60% of its initial losses in just 2 months.
4. In 2022, at the intraday peak on August 16th, the S&P had made back 58% of its losses since its June low. Thus we could say the current event, so far, is looking eerily similar to these other historic superbubbles.

Have we seen the secular peak in this market? That’s the only real question investors need to concern themselves with. The above statistics are certainly compelling, but the size of the rebounds should also be considered relative to the size of the initial declines from the peaks. Let’s round out that data.

1. The Dow Jones Industrials Average accelerated to the peak on September 3rd 1929. It fell 47.87% to the initial low on November 13th
2. The peak in 1973 was a failed upside break from a range that had been forming since 1966; with the Dow failing at the psychological 1000 on several occasions. That failed upside break resulted in a deeper pullback than any (25% & 36%) posted during the ranging phase. The failed downside break in 1974 resulted in a 75% rebound. It was another six years before a breakout to new highs was sustained.
3. Between March 10th and May 26th 2000 the Nasdaq Composite fell 40.72%.
4. Between January 7th and the low on June 17th the S&P500 declined 24.52%.

To understand how this melting ice will impact sea levels around the world, scientists use computer models of ice flow and complex climate interactions. According to the authors of this new study, this approach has shortcomings in that they are imprecise and don't account for a number of factors scientists are observing in the field. These include more rain that is accelerating the melting of surface ice, an influx of tropical ocean currents into Greenland's fjords, and the darkening of the sheet surface that causes it to absorb more heat.

"We’re observing many emerging processes that the models don’t account for that increase the ice sheet’s vulnerability," study author Alun Hubbard, Professor of Glaciology at University of Tromsø, writes in an accompanying piece for The Conversation.

So if we change shorten the average from 40 years to 20 years and then linearly project that higher number forward, we get a headline grabbing doomsday prediction.

The problem with making such bombastic predictions is the capacity of the general population to sustain a feeling of terror is not infinite. Eventually people settle down into a fatalistic emotional state where they just don’t care anymore. Sea levels rising 10 inches by 2100 is not going to put food on the table today.

​It surprises me that there is still no widespread acceptance that improving living standards are the solution to just about every social or environmental problem.
When people are better educated and have solid working conditions, they have more regard for luxuries like a safe, clean environment. Take care of people and everything else takes care of itself.

Officials attending the Federal Reserve’s Jackson Hole gathering signaled the ECB is prepared to at least repeat the 50 basis-point hike enacted in July, with some not excluding an even larger increase. Executive Board member Isabel Schnabel urged “strong determination to bring inflation back to target quickly.”

While Lane didn’t spell out whether he’d oppose a 75 basis-point step, his comments suggest officials would need to see the need for a higher “terminal rate,” or high point of the current hiking cycle, for him to support such a move.

The Irish official said a “multi-step adjustment path towards the terminal rate also makes it easier to undertake mid-course corrections if circumstances change.” If new data called for a lower terminal rate, “this would be easier to handle under a step-by-step approach,” he said. 

Among the more cautious voices on the Governing Council is Executive Board member Fabio Panetta, who said last week that policy maker must tread carefully as a significant economic slowdown would ease inflationary pressure. 

The ECB has one of the most out of control inflation problems in the world. The pressure being exerted on the region from Russia’s energy war is not about to disappear. However, the successful filling of gas storage facilities ahead of schedule will moderate the risk of shortages this winter.  

With just 10 days to go until Boris Johnson’s successor as premier and Conservative Party leader is announced, neither candidate has detailed how much assistance they’ll provide to families and businesses who face soaring energy costs, despite Chancellor of the Exchequer Nadhim Zahawi conceding that the current support package is “not enough.”

Whichever candidate wins the Tory leadership contest, addressing the impact of rocketing energy bills will be at the top of their in-tray after Ofgem said on Friday that a price cap on average annual energy bills would rise to £3,549 ($4,206) in six weeks’ time. That’s 178% higher than last winter and 80% more than at present. 

The only questions considered are how much support to provide. Fiscal discipline is out of favour at present. With inflation and energy prices hitting living standards so aggressively, the UK government is under extraordinary pressure to ease the pain.

More broadly, the three “moments” of reckoning we discussed above mean that global supply chains, whether they produce military or civilian goods, are facing a Minsky Moment – a Real Minsky Moment. Paul McCulley’s term referred to the implosion of the long -intermediation chains of the shadow banking system that marked the onset of the Great Financial Crisis. Today, we are witnessing the implosion of the long -intermediation chains of the globalized world order: masks, baby formula, chips, missiles, and artillery shells, for now. The triggers aren’t a lack of liquidity and capital in the banking and shadow banking systems, but a lack of inventory and protection in the globalized production system, in which we design at home and manage from home, but source, produce, and ship everything from abroad, where commodities, factories, and fleets of ships are dominated by states – Russia and China – that are in conflict with the West.

Inventory for supply chains is what liquidity is for banks. In 2007 -08, big banks ran on “just -in -time” liquidity: the dominant form of liquidity was market liquidity, for which you could always sell assets into a deep market without moving prices, so you did not have to have liquidity reserves at the central bank. Similarly, big corporations today run “just -in -time” supply chains for which they assume that they can always source what they need without moving the price. But not really: the U.S. military has to wait a little bit as Raytheon “will take a little while”; Taiwan and Saudi Arabia have to wait as well until the conflict in Ukraine is over; and if your washing machine broke recently, you’ll have to wait a bit too until defense contractors are done buying them up to rip chips out to make missiles.

In propagating the Belt and Road Initiative, China has long complained that the USA’s policy towards it is one of containment. That has become more much overt since 2016. Sanctions on chip manufacturing capacity are an escalation. The rationale for such moves is obvious. The USA and Europe need time to rebuild domestic manufacturing capacity.

BYD is scouting lithium mines to protect itself from surging prices of the essential battery metal. Despite rapid sales growth, BYD's margins were hammered last year due to high raw material prices. Net margins fell to 1.4% in 2021 from 2.6% a year earlier, according to FactSet. That compares with Tesla's 10.3%.

There is some hope of that reversing however, as commodity prices retreat again and new, pricier models hit showroom floors: The models in BYD's launch pipeline are twice as expensive as prior ones, according to Goldman Sachs. The bank expects BYD's net margin to expand to 2.2% this year and 2.5% in 2023.

BYD has paid down debt rapidly in recent years and as of December had more cash and short-term investments on hand than debt according to FactSet -- a reverse of the situation as recently as June last year.

In the downside scenario of a nasty Chinese recession, that could prove to be an important cushion.

One obvious challenge at home will be getting buyers to pony up for pricier cars with China's economy, potentially at least, deep in the doldrums. But for now at least, the company seems confident. BYD, which reports on Aug. 29, said in July that first-half net income could climb as much as 207% to 3.6 billion yuan, equivalent to about $528 million.

Sustaining such heady numbers will be a challenge but with strong, cost-effective technology, an integrated supply chain and Beijing's determination to dominate the sector, it would be a mistake to count BYD out.

 

Chinese lithium carbonate prices are still close to CNY500,000 a tonne. Significant investment and political will are being devoted to boosting supply of the metal but that is a medium-term objective. Meanwhile, nickel, copper, cobalt and manganese have all retraced much of their initial price spikes. That’s more about less demand than a sudden increase in supply.  

Russia’s limiting of supply into Western Europe has sent local gas prices to levels never previously imagined. The growth of the global LNG network provides a partial salve to the pressure on the European economy.

We have a large number of people who are estranged from our economy. In 1960, 5% of men were not working between the ages of 25 and 54. Today it’s more like 15%. If 15% of men are not working at any point in time, then a quarter of the people will have been out of work for a year or more over a four or five-year period. That’s destructive to the economy's productive potential. It’s destructive to their families. It’s destructive to the areas in which they live. It’s destructive to the moral fabric of our national life.

I recently finished reading Coming Apart by Charles Murray. It’s a harrowing account of how the polarization in the economy is manifested in a growing rift between the privileged, insulated upper class and a benefits-dependent underclass.  

“UK CPI inflation surged in July amid rising food prices that helped lift the rate above market expectations. The peak is still likely come in October, when energy prices are due to be increased again -- we see annual CPI moving to a little below 13% at that point. With inflation now more than five-times the Bank of England’s target, the question isn’t whether the central bank will tighten, it’s by how much? Today’s reading makes it more likely than not that the BOE lift rates by 50 basis points in September -- our baseline ahead of the data release was for a 25-bp move.”

Economists are growing increasingly pessimistic about the UK, with the risk of a recession now seen as far more likely than not due to rising cost pressures. The BOE expects a recession to start in the fourth quarter, lasting into the early part of 2024.

The central bank expects inflation to surpass 13% later this year when regulators allow energy bills to rise again. That would mark the worst reading since September 1980, when Margaret Thatcher’s government struggled to bring a wage-price spiral under control.

 

In the normal course of events UK inflation should have peaked already. Money supply growth peaked on a year over year basis 18 months ago and on a month over month basis is now negative. At the same time the Bank of England has been raising rates, albeit modestly, for the last eight months and is now also talking about reducing the size of its balance sheet.

Q: Are we in a bear or a bull?

Thank you for voicing the question I believe everyone is asking. The short answer is yes, the long answer is more nuanced. Let’s frame this discussion in terms of the yield curve spread. The 10-year – 2-year is sharply negative. The 10-year – 3-month and the 10-year – Fed Funds Rate have both accelerated lower but are not yet negative. All three point toward significant monetary tightening. That is before the impending acceleration in the contraction of the Fed’s balance sheet is 

I know you have consistently highlighted the challenges that UK households will experience in relation to their energy bills, and just today they are saying that "typical" households could be paying nearly £600 in January, money that most just can't find. Already consumers are a collective £1.3 billion in arrears on their bills, with an expected 86% hike in the energy cap expected on 1 October.

But far less is said of the impact on businesses, and on this I can shed some very specific light. I own a small business, an indoor children's play centre. On 1 December last year I renewed my energy supply contract, and faced with an increase then from 15p/kwH to 20p/KwH I opted to take just a 1 year renewal, with gas prices fairly stagnant until then as you know.

I have been informed today that when I come to renew once more on 1 December, I am going to staring at a tariff of anywhere between 50p/kwh to as much as 89p/kwh. I was also told in no uncertain terms by the 'sales' person at my current supplier, that they are trying to migrate away from small and medium business in this environment, and are deliberately pricing us away. the daily fixed standing charge will move from £83 per month, to potentially as much as £1,000.

For context, my own energy bill is going to shift from £20k per year to closer to 60k-£70k. This is going to be catastrophic for U.K. businesses, as many will be left in dire straits, unable to keep the lights on, and customers cool (in summer) or sufficiently warm in the winter. So many businesses in the hospitality sector especially are saddled with the burden of Covid "bounce back loans", delayed VAT repayments, and of course huge inflation on input costs with a consumer at breaking point. Business closures = higher unemployment...it is looking particularly dire here in the U.K.

Thank you for sharing this visceral experience of price increases business owners are experiencing. The challenges are significant and options to raise prices are inhibited so many businesses will close. The strike action in the UK which has been building for months and will escalate further. They are a symptom of how much living standards are being impacted by the rising cost of living.

“This is a necessary print for the Fed, but it’s not sufficient,” Pond said. “We need to see a lot more. You can think about this print as sort of like the weather -- it’s better today than it has been over the past few days. But it’s still summer. There’s still a lot of humidity out there. It’s not great. So it’s in the right direction. But we’re certainly not there yet.” 

For Diane Swonk, the chief economist at KPMG LLP, the Fed is now hedging against risk of future supply shocks as well as combating current inflation and will likely favor a 75 basis-point increase.

“The Fed is no longer willing to rest on their laurels on a one-month move,” she said. “The greater risk for the Fed is to stop too soon than stop too late. It will take a lot more cooling than this for the Fed to shift its decision rule, although in this economy, September seems an eternity away.”

The big question for investors is whether the Federal Reserve will focus on core or non-core items in how much they decide to raise rates in September. Commodity price inflation is less urgent today than earlier this year. Lumber prices have made a full round trip. Wheat has fully unwound the Ukraine invasion surge. Palm Oil is steadying in the region of the 2008, but the price has almost halved from the peak level. 

Bond investors in New Zealand are not as sanguine. Yields on two-year debt are just two basis points below 10-year rates, the narrowest gap since 2015 when the curve last inverted. The difference between Australia’s 10- and three-year bond futures stands around 17 basis points.

Much of the fears in Australia and New Zealand are centered on concerns about the housing market, which experienced a post-pandemic boom when borrowers piled in to take advantage of record-low interest rates. The two central banks have indicated that borrowing costs will continue to rise.

“The Australian economy is already showing some cracks -- weak consumer sentiment, falling dwelling prices, cooling consumer spending -- and New Zealand’s economy is showing more,” said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “Australia will slide into recession in the second quarter of next year under the weight of recent and prospective RBA rate hikes, which will expose Australia’s Achilles’ heel, an extended housing market and highly leveraged consumers.”

Australian consumer confidence dropped for a ninth straight month in August to reach a two-year low, according to a report released Tuesday by Westpac Banking Corp.

The yield curve spread (10-year – 2-year) is a reliable lead indicator for US recessions. It does not have nearly the same strong record of predicting recessions for other countries. That is probably because other countries do not rely so heavily on their banks for credit creation. 

Lawmakers appear close to passing into law the Inflation Reduction Act of 2022. The legislation is born out of the Build Back Better agenda that President Biden proposed more than a year ago. It raises nearly $750 billion over the next decade through higher taxes on large corporations and wealthy individuals and lower Medicare prescription drug costs, to pay for nearly $450 billion in tax breaks and additional government spending to address climate change and pay for lower health insurance premiums for Americans benefiting from the Affordable Care Act (see Table 1). The remaining more than $300 billion goes to reducing the federal government’s future budget deficits (see Chart 1). Broadly, the legislation will nudge the economy and inflation in the right direction, while meaningfully addressing climate change and reducing the government’s budget deficits.

The renewable energy sector rebounded emphatically on the prospect of additional subsidies last week. Removing the limitation on EV rebates so every buyer gets a $7500 discount and reinstating the 30% tax credit for solar installations are both stimulative for their respective sectors.

Yields on two-year Treasuries surged in response to the jobs report, a reflection of the expected Fed rates over that period. Market pricing indicated a 75 basis-point increase to the Fed’s key rate is now seen as a more likely outcome in at the central bank’s September meeting than 50 basis points.

Powell has described the labor market as “tight to an unhealthy level,” and has been seeking a moderation to help bring demand for products and services more in line with supplies that have been constrained by Covid-19 disruptions. He and other Fed leaders are worried about the potential for a wage-price spiral, with higher wages feeding into inflation in a cycle that is hard to break.

“This number is so comprehensively strong with a pretty significant uptick in wages,” said Mark Spindel, chief investment officer at MBB Capital Partners LLC in Chicago. “Companies are paying up for labor. Income matters most. When you look at the breadth of the employment report, and the earnings, this is an enormous tailwind for income.” 

It has been widely reported that the USA has missed out on 2 million immigrants following the isolationist policies adopted by President Trump’s administration. At least 1 million of those would have been highly educated/skilled individuals.

The Bank of England is reminding the world what a politically independent central bank can and should do: act as a “trusted adviser,” willing to share analytically honest views that other more politically sensitive institutions are either unable or unwilling to do.

Of course, this is not a risk-free approach. Such honesty — rather than catalyzing appropriate responses from policy-making agencies that lead to better economic and social outcomes — can provoke household and corporate behaviors that accelerate the bad outcomes. Yet the risks involved are worth taking, especially when the alternative is a central bank that loses institutional credibility, sees the effectiveness of its forward policy guidance erode and becomes even more vulnerable to political interference.

It should also be noted that the UK’s situation differs in some important way from those of other countries. The country’s economic challenges are complicated not only by the energy price catch-up but also by the political transition and the changing nature of the country’s relations with its trading partners.

In the last six weeks gilt yields have pulled back aggressively from 2.75% to test the region of the trend mean around 1.75%. This is the first area of potential resistance and is the point at which traders will begin to question how likely a long-term low interest rate environment is.  

JPMorgan holds tens of billions of dollars in gold in vaults in London, New York and Singapore. It is one of four clearing members of the London market, where global gold prices are set by buying and selling metal held in a few London vaults -- including JPMorgan’s and the Bank of England’s.

JPMorgan is the biggest player among a small group of “bullion banks” that dominate the precious metals markets, and internal documents presented by prosecutors provided a glimpse of just how dominant a role the bank has played. 

In 2010, for example, 40% of all transactions in the gold market were cleared by JPMorgan. 

And

Another set of important clients were central banks, which trade gold for their reserves and are among the biggest players in the bullion market. At least ten central banks held their metal in vaults run by JPMorgan in 2010, according to documents disclosed in court. 

With such a large position in the gold market, JPMorgan has both significant information and motive to swing prices in the interests of its trading desks on an intraday basis. That’s not quite the same as saying they have the capability to depress pricing over a prolonged period. That kind of overt manipulation would quickly attract the attention of other market participants and opposing positions aimed at pressuring the bank would be taken.

“The golden period of 30 years between 2020-50 where our working age population will bulge can be an important horizontal enabler to bolster growth, even as the developed world including China ages,” the report notes.

The report adds that over the years, India has experienced rising literacy rates, but level of vocational training/skilling is low, which gets reflected in the high unemployment rate among the educated. “Closing the skill gaps of its qualified workforce will be critical, as India depends more on human capital than its peer countries that have a similar level of economic development,” it said, adding that skilling and reskilling require a coordinated response from the government, industry, academia even as COVID continues to cause structural changes to the workplace.

“The reversal in India’s structural transformation back toward agriculture is a sign of fall back to subsistence employment. Enhanced safety nets through PM-KISAN and the MGNREGA will be critical investments needed to ensure that incomes of small and marginal farmers are protected and their basic needs are met… But manufacturing and services will still have to be the two key growth engines going forward,” it said.

Given the trajectory of emerging market development over the decades, it is stating the obvious that India needs to do whatever is necessary to improve employment opportunities for its millions of young people. The fact the conversation is taking place is at least a good starting point.