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More than ninety central banks worldwide are increasing interest rates. Bloomberg predicts that by mid-2023, the global policy rate, calculated as the average of major central banks’ reference rates weighted by GDP, will reach 5.5%. Next year, the federal funds rate is projected to reach 5.15 percent.

Raising interest rates is a necessary but insufficient measure to combat inflation. To reduce inflation to 2%, central banks must significantly reduce their balance sheets, which has not yet occurred in local currency, and governments must reduce spending, which is highly unlikely.

The most challenging obstacle is also the accumulation of debt.

The so-called “expansionary policies” have not been an instrument for reducing debt, but rather for increasing it. In the second quarter of 2022, according to the Institute of International Finance (IIF), the global debt-to-GDP ratio will approach 350% of GDP. IIF anticipates that the global debt-to-GDP ratio will reach 352% by the end of 2022.

Global issuances of high-yield debt have slowed but remain elevated. According to the IMF, the total issuance of European and American high-yield bonds reached a record high of $1.6 trillion in 2021, as businesses and investors capitalized on still-low interest rates and high liquidity. According to the IMF, high-yield bond issuances in the United States and Europe will reach $700 billion in 2022, similar to 2008 levels. All of the risky debt accumulated over the past few years will need to be refinanced between 2023 and 2025, requiring the refinancing of over $10 trillion of the riskiest debt at much higher interest rates and with less liquidity.

Moody’s estimates that United States corporate debt maturities will total $785 billion in 2023 and $800 billion in 2024. This increases the maturities of the Federal government. The United States has $31 trillion in outstanding debt with a five-year average maturity, resulting in $5 trillion in refinancing needs during fiscal 2023 and a $2 trillion budget deficit…

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Germany Unleashed Half-Trillion Dollar ‘Energy Bazooka’ To Keep Lights On

December 16, 2022

Germany Unleashed Half-Trillion Dollar ‘Energy Bazooka’ To Keep Lights On

Western sanctions on Moscow have backfired, failed to paralyze Russia’s economy, and ultimately sparked financial pain for ordinary Europeans and the largest economy in the block.

According to Reuters calculations, Germany has hemorrhaged cash to the tune of 440 billion euros ($465 billion) in energy bailouts and schemes, as well as keeping energy supplies flowing while it lost access to inexpensive natural gas from its leading supplier Russia in 2022.

“How severe this crisis will be and how long it will last greatly depends on how the energy crisis will develop,” said Michael Groemling at the German Economic Institute (IW). He added: “The national economy as a whole is facing a huge loss of wealth.”

Reuters said the “cumulative scale” of energy bailouts and other schemes employed by Berlin equates to 1.5 billion euros per day since Russia invaded Ukraine, or about 12% of national economic output, or 5,400 euros for each German.

Germany has shown Europe how backfiring sanctions ruin its country’s finances and send millions of its citizens crashing into energy poverty overnight. These anti-Russian measures have caused soaring electricity and NatGas prices and elevated risks of entering a recession in 2023.

“The German economy is now in a very critical phase because the future of energy supply is more uncertain than ever.

“Where does the German economy stand? If we look at price inflation, it has a high fever,” said Stefan Kooths, vice president and research director of business cycles and growth at the Kiel Institute for the World Economy.

Many other European countries find themselves at the mercy of the weather as NatGas injections into EU storage facilities have flipped to draws amid a wicked cold spell boosting heating demand.

“The country has turned to the pricier spot, or cash, energy market to replace some of the lost Russian supplies, helping drive inflation into double-digits,” Reuters noted.

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No Surprise: Wall Street Wants to Raise the Target Inflation Rate above 2 Percent

December 14, 2022

No Surprise: Wall Street Wants to Raise the Target Inflation Rate above 2 Percent

Price inflation in the United States remains stubbornly high, with October’s print at 7.7 percent. The Fed’s preferred measure, so-called core inflation is only two-tenths of a percent below 40-year highs, at 6.3 percent. Yet, it was just last year that the Federal reserve and other “experts” were concerned that inflation wasn’t high enough. In January 2021, for example, Jerome Powell stated that the Fed wanted price inflation to run above the “2-percent goal” because it had run below 2 percent for too long. The 2-percent inflation target, of course, is the arbitrary target picked by the Federal Reserve (and many other central banks) as the “correct” inflation rate.

Now with inflation running near 40-year highs, many are wondering what will be necessary to bring price inflation back down to the target level. More specifically, how many hikes in the target interest rate will be necessary, and how severe of a recession will be required? Wall Street is especially interested in the answer to this question because Wall Street is no longer about fundamentals. Rather, the “market” depends overwhelmingly on how much easy money the central bank pumps out. Naturally, the banker class wants a return to “normal”—i.e., quantitative easing and ultralow interest rates—as soon as possible. Moreover, Washington wants the same thing since the political class wants low interest rates to help ease the path to ever more government debt and higher deficits.

It’s not the least bit surprising that we’re already hearing calls for the Federal Reserve to abandon the 2-percent inflation target and instead embrace even higher perpetual inflation rates. For example, last week Bank of America economist Ethan Harris suggested that the 2-percent target CPI inflation rate be raised. We’ve seen similar urgings from both the Wall Street Journal and from think tank economists in recent months.

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The Mother of all Economic Crises

December 14, 2022

The Mother of all Economic Crises

Nouriel Roubini, a former advisor to the International Monetary Fund and member of President Clinton’s Council of Economic Advisors, was one of the few “mainstream” economists to predict the collapse of the housing bubble. Now Roubini is warning that the staggering amounts of debt held by individuals, businesses, and the government will soon lead to the “mother of all economic crises.”

Roubini properly blames the creation of a debt-based economy on the near-or-at-zero interest rate and quantitative easing policies pursued by the Federal Reserve and other central banks. The inevitable result of the zero-interest and quantitative easing policies is price inflation wreaking havoc on the American people.

The Fed has been trying to eliminate price inflation with a series of interest rate increases. So far, these rate increases have not significantly reduced price inflation. This is because rates remain at historic lows. Yet the rate increases have had negative economic effects, including a decline in the demand for new homes. Increasing interest rates make it impossible for many middle- and working-class Americans to afford a monthly mortgage payment for even a relatively inexpensive home.

The main reason the Fed cannot raise rates to anywhere near what they would be in a free market is the effect it would have on the federal government’s ability to manage its debt. According to the Congressional Budget Office (CBO), interest on the national debt is already on track to consume 40 percent of the federal budget by 2052 and will surpass defense spending by 2029! A small interest rate increase can raise yearly federal debt interest rate payments by many billions of dollars, increasing the amount of the federal budget devoted solely to servicing the debt.

…click on the above link to read the rest…

What Does the Fed’s Jerome Powell Have Up His Sleeve?

December 12, 2022

What Does the Fed’s Jerome Powell Have Up His Sleeve?

The Real Goal of Fed Policy: Breaking Inflation, the Middle Class or the Bubble Economy?

“There is no sense that inflation is coming down,” said Federal Reserve Chairman Jerome Powell at a November 2 press conference, — this despite eight months of aggressive interest rate hikes and “quantitative tightening.” On November 30, the stock market rallied when he said smaller interest rate increases are likely ahead and could start in December. But rates will still be increased, not cut. “By any standard, inflation remains much too high,” Powell said. “We will stay the course until the job is done.”

The Fed is doubling down on what appears to be a failed policy, driving the economy to the brink of recession without bringing prices down appreciably. Inflation results from “too much money chasing too few goods,” and the Fed has control over only the money – the “demand” side of the equation. Energy and food are the key inflation drivers, and they are on the supply side. As noted by Bloomberg columnist Ramesh Ponnuru in the Washington Post in March:

Fixing supply chains is of course beyond any central bank’s power. What the Fed can do is reduce spending levels, which would in turn exert downward pressure on prices. But this would be a mistaken response to shortages. It would answer a scarcity of goods by bringing about a scarcity of money. The effect would be to compound the hit to living standards that supply shocks already caused.

So why is the Fed forging ahead? Some pundits think Chairman Powell has something else up his sleeve.

The Problem with “Demand Destruction”

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Peter Schiff: You Think Inflation Is Bad Now? Wait Until Next Year!

December 6, 2022

Peter Schiff: You Think Inflation Is Bad Now? Wait Until Next Year!

Peter Schiff recently appeared on Real America with Dan Ball to talk about the economy, energy prices, and inflation. Peter said if you think inflation was bad this year, wait until next year with a much weaker dollar.

Dan set the interview up with a list of tech firms set to lay off employees. He asked how people can say the economy is just fine when you have tens of thousands getting laid off, nobody has any savings, and when the housing market is tanking.

Peter said they’re going to keep saying that, but it simply isn’t true. He pointed out that the entirety of the Q3 GDP increase was from a decrease in the trade deficit.

It’s not like it went away. It just got slightly less enormous than it had been. And that was for two reasons. The strong dollar enabled us to buy imports cheaper. But also, all that oil that was released from the Strategic Petroleum Reserve, we got to export that, so that increased our exports and reduced our deficit. And so that helped us out.”

But those impacts are already starting to reverse. The dollar is tanking.

And all of the economic data that’s come out so far on the fourth quarter suggests that GDP in the fourth quarter is going to be negative again.”

That would mean a drop in GDP in three of the four quarters in 2022. And Peter said the Q4 drop could be the biggest yet.

As far as the petroleum reserves, Peter said we’re going to run out sometime next year.

And I think in California, by the time Biden finishes his first term, and hopefully his only term, I bet you guys in California will be paying $10 a gallon for gas.”

…click on the above link to read the rest…

How Europe’s Energy Crisis Could Turn Into A Food Crisis

November 22, 2022

How Europe’s Energy Crisis Could Turn Into A Food Crisis

Runaway energy inflation has taken a toll on European industry, but another threat is looming.

Europe’s two biggest fertilizer suppliers, Russia and Belarus have retaliated against European sanctions by cutting off fertilizer exports.
The fact remains that the global food chain, especially its European links, is not in a good place right now.

Runaway energy price inflation has wreaked havoc on European industrial activity, with the heaviest consumers taking the brunt. Aluminum and steel smelters are shutting down because of energy costs. Chemical producers are moving to the United States. BASF is planning a permanent downsizing.

There is, however, a bigger problem than all these would constitute for their respective industries. Fertilizer makers are also shutting down their plants. And fertilizer imports are down because the biggest suppliers of fertilizers for Europe were Russia and Belarus, both currently under sanctions.

Both countries have retaliated against the sanctions by cutting off exports of fertilizers to Europe, and European officials repeating that fertilizer exports are not sanctioned is not really helping.

Russia accounts for 45 percent of the global ammonia nitrate supply, according to figures from the Institute for Agriculture and Trade Policy cited by the FT. But it also accounts for 18 percent of the supply of potash—potassium-containing salts that are one of the main gradients of fertilizers—and 14 percent of phosphate exports.

Belarus is a major exporter of fertilizers, too, especially potash. But Belarus has been under EU sanctions since 2021 on human rights allegations, and unlike Russia, it has seen its fertilizer industry targeted by these sanctions. This has made for an unfortunate coincidence for Europe and its food security.

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The Regime Is Shifting, And Here’s What That Means

November 17, 2022

The Regime Is Shifting, And Here’s What That Means

Authored by Simon White, Bloomberg macro-strategist,

The macro landscape is changing. Inflation will remain in an elevated and unstable regime, but the first stage of the crisis is drawing to a close. That means the dollar in a downward trend, bonds in an upward trend, stocks underperforming bonds, and growth outperforming value.

Regime shifts can be almost imperceptible in real time, but in retrospect they mark fundamental turning points. Inflation today is going through one of these shifts, analogous to the 1970s. In that decade, inflation could be understood as a play in three acts, a drama that is likely to be repeated in this cycle.

In the first act, inflation makes new highs and the Fed tightens aggressively.
The second is when inflation begins to recede, allowing the central bank to pull back from tightening.
The final act is when we see inflation return with a vengeance, eliciting a Volcker-esque monetary response and a deep recession in order to fully snuff it out.

So what’s brought the curtain down on the first act? Three important indicators have made a decisive turn:

The market is now ahead of the Fed’s rate projections (the Dots)
The real yield curve is emphatically flattening
My Advanced Global Financial Tightness Indicator (AGFTI) is rising

All through this cycle, the market has been anticipating a lower peak rate than desired by FOMC members. That changed in the last couple of months, signaling that Fed hawkishness was peaking as the market was amplifying — not inhibiting — the Fed’s intended policy.

The real yield curve had steepened relentlessly as shorter-term real rates kept falling while the Fed rate lagged inflation. But the trend definitively turned in July, pointing to a peak in the dollar…

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#242. The dynamics of global re-pricing

November 10, 2022

#242. The dynamics of global re-pricing

IN SEARCH OF EXPLANATIONS

SUMMARY

There is a growing acknowledgement that the World economy has entered a new era. We know that the cost of capital is trending upwards, with adverse consequences for asset prices. But there’s been remarkably little inclination to examine the underlying processes that are causing this to happen. Neither is there much in the way of recognition that entire sectors could be crushed, or even eliminated altogether, as re-pricing becomes more selective.

We need to dismiss any idea that this is temporary. There are some linkages connecting the resurgence of inflation with pandemic-era QE, and with the war in Ukraine, but these are little more than symptoms.

The underlying dynamic is that the economic driver of the industrial era – the supply of low-cost energy from oil, natural gas and coal – is winding down, and there is no assured replacement at hand. Transition to renewables is imperative, but there’s no guarantee that an economy based on wind-turbines, solar panels and batteries can be as large as the fossil-based economy of today. The probabilities are that it will be smaller.

Had we been prepared to do so, we could have seen this coming. The chain of causation starts in the 1990s, when the authorities responded to “secular stagnation” with deregulation programmes that made credit easier to obtain. The subsequent financial crisis forced the adoption of QE, initially to prop up the banking system, and latterly as a self-standing form of stimulus. We were assured, quite wrongly, that QE would not be inflationary, but it has created a systemically-dangerous “everything bubble” in assets.

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UK Food Inflation Hits Record High As Discretionary Income Evaporates Ahead Of Dark Winter

November 10, 2022

UK Food Inflation Hits Record High As Discretionary Income Evaporates Ahead Of Dark Winter

Brits have watched double-digit inflation wipe out any wage gains in one of the worst cost-of-living crises in a generation. Many have gone into debt, paying for things such as food, energy, and shelter. Others have been left with little or no discretionary income ahead of a very dark and cold winter.

Research company Kantar published a new survey Tuesday that revealed startling food inflation numbers for October that soared at the fastest pace in 14 years.

Kantar said annual grocery prices rose to 14.7% last month, the fastest since the research firm began tracking prices.

Consumers are expected to pay an additional £682 in their annual grocery bill if they continue buying the same items.

The survey found that 27% of all households are “struggling financially,” double the amount from last November. Nine in ten respondents said food inflation is a top concern, while energy bills were second.

“So it’s clear just how much grocery inflation is hitting people’s wallets and adding to their domestic worries,” Kantar said.

Kantar revealed consumers are switching from name-brand items to cheap private-label store brands to save money:

Own label sales have jumped again by 10.3% over the latest four weeks, as shoppers adopt different strategies to manage their budgets. The branded goods market grew far slower at 0.4%.

In a separate study, the Joseph Rowntree Foundation found a whopping 7 million families have given up on heating, showers, and toiletries this year due to the cost-of-living crisis squeezing discretionary income.

The Centre for Economics and Business Research, which publishes the Asda tracker, found that after paying taxes for housing, heating, and food, 20% of earners in the second lowest income have nothing left to spend, according to Bloomberg.

…click on the above link to read the rest…

Energy Bills In Europe Are 90% Higher Than Last Year

November 10, 2022

Energy Bills In Europe Are 90% Higher Than Last Year

Electricity and gas prices are soaring across Europe, with bills close to double from last year in most European capitals, according to new data from the Household Energy Price Index—a monthly tracker of energy prices for households across 33 European capitals, including the 27 EU member states and several non-members.

According to the data collected for the HEPI, natural gas bills in Europe have gone up by as much as 111 percent over the past year, with electricity prices up by an average of 69 percent. Taken together, Euronews calculates these two make for a total 90-percent increase in household energy bills over the past year.

“Significantly higher [energy prices] compared to one year ago … can be attributed to a combination of factors, such as increased demand connected to post-pandemic economic recovery and extraordinary weather conditions, the record-high prices for natural gas, and high CO2 emissions allowances,” the authors of the latest HEPI report noted.

The high energy bills are creating headaches for European governments: strikes and protests are multiplying and disgruntlement with energy policies is growing. The cost of living in most of Europe is already exorbitant because of the energy crisis and this crisis is only going to get worse after the EU embargoes on Russian oil and then fuels come into effect.

In some parts of Europe, according to the latest HEPI report, energy prices have reached record highs but in others, prices have actually fallen, at least in October. The news is not as good as it looks at first glance: the decline was a result of government intervention, i.e. energy subsidies.

There have been a lot of subsidies as European governments try to alleviate the financial pain on households and businesses to avoid further disgruntlement. Germany alone will be spending some $200 billion on such coping measures, including a cap on energy prices up to a certain level of consumption.

World Dollar Hegemony Is Ending (and That May Be a Good Thing)

November 8, 2022

World Dollar Hegemony Is Ending (and That May Be a Good Thing)

The end of world dollar hegemony is coming and hardly anyone in government is taking notice or even understands what this means. Since the Bretton Woods Conference in 1944, the dollar has been the only currency accepted throughout the world for settlement of international trade accounts among nations.

Prior to 1944, physical gold was used for international settlement. When an exporter in country A sold goods to an importer in country B, country B would pay with its own currency. But country A would have no interest in allowing country B’s currency to build up in its vaults beyond an amount required to settle its own importers’ needs. Thus, country A would demand that country B redeem its own currency in gold. Sometimes country B would ship physical gold to country A. Or perhaps gold held in safekeeping in a third country would be designated as now belonging to country A, a book entry transaction that is more convenient than physical movement.

The Bretton Woods Agreement and Its Demise

The Bretton Woods Agreement added the dollar as tantamount to physical gold at $35 per ounce. The reason was simple: at the end of World War II the United States had accumulated a preponderance of gold, due primarily to its role as the “arsenal of democracy.” Thus, central banks could exchange dollars for settlement rather than moving or redesignating the ownership of physical gold. The weakness of this system was that the world had to trust the USA not to create more dollars than it could redeem for gold at $35 per ounce. But central banks always had the option to demand physical gold from the USA and hence ensure that their trust in the measure of $35 per ounce was fully supported.

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The Unintended Consequences of Unintended Consequences

November 8, 2022

The Unintended Consequences of Unintended Consequences

Decades of central bank distortions and regulatory / market-share capture by cartels and monopolies have completely gutted “markets,” destroying their self-correcting dynamics.

Unintended consequences introduce unexpected problems that may not have easy solutions. An entirely different set of problems are unleashed as unintended consequences have their own unintended consequences. This is the problem with complex emergent systems such as economies, societies and global supply chains: the system’s feedback, leverage points and phase-change thresholds are not necessarily visible or predictable, yet these dynamics have the potential to cascade small failures into systemic collapse.

The unintended consequences of unintended consequences are called second-order effects: consequences have their own consequences.

So for example, you juice your economy with massive stimulus after a lockdown that upended consumers and global supply chains, crushing both demand and supply, and suddenly you have rip-roaring inflation as demand comes back while supply chains remain tangled.

Shifting critical industrial production to frenemies so corporations could maximize profits while reducing the quality of goods and services seemed like a good idea until the potential costs of that dependence on frenemies become apparent.

Assuming oil and natural gas would always be in abundance made sense when they were abundant, but geopolitical forces kicked that assumption into the gutter. All the reassuring economic stories we told ourselves–energy is only 3.5% of the economy and the household spending budget, so cost really doesn’t matter–fall off the cliff when availability and supply become the paramount issues setting price.

That 3.5% loses meaning when there’s not enough to supply demand and somebody loses the game of musical chairs.

Then there’s the fantasy that monetary policy imposed by central banks control inflation. The inconvenient reality is central bank monetary policy is akin to building sand castles on the beach: when the tide is ebbing, the castles look magnificent. When the tide is rising, the sand castles are quickly washed away.

…click on the above link to read the rest…

Peter Schiff: Very Scary Admissions from the Fed

November 8, 2022

Peter Schiff: Very Scary Admissions from the Fed

Last week, the Federal Reserve delivered a 75-basis point rate hike, but Fed Chair Jerome Powell failed to deliver the more doveish rhetoric that many expected. The messaging did not indicate much softening in the stance on the future trajectory of rate hikes, despite an apparent “soft pivot” the week before.

In his podcast, Peter broke down Powell’s messaging and pointed out a number of very scary admissions that came out of the Fed meeting.

Peter said the Fed did do a soft pivot but was able to back off when the bond market stabilized.

I believe the Fed was forced into making that pivot because it stood on the precipice of a bond market crash, which was in the process of happening. And I think the only way the Fed was able to stop that slow-motion crash from playing out accelerating was by throwing a bone to the markets and indicating through the Wall Street Journal that there was going to be some type of statement that was going to go along with the rate hike that would indicate that maybe there was going to be a pause in the pace, a slowdown in the pace, that the Fed was going to take a step back and reflect and assess, and maybe acknowledge the progress that had been made without indicating complete victory, but at least acknowledging that victory was at least in sight and that the Fed could take a more cautious approach going forward. … Something to that effect was expected.”

However, the Fed didn’t deliver anything close to that.

Initially, the markets thought the Fed was going more doveish. The statement released by the FOMC left some wiggle room for a slowdown in hiking or even a pause with language about monetary policy “lags” and “cumulative” effects.

…click on the above link to read the rest…

Orange Juice Prices Soar To Record Highs As Inventories Collapse

October 25, 2022

Orange Juice Prices Soar To Record Highs As Inventories Collapse

We recently outlined “Orange Juice Prices Could “Increase Substantially” As Hurricane Pummels Florida’s Top Citrus Grow Region.” And that’s precisely what’s happening today.

First, let’s begin with US stockpiles of cold-stored orange juice plunged by 43% in September from a year earlier — the lowest level since 1977, according to the latest US Department of Agriculture data.

A combination of crop diseases across Florida’s citrus groves and Hurricane Ian that destroyed crops are creating a supply crunch that has catapulted orange juice futures contracts to as high as $2.18 per pound, the highest level ever.

Ahead of Hurricane Ian, we penned a note titled “OJ Squeeze Ahead? Tropical Threat Looms For Florida’s Citrus Groves” and warned this may spark even higher breakfast inflation. Last month, we noted that a dozen eggs at the supermarket have jumped to record highs due to devastating bird flu.

Sticky food inflation continues to wreak havoc on households, as shown in the latest CPI report.

Breakfast was cheap but has since become expensive as orange juice and egg prices soar to record highs.

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