Baltic Dry Index. 1904 -40 Brent Crude 93.82
Spot Gold 1667 US 2 Year Yield 4.30 unch.
Coronavirus
Cases 02/04/20 World 1,000,000
Deaths 53,100
Coronavirus Cases 12/10/22 World 627,679,146
Deaths 6,563,786
Wave of defaults
could lead to a total breakdown of system
As I say, this was
far from the only thing going on in markets.
On top of all the
above, there were and are question marks about whether the Bank of England is
acting fast enough to clamp down on inflation.
But these questions,
and many others, were effectively swamped by the catastrophic surge in interest
rates following the mini-budget.
Catastrophic
because the increase in rates was so sharp it threatened the very functioning
of the gilts market - this bedrock of the financial
system.
And for those liability-driven investors in the pensions sector, it threatened to cause a wave of defaults which could, the Bank of England feared, lead to a total breakdown of the system within days or even hours.
Forget the stock casino action this morning, this morning it’s all about a developing implosion in the UK bond market and with it, if it happens, an implosion in most other global bond markets.
Since the Great Nixonian Error of fiat money, August 15, 1971, our capitalist world has been operating a sophisticated version of a giant Ponzi scheme. Our fiat money is worthless, dependent on everyone having trust and faith in the illusion of fiat being accepted by one and all.
I’ll believe in your fiat currency having some value for goods and services, if you will believe that mine has some related value for goods and services too.
But mostly the great Ponzi scheme was held up by faith in the integrity of the G-7 multi-trillion dollar bond markets.
That faith and integrity, in London’s case at least, was destroyed in the September 23rd car crash mini-budget of tax cuts funded by massive borrowings into the face of rapidly rising global interest rates.
When Reagan-Thatcher did it in the early 80s, interest rates were falling from sky high rates used to break the 70s great inflation. Government debt was small in comparison to now. The unions were cowed after Reagan fired some 11,000 striking PATCO air traffic controllers while Thatcher despatched the communist led miners union.
This morning in London it’s starting to look like an economic hurricane is coming three days before the anniversary of a real hurricane hit London and southeast England on October 15, 1987. That in turn was followed by Black Monday, October 19, 1987.
Earlier on today, apparently, a woman rang the BBC and said she heard there was a hurricane on the way... well, if you're watching, don't worry, there isn't!"
Hours after he said there was no hurricane coming "but it will be very windy in Spain" there was devastation across the UK that claimed 18 lives.
Michael Fish, BBC
weatherman October 14, 1987.
What on earth is happening
in UK markets and why is the Bank of England struggling to address it?
Ed Conway, economics and data editor 11 October 2022
This is starting to look a little… unnerving.
This morning the Bank of
England tweaked its emergency
intervention into the government bond (gilts) market for
a second successive day.
The details are somewhat arcane:
yesterday it doubled the amount it was offering to buy each day; today it said
it would widen the stock of assets it is offering to buy. But what matters more
is the big picture.
The government bond market is - in the UK and
elsewhere - best thought of as the bedrock of the financial system.
The government borrows lots of money
each year at very long durations and these bonds are bought by all sorts of
investors to secure a low but (usually) reliable income over a long period of
time.
Compared to other sorts of assets -
such as the shares issued by companies or for that matter cryptocurrencies -
government bonds are boring. Or at least, they're supposed to be boring.
They don't move all that much each
day and the yield they offer - the interest rate implied by
their prices - is typically much lower than most other asset classes.
But recently the UK bond market (we
call them gilts as a matter of tradition, short for gilt-edged securities,
because in their earliest embodiment they were pieces of paper with golden
edges) has been anything but boring.
In the wake of the mini-budget, the yield on
gilts of various different durations leapt higher - much higher. The price of
the gilts fell dramatically. That, ultimately, was what the Bank of England was
originally responding to a couple of weeks ago.
But to understand what a tricky
position it's in, you need to zoom out even further. For while it's tempting to
blame everything on the government and its mini-budget, it's fairer to see this
as the straw that broke the market's back. For there are three intersecting
issues at play here.
The end of the low
interest rate era
The first is that we are in the midst
of a seismic economic moment.
For the past decade and a bit, we
(here in the UK but also in the US, Eurozone and throughout most of the world)
have become used to interest rates being incredibly low.
More than low, they were effectively
negative, because in the wake of the financial crisis central banks around the
world pumped trillions of dollars into the financial plumbing.
They mostly did so (in this case the
method really matters) by buying up vast quantities of government debt. The
Bank of England became the single biggest owner of UK gilts, at one point
owning roughly a third of the UK's national debt.
It was an emergency measure designed
to prevent a catastrophic rerun of the Great Depression, but the medicine has
proven incredibly difficult to wean ourselves off.
A few years ago, when the US Federal
Reserve thought out loud about reversing quantitative easing (QE) - as the
bond-buying programme is called - it triggered such a panic in bond markets
that it immediately thought twice about it.
Since then, it and other central
banks like the Bank of England have been as careful as possible not to frighten
these markets. They have managed to end QE and, in the case of the Fed, have
begun to reverse it. This is a very, very big deal.
More. Much, much, more!
Bank
of England governor signals no extension to bond-buying aid for pension funds
Yesterday 19:42
The Bank of England's governor has signalled that it will not
extend its bond-buying support for pension funds beyond Friday's deadline.
Andrew Bailey told an event in
Washington that funds had "three days left... to get this done" after
a series of interventions to support the "dysfunctional" market in
the wake of the wider meltdown over the government's mini-budget.
The latest action, on Tuesday, saw
the Bank snap up index-linked gilts, government bonds with interest payments in
line with inflation.
They are heavily used by pension
funds.
The Bank had already been buying up
long-dated gilts - a type of government bond that make up a large proportion of
pension pots - to steady market jitters.
It saw yields - the rate demanded to
hold government debt - shoot up as pension schemes tried to raise cash through
firesales of government and corporate bonds to meet cash calls - the latest
coming from providers of so-called liability-driven investment strategies.
They are demanding funds put up more
money to support new and older hedging positions.
Mr Bailey told an event organised by
the Institute of International Finance that the intervention must be temporary.
"We have announced that we will be
out by the end of this week. We think the rebalancing must be done.
"And my message to the funds
involved and all the firms involved managing those funds: You've got three days
left now. You've got to get this done."
Industry body the Pensions and Lifetime
Savings Association had earlier urged the Bank to extend the bond-buying
programme until 31 October - the new date for the publication of the
government's debt plan - at least.
More
Bank of England governor signals no extension to bond-buying aid for pension funds (msn.com)
Finally, commodities. Food and energy
inflation problems will be with us well into next year. Whose idea was it to
start a new European war in the breadbasket of Europe and with the supplier of
almost half Europe’s supply of natural gas? For what?
Analysis: Russian gas
supply gap casts chill in Europe as winter nears
October
11, 2022 7:08 AM GMT+1
LONDON, Oct 11
(Reuters) - Europe needs to pay up to import liquefied natural gas, pray for a
mild winter and cut energy demand as any sabotage of infrastructure or even
deeper cuts to Russian supply would make power rationing or blackouts all but
inevitable.
Even if Europe
manages to stay warm and keep the lights on this winter, it will have a much
bigger challenge to refill depleted storage next year than it did to meet a
European Union goal to build stocks to 80% of capacity by November this year.
It has
exceeded that goal and storage, currently around 90%, is a buffer, but the halt
of gas through the Nord Stream network from Russia to Germany, leaves a gap
despite increased supplies from elsewhere.
Russia
progressively reduced gas flows through Nord Stream and also via other routes
after Western sanctions in response to the Ukraine war that began in February.
Gas via Nord Stream stopped completely in September.
Analysts put the
gas shortfall at almost 15% of average European demand in winter, meaning the
continent has to cut consumption to get through the peak demand heating season.
"The
situation will remain very fragile," Cuneyt Kazokoglu, director of energy
economics at FGE, said.
"Household
gas consumption in Germany jumped at the end of September to the highest level
since March because of a cold spell, and demand was about 14% above the
2018-2022 four-year average. This is posing a threat," he added.
Germany, Europe's
biggest economy and one of the continent's biggest importers of Russian gas, is
most exposed to the supply disruption and has been especially active in
developing plans to shelter its industries and consumers.
Any hope of the
Nord Stream network resuming shipments to Germany was dashed last month by
suspected sabotage.
European nations
have said they are working on increasing security of critical infrastructure
after explosions damaged
Nord Stream 1 and also Nord Stream 2, which has never operated,
but had been filled with gas in readiness.
Russian outages
could yet worsen if Moscow makes good on its threat of sanctioning Ukrainian
energy firm Naftogaz, shutting one of the last functioning Russian gas routes to
Europe.
More
Analysis: Russian gas supply gap casts chill in Europe
as winter nears | Reuters
Food inflation has
soared in the U.S. And now farmers are planting wheat in the most expensive
harvest ever
October 10, 2022
U.S. farmers are planting wheat during a critical time, as food prices
remain high because of a host of issues including widespread inflation,
supply-chain snarls, droughts and Russia’s war in Ukraine.
This year’s planting
season is fraught for farmers, especially in the Plains states where much of
wheat grows. Producers are seeding wheat through a third straight year of
drought, and weather forecasts for another La Nina phenomenon — the counterpart
to El Nino — means dry conditions are likely to stay.
On Monday, benchmark wheat
prices spiked to a two-week high of $9.42 a bushel as Russia bombed several
Ukrainian cities, including the capital of Kyiv, in retaliation for Saturday’s
destruction of a bridge to Crimea. All of this underscores just how volatile
prices are.
The government will release
September figures for food and other costs in its Consumer Price Index report
Thursday. In its previous release for August, food was one of the biggest contributions to
inflation — the index for that category surged 11.4% over 12 months, the
biggest gain since 1979.
Drought is limiting wheat yields
Wheat prices spiked to an
all-time high of around $12.75/bushel in the early weeks of Russia’s invasion
of Ukraine, then fell 42% from those highs as the U.S. harvest rolled in,
Ukraine exported some grain and recession fears weighed on wheat values.
Since late summer into early
fall, prices rose about 20% from lows, in part after the U.S. Department of
Agriculture acknowledged this year’s drought-decimated harvest, cutting both
yield and harvested acres.
U.S. farmers are about 40%
done seeding the winter wheat crop, on track for their usual pace. Wheat prices
around $9.50/bushel are well above the 14-year average price of $5.62 for the
year ending 2020, according to the University of Illinois.
Whether
farmers benefit from those prices is an open question. Sterling Smith, director
of agriculture research at AgriSompo North America, said the 2022 crop, whether
it was wheat, corn or soybeans, was the most expensive harvest ever because of
high prices for inputs such as diesel, natural gas and fertilizer.
It’s going to be another
expensive year as energy prices and crop inputs stay costly. The Mosaic Co.
said in its August earnings report that nutrient prices are elevated and reduced
global supplies for fertilizer ingredients means some demand goes unfulfilled.
Other fertilizer companies including CF Industries Nutrien and CVR Partners
have echoed similar comments.
Smith said farmers are
focusing on their most productive lands and irrigated fields, but with farming,
Mother Nature plays a role.
“It’s luck of the draw. If
your bad acres that didn’t get fertilized get the rain, and your good acres
that got fertilized don’t get the rain, suddenly, you have a problem,” he said.
Logistics problems
reduce crop quality
---- “Food companies are going to have challenges here. This
is not good news for food inflation. You could have a situation where grain
prices could potentially come down. But food prices are going go up because of
quality issues,” he said.
‘Elephant in the room’
Ukraine exported some grain
this summer under the Black Sea Grain Initiative, a deal between Russia and Ukraine, which helped cap
wheat prices, but how much those farmers can plant for next year’s harvest is
open to debate, said Jerry Gidel, an analyst at Midland Research.
Recently, Moscow claimed to
have annexed Luhansk, Donetsk, Zaporizhia and Kherson, and a USDA map shows the four regions represent 21% of Ukraine’s
wheat-producing areas.
“The big elephant in the room
is the Ukrainian food corridor, with our friend Mr. Putin running the show and
threatening to use nuclear warheads and declaring areas his property,” Gidel
said.
Wheat prices for all three
exchanges — Chicago Board of Trade, Kansas City and Minneapolis — spiked on the
pickup in the Russian-Ukraine war over the weekend. However, Kriskey said as
the benchmark, the CBOT is where market speculators express their views on the
situation in Ukraine.
“People think Ukraine equals
wheat. … Even though they’re trading a U.S. contract, they’re basically
(saying) this is where I want to put my money,” she said.
The Invesco DB Agriculture
ETF has a 12.5% weighting to wheat, which tracks both CBOT and Kansas City
wheat futures. The Teucrium Wheat ETF follows CBOT wheat futures.
Besides droughts in the U.S.
and Europe hampering production, Argentina’s crop is also being hit by La
Nina-induced dryness, Gidel said. Canada and Australia have ample crops that
help global supplies. Russia also had a hefty harvest, but its exports were
limited to countries it is friendly with, such as Syria and other parts of the
Mideast, he added.
Kriskey said the Black Sea
Grain Initiative expires in late November, and she added that Putin has
complained that much of that wheat is going to the EU, with only one-third going
to low-income countries.
More
Global Inflation/Stagflation/Recession
Watch.
Given
our Magic Money Tree central banksters and our spendthrift politicians,
inflation now needs an entire section of its own.
Britain's
Pret raises staff pay for second time this year
11
October 2022
LONDON (Reuters) -Coffee and sandwich chain
Pret A Manger on Tuesday became the latest British retailer to raise staff pay
for a second time this year to help workers navigate a worsening cost-of-living
crunch amid a tight labour market.
With Britain's unemployment rate down
to its lowest since 1974 at 3.5%, retailers are having to repeatedly hike wages
to attract and retain staff.
Groups including market leader Tesco,
Sainsbury's and Currys have all recently announced pay increases.
The Bank of England is watching pay
settlements closely as it mulls further rises in interest rates.
Pret, owned by investment group JAB
and founder Sinclair Beecham, said that from Dec. 1 all UK employees across
shops and its support centre will receive a 5% pay increase, equating to a 13%
rise within a year. UK inflation was 9.9% in August.
The group, which employs 8,600 shop
staff, said the latest rise will cost it 10 million pounds ($11 million),
surpassing a 9.2 million investment made in April.
Pret "team members" will
see their pay increase from between 9.80 pounds and 11.00 pounds per hour to
between 10.30 pounds and 11.55 pounds depending on location.
Barista pay will increase from
between 10.30 pounds and 11.90 pounds an hour to between 10.85 pounds and 12.50
pounds.
Bonuses can take pay higher and staff
also get free food and drink while working.
Britain's Pret
raises staff pay for second time this year (msn.com)
US Rate Hikes Feeding Risk Of Global Recession: Borrell
By
AFP - Agence France Presse October
10, 2022
US interest rate
hikes are pushing global prices higher at a time of food crisis and war,
presenting the world with "a perfect storm," the EU's top diplomat
warned on Monday.
"Everybody's
running to increase interest rates -- these will bring us to a world
recession," Josep Borrell predicted to EU ambassadors in an annual
gathering.
A surging US dollar
is making basic goods in other countries unaffordable unless central banks
follow the US Federal Reserve's lead, he explained.
"There is no
other way otherwise the capital will flow (elsewhere)," he said.
The eurozone is
already struggling with the conundrum of having to raise interest rates to tamp
down soaring inflation while keeping a wary eye on how hard that will hit
flagging growth amid an energy crunch.
Although global
finance isn't in the remit of Borrell, he referenced the interest rate problem
in the same breath as he spoke of the widespread food crisis that has
particularly left Africa and parts of the Middle East vulnerable.
"I am afraid
that we are only at the beginning, that the food crisis will make things worse
in many parts of the world," he said.
The world itself
had become more "competitive," he stressed, highlighting the
hardening confrontation between the United States and China.
"Everything is
being weaponised. Everything is an arm: energy, investments, information,
migration flows, data. There is a global fight about access to some strategic
domains, cyber, maritime, outer space."
The United States
is a valuable ally, he said, but raised the question of "What will happen
two years from now?... If instead of (US President Joe) Biden, it would be (ex-president
Donald) Trump or someone like him in the White House?"
The world, he said,
was being buffeted by tensions from an "authoritarian trend" that
included China and Russia, and democracies.
In between were a
bunch of "swing" states of different hues that were in-between and
didn't want to pick sides, yet didn't feel that they were getting benefits from
globalisation, Borrell said.
"Radical
nationalism and imperialism" were on the march, with Russia one of the
main proponents, he added.
More
US Rate Hikes
Feeding Risk Of Global Recession: Borrell | Barron's (barrons.com)
Below,
why a “green energy” economy may not be possible, and if it is, it won’t be
quick and it will be very inflationary, setting off a new long-term commodity
Supercycle. Probably the largest seen so far.
The
“New Energy Economy”: An Exercise in Magical Thinking
https://media4.manhattan-institute.org/sites/default/files/R-0319-MM.pdf
Mines,
Minerals, and "Green" Energy: A Reality Check
https://www.manhattan-institute.org/mines-minerals-and-green-energy-reality-check
"An
Environmental Disaster": An EV Battery Metals Crunch Is On The Horizon As The
Industry Races To Recycle
by Tyler Durden Monday, Aug 02, 2021 - 08:40 PM
Covid-19
Corner
This
section will continue until it becomes unneeded.
With Covid-19 starting to become only endemic,
this section is close to coming to its end.
Covid
cases rising as People's Daily calls for patience with Dynamic zero-Covid
policy; The Navigator; US tech controls
October
10, 2022
Summary
of today’s Essential Eight:
1. Covid - Cases are rising again, new Omicron variants have
entered the country, Shanghai is seeing more targeted lockdowns, and official
media are making clear dynamic zero-Covid is the correct policy and is not
going away. I don’t have any other word to describe the situation other than
grim. The October Holiday economy was again damaged by Covid, and between the
rise in cases and the Party Congress in a few days we should not be surprised
if at least October, the first month of Q4, has more bad economic data.
2. CPC and
CCDI Seventh Plenums - There
has been limited coverage of the Seventh Plenum 19th CPC Central Committee,
just a brief announcement, and there was minimal coverage of the Seventh Plenum
of the 19th Central Commission for Discipline Inspection (CCDI). Both meetings
are really about the final procedural preparations for the 20th Party Congress.
No details of the work report or the revisions to the Party charter have
leaked, though propaganda gives some good hints, and nor has any credible list
of the Politburo and Standing Committee members for the upcoming 20th Party
Congress. At least when it comes to personnel, everyone is still guessing.
3. The Navigator - Among the propaganda work ahead of the 20th Party
Congress is a 16 episode TV show now running in primetime titled “领航”, which can be translated as “Navigate” or “Navigator”.
I am going with “Navigator”, as it meshes with the “helmsman” talk we have seen
with increasing frequency, and likely presages things we are going to see in
the work report Xi delivers to the Party Congress.
4. New US
Technology controls - The
long-rumored new US restricts on exports to the PRC of semiconductor-related
technologies became public Friday, and they look to be extremely damaging to
PRC technology firms if they are fully implemented. I do not think the timing
just before the 20th Party Congress was intentional, rather it has to do with
bureaucratic jostling in the US government, but the release just eight days
before the Congress is very useful to Xi as more evidence he can point to that
he is correct in his push for self-reliance and specifically the quest for
breakthroughs in “chokehold” technologies, with the US as the country doing the
choking. There is no turning back in the US-China protracted technology war.
More
Next, some vaccine links
kindly sent along from a LIR reader in Canada.
NY Times Coronavirus Vaccine
Tracker. https://www.nytimes.com/interactive/2020/science/coronavirus-vaccine-tracker.html
Regulatory Focus COVID-19
vaccine tracker. https://www.raps.org/news-and-articles/news-articles/2020/3/covid-19-vaccine-tracker
Some other useful Covid links.
Johns Hopkins Coronavirus
resource centre
https://coronavirus.jhu.edu/map.html
Centers for Disease Control
Coronavirus
https://www.cdc.gov/coronavirus/2019-ncov/index.html
The
Spectator Covid-19
data tracker (UK)
https://data.spectator.co.uk/city/national
Technology
Update.
With events happening fast in the
development of solar power and graphene, among other things, I’ve added this
section. Updates as they get reported.
No update today, normal service,
hopefully depending on the global bond markets, tomorrow.
21st century
adage: Is that true or did you hear it on the BBC?
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