Today’s News 25th October 2021

• Millions Of Jobs At Risk As Europe Faces Magnesium Shortage
  Millions Of Jobs At Risk As Europe Faces Magnesium Shortage

  Europe purchases 95% of its magnesium from China, will run out of the industrial metal used to strengthen aluminum by the end of November that could threaten millions of jobs in sectors from automobiles to aerospace to defense and much more, according to Bloomberg. 

  Three trade groups, including European Aluminium, Eurometaux, and industriAll, warn shipments from China are dwindling quick due to power cuts to energy-intensive magnesium smelters. They said if reserves of the industrial metal aren’t increased in the near term, it may result in trade production shortages, factory closures, and job losses. 

  

  “Supply of magnesium originating from China has either been halted or reduced drastically since September 2021, resulting in an international supply crisis of unprecedented magnitude,” the trade groups said. They urged Brussels “to urgently work toward immediate actions with their Chinese counterparties to mitigate the short-term, critical shortage issue, as well as the longer-term supply effects on European industries.”

  

  Magnesium, which is used extensively in the aerospace industry, is a metal for producing aluminum alloys in the automotive industry and could compound issues for European carmakers already dealing with crippling chip shortages. 

  

  Morgan Stanley’s Amy Sergeant and Ioannis Masvoulas told clients last week that Europe stands out as the most exposed region to magnesium shortfalls from China. They said Europe shuttered its last magnesium smelter in 2001. This means that there’s no way for Europe to domestically increase magnesium supplies and hinges all on China’s output. 

  Days ago, Barclays analyst Amos Fletcher warned clients, “there are no substitutes for magnesium in aluminum sheet and billet production.” He said if “magnesium supply stops,” the entire auto industry will grind to a halt. 

  European Aluminium, whose members include Norsk Hydro, Rio Tinto, and Alcoa, said, “the current magnesium supply shortage is a clear example of the risk the EU is taking by making its domestic economy dependent on Chinese imports. The EU’s industrial metals strategy must be strengthened.” 

  Morgan Stanley warns: “Should magnesium shortages persist through to 2022, there is a growing risk of downstream demand destruction as smelters may be unable to produce specific aluminum alloys for the automotive, building, and packaging sectors. In that scenario, we could see a shift towards commodity-grade standard ingot.” 

  The unintended consequences of European officials deciding decades ago to rely entirely on China for magnesium could spell disaster for millions of jobs if reserves aren’t replenished soon. 

  Tyler Durden
  Mon, 10/25/2021 – 02:45

• The Dutch Government Is Gambling Billions On Green Hydrogen
  The Dutch Government Is Gambling Billions On Green Hydrogen

  Authored by Cyril Widdershoven via OilPrice.com,

  • Green hydrogen is making headlines around the world as many consider it a cornerstone of a successful energy transition 

  • The Netherlands is ready to spend billions in its attempt to become a global green hydrogen hub, but some observers are becoming increasingly skeptical 

  • The economic viability of this new investment is unclear and a growing number of critics see these investments as the government gambling with billions of euros 

  

  The future of green hydrogen looks very bright, with the renewable energy source becoming something of a media darling in recent months. The global drive to invest in green or blue hydrogen is picking up steam and investment levels are staggering. Realism and economics, however, seem to be lacking when it comes to planning new green hydrogen projects in NW Europe, the USA, and Australia. At the same time, blue hydrogen, potentially an important bridge fuel, is being largely overlooked. The Netherlands, formerly a leading natural gas producer and NW-European gas trade and transportation hub, is attempting to establish itself as a main pillar of the European hydrogen economy. According to the Dutch government, the Netherlands is ready to provide whatever is needed to support the set-up of a new green hydrogen hub and transportation network. During the presentation of the 2021-2022 government plans in September (Prinsjesdag), Dutch PM Mark Rutte committed himself to this green hydrogen future. Without any real assessments of the risks and potential economic threats, plans are being discussed and implemented for a multibillion spending spree on green hydrogen, involving not only the refurbishment of the Dutch natural gas pipeline infrastructure but also the building of major new offshore wind parks, targeting the construction of hundreds of additional windmills. These wind parks are going to be set up and owned by international consortia, such as the NorthH2, involving Royal Dutch Shell, Gasunie (owned by the government), and others. The optimism about these projects is now being questioned, not only by skeptics but increasingly by parties, such as Gasunie, that are part of the deals. 

  Dutch public broadcaster NOS reported yesterday that questions are popping up about the feasibility and commercial aspects of these large-scale plans as well as the potential risks of a new “cartel” of offshore wind producers. The multibillion-dollar investment plans, supported by the government, are even being questioned by experts of the Dutch ministry of economy, as it is not clear at all if green hydrogen production in the Netherlands, such as the NorthH2 project in Groningen (formerly known as the Dutch natural gas province), will ever be feasible or take-off. The commercial viability of green hydrogen is a major issue as it still needs large-scale technical innovation and scaling up of electrolyzers. At the same time, there is uncertainty over demand as industry (the main client) does not appear to be interested at present. Dutch parties are also asking themselves if the current set up of the planned offshore wind parks are not a precursor to a new wind-energy cartel in the making.  Some Dutch political parties and even insiders from Gasunie are worried about a monopoly position of the likes of Shell in the future. 

  Still, the main underlying issue is the financial risks being taken by the government in the coming years. As Dutch professor Paul Bovend’Eert stated to the news “plans are being developed, but financial risks are not addressed”. He also reiterated that the Dutch parliament has often been left out of the loop or not simply addressed at all. Several analysts have already warned that the current pro-green hydrogen strategy of the government is ‘gambling with billions”. Some have even warned that the projections about needed investments could be much higher than already is expected. The EU already stated that between EUR240-380 billion is needed to set up European-wide 40GW of hydrogen production. The Dutch government plans indicate a production capacity of 3-4GW by 2030 or an investment of tens of billions. To become a real NW-European hydrogen hub, investments will have to be even higher. While optimism is there, no real regulation and control mechanisms are in place to structure these government investments or subsidies to commercial parties. Gasunie board members indicated that more conditions and legal structures need to be put in place to control where the money is going. The current energy, oil, and gas markets in the Netherlands and EU are already liberalized. Ownership and investment or production strategies are not being set up by governments or the EU but by companies themselves. Nothing, in reality, would change dramatically, comparisons between hydrogen and natural gas markets are large.

  The increased criticism by some, such as Gasunie and political parties, with regards to the power position of commercial parties, is also very strange. Some could argue that the current hydrogen strategy of Shell and others is what society and Dutch judges have forced them to do. Shell could and should argue a very simple position “we are doing what the Dutch legal system is forcing us to do”. For parties such as Shell, at least in the Netherlands or the EU, taking up green hydrogen strategies is a new License to Operate. International energy giants such as Shell do not want to be minor players in this market. For an international player, a pivotal position in any market is a must. 

  In the coming weeks, especially after COP26, as criticism is now being muted by most, a potential storm could be brewing. If assessments are pointing out that the risks being taken by the Dutch government are too high in light of the benefits, and potential higher bills for customers, potential opposition to green hydrogen plans could be growing. At the same time, the Dutch hydrogen plans are seen by most as pivotal, even in light of the EU Commission’s Green Deal plans. A full-scale backlash to hydrogen could be a reality if Dutch political parties are going to constrain implementation, while other European countries will be more skeptical about their own plans. Billions, or potentially trillions, of euros will be at risk if this new hydrogen infrastructure turns out not to be economically viable. Without the power and technology of existing energy players, especially Shell, Total, BP, or ENI, behind the set-up, the future of this new power source will remain uncertain.

  Tyler Durden
  Mon, 10/25/2021 – 02:00

• Escobar: The World According To Vladimir Putin
  Escobar: The World According To Vladimir Putin

  Authored by Pepe Escobar via The Asia Times,

  Russian president, in Sochi, lays down the law in favor of conservatism – says the woke West is in decline…

  

  The plenary session is the traditional highlight of the annual, must-follow Valdai Club discussions – one of Eurasia’s premier intellectual gatherings.

  Vladimir Putin is a frequent keynote speaker. In Sochi this year, as I related in a previous column, the overarching theme was “global shake-up in the 21st century: the individual, values and the state.”

  Putin addressed it head on, in what can already be considered one of the most important geopolitical speeches in recent memory (a so-far incomplete transcript can be found here) – certainly his strongest moment in the limelight. That was followed by a comprehensive Q&A session (starting at 4:39:00).

  Predictably, assorted Atlanticists, neocons and liberal interventionists will be apoplectic. That’s irrelevant. For impartial observers, especially across the Global South, what matters is to pay very close attention to how Putin shared his worldview – including some very candid moments.

  Right at the start, he evoked the two Chinese characters that depict “crisis” (as in “danger”) and “opportunity,” melding them with a Russian saying: “Fight difficulties with your mind. Fight dangers with your experience.”

  This elegant, oblique reference to the Russia-China strategic partnership led to a concise appraisal of the current chessboard:

  The re-alignment of the balance of power presupposes a redistribution of shares in favor of rising and developing countries that until now felt left out. To put it bluntly, the Western domination of international affairs, which began several centuries ago and, for a short period, was almost absolute in the late 20th century, is giving way to a much more diverse system.

  That opened the way to another oblique characterization of hybrid warfare as the new modus operandi:

  Previously, a war lost by one side meant victory for the other side, which took responsibility for what was happening. The defeat of the United States in the Vietnam War, for example, did not make Vietnam a “black hole.” On the contrary, a successfully developing state arose there, which, admittedly, relied on the support of a strong ally. Things are different now: No matter who takes the upper hand, the war does not stop, but just changes form. As a rule, the hypothetical winner is reluctant or unable to ensure peaceful post-war recovery, and only worsens the chaos and the vacuum posing a danger to the world.

  A disciple of Berdyaev

  In several instances, especially during the Q&A, Putin confirmed he’s a huge admirer of Nikolai Berdyaev. It’s impossible to understand Putin without understanding Berdyaev (1874-1948), who was a philosopher and theologian – essentially, a philosopher of Christianity.

  In Berdyaev’s philosophy of history, the meaning of life is defined in terms of the spirit, compared with secular modernity’s emphasis on economics and materialism. No wonder Putin was never a Marxist.

  For Berdyaev, history is a time-memory method through which man works toward his destiny. It’s the relationship between the divine and the human that shapes history. He places enormous importance on the spiritual power of human freedom.

  

  Nikolai Berdyaev. Photo: Center for Sophiological Studies

  Putin made several references to freedom, to family – in his case, of modest means – and to the importance of education; he heartily praised his apprenticeship at Leningrad State University. In parallel, he absolutely destroyed wokeism, transgenderism and cancel culture promoted “under the banner of progress.”

  This is only one among a series of key passages:

  We are surprised by the processes taking place in countries that used to see themselves as pioneers of progress. The social and cultural upheavals taking place in the United States and Western Europe are, of course, none of our business; we don’t interfere with them. Someone in the Western countries is convinced that the aggressive erasure of whole pages of their own history – the “reverse discrimination” of the majority in favor of minorities, or the demand to abandon the usual understanding of such basic things as mother, father, family or even the difference between the sexes – that these are, in their opinion, milestones of the movement toward social renewal.

  So a great deal of his 40 minute-long speech, as well as his answers, codified some markers of what he previously defined as “healthy conservatism”:

  Now that the world is experiencing a structural collapse, the importance of sensible conservatism as a basis for policy has increased many times over, precisely because the risks and dangers are multiplying and the reality around us is fragile.

  Switching back to the geopolitical arena, Putin was adamant that “we are friends with China. But not against anyone.”

  Geoeconomically, he once again took time to engage in a masterful, comprehensive – even passionate – explanation of how the natural gas market works, coupled with the European Commission’s self-defeating bet on the spot market, and why Nord Stream 2 is a game-changer.

  Afghanistan

  During the Q&A, scholar Zhou Bo from Tsinghua University addressed one of the key, current geopolitical challenges. Referring to the Shanghai Cooperation Organization, he pointed out that, “if Afghanistan has a problem, the SCO has a problem. So how can the SCO, led by China and Russia, help Afghanistan?”

  Putin stressed four points in his answer:

  • The economy must be restored;

  • The Taliban must eradicate drug trafficking;

  • The main responsibility should be assumed “by those who had been there for 20 years” – echoing the joint statement  after the meeting between the extended troika and the Taliban in Moscow on Wednesday; and

  • Afghan state funds should be unblocked.

  He also mentioned, indirectly, that the large Russian military base in Tajikistan is not a mere decorative prop.

  

  Training bunker at Russia’s military base in Takikistan. Photo: Moscow Times

  Putin went back to the subject of Afghanistan during the Q&A, once again stressing that NATO members should not “absolve themselves from responsibility.”

  He reasoned that the Taliban “are trying to fight extreme radicals.” On the “need to start with the ethnic component,” he described Tajiks as accounting for 47% of the overall Afghan population – perhaps an over-estimation but the message was on the imperative of an inclusive government.

  He also struck a balance: As much as “we are sharing with them [the Taliban] a view from the outside,” he made the point that Russia is “in contact with all political forces” in Afghanistan – in the sense that there are contacts with former government officials like Hamid Karzai and Abdullah Abdullah and also Northern Alliance members, now in the opposition, who are self-exiled in Tajikistan.

  Those pesky Russians

  Now compare all of the above with the current NATO circus in Brussels, complete with a new “master plan to deter the growing Russian threat.”

  No one ever lost money underestimating NATO’s capacity to reach the depths of inconsequential stupidity. Moscow does not even bother to talk to these clowns anymore: as Foreign Minister Sergey Lavrov has pointed out, “Russia will no longer pretend that some changes in relations with NATO are possible in the near future.”

  Moscow from now on only talks to the masters – in Washington. After all, the direct line between the Chief of General Staff, General Gerasimov, and NATO’s Supreme Allied Commander, General Todd Wolters, remains active. Messenger boys such as Stoltenberg and the massive NATO bureaucracy in Brussels are deemed irrelevant.

  This happens, in Lavrov’s assessment, right after “all our friends in Central Asia” have been “telling us that they are against … approaches either from the United States or from any other NATO member state” promoting the stationing of any imperial “counter-terrorist” apparatus in any of the “stans” of Central Asia.

  And still the Pentagon continues to provoke Moscow. Wokeism-lobbyist-cum-Secretary of Defense Lloyd “Raytheon” Austin, who oversaw the American Great Escape from Afghanistan, is now pontificating that Ukraine should de facto join NATO.

  That should be the last stake impaling the “brain-dead” (copyright Emmanuel Macron) zombie, as it meets its fate raving about simultaneous Russian attacks on the Baltic and Black Seas with nuclear weapons.

  Tyler Durden
  Sun, 10/24/2021 – 23:30

• 10 Years After The Arab Spring: Gains For Democracy?
  10 Years After The Arab Spring: Gains For Democracy?

  On October 23, 2011, Libya was declared liberated from the regime of Muammar Gaddafi, marking one of the key events of the Arab Spring. Ten years after the wave of pro-democracy protests swept the region, Statista’s Katharina Buchholz details below that some countries have improved their scores on the Economist Intelligence Unit Democracy Index, while hopes of creating a more egalitarian society were quashed elsewhere.

  Even among countries which experienced a toppling of their government in connection with the Arab Spring, outcomes are widely differing ten years later, highlighting the volatility that can come with sudden political change.

  

  You will find more infographics at Statista

  Tunisia, where the government of President Zine El Abidine Ben Ali was overthrown in the beginning of 2011, achieved a rating of 6.59 out of 10 in the 2020 index, climbing 90 ranks since 2010 while being named the 54th most democratic country in the world. On the other hand, there is the tragic story of Yemen were chaos reigned in the aftermath of government overthrow. After the fall of two governments in 2012 and 2015, Yemen descended 11 ranks into the bottom ten of the world’s least democratic countries. Tunisia’s success has, however, been overshadowed by a governmental crisis in which the current President Kais Saied has suspended the parliament since July, showing the persistent fragility of democratic systems in the region.

  Libya stagnated near the end of the list, now sharing a rank with Yemen at the dismal democracy score of 1.95 out of 10. Despite a protracted crisis which saw government overthrow in 2011 and 2013, Egypt also stagnated, if at a somewhat higher score of 2.93. In Syria, dictator Bashar al-Assad resisted a change of power with all force, causing a civil war that killed hundreds of thousands of people to-date and caused the country to now be ranked as one of the five least democratic in the world.

  Two more countries in Northern Africa, Algeria and Morocco – where protests, but no direct governmental changes took place – nevertheless made democratic gains according to the EIU. While Algeria rose ten ranks to a score of 3.77, Morocco climbed even more, by 20 spots between 2010 and 2020, to a score of five out of ten, equaling rank 96 of the world’s most democratic nations.

  Tyler Durden
  Sun, 10/24/2021 – 23:00

• Jim Bovard: Down With Fraudulent 'Fair' Trade
  Jim Bovard: Down With Fraudulent ‘Fair’ Trade

  Authored by Jim Bovard via The Libertarian Institute,

  The Biden administration is embracing the same flawed “fair trade” mantra that previous administrations used to sanctify protectionist policies. Biden’s team has “largely dispensed with the idea of free trade as a goal in and of itself,” the New York Times reported. US Trade Representative Katherine Tai recently touted the Biden administration’s plans to “shape the rules for fair trade in the 21st century.” What could possibly go wrong from such a lofty aspiration?

  Thirty years ago, my book The Fair Trade Fraud was published by St. Martin’s Press. That book was translated into Japanese and Korean, and adapted as a textbook at the University of Chicago, Duke University, American University, University of Texas, and many other colleges. That book exposed fair trade as one of the great intellectual frauds of modern times. It is also a moral delusion that could lead to endless conflicts and an economic catastrophe.

  

  When politicians call for fair trade with foreigners, they use a concept of fairness diametrically opposed to the word’s normal usage. In exchanges between individuals – in contract law – the test of fairness is the voluntary consent of each party to the bargain: “the free will which constitutes fair exchanges,” as Sen. John Taylor wrote in 1822. When politicians speak of unfair trade, they do not mean that buyers and sellers did not voluntarily agree, but that federal officials disapprove of bargains American citizens made. Fair trade means government intervention to direct, control, or restrict trade.

  Fair trade often consists of some politician or bureaucrat picking a number out of thin air and forcibly imposing it on foreign businesses and American consumers. Fair trade meant that Jamaica was allowed to sell the U.S. only 970 gallons of ice cream a year, that Mexico could sell Americans only 35,292 bras a year, and that Poland could ship us only 51,752 pounds of barbed wire. Fair trade meant permitting each American citizen to consume the equivalent of only one teaspoon of foreign ice cream per year, two foreign peanuts per year, and one pound of imported cheese per year.

  American protectionists have always found moral pretexts to denounce “unfair” imports. In the 1820s, protectionists proclaimed that trade between England and America could not be fair because England was advanced and America was comparatively backward. In the 1870s, protectionists announced that trade between the US and Latin America could not be fair because the US was comparatively rich while Latin American countries were poor. In the 1880s, protectionists warned that trade could not be fair if the interest rate among the trading nations differed by more than two percent. In 1922, Congress effectively defined “unfair competition” as any foreign cost of production advantage that existed for any reason on any product.

  Since then, the US definitions of unfair trade have proliferated almost as fast as the number of D.C. trade lawyers. In the 1980s and early 1990s, the U.S. government penalized foreign farmers for not paying wages to their wives and children, foreign governments for not coercing foreign companies to buy more American products, and foreign companies for relying on part-time labor, making charitable donations, and failing to charge American customers the highest prices in the world. Federal law currently assumes that foreign competition that prevents American companies from raising their prices unfairly injures them.

  The most common foreign “unfair trade practice” is selling a better product at a lower price. Xenophobia is the foundation of U.S. antidumping law. The U.S. Commerce Department sees low-priced imported goods as Trojan Horses, insidiously undermining the American economy. The US government has imposed more dumping penalties against low-priced imports than has any other government in the world.

  

  The dumping law forces foreign companies to run a nearly endless gauntlet of American bureaucrats. Antidumping laws make it a crime for a company to sell the same product for two different prices in two different markets 15,000 miles apart. Dumping did not become a top trade issue until the 20th century, perhaps because our ancestors had not studied enough economics to become paranoid about minor price variations.

  “Fair trade” is increasingly a rallying cry of both conservatives and liberals who apparently believe that there is some hidden wisdom buried in the basement of federal agencies. But it is impossible to overstate the folly of some protectionist regimes. In 1816, Congress imposed high tariffs on sugar imports in part to prop up the value of slaves in Louisiana. Sugar producers have been “protected” almost ever since. The sugar program relies on import quotas and other interventions to drive U.S. sugar prices to double or more of the world price, costing consumers $4 billion a year. Since 1997, Washington’s sugar policy has zapped more than 120,000 U.S. jobs in food manufacturing. More than 10 jobs have been lost in manufacturing for every remaining sugar grower in the US American sugar growers will never become competitive unless there is far more global warming than even Swedish teen celebrity Greta Thunberg predicts.

  Fair trade dictates intentionally sacrifice some industries to other industries. A 1984 Federal Trade Commission study estimated that steel import quotas cost the U.S. economy $25 for each additional dollar of profit of American steel producers. Restrictions on steel crankshafts imports in 1987 hurt diesel truck engine manufacturers, restrictions on ball bearings imports in 1989 clobbered scores of American industries, and restrictions on computer flat panel displays devastated computer makers in 1991. More recently, Trump’s steel and aluminum tariffs, along with the foreign retaliation they sparked, destroyed an estimated 300,000 jobs. But the Biden team is perpetuating Trump’s tariffs (which were widely denounced when they were first imposed).

  American politicians profiteer on allegations of foreign unfairness. For American trade policy, need is the basis of right, and political campaign contributions are the measure of need. The more foreign unfair practices that politicians claim to discover, the more power they seize over what Americans are allowed to eat, drink, drive, and wear. Each new definition of unfair trade becomes a pretext to further restrict the freedom of American citizens.

  The myth of fair trade is that politicians and bureaucrats are fairer than markets—that government coercion and restriction can create a fairer result than voluntary agreement—and that prosperity is best achieved by arbitrary political manipulation, rather than allowing each individual and company to pursue his own interest.

  If a foreign nation blockades our ports, it is an act of war. But if American politicians blockade our ports, it is supposedly public service. Protectionism pretends that government can enrich citizens by selectively raising the prices of politically favored items. Protectionists champion the Washington version of Adam Smith’s Invisible Hand: Americans automatically benefit from any trade restriction which politicians are bribed to impose.

  As soon as a politician or federal bureaucrat accuses foreigners of unfair trade, then any subsequent trade restriction is supposedly self-evidently justified. Protectionists profiteer because most of the Washington press corps is simply “stenographers with amnesia.” Reporters base their trade stories on government press releases and rarely probe beneath the surface of the latest edict. Few journalists take the time to sift through the details of foreign perfidy to recognize how often U.S. government accusations fail the laugh test.

  Trade allows consumers everywhere a chance to benefit from increases in productivity anywhere. As Emerson observed, “If a talent is anywhere born into the world, the community of nations is enriched.” Trade binds humanity together in laboring for mutual benefits. The expansion of trade between the end of World War II and the 1980s produced the greatest era of prosperity in world history.

  Government cannot make trade more fair by making it less free. It should not be a federal crime to charge low prices to American consumers. The time has come to end the medieval pursuit of a “just price” for imports and to cease allowing government officials to cease boundless economic power over American consumers and business. Unfortunately, fair trade demagoguery will continue as long as politicians are greedy, lobbyists are generous, and journalists are clueless.

  Tyler Durden
  Sun, 10/24/2021 – 22:30

• Goldman Cut's China's 2022 GDP To Just 5.2%
  Goldman Cut’s China’s 2022 GDP To Just 5.2%

  Less than a month after Goldman stunned its Wall Street peers when it slashed its Q3 China GDP forecast to just 0%, forecasting no growth in the world’s second largest economy, Goldman has done it again and in a note published late on Sunday, not only does the bank admit that China has entered a phase of “temporary stagflation”, but in a tone that is almost apologetic as Beijing will likely take great offense at this provocation, the bank cut its 2022 GDP forecast form an already low 5.8% to just 5.4%.

  Goldman first summarizes the stagflationary dynamics of the recently concluded third quarter, in which just Chinese real GDP growth slowed to a 0.8% annual rate while at the same time, PPI inflation reached 10.7% yoy in September, the highest on record.

  

  However, and this is where Goldman is ever so sorry for offending Beijing with its “math“, Goldman’s Hui Shan writes that this “stagflation” is very different from the experience of the US and other developed countries in the 1970 (spoiler alert: it actually isn’t different at all as we explained in “Is Stagflation Here: Comparing The 2020s With The 1970s…“).

  Goldman then spends the balance of the note not so much focusing on China’s deep economic problems, as much as apologetically explaining (to anyone who will listen), why these challenges are so transitory, they can effectively be ignored. As Shan writes, “the weakness in Q3 growth was driven by a number of factors, including the August Covid outbreak that impacted many provinces, the sharp slowdown in the property market, and the energy shortages and power cuts in late September. We think the Covid outbreak probably played the biggest role in negatively impacting Q3 activity, followed by property and energy.”

  It gets better: to make sure the message is received loud and clear in Beijing, Goldman goes so hyperbolic as to call events in Q3 a “perfect storm” (which of course is unpredictable, so it’s not Beijing’s fault for what is taking place in the economy). Here are Goldman’s key observations on this topic:

  The weak Q3 growth was driven by a number of factors – Covid outbreaks and chip shortages that the government has less control over on the one hand, and property tightening and power cuts that are mostly policy-driven on the other. The September activity data show evidence on the combination of various shocks to the economy (fig.3) For example, catering sales (i.e., restaurant services) rebounded sharply in September after slumping in August on Covid lockdowns in multiple provinces. Auto production and sales remained soft on chip shortages. Property sales continued to drop on the government’s deleveraging efforts and lending restrictions. Output of high-emission products such as steel and cement fell sharply on the “dual controls” of energy use and severe coal shortages which led to power cuts and production halts in these sectors.

  After the anemic sequential growth year-to-date (averaging only about 2% annualized rate), the Chinese economy appears to have gone from a positive output gap at the end of last year to some excess capacity in Q3.

  

  Looking across different sectors, Exhibit 5 shows that, with the exception of agriculture, all industries are currently at or below trend level of output, assuming a pre-Covid sector-specific trend. In the case of leasing and commercial services (e.g., travel agencies and large conferences), hotel and restaurant services, and other services (e.g., household cleaning services), the negative output gap remains significant. Eighteen months after the onset of the Covid outbreak early last year and with no end of the “zero Covid” policy in sight, activity in these sectors is at risk for longer-term scarring effects.

  

  Household consumption was the hardest-hit part of the economy last year on both lower income growth and a higher saving rate. By Q3, household saving rate has mostly normalized to its pre-Covid level, falling from a peak of 35% in 2020Q1 to 30% now (Exhibit 6). The main constraint to consumption is income growth. As of Q3, the growth of household disposable income averaged only 6.6% per year over the past two years, compared to 8.8% in 2019. Among different sources of income, growth of business income underperformed the most, averaging 3.6% per year over the past two years compared to 8.0% in 2019 (Exhibit 7).

  

  In other words, China’s stagflation is “temporary” and should reverse soon. Until it does, however, Goldman is tracking the contribution of housing to GDP growth, and calculates it as subtracting 0.5% from Q3 GDP. The bank admits that it expects “even bigger drags in the coming quarters.”

  

  Meanwhile, as the property market shrinks, and the overall economy is barely growing, PPI inflation soared in September, but here too Goldman expects CPI inflation “to remain muted in the coming months for two reasons. First, food and service inflation has little relationship with PPI inflation and is likely to stay low. Second, even at extremely high levels of PPI inflation, the pass-through into CPI inflation is fairly low: we estimate an additional 1pp increase in PPI inflation raises headline CPI inflation by 0.1pp.” It explains further below:

  September PPI inflation reached the highest level since the data were available in 1997, raising questions about both the duration of the high PPI inflation and its potential passing through into CPI inflation which has remained low. On the first question, PPI inflation is likely to stay high in the near term, but should soften notably in six months on base effect. If prices were to remain unchanged from here, PPI inflation would drop to about 2% in mid-2022. On the latter, we expect the pass-through from PPI to CPI to be limited for two reasons.

  First, CPI has three distinct components – food, non-food goods, and services (Exhibit 11). Food inflation and service price inflation are likely to remain low in the coming months on depressed pork prices (which dominate food prices) and negative output gap (which is a key driver of service inflation). Second, historically the sensitivity of CPI non-food goods inflation to PPI inflation is statistically significant but economically small. Exhibit 12 shows a nonlinear relationship where relatively mild year-over-year PPI inflation (i.e., between -5% and +5%) appears to have very little impact on CPI non-food goods inflation.

  

  But even at more extreme levels of PPI inflation, the magnitude of the pass-through remains modest: an additional 1pp increase in PPI inflation from its currently elevated levels boosts CPI non-food goods inflation by 0.25pp which translates into 0.1pp for headline CPI inflation.

  Goldman’s bottom line is please don’t revoke our operating license in China for telling it how it is that things are bad but will get better soon because “unlike the stagflation of the 1970s, the very low growth and high inflation in China in Q3 were policy-driven (e.g., property tightening and decarbonization), partial (e.g., PPI only), and likely temporary (e.g., policies have already been adjusted to boost coal production and accelerate fiscal spending in Q4).” Again, all of this is a pure figment of Goldman’s goalseeking imagination. For a full picture of how the 1970s stagflation is ominously similar to what is going on now, read this.

  In any case, with China’s economy now at stall speed, Goldman had a choice: bad news and even worse news, or good, if meaningless news and, well, worse news. The bank picked the latter writing that it now expects a sequential pickup in growth in Q4 – which by the way  is unchanged from Goldman’s previous forecast – with year-over-year GDP growth to drop to 3.1%. However, while nobody cares about Q4 without the bigger picture, it was here that Goldman saved its worst news for last, warning that “long-term policy direction such as property deleveraging remains unchanged as evidenced by the latest news on starting property tax trials in select cities.” As such, the bank has slashed its 2022 growth forecast to 5.2% from 5.6% previously.

  

  And, as was the case with Goldman’s overoptimistic 2021 GDP forecasts, expect  many more GDP cuts as China’s economy gets dangerously close to a hard landing, if not outright crash. Not surprisingly, Goldman’s conclusion suggests as much:

  Given the continued slowdown in credit growth – the year-over year growth in the stock of total social financing (TSF) dropped to 10.0% in September from 13.5% a year ago – and the “just do enough” approach of policymakers, we revise down our credit growth forecast to 10.5% for 2021 (previously 11.5%). This still implies a modest pick-up in sequential credit growth in Q4. In addition, we recently changed our monetary policy forecast and no longer expect a RRR cut in Q4. This is not a call on the broader monetary policy stance. Rather, recent communications by the PBOC suggest that the central bank is likely to use targeted liquidity instruments (e.g., SME and green financing relending programs) instead of broad-based RRR cut to replace the large amounts of maturing MLF loans.

  Finally, Goldman looks at its downside case scenario (the onw which will happen), and says that “if growth were to deteriorate sharply, we believe the government will react decisively, especially as China prepares for next year’s Beijing Winter Olympics” (starting from Feb 4)and the 20th Party Congress (October/November). Spoiler alert: growth will deteriorate sharply from here, something which the PBOC clearly see and is why the central bank just injected a net $190BN in reverse repo, the biggest liquidity injection since January. Here, too, expect much more.

  

  And while Goldman expects a sequential pickup inQ4, its year-over-year growth is poised to decline further. But under the “just do enough” mentality of policymakers, especially as the unemployment rate remains low despite weak growth, the bank warns that “growth headwinds are likely to linger and the slower-than-expected credit growth over the past few months should weigh on economic activity next year based on historical experience.”

  Tyler Durden
  Sun, 10/24/2021 – 22:04

• Who Will Join The 100 Billion Dollar Club Next?
  Who Will Join The 100 Billion Dollar Club Next?

  Indian industrial magnate Mukesh Ambani made headlines recently when he entered the more-than-exclusive club of those with $100 billion or more in net worth. Currently, eleven men can call themselves members of this elusive bunch.

  Tech billionaires dominate the global $100 billion club – and they are exclusively at home in the United States. Even though Tesla CEO Elon Musk – currently the richest person in the world – is arguably a hybrid case, the only tycoon other than Ambani who made it this big in consumer or industrial products is Frenchman Bernard Arnault. The third non-techie, Warren Buffett of investment group Berkshire Hathaway, also hails from the United States.

  

  You will find more infographics at Statista

  In comparison, the global 1 percent are a group of around 80 million people, while the global 0.1 percent still comprises 8 million individuals – making the $100 billion club the equivalent of the global 0.0000001 percent.

  But, as Statista’s Katharina Buchholz notes, the entrance of Ambani as the second non-American and first person from a developing country is likely only the beginning of a diversification of the $100 billion club that could start very soon.

  According to data available through the Bloomberg Billionaires Index, eight billionaires could surpass the $100 billion barrier in the next four years, given that they continue to grow their fortunes at the same rate as they did between January and October 2021.

  

  You will find more infographics at Statista

  A second Indian, Gautam Adani of port operator Adani Group, could theoretically surpass the line in around five months, while the first woman who could join the club – French L’Oreal heiress Francoise Bettencourt Meyers – is still a potential 1.3 years away. A Chinese or Hongkongese member would join in early 2024, according to the calculation.

  Of course, billionaires’ net worth is tied to the volatile stock market and fortunes can change very quickly. Yet, the amount of contenders which are from more diverse backgrounds suggests that the list of the obscenely rich will start to look different in the future one way or another.

  Tyler Durden
  Sun, 10/24/2021 – 22:00

• Virus Gonna Virus (And China Gonna China)!
  Virus Gonna Virus (And China Gonna China)!

  Authored by Alex Berenson via Unreported Truths substack,

  We are almost two years into the plague di tutti plagues, the virus with a 3 in 1,000 death rate (give or take), which rounds down to roughly 0 in 1,000 for the non-elderly and morbidly obese.

  Along the way, lots of different states and countries have pursued lots of different strategies, from Zero Covid to Zero Restrictions, from early vaccines to late vaccines to (basically) no vaccines.

  Two years should be long enough to know who wore it best, amirite? So let’s go to the videotape!

  Here’s the United Kingdom (heavy early lockdown, 70% vaccinated, tons of testing, just like the public health people want)

  

  Erm. Not so good.

  And here’s India (hard early lockdown, 20% fully vaccinated, very few with mRNA vaccines)

  

  Okay, they had that big spikeroo in the spring, but they don’t look bad. But also they’re relatively young.

  Now here’s Colombia (VERY hard early lockdown, 39% fully vaccinated)

  

  Three, count them three, different waves, but nothing the last six months. Hmm. Maybe 39% vaccinated is the magic number?

  Or maybe not. Because here’s Russia (light lockdowns, 33% vaccinated):

  

  Mother Russia! Clearly some hard lockdowns are in order.

  And speaking of lockdowns, maybe Australia (SUPER hard lockdowns, explicit Zero Covid strategy, late but aggressive vaccinations) has the answer?

  

  Looking good for a while, Australia… but not so much now.

  It’s almost – hear me out, this is gonna sound CRAZEE – government strategies have made NO DIFFERENCE to the spread of this highly contagious but only moderately dangerous respiratory disease.

  There is one exception, though.

  I give you the People’s Republic of China, without which we wouldn’t be talking about the ro at all. Somehow Xi and Shi, the dear leader and the bat lady, have managed to make Covid go bye-bye – without a single jab of our fancy Western vaccines.

  

  Virus gonna virus. And China gonna China.

  It’s a miracle, I tell ya. A miracle!

  Tyler Durden
  Sun, 10/24/2021 – 21:30

• Is Stagflation Here: Comparing The 2020s With The 1970s…
  Is Stagflation Here: Comparing The 2020s With The 1970s…

  Now that the fear of stagflation is a growing concern on Wall Street as the latest BofA Fund Manager Survey showed…

  

  … as the inflation debate – at a time of shrinking global growth – has taken on renewed vigor given the latest commodity price surge over recent weeks, the energy shocks and discussions around stagflation have led many to make the comparison to the 1970s not just on this site…

  If this guy is right, there will be 1970s style mass shortages of most products in a few months https://t.co/7vpfupqhEj

  — zerohedge (@zerohedge) April 28, 2021

  https://platform.twitter.com/widgets.js

  … but elsewhere:

  • Paul Tudor Jones, CEO of Tudor Investment Corp., tells CNBC that inflation is the single biggest threat to the economy: “The inflation genie is out of the bottle and we run the risk of returning to the 1970s” – CNBC
  • Is Stagflation Coming Back? Economist Sees Parallels With the 1970s—and Big Differences – Barrons
  • Is the world economy going back to the 1970s? – The Economist
  • What the Inflation of the 1970s Can Teach Us Today – WSJ
  • Conditions are ripe for repeat of 1970s stagflation – Guardian
  • Ignore the fearmongers: the 1970s are not coming back – Guardian
  • A Stock Market Malaise With the Shadow of ’70s-Style Stagflation – NYT

  Addressing these growing comparisons between the 2020s and the 1970s, last week Deutsche Bank’s credit strategists Henry Allen and Jim Reid looked into some of the similarities and differences between that infamous inflationary decade and today. Below we summarize some of the key observations made by the duo, who looked at how the 1970s evolved from an inflationary perspective and compare and contrast to today.

  We start by reminding readers that things were very bad in the 1970s….

  As Deutsche Bank writes, TV screens in the UK have recently shown scenes of long lines for gas across the vast majority of fuelling stations. Initially, this wasn’t about a shortage of fuel, but a shortage of HGV drivers that fed upon itself to become a fuel shortage amidst a demand surge as well. Right now, we’re still a long way from what we saw in the 1970s, when there were big reductions in the supply of energy, but the recent rise in global gas prices could be much more troublesome going forward. Across the globe, fuel rationing took place for a period of time back then, and governments ran huge media campaigns to conserve energy. President Nixon asked gas stations not
  to sell gasoline on Saturday or Sunday nights, and eventually license plate restrictions (odd and even) were in place in the US for when you could buy fuel. In Europe, some examples of the stresses included a ban in the Netherlands on Sunday driving, whilst the UK imposed a 3-day week as coal shortages threatened electricity supplies alongside a winter series of strikes by coal miners and rail workers.  Households were asked to heat only one room in their homes.

  so we need to put into perspective how bad things got for individuals and economies due to the energy issues. The recent gas problems have raised the prospects of a winter where rationing could take place but this is speculation for now. However, the spikes in gas prices are reminiscent of what happened with oil in the early 1970s (both have a geopolitical angle too) so some historical awareness is useful.

  How did inflation get out of control in the 1970s?

  Today’s situation has a number of parallels to what happened in the 1960s and 1970s, when inflation gradually accelerated to the point where it was out of control. Various shocks coalesced over a short period of time, and policymakers were consistently behind the curve in reacting:

  • In the US, the Johnson Administration’s Great Society programs and the Vietnam War drove up fiscal spending in the late-1960s.
  • In 1971, President Nixon ended the dollar’s link to gold, ending the system of fixed exchange rates that had prevailed after the Second World War.
  • An El Nino event in 1972 drove up food prices.
  • The dollar underwent a devaluation in February 1973.
  • Then on top of all this, the first oil shock occurred in 1973, followed by a second oil shock in 1979.

  Even though the commodity shocks are generally held most responsible for the high inflation over the period, it’s clear that inflation was already embedded in the system well before they occurred. So if you were keeping a strict timeline you could argue that when it comes to economic policy being more expansionary, we’re more in the late-1960s than the 1970s. Perhaps Covid has made the timeline more compressed, but inflation steadily moved from under 2% in the first half of the 60s to over 6% by the end of the decade.

  The inflationary set up in the 70s then deteriorated thanks to the suspension of the dollar’s convertibility into gold in 1971. Given that virtually every other currency was fixed to the dollar at the time, we quickly moved from a world of gold-based money to one where fiat money was in control. Interestingly, Figure 1 shows that with this loosening of policy constraints, the YoY percentage growth in monetary aggregates moved consistently into the low teens from high single digits in the late 1960s.

  

  Today, we’ve moved from pre-covid mid-single digit YoY percentage growth to a brief period of 25% YoY growth at the peak. Even if we revert back to single digit percentage growth there’s still a large residual amount of liquidity in the economy far above that assumed by the pre-covid trend. So there’s been a faster injection of money into the economy in the space of a year than we saw at any point in the 1970s.

  But even as inflation continuously accelerated through the late-1960s onwards, central bankers found it difficult to shift policy in a hawkish direction. This was partly down to political pressure, both explicit and implicit, since politicians were not keen on the idea of a slowdown in growth and higher unemployment. It was also down to a poor understanding of the economy – with policymakers wrongly believing in the Phillips Curve, and the belief that it was possible to “buy” lower unemployment with higher inflation, when this wasn’t actually true over the long term.

  We can see some of this pressure in action by looking back through the archives. The following quote comes from the Fed’s senior economist, J. Charles Partee, in the memorandum of discussion from the March 1973 FOMC meeting. He said that “To adopt a substantially more restrictive policy that carries with it the danger of stagnation or recession would seem unreasonable and  counterproductive. As unemployment rose, there would be strong social and political pressure for expansive actions, so that the policy would very likely have to be reversed before it succeeded in tempering either the rate of inflation or the underlying sources of inflation.”

  So even the Fed’s economists at the time were acknowledging the “social and political pressure” under which they were operating. One more recent academic paper by Charles Weise (2012) actually found that references at FOMC meetings to the political environment were correlated with the stance of monetary policy, which further suggests it was having an impact on decision-making.

  Another serious issue was that the Fed was operating with a poor understanding of the available data. Orphanides (2002) notes that errors in the assessment of the natural rate of unemployment meant policymakers believed that the economy was operating beneath potential. So that helped to justify lower interest rates than prevailed in reality. Had they actually realized the situation as it prevailed at the time, then perhaps they would have pushed more strongly for a hawkish stance. So a number of factors were pushing inflation higher. But what turbocharged it into double-digits in the US were two major oil shocks, which had ramifications across the entire developed world?

  1973: The First Oil Shock

  The first oil shock was triggered by the Organization of Arab Petroleum Exporting Countries (OAPEC) placing an embargo on a number of countries, including the United States, in retaliation for their support for Israel in the Yom Kippur War. There is also some evidence that the US abandoning the convertibility of the dollar into gold, which led to a big devaluation of the dollar, and a loss of income for oil producers, helped create resentment from this group.

  Regardless of the cause, this led to a quadrupling in oil prices, triggering a recession across multiple countries that began in late 1973. Inflation was already running at  a decent clip, but this turbocharged it, with CPI peaking at 12.2%, which was the highest it had been since the immediate aftermath of WWII.

  

  This, as Deutsche Bank notes, posed a tricky dilemma for the Federal Reserve. Although the inflation rate was high and rising, unemployment was also climbing at the same time. So hiking rates to deal with inflation risked exacerbating the unemployment situation. This scenario is completely unlike what happened after the GFC in 2008, which was a big deflationary shock, making it clear which way the Fed needed to move rates.

  At the time, the view was that the embargo was a structural shock that monetary policy couldn’t affect, so it should therefore look through such a transitory factor (this should ring a few bells). For a fly-on-the-wall view, Stephen Roach, who’s now a Senior Fellow at Yale but was formerly on the research staff at the Fed, said that Fed Chair Burns argued that as the shock had nothing to do with monetary policy, the Fed should exclude oil and energy-related products from the CPI index for its analysis.  Roach then said Burns insisted on removing food prices in 1973 after unusual weather. This too should ring bells… and alarms.

  The exclusions of these “transitory” factors became so extreme that Roach estimates that only 35% of the CPI basket was left. By the middle of the decade this series itself was then rising at a double-digit rate. You can get a sense of how loose policy was here by looking at the real Federal Funds rate, which moved into negative territory as a result of the oil shock. Interestingly, the real rate is now even lower than it was at any point in the 1970s.

  

  To be fair to the Fed, at the start of the energy shock it would have been tough to know how the situation would develop. The record from the December 1973 Fed meeting says: “On balance, the Chairman concluded, he believed that some easing of monetary policy was indicated today, but that it should take the form of a modest and cautious step. He was aware of the possibility that the oil embargo might not last more than another few weeks. On the other hand, the embargo might last another year.” So although we can view events with a detached level of hindsight, with the knowledge of how they played out, they were living through this in real time.

  As it happened, the embargo lasted until the following March, but the long-term effects are still with us today. The shock had revealed the dependence of the United States and others on foreign oil, so an emphasis was placed on reducing that dependence. That saw the Strategic Petroleum Reserve created in the US in 1975, which is a tool that today’s Energy Secretary has said is under consideration to deal with the present energy price surge. Then in 1977, the Department of Energy was created, which is also with us to this day.

  As Figure 4 shows, US inflation did come down again once the worst of the first oil shock had passed. But it only fell back to around 5% before picking up again, whilst monetary policy still remained fairly accommodative to deal with high unemployment (Figure 5), which in December 1976 stood at 7.8%.

  

  This was partly because there was still political pressure on the Fed. The Carter Administration arrived in office at the start of 1977, and in the transcript of the FOMC meeting that January, Chairman Burns said “We have a new Administration; the new Administration has proposed a fiscal plan for reducing unemployment, and any lowering of monetary growth rates at this time would, I’m quite sure, be very widely interpreted–and not only in the political arena–as an attempt on the part of the Federal Reserve to frustrate the efforts of a newly elected President and newly elected Congress to get our economy, to use a popular phrase, “moving once again.”

  Fast forward to today and although there isn’t the same level of political concern, the Fed have recently undertaken a dovish shift following their recent policy review. Their move towards average inflation targeting is an explicit acknowledgement that they’re willing to accept above-target inflation to make up for past undershoots. Furthermore, they have adopted a much more tolerant view on the risk of
  inflationary pressures from low unemployment, and officials regularly discuss distributional issues such as economic performance for those on low incomes or minority groups. So it’s clear that the Fed’s reaction function has changed relative to where it was just a few years ago.

  1979: The Second Oil Shock

  Back to the 70s and just as the economy was recovering from the effects of the 1973 shock, a second oil shock in 1979 sent inflation  sharply higher once again. This took place around the time of the Iranian revolution, which coincided with a big decline in Iranian oil output, to the tune of around 7% of global production at the time. Then in 1980, the Iran-Iraq War caused further declines in production for both countries.

  Although plenty blame the oil shock for creating high inflation, the truth was that this was merely the final nail in the coffin for the old regime, since in the preceding years, the Fed had persistently underestimated how high inflation would rise. The next chart shows that the Fed’s staff forecasts were repeatedly upgraded as time went on, even prior to the second shock.

  

  Unlike in 1973 however, this shock induced a much more hawkish policy response from the new Fed Chair Paul Volcker. Indeed, the transcript from Volcker’s first meeting as Fed Chair in August 1979 shows him pointing to higher inflation expectations that had developed, saying that “I think people are acting on that expectation [of continued high inflation] much more firmly than they used to.” And Volcker also recognized that restoring the credibility of economic policy could also “buy some flexibility in the future”.

  Although higher rates were a contributory factor behind the recession that began in early 1980, this new pro-active approach was successful at containing inflation, which fell from a peak of 14.6% in March 1980, down to 2.4% in July 1983. The real Fed Funds rate turned sharply positive in the early 1980s, dramatically above levels seen in the mid-1970s (see Figure 3). To this day, US inflation has yet to rise above 7% again.

  Comparing the 1970s and the 2020s: can we expect a repeat?

  Having discussed the 1970s, Deutsche notes that one of the biggest questions on investors’ minds is whether we’re in for a repeat. Some factors like demographics or globalization indicate that there are much greater inflationary pressures today. But others like declining union power and lower energy intensity are pointing in the other direction. We now look at a number of these in turn.

  1. Monetary Policy

  Like the 1970s, monetary policy is very loose today. In fact, the real federal funds rate (simply found by subtracting 12-month CPI inflation as per Figure 3) is actually lower today than it was then, while the increase in the money stock (Figure 1) has also seen a much bigger single year expansion than ever took place in the 1970s. Financial conditions today remain accommodative as well, thus providing a lot of support for the economy.

  2. Debt

  Recent decades have seen an extraordinary increase in global debt levels. In particular, government debt levels today are well in excess of the low levels reached in the 1970s. As a consequence, higher rates will have a much bigger impact on government and non-government balance sheets, and risk being much tougher to stomach today than they were then. This could mean policy makers are forced to remain behind the curve in a similar way to the 1970s, albeit for different reasons.

  

  3. Demographics

  The consensus assumes that demographics will be disinflationary as societies age. However, one similarity between the 1970s and now could be a worker shortage, albeit from different sides of the baby boomer demographic miracle. In the 1970s, the boomers had yet to hit the workforce and labor was relatively scarce. But from the 1980s onwards, the global labor force exploded in size as the boomers came of age. Simultaneously, China began to integrate itself into the global economy for the first time in several generations, thus unleashing a big positive labor supply shock onto the global economy. This combination has been disinflationary for wages for the past four decades. However, the major economies are now set to see their labor forces decline or at best level off as the baby boomers retire. So will we get similar labor market pressures as seen in the 1970s? Covid has shown what can happen to wages when there is a shortage of labor. The huge number of vacancies in low-paid jobs today due to a shortage of workers due to covid related issues are pushing wages up. And although the covid bottleneck will clear, the declining working-age population in many places over the decade ahead could see labor gain back some power that it lost from the end of the 1970s.

  

  4. Globalization

  The late-20th century was an era of rising globalization, with the 1970s alone seeing the share of global trade in GDP rise from 27% in 1970 to 39% by 1980. But since 2008, that progressive advance has stalled, and there are many signs that the post-pandemic will see a return to less globalization, as both countries and corporates look to localize their supply chains in order to make them more resilient. In turn, a retreat from globalization and firms facing less competition implies higher prices than would otherwise be the case. So as with demographics, the potential retreat of globalization would remove another of the big forces that’s helped to suppress inflation over recent decades.

  

  All the factors mentioned above point towards inflation being more difficult to combat today. But there are others that point in the opposite direction.

  5. Energy Reliance

  Since the 1970s, the US economy has become progressively less energy intensive. By 2020, the amount of energy required for each unit of GDP was just 37% of where it had been back in 1970, and the US Energy Information Agency are forecasting that will continue to fall over the coming decades. So with less energy required to support output, the impact of a price shock will be commensurately less than it was back in the Great Inflation of the 1970s.

  

  6. Union Power

  Another force acting against inflation is the decline in union membership over recent decades. Unions themselves do not cause inflation, which is a monetary phenomenon, but they can contribute to wage-price spirals. This is because higher inflation leads to higher wage demands from trade unions to ensure their members’ wages keep up with the rising cost of living. But firms then anticipate this by bidding up their own prices further, which can create a circular feedback loop as the unions in turn demand higher wages still. So the fact that unions are weaker is likely to put downward pressure on inflation, all other things equal. Having said this, there is some evidence that unionization is on an increasing trend, albeit from a low base. The mention of unions in official company documents was the fastest growing of our ESG buzz words in September 2021 relative to a year earlier.

  

  7.War, Geopolitics and Climate Change

  Many of the biggest inflations in history have been associated with wars, and the inflation of the 1960s and 1970s got going around the time of the Vietnam War, when there was upward pressure on spending. Today, the economic response to Covid has been almost comparable, with fiscal deficits on a scale not seen since WWII for many countries. In addition, the geopolitics of Russia being such an important supplier of gas to Europe has parallels with the West’s reliance on Middle Eastern oil supplies in the 1970s at a time of a divisive Arab/Israeli conflict.

  Going forward, the US/China relationship could be a key driver of inflation later in the current decade, particularly if an escalating cold war leads to a more bipolar world and a retreat from globalization, as discussed earlier. And that’s before we get onto the threat of climate change, where we’re already seeing the consequence of trying to move away from coal, in that we’ve become more dependent on other fuel sources such as natural gas. As the globe tries to further wean itself off fossil fuels, we could have more energy shocks over the course of this decade.

  8. The lessons of history

  Finally, history itself plays an important role in policymaking. For example, part of the reason that the economic response to the pandemic was so large and swift was in order to avoid repeating the mistakes of the global financial crisis, where delays undermined the recovery.

  When it comes to inflation in 2021, plenty have raised concerns that today’s policymakers have little to no experience of dealing with a significant inflation problem. Indeed, for the decade after 2008, the main focus was on how to tackle chronically deficient demand as central bankers struggled to hit their inflation targets on a sustained basis in many countries. So the fear is that policymakers might have a dovish bias given these experiences, and risk being slow to recognize if inflation has become a more permanent feature of the landscape. This is particularly so when if anything, the perception is that they were too hawkish in the period following the financial crisis.

  On the other hand, today’s central bankers and other policymakers are aware of the lessons of the 1970s and will not want their legacies to involve a repeat. They recognize that inflation and unemployment can’t be traded off against each other over the longer term, and have much better data than their predecessors. Furthermore, there is still strong political pressure to avoid higher inflation… even as there is even greater political pressure to avoid taking the much needed if very painful steps to contain the coming inflation.

  What can we learn from this?

  Looking at the 1970s, the most important lesson is that even if inflation is down to transitory factors, the arrival of yet more “transitory” shocks can accumulate to keep inflation at high levels, with expectations becoming unanchored. That was what occurred with the oil shocks: although inflation was sent sharply higher, the truth is that inflation was pretty high already, as a legacy from the late 1960s, and the shocks turbocharged it yet further.

  But we can view the events of the 1970s with the benefit of hindsight. For policymakers at the time, it was less obvious that these shocks would not prove transitory, and today they face a similar dilemma. If policy reacts too forcefully to something central banks can’t control (like inflation thanks to supply-chain disruptions), then that risks undermining the recovery and actually pushing inflation below target, since the shock will eventually pass and monetary policy operates with a lag. On the other hand, doing nothing risks inflation expectations becoming unanchored, particularly if another shock then arrives to push inflation higher still. One can also argue that with money supply growth so strong over the past 18 months, there has been a strong monetary angle to inflation and therefore some tightening of monetary policy is sensible. Overall, it is an unenviable dilemma, and the debate in the economics profession right now speaks to the unknowns.

  So we approach this question with some humility. But we do think it worth noting that many factors like debt, demographics and globalisation all indicate that we could be facing an even more difficult situation than we saw back then. And the monetary aggregates have also seen a much more rapid increase as well. So policymakers will need to be vigilant for a potential repeat, particularly given that the institutional memories of high inflation have faded over time.

  The full Deutsche Bank report is available to pro subs.

  Tyler Durden
  Sun, 10/24/2021 – 21:00

• Treasury Secretary Says US Not Losing Control Over Inflation As Twitter CEO Issues Dire Warning
  Treasury Secretary Says US Not Losing Control Over Inflation As Twitter CEO Issues Dire Warning

  Authored by Jack Phillips via The Epoch Times,

  Twitter CEO Jack Dorsey issued a warning about rising inflation over the weekend as Treasury Secretary Janet Yellen on Sunday said the United States isn’t losing control.

  “Hyperinflation is going to change everything. It’s happening,” Dorsey wrote on Twitter, later continuing to say:

  “It will happen in the U.S. soon, and so the world.”

  

  Jack Dorsey, CEO of Twitter and co-founder & CEO of Square, attends the crypto-currency conference Bitcoin 2021 Convention at the Mana Convention Center in Miami, Fla., on June 4, 2021. (Marco Bello/AFP via Getty Images)

  During an interview on Sunday with CNN, Yellen said that inflation levels would return to normal by the second half of next year. The Treasury Secretary made the remarks in context of promoting President Joe Biden’s domestic infrastructure and social spending packages worth trillions of dollars combined, saying the two programs would be implemented over 10 years.

  “I don’t think we’re about to lose control of inflation,” Yellen said. 

  “On a 12-month basis, the inflation rate will remain high into next year because of what’s already happened. But I expect improvement by the middle to end of next year… second half of next year,” she added.

  Supply chain snags have bedeviled the United States and other countries as economic reopenings have spurred a surge in demand, she continued.

  “As we make further progress on the pandemic, I expect these bottlenecks to subside. Americans will return to the labor force as conditions improve,” she said.

  

  Treasury Secretary Janet Yellen testifies during the House Financial Services Committee hearing in Washington on Sept. 30, 2021. (Sarah Silbiger/Pool via Reuters)

  However, a group that represents UPS, FedEx, and other air cargo companies issued a warning that the looming Biden vaccine mandate for federal contractors on Dec. 8 will trigger supply chain chaos. With that mandate coming in the midst of the Christmas shopping season, they argued that will further “adversely impact needed operations” and noted that worker shortages are already persistent.

  Meanwhile, a report from the Department of Labor released earlier this month found that the U.S. consumer price inflation is running near a 30-year high. Year-over-year prices in September are up by 5.4 percent, its report found, noting price increases for food, cars, and other staple goods.

  Procter & Gamble and Unilever, which both make consumer goods, both announced in recent days that they would increase prices on certain goods amid worsening inflation.

  Unilever finance chief Graeme Pitkethly saw little letup in inflationary pressures and warned that “we expect inflation could be higher next year than this year,” Reuters reported.

  Procter & Gamble’s price hikes are not being implemented on all its products, but they will be marked for specific items such as razors and in some sub-categories, CFO Andre Schulten said, reported Reuters. U.S. retailers are aware of the new sticker prices, he added.

  “We announced price increases to retailers in the U.S. on oral care, skin care, and grooming,” Schulten said in a conference call. “It’s item by item,” he added.

  Tyler Durden
  Sun, 10/24/2021 – 20:30

• Northern California Swamped With "Historic Rain" Amid Rare Atmospheric River Event 
  Northern California Swamped With “Historic Rain” Amid Rare Atmospheric River Event 

  The National Weather Service’s (NWS) Sacramento office said “potentially historic rain” rain has fallen in parts of Northern California after a bomb cyclone accompanied an atmospheric river that unleashed massive amounts of moisture pulled in from the Pacific Ocean.

  

  Northern California bore the brunt late Saturday/Sunday, with record rainfall in some areas. NWS Bay Area said, “We just passed the Gold Rush year of 1849 for 7th wettest October on record for Downtown SF. 1876 (3.36) here we come..(Current value is 3.14 which ties 1849).” 

  Evacuations were ordered for parts of Northern California that have been drought-stricken and left barren by wildfires. Areas that have been burnt are prone to dangerous flooding called “debris flows.” 

  SR-70 remains closed due to multiple #Rockslides, #Landsslides and #floodings

  📸 CHP – HQ#AtmosphericRiver #California #Rain #Storm #PlumasCounty pic.twitter.com/8KtOiyjGO7

  — Michael Barthel (@RealMiBaWi) October 24, 2021

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  Landslide on Hwy 70 near Tobin, Ca has the highway shutdown and will likely be for a long duration. #CAwx #wxtwitter #AtmosphericRiver pic.twitter.com/MlBVa19Dyl

  — WXChasing (Brandon Clement) (@bclemms) October 24, 2021

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  This is a look at how many incidents firefighters are currently responding to in San Mateo County. #CaWx @sanmateoco pic.twitter.com/fWQxPuEJp2

  — CAL FIRE CZU (@CALFIRECZU) October 24, 2021

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  “If you are in the vicinity of a recent burn scar and haven’t already, prepare now for likely debris flows,” the Sacramento weather service tweeted. “If you are told to evacuate by local officials, or you feel threatened, do not hesitate to do so. If it is too late to evacuate, get to higher ground.”

  VIDEO: A flash flood watch is in effect through 11 p.m. in the North Bay due to the atmospheric river storm soaking the Bay Area. Here’s what you need to know. https://t.co/jnXHUuuFIu pic.twitter.com/PFaD677Dyp

  — NBC Bay Area (@nbcbayarea) October 24, 2021

  https://platform.twitter.com/widgets.js

  Flooded streets were reported across the Bay Area, closing some in Berkeley and Oakland’s Bay Bridge toll plaza. Just north of San Francisco, a whopping 6 inches of rain has fallen this weekend. Rainfall estimates for the Bay Area show at least 3 inches have fallen, trouncing any other storm in years. 

  

  “Some of our higher elevation locations could see 6, 7, 8 inches of rain before we’re all said and done,” Sean Miller, a meteorologist for the NWS in Monterey. 

  The convergence of storms brings Northern California a huge relief amid devastating droughts and wildfires this past summer.

  As we’ve previously mentioned, La Niña conditions have been declared by NWS, which means wetter than average conditions for Northern California and the Pacific Northwest. In contrast, drier than average conditions are expected for Southern and Central California. 

  Tyler Durden
  Sun, 10/24/2021 – 20:00

• Illinois Supreme Court Rules Tax On Guns & Ammo Unconstitutional
  Illinois Supreme Court Rules Tax On Guns & Ammo Unconstitutional

  By Lorenz Duchamps of Epoch Times,

  The Illinois Supreme Court ruled on Oct. 21 that two taxes on guns and ammunition in Cook County violate the state’s constitution because they affect law-abiding citizens’ Second Amendment right to acquire firearms for self-defense.

  

  Supreme Court Justice Mary Jane Theis wrote in a 6–0 decision that the taxes violate the constitution’s uniformity clause, while also pointing out that the revenue from the generated tax isn’t directed toward funds or programs that reduce gun violence.

  “While the taxes do not directly burden a law-abiding citizen’s right to use a firearm for self-defense, they do directly burden a law-abiding citizen’s right to acquire a firearm and the necessary ammunition for self-defense,” Theis wrote in a 14-page opinion (pdf) filed on Thursday.

  “Under the plain language of the ordinances, the revenue generated from the firearm tax is not directed to any fund or program specifically related to curbing the cost of gun violence,” she noted. “Additionally, nothing in the ordinance indicates that the proceeds generated from the ammunition tax must be specifically directed to initiatives aimed at reducing gun violence.”

  The justice concluded that the case will be remanded to the circuit court “for entry of summary judgment in favor of plaintiffs.”

  In 2012, the Cook County Board of Commissioners approved a $25 tax on the retail purchase of a firearm within the county. The county’s Firearm Tax Ordinance was enacted in April 2013.

  A separate county tax was enacted in 2015, which added $0.05 per cartridge for centerfire ammunition and $0.01 per cartridge for rimfire ammunition. Americans who fail to pay those taxes are subject to a $1,000 fine for the first offense and a $2,000 fine for subsequent offenses.

  The trade group and gun-rights organization, Guns Save Life, challenged both taxes in a lawsuit against the county, saying they violate the Second Amendment rights of law-abiding citizens.

  A spokesman for Cook County President Toni Preckwinkle said on Thursday they are disappointed in the ruling and will work to determine the next steps.

  Tyler Durden
  Sun, 10/24/2021 – 19:30

• "Euphoria Is Increasing": Goldman Doubles Down On Market Meltup Call, Sees $90BN In New Stock Buying This Week
  “Euphoria Is Increasing”: Goldman Doubles Down On Market Meltup Call, Sees $90BN In New Stock Buying This Week

  Last weekend we published a note by Goldman flow trader, Scott Rubner, who explained why despite a huge wall of worry which included such worries as a stagflation, China property bust, China slowing, Covid, tapering, corporate margin fears, snarled supply chains, energy, rate hikes, global growth slowing, higher rates, etc, stocks would melt up for a handful of simple reasons including a flood of buybacks and equity fund inflows, collectively amounting to roughly $8 billion per trading day, muted buyside sentiment, gamma flipping positive, a buying thrust from Vol Control funds and favorable seasonals.

  In retrospect, and with the S&P hitting new all time highs just a few days later, the Goldman trader was spot on.

  Fast forwarding one week, some may ask if Goldman’s enthusiasm has tapered. The answer, as the flow trader wrote in his latest Tactical Fund Flow note, is not at all, and instead Rubner is doubling-down on optimism, once again predicting nothing but meltups for stocks in the weeks to come. If one had to summarize his sentiment with one word it would be FOMO – the money just keeps flowing into stocks as the mechanistic Pavlovian response to just keep buying because the Fed will never let stocks sink proves simply far too strong. As a result, the bank now expects a gargantuan $90 billion in global equity demand for the coming week (more below).

  Global Equities logged >$1 Trillion dollars worth of inflows during the last 51 weeks and the start of positive vaccine news. This is the biggest market structure dynamic of the year. For context, the prior best rolling 51 week record was +$250 Billion. 2021 is 4x larger than the next best yearly inflow. I think the equity TINA money flow train keeps charging to close the year and accelerates aggressively in November. I calculate a significant, +$18B worth of non-fundamental equity demand every day this week and this increases with massive November monthly inflows and corporate demand after >47% of the S&P reports next week.

  

  Below Rubner lays out his latest detailed take on why the most likely path for stocks is a continued meltup higher.

  • 1. S&P 500 just logged its 55th new all-time high of 2021 after 7 straight gains and highest level since September 2nd.  Watch CNBC “boo-ya Jim” headlines.
  • 2. S&P 500 logged a new all-time high in every month so far this year and that has only happened one other time since 1928. (2014)
  • 3. There have been 15 times since 1928, that the S&P is up >20% or more through October. The median return for the rest of the year (last two months only) is +5.92%, with an 80% hit rate. 2021 would be the 16th time.

  

  • 4. As of Friday, Goldman Sachs Sentiment Indicator, which pulls in 9 positioning indicators, logged the lowest reading (-.9), since May 22nd, 2020 (covid times), which was 73 weeks ago. (SPX was 2,955.45 vs. SPX 4,532.65 currently).

  

  • 5. We are entering the strongest month (and best two month period) of the year with a median return of 2.1% and positive hit rate of 71% going back to 1985. VIX below 15, through pandemic lows.

  

  

  • 6. November Inflows is the biggest dynamic in the market next week. Goldman models +20bps of AUM ($23 Trillion) or +$46B of new demand (I expect double given money has completely halted going into bonds).

  

  • 7. Improving tax headlines dampen my biggest flow-of-funds worry for December. I am reducing my probability of December selling, no selling of tech stocks is positive in itself.
    • a) The timing of a potential capital gains tax rate hike has been a key focus of many investors. Long-term capital gains and qualified dividends are currently taxed at a maximum rate of 20%, along with a separate 3.8% tax on investment income. Vice President Biden has proposed taxing these as ordinary income for filers with over $1 million in annual income. This would roughly double the tax rate on capital gains and dividend income from 23.8% to 43.4%. Link
    • b) Using Federal Reserve data, GS Research estimates the wealthiest households now hold around $1 trillion in unrealized equity capital gains. This equates to 3% of total US equity market cap and roughly 30% of average monthly S&P 500 trading volume.
    • c) Past capital gains tax hikes have been associated with declines in equity prices and in total household equity allocations. In addition, high-momentum “winners” that had delivered the largest gains to investors ahead of the rate hike have usually underperformed. The Tech and Consumer Discretionary sectors have led the market this year and have also been the largest sources of capital gains within the US equity market during the last 3, 5, and 10 years.
    • d) The wealthiest 1% were the biggest net sellers of equities across US households around the last capital gains rate hike in 2013. In the three months prior to the hike, the wealthiest households sold 1% of their starting equity assets, which would equate to around $100 billion of selling in current terms.

  Just in case his euphoria outlook was not clear enough, Rubner then repeats what he wrote in various client chat rooms this week, explaining – again – he expects another epic liftathon.

  • 1. CTA – GS systematic strats estimate $47B to buy over the next 1 week assuming a flat tape. (and $23B to buy in a down 2.5 standard deviation move lower). ~$10B of global equity demand per day.
  • 2. Corporates – US Corporates are expected to purchase $3.80B shares per day. 47% of S&P reports next week.
  • 3. Retail – This week Global equities logged +$25B worth of inflows or ~5B per day.
  • 4. Retail (2) – US households currently own 38% of the $75 Trillion US Corporate Equity Market. There is a max frenzy around the new Bitcoin ETF launches. Pull up the DWAC SPAC, Euphoria is increasing.

  

  • 5. That is roughly $18B worth of global equity demand per day, every day this week, according to Goldman’s calculations.
  • 6. Positioning on the discretionary HF side remains low / negative / short, and Goldman is looking for any dip to be shallow.

  Last but not least, seasonals from here are up, up and away.

  

  Tyler Durden
  Sun, 10/24/2021 – 19:00

• This Shows Why The Yuan Is Defying Economic Slowdown
  This Shows Why The Yuan Is Defying Economic Slowdown

  By Ye Xie, Bloomberg markets live commentator and analyst

  Three things we learned last week:

  1. The yuan keeps rising even as the economy slows. China’s growth slipped below 5% in the third quarter. Excluding pandemic-hit 2020, that would be the slowest in more than three decades. Yet the yuan is surprisingly strong with the trade-weighted index hovering near the highest in almost six years. Friday’s FX settlement data show why the yuan is so resilient.

  A proxy for foreign-currency inflows, the net yuan purchases by banks’ clients amounted to 174 billion yuan ($27 billion) in September. The 12-month average rose to a record 159 billion yuan, thanks to strong exports and inflows to China’s stock and bond markets. The portfolio inflow will likely keep coming. The widely-followed FTSE WGBI index will include Chinese bonds by the end of this month, a move that Citigroup estimated will bring in about $3 billion a month. Against this background, any expectation for large yuan deprecation is likely to be misplaced.

  

  2. Beijing is making moves to calm the property market. A slew of senior officials, including Vice Premier Liu He, came out to try to shore up the struggling real-estate sector and reassure everyone that risks from Evergrande are contained. Evergrande’s surprising payment of interest rates last week helped it avoid an imminent default, triggering the biggest weekly rally in Chinese junk bonds since 2012. The crisis is by no means ending. But China’s fine-tuning of housing policy, including encouraging banks to increase mortgages, should bring some relief for property developers.

  It’s part of broad efforts by policy makers to keep the economy from faltering further. On Friday, a Ministry of Finance official said Beijing has urged local governments to speed up bond issuance to fund infrastructure projects.

  

  3. Inflation is bringing forward central bank rate expectations across the world. The global bond selloff continued last week as inflation expectations rose. The U.S. five-year breakeven rate reached the highest in more than a decade. In Russia, the central bank stunned investors with a bigger-than-expected rate increase Friday, and warned that more tightening may come to curb inflation. In China, while consumer prices are held back by lower pork prices, bond yields have also increased in recent weeks as expectations of reserve ratio cuts waned.

  Tyler Durden
  Sun, 10/24/2021 – 18:30

• "Welcome To The Hunger Games": More Chicago Officers 'Summoned' As City Council Mulls Vax Mandate Reversal
  “Welcome To The Hunger Games”: More Chicago Officers ‘Summoned’ As City Council Mulls Vax Mandate Reversal

  Chicago’s main police union is continuing to tell officers to hold the line as police HQ continues summoning officers to disclose their Covid vaccination status, and placing those who don’t comply on “no-pay status” while sending them home.

  Just ahead of a crucial city council meeting set for Monday, Fraternal Order of Police First Vice President Michael Mette likened the continued standoff to “The Hunger Games”. Mette referenced the popular dystopian novel series and movies in a social media video posted prior to the weekend, saying “Welcome to day three of ‘The Hunger Games,’ where we find out who the city is going to offer up as tribute.”

  

  As of the weekend it’s as yet unknown precisely how many dozens or possibly many more officers have been temporarily relieved of duty, but it’s been clear that city authorities have been deeply hesitant to pull the trigger on threats of mass firings, given the already understaffed police and first responder units face weekend after weekend of high crime and violent incidents, including dozens of shootings a week.

  The police union is hoping that a proposal for reversing the vax status mandate order passes in a much anticipated city council vote to take place Monday:

  Fraternal Order of Police President John Catanzara is hoping a crowd shows up to City Hall to support an ordinance that will be introduced Monday that would defy the Mayor’s city employee COVID-19 vaccine mandate.

  “Let’s hope enough Aldermen do the right thing and push to have that ordinance enacted so this vaccine policy gets reset and negotiated like it should have been,” Catanzara said.

  In his most recent video, Catanzara said he hopes an ordinance that will be proposed Monday overturning Mayor Lori Lightfoot’s vaccine mandate will pass.

  The latest local reports say that at this point up to 70% of the some 12,000 member police force have revealed the vaccination status so far.

  BREAKING REPORT: Local CFD First Responder says Chicago Police Department Are Now SENDING WORKERS HOME If They Don’t Get Vaccinated…

  — Chuck Callesto (@ChuckCallesto) October 23, 2021

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  If Monday’s ordinance passes, the reversal of Lightfoot’s original mandate would mean any employee already placed on leave would receive back any missed paychecks retroactively, and the vax order would be declared “null and void”. 

  In fresh statements, union leader Catanzara estimated that this his knowledge thus far, “Over two dozen officers held the line and disobeyed the order and went into a no-pay status.”

  Chicago police union official compares vaccine standoff with mayor to ‘Hunger Games’ https://t.co/AaAHX84lXv pic.twitter.com/SLf9wrnzZQ

  — American Military News (@AmerMilNews) October 22, 2021

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  The union is attempting to cover missed pay for resisters, also in order to encourage more: “We set up a heroes fund on the FOP website, that money will be distributed to the officers in no-pay status. We are going to figure out a calculation on how to help them out on this financial crunch they voluntarily took on our behalves,” Catanzara said.

  Tyler Durden
  Sun, 10/24/2021 – 18:00

• Shock Waves In The Virginia Gubernatorial Election, Can Biden Help?
  Shock Waves In The Virginia Gubernatorial Election, Can Biden Help?

  Authored by Mike Shedlock via MishTalk.com,

  With 10 days to go before Election Day, Democrat Terry McAuliffe and Republican Glenn Youngkin are locked in a close battle for governor of Virginia…

  

  GOP Gains in Governor’s Race

  Highly respected pollster Monmouth University reports GOP Gains in Governor’s Race

  Democrat Terry McAuliffe and Republican Glenn Youngkin are locked in a close battle for governor of Virginia. The last Monmouth (“Mon-muth”) University Poll of the race before the election marks a gain for the GOP candidate from prior polls. Youngkin’s improved position comes from a widening partisan gap in voter engagement and a shift in voters’ issue priorities, particularly around schools and the pandemic.

  Youngkin (46%) and McAuliffe (46%) hold identical levels of support among all registered voters. This marks a shift from prior Monmouth polls where the Democrat held a 5-point lead (48% to 43% in September and 47% to 42% in August). A range of probabilistic likely electorate models* shows a potential outcome – if the election was held today – of anywhere from a 3-point lead for McAuliffe (48% to 45%) to a 3-point lead for Youngkin (48% to 45%). This is the first time the Republican has held a lead in Monmouth polls this cycle. All prior models gave the Democrat a lead (ranging from 2 to 7 points).

  A new Monmouth poll of Virginia’s race for governor shows Democrat Terry McAuliffe and Republican Glenn Younkin tied at 46 percent among registered voters.

  This marks a shift from prior Monmouth polls where McAuliffe held a 5-point lead. https://t.co/cDXa8ufpsu

  — Geoff Bennett (@GeoffRBennett) October 20, 2021

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  What Happened?

  At a September 28 debate, Mr. McAuliffe bluntly declared: “I don’t think parents should be telling schools what they should teach.” 

  Youngkin took that pitch and ran with it. He promises more accountability, more charter schools, and an end to critical-race indoctrination.

  The Monmouth analysis is pretty good and gets to the Democrats’ annoyance/disbelief at the schools issue. It didn’t poll as a top voter issue – covid and the economy did – but McAuliffe’s gaffe inspired Youngkin to hammer it relentlessly and change media/voter focus.

  — David Weigel (@daveweigel) October 20, 2021

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  Taken Out of Context?

  McAuliffe: “I have been taken out of context.”

  Translation: “I accidently said exactly what I thought, instead of the poll tested remarks prepared for me by my staff, who know that I wont get elected if I say what I actually think.” https://t.co/bP3ujZDi4Y

  — Nick Freitas (@NickForVA) October 19, 2021

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  What a hoot. The translation is perfect.

  Translation: “I accidently said exactly what I thought, instead of the poll tested remarks.”

  Biden to the Rescue?

  Biden campaigns for McAuliffe as new poll shows the race is even https://t.co/SXtPDWyLo7

  — 9 Breaking News (@9_breaking_news) October 21, 2021

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  Is that supposed to help? Whom?

  Obviously Biden thinks it will help McAuliffe, but color me skeptical. If an incoherent Biden gets on the stage with McAuliffe, it just might help Youngkin.

  My guess Biden sticks to cameo appearances, tries to say nothing, and the pluses and minuses balance out to nothingness. 

  Harris to the Rescue?

  VP Kamala Harris campaigns for Terry McAuliffe, Democratic gubernatorial candidate for Virginia in Dumfries on Thursday. The race between McAuliffe & Republican Glenn Youngkin has narrowed to a tie just two weeks ahead of Election Day, according to a new Monmouth University poll. pic.twitter.com/v5MGSUftsh

  — Al Drago (@Al_Drago) October 21, 2021

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  Is that supposed to help? 

  I’ll take a stab that this is negative for McAuliffe. Harris is not well liked and proven useless at the border.

  Education Message

  Monmouth poll: Education went up in importance by ten points at the same time Youngkin jumped ahead of McAuliffe on trust on the issue. pic.twitter.com/9u5MOiipB3

  — Ben Domenech (@bdomenech) October 20, 2021

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  Changing Numbers 

  Big Data Poll @Peoples_Pundit
  Key takeaways

  McAuliffe/Youngkin Approval
  -White 39.1/55.8
  -Black 67/13 (-20% less approve of McAuliffe vs Gov Northam )
  -Hispanic 53.6/41.4(+20% swing towards (R) from 2017)

  McAuliffe/Youngkin By Party
  (D) 92.8/4.2
  (R) 7.1/88.8
  (I) 38/48.3 pic.twitter.com/Ko2N9GcuJa

  — InteractivePolls (@PollsandOdds) October 22, 2021

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  Poll Dynamics 

  New Schoen Cooperman poll of #VAGOV shows different results based on different turnout dynamics:

  RVs: McAuliffe 47, Youngkin 43.

  Those who sag they’re certain to vote: McAuliffe 47, Youngkin 47.

  Voters who have voted in past VA-GOV races: Youngkin 49, McAuliffe 45 pic.twitter.com/4PTKIuQLMs

  — Josh Kraushaar (@HotlineJosh) October 20, 2021

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  538 Poll Synopsis 

  

  The Trafalgar Group also has the poll as tied. But 538 corrects that to +1 for Younkin. 

  Amusingly, after having repeatedly blasted Trafalgar in the 2020 presidential election, 538 now ranks Trafalgar as A-.

  McAuliffe’s Gift to the GOP

  The Wall Street Journal discusses McAuliffe’s Gift to the GOP.

  Mr. McAuliffe this week released an ad that radiates panic. The screen pans over pictures of Mr. McAuliffe’s children, as the Democrat complains his Republican opponent took his words about education “out of context.” 

  Candidates stuck explaining what they really meant (two weeks from an election) are candidates in trouble. And every sign is that Mr. McAuliffe’s campaign has been on a perilous slide since that fateful comment.

  The moment illustrates again the power of education as a wedge issue. It crosses socio-economic lines, giving Republicans the opportunity to peel back crucial suburban voters who helped Joe Biden to the White House. And it crosses racial lines, providing the party a chance to build on gains among blacks, Hispanics and Asian voters.

  The issue resonates as strongly with Mr. Youngkin’s base, which is energized by a candidate willing to confront entrenched school boards and teachers unions. Monmouth finds GOP voter enthusiasm is booming, with 79% of Republicans saying they are very motivated to vote (7 points higher than Democrats) and 49% saying they are enthusiastic about the election (23 points higher). Education transcends the divide between working-class and college-educated voters.

  Virginia isn’t an outlier; it’s a road map. While the Beltway press corps has obsessed over protests in the Virginia suburbs, the same fury is ripping across districts in every state—including those crucial to Democrats’ congressional majorities. In New Hampshire ( Sen. Maggie Hassan ), parents line up to rail at school boards. In Colorado (where Sen. Michael Bennet used to be Denver’s superintendent of schools), board members are quitting, getting recalled or being challenged by entire slates of reformist parents. In Arizona ( Sen. Mark Kelly ), the state GOP has taken to running to “school board boot camps” to handle the unprecedented flood of newly engaged citizens.

  The McAuliffe experience shows how tricky the issue can be for Democrats. Teachers unions (core Democratic donors) demand fealty. Activists demand backing for transgender policies and critical-race curriculums. Yet it turns out this standard progressive line is offensive to millions of reengaged parents. Mr. McAuliffe’s first instinct was to bow to and back the educational establishment—which didn’t go well. He’s since tried to turn the tables and duck questions by incorrectly claiming CRT isn’t taught in Virginia schools and is a fiction—a “racist” “dog whistle.” That’s not fooling a single Virginia parent.

  Mish Call 

  Tossup. I don’t know. Perhaps a slight edge to Youngkin, simply based on momentum.

  But there is a second issue that no one above addressed and it can easily be the deciding factor.  

  Right To Choose

  Youngkin is pro-life in a deeply blue state. Women are over half the voters. This is just not a good issue for Republicans. In fact, it’s a terrible issue for them. 

  Once again, the base is going nowhere. Independents and moderates will decide the election. 

  Can Youngkin win enough independents and swing voters on education to counter a major flaw on abortion? 

  The Real Lesson  

  The real takeaway that the WSJ missed is the GOP needs to bend towards the middle. 

  The middle wants an end to critical-race indoctrination. But the middle includes other wedge issues like abortion. 

  The middle does not want the radical Left policies of the Progressives who have hijacked Biden’s agenda. 

  Instead, we have extreme politics on both sides where independents have to chose one wedge issue over another.

  *  *  *

  Like these reports? If so, please Subscribe to MishTalk Email Alerts.

  Tyler Durden
  Sun, 10/24/2021 – 17:30

• "RV Capital Of The World" Sees Influx Of New Residents As Americans Abandon Big-City Living
  “RV Capital Of The World” Sees Influx Of New Residents As Americans Abandon Big-City Living

  Every once in a while, a headline cuts right through the haze of statistics and really tells you something about the complicated state of what’s really going on in the US.

  

  And somehow, the WSJ did it Tuesday with an article about how surging home prices (particularly in densely populated cities) and a shift toward a remote-work lifestyle are causing significant numbers of Americans to move away from big urban centers like NYC and smaller or mid-sized cities.

  Many of the cities on the receiving end are happy to see newcomers after decades of decline in their industrial base hollowed out over decades of deindustrialization.

  And their transition is a loss for largely blue states like California and New York that are hiking taxes and driving more taxpayers away.

  In the latest sign of this shift away from the more than decade-long shift of young people moving to big cities, Elkhart, Ind., which calls itself “the RV Capital of the world” based on the fact that it’s the largest RV manufacturer in the US, was the leading county in Realtor.com’s latest

  According to the latest data from a Realtor.com/News Corp., the last quarter was a very good one for Elkhart’s real-estate market, which is hotter than it’s been in decades. The Indiana county topped the WSJ’s “Emerging Housing Markets Index” in Q3.

  The index claims to identify “the top metro areas for home buyers seeking an appreciating housing market and appealing lifestyle amenities”.

  Per WSJ, the index’s top-ranked markets saw “faster-growing populations and more shopping interest from shoppers outside their metro areas than the market as a whole, said Danielle Hale, chief economist at Realtor.com.”

  

  Just in case you didn’t put the pieces together yourself, the WSJ reports that the COVID pandemic “...has spurred more RV demand” as households wanted to travel while “keeping their distance from others.” Unemployment in Elkhart did sit at 3% in August, compared with the 5.1% headline national average.

  The median home-sale price in Elkhart County rose 12.3% in August from a year earlier to $209,900, according to the Indiana Association of Realtors. There were 163 homes for sale that month, down from 220 a year earlier.

  “Market activity has slowed slightly in recent weeks, but “anything under $250,000 still goes very, very fast,” Ms. Miller said. “Those are the hardest to come by and the fastest to sell.”

  They even managed to measure the fact that about “65% of the page vies on Elkhart-area property listings” came from “outside the metro area” to illustrate the pace of interest from out-of-town buyers.

  It’s just the latest sign that, as we noted last week, job openings are soaring as millions of Americans are moving to new places and looking to start over.

  Tyler Durden
  Sun, 10/24/2021 – 17:05

• What's Behind The Eerie Calm In Corporate Credit
  What’s Behind The Eerie Calm In Corporate Credit

  By Vishwanath Tirupattur, global head of Quantitative Research at Morgan Stanley

  Over the past few weeks, risk markets have been buffeted by volatility from a wide array of sources. It was around a month ago that the regulatory reset in China and near-term funding pressures on select property developers roiled global markets, as investors fretted over the systemic implications for global growth. A mixed US jobs report along with sharply higher commodity prices intensified the debate around stagflation. Rhetoric from multiple central banks has been increasingly hawkish. The combination of these concerns has resulted in substantial market gyrations. Relative to a month ago, the S&P 500 Index declined by about 4% before recovering to up 6%. The shape of the Treasury yield curve has twisted and turned. The benchmark 10-year Treasury interest rate went from around 1.30% to around 1.70%, and market pricing of the timing of a Fed rate hike has come in sharply.

  

  Amid these substantial moves, corporate credit markets on both sides of the Atlantic have largely stayed calm. Credit spreads in investment grade, high yield and leveraged loans across the US and Europe have hovered near 52-week tights, with surprisingly limited volatility.

  

  Credit market beta relative to equity markets remains very low. Market access for companies across the credit spectrum has remained robust, as indicated by strong issuance trends, running at or ahead of the pace a year ago. What explains this stark difference between credit and other markets? The answer boils down to meaningfully improved credit fundamentals and elevated balance sheet liquidity, leading to a decidedly benign outlook for defaults over the next 12 months, if not longer.

  Our credit strategists, Srikanth Sankaran and Vishwas Patkar, have highlighted that the balance sheet damage from COVID has been reversed. At the end of 2Q, gross leverage in US investment grade credit had declined sharply to 2.4x, back to pre-COVID levels. Net leverage is now below pre-COVID levels, while interest coverage has risen sharply to a seven-year high.

  The trends in the high yield sector are even more impressive and the improvement broad-based, driven not just by the rebound in earnings but also negative debt growth. At 3.87x, the median leverage of high yield companies in our coverage universe for 2Q21 is down 0.5x Q/Q and 0.89x Y/Y. After four consecutive quarters of declines from the 2Q20 peak, median leverage now sits below the pre-COVID trough. That 71% of the issuers are reporting lower gross leverage Q/Q reflects the broad-based improvement.

  Encouragingly, the size of tail cohorts has also begun to normalize – the share of issuers reporting 6x+ leverage is down 7 percentage points on the quarter. On the median measure, debt balances were 3.9% lower Y/Y while LTM EBITDA was 17.5% higher. Median interest coverage increased in the quarter to 4.68x (+0.52x Q/Q), with a solid 82% of issuers posting improved coverage. Cash-to-debt ratios remained close to record highs at 15.6%. Even in LBO land, while 2021 has been a bumper year for acquisition activity, with transaction multiples and debt multiples at record highs – usually a source of concern for leveraged loan and high yield bond investors – unprecedented equity cushions have resulted in a better alignment of sponsor and lender interests, helping to alleviate concerns.

  These improvements in credit fundamentals explain the low-beta behavior of credit versus equity markets. Earnings and margin concerns matter for credit investors, too, but the intensity and breadth of balance sheet repair matter more. Furthermore, given the sharp rally in stocks, equity cushions in capital structures have increased and leverage as measured by debt-to-EV has declined.

  What are the implications for investors? A lot, of course, is in the price. With credit spreads near the tight end of the spectrum, we are more likely to see them widen than tighten.

  Indeed, the base case expectation of our credit strategists is for modestly wider spreads. However, the strength in credit fundamentals suggests that the outlook for defaults is benign and likely below long-term average realized default levels. Thus, we prefer taking default risk to spread risk here, leading us to favor high yield over investment grade and, within high yield, loans over bonds. For the more sophisticated investor seeking double-digit returns, the best expression of this view would be through equity tranches of collateralized loan obligations (CLO). Structural leverage as opposed to repo leverage, cash flows that are front end-loaded, multiple embedded refinancing options, all combined with the expectations of benign defaults, make CLO equity tranches a particularly interesting opportunity.

  Tyler Durden
  Sun, 10/24/2021 – 16:40

• Lira Tumbles To New Record Low As Critics Blast Erdogan's Ambassador Expulsion Scandal
  Lira Tumbles To New Record Low As Critics Blast Erdogan’s Ambassador Expulsion Scandal

  Following Erdogan’s Friday tirade, lashing out at Western countries for issuing a joint letter demanding the immediate release of jailed Turkish billionaire philanthropist businessman and opposition politician Osman Kavala, which was followed by the president’s threat that he had ordered ten ambassadors – including the US – to be deemed ‘persona non grata’ by Turkey’s government, the Turkish lira weakened to another record low against the dollar after electronic trading reopened early in the Asian session.

  Around 4pm ET Sunday afternoon, the lira tumbled 1.6% to a new record low against the dollar of 9.73 at the opening of Asian trading; this following the bigger-than-expected rate cut on Thursday despite rising inflation which sparked a furious selloff in the country’s currency as the move was widely derided as a dramatic and reckless and followed’s Erdogan’s erratic firing of three central bankers  the week prior.

  

  The non grata designation targeted the ambassadors of US, Germany, France, Canada, Denmark, Finland, the Netherlands, Sweden, Norway, and New Zealand. Meanwhile, Turkish opposition leaders slammed Erdogan’s lashing out against the United States embassy and other allied Western countries as nothing but a major effort at distraction from Turkey’s economic tailspin and disaster in the making: 

  Kemal Kilicdaroglu, leader of the main opposition CHP, said Erdogan was “rapidly dragging the country to a precipice.”

  “I worry … for Turkish financial markets on Monday. The lira will inevitably come under extreme selling pressure,” said veteran emerging market watcher Tim Ash at BlueBay.

  “And we all know that (Central Bank Governor Sahap) Kavcioglu has no mandate to hike rates, so the only defense will be spending foreign exchange reserves the CBRT does not have.”

  Typically such a designation of foreign ambassadors results in their prompt expulsion from the country, but as of Sunday night that doesn’t appear to have happened yet, suggesting this may be yet more jawboning from Erdogan. It wouldn’t be the first time the president has failed to follow up on his threats: in 2018, he said Turkey would boycott U.S. electronic goods in a dispute with Washington. Sales were unaffected. Last year, he called on Turks to boycott French goods over what he said was President Emmanuel Macron’s “anti-Islam” agenda, but did not follow through.

  As Reuters adds, citing a diplomatic source, a decision could be taken at Monday’s cabinet meeting and that de-escalation was still possible. Erdogan has said he will meet U.S. President Joe Biden at next weekend’s G20 summit in Rome. Erdogan has dominated Turkish politics for two decades but support for his ruling alliance has eroded ahead of elections scheduled for 2023, partly because of high inflation.

  Emre Peker, from the London-based consultancy Eurasia Group, said the threat of expulsions at a time of economic difficulties was “at best ill-considered, and at worst a foolish gambit to bolster Erdogan’s plummeting popularity”.

  “Erdogan has to project power for domestic political reasons,” he said.

  Erdogan’s anger erupted after the ambassadors of Canada, Denmark, France, Germany, the Netherlands, Norway, Sweden, Finland, New Zealand and the United States issued a joint statement on Oct. 18, calling for a just and speedy resolution to Kavala’s case, and for his “urgent release”.

  Soner Cagaptay from the Washington Institute for Near East Policy tweeted: “Erdogan believes he can win the next Turkish elections by blaming the West for attacking Turkey — notwithstanding the sorry state of the country’s economy.”

  Tyler Durden
  Sun, 10/24/2021 – 16:20

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