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Dog Days

Overview: The dog days of August for the Northern Hemisphere are here and the capital markets are relatively subdued. Equities are firmer. The notable…

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Overview: The dog days of August for the Northern Hemisphere are here and the capital markets are relatively subdued. Equities are firmer. The notable exceptions in Asia was China, Hong Kong, and Taiwan. The MSCI Asia Pacific Index has advanced for the last three weeks. Europe’s Stoxx 600 slipped almost 0.6% last week and has recouped most of it today. US futures are steady to firmer. The US 10-year yield is struggling to stay above 2.8%, while European benchmarks are off 3-6 bp, with Italian yields firmer after Moody’s cut the country’s credit outlook to negative before the weekend. The dollar is mostly softer with the Australian and New Zealand dollar’s leading the way (~0.60%-0.75% better). The euro and yen are little changed. Among emerging market currencies, the Asian Pacific complex is softer while the central European currencies, South African rand, and Mexican peso enjoy a firmer tone. Gold is trading quietly in a $4-range centered near $1775. September WTI was sold back down after it tried to resurface above $90 a barrel. OPEC and IEA provide new market assessments tomorrow. US natgas is heavier for the third consecutive session, while Europe’s benchmark is up 2%, is first gain in five sessions. Iron ore snapped a five-day fall ahead of the weekend with a 3.2% advance. It is up another 2.25% today. September copper rose in the last two sessions, but it is struggling today. September wheat fell almost 4% last week and is off nearly another 1% today. At the end of the week, the US Department of Agriculture updates its World Agriculture Supply and Demand Estimate. 

Asia Pacific

China's July trade surplus rose to a new record of $101 bln after $97.9 bln in June. Exports edged up slightly, rising 18% year-over-year after a 17.9% increase previously. Economists had expected exports to slow to around 14%. Imports rose 2.3%, a little more than half what was projected, but more than double June's 1% increase. While imports of crude oil increased, only commodities, such as soy, copper, natural gas. The sluggish growth in imports is thought to reflect soft domestic demand. However, the economy does appear to be recovering from the contraction earlier this year.

Japan, on the other hand, has seen a deterioration of the terms of trade and recorded a JPY1.37 trillion trade deficit in June, which drove the current account into a deficit of JPY132.4 bln, the first since January. To put the trade deficit in balance-of-payment terms in a context, consider that it ran a surplus of about JPY2.28 trillion in H1 21 and a JPY5.66 trillion deficit in H1 22. Separately, we note that the speculative positioning in the futures market showed a roughly 18k contract reduction of the net short yen position in the week ending August 2. At about 42.7k contracts (each worth ~$95k), it is the smallest net short position since June 2021. Lastly, and arguably with the least direct economic implications, press reports have confirmed what has swirled around for several days, namely a cabinet reshuffle that Prime Minister Kishida is expected to announce Wednesday. The powerful ministries of finance, industry, and foreign affairs are not expected to change. Given that there ae no national elections for three years, Kishida may be re-balancing the three main factions in the LDP now: his, Abe, and Aso (LDP Vice President). It looks like the Abe faction may be weaker for obvious reasons. The latest polls show public support for the cabinet is waning but still above 55%. Still, changing a few top ministers is unlikely to hurt and maybe even help.

Foreign investors sold around $430 mln of Taiwanese equities last week which brings the quarter-to-date liquidation to $1.06 bln. In H1, foreign investors sold almost $34 bln of Taiwanese shares. News that officials would support the equity and currency markets helped stabilize the Taiex and the Taiwanese dollar. The Taiex recouped the week's losses plus a little more with a 2.25% surge at the end of last week. Similarly, the Taiwanese dollar rose by almost 0.15% ahead of the weekend, allowing it to close with a miniscule advance for the week. While Taiwan's reserves are little changed this year, Hong Kong Monetary Authority's defense of the peg has been persistent. Its reserves, while still plentiful at nearly $442 bln, have fallen by more than $55 bln over the past eight months. This means HK may account for almost half of the $116 bln decline in the Federal Reserve's custody holdings of Treasuries and Agencies for foreign central banks over this period. South Korea's reserves have fallen steadily since the end of last year and are now around $30 bln lower. Thailand's reserves have fallen by $26 bln this year after $12 bln last year. The Philippine's reserves have fallen for the past five months and six of the past seven for a cumulative loss of about $10 bln. Lastly, China's July reserves rose $32.8 bln to $3.10 trillion from $3.07 trillion. It was only the second increase in reserves this year and appears to be largely the result of valuation adjustments:  the dollar and yields fell. Year-to-date, China's reserves have fallen by around $146 bln.

The US dollar edged slightly above the job-induced high against the Japanese yen seen ahead of the weekend, stalling near JPY135.60. It peaked on July 14 around JPY139.40 and fell to JPY130.40 last week. The recovery in US yields has helped the greenback recoup more than half of the decline. The JPY136 area corresponds to the (61.8%) retracement objective. Initial support is around JPY134.80. The Australian dollar has nearly recovered its pre-weekend losses to test the $0.6975 area. A band of resistance extends to $0.7000 and last week's high was closer to $0.7050. We look for a heavier Aussie in the North American session, with potential toward the $0.6900-20 area. Meanwhile, the greenback is slightly firmer against the Chinese yuan above CNY6.76. Yet, it is within the new range that has developed in recent weeks between roughly CNY6.7280 and CNY6.7820. The PBOC set the dollar's reference rate tightly against expectations (CNY6.7695 vs. CNY6.7693).

Europe

Before the weekend, Moody's cut the outlook for Italy's rating to negative from stable. It cited the accumulation of risks stemming from Russia's invasion of Ukraine and the political uncertainty following the collapse of the Draghi government. Of the three large rating agencies, Moody's is the toughest on Italy. It assigns a Baa3 rating to it, which is one notch above junk and one notch below S&P and Fitch. Late last month, S&P revised its rating outlook for Italy to stable from positive. Fitch has had a stable outlook. Last week, Italy's premium over Germany on 10-year rates fell 14 bp, including nearly half (six basis points) ahead of the weekend to near 2.06%, a three-week low. It has given the pre-weekend gains back and is near 2.13%. At the two-year tenor, Italy's premium fell 30 bp to 0.81%, the least since mid-July and has also recovered the pre-weekend decline and is near 0.89%. 

With a national election next month Italy's political drama is center stage. Meloni, the head of the Brothers of Italy, who could become the next prime minister (and first woman) is not from the part of the Italian right that is anti-EU, anti-NATO. To the contrary, she committed to the reforms that will unlock more of the EU's Next Generation funds, for which Italy could be the largest beneficiary. The center-left looks like its flailing. A coalition announced on Saturday was abandoned on Sunday. Without a credible coalition the polls warn that the center-right can win as much as three-quarters of both chambers of parliament. Meanwhile, the flexibility the ECB has secured in reinvesting the maturing proceeds from the Pandemic Emergency Purchase Program already appears to have been utilized to support the peripheral bond markets.

In addition, to the disruptions spurred by Russian's invasion of Ukraine, post-Covid supply chain disruptions, and the tightening of monetary policy, the extreme weather in Europe is also exacerbating economic tensions. It is the driest in Britain in 90-years according to some estimates. The Rhine River is becoming too shallow for transport of heavy materials, and French nuclear plants have been given a temporary waiver to dump hot water in the rivers that are meant to help cool the plants.

The euro is in a little more than a half-of-a-cent range today below $1.0215. The pre-weekend low, after the US jobs report was slightly above $1.0140. Today's low, set in Asia, was near $1.0160. The single currency does not appear to be moving quickly anywhere and appears comfortable in a $1.01-$1.03 range. That said, we do not have much confidence in its resilience in the face of the widening of the US 2-year premium over Germany. It stands at a new high today of 2.80%, the most since May 2019. Sterling is trading quietly in a $1.2050-$1.2125 range today, easily inside the pre-weekend range (~$1.2000-$1.2170). The economic highlight of the week comes Friday with the preliminary look at Q2 GDP. A small contraction is expected. Despite downside risks, the Bank of England is expected to deliver another 50 bp hike next month (~88% chance discounted in the swaps market). 

America

The softness seen in the weekly jobless claims and ISM surveys was countered by the strong employment report. Almost 530k jobs positions were filled last month, more than twice expectations. The establishment survey has now fully made up for the losses during the pandemic, though if the public health crisis did not take place, the total number of employment could be around 2.0.2-5 mln higher. It also suggests that much of focus on the number of layoffs announced last month was sensationalist. It is not that it is fake news, but distorted news especially when portrayed as reflective of broad developments. 

Fed Chair Powell says price pressures are straightforward enough that one number, headline PCE captures it. However, the labor market is more complex, he says. Several other elements of the employment report reflected a still-robust labor market, including the 0.4% increase in aggregate hours (good sign for GDP), and a 0.5% rise in hourly earnings (and an upward revision in the June series to 0.4% from 0.3%). The unemployment rate slipped to a new low of 3.5%, though it partly is a function of the fall in the participation rate to 62.1% from 62.2%. The teenage participation rate seemed to have been a factor. Where does this leave the US economy at the start of Q3?  The PMI and Fed surveys data disappointed, but the ISM survey was better, and two real sector reports, auto sales and jobs saw some momentum not seen at the end of Q2.

Without fresh "leaks", the market realizes that the strength of the jobs report eases the pressure to recognize the current situation as a recession and boosts the chances of a 75 bp rate hike next month. Some apparently have suggested the risk of an inter-meeting move, but the market is not really biting. Fair value for the August Fed funds futures, assuming no inter-meeting hike, is 97.67 (2.33%), and the contract closed at 97.655 (2.345%). The futures strip shows the year-end rate to be 3.56%, a 25 bp increase on the week. Recall the July high was 3.68% and the June high was 3.72%.

US consumer credit soared by $40.2 bln in June, half again as much as expected. It is the second-highest on record. Consumer credit has accelerated this year. It rose $100 bon in Q1 and another $100 bln in Q2. In all of last year, consumer credit rose by almost $250 bln. Notably, revolving credit (credit cards) rose by $14.8 bln in June, slightly above the recent average.  Non-revolving debt grew by $25.4 bln. As this chart of consumer credit shows, it typically falls sharply in a recession.  

The divergence of the jobs' reports before the weekend, weighed on the Canadian dollar, even though the S&P 500 recouped most of its early losses. Canada shed full-time jobs for the second consecutive month and saw decline in the participation rate.  The US dollar reached CAD1.2985, its highest level in two-and-a-half weeks.  It is consolidating today in a 30-pip range on either side of CAD1.2920.  The re-assessment of the trajectory of Fed policy plus the drop in oil prices comes as the momentum indicators turn up for the greenback.  We suspect the path of least resistance is higher for the greenback.  Initially, we look for CAD1.3050, and maybe CAD1.31.  Mexico reports CPI figures tomorrow. Price pressures are still accelerating, and this will likely lead to another 75 bp rate hike (same as in June), which would lift the overnight target to 8.5%.  The swaps market sees another 100 bp after this week's hike over the next six months.  The US dollar peaked last week near MXN20.83 and finished the week around MXN20.4050.  It tested the MXN20.3060 area today.  Support is seen in the MXN20.20-MXN20.23 band.  A break could target the MXN20.00-05 area, we would be more inclined to fade it.  Note that Brazil reports its IPCA inflation measure tomorrow, and it is expected to fall to its lowest level of the year, slightly above 10%. It peaked in April at 12.1%.  The dollar fell almost 1% against the Brazilian real before the weekend.  Last week's low was set near BRL5.13.  A break of the BRL5.10 area could spur a test on BRL5.0.  


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Economics

Nearly Half Of Americans Making Six-Figures Living Paycheck To Paycheck

Nearly Half Of Americans Making Six-Figures Living Paycheck To Paycheck

Roughly 60% of Americans say they’re living paycheck to paycheck -…

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Nearly Half Of Americans Making Six-Figures Living Paycheck To Paycheck

Roughly 60% of Americans say they're living paycheck to paycheck - a figure which hasn't budged much overall from last year's 55% despite inflation hitting 40-year highs, according to a recent LendingClub report.

Even people earning six figures are feeling the strain, with 45% reporting living paycheck to paycheck vs. 38% last year, CNBC reports.

"More consumers living paycheck to paycheck indicates that many are continuing to lose their financial stability," said LendingClub financial health officer, Anuj Nayar.

The consumer price index, which measures the average change in prices for consumer goods and services, rose a higher-than-expected 8.3% in August, driven by increases in food, shelter and medical care costs.

Although real average hourly earnings also rose a seasonally adjusted 0.2% for the month, they remained down 2.8% from a year ago, which means those paychecks don’t stretch as far as they used to. -CNBC

Meanwhile, Bank of America found that 71% of workers say their income isn't keeping pace with inflation - resulting in a five-year low in terms of financial security.

"It is no secret that prices have been increasing for everyday Americans — not only in the goods and services they purchase but also in the interest rates they’re paying to fund their lives," said Nayar, who noted that people are relying more on credit cards and carry a higher monthly balance, making them financially vulnerable. "This can have detrimental consequences for someone who pays the minimum amount on their credit cards every month."

According to an Aug. 30 report from the Federal Reserve Bank of New York, credit card balances increased by $46 billion from last year, becoming the second-biggest source of overall debt last quarter.

And as Bloomberg noted last month, more US consumers are saddled with credit card debt for longer periods of time. According to a recent survey by CreditCards.com, 60% of credit card debtors have been holding this type of debt for at least a year, up 50% from a year ago, while those holding debt for over two years is up 40%, from 32%, according to the online credit card marketplace.

And while total credit-card balances remain slightly lower than pre-pandemic levels, inflation and rising interest rates are taking a toll on the already-stretched finances of US households.

About a quarter of respondents said day-to-day expenses are the primary reason why they carry a balance. Almost half cite an emergency or unexpected expense, including medical bills and home or car repair.

The Federal Reserve is likely to raise interest rates for the fifth time this year next week. Credit-card rates are typically directly tied to the Fed Funds rate, and their increase along with a softening economy may lead to higher delinquencies. 

Total consumer debt rose $23.8 billion in July to a record $4.64 trillion, according to data from the Federal Reserve. -Bloomberg

The Fed's figures include credit card and auto debt, as well as student loans, but does not factor in mortgage debt.

Tyler Durden Tue, 10/04/2022 - 20:25

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Spread & Containment

Plunging pound and crumbling confidence: How the new UK government stumbled into a political and financial crisis of its own making

Liz Truss took over as prime minister with an ambitious plan to cut taxes by the most since 1972 – investors balked after it wasn’t clear how she would…

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The hard hats likely came in handy recently for Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng. Stefan Rousseau/Pool Photo via AP

The new British government is off to a very rocky start – after stumbling through an economic and financial crisis of its own making.

Just a few weeks into its term on Sept. 23, 2022, Prime Minister Liz Truss’ government released a so-called mini-budget that proposed £161 billion – about US$184 billion at today’s rate – in new spending and the biggest tax cuts in half a century, with the benefits mainly going to Britain’s top earners. The aim was to jump-start growth in an economy on the verge of recession, but the government didn’t indicate how it would pay for it – or provide evidence that the spending and tax cuts would actually work.

Financial markets reacted badly, prompting interest rates to soar and the pound to plunge to the lowest level against the dollar since 1985. The Bank of England was forced to gobble up government bonds to avoid a financial crisis.

After days of defending the plan, the government did a U-turn of sorts on Oct. 3 by scrapping the most controversial component of the budget – elimination of its top 45% tax rate on high earners. This calmed markets, leading to a rally in the pound and government bonds.

As a finance professor who tracks markets closely, I believe at the heart of this mini-crisis over the mini-budget was a lack of confidence – and now a lack of credibility.

A looming recession

Truss’ government inherited a troubled economy.

Growth has been sluggish, with the latest quarterly figure at 0.2%. The Bank of England predicts the U.K. will soon enter a recession that could last until 2024. The latest data on U.K. manufacturing shows the sector is contracting.

Consumer confidence is at its lowest level ever as soaring inflation – currently at an annualized pace of 9.9% – drives up the cost of living, especially for food and fuel. At the same time, real, inflation-adjusted wages are falling by a record amount, or around 3%.

It’s important to note that many countries in the world, including the U.S. and in mainland Europe, are experiencing the same problems of low growth and high inflation. But rumblings in the background in the U.K. are also other weaknesses.

Since the financial crisis of 2008, the U.K. has suffered from lower productivity compared with other major economies. Business investment plateaued after Brexit in 2016 – when a slim majority of voters chose to leave the European Union – and remains significantly below pre-COVID-19 levels. And the U.K. also consistently runs a balance of payments deficit, which means the country imports a lot more goods and services than it exports, with a trade deficit of over 5% of gross domestic product.

In other words, investors were already predisposed to view the long-term trajectory of the U.K. economy and the British pound in a negative light.

An ambitious agenda

Truss, who became prime minister on Sept. 6, 2022, also didn’t have a strong start politically.

The government of Boris Johnson lost the confidence of his party and the electorate after a series of scandals, including accusations he mishandled sexual abuse allegations and revelations about parties being held in government offices while the country was in lockdown.

Truss was not the preferred candidate of lawmakers in her own Conservative Party, who had the task of submitting two choices for the wider party membership to vote on. The rest of the party – dues-paying members of the general public – chose Truss. The lack of support from Conservative members of Parliament meant she wasn’t in a position of strength coming into the job.

Nonetheless, the new cabinet had an ambitious agenda of cutting taxes and deregulating energy and business.

Some of the decisions, laid out in the mini-budget, were expected, such as subsidies limiting higher energy prices, reversing an increase in social security taxes and a planned increase in the corporate tax rate.

But others, notably a plan to abolish the 45% tax rate on incomes over £150,000, were not anticipated by markets. Since there were no explicit spending cuts cited, funding for the £161 billion package was expected to come from selling more debt. There was also the threat that this would be paid for, in part, by lower welfare payments at a time when poorer Britons are suffering from the soaring cost of living. The fear of welfare cuts is putting more pressure on the Truss government.

a man in a brown stocking hat inspects souvenirs near a bunch of UK flags and other trinkets
The cost of living crisis in the U.K. has everyone looking for deals where they can. AP Photo/Kirsty Wigglesworth

A collapse in confidence

Even as the new U.K. Chancellor of the Exchequer Kwasi Kwarteng was presenting the mini-budget on Sept. 23, the British pound was already getting hammered. It sank from $1.13 the day before the proposal to as low as $1.03 in intraday trading on Sept. 26. Yields on 10-year government bonds, known as gilts, jumped from about 3.5% to 4.5% – the highest level since 2008 – in the same period.

The jump in rates prompted mortgage lenders to suspend deals with new customers, eventually offering them again at significantly higher borrowing costs. There were fears that this would lead to a crash in the housing market.

In addition, the drop in gilt prices led to a crisis in pension funds, putting them at risk of insolvency.

Many members of Truss’ party voiced opposition to the high levels of borrowing likely necessary to finance the tax cuts and spending and said they would vote against the package.

The International Monetary Fund, which bailed out the U.K. in 1976, even offered its figurative two cents on the tax cuts, urging the government to “reevaluate” the plan. The comments further spooked investors.

To prevent a broader crisis in financial markets, the Bank of England stepped in and pledged to purchase up to £65 billion in government bonds.

Besides causing investors to lose faith, the crisis also severely dented the public’s confidence in the U.K. government. The latest polls showed the opposition Labour Party enjoying a 24-point lead, on average, over the Conservatives.

So the government likely had little choice but to reverse course and drop the most controversial part of the plan, the abolition of the 45% tax rate. The pound recovered its losses. The recovery in gilts was more modest, with bonds still trading at elevated levels.

Putting this all together, less than a month into the job, Truss has lost confidence – and credibility – with international investors, voters and her own party. And all this over a “mini-budget” – the full budget isn’t due until November 2022. It suggests the U.K.‘s troubles are far from over, a view echoed by credit rating agencies.

David McMillan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Economics

Roubini: The Stagflationary Debt Crisis Is Here

Roubini: The Stagflationary Debt Crisis Is Here

Authored by Nouriel Roubini via Project Syndicate,

The Great Moderation has given way to…

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Roubini: The Stagflationary Debt Crisis Is Here

Authored by Nouriel Roubini via Project Syndicate,

The Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. US and global equities are already back in a bear market, and the scale of the crisis that awaits has not even been fully priced in yet.

For a year now, I have argued that the increase in inflation would be persistent, that its causes include not only bad policies but also negative supply shocks, and that central banks’ attempt to fight it would cause a hard economic landing. When the recession comes, I warned, it will be severe and protracted, with widespread financial distress and debt crises. Notwithstanding their hawkish talk, central bankers, caught in a debt trap, may still wimp out and settle for above-target inflation. Any portfolio of risky equities and less risky fixed-income bonds will lose money on the bonds, owing to higher inflation and inflation expectations.

How do these predictions stack up? First, Team Transitory clearly lost to Team Persistent in the inflation debate. On top of excessively loose monetary, fiscal, and credit policies, negative supply shocks caused price growth to surge. COVID-19 lockdowns led to supply bottlenecks, including for labor. China’s “zero-COVID” policy created even more problems for global supply chains. Russia’s invasion of Ukraine sent shockwaves through energy and other commodity markets. And the broader sanctions regime – not least the weaponization of the US dollar and other currencies – has further balkanized the global economy, with “friend-shoring” and trade and immigration restrictions accelerating the trend toward deglobalization.

Everyone now recognizes that these persistent negative supply shocks have contributed to inflation, and the European Central Bank, the Bank of England, and the US Federal Reserve have begun to acknowledge that a soft landing will be exceedingly difficult to pull off. Fed Chair Jerome Powell now speaks of a “softish landing” with at least “some pain.” Meanwhile, a hard-landing scenario is becoming the consensus among market analysts, economists, and investors.

It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand. Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%). And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China’s slowdown, and the ECB falling even further behind the curve relative to the Fed.

Are we already in a recession? Not yet, but the US did report negative growth in the first half of the year, and most forward-looking indicators of economic activity in advanced economies point to a sharp slowdown that will grow even worse with monetary-policy tightening. A hard landing by year’s end should be regarded as the baseline scenario.

While many other analysts now agree, they seem to think that the coming recession will be short and shallow, whereas I have cautioned against such relative optimism, stressing the risk of a severe and protracted stagflationary debt crisis. And now, the latest distress in financial markets – including bond and credit markets – has reinforced my view that central banks’ efforts to bring inflation back down to target will cause both an economic and a financial crash.

I have also long argued that central banks, regardless of their tough talk, will feel immense pressure to reverse their tightening once the scenario of a hard economic landing and a financial crash materializes. Early signs of wimping out are already discernible in the United Kingdom. Faced with the market reaction to the new government’s reckless fiscal stimulus, the BOE has launched an emergency quantitative-easing (QE) program to buy up government bonds (the yields on which have spiked).

Monetary policy is increasingly subject to fiscal capture. Recall that a similar turnaround occurred in the first quarter of 2019, when the Fed stopped its quantitative-tightening (QT) program and started pursuing a mix of backdoor QE and policy-rate cuts – after previously signaling continued rate hikes and QT – at the first sign of mild financial pressures and a growth slowdown. Central banks will talk tough; but there is good reason to doubt their willingness to do “whatever it takes” to return inflation to its target rate in a world of excessive debt with risks of an economic and financial crash.

Moreover, there are early signs that the Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. In addition to the disruptions mentioned above, these shocks could include societal aging in many key economies (a problem made worse by immigration restrictions); Sino-American decoupling; a “geopolitical depression” and breakdown of multilateralism; new variants of COVID-19 and new outbreaks, such as monkeypox; the increasingly damaging consequences of climate change; cyberwarfare; and fiscal policies to boost wages and workers’ power.

Where does that leave the traditional 60/40 portfolio? I previously argued that the negative correlation between bond and equity prices would break down as inflation rises, and indeed it has. Between January and June of this year, US (and global) equity indices fell by over 20% while long-term bond yields rose from 1.5% to 3.5%, leading to massive losses on both equities and bonds (positive price correlation).

Moreover, bond yields fell during the market rally between July and mid-August (which I correctly predicted would be a dead-cat bounce), thus maintaining the positive price correlation; and since mid-August, equities have continued their sharp fall while bond yields have gone much higher. As higher inflation has led to tighter monetary policy, a balanced bear market for both equities and bonds has emerged.

But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress.

The crisis is here.

Tyler Durden Tue, 10/04/2022 - 17:25

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