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One More For Euro$ #5: The Mainstream Downgrade Parade

It wouldn’t be Euro$ #5 without perhaps the last of its rituals completed: the mainstream downgrades. Go back in time to each of the prior episodes,…



It wouldn’t be Euro$ #5 without perhaps the last of its rituals completed: the mainstream downgrades. Go back in time to each of the prior episodes, markets change, the data inflects, and then only later do surprised, shocked Economists at whichever establishment outpost begin to recalculate their DSGE outputs.

Every time.

Way back in 2015, it took the IMF’s semi-annual World Economic Outlook (WEO) quite a while to catch on to what was already shaping up to be a nasty third outbreak of eurodollar disease. This was on top of only long after picking up the atrociously permanent aftermath from number two (see: below).

When the downgrades finally began, I wrote about how initially there’d been hope for “decoupling”:

The situation now is reversed [from 2007-08] in that advanced economies [were], especially the US, supposed to pick up the slack from emerging nations struggling under some apparently unknown strain…Setting aside the obvious consistency in how the “setback” is supposedly “temporary” and yet they don’t want the Fed to raise rates, the failed narrative is much deeper. In other words, the US was supposed to be the grand support for the global economy, but now is not…

Since no one ever bothered to explain just where this massive and global weakness actually came from, it was all just forgotten as if nothing more than a careless driver presumed by its passengers to have plowed over some unseen pothole.

Only, no. The vehicle had actually detoured right (further) off the road. Without having figured out what happened to 2015-16’s global debacle, the world was left imagining 2017’s globally synchronized growth as anything better than unsatisfying reflation could be a realistic possibility.

Instead, Euro$ #4 eventually, and by the release of 2019’s first stab at the WEO once more the downgrades. From April 2019:

The IMF becomes the latest mainstream organization to abandon the recovery. It wasn’t really much of one to begin with, mostly just the hope that an uptick in growth would lead to the long sought, and necessary, completion. Globally synchronized growth in 2017 was supposed to mean a plausible pathway toward it…But it took until 2019 for anyone to admit the possibility something was wrong, let alone actual conditions already very wrong.

All those missed 2018 market warning signs had finally caught up to the IMF, just as they had to Jay Powell by then (at the time merely “pausing” rate hikes which were shortly thereafter converted to full rate cuts).

Mainstream model downgrades like these are simply another item in a long and lengthening list on the wrong side of the ledger pointing to a global economy already tipped in the wrong direction.

The first of the IMF WEO’s in 2022, published just hours ago, contains, as you already figured out, a plethora of downgrades. Big ones, too.

Reasons given are the standard excuses. Whereas there were trade wars and rate hikes frequently cited back in 2019, today there are future rate hikes and an actual war to dent “sentiment” – the DSGEs have to incorporate “sentiment” because they don’t model money or finance, so still have yet to figure out what happened to growth since August 2007. The problem isn’t the regressions; remember, always garbage in/garbage out.

As it now stands, the IMF calculates CY2022 real GDP growth for the entire worldwide economy should end up around 3.59%. That’s a huge deduction from the last WEO, the second of 2021’s when global GDP for this year was anticipated at 4.89%.

Shedding 130 bps in between last fall and today is a serious move toward pessimism, particularly for these tools which always expect the best and the most. The current 2022 figure is back where it had been a year ago before all the fuss about “red-hot”, overheated inflation and such.

No geographic section was spared: US GDP for 2022 was drastically cut to 3.71% from last 5.20%; for advanced economies overall, including the US, Europe, and Japan, the 2022 figure went from 4.54% down to 3.26%.

All this from a single Fed rate hike? Yeah, not on your life.

The IMF currently figures the economy will accelerate modestly if now in 2023, but the IMF’s methods always calculate a modest acceleration after the initial downgrade. In that 2015 WEO I referenced at the start, real GDP estimates for the world in CY2015 had just been cut to 3.12% from 3.84% the prior year, if only for the models expecting CY2016 to be somewhat better (3.56%).

It wasn’t.

The downgrades, like the actual economic trajectory, persist. That’s something else to keep in mind as the world attempts to navigate this progressively confirmed Euro$ #5; both the sliding estimates along with the real decline in the system are almost certainly just beginning.

Like 2015, China deserves special attention as both the primary proximate reason for these lowered projections as well as, in every real sense, a primary feedback mechanism surrounding Euro$ #5 and its damaging effects. Bad money (risk aversion) leads to bad economy (and bad politics), which then leads to more bad money (risk aversion confirmed, so more aversion) then still more bad economy.

The IMF’s estimates like any others plainly show the Chinese epicenter. Not only did China’s economy manage to underperform last year, optimism-biased econometrics can’t help but pick up on what’s now an entrenched downward trajectory. Back during the second half of 2020, these were expecting 5.80% real GDP growth in CY2022, now today are looking at just 4.37%.

For China.

Even the 2023 estimate has been cut, contrary to the standard practice of raising the number one-year further out after such a downgrade (the IMF still, for now, believes 2023 will be a touch better over there than 2022).

In other words, the IMF acknowledges – without acknowledging – China’s bad shape. And if the Chinese are in bad shape, given how much of the world counts on this place to transmit a serious and sustained growth “impulse”, the WEO can’t help but hand out big declines around the rest of the world.

But why?

Again, the excuses are legion; in addition to Russia and rate hikes, they can (and do) cite consumer prices carving into consumer demand as well as lingering COVID, the last one especially when it comes to trying to explain China’s accelerating problems.

That’s the thing about understanding our number scheme rather than those; Euro$ #5 is, obviously, just the fifth time this same general pattern has repeated. In other words, the world always faces difficulties from going back to time immemorial. Before August 2007, those would rarely lead to such material worldwide economic and financial spasms, through this monetary channel, creating such pronounced and synchronized (given a small amount of time) setbacks.

While it is true overactive governments confronting COVID are as novel as the coronavirus itself, Euro$ #5 was presenting symptoms at the same time most government intrusions were being unwound. Number five has also outlasted them and the corona variants; it, not they, persists.

Even in China, the government’s lack of discretion is, I fully believe, more about the economy than the virus.

Either way, and for whichever set of reasons you might choose to accept, it’s no longer possible to completely ignore and dismiss these symptoms which not coincidentally happen to be perfectly consistent with prior monetary outbreaks.

Unless, of course, you are a member of the Federal Reserve.

Policymakers finally understanding the real risks and gravity would be – will be? – among the final developments for the first phase of Euro$ #5. As most markets already and currently price, it is widely expected the Fed finally sees reality, stops hiking like in 2016, or, as in 2019, reverses course entirely to go along with even more mainstream downgrades still to come

Parades typically go on well beyond its opening act.

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Fighting the Surveillance State Begins with the Individual

It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in…



It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in place, collecting data on the entire populace. This has been proven beyond a shadow of a doubt by people like Edward Snowden, a National Security Agency (NSA) whistleblower who exposed that the NSA was conducting mass surveillance on US citizens and the world as a whole. The NSA used applications like those from Prism Systems to piggyback on corporations and the data collection their users had agreed to in the terms of service. Google would scan all emails sent to a Gmail address to use for personalized advertising. The government then went to these companies and demanded the data, and this is what makes the surveillance state so interesting. Neo-Marxists like Shoshana Zuboff have dubbed this “surveillance capitalism.” In China, the mass surveillance is conducted at a loss. Setting up closed-circuit television cameras and hiring government workers to be a mandatory editorial staff for blogs and social media can get quite expensive. But if you parasitically leech off a profitable business practice it means that the surveillance state will turn a profit, which is a great asset and an even greater weakness for the system. You see, when that is what your surveillance state is predicated on you’ve effectively given your subjects an opt-out button. They stop using services that spy on them. There is software and online services that are called “open source,” which refers to software whose code is publicly available and can be viewed by anyone so that you can see exactly what that software does. The opposite of this, and what you’re likely already familiar with, is proprietary software. Open-source software generally markets itself as privacy respecting and doesn’t participate in data collection. Services like that can really undo the tricky situation we’ve found ourselves in. It’s a simple fact of life that when the government is given a power—whether that be to regulate, surveil, tax, or plunder—it is nigh impossible to wrestle it away from the state outside somehow disposing of the state entirely. This is why the issue of undoing mass surveillance is of the utmost importance. If the government has the power to spy on its populace, it will. There are people, like the creators of The Social Dilemma, who think that the solution to these privacy invasions isn’t less government but more government, arguing that data collection should be taxed to dissuade the practice or that regulation needs to be put into place to actively prevent abuses. This is silly to anyone who understands the effect regulations have and how the internet really works. You see, data collection is necessary. You can’t have email without some elements of data collection because it’s simply how the protocol functions. The issue is how that data is stored and used. A tax on data collection itself will simply become another cost of doing business. A large company like Google can afford to pay a tax. But a company like Proton Mail, a smaller, more privacy-respecting business, likely couldn’t. Proton Mail’s business model is based on paid subscriptions. If there were additional taxes imposed on them, it’s possible that they would not be able to afford the cost and would be forced out of the market. To reiterate, if one really cares about the destruction of the surveillance state, the first step is to personally make changes to how you interact with online services and to whom you choose to give your data.

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Stock Market Today: Stocks turn higher as Treasury yields retreat; big tech earnings up next

A pullback in Treasury yields has stocks moving higher Monday heading into a busy earnings week and a key 2-year bond auction later on Tuesday.



Updated at 11:52 am EDT U.S. stocks turned higher Monday, heading into the busiest earnings week of the year on Wall Street, amid a pullback in Treasury bond yields that followed the first breach of 5% for 10-year notes since 2007. Investors, however, continue to track developments in Israel's war with Hamas, which launched its deadly attack from Gaza three weeks ago, as leaders around the region, and the wider world, work to contain the fighting and broker at least a form of cease-fire. Humanitarian aid is also making its way into Gaza, through the territory's border with Egypt, as officials continue to work for the release of more than 200 Israelis taken hostage by Hamas during the October 7 attack. Those diplomatic efforts eased some of the market's concern in overnight trading, but the lingering risk that regional adversaries such as Iran, or even Saudi Arabia, could be drawn into the conflict continues to blunt risk appetite. Still, the U.S. dollar index, which tracks the greenback against a basket of six global currencies and acts as the safe-haven benchmark in times of market turmoil, fell 0.37% in early New York trading 105.773, suggesting some modest moves into riskier assets. The Japanese yen, however, eased past the 150 mark in overnight dealing, a level that has some traders awaiting intervention from the Bank of Japan and which may have triggered small amounts of dollar sales and yen purchases. In the bond market, benchmark 10-year note yields breached the 5% mark in overnight trading, after briefly surpassing that level late last week for the first time since 2007, but were last seen trading at 4.867% ahead of $141 billion in 2-year, 5-year and 7-year note auctions later this week. Global oil prices were also lower, following two consecutive weekly gains that has take Brent crude, the global pricing benchmark, firmly past $90 a barrel amid supply disruption concerns tied to the middle east conflict. Brent contracts for December delivery were last seen $1.06 lower on the session at $91.07 per barrel while WTI futures contract for the same month fell $1.36 to $86.72 per barrel. Market volatility gauges were also active, with the CBOE Group's VIX index hitting a fresh seven-month high of $23.08 before easing to $20.18 later in the session. That level suggests traders are expecting ranges on the S&P 500 of around 1.26%, or 53 points, over the next month. A busy earnings week also indicates the likelihood of elevated trading volatility, with 158 S&P 500 companies reporting third quarter earnings over the next five days, including mega cap tech names such as Google parent Alphabet  (GOOGL) - Get Free Report, Microsoft  (MSFT) - Get Free Report, retail and cloud computing giant Amazon  (AMZN) - Get Free Report and Facebook owner Meta Platforms  (META) - Get Free Report. "It’s shaping up to be a big week for the market and it comes as the S&P 500 is testing a key level—the four-month low it set earlier this month," said Chris Larkin, managing director for trading and investing at E*TRADE from Morgan Stanley. "How the market responds to that test may hinge on sentiment, which often plays a larger-than-average role around this time of year," he added. "And right now, concerns about rising interest rates and geopolitical turmoil have the potential to exacerbate the market’s swings." Heading into the middle of the trading day on Wall Street, the S&P 500, which is down 8% from its early July peak, the highest of the year, was up 10 points, or 0.25%. The Dow Jones Industrial Average, which slumped into negative territory for the year last week, was marked 10 points lower while the Nasdaq, which fell 4.31% last week, was up 66 points, or 0.51%. In overseas markets, Europe's Stoxx 600 was marked 0.11% lower by the close of Frankfurt trading, with markets largely tracking U.S. stocks as well as the broader conflict in Israel. In Asia, a  slump in China stocks took the benchmark CSI 300 to a fresh 2019 low and pulled the region-wide MSCI ex-Japan 0.72% lower into the close of trading.
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iPhone Maker Foxconn Investigated By Chinese Authorities

Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple…



Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple media reports. Foxconn’s business has been searched by Chinese authorities and China’s main tax authority has conducted inspections of Foxconn’s manufacturing operations in the Chinese provinces of Guangdong and Jiangsu. At the same time, China’s natural-resources department has begun onsite investigations into Foxconn’s land use in Henan and Hubei provinces within China. Foxconn has manufacturing facilities focused on Apple products in three of the Chinese provinces where authorities are carrying out searches. While headquartered in Taiwan, Foxconn has a huge manufacturing presence in China and is a large employer in the nation of 1.4 billion people. The investigations suggest that China is ramping up pressure on the company as Foxconn considers major investments in India, and as presidential elections approach in Taiwan. Foxconn founder Terry Gou said in August of this year that he intends to run for the Taiwanese presidency. He has resigned from the company’s board of directors but continues to hold a 12.5% stake in the company. Gou is currently in fourth place in the polls ahead of the election that is scheduled to be held in January 2024. The potential impact on Apple and its iPhone manufacturing comes amid rising political tensions between politicians in Washington, D.C. and Beijing. Apple’s stock has risen 16% over the last 12 months and currently trades at $172.88 U.S. per share.  

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