Should the fact that the U.S. economy actually contracted during the first quarter actually surprise any of us? Since the start of 2022, there has been crisis after crisis, and now the war in Ukraine is depressing economic activity all over the planet. What we are facing could most definitely be described as a “perfect storm”, and the truth is that this storm isn’t going to go away anytime soon. But where do we go from here? Will the U.S. economy bounce back, or will this new economic downturn soon become even worse? Most economic optimists are assuming that the former will be true, while many economic realists are issuing dire warnings about what is ahead.
I was actually thinking of writing about something else today, but I knew that my regular readers would want me to talk about this…
Gross domestic product unexpectedly declined at a 1.4% annualized pace in the first quarter, marking an abrupt reversal for an economy coming off its best performance since 1984, the Commerce Department reported Thursday.
The negative growth rate missed even the subdued Dow Jones estimate of a 1% gain for the quarter, but the initial estimate for Q1 was the worst since the pandemic-induced recession in 2020.
So what caused this “sudden” downturn? According to CNN, there are quite a few factors that can be blamed…
A push by the Federal Reserve to raise interest rates and combat high inflation. Supply chain shortages. An ongoing global health crisis. And of course, the geopolitical earthquake caused by Russia’s invasion of Ukraine, which is also threatening to create a world food crisis.
If the U.S. economy shrinks again in the second quarter, that will officially meet the definition of a “recession”.
But as John Williams of shadowstats.com has pointed out, if honest numbers were being used the U.S. economy would still be in a recession that started all the way back at the beginning of the COVID pandemic.
Everybody pretty much realizes that economic conditions are not great right now.
So are brighter days just around the corner? That is what some pundits seem to think…
The US economy will return to growth during the second quarter, according to RSM chief economist Joe Brusuelas. “Without a doubt,” he said.
“This is noise; not signal,” Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a report. “The economy is not falling into recession.”
Last month, 33,333 properties across the U.S. faced foreclosure, a 181 percent jump from March 2021 and 29 percent pop from February, according to a report by foreclosure tracker Attom. The first quarter saw 78,271 properties with a foreclosure filing, a 39 percent from the previous quarter and 132 percent from last year.
Needless to say, there are other experts that have a much more negative view on what is ahead.
For example, Nancy Lazar is warning of a “synchronized” global recession…
Piper Sandler chief global economist Nancy Lazar warned on Monday that the world is in the early stages of a “very significant” and “synchronized” recession.
In an appearance on “Mornings with Maria” Monday, Lazar noted that a recession is expected outside of the United States.
“It’s going to be a global recession pulling down [the] Euro zone in particular,” she told host Maria Bartiromo. “It looks like China GDP [Gross domestic product] in the second quarter could also be negative.”
Actually, if all we suffer is a significant global recession that will be really good news.
Because right at this moment inflation is dramatically spiking all over the globe, we are witnessing the largest land war in Europe since World War II, and the UN is telling us that we are heading into a horrific worldwide food crisis.
An increasing number of Americans are starting to realize that things are moving in the wrong direction. In Gallup’s April survey, only 18 percent of Americans rated economic conditions as “good”, and only 2 percent rated them as “excellent”…
The GDP news comes on the heels of newly released polling data from Gallup that suggested that economy confidence is extremely low among the American public.
More than four in ten (42%) of Americans said that economic conditions in America were “poor,” while another 38% said that they were only “fair” in Gallup’s April survey. Just 2% said economic conditions were “excellent,” while 18% said they were “good.”
Those are terrible numbers, and they have very serious implications for the Democrats in the fall.
But instead of focusing on fixing the economy, Joe Biden wants Congress to give him another 33 billion dollars for the war in Ukraine…
President Joe Biden is asking Congress for another $33 billion to help Ukraine resist Russia’s invasion and provide humanitarian aid to the Ukrainian people.
The proposal, which the White House will send to lawmakers on Thursday, includes $20 billion in additional security and military assistance for Ukraine, another $8 billion for economic assistance and $3 billion in humanitarian aid.
This is complete and utter madness.
To put this in perspective, the military budget for Ukraine is normally about 6 billion dollars for an entire year.
And much of the equipment that the U.S. is sending to Ukraine is being blown up by the Russians before it can even get to the fighters on the frontlines.
With each passing day it is becoming clearer to everyone that this conflict is really a proxy war between the United States and Russia.
And nuclear war is increasingly becoming one of the hottest topics on Russian television. For example, the following is a recent exchange between two Russian television personalities that is making headlines all over the globe…
“Everything will end with a nuclear strike is more probable than the other outcome,” she continued. “This is to my horror, on one hand, but on the other hand, with the understanding that it is what it is.”
It was at that point Solovyov chimed in, “But we will go to heaven, while they will simply croak.”
“We’re all going to die someday,” Simonyan agreed.
“We’re all going to die someday”?
I certainly don’t like the sound of that.
Unfortunately, many Russians are now entirely convinced that nuclear war is coming.
But instead of pushing for peace, Joe Biden and his minions just keep escalating the conflict.
If we continue to go down this path, it will end in a nightmare.
Our current economic problems pale in comparison to the possibility of a nuclear conflict, but most Americans still don’t understand the implications of the decisions that our leaders are making.
Because if they did understand, there would be giant protests in the streets of every single major U.S. city right now.
Russia has just made some moves that are going to change the global financial system forever. When the conflict in Ukraine originally erupted, the U.S. immediately attempted to crash the value of Russia’s currency. Those attempts were successful for a few days, but now the value of the ruble relative to the U.S. dollar is almost all the way back to where it was before the start of the war. This has absolutely stunned many of the experts, because they thought that U.S. sanctions would absolutely cripple Russia. So what happened? Well, it turns out that the Russians have made some very savvy moves that have turned the tables on the Biden administration.
For one thing, Russia has started to demand payment in rubles when it sells natural gas to non-friendly nations. A lot of countries in western Europe are quite upset about this, but they really have no choice, because they are exceedingly dependent on Russian gas. So from this point forward, Western powers are actually going to be forced to help prop up the value of the ruble…
Russia wants “unfriendly countries” to pay for Russian natural gas in rubles. That’s a new directive from President Vladimir Putin as he attempts to leverage his country’s in-demand resources to counter a barrage of Western sanctions.
“I have decided to implement … a series of measures to switch payments — we’ll start with that — for our natural gas supplies to so-called unfriendly countries into Russian rubles,” Putin said in a televised government meeting, adding that trust in the dollar and euro had been “compromised” by the West’s seizure of Russian assets.
Much more interesting was Zavalny’s main point, even though it has been mostly overlooked. If other countries want to buy oil, gas, other resources or anything else from Russia, he said, “let them pay either in hard currency, and this is gold for us, or pay as it is convenient for us, this is the national currency.”
In other words, Russia is happy to accept your national currency — yuan, lira, ringgits or whatever — or rubles, or “hard currency,” and for them that no longer means U.S. dollars, it means gold.
“The dollar ceases to be a means of payment for us, it has lost all interest for us,” Zavalny added, calling the greenback no better than “candy wrappers.”
This is huge, but it isn’t being discussed much by the corporate media in the United States.
The Russians aren’t just saying that they do not recognize U.S. dollars as the reserve currency of the world any longer.
That would be bad enough.
At this point, they are actually saying that they will no longer accept U.S. dollars as a form of payment at all.
“I am reminded of what the U.S. did in the middle of the Great Depression. For the next 40 years, gold’s price was pegged to the U.S. dollar at $35. There is a precedent for this. It leads me to believe that Russia’s intention would be for the value of the ruble to be linked directly to the value of gold,” Gainesville Coins precious metals expert Everett Millman told Kitco News. “Setting a fixed price for rubles per gram of gold seems to be the intention. That’s pretty important when it comes to how Russia could seek funding and manage its central bank financing outside of the U.S. dollar system.”
Others believe that this move will create great instability in the global financial system.
1: At $1550 per ounce the first order effect here is that is implies a RUB/USD rate of around 75. Incentivizing those holding RUB to continue and those needing them to bid up the price from current levels.
2: This creates a positive incentive loop to bring the ruble back to pre-war levels. Then after that market effects take over as ruble demand becomes structural, based on Russia’s trade balance.
3: Once that happens and the RUB/USD falls below 75, then the USD price of gold rises, structurally draining the paper gold markets and collapsing the financial system based on leveraged/hypothecated gold. Now we’re into the arb. phase @Lukegromen postulated w/ 1000bbls/oz.
Time will tell if Luongo is right or if he is wrong.
But without a doubt, things have not played out the way that Biden administration officials were hoping.
They had hoped that U.S. sanctions would crush the ruble, the Russian financial system and the entire Russian economy.
Instead, the Russians have been able to successfully prop up the value of the ruble and have made moves that directly threaten the dominance of the U.S. dollar.
No matter what happens with the ceasefire talks, I expect the United States and Russia to continue this economic conflict for the foreseeable future.
Ultimately, that will be bad for both of our nations.
The biggest financial paradigm shift in our lives is underway, and there’s no turning back. No one knows exactly what it’s going to look like going forward nor how we’ll be able to get there.
A working definition of “paradigm” taken from dictionary.com is that it is “a framework containing the basic assumptions, ways of thinking and methodology that are commonly accepted by members of “an operating system.” Think global to local and buy/ sell/exchange finance.
When a new paradigm starts being formed, an original set of rules has to be put together in order to operate successfully within it. Most of the rules that worked in the old paradigm(s) no longer apply. (An example would be trying to communicate with business associates and family by sending letters instead of email via the internet.)
During the new system’s “early days,” everyone using it is pretty much in the same boat as we all attempt to figure out what the rules are, how to best apply them, and what the results might be. Getting it right will hopefully enable us to be safer and more successful in our personal and professional lives.
The national and global financial systems were already under great stress due to mismanagement, indebtedness, the Covid response, and rising socio-political unrest.
To cite just two examples, the Canadian government’s response to the truckers’ drive to Ottawa, and the invasion of Ukraine by Russia and the West’s response to it have inflicted structural damage that could destroy the whole house of cards.
At minimum it is sweeping away operative assumptions most of us have followed in order to provide predictability, safety and financial growth.
This is not the place to argue the merits for or against one side or the other, but to state that the world is changing, and in many ways will never be the same.
Consider these data points:
The West’s freezing of Russian Central Bank’s $600B in assets is a first.
Exclusion of Russia from the SWIFT payment system of international trade.
Breakdown of the petrodollar system for oil purchases to allow yuan and gold.
Europe’s largest grain exporter, Hungary, ceasing all exports effective immediately.
Critical metals sources (REEs, copper, uranium, nickel, etc.) in limbo.
Cancellation of many billions, if not trillions of dollars in international contracts.
Canada freezing accounts of anyone contributing even $40 to an unapproved cause.
A gas supply cutoff from Nordstream 1 could bring German industry to a standstill.
The U.S. facing its highest inflation rates in 40 years.
The inevitable global drive toward “paperless” digital money and total privacy loss.
Gold and silver retail supply sources and premiums stressed as never before.
Most uranium and its processing coming from Kazakhstan and Russia respectively.
Anyone reading the above can list an additional dozen. The point being that the few remaining assumptions of our money being safe, accessible, and utilizable as we see fit have been shattered.
Neither the (hopefully) inevitable end of the war in Ukraine, nor effects of the Canadian truckers’ strike will restore the attributes most rational folks have held onto throughout what Germans refer to as Sturm und Drang (“storm and stress”) — trust in others, and confidence in the accessibility and value of our money.
Doug Casey, an investment and privacy doyen since the 1970s says,
“The only practical defense for the average guy is to accumulate gold and silver in personal possession… That’s because the only financial asset that’s not simultaneously somebody else’s liability is gold. Unfortunately, the average American neither understands gold (or silver) nor has any. Will that change in the future?”
Answer:See Mark Dice, in October 2021, offering passersby either a 100z silver bar (then worth around $2,000 but now closer to $3,000) or a candy bar.
The Message? The financial markets, including precious metals, are in sea change mode. Looking to the past is not going to enable you to thrive and survive facing tomorrow’s challenges. A glimpse of what to expect taken intraday from the Energies and Metals market action can be seen nearby:
Using 1979 as a guide to today’s more serious systemic risk profile suggests that we’ll soon see multiple dollar intraday silver swings; three-digit gold swings, and copper-now trading like a semi-precious metal, moving 20-40 cents/pound intraday.
Expect persistent two-way volatility in the entire commodities sector, along with ongoing inflation.
A few days ago, a two-day rise of 250% in the price of nickel shut down its trading on the LME. Wheat futures rose for several consecutive days at the expanded .85 cent/day limit. In a month, check your grocery store for the price and availability of grains.
Last week, crude oil futures touched $130/bbl. Care to bet against the possibility of $150 or even $200 this year?
Care to guess what this will do to today’s “officially-stated” 9.5% inflation rate (actually closer to 15-20%)? We’ve been seeing almost everything we use this year rise at least 15%, with +25% by no means an outlier.
The real danger going forward? An evolving built-in expectation by people that across-the-board inflation is here to stay…and it’s going to get worse. This will lead to a self-fulfilling prophecy as everyone “buys ahead” on anything they might need (think toilet paper buying on steroids), leading to hoarding for the sake of asset value protection and barter.
If folks are waiting for today’s “party carriage” — fiat — what David Morgan has long called “paper promises” to turn into a pumpkin of worth-less value, then be prepared to join the ranks of others in Lebanon, Turkey, Argentina, Mexico, Venezuela — and, yes, Russia, as you watch the nominal value of your greenbacks shrivel.
And if you’re not sure you “have enough”? Well, then don’t just stand there. Do something productive!
David H. Smith is Senior Analyst for TheMorganReport.com, a regular contributor to MoneyMetals.com as well as the LODE digital Gold and Silver Project. He has investigated precious metals’ mines and exploration sites in Argentina, Chile, Peru, Mexico, Bolivia, China, Canada and the U.S. He shares resource sector observations with readers, the media, and North American investment conference attendees.
BlackRock CEO Larry Fink’s annual letter to shareholders has become heavily scrutinized as ones from Berkshire Hathaway chief Warren Buffett and JP Morgan chief Jamie Dimon. Fink is the boss of a $10 trillion asset manager, the world’s largest, and oversees more money than the Fed. Fink told shareholders that Russia’s invasion of Ukraine would fundamentally reshape the world economy and drive up inflation as supply chains are reconfigured.
“The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades,” Fink wrote.
Fink predicted “companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations resulting in a faster pull back from some countries.”
As a result, “a large-scale reorientation of supply chains will inherently be inflationary,” he said, pointing out that even before the conflict broke out in Eastern Europe, the economic effects of the virus pandemic brought US inflation to its highest in four decades.
Today’s inflationary environment, teetering on the verge of stagflation, has put central banks in “difficult decisions about how fast to raise rates. They face a dilemma they haven’t faced in decades, which has been worsened by geopolitical conflict and the resulting energy shocks. Central banks must choose whether to live with higher inflation or slow economic activity and employment to lower inflation quickly,” Fink said.
Like Fink’s last letter to shareholders, he was focused on the firm’s “ESG” and “green technology” commitments. This time around, he said the invasion “will actually accelerate the shift toward greener sources of energy in many parts of the world,” because higher fossil fuel prices will make the transition of renewables financially competitive.
“We’ve already seen European policymakers promoting investment in renewables as an important component of energy security,” he said. “More than ever, countries that don’t have their own energy sources will need to fund and develop them– which for many will mean investing in wind and solar power.”
In the short-term, alternatives to Russian energy products “will inevitably slow the world’s progress toward net-zero [emissions] in the near term,” he added. BlackRock is the world’s largest asset manager, which has pushed “ESG” policies that harm American fossil fuel companies, basically following the World Economic Forum’s (WEF) script.
On digital currencies, Fink said the Ukrainian conflict has the “potential impact on accelerating digital currencies. The war will prompt countries to re-evaluate their currency dependencies.” He spoke about central bank digital currencies (CBDC) and how they “can enhance the settlement of international transactions while reducing the risk of money laundering and corruption.” Again, Fink is following WEF’s script of implementing new forms of digital currency that will mean governments will have more control over the people.
Fink also praised how global corporate elites banded together following Russia’s invasion and isolated Moscow from the global financial system overnight, paralyzing the country’s economy. He said the private sector demonstrated the power of the capital markets:
“Russia has been essentially cut off from global capital markets, demonstrating the commitment of major companies to operate consistent with core values. This “economic war” shows what we can achieve when companies, supported by their stakeholders, come together in the face of violence and aggression,” he said.
Fink has made clear that the conflict in Ukraine is being used as an accelerator to reorganize the global economy as the old world order crumbles and a multipolar world emerges. Supply chains will be onshored or moved closer to home, and the WEF’s agenda of a green new world, more corporate surveillance, and trackable money are inevitable this decade.
Sometimes weeks happen in a day, and we seem to be living in such times. In my latest Patreon Post I laid out how Putin’s War and the sanctions imposed by the West and other nations will cause a tectonic shift in the new world order. It’s already happening.
Many articles have said in the past week or two that globalism has been breaking down and that the break between the West and East caused by Putin’s War has shattered the trend in recent years toward a globalized economy and globalized governance. I argued the opposite — that it greatly accelerates globalism while cracking it into a new kind of bi-polar globalism.
Only a couple of hours after publishing that Patron Post this morning, I read the following statement:
We’re at an inflection point, I believe, in the world economy, not just the world economy, the world, that occurs every three or four generations…. [A general told me that] 60 million people died between 1900 and 1946 and since then we’ve established a liberal world order, and it hasn’t happened in a long while…. Now is the time when things are shifting and there’s going to be a new world order out there, and we’ve got to lead it. We’ve got to unite the rest of the free world in doing it….
You could hardly ask for a stronger confirmation from the “leader of the free world” that we are headed exactly where I said we were going in that post. Sometimes it doesn’t take long to see it in the news.
Bond yields and inflation swing their scythes like the Grim Reaper
Only days ago, I had also written in the introduction to my latest series of Patron Posts,
We slid in economic meltdown toward a covert recession few saw coming in the last few months of 2021 as the Fed merely tapered its QE, which it had to do because we were roaring back into the hottest inflation since the seventies and early eighties (which I had also assured everyone was coming)…. The Fed’s taper gave rise to bond vigilantes (as I predicted it would) and a slow stock market crash that has taken two major indices down more than 20%, and now the world is facing a global crisis due to Putin’s War and the greatest economic sanctions of all time!… In the past few weeks — as the taper ended Fed control of the curve, and the sanctions began, and the Fed started tightening — the front end of the curve shot up….
I would put the probability of a recession starting in this quarter at 95% because the yield curve is inverting now. As I’ve already stated several times, we could expect the yield curve inversion to be the late arriver to the party this time, entering after recession already began because the Fed froze it out with two years of absolute yield-curve control which it has only just finished backing out of.
My main thesis last year claimed the Fed had been exercising total yield-curve control for the past two years with its massive bond purchases along all maturities along the curve. Obviously, the Fed decided for itself how many treasuries to buy at each inflection point to set the curve where it wanted it as it undertook this massive money printing. Why wouldn’t it if it is buying all along the curve in numbers sufficient to change bond yields?
I gave all my readers a key for understanding the events that would come at the start of 2022 (Patrons first, of course): realize that the Fed would inevitably be relinquishing all of that control over bond yields when it stopped its QE bond purchases, which would allow the bond vigilantes to price in the inflation that the yield curve had been incapable of showing for the past two years.
For over a year, a few people on other sites than my own argued with me that there could be no massive inflation coming and no recession because bonds were not showing it, and bond yields always rise to keep up with inflation, and bonds are the Fed’s most preferred gauge for judging when a recession is coming. I argued that bonds couldn’t show any of that because the Fed had shunted the meter because its massive bond purchases took all price discovery out of the bond market.
I referred to the Fed as the whale in the bond pool — a whale so big it took up the whole pool. Thus, the water level of the pool (bond prices) would fall quickly when the whale got out of the pool. (Falling prices amount to the same thing as rising yields).
The key for you to see what was coming was to understand why the Fed’s favorite meter was broken, what it would take to fix it, and how quickly it would respond once fixed. I re-explained those dynamics in a Patron Post last month and share it all here as reminder:
One … insidious aspect of the bond bubble blowing up is that the yield curve for bonds is now rapidly flattening as bond vigilantes seize the reins on the bond market that the Fed is releasing. That flattening presages a recession. I don’t think a flat and then inverted yield curve, in itself, causes recessions, but simply that it is a sign that is regarded by the Fed as its most reliable indicator of recessions; so, when the yield curve inverts, it creates recessionary sentiment throughout all financial markets. In that sense, it is an amplifier that makes it somewhat of a self-fulfilling prophecy. It’s almost like a guarantee or a seal on the recession to follow. This time it is a delayed indicator because of how tightly the Fed held the reins on bond pricing, restricting its own best indicator like a broken gauge to where the Fed doesn’t even see recession is already at the door….
[Here’s] the key that I’ve laid out in past Patron Posts for understanding the significance of the changes that are now arriving. By backing away from bond purchases (as is now seen happening in various places around the world simultaneously), central banks are liberating interest-rate curves all over the world. That means markets will start pricing in the inflation that they were locked out of pricing by massive CB interference; so, expect the repricing of bonds to happen quickly (in a realm of normally glacial moves in interest) and yield curves to flatten quickly and all of that to roil a lot of markets….
I explained that the yield-curve indicator is behind the curve because the Fed exercised its tightest control ever over the yield curve during the last two years, which is why the curve is rapidly changing now, AND why it is can be expected to be a late arriver in predicting the recession because it would have priced this in months ago (the amount of time before a recession when it usually turns negative), if the Fed had not been exerting total control.
That, I warned last month, puts us close to the bursting of the bond bubble and likely already in a recession because the curve this time was restrained from showing all of this until released by the Fed’s taper. One important factor, in terms of how the change in bond yields affects other markets, is how quickly bond yields rise and the yield curve flattens and then inverts to show a recession. Rapid change in a normally slow-changing indicator spooks markets.
Well, we’re here. It’s all happening this week and last. Look at what has happened to bond interest rates and the yield curve since the Fed finished its tapering:
Compare that to all the incremental moves over the past year when the Fed had the meter shunted, as I say, and you see bond yields have come alive and are changing to show inflation at a rate of rise we haven’t seen in a long time. The 10YR bond/note has gone from 1.95% on March 9, when the Fed ended tapering with its final QE purchase, to 2.39% today — 46 basis points in less than two weeks, and in the last two days alone it rose 24 of those basis points.
And this is a global phenomenon. Here is what those rising bond yields (globally) have meant in terms of bond prices:
“This Is Now The Worst Drawdown on Record for Global Fixed Income”
Global bond markets have suffered unprecedented losses since peaking last year, as central banks including the Federal Reserve look to tighten policy to combat surging inflation…. [It’s] the biggest decline from a peak in data stretching back to 1990, surpassing a 10.8% drawdown during the financial crisis in 2008. It equates to a drop in the index market value of about $2.6 trillion, worse than about $2 trillion in 2008….
Rising inflationary pressure around the world is fueling concerns about the ability of the global economy to weather any sustained period of higher financing costs…. “The safe haven attributes of Treasuries have been undermined when one adds duration risk to the equation,” said Winson Phoon, head of fixed income research at Maybank Securites Pte. Ltd. That’s a blow to money managers accustomed to years of consistent gains, backstopped by loose monetary policy….
Corporate bonds are particularly vulnerable to mounting stagflation threats, as slowing economic growth also raises credit risks….
The meltdown in global debt markets is a reminder of the Fed’s tightening cycle in 2018, though the broad global bond index wound up losing only 1.2% for that full year. But unlike four years ago, price pressures are now much stronger and the global supply chain is beleaguered.
Yield curve inverting at lightning speed screams “recession”
Bonds are also repricing in the pattern that flashes “recession” now that they have been released from Fed control. We have witnessed the fastest moves into inversion of the yield curve one can imagine as prices rise disproportionately toward the front end of the curve:
Last week Ethan wrote that the horrific performance of US Treasuries was something of an inevitable return to normal after they were placed into a policy-induced economic coma during Covid.
There we have someone else using the term I was using to describe why bond yields weren’t pricing in anything for all the months prior. Bond yields were in a FedMed-induced “coma”:
The Fed created a codependent economy to which I said, as soon as you remove life support, the comatose patient will begin to die. It has proven out that, every time the Fed has removed life support, the patient has declined to such ill health that the Fed had to rush back in with greater life support.
Across the curve, Treasury yields are returning to their pre-pandemic levels — even if in fits and starts. Even the stubborn 30-year yield is back where it was in early 2019 . . . Epic fiscal, monetary and epidemiological interventions transformed the US economy overnight. A bear market in Treasuries [meaning this present bear market] mostly represents things returning to normal, though high inflation and Russia’s war have made for a bumpier ride….
The ride has only become rockier in the past few days. As the FT markets team reported on Monday, Treasuries have now had their worst month since 2016.…
The worry is that returning to normal at the same time the Fed digs in for a fight against inflation might trigger a recession. That, at any rate, is the worry being flagged by the yield curve.
Sharp moves in the U.S. Treasury market are increasingly pointing to the risk of an approaching recession, with “bond vigilantes coming out of the woodwork” and markets doubting the U.S. Federal Reserve’s plan to engineer a “soft landing” for the economy as it hikes interest rates to fight inflation, market experts said….
“The yield curve does look ominous,” wrote Christopher Murphy, Co-Head of Derivatives Strategy at Susquehanna Financial Group….
Melissa Brown, Global Head of Applied Research at Qontigo, said… ‘”The market perhaps is assuming that they can’t thread that needle … it’s going to be tough to not drive us into recession….”
“Bond vigilantes have come out of the woodwork,” Brenner said, adding he saw a large amount of selling in the futures market, particularly concentrated in five-year futures.
That is the drum I kept beating last year — that when the Fed tapered, you’d see bond vigilantes coming out of the woodwork (I think I even used that clichè) to reprice bonds to show inflation and a recession all at once. Of course, the most critical part of the curve, which the Fed says is its most reliable indicator is the 2Yr v the 10Yr, and that has not quite inverted yet, but it is very close:
“The Yield Curve – Only 17 Basis Points To Zero“
The difference between the 2-year and 10-year note is now just 17 basis points…. . Every recession in the past 40 years was preceded by an inverted yield curve – where this spread turned negative before the recession…. Even the 2020 recession, which had nothing to do with the Fed but a mandatory COVID shutdown, also saw an inverted yield curve in the summer of 2019
“From geopolitical risks to rising interest rates, U.S. Stocks face unique risks that lead to bear markets”
It’s a unique moment for the U.S. stock market, which is staring down a distinct set of circumstances — from geopolitical risks to rising interest rates — that when combined have historically led to a bear markets….
First, the Federal Reserve is starting to raise interest rates…
Then there’s Russia’s war with Ukraine…
Meanwhile, oil prices are soaring past $100 a barrel…
It’s rare for the Fed to raise rates at a time when markets are under pressure and geopolitical tensions are bubbling.
For free, I handed everyone the key for understanding in detail the massive financial collapse that was coming in the first quarter of this year due to the Fed’s taper (with Patrons, of course, getting the most and earliest details, but I made sure everyone got the minimum they needed to see what was coming because it is important to all). Such exasperating times for the Fed are exactly the corner I’ve said they were painting themselves into where the inflation they helped create forces them to tighten a Fed-dependent economy with all of its Fed-dependent markets when they can least afford to do so — backs against the wall.
I had also noted a number of times that the broken meter would be showing what it would have shown 6-9 months ago if it had been able to. That meant it would only start predicting a recession after we were already in it. That is why the meter is rising so rapidly now. It’s catching up to realization of what should have been priced in last summer.
That leaves you with a key many others still don’t grasp. They now suddenly talk of a recession coming later this year or early in 2023, but what you know is we’re just now getting last summer’s reading, so the recession is likely already here.
“The S&P 500 Index Will Face More Pain as Rate Hikes Continue”
When the Fed tightens the money supply, it often leads to an economic slowdown. And indeed, the credit market is now heading toward inversion, which has an almost perfect track record of predicting recessions and, thus, stock market declines. As such, traders should be careful with SPY and other such index ETFs here. Last week’s rally in no way guarantees that a bottom is in.
In fact, be very careful because things are going to reprice quickly now as we saw the moment the taper ended and even before Powell announced his first interest hike. Even Powell practically admitted the situation is looking like it’s run out of control, though he assured us, of course, that it has not out of control because it is his job not to alarm markets:
“But inflation is far above our target. And, you know, the help we’ve been expecting, and other forecasters have been expecting, from supply-side improvement, labor-force participation, bottlenecks, all those things getting better — it hasn’t come. And so we’re looking now to using our tools to restore price stability. And we’re committed to doing that.”
In other words, nothing has come in to rescue the Fed from rising inflation as they expected when they kept saying it was all transitory and I kept warning it was NOT. Had they been reading here, they would have expected differently. (Alas, I have never been able to impress upon them the value of doing so ; )
The Federal Reserve chair rarely gets directly to the point.
However, as Powell bluntly noted, that anticipated help simply “hasn’t come.” So now the Fed has to take matters into its own hands with a sharper policy response to get inflation under control.
“Sharper policy responses” are not what markets like. They don’t like surprises. On top of all that, my latest Patron Post series was intended to lay out — as one of the comments above also notes as a contributing factor but not the primary cause — how Putin’s War exacerbates the entire Everything Bubble Bust I wrote about in my Patron Posts the month before, which Bloomberg now seems to be leaning toward in agreement:
As Bloomberg’s Cormac Mullen writes, the bond market suggests that “the chance the Federal Reserve can engineer a soft landing is fading by the week, with the war in Ukraine exacerbating the inflationary pressures.…” As Mullen concludes, “Even Powell himself acknowledged the severity of the test the Fed now faces, withdrawing stimulus as inflation accelerates at the fastest pace in four decades.”
Yeah, that’ll land about as smoothly as a 747 in the Himalayas. Picture Captain Powell, fingers clenched around the yoke, leaning forward, eyes squinting to see through the clouds around Mt. Everest, trying to find an airstrip where he can set down his 747. That’s the ride I want to be on. And, if you think he’s got the skill to do it, remember 2018, which was nothing compared to this Fed episode.
The Big Bond Bubble Breakdown
In the bond realm, the interest trajectory shown above is a rocket ride. I’ve also said that the point where rapidly climbing bond interest is likely to cause serious trouble for stocks was in the 2.25%-2.5% range. Well, we’ve clipped almost to the top of that range in the space of one day; so, we’ll see what happens as that fact gets digested by stock investors; so far they seem to be in a state of denial about what they are seeing; however…
If there are laws of gravity in finance, the equity market is in for a big hurt. That’s because monetary policy is a blunt instrument. As policymakers use traditional and non-traditional monetary policy tools to kill the consumer price inflation cycle, it will hit asset prices hard.Moreover, given the scale of over-valuation, the potential decline in equity prices could rival the “big” ones of years past. So investors should take note: history sometimes repeats itself in the world of finance.
That is the scenario I said we’d likely find ourselves feeling this March as soon as the Fed taper brought QE to a close, but it is the bond bubble that I said in last month’s Patron Posts would be the really big deal. The importance of the bond bubble is that all other bubbles attach. In that Patron Post, I described its importance this way:
No one has ever seen a universal bond bubble collapse at the center of the entire financial solar system of little and large orbiting nations; so, this is not something we have a clear concept about in terms of its danger, but it is really bonds that are the epicenter (core) of the exploding Everything Bubble. While we are used to stock market crashes being the biggest financial events we’ve seen, they are mere solar flares compared to the core implosion of a global bond bubble. (In a supernova, the core collapses, then the whole, suddenly-compressed star explodes away the solar system around it.)
The collapse of the Everything Bubble will be an economic supernova. Think Lehman Bros. and Bear Stearns and all the rest of what happened to cause the great recession, then raise it an order of magnitude because most of that developed just out of mortgage-backed securities.
The bond bubble is the core collapse. Bond rates set mortgage rates, so mortgage rates rise rapidly if the treasuries rise rapidly. Rapidly rising mortgage rates will deflate or collapse the housing bubble. If treasuries reprice rapidly, corporate bonds will reprice because they cannot have lower yields than far safer government bonds. So, then the corporate bond bubble collapses. With the rapid upward pricing of corporate bonds comes the collapse of the corporate zombie bubble because zombie corporations (businesses that only make enough money to cover the interest on their debt) suddenly cannot refinance at the higher interest rates, so they go bankrupt.
Since those corporate bonds were used predominantly to fund stock buybacks, which have been the main fuel for the rapid rise of the stock market for years, then the stock market bubble collapses because buybacks become too expensive to justify compared to when money was practically free. Stocks will fall for other related reasons: The withdrawal of Fed QE that allows bond yields to rise is also the withdrawal of major new money every month that was seeking a place to park and finding that place in stocks. The new money has to go somewhere until it isn’t there anymore to go anywhere. I’ve also pointed out how rising bond yields are an attractant that tends over time to draw money out of stocks (the pump that I’ve mentioned that moves money from the stock pool to the bond pool).
All of that I said was coming before there even was a war; so, it is not caused by the war, but the war certainly will make it all worse. Undoubtedly some — especially the Fed — will be inclined to blame it all on the war, but you’ve read it for months here, so you know it was seen coming long before Putin started promising he would never invade Ukraine.
And, of course, all of this eventually leads to sovereign debt troubles to. In the first Patron Post in this month’s latest series, I wrote,
Putin’s War has certainly increased the number of sovereign debt defaults we are going to see….
Because we keep putting off the pain with new mountains of debt but no structural repairs or redesign to the fundamentals of our complex modern economies, everything I said about bankruptcies and defaults on debts in my Patron Posts about the Everything Bubble Bust has been intensified by the sanctions that have been laid down globally in response to Putin’s War.
Sovereign-debt defaults are now more likely, not less, in nations that will be impacted the worst by these sanctions because they have less capacity to add more debt to carry the burden of the sanctions, especially as some see their credit ratings downgraded due to the collateral economic damage caused by the sanctions.
What could be worse than all sovereign debts starting to see a rise in interest because nations have ended their QE happening at a time when those nations will be pressed by sanctions to lean more heavily on debt. Now, their need to take on more debt will force their central banks back to QE in order to keep interest rates from killing them, but that just, once again throws them back into those endlessly surging massive debt cycles I wrote about in my little book Downtime and into a hyperinflation trap.
As go bonds, so goes the financial world.
All of this I laid out in detail, explaining the connections, in these Patron Posts. And now we see the big risk of the Big Bond-Bubble Breakdown arising rapidly because the Fed stepped out of the QE bond market this month, and already the mess is piling up in news articles everywhere!
Before the Russian invasion of Ukraine, Russia supplied the world with one out of every ten barrels of crude consumed. But as the United States, Canada, and Australia have imposed embargoes on Russian crude and some buyers in Europe are halting purchases, the global oil market is facing one of the worst disruptions since the 1973 oil crisis when the members of the Organization of Arab Petroleum Exporting Countries (OAPEC) led by Saudi Arabia declared an oil ban on Western countries for their support of Israel during the Yom Kippur War.
The energy price shock of the mid-1970s led to the reduction of maximum national speed limits from 70 mph to 55 mph. The 21% reduction in speed equated to gas consumption savings.
Now the International Energy Agency (IEA) has proposed similar measures to lessen the oil shock following the Russian invasion of Ukraine and embargoes on Russian crude.
IEA said Western economies could reduce daily oil demand by 2.7 million barrels within four months by restricting how people drive, indicating the move to reduce highway speed could almost offset the 3 million barrel-a-day loss of Russian production for April.
“These efforts would reduce the price pain being felt by consumers around the world, lessen the economic damage, shrink Russia’s hydrocarbon revenues, and help move oil demand to a more sustainable pathway,” IEA said.
The IEA has unveiled a ten-point action plan it hopes Western countries will implement to curtail oil demand.
1 -Reduce speed limits on highways by at least 10 km/h
Impact*: Saves around 290 kb/d of oil use from cars, and an additional 140 kb/d from trucks
2 – Work from home up to three days a week where possible
Impact: One day a week saves around 170 kb/d; three days saves around 500 kb/d
3 – Car-free Sundays in cities
Impact: Every Sunday saves around 380 kb/d; one Sunday a month saves 95 kb/d
4 – Make the use of public transport cheaper and incentivise micromobility, walking and cycling
Impact: Saves around 330 kb/d
5 – Alternate private car access to roads in large cities
Impact: Saves around 210 kb/d
6 – Increase car sharing and adopt practices to reduce fuel use
Impact: Saves around 470 kb/d
7 – Promote efficient driving for freight trucks and delivery of goods
Impact: Saves around 320 kb/d
8 – Using high-speed and night trains instead of planes where possible
Impact: Saves around 40 kb/d
9 – Avoid business air travel where alternative optionsexist
Impact: Saves around 260 kb/d
10 – Reinforce the adoption of electric and more efficient vehicles
Impact: Saves around 100 kb/d
Today’s oil price shock could be a redux of the mid-1970s oil crisis as it may suggest price controls are next. Prime Minister of Italy Mario Draghi stated Friday that price controls could be coming to the natural gas markets, likely meaning petrol is next.
Mark Twain once wrote, “history doesn’t repeat itself, but it often rhymes.” Baby boomers who remember the mid-1970s and the pain a commodity shock caused most likely understand today’s turmoil is far from over.
What is lurking dead ahead is stagflation; what may be lurking beyond that is far, far worse.
There is pressure on the US dollar from entities like the IMF and nations like Saudi Arabia. But how bad is it?
We previously reported that Russia and the Saudis signed an agreement some believed would be the end of the US ‘Petrol’ Dollar. The USD was the currency used in oil trades and this was likely being replaced in an agreement between Russia and Saudi Arabia.
As far back as 2011, the IMF thought it would be a good idea to replace the USD as the world’s reserve currency.
The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world’s reserve currency.
The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system. SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends countries funds denominated in SDRs
A report from Wolfstreet discusses the current situation of the USD as the world’s reserve currency.
The global share of US-dollar-denominated exchange reserves declined to 59.15% in the third quarter, from 59.23% in the second quarter, hobbling along a 26-year low for the past four quarters, according to the IMF’s COFER data released today. Dollar-denominated foreign exchange reserves are Treasury securities, US corporate bonds, US mortgage-backed securities, and other USD-denominated assets that are held by foreign central banks.
In 2001 – the moment just before the euro officially arrived as bank notes and coins – the dollar’s share was 71.5%. Since then, it has dropped by 12.3 percentage points.
In 1977, when inflation was raging in the US, the dollar’s share was 85%. And when it looked like the Fed wasn’t doing anything about inflation that was threatening to spiral out of control, foreign central banks began dumping USD-denominated assets, and the dollar’s share collapsed.
The plunge of the dollar’s share bottomed out in 1991, after the inflation crackdown in the early 1980s caused inflation to abate. As confidence grew that the Fed would keep inflation more or less under control, the dollar’s share then surged by 25 percentage points until 2000 when the euro arrived.
Since then, over those 20 years, other central banks have been gradually diversifying away from US dollar holdings.
Under Biden it seems that everything is going in the wrong direction.
Americans get fed a lot of BS when it comes to price inflation. Prices in the U.S. are rising faster than they were in the late 1970s when gasoline shortages triggered an economic crisis.
Today, supply chain disruptions and exploding prices are also nearing crisis levels.
Meanwhile, there has been a dramatic rise in dishonesty amongst politicians, bankers, and the corporate press on this subject. They hide the truth on inflation for a couple of reasons.
For starters, the establishment doesn’t want people alarmed to the point of dumping dollars and fixed-rate debt such as U.S. Treasuries. Officials need strong demand for both, because the supply they are producing is so massive.
U.S. debts and obligations are much too large to be honored – at least in today’s Federal Reserve Note “dollars.” The politically expedient option is a default through currency debasement – lessening the real burden of debt and entitlement obligations.
The key is to keep Americans docile, holding onto Federal Reserve Notes and Treasury debt, and getting gradually poorer.
The same is true in other nations as well. Andrew Bailey, Governor of Britain’s central bank, said the quiet part out loud last week:
“In the sense of saying, we do need to see a moderation of wage rises. Now that’s painful. I don’t want to, in any sense, sugar that… it is painful. But we need to see that in order to get through this problem more quickly,”
He wants the British to stand there and take it. It didn’t go over too well.
He probably won’t slip up and tell the truth again. Officials certainly do not want people angry about rising prices.
President Biden is feeling some heat of his own. It would be much worse if people knew the truth, but most don’t.
The modern Consumer Price Index (CPI) is a form of deception. The chart below shows the difference between the heavily managed CPI number published by the BLS versus the 1980 method. We covered the tricks officials have been using to disguise the rapid decline of the dollar last week.
Most Americans would be surprised to know if price inflation was calculated using the same methodology the Bureau of Labor Statistics used during the 1980 peak, inflation would officially be worse now than it was then.
Rigging the data isn’t the only way officials mislead people. In Joseph Goebbels style, a good part of the strategy is telling good, old-fashioned lies so often people will accept them as truth.
Here are a couple examples of the lies:
Inflation is a good thing. Don’t mind the fact that money purchases less each year because it is a symbol of economic growth.
Higher prices are transitory. The forces driving inflation will soon moderate.
Today’s mounting inflation crisis is very different from the one forty years ago. Fed bankers have nowhere near the leeway to hike interest rates and bring surging prices back under control.
The equity markets cannot stomach rates above the low single digits. Markedly higher interest rates would also blow up the federal budget as well as destroy the U.S. banking system.
People should simply expect more of the inflation disinformation campaign and invest as if prices are rising twice as fast as they are being told.
Clint Siegner is a Director at Money Metals Exchange, a precious metals dealer recently named “Best in the USA” by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.
Digital currency is and has been a huge topic within the past few years, especially with the growth of Bitcoin, Ethereum, and several other cryptocurrencies. But with so many other new and popular developments, these new currencies have been shrouded with controversy and a polarization of opinion.
Now, a new development is on the horizon: Central Bank Digital Currencies (CBDC). But don’t be fooled, it’s not the same as cryptocurrency, nor does it bring the benefits crypto offers. Instead, CBDC might just be a new version of the same old central banking system.
A much anticipated paper by MIT and the Boston Fed is expected to be released this fall. The paper will include details of what a U.S. CBDC might look like.
Because of this perspective, many actions taken by the “financial elite”, like the establishment of a CBDC, are noteworthy, and raise suspicion that thesemeasures will be implemented for more power and control.
Former President of the Federal Reserve Bank of Boston Eric Rosengren provided some key insights as to what a central bank digital currency (CBDC) might look like.
“Rosengren broke out the ecosystem into three buckets: bitcoin, stablecoins, and CBDC, which he referred to as ‘digital currency’….Rosengren also revealed that blockchain and distributed ledger technology were not part of the design in a hypothetical U.S. digital currency. Rosengren stated it is, “…less likely that we are going to be designing a digital currency for the blockchain or for a particular blockchain.”
According to Rosengren, he further envisioned a central bank digital currency not as a stablecoin, but rather as a retail payment or substitute for cash. “You can’t pay for something on the internet withcash so the digital currency provides you a mechanism to use cash but in digital form,” said Rosengren.”
So, CBDC is basically cash in digital form. Digital cash that can and will be used to make transactions in everyday life, something that not all cryptocurrencies are designed for. While some cryptocurrencies can be used for these purposes, others, like Bitcoin, are more of an asset for storing wealth. That being said, Bitcoin can still be used to purchase some goods and services and is now legal tender in El Salvador.
There are differences between CBDC and cryptocurrencies. While both can be seen as ‘digital’, their differences are vast and one should not assume that CBDC is the solution cryptocurrencies are offering.
One of the most important differences is that cryptocurrency is on a blockchain ledger, while CBDC isn’t. A blockchain is a new way of creating databases that has huge potential in many industries. Specific to currency, blockchain allows for decentralization of currency, a transparent ledger of transactions and it makes it so no single entity can control all the currency and manipulate its value easily. It also means transactions cannot be deleted or altered, and everyone can verify it.
This level of transparency is not typically favored by those who control an entire country’s money supply – i.e. central banks.
To go deeper, Bitcoin is not a privately owned currency. It’s not part of the “system.” Your wealth in Bitcoin cannot be frozen, controlled, or seized by governments. In fact, governments don’t have any “power” over these cryptocurrencies as they do with modern day currency – the type of control government would have over CBDC.
In speaking about some of the values of Bitcoin, and perhaps other cryptocurrencies, Chamath Palihapitiya, a former Facebook executive said,
“This is a fantastic fundamental hedge and store of value against autocratic regimes and banking infrastructure that we know is corrosive to how the world needs to work properly,” Palihapitiya said. “You cannot have central banks infinitely printing currency.”
With all this in mind, CBDC will be no different than modern day currency, it’s just going to be digital, that’s all. CBDC is not an embrace of cryptocurrency, which remains something entirely different, something governments don’t like and have no control over.
National Security Agency (NSA) whistleblower Edward Snowden, who leaked documents exposing a massive global surveillance being used by the NSA explains,
“Rather, I will tell you what a CBDC is NOT—it is NOT, as Wikipedia might tell you, a digital dollar. After all, most dollars are already digital, existing not as something folded in your wallet, but as an entry in a bank’s database, faithfully requested and rendered beneath the glass of your phone…”
“Instead, a CBDC is something closer to being a perversion of cryptocurrency, or at least of the founding principles and protocols of cryptocurrency—a cryptofascist currency, an evil twin entered into the ledgers on Opposite Day, expressly designed to deny its users the basic ownership of their money and to install the State at the mediating center of every transaction.”
Snowden explains that proponents of CBDCs believe that strictly-centralized currencies are the realization of a bold new standard “where every central-bank-issued-dollar is held by a central-bank-managed account, recorded in a vast ledger-of-State that can be continuously scrutinized and eternally revised.” They believe that this will make everyday transactions safer and easier to tax, making it impossible to hide money from the government.
“He argues that this is simply a step to increase the power and control of the surveillance state, one that continually finds ways to take away our right to privacy for the sake of “national security.”
CBDC opponents, however, cite that very same purported “safety” and “ease” to argue that an e-dollar, say, is merely an extension to, or financial manifestation of, the ever-encroaching surveillance state. To these critics, the method by which this proposal eradicates bankruptcy fallout and tax dodgers draws a bright red line under its deadly flaw: these only come at the cost of placing the State, newly privy to the use and custodianship of every dollar, at the center of monetary interaction. Look at China, the napkin-clingers cry, where the new ban on Bitcoin, along with the release of the digital-yuan, is clearly intended to increase the ability of the State to “intermediate”—to impose itself in the middle of—every last transaction.”
This is the key difference between CBDC and Bitcoin, Ethereum, and others. These are viewed by both central and commercial banks as dangerous because they’ve been designed to ensure equal protection for all users, with no special privileges or power extended to the State who like to keep their eye on everything.
A guest essay published in the New York Times by Dr. Eswar Prasad, a professor of trade policy at Cornell University and the author of a forthcoming book on digital currencies, outlines a number of pros and cons of digital currencies. One of the cons is as follows,
“If cash were replaced with a digital dollar, however, the Fed could impose a negative interest rate by gradually shrinking the electronic balanced in everyone’s digital currency accounts, creating an incentive for consumers to spend and for companies to invest.”
Dr. Eswar Prasad
The thought of banks depleting the savings of every wage worker if they don’t spend it is quite concerning to say the least.
In China, things are moving fast. The country’s central bank, the People’s Bank of China, stated in a July 2021 white paper that the digital renminbi is “ready for cross-border use.” Yet for its state-sponsored digital currency to be realized, the digital renminbi must be interoperable with the CBDCs of other countries. Simply put, their currency must be able to work with digital currencies from other countries.
The People’s Bank of China is supporting the development of global CBDC standards and working with other monetary authorities to launch a multi-CBDC arrangement because of this reason.
When it comes to CBDC, it simply favours the already powerful and allows them more control over people’s lives and an even greater reduction of their privacy. Like many moves the “elite” make, it will all be done under the guise of ‘goodwill and service to others’ when it fact that is likely not the intention.
As new technological solutions arise we see human life becoming simpler and more expansive, but what type of thinking and paradigms back the way that technology is used? In our current world, it is a paradigm of control, disconnection, and domination. Perhaps the most important takeaway here is that as the world evolves technologically we are still not solving real problems because we are stuck in old ways of thinking.
We must begin connecting with the earth, ourselves and something deeper inside ourselves to ask what type of world we truly wish to see. Sitting back and leaving our collective direction up to those currently in power will not result in a meaningful paradigm change. We must come together at a grass roots level and think differently about how we want to live on this planet.
Update Oct 26, 7:30PM: Correction on Bitcoin being legal tender in El Salvador, not Ecuador.
The opening last year of the world’s largest artificial resort island, developed by China Evergrande Group for nearly $13 billion, was the realization of the ambitions of founder Hui Ka Yan, who sketched a design for the project himself.
Now Evergrande is in default to global bondholders, the former Communist Party secretary of the small Hainan island city where Ocean Flower Island was built is serving a life sentence for bribery, and officials in Danzhou city have ordered 39 of the project’s towers – roughly 3,900 of the island’s 65,000 homes – to be demolished over environmental and construction violations.
The demolition of part of the 2,000-acre, flower-shaped project would add to the woes of what was once China’s top-selling developer, which is now reeling under more than $300 billion in debt, struggling to revive sales and repay creditors and suppliers.
Government documents related to the project and details provided by two sources with direct knowledge of the island’s development show how the work skirted environmental and zoning regulations during nearly a decade of development, eventually drawing scrutiny from regulatory authorities.
As noted, Hui was Asia’s richest man at one point.
In 2017, Hui was Asia’s richest man. As recently as July 2021, the former steel technician could be found mingling with power brokers in Beijing at a celebration to mark the centenary of the Chinese Communist Party.
Chinese authorities have been scrutinising the firm and Hui’s assets since late last year to determine whether anything was hidden, and the central bank has blamed mismanagement and breakneck expansion for Evergrande’s problems.
As Evergrande, now at the centre of China’s property sector liquidity squeeze, pushed ahead with the resort island, it ran into environmental issues, in particular over land reclamation that damaged the local ecology, the two sources said.
The Evergrande crisis has not only impacted Asia’s former richest man, but it also impacts Hong Kong’s former richest woman.
The company with over $300 billion in debt is now facing bankruptcy. The property management sector in China, one of its biggest sectors is in peril. Is this the beginning of massive financial challenges for companies in this market? Time will tell.
“As far as I'm concerned, it's a damned shame that a field as potentially dynamic and vital as journalism should be overrun with dullards, bums, and hacks, hag-ridden with myopia, apathy, and complacence, and generally stuck in a bog of stagnant mediocrity.” -Hunter Thompson