The War Economy

 December 9, 2022 key news items this week:

1. 2023 The War Economy: Every December Saxo Bank of Denmark came out with an outrageous prediction of possible but unlikely events to happen in the following year. The theme for 2023 will be the War Economy. (Fig. 1).

Whilst neither refuting nor endorsing Saxo’s outrageous predictions, it is worth our while to think ahead as to what would a global war economy looks like.

 (i) World Domination: It is funny how famous quotes from Epic movies stick to one’s mind, In the first James Bond series, “Dr No”, James Bond responded to Dr No’s quest to bring the entire world to submission saying,”World Domination, same old dream, many people think they are Napoleon or God”. And so throughout history from the Tower of Babel to the current Anglo American Empire, there is no lack of crazies with a God complex. In the 70s, David Rockefeller and his crony elites began to construct this dream through 10 regional power centers and Gun Boat Diplomacy. (Fig. 2).

Whilst there has always been traitors and Sold Outs of their own kin, lies and slogans would eventually succumb to the more powerful uniting force of ethnicity. A new multi-polar world has emerged in defiance to the 400 years of Anglo American Rules. (Fig. 3).

The theory of Thucydides trap dictates conflicts and competition to continue until the old establishment self destructs under its hubris blindness.

 (ii) Major Resource and Currency Realignment: The foundational area of conflicts was firstly a weaponization of USD against Iran in 2012 followed by a progressive repudiation of worldwide US Coinage Tax. No country will accept as a reserve currency, conditional IOUs with an 8% compound annual depreciation. It finally took a war of NATO against Russia to complete this decades long migration. The icing on cake for Global De-dollarization was the Joint Announcement at the Sino Saudi Summit in early December 2022. In terms of Conventional Energy War (principally oil and gas), the collective West is in a no win situation with the Gulf States on the side of East.(Fig. 4 & 5).

 

 

 

 Whilst North America may still be self sufficient in terms of conventional fossil fuel, the dominant country in New Energy Generation is China with the largest market share in generation of Solar(China -31.7%, US -16%); and Wind(China -35.2%, US - 20.6%). Throughout 2022, we reported on a monthly basis the global sell down of US Treasuries and we expect the pace of sell down to accelerate in 2023. On Oct 31, 2022 US Treasury announced an increase of borrowing needs by 37.5% (from $400 to $550 billion) for Q4 2022 (Fig.7) .

This came just three months after a forecast made on August 1. The expected 12 months run rate of Federal Deficit for 2023 will also increase from US$1.3T to US$2.6T. US has already exhausted the global capacity to buy USD and everyone knows. Expect the Federal Reserve to again run hot its printing presses, continued dollar depreciation and commodities price inflation.

 (iii) Rearmament Trade: Whilst sophisticated hi tech weaponry has its place in precision warfare, the Ukraine conflict has exposed the underbelly of Western misallocation of resources against conventional weaponries. The largest and best trained army of NATO is in Ukraine and the AFU is being pounded to disintegration by a 3:1 Russian advantage on fire power. Daily sorties by RAF missiles and shells numbered 3 to 1 against AFU (RAF 20,000 daily vs AFU 6,000) and one third of M777 howitzers given in aide to Ukraine laid idle as the guns could not take the stress of prolonged repeated overdeploment. (Fig. 8).

The entire annual US production of M777 155mm howitzer shells is only 250,000. (41 days AFU average daily consumption). For a prolonged war, US and NATO badly need an upgrade of military industrial capacity but where comes the energy to make this happen in Europe. By blowing up the Nord Stream pipelines, US and UK had sealed the fate of Europe in this conflict. We will know soon enough the outcome of this sad saga. Oh, does the US embargo of chip making technologies and equipment hurt the East military production? Probably not, because military grade chips only requires 65nm to 28 nm technologies.

 The past week’s financial markets:

 A. Stock Market: Dow dropped 953.42 points for the week (-2.77%). (Fig. 9)

Last week we lamented the Federal Reserve weekly Open Motor Mouth Policies. No sooner had Powell confirmed interest rates hikes will slow as early as December, “Fed Whisperer” appeared and whispered “higher for longer rates”. (Fig. 10)

The market reacted in response. But of course you know better.

 B. Debt Market: (Fig. 11): USGG10YR ended the week at 3.586% a gain of 9.4 basis points from the previous week. 

 Our continued monitoring of Spread between USGGYR2 and Fed Funds Rate indicates the Fed is in no position to push for further rate hikes.(Fig. 12).

UST Yield Curve continued to be seriously inverted, but during the week, it flattened somewhat with a drop in short duration with of 10 to 12 basis points and an increase of 3 points towards the long end. This is the second consecutive week of a drop in short rates. (Fig. 13)

 C. FX Market (Fig. 14): for the week ended December 9, 2022, DXY opened at 104.506 and closed at 104.932 (Up +0.4%).

Only minor movements were observed in European currencies against the USD, the Yen weakened whilst Rmb gained on further easing of Zero Covid policy. Oil took a beating with WTI dropped nearly 12% for the week as EU moved on to capping prices for Russian Oil and recession looming against the US economy. This is more derivatives in action for psychological impact. (Fig. 15).

Precious metals continued to strengthen.

 D. Precious Metals & Crypto :(Fig. 16): Gold price opened at $1797.25, and closed the week at $1797.11, 

the Fed Open Mouth Policy only affected some opportunistic traders and prices remained stable. As BIS and Bullion Banks begin to exit the paper gold market due to Basal III rules, volume were subdue and prices are subject to large swings on thin volume. The mystery buyer for 300 tons of physical gold turned out to be China. Russia and China are preparing for an alternate gold backed international settlement system. Silver was manipulated down earlier in the week but rebounded to close higher. Crypto languished in low volume.(Fig. 17)

 Gen 11:1  Now the whole earth had one language and one speech. 2  And it came to pass, as they journeyed from the east, that they found a plain in the land of Shinar, and they dwelt there. 3  Then they said to one another, "Come, let us make bricks and bake them thoroughly." They had brick for stone, and they had asphalt for mortar. 4  And they said, "Come, let us build ourselves a city, and a tower whose top is in the heavens; let us make a name for ourselves, lest we be scattered abroad over the face of the whole earth." 5  But the LORD came down to see the city and the tower which the sons of men had built. 6  And the LORD said, "Indeed the people are one and they all have one language, and this is what they begin to do; now nothing that they propose to do will be withheld from them. 7  Come, let Us go down and there confuse their language, that they may not understand one another's speech." 8  So the LORD scattered them abroad from there over the face of all the earth, and they ceased building the city. 9  Therefore its name is called Babel, because there the LORD confused the language of all the earth; and from there the LORD scattered them abroad over the face of all the earth.