December 16, 2022 key news items this week:
1. Zombiefied : Last week we reported the 2023 Global Economy will be a War Economy. This week we will look at another aspect of the Economy and we will call it the Zombie Economy. In financial market terms “Zombie companies “ZBC” are typically defined as firms that haven't produced enough profit to service their debts (also known as an interest coverage ratio below one) for three straight years. Last year on July 30, the Federal Reserve published a study and estimated 13% of US Listed Companies belonged to that category. (Fig. 1).
The Federal Reserve has a lower estimates of ZBC than others as the generally accepted benchmark is ICR( interest cover ratio) of less than 1. (Fig. 2).
Bearing in mind, at the time of the Fed’s publication, the Effective Fed Funds Rate “EFFR” was only 0.07%, the fact that the Fed just raised its EFFR to 4.33% this Friday means the number of companies that fit into that category is a whole lot bigger. Why is that important? When a company that cannot service its debt, there cannot be any sustained growth unless it is in a high growth sector with robust earnings growth prospects. ZBC are found in different industries. The distribution by Industry Classifications can be found in (Fig. 3)
. ZBC are not only found in US and there are plenty of examples of Zombies in Europe and Japan. In fact the Bank for International Settlement “BIS” published a study of ZBC earlier in September 2018. (Fig. 4).
For those interested in these two studies, we list the links below:
https://www.bis.org/publ/qtrpdf/r_qt1809g.pdf
(i) US Inc. And the Federal Reserve are Zombies - Having explained ZBC, the punch line is the entire country of US and the Federal Reserve are Zombies. Let me explain below, every Wednesday, the Federal Reserve published the surpluses (income from its Treasury portfolio less expenses including interest paid and trading losses) it made. From first published figures in Jan 2011, the average weekly earnings of the Fed is $1.6 billion per week but since Sep 7, 2022, such earnings turned into deficits and the pace of decline is in acceleration. By the week of Dec 14, 2022 the weekly deficit swelled to $14.3 billion. (Fig. 5).
By hiking interest rate again on Dec 14 and forecasts further interest rate increases in 2023, sustained losses at the Federal Reserve will snowball to an avalanche. The Federal Reserve is already trading at significant negative assets (liabilities greater than assets) and relies on the “full faith and credit of the US Government”. But is the US Government doing better? No, of course not. For Fiscal 2023, Gross Tax Receipts of the US Federal Govt was $570.61 billion. With Gross Federal Debt of $31.32 trillion as at December 15, 2022 and average interest rate of say 4%, interest on Federal Debt is $1,252.8 billion. The entire US Federal Gross Tax Receipts could only cover 45% of interests expense. By definition, US Inc is a Zombie and the mother of all Zombies.
(ii) The Entire Western Alliance are Zombies - We are all well aware of the conflicts within the EU and between EU and US in terms of energy profiteering and trade subsidies and frictions. But is it the ideology of Democracy and Freedom that binds their alliance. No, these are just slogans for the naive public consumption. The sad truth is the alliance only because of their Zombie blood that by acting in concert as a pack they hope to continue to suck dry the life blood of the rest of the unallied world. Whilst USD remains as the only Reserve Currency, the Euro, the Sterling and the Yen could still gleam from the crumbs fallen from the US table, when the USD hegemon fails, every Western currency will fall like dominoes.
Revelation18:11 "And the merchants of the earth will weep and mourn over her, for no one buys their merchandise anymore: (Fig. 6)
(iii) The Vampire Killer - Every month, US Treasury published a report on international capital flow and the October 2022 figures was released yesterday. In the month of October, the international sell down of US Treasuries continued and Foreign Holders dumped another US$111.5 billion. Cumulatively for the 10 months to October, total sell down was $554 billion comprising Central Banks -$511.2 and Private Sector -$42.8 billion. (Fig. 7).
Leading the charge of the Vampire Killing mission is China and the anti-vampire ranks are growing by leaps and bounds.
Please caution that the US Treasury figures above are highly dressed up, the real picture is a lot worst. We will discuss this aspect in later paragraphs.
2. Update on Ukraine Conflict:
(i) In a rare moment of Western MSM candor, the Financial Times admitted Ukraine is running out of vital weapons (Fig. 8)
(ii) The exhaustion of weapons, as previously reported, did not happen just in Ukraine but throughout Eu and NATO countries. EU top diplomat Borrell made an urgent appeal to the military industrial complex to step up capacity and investment to supply Ukraine. (Fig. 9)
(iii) The same was echoed by the US Envoy. (Fig. 10)
(iv) In another propaganda piece, BBC reported yet another game changer when US announced she will equip Ukraine with Patriot Air Defense Missiles. (Fig. 11).
Independent military analysts immediately pointed out with Ukraine’s power and communication infrastructures in ruins, the odd Patriot equipment could hardly be built into an integrated air defense system (iads) (Fig, 11, red framed window). Again supply of such equipment are purely for optics and would make little real impact.
The past week’s financial markets:
A. Stock Market: Dow dropped 556 points for the week (-1.66%). (Fig. 12).
On Dec 14th the Federal Reserve raised the Fed Funds rate by 50 basis points. Although it was consistent with previous announcements, the Fed left the door open for higher and longer rate increases. That spooked the market and the reaction was risks off. For over 45 years, Fed Funds Rate”FFR” have followed closely the market rates of Treasury 2 Year Notes “YR2”, Rarely would FFR exceeds YR2. (Fig. 13).
Only on 9 occasions did the Fed break this market order and in every case it all foreshadowed severe problems ahead for the US Economy and USD. (Fig. 14).
The most severe case happened in the late 70s and early 80s when US defaulted on the Bretton Woods agreement. This resulted in an USD crisis which took 35 months of extreme high interest rates to restore order in the world currency markets. (Fig. 15)
However in the 70s US was still the world’s largest creditor nation and debt to GDP was in the 60% range. Today, US is the largest debtor nation with debt to GDP of over 120%. The capacity for US to restore confidence in the USD has forever been lost. This gambit by Powell to imitate Paul Volcker will fail. We expect a systemic crisis to occur within 3 to six months and the Fed will start an overt printing of USD with hyper-inflation to follow.
B. Debt Market: (Fig. 16): USGG10YR ended the week at 3.488% a drop of 9.8 basis points from the previous week and back to the same position two weeks ago.
In the previous paragraph we have already explained the severity of FFR crossing over YR2. The UST Yield Curve continued to be seriously inverted, but during the week, after the FOMC meeting of 50 basis points increase in FFR, Treasury bills of one and two months increased rates by 9 to 13 basis points but other duration all showed a decline. A very clear indication of recession fears. (Fig. 17).
To understand why the Fed won’t pivot to reduce the risks of recession we have to look at what the Fed can do. We explained before in order to fight inflation, the Fed as only 3 tools: (a) Cost of Money - to use interest rate as a lever to destroy demand, (b) Supply of Money = Withdraw liquidity from the market by reducing its Balance Sheet (ie, Quantitative Tightening or “QT” and (c) Forward Guidance - I.e. Talk or more precisely lie disguised as directional guidance. (Fig. 18) is Fed’s Balance Sheet which gave an appearance of QT, although ever so gently.
But of course, the real truth is the Fed has continued to print non-stop but taken off balance sheet and warehoused the US Govt Bonds in some Crony Accounts or Off Shore Entities.The Fed gave a confusing name for the deception and called it a Reverse Repo Operation. (Fig. 19). is a chart showing the Fed’s Balance Sheet with what the quantity of Treasuries the Fed is committed buy within the next 24 hours each and every night.
Quite blatantly, there was never any QT but a only conspiracy to defraud. The US Govt cannot reduce spending and with no buyers of Federal Debt, the Fed just have to buy and lie about it. Even the Hong Kong Standard picked up the story and reported it in early December. (Fig. 20)
C. FX Market (Fig. 21): for the week ended December 16, 2022, DXY opened at 104.932 and closed at 104.837 (Down -0.09%).
FX movements have been minimal within the week. As explained in the previous week, the drop in oil price as a result of the Western alliance price cap was just psy-
op and oil price rebounded by 4% for the week.(Fig. 22)
D. Precious Metals & Crypto :(Fig. 23): Gold price opened at $1797.11, and closed the week at $1792.59,
Silver and Bitcoin both traded down slightly for the week. (Fig. 24)
Leviticus 19:35 'You shall do no injustice in judgment, in measurement of length, weight, or volume. 36 You shall have honest scales, honest weights, an honest ephah, and an honest hin: I am the LORD your God, who brought you out of the land of Egypt. 37 'Therefore you shall observe all My statutes and all My judgments, and perform them: I am the LORD.' "
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