The Cost of Being a Proxy in between Wars of Giants

Week ended July 21, 2023, interesting news items to look at this week were:

 

The Cost of Being a Proxy in between Wars of Giants: Henry Kissinger once said,” To be an enemy of America is dangerous but to be a friend is fatal”. (Fig. 1)

514 days into the NATO/Russia European armed conflict, the cost to the Ukrainians has been horrendous. In June 2023, FT reported BlackRock and JP Morgan help to set up Ukraine reconstruction bank. (Fig. 2).

Of course this newspaper headline was just a propaganda spin for the western obtuse readers, the reality to the world at large is the Anglo American mortgagees have taken possession of the key national assets of Ukraine (Power Stations and Power Grid, Railway infrastructure and associated land, 60% of the famous Ukrainian black soil agricultural land and many other key State owned Industrial Enterprises.) The national debt of Ukraine in 2023 is US$162 billion not counting the huge debt to NATO as a result of the Weapons Lend-Lease deal (at least US$75 billion owed to US alone). The Global South’s interpretation is the hypothecated Ukrainian National assets are nothing more than a sale at distressed prices to transnational capital. (Fig. 2 red framed picture).

 

Just a few weeks into the great Ukrainian 2023 Spring/Summer counter offensive, KIA of the AFU already amounted to 34,045 (June 4^th to July 18^th) as reported by MOD of Russia. Cumulatively over the past 9 months KIA of AFU amounted to 116,167 (Fig. 3).

 If counted from Feb 24 2022, KIA of AFU would totaled between 300,000 to 350,000 according to various independent US military observers like Col Macgregor, or Weapons Inspector Scott Ritter. Together with the seriously wounded, the loss of combat life forces of AFU would reach 1 million. The demilitarization of Ukraine is now almost complete, yet the Anglo American Empire would not give up nor seek a negotiated peaceful settlement. Let’s not forget, before Russia’s SMO in 2022, Ukraine has the biggest army in Europe, larger than the combined army of France and Britain, so substituting Polish and Lithuania soldiers is not the answer. (Fig. 4)

What is at stake for the British and the Americans are the US$330 billion seized Russian Central Bank and Oligarch assets that will need to be returned and loss of control of prime Ukrainian assets. The AA elites have religiously refused to give up their dream of a handsome war dividend just by disposing obsolete moth balled weapons and equipment to Ukraine. The recent NATO summit is all but rhetoric and no substance and only bottom of the barrel Cluster Bombs would be furnished to Ukraine by US. Biden even openly admit there is nothing much else to give. I am sure you all have seen the following pic of a depressed, isolated Zelensky. (Fig. 5)  

 

In terms of territorial loss, the majority of the industrial and agricultural productive regions has been annexed by Russia. (Fig. 6)

and as RAF advances further west to take Odessa, Ukraine will become a landlocked ghost country littered with US dud cluster bomb submunitions. Ukrainians who have fled to EU or joined the Russian Federation are unlikely to return, making true Kissinger’s statement that a friendly association with America is indeed fatal.

 

This week in retaliation on the attack of the Crimea Bridge, two British cargo ships were struck at Odessa. Russian MOFA spokesperson explained it was a malfunction of targeting instruments but in my opinion Russia is drawing the British out and dragging their feet to the fire. We will see whether the British’s bite is as fierce as its bark after being lured into the open.

 

In Asia, China’s drive in self sufficiency and robust exports is hitting hard the pro US regime in South Korea in sales of semiconductors, cars and ships with not dis-similar problems in Japan. We will be keeping a look out at the effort of China’s export restrictions on gallium and germanium. The old saying “When goods do not cross borders, soldiers will” is progressively heating up everywhere.(Fig. 7)

 

 

The year to date’s financial markets:

 A. Stock Market: (Fig. 8): Dow closed at 35,227 for the week, making a year to date return of -3.04%. S&P 500 +18.14%, NASDAQ +34.1%.

But what lies underneath the index is not a healthy economy but hype and froth. (Fig. 9) shows just how 7 stocks have lifted the various indexes of the Stock Market all on the back of a hype of AI.

I have written before AI will indeed be another disruptive technology but as at this moment, we are still in the rudimentary stages of development. The co-ordinated push of ChatGPT across all media is to serve one purpose only, stock valuation of 7 heavy weight tech stock for the rescue of the US financial market valuation by momentum traders. In fact despite being a beneficiary of high stock valuation, a spokesman of Meta came out and said “ The ‘hype’ behind artificial intelligence has surpassed what it is actually capable of, Meta has said” (Fig. 10).

Last week Goldman Sachs trader Bobby Molavi wrote a piece that retail investors are waiting for the right moment to short AI stocks. (Fig.11)   

 

B. Debt Market: (Fig. 12): USGG10YR ended the week at 3.837%, gyrating between a low 3.253% and a high of 4.073% through 2023.

The Federal Reserve has but an Hobson’s Choice of saving the US$ or saving the US economy. Hawkish statements by the Fed on fighting inflation were mere words as the quantity of money supply were effectively and substantially increased throughout the QT period by a process called Reverse Repo. (Fig. 13).

Reverse Repo is a process whereby the Federal Reserve sell her holding of Treasuries before close of business today (off the books) but with a commitment to buy back the same securities the next day. With a global de-dollarization in full swing and rampant inflation due to excessive currency issuance during the pandemic period, the Fed’s only tool is to force domestic US bank depositors to switch their cash from bank deposits into US Treasuries. A failure to find buyers of US Treasuries means an immediate default by the US Government. (Fig. 14) are National Deposit Rates published by the FDIC alongside with Treasury yield of comparable duration.

Looking at the table, the immediate question that comes to one’s mind is “Why are Treasury Yield so much higher than bank deposit rates?” The reason is simple, after more than 10 years of Zero Interest Rate policy, virtually the loan and securities portfolio of all the US banks have been locked into yield of around 4% so the maximum savings and deposit rates banks can offer is between 1 to 2 %. Otherwise, their interest income cannot cover their interest expenses after payroll and overhead costs. (Fig. 15) shows the extent of the flight of bank deposits into Money Market Funds (“MMF”) and this trend have continued unabated putting severe pressure on the entire US banking system.

At the beginning of 2023, money market funds has a size of around 20% of US Commercial Banks total Assets. this had grown to be around 24% by Jul 2023, with MMF rising and Commercial Bank Assets in contraction. Sadly, the Federal Reserve is itself not immune to the same profit and loss principles. By offering Fed Funds Rate at the current effective rate 5.08%, the Federal Reserve is running a weekly loss of nearly $80 billion. (Fig. 16).

From early September 2022 when the Federal Reserve first run a weekly cash loss to July 19, 2023, the cumulative weekly losses of the Federal Reserve now reaches $1.5 trillion, about twice the consolidated equity of all the Federal Reserve Banks. The Federal Reserve is insolvent, the US Government is bankrupt, yet I am amazed other than the Central Banks of the Global South, most investors in the developed financial markets still merrily dance to the piper tune of Uncle Sam. Can the Fed revert the rot of the Commercial Bank deposits, yes it can. The method is simple by capping the size of the Reverse Repo Operation. This will effectively take away the key to liquidity of the MMF and force the MMF to face the same duration risks as the Commercial Banks and thereby a fundamental attraction for investor to park their money with MMF. But by doing so, the depth and liquidity of the entire US Treasury Market will be hampered making US Treasury even less popular. It is why I said what I said, the Fed has only an Hobson’s choice of saving the USD or the US economy.

 

Another Grey Rhino in the US Debt market to implode is the Commercial Real Estate Mortgages (“CREM”). The market consists of $4.5 trillion backed by income-producing properties and $470 billion of construction loans. Banks hold less than 40% of income-producing loans and around 45% of all CRE mortgages. (Fig. 17) shows the prevailing low occupancy rate of 50% of Commercial Real Estates as compared with the pre-pandemic level of over 90%.

CRE Mortgages in US are often structured on a non-recourse basis. With high interest rates and low occupancy, even deep pockets like BlackRock are handing their property keys back to the lenders. Recent transactions showed distressed sale price are closed at discounts over book value in excess of 60%. The fireworks of CREM is beginning to gather pace as the fixed rate duration of CREM comes to maturity and refinancing costs will double while rental income have halved.

 

Looking at the UST Yield Curve (Fig. 18),

inversion began in July 1, 2022 but officially the US economy is still not in recession. The Yield Curve Inversion as a traditional recession indicator has never failed but neither been the US Govt and the Federal Reserve so reckless in massaging published numbers. Although the Fed’s QT program is still to contract money supply by $90 billion a month, stealth digital currency printing is done by giving $80 billion per week through the Fed’s trading desk losses. This ensures liquidity to the market has not missed a bit. Additionally the Fed has provided $102 billion in Bank Term Funding Program (“BTFP”).Allowing banks to handover underwater Treasuries for one year at full nominal value with losses underwritten by the Treasury. All these have allowed US Commercial Banks to kick the can down the road and extended Judgement Day to a long march and not via a waterfall descend. The debt ceiling is effectively postponed until after the 2024 election and Washington continued to spend money like there is no tomorrow. Dark clouds now overhang every economy but deluded Western politicians still have their sun glasses on as they deplete their strategic petroleum reserve to slow oil price inflation (Fig. 19)

, and empty their weapons cache in support of a loosing war against Russia in Ukraine.

 

As China stepped up her counter measure in the chips war through a strategic metal choke hold, the US Semiconductor Industry Association petitioned and separately the CEO of Intel, Qualcomm and NVIDIA held talks with top US officials including Secretary of State Antony Blinken, Commerce Secretary Gina Raimondo, Director of the National Economic Council Lael Brainard, and National Security Advisor Jake Sullivan that restrictions on chip sales to China could backfire on the US. (Fig. 20).

 

In previous blogs we have mentioned we are in a War Cycle overlapping a Civil Disobedience Cycle, whether we will end up with a big bang or a long drawn out deflation is anybody’s guess. As for me and my family, we are preparing for tough and turbulent days ahead.

 

C. FX and Precious Metals: I have prepared a chart of a mix bag of currencies, commodities and indexes from just before Russian’s SMO to today. (Fig. 21) The ranking of relative performance are:

Gold (+8.91%), Silver(+8.59%), NASDAQ(+1.91%), USD(0%), S&P 500(-0.22%), Euro (-1.28%), GBP(-4.88%), Rmb(-11.49%), Oil(-12.29%), Rubble(-15.3%), JPY(-19.13%), Bitcoin (-22.33%). Of course past performance is not necessarily an indication of the future. It is nevertheless useful to know where we have came through as we watch closely the ongoing Geo-political. Economic and Monetary developments.

 

^{Colossians 3:15} May the peace of God rule in your hearts. May the Word of Christ dwell in you richly in all wisdom.