Zombiefied

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.federalreserve.gov/econres/notes/feds-notes/us-zombie-firms-how-many-and-how-consequential-20210730.html#fig1

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 14^th 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.' " 

 

 

       

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.